CS Company Law – Legal Framework Governing Company Secretaries

Legal Framework Governing Company Secretaries

Associates and Fellows Company Secretaries

The members of the Institute shall be divided into two classes designated respectively as Associates and Fellows.

Any person whose name is entered in the Register of members maintained by Institute of Company Secretaries of India shall be deemed to have become an Associate and as long as his name remains so entered, shall be entitled to use the letters “A.C.S.” after his name to indicate that he is an Associate.

A person, being an Associate who has been in continuous practice in India as a Company Secretary for at least five years and a person who has been an Associate for a continuous period of not less than five years and who possesses such qualifications or practical experience as the Council may prescribe with a view to ensuring that he has experience equivalent to the experience normally acquired as a result of continuous practice for a period of five years as a Company Secretary shall, on payment of fees, be entered in the Register as a Fellow.

Register of Members

The Council shall maintain in the prescribed manner a Register of the members of the Institute. The Register shall include the following particulars about every member of the Institute, namely:

  • his full name, date of birth, domicile, residential and professional addresses;
  • the date on which his name is entered in the Register;
  • his qualifications;
  • whether he holds a certificate of practice; and
  • any other particulars which may be prescribed.

Disciplinary Directorate

Section 21 of the Act provides for the establishment of a Disciplinary Directorate headed by an officer of the Institute designated as Director (Discipline) and such other employees for making investigations in respect of any information or complaint received by it.

On receipt of any information or complaint along with the prescribed fee, the Director (Discipline) shall arrive at a prima facie opinion on the occurrence of the alleged misconduct. The Disciplinary Directorate shall follow such procedure as may be specified to make investigations under the Act.

Disciplinary Committee

According to Section 21B a Disciplinary Committee shall be constituted by the Council. The Disciplinary Committee shall consist of the President or the Vice-President of the Council as the Presiding Officer and two members to be elected from amongst the members of the Council and two members to be nominated by the Central Government from amongst the persons of eminence having experience in the field of law, economics, business, finance or accountancy:

The Council may constitute more Disciplinary Committees as and when it considers necessary. The Disciplinary Committee, while considering the cases placed before it, shall follow such procedure as may be specified.

Appeal to Authority

Under Section 22A of the Act the Appellate Authority constituted under sub-section (1) of Section 22A of the Chartered Accountants Act, 1949, shall be deemed to be the Appellate Authority for the purposes of this Act, subject to certain modifications.

Accordingly, any member of the Institute aggrieved by any order of the Board of Discipline or the Disciplinary Committee imposing on him any of the penalties referred to in Section 21A and Section 21B, may within ninety days from the date on which the order is communicated to him, prefer an appeal to the Authority:

The Director (Discipline) may also appeal against the decision of the Board of Discipline or the Disciplinary Committee to the Authority if so authorised by the Council, within ninety days:

The Authority may entertain any such appeal after the expiry of the said period of ninety days, if it is satisfied that there was sufficient cause for not filing the appeal in time.

Certain Provisions Relating to Misconduct under the Company Secretaries Act, 1980

  • Professional misconduct in relation to Company Secretaries in Practice. (Part I of the First Schedule).
  • Professional misconduct in relation to members of the Institute in service. (Part II of the First Schedule)
  • Professional misconduct in relation to members of the Institute generally. (Part Ill of the First Schedule)
  • Other misconduct in relation to members of the Institute generally (Part IV of the First Schedule)
  • Professional misconduct in relation to Company Secretaries in practice requiring action by disciplinary committee (Part I of the Second Schedule)
  • Professional misconduct in relation to members of the Institute generally, requiring action by disciplinary committee (Part II of the Second Schedule).
  • Other misconduct in relation to members of the Institute generally (Part III of the Second Schedule)

Complaints and Enquiries Relating To Professional or Other Misconduct of Members

  • any complaint received against a member of the Institute under Section 21 shall be investigated, and any enquiry relating to misconduct of such member shall be held, by the Disciplinary Committee.
  • A complaint under Section 21 shall be made to the Council in the appropriate from, duly verified as required therein.
  • Every complaint shall contain the following particulars, namely-
    • the acts or omissions which, if proved, would render the member complained against guilty of any professional or other misconduct;
    • the oral and/or documentary evidence relied upon in support of the allegations made in the complaint.
  • Every complaint other than a complaint made by or on behalf of the Central or any State Government, shall be accompanied by a deposit of rupees fifty which shall be forfeited, if the Council, after considering the complaint, comes to the conclusion that no prima facie case is made out and, moreover, that the complaint is either frivolous or has been made with mala fide intention.

Descriptive Questions

Question 1. Rakesh, practising Company Secretary, has accepted the position of Secretarial Auditor previously held by another Company Secretary in practice by communicating through SMS. He also used designation ‘Company Law Consultant’ in his visiting cards. Examine with reference to the relevant provisions of Company Secretaries Act, 1980 and/or Companies Act, 2013 whether these are in order.

Answer:

Clause 8 of Part I of First Schedule to the Company Secretaries Act, 1980, provides that a Company Secretary in Practice shall be deemed to be guilty of professional misconduct, if he accepts the position of a Company Secretary in Practice previously held by another Company Secretary in Practice without first communicating with him in writing.

The primary requirement under this clause is of prior communication with the previous incumbent. The is intended for reasons of professional courtesy. It would be necessary that the communication, in order to be effective, shall be by a registered letter or by hand with an acknowledgment so that there is positive evidence of the communication having been complete.

With the advent of use of the technology, communication by any electronic medium viz., SMS, WhatsApp and such other Messenger apps is permitted, provided the sender (the PCS taking up the assignment) is able to establish that the message is delivered to the recipient before he or she takes up the assignment.

Therefore, Rakesh is not guilty of professional misconduct in this case. Clause 7 of Part I of First Schedule to the Company Secretaries Act, 1980, provides that a Company Secretary in Practice shall be deemed to be guilty of professional misconduct, if he uses any designation or expressions other than Company Secretary on professional documents, visiting cards, letter-heads or signboards, unless it is a degree of a University established by law in India or recognised by the Central Government or a title indicating membership of the Institute of Company Secretaries of India or of any other institution that has been recognised by the Central Government or may be recognised by the Council.

Designations like Company Law Consultant, Income Tax Consultant, Corporate Adviser, Investment Adviser, Management Consultant etc. are prohibited.

Therefore, Rakesh is guilty of professional misconduct in this case.

Question 2. How would you substantiate the view that the members of the Institute of Company Secretaries of India (ICSI) are subject to disciplinary mechanism?

Answer:

The members of the Institute of Company Secretaries of India are subject to disciplinary mechanism under First and Second Schedule of the Company Secretaries Act as amended from time to time.

Where a member is guilty of any professional or other misconduct mentioned in the First Schedule, the matter shall be placed before the Board of Discipline.

Where a member is guilty of any professional or other misconduct mentioned in the Second Schedule or in both the Schedules, the matter shall be placed before the Disciplinary Committee.

  • reprimand the member;
  • remove the name of the member from the Register up to a period of three months;
  • impose such fine as it may think fit which may extend to rupees one lakh.

Where the Disciplinary Committee is of the opinion that a member is guilty of a professional or other misconduct mentioned in the Second Schedule or both the First Schedule and the Second Schedule, it shall afford to the member an opportunity of being heard before making any order against him and may thereafter take any one or more of the following actions, namely;

  • reprimand the member;
  • remove the name of the member from the Register permanently or for such period, as it thinks fit;
  • impose such fine as it may think fit, which may extend to rupees five lakhs.

Question 3. CS Rohan, a company secretary in practice availed loan against his personal investments from a bank. He issued two cheques towards repayment of the said loan as per terms of sanction of loan. Both the cheques were returned by the bank with remarks ‘returned due to insufficient funds’. Comment on the facts given with reference to provisions of the Company Secretaries Act, 1980.

Answer:

  • A Company Secretary is expected to maintain highest standards of integrity even in his personal affairs and any deviation from these standards even in his non-professional work would expose him to disciplinary action.
  • A member of the Institute is subject to disciplinary action under Section 21 of the Company Secretaries Act, 1980 if he is found guilty of any, professional or other misconduct.
  • As per Clause 2 of Part IV of the First schedule to the Company Secretaries Act, 1980, a member of the Institute whether in practice or not shall be deemed to be guilty of other misconduct if in the opinion of the council brings disrepute to the profession or the Institute as a result of his action whether or not related to the professional work.
  • The question whether a particular act or omission constitutes other misconduct should be based on facts and circumstances of each case.
  • Further, Part III of the Second Schedule to the Company Secretaries Act, 1980 provides that, a member of the Institute whether in practice or not shall be deemed to be guilty of other misconduct if he is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term exceeding six months.
  • Under Negotiable Instruments Act, 1881 where any cheque drawn by a person for the discharge of any liability is returned by the bank unpaid either for insufficiency of funds or the cheque amount exceeds the arrangements made by the drawer of the cheque the drawer of the cheque shall be deemed to have committed an offence.
  • In the above case the cheque was dishonored with the remark insufficient funds. Hence, CS Rohan may be liable for misconduct under Clause 2 of Part IV of the First Schedule of the Company Secretaries Act, 1980, if the Council is of the opinion that the offence under Negotiable Instruments Act, 1881 is due to negligence or willful act of CS Rohan.

Question 4. Kavita, a practicing company secretary, posted a request on whatsapp group of practicing company secretaries for providing secretarial audit in any company. She also made a similar request on whatsapp to her college friends. Has she committed professional misconduct?

Answer:

According to Clause 6 of Part I of the first Schedule to the Company Secretaries Act, 1980, a Company Secretary in Practice shall be deemed to be guilty of professional misconduct, if he/she ‘solicits clients or professional work, either directly or indirectly, by circular, advertisement, personal communication, interview or by any other means’.

Although, there are two exceptions. According to the above clause, nothing contained in this clause shall be construed as preventing or prohibiting

  • Any Company Secretary from applying or requesting for or inviting or securing professional work from another Company Secretary in practice.
  • A member from responding to tenders or enquiries issued by various users of professional services or organizations from time to time and securing professional work as a consequence.

Accordingly, when Kavita posted a request on Whatsapp group of Company Secretaries in Practice, it would not amount to professional misconduct. Although, when she sends messages to her college friends seeking professional work it would amount to professional misconduct.

Question 5. FMP & Associates, Company Secretaries, has sent a letter to the foreign exchange department of Reserve Bank of India stating that the firm has three partners who specialise in the law of Foreign Exchange & Management and asked the said Authority to include their name in the panel, whenever formed for providing advisory services. Comment with reference to the provisions of the Company Secretaries Act, 1980.

Answer:

Clause 6 of Part I of First Schedule to the Company Secretaries Act, 1980 states that a Company Secretary in practice shall be deemed to be guilty of professional misconduct if he solicits clients or professional work either directly or indirectly by a circular, advertisement, personal communication or interview or by any other means. Such a restraint has been put so that the members maintain their independence of judgement and able to command respect from their prospective clients.

Consequently, CS firm FMP & Associates and its partners are guilty of professional misconduct under Clause 6 of Part I of First Schedule to the Company Secretaries Act, 1980 as it has solicited professional work from the Reserve Bank of India by inquiring about the maintenance of the panel and advertising about the partners of the firm having specialised knowledge of foreign exchange and management law.

Question 6. Can a company secretary advertise himself as per the guidelines of the ICSI 2020? Mention few of the restrictions in this regard.

Answer:

As per the ICSI 2020 guidelines, the following activities are permitted for a company Secretary in Practice as means to advertise:

  • Display the scope of work on his/her own website.
  • Creating a visual identity in compliance with the Guidelines for use of individual Logo issued by the Council of ICSI.
  • Display of Location and decor of the workplace, meeting rooms, etc.
  • Display of Firm name, Logo or any other identity on Uniform, Office/s, office stationary and equipment/ material and providing Training to Staff.
  • Professional Updates and Write ups in any mode.
  • Appearing on local radio or television.
  • Holding professional seminars, conferences and workshops.
  • Sponsoring any event or helping with community programmes or doing voluntary work as a professional for charitable organizations.

The restrictions are given below:

The Advertisement shall:

  • not be in violation of provisions of Institute of Company Secretaries interest;” Act, 1980
  • not be false or misleading
  • not claim superiority over any or all other Company Secretaries;
  • not be indecent, sensational or otherwise of such nature which may bring disrepute to the profession or the Institute;
  • not contain fabricated or false testimonials or endorsements concerning the Company Secretary;
  • not refer the Company Secretaries in the terms such as “specialists” or “experts”;
  • not constitute a guarantee, warranty, or prediction regarding the outcome of any professional assignment;
  • in no way indicate that the charging of a fee is contingent on outcome, or that no fee will be charged in the absence of the desired outcome;
  • not be designed for “pleasing customers,” which might mislead or eventually harm customers or third parties;
  • not contain any humorous slogans. E.g. Save Xxxx Come to us, we will tell you how.

Practical Questions

Question 1. Ragini, a practicing company secretary expressed her opinion on a report given to a business firm called “Quick March Consultants”. Ragini has an interest in the same to be extent of 12% of shares in the firm. Is she guilty of professional misconduct?

Answer:

Clause 4 of Part I of the Second Schedule to the Companies Secretaries Act, 1980 deals with professional misconduct in relation to Company Secretaries in Practice. A company secretary in practice shall be deemed to be guilty of professional misconduct, if he –

“Expresses his opinion on any report or statement given to any business enterprise in which he, his firm or a partner in his firm has a substantial

This clause ensures that a professional has to be independent, while expressing any opinion. He should not have any substantial interest in the business enterprise to which the report or statement pertains. That would create a conflict with his duty. Expressing opinion or giving report with appropriate disclosure about his interest in the report was permitted earlier.

However under the new clause there is a total ban on expressing opinion or giving any report about any business enterprise in which he, his firm or a partner in his firm has a substantial interest. “Substantial Interest used in this clause is not limited to financial interest only.

In this connection it may be stated that the Council of the ICSI pursuant to Regulation 168 of the Company Secretaries Regulations, 1982 passed a resolution in which ‘Substantial Interest’ has been defined to mean an interest to the extent of 25%. The same guideline is relevant under the above clause also.

Based on the above regulation, Ragini who holds only 12% of shares in the business firm Quick March Consultants would not be guilty of Professional mis-conduct.

Question 2. A complaint of professional misconduct is filed with ICSI against Swapan, a practising member. The Disciplinary Committee of ICSI is of the opinion that Swapan is guilty of professional misconduct mentioned in the Second Schedule to the Company Secretaries Act, 1980. The Committee, after affording Swapan an opportunity of being heard, ordered for removal of his name from Register permanently and also imposed penalty of 10 lakh. Is the action of the Committee valid? What actions can the Board of Discipline (a separate authority) take if it is of the opinion that a member is guilty of professional misconduct mentioned in the First Schedule to the Act, 1980?

Answer:

Under section 21B(3) of the Company Secretaries Act, 1980 where the Disciplinary Committee is of the opinion that a member is guilty of professional or other misconduct as mentioned in the Second Schedule or both the First Schedule and the Second Schedule to the Company Secretaries Act, 1980, it shall afford to the member an opportunity of being heard before making any order against him and may thereafter take any one or more of the following actions, namely:

  • Reprimand the member;
  • Remove the name of the member from the Register permanently or for such period, as it thinks fit;
  • impose such fine as it may think fit, which may extend to ₹ 5 Lakhs.

In the given provisions to Swapan, a practising member, the order for permanent removal of name from Register of members is valid but fine can be imposed maximum upto 5 Lakhs.

Under section 21A(3) of the Company Secretaries Act, 1980 Where the Board of Discipline is of the opinion that a member is guilty of professional or other misconduct mentioned in the First Schedule to the Company Secretaries Act, 1980, it shall afford to the member an opportunity of being heard before making any order against him and may thereafter take any one or more of the following actions, namely:

  • reprimand the member;
  • remove the name of the member from the Register up to a period of 3 months;
  • impose such fine as it may think fit which may extend to 1 lakh. Space to write important points for revision

Short Notes

Question 1. Write short notes on:

  1. Board of Discipline
  2. Fellow member
  3. Appellate authority

Answer:

Board of Discipline: The Board of Discipline shall be constituted by the Council of the Institute under Section 21A of the Companies Act, 1980. The Board of Discipline shall follow summary disposal procedure in dealing with all the cases before it.

Where the Board of Discipline is of the opinion that a member is guilty of a professional or other misconduct mentioned in the First Schedule, it shall afford to the member an opportunity of being heard before making any order against him and may thereafter take any one or more of the following actions, namely:

  • reprimand the member;
  • remove the name of the member from the Register up to a period of three months;
  • impose such fine as it may think fit which may extend to rupees one lakh.

The Director (Discipline) shall submit before the Board of Discipline all information and complaints where he is of the opinion that there is no prima facie case and the Board of Discipline may, if it agrees with the opinion of the Director (Discipline), close the matter or in case of disagreement, may advise the Director (Discipline) to further investigate the matter.

Fellow member: Any person whose name is entered in the Register of members maintained by Institute of Company Secretaries of India shall be deemed to have become an Associate and as long as his name remains so entered, shall be entitled to use the letters “A.C.S.” after his name to indicate that he is an Associate.

A person, being an Associate who has been in continuous practice in India as a Company Secretary for at least five years and a person who has been an Associate for a continuous period of not less than five years and who possesses such qualifications or practical experience as the Council may prescribe with a view to ensuring that he has experience equivalent to the experience normally acquired as a result of continuous practice for a period of five years as a Company Secretary shall, on payment of fees, be entered in the Register as a Fellow.

Appellate authority: Under section 22A of the Act the Appellate Authority constituted under sub-Section (1) of Section 22A of the Chartered Accountants Act, 1949, shall be deemed to be the Appellate Authority for the purposes of this Act, subject to certain modifications.

Accordingly, any member of the Institute aggrieved by any order of the Board of Discipline or the Disciplinary Committee imposing on him any of the penalties referred to in Section 21A and 21B, may within ninety days from the date on which the order is communicated to him, prefer an appeal to the Authority:

The Director (Discipline) may also appeal against the decision of the Board of Discipline or the Disciplinary Committee to the Authority if so authorised by the Council, within ninety days:

The Authority may entertain any such appeal after the expiry of the said period of ninety days, if it is satisfied that there was sufficient cause for not filing the appeal in time.

The Authority may, after calling for the records of any case, revise any order made by the Board of Discipline or the Disciplinary Committee under sub-section (3) of Section 21A and sub-Section (3) of Section 21B and may-

  • confirm, modify or set aside the order;
  • impose any penalty or set aside, reduce, or enhance the penalty imposed by the order;
  • remit the case to the Board of Discipline or Disciplinary Committee for such further enquiry as the Authority considers proper in the circumstances of the case; or
  • pass such other order as the Authority thinks fit:

Provided that the Authority shall give an opportunity of being heard to the parties concerned before passing any order. – Space to write important points for revision-

Descriptive Questions

Question 2. What is the Disciplinary Mechanism in case of misconduct of clause 5 of Part I of First Schedule of Company Secretaries Act, 1980?

Answer:

Disciplinary Directorate:

Section 21 of the Act provides for the establishment of a Disciplinary Directorate headed by an officer of the Institute designated as Director (Discipline) and such other employees for making investigations in respect of any information or complaint received by it. On receipt of any information or complaint along with the prescribed fee, the Director (Discipline) shall arrive at a prima facie opinion on the occurrence of the alleged misconduct.

The Disciplinary Directorate shall follow such procedure as may be specified to make investigations under the Act. Where the Director (Discipline) is of the opinion that a member is guilty of any professional or other misconduct mentioned in the First Schedule, the matter shall be placed before the Board of Discipline.

Where the Director (Discipline) is of the opinion that a member is guilty of any professional or other misconduct mentioned in the Second Schedule or in both the Schedules, the matter shall be placed the Disciplinary Committee.

Board of Discipline:

The Board of Discipline shall be constituted by the Council of the Institute under Section 21A of the Companies Act, 1980. The Board of Discipline shall follow summary disposal procedure in dealing with all the cases before it.

Where the Board of Discipline is of the opinion that a member is guilty of a professional or other misconduct mentioned in the First Schedule, it shall afford to the member an opportunity of being heard before making any order against him and may thereafter take any one or more of the following actions, namely:

  • reprimand the member;
  • remove the name of the member from the Register up to a period of three months;
  • impose such fine as it may think fit which may extend to rupees one lakh.

The Director (Discipline) shall submit before the Board of Discipline all information and complaints where he is of the opinion that there is no prima facie case and the Board of Discipline may, if it agrees with the opinion of the Director (Discipline), close the matter or in case of disagreement, may advise the Director (Discipline) to further investigate the matter.

Disciplinary Committee:

According to Section 21B a Disciplinary Committee shall be constituted by the Council. The Disciplinary Committee shall consist of the President or the Vice-President of the Council as the Presiding Officer and two members to be elected from amongst the members of the Council and two members to be nominated by the Central Government from amongst the persons of eminence having experience in the field of law, economics, business, finance or accountancy:

The Council may constitute more Disciplinary Committees as and when it considers necessary. The Disciplinary Committee, while considering the cases placed before it, shall follow such procedure as may be specified.

Authority, Disciplinary Committee, Board of Discipline and Director (Discipline) to have powers of civil court:

Section 21C provides that for the purposes of an inquiry under the provisions of this Act, the Authority, the Disciplinary Committee, Board of Discipline and the Director (Discipline) shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, in respect of the following matters, namely:

  • summoning and enforcing the attendance of any person and examining him on oath;
  • the discovery and production of any document; and
  • receiving evidence on affidavit.

Appeal to Authority:

Under Section 22A of the Act the Appellate Authority constituted under sub-section (1) of Section 22A of the Chartered Accountants Act, 1949, shall be deemed to be the Appellate Authority for the purposes of this Act, subject to certain modifications.

Accordingly, any member of the Institute aggrieved by any order of the Board of Discipline or the Disciplinary Committee imposing on him any of the penalties referred to in Section 21A and 21B, may within ninety days from the date on which the order is communicated to him, prefer an appeal to the Authority:

The Director (Discipline) may also appeal against the decision of the Board of Discipline or the Disciplinary Committee to the Authority if so authorised by the Council, within ninety days:

The Authority may entertain any such appeal after the expiry of the said period of ninety days, if it is satisfied that there was sufficient cause for not filing the appeal in time.

The Authority may, after calling for the records of any case, revise any order made by the Board of Discipline or the Disciplinary Committee under sub-section (3) of Section 21A and sub-Section (3) of Section 21B and may-

  • confirm, modify or set aside the order;
  • impose any penalty or set aside, reduce, or enhance the penalty imposed by the order;
  • remit the case to the Board of Discipline or Disciplinary Committee for such further enquiry as the Authority considers proper in the circumstances of the case; or
  • pass such other order as the Authority thinks fit:

Provided that the Authority shall give an opportunity of being heard to the parties concerned before passing any order. -Space to write important points for revision-

CS Company Law Virtual Meetings Question and Answers

Virtual Meetings

Virtual Meeting – Definition

A meeting held totally through either Video conferencing or other audio-visual means is known as a Virtual Meeting. A virtual meeting is when people around the world, regardless of their location, use video, audio, and text to link up online. Virtual meetings allow people to share information and data in real time without being physically located together.

In virtual meetings, there is no physical presence of participants and there is no designated venue for meetings. Participants located at different places participate in the meeting either by teleconference video conference or a combination of them at a predetermined time.

Basic Requirements for Virtual Meeting

  • Meeting rooms
  • Software, which can be either purchased or can be provided by a vendor for a fee oa n yearly rental basis.
  • Hardware equipment like Monitor or LED screen, Webcams.
  • High-quality mike system.
  • Projectors.
  • Document scanners.
  • Leased Lines.
  • High-speed wireless internet.
  • Recording and Storage Equipment for recording the proceeding and Proper storage for future reference as may be required under law.
  • Have a trial run before the meeting to ensure all the systems are working properly.
  • Ensure that the proper arrangements are made in the Meeting room.

Virtual Board Meetings

Present day Directors’ who are professionals have busy schedules which makes it difficult for them to attend board meetings of the companies in which they are directors, especially for those who are living and working in different cities and countries.

Teleconferencing, videoconferencing, and meeting online benefit boards and directors to enable them to attend the meetings from any location.

Virtual meetings help the directors to participate in meetings wherever they are despite their busy schedule and make valuable contributionthroughby their participation.

Electronic Mode

“Electronic Mode” about Meetings means Meetings through video conferencing or other audio-visual means. “Video conferencing or other audiovisual means” means audio-visual electronic communication facility employed which enables all the persons participating in a Meeting to communicate concurrently with each other without an intermediary and to participate effectively in the Meeting.

Secured Computer System

“Secured Computer System” means computer hardware, software, and procedure that –

  • Are reasonably secure from unauthorized access and misuse;
  • Provide a reasonable level of reliability and correct operation;
  • Are reasonably suited to performing the intended functions; and
  • Adhere to generally accepted security procedures.

The attendance registers

The attendance register shall be deemed to have been signed by the Directors participating through Electronic Mode, if their attendance is recorded in the attendance register and authenticated by the Company Secretary or where there is no Company Secretary, by the Chairman or by any other Director present at the Meeting, if so authorized by the Chairman and the fact of such participation is also recorded in the Minutes.

Venue of the meeting

Concerning every meeting conducted through video conferencing or other audio-visual means authorized under these rules, the scheduled venue of the meeting as outlined in the notice convening the meeting shall be deemed to be the place of the said meeting and all recordings of the proceedings at the meeting shall be deemed to be made at such place.

Virtual AGM/EGMs

Section 108 of the Companies Act, 2013 provides for Voting through electronic means. The Central Government may prescribe the class or classes of companies and the manner in which a member may exercise his right to vote by electronic means

General meetings, particularly when large numbers of shareholders are involved, can be very expensive and are not considered to ba cost-effective.

Virtual Meetings

Advantages of Virtual AGM/EGMs

  • Increase shareholder participation in meetings,
  • Save time on travel and cost because of remote voting.
  • Encourages more participation by investors across the world.
  • Provides greater accessibility to shareholders who cannot be physically present due to distance.
  • Enables institutional investors to attend more than one meeting in a day and protect shareholders’ interests.
  • Reduce the cost of holding and conducting shareholder meetings, including the costs of the venue, stationery, transport, and refreshments.
  • Save time for the Company’s personnel.

Difficulties in holding Virtual Meetings of Members

  • Security of the systems used.
  • Streaming with quality without interruption.
  • Providing with secure login and shareholder authentication for attendance, with ease of access for shareholders, and remote voting.
  • Combined registration, voting, and reporting software.
  • Customized instant results screen and detailed audit reporting.
  • Data Security of Logins and Passwords.
  • Allowing the shareholders, the choice of device.
  • the technology used must give all shareholders a reasonable opportunity to participate
  • the technology must be secure and must provide reasonable measures for verifying/validating those allowed to attend and vote at the meeting
  • The company must provide a digital record of the meeting.

Virtual Meetings  Descriptive Questions

Question 1. The Board of Directors of Vedic Ltd. desirous of transacting certain matters through video conferencing, seeks your advice on the matters which cannot be dealt with through video conferencing. Advise the Board.

Answer:

Matters are not to be dealt with in a meeting through video conferencing or other audio-visual means.

Company Law Virtual Meetings Rule 4 of Companies

Question 2. Referring to the provision of the Companies Act, 2013 advise the directors of a company in the following matters:

  1. The company wishes to obtain approval of the financial statement in a meeting held through video conferencing.
  2. Due to urgency, the company wants to get its prospectus approved in a meeting held through video conferencing.

Answer:

Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides that the following matters, shall not be dealt with in any meeting held through video conferencing or other audio-visual means:

  • the approval of the annual financial statements;
  • the approval of the Board’s report;
  • the approval of the prospectus;
  • the Audit Committee Meetings for consideration of financial statements including consolidated financial statements, if any, to be approved by the Board under sub-Section (1) of Section 134 of the Act; and
  • the approval of the matter relating to amalgamation, merger, demerger, acquisition, and takeover.

Accordingly, the company cannot obtain approval of the financial statements from directors in a meeting held through video conferencing (2) The company cannot get its prospectus approved in a meeting held through video conferencing.

Question 3. Enumerate the difficulties encountered in holding virtual meetings of Members:

Answer:

The following are the main difficulties encountered in holding virtual meetings of members:

  • Security of the systems used.
  • Streaming with quality without interruption.
  • Providing secure login and shareholder authentication for attendance with ease of access for shareholders and remote voting.
  • Combined registration, voting, and reporting software.
  • Customized instant results screen and detailed audit reporting.
  • Data security of logins and Passwords.
  • Allowing the shareholders, the choice of device.
  • the technology used must give all shareholders a reasonable opportunity to participate
  • the technology must be secure and must provide reasonable measures for verifying/validating those allowed to attend and vote at the meeting
  • The company must provide a digital record of the meeting.

Question 4. What do you understand by the term ‘secured computer

Can all matters required to be approved by a meeting of the Board of Directors be approved by video conferencing?

Answer:

According to Secretarial Standard-1, a Secured Computer System in the context of virtual Board Meetings means computer hardware, software, and procedures that

  • are reasonably secure from unauthorized access and misuse;
  • provide a reasonable level of reliability and correct operation;
  • are reasonably suited to perform the intended functions; and
  • adhere to generally accepted security procedures

Section 173(2) of the Companies Act, 2013 read with Rule 4 of Companies (Meetings of Board and its Powers) Rules, 2014, prescribes that the following matters shall not be dealt with in any meeting held through video conferencing or other audio-visual means:

  • The approval of the Annual Financial Statements;
  • The approval of the Board’s report;
  • The approval of the Prospectus;
  • The Audit Committee Meetings for consideration of financial statements including consolidated financial statements if any, to be approved by the board under Section 134(1) of the Companies Act, 2013;
  • The approval of the matter relating to amalgamation, merger, demerger acquisition, and takeover.

Although, where there is a quorum present in a Board meeting through the physical presence of directors, any other director may participate through the Opportunity to participate. video conferencing or other audiovisual means.

Accordingly, as per the above-mentioned provisions, all matters required to be approved by a meeting of the Board of Directors cannot be approved by video conferencing.

Virtual Meetings  Practical Questions

Question 1. Jolly Retails Ltd. issued a notice for the meeting of its Board of directors scheduled for 5th June 2019 at its corporate office. One of the directors intimated that he would be participating in the meeting through video conferencing.

The Secretary contended that the meeting cannot be participated through video conferencing and that the concerned director cannot insist that the company should provide video conferencing facilities for attending the board meeting. Is the contention of the Secretary tenable as per the provisions of the Companies Act, 2013? Discuss with relevant case laws if any.

Answer:

Section 173(2) of the Companies Act, 2013 states the participation of directors in a meeting of the Board may be either in person or through video conferencing or other audio-visual means as may be prescribed, which are capable of recording and recognizing the participation of the directors and recording and storing the proceedings of such meetings along with date and time.

The second proviso of section Sub Section 2 of Section 173 states that where there is quorum in a meeting through the physical presence of directors, any other director may participate through video conferencing or other audio-visual means in such meeting on any matter specified under the first proviso. (Inserted by the Companies (Amendment) Act, 2017, w.e.f 7-5-2018).

Rule 4 of the Companies (Meeting of Board and its Powers) Rules 2014, which states the matter is not to be dealt with in a meeting through video conferencing or other audio-visual means has been amended by the Companies (Amendment) Act, 2017, by the inclusion of the proviso that where there is a quorum in a meeting through the physical presence of directors, any other director may participate through video conferencing or other audio visual means (inserted w.e.f. 7-5-2018). One of the matters specified in this rule is the approval of the prospectus.

In this case of Achintya Kumar Barua vs. Ranjit Barthkur ([2018] 91 taxman. com 123 (NCL-AT)] The NCLAT has held that, even if one of the directors so desires, a company is bound to provide facilities to directors to participate in board meetings by video conferencing.

With the above amendment and the Tribunal decision, Jolly Retail Ltd. is bound to provide the necessary video conferencing facilities to the director. Space to write important points for revision

Question 2. JKJ Ltd. has 10 directors on its Board. A Board meeting was convened on 19-10-2019 in which two of the directors participated in person and one director through video conferencing. Two directors were interested in the agenda and hence, did not participate in the meeting. The auditor claimed that the quorum was not present for the meeting to be valid. Do you agree with the auditor? Justify your answer about provisions of the Companies Act, 2013.

Answer:

Under Section 174 of the Companies Act, 2013 the quorum for Board Meeting Requirements is as under:

  • The quorum for a Board Meeting is 1/ 3rd of its Total strength or two directors, whichever is higher
  • A Director participating through video conferencing/audio-visual modes will also be counted for quorum
  • Any fraction of a member will be rounded off as one
  • “Total strength” shall not include directors whose places are vacant
  • In the JKJ Board meeting held on 19.10.19, the quorum is: Total Strength 10×1/3 is 3.33 So, it is rounded off to 4 Directors. Therefore, the Directors required for Quorum is 4 Directors.
  • Since two directors attended in person and one director through video conferencing there was an absence of quorum. The claim of the Auditor is true.

Virtual Meetings  Short Notes

Question 1. Write short notes on Virtual Board Meetings.

Answer:

  • Present-day Directors who are professionals have busy schedules which makes it difficult for them to attend board meetings of the companies in which they are directors, especially for those who are living and working in different cities and countries.
  • Teleconferencing, videoconferencing, and meeting online benefit boards and directors to enable them to attend the meetings from any location. Virtual meetings help the directors to participate in meetings wherever they are despite their busy schedule and make valuable contributionthroughby their participation.
  • Virtual attendance can also make board participation more attractive and appealing, especially for independent directors as they are not expected to attend every meeting in person and it is not practically possible as they sit on many boards of the company which are located in different cities and countries and due to statutory requirements most the board meetings of the companies especially listed entities are held around the same time making it more difficult for the Independent professional directors to be physically present and participate in the meetings.
  • By holding virtual meetings, Boards with members around the country and globe will benefit from wider participation and it would be very convenient for the directors to attend through virtual media from their respective locations also it helps with reduced travel and reimbursement of costs

Virtual Meetings  Descriptive Questions

Question 2. What do you understand by the concept of Virtual Annual General Meeting? Discusses benefits of such h meeting.

Answer:

Section 108 of the Companies Act, 2013 provides for Voting through electronic means. The Central Government may prescribe the class or classes of companies and how a member may exercise his right to vote by electronic means General meetings, particularly when large numbers of shareholders are involved, can be very expensive and are not considered to be cost-effective.

Advantages of Virtual AGM/EGMs

  • Increase shareholder participation in meetings,
  • Save time on travel and cost because of remote voting.
  • Encourages more participation by investors across the world.
  • Provides greater accessibility to shareholders who cannot be physically present due to distance.
  • Enables institutional investors to attend more than one meeting in a day and protect shareholders’ interests.
  • Reduce the cost of holding and conducting shareholdemeetingsng, including the costs of the venue, stationery, transport, and refreshments. Saves time for the Company’s personnel.

Question 3. ABC Ltd. Wants to hold meetings in electronic mode. As a company secretary detail the procedure to the Board.

Answer:

Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides for the requirements and procedures, in addition to the procedures required for Board meetings in person, for convening and conducting Board meetings through video conferencing or other audio-visual means:

  • Every Company shall make necessary arrangements to avoid failure of video or oaudio-visualal connection.
  • The Chairperson of the meeting and the company secretary, if any, shall take due and reasonable care, the same has been discussed above.
  • The notices of the meeting shall be sent to all the directorbyth the provisions of sub-section (3) of section 173 of the Act.
    • 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.
    • A director intending to participate through video conferencing mode or audio-visual means shall communicate his intention to the Chairman or the company secretary of the company.
    • If the director intends to participate through video conferencing or other audio-visual means, he shall give prior intimation to that effect sufficiently in advance so that the company can make suitable arrangements on this behalf.
    • In the absence of any such intimation from the director, it shall be assumed that the director will attend the meeting in person.
  • At the commencement of the meeting, a roll call shall be taken by the Chairperson when every director participating through video conferencing or otheaudio-visualal means shall state, for the record, the following namely:
    • name;
    • the location from where he is participating;
    • that he can completely and see, hear, and communicate with the other participants;
    • that he has received the agenda and all the relevant material for the meeting; and
    • that no one other than the concerned director is attending or having access to the proceedings of the meeting at the location mentioned in (b) above.
  • After the roll call, the Chairperson or the Secretary shall inform the Board about the names of persons other than the directors who are present for the said meeting at the request or with the permission of the Chairman and confirm that the required quorum is complete.
    • Explanation: It is clarified that a director participating in a meeting through video conferencing or other audio-visual means shall be counted for quorum, unless he is to be excluded for any items of business under any provisions of the Act or the Rules.
    • The roll call shall also be madafterof the meeting ant the re-commencement of the meeting after every break to confirm 12. (a) The draft minutes of the meeting shall be circulated among all the presence of a quorum throughout the meeting.
  • Concerning every meeting conducted through video conferencing or other audio-visual means authorized under these rules, the scheduled venue of the meeting as outlined in the notice convening the meeting shall be deemed to be the place of the said meeting and all recordings of the proceedings at the meeting shall be deemed to be made at such place.
  • The statutory registers which are required to be placed in the Board meeting as per the provisions of the Act shall be placed at the scheduled venue of the meeting and where such registers are required to be signed by the directors, the same shall be deemed to have been signed by the directors participating through electronic mode if they have given their consent to this effect and it is so recorded in the minutes of the meeting.
  • Every participant shall identify himself for the record before speaking on any item of business on the agenda.
    • If a statement of a director in the meeting through video conferencing or otheaudio-visualal means is interrupted or garbled, the Chairperson or company secretary shall request for a repeat or reiteration by the director.
  • If a motion is objected to and there is a need to put it to vote, the Chairperson shall call the roll and note the vote of each director who shall identify himself while casting his vote.
  • From the commencement of the meeting until the conclusion of such meeting, no person other than the Chairperson, directors, Secretary, and any other person whose presence is required by the Board shall be allowed access to the place where any director is attending the meeting either physically or through video conferencing without the permission of the Board.
  • At the end othe f discussion on each agenda item, the Chairperson of the meeting shall announce the summary of the decision taken on such item along with names of the directors, if anywho , dissented from the decision taken bthe y majority
    • The minutes shall disclose the particulars of the directors who attended the meeting through video conferencing or otheaudio-visualal means.
  • The draft minutes of thmeetingng shall be circulated among all the directors within fifteen days of the meeting either in writing or in electronic mode as may be decided by the Board.
    • Every director who attended the meeting, whether personally or through video conferencing or other audio-visual means, shall confirm or give his comments, about the accuracy of recording of the proceedings of that particular meeting in the draft minutes, within seven days or some reasonable time as decided by the Board, after receipt of the draft minutes failing which his approval shall be presumed.

Question 4. Describe the requirements for VirtuaMeetingsng.

Answer:

  • Meeting rooms
  • Software, which can be either purchased or can be provided bthe y vendor
  • for a fee oa n yearly rental basis.
  • Hardware equipment like Monitor or LED screen, WebcamsHigh-qualityty mike system.
  • Projectors.
  • Document scanners.
  • Leased LinesHigh-speeded wireless internet.
  • Recording and Storage Equipment for recording the proceeding and Proper storage for future reference as may be required under law. Hava e trial run before the meeting to ensure all the systems are working properly.
  • Ensure that the proper arrangements are made in the Meeting room.

CS Company Law Meeting Of Board And Its Committee Question and Answers

Meeting Of Board And Its Committee

Frequency of the Meetings of the Board [Section 173 (1)]

The Act provides that the first Board meeting should be held within thirty days of the date of incorporation.

Thereafter there shall be minimum of four Board meetings every year and not more one hundred and twenty days shall intervene between two consecutive Board meetings

Further in this context Secretarial Standard on Board Meetings (SS-1) issued by ICSI clarifies that the Board shall meet at least once in every calendar quarter, with a maximum interval of one hundred and twenty days between any two consecutive Meetings of the Board, such that at least four meetings are held in each calendar year.

In case of One Person Company (OPC), small company, dormant company and private company which is start-up, at least one Board meeting should be conducted in each half of the calendar year and the gap between two meetings should not be less than Ninety days. However, this provision would not apply to a one person company in which there is only one director on its Board.

Preparation of Notices for meetings of Board

The Act requires that not less than seven days’ notice in writing shall be given to every director at the registered address (whether in India or outside India) as available with the company, unless the Articles prescribe a longer period.

Notice of an adjourned Meeting shall be given to all Directors including those who did not attend the Meeting on the originally convened date and unless the date of adjourned Meeting is decided at the Meeting, Notice thereof shall also be given not less than seven days before the Meeting.

Agenda of Board/Committees Meetings

The Act does not prescribe such requirement to circulate Agenda etc. However Good governance envisage such requirement. Secretarial Standard on Board Meetings provide exhaustively on the Agenda management.

The Agenda, setting out the business to be transacted at the Meeting, and Notes on Agenda shall be given to the Directors at least seven days before the date of the Meeting, unless the Articles prescribe a longer period.

Quorum for Board Meetings [Section 174]

One third of total strength or two directors, whichever is higher, shall be the quorum for a meeting. For the purpose of determining the quorum, the participation by a director through Video Conferencing or other audio visual means shall also be counted, unless he is to be excluded for any item of business under any provisions of the Act or the rules – Section 174(1)

Section 174 is not applicable to One Person Company in which there is only one director.

If at any time the number of interested directors exceeds or is equal to two-thirds of the total strength of the Board of directors, the number of directors who are not interested and present at the meeting, being not less than two shall be the quorum during such time.

Chairman of the meeting of the Board/ Committee

The Chairman of the Company shall be the chairman of the Board. If the company does not have a Chairman, the Directors may elect one of themselves to be the chairman of the Board. In case of committee meeting, a member of the committee appointed by the Board or elected by the Committee as chairman of the Committee, in accordance with the Act or any other law or the Articles, shall conduct the meetings of the committee.

If no Chairman has been so elected or if the elected chairman is unable to attend the meeting, the Committee shall elect one of its members present to chair and conduct the meeting of the committee, unless otherwise provided in the articles.

Passing of Resolution by Circulation

A company may pass the resolutions through circulation. The resolution in draft form together with the necessary papers may be circulated to all the directors or members of committee at their address registered with the company in India by hand or by speed post or by courier or through electronic means which may include e-mail or fax.

The said resolution must be passed by majority of directors or members entitled to vote.

If more than one third of directors require that the resolution must be decided at the meeting, the chairperson shall put the resolution to be decided at the meeting.

Minutes

Section 118 provides that every company shall prepare, sign and keep minutes of proceedings of every general meeting, including the meeting called by the requisitionists and all proceedings of meeting of any class of share holders or creditors or Board of Directors or committee of the Board and also resolution passed by postal ballot within thirty days of the conclusion of every such meeting concerned.

Meeting of Board

In addition to the first meeting to be held within thirty days of the date of incorporation, there shall be minimum of four Board Meetings every year and not more one hundred and twenty days shall intervene between two consecutive Board Meetings.

In case of One Person Company (OPC), small company and dormant company, at least one Board Meeting should be conducted in each half of the calendar year and the gap between two meetings should not be less than Ninety days.

Matters not to be dealt with in a Meeting through Video Conferencing or other Audio Visual Means

  • the approval of the annual financial statements;
  • the approval of the Board’s report;
  • the approval of the prospectus;
  • the Audit Committee Meetings for consideration of accounts; and
  • the approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover.

Quorum for Board Meeting

  • One third of total strength or two directors, whichever is higher, shall be the quorum for a meeting.
  • For the purpose of determining the quorum, the participation by a director through Video Conferencing or other audio visual means shall also be counted.
  • If at any time the number of interested directors exceeds or is equal to two-thirds of the total strength of the Board of Directors, the number of directors who are not interested and present at the meeting, being not less than two shall be the quorum during such time.

Meeting Of Board And Its Committee  Descriptive Questions

Question 1. The Board of directors of a company met thrice in the year 2012 and the fourth meeting was not held for want of quorum. As a Company Secretary, examine the provisions of the Companies Act, 2013 and decide with reasons whether the company has complied with the requirement of minimum number of meetings to be held in a calendar year or violated the requirement thereof?

Answer:

Company Law Meeting Of Board And Its Committee Meetings of Board of Directors and QUORUM

Question 2. Comment on the following:

  1. A director insists that his note of dissent be recorded in the minutes of the Board meeting which he attended and did not agree to some of the points of the agenda.
  2. A member of a company has statutory right to appoint proxy for attending the general meeting of the company. Similarly, a director can also appoint his proxy for attending the meetings of Board of directors of the company.
  3. A meeting of the Board of directors was scheduled to take place at the factory premises of a company and not at the registered office. At the scheduled date and time, the required quorum was not present. The Chairman of the meeting announced that the meeting is dissolved. Answer:

Company Law Meeting Of Board And Its Committee Section 119 (4) of Companies

Company Law Meeting Of Board And Its Committee Section 105

Company Law Meeting Of Board And Its Committee Section 174 of the Companies

Question 3. Comment on the following:

Secretarial Standard does not empower Company Secretary of a company to call a meeting of Board of Directors on its own.

Answer:

Secretarial Standard does not empower Company Secretary of a company to call a meeting of Board of Directors on its own.

Any Director of a company may, at any time, summon a meeting of the Board, and the Company Secretary or where there is no Company Secretary, any person authorised by the Board in this behalf, on the requisition of a Director, shall convene a meeting of the Board, in consultation with the Chairman or in his absence, the Managing Director or in his absence, the whole-time Director, where there is any, unless otherwise .provided in the Articles.

Question 4. Articles of Reality Ltd. provides that directors participating through audio-visual means in its Board meetings shall always be counted for quorum. Examine the validity of this provision with reference to the Companies Act, 2013.

Answer:

Under Section 173 of Companies Act, 2013, read with Rules 3 and 4 of Companies (Meetings of Board and its powers) Rules, 2014, a director participating in a meeting through video conferencing or other audio visual means shall be counted for the purpose of quorum, unless he is to be excluded for any items of business under Rule 4.

As per Rule 4 the following matters shall not be dealt with in any meeting held through video conferencing or other audio visual means.

  • The approval of the Annual Financial Statements;
  • The approval of the Board’s report;
  • The approval of the prospectus;
  • The Audit Committee Meetings for consideration of financial statement including consolidated financial statement, if any, to be approved by the Board under sub section (1) of Section 134 of Companies Act, 2013; and
  • The approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover.

Provided that in case where there is quorum in a meeting through physical presence of directors, any other director may participate through

Question 5. A Board meeting of a listed public company was called at shorter notice to transact an urgent business. None of the Independent directors could attend the meeting. Examine the validity of resolution(s) passed at the meeting referring to the provisions of the Companies Act, 2013.

Answer:

Accordingly to Section 173(3) of the Companies Act, 2013 a meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting.

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.

Accordingly, all decisions taken at the meeting needs to be circulated to all the directors and shall be final only on ratification of atleast one independent director.

Question 6. Prepare an Agenda items for a Board Meeting with a minimum of any eight items to be discussed. 

Answer:

Agenda Items for meeting of the Board of Director of the Company Scheduled to be held on (day), (Date) at (Venue)) at (Time) (meeting No.) 2019-20-(Any 8 items)

Company Law Meeting Of Board And Its Committee Agenda Items

Question 7. In a Board of Directors meeting of a private company held on 15th November, 2019 all the directors present, unanimously decided that the next meeting of the Board of Directors would be held on 29th November, 2019 at the registered office of the company. As a Company Secretary do you think a notice of the meeting of the Board of Directors need be sent to ensure legal compliance?

Answer:

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

As per Secretarial Standard-1, the Notice of the meeting of the Board shall be given even if meetings are held on pre-determined dates or at pre-determined intervals.

Hence, in the instant case even if the directors have agreed unanimously to hold the meeting on November 29, 2019, then also the Company Secretary need to send the Notice, Agenda and the Notes thereon separately for each Meeting in the aforesaid manner to ensure legal compliance.

Question 8. Dhanvantri is the Chairman of the Risk Management Committee of Advanced Solutions Ltd. A meeting of this Committee of Directors has been scheduled to be held on 5th December, 2019 at 3.00 p.m. At 3.10 p.m. though the requisite quorum is present, Dhanvantri is not present. Can the meeting be still held or requires to be adjourned? Answer with reference to the relevant provisions.

Answer:

Regulation 72 of Table F of Schedule I to the Companies Act, 2013 provides that if at the meeting of Committee, the Chairman is not present within five minutes after the time appointed for holding the meeting, the members present may choose one of their members to be Chairman of the Meeting.

In the above case, the Chairman of the Risk Management Committee is not present within the 5 minutes of the scheduled time of the meeting and the requisite quorum is present. Therefore, the members present may elect any one among them to act as the Chairman of the meeting and hold the meeting.

Question 9. R is a newly qualified CS and seeks your advice on passing of Resolution by Circulation. Advise him suitably as to the procedure to be followed in this regard. 

Answer:

A company may pass the resolutions through circulation:

  • As per Section 175 of the Companies Act, 2013, no resolution shall be deemed to have been duly passed by the Board or by a committee thereof by circulation, unless the resolution has been circulated in draft form together with the necessary papers to all the directors or members of committee at their addresses registered with the company in India by hand delivery or by post or by courier or through electronic means which may include E-mail or fax.
  • The said resolution must be approved by majority of directors or members who are entitled to vote.
  • Although, where not less than one-third of the total number of Directors of the company for the time being require that any resolution under circulation must be decided at a meeting, the chairperson shall put the resolution to be decided at a meeting of the Board.
  • The resolution passed through circulation be noted at a subsequent meeting of the Board or the committee and made part of the minutes of such meeting.
  • As per Secretarial Standard – 1, the decision of the Directors shall be sought for each Resolution separately.
  • Not more than seven days from the date of circulation of the draft of the Resolution shall be given to the Directors to respond and the last date shall be computed accordingly.
    An additional two days shall be added for the service of the draft Resolution, in case the same has been sent by the company by speed post or by registered post or by courier. Passing of Resolution by circulation shall be considered valid as if it had been passed at a duly convened meeting of the Board.
    This shall not dispense with the requirement for the Board to meet at the specified frequency.

The Resolution is passed when it is approved by a majority of the Directors entitled to vote on the Resolution, unless not less than one-third of the total number of Directors for the time being require the Resolution under circulation to be decided at a Meeting.

The Resolution, if passed, shall be deemed to have been passed on the earlier of:

  • the last date specified for signifying assent or dissent by the Directors, or
  • the date on which assent has been received from the required majority, provided that on that date the number of Directors, who have not yet responded on the resolution under circulation, along with the Directors who have expressed their desire that the resolution under circulation be decided at a Meeting of the Board, shall not be one third or more of the total number of Directors; and shall be effective from that date, if no other effective date is specified in such Resolution.

Question 10. A has been appointed as a Company Secretary in the Company by a circular Resolution. In addition, he has also been advised to act as a Group Company Secretary and head of the parent Company and its subsidiary. Examine with reference to the provisions of the Act.

Answer:

According to Section 179(3) read with Rule 8 of Companies (Meetings of Board and its Powers) Rules, 2014, provides that the Board of Directors of a company shall appoint or remove key managerial personnel by means of resolutions passed at meetings of the Board.

Hence, appointment of A as a Company Secretary in the company cannot be done by circular resolution.

As per Section 203(3) of the Companies Act, 2013, a whole time key managerial personnel (KMP) shall not hold office in more than one Company except in its subsidiary company at the same time.

In the above case, A has is also advised to act as a Group Company Secretary consisting of a group of a parent company in which he has been appointed and its subsidiary.

Hence, he can act as a Group Company Secretary to look after the parent company and its subsidiary.

Alternate

Section 179(3) read with Rule 8 of Companies (Meetings of Board and its Powers) Rules, 2014, provides that the Board of Directors of a company shall appoint or remove key managerial personnel by means of resolutions passed at meetings of the Board.

Hence, appointment of A as a Company Secretary in the company cannot be done by circular resolution.

Conclusion:

In the given case, A has been appointed as a Company Secretary in the company by a circular resolution which is not valid hence he cannot be advised to act as a Group Company Secretary and head of the parent Company and its subsidiary.

Question 11. X is a company secretary of XYZ Ltd. He is of the opinion that the notice, agenda and notes on agenda of the board meeting should be send only to the alternate director and not to the original director of the company. Advice in this matter. 

Answer:

According to Section 173, the notice of Board meeting is to be sent in writing to every director at his address registered with the company.

SS-1 provides that the Notice, Agenda and Notes on Agenda shall be sent to the Original Director also at the address registered with the company, even if these have been sent to the Alternate Director.

Although, the mode of sending Notice, Agenda and Notes on Agenda to the original director shall be decided by the company.

Therefore, it is advisable to send the Notice, Agenda and Notes on Agenda both to original and alternate director of the company.

Meeting Of Board And Its Committee  Practical Questions

Question 1. A housing company has sold a flat to its Managing Director by accepting 50% in cash and balance in installments. Decide whether this transaction attracts the provisions pertaining to loan to directors under section 185. If so, validate the transaction.

Answer:

Amendment made by Companies (Amendment) Act, 2017

Section 185

  • For Section 185 of the principal Act, the following section shall be substituted, namely:
    “185.(1) No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,-

    • any director of company, or of a company which is its holding company or any partner or relative of any such director; or
    • any firm in which any such director or relative is a partner.
  • A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that-
    • a special resolution is passed by the company in general meeting:
      Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact; and
    • the loans are utilised by the borrowing company for its principal business activities.
      Explanation: For the purposes of this sub-section, the expression “any person in whom any of the director of the company is interested” means-

      • any private company of which any such director is a director or member;
      • any body corporate at a general meeting of which not less than twenty-five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
      • any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
  • Nothing contained in sub-Sections (1) and (2) shall apply to-
    • the giving of any loan to a managing or whole-time director-
      • as a part of the conditions of service extended by the company to all its employees; or
      • pursuant to any scheme approved by the members by a special resolution; or
    • a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three year, five year or ten year Government security closest to the tenor of the loan; or
    • any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
    • any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:
      Provided that the loans made under clause’s (c) and (d) are utilised by the subsidiary company for its principal business activities.
  • If any loan is advanced or a guarantee or security is given or provided or utilised in contravention of the provisions of this section,-
    • the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees,
    • every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine
    • which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees; and
    • the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.”

Case Law Analysis

The facts of this case is similar to a decided case law in Bombay High Court in Eredie Ardesher Mehta (Dr.) Vs. Union of India (1991) 70 Comp. Case 210 (1991) 1 Comp. It was held that the company selling one of its flats to one of its directors on receiving half the price in cash and agreeing to accept the balance in instalments does not amount to giving loan.

Question 2. As the Company Secretary of Joy Ltd., what steps would you take in case the scheduled Board Meeting could not complete the agenda slated thereat. The items of business left untransacted are of extreme importance for the company’s growth and the same cannot be deferred until the next Board meeting because of urgency. Advise the Board about the steps to be taken to get the untransacted items passed.

Answer:

Untransacted Items to be passed by circulation

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

Procedure as per Section 175 and Point no 6 of Secretarial Standards

In order to get the un transacted item pass the Board may consider the following procedure as laid down in Section 175 and Point no. 6 of Secretarial Standards on Board Meetings.

  • The resolution in draft form together with the necessary papers may be circulated to the directors or members of committee at their address registered with the company in India by post, hand delivery or through electronic means which may include e-mail or fax.
  • The said resolution must be passed by majority of directors or members entitled to vote.
  • If more than one third of directors require that the resolution must be decided at the meeting, the chairperson shall put the resolution to be decided at the meeting.
  • Each business proposed to be passed by way of Resolution by circulation shall be explained by a note setting out the details of the proposal, relevant material facts that enable the Directors to understand the meaning, scope and implications of the proposal, the nature of concern or interest, if any of any Director in the Proposal, which the Director had earlier disclosed and the draft of the Resolution proposed.
  • The note shall also indicate how a Director shall signify assent or dissent to the Resolution proposed and the date by which the Director shall respond.
  • Each Resolution shall be separately explained. The decision of the Directors shall be sought for each Resolution separately.
  • Not more than seven days from the date of circulation of the draft of the Resolution shall be given to the Directors to respond and the last date shall be computed accordingly.
  • The Resolution, if passed, shall be deemed to have been passed on the last date specified for signifying assent or dissent by the Directors or the date on which assent from more than two-third of the Directors has been received, whichever is earlier, and shall be effective from that date, if no other effective date is specified in such Resolution.
  • The resolution passed through circulation be noted at a subsequent meeting and made part of the minutes of such meeting.

Question 3. Director, Ravi, was appointed on 1st July, 2018. On 2nd July, 2018 he wrote to Managing Director of the company to inspect the minutes of the board meeting held on 1st August, 2017. The Managing Director refused as he was not a director at that time. Ravi attended a meeting held on 1 September, 2018 and resigned on 3rd October, 2018.

On 4th October, 2018 he wrote to the Managing Director to send him a copy of the signed minutes of the meeting held on 1st September, 2018. Again, the Managing Director refused. Are the actions of Managing Director valid under Companies Act, 2013/Secretarial Standards? Comment. 

Answer:

According Para 7.7.1. of Secretarial Standard on Board Meeting a Director is entitled to inspect the Minutes of a Meeting held before the period of his Directorship. Further, Para 7.7.2 provides that a Director is entitled to receive a copy of the signed Minutes of a Meeting held during the period of his Directorship, even if he ceases to be a Director.

Therefore, the actions of managing director are not valid. Claim of Mr. Ravi for inspecting the Minutes of a Meeting held before the period of his Directorship and for receiving a copy of the signed Minutes of a Meeting held during the period of his Directorship is valid.

Question 4. A meeting of the Board of Directors was convened to approve the annual financial statements of the company. The company has a total of 9 directors out of which 4 directors were attending the meeting through video-conferencing while the Chairman and 4 other directors were personally present.

Five directors (including the Chairman and those attending the meeting through video-conferencing) gave their assent to approve the financial statements while three directors personally present dissented. Can the Chairman consider the financial statements as approved? Explain with reasons.

Answer:

Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014 prescribes that approval of annual financial statements must not be dealt with in any Meeting through video-conferencing or other audio-visual means.

Although, second proviso of Section 173(2) of the Companies Act, 2013 read with first proviso of Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014, provides that where there is quorum present in a meeting through physical presence of directors, any other director may participate in the meeting through video or other audio-visual means.

In the given case, Chairman and 4 other directors were personally present, thus, fulfilling the requisite quorum through physical presence of Directors, the remaining 4 directors attending the meeting through Video Conferencing can participate in the meeting.

Accordingly, assent given by the Chairman and 4 directors participating through video-conferencing to approve the financial statements shall be valid and the resolution shall be deemed to be passed by requisite majority. Space to write important points for revision

Question 5. The Chairman of the Board of Directors of Jagruti Printers Ltd. has sent a draft of Resolution along with necessary papers to all the ten directors of the company to get it passed through a resolution by circulation. The last date for signifying the assent or dissent is 20th November, 2019.

On 15th November, 2019, six directors communicated their assent while on 17th November, 2019 the remaining 4 directors requested that the resolution must be decided at a meeting. Referring to the relevant provisions of the Companies Act, 2013, decide whether the resolution can be deemed to have been passed or requires to be decided at a Board of Directors meeting? 

Answer:

As per Section 175 of the Companies Act 2013 states that, no resolution shall be deemed to have been duly passed by the Board of Directors by circulation, unless the resolution has been circulated in draft, together with the necessary papers, if any, to all the directors at their addresses registered with the company in India, by hand delivery or by post or by courier, or through electronic means which may include e-mail or fax and has been approved by a majority of the directors, who are entitled to vote on the resolution.

Although, where not less than one-third of the total number of directors of the company for the time being require that any resolution under circulation must be decided at a meeting, the Chairman shall put the resolution to be decided at a meeting of the Board.

In the above case, majority directors had communicated their assent but subsequently before the due date more than one-third directors have requested that the resolution must be decided at a board meeting.

Question 6. Therefore, the resolution sought to be passed by circulation will be required to be passed only at a Board meeting.

The Board of Directors of Passion Ltd. has passed board resolutions for the following items. Examine the validity of resolution as a secretarial auditor of the company:

  1. To invest the funds of the company for 15 lakh in ABC Mutual funds;
  2. To remit, or give time for the repayment of, any debt due from a director;
  3. To invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation;
  4. To take over a company or acquire a controlling or substantial stake in another company.

Answer:

  • Under Section 179(3) (e) of the Companies Act, 2013, the Board of Directors of a company shall exercise the powers to invest the funds of the company of 15 Lakhs in ABC Mutual funds by means of resolutions passed Boards Meetings.
  • Under Section 180(1)(d) of the Companies Act, 2013, the Board of Directors of a company shall exercise the power to remit, or give time for the repayment of, any debt due from a director only with the consent of the company by a special resolution at General Meetings.
  • Under Section 180(1)(b) of the Companies Act, 2013, the Board of Directors of a company shall exercise the power to invest otherwise in trust securities, the amount of compensation received by it as a result of any merger or amalgamation with the consent of the company by a special resolution at General Meetings.
  • Under Section 179(3)(j) of the Companies Act, 2013, the Board of Directors of a company shall exercise the powers to take over a company or acquire a controlling or substantial stake in another company by means of resolutions passed at Board Meetings.

Question 7. The following figures were extracted from the books of X Ltd (audited).

Paid up share capital                ₹ 100 Lakh

Reserve & Surplus

General Reserve                       ₹ 50 Lakh

Security Premium Account      ₹ 25 Lakh

Re-valuation Reserve               ₹ 25 Lakh

Total                                         ₹ 200 Lakh

Long Term Borrowings            ₹ 125 Lakh

Short Term Borrowings (Cash Credit Loan)            ₹ 50 Lakh

Temporary Loan for construction of Building        ₹ 25 Lakh

Total                                                                       ₹ 200 Lakh

The Board of Directors further want to borrow a sum of 350 Lakh as Long Term Loan without obtaining the consent of the members in general meeting by special resolution. Advice the Board about the validity of this proposal. What will be your answer if it is a Private Limited company?

Answer:

Under Section 180(1)(c), of the Companies Act, 2013 the board of directors of a company with the consent of the company by a special resolution shall borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.

Temporary loans means loans repayable on demand or within six months from the date of the loan such as short-term, cash credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal character, but does not include loans raised for the purpose of financial expenditure of a capital nature.

In the given problem, the eligible amount which can be borrowed by the Board is given below:

Paid up share capital                        ₹ 100 Lakh

Reserve & Surplus

General Reserve                              ₹ 50 Lakh

Security Premium Account              ₹ 25 Lakh

Total                                                 ₹ 175 Lakh

Re-valuation Reserve is not treated as free reserve as per Section 2(43).

The total borrowing of the company for the purpose of this sub section is:

Long Term Borrowings                                             ₹ 125 Lakh

Temporary Loan for construction of Building          ₹ 25 Lakh

Total                                                                         ₹ 150 Lakh

Short Term Borrowings (Cash Credit Loan) of 50 Lakhs is considered as temporary loan and loan for construction of building in not consider as temporary loan as per the explanation for temporary loan mentioned above.

Hence, the company can borrow a further sum upto 25 Lakh without seeking the approval from the members. Thus, the board cannot borrow a sum of 50 Lakhs as Long Term Loan without obtaining the consent of the members in general meeting by special resolution.

In case of private company the provision of section 180 does not apply vide exemption notification dated 05th June, 2015 therefore, the board can borrow without approval.

Meeting Of Board And Its Committee  Short Notes

Question 1. Write short notes on Passing of Resolution by circulation.

Answer:

Passing of Resolution by Circulation:

A company may pass the resolutions through circulation. The resolution in draft form together with the necessary papers may be circulated to all the directors or members of committee at their address registered with the company in India by hand or by speed post or by courier or through electronic means which may include e-mail or fax.

The said resolution must be passed by majority of directors or members entitled to vote.

If more than one third of directors require that the resolution must be decided at the meeting, the chairperson shall put the resolution to be decided at the meeting.

The resolution passed through circulation be noted at a subsequent meeting and made part of the minutes of such meeting.

CS Company Law Key Management Personnel Question and Answers

Key Management Personnel

Key Managerial Personnel

  • Under section 2(51) a Key Managerial Personnel is define as the Chief Executive Officer or Managing Director or the manager or, a Company Secretary or the whole time director and the Chief Financial Officer in relation to a company.
    Amendment made by Companies (Amendment) Act, 2017 Revised Section 2(51)-
    “Key managerial personnel” in relation to a company, means-
    • the Chief Executive Officer or the managing director or the manager;
    • the company secretary;
    • the whole-time director;
    • the Chief Financial Officer;
    • such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and
    • such other officer as may be prescribed;”
  • Every listed Company and every other public company having a paid up share capital of 10 crore or more is compulsorily required to have whole time key managerial personnel.
  • The whole time key managerial personnel is to be appointed by the Board and shall not hold office in more than one company however he is permitted to hold such other office with the permission of Board of the company.

Penalty for not appointing Key Managerial Personnel when Mandatory

Every director or the key managerial personnel who is in default shall be punishable with a fine which may extend to 50,000 and a further fine which may be extended to 1,000 for every day during which the default continues.

As per Companies (Amendment) Act, 2019

Section 203 of Companies Act, 2013 make provisions for mandatory appointment of certain Key Managerial personnel like MD or CEO, Company Secretary and CFO.

If any company makes any default in complying with the provisions of Section 203, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees – Section 203(5) of Companies Act, 2013 amended vide the Companies (Amendment) Act, 2019.

Till 2.11.2018, the section provided for fine which could be imposed only by Court. Now, penalty can be imposed by RoC or RD who is authorized for this purpose.

Even earlier, the offense was compoundable. However, procedure of compounding had to be complied with. Now, directly penalty can be imposed after issuing Show Cause Notice.

Section 203 of Companies Act 2013

The Company Secretary has been covered under the same section of KMP i.e. Section 203.

  • Rule 8A of Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rule, 2020, Appointment of Company Secretaries in companies not covered under Rule 8A. A company other than a company covered under Rule 8 which has a paid up share capital of 10 crore or more shall have a whole time company secretary.

Company Secretary of Companies Act 2013

Section 2(24) of the Companies Act, 2013 defines “company secretary” or “secretary” means a company secretary as defined in clause (c) of sub-section (1) of Section 2 of the Company Secretaries Act, 1980 who is appointed by a company to perform the functions of a company secretary under this Act.

According to clause (c) of Sub-section (1) of Section 2 of the Company Secretaries Act, 1980, a company secretary means a person who is a member of the Institute of Company Secretaries of India. Therefore, ‘Company Secretary’ means a person who is a member of the Institute of Company Secretaries of India (ICSI) and who is appointed by a company to perform the functions of a company secretary. The functions of company secretary have been detailed in Section 205 of the Act.

Statutory Duties and Liabilities of a Company Secretary of Companies Act 2013

  • Declaration regarding compliance with requirement of registration
  • Authentication of documents, proceedings and contracts
  • Signing share certificate
  • Signing annual return
  • Signing of financial statements
  • Appear before NCLT
  • Secretary as Compliance Officer of listed company
  • Demat shares
  • Additional duties
  • Nodal Officer

Functions of Company Secretary of Companies Act 2013

According to Section 205 the functions of the company secretary shall include,-

  • to report to the Board about compliance with the provisions of this Act, the rules made thereunder and other laws applicable to the company;
  • to ensure that the company complies with the applicable secretarial standards;
  • to discharge such other duties as may be prescribed.

Officer in Default of Companies Act 2013

As per Section 2(60), “officer who is in default”, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:

  • whole-time director;
  • key managérial personnel;
  • where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;
  • any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;
  • in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer.

Managerial Personnel of Companies Act 2013

Overall managerial remuneration of Companies Act 2013

Section 197 of the Companies Act, 2013 prescribed the maximum ceiling for payment of managerial remuneration by a public company to its managing director whole-time director and manager which shall not exceed 11% of the net profit of the company in that financial year computed in accordance with Section 198 except that the remuneration of the directors shall not be deducted from the gross profits.

Remuneration to Managing Director/whole time Director/Manager

The remuneration payable to any one managing director or whole- time director or manager shall not exceed 5% of the net profits of the company and if there are more than one such director remuneration shall not exceed 10% of the net profits to all such directors.

Remuneration to other directors of Companies Act 2013

Except with the approval of the company in general meeting, the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed,-

1% of the net profits of the company, if there is a managing or whole-time director or manager;

3% of the net profits in any other case.

Remuneration by a company having no profit or inadequate profit of Companies Act 2013

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 and if it is not able to comply with Schedule V, with the previous approval of the Central Government.

Managerial Remuneration under Schedule V (Part II)

Section 1: Remuneration by Companies ha:ing Profits

A company having profits in a financial year may pay remuneration to its managerial persons or persons or other director or directors in accordance with Section 197.

Section 2: Where in any financial year during the currency of tenure of a managerial person, or other director a company has no profits or its profits are inadequate it may without Central Government approval, pay remuneration to the managerial person or other directors not exceeding the limits under (A) and (B) given below:

Company Law Key Management Personnel Where the Effective Capital

Provided that the above limits shall be doubled if the resolution passed by the shareholders is a special resolution.

Explanation-

It is hereby clarified that for a period less than one year, the limits shall be pro-rated.

In case of a managerial person or other director who is functioning in a professional capacity, no approval of Central Government is required, if such managerial person or other director is not having any interest in the capital of the company or its holding company or any of its subsidiaries directly or indirectly or through any other statutory structures and not having any direct or indirect interest or related to the directors or promoters of the company or its holding company or any of its subsidiaries at any time during the last two years before or on or after the date of appointment and possesses graduate level qualification with expertise and specialised knowledge in the field in which the company operates:

Provided that any employee, of a company holding shares of the company not exceeding 0.5% of its paid up share capital under any scheme formulated for allotment of shares to such employees including Employees Stock Option Plan or by way of qualification shall be deemed to be a person not having any interest in the capital of the company.

Amendment made by Companies (Amendment) Act, 2017 Revised First Proviso to Section 197(1)-

“Provided that the company in general meeting may, with the approval of the Central Government, authorize the payment of remuneration exceeding eleven percent. of the net profits of the company, subject to the provisions of Schedule V:”

Key Management Personnel

Revised Second Proviso to Section 197(1) of Companies Act 2013

“Provided further that, except with the approval of the company in general meeting by a special resolution,-

  • the remuneration payable to any one managing director; or whole-time director or manager shall not exceed five per cent. of the net profits of the company and if there is more than one such director remuneration shall not exceed ten per cent. of the net profits to all such directors and manager taken together;
  • the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed,-
    • one per cent. of the net profits of the company, if there is a managing or whole-time director or manager;
    • three per cent, of the net profits in any other case.

Third Proviso to Section 197(1) of Companies Act 2013

“Provided also that, where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.”

Compensation For Loss of Office of Managing or Whole-Time Director or Manager (Section 202)

Section 202 provides that 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.

However, No payment shall be made in the following cases:

  • where the director resigns from his office as a result of the reconstruction/amalgamation of the company and is appointed as the managing or whole-time director, manager or other officer of the reconstructed company/of resulting company from the amalgamation;
  • where the director resigns from his office otherwise than on the reconstruction/ amalgamation of the company;
  • where the office of the director is vacated due to disqualification;
  • where the company is being wound up due to the negligence or default of the director;
  • where the director has instigated, or has taken part directly or indirectly in bringing about, the termination of his office.

Steps for the Appointment of Whole-time Director

Company Law Key Management Personnel Appointment of Whole time Director as per Schedule V

List of Important Forms of Companies Act 2013

Company Law Key Management Personnel List of Important Forms

Key Management Personnel  Short Notes

Question 1. Write a note on the following:

Statutory duties of a Company Secretary under the Companies Act, 2013.

Answer:

Company Law Key Management Personnel Duties of company secretary

Key Management Personnel  Distinguish Between

Question 1. Distinguish between the following:

‘Managing director’ and ‘whole-time director’.

Answer:

Company Law Key Management Personnel Whole Time Director

Question 2. Distinguish between the following:

‘Key-managerial personnel’ and ‘Managing Director’.

Answer:

‘Key-managerial personnel’ and ‘Managing Director’

Key-Managerial Personnel

As per Section 2(51) of the Companies Act, 2013, “key managerial personnel”, in relation to a company, means-

  • the Chief Executive Officer or the managing director or the manager;
  • the Company Secretary;
  • the whole-time director;
  • the Chief Financial Officer; and
  • such other officer as may be prescribed.

Amendment made by Companies (Amendment) Act, 2017 Revised Section 2(51)-

“Key managerial personnel” in relation to a company, means-

  • the Chief Executive Officer or the managing director or the manager;
  • the company secretary;
  • the whole-time director;
  • the Chief Financial Officer;
  • such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and
  • such other officer as may be prescribed;”

‘Key managerial personnel’ (KMP) is a broader term and it includes managing director and other specified officers of a company. For being designated as KMP vesting of substantial power is not necessary. For example, a CFO or a Company Secretary may or may not have substantial power of management; still they may be designated as KMP.

Managing Director

According to Section 2(54) of the Companies Act, 2013, “managing director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with of the affairs of the company and substantial powers of management position of managing director, by includes a director occupying the whatever name called.

A Managing Director (MD) can be KMP but it is not mandatory that a KMP shall be MD.

The Managing Director must have substantial power of management.

Question 3. Distinguish between the following:

Chief Executive Officer and Managing Director.

Answer:

Section 2(18) of the Companies Act, 2013, has defined “Chief Executive Officer’ so as to mean an officer of a company, who has been designated as such by it.

Section 2(54) of the Companies Act, 2013, “Managing Director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs. of the company and includes a director occupying the position of managing director, by whatever name called.

Key Management Personnel  Descriptive Questions

Question 1. Kapil is branch head of a limited company. The company proposes to elevate Kapil to the Board. Enumerate the steps involved in such a proposal.

Answer:

Company Law Key Management Personnel Approval of Central Government

Steps for the Appointment of Whole-time Director

Company Law Key Management Personnel Appointment of Whole time Director as per Schedule V

Question 2. Explain the meaning of the term ‘key managerial personnel’ in relation to a company as introduced by the Companies Act, 2013 and also state the manner in which they are appointed.

Answer:

Company Law Key Management Personnel Appointment of Key Managerial Personnel

Question 3. If a company has appointed a Company Secretary then his signature is mandatory on the share certificate issued by the company. Analyse with reference to the provisions of the Companies Act, 2013.

Answer:

Under Section 46(3) of the Companies Act, 2013 a share certificate, issued under the common seal, if any, of the company or signed by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary, specifying the shares held by any person, is the prima facie evidence of the title of the person to such shares.

Therefore, where the company has appointed a Company secretary then his signature is compulsory on the share certificate issued by the company.

Question 4. Jackson is a prospective candidate for the post of Managing Director of Tirubuvani Sugars Ltd. Unfortunately, his proposed appointment could not satisfy the conditions of Schedule V of the Companies Act, 2013. Discuss if any other option is available with the company to appoint him as the Managing Director of the company. 

Answer:

  • Pursuant to Section 196 and Section 201 of the Companies Act, 2013 in case the provisions of Schedule V of the Companies Act, 2013 are not satisfied by company, w.r.t. appointment of a Managing Director, the terms and conditions of such appointment and remuneration payable be approved by the Board of Directors (BOD) at a meeting which shall be subject to approval by a resolution at the next general meeting of the company and by the Central Government.
  • Further an application seeking approval to the appointment of a managing director as aforesaid shall be made to the Central Government, in E-Form No. MR:2, within a period of 90 days from the date of such appointment.
  • Section 201 of the Companies Act, 2013, before such application is made to the Central Government, there shall be issued by or on behalf of the company a general notice to the members indicating nature of application proposed to be made.
  • The general notice shall be published in at least once in a newspaper in the main language of the district in which, registered office of the Company is situated and at least once in English in an English newspaper circulating in that district.
  • The copies of the notices, together with a certificate by the company as to the due publication therefore, shall be attached to the application.
  • Hence, Tirubuvani Sugars Limited will file an application seeking approval to the appointment of Jackson as Managing Director to the Central Government in e-Form No. MR-2.

Question 5. Logic Ltd. wants to remove Radhika, Company Secretary of the Company. Explain the procedure.

Answer:

A Company Secretary can be removed or dismissed like any other employees of the organization. Since he/she is appointed by Board, the Board of Directors of a company has absolute discretion to remove a Company Secretary or to terminate his/her services at any time for any reason or without any reason. Although, principles of natural justice like show cause notice, hearing, reasoned order etc. must be followed.

A Company Secretary can be removed in accordance with the terms of. appointment and the Board can record the same. The procedure for removal of Company Secretary is given below:

  • Convene a Board Meeting after giving notice to all the Directors of the company as per section 173 of the Companies Act, 2013, place the matter of removal of the Company Secretary and pass a resolution to the effect. The resolution shall state the effective date of termination of the Company Secretary.
  • The Company shall thereafter serve a notice of termination to the Company Secretary. The period of notice shall be governed by the employment letter or in its absence the termination policy of the Company.
  • The Company Secretary shall cease to be in office from the date of expiry of notice.
  • Company is required to file e-Form DIR-12 within 30 days of cessation with the Registrar of Companies together with requisite filing fees along with evidence of Cessation. Inform the stock exchange, if the company is listed.
  • Make entries in the Register maintained for recording the particulars of Company Secretaries under section 170 of the Companies Act, 2013.
  • Issue a general public notice, if it is so warranted, according to size and nature of the company.

Hence, Logic Ltd. has to follow above procedures to remove Radhika, Company Secretary of the company.

Key Management Personnel  Practical Questions

Question 1. Pawan, the Managing Director of ABC Ltd., resigned on 10th May, 2012. The company has filed e-form No. DIR-12 with the Registrar of Companies mentioning the date of resignation as 5th July, 2013.

The company issued various cheques to its investors in repayment of the deposits after 10th May, 2012 and the said cheques were dishonoured. The investors filed complaints against the company and Pawan, the former Managing Director of the company. Discuss and advise whether Pawan shall be liable or not.

Answer:

Company Law Key Management Personnel MD of ABC Ltd

Question 2. In a limited company, the Managing Director terminated an employee on the charge of various misconducts. The aggrieved employee filed a writ petition before the High Court challenging the dismissal contending that the Managing Director had no power to do so and the proper authority was the Board of Directors.

During the pendency of writ, the Board of Directors passed a resolution ratifying the action of the Managing Director. The High Court while setting aside the Managing Director’s dismissal order, allowed the writ petition. Managing Director appealed to the Supreme Court. Decide the case having regard to the judicial pronouncements in the matter. 

Answer:

Company Law Key Management Personnel Case Law Analysis

Question 3. Heal Ltd. owns a chain of hospitals in Mumbai. Dr. Aman, a practicing surgeon, has been appointed by the company as its non- executive ordinary director and wants to pay him fees on case-to-case basis for surgeries performed by him on patients at hospital. Advise the company, whether payment of such fees to him would amount to payment of managerial remuneration to a director under the Companies Act, 2013.

Answer:

Company Law Key Management Personnel Remuneration for Professional Services

Question 4. Alok, the Managing Director of Yellow Ltd., borrowed a large sum of money and misappropriated the same. Later, when -the lender demanded his money, the company refused to repay, contending that the money borrowed by Managing Director was misappropriated by him and the company is not liable for repayment. Decide, giving reasons, whether the lerder would succeed in recovering the money from the company.

Answer:

Company Law Key Management Personnel Analysis of the problem in the light of decided case law

Question 5. Ms. Jyoti is the Managing Director of Wise (India) Ltd., incorporated under the Companies Act, 2013. Board of Directors of the company presents the following financial data extracted from the company’s financial statements as at 31st March, 2015:

Company Law Key Management Personnel Particulars

Due to losses in the financial year 2014-15, the company is not in a position to pay any remuneration to Ms. Jyoti, Managing Director of the company. As per the agreement of service between Ms. Jyoti and the company, in case of losses or inadequacy of profits in any financial year, she is to be paid remuneration on the basis of ‘effective capital’ of the company. Based on the provisions of the Companies Act, 2013, decide the maximum remuneration payable to Ms. Jyoti for the financial year 2014-15 without the approval of the Central Government.

Answer:

“Effective Capital” means the aggregate of the paid-up share capital (excluding share application money or advances against shares); amount, if any for the time being standing to the credit of share premium account; reserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable after one year (excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc.,

And other short-term arrangements) as reduced by the aggregate of any investments (except in case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities), accumulated losses and preliminary expenses not written off.

Computation of effective capital for managerial remuneration:

Company Law Key Management Personnel Particulars 1

Remuneration payable by companies having no profit or inadequate profit without Central Government approval [Section II of the Part II of the Schedule V]: Where in any financial year during the currency of tenure of a managerial person, or other director a company has no profits or its profits are inadequate, it may, without Central Government approval, pay remuneration to the managerial person or other director not exceeding the limits given below:

Remuneration based on effective capital:

Company Law Key Management Personnel Where the Effective Capital

Provided that the above limits shall be doubled if the resolution passed by the shareholders is a special resolution.

The above limits shall be doubled if the resolution passed by the shareholders is a special resolution.

If a period less than one year, the limits shall be pro-rated. Considering the above provisions, Ms. Jyoti, Managing Director of Wise (India) Ltd. can be remunerated in following ways without approval of Central Government:

  • As company’s effective capital’ is between ” 5 Crores to 100 Crores”; Ms. Jyoti can be paid annual remuneration of 84 Lakhs i.e. monthly * 7 Lakhs.
  • If company pass special resolution, remuneration can be doubled i.e. *1 Crore 68 lakhs annum i.e. 14.00 Lakhs per month can be paid.

Amendment made by Companies (Amendment) Act, 2017 Revised First Proviso to Section 197(1)-

“Provided that the company in general meeting may, with the approval of the Central Government, authorise the payment of remuneration exceeding eleven per cent. of the net profits of the company, subject to the provisions of Schedule V:”

Revised Second Proviso to Section 197(1)-

“Provided further that, except with the approval of the company in general meeting by a special resolution,-

  • the remuneration payable to any one managing director; or whole-time director or manager shall not exceed five percent. of the net profits of the company and if there is more than one such director remuneration shall not exceed ten per cent. of the net profits to all such directors and manager taken together;
  • the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed,-
    • one per cent. of the net profits of the company, if there is a managing or whole-time director or manager;
    • three per cent. of the net profits in any other case.

Third Proviso to Section 197(1)-

“Provided also that, where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.”

Important:

As per Companies (Amendment) Act 2019.

Penalty for contravention of Section 197 in respect of managerial remuneration

Section 197 makes provisions in respect of managerial remuneration. If any person makes any default in complying with the provisions of Section 197, he shall be liable to a penalty of one lakh rupees and where any default has been made by a company, the company shall be liable to a penalty of five lakh rupees – Section 197(15) of Companies Act, 2013 amended vide the Companies (Amendment) Act, 2019.

Till 2.11.2018, the section provided for fine which could be imposed only by Court. Now, penalty can be imposed by RoC or RD who is authorized for this purpose.

Even earlier, the offense was compoundable. However, procedure of compounding had to be complied with. Now, directly penalty can be imposed after issuing Show Cause Notice.

Question 6. It has been found that Mrs. Shweta director of a company, has drawn remuneration in excess of the prescribed limits. The Chief Financial Officer of the company has sought your advice in the matter. As the Secretary of the company, advise the Chief Financial Officer, the course of action that may be taken in this regard.

Answer:

Company Law Key Management Personnel Provisions of Section 197

Question 7. Out of 9 directors in Rooftop Ltd., 5 are Indian nationals, 3 are foreign residents and one is a person of Indian origin. The articles of the company stipulate that quorum for a Board meeting shall be 5 directors of which at least one director shall be a foreign resident. Referring to the provisions of the Companies Act, 2013, examine the validity of the above provision in the articles. 

Board of directors of KM Ltd. proposes to transfer 11.33% of the net profits of the company for the financial year 2015-16 to general reserves. Examining the provisions of the Companies Act, 2013, advise the Board whether it can go ahead with its proposal.

Answer:

Company Law Key Management Personnel Section 174

A company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserve of the company.

Hence, Board of Directors of KM Ltd. may transfer 11.33% of the net profit to general reserves.

Question 8. Mr. Atul Rastogi, the Managing Director of ABC Limited has resigned from the Managing Directorship of the company. He, however, wants to continue as a director in the company. Referring to the provisions of the Companies Act, 2013, state whether Mr. Atul can continue as a director in the company.

Answer:

Yes. According to the provisions of the Companies Act, 2013, Mr. Atul Rastogi can continue as a director of the company in the given case.

In G. Subba Rao. v. Rasmi Die-Casting Ltd. [1998] 93 Com. Cases 797, the Andhra Pradesh High Court held that from the definition of ‘managing director’ as per Section 2 (26) [Corresponds to Section 2(54) of the Companies Act, 2013], it is clear that the managing director has to act under the superintendence, control and direction of the Board of directors. Moreover, powers of routine administrative nature like the power to affix common seal, to draw and endorse any negotiable instrument do not fall within the substantial powers conferred upon the managing director.

What is to be seen is whether the managing director making any representation for and on behalf of a company had in fact, ‘actual authority’ either in terms of the provisions of the constitution of that company or by virtue of the delegation by the Board of directors.

A managing director must hold and continue to hold the office of director. A managing director is first a director and then a managing director with certain additional powers [Shanta Shamsher Jung Bahadur v. Kamani Brothers P. Ltd. (1959) 29 Com Cases 501 (Bom.)].

A managing director is an ordinary director entrusted with special powers. If a company wants to appoint a person as managing director, who is not a director of the company, he has first to be appointed as an additional director in accordance with the provisions of Section 161 of the Companies Act, 2013 of the Act. Space to write important points for revision

Question 9. Mrs. Beautiful, aged 40 years, is the Managing Director of Beauty Care Products Limited. She has received contribution to superannuation fund and leave encashment during her tenure with the company during the financial year ending 31st March, 2017. The Manager (Accounts) of the company is not very confident, if these perquisites are to be included in the computation of ceiling on remuneration specified in the Companies Act, 2013. Referring to the provisions of the Act, advise the Manager (Accounts). 

Answer:

The matter given in the question needs to be solved in the light of the provisions as contained in Section IV of Part II to Schedule V of the Companies Act, 2013. A managerial person or other director shall be eligible for the following perquisites which shall not be included in the computation of the ceiling on remuneration specified in Section 2 and 3:

  • contribution to provident fund, superannuation fund or annuity fund to the extent these either singly or put together are not taxable under the Income-Tax Act, 1961;
  • gratuity payable at a rate not exceeding half a month’s salary for each completed year of service; and
  • encashment of leave at the end of the tenure.

Therefore, applying the provisions as stated above, contribution to superannuation fund received by Mrs. Beautiful, Managing Director shall not be included in the computation of managerial remuneration ceiling. But she has received leave encashment during the tenure of her service and not at the end of her tenure and thus it should be included in the calculation of ceiling of managerial remuneration under the provisions of the Companies Act, 2013.

The Manager (Accounts) is accordingly advised.

Question 10. Sand Ltd. wants to appoint River as Managing Director of the company for a period of three years with effect from 1st August, 2018. River has given a written statement to the company that he has paid rupees one thousand to the prescribed authorities for a conviction of an offence under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 on 30th June, 2018. State whether River can be appointed as Managing Director of the company under the Companies Act, 2013. 

Answer.

According to Schedule V of the Companies Act, 2013, no person shall be eligible for appointment as a managing or whole-time director or a manager of a company, if he has been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

In the present case Mr. River has only paid fine of 1,000 to the prescribed authorities for a conviction of an offence under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974. Since it is only conviction and he was not detained, he can be appointed as Managing Director of the company.

Question 11. On 4th September, 2018 Varun was appointed as Managing Director of Astha Ltd. by the Board of directors subject to the approval of the members at the next general meeting. On 10th September, 2018 Varun in the capacity of managing director executed an agreement with Shabeer to purchase some machines.

On 3rd October, 2018 members in the general meeting did not approve the appointment of Varun. Later on company refuses to accept delivery of machines from Shabeer on the ground that agreement was executed by Varun whose appointment is not approved by the members. Is refusal of company valid on the said ground? Examine.

Answer:

According to Section 196(5) of Companies Act, 2013 where an appointment of a managing director, whole-time director or manager is not approved by the company at a general meeting, any act done by him before such approval shall not be deemed to be invalid.

In accordance with above express provision in the given case the contention of refusing to accept delivery of goods on the grounds that the appointment of managing director was not approved at the general meeting and agreement was signed prior to general meeting and after appointment by the Board does not stand valid.

Question 12. SRM Ltd. has paid 15 lakh as an insurance premium on behalf of its Company Secretary and Managing Director for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company. Can the company pay such insurance premium? Discuss referring to the provisions of the Companies Act, 2013.

Answer:

Under section 197(13) of Companies Act, 2013, where any insurance is taken by a company on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer or Company Secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel.

Further it has been provided that if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration. In accordance with above express provision in the given case the company can pay the insurance premium of 15.00 lakhs for company secretary and managing director for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company, and such shall not be treated as remuneration.

Question 13. ‘S’ is a member of Institute of a Company Secretaries of India. He has defaulted in payment of annual subscription and his name is removed from the Register of Members by ICSI on 31 December, 2018.

  1. Can he be appointed as “Company Secretary” by ‘M’ Ltd. with a paid up share capital of 10 crore on 1 January, 2019?
  2. If M Ltd. has paid up share capital of 2 crore and it has appointed ‘S’ as a company secretary on part time basis, is it valid? (4 marks)

Answer:

Section 2(24) of the Companies Act, 2013 defines “company secretary” or “secretary” means a company secretary as defined in clause (c) of sub Section (1) of Section 2 of the Company Secretaries Act, 1980 who is appointed by a company to perform the functions of a company secretary under this Act.

According to clause (c) of Sub-section (1) of section 2 of the Company Secretaries Act, 1980, a company secretary means a person who is a member of the Institute of Company Secretaries of India. Therefore, ‘Company Secretary means a person who is a member of the Institute of Company Secretaries of India (ICSI) and who is appointed by a company to perform the function of a company secretary. The functions of company secretary have been detailed in Section 205 of the Companies Act, 2013.

  • No, S cannot be appointed as a company secretary as his name is removed from the register of members by ICSI on 31.12.2018 itself.
  • There is no mandatory requirement to appoint company secretary for a company having paid up share capital of less than five crore rupees. No, S cannot be appointed as a company secretary of M Ltd. even if the paid up capital of the company is 2 crores as his name is removed from the register of members by ICSI. Therefore, appointment of S as Company Secretary is not valid.

Question 14. ABC Corporation Ltd. has no managerial person acting in professional capacity. During the current financial year the company sustained a loss. How can the company remunerate their non-professional managerial personnel in such a situation?

Answer:

The ABC Corporation Ltd. can remunerate their non-professional managerial personnel according to the following provisions of Section 197 of the Companies Act, 2013 read with Schedule V of the Act, which provides as under:

  • If in any financial year, a company has no profits or its profits are inadequate, the company shall not pay by way of remuneration any sum exclusive of sitting fees to its directors including any managing or whole- time director or manager except in accordance with the provisions of Schedule 5.
  • In cases where Schedule V is applicable on grounds of no profits or inadequate profits, any provision relating to the remuneration of any director which purports to increase or has the effect of increasing the amount thereof, whether the provision be contained in Company’s memorandum or articles, or in an agreement entered into by it, or in any. resolution passed by the company in general meeting or its Board, shall not have any effect unless such increase is in accordance with the conditions specified in that schedule.

Company Law Key Management Personnel Where the Effective Capital

Provided that the remuneration in excess of above limits may be paid if the resolution passed by the shareholders is a special resolution.

Question 15. Owing to the resignation of Prashant, Managing Director of Beauty Herbals Ltd. on 15th October, 2019, the company appointed one of its Senior Deputy General Manager Kristina Kelly, aged 26 years and a Canadian citizen as its Managing Director with effect from 1st November, 2019 at a meeting of the Board of Directors held on 31st October, 2019.

Kristina Kelly came to India for the first time for the purpose of taking up employment in India on 1st January, 2018. She got appointed in the Company on 1st April, 2018. From 1st December, 2018 she was sent for a training program for 6 months and she returned to India on 1st June, 2019. Advise the management of the company whether her appointment by the Board of Directors is valid and if any further compliances are required to validate her appointment.

Answer:

The Foreign national can also be appointed as a Managing Director of a company subject to the compliance of conditions prescribed under Section 196 along with Part I of Schedule V of the Companies Act, 2013.

As per Part I (e) of Schedule V of the Companies Act, 2013, the person is required to be a resident of India to be appointed as a Managing Director of the company.

As per Explanation I to the above schedule, resident in India includes a person who has been staying in India for a continuous period of not less than 12 months immediately preceding the date of his appointment as a managerial person and who has come to stay in India, –

  • for taking up employment in India; or
  • for carrying on a business or vacation in India.

In the given case, Kristina Kelly who is a Canadian citizen, appointed as Managing Director of the company w.e.f. November 01, 2019 has not stayed in India for a continuous period of 12 months immediately preceding the date of her appointment.

Consequently, her appointment as Managing Director by the Board of Directors of the Company is not valid as it is not in compliance with Part I of Schedule V of the Companies Act, 2013.

Therefore, to validate her appointment, the company is required to file an application in e-Form MR-2 within a period of 90 days from the date of such appointment to the Central Government seeking the approval for such appointment as provided in Section 196 read with Rule 7 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

Question 16. Board of director of Yes No Ltd. proposes to appoint Arjun as managing director. Arjun has recently celebrated his 71st birthday. Arjun has spent his entire career in power sector and will be a strategic fit for Yes No Ltd. Company Secretary of the company suggests that Arjun can only be appointed through special resolution. Do you agree with the Company Secretary?

Answer:

According to Section 196(3) of the Companies Act, 2013, no company shall appoint or continue the employment of any person as managing director, whole-time director or manager who is below the age of 21 years or has attained the age of 70 years.

  • Although, appointment of a person who has attained the age of 70 years may be made by passing a special resolution in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person.
  • Where no such special resolution is passed but votes cast in favour of the motion exceed the votes, if any, cast against the motion and the Central Government is satisfied, on an application made by the Board, that such appointment is most beneficial to the company, the appointment of the person who has attained the age of seventy years may be made..

Consequently, in the above case, appointment of Mr. Arjun in Yes No Ltd. can also be made by an application made by the Board of Directors to the Central Government. Hence, advice of Company Secretary is not correct.

Question 17. X has been appointed as the Managing Director of XYZ Limited. The company does not have any other whole time directors. The terms and conditions of his appointment are as under:

  1. Remuneration amounting to 5% of the net profits of the company.
  2. A fees of 1,00,000 per annum towards actuarial services, even though X does not hold any professional qualification in actuarial science.
  3. Sitting fees of 50,000 for every meeting of the Board or the Committee thereof attended by X.

The Company had defaulted in the repayment of interest and principal on term loans borrowed from banks, which default is still subsisting. Suggest, whether the above remuneration is in line with the provisions of the Companies Act, if not also explain the remedial action required from the Company.

Answer:

Chapter 8 of the Companies Act, 2013 read with Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 deal with the legal and procedural aspects of appointment of key managerial personnel including managing director, whole-time director or manager, managerial remuneration, secretarial audit etc.

  • 10 has been appointed as the Managing Director of XYZ Ltd. The Company does not have any other Whole Time Director. In this case, remuneration to X, amounting to 5% of Net Profits of the Company, is absolutely as per provisions of the Act and perfectly valid.
  • In case of a managerial person or other director who is functioning in a professional capacity: If a managerial personnel or other director is functioning in professional capacity, remuneration as per item (A) may be paid, if the following conditions is satisfied:
    • They are not having any interest in the capital of the company or its holding company or any of its subsidiaries directly or indirectly or through any other statutory structures
    • not having any, direct or indirect interest or related to the directors or promoters of the company or its holding company or any of its subsidiaries at any time during the last two years before or on or after the date of appointment; and
    • possesses graduate level qualification with expertise and specialized knowledge in the field in which the company operates. Hence, fees paid to X amounting to 1 lakh p.a. towards actuarial services is not valid.
  • Sitting fee can be paid to Director upto 1 lakh per meeting. Hence, sitting fee of 50000/- for every Board Meeting or meeting of committee thereof, attended by X, is valid.
  • The benefits of the limits specified for Managerial Remuneration can be availed if the following further conditions are satisfied.
  • Further, considering the above provisions, the fee payable for actuarial services is to be added to Mr. X remuneration as he does not hold any professional qualification to practice actuarial science.
  • In the above case, the overall remuneration exceeds the limit of 5% of net profits as provided in the section. Therefore, the company has to get the approval of the shareholders by way of a special resolution in terms of Section 197 of the Act.
  • As the company has defaulted in payment of interest and principal on term loans to the banks, the company should also take a prior approval of the banks for paying the above remuneration to Mr. X before passing the special resolution by shareholders.

Question 18. XYZ Ltd wants to pay sitting fees to its women directors, less than the sitting fees payable to other directors of the Company. And want to appoint X as its Managing Director of the company for a term exceeding five years at a time. Advise the company on the above proposals. 

Answer:

As per Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014:

A company may pay a sitting fees to a director for attending meetings of the Board or committees thereof, such sum as may be decided by the Board of directors thereof which shall not exceed one lakh rupees per meeting of the Board or committee thereof.

Although, for Independent Directors and Women Directors, the sitting fees shall not be less than the sitting fee payable to other directors.

Thus, XYZ Ltd. cannot pay sitting fees to its women directors less than the sitting fees payable to other directors of the company.

Conclusion:

As per Section 196 of the Companies Act, 2013 a company shall not appoint or reappoint any person as its managing director for a term exceeding five years at a time.

Thus, Mr. X cannot be appointed as Managing Director of the company for a term exceeding five years at a time.

Question 19. X, a finance expert having experience of 30 years. XYZ Ltd. wants to appoint him as a Chief Financial Officer at a salary which is more than that of director of the company. State whether the limits on managerial remuneration under section 197 of the Companies Act, 2013 and Schedule -V apply to X.

Answer:

Remuneration of Director:

According to Section 197 of the Companies Act, 2013 contains certain limits with respect to remuneration of Directors including managing director and whole time director and manager. However, these limits do not apply to other key managerial personnel i.e. the Chief Executive Officer, the Chief Financial Officer and the Company Secretary.

As per, Schedule V contains certain limits with respect to remuneration of managing director, whole time director and manager. However, these limits also do not apply to other key managerial personnel, i.e. the Chief Executive Officer, the Chief Financial Officer and the Company Secretary.

Conclusion:

So, the limits on managerial remuneration as contained in section 197 of the Companies Act, 2013 and Schedule V shall not apply to Mr. X.

Key Management Personnel  Descriptive Questions

Question 1. Describe the compensation for loss of office of managing or Whole Time Director or Manager.

Answer:

Section 202 provides that 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.

However, No payment shall be made in the following cases:

  • where the director resigns from his office as a result of the reconstruction/amalgamation of the company and is appointed as the managing or whole-time director, manager or other officer of the reconstructed company/of resulting company from the amalgamation;
  • where the director resigns from his office otherwise than on the reconstruction/ amalgamation of the company;
  • where the office of the director is vacated due to disqualification;
  • where the company is being wound up due to the negligence or default of the director;
  • where the director has been guilty of fraud or breach of trust or gross negligence or mismanagement of the conduct of the affairs of the company or any subsidiary company or holding company; and
  • where the director has instigated, or has taken part directly or indirectly in bringing about, the termination of his office.

Question 2. Enumerate the statutory duties and liabilities of a company secretary.

Answer:

  • Declaration regarding compliance with requirement of registration: In terms of Section 7(1)(b) of the Companies Act, 2013, a company gets incorporated by submitting memorandum and articles duly signed along with a declaration in a prescribed form that all requirements of Act and rules have been complied with in respect of registration of company. Such declaration in prescribed form can be signed by an Advocate, a chartered accountant, cost accountant or company secretary in practice who is engaged in the formation of the company and by a person named in the articles as a director, manager or secretary of the company.
  • Authentication of documents, proceedings and contracts: Authentication is more than simply attestation. Authentication is attestation made by proper officer by which he certifies that a record is in due form of law and that the person who certifies is the officer appointed to do so. A document or proceeding requiring authentication by a company or contract made by or on behalf of a company may be signed by any key managerial personnel or an officer of the company duly authorized by the Board in this behalf.
  • Signing share certificate:
    Share certificates of the company should be signed by two directors (out of which one should be Managing Director or whole time director, if appointed) and Secretary or other person authorized by Board.
  • Signing annual return:
    Annual return to be filed with Registrar of Companies has to be signed by a director and Company Secretary. If Company does not have Company Secretary, the return can be signed by company secretary in practice.
  • Signing of financial statements:
    The financial statement, including consolidated financial statement is to be signed on behalf of the Board by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director, if any, and the Chief Executive Officer, the Chief Financial Officer and the company secretary of the company, wherever they are appointed.
  • Appear before NCLT:
    A Company Secretary can appear before National Company Law Tribunal (NCLT) on behalf of the company. [Section 432]
  • Secretary as Compliance Officer of listed company:
    As per clause (1) of Regulation 6 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, a listed company is required to appoint the company secretary to act as ‘Compliance Officer’, who will be responsible for the following-

    • ensuring conformity with the regulatory provisions applicable to the listed entity in letter and spirit.
    • co-ordination with and reporting to the Board, recognised stock exchange(s) and depositories with respect to compliance with rules, regulations and other directives of these authorities.
  • Demat shares
    Secretary has to coordinate between depository and stock exchange in case of demat shares.
  • Additional duties
    In addition to statutory duties of company secretary, he is often entrusted with additional duties like looking after legal matters, personnel matters, finance and sometime even general administration.
  • Nodal Officer
    Company secretary has to perform duty of nodal officer under IEPF Rules. He shall verify all applications filed to reclaim shares from IEPF.

Liabilities of Company Secretary

Company Secretary has been defined as ‘Officer in default’ along with Managing Director, Manager and Wholetime Director etc. Thus, he can be punished in respect of offences under Companies Act. He may be held liable as Key Managerial Personnel also under various provisions of the Act.

Question 3. Enumerate the role and responsibilities of company secretary.

Answer:

A company secretary is an officer of the company responsible for compliance by the company with the provisions of the Companies Act, 2013 and various other corporate, taxation, industrial and economic laws applicable to companies in general.

Under the Companies Act, the role of a secretary is three-fold, viz., as a statutory officer, as a co-ordinator and as an administrative officer if so authorized. Similarly, the responsibility of company secretaries extends not only to a company, but also to its shareholders, depositors, creditors, employees, consumers, society and government.

The role of a company secretary may conveniently be studied from three different angles:

  • as a statutory officer,
  • as a co-ordinator,
  • as an administrative officer..

Statutory Officer:

The company secretary is an officer responsible for compliance with numerous legal requirements under different Acts including the Companies Act, 2013 as applicable to companies. The responsibilities of company secretary has also increased as he has been included in the definition of Key Managerial Personnel as defined in Section 2(51) of the Act, who are also liable to punishment by way of imprisonment, fine or otherwise for violation of the provisions of the Companies Act which hold the “officers in default” under Section 2(60).

Co-ordinator:

On dealing with the Board functions, Peter Ferdinand Drucker say – “But there are real functions which only a Board of directors can discharge”. The Board cannot function without proper coordination amongst various department of the company and communication of their proposals and project which deserve consideration of the board.

This is evidenced by the various conditions imposed in the loan agreements entered into between the financial institutions and the assisted companies. Company managements look to the company secretary for implementation of the conditions in the loan agreements.

The financial institutions stipulate that in the case of companies assisted by them financially, compliance certificate as per their format duly certified by the company secretary should be furnished periodically at the Board meetings.

Furnishing of the certificate requires skill of coordination between the company secretary and the functional heads and the factory manager.

CS Company Law Directors Question and Answers

Law Directors

Number of Directors

Every public company shall have at least 3 directors every private company shall have at least 2 directors and every one-person company shall have at least 1 director under Section 149.

Legal Position of Director

Directors are trustees for the company i.e. the directors are persons selected to manage the affairs of the company for the benefit of the shareholders.

Maximum Number of Directors

The maximum number of directors is 15, which can be increased by passing a special Resolution.

Woman Director

Certain prescribed class or classes of companies is required to have at least one woman director. This is a mandatory provision. Residence of Director

Residence of Director

Every company including one person company shall have at least one director who stays in India for not less than 182 days during the financial year.

Number of Directorship

The maximum limit on the total number of directorships has been fixed at 20 companies and the maximum number of public companies in which a person can be appointed as a director shall be 10.

Removal of Director

A director may be removed from the office by giving a special notice.

List of Important Forms

Company Law Directors List Of Important Forms

Short Notes

Question 1. Write a note on the following:

Resident director

Answer:

Company Law Directors Meaning of Resisdence

Distinguish Between

Question 1. Distinguish between the following:

‘Appointment of directors by nomination’ and ‘appointment of directors against casual vacancy’.

Answer:

Company Law Directors Appointment of Directors

Descriptive Questions

Question 1. State the provisions of the Companies Act, 2013 relating to loans to directors.

Answer:

Amendment made by Companies (Amendment) Act, 2017 Section 185:

  • For Section 185 of the Principal Act, the following section shall be substituted, namely:
    “185. (1) No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,-

    • any director of the company, or of a company which is its holding company or any partner or relative of any such director; or
    • any firm in which any such director or relative is a partner.
  • A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the directors of the company is interested, subject to the condition that-
    • a special resolution is passed by the company in the general meeting: Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security and any other relevant fact; and
    • the loans are utilized by the borrowing company for its principal business activities.
      Explanation. For this sub-section, the expression “any person in whom any of the directors of the company is interested” means-

      • any private company of which any such director is a director or member;
      • any body corporate at a general meeting of which not less than twenty-five percent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
      • any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act by the directions or instructions of the Board, or of any director or directors, of the lending company.
  • Nothing contained in sub-sections (1) and (2) shall apply to
    • the giving of any loan to a managing or whole-time director-
      • as a part of the conditions of service extended by the company to all its employees; or
      • under any scheme approved by the members by a special resolution; or
    • a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three year, five year or ten year Government security closest to the tenor of the loan; or
    • any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
    • any guarantee given or security provided by a holding company in respect of a loan made by any bank or financial institution to its subsidiary company:
      Provided that the loans made under clauses (c) and (d) are utilized by the subsidiary company for its principal business activities.
  • If any loan is advanced or a guarantee or security is given or provided or utilized in contravention of the provisions of this section,-
    • the company shall be punishable with a fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees,
    • every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with a fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees; and
    • the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months, or with a fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.”

Question 2. The Board of Directors of Zest Ltd. appoints Pavan as a director under Section 161, of the Companies Act, 2013 by passing a resolution by circulation. The appointee now seeks your advice about the tenure of his appointment. Advise him.

Answer:

Company Law Directors Appointment of Term of Additional Director

Question 3. A person other than a retiring director is also eligible for appointment as director. Examine. 

Answer:

Company Law Directors Right of Persons

Question 4. Comment on the following:

Director Identification Number (DIN) is not mandatory for directors of a foreign company having branch offices in India.

Answer:

Company Law Directors Provisions related to DIN

Question 5. In what way do the Companies Act, 2013 and the Rules made thereunder regulate the appointment of woman directors in a company? Explain.

Answer:

Company Law Directors Appointment of woman director

Question 6. Comment on the following:

Every director of a company must disclose his interest or the nature of his concern in other companies in which he is a director.

Answer:

Disclosure of interest by Director (Section 184)

  • Yes, every director of a company must disclose his interest or the nature of his concern in other companies in which he is a director. The Act provides for the disclosure by directors relating their concern or interest in any company or companies or body corporate (including shareholding interest), firms, or other association of individuals by giving a notice in writing in form MBP 1 (Rule 9(1)) at the first meeting of the board after being appointed as director and at the first meeting of the board of every financial year, in addition to this, any change required to be disclosed in next board meeting.

Applicability for Disclosure

  • Every director is required to disclose the nature of his concern or interest at the meeting of the board in which the contract or arrangement is discussed and he has not to participate in such meeting.
  • The abovementioned interest may be direct or indirect and relate to some contract or arrangement or proposed contract or arrangement entered into or to be entered into with a body corporate in which such director or such director in association with another director holds more than two percent shareholding or is a promoter, manager, Chief Executive Officer of that body corporate or with a firm or other entity in which such director is a partner, owner or member as the case may be.
  • If a contract or arrangement entered into by the company without disclosure of interest by the director 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.
  • Amendment made by Companies (Amendment) Act 2020. If a director of the company contravenes the provisions of sub-section (1) or sub-section (2) of Section 184 of the Companies Act, 2013, such director shall be liable to a penalty of ₹ 1 Lakh.
  • Any contract or arrangement entered into or to be entered into between two companies, where any director of any company holds more than two percent of the paid-up capital in another company, the provisions of this section shall not apply. Amended by the Companies Act, 2017 shall apply to any contract or arrangement entered into or to be entered into between two companies or between one or more companies and one or more bodies corporate where any of the directors of the one company or body corporate or two or more of them together holds or hold not more than two percent. of the paid-up share capital in the other company or the body corporate.

Question 7. Five Board meetings were held in Asha Ltd. during the period from January to June in the calendar year 2016. Rajeev, an additional director, attended none of these meetings. For the first two meetings, he sought a leave of absence from the Board but did not inform the Board for the remaining three meetings. Examining the provisions of the Companies Act, 2013, decide whether he is disqualified to act as a director. 

Answer:

Company Law Directors Section 167 (1)(b)

Question 8. Mr. Sunil Goyal, a director of XYZ Limited wants to go on a foreign trip. He wants to assign his office to the Vice President of the company. Mr. Sunil Goyal seeks your advice on whether he can do so. Referring to the provisions of the Companies Act, 2013 advise him in the matter.

Answer:

By the provisions of the Companies Act, 2013, as contained in Section 166(6), a director of a company shall not assign his office. Any assignment so made shall be void. Therefore, Mr. Sunil Goyal, the director of the company who wants to go on a foreign trip cannot assign his office to the Vice President. He is advised accordingly not to assign his office.

However, for quorum and smooth function of the Board, the Alternate director may be appointed under the provisions of Section 161 of the Companies Act, 2013.

Question 9. Examine the validity of the following statements:

  1. ‘Every listed public company must have an independent woman director.’
  2. ‘Every listed public company must have a small shareholders’ director.”

Answer:

According to Regulation 17 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the Board of Directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019, and the Board of Directors of the top 1000 listed entities shall have at least one independent woman director by April 1, 2020.

The top 500 and 1000 entities shall be determined based on market capitalization, as of the end of the immediate previous financial year.

Thus, every listed public company is not required to appoint an independent woman director, but the listed entities falling under the above bracket must have an independent woman director.

According to Section 151 of the Companies Act, 2013 r/w Rule 7 of the Companies (Appointment and Qualifications of Directors) Rules, 2014, a listed company may have one director elected by small shareholders upon notice by not less than one thousand small shareholders or one-tenth of the total number of such small shareholders, whichever is lower. Although, a listed company may opt to have a director representing small shareholders -suo-motu.

Hence, the appointment of small shareholders by the listed companies is optional.

Question 10. Kailash, a director of a company has sent in his resignation notice stating that he is resigning from the office of director with effect from 10th December 2019. The notice was received by the company on 15th December 2019. State the effective date of resignation Kailash and the date up to which the company is required to inform the Registrar of Companies (ROC). Is Kailash required to intimate his resignation to the ROC mandatorily?

Answer:

According to Section 168(2) of the Companies Act, 2013, the resignation of a director shall take effect from the date on which the notice is received by. the company or the date, if any, specified by the director in the notice, whichever is later. Thus, in the given case, the resignation of Kailash shall take effect from December 15, 2019.

Section 168(1) read with Rule 15 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 stipulates that the company shall within thirty days from the date of receipt of notice of resignation from a director, intimate to the Registrar of Companies (ROC) in Form DIR- 12 along with specified fees and post the information on its website, if any. Consequently, in this case, the company will have to file form DIR-12 by January 14, 2020.

According to Rule 16 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 the resigning director may also forward to the Registrar of Companies, a copy of his resignation along with reasons for the resignation in form DIR-11 along with prescribed fees within 30 days from the date of resignation.

Question 11. Vasu is an independent director in various companies and he seeks your opinion regarding the presence of independent directors in different types of Committees. Advise.

Answer.

Company Law Directors Nature of directorship

Practical Questions

Question 1. Manish, a director of PQR Ltd., defaulted in filing financial statements and annual returns with the Registrar of Companies for a continuous period of three financial years ended 31st March 2012. Based on the provisions of the Companies Act, 2013, validate the following:

  1. Whether Manish can continue to be a director of PQR Ltd. when he is also a director of UV Ltd.? Also, narrate whether he can be reappointed in PQR Ltd. as well as in UV Ltd.
  2. If the defaulting company is a private limited company, what would be your answer?

Answer:

Company Law Directors Disqualification of Director

Question 2. Answer the following citing the relevant provisions of law/case law, if any:

A foreign national was intended to be appointed to the Board of an MNC in India. He contends that a director identification number (DIN) is not required for him as he is a foreign national. Whether his contention valid? 

Answer:

Company Law Directors Authenticity of the contention of foreign national

Question 3. In a public limited company, certain directors who guaranteed the company’s debts retired, and new directors were appointed in their places and they also signed the guarantee bonds. There was no agreement to show that the earlier guarantee had ceased to be operative. repayment.

The retired directors contended that they have already retired The bank who is the beneficiary, exercised its option and demanded that they are not liable to the bank on the strength of the bond. Is the contention valid? Decide the case about the provisions of the Companies Act, 2013.

Answer:

In the case of Bank of Baroda v. Official Liquidator (1992) 73 Com. Cases 688 (MP). It was held that all the directors including the retired directors were liable jointly and severally under the guarantee and hence the contention of the Bank is correct. They have to make good the guarantee amount under the bond to the bank.

Question 4. In Bright Ltd., the vacancy of a director is caused by the death of Mohan, a director of the company, after three months of his joining the company as director. The Board of the company, therefore, appointed Sumit in his place but did not seek approval from the company in a general meeting. Referring to the provisions of the Companies Act, 2013, examine the validity of Sumit’s appointment.

Johnson, a director in Disha Ltd. proceeds on leave for 8 months to France for personal reasons. The Board of Directors at a meeting appoints Peter for two months, as an alternate director. Articles of association of the company do not confer upon the Board of Directors any such power to appoint anyone as alternate director. Referring to the provisions of the Companies Act, 2013, examine the validity of the above appointment. What shall be your answer in case the Board appoints Péter for the entire period of Johnson’s leave?

Answer:

Company Law Directors Appointment of Directors in casual vacancy

Company Law Directors Analysis of the problem

Question 5. Paras, a director of Spike (Pvt.) Ltd. resigns from the office of director. He has forwarded a copy of his resignation to the company and the Registrar of Companies (ROC) in time. The company, however, has not filed a relevant form to the ROC. Explaining the provisions of the Companies Act, 2013 in this regard, decide the status of Paras. 

Answer:

Company Law Directors Section 168 of the Companies Act

Question 6. Krugen Holdings Ltd. promoted Ms. Bhavna and designated her as the Director (Administration). Examine the validity of such a designation under the provisions of the Companies Act, 2013.

Answer:

Company Law Directors Provisions

Question 7. Divine Industries (Pvt.) Ltd. has a turnover of * 350 crore during the financial year 2014-15. The bankers of the company have advised the company to compulsorily appoint a women director company as required under the Companies Act, 2013. Referring to the provisions of the Act, examine the validity of the banker’s advice. What would be your answer in case the company in question is a public limited company? 

Answer:

Company Law Directors Rules 3 of Companies

Question 8. Newly incorporated Abhay Limited has not mentioned the names of the first directors of the company in the Articles of Association. Referring to the provisions of the Companies Act, 2013, advise the Board of Directors regarding the appointment of the first directors of the company. What would be your answer in case the company is a one-person company? Also, state whether provisions of the Act apply to a Private Limited Company.

Answer:

First directors of the companies are generally named in the articles of the company. Regulation 60 of Table F provides that the number of directors and the names of the first directors shall be determined in writing by the subscribers of the memorandum or a majority of them. If they are not so named in the articles of a company, then subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed.

In the case of a one-person company, an individual being a member shall be duly deemed to be the company’s first director until the director (s) are duly appointed by the members by the provisions of Section 152 of the Companies Act, 2013.

Section 152 (1) of the Act applies to all companies, whether public or private.

Law Directors

Question 9. Mr. Solid, a young professional of 29 years, has stayed in India for 150 days in the previous financial year. He does not hold any shares in Happy Retails Limited, which is a quoted (listed) company. Small shareholders have decided amongst themselves that he is proposed to be appointed as small shareholders director who shall not be liable to retire by rotation and his tenure shall be for five years from the date of joining the office of director. Examining the provisions of the Companies Act, 2013, state whether Mr. Solid can be so appointed as small shareholders’ director.

Answer:

Rule (7) of the Companies (Appointment and Qualification of Directors) Rules, 2014 contains provisions for the appointment and qualification of small shareholder directors. Sub-rule (2) allows a person who is not a shareholder to become a shareholder’s director. Under sub-rule (5), the appointment of a small shareholder’s director shall be subject to the provisions of Section 152 except that-

  • such director shall not be liable to retire by rotation,
  • such director’s tenure as small shareholders’ director shall not exceed 3 corrective years and,
  • on the expiry of the tenure, such director shall not be eligible for re-appointment.

Thus, by sub-rule(2) of Rule 7, Mr. Solid who does not hold any shares in Happy Retails Limited can be proposed to be appointed as a small shareholder director. He shall not be liable to retire by rotation but he cannot be appointed for 5 years. Mr. Solid can be appointed as a small shareholders’ director only for 3 years.

Question 10. The Board of Directors of Goodwill (India) Ltd. wishes to appoint an alternate director on the Company’s Board in the absence of Mr. Prince, a director, who proceeded on leave. Referring to the provisions of the Companies Act, 2013, state the conditions to be satisfied before the Board appoints such a director. What shall be the tenure of such alternate director in case Mr. Prince incurs a disqualification and ceases to be a director?

Answer:

Section 161(2) of the Act empowers the Board if so authorized by its articles or by a resolution passed by the company in a general meeting, to appoint a director (termed as ‘alternate director) to act in the absence of an original director during his absence for not less than three months from India.

The provisions applicable to an alternate director are as follows.

Applicability:

Section 161(2) of the Act applies to all companies, whether public or private.

Conditions for appointment of an alternate director:

  • The Board of Directors of a company must be authorized by its articles or by a resolution passed by the company in a general meeting for the appointment of the alternate director.
  • The person in whose place the Alternate Director is being appointed should be absent for not less than 3 months from India.
  • The person to be appointed as the Alternate Director shall be a person other than the person holding any Alternate directorship for any other Director in the company.
  • If it is proposed to appoint an Alternate Director to an Independent Director, it must be ensured that the proposed appointee also satisfies the criteria of Independence as per Section 149(6) of the Act.

Terms of office of an alternate director:

  • Not exceeding the term permissible to the original director: An alternate director shall not hold office for a period longer than that permissible to the director in whose place he has been appointed. If the original director ceases to be a director because of death or vacation of office under Section 167, the alternate director shall immediately cease to hold his office.
  • On the return of the original director: The alternate director shall vacate his office when the original director in whose place he has been appointed returns to India.

Question 11. R Systems Ltd. holds 40% of the paid-up share capital of ATC Aviation Pvt. Ltd. R Systems appointed a representative director in ATC Aviation Pvt. Ltd. to safeguard its interest. The Board of Directors of R Systems Ltd. wishes to know whether the director appointed by them shall be treated as a nominee director. Advise the Board.

Answer:

Explanation to Section 149 of the Companies Act, 2013 provides that a “Nominee Director” means a director

  • nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or
  • appointed by any Government, or
  • any other person to represent its interests.

Thus, the Director appointed by R Systems Ltd. in ATC Aviation Pvt. Ltd. shall be treated as a “Nominee Director”.

Question 12. Anil, a shareholder holding 9% equity shares of the company, who is not holding any directorship wants to stand for directorship in Pritam Ltd. in its next annual general meeting. State the procedure for the appointment of Anil as per the provisions of the Companies Act, 2013.

Answer:

In the given case, Mr. Anil not a retiring director in the company is desirous of standing for directorship of the Pritam Ltd., in pursuance of Section 160 of the Companies Act, 2013 the following procedure needs to be followed:

  • The proposed director or some member intending to propose him as a director, has, not less than fourteen days before the general meeting, left at the registered office of the company, a notice in writing under his hand signifying his candidature as a director or, as the case may be, the intention of such member to propose him as a candidate for that office, along with the deposit of one lakh rupees which shall be refunded to such person or, as the case may be, to the member, if the person proposed gets elected as a director or gets more than twenty-five percent of total valid votes cast either on a show of hands or on the poll on such resolution.
  • The company shall, at least seven days before the general meeting, inform its members of the candidature of a person for the office of a director or the intention of a member to propose such person as a candidate for that office:
    • By serving individual notices, on the members through electronic mode to such members who have provided their email addresses to the company for communication purposes, and in writing to all other members; and
    • By placing notice of such candidature or intention on the website of the company, if any; or
    • Publishing the same in vernacular newspaper seven days before the meeting.
  • The candidate may obtain a Director Identification Number (DIN) and give his consent in DIR-2.
  • If the candidate is elected the company shall file DIR-12. Space to write important points for revision

Question 13. Fashion Ltd. holds a general meeting to pass a special resolution regarding the appointment of Shyamal aged 72 years as Managing Director of the company. Out of the 50 members present in the meeting 25 voted in favour, 15 against and 10 members did not cast their vote. Can the company appoint Shyamal as the Managing Director of the company? Discuss.

Answer:

Under section 196(3) of the Companies Act, 2013, no company shall appoint or continue the employment of any person as managing director, whole-time director, or manager who is below the age of twenty-one years or has attained the age of seventy years. Further appointment of a person who has attained the age of seventy years may be made by passing a special resolution in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person.

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

A person who has attained the age of seventy may be appointed as the managing director of the company after passing a special resolution. In the present case, the special resolution was not passed.

Mr. Shyamal may be appointed as the Managing Director since the votes cast in favor exceed the vote cast against the resolution and Central Government approval may be obtained by the Board of Directors of the Company to appoint him as managing director. If the Central Government is satisfied the approval may be granted.

Question 14. “A” Ltd., a public company wants to appoint Alternate Directors. Examine the validity of acts of the company concerning provisions of the Companies Act, 2013 in the following cases:

  1. ‘D’ a director was absent for two and a half months. It is proposed to appoint an alternate director.
  2. ‘E’ a director was absent for 4 months. It is proposed to appoint ‘F’ as an alternate director in the place of ‘E’. ‘F’ is already acting as an alternate director in “A” Ltd. for director ‘G’ who was absent for 5 months.
  3. Can the said appointment, if permitted, be passed by circular resolution?

Answer:

  • Section 161(2) of the Companies Act 2013 empowers the Board if so authorized by its articles or by a resolution passed by the company in a general meeting, to appoint a director (termed as ‘alternate director) to act in the absence of an original director during his absence for not less than three months from India. Since D has been absent only for two and a half months. An alternate director in place of D cannot be appointed.
  • Section 161(2) of the Companies Act, 2013 states that in the conditions for the appointment of an Alternate Director, the person to be appointed as the Alternate Director shall be a person other than the person holding any alternate directorship for any other Director in the company or holding directorship in the same company. Therefore since F is acting as an alternate director for another director i.e. “G”, he cannot be appointed again as alternate director for E in the same company.
  • There is no specific provision in the Act that provides that the appointment of an Alternate Director shall be made at the meeting of the Board. In the absence of any such prohibition, an alternate director can be appointed by passing a resolution by circulation. Therefore in the given illustration, if permitted the alternate Director can be appointed by circular resolution.

Question 15. ‘T’ Ltd. a listed company has 20 crore paid-up share capital and has nine directors on its Board. Advise T Ltd. on the following matters:

  1. The number of independent directors it should appoint on its board.
  2. How many independent directors should be appointed by T Ltd. in case it is an “unlisted public company”?
  3. Can T Ltd. appoint an independent director for a second consecutive term of 6 years whose first term, as an independent director in T Ltd. was for 4 years?
  4. Ltd. wants to appoint another independent director for a further period of 2 years. He has already completed 2 consecutive tenures of 4 years each as an independent director in T Ltd. 

Answer:

  • As per Section 149(4) of the Companies Act 2013, every listed public company is mandatorily required to have at least one-third of the total number of directors as independent directors. T Ltd should appoint 1/3 of its total Directors as Independent Directors and accordingly has to appoint 3 independent directors.
  • As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules. 2014 unlisted public companies having paid-up share capital of 10 crore rupees or more shall have at least two independent. Hence, Two independent directors have to be appointed by T Ltd as it is an unlisted company and its paid-up share capital is more than 10 crores.
  • Section 149(10) of the Companies Act, 2013 states that subject to the provisions of Section 152, an independent director can be appointed for a term of up to five consecutive years on the Board. It has been clarified that as such while appointment of an Independent Director for a term of less than 5 years would be permissible, appointment for any term (whether for 5 years or less) is to be treated as a one term under Section 149(10) of the Act. Therefore T Ltd cannot appoint an Independent Director for term of a six years for the second consecutive term.
  • Section 149(11) of the Act, no person can hold the office of Independent Director(ID) for more than two consecutive term’s such a person shall have to demit office after two consecutive terms, even if the total number of years of his appointment in such two consecutive terms is less than 10 years. It is clarified by the Ministry that appointment for any term (whether 5 years or less) is to be treated as one term under Section 149(10) of the Companies Act, 2013.
  • Further, under Section 149(11) of the Companies Act,2013 no person can hold the office of independent director for more than two consecutive term’s such a person shall have to demit office after two consecutive terms, and he shall be eligible for appointment only after the expiry of the requisite cooling -off period of 3 years. Therefore T Ltd cannot appoint an independent Director who has already completed two consecutive terms for 4 years for another period of two years.

Question 16. ‘X’ was appointed as an Additional Director of Precious Ltd. w.e.f. 21st November, 2018 in a casual vacancy caused by the unexpected death of “P” by way of a circular resolution passed by the Board of Directors. Concerning the provisions of the Companies Act, 2013 advise the company on the validity of the appointment of ‘X’ and his continuation as Additional director.

Answer:

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

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

Section 161 does not authorize the Board to appoint an additional director to fill the casual vacancy

  • If the appointment of X is made as an additional director, then, such an appointment cannot amount to filling a casual vacancy.
  • If X is appointed to fill a casual vacancy, then he shall not be an additional director.

It is thus clear that the appointment of X as an additional director to fill the casual vacancy is not valid. However, X can be treated as an additional director and his office as an additional director will be valid upto the date of the ensuing AGM. In this regard, the text of the resolution dealing with a casual vacancy will be void but will be valid to the extent of the additional directors.

Further X has been appointed to fill the casual vacancy by passing a circular resolution. Since the appointment of a director to fill a casual vacancy requires the passing of the resolution in a board meeting, the appointment of X is in contravention of Section 161, and is, therefore, invalid.

Question 17. Rajesh Gawda is a director of XYZ Pvt. Ltd. having a paid-up share capital of 11 crore. The company has granted a loan of ₹ 2 crore to Rajesh Gawda. The company has a borrowing of 15 crore from HDFC Bank. The company secretary informs the company that the loan to the director violates the provisions of the Companies Act, 2013. Justify the claim of the company secretary.

Answer:

Pursuant to Section 185(1) of the Companies Act, 2013, no company shall, directly or indirectly, advance any loan, including any loan represented by a with any loan taken by,- book debt to, or give any guarantee or provide any security in connection

  • Any director of the company, or of a company which is its holding company or any partner or relative of any such director; or
  • Any firm in which any such director or relative is a partner.

Further, vide Exemption Notification dated 5th June 2015, Section 185 of the Companies Act, 2013 shall not apply to Private Companies meeting the following conditions:

  • In whose share capital no other body corporate has invested any money;
  • If the borrowings of such a company from banks or financial institutions or anybody corporation is less than twice its paid-up share capital or fifty Crores rupees, whichever is lower; and
  • Such a company has not defaulted in repayment of such borrowings subsisting at the time of making transactions under this section.

Now, considering that the Paid Capital of the Company is 11 Crores and borrowing from HDFC Bank is 15 Crore, it can be seen that the amount of borrowings by the company from Banks (* 15 Crores) is less than twice the amount paid-up capital (i.e. 2 x 11 Cr. =22 Crores). So as per exemption conditions available to private companies borrowing from the bank is less than 2 times of Paid-up Capital of the Company.

To avail exemption, the company needs to fulfill all conditions as provided in the Exemption Notification. Therefore, if all the above conditions are fulfilled, the loan to Rajesh Gowda is exempted under Section 185 and the company is not in violation of the provisions of the Companies Act, 2013 and the claim of CS is not justified.

Question 18. Destinations Ltd. is a listed company with a paid-up share capital of 40 crore, a turnover of 200 crore but a loss of *10 crore for the year ended 31 March 2018. The woman direonor in the Board of the company resigned on 1 October 2018. The last Board meeting was held on 25th September 2018.

The Board is likely to meet next on 15th January 2019. Lalita, aged 30 years, has conveyed her interest to be associated with the company as a woman director. Discuss if any woman director is required to fill the vacancy and if so, when the appointment should be made as per the provisions of the Companies Act, 2013.

Answer:

Second Proviso to section 149 of the Companies Act, 2013 provides that such class or classes of companies as may be prescribed in Rule 3 of Space to write important points for revision- Companies (Appointment and Qualification of Directors) Rules, 2014, provides that the following class of companies shall appoint at least one woman director-

  • every listed company;
  • every other public company has:-
    • paid-up share capital of one hundred crore rupees or more; or
    • turn over of three hundred crore rupees or more.

However, any intermittent vacancy of a woman director shall be filled up by the Board at the earliest but not later than the immediate next Board meeting or three months from the date of such vacancy, whichever is later. In the above case, as Destinations Ltd. is a listed company hence, the company is required to appoint a woman director to its board irrespective of paid-up capital, turnover, and loss amounts.

The appointment of Ms. Lalita as woman director is to be made at the before time but not later than the immediate next board meeting i.e. 15th January 2019 or 3 months from the date of cause of vacancy i.e. 1st October 2018; whichever is later, than way the appointment shall be made by 15th January 2019.

Question 19. Rajeev and his wife Surekha are the only two directors of Rajsur Pvt. Ltd. Rajeev went abroad for two months. Before going abroad, he registered a general power of attorney in favour of his son Ranbeer, aged 21 years, to execute all documents on his behalf as an individual, as well as director of Rajsur Pvt. Ltd. Ranbeer, signed a contract on behalf of Rajsur Pvt. Ltd. by exercising his power of attorney. Is this contract binding upon the company?

Answer:

Section 166 (6) of the Companies Act 2013 prohibits the assignment of the office of director to any other person. Any assignment of office made by a director shall be void. Authorizing any person to sign a document as a director amounts to the assignment of the office of director.

Hence, in the instant case, Rajeev cannot assign his office of directorship in Rajsur Pvt. Ltd. to his son Ranbeer by a general power of attorney to sign documents on his behalf as director of the company. Contracts signed by Ranbeer on behalf of the company are void and not binding upon the company.

Amit has directorship of the following companies:

Company Law Directors Nature of Companies

Indicate how many more directorships Amit can undertake in public or private companies.

Answer.

As per Section 165(1) of the Companies Act, 2013, no person, can hold office as a director, including any alternate directorship, in more than twenty companies at the same time. For reckoning the limit of directorships in twenty companies, the directorship in a dormant company is excluded.

Further, out of the above twenty companies, the maximum number of Public Companies in which a person can be appointed as a director cannot be more than ten. For reckoning the limit of ten Public Companies, directorship in Private Companies that are either holding or subsidiary companies of a Public Company shall also need to be included.

In the above case, Amit is holding a directorship in:

  • 8 Public Companies (including 2 Dormant Companies);
  • 10 Private Companies (including 2 subsidiaries of Public Companies);
  • Alternate Director (in a Private Company);
  • Section 8 Company

Accordingly, in a Public Company presently he is holding 8 directorships, and in a Private Company 9 directorships. Therefore, the total number of directorships he is already holding is 17 (since, directorship in Section 8 Company is excluded, from reckoning the limit of directorship of 20 companies). Hence, Amit can take up directorship in 2 more Public Companies and 1 more Private Company

Question 20. Rohan is a well-known banker and holds directorship in 22 companies as of 30th September 2020. The companies include 10 public companies, 11 private companies (including MNP Pvt. Ltd., a dormant company), and 1 company registered under section 8 of the Companies Act, 2013. Recently, on 20th December 2020, ABC-Ltd. in which Rohan is not a director acquired 100% of shares in MNP Pvt. Ltd. In this context, answer the following:

  1. Whether the directorships held by Rohan as of 30th September 2020 aalid?
  2. Can Rohan continue to hold directorship in all 22 companies after the acquisition made by ABC Ltd.?
  3. The Company Secretary of ABC Ltd. has proposed to restrict several directorships of the directors in ABC Ltd. Whether the proposal given by the Company Secretary is tenable in light of the provisions of the Companies Act, 2013.

Answer:

  • As per Section 165 of the Companies Act, 2013, no person shall hold office as a director, including any alternate directorship, in more than 20 companies at the same time.
  • Whereas the maximum number of public companies in which a person can be appointed as a director shall not exceed 10.
  • For computation, the limit of public companies in which a person can be appointed as director, and directorship in private companies that are either holding or subsidiary companies of a public company shall be included. Further, for reckoning the limit of directorships of 20 companies, the directorship in a dormant company and section 8 companies shall not be included.
  • The members of a company may, by special resolution, specify any lesser number of companies in which a director of the company may act as directors.
    • In the given case, the holding of directorship of Rohan as of 30th September 2020 is valid as he is holding directorship in 10 public companies and in 11 private companies out of which one company is dormant and one company is registered under section 8 of the Companies Act, 2013. Therefore, the maximum directorship he is holding is in 20 companies.
    • Upon MNP Pvt. Ltd. becoming a subsidiary of ABC Ltd. (a public company) directorship in MNP Pvt. Ltd. shall also be included within the limit of 10 public companies.
      Accordingly, if Rohan acts as a director in more than 10 public companies, then same will violate Section 165 of the Companies Act,
    • As per section 165(2) of the Companies Act, 2013 subject to the provisions of Section 165 (1), the members of a company may, by special resolution, specify any lesser number of companies in which a director of the company may act as directors. Therefore, the proposal of the Company Secretary is tenable.

Question 21. Raman is a director of Mega Ltd., a company engaged in the business of selling mineral water. Rohini, wife of Raman, is a partner in M/s. Total  is a partnership firm, engaged in the business of selling packaged juices. Raman also holds 100 shares in Zimba Pvt. Ltd., a company engaged in the business of manufacturing bottles.

The board of directors of Mega Ltd. Intends to grant a loan to M/s. Total and Zimba Pvt. Ltd. within the limits specified under the Companies Act, 2013. Examine whether Mega Ltd. can grant the loan. If yes, what are the conditions?

Answer:

Under section 185(1) of the Companies Act, 2013, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any. a loan is taken by:

  • any director of the company, or of a company which is its holding company or any partner or relative of any such director; or
  • any firm in which any such director or relative is a partner.
    • Consequently, based on the above provisions of Section 185(1) of the Companies Act, 2013, Megha Ltd. cannot grant a loan to M/s. Total, since it is a partnership firm in which the wife of Raman (Director of the lending company) is a partner.
      Section 185(2) of the Companies Act, 2013 prescribes that a
      company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the directors of the company is interested, subject to the condition that-

      • A special resolution is passed by the company in a general meeting
      • the loans are utilized by the borrowing company for its principal business activities.
    • Consequently, by complying with the conditions as prescribed above under Section 185(2) of the Companies Act, 2013, Megha Ltd. can grant a loan to Zimba Pvt. Ltd. which Raman is a member holding. 100 shares.

Question 22. In the following scenario, examine whether the amount of sitting fees decided by the Board of directors is by the provisions of the Companies Act, 2013 and the rules made thereunder:

Company Law Directors Nature of directorship

Answer:

Section 197(5) of the Companies Act, 2013 read with Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 prescribes that a company may pay a sitting fee to a Director for attending meetings of the Board or committees thereof, such sum as may be decided by the Board of Directors, which shall not exceed 1 lakh per meeting of the Board or committees thereof.

Provided that for Independent Directors and Women Directors, the sitting fee shall not be less than the sitting fee payable to other Directors. Based on the above laid down provisions, the following mentioned sitting fees payable is:

Company Law Directors Nature of directorship 1

Question 23. Dim Dim Ltd. was incorporated on 31st December 2019. An advisor to the company has suggested that since the Articles of Association (AOA) does not contain provisions relating to the appointment of first directors, the company can function without the directors until the AOA is amended.

Do you agree with the suggestion given by the advisor? Can Dim Dim Ltd. appoint a director who has just stayed for 120 days in India during the financial year 2019-20?

Answer:

The first directors of most of the companies are named in their Articles of Association. Regulation 60 of Table F provides that the number of directors and the names of the first directors shall be determined in writing by the subscribers of the memorandum or a majority of them.

, Section 152(1) of the Companies Act, 2013 provides that, where no provision is made in the Articles of Association of a company for the appointment of the first director, the subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed.

Consequently, in the given case, the advice given by the advisor regarding the first director is not correct.

  • Section 149(3) of the Companies Act, 2013 provides that every company shall have at least one director who has stayed in India for a total period of not less than 182 days during the financial year.
  • However, in the case of a newly incorporated company, the requirement under this sub-section shall apply proportionately at the end of the financial year in which it is incorporated.

Therefore, Dim Dim Ltd. which was incorporated on December 31, 2019, can appoint a director who has just stayed for 120 days in India during the financial year, 2019-20.

Question 24. Shankar was appointed as a small shareholders’ director on 2nd March 2017. Shankar has submitted a letter to the Board of directors expressing his desire to get re-appointed. In this context, the Board wants your opinion on the following points:

  1. Whether Shankar can be re-appointed as on 31st March, 2021?
  2. Whether he is liable to retire by rotation of 31st Marc, 2019?
  3. Since Shankar is serving as a director in many companies, whether his directorship in the capacity of small shareholders’ director included in the total number of directors as per the provisions of the Companies Act, 2013? Answer to the Board. 

Answer:

According to Section 151 read with Rule 7 of the Companies (Appointment and Qualifications of Directors) Rules, 2014, the tenure of small shareholders’ director shall not exceed 3 consecutive years and on the expiry of the tenure, such director shall not be eligible for re-appointment. Further, such a director shall not be liable to retire by rotation. A small shareholders’ director is included in the total limit of directorship of 20 companies as prescribed under section 165 (1) of the Companies Act, 2013.

Based on the above provisions, answers to the questions are as under:

  • No, Shankar as small shareholder director cannot be re-appointed as of March 31, 2021.
  • No, Shankar is not liable to retire by rotation as of March 31, 2019.
  • Yes, Shankar’s directorship will be counted in the overall limit provided under Section 165 (1) of the Companies Act, 2013.

Question 25. X proposes his candidature as a director of X Ltd. along with a deposit of 1 Lakh. Later X failed to be appointed as director but received 39% of the total votes. , claimed X Ltd. to refund the deposit but the companyrefusedd to pay as he failed to be elected having obtained only 39% ofthe votes cast. Is the decision of the company valid? Explain when the requirement of deposit of amount is not applicable.

Answer:

Right of persons other than retiring directors to stand for directorship [Section 160]

  • A person who is not a retiring director shall be eligible for appointment to the office of a director at any general meeting, if he, or some member intending to propose him as a director, has, not less than fourteen days before the meeting, left at the registered office of the company, a notice in writing under his hand signifying his candidature as a director or, as the case may be, the intention of such member to propose. him as a candidate for that office. Such a person may be a member or a non-member, an additional director or a director to fill a casual vacancy, or an alternate director, or a nominee director.
  • Such notice must come along with the deposit of one lakh rupees or such higher amount as may be prescribed which shall be refunded to such person or, as the case may be, to the member, if the person proposed gets elected as a director or gets more than twenty-five percent of total valid votes cast either on a show of hands or on the poll on such resolution. In the case of Nidhi company, instead of Rupees One Lakh, a deposit of Rupees ten thousand is required with the notice.
  • Section 160 does not apply to a Government Company where the entire paid-up share capital is held by the Central Government jointly or severally or in the case of a subsidiary of a Government Company in which the entire paid-up capital is held by that Government Company. Further, Section 160 does not apply to Private Companies, Section 8 Companies whose article provides for election of directors by Ballot.

Conclusion: X failed to get appointed as Director in X Ltd, but secured more than 25% of the total votes. Hence, considering the above relevant provisions of the Act, the decision of the Company, X Ltd, is not valid. -Space to write important points for revision

Question 26. X has applied to the Indian Institute of Corporate Affairs (IICA) for the inclusion of his name in the data bank of independent directors. He is working as a director of X Ltd. and Y Ltd, both unlisted public companies having a paid-up share capital of 10 crores for the last 7 years. X says that he is not required to pass the online proficiency self-assessment test as he is the director of two unlisted companies with paid-up share capital of 10 crores in the last 7 years. Explain whether the contention of X is correct. 

Answer:

As per Rule 6(4) of the Companies (Appointment and Qualification of Directors) Rules, 2014:

  • Every individual whose name is included in the data bank of independent directors of IICA shall pass an online proficiency self-assessment test conducted by the IICA within two years from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the data bank of the institute.
  • Proviso to this sub-rule provides that the individual who has served for not less than three years as of the date of inclusion of his name in the data bank as a director or key managerial personnel in a listed public company or an unlisted public company having a paid-up share capital of 10 crores or more shall not be required to pass the online proficiency self-assessment test.
  • It is further provided that for calculation of the period of three years referred to in the first proviso, any period during which an individual was acting as a director or as key managerial personnel in two or more companies or bodies corporate or statutory corporations at the same time shall be counted only once.

Conclusion:

Given the above problem, the contention of the director is valid as the experience of the director is 7 years.

Short Notes

Question 1. Write a short note on the resignation of Directors.

Answer:

According to Section 168-

  • A director may resign from its office by giving a notice with the reasons of resignation in writing to the company.
  • The Board shall on receipt of such a notice from a director take note of the same.
  • The company shall within 30 days from the date of receipt of notice of resignation from a director, intimate the registrar in Form DIR-12 and post the information on its website if any as provided in Rule 15 of the companies (Appointment and Qualification of Directors) Rules, 2014.
  • The board shall place the facts of such resignation by the director in the Report of Directors laid in immediately following the general meeting by the company.
  • The Director shall within 30 days from his resignation, forward to the registrar a copy of his resignation along with reasons for resignation with reasons provided therein in Form DIR-11 along with the fee provided. In the case of Specified IFSC public and private companies, a director may file Form DIR-11 to the Registrar.
  • The resignation shall be effective from the date on which the notice is received by the company or the date specified by the Director in the notice whichever is later.
  • When all the Directors resign at the same time under section 167, in such case,e the required number of directors are to be appointed by the promoter or, the Central Government. The Directors so appointed shall hold office till the Directors are appointed by the company in a general meeting.

Descriptive Questions

Question 2. Describe the procedure for the Appointment of directors to be elected by small shareholders.

Answer:

  • A listed company has a paid-up capital of five crore rupees or more. and having one thousand or more small shareholders (holding shares of nominal value of 20,000 or less may have a director elected by such small shareholders.
  • Small shareholders intending to propose a person as a candidate for the post of small shareholders’ director shall leave a notice of their intention with the company at least fourteen days before the meeting under their signature specifying the name, address, shares held, and folio number of the person whose name is being proposed for the post of director and of the small shareholders who are proposing such person for the office of director.
  • 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 of the proposed director stating his DIN, that he is not disqualified and his consent to act as director of the company.
  • Such a director shall be considered as an independent director subject to being eligible and giving a declaration of his independence by sub-sections (6) and (7) of Section 149 of the Act.
  • The small shareholder director shall be elected through a postal ballot.
  • Ensure that the proposed director shall not hold the position of small shareholder director in more than 2 companies at the same time. Provided that the second company in which he has been appointed shall not be in a business which is competing or is in conflict with the business of the first company.
  • Such a director shall not be retired by rotation and shall have a tenure of continuous three years.
  • After completion of tenure small shareholders director shall not be eligible for reappoint.
  • When small shareholders directors cease to beshareholdersrser they cease to be small shareholders directors.
  • The company has to file particulars of the director in Form DIR-12 with the Registrar of Companies within thirty days of the appointment after paying the requisite fee electronically.
  • Ensure that said Form is digitally signed by the managing director or manager or secretary of the company and also certified by a Company Secretary or Chartered accountant or Cost accountant in Full-time practice by digitally signing it.
  • To file Form DIR-12, the following attachments are required:
    • Letter of appointment
    • Declaration by the first director
    • Declaration of the appointee Director, in Form DIR-2;
    • Interest in other entities;
  • In the case of a listed company, the particulars of the appointment of a director should also be given to the stock exchange if the shares of the company are listed.
  • The particulars of the director and other aspects of the director have to be entered by the company in the registers maintained under sections 170 and 189
  • After appointment the director concerned has to inform other companies in which he is director about his appointment

Question 3. How can the directors be removed from the office before the expiry of their term?

Answer:

The following procedure is required to be adopted for removal of a director:

  • A special notice from a member of the company proposing an ordinary resolution for removing the director is necessary.
  • Send forthwith a copy of the special notice to the director proposed to be removed.
  • Decide to call a general meeting through the Board resolution.
  • Issue notice of the general meeting in writing at least twenty-one clear days before the date of the meeting informing about the special notice and proposing the ordinary resolution for removal.
  • In the notice of the meeting, state the facts of the representation made by the director concerned and also send a copy of the representation to every member of the company to whom notice of the meeting is sent (whether before or after the receipt of the representations by the company).
  • If the representation is received too late and it cannot be sent to the members, the director concerned may require that the representation be read out at the meeting. The director concerned has also the right of being heard at the meeting.
  • However, the National Company Law Tribunal on an application of the company or any other person who claims to be aggrieved, on having satisfied, may dispense with the procedure of sending a copy of representation and reading thereof at the meeting if it is being used to secure needless publicity for defamatory matter.
  • In the case of a listed company, send notice of the general meeting to the stock exchange(s) within 24 hours of the occurrence of the event where the company is listed [Refer Regulation 30(6) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015].
  • Hold the general meeting and pass the proposed resolution by ordinary resolution.
  • In the case of a listed company, forward a copy of the proceedings of the meeting within 24 hours of the occurrence of the event to the stock exchange(s) where the company is listed.
  • Ensure that said Form is digitally signed by the managing director or manager or secretary of the company and also certified by a Company Secretary or Chartered accountant or Cost accountant in Full-time practice by digitally signing it.
  • The company has to file particulars of the director in Form DIR-12 with the Registrar of Companies within thirty days of the removal after paying the requisite fee electronically.
  • To file Form DIR-12, the following attachments are required:
    • Notice of resignation;
    • Evidence of Cessation;
    • Interest in other entities;
  • The particulars of the director and other aspects of the director have accordingly been modified in the registers maintained under sections 170 and 189.
  • Give a general public notice in the newspaper regarding the removal of the director if it is so warranted for the protection of the company and the benefit of the general public.

Question 4. Under what circumstances is a director deemed to have vacated the office of directorship?

Answer:

According to Section 167 of the Companies Act, 2013, the office of a director shall become vacant in case –

  • he incurs any of the disqualifications specified in Section 164;
  • he absents himself from all the meetings of the Board of Directors held during twelve months with or without seeking leave of absence of the Board;
  • he acts in contravention of the provisions of Section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;
  • he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of Section 184;
  • he becomes disqualified by an order of a court or the Tribunal;
  • he is convicted by a court of any offense, whether involving moral turpitude or otherwis, and sentenced in respect thereof to imprisonment for not less than six months. Provided that the office shall not be vacated by the director in case of orders referred to in clauses (e) and (f)-
    • for thirty days from the date of conviction or order of disqualification;
    • where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed of; or
    • where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed of;
  • he is removed in pursuance of the provisions of this Act;
  • he, having been appointed a director by his holding any office or other employment in the holding, subsidiary, or associate company, ceases to hold such office or other employment in that company.
  • has not complied with the provisions of Section 165(1)

Question 5. Enumerate the rights and duties of directors.

Answer:

  • Duty to act as per the articles of the company
    The director of a company shall act by the articles of the company.
  • Duty to act in good faith
    A director of a company shall act in good faith to promote the objects of the company for the benefit of its members as a whole and in the best interests of the company, its employees, the shareholders, the community, and for the protection of the environment.
  • Duty to exercise due care
    A director of a company shall exercise his duties with due and reasonable care, skill, and diligence and shall exercise independent judgment.
  • Duty to avoid conflict of interest
    A director of a company shall not be involved in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
  • Duty not to make any undue gain
    A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
  • Duty not to assign his office
    A director of a company shall not assign his office and any assignment so made shall be void.

CS Company Law Board Constitution And Its Powers Question and Answers

Board Constitution And Its Powers

Board of Director

Section 2(10) of the Companies Act, 2013 defines that “Board of Directors” or “Board”, about a company, means the elective body of the directors of the company.

The term ‘Board of Directors’ means a body duly constituted to direct, control, and supervise the affairs of a company.

Maximum and Minimum Number of Directors in a Company

Section 149(1) of the Companies Act, 2013 requires that every company shall have a minimum number of 3 directors in the case of a public company, two directors in the case of a private company, and one director in the case of a One Person Company. A company can appoint a maximum of 15 fifteen directors without any specific compliance. A company may appoint more than fifteen directors after passing a special resolution in a general meeting.

The restriction of a maximum number of directors shall not apply to Section 8 companies.

Number of Directorship (Section 165)

The maximum number of directorships, including any alternate directorship, a person can hold is 20. Same time, a person cannot be a director of more than 10 public companies. To count such directorship in public companies, directorship in private companies that are either holding or subsidiary of a public company shall be included.

Alternate directorship shall also be included while calculating the directorship of 20 companies. Section 8 companies will not be counted for the maximum number of directors. Further, the members of a company may restrict the abovementioned limit by passing a special resolution for its directors.

Power of Board

  • To make calls on shareholders in respect of money unpaid on their shares;
  • To authorize the buy-back of securities under section 68;
  • To issue securities, including debentures, whether in or outside India;
  • To borrow money;
  • To invest the funds of the company;
  • To grant loans or give guarantee or provide security in respect of loans;
  • To approve financial statements and the Board’s report;
  • To diversify the business of the company;
  • To approve amalgamation, merger, or reconstruction;
  • To take over a company or acquire a controlling or substantial stake in another company;
  • To make political contributions;
  • To appoint or remove key managerial personnel (KMP);
  • To appoint internal auditors and secretarial auditors;

Contributions to Charitable Funds and Political Parties

The power of contributing to ‘bona fide’ charitable and other funds is available to the board subject to certain limits.

Further, the prior permission of the company in a general meeting is required if such contribution exceeds five percent of its average net profits for the three immediately preceding previous years.

Prohibitions and Restrictions Regarding Political Contributions

Notwithstanding anything contained in any other provision of this Act, a company, other than a Government company and a company which has been in existence for less than three financial years.

Audit Committee

Every Listed Public Company and (i) all public companies with a paid-up capital of ten crore rupees or more;

All public companies having turnover of one hundred crore rupees or more; (iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more shall form an Audit Committee comprised of a minimum 3 directors with a majority of the Independent Directors and majority of members of the committee shall be a person with the ability to read and understand financial statement.

Nomination and Remuneration Committee

Every listed company and (i) all public companies with a paid-up capital of ten crore rupees or more; (ii) all public companies having turnover of one hundred crore rupees or more; (iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more.

The committee shall consist of three or more non-executive directors out of which not less than one-half shall be independent directors, shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one-half shall be independent directors.

Board Constitution And Its Powers

The Stake-holders Relationship Committee

Section 178(5) of the Companies Act, 2013 provides for the constitution of the stakeholder’s relationship committee.

The Board of a company that has more than one thousand shareholders, debenture-holders, deposit-holders, and any other security holders at any time during a financial year is required to constitute a Stakeholders Relationship Committee consisting of a chairperson who shall be a non-executive director, and such other members as may be decided by the Board.

Risk Management Committee under SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015

As per Regulations 21 of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015, the board of directors of the top 100 listed entities, determined based on market capitalization, as at the end of the immediate previous financial year shall constitute a Risk Management Committee. The Board of Directors shall constitute a Risk Management Committee, and the majority of members of the Risk Management Committee shall consist of members of the board of directors. The Chairperson of the Risk management committee shall be a member of the board of directors and senior executives of the listed entity may be members of the committee.

Corporate Social Responsibility Committee

The Section applies to the following classes of companies during any financial year:

  • Companies having a Net Worth of 500 crores or more;
  • Companies having a turnover of 1,000 crores or more;
  • Companies having Net Profit of 5 crores or more.

Other Board Committees

In addition to the Committees of the Board mandated by the Companies Act, 2013 viz, Audit Committee, Nomination and Remuneration Committee, Stakeholders Relationship Committee, and the CSR Committee, the Board of Directors may also constitute other Committees to oversee a specific objective or project. The nomenclature, composition, and role of such Committees will vary, depending upon the specific objectives of the company.

A few examples of such Committees prevalent in the corporate sector in India and abroad are given below:

  • Corporate Governance Committee
  • Science, Technology and Sustainability Committee
  • Regulatory, Compliance, and Government Affairs Committee.
  • Investment Committee
  • Ethics Committee.

Section 154 of the Finance Act, 2017 amends Section 182 of the Companies Act, 2013. As per the amendment, the limit on the maximum amount that can be contributed by a company to a political party has been removed.

Board Constitution And Its Powers Descriptive Questions

Question 1. Can the Board of directors of a company delegate any of its powers to others? Discuss.

Answer:

Powers of Board Section 179

  • Section 179 of the Act deals with the powers of the board; all powers to do such acts and things for which the company is authorized are vested with the board of directors. But the board can act or do the things for which powers are vested with them and not with general meetings.

Powers that can be excised with Board Resolution only. [Section 179(3] read with Rule 8 of Companies Meetings of Board and its Powers Rules 2014

The following powers of the Board of Directors shall be exercised only using resolutions passed at meetings of the Board, namely:

  • To make calls on shareholders in respect of money unpaid on their shares;
  • To authorize buy-back of securities under Section 68;
  • To issue securities, including debentures, whether in or outside India;
  • To borrow money;
  • To invest the funds of the company;
  • To grant loans or give guarantee or provide security in respect of loans;
  • To approve financial statements and the Board’s report;
  • To diversify the business of the company;
  • To approve amalgamation, merger, or reconstruction;
  • To take over a company or acquire a controlling or substantial stake in another company;
  • To make political contributions;
  • To appoint or remove key managerial personnel (KMP);
  • To take note of appointment(s) or removal(s) of one level below the Key Management Personnel;
  • To appoint internal auditors and secretarial auditors;
  • To take note of the disclosure of the director’s interest and shareholding;
  • To buy, and sell investments held by the company (other than trade investments), constituting five percent or more of the paid-up share capital and free reserves of the investee company;
  • To invite accept or renew public deposits and related matters;
  • To review or change the terms and conditions of public deposit;
  • To approve quarterly, half-yearly, and annual financial statements or financial results as the case may be.
  • To appoint internal auditors and secretarial auditors.

Delegation of Powers to Directors, MD, Manager, etc.

Board may, by a resolution passed at a meeting, delegate

  • To any committee of directors,
  • The managing director,
  • The manager or
  • Any other principal officer of the company or
  • In the case of a branch office of the company, the principal officer of the branch office, the powers specified in clauses (d) to (f) on such conditions as it may specify.

Question 2. Explain the prohibitions and restrictions regarding political contributions by a company.

Answer:

Company Law Board Constitution And Its Powers Eligible Companies for Political Contribution

Question 3. Comment on the following:

The powers of the directors of a company are co-extensive with those of the company.

Answer:

Company Law Board Constitution And Its Powers Powers of Board of Directors

Question 4. Explain the provisions of the Companies Act, 2013 relating to the constitution of an audit committee. What role does the audit committee play in the management of a company?

Answer:

Audit Committee Sec.177 of Companies Act, 2013

Companies, required to have Audit Committees

The requirement of the constitution. of Audit Committee has been limited to:

  • Every listed Public Companies; or
  • The following class of companies –
    • All public companies with a paid-up capital of ten crore rupees or more;
    • All public companies having a turnover of one hundred crore rupees or more;
    • All public companies, having in aggregate, outstanding loans borrowings debentures, or deposits exceeding fifty crore rupees or more.

Amended by Companies Act, 2017: In Section 177 of the Companies Act, 2013, in sub-section (1), for the words “every listed company”, the words “every listed public company” shall be substituted;

Composition of Directors

  • The Committee shall comprise a of minimum 3 directors with the majority of the directors being Independent Directors. The majority of members of the audit committee including its chairperson shall be persons with the ability to read and understand the financial statement.

Transition Period

  • A transition period of one year from the date on which the new Act comes into effect has been provided to enable companies to reconstitute the Audit Committee.

Role of Audit Committee Section 177 (4)

Every Audit Committee shall act by the terms of reference specified in writing by the Board.

Terms of reference as prescribed by the board shall inter alia, include, –

  • the recommendation for appointment, remuneration, and terms of appointment of auditors of the company;
  • (In the case of Government Companies, in Clause (1) of sub-section (4) of Section 177, for the words “recommendation for appointment, remuneration and terms of appointment” the words “recommendation for remuneration” shall be substituted Exemption Notification dated 05-06-2015)
  • review and monitor the auditor’s independence and performance, and the effectiveness of the audit process;
  • examination of the financial statements and the auditors’ report thereon;
  • approval, or any subsequent modification of transactions of the company with related parties;
  • The Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as prescribed under rule 6A of the Companies (Meetings of Board and its Powers) Rules, 2014.
  • Further, in case of transactions, other than transactions referred to in Section 188 (Related Party Transactions), and where the Audit Committee does not approve the transaction, it shall make its recommendations to the Board.
  • In case any transaction involving any amount not exceeding one crore rupees is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within three months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorized by any other director, the director concerned shall indemnify the company against any loss incurred by it:
  • The provisions of this clause shall not apply to a transaction, other than a transaction referred to in Section 188, between a holding company and its wholly-owned subsidiary company.
  • scrutiny of inter-corporate loans and investments;
  • valuation of undertakings or assets of the company, wherever it is necessary;
  • evaluation of internal financial controls and risk management systems;
  • monitoring the end use of funds raised through public offers and related matters.

Question 5. Explaining the provisions of the Companies Act, 2013, state the duties of the Nomination and Remuneration Committee.

Answer:

Company Law Board Constitution And Its Powers Nomination and Remunatration Committee

Question 6. State the situations under which a company is required to constitute the Audit Committee.

Answer:

Section 177(1) of the Companies Act, 2013 read with Rule 6 of the Companies (Meeting of the Board and its Powers) Rules. 2014, provides that the Board of directors of the following companies are required to constitute an Audit Committee of the Board –

  • Every listed public company;
  • All public companies with a paid-up share capital of 10 crore rupees or more;
  • All public companies having turnover of 100 crore rupees or more; (iv) All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.
  • The paid-up share capital or turnover or outstanding loans or borrowings or debentures or deposits, as the case may be, as existing on the date of last audited financial statements shall be taken into account for the purpose.

Question 7. The board of directors of Charity Ltd. wants to understand from you the applicability of the provisions relating to CSR to companies including requirements to constitute a CSR committee. Inform the Board.

Answer:

Section 135 of the Companies Act, 2013 about Corporate Social Responsibility specify that:

  • every company having a net worth of 500 crore or more;
  • every company having a turnover of 1000 crore or more; or
  • every company having a net profit of ₹5 crore or more.

During the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of 3 or more directors, out of which at least 1 director shall be independent.

Although, where a company is not required to appoint an independent director under Section 149(4) of the Companies Act, 2013, it ‘shall have in its Corporate Social Responsibility Committee 2 or more directors.’

Additionally, as per Rule 5 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, a private company having only 2 directors on its Board shall constitute its CSR Committee with 2 such directors.

Concerning a foreign company covered under these rules, the CSR Committee shall comprise at least 2 persons of which 1 person shall be as specified under clause (d) of section 380(1) of the Companies Act, 2013 and another person shall be nominated by the foreign company. The role of the Corporate Social Responsibility Committee is-

  • to formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company in areas or subjects, specified in Schedule VII of the Companies Act, 2013;
  • to recommend the amount of expenditure to be incurred on the activities referred to in clause (a) above; and
  • to monitor the Corporate Social Responsibility Policy of the company from time to time.

After taking into account the recommendations of the. CSR Committee, the Board shall approve the CSR Policy for the company.

Question 8. Approval of the Audit Committee to a related party transaction can be granted by passing a circular resolution. Discuss. 

Answer:

Section 188(1) of the Companies Act, 2013 prohibits the Board from dealing with an item of business about a contract or arrangement with a related party through a circular resolution. However, the law is silent on dealing with any item of business by the Audit Committee through a circular resolution.

  • Here, the intention of the Legislature is required to be gathered from the language used; which means that attention should be paid to what has been said as also to what has not been said.
  • As a consequence, however, it cannot be added that the law imposes any restriction, the principle applicable to meetings of the Board would apply to the meetings of the Audit Committee too, while dealing with items of business on related party transactions.
  • As per the Secretarial Standard on Meetings of the Board of Directors (SS-1), the Audit Committee should discuss related party transactions that are not in the ordinary course of business or which are not on an arm’s length basis at its meetings and not through circulation.
  • However, there is no bar on omnibus approval of limits being passed by a circular resolution by the Audit Committee. Space to write important points for revision-

Board Constitution And Its Powers Practical Questions

Question 1. Net profits of PQR Ltd. during the following years as disclosed in the statement of profit and loss are as under:

Financial year ended     Net profits (in crore)

31st March 2013                      10

31st March 2014                      12

31st March 2015                      08

The Board of Directors of the company at its meeting decided to contribute to a charitable organization, for charitable purposes, a sum of  ₹ 3 crores out of the net profits of the financial year ended 31st March 2015. This contribution has been made by the Board without seeking the approval of shareholders in a general meeting.

In light of the provisions of the Companies Act, 2013, examine the validity of the contribution made by the company. What shall be your answer in case the Board decides to contribute 1 crore only?

Answer:

Company Law Board Constitution And Its Powers Applicability of Section 181

Question 2. The Board of Directors of Divine Ltd. decides to enter into a contract whereby Manish, a director of the company shall acquire certain assets from the company for consideration other than cash, without seeking approval of the company in its general meeting.

Certain shareholders of the company object to the said decision of the Board. Referring to the provisions of the Companies Act, 2013, examine the validity of the Board’s decision and state whether the contention of the shareholders shall be tenable.

Answer:

Company Law Board Constitution And Its Powers Provisions of Section 192

Question 3. Examining the provisions of the Companies Act, 2013, relating to the constitution of a ‘Nomination and Remuneration Committee’ and ‘Stakeholders Relationship Committee’, answer the following:

  1. Is it mandatory for a listed company to constitute such committees? Also, state whether it is mandatory for a non-listed public company having paid-up share capital of 5 crore to constitute such committees.
  2. What shall be the composition of the committees in case the company is required to constitute such committees? 

Answer:

Company Law Board Constitution And Its Powers Provisions of Sec.178

Question 4. Charjee Biotech Private Limited is a two-year-old company. The Board of Directors of the company wants to contribute 2.8% of its average net profits of the last years to the Prime Minister’s National Relief Fund. Referring to the provisions of the Companies Act, 2013, advise the board.

Answer:

Section 181 of the Companies Act, 2013 states that the Board of Directors of a company may contribute to bona fide charitable and other funds, provided that prior permission of the company in a general meeting shall be required for such contribution in case any amount of the aggregate of which, in any financial year, exceed five percent of its average net profits for the three immediately preceding financial years.

In the given case, Charjee Biotech Private Limited wants to contribute 2.8% of its net profits for the last two years, as it has been in existence for the last two years only.

Prime Minister’s National Relief Fund is a bona fide charitable fund. As the rate of contribution does not exceed 5% of the average net profits, prior permission of members in general meetings is not required. A resolution passed by the Board of Directors shall suffice for making the said contribution.

Question 5. The Board of Directors of Wood Ltd. is authorized to borrow money upto 2 crores. The Board of Directors got sanctioned a loan of 30 lakh from a Bank for payment of debt liabilities of the company. But the Board of Directors used this amount towards payment of their traveling and tour expenses. Will Wood Ltd. be held liable for prepayment of the loan? Discuss.

Answer:

In a clear case of V.K.R.S.T Firm v. Oriental Investment Trust Ltd. under the authority of the company, its managing director borrowed large sums of money and misappropriated it. The company was held liable stating that where the borrowing is within the powers of the company, the lender will not be prejudiced simply because its officer has applied the loan to unauthorized activities provided the lender did not know about the intended misuse.

Applying the principles of the above-decided case in the above case Wood Ltd. will be held liable for repayment of the loan of 30 lakhs which is well within the sanctioned limits of the company.

Question 6. The Board of Directors of XYZ Ltd. wants to delegate all or any of their powers to any of the directors of the company or any person even not in the employment of the company for transfer of securities. Referring to the provisions of the Companies Act, 2013 advise in the matter. 

Answer:

There is no restriction on the delegation of powers of the Board of Directors of the company except as provided in the first proviso to Section 179(3) of the Companies Act, 2013.

It provides that The Board may delegate power to borrow money, to invest the funds of the company, and to grant loans or give guarantee or provide security in respect of loans, by way of resolution to any committee of directors, the managing director, manager or any other principal officer, or principal officer of a branch of the company.

Apart from this, the Board of Directors may delegate all or any of its powers to any person including a person not in employment of the company if the Articles of Association so provide.

Appropriately, in the given case the Board of Directors of XYZ Ltd. may delegate the powers relating to the transfer of securities only when the Articles of Association allows delegation of the powers to any of the directors of the company or any person not in employment of the company.

DEF Ltd. has made a profit for the last 3 consecutive financial years as under:

Company Law Board Constitution And Its Powers Financial year

Question 7. Considering the provisions of the Companies Act 2013, state whether:

  1. DEF Ltd. can contribute 33.75 crores directly to a political party by a bearer cheque.
  2. What is the limit on the maximum amount that can be contributed by a company to a political party?
  3. Would your answer be different, if DEF Ltd. is a “Government Company” and donation is given by an “account payee cheque”?

Answer:

According to Section 182 of the Companies Act, 2013. a company, other than a government company and a company that has been in existence for less than three financial years, may contribute any amount directly to any political party, on obtaining approval from the Board of Directors in their meeting.

Further, the contribution under this section shall not be made except by an account payee cheque drawn on a bank or an account payee bank draft or the use of an electronic clearing system through a bank account. Therefore as per the above provision, DEF Limited cannot contribute 33.75 Crore directly to a political party through a bearer cheque.

As per Section 182 of the Companies Act, 2013; a company, other than a Government company and a company which has been in existence for less than three financial years, may contribute any amount directly or indirectly to any political party. Hence DEF Ltd can contribute any amount to a Political Party.

According to Section 182 of the Companies Act, 2013 Government Companies are not allowed to contribute to the political party. Considering DEF Limited is a Government Company, it cannot make any contribution to a political party even by way of an account payee cheque.

Question 8. Moon Oil Exploration Ltd. (MOEL) was incorporated on 1st June 2007 and the company made a considerable amount of profit in the past years:

Company Law Board Constitution And Its Powers Profit in the past years

  1. In the current financial year 2019-20, the company wants to contribute to a political party. How much can it contribute?
  2. If MOEL had contributed to political parties earlier in the year 2017, how much could it have contributed at the maximum during those years?
  3. The Chairman of MOEL directed its account manager to pay a political party’s office an amount of 50 Lakh by cheque as part of payment to the party, can he do so?
  4. The Board of Directors authorised a payment to the National Defence Fund too but wanted to not show it in the profit and loss account. Is it possible to do so?
  5. A sum of 2 lakh was spent by MOEL on an advertisement in a tract published by a political party. How it is to be treated in the accounts of the company?

Answer:

  • Under Section 182 of the Companies Act, 2013, a company, other than a Government company and a Company which has been in existence for less than three financial years, may contribute any amount directly or indirectly to any political party.
    The Finance Act, 2017 amended Section 182 of the Companies Act, 2013, accordingly the limit on the maximum amount that can be contributed by a company to a political party has been removed. Therefore a company now can contribute any percentage without any limit.
  • Further, before the amendment to Section 182 by the Finance Act, 2017, the limit of contribution to political parties was 7.5% of the average net profits during the three immediately preceding financial years. Thus, earlier to 2017, it could have contributed only 7.5% of average net profits at the maximum.
  • As per Section 182(1) of the Companies Act, 2013, the contribution must be authorized by the board in its meeting by resolution and such resolution shall be deemed to be the justification in law for making such a contribution.
  • Section 182(3A) of the Companies Act, 2013, further, contribution under this section shall not be made except by an account payee cheque drawn on a bank or an account payee bank draft or use of an electronic clearing system through a bank account.
  • Therefore, the chairman cannot direct the payment to be made unless he is duly authorized by a Board resolution passed at a meeting and the payment is to be made through an Account Payee Cheque/Bank Draft or an electronic clearing system only.
  • Section 183 of the Companies Act, 2013 the Board is authorized to contribute such amount as it thinks fit the National Defence Fund or any other fund approved by the Government for National Defence.
  • Further, the company is required to disclose in its profit and loss account the total amount or amounts contributed by it during the financial year. Therefore, it is not possible to avoid the disclosure in the Profit and Loss Account about the amount of the contribution made to the National Defence Fund.
  • If the expenditure incurred on advertisement in any publication souvenir, brochure, tract, pamphlet, or the like is deemed as a political contribution if such publication is by or on behalf of a political party or if not, then for the advantage to such political party for a political purpose. Therefore, this amount is to be treated as a political contribution and shown in the profit and loss account under the head political contribution. -Space to write important points for revision

Question 9. Warner Ltd. is an Indian company with a net profit of 24, 7, 6, and 7 crores respectively in the last four years. Net profit for each of the last four years included a dividend of 1 crore received from WB Ltd. which is an Indian company. Discuss whether Warner Ltd. is required to spend on CSR activities. If yes, how much it should cost? If no, state the reasons for it. 

Answer:

Under Section 135 of the Companies Act 2013, the CSR provision applies to companies that fulfill any of the following criteria during the immediately preceding financial year:

  • Companies having a net worth of rupees five hundred crore or more, or
  • Companies having a turnover of rupees one thousand crore or more or
  • Companies having a net profit of rupees five crore or more

Explanation to Section 135 provides that for this section “net profit” shall not include such sums as may be prescribed and shall be calculated by the provisions of Section 198.

Section 198 of the Companies Act, 2013 read with CSR Rules has clarified how a company’s net profit will be computed to determine if it fits into the ‘spending’ norm. To determine the ‘net profit’, dividend income received from another Indian Company or profits made by the company from its overseas branches have been excluded. Besides, the 2% CSR is computed as 2% of the average net profits made by the company during the preceding three financial years.

Now, presume that W.B. Ltd. is duly covered under Section 135 Companies Act, 2013 and is also complying with the said provisions, the dividend received by Warner Ltd. from WB Ltd. shall be deducted from the Net Profit of Warner Ltd. to compute “net profit” & “average net profit” for Section 135 of Companies Act, 2013.

Therefore, based on the above assumption, Warner Ltd’s net profit shall be considered as rupees 7 crore minus 1 crore (dividend from another Indian company) = 6 crore in the preceding financial year, hence making it liable to comply with Section 135. It will therefore be required to spend on CSR Activities.

The CSR amount to be spent/created is 2% of 6 crores + 5 crores + 6 crores = 17/3 = 5.67 crore (average profit of the preceding three years) i.e. 2% of 5.67 crore being 11.33 Lakhs.

Question 10. RPK Ltd. is an unlisted company having ₹9 crores as paid-up capital and 52 crores as a long term loan. The directors of the company would like to know from you the answers to the following questions:

  1. Would the company be liable to constitute an audit committee?
  2. If the company is listed after a fresh issue of shares to the tune of *50 crores, in such a situation, would the company be liable to constitute an Audit Committee?
  3. What is the quorum for meetings and several meetings to be held in a year by the audit committee?

Answer:

  • Under Section 177(1) of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014, provides that the Board of Directors of the following companies is required to constitute an Audit Committee of the Board-
    • Every listed Public company;
    • All Public companies with a paid-up capital of 10 crores rupees or more;
    • All Public companies having turnover of 100 crores rupees or more;
    • All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.
      Therefore, RPK Ltd. is liable to constitute the audit committee as its long-term loan is more than the prescribed limit of 50 Crore.
  • Yes, the company is liable to constitute an audit committee as it will then become a listed company.
  • Secretarial Standard-1 provides that the Committee shall meet as often as necessary subject to the minimum number and frequency prescribed by any law or any authority or as stipulated by the board.
    Secretarial Standard -1, unless otherwise stipulated in the Act or the Articles or under any other law, the Quorum for meeting of any Committee constituted by the Board shall be as specified by the Board. If no such Quorum is specified, the presence of all the members of any such Committee is necessary to form the Quorum.
    Accordingly, RPK Ltd. In the case of unlisted public companies, a minimum number of meetings and quorum may be decided by the Board of Directors.

Question 11. X Ltd. is a listed company having 565 shareholders as of 31st December 2019. The Board of Directors asks you about the formation of the Stakeholders Relationship Committee. Is it necessary to constitute a Stakeholders Relationship Committee? Will your answer be the same if X Ltd. is an unlisted company? What should be the composition of this committee? 

Answer:

Section 178- Stakeholders Relationship Committee:

Section 178(5) of the Companies Act, 2013 provides for the constitution of the stakeholder’s relationship committee. The Board of Directors of a companythath consists of more than 1000 shareholders, debenture-holders, deposit holders, and any other security holders at any time during a financial year shall constitute a Stakeholders Relationship Committee.

Section 178(8) provides that in case of any contravention of the provisions of section 177 and section 178, the company shall be liable to a penalty of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of one lakh rupees.

Conclusion: Considering the above provisions, we can state that it is not necessary to constitute a Stakeholders Relationships Committee, in the case of X Ltd. The answer would remain the same even if it is an unlisted Company (both answers assuming that there is no one else except 565 shareholders given in the question)

Constitution of Stakeholders Relationship Committee The Stakeholders Relationship Committee shall consist of a chairperson who shall be a non-executive director and such other members as may be decided by the Board.

Under Regulation 20 of SEBI (LODR) [Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements)] Regulations, 2015

The listed entity shall constitute a Stakeholders Relationship Committee to specifically look into various aspects of interest of shareholders, debenture holders, and other security holders.

It shall consist of:

  • At least 3 directors, with at least 1 being an independent director, who shall be the members of the Committee
  • In the case of a listed entity having outstanding SR equity shares, at least two-thirds of the Stakeholders Relationship Committee shall comprise independent directors.
  • The chairperson of this committee shall be a non-executive director.

Conclusion:

In the above case, a listed company even if having less than 1000 shareholders is required to constitute a Stakeholder Relationship Committee. In case X Ltd. is an unlisted company, it is not required to constitute a Stakeholder Relationship Committee under the Companies Act, 2013.

As per SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, at least three directors, with at least one being an independent director, shall be members of the Committee.

Question 12. With the scenarios described below, examine whether any of the following companies is required to constitute an Audit Committee as per provisions of the Companies Act, 2013.

Company Law Board Constitution And Its Powers Name of the company

Board Constitution And Its Powers Descriptive Questions

Question 1. Explain the provisions relating to the constitution of the Nomination and Remuneration Committee.

Answer:

The Nomination and Remuneration Committee helps the Board of Directors in the preparations relating to the election of members of the Board of Directors, and in handling matters within its scope of responsibility that relate to the conditions of employment and remuneration of senior management, and management’s and personnel’s remuneration and incentive schemes.

The responsibilities of the Nomination and Remuneration Committee are defined in the Nomination and Remuneration policy or terms of reference of the Nomination and Remuneration document.

The Board of Directors of the following companies shall constitute the Nomination and Remuneration Committee of the Board:

  • Every listed Public Companies; or
  • The following class of companies –
    • all public companies with a paid-up capital of ten crore rupees or more;
    • all public companies having a turnover of one hundred crore rupees or more;
    • all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more.

The following classes of unlisted public companies shall not be covered for the above purpose:-

  • a joint venture;
  • a wholly owned subsidiary; and
  • a dormant company as defined under section 455 of the Act.

The committee shall consist of three or more non-executive directors out of which not less than one-half shall be independent directors.

The chairperson of the company may be appointed as a member, but shall not chair such committee.

Additionally, for listed Companies, SEBI (LODR) Reg, 2015 provides that the nomination and remuneration committee shall comprise at least three directors. All directors of the committee shall be non-executive directors, and at least fifty percent of the directors shall be independent directors.

The Chairperson of the nomination and remuneration committee shall be an independent director. The chairperson of the listed entity, whether executive or non-executive, may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee.

The Chairperson of the nomination and remuneration committee may be present at the annual general meeting, to answer the shareholders’ queries; however, it shall be up to the chairperson to decide who shall answer the queries.

Question 2. Explain the provisions relating to the constitution of the Stakeholders and Relationship Committee.

Answer:

Stakeholders Relationship Committee

Section 178(5) of the Companies Act, 2013 provides for the constitution of the stakeholder’s relationship committee.

The Board of a company that has more than one thousand shareholders, debenture-holders, deposit-holders, and any other security holders at any time during a financial year is required to constitute a Stakeholders Relationship Committee consisting of a chairperson who shall be a non-executive director and such other members as may be decided by the Board.

The stakeholder’s relationship committee shall consider and resolve the grievances of security holders of the company. The Committee shall consider and resolve the grievances of the security holders of the listed entity including complaints related to transfer of shares, non-receipt of annual report, and non-receipt of declared dividends.

The chairperson of each of the committees constituted under this section or, in his absence, any other member of the committee authorized by him on this behalf shall attend the general meetings of the company.

Comparison table of Stakeholders and Relationship Committee under Companies Act 2013 and SEBI (LODR) Regulations, 2015

Company Law Board Constitution And Its Powers SEBI

CS Company Law Global Developments in Companies Act Question and Answers

Global Developments

Modernization of Company Law for Global Competitiveness

It is increasingly being recognized that the framework for the regulation of corporate entities must facilitate companies to operate in a national and global context, encourage good corporate governance, and enable the protection of interests of investors, employees, and creditors as well as boost the economy as a whole.

In the competitive and technology-driven business environment, while corporates require greater autonomy of operation and opportunity for self-regulation with optimum compliance costs, there also is a need to bring about transparency through better disclosures and greater responsibility on the part of corporates and management for improved compliance.

Core Company Law

In recognition of the fact that the primary purpose of any law is to facilitate the public and bearing in mind the current international style of legal drafting, an ideal law for the corporate sector should be clear, concise, and comprehensible. The law should be a “core company law” i.e. regulating the “entity” (irrespective of its corporate structure and size) rather than its “activity” and providing the basic principles governing all aspects of the operation of corporate entities within a single, comprehensive framework.

Global Developments

Modernizing and Harmonizing

It is in this context that countries across the world are modernizing and harmonizing their company law with global standards.

List of Important Forms

Company Law Global Developments List of Important Forms

Global Developments in Companies Act  Descriptive Questions

Question 1. Mention the provisions of the Singapore Companies Act relating to the formation of companies.

“The provisions of the Hong Kong Companies Ordinance relating to the formation of an incorporated company are broadly similar to the provisions of the Companies Act, 2013”. Comment.

Answer:

  • Formation of Companies under the provisions of the Singapore Companies Act. Any person may, whether alone or together with another person, subscribe his name or their names to a memorandum and comply with the requirements as to registration form an incorporated company.
    A company may be :

    • a company limited by share
    • a company limited by guarantee on unlimited company.

Provisions :

A company must have at least one members – the first consideration is to decide on the right business entity that will meet the business needs.

The most common three business entities available in Singapore are:

  • Sole proprietorship
  • Limited Liability Partnership
  • Private Limited Company.

Sole Proprietorship: The following requirements are given below:

  • Minimum one owner
  • A Singapore registered office-address.
  • For foreign individual and companies only one manager who must be a Singapore resident.

Following documents are needed for registration of a sole proprietorship

  • Proposed sole proprietorship name
  • Copies of NRIC
  • Brief description of business activities
  • Registered office address for the sole proprietorship.

Limited Liability Partnership: A LLP gives owner the flexibility of operating as a partnership while having a separate legal entity like a private limited company. Singapore citizens, residents, and employment pass holders can register a LLP.

Private Limited Company: The private limited company is the most popular business entity in Singapore. It has a separate legal entity from its shareholders and directors, who have limited liability for the debt and losses of the company. It usually has the words Pvt. Ltd. as parts of its name.

Answer:

The statements that the provisions of Hong Kong Companies Ordinance relating to the formation of an incorporated company are broadly similar to the provisions of the Companies Act, 2013, appear to be correct for the following reasons.

Similarities are given below:

Company Law Global Developments Hong Kong

Question 2. State the broad requirements of the Companies Act, 2006 of United Kingdom as regards ‘Directors’ Remuneration Report’.

Answer:

Requirement for audited accounts (Section 475 of the UK Companies Act, 2006)

A company’s financial statements for a financial year must be audited in accordance with this part unless the company-

  • is exempt from audit under Section 477 (small companies) or Section 480 (dormant companies), or
  • is exempt from the requirements of this Part under Section 482 (nonprofit making companies subject to public sector audit)

A company is not entitled to any such exemption unless its balance sheet contains a statement by the directors to that effect.

A company is not entitled to exemption under any of the provisions mentioned in sub-Section (1) (a) unless its balance sheet contains a statement by the directors to the effect that –

  • the members have not required the company to obtain an audit of its accounts for the year in question in accordance with Section 476, and
  • the directors acknowledge their responsibilities for complying with the requirements of this Act with respect to accounting records and the preparation of accounts.

Question 3. Explain the salient features of the Australian Corporations Act, 2001 relating to appointment of auditors.

Answer:

The following may be appointed as auditor of a company for the purposes of the Australian Corporations Act, 2001: (a) an individual; (b) a firm; (c) a company.

  • In case of Proprietary company, the directors may appoint an auditor for the company.
  • The company may have more than one auditor. The appointment of a firm as auditor of a company is taken to be an appointment of all persons who, at the date of the appointment, are (a) members of the firm; and (b) registered company auditors. This is so whether or not those persons are resident in Australia.
  • The directors of a public company must appoint an auditor of the company within one month after the day on which a company is registered as a company unless the company at a general meeting has appointed an auditor.
  • A public company must appoint an auditor of the company at its first AGM and appoint an auditor of the company to fill any vacancy in the office of auditor at each subsequent AGM. Space to write important points for revision

Question 4. What are the special features of the Corporations Act, 2001 of Australia, which are distinct and different from the provisions of the Companies Act, 2013 in India.

Answer:

Corporations Act, 2001 and the Corporate Regulations, 2001 framed under the Corporations Act, 2001 govern the functioning of the companies in Australia. Following are the special and distinct features of the corporate laws in Australia as compared to the Indian Companies Act, 2013:

  • The Australian Corporations Act imposes duties on directors and officers of incorporated bodies. Breach of statutory duties draws penalties under the Act which range up to $ 2,20,000. Defaulting Officers or directors may also be required to pay compensation or to account for profits. In some cases, directors may also be disqualified from office.
  • It distinguishes proprietary company and public company. A public company must have at least 3 directors out of whom at least 2 directors must ordinarily reside in Australia.
  • Australian Securities and Investment Commission (ASIC) controls and regulates the affairs of companies. A person who is not disqualified from managing corporations may only be appointed as director of a company if the appointment is made with permission granted by Australian Securities and Investments Commission under the leave granted by the Tribunal.
  • A person who is the only director and only shareholder of a proprietary company can exercise all the powers of the company.
  • A company secretary’s obligations may continue even after the company has been deregistered.
  • The company secretary must notify ASIC about changes:-
    • to the identities, names and addresses of the company’s directors and company secretaries; and
    • to the register of members; and
    • to any ultimate holding company;

Question 5. The concept of treasury shares in United Kingdom is same as buy-back of shares in India. Examine.

Answer:

Section 124 read with Chapter 6 of U.K Companies Act, 2006 deals with treasury shares. Treasury shares are purchased by the company out of the distributable profits of the company and the company is allowed to hold such shares. The aggregate nominal value of shares held as treasury shares must not exceed 10 percent of nominal value of issued share capital.

In India, the Section 68 of Companies Act, 2013, provides that the buy back of its own shares but does not allow a company to hold shares. Bought back shares are to be cancelled within seven days, thus in India, bought back shares cannot be held as treasury stock. In India buy back of shares cannot exceed 25% of total paid up capital in any financial year.

Question 6. What types of companies can be formed in Singapore as per the Singapore Companies Act?

Answer:

According to Singapore Companies Act, 1967 any person may, whether alone or together with another person, by subscribing his name or their names to a constitution and complying with the requirements as to registration, form an incorporated company.

A company may be –

  • a company limited by shares;
  • a company limited by guarantee; or
  • an unlimited company.

No company, association or partnership consisting of more than 20 persons can be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the company, association or partnership, or by the individual members thereof, except it is registered as a company under the Singapore Companies Act, or is formed in pursuance of some other written law in Singapore or letters patent.

Question 7. Comment on the following:

In the United Kingdom, the name of the company may be entered in its register of members as a member in certain cases. (5 marks)

Answer:

Under Section 724 of the U.K. Companies Act, 2006 deals with the Treasury Shares, a limited company can make a purchase of its own shares out of distributable profits. The company may

  • hold shares (or any of them) or
  • deal with any of them, at any time,

As per section 727 or 729 of the U.K. Companies Act, 2006 w.r.t. disposal and cancellation of treasury shares.

Therefore, when such Treasury Shares are held by the company, then the name of the company must be entered in the register of members as the member holding those shares.

Question 8. What are the requirements to form a proprietary company under the Australian Corporations Act, 2001?

Answer:

A proprietary company is a company that is registered as, or converts to, a proprietary company under the Australian Corporations Act, 2001.

A proprietary company limited by shares must have at least one shareholder and must have at least one director. That director must ordinarily reside in Australia.

A proprietary company must:

  • be limited by shares or be an unlimited company with a share capital;
  • have no more than 50 non-employee shareholders; and
  • not do anything that would require disclosure to investors under Chapter 6D of the Act (except in limited circumstances).

Question 9. Highlight the aspects of corporate governance in the USA as per SOX Act.

Answer:

Sarbanes-Oxley Act, 2002:

  • The rules and enforcement policies outlined in the Sarbanes-Oxley Act of 2002 amended or supplemented existing laws dealing with security regulation, including the Securities Exchange Act of 1934 and other laws enforced by the Securities and Exchange Commission (SEC).
  • The new law set out reforms and additions in four principal areas:
    • Corporate responsibility.
    • Increased criminal punishment
    • Accounting regulation
    • New protections

Major Provisions of the Sarbanes-Oxley (SOX) Act of 2002:

  • The Sarbanes-Oxley Act of 2002 is a complex and lengthy piece of legislation. Three of its key provisions are commonly referred to by their section numbers: Section 302, Section 404, and Section 802.
  • Because of the Sarbanes-Oxley Act of 2002, corporate officers who knowingly certify false financial statements can go to prison.
  • Section 302 of the SOX Act of 2002 mandates that senior corporate officers personally certify in writing that the company’s financial statements “comply with SEC disclosure requirements and fairly present in all material aspects the operations and financial condition of the issuer.” Officers who sign off on financial statements that they know to be inaccurate are subject to criminal penalties, including prison terms.
  • Section 404 of the SOX Act of 2002 requires that management and auditors establish internal controls and reporting methods to ensure the adequacy of those controls. Some critics of the law have complained that the requirements in Section 404 can hurt publicly traded companies because it’s often expensive to establish and maintain the necessary internal controls.
  • Section 802 of the SOX Act of 2002 contains the three rules that affect record keeping. The first deals with the destruction and falsification of records. The second strictly defines the retention period for storing records. The third rule outlines the specific business records that companies need to store, which includes electronic communications.
  • Besides the financial side of a business, such as audits, accuracy, and controls, the SOX Act of 2002 also outlines requirements for information technology (IT) departments regarding electronic records. The act does not specify a set of business practices in this regard but instead defines which company records need to be kept on file and for how long. The standards outlined in the SOX Act of 2002 do not specify how a business should store its records, just that it’s the company’s IT department’s responsibility to store them.
  • The Sarbanes-Oxley Act (SOX) is the primary federal law governing corporate governance and accountability across multiple aspects of corporate business practice.
  • SOX specifically regulates markets, brokers, dealers, accounting and auditing, on-going government and shareholder disclosure by reporting companies, insider trading, anti-fraud, proxy regulation and so forth. SOX established a new regulatory body, increased the authority of existing regulators, as well as imposed regulations beyond those of the self-regulating, industry organizations.
  • The primary objectives of SOX are to promote:
    • Fairness to Shareholders – SOX requires or promotes governance provisions that protect shareholder rights and allow shareholders to exercise those rights through governance procedures, such as shareholder meetings.
    • Fairness to Stakeholders – SOX requires or promotes governance provisions that take into consideration the interests of employees, suppliers, buyers, and the local community.
    • Heightened Director and Board Responsibilities – SOX places specific requirements on the composition of boards of Directors, including skill and independence requirements. Notably, in an effort to promote Director independence in decision making, SOX requires corporations to employee committees for special purposes.

Example: SOX requires boards appoint an audit committee where all members are independent of corporate operations (not officers of the corporation) with at least one financial expert as a member of the committee.

    • Director and Officer Ethics – SOX imposes additional obligations on corporations to establish and maintain ethical standards for officer and Director conduct and decision-making. Example: SOX prohibits the corporation from making personal loans to corporate executives or their families.
    • Disclosure and Accountability – SOX places requirements on boards to increase transparency in corporate governance practices. This includes implementing procedures for ensuring accurate accounting practices and public disclosure mechanisms.
      Note: SOX requires internal review procedures and independence of external auditors that report directly to the corporation’s independent audit committee.

CS Company Law MCA 21 And Filling In XBRL Question and Answers

An Introduction To MCA – 21 And Filling In XBRL

E-form

An e-form is a re-engineered conventional form, represents a document in electronic format.

Feature of E-governance

Director Identification Number (DIN), Corporate Identity Number (CIN) and Digital Signature Certificate (DSC) are the important features under e-governance mode (MCA-21).

MCA-21

MCA-21 system provides for the facility of payment of statutory fees through multiple modes i.e. (i) Off-line payment through a challan generated by the system and payment of fees at the counter of the notified bank branches through DDs/ Cash; (ii) on-line payments through Internet Banking and Credit Cards [Master Card/VISA].

SRN

Each transaction under e-filing is uniquely identified by a Service Request Number (SRN). On filing of an e-form, the system will generate and provide a Service Request Number (SRN). A user can check the status of the document/ transaction, by entering the SRN.

Stamp duty on documents

If the stamp duty on documents which are required to be filed on non-judicial stamp paper is paid electronically through Ministry of Corporate Affairs portal www.mca.gov.in, in such case, the company. shall not be required to make physical submission of such documents, in addition to their submission in the electronic form.

MCA Services

  • LLP Services
  • LLP Services for Business User
  • E-Filing
  • Company Services
  • Complaints
  • Document Related Services
  • Fee and Payment Services
  • Public Search of Trademark
  • Investor Services

Corporate Identity Number(CIN)/ Foreign Company Registration Number (FCRN)

Every company is allocated a Corporate Identity Number (CIN). CIN can be found from the MCA-21 portal through search based on:

  • ROC Registration No.
  • Existing Company Name
  • Old Name of Company (in case of change of name, user is required to enter old name and the system displays corresponding current name).
  • Inactive CIN [In case of change of CIN, the user is required to enter previous (inactive) CIN Number]

Foreign Company Registration Number (FCRN)

Every foreign company has been allocated a Foreign Company Registration Number (FCRN).

Director Identification Number (DIN)

DIN is an identification number which the Central Government may allot to any individual, intending to be appointed as director or to any existing directors of a company, for the purpose of his identification

All existing and any person intending to be appointed as a director are required to obtain the Director Identification Number (DIN). DIN is also mandatory for directors of Indian Companies who are not citizens of India. However, DIN is not mandatory for directors of foreign company having branch offices in India.

Every individual, who is intending to be appointed as Director of a company or designated partner of a limited liability partnership is required to make an application electronically in Form DIR -3 to Central Government for obtaining Director Identification Number (DIN) or in case the company is being incorporated through Form SPICE, a maximum of three directors can apply for DIN. DIN is a unique, identification number and once obtained is valid for life time of a director. A single DIN is required to be obtained irrespective of the number of directorships.

MCA 21 And Filling In XBRL

Digital Signature Certificate (DSC)

For MCA-21, the following four types of users are identified as users of Digital Signatures and are required to obtain digital signature certificate:

  • MCA (Government) Employees.
  • Professionals (Company Secretaries, Chartered Accountants, Cost Accountants, and Lawyers) who interact with MCA and companies in the context of Companies Act.
  • Authorized signatories of the Company including Managing Director, Directors, Manager or Secretary.
  • Representatives of Banks and Financial Institutions.

e-forms

An e-form is only a re-engineered conventional form notified and represents a document in electronic format for filing with MCA authorities through the Internet. This may be either a form filed for compliance or information purpose or an application seeking approval from the MCA. Due to technical updates, these forms updates regularly, even though their user interface may not change. User always use latest e- forms from the MCA Portal.

XBRL Extensive Business Reporting Language

XBRL Filing

XBRL (Extensible Business Reporting Language) is a language for the electronic communication of business and financial data which is revolutionizing business reporting around the world. It helps in the preparation, analysis and communication of business information. It offers cost savings, greater efficiency and improved accuracy and reliability to all those involved in supplying or using financial data.

The Ministry of Corporate Affairs has mandated the following select class of companies mentioned below to file financial statements in XBRL (extensible Business Reporting Language) mode and by using the XBRL taxonomy:

  • all companies listed with any Stock Exchange(s) in India and their Indian subsidiaries; or
  • all companies having paid-up capital of Rupees five crore and above; or
  • all companies having turnover of Rupees one hundred crore and above; or
  • all companies who were required to file their financial statements for FY 2010-11, using XBRL mode.

However, the companies in banking, insurance, power sector, non-banking financial companies and housing finance companies are exempted from XBRL filing till further orders.

MCA 21 And Filling In XBRL Short Notes

Question 1. Write notes on the following:

XBRL

Answer:

Extensible Business Reporting Language (XBRL) is a language for the electronic communication of business and financial data revolutionizing business reporting around the world. It provides major benefits in the preparation, analysis and communication of business information. It offers cost savings, greater efficiency and improved accuracy and reliability to all those involved in supplying or using financial data.

The Ministry of Corporate Affairs has mandated for selected class of companies to file their Balance Sheet and Profit and Loss Account and other documents as required under Section 137 of Companies Act, 2013 with the Registrar of Companies in XBRL (Extensible Business Reporting Language) mode and by using the XBRL taxonomy.

Question 2. Write notes on the following:

XBRL filing.

Answer:

The applicability of e-form AOC-4 XBRL on classes of companies has been amended.

Filing of financial statements with Registrar. The following class of companies shall file their financial statements and other documents under Section 137 of the Act with the Registrar in e-form AOC-4 XBRL as per Annexure-1:

  • companies listed with stock exchanges in India and their Indian subsidiaries;
  • companies having paid up capital of five crore rupees or above;
  • companies having turnover of one hundred crore rupees or above;
  • all companies which are required to prepare their financial statements in accordance with Companies (Indian Accounting Standards) Rules, 2015:

Provided that the companies preparing their financial statements under the Companies (Accounting Standards) Rules, 2006 shall file the statements using the Taxonomy provided in Annexure-Il and companies preparing their financial statements under Companies (Indian Accounting Standards) Rules, 2015, shall file the statements using the Taxonomy provided in Annexure-II A:

Provided further that non-banking financial companies, housing finance companies and companies engaged in the business of banking and insurance sector are exempted from filing of financial statements under these rules.

Key benefits of XBRL filing are as under:

Relevant data has tags and selective information can be fetched for specific purposes by various government and regulatory agencies.

It is in conformity with Global Reporting Standards, which helps in improved data mining and relevant information search.

Question 3. Write notes on the following:

Keeping documents, records, registers, minutes, etc., of the company in electronic form

Answer:

According to Section 120, the documents, records, registers, minutes etc. may be kept and inspected in electronic form.

Rule 27 of Companies (Management and Administration) Rules, 2014 initially mandated every listed company or a company having not less than one thousand shareholders, debenture holders and other security holders may maintain its records, as required to be maintained under the Act or Rules made thereunder in electronic form.

According to Rule 27(2) the records in electronic form shall be maintained in such manner as the Board of Directors of the company may think fit, provided that:

  • the records are maintained in the same formats and in accordance with all other requirements as provided in the Act or the rules made thereunder;
  • the information as required under the provisions of the Act or the rules made thereunder should be adequately recorded for future reference;
  • the records must be capable of being readable, retrievable and reproducible in printed form;
  • the records are capable of being dated and signed digitally wherever it is required under the provisions of the Act or the rules made thereunder;
  • the records, once dated and signed digitally shall not be capable of being edited or altered:
  • the records shall be capable of being updated, according to the provisions of the Act.or the rules made thereunder and the date of DISTINGUISH BETWEEN updating shall be capable of being recorded on every updating. Space to write important points for revision

Question 4. Write notes on the following:

Pre-certification of e-forms

Answer:

Pre-certification of e-forms

Apart from authentication of e-forms by authorized signatories using digital signatures, certain e-forms are also required to be pre-certified by practicing professionals who are members of professional bodies namely ICAI, ICSI or ICWAI with the responsibility of ensuring correctness, completeness and integrity of documents filed by them with MCA in electronic mode including filing of financial statements in XBRL mode. Pre-certification is not required in the case of one person companies and small companies.

Once an e-form has been pre-certified by a professional towards its authenticity based on the particulars contained in the books of accounts and records of the company, MCA21 system takes that e-form on file by way of straight through process. Professionals are responsible for certifying documents through digital signature and the system would accept the documents online without approval by ROC.

This process of taking the forms on record by way of straight through process requires professionals to be extra cautious and vigilant towards the information, he/she certifies in the forms. If a professional certifies incorrect information or omits any material information, which later on proves that the same was done knowingly, he/she will be liable for the punishment under Section 448 read with Section 447 of the Companies Act, 2013, besides disciplinary action by the respective Institute, which issued the certificate of practice to the professionals.

MCA 21 And Filling In XBRL Distinguish Between

Question 1. Distinguish between the following:

‘Pre-scrutiny’ and ‘check form’.

Answer:

Company Law An Introduction To MCA And Filling In XBRL Pre Scrutiny and check form

Question 2. Distinguish between the following:

‘Informational services’ and ‘approval services (Registrar of Companies)’ for categories of e-forms.

Answer:

Company Law An Introduction To MCA And Filling In XBRL Approval Services

Informational Services:

Company Law An Introduction To MCA And Filling In XBRL Informational Services

Question 3. Distinguish between the following:

XBRL tags and XBRL taxonomies.

Answer:

In XBRL, information is not treated as a static block of text or set of numbers. Instead, information is broken down into unique items of data (e.g. total liabilities = 100). These data items are then assigned mark-up tags that make them computer-readable. For example, the tag<Liabilities>100</Liabilities> enables a computer to understand that the item is liabilities, and it has a value of 100.

Computers can treat information that has been tagged using XBRL ‘intelligently’; they can recognize, process, store, exchange and analyze it automatically using software.

Because XBRL tags are formed in a universally-accepted way, they can be read and processed by any computer that has XBRL software XBRL tags are defined and organized using categorization schemes called taxonomies.

XBRL Taxonomies:

Different countries use different accounting standards. Reporting under each standard reflects differing definitions. The XBRL language uses different dictionaries, known as ‘taxonomies’, to define the specific tags used for each standard. Different dictionaries may be defined for different purposes and types of reporting.

Taxonomies are the computer-readable ‘dictionaries’ of XBRL. Taxonomies provide definitions for XBRL tags, they provide information about the tags, and they organize the tags so that they have a meaningful structure.

As a result, taxonomies enable computers with XBRL software to:

  • understand what the tag is (e.g. whether it is a monetary item, a percentage or text);
  • In tagging Section, “N” refers to navigation, “A” refers to attaching the disclosures “T” refers to text entry etc.
  • what characteristics the tag has (e.g. if it has a negative value);
  • its relationship to other items (e.g. if it is part of a calculation).

Taxonomies differ according to reporting purposes, the type of information being reported and reporting presentation requirements.

MCA 21 And Filling In XBRL Descriptive Questions

Question 1. In relation to e-form CRA-2, state the:

  1. Reasons for filing this form
  2. Particulars required to be filled in the form
  3. Documents required to be enclosed with the form
  4. Person who is to sign and certify the form.

Answer:

  • Reasons for filling this form
    • This is a form of application to the Central Government for appointment of cost auditor.
  • Particulars required to be filled in the form
    • Corporate Identity Number (CIN) or Foreign Company Registration Number (FCRN) of the company;
    • Name of the company;
    • Category of cost audit order;
    • Details of the cost auditor proposed to be appointed;
    • Proposed remuneration of the cost auditor; and
    • Date of Board Meeting of Directors proposing the name of the cost auditor.
  • Documents required to be enclosed with the form
    • Copy of the board resolution of the company sanctioning the proposal for which the Government approval has been sought.
    • Copy of the certificate obtained from cost auditor.
  • Person who is to sign and certify the form
    • The form is required to be digitally signed by Managing Director or Director or Manager or Secretary of the company (in case of Indian Company) or an authorized representative (in case of a Foreign Company).

Question 2. Who are the persons required/obliged to use digital signature for filing/certifying e-forms? 

Answer:

Digital signature certificate is essential for every users who is required to sign in e-form for submission with MCA. For MCA – 21 there are four types of users that is given below are identifies as user of digital signature and are. required to obtain digital signature certificate:

  • MCA (Government) Employee.
  • Professional (Company Secretaries, Chartered Accountants, Cost Accountants).
  • Authorised signatories of the company including managing director, directors, manager or secretary.
  • Representatives of Banks and Financial Institutions.

Question 3. When a Director Identification Number (DIN) application is rejected by the Ministry of Corporate Affairs portal, does the applicant necessarily need to apply for a fresh DIN? Discuss.

Is online viewing of public documents of a company open to any member of the public? How one (who is eligible) can view online public documents of a company? Is a copy of a public document available to the public? Give two examples of company documents filed online with the Registrar of Companies.

Answer:

  • Common causes of Rejection for Director Identification Number (DIN)
    • The applicant details are not as per the PAN.
    • The particulars filed in form DIR 3 do not match with the details given in the supporting documents submitted along with DIN application.
    • Residence proof like :
      • Bank statement
      • Electricity bill
      • Telephone bill
      • Utility bill etc.
        Submitted are older than 2 months of submitting the application for verification.
    • The supporting document are not duly attested that is:
      • Name
      • Designation
      • Membership
      • Practicing certificate number etc. are not clearly indicated
    • Passport/Driving License/Identity proofs etc. attached are expired only such documents which are currently valid should be attached..

Viewing public documents is open to any member of public because the very term ‘public document’ means a document to which a member of public has access. There is no issue on eligibility to view public document. Any member of public or citizen can access MCA portal for viewing public documents of any company registered with ROC.

The feature of viewing is available after login. One who wishes to view will select the company concerned after login. Then the documents under each category will come on the screen. Contents of the documents can be seen only after payment of requisite fee. Once payment is made the person can view the documents during the next 7 days and once the view is started then it is available for a maximum of 3 hours.

The documents can be viewed from anywhere i.e. from any online facility available without visiting Registrar of Companies’ office, using the ‘My documents’ tab available after logging into the portal. Apart from viewing public documents, a person can also obtain certified copies of documents of payment. In this regard, an application is to be made to the concerned ROC within whose jurisdiction the company’s registered office is situated. Examples of public documents are:

Documents relating to incorporation of a company

Annual returns and balance sheets

Note: Examples of public documents are given below:

  • Documents relating to incorporation of company.
  • Annual returns and financial statement. Space to write important points for revision

Question 4. What is the general structure of e-filing process under MCA-21?

Answer:

Company Law An Introduction To MCA And Filling In XBRL Features of E-filling

Question 5. “XBRL offers major benefits at all stages of business reporting and analysis”. Discuss.

Answer:

Benefits of XBRL

XBRL offers major benefits at all stages of business XBRL reporting and analysis. The benefits are seen in automation, cost saving, faster, more reliable and more accurate handling of data, improved analysis and in better quality of information and decision- making.

  • It saves costs and improves efficiency in handling business and financial information.
  • It is extensible and flexible which can adapt any changes according to the requirements.
  • It enables producers and consumers of financial data to switch resources away from costly manual processes, typically involving time-consuming comparison, assembly and re-entry of data.
  • The users of financial data are able to make more effort on analysis.

Question 6. List out the resolutions which require filing of e- Form MGT-14 with the Registrar of Companies.

Answer:

Section 117 of the Companies Act, 2013 provides that a copy of every resolution and an agreement in respect of matters specified therein together with a explanatory statement shall be filed in Form No. MGT-14 with the Registrar within thirty days of its passing.

Resolutions and agreements to be filed with the Registrar are as under:

  • special resolutions;
  • resolutions which have been agreed to by all, the members of a company, but which if not so agreed to, would not have been effective for their purpose unless they had been passed as special resolutions;
  • any resolution of the Board of Directors of a company or agreement executed by a company, relating to the appointment, re-appointment or renewal of the appointment or variation of the terms of appointment, of a managing director;
  • resolutions or agreements which have been agreed to by any class of members but which, if not so agreed to, would not have been effective for their purpose unless they had been passed by a specified majority or otherwise in some particular manner and all resolutions or agreements which effectively bind such class of members though not agreed to by all those members;
  • resolutions passed by a company according consent to be exercised by its Board of Directors of any of the powers under clause (a) and clause (c) of Sub-Section (1) of Section 180;
  • resolutions requiring a company to be wound up voluntarily passed in pursuance of Section 304;
  • resolutions passed in pursuance of Sub-Section (3) of Section 179, and
  • any other resolution or agreement as may be prescribed and placed in the public domain.

Question 7. “The e-forms are required to be authenticated by the authorised signatories using digital signatures.” With reference to e-filing of documents with the Registrar of Companies, identify the users of digital signature who are required to obtain Digital Signature Certificate (DSC) and enlist the requirements of obtaining DSC in the case of foreign directors.

Answer.

The following four types of users are identified as users of Digital Signatures and are required to obtain digital signature certificate:

  • MCA (Government) Employees.
  • Professionals (Company Secretaries, Chartered Accountants, Cost Accountants and Lawyers) who interact with MCA and companies in the context of Companies Act.
  • Authorized signatories of the Company including Managing Director, Directors, Manager or Secretary.
  • Representatives of Banks and Financial Institutions.

Requirements for obtaining DSC in case of foreign directors: Foreign directors are required to obtain Digital Signature Certificate from an Indian Certifying Authority (List of Certifying Authorities is available on the MCA portal). The process of registration of DSC is same as applicable to others.

In case of Foreign Director, the DSC application is to be made to one of the Indian Certifying Authorities which is licensed u/s 24 of the Information Technology Act, 2000 and mentioned in the list available on the MCA portal. The said application should be duly filled by such applicant with the relevant enclosures.

Such DSC application then to be physically submitted with the necessary documents. Further, the said documents be attested and notarized by the Notary Public by the Foreign Ambassador/Diplomatic. In this manner, the Foreign Director can obtain the DSC from C.A. on the successful verification of the Application along with the documents and information.

Question 8. CIN, issued by MCA, the unique identifier, provides the key profile of companies – Explain.

Answer:

Every company incorporated on or after Nov 1, 2000 is allotted a 21.digit Corporate Identity Number (CIN) by the ROC, which indicates the listing status, economic activity (industry), State, Year of incorporation, ownership and sequential number assigned by the ROC. This number is to be quoted in all e-forms and once the number is typed, MCA site automatically pre-fills the essential particulars.

CIN is structured as under to indicate the profile of the company:

1st digit Listing Status

Next 5 digits: Economic activity (industry to which the company belongs) Next 2 digits: State in which Company is registered

Next 4 digits: Year of incorporation

Next 3 digits: Ownership

Next 6 digits: Sequential number assigned by the ROC (Registration Number)

CIN can also be searched in MCA site based on ROC registration number, existing company name or old name, if any. Keeping in view the said specifications, CIN can be considered the unique identifier.

Question 9. Filing of financial statements in XBRL mode and by using XBRL taxonomy is mandatory to certain companies. Discuss, referring to the provisions of the Companies Act, 2013. 

Answer:

As per Rule 3 of the Companies (Filling of Documents and Forms in Extensive Business Reporting Language) Rules, 2018 mandates the following select class of companies mentioned below to file financial statements in XBRL (extensible Business Reporting Language) mode and by using the XBRL taxonomy:

  • All companies listed with any Stock Exchange(s) in India and their Indian subsidiaries; or
  • All companies having paid-up capital of Rupees five crore and above; or
  • All companies having turnover of Rupees one hundred crore and above; or
  • All companies who were required to file their financial statements for F.Y. 2010-11, using XBRL mode.

But, the companies in banking, insurance, power sector, non-banking financial companies and housing finance companies are exempted from XBRL filing till further orders.

Question 10. Shalini, practicing Company Secretary, has disclosed information acquired in the course of her professional engagement to a person other than the client, without the consent of such client. Can she do so? Can she retain the digital signature of her client for uploading e-forms on MCA portal?

Answer:

Clause 1 of Part I of Second Schedule to the Company Secretaries Act, 1980 provides that a Company Secretary in Practice shall be deemed to be guilty of professional misconduct, if he discloses information acquired in the course of his professional engagement to any person other than the client so engaging him, without the consent of such client, or otherwise than as required by any law for the time being in force. This clause indicates the position of trust and confidence reposed by the client in a Company Secretary in practice. Therefore, Shalini is guilty under the above mentioned clause.

It is suggested that Shalini may retain digital signature of client after obtaining a formal letter signed by his client authorising PCS to make use of his Digital signature..

Question 11. Who are all the persons required to obtain Digital Signature Certificates?

Answer:

The e-forms are required to be authenticated by the authorized signatories using Digital Signature Certificate (DSC) as defined under the Information Technology Act, 2000. A digital signature is the electronic signature duly issued by a certifying authority that shows the authority of the person signing the same.

It is an electronic equivalent of a written signature. Every user who is required to sign an e-form for submission with MCA is required to obtain a Digital Signature Certificate. For MCA-21, the following four types of users are identified as users of Digital Signatures and are required to obtain digital signature certificate:

  • MCA (Government) Employees.
  • Professionals (Company Secretaries, Chartered Accountants, Cost Accountants and Lawyers) who interact with MCA and companies in the context of Companies Act.
  • Authorized signatories of the Company including Managing Director, Directors, Manager or Secretary.
  • Representatives of Banks and Financial Institutions.

All companies (Public Company, Private Company, Company not having share capital, Company limited by share or guarantee, Unlimited Company) must comply with this requirement of registration of DSC by the director, manager and secretary. Foreign directors are required to obtain Digital Signature Certificate from an Indian Certifying Authority (List of Certifying Authorities is available on the MCA portal). The process of registration of DSC is same as applicable to others.

Question 12. Every company is required to get pre-scrutiny and pre- certification of e-forms by a practising professional before filing with the Registrar of Companies (ROC). Is this true? Explain the relevant legal provisions.

Answer:

Pre-Scrutiny: Pre-scrutiny is a functionality that is used checking whether certain core aspects are properly filled in the e-form. It can be done by the company itself and no professional is required. Pre scrutiny function is available for all forms and is to be done by all class of companies.

Pre-Certification: Apart from authentication of e-forms by authorized signatories using digital signatures, some e-forms are also required to be pre-certified by practicing professionals. Pre-certification means certification of correctness of any document by a professional before the same is filed with the Registrar of Companies. E-forms mentioned in Rule 8(12) of the Companies (Registration Offices and Fees) Rules, 2014 such as INC-22, AOC-4, MGT-14, DIR-12 etc., are required to be pre-certified by Company Secretaries or Chartered Accountants or Cost Accountants who are in whole-time practice by all class of companies except One Person Company and Small Companies.

Consequently, every company is required to do pre-scrutiny of e-forms but pre-certification of certain forms is not mandatory for every class of company. Space to write important points for revision

Question 13. Assistant Company Secretary of JKL Ltd. has made excess payment of 1 lakh to MCA for filing of e-forms. What is the procedure of refund of MCA-21 fees?

Answer:

In order to claim refund of multiple payments or incorrect payment or excess payment of MCA-21 fees, while using MCA services, following procedure is required to be followed:

  • The Person is required to file the ‘Refund Form’ available on MCA21 portal for claiming refund.
  • The refund of MCA21 fees is available in the following cases:
    • Multiple Payments This includes cases where service seeker does multiple filings such as in e-Form No. SH-7 and makes payments more than once (multiple times) for the same service. Although, refund shall not be allowed in respect of approved e-Forms.
    • Incorrect Payments This includes cases where the service seeker has made payment in respect of an e-Form or Stamp duty through an incorrect option under Pay miscellaneous fee facility.
    • Excess Payments- This includes cases where any excess fee has been paid by the service seeker due to some incorrect data entered in the e-Form or incorrect data in MCA-21 system due to migration of data from legacy system.
  • The refund form is to be filed within the stipulated time period. Also, there shall be deduction in the amount to be refunded based on time period within which refund e-form is filed. Space to write important points for revision-

MCA 21 And Filling In XBRL Practical Questions

Question 1. Prudent General Insurance Company Ltd. is engaged in the general insurance business. The company is not listed in any stock exchange in India but is a subsidiary of Reliable General Insurance Company Ltd., listed at Bombay Stock Exchange. The turnover of Prudent General Insurance Company Ltd. is 330 crore. Examining the provisions of the Companies Act, 2013, state whether the company is required to file XBRL enabled balance sheet.

Answer:

Company Law An Introduction To MCA And Filling In XBRL XBRL Filling

Question 2. In relation to filing of financial statements of a company in XBRL mode and by using the XBRL taxonomy, decide whether the following companies are required to file the financial statements in the said mode:

  1. Grand Ltd., the subsidiary company of Tiny Ltd. which is listed at Kolkata Stock Exchange.
  2. Prime Ltd., a company which has paid-up share capital of 100 crore.
  3. Crafty Ltd., a company which has a turnover of 400 crore.
  4. Comfort Ltd., a non-banking financial company.

Answer:

XBRL Filing: The Ministry of Corporate Affairs has mandated the following select class of companies mentioned below to file financial statements in XBRL (Extensible Business Reporting Language) mode and by using the XBRL taxonomy:

  • all companies listed with any Stock Exchange(s) in India and their Indian subsidiaries; or
  • all companies having paid-up share capital of rupees five crore and above; or
  • all companies having turnover of rupees one hundred crore and above; or
  • all companies who were required to file their financial statements for F.Y. 2010-11; using XBRL mode.

However, banking companies, insurance companies, power companies and Non-Banking Financial Companies are exempted from XBRL filing till further orders.

  • Yes, Company is required to file financial statements through XBRL mode.
  • Yes, Company is required to file financial statements through XBRL mode.
  • Since in this case the turnover is more than 100 crore, the company is required to file the financial statements through XBRL mode.
  • This company is exempted from filing the financial statements through XBRL mode.

Question 3. ABC Ltd. has not satisfied any conditions specified as per section 137 of the Companies Act for current financial year.. The company has filed financial statement as per XBRL Taxanomy for the previous financial year. Is ABC Ltd. still required to file financial statements as per XBRL. Taxanomy for the current financial year?

Answer:

Rule 3 of the Companies (Filing of Documents and Forms in XBRL) Rules, 2015

  • The following class of companies shall file their financial statements and other documents under section 137 of the Act with the Registrar in e-Form AOC-4 XBRL:
    • companies listed with stock exchanges in India and their Indian subsidiaries
    • companies having paid up capital of five crore rupees or above;
    • companies having turnover of one hundred crore rupees or above;
    • all companies which are required to prepare their financial statements in accordance with Companies (Indian Accounting Standards) Rules, 2015.
  • Provided that the Companies preparing their financial statements under the Companies (Accounting Standards) Rules, 2006 shall file the statements using the Taxonomy provided in Annexure-Il and companies preparing their financial statements under Companies (Indian Accounting Standards) Rules, 2015, shall file the statements using the Taxonomy provided in Annexure-II A of the Companies (Filing of Documents and Forms in XBRL) Rules, 2015
  • Further non-banking financial companies, housing finance companies and companies engaged in the business of banking and insurance sector are exempted from filing of financial statements under these rules.
  • The companies which have filed their financial statements under sub-rule (1) of Rule 3 of XBRL Rules, shall continue to file their financial statements and other documents though they may not fall under the class of companies specified therein in succeeding years. The companies which have filed their financial statements under the erstwhile rules, namely the Companies (Filing of Documents and Forms in Extensible Business Reporting Language) Rules, 2011, shall continue to file their financial statements and other documents as prescribed in Rule 3(1) of XBRL Rules though they do not fall under the class of companies specified therein.

Therefore, as per the above provisions ABC Ltd. though has not satisfied any conditions specified as per Section 137 of the Companies Act, 2013 for current financial year, yet the company is required to file financial statements as per XBRL Taxonomy for the current financial year as it has filed the financial statements as per XBRL Taxonomy for the previous financial year.

CS Company Law Merger And Amalgamation Of Companies Question and Answers

An Overview Of Corporate Re-organisation Merger And Amalgamation Of Companies Chapter At A Glance

Compromise in Companies Act, 2013

A compromise means settlement or adjustment of claims in dispute by mutual concessions.

Arrangement in Companies Act, 2013

Arrangement includes a reorganization of the share capital of the Company by consolidation of shares of different classes or division of shares into shares of different classes or by both of these methods.

Reconstruction in Companies Act, 2013

Reconstruction’, inter alia, indicates the process that involves

  • the transfer of undertakings of an existing company to another company, usually incorporated for the purpose. The old company ceases to exist. However, all the assets might not be passed to the new company;
  • the carrying on of substantially the same business by the same persons;
  • the rights of the shareholders in the old company are satisfied by their being allotted shares in the new company.

Amalgamation in Companies Act, 2013

Amalgamation is the blending of two or more undertakings (companies) into one undertaking, the shareholders of each blending undertaking becoming substantially the shareholders of the other company that holds blended undertakings.

Merger in Companies Act, 2013

Merger is a form of amalgamation where all the properties and liabilities of the transferor company get merged with the properties and liabilities of the transferee company leaving behind nothing with the transferor company except its name, which also gets removed through the process of law. In reality, companies do not merge; only the assets and liability merge.

Reverse Merger in Companies Act, 2013

Reverse Merger is the opposite of Merger. No clear definition of reverse merger has been given in the Companies Act nor the term has been precisely defined by the Indian Courts. Reverse Merger represents a case where the loss-making company or less profit-earning company extends its embracing arms to the profitable company and, in turn, absorbs it into its fold.

Binding in Companies Act, 2013

The sanctioned scheme would be binding on all the concerned parties. However, in certain circumstances, the Tribunal shall not sanction a scheme of compromise and arrangement.

No Objection Certificate in Companies Act, 2013

In a scheme of compromise or arrangement, the Tribunal is bound to seek a report from the Registrar of Companies as well as a no objection certificate from the Income Tax Authority to ensure that the affairs of the Company have not been conducted in a prejudicial manner.

Explanatory Statement in Companies Act, 2013

An explanatory statement, as provided for in the act, would be attached to every notice calling the meeting.

Supervise the Scheme in Companies Act, 2013

The Tribunal has the power to supervise the implementation of the scheme and to sanction modification of the terms of the scheme. While sanctioning the scheme; the Tribunal also has the power to order winding up.

Cross Border Mergers in Companies Act, 2013

Section 234(2) states that subject to the provisions of any other law for the time being in force, a foreign company, may with the prior approval of the Reserve Bank of India, merge into a company registered under this Act or vice versa and the terms and conditions of the scheme of merger may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash or Depository Receipts or partly in cash and partly in Depository Receipts, as the case may be, as per the scheme to be drawn up for the purpose.

Merger And Amalgamation Of Companies

Merger And Amalgamation Of Companies Descriptive Questions

Question 1. Examining the provisions of the Companies Act, 2013, explain the powers of the Central Government to order the amalgamation of companies in the public interest.

Answer:

Section 237(1) states that when 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.

Question 2. Comment on the following:

The merger of a ‘Subsidiary’ Company into a ‘Holding’ Company.

Answer:

The merger of a ‘Subsidiary’ Company into a ‘Holding’ Company

  • As per Section 233 of the Companies Act, 2013, a scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed, subject to the following, namely:
    • a notice of the proposed scheme inviting objections or suggestions, if any, from the Registrar and Official Liquidators where the registered office of the respective companies are situated or persons affected by the scheme within thirty days is issued by the transferor company or companies and the transferee company
    • the objections and suggestions received are considered by the companies in their respective general meetings and the scheme is approved by the respective members or class of members at a general meeting holding at least ninety percent. Of the total number of shares
    • each of the companies involved in the merger files a declaration of solvency, in the prescribed form, with the Registrar of the place where the registered office of the company is situated and
    • the scheme is approved by a majority representing nine-tenths in value of the creditors or class of creditors of respective companies indicated in a meeting convened by the company by giving a notice of twenty-one days along with the scheme to its creditors for the purpose or otherwise approved in writing.
    • The transferee company shall file a copy of the scheme so approved in the manner as may be prescribed, by the Central Government, Registrar, and the Official Liquidator where the registered office of the company is situated.
    • On the receipt of the scheme, if the Registrar or the Official Liquidator has no objections or suggestions to the scheme, the Central Government shall register the same and issue a confirmation thereof to the companies.
    • If the Registrar or Official Liquidator has any objections or suggestions, he may communicate the same in writing to the Central Government within thirty days:
    • Provided that if no such communication is made, it shall be presumed that he has no objection to the scheme.
    • If the Central Government after receiving the objections or suggestions or for any reason thinks that such a scheme is not in the public interest or the interest of the creditors, it may apply to the Tribunal within sixty days of the receipt of the scheme under sub-Section (2) stating its objections and requesting that the Tribunal may consider the scheme under Section 232.
    • On receipt of an application from the Central Government or any person, if the Tribunal, for reasons to be recorded in writing, thinks that the scheme should be considered as per the procedure laid down in Section 232, the Tribunal may direct accordingly or it may confirm the scheme by passing such order as it deems fit:
    • Provided that if the Central Government does not have any objection to the scheme or it does not file any application under this section before the Tribunal, it shall be deemed that it has no objection to the scheme.

Question 3. Serious Ltd. has three factories in Chennai. The company wants to sell one of the factories. Can the company sell its factory? Further, assuming that the company has also borrowed credit facilities from the bank, explain the statutory provisions under the Companies Act, 2013.

Answer:

According to Sub-Section (1)(a) of Section 180 of the Companies Act, 2013, the Board of Directors of a company may sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings only with the consent of the company by a special resolution.

Accordingly, the company may sell any of its factories with the consent of the company by a special resolution.

Where the company has a credit facility on creating a charge on such undertaking, the company, may be required to obtain a no-objection- certificate from the bank as per contractual obligation and shall also modify the charge accordingly.

CS Company Law Merger And Amalgamation Of Companies

Question 4. Comment on the following:

The provisions of the Companies Act, 2013 relating to compromises and arrangements are uniformly applicable to all companies. 

Answer:

Sections 230 to 240 of the Companies Act, 2013 provide for the Compromise, Arrangements, and Amalgamation of Companies. The said provisions are uniformly applicable to all companies except Section 233 which specifies the simplified procedure for merger or amalgamation of –

  • Two or more small companies, or
  • Between a holding company and its wholly-owned subsidiary company,
    or
  • Such other classes or classes of companies as may be prescribed.

Section 233 (1) of the Companies Act, 2013 Provides that notwithstanding the provisions of Section 230 and Section 232 of the Companies Act, 2013, a scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be specified, subject to the following, namely:-

  • a notice of the proposed scheme inviting objections or suggestions, if any, from the Registrar and Official Liquidators where the registered office of the respective companies are situated or persons affected by the scheme within 30 days is issued by the transferor company or companies and the transferee company;
  • the objections and suggestions received are considered by the. companies in their respective general meetings and the scheme is approved by the respective members or class of members at a general meeting holding at least ninety percent of the total number of shares;
  • each of the companies involved in the merger files a declaration of solvency, in the prescribed form, with the Registrar of the place where the registered office of the company is situated; and
  • the scheme is approved by a majority representing nine-tenths in value of the creditors or class of creditors of respective companies indicated in a meeting convened by the company by giving a notice of twenty-one days along with the scheme to its creditors for the purpose or otherwise approved in writing.

Question 5. The appointed date and Effective date are very important in any merger or amalgamation through a scheme of arrangement. Do you agree?

Answer:

The appointed date and Effective date are two significant dates in any scheme of Merger and Amalgamation.

Mention of an appointed date is compulsory for the schemes falling under Section 232 of the Companies Act, 2013. Schemes involving Merger Amalgamation or division of undertaking are required to fix an appointed date.

In Marshall Sons & Co. India Ltd. vs. ITO, it was held by the Hon’ble Supreme Court that every scheme of amalgamation has to necessarily provide a date with effect from which the amalgamation/transfer shall take place and that such date may precede the date of sanctioning of the scheme by the Court, the date of filing of certified copies of the orders of the Court before the Registrar of Companies, and the date of allotment of shares, etc. Although, would be given effect from the transfer date (appointed date) itself.

  • Section 232(6) of the Companies Act, 2013 states that the scheme shall be deemed to be effective from the ‘appointed date’ and not a date after the ‘appointed date’.
  • This is an enabling provision to allow the companies to decide and agree upon an ‘appointed date’ from which the scheme shall come into force.

The “Effective date” is the date when the amalgamation/merger is completed in all respects after having gone through the formalities involved, and the transferor company is dissolved by the Registrar of Companies and a certified copy of the order for the scheme of compromise and arrangement is filed with ROC and all other required statutory authorities, if any.

Merger And Amalgamation Of Companies Practical Questions

Question 1. A transferor company got approval for a scheme of amalgamation with the transferee company. An amount of 5 lakh was deposited by the transferor company on the direction of the Tribunal for settling the dues of employees. An ex-employee of the transferor company objected to the amalgamation citing that he is also entitled to the claim in the amount deposited. Will he succeed? Give reasons.

Answer:

Company Law An Overview of Corporate Re-organisation Merger Facts of the Case

Question 2. SUP Ltd. is a public company incorporated in India. It wants to propose a scheme of arrangement (merger) with another company in the same line of business in India. Help the company in preparing such a scheme of arrangement first. Secondly, help the company in getting approval from NCLT. Advise how the company should approach NCLT for its approval of the scheme and discuss grounds based on which NCLT will accord its approval.

Answer:

Preparation of Scheme of Amalgamation

The scheme of amalgamation to be prepared by the company should contain the following information:

  • Brief details of transferor and transferee companies.
  • Appointed date.
  • Main terms of transfer of assets and liabilities from the transferor to the transferee.
  • Effective date of the scheme.
  • The terms of carrying on the business activities by transferor between ‘appointed date’ and ‘effective date’.
  • Details of Share Capital of Transferor and Transferee Company.

No Companies or arrangement shall be sanctioned by the Tribunal unless a certificate by the company’s auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement conforms with the accounting standards prescribed under Section 133.

Approach the Tribunal

In terms of provisions of Section 232(1), an application is required to be made to the Tribunal for sanctioning a scheme of an arrangement (merger) proposed between a company and another company.

On receiving the application, the Tribunal may order a meeting of the creditors or class of creditors or the members or class of members, as the case may be, to be called, held, and conducted in such manner as the Tribunal may direct and the provisions of sub-sections (3) to (6) of Section 230 shall apply mutatis mutandis.

The company, after receiving such an order must circulate the required documents for members’/creditors’ meetings as stated under the provisions of Section 232(2).

Merger And Amalgamation Of Companies Short Notes

Question 1. Write short notes on the merger of small companies.

Answer:

Accordingly, sub-section (1) of Section 233 states that notwithstanding the provisions of Section 230 and 232, a scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed, subject to the following, namely:

  • a notice of the proposed scheme inviting objections or suggestions, if any, from the Registrar and Official Liquidators where the registered office of the respective companies are situated or persons affected by the scheme within thirty days is issued by the transferor company or companies and the transferee company;
  • the objections and suggestions received are considered by the companies in their respective general meetings and the scheme is approved by the respective members or class of members at a general meeting holding at least ninety percent of the total number of shares;
  • each of the companies involved in the merger files a declaration of solvency, in the prescribed form, with the Registrar of the place where the registered office of the company is situated; and
  • the scheme is approved by a majority representing nine-tenths in value of the creditors or class of creditors of respective companies indicated in a meeting convened by the company by giving a notice of twenty-one days along with the scheme to its creditors for the purpose or otherwise approved in writing.

Merger And Amalgamation Of Companies Descriptive Questions

Question 2. Describe the powers of the Central Government to provide for the amalgamation of companies in the public interest.

Answer:

  • If 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.
  • The order under sub-section (1) 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 the amalgamation.
  • 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 his 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.
  • Any person aggrieved by any assessment of compensation made by the prescribed authority under sub-section (3) may, within thirty days from the date of publication of such assessment in the Official Gazette, prefer an appeal to the Tribunal and thereupon the assessment of the compensation shall be made by the Tribunal. No order shall be made under this section unless-
    • a copy of the proposed order has been sent in draft to each of the companies concerned;
    • the time for preferring an appeal under sub-section (4) has expired, or where any such appeal has been preferred, the appeal has been finally disposed of; and
    • the Central Government has considered and made such modifications, if any, in the draft order as it may deem fit in the light of suggestions and objections which may be received by it from any such company within such period as the Central Government may fix in that behalf, not being less than two months from the date on which the copy aforesaid is received by that company, or from any class of shareholders therein, or any creditors or any class of creditors thereof.

The copies of every order made under this section shall, as soon as may be after it has been made, be laid before each House of Parliament.

Question 3. Describe the provisions relating to cross-border mergers in Companies Act, 2013.

Answer:

Section 234(2) states that subject to the provisions of any other law for the time being in force, a foreign company, may with the prior approval of the Reserve Bank of India, merge into a company registered under this Act or vice versa and the terms and conditions of the scheme of merger may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or Depository Receipts, or partly in cash and partly in Depository Receipts, as the case may be, as per the scheme to be drawn up for the purpose.

For subsection (2), the expression “foreign company” means any company or body corporate incorporated outside India whether having a place of business in India or not.

Section 234(1) states that the provisions of this Chapter unless otherwise provided under any other law for the time being in force, shall apply mutatis mutandis to schemes of mergers and amalgamations between companies registered under this Act and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government. The Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations provided under this section.

Question 4. What are the requirements relating to notice required under Section 230 of the Companies Act, 2013?

Answer:

Section 230(3) states that when a meeting is proposed to be called in pursuance of an order of the Tribunal under sub-section (1), a notice of such meeting shall be sent to all the creditors or class of creditors and all the members or class of members and the debenture-holders of the company, individually at the address registered with the company which shall be accompanied by

  • a statement disclosing the details of the compromise or arrangement,
  • a copy of the valuation report, if any, and
  • explaining their effect on creditors, key managerial personnel, promoters and non-promoter members, and the debenture-holders, and
  • the effect of the compromise or arrangement on any material interests of the directors of the company or the debenture trustees, and
  • such other matters as may be prescribed;

Such notice and other documents shall also be placed on the website of the company, if any, and in the case of a listed company, these documents shall be sent to the Securities and Exchange Board and stock exchange where the securities of the companies are listed, for placing on their website and shall also be published in newspapers in such manner as may be prescribed. -Space to write important points for revision

 An Overview Of Corporate Reorganisation Majority Rule And Minority Rights

Powers

Under the Companies Act, the powers have been divided between two segments; one is the Board of Directors and the other is of shareholders. The directors exercise their powers through meetings of the Board of Directors and shareholders exercise their power through Annual General Meetings/Extra-ordinary General Meetings.

Principle of company law

The general principle of company law is that every member holds equal rights with other members of the company in the same class. The scale of rights of members of the same class must be held evenly for the smooth functioning of the company. In case of difference(s) amongst the members, the issue is decided by a vote of the majority.

Protection for the minority shareholders

Since the majority of the members are in an advantageous position to run the company according to their command, the minority shareholders are often oppressed. The company law provides for adequate protection for the minority shareholders when their rights are trampled by the majority.

Prejudicial to the public interest

Any member of a company who complains that the affairs of the company are being conducted in a manner prejudicial to the public interest or in a manner oppressive to any member(s) (including any one or more of themselves) may make an application to the NCLT by way of petition for relief.

Relief

Relief under the Act will also be available if the affairs of the company are being conducted in a manner prejudicial to the public interest. ‘Public interest’ is a very broad term involving the welfare not only of the individual shareholders but also of the country according to the economic and social policies of the State.

Violation of the Regulations

If there is a persistent violation of the regulations and statutes and an appeal to the general body is not likely to put an end to the matters complained of because those responsible for the violations control the affairs of the company, then it will be just and equitable to wind up the company.

Right to Apply

The following members of a company shall have the right to apply u/s 241, namely:

  • In the case of a company having a share capital of not less than 100 members of the company or not less than one-tenth of the total number of members, whichever is less or any member or members holding not less than one-tenth of the issued share capital of the company, subject to the condition that the applicant or applicants have or have paid all calls and other sums due on his or their shares;
  • In the case of a company not having a share capital: Not less than one-fifth of the total number of members. However, the Tribunal may, on an application, waive all or any of the above requirements to enable the members to apply u/s 241.

Exceptions to the Rule in Foss v. Harbottle or Protection of Minority Rights and share-holders remedies

  • Ultra Vires Act
  • Fraud on Minority
  • Wrongdoers in Control
  • A resolution requiring a Special Majority but is passed by a simple majority
  • Personal Actions
  • Breach of Duty
  • Prevention of Oppression and Mismanagement

Under the Provision of Companies Act, 2013:

The first remedy in the hands of an oppressed minority is to move the NCLT. Section 241 provides that any member of a company who complains that the affairs of the company are being conducted in a manner prejudicial to the public interest or in a manner oppressive to any member(s) (including any one or more of themselves) may make an application to the NCLT by way of petition for relief.

The following requirements must be satisfied to seek relief under Section 241:

  • That the affairs of the company are being conducted: (a) in a manner prejudicial to public interest; or (b) oppressive to any members.
  • The fact justified the compulsory winding up order because it is just and equitable that the company should be wound up.
  • That to wind up the company would unfairly prejudice the petitioners [Ramji Lal Baiswala v. Britain Cable Ltd., (1964) 14 Raj. 135].

On being satisfied with the above requirements, the NCLT may make the necessary orders for ending the matters complained of. The first requirement relates to public interest or oppression. First, we analyze and discover the precise connotation of the word “oppression” with the help of judicial decisions.

Class Action Suits

A class action suit is a lawsuit where a group of people representing a common interest may approach the Tribunal to sue or be sued. It is a procedural instrument that enables one or more plaintiffs to file and prosecute litigation on behalf of a larger group or class having common rights and grievances.

Application of Class Action and Relief

  • to restrain the company from committing an ultra act vires the articles or memorandum of the company;
  • to restrain the company from committing a breach of any provision of the company’s memorandum or articles;
  • to declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by misstatement to the members or depositors;
  • to restrain the company and its directors from acting on such a resolution;
  • to restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force;
  • to restrain the company from taking action contrary to any resolution passed by the members;

Corporate Reorganisation Majority Rule And Minority Rights

Distinguish Between

Question 1. Distinguish between the following:

‘Oppression’ and ‘mismanagement’.

Answer:

Company Law An Overview of Corporate Re-organisation Merger Oppression

Question 2. Distinguish between the following:

Oppression and mismanagement application and Class action suits.

Answer:

Oppression and Mismanagement Application:

Section 244 of the Companies Act, 2013 provides that the following members of a company have the right to apply in case of oppression and management referred to under Section 241 to the tribunal:

  • in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, subject to the condition that the applicant or applicants have or have paid all calls and other sums due on his or their shares;
  • in the case of a company not having a share capital, not less than one-fifth of the total number of its members:
    The Tribunal has the power that on an application made to it on this behalf, waive all or any of the above-mentioned requirements to enable the members to apply under Section 241.

Class Action Suits:

Section 245 of the Companies Act, 2013, dea! with Class action suits. It is provided that members, depositors. or any class of them, may, if they think that the management or conduct of the affairs of the company is being conducted in a manner prejudicial to the interests of the company or its members or depositors, apply to the Tribunal on behalf of the members or depositors.

The requisite number of members is as under:

  • in the case of a company having a share capital, not less than one hundred members of the company or not less than such percentage of the total number of its members as may be prescribed, whichever is less, or any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed, subject to the condition that the applicant or applicants have or have paid all calls and other sums due on his or their shares;
  • in the case of a company not having a share capital, nor less than one-fifth of the total number of its members.

Further, the requisite number of depositors shall not be less than one hundred depositors or not less than such percentage of the total number of depositors as may be prescribed, whichever is less, or any depositor or depositors to whom the company owes such percentage of total deposits of the company as may be prescribed.

Corporate Reorganisation Majority Rule And Minority Rights

Descriptive Questions

Question 1. Comment on the following:

The NCLT law will not interfere with the internal management of companies acting within their powers. 

Answer:

Company Law An Overview of Corporate Re-organisation Merger The Principle of Majority Rule

Company Law An Overview of Corporate Re-organisation Merger Act illegal or ultra vires

Question 2. Explain the following:

A mere lack of confidence between the majority shareholders and minority shareholders would not be enough to order relief under Section 241. 

Answer:

  • The scope of Section 241 was very succinctly enunciated by the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. where it observed that “It is not enough to show that there is just and equitable cause for winding up of the company though that must be shown as a preliminary to the application under Section 241.
  • It must further be shown that the conduct of majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story.
  • There must be continuous acts on the part of the majority shareholders continuing to the date of the petition, showing that the affairs of the company were being conducted in a manner oppressive to some members. the conduct must be burdensome, harsh, and wrongful.
  • Mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from the oppression of the minority by the majority in the management of the company’s affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.”

Question3. A petition signed by 100 members of a company has been moved to NCLT for prevention of mismanagement. Later on, half of the members (signatories) withdrew their consent after filing the petition. Examine whether the remaining applicants (petitioners/signatories) to the petition would be successful in their complaint to NCLT.

Answer:

  • Right to apply under Section 241 [Section 244]
    • The following members of a company shall have the right to apply u/s 241, namely:
      • In the case of a company having a share capital of not less than 100 members of the company or not less than one-tenth of the total number of members, whichever is less or any member or members holding not less than one-tenth of the issued share capital of the company, subject to the condition that the applicant or applicants have or have paid all calls and other sums due on his or their shares;
      • In the case of a company not having a share capital: Not less than one-fifth of the total number of members.
  • Rajahmundry Electric Supply Co. v. A. Nageshwara Rao, AIR 1956 SC 213
    • However, the Tribunal may, on an application, waive all or any of the above requirements to enable the members to apply u/s 241. Once the consent has been given by the requisite number of members by signing the application, the application may be made by one or more of them on behalf of and for the benefit of all of them.
    • It has been held by the Supreme Court in Rajahmundry Electric Supply Co. v. A. Nageshwara Rao, AIR 1956 SC 213, that if some of the consenting members have, after the presentation of the application, withdraw their consent, it would not affect the right of the applicant to proceed with the application.
    • Obtaining consent is a condition precedent to the making of the application and hence consent obtained after the application is ineffective. Makhan Lal Jain Vs. The Amrit Banaspati Co. Ltd., I. L. R. (1954) I All. 131.
  • Chandramurthy V. K. L. Kapsi (2005) 48 SCL | 294 CLB
    • In L. Chandramurthy V. K. L. Kapsi (2005) 48 SCL 294 CLB, a person who had disposed of his shares was not allowed to apply. Therefore, in the above case, the withdrawal of consent by some of the members shall not affect the success of the remaining applicants.

Question 4. What do you mean by Class Action Suit? Discuss concerning eligibility criteria for class action, the nature of relief, and the effect of the Tribunal’s order. 

Answer:

Section 245 of the Companies Act, 2013 makes provision for class action by investors. The term ‘investors’ includes shareholders, deposit holders, and any class of security holders of the company.

Section 245 permits a representative of any class of investors to file a suit before the National Company Law Tribunal for relief.

In terms of Section 245 (1), Such number of members or members, depositor or depositors or any class of them, as the case may be, as is indicated in sub-section (2) of the section may if they think that the management or conduct of the affairs of the company is being conducted in a manner prejudicial to the interests of the company or its members or depositors, apply to the Tribunal on behalf of the members or depositors for seeking all or any of the relief specified. Eligibility criteria for class action

Sub-section (3) (i) of Section 245 of the Companies Act, 2013 provides the requisite number of members provided in Sub-Section (1) shall be as under:

  • in the case of a company having a share capital, not less than one hundred members of the company or not less than such percentage of the total number of its members as may be prescribed, whichever is less, or any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed, subject to the condition that the applicant or applicants have or have paid all calls and other sums due on his or their shares;
  • in the case of a company not having a share capital, not less than one-fifth of the total number of its members.

The requisite number of depositors provided in sub-section (1) shall not be less than one hundred depositors or not less than such percentage of the total number of depositors as may be prescribed, whichever is less, or any depositor or depositors to whom the company owes such percentage of total deposits of the company as may be prescribed.

Nature of Relief

The order by Tribunal may relate:

  • to restrain the company from committing an ultra act vires the articles or memorandum of the company;
  • to restrain the company from committing a breach of any provision of the company’s memorandum or articles;
  • to declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by misstatement to the members or depositors;
  • to restrain the company and its directors from acting on such a resolution;
  • to restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force;
  • to restrain the company from taking action contrary to any resolution passed by the members;
  • to claim damages or compensation or demand any other suitable action from or against:
    • the company or its directors for any fraudulent, unlawful, or wrongful act or omission or conduct or any likely act or omission or conduct on its or their part;
    • the auditor including the audit firm of the company for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful, or wrongful act or conduct; or
    • any expert advisor consultant or any other person for any incorrect or misleading statement made to the company or for any fraudulent, unlawful, or wrongful act or conduct or any likely act or conduct on his part;
  • to seek any other remedy as the Tribunal may deem fit.

Effect

Any order passed by NCLT shall be binding on the company and all its members, depositors, auditors, consultants advisors, or any other person associated with the company. Non-compliance with the order by the company shall be punishable with a fine which shall not be less than 5 Lakhs but which may extend to 25 Lakhs and every officer of the company who is in default shall be punishable with imprisonment for a term upto 3 years and with a fine ranging from 25,000 to 1 lakh.

Question 5. What do you understand by ‘class action suit’ as introduced by the Companies Act, 2013? Explain the objective behind introducing this provision in the Companies Act and the persons who can initiate such a class action suit.

Answer:

A class action suit is a lawsuit where a group of people representing a common interest may approach the Tribunal to sue or be sued. It is a procedural instrument that enables one or more plaintiffs to file and prosecute litigation on behalf of a larger group or class having common rights and grievances.

The major objective behind the provision of class action suits is to safeguard the interests of the minority shareholders. So, class action suits are expected to play an important role in addressing numerous prejudicial and abusive acts committed by the Board of Directors and other managerial personnel.

Person to initiate Class Action Suit:

  • Members:
    The requisite number of members provided in sub-section (1) shall be as under:-
    • in the case of a company having a share capital, not less than one hundred members of the company or not less than such percentage of the total number of its members as may be prescribed, whichever is less, or any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed, subject to the condition that the applicant or applicants have or have paid all calls and other sums due on his or their shares;
    • in the case of a company not having a share capital, not less than one-fifth of the total number of its members.
  • Depositors:
    • According to Section 245(3)(ii) the requisite number of depositors provided in Section 245(1) shall not be less than one hundred depositors or not less than such percentage of the total number of depositors as may be prescribed, whichever is less, or any depositor or depositors to whom the company owes such percentage of total deposits of the company as may be prescribed. Space to write important points for revision

Question 6. In a scheme of amalgamation, it was proposed that the name of the transferor company shall be deemed to be the name of the transferee company. The Regional Director (RD), of the Ministry of Company Affairs, objected to the because the proposed name is undesirable if it is identical with or too nearly resembling the name of an existing company. Decide if the stand taken by the RD is valid under the Companies Act, 2013. Reference may be made to decided case laws.

Answer:

It has been held in earlier judgment PMP Auto Industries Ltd. that in case of amalgamation Chapter XV of the Companies Act, 2013 is a complete code like a “single window clearance” system, the object of which is to eliminate frequent applications being made to the Court in order effectively to implement a scheme of amalgamation which the Court sanctions in the exercise of its powers.

Further, in this case, Michelin India Private Limited High Court held that a complete code by itself on the subject of arrangement/compromise and reconstruction is comprehensive enough to include a change in the name consequent on the amalgamation or arrangement.

Thus considering the above, in the present case the objection of RD is invalid.

Question 7. “The Companies Act, 2013 attempts to maintain a balance between the rights of majority and minority shareholders.” Discuss.

Answer:

  • In India, the Companies Act, 2013 attempts to maintain a balance between the rights of majority and minority shareholders by admitting, the rule of the majority but limiting it at the same time by several well-defined minority rights, thus protecting the minority shareholders as well.
  • The rule of Foss V. Harbottle establishes the rule of the majority but it is not absolute but subject to certain exceptions and the minority shareholders are protected by
    • the common law; and
    • the provisions of the Companies Act, 2013.
  • Section 241 to Section 245 of Chapter XVI of the Companies Act, 2013 deals with the provisions relating to the prevention of oppression and mismanagement of a company.
  • Oppression and mismanagement of a company mean that the affairs of the company are being conducted in a manner that is oppressive and biased against the minority shareholders or any member or members of the company.
  • To prevent the same, there are provisions for the prevention and mismanagement of a company.

Corporate Reorganisation Majority Rule And Minority Rights Practical Questions

Question 1. In a case about oppression and mismanagement, the respondents pleaded that the legal heirs of a deceased member whose name is still on the register of members are not entitled to apply before the Tribunal, as only members of the company can complain about oppression and mismanagement. Thus, legal heirs have no locus standi. Examine this argument in the light of decided cases.

Answer:

According to Section 241 of the Companies Act, 2013 any member of the company may make an application to the Tribunal for relief in cases of oppression or mismanagement under given circumstances. In Worldwide Agencies (P) Ltd. v. Margaret T. Decor (1990), it was decided that the legal representatives of a deceased member whose name is still on the register of members are entitled to file a petition, for relief against oppression or mismanagement.

In the above case, the above-mentioned case is applicable, where the member has died and his name still exists in the register of members, the legal heirs are entitled to maintain the petition.

Question 2. XYZ Ltd. sold a mine, owned by it for 28.20 crore. A minority shareholder brought an action for damages against their directors and against the company itself stating that the real value of the mine was 100.00 crore. Concerning provisions of the Companies Act, 2013 state whether the action for damages is maintainable.

Answer:

In the case of Pavlides v. Jensen (1956) Ch. 565, a minority shareholder brought an action for damages against three directors and against the company it because that they had been negligent in selling a mine owned by the company for £ 82,000, whereas its real value was about £ 10,00,000. It was held that the action was not maintainable.

The judge observed, “It was open to the company, on the resolution of a majority of the shareholders to sell the mine at a price decided by the company in that manner, and it was open to the company by a vote of majority to decide that if the directors by their negligence or error of judgment have sold the company’s mine at an undervalue, proceedings should not be taken against the directors”.

Applying the above interpretation, the action for damages undertaken by the minority shareholders of XYZ Ltd. is not maintainable. Hence an action for damages neither against the company nor against the directors is valid. Space to write important points for revision-

Corporate Reorganisation Majority Rule And Minority Rights Short Notes

Question 1. Write short notes on Class Action Suits.

Answer:

A class action suit is a lawsuit where a group of people representing a common interest may approach the Tribunal to sue or be sued. It is a procedural instrument that enables one or more plaintiffs to file and prosecute litigation on behalf of a larger group or class having common rights and grievances.

Application of Class Action and Reliefs [Section 245(1)]

Subsection (1) of Section 245 states that such number of members, depositors, or any class of them, as the case may be, may, file an application before the Tribunal for seeking all or any of the following orders, namely:

  • to restrain the company from committing an ultra act vires the articles or memorandum of the company;
  • to restrain the company from committing a breach of any provision of the company’s memorandum or articles;
  • to declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by misstatement to the members or depositors;
  • to restrain the company and its directors from acting on such a resolution;
  • to restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force;
  • to restrain the company from taking action contrary to any resolution passed by the members;
  • to claim damages or compensation or demand any other suitable action from or against-
    • the company or its directors for any fraudulent, unlawful, or wrongful act or omission or conduct or any likely act or omission or conduct on its or their part;
    • the auditor including the audit firm of the company for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful, or wrongful act or conduct; or
    • any expert advisor consultant or any other person for any incorrect or misleading statement made to the company or for any fraudulent, unlawful, or wrongful act or conduct or any likely act or conduct on his part;
  • to seek any other remedy as the Tribunal may deem fit.

Question 2. Write short notes on the Effect of Order.

Answer:

Order shall The ordering: Any order passed by the Tribunal shall be binding on the company and all its members, depositors, and auditor including the audit firm expert consultants advisor, or any other person associated with the company. [Section 245(6)]

Punishment for non-compliance: Any company which fails to comply with an order passed by the Tribunal under this section shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees. [Section 245(7)]

An Overview Of Corporate Re-organisation Winding-up

Winding-up of a Company

  • Winding-up of a Company is defined as a process by which the life of a Company is brought to an end and its property administered for the benefit of its members and creditors.
  • An administrator called the liquidator is appointed and he takes control of the Company, collects its assets, pays debts, and finally distributes any surplus among the members by their rights.
  • At the end of winding up, the Company will have no assets or liabilities. When the affairs of a company are completely wound up, the dissolution of the Company takes place.
  • On dissolution, the company’s name is struck off from the Register of Companies, and its legal personality as a corporation comes to an end.

Modes of Winding-up

There are two modes of winding up:

Winding up by Tribunal i.e. Compulsory Winding-up, and Voluntary Winding-up;

Compulsory Winding-up

Section 271 of the Companies Act, 2013 provides that a company may, on a petition under Section 272, be wound up by the Tribunal under the following circumstances-

  • if the company has, by special resolution, resolved that the company be wound up by the Tribunal;
  • if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency, or morality;
  • if on an application made by the Registrar or any other person authorized by the Central Government by notification under this Act, the Tribunal thinks that the affairs of the company have been conducted fraudulently or the company was formed for a fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up;
  • 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; or
  • if the Tribunal thinks that it is just and equitable that the company should be wound up.”.

Petition for the Winding up (Section 272 of Companies Act, 2013)

Who may file a Petition for the Winding up?

  • the company; or
  • any creditor or creditors, including any contingent or prospective creditor or creditors; or
  • any contributory or contributories; or
  • all or any of the parties specified above in clauses (a), (b), (c) whether together or separately; or
  • the Registrar; or
  • any person authorized by the Central Government.
  • by the Central government or State Govt., in a case falling under clause (c) of Section 271(1).

Voluntary Winding-up

  • A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under the provisions of this Chapter.
  • The voluntary liquidation of a corporate person under sub-section (1) shall meet such conditions (3) and procedural requirements as may be specified by the Board.
  • Without prejudice to sub-section (2), voluntary liquidation proceedings of a corporate person registered as a company shall meet the following conditions, namely:
    • a declaration from the 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;
    • the declaration under sub-clause (a) shall be accompanied by the following documents, namely:
      • audited financial statements and records 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;
    • within four weeks of a declaration under sub-clause (a), there shall be
      • a special resolution of the members of the company in a general meeting.
      • a resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily as a result of the 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.

Registered Valuer

Section 247(1) of the Companies Act, 2013 states that where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill, or any other assets or net worth of a company or its liabilities under the provision of the Companies Act, 2013, it shall be valued by a person having such qualifications and experience and registered as a valuer in such manner, on such terms and conditions as may be prescribed and appointed by the audit committee or in its absence by the Board of Directors of that company.

ICSI- RVO

As specified above, Section 247 of the Companies Act, 2013 provides that where a valuation is required to be made in respect of any assets it shall be valued by a person who, having the necessary qualifications and experience, and being a valuer member of a recognized valuer organization, is registered as a valuer with the Authority. Accordingly, to enable the members of the Institute/others to practice as Registered Valuers, the Institute incorporated ICSI-RVO.

ICSI-RVO is a Section 8 company that has been formed with the intent to enroll, register, educate, train, promote, develop, and regulate Registered Valuers Rules while establishing and promoting high standards of practice and professional conduct and to promote good professionalism, ethical conduct and competency of Registered Valuers for ensuring the quality of valuation work.

Corporate Re-organisation Winding-up Distinguish Between

Question 1. Distinguish between the following: (a) ‘Winding-up’ and ‘dissolution’.

Answer:

The terms winding up and dissolution are sometimes erroneously used to mean the same thing. But there is a subtle difference between the two terms.

Company Law An Overview of Corporate Re-organisation Merger Winding up and dissolution

Corporate Re-organisation Winding-up Descriptive Questions

Question 1. Comment on the following:

Winding-up is only a process while dissolution puts an end to the existence of a company. 

Answer:

In the process of winding up the assets of the company are disposed of and the debts of the company are paid off out of the realized assets by a liquidator. If any balance remains in the hands of the liquidator, it is distributed among the members of the company by their rights under the articles.

According to Professor Gower, “winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members.”

  • An administrator, called a liquidator, is appointed and he takes control of the company, collects its assets, pays its debts, and finally distributes any surplus among the members by their rights. At the end of the winding up there will not be type remained any of assets and liabilities in the company, and it will therefore be simply a formal step for it to be dissolved that is for its legal personality as a corporation to be brought to an end.
  • In between winding up and dissolution, the legal entity of the company remains and it may be sued in a Tribunal.
  • A company that has been dissolved no longer exists as a separate entity capable of holding property or of being sued in a Tribunal of law, but a company in liquidation though the administration of its affairs has passed the liquidator retains its complete existence.
  • If the liquidation should be annulled, the company will resume its powers.
  • On dissolution, the company’s name is struck off the register of companies, and its legal personality as a corporation comes to an end. Space to write important points for revision

Question 2. Mahesh is a creditor of an unlimited company. The company was wound up. Mahesh, therefore, wants to sue the members of the company to recover the dues. Advise Mahesh regarding the remedy available to him.

Answer.

Company Law An Overview of Corporate Re-organisation Merger Meaning of Unlimited Company

Question 3. Referring to the provisions of the Companies Act, 2013, state the grounds on which the Registrar of Companies can file a petition for the winding-up of a company.

Answer:

The Registrar shall be entitled to present a petition for winding up under Section 271, except on the grounds specified in clause (a) or clause (e) of that sub-section:

Provided that the Registrar shall obtain the previous sanction of the Central Government for the presentation of a petition:

Provided further that the Central Government shall not accord its sanction unless the company has been given a reasonable opportunity to make representations.

Question 4. The Mumbai Bench of the National Company Law Tribunal has received a petition for the winding up of Presentable Commodities Ltd. Pramod, Manager (Human Resources) of the company wants to know from you, the Secretary of the company, what orders can be passed by the Tribunal in this regard. Advise Pramod, under the relevant provisions of the Companies Act, 2013.

Answer:

According to Section 273(1) of the Companies Act, 2013, the Tribunal may, on receipt of a petition for winding up pass any of the following orders:

  • dismiss it, with or without costs;
  • make any interim order as it thinks fit;
  • appoint a provisional liquidator of the company till the making of a winding-up order;
  • make an order for the winding up of the company with or without costs;
    or
  • any other order as it thinks fit.

Question 5. Can a contributory file a petition for the winding up of the company? Discuss.

Answer:

Section 272(1) of the Companies Act, 2013 provides that subject to the provisions of this section, a petition to the Tribunal for the winding up of a company shall be presented by, inter-alia, any contributory or contributory.

As per Section 272(2) of the Companies Act, 2013, a contributory shall be entitled to present a petition for the winding up of a company, notwithstanding that he may be the holder of fully paid-up shares, or that the company may have no assets at all or may have no surplus assets left for distribution among the shareholders after the satisfaction of its liabilities, and shares in respect of which he is a contributory or some of them were either originally allotted to him or have been held by him, and registered in his name, for at least six months during the eighteen months immediately before the commencement of the winding up or have devolved on him through the death of a former holder.

Question 6. Govt. of West Bengal applied winding up of KTC Ltd. in the Tribunal citing sec. 271 of the Companies Act, 2013 in the interest of the sovereignty and integrity of India which was opposed by the company stating that the state government cannot file a petition for winding up. Is the claim of the company sustainable and why?

Answer:

Section 271(b) of the Companies Act, 2013 provides that a company may, on a petition under section 272, be wound up by the Tribunal if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality.

Section 272(1) of the Companies Act, 2013 provides that subject to the provisions of this section, a petition to the Tribunal for the winding up of a company shall be presented by

  • the company;
  • any contributory or contributors;
  • all or any of the persons specified in clauses (a) and (b);
  • the Registrar;
  • any person authorized by the Central Government on that behalf; or
  • in a case falling under clause (b) of sub-section (1) of section 271, by the Central Government or a State Government.

Given the above provisions, the claim of the company is not sustainable. -Space to write important points for revision

Corporate Re-organisation Winding-up Practical Questions

Question 1. On 3rd December 2018, the Registrar of Companies applied to the Regional Director for seeking sanction to file a winding up application against a company. On the next day i.e. on 4th December, 2018, the Regional Director granted its sanction. Examine the validity of the Regional Director’s action.

Answer:

Section 272(1) of the Companies Act, 2013, provides that a petition to the Tribunal for the winding up of a company can be presented by the Registrar of Companies. However, the Registrar shall obtain the previous sanction of the Central Government for the presentation of a petition. The section also provides that the Central Government shall not accord its sanction unless the company has been given a reasonable opportunity to make representations. The Power of Central Government in this context has been assigned to Regional Directors.

In the above case, the Regional Director granted its sanction on the very next day of filing the petition without giving a reasonable opportunity to the company to be heard. Here the action of the Regional Director is invalid. – Space to write important points for revision-

Question 2. Amitabh is a director at PQR Overseas Trading Ltd. The company’s name has recently been struck off from the register of companies by the Registrar. He does not hold a directorship in any other company. Therefore, Amitabh applied to the Registrar for cancellation of his DIN. However, the application was rejected by the Registrar. Is the rejection of the application correct in your opinion? 

Answer:

Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 allows cancellation surrender, or deactivation of DIN under the following cases-

  • If DIN is found to be duplicated in respect of the same person provided the data related to both the DIN shall be merged with the validly retained number;
  • If it is obtained in a wrongful manner or by fraudulent means
  • Death of the concerned individual
  • A concerned individual has been declared as a person of unsound mind by a competent court
  • A concerned individual has been adjudicated an insolvent
  • On application made in Form DIR-5 by the DIN holder to surrender DIN along with a declaration that he has never been appointed as a director in any company and said DIN has never been used for filing of any document with any authority.

The issue raised in question is not covered in any of the above conditions. As Amitabh was appointed as a director using his DIN (and presumably filed e-forms using the DIN), such DIN shall not be deactivated and DIR-5 cannot be filled even though the name of the company has been struck off and he does not hold directorship in any other Company. Therefore, the action of the Registrar is correct.

Question 3. Sunita sold her flat to NOP Televisions Ltd. on 1 April 2016. The company appointed Prakash (a registered valuer and also husband of Sunita) on 1st May 2019 to determine the value of the flat purchased from Sunita. Can Prakash validly undertake this assignment? Would your answer differ if the appointment had been made on 1 March 2019?

Answer:

According to Section 247(2)(d) of the Companies Act, 2013, the valuer shall not undertake the valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during three years before his appointment as a valuer or three years after the valuation of assets was conducted by him.

In the instant case, Prakash had an indirect interest in the property because it was owned by his wife (Sunita). However, he was appointed on May 01, 2019, as valuer of the property, since a period of three years has already elapsed after the sale of the property, Prakash can validly take up the assignment of valuation of the property.

However, if the appointment had been made on March 01, 2019, the period of three years would not have elapsed and he could not have taken up the assignment.

Corporate Re-organisation Winding-up Short Notes

Question 1. Write short notes on Registration Offices and Fees.

Answer:

Section 403 states that any document, required to be submitted, filed, registered, or recorded, or any fact or information required or authorized to be registered under the Companies Act, 2013, shall be submitted, filed, registered, or recorded within the time specified in the relevant provision on payment of such fee as may be prescribed. The fees are prescribed under the Companies (Registration Offices and Fees) Rules, 2014.

However, in case of failure to submit, file register, or record the above-stated documents, within the period provided in the relevant section, it may, without prejudice to any other legal action or liability under the Companies Act, 2013, be submitted, filed, registered or recorded as the case may be:-

  • In case of documents provided under Section 92 or 137 [First proviso to Section 403]
    • alter expiry of the period so provided under Section 92 or 137,
    • on payment of such additional fee as may be prescribed –
      • which shall not be less than one hundred rupees per day, and
      • different amounts may be prescribed for different classes of companies.
  • In case of any other documents [Second proviso to Section 403]:
    • after the expiry of the period so provided under the relevant Section,
    • on payment of such additional fees as may be prescribed and different fees may be prescribed for different classes of companies.

Corporate Re-organisation Winding-up Descriptive Question

Question 2. Who shall Conduct the valuation?

Answer:

Section 247(1) of the Companies Act, 2013 states that where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill, or any other assets or net worth of a company or its liabilities under the provision of the Companies Act, 2013, it shall be valued by a person having such qualifications and experience and registered as a valuer in such manner, on such terms and conditions as may be prescribed and appointed by the audit committee or in its absence by the Board of Directors of that company.

The valuer appointed under sub-section (1) shall,-

  • make an impartial, true, and fair valuation of any assets which may be required to be valued;
  • exercise due diligence while performing the functions as a valuer;
  • make the valuation by such rules as may be prescribed; and
  • not undertake valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during three years before his appointment as valuer or three years after the valuation of assets was conducted by him.

Question 3. What is ICSI-RVO?

Answer:

As specified above, Section 247 of the Companies Act, 2013 provides that where a valuation is required to be made in respect of any assets it shall be valued by a person who, having the necessary qualifications and experience, and being a valuer member of a recognized valuer organization, is registered as a valuer with the Authority. Accordingly, to enable the members of the Institute/others to practice as Registered Valuers, the Institute incorporated

ICSI-RVO.

ICSI-RVO is a Section 8 company that has been formed with the intent to enroll, register, educate, train, promote, develop, and regulate Registered Valuers Rules while establishing and promoting high standards of practice and professional conduct and promoting good professionalism, ethical conduct and competency of Registered Valuers for ensuring the quality of valuation work.

The IBBI vide Registered Valuers Organisation Recognition No. IBBI/RVO/2018/003 recognized ICSI RVO. as a Registered Valuers Organisation for the Asset Class(es):-

  • Land and Building
  • Plant and Machinery
  • Securities or Financial Assets

Question 4. Who can offer valuation services?

Answer:

For conducting valuations required under the Companies Act, 2013, and the Insolvency and Bankruptcy Code, 2016, a person is to be registered with the IBBI as a registered valuer. To register with IBBI, a person must have the necessary qualifications and experience, haves to be enrolled as a valuer member with a Registered Valuer Organisation (RVO), complete a recognized educational course conducted by the RVO and pass a value,tion examination conducted by IBBI.

IBBI, being the Authority, in pursuance of the first proviso to Rule 5 (1) of the Companies (Registered Valuers and Valuation) Rules, 2017 specified the details of the educational course for the Asset Class of ‘Securities or Financial Assets’. These courses shall be delivered by the RVOS in not less than 50 hours.

A person, who is rendering valuation services under the Companies Act, 2013, may continue to do so without a certificate of registration up to 31st March, 2018, thereafter with effect from 1st April, 2018 for conducting valuations required under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016, a person is to be registered with the IBBI as a registered value.

CS Company Law Registers And Records Question and Answers

Registers And Records Introduction

The Companies Act, 2013 lays down that every company incorporated under this Act must maintain and keep at its registered office certain books, registers and copies of certain returns, documents etc. and to give certain notices, file certain returns, forms, reports, documents etc. with the Registrar of Companies within certain specified time limits and with the prescribed filing fees. These books are known as Statutory Books.

Statutory books and registers

Every company incorporated under the Act is required to keep at its registered office, inter alia, the following statutory books and registers:

  • Register of securities bought back. (Section 68 Rule 17(12) of Companies (Share Capital and Debenture) Rules, 2014.
  • Register of deposits. [Section 73, Rule 14 Companies (Acceptance of Deposits) Rules, 2014.
  • Register of charges (Section 81 Rule 7 of Company’s Registration of Charges, Rules, 2014).
  • Register of sweat equity shares [Section 54 and Rule 8 (14) of Companies (Share Capital and Debenture) Rules, 2014]
  • Annual Return (Section 92) Rule 11 of The Companies (Management and Administration (Rules 2014)).
  • Register of Postal Ballot [Section 110 and Rule 22 of the Companies (Management and Administration) Rules, 2014]
  • Books containing minutes of general meeting and of Board and of committees of Directors. [Section 118] Books of Accounts. [Section 128]
  • Register of Directors/ key managerial personnel. (Section 170 (1)).
  • Register of investments in securities not held in company’s name. [Section 187, Rule 14 of Companies (Meetings and Board Powers) 2014].
  • Register of loans, guarantees given and security provided or acquiring securities (Section 186/9 rule 12 Companies Meetings of Boards and its Powers Rules, 2014).
  • Register of contracts with companies/firms in which directors are interested. [Section 189(5) Rule 16 of Companies (Meetings of Boards and its Powers) Rules, 2014].

Law Registers And Records

Registers And Records List of Important Forms

Company Law Registers And Records List of Important Forms

Registers And Records Distinguish Between

Question 1. Distinguish between the following:

‘Statutory books’ and ‘statistical books’.

Answer:

Company Law Registers And Records Statutory Books

Registers And Records Descriptive Questions

Question 2. Chairman of your company wants to know the procedure of condonation of delay by Central Government in filing the document with the Registrar of Companies. As a Company Secretary, prepare a note for consideration of the Chairman.

Answer:

Company Law Registers And Records Condonation of Delay in filling any document

Question 3. Minutes of the meetings of the company shall be preserved for a period of not less than eight years. Comment with reference to the provisions of the Companies Act, 2013.

Answer:

Section 118 of Companies Act, 2013, read with Secretarial Standards on Board Meetings (SS-1) and Secretarial Standards on General Meetings (SS-2), Minutes of all Board Meetings and shareholders meetings shall be preserved permanently in physical or in electronic form with Timestamp. Space to write important points for revision-

Question 4. What are the requirements as to the maintenance of Register of Postal Ballot?

Answer:

Section 110 of the Companies Act, 2013 and Rule 22(10) of the Companies (Management and Administration) Rules, 2014 states that every company which is required to or which proposes to get any resolution passed through postal ballot should maintain a separate register for each postal ballot to record the assent or dissent received through postal ballot.

The scrutinizer shall maintain a register either manually or electronically to record their assent or dissent received, mentioning the particulars of name, address, folio number or client ID of the shareholder, number of shares held by them, nominal value of such shares, whether the shares have differential voting rights, if any, details of postal ballots which are received in defaced or mutilated form and postal ballot forms which are invalid.

Entries in the register should be made immediately after the opening of postal ballots. Separate folios should be maintained for each resolution passed through postal ballot. The register should be kept at the registered office of the company after the Scrutinizer has submitted his report.

The postal ballot and all other papers relating to postal ballot including voting by electronic means, shall be under the safe custody of the scrutinizer till the chairman considers, approves and signs the minutes and thereafter, the scrutinizer shall return the ballot papers and other related papers or register to the company who shall preserve such ballot papers and other related papers or register safely.

Question 5. You are a company secretary in a company. The Board of Directors want to know the details that should be entered in the Register of Renewed and Duplicate share certificates and the period for which such register should be maintained. Clarify the Board in this regard.

Answer:

  • In terms of Section 46 of the Companies Act, 2013 read with Rule 6 of the Companies (Share Capital and Debentures) Rules, 2014, every company with a share capital should, from the date of its registration, maintain a register of renewed and duplicate certificates.
  • The word ‘renewed’ includes consolidation and sub-division of shares and issue of certificate in lieu thereof.
  • Particulars of every share certificate issued shall be recorded in a Register of Renewed and Duplicate Share Certificates. Such register shall be maintained in Form No. SH-2 indicating against the name(s) of the person(s) to whom the certificate is issued, the number and date of issue of the share certificate in lieu of which the new certificate is issued, and the necessary changes indicated in the Register of Members by suitable cross-references in the “Remarks” column. Such register shall be kept at the registered office of the company or at such other place where the Register of Members is kept.
  • The register shall be preserved permanently and shall be kept in the custody of the Company Secretary of the company or any other person authorized by the Board for the purpose.
  • All entries made in the Register of Renewed and Duplicate Share Certificates shall be authenticated by the company secretary or such other person as may be authorised by the Board for purposes of sealing and signing the share certificate. The register is not open for inspection. -Space to write important points for revision

Question 6. Mention the requirements in relation to maintenance of minutes, as prescribed by the Secretarial Standards Board. 

Answer:

Secretarial Standard-2 (SS-2) on “General Meetings”:

  • Secretarial Standard-2 (SS-2) on “General Meetings”, is issued by the Council of the Institute of Company Secretaries of India and approved by the Central Government.
  • Minutes’ are the official recording of the proceedings of the Meeting and the business transacted at the Meeting. Every company shall keep Minutes of all Meetings. Minutes kept by the provisions of the Act evidence the proceedings recorded therein. Minutes help in understanding the deliberations and decisions taken at the Meeting.
  • Minutes of Board Meeting:
    • Minutes shall be recorded in books maintained for that purpose.
    • A distinct Minutes Book shall be maintained for Meetings of the Members of the company, creditors and others as may be required under the Act.
    • A company may maintain its Minutes in physical or electronic form.
    • The pages of the Minutes Books shall be consecutively numbered. Minutes shall not be pasted or attached to the Minutes Book, or tampered with in any manner.
    • Minutes of Meetings, if maintained in loose-leaf form, shall be bound periodically at least once in every three years.
    • Minutes Books shall be kept at the Registered Office of the company.
  • Contents of Minutes:
    • Minutes shall state, at the beginning the Meeting, name of the company, day, date, venue and time of commencement of the Meeting
    • Minutes shall record the names of the Directors and the Company Secretary present at the Meeting
    • Minutes shall, inter alia, contain, (a) The Record of election, if any, of the Chairman of the Meeting. (b) The fact that certain registers, documents, the Auditor’s Report and Secretarial Audit Report, as prescribed under the Act were available for inspection. (c) The Record of presence of Quorum. (d) The number of Members present in person including representatives. (e) The number of Proxies and the number of shares represented by them. (f) The presence of the Chairmen of the Audit Committee, Nomination and Remuneration Committee and Stakeholders Relationship Committee or their authorised representatives. (g) The time of commencement and conclusion of the Meeting.
  • In respect of Resolutions passed by e-voting or postal ballot, a brief report on the e-voting or postal ballot conducted including the Resolution proposed, the result of the voting thereon and the summary of the scrutiniser’s report shall be recorded in the Minutes Book and signed by the Chairman or in the event of death or inability of the Chairman, by any Director duly authorised by the Board for the purpose, within thirty days from the date of passing of Resolution by e-voting or postal ballot.
  • Recording of Minutes:
    • Minutes shall contain a fair and correct summary of the proceedings of the Meeting.
    • Minutes shall be written in clear, concise and plain language
    • Each item of business taken up at the Meeting shall be numbered. Minutes shall be entered in the Minutes Book within thirty days from the date of conclusion of the Meeting
    • The date of entry of the Minutes in the Minutes Book shall be recorded by the Company Secretary
    • Minutes, once entered in the Minutes Book, shall not be altered Minutes of a General Meeting shall be signed and dated by the Chairman of the Meeting or in the event of death or inability of that Chairman, by any Director who was present in the Meeting and duly authorised by the Board for the purpose, within thirty days of the General Meeting
    • The Chairman shall initial each page of the Minutes, sign the last page and append to such signature the date on which and the place where he has signed the Minutes.
  • Inspection and Extracts of Minutes:
    • Directors and Members are entitled to inspect the Minutes of all General Meetings including Resolutions passed by postal ballot.
    • Extract of the Minutes shall be given only after the Minutes have been duly signed. However, any Resolution passed at a Meeting may be issued even pending signing of the Minutes, provided the same is certified by the Chairman or any Director or the Company Secretary.
  • Preservation of Minutes and Other Records:
    • Minutes of all Meetings shall be preserved permanently in physical or in electronic form with Timestamp
    • Office copies of Notices, scrutiniser’s report and related papers shall be preserved in good order in physical or in electronic form for as long as they remain current or for eight financial years, whichever is later and may be destroyed thereafter with the approval of the Board.
    • Minutes Books shall be kept in the custody of the Company Secretary.