CS Company Law – Accounts Audit And Auditors Question and Answers

Accounts, Audit And Auditors

Books of Accounts

Proper books of accounts shall be deemed to have been kept by a company if such books exhibit and explain the transactions and financial position of the business of the company, including books containing sufficiently detailed entries of daily cash receipts and payments.

Kept Book of A/c

Every company is required to keep books of account at its registered office in respect of specified transactions. However, all or any of the books of accounts may be kept at such other place in India as the Board of directors may decide.

Inspection Book of A/c

As per the Act, books of account and other books and papers should be available for inspection by any director on working days during business hours.

Persons Responsible to Maintain Books

  • Managing Director,
  • Whole-Time Director, in charge of finance
  • Chief Financial Officer; or
  • Any other person of a company charged by the Board with duty of complying with provisions of Section 128.

Financial Statement Section 129

This section provides that the financial statements shall give a true and fair view of the state of affairs of the company or companies in the form as provided for different class or classes in Schedule III and shall comply with accounting standards notified under Section 133 of the Act.

Insurance companies, banking company, companies engaged in generation/supply of electricity or any other class of companies shall make financial statements in the form as has been specified in or under the Act governing such companies.

The financial statement shall be laid in the annual general meeting of that financial year. [Section 129(2)]

Consolidated Financial Statements

The Companies Act, 2013 has made preparation of consolidated accounts mandatory for all companies including unlisted companies and private companies having one or more subsidiaries or associates or joint ventures.

Cs Company Law Question And Answers

Signature of Financial Statement

The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are 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, or in the case of One Person Company, only by one director, for submission to the auditor for his report thereon.

The auditors’ report shall be attached to every financial statement. A report by its Board of Directors shall also be attached to statements laid before a company in general meeting.

National Financial Reporting Authority (NFRA)

Through Section 132 of the Companies Act, 2013, the Central Government has introduced a new regulatory authority named as National Authority for Financial Reporting known as National Financial Reporting Authority (NFRA) with wide powers to recommend, enforce and monitor the compliance of accounting and auditing standards.

NFRA shall be responsible for monitoring and enforcing compliance of auditing and accounting standards and for that purpose, oversee the quality of professions associated with ensuring such compliances. The Authority shall investigate professional and other misconducts which may be committed by Chartered Accountancy members and firms.

Accounting Standards

The Act provides that every financial statement of the company shall comply with the accounting standards.

Object of Audit

The main object of audit is to ensure that the statement of accounts of the relevant financial year truly and fairly reflect the state of affairs of the company. Audit also provides a moral check on those who are entrusted with the task of running business and of keeping and maintaining the books of account of the company. An audit of accounts is conducted with two-fold purpose:

  • detection and prevention of errors;
  • detection and prevention of fraud.

Appointment of Auditors

The Act provides that every company shall, at each annual general meeting appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of next annual general meeting. The Act also provides for methods of appointment of auditors along with their qualifications and disqualifications.

Auditor’s Report

The Act provides that the auditor’s report shall be signed only by the person appointed as an auditor of the company..

Appointment of First Auditor [Section 139(6)]

Appointment of first auditor in case of every company except government company or company owned/ controlled by Central Government/State Government/Central Government and State Government [Section 139(6)]:

  • The first auditor of a company, other than a Government company, shall be appointed by the Board within thirty days from the date of registration of the company and if the Board fails to appoint such auditor, it shall inform the members of the company and the members shall make the appointment of first auditor within ninety days of information at an extra ordinary general meeting and such auditor shall hold office till the conclusion of the first annual general meeting.
  • Appointment of first auditor shall be made by Comptroller and Auditor-General of India (CAG) within sixty days of registration of the company. If CAG fails to appoint the first auditor within given time then Board of such company shall appoint first auditor within next 30 days. If Board fails to appoint the first auditor within given time then it shall inform to members and members shall make the appointment of first auditor within 60 days of information at an extra ordinary general meeting. The First Auditor shall hold office till the conclusion of first AGM.

Appointment of auditors at AGM (first AGM and subsequent AGM)

Appointment of auditor shall be made by members at First AGM and every subsequent 6th AGM. At the first AGM, every company shall appoint an individual or a firm as an auditor. The auditor so appointed shall hold office from the conclusion of first AGM till the conclusion of 6th AGM.

Rotation of Auditor

In case of an individual as auditor:

  • No individual shall be appointed or re-appointed as auditor for more than 1 term of 5 consecutive years.
  • An individual auditor, who has completed his term of 5 consecutive years, shall not be eligible for re-appointment as auditor in the same company for 5 years from the date of completion.

In case of a firm as an auditor:

  • No audit firm shall be appointed or re-appointed as auditor for more than 2 terms of 5 consecutive years.
  • An audit firm which has completed its 2 terms of 5 consecutive years, shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of such terms.
  • If any firm/LLP which has one or more partners who are also partners in the outgoing audit firm/LLP, cannot be appointed as auditors during the 5 year period.

Appointment of an Auditor in Casual Vacancy

Casual vacancy arising by other than resignation: Whereas casual vacancy is arising by other than resignation then vacancy shall be filled by the Board within 30 days.

Casual vacancy arising due to resignation: If casual vacancy is arising due to the resignation of auditor, it shall be filled within 30 days by the Board of Directors, and the appointment made by the Board shall be approved in a general meeting convened within 3 months from the date of recommendation of the Board.

Appointment of auditor in Casual Vacancy in case of Govt. Company

Casual vacancy shall be filled by the CAG within 30 days. If CAG fails to fill the vacancy within given time then BOD shall fill the vacancy within next 30 days.

Auditors not to render certain services

  • accounting and book keeping services;
  • internal audit;
  • design and implementation of any financial information system;
  • actuarial services;
  • investment advisory services;
  • investment banking services;
  • rendering of outsourced financial services;

Audit And Auditors Important Questions Cs

Cost Auditor

  • Every company referred to in sub-rule (1) shall inform the cost auditor concerned of his or its appointment as such and file a notice of such appointment with the Central Government within a period of thirty days of the Board Meeting in which such appointment is made or within a period of one hundred and eighty days of the commencement of the financial year, whichever is earlier, through electronic mode, in form CRA-2,
  • After the expiry of thirty days, the company shall issue formal letter of appointment to the cost auditor.
  • Every cost auditor, who conducts an audit of the cost records of a company, shall submit the cost audit report along with his or its reservations or qualifications or observations or suggestions, if any, in form CRA-3.
  • Every cost auditor shall forward his report to the Board of Directors of the company within a period of one hundred and eighty days from the closure of the financial year.
  • Every company covered under these rules shall, within a period of thirty days from the date of receipt of a copy of the cost audit report, furnish the Central Government with such report alongwith full information and explanation on every reservation or qualification contained therein, in form CRA-4 along with fees specified in the Companies (Registration Offices and Fees) Rules, 2014.

The company shall disclose full particulars of the cost auditor, along with the due date and actual date of filing of the cost audit report by the cost auditor, in its Annual Report for each relevant financial year.

Branch Audit Section 143 (8) and Rule 12

Branch Auditor: Accounts of branch office can be audited by-

  • The company’s auditor; or
  • Any other person, qualified to be and appointed as an auditor as per the provisions of the Act as branch auditor; or
  • In case of foreign branch, by the company ‘s auditor or by an accountant or a competent person appointed in accordance with the prevailing laws of the foreign country.

The branch auditor shall prepare a report on the accounts of the branch examined by him and the company’s auditor shall deal with such report in his audit report in a manner as he considers necessary.

Secretarial Audit

Secretarial Audit is a compliance audit and it is a part of total compliance management in an organisation. The Secretarial Audit is an effective tool for corporate compliance management. It helps to detect non-compliance and to take corrective measures.

Secretarial Audit is an independent, objective assurance intended to add value and improve an organisation’s operations. It helps to accomplish the organisation’s objectives by bringing a systematic, disciplined approach to evaluate and improve effectiveness of risk management, control, and governance processes.

As per rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the prescribed class of companies is as under:

  • every public company having a paid-up share capital of fifty crore rupees or more; or
  • every public company having a turnover of two hundred fifty crore rupees or more.

Note: As per Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2020

  • with this insertion in Rule 9(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, now every company having outstanding loans or borrowing from banks or public financial institutions of one hundred crore rupees or more is also required to annex the Secretarial Audit report with its Boards Report. MCA has also clarified that for the purpose of this rule paid up share capital, turnover, or outstanding loans or borrowings as the case may be, existing on the last date of latest audited financial statement shall be taken into account.

List of Important Forms

Company Law Accounts, Audit And Auditors List Of Important Forms

Company Accounts Cs Executive

Short Notes

Question 1. Write a short note on ‘appointment of cost auditor’.

Answer:

Company Law Accounts, Audit And Auditors Appointment of Cost Auditor

Question 2. Write a note on the following:

Intangible assets

Answer:

Intangible means “that cannot be touched.”

Some of the assets are such which cannot be touched and do not have physical existence and are called intangible assets.

For example:

  • Goodwill
  • Brands/trademarks
  • Computer software
  • Mining rights
  • Recipes formulae, models, designs and proto types.

Question 3. Write a note on the following:

Approval and signing of the financial statement.

Answer:

Company Law Accounts, Audit And Auditors Financial Statement

Question 4. Write a note on the following:

Qualifications and disqualifications of auditors.

Answer:

Company Law Accounts, Audit And Auditors Qualifications of Auditor

Question 5. Distinguish between the following:

‘Internal Audit’ and ‘Secretarial Audit’.

Answer:

‘Internal Audit’ and ‘Secretarial Audit’

Company Law Accounts, Audit And Auditors Internal Audit

Cs Executive Company Law Previous Year Questions

Descriptive Questions

Question 1. Comment on the following:

It is not obligatory for every company to preserve its books of account.

Answer:

Company Law Accounts, Audit And Auditors Authenticity of the Statement

Question 2. Comment on the following:

Adoption of accounts is an important business to be transacted only at general meetings. 

Answer:

  • An important business to be transacted at an annual general meeting is adoption of the accounts including:
    • Financial Statement (including consolidated financial statement)
    • Director Report and
    • Auditor Report
  • The financial statements are required to be placed only at an annual general meeting and not at any other general meeting.
  • In case, if the financial statements are not ready for laying at the annual general meeting, the company may adjourn the said annual general meeting to a subsequent date. This may be done by adopting an appropriate resolution adjourning the said annual general meeting to a specified date or to a date to be specified later. -Space to write important points for revision

Question 3. Comment on the following:

Where a company has a branch office, whether in India or abroad, the original books of account, records, etc. of the branch office will have to be maintained in the registered office of the company.

Answer:

Company Law Accounts, Audit And Auditors Registered office of the company

Question 4. Comment on the following:

A director of a company has an absolute right of inspection of the books of account.

Answer:

Company Law Accounts, Audit And Auditors Section 128(3)

Question 5. Mention the importance of ‘notes on accounts’. Will it convey any meaning to stakeholders?

Answer:

Company Law Accounts, Audit And Auditors Notes on Accounts

Company Law And Audit Notes For Cs

Question 6. “Financial statements shall be signed only by the Chairperson of the company.” Explain.

Answer:

Company Law Accounts, Audit And Auditors Section 134

Note:

Amendment made by Companies (Amendment) Act, 2017

Revised Section 134(1)-

“The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are 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, or in the case of One Person Company, only by one director, for submission to the auditor for his report thereon.”

Revised Section 134(3)(a)-

“(a) the web address, if any, where annual return referred to in sub-section (3) of Section 92 has been placed;”

Revised Section 134(3)(p)-

“(p) in case of a listed company and every other public company having such paid-up share capital as may be prescribed, a statement indicating the manner in which formal annual evaluation of the performance of the Board, its Committees and of individual directors has been made.”

Provison to Revised Section 134(3)-

“Provided that where disclosures referred to in this sub-section have been included in the financial statements, such disclosures shall be referred to instead of being repeated in the Board’s report:

Provided further that where the policy referred to in clause (e) or clause (0) is made available on company’s website, if any, it shall be sufficient compliance of the requirements under such clauses if the salient features of the policy and any change therein are specified in brief in the Board’s report and the web- address is indicated therein at which the complete policy is available.”

Section 134(3A)-

“(3A) The Central Government may prescribe an abridged Board’s report, for the purpose of compliance with this section by a One Person Company or small company.”

Question 7. Explain the provisions of the Companies Act, 2013 relating to ‘secretarial audit’. State whether ‘secretarial audit’ is mandatory for all companies.

Answer:

Company Law Accounts, Audit And Auditors Secretarial audit

Answer the following by explaining the provisions of the Companies Act, 2013 relating to ‘internal audit’:

  1. Whether a private company is mandatorily required to appoint an internal auditor?
  2. Who may be appointed as an internal auditor? Whether a Practicing Company Secretary (PCS) can be appointed as an internal auditor?

Answer:

Company Law Accounts, Audit And Auditors Section 138

Company Law And Audit Notes For Cs

Question 8. Explain with reference to the provisions of the Companies Act, 2013, the meaning and importance of ‘secretarial audit’. Which companies are required to get the ‘secretarial audit’ conducted?

Answer:

Company Law Accounts, Audit And Auditors Secretarial audit conducted

Question 9. Comment on the following:

The time gap between the date of approval of financial statements by the Board of directors of a company and the date of notice of annual general meeting should be 45 days. 

Answer:

Company Law Accounts, Audit And Auditors Section 101

Question 10. Referring to the provisions of the Companies Act, 2013, explain whether the Company Secretary being a Chief Financial Officer of the company can be held liable for maintenance of books of account of the company. 

Answer:

Company Law Accounts, Audit And Auditors Persons responsible to maintain books

Question 11. Comment on the following:

  1. Consolidation of financial statements is mandatory for all companies including unlisted companies and private companies.
  2. A statutory auditor of a private limited company is restricted to take up any other assignment in the companies. 

Answer:

The Companies Act, 2013 has made preparation of consolidated accounts mandatory for all companies including unlisted companies and private companies having one or more subsidiaries or associates or joint ventures.

In accordance with the provisions of the Companies Act, 2013, as contained in Section 129(3), where a company has one or more subsidiaries or associates or joint ventures, it shall, in addition to its financial statements for the financial year, prepare a consolidated financial statement of the company and of all the subsidiaries or associates or joint ventures in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statements, a separate statement containing the salient features of the financial statements of its subsidiaries or associate (s) or joint venture (s) in Form AOC -1 (Rule 5).

However, for intermediate holding company, the provisions of Rule 6 of Companies (Accounts) Rules, 2014 inter alia provide certain conditions, compliance of which ensures exemption from consolidation of accounts to such intermediate holding company. These conditions are:-

  • intimation to all members for not consolidating the accounts.
  • shares being unlisted or not in process of listing on any stock exchanges and filing of consolidated financial statement by the ultimate Indian holding company whose 100% subsidiary is the intermediate holding company.

Amendment made by Companies (Amendment) Act, 2017 Revised Section 129(3)-

“Where a company has one or more subsidiaries or associate companies, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):

Provided that the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries and associate company or companies in such form as may be prescribed:

Provided further that the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed.”

An auditor appointed under this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be, (of the company concerned) but which shall not include any of the following services (whether such services are rendered directly or indirectly to the company or its holding company or subsidiary company, namely:

  • accounting and book keeping services
  • internal audit
  • design and implementation of any financial information system
  • actuarial services
  • investment advisory services
  • investment banking service
  • rendering of outsourced financial services
  • management services and
  • any other kind of services as may be prescribed.

Question 12. Comment on the following:

Appointment and rotation of statutory auditor is mandatory for one person company and small company.

Answer:

As per Section 139(1) of the Companies Act, 2013 inter alia provides that every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till conclusion of every sixth meeting.

The Companies Act, 2013 has introduced the system of rotation of auditors under Section 139. As per Rule 5 of the Companies (Audit and Auditors) Rules, 2014, rotation of auditors is applicable to:

  • All listed companies;
  • All unlisted public companies having paid up share capital of 10 crore or more;
  • All private limited companies having paid up share capital of ₹ 50 crore or more;
  • All companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of 50 crore or more. In view of the above it is clear that appointment is applicable on all the Companies including one person companies and small companies, however, the provisions of rotation of auditors shall not apply to one person companies and small companies.

Cs Company Law Question And Answers

Question 13. Perfect Pvt. Ltd. wishes to appoint its Secretary, Satish, as an internal auditor. Referring to the provisions of the Companies Act, 2013 advise the company.

Answer:

According to Section 138(1) of the Companies Act, 2013 read with the Rule 13 of the Companies (Accounts) Rules, 2014, following persons may be appointed as an internal auditor of the company:

  • a Chartered Accountant or;
  • a Cost Accountant or;
  • such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the Company.

Further, Rule 13 of the Companies (Accounts) Rules, 2014 inter alia provides that the internal auditor may or may not be an employee of the Company. Mr. Satish being the Secretary of Perfect Ltd. may be appointed as an internal auditor of the company only if so decided by the Board to conduct internal audit of the functions and activities of the Company.

Question 14. Who will appoint Secretarial Auditor of the company: Board of Directors or Shareholders? What is the duty of Board of Directors towards secretarial auditor and audit report?

Answer:

  • According to Section 204, every listed company and every public company having paid up share capital of fifty crore rupees or more; or public company having a turnover of two hundred fifty crore rupees or more shall attach a Secretarial Audit Report given by Practicing Company Secretary (PCS).
  • As per Section 179 of the Companies Act, 2013 read with Rule 8 of the Companies (Meeting of Board and its Powers) Rules, 2014, the Board of Directors, only by means of resolutions passed at meetings of the Board, shall appoint a Secretarial Auditor.
  • It shall be the duty of the company to give all assistance and facilities to the Company Secretary in Practice (Secretarial Auditor), for auditing the secretarial and related records of the company. (Section 204(2))
  • The Board of Directors, in their report shall explain in full any qualification or observation or other remarks made by the company secretary in practice in his report.

Question 15. Comment on the following:

Chief Financial Officer is responsible to maintain books of account of the company.

Answer:

As per Section 128 of the Companies Act, 2013 provides that to maintenance of Books of accounts by the company. According to sub section. (6) of Section 128 if the Managing Director, the Whole-Time Director in charge of finance, the Chief Financial Officer or any other person of a company charged by the Board with the duty of complying with the provisions of Section 128, fails to comply with the provisions shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.

Accordingly it is the responsibility of the Chief Financial Officer along with Managing Director and whole time director in charge of finance of the company to maintain the Books of Accounts of the company. -Space to write important points for revision

Question 16. Every financial statement of the company must give true and fair view of the state of affairs of the company at the end of the financial year. 

Answer:

As per provisions of sub-Sections (1) and (2) of Section 129 of the Companies Act 2013 every financial statement of the company must give true and fair view of the state of affairs of the company at the end of financial year. True and Fair view in respect of financial statement means-

  • Financial statements and items contained should comply with accounting standards notified under Section 133;
  • Financial statement shall be in form or forms as provided for different ‘class or classes of companies in Schedule III;
  • Financial statement shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by the reason of the fact that they do not disclose-
    • in the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999;
    • in the case of a banking company, any matters which are not required to be disclosed by the Banking Regulation Act, 1949;
    • in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed by the Electricity Act, 2003;
    • in the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that law.

Question 17. An application has been made by a shareholder of a company to the National Company Law Tribunal (NCLT) that the company which has been just incorporated has supplied incorrect information in the documents filed for incorporation. Examine what action can be taken by the NCLT if the contention of the shareholder is proved to be true?

Answer:

Under Section 7(7) of the Companies Act, 2013, where a company has got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company or by any fraudulent action, the National Company Law Tribunal may on an application made to it, on being satisfied that the situation so warrants:

  • Pass such orders as it may think fit for regulation of the management of the company including changes, if any, in its Memorandum and Articles, in public interest or in the interest of the company and its members and creditors; or
  • Direct that the liability of the members shall be unlimited; or
  • Direct removal of the name of the company from the register of companies; or
  • Pass an order for winding up of the company; or
  • Pass any such orders as it deems fit.

Question 18. Books of account have to be kept only at the registered office of the company. As a corporate consultant give your comments in this regard. 

Answer:

According to Section 128(1) of the Companies Act, 2013 requires every company to prepare and keep the books of accounts and other relevant books and papers and financial statements for every financial year at its registered office.

Although, all or any of the books of accounts and other relevant papers may be kept at such other place in India as the Board of Directors may decide.

  • When the Board of Directors so decides, the company shall, within 7 days of such decision, file with the Registrar of Companies, a notice in writing giving full address of that other place.
  • Such intimation is to be made in e-form AOC 5 to the Registrar of Companies.

Therefore, Board of Directors of the company may decide any place, other than the Registered office of the company for keeping the books of accounts.

Question 19. Comment on the following:

National Financial Reporting Authority (NFRA) has wide powers to recommend, enforce and monitor the compliance of accounting and auditing standards.

Answer:

National Financial Reporting Authority (NFRA)

  • Through Section 132 of the Companies Act, 2013, the Central Government has introduced a new regulatory authority named as National Authority for Financial Reporting known as National Financial Reporting Authority (NFRA) with wide powers to recommend, enforce and monitor the compliance of accounting and auditing standards.
  • NFRA is responsible for monitoring and enforcing compliance of auditing and accounting standards and for that purpose, oversee the quality of professions associated with ensuring such compliances. The Authority has power to investigate professional and other misconducts which may be committed by Chartered Accountancy members and firms. There is also a provision for appellate authority.
  • The National Financial Reporting Authority is a quasi-judicial body to regulate matters related to accounting and auditing. With increasing demand of non-financial reporting, it may be referred to as a National level business Reporting Authority to regulate standards of all kind of reporting-financial as well as non-financial, by the companies in future.
  • National Financial Reporting Authority shall give its recommendations on accounting standards and auditing standards. It shall only recommend and it is the Central Government who shall prescribe such standards.
  • The objectives of National Financial Reporting Authority are as follows:
    • Make recommendations on formulation of accounting and auditing policies and standards for adoption by companies, class of companies or their auditors;
    • Monitor and enforce the compliance with accounting standards and auditing standards;
    • Oversee the quality of service of professionals associated with ensuring compliance with such standards and suggest measures required for improvement in quality of service; and
    • Perform such other functions as may be prescribed in relation to aforementioned objectives.

Audit And Auditors Important Questions Cs

Practical Questions

Question 1. The Board of directors of Grow More Ltd., a public company, has duly delegated its power to approve the financial statements of the company for the year 2011-12 to a committee of directors. The said committee considered the financial statements and approved the same before the accounts were handed over to the statutory auditor of the company. Will you accept such approval of financial statements?

Answer:

Company Law Accounts, Audit And Auditors Analysis of the statement

Question 2. An auditor of a company signed the financial statement including Financial Statement and schedules/notes and furnished the auditors report on the same date on which the reports were signed by the directors on behalf of the Board. One of the directors raised objection stating that the audit can not be completed and certified in a day. Do you agree with the director and if not, why? 

Answer:

Company Law Accounts, Audit And Auditors Section 141(3)

Question 3. A director of the company along with another director was prosecuted for their failure to file annual return, financial statements and audited balance sheet required to be laid before the AGM. The directors filed petition before the Tribunal to quash the prosecution initiated by the Registrar of Companies. As a Company Secretary in Practice, advise in the matter.

Answer:

  • Section 137 requires every company to file the financial statements including consolidated financial statement together with Form AOC-4
  • with the Registrar within 30 days from the day on which the annual general meeting held and adopted the financial statements with such fees or additional fee as specified in Companies (Registration Offices and Fees) Rules, 2014.
  • If the financial statements are not adopted at the annual general meeting or adjourned annual general meeting, such unadopted financial statements along with the required documents be filed with the Registrar with in thirty days of the date of annual general meeting. The Registrar shall take them in his record as provisional, until the adoption at annual general meeting.
  • The One Person Company shall file the copy of financial statements duly adopted by its members within a period of one hundred and eighty days from the closure of financial year.
  • The company shall also attach the accounts of subsidiaries incorporated outside India and which have not established their place of business in India with the financial statements.
  • The class of companies as may be notified by the Central Government from time to time, shall mandatorily file their financial statement in Extensible Business Reporting Language (XBRL) format and the Central Government may specify the manner of such filing under such notification for such class of companies [Rule 12(2).]
  • If annual general meeting has not been held, the financial statement duly signed along with the statement of facts and reasons for not holding the annual general meeting shall be filed with the Registrar within thirty days of the last days before which the annual general meeting should have been held.
  • If company fails to comply with the requirement of submission of financial statement before Registrar, the company shall be liable to penalty of one thousand rupees for every day during which failure continues subject to maximum of rupees ten lakh.
  • The managing director and CFO if any, and, in the absence of such managing director or CFO, any other director who is charged by the Board with the responsibility of complying with the provisions of this
  • section, in the absence of such director, all directors of the company shall be liable to a penalty of 10,000 and in case of continuing failure, with a further penalty of 100 for each day after the first during which such failure continues, subject to a maximum of 50,000. As per Companies (Amendment) Act, 2020.

Question 4. Vir is a director in DJA Ltd. (the company). The company holds 75% shares of MRN Ltd. Vir wants to inspect the books of MRN Ltd. Examining the provisions of the Companies Act, 2013 advise whether Vir, the director of DJA Ltd. can be allowed to inspect the books of MRN Ltd.

Answer:

Company Law Accounts, Audit And Auditors Analysis of given the case

Question 5. Manohar, the auditor of Belle Ltd. appointed by the company in its last general meeting has resigned from the office of auditor of the company for some personal reasons. Referring to the provisions of the Companies Act, 2013, answer the following:

  1. Who is the competent authority to accept and approve the resignation?
  2. State the manner in which the vacancy caused by Manohar’s resignation shall be filled in. 

Answer:

Company Law Accounts, Audit And Auditors Section 140(2)

Company Accounts Cs Executive

Question 6. Adorable Ltd., incorporated under the Companies Act, 2013 has on its Board, 5 Directors and a Managing Director. The company has also appointed a Company Secretary. The financial statements of the company, viz., balance sheet and statement of profit and loss for the year ended 31st March, 2015, were authenticated under signatures of one director and the Company Secretary.

Referring to the provisions of the Companies Act, 2013, examine the validity of authentication. What shall be your answer in case the company in question is a ‘one person company’?

Answer:

Company Law Accounts, Audit And Auditors Analysis of the Present Case

Question 7. The paid-up equity share capital of Strong Foundry Ltd. is 45 lakh. President (Finance) of the company seeks your advice whether it is possible to re-open its books of account and recast the company’s financial statements of the previous year. You being the Secretary of the company, advise the President (Finance) by preparing a note in this regard.

Answer:

Re-opening of Accounts on Tribunals’s Orders: Section 130 provides for provisions relating to re-opening or re- casting of books of accounts of the company. Accordingly,

  • A company shall not re-open its books of account and shall not recast its financial statements, unless an application in this regard is made by any one or more of the following:
    • the Central Government, or
    • the Income-tax authorities, or
    • the Securities and Exchange Board of India (SEBI), or
    • any other statutory regulatory body or authority or any person concerned, and
    • an order in this regard is made by a Tribunal of competent jurisdiction or the Tribunal.
  • The re-opening and re-casting of financial statements is permitted only for the following reasons:
    • the relevant earlier accounts were prepared in a fraudulent manner; or
    • the affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial statements.
  • The Tribunal, as the case may be, shall give the notice to:
    • the Central Government,
    • the Income-tax authorities,
    • the Securities and Exchange Board,
    • any other statutory regulatory body or authority concerned and shall take into consideration the representations, if any, made by Central Government or the income tax authorities, Securities and Exchange Board or the body or authority concerned before passing any order under this section.
  • Director’s report of the year in which such provisions are invoked, should provide for the reasons or circumstances in which. such revisions were warranted.

Further, Section 131 deals with power of Board to make application to tribunal and obtain approval for voluntary revision of financial statements and Board’s Report of any of the preceding three financial years.

Hence, one time revision of financial accounts of the company may be made after, obtaining approval of the tribunal subject to applicability and enforceability of Section 131 of Companies Act, 2013.

This is for information and record please.

Amendment made by Companies (Amendment) Act, 2017 Section 130(3): No order shall be made under sub-section (1) in respect of re-opening of books of account relating to a period earlier than eight financial years immediately preceding the current financial year:

Provided that where a direction has been issued by the Central Government under the proviso to sub-section (5) of Section 128 for keeping of books of account for a period longer than eight years, the books of account may be ordered to be re-opened within such longer period.

Question 8. Peculiar Ltd., an unlisted company, did not prepare its financial statements for the year ended 31st March, 2016 in conformity with some of the mandatory accounting standards. With reference to the provisions of the Companies Act, 2013, state the responsibilities of the directors and statutory auditors of the company in this regard.

Answer:

  • In accordance with the provisions of the Companies Act, 2013 as contained in Section 129 read with Section 133 financial statements of a company shall be prepared in compliance with the accounting standards.
  • Section 129(5) states that where the financial statements of the company do not comply with accounting standards, such companies shall disclose in its profit and loss account and the balance sheet-
  • the deviation from the accounting standards;
  • the reasons for such deviation; and
  • the financial effects, if any, arising out of such deviation. The Board of Directors is required under Section 134 of the Companies Act, 2013 to include, in Board’s report, a Director’s Responsibility Statement indicating therein that in the preparation of the financial statements, the applicable accounting standards have been followed along with proper explanation relating to material departures.
  • As per this provision the directors need to ensure that the financial statements are prepared in accordance with the accounting standards.
  • The statutory auditor of the company has a duty to state if, in his opinion, the financial statements are not in compliance comply with accounting standards.

Cs Executive Company Law Previous Year Questions

Question 9. Novel LLP, Trademark and Patent Attorneys, have been successfully running their business for the last five years. They have fixed assets in the form of intangibles (software) worth 75 lakh in their balance sheet. Advise as to whether their accounts are to be audited. 

Answer:

Company Law Accounts, Audit And Auditors Section 34(4)

Question 10. Board of Directors of Anil Limited has decided not to preserve the books of accounts and other related records of accounts, for more than five years immediately preceding the relevant financial year of 2016-17 due to shortage of space in the office premises. Referring to the provisions of the Companies Act, 2013, examine the validity of the Board’s decision. 

Mr. X is a director is Greenfield Industries Limited. He is a man of wide knowledge of commercial matters. The company has not filed financial statements with the Registrar of Companies for the years ended 31st March, 2014, 31st March, 2015 and 31st March, 2016. However, it has filed the annual returns for those years in compliance of the provisions of the Companies Act, 2013.

Considering Mr. X’s huge experience, Redfield Industries Limited wants to induct him as a director on its Board. Referring to the provisions of the Companies Act, 2013 examine the validity of such proposition.

Answer:

According to sub-section (5) of Section 128 of the Companies Act, 2013, the books of accounts, together with vouchers relevant to any entry in such books are required to be preserved for a period of not less than eight financial years immediately preceding a financial year. Where the company had been in existence for a period less than eight years, the books of account in respect of all the preceding years together with the vouchers relevant to any entry in such books of account shall be kept in good order.

The provisions of the Income-tax Act, 1961 shall also be complied with in this regard. As per proviso to sub-section (5) of Section128, where an investigation has been ordered in respect of the company under Chapter XIV, the Central Government may direct that the books of account may be kept for such longer period as it may deem fit and give directions to that effect.

The decision taken by the Board of Directors of Anil Limited is not in accordance with the provisions of the law and the company cannot do

Amendment made by Companies (Amendment) Act, 2017 Section 164(2) also provides that no person who is or has been a director of a company which –

  • Has not filed financial statements or annual returns for any continuous period of three financial years; or
  • Has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one, year or more, shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

In the given case, Greenfield Industries Limited has not filed its financial statements for the financial years ended 31st March, 2014, 31st March, 2015 and 31st March, 2016. Therefore, it has not filed such statements for a continuous period of 3 financial years. However, it has filed annual return for those 3 financial years. Non-filing of any one of financial statements or annual returns for a continuous period of 3 financial years will disqualify such director from being appointed as a director in any other company.

Applying the above provisions of Section 164(2)(a), in the given case, Mr. X, a director of Greenfield Industries Limited cannot be appointed as a director in Redfield Industries Limited till the expiry of five years.

Question 11. CIF Technosystems Private Limited is proposed to be incorporated in Bhubaneshwar, Orissa under the Companies Act, 2013. The company will be a holding company of CIF Holding Private Limited, already incorporated in Brazil under the Company Law of Brazil. The company in Brazil follows financial year 1st January to 31st December of a calendar year. Referring to the provisions of the Companies Act, 2013, state whether the financial year of CIF Technosystem can also be 1st January to 31st December, in order to make it easier to prepare consolidated financial statements.

Answer:

Section 2(41) of the Companies Act, 2013 has defined the term “financial year”. It states that financial year in relation to any company or body corporate, means the period ending on the 31st day of March every year.

The financial year of every company registered under the Companies Act in India has to be from April of a calendar year to March of the next calendar year.

However, proviso to Section 2(41) reads that on an application made by a company or body corporate, which is a holding company or a subsidiary or Associated company of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Central Government may, if it is satisfied, allow any period as its financial year.

As per Companies (Amendment) Act, 2019

Where a company or body corporate, which is a holding company or a subsidiary or associate company of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Central Government may, on an application made by that company or body corporate in such form and manner as may be prescribed, allow any period as its financial year, whether or not that period is a year-first proviso to Section 2(41) of Companies Act, 2013 as amended vide the Companies (Amendment) Act, 2019.

Earlier, the powers were with NCLT. Applications pending with NCLT as on 2.11.2018 will continue to be dealt by NCLT-second proviso to Section 2(41) of Companies Act, 2013 as inserted vide the Companies (Amendment) Act, 2019.

Provision as existing upto 2.11.2018- On an application made by a company or body corporate, which is a holding company or a subsidiary or associate company of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the NCLT may, if it is satisfied, allow any period as its financial year, whether or not that period is a year [first proviso to Section 2(41) of Companies Act, 2013 as existing upto 2.11.2018]. [The words in italics were added w.e.f. 9.2.2018].

On the basis of position of law here in above, CIF Technosystems Private Limited proposed to be incorporated under the Companies Act, 2013 has to have its financial year to end on 31st March every calendar year.

However, as it is a holding company of CIF Private Limited, a company in Brazil incorporated outside India, and that company follows its financial year 1st January to 31st December of a calendar year, the Indian company CIF Technosystems Private Limited can apply to Tribunal to allow its financial year to be aligned to end on 31st December for ease of consolidation of financial statement. The Tribunal will decide on the basis of merit in application.

Question 12. XYZ Ltd. has 6 directors on its Board of Directors. Out of 6 directors, 5 are foreigners and they reside in America. The company wants to convene its Board meeting in Mumbai but all the 5 directors are pre- occupied and are not in a position to travel to India. Advice the company regarding conduct of such a Board meeting as per provisions of the Companies Act, 2013 and relevant Rules. Will the same Rules or provisions be applicable in case the company wants to approve annual financial statements in the Board meeting.

Answer:

The directors of the company may participate in a meeting of Board/Committee of directors under the Companies Act, 2013 through video conferencing or other audio visual mean. “Video conferencing or other audio visual 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 tc participate effectively in the meeting.

A director participating in a meeting through use of video conferencing shal be counted for the purpose of quorum. The minutes shall also disclose the particulars of the directors who attend the meeting through electronic mode. Therefore, to convene Board meeting, the director present in India shall ac as Chairman and shall be physically present in Mumbai.

According to Rule 4 of 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 2 consideration of financial statement including consolidated financial statement 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.

Therefore, Annual financial statements cannot be approved in a meeting conducted through video conferencing.

Amendment made by Companies (Amendment) Act, 2017

Second Proviso to Section 173(2)-

“Provided further that where there is quorum in a meeting through 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.”

Company Law And Audit Notes For Cs

Question 13. Ram is a chartered accountant in practice. His proprietory concern has been appointed as the statutory auditor of a private limited company. Subsequently, it came to light that Mrs. Ram has been holding less than 1% shares of that private limited company. Examine the legal validity of the appointment of statutory auditor.

Answer:

Pursuant to Section 141, a person who himself, or his relative or partner is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company is not eligible for appointment of auditor of the company.

Provided that the relative may hold security or interest in the company of face value not exceeding 1,000 or such sum as may be prescribed.

As per Rule 10 of the Companies (Audit and Auditors) Rules, 2014, a relative of an auditor may hold securities in the company of face value not exceeding * 1 lakh.

In accordance with provisions stated above, Mrs. Ram may hold shares of the value not exceeding 1 lakh to render Mr. Ram eligible for appointment as the auditor.

Since the question is silent on the value of the 1% shares of the company, the conclusion regarding the appointment of Ram may be drawn as under: If the holdings of Mrs. Ram exceed 1 lakh based on aforesaid provision of law Mr. Ram cannot be appointed as auditor.

However, if Mrs. Ram holding is less than 1 lakh Mr. Ram can be appointed as auditor.

Question 14. Ram is a practising Chartered Accountant and partner of two audit firms namely PYMG and YE. In the immediately preceding financial year, PYMG has completed its two terms of five consecutive years in Gayatri Pvt. Ltd. having paid-up share capital of 60 crore. Now Gayatri Pvt. Ltd. is considering appointing YE firm as its statutory auditors. Can Gayatri Pvt. Ltd. appoint YE firm as its auditors?

What will be your answer in the following cases?

  1. If appointing company is a one person company;
  2. If appointing company is a small company.

Answer:

Under section 139 of the Companies Act, 2013 read with Rule 5 of Companies (Audit and Auditors) Rules, 2014, the following companies are required to appoint and rotate auditors:

  • All listed companies;
  • All unlisted public companies having paid up share capital of rupees ten crore or more;
  • All private limited companies having paid up share capital of rupees fifty crore or more;
  • All companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more.
    • An individual auditor who has completed his term as auditor for more than one term of five consecutive years and an audit firm who has completed the term as auditor for more than two terms of five consecutive years shall not be re-appointed as an auditor of the company.
    • It is further provided that as on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years.

Accordingly in the above case, the company is required to appoint and rotate the auditors on completion of the tenure. Thus Gayatri Ltd. cannot appoint YE audit firm as auditor of the company.

  • In case the appointee company is a One Person Company, rotation of auditor does not apply and hence the appointing company can appoint YE audit firm as auditor.
  • In case the appointee company is a Small Company, rotation of auditor does not apply and therefore the appointing company can appoint YE audit firm as auditor.

Question 15. Vijay is an auditor of XYZ Ltd. a listed public company having paid-up share capital of 10 crore. Advise him as to whether he can render the following services, keeping in mind, the relevant provisions of Companies Act, 2013?

  1. Vijay wants to conduct internal audit of XYZ Ltd. He also wishes to provide actuarial services to XYZ Ltd.
  2. Vijay wishes to “design and implement one financial system” and offer management services to ABC Ltd. the holding company of XYZ Ltd.
  3. What will be your answer in the above two cases if services are provided to PQR Ltd. a subsidiary company of XYZ Ltd.?

Answer:

Section 144 of the Companies Act, 2013 provides that an auditor shall provide to the company only such other services as are approved by the Board of Directors/ the audit committee, but which shall not include any of the following services (whether such services are rendered directly or indirectly to the company or its holding company or subsidiary company, namely:

  • accounting and book keeping services;
  • internal audit;
  • design and implementation of any financial information system;
  • actuarial services;
  • investment advisory services;
  • investment banking services:
  • rendering of outsourced financial services;
  • management services; and
  • any other kind of services as may be prescribed.

Therefore based on the above mentioned provisions advice to Vijay will be as under:

  • Vijay cannot conduct internal audit of XYZ Ltd or carry out actuarial services to XYZ Ltd.
  • Vijay cannot provide management services or implementation of financial system to ABC Ltd as such services to the holding company is also not allowed.
  • Providing (i) and (ii) services above to PQR Ltd the subsidiary company of XYZ Ltd is also not allowed. Space to write important points for revision-

Question 16. Reels India Ltd. is a wholly owned subsidiary of Wheels India Ltd. The auditor of Wheels India Ltd. has intimated the Board of directors that the company will not be required to prepare consolidated financial statements if provisions of section 129, Companies Act, 2013 are complied with. As a company secretary give your comments in this regard. 

Answer:

The consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards:

In case of a company covered under of Section 129(3) of the Companies Act, 2013 which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.

The contention of the Auditor is justifiable as Section 129 (3) of Companies Act, 2013 provides for not preparing the consolidated financial statement if conditions are fulfilled. Which according to second proviso to Rule 6 are as under:

Provided further that nothing in this rule shall apply in respect of preparation of consolidated financial statements by a company if it meets the following conditions:-

  • It is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company and all its other members, including those not otherwise entitled to vote, having been intimated in writing and for which the proof of delivery of such intimation is available with the company, do not object to the company not presenting consolidated financial statements;
  • It is a company whose securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India; and
  • Its ultimate or any intermediate holding company files consolidated financial statements with the Registrar which are in compliance with the applicable Accounting Standards.

Cs Company Law Question And Answers

Question 17. ABC & Associates is an audit firm with partners A, B and C. The firm’s tenure as statutory auditor in M Ltd. has expired under Companies Act, 2013. M Ltd. is a listed company. XY & Co. another audit firm is appointed as auditor of M Ltd. for the subsequent year. B joins XY & Co. as partner, 4 months after it was appointed as statutory auditor of M Ltd. Comment with reference to the provisions of the Companies Act, 2013.

Answer:

According to Section 139(2) of the Companies Act, 2013 provides that as on date of appointment of Auditors, no audit firm having a common partner or partners to the other audit firm whose tenure has expired in a company immediately preceding the financial year shall be appointed as auditor of the same company for a period of 5 years.

Now M Ltd is a listed entity and therefore rotational provisions are applicable. B is a partner in ABC & associates whose tenure as statutory auditor in M Ltd. has expired. He joined XY & Co. as partner 4 months after XY & Co. was appointed as statutory auditor of M Ltd..

It may be noted that there should not be a common partner in firms as on date of appointment. In the above case, B has joined XY & Co. after 4 months of its appointment as statutory auditor of M Ltd. Thus, XY &Co. can continue as statutory auditor of M Ltd for the remaining term after B joined them as Partner.

Question 18. In the course of business of the company, RST Logistics Ltd. received 2 lakh on 31st March, 2015 as advance towards consideration for providing future services in the form of warranty as per their agreement with Apurva. The period for providing such services in terms of common business practice is 3 years.

The amount is still lying as advance and while auditing the books of accounts for the year ended 31st March, 2019, the statutory auditor had commented about contravention of the provisions of the Companies Act, 2013 in its preliminary findings to the Vice-President (Finance). Advise the Vice-President (Finance) if the comments of the auditor are justified in terms of provisions of the Companies Act, 2013.

Answer:

According to Rule 2(1) (xii) (e) of the Companies (Acceptance of Deposits) Rules, 2014. The term ‘deposit’ does not include any advance towards consideration for providing future services in the form of a warranty or maintenance contract as per written agreement or arrangement, if the period for providing such services does not exceed the period prevalent as per common business practice or five years, from the date of acceptance of such service whichever is less.

In the instant case, the amount of 2 lakhs received on March 31, 2015 as advance towards consideration for providing future services in the form of a warranty, is still lying with the company until March 31, 2019 and the period prevalent as per common business practice, for providing such service is 3 years, which has expired.

Accordingly, this amount has come within the ambit of the term ‘deposit’. Hence, the comments of the auditor are justified and the Vice-President (Finance) is advised to immediately refund the advance amount along with the due interest thereon to Apurva.

Question 19. Comment on the following:

Debapriya was appointed as alternate director of Julien in Amal Housing Finance Ltd. The company was served a demand notice by Goods & Service Tax department for 25 lakh for violation of certain provisions of GST law. Due to cash crunch the CEO approached Debapriya for a help of 12 lakh. Debapriya borrowed 7.50 lakh from his sister’s husband and gave to the company. The company recorded the same in its books of account.

Answer:

As per rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules 2014, provides that any amount received from a person who, at the time of receipt of the amount, was a director of the company shall not be regarded as deposit, if the director from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others.

Although, proviso to Section. 73(1) read with Rule 1(3)(iii) of the Companies (Acceptance of Deposits) Rules 2014 excludes a housing finance company registered with National Housing Bank established under the National Housing Bank Act, 1987 from the provisions of Section 73 to 76A of the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014.

Therefore, the transaction of accepting money from the director recorded by Amal Housing Finance Ltd. in its book of account is not considered as non-compliance of the provisions of the Companies Act.

Question 20. Advise whether the internal auditor is required to be appointed in the following scenarios:

Company Law Accounts, Audit And Auditors Name of the Company

Can the following persons be appointed as internal auditor?

  1. President (HR)
  2. DGM (Finance)

Answer:

According to Section 138 of the Companies Act, 2013 read with Rule 13 of the Companies(Accounts) Rules, 2014, lay down the following class of companies which is required to appoint an internal auditor namely:

  • Every listed company;
  • Every unlisted public company having:
    • paid up share capital of 50 crore or more during the previous financial year; or
    • turnover of 200 crore or more during the previous financial year; or
    • Outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore or more at any point of time during the previous financial year; or
    • Outstanding deposits of 25 crore or more at any point of time during the previous financial year; and
  • Every private company having-
    • Turnover of 200 crore or more during the previous financial year;
      or
    • Outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore or more at any point of time during the previous financial year.

Accordingly, in the above case, solution is as under:

Company Law Accounts, Audit And Auditors An internal auditor

An internal auditor, shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company. The internal auditor may or may not be an employee of the company. Therefore, if President (HR) and DGM (Finance) satisfying the above criteria, can be appointed as internal Auditor.

Audit And Auditors Important Questions Cs

Question 21. Chief Financial Officer (CFO) of a conglomerate is of the view that secretarial audit is mandatory for all the companies. He has approached you to determine whether secretarial audit is applicable in case of the following companies:

Company Law Accounts, Audit And Auditors Chief Financial Officer

Answer:

Considering the increasing significance of Corporate Governance, Section 204 of the Companies Act, 2013 directive every listed company and such other class of prescribed companies to annex a Secretarial Audit Report, given by a Company Secretary in practice in Form MR-3 with its Board’s report.

As per rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the lay down class of companies is as under:

  • every public company having a paid-up share capital of 50 Crore or more; or
  • every public company having a turnover of ₹250 crore or more; or
  • every company having outstanding loans or borrowings from banks or public financial institutions of 100 crore or more.

Secretarial Audit is also applicable to a private company which is a subsidiary of a public company, and which falls under the prescribed class of companies as indicated above.

Question 22. In light of the given case, applicability is specified in the table below:

Company Law Accounts, Audit And Auditors Applicability of Secretarial Audit

Answer the following with regard to appointment of auditor:

  1. X, a practising chartered accountant holds shares in ABC Ltd. The nominal value of shares is 50,000. Whether ABC Ltd. can appoint him as auditor?
  2. A, a practising chartered accountant has business relationship with XYZ Hotels Ltd. The hotel used to provide services to A frequently on the same price as charged from other customers. Whether XYZ Hotels Ltd appoint A as its auditor?
  3. X, a chartered accountant is working as a General Manager Accounts with ABC Ltd. Could X be appointed as auditor in ABC Ltd?

Answer:

  • According to Section 141(3) of the Companies Act, 2013 provides that a person shall not be eligible for appointment as an auditor of a company when he himself or his relative or partner is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company. In the above problem Mr. X, a practicing Chartered Accountant holding shares in ABC Ltd cannot be appointed as Auditor of that company.
  • Section 141(3) of the Companies Act, 2013 read with Rule 10 of the Companies (Audit and Auditors) Rules, 2014 provides that a person shall not be eligible for appointment as an auditor of a company when he has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company.
  • The term business relationship shall be construed as any transaction entered into for a commercial purpose except –
    • commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under the Act and the Chartered Accountant Act, 1949 and the rules or the regulations made under those Act;
    • commercial transactions which are in the ordinary course of business of the company at arm’s length price like sale of products or services to the auditors, as customer, in the ordinary course of business, by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses.
      As the transaction is at the arm length price so Mr. A can be appointed as an auditor of XYZ Hotels Ltd.
  • As per section 141(3) of the Companies Act, 2013 provides that an officer or employee of the company is not eligible for appointment as an auditor of a company.

In the above case Mr. X, is working as a General Manager Accounts with ABC Ltd. so he cannot be appointed as Auditor of that company. Space to write important points for revision-

Short Notes

Question 1. Write short note on the following:

  1. National Finance Reporting Authority
  2. Consolidated Financial Statement

Answer:

National Financial Reporting Authority (NFRA)

Through Section 132 of the Companies Act, 2013, the Central Government has introduced a new regulatory authority named as National Authority for Financial Reporting known as National Financial Reporting Authority (NFRA) with wide powers to recommend, enforce and monitor the compliance of accounting and auditing standards.

NFRA shall be responsible for monitoring and enforcing compliance of auditing and accounting standards and for that purpose, oversee the quality of professions associated with ensuring such compliances. The Authority shall investigate professional and other misconducts which may be committed by Chartered Accountancy members and firms. T

he National Financial Reporting Authority shall be a quasijudicial body to regulate matters related to accounting and. auditing. With increasing demand of non-financial reporting, it may be referred to as a National level business Reporting Authority to regulate standards of all kind of reporting-financial as well as non-financial, by the companies in future.

National Financial Reporting Authority shall give its recommendations on accounting standards and auditing standards. It shall only recommend and it is the Central Government who shall prescribe such standards.

Objective

The objectives of National Financial Reporting Authority inter alia shall be as follows:

  • Make recommendations on formulation of accounting and auditing policies and standards for adoption by companies, class of companies or their auditors;
  • Monitor and enforce the compliance with accounting standards, monitor and enforce the compliance with auditing standards;
  • Oversee the quality of service of professionals associated with ensuring compliance with such standards and suggest measures required for improvement in quality of service, and
  • Perform such other functions as may be prescribed in relation to aforementioned objectives.

Consolidated Financial Statements

The Companies Act 2013 has made preparation of consolidated accounts mandatory for all companies including unlisted companies and private companies having one or more subsidiaries or associates or joint ventures.

According to sub Section 3 of the Section 129 of the Companies Act, 2013, where a company has one or more subsidiaries or associates companies, it shall, in addition to its financial statements for the financial year, prepare a consolidated financial statement of the company and of all the subsidiaries and associates companies in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub Section 2.

The company shall also attach along with its financial statement, a separate statement containing the salient features of the Financial Statement of its subsidiary/ies or associate/s or joint venture/s in Form AOC-1 (Rule 5).

Manner of Consolidation of Accounts

The consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards:

Provided that in case of a company covered under sub-Section (3) of Section 129 which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.

Question 2. Write short note on Secretarial Audit.

Answer:

Secretarial Audit:

Secretarial Audit is a compliance audit and it is a part of total compliance management in an organisation. The Secretarial Audit is an effective tool for corporate compliance management. It helps to detect non-compliance and to take corrective measures.

Secretarial Audit is an independent, objective assurance intended to add value and improve an organisation’s operations. It helps to accomplish the organisation’s objectives by bringing a systematic, disciplined approach to evaluate and improve effectiveness of risk management, control, and governance processes.

As per Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the prescribed class of companies is as under:

  • every public company having a paid-up share capital of fifty crore rupees or more; or
  • every public company having a turnover of two hundred fifty crore rupees or more.

As per Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rule, 2020

  • with this insertion in Rule 9(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, now every company having outstanding loans or borrowing from banks or public financial institutions of one hundred crore rupees or more is also required to annex the Secretarial Audit report with its Boards Report.
  • MCA has also clarified that for the purpose of this rule paid up share capital, turnover, or outstanding loans or borrowings as the case may be, existing on the last date of latest audited financial statement shall be taken into account.

It shall be the duty of the company to give all assistance and facilities to the company secretary in practice for auditing the secretarial and related records of the company.

Secretarial Audit is also applicable to a private company which is a subsidiary of a public company, and which falls under the prescribed class of companies as indicated above.

Descriptive Questions

Question 3. What is the procedure of report fraud.

Answer:

Reporting of Frauds by Auditor-Section 143(12) to 143 (15) and Rule 13 Section 143(12) and Rule 13 provides that If an auditor of a company, in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of rupees one crore or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to Central Government.

  • The auditor shall report the matter to the Central Government as under:-
    • the auditor shall report the matter to the Board or the Audit Committee, immediately but not later than two days of his knowledge of the fraud, seeking their reply or observations within forty-five days;
    • on receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days from the date of receipt of such reply or observations;
    • in case the auditor fails to get any reply or observations from the Board or the Audit Committee within forty-five days, he shall forward. his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations;
  • The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same.
  • The report shall be on the letter-head of the auditor containing postal address, e-mail address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number.
  • The report shall be in the Form ADT-4.
  • In case of a fraud involving lesser than the amount specified above, the auditor shall report the matter to Audit Committee or to the Board immediately but not later than two days of his knowledge of the fraud and he shall report the matter specifying the following:
    • Nature of Fraud with description;
    • Approximate amount involved; and
    • Parties involved.
  • The fraud reported to the Audit Committee or the Board during the year shall be disclosed in the Board’s Report specifying the following-
    • Nature of Fraud with description;
    • Approximate Amount involved;
    • Parties involved, if remedial action not taken; and
    • Remedial actions taken.
  • The provision of this rule shall also apply, mutatis mutandis, to a Cost Auditor and a Secretarial Auditor during the performance of his duties under Section 148 and 204 respectively.
    Note: The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) during the year shall be disclosed in the Board’s Report:

    • Nature of Fraud with description;
    • Approximate Amount involved;
    • Parities involved, if remedial action not taken; and
    • Remedial action taken.

Question 4. ABC Ltd. wants to appoint FMC and Associates as its internal auditor. What are the conditions of such appointment?

Answer:

Internal Audit:

Classes of companies requiring Internal Audit

The following class of companies shall be required to appoint an internal auditor or a firm of internal auditors:-

  • Every listed company;
  • Every unlisted public company having-
    • Paid up share capital of fifty crore rupees or more during the preceding financial year; or
    • Turnover of two hundred crore rupees or more during the preceding financial year; or
    • Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or
    • Outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year; and
  • Every private company having-
    • Turnover of two hundred crore rupees or more during the preceding financial year; or
    • Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year.

The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit.

The board may appoint any practicing Chartered Accountant or a Cost Accountant or any other person whom it deems fit to be appointed as its internal auditor. For this purpose, company board may consider the nature and volume of business of company; qualifications, experience and capabilities of such person being appointed as auditor and scope of internal audit.

Who can be an Internal Auditor

  • A Chartered Accountant or;
  • A Cost Accountant or;
  • Such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the Company.

For this sub-section, Chartered Accountant means a Chartered Accountant, who is a member of the Institute of Chartered Accountants of India and has a valid certificate of practice and Cost Accountant means a member of The Institute of Cost Accountants of India. Other professionals, as may be decided by the company’s board, may also be appointed as an internal auditor.

CS Company Law Paper – Corporate Social Responsibility Question and Answers

Corporate Social Responsibility

Meaning of CSR

Corporate Social Responsibility is an important business strategy because, to some extent a consumer wants to buy products from companies he trusts, a supplier wants to form business partnership with companies he can rely on, an employee want to work for a company he respects, other concerns want to establish business contacts with companies seeking feasible solutions and innovations in areas of common concern.

CSR Applicability

As per Section 135 of the Companies Act, 2013, the CSR provision is applicable to companies which fulfills any of the following criteria during the immediately preceding financial year:

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

Functions of CSR Committee

  • To formulate and recommend to the Board, a CSR Policy which would indicate the activities to be undertaken in areas or subject, specified in Schedule VII of the Act.
  • To recommend the amount of the expenditure to be incurred on the activities undertaken in pursuance of the CSR policy.
  • To institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company.
  • To monitor the CSR policy of the company time to time.

List of CSR Activities

  • eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water.
  • promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects.
  • promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
  • protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;
  • measures for the benefit of armed forces veteran, war widows and their dependents;
  • training to promote rural sports, nationally recognized sports, para Olympic sports and Olympic sports;
  • rural development projects.

CSR Expenditure

  • The Board of every company shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. This amount will be CSR expenditure.
  • If the company fails to spend such amount, the Board shall, in its report specify the reasons for riot spending the amount.
  • The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.
  • Expenditure incurred on specified activities that are carried out in India only will qualify as CSR expenditure. Such expenditure includes contribution to the corpus or on projects or programs relating to CSR activities.
  • Any surplus arising out of CSR activities will not be considered as business profit for the spending company.

Computation of Net Profit

“Net profit” as per explanation of Section 135(5) means that net profit shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of Section 198. The net worth, turnover and net profits are to be computed in terms of Section 198 of the 2013 Act as per the profit and loss statement prepared by the company in terms of Section 381 (1) (a) and Section 198 of the 2013 Act.

Every company will have to report its standalone net profit during a financial year for the purpose of determining whether or not it triggers the threshold criteria as prescribed under Section 135(1) of the Companies Act.

Corporate Social Responsibility In Company Law

 Corporate Social Responsibility Disclosure Requirements

It is mandatory for companies to disclose in Board’s Report, an annual report on CSR. The report of the Board of Directors attached to the financial statements of the Company would also need to include an annual report on the CSR activities of the company in the format prescribed containing following particulars –

  • A brief outline of the company’s CSR policy, including overview of projects or programs proposed to be undertaken and a reference to the web-link to the CSR policy and projects or programs.
  • The Composition of the CSR Committee.
  • Average net profit of the company for last three financial years
  • Prescribed CSR Expenditure
  • Details of CSR spent during the financial year.
  • In case the company has failed to spend the two per cent of the average net profit of the last three financial years or any part thereof, the company shall provide the reasons for not spending the amount in its Board report.

Paper Corporate Social Responsibility

 Corporate Social Responsibility Descriptive Questions

Question 1. The Companies Act, 2013 has introduced several provisions which would change the way Indian corporates do business and one such provision is spending on corporate social responsibility (CSR) activities which has assumed considerable importance. Discuss the provisions governing CSR as provided in the Companies Act, 2013 and rules made thereunder.

Answer:

The provisions of Corporate Social Responsibility are dealt under Section 135 read with the Companies (Corporate Social Responsibility Policy) Rules, 2014 and clarifications issued by the Ministry from time to time. Some of the important provisions are as under:

  • As per Section 135 of the Companies Act, 2013, every company having net worth of 500 crores or more, or turnover of 1,000 crores or more or a net profit of 5 crores or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors out of which at least one director shall be an independent director. There need not be any independent director on the CSR Committee if the Company is unlisted Public Company or a Private Company.
  • In case of Private Company CSR Committee can be formed with two members.
  • CSR Committee shall formulate and recommend Corporate Social Responsibility Policy which shall indicate the activity or activities to be undertaken by the company as specified in Schedule VII and also recommend the amount of expenditure to be incurred on CSR activities. The Board of every company shall ensure that the company spends in every financial year at least 2% of the average net profit of the company made during the three immediately preceding financial years in pursuance of its CSR policy.
  • Net Profit of a company for the purposes of Section 135 of the Companies Act, 2013 does not include the profit arising from any overseas branch of the company and the dividends received from other companies in India which are complying with Section 135 of the Companies Act, 2013.
  • The company shall give preference to local areas where it operates, for spending amount earmarked for CSR activities.
  • The CSR activities shall be undertaken by the company, as per its stated CSR Policy, as projects or programs or activities (either new or ongoing), excluding activities undertaken in pursuance of its normal course of business.
  • The Board of a company may decide to undertake its CSR activities approved by the CSR committee, through a registered trust or a registered society or a company established by the company or its holding or subsidiary or associate company under section 8 of the Act or otherwise.
  • The CSR projects or programs or activities undertaken in India only shall amount to CSR expenditure.
  • The CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with Section 135 of the Act.
  • Contribution of any amount directly or indirectly to any political party under section 182 of the Act, shall not be considered as CSR activity.
  • The CSR Policy of the company is required to be displayed on Company’s website.
  • The term CSR is not defined under the Act but Schedule VII of the Companies Act, 2013 requires that the CSR policy created by the CSR Committee must involve atleast one of the focus areas as mentioned in that schedule.
  • The CSR activities should be according to the stated CSR policy, as projects or programs or activities (either new or ongoing). The CSR activities may be decided by the Board to be undertaken through a registered trust or a registered society or a company established by the company or its holding or subsidiary or associate company, provided that:
    • if such trust, society or company is not established by the company or its holding or subsidiary or associate company, it shall have an established track record of three years in undertaking similar programs or projects;
    • the company has specified the project or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.
  • A company may also collaborate with other company but the reports of such projects shall be separately made as per the rules.
  • CSR projects or programs or activities undertaken in India shall amount to CSR expenditure.
  • CSR projects that benefits only the families of the employees shall not be considered as CSR activities.
  • Companies can either conduct CSR activities by mobilizing their own personnel or through institutions having a track record of at least three years but such expenditure must exceed 5% of total CSR expenditure in one financial year.
  • Contribution made to the any political party shall not be considered as CSR activity.

CSR Under Companies Act 2013

Question 2. Referring to the provisions of the Companies Act, 2013 relating to ‘corporate social responsibility’ (CSR), answer the following:

  1. Which activities would not qualify as CSR?
  2. Whether the average net profit criteria for CSR is before tax or after tax?

Answer:

Company Law Corporate Social Responsibility Activities which would not be classifies

Question 3. Any expenditure incurred for the benefit of the society will be considered as expenditure in pursuance of corporate social responsibility policy. Comment with reference to the provisions of the Companies Act, 2013.

Answer:

As per Section 135 of Companies Act, 2013 provides that a company falling under specified criteria shall put in place a Corporate Social Responsibility Policy specify the activities to be undertaken by the company in areas or subject, specified in Schedule VII of Companies Act, 2013.

It is further provided that the Board of Directors of every company shall make sure that the activities as are included in Corporate Social Responsibility Policy of the company are accept by the company.

The expenditure incurred for the benefit of society shall be considered as expenditure in pursuance to Section 135 of Companies Act, 2013, only if the same falls under Corporate Social Responsibility Policy of the Company.

Logical Solutions Ltd., a listed company, is having a Corporate Social Responsibility (CSR) committee constituted with the following members:

Rohan-Whole-time director and Chairman of CSR committee and Board

Sohan-Non-executive director

Mohan-Independent director

Question 4. Can company constitute a Nomination and Remuneration committee consisting of same three members of CSR committee with same composition? Discuss.

Answer:

Under section 178 of Companies Act, 2013, the Board of Directors of every listed public company 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 director.

The Chairperson of the company (whether executive or non-executive) may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee.

In the above case the CSR Committee cannot serve as Nomination and Remuneration committee as the composition is different.

Question 5. Explain whether the Corporate Social Responsibility (CSR) Committee is entrusted with any specific functions under the Companies Act, 2013?

Answer:

Section 135 (3) of the Companies Act, 2013 read with Rules made thereunder provides that the following functions shall be carried out by a Corporate Social Responsibility (CSR) Committee:

  • To formulate and recommend to the Board. a CSR Policy which would indicate the activities to be undertaken in areas or subject, specified in Schedule VII of the Act.
  • To recommend the amount of the expenditure to be incurred on the activities undertaken in pursuance of the CSR policy.
  • To institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company.
  • To monitor the CSR policy of the company time to time.

Corporate Social Responsibility Questions And Answers

Question 6. DEF Traders Ltd. is incorporated as a small company. State with reference to the relevant legal provisions whether it is required to set up a Corporate Social Responsibility Committee?

Answer:

According to Section 135 of the Companies Act, 2013, only the following companies are required to constitute a Corporate Social Responsibility Committee which in the immediately preceding financial year have:

  • Net worth of 500 crore or more; or
  • Turnover of 1000 crore or more; or
  • Net profit of 5 crore or more

A small company is defined in section 2(85) of the Companies Act, 2013 to mean a company, other than a public company whose:

  • Paid up share capital does not exceed 50 Lakh or such higher amount as may be prescribed which shall not be more than 10 crore and
  • Turnover of which as per profit and loss account for the immediately preceding financial year does not exceed 2 crore or such higher amount as may be prescribed which shall not be more than 100 crore

As DEF Traders Ltd. is incorporated as small company, it does not meet the criteria specified in section 135 of the Companies Act, 2013 and would, therefore not be required to constitute a Corporate Social Responsibility Committee.

Corporate Social Responsibility Practical Questions

Question 1. Brave Ltd. is listed at Bombay Stock Exchange and has a net worth of over 600 crore. The company has constituted a corporate social responsibility (CSR) committee with Jay and Vijay as its members. Both Jay and Vijay are directors of the company, Jay being an independent director.

Explaining the provisions of the Companies Act, 2013 relating to ‘corporate social responsibility’, examine whether the company has complied with the provisions of the Act in this regard.

Answer:

Company Law Corporate Social Responsibility Corporate Social Responsibility

Note: Since the company in question has a net worth of 600 crore which is more than the required sum of 500 crore, the company has to comply with the provisions of the Companies Act, 2013, presently, company has only two directors, accordingly there is a need to reconstitute the CSR Committee of Brave Ltd.

Amendment made by Companies (Amendment) Act, 2017 Revised Section 135(1)-

“Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

Provided that where a company is not required to appoint an independent director under sub-section (4) of Section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.”

Revised Section 135(3)(a)-

“(a) 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 subject, specified in Schedule VII.”

Revised Explanation to Section 135(5)

“For the purposes of this section “net profit” shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of Section 198.”

Cs Company Law Csr Questions

Question 2. Corporate Social Responsibility (CSR) provisions are applicable to Microskill Ltd. The company finalised the project under its CSR initiatives which require funds beyond the mandated 2% of average net profit of the company for last three financial years. Will such excess expense, when incurred, be counted in subsequent financial years as a part of CSR expenditure? Advise.

Answer:

In terms of Section 135(5) of the Companies Act, 2013, the Board of every company to which Section 135 is applicable shall ensure that the company spends in every financial year, at least 2% of the average net profits or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.

Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, is required to specify the reasons for not spending the amount and, unless the unspent amount relates to any ongoing project referred to in section 135(6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.

There is no provision for carry forward or excess expenditure to the next year(s). The words used in the section are ‘at least’. Therefore, any expenditure over 2% could be considered as “voluntary higher spending”.

Fortune Ltd. had below financial details during the last three financial years:

Company Law Corporate Social Responsibility Three Financial Year

Question 3. Discuss the compliance requirements for the Company on Corporate Social Responsibility. Whether Company requires to spend amount on CSR Activities, and what are the consequences if the Company fails to spend any amount?

Answer:

Section 135(1) of the Companies Act, 2013 provides that every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

Section 135(3) requires that the Committee shall formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII. The Committee shall further recommend the amount of expenditure to be incurred on CSR activities and monitor the Policy from time to time.

As per Section 135(5) of the Act, the Board shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR Policy.

In Section 135 of the principal Act,

  • in sub-section (5),-
    • after the words “three immediately preceding financial years,”, the words “or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years,” shall be inserted;
    • in the second proviso, after the words “reasons for not spending the amount” occurring at the end, the words, brackets, figure and letters “and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year”.

Amendment made by Companies (Amendment) Act, 2020

in sub-section (5), after the second proviso, the following proviso shall be inserted, namely:-

“Provided also that if the company spends an amount in excess of the requirements provided under this sub-section, such company may set off such excess amount against the requirement to spend under this sub-section for such number of succeeding financial years and in such manner, as may be prescribed.”;

As Per Companies (Amendment) Act, 2019:

After sub-Section (5), the following sub-Sections shall be inserted, namely:

  • “Any amount remaining unspent under sub-Section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in persuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility.
  • Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
  • If a company contravenes the provisions of sub-Section (5) or sub- Section (6), the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.
  • The Central Government may give such general or special directions to a company or class of companies as it considers necessary to ensure compliance of provisions of this Section and such company or class of companies shall comply with such directions.”
  • Accordingly, Fortune Ltd. whose net profits during the current year exceeds rupees five crore is required to comply with the requirements of Section 135 and form a CSR Committee as explained above and spend an amount of rupees eight lakh (being 2% of the average net profits of rupees four crore).
  • However, the company shall seek to give preference to the local area and areas around it where it operates for spending the aforesaid amount. However, if Fortune Ltd. fails to spend such amount, the Board shall, in its report made u/s 134(3)(0), specify the reasons for not spending the amount. Space to write important points for revision

CSR Policy Requirements In India

Question 4. From the following information in respect of two companies viz. ZYX Limited and CBA Private Limited, compute the amount the companies are required to spend on account of Corporate Social Responsibility (CSR):

Company Law Corporate Social Responsibility Financial Year

Answer:

Section 135(1) read with Section 135(5) of the Companies Act; 2013 provides that every company having net worth of rupees 500 crore or more, or turnover of rupees 1,000 crore or more or a net profit or rupees 5 crore or more during any financial year shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately, preceding financial years.

As Per Companies (Amendment) Act, 2019:

After sub-Section (5), the following sub-Sections shall be inserted, namely:

  • “Any amount remaining unspent under sub-Section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in persuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility.
  • Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer from the date of completion of the third financial year. the same to a Fund specified in Schedule VII, within a period of thirty days
  • The Central Government may give such general or special directions to a company or class of companies as it considers necessary to ensure compliance of provisions of this Section and such company or class of companies shall comply with such directions.”
  • Where the amount to be spent by a company under sub-section (5) does not exceed fifty lakh rupees, the requirement under sub-section (1) for constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company.”
  • In the given case, in case of ZYX Limited, the net profit for financial year 2016-17 is 18 crore. The average net profit for preceding 3 financial years is (0+6+18) crore/3=24 crore/3=8 crore. It is to be noted that though the company was not incorporated in the financial year 2014-15, yet that year is to be considered for calculation of average net profit. Accordingly, the company has to spend 2% of 8 crore, i.e., 0.16 crore towards CSR activities.
  • In case of CBA Private Limited, the net profit for financial year 2016-17 is 6 crore. The average net profit for preceding 3 financial year is * [(-4)+ (-1)+6] crore/3=1 crore/3 33.33 lakh. It is to be observed that though the company suffered losses in 2 years 2014-15 and 2015-16, yet those 2 years are to be considered for calculation of average net profit. Accordingly, the company has to spend 2% of 33.33 lakh, i.e., 0.67 lakh towards CSR activities.

Corporate Social Responsibility Case Studies

Question 5. RS Ltd. has incurred 5 lakh for the fulfillment of Labour Law, Land Acquisition Act and Food Safety and Standards Act in the month of May, 2018. The company has accounted for this 5 lakh as Corporate Social Responsibility (CSR) expenditure. Explaining the provisions of the Companies Act, 2013 discuss whether the company has rightly accounted for the amount in CSR.

Answer:

According to the Provisions of Section 135 of the Companies Act, 2013 and rules and clarifications thereunder, expenses incurred by companies for the fulfillment of any Act/Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act, 2013.

In accordance with the aforementioned clarification, expenditure of * 5 lacs relating to fulfillment of requirement under Labour Law, Land Acquisition Act and Food Safety and Standard Act by RS Ltd., will not be treated as CSR expenditure.

Question 6. XYZ Ltd. is carrying out a project under its CSR initiatives. Some of its employees are working in this project. The company want to monetize and account it under the head of ‘CSR expenditure’? Advice the company.

Answer:

As per the MCA General Circular No. 01/2016 dated 12th January, 2016, the contribution and involvement of employees in CSR activities of the company will no doubt generate interest/pride in CSR work and promote transformation from Corporate Social Responsibility as an obligation, to Socially Responsible Corporate in all aspects of their functioning. Therefore, should be encouraged to involve their employees in CSR activities. Although, monetization of such services of employees would not be counted towards CSR expenditure.

CS Executive Program Company Law Paper Chapter 1 Company Law Introduction

Chapter 1 Introduction

Company

A company is an association of both natural and artificial persons incorporated under the existing law of a country. A company has a separate legal entity from the persons constituting it.

Characteristics of a company

The main characteristics of a company are corporate personality, limited liability, perpetual succession, separate property, transferability of shares, common seal, capacity to sue and be sued, contractual rights, limitation of action, separate management, termination of existence etc.

Cs Executive Company Law Introduction

Compared to other types of business associations

As compared to other types of business associations, an incorporated company has the advantage of corporate personality, limited liability, perpetual succession, transferable shares, separate property, capacity to sue, flexibility and autonomy.

Disadvantages and inconveniences in incorporation

There are, however, certain disadvantages and inconveniences in incorporation. Some of these disadvantages are formalities and expenses, corporate disclosures, separation of control from ownership, greater social responsibility, greater tax burden in certain cases, cumbersome winding-up procedure.

CS Executive Program Company Law Paper Chapter 1 Company Law Introduction

Doctrine of lifting of or piercing the corporate veil

  • Sometime veil of corporate personality is used for some dishonest and fraudulent purpose in that case NCLT will look into reality and remove the corporate veil.
    • In the following case the Tribunal have lifted the corporate veil.
    • Prevention of fraud and misconduct [Gilford Motor Co. Vs. Horne [1933] Ch 935]
    • The company is in reality an agency or trust for someone else [Re. F G Films Ltd. (1953) 1 All E.R. 615]
    • Protection of public policy [Connors Vs. Connors Ltd. (1940) 4 All E.R. 179]
    • Enemy character of company [Daimler Co. Ltd. Vs. Continental Tyre and Rubber Co. (1916) 2 A.C. 307]
    • To protect labour welfare legislation [Workmen of Associated Rubber Industries Ltd. Vs. Associated Rubber Industries Ltd. A.I.R. 1986 SC 1]
    • Use of corporate veil for hiding criminal activities.
    • To punish for contempt of Court [Jyoti Limited Vs. Kanwaljit Kavr Bhasin 32] (1987) DLT 198]
  • Where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality.
  • The NCLT will break through the corporate shell and apply the principle/doctrine of what is called as “lifting of or piercing the corporate veil”.

LLP

It is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. LLP can continue its existence irrespective of changes in partners.

It is capable of entering into contracts and holding property in its own name. LLP is a separate legal entity, and is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.

Corporation

An organization formed under state law for the purpose of carrying on a business enterprise in such a manner as to make the enterprise distinct from its owners.

Illegal association

As per Section 464 of Companies Act, no association or partnership consisting of more than such number of persons as may be prescribed shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof, unless it is registered as a company under this Act or is formed under any other law for the time being in force. The number of persons which may be prescribed under this section shall not exceed 100. Rule 10 of Companies (Miscellaneous) Rules, 2014 prescribes 50 persons in this regard.

Effects of an illegal association: An illegal association:

  • Cannot enter into any contract.
  • Cannot sue any member, or outsider, not even if the company is subsequently registered.
  • Cannot be sued by a member, or an outsider for recovery of any debts.
  • Cannot be wound up by an order of the Tribunal. In fact, the Tribunal cannot entertain a petition for winding up as an unregistered company, for if it did, it would be indirectly according recognition to the illegal association. [Raghubar Dayal Vs. Sarafa Chamber A.I.R. 1954 All. 555]

However, an illegal association is liable to be taxed. [Kumara Swamy Chattiar Vs. Income Tax Officer (1957) I.T.R. 457].

Company as a Citizen

The company, though a legal person, is not a citizen under the Citizenship Act, 1955 or under the Constitution of India.

In State Trading Corporation of India Ltd. Vs. CTO AIR 1963 SC 1811, the Supreme Court held that the State Trading Corporation though a legal person, was not a citizen and can act only through natural persons.

Introduction To Company Law Cs Executive

Nationality & Residence

Though it is established through judicial decisions that a company cannot be a citizen, yet it has nationality, domicile and residence.

In Gasque Vs. Inland Revenue Commissioners (1940) 2 K.B. 88, it was held that a limited company is capable of having a domicile and its domicile is the place of its registration and that domicile clings to it throughout its existence.

Short Notes

Question 1. Write a note on the following: (5) Illegal association.

Answer:

Illegal Association:

Company Law Introduction Illegal Association

Distinguish Between

Question  1. Distinguish between the following:

(a) ‘Company’ and ‘partnership firm’.

Answer:

Company Law Introduction Company And Partner Firm

Question  2. Distinguish between the following:

(c) ‘Limited liability Partnership’ and ‘body corporate’.

Answer:

Limited Liability Partnership (LLP) and Body Corporate

Company Law Introduction Limited Liability Partnership and Body Corporate

Question  3. Distinguish between the following:

(a) ‘Company’ and ‘limited liability partnership’.

Answer:

Company Law Introduction Company And Limited Liability

Descriptive Questions

Question 1. Comment on the following:

(2) A shareholder who holds 99% of the share capital of a company can be held liable for the acts of the company.

Answer:

Company Law Introduction Liable for the acts of the company

Cs Company Law Chapter 1 Summary

Question 2. Comment on the following:

(b) A shareholder is held personally liable for the acts of the company, if he holds virtually the entire share capital of the company.

(d) Common seal acts as the official signature of a company.

Answer:

Company Law Introduction Authenticity of the statement

Question  3. Comment on the following:

(b) Common seal can be used by any employee of the company irrespective of his designation.

Answer:

Company Law Introduction Authenticity of the Statement 1

Amendment Made by Companies (Amendment) Act, 2015

Company Law Introduction Amendment made by companies

Question 4. Answer the following citing the relevant provisions of law/case law, if any:

“Separate personality of a company is a special privilege. In case of dishonest or fraudulent use of this privilege, corporate veil can be lifted”. Discuss.

Answer:

Doctrine of lifting of or piercing the corporate veil:

Company Law Introduction Doctrine of lifting of or piercing the corporate veil

In the following cases the Tribunal have lifted the corporate veil.

Company Law Introduction Tribunal have lifted the corporate veil

Company Law Cs Executive Study Material

Question 5. In an annual general meeting of Amar (Pvt.) Ltd., all the shareholders were killed in a bomb blast. State, whether the company is still in existence. If so, how?

Answer:

Company Law Introduction Perpetual Succession

Question 6. Comment on the following:

(a) A company incorporated under the Companies Act, 2013, being an artificial person, is not entitled to sue a natural person or to sue another company incorporated under the same Act.

(d) A company incorporated under the Companies Act, 2013 never dies except when it is wound-up as per the law.

Answer:

Company Law Introduction Companies Act 2013

However in case of merger, the transferor company is dissolved without winding up.

Question 7. Explain clearly the meaning of ‘lifting of corporate veil’ in relation to a company incorporated under the Companies Act, 2013. Examining the judicial decisions, state whether ‘corporate veil’ can be lifted in the following cases:

Where the corporate veil has been used for improper conduct; and

Where the acts of a company are opposed to workmen?

Answer:

Company Law Introduction Lifting of Corporate Veil

Cs Executive Company Law Notes Pdf

Question 8. Comment on the following:

Three companies incorporated with the same set of shareholders are treated as same companies under the Companies Act, 2013.

Answer:

Company Law Introduction Separate Legal Entity

Question 9. One of the subscribers to Memorandum of Association of a company under process of incorporation is a foreign national residing outside India. State the provisions of Companies Act, 2013 regarding authentication of his signature and address. Will the requirement of business visa be applicable to his case if he is a person of Indian origin or overseas citizen of India?

Answer:

Where subscriber to the memorandum is a foreign national residing outside India:

  • in a country in any part of the Commonwealth, his signatures and address on the memorandum and articles of association and proof of identity shall be notarized by a Notary (Public) in that part of the Commonwealth.
  • in a country which is a party to the Hague Apostille Convention, 1961, his signatures and address on the memorandum and articles of association and proof of identity shall be notarized before the Notary (Public) of the country of his origin and be duly apostillised in accordance with the said Hague Convention.
  • in a country outside the Commonwealth and which is not a party to the Hague Apostille Convention, 1961, his signatures and address on the memorandum and articles of association and proof of identity, shall be notarized before the Notary (Public) of such country and the certificate of the Notary (Public) shall be authenticated by a Diplomatic or Consular Officer empowered in this behalf under Section 3 of the Diplomatic and Consular Officers (Oaths and Fees) Act, 1948 (40 of 1948) or, where there is no such officer by any of the officials mentioned in Section 6 of the Commissioners of Oaths Act, 1889 (52 and 53 Vic.C.10), or in any Act amending the same;
  • visited in India and intended to incorporate a company, in such case the incorporation shall be allowed if, he/she is having a valid Business Visa.

Explanation: For the purposes of this clause, it is hereby clarified that, in case of Person is of Indian Origin or Overseas Citizen of India, requirement of business Visa shall not be applicable.

Question 10. Comment on the following:

(a) The Companies Act, 2013 does not provide statutory recognition to the doctrine of lifting of corporate veil. Only judicial interpretations disregard the concept of separate personality.

Answer:

It is not correct to State that the Companies Act, 2013 does not provide statutory recognition to the doctrine of lifting of corporate veil and only judicial interpretation disregard the concept of separate personality.

The Companies Act, 2013 itself contains various provisions in Sections 7(7), 251(1) and 339 which lift the corporate veil to reach the real forces of action. Section 7(7) of Companies Act, 2013 deals with punishment for incorporation of company by furnishing incorrect information; Section 251(1) of Companies Act, 2013 provides that liability for making fraudulent application for removal of name of company from the register of companies and Section 339 of Companies Act, 2013 deals with liability for fraudulent conduct of business during the course of winding up.

Ever behind the decision in Salomon v. Salomon & Co. Ltd., generally Courts are reluctant or at least very cautious to lift the veil of corporate personality to see the real persons behind it. Nevertheless, Courts have found it necessary to disregard the separate personality of a company in the different situations:

  • Fraud or Improper conduct: Where the corporate veil has been used for commission of fraud or improper conduct. In this case, Courts have lifted the veil and looked at the realities of the situation. (Case Law:Jones vs. Lipman)
  • Company acting as an agent: Where a corporate facade is really only an agency instrumentality.(Case Law: R.G. Films Ltd.)
  • Conflict with Public Policy: Where the conduct conflicts with public policy, Courts lifted the corporate veil for protecting the public policy. (Case Law: Connors Bros. v. Connors)
  • Enemy Character: A company will be regarded as having enemy character, if the persons having de facto control of its affairs are resident in an enemy country or, wherever they may be, are acting under instructions from or on behalf of the enemy. (Case Law: Daimler Co. Ltd. v. Continental Tyre & Rubber Co.)
  • Evasion of taxes: Where it was found that the sole purpose for which the company was formed was to evade taxes the Court will ignore the concept of separate entity and make the individuals concerned liable to pay the taxes which they would have paid but for the formation of the company.(Case Law: Sir Dinshaw Maneckjee Petit, Vodafone case)
  • Avoidance of welfare legislation: Avoidance of welfare legislation is as common as avoidance of taxation and the approach in considering problems arising out of such avoidance has necessarily to be the same and, therefore, where it was found that the sole purpose for the formation of the new company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the Supreme Court upheid the piercing of the veil to look at the real transaction. (Case Law: The Workmen Employed in Associated Rubber Industries Limited)
  • Unjust and inequitable: Where it is found that a company has abused its corporate personality for an unjust and inequitable purpose, the Court would not hesitate to lift the corporate veil. Space to write important points for revision

Cs Company Law Important Topics

Question 11. Comment on the following:

The privilege of Limited Liability for Business Debts is one of the principal advantage of doing business under the corporate form of organization with some exceptions.

Answer:

“The privilege of limited liability for business debts is one of the principal advantages of doing business under the corporate form of organisation.” The company, being a separate person, is the owner of its assets and bound by its liabilities. The liability of a member as shareholder, extends to the contribution to the capital of the company up to the nominal value of the shares held and not paid by him. Members, even as a whole, are neither the owners of the company’s undertakings, nor liable for its debts.

Exceptions to the principle of limited liability:

  • Members are severally liable in certain cases- If at any time the number of members of a company is reduced, in the case of a public company, below seven, in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognizant of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor. [Section 3A]
  • Where a company has been got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal may, on an application made to it, on being satisfied that the situation so warrants, direct that liability of the members of such company shall be unlimited. [Section 7(7)(b)]
  • Further under section 339(1), where in the course of winding up it appears that any business of the company has been carried on with an intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal may declare the persons who were knowingly parties to the carrying on of the business in the manner aforesaid as personally liable, without limitation of liability, for all or any of the debts/liabilities of the company. [Section 339]
  • Under Section 35(3), where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person who was a director at the time of issue of the prospectus or has been named as a director in the prospectus or every person who has authorized the issue of prospectus or every promoter or a person referred to as an expert in the prospectus shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus
  • As per section 75(1), where a company fails to repay the deposit or part thereof or any interest thereon referred to in section 74 within the time specified or such further time as may be allowed by the Tribunal and it is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance of such deposit shall, without prejudice to other liabilities, also be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors.
  • Section 224(5) states that where the report made by an inspector states that fraud has taken place in a company and due to such fraud any director, key managerial personnel, other officer of the company or any other person or entity, has taken undue advantage or benefit, whether in the form of any asset, property or cash or in any other manner, the Central Government may file an application before the Tribunal for appropriate orders with regard to disgorgement of such asset, property, or cash, and also for holding such director, key managerial personnel, officer or other person liable personally without any limitation of liability. Space to write important points for revision-

Practical Questions

Question 1. Six persons are the only members of Tab (Pvt.) Ltd. All of them went to USA on a pleasure trip by aeroplane. On the way, the plane crashed and all the six members died. Does Tab (Pvt.) Ltd. still exist? Decide.

Answer:

 

Company Law Introduction Pleasure trip by aeroplane

Question 2. Comment on the following:

Raman Pvt. Ltd. has only two shareholders, X and Y. All shares were fully paid-up X sold all his shares to Y and the company carries on its business activities thereafter.

Answer:

Company Law Introduction Raman Pvt Ltd

Cs Executive Company Law Introduction

Short Notes

Question 1. Write short note on one person company.

Answer.

Company Law Introduction One Person Company

Distinguish Between

Question 2. Distinguish between Hindu Undivided Family and company.

Answer.

Company Law Introduction Hindu Undivided Family

Introduction To Company Law Cs Executive

Question 3. Discuss the new concepts relates to types of companies under companies Act, 2013.

Answer.

Company Law Introduction Conceps relates

CS Executive Program Company Law Paper Chapter 5 Charges

Chapter 5 Charges

Charge

  • A charge is a security given for securing loans or debentures by way of a mortgage on the assets of the company. As mentioned earlier, the power of the company to borrow includes the power to give security also.
  • A charge may be created either through the act of parties or by operation of law.
  • A charge created by operation of law does not require registration. But a charge croated by act of parties requires registration.
  • The charge may be in perpetuity.
  • A charge only gives a right to receive payment out of a particular property.
  • A charge is good against subsequent transferees with notice.
  • In case of charge, no personal liability is created. But where a charge is the result of a contract, there may be a personal remedy.
  • There is no such transfer of interest in the case of a charge.

Two Kinds of Charges

There are two kinds of charges, fixed or specific charge and floating charge.

Fixed Charge

A charge is called fixed or specific when it is created to cover assets which are ascertained and definite or are capable of being ascertained and defined, at the time of creating the charge e.g., land, building, or plant and machinery. A fixed charge, therefore, is a security in terms of certain specific property, and the company gives up its right to dispose off that property until the charge is satisfied.

Floating Charge

A floating charge, as a type of security, is peculiar to companies as borrowers. A floating charge is not attached to any definite property but covers property of a fluctuating type e.g., stock-in-trade and is thus necessarily equitable.

A floating charge is a charge on a class of assets present and future which in the ordinary course of business is changing from time to time and leaves the company free to deal with the property as it sees fit until the holders of charge take steps to enforce their security.

CS Executive Program Company Law Paper Chapter 5 Charges

Crystallisation of Floating Charge

A floating charge attaches to the company’s property generally and remains dormant till it crystallizes or becomes fixed. The company has a right to carry on its business with the help of assets over which a floating charge has been created till the happening of some event which determines this right. A floating charge crystallises and the security becomes fixed in the following cases:

  • when the company goes into liquidation;
  • when the company ceases to carry on its business;
  • when the creditors or the debenture holders take steps to enforce their security e.g. by appointing receiver to take possession of the property charged;
  • on the happening of the event specified in the deed.

Mortgage

  • A mortgage is the transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performance of an agreement which may give rise to pecuniary liability.
  • A mortgage is created by the act of the parties.
  • A mortgage requires registration under the Transfer of Property Act, 1882.
  • A mortgage is for a fixed term.
  • A mortgage is a transfer of an interest in specific immovable property.
  • A mortgage is good against subsequent transferees.
  • A simple mortgage carries personal liability unless excluded by express contract.
  • A mortgage is a transfer of an interest in a specific immovable property.

Cs Executive Company Law Notes

Registration of Charges- Section 77(1)

Any charge created

  • within or outside India,
  • on its property or assets or any of its undertakings,
  • whether tangible or otherwise, and situated in or outside India Shall be registered.
  • Particulars of charges that is being filed with Registrar of Companies is to be signed by the company creating the charge and the charge holder in Form No. CHG-1 (for other than Debentures) or Form CHG-9 (for debentures) as the case may be.
  • The Charge has to be registered within 30 days of its creation.

As per Companies (Amendment), Act, 2019

Time limit for filing charge created on or after 2.11.2018 reduced The charge should be filed within 30 days from its creation. In case of charges created on or after 2.11.2018, RoC can allow extension upto 30 days (total 60 days from date of creation of charge, on payment of prescribed additional fees.

RoC can allow further extension of 60 days on after payment of such ad valorem fees as may be prescribed – first and second proviso to Section 77(1) of Companies Act, 2013 amended vide the Companies (Amendment) Act, 2019.

There is no provision to grant further extension for registration of charges. Section 87 of Companies Act, 2013 has been amended w.e.f. 2.11.2018 to provide that Central Government cannot order rectification of register of charges in such cases.

Provision in respect of charges created before 2.11.2018 Registrar can allow filing of particulars of such registration within 300 days of such creation, on payment of additional fee as prescribed.

He can grant further extension upto 6 months on payment of additional fees as may be prescribed – first and second proviso to Section 77(1) of Companies Act, 2013 amended vide the Companies (Amendment) Act, 2019.

Registrar can condone delay upto 300 days on being satisfied that company had sufficient cause for not filing particulars and instrument of charge within 30 days, on payment of additional fee – Rule 4 of Companies (Registration of Charges) Rules, 2014.

If the charge is not filed within 300 days of creation, further extension could be granted by Central Government under section 87 of Companies Act, 2013 second proviso to Section 77(1) of Companies Act, 2013 as existing upto 2.11.2018 [powers delegated to Regional Director]. Now, such extension cannot be granted.

Punishment for not filing charges or giving false information Amendment made by Companies (Amendment) Act, 2020 “(1) If any company is in default in complying with any of the provisions of this Chapter, the company shall be liable to a penalty of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.”.

CS Executive Program Company Law Paper, Charges

Satisfaction of Charges

According to Section 82 read with the rules, the company shall give intimation to the Registrar of the payment or satisfaction in full of any charge within thirty days from the date of such payment or satisfaction in Form No. CHG-4 along with the fee.

The Registrar may, on an application by the company or the charge holder, allow such intimation of payment or satisfaction to be made within a period of three hundred days of such payment or satisfaction on payment of such additional fees as may be prescribed.

Notice of Charge

According to Section 80, where any charge on any property or assets of a company or any of its undertakings is registered under Section 77, any person acquiring such property, assets, undertakings or part thereof or any share or interest therein shall be deemed to have notice of the charge from the date of such registration.

The section clarifies that if any person acquires a property, assets or undertaking for which a charge is already registered, it would be deemed that he has complete knowledge of the charge from the date the charge is registered.

Consequences of Non-registration of Charge

According to Section 77 of the Companies Act, 2013, all types of charges created by a company are to be registered by the ROC, where they are non-compliant and are not filed with the Registrar of Companies for registration, it shall be void as against the liquidator and any other creditor of the company.

Particulars of Charges

The following particulars in respect of each charge are required to be filed with the Registrar:

  • Date and description of instrument creating charge;
  • The total amount secured by the charge;
  • Date of the resolution authorising the creation of the charge; (in case of issue of secured debentures only);
  • General description of the property charged;
  • List of the terms and conditions of the loan; and
  • Name and address of the charge holder.

Central Government can Order Rectification of Register of Charges Only When Delay was in Respect of Filing of Satisfaction of Charge or Mistake Made in Filing Charges

The Central Government can order the rectification of register on any of the | following grounds:

The Central Government on being satisfied that:

  • the omission to give intimation to the Registrar of the payment or satisfaction of a charge, within the time required under this Chapter,
  • the omission or misstatement of any particulars with respect to any such charge or modification or with respect to any memorandum of satisfaction or other entry made in pursuance of section 82 or 83, was accidental or due to inadvertence or some other sufficient cause or it is not of a nature to prejudice the position of creditors or shareholders of the company, it may, on the application of the company or any person interested and on such terms and conditions as the Central Government deems just and expedient, direct that the time for the giving of intimation of payment or satisfaction shall be extended or, as the case may require, that the omission or misstatement shall be rectified Section 87 of Companies Act, 2013 amended vide the Companies (Amendment) Act, 2019.
  • Central Government cannot order rectification of register of charges if there was delay in filing of the original charge itself, beyond the specified period or extended period as allowable under section 77 of Companies Act, 2013.
  • Application for rectification can be made by company or any person interested. Thus, secured creditor (Bank or FI) can make application if the charge or its modification was not filed in time, as the secured creditor is certainly interested in registration/modification of charge. Powers to order rectification of register of charges have been delegated to Regional Director vide Notification F No. 1/6/2014 – CL. V dated 21.5.2014.

List of Important Forms

Company Law Charges List Of Important Forms

Charges In Company Law

Short Notes

Question 1. Write a note on the following:

Consequences of non-registration of charge

Answer:

Company Law Charges Consequences of non-registration

Question 2. Distinguish Between

Distinguish between the following:

‘Mortgage’ and ‘charge’.

Answer:

Company Law Charges Mortage And Charge

Question 3. Distinguish between the following:

‘Notice of a charge’ and ‘satisfaction of a charge’.

Answer:

Company Law Charges Satisfaction of Charges

Descriptive Questions

Question 1. What is meant by ‘floating charge’ and how it would be crystallised?

Answer:

Company Law Charges Floating Charge

Cs Executive Chapter 5 Charges

Question 2. Explain clearly the meaning of the terms ‘fixed charge’ and ‘floating charge’. State the circumstances under which a ‘floating charge’ automatically becomes ‘fixed’.

Answer:

Company Law Charges Fixed Specific Charge

Question 3. Explain whether a Floating charge attached to the company’s property generally remains dormant till it crystallizes or becomes fixed.

Answer:

A floating charge attached to the company’s property generally remains dormant till it crystallizes or becomes fixed. The company has a right to carry on its business with the help of assets over which a floating charge has been created till the happening of some event which determines this right.

Crystallization is the process by which a floating charge converts into a fixed charge. A floating charge crystallises and the security becomes fixed in the following cases:

  • when the company goes into liquidation;
  • when the company ceases to carry on its business;
  • when the creditors or the debenture holders take steps to enforce their security e.g. by appointing receiver to take possession of the property charged;
  • on the happening of the event specified in the deed.

In the aforesaid circumstances, the floating charge is said to become. fixed or to have been crystallised. Until the charge crystallises or attaches or becomes fixed, the company can deal with the property so charged in any manner it likes. Once crystallized, the security cannot be sold, and the lender may take possession of it.

Question 4. Comment on the following:

An unregistered charge shall be void against the liquidator and other creditors of the company.

Answer:

  • Under Section 77 of the Companies Act, 2013, all types of charges created by a company are to be registered with the Registrar of Companies, where they are non-compliant and are not filed with the Registrar for registration, the charge shall be void as against the liquidator and any other creditor of the company.
  • In the case of ONGC Ltd v. Official Liquidators of Ambica Mills Co Ltd (2006), the ONGC had not been able to point out whether the so called charge, on the basis of which it was claiming preference as a secured creditor, was registered or not.
  • It was held that in the light of this failure, ONGC could not be treated as a secured creditor.
  • This does not, however, mean that the charge is altogether void and the debt is not recoverable. So long as the company does not go into liquidation, the charge is good and may be enforced.
  • Void against the liquidator means that the liquidator, on winding up of the company, can ignore the charge for the purpose of ascertaining the priority of payment and can treat the concerned creditor as an unsecured creditor. The property will be treated as free of charge i.e. the creditor cannot sell the property to recover its dues.
  • Void against any other creditors of the company means that if any subsequent charge is created on the same property and the earlier charge is not registered, the earlier charge would have no consequence and the latter charge if registered would enjoy priority over the earlier charge.
  • Hence, non-filing of particulars of a charge as required under Section 77 of the Companies Act, 2013 does not invalidate the charge against the company as a going concern.
  • It is void only against the liquidator and the creditors at the time of liquidation. The company itself cannot have a cause of action arising out of non-registration.

Question 5. Comment on the following:

An encumbrance may be created by a charge, pledge or a mortgage.

Answer:

An encumbrance means a restriction imposed on the owner’s right over his property. All the three words (charge, mortgage and pledge) used above impose a restriction on the right of the owner over his own property.

  • Charge: As per Clause 16 of Section 2 of the Companies Act, 2013, charge means an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage.
    • A charge is called fixed or specific when it is created to cover assets which are ascertained and definite or are capable of being ascertained and defined, at the time of creating the charge whereas a floating charge is not attached to any definite property but covers property of a fluctuating type such as stock in trade.
    • On the contrary, in case of a fixed or a floating charge the possession of the assets remains with the borrower. The ownership of the property also remains with the borrower.
    • In case of fixed charge he has no right to sell or transfer the asset except with the consent of the charge holder.
    • In case of a floating charge the borrower can treat his floating assets as if they have not been charged.
    • He loses this right only when he commits a default and the charge holder decides to take action for recovery of the money due. In the above case we say the floating charge crystallizes.
  • Mortgage: A mortgage is the transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or performance of an agreement which may give rise to pecuniary liability.
  • Pledge: In a pledge the borrower loses possession of the goods pledged as a security for repayment of a debt or performance of an obligation. The pledgor remains the owner of the property. He is entitled to get back
    • Although, in all these cases if the borrower commits a default in payment of the principal and interest thereof the lender gets a right to sell the property and recover the amount due to him.
    • Hence, an encumbrance may be created by a charge, pledge or a mortgage.

Types Of Charges In Company Law

Question 6. As a Company Secretary, explain the procedure of satisfaction of charge.

Answer:

  • Under Section 82 of the Companies Act, 2013 read with Rule 8 of the Companies (Registration of Charges) Rules, 2014, the company shall give intimation to the ROC of the payment or satisfaction in full of any charge within a period of 30 days from the date of such payment or satisfaction in Form No.CHG-4 along with the prescribed fees.
  • The Registrar may, on an application by the company or the charge holder, allow such intimation of payment or satisfaction to be made within a period of three hundred days of such payment or satisfaction on payment of such additional fees as specified.
  • On receipt of intimation of satisfaction of charge, the Registrar of Companies (ROC) shall issue a notice to the holder of the charge calling upon him to show cause within such time not exceeding 14 days, as may be specified in such notice, as to why payment or satisfaction in full should not be recorded as intimated to the Registrar of Companies. (ROC).
  • If no cause is shown, by such holder of the charge, the RoC shall order that a memorandum of satisfaction shall be entered in the register of charges maintained by the RoC under Section 81 of the Companies Act and shall inform the company.
  • Although, if the cause is shown to the Registrar, he shall record a note to that effect in the register of charges and shall inform the company accordingly.
  • Further, Proviso to Section 82(2) of the Companies Act, 2013 states that the aforesaid notice shall not be required to be sent, in case intimation to the Registrar of Companies (ROC) in this regard is in the specified form along with the Letter of the charge holder stating that the amount has been satisfied, which is a compulsory attachment in all cases of CHG-4 and is signed by the holder of charge.
  • Where the Registrar of Companies (ROC) enters a memorandum of satisfaction of charge in full, he shall issue a certificate of registration of satisfaction of charge in Form No.CHG-5. Space to write important points for revision-

Practical Questions

Question 1. Rose Ltd. raised a loan from a State financial institution by creating hypothecation of book debts and also future debts of the company. Incidentally, the charge was not registered with the Registrar of Companies concerned.

State financial institution demanded a certificate of registration of charge for the amount of loan so granted by it. The directors of the company replied to the State financial institution that the charge need not be registered for hypothecation of book debts. Is the action of the directors valid? Give reasons.

Answer:

Company Law Charges Requirement of Registration of Charge

Company Law Charges Explained

Question 2. XYZ Limited has office building in London. The company has been granted a term loan of 15 crore from a Bank. The company wants to mortgage office building of London. Examining the provisions of the Companies Act, 2013, answer the following:

  1. Whether the company can mortgage the above office building?
  2. Whether a charge can be created for property situated outside India? 

Answer:

Company Law Charges Provision of Section 77

Question 3. The authorised share capital of Shine Ltd. is 50 lakh. The paid-up capital of the company is 20 lakh. The Board of Directors at its 100th meeting held in the residence of Managing Director of the company resolved to create charge on uncalled share capital of 30 lakh. With reference to the provisions of the Companies Act, 2013 ascertain if the resolution is valid. 

Answer:

  • A loan taken by a company may be secured by a charge on uncalled capital; A company does not have implied power of charging its uncalled share capital and a company may charge its uncalled capital if its articles or memorandum authorise it to charge it.
  • The memorandum may give an express power to charge uncalled capital, or the power may be so wide that it can be inferred by implication. In Newton v. Debenture holders of Anglo-Australian Investment Co., (1895) A.C. 224, the memorandum authorised the company to borrow “upon any security of the company”.
  • It was held that the power was wide enough to include a charge on uncalled capital.
  • In present case the company may take a loan secured by charge on uncalled capital only if the article or memorandum of the company so permits.

Question 4. XYZ Limited has an office building in London. The Company has been granted a term loan of 15 crore from a Bank. The Company wants to mortgage office building of London. Examining the provisions of the Companies Act, 2013, answer the following:

  1. Whether the company can mortgage the above office building?
  2. Whether a charge can be created for property situated outside India?

Answer:

Registration of Charges:

As per Section 77(1) of the Companies Act, 2013 and read with Rule 3 of the Companies (Registration of Charges) Rules, 2014, it shall be the duty of every company creating a charge within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India, to register the particulars of the charge signed by the company and the charge-holder together with the instruments, if any, creating or modifying such charge in Form No.

CHG-1 (for other than Debenture) or Form No. CHG-9 (For Debentures) as the case may be, and is need to be filed with the Registrar of Companies (ROC) within a period of 30 days of the date of creation or modification of charge along with the specified fees.

  • In the above provisions, XYZ Limited can mortgage the office building situated in London (UK).
  • In the above provisions, a charge can be created for property situated outside India. The e-form prescribed for the purpose of Registration of the charge is Form No. CHG-1 and it will be filled within the prescribed period.

Short Notes

Question 1. Write short note on Particulars of Charge.

Answer:

The following particulars in respect of each charge are required to be filed with the Registrar:

  • date and description of instrument creating charge;
  • total amount secured by the charge;
  • date of the resolution authorising the creation of the charge; (in case of issue of secured debentures only);
  • general description of the property charged;
  • list of the terms and conditions of the loan; and
  • name and address of the charge holder.

Distinguish Between

Cs Executive Company Law Notes

Question 2. What is the difference between Charge and Pledge?

Answer:

According to the generally accepted definition, a ‘pledge’ is a bailment of personal property as security for some debt or engagement, redeemable on certain terms, and with an implied power of sale on default. It consists of a delivery of goods by a debtor to his creditor as security for a debt or other obligation, to be held until the debt is repaid along with interest or other obligation of the debtor is discharged, and then to be delivered back to the pledger, the title not being changed during the continuance of the pledge.

Unlike a pledge, a ‘charge’ is not a transfer of property of one to another. It is a right created in favour of one, referred to as “the lender” in the immovable property of another, referred to as “the borrower”, as security for repayment of the loan and payment of interest on the terms and conditions contained in the loan documents evidencing charge.

Both a pledge and a charge are the result of voluntary act of parties. Both create security but the nature of the security is different. -Space to write important points for revision-

Descriptive Questions

Question 3. State the procedure to be adopted by the company for satisfaction of a registered charge.

Answer:

Satisfaction of Charges

According to Section 82 read with the rules, the company shall give intimation to the Registrar of the payment or satisfaction in full of any charge within a period of thirty days from the date of such payment or satisfaction in Form No. CHG-4 along with the fee.

The Registrar may, on an application by the company or the charge holder, allow such intimation of payment or satisfaction to be made within a period of three hundred days of such payment or satisfaction on payment of such additional fees as may be prescribed.

On receipt of such intimation, the Registrar shall issue a notice to the holder of the charge calling a show cause within such time not exceeding fourteen days, as to why payment or satisfaction in full should not be recorded as intimated to the Registrar.

If no cause is shown, by such holder of the charge, the Registrar shall order that a memorandum of satisfaction shall be entered in the register of charges maintained by the registrar under section 81 and shall inform the company. If the cause is shown to the Registrar shall record a note to that effect in the register of charges and shall inform the company accordingly.

However the aforesaid notice shall not be sent, in case intimation to the registrar is in specified form and is signed by the holder of charge. [Proviso to Section 82(2)]

Question 4. State the procedure to be followed by a for company for registration of charge.

Answer:

If a company has passed special resolutions under Section 180(2) authorising its Board of directors to borrow funds for the requirements of the company and under Section 180(1)(a), authorising its Board of directors to create charge on the assets and properties of the company to provide security for repayment of the borrowings in favour of the financial institutions/banks or lenders and in exercise of that authority has signed the loan documents and now proposes to have the charge, created it should follow the procedure detailed below:

  • Where the special resolution as required under Section 180 is passed, Form MGT-14 of the Companies (Management and Administration) Rules, 2014 is to be filed with the Registrar.
  • According to Section 77, every company creating any charge created within or outside India on property or assets or any of the company’s undertakings whether tangible or otherwise, situated in or outside India shall have to be registered. For the purpose of creating/ modifying a charge file particulars of the charge with the concerned Registrar of Companies within thirty days of creating the Form No. CHG-1 (for other than Debentures) or Form No. CHG-9 (for debentures including rectification), as the case may be.
  • Attach the following documents with e-Form No. CHG-9/CHG-1:
    • A certified true copy of every instrument evidencing any creation or modification of charge;
    • In case of joint charge and consortium finance, particulars of other charge holders;
    • Instrument(s) evidencing creation or modification of charge in case of acquisition of property which is already subject to charge together with the instrument evidencing such acquisitions.
  • Payment of fees can be made online in accordance with Annexure ‘B’ of. Companies (Registration offices and fees) Rules, 2014. Electronic payments through internet can be made either by credit card or by internet banking facility.
  • If the particulars of charge cannot be filed within thirty days due to unavoidable reasons, then it may be filed within three hundred days of such creation after payment of such additional fee as prescribed under Annexure ‘B’ of Companies (Registration offices and fees) Rules, 2014.
  • Such application for delay to the Registrar shall be made in Form No. CHG-1 and supported by a declaration from the company signed by its secretary or director that such belated filing shall not adversely affect rights of any other intervening creditors of the company.
  • Where a charge is registered Registrar will issue a certificate of registration of such charge in Form No. CHG-2. Where the particulars of modification of charge are registered the Registrar shall issue a certificate of modification of charge in Form No. CHG-3.
  • A company shall within a period of thirty days from the date of the payment or satisfaction in full of any charge registered, give intimation of the same to the Registrar in Form No. CHG-4 along with the fee as prescribed under Annexure ‘B’ of Companies (Registration Offices and Fees) Rules, 2014.
  • Where the Registrar enters a memorandum of satisfaction of charge in full, obtain a certificate of registration of satisfaction of charge in Form No. CHG-5.
  • Incorporate changes in relation to creation, modification and satisfaction of charge in the register of charges maintained by the company in Form No. CHG.7 and enter therein particulars of all the charges registered with the Registrar on any of the property, assets or undertaking of the company and the particulars of any property acquired subject to a charge as well as particulars of any modification of a charge and satisfaction of charge. Such register is to be kept at the registered office of the company.
  • All the entries in the register shall be authenticated by a director or the secretary of the company or any other person authorised by the Board for the purpose.
  • The register of charges shall be preserved permanently and the instrument creating a charge or modification thereon shall be preserved for a period of eight years from the date of satisfaction of charge by .he company.
  • Where the satisfaction of the charge is not filed with the Registrar within thirty days from the date on such payment of satisfaction, an application for condonation of delay shall be filed with the Central Government in Form No. CHG-8 along with the fee as prescribed under Annexure ‘B’ of Companies (Registration Offices and Fees) Rules, 2014.
  • Where the instrument creating or modifying a charge is not filed with the Registrar within a period of three hundred days from the date of its creation (including acquisition of a property subject to a charge) or modification an application for condonation of delay shall be filed with the Central Government in Form No. CHG-8 along with the fee as prescribed under Annexure ‘B’ of Companies (Registration Offices and Fees) Rules, 2014.
  • The order passed by the Central Government shall be required to be filed with the Registrar in Form No. INC.28 along with the fee as per the conditions stipulated in the said order.
  • For all other matters other than condonation of delay, application shall be made to the Central Government in Form No. CHG-8 along with the fee.

Charges In Company Law

Question 5. Draft resolution for creating a charge on the company’s assets and properties.

Answer:

Resolution under Section 180(1)(a) for creating charge on company’s assets and properties

  • To consider and, if thought fit, to pass with or without modification(s), the following as Special Resolution;
    • “Resolved that consent of the Company be and is hereby accorded in terms of Section 180(1) (a) and other applicable provisions, if any, of the Companies Act, 2013 or any modification or re-enactment thereof, to mortgaging and/or charging by the Board of directors of the Company by way of equitable and/or legal mortgage on such immovable and movable properties of the Company, both present and future, together with power to takeover the assets of the Company in certain events, to or in favour of Industrial Development Bank of India (IDBI).
    • The Industrial Finance Corporation of India Ltd. (IFCI) by way of first pari passu Charge to secure the Rupee Term Loans of 1000.00 lacs and 880.00 lacs respectively granted to the Company together with interest at the agreed rate(s), liquidated damages, front end fees, premia on pre payment, costs, charges, expenses and all other moneys payable by the Company under the Loan Agreements, Deeds of Hypothecation and other documents executed/to be executed by the Company in respect of the Term Loans of IDBI and IFCI.
    • Resolved further that the Board of directors be and is hereby authorised and shall always be deemed to have been authorised to finalise with IDBI and IFCI the documents for creating the aforesaid mortgage and/ or charge and to do all acts, deeds and things as may be necessary for giving effect to the above resolution.”
  • To consider and, if thought fit, to pass with or without modification(s), the following as Special Resolution;
    • “Resolved that consent of the Company be and is hereby accorded in terms of Section 180(1)(a) and other applicable provisions, if any, of the Companies Act, 2013 or any modification or re-enactment thereof, to mortgaging and/or charging by the Board of directors of the Company by way of equitable and/or legal mortgage on such immovable and movable properties of the Company, both present and future, in favour of State Bank of India.
    • New Delhi the Company’s Bankers by way of Second Charge to secure the various fund based/non-fund based credit facilities granted/to be granted to the Company and the interest at the agreed rate, costs, charges, expenses and all other moneys payable by the Company under the Deed(s) of Hypothecation and other documents executed/to be executed by the Company in respect of credit facilities of State Bank of India, in such form and manner as may be acceptable to State Bank of India.
    • Resolved further that the Board of directors be and is hereby authorised and shall always be deemed to have been authorised to finalise with State Bank of India the documents for creating the aforesaid mortgage and/or charge and to do all acts, deeds and things as may be necessary for giving effect to the above resolution.”

CS Executive Program Company Law Paper Chapter 4 Debt Capital

Debt Capital

Borrowing

All companies are given the power to borrow by their articles which fix the maximum limit of borrowings.

Power to borrow

The power to borrow monies and to issue debentures (whether in or outside India) can only be exercised by the Directors at a duly convened meeting.

Ultra vires borrowings

Where the company borrows without the authority conferred on it by the Articles or beyond the amount set out in the Articles, it is an ultra vires borrowing and hence void.

Ultra vires borrowings cannot even be ratified by a resolution passed by the company in a general meeting. In case of ultra vires borrowings the lender has the following remedies: (a) Injunction and Recovery, (b) Subrogation, (c) Suit against Directors.

Debenture

A debenture is a document given by a company under its seal as evidence of a debt to the holder usually arising out of a loan and most commonly secured by a charge.

CS Executive Program Company Law Paper Chapter 4 Debt Capital

Amendment made by Companies (Amendment) Act, 2017

In Section 2 in clause (30), the following proviso shall be inserted, namely: “Provided that-

  • the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and
  • such other instrument, as may be prescribed by the Central Government in consultation with Reserve Bank of India, issued by a company, shall not be treated as debenture.”

Kinds of debentures

Debentures may be of different kinds, viz. redeemable debentures, registered and bearer debentures, secured and unsecured or naked debentures, and convertible debentures.

Debenture stock

A debenture stock is a borrowed capital consolidated into one mass for the sake of convenience.

Debenture Redemption Reserve

Section 71(4) of the Act requires every company to create a debenture redemption reserve account to which an adequate amount shall be credited out of its profits available for payment of dividends until such debentures are redeemed and shall utilize the same exclusively for the redemption of a particular set or series of debentures only.

Appointment of Debenture Trustees

Section 71(5) read with Rule 18(2) of aforesaid rules, provide that a company before making an issue of a prospectus or an offer or inviting the public or members to more than 500 persons, shall appoint one or more debenture trustees. The names of the debenture trustees shall be stated in the letter of offer inviting subscription for debentures and also in all the subsequent notices or other communications sent to the debenture holders. Before the appointment of a debenture trustee or trustees, written consent shall be obtained from such debenture trustee.

Duties of Debenture Trustees

Section 71(6) read with Rule 18(3) of aforesaid rules provides that a debenture trustee shall take steps to protect the interests of the debenture holders and redress their grievances.

It shall be the duty of every debenture trustee to

  • satisfy himself that the letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed;
  • satisfy himself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders;
  • call for periodical status or performance reports from the company;
  • inform the debenture holders immediately of any breach of the terms of the issue of debentures or covenants of the trust deed;
  • ensure the implementation of the conditions regarding the creation of security for the debentures, if any, and debenture redemption reserve;

Debenture trust deed

A debenture trust deed is a document created by the company, whereby debenture trustees are appointed to protect the interest of Debenture holders before they are offered for public subscription.

Company

The company may accept deposits from its members by passing a resolution in a general meeting and subject to conditions as may be prescribed in the Rules including Credit rating, Deposit insurance,, etc.

Cs Executive Company Law Notes

Eligible company

Eligible company public company may accept deposits, if it has a net worth of not less than 100 crores or a turnover of not less than 500 crore and has obtained the prior consent of the company in a general meeting using a special resolution and also filed the said resolution with the Registrar of Companies and where applicable, with the Reserve Bank of India before making any invitation to the Public for acceptance of Deposits.

Deposit trustees

No company under sub-section (2) of section 73 or any eligible company shall issue a circular or advertisement inviting secured deposits unless the company has appointed one or more deposit trustees to create security for the deposits.

Deposit insurance

Amendment made by companies (Amendment) Act, 2017 Contract providing for deposit insurance at least thirty days before the issue of circular or advertisement.

In Section 73 of the principal Act, in sub-Section (2),-clause (d) shall be omitted;

Foreign investment

Repatriation Capital flows from a foreign country to the country of origin. This usually refers to returning returns on foreign investment in the case of a corporation or transferring foreign earnings home in the case of an individual.

List of Important Forms

Company Law Debt Capital List Of Important Forms

Debt Capital Distinguish Between

Question 1. Distinguish between the following:

‘Debentures’ and ‘shares’.

Answer:

Company Law Debt Capital Debentures and shares

Debt Capital Descriptive Questions

Question 1. Comment on the following:

Issue of unsecured debentures by a company to another company, where the debentures have an option for compulsory conversion into equity shares within seven years, cannot be termed as deposits.

Answer:

Company Law Debt Capital Analysis of the present case

Cs Executive Company Law Chapter 4 Summary

Question 2. Define the term ‘deposits’ and list the receipts of money that are not considered deposits.

Answer:

As per Section 2(31) of the Companies Act, 2013 “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

“Deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include:

  • Any amount received from the Central Government or a State Government, any amount received from any other source whose repayment is guaranteed by the Central Government or a State Government any amount received from a local authority, or any amount received from a statutory authority constituted under an Act of Parliament or a State Legislature;
  • Any amount received from foreign governments, foreign or international banks, multilateral financial institutions (including, but not limited to, International Finance Corporation, Asian Development Bank, Commonwealth Development Corporation, and International Bank for Industrial and Financial Reconstruction), foreign governments development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 and rules and regulations made there under;
  • Any amount received as a loan or facility from any banking company or the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under Section 51 of the Banking Regulation Act, 1949, or a corresponding new bank as defined in clause (d) of Section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or in clause (b) of Section (2) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 or from a co-operative bank as defined in clause (b-ii) of Section 2 of the Reserve Bank of India Act, 1934;
  • Any amount received as a loan or financial assistance from Public Financial Institutions notified by the Central Government on this behalf in consultation with the Reserve Bank of India, or any regional financial institutions or Insurance Companies or Scheduled Banks as defined in the Reserve Bank of India Act, 1934;
  • Any amount received against the issue of commercial paper or any other instruments issued by the guidelines or notification issued by the Reserve Bank of India;
  • Any amount received by a company from any other company; (vii) any amount received and held under an offer made by the provisions of the Act towards a subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for.
  • Any amount received from a person who, at the time of the receipt of the amount, was a director of the company. The director from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others;
  • Any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within ten years. If such bonds or debentures are secured by the charge of any assets referred to in Schedule Ill of the Act excluding intangible assets, the amount of such bonds or debentures shall not exceed the market value of such assets as assessed by a registered valuer;
  • Any amount received from an employee not exceeding his annual salary, under a contract of employment with the company like non-interest-bearing security deposit;
  • Any non-interest-bearing amount received or held in trust;
  • Any amount received in the course of or for the business of the company:
    • As an advance for the supply of goods or provision of services provided that such advance is appropriated against the supply of goods or provision of services within a period of three hundred and sixty-five days from acceptance of such advance. In case of any advance which is the subject matter of any legal proceedings before any Court of law, the said time limit of three hundred and sixty-five days shall not apply.

CS Executive Program Company Law Paper

    • As advance, accounted for in any manner whatsoever, received in connection with consideration for an immovable property under an agreement or arrangement, provided that such advance is adjusted against the property, by the terms of agreement or arrangement.
    • As a security deposit for the performance of the contract for the supply of goods or provision of services.
    • As advance received under long-term projects for supply of capital goods except those covered under item (b) above. if the amount received under (a), (b) and (d) above becomes refundable (with or without interest) because the company accepting the money does not have the necessary permission or approval to deal in the goods properties, or services for which the money is taken, the amount received shall be deemed to be a Deposit under these rules.
  • Any amount brought in by the promoters of the company by way of an unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to fulfillment of the following conditions:
    • The loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance; and
    • The loan is provided by the promoters themselves by their relatives or by both and
    • The exemption under this sub-clause shall be available only till the loans of financial institutions or banks are repaid and not thereafter.
  • Any amount accepted by a Nidhi Company by the rules made under Section 406 of the Act.

Cs Company Law Important Questions

Question 3. Comment on the following:

A private company incorporated under the Companies Act, 2013 may issue debentures to any number of persons and can accept deposits from the public.

Answer:

  • According to the definition of a private company under Section 2(68), a private limited company may not make an invitation to the public to subscribe to any securities of the company. However, under Section 42 read with Section 2(68), it may issue such security to any person (number of persons not exceeding 200).
  • In terms of provisions of Section 73(2) read with Exemption Notification dated 5th June 2015, a private company may accept from its members monies not exceeding one hundred percent of the aggregate of the paid-up share capital and free reserves, subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from its members on such terms and conditions, as may be agreed upon between the company and its members, subject to the fulfillment of certain conditions, as provided under the Act. -Space to write important points for revision

Question 4. Comment on the following:

A private limited company can accept deposits from its members under the provisions of the Companies Act, 2013.

Answer:

A private limited company can accept deposits from its members by Section 73 of the Companies Act, 2013 and the rules made thereunder. Moreover, the Government has exempted the private companies vide notification dated 13th June 2017, from applicability of Section 73(1)(a) to (e).

Accordingly, a private company may accept deposits from its members:

  • not exceeding one hundred percent of the aggregate of the paid-up share capital, free reserves, and securities premium account; or
  • is a start-up, for five years from the date of its incorporation; or
  • if it full all of the following conditions, namely:
    • is not an associate or a subsidiary company of any other company;
    • if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice its paid-up share capital or fifty crore rupees, whichever is lower; and
    • such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section:

Provided that the company referred to in clause (A), (B), or (C) shall file the details of monies accepted to the Registrar in such manner as may be specified.

Question 5. Comment on the following:

A public company may issue secured irredeemable debentures.

Answer:

  • A Debenture, in which no time is fixed for the company to pay back the money, is an irredeemable debenture.
  • As per Rule 18(1)(a) Companies (Share Capital and Debentures) Rules, 2014 an issue of secured debenture may be made for a period of redemption not exceeding ten years from the date of issue. In the case of certain companies such redemption period may exceed ten years but not exceed thirty years.
  • After the commencement of the Companies Act, 2013, no company either public or private can issue perpetual or irredeemable debentures.

A private company and a banking company can freely accept deposits.

Answer:

Rule 1(3) of the Companies (Acceptance of Deposits) Rule, 2014 made under Sections 73 and 76 of the Companies Act, 2013 provides that the Companies (Acceptance of Deposits) Rule, 2014 shall apply to a company other than

  • a banking company;
  • a non-banking financial company as defined in the Reserve Bank of India Act, 1934 registered with the Reserve Bank of India;
  • a housing finance company registered with the National Housing Bank established under the National Housing Bank Act, 1987; and
  • a company specified by the Central Government under the proviso to sub-Section (1) of Section 73 of the Act.

Accordingly, the Companies (Acceptance of Deposits) Rules 2014 does not apply to banking companies. Hence, a banking company can freely accept deposits.

A private company is allowed to accept deposits from its members subject to fulfillment of conditions provided under Section 73(2)(a) to (e) of the Companies Act, 2013.

However, the Ministry of Corporate Affairs vide the notification dated 13th June 2017 provides that Section 73(2)(a) to (e) shall not apply to the following classes of private companies.

  • which accepts from its member’s monies not exceeding one hundred percent of the aggregate of the paid-up share capital, free reserves, and securities premium account; or
  • which is a start-up, for five years from the date of its incorporation; or
  • which fulfills all of the following conditions, namely:-
    • which is not an associate or a subsidiary company of any other company;
    • if the borrowings of such a company from banks or financial institutions or anybody corporate is less than twice its paid-up share capital or fifty crore rupees, whichever is lower; and
    • such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section:

The company referred to in clauses (A), (B), or (C) shall file the details of monies accepted to the Registrar in Form DPT-3.

Company Law Cs Executive Study Material

Question 6. Concerning the provisions of the Companies Act, 2013 and the rules framed there under, state the disqualifications for a Debenture Trustee. Explain whether the following persons can be appointed as Debenture Trustees.

  1. A relative of the whole-time director of the company.
  2. A shareholder who has no beneficial interest.

Answer:

Section 71 of the Companies Act 2013, read along with rule 18(2) of the Companies (Share Capital and Debentures) Rules, 2014 provides that a person shall not be appointed as a debenture trustee if he

  • beneficially holds shares in the company;
  • is a promoter, director, or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary, or associated company;
  • is beneficially entitled to money which is to be paid by the company otherwise than as remuneration payable to the debenture trustee;
  • is indebted to the company, or its subsidiary its holding or associated company, or a subsidiary of such holding company;
  • has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;
  • has any pecuniary relationship with the company amounting to two percent or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or the current financial year;
  • is relative to any promoter or any person who is employed by the company as a director or key managerial personnel.

Accordingly, the explanations to the questions would be as under:

  • A relative of the whole-time director of the company (KMP) cannot be appointed as a debenture trustee.
  • A shareholder who has no beneficial interest can be appointed as a debenture trustee.

Question 7. What are the disqualifications for debenture trustees?

Answer:

Rule 18 of the Companies (Share Capital & Debentures) Rules, 2014, provides that the disqualifications for debenture trustees are as under:

  • Beneficially holds shares in the company;
  • Is a promoter, director or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary, or associate company;
  • Is beneficially entitled to money which is to be paid by the company otherwise than as remuneration payable to the debenture trustee;
  • Is indebted to the company, or its subsidiary its holding or associate company, or a subsidiary of such holding company;
  • Has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;
  • Has any pecuniary relationship with the company amounting to 2% or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or the current financial year;
  • Is relative of any promoter or any person who is in the employment by the company, as a director, or as a key managerial personnel. Space to write important points for revision-

Question 8. Comment on the following:

A private limited company incorporated under the Companies Act, 2013, may issue debentures to any number of persons and can accept deposits from the public.

Answer:

Definition of Private Company and Securities:

A private company has been defined under Section 2(68) of the Companies Act, 2013, as a private limited company that is prohibited from making an invitation to the public to subscribe to any securities of the company.

‘Securities’ has been defined under Section 2(81) of the Companies Act, 2013 to mean the securities as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956. As per Section 2(h) of the Securities Contracts (Regulation) Act, 1956, “Securities” include debentures, debenture stock, or other marketable securities of a like nature.

However, under Section 42 of the Companies Act, 2013, a Private Company may issue such securities on a private placement basis only to a selected group of persons who have been identified by the Board of Directors, and whose number shall not exceed 200 (two hundred) in the aggregate in a financial year excluding the qualified institutional buyers (IB) and employees of the company being offered securities under a scheme of employees stock options subject to prescribed conditions.

Further, as per Sections 73 and 76 of the Companies Act, 2013, only the. following may invite, accept, or renew public deposits from the public:

  • a banking company
  • non-banking financial company (NBFC) as defined in the Reserve Bank of India Act, 1934
  • to such other company as the Central Government may, after consultation with the Reserve Bank of India (RBI), specify on this behalf,
  • Public company (Eligible Company) having a Net worth not less than * 100 Crores or a Turnover not less than 500 Crores and which has obtained the prior consent of the company in a general meeting using a resolution and also filed the said resolution with the Registrar of Companies (ROC) before making any invitation to the Public for acceptance of deposits.

So, a Private Company cannot accept deposits from the public. -Space to write important points for revision

Debt Capital Practical Questions

Question 1. Ajay Ltd. borrowed 100 crore from Prem, without the authority conferred on it by the articles of association. Later, the money borrowed by Ajay Ltd. was used by its Board of directors to pay off lawful debts of the company. In this scenario, Prem, the lender seeks your advice for the recovery of his money. Advise him.

Answer:

Company Law Debt Capital Ultra vires borrowing

Cs Executive Company Law Chapter Wise Notes

Question 2. The balance sheet of Duck Ltd. shows a paid-up capital of 5 crore and free reserves of 2 crore. Due to the heavy financial requirements of the company, it plans to apply for a loan of 8 crore with XYZ Bank Ltd. Advise the company on the formalities required to be fulfilled. Also advise on the alternative course of action, if any.

Answer:

Company Law Debt Capital Borrowing power of the company

Question 3. Sun-beam Ltd. failed to pay interest on repayment of deposits. One depositor approached the consumer forum with the request to issue an order against the company for payment of interest on deposits. The company contended that the consumer forum was not a proper authority to issue such directions. Advise the company suitably.

Answer:

Company Law Debt Capital Analysis of given problem

Question 4. Prism Ltd. has accepted 10 lakh as an advance towards the supply of goods to certain parties. As per the agreement, the company will supply the goods after two years from the date of deposit. Later on, internal auditors qualified their report on the ground that the company had violated the provisions of the Companies Act, 2013.

Directors explained that this is required to complete the order. Examining the relevant provisions of the Companies Act, 2013 state whether the explanation given by the directors is justified.

Answer:

Company Law Debt Capital Section 2(31)

Question 5. The Board of Directors of Green Field Ltd. decides to accept deposits from the public at a compound interest rate of 12% per annum. Examining the provisions of the Companies Act, 2013, advise whether the Board can go ahead with its proposal.

Answer:

Company Law Debt Capital Section 73(2)

Cs Executive Company Law Previous Year Questions

Question 6. Suresh, a member of Ruchi Ltd., wants to inspect the register of deposits maintained by the company as required under the provisions of the Companies Act, 2013. The company refused to provide the register for inspection without assigning any reason. Referring to the provisions of the Act, examine the validity of the company’s refusal. What shall be your answer if the same Register is demanded by the statutory auditors of the company for inspection and audit?

Answer:

Company Law Debt Capital Rule 14 of Companies

Question 7. A company has taken a term loan from a financial institution and is regularly paying the loan installments and interest. The financial institution proposes to convert 20% of the loan into equity shares of the company as per the terms of the agreement. Advise the company, whether the financial institution can enforce such a convertibility clause. Also, examine the validity of such a clause.

Answer:

Section 62(3) states the provisions of Section 62 shall not apply to the increase of the subscribed capital of the company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the companies to convert such debentures/loan into the shares in the company. Further, the terms of the issue of such debentures or loans containing such an option should have been approved before the issue of such debentures or raising of loans by a special resolution passed by the company in the General Meeting.

Thus, in the given case, if the raising of a loan is already approved by the shareholders by special resolution, then the financial institution can enforce the convertibility.

Question 8. KAJ Ltd., a company incorporated under the Companies Act, 2013 wants to go for the issue of secured debentures. Referring to relevant provisions and Rules, state the conditions to be satisfied before the company goes for such issue of debentures. Will your answer be different in case such an issue of debentures is by a Government company where the Central Government has given a guarantee?

Answer:

Section 71(2) states that no company shall issue any debentures carrying any voting rights. Secured Debentures to comply with terms and conditions prescribed Section 71(3) states that Secured Debentures may be issued by a company subject to such terms and conditions as may be prescribed. Rule 18(1) of Companies (Share Capital and Debentures) Rules, 2014, prescribes the following conditions;

The company shall not issue secured debentures, unless it complies with the following conditions, namely:

  • An issue of secured debentures may be made, provided the date of its redemption shall not exceed ten years from the date of issue. A company engaged in the setting up of infrastructure projects may issue secured debentures for a period exceeding ten years but not exceeding thirty years;
  • such an issue of debentures shall be secured by the creation of a charge, on the properties or assets of the company, having a value that is sufficient for the due repayment of the amount of debentures and interest thereon;
  • the company shall appoint a debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and not later than sixty days after the allotment of the debentures, execute a debenture trust deed to protect the interest of the debenture holders; and
  • the security for the debentures by way of a charge or mortgage shall be treated in favor of the debenture trustee on-
    • any specific movable property of the company (not being like the pledge); or
    • any specific immovable property wherever situated, or any interest therein.

In the case of a non-banking financial company, the charge or mortgage may be created on any movable property. Further in case of any issue of debentures by a Government company that is fully secured by the guarantee given by the Central Government or one or more State Governments or by both, there is no requirement for the creation of a charge under this sub-rule.

In case of any loan taken by a subsidiary company from any bank or financial institution, the charge or mortgage may also be created on the properties or assets of the holding company.

Cs Executive Company Law Notes

Question 9. Fun and Frolic Ltd. has received 5 lakh from its Promoters as unsecured Joan in pursuance of the stipulation of credit facilities from the Bank. Can the company accept the unsecured loan? What would be your answer if the company has repaid in full its amount of credit facilities and after such repayment, the company continues this unsecured loan? Referring to the provisions of the Companies Act, 2013 advise the company.

Answer:

According to Rule 2 of the Companies (Acceptance of Deposit) Rules, 2014 any amount brought in by the promoters of the company by way of an unsecured loan in pursuance of the stipulation of any lending financial institution or a bank, shall not be treated as deposit, subject to fulfillment of the following conditions, namely:

  • the loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance;
  • the loan is provided by the promoters themselves by their relatives or by both; and
  • the exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid and not thereafter;

Accordingly, in the case of Fun and Frolic Ltd., 5 Lakhs may be accepted from the Promoters, as the same is in pursuance of the stipulation of credit from the bank. Once the credit facilities are paid in entirety and the company continues to retain the unsecured loan, it shall be treated as a deposit under the Companies Act, 2013.

Question 10. IOL, a manufacturing company, issued partly convertible debentures with 36 crores a few years back. The convertible option is only for 50% of the issue and debentures are redeemable in the current financial year. What is the quantum of Debenture Redemption Reserve (DDR) required to be created by the company now and how much should be deposited or invested by the company? 

Answer:

  • Section 71(4) of the Companies Act, 2013, read with Rule 18(7) of the Companies (Share Capital & Debentures) Rules, 2014 provides for the creation of a Debenture Redemption Reserve (DRR) out of the profits of the company available for payment of dividend. The amount credited to such account shall not be utilized by the company except for the redemption of debentures.
  • The provisions for the creation of DRR for manufacturing companies are 25% of the value of outstanding debentures issued through the public issue as per present SEBI (Issue and Listing of Debt Securities) Regulations, 2008, and also 25% DRR is required in the case of privately placed debentures by listed companies. For unlisted companies issuing debentures on a private placement basis, the DRR will be 25% of the value of outstanding debentures.
  • Every company required to create a Debenture Redemption Reserve shall on or before the 30th day of April in each year, be required to invest or deposit a sum that shall not be less than 15% of the amount of debentures maturing during the current financial year ending 31st March of next year.
  • In case of partly convertible debentures, a Debenture Redemption Reserve shall be created in respect of non- convertible portion of the debenture issue by this rule.
  • Since, only 50% of the debentures are convertible, for the non-convertible part the DRR is required to be created. Thus, only 3 crores worth of debentures DRR is required. Hence, 25% of 3 crores is 75 lakhs to be created as DRR and 45 Lakhs (15%) deposited in the invested bank account or securities, etc. during the current financial year.

Question 11. Arup entered into a transaction with Brilliant Merchandise Ltd. for a contract worth 51 lakh. The Articles of Association of the company stipulate that a contract above 25 lakh should be approved by a meeting of the Board of Directors.

Anjaan, Deputy General Manager (Commercial) produces a forged document which shows a resolution approving the contract having been passed in a Board Meeting. Later, the forgery is discovered. Arup pleads that his contract with the company is protected by the Doctrine of Indoor Management. Will Arup succeed?

Answer:

The doctrine of Constructive Notice protects a company from outsiders. The doctrine provides that an outsider must read the Memorandum and Articles of the Company and satisfy himself that the contract he is seeking to enter into with the company is within its powers.

As far as internal procedures are concerned, an outsider is entitled to presume that everything has been done according to the procedures laid down and there is no irregularity. An outsider cannot find out what is going on inside the doors as the doors of management are closed. This is called the doctrine of Indoor Management [also known as the rule in Royal British Bank v. Turquand (1856) CI & B 327].

However, in certain exceptional situations, the doctrine of indoor management is not applicable and one of them is when a person relies on a forged document. Nothing can validate forgery. A company cannot be held liable for forgery committed by its officers. This has been established in the case Ruben v. Great Fingall Consolidated case [1906] 1 AC 439.

In the above case, Arup has relied on a forged document. Therefore he will not be protected and he will not succeed in his pleading.

Question 12. The following information as per the latest balance sheet figures as of 31 March 2019 is made available to you:

Company Law Debt Capital Paid-up

The company has not accepted any deposits as of now. The Board of Directors wants to know what is the maximum amount it can accept by way of deposits from (1) members and (2) the public. Advise them.

Answer:

As per Rule 3(4) of the Companies (Acceptance of Deposits) Rules, 2014, no eligible company can accept or renew-

  • any deposit from its members, if the amount of such deposit together with the number of deposits outstanding as on the date of acceptance or renewal of such deposits from members exceeds 10% of the aggregate of the paid-up share capital, free reserves, and securities premium account of the company.
  • any other deposit, if the amount of such deposit together with the amount of such other deposits, other than the deposit referred to in clause (a), outstanding on the date of acceptance or renewal exceeds 25% of the aggregate of the paid-up share capital, free reserves and securities premium account of the company.

In the above case, as the net worth of the company exceeds 100 crore, the company is assumed to be an eligible company. Further, the aggregate of the paid-up share capital, free reserves, and securities premium account is 220 crores and the company has not accepted any deposits as of now. Accordingly, from the members, the eligible company can accept upto 10% of 220 crores i.e. 22 crores. From the public, it can accept upto 25% of 220 crores i.e. 55 crores.

Cs Executive Company Law Chapter 4 Summary

Question 13. ABC Products Ltd. has taken a term loan of * 5 crores from the bank and has given the properties situated in the Maldives as prime security of the loan. Can the company give the properties situated outside India for security of loan? Referring to the provisions of the Companies Act, 2013, discuss.

Answer:

The Companies Act, 2013 does not limit a company to give any property situated in India or outside India. An inference can be drawn from Section 77(1) of the Companies Act, 2013, which permits the registration of charges created on a property situated in or outside India.

Section 77(1) of the Companies Act, 2013, provides that it shall be the duty of every company creating a charge within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India, to register the particulars of the charge signed by the company and the charge-holder together with the instruments, if any, creating/modifying such charge in Form CHG-1/CHG-9, as the case may be, and is required to be filed with the Registrar of Companies (ROC) within 30 days of the date of creation or modification of charge along with the specified fees.

Hence, ABC Products Ltd. can give the properties situated in the Maldives for the security of a term loan.

Debt Capital Short Notes

Question 1. Write a short note on the following:

  1. Ultra virus borrowing
  2. Intra virus borrowing
  3. Debenture stock

Answer:

  • Where a company borrows without the authority conferred on it by the articles or beyond the amount set out in the Articles, it is an ultra vires borrowing. Any act which is ultra vires the company is void. In such a case the contract is void and the lender cannot sue the company for the return of the loan. The securities given for such ultra-vires borrowing are also void and inoperative.
  • Ultra vires borrowings cannot even be ratified by a resolution passed by the company in a general meeting. However, equity assists the lender where the common law fails to do so. If the lender has parted with his money to the company under an ultra vires borrowing, and is, therefore, unable to sue for its return or enforce any security granted to him, he nevertheless has, in equity, the following remedies:
    • Injunction and Recovery: Under the equitable doctrine of restitution he can obtain an injunction provided he can trace and identify the money lent, and any property which the company has bought with it. Even if the monies advanced by the lender cannot be traced, the lender can claim repayment if it can be proved that the company has benefited thereby.
    • Subrogation: Where the money of an ultra vires borrowing has been used to pay off lawful debts of the company, he would be subrogated to the position of the creditor paid off and to that extent would have the right to recover his loan from the company. Subrogation is allowed for the simple reason that when a lawful debt has been paid off with an ultra vires loan, the total indebtedness of the company remains the same. By subrogating the ultra vires lender, the Court can protect him from loss, while the debt burden of the company is in no way increased.
    • Suit against Directors: In the case of ultra vires borrowing, the lender may be able to sue the directors for breach of warranty of authority, especially if the directors deliberately misrepresented their authority.
  • A distinction should always be made between a company’s borrowing powers and the authority of the directors to borrow. Where the directors borrowed money beyond their authority and the borrowing is not ultra vires the company, such borrowing is called Intra vires borrowing but outside the Scope of Agents’ Authority.
  • The company will be liable to such borrowing if the borrowing is within the directors’ ostensible authority and the lender acted in good faith or if the transaction was ratified by the company.
  • Where the borrowing is intra vires the company but outside the authority of the directors e.g. where the articles provide that the directors shall have the power only up to 100 lacs and prior approval of the shareholders would be required to borrow beyond 100 lacs; any borrowing beyond 100 lacs without shareholders approval i.e. intra vires borrowing by the company but outside the authority of directors can be ratified by the company and become binding on the company.
  • The company would be liable, particularly if the money has been used for the benefit of the company.
  • Here the legal position is quite clear. The company has the power or capacity to borrow, but the authority of the directors is restricted either by the articles of the company or by the statute, and they have exceeded it.
  • A company, instead of issuing debentures, each in respect of a separate and distinct debt, may raise one aggregate loan fund or composite stock known as ‘debenture stock’.
  • Accordingly, a debenture stock is a borrowed capital consolidated into one mass for the sake of convenience.
  • Instead of each lender having a separate bond or mortgage, he has a certificate entitling him to a certain sum being a portion of one large loan.
  • It is generally secured by a trust deed. As in the case of shares, a person may subscribe for, or transfer any amount even a fraction amount.
  • Debenture stock is the indebtedness itself, and the debenture stock certificate furnishes evidence of the title or interest of the holder in the indebtedness.
  • A debenture is a document that furnishes evidence of the debt. Debenture stock must be fully paid, while debenture may or may not be fully paid.

Cs Company Law Important Questions

Debt Capital Descriptive Questions

Question 2. Is it compulsory to maintain a Debenture Redemption Reserve Account? If yes, how?

Answer:

Section 71(4) read Rule 18(7) of aforesaid rules provides that when debentures are issued by a company, the company shall create a debenture redemption reserve account (DRR) out of the profits of the company available for payment of dividends. The amount credited to such account shall not be utilized by the company except for the redemption of debentures.

Quantum of Debenture Redemption Reserve

DRR is not required to be created for the convertible part of partly convertible debentures. The provisions for creation of DRR for various classes of companies are as follows:

Company Law Debt Capital Class of Company

Every company required to create DRR is required to invest or deposit at least 15% of the debentures maturing during the current financial year ending 31st March of next year.

The company may choose any of the below-given methods:

  • in deposits with any scheduled bank, free from any charge or lien;
  • in unencumbered securities of the Central Government or of any State Government;
  • in unencumbered securities mentioned in sub-clauses (a) to (d) and (ee) of Section 20 of the Indian Trusts Act, 1882;
  • in unencumbered bonds issued by any other company which is notified under sub-clause (f) of Section 20 of the Indian Trusts Act, 1882;
  • the amount invested or deposited as above shall not be used for any purpose other than for redemption of debentures maturing during the year referred above: The amount remaining invested or deposited, as the case may be, shall not at any time fall below fifteen percent of the amount of the debentures maturing during the year ending on the 31s day of March of that year;

Question 3. What are the duties of debenture trustees?

Answer:

It shall be the duty of every debenture trustee to

  • satisfy himself that the letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed;
  • satisfy himself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders;
  • call for periodical status or performance reports from the company;
  • communicate promptly to the debenture holders defaults, if any, about payment of interest or redemption of debentures and action taken by the trustee therefor;
  • appoint a nominee director on the Board of the company in the event of-
    • two consecutive defaults in payment of interest to the debenture holders; or
    • default in the creation of security for debentures; or
    • default in the redemption of debentures.
  • ensure that the company does not commit any breach of the terms of issue of debentures or covenants of the trust deed and take such reasonable steps as may be necessary to remedy any such breach;
  • inform the debenture holders immediately of any breach of the terms of the issue of debentures or covenants of the trust deed;
  • ensure the implementation of the conditions regarding the creation of security for the debentures, if any, and debenture redemption reserve;
  • ensure that the assets of the company issuing debentures and of the guarantors, if any, are sufficient to discharge the interest and principal amount at all times and that such assets are free from any other encumbrances except those which are specifically agreed to by the debenture holders;
  • do such acts as are necessary in the event the security becomes enforceable;
  • call for reports on the utilization of funds raised by the issue of debentures;
  • take steps to convene a meeting of the holders of debentures as and when such meeting is required to be held;
  • ensure that the debentures have been converted or redeemed by the terms of the issue of debentures; -Space to write important points for revision

Company Law Cs Executive Study Material

Question 4. What is the procedure for accepting deposits from numbers?

Answer:

The procedure to accept deposits from members can be summarized as under:-

  • The companies intending to invite deposits from its members shall convene a Board meeting to consider and Approve the business to propose and accept deposits from members and decide the day, date, time, and place of the general meeting.
  • Issue notice of general meeting to the members of the company.
  • Hold the general meeting and pass a resolution for acceptance of deposits.
  • Comply with the Rules prescribed in consultation with RBI and terms and conditions mutually agreed by the company and deposit holders either for acceptance or for repayment of deposits.
  • Issue circular to the members of the company including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors, and the amount due towards depositors in respect of any previous deposits and such other particulars as may be prescribed. These details indicate the soundness of the company or a warning about the risks involved. The circular shall be published at least once in the English language in a leading English newspaper and vernacular language in a vernacular newspaper having wide circulation in the State in which the registered office of the company is situated.
  • File the copy of the aforesaid circular in Form DPT-1 along with such statement with the Registrar within thirty days before the date of issue of circular.
  • In case, a company does not secure the deposits or secures such deposits partially, then, the deposits shall be termed “unsecured deposits” and shall be so quoted in every circular, form, advertisement, or any document related to invitation or acceptance of deposits.
  • A company inviting secured deposits shall provide for security by way of a charge on its assets for the due repayment of the amount of deposit and interest thereon. The company shall submit Form CHG-1 with the Registrar for assets other than intangible assets. Secured deposits including interest thereon can in no case exceed the market value of the charged assets assessed by the registered valuer.
  • After the expiry of 30 days of filing Form DPT-1, the circular in Form DPT-1 along with the application form is sent to all members by registered post with acknowledgement due/speed post/electronic mail.
  • Collect duly signed application forms along with money from the members.
  • Issue receipts of deposits within 21 days of the receipts of money/realization of cheque.
  • Maintain a register of deposits at its registered office which shall contain the details as prescribed under Rule 14 Companies (Acceptance of Deposits) Rules, 2014 from the date of such acceptance.
  • Pay interest as per the rate proposed on agreed terms.
  • Deposit such sum which shall not be less than twenty percent of the amount of its deposits maturing during the financial year and the financial year following and keep it in a separate bank account called a deposit repayment reserve account.
  • Certification that the Company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits and where a default had occurred, the company made good the default and a period of five years had elapsed since the date of making good the default
  • Submit the return of deposits in Form DPT-3 on or before 30th June each year for information as of 31st March of the respective year.

Allotment Of Shares – Under Companies Act, 2013

Share Capital, Issue And Allotment Of Securities

Share capital in Companies Act, 2013

Share capital of a company can be classified as:

  • nominal, authorized or registered capital;
  • issued and subscribed capital;
  • called up and uncalled capital.

Nominal, Authorised or Registered Capital in Companies Act, 2013

Such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company.

Issued Capital in Companies Act, 2013

Such capital as the company issues from time to time for subscription. It is that part of the authorised or nominal capital which the company issues for the time being for public subscription and allotment. This is computed at the face or nominal value.

Subscribed Capital in Companies Act, 2013

Allotment Of Shares – Under Companies Act, 2013

Such part of the capital which is for the time being subscribed by the members of a company. It is that portion of the issued capital at face value which has been subscribed for or taken up by the subscribers of shares in the company. It is clear that the entire issued capital may or may not be subscribed.

Allotment Of Shares Under Companies Act 2013

Called-up Capital in Companies Act, 2013

Such part of the capital, which has been called for payment. It is that portion of the subscribed capital which has been called up or demanded on the shares by the company.

Paid-up Share Capital in Companies Act, 2013

Such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called.

Equity and Preference Share Capital (Discussed later) in Companies Act, 2013

“Equity Share Capital”, with reference to any company limited by shares, means all share capital which is not preference share capital; “preference share capital”, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to-

  • payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and
  • repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company;

Share in Companies Act, 2013

A share is defined as a share in the share capital of a company, including stock except where a distinction between stock and shares is expressed or implied.

Two classes of shares in Companies Act, 2013

The Companies Act, 2013 permits a company limited by shares to issue two classes of shares, namely equity share capital and preference share capital.

Preference share in Companies Act, 2013

A preference share or preference share capital is that part of share capital which carries a preferential right with respect to both dividend and capital.

Types of preference shares in Companies Act, 2013

Preference shares may be of various types, namely participating and non-participating, cumulative and non-cumulative shares, redeemable and irredeemable preference shares.

Equity share capital in Companies Act, 2013

Equity share capital means all share capital which is not preference share capital.

Prospectus in Companies Act, 2013

Prospectus has been defined as any document described or issued as a prospectus and includes a red-herring prospectus referred to in Section 32 or shelf prospectus referred to in Section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.

Shelf prospectus in Companies Act, 2013

Shelf prospectus means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus (Section 31).

Red-herring prospectus in Companies Act, 2013

What is Red Herrring Prospectus of Company ?

The expression ‘red herring prospectus’ means a prospectus which does not include complete particulars of the quantum or price of the securities included therein.

  • A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus.
  • A company proposing to issue a red herring prospectus shall file it with the Registrar at least 3 days prior to the opening of the subscription list and the offer.
  • Upon the closing of the offer of securities, the prospectus shall be filed with the Registrar and SEBI.
  • Any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.
  • The prospectus shall state-
    • the total capital raised, whether by way of debt or share capital;
    • the closing price of the securities; and
    • any other details as were not included in the red herring prospectus.

A red herring prospectus shall carry the same obligations as are applicable to a prospectus.

Procedure For Allotment Of Shares

What is Abridged prospectus in Companies Act, 2013?

  • ‘Abridged prospectus’ means a memorandum containing such salient features of a prospectus as may be specified by SEBI by making regulations in this behalf [Section 2(1)].
  • No form of application for the purchase of any of the securities of a company shall be issued unless such form is accompanied by an abridged prospectus.
  • A copy of the prospectus shall, on a request being made by any person before the closing of the subscription list and the offer, be furnished to him.
    • Where an application form is issued in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to such securities.
    • Where an application form is issued in relation to securities which are not offered to the public.

The company shall be liable to a penalty of 50,00,000 for each default.

Offer for Sale in Companies Act, 2013

Public Offer includes or an offer for sale (OFS) of securities to the public by an existing shareholder, through issue of a prospectus.

  • Under Section 25 of the Act where a company allots or agrees to allot any securities of the company with a view to all or any of those securities being offered for sale to the public, any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company. In simple terms any document by which the offer or sale of shares or debentures to public is made shall for all purposes be treated as prospectus.
  • The document “Offer for sale” is an invitation to the general public to purchase the shares of a company through an intermediary, such as an issuing house or a merchant bank.
  • A company may allot or agree to allot any shares or debentures to an “Issue house” without there being any intention on the part of the company to make shares or debentures available directly to the public through issue of prospectus.
  • The issue house in turn makes an “Offer for sale” to the public.

Private placement in Companies Act, 2013

“Private placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in Section 42.

  • Offer Letter to be in Form No. PAS-4.
  • The offer shall not be made to more than 200 persons excluding QIBS and the employees of the company in a financial year under the scheme of ESOS only the person addressed in the application can apply.
  • All monies payable on subscription shall not be paid by cash, but by DD or Cheque.
  • If unable to allot within 60 days then repay the money in 15 days from the end of those 60 days and money shall be refunded with interest @12%p.a.
  • Offer only to be made to those whose names are recorded by the company.
  • The record shall be kept in Form No. PAS-5.
  • A copy of record to be filed with registrar along with PAS-4 and with SEBI and the stock exchange within 30 days.

Amendment made by Companies (Amendment) Act, 2017

The Private Placement process is simplified by doing away with separate offer letter details to be kept by company and reducing number of filings to Registrar. In order to ensure that investor gets adequate information about the company which is making private placement, the disclosures made under Explanatory Statement referred to in Rule 13(2)(d) of Companies (Share Capital and Debenture) Rules, 2014, embodied in the Private Placement Application Form.

There would be ease in the private placement offer related documentation to enable quick access to funds.

Change in definition of private placement is proposed to cover all securities offer and invitations other than right.

There is condensed format of private placement offer letter and application form likely to be introduced

The Companies would be allowed to make offer of multiple security instruments simultaneously.

Restriction on utilization of subscription money before making actual allotment and additionally before filing the allotment return to the registrar. Since contract is concluding on allotment and return filing is just a post conclusion compliance, there may be difficulty in compliance.

The penalty provisions for raising of capital are pro-posed to be rationalized by linking it to the amount involved in the issue (twice the amount involved or 2 crores whichever is lower).

Period for filing return of return of allotment is pro-posed to be reduced to 15 days.

Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018

  • For the purposes of sub-section (2) and sub-section (3) of Section 42, a company shall not make an offer or invitation to subscribe to securities through private placement unless the proposal has been previously approved by the shareholders of the company, by a special resolution for each of the offers or invitations: Provided that in the explanatory statement annexed to the notice for shareholders’ approval, the following disclosure shall be made:-
    • particulars of the offer including date of passing of Board resolution;
    • kinds of securities offered and the price at which security is being offered;
    • basis or justification for the price (including premium, if any) at which the offer or invitation is being made;
    • name and address of valuer who performed valuation;
    • amount which the company intends to raise by way of such securities;
    • material terms of raising such securities, proposed time schedule, purposes or objects of offer, contribution being made by the promoters or directors either as part of the offer or separately in furtherance of objects; principle terms of assets charged as securities:
  • Provided further that this sub-rule shall not apply in case of offer or invitation for non-convertible debentures, where the proposed amount to be raised through such offer or invitation does not exceed the limit as specified in clause (c) of sub-section (1) of Section 180 and in such cases relevant Board resolution under clause (c) of sub-section (3) of Section 179 would be adequate:
  • Provided also that in case of offer or invitation for non-convertible debentures, where the proposed amount to be raised through such offer or invitation exceeds the limit as specified in clause (c) of sub-section (1) of Section 180, it shall be sufficient if the company passes a previous special resolution only once in a year for all the offers or invitations for such debentures during the year.
  • For the purpose of sub-section (2) of Section 42, an offer or invitation to subscribe securities under private placement shall not be made to persons more than two hundred in the aggregate in a financial year: Provided that any offer or invitation made to qualified institutional buyers, or to employees of the company under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of Section 62 shall not be considered while calculating the limit of two hundred persons. Explanation.- For the purposes of this sub-rule, it is hereby clarified that the restrictions aforesaid would be reckoned individually for each kind of security that is equity share, preference share or debenture.
  • A private placement offer cum application letter shall be in the form of an application in Form PAS-4 serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the name of such person pursuant to sub-section (3) of Section 42: Provided that no person other than the person so addressed in the private placement offer.cum application letter shall be allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid.
  • The company shall maintain a complete record of private placement offers in Form PAS-5.

Types Of Share Allotment

  • The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the bank account from where such payment for subscription has been received: Provided that monies payable on subscription to securities to be hold by joint holders shall be paid from the bank account of the person whose name appears first in the application: Provided further that the provisions of this sub-rule shall not apply in case of issue of shares for consideration other than cash.
  • A return of allotment of securities under section 42 shall be filed with the Registrar within fifteen days of allotment in Form PAS-3 and with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 along with a complete list of all the allottees containing- (i) the full name, address, Permanent Account Number and E-mail ID of such security holder; (ii) the class of security held; (iii) the date of allotment of security; (iv) the number of securities held, nominal value and amount paid on such securities; and particulars of consideration received if the securities were issued for consideration other than cash.
  • The provisions of sub-rule (2) shall not be applicable to (a) non-banking financial companies which are registered with the Reserve Bank of India under the Reserve Bank of India Act, 1934 (2 of 1934); and (b) housing finance companies which are registered with the National Housing Bank under the National Housing Bank Act, 1987 (53 of 1987), if they are complying with regulations made by the Reserve Bank of India or the National Housing Bank in respect of offer or invitation to be issued on private placement basis: Provided that such companies shall comply with sub-rule (2) in case the Reserve Bank of India or the National Housing Bank have not specified similar regulations.
  • A company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in the Registry: Provided that private companies shall file with the Registry copy of the Board resolution or special resolution with respect to approval under clause (c) of sub-section (3) of Section 179.

Issue of shares at premium [Section 52]

  • Share premium to be transferred to share premium account.
  • Utilisation of share premium account should be as prescribed in Section 52.

Issue of shares at discount [Section 53]

  • Issue of shares at discount is prohibited except by issue of sweat equity shares.
    Any share issued by the company at a discount shall be void.

Amendment made by Companies (Amendment) Act, 2017 in sub-section (2), for the words “discounted price”, the word “discount” shall be substituted;

“Allotment” of securities in Companies Act, 2013

“Allotment” of securities means the act of appropriation by the Board of Directors of the company out of the previously un-appropriated capital of a company of a certain number of securities to persons who have made applications for securities.

Share certificate in Companies Act, 2013

A share certificate is a certificate issued to the members by the company under its common seal specifying the number of shares held by him and the amount paid on each share.

  • Pass board resolution.
  • Certificate shall be issued in Form No. SH-1 and shall specify the name of person in whose favour the certificate is issued.
  • Common Seal (if any).
  • A certificate issued by the company is prima facie evidence of the title of the member to the shares specified therein.
  • Every share certificate shall be issued under the common seal, (if any) of the company or in case company does not have a common seal, certificate be duly issued under signature of two directors or one director and a company secretary if company has appointed a company secretary.

Return of allotment in Companies Act, 2013

After allotment of securities, a return of allotment in the Form PAS-3 is required to be filed with Registrar of Companies within 30 days of allotment of securities.

Call

A call is a demand by the company upon its shareholders to pay the whole or part of the balance still due on each class of shares allotted, made at any time during the life of the company.

  • Board of Directors to make call(s) on shares.
  • Call(s) to be made bonafide in the interest of the company.
  • Call(s) must be made on uniform basis.
  • Notice of call(s).
  • Time limitations for receiving the call money.

Split certificate

A split certificate means a separate certificate claimed by a shareholder for a portion of his holding.

List Of Important Forms

Company Law Share Capital Issue And Allotment Of Securities List Of Important Forms

Share Allotment Process In India

Allotment Of Shares Short Notes

Question 1. Write a note on the following:

Red-herring prospectus.

Answer:

Company Law Share Capital Issue And Allotment Of Securities Red-herring prospectus

Allotment Of Shares Under Companies Act, 2013 Distinguish Between

Question 1. Distinguish between the following:

‘Capital reserve’ and ‘reserve capital’.

Answer:

Company Law Share Capital Issue And Allotment Of Securities Capital Reserve and reserve capital

Question 2. Distinguish between the following:

‘Letter of allotment’ and ‘letter of renunciation’.

 ‘Brokerage’ and ‘underwriting commission’.

‘Reserve capital’ and ‘capital reserve’.

Answer:

Letter Of Allotment

Company Law Share Capital Issue And Allotment Of Securities Letter of Allotment

Letter of Reunciation

Company Law Share Capital Issue And Allotment Of Securities Letter of Renunciation

Brokage and underwriting commission:

Company Law Share Capital Issue And Allotment Of Securities Brokage and underwriting commission

Question 3. Distinguish between the following:

‘Preference shares’ and ‘equity shares’.

‘Red-herring prospectus’ and ‘abridged prospectus’.

Answer:

Company Law Share Capital Issue And Allotment Of Securities Preference shares

Following are the main points of distinction between Red-herring Prospectus & Abridged Prospectus:

Company Law Share Capital Issue And Allotment Of Securities Red herring Prospectus and Abridged Prospectus

Companies Act 2013 Share Allotment Rules

Allotment Of Shares Descriptive Questions

Question 1. Explain the manner in which calls on shares should be made by a company.

Answer:

Company Law Share Capital Issue And Allotment Of Securities Shares should be made by a company

Question 2. Explain the following:

Securities premium shall be utilised for certain specific purposes only.

Answer:

Company Law Share Capital Issue And Allotment Of Securities Securities Premium

Question 3. Comment on the following:

Public companies can issue ‘shelf prospectus’.

Answer.

Company Law Share Capital Issue And Allotment Of Securities Provisions of Sec. 31 of Companies Act

Question 4. Answer the following citing the relevant provisions of law/case law, if any:

A company has issued a prospectus to the public stating that the company has paid dividend regularly and the prospectus is silent relating to the sources of profits, i.e., whether trading profits or capital profits. The fact is that the company has incurred losses for all the last 5 years, but the dividend is paid out of realised capital profits (i.e., secret reserves). Y, a shareholder, claimed that the prospectus is false. Whether Y’s contention is correct? Discuss.

Answer:

Company Law Share Capital Issue And Allotment Of Securities Validity of Y's Contention

Allotment Of Shares Under Companies Act 2013

Question 5. Shortcut Ltd. has allotted shares to investors of the company without filing prospectus with the Registrar of Companies, Mumbai. Explain the remedies available to the investors in this regard.

Answer:

Company Law Share Capital Issue And Allotment Of Securities Reseve Capital

Question 6. Comment on the following:

A public limited company incorporated under the Companies Act, 2013 may amend its articles of association so as to confer upon it power to forfeit the shares of those members who have defaulted in the payment of calls made by the company.

Answer:

Company Law Share Capital Issue And Allotment Of Securities Table F of Model Articles of Association

Question 7. “If a company does not receive minimum subscription, it should refund money received from applicants within such time as may be prescribed”. Explain the above statement with suitable comments.

Answer:

According to Section 39 of the Companies Act, 2013 allotment of any securities of a company offered to the public for subscription shall be made only when the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application for the amount so stated have been paid to and received by the company by cheque or other

The amount payable on application on every security shall not be less than five per cent of the nominal amount of the security or such other percentage or amount, as may be specified by the Securities and Exchange Board of India (SEBI) by making regulations in this behalf.

Refund of money:

In cases where the stated minimum amount has not been subscribed and the sum payable on application is not received within a period of thirty days from the date of issue of the prospectus, or such other period as may be specified by SEBI, the amount received as above shall be returned.

The application money shall be repaid within a period of fifteen days from the closure of the issue and if any such money is not so repaid within such period, the directors of the company who are officers in default shall jointly and severally be liable to repay that money with interest at the rate of fifteen percent per annum. The application money to be refunded shall be credited only to the bank account from which the subscription was remitted.

Question 8. State the time limit within which certificate of securities as provided in Companies Act, 2013 to be issued in case of :

Any allotment of shares.

Any allotment of debentures.

What is the punishment in case of default committed in the above cases?

Answer:

Under Section 56(4) of the Companies Act, 2013, every company, unless prohibited by any provision of law or any order of any Court Tribunal or other authority must deliver the certificates of all securities allotted, transferred or transmitted.

  • Within a period of two months from the date of incorporation, in the case of subscribers to the Memorandum and within a period of two months from the date of allotment in the case of any allotment of any of its shares;.
  • Within a period of six months from the date of allotment in the case of any allotment of debenture

However, as per the proviso to sub Section 4 of Section 56. where the securities are dealt with in a depository, the company shall intimate the details of allotment of securities to depository immediately on allotment of such securities.

Where any default is made in complying with the above provisions, Section 56(6) states the company shall be punishable with fine which shall not be less than 25,000 but which may extend to ₹ 5 Lakh and every officer of the company who is in default shall be punishable with fine which shall not be less than 10,000 but which may extend to * 1,00,000.

Amendment made by Companies (Amendment) Act, 2020

“(6) Where any default is made in complying with the provisions of sub-sections (1) to (5), the company, and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.

Allotment Of Shares Under Companies Act 2013

Question 9. Comment on the following:

Certain members of a company are allowed to offer for sale their shareholding in the company to the public, such offer document is deemed to be a prospectus issued by the company.

Answer:

  • As per Section 28 of the Companies Act, 2013 permits certain members of a company, in consultation with Board of directors, to offer the whole or a part of their holdings of shares to the public. The document by which the offer of sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company.
  • Since public offer is not same as offer for sale. However many provisions relating to issue of prospectus does apply to such an offer, yet many provisions including requirement of minimum subscription does not apply to the same.
  • All laws and rules made under this agreement as to the contents of the prospectus and as to liability in respect of misstatements in and omission from prospectus or otherwise relating to prospectus shall apply as if this offer document is a prospectus issued by the company.
  • The section states that the members, whether individuals or bodies corporate or both, whose shares are proposed to be offered to the public, shall collectively authorize the company, whose share were offered for sale to the public, to take all actions in respect of offer of sale for and on their behalf and they shall reimburse the company all expenses incurred by it on this matter.
  • Rule 8 of The Companies (Prospectus and Allotment of Securities) Rules, 2014 in this context state that the provisions of “Prospectus and Allotment of Securities” and rules made there under shall be applicable to an offer of sale referred to in Section 28 of Companies Act, 2013 except for the following, namely:-
    • the provisions relating to minimum subscription;
    • the provisions for minimum application value;
    • the provisions requiring any statement to be made by the Board of directors in respect of the utilization of money; and
    • any other provision or information which cannot be compiled or gathered by the offer or, with detailed justifications for not being able to comply with such provisions.
  • Another rules provide that such offer document or prospectus issued under the section shall disclose the name of the entity bearing the cost of making the offer for sale along with reasons.

Comment on the following:

Amount lying in the securities premium account belongs to the shareholders and can be used freely for their benefit.

Answer:

According to Section 52(2) of the Companies Act, 2013, the securities premium can be utilised only:

  • towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares;
  • in writing off the preliminary expenses of the company;
  • in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company;
  • in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or
  • for the purchase of its own shares or other securities under Section 68 of the Companies Act, 2013.

Hence, the amount available in the securities premium is restrictive in nature and can only be used for specified purposes.

Question 10. Santosh, CEO of the company, has advised the Board of directors of an unlisted company that in order to market the public issue and generate interest and awareness amongst the public a prospectus can be issued without giving details of number of shares and the issue price. Examine the correctness of the advice in light of the provisions of the Companies Act, 2013.

Answer:

Section 32 of the Companies Act, 2013, Red herring Prospectus means “a prospectus which does not include complete particulars of the quantum or price of the securities included therein.” In other words, a Red herring Prospectus is a prospectus, which does not include details of either price or number of securities being offered, or the amount of issue.

As per section 32(1) of the Companies Act, 2013, a company proposing to make an offer of securities may issue a Red herring Prospectus prior to the issue of a prospectus. Such company proposing to issue a Red herring Prospectus shall file it with the Registrar of Companies at least 3 days prior to the opening of the subscription list and the offer. Hence, the advice given by CEO Santosh is correct. Space to write important points for revision

Question 11. Provide a specimen of board resolution for preparation of annual report in abridged form for mailing to the members. Assume facts and figures for the purposes of mentioning in the resolution.

Answer:

The Board Resolution for preparation of Annual Report in abridged form “RESOLVED THAT pursuant to the provisions of second proviso of Section

136(1) of the Companies Act, 2013 and Rule 10 of the Companies (Accounts) Rules 2014, the Annual Report comprising of the Balance Sheet, Profit and Loss Account and other relevant documents to be attached to the financial statements in abridged form for the financial year ended 31st March… also, to be prepared, finalised and audited in the prescribed Form No. AOC-3 for sending to the members of the company.”

“RESOLVED FURTHER THAT the draft audited financial statement containing salient features of financial statements for the year ended 31st March, prepared in the prescribed Form No. AOC-3 as submitted to the meeting, be and are hereby approved and the same be authenticated by the directors of the company as required under Section 136 of the Companies Act, 2013 and be sent to the statutory auditors of the company for their report thereon and thereafter be sent to the members of the company for adoption at the ensuing annual general meeting of the company.”

Allotment Of Shares Practical Questions

Question 1. Answer the following citing the relevant provisions of law/case law, if any:

A deceitful prospectus was issued by the directors on behalf of the company. Pavan received a copy of it, but did not take any shares in the company. The allotment of shares to applicants was completed. Several months later, Pavan bought 2,000 shares of that company from the stock market. He proceeded with a suit against the directors for issuing deceitful prospectus. Will he succeed?

Answer:

Company Law Share Capital Issue And Allotment Of Securities Right to claim compensation only to subscribers to prospectus

Question 2. On receipt of 85% of the minimum subscription stated in the prospectus, Little Stars Ltd. allotted 200 shares to Ranjit and the money was deposited in a scheduled bank. Later on, it was revealed that 40% of the amount withdrawn was for acquisition of fixed assets for the company. Ranjit, knowing these facts, refused to accept the allotment contending that the allotment was irregular under the provisions of the Companies Act, 2013. As an expert on company law advise Ranjit.

Answer:

Company Law Share Capital Issue And Allotment Of Securities Minimum subscription under companies act 2013

Procedure For Allotment Of Shares

Question 3. KBC Ltd. filed Form PAS-3 with the Registrar of Companies (ROC). Mumbai as required under the Companies Act, 2013 with late fees as it was not filed within the due date. The ROC on examining the e-form, found it necessary to call for further information. He gave a notice to the company directing it to furnish the required information within the prescribed time. The company furnished only a part of the required information. Discuss the consequences of the action in such circumstances under the provisions of the Companies Act, 2013. 

Answer:

Rule 10(2) of the Companies (the Registration offices and Fees) Rules, 2014 provides that, where the Registrar on examining any application or e-form or document finds it necessary to call for further information or finds such application or e-form or document to be defective or incomplete in any respect, he shall give intimation of such information called for or defect or incompleteness, by e-mail on the last intimated e-mail address of the person or the company, which has filed such application or e-form or document, directing him or it to furnish such information or to rectify such defects or incompleteness or to re-submit such application or e-Form or document within the prescribed time.

Rule 10(4) of the Companies (the Registration offices and Fees) Rules, 2014 provides that, in case where such further information called for has not been provided or has been furnished partially or defects or incompleteness has not been rectified or has been rectified partially or has not been rectified as required within the stipulated period, the Registrar shall either reject or treat the application or e-form or document, as the case may be, as invalid in the electronic record, and shall inform the person or the company.

Accordingly, where any document is recorded as invalid by the Registrar, the document may be rectified by the person or company by only fresh filing along with payment of fee and additional fee, as applicable at the time of fresh filing, without prejudice to any other liability under the Companies Act.

Shareholders’ Rights Under Companies Act, 2013

 Members And Shareholders

Modes of acquiring membership

Section 2(55) of the Companies Act, 2013 provides the modes by which a person may acquire membership of a Company.

  • by subscribing to the Memorandum,
  • by agreeing in writing to become a member,
  • by holding equity share capital of a Company as beneficial owner in the records of the depository.

Shareholders’ Rights Companies Act 2013

Joint Members in Companies Act 2013

If more than one person apply for shares in a company and shares are allotted to them, each one of such applicant becomes a member. Unless the Articles of the company otherwise provide, joint members can insist on having their names registered in any order they may require.

They may also have their holding split into several joint holdings with their names in different orders so that all of them may have a right to vote as first named holding in one or the other joint holdings.

Shareholders' Rights Under Companies Act, 2013

Cessation of membership in Companies Act 2013

A person ceases to be a member of a company when his name is removed from its register of members, which may occur in any of the following situations:

  • He transfers his shares to another person;
  • His shares are forfeited;
  • His shares are sold by the company to enforce a lien;
  • He dies; (his estate, however, remains liable for calls);
  • He is adjudged insolvent and the Official Assignee disclaims his shares;
  • His redeemable preference shares are redeemed;
  • The company is wound up:

Inspection of Registers in Companies Act 2013

According to Section 94(2) read with Rule 14 of Companies (Management and Administration) Rules, 2014 the registers and their indices, except when they are closed under the provisions of this Act, and the copies of all the returns shall be open for inspection by any member, debenture-holder, other security holder or beneficial owner, during business hours without payment of any fees and by any other person on payment of such fees as may be specified in the articles of association of the company but not exceeding 50 for each inspection.

Foreign Register in Companies Act 2013

Section 88(4) of the Companies Act, 2013 empowers companies to keep foreign registers of members or debenture-holders, other security holders or beneficial owners residing outside India. It states:

“A company may, if so authorised by its articles, keep in any country outside India, in such manner as may be prescribed, a part of the register referred to in sub-section (1), called “foreign register” containing the names and particulars of the members, debentureholders, other security holders or beneficial owners residing outside India.”

Closing of register of members in Companies Act 2013

A company may close the register of members or the register of debentureholders or the register of other se curity holders for any period or periods not exceeding in the aggregate forty-five days in each year, but not exceeding thirty days at any one time, subject to giving of previous notice of at least 7 days or such lesser period as may be specified by Securities and Exchange Board for listed companies.

Significant Beneficial Owner in Companies Act 2013

Section 90 of the Act provides that every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per cent. or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in clause (27) of Section 2, over the company (herein referred to as “significant beneficial owner”), shall make a declaration to the company, specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed.

Collective Membership Rights in Companies Act 2013

Members of a company have certain rights which can be exercised by members collectively by means of democratic process, i.e. by majority of members usually unless otherwise prescribed.

  • This involves the principle of submission by all members to the will of the majority, provided that the will is exercised in accordance with the law and the Memorandum and Articles of Association of the company.
  • Thus, the shareholders in majority determine the policy of the company and exercise control over the management of the company.

Dissenting members in Companies Act 2013

Rights attached to the shares of any class can be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a separate meeting of the holders of the issued shares of the class.

Variation of Share-holder’s Rights in Companies Act 2013

Section 48 (1) of the Companies Act, 2013 lays down that where a share capital of the company is divided into different classes of shares, the rights attached to the shares of any class can be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a separate meeting of the holders of the issued shares of that class. Further, the variation of rights of shareholders can be effected only:

  • if provision with respect to such variation is contained in the Memorandum or Articles of association of the company; or
  • in the absence of any such provision in a Memorandum or Articles of association of the company, if such a variation is not prohibited by the terms of issue of the shares of that class.

Shareholders’ Democracy in Companies Act 2013

The concept of shareholders’ democracy in the present day corporate world denotes the shareholders’ supremacy in the governance of the business and affairs of corporate sector either directly or through their elected representatives.

  • 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 Board of directors and shareholders exercise their powers through General Meetings.
  • Although constitutionally all the acts relating to the company can be performed in General Meetings but most of the powers in regard thereto are delegated to the Board of directors by virtue of the constitutional documents of the company viz. the Memorandum of Association and Articles of Association.

Shareholder’s Agreement in Companies Act 2013

Shareholders’ agreements (SHA) are quite common in business. In India shareholder’s agreement have gained popularity and currency only lately with bloom in newer forms of businesses. There are numerous situations where such agreements are entered into family companies, JV companies, venture capital investments, private equity investments, strategic alliances, and so on.

Shareholders’ agreement is a contractual arrangement between the shareholders of a company describing how the company should be operated and the defining inter-se shareholders’ rights and obligations. shareholders’ agreement. SHAS are the result of mutual understanding among the shareholders of a company to which, the company generally becomes a consenting party. Such agreements are specifically drafted to provide specific rights, impose definite restrictions over and above those provided by the Companies Act.

Veto Power or Rights in Companies Act 2013

  • A right is inherent. Shareholders rights refer to rights enshrined in the constitutional document of the company or as provided by the law. A power has its genesis under the provisions of law.
  • As per the provisions of the Companies Act, 2013 there are some resemblance where the management can take decisions on their own, by virtue of law.
  • However, there are some instances where the consent of the shareholders is mandatory to approve any decision or transaction which is said to be as the veto power or veto right of shareholders of the company.
  • For instance in case of related-party transactions, promoters, who are majority shareholders, cannot vote in special resolutions in cases of related-party transactions.

Veto Power and Casting Vote in Companies Act 2013

Veto power is different than casting vote of Chairman. Casting vote is applicable on in case of equality of votes in favour and against.

  • In case of equality the Chairman may give vote either in favour or against the resolution and it can be carried accordingly.
  • Veto power has not been defined in Companies Act.
  • However, dictionary meaning of veto power is: “to refuse to admit or approve; specifically: to refuse assent to (a legislative bill) so as to prevent enactment or cause reconsideration.”

Assignment of Shares in a Company in Companies Act 2013

Section 44 of the Companies Act, 2013 defines the nature of property in the shares of a company. It lays down: “The shares or debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company.”

Companies Act 2013 Short Notes

Question 1. Write a note on the following:

Rights of dissentient shareholders.

Answer:

Company Law Members And Shareholders Rights of dissentient shareholders

Companies Act 2013 Descriptive Questions

Question 1. Comment on the following:

A Limited Liability Partnership can become member in a company incorporated under the provisions of the Companies Act, 2013.

Answer:

  • Subject to the Memorandum and Articles, any sui juris (a person who is competent to contract on its own behalf) except the company itself, can become a member of a company.
  • Yes, Limited Liability Partnership, being an incorporated body and separate legal entity, under the statute, can become a member of a company.

Question 2. A member of an incorporated company becomes insolvent. He claimed right to vote and receive dividend from the company. Referring to the provisions of the Companies Act, 2013 discuss whether his claim is valid. 

Answer:

  • An insolvent may be a member of a company as long as he is on the register of members. He is entitled to vote, but he loses all beneficial interest in the shares and company will pay dividend on his shares to the Official Assignee or Receiver [Morgan v. Gray, (1953)].
  • Hence, his claim is invalid and his dividend shall be paid to official assignee.

Rights Of Shareholders In Company Law

Question 3. Every shareholder of a company is known as member while every member may not be known as shareholder.

Answer:

  • A company is composed of, members though it has its own separate legal entity. The members of the company are the persons who constitute the company as a corporate entity.
  • In the case of a company limited by shares, the shareholders are the members.
  • The terms “members” and “shareholders” are usually used interchangeably being synonymous, as there can be no membership except through the medium of shareholding.
  • Thus, generally speaking every shareholder is a member and every member is a shareholder.
  • However, there may be exceptions to this statement, e.g., a person may be a holder of share(s) by transfer but will not become its member until the transfer is registered in the books of the company in his favor and his name is entered in the register of members.
  • Similarly, a member who has transferred his shares, though he does not hold any shares yet he continues to be member of the company until the transfer is registered and his name is removed from the register of members maintained by the company under Section 88 of the Companies Act, 2013.
  • A member is a person who has subscribed to the memorandum of association of the company.
  • A shareholder is a person who owns the shares of the company.
  • The bearer of a share warrant is not a member, but the bearer of a share warrant can be a shareholder.

Question 4. Draft “A specimen of deed of Assignment of shares of a company”.

Answer:

Specimen of Deed of Assignment of Shares of Company:

And the assignee hereby agrees to take the said Equity Shares subject to such conditions.

In Witness Whereof the assignor and the assignee do hereto affix their respective signatures on the day, month and the year stated above. Witness: Assignor :

Question 5. A public limited company has only seven shareholders. Being all the shares paid in full, one such shareholder purchased all the shares of another shareholder in a private settlement between them reducing the no. of shareholders to six. The company continues to carry on its business thereafter. Discuss with reference to the Companies Act, 2013 the implications of this transaction on the functioning of the company

Answer:

  • Section 3A of the Companies Act, 2013 provides that if at any time the number of members of a company is reduced, in the case of a public company, below seven or in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognizant of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued there for.
  • In view of the above provision, if the company continued to carry on the business with that reduced membership (i.e. 6) beyond six months period, only those members who are cognisant of the fact that it is carrying on business with less than seven members shall be severally liable for the payment of the whole of debts of the company contracted during that time, and may be severally sued therefor.

Question 6. Who is a ‘Significant Beneficial Owner’ under the Companies Act, 2013? Is Significant Beneficial Owner required to file BEN-1 to the reporting company?

Answer:

Pursuant to Section 90 of the Companies Act, 2013 every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India holds beneficial interests, of not less than 25% or such other percentage as may be specified, in shares of a company or the right to exercise or the actual exercise of significant influence or control as per as Section 2(27) over the reporting company is a significant beneficial owner.

  • Such an individual being the Significant beneficial Owner holding such beneficial interest is required to make a declaration to the reporting company specifying the nature of his interest and other particulars as required.
  • From commencement of the Companies (SBO) Amendment Rules, 2019, every SBO in a reporting company, is required to give the requisite declaration of his beneficial ownership in Form No. BEN-1 to the reporting company within 90 days from such commencement.

Examine with reference to the provisions of the Companies Act, 2013 whether any of the following persons can become member of the company engaged in the business of producing steel products?

  • Pawnee
  • Partnership firm
  • Unregistered trade union.

Minority Shareholder Rights India

Companies Act 2013 Practical Questions

Question 1. 1,000 Shares of Astro Ltd. are registered in the names of three persons P, Q and R jointly. Interestingly, the articles of the company provide that the survivors shall be the only person to be recognised by the company as having any title to the shares of the company. Unfortunately, P and Q died in an air crash. In these circumstances, R, being the survivor claims to be the full owner of the said 1,000 shares. However, the legal heirs of P and Q are also making counter claims. Who will succeed? Explain.

A, B and C are joint holders of shares in Clearhead Ltd. The joint holders now ask the company for altering or rearranging the serial order of their names in the register of members of the company. In reply, the company intends to ask the joint holders to execute a transfer deed for transposition of names in the register of members. Advise the company on the course of action.

Answer:

Company Law Members And Shareholders Facts of the case

Company Law Members And Shareholders Transposition of shares

Question 2. ABC & Co., a partnership firm applied for shares in XYZ Ltd. The company allotted the shares required by the partnership firm. In the given context, what is the liability of the partners and the partnership firm?

Answer:

Company Law Members And Shareholders Partnership firm not a legal person

Question 3. A2Z Management Services Limited is a listed company quoted at Bombay Stock Exchange Limited. The company closed its register of debenture holders in June and August 2016 for 12 and 21 days respectively. The Chief Financial Officer (CFO) of the company has informed the Secretary of the company to consider closing the register in December for another 15 days for some strategic reasons. Referring to the provisions of the Companies Act, 2013, examine the validity of the above action of the company.

Answer:

Company Law Members And Shareholders Section 91

Companies Act 2013 Shareholder Protections

Question 4. Ram Singh is a shareholder of Alexandra India Ltd. The Board of directors of the company are of the view that the conduct of Ram Singh has been detrimental to the interest of the company. Further, the Board also noted that Ram Singh is director in a company which is a competitor company of Alexandra India Ltd. The Articles of Association of Alexandra India Ltd. permit expulsion of members. The Board unanimously decided to expel Ram Singh from the company. Discuss the relevant provisions of Companies Act, 2013 in this regard. If Ram Singh files a case against the Board whether he will win the case?

Answer:

  • A controversy has arisen as to whether a public limited company had powers to insert an article in its Articles of Association relating to expulsion of a member by the Board of Directors of the company where the directors were of the view that the activities or conduct of such a member was detrimental to the interests of the company.
  • The Department of Company Affairs (now, Ministry of Corporate Affairs) clarified that an article for expulsion of a member is opposed to the fundamental principles of the Company Jurisprudence and is ultra vires the company, the reason being that such a provision will be against the provisions of the Companies Act relating to the rights of a member in a company, the powers of the Central Government as an appellate authority under Section 111 of the Act and the powers of the Court under Sections 107, 395 and 397 of the Companies Act, 1956.
  • These sections correspond to Sections 38, 58, 48, 235 and 241 of the Companies Act, 2013 respectively having the same impact as earlier provisions.
  • Further, according to Section 6 of the Companies Act, 2013, the Act shall override the Memorandum and Articles of Association and any provisions contained in these documents repugnant to the provisions of the Companies Act, 2013 shall be void.
  • Hence, any assumption of the powers by the Board of Directors to expel a member by alteration of Articles of Association shall be illegal and void.
  • The Supreme Court in the case of Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Com Cases 1 has laid down the law as to the conditions on the basis of which directors could refuse a person to be admitted as a member of the company. The principles laid down by the Supreme Court in this case, even though pertain to the refusal by a company to the admission of a person as a member of the company, are applicable even with greater force to a case of expulsion of an existing member.
  • As, under Article 141 of the Constitution, the law declared by the Supreme Court is binding on all courts within the territory of India, any provision pertaining to the expulsion of a member by the management of a company which is against the law as laid down by the Supreme Court will be illegal and ultra vires. In the light of the aforesaid position, it is clarified that assumption by the Board of directors of a company of any power to expel a member by amending its articles of association is illegal and void.
  • If Ram Singh a files a suit against the company or the directors he will certainly win the case, as expulsion of a member is illegal and void as per the Companies Act 2013.

Question 5. Sumeet, Puneet and Manmeet were subscribers to the Memorandum of Association of a private company for 500 shares, 300 shares and 200 shares respectively. After incorporation, Sumeet and Puneet bought the shares, they had subscribed for, from the company whereas Manmeet bought 200 shares from Sumeet. Will Manmeet be liable to the company for the shares, he has not bought from the company?

Answer:

In the case of a subscriber, no application or allotment is obligatory to become a member. Since, by virtue of his subscribing to the memorandum, he is deemed to have agreed to become a member and he becomes ipso facto member on the incorporation of the company and is liable for the shares he has subscribed.

As per Section 10(2) of the Companies Act, 2013, all monies payable by any member to the company under the Memorandum of Association or Articles of Association of the company shall be debt due from him to the company.

Further, a subscriber to the Memorandum must make payment for his shares, even if the promoters have promised him the shares for services rendered in connection with the promotion of the company.

When the Subscriber subscribes to the Memorandum, he gives an undertaking to the company that he will pay to the company for the shares he has subscribed.

Further, Subscribers has to take these shares directly from the company and not through transfer from other member(s).

In the above case, Manmeet is not absolved from his liability to the company by purchasing the shares from Sumeet. He has a statutory responsibility to buy the shares from the company by making payment to the company.

Voting Rights Of Shareholders In India

Question 6. X applied for 400 shares in XYZ Ltd. and paid $2.50 on the face value of 10 but no allotment was made to him. Subsequently 400 shares were allotted and issued to him without his request and his name was entered in the register of members.

X knew it but took no steps for rectification of the register of members. The company went into liquidation and X was held liable as a contributory. X claims that he is not liable as contributory. Whether his claim is tenable?

Answer:

Registers, etc. to be Evidence:

According to Section 95 of the Companies Act, 2013 states that the register, their indices and copies of annual returns maintained under section 88 and 94 shall be prima facie evidence of any matter directed or authorised to be inserted therein by or under this Act.

A register of members is prima facie evidence of the truth of its contents. Consequently, if a person’s name, to his knowledge, is there in the register of members of a company, he shall be deemed to be a member and onus lies on him to prove that he is not a member.

He must promptly appeal to the Tribunal for rectification of the register under section 59 of the Companies Act, 2013 to take his name off the register, failing which the doctrine of holding out will apply.

In Re. M.F.R.D. Cruz, A.I.R. 1939 Madras 803, the Court held “when a person knows that his name is included in the register of shareholders and he stands by and allow his name to remain, he is holding out to the public that he is a shareholder and thereby he loses his right to have his name removed”.

Local Ltd. is planning to issue its equity shares to persons residing outside India. In this context, Chairman of the company wants to know on the following matters:

  • What are the provisions relating to maintaining the foreign register of members?
  • Can company discontinue maintaining forsign register of members? If so, when?
  • Give your inputs to the Chairman of Local Ltd.

Companies Act 2013 Short Notes

Question 1. Write short on Significant Beneficial Owner.

Answer:

  • Section 90 of the Act provides that every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per cent. or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in clause (27) of Section 2, over the company (herein referred to as “significant beneficial owner”), shall make a declaration to the company, specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed.
  • Further every company shall maintain a register of the interest declared by individuals stated above and changes therein which shall include the name of individual, his date of birth, address, details of ownership in the company and such other details as may be prescribed.
  • The register so maintained shall be open to inspection by any member of the company on payment of such fees as may be prescribed.
  • Every company shall file a return of significant beneficial owners of the company and changes therein with the Registrar containing names, addresses and other details as may be prescribed within such time, in such form and manner as may be prescribed. -Space to write important points for revision

Voting Rights Of Shareholders In India

Question 2. Write short on the following:

  1. Shareholders’ Democracy
  2. Shareholders’ Agreement

Answer:

  • Shareholders’ Democracy
    • The concept of shareholders’ democracy in the present day corporate world denotes the shareholders’ supremacy in the governance of the business and affairs of corporate sector either directly or through their elected representatives.
    • 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 Board of directors and shareholders exercise their powers through General Meetings.
    • Although constitutionally all the acts relating to the company can be performed in General Meetings but most of the powers in regard thereto are delegated to the Board of directors by virtue of the constitutional documents of the company viz. the Memorandum of Association and Articles of Association.
    • Proviso to this section restricts the power of the Board of directors to do things which are specifically required to be done by shareholders in the General Meetings under the provisions of Companies Act or Memorandum of Association or the Articles of Association.
    • Thus the Companies Act has tried to demarcate the area of control of directors as well as that of shareholders. Basically all the business to be transacted at the meetings of shareholders is by means of an ordinary resolution or a special resolution or by postal ballot.
  • Shareholder’s Agreement
    • Shareholders’ agreements (SHA) are quite common in business. In India shareholder’s agreement have gained popularity and currency only lately with bloom in newer forms of businesses.
    • There are numerous situations where such agreements are entered into-family companies, JV companies, venture capital investments, private equity investments, strategic alliances, and so on.
    • Shareholders’ agreement is a contractual arrangement between the shareholders of a company describing how the company should be operated and the defining inter-se shareholders’ rights and obligations. shareholders’ agreement.
    • SHAS are the result of mutual understanding among the shareholders of a company to which, the company generally becomes a consenting party.
    • Such agreements are specifically drafted to provide specific rights, impose definite restrictions over and above those provided by the Companies Act,
  • Enforceability of the Shareholder’s Agreement
    • Though the international view is split but to a large extent courts are inclined towards favouring SHA as long as they are not found to be detrimental to the minority stakeholder’s rights.
    • In the leading case of Russell v. Northern Bank Development Corporation Ltd [1992] BCC 578; [1992] 1 WLR 588, the House of Lords found that though a’company cannot deprive itself of its power to alter its constitution, the members of the company could agree in a shareholders’ agreement as to how they will exercise their voting rights on a resolution to alter the articles/constitution. The US Courts have largely accepted shareholder agreement.

Companies Act 2013 Distinguish Between

Question 3. Distinguish Between Veto Power and Costing Vote.

Answer:

  • Veto power is different than casting vote of Chairman. Casting vote is applicable on in case of equality of votes in favour and against.
  • In case of equality the Chairman may give vote either in favour or against the resolution and it can be carried accordingly.
  • Veto power has not been defined in Companies Act. However, dictionary meaning of veto power is: “to refuse to admit or approve; specifically: to refuse assent to (a legislative bill) so as to prevent enactment or cause reconsideration.”
  • Shareholders Agreement and Articles of Association of a company may provide for certain rights to the minority shareholder who has invested funds in the company.
  • Such powers may include power to refuse capital expenditure over certain specified limit.
  • In case the representative of the minority group is not in favour of the capital expenditure proposed by the company, he can exercise his right under the Articles which in common terminology is referred to as “veto powers”.

Companies Act 2013 Descriptive Questions

Question 4. What do you understand by Veto Power or Rights.

Answer:

  • A right is inherent. Shareholders rights refer to rights enshrined in the constitutional document of the company or as provided by the law. A power has its genesis under the provisions of law.
  • As per the provisions of the Companies Act, 2013 there are some resemblance where the management can take decisions own their own, by virtue of law.
  • However, there are some instances where the consent of the shareholders is mandatory to approve any decision or transaction which is said to be as the veto power or veto right of shareholders of the company.
  • For instance in case of related-party transactions, promoters, who are majority shareholders, cannot vote in special resolutions in cases of related-party transactions.
  • As stated under the provisions of Section 188 any related-party transaction that is not done in the ordinary course of business and is not at an arm’s length will need approval of minority shareholders by way of a special resolution.
  • The other instance where the law provides veto power to shareholders is in case of class action suits. Section 245 of Companies Act, 2013 provides for class action to be instituted against the company as well as the auditors of the company.
  • Under the provisions of sub-section (3) of Section 245, 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 has or have paid all calls and other sums due on his or their shares.

Introduction To Medicinal Chemistry

Chapter 1 Introduction To Medicinal Chemistry

Medicinal chemistry is an interdisciplinary field of study which combines aspects of organic chemistry, physical chemistry, pharmacology, microbiology, biochemistry, as well as computational chemistry including bioinformatics and chemo informatics.

Medicinal chemistry is defined as an interdependent science that is a combination of applied (medicine) and basic (chemistry) sciences. It encompasses the discovery, development, identification, and interpretation of the mode of action of biologically active compounds at the molecular level.

It can be viewed as the melting pot of synthetic chemistry and molecular pharmacology that emphasizes the study of SAR of drug molecules; it therefore requires a clear understanding of both chemical and pharmacological principles. Drugs may be from natural origin or obtained through organic synthesis.

They are chemicals used for medicinal purposes. They interact with complex chemical systems (targets) of humans or animals. Medicinal chemistry is concerned with this interaction, focusing on the organic and biochemical reaction of drug substances with their targets.

The art of medicinal chemistry has enriched greatly from developments in the areas of organic chemistry, biology, biophysical/biochemical methods, and computational tools. While opportunities are enormous, advancing a drug candidate from bench top to clinic is associated with challenges as well, and a good understanding on both these aspects would significantly accelerate drug discovery process.

A drug molecule thus synthesized and clinically tested needs to be “developed” in suitable formulation before it comes to the shelves of the chemists for patient’s consumption purpose.

Read and Learn More Medicinal Chemistry III Notes

Medicinal chemistry continues to play a major role in drug research and development, taking advantage of newer techniques and increased knowledge of different branches of related sciences.

Important Techniques Used in Drug Development and Medicinal Chemistry:

  • Quantitative structure activity relationship (QSAR)
  • Molecular modeling
  • Virtual screening and docking
  • Drug target binding forces
  • Combinatorial library design Bioinformatics
  • Structure based drug design
  • Peptidomimetics
  • Analog design
  • Rational drug design
  • Chirality
  • Study of structural basis for toxicity
  • Use of natural products as drug leads

History And Development Of Medicinal Chemistry

Roots of Medicinal chemistry can be traced back to ancient folk medicine and early natural product chemistry. Since it serves as the link between chemical structure and observed biological activity, medicinal chemistry emerged about 100 years ago as a special discipline aiming to explore such relationships via chemical modification and structural mimicry of nature’s materials, particularly with the aim of enhancing the efficacy of substances thought to be of therapeutic value. Just as in all fields of science, the history of medicinal chemistry is comprised of the ideas, knowledge, and available tools that have advanced contemporary knowledge.

The Nineteenth Century Age of Innovation and Chemistry:

There is a long history of plants being used to treat various diseases. They figure in the records of early civilizations in Babylon, Egypt, India and China. The therapeutic properties of plants were described by the ancient Greeks and by the Romans and are recorded in the writings of Hippocrates, Dioscorides, Pliny and Galenus. Some metals and metal salts were also used at this time. In the middle ages various Materia Medica and pharmacopoeias brought together traditional uses of plants.

Exploration in the seventeenth and eighteenth centuries led to the addition of a number of useful tropical plants to those of European origin. Improved communications, between practitioners in eighteenth and nineteenth centuries resulted in progressive removal of preparations that were either ineffective or too toxic from herbals. It also led to a more rational development of new drugs.

The nineteenth century saw the beginnings of modern organic chemistry and consequently of medicinal chemistry. Their development is intertwined. Chemists throughout Europe refined and extended the techniques of chemical analysis. The synthesis of acetic acid by Kolbe in 1845 and of methane by Berthelot in 1856 set the stage for organic chemistry.

The emphasis was shifted from finding new medicaments from the vast world of plants to the finding of active ingredients that accounted for their pharmacologic properties. The isolation of a number of alkaloids including morphine, quinine and atropine from crude medicinal plant extracts was part of the analytical effort to standardize drug preparations and overcome fraud.

General anesthetics were introduced in surgery from 1842 onwards (diethyl ether, nitrous oxide and chloroform). Antiseptics such as iodine (1839) and phenol (1860) also made an important contribution to the success of surgery.

Many of the developments after the 1860s arose from the synthesis of compounds specifically for their medicinal action. Although the use of willow bark as a pain-killer was known to the herbalists, the analgesic activity of its constituent, salicin and of salicylic acid was developed in the 1860s and 1870s.

Once ideas of chemical structure were formulated in the mid-nineteenth century, the first theories of the relationships between chemical structure and biological activity began to emerge. Thus Crum-Brown and Fraser (1869) noted that a ‘relationship exists between the physiological action of a substance and its chemical composition! leading to the idea that cells can respond to the signals from specific molecules.

On the basis of observations that certain dyes selectively stained micro-organisms, Ehrlich in the 1890s put forward the idea that there were specific receptors for biologically active compounds – ‘lock and key’ relationships. The work of Meyer and Overton (1899-1901) to relate a physical property (the oil water distribution coefficient) to biological activity (anaesthesia) were the first rudimentary QSAR.

Another quantitative measurement that was made was the chemotherapeutic index, which was the ratio of the minimum curative dose to the maximum tolerated dose (CD50/LD50).

The Twentieth Century Age of Innovation and Chemistry:

Several different aspects of medicinal chemistry were developed in parallel through the second half of the twentieth century. Diseases of protozoal and spirochetal origin responded to synthetic chemotherapeutic agents. Interest in synthetic chemicals that could inhibit the rapid reproduction of pathogenic bacteria and enable the host organism to cope with invasive bacteria was dramatically increased.

The observation by Woods and Fildes in 1940 that the bacteriostatic action of sulfonamide-like drugs was antagonized by p-aminobenzoic acid, was one of the early examples in which a balance of stimulatory and inhibitory properties depended on the structural analogies of chemicals.

Together with the discovery of penicillin by Heming in 1929 and its subsequent examination by Florey and Chain in 1941 led to a water soluble powder of much higher antibacterial potency and lower toxicity than those of previously known synthetic chemotherapeutic agents. With the discovery of a variety of highly potent anti-infective agents, a significant change was introduced into medical practice.

Developments Leading to Various Medicinal Classes:

Psychiatrists have been using agents that are active in the central nervous system for hundreds of years. Stimulants and depressants were used to modify the mood and mental states of psychiatric patients. Amphetamine, sedatives, and hypnotics were used to stimulate or depress the mental states of patients. The synthesis of chlorpromazine by Charpentier ultimately caused a revolution in the treatment of schizophrenia.

The first pure hormone to be isolated from an endocrine gland was epinephrine, which led to further molecular modifications in the area of sympathomimetic amines. Subsequently, norepinephrine was identified from sympathetic nerves. The development of chroma- tographic techniques allowed the isolation and characterization of a multitude of hormones from a single gland. Various techniques emerged subsequently to take process of drug development to new heights.

The study of medicinal chemistry has certain defined objectives as mentioned below:

  • Physico-chemical properties of drug molecules in relation to drug ADME.
  • Chemical basis of pharmacology and therapeutics.
  • Fundamental pharmacophores for drugs used to treat disease.
  • Structure activity relationship (SAR) in relation to drug-target interactions.
  • Chemical pathways of the drug metabolism.
  • Application to making drug therapy decisions.

The Medicinal Chemist would strive hard to convert a chemical into suitable lead molecule and then into a drug using various tools and approaches of medicinal chemistry.

Physicochemical Properties In Relation To Biological Action

Classification of drugs:

Drugs are chemical substances which can generally be classified based on their therapeutic use as follows:

  • Drugs which act upon various physiological functions of the body (Pharmacodynamic agents) e.g. sedatives, analgesics, antipyretic and antirheumatic agents, antipsychotic, antihistaminic and anti-allergic drugs, anti-inflammatory agents, diuretics, cardiovascular agents and drugs acting on the heart, adrenergic and cholinergic agents and drugs acting on the gastrointestinal tract (GIT), etc.
  • Drugs acting on Central Nervous System (CNS agents) e.g. antidepressant drugs, anaesthetic, anticonvulsants, antipsychotics, hypnotics and sedatives etc.
  • Drugs that are used to fight pathogenic organisms (chemotherapeutic agents): e.g. sulfonamides, antibiotics, anti-infective agents, antimicrobial, anti-amoebic, antifungal agents, antiviral agents, anticancer agents, anti-malarial agents, etc.
  • Supplement agents: e.g. Vitamins, dietary supplements, etc.

It is an established fact that “structure” is the fundamental aspect of drug molecule which affects both its pharmacodynamic and pharmacokinetic properties. In the given Unit, we will discuss about how structural features of the drugs impact its pharmacological actions.

Whenever a drug molecule enters the body, it interacts with one or more biomolecules found in the extracellular fluid, in the cell membrane, and within cells. The type and the extent of this interaction will depend on the kind and number of chemically reactive functional groups and the polarity of the drug molecule. The drug-protein interaction does not involve covalent bonds that are relatively stable at body temperatures.

Instead, weak forces such as ionic bonds, hydrogen bonds, Van der Waals forces, dipole-ion, and dipole- dipole forces are involved. A biological response is produced by the interaction of a drug with a functional or an organized group of molecules, generally referred as receptor site (chemoreceptive substance).

The physical and chemical properties (physicochemical properties) which affect biological action of drug are as follows:

  • Ionization
  • Partition coefficient (Log P)
  • Solubility
  • Protein binding
  • Chelation
  • Bioisosterism
  • Hydrogen bonding
  • Optical and Geometrical Isomerism

Ionization

Ionization is the process of formation of ions, in which an atom or a molecule possesses a negative or positive charge by gaining or losing electrons, often in conjunction with other chemical changes.

The first three stages of the pharmacokinetic process [absorption, distribution, metabolism and excretion (ADME)] are:

  • Liberation: Release of the medicinal drug from a formulated medicine.
  • Absorption: Movement of the liberated drug into the bloodstream.
  • Distribution: Passage of the drug from the bloodstream to body tissues and organs.

Molecular compounds are less soluble in water than in non-polar solvents, while ionic compounds are more soluble in water than in non-polar solvents. In the body there are two distinct environments. One, such as blood plasma, is aqueous and so ionic compounds are more likely to be soluble in blood than are molecular compounds. The other is cell membrane which is mainly composed of non-polar lipids (phospholipids, glycolipids and cholesterol).

The central part of the membrane, therefore, consists mainly of long chain hydrocarbons and so molecular compounds are more likely to be soluble in cell membrane than are ionic compounds. An effective drug needs to be sufficiently soluble in water to dissolve in blood plasma and be carried around the body while also being sufficiently soluble in non-polar lipids to pass through cell membranes into cells.

Medicinal Chemistry Introduction To Medicinal Chemistry Lipid bilayer

Most drug molecules ionize in aqueous solution to give weakly acidic or basic solutions. Naproxen is a non-steroidal anti-inflammatory drug (NSAID). It is used to relieve pain and inflammation in diseases like rheumatic disease, sprains, strains, backache, gout, and menstrual pain.

A naproxen molecule has a carboxylic group and so it is a weak acid. It ionizes in water to give an equilibrium solution that contains a mixture of unionized molecules, carboxylate ions and hydroxonium ions.

Medicinal Chemistry Introduction To Medicinal Chemistry Dissociation of Naproxen in aqueous solution

Aspirin, fenoprofen and penicillin-G (benzylpenicillin) are the drug molecules that also contain carboxylic acid groups. All three compounds partially ionize in aqueous solution.Medicinal Chemistry Introduction To Medicinal Chemistry Drugs forming weakly acidic solution in water

Diphenhydramine is a first generation antihistamine used to treat allergic symptoms though it does have as sedating effect. More recently developed antihistamines are not sedating. The sedating properties of diphenhydramine explain its use to treat insomnia and travel sickness. Diphenhydramine molecule has an amine group and hence it is a weak base. It ionizes in water to give an equilibrium solution that contains a mixture of unionized molecules, quaternary ammonium ions and hydroxide ions.

Medicinal Chemistry Introduction To Medicinal Chemistry The ionization of diphenhydramine in water

Other drugs which are bases include adrenaline, ephedrine, atropine and tetracycline. The rate of absorption depends on concentration of unionized form. Accumulation of an ionized drug in the body compartment is called as ion trapping. Drug ionization depends on pH and its pKa.

Most drugs can be classified as acids or bases as a large number of drugs can behave as either acids or bases, as they circulate in the patient in different dosage forms and end up in systemic circulation. Acid-base properties of a drug can considerably influence its bio-distribution and partitioning characteristics.

For the definition of acids and bases, the model used in pharmacy and biochemistry was developed independently by Lowry and Bronsted. An acid is a proton donor and a base is a proton acceptor.

Percent Ionization

Percent ionization is defined as the amount of a weak acid that exists as an ions at a particular concentration. Ionized drugs are water soluble and unionized drugs are lipid soluble.

HA Unionized acid, H2O= base, H,O= conjugate acid, A = ionized conjugate base.

B = Unionized base, H2O= acid, BH = conjugate acid, OH Conjugate base Change in pH changes the degree of ionization.

Examples:

  • In Phenytoin, pKa = 8.3 i.e. at pH 8.3, it is 50% ionized. To ionize completely, its pH is raised to 12 by NaOH and complete ionization is ensured by maximum H2O solubility.
  • In Aspirin, pKa= 3.5, pH = 1, it is 99% more unionized. It is lipid soluble and easily absorbed through stomach.

Acid-conjugate base:

Representative examples of pharmaceutically important acidic drugs are listed. Each acid, or proton donor, yields a conjugate base. Conjugate bases range from the chloride ion [reaction (a)], which does not accept a proton in aqueous media, to ephedrine [reaction (h)], which is an excellent proton acceptor.

Base-conjugate acid:

The Bronsted-Lowry theory defines a base as a molecule that accepts a proton. The product resulting from the addition of a proton to the base is the conjugate acid. Pharmaceutically important bases are listed. There are a variety of structures, including the easily recognizable base sodium hydroxide [reaction (a)]; the basic component of an important physiological buffer, sodium monohydrogen phosphate [reaction (b)], which is also the conjugate base of dihydrogen phosphate; ammonia [reaction (c)], which is also the conjugate base of the ammonium cation [reaction (c)]; sodium acetate [reaction (d)], which is also the conjugate base of acetic acid [reaction (d)] in the enolate form of phenobarbital [reaction (e)], which is also the conjugate base of phenobarbital [reaction (e)]; the carboxylate form of indomethacine [reaction (f)], which is also the conjugate base of indomethacine [reaction (f)]; the imidate form of saccharin [reaction (g)], which is also the conjugate base of saccharin [reaction (g)] in  and the amine ephedrine [reaction (h)], which is the conjugate base of ephedrine HCI. Medicinal Chemistry Introduction To Medicinal Chemistry Examples of acids

Medicinal Chemistry Introduction To Medicinal Chemistry Examples of bases

Since, pKa = -log Ka and pH = -log [H3O]*.

The pH will be calculated according to the following equation:

It is now common to express the basicity of a chemical in terms of pka using the following equation:

Examples of calculations requiring the pKa (a):

To determine the ratio of ephedrine to ephedrine HCI, (pKa 9.6) in the intestinal tract at pH 8.07. Using Eq. (3) we get,

The number 1.6 whose log is 0.025, meaning that there are 25 parts ephedrine for every 1000 parts ephedrine HCI in the intestinal tract whose environment is pH 8.0.

To determine the pH of a buffer containing 0.1 mol/lit CH3COOH (pKa 4.8) and 0.08 mol/lit CH3COONa. Using Eq. (3) we get,

Medicinal Chemistry Introduction To Medicinal Chemistry Acidity

Importance of ionization of drugs:

  • Unionized form of a drug can partition across biological membranes as the unionized form is lipophilic.
  • Ionized form tends to be more water soluble as it is important for drug administration and distribution in plasma.
  • Lower the pH with respect to pKa, greater will be the fraction of protonated drug which may be charged or uncharged.
  • Weak acids are more lipid-soluble, because they are uncharged and hence, this form passes through biological membranes more rapidly. Acidic pH provides a proton to weak acids to form uncharged species.
    RCOO + H* → RCOOH
  • Similarly alkaline pH will cause weak bases to lose a proton to form uncharged species.

Partition Coefficient

Partition coefficient (P) finds importance as it directly influences drug transport and drug distribution. It is defined as ratio of concentrations of compounds in two phases of a mixture of two immiscible liquids at equilibrium. E.g. Phenobarbitone has a high lipid / water partition coefficient of 5.9, whereas Thiopentone sodium has a chloroform / water partition coefficient of about 100 which states that the later is highly soluble in lipid. It is defined as equilibrium constant of drug concentration in two phases.

It is difficult to measure partition coefficient in a living system. It is usually estimated in vitro by using octanol as a lipid phase and phosphate buffer (pH 7.4) as the aqueous phase. Partition coefficient is dimensionless and its logarithm (log P) is widely used as the measure of lipophilicity. Factors affecting partition coefficient are:

  • pH
  • Co-solvents
  • Surfactant
  • Complexation

Medicinal Chemistry Introduction To Medicinal Chemistry Drugs and their partition coefficients

Log P can be determined by shake flask method in which drug molecule is partitioned between known quantity of octanol and that of buffer or water. The concentration of drug is determined by UV spectroscopy method. This method, however, is a cumbersome method. Another method includes HPLC method, in which compounds with known log P are injected onto a C18 reverse phase HPLC column followed by unknown compounds.

Applications of Partition Coefficient

  • Solubility of drugs in water and other solvents and in mixture of solvents can be predicted.
  • Drug absorption in vivo can be predicted.
  • SAR for a series of drugs can be studied.
  • Log P is an indicator of lipophilic and hydrophilic character of a drug molecule.

Solubility

Solubility is defined as the ability of a substance (solute) to enter into a bulk medium (solvent) and form a homogenous solution. Different compounds have different solubilities depending on various factors. Solubility refers to the concentration of dissolved solute, which is in equilibrium with solid solute at a given temperature. Sufficient solubility and good membrane permeability are prime factors affecting oral absorption.

It has been said that low solubility is at the top of the list of undesirable properties of a potential medicinal drug. So measurement of solubility and, if necessary, modification of a compound to alter its solubility without affecting its therapeutic properties is important.

Equilibrium solubility:

The equilibrium solubility of a compound is the concentration of a saturated solution in contact with an excess of undissolved solid.

Traditionally, excess compound is shaken with a solvent until a saturated solution is produced with an excess of the solid compound present. It is an accurate but very time-consuming method.

Kinetic solubility:

The kinetic solubility in water of a drug that is a weak acid is determined by:

  • dissolving the acid in a known volume of base, e.g. potassium hydroxide solution;
  • adding an acid, e.g. hydrochloric acid, until a precipitate is detected (the UV sensor ‘sees’ the first formation of cloudiness).

Rather than solubility, logs is usually calculated.

Aqueous solubility depends upon the following facts:

  • Buffer and Ionic strength
  • Polymorphism and purity of the sample
  • PH
  • Super saturation
  • Thermodynamic vs. kinetic solubility

Aqueous solubility decreases with corresponding increase in various physicochemical properties like boiling point, viscosity, surface activity and partition coefficient across a homologous series. Solubility of a drug can be increased or decreased by derivatization e.g. water soluble methyl predinisolone acetate is transformed to methyl predinisolone sodium succinate which is water soluble.

Similarly, slightly soluble chloramphenicol can be converted into insoluble chloramphenicol palmitate. Solubility not only depends on the solute and solvent, but also to a larger extent on temperature, pressure and pH. Solubility of a molecule can also be expressed in terms of its affinity or philicity and repulsion or phobicity for either an aqueous (hydro) or lipid (lipo) solvent.

Medicinal Chemistry Introduction To Medicinal Chemistry Various terms used to express solubility

Various types of bonds like London forces, hydrogen bonds, dipole-dipole, etc. are responsible for keeping atoms and molecules together which are responsible for maintaining solubility. Following intermolecular attractive forces are responsible for solubility:

  • Vander Waals’ forces: These are weakest (0.5 -1.2 kcal/mole) of all the forces resulting from induced dipole and occur between non-polar groups e.g. hydrocarbons.
  • Dipole-dipole interaction: These are strong (1.2 to 10.8 kcal/mole) forces arising ionically between dipoles created due to an electronegative atom attached to carbon atom. E.g. Hydrogen bond that contributes for hydrophilicity.
  • Ionic bonding: These arise mostly in inorganic compounds and their salts and are comparatively strong (5 kcal/mole) bonds. The degree of ionization for any molecule is an important factor affecting solubility.
  • Ion-dipole bonding: These are relatively strong bonds (1.2 to 5.2 kcal/mole) similar to ionic interactions and arise electrostatically between a cation/anion and a dipole. These forces depend on distance and temperature.
  • Covalent bond: Molecular bond that involves the sharing of electron pairs between atoms is a covalent bond and is greatly affected by electronegativity of atoms which determines the chemical polarity of the bond. These are the strongest of all the bonds and may vary from 50 kcal/mol to 110 kcal/mol depending on the elements involved.

Many methods have been tried and tested to improve solubility of drug molecules which include:

  • Use of co-solvents (like glycols, sorbitol, ethanol etc.) for highly lipophillic molecules.
  • Use of surfactants (like Tween 80) which being amphiphillic (polar head and non- polar tail), enhances solubility by forming micelles which partitions the non-polar drug into its hydrophobic core.
  • Use of hydrotropes, which are organic molecules and when added in water, forms loose aggregates. The drug gets dissolved in the matrix of the hydrotrope.
  • Structural alternations of drug molecule (e.g. Carrier linked prodrugs)
  • Use of complexing agents which uses various forces like London dispersion forces, hydrogen bonding and hydrophobic interactions to form a complex with drug molecule leading to enhanced solubility. e.g. Cyclodextrin complexes.
  • Changing the pH of aqueous solution of drug molecule so that ionization pattern is affected. Solubility increases with ionization as ions are more soluble in aqueous media than neutral molecules. Hence, pH of the solution can be increased or decreased depending on the nature of drug.

Factors Affecting Solubility:

  • Temperature: Increase in temperature increases kinetic energy of the system, thereby increasing solubility. Heat energy gets converted to kinetic energy which causes the molecules of both solute and solvent to vibrate causing more interaction between the molecules.
  • Pressure: Pressure doesn’t affect the solubility of solids and liquids to a great extent. However, the solubility of gases increases with increase in pressure.
  • Particle size of solute: Smaller the particle size, more is the solubility. Small particle size results in large surface area and large surface area means more interaction with the solvent and hence, more dissolution. But extremely small particle sizes can lead to aggregation of the particles to form clumps which again decreases solubility.
  • Polymorphism: Different forms of a compound have different solubilities. Generally, amorphous forms are more water soluble than crystalline materials as more surface area is available for solvent interactions due to finer particle size. Furthermore, in crystalline compounds, anhydrous forms are more soluble than hydrate forms as hydrate forms already contain bound water within their crystal lattice. Also, metastable forms of crystals have greater solubility than stable forms.
  • Polarity: The polarity of solute as well as solvent can affect solubility of the solute. If a solute is polar in nature, it will dissolve only in a polar solvent. This is because of dipole-dipole interactions between the solute and the solvent molecules. The positive end of a solute molecule will have affinity for the negative ends of the solvent molecules and such interactions form a solution. Similarly, non-polar solutes will be soluble in non-polar solvents due to the presence of London dispersion forces. These are attractive forces that form temporary dipoles of atoms and molecules thus aiding solubility.

Some other factors include the nature of solute, nature of solvent, molecular size of solute, melting point of solid solutes, etc., which affect the extent of solubility of a compound in variable degrees.

Importance of Solubility:

  • Solubility is of great concern as it is necessary that the drug must be in the solution form so that it can be absorbed by the body or have any biological activity.
  • Drugs (mainly organic) with limited aqueous solubility won’t dissolve in the body fluids which decreases bioavailability.
  • Not only lipophilicity plays an important role to cross the lipid bilayer of plasma membrane, but the drug must also dissolve in the aqueous portion of the cell for optimum absorption.
  • Drugs must dissolve so that it can interact freely with biological targets.

Protein Binding

Binding of drug to protein may enhance distribution of drugs, or inactivate the drug by not enabling a sufficient concentration of free drug to target at receptor site or retard the excretion of such drug molecule. Interaction of drugs with protein may cause displacement of body hormones or change the configuration of protein or inactivates the drug biologically by forming a drug-protein complex.

Drug binding to a protein or multiple proteins mainly depends on nature (acidic or basic) of drug. Albumin is the most common protein that is involved in binding of drugs and comprises of more than half of blood proteins. Albumin can interact with both, acidic as well as basic drugs in the plasma by Van der Waals’ dispersion forces, hydrophobic bonding, hydrogen bonding and ionic interaction.

Protein binding values (% fraction bound) are normally given in terms of percentage of total plasma concentration of a drug that is bound to all plasma proteins. Drugs bind to protein either through hydrophobic interactions (e.g. binding of Ca2+ to target protein) or through self-association in which drug may self dissociate to form dimers, trimers or aggregates of larger size.

Many times binding to plasma proteins is reversible, and the concentration of the free and bound drug at equilibrium may be expressed as:

Free drug + Free protein = Drug-protein complex

Pharmacokinetic importance of protein binding:

  • Drug-protein binding influences the distribution equilibrium of the drug.
  • Plasma proteins exert a buffer and transport function in the distribution process.
  • Only free and unbound drug acts can leave the circulatory system and diffuse into the tissue.
  • Protein binding is affected by the presence of diseases. e.g. drugs like dapsone, morphine show decreased extent of protein binding in liver diseases, whereas drugs like barbiturates and sulphonamides show less binding in renal diseases.

Protein binding can be determined by many methods like dialysis, ultracentrifugation, ultra filtration, electrophoresis etc.

Chelation

Chelating agents are organic or inorganic compounds capable of binding metal ions to form complex ring-like structure called ‘chelates’. Chelating agents possess “ligand binding atoms that form either two covalent linkages or one covalent and one co-ordinate or two co-ordinate linkages in the case of bidentate chelates.

Mainly atoms like S, N and O function as ligand atoms in the form of chemical groups like -SH, -S-S, -NH2, NH, -OH, -OPO3H, or >C=O. Bidentate or multidentate ligands form ring structures that include the metal ion and the two-ligand atoms attached to the metal. Chelation is a result of a donor-acceptor mechanism (electrons or electron pair) or Lewis acid-base reaction (protons) leading to formation of complexes or coordination compounds.

Any non-metallic atom or ion (in free form or in neutral molecule or in ionic compound) that can donate an electron pair may serve as the donor. Any metallic ion or a neutral molecule may accept a pair of electrons and acts as acceptor. In addition, intramolecular forces can also be involved in the formation of complexes. Complexes may be divided broadly into two classes depending on whether the acceptor compound is a metal ion or an organic molecule.

Medicinal Chemistry Introduction To Medicinal Chemistry Chelating agents used to treat cases of heavy metal poisoning

Many a times, an ideal chelator in vitro might not prove so in vivo, either due to the toxicity considerations or due to the presence of endogenous substances (haemoglobin, cytochromes, etc.) that can also chelate metal ions and thus leads to competition. Also, pH appears to be an important factor influencing complex formation and stability.

Most chelating agents are unstable at low pH, whereas at high pH metals tend to form insoluble hydroxides which are less accessible to chelating agents. This feature becomes significant in pathological conditions leading to acidosis or alkalosis. Optimally effective chelation can be achieved by virtue of some combination of the basic properties of both the metal ions, chelating agents and the resulting metal complex.

Applications of chelation:

  • It is significantly involved in biological system and to some extent in explaining drug action.
  • Can lead to effective antidotes for organic arsenicals, treatment of poisoning due to antimony, gold and mercury, etc. e.g. Dimercaprol.
  • Penicillamine is an effective antidote for treatment of copper poisoning because it forms water-soluble chelate with copper and other metal ions.
  • 8-Hydroxyquinoline and its analogue acts as antibacterial and antifungal agent by complexing with iron and copper.

Bioisosterism

Longmuir coined the term isosterism. When two molecules or molecular fragments containing an identical number and arrangement of electron will have similar properties then they are termed as isosteres. Isosteres should be isoelectric i.e. they should possess same total charge. The phenomenon of isosterism is important because the biological characteristics of isosteres appear to be similar.

Bioisosterism is defined as the phenomenon by which compounds or groups that possess similar molecular shapes and volumes, approximately same electronic distribution and similar physical properties exhibits similar biological activities.

Classification:

Bioisosteres are classified into the following two types:

  • Classical bioisosteres
  • Non-classical bioisosteres

Classical bioisosteres:

  • Classical bioisosteres have similarities in shape and electronic configuration of atoms, groups, and molecules, which they replace. They have similarities of shape and electronic configuration of atoms, groups and molecules which they replace.
  • The classical bioisosteres may be,

Univalent atoms and groups:

Cl, Br, F, H, OH, NH, CH3 for H, SH and CF3

Medicinal Chemistry Introduction To Medicinal Chemistry Univalent atoms and groups

Bivalent atoms and groups:

Medicinal Chemistry Introduction To Medicinal Chemistry Bivalent atoms and groups

Trivalent atoms and groups:

-CH=, N =, p =, – AS =

Tetravalent atoms and groups:

=N*, C=,=P*=,=As*=

Ring equivalents:

Medicinal Chemistry Introduction To Medicinal Chemistry Ring equivalents

Non-classical Bioisosteres:

They do not follow the steric and electronic definition of classical isosteres. They do not have the same number of atoms as replacement. They have one of the following characteristic features, such as

  • Electronic properties
  • Physicochemical properties
  • Spatial arrangements
  • Functional moiety critical for biological activity

Exchangeable groups: Exchangeable group isosterism in which the properties of discrete functional elements are emulated. Eg. Carboxylic acid functionality can be exchanged with tetrazole or sulphonamido groups.

Medicinal Chemistry Introduction To Medicinal Chemistry Exchangeable groups

Cyclic versus non-cyclic structure:

Medicinal Chemistry Introduction To Medicinal Chemistry Cyclic versus non-cyclic structure

Hydrogen Bonding

Among the secondary forces, hydrogen bonding is one of the most important forces that affects the physical property of the compound. Hydrogen bonds are created because of groups like -OH, -NH, etc. which can form intermolecular or intramolecular hydrogen bonds e.g. water, salicylic acid, o-nitro phenol etc. Hydrophobic bonds are seen between non-polar regions of the receptor and the drug e.g. isopropyl moiety, of a drug fits into a hydrophobic cleft on the receptor composed of hydrocarbon chains of amino acids valine, isoleucine and leucine.

Medicinal Chemistry Introduction To Medicinal Chemistry Molecules capables of forming hydrogen bonds

Hydrogen bonds are generally, of two types, one, intermolecular hydrogen bonding and other one is intramolecular hydrogen bonding. The intermolecular hydrogen bonding occurs between different molecules of same compound so as to form polymeric aggregate. This cause increases in boiling point of the compound as well as its water solubility.

The reason for increase in solubility is the formation of intermolecular hydrogen bonding with water e.g. ethanol shows higher boiling point and higher solubility in water than dimethyl ether even though both have the same molecular weight. And the intramolecular hydrogen bonding occurs between different atoms of same molecule.

Such kind of bonding may result into ring like systems thus causing decrease in boiling point and water solubility. The reason for decrease in solubility is the restriction of possibility of intermolecular hydrogen bonding of the o-substituted groups with water that prevents association of the molecules to form an aggregate.

Medicinal Chemistry Introduction To Medicinal Chemistry Intermolecular hydrogen bonding

Medicinal Chemistry Introduction To Medicinal Chemistry Intramolecular hydrogen bonding

Medicinal Chemistry Introduction To Medicinal Chemistry Effect of intermolecular and intramolecular hydrogen bonding

Effects of Hydrogen Bonding:

All physical properties such as boiling points, melting point, water solubility, etc. and several chemical properties like acid character, basic character, properties of carbonyl groups, etc. are affected by hydrogen bonding.

For example, Intermolecular hydrogen bonding cause association of several molecules of the same compound leading to increase in intermolecular forces and increased boiling point. The intramolecular hydrogen bonding cause chelation between the groups of same molecule thereby restricting the possibility of intermolecular hydrogen bonding and thus reduces melting point and boiling point.

Hydrogen bonding between the solvent and the solute increases aqueous solubility by many folds e.g. methanol and ethanol are highly soluble in water due to hydrogen bonding between molecules. Similarly, high solubility of polyhydric phenols and sugars may be due to availability of greater number of -OH groups for hydrogen bonding.

Compounds showing hydrogen bonding have higher surface tension and viscosity e.g. glycerol, glycol, sulphuric acid, sugar syrup, phosphoric acid, etc. Due to more number of -OH groups, the extent of hydrogen bonding is more in glycerol. So, it is more viscous than glycol. The tertiary structures of proteins and nucleic acids are due to hydrogen bonding.

In a-helices, hydrogen bonds are formed between hydrogen of polar N-H units with oxygen of polar C=O units. Also, the double strands of DNA are held together by hydrogen bonds. Replication of DNA depends on hydrogen bonds which selectively connect specific base pairs, as do the several steps by which the genetic message determines the specific order of amino acids in a protein.

Drug-Receptor interactions: Hydrogen bonding provides secondary binding force for drug-receptor interactions.

Isomerism

Isomers are the molecules of identical atomic compositions, but with different bonding arrangements of atoms or orientations of their atoms in space i.e., isomers are two or more different substances with the same molecular formula. Three types of isomerism are possible – Constitutional, Configurational, and Conformational. The terms configuration and conformation are often confused.

Configuration refers to the geometric relationship between a given set of atoms, for example, those that distinguish L- from D-amino acids. Interconversion of configurational alternatives requires breaking of covalent bonds. Conformation refers to the spatial relationship of every atom in a molecule. Interconversion between conformers occurs without covalent bond rupture, with retention of configuration, and typically via rotation about single bonds.

Geometrical Isomerism:

Stereochemistry, enantiomers, symmetry and chirality are impotent concepts in therapeutic and toxic effect of drug. The drug must possess a high degree of structural specificity or stereo selectivity. Many drugs show stereo selectivity because mostly the sites or targets are optically active biological macromolecules such as proteins, polynucleotides or glycolipids.

Geometrical isomers are stereoisomers having same molecular formula, same functional groups, same positions, but different orientation around a double bond or on a ring.

An important criteria to exhibit geometric isomerism is that the isomers cannot be interconverted through mere rotation around a single bond. The relative positions of atoms attached directly to multiple bonds are also fixed. For the double bond, cis- and trans- isomers result.

For example, diethylstilbestrol exists in two fixed stereoisomeric forms: trans- diethylstilbestrol is estrogenic, whereas the cis-isomer is only 7% active. In trans- diethylstilbestrol, resonance interactions and minimal steric interference tend to hold the two aromatic rings and connecting ethylene carbon atoms in the same plane.

Medicinal Chemistry Introduction To Medicinal Chemistry Geometrical Isomerism

Geometric isomerism is represented by cis/trans isomerism resulting from restricted rotation due to carbon-carbon double bond or in rigid ring system. They are two or more coordination compounds which contain the same number and types of atoms, and bonds (i.e., the connectivity between atoms is the same), but which have different spatial arrangements of the atoms. Specific isomer gives specific response and hence different pharmacological responses are obtained for different isomers.

Medicinal Chemistry Introduction To Medicinal Chemistry Z configuration is inactive

Optical Isomerism:

Optical isomers are non-superimposable mirror images of each other (called a pair of enantiomers) and differ in their optical activity. Many drugs come from natural sources like plants. They are usually chiral and are generally found only as single enantiomers in nature rather than as racemic mixtures. Example, synthetic drugs like Ibuprofen are chiral, one of its enantiomers has analgesic and anti-inflammatory properties, the other does not (it is pharmacologically inactive).

Stereoisomers differ in pharmacokinetic and pharmacodynamic properties. Pharmaco- kinetic differences resulting out of stereo-isomerism can be in absorption, e.g. L-Methotrexate is better absorbed than D-Methotrexate, Esomeprazole is more bioavailable than racemic omeprazole; in distribution, e.g. S-Warfarin is more extensively bound to albumin than R-Warfarin, hence it has lower volume of distribution.

Levocetrizine has smaller volume of distribution than its dextroisomer, D-Propranolol is more extensively bound to proteins than L-Propranolol; in metabolism like S-Warfarin is more potent and metabolized by ring oxidation while R-Warfarin is less potent and metabolized by side chain reduction, half life of S-Warfarin is 32 hours, while it is 54 hours for R-Warfarin.

Pharmacodynamic differences resulting out of stereoisomerism can be in pharmaco- logical activity and potency like L-Propranolol has ẞ-adrenoceptors blocking action while D- Propranolol is inactive; Carvedilol is a racemic mixture, the S(-) isomer is a nonselective ẞ- adrenoceptor blocker, while both S(-) and R(+) isomers have approximately equally α- blocking potency; S-Timolol is more potent a-blocker than R-timolol but both are equipotent ocular hypotensive agents.

Medicinal Chemistry Introduction To Medicinal Chemistry Optical Isomerism

Medicinal Chemistry Introduction To Medicinal Chemistry Examples of other drug stereoisomers

Conformational Isomerism:

Another form of isomerism is conformational isomerism which arises due to free rotation around carbon-carbon single bond. Conformational isomers (or conformers) are non- superimposable orientations. In order for a molecule to possess conformational isomers, it must possess at least one single bond that is not part of a ring system.

The reason for this restriction is that it is impossible to freely rotate a single bond within a ring system without breaking the ring in the process. The conformational flexibility of most open-chain neurohormones, such as acetylcholine, epinephrine, serotonin, histamine, and related physiologically active biomolecules, permits multiple biological effects to be produced by each molecule, due to their ability to interact in a different and unique conformation with different biological receptors.

For example, acetylcholine may interact with the muscarinic receptor of postganglionic parasympathetic nerves and with acetyl cholinesterase in the fully extended conformation and, in a different, more folded structure, with the nicotinic receptors at ganglia and at neuromuscular junctions.

In the structure of acetylcholine, the ethane bridge (i.e., atoms 4 and 5) between the ester oxygen and the quaternary nitrogen is a freely rotatable system and gives rise to a variety of different conformations. When the acetyl group and the quaternary nitrogen are situated 180° apart, the molecule is said to be in the trans or anti conformation.

Both a sawhorse representation and a Newman projection of the trans conformation are illustrated. Rotation of the trans Newman projection 60° in the counterclockwise direction gives rise to the gauche or skew conformation. Continued rotation by another 30° in the same direction provides the fully eclipsed conformation.

These rotations alter the spatial arrangement of the atoms without breaking a bond. Therefore, conformational isomers are not distinct molecules, but rather different orientations of the same molecule. Obviously, there are many more conformations possible.

Medicinal Chemistry Introduction To Medicinal Chemistry Conformational isomerism of acetyl choline

Drug Metabolism

Metabolism (biotransformation) is a necessary phenomenon to eliminate drugs or other foreign compounds (xenobiotic) from body. During metabolism the lipophilic compounds are converted into hydrophilic one and are excreted out. Drug metabolism is also referred as detoxification process, (but prodrugs are exceptional to this) because of which toxic metabolites are wiped out of body.

Drug metabolism takes place in two phases:

  • Phase 1 (Functionalization)
  • Phase 2 (Conjugation)

Phase-1: Functionalization

Functionalization includes oxidation, reduction and hydrolysis. The purpose is to introduce a polar functional group like OH, COOH, NH2, SH, into xenobiotic molecules with the help of several enzymes.

This can be done in two ways:

  • Direct introduction of functional group (aromatic /aliphatic hydroxylation)
  • Modification or unmasking of existing functionalities.

e.g. Reduction of ketone and aldehyde to alcohol, oxidation of alcohols to acids, hydrolysis of esters and amide to acid, amines and OH groups, reduction of azo and nitro compound to give amino.

Phase-1 reaction may not be able to produce complete inactive metabolite or sufficient hydrophilic metabolite, but makes the molecules amenable to undergo phase-II reactions easily. Thus Phase-I reactions increase hydrophilicity of molecule, reduces its stability and facilitates conjugation process.

Phase-2: Conjugation

Basic purpose of these reactions is to attach small, polar and ionizable endogenous compounds to the metabolite obtained from phase-I. This group includes glucoronic acid, sulfate, glycine and other amino acid so as to form water soluble conjugates. Parent compounds having -OH, -COOH, -NH2 functional groups can directly be conjugated by phase-II enzymes.

These highly hydrophilic metabolites excreted in urine are non-toxic and have no pharmacological effect. Other phase-II pathways like methylation, acetylation, glutathione conjugation (GSH) either terminate biological activity or protect body against chemically reactive metabolites.

Sites of Drug Biotransformation:

Liver is the main site of drug metabolism. All orally administered drugs pass through liver and hence are susceptible to first pass hepatic metabolism before reaching to systemic circulation. This decreases oral bioavailability of drugs like lidocaine, meperidine, propranolol, etc.

Intestine is also important for metabolism of some of the drugs (extra hepatic metabolism of xenobiotic) e.g. levodopa, chlorpromazine and diethyl stilbesterol. Enzymes like esterase and lipase present in intestinal wall; bacterial flora in intestinal and colon wall are helpful in metabolism. Other tissues like kidney, lungs, adrenal glands, brain and skin do take part in metabolism; but in a smaller extent.

Factors Influencing Drug Metabolism

  • Genetic factors: Species difference must be considered when the data from animals are used to extrapolate the results in human.
  • Physiological factors: Age (elderly disorder), individual variations in hormones, sex, physiological difference, nutritional status (diet), etc also affect rate of metabolism. If protein deficiency exists, then hepatic enzymes are also reduced. If lipid deficiency exists, rate of oxidative metabolism also decreases. If vitamins deficiency exists, activity of microsomal enzymes decreases.
  • Pharmacodynamic factors: Dose, frequency of dose administration, route of administration, tissue distribution of drugs, proteins binding, etc. affect rate of metabolism.
  • Environmental factors: The body can be exposed to environmental factors like air, water and food contaminants or pollutants by design or by accident. Pollutants like polychlorinated biphenyls are resistant to hydroxylation and thus may be hazardous to life as it remains there for long time after absorption.

Phase 1: Pathways Of Metabolism

Oxidative biotransformation: This is most preferred and important pathway of metabolism and follows following reaction scheme:

Medicinal Chemistry Introduction To Medicinal Chemistry Oxidative biotransformation

Enzyme carrying out this metabolism is mixed function oxidase (FMO) or mono- oxygenases. FMO is made up of many components like Cytochrome P-450 enzyme which transfers oxygen atom to RH, NADPH dependent cytochrome P-450 reductase, NADH linked cytochrome bs.

Cytochrome P-450 is a hemeprotein abundantly found in liver. Heme is the iron containing porphyrin i.e. protoporphyrin-IX and protein is apoprotein. Reduced form of cytochrome P-450 (i.e. Fe2+) binds with -CO to form a complex having absorption maximum at 450 nm, hence the family of enzyme is referred as cytochrome P-450.

Cytochrome P-450 metabolizes number of diverse substrates by various oxidative mechanisms. This enzyme is membrane bound and exists in different forms. The apoprotein portions of various cytochrome P-450 differ in their structure. Because the apoprotein portion is important in substrate binding and catalytic transfer of activated oxygen, specific form may oxidize specific substrate only.

Oxidative Reactions:

Oxidation of Aromatic Compounds:

Hydroxylation: It causes oxidation of arene to arenol. Arene oxide (epoxide) is electrophilic, highly reactive because of strained 3-membered ring.

Medicinal Chemistry Introduction To Medicinal Chemistry Hydroxylation

Many drugs follow this path e.g. (1) Propranolol, (2) Phenobarbital, (3) Phenytoin, (4) Warfarin, (5) Amphetamine.

Medicinal Chemistry Introduction To Medicinal Chemistry Aromatic hydroxylation

Sometimes the Phase-I hydroxyl metabolites are pharmacologically active. For example, in case of phenylbutazone, its metabolite is more active and hence it is termed as prodrug.

Detoxification of arene oxides: Arene oxides can be further inactivated by various ways as follows:

  • Spontaneous rearrangement to arenols via NIH (1, 2-hydride) shift
  • Hydration to trans-dihydrodiols
  • Glutathione adducts
  • Macromolecule adducts

Sometimes, in molecules like benzene, detoxification forms covalent adduct with nucleophillic groups present on DNA or RNA leading to cellular damage. Hence such molecules are very toxic to mammalian systems.

Medicinal Chemistry Introduction To Medicinal Chemistry Detoxification of arene oxides

NIH Shift (1, 2-hydride shift): The novel intramolecular hydride migration is termed as NIH shift. It was named after National Institute of Health (NIH), USA, who discovered this process. Not all aromatic hydroxylation occurs through this process. The phenolic products of the hydroxylation of aromatics containing ortho-/para-directing substituents (F, Cl, Br, I, OH, NH2, CH3, CH2CH3, and OCH3) were primarily para-phenols.

In contrast, with aromatics containing meta-directing substituents (NO2 and CN), the phenolic products were a more even mixture of meta- and para-phenols. Ortho-fluorophenol was the only ortho-phenolic product observed. The nature of the products suggested that the reaction involves an enzyme-specific, electrophilic addition to the aromatic ring so as favour hydroxylation at either the meta- or para-positions.

With the fluoro-, chloro- and bromobenzene substrates, the values for the migration and retention of hydrogen during hydroxylation (NIH shift) were nearly identical when the hydrogen was either at the site of hydroxylation or at an adjacent site, indicating a possible common intermediate.

Metabolism of Phenytoin:

Medicinal Chemistry Introduction To Medicinal Chemistry Metabolism of Phenytoin

Oxidation of Olefins:

Medicinal Chemistry Introduction To Medicinal Chemistry Oxidation of olefins

Olefinic epoxidation of carbamazepine:

Medicinal Chemistry Introduction To Medicinal Chemistry Olefinic epoxidation of carbamazepine

In drugs like alclofenac, secobarbital the epoxides are not stable and immediately converted to dihydroxy derivatives which are quite stable and isolable.

Medicinal Chemistry Introduction To Medicinal Chemistry Dilhydroxyalclofenac

Sometimes epoxides formed are very reactive and produce toxic effects.

Medicinal Chemistry Introduction To Medicinal Chemistry Epoxide

These reactive epoxides sometimes cause the destruction of cytochrome P450 enzymes e.g. epoxide of secobarbital, fluroxene (volatile anaesthetics) etc.

Oxidation of Benzylic C-Atoms:

Carbon attached to benzylic position in aromatic compound is susceptible to oxidation so as to form corresponding alcohol (carbinol) metabolite.

Medicinal Chemistry Introduction To Medicinal Chemistry Oxidation of Benzylic C-Atoms

Oxidation of Aliphatic C-Atoms:

Metabolic oxidation at terminal methyl group is called as “o oxidation” and that of penultimate carbon atom (next to last carbon) is known as “o-1 oxidation”. This is generally observed in drug molecules with straight or branched alkyl chains.

Medicinal Chemistry Introduction To Medicinal Chemistry Oxidation of Aliphatic C-Atoms

Oxidation of C-Atoms Alpha to Carbonyls and Imines:

e.g. Metabolism in diazepam.

Medicinal Chemistry Introduction To Medicinal Chemistry Oxidation of C-Atoms Alpha to Carbonyls and Imines

Oxidation of Alicyclic C-Atoms:

E.g. Oxidation of minoxidil

Medicinal Chemistry Introduction To Medicinal Chemistry Oxidation of Alicyclic C-Atoms

Oxidation of C-Hetero Atom Systems:

This involves two basic types of biotransformation processes. One hydroxylation of a-carbon attached directly to heteroatom leading to unstable intermediate and subsequent hydroxylation of heteroatom.

C-N Systems:

N-dealkylation: E.g. Codeine

Medicinal Chemistry Introduction To Medicinal Chemistry N-dealkylation

N-oxide formation: E.g. Trimethoprim

Medicinal Chemistry Introduction To Medicinal Chemistry N-oxide formation

N-hydroxylation: Eg. Dapsone

Medicinal Chemistry Introduction To Medicinal Chemistry N-hydroxylation

C-S Systems:

S-dealkylation: Eg. 6 methyl mercaptopurine

Medicinal Chemistry Introduction To Medicinal Chemistry S-dealkylation

Desulfuration: Eg. Thiopental

Medicinal Chemistry Introduction To Medicinal Chemistry Desulfuration

S-oxidation: E.g. Cimetidine

Medicinal Chemistry Introduction To Medicinal Chemistry S-oxidation

C-O Systems: E.g. Phenacetin

Medicinal Chemistry Introduction To Medicinal Chemistry C-O Systems

Oxidation of Alcohol and Carbonyl Functions:

Carbinol/alcohol metabolite intermediates obtained after oxidation of different hydroxylation processes which may undergo further oxidation to aldehydes or ketones and finally to acids. Secondary alcohol group is more polar and functionalized and hence may not get oxidized further, but it can get conjugated easily.

Medicinal Chemistry Introduction To Medicinal Chemistry Oxidation of Alcohol and Carbonyl Functions

Miscellaneous: E.g. Chloroform

Medicinal Chemistry Introduction To Medicinal Chemistry Miscellaneous

Reductive Reactions:

Reduction of Carbonyl Functions: Reduction of aldehydes E.g. Chloral hydrate.

Medicinal Chemistry Introduction To Medicinal Chemistry Reduction of Carbonyl Functions

Reduction of Aromatic Ketone: E.g. Acetophenone

Medicinal Chemistry Introduction To Medicinal Chemistry Reduction of Aromatic Ketone

Reduction of N-Compounds: Eg. Nitrazepam.

Medicinal Chemistry Introduction To Medicinal Chemistry Reduction of N-Compounds

Miscellaneous: E.g. Disulfiram

Medicinal Chemistry Introduction To Medicinal Chemistry Miscellaneous

Hydrolytic Reactions:

Hydrolysis of esters and amides is done mainly by esterase, pseudo cholinesterase, amidases and deacylases. Esters are easy to hydrolyse as compared to amides. Functional groups like phosphate esters, sulphonyl urea, carbamate esters, epoxides and arene oxides are also susceptible to undergo hydrolysis.

Peptide hormones like insulin, prolactin etc. are also metabolized by hydrolysis. Sometimes ester hydrolysis may give pharmacologically active metabolite as in the case of chloramphenicol palmitate (prodrug). The palmitate ester is used to minimize the bitter test of the drug and increase palatability in the paeidatric patients.

Hydrolysis of Esters: E.g. Aspirin

Medicinal Chemistry Introduction To Medicinal Chemistry Hydrolysis of Esters

Hydrolysis of Amides: E.g. Procainamide

Medicinal Chemistry Introduction To Medicinal Chemistry

Hydrolytic Dehalogenation: E.g. Dichloro diphenyls trichloroethane

Medicinal Chemistry Introduction To Medicinal Chemistry Hydrolytic Dehalogenation

Phase-2: Conjugation Reactions

Phase-1 metabolites need further conversion for easy excretion and hence small, polar and ionizable endogenous molecules like glucuronic acid, sulfate glycine and glutamine are attached to them leading to generation of Phase-II metabolites. These are biologically inactive, non-toxic. Some other phase-II reactions like methylation and acetylation do not increase water solubility, but terminate pharmacological activity. True detoxification occurs in phase-II pathway. Glutathione (GSH) combines with reactive phase-I metabolites and prevent them combining with biomolecules like DNA/RNA, thus cytotoxicity is prevented.

Mechanism of Action: Conjugating groups are activated in the forms of coenzymes and then are attached / transferred to accepting substrates; while in some other cases like glycine and glutamine conjugation, substrate is activated rather than conjugating groups. Transferase enzyme plays an important role in activation.

Glucuronic Acid Conjugation:

This is the most common pathway because:

  • D-glucuronic acid is easily available (obtained from D-glucose).
  • Many functional groups can combine enzymatically with glucuronic acid.
  • Glucuronyl moiety can ionize carboxylate and polar hydroxyl group to increase water solubility.

Mechanism of Action: B-glucuronide moiety is attached to substrate with the help of microsomal uridine-5-diphospho-glucuronosyl transferase enzyme. All glucuronide conjugations have B-linkage or B-conjugation at C1.. Many functional groups undergo glucuronidation. According to hetero atom (O, S, N) attached to C1 of glucuronyl moiety, metabolic products of these conjugation are classified as –

  • Oxygen glucuronidee.g.: Acetaminophen
  • Nitrogen glucuronides – e.g.: Desipramine
  • Sulfur glucuronides – e.g. Methimazole
  • Carbon glucuronides – e.g. : Phenylbutazone

O-Glucuronides

Medicinal Chemistry Introduction To Medicinal Chemistry O-Glucuronides

N-glucuronides:

These are formed with aromatic amines, aliphatic amines, amides and sulfonamides. But generally aliphatic and aromatic amines are not glucurylated. They undergo N-acetyl preferably.

Medicinal Chemistry Introduction To Medicinal Chemistry N-glucuronides

S-glucuronides: This is observed very rarely.

Medicinal Chemistry Introduction To Medicinal Chemistry S-glucuronides

C-glucuronides:

Medicinal Chemistry Introduction To Medicinal Chemistry C-glucuronides

Apart from xenobiotic, many endogenous substrates like bilirubin, steroidal hormones are also eliminated as glucuronide conjugates. In neonates and infants glucuronidation processes are not fully developed. So in such cases serious toxicity may be seen because of accumulation of drugs like bilirubin.

e.g. Neonatal hyperbilirubinemia- Inability to conjugate bilirubin with ẞ-glucuronide.

Gray baby syndrome – Inability to conjugate chloramphenicol with glucuronide.

Sulfate Conjugation:

This occurs primarily in phenols and also in alcohols, aromatic amines etc. Amount of sulfate available for conjugation is limited. Endogenous substance like heparin, steroids, catecholamine and thyroxin are also sulfate conjugated.

Mechanism: Sulfate group from PAPS (3-phosphoadenosine-5-phosphosulfate) is transferred to substrate with the help of sulfotransferase enzymes (in liver, kidney, intestine etc.) Phenols are more susceptible to this conjugation.

Medicinal Chemistry Introduction To Medicinal Chemistry Sulfate conjugation

Examples:

a-Methyl dopa:

Medicinal Chemistry Introduction To Medicinal Chemistry Methyl Dopa

Acetaminophen:

Medicinal Chemistry Introduction To Medicinal Chemistry Acetaminophen

Conjugation with Glycin, Glutamine and Other Amino Acids

This is specifically used for conjugation of aromatic acid and aryl alkyl acids. Limited quantities of amino acids are available for conjugation.

Mechanism: Substrate is activated with ATP and CoA to form Acyl-CoA complex. This acylates glycine/ glutamine under influence of specific enzymes like glycine/ glutamate N-acyltransferase Activation and acylation take place in mitochondria of liver/kidney cells.

Glycin conjugation:

Medicinal Chemistry Introduction To Medicinal Chemistry Glycin conjugation

Glutamine conjugation:

Medicinal Chemistry Introduction To Medicinal Chemistry Glutamine conjugation

Glutathione (GSH) or Mercapturic Acid Conjugates:

This is also an important pathway for detoxification of chemically reactive electrophilic compound. GSH protects vital cellular constituents against chemically reactive species by its nucleophilic -SH group. This SH group reacts with electron deficient compound to form S-substituted GSH adduct. GSH conjugated with xenobiotic is further biotransformed into mercapturic acid, involving enzymatic cleavage of 2 amino acids (glutamic and glycine). GSH conjugation does not involve initial formation of activated coenzymes of substrate.

Mechanism of Action: Nucleophilic displacement at an electron deficient carbon/ heteroatom or nucleophilic addition to an electron deficient C=C. Many industrial chemicals are detoxified by this route.

Example: 2,4-dichloro nitrobenzene

Medicinal Chemistry Introduction To Medicinal Chemistry Glutathione

GSH Conjugation Involving Substitution At Heteroatom Like N, O, S:

Example: Azathioprine

Medicinal Chemistry Introduction To Medicinal Chemistry Azathioprine

Nucleophilic Addition Of GSH To Electron Deficient C=C:

The C=C is generally made electron deficient by resonance or conjugation with C=O group, esters, amides, nitriles etc. It generally occurs in a, B-unsaturated systems and undergoes Michael addition reaction with GSH to give GSH adduct.

Mechanism of nucleophilic addition of GSH to electron deficient C=C is as follows:

Medicinal Chemistry Introduction To Medicinal Chemistry GS adduct

Example: Ethacrynic acid (Diuretic)

Medicinal Chemistry Introduction To Medicinal Chemistry Ethacrynic acid

Sometimes chemically reactive a,ẞ-unsaturated systems are generated during various biotransformations. GSH reacts with these systems by Michael addition reaction.

Example: Acetaminophen

Medicinal Chemistry Introduction To Medicinal Chemistry Mercapturic acid derivative

GSH conjugate may also cause toxicity due to metabolic intermediates which are electrophilic. Such electrophiles attack on DNA or RNA and produce cytotoxicity.

Example: 1,2-dichloroethane

Medicinal Chemistry Introduction To Medicinal Chemistry Cytotoxicity

Acetylation:

Drugs containing primary amines undergo metabolism by this route. It includes various functional groups like aromatic amines, sulphonamides, hydrazines, hydrazides and primary aliphatic amines. Soluble N-acetyl transferase are the enzymes which transfer the acetyl group from acetyl CoA to the accepting amino substrate. N-acetylation process doesn’t affect water solubility, but terminates the biological activity.

Medicinal Chemistry Introduction To Medicinal Chemistry Acetylation

Examples:

Isoniazid

Medicinal Chemistry Introduction To Medicinal Chemistry Isoniazid

Nitrazepam

Medicinal Chemistry Introduction To Medicinal Chemistry Nitrazepam

Biotransformation Of Sulfonamide:

Medicinal Chemistry Introduction To Medicinal Chemistry Biotransformation of sulfonamide

Biotransformation Of Hydrazine And Hydride Derivative:

Medicinal Chemistry Introduction To Medicinal Chemistry Biotransformation of hydrazine

Acetylation Polymorphism:

The acetylation pattern of many drugs in human being can be classified as-slow and rapid acetylation. i.e. drug conjugates with acetyl CoA slowly or rapidly. This phenomenon is called as acetylation polymorphism and individual are called as slow acetylators or rapid acetylators. This variation in acetylation is genetic and depends on activity of N-acetyltransferases.

Asians and Eskimos are rapid acetylators and hence produce insufficient response at therapeutic dose. Egyptians and western population are slow acetylators and may produce adverse reaction at given dose. e.g. Half-life of isoniazid in rapid acetylators is 45-80 minutes, while in slow acetylators it is 140-200 minutes.

In the slow acetylators, accumulation of drug is seen which gives higher response and higher side effects. Slow acetylators are also susceptible to drug interaction. e.g. In isoniazid slow acetylators, isoniazid inhibit metabolism of phenytoin, thus its accumulation is more leading to toxicity.

While in case of rapid acetylators, the acetyl hydrazine metabolite formed by rapid biotransformation of isoniazid undergoes N-oxidation mediated by cytochrome P450 and gives reactive intermediate which may covalently bind to liver cells. So rapid acetylators have a greater risk of liver injury.

Methylation:

Catechols, phenols, amines, N-heterocyclic and thiol compounds undergo methylation. It plays an important role in inactivation of many physiologically active biogenic amines like dopamine, 5-HT, histamine and norepinephrine. It is minor pathway of conjugation. Most methylated products are inactive and non-toxic.

Coenzyme like 5-adenosylmethione and enzymes like methyl-transferase play crucial role here. Methyl-transferase is a group of enzymes which contain catechol-o-methyltransferase (COMT), phenol-o-methyl-transferase, non-specific N-methyl-transferase and S-methyl-transferase etc.

Medicinal Chemistry Introduction To Medicinal Chemistry Methylation

COMT causes O-methylation of neurotransmitter like norepinephrine, dopamine. Other drugs methylated by COMT include methyl dopa. Bismethylation do not occur in above case. 1,2-dihydroxy group. is necessary for the action of COMT. Hence in case of 1,3 and 1,4-dihydroxy benzene scaffold selective O-methylation is not possible. Hence isoproterenol undergoes O-methylation, whereas terbutaline does not.

Medicinal Chemistry Introduction To Medicinal Chemistry Methylated isoproterenol

Other examples:

Medicinal Chemistry Introduction To Medicinal Chemistry Methylated nicotine

Factors Affecting Drug Metabolism

  • Age Difference
  • Species and Strain
  • Genetic/Hereditary factors.
  • Sex differences
  • Enzyme Induction
  • Enzyme Inhibition

Age Difference:

In case of fetus and newborn babies, oxidative and conjugative enzymes are either deficient or underdeveloped. Hence their response to metabolism of certain drug is very different. e.g. Oxidative metabolism of tolbutamide is less in newborn, while half-life in adult is 8 hours and in infants it is greater than 40 hrs.

Activity of glucuronyltransferase is less in infants. Neonatal hyperbilirubinemia and gray baby syndrome are examples of such underdeveloped metabolism systems, in which infants are unable to glucuronidate bilirubin and chloramphenicol respectively.

Species And Strain:

Metabolism of many drugs and foreign compounds is species dependent. Cats lack glucuronyltransferase enzymes, hence phenolic xenobiotic are metabolized by sulfation, rather than glucuronidation only. But in pigs, due to lack of sulfotransferase enzymes, these phenolic drugs are metabolized by glucuronidation only. Example of strain difference includes cottontail rabbit liver microsomes metabolizes hexobarbital more rapidly than New Zealand rabbit liver microsomes.

Genetic/Hereditary Factors:

As seen above, acetylation of isoniazid is different in different races and accordingly they are categorized as – rapid and slow acetylators. Genetic factor influences rate of oxidation of some drugs like phenytoin, phenylbutazone etc.

Sex Differences:

Nicotine and aspirin are metabolized differently in women and men. Adult male rats metabolize many foreign compounds at faster rate than female.

e.g. N-demethylation of aminopyrine.

Enzyme Induction:

Activity of cytochrome P-450 dependent Mixed Function Oxidases (MFO) can be enhanced upon exposure to many drugs, pesticides, polycyclic aromatic hydrocarbons etc. This is called as enzyme induction. Enzyme induction causes increase in drug metabolism and decreases duration of drug action. e.g. Induction of microsomal enzyme by phenobarbital increases metabolism of warfarin and thus decreases anticoagulant effect.

Other example is enhanced metabolism of endogenous substances like cortisol, testosterone, vitamin D and bilirubin by phenobarbital. Phenobarbital also induces glucuronyltransferase enzyme and thus increases conjugation of bilirubin with glucuronic acid and hence it can be used to treat hyper bilirubinemia in neonates.

Enzyme Inhibition:

Some drugs can inhibit metabolism of other drugs. Decreased metabolism leads to accumulation, prolonged drug action and serious adverse effect. Enzyme inhibition takes place by many mechanisms like substrate competition, interference with protein synthesis, fractionation of drug metabolizing enzymes and hepatotoxicity leading to impairment of enzyme activity etc. e.g. Phenylbutazone inhibits metabolism of S (-) warfarin stereo- selectivity due to which, increased anticoagulant effect (hypoprotothombinemia) is seen. Other examples include metabolism of phenytoin is inhibited by drugs like disulfiram, isoniazid and chloramphenicol.

Miscellaneous Factors:

  • Dietary factor – Protein or carbohydrate ratio affects metabolism of many drugs. Vitamins, minerals, starvation and malnutrition also influence drug metabolism.
  • Physiological factor Pathogenic state of liver, pregnancy, hormonal disturbances, etc. also affect metabolism.

e.g. Indoles present in vegetables like cabbage, cauliflower and polycyclic aromatic hydrocarbons present in boiled beef causes enzymes induction and increases metabolism of many drugs.

Stereochemical Aspects Of Drug Metabolism

Stereoselectivity is also observed in drug disposition particularly for those processes which depend on an interaction with a chiral biological macromolecule, e.g. active transport processes, binding to plasma proteins, and drug metabolism. In drug metabolism, stereoselectivity in metabolism is probably responsible for the majority of the differences observed in enantioselective drug disposition.

Stereoselectivity in metabolism may arise from differences in the binding of enantiomeric substrates to the enzyme active site and/or be associated with catalysis owing to differential reactivity and orientation of the target groups to the catalytic site. As a result, pair of enantiomers is frequently metabolized at different rates and/or via different routes to yield alternative products.

Example: Drug receptor interaction of (R)-(-)-epinephrine, (S)-(+)-epinephrine and N-methyl dopamine.

Medicinal Chemistry Introduction To Medicinal Chemistry Drug receptor

The stereoselectivity of the reactions of drug metabolism may be classified into three groups in terms of their selectivity with respect to the substrate, the product, or both. Thus, there may be substrate selectivity when one enantiomer is metabolized more rapidly than the other; product stereoselectivity, in which one particular stereoisomer of a metabolite is produced preferentially; or a combination of the above, i.e. substrate- product stereo- selectivity, where one enantiomer is preferentially metabolized to yield a particular diastereoisomeric product.

An alternative classification involves the stereochemical consequences of the transformation reaction. Using this approach, metabolic pathways may be divided into five groups:

Prochiral To Diastereoisomer Transformations: Metabolism taking place either at a prochiral center or on an enantiotopic group within the molecule e.g. phenytoin undergoes stereoselective para-hydroxylation to yield (S)-4′-hydroxyphenytoin in greater than 90% enantiomeric excess.

Medicinal Chemistry Introduction To Medicinal Chemistry Prochiral to chiral transformations'

Chiral To Diastereoisomer Transformations: The individual enantiomers of a drug undergo metabolism at a site remote from the center of chirality with no configurational consequences e.g. (S)-warfarin undergoes aromatic oxidation mediated by CYP 2C9 in the 7- and 6-positions to yield (S)-7-hydroxy- and (S)-6-hydroxywarfarin in the ratio 3.5:1.

Medicinal Chemistry Introduction To Medicinal Chemistry Chiral to chiral transformations

Chiral To Diastereoisomer Transformations: A second chiral center is introduced into the drug either by reaction at a prochiral center or via conjugation with a chiral conjugating agent e.g. stereoselective glucuronidation of oxazepam.

 

Medicinal Chemistry Introduction To Medicinal Chemistry Chiral to diastereoisomer

Chiral To Achiral Transformations: The substrate undergoes metabolism at the center of chirality, resulting in a loss of asymmetry e.g. oxidation of the benzimidazole proton pump inhibitors, e.g., Omeprazole, which undergoes CYP 3A4-mediated oxidation at the chiral sulfoxide to yield the corresponding sulfone. The reaction shows tenfold selectivity for the S-enantiomer in terms of intrinsic clearance.

 

Medicinal Chemistry Introduction To Medicinal Chemistry Chiral to achiral transformations

Chiral Inversion: One stereoisomer is metabolically converted into its enantiomer with no other alteration in structure, e.g. 2-arylpropionic acids like ibuprofen, fenoprofen, flurbiprofen, ketoprofen, and the related 2-aryloxypropionic acid herbicides, e.g., haloxyfop. The reaction is essentially stereospecific, the less active, or inactive, R-enantiomers undergoing inversion to the active S-enantiomers.

Medicinal Chemistry Introduction To Medicinal Chemistry Chiral inversion

Multiple Choice Questions

Question 1. The term “biotransformation” includes the following:

  1. Accumulation of substances in a fat tissue
  2. Binding of substances with plasma proteins
  3. Accumulation of substances in a tissue
  4. Process of physicochemical and biochemical alteration of a drug in the body

Answer. 4. Process of physicochemical and biochemical alteration of a drug in the body

Question 2. Biotransformation of the drugs is to render them:

  1. Less ionized
  2. More pharmacologically active
  3. More lipid soluble
  4. Less lipid soluble

Answer. 4. Less lipid soluble

Question 3. Metabolic transformation (phase 1) is:

  1. Acetylation and methylation of substances
  2. Transformation of substances due to oxidation, reduction or hydrolysis
  3. Glucuronide formation
  4. Binding to plasma proteins

Answer. 2. Transformation of substances due to oxidation, reduction or hydrolysis

Question 4. Confirmational isomerism is

  1. Cis-trans isomerism
  2. Optical isomerism
  3. Dextro and levo rotatory
  4. Non-identical spatial arrangement of the atoms in molecule resulting from rotation about one or more simple bonds

Answer. 4. Non-identical spatial arrangement of the atoms in molecule resulting from rotation about one or more simple bonds

Question 5. Conjugation is:

  1. Process of drug reduction by special enzymes
  2. Process of drug oxidation by special oxidases
  3. Coupling of a drug with an endogenous substrate
  4. Solubilization in lipids

Answer. 3. Coupling of a drug with an endogenous substrate

Question 6. Which of the following processes proceeds in the second phase of biotransformation?

  1. Acetylation
  2. Reduction
  3. Oxidation
  4. Hydrolysis

Answer. 1. Acetylation

Question 7. According to pH partition theory, a weakly acidic drug will most likely be absorbed from the stomach because the drugs which exist primarily in the:

  1. Un-ionized, more lipid soluble
  2. Ionized, more water soluble
  3. Form a weak acid and more soluble in water media
  4. Ionic form of the drug which facilitates diffusion

Answer. 1. Un-ionized, more lipid soluble

Question 8. Conjugation of a drug includes the following EXCEPT:

  1. Glucuronidation
  2. Sulphate formation
  3. Hydrolysis
  4. Methylation

Answer. 3. Hydrolysis

Question 9. Metabolic transformation and conjugation usually results in an increase of a substance’s biological activity:

  1. True
  2. False

Answer. 2. False

Question 10. An antagonist is a substance that:

  1. binds to the receptors and initiates changes in cell function, producing maximal effect.
  2. binds to the receptors and initiates changes in cell function, producing submaximal effect.
  3. interacts with plasma proteins and doesn’t produce any effect.
  4. binds to the receptors without directly altering their functions.

Answer. 4. binds to the receptors without directly altering their functions.

Question 11. Irreversible interaction of an antagonist with a receptor is due to:

  1. Ionic bonds
  2. Hydrogen bonds
  3. Covalent bonds
  4. All of the above

Answer. 3.Covalent bonds

Surgical Endodontics Question And Answers

Surgical Endodontics Important Notes

  • Cardinal principles of flap design
    • The base of the flap should be wider than the free end to ensure adequate circulation into the flap
    • The sutured flap margins should rest on sound bone
    • Incision should be made with a firm, continuous stroke, perpendicular to cortical bone
    • Short, intermittent incisions result in tissue tags and ragged margins
  • Trephination is a type of artificial fistulation in which the cortical bone is perforated to release the build-up pressure and exudate around root apex to release pain
  • Semilunar Incision
    • Bemilunar Incision Advantages
      • High healing potential
      • Minimal bone damage
    • Semilunar Incision Disadvantages:
      • Inaccessibility
      • Excessive haemorrhage
      • Delayed healing
      • Scarring
  • Replacement resorption
    • It is characterized by gradual root resorption including periodontal ligament, cementum, and dentin of root with replacement by bone, and finally the tooth becomes ankylosed
    • It is considered a success of replanted tooth
  • Best storage media for avulsed tooth
    • Tooth socket
    • Patient’s saliva
    • Milk
    • Water
  • Transport media for avulsed tooth
    • HBSS [Hank balanced salt solution]
    • Coconut water
    • Saliva
    • Vestibule of mouth
    • Milk
    • Saline
    • Water
      • Viaspan
      • CPP – ACP [Casein Phosphopeptide – Amorphous Calcium Phosphate]
  • Contraindications of periradicular surgery
    • Proximity to anatomic structures
    • Serious systemic health problems
    • Emotionally distressed patient
    • Inaccessible surgical sites
    • Teeth with poor prognosis
  • Types of post
    • Tapered or parallel
      • Tapered posts
        • They are the least retentive of all posts
        • Produces high incidence of root fracture
        • Concentrates stress at the post-core junction
      • Parallel posts
        • More retentive
        • Less incidence of root fracture
        • Concentrates stress apically on the post
    • Threaded or non-threaded
      • Threaded posts
        • Produces the greatest potential for root fracture
        • Recommended for post-endodontic restorations
      • Non-threaded posts
        • Produces the least stress
        • Have the least tendency for root fracture
    • Metallic or non-metallic
  • Stitch abscess may develop due to
    • Local laceration of tissue
    • Accumulation of debris at the site of suturing
    • Tying of knot in the line of incision

Surgical Endodontics Procedures

Surgical Endodontics Short Essay

Question 1. Indications for periapical surgery. Add a note on flap designs
Answer.

Indications Of Periapical Surgery:

Surgical Drainage:

  • Failed non-surgical treatment
  • Calcified metamorphosis of pulp space
  • Horizontal fracture at the root tip
  • Iatrogenic errors
  • Anatomic variation
  • Biopsy
  • Corrective surgery
  • Replacement surgery
  • Implant surgery
  • Exploratory surgery

Read And Learn More: Endodontics Question and Answers

Flap Designs

  • Semilunar Flap:
    • It is a curved horizontal incision with the convex portion of the incision towards the gingival crest
    • The incision begins at the mesiobuccal fold and follows a half moon path
    • Semilunar Flap Indications:
      • When incisors are involved
    • Semilunar Flap Advantages:
      • Simple
      • Easy to reflect
      • Easy to maintain oral hygiene
      • Gingival attachment is not disturbed
    • Semilunar Flap Disadvantages:
      • Restricted access with limited visibility
      • Limited use
  • Luebke Oschenbein Flap:
    • Named after Luebke and Oschenbein
    • It is a modified semilunar flap in which a scalloped horizontal incision is made in the attached gingiva with vertical incisions
    • Luebke Oschenbein Flap Advantages:
      • Greater access and visibility
      • The flap is easily displaced and sutured
      • Marginal gingiva is not disturbed
    • Luebke Oschenbein Flap Disadvantages:
      • Scarring is possible
  • Triangular Flap:
    • Indicates for surgery involving short rooted teeth
    • An incision along the gingival border forms the base of the triangle
    • A single vertical incision is carried far into the alveolar mucosa
    • Vertical incision is made between the root eminences of teeth
    • Triangular Flap Advantages:
      • The possibility of incision crossing the lesion is eliminated
    • Triangular Flap Disadvantages:
      • Retraction is difficult
  • Trapezoidal Flap:
    • Two oblique incisions are made and the entire flap is retracted toward the vestibule
    • Horizontal incisions are made to separate the flap
    • Trapezoidal Flap Advantages:
      • Good accessibility
      • Convenient method
    • Trapezoidal Flap Disadvantages:
      • Gingival tissue attachment is lost

Apicoectomy In Endodontics

Question 2. Apicectomy.
Answer.

Apicectomy

Apicectomy is the ablation of the apical portion of the root end attached to soft tissues.

Apicectomy Indications:

  • Anatomical anomalies
  • Persistent infections
  • Need for biopsy
  • Medical reasons
  • Lack of time
  • Over fillings

Apicectomy Contraindications:

  • Systemic diseases
  • Deep pockets
  • Acute infection
  • Short root length

Apicectomy Preparation:

  • Class 1 preparation – 3 mm into root dentin
  • Walls are made parallel to pulp space
  • Remove all isthmus tissue
  • 0-10 bevel is given
  • Reset upto 3 mm of the apical portion
  • Seal the apical portion
  • Closure of flap
  • Suturing

Apicectomy Complications:

  • Bleeding
  • Damage to the neighboring root
  • Entry into nerve
  • Abscess
  • Fenestration
  • Increased mobility of tooth

Endodontics Surgical Endodontics Root end preparation using straight hand piece

Endodontic Surgery Indications

Question 3. Root end Filling Materials/Retrograde filling materials.
Answer.

Root End Filling Materials Properties:

  • Root End Filling Materials Should be well-tolerated
  • Root End Filling Materials Should adhere to the tooth surface
  • Root End Filling Materials Should be stable
  • Root End Filling Materials Should be resistant
  • Root End Filling Materials Should be bactericidal
  • Root End Filling Materials Should be noncorrosion
  • Root End Filling Materials Should not stain
  • Root End Filling Materials Should be radiopaque

Root End Filling  Materials:

  • Amalgam:
    • Radiopaque
    • Well tolerated
    • Slow setting
    • Dimensionally unstable
  • ZOE:
    • Weak
    • Long setting time
    • Irritation due to Eugenol
  • IRM:
    • Higher success rate
  • Super EBA:
    • Low solubility
    • Radiopaque
  • MTA:
    • Least toxic
    • Hydrophilic
    • Radiopaque
  • Composite Resin:
    • Technique sensitive
  • Gold Foil:
  • Glass Ionomer:
  • Cavit:
    • Available in single-paste forms

Question 4. Post and Core.
Answer.

Root End Filling  Post:  Root End Filling  Post is a rigid restorative material placed in the root of a non-vital tooth.

Root End Filling  Core: Root End Filling  Post is a supragingival portion that replaces the missing tooth structures

Root End Filling  Functions Of Post

  • Retains core
  • Distributes stresses

Root End Filling  Requirements Post:

  • Provide maximum protection
  • Provide maximum retention
  • Easy to place
  • Less technique sensitive
  • Biocompatible
  • Easy to retrieve
  • Be esthetic
  • Not expensive

Root End Filling  Core:

  • Biocompatible
  • Easy to manipulate
  • Sufficient strength
  • Stable
  • Cheap
  • Easily available

Root End Filling  Materials:

Root End Filling  Post:

  • Gold
  • High platinum
  • Co-Cr-Mo alloys
  • Stainless steel
  • Titanium
  • Carbon fiber
  • Zirconium
  • Glass fiber
  • Plastic

Root End Filling  Core:

  • Dental amalgam
  • Resin modified GIC
  • Composite resin
  • Cast core

Root-End Filling Materials

Question 5. Effect of Dental Procedures on Pulp.
Answer.

  • Effect Of Dental Caries: 

Endodontics Surgical Endodontics Effect Of Dental Caries

  • Effect Of Tooth Preparation: Causes aspiration of nuclei of odontoblast
  • Remaining Dentin Thickness [RDT]: Dentin permeability increases with decreased RDT
  • Effect Of Local Anaesthesia:
    • Reduces blood flow
    • Increases irritants
  • Calcium Hydroxide:
    • Causes demineralization
    • Stimulate fibroblast
    • Reparative dentin formation
  • Zinc Oxide Eugenol:
    • Reduce nerve impulse
  • Zinc Phosphate:
    • Toxic to pulp
  • GIC:
    • Antocariogenic
  • Amalgam:
    • Inflammation
    • Inhibition of reparative dentin formation
    • Cytotoxic effect
    • Copper is toxic
  • PIN Insertion:
    • Dentinal fractures
    • Irritation to pulp

Question 6. Replanation/Intentional Replanation.
Answer.

Replantation/Intentional Replantation

Intentional Replantation is the intentional removal of the tooth and its reinsertion into the socket after retrograde obturation and resection of the root tip.

Replantation Indications:

  • Broken instruments in canals
  • Calcified canals
  • Over filling
  • Curved canals
  • Presence of foreign body in periapical tissue.

Replantation Contraindications:

  • Medically compromised
  • Periodontal involvement
  • Missing buccal/lingual plate
  • Nonrestorable tooth

Replantation Technique:

Endodontics Surgical Endodontics Replantation Technique

Endodontics Surgical Endodontics Beaks of the forceps should be away from the cementum

Endodontics Surgical Endodontics Beaks of force should rest on cement enamel junction

Endodontics Surgical Endodontics Any repair or procedure should be done as quickly as possible

Microsurgical Endodontics

Question 7. Types and indications of Periradicular surgery.
Answer.

Peri-Radicular Surgery:

  • Curettage
  • Biopsy
  • Root end resection
  • Corrective surgery
  • Replacement surgery
  • Implant surgery

Peri-Radicular Surgery Indications:

  • Surgical drainage
  • Failed non-surgical treatment
  • Calcified metamorphosis of pulp space
  • Horizontal fracture at the root tip
  • Iatrogenic errors
  • Anatomic variation
  • Biopsy
  • Corrective surgery
  • Replacement surgery
  • Implant surgery
  • Exploratory surgery

Peri-Radicular Surgery Contra-Indications:

  • Mobile tooth
  • Pockets
  • Leukemic patients
  • Cardiac surgery
  • Uncontrolled hypertension
  • Uncontrolled bleeding disorders
  • Immuno-compromised patients
  • The first trimester of pregnancy
  • Apprehensive patient
  • Short root length
  • Proximity to vital structures
  • Non-restorable tooth
  • Non-strategic tooth

Question 8. Indications of endodontic surgery.
Answer.

Indications of endodontic  Surgical drainage:

  • Failed non-surgical treatment
  • Calcified metamorphosis of pulp space
  • Horizontal fracture at the root tip
  • Iatrogenic errors
  • Anatomic variation
  • Biopsy
  • Corrective surgery
  • Replacement surgery
  • Implant surgery
  • Exploratory surgery

Surgical Endodontics Short Questions And Answers

Question 1. Flaps in Endodontics.
Answer.

Flaps In Endodontics Classification:

  • Full mucoperiosteal flap
  • Triangular
  • Rectangular
  • Trapezoidal
  • Horizontal
  • Limited mucoperiosteal flap
  • Sub-marginal curved
  • Sub-marginal scalloped rectangular

Apicoectomy In Endodontics

Question 2. Ochsenbein – Luebke Flap.
Answer.

Ochsenbein – Luebke Flap

  • By Neumann

Ochsenbein – Luebke Flap Design:

  • Vertical incision on either side of the surgical site
  • Horizontal incision along attached gingiva.

Ochsenbein – Luebke Flap Advantages:

  • Unaltered attachment level
  • Unexposed bone
  • Accessibility
  • Good healing

Ochsenbein – Luebke Flap Indications:

  • Gingivitis/periodontitis
  • Bony dehiscence

Ochsenbein – Luebke Flap Disadvantages:

  • Disturb blood supply
  • Flap shrinkage
  • Limited apical orientation
  • Scar formation
  • Difficult wound closure

Endodontics Surgical Endodontics Ochesenbein Luebke flap

Endodontic Surgery Indications

Surgical Endodontics Viva Voce

  • Excessive hemorrhage during apical surgery is controlled by placing epinephrine epinephrine-containing solution in the surgical site
  • In apicoectomy, a typical surgical flap used should extend one or two tooth/teeth laterally
  • Parallel port is the best-preferred post
  • Splinting should be removed in 7-10 days
  • Hanks balanced solution is an isotonic salt solution used for preserving avulsed teeth
  • Apical surgery is done with great caution on mandibular bicuspids because of their proximity to the mental foramen
  • Paraesthesia is common in the mandible, especially in the premolar and molar region
  • Ecchymosis results in skin discoloration from extravasation and the breakdown of blood adjacent to the surgical area
  • Endodontic surgery should be avoided on lingual surfaces of molars or external oblique ridge of the mandible due to inaccessibility and difficulty in gaining access to the surgical site

Single Visit Endodontics Question And Answers

Single Visit Endodontics Important Notes

  • Contradictions of single-visit endodontics
    • A tooth with acute symptoms
    • Presence of anatomic difficulties
    • If there is possible increased stress on TMJ
  • Advantages of single-visit endodontics
    • Immediate familiarity with the internal anatomy, canal shape, and contour facilities obturation
    • No risk of bacterial leakage
    • Reduction of clinic time
    • Less cost
  • Disadvantages of single-visit endodontics
    • No easy access to the apical canal
    • Fatigue to the patient and clinician
    • Not possible to place intracanal disinfectant

Single Visit Endodontics

Single Visit Endodontics Short Essays

Question 1. Single visit Endodontic.
Answer.

Single Visit Endodontic

Single-visit Endodontic is the procedure of cleaning, shaping, and disinfecting the canal followed by obturation of the canal done at the same appointment.

Read And Learn More: Endodontics Question and Answers

Single Visit Endodontics Advantages:

  • Convenient
  • Efficient
  • Comfortable
  • Less painful
  • Cheaper
  • Less error

Read And Learn More: Endodontics Question and Answers

Single Visit Endodontics Disadvantages:

  • Tireful for patient
  • Mid treatment flare-up
  • Unable in calcified canals.

Endodontics Single Visit Endodontics Indications

Advantages Of Single Visit Rct

Single Visit Endodontics Contra-Indications:

  • Anatomic anomalies
  • Asymptomatic non-vital teeth
  • Acute apical periodontitis
  • Allergic patients
  • TMJ disorders