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Serial no., , Chapter, , Page no., , 1., , Chapter 1: PRELIMINARY, , 3, , 2., , CHAPTER 2: INCORPORATION OF COMPANY, AND MATTERS INCIDENTAL THERETO, , 5, , 3., , CHAPTER 3: PROSPECTUS AND ALLOTMENT, OF SECURITIES, , 21, , 4., , CHAPTER 4: SHARE CAPITAL AND, DEBENTURES, , 33, , 5., , CHAPTER 5: ACCEPTANCE OF DEPOSITS BY, COMPANIES, , 51, , 6., , CHAPTER 6: REGISTERATION OF CHARGES, , 61, , 7., , CHAPTER 7: MANAGEMENT AND, ADMINISTRATION, , 67, , 8., , CHAPTER 8: DECLARATION AND PAYMENT OF, DIVIDEND, , 82, , 9., , CHAPTER 9: ACCOUNTS OF COMPANIES, , 94, , 10., , CHAPTER 10: AUDIT AND AUDITORS, , 104, , 11., , The Indian Contract Act 1872, , 116, , 12., , NEGOTIABLE INSTRUMENT ACT, , 134, , -2-
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13., , GENERAL CLAUSES ACT, , 149, , 14., , INTERPRETATION OF STATUTES, , 160, , CA INTERMEDIATE SCANNER, CORPORATE LAW AND OTHER LAWS, , Chapter 1: PRELIMINARY, NOVEMBER 2019, Ques 1 Herry Limited is a company registered in Thailand. It has no, place of business established in India, yet it is doing online business, through telemarketing in India having its main server for online, business outside India. State the status of the Company under the, provisions of the Companies Act, 2013., , -3-
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SKP Limited (Registered in India), a wholly owned subsidiary, company of Herry Limited decided to follow different financial year, for consolidation of its accounts outside India. State the procedure, to be followed in this regard, Answer1, According to section 2(42) of the Companies Act, 2013,, “foreign company” means, any company or body corporate incorporated outside India, which –, (a), , has a place of business in India whether by itself or, through an agent, physically or through electronic, mode; and, , (b), , conducts any business activity in India in any other, manner., According to Rule 2(1)(c)(iv) of the Companies, (Registration of Foreign Companies) Rules, 2014,, “electronic mode” means carrying out electronically, based, whether main server is installed in India or not,, including, but not limited to online services such as, telemarketing,, telecommuting,, telemedicine,, education and information research., Looking to the above description, it can be said that, being involved in telemarketing in India having its, main server for online business outside India, Herry, Limited will be treated as foreign company., , (ii), , 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., Any application pending before the Tribunal as on the date, of commencement of the Companies (Amendment) Act,, , -4-
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2019, shall be disposed of by the Tribunal in accordance, with the provisions applicable to it before such, commencement., Also, a company or body corporate, existing on the, commencement of this Act, shall, within a period of two, years from such commencement, align its financial year, as per the provisions of this clause., SKP Limited is advised to follow the above procedure, accordingly., [Note: This answer is based on the assumption that Herry, limited is a foreign Company registered outside India as, inferred from part (i) of the question], , CHAPTER 2: INCORPORATION OF COMPANY AND MATTERS, INCIDENTAL THERETO, JANUARY 2021, Ques 1, The role of doctrine of 'Indoor management' is opposed to that of the role of, 'Constructive notice'. Comment on this statement with reference to the, Companies Act, 2013. (5 Marks), Answer, Doctrine of Indoor Management, According to this doctrine, persons dealing with the company cannot be assumed to, have knowledge of internal problems of the company. They can simply assume, that all the required things were done properly in the company., Stakeholders need not enquire whether the necessary meeting was convened, and held properly or whether necessary resolution was passed properly. They, are entitled to take it for granted that the company had gone through all these, proceedings in a regular manner., , -5-
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The doctrine helps protect external members from the company and states that, the people are entitled to presume that internal proceedings are as per, documents submitted with the Registrar of Companies., The doctrine of indoor management was evolved around 150 years ago in the, context of the doctrine of constructive notice. The role of doctrine of indoor, management is opposed to of the role of doctrine of constructive notice., Whereas the doctrine of constructive notice protects a company against outsiders,, the doctrine of indoor management protects outsiders against the actions of a, company. This doctrine also is a possible safeguard against the possibility of, abusing the doctrine of constructive notice., Basis for Doctrine of Indoor Management, What happens internal to a company is not a matter of public knowledge., An outsider can only presume the intentions of a company, but not know, the information he/she is not privy to., If not for the doctrine, the company could escape creditors by denying the, authority of officials to act on its behalf., Exceptions to Doctrine of Indoor Management (Applicability of doctrine of, constructive notice), Knowledge of irregularity: In case this ‘outsider’ has actual knowledge of, irregularity within the company, the benefit under the rule of indoor, management would no longer be available. In fact, he/she may well be, considered part of the irregularity., Negligence: If, with a minimum of effort, the irregularities within a company, could be discovered, the benefit of the rule of indoor management would not, apply. The protection of the rule is also not available in the circumstances, where company does not make proper inquiry., Forgery: The rule does not apply where a person relies upon a document that, turns out to be forged since nothing can validate forgery. A company can never, be held bound for forgeries committed by its officers., The above doctrines have been well considered while framing the provisions of, various Acts pertaining to the companies worldwide. The Companies Act, 2013, and the earlier Acts relevant for the Companies in India are no exception to the, same., , -6-
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NOVEMBER 2020, Question, Mr. Raja along with his family members is running successfully a, trading business. He is capable of developing his ideas and, participating in the market place. To achieve this, Mr. Raja formed, a single person economic entity in the form of One Person Company, with his brother Mr. King as its nominee. On 4th May 2020, Mr., King withdrew his consent as Nominee of the One Person Company., Can he do so under the provisions of the Companies Act, 2013?, Examine whether the following individuals are eligible for being, nominated as Nominee of the One Person Company as on 5th May, 2020 under the above said Act., (i), , Mr. Shyam, son of Mr. Raja who is 15 years old as on 5th, May 2020., , (ii), , Ms. Devaki an Indian Citizen, sister of Mr. Raja stays in, Dubai and India. She stayed in India during the period, from 2nd January 2019 to 16th August 2019. Thereafter, she left for Dubai and stayed there., , (iii), , Mr. Ashok, an Indian Citizen residing in India who is, presently a member of a 'One Person Company'. (6, Marks), , Answer, (a), , As per section 3 of the Companies Act, 2013, the, memorandum of One Person Company (OPC) shall indicate, the name of the other person (nominee), who shall, in the, event of the subscriber’s death or his incapacity to contract,, become the member of the company., The other person (nominee) whose name is given in the, memorandum shall give his prior written consent in, prescribed form and the same shall be filed with Registrar, , -7-
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of companies at the time of incorporation along with its, Memorandum of Association and Articles of Association., Such other person (nominee) may withdraw his consent in, such manner as may be prescribed., Therefore, in terms of the above law, Mr. King, the nominee,, whose name was given in the memorandum, can withdraw, his consent as a nominee of the OPC by giving a notice in, writing to the sole member and to the One Person Company., Following are the answers to the second part of the question, as regards the eligibility for being nominated as nominee:, (i), , As per the Rule 3 of the Companies (Incorporation) Rules,, 2014, no minor shall become member or nominee of the, OPC. Therefore, Mr. Shyam, being a minor is not eligible, for being nominated as Nominee of the OPC., , (ii), , As per the Rule 3 of the Companies (Incorporation) Rules,, 2014, only a natural person who is an Indian citizen and, resident in India, shall be a nominee or the sole member of, a One Person Company. The term “Resident in India”, means a person who has stayed in India for a period of not, less than 182 days during the immediately preceding, financial year. Here Ms. Devaki though an Indian Citizen, but not resident in India as she stayed for a period of less, than 182 days during the immediately preceding financial, year in India. So, she is not eligible for being nominated as, nominee of the OPC., , (iii), , As per the Rule 3 of the Companies (Incorporation) Rules,, 2014, a person shall not be a member of more than one, OPC at any point of time and the said person shall not be, a nominee of more than one OPC. Mr. Ashok, an Indian, Citizen residing in India who is a member of an OPC (Not, a nominee in any OPC), can be nominated as nominee., , Ques, S Ltd acquired 10% paid up share capital of H Ltd on 15th March, 2017. H Ltd acquired 55% paid up share capital of S Ltd on 10th, March 2018. H Ltd. on 25th September, 2020 decided to issue bonus, , -8-
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shares in the ratio of 1:1 to the existing shareholders. Accordingly,, bonus shares were allotted to S Ltd. Examine under the provisions of, the Companies Act, 2013 and decide, the validity of holding of shares by S Ltd. in H Ltd., allotment of Bonus shares by H Ltd. to S Ltd. (4 Marks), , Answer, As per Section 19 of the Companies Act, 2013, no company shall,, hold any shares in its holding company and no holding company, shall allot or transfer its shares to any of its subsidiary companies, and any such allotment or transfer of shares of a company to its, subsidiary company shall be void., However, this shall not apply where the subsidiary company is a, shareholder even before it became a subsidiary company of the, holding company., In the given case, H Ltd. has acquired 55% paid up share capital of, S Ltd. on 10th March 2018. Whereas, S Ltd. has been holding 10%, paid up share capital of H Ltd. since 15th March, 2017. The said, instance as asked in the question falls under the exception stated, above., Therefore Holding of shares by S Ltd. in H Ltd. is valid in view of the proviso, (c) to sub-section, of section 19 of the Act, which states that the restrictions of, provisions of section 19(1) will not be applicable where the, subsidiary company is a shareholder even before it became a, subsidiary company of the holding company., Allotment of bonus shares by H Ltd. to S Ltd. is also valid in view of, the above proviso., , -9-
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NOVEMBER 2019, Ques, Naveen incorporated a "One Person Company" making his sister Navita as, the nominee. Navita is leaving India permanently due to her marriage, abroad. Due to this fact, she is withdrawing her consent of nomination, in the said One Person Company. Taking into considerations the, provisions of the Companies Act, 2013 answer the questions given below., If Navita is leaving India permanently, is it mandatory for her to withdraw, her nomination in the said One Person Company?, If Navita maintained the status of Resident of India after her marriage,, then can she continue her nomination in the said One Person Company?, (6 Marks), Answer, As per Rule 3 & 4 of the Companies (Incorporation) Rules, 2014 following, the answers :, Yes, it is mandatory for Navita to withdraw her nomination in the said, OPC as she is leaving India permanently as only a natural person who is an, Indian citizen and resident in India shall be a nominee in OPC., Yes, Navita can continue her nomination in the said OPC, if she, maintained the status of Resident of India after her marriage by staying, in India for a period of not less than 182 days during the immediately, preceding financial year., Question 3, Mahima Ltd. was incorporated by furnishing false, informations. As per the Companies Act, 2013, state the, powers of the Tribunal (NCLT) in this regard., (5, Marks, Answer, (a) Order of the Tribunal: According to section 7(7) of, the Companies Act, 2013, where a company has been, got incorporated by furnishing false or incorrect, information or representation or by suppressing any, 10
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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—, (a), , 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, , (b), , direct that liability of the members shall be, unlimited; or, , (c), , direct removal of the name of the company from, the register of companies; or, , (d), , pass an order for the winding up of the company;, or, , (e), , pass such other orders, , as it may deem fit., However before making, any order(i), , the company shall be given a reasonable, opportunity of being heard in the matter; and, , the Tribunal shall take into consideration the transactions, entered into by the company, including the obligations, if, any, contracted or payment of any liability, , RTP NOVEMBER 2021, 1., , AB Limited issued equity shares of ` 1,00,000, (10000 shares of ` 10 each) on 01.04.2020 which, have been fully subscribed whereby XY Limited, holds 4000 shares and PQ Limited holds 2000, shares in AB Limited. AB Limited is also holding, 20% equity shares of RS Limited before the date of, issue of equity shares stated above. RS Limited, 11
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controls the composition of Board of Directors of, XY Limited and PQ Limited from 01.08.2020., Examine with relevant provisions of the Companies, Act, 2013:, (i), , Whether AB Limited is a subsidiary of RS Limited?, , (ii), , Whether AB Limited can hold shares of RS, Limited?, , (iii), , Whether AB Limited can vote at Annual General, Meeting of RS Limited held on 30.09.2020?, , Answer This given problem is based on sub-clause, (87) of Clause 2 read with section 19 of the, Companies Act, 2013., As per sub-clause (87) of Clause 2 of the Companies, Act, 2013 "subsidiary company" or "subsidiary", in, relation to any other company (i.e., the holding, company), means a company in which the holding, company—, (i), , controls the composition of the Board of Directors;, or, , (ii), , exercises or controls more than one-half of the, total voting power either at its own or together, with one or more of its subsidiary companies., , For the purposes of this clause, Explanation is, given providing that a company shall be deemed to, be a subsidiary company of the holding company, even if the control referred to in point (i) or point, (ii) above, is of another subsidiary company of the, holding company., Whereas Section 19 provides that, no company, shall, hold any shares in its holding company and no, holding company shall allot or transfer its shares to, any of its subsidia ry companies and any such, allotment or transfer of shares of a company to its, subsidiary company shall be void., Provided that nothing in this sub-section shall apply, to a case where the subsidiary company is a, 12
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shareholder even before it became a subsidiary, company of the holding company., Here in the instant case, AB Ltd. issued 10,000, equity shares on 1.4.2020 whereby XY Ltd. & PQ, Ltd. holds 4000 & 2000 shares respectively in AB, Ltd., Considering 1 share = 1 vote, XY Ltd. and PQ, Ltd. together holds more than one-half (50%) of, the total voting power. Therefore, AB Ltd. will be, subsidiary to XY Ltd. & PQ Ltd. from 1.4.2020., Whereas AB Ltd. is already holding 20% equity, shares of RS Ltd. before the date of issue of equity, shares i.e. 1.4.2020., Further, RS Ltd. controls the composition of Board, of Directors of XY Ltd. and PQ Ltd. from, 01.08.2020. In the light of sub-clause (87) of, Clause 2, RS Ltd. is a holding company of XY Ltd., and PQ Ltd. (Subsidiary companies)., Following are the answers to the questions:, (i), , Yes. In this case AB Ltd. shall be deemed to be a, subsidiary company of the holding company (RS, Ltd.) as RS Ltd. controls the composition of, subsidiary companies XY Ltd. & PQ Ltd. as per, explanation to sub-clause (87) of Clause 2., , (ii), , Yes. In this case AB Limited is a subsidiary of RS, Limited as AB Ltd. was holding 20% of equity, shares of RS Ltd. even before it became a, subsidiary company of the RS Ltd. (i.e. on 01, 08.2020), according to the exception to section, 19., No. The subsidiary company shall have a right, to vote at a meeting of the holding company only, in respect of the shares held by it as a legal, representative or as a trustee but not where the, subsidiary company is a shareholder even, before it became a subsidiary company of the, holding company. Therefore, AB Ltd. cannot vote, at AGM of RS Ltd. held on 30.9.2020., 13
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RTP MAY 2021, 1., , (i) Mr. Bindra is holding 950 equity shares of Bio, safe Herbals, a section 8 company. Bio safe, Herbals is planning to declare dividend in the, Annual General Meeting for the Financial Year, ended 31-03-2020. Examine whether the act of, the company is in accordance with the provisions, of the Companies Act, 2013., Answer According to Section 8(1) of the Companies, Act, 2013, the companies licenced under Section 8 of, the Act (Formation of companies with Charitable, Objects, etc.) are prohibited from paying any, dividend to, their members. Their profits are, intended to be applied only in promoting the objects, for which they are formed., Hence, in the instant case, the proposed act of Bio, safe Herbals, a company licenced under Section 8, of the Companies Act, 2013, which is planning to, declare dividend, is not in accordance to the, provisions of the Companies Act, 2013., , 2., , Nadeem incorporated a "One Person Company", making his sister Nisha as the nominee. Nisha is, leaving India permanently due to her marriage, abroad. Due to this fact, she is withdrawing her, consent of nomination in the said One Person, Company. Taking into considerations the provisions, of the Companies Act, 2013 answer the questions, given below., (A), , If Nisha is leaving India permanently, is it, mandatory for her to withdraw her nomination, in the said One Person Company?, , (B), , If Nisha maintained the status of Resident of, India after her marriage, then can she continue, her nomination in the said One Person Company?, , Answer As per Rule 3 & 4 of the Companies, (Incorporation) Rules, 2014 following the answers:, 14
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(A), , Yes, it is mandatory for Nisha to withdraw her, nomination in the said OPC as she is leaving India, permanently as only a natural person who is an, Indian citizen and resident in India shall be a, nominee in OPC., , (B), , Yes, Nisha can continue her nomination in the, said OPC, if she maintained the status of Resident, of India after her marriage by staying in India for, a period of not less than 182 days during the, immediately preceding financial year., , RTP NOVEMBER 2020, 1., , Vijay, a member of Mayur Electricals Ltd. gave in writing to the, company that the notice for any general meeting be sent to him, only by registered post at his residential address at Kanpur, for which he deposited sufficient money. The company sent, notice to him by ordinary mail under certificate of posting., Vijay did not receive this notice and could not attend the, meeting and contended that the notice was improper., Decide:, (i), , Whether the contention of Vijay is valid., , Will your answer be the same if Vijay remains in, London for two months during the notice of the meeting, and the meeting held?, Answer According to section 20(2) of the Companies Act,, 2013, a document may be served on Registrar or any member, by sending it to him by post or by registered post or by speed, post or by courier or by delivering at his office or address, or, by such electronic or other mode as may be prescribed, Provided that a member may request for delivery of any, document through a particular mode, for which he shall pay, such fees as may be determined by the company in its annual, general meeting., , (ii), , Thus, if a member wants the notice to be served on him only, by registered post at his residential address at Kanpur for, which he has deposited sufficient money, the notice must be, served accordingly, otherwise service will not be deemed to, have been effected., 15
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Accordingly, the questions as asked may be answered as under:, (i), , The contention of Vijay shall be tenable, for the reason, that the notice was not properly served., , (ii), , In the given circumstances, the company is bound to serve, a valid notice to Vijay by registered post at his residential, address at Kanpur and not outside India., , RTP MAY 2020, 1., , Yadav Dairy Products Private limited has registered its articles, along with memorandum at the time of registration of company, in December, 2014. Now directors of the company are of the, view that provisions of articles regarding forfeiture of shares, should not be changed except by a resolution of 90% majority., While as per section 14 of the Companies Act, 2013 articles, may be changed by passing a special resolution only. Hence,, one of the directors is of the view that they cannot make a, provision against the Companies Act, 2013. You are required to, advise the company on this matter., ANSWER, As per section 5 of the Companies Act, 2013, the article may contain provisions for entrenchment to the, effect that specified provisions of the articles may be altered on, ly if more restrictive conditions than a special resolution,, are met., The provisions for entrenchment shall only be made either, on formation of a company, or by an amendment in the, articles agreed to by all the members of the company in the, case of a private company and by a special resolution in, the case of a public company., Where the articles contain provisions for entrenchment,, whether made on formation or by amendment, the company, shall give notice to the Registrar of such provisions in, prescribed manner., In the present case, Yadav Dairy Products Private Limited is, a private company and wants to protect provisions of, articles regarding forfeiture of shares. It means it wants, to make entrenchment of articles, which is allowed. But the, company will have to pass a resolution taking permission, 16
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of all the members and it should also give notice to, Register of Companies regarding entrenchment of, articles., , MTP NOVEMBER 2021, SERIES 1, 1., , 1., , Explain the provisions of the Companies Act, 2013 relating to, the ‘Service of Documents’ on a, company and the members of the company., (3, Marks), Under section 20 of the Companies Act, 2013 a document may be, served on a company or an officer thereof by sending it to the, company or the officer at the registered office of the company, by registered post or by speed post or by courier service or by, leaving it at its registered office or by means of such, electronic or other mode as may be prescribed. However, in, case where securities are held with a depository, the records, of the beneficial ownership may be served by such depository, on the company by means of electronic or other mode., Under section 20 (2), save as provided in the Act or the rule, thereunder for filing of documents with the registrar in, electronic mode, a document may be served on Registrar or, any member by sending it to him by post or by registered, post or by speed post or by courier or by delivering at his, office or address, or by such electronic or other mode as, may be prescribed. However, a member may request for, delivery of any document through a particular mode, for, which he shall pay such fees as may be determined by the, company in its annual general meeting., , (a) Kavya Ltd. has a paid up share-capital of Rs. 80 crores. Amjali, Ltd. holds a total of Rs. 50 crores of Kavya Ltd. Now, Kavya, ltd. is making huge profits and wants to expand its business, and is aiming at investing in Amjali Ltd. Kavya Ltd. has, approached you to analyse whether as per the provisions of, the Companies Act, 2013, they can hold 1/10 th of the share, capital of Amjali Ltd., (5 Marks), 2., , 17
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2., , (a) In terms of section 2 (87) of the Companies Act 2013, "subsidiary company" or "subsidiary", in relation to any other, company (that is to say the holding company), means a company, in which the holding company—, (i), , controls the composition of the Board of Directors; or, , (ii), , exercises or controls more than one-half of the total voting, power either at its own or together with one or more of, its subsidiary companies:, Provided that such class or classes of holding companies, as may be prescribed shall not have layers of subsidiaries, beyond such numbers as may be prescribed., Since, Kavya ltd. is holding more than one half (50 crores, out of 80 crores) of the total share capital of Kavya Ltd., it, (Amjali Ltd.) is holding of Kavya Ltd., Further, as per the provisions of section 19 of the Companies, Act, 2013, no company shall, either by itself or through its, nominees, hold any shares in its holding company and no, holding company shall allot or transfer its shares to any of, its subsidiary companies and any such allotment or, transfer of shares of a company to its subsidiary, company shall be void:, Provided that nothing in this sub-section shall apply to a, case—, , (a), , where the subsidiary company holds such shares as the, legal representative of a deceased member of the holding, company; or, , (b), , where the subsidiary company holds such shares as a trustee;, or, , (c), , where the subsidiary company is a shareholder even before, it became a subsidiary company of the holding company, In the given question, Kavya ltd. cannot acquire the shares, of Amjali Ltd. as the acquisition of shares does not fall, within the ambit of any of the exceptions provided in, section 19., , 18
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SERIES 2, 1., , (a) Mr. Shyamlal is a B. Tech in computer science. He has promoted, an IT start up and got it registered as a Private Limited Company., Initially, only he and his family members are holding all the, shares in the company. While drafting the Articles of Association, of the company, it has been included that Mr. Shyamlal will, remain as a director of the company for lifetime., Mr. Mehra, a close friend of Mr. Shyamlal has warned him, (Mr. Shyamlal) that in future if 75% or more shares in the, company are held by non- family members then by, passing a Special Resolution, the relevant articles can be, amended and Mr. Shyamlal may be removed from the post, of director., Mr. Shyamlal has approached you to advise him for protecting, his position as a director for lifetime. Give your answer as, per, , the, , provisions, , of, , the, , Companies, , Act,, , 2013., (, , 6 Marks), Answer As per the provisions of sub-section (3) of section 5 of the, Companies Act, 2013, the articles may contain provisions for, entrenchment to the effect that specified provisions of the articles, may be altered only if conditions or procedures as that are more, restrictive than those applicable in the case of special resolution are, met or complied with., Usually, an article of association may be altered by passing a special, resolution but entrenchment makes it one difficult to change it. So,, entrenchment means making something more protective., Manner of inclusion of the entrenchment provision:, As per the provisions of sub-section (4) of section 5 of the Companies Act,, 2013, the provisions of entrenchment shall only be made either on, formation of a company, or by an amendment in the Articles of, Association as agreed to by all the members of the company in the case, 19
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of a private company and by a special resolution in case of a public, company., Notice to the Registrar of the entrenchment provision:, As per the provisions of sub-section (4) of section 5 of the, Companies Act, 2013, where the articles contain provision for, entrenchment whether made on formation or by amendment, the, company shall give notice to the Registrar of such provisions in such, form and manner as may be prescribed., In the said situation the IT startup company is a private company., Therefore, Mr. Shyamlal can get the articles altered which is agreed to, by all the members whereby the amended article will say that he can, be removed from the post of director only if, say, 95% votes are cast, in favour of the resolution and give notice of the same to the, Registrar., 2., , (a), , Mr. Dinesh incorporated a new Private Limited Company, under the provisions of the Companies Act, 2013 and desires, to commence the business immediately. Please advise Mr., Dinesh about the procedure for commencement of business, as laid under the provisions of the Section 10A of the, Companies, Act,, 2013., (, 5 Marks), , ANSWER As per Section 10A of the Companies Act, 2013, a company, incorporated after the commencement of the Companies (Amendment), Second Ordinance, 2019 and having a share capital shall not, commence any business or exercise any borrowing powers unless:, (i), , A declaration is filed by a director within a period of 180, days of the date of incorporation of the company in such, form and verified in such manner as may be prescribed,, with the Registrar that every subscriber to the memorandum, has paid the value of the shares agreed to be taken by him, on the date of making of such declaration; and, , (ii), , The company has filed with the Registrar a verification of, it registered office as provided in sub-section (2) of, section 12., , Mr. Dinesh has to comply with the above requirements and procedure for, commencing the business of the company, 20
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CHAPTER 3: PROSPECTUS AND ALLOTMENT OF, SECURITIES, JANUARY 2021, Question, A Ltd. issued 1,00,000 equity shares of ` 100 each at par to, the public by issuing a prospectus. The prospectus discloses, the minimum subscription amount of ` 15,00,000 required, to be received on application of shares and share, application money shall be payable at ` 20 per share. The, prospectus further reveals that A Ltd. has applied for, listing of shares in 3 recognized stock exchanges of which 1, application has been rejected. The issue was fully, subscribed and A Ltd. received an amount of ` 20,00,000, on share application. A Ltd., then proceeded for allotment, of shares. Examine the three disclosures in the above case, study which are the deciding factors in an allotment of, shares and the consequences for violation, if any under the, provisions of the Companies Act, 2013., Answer, As per the requirement of the question, disclosures which, are the deciding factors in an allotment of shares are laid, down in section 39 of the Companies Act, 2013. According, to Section 39(1), no allotment of any securities of a, company offered to the public for subscription shall be, made unless- 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, instrument. 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 by making regulations in this behalf. In, 21
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the question, A Ltd. issued shares to public by issuing of, prospectus, disclosing minimum subscription, sum payable, on application for the amount; and the amount received on, share application is more than 5% of the nominal amount, of the security. Further, it revealed that A Ltd. has applied, for listing of shares in 3 recognized stock exchanges of, which one application was rejected. In the given instance,, there is compliance to section 23, as nothing is talked, about matters required to be included in the prospectus, under section 26 (1) and about filing with the registrar;, assuming that the said requirements have been complied, with, requirement of section 39 as regards obtaining of, minimum subscription and the minimum amount, receivable on application (not less than 5% of the nominal, value of the securities offered) are fulfilled. The provisions, of section 40 of the Companies Act, 2013 states that every, company making public offer shall, before making such, offer, make an application to one or more recognized stock, exchange or exchanges and obtain permission for the, securities to be dealt with in such stock exchange or, exchanges. The above provision is very clear that not only, the company has to apply for listing of the securities at a, recognized stock exchange, but also obtain permission, thereof from all the stock exchanges where it has applied,, before making the public offer. Since one of the three, recognized stock exchanges, where the company has, applied for enlisting, has rejected the application and the, company has proceeded with making the offer of shares, it, has violated the provisions of section 40. Therefore, this, shall be deemed to be irregular allotment of shares., Consequently, A Ltd. shall be required to refund the, application money to the applicants in the prescribed, manner within the stipulated time frame., Question CDS Ltd. is planning to make a private placement, of securities. The Managing Director arranged to obtain a, brief note from some source explaining the salient features, of the issue of private placement that the Board of, 22
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Directors shall keep in mind while approving the proposal, on this subject. The brief note includes, inter alia, the, information / suggestions on the following points:, (i) A private placement shall be made only to a select, group of identified persons not exceeding 200 in a, financial year. The aforesaid ceiling of identified persons, shall not apply to the offer made to the qualified, institutional buyers but is applicable to the employees of, the Company who will be covered under the Company's, Employees Stock Option Scheme., (ii) The offer on private placement basis shall be made, only once in a financial year for any number of identified, persons not exceeding 200. The Company solicits your, remarks on the points referred above as to whether they, are valid or not? Reasoned remarks should be given in, accordance with the provisions of the Companies Act,, 2013., Answer (a) As per the provisions of sub-section (2) of, section 42 of the Companies Act, 2013, private placement, shall be made only to a select group of persons who have, been identified by the Board (herein referred to as, "identified persons"), whose number shall not exceed 50, or such higher number as may be prescribed, in a financial, year subject to such conditions as may be prescribed. It is, also 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, section 62(1)(b) shall not be considered while calculating, the limit of two hundred persons. According to Rule 14 (2), of the Companies (Prospectus and Allotment of Securities), Rules, 2014, 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. As per Explanation given in this Rule, it is clarified, that the restrictions aforesaid would be reckoned, individually for each kind of security that is equity share,, preference share or debenture., 23
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Referring to the above mentioned provisions of sub-section, (2) of section 42 of the Companies Act, 2013 and Rule 14, the Companies (Prospectus and Allotment of Securities), Rules, 2014, we can conclude as follows:, (i), , The company is correct in proposing that private, placement shall be made only to a select group of, identified persons not exceeding 200 in a financial, year. This part of the proposal is correct. The, company is also correct in proposing that the, aforesaid ceiling of identified persons shall not apply, to offer made to the qualified institutional buyers,, but the company is not correct in saying that the said, ceiling is applicable to employees covered under the, Company’s Employee Stock Option Scheme. Hence,, the second part of the proposal is only partially, correct., (ii) The Companies (Prospectus and Allotment of, Securities) Rules, 2014 provides that an offer or, invitation to subscribe securities under private, placement shall not be made to persons more than, 200 in aggregate in a financial year. Keeping the, ceiling of 200 persons in aggregate during a financial, year, offer of private placement can be made more, than once in a financial year. Therefore, the second, statement is not fully correct., , NOVEMBER 2020, NOVEMBER 2019, Question, The Board of Directors of Chandra Ltd. proposes to issue the, prospectus inviting offers from the public for subscribing, the shares of the Company. State the reports which shall be, included in the prospectus for the purposes of providing, financial information under the provisions of the Companies, Act, 2013., (4, Marks), 24
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Answer, As per section 26(1) of the Companies Act, 2013, every, prospectus issued by or on behalf of a public company, either with reference to its formation or subsequently, or, by or on behalf of any person who is or has been engaged, or interested in the formation of a public company, shall, be dated and signed and shall state such information and, set out such reports on financial information as may be, specified by the Securities and Exchange Board in, consultation with the Central Government:, Provided that until the Securities and Exchange Board, specifies the information, and reports on financial, information under this sub-section, the regulations made, by the Securities and Exchange Board under the Securities, and Exchange Board of India Act, 1992, in respect of such, financial information or reports on financial information, shall apply., Prospectus issued make a declaration about the compliance, of the provisions of this Act and a statement to the effect, that nothing in the prospectus is contrary to the provisions, of this Act, the Securities Contracts (Regulation) Act, 1956, and the Securities and Exchange Board of India Act, 1992, and the rules and regulations made thereunder., Accordingly, the Board of Directors of Chandra Ltd. who, proposes to issue the prospectus shall provide such, reports on financial information as may be specified by the, Securities and Exchange Board in consultation with the, Central Government in compliance with the above stated, provision and make a declaration about the compliance of, the above stated provisions., , RTP MAY 2021, Question, Keya Limited decides to issue 1,00,000 securities of the, company. The company decides to publish an, advertisement of the prospectus. Enumerate to the, company about necessary contents of its memorandum to, 25
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be specified therein., Answer, According to Section 30, where an advertisement of any, prospectus of a company is published in any manner, it, shall be necessary to specify therein the contents of its, memorandum as regards the following:, 1., , the objects,, , 2., , the liability of members and the amount of share, capital of the company,, , 3., , the names of the signatories to the, memorandum,, , 4., , the number of shares subscribed for by the, signatories, and, , 5., , the capital structure of the company., , RTP NOVEMBER 2020, 1., , The Board of Directors of Ramesh Ltd. proposes to issue the, prospectus inviting offers from the public for subscribing the, shares of the Company. State the reports which shall be, included in the prospectus for the purposes of providing financial, information under the provisions of the Companies Act, 2013., , Answer, As per section 26(1) of the Companies Act, 2013, every prospectus, issued by or on behalf of a public company either with reference, to its formation or subsequently, or by or on behalf of any person, who is or has been engaged or interested in the formation of a public, company, shall be dated and signed and shall state such, information and set out such reports on financial information as, may be specified by the Securities and Exchange Board in, consultation with the Central Government., Provided that until the Securities and Exchange Board specifies, the information and reports on financial information under this, sub-section, the regulations made by the Securities and Exchange, Board under the Securities and Exchange Board of India Act,, 1992, in respect of such financial information or reports on, financial information shall apply., 26
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Prospectus issued make a declaration about the compliance of, the provisions of this Act and a statement to the effect that, nothing in the prospectus is contrary to the provisions of this, Act, the Securities Contracts (Regulation) Act, 1956 and the, Securities and Exchange Board of India Act, 1992 and the rules, and regulations made thereunder., Accordingly, the Board of Directors of Ramesh Ltd. who proposes, to issue the prospectus shall provide such reports on financial, information as may be specified by the Securities and, Exchange Board in consultation with the Central Government in, compliance with the above stated provision and make a, declaration about the compliance of the above stated provisions., , RTP MAY 2020, 1 Green Ltd. was dealing in export of rubber to specified foreign, countries. The company was willing to purchase rubber trees in, A.P. State. The prospectus issued by the company contained some, important extracts of the expert report and number of trees in, A.P. State. The report was found untrue. Mr. Andrew purchased, the shares of Green Ltd. on the basis of the expert’s report, published in the prospectus. However, he did not suffer any loss, due to purchase of such shares. Will Mr. Andrew have any remedy, against the company? State also the circumstances where an, expert is not liable under the Companies Act, 2013., ANSWER 1 Under section 35 (1) of the Companies Act 2013, where, a person has subscribed for securities of a company acting on any, statement included in the prospectus which is misleading and has, sustained any loss or damage as a consequence thereof, the company, and every person including an expert shall, be liable to pay, compensation to the person who has sustained such loss or, damage., In the present case, Mr. Andrew purchased the shares of, Green Ltd. on the basis of the expert report published in, the prospectus. Mr. Andrew can claim compensation for any, loss or damage that he might have sustained from the, purchase of shares. However, he did not suffer any loss due, to purchase of such shares., 27
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Hence, Mr. Andrew will have no remedy against the company., Circumstances when an expert is not liable: An expert will, not be liable for any mis- statements in the prospectus, under the following situations:, (i), , Under section 26 (5), that having given his consent, but, withdrew it in writing before delivery of the copy of, prospectus for filing, or, , (ii), , Under section 35 (2), that the prospectus was issued without, his knowledge / consent and that on becoming aware of it, he, forthwith gave a reasonable public notice that it was issued, without his knowledge or consent;, , (iii), , An expert will not be liable in respect of any statement not, made by him in the capacity of an expert and included in, the prospectus as such;, that, as regards every misleading statement purported to, be made by an expert or contained in what purports to be, a copy of or an extract from a report or valuation of an, expert, it was a correct and fair representation of the, statement, or a correct copy of, or a correct and fair extract, from, the report or valuation; and he had reasonable, ground to believe and did up to the time of the issue of the, prospectus believe, that the person making the statement, was competent to make it and that the said person had, given the consent required by section 26(5) to the issue of, the prospectus and had not withdrawn that consent before, filing of a copy of the prospectus with the Registrar or, to, the defendant's knowledge, before allotment thereunder., , MTP NOVEMBER 2021, SERIES 1, Question, Prakash Limited wants to raise funds for its upcoming project., Accordingly, it has issued private placement offer letters for issuing, equity shares to 55 persons, of which four are qualified institutional, 28
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buyers and remaining are individuals. Before the completion of, allotment of equity shares under this offer letter, company issued another, private placement offer letter to another 155 persons in their individual, names for issue of its debentures., Being a public company is it possible for Prakash Limited to issue, securities under a private placement offer? By doing so, whether the, company is in compliance with provisions relating to private, placement or should these offers be treated as public offers? What, if the offer for debentures is given after allotment of equity shares but, within the same financial year? (6 Marks), Answer, According to section 42 of the Companies Act, 2013 any private or, public company may make private placement through issue of a, private placement offer letter., However, the offer shall be made to the persons not exceeding fifty or, such higher number as may be prescribed, in a financial year. For, counting number of persons, Qualified Institutional Buyers (QIBs) and, employees of the company being offered securities under a scheme of, employees’ stock option will not be considered., Further, Rule 14 (2) of the Companies (Prospectus and Allotment of, Securities) Rules, 2014 prescribes maximum of 200 persons who can be, offered securities under the private placement in a financial year,, though this limit should be counted separately for each type of, security., It is to be noted that if a company makes an offer or invitation to more, than the prescribed number of persons, it shall be deemed to be an offer, to the public and accordingly, it shall be governed by the provisions, relating to prospectus., Also, a company is not permitted to make fresh offer under this section, if the allotment with respect to any offer made earlier has not been, completed or otherwise, that offer has been withdrawn or abandoned, by the company. This provision is applicable even if the issue is of, different kind of security., Any offer or invitation not in compliance with the provisions of this, section shall be treated as a public offer and all provisions will apply, accordingly., In the given case Prakash Limited, though a public company but the, 29
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private placement provisions allow even a public company to raise funds, through this route. The company has given offer to 55 persons out of which, 4 are qualified institutional buyers and hence, the offer is given, effectively to only 51 persons which is well within the limit of 200 persons., From this point of view, the company complies the private placement, provisions., However, as per the question, the company has given another private, placement offer of debentures before completing the allotment in, respect of first offer and therefore, the second of fer does not comply, with the provisions of section 42. Hence, the offers given by the, company will be treated as public offer., In case the company gives offer for debentures in the same financial year, after allotment of equity shares is complete then both the offers can, well be treated as private placement offers., Question, (a) An allottee of shares in a company brought action against a director, in respect of false statements made in the prospectus. The director, contended that the statements were prepared by the promoters and he, simply relied on them. Is the director liable under these, circumstances? Decide referring to the provisions of the Companies Act,, 2013., (6 Marks), ANSWER Yes, the Director shall be held liable for the false statements, made in the prospectus under sections 34 and 35 of the Companies Act,, 2013. Whereas section 34 imposes a criminal punishment on every, person who authorises the issue of such prospectus, section 35 more, particularly includes a director of the company in the imposition of, liability for such mis-statements., The only situations when a director will not incur any liability for misstatements in a prospectus are as under:, (1), , No criminal liability under section 34 shall apply to a person, if he proves that such statement or omission was, immaterial or that he had reasonable grounds to believe,, and did up to the time of issue of the prospectus believe,, that the statement was true or the inclusion or omission, was necessary., , (2), , No civil liability for any mis-statement under section 35, shall apply to a person if he proves that:, 30
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(i), , having consented to become a director of the company,, he withdrew his consent before the issue of the, prospectus, and that it was issued without his authority, or consent; or, , (ii), , the prospectus was issued without his knowledge or, consent, and that on becoming aware of its issue, he, forthwith gave a reasonable public notice that it was, issued without his knowledge or consent., , (iii), , that, as regards every misleading statement purported, to be made by an expert or contained in what purports, to be a copy of or an extract from a report or valuation, of an expert, it was a correct and fair representation, of the statement, or a correct copy of, or a correct and, fair extract from, the report or valuation; and he had, reasonable ground to believe and did up to the time of, the issue of the prospectus believe, that the person, making the statement was competent to make it and, that the said person had given the consent required by, sub-section (5) of section 26 to the issue of the, prospectus and had not withdrawn that consent before, filing of a copy of the prospectus with the Registrar or,, to the defendant's knowledge, before allotment, thereunder., , Therefore, in the present case the director cannot escape, the liability by stating that he had relied on the promoters, for making correct statements in the prospectus. He will, be liable for mis-statements in the prospectus., , SERIES 2, 1., , (a) How does the Companies Act, 2013 regulate and, restrict the following matters in respect of a company, going for public issue of shares:, (i), , Minimum Amount stated in the Prospectus; and, 31
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(ii), , 1., , Application Money payable on shares., (6 Marks), , (a) The Companies Act, 2013 by virtue of the provisions as, contained in Section 39 (1) and (2) regulates and restricts, the minimum amount stated in the prospectus and the, application money payable in a public issue of shares as, under:, Minimum amount stated in a prospectus [Section 39 (1)], No Allotment shall be made of any securities of a company, offered to the public for subscription; unless; (i), , the amount stated in the prospectus as the minimum amount, has been subscribed; and, , (ii), , the sums payable on application for such amount has been, paid to and received by the company., Application money: Section 39 (2) provides that the, amount payable on application on each security shall not, be less than 5% of the nominal amount of such security or, such amount as Securities and Exchange Board of India, (SEBI) may prescribe by making any regulations in this, behalf. Further section 39 (3) provides that if the stated, minimum amount is not received by the company within 30, days of the date of issue of the prospectus or such time as, prescribed by SEBI, the company will be required to refund, the application money received within such time and, manner as may be prescribed., Rule 11 (1) of the Companies (Prospectus and Allotment of, Securities) Rules, 2014 mentions that if the stated minimum, amount has not been subscribed and the sum payable on, application is not received within the period specified, therein, then 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., In case of any default, the company and its officer who is in, default shall be liable to a penalty, for each default, of one, thousand rupees for each day during which such default, 32
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continues or one lakh rupees, whichever is less., Section 40 (3) provides that all moneys received on, application from the public for subscription to the securities, shall be kept in a separate bank account maintained with a, scheduled bank., , CHAPTER 4: SHARE CAPITAL AND DEBENTURES, JANUARY 2021, Question, State the reasons for the issue of shares at premium or, discount. Also write in brief the purposes for which the, securities premium account can be utilized? (5 Marks), Answer, When a company issues shares at a price higher than their, face value, the shares are said to be issued at premium and, the differential amount is termed as premium. On the other, hand, when a company issues shares at a price lower than, their face value, the shares are said to be issued at discount, and the differential amount is termed as discount., However, as per the provisions of section 53 of the, Companies Act, 2013, a company is prohibited to issue, shares at a discount except in the case of an issue of sweat, equity shares given under section 54 of the Companies Act,, 2013. As per the provisions of sub-section (1) of section 52, of the Companies Act, 2013, where a company issues shares, at a premium, whether for cash or otherwise, a sum equal, to the aggregate amount of the premium received on those, shares shall be transferred to a “securities premium, account”., Application of Securities Premium Account: As per the, provisions of sub-section (2) of section 52 of the Companies, Act, 2013, the securities premium account may be applied, by the company— (a) towards the issue of unissued shares, 33
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of the company to the members of the company as fully, paid bonus shares; (b) in writing off the preliminary, expenses of the company; (c) in writing off the expenses of,, or the commission paid or discount allowed on, any issue of, shares or debentures of the company; (d) in providing for, the premium payable on the redemption of any redeemable, preference shares or of any debentures of the company; or, (e) for the purchase of its own shares or other securities, under section 68., Question (i) London Limited, at a general meeting of, members of the company, passed an ordinary resolution to, buy-back 30 percent of its equity share capital. The articles, of the company empower the company for buy-back of, shares. Explaining the provisions of the Companies Act,, 2013, examine: (A) Whether company's proposal is in, order? (B) Would your answer be still the same in case the, company instead of 30 percent, decides to buy-back only 20, per cent of its equity share capital?, (ii) The Board of Directors of Rajesh Exports Ltd., a, subsidiary of Manish Ltd., decides to grant a loan of ` 3, lakh to Bhaskar, the finance manager of Manish Ltd.,, getting salary of ` 40,000 per month, to buy 500 partly, paid-Up equity shares of ` 1,000 each of Rajesh Exports, Ltd. Examine the validity of Board's decision with reference, to the provisions of the Companies Act, 2013. (2 Marks), Answer (i) According to the provisions of section 68 (2) of, the Companies Act, 2013, no company shall purchase its, own shares or other specified securities under subsection, (1), unless— (a) the buy-back is authorised by its articles;, (b) a special resolution has been passed at a general, meeting of the company authorising the buy-back: Provided, that nothing contained in this clause shall apply to a case, where— (i) the buy-back is, ten per cent or less of the total, paid-up equity capital and free reserves of the company;, and (ii) such buy-back has been authorised by the Board by, means of a resolution passed at its meeting; (c) the buyback is twenty-five per cent or less of the aggregate of, 34
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paid-up capital and free reserves of the company: Provided, that in respect of the buy-back of equity shares in any, financial year, the reference to twenty-five per cent in this, clause shall be construed with respect to its total paid-up, equity capital in that financial year. In the instant case,, London Limited, at a general meeting of members of the, company, passed an ordinary resolution to buy back 30% of, its equity share capital. The articles of the company, empower the company for buy back of shares. (A) the, Company’s proposal is not in order, since a special, resolution as required by the above provision has not been, passed, rather an ordinary resolution has only been passed., (B) if the company instead of 30%, decides to buy back only, 20% (even if it is within the specified limit of 25%) of its, equity share capital, then also special resolution is, required. Hence, our answer will not change. This proposal, of the company will also be not in order., (ii) As per section 67(2) of the Companies Act, 2013, no, public company shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision, of security or otherwise, any financial assistance for the, purpose of, or in connection with, a purchase or, subscription made or to be made, by any person of or for, any shares in the company or in its holding company. As, per the provisions of section 67(3)(c) of the Companies Act,, 2013, nothing stated above, shall apply to the giving of, loans by a company to persons in the employment of the, company other than its directors or key managerial, personnel, for an amount not exceeding their salary or, wages for a period of six months with a view to enabling, them to purchase or subscribe for fully paid-up shares in, the company or its holding company to be held by them by, way of beneficial ownership. If we analyse the provisions, of section 67(3)(c) of the Companies Act, 2013, we can, come to know that the relaxation given here can be availed, only when all the following three conditions are fulfilled: 1., The loan has been given to the employees of the company, 35
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other than its directors or key managerial personnel (not, the employee of its holding company). - Therefore this, condition has not been fulfilled; 2. The amount does not, exceed their salary or wages for a period of six months.This condition has not been fulfilled. 3. The amount should, be utilized by the employee for purchase of fully shares or, subscribe for fully paid-up shares in the company or its, holding company to be held by them by way of beneficial, ownership. - Here Mr. Bhaskar is going to purchase the, shares in Rajesh Exports Ltd., which is neither his, employer company, nor holding company of his employer, company and the shares are not fully paid-up. Therefore,, this condition has also not been fulfilled. Even in case Mr., Bhaskar would not have fulfilled any one of the above, conditions, the decision of the Board of Directors of Rajesh, Exports Ltd. would not have been valid. Therefore we can, conclude that the decision of the Board of Directors of, Rajesh Exports Ltd. is not valid., , NOVEMBER 2020, Question, (a), , The Authorized share capital of SSP Limited is ` 5, crore divided into 50 Lakhs equity shares of ` 10 each., The Company issued 30 Lakhs equity shares for, subscription which was fully subscribed. The, Company called so far ` 8 per share and it was paid, up. Later on the Company proposed to reduce the, Nominal Value of equity share from ` 10 each to ` 8, each and to carry out the following proposals:, (i), , Reduction in Authorized Capital from ` 5 crore, divided into 50 Lakhs equity shares of ` 10 each, to ` 4 crore divided into 50 Lakhs equity shares of, ` 8 each., , (ii), , Conversion of 30 Lakhs partly paid up equity, shares of ` 8 each to fully paid up equity shares, of ` 8 each there by relieving the shareholders from, 36
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making further payment of ` 2 per share., State the procedures to be followed by the Company, to carry out the above proposals under the provisions, of the Companies Act, 2013., (5, Marks), Answer, (a), , (i) Procedure for reduction of share capitalIn order to carry out proposals by SSP Limited to, reduce the nominal value of the equity share, the, company has to comply with the procedure given, under section 66 of the Companies Act, 2013, which deals with the Reduction of share capital., Procedure, (1), , (2), , Reduction of share capital by special, resolution: Subject to confirmation by the, Tribunal on an application by the company, a, company limited by shares or limited by, guarantee and having a share capital may, by, a special resolution, reduce the share capital, in any manner and in particular, may—, (a), , extinguish or reduce the liability on any of, its shares in respect of the share capital, not paid-up; or, , (b), , either with or without extinguishing or, reducing liability on any of its shares,—, (i), , cancel any paid-up share capital which, is lost or is unrepresented by available, assets; or, , (ii), , pay off any paid-up share capital which, is in excess of the wants of, the, company, alter its memorandum by, reducing the amount of its share capital, and of its shares accordingly., , Issue of Notice from the Tribunal: The, Tribunal shall give notice of every application, made to it to, the Central, Government,, Registrar and the creditors of the company, 37
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and shall take into consideration the, representations, if any, made to it by them, within a period of three months from the date, of receipt of the notice., (3), , Order of tribunal: The Tribunal may, if it is, satisfied that the debt or claim of every, creditor of the company has been discharged, or determined or has been secured or his, consent is obtained, make an order confirming, the reduction of share capital on such terms, and conditions as it deems fit., , Publishing of order of confirmation of, tribunal: The order of confirmation of the, reduction of share capital by the Tribunal shall, be published by the company in such manner, as the Tribunal may direct., Delivery of certified copy of order to the registrar: The, company shall deliver a certified copy of the order of, the Tribunal and of a minute approve by the Tribunal to, the Registrar within thirty days of the receipt of the copy of, the order, who shall register the same and issue a, certificate to that effect., (4), , Alteration of Share Capital:, SSP Limited proposes to alter its share capital., The Present authorized share capital ` 5 Crore, will be altered to ` 4 Crore. According to Section, 61 of the Companies Act, 2013, a limited company, having a share capital may alter its capital part, of the memorandum., A limited company having a share capital may, if, so authorized by its articles, alter, its, memorandum in its general meeting to Cancel shares which, at the date of the passing, of the resolution in that behalf, have not been taken, or agreed to be taken by any person, and diminish, the amount of its share capital by the amount of the, shares so cancelled. The cancellation of shares shall, not be deemed to be reduction of share capital., 1., , 38
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A company shall within 30 days of the shares, having been consolidated, converted, sub-divided,, redeemed, or cancelled or the stock having been, reconverted, shall give a notice to the Registrar in, the prescribed form along with an altered, memorandum [Section 64 of the Companies Act,, 2013]., 2., , The Company has to follow the above procedures, to alter its authorized share capital., , Question, ABC Limited is a public company incorporated in New Delhi., The Board of Directors (BOD) of the company wants to, bring a public issue of 100000 equity shares of 10 each., The BOD has appointed an underwriter for this issue for, ensuring the minimum subscription of the issue. The, underwriter advised the BOD that due to current economic, situation of the Country it would be better if the company, offers these shares at a discount of ` 1 per share to ensure, full subscription of this public issue. The Board of Directors, agreed to the suggestion of underwriter and offered the, shares at a discount of ` 1 per share. The issue was fully, subscribed and the shares were allotted to the applicants in, due course., Decide whether the issue of shares as mentioned above is, valid or not as per Section 53 of Companies Act 2013. What, would be your answer in the above case if the shares are, issued to employees as Sweat equity shares?, (2 + 1 =, 3 Marks), Answer, (i) As per the provisions of sub-section (1) of section 53, read with section 54 of the Companies Act, 2013, a, company shall not issue shares at a discount, except in the, case of an issue of sweat equity shares. As per the, provisions of sub-section (2) of section 53 of the, 39
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Companies Act, 2013, any share issued by a company at a, discount shall be void., In terms of the above provisions, issue of shares by ABC, Limited at a discount of, per share is not valid., In case the above shares have been issued to employees as, Sweat equity shares, then the issue of shares at discount is, valid. [Section 54(1) of the Companies Act, 2013., , NOVEMBER 2019, Question 5, (a) X Ltd. issued a notice on 1st Feb, 2018 to its existing, shares holders offering to purchase one extra share, for every five shares held by them., The last date to accept the offer was 15th Feb, 2018, only. Mr. Kavi has given an application to renounce, the shares offered to him in favour of Mr. Ravi, who, is not a shareholder of the company. Examine the, validity of application of Mr. Kavi under the, provisions of the Companies Act, 2013. Would your, answer differ if Mr. Kavi is a shareholder of X Ltd.?, (5, Marks), Answer, (a), , According to section 62 of the Companies Act, 2013,, where at any time, a company having a share, capital proposes to increase its subscribed capital by, the issue of further shares, such shares shall be, offered—, (a), , to persons who, at the date of the offer, are, holders of equity shares of the company in, proportion, as nearly as circumstances admit, to, the paid-up share capital on those shares by, sending a letter of offer subject to the following, 40
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conditions, namely:(i), , the offer shall be made by notice specifying, the number of shares offered and limiting a, time not being less than fifteen days and not, exceeding thirty days from the date of the, offer within which the offer, if not accepted,, shall be deemed to have been declined;, , (ii), , unless the articles of the company otherwise, provide, the offer aforesaid shall be deemed, to include a right exercisable by the person, concerned to renounce the shares offered to, him or any of them in favour of any other, person; and the notice referred to in clause (i), shall contain a statement of this right;, , (iii), , after the expiry of the time specified in the, notice aforesaid, or on receipt of earlier, intimation from the person to whom such, notice is given that he declines to accept the, shares offered, the Board of Directors may, dispose of them in such manner which is not, dis-advantageous to the shareholders and the, company., , In the instant case, X Ltd. issued a notice on 1st, Feb, 2018 to its existing shares holders offering, to purchase one extra share for every five shares, held by them. The last date to accept the offer was, 15th Feb, 2018 only. Mr. Kavi has given an, application to renounce the shares offered to him, in favour of Mr. Ravi, who is not a shareholder of, the company., As nothing is specified related to the Articles of, the company, it is assumed offer shall be deemed, to include a right of renunciation. Hence, Mr., Kavi can renounce the shares offered to him in, favour of Mr. Ravi, who is not a shareholder of, the company., In the second part of the question, even if Mr., Ravi is a shareholder of X Ltd. then also it does, 41
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not affect the right of renunciation of shares of, Mr. Kavi to Mr. Ravi., , 42
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Or, (a), , XYZ unlisted company passed a special resolution in, a general meeting on January 5th, 2019 to buy back, 30% of its own equity shares. The Articles of, Association empowers the company to buy back its, own shares. Earlier the company has also passed a, special resolution to buy back its own shares on, January 15th, 2018. The company further decided, that the payment for buyback be made out of the, proceeds of the company's earlier issue of equity, share. In the light of the provisions of the Companies, Act, 2013,, (i), , Decide, whether the company's proposal is in order., , (ii), , What will be your answer if buy back offer date is, revised from January 5 th, 2019 to January 25th, 2019 and percentage of buyback is reduced from, 30% to 25% keeping the source of purchase as, above?, (5, Marks), , Answer (i) In the instant case, the company’s, proposal is not in order due to the following, reasons:, Though XYZ unlisted company passed a special resolution, but it proposed to buy back 30% of its own equity shares., But as per section 68(2)(c) of the Companies Act, 2013,, buy-back of equity shares in any financial year shall not, exceed 25% of its total paid up equity capital in that, financial year (i) In the instant case, the company’s, proposal is not in order due to the following reasons:, (A), , Though XYZ unlisted company passed a special, resolution but it proposed to buy back 30% of, its own equity shares. But as per section, 68(2)(c) of the Companies Act, 2013, buy-back, of equity shares in any financial year shall not, exceed 25% of its total paid up equity capital, in that financial year The Articles of, Association empowers the company to buy, 43
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back its own shares. This condition is in, order as per section 68(2)(a)., (B), , Earlier the company has also passed a special, resolution to buy back its own shares on, January 15th, 2018, now the company passed, a special resolution on January 5th, 2019 to, buy back its own shares. This is not valid as no, offer, of buy-back, shall be made within a, period of one year from the date of the closure, of the preceding offer of buy-back, if any., [proviso to section 68(2)], , (C), , The company, further decided that the, payment for buy back be made out of the, proceeds of the company’s earlier issue of, equity share. This is not in order as, according to proviso to section 68(1), buyback of any kind of shares or other specified, securities cannot be made out of the proceeds, of an earlier issue of the same kind of shares, or same kind of other specified securities., , (ii) If buy back offer date is revised from 5th January, 2019 to January 25th 2019 and percentage of buy, back is reduced from 30% to 25% keeping the, source of purchase as above, then also the, company’s proposal is not in order as buy-back of, any kind of shares or other specified securities, cannot be made out of the proceeds of an earlier, issue of the same kind of shares or same kind of, other specified securities., , RTP NOVEMBER 2021, Ques, Yellow Pvt Ltd. is an unlisted company incorporated in the, year 2012. The company have share capital of rupees fifty, crores. The company has decided to issue sweat equity, shares to its directors and employees. The company, decided to issue 10% sweat equity shares (which in total, 44
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will add up to 30% of its paid up equity shares), with a, locking period of five years, as it is a start-up company., How would you justify these facts in relation to the, provision for issue of sweat equity shares by a start-up, company, with reference to the provision of the Company, Act, 2013. Explain?, Answer, Sweat Equity Shares is governed by Section 54 of the, Companies Act, 2013 and Rule 8 of Companies (Share, capital and debentures) Rules, 2014. According to Section, 54 the company can issue sweat equity shares to its, director and permanent employees of the company., According to rule 8 (4) proviso, states that a start up, company, is defined in a notifica tion number Ministry of, Commerce and industry Government of India, may issue, sweat equity share not exceeding 50% of its paid up share, capital up to 10 years from the date of its in incorporation, or registration., According to Rule 8(5), the sweat equity shares issued to, directors or employees shall be locked in/ non, transferable for a period of three years from the date of, allotment and the fact that the share certificates are, under lock-in too., Hence, in the above case the company can issue sweat, equity shares by passing special resolution at its general, meeting. The company as a startup company is right in, issue of 10% sweat equity share as it is overall within the, limit of 50% of its paid up share capital. But the lock in, period of the shares is limited to maximum three years, period from the date of allotment., Ques, 500 equity shares of ABC Limited were acquired by Mr., Amit, but the signature of Mr. Manoj, the transferor, on, the transfer deed was forged. Mr. Amit, after getting the, shares registered by the company in his name, sold 250, equity shares to Mr. Abhi on the strength of the share, certificate issued by ABC Limited. Mr. Amit and Mr. Abhi, 45
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were not aware of, the forgery. What are the, liabilities/rights of Mr. Manoj, Amit and Abhi against the, company with reference to the aforesaid shares?, Answer, According to Section 46(1) of the Companies Act, 2013, a, share certificate once issued under the common seal, if, any, of the company or signed by two directors or by a, director and the Company Secretary, wherever the, company has appointed a Company Secretary, specifying, the shares held by any person, shall be prima facie, evidence of the title of the person to such shares., Therefore, in the normal course the person named in the, share certificate is for all practical purposes the legal, owner of the shares therein and the company cannot deny, his title to the shares., However, a forged transfer is a nullity. It does not give, the transferee (Mr. Amit) any title, to the shares., Similarly, any transfer made by Mr. Amit (to Mr. Abhi), will also not give a good title to the shares as the title of, the buyer is only as good as that of the seller., Therefore, if the company acts on a forged transfer and, removes the name of the real owner (Mr. Manoj) from the, Register of Members, then the company is bound to, restore the name of Mr. Manoj as the holder of the shares, and to pay him any dividends which he ought to have, received., In the above case, therefore, Mr. Manoj has the right, against the company to get the shares recorded in his, name. However, neither Mr. Amit nor Mr. Abhi have any, rights against the company even if they are bona fide, purchasers. But as Mr. Abhi acted on the faith of share, certificate issued by company, he can demand, compensation from Mr. Amit., , 46
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RTP MAY 2021, Ques, Shiva Cement Limited is engaged in the manufacture of, different types of cements and has got a good brand value., Over the years, it has built a good reputation and its, Balance Sheet as at March 31, 2020 showed the following, position:, 1., , Authorized Share Capital (25,00,000 equity, shares of ` 10/- each) ` 2,50,00,000, , 2., , Issued, subscribed and paid-up Share Capital, (10,00,000 equity shares of ` 10/- each, fully, paid-up) ` 1,00,00,000, , 3., , Free Reserves ` 3,00,00,000, , The Board of Directors are proposing to declare a bonus, issue of 1 share for every 2 shares held by the existing, shareholders. The Board wants to know the conditions and, the manner of issuing bonus shares under the provisions, of the Companies Act, 2013., Answer, According to Section 63 of the Companies Act, 2013, a, company may issue fully paid-up bonus shares to its, members, in any manner whatsoever, out of (i), , its free reserves;, , (ii), , the securities premium account; or, , (iii), , the capital redemption reserve account., , Provided that no issue of bonus shares shall be made by, capitalising reserves created by the revaluation of assets., Conditions for issue of Bonus Shares: No company shall, capitalise its profits or reserves for the purpose of issuing, fully paid-up bonus shares, unless—, (i), , it is authorised by its Articles;, , (ii), , it has, on the recommendation of the Board, been, authorised in the general meeting, of the, company;, , (iii), , it has not defaulted in payment of interest or, 47
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principal in respect of fixed deposits or debt, securities issued by it;, (iv), , it has not defaulted in respect of payment of, statutory dues of the employees, such as,, contribution to provident fund, gratuity and, bonus;, , (v), , the partly paid-up shares, if any, outstanding on, the date of allotment, are made fully paid-up;, , (vi), , it complies with such conditions as are, prescribed by Rule 14 of the Companies (Share, Capital and debentures) Rules, 2014 which states, that the company which has once announced the, decision of its Board recommending a bonus, issue, shall not subsequently withdraw the same., , Further, the company has to ensure that the bonus shares, shall not be issued in lieu of dividend., For the issue of bonus shares Shiva Cement Limited will, require reserves of ` 50,00,000 (i.e. half of ` 1,00,00,000, being the paid-up share capital), which is readily available, with the company. Hence, after following the above, conditions relating to the issue of bonus shares, the, company may proceed for a bonus issue of 1 share for every, 2 shares held by the existing shareholders., , RTP NOVEMBER 2020, Question, Surya Ltd. is engaged in the manufacture of consumer goods and has, got a good brand value. Over the years, it has built a good reputation and, its Balance Sheet as at March 31, 2019 shows the following position:, Authorized Share Capital (25,00,000 equity shares of face value, of ` 10/- each), 2,50,00,000 issued, subscribed and paid-up capital (10,00,000 equity, shares of face value of `10/- each, fully paid-up) ` 1,00,00,000, Free Reserves ` 3,00,00,000, The Board of Directors are proposing to declare a bonus issue of 1 share, for every 2 shares held by the existing shareholders. The Board wants, 48
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to know the conditions and the manner of issuing bonus shares under, the provisions of the Companies Act, 2013. Discuss., Answer According to Section 63 of the Companies Act, 2013, a, company may issue fully paid-up bonus shares to its members, in any, manner whatsoever, out of (i), , its free reserves;, , (ii), , the securities premium account; or, , (iii), , the capital redemption reserve account., , Provided that no issue of bonus shares shall be made by capitalising, reserves created by the revaluation of assets., Conditions for issue of Bonus Shares: No company shall capitalise its, profits or reserves for the purpose of issuing fully paid-up bonus, shares, unless—, (i), , it is authorised by its Articles;, , (ii), , it has, on the recommendation of the Board, been, authorised in the general meeting of the company;, , (iii), , it has not defaulted in payment of interest or principal, in respect of fixed deposits or debt securities issued by, it;, , (iv), , it has not defaulted in respect of payment of statutory, dues of the employees, such as, contribution to, provident fund, gratuity and bonus;, , (v), , the partly paid-up shares, if any outstanding on the date, of allotment, are made fully paid-up;, , (vi), , it complies with such conditions as may be prescribed., , But the company has to ensure that the bonus shares shall not be issued, in lieu of dividend., To issue bonus shares, company will need reserves of ` 50,00,000 (half, of `1,00,00,000), which is available with the company. Hence, after, following the above compliances on issuing bonus shares under the, Companies Act, 2013, Surya Ltd. may proceed for a bonus issue of 1 share, for every 2 shares held by the existing shareholders., , RTP MAY 2020, 49
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Ques, K Limited, a subsidiary of Old Limited, decides to give a loan of ` 4,00,000, to the Human Resource Manager, who is not a Key Managerial, Personnel of K Limited, drawing salary of, ` 30,000 per month, to buy 500 partly paid-up equity Shares of ` 1000, each in K Limited. Examine the validity of company's decision under the, provisions of the Companies Act, 2013, ANSWER Restrictions on purchase by company or giving of loans, by it for purchase of its share: As per section 67 (3) of the, Companies Act, 2013 a company is allowed to give a loan to its, employees subject to the following limitations:, (a), , The employee must not be a Key Managerial Personnel;, , (b), , The amount of such loan shall not exceed an amount equal, to six months’ salary of the employee., , (c), , The shares to be subscribed must be fully paid shares, , In the given instance, Human Resource Manager is not a Key Managerial, Personnel of the K Ltd. He is drawing salary of ` 30,000 per month and, took loan taken to buy 500 partly paid up equity shares of ` 1000 each, in K Ltd., Keeping the above provisions of law in mind, the company’s (K Ltd.), decision is invalid due to two reasons:, The amount of loan being more than 6 months’ salary of, the HR Manager, which should have restricted the loan to `, 1.8 Lakh., The shares subscribed are partly paid shares whereas the benefit is, available only for subscribing fully paid shares, i., , MTP NOVEMBER 2021, SERIES 2, QUES, (a) Natraj Limited is engaged in the manufacturing of glass products., It wants to provide financial assistance to its employees to enable, them to subscribe for fully paid shares of the company. Advise whether, it amount to purchase of its own shares. If, in the instant case, the company, itself purchasing to redeem its preference shares, does it amount to, acquisition of its own shares?, 50
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(5 Marks), ANSWER, Yes, the financial assistance to its employees by the company to enable, them to subscribe for the shares of the company will amount to the, company purchasing its own shares. However, section 67 (3) of the, Companies Act, 2013, permits a company to the give loans to its, employees other than its directors or key managerial personnel, for an, amount not exceeding their salary or wages for a period of six months, with a view to enabling them to purchase or subscribe for fully paid up shares in the company or its holding company to be held by them by, way of beneficial ownership., Section 68 of the Companies Act, 2013 however, allows a company to, buy back its own shares under certain circumstances and subject to, fulfilment of prescribed conditions., Purchasing in order to redemption its preference shares, does amount, to acquisition or purchase of its own shares. But this is allowed in terms, of section 68 of the Companies Act, 2013 subject to the fulfilment of, prescribed conditions, and upto specified limits and only after, following the prescribed procedure., , CHAPTER 5: ACCEPTANCE OF DEPOSITS BY COMPANIES, JANUARY 2021, Ques, RS Ltd. received share application money of ` 50.00 Lakh, on 01.06.2019 but failed to allot shares within the, prescribed time limit. The share application money of `, 5.00 Lakh received from Mr. Khanna, a customer of the, Company, was refunded by way of book adjustment, towards the dues payable by him to the company on, 30.07.2019. The Company Secretary of RS Ltd. reported to, the Board that the entire amount of ` 50.00 Lakh shall be, deemed to be 'Deposits' as on 31.07.2019 and the Company, is required to comply with the provisions of the Companies, Act, 2013 applicable to acceptance of deposits in relation to, this amount. You are required to examine the validity of the, 51
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reporting of the Company Secretary in the light of the, relevant provisions of the Companies Act, 2013. (4 Marks), Answer, According to Rule 2(1)(c) of the Companies (Acceptance of, Deposits) Rules, 2014, the following category of receipt is, not considered as deposit: Any amount received and held, pursuant to an offer made in accordance with the, provisions of the Companies Act, 2013 towards subscription, to any securities, including share application money or, advance towards allotment of securities, pending, allotment, so long as such amount is appropriated only, against the amount due on allotment of the securities, applied for; It is clarified by way of Explanation that if the, securities for which application money or advance for such, securities was received cannot be allotted within 60 days, from the date of receipt of the application money or, advance for such securities and such application money or, advance is not refunded to the subscribers within 15 days, from the date of completion of 60 days, such amount shall, be treated as a deposit under these rules. Further, it is, clarified that any adjustment of the amount for any other, purpose shall not be treated as refund. In the given, question, RS Limited has received ` 50 Lakhs as share, application money on 01.06.2019. It failed to allot shares, within the prescribed limit. Further, on 30.07.2019 the, company adjusted the amount of ` 5 Lakhs received from, Mr. Khanna (a customer of the company), by way of book, adjustment towards the dues payable by him to the, company. In the light of the facts of the question and, provisions of Law: (1) If such application money or advance, is not refunded to the subscribers within 15 days from the, date of completion of 60 days, such amount shall be treated, as a deposit. In the question, the prescribed limit of 60, days will end on 31.07.2019 and the company has 15 more, days to refund such application money to the subscribers., Otherwise, after lapse of such 15 days, the amount not so, refunded will be treated as deposit. Hence, the Company, 52
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Secretary of RS Limited is not correct in treating the entire, amount of ` 50 Lac as ‘Deposits’ on 31.07.2019., (2) Any adjustment of the amount for any other purpose, shall not be treated as refund. Thus, the amount of ` 5, Lakhs adjusted against payment due to be received from, Mr. Khanna, cannot be treated as refund., Ques, Referring to the provisions of the Companies Act, 2013,, examine the validity of the following: Safar Limited having, a net worth of ` 130 crore wants to accept deposits from its, members. It has approached you to advise whether it falls, within the category of an eligible company? What special, care has to be taken while accepting such deposits from, members?, Answer, According to Rule 2(1)(e) of the Companies (Acceptance of, Deposits) Rules, 2014, an “eligible company” as referred to, in section 76(1) of the Companies Act, 2013 means a public, company, having a net worth of not less than one hundred, crore rupees or a turnover of not less than five hundred, crore rupees and which has obtained the prior consent of, the company in general meeting by means of a special, resolution and also filed the said resolution with the, Registrar of Companies before making any invitation to the, public for acceptance of deposits. However, an ‘eligible, company’, which is accepting deposits within the limits, specified under section 180 (1) (c), may accept deposits by, means of an ordinary resolution. According to Rule 4 (a) of, the Companies (Acceptance of Deposits) Rules, 2014, an, ‘eligible company’ shall accept or renew any deposit from, its members, if the amount of such deposit together with, the amount of deposits outstanding as on the date of, acceptance or renewal of such deposits from members does, not exceed ten per cent. of the aggregate of the paid-up, share capital, free reserves and securities premium account, 53
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of the company. Safar Limited is having a net worth of `, 130 crores. Hence, it falls in the category of ‘eligible, company’. The fact that turnover has not been stated in the, question will not affect this answer, since fulfilling any one, criteria will be sufficient. Thus, Safar Limited has to ensure, that acceptance of deposits from its members together with, the amount of deposits outstanding as on the date of, acceptance or renewal of such deposits from the members,, in no case, exceeds 10% of the aggregate of the paid-up, share capital, free reserves and securities premium account, of the company., , NOVEMBER 2020, Question, Viki Limited engaged in the business of consumer durables., It is managed by a team of professional managers. The, Company has not made default in payment of statutory, dues, and repayment of debenture/ Institutional loan with, interest. The Company advertised a circular in the, newspaper dated 20th September 2020 inviting the deposits, from the members and public for the first time. The latest, audited financial statement of the Company revealed the, following data, as on 31.3.2020:, Paid up share capital, , ` 70 Crores, , Securities Premium, , ` 20 Crores, , Free Reserves, , ` 20 Crores, , Long-term borrowings, , ` 50 Crores, , The Company in the advertisement invited public deposit for, a period of 4 Months Plan A and Plan B for 36 Months., (i), , Explain the term 'eligible company' and calculate, the Maximum amount of Deposit that can be, 54
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accepted from Public (Non-Member) for Plan A and, Plan B based on, latest audited Financial, Statement under the provisions of the Companies, Act, 2013., (ii), , Calculate the maximum amount of deposit Viki, Limited can accept from the public under Plan B in, case it is a wholly owned Government Company, under the provisions of the said Act., (6, Marks), , Answer, (i) According to Rule 2(1)(e) of the Companies (Acceptance, of Deposits) Rules, 2014 "eligible company" means a public, company as referred to in sub-section (1) of section 76 of, the Companies Act, 2013, having a net worth of not less, than one hundred crore rupees or a turnover of not less, than five hundred crore rupees and which has obtained the, prior consent of the company in general meeting by means, of a special resolution and also filed the said resolution, with the Registrar of Companies before making any, invitation to the Public for acceptance of deposits., Provided that an eligible company, which is accepting, deposits within the limits specified under clause (c) of subsection (1) of section 180, may accept deposits by means of, an ordinary resolution., Net worth of Viki Limited as per section 2(57) of the, Companies Act, 2013 can be calculated as follows:, Paid up share capital: ` 70, crores Free Reserves: ` 20, crores Securities premium: `, 20 crores Total: ` 110 crores, Hence, Viki Limited is an eligible company, since its Net, worth is in excess of, ` 100 crores., Tenure for which Deposits can be Accepted: As per Rule, 3(1)(a) of the Companies (Acceptance of Deposits) Rules,, 2014, a company is not permitted to accept or renew, 55
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deposits (whether secured or unsecured) which is, repayable on demand or in less than six months. Further,, the maximum period of acceptance of deposit cannot, exceed thirty six months., Exception to the rule of tenure of six months: As per the, proviso to the above rule, for the purpose of meeting any, of its short-term requirements of funds, a company may, accept or renew deposits for repayment earlier than six, months subject to the condition that such deposits shall, not exceed ten per cent. of the aggregate of the paid-up, share capital, free reserves and securities premium, account of the company., As per Rule 3(1)(b) of the Companies (Acceptance of, Deposits) Rules, 2014, such deposits are repayable not, earlier than three months from the date of such deposits, or renewal thereof., Maximum Amount of Deposits: As per Rule 3(4)(b) of the, Companies (Acceptance of Deposits) Rules, 2014, an, eligible company is permitted to accept or renew deposits, from persons other than its members. As per the law the, amount of such deposit together with the amount of, outstanding deposits (excluding deposits from members), on the date of acceptance or renewal can be maximum, twenty-five per cent. of the aggregate of its paid-up share, capital, free reserves and securities premium account of, the company., For Plan A: Since the maximum period of deposits is 4, months, the maximum amount of deposits shall not, exceed ten per cent. of the aggregate of the paid-up share, capital, free reserves and securities premium account of, the company., Maximum amount of deposits: 10% of 110 crores (70 + 20, + 20) = 11 crores., For Plan B: Maximum amount of deposits: 25% of 110, crores (70 + 20 + 20) -11 crores (outstanding deposit, under plan A) = 16.5 crores., (ii) In terms of Rule 3(5) of the Companies (Acceptance of, Deposits) Rules, 2014, in case Viki Limited is a wholly, 56
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owned Government Company, so it can accept deposit, together with the amount of other outstanding deposits as, on the date of acceptance or renewal maximum up to, thirty-five per cent. of the aggregate of its paid-up share, capital, free reserves and securities premium account., For Plan B: Maximum amount of deposits: 35% of 110, crores (70 + 20 + 20) = 38.5 crores., , NOVEMBER 2019, QUES, Define the term 'deposit' under the provisions of the, Companies Act, 2013 and comment with relevant provisions, that the following amount received by a company will be, considered as deposit or not;, (i), , ` 5,00,000 raised by Rishi Ltd. through issue of, non-convertible debenture not constituting a, charge on the assets of the company and listed on, a recognised stock exchange as per applicable, regulations made by Securities and Exchange, Board of India., , (ii), , ` 2,00,000 received from Mr. T, an employee of the, company who is drawing annual salary of `, 1,50,000 under a contract of employment with the, company in the nature of non-interest bearing, security deposit., , (iii), , Amount of ` 3,00,000 received by a private, company from a relative of a Director, declared by, the depositor as out of gift received from his, mother., (6, Marks), , AMSWER, Deposit: According to section 2 (31) of the Companies Act,, 2013, the term ‘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, 57
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prescribed in the Rule 2 (1), (a) of the Companies (Acceptance of deposit) Rules,, 2014, in consultation with the Reserve bank of India., Amounts received by the company will not be, considered as deposit: In terms of Rule 2, (1) (c) of the Companies (Acceptance of deposit), Rules, 2014, following shall be the answers(i), , In the first case, where ` 5,00,000 raised by the, Rishi Ltd. through issue of non- convertible, debenture not constituting a charge on the assets, of the company and listed on recognised stock, exchange as per the applicable regulations made, by the SEBI, will not be considered as deposit in, terms of sub-clause (ixa) of the said rule., , (ii), , In the second case, ` 2,00,000 was received from, Mr. T, an employee of the company drawing, annual salary of ` 1,50,000 under a contract of, employment with the company in the nature of, non-interest bearing security deposit. This, amount received by company from employee, Mr., T will be considered as deposit in terms of subclause (x) of the said rule, as amount received is, more than his annual salary under a contract of, employment with the company in the nature of, non-interest, bearing security deposit., , (iii), , In the third case, amount of `3,00,000 received, by a private company from a relative of a, Director, declaring details of the amounts so, deposited as out of gift received from his mother., This amount received by the private Company, will not be considered as deposit in terms of subclause (viii) of the said rule. Here as per the, requirement, the relative of the director of the, private company, from whom money is received,, furnished the declaration in writing to the effect, that the amount is given out of gift received from, his mother and not being given out of funds, 58
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acquired by him by borrowing or accepting loans, or deposits from others., , RTP NOVEMBER 2020, QUES, State, with reasons, whether the following statements are true or false?, (i) XYZ Private Limited may accept the deposits from its, members to the extent of `, 60.00 Lakh, if the aggregate of its paid-up capital, free, reserves and security premium account is ` 60.00 Lakh., (ii) A Government Company, which is eligible to accept deposits, under Section 76 of the Companies Act, 2013 cannot accept, deposits from public exceeding 25% of the aggregate of its, paid- up capital, free reserves and security premium account., Answer (i) As per the provisions of Section 73(2) of the Companies, Act, 2013 read with Rule 3 of the Companies (Acceptance of Deposits), Rules, 2014, as amended by the Companies (Acceptance of Deposits), Amendment Rules, 2016, a company shall accept any deposit from its, members, together with the amount of other deposits outstanding as, on the date of acceptance of such deposits not exceeding thirty five, per cent of the aggregate of the Paid-up share capital, free Reserves, and securities premium account of the company. Provided that a, private company may accept from its members monies not exceeding one, hundred per cent of aggregate of the paid up share capital, free reserves, and securities premium account and such company shall file the details, of monies so accepted to the Registrar in such manner as may be, specified., Therefore, the given statement of eligibility of XYZ Private Ltd. to, accept deposits from its members to the extent of ` 60.00 lakh is True., (ii) A Government company is not eligible to accept or renew deposits, under section 76, if the amount of such deposits together with the, amount of other deposits outstanding as on the date of acceptance or, renewal exceeds thirty five per cent of the aggregate of its Paid-up, share capital, free Reserves and securities premium account of the, company., Therefore, the given statement prescribing the limit of 25% to accept, deposits is False., 59
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MTP NOVEMBER 2021, SERIES 1, QUES, NIM Private Limited is engaged in the business of manufacturing, household plastic goods. The books of accounts of the company provides, that aggregate of its paid-up capital, free reserves and security premium, account is Rs. 35.00 lacs. The company intends to accept deposits, from its members to the extent of Rs. 35.00 lacs. Advise the company, whether it can do so. Support your answer as per the provisions of the, Companies Act, 2013. (4 Marks), ANSWER, As per the provisions of Section 73 (2) of the Companies Act, 2013 read, with Rule 3 (3) of the Companies (Acceptance of Deposits) Rules, 2014, as, amended from time to time, a company shall accept any deposit from its, members, together with the amount of other deposits outstanding as, on the date of acceptance of such deposits not exceeding 35% of the, aggregate of the paid-up share capital, free reserves and securities, premium account of the company. It is provided that a private, company may accept from its members monies not exceeding 100% of, aggregate of the paid-up share capital, free reserves and securities, premium account and such company shall file the details of monies, so accepted to the Registrar in Form DPT-3., In the given question, since NIM Private Limited is a private company, hence it may accept monies to the extent of Rs. 35.00 lacs as deposits, from its members., , SERIES 2, QUES, A Government Company, which is eligible to accept deposits under, Section 76 of the Companies Act, 2013, cannot accept deposits from, public exceeding 25% of the aggregate of its paid-up capital, free, reserves and security premium account., State, with reasons, whether the following statement is ‘True or False’?, 60
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ANSWER, As per Rule 3 (5) of the Companies (Acceptance of Deposits) Rules, 2014, a Government Company is not eligible to accept or renew, deposits under section 76, if the amount of such deposits together with, the amount of other deposits outstanding as on the date of acceptance, or renewal exceeds thirty five per cent of the aggregate of its paid-up, share capital, free reserves and securities premium account., Therefore, the given statement where the limit of 25% has been stated, for acceptance of deposits is ‘false’., , CHAPTER 6: REGISTERATION OF CHARGES, JANUARY 2021, Ques, Moon Light Ltd. is having its establishment in USA. It, obtained a loan there creating a charge on the assets of the, foreign establishment. The Company received a notice from, the Registrar of Companies for not filing the particulars of, charge created by the Company on the property or assets, situated outside India. The Company wants to defend the, notice on the ground that it shall not be the duty of the, company to register the particulars of the charge created, on the assets not located in India. Do you agree with the, stand taken by the Company? Give your answer with, respect to the provisions of the Companies Act, 2013. (3, Marks), Answer, According to section 77 of the Companies Act, 2013, it shall, be duty of the 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. Thus, charge, may be created within India or outside India. Also, the, subject-matter of the charge i.e., the property or assets or, any of the company’s undertakings, may be situated within, 61
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India or outside India. In the given question, the company, has obtained a loan by creating a charge on the assets of, the foreign establishment. As per the above provisions, it is, the duty of the company creating a charge within or outside, India, on its property or assets or any of its undertakings,, whether tangible or otherwise and whether situated in or, outside India, to register the particulars of the charge., Hence, the stand taken by Moon Light Ltd. not to register, the particulars of charge created on the assets located, outside India is not correct., , NOVEMBER 2020, Ques, (a), , Rose (Private) Limited on 3rd April 2019 obtained, ` 30 lakhs working capital loan by offering its, Stock and Accounts Receivables as security and `, 5 Lakhs adhoc, overdraft on the personal, guarantee of a Director of Rose (Private) Limited,, from a financial institution., , (i), , Is it required to create charge for working capital, loan and adhoc overdraft in accordance with the, provisions of the Companies Act, 2013?, , State the provisions relating to extension of time, and procedure for registration of charges in case, the above charge was not registered within 30, days of its creation., (4 Marks), (ii), , Answer, As per the provisions of Section 2(16) 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 mortgage., (i), , Whenever a company obtains working capital, loans from financial institutions by offering stock, and Accounts Receivables as security, Rose, (Private) Limited is required to create a charge, on such property or assets in favour of the, 62
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lender. Hence, for ` 30 Lakhs working capital, loan, it is required to create a charge on it., Rose (Private) Limited is not required to create a, charge for ` 5 Lakh adhoc overdraft on the, personal guarantee of a director. Since charge is, always created on the property or assets of a, company and personal guarantee of director is, not a property or asset of company., (ii), , As per the provisions of Section 77 of the, Companies Act, 2013, in case the above charge, was not registered within 30 days of creation of, the charge, the Registrar may, on an application, by the company, allow such registration to be, made within a period of 60 days of such creation, (i.e. another 30 days are granted after the expiry, of original 30 days), on payment of additional, fees as prescribed., , Procedure for Extension of Time Limit: For seeking, extension of time, the company is required to make an, application to the Registrar in the prescribed form. It, should be supported by a declaration from the company, signed by its company secretary or a director that such, belated filing shall not adversely affect the rights of any, other intervening creditors of the company., The application so made must satisfy the Registrar that the, company had sufficient cause for not filing the particulars, and the instrument of charge, if any, within the original, period of thirty days. Only then he will allow registration, of charge within the extended period. Further, requisite, additional fee or advalorem fee, as applicable, must also be, paid., , NOVEMBER 2019, Ques, , 63
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DN Limited hypothecated its plant to a Nationalised Bank, and availed a term loan. The Company registered the charge, with the Registrar of Companies. The Company settled the, term loan in full, The Company requested the Bank to issue, a letter confirming the settlement of the term loan. The, Bank did not respond to the request. State the relevant, provisions of the Companies Act, 2013 to register the, satisfaction of charge in the above circumstance. State the, time frame up to which the Registrar of Companies may, allow the Company to intimate satisfaction of charges. (5, Marks), Answer, Intimation regarding Satisfaction of Charge, Section 82 of the Companies Act, 2013, requires a company, to give intimation of payment or satisfaction in full of, any charge earlier registered, to the Registrar in the, prescribed form. The intimation needs to be given within a, period of 30 days from the date of such payment or, satisfaction., Extended period of intimation: Proviso to Section 82 (1), extends the period of intimation from thirty days to three, hundred days. Accordingly, it is provided that 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 300 days of such payment or, satisfaction on payment of prescribed additional fees., , RTP NOVEMBER 2021, QUESTION, Define the term “charge” and also explain what is the, punishment for default with respect, to registration of charge as per the provisions of the, Companies Act, 2013 ., Answer, The term charge has been defined in section 2 (16) of the, 64
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Companies Act, 2013 as ‘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’., Punishment for contravention – According to section 86, of the Companies Act, 2013, 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., Further, if any person willfully furnishes any false or, incorrect information or knowingly suppresses any, material information which is required to be registered, under section 77, he shall be liable for action under, section 447 (punishment for fraud)., , RTP NOVEMBER 2020, QUESTION, What are the powers of Registrar to make entries of satisfaction and, release of charges in the absence of any intimation from the company., Discuss this matter in the light of provisions of the Companies Act,, 2013., Answer, Section 83 of the Companies Act, 2013 empowers the Registrar to, make entries with respect to the satisfaction and release of charges, even if no intimation has been received by him from the company., Accordingly, with respect to any registered charge if an evidence, is shown to the satisfaction of Registrar that the debt secured by charge, has been paid or satisfied in whole or in part or that the part of the, property or undertaking charged has been rele ased from the charge, or has ceased to form part of the company’s property or undertaking,, then he may enter in the register of charges a memorandum of, satisfaction that:, , , the debt has been satisfied in whole or in part; or, , , , the part of the property or undertaking has been released, from the charge or has ceased to form part of the, 65
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company’s property or undertaking., This power can be exercised by the Registrar despite the fact that no, intimation has been received by him from the company., Information to affected parties: The Registrar shall inform the affected, parties within 30 days of making the entry in the register of, charges., Issue of Certificate: As per Rule 8 (2), in case the Registrar enters a, memorandum of satisfaction of charge in full, he shall issue a, certificate of registration of satisfaction of charge in Form No. CHG5., , MTP NOVEMBER 2021, SERIES 1, QUES, How will a copy of an instrument evidencing creation of charge and, required to be filed with the Registrar be verified?, ANSWER, A copy of every instrument evidencing any creation or modification of, charge and required to be filed with the Registrar shall be verified, as follows:, (i), , in case property is situated outside India: where the, instrument or deed relates solely to the property situated, outside India, the copy shall be verified by a certificate, issued either under the seal, if any, of the company, or, under the hand of any director or company secretary of the, company or an authorised officer of the charge holder or, under the hand of some person other than the company, who is interested in the mortgage or charge;, , (ii), , in case property is situated in India (whether wholly or, partly): where the instrument or deed relates to the, property situated in India (whether wholly or partly), the, copy shall be verified by a certificate issued under the hand, of any director or company secretary of the company or, an authorised officer of the charge holder., 66
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QUES, Mr. A is working with a reputed Chartered Accountant firm in Delhi., After gaining an experience of 5 years, now Mr. A is planning to open, his own firm A and Associates. He has now purchased a commercial, property in Delhi belonging to Kesha Limited after entering into an, agreement with the company. At the time of registration, Mr. A comes to, know that the title deed of the company is not free and the company, expresses its inability to get the title deed transferred in his name, contending that he ought to have the knowledge of charge created on, the property of the company. Explain, whether the contention of Kesha, Limited is correct? Give your answer with respect to the provisions of, the, Companies, Act,, 2013., (, 4 Marks), ANSWER, According to section 80 of the Companies Act, 2013, where any charge, on any property or assets of a company or any of its undertakings is, registered under section 77 of the Companies Act, 2013, 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., Thus, Section 80 clarifies that if any person acquires a property,, assets or undertaking in respect of which a charge is already, registered, it would be deemed that he has complete knowledge of, charge from the date of its registration. Mr. A, therefore, ought to have, been careful while purchasing property and should have verified, beforehand that Kesha Limited had already created a charge on the, property., In view of above, the contention of Kesha Limited is correct., , CHAPTER 7: MANAGEMENT AND ADMINISTRATION, JANUARY 2021, Ques, A company received a proxy form 54 hours before the time, fixed for the start of the meeting. The company refused to, 67
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accept the proxy form on the ground that the Articles of the, company provided that a proxy form must be filed 60 hours, before the start of the meeting. Define proxy and decide, under the provisions of the Companies Act, 2013, whether, the proxy holder can compel the company to admit the, proxy in this case?, Answer, Section 105 of the Companies Act, 2013 deals with the, provisions of proxy for meetings. Section 105(1) of the Act, provides that any member of a company entitled to attend, and vote at a meeting of the company shall be entitled to, appoint another person as a proxy to attend and vote at the, meeting on his behalf. Further, Section 105(4) of the Act, provides that a proxy received 48 hours before the meeting, will be valid even if the articles provide for a longer period., In the given case, the company received a proxy form 54, hours before the time fixed for start of the meeting. The, Company refused to accept proxy on the ground that, articles of the company provides filing of proxy before 60, hours of the meeting. In the said case, in line with, requirement of the above stated legal provision, a proxy, received 48 hours before the meeting will be valid even if, the articles provide for a longer period. Accordingly, the, proxy holder can compel the company to admit the proxy., Ques, Veena Ltd. held its Annual General Meeting on September, 15, 2018. The meeting was presided over by Mr. Mohan, Rao, the Chairman of the Company's Board of Directors. On, September 17, 2018, Mr. Mohan Rao, the Chairman, without, signing the minutes of the meeting, left India to look after, his father who fell sick in London. Referring to the, provisions of the Companies Act, 2013, state the manner in, which the minutes of the above meeting are to be signed in, the absence of Mr. Mohan Rao and by whom? (5 Marks), Answer, 68
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Section 118 of the Companies Act, 2013 provides that every, company shall prepare, sign and keep minutes of, proceedings of every general meeting, including the, meeting called by the requisitionists and all proceedings of, meeting of any class of shareholders or creditors or Board, of Directors or committee of the Board and also resolution, passed by postal ballot within thirty days of the conclusion, of every such meeting concerned. Minutes kept shall be, evidence of the proceedings recorded in a meeting. By, virtue of Rule 25 of the Companies (Management and, Administration) Rules, 2014 read with section 118 of the, Companies Act, 2013, each page of every such book shall be, initialled or signed and the last page of the record of, proceedings of each meeting or each report in such books, shall be dated and signed by, in the case of minutes of, proceedings of a general meeting, by the chairman of the, same meeting within the aforesaid period of thirty days or, in the event of the death or inability of that chairman, within that period, by a director duly authorized by the, Board for the purpose. Therefore, the minutes of the, meeting referred to in the case of Veena Ltd. can be signed, in the absence of Mr. Mohan Rao, by any director,, authorized by the Board in this respect., , NOVEMBER 2020, Ques, PQ Limited is a public company having its registered office, in Mumbai. It has 3680 members. The company sent notice, to all its members for its Annual general Meeting to be held, on 2nd September 2019 (Monday) at 11 :00 AM at its, registered office. On the day of meeting there were only, 12 members personally present upto 11:30 AM. The, Chairman adjourned the meeting to same day in next week, at the same time and place., On the day of adjourned meeting only 10 members were, personally present. The Chairman initiated the meeting, 69
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after 11:30 AM and passed the resolutions after discussion, as per the agenda of the meeting given in the notice., Comment whether the AGM conducted after adjournment is, valid or not as per the provisions of section 103 of, Companies Act 2013 by explaining the relevant provisions, in this regard., What would be your answer in the above case, if PQ Limited, is a Private company?, (2 + 2 = 4 Marks), Answer, According to section 103 of the Companies Act, 2013,, unless the articles of the company provide for a larger, number, in case of a public company, fifteen members, personally present may fulfil the requirement of quorum,, if the number of members as on the date of meeting is more, than one thousand but up to five thousand., If the specified quorum is not present within half-an-hour, from the time appointed for holding a meeting of the, company, the meeting shall stand adjourned to the same, day in the next week at the same time and place, or to such, other date and such other time and place as the Board may, determine., If at the adjourned meeting also, a quorum is not present, within half-an-hour from the time appointed for holding, meeting, the members present shall be the quorum., In the instant case, there were only 12 members personally, present on the day of meeting of PQ Limited upto 11:30, AM. This was not in compliance with the required quorum, as per the law. In the adjourned meeting also, the required, quorum was not present but in the adjourned meeting, the, members present shall be considered as quorum in line, with the provisions of section 103., Hence, the AGM conducted by PQ Limited after adjournment, is valid., As per the provisions of section 103(1)(b), in case of a, private company, two members personally present, shall be, 70
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quorum for the meeting of a company. Therefore, in case,, PQ Limited is a private company, then only two members, personally present shall be the quorum for AGM and there, was no need for adjournment., , NOVEMBER 2019, Question, Om Limited served a notice of General Meeting upon its, members. The notice stated that the following resolutions, will be considered at such meeting:, (i), , Resolution to increase the Authorised share capital, of the company., , (ii), , Appointment and fixation of the remuneration of, Mr. Prateek as the auditor., , A shareholder complained that the amount of the proposed, increase and the remuneration was not specified in the, notice. Is the notice valid under the provisions of, the, Companies Act, 2013., (4, Marks), Answer, (a), , Under section 102(2)(b) of the Companies Act, 2013,, in the case of any meeting other than an Annual, General Meeting, all business transacted thereat, shall be deemed to be special business., Further, under section 102(1), an explanatory a, statement setting out the following material facts, concerning each item of special business to be, transacted at a general meeting, shall be annexed to, the notice calling such meeting., namely:(a), , the nature of concern or interest, financial or, otherwise, if any, in respect of each items, of:, (i), , every director and the manager, if any;, , (ii), , every other key managerial personnel; and, 71
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(iii), , (b), , relatives of the persons mentioned in subclauses (i) and (ii);, , any other information and facts that may enable, members to understand the meaning, scope and, implications of the items of business and to take, decision thereon., , The information about the amount is also a material fact, that may enable members to understand the meaning and, implication of items of business to be transacted and to, take decision thereon., Section 102 also prescribes ordinary businesses for which, explanatory statement is not required., Part (i) of the question relating to increase in the, Authorized Capital falls under special business and hence, in the absence of amount of proposed increase of share, capital, the notice will be treated as invalid., Part(ii) is an ordinary business and hence explanatory, statement is not required. However, considering the two, resolutions mentioned in the question are to be passed in, the same meeting, notice of the meeting is invalid., Thus, the objection of the shareholder is valid since the, details on the item to be considered are lacking., The information about the amount is a material fact with, reference to the proposed increase of authorized share, capital and remuneration of Mr. Prateek as the auditor., The notice is, therefore, not a valid notice under Section 102, of the Companies Act, 2013., , RTP NOVEMBER 2021, QUESTION, Nutty Buddy Limited is manufacturing premium quality, milk based ice cream in two flavors- first chocolate and, second butter scotch. The company called its Annual, General Meeting (AGM) in order to lay down the financial, statements for Shareholders’ approval. However, due to, want of quorum, the meeting was cancelled. Also, the, 72
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Directors of the company did not file the Annual Return, with the Registrar. The directors were of the idea that, the time for filing of returns within 60 days from the date, of AGM would not apply, as AGM was cancelled. Has the, company contravened the provisions of Companies Act,, 2013? If the company has contravened the provisions of, the Act, how will it be penalized?, Answer, According to section 92(4) of the Companies Act, 2013,, every company shall file with the Registrar a copy of the, annual return, within sixty days from the date on which, the annual general meeting is held or where no annual, general meeting is held in any year within sixty days, from the date on which the annual general meeting should, have been held together with the statement specifying, the reasons for not holding the annual general meeting., Sub-section (5) of Section 92 also states that if any, company fails to file its annual return under sub-section, (4), before the expiry of the period specified therein, such, company and its every officer who is in default shall be, liable to a penalty of ten thousand rupees and in case of, continuing failure, with further penalty of one hundred, rupees for each day during which such failure continues,, subject to a maximum of two lakh rupees in case of a, company and fifty thousand rupees in case of an officer, who is in default., In the instant case, the idea of the directors that since the, AGM was cancelled, the provisions requiring the company, to file annual returns within 60 days from the date of, AGM would not apply, is incorrect., In the above case, the annual general meeting of Nutty, Buddy Limited should have been held within a period of, six months, from the date of closing of the financial year, but it, did not take place. Thus, the company has, contravened the provisions of section 92 of the, Companies Act, 2013 for not filing the annual return and, shall attract the penal provisions along with every officer, of the company who is in default as specified in Section, 73
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92(5) of the Act., , RTP MAY 2021, QUESTION, A General Meeting was scheduled to be held on 15th April,, 2019 at 3.00 P.M. As per the notice the members who are, unable to attend a meeting in person can appoint a proxy, and the proxy forms duly filled should be sent to the, company so as to reach at least 48 hours before the, meeting. Mr. X, a member of the company appoints Mr. Y, as his proxy and the proxy form dated 10-04-2019 was, deposited by Mr. Y with the company at its registered, Office on 11-04-2019. Similarly, another member Mr. W, also gives two separate proxies to two individuals named, Mr. M and Mr. N. In the case of Mr. M, the proxy dated 1204-2019 was deposited with the company on the same day, and the proxy form in favour of Mr. N was deposited on, 14-04-2019. All the proxies viz., Y, M and N were present, before the meeting., According to the provisions of the Companies Act, 2013,, who would be the persons allowed to represent as proxies, for members X and W respectively?, Answer A Proxy is an instrument in writing executed by a, shareholder authorizing another person, to attend a, meeting and to vote thereat on his behalf and in his, absence. As per the provisions of Section 105 of the, Companies Act, 2013, every shareholder who is entitled to, attend and vote has a statutory right to appoint another, person as his proxy. It is not necessary that the proxy be a member of the company., Further, any provision in the articles of association of the, company requiring instrument of proxy to be lodged with, the company more than 48 hours before a meeting shall, have effect as if 48 hours had been specified therein. The, members have a right to revoke the proxy’s authority by, voting himself before the proxy has voted but once the, proxy has voted the member cannot retract his authority., Where two proxy instruments by the same shareholder are, lodged of in such a manner that one is lodged before and, 74
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the other after the expiry of the date fixed for lodging, proxies, the former will be counted Thus, in case of, member X, the proxy Y will be permitted to vote on his, behalf as form for appointing proxy was submitted within, the permitted time., However, in the case of Member W, the proxy M (and not, Proxy N) will be permitted to vote as the proxy, authorizing N to vote was deposited in less than 48 hours, before the meeting., QUESTION, Pristine Limited, a listed public company, conducted its, Annual General Meeting on 31st August, 2020. However,, 10 days have passed since 31st August, 2020, but it has, still not filed report on Annual General Meeting. The, Accountant of the company has approached you to advise, them whether Pristine Limited is required to file report, on Annual General Meeting?, Answer, According to Section 121, every listed public company shall, prepare a report on each annual general meeting including, the confirmation to the effect that the meeting was, convened held and conducted as per the provisions of the, Act and the rules made thereunder. A copy of the report is, to be filed with the Registrar in Form No. MGT. 15 within, thirty days of the conclusion of AGM along with the, prescribed fee. If the company does not file such report, on Annual General Meeting within 30 days of the, conclusion of the Annual General Meeting then the, company and defaulting officers are liable for prescribed, penalties., Since, Pristine Ltd. is a listed company, hence it has to file, a copy of 1annual Report with the Registrar within 30 days, from 31st August, 2020., , 75
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RTP NOVEMBER 2020, QUESTION, Chetan Ltd. issued a notice for holding its Annual general meeting on, 7th November 2019. The notice was posted to the members on 16 th, October 2019. Some members of the company allege that the company, had not complied with the provisions of the Companies Act, 2013 with, regard to the period of notice and as such the meeting was valid., Referring to the provisions of the Act, decide:, (i), , Whether the meeting has been validly called?, , (ii), , If there is a shortfall, state and explain by how many, days does the notice fall short of the statutory, requirement?, , (iii), , Can the delay in giving notice be condoned?, , Answer, According to section 101(1) of the Companies Act, 2013, a general, meeting of a company may be called by giving not less than clear, twenty-one days' notice either in writing or through electronic, mode in such manner as may be prescribed. Also, it is to be noted, that 21 clear days mean that the date on which notice is served and the, date of meeting are excluded for sending the notice., Further, Rule 35(6) of the Companies (Incorporation) Rules, 2014,, provides that in case of delivery by post, such service shall be deemed, to have been effected in the case of a notice of a meeting, at the, expiration of forty eight hours after the letter containing the same is, posted., Hence, in the given question:, A 21 days’ clear notice must be given. In the given question, only 19 clear, days’ notice is served (after excluding 48 hours from the time of its, posting and the day of sending and date of meeting). Therefore, the, meeting was not validly called., As explained in (i) above, notice falls short by 2 days., The Companies Act, 2013 does not provide anything specific, regarding the condonation of delay in giving of notice. Hence, the delay, in giving the notice calling the meeting cannot be condoned., 76
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RTP MAY 2020, QUESTION, EFG Ltd. was incorporated on 1.4.2017. No General Meeting of the, company has been held till, 30.4.2019. Discuss the provisions of the Companies Act, 2013, regarding the time limit for holding the first annual general meeting, of the Company and the power of the Registrar to grant extension of, time for the First Annual General Meeting, ANSWER, According to Section 96 of the Companies Act, 2013, every company, shall be required to hold its first annual general meeting within a, period of 9 months from the date of closing of its first financial year., The first financial year of EFG Ltd is for the period 1 st April 2017 to, 31st March 2018, the first annual general meeting (AGM) of the, company should be held on or before 31st December, 2018., The section further provides that the Registrar may, for any special, reason, extend the time within which any annual general meeting, other, than the first annual general meeting, shall be held, by a period not, exceeding three months., Thus, the first AGM of EFG Ltd. should have been held on or before 31 st, December, 2018. Further, the Registrar does not have the power to, grant extension to time limit for the first AGM., QUESTION, The Articles of Association of Ajad Ltd. require the personal presence, of 7 members to constitute quorum of General Meetings. The company, has 965 members as on the date of meeting. The following persons were, present in the extra-ordinary meeting to consider the appointment of, Managing Director:, (i), , A, the representative of Governor of Uttar Pradesh., , (ii), , B and C, shareholders of preference shares,, , (iii), , D, representing Y Ltd. and Z Ltd., , (iv), , E, F, G and H as proxies of shareholders., 77
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Can it be said that the quorum was present in the meeting?, ANSWER, According to section 103 of the Companies Act, 2013, unless the, articles of the company provide for a larger number in case of a public, company, five members personally present if the number of members, as on the date of meeting is not more than one thousand, shall be the, quorum., In this case the quorum for holding a general meeting is 7 members, to be personally present (higher of 5 or 7). For the purpose of quorum,, only those members are counted who are entitled to vote on, resolution proposed to be passed in the meeting.Again, only members, present in person and not by proxy are to be counted. Hence, proxies, whether they are members or not will have to be excluded for the, purposes of quorum., If a company is a member of another company, it may authorize a, person by resolution to act as its representative at a meeting of the, latter company, then such a person shall be deemed to be a member, present in person and counted for the purpose of quorum Where two, or more companies which are members of another company, appoint, a single person as their representative then each such company will, be counted as quorum at a meeting of the latter company., Further the President of India or Governor of a State, if he is a member of, a company, may appoint such a person as he thinks fit, to act as his, representative at any meeting of the company. A person so appointed, shall be deemed to be a member of such a company and thus, considered as member personally present., In view of the above there are only three members personally present., ‘A’ will be included for the purpose of quorum. B & C have to be, excluded for the purpose of quorum because they represent the, preference shares and since the agenda being the appointment of, Managing Director, their rights cannot be said to be directly affected, and therefore, they shall not have voting rights. D will have two votes, for the purpose of quorum as he represents two companies ‘Y Ltd.’ and, ‘Z Ltd.’ E, F, G and H are not to be included as they are not members, but representing as proxies for the members., Thus, it can be said that the requirements of quorum has not been, met and it shall not constitute a valid quorum for the meeting., , 78
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MTP NOVEMBER 2021, SERIES 1, QUESTION, Shambhu Limited was incorporated on 1.4.2018. The company did not, have much to report to its shareholders, so no general meeting of the, company has been held till 30.4.2020. The company has recently, appointed a new accountant. The new accountant has pointed out that, the company required to hold the Annual General Meeting. The company, has approached you a senior Chartered Accountant. Please advise the, company regarding the time limit for holding the first annual general, meeting of the Company and the power of the Registrar to grant, extension of time for the First Annual General Meeting., (5 Marks), ANSWER, According to Section 96 of the Companies Act, 2013, every company, shall be required to hold its first annual general meeting within a period, of 9 months from the date of closing of its first financial year., The first financial year of Shambhu Ltd is for the period 1st April 2018 to, 31st March 2019, the first annual general meeting (AGM) of the company, should be held on or before 31st December, 2019., The section further provides that the Registrar may, for any special, reason, extend the time within which any annual general meeting, other, than the first annual general meeting, shall be held, by a period not, exceeding three months., Thus, the first AGM of Infotech should have been held on or before 31st, December, 2019. Further, the Registrar does not have the power to grant, extension to time limit for the first AGM of the company., , SERIES 2, QUES, a) P Limited had called its Annual General Meeting on 30 th August, 2019. Mr. Pawan has filed a complaint against the company, that he could, attend the meeting as the company did not serve the notice to him for, attending the annual general meeting. The company, in turn, provided, 79
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the proof that they had sent the notice, by way of an email to Mr., Pawan, inviting him to attend the annual general meeting of the, company. Mr. Pawan alleged that he never received the email., In the light of the provisions of the Companies Act, 2013, advise the, whether the company has erred in serving the notice of Annual General, Meeting, to, Mr., Pawan., (, 4 Marks), ANSWER, As per Rule 18 of the Companies (Management & Administration) Rules,, 2014, sending of notices through electronic mode has been statutorily, recognized., A notice may be sent through e-mail as a text or as an attachment to, e-mail or as a notification providing electronic link or Uniform, Resource Locator for accessing such notice., The e-mail shall be addressed to the person entitled to receive such email as per the records of the company as provided by the depository., Also, the company shall provide an advance opportunity at least once, in a financial year, to the member to register his e-mail address and, the changes therein and such request may be made by only those, members who have not got their email id recorded or to update a fresh, email id and not from the members whose email id s are already, registered., In the light of the above provisions of the Act, the company’s obligation, shall be satisfied when it transmits the e-mail and the company shall, not be held responsible for a failure in transmission beyond its control., Also, if the member entitled to receive the notice fails to provide or, update relevant e-mail address to the company, or to the depository, participant as the case may be, the company shall not be in default, for not delivering notice via e-mail., Hence, the company has not erred in serving notice of Annual General, Meeting to Mr. Pawan., , QUES, Board of Directors of Swati Limited called an extraordinary general, 80
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meeting upon the requisition of members. However, the meeting was, adjourned on the ground that the quorum was not present at the, meeting. Advise the company on the basis of the provisions of the, Companies, Act,, 2013., (, 4 Marks), ANSWER, According to section 100 (2) of the Companies Act 2013, the Board of, directors must convene a general meeting upon requisition by the, stipulated minimum number of members., As per Section 103 (2) (b) of the Companies Act, 2013, if the quorum is, not present within half an hour from the appointed time for holding a, meeting of the company, the meeting, if called on the requisition of, members, shall stand cancelled. Therefore, the meeting stands, cancelled and the stand taken by the Board of Directors to adjourn it,, is not proper., QUES, State with reason whether the following statement is correct or incorrect:, (i), , An annual general meeting can be held on a national holiday., , (ii), , A company should file its annual return within six months of the closing of the financial, year, , Answer, , (i) An annual general meeting cannot be held on a national holiday. Under, section 96 (2) of the Companies Act, 2013 every annual general meeting, shall be called during business hours, that is, between 9 a.m. and 6 p.m., on any day that is not a National Holiday. A national holiday has been, defined in the explanation to section 96 as a day declared as National, Holiday by the Central Government., Thus, the statement ‘An annual general meeting can be held on a national, holiday’ is incorrect., The statement is incorrect in terms of section 92 (4) of the Companies, Act, 2013., Section 92 (4) states that every company shall file with the Registrar a, copy of the annual return, within sixty days from the date on which the, 81
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annual general meeting is held or where no annual general meeting is, held in any year within sixty days from the date on which the annual, general meeting should have been held together with the statement, specifying the reasons for not holding the annual general meeting, with, such fees or additional fees as may be prescribed., , CHAPTER 8: DECLARATION AND PAYMENT OF DIVIDEND, JANUARY 2021, Ques, Mr. R, holder of 1000 equity shares of ` 10 each of AB Ltd., approached the Company in the last week of September,, 2019 with a claim for the payment of dividend of ` 2000, declared @ 20% by the Company at its Annual General, Meeting held on 31.08.2011 with respect to the financial, year 2010-11. The Company refused to accept the request of, R and informed him that his shares on which dividend has, not been claimed till date, have also been transferred to the, Investor Education and Protection Fund. Examine, in the, light of the provisions of the Companies Act, 2013, the, validity of the decision of the Company and suggest the, remedy, if available, to him for obtaining the unclaimed, amount of dividend and re-transfer of corresponding shares, in his name., Answer, According to section 124 of the Companies Act, 2013: (1), Unpaid or Unclaimed Dividend to be transferred to the, Unpaid Dividend Account - Where a dividend has been, declared by a company but has not been paid or claimed, within thirty (30) days from the date of declaration, the, company shall, within seven (7) days from the expiry of the, 82
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said period of 30 days, transfer the total amount of unpaid, or unclaimed dividend to a special account called the, Unpaid Dividend Account (UDA). The UDA shall be opened, by the company in any scheduled bank. (2) Transfer of, Unclaimed Amount to Investor Education and Protection, Fund (IEPF) - Any money transferred to the Unpaid, Dividend Account which remains unpaid or unclaimed for a, period of seven (7) years from the date of such transfer, shall be transferred by the company along with interest, accrued thereon to the Investor Education and Protection, Fund. (3) Transfer of Shares to IEPF- All shares in respect, of which dividend has not been paid or claimed for 7, consecutive years or more shall be transferred by the, company in the name of Investor Education and Protection, Fund along with a statement containing the prescribed, details. (4) Right of Owner of ‘transferred shares’ to, Reclaim - Any claimant of shares so transferred to IEPF, shall be entitled to reclaim the ‘transferred shares’ from, Investor Education and Protection Fund in accordance with, the prescribed procedure and on submission of prescribed, documents. As per the provisions of sub-section (3) of, section 125 of the Companies Act, 2013, read with rule 7 of, Investor Education and Protection Fund Authority, (Accounting, Audit, Transfer and Refund) Rules, 2016, any, person, whose unclaimed dividends have been transferred, to the Fund, may apply for refund, to the Authority, by, submitting an online application., In the given question, Mr. R did not claim the payment of, dividend on his shares for a period of more than 7 years, (i.e., expiry of 30 days from 31.08.2011 to last week of, September 2019). As a result, his unclaimed dividend (`, 2,000) along with such shares (1,000 equity shares) must, have been transferred to Investor Education and Protection, Fund Account. Therefore, the company is justified in, refusing to accept the request of Mr. R for the payment of, dividend of ` 2,000 (declared in Annual General Meeting on, 31.8.2011). In terms of the above stated provisions, Mr. R, 83
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should be advised as under: (i) If Mr. R wants to reclaim, the transferred shares, he should apply to IEPF authorities, along with the necessary documents in accordance with the, prescribed procedure. (ii) He is also entitled to get refund, of the dividend amount, which was transferred to the above, fund; in accordance with the prescribed rules., , NOVEMBER 2020, Ques, Sun Light Limited was incorporated on 22nd January 2019, with the objects of providing software services. The, Company adopted its first financial year as from 22nd, January 2019 to 31st March 2020. The financial statement, for the said period, after providing for depreciation in, accordance with Schedule II of the Companies Act, 2013, revealed net profit. The Board of Directors declared 20%, interim dividend at their meeting held on 7th July 2020,, before holding its first Annual General Meeting. In the light, of the provisions of the Companies Act, 2013 and Rules made, thereunder:, (i), , Whether the Company has complied due diligence, in declaring interim dividend?, , (ii), , Whether the Company can declare dividend in case, it was registered under Section, 8 of the, Companies Act, 2013?, , What are the penal consequences in case of failure, to pay the interim dividend?, (4 Marks), (iii), , Answer, According to section 123(3) of the Companies Act, 2013,, the Board of Directors of a company may declare, interim dividend during any financial year or at any, time during the period from closure of financial year till, holding of the annual general meeting out of the surplus, 84
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in the profit and loss account or out of profits of the, financial year for which such interim dividend is sought, to be declared or out of profits generated in the, financial year till the quarter preceding the date of, declaration of the interim dividend., In the instant case, Sun Light Limited has complied due, diligence in declaring interim dividend as the Interim, Dividend was declared by Board of Directors at their, meeting held on 7th July, 2020 before holding its first, Annual General Meeting. Also, the financial statement, revealed net profit so the interim dividend can be paid out, of profits of the financial year ending 31st March, 2020., (ii), , According to section 8 (1) of the Companies Act,, 2013, a company having licence under Section 8, (Formation of companies with charitable objects,, etc.) is prohibited from paying any dividend to its, members. Its profits are intended to be applied, only in promoting the objects for which it is, formed., , Penal consequences: According to section 127 of the, Companies Act, 2013, where a dividend has been declared, by a company but has not been paid or the warrant in, respect thereof has not been posted within thirty days from, the date of declaration, to any shareholder entitled to, the payment of the dividend, every director of the, company shall, if he is knowingly a party to the default, be, punishable with imprisonment which may extend to two, years and with fine which shall not be less than one, thousand rupees for every day during which such default, continues and the company shall be liable to pay simple, interest at the rate of eighteen per cent per annum during, the period for which such default continues., Ques, AB Limited is a public company having its registered office, in Coimbatore. The company has incurred a net loss of ` 20, lakhs in the Financial Year (FY) 2019-20. The Board of, Directors (BOD) wants to declare dividend for the FY 201985
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20. The balances of the company as per the latest audited, financial statements are as follows:, 1., , Equity Share Capital (` 10 each), , 2., , General Reserve, , 3., , Debenture redemption Reserve -, , -, , - 100 lakhs, , 150 lakhs, 50 lakhs, , The company has not declared any dividend in the preceding, three financial years. Decide whether AB Limited is, allowed to declare dividend or not for the FY 2019-20 by, explaining the relevant provisions of the Companies Act in, this regard., If allowed to declare dividend then state the maximum, amount of dividend that can be paid by AB Limited as per, the Section 123 of Companies Act 2013. (2 + 2 = 4 Marks), Answer, In the given case, AB Limited has not made adequate, profits during the current year ending on 31st March,, 2020, but it still wants to declare dividend. Therefore,, Rule 3 of the Companies (Declaration and Payment of, Dividend) Rules, 2014 will be applied, According to the said rule, the required conditions are:, Condition I: The rate of dividend declared shall not exceed, the average of the rates at which dividend was declared by, the company in the three years immediately preceding, that year. Since the company has not declared any dividend, in the preceding three financial years, hence condition I is, not applicable in this case., Condition II: The total amount to be drawn from such, accumulated profits shall not exceed 10% of its paid-up, share capital and free reserves as appearing in the latest, audited financial statement., Paid-up capital+Free reserves = ` (100+150) Lakhs (General, reserves are free reserves), = ` 250 Lakhs, 10% thereof, , = ` 25 Lakhs, 86
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Condition III: The amount so drawn shall first be utilized, to set off the losses incurred in the financial year in which, dividend is declared before any dividend in respect of, equity shares is declared., The amount drawn as stated, above, Less: loss for the financial, year 2019-2020, Amount available, , = ` 2, 5, = ` 2, 0, = ` 5, , Lakh, s, Lakh, s, Lakh, s, Hence, the quantum of dividend is further restricted to ` 5, lakhs., Condition IV: The balance of reserves after such, withdrawal shall not fall below 15% of its paid up share, capital as appearing in the latest audited financial, statement., Accumulated Reserves, , ` 150, , Lakhs Proposed withdrawal, declaration of dividend, , `5, , Lakhs Balance of Reserves, , ` 145, , Lakhs, This is more than 15% of paid-up capital (i.e. 15% of `, 100 Lakhs) i.e. ` 15 lakhs. Thus, the company can, declare a dividend of ` 5 lakhs., Hence, by following above provisions, AB Limited is, allowed to declare dividend for the FY 2019-2020 and, the maximum amount of dividend that can be paid is ` 5, Lakhs., , NOVEMBER 2019, 87
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Ques, Referring to the provisions of the Companies Act, 2013,, examine the validity of the following :, (i), , The Board of Directors of Anand Ltd. proposes to, declare dividend at the rate of 20% to the equity, shareholders, despite the fact that the company, has defaulted in repayment of public deposits, accepted before the commencement of this Act., , (ii), , Whether a Company can declare dividend for the, financial year in which i t incurred loss., (5, Marks), , Answer, Section 123(6) of the Companies Act, 2013, specifically, provides that a company which fails to comply with the, provisions of section 73 (Prohibition of acceptance of, deposits from public) and section 74 (Repayment of, deposits, etc., accepted before the commencement of this, Act) shall not, so long as such failure continues, declare, any dividend on its equity shares., In the given instance, the Board of Directors of Anand, Limited proposes to declare dividend at the rate of 20% to, the equity shareholders, in spite of the fact that the, company has defaulted in repayment of public deposits, accepted before the commencement of the Companies Act,, 2013. Hence, according to the above provision, declaration, of dividend by the Anand Limited is not valid., (ii), As per Second Proviso to Section 123 (1) of the, Companies Act, 2013, in the event, of inadequacy or, absence of profits in any financial year, a company may, declare dividend out of the accumulated profits of previous, years which have been transferred to the free reserves., However, such declaration of dividend shall be subject to, the conditions as prescribed under Rule 3 of the Companies, (Declaration and Payment of Dividend) Rules, 2014., , RTP NOVEMBER 2021, 88
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Ques, The Board of Directors of GEN X Fashions Limited at its, meeting recommended a dividend on its paid-up equity, share capital which was later on approved by the, shareholders at the Annual General Meeting. Thereafter,, the directors at another meeting of the Board passed a, board resolution for diverting the total dividend to be, paid to the shareholders for purchase of certain shortterm investments in the name of the company. As a result,, dividend was paid to shareholders after 45 days., Examining the provisions of the Companies Act, 2013,, state whether the act of directors is in violation of the, provisions of the Act and if so, state the consequences that, shall follow for the above violative act., Answer, According to section 124 of the Companies Act, 2013,, where a dividend has been declared by a company but has, not been paid or claimed within 30 days from the date of, the declaration, the company shall, within 7 days from the, date of expiry of the said period of 30 days, transfer the, total amount of dividend which remains unpaid or, unclaimed to a special account to be opened by the, company in any scheduled bank to be called the Unpaid, Dividend Account., Further, according to section 127 of the Companies Act,, 2013, where a dividend has been declared by a company, but has not been paid or the warrant in respect thereof, has not been posted within 30 days from the date of, declaration to any entitled shareholder, every director of, the company shall, if he is knowingly a party to the, default, be li able for punishment., In the present case, the Board of Directors of GEN X, Fashions Limited at its meeting recommended a dividend, on its paid-up equity share capital which was later on, approved by the shareholders at the Annual General, Meeting. Thereafter, the directors at another meeting of, the Board decided by passing a board resolution for, diverting the total dividend to be paid to the shareholders, 89
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for purchase of certain short-term investments in the, name of the company. As a result, dividend was paid to, shareholders after 45 days., Since, declared dividend has not been paid within 30 days, from the date of the declaration to any shareholder, entitled to the payment of dividend, the company shall,, within 7 days from the date of expiry of the said period of, 30 days, transfer the total amount of dividend which, remains unpaid or unclaimed to a special account to be, opened by the company in any scheduled bank to be called, the Unpaid Dividend Account., (iii), , The Board of Directors of GEN X Fashions, Limited has violated section 127 of the, Companies Act, 2013 as it failed to pay dividend, to shareholders within 30 days due to its, decision to divert the total dividend to be paid, to shareholders for purchase of certain shortterm investments in the name of the company., , Consequences: The following are the consequences for, violation of the above provisions:, (a), , (iv), , Every director of the company shall, if he is, knowingly a party to the default, be, punishable with maximum imprisonment of, two years and shall also be liable for a, minimum fine rupees one thousand for every, day during which such default continues., , The company shall also be liable to pay simple, interest at the rate of 18% p.a. during the period, for which such default continues, , RTP MAY 2020, Ques, , 90
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MNP Ltd. has a paid up share capital of ` 10 crore and free reserves of, ` 50 crore, as on 31st March, 2019. The company made a loss of ` 40, lakh after providing for depreciation for the year ended 31st March,, 2019 and as a result, the company was not in a position to declare any, dividend for the said year out of profits. However, the Board of directors, of the company announced the declaration of dividend of 20% on the, equity shares payable out of free reserves. The average dividend, declared by the company in the last three years is 25%. Referring to the, provisions of the Companies Act, 2013, examine the validity of, declaration of dividend, ANSWER, As per Second Proviso to Section 123 (1), in the event of inadequacy or, absence of profits in any financial year, a company may declare, dividend out of the accumulated profits of previous years which have, been transferred to the free reserves. However, such declaration, shall be subject to the following conditions as per Rule 3 of Companies, (Declaration and Payment of Dividend) Rules, 2014., The rate of dividend declared shall not exceed the average of the rates, at which dividend was declared by the company in the immediately, preceding three years As per facts of the question the present rate of, dividend is 20% and average dividend declared in the last three years, is 25%. So, this condition is fulfilled., The total amount to be drawn from free reserves shall not exceed onetenth i.e., 10% of its paid-up share capital and free reserves as per, the latest audited financial statement., Amount of dividend proposed: ` 2 Crores (20% of ` 10 Crore i.e on paid, up capital), 10% of paid up share capital and free reserves: 10% of (10 crore + 50, crore) = ` 6 Crore., This condition is fulfilled as amount of dividend is not exceeding 10%, of its paid-up share capital and free reserves., The amount so drawn shall first be utilized to set off the losses incurred, in the financial year in which dividend is declared and only thereafter,, any dividend in respect of equity shares shall be declared., After such withdrawal from free reserves, the residual reserves shall, not fall below 15% of its paid-up share capital as per the latest, 91
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audited financial statement., Balance of reserves after payment of dividend: ` 48 crore (50 crore, – 2 crore) 15% of paid up share capital: 1.5 crore (15% of 10, crore), This condition is fulfilled., Taking into account all the conditions, it can be said that declaration, of dividend by MNP Limited is valid., , MTP NOVEMBER 2021, SERIES 1, Ques, Vishal Limited declared and paid 10% dividend to all its shareholders, except Mr. Ricky, holding 500 equity shares, who instructed the, company to deposit the dividend amount directly in his bank account., The company accordingly remitted the dividend, but the bank returne, d the payment on the ground that the account number as given by Mr., Ricky doesn't tally with the records of the bank. The company,, however, did not inform Mr. Ricky about this discrepancy., ·Comment on this issue with reference to the provisions of the, Companies Act, 2013 regarding failure to distribute dividend., Kumar, holder of 5000 equity shares of Rs. 100 each of Vicky Limited, did not pay final call of Rs. 10 per share. Vicky Limited declared dividend, of 10%. Examine with reference to relevant provisions of the Companies, Act, 2013, the amount of dividend Karan should receive., , (ii) Kumar, holder of 5000 equity shares of Rs. 100 each of, Vicky Limited did not pay final call of Rs. 10 per share. Vicky, Limited declared dividend of 10%. Examine with reference to, relevant provisions of the Companies Act, 2013, the amount, of dividend Karan should receive., (6 Marks), , ANSWER, 92
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Section 127 of the Companies Act, 2013 provides for punishment for, failure to distribute dividend on time. One of such situations is where, a shareholder has given directions to the company regarding the, payment of the dividend and those directions cannot be complied with, and the same has not been communicated to the shareholder., In the instant case, Vishal Ltd. has failed to communicate to the, shareholder Mr. Ricky about non-compliance of his direction regarding, payment of dividend. Hence, the penal provisions under, section 127 will be attracted., As per the proviso to section 127 of the Companies Act, 2013, no, offence will be deemed to have been committed by a director for, adjusting the calls in arrears remaining unpaid or any other sum due, from a member against the dividend declared by the company., Thus, as per the given facts, Vicky Limited can adjust the unpaid call, money of Rs. 50,000 against the declared dividend of 10%, i.e. 5,00,000, x 10/100 = 50,000. Hence, call money of Rs. 50,000 not paid by Kumar, can be adjusted fully from the entitled dividend amount of Rs., 50,000 payable to him., (ii) As per the proviso to section 127 of the Companies Act, 2013, no, offence will be deemed to have been committed by a director for, adjusting the calls in arrears remaining unpaid or any other sum due, from a member against the dividend declared by the company., Thus, as per the given facts, Vicky Limited can adjust the unpaid call, money of Rs. 50,000 against the declared dividend of 10%, i.e. 5,00,000, x 10/100 = 50,000. Hence, call money of Rs. 50,000 not paid by Kumar, can be adjusted fully from the entitled dividend amount of Rs., 50,000 payable to him., , SERIES 2, Ques, Alpha Limited is facing loss in business during the financial year 20192020. In the immediate preceding three financial years, the company, had declared dividend at the rate of 7%, 11% and 12% respectively., The Board of Directors has decided to declare 12% interim dividend, for the current financial year atleast to be in par with the immediately, 93
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preceding year. Is the act of the Board of Directors valid ? Give your, answer as per the provisions of the Companies Act, 2013., . (5 Marks), ANSWER, As per Section 123(3) of the Companies Act, 2013, the Board of, Directors of a company may declare interim dividend during any, financial year out of the surplus in the profit and loss account and out, of profits of the financial year in which such interim dividend is, sought to be declared., Provided that in case the company has incurred loss during the current, financial year up to the end of the quarter immediately preceding the, date of declaration of interim dividend, such interim dividend shall not, be declared at a rate higher than the average dividends declared by the, company during the immediately preceding three financial years., According to the given facts, Alpha Limited is facing loss in business during, the financial year 2019- 2020. In the immediate preceding three financial, years, the company declared dividend at the rate of 7%, 11% and 12%, respectively. Accordingly, the rate of dividend declared shall not, exceed 10%, the average of the rates (7+11+12=30/3) at which, dividend was declared by it during the immediately preceding three, financial years., Therefore, the act of the Board of Directors as to declaration of interim, dividend at the rate of 12% during the F.Y 2019-2020 is not valid., , CHAPTER 9: ACCOUNTS OF COMPANIES, JANUARY 2021, Ques, The Board of Directors of Dilip Telelinks Ltd. consists of, Mr. Choksey, Mr. Patel (Directors) and Mr. Shukla, (Managing Director). The company has also employed a full, time Secretary. The Profit and Loss Account and Balance, Sheet were signed by Mr. Choksey and Mr. Patel. Examine, whether the authentication of financial statements of the, 94
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company is in accordance with the provisions of the, Companies Act, 2013 ? (3 Marks), (ii) X Ltd. is a listed company having a paid-up share, capital of ` 25 crore as at 31st March, 2019 and turnover of, ` 100 crore during the financial year 2018-19. The Company, Secretary has advised the Board of Directors that X Ltd. is, not required to appoint 'Internal Auditor' as the company's, paid up share capital and turnover are less than the, threshold limit prescribed under the Companies Act, 2013., Do you agree with the advice of the Company Secretary?, Explain your view referring to the provisions of the, Companies Act, 2013., Answer, According to Section 134(1) of the Companies Act, 2013, 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. In the, instant case, the Balance Sheet and Profit and Loss Account, have been signed only by Mr. Choksey and Mr. Patel, the, directors. In view of Section 134(1) of the Companies Act,, 2013, Mr. Shukla, the Managing Director should have been, one of the two signing directors. Further, since the, company has also employed a full- time Secretary, he, should also sign the Balance Sheet and the Statement of, Profit and Loss., According to the provisions of Section 138 of the Companies, Act, 2013, read with Rule 13 of the Companies (Accounts), Rules, 2014, the following class of companies shall be, required to appoint an internal auditor which may be either, 95
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an individual or a partnership firm or a body corporate,, namely: (1) every listed company; (2) every unlisted public, company having- (A) paid up share capital of 50 crore, rupees or more during the preceding financial year; or (B), turnover of 200 crore rupees or more during the preceding, financial year; (C) outstanding loans or borrowings from, banks or financial institutions exceeding one hundred crore, rupees or more at any point of time during the preceding, financial year; or (D) outstanding deposits of twenty five, crore rupees or more at any point of time during the, preceding financial year. Besides, some private companies, are also required to appoint an internal auditor which may, be either an individual or a partnership firm or a body, corporate. Thus, X limited (which is a listed company) is, required to appoint an internal auditor, irrespective of its, paid-up share capital or turnover (as the limit of paid- up, share capital or turnover is applicable for unlisted public, company). Hence, the advice of the Company Secretary is, not correct., , NOVEMBER 2020, Question, Explain the following in brief with reference to Companies, Act 2013:, National Financial Reporting Authority (NFRA), Corporate Social Responsibility (CSR) Committee (3 + 3 = 6, Marks), Answer, National Financial Reporting Authority (NFRA), According to section 132 of the Companies Act, 2013, the, Central Government may, by notification, constitute the, National Financial Reporting Authority (NFRA) to provide, for matters relating to accounting and auditing standards, under this Act., Notwithstanding anything contained in any other law for, 96
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the time being in force, the NFRA shall—, , (ii), , (a), , make recommendations to the Central, Government on the formulation and laying, down of accounting and auditing policies and, standards for adoption by companies or class, of companies or their auditors, as the case, may be;, , (b), , monitor and enforce the compliance with, accounting standards and auditing standards, in such manner as may be prescribed;, , (c), , oversee the quality of service of the, professions, associated, with, ensuring, compliance with such standards, and suggest, measures required for improvement in quality, of service and such other related matters as, may be prescribed; and, , (d), , perform such other functions relating to, clauses (a), (b) and (c) as may be prescribed., , Corporate Social Responsibility (CSR)Committee:, , According to section 135(1) of the Companies Act, 2013,, every company having, (1), , net worth of rupees 500 crore or more, or, , (2), , turnover of rupees 1000 crore or more or, , (3), , a net profit of rupees 5 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., Duties of CSR Committee [Section 135(3)]:, The CSR Committee shall97
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(a), , formulate and recommend to the Board, a CSR, Policy which shall indicate the activities to be, undertaken by the company in areas or, subject, specified in Schedule VII;, , (b), , recommend the amount of expenditure to be, incurred on the activities referred to in clause, (a); and, , (c), , monitor the CSR Policy of the company from, time to time., , NOVEMBER 2019, Ques, Ravi Limited maintained its books of accounts under Single, Entry System of Accounting. Is it permitted under the, provisions of the Companies Act, 2013?, State the person responsible for complying with the, provisions regarding maintenance of Books of Accounts of a, Company., Whether a Company can keep books of Accounts in, electronic mode accessible only outside India., (6, Marks), Answer, According to Section 128(1) of the Companies Act, 2013,, every company shall prepare “books of account” and, other relevant books and papers and financial statement, for every financial year., These books of accounts should give a true and fair view, of the state of the affairs of the company, including that, of its branch office(s)., These books of accounts must be kept on accrual basis, and according to the double entry system of accounting., Hence, maintenance of books of account under Singly, Entry System of Accounting by Ravi Limited is not, 98
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permitted., Persons responsible to maintain books, As per Section 128 (6) of the Companies Act, 2013, the, person responsible to take all reasonable steps to secure, compliance by the company with the requirement of, maintenance of books of accounts etc. shall be:, (a), , Managing Director,, , (b), , Whole-Time Director, in charge of finance, , (c), , Chief Financial Officer, , (d), , Any other person of a company charged by, the Board with duty of complying with, provisions of section 128., , A Company have has the option of keeping such books of, account or other relevant papers in electronic mode as per, Rule 3 of the Companies (Accounts) Rules, 2014. According, to such Rule,, such books of accounts or other relevant books or papers, maintained in electronic mode shall remain accessible in, India so as to be usable for subsequent reference., There shall be a proper system for storage, retrieval,, display or printout of the electronic records as the Audit, Committee, if any, or the Board may deem appropriate and, such records shall not be disposed of or rendered unusable,, unless permitted by law., The back-up of the books of account and other books and, papers of the company maintained in electronic mode,, including at a place outside India, if any, shall be kept in, servers physically located in India on a periodic basis., Hence, a company cannot keep books of Account in, electronic mode accessible only outside India., , RTP NOVEMBER 2021, Ques, Kim Private Limited was incorporated on 30th September, 2016. It has a paid up share capital of ` 45 crore. The, 99
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company had a turnover of 250 crore for the financial, year 2019-20. The accounts manager of the company has, intimated to the company that they are not required to, appoint internal auditor for the financial year 2020 -21., The management of the company have approached you to, advise them about the appointment of internal auditor., Advise them as per the provisions of the Companies Act,, 2013., Answer, According to section 138 read along with Rules of the, Companies Act, 2013, every private company having—, (A), , turnover of 200 crore rupees or more during the, preceding financial year; or, , (B), , outstanding loans or borrowings from banks or, public financial institutions exceeding 100, crore rupees or more at any point of time, during the preceding financial year., , shall be required to appoint an internal auditor which, may be either an individual or a partnership firm or a, body corporate., In the given question, the company has a paid up capital of, ` 45 crore and turnover of` 250 crore for the financial year, 2019-20., Since, the company is fulfilling the criteria of turnover, (i.e. more than ` 200 crore), hence, it is required to, appoint an internal auditor for the financial year 2020 21., , RTP MAY 2021, Ques, The Income Tax Authorities in the current financial year, 2019-20 observed, during the assessment proceedings, a, need to re-open the accounts of Qurie Ltd. for the financial, year 2008-09 and, therefore, filed an application before, 100
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the National Company Law Tribunal (NCLT) to issue the, order to Qurie Ltd. for re-opening of its accounts and, recasting the financial statements for the financial year, 2008-09. Examine the validity of the application filed by, the Income Tax Authorities to NCLT., Answer, As per section 130 of the Companies Act, 2013, a company, shall not re-open its books of account and not recast its, financial statements, unless an application in this regard, is made by the Central Government, the Income-tax, authorities, the Securities and Exchange Board, any other, statutory body or authority or any person concerned and, an order is made by a court of competent jurisdiction or, the Tribunal to the effect that—, 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:, However, no order shall be made in respect of re-opening, of books of account relating to a period earlier than eight, financial years immediately preceding the current, financial year., In the given instance, an application was filed for reopening and re-casting of the financial statements of Qurie, Ltd. for the financial year 2008-2009 which is beyond 8, financial years immediately preceding the current financial, year., Though application filed by the Income Tax Authorities to, NCLT is valid, its recommendation for reopening and, recasting of financial statements for the period earlier, than eight financial years immediately preceding the, current financial year i.e. 2019 -2020, is invalid., Ques, Kiara, holder of 5000 equity shares of ` 100 each of, Kanpur Leather Shoes Limited did not pay final call of ` 10, per share. Kanpur Leather Shoes Limited declared dividend, 101
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@ 10%. Examine with reference to relevant provisions of, the Companies Act, 2013, the amount of dividend Kiara, should receive., Answer, As per the proviso to section 127 of the Companies Act,, 2013, no offence will be deemed to have been committed by, a director for adjusting the calls in arrears remaining, unpaid or any other sum due from a member against the, dividend declared by the company., thus, as per the given facts, Kanpur Leather Shoes Limited, can adjust the unpaid call money of ` 50,000 against the, declared dividend of 10%, i.e. 5,00,000 x 10/100, = 50,000. Hence, call money of ` 50,000 not paid by, Kiara can be adjusted fullfrom the entitled dividend, amount of ` 50,000 payable to her., , RTP MAY 2020, Ques, The Board of Directors of Vishwakarma Electronics Limited consists, of Mr. Ghanshyam (Director), Mr. Hyder (Director) and Mr. Indersen, (Managing Director). The company has also employed a full time, Secretary. The Profit and Loss Account and Balance Sheet of the, company were signed by Mr. Ghanshyam and Mr. Hyder. Examine, whether the authentication of financial statements of the company was, in accordance with the provisions of the Companies Act, 2013?, ANSWER, According to section 134(1) of the Companies Act, 2013, 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., 102
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In the instant case, the Balance Sheet and Profit and Loss Account, have been signed by Mr. Ghanshyam and Mr. Hyder, the directors. In, view of Section 134( 1) of the Companies Act, 2013, Mr. Indersen, the, Managing Director should be one of the two signing directors. Since, the, company has also employed a full- time Secretary, he should also sign, the Balance Sheet and Profit and Loss Account., , ., , MTP NOVEMBER 2021, SERIES 1, Ques, State the persons responsible for complying with the provisions, regarding maintenance of Books of Accounts of a Company. Support, with the help of relevant provisions of the Companies Act, 2013. (3, Marks), ANSWER, Persons responsible to maintain books: As per Section 128 (6) of, the Companies Act, 2013, the person responsible to take all reasonable, steps to secure compliance by the company with the requirement of, maintenance of books of account etc. shall be:, (a), , Managing Director,, , (b), , Whole-Time Director, in charge of finance, , (c), , Chief Financial Officer, , (d), , Any other person of a company charged by the, Board with duty of complying with provisions of, section 128., , Ques, Green Limited is a company dealing in trading of spices. It has, maintained its books of accounts under Single Entry System of, Accounting. The company has recently hired a new account. The new, accountant, Mr. Dubey, is doubtful that the accounts can be, 103
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maintained under Single Entry System. Advise the company whether it, is, allowed, to, do, so?, (4 Marks), Answer, According to Section 128(1) of the Companies Act, 2013, every, company shall prepare “books of account” and other relevant books, and papers and financial statement for every financial year. These, books of account should give a true and fair view of the state of the affairs, of the company, including that of its branch office(s). These books of, account must be kept on accrual basis and according to the double, entry system of accounting., Hence, maintenance of books of account under Singly Entry System of, Accounting by Green Limited is not permitted., , CHAPTER 10: AUDIT AND AUDITORS, JANUARY 2021, Ques, Three chartered accountants, Mr. Robert, Mr. Ram and, Mrs. Rohini, formed a Limited Liability Partnership under, the Limited Liability Partnership Act, 2008 in the name of, 'R & Associates LLP', practicing chartered accountants. SR, Ltd. intends to appoint 'R & Associates LLP' as auditors of, the company. Examine the validity of the proposal of SR, Ltd. to appoint 'R & Associates LLP', a body corporate, as an, auditor of the company as per the provisions of the, Companies Act, 2013., Answer, As per the provisions of Section 141 (3) of the Companies, Act, 2013 read with Rule 10 of Companies (Audit and, Auditors) Rule 2014, a body corporate other than a limited, liability partnership registered under the Limited Liability, 104
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Partnership Act, 2008 shall not be qualified for, appointment as auditor of a company. In the given case,, proposal of SR Ltd. to appoint ‘R & Associates LLP’ as, auditors of the company is valid as the restriction marked, for appointment as auditor for a body corporate is not, applicable to Limited Liability Partnership., , NOVEMBER 2020, Ques 1, The Board of Directors of Moon Light Limited, a listed, company appointed Mr. Tel, Chartered Accountant as its, first auditor within 30 days of the date of registration of the, Company to hold office from the date of incorporation to, conclusion of the first Annual General Meeting (AGM). At, the first AGM, Mr. Tel was re-appointed to hold office from, the conclusion of its first AGM till the conclusion of 6th, AGM. In the light of the provisions of the Companies Act,, 2013, examine the validity of appointment/ reappointment, in the following cases:, (i) Appointment of Mr. Tel by the Board of Directors., (ii) Re-appointment of Mr. Tel at the first AGM in the, above situation., (iii) In case Mr. Bell, Chartered Accountant, was, appointed as auditor at the first AGM to hold, office from the conclusion of its first AGM till the, conclusion of 5th AGM. ie., 4 years tenure. (6, Marks), Answer, As per section 139(6) of the Companies Act, 2013, the first, auditor of a company, other than a Government company,, shall be appointed by the Board of Directors within thirty, days from the date of registration of the company and, such auditor shall hold office till the conclusion of the, first annual general meeting., Whereas Section 139(1) of the Companies Act, 2013 states, that every company shall, at the first annual general, meeting (AGM), appoint an individual or a firm as an, 105
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auditor of the company who shall hold office from the, conclusion of 1st AGM till the conclusion of its 6th AGM, and thereafter till the conclusion of every sixth AGM., As per section 139(2), no listed company or a company, belonging to such class or classes of companies as may be, prescribed, shall appoint or re-appoint an individual as, auditor for more than one term of five consecutive years., As per the given provisions following are the answers:, i., ii., , iii., , Appointment of Mr. Tel by the Board of Directors is, valid as per the provisions of section 139(6)., Appointment of Mr. Tel at the first Annual General, Meeting is valid due to the fact that the appointment, of the first auditor made by the Board of Directors is, a separate appointment and the period of such, appointment is not to be considered, while Mr. Tel is, appointed in the first Annual General Meeting, which, is for the period from the conclusion of the first, Annual General Meeting to the conclusion of the sixth, Annual General Meeting., As per law, auditor appointed shall hold office from, the conclusion of 1st AGM till the conclusion of its, 6th AGM i.e., for 5 years. Accordingly, here, appointment of Mr. Bell, which is for 4 years, is not, in compliance with the said legal provision, so his, appointment is not valid., , NOVEMBER 2019, Ques, Examine whether the following persons are eligible for, being appointed as auditor under the provisions of the, Companies Act, 2013 :, (i), , "Mr. Prakash" is a practicing Chartered, Accountant and "Mr. Aakash", who i s a relative, of "Mr. Prakash" is holding securities of "ABC, Ltd." having face value of, 106
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` 70,000/- (market value ` 1, 10,000/-)., Directors of ABC Ltd. want to appoint Mr., Prakash as an auditor of the company:, (ii), , Mr. Ramesh is a practicing Chartered Accountant, indebted to MNP Ltd. for ` 6 lacs. Directors of, MNP Ltd. want to appoint Mr. Ramesh as an, auditor of the company., , Mrs. KVJ spouse of Mr. Kumar, a Chartered, Accountant, is the store keeper of PRC Ltd., Directors of PRC Ltd. want to appoint Mr. Kumar, as an auditor of the company., (5 Marks), (iii), , Answer, As per section 141 (3)(d)(i) of the Companies Act, 2013,, an auditor is disqualified to be appointed as an auditor if, he, or his relative or partner 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., Further as per proviso to this Section, the relative of the, auditor may hold the securities or interest in the company, of face value not exceeding of ` 1,00,000., In the present case, Mr. Aakash (relative of Mr. Prakash,, an auditor), is having securities of ABC Ltd. having face, value of ` 70,000 (market value ` 1,10,000), which is, within the limit as per requirement of under the proviso to, section 141 (3)(d)(i). Therefore, Mr. Prakash will not be, disqualified to be appointed as an auditor of ABC Ltd., As per section 141(3)(d)(ii), an auditor is disqualified to, be appointed as an auditor if he or his relative or partner, is indebted to the company, or its subsidiary, or its holding, or associate company or a subsidiary of such holding, company, in excess of, ` 5 Lacs., In the instant case, Mr. Ramesh will be disqualified to be, appointed as an auditor of MNP Ltd. as he indebted to MNP, Ltd. for ` 6 lacs., 107
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As per section 141(3)(f), an auditor is disqualified to be, appointed as an auditor if a person whose relative is a, director or is in the employment of the company as a, director or a key managerial personnel., In the instant case, since Mrs. KVJ Spouse of Mr. Kumar, (Chartered Accountant) is the store keeper (not a director, or KMP) of PRC Ltd., hence Mr. Kumar will not be, disqualified to be appointed as an auditor in the said, company., , RTP NOVEMBER 2021, Ques’, The Board of Directors of Moon Light Limited, a listed, company appointed Mr. Teja, Chartered Accountant as its, first auditor within 30 days of the date of registration of, the Company to hold office from the date of incorporation, to conclusion of the first Annual General Meeting (AGM)., At the first AGM, Mr. Teja was re-appointed to hold office, from the conclusion of its first AGM till the conclusion of, 6th AGM. In the light of the provisions of the Companies, Act, 2013, examine the validity of appointment/, reappointment in the following cases:, Appointment of Mr. Teja by the Board of Directors., Re-appointment of Mr. Teja at the first AGM in the above, situation, Answer, As per section 139(6) of the Companies Act, 2013, the, first auditor of a company, other than a Government, company, shall be appointed by the Board of Directors, within thirty days from the date of registration of the, company and such auditor shall hold office till the, conclusion of the first annual general meeting., Whereas Section 139(1) of the Companies Act, 2013 states, that every company shall, at the first annual general, meeting (AGM), appoint an individual or a firm as an, auditor of the company who shall hold office from the, 108
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conclusion of 1st AGM till the conclusion of its, 6th, AGM and thereafter till the conclusion of every sixth AGM., As per section 139(2), no listed company or a company, belonging to such class or classes of companies as may be, prescribed, shall appoint or re-appoint an individual as, auditor for more than one term of five consecutive years., As per the given provisions following are the answers:, (i), , Appointment of Mr. Teja by the Board of, Directors is valid as per the provisions of section, 139(6)., , (ii), , Appointment of Mr. Teja at the first Annual, General Meeting is valid due to the fact that the, appointment of the first auditor made by the, Board of Directors is a separate appointment, and the period of such appointment is not to be, considered, while Mr. Teja is appointed in the, first Annual General Meeting, which is for the, period from the conclusion of the first Annual, General Meeting to the conclusion of the sixth, Annual General Meeting., , RTP MAY 2021, Ques, The Board of Directors of Amit Ltd. requested its Statutory, Auditor to accept the, assignment of designing and, implementation of suitable financial information system, to strengthen the internal control mechanism of the, Company. How will you approach to this proposal, as an, Statutory Auditor of Amit Ltd., taking into account the, consequences, if any, of accepting this proposal?, Answer, According to section 144 of the Companies Act, 2013, 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, 109
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be. But such services shall not include designing and, implementation of any financial information system., In the said instance, the Board of directors of Amit Ltd., requested its Statutory Auditor to accept the assignment of, designing and implementation of suitable financial, information system to strengthen the internal control, mechanism of the company. As per the above provision said, service is strictly prohibited., In case the Statutory Auditor accepts the assignment, he, will attract the penal provisions as specified in Section 147, of the Companies Act, 2013., In the light of the above provisions, we shall advise the, Statutory Auditor not to take up the above stated, assignment., , RTP NOVEMBER 2020, Ques, Shekhar Limited appointed an individual firm, Suresh & Company,, Chartered Accountants, as Auditors of the company at the Annual General, Meeting held on 30 th September, 2019. Mrs. Kamala, wife of Mr. Suresh,, invested in the equity shares having face value of ` 1 lakh of Shekhar, Limited on 15th October, 2019. But Suresh & Company continues to, function as statutory auditors of the company. Advice., Answer :, Disqualification of auditor: According to section 141(3)(d)(i) of the, Companies Act, 2013, a person who, or his relative or partner holds any, security of the company or its subsidiary or of its holding or associate, company a subsidiary of such holding company, which carries voting, rights, such person cannot be appointed as auditor of the company., Provided that the relative of such person may hold security or interest, in the company of face value not exceeding 1 lakh rupees as prescribed, under the Companies (Audit and Auditors) Rules, 2014., In this case, Mr. Suresh, Chartered Accountants, did not hold any such, security. But Mrs. Kamala, his wife held equity shares of Shekhar Limited, of face value ` 1 lakh, which is within the specified limit., Further Section 141(4) provides that if an auditor becomes subject,, 110
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after his appointment, to any of the disqualifications specified in subsection 3 of section 141, he shall be deemed to have vacated his office, of auditor. Hence, Suresh & Company can continue to function as, auditors of the Company even after 15 th October, 2019 i.e. after the, investment made by his wife in the equity shares of Shekhar, Limited., , RTP MAY 2020, 1., , The Board of Directors of Amit Ltd. requested its Statutory, Auditor to accept the assignment of designing and, implementation of suitable financial information system to, strengthen the internal control mechanism of the Company. How, will you approach to this proposal, as an Statutory Auditor of, Amit Ltd., taking into account the consequences, if any, of, accepting this proposal?, , Answer, According to section 144 of the Companies Act, 2013, 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. But such services shall not include, designing and implementation of any financial information, system., In the said instance, the Board of directors of Amit Ltd. requested its, Statutory Auditor to accept the assignment of designing and, implementation of suitable financial information system to, strengthen the internal control mechanism of the company. As per the, above provision said service is strictly prohibited., In case the Statutory Auditor accepts the assignment, he will attract, the penal provisions as specified in Section 147 of the Companies, Act, 2013., In the light of the above provisions, we shall advise the Statutory Auditor, not to take up the above stated assignment., 2., , New Limited appointed an individual firm, Naresh & Company,, Chartered Accountants, as Auditors of the company at the, Annual General Meeting held on 30 September 2019. Mrs., 111
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Reena, wife of Mr. Naresh, invested in the equity shares face, value of ` 1 lakh of New Limited on 15 October 2019. But Naresh, & Company continues to function as statutory auditors of the, company. Advice, Naresh & Company on the continuation of, such appointment, as per provisions of the Companies Act,, 2013., ANSWER, Disqualification of auditor: According to section 141(3)(d)(i) of, the Companies Act, 2013, a person who, or his relative or partner, holds any security of the company or its subsidiary or of its holding, or associate company or a subsidiary of such holding company,, which carries voting rights, such person cannot be appointed as, auditor of the company. Provided that the relative of such person, may hold security or interest in the company of face value not, exceeding 1 lakh rupees as prescribed under the Companies, (Audit and Auditors) Rules, 2014., In the case Mr. Naresh, Chartered Accountants, did not hold any, such security. But Mrs. Reena, his wife held equity shares of New, Limited of face value ` 1 lakh, which is within the specified limit., Further Section 141(4) provides that if an auditor becomes subject,, after his appointment, to any of the disqualifications specified in subsection 3 of section 141, he shall be deemed to have vacated his office, of auditor. Hence, Naresh & Company can continue to function as, auditors of the Company even after 15 October 2019 i.e. after the, investment made by his wife in the equity shares of New Limited., , MTP NOVEMBER 2021, SERIES 1, Ques, Shivam Limited is incorporated on 1.1.2020. The company wants to, appoint its first auditor. Please enumerate to the company the, relevant provisions of the Companies Act, 2013 with respect to the, appointment of first auditor., ANSWER, 112
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According to section 139(6) of the Companies Act, 2013, the first auditor, of a company, other than a Government Company, shall be appointed by, the Board of directors within 30 days of the date of registration of the, company and the auditor so appointed shall hold office until the, conclusion of the first AGM., If the Board fails to exercise its powers i.e. appointment of first, auditor, it shall inform the members of the company and the company, may appoint the first auditor within 90 days at an extra ordinary general, meeting (EGM) and such auditor shall hold office till the conclusion of, the first AGM., , SERIES 2, Ques, Shiv Limited is incorporated on 3.10.2020. The company is having a, paid- up share capital of Rs. 5 crores. Following are key, shareholders of the company:, Name of the Party holding shares, Central Government, Punjab Government, Others, , Amount (in, Rs.), 1.50, 1.23, 2.27, , The first auditor of the company has been appointed by the Board of, Directors on 31.10.2020. The members of the company have objected to, such an appointment by the Board of Directors. According to the, members its only the members who can appoint the first auditor., Advise the company on the validity of such appointment as per the, provisions of the Companies Act, 2013. Also, advise whether the, contention of members of the company is correct., (6 Marks), Answer, According to section 2(45) of the Companies Act, 2013, "Government, company" means any company in which not less than 51% of the paidup share capital is held by the Central Government, or by any State, Government or Governments, or partly by the Central Government and, partly by one or more State Governments, and includes a company, 113
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which is a subsidiary company of such a Government company., As per section 139(7), in the case of a Government company or any, other company owned or controlled, directly or indirectly, by the, Central Government, or by any State Government, or Governments,, or partly by the Central Government and partly by one or more, State Governments, the first auditor shall be appointed by the, Comptroller and Auditor-General of India within 60 days from the date of, registration of the company and in case the Comptroller and Auditor General of India does not appoint such auditor within the said period, the, Board of Directors of the company shall appoint such auditor within the, next 30 days; and in the case of failure of the Board to appoint such, auditor within the next 30 days, it shall inform the members of the, company who shall appoint such auditor within the 60 days at an, extraordinary general meeting, who shall hold office till the, conclusion of the first annual general meeting ., In the given question, Shiv Limited is a government company as 54.6%, [(1.5+1.23)/ 5= 54.6%] of the share capital is held by Central, government and State Government (Punjab Government). Thus, the, first auditor of Shiv Limited shall be appointed by the Comptroller, and Auditor-General of India within 60 days from the date of, registration. Thus, the appointment of first auditor by Board of Directors, on 31.10.2020 is not valid. The Board of Directors can appoint the first, auditor in case the Comptroller and Auditor-General of India does not, appoint such auditor within the said period of period 60 days. The, Board of Directors of the company shall appoint such auditor within the, next 30 days., In the case of failure of the Board to appoint such auditor within the, next 30 days, it shall inform the members of the company who shall, appoint such auditor within 60 days at an extraordinary general, meeting, who shall hold office till the conclusion of the first annual, general meeting . Thus, the contention of members that its only the, members who can appoint the first auditor of the Government, company, is not correct., Ques, Maya Limited is a public company. Maharashtra Bank (a nationalized, bank) is a shareholder holding 18% of the subscribed capital of the, company. Explain how the following shall be appointed:, 114
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(i), , First auditor, , (ii), , Subsequent auditor, Marks), , (6, , ANSWER, According to section 2(45) of the Companies Act, 2013, "Government, company" means any company in which not less than 51% of the paidup share capital is held by the Central Government, or by any State, Government or Governments, or partly by the Central Government and, partly by one or more State Governments, and includes a company, which is a subsidiary company of such a Government company., Answer, In the given case, the total shareholding of the Maharashtra Bank in, Maya Limited, is just 18% of the subscribed capital of the company., Hence, Maya Limited is not a government company. Hence, the provisions, applicable to non-government companies in relation to the appointment, of auditors shall apply., The auditor shall be appointed as follows:, According to section 139(6) of the Companies Act, 2013, the first auditor, of a company, other than a Government company, shall be appointed by, the Board of Directors within 30 days from the date of registration of, the company and in the case of failure of the Board to appoint such, auditor, it shall inform the members of the company, who shall within, 90 days at an extraordinary general meeting appoint such auditor and, such auditor shall hold office till the conclusion of the first annual, general meeting., The 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 the conclusion of every sixth meeting., Before such appointment of auditor is made, the written consent of the, auditor to such appointment, and a certificate from him or firm of, auditors that the appointment, if made, shall be obtained from the, auditor:, Further, the company shall inform the auditor concerned of his or its, appointment, and also file a notice of such appointment with the, Registrar within 15 days of the meeting in which the auditor is, appointed, 115
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The Indian Contract Act 1872, , QUES: Radheshyam borrowed a sum of ` 50,000 from a, Bank on the security of, gold on 1.07.2019 under an, agreement which contains a clause that the bank shall, have a right of particular lien on the gold pledged with it., Radheshyam thereafter took an unsecured loan of ` 20,000, from the same bank on 1.08.2019 for three months. On, 30.09.2019 he repaid entire secured loan of ` 50,000 and, requested the bank to release the gold pledged with it., The Bank decided to continue the lien on the gold until, the unsecured loan is fully repaid by Radheshyam. Decide, whether the decision of the Bank is valid within the, provisions of the Indian Contract Act, 1872 ?, ., ANS: General lien of bankers: According to section 171, of the Indian Contract Act, 1872, bankers, factors,, wharfingers, attorneys of a High Court and policy brokers, may, in the absence of a contract to the contrary, retain,, as a security for a general balance of account any goods, bailed to them; but no other persons have a right to, retain, as a security for such balance, goods bailed to, them, unless there is an express contract to the effect., Section 171 empowers the banker with general right of lien, in absence of a contract whereby it is entitled to retain the, goods belonging to another party, until all the dues are, discharged. Here, in the first instance, the banker under an, agreement has a right of particular lien on the gold pledged, with it against the first secured loan of ` 50,000/-, which, has already been fully repaid by Radheshyam. Accordingly,, Bank’s decision to continue the lien on the gold until the, unsecured loan of ` 20,000/- (which is the second loan) is, not valid., 116
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QUES: Explain whether the agency shall be terminated in, the following cases under, the provisions of the Indian, Contract Act, 1872:, (i), , A gives authority to B to sell A's land, and to pay, himself, out of the proceeds, the debts due to him from, A. Afterwards, A becomes insane., , (ii) A appoints B as A's agent to sell A's land. B, under the, authority of A, appoints C as agent of B. Afterwards, A, revokes the authority of B but not of C. What is the, status of agency of C ?, , ANS: (i) According to section 202 of the Indian Contract, Act, 1872, where the agent has himself an interest in, the property which forms the subject matter of the, agency, the agency cannot, in the absence of an express, contract, be terminated to the prejudice of such, interest., In other words, when the agent is personally interested in, the subject matter of agency, the agency becomes, irrevocable., In the given question, A gives authority to B to sell A’s land,, and to pay himself, out, of the proceeds, the debts due to him from A., As per the facts of the question and provision of law, A, cannot revoke this authority, nor it can be terminated by, his insanity., (ii) According to section 191 of the Indian Contract Act,, 1872, a “Sub-agent” is a person employed by, and acting, under the control of, the original agent in the business of, the agency., Section 210 provides that, the termination of the authority, of an agent causes the termination (subject to the rules, 117
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regarding the termination of an agent’s authority) of the, authority of all sub-agents appointed by him., In the given question, B is the agent of A, and C is the agent, of B. Hence, C becomes a sub- agent., Thus, when A revokes the authority of B (agent), it results, in termination of authority of sub-agent appointed by B, i.e. C (sub-agent)., , QUES: Satya has given his residential property on rent, amounting to ` 25,000 per month to Tushar. Amit became the, surety for payment of rent by Tushar. Subsequently, without, Amit's consent, Tushar agreed to pay higher rent to Satya., After a few months of this, Tushar defaulted in paying the, rent., (i), , Explain the meaning of contract of guarantee, according to the provisions of the Indian Contract, Act, 1872., , (ii), , State the position of Amit in this regard, , Answer, (i) Contract of guarantee: As per the provisions of, section 126 of the Indian Contract Act, 1872, a contract of, guarantee is a contract to perform the promise made or, discharge the liability, of a third person in case of his, default., Three parties are involved in a contract of guarantee:, Surety- person who gives the guarantee,, Principal debtor- person in respect of whose default the, guarantee is given,, Creditor- person to whom the guarantee is given, (ii) According to the provisions of section 133 of the Indian, Contract Act, 1872, where there is any variance in the, terms of contract between the principal debtor and, creditor without surety’s consent, it would discharge the, surety in respect of all transactions taking place, 118
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subsequent to such variance., In the instant case, Satya (Creditor) cannot sue Amit, (Surety), because Amit is discharged from liability when,, without his consent, Tushar (Principal debtor) has changed, the terms of his contract with Satya (creditor). It is, immaterial whether the variation is beneficial to the surety, or does not materially affect the position of the surety., , QUES: X has made an agency agreement with Y to, authorize him to purchase goods on the behalf of X for the, year 2020 only. The agency agreement was signed by both, and it contains all the terms and conditions for the agent., It has a condition that Y is allowed to purchase goods, maximum upto the value of ` 10 lakhs only. In the month, of April 2020, Y has purchased a single item of ` 12 lakhs, from Z as an agent of X. The market value of the item, purchased was ` 14 lakhs but a discount of ` 2 lakhs was, given by Z. The agent Y has purchased this item due to, heavy discount offered and the financially benefit to X., After delivery of the item Z has demanded the payment from, X as Y is the agent of X. But X denied to make the payment, stating that Y has exceeded his authority as an agent, therefore he is not liable for this purchase. Z has filed a suit, against X for payment., Decide whether Z will succeed in his suit against X for, recovery of payment as per provisions of The Indian, Contract Act, 1872., , ANS: An agent does all acts on behalf of the principal but, incurs no personal liability. The liability remains that of, the principal unless there is a contract to the contrary. An, agent also cannot personally enforce contracts entered, into by him on behalf of the principal. In the light of section, 226 of the Indian Contract Act, 1872, Principal is, considered to be liable for the acts of agents which are, within the scope of his authority. Further section 228 of, 119
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the Indian Contract Act, 1872 states that where an agent, does more than he is authorised to do, and what he does, beyond the scope of his authority cannot be separated, from what is within it, the principal is not bound to, recognise the transaction., In the given case, the agency agreement was signed, between X and Y, authorizing Y to purchase goods maximum, upto the value of ` 10 lakh. But Y purchased a single item, of` 12 lakh from Z as an agent of X at a discounted rate to, financially benefit to X. On demand of payment by Z, X, denied saying that Y has exceeded his authority therefore, he is not liable for such purchase. Z filed a suit against X, for payment., As said above, liability remains that of the principal unless, there is a contract to the contrary. The agency agreement, clearly specifies the scope of authority of Y for the, purchase of goods, however he exceeded his authority as, an agent. Therefore, in the light of section 228 as stated, above, since the transaction is not separable, X is not, bound to recognize the transaction entered between Z and, Y, and therefore may repudiate the whole transaction., Hence, Z will not succeed in his suit against X for recovery, of payment., , QUES: (i) Mr. CB was invited to guarantee an employee Mr., BD who was previously dismissed for dishonesty by the, same employer. This fact was not told to Mr. CB. Later, on, the employee embezzled funds. Whether CB is liable for, the financial loss as surety., (ii) Mr. X agreed to give a loan to Mr. Y on the security of, four properties. Mr. A gave guarantee against the loan., Actually Mr. X gave a loan of smaller amount on the security, of three properties. Whether Mr. A is liable as surety in case, Mr. Y failed to repay the loan?, (2 + 2 = 4, Marks), 120
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ANS: (i) As per section 143 of the Indian Contract, Act, 1872, any guarantee which the creditor has, obtained by means of keeping silence as to material, circumstances, is invalid. In the given instance, Mr., CB was invited to give guarantee of an employee Mr., BD to the same employer who previously dismissed, Mr. BD for dishonesty. This fact was not told to Mr., CB. Here, keeping silence as to previous dismissal, of Mr. BD for dishonesty is a material fact and if Mr., BD later embezzled the funds of the employer, Mr., CB will not be held liable for the financial loss as, surety since such a contract of guarantee entered is, invalid in terms of the above provisions., (ii) As per the provisions of section 133 of the Indian, Contract Act, 1872, any variance, made without, the surety’s consent, in the terms of the contract, between the principal [debtor] and the creditor,, discharges the surety as to transactions, subsequent to the variance., In the given instance, the actual transaction was, not in terms of the guarantee given by Mr. A. The, loan amount as well as the securities were, reduced without the knowledge of the surety., So, accordingly, Mr. A is not liable as a surety in, case Y failed to repay the loan., QUES: Distinguish between a contract of Indemnity and a, contract of Guarantee as per The Indian Contract Act,, 1872., , Answer, Point of distinction, Number of party/, Parties to the, contract, , Contract of Indemnity Contract of Guarantee, there are only two there are three parties, parties, namely, the creditor, principal, indemnifier [promisor] debtor, and surety., and the, 121
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Nature of liability, , Time of liability, , Time to act, , Right to sue third, party, , Purpose, Competency to, contract, , indemnified [promisee], The, liability, of the The liability of the, indemnifier is primary surety is secondary, and unconditional., and conditional as the, primary liability is, that of the principal, debtor., The liability, of the The liability arises only, indemnifier arises only on the non performance, on the happening of a of an existing promise, contingency., or non- payment of an, existing, debt., The indemnifier need, The surety acts at the, not act at the, request of principal, request of, debtor., indemnity holder, indemnifier cannot sue surety can proceed, a third party for loss in against, principal, his own name as there debtor in his own right, is no privity of contract. because he gets all the, Such a right would arise right of a creditor after, only if, there is an discharging the debts., assignment, in his, favour., Reimbursement of loss For the securit of the, creditor y, All parties, be In the case of a, must, contract of guarantee,, competent to, where a minor is a, contract, principal debtor, the, contract is still valid., , 122
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QUES: (i) Srushti acquired valuable diamond at a very, low price by a voidable contract under the provisions of, the Indian Contract Act, 1872. The voidable contract was, not rescinded. Srushti pledged the diamond with Mr. VK. Is, this a valid pledge under the Indian Contract Act, 1872?, (iii), , Whether a Pawnee has a right to retain the goods, pledged, , ANS: (i) Pledge by person in possession under voidable, contract [Section 178A of the Indian Contract Act, 1872]:, When the pawnor has obtained possession of the goods, pledged by him under a contract voidable under section 19, or section 19A, but the contract has not been rescinded at, the time of the pledge, the pawnee acquires a good title to, the goods, provided he acts in good faith and without, notice of the pawnor’s defect of title.Therefore, the pledge, of diamond by Srushti with Mr. VK is valid. (ii) Right of, retainer [Section 173 of the Indian Contract Act, 1872]:, Yes, the pawnee may retain the goods pledged, not only, for payment of the debt or the performance, of the, promise, but for the interest, of the debt, and all necessary, expenses incurred by him in respect of the possession or, for the preservation of the goods pledged., , QUES: Bhupendra borrowed a sum of ` 3 lacs from Atul., Bhupendra appointed Atul as his agent to sell his land and, authorized him to appropriate the amount of loan out of, the sale proceeds. Afterward, Bhupendra revoked the, agency., Decide under the provisions of the Indian Contract Act,, 1872 whether the revocation of the said agency by, Bhupendra is lawful., , ANS: According to Section 202 of the Indian Contract Act,, 123
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1872 an agency becomes irrevocable where the agent has, himself an interest in the property which forms the, subject-matter of the agency, and such an agency cannot, in, the absence of an express provision in the contract, be, terminated to the prejudice of such interest., In the instant case, the rule of agency coupled with, interest applies and does not come to an end even, on death, insanity or the insolvency of the principal., Thus, when Bhupendra appointed Atul as his agent to sell, his land and authorized him to appropriate the amount of, loan out of the sale proceeds, interest was created in, favour of Atul and the said agency is not revocable. The, revocation of agency by Bhupendra is not lawful., , QUES: 'C' advances to 'B', ` 2,00,000 on the guarantee of, 'A'. 'C' has also taken a further security for the same, borrowing by mortgage of B's furniture worth ` 2,00,000, without knowledge of 'A'. C' cancels the mortgage. After 6, months 'B' becomes insolvent and 'C' 'sues ‘A’ his, guarantee. Decide the liability of 'A' if the market value of, furniture is worth 80,000, under the Indian Contract Act,, 1872., , ANS: Surety’s right to benefit of creditor’s securities:, According to section 141 of the Indian Contract Act,, 1872, a surety is entitled to the benefit of every security, which the creditor has against the principal debtor at the, time when the contract of suretyship is entered into,, whether the surety knows of the existence of such, security or not; and, if the creditor loses, or, without, the consent of the surety, parts with such security, the, surety is discharged to the extent of the value of the, security., In the instant case, C advances to B, ` 2,00,000 rupees on, the guarantee of A. C has also taken a further security for, 124
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` 2,00,000 by mortgage of B’s, furniture, without, knowledge of A. C cancels the mortgage. B becomes, insolvent, and C sues A on his guarantee. A is discharged, from liability to the amount of the value of the furniture, i.e. ` 80,000 and will remain liable for balance ` 1,20,000., , QUES : Megha lends a sum of Rs. 20,000 to Bhim, on the, security of two shares of a Prema Limited on 1st April, 2019. On 15th June, 2019, the company issued two bonus, shares. Bhim returns the loan amount of Rs. 20,000 with, interest but Megha returns only two shares which were, pledged and refuses to give the two bonus shares. Advise, Bhim in the light of the provisions of the Indian Contract, Act, 1872., , ANS: . Bailee’s Duties and Liabilities: The problem as, asked in the question is based on the provisions of, Section 163(4) of the Indian Contract Act, 1872. As per the, section, “in the absence of any contract to the contrary,, the bailee is bound to deliver to the bailor, any increase or, profit w hich may have accrued from the goods bailed.”, In the given question, Megha received 2 bonus, shares on the 2 pledged shares of Prema Limited., Applying the provisions of the Indian Contract, Act, 1872, to the given case, the bonus shares are, an increase on the shares pledged by Bhim to, Megha. So, Megha is liable to return the shares, along with the bonus shares. Hence Bhim the, bailor, is entitled to receive the original shares as, well as bonus shares (after he has repaid the loan, amount)., , 125
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QUES: Ramesh instructed Suresh, a transporter, to send a, consignment of apples to Mumbai. After covering half the, distance, Suresh found that the apples will perish before, reaching Mumbai. He sold the same at half the market, price. Ramesh sued Suresh. Will he succeed? Give your, answer as per the provisions of the Indian Contract Act,, 1872, , ANS: According to section 189 of the Indian Contract Act,, 1872, an agent has authority, in an emergency, to do all, such acts for the purpose of protecting his principal from, loss as would be done by a person of ordinary prudence,, in his own case, under similar circumstances., In the given question the ‘agent’ is handling perishable, goods like ‘apples’ and thus can decide the time, date and, place of sale, not necessarily as per instructions of the, principal, with the intention of protecting the principal, from losses. Here, the agent acts in an emergency and acts, as a man of ordinary prudence., Thus, in the given case Suresh had acted in an emergency, situation and Ramesh will not succeed against him., , QUES: As per the Indian Contract Act, 1872, answer the, following:, (i), , Definition of Pledge, pawnor and pawnee, , Essential characteristics of contract of pledge, , ANS: (i) “Pledge”, “pawnor” and “pawnee” defined, [Section 172]: The bailment of goods as security for, payment of a debt or performance of a promise is called, “pledge”. The bailor is in this case called the “pawnor”., The bailee is called the “pawnee”., Since Pledge is a special kind of bailment, all the essential, 126
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of bailment are also essentials of Pledge. Apart from that,, the characteristics of the pledge are:, (1), , There shall be a bailment of security against, payment or performance of the promise., , (2), , The subject matter of pledge is goods., , (3), , Goods pledged for shall be in existence, , (4), , There shall be delivery of goods from pledger, to pledgee., , QUES: Pankaj appoints Shruti as his agent to sell his estate., Shruti, on looking over the estate before selling it, finds the, existence of a good quality Granite-Mine on the estate, which is, unknown to Pankaj. Shruti buys the estate herself after informing, Pankaj that she (Shruti) wishes to buy the estate for herself but, conceals the existence of Granite-Mine. Pankaj allows Shruti to, buy the estate, in ignorance of the existence of Mine. State giving, reasons in brief the rights of Pankaj, the principal, against Shruti,, the agent. Give your answer as per the provisions of the, Contract Act, 1872., What would be your answer if Shruti had informed Pankaj about, the existence of Mine before she purchased the estate, but after, two months, she sold the estate at a profit of 10 lac?, , ANS: Agent’s duty to disclose all material circumstances, & his duty not to deal on his own account without, principal’s consent. The problem is based on Sections 215 &, 216 of the Indian Contract Act, 1872. According to Section 215, if, an agent deals on his own account in the business of the agency,, without obtaining the consent of his principal and without, acquainting him with all material circumstances, then the principal, may repudiate the transaction. On the other hand, section 216, provides that, if an agent, without the knowledge of his, principal, acts on his own account in the business of the agency,, then the principal may claim any benefit which may have, 127
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accrued to the agent from such a transaction. Hence in the first, instance, though Pankaj had given his consent to Shruti, permitting the latter to act on his own account in the business of, agency, Pankaj may still repudiate the sale as the existence of, the mine, a material circumstance, had not been disclosed to, him., In the second instance, Pankaj had knowledge that Shruti was, acting on her own account and also that the mine was in existence;, hence, Pankaj cannot repudiate the transaction under section 215., Also, under Section 216, Pankaj cannot claim any benefit from, Shruti as he had knowledge that Shruti was acting on her own, account in the business of the agency., , QUES: Sandeep guarantees for Gaurav, a retail textile, merchant, for an amount of ` 1,00,000, for which, Sharma, the supplier may from time to time supply goods, on credit basis to Gaurav during the next 3 months., After 1 month, Sandeep revokes the guarantee, when, Sharma had supplied goo ds on credit for ` 40,000., Referring to the provisions of the Indian Contract Act,, 1872, decide whether Sandeep is discharged from all the, liabilities to Sharma for any subsequent credit supply., What would be your answer in case Gaurav makes default, in paying back Sharma for the goods already supplied on, credit i.e. ` 40,000?, , ANS: Discharge of Surety by Revocation: As per section, 130 of the Indian Contract Act, 1872 a specific guarantee, cannot be revoked by the surety if the liability has, already accrued. A continuing guarantee may, at any, time, be revoked by the surety, as to future transactions,, by notice to the creditor, but the surety remains liable, for transactions already entered into., As per the above provisions, liability of Sandeep is, 128
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discharged with relation to all subsequent credit supplies, made by Sharma after revocation of guarantee, because it, is a case of continuing guarantee., However, liability of Sandeep for previous transactions, (before revocation) i.e. for` 40,000 remains. He is liable for, payment of 40,000 to Sharma because the transaction was, already entered into before revocation of guarantee., , QUES: Raj gives his umbrella to Manoj during raining, season to be used for two days during Examinations., Manoj keeps the umbrella for a week. While going to, Raj’s house to return the umbrella, Manoj accidently slips, and the umbrella is badly damaged. Taking into account, the provisions of the Indian Contract Act, 1872, who will, bear the loss and why?, ANS: It is the duty of bailee to return, or deliver, according to the bailor’s directions, the goods bailed, without demand, as soon as the time for which they were, bailed, has expired, or the purpose for which they were, bailed has been accomplished. [Section 160 of the Indian, Contract Act, 1872], If, by the default of the bailee, the goods are not returned,, delivered or tendered at the proper time, he is responsible, to the bailor for any loss, destruction or deterioration of, the goods from that time. [Section 161], In the instant case, Manoj shall have to bear the loss since, he failed to return the umbrella within the stipulated time, and Section 161 clearly says that where a bailee fails to, return the goods within the agreed time, he shall be, responsible to the bailor for any loss, destruction or, deterioration of the goods from that time notwithstanding, the exercise of reasonable care on his part., , 129
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QUES: Akash is a famous manufacturer of leather goods., He appoints Prashant as his agent. Prashant is entrusted, with the work of recovering money from various traders, to whom Akash sells leather goods. Prashant is paid a, monthly remuneration of ` 15,000. Prashant during a, particular month recovers ` 40,000 from traders on, account of Akash. Prashant gives back ` 25,000 to Akash,, after deducting his salary., Examine with reference to relevant provisions of the Indian, Contract Act, 1872, whether act of Prashant is valid., ANS: The given problem is based on the provision related, to ‘agency coupled with interest’. According to Section, 202 of the Indian Contract Act, 1872 an agency becomes, irrevocable where the agent has himself an interest in the, property which forms the subject-matter of the agency,, and such an agency cannot, in the absence of an express, provision in the contract, be terminated to the prejudice, of such interest., In the given instance, Akash appointed Prashant as his, agent to recover money from various traders to whom, Akash sold his leather goods, on a monthly remuneration, of, 15,000. Prashant during a month recovers ` 40,000 from, traders on account of Akash. Prashant after deducting his, salary give the rest amount to Akash. In the said case,, interest was created in favour of Prashant and the said, agency is not revocable, therefore, the act of Prashant is, valid., , Ques, Megha lends a sum of Rs. 20,000 to Bhim, on the security of two, shares of a Prema Limited on 1st April 2019. On 15th June, 2019, the, company issued two bonus shares. Bhim returns the loan amount of, Rs. 20,000 with interest but Megha returns only two shares which, 130
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were pledged and refuses to give the two bonus shares. Advise Bhim, in the light of the provisions of the Indian Contract Act, 1872., (4 Marks), , Answer Bailee’s Duties and Liabilities: The problem as asked in the, question is based on the provisions of Section 163(4) of the Indian, Contract Act, 1872. As per the section, “in the absence of any contract, to the contrary, the bailee is bound to deliver to the bailor, any increase, or profit w hich may have accrued from the goods bailed.”, In the given question, Megha received 2 bonus shares on the 2 pledged, shares of Prema Limited., Applying the provisions of the Indian Contract Act, 1872, to the given, case, the bonus shares are an increase on the shares pledged by Bhim, to Megha. So, Megha is liable to return the shares along with the bonus, shares. Hence Bhim the bailor, is entitled to receive the original shares, as well as bonus shares (after he has repaid the loan amount)., Ques, Ramesh instructed Suresh, a transporter, to send a consignment of, apples to Mumbai. After covering half the distance, Suresh found, that the apples will perish before reaching Mumbai. He sold the same, at half the market price. Ramesh sued Suresh. Will he succeed? Give, your answer as per the provisions of the Indian Contract Act, 1872., , Answer, According to section 189 of the Indian Contract Act, 1872, an agent has, authority, in an emergency, to do all such acts for the purpose of, protecting his principal from loss as would be done by a person of, ordinary prudence, in his own case, under similar circumstances., In the given question the ‘agent’ is handling perishable goods like ‘apples’, and thus can decide the time, date and place of sale, not necessarily as, per instructions of the principal, with the intention of protecting the, principal from losses. Here, the agent acts in an emergency and acts as a, man of ordinary prudence., Thus, in the given case Suresh had acted in an emergency situation and, Ramesh will not succeed against him., 131
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Ques, As per the Indian Contract Act, 1872, answer the following:, (i), , Definition of Pledge, pawnor and pawnee, (ii), , Essential characteristics of contract of pledge, , Answer “Pledge”, “pawnor” and “pawnee” defined [Section 172]:, The bailment of goods as security for payment of a debt or, performance of a promise is called “pledge”. The bailor is in this case, called the “pawnor”. The bailee is called the “pawnee”., (ii), , Since Pledge is a special kind of bailment, all the essential of, bailment are also essentials of Pledge. Apart from that, the, characteristics of the pledge are:, (1), , There shall be a bailment of security against payment or, performance of the promise., , (2), , The subject matter of pledge is goods., , (3), , Goods pledged for shall be in existence, , (4), , There shall be delivery of goods from pledger to pledgee., , 132
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NEGOTIABLE INSTRUMENT ACT, QUES: Referring to the provisions of the Negotiable, Instruments Act, 1881, examine the validity of the following: A, Bill of Exchange originally drawn by R for a sum of ` 10,000, but accepted by S only for 7,000., , ANS: As per the provisions of Section 86 of the Negotiable, Instruments Act, 1881, if the holder of a bill of exchange, acquiesces in a qualified acceptance, or one limited to part, of the, sum mentioned in the bill, or which substitutes a different place, or time for payment, or which, where the drawees are not, partners, is not signed by all the drawees, all previous parties, whose consent is not obtained to such acceptance are discharged, as against the holder and those claiming under him, unless on, notice given by the holder they assent to such acceptance., Explanation to the above section states that an acceptance is, qualified where it undertakes the payment of part only of the, sum ordered to be paid., In view of the above provisions, the bill, which has been drawn, by R for ` 10,000/-, has been accepted by S only for ` 7,000/-., It is a clear case of qualified acceptance, which may either be, rejected by R or he may give assent to the acceptance of `, 7,000/- only, , QUES: A promissory note specifies that three months after, A will, pay ` 10,000 to B or his order for value received. It is to be noted, that no rate of interest has been stipulated in the promissory note., The promissory note falls due for payment on 01.09.2019 and paid, on 31.10.2019 without any interest. Explaining the relevant, provisions under the Negotiable Instruments Act, 1881, state, whether B shall be entitled to claim interest on the overdue, amount?, 134
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ANS: When no rate of interest is specified in the, instrument: As per the provisions of Section 80 of the, Negotiable Instruments Act, 1881, when no rate of interest is, specified in the instrument, interest on the amount due, thereon shall, notwithstanding any agreement relating to, interest between any parties to the instrument, be calculated, at the rate of eighteen per centum per annum, from the date at, which the same ought to have been paid by the party charged,, until tender or realization of the amount due thereon, or until, such date after the institution of a suit to recover such, amount as the Court directs., In the given question, the promissory note falls due for, payment on 1.9.2019 and was paid on 31.10.2019. The note, does not mention any rate of interest, hence interest will be, charged @ 18% p.a., Thus, B shall be entitled to claim interest on the overdue amount, for the period from 01.09.2019 to 31.10.2019, @ 18% p.a., , QUES: Gireesh, a legal successor of Ripun, the deceased person,, signs a Bill of Exchange in his own name admitting a liability of, ` 50,000 i.e. the extent to which he inherits the assets from the, deceased payable to Mukund after 3 months from 1st January,, 2019. On maturity, when Mukund presents the bill to Gireesh,, he (Gireesh) refuses to pay for the bill on the ground that since, the original liability was that of Ripun, the deceased,, therefore, he is not liable to pay for the bill., Referring to the provisions of the Negotiable Instruments Act,, 1881 decide whether Mukund can succeed in recovering `, 50,000 from Gireesh. Would your answer be still the same in, case Gireesh specified the limit of his liability in the bill and the, value of his inheritance is more than the liability ?, 135
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ANS: Liability of a legal representative (Section 29 of the, Negotiable Instruments Act, 1881): A legal representative of a, deceased person, who signs his name on a promissory note,, bill of exchange or cheque is liable personally thereon unless, he expressly limits his liability to the extent of the assets, received by him., Thus, in the absence of an express contract to the contrary, the, liability of a legal representative is unlimited. However, a legal, representative may, by an express agreement, limit his liability, to the extent of the assets received by him., In the light of the stated provision, Mukund can succeed in, recovering ` 50,000 from Gireesh as he has admitted liability of, ` 50,000 i.e. to the extent of the assets received by him from, the Ripun, the deceased., Yes, the limit of liability specified in the bill by Gireesh, will, remain same even if value of his inheritance is more than the, liability, in case he specified the liability by an express, agreement., , QUES: State with reasons whether each of the following, instruments is an Inland Instrument or a Foreign Instrument, as per The Negotiable Instruments Act, 1881:, (i), , Ram draws a Bill of Exchange in Delhi upon Shyam a, resident of Jaipur and accepted to be payable in, Thailand after 90 days of acceptance., , (ii), , Ramesh draws a Bill of Exchange in Mumbai upon, Suresh a resident of Australia and accepted to be, payable in Chennai after 30 days of sight., , (iii), , Ajay draws a Bill of Exchange in California upon Vijay, a resident of Jodhpur and accepted to be payable in, Kanpur after 6 months of acceptance., 136
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Mukesh draws a Bill of Exchange in Lucknow upon Dinesh a, resident of China and accepted to be payable in China after 45, days of acceptance., ANS: “Inland instrument” and “Foreign instrument”, [Sections 11 & 12 of the Negotiable Instruments Act, 1881], A promissory note, bill of exchange or cheque drawn or, made in India and made payable in, or drawn upon any, person resident in India shall be deemed to be an inland, instrument., Any such instrument not so drawn, made or made payable, shall be deemed to be foreign instrument., Following are the answers as to the nature of the, Instruments:, (i), , In first case, Bill is drawn in Delhi by Ram on a person, (Shyam), a resident of Jaipur (though accepted to be, payable in Thailand after 90 days) is an Inland, instrument., , (ii), , In second case, Ramesh draws a bill in Mumbai on, Suresh resident of Australia and accepted to be, payable in Chennai after 30 days of sight, is an Inland, instrument., , (iii), , In third case, Ajay draws a bill in California (which is, situated outside India) and accepted to be payable in, India (Kanpur), drawn upon Vijay, a person resident, in India (Jodhpur), therefore the Instrument is a, Foreign instrument., , In fourth case, the said instrument is a Foreign instrument as, the bill is drawn in India by Mukesh upon Dinesh, the person, resident outside India (China) and also payable outside India, (China) after 45 days of acceptance., QUES: Vikram accepts a Bill of Exchange for ` 50,000, which is an accommodation bill drawn by A on 1st, 137
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January 2020 to be payable at Mumbai on 1st July 2020., A transfers the bill to B on 1st February 2020 without any, consideration. B further transfers it to C on 1st March, 2020 for value. Then C transfers it again to D on 1st April, 2020 without consideration. D holds the bill till maturity, and on the due date of payment he presented the bill for, payment but the bill is dishonoured by Vikram., Discuss the rights of A, B, C and D to recover the amount, of this bill as per the provisions of the Negotiable Instruments, Act, 1881, ANS: According to section 43 of the Negotiable, Instruments Act, 1881, a negotiable instrument made,, drawn, accepted, indorsed, or transferred without, consideration, or for a consideration which fails, creates, no obligation of payment between the parties to the, transaction. But if any such party has transferred the, instrument with or without endorsement to a holder for, consideration, such holder, and every subsequent holder, deriving title from him, may recover the amount due on, such instrument from the transferor for consideration, or any prior party thereto., In view of the above provisions, A and B have no right to, recover the bill amount. But, C, being a holder for, consideration and the subsequent party D have right to, recover the amount of the bill., , QUES: A’ draws a bill amounting ` 5,000 of 3 month's maturity, period on ‘B’ but signs it in the fictitious name of 'C'. Bill is, payable to the order of ‘C’ and it is duly accepted by 'B'. ‘D’, obtains the bill from 'A' and thus becomes its 'Holder-in-Due, course. On maturity ‘D’ presents bill to ‘B’ for payment. Is ‘B’, bound to make the payment of the bill? Examine it referring to, the provisions of the Negotiable Instruments Act, 1881., 138
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ANS: Bill drawn in fictitious name: The problem is based on, the provision of Section 42 of the Negotiable Instruments, Act, 1881. In case a bill of exchange is drawn payable to the, drawer's order in a fictitious name and is endorsed by the, same hand as the drawer's signature, it is not permissible for, the acceptor to allege as against the holder in due course that, such name is fictitious., Accordingly, in the instant case, B cannot avoid payment by, raising the plea that the drawer, C is fictitious. The only, condition is that the signature of C as drawer and as endorser, must be in the same handwriting., Therefore, in the given case, B is bound to make the payment of, the bill to D., , QUES: Mr. X is the payee of an order cheque. Mr. Y steals the, cheque and forges Mr. X signature and endorses the cheque in, his own favour. Mr. Y then further endorses the cheque to Mr. Z,, who takes the cheque in good faith and for valuable, consideration.Examine the validity of the cheque as per the, provisions of the Negotiable Instruments Act, 1881 and also state, whether Mr. Z can claim the privileges of holder-in-due course., ANS: Forgery confers no title and a holder acquires no title to, a forged instrument. Thus, where a signature on the, negotiable instrument is forged, it becomes a nullity., Therefore, cheque further endorsed to Mr. Z, is not valid., Since a forged instrument is a nullity, therefore the, property in the such instrument remains vested in the, person who is the holder at the time when the forged, signatures were put on it. Forgery is also not capable of, being ratified. In the case of forged endorsement, the, person claiming under forged endorsement even if he is, purchaser for value and in good faith, cannot acquire the, rights of a holder in due course. Therefore, Mr. Z,, 139
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acquires no title on the cheque., QUES: State whether the following alteration is material, alteration under the provisions of the Negotiable Instruments, Act, 1881. ·, A promissory note was made without mentioning any time for, payment. The holder added the words "on demand" on the face of, the instrument., ANS: An alteration is material which in any way alters the, operation of the instrument and affects the liability of parties, thereto. Any alteration is material (a) which alters the business, effect of the instrument if used for any business purpose; (b), which causes it to speak a different language in legal effect form, that which it originally spoke or which changes the legal identity, or character of the instrument, In the said case, a promissory note was made without, mentioning any time for payment. The holder added the words, “on demand” on the face of the instrument. As per the above, provision of the Negotiable Instruments Act, 1881 this is not a, material alteration as a promissory note where no date of, payment is specified will be treated as payable on demand., Hence, adding the words “on demand” does not alter the, business effect of the instrument., , QUES: A draws a bill on B. B accepts the bill without any, consideration. The bill is transferred to C without, consideration. C transferred it to D for value. Decide-., (i), , Whether D can sue the prior parties of the bill, and, , (ii), , Whether the prior parties other than D have any right, of action inter se?, , Give your answer in reference to the Provisions of Negotiable, 140
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Instruments Act, 1881, ANS: Problem on Negotiable Instrument made without, consideration: Section 43 of the Negotiable Instruments Act,, 1881 provides that a negotiable instrument made, drawn,, accepted, indorsed or transferred without consideration, or for, a consideration which fails, creates no obligation of payment, between the parties to the transaction. But if any such party, has transferred the instrument with or without endorsement, to a holder for consideration, such holder, and every, subsequent holder deriving title from him, may recover the, amount due on such instrument from the transferor for, consideration or any prior party thereto., (i), , In the problem, as asked in the question, A has drawn, a bill on B and B accepted the bill without, consideration and transferred it to C without, consideration. Later on, in the next transfer by C to D, is for value. According to provisions of the aforesaid, section 43, the bill ultimately has been transferred to, D with consideration. Therefore, D can sue any of the, parties i.e. A, B or C, as D arrived a good title on it, being taken with consideration., , (ii), , As regards to the second part of the problem, the prior, parties before D i.e., A, B, and C have no right of action, inter se because first part of Section 43 clearly lays, down that a negotiable instrument, made, drawn,, accepted,, indorsed, or, transferred, without, consideration, or for a consideration which fails,, creates no obligation of payment between the parties, to the transaction prior to the parties who receive it, on consideration., , 141
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QUES: As per the Negotiable Instruments Act, 1881, what are, the parties who may cross a cheque?, , ANS: A cheque may be crossed by the following parties:, (1), , By Drawer: A drawer may cross it generally or, specially., , (2), , By Holder: A holder may cross an uncrossed cheque, generally or specially. If the cheque is crossed, generally, the holder may cross specially. If cheque, crossed generally or specially, he may add words “not, negotiable”., , (3), , By Banker: A banker may cross an uncrossed cheque,, or if a cheque is crossed generally he may cross it, specially to himself. Where a cheque is crossed, specially, the banker to whom it is crossed may again, cross it specially to another banker, his agent, for, collection., , QUES: Discuss with reasons, whether the following persons can be, called as a ‘holder’ under the, Negotiable Instruments Act, 1881:, (i), , X who obtains a cheque drawn by Y by way of gift., , (ii), , A, the payee of the cheque, who is prohibited by a court, order from receiving the amount of the cheque., , (iii), , M, who finds a cheque payable to bearer, on the road and, retains it., , (iv), , B, the agent of C, is entrusted with an instrument without, endorsement by C, who is the payee., , (v), , B, who steals a blank cheque of A and forges A’s signature., 142
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ANS : Person to be called as a holder: As per section 8 of the, Negotiable Instruments Act, 1881 ‘holder’ of a Negotiable, Instrument means any person entitled in his own name to the, possession of it and to receive or recover the amount due thereon from the, parties thereto., On applying the above provision in the given cases—, (i), (ii), , Yes, X can be termed as a holder because he has a right to, possession and to receive the amount due in his own name., No, he is not a ‘holder’ because to be called as a ‘holder’ he must, be entitled not only, to the possession of the instrument but also to receive the, amount mentioned therein., , (iii), , No, M is not a holder of the Instrument though he is in, possession of the cheque, so is not entitled to the possession, of it in his own name., , (iv), , No, B is not a holder. While the agent may receive payment of, the amount mentioned in the cheque, yet he cannot be called, the holder thereof because he has no right to sue on the, instrument in his own name., , (v), , No, B is not a holder because he is in wrongful possession of, the instrument., , QUES: Rahul drew a cheque in favour of Aman. After having, issued the cheque; Rahul requested Aman not to present the, cheque for payment and gave a stop payment request to the, bank in respect of the cheque issued to Aman. Decide, under the, provisions of the Negotiable Instruments Act, 1881 whether the, said acts of Rahul constitute an offence?, , 143
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ANS: As per the facts stated in the question, Rahul (drawer), after having issued the cheque, informs Aman (drawee) not, to present the cheque for payment and as well as gave a stop, payment request to the bank in respect of the cheque issued, to Aman., Section 138 of the Negotiable Instruments Act, 1881, is a penal, provision in the sense that once a cheque is drawn on an, account maintained by the drawer with his banker for payment, of any amount of money to another person out of that account, for the discharge in whole or in part of any debt or liability, is, informed by the bank unpaid either because of insufficiency of, funds to honour the cheques or the amount exceeding the, arrangement made with the bank, such a person shall be, deemed to have committed an offence., Once a cheque is issued by the drawer, a presumption under, Section 139 of the Negotiable Instruments Act, 1881 follows and, merely because the drawer issues a notice thereafter to the, drawee or to the bank for stoppage of payment, it will not, preclude an act ion under Section 138., Also, Section 140 of the Negotiable Instruments Act, 1881,, specifies absolute liability of the drawer of the cheque for, commission of an offence under the section 138 of the Act., Section 140 states that it shall not be a defence in a prosecution, for an offence under section 138 that the drawer had no reason, to believe when he issued the cheque that the cheque may be, dishonoured on presentment for the reasons stated in that, section., lAccordingly, the act of Rahul, i.e., his request of stop payment, constitutes an offence under the provisions of the Negotiable, Instruments Act, 1881., , 144
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QUES: (i) Calculate the date of maturity of bill of exchange, drawn on 1 6.2019,, payable 120days after considering, the relevant provisions of the Negotiable Instruments Act, 1881., (ii) Chandra issues a cheque for ` 50,000/- in favour of Daye., Chandra has sufficient amount in his account with the Bank. The, cheque was not presented within reasonable time to the Bank for, payment and the Bank, in the meantime, became bankrupt., Decide under the provisions of the Negotiable Instruments Act,, 1881, whether Daye can recover the money from Chandra?, , ANS: (i) Date of maturity of the bill of exchange: In this case, the day of presentment for sight is to be excluded i.e. 1st, June, 2019. The period of 120 days ends on 29th September,, 2019 (June 29 days + July 31 days + August 31 Days +, September 29 days = 120 days). Three days of grace are to be, added. It falls due on 2nd October, 2019, whichhappens to be a, public holiday. As such it will fall due on 1st October, 2019 i.e.,, the next preceding Business Day., (ii) Section 84(1) of the Negotiable Instruments Act, 1881, provides that cheque should be presented to Bank within, reasonable time. If cheque is not presented within reasonable, time, meanwhile the drawer suffers actual damage, the drawer, is discharged to the extent of such actual damage. This would, be so if the cheque would have been passed if it was presented, within reasonable time. As per section 84(2), in determining, what is a reasonable time, regard shall be had to (a) the nature, of the instrument (b) the usage of trade and of bankers, and (c), facts of the particular case. The drawer will get discharge, but, the holder of the cheque will be treated as creditor of the bank,, in place of drawer. He will be entitled to recover the amount, from Bank [section 84(3)]., In the above case drawer i.e. Chandra has suffered damage as, 145
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cheque was not presented by Daye within reasonable time., Hence, Chandra will be discharged but Daye will be the creditor, of bank for the amount of cheque and can recover the amount, from the bank., , Ques, A draws a bill on B. B accepts the bill without any consideration. The bill is, transferred to C without consideration. C transferred it to D for value., Decide-., (i), , Whether D can sue the prior parties of the bill, and, , (ii), , Whether the prior parties other than D have any right of action, inter se?, Give your answer in reference to the Provisions of Negotiable, Instruments Act, 1881. (3 Marks), , Answer, (b), , Problem on Negotiable Instrument made without consideration:, Section 43 of the Negotiable Instruments Act, 1881 provides that a, negotiable instrument made, drawn, accepted, indorsed or, transferred without consideration, or for a consideration which, fails, creates no obligation of, , 146
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payment between the parties to the transaction. But if any such, party has transferred the instrument with or without, endorsement to a holder for consideration, such holder,, and every subsequent holder deriving title from him, may, recover the amount due on such instrument from the, transferor for consideration or any prior party thereto., (i), , In the problem, as asked in the question, A has drawn a bill, on B and B accepted the bill without consideration and, transferred it to C without consideration. Later on, in the, next transfer by C to D is for value. According to provisions, of the aforesaid section 43, the bill ultimately has been, transferred to D with consideration. Therefore, D can sue, any of the parties i.e. A, B or C, as D arrived a good title on, it being taken with consideration., , (ii), , As regards to the second part of the problem, the prior, parties before D i.e., A, B, and C have no right of action inter, se because first part of Section 43 clearly lays down that a, negotiable instrument, made, drawn, accepted, indorsed or, transferred without consideration, or for a consideration, which fails, creates no obligation of payment between the, parties to the transaction prior to the parties who receive, it on consideration., , Ques, As per the Negotiable Instruments Act, 1881, what are the parties who, may cross a cheque?, (3 Marks), Answer, A cheque may be crossed by the following parties:, (1), , By Drawer: A drawer may cross it generally or specially., , (2), , By Holder: A holder may cross an uncrossed cheque, generally or specially. If the cheque is crossed generally,, the holder may cross specially. If cheque crossed generally, or specially, he may add words “not negotiable”., , (3), , By Banker: A banker may cross an uncrossed cheque, or if a, cheque is crossed generally he may cross it specially to, 147
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himself. Where a cheque is crossed specially, the banker to, whom it is crossed may again cross it specially to another, banker, his agent, for collection., Question, Give the answer of the following:, (i), , A promissory note was made without mentioning any time, for payment. The holder added the words “on demand” on, the face of the instrument. Does this amount to material, alteration?, , Amit draws a cheque for Rs. 1000 and hands it over to Beena by way of, gift. Is Beena a holder in due course?, Answer, (i) An alteration is material which in any way alters the operation, of the instrument and affects the liability of parties thereto. Any, alteration is material which alters the business effect of the instrument, if used for any business purpose., In the given case, a promissory note was made without mentioning any, time for payment. The holder added the words “on demand” on the face, of the instrument. As per the provision of the Negotiable Instruments, Act, 1881 this is not a material alteration as a promissory note where, no date of payment is specified will be treated as payable on demand., Hence , adding the words “on demand” does not alter the business effect, of the instrument., The “holder” of a promissory note, bill of exchange or cheque means, any person entitled in his own name to the possession thereof, and to, receive or recover the amount due thereon from the parties thereto., “Holder in due course” means any person who for consideration became, the possessor of a promissory note, bill of exchange or cheque (if, payable to bearer), or the payee or indorsee thereof, (if payable to, order), before the amount mentioned in it became payable, and without, having sufficient cause to believe that any defect existed in the title of, the person from whom he derived his title., In the given question, Beena is a holder but not a holder in due course, as she does not get the cheque for value and consideration. Her title is, good and bonafide. As a holder she is entitled to receive Rs. 1000 from, 148
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the bank on whom the cheque is drawn., , GENERAL CLAUSES ACT, QUES: Sohel, a director of a Company, not being, personally concerned or interested, financially or, otherwise, in a matter of a proposed motion placed, before the Board Meeting, did not disclose his interest, although he has knowledge that his sister is interested, in that proposal. He restrains from making any, disclosure of his interest on the presumption that he, is not required by law to disclose any interest as he is, not personally interested or concerned in the, proposal. He made his presumption relying on the, 'Rule of Literal Construction'. Explaining the scope of, interpretation under this rule in the given situation,, decide whether the decision of Sohel is correct?, ANS: Rule of Literal Construction, Normally, where the words of a statute are in, themselves clear and unambiguous, then these, words should be construed in their natural and, ordinary sense and it is not open to the court to, adopt any other hypothetical construction. This is, called the rule of literal construction., This principle is contained in the Latin maxim, “absoluta sententia expositore non indeget” which, literally means “an absolute sentence or preposition, needs not an expositor”. In other words, plain words, require no explanation., Sometimes, occasions may arise when a choice has to, be made between two interpretations – one narrower, and the other wider or bolder. In such a situation, if, the narrower interpretation would fail to achieve the, manifest purpose of the legislation, one should, rather adopt the wider one, 149
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When we talk of disclosure of ‘the nature of concern or, interest, financial or otherwise’ of a director or the, manager of a company in the subject-matter of a proposed, motion (as referred to in section 102 of the Companies Act,, 2013), we have to interpret in its broader sense of, referring to any concern or interest containing any, information and facts that may enable members to, understand the meaning, scope and implications of the, items of business and to take decisions thereon. What is, required is a full and frank disclosure without reservation, or suppression, as, for instance where a son or daughter or, father or mother or brother or sister is concerned in any, contract or matter, the shareholders ought fairly to be, informed of it and the material facts disclosed to them., Here a restricted narrow interpretation would defeat the, very purpose of the disclosure., In the given question, Sohel (a director) did not, disclose his interest in a matter placed before the, Board Meeting (in which his sister has interest), as, he is not personally interested or concerned in the, proposal., Here, he ought to have considered broader meaning, of the provision of law; and therefore, even though, he was personally not interested or concerned in the, proposal, he should have disclosed the interest., , QUES:, (i) PK and VK had a long dispute regarding the ownership, of a land for which a legal suit was pending in the court., The court fixed the date of hearing on 29.04.2018, which, was announced to be a holiday subsequently by the, Government. What will be the computation of time of the, hearing in this case under the General Clauses Act, 1897?, (ii) Income Tax Act, 1961 provides that the gratuity paid by, the government to its employees is fully exempt from tax., You are required to explain the scope of the term, 150
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'government' and clarify whether the exemption from, gratuity income will be available to the State Government, Employees? Give your answer in accordance with the, provisions of the General Clauses Act, 1897, , (a), , ANS: (i) According to Section 10 of the General, Clauses Act, 1897, where by any legislation or, regulation, any act or proceeding is directed or, allowed to be done or taken in any court or, office on a certain day or within a prescribed, period then, if the Court or office is closed on that, day or last day of the prescribed period, the act, or proceeding shall be considered as done or, taken in due time if it is done or taken on the next, day afterwards on which the Court or office is, open., In the given question, the court fixed the date of, hearing of dispute between PK and VK, on, 29.04.2018, which was subsequently announced, to be a holiday., Applying the above provisions we can conclude, that the hearing date of 29.04.2018, shall be, extended to the next working day., (ii) According to section 3(23) of the General Clauses, Act, 1897, ‘Government’ or ‘the Government’ shall, include both the Central Government and State, Government., Hence, wherever, the word ‘Government’ is used,, it will include Central Government and State, Government both., Thus, when the Income Tax Act, 1961, provides, that gratuity paid by the government to its, employees is fully exempt from tax, the, exemption from gratuity income will be available, to the State Government employees also., , 151
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QUES: "The act done negligently shall be deemed to be done, in good faith.", Comment with the help of the provisions of the General, Clauses Act, 1897., , ANS: Good Faith, In general, anything done with due care and attention,, which is not malafide is presumed to have been done in, good faith., But, according to section 3(22) of the General Clauses Act,, 1897, a thing shall be deemed to be done in “good faith”, where it is in fact done honestly, whether it is done, negligently or not., The question of good faith under the General Clauses Act is, one of fact. It is to determine with reference to the, circumstances of each case., , 152
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It is therefore understood that the General Clauses, Act, 1897 considers the honesty in doing the Act as a, primary test to constitute the thing done in good, faith and therefore the act done honestly but with, negligence may also be termed as done in good faith, as per the General Clauses Act, 1897., The term “Good faith” has been defined differently, in different enactments. This definition of the good, faith does not apply to that enactment which, contains a special definition of the term “good, faith” and there the definition given in that, particular enactment has to be followed. This, definition may be applied only if there is nothing, repugnant in subject or context, and if that is so, the, definition is not applicable., , QUES (i) Mrs. K went to a Jewellary shop to purchase, diamond ornaments. The owners of jewellary shop are, notorious and indulging in smuggling activities. Mrs. K, purchased diamond ornaments honestly without making, proper enquiries. Was the purchase made in Good faith as, per the provisions of the General Clauses Act, 1897 so as to, convey good title?, (iv), , (b), , There are two ways to reach city A from city B., The distance between the two cities by roadways, is 100 kms and by water ways 80 kms. How is the, distance measured for the purpose of any Central, Act under the provisions of the General Clauses, Act, 1897?, , ANS: (i) In the instant case, the purchase of diamond, ornaments by Mrs. K from a Jewellary Shop, the, owners of which are notorious and indulged in, smuggling activities, made in good faith, will not, convey good title., 153
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As per section 3 (22) of the General Clauses Act,, 1897, a thing shall be deemed to be done in “good, faith” where it is in fact done honestly, whether, it is done negligently or not., The definition of good faith as is generally, understood in the civil law and which may be, taken as a practical guide in understanding the, expression in the Indian Contract Act, 1872 is that, nothing is said to be done in good faith which is, done without due, care and attention as is, expected with a man of ordinary prudence. An, honest purchase made carelessly without making, proper enquiries cannot be said to have been, made in good faith so as to convey good title., (iii) “Measurement of Distances” [Section 11 of the, General Clauses Act, 1897]: In the measurement of, any distance, for the purposes of any Central Act or, Regulation made after the commencement of this Act,, that distance shall, unless a different intention, appears, be measured in a straight line on a, horizontal plane, , QUES: Define the term "Affidavit", Clauses Act, 1897, , under the General, , ANS: “Affidavit” [Section 3(3) of the General Clauses Act,, 1897]: ‘Affidavit’ shall include affirmation and, declaration in the case of persons by law allowed to, affirm or declare instead of swearing., There are two important points derived from the, above definition:, 1., , Affirmation and declaration,, , 2., , In case of persons allowed affirming or declaring, instead of swearing., , The above definition is inclusive in nature. It states, 154
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that Affidavit shall include affirmation and, declarations. This definition does not define, affidavit. However, we can understand this term in, general parlance. Affidavit is a written statement, confirmed by oath or affirmation for use as evidence, in Court or before any authority., QUES: Mr. R, an advocate, fraudulently deceived his client, Mr. Chandan who was taking his expert advise on taxation, matters. Now, Mr. R is liable to a fine for his fraudulent, act both under the Advocates Act and the Income Tax Act,, 1961. State the provision as to whether his offence is, punishable under both Acts. Give your answer as per the, provisions of the General Clauses Act, 1897., , ANS: "Provision as to offence punishable under two or, more enactments" (Section 26 of the General Clauses, Act, 1897), Where an act or omission constitutes an offence under two, or more enactments, then the offender shall be liable to be, prosecuted and punished under either or any of those, enactments, but shall not be liable to be punished twice for, the same offence., Thus, Mr. R shall be liable to be punished either under the, Advocates Act, 1961 or under the Income Tax Act, 1961, but, shall not be punished twice for the same offence. He can be, punished under any of the enactments if his offence is, established., , QUES: Elucidate the term “Commencement” as per the, General Clauses Act, 1897 ., ANS: Section 3(13) of the General Clauses Act, 1897,, defines the term "Commencement"., 155
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"Commencement" used with reference to an Act or, Regulation, shall mean the day on which the Act or, Regulation comes into force., Coming into force or entry into force (also called, commencement) refers to the process by which legislation;, regulations, treaties and other legal instruments come to, have a legal force and effect., A law cannot be said to be in force unless it is brought into, operation by legislative enactment, or by the exercise of, authority by a delegate empowered to bring it into, operation. The theory of a statute being "in operation in a, constitutional sense" though it is not in fact in operation, has no validity. (State of Orissa Vs. Chandrasekhar Singh, Bhai — AIR1970 sc 398)., , QUES: Mr. Vyas is the owner of House No. 20 in Geeta Colony,, Delhi. He has rented two rooms in this house to Mr. Iyer. The, Income Tax Authority has served a show cause notice to Mr. Vyas., The said notice was received by Mr. Iyer and returned the, notice with an endorsement of refusal. Decide with reference to, provisions of "General Clauses Act, 1897”, whether the notice, was rightfully served on Mr. Vyas., ANS: According to section 27 of the General Clauses Act, 1897,, where any legislation or regulation requires any document to be, served by post, then unless a different intention appears, the, service shall be deemed to be effected by:, (vi), , Properly addressing, , (vii), , Pre-paying, and, , (viii), , Posting by registered post., A letter containing the document to have been effected, at the time at which the letter would be delivered in the, ordinary course of post., The facts of the question are similar to a decided case, law, wherein it was held that where a notice is sent to, the landlord by registered post and the same is, returned by the tenant with an endorsement of refusal,, 156
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it will be presumed that the notice has been served., Thus, in the given question it can be deemed that the, notice was rightfully served on Mr. Vyas., , QUES: Referring to the provisions of the General Clauses, Act, 1897, find out the day/ date on which the following, Act/Regulation comes into force. Give reasons also., An Act of Parliament which has not specifically, mentioned a particular date., ii The Securities and Exchange Board of India, (Issue of Capital and Disclosure Requirements) (Fifth, Amendment) Regulations, 2015 was issued by SEBI vide, Notification dated 14th August, 2015 with effect from 1st, January, 2016, (1), , ANS: (1) According to section 5 of the General Clauses, Act, 1897, where any Central Act has not specifically, mentioned a particular date to come into force, it shall be, implemented on the day on which it receives the assent, of the President in case of an Act of Parliament., (2) If any specific date of enforcement is prescribed, in the Official Gazette, the Act shall come into, enforcement from such date., Thus, in the given question, the SEBI (Issue of Capital and, Disclosure Requirements) (Fifth Amendment) Regulations,, 2015 shall come into enforcement on 1 st January, 2016, rather than the date of its notification in the gazette., , QUES: (i) Mr. Apar and Mr. New, both aspiring Chartered, Accountants have met in a conference for CA students., Both are having an argument about the meaning of, Financial Year. They have approached you as a senior in, the profession to guide them about the meaning of, Financial Year as per the provisions of the General, 157
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Clauses Act, 1872. Also, brief them about the difference, between a calendar year and financial year., (ii) What is the meaning of service by post as per, provisions of the General Clauses Act, 1897?, , ANS: (i) Financial Year: According to section 3(21) of the, General Clauses Act, 1897, financial year shall mean, the year commencing on the first day of April., The term Year has been defined under Section, 3(66) as a year reckoned according to the British, calendar. Thus, as per General Clauses Act, Year, means calendar year which starts from January, to December., Difference between Financial Year and, Calendar Year: Financial year starts from first, day of April but Calendar Year starts from first, day of January., (ii), , Meaning of Service by post: According to section, 27 of the General Clauses Act, 1897, where any, legislation or regulation requires any document, to be served by post, then unless a different, intention appears, the service shall be deemed to, be effected by:, (i), , properly addressing, , (ii), , pre-paying, and, , (iii), , posting by registered post., , A letter containing the document to have been, effected at the time at which the letter would be, delivered in the ordinary course of post., Ques, Mr. R, an advocate, fraudulently deceived his client Mr. Chandan who was, taking his expert advise on taxation matters. Now, Mr. R is liable to a, fine for his fraudulent act both under the Advocates Act and the, Income Tax Act, 1961. State the provision as to whether his offence is, punishable under both Acts. Give your answer as per the provisions of, 158
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the General Clauses Act, 1897., (4 Marks), Answer, Provision as to offence punishable under two or more enactments", (Section 26 of the General Clauses Act, 1897), Where an act or omission constitutes an offence under two or more, enactments, then the offender shall be liable to be prosecuted and, punished under either or any of those enactments, but shall not be, liable to be punished twice for the same offence., Thus, Mr. R shall be liable to be punished either under the Advocates, Act, 1961 or under the Income Tax Act, 1961, but shall not be punished, twice for the same offence. He can be punished under any of the, enactments if his offence is established., Ques Elucidate the term “Commencement” as per the General Clauses, Act, 1897 ., (3, Marks), Answer, Section 3(13) of the General Clauses Act, 1897, defines the term, "Commencement"., "Commencement" used with reference to an Act or Regulation, shall, mean the day on which the Act or Regulation comes into force., Coming into force or entry into force (also called commencement), refers to the process by which legislation; regulations, treaties and, other legal instruments come to have a legal force and effect., A law cannot be said to be in force unless it is brought into operation, by legislative enactment, or by the exercise of authority by a delegate, empowered to bring it into operation. The theory of a statute being "in, operation in a constitutional sense" though it is not in fact in operation, has no validity. (State of Orissa Vs. Chandrasekhar Singh Bhai —, AIR1970 sc 398)., , 159
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INTERPRETATION OF STATUTES, QUES: What is External Aid to interpretation? Explain how, the Dictionary definitions are the External Aids to, Interpretations?, , ANS: External aids are the factors that help in, interpreting/construing an Act and have been given the, convenient nomenclature of ‘External Aids to, Interpretation’. Apart from the statute itself there are, many matters which may be taken into account when the, statute is ambiguous. These matters are called external, aids., Dictionary Definitions: Dictionary Definitions is one of, the External Aids to interpretation. First we have to, refer to the Act in question to find out if any particular, word or expression is defined in it. Where we find that a, word is not defined in the Act itself, we may refer to, dictionaries to find out the general sense in which that, word is commonly understood. However, in selecting one, out of the several meanings of a word, we must always, take into consideration the context in which it is used in, the Act. It is the fundamental rule that the meanings of, words and expressions used in an Act must take their, colour from the context in which they appear. Further,, judicial decisions laying down the meaning of words in, construing statutes in ‘pari materia’ will have greater, weight than the meaning furnished by dictionaries., However, for technical terms reference may be made to, technical dictionaries, , QUES: Write a short note on "Proviso" and “Instrument”, with reference to the rules of interpretation. (3 Marks), 160
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ANS: Proviso: The normal function of a proviso is to, except something out of the enactment or to qualify, something stated in the enactment which would be within, its purview if the proviso were not there. The effect of, the proviso is to qualify the preceding enactment which is, expressed in terms which are too general. As a general, rule, a proviso is added to an enactment to qualify or, create an exception to what is in the enactment., Ordinarily a proviso is not interpreted as stating a, general rule., It is a cardinal rule of interpretation that a proviso to a, particular provision of a statute only embraces the field, which is covered by the main provision. It carves out an, exception to the main provision to which it has been, enacted as a proviso and to no other. (Ram Narain Sons, Ltd. Vs. Assistant Commissioner of Sales Tax, AIR SC 765)., ‘Instrument’: In common parlance, ‘instrument’ means a, formal legal document which creates or confirms a right or, records a fact. It is a formal writing of any kind, such as an, agreement, deed, charter or record, drawn up and, executed in a technical form. It also means a formal legal, document having legal effect, either as creating liability or, as affording evidence of it. Section 2(14) of the Indian, Stamp Act, 1899 states that ‘instrument’ includes every, document by which any right or liability is or purports to, be created, transferred, extended, extinguished or, recorded, , QUES: “Associate words to be understood in common, sense manner.” Explain this statement with reference to, rules of interpretation of statutes., , ANS: Associated Words to be Understood in Common, Sense Manner: When two words or expressions are, coupled together one of which generally excludes the, other, obviously the more general term is used in a, 161
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meaning excluding the specific one. On the other hand,, there is the concept of ‘Noscitur A Sociis’ (‘it is known by, its associates’), that is to say ‘the meaning of a word is to, be judged by the company it keeps’. When two or more, words which are capable of analogous (similar or parallel), meaning are coupled together, they are to be understood in, their cognate sense (i.e. akin in origin, nature or quality)., They take, as it were, their colour from each other, i.e., the, more general is restricted to a sense analogous to the less, general. It is a rule wider than the rule of ejusdem generis,, rather ejusdem generis is only an application of the, noscitur a sociis. It must be borne in mind that nocitur a, sociis, is merely a rule of construction and it cannot, prevail in cases where it is clear that the wider words have, been deliberately used in order to make the scope of the, defined word correspondingly wider., , QUES: At the time of interpreting a statutes what will be, the effect of 'Usage' or 'Practice'?, , ANS: Effect of usage: Usage or practice developed under, the statute is indicative of the meaning recognized to its, words by contemporary opinion. A uniform notorious, practice continued under an old statute and inaction of, the Legislature to amend the same are important factors, to show that the practice so followed was based on, correct understanding of the law. When the usage or, practice receives judicial or legislative approval it gains, additional weight., In this connection, we have to bear in mind two Latin, maxims:, (i), , 'Optima Legum interpres est consuetude' (the, custom is the best interpreter of the law); and, 162
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(ii), , 'Contemporanea exposito est optima et fortissinia, in lege' (the best way to interpret a document, is to read it as it would have been read when, made)., , Therefore, the best interpretation/construction of a, statute or any other document is that which has been, made by the contemporary authority. Simply stated,, old statutes and, documents should be interpreted as they would have, been at the time when they were enacted/written., Contemporary official statements throwing light on, the construction of a statute and statutory, instruments made under it have been used as, contemporanea exposition to interpret not only, ancient but even recent statutes in India., , QUES: (i) What is the effect of proviso? Does it qualify the, main provisions of an Enactment?, (iii), , Does an explanation added to a section widen the, ambit of a section?, , ANS: (i) Normally a Proviso is added to a section of an Act, to except something or qualify something stated in that, particular section to which it is added. A proviso should, not be, ordinarily, interpreted as a general rule. A proviso, to a particular section carves out an exception to the main, provision to which it has been enacted as a Proviso and to, no other provision. [Ram Narian Sons Ltd. Vs., Commissioner of Sales Tax AIR (1955) S.C. 765], •, , Sometimes an explanation is added to a, section of an, Act for the purpose of, explaining the main provisions contained, in that section. If there is some ambiguity in, the provisions of the main section, the, 163
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explanation is inserted to harmonise and, clear up and ambiguity in the main section., Something may added be to or something, may be excluded from the main provision by, insertion of an explanation. But the, explanation should not be construed to, widen the ambit of the section, , QUES: Differentiate Mandatory Provision from a, Directory Provision. What factors decide whether a, provision is directory or mandatory?, ANS: Practically speaking, the distinction between a, provision which is ‘mandatory’ and one which is, ‘directory’ is that when it is mandatory, it must be, strictly observed; when it is ‘directory’ it would be, sufficient that it is substantially complied with. However,, we have to look to the substance and not merely the form,, an enactment in mandatory form might substantially be, director y and, conversely, a statute in directory form, may in substance be mandatory. Hence, it is the substance, that counts and must take precedence over mere form. If, a provision gives a power coupled with a duty, it is, mandatory: whether it is or is not so would depend on, such consideration as:, −, , the nature of the thing empowered to be done,, , −, , the object for which it is done, and, , −, , the person for whose benefit the power is to be, exercised., , QUES: ‘Preamble does not over-ride the plain provision, of the Act.' Comment. Also give suitable example., ANS: Preamble: The Preamble expresses the scope,, object and purpose of the Act more comprehensively. The, 164
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Preamble of a Statute is a part of the enactment and can, legitimately be used as an internal aid for construing it., However, the Preamble does not over-ride the plain, provision of the Act. But if the wording of the statute, gives rise to doubts as to its proper construction, for, example, where the words or phrase has more than one, meaning and a doubt arises as to which of the two, meanings is intended in the Act, the Preamble can and, ought to be referred to in order to arrive at the proper, construction., In short, the Preamble to an Act discloses the primary, intention of the legislature but can only be brought in as an, aid to construction if the language of the statute is not, clear. However, it cannot override the provisions of the, enactment., Example: Use of the word ‘may’ in section 5 of the Hindu, Marriage Act, 1955 provides that “a marriage may be, solemnized between two Hindus…..” has been construed to, be mandatory in the sense that both parties to the marriage, must be Hindus as defined in section 2 of the Act. It was, held that a marriage between a Christian male and a Hindu, female solemnized under the Hindu Marriage Act was void., This result was reached also having regard to the preamble, of the Act which reads: ‘An Act to amend and codify the law, relating to marriage among Hindus” [Gullipoli Sowria Raj V., Bandaru Pavani, (2009)]., , QUES: At the time of interpreting a statutes what will be, the effect of 'Usage' or 'customs and Practices'?, , ANS: Effect of usage: Usage or practice developed, under the statute is indicative of the meaning, recognized to its words by contemporary opinion. A, uniform notorious practice continued under an old, statute and inaction of the Legislature to amend the, 165
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same are important factors to show that the practice, so followed was based on correct understanding of, the law. When the usage or practice receives judicial, or legislative approval it gains additional weight. In, this connection, we have to bear in mind two Latin, maxims:, (i), , 'Optima Legum interpres est consuetude' (the, custom is the best interpreter of the law); and, , (ii), , 'Contemporanea exposito est optima et fortissinia, in lege' (the best way to interpret a document is, to read it as it would have been read when made)., , Therefore, the best interpretation/construction of a, statute or any other document is that which has been, made by the contemporary authority. Simply stated,, old statutes and documents should be interpreted as, they woul d have been at the time when they were, enacted/written., Contemporary official statements throwing light on, the construction of a statute and statutory, instruments made under it have been used as, contemporanea exposition to interpret not only, ancient but even recent statutes in India., Ques, What is the effect of proviso? Does it qualify the main, provisions of an Enactment?, (ii) Does an explanation added to a section widen the ambit of a, section?, (3, Marks), Answer, (i) Normally a Proviso is added to a section of an Act to except, something or qualify something stated in that particular section to, which it is added. A proviso should not be, ordinarily, interpreted as a, general rule. A proviso to a particular section carves out an exception to, the main provision to which it has been enacted as a Proviso and to no, other provision. [Ram Narian Sons Ltd. Vs. Commissioner of Sales Tax, AIR (1955) S.C. 765], (ii) Sometimes an explanation is added to a section of an Act for the, 166
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purpose of explaining the main provisions contained in that section. If, there is some ambiguity in the provisions of the main section, the, explanation is inserted to harmonise and clear up and ambiguity in the, main section. Something may added be to or something may be excluded, from the main provision by insertion of an explanation. But the, explanation should not be construed to widen the ambit of the section., Question, Differentiate Mandatory Provision from a Directory Provision. What, factors decide whether a provision is directory or mandatory?, (3 Marks), Answer, Practically speaking, the distinction between a provision which is, ‘mandatory’ and one which is ‘directory’ is that when it is mandatory,, it must be strictly observed; when it is ‘directory’ it would be, sufficient that it is substantially complied with. However, we have to, look to the substance and not merely the form, an enactment in, mandatory form might substantially be director y and, conversely, a, statute in directory form may in substance be mandatory. Hence, it is, the substance that counts and must take precedence over mere form. If, a provision gives a power coupled with a duty, it is mandatory: whether, it is or is not so would depend on such consideration as:, •, , the nature of the thing empowered to be done,, , •, , the object for which it is done, and, , •, , the person for whose benefit the power is to be, exercised., , 167
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