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The Institute of Chartered Accountants of India

PAPER-4 CORPORATE AND ALLIED LAWS

Question No. 1 is compulsory.
Answer any five from the rest
Question 1
(a) On recommendation of the Board of Directors of DJA Company Limited, Mr. R is
appointed at the company`s Annual General Meeting held on 1st October, 2014 as the
company`s auditor for a period of 10 years. A resolution to this effect was passed
unanimously with no vote against the resolution. Explaining the provisions of the
Companies Act, 2013 relating to the appointment and re-appointment of auditors:
(i)

Examine the validity of the above resolution.

(ii)

What shall be your answer in case an audit firm Messrs R & Associate is appointed
as the company`s auditor ?
(5 Marks)

(b) The Board of Directors of XYZ Company Limited at its meeting declared a dividend on its
paid-up equity share capital which was later on approved by the company`s Annual
General Meeting. In the meantime the directors at another meeting of the Board decided
by passing a resolution to divert the total dividend to be paid to shareholders for
purchase of investments for the company. As a result dividend was paid to shareholders
after 45 days. Examining the provisions of the Companies Act, 2013, state:
(i)

Whether the act of directors is in violation of the provisions of the Act and also the
consequences that shall follow for the above act of directors?

(ii)

What would be your answer in case the amount of dividend to a shareholder is

adjusted by the company against certain dues to the company from the
shareholder?
(5 Marks)

(c) Mr. Bhagvath, recently acquired 76 % of the equity shares of M/s Renowned Company
Ltd., in the hope of earning good dividend income. Unfortunately the existing Board of
Directors have been avoiding declaration of dividend due to alleged inadequacy of
profits. Unconvinced, Mr. Bhagvath seeks permission of the Company to allow him to
examine the Books of Accounts, which is summarily rejected by the Company. Examine
and advise the provisions relating to inspection of Books of Accounts and remedy
available.
(4 Marks)
(d) Central Government has received complaints regarding improper functioning of a stock
exchange. Explain the powers of the Central Government under the Securities Contracts
(Regulation) Act, 1956 to suspend the business of the stock exchange.
(6 Marks)

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Answer
(a) Appointment of Auditor (Section 139 of the Companies Act, 2013 and the
Companies (Audit and Auditors) Rules, 2014):
Section 139(2) of the Companies Act, 2013, provides that listed companies and other
prescribed class or classes of companies (except one person companies and small
companies) shall not appoint or re-appoint(1) an individual as auditor for more than one term of five consecutive years; and
(2) an audit firm as auditor for more than two terms of five consecutive years.
The Companies (Audit and Auditors) Rules, 2014 has prescribed the following classes of
companies for the purposes of section 139(2):
(1) all unlisted public companies having paid up share capital of rupees 10 crore or
more;
(2) all private limited companies having paid up share capital of rupees 20 crore or
more;
(3) all companies having paid up share capital of below threshold limit mentioned in (1)
and (2) above, but having public borrowings from financial institutions, banks or
public deposits of rupees 50 crores or more.
(i)

In the above question, on recommendation of the Board of Directors of DJA

Company Limited) Mr. R is appointed at the company's Annual General Meeting
held on 1st October, 2014 as the company's auditor for a period of 10 years. As per
the above provisions of the Companies Act, 2013, the appointment of Mr. R as
auditor of the company for 10 years is not valid because an individual shall not be
appointed as auditor for more than one term of five consecutive years. The said
resolution is not valid.
Assumption: As the question does not specify the status of the company whether
listed or unlisted; amount of paid up share capital, public borrowings from financial
institutions, banks or public deposits are not known; it is assumed that DJA
Company Limited is a listed company or within the prescribed classes of companies
specified under the above said Rules.

(ii) An audit firm can be appointed as an auditor for two terms of five consecutive years.
This means that a firm can be appointed for five years and thereafter may be
appointed/ reappointed for further five years. The total period for which a firm can
be appointed is 10 years. A firm cannot be appointed as auditor for ten years by a
single resolution.
Thus, the appointment of Messrs R & Associate as the company`s auditor for ten years
by a single resolution is not valid.

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(b) Payment of dividend; delay in payment; adjustment against dues (Section 127 of
the Companies Act, 2013):
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, is liable for the punishment under the said section.
In the present case, the Board of Directors of XYZ Company Limited at its meeting
declared a dividend on its paid-up equity share capital which was later on approved by
the company's Annual General Meeting. In the meantime the directors at another
meeting of the Board decided by passing a resolution to divert the total dividend to be
paid to shareholders for purchase of investment for the company. As a result dividend
was paid to shareholders after 45 days.
(i)

The Board of Directors of XYZ Company Limited is in violation of section 127 of the
Companies Act, 2013 as it failed to pay dividend to shareholders within 30 days due
to their decision to divert the total dividend to be paid to shareholders for purchase
of investment for the company.
Consequences: The following are the consequences for the violation of above
provisions:
(a) 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 shall also be
liable for a fine which shall not be less than one thousand rupees for every day
during which such default continues.
(b) 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.

(ii)

If the amount of dividend to a shareholder is adjusted by the company against

certain dues to the company from the shareholder, then failure to pay dividend
within 30 days shall not be deemed to be an offence under Proviso to section 127 of
the Companies Act, 2013.

(c) Inspection of Books of Accounts of the Company (Section 128 of the Companies
Act, 2013)
Mr. Bhagvath has no right to carry out an inspection of the books of accounts of the
company despite the fact that he holds 76% of the equity shares of M/s Renowned
Company Ltd. According to sections 128(3) of the Companies Act, 2013 and 209A of the
Companies Act, 1956, the following persons have the right to carry out the inspection of
the books of accounts of the company.
(i)

Directors of the Company [Section 128(3) of the Companies Act, 2013]

(ii)

Registrar of Companies [Section 209A of the Companies Act, 1956]

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(iii) Such officer of Government as may be authorised by the Central Government in this
behalf (Section 209A of the Companies Act, 1956).
(iv) Such officers of SEBI as may be authorised by SEBI [Section 209A of the
Companies Act, 1956 read with Section 24 of the Companies Act, 2013].
Since Mr. Bhagvath does not fall in any of above mentioned categories, he is not eligible
to carry out the inspection.
[Note: According to Regulation 95, of Table A, of the Companies Act, 1956, a member
has right to inspect the books of accounts if he is so authorized by a resolution of the
Board of Director or a resolution passed by the company in general meeting. Thus, Mr.
Bhagvath can inspect the books of accounts if authorized by a resolution of the Board of
directors or a resolution passed by the company in general meeting].
(d) Powers of the Central Government to suspend business of the Stock Exchange
(Section 12 of the Securities Contracts (Regulation) Act, 1956):
According to the provisions of the Securities Contracts (Regulations) Act, 1956, if in the
opinion of the Central Government an emergency has arisen and for the purpose of
meeting of the emergency the Central Government considers it expedient so to do, it
may, by Notification in the Official Gazette, for reasons to be set out therein, direct a
recognized stock exchange to suspend such of its business for such period not
exceeding 7 days and subject to such conditions as may be specified in the notification,
and if in the opinion of the Central Government the interest of the trade or the public
interest requires that the period should be extended, may, by like notification extend the
said period from time to time.
Provided that where the period of suspension is to be extended beyond the first period,
no notification extending the period of suspension shall be issued unless the Governing
Body of the recognized Stock Exchange has been given an opportunity of being heard in
the matter.
Question 2
(a) Referring to the provisions of the Companies Act, 2013, examine the validity of the
following:
(i)

The Board of Directors of AJD Limited appointed Mr. N as an alternate director for a
period of two months against a director who has proceeded abroad on leave for a
period of six months. Articles of Association of the company are silent.

(ii)

Mr. P who is not qualified to be appointed as an independent director is appointed

by the Board of Directors of XYZ Company Limited, for an independent director, as
an alternate director.

(iii) On the request of bank providing financial assistance the Board of Directors of PQR
Limited decides to appoint on its Board Mr. Peter, as nominee director. Articles of
Association of the Company do not confer upon the Board of Director any such

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power. Further, there is no agreement between the company and the bank for any
such nomination.
(8 Marks)
(b) (i)

Following is data relating to Prince Company Limited:

Authorised Capital (Equity Shares)

- ` 100 crores

Paid up Share Capital

- ` 40 crores

General Reserves

- ` 20 crores

Debenture Redemption Reserve

- ` 10 crores

Provision for Taxation

- ` 5 crores

Loan (Long Term)

- ` 10 crores

Short Term Creditors

- ` 3 crores

Board of Directors of the company by a resolution passed at its meeting decided to

borrow an additional sum of ` 90 crores from the company`s Bankers. You being
the company`s financial advisor, advise the Board of Directors the procedure to be
followed as required under the Companies Act, 2013.
(5 Marks)
(ii)

Mr. N is appointed as an additional Director by the Board of Directors of MNR

Company Limited at its meeting held on 1st October, 2014 for a period as permitted
by law.
(3 Marks)
Draft a resolution and state the body which appoints N.

Answer
(a) Appointment of alternate Director (Section 161 of the Companies Act, 2013)
(i)

According to section 161(2) of the Companies Act, 2013, the Board of Directors of a
company may, if so authorised by its articles or by a resolution passed by the
company in general meeting, appoint a person to act as an alternate director for a
director (original director) during his absence for a period of not less than three
months from India.
In the present case, the Board of Directors of AJD Limited appointed Mr. N as an
alternate director for a period of two months against a director who has proceeded
abroad on leave for a period of six months and Articles of Association of the
company are silent. The said appointment is not valid because the power to appoint
alternate director is not authorised by its articles or by a resolution passed by the
company in general meeting.

(ii) According to first proviso to section 161(2) of the Companies Act, 2013, no person
shall be appointed as an alternate director for an independent director unless he is
qualified to be appointed as an independent director under the provisions of this
Act.

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In the present case, Mr. P who is not qualified to be appointed as an independent

director is appointed by the Board of Directors of XYZ Company Limited; for an
independent director, as an alternate director. Thus, the said appointment is not
valid.
(iii) According to section 161(3) of the Companies Act, 2013, the Board may appoint any
person as a director nominated by any institution in pursuance of the provisions of
any law for the time being in force or of any agreement or by the Central
Government or the State Government by virtue of its shareholding in a Government
company, subject to the articles of a company.
In the present case, on the request of bank providing financial assistance the Board
of Directors of PQR Limited decides to appoint on its Board Mr. Peter, as nominee
director. Articles of Association of the company do not confer upon the Board of
Directors any such power and further there is no agreement between the company
and the bank. Thus, the appointment of Mr. Peter as nominee director is not valid as
Articles do not confer upon the Board of Directors any such power.
(b) (i)

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

As per Section 180(1)(c) of the Companies Act, 2013, the Board of Directors of a
company, without obtaining the approval of shareholders in a general meeting
through a special resolution, can borrow the funds including funds already borrowed
upto an amount which does not exceed the aggregate of paid up capital of the
company and its free reserves. Such borrowing shall not include temporary loans
obtained from the company's bankers in ordinary course of business.
Free reserves do not include the reserves set apart for specific purpose.
According to the above provisions, the Board of Directors of Prince Company
Limited can borrow, without obtaining approval of the shareholders in a general
meeting, upto an amount calculated as follows:
Particulars
Paid up Share Capital
General Reserve (being free reserve)
Debenture Redemption Reserve (This reserve is not to be
considered since it is kept apart for specific purpose of
debenture redemption)
Aggregate of paid up capital and free reserve.
Total borrowing power of the Board of Directors of the company,
i.e, 100% of the aggregate of paid up capital and free reserves
Less: Amount already borrowed as Long term loan
Amount upto which the Board of Directors can further borrow
without the approval of shareholders in a general meeting.

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`
40 Crores
20 Crore
---60 Crore
60 Crore
10 Crore
50 Crore

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In the present case, the directors of Prince Company Limited by a resolution passed
at its meeting decide to borrow an additional sum of ` 90 Crore from the company
bankers. Thus, the borrowing will be beyond the powers of the Board of directors.
Thus, the management of Prince Company Limited., should take steps to convene
the general meeting and pass a special resolution by the members in the meeting
as stated in Section 180(1)(c) of the Companies Act, 2013. Then, the borrowing will
be valid and binding on the company and its members.
(ii) Appointment of Additional Director: Resolution (Section 161 of the Companies
Act, 2013)
According to section 161(1) of the Companies Act, 2013, the articles of a company
may confer on its Board of Directors the power to appoint any person as an
additional director at any time.
Board Resolution
"Resolved that pursuant to the Articles of Association of the company and section
161(1) of the Companies Act, 2013, Mr. N is appointed as an Additional Director of
the MNR Company Limited with effect from 1st October, 2014 to hold office up to
the date of the next annual general meeting or the last date on which the annual
general meeting should have been held, whichever is earlier.
Resolved further that Mr. N will enjoy the same powers and rights as other directors.
Resolved further that Mr.__________ Secretary of MNR Company Limited be and is
hereby authorised to electronically file necessary returns with the Registrar of
Companies and to do all other necessary things required under the Act."
Assumption: As the question is silent about the Articles of Association, it is
assumed that Articles of Association has conferred the power to appoint the
additional director on the Board of Directors of MNR Company Limited.
Question 3
(a) What securities are not eligible for the computation of minimum promoters contribution in
case of public issue of shares by a company according to SEBI (Issue of Capital and
Disclosure Requirements) Regulation, 2009? State the cases in which the requirements
of minimum promoters contribution to an issue is not applicable.
(8 Marks)
(b) Explain the concept of CSR (Corporate Social Responsibility) as introduced by the
Companies Act, 2013. Examining the provisions of the Act, answer the following:
(i)

Which companies are required to constitute CSR Committee?

(ii)

Which companies are excluded from the requirements of the provisions of the Act in
relation to CSR committee?

(iii) What is the minimum contribution the companies are required to make towards
CSR?
(8 Marks)

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Answer
(a) Public issue of shares [Regulations 33 and 34 of the SEBI (Issue of Capital and
Disclosure Requirements)Regulations, 2009]
Securities ineligible for minimum promoters' contribution - As per the SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2009, for the computation of
minimum promoters' contribution, the following specified securities shall not be eligible:
(a) specified securities acquired during the preceding three years, if they are:
(i)

acquired for consideration other than cash and revaluation of assets or

capitalisation of intangible assets is involved in such transaction; or

(ii)

resulting from a bonus issue by utilisation of revaluation reserves or unrealised

profits of the issuer or from bonus issue against equity shares which are
ineligible for minimum promoters' contribution;

(b) specified securities acquired by promoters and alternative investment funds

during the preceding one year at a price lower than the price at which specified
securities are being offered to public in the initial public offer:
Provided that nothing contained in this clause shall apply:
(i)

if promoters/alternative investment funds pay to the issuer, the difference

between the price at which specified securities are offered in the initial public
offer and the price at which the specified securities had been acquired;

(ii)

if such specified securities are acquired in terms of the scheme under sections
391- 394 of the Companies Act, 1956, as approved by a High Court, by
promoters in lieu of business and invested capital that had been in existence
for a period of more than one year prior to such approval;

(iii) to an initial public offer by a government company, statutory authority or

corporation or any special purpose vehicle set up by any of them, which is
engaged in infrastructure sector;
(c) specified securities allotted to promoters and alternative investment funds
during the preceding one year at a price less than the issue price, against funds
brought in by them during that period, in case of an issuer formed by conversion of
one or more partnership firms, where the partners of the erstwhile partnership firms
are the promoters of the issuer and there is no change in the management:
Provided that specified securities, allotted to promoters against capital existing in
such firms for a period of more than one year on a continuous basis, shall be
eligible;
(d) specified securities pledged with any creditor.
Specified securities referred above in clauses (a) and (c) of sub-regulation (1) of
Regulation 33, shall be eligible for the computation of promoters' contribution, if such

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securities are acquired pursuant to a scheme which has been approved under sections
391-394 of the Companies Act, 1956.
Cases in which requirement of minimum promoters' contribution to an issue is not
applicable According to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
the requirements of minimum promoters' contribution shall not apply in case of:
(i)

an issuer which does not have any identifiable promoter;

(ii)

a further public offer, where the equity shares of the issuer and are not infrequently
traded in a recognised stock exchange for a period of at least three years and the
issuer has a track record of dividend payment for at least immediately preceding
three years:
Provided that where promoters propose to subscribe to the specified securities
offered to the extent greater than higher of the two options available in clause (b) of
sub-regulation (1) of regulation 32, the subscription in excess of such percentage
shall be made at a price determined in terms of the provisions of regulation 76 or
the issue price, whichever is higher.

(iii) rights issues.

(b) Concept of Corporate Social Responsibility, CSR Committee & Minimum
Contribution (Sections 135 of the Companies Act, 2013)
Corporate Social Responsibility (CSR): CSR implies a concept, whereby companies
decide voluntarily to contribute to a better society and a cleaner environment a
concept, whereby the companies integrate social and other useful concerns in their
business operations for the betterment of its stakeholders and society in general in a
voluntary way.
According to section 135 of the Companies Act, 2013:
(i)

Company which is required to constitute CSR committee:

(A) Every company including its holding or subsidiary, and a foreign company
defined under section 2(42) of the Companies Act, 2013 having its branch
office or project office in India, 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 any financial year shall constitute a Corporate Social Responsibility
Committee of the Board.

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(B) The CSR Committee shall institute a transparent monitoring mechanism for
implementation of the CSR projects or programs or activities undertaken by the
company.
(C) However, the net worth, turnover or net profit of a foreign company shall be
computed in accordance with balance sheet and profit and loss account of
such company as prepared in accordance with the provisions of section
381(1)(a) and section 198 of the Act.
(ii) Companies excluded from the requirements of the provisions of the Act in
relation to CSR Committee:
Every company which ceases to be a company as per section 135(1) of the Act for
three consecutive financial years
(1) shall not be required to constitute a CSR Committee, and
(2) is not required to comply with the provisions as per section 135.
(iii) Required minimum contribution of the Companies towards CSR:
(A) The Board of every company shall ensure that the company spends, in every
financial year, at least two per cent of the average net profits of the company
made during the three immediately preceding financial years, in pursuance of
its CSR Policy.
(B) The company shall give preference to the local area and areas around it where
it operates, for spending the amount earmarked for CSR activities.
(C) If the company fails to spend such amount, the Board shall, in its report,
specify the reasons for not spending the amount.
(D) Companies may build CSR capacities of their own personnel as well as those
of their Implementing agencies through Institutions with established track
records of at least three financial years. However, such expenditure shall not
exceed five percent of total CSR expenditure of the company in one financial
year.
Question 4
(a) Zebra Private Limited was incorporated in the year 2010 under the Companies Act, 1956
by three brothers namely A, B and C. All the three were promoter-directors named in the
Articles of Association and subscribed for 100 shares each in the company through
Memorandum of Association. Thereafter from time to time, further shares were allotted in
proportion to one-third to each of them and in due course the company started earning
substantial profits. Due to greed of money, the two brothers, namely A and B joined
hands together and assumed complete control of the company leaving their brother C in
lurch. Both the brothers got further shares allotted to themselves, thereby their joint
holding increased from 66 % to 90 %, while the shareholding of C got reduced from 33 %

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FINAL EXAMINATION: NOVEMBER, 2014

to 10 %. No notice of any Board Meeting was sent to C, who was sidelined and was also
removed as a director. Aggrieved by the decision taken by his two brothers at his back, C
seeks your advice for taking out appropriate proceedings before the Court or Judicial
authority of competent jurisdiction. Also suggest the nature of reliefs he may claim while
filing the case.
(8 Marks)
(b) M/s Eternal Health Limited was facing acute financial difficulty as operations were
continuously disrupted due to (a) non-availability of raw material (b) successive drought
in its marketing areas and loss of demand and (c) frequent breakdown due to nonreplacement of old plant and machinery. On the verge of liquidation, the Management
proposes one last ARRANGEMENT between creditors and the company, whereby the
creditors have to forego 50 % of their dues to the company. This has evoked strong
protest from some of the creditors who may block the arrangement. You are requested to
examine the arrangement in the light of the Companies Act, 1956 and advise the course
of action/procedure to be adopted by the company to implement the same.
(8 Marks)
Answer
(a) Oppression and Mismanagement: Remedies (Sections 397 and 399 of the
Companies Act, 1956)
Under section 397 of the Companies Act, 1956, if on an application by any member of a
company, the Company Law Board (CLB) is of the opinion that
(i)

the company's affairs are being conducted in a manner which is prejudicial to public
interest or in a manner oppressive to any member(s); and

(ii)

to wind up the company would unfairly prejudice such member(s), but that otherwise
the facts justify winding up of the company on just and equitable ground;

the CLB may, with a view to bringing to an end the matters complained of, make such
order as it thinks fit.As per section 399, a member holding 10% shares is entitled to file such a petition.
In the present case, C was holding 33% shares in the company which is nothing but a
quasi partnership and was participating in the management. By further allotment of
shares in a clandestine manner and without the consent of C, his shareholding was
reduced to 10% while the shareholding of his brothers stood at 90%. This is a serious act
of oppression of C, a minority shareholder. On similar facts, it was held by Supreme
Court in Dale & Carrington Invt. Private Ltd. Vs. P. K. Prathpan, (2004) 122 Comp cases
175 (SC) that assuming meetings of board of directors did take place, the manner in
which the shares were issued in favour of R without informing other shareholders about it
and without offering them to any other shareholder, was totally mala fide and the sole
object of R in this was to gain control of the company by becoming a majority
shareholder. This was clearly an act of oppression on the part of R. The only relief that
has to be granted in the present case was to undo the advantage gained by R through

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his manipulation and fraud. The allotment of all the additional shares in favour of R had
to be set aside.
Section 397 protects the rights of shareholders and not as a director. It has, however,
been held by CLB in a number of cases that in a family company like the present one,
removal of the promoterdirector is also an act of oppression.
In the facts and circumstances of this case, C is advised to file a petition under section
397 of the Act. Being a 10% shareholder he is entitled to file the petition before the
Principal Bench of CLB at New Delhi.
Reliefs: He may seek the following reliefs:
(i)

the alleged allotment of further shares be declared null and void and set aside;

(ii)

the alleged removal of the petitioner, C be declared as null and void and set aside;

(iii) The Board of directors be re-constituted with the petitioner and his two brothers and
an independent person, as the Chairman of the Board of directors to be appointed
by the CLB with casting vote;
(iv) the petitioner may be appointed as Managing director of the company having
substantial powers of management.
(b) Scheme of Compromise or arrangement (Section 391 of the Companies Act, 1956)
The scheme provides for sacrifice on the part of creditors as they have to forego 50% of
their dues to the company. The company is sick and therefore it can be considered as a
company liable to be wound up within the meaning of section 390(a) of the Companies
Act, 1956. The proposed scheme involves as a compromise or arrangement with
creditors and it attracts section 391.
While the company or any creditor or member can make application to the court under
section 391, it is usual for the company to make an application. On such application, the
court may order that a meeting of creditors and/or members be called and held as per
directions of the court [Section 391(1)].
Company must arrange to send notice of meeting to every creditor containing a
statement setting forth the terms of compromise or arrangement explaining its effect.
Material interest of directors, Managing Director, or manager of the company in the
scheme and the effect of scheme on their interest should be fully disclosed [Section
393(1)(a)]. Advertisement issued by the company must comply with the requirements of
section 393(2). At the meetings convened as per directions of the court, majority in
number representing at least % in value of creditors present and voting (either in person
or by proxy if allowed) must agree to compromise or arrangement.
Thereafter the company must present a petition to the court for confirmation of the
compromise or arrangement. The notice of application made by the company will be
served on the Central Government and the Court will take into consideration

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representation, if, any made by the Central Government (Section 394A). The Court will
sanction the scheme, if it is satisfied that the company has disclosed all material facts
relating to the company e.g. latest financial position, auditor's report on accounts of the
company, pendency of investigation of company, etc.
Copy of Court order must be filed with the Registrar of Companies and then only the
order will come into effect [Section 391(3)]. Copy of court order must be annexed to
every Memorandum of Association issued thereafter. [Section 391(4)].
If the court sanctions the scheme, it will be binding on all members and creditors even
those who were dissenting [Section 391(2)]. (Case Law: S. K. Gupta Vs. K. P. Jain, AIR
1979 SC 374)
Question 5
(a) JKL Company Limited has gone into winding up. The winding up proceedings have
already commenced but the winding up could not be completed within a period of two
years.
Referring to the provisions of the Companies Act, 1956, answer the following:
(i)

As the Official Liquidator of the company what duties you are required to perform in
relation to filing of petition.

(ii)

What shall be your answer in case the company in question is a Government

company?

(iii) What consequences follow in case the Official Liquidator does not comply with the
legal requirements in relation to the above?
(8 Marks)
(b) Referring to the provisions of the Banking Regulation Act, 1949, examine the validity of
the following:
(i)

Accounts and Balance Sheet along with auditor`s report has been filed with Reserve
Bank of India after nine months from the end of the period to which these relate.

(ii)

Trinity Bank Limited acquired a building from ABC College in discharging a term
loan advance. The building had been mortgaged as security with the bank and the
college had failed to repay the loan. The bank proposes to retain the building with it
and let out on commercial basis to shops.
(8 Marks)

Answer
(a) Winding up: Duties of Official Liquidator: Consequences of failure (Section 551 Of
the Companies Act, 1956)
(i)

According to Section 551(1) of the Companies Act, 1956, when the winding-up of a
company is not concluded within one year after its commencement the liquidator
shall, unless exempted from so doing either wholly or in part by the Central
Government, within two months of the expiry of such year and thereafter, until the

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winding-up is concluded, at intervals of not more than one year or at such shorter
intervals, if any, as may be prescribed, file a statement in the prescribed form.
The statement shall contain necessary particulars and be audited by a person
qualified to act as auditor of the company. These particulars must be with respect to
the proceedings in and position of the liquidation.
In the case of a winding-up being carried on by or under the supervision of the
Court, the aforesaid statement is to be filed in the Court but in the case of a
voluntary winding-up, it is to be filed with the Registrar. However, an audit is not
necessary in case of winding-up by the Court, where provisions of Section 462 of
the Companies Act, 1956, apply.
Simultaneously with the filing of a copy of the statements of account in the Court, a
copy shall be filed with a Registrar. [Section 551 (2)]
(ii)

According to section 551(2A) of the Companies Act, 1956, in the case of a

government company, the copy of the statement as mentioned in section 551(1)
shall be filed with;
(a) the Central Government if that Government is a member of the Government
company, or
(b) the State Government if that Government is a member of the Government
company, or
(c) the Central Government and any State Government, if both the Governments
are members of the Government Company.

(iii) If a liquidator fails to comply with any of the above requirements, he shall be
punishable with fine which may extend to five thousand rupees for every day during
which the failure continues.
However, if the liquidator makes willful default in causing the statement referred to
in section 551(1) to be audited by a person qualified to act as auditor of the
company, the liquidator shall be punishable with imprisonment for a term which may
extend to six months, or with fine which may extend to ten thousand rupees, or with
both.
(b) Delay in Filing Accounts a Balance Sheet: Acquisition of Properties for Security
(Sections 31 and 6 of the Banking Regulation Act, 1949):
(1) Filing of Accounts and Balance Sheet: According to section 31 of the Banking
Regulation Act, 1949, the accounts and balance sheet along with auditor's report
shall be published in prescribed manner and three copies thereof shall be furnished
as returns to the Reserve Bank of India within three months from the end of the
period to which they refer. The Reserve Bank of India may extend the period by a
further period of not exceeding three months.

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FINAL EXAMINATION: NOVEMBER, 2014

In the given question, accounts and balance sheet along with auditor's report has
been filed with the Reserve Bank of India after nine months from the end of the
period to which these relate, which is not valid.
(2) Acquisition of Property: Section 6 of the Banking Regulation Act, 1949, provides a
list of activities which Banking Company may engage in addition to the business of
banking, wherein it is provided that among other activities the Banking company
may also engage in:
acquiring and holding and generally dealing with any property or any right, title or
interest in any such property which may form the security or part of the security for
any loans or advances or which may be connected with any such security.
As per the given question, Trinity Bank Limited proposes to retain and let out on
commercial basis to shops, the building that the Bank has acquired from ABC
college in discharge of a term loan advanced and which the college failed to repay.
In the light of the provisions of section 6 of the Banking Regulation Act, 1949, and
facts of the case, Trinity Bank Limited's proposal to retain the building with it and
letting out on commercial basis is valid.
Question 6
(a) (i)

A group of 8 individuals together with a producer institution approached the

Registrar for incorporation of a producer company under Section 581 of the
Companies Act, 1956. Can the Registrar go ahead with the registration and
incorporation? Discuss.

(ii)

Explain the provisions under the Companies Act, 1956 for amendment of Articles of
Association of a producer company.
(8 Marks)

(b) In what way does the Companies Act, 2013 restricts the non-cash transactions involving
directors of a public limited company? Explain.
(8 Marks)
Answer
(a) (i)

Formation and Registration of producer company: According to Section 581C of the

Companies Act, 1956, any ten or more individuals, each of them being a producer,
or any two or more producer institutions, or a combination of ten or more individuals
and producer institutions, desirous of forming a producer company having its
objects specified in section 581B and otherwise complying with the requirements
and provisions of this Act in respect of registration, may form an incorporated
company as a Producer Company under this Act.
If the Registrar of Companies is satisfied that all the requirements of this Act have
been complied with in respect of registration and matters precedent and incidental
thereto, he shall, within thirty days of the receipt of the documents required for
registration, register the memorandum, the articles and other documents, if any, and
issue a certificate of incorporation under this Act.

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In the problem given here, a group of 8 individuals together with a producer

company approached the registrar for incorporation of a producer company. Since
the requirements "combination of ten or more individuals and producer institutions"
of this provision has not been complied with in respect of registration, so registrar
cannot proceed with the registration and incorporation of the company.
(ii) Amendment of articles (Section 581-I of the Companies Act, 1956): Any
amendment of the articles shall be proposed by not less than two-third of the
elected directors or by not less than one-third of the members of the producer
company, and adopted by the members by a special resolution.
A copy of the amended articles together with the copy of the special resolution, both
duly certified by two directors, should be filed with the Registrar within thirty days
from the date of its adoption.
(b) Restrictions on non-cash transactions involving Directors (Section 192 of the
Companies Act, 2013):
Section 192 of the Companies Act, 2013 provides for restrictions on non-cash
transactions involving directors. According to the provision,
(i)

No company shall enter into an arrangement by which

(a) a director of the company or its holding, subsidiary or associate company or a
person connected with him acquires or is to acquire assets for consideration
other than cash, from the company; or
(b) the company acquires or is to acquire assets for consideration other than cash,
from such director or person so connected, unless prior approval for such
arrangement is accorded by a resolution of the company in general meeting
and if the director or connected person is a director of its holding company,
approval shall also be required to be obtained by passing a resolution in
general meeting of the holding company.

(ii)

The notice for approval of the resolution by the company or holding company in
general meeting shall include the particulars of the arrangement along with the
value of the assets involved in such arrangement duly calculated by a registered
valuer.

(iii) Any arrangement entered into by a company or its holding company in

contravention of the provisions of this section shall be voidable at the instance of
the company unless (a) the restitution of any money or other consideration which is the subject-matter
of the arrangement is no longer possible and the company has been
indemnified by any other person for any loss or damage caused to it; or
(b) any rights are acquired bona fide for value and without notice of the
contravention of the provisions of this section by any other person.

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FINAL EXAMINATION: NOVEMBER, 2014

Question 7
Attempt any four:
(a) (i)

Mr. P has won a big lottery and wants to remit US Dollar 20,000 out of his winnings
to his son who is in USA. Advise whether such remittance is possible under the
Foreign Exchange Management Act, 1999.

(ii)

Mr. Z is unwell and would like to have a kidney transplant done in USA. He would
like to know the formalities required and the amount that can be drawn as foreign
exchange for the medical treatment abroad.
(4 Marks)

(b) X a member of the Competition Commission of India was removed by the Central
Government on the grounds that he had acquired financial interest likely to affect
prejudicially his functions as a member. X challenged his removal by the Central
Government claiming that the Central Government had no authority to pass order for
removal. Clarify whether X`s contention is right as per the provisions under the
Competition Act, 2002.
(4 Marks)
(c) Explaining the meaning of the term Insider Trading and Price Sensitive Information,
state the manner in which the Companies Act, 2013 prohibits the above.
(4 Marks)
(d) Referring to the provisions of the Securitisation & Reconstruction of Financial Assets &
Enforcement of Security Interest Act, 2002 state the circumstances under which the
Reserve Bank of India may cancel the certificate of registration granted to a
Securitisation Company.
(4 Marks)
(e) X Inc is a company registered in UK and carrying on Trading Activity, with Principal Place
of Business in Chennai. Since the company did not obtain registration or make
arrangement to file Return, the State VAT Officer having jurisdiction, intends to serve
show cause notice on the Foreign Company. As Standing Counsel for the department,
advise the VAT Officer on valid service of notice.
(4 Marks)
Answer
(a) Remittance of Foreign Exchange (Section 5 of the Foreign Exchange Management
Act, 1999): According to section 5 of the FEMA, 1999, any person may sell or draw
foreign exchange to or from an authorized person if such a sale or drawal is a current
account transaction. Provided that Central Government may, in public interest and in
consultation with the reserve bank, impose such reasonable restrictions for current
account transactions as may be prescribed.
As per the rules, drawal of foreign exchange for current account transactions are
categorized under three headings1.

Transactions for which drawal of foreign exchange is prohibited,

2.

Transactions which need prior approval of appropriate government of India for

drawal of foreign exchange, and

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3.

Transactions which require RBI's prior approval for drawl of foreign exchange.

(i)

Mr. P wanted to remit US Dollar 20,000 out of his lottery winnings to his son
residing in USA. Such remittance is prohibited and the same is included in the
Foreign Exchange Management (Current Account Transactions) Rules, 2000.
Hence Mr. P cannot withdraw foreign exchange for this purpose.

(ii) Remittance of foreign exchange for medical treatment abroad requires prior
permission or approval of RBI when the expenditure in foreign currency exceeds the
estimate of hospital or doctor abroad or estimate from doctor in India in that field of
treatment.
Therefore, Mr. Z can draw foreign exchange up to the estimate of hospital/ doctor
abroad or estimate from doctor in India in that field of treatment and prior
permission/ approval of RBI is required.
(b) Removal of Member of Competition Commission (Section 11 of the Competition
Act, 2002):
Provisions of section 11(2) of the Competition Act, 2002 empowers the Central
Government to remove, by an order, a member of the Competition Commission of India
from his office if such member has acquired such financial interest as is likely to affect
prejudicially his functions as a Member of the Competition Commission.
However, provisions of section 11(3) of the said Act put some restrictions on such
powers of the Central Government. According to this section, in case as stated in the
question, the Central Government wants to remove a member of the Competition
Commission from his office, it has to make a reference to the Supreme Court. The
Supreme Court shall hold an enquiry in accordance with the procedure formulated by it
and then report that the member in question ought to be removed from his office.
Thus, the Central Government can remove a member of Competition Commission from
his office by following the above procedure. So, contention of X is incorrect with respect
to his removal by the Central Government.
(c) Insider trading; price-sensitive information; prohibition (Section 195 of the
Companies Act, 2013)
Meaning of "insider trading":
(i)

An act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or

deal in any securities by any director or key managerial personnel or any other
officer of a company either as principal or agent if such-director or key managerial
personnel or any other officer of the company is reasonably expected to have
access to any non-public price sensitive information in respect of securities of
company; or

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(ii)

An act of counseling about procuring or communicating directly or indirectly any

non-public price-sensitive information to any person.

"price-sensitive information"- means any information which relates, directly or indirectly,

to a company and which if published is likely to materially affect the price of securities of
the company.
Prohibition on insider trading of securities - Section 195 of the Companies Act, 2013
provides for prohibition on insider trading of securities. According to it, no person
including any director or key managerial personnel of a company shall enter into insider
trading. But if any communication is required in the ordinary course of business or
profession or employment or under any law, then the above prohibition does not apply.
If any person contravenes the provisions of this section, he shall be punishable with
imprisonment for a term which may extend to five years or with fine which shall not be
less than five lakh rupees but which may extend to twenty-five crore rupees or three
times the amount of profits made out of insider trading, whichever is higher, or with both.
(d) Cancellation of Certificate of Registration (Sections 3 and 4 of the securitisation &
reconstruction of financial assets & enforcement of Security Interest Act, 2002)
As per the section 4 of the Securitisation & Reconstruction of Financial Assets
&Enforcement of security Interest Act, 2002, the Reserve Bank may cancel a certificate
of registration granted to a securitization company or a reconstruction company, if such
company(i)

ceases to carry on the business of securitisation or asset reconstruction; or

(ii)

ceases to receive or hold any investment from a qualified institutional buyer; or

(iii) has failed to comply with any conditions subject to which the certificate of
registration has been granted to it; or
(iv) at any time fails to fulfil any of the conditions referred to in clauses (a) to (g) of subsection (3) of section 3; or
(v) fails to(a) comply with any direction issued by the Reserve Bank under the provisions of
this Act; or
(b) maintain accounts in accordance with the requirements of any law or any
direction or order issued by the Reserve Bank under the provisions of this Act;
or
(c) submit or offer for inspection its books of account or other relevant documents
when so demanded by the Reserve Bank; or
(d) obtain prior approval of the Reserve Bank required under sub-section (6) of
section 3.

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(e) Service of notice on foreign company (Section 383 of the Companies Act, 2013):
According to section 383 of the Companies Act, 2013, any process, notice, or other
document required to be served on a foreign company shall be deemed to be sufficiently
served, if addressed to any person whose name and address have been delivered to the
Registrar under section 380 of the Companies Act, 2013, and left at, or sent by post to,
the address which has been so delivered to the Registrar or by electronic mode. Hence,
the VAT Officer may serve the show cause notice by following the above provisions.
Assumption: It is assumed that X Inc is a foreign company within the meaning of section
379 of the Companies Act, 2013.

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