Practice Paper on Corporate and Allied Laws for CA Final May 2015 Examination Question 1 is compulsory (attempt any four sub-parts).

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1 Practice Paper on Corporate and Allied Laws for CA Final May 2015 Examination Question 1 is compulsory (attempt any four sub-parts). Answer any other five questions from rest of the Paper Q.1.(a). ABC Limited, an unlisted company, incorporated several years ago with 1100 members, is transiting to the Companies Act, 2013 pursuant to enactment of its various provisions by MCA from time to time. It s paid up share capital as at 31 st March, 2014 is Rs. 25 crores (previous year Rs. 25 crores) and the turnover for the period ended on this date is Rs. 550 crores (previous year Rs. 470 crores). It s application for listing is also pending for vetting before SEBI. Its articles of association require appointment of SSD on suo motu basis in the next half year next to the year in which its turnover exceeds Rs. 500 crores. At present, the company do have the following directors in its Board of Directors: 1) Mr. A, Managing Director, having 5% shareholding in ABC Limited; 2) Mr. B, Whole Time Director; 3) Mr. C, Director (Finance); 4) Mr. D, Director (Legal) ABC Limited has approached you to advise about the following appointments for an initial period of 5 years as well as the changes required to be made in its BOD and/or its committees pursuant to the 2013 Act: a) Mr. R, brother of Mr. B, as Director (Operations) of the Company at a monthly remuneration of Rs. 3,00,000 p.m. and CEO of its holding company DEF Limited at a monthly remuneration of Rs. 2,75,000 p.m. (similar appointments made by other companies in industry at the same amount); b) Mr. M, brother of Mr. C and a Chartered Accountant in practice to appear before authorities for hearing of income taxes cases, as and when required, at a fees of Rs. 25,000 per hearing; c) Mrs. R, as SSD in the Company; d) Ms. P, as SSD in the Company. Her father is a trustee in NGO which receives 40% of its donations from ABC Limited, for the education of needy children; e) Ms. T, as SSD in the Company, who has defaulted in filing of annual accounts and annual returns in PQR Private Limited for a continuous period of 3 years till the year , while being a director in charge of finance department in PQR (P) Ltd.; f) Ms. Q, as SSD in the Company, being a fresh qualified CS, who is already executive director in other rival company. Assume that none of the proposed appointments in (a) to (f) hold any share in the Company ABC Limited. (5 Marks) Hint: The Company is required to appoint atleast 1 woman director within 1 year w.e.f. 1 st April, 2014, i.e. by 31 st March, 2015 [Proviso to Section 149(1) and Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014]; Every Public Company shall have atleast 2 Independent Directors on its Board), if (as per its latest audited F.S.): 1. Its Paid-up Share Capital > Rs. 10 Crores; or 2. Its Turnover > Rs. 100 Crores; or 3. Its Loans, Debentures, Deposits > 50 Crores Every listed company shall disclose in the Board s report, the prescribed particulars about every employee of the company, who if employed throughout the financial year or part thereof, was in receipt of remuneration in that year which, in the aggregate, or as the case may be, at a rate which, in the aggregate, is in excess of that drawn by the managing director or whole-time director or manager and holds by himself or along with his spouse and dependent children, not less than 2% of the equity shares of the company [Section 197(12)]. This requirement though is not applicable to ABC Limited (it being an unlisted company) despite Mr. A holding 5% shareholding in ABC Limited; Section 151 of the Companies Act, 2013 and Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014, provides the right (option) to a listed company for appointing SSD subject to fulfillment of certain conditions. But since these provisions are applicable only to a listed company, it follows that the companies other than listed companies (ABC Limited in the given question) may appoint SSD in accordance with the provisions contained in Articles of Association of the Company; SR Approval under Section 188 regarding Office or Place of Profit need not be taken for Mr. R because the appointment has taken place at a remuneration which is at Arm s Length Prices; SR Approval under Section 188 regarding Office or Place of Profit need not be taken for Mr. M because the appointment is on case to case basis and not on regular basis; Appointment of Mrs. R as SSD although fulfils requirement to appoint woman director and SSD but she cannot be stated as Independent Director because her relative (Mr. R) is employee in the Company; Appointment of Ms. P as SSD although fulfils requirement to appoint woman director and SSD but she cannot be stated as Independent Director because her relative (her father) is a trustee of NGO that receives > 25% receipts from Company; Appointment of Ms. T as SSD although fulfils requirement to appoint woman director, SSD and Independent Director. The disqualification for annual filing default shall not be applicable on Ms. T because until , the disqualification u/s 274(1)(g) of Companies Act, 1956, was not applicable on a private company. CA Kamal Garg [B. Com (H), FCA, DISA (ICAI)], Page 1

2 Q.1.(b). Q.1.(c). Q.1.(d). Appointment of Ms. Q as SSD fulfils the requirement to appoint woman director, SSD and Independent Director and but the restriction about appointment in rival company will restrict Ms. Q to be appointed as SSD in ABC Limited. The promoters of a listed public company propose to have the strength of the Board of directors as eleven. They also propose to make the managing director and whole time directors as directors not liable to retire by rotation. Advise about the following matters: (i) Maximum number of persons, who can be appointed as directors not liable to retire by rotation. (ii) How many of the remaining directors will have to retire by rotation every year at the annual general meeting? (iii) For the purpose of increasing the strength, certain nominations were received from shareholders to nominate candidates for contesting elections. One of the nominations was rejected by the Directors because it was received after sending the notice of AGM and that too after the working hours of the last day on which nomination should have been received. (iv) Can the BOD increase the strength of company s directors to eighteen through by appointing additional directors through passing single resolution. If yes, then whether these additional directors are liable for rotation? (5 Marks) Hint: The proposal to make the managing director and whole time directors as directors not liable to retire by rotation is in order. Total number of directors: 11. As per the Section 152(6), at least 2/3 rd shall be rotational directors. Hence, rotational directors: 8 (i) Therefore, maximum number of persons, who can be appointed as directors not liable to retire by rotation is 3 (ii) Three directors shall retire at the annual general meeting. Section 160 provides that a person, not being a retiring director shall be eligible for appointment as a director at any general meeting, if he or some member, intending to propose him has given atleast 14 days notice before the meeting about proposal for such candidature. Further, it was held that tender of nomination need not be before a particular time on last day [Oriental Benefit and Deposit Society Ltd. v Bharat Kumar K. Shah]Thus, the rejection of nominations by the Directors is invalid. Section 162 which prohibits the appointment of directors by passing single resolution is not applicable to the appointments of directors made by company otherwise than in general meeting. Since, the appointment of Additional Directors (ADD) is made at the Board Meeting under the provisions of Section 161, there is no prohibition to make such an appointment. However, the articles must be amended by passing SR to increase the strength of directors by virtue of first proviso to Section 149(1) & (2). Since the ADD are appointed at Board Meeting instead of General Meeting, they need not retire u/s 152(6) because only those directors who are appointed at general meeting are subjected to retirement at each AGM, unless AOA provide otherwise. Suresh, a director of ABC Ltd. made default in filing of annual accounts and annual returns with ROC for a continuous period of 3 financial years ending on Examine the validity of the following under Companies Act, 2013: (i) Whether Suresh can continue to be a director of ABC Ltd., and also EF Ltd., where he is a director. Also state whether he can be reappointed as a director in ABC Ltd. as well as EF Ltd.; [Hint: In ABC Limited he need to vacate the office by virtue of Section 167 read with Section 164(2). In EF Limited he can continue as director. But in both the companies he cannot be reappointed as director] (ii) Would your answer be still the same in case Suresh is a nominee director of a Public Financial Institution; [Hint: Such provisions not applicable to nominee directors] (iii) What would be your answer in case the defaulting company (i.e. ABC Ltd.) is a private company; [Hint: Answer will remain same because under Companies Act, 2013 the provisions of Section 164(2) and 167 are applicable to all the Companies] (iv) Can Mr. Suresh be appointed as alternate director for Mr. Dinesh, a director in LMN Limited, who would be out of India for 4 months, if the company has filed application for rectifying annual filing default under CLSS, 2014, on 10 th August, 2014; [Hint: Yes] (v) Can Mrs. Suresh be appointed as alternate director for Mr. Vinesh, a director in LMN Limited, who would be out of India for 4 months. Mrs. Suresh was not elected as director by members of LMN Limited in the election conducted during last year; [Hint: No because of restriction contained in Section 169. But this restriction will be applicable only if Mrs. Suresh contested elections for being reappointed instead of being taking the fresh appointment] (vi) Can Mr. Naresh, brother of Mr. Suresh, be appointed as alternate director by and for Mr. Jinesh, a director in LMN Limited, who would be out of India for 4 months. [Hint: No because it will result in assignment of office u/s 166. Alternate Director can be appointed by the BOD and not by a Director] (5 Marks) Mr. R, S, T, U and V are the directors in RST Limited (Paid up capital Rs. 8 crores and average turnover Rs. 1,000 crores). Each one is drawing a remuneration of Rs. 75,000 p.m. On the secretarial audit of this Company for the financial year , the following information was identified by the secretarial auditor: (i) RST Limited has rectified its s default in repayment of statutory dues and public deposits in the current year; CA Kamal Garg [B. Com (H), FCA, DISA (ICAI)], Page 2

3 Q.1.(e). [Relevant while assessing Section 191 implications] (ii) A mortgage was created over the property of the company. The loan was advanced by the son of Mr. R. All the directors already knew this fact. But he neither disclosed his interest nor abstained from voting while approving the said transaction; [Refer Section 184 and 189] (iii) RST Ltd. entered into a contract with M and Co. Ltd. for purchase of raw materials of Rs. 2,50,000 at the prevailing market rate. Mr. S and Mrs. S were respectively holding shares of the value of 1% and 1.5% of the paid up capital of M and Co. Ltd. Mr. S did not disclose the nature of interest; [Refer Section 184 and 189] (iv) 60% of equity share capital in RST Limited was allotted to ZEN Limited. Aggrieved with this, Mr. T, U and V offered their resignations and the following terms were settled: Mr. T would be given consideration for his resignation for his unexpired tenure of 3 years; [Refer Section 191 read with Section 202] The firm of Mr. U would be appointed as sole selling agent of RST Limited whereby the firm would be paid a commission of 5% of sales affected by it. The sales quota fixed for the firm is Rs. 250 crores; [Refer Section 188] Mr. V shall continue in the office subject to the condition(s) that he would be acquiring 3% equity in ZEN Limited after 6 months at face value [Refer Section 194] Advise in brief the legal implications involved in above mentioned information pursuant to Companies Act, (5 Marks) An Inter-state co-operative society was incorporated on 1st May 2013 as a Producer company under the provisions of the Companies Act, 1956/ Advise the company in respect of the following proposals: 1. The company decides to have 18 Directors on its Board after incorporation. 2. Transferability of shares and voting rights; 3. Process for reconversion from Producer Company to Inter-state co-operative society; 4. Issue of bonus shares; and 5. Position of directors in the following circumstances: X a Director of ABC Ltd., a producer company has made a default in payment of loan taken from a company and default continues for 60 days. Z a Director of the above company could not call the AGM for the company due to some natural calamity occurred three days before the Schedule date. (5 Marks) Hint: Provisions pertaining to producer companies are contained in Part IX-A of the Companies Act, As per Section 465 of Companies Act, 2013, until new provisions of producer companies are notified, the provisions contained in Companies Act, 1956 shall remain in force. (i) As per Section 581O, a producer company can have maximum 15 directors on its board. However, an inter-state cooperative society incorporated as a producer company can have more than 15 directors for a period of 1 year from the date of incorporation as a producer company. (ii) As per Section 581ZD, transfer of shares is permitted only to active members at par value. However, prior approval of Board of Directors is required for the said purpose. (iii) The share capital of a producer company shall comprise of equity shares only. The shares held by a member shall be in proportion to the patronage of that company. Patronage means the use of services offered by the producer company to its members by participation in its business activities. A producer company shall be a body corporate, limited by shares. All provisions shall apply as if it is a private company. However, it shall not be considered as a private company or a public company. Where membership consists of only individuals, every member shall have a SINGLE vote. Where membership consists of only producer institutions, For the first year of registration voting right shall be determined based on the shareholding by such producer institutions. For the other years based on the participation in the business of the producer company in the previous year. Where membership consists of both individuals and producer institutions, every member shall have a SINGLE vote. The Articles of Association may provide for conditions, subject to which, membership shall be given to a person or producer institution and also the manner in which the voting rights shall be exercised by the members. The voting rights of the members can also be restricted to active members, subject to authorization by the Articles of Association. (iv) Reconversion of Producer Company into Inter State Cooperative Society is covered under Section 581ZS of Companies Act, The provisions laid down are as follows:- (a) Eligibility for reconversion shall exist only if the earlier conversion was under section 581J. (b) Application has to be made to the High Court. (c) > 2/3 rd of the consenting members at Genera Meeting can apply. (d) > 3/4 th in value of total creditors can apply. (e) The High Court shall direct for the Court convened meetings and specify other terms and conditions CA Kamal Garg [B. Com (H), FCA, DISA (ICAI)], Page 3

4 Q.2.(a). (f) The High Court may stay suits and proceedings. (g) Reconversion must be approved by > 3/4 th in value of members or creditors, present and voting. (h) All material facts such as latest financial position, auditor s report, any pending litigation etc., shall have to be disclosed to the High Court. (i) If majority approves the reconversion, the High Court may sanction the reconversion. If sanctioned, it shall be binding on all members, creditors and the producer company. (j) The High Court shall have to be thereafter filed with the Registrar of Companies (k) Thereafter, application has to be made to Registrar of Multi-State Cooperative Society within 6 months of High Court order. (v) Issue of bonus shares shall be governed by Section 581ZJ of Companies Act, The points to be taken care of are as follows:- (a) General Reserve capitalization (b) Shares be issued in proportion to the shares held on issue date (c) The Bonus Issue has to be recommended by the Board of Directors. (d) Resolution has to be passed in the general meeting for approval by the shareholders. (vi) Position of directors in the following circumstances: In the given case, X is a Director of ABC Ltd., a producer company. The producer company has made a default in payment of loan taken from a company and default continues for 60 days. Disqualification and consequent vacation of office of director shall occur only when the default continues for a period 90 days or more. Thus, no vacation of office by the director under Section 581ZD. The office of director Z shall not become vacant as he could not call the Annual General Meeting for the company due to some natural calamity. The Board of directors of ABC Ltd. met thrice in the year 2014 and the 4th meeting, though called could not be held for want of quorum. Examine with reference to the relevant provisions of the Companies Act, 2013, the following: (i) Whether any provisions of the Companies Act, 2013 have been contravened? (ii) Is a director bound to attend the Board meetings and when his frequent absence there-from may be excused? Further, the articles of association of a company provide that the meeting of the Board of Directors of the company will be held on the last Friday of every month. The secretary of the company as a result does not serve the notice to the individual directors of the company. Consequently, a meeting of the Board of directors was held on The meeting was attended by all the directors with the exception of two directors out of a total of 10 directors and certain resolutions were passed. The two absentee directors object to the meeting and the proceedings of the meeting for want of notice. Under the Companies Act, 2013, decide: (i) Whether the objection raised by the two absentee directors is valid? (ii) Would your answer be the same in case the secretary of the company, instead of sending notice on a usual format to the individual directors, sent a copy of the articles of association to each one of the directors? In the second BOD meeting during the year 2014 of ABC Ltd. 4 directors were physically present and 4 participated through video conferencing to discuss buy back of shares and approval of financial statements. After completion of discussion on a matter voting was done. 3 (1 through e mode) directors voted in favour of the motion, 2 directors voted against the motion while 3 (1 through e mode) directors abstained from voting. (i) State w.r.t. the provisions of the Companies Act, 2013 whether the motion was carried or not. (ii) If the motion is carried out with majority, then whether it will remain valid if the minutes in this respect were not signed even in the subsequent Board Meeting. (iii) Would your answer be different if this Board Meeting agenda was carried through circulation instead of video conferencing In the third Board meeting of ABC Ltd. held in the year 2014, at Chennai at 11 a.m., at the starting of meeting, the numbers of directors present were 7. The total directors were 10. The board transacted 10 items in the meeting. At 12 noon after the completion of 4 items in the agenda, 4 directors left the meeting. Examine the validity of these transactions. (4 Marks) Hint: Provisions of Companies Act shall not be deemed to have been contravened, if a meeting was called to comply with the requirements of this section, but could not be held for the want of quorum. No, the director is not bound to attend all the Board meetings, but he must try to attend all or maximum meetings. If a director fails to attend the Board meetings for a regular period of 12 months then he would be required to vacate the office u/s 167 irrespective of leave of absence being given by the BOD. No notice is to be given to the directors, if the Board Meeting is held in accordance with the Articles, as the directors are presumed to have knowledge of articles. There is no need to send the copy of Articles to the director. It was held in Arunachalam Chettiar (AL AR AR) v Kaleeswarar Mills Ltd, that if the directors are duly informed that, in future, the Board meeting would be held on first Saturday of every month, it would be sufficient compliance of the provisions of 2013 Act. Approval of financial statements cannot be carried out through Video Conferencing. The motion was carried out in other case. [Also refer Section 175 for Resolution by Circulation] CA Kamal Garg [B. Com (H), FCA, DISA (ICAI)], Page 4

5 Q.2.(b). Q.2.(c). Q.2.(d). Directors 10 Quorum - higher of 1/3 rd or 2 04 Directors at the start 07 Resolutions passed before 4 directors left 04 - Valid Resolutions passed after 4 directors left 06 - Invalid. Premier Housing Finance Co. Limited is prepared to give housing loans to the employees of Supreme Chemicals Limited subject to the condition that the loans are guaranteed by Supreme Chemicals Limited. Supreme Chemicals Limited is not a listed company and the company will be exceeding the limits prescribed under the Companies Act, 2013 by providing such guarantee. Advise the company about the legal requirements under the Companies Act, 2013 to give effect to the above proposal. What would be your advice, if the company was required to provide security instead of guarantee? (4 Marks) Hint: Section 186 The approval of Board must be obtained by passing a unanimous resolution in a board meeting. The approval of members must be obtained by passing a special resolution in a general meeting. If the company has taken any term loan from any public financial institution, then its approval shall be obtained, if there is default. No default w.r.t. deposits must be subsisting; otherwise the company cannot give such guarantee. The same provisions are applicable for providing security, but it is mandatory for the company to pass a special resolution before providing the security. M/s ABC Ltd. had power under its memorandum to sell its one of the undertaking out of ten undertakings to another company having similar objects. The net worth of ABC Limited is Rs crores and its total investment in its various undertakings is Rs. 200 crores in equal proportion. One of its undertakings generates 30% of total income for the company but its value in line with ABC Limited is only 10% of company's value. The Articles of company empower the directors to sell or otherwise deal with the property of the company. The Shareholders passed an ordinary resolution for the sale of its assets on certain terms and required the directors to carry out the sale. The Directors refused to comply with the wishes of the shareholders where upon it was contended on behalf of the shareholders that they were the principal and directors being their agents were bound to give effect to their decision. Decide: (i) Whether the contention of shareholders against the non-compliance of their wishes by the directors is tenable. (ii) Can shareholders usurp the powers which by articles are vested in directors by passing a resolution in GM (4 Marks) Hint: Section 180(1)(a) states that the Board of Directors of a company shall exercise certain powers only with the consent of the company by a special resolution, namely with respect to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings. Meaning of Undertaking: "Undertaking" shall mean an undertaking: in which the investment of the company exceeds 20% of its net worth as per the audited balance sheet of the preceding financial year; or which generates 20% of the total income of the company during the previous financial year; Net Worth = Paid up Share Capital (+) Reserves created out of Profits (+) Securities Premium A/c (-) Accumulated Losses (-) Deferred Expenditure (-) Miscellaneous Expenditure Meaning of Substantially the whole of the Undertaking: The expression "substantially the whole of the undertaking" in any financial year shall mean 20% or more of the value of the undertaking as per the company s audited balance sheet of the preceding financial year (i) There is a difference between approving authority and exercising authority. Even if the shareholders have passed a resolution for disposing of the undertaking, it shall be the discretion of the Board of Directors to exercise such resolution passed by the shareholders. The contention of the shareholders against the non-compliance of their wishes by the directors is not tenable. (ii) The shareholders have no legal right to force Board of Directors for exercising their resolution and the shareholders action to usurp powers of Board of Directors shall be against the powers contained in Section 180 of Companies Act, ABC Limited filed its incorporation document with Registrar of Companies (ROC) on 28 th September, 2015 with its registered office to be located in SEZ. Its application for incorporation was rejected by the ROC because all its proposed directors were foreign national and only 1 of such foreigner directors (Mr. X) resided in India during calendar year 2014 for a total of 140 days. Advise about the legal validity of ROC action. Would your answer be different if company would have been given the certificate of incorporation and Mr. X is proposed to be appointed as MD in the Company? (4 Marks) Hint: Even SEZ companies are required to have at least 1 resident director. For the calendar year 2014 MCA has permitted atleast 137 days of stay in India to make an individual as a resident person for a Director. But under Schedule V, the MD can be appointed only if such a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person Or CA Kamal Garg [B. Com (H), FCA, DISA (ICAI)], Page 5

6 Q.3.(a). Q.3.(b). NGR Co. Limited made a loss of `20 lakhs after providing for depreciation for the year ended and as a result the company was not in a position to declare any dividend for the said year out of the profits. However, the Board of the company announced the declaration of dividend at the rate of 15% on the equity shares payable out of the free reserves. The paid up share capital of the company and its free reserves as on are `2 crores and 10 crores respectively. The average dividend declared by the company in the last five years is 25%. Examine the validity of declaration of dividend (4 Marks) Hint: ROD for the year < Avg. ROD of past 3 years = 15% < 25% [Condition fulfilled]; Total Reserves = Rs. 10 cr. Max. Amt. that can be withdrawn from Reserves = Rs. 1.2 cr. [1/10 of (Paid up cap. Rs. 2 cr. (+) Free Reserves Rs. 10 cr.)] Amount utilised and withdrawn from Reserves: (i) For set off of loss: Rs 20 lakhs; (ii) For payment of dividend: Rs 30 lakhs Total Rs. 50 lakhs which is not exceeding Rs. 1.2 cr. Bal. Reserves after withdrawal = 10 cr lakhs = Rs. 9.5 cr. Reserves after withdrawal: Rs. 9.5 cr. > 15% of Paid up capital: Rs. 30 Lakhs [Condition fulfilled] Following is the latest audited Balance Sheet of XYZ Ltd.: Capital and Liabilities Rs. Assets Rs. 10,00,000 Goodwill Land and buildings Plant and Machinery Equity Shares in A Ltd. Preference Shares in B Ltd. Debentures in C Ltd. Shares in P Ltd. Capital in Z and Co. Current Assets Equity Share Capital (10,000 shares of Rs. 100 each) Less: Calls unpaid Preference Share Capital Share Application Money Securities Premium A/c Capital Redemption Reserves General Reserve Profit and Loss A/c Sinking Fund Reserve Dividend Equalisation Reserve Loan from Public Financial Institutions (P.F.I.) Deposits from S Ltd Current Liabilities Provision for Taxation 10,000 9,90,000 1,50,000 2,00,000 1,50,000 2,25,000 5,00,000 2,20,000 1,10,000 60,000 10,00,000 2,00,000 1,25,000 1,00,000 3,00,000 10,50,000 20,25,000 1,25,000 50,000 1,00,000 2,25,000 1,00,000 55,000 40,30,000 40,30,000 The following is the additional information: (i) Of the equity share capital, 3,000 shares have been issued as rights shares and 2,000 shares as bonus shares. (ii) B Ltd. is subsidiary of XYZ Ltd. with 90% shareholding, whereas A Ltd. is wholly owned subsidiary of XYZ Ltd. (iii) Z and Co. is a partnership firm. The directors seek yours advice about proposal of following additional investments, etc. to be considered in Board Meeting: (i) Loan to A Ltd.: Rs. 10,00,000 and Guarantee to be given by A Limited for Loan from P.F.I: Rs. 5,00,000; (ii) Debentures in B Ltd.: Rs. 2,25,000 and Guarantee to be given by B Limited for Loan from P.F.I: Rs. 5,00,000; (iii) Purchase of 80% equity shares of Shree Investment Company Limited in the open market: Rs. 95,000; (iv) Shree Investment Company Limited has been directed by XYZ Limited to invest the money invested by it, in 60% equity of Devi Investment Company Limited and pursuant to this Devi Investment Company Limited would be making further investments of XYZ Limited money received through Shree Investment Company Limited, in the preference share capital of ITC Limited, a FMCG Company. Would your answer be different if Mr. X is a common director in XYZ Limited and A Limited and B Limited (5 Marks) Hint: Refer Section 186 and Section 185 already covered in the Class with the same illustration. Transactions are allowed from Holding to WOS/ Subsidiary subject to certain conditions, even when directors are common [See Rule 11 and 10 conditions] Mr. X, a Chartered Accountant in practice had access to financial statements of M/s Grow Big Limited, a listed entity for the purpose of limited review. Mr. X was not the statutory auditor of M/s Grow Big Limited. Mr. Y, brother of Mr. X had purchased 60,000 shares of Rs. 8/- face value with a market value of Rs.12/-, contributing to a market capitalization of the company to the tune of Rs. 7,20,000 of M/s Grow Big Limited. Mr. X discussed the findings of his limited review with his brother Mr. Y and warned him of the negative impact of its quarterly results on the market capitalization and the stock of the company. Mr. Y thereafter, sold his shares of M/s Grow Big Limited before the disclosure of such unpublished price sensitive information in the public domain. One of the directors of M/s Grow Big Limited, Mr. A, also had access to the said documents and accordingly undertook a forward dealing for sale of a part of his shareholding in the stock market, one day prior to announcement of results in the stock market in order to capitalize his profits. He was aware, that subsequent to announcement of financial results, the CA Kamal Garg [B. Com (H), FCA, DISA (ICAI)], Page 6

7 Q.3.(c). stock price shall go down considerably. He therefore, decided to undertake a prudent step to avert the possible future loss due to downfall in share price. Mr. A, on behalf of the company, submitted a copy of the said financials to PQR Bank Limited for renewal of its overdraft limit and also for grant of a loan. Basis the aforementioned, advise on the following: a. Does the act of Mr. X of disclosing unpublished price sensitive information of his client M/s Grow Big Limited to his brother Mr. Y, who holds shares of M/s Grow Big Limited, amount to insider trading? b. If Mr. Y is guilty of insider trading, what is the penalty and prosecution provision for which he is liable? c. In (b) above, if Mr. Y is guilty then what are remedies which can be resorted to by him? d. In (b) above, if Mr. Y is proved as not guilty before the Court and acquitted from the offence of insider trading then what is recourse available before the Central Government under Companies Act, 2013? (6 Marks) Hint: According to Section 195 of Companies Act, 2013, no person including any director or key managerial personnel of a company shall enter into insider trading. However, the said provision shall not apply to any communication required in the ordinary course of business or profession or employment, or under any law. Insider Trading means any kind of divulgence either directly or indirectly of any unpublished price sensitive information. According to Section 194 of Companies Act, 2013, no director or key managerial personnel of a company shall buy in the company, or in its holding, subsidiary or associate company; a right to call for delivery or a right to make delivery or a right as he may elect, to call for delivery or to make a delivery, at a specified price and within a specified time, of a specified number of relevant shares or a specified number of relevant debentures. On the basis of the above, the following may be advised:- The act of Mr. X of disclosing unpublished price sensitive information of his client M/s Grow Big Limited to his brother Mr. Y, who holds shares of M/s Grow Big Limited, amounts to insider trading. He has, in the instant case, counseled or communicated to his brother Mr. Y, about the unpublished price sensitive information about his client company M/s Grow Big Limited. Mr. X is guilty of insider trading provisions on account of disclosure of unpublished price sensitive information, which is not in accordance with any business or professional or legal requirement. Mr. Y is not guilty of insider trading under Companies Act, but shall be guilty under SEBI Act, He shall be liable for the following penal actions and prosecution. Under Section 194, he shall be punishable with imprisonment for a term which may extend to two years or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees or both. Under Section 195, 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 profit made out of insider trading, whichever is higher, or with both. Remedies: Compounding u/s 441; Power to Grant Immunity u/s 463 Recourse available to CG is Appeal against Acquittal: Refer Section 444 Advise M/s Super Specialities Ltd. having multiple business segments in respect of the following proposals under consideration of its Board of directors: (i) Appointment of a whole time director aged 18 years and a managing director cum chairman who is more than 70 years of age; [Hint: WTD cannot be appointed as he is less than 21 years of age but MD cum Chairman can be appointed either by SR approval or CG approval] (ii) Appointment of a manager who was convicted of an offence under Negotiable Instruments Act, 1881 due to bouncing of cheque for insufficient funds; [Hint: Manager can be appointed because offence under Negotiable Instruments Act, 1881 is not a specified offence under Schedule V] (iii) Payment of commission of 4% of the net profits per annum to the ordinary directors of the company; [Hint: The payment of commission cannot exceed 1% of net profits (if the company has employed managing director, whole time director or manager) and 3% of net profits (if the company has not employed any of managing director, whole time director and manager). A special resolution must be passed, in order to pay commission to non-executive directors. The commission of 4% can be paid, with the approval of the Central Government] (iv) Payment of remuneration to an ordinary director for rendering professional services; [Hint: Any payment made to a director for rendering services in any other capacity shall be covered in 'overall managerial remuneration'. But, the payment of an extra amount will be permissible if the services are rendered in a professional capacity; and in the opinion of the Nomination and Remuneration Committee, the director possesses requisite professional qualifications] (v) Payment of remuneration of Rs. 40,000 per month to the whole time director of the company running in loss and having an effective capital of Rs lakhs; [Hint: Allowed under Schedule V] (vi) Payment of sitting fees to independent director for an amount of Rs. 50,000 per Board Meeting when other directors are entitled to sitting fees of Rs. 75,000 per Board Meeting; [Hint: The sitting fee payable to independent and women directors shall not be less than the other director] (vii) Waiver of recovery of (a) fidelity insurance premium paid on behalf of its managerial persons for the indemnification of the Company; and (b) excess remuneration paid due to incorrect profits computed for the fraudulent financial CA Kamal Garg [B. Com (H), FCA, DISA (ICAI)], Page 7

8 Q.4.(a). Q.4.(b). reporting made in the previous year. [Hint: Section 197(13) provides that where any insurance is taken by a company on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer or Company Secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel. However if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration. Section 199 provides that without prejudice to any liability incurred under the provisions of this Act or any other law for the time being in force, where a company is required to re-state its financial statements due to fraud or noncompliance with any requirement under this Act and the rules made thereunder, the company shall recover from any past or present managing director or whole-time director or manager or Chief Executive Officer (by whatever name called) who, during the period for which the financial statements are required to be re-stated, received the remuneration (including stock option) in excess of what would have been payable to him as per restatement of financial statements.] (5 Marks) Or Examine w.r.t. the provisions of Co. Act, 2013 whether the following companies can be treated as foreign companies: a) A company incorporated outside India having a share registration office at Mumbai. b) Indian citizens incorporated a company in Singapore for the purpose of carrying on business there. c) A company which is incorporated outside India employs agents in India but has no place of business in India. d) A company incorporated outside India, having shareholders who are all Indian citizens. e) A company incorporated in India but all the shares are held by foreigners. (i) State the documents that are required to be filed with the ROC under the Co. Act, 2013, by foreign companies identified above, initially when they establish a place of business in India and later on periodically or on happening of certain events. (ii) 20% of equity share capital and 50% of preference share capital of ABC Limited (a company incorporated outside India) is held by companies incorporated in India. While issuing prospectus for inviting subscriptions in India, it did not mention the country where it is incorporated. Examine the validity of such prospectus. (5 Marks) Hint: (i) The company is a foreign company, as establishment of a share registration office in India amounts to establishment of a place of business in India (ii) The company is not a foreign company, even if the company has been formed by Indian citizens; as the company has not established a place of business in India. (iii) The company is not a foreign company, as it has not established a place of business in India. The employment of agents will not make any difference. (iv) The company is not a foreign company, as it has not established a place of business in India. (v) It is not a foreign company but an Indian company. The place of incorporation determines the status of the company. Also refer Section 379 and Section 380 from the Book for other parts of the Question [Since 70% of the capital is being held by companies incorporated in India, ABC Limited need to comply with provisions of the Act as if it s a company incorporated in India] An inspector was appointed under the Companies Act, 1956/ 2013 to investigate the affairs of a public company. Mr. WM, the works manager of the company, who is aware of certain misdeeds of the management, desires to know whether he is entitled to any protection against dismissal by the company, if he discloses the misdeeds during the course of examination by the inspector. Advise him explaining the relevant provisions of the Companies Act, 1956/ (4 Marks) Hint: Section 635B [Section 218] of the Companies Act, 1956 [2013] protects against dismissal, discharge, removal etc., of the employees of the company under investigation who makes disclosure during the course of investigation. The Section provides that if during the course of investigation etc., the Company proposes to discharge any employee from service or punish him by way of dismissal removal or reduction in rank, then the Company must send to Company Law Board/Tribunal a previous intimation in writing of the action proposed to be taken against the employee. If the Company Law Board has any objection to the proposed action, it must send a notice there of to the employer. The Company Law Board is not bound to hear the company or any other person before issuing the notice (Ashoka Marketing Ltd V. CLB) If the company does not receive any notice of objection from the Company Law Board within 30 days if sending of the intimation when the company may proceed to take the proposed action against the employee. If the company is dissatisfied with the objection raised by Company Law Board, it may, within 30 days of the receipt of notice of the objections prefer an appeal to the Court/appellate tribunal in the prescribed manner. The decision of the Court on such appeal shall be final and binding on the Company Law Board and on the company. The works manager in this case is entitled to this protection under Section 635B/ 218 as mentioned above. The report submitted by the inspector appointed under the Co. Act, 1956/ 2013 to investigate the affairs of a Company revealed that substantial funds of the Company have been misappropriated by the MD of the Company. The Central Government is of the opinion that effective action may not be taken the company for recovery of the funds misappropriated by the MD. Examine with reference to the provisions of the Companies Act, 1956/ 2013 the action that can be CA Kamal Garg [B. Com (H), FCA, DISA (ICAI)], Page 8

9 Q.4.(c). Q.4.(d). taken by the Central Government for recovery of damages or funds misappropriated by the Managing Director. (4 Marks) Hint: Section 224 of the Companies Act, 2013 provides that where from the inspectors report it appears that a fraud or misappropriation of property has been committed and the Company is therefore, entitled to bring an action for damages for misconduct or for the recovery of any property, which has been misapplied or wrongfully retained, the Central Government may itself in public interest bring proceedings for that purpose in the name of the Company. Thus, the Central Government is empowered to bring civil proceedings in the name of the Company in any case where it appears that such proceedings ought in the public interest to be brought, even if the company does not take such action. In such a proceeding, the inspector's report shall be admissible as evidence of the opinion of the inspection in relation to any matter contained in the report. The Central Government should indemnify the company against any cost or expenses incurred by it or in connection with any proceedings brought by it. A group of creditors of a company lodged a complaint with the ROC alleging that the Directors of the company are engaged in falsification and destruction of account books and records of the company and urged the Registrar to seize the account books and records of the company. It was also alleged that one of the director was in wrongful possession of company s property for which the recovery application was filed before the Court. Discuss the power available to ROC and Company in this regard under Companies Act, 1956/ (4 Marks) Hint: Seizure of documents by Registrar (Sections 206 read with 209 of the Companies Act, 2013): If, pursuant to the information in his possession or otherwise, the Registrar has reasonable ground to believe that books and papers of a company may be destroyed, mutilated, altered, falsified or secreted, the Registrar may make an application to the Special Court, having jurisdiction for an order for the seizure of such books and records and the special court, after considering the application and hearing the Registrar, may authorize the Registrar to do the following: (i) To enter the place or places where such books and papers are kept. (ii) To search the place or places in the manner as provides in the Magistrate s order. (iii) To seize the books and papers as he considers necessary. The Registrar is authorised to keep the seized books and papers for a period of 180 days, after which the same have to be returned to the person from whom the seizure was made. But the Registrar is empowered, before returning the said books and papers, to take copies of or extracts from them or place identification marks on them or deal with them in the manner he considers necessary. In view of the above, the Registrar of Companies is empowered to seize the books and papers of the company against whom the complaint has been made by following the procedure laid down in the section. Punishment for wrongful withholding of property: If any officer or employee of a company (a) wrongfully obtains possession of any property, including cash of the company; or (b) having any such property including cash in his possession, wrongfully withholds it or knowingly applies it for the purposes other than those expressed or directed in the articles and authorised by this Act, he shall, on the complaint of the company or of any member or creditor or contributory thereof, be punishable with fine which shall not be less than ` 1 lakh but which may extend to ` 5 lakh. [Section 452(1)] The Court trying an offence under sub-section (1) may also order such officer or employee to deliver up or refund, within a time to be fixed by it, any such property or cash wrongfully obtained or wrongfully withheld or knowingly misapplied, the benefits that have been derived from such property or cash or in default, to undergo imprisonment for a term which may extend to two years. [Section 452(2)] ABC Limited, over years, enjoys high reputation and its General Reserve is many times more than the paid-up capital of the company. There is apprehension of cornering the shares of the company by some persons likely to result in change in the Board of Directors which may be prejudicial to the Public interest. Advise, as to how can, ABC Limited block the transfer of shares of the company under the provisions of the Companies Act, 1956/ (4 Marks) Hint: In accordance with provisions of the Companies Act, 1956, as contained in Section 250 (4), where the Company Law Tribunal (Company Law Board till the Company Law Tribunal becomes operational, referred to as CLB hereinafter) has reasonable grounds to believe that a transfer of shares in a company is likely to take place whereby a change in the composition of the Board of Directors of a company is likely to take place and the CLB is of the opinion that any such change would be prejudicial to the public interest, the CLB may, by an order, direct that any transfer of shares in the concerned company during such period not exceeding three years, as may be specified in the order, shall be void. Further, in accordance with the provisions of the Act, as contained in Section 250(1) & (2), if the CLB is of the view that there are good reasons to find out the relevant facts about any shares and the CLB is of the opinion that such facts cannot be found out unless the restrictions are imposed, as an interim measure, it may, by an order, direct that transfer of any such shares shall be void and no voting rights shall be exercised in respect of such shares. However, the CLB is empowered to vary or rescind its order at any time. The facts given in the question squarely fall within the provisions of Section 250 of the Companies Act, The management of ABC Ltd. may make a complaint to the CLB and convince it that the transfer of shares in favour of the group of unscrupulous persons would change the composition of the Board of Directors of the company which shall be CA Kamal Garg [B. Com (H), FCA, DISA (ICAI)], Page 9

10 Q.5.(a). Q.5.(b). Q.5.(c). prejudicial to the public interest and if the CLB is convinced with the plea of the company, it may pass an order as stated above which would block the transfer of shares as stated in the question. A group of shareholders consisting of 25 members decide to file a petition before CLB for relief against oppression and mismanagement by Board of Directors of M/s Fly By Night Operators Ltd. The company has a total of 300 members and the group of 25 members holds 1/10 th of the total paid up share capital accounting for 1/15 th of the issued share capital. The main grievances of the group are as follows: 1. due to mismanagement by the Board of directors, the company is incurring losses and the company has not declared any dividends even when profits were available in the past years for declaration of dividend; 2. the minority shareholders are continuously creating hurdles for the majority in availing loans from the Bankers for company s expansion activities Advise the group of shareholders regarding the success of: (i) getting the petition admitted and obtaining relief from the Company Law Board (ii) members right to inspect of Books and other records of the Company in this regard (4 Marks) Hint: As per Section 398 and 399 of the Companies Act, 1956: (i) The petition will not be admitted. This is because the applicants are: less than 1/10th of total number of members; less than 100 members; and holding less than 1/10th of issued share capital But the Central Government may allow the application, if it deems fit. (ii) The continuous losses and failure to declare dividends by itself cannot amount to oppression. No relief can be given. The majority can also claim the relief from the oppressive acts of minority for creating hurdles for the majority in availing loans from the Bankers for company s expansion activities [Sindri Iron Foundary Private Limited, Re]. Under the provisions of the Companies Act, 2013, the following persons have the right to carry out the inspection of the books of accounts of the company. (i) Directors of the Company (ii) Registrar of Companies (iii) Such officer of Government as may be authorised by the Central Government in this behalf. (iv) Such officers of SEBI as may be authorised by SEBI. According to Regulation 89, of Model Articles under Companies Act, 2013, 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. According to this, the members have right to inspect the books of account. ABC Co. Ltd. was amalgamated with, and merged in XYZ Co. Ltd. Some workers of ABC Co. Ltd. refuse to join as workers of XYZ Co. Ltd. and claim compensation for premature termination of services. XYZ Co. Ltd. resists the claim on the ground that their services are transferred to XYZ Co, Ltd. by the order of amalgamation and merger and, therefore, the workers must join service of XYZ Co. Ltd. and cannot claim any compensation. State whether the workers of ABC Co. Ltd. will succeed in their claim. Give reasons. (4 Marks) Hint: In light of Section 394 of the Companies Act, 1956, the transfer of property shall be automatic, without requiring execution of any document as per order of the Court. But there cannot be automatic transfer of services, as it is not property. The workers of ABC Co. Ltd. cannot be compelled to join XYZ Co. Ltd, and are entitled to compensation, if they refuse to join XYZ Co. Ltd. M/s Info-tech Overtrading Ltd. was ordered to be wound up compulsorily by an order dated of the Delhi High Court. The OL who has taken control of the assets and other records of the company, has noticed the following: (i) The MD of the company has sold certain properties belonging to the company to a private company in which his son was interested causing loss to the company to the extent of Rs. 50 lakhs. The sale took place on (ii) The company created a floating charge on in favour of a private bank for the overdraft facility to the extent of Rs. 5 crores, by hypothecating the current assets viz., stocks and book debts. Examine what action the official liquidator can take in this matter having regard to the provisions of the Companies Act, The Official Liquidator after realisation of assets (other than above) has an amount of Rs. 28,00,000 at his disposal towards payment to the creditors of the company. The list of creditors is given below: (i) Dues to secured creditors: 20,00,000 (ii) Dues to workers: 15,00,000 (iii) Taxes, etc, payable to the government authorities: 2,00,000 (iv) Unsecured creditors: 40,00,000 Since the available amount is insufficient to meet the claims of all the creditors, explain the procedure to be followed for payment of dues as provided in the Companies Act, (8 Marks) Hint: (i) As per Section 531A, any voluntary transfer of property within preceding 12 months of commencement of CA Kamal Garg [B. Com (H), FCA, DISA (ICAI)], Page 10