CS Executive Programm M-I Company Law Paper-1 December-2013 (Solution) New Syllabus

CS Executive Programm M-I Company Law Paper-1 December-2013 (Solution) New Syllabus 2013 - Dec [1] (a) Role of a Company Secretary:- Generally speaking, the role of the company secretary is threefold- as a statutory officer, as a coordinator and as an administrative officer. 1. Statutory Officer- As a Principal Officer of the company, the Company Secretary is responsible for strict compliance with the various provisions of the companies act and the requirements of other acts. He has a very important role to play from the incorporation stage to the winding up of the company. He is responsible for proper maintenance of book of accounts and other registers. He has to sign several documents such as annual return, return of allotment etc. He is responsible for authentication of the balance sheet and Profit & Loss a/c.(section 215). The Secretary is responsible for holding Board meetings and shareholders. As per Section 5 of the Companies act, he is regarded as an officer in default and he shall be held liable for any non-compliance of any provisions of the act. Under the Indian Stamp Act, it is the duty of a Secretary to see that the documents such as letter of allotment, share certificate, debentures, mortgages issued or duly stamped. The Company Secretary is also to perform various duties under various Acts like- (a) Industrial Dispute Act, 1947 (b) Employees State Insurance Act, 1948 (c) Minimum wages Act, 1948 (d) Factories Act, 1948 (e) The Securities and Exchange Board of India etc. 2 Coordinator - The Company Secretary as a coordinator has an important role to play in administration of company s business affairs. A Company Secretary is a link between the Board of Directors and other executives of the company. The Board lays down the policy decisions but it is the company secretary who insures their proper implementation. In a company where there are several independent departments such as sales, purchases, personnel etc. He acts as a co-ordinator with these functionaries for ensuring that the policy decisions are duly carried out. The Company Secretary also acts as a co-ordinator between the company on one hand, and outsider like the shareholders, customers, trade unions, government and community at large on the other. The role of Company 1

Secretary as a co-ordinator has two aspects mainly internal and external. The internal role of a co-ordinator extends to the board including chairman and managing director, staff personnel etc. His role as an external co-ordinator extends to relationship with shareholders, government and society. 3. Administrative Officer - As a general administrative officer, the Company Secretary is responsible for efficient administration of the company. The Company Secretary has to insure that the policies of the company are duly carried out. The role of Company Secretary as an administrator can be sub-divided into organizational, and functional, office and personal administration. The Company Secretary is in such a position that he can have an overall view of different aspects of company administration and can developed a strong and efficient organizational structure. The Company Secretary has to play an important role in financial administration. He is to analyse the financial statements and recommend suitable steps. 2013 - Dec [1] (b) A company is an artificial person. It is formed and registered under the Companies Act. It has distinct legal entity. Its personality is separate and distinct from its members. In some cases company is treated as a natural person. (a) It can make contract. (b) Open a bank account. (c) Can sue and be sued by others. (d) It can also own property by its own name. The company s money and property belong to the company and not the property of members. Similarly, the members personal property can not be held liable to pay the creditors of the company. LEADING CASE in this point is Saloman Vs. Saloman Company Ltd. has clearly established the principle that once a company has been validly constituted under the Companies Act, 1956, it becomes a legal person distinct from its members and for this purpose it is immaterial whether any member has a large or small proportion of the share, and whether he holds those shares beneficially or as a mere trustee. Hence, shareholders can not be held liable for the acts of the company. 2013 - Dec [1] (c) Inspection of books of accounts of companies by any director According to Section 209 (4) of the Companies Act, 1956. The books of account and other books and paper shall be open for inspection by any director during business hours. The directors can make inspection through agents. However, the right of 2

inspection is not an absolute right and may be refused if it is malafide, for some ulterior motive, or against the interest of the company. But the right of inspection is a statutory right and a director who is refused inspection, may enforce his right through court. Members have no right of inspection unless provided in the Articles, which is rare. 2013 - Dec [1] (d) Common Seal-Since a company has no physical existence. It must act through its agents and all such contracts entered into by its agents must be under the seal of the company. The common seal acts as the official signature of the Company. In terms of Section 34 (2) of the companies Act, 1956. The provision of common seal is a statutory requirement for a company then is affixed on a document as evidence of authenticity of attestation and in the case of a company the presence of seal of the company on any document executed by it, is evidence. That it was duly executed by authority, The seal usually contains the name and place of the company under the Companies Act, 1956 statutory. The common seal is required to be affixed to the following documents: (a) The common seal should be entrusted on power of attorney [Sec. 48 (11)] (b) Share certificate (Sec. 84) (c) Share warrant (Sec. 114) (d) Any deed as required by Articles. 2013 - Dec [2] (a) 1. Regulating Act : A Company is regulated by the Companies Act, 1956 while a partnership is governed by the Indian Partnership Act, 1932. 2. Mode of Creation : Registration is compulsory in case of company. Whereas registration is not compulsory in Partnership. 3. Membership : (a) Minimum : In partnership the minimum no. of partner is two whereas the minimum number of member in a private company is two and in case of public company is seven. (b) Maximum : The maximum no. of partner is limited to 10 in case it is carrying on banking company and twenty in case of any other business. The maximum no. of shareholder in a private company is 50 but in case of public company there is no limit on the maximum number of members. 4. Legal Status : A company has a separate legal personality distinct from that of its members whereas partnership is not a distinct person. It is made up of the several persons who compose it. 3

5. Liability of Members : In case of company the liability of shareholder is limited to the extent of their share capital or upto the amount of guarantee given by him. But in case of partnership the liability of partner is unlimited. Each partner is liable to an unlimited extent for the debt incurred in the ordinary course of business. 6. Transfer of Share : Share in a Public Co. is freely transferable but in case of partnership no partner can transfer his share without the consent of other partner. 2013 - Dec [2] (b) S.No. Transfer of shares 1 Transfer of share is effected by a voluntary act of the members. 2 Transfer of share is the method of transferring the property. 3 There must be adequate consideration for the transfer of shares. Transmission of shares Where as transmission of shares take place by operation of law, e.g., due to death or insolvence or lunacy of the owner. There is no prescribed instrument of transfer. No consideration is involved. 4 In case of transfer of shares through an Where as no stamp duty is payable in instrument of transfer stamp duty is case of transmission of shares. payable on the market value of shares. 2013 - Dec [2] (c) Difference between Limited Liability Partnership and Partnership. Partnership 1. It is governed by The Indian Partnership Act, 1932'. LLP It is governed by The Limited Liability Partnership Act, 2008'. 2. Registrational is optional. Registration is compulsory. 3. It is created by agreement. It is created by law. 4. It has no separate legal entity. It has separate legal entity. 4

5. It does not have perpetual succession. 6. There is no concept of common seal. 7. Minimum 2 and maximum 10 for banking business and 20 for non - banking business. It has perpetual succession. It may have its own common seal as per its agreement. Minimum 2 but there is no limit on maximum number of partners. 8. Liability of partner is unlimited. Liability of partner is limited. 2013 - Dec [2] (d) (1) A member voluntary winding up result where, before convening the GM of the company at which the resolution of winding up is to be passed and directors are file with the Registrar a statutory declaration of solvency. A creditor voluntary winding up is one when no such declaration is filled. (2) Member voluntary winding up creditors do not participate directly in the control of the liquidation, but in a creditors voluntary winding up the company is deemed to be insolvent and therefore the control of liquidation remains in the hand of the creditors. (3) In member voluntary winding up there is no meeting held but creditors voluntary winding up meeting of creditor have to be called a meeting for appointed of the liquidator. 2013 - Dec [2A] (i) A promoter has no legal right to claim promotional expenses for his services unless there is a valid contract. Without such a contract he is not even entitled to recover his preliminary expenses. [Re. English & Colonial Produce Company (1906) 2 ch. 435(A). The promoters are entitled to receive all the expenses incurred for in setting up and registering the company from Board of Directors. The articles will have provision for payment of preliminary expenses to the promoters. The company may pay the expenses to the promoters even after its formation, but such payment should not be Ultra vires the articles of the company. The Articles may have provision regarding payment of fixed sum to the promoters. 2013 - Dec [2A] (ii) The Ministry has simplifying the procedures under the Act. The MCA modified the 5

incorporation procedures to enable promoters to get their companies incorporated online within 24 hours. The e-form 1, 18, 32, are being certified by the practicing professionals regarding the correctness of the information (declarations given by the subscribers). The application is being processed electronically and the digital certificate of incorporation is being issued immediately online by the ROC. 2013 - Dec [2A] (iii) In accordance with provisions of section 78(2) of the Act, the securities premium can be utilised only for : (a) issuing fully paid bonus shares to members, (b) writing off the balance of the preliminary expenses of the company, (c) writing off commission paid or discount allowed, or the expenses of the company, (d) for providing for the premium payable on redemption of any redeemable preference shares or debentures of the company. 2013 - Dec [2A] (iv) Protection is accorded to minority Shareholders under the Companies Act in the following circumstances:- (a) Variation of Class Rights:- According to Section 106 of the Companies Act, 1956. If the capital is divided into different classes of shares, the Memorandum or the Article may Provide that the Special rights of each class of shareholders may be altered with the consent of the 3/4th majority of the shareholders of that class. Where this is done and the rights are varied by the requisite majority vote. Shareholders holding not less than 10 percent of the issued shares of that class who had not asserted to the variation may apply to the Court for the cancellation of the variation under Section 107 of the Act. (b) Investigation of affairs of a company by Central Government:- The Central Government may, where a report has been made by the Registrar under Section 234, appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct. An application for Investigating the affairs of a company may be made to the Company law Tribunal- (i) in the case of company having a share capital, by not less then 200 members or by members holding not less then 1/10th of the total voting power therein and (ii) in the case of a company no share capital, by not less then 1/5th of the members on the company s register of members. (c) Scheme of reconstruction and amalgamation:- The minority shareholders are 6

accorded protection where they do not consent to schemes of reconstruction and amalgamation (Section 391 to 395). (d) Prevention of oppression and mismanagement:- A member who complains that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to some of the members, including any one or more of themselves, may apply to the Company Law Tribunal for redressel. (e) The member qualified to apply under Section 399 may apply to the Company Law Tribunal for relief in cases of mismanagements of the company [Sec. 398] (f) The member of a company may apply to the Central Government for the appointment of such number of persons to hold office or directors of the company, as specified by the company law Tribunal as necessary to effectively safeguard the interest of the company or its shareholders or the public interest. [Section 408] 2013 - Dec [3] (a) As per Section 372 A read with Section 295 of the Companies Act, 1956 prior approval of Central Government is required for the giving of loan by Public Limited Company to a Private Limited Company in which a director of a Public Company is a Director or member. Further, under Section 372 A (1) of the Companies Act, 1956, the loan and investment should not exceed: (a) 60% of its paid-up share capital and free reserves, or (b) 100% of its free reserves, whichever is higher. Unless previously authorized by a special resolution passed in a General Meeting. In the present case amount of loan proposed i.e. ` 8 crores, is in excess of 60% of the paid-up capital and free reserves of the Public Ltd. Company or 100% of the free reserves of the company [60% of 7 crores ` 4.2 crores, 100% of 2 crores = 2 crores). Hence Gold limited has to obtain prior approval of the Central Government and approval of its shareholders by passing special resolution. 2013 - Dec [3] (b) Partnership firm cannot become a member of a company whereas LLP, being an incorporated body can become member of a company. Partnership firm is not a legal person and as such it cannot, in its own name, become a member of a company except in company registered v/s 25 of companies Act. If more than one person apply for share in a company and share are alloted to then, each one of such applicant become a member. 2013 - Dec [3] (c) 7

According to sec. 207 any failure (director) of the company, who is knowingly a party to the default, liable for punishment with simple imprisonment for a term which may extend to three year and also five of ` 1000 for every day during which such default continues. N. Kumar V. M. O. Roy, Assistant Director S.E.I.O. [(2007) 80 SCL 55(MAD)], a company for the financial year 1995-96, declared the dividend on 19.9.1996 and failed to distribute same with in the prescribed period. A complaint has been filed against the company and its directors on 23.8.2006 for the contravention of the provision v/s 207 of the Acts. A director contended that he had resigned before the declaration of dividend so he could not be held liable for the contravention of sec. 207. The court held that the director was not a whole time director to be aware about the entire affairs of the company. The director could not be held vicariously liable for the contravention under sec. 207 and therefore the proceedings were liable to be quashed as against the director. 2013 - Dec [3] (d) (i) As per Rule 3(a), whenever a company fails to file the annual accounts and annual returns as described in sub-clause (A) of clause (g) of sub section (i) of section 274, persons who are directors on the last due date for filing the annual accounts and the annual returns for any continuous three financial year commencing on and after the first day of 1April, 1999 shall be disqualified. Provided that all the directors who have bee directors in the relevant year from the due date to the expiry of one year after the due date, will be disqualified. Provided further that disqualification on account of the reasons cited under this rule shall also apply to the reappointment as a director. Name of such director who have been exempted from application of section 274 (i) (g) by the Central Government from time to time, shall be excluded. 2013 - Dec [3] (d) (ii) These rule not apply on the private company shall appoint as a director. 2013 - Dec [3A] (i) According to Section 288 (2) of the companies Act, 1956. The Provisions of Section 285, relating to the Board meeting must be held at least once in every 3 months and atleast 4 such meetings must be held in every year. Where the meeting of the Board is called but could not be held for want of quorum, there shall be no contravention of Section 285. Thus the allegation that the company has contravened the provisions of section 285 in the matter of holding the board meeting is not correct. 8

2013 - Dec [3A] (ii) According to section 288 (i) and (ii) of the Companies Act, 1956 (i) If a meeting of the Board could not be held for want of quorum, then, unless the articles otherwise provide, the meeting shall automatically stand adjourned till the same day in the next week, at the same time and place, or if that they is public holiday, till the next succeeding day which is not a public holiday, at the same time (ii) and place. The provisions section 285 shall not be deemed to have been contravened merely by reason of the fact that a meeting of the Board which had been called in compliance with the terms of the section could not be held for want of a quorum. U/S 162 of the Companies Act, 1956, if default in the provision of section 159, 160 and 161 then, company and every officer in default shall be punishable with fine which may extend to ` 500 for every day during the default continue. 2013 - Dec [3A] (iii) Disqualification of designated partner: (a) Has at any time within the preceding five year been adjudged insolvent. (b) Suspends, (c) has been convicted by a court for any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months. (d) has been convicted by a court for an offence involving section 30 of the Act. According to question if designated partner has disqualified then LLP is not valid as per section 11(i) of the LLP Act, 2008, a LLP has minimum two or more persons associated for carrying on a lawful business with a view to profit shall subscribe their names to an incorporation document when number of partner is less than two the LLP is dissolved. 2013 - Dec [3A] (iv) In Webneuron services Ltd. In Re. [(2009) 149 com cases 61 (Del)], the transferor company sought approval to a scheme of amalgamation with the transferee company. Employee of Transferor company opposed the petition on the ground of non payment of dues of ` 4,48,040. Objection of the employee was overruled and the scheme was sanctioned. The reason given was that the transferor company had, in accordance, with the direction of the court, deposited an amount of ` 4,48,040 with the Registrar General of the court and, in case the ex employee was found entitled to the amount, he could get it with interest. The terms and conditions of service of the employees of the transferor company were not affected and there was no legal impediment in sanctioning the proposed scheme 9

of amalgamation. The scheme was to be sanctioned and the transferor company was to be wound up without formal winding up. 2013 - Dec [4] (a) A dividend once declared (including the interim dividend) becomes debt and cannot be revoked except with the consent of the shareholders. But if the declaration is not supported by available profits is no declaration and hence the decision could be rescinded. If a dividend is declared and paid to shareholders, the character of the payment cannot be altered by a subsequent resolution. The following steps should be taken for revocation of interim dividend: 1. The Board of Directors shall consider the reason for revocation and pass the necessary resolutions rescinding the previous resolution declaring interim dividend. 2. The revocation of dividend shall be decided before dispatch of warrants to shareholders. 3. Suitable news inserted in any news paper having wide circulation shall indicate in brief the reasons for revocation of interim dividend and regretting the inconvenience caused to the shareholders. 2013 - Dec [4] (b) Under section 637- B of the Act the Central Government may for reasons to be recorded in waiting, condone the delay where any document required to be filed with the Registrar under any provision of the Act is not filed within the time specified therein. Procedure for condonation of delay by Central Government in relation to filing of document with ROCs. (1) Convene a Board Meeting and pass a resolution for seeking condonation of delay in filing the document. (2) Submit an application to the Central Governmnet, in paf format, as attachement to electronic form no. 65 to this effect indicating alongwith the reasons for such delay. The application should be accompanied by a copy of the Board Resolution seeking condonation of delay latct audited balance sheet and P/L account, certified copy of the memorandum and articles of the association and filling fees. (3) The Central Government may for reasons to be recorded in writing, condone the delay. 2013 - Dec [5] (a) 10

Yes, Pawan can Sue for compensation of loss. In Peek v. Gurney (1873) 43 L.J. Ch. 19, a deceitful prospectus was issued by the directors on behalf of the company. P received a copy of it but did not take any shares originally in the company. The allotment of shares to applicants was completed, and several months afterwards he bought 2,000 shares on the stock exchange. His action against the directors for deceit was rejected. It was observed by the Court that the office of a prospectus is to invite persons to become allottees, and, allotment having been completed, such office is exhausted and liability to allottees does not follow the shares into the hands of subsequent transferees. 2013 - Dec [5] (b) DIN is a unique identification number and once obtained is valid life time of a persons intending to be appointed ax a director and all existing director. DIN is also mandatory for directors of Indian Companies who are not citizens of India, However, DIN is not mandotory for directors of foreign company having branch offices in India only a single DIN is required for an Individual irrespective of directorship held by him. 2013 - Dec [5] (c) According to Section 237(b) of the Companies Act,1956, the Central Government may appoint one or more competent person as inspectors to investigate the affairs of company and to report thereon, in such manner as the Central Government may direct, if in the opinion of Company Law Board there are circumstances suggesting that! (i) the business of the company is being conducted with intend to defraud its creditors, members or any other persons or for a fraudulent or unlawful purpose or in a manner oppressive of any of its members or that the company was formed for any fraudulent or unlawful purpose; (ii) persons concerned in the formation of company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or (iii) the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director or the manager of company. It is important to note that these three grounds limit the jurisdiction of the Company Law Board. Before ordering an investigation under Section 237(b) of the Act or forming an 11

opinion for investigation, the Company Law Board must satisfy itself whether the circumstances of case fall under any one or more of the above grounds and it has no jurisdiction to go on a fishing expedition to find evidence. 2013 - Dec [5] (d) According to Section 383 A(1) of the Companies Act, 1956 makes it obligatory for every company, having such paid-up share capital as may be prescribed, shall have a whole time Secretary. This shall means that the company should have a minimum of one Company Secretary. In Practice, there is no bar on appointment of 2 or more Secretaries in a single company. Therefore if there are 2 or more secretaries in a company, it shall not be in violation of the provisions of this section. However, file form 32 shall be filed with ROC for every individual appointed as company secretary of company. 2013 - Dec [6] (a) (i) Directors responsibility statements is aimed at highlighting the accountability of the directors with a view to ensuring good corporate governance. It will make the directors accountable to safeguard the assets of the company and to take positive steps in this regard. (ii) under Section 217 (2AA) shall indicate there in (a) that in the preparation of annual accounts, the applicable accounting standards has been followed along with proper explanation relating to material departures. (b) that the directors had selects such accounting policies and applies therein consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of financial year and of Profit or Loss Account of the account for that period; (c) that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; (d) that the directors had prepared the annual accounts on a going concern basis. (iii) The statement should figure in the Board Report. 12

2013 - Dec [6] (b) The balance sheet and P/L account must be approved by the Board of directors and signed by the directors before they are submitted to the auditors for their report In case of banking company shall be signed by the person metioned in clause (a) or (b) of sec. 29 (2) of Banking Regulation Act. 1949. Other companies, must be signed on behalf of the Board of directors by not less than two direction and the manager or secretary if any. If the company has a managing director he should be one of the signing directors. 2013 - Dec [6] (c) It is used by the courts to ignore the status of share holders, officers and to their liability in their respective capacity so that they may be held personally liable for their action when they have acted fraudulently or unjustly. In Lennards carying Co.V. Asiatic Petroleum Co. (9). Viscount Haldane propounded the alter ego theory and distinguished from vicarious liability. The house of Lord stated that the default of the MD who is the directing mind and will of the company would be attributed to him and he be held for the wrong doing of the company. 2013 - Dec [6] (d) Section 107 of the Act confers certain right upon the dissentient shareholder. According to this section where the right of any class of share are varied the holders of not less than ten percent of the shares of that class, being persons who did not consent to or vote in favour of the resolution for the variation can apply to the court to have the variation cancelled where any such application is made to the court the variation will not be effective unless and until it is confirmed by the court. 13