CS Executive Company Law Important Questions

CS Executive Company Law Important Questions PDF

CS Executive Company Law Important Questions with Answers for Dec 2021 and June 2022

CS Executive Company Law Important Questions with Answers from Debt Capital (Chapter 4). These questions were asked by ICSI in Previous Examinations. Thus these questions are important from exams point of view. We have provided answers with due care and all answers include amendments till Companies (Amendment) Act, 2020.

Questions related to Unauthorised  Borrowings

Question 1
Ajay Ltd. borrowed Rs.100 crore from Prem, without the authority conferred on it by the articles of association. Later, the money borrowed by Ajay Ltd. was used by its Board of directors to pay off lawful debts of the company. In this scenario, Prem, the lender seeks your advice for recovery of his money. Advise him. (June 2012) (5 marks)

Answer:
The power of the company to borrow is exercised by its directors, who cannot borrow more than the sum authorized. The powers to borrow money and to issue debentures whether in or outside India can only be exercised by the Directors at a duly convened meeting.

Where a company borrows without the authority conferred on it by the articles or beyond the amount set out in the Articles, it is an ultra vires borrowing. Any act which is ultra vires the company is void. In such a case the contract is void and the lender cannot sue the company for the return of the loan.

Still lender has following remedy:
Subrogation: Where the money of an ultra vires borrowing has been used to pay off lawful debts of the company, he would be subrogated to the position of the creditor paid off and to that extent would have the right to recover his loan from the company.

Subrogation is allowed for the simple reason that when a lawful debt has been paid off with an ultra vires loan, the total indebtedness of the company remains the same. By subrogating the ultra vires lender, the Court is able to protect him from loss, while debt burden of the company is in no way increased.

Question 2
Alok, the Managing Director of Yellow Ltd., borrowed a large sum of money and misappropriated the same. Later, when the lender demanded his money, the company refused to repay, contending that the money borrowed by Managing Director was misappropriated by him and the company is not liable for repayment. Decide, giving reasons, whether the lender would succeed in recovering the money from the company. (4 marks each) (June 2015)
Answer:

In V.K.R.S.T Firm v. Oriental Investment Trust Ltd., AIR 1944 Mad 532 under the authority of the company, its managing director borrowed large sums of money and misappropriated it. The company was held liable stating that where the borrowing is within the powers of the company, the lender will not be prejudiced simply because its officer have applied the loan to unauthorised activities provided the lender had no knowledge of the intended misuse.

Thus, if managing director borrowed large sums of money under the authority of the company, the company cannot refuse to repay the money even if such money is misappropriated by the managing director.

General Question on Debentures

Question 1

Distinguish Between: Redemption of shares and redemption of debentures. (June 2018) (4 marks)

Answer:

Redemption of Share CapitalRedemption of debentures
Only preference shares can be redeemed. Company can’t redeem equity shares.Company can redeem debentures according to the terms and conditions of the issue.
According to Section 55, preference shares shall be redeemed within 20 years (except in case of company engaged in infrastructure project).Company may issue redeemable debentures as well as irredeemable debentures (which shall be redeemed at the time of winding up of the company)
Where debentures are issued by a company, the company shall create a Debenture Redemption Reserve account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the redemption of debentures.No such account is required in case of redemption of Preference Shares.
Preference shares may be redeemed
–          out of the profits of the company which would otherwise be available for dividend or
–          out of the proceeds of a fresh issue of shares made for the purposes of such redemption
Debentures can’t be redeemed out of the proceeds of a fresh issue of shares made for the purposes of such redemption

Question 2.
Distinguish between Debentures and Shares (June 2014) (4 Marks)

Answer

 DebenturesShares
1Debentures constitute a loan.Shares are part of the capital of a company.
2Debenture holders are creditors.Shareholders are members/owners of the company.
3Debentures holder gets fixed Interest which carries a priorities over dividend.Shareholder gets dividends with a varying rate.
4Debentures generally have a charge on the assets of the company.Shares do not carry any such charge.
5Debentures can be issued at a discount without restrictions.Shares cannot be issued at a discount.
6The rate of interest is fixed in the case of debentures.Whereas on equity shares the dividend varies from year to year depending upon the profit of the company and the Board of directors decision to declare dividends or not.
7Debenture holders do not have any voting right.Shareholders enjoy voting right.
8Interest on debenture is payable even if there are no profits i.e. even out of capital.Dividend can be paid to shareholders only out of the profits of the company and not otherwise.
9Interest paid on debenture is a business expenditure and allowable deduction from profits.Dividend is not allowable deduction as business expenditure.
10Return of allotment is not required for allotment of debentures.Return of allotment in Form PAS-3 is to be filed for allotment of shares.

 

Question 3
A public company may issue secured irredeemable debentures. Comment (December 2018) (5 marks)

Answer:
Perpetual or Irredeemable Debentures

A Debenture, in which no time is fixed for the company to pay back the money, is an irredeemable debenture. The debenture holder cannot demand payment as long as the company is a going concern and does not make default in making payment of the interest. But all debentures, whether redeemable or irredeemable become payable on the company going into liquidation.

 According to Rule 18(1) of Companies (Share Capital and Debentures) Rules, 2014, company may issue secured debentures, provided the date of its redemption shall not exceed 10 years from the date of issue.

Provided that

  • a company engaged in the setting up of infrastructure projects
  • Infrastructure Finance Companies
  • Infrastructure Debt Fund Non-Banking Financial Companies
  • Companies permitted by a Ministry or Department of the Central Government or by Reserve Bank of India or by the National Housing Bank or by any other statutory authority

may issue secured debentures for a period exceeding 10 years but not exceeding 30 years;

 Thus, a public company shall not issue secured irredeemable debentures.

Questions relataed to Debentures Trustees

Question 1
What are the rights, powers, and disabilities of debenture trustees? (Dec 2010)(6 Marks)

Answer
Duties of debenture trustees [Section 71(6)]

A debenture trustee shall take steps to protect the interests of the debenture-holders and redress their grievances in accordance with such rules as may be prescribed.

Rule 18 of Companies (Share Capital and Debentures) Rules, 2014 deals with the Rights, Duties and Powers of Debenture Trustees.

Duties of Debenture Trustees

It shall be the duty of every debenture trustee to-

(a)    satisfy himself that the letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed;
(b)   satisfy himself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders;
(c)    ensure that the company does not commit any breach of the terms of issue of debentures or covenants of the trust deed and take such reasonable steps as may be necessary to remedy any such breach;
(d)   inform the debenture holders immediately of any breach of the terms of issue of debentures or covenants of the trust deed;
(e)   ensure the implementation of the conditions regarding creation of security for the debentures, if any, and debenture redemption reserve;
(f)     ensure that the assets of the company issuing debentures and of the guarantors, if any, are sufficient to discharge the interest and principal amount at all times and that such assets are free from any other encumbrances except those which are specifically agreed to by the debenture holders;
(g)    do such acts as are necessary in the event the security becomes enforceable;

Powers of Debenture Trustees

Debenture Trustee may/shall

(a)    call for periodical status or performance reports from the company;
(b)   communicate promptly to the debenture holders defaults, if any, with regard to payment of interest or redemption of debentures and action taken by the trustee therefor;
(c)    appoint a nominee director on the Board of the company in the event of- (1) two consecutive defaults in payment of interest to the debenture holders; or (2)   default in creation of security for debentures; or (3) default in redemption of debentures.
(d)    call for reports on the utilization of funds raised by the issue of debentures
(e)   take steps to convene a meeting of the holders of debentures as and when such meeting is required to be held;
(f)      ensure that the debentures have been converted or redeemed in accordance with the terms of the issue of debentures;

Rights of Debenture TrusteesBefore the appointment of debenture trustee or trustees, a written consent shall be obtained from such debenture trustee or trustees proposed to be appointed and a statement to that effect shall appear in the letter of offer issued for inviting the subscription of the debentures;

Question 2
With reference to the provisions of the Companies Act, 2013 and the rules framed thereunder, state the disqualifications for a Debenture Trustee. Explain whether the following persons can be appointed as Debenture Trustee?

  • A relative of the whole-time director of the company.
  • A shareholder who has no beneficial interest. (June 2019) (5 marks)           or

What are the disqualifications for Debenture Trustees? (Dec 2019)(3 marks)
Answer:
Rule 18(2) of Companies (Share Capital and Debentures) Rules, 2014

A person shall not be appointed as a debenture trustee, if he-

  • beneficially holds shares in the company;
  • is a promoter, director or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary or associate company;
  • is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee;
  • is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;
  • has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;
  • has any pecuniary relationship with the company amounting to 2% or more of its gross turnover or total income or 50 Lakhs or whichever is lower, during the 2 immediately preceding financial years or during the current financial year;
  • is relative of any promoter or any person who is in the employment of the company as a director or key managerial personnel

Thus,

  • A relative of the whole-time director of the company cannot become the debenture trustee.
  • A shareholder who has no beneficial interest in the company may become the debenture trustee.

Applicability of Provisions related to Deposits

Question 1.
Provision of section 73 is not applicable to guarantee companies and Section 8 companies (that is association not for profit). (June 2009) (5 marks)

Answer:
Section 73 deals with the Acceptance of Deposits According to Section 73(1), no company shall invite, accept or renew deposits under this Act from the public except in a manner provided under this Chapter.

But provisions of this chapter (Section 73 to 76A) is not applicable on:

  • a banking company and
  • a non- banking financial company as defined in the RBI Act, 1934 and
  • a housing finance company registered with the National Housing Bank; and
  • such other company as the Central Government may, after consultation with the RBI, specify in this behalf.

Thus, provisions of section 73 are applicable to guarantee companies and Section 8 companies

Definition of Deposits

Question 1.
Define the term ‘deposits’ and list out the receipts of money which are not considered deposits. (December 2016) (8 marks)

Answer:
According to the Section 2(31) of the Act read with Rule 2(c) of Companies (Acceptance of Deposits) Rules, 2014, “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company.

Further, following shall be treated as a deposit
Any amount

(a) received by the company, whether in the form of installments or otherwise, from a person with promise or offer to give returns, in cash or in kind, on completion of the period specified in the promise or offer, or earlier, accounted for in any manner whatsoever, or
(b) any additional contributions, over and above the amount under item (a) above, made by the company as part of such promise or offer

But following receipts shall not be considered as deposit:

(i) any amount received from

  • Central Government or a State Government, or
  • from any other source whose repayment is guaranteed by the Central Government or a State Government, or
  • a local authority, or
  • a statutory authority

(ii) any amount received from

  • foreign Governments,
  • foreign/international banks,
  • multilateral financial institutions,
  • foreign government owned development financial institutions,
  • foreign export credit agencies,
  • foreign collaborators,
  • foreign bodies corporate and foreign citizens,
  • foreign authorities or persons resident outside India subject to the provisions of FEMA

(iii) any amount received as a loan or facility from

    • any banking company or
    • the State Bank of India or
    • any of its subsidiary banks or
    • a banking institution notified by the Central Government

(iv) any amount received as a loan or financial assistance from

    • Public Financial Institutions,
    • Regional financial institutions,
    • Insurance Companies or
    • Scheduled Banks

(v) any amount received against issue of commercial paper or any other instrument issued in accordance with the guidelines or notification issued by the RBI;
(vi) any amount received by a company from any other company;
(vii) any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for
(viii) any amount received from a Peron who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company:
(ix) any amount raised by the issue of bonds or debentures

    • if such bonds or debentures are secured by a first charge or a charge ranking pari passu with the first charge on any assets excluding intangible assets of the company or
    • bonds/debentures are compulsorily convertible into shares of the company within 10 years.

(x) any amount raised by issue of non-convertible debenture not constituting a charge on the assets of the company and listed on a stock exchange.
(xi) Interest free security deposit from an employee not exceeding his annual salary
(xii) Any non-interest bearing amount received and held in trust;
(xiii) any amount received in the course of or for the purposes of the business of the company:
(ixv) any amount accepted by a Nidhi Company
(xv) any amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982;
(xvi) any amount received by the company under any collective investment scheme
(xvii) an amount of 25 lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding 5 years from the date of issue) in a single tranche, from a person.
(xviii) any amount received by a company from Alternate Investment Funds, Domestic Venture Capital Funds Infrastructure Investment Trusts, Real Estate Investment Trusts and Mutual Funds.

Question 2
Issue of unsecured debentures by a company to another company, where the debentures have an option for compulsory conversion into equity share within seven years, cannot be termed as deposits. (December 2016) (5 marks)

 Answer:
Although unsecured debentures are considered as deposits. But under Section 2(31) of Companies Act, 2013 read with Rule 2(c) of Companies (Acceptance of Deposits) Rules, 2014, any amount received by a company from any other company shall not be considered as deposits.

Further, any amount raised by the issue of bonds or debentures if bonds/debentures are compulsorily convertible into shares of the company within 10 years, shall not be considered as deposit.

 Thus, the statement given in the question is correct.

Question 3
Prism Limited has accepted rupees INR 10 lakh as an advance towards the supply of goods to certain parties. As per the agreement, the company will supply the goods after two years from the date of deposit. Letter on, internal auditors qualified their report on the ground that the company has violated the provisions of the Companies Act, 2013. Directors explained that this is required to complete the order. Examining the relevant provisions of the Companies Act, 2013, state whether the explanation given by the directors is justified. (June 2016) (4 marks)

Answer:
According to Section 2(31) of the Companies Act, 2013, ‘Deposit’ includes any receipt of money by way of deposit or loan or in any other form by a company but does not include such categories of amount as may be prescribed in consultation with the RBI.

As per Rule 2 of the Companies (Acceptance of Deposit) Rules, 2014, the deposit does not include any amount received in the course of or for the purpose of the Business of the company as an advance for the supply of goods or provision of services provided that such advance is appropriated against supply of goods or provision of services within a period of 365 days from acceptance of such advance.

As per facts given in the case, Prism Ltd. has accepted INR 10 lakh as an advance towards the supply of goods to certain parties. As per the agreement, the company will supply the goods after two years from the date of deposit.

Thus, the company has accepted advance for more than 365 days for the supply of goods, and hence it is ‘Deposit’ as per Section 2(31) read with Rule 2 of the Companies (Acceptance of Deposit) Rules, 2014. The Company has defaulted in accepting deposit without complying with the provision and hence remark passed by the internal auditor is correct and explanation given by the director is not sufficient

Question 4
Fun and Frolic Limited has received INR 5,00,000 from its Promoters as an unsecured loan in pursuance of the stipulation of credit facilities from the Bank. Can the company accept the unsecured loan? What would be your answer if the company has repaid in full its amount of credit facility and after such repayment, the company continues this unsecured loan? Referring to the provisions of the Companies Act, 2013. Advice the company (June 2018) (4 marks)

Answer:
As per Rule 2 of the Companies (Acceptance of Deposits) Rules, 2014, the deposit does not include any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to fulfilment of the following conditions:-

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

As per the facts given in the case, Fun and Frolic Limited has received INR 5,00,000 from its promoters as an unsecured loan in pursuance of the stipulation of credit facilities from the Bank. Such unsecured loan will not be treated as a deposit till the loans of financial institution or bank are repaid and not thereafter.

However, after repayment of the credit facility if the company continues to keep the unsecured loan of its promoter, then it will be treated as a deposit.

Questions related to acceptance of deposits by Private companies

Question 1.
A private limited company can accept deposits from its member under the provisions of the Companies Act, 2013. (June 2018) (4 marks)

Answer:
Acceptance of deposits by Private companies from its members
The MCA vide notification dated 5th June 2015 has allowed private companies to accept deposits from its members, monies not exceeding 100% of aggregate of the paid up share capital and free reserves, and such company shall file the details of monies so accepted to the Registrar in such manner as may be specified without complying with Section 73(2) (a) to (e).

Thus a private company will have to follow only the condition mentioned in Section 73(2) (f) i.e. providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company

Private companies cannot accept deposits from public.

Question 2.
A private company and a banking company can freely accept deposits. (June 2019) (5 marks)

Answer:
Acceptance of deposits by Private companies
The MCA vide notification dated 5th June 2015 has allowed private companies to accept deposits from its members, monies not exceeding 100% of aggregate of the paid up share capital and free reserves.

Private companies cannot accept deposits from public.
Acceptance of deposits by banking companies

According to Section 73(1), no company shall invite, accept or renew deposits under this Act from the public except in a manner provided under this Chapter (Section 73 to section 76A).

But provisions of this chapter is not applicable on:

  • a banking company and
  • a non- banking financial company as defined in the RBI Act, 1934 and
  • a housing finance company registered with the National Housing Bank; and such other company as the Central Government may, after consultation with the RBI, specify in this behalf.

It means a banking company may accept deposits freely.

Question 3
A private company incorporated under the Companies Act, 2013 may issue debentures to any number of persons and can accept deposits from public. (Dec 2017)(5 Marks)

Answer
Issuance of Debentures by Private Company

A private company may issue debentures through private placement only. It cannot make public issue of Debentures.

According to Section 42 of Companies Act, 2013 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, an offer or invitation to subscribe securities under private placement shall not be made to persons more than 200 in the aggregate in a financial year.

Thus, a private company can issue debentures to max. 200 person in a financial year.

Acceptance of deposits by Private companies
The MCA vide notification dated 5th June 2015 has allowed private companies to accept deposits from its members, monies not exceeding 100% of aggregate of the paid up share capital and free reserves, and such company shall file the details of monies so accepted to the Registrar in such manner as may be specified without complying with Section 73(2) (a) to (e).

Thus a private company will have to follow only the condition mentioned in Section 73(2) (f) i.e. providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company

Private companies cannot accept deposits from public.

Questions related to Deposit Rules

Question 1
The Board of directors of Green Field Limited decides to accept deposits, from the public at a compound interest rate of 12% per annum. Examining the provisions of the Companies Act, 2013, advise whether the Board can go ahead with its proposal. (June 2016) (4 marks)

Answer:
Max. Rate of interest and brokerage [Rule 3(6) of Companies (Acceptance of Deposits) Rules, 2014
No company under section 73(2) or any eligible company shall invite or accept or renew any deposits in any form, carrying a rate of interest or pay brokerage thereon at a rate exceeding the maximum rate of interest or brokerage prescribed by the RBI for acceptance of deposits by non-banking financial companies.

Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or compounded at rests not shorter than monthly rests.

Thus, Board of Directors of Green Field Limited can go ahead with its proposal.

Question 2
A single fixed deposit holder, after marriage, applied for adding the name of his wife as joint holder. The company refused to do so. Comment (June 2011) (4 marks)

Answer:
Rule 2(1)(d) of Companies (Acceptance of Deposits) Rules, 2014 defines depositor as under:
Depositor’ means-

  1. any member of the company who has made a deposit with the company in accordance with subsection (2) of section 73 of the Act, or
  2. . any person who has made a deposit with a public company in accordance with section 76 of the Act.

As per Rule 3(2), where depositors so desire, deposits may be accepted in joint names not excluding three, with or without any of the clauses namely, “Jointly”, “Either or Survivor”, “First named or Survivor”, “Anyone or Survivor”.

Thus, the company cannot refuse to add the name of the wife of the deposit holder.

Question 3
Shine Well Limited has accepted deposits from the public under the Companies (Acceptance of Deposits) Rules, 2014. The company now decided to repay some of its deposits before maturity. Can the company do so? If yes, what are the conditions attached there too? (June 2011) (4 marks)

Answer:
Provisions regarding premature repayment of deposits [Rule 15]
When a company makes a repayment of deposits, on the request of the depositor, after the expiry of a period of 6 months from the date of such deposit but before the expiry of the period for which such deposit was accepted, the rate of interest payable on such deposit shall be reduced by 1% from the rate which the company would have paid had the deposit been accepted for the period for which such deposit had actually run and the company shall not pay interest at any rate higher than the rate so reduced.

Thus,

  • Shine Well Limited may makes a repayment of deposits, on the request of the depositor, only after the expiry of a period of 6 months from the date of such deposit.
  • The rate of interest payable on such pre-matured deposit shall be reduced by 1% from the rate which the company would have paid had the deposit been accepted.

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