ICSI Past Attempt Question Answer from Chapter 2 &4 of SBEC

Type of Companies

Dec 2021 Q1(b)(i) (3 Marks) Associate Companies
Luv Ltd. has entered into a contract with Kush Ltd. by which Kush Ltd. will control 22% of the sale and disposal of the output of Luv Ltd. Enumerate the nature of relationship between both Companies.

Answer
As per Section 2(6) of the Companies Act, 2013, “associate company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

“Significant Influence” means control of at least 20% of total voting power, or control of or participation in business decisions under an agreement.

In the given case, Kush Ltd. controls more than 20% of the sale and disposal of the output of Luv Ltd. Thus Luv Ltd. is the associate of Kush Ltd. But Luv Ltd. neither influences the business decision of Kush Ltd. in any manner nor does it control 20% of the total share capital of Kush Ltd.

Hence Kush Ltd. cannot be called an associate of Luv Ltd.

Dec 2021 Q1(b)(ii) (2 Marks) Small Companies
If Surya Pvt. Ltd. having paid up share capital of Rs. 45 Lakhs and annual Turnover of Rs. 185 Lacs is a wholly owned subsidiary of Hima Ltd. a listed Company. Can Surya Pvt. Ltd. be called a Small Company? Explain.

Answer
As per Section 2(85) of the Companies Act 2013 read with Rule 2(1)(t) of the Companies (Specification of definitions Details) Rules, 2014, “Small Company’’ means a company, other than a public company, having—

  • paid-up share capital of which does not exceed two crores rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and
  • turnover of which as per profit and loss account for the immediately preceding financial year does not exceed twenty crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company; 
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;

In the given case, Surya Pvt. Ltd. satisfies the turnover and paid up share capital criteria to be small company, but being a subsidiary of Hima Ltd., it falls under the exclusions to the definition and hence is not a small Company.

Dec 2021 Q2(d)(4 Marks) Nidhi Companies
Mahesh Nidhi Limited was incorporated on 30th September, 2020. The Board of Directors seek your advice about the compliances need to be done in respect of each of the following:

(i) Compliances which are required to be done upto the end of first financial year of the Company.
(ii) Opening of branches of Mahesh Nidhi Limited

Answer

(i)     As per Rule 5(1) of the Nidhi Rules, 2014 deals with requirements for minimum number of members, net owned fund etc. It provides that every Nidhi shall, within a period of 1 year from the date of its incorporation, ensure that it has:

  • Not less than 200 members
  • Net Owned Funds of Rs. 10 lakh or more
  • Unencumbered term deposits of not less than 10% of the outstanding deposits
  • Ratio of Net Owned Funds to deposits of not more than 1:20.

Thus Mahesh Nidhi Ltd. needs to ensure above requirement upto end of the first financial year of the Company.

(ii)    Rule 10 of the Nidhi Rules, 2014 lays down conditions for opening branches by a Nidhi Company as follows:

  • A Nidhi may open branches, only if it has earned net profits after tax continuously during the preceding three financial years. A Nidhi may open up to three branches within the district.
  • If a Nidhi proposes to open more than three branches within the district or any branch outside the district, it shall obtain the prior permission of the Regional Director and an intimation is to be given to the Registrar about opening of every branch within thirty days of such opening.
  • Nidhi shall not open branches or collection centres or offices or deposit centres, or by whatever name called outside the State where its registered office is situated.
  • Nidhi shall not open branches or collection centres or offices or deposit centres, or by whatever name called unless financial statement and annual return (up to date) are filed with the Registrar.

Dec 2021 Q2A(iv)(4 Marks) Foreign Companies
M N Ltd., a Company registered in Japan has established a place of business in India. Advise MN Ltd. on the documents required to be filed by the Company with the concerned Registrar of Companies under the provisions of the Companies Act, 2013.

 Answer
As per Section 380 of the Companies Act, 2013, the following documents are required to be filed by MN Ltd., a foreign company with the concerned Registrar of Companies within 30 days of establishment of place of business in India:

  • Certified copy of the charter, statutes or memorandum and articles, of the company or other instrument constituting or defining the constitution of the company and, if the instrument is not in the English language, a certified translation thereof in the English language;
  • Full address of the registered or principal office of the company;
  • List of the directors and secretary of the company containing such particulars as prescribed;
  • Name and address or the names and addresses of one or more persons resident in India authorised to accept on behalf of the company service of process and any notices or other documents required to be served on the company;
  • Full address of the office of the company in India which is deemed to be its principal place of business in India;
  • Particulars of opening and closing of a place of business in India on earlier occasion or occasions;
  • Declaration that none of the directors of the company or the authorised representative in India has ever been convicted or debarred from formation of companies and management in India or abroad; and
  • Any other information as may be prescribed.

June 2021 Q1(b)(5 Marks) Nidhi Companies
Nidhi Companies can provide loans to its members’ subject to certain limits as per Nidhi Rules, 2014. Rakesh being a member of a Nidhi Company wants to know the limits mentioned under Nidhi Rules, 2014 and also seek your advice whether a second loan can be granted within limits specified, if 1st loan is overdue, outstanding and remains unpaid.

Answer
According to Rule 15 of Nidhis Rules, 2014 a Nidhi company can provide loans only to its members. The loans given by a Nidhi company to a member shall be subject to the following limits, namely:

Rs. 2 lakhs, where the total amount of deposits of such Nidhi from its members is less than Rs. 2 crore;

Rs. 7.50 lakhs, where the total amount of deposits of such Nidhi from its members is more than Rs. 2 crore but less than Rs. 20 crore;

Rs. 12 lakhs, where the total amount of deposits of such Nidhi from its members is more than Rs. 20 crore but less than Rs. 50 crore; and

Rs. 15 lakhs, where the total amount of deposits of such Nidhi from its members is more than Rs. 50 crore.

However, where a Nidhi has not made profits continuously in the three preceding financial years, it shall not make any fresh loans exceeding 50% of the maximum amounts of loans specified in above mentioned clauses.

A member shall not be eligible for any further loan, if he has borrowed any earlier loan from the Nidhi and has defaulted in repayment of such loan. Based on above provision, Rakesh cannot be granted 2nd loan as he has defaulted in repayment of 1st loan.

June 2021 Q1(c)(i)(2.5 Marks) Private Companies
State the consequences in each of the following cases giving reasons for your answers:

A Private Company has 210 members in total out of which 10 are the employees of the company. Will your answer differ, if 5 of these employees leave the employment of the company?

 Answer
Section 2(68) of the Companies Act, 2013 provides that private companies can have a maximum of 200 members (except for One Person Companies).

This number does not include present employees and former employees who were members of the company while in that employment and have continued to be members after the employment has ceased.

Moreover, where two or more persons hold one or more shares in a company jointly, they shall, be treated as a single member.

Hence, the company is within the maximum limit of 200 members.

The answer would have remained same even if 5 employees leave the employment as threshold limit of 200 persons for private company does not take into account former employees who were members of the company while in employment and continued to be member even after employment ceased.

June 2021 Q2(a)(4 Marks) Foreign Companies
Melta LLC is a Limited Liability Corporation registered in California (USA). The company has no place of business in India by itself or through agent, but it’s doing online business through electronic mode in India. Explain whether Melta LLC will be treated as a Foreign Company as per the provisions of the Companies Act, 2013.

Answer
As per Section 2(42) of the Companies Act, 2013, foreign company means any company or body corporate incorporated outside India which-

  • has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
  • conducts any business activity in India in any other manner.

The Companies (Specification of Definitions Details) Rules, 2014 defines the term ‘electronic mode’ in the context of a foreign company under Rule 2(h). The same is also defined under Rule 2 (1)(c) of the Companies (Registration of Foreign Companies) Rules, 2014.

The definition of electronic mode encompasses all electronic based transactions, whether main server is installed in India or not, including, but not limited to-

  • business to business and business to consumer transactions,
  • data interchange and other digital supply transactions,
  • offering to accept/inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India,
  • financial settlements,
  • web based marketing,
  • advisory and transactional services,
  • database services and products,
  • supply chain management.

It further includes all online services and all related data communication services, whether conducted by e-mail, mobile devices, cloud computing, social media, data transmission or otherwise.

Hence, Melta LLC is treated as Foreign Company, even though it has no place of business in India, but it is conducting its online business through electronic mode in India.

Dec 2020 Q2(b)(4 Marks) Govt. Companies
PQR Ltd. was incorporated as a Government Company. The Authorised Share Capital of the Company is Rs. 15 Crore. The Paid-up Share Capital of the Company is Rs. 3 Crore. What provisions of section 203 of the Companies Act, 2013 are applicable to a Government Company with respect to appointment of Key Managerial Personnel?

Answer
Section 203 of the Companies Act, 2013 read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 mandates the appointment of whole-time Key Managerial Personnel and makes it obligatory for every listed company and every other public company having a paid- up share capital of Rs. 10 crores or more, to appoint the following whole-time key managerial personnel:

1.        

Managing Director, or Chief Executive Officer or Manager and in their absence, a Whole-Time Director;

2.        

Company Secretary; and

3.        

Chief Financial Officer.

Further rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 requires that every private company which has a paid-up share capital of Rs. 10 crore or more shall have a whole -time company secretary.

Vide notification dated June 05, 2015 issued by Ministry of Corporate Affairs, Government Companies are granted certain exemptions. As per the said notifications:

  • The provisions of sub-sections (1), (2), (3) and (4) of Section 203 of the Companies Act, 2013 with respect to appointment of key managerial personnel, holding of office, period within which appointment to be made in case of vacation of office of KMP, will not apply to a Managing Director or Chief Executive Officer or Manager and in their absence, a whole-time director of the Government company.
  • However, all the provisions of Section 203 of the Companies Act, 2013 will continue to apply to CFO and CS of Government Companies as only these persons will be mandatorily required to be appointed as whole time KMP in case of selected class of companies prescribed in the Companies Act, 2013.

As the Paid-up share capital of PQR Ltd. is Rs. 3 crores which is less than prescribed limit mentioned under Section 203 of the Companies Act, 2013, it is not required to appoint the whole-time Key Managerial Personnel in the Company.

Dec 2020 Q2A(v)(4 Marks) Net Owned Fund Nidhi Companies
Define the term ‘Net Owned Fund’.
Answer
According to Rule 3 of the Nidhis Rules, 2014, Net Owned Fund means the aggregate of paid up equity share capital and free reserves as reduced by accumulated losses and intangible assets appearing in the last audited balance sheet.

Further, the amount representing the proceeds of issue of preference shares shall not be included for calculating Net Owned Funds.

Dec 2019 Q1(c)(5 Marks) Small Companies
TP Private Ltd. Company registered under the Companies Act, 2013 with paid up capital of Rs 35 lakh and turnover of Rs 2.5 crore. Explain the meaning of ‘Small Company’ and examine the following in accordance with the provision of the Companies Act, 2013 :

(i) Whether the TP Pvt. Limited can avail the status of ‘Small Company’ ?
(ii) Will your answer be different if the turnover of the company is Rs 1 crore ?

 Answer
Section 2(85) of the Companies Act, 2013 defines a ‘small company’ as a company, other than a public company, –

(i)

paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and

(ii)

turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:

Provided that nothing in this clause shall apply to –

(A)

a holding company or a subsidiary company;

(B)

a company registered under section 8; or

(C)

a company or body corporate governed by any Special Act.

Hence, in order to avail the status of a ‘small company’, a company has to fulfill both conditions (i) and (ii) above.

(i)

In the given case, TP Pvt. Ltd. is a registered company under the Companies Act, 2013 with a paid-up capital of Rs.35 lakh and turnover of Rs.2.5 crore. As per the provision it only meets one criteria i.e. share capital does not exceed fifty lakh rupees and does not meet the second criteria. Hence, TP Pvt. Ltd. cannot avail the status of small company.

(ii)

If the turnover of the company is Rs.1 crore then TP Pvt. Ltd. can avail the status of small company as both the conditions will be fulfilled.

Dec 2019 Q1(d)(5 Marks) OPC
Axar is in plant research and he has invented a process for extracting bio-fuel from certain plants, now he is proposing to commercialize his invention by promoting a One Person Company (OPC). But he proposes his name and his wife name as directors of the Company. As a Company Secretary clarify Axar on number of shareholders and directors OPC can have. Also brief him the provisions on Board, Annual General Meeting, signing of Financial statements, Board’s Report and Annual Return

 Answer
According to Section 2(62) of the Companies Act, 2013, ‘One Person Company’ means a company which has only one person as a member. A natural person who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company (OPC).

As per section 149(1) of the Companies Act, 2013, One Person Company may have more than one director on its Board. But an OPC should have only one member. Hence, Axar may incorporate an OPC and he and his wife may be the directors of the company.

As per section 173(5) of the Companies Act, 2013, it is required to hold at least one meeting of the Board of Directors in each half of a calendar year and the gap between the two meetings should not be less than ninety days.

For an OPC having only one director, the provisions of section 173 (Meetings of the Board) and section 174 (Quorum for meeting of Board) of the Companies Act, 2013 will not apply.

As per section 96(1) of the Companies Act, 2013, OPC need not hold annual general meeting.

As per section 92(1) of the Companies Act, 2013, the annual return shall be signed by the Company Secretary, or where there is no Company Secretary, by the director of company.

As per section 134(1) of the Companies Act, 2013, financial statement and Board’s Report can be signed only by one director. 

June 2019 Q1(b)(5 Marks) Foreign Companies
Actavis Ireland Ltd. a pharma firm incorporated in Ireland:

(i)           has a share transfer office in Kanpur
(ii)          Directors of the company frequently stayed in a hotel in Noida and Mumbai for looking after matters of business, the company does not have any physical office or property in India.

As a practising Company Secretary, advise under the provisions of the Companies Act, 2013, whether the company will be treated as having place of business in India?

Answer
As per Section 2(42) of the Companies Act, 2013, ‘Foreign Company’ means any company or body incorporated outside India which —

a.        

has a place of business in India whether by itself or through an agent physically or through electronic mode; and

b.       

conducts any business activity in India in any other manner As per Section 386(c) of the Companies Act, 2013, for the purpose of Chapter XXII, which provides the provision for foreign companies, states that the expression “place of business” includes a share transfer or registration office.

The similar was held in the case of Tovarishestvo Manufacture Liudivg Rabenek, Re (1944). In the case, the court was of the opinion that where representative of a Company incorporated outside the country, frequently stayed in a hotel in England for looking after the matter of the business, then it would be assumed that the company had a place of business in England.

In certain other cases also, it was held that mere holding of property cannot tantamount to having a place of business in India.

Accordingly, applying the above proposition in the given case, it would be advisable to the Actavis Ireland Ltd., a Pharma Firm, incorporated in Ireland, that it has —

  1. A share transfer office in Kanpur which constitutes a place of business in India and
  2. Its Directors frequently stayed in a hotel in Noida and Mumbai for looking after matter of business.

Though the Company does not have any physical office or property in India, it would be treated as having a place of business in India.

June 2019 Q1(d)(5 Marks) Subsidiary Companies
The paid up share capital of PKA India Pvt. Ltd. is Rs. 20 crore, consisting of 150 lakh fully paid up Equity Shares of Rs. 10 each, and 50 lakh fully paid up Cumulative Preference Shares of Rs. 10 each. PKA India Capital Pvt. Ltd. and PKA India Tele Services Pvt. Ltd. are holding 55 lakh and 25 lakh Equity Shares respectively in PKA India Pvt. Ltd.

PKA India Capital Pvt. Ltd. and PKA India Tele Services Pvt. Ltd. are subsidiaries of Lord Krishna Pvt. Ltd.

Referring to the provisions of the Companies Act, 2013 examine whether PKA India Pvt. Ltd. is a subsidiary of Lord Krishna Pvt. Ltd.?

Would your answer be different if Lord Krishna Pvt. Ltd. has five out of total seven directors on the Board of Directors of PKA India Pvt. Ltd.?

Answer
As per Section 2(87) of the Companies Act, 2013, subsidiary company means a company in which the other company (“Holding Company”): —

i.             

Controls the composition of the Board of Directors; or

ii.

Exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies.

The meaning of phrase “total voting power” has been defined under Section 2(89) of the Companies Act, 2013, which states that total voting power in relation to any matter means the total number of votes which may be cast in regard to that matter on a poll at a meeting of a company if all the members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes.

The total equity share capital of PKA India Pvt. Ltd. is Rs. 1500 Lakhs and in absence of any specific condition in the problem, it may be presumed that the all equity share of PKA India Pvt. Ltd. is carrying equal voting rights.

The PKA India Capital Pvt. Ltd. holds Rs. 550 Lakhs in PKA India Pvt. Ltd. and PKA India Tele Services Pvt. Ltd. holds Rs. 250 Lakhs in PKA India Pvt. Ltd. And PKA India Capital Pvt. Ltd. and PKA India Tele Services Pvt. Ltd. both are subsidiaries of Lord Krishna Ltd.

From the above, it is clear that PKA India Capital Pvt. and PKA India Tele Services Pvt. Ltd. collectively holds 800 lakhs equity share capital in PKA India Pvt. Ltd, and both of them are subsidiaries of Lord Krishna Ltd.

Thus, in view of Section 2(87)(ii) of the Companies Act, 2013, it can be said that Lord Krishna Ltd exercises or controls more than half of the total voting power in PKA India Pvt. Ltd together its subsidiaries viz. PKA India Capital Pvt. and PKA India Tele Services Pvt. Ltd.

Accordingly, PKA India Pvt. Ltd shall become an indirect subsidiary of Lord Krishna Ltd.

Even if Lord Krishna Ltd would have right to appoint five directors out of total seven directors in PKA India Pvt. Ltd even then Answer would remain same for the question of Lord Krishna Ltd.’ However, under this circumstance, PKA India Pvt. Ltd., becomes direct subsidiary of Lord Krishna Ltd., as per the provisions of Section 2(87)(1) of the Companies Act, 2013 i.e. through controlling the composition of Board of Directors.

June 2019 Q2(a)(4 Marks) Nidhi Companies
Ragavi and her six more relatives & friends want to incorporate a Nidhi Company. They seek your advice on the following issues with respect to the formation of company:

(i)           Whether Nidhi Company can be formed as a private company? Is there any specific law for the Nidhi Companies?
(ii)          Whether the approval of Reserve Bank of India (RBI) is required?
(iii)         Whether Nidhi is allowed to raise funds through issue of equity shares and preference shares?
(iv)         Whether Nidhi is allowed to carry on business other than the business of borrowing or lending in its own name  

As a practising Company Secretary, advise with reference to the provisions of the Companies Act, 2013.

Answer

i.             

No, as per rule 4 of the Nidhi Rules, 2014, a Nidhi Company to be incorporated under the Companies Act, 2013 shall be a public company and shall have a minimum paid up equity share capital of five lakh rupees and these Nidhi Companies are required to comply with two set of norms, one as a Public Limited Company under the provisions of Companies Act, 2013 and another under the Nidhi Rules, 2014.

ii.

No, RBI approval is not necessary to register the Nidhi Company, as RBI has specifically exempted this category of NBFC in India.

iii.

As per rule 6 of the Nidhi Rules, 2014, no Nidhi Company shall issue preference shares, debentures or any other debt instrument by any name or in any form whatsoever.

v.

As per rule 6 of the Nidhi Rules, 2014, no Nidhi Company shall carry on any business other than the business of borrowing or lending in its own name

 

June 2019 Q2A(i)(4 Marks) Small Companies
A Company under Section 8 can be registered as a Small Company under the provisions of the Companies Act, 2013.

Answer
As per Section 2(85) of the Companies Act, 2013 small company means a company, other than a public company,

i.             

Paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and

ii.

Turnover of which for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees.

Further proviso to Section 2(85) of the Companies Act, 2013 provides that nothing in Section 2(85) shall apply to

a.        

A holding company or a subsidiary company; or

b.       

A company registered under section 8; or

c.        

A company or body corporate governed by any special Act.

Accordingly, as per the above provisions, a Company registered under Section 8 cannot be treated as Small Company or a Company under Section 8 cannot be registered as Small Company.

June 2019 Q2A(i)(4 Marks) Small Companies
A Company under Section 8 can be registered as a Small Company under the provisions of the Companies Act, 2013.

Answer
As per Section 2(85) of the Companies Act, 2013 small company means a company, other than a public company,

i.             

Paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and

ii.

Turnover of which for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees.

Further proviso to Section 2(85) of the Companies Act, 2013 provides that nothing in Section 2(85) shall apply to

a.        

A holding company or a subsidiary company; or

b.       

A company registered under section 8; or

c.        

A company or body corporate governed by any special Act.

Accordingly, as per the above provisions, a Company registered under Section 8 cannot be treated as Small Company or a Company under Section 8 cannot be registered as Small Company.

Dec 2018 Q1(c)(5 Marks) Govt. Companies
43% of the paid up share capital of V4C Ltd. is held by the Central Government and 8% is held by the Life Insurance Corporation of India and Unit Trust of India (Public Institutions). Analyze the definition of ‘Government Company’ under the provisions of the Companies Act, 2013 and decide whether V4C Ltd. is a Government Company.
Answer
No, V4C is not a Government Company.

According to Section 2 (45) of the Companies Act, 2013, a Government Company means any company in which not less than 51% of the paid up share capital is held by—

a.        

The Central Government (CG) or

b.       

Any State Government or Governments (SG) or

c.        

Partly by the Central Government and partly by one or more State Governments.

Thus, in determining whether a company is a Government Company or not, the percentage of its paid up share capital held by CG and/ or SG shall be considered.

In the given problem, 43% of the paid up capital of V4C Ltd is held by CG, however, 8% shares are held by Life insurance Corporation of India and the Unit Trust of India, which are public authorities and not Central Government or State Government.

In view of the definition of the Government Company given u/s 2(45) of the Companies Act, 2013, the shares held by the Public institutions viz Life insurance Corporation of India and the Unit Trust of India shall not to be taken into consideration for identifying a Company as Government Company.

As CG holds 43% in V4C Ltd, therefore, it is not a Government Company.

Dec 2018 Q2A(iv)(4 Marks) Small Companies
Pratham Food Trading Pvt. Ltd. has a paid up capital of 50 lakh and turnover of 1.20 crore in the last financial year 2017-18. The company has filed its annual return for the relevant financial year signed by only one director of the company. With reference to the provisions of the Companies Act. 2013, analytically comment whether the act of the company is in order?

Answer
Sub section (85) of Section 2 of the Companies Act, 2013 defines “Small Company” as under — “Small Company” means a Company, other than a public company —

 i.

Paid up capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and

ii. 

Turnover of which as per profit and loss account for the immediately preceding financial year] does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:

Provided that nothing in this clause shall apply to —

a.        

A holding company or a subsidiary company;

b.       

A company registered under section 8; or

c.        

A company or body corporate governed by any special Act.

By applying the above provision to the given problem, Pratham Food Trading Private Ltd would be a “Small Company” since it has paid up capital of Rs 50 lakh and turnover of Rs 1.20 crore in the last financial year 2017-18 which is within the limit prescribed under Section 2(85) of the Companies Act, 2013.

As per Section 92 of the Companies Act, 2013, the annual return of a private company classified as “Small Company”, can be signed by a Company Secretary or by a Director of that private limited company as permitted by proviso to Section 92(1) of the Act.

In view of the above, in the given case, Company has filed its annual return for the relevant financial year signed only by one director of the company. Hence, the act of the company is in order.

Question Answers (Incorporation of Companies)

June 2021 Q1(c)(ii)(2.5 Marks) Section 3A – Time Frame
State the consequences in each of the following cases giving reasons for your answers:

A Public Company has 150 shareholders in total of which 47 members and 2 out of 4 directors dies due to epidemic. What is the time frame allowed under the Companies Act for compliance in case of non-compliance of provisions regarding status of the Company?

Answer
Due to separate legal entity concept, a company limited by shares, whether private or public, is not affected by death of one of its shareholders, but the shares are transmitted to the next kin or legal heir of such deceased shareholder and the company continues to run its business as usual.

Section 149(1) of the Companies Act, 2013 requires that every public company shall have a minimum number of 3 directors. Further, Section 161(4) of the Companies Act, 2013 states that if the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board which shall be subsequently approved by members in the immediate next General Meeting (Annual General Meeting or Extra-Ordinary General Meeting).

Therefore, in the given case of a director’s death, subject to any provisions of the Articles of Association of the company, the Board is empowered to fill the resulting casual vacancy which may be filled by Board of Directors at Board meeting and which shall be subsequently approved by members in the immediate next General Meeting.

June 2021 Q2A(iii)(4 Marks) ACTIVE – Non Compliant
Nataasha Dalvi was appointed as a Director of a Company imparting online education. She checked the MCA website to know the status of the Company and found that Company name is marked as ‘ACTIVE – non-compliant’. Explain to her reasoning for such status and also brief her what types of Forms cannot be filed when Company is in ‘ACITIVE – non-compliant’ status.

Answer
As per Rule 25A of Incorporation Rules, every company incorporated on or before the 31st December, 2017 shall file the particulars of the company and its registered office, in e-Form Active (Active Company Tagging Identities and Verification) on or before 15.06.2019.

Cases when filling of e-Form Active is not allowed
Any company which has not filed its

  • due financial statements under section 137 or
  • due annual returns under section 92 or
  • both

with the Registrar shall be restricted from filing e-Form-Active, unless such company is under management dispute and the Registrar has recorded the same on the register

Cases when filling of e-Form Active is not Required
Companies which have been struck off or are under process of striking off or under liquidation or amalgamated or dissolved, as recorded in the register, shall not be required to file e-Form Active.

Consequences of not filing e-Form Active

  • In case a company does not intimate the said particulars, the Company shall be marked as “Active-non-compliant” on or after 16th June, 2019 and shall be liable for action under sub-section (9) of section 12 of the Act
  • Further, no request for recording the following event based information or changes shall be accepted by the Registrar from such companies marked as “Active-non-compliant”, unless “ e-Form Active” is filed –
  • SH-07 (Change in Authorized Capital);
  • PAS-03 (Change in Paid-up Capital);
  • DIR-12 (changes in Director except in case of :
  • cessation of any director or
  • appointment of directors in such company where the total number of directors are less than the minimum number provided in clause (a) of sub-section (1) of section 149 on account of disqualification of all or any of the director under section 164.
  • appointment of any director in such company where DINs of all or any its director(s) have been deactivated.
  • appointment of director(s) for implementation of the order passed by the Court or Tribunal or Appellate Tribunal under the provisions of this Act or under the Insolvency and Bankruptcy Code, 2016).]
  • INC-22 (Change in Registered Office);
  • INC-28 (Amalgamation, de-merger)

Filing of “e-Form Active”, on or after 16th June, 2019
Where a company files “e-Form Active”, on or after 16th June, 2019, the company shall be marked as “Active Compliant”, on payment of fee of Rs. 10,000.

Dec 2020 Q1(b)(5 Marks) Active Status in case of Government Companies
ABC Ltd. was incorporated on 11th December, 2018 as a Government Company with the main object to provide examination services to other Public Sector Undertakings where the employees are recruited through advertisement. The Secretary, Education informed the Managing Director that there are recent changes with respect to “Active Company Tagging Identities and Verification” in Companies (Incorporation) Rules, 2014. Comment about applicability of Active Compliance with respect to ABC Ltd., a Government Company.

Answer
As per Rule 25A of the Companies (Incorporation) Rules, 2014, every Company incorporated on or before December 31, 2017 is required to file the particulars of the Company and its registered office, in E-Form ACTIVE (Active Company Tagging Identities and Verification) on or before June 15, 2019.

However, following companies are exempted for filing e-Form ACTIVE:

(a)

Companies which have been struck off

(b)

Companies under process of striking off

(c)

Companies under liquidation

(d)

Companies which are amalgamated or dissolved

Further, any company which has not filed its due financial statements under section 137 of the Companies Act, 2013 or due Annual Returns under Section 92 of the Companies Act, 2013 or both with the Registrar of Companies shall be restricted from filing e-Form ACTIVE, unless such company is under management dispute and the Registrar has recorded the same on the register.
As the Company was incorporated as Government Company after December 31, 2017, hence, there is no need to file e-form ACTIVE for such companies.

Dec 2021 Q1(a)(5 Marks) Ultra Virus – Indoor Management
The Articles of Association of BC Ltd. empowered the directors to borrow money within the limit of Rs. 50 lakh. The Articles further provided that the directors can also exceed the borrowing limit of Rs. 50 lakh with the consent of the Company in general meeting. The directors of BC Ltd. took the loan of Rs. 75 lakh from R being one of the directors of BC Ltd. without obtaining the consent of the Company in general meeting. The Company, BC Ltd. refused to repay the loan amount to R. In the light of decided case law, state whether R will be able to get his money back from the Company.

 Answer
In the given case, directors of BC Ltd. raised money beyond their power as authorised by AOA. But the Act of directors are within the powers of the company as directors can raise money beyond Rs. 50 Lakh with the consent of the company in the general meeting. It means the act of directors was ultra vires the directors but intra vires the company.  

So, members may ratify this act of directors by passing proper resolution in the general meeting.

If members don’t ratify this act of directors, R will be able to get only Rs. 50 lakh from BC Ltd. He will not be able to get the remaining amount of Rs. 25 lakh as he being the director of BC Ltd. is deemed to have knowledge of the authority of Board of Directors of the Company to borrow money as per the provisions of Articles of Association of the Company.

The relief on the ground of ‘Indoor Management cannot be claimed by an outsider dealing with the company where the outsider had knowledge of irregularity. The rule does not protect any person who has actual or even an implied notice of the lack of authority of the person acting on behalf of the company. Thus, a person knowing fully well that the directors do not have the authority to make the transaction but still enters into it, cannot seek protection under the rule of indoor management.

In Howard v. Patent Ivory Co., the articles of a company empowered the directors to borrow upto one thousand pounds only. They could, however, exceed the limit of one thousand pounds with the consent of the company in general meeting. Without such consent having been obtained, they borrowed 3,500 pounds from one of the directors who took debentures. The company refused to pay the amount. Held that, the debentures were good to the extent of one thousand pounds only because the director had notice or was deemed to have the notice of the internal irregularity.

Dec 2021 Q1(d)(5 Marks) Board and General Body Resolutions related to Share Capital
QP Ltd. wants to increase its Authorised Share Capital from Rs. 50,00,000 divided into 5,00,000 Equity Shares of Rs. 10 each to Rs. 75,00,000 divided into 7,50,000 Equity Shares of Rs. 10 each by creation of additional 2,50,000 Equity Shares of Rs. 10 each ranking pari passu in all respect with the existing Equity Shares of the Company.

 Draft specimen of Board and General Body Resolutions for increasing the Authorised Share Capital and for alteration of Capital Clause in the Memorandum of Association of the Company.

Board of Directors Resolution
“RESOLVED THAT pursuant to the provisions of Section 61 and 64 and other applicable provisions, if any, of the Companies Act, 2013 and the rules framed there under, and subject to the approvals of shareholders in the General meeting, the consent of the Board of Directors of the Company be and is hereby given to increase the Authorized Share Capital of the Company from existing Rs. 50,00,000 (Rupees Fifty Lakh) divided into 5,00,000 (Five Lakh) Equity Shares of Rs. 10/- each to Rs. 75,00,000 (Rupees Seventy Five Lakh) divided into 7,50,000 (Seven Lacs Fifty Thousand) Equity Shares of Rs. 10/- each by creation of additional 2,50,000 (Two Lakh Fifty Thousand) Equity Shares of Rs. 10/- each ranking pari passu in all respect with the existing Equity Shares of the Company.”

 General Body Resolution

Ordinary Resolution:
RESOLVED THAT pursuant to the provisions of Section 61 read with Section 64 and other applicable provisions, if any, of the Companies Act, 2013 and the rules framed there under, the consent of the members of the Company be and is hereby given to increase the Authorized Share Capital of the Company from existing Rs. 50,00,000/- (Rupees Fifty Lacs Only) divided into 5,00,000 (Five Lacs) Equity Shares of Rs. 10/- each to Rs. 75,00,000/- (Rupees Seventy Five Lacs Only) divided into 7,50,000 (Seven Lacs Fifty Thousand) Equity Shares of Rs. 10/- (Rupees Ten Only) each by creation of additional 2,50,000 (Two Lacs Fifty Thousand) Equity Shares of Rs.10/- each ranking pari passu in all respect with the existing Equity Shares of the Company.

RESOLVED FURTHER THAT the Board of Directors of the Company (hereinafter referred to as “Board” which term shall include a Committee thereof authorized for the purpose) be and is hereby authorised to take all such steps and actions and give such directions as may be necessary for the purpose of giving effect to this resolution.

Special Resolution
RESOLVED THAT pursuant to the provisions of Section 13 and other applicable provisions, if any, of the Companies Act, 2013 and the rules framed there under, the Memorandum of Association of the Company be altered in the following manner i.e. existing Clause V of the Memorandum of Association of the company be deleted and the same be substituted with the following new clause as Clause V: ‘V. The Authorised Share Capital of the Company is Rs. 75,00,000/- (Rupees Seventy Five Lacs) divided into 7,50,000 (Seven Lacs Fifty Thousand) Equity Shares of face value of Rs. 10/- (Rupees Ten Only) each.’

RESOLVED FURTHER THAT the Board of Directors of the Company (hereinafter referred to as “Board” which term shall include a Committee thereof authorized for the purpose) be and is hereby authorised to take all such steps and actions and give such directions as may be necessary for the purpose of giving effect to this resolution.”

Dec 2021 Q2(c)(4 Marks) Ambiguity in MOA and AOA
The memorandum and articles must be read together in the event of any ambiguity. Explain the given statement referring a suitable case law.
Answer
The memorandum and articles must be read together in the event of any ambiguity.

In Angostura Bitters & Co. Ltd. v. Kerr, (1933), the Privy Council held, “Except in respect of such matters as must be statutorily provided for by the conjunction with the articles, the two documents must be read together at all events so far as may be necessary to explain any ambiguity appearing in the terms of the memorandum or to supplement it upon any matter as to which it is silent”.

Lord Cairns, L.C. in Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1875) described the role of AOA: “The articles play a part that is subsidiary to the memorandum of association. They accept the memorandum of association as the charter of incorporation of the company, and so accepting it, the articles proceed to define the duties, rights and powers of the governing body as between themselves and the company at large, and the mode and form in which business of the company is to be carried on, and the mode and form in which changes in the internal regulations of the company may from time to time be made… The memorandum, is as it were… the area beyond which the action of the company cannot go; inside that area shareholders may make such regulations for the governance of the company as they think fit”

The articles of a company are subordinate to and subject to the memorandum of association and the Act. Any clause in the Articles going beyond the memorandum will be ultra vires. But the articles are only internal regulations, over which the members of the company have full control and may alter them according to what they think fit. Only care has to be taken to see that regulations provided for in the articles do not exceed the powers of the company as laid down by its memorandum [Ashbury v. Watson, (1885)].

June 2021 Q2(b) (4 Marks) Ultra Virus – Indoor Management
The Article of Association of XYZ Ltd. provides that the Board of directors has authority to issue bonds provided such issue is authorized by the shareholders by a necessary resolution in the general meeting of the company. The company was in dire need of funds and therefore it issued the bonds to X without passing any such resolution at general meeting. Can X recover the money from the company? Decide referring the relevant case laws and provisions of the Companies Act, 2013?

Answer
In the given case, directors of XYZ Ltd. issued bonds beyond their power as authorised by AOA. But the Act of directors are within the powers of the company as directors can issue bonds with the consent of the company in the general meeting. It means the act of directors was ultra vires the directors but intra vires the company.  

So, members may ratify this act of directors by passing proper resolution in the general meeting.

If members don’t ratify this act of directors, X can take the plea of Doctrine of Indoor Management.

The relief on the ground of ‘Indoor Management can be claimed by an outsider dealing with the company where the outsider had no knowledge of irregularity. In other words, while persons contracting with a company are presumed to know the provisions of the contents of the memorandum and articles, they are entitled to assume that the provisions of the articles have been observed by the officers of the company. It is not a part of the duty of an outsider to see that the company carries out its own internal regulations.

So, in the given case, X could sue the company and recover his money, as he was entitled to assume that the necessary resolution had been passed and the required formalities have been duly complied.

Dec 2020 Q2(d) (4 Marks) Ultra Vires Transaction
The Paid-up Capital of X Ltd. is Rs. 10 Crore and Reserve and Surplus are negative (due to huge losses since previous few years) amounting Rs. 300 Crore. To pay the dues to Creditors, the Board of Directors passed the resolution for borrowing of Rs. 50 Crore and got funded through Financial Institution in term of Medium Term Loan for 3 years. Entire amount was utilized to pay the Debts.

 The Financial Institution when got the information that such act was ultra vires transaction, filed a suit against the Directors of the Company. The Plea of the Directors were that Shareholders and Directors have limited liability and doctrine of indoor management is applicable. Therefore, they are not personally liable. Comment.

Answer
According to Section 180(1)(c) read with Section 179 of the Companies Act, 2013, the Board of Directors can only with the consent of the company by a special resolution would borrow money, where the money to be borrowed, together with the money already borrowed by the company exceeds aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.

The Paid-up Capital of X Ltd. is Rs. 10 Crore and Reserve and Surplus are negative (Rs. 300 Crore). Thus the amount raised by the directors of X Ltd. without the approval of shareholders is ultra-virus the directors as well as company.

In such a case Financial Institution may have following remedies:

  1. Doctrine of Subrogation
    The amount raised by the directors in this ultra-vires transaction is used to pay the lawful debts of the company. Here the financial institution is allowed to step in the shoes of creditors of the company. Thus, legal rights of creditors against the company shall be considered to be passed to the financial institutions. 
  1. Personal liability of Directors
    As directors have borrowed money beyond their legal authority, financial institution may file personal case against the directors to recover the amount.

Dec 2019 Q2(a) (4 Marks) Alteration of Capital Clause
‘Alteration of Capital Clause in Memorandum of Association is a precondition to restructuring the Capital structure of the Company’ — Elaborate the statement mentioning relevant provisions of the Companies Act, 2013 on types of alterations of Capital Clause.

Answer
According to Section 4 of Companies Act, 2013, Capital Clause in Memorandum of Association shall state

  • the amount of share capital with which the company is to be registered and
  • the division thereof into shares of a fixed amount and
  • Face value/Nominal Value of each share

Thus, it is correct to say that alteration of Capital Clause in Memorandum of Association is a precondition to restructuring the Capital structure of the Company because without such alteration it is not possible to restructure the capital of a company.

According to Section 61, a limited company having a share capital may, if so authorised by its articles, alter its memorandum in its general meeting to—

(a)

increase its authorised share capital by such amount as it thinks expedient;

(b)

consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares: Provided that no consolidation and division which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal on an application made in the prescribed manner;

(c)

convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination;

(d)

sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived;

(e)

cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.

Further, according to Section 66, a company may reduce the share capital in any manner and in particular, may

(a)

extinguish or reduce the liability on any of its shares in respect of the share capital not paidup; or

(b)

either with or without extinguishing or reducing liability on any of its shares,—

 

(i)

cancel any paid-up share capital which is lost or is unrepresented by available assets; or

 

(ii)

pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly

Dec 2019 Q2(a) (4 Marks) Alteration of Capital Clause
‘Alteration of Capital Clause in Memorandum of Association is a precondition to restructuring the Capital structure of the Company’ — Elaborate the statement mentioning relevant provisions of the Companies Act, 2013 on types of alterations of Capital Clause.

 Answer
According to Section 4 of Companies Act, 2013, Capital Clause in Memorandum of Association shall state

  • the amount of share capital with which the company is to be registered and
  • the division thereof into shares of a fixed amount and
  • Face value/Nominal Value of each share

Thus, it is correct to say that alteration of Capital Clause in Memorandum of Association is a precondition to restructuring the Capital structure of the Company because without such alteration it is not possible to restructure the capital of a company.

According to Section 61, a limited company having a share capital may, if so authorised by its articles, alter its memorandum in its general meeting to—

(a)

increase its authorised share capital by such amount as it thinks expedient;

(b)

consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares: Provided that no consolidation and division which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal on an application made in the prescribed manner;

(c)

convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination;

(d)

sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived;

(e)

cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.

Further, according to Section 66, a company may reduce the share capital in any manner and in particular, may

(a)

extinguish or reduce the liability on any of its shares in respect of the share capital not paidup; or

(b)

either with or without extinguishing or reducing liability on any of its shares,—

 

(i)

cancel any paid-up share capital which is lost or is unrepresented by available assets; or

 

(ii)

pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly

Dec 2019 Q2A(iv) (4 Marks) Ultravires or illegal acts 
Individual or minority members cannot bring a suit except when it is intended for enforcement of personal rights of members or to prevent the company from doing any ultravires or illegal act, fraud or oppression and mismanagement. Discuss with the help of decided case laws the distinction between ultravires or illegal acts and personal rights.

Answer
Since the articles constitute a contract binding the company to its members in their capacity as members, a member can bring an action against the company for infringement by it of the memorandum or articles. For example, an individual member can sue the company for an injunction restraining it from improper payment of dividend [Hoole v. Great Western Railway (1867)].

Further, the company is bound to individual members in respect of their ordinary rights as members, e.g. the right to receive share certificate in respect of shares allotted to them, or to receive notice of general meeting, etc.

Normally, action for breach of articles against the company can be brought only by a majority of the members. Individual or minority members cannot bring such a suit except when it is intended for enforcement of personal rights of members or to prevent the company from doing any ultra vires or illegal act, fraud, or oppression and mismanagement.

Dec 2019 Q2A(v)(4 Marks) Shifting of the registered office
X, an employee of BG Ltd., is aggrieved by the decision of shifting of the registered office of the Company from the state of Uttar Pradesh to Haryana. He has filed a Public Interest Litigation (PIL) regarding the same, considering that the business of the company will be severely affected by the said decision of shifting of registered office. In the light of decided case laws, examine the strength of argument raised in the PIL.

 Answer
In the case of Bharat Commerce and Industries Ltd., Re, (1973), it was held that employees’ union, which was a registered body and which represented quite a number of the employees at the registered office of the company, would have the legal standing to appear before the court and oppose the application on the ground that their interests are likely to be prejudicially affected if the resolution for shifting the registered office of the company from one state to another is confirmed by the court. However, it was held that the employees’ union cannot oppose on the ground that there would be loss of revenue or unemployment in the State or that the meeting at which the special resolution was passed was itself not valid.

Thus, in the light of above case law, the PIL of an employee of BG Ltd. is not tenable if no employee shall be retrenched as a consequence of shifting of the registered office from one state to another state.

June 2019 Q1(c)(5 marks) Powers of BOD to expel any member
The majority of the shareholders of Kasi Textiles Private Ltd., passed a special resolution to alter its Articles of Association and gave the directors a power to require any shareholder who is doing competing business with that of the company’s business to transfer his shares. Swaroop, who is carrying on a competing business, challenged the validity of the alteration. Decide whether Swaroop will succeed in the light of the provisions of the Companies Act, 2013 and decided case law.

 Answer
In general, if there is a provision in the Articles empowering the Directors of the company to expel any member of the company under any of the given conditions, then such a provision shall be totally inconsistent with the provisions of Section 6 of the Act. It is opposed to the fundamental principles of the company’s jurisprudence and is ultra vires of the company.

But a change in Articles made bonafide for the benefit of the Company as a whole is justified. In this case, the directors were empowered to change the Articles of Association to ask a shareholder to transfer his shares in case he was found to be carrying on a business in competition with that of the Company.

It is possible for a person to take advantage in a competing business, of facts known to him or which he may know because of his shareholding in the Company.

The facts of the given problem are similar to the facts of a decided English case of Sidebottom Vs Kershaw in which Court held that alteration was valid in as much as it was made bode fide and in the interest of the Company as a whole.

Hence, in the given case, Mr. Swaroop may not succeed.

Dec 2018 Q2A(ii)(4 Marks) Powers not implied in object clause of MOA
State any six powers which are prudent to be included in the object clause of the Memorandum of Association of a Company as general and ancillary objects

 Answer
The following powers have been held not to be implied and it is, therefore, prudent to include them expressly in the object clauses of Memorandum of Association of a Company:

1.        

Acquiring any business similar to the company’s own business.

2.        

Entering into an agreement with other persons or companies for carrying on business in partnership or for sharing profit, joint venture or other arrangements. Very clear powers are necessary to justify such transactions

3.        

Taking shares in other companies having similar objects.

4.        

Taking shares of other companies where such investment authorizes the doing indirectly that which will not be intra virus if done directly;

5.        

Promoting other companies or helping them financially

6.        

A power to sell and dispose of the whole of a company’s undertaking;

7.        

A power to use funds for political purposes;

8.        

A power to give gifts and make donations or contributions for charities not relating to the objects stated in the memorandum;

9.        

Acting as a surety or as a guarantor.

 

Dec 2021

June 2021

Dec 2020

June 2020

Dec 2019

June 2019

Dec 2018

Average

 

 

 14

4

4

 

12

5

8

 

 

 

13

18

13

 

10

18

9

 

 

 

27

22

17

 

22

23

17

21.33

 

 

 

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