PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

Question No. 1 is compulsory.

Attempt any five questions from the remaining six questions.

Question 1
(a) ‘Ramesh’ and ‘Suresh’ were engaged in business having same nature. ‘Ramesh’ stands
surety for ‘Suresh’ for any amount which ‘Kamlesh’ may lend to ‘Suresh’ from time to time
during the next 6 months subject to a maximum of ` 85,000. 3 months later, ‘Ramesh’
revokes the guarantee, when ‘Kamlesh’ had lent to ‘Suresh’ ` 35,000. Decide whether
‘Ramesh’ is discharged from all the liabilities to ‘Kamlesh’ for any subsequent loan under
the provisions of the Indian Contract Act, 1872. Would your answer differ in case ‘Suresh’
makes a default in paying back to ‘Kamlesh’ the money already borrowed i.e. ` 35,000?
(5 Marks)
(b) MN Ltd. is engaged in the manufacture of consumer goods and has got a good brand
value. Over the years, it has built a good reputation and its Balance Sheet as at March
31, 2017 shows the following position:
Authorized Share Capital ` 2,50,00,000
(25,00,000 equity shares of face value of ` 10/- each)
Issued, subscribed and paid-up capital ` 1,00,00,000
(10,00,000 equity shares of face value of ` 10/- each,
fully paid-up)
Free Reserves ` 3,00,00,000
The Board of Directors are proposing to declare a bonus issue of 1share for every 2
shares held by the existing shareholders. The Board wants to know the conditions and
the manner of issuing bonus shares under the provisions of the Companies Act, 2013.
Advise. (5 Marks)
(c) “Ethics programs are not helping to manage values associated with quality management,
strategic planning and diversity management.” Do you agree? Give reasons. (5 Marks)
(d) Negotiation is said to be an art of finding a mutually acceptable agreement between
parties. What are the various approaches through which the process of negotiation can
be made acceptable? (5 Marks)
Answer
(a) Revocation of continuing guarantee: The problem asked in the question is based on
section 130 of the Indian Contract Act, 1872 relating to the revocation of a continuing
guarantee as to future transactions which can be done mainly in the following two ways:

© The Institute of Chartered Accountants of India

 PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 31

1. By Notice: A continuing guarantee may at any time be revoked by the surety as to

future transactions, by giving notice to the creditor.
2. By death of surety: The death of the surety operates, in the absence of any
contract to the contrary, as a revocation of a continuing guarantee, so far as regards
future transactions. (Section 131)
So far as the transactions before revocation are concerned, the liability of the surety for
previous transactions (i.e. before revocation) remains.
Thus, applying the above provisions in the given case,
• ‘Ramesh’ is discharged from all the liabilities to ‘Kamlesh’ for any subsequent loan.
• Answer in the second case would differ i.e. ‘Ramesh’ is liable to ‘Kamlesh’ for
` 35,000 on default of ‘Suresh’ since the loan was taken before the notice of
revocation was given to ‘Kamlesh’.
(b) Issue of Bonus Shares: According to Section 63 of the Companies Act, 2013, a
company may issue fully paid-up bonus shares to its members, in any manner
whatsoever, out of -
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account.
Provided that no issue of bonus shares shall be made by capitalising reserves created by
the revaluation of assets.
Conditions for issue of Bonus Shares: No company shall capitalise its profits or
reserves for the purpose of issuing fully paid-up bonus shares, unless—
(a) it is authorised by its Articles;
(b) it has, on the recommendation of the Board, been authorised in the general meeting
of the company;
(c) it has not defaulted in payment of interest or principal in respect of fixed deposits or
debt securities issued by it;
(d) it has not defaulted in respect of payment of statutory dues of the employees, such
as, contribution to provident fund, gratuity and bonus;
(e) the partly paid-up shares, if any outstanding on the date of allotment, are made fully
paid-up;
(f) it complies with such conditions as may be prescribed.
But the company has to ensure that the bonus shares shall not be issued in lieu of
dividend.

© The Institute of Chartered Accountants of India

 32 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

Hence, after following the above compliances on issuing bonus shares under the
Companies Act, 2013, MN Ltd. may proceed for a bonus issue of 1 share for every 2
shares held by the existing shareholders.
(c) “Ethics programs are not helping to manage values associated with quality management,
strategic planning and diversity management”.
No. This is an incorrect statement.
Reason: Ethics programs help identifying the preferred values and ensuring that
organizational behaviours are aligned with those values. This includes recording the
values, developing policies and procedures to align behaviours with preferred values and
then providing training to all personnel about the policies and procedures. This overall
effort is very useful for several other programs in the workplace that require behaviours
to be aligned with values, including quality management, strategic planning and diversity
management.
For example, total quality management initiatives include high priority on certain
operating values, e.g. trust among stakeholders, performance, reliability, measurement
and feedback.
(d) Negotiation: Negotiation is a common way of settling issues between two or more
disagreeing parties. When handled skillfully, negotiation can improve the position of one
or even both but when poorly handled; it can leave a problem still unsolved and perhaps
worse than before.
Approaches: Negotiation can be approached in four ways. Each of these approaches
produces a different outcome.
Win-Lose Orientation: This is the approach taken by competitive communicators. The
win-lose orientation is based on the assumption that only one side can reach its goals
and that any victory by that party will be matched by the other's loss. Despite the fact that
it produces losers as well as winners, a win-lose orientation can sometimes be the best
approach to negotiating. For example, in a one-time commercial transaction (the sale of a
car, for instance), concern for helping the other party may take a back seat in getting the
best possible deal, without violation of ethical values.
Lose-Lose Orientation: With a lose-lose orientation, a conflict plays out in a way that
damages both parties to such a degree that everyone feels like a loser. Nobody starts out
seeking a lose-lose outcome, of course, but sometimes when people feel that a
negotiating partner is blocking them, they wind up seeking revenge. For example, if
customers feel cheated, they are likely to tell others about their dissatisfaction, costing
the company future business.
Compromise: Sometimes it seems better to compromise than to fight battles in a
competitive manner and risk a lose-lose outcome. There are cases in which compromise
is the best obtainable outcome-usually when disputed resources are limited or scarce.
For example, if two managers, both of whom need a separate full-time secretary but

© The Institute of Chartered Accountants of India

 PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 33

budget restrictions make this impossible, they may have to compromise by sharing one
secretary.
Win-Win Orientation: A win-win approach differs significantly from the preceding
negotiating styles. It is a collaborative approach to negotiation and assumes that
solutions can be reached that satisfy the needs of all the parties. Most importantly, it
looks beyond the conflicting means of both parties (my way versus your way) and
focuses on satisfying the ends each is seeking. The key is to avoid taking polar positions
(arguing over means) and instead to identify the ends or goals of both parties.
Question 2
(a) (i) In 2016, Axis Electronics Corporation, an establishment in public sector starts to sell
mobile sets manufactured by it, in addition to Air conditioners, so as to compete with
private sector establishments of mobile sets in the market. The income from sale of
mobile sets is 28 percent of the gross income of the Axis Electronics Corporation.
The employees of the Corporation went to strike for demand of bonus.
Decide, whether the demand of the employees is tenable under the provisions of
the payment of Bonus Act, 1965. Would your answer be different if the income from
sale of mobile sets is only 18 percent of the gross income of the Corporation?
(4 Marks)
(ii) Artha Steels Ltd. decided to forfeit the amount of gratuity of its employees ‘A’ and
‘C’ on account of disorderly conduct and other acts which caused loss to the
property belonging to the Company.
‘A’ and ‘C’ committed the following acts:
(i) ‘A refused to surrender the occupied land belonging to the Company.
(ii) ‘C’ after superannuation continued to occupy the quarter of the Company for
six months.
Against the decision of the Company, ‘A’ and ‘C’ applied to the appropriate authorities
for relief. The Company contented that the right to gratuity is not a statutory right and
the forfeiture of the amount of gratuity was within the law. Examine the contention of
the Company and the decision taken by the Company to forfeit the amount of gratuity
in the light of the Payment of Gratuity Act, 1972. (4 Marks)
(b) Explain how the following measures can help in managing ethics in the work place:
(i) Codes of Conduct and Ethics
(ii) Appointing an Ombudsperson (2 + 2 = 4 Marks)
(c) Write short notes on the following:
(i) The Caux Round Table (CRT)
(ii) Euphemisms (2 + 2 = 4 Marks)

© The Institute of Chartered Accountants of India

 34 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

Answer
(a) (i) Sub Section (1) of Section 20 of the Payment of Bonus Act, 1965 provides that, if in
any accounting year, an establishment in public sector sells any goods produced or
manufactured by it or if it renders any services in competition with an establishment
in private sector and if the income from such sale or service or both is not less than
20% of the gross income of such establishment, then, the provisions of this Act shall
apply in relation to such establishment in public sector as they apply in relation to a
like establishment in private sector.
Sub Section (2) of Section 20 of the Payment of Bonus Act, 1965 provides that,
save as otherwise provided in sub-section (1), nothing in this Act shall apply to the
employees employed by an establishment in public sector.
In the instant case, Axis Electronics Corporation, an establishment in public sector
starts selling mobile sets manufactured by it, in addition to Air conditioners, so as to
compete with private sector establishments of mobile sets in the market.
In the first case, the income from sale of mobile sets is 28% of the gross income of
Axis Electronics Corporation. The employees of the Corporation went on strike for
demand of Bonus. The demand of the employees is tenable in this case due to the
fact that income from sale of mobile sets is not less than 20% of the gross income
of the establishment.
In the second case, the income from sale of mobile sets is only 18% of the gross
income of the corporation; hence, demand of the employees is not tenable since
income from sale of mobile sets is less than 20% of the gross income of the
establishment.
(ii) As per the provisions of section 4(1) of the Payment of Gratuity Act, 1972, gratuity
is payable to an employee on termination of his employment after he has rendered
continuous service for not less than five years, -
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease:
Provided that the completion of continuous service of five years shall not be
necessary where the termination of the employment of any employee is due to
death or disablement.
Forfeiture of Gratuity: In accordance with the provisions of Section 4(6) of the
Payment of Gratuity Act, 1972, if the services of any employee have been
terminated for any act, willful omission, or negligence causing any damage or loss
to or destruction of property belonging to the employer, the gratuity shall be forfeited
to the extent of the damage or loss so caused.

© The Institute of Chartered Accountants of India

 PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 35

Further, if the services of such an employee have been terminated for any act which
constitutes an offence involving moral turpitude, provided that such offence is
committed by him in the course of his employment, the gratuity payable to the
employee may be wholly or partially forfeited.
The correctness of the decision taken by Artha Steel Ltd. in the given case,
regarding forfeiture of gratuity to its employees A and C may be tested in the light of
Section 4(6) of the Payment of Gratuity Act, 1972 as referred above.
(i) A, as per the given facts, refused to surrender the occupied land belonging to
the company. This reflects unauthorized occupation or holding of land and
deliberate appropriation of the company’s property by him. This may be termed
as disorderly conduct on the part of A. Hence, his gratuity may be forfeited by
the company as per the provisions of section 4(6) the Payment of Gratuity Act,
1972.
(ii) C had wrongfully continued to occupy the company’s quarter for six months
after superannuation. C may have caused a deliberate loss to the company by
his wrongful occupation for 6 months as the quarter could not be provided to
another employee and the company may have incurred the cost of rent in such
case. Hence, the company is entitled to charge rent from him and after
adjusting other dues the remaining amount of gratuity if any, should be paid.
In a similar case to the situation given in the question, [Wazir Chand vs. Union
of India, 2001, LLR172 (SC)], the court has taken view that there is no illegality
in those rental dues being adjusted against the death-cum-retirement dues of
the appellant.
(b) (i) Codes of Conduct and Ethics: A code of ethics specifies the ethical rules of
operation in an organization. Codes of conduct specify actions in the workplace and
codes of ethics are general guides to decisions about those actions. Examples of
topics typically addressed by codes of conduct include: preferred style of dress,
avoiding illegal drugs, following instructions of superiors, being reliable and prompt,
maintaining confidentiality, not accepting personal gifts and so on.
(ii) Appointing an ombudsperson: The ombudsperson is responsible to help and
coordinate in the development of the policies and procedures to institutionalise
moral values in the workplace. This establishes a point of contact where employees
can go to ask questions in confidence about the work situations they confront and
seek advice.
(c) (i) The Caux Round Table (CRT) promotes principled business leadership and the
belief that business has a crucial role in identifying and promoting sustainable and
equitable solutions to key global issues affecting the physical, social and economic
environments. The CRT is comprised of senior business leaders from Europe,
Japan and North America, and is based in Caux, Switzerland. The CRT has

© The Institute of Chartered Accountants of India

 36 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

produced “Principles for Business,” a document which seeks to express a worldwide

standard for ethical and responsible corporate behaviour for dialogue and action by
business and leaders worldwide. The principles include the social impact of
company operations on the local community, a respect for rules and ethics, support
for multilateral trade agreements that promote the “judicious liberation of trade,”
respect for the environment and “avoidance of illicit operation,” including bribery,
money laundering, and other corrupt practices.
(ii) Euphemisms: By definition, a euphemism is using a less offensive expression
instead of one that might cause distress. For example using the expression "passed
away" instead "died" is one of the more common examples. This usage is
understandable. However, people frequently use these terms to obscure the truth.
For example a purchasing agent has a far easier time accepting a "consideration
fee" than a "bribe." Petty office theft gets passed off as merely "permanently
borrowing" the item instead of "stealing."
Question 3
(a) (i) ‘A’ gives to ‘M’ a continuing guarantee to the extent of ` 8,000 for the fruits to be
supplied by ‘M’ to ‘S’ from time to time on credit. Afterwards ‘S’ became
embarrassed and without the knowledge of ‘A’, ‘M’ and ‘S’ contract that ‘M’ shall
continue to supply ‘S’ with fruits for ready money and that payments shall be applied
to the then existing debts between ‘S’ and ‘M’. Examining the provision of the Indian
Contract Act, 1872, decide whether ‘A’ is liable on his guarantee given to M.
(4 Marks)
(ii) Distinguish between ‘Contract of Indemnity’ and ‘Contract of Guarantee’. (4 Marks)
(b) What are the matters to be considered by a finance and accounting professional when he
is required to resolve an ethical conflict in the application of fundamental principles?
(4 Marks)
(c) What are the factors influencing ethical communication? Explain them. (4 Marks)
Answer
(a) (i) Discharge of surety by variance in terms of contract: The problem asked in the
question is based on the provisions of the Indian Contract Act, 1872 as contained in
Section 133. The section provides that any variance made without the surety’s
consent in the terms of the contract between the principal debtor and the creditor,
discharges the surety as to transactions subsequent to the variance.
In the given problem, ‘M’ and ‘S’ entered into arrangement by entering into a new
contract without knowledge of the Surety ‘A’. Since, the variance made in the
contract is without the surety’s consent in the existing contract, as per the provision,
‘A’ is not liable on his guarantee for the fruits supplied after this new arrangement.
The reason for such a discharge is that the surety agreed to be liable for a contract

© The Institute of Chartered Accountants of India

 PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 37

which is no more there now and he is not liable on the altered contract because it is
different from the contract made by him.
(ii) Distinction between Contract of indemnity and Contract of Guarantee: The
difference between the two types of contracts is as follows:
(1) Number of parties: In a contract of indemnity there are only two parties namely
the indemnifier [promisor] and the indemnified [promisee]. In a contract of
guarantee there are three parties, creditor, principal debtor and the surety.
(2) Extent of liability: The liability of the indemnifier is primary and independent.
The liability of the surety is secondary; the primary liability is that of the
principal debtor.
(3) Time of liability: The liability of the indemnifier arises only on the happening
of a contingency. In the case of guarantee, liability is already in existence but
specifically crystallizes when principal debtor fails.
(4) Time to Act: The indemnifier need not necessarily act at the request of
indemnified. In case of guarantee surety must act by extending guarantee at
the request of debtor.
(5) Right to sue third party: In case of contract of indemnity, indemnifier cannot
sue a third party for loss in his own name as there is no privity of contract.
Such a right would arise only if there is an assignment in his favour. On the
other hand in the case of contract of guarantee surety can proceed against
principal debtor in his own right because he gets all the right of a creditor after
discharging the debts.
(b) Conflict Resolution: While evaluating compliance with the fundamental principles, a
finance and accounting professional may be required to resolve a conflict on the
application of fundamental principles. The following needs to be considered, either
individually or together with others, during a conflict resolution process:
(i) Relevant facts
(ii) Ethical issues involved
(iii) Fundamental principles related to the matter in question
(iv) Established internal proceedings and
(v) Alternative course of action
Having considered these issues, the professional should determine the appropriate
course of action that is consistent with the fundamental principles identified. The
professional should weigh the consequences of each possible course of action. If the
matter remains unresolved, the professional should consult other appropriate persons
within the firm or employing organization for help in obtaining resolution.

© The Institute of Chartered Accountants of India

 38 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

(c) Factors influencing ethical communication: Following are the factors that influence
ethical communication:
1. Every Communication Decision has some Ethical Aspect to it, Acknowledged
or Not:
There are countless complexities involved in the communication process, but
communicators initially face three simple choices: to speak, to listen, or to remain
silent. Each choice implies an ethical decision.
In a message the sender chooses to disclose information, motives, or feelings to
others. That choice inevitably involves an ethical element. Clearly, some messages
should not be sent, such as those involving "insider information." To do so give
certain people an unfair advantage in the marketplace. But should one share a
rumour about an organizational change with a colleague? Such actions are common
and appear to be less objectionable than insider trading.
The timing and mode of communication add another layer of complexity to the ethical
dimension.
Remaining silent might seem like the safest way to avoid ethical dilemmas. But
even here there is no safe heaven. Remaining silent in the face of unlawful behavior
or a potentially harmful situation presents a serious ethical decision. Silence signals
consent or perhaps tacit agreement.
2. The Ethical Nature of Communication must be Considered within the Context
of Who, What, When, and Where:
Suppose fellow employees discussed a project they were working on. This may
seem perfectly ethical on the surface. After all, such discussions actually foster ef-
fective interdepartmental relationships; a worthy goal indeed. The problem may be
that the discussion took place in a crowded restaurant and a competitor overheard
the conversation. When the employees are confronted, they may reply, "What did
we say that was wrong? We were not talking to a competitor." But this is, of course,
the wrong question. The issue does not concern what was said or even who they
were talking to. The ethical issue revolves around where the conversation took
place. Herein lies the complexity of ethical issues - evaluations must be made on
more than one dimension. Ethical communicators are not concerned with just who
or what or where or when, but with all four dimensions simultaneously.
Question 4
(a) (i) A Limited has an Authorized Capital of 10,00,000 equity shares of the face value of
` 100/- each. Some of the shareholders expressed their opinion in the Annual
General Meeting that it is very difficult for them to trade in the shares of the
Company in the share market and requested the Company to reduce the face value
of each share to `10/- and increase the number of shares to 1,00,00,000. Examine

© The Institute of Chartered Accountants of India

 PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 39

whether the request of the shareholders is possible and if so, how the Company can
alter its share capital as per the provisions of the Companies Act, 2013. (4 Marks)
(ii) What do you mean by ‘Pari Passu’ clause in a debenture? State the particulars that
are required to be filed with the Registrar of Companies in case such debentures are
secured by way of a charge on certain immovable assets of the Company. (4 Marks)
(b) Explain the concept of Corporate Social Responsibility and its meaning to different
people. (4 Marks)
(c) Explain the elements that can be used to influence an organisational culture. (4 Marks)
Answer
(a) (i) Power of Limited Company to Alter its Share Capital: As per section 61 of the
Companies Act, 2013, a limited company having share capital may, if so authorised
by its articles, may alter its memorandum in its general meeting so as to divide all or
any of its share capital of a larger amount than its existing shares or sub-divide the
whole or any part of its 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.
In the given instance, shareholders of A Limited in the Annual General Meeting,
requested the company to reduce the face value of each shares (i.e. from ` 100 to
` 10) and increase in the number of shares, then is fixed by the memorandum (i.e.,
from 10 lacs to 1 crore). According to the above stated provision, it is possible on
the part of the company to alter its share capital by sub-dividing its shares, or any of
them, into shares of smaller amount than is fixed by the memorandum, provided it is
authorised by its articles. The company has to alter its memorandum in its general
meeting as per the procedure contained in the provisions of section 13 of the
Companies Act, 2013.
(ii) ‘Pari Passu’: Pari Passu clause in a debenture means that all the debentures of
that particular series are to be paid rateably, if, therefore, security is insufficient to
satisfy the whole debts secured by the series of debentures, the amounts of
debentures will abate proportionately. If this clause is not included, the debentures
will rank in priority for payment in accordance with the date of issue, and if they are
all issued on the same date they will be payable according to their numerical order.
A company, however, cannot issue a new series of debentures so as to rank ‘pari
passu’ with any prior series unless the power to do so is expressly reserved and
contained in the document of offer.
Registration of charge: Under section 77 (1) of the Companies Act, 2013, it shall
be the duty of every company creating a charge on its property or assets or any of
its undertakings, whether tangible or otherwise to register the particulars of the
charge signed by the company and the charge-holder together with the instruments,

© The Institute of Chartered Accountants of India

 40 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

if any, creating such charge in such form, on payment of such fees and in such
manner as may be prescribed with the Registrar within thirty days of its creation.
In terms of Rule 3 of the Companies (Registration of Charges), Rules 2014 for the
registration of charge in respect of debentures the following documents should be
submitted to the Registrar:
(a) The particulars of charge;
(b) Instrument for the creation or the modification of the charge;
(c) Application in prescribed Form
(b) Corporate Social Responsibility (CSR): It is a concept that organizations, have an
obligation to consider the interests of customers, employees, shareholders, communities,
and ecological considerations in all aspects of their operations. This obligation is seen to
extend beyond their statutory obligation to comply with legislation. CSR is closely linked
with the principles of Sustainable Development, which argues that enterprises should
make decisions based not only on financial factors such as profits or dividends, but also
based on the immediate and long-term social and environmental consequences of their
activities, especially taking into consideration the needs of future generations. It is an
integrated combination of policies, programs, education, and practices which extend
throughout a corporation’s operations and into the communities in which they operate,
about how companies voluntarily manage the business processes to produce an overall
positive impact on society.
CSR can mean different things to different people:
♦ for an employee it can mean fair wages, no discrimination, acceptable working
conditions etc.
♦ for a shareholder it can mean making responsible and transparent decisions
regarding the use of capital.
♦ for suppliers it can mean receiving payment on time.
♦ for customers it can mean delivery on time, etc.
♦ for local communities and authorities it can mean taking measures to protect the
environment from pollution.
♦ for non-governmental organisations and pressure groups it can mean disclosing
business practices and performance on issues ranging from energy conservation
and global warming to human rights and animal rights, from protection of the
rainforests and endangered species to child and forced labour, etc.
For a company, however, it can simply be seen as responding to the needs and concerns
of people who can influence the success of the company and/or whom the company can
impact through its business activities, processes and products.

© The Institute of Chartered Accountants of India

 PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 41

(c) Elements influencing organisational Culture: There are number of elements that can
be used to describe or influence Organizational Culture. Some of these are:
♦ The Paradigm: What the organization is about; what it does; its mission; its values.
♦ Control Systems: The processes in place to monitor what is going on.
♦ Organizational Structures: Reporting lines, hierarchies, and the way that work flows
through the business.
♦ Power Structures: Who makes the decisions and how power is distributed across
the organization.
♦ Symbols: These include the logos and designs, but would extend to symbols of
power, such as car parking spaces and executive washrooms!
♦ Rituals and Routines: Management meetings, board reports and so on may become
more habitual than necessary.
♦ Stories and Myths: build up about people and events, and convey a message about
what is valued within the organization.
Communicating the corporate culture effectively is paramount. For example, at General
Electric (GE), corporate values are so important to the company, that Jack Welch, the
former legendary CEO of the company, had them inscribed and distributed to all GE
employees at every level of the company.
Question 5
(a) (i) ‘K’ is an employee of ‘Sumit’. He fraudulently obtains from Sumit a cheque crossed
‘not negotiable’. He later transfers the cheque to ‘D’ who gets the cheque encashed
from XYZ Bank, which is not the drawee bank. Sumit comes to know about the
fraudulent act of ‘K’, sues XYZ Bank for the recovery of money. Examine with
reference to the relevant provisions of the Negotiable Instruments Act, 1881,
whether Sumit will be successful in his claim? Would your answer be still the same
in case ‘K’ does not transfer the cheque and gets the cheque encashed from XYZ
Bank himself? (4 Marks)
(ii) ‘E’ is the holder of a bill of exchange made payable to the order of ‘F’. The bill of
exchange contains the following endorsements in blank:
First endorsement ‘F’
Second endorsement ‘G’.
Third endorsement ‘H’ and
Fourth endorsement ‘I’
‘E’ strikes out, without I’s consent, the endorsements by ‘G’ and ‘H’. Decide with
reasons whether ‘E’ is entitled to recover anything from ‘I’ under the provisions of
Negotiable Instruments Act, 1881. (4 Marks)

© The Institute of Chartered Accountants of India

 42 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

(b) The paid-up share capital of SAB Private Limited is ` 1 crore, consisting of 8 lacs Equity
Shares of ` 10 each, fully paid-up and 2 lacs Cumulative Preference Shares of `10 each,
fully paid-up. JVN Private Limited and SARA Private Limited are holding 3 lacs Equity
Shares and 50,000 Equity Shares respectively in SAB Private Limited. JVN Private
Limited and SARA Private Limited are the subsidiaries of PQR Private Limited. With
reference to the provisions of the Companies Act, 2013 examine whether SAB Private
Limited is a subsidiary of PQR Private Limited? Would your answer be different if PQR
Private Limited has 8 out of 9 Directors on the Board of SAB Private Limited?
(4 Marks)
(c) Mr. ‘X’ is the Chief Financial Officer of a Public Limited Company and the management of
the Company orders him to do certain changes in the financial statements against the
prescribed Accounting Standards which was refused by him. Mr. ‘X’ is against those
changes. In the light of the above situation, explain the pressures which are normally
faced by the finance and accounting professionals in an organization in the compliance of
fundamental principles of ethics. (4 Marks)
Answer
(a) (i) According to Section 130 of the Negotiable Instruments Act, 1881 a person taking
cheque crossed generally or specially bearing in either case the words ‘Not
Negotiable’ shall not have or shall not be able to give a better title to the cheque
than the title the person from whom he took it had. In consequence, if the title of the
transferor is defective, the title of the transferee would be vitiated by the defect.
Thus, based on the above provisions, it can be concluded that if the holder has a
good title, he can still transfer it with a good title, but if the transferor has a defective
title, the transferee is affected by such defects, and he cannot claim the right of a
holder in due course by proving that he purchased the instrument in good faith and
for value.
Since ‘K’ in the given case, had obtained the cheque fraudulently, he had no title to
it and cannot give to the bank any title to the cheque or money; and the bank would
be liable for the amount of the cheque for encashment. (Great Western Railway Co.
v. London and Country Banking Co.)
The answer in the second case would not change and shall remain the same for the
reasons given above.
Thus, ‘Sumit’ in both the cases shall be successful in his claim from XYZ Bank.
(ii) According to section 40 of the Negotiable Instruments Act, 1881, where the holder
of a negotiable instrument, without the consent of the endorser, destroys or impairs
the endorser’s remedy against a prior party, the endorser is discharged from liability
to the holder to the same extent as if the instrument had been paid at maturity. Any

© The Institute of Chartered Accountants of India

 PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 43

party liable on the instrument may be discharged by the intentional cancellation of

his signature by the holder.
In the given question, E is the holder of a bill of exchange of which F is the payee
and it contains the following endorsement in blank:
First endorsement, ‘F’
Second endorsement, ‘G’
Third endorsement, ‘H’
Fourth endorsement, ‘I’
‘E’, the holder, may intentionally strike out the endorsement by ‘G’ and ‘H’; in that
case the liability of ‘G’ and ‘H’ upon the bill will come to an end. But if the
endorsements of ‘G’ and ‘H’ are struck out without the consent of ‘I’, ‘E’ will not be
entitled to recover anything from ‘I’. The reason being that as between ‘H’ and ‘I’, ‘H’
is the principal debtor and ‘I’ is surety. If ‘H’ is released by the holder under Section
39 of the Act, ‘I’, being surety, will be discharged. Hence, when the holder without
the consent of the endorser impairs the endorser’s remedy against a prior party, the
endorser is discharged from liability to the holder.
Thus, if ‘E’ strikes out, without I’s consent, the endorsements by ‘G’ and ‘H’, ‘I’ will
also be discharged.
(b) In terms of section 2 (87) of the Companies Act 2013 "subsidiary company" or
"subsidiary", in relation to any other company (that is to say the holding company),
means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total share capital either at its own
or together with one or more of its subsidiary companies:
Explanation.—For the purposes of this clause,—
(a) a company shall be deemed to be a subsidiary company of the holding company
even if the control referred to in sub-clause (i) or sub-clause (ii) is of another
subsidiary company of the holding company;
(b) the composition of a company's Board of Directors shall be deemed to be controlled
by another company if that other company by exercise of some power exercisable
by it at its discretion can appoint or remove all or a majority of the directors.
In the present case, JVN Pvt. Ltd. and SARA Pvt. Ltd. together hold less than one half of
the total share capital. Hence, PQR Private Ltd. (holding of JVN Pvt. Ltd. and SARA Pvt.
Ltd) will not be a holding company of SAB Pvt. Ltd.
However, if PQR Pvt. Ltd. has 8 out of 9 Directors on the Board of SAB Pvt. Ltd. i.e.
controls the composition of the Board of Directors; it (PQR Pvt. Ltd.) will be treated as
the holding company of SAB Pvt. Ltd.

© The Institute of Chartered Accountants of India

 44 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

(c) Ordinarily, a finance and accounting professional should support the legitimate and
ethical objectives established by the employer and the rules and procedures drawn up in
support of those objectives. Nevertheless, where compliance with the fundamental
principles is threatened, a finance and accounting professional must consider a response
to the circumstances. As a consequence of responsibilities to an employing organization,
a finance and accounting professional may be under pressure to act or behave in ways
that could directly or indirectly threaten compliance with the fundamental principles. Such
pressure may be explicit or implicit; it may come from a supervisor, manager, director or
another individual within the employing organization. A finance and accounting
professional may face pressure to:
♦ Act contrary to law or regulation.
♦ Act contrary to technical or professional standards.
♦ Facilitate unethical or illegal earnings management strategies.
♦ Lie to, or otherwise intentionally mislead (including misleading by remaining silent)
others, in particular:
♦ The auditors of the employing organization; or
♦ Regulators;
♦ Issue, or otherwise be associated with, a financial or non-financial report that materially
misrepresents the facts, including statements in connection with.
For example: The financial statements; Tax compliance; Legal compliance; or
Reports required by securities regulators.
Question 6
(a) ABC Ltd. having a networth of ` 80 crores and turnover of ` 30 crores wants to accept
deposits from public other than its members. Referring to the provisions of the
Companies Act, 2013, state the conditions and the procedures to be followed by ABC
Ltd. for accepting deposits from public other than its members. (8 Marks)
(b) State whether the following statements are correct or incorrect.
(i) Debenture with voting rights can be issued only if permitted by the Articles of
Association.
(ii) A bearer of a share warrant of a Company is not a member of the Company unless
the Articles of Association so provide.
(iii) An insolvent may be a member of the Company.
(iv) A partnership firm may hold shares in a Company by holding shares in the individual
names of the partners as joint holders. (1 x 4 = 4 Marks)

© The Institute of Chartered Accountants of India

 PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 45

(c) Ram Prasad is a retired teacher and due to his ill health he lives with his nephew at
Delhi. He has a house at Delhi which he wants to gift to his nephew. Draft a Gift Deed for
Ram Prasad. (4 Marks)
Answer
(a) Acceptance of deposit from public: According to section 76 of the Companies Act,
2013, a public company, having net worth of not less than 100 crore rupees or turnover
of not less than 500 crore rupees, can accept deposits from persons other than its
members subject to compliance with the requirements provided in sub-section (2) of
section 73 and subject to such rules as the Central Government may, in consultation with
the Reserve Bank of India, prescribe.
Provided that such a company shall be required to obtain the rating (including its
networth, liquidity and ability to pay its deposits on due date) from a recognised credit
rating agency for informing the public the rating given to the company at the time of
invitation of deposits from the public which ensures adequate safety and the rating shall
be obtained for every year during the tenure of deposits.
Provided further that every company accepting secured deposits from the public shall
within thirty days of such acceptance, create a charge on its assets of an amount not less
than the amount of deposits accepted in favour of the deposit holders in accordance with
such rules as may be prescribed.
Since, ABC Ltd. has a net worth of ` 80 crores and turnover of ` 30 crores, which is
less than the prescribed limits, hence, it cannot accept deposit from public other than
its members. If the company wants to accept deposits from public other than its
members, it has to fulfill the eligibility criteria of net worth or Turnover or both and then
the other conditions as stated above.
(b) (i) Incorrect
(ii) Correct
(iii) Correct
(iv) Correct
(c) GIFT DEED
THIS DEED OF GIFT made on this ……..…day of ……........BETWEEN Ram Prasad
aged about………years, son of …………….. resident of ………………….(hereinafter
called “the Donor”) of the one part AND ………………, aged about…………….years, son
of ……………….....…, resident of .........……………..(hereinafter called “the Donee”) of
the other part:
WHEREAS the Donor is the absolute owner in possession of the house (particulars to be
specified) at Delhi.

© The Institute of Chartered Accountants of India

 46 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

AND WHEREAS the Donor has no issue and the Donee is the nephew of the Donor with
whom the Donor has been living with.
AND WHEREAS the Donor out of natural love and affection for his said nephew, (the
Donee), is desirous of making a gift of the said house to the Donee:
NOW THEREFORE THIS DEED WITNESSES as follows:
1. That in consideration on natural love and affection of donor for the Donee, the donor
hereby voluntarily transfers to the Donee free from all encumbrances whatsoever
ALL the said house with ALL rights of easement, privileges appurtenant thereto TO
HOLD the same unto the donee absolutely.
2. That the Donor or his heirs shall have no interest in the said house hereafter.
3. That the Donee hereby accepts the said transfer made by the Donor.
4. That the value of the said house is ……….. lacs only.
IN WITNESS WHEREOF the parties hereto have signed this deed at …………………… in
presence of the witnesses on the date and year first hereinabove written.
Signed and Delivered
By with the named ‘Donor’
In the presence of……………
1. ............………..
2. ........………......
Signed and Delivered:
By the named Donee.
In the presence of...........
1 ......……………......
2. ……………….…….
Question 7
Answer any four of the following:
(a) With reference to the provision of the Employees’ Provident Fund and Miscellaneous
Provisions Act, 1952 explain the following:
(i) Liability of an employer in case of transfer of an establishment to another person.
(ii) Whether the payment of contribution to provident fund of an employee, to be made by
his employer, who has become insolvent, a preferential payment? (2 + 2 = 4 Marks)

© The Institute of Chartered Accountants of India

 PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 47

(b) Shyam Dairy Ltd., a dairy products manufacturing company wants to set-up a new
processing unit at Jaipur. Due to paucity of funds, the existing shareholders are not
willing to fund for expansion. Hence, the Company approached XYZ Ltd. for subscribing
to the shares of the Company for expansion purposes. Can Shyam Dairy Ltd. issue
shares only to XYZ Ltd. under the provisions of the Companies Act, 2013? If so, state the
conditions. (4 Marks)
(c) To remove the Managing Director, 40% members of Tiger Farms Limited submitted
requisition for holding an extra-ordinary general meeting. The Company failed to call the
said meeting and hence the requisitionists held the meeting. Since the Managing Director
did not allow the holding of the meeting at the registered office of the Company, the said
meeting was held at some other place and a resolution for removal of the Managing
Director was passed.
Examine the validity of the said meeting and the resolution passed therein under the
provisions of the Companies Act, 2013. (4 Marks)
(d) Intimidation threats may occur when an accounting professional may be prohibited from
acting objectively by threats, actual or perceived. Give two examples of each such
threats when the accounting professional is working as:
(i) An Auditor;
(ii) An Employee in a Company (2 + 2 = 4 Marks)
(e) Explain the principles of “lnterpersonal Communication” with reference to:
(i) Situational Context
(ii) Cultural Context (2 + 2 = 4 Marks)
Answer
(a) (i) Liability in case of transfer of establishment: Section 17-B of the Employees’
Provident Funds and Miscellaneous Provisions Act, 1952 deals with the liability of
transferor and transferee in case of transfer of establishment in regard to the money
due under: (a) the Act; or (b) the Scheme; (c) Pension Scheme. In the case of
transfer of the establishment brought in by sale, gift, lease, or any other manner
whatsoever, the liability of the transferor and the transferee is joint and several, but
is limited with respect to the period up to the date of the transfer. Also the liability of
the transferee is further limited to the assets obtained by him from the transfer of
the establishment.
(ii) Preferential payment of contribution of provident fund of an employee:
According to section 11 of the Employees’ Provident Funds and Miscellaneous
Provisions Act, 1952, if the employer is adjudged an insolvent or if the employer is a
company and an order for winding thereof has been made, the amount due from the
employer whether in respect of the employee’s contribution or the employer’s
contribution must be included among the debts which are to be paid in priority to all

© The Institute of Chartered Accountants of India

 48 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

other debts under Section 49 of the Presidency-Towns Insolvency Act, Section 61 of

the Provincial Insolvency Act, Section 530 of the Companies Act, 1956 (now section
327 of the Companies Act, 2013), in the distribution of the property of the insolvent
or the assets of the company. In other words, this payment will be a preferential
payment provided the liability therefor has accrued before this order of adjudication
or winding up is made.
This provision is substantial as it declares that PF dues shall be made a first charge
on the assets of the establishment and shall be paid in priority to other debts.
(b) Issue of Further Shares: According to Section 62 (1) of the Companies Act, 2013 if at
any time, a company having a share capital proposes to increase its subscribed capital
by the issue of further shares, such shares should be offered to –
(i) the existing equity shareholders of the company as at the date of the offer, in
proportion to the capital paid up on those shares.
(ii) employees under a scheme of employees’ stock option subject to a special
resolution passed by the company and subject to such conditions as may be
prescribed.
(iii) to any persons, if it is authorised by a special resolution, whether or not those
persons include the persons referred to in clause (i) or clause (ii), either for cash or
for a consideration other than cash, if the price of such shares is determined by the
valuation report of a registered valuer subject to such conditions as may be
prescribed.
Since, in the given case Shyam Dairy Ltd. approached XYZ Ltd. for subscribing to the
shares of the company for its expansion and XYZ Ltd. is neither an existing equity
shareholder of the company nor an employee, Shyam Dairy Ltd., if it is authorised by a
special resolution, may issues shares to XYZ Ltd. either for cash or for a consideration
other than cash, subject to the condition that the price of such shares is determined by
the valuation report of a registered valuer.
(c) Calling of Extra Ordinary General Meeting: Section 100 (2) of the Companies Act,
2013 makes it obligatory on the Board of Directors to convene an extra ordinary meeting
of members if requisitioned by the stipulated number of members. In case of a company
having share capital, such number of members who hold, on the date of requisition, not
less than one-tenth of such of the paid-up share capital of the company as on that date
carries the right of voting is the stipulation. Since 40% of members (presumed to have
40% voting right) submitted the requisition for the meeting, the board of directors has
violated the provisions of law by not calling the meeting.
However, section 100 (4) of the Companies Act, 2013 provides that if Board fail to
proceed to call a meeting within 21 days from the date of receipt of a valid requisition and
to convene meeting within 45 days of the receipt of the requisition, the requisitionists
may themselves call a meeting within 3 months of the date of the requisition.

© The Institute of Chartered Accountants of India

 PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 49

Moreover, where a meeting is called by the requisitionists and the registered office is not
made available to them, it was decided in R. Chettiar v. M. Chettiar that the meeting may
be held anywhere else.
Further, resolutions properly passed at such a meeting, are binding on the company.
Thus, in the given case, since all the above desired provisions are duly complied with,
the meeting held by the requisitionists and the resolution passed for removing the
Managing Director of Tiger Farms Limited shall be valid.
(d) (i) Intimidation threat for finance and accounting professionals working as
auditors:
(a) Being threatened with dismissal or replacement;
(b) Being threatened with litigation;
(c) Being pressured to reduce inappropriately the extent of work performed in
order to reduce fees;
(ii) Intimidation threat for finance and accounting professionals working as
employees:
(a) Threat of dismissal or replacement of the finance and accounting professional
or a close or immediate family member over a disagreement about the
application of an accounting principle or the way in which financial information
is to be reported for external use as well as for decision making purposes.
(b) A dominant personality attempting to influence the decision making process,
for example with regard to the exclusion of irrelevant costs from projected cost
estimates.
(e) (i) Situational context deals with the “psycho-social-where" one is communicating.
For example, an interaction that takes place in a classroom will be very much
different from one that takes place in a Board room.
(ii) Cultural context includes all the learned behaviours and rules that affect the
interaction. If you come from a culture (foreign or within your own country) where it
is considered rude to make long, direct eye contact, you will out of politeness avoid
eye contact. If the other person comes from a culture where long, direct eye contact
signals trustworthiness, then we have in the cultural context a basis for
misunderstanding.

© The Institute of Chartered Accountants of India