Mock Examination May 2007

Organized by Parveen Sharma Courtesy: Munish Bhandari

CA FINAL – LAW
Time Allowed: 3 Hours Max. Marks: 100

Question Numbers 1, 2 and 3 are compulsory. Answer any four from the rest.

Question 1. Answer any two of the following (5 marks each):

(a) The paid up capital of Needy Private Limited is Rs. 5 lakhs. Liberal Finance Ltd. has
agreed to grant a loan or Rs. 2 crores to Needy Private Limited on the condition that
Liberal Finance Ltd. shall have a right to nominate Mr. Successful, Mr. Achiever and
Mr. Reliable as directors on the Board of Needy Private Limited. The articles of Needy
Private Limited require every director to hold qualification shares of a nominal value of
Rs. 20,000. Answer the following in view of the provisions of the Companies Act,
1956:

(i) Whether appointments of the three directors by Liberal Finance Ltd. can be made
in accordance with the Loan Agreement entered into by Liberal Finance Ltd. and
Needy Private Limited?

(ii) Whether the three directors nominated by Liberal Finance Ltd. shall have to
obtain the qualification shares. If yes, what will be the value of the qualification
shares?

(ii) Assuming that all legal requirements for appointment of the three directors are
complied with, and the three directors hold requisite qualification shares, if any,
whether these directors are required to disclose their interest in an agreement
put for consideration in the Board meeting of Liberal Finance Ltd., and can they
vote thereat?

(b) M/s Brokers & Brokers, a member of a recognised stock exchange propose to buy
and sell shares of a particular company on behalf of investors as well as on their own
account. They seek your advice as to restrictions, if any, under Securities Contracts
(Regulation) Act, 1956 for dealing in securities on their own account. Advise.

(c) What do you mean by the terms ‘corporatisation’, ‘demutualisation’ and ‘scheme’?
Explain the consequences where a stock exchange fails to corporatise or
demutualise.

Question 2. Answer any two of the following (7 marks each):

(a) According to Foreign Exchange Management Act, 1999, a person resident in India
shall take all reasonable steps to repatriate to India any amount of foreign exchange
earned and accrued to him. What is meant by the expression ‘repatriate to India’?
State the cases where foreign exchange can be held or need not be repatriated to
India by a resident in India.
(b) State whether there are any restrictions in respect of the following transactions:

(i) Drawal of foreign exchange for payments due on account of amortisation of loans.

(ii) Purchase of shares of a company engaged in plantation activities by a person

resident outside India.

(iii) Transfer by a person resident in India of an immovable property situated outside

India which was acquired by him when he was resident outside India.

(c) Explain the powers of the Central Government to supersede the Competition
Commission of India.

Question 3. Answer any two of the following (7 marks each):

(a) M/s Herbal Pharma Limited, a listed company, decides to make a public issue of
equity shares. Explain briefly the eligibility norms prescribed by SEBI guidelines to be
complied with by the company.

(b) SEBI received a compliant from an investor that he has not received the payment due
to him from a registered stock broker. Explain the action that can be taken by SEBI
against the stock broker under the provisions of Securities and Exchange Board of
India Act, 1992 and the factors that will be taken into account while taking such
action.

(c) Explain the rules relating to interpretation of the terms ‘subject to’ and
‘notwithstanding’ used in the provisions of an Act. State the effect of the term
‘notwithstanding anything contained in this Act’ used in section 408 of the Companies
Act empowering the Central Government to prevent oppression or mismanagement.

Question 4. (8 + 7 Marks)

(a) (i) Director’s Responsibility Statement is required to be made only when a company
has not made compliances with the provisions of the Companies Act, 1956. The
contents of the Director’s Responsibility Statement shall be such as deem fit by
the directors. Comment.

(ii) The Companies Act has made it obligatory for every company to file annual
accounts every year. Comment.

(b) (i) ABN Limited has entered into an agreement with the State Bank of India for
borrowing of Rs. 5 crores as term loan against the security of its assets. The
directors contend that such borrowings do not attract section 372A of the
Companies Act, 1956.

(ii) JKL Limited is considering offering a guarantee to Mr. Ram Gopal who has
agreed to provide loan to Mr. Janak, the managing director of the company. JKL
Limited contends that such guarantee does not require any compliance under the
Companies Act, 1956.
Question 5. (8 + 7 Marks)

(a) State the legal position in the following cases:

(i) The directors refuse to carry out a sale agreement resolved by the members in
general meeting because in their opinion it is not in the best interests of the
company. The members insist that the directors are bound to carry out the
agreement since the directors are the agents of the shareholders. The members
bring a suit to force the directors to enter into such an agreement. Comment.

(ii) The directors of a company have to travel very often for the company’s business.
The company makes some advances to them for this purpose which sometimes
exceed the actual requirements. Comment.

(b) As a secretary of ST Ltd. advise the Board of directors regarding appointment of an

alternate director, an additional director, and a director filling a casual vacancy. The
articles of ST Ltd. does not contain any provision regarding appointment of any
directors.

Question 6. (8 + 7 Marks)

(a) A company failed to file annual accounts and annual return for two consecutive
financial years (although such documents were ready for filing). The annual accounts
and annual return for third financial year are not ready as on last date of filing annual
return. Suggest the course of action to be adopted by the company and
consequences if default is made in third year also.

(b) Give your views in the following cases:

(i) Mr. A, a whole time director of the company is appointed as a secretary at a

remuneration of Rs. 5,600 per month. No approval of shareholders is obtained in
the first general meeting. Mr. B, another director of the company contends that
Mr. A shall cease to be a director as from the date of first general meeting.
Comment.

(ii) Mr. X is already a director in 15 companies. He has been appointed as a director

in RT Ltd. on 23.4.2004 and in ST Ltd. on 30.4. 2004. Mr. X resigns from one of
his earlier directorships on 13.5.2004. On the same date, he intends to accept
the directorship in RT Ltd. and ST Ltd. Comment.

Question 7. (8 + 7 Marks)

(a) The Board of Directors of the company at their meeting held on 4th April, 1998 decide
by a resolution that Mr. A be appointed as the Managing Director of the company for
a period of 5 years effective from 1st June, 1998, and paid remuneration by way of
salary, commission and perquisites in accordance with Part II of Schedule XIII of the
Companies Act, 1956. Draft the necessary resolution of the Board of directors.

(b) The balance sheet of M/s. Hush Hush Ltd., as at 31.3.1999 filed with registrar of
companies, Mumbai disclosed that the liabilities amounted to Rs. 2.75 crores as
against the assets of Rs. 1.25 crores. On the basis of the scrutiny of the Balance
Sheet, the registrar filed a winding up petition against the company stating that it is
commercially insolvent and that the company is unable to pay its debts on the ground
 that the value of liabilities far exceeded the value of assets. Examine whether the
company has any case to defend against the winding up petition filed by the registrar.

Question 8. (8 + 7 Marks)

(a) The directors of a company held more than 75% shares in the company. The
company was carrying on business of construction of projects. The directors acquired
certain contracts in their own name in breach of trust and made profits for
themselves. In the annual general meeting, they passed a resolution that the
company had no interest in the contract. The minority shareholders filed a case
against directors asking them to account for the profits. Discuss.

(b) (i) Where the appointment of a sole selling agent is made without a condition that
the appointment is subject to approval of members but later on members’
approval is obtained, the appointment of sole selling agent is validated.
Comment.

(ii) XYZ Private Limited having paid up capital of Rs. 25 lakhs intends to appoint M/s
BNM Marketing as its sole selling agent. BNM Marketing is owned by relatives of
directors of XYZ Private Limited but they do not hold any share capital in the
company. Comment.

Question 9. (8 + 7 Marks)

(a) State your views on the following:

(i) A company in which 50% or more of equity share capital is held by the Central
Government or the State Government, is called as a Government Company.

(ii) A foreign company shall file the world accounts and Indian business accounts
within 6 months of holding its annual general meeting.

(iii) Any alteration in the documents filed by a foreign company shall be intimated to
the registrar within 30 days.

(b) Examine whether the quorum is present in the following cases:

(i) In a Board meeting, only 3 directors were present out of the total of 11 directors.
None of the 3 directors was interested in any of the items of the agenda.

(ii) In a meeting of the Board, out of the total of 11 directors, 7 directors were
present of which only 2 directors were not interested in one of the transactions.

(iii) The articles of association of a company fixed 3 as the quorum for a meeting of
the Board. At a meeting of the Board, all the 5 directors were present. They
allotted the shares of the company to 3 of the directors. Is the allotment valid?
 Mock Examination May 2007
Organized by Parveen Sharma Courtesy: Munish Bhandari
CA FINAL – SOLUTION LAW
Time Allowed: 3 Hours Max. Marks: 100

Ans. to Q. No. 1(a).

The given problem relates to Sec. 255, 270, 299 and 300 of the Companies Act, 1956.
1. As per Sec. 255, unless the articles otherwise provide, the directors in a private
company shall be appointed in general meeting. Thus, a company may appoint
nominee directors on the Board of a private company only if the articles of the private
company contain an express provision enabling the appointment of nominee
directors.
2. As per Sec. 270, the articles of a company may require the directors to hold
qualification shares. The qualification shares shall be obtained by the directors within
2 months of appointment. The nominal value of qualification shares shall not exceed
Rs. 5,000. However, the provisions of Sec. 270 do not apply to a private company.
Thus, the directors of a private company shall hold qualification shares of such value
as may be required by the articles.
3. As per Sec. 299, if one or more directors (directly or indirectly) hold more than 2%
share capital of any other company, they shall be deemed to be interested in any
contract or arrangement that may be entered into by the company with such other
company. Further, the interested directors shall disclose their interest in a Board
meeting.
4. As per Sec. 300, an interested director shall not discuss or vote, and shall not be
counted in quorum in the contract or arrangement in which he is interested. But, Sec.
300 does not apply where the directors nominated by a company in a public company
hold not more than such number of shares as they are required to hold as
qualification shares.
In view of the above provisions, the given problem is answered as follows:
(i) The appointments of the three directors by Liberal Finance Ltd. in accordance with
the Loan Agreement entered into by Liberal Finance Ltd. and Needy Private Limited
are not valid. These appointments shall be valid only if the articles of Needy Private
Limited expressly authorise the appointment of nominee directors.
(ii) The three directors nominated by Liberal Finance Ltd. shall have to obtain the
qualification shares. The value of qualification shares shall be Rs. 20,000 for every
director.
(iii) The three directors nominated by Liberal Finance Ltd. hold in Needy Private Limited
shares of the value of Rs. 60,000 which is more than 2% of the paid up share capital
of Needy Private Limited. Therefore, the three directors nominated by Liberal Finance
Limited are required to disclose their interests as per Sec. 299. The exemption given
u/s 300 does not apply to the present case, and therefore, the three directors shall not
be counted in quorum, shall not discuss and vote on the contract or arrangement in
which they are interested.
Ans. to Q. No. 1(b).
The given problem relates to Sec. 15 of the Securities Contracts (Regulation) Act, 1956,
as explained below:
As per section 15, no member of a recognised stock exchange shall enter into any
contract as a principal with any person other than a member of a recognised stock
exchange, except in the following cases:
(a) Where the member of the recognised stock exchange –
(i) secures the consent of such other person in writing; and
(ii) makes a disclosure in the note, memorandum or agreement of sale or purchase
that he is acting as a principal.
(b) Where the member secures the consent of such other person otherwise than in
writing, he shall secure written confirmation by such person of such consent within 3
days from the date of the contract.
(c) A member may, without obtaining any written consent of such person, close out any
outstanding contract entered into by such person in accordance with the bye-laws of
the stock exchange. However, the member shall disclose in the note, memorandum
or agreement of sale or purchase in respect of such closing out that he is acting as a
principal.
(d) Where the contract is a spot delivery contract.
Thus, M/s Brokers & Brokers, can buy and sell shares on their own account in the
abovementioned cases.

Ans. to Q. No. 1(c).

The terms ‘corporatisation’, ‘demutualisation’ and ‘scheme’ are defined under section 2 of
the Securities Contracts (Regulation) Act, 1956. These definitions are given hereunder:
1. Definition of ‘corporatisation’ [Section 2(aa)]
‘Corporatisation’ means the succession of a recognised stock exchange, being a body
of individuals or a society registered under the Societies Registration Act, 1860, by
another stock exchange, being a company incorporated for the purpose of assisting,
regulating or controlling the business of buying, selling or dealing in securities carried
on by such individuals or society.
2. Definition of ‘demutualisation’ [Section 2(ab)]
‘Demutualisation’ means the segregation of ownership and management from the
trading rights of the members of a recognised stock exchange in accordance with a
scheme approved by SEBI.
3. Definition of ‘scheme’ [Section 2(ga)]
‘Scheme’ means a scheme for corporatisation or demutualisation of a recognised stock
exchange which may provide for –
(a) the issue of shares for a lawful consideration, and provision of trading rights in lieu
of membership cards of members of a recognised stock exchange;
(b) the restrictions on voting rights;
(c) the transfer of property, business, assets, rights, liabilities, recognitions, contracts
of the recognised stock exchange, legal proceedings by, or against, the
recognised stock exchange, whether in the name of the recognised stock
 exchange or any trustee or otherwise and any permission given to, or by, the
recognised stock exchange;
(d) the transfer of employees of a recognised stock exchange to another recognised
stock exchange;
(e) any other matter required for the purpose of, or in connection with, the
corporatisation or demutualisation, as the case may be, of the recognised stock
exchange.

Ans. to Q. No. 2(a).

Repatriation to India [Section 2(y)]
‘Repatriate to India’ means bringing into India the realised foreign exchange and –
(i) the selling of such foreign exchange to an authorised person in India in exchange for
rupees, or
(ii) the holding of realised amount in an account with an authorised person in India to the
extent notified by the Reserve Bank, and includes use of the realised amount for
discharge of a debt or liability denominated in foreign exchange.
Realisation and repatriation of foreign exchange (Section 8)
Where any amount of foreign exchange is due or has accrued to any person resident in
India, such person shall take all reasonable steps to realise and repatriate to India such
foreign exchange within such period and in such manner as may be specified by the
Reserve Bank.
Exemption from realisation and repatriation (Section 9)
The provisions of sections 4 and 8 shall not apply to the following, i.e., in the following
cases the foreign exchange need not be repatriated to India:
(a) Possession of foreign currency or foreign coins by any person upto such limit as the
Reserve Bank may specify.
(b) Foreign currency account held or operated by such person or class of persons upto
such limits as may be specified by the Reserve Bank of India.
(c) Foreign exchange acquired or received before the 8th day of July, 1947 or any
income arising or accruing thereon which is held outside India by any person in
pursuance of a general or special permission granted by the Reserve Bank.
(d) Foreign exchange held by a person resident in India upto such limit as the Reserve
Bank may specify, if such foreign exchange was acquired by way of gift or inheritance
from a person referred to in clause (c), including any income arising therefrom.
(e) Foreign exchange acquired from employment, business, trade, vocation, services,
honorarium, gifts, inheritance or any other legitimate means upto such limits as the
Reserve Bank may specify.
(f) Such other receipts in foreign exchange as the Reserve Bank may specify.

Ans. to Q. No. 2(b).

The given problem relates to Sec. 6 of Foreign Exchange Management Act, 1999 read
with Foreign Exchange Management (Permissible Capital Account Transactions)
Regulations, 2000, as explained below:
(i) As per section 6, the Reserve Bank shall not impose any restriction on the drawal of
foreign exchange for payments due on account of amortisation of loans or for
depreciation of direct investments in the ordinary course of business. Thus, there are
 no restrictions for drawal of foreign exchange for payments due on account of
amortisation of loans.
(ii) Reserve Bank has framed Foreign Exchange Management (Permissible Capital
Account Transactions) Regulations, 2000. As per these regulations no person
resident outside India shall make investment in India, in any form, in any company or
partnership firm or proprietary concern or any entity, whether incorporated or not
which is engaged or proposes to be engaged in agricultural or plantation activities.
Thus, purchase of shares of a company engaged in plantation activities by a person
resident outside is not permissible.
(iii) As per Sec. 6, a person resident in India may hold, own, transfer or invest in foreign
currency, foreign security or any immovable property situated outside India if such
currency, security or property was acquired, held or owned by such person when he
was resident outside India or inherited from a person who was resident outside India.
Thus, transfer by a person resident in India of an immovable property situated outside
India which was acquired by him when he was resident outside India is permissible.

Ans. to Q. No. 2(c).

Section 56 empowers the Central Government to supersede the Commission. These
provisions may be explained as follows:
1. Reasons for supersession
The Central Government may supersede the Commission in the following cases:
(a) Where the Central Government is of the opinion that on account of circumstances
beyond the control of the Commission, the Commission is unable to discharge the
functions or perform the duties imposed on it.
(b) Where the Central Government is of the opinion that the Commission has
persistently made default in –
 complying with any direction given by the Central Government; or
 discharge of the functions or performance of the duties imposed on it,
and as a result of such default the financial position of the Commission or the
administration of the Commission has suffered
(c) Where the Central Government is of the opinion that circumstances exist which
render it necessary in the public interest to supersede the Commission.
2. Conditions for making an order of supersession
(a) The Central Government shall give a reasonable opportunity to the Commission to
make representations against the proposed supersession. The Central Government
shall consider the representations made by the Commission before supersession.
(b) The Central Government shall be required to issue a notification in the Official
Gazette stating therein the reasons for supersession of the Commission.
(c) The time period for which the Central Government has superseded the Commission
shall be specified in the notification. Such time period shall not exceed 6 months.
3. Effects of supersession
On the publication of notification of supersession, the following consequences shall
follow:
(a) The Chairperson and other Members shall vacate their offices. The cessation shall
be effective as from the date of publication of order of supersession in the Official
Gazette.
 (b) All the powers, functions and duties which were previously exercised or discharged
by the Commission shall now be exercised and discharged by the Central
Government or such authority as the Central Government may specify in this
behalf. However, after the Commission is reconstituted, all such powers, functions
and duties shall be exercised or discharged by the Commission so reconstituted.
(c) All properties owned or controlled by the Commission shall vest in the Central
Government. However, after the Commission is reconstituted, such properties shall
vest in the Commission so reconstituted.
4. Reconstitution of Commission
(a) It shall be obligatory for the Central Government to reconstitute the Commission.
Accordingly, the Central Government shall reconstitute the Commission on or
before the expiration of the period of supersession.
(b) The reconstitution of Commission shall be made by a fresh appointment of its
Chairperson and other Members.
(c) The persons who had vacated their offices because of supersession of the
Commission by the Central Government shall not be deemed to be disqualified for
reconstitution.

Ans. to Q. No. 3(a).

1. A listed company shall be eligible to make a public issue of equity shares or any other
security which may be converted into or exchanged with equity shares at a later date.
2. However, if the aggregate of the proposed issue and all previous issues made in the
same financial year in terms of size (i.e., offer through offer document + firm allotment
+ promoters’ contribution through the offer document), issue size does not exceed 5
times its pre-issue networth as per the audited balance sheet of the last financial year.
3. In case there is a change in the name of the issuer company within the last 1 year
(reckoned from the date of filing of the offer document), the revenue accounted for by
the activity suggested by the new name is not less than 50% of its total revenue in the
preceding 1 full-year period.

Ans. to Q. No. 3(b).

1. Penalty for non-payment by a stock broker
A registered stock broker is liable to penalty under section 15F in respect of certain
defaults. Accordingly, if a stock broker fails to make payment of the amount due to the
investor in the manner and within the period specified in the regulations, he shall be
liable to a penalty of Rs. 1 lakh for each day during which such failure continues or Rs.
1 crore, whichever is less (Section 15F).
2. Procedure for adjudication
As per section 15I, SEBI shall appoint any of its officers (not below the rank of Division
Chief) to be an adjudicating officer for holding an enquiry in the prescribed manner. The
adjudicating officer shall give an opportunity of being heard before imposing any
penalty.
3. Factors to be taken into consideration while imposing penalty
As per section 15J, while adjudging the quantum of penalty, the adjudicating officer
shall have due regard to the following factors:
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable,
made as a result of the default.
 (b) the amount of loss caused to an investor or group of investors as a result of the
default.
(c) the repetitive nature of the default.

Ans. to Q. No. 3(c).

The rules relating to interpretation of the terms ‘subject to’ and ‘notwithstanding’ can be
explained as follows:
Meaning of the term ‘notwithstanding’
A provision containing the word ‘notwithstanding’ is generally termed as ‘non obstante
clause’. The provision containing the word ‘notwithstanding’ has an over-riding effect on
the other provision, i.e., such provision shall prevail over the other provision. In other
words, if there is any inconsistency or departure between the non obstante clause and
another provision, it is the non obstante clause which will prevail. Accordingly, a non
obstante clause restricts the operation and effect of other contrary provisions.
For example, section 408(1) of the Companies Act, 1956 gives over-riding powers to the
Central Government to appoint a director (hereinafter referred to as ‘nominee director’) on
the Board of any company to prevent oppression or mismanagement. It reads as –
“Notwithstanding anything contained in this Act, the Central Government may appoint …”.
The effect of this non obstante provision is that the Central Government can make the
appointment of directors under section 408(1), even if such appointment would not be
permissible under any other provision of the Act.
Similarly, section 408(6) is a non obstante clause which explains the provisions applicable
to a nominee director. Accordingly, the special provisions as enacted in section 408(6)
shall apply to a nominee director irrespective of provisions of the Companies Act, 1956 as
applicable to other directors. Therefore, the position of a nominee director differs from any
other director in respect of the following matters:
(a) In reckoning two-third or any proportion thereof, a nominee director shall not be taken
into account.
(b) A nominee director shall be required to hold the qualification shares.
(c) A nominee director shall not be required to retire by rotation. As such, provisions of
sections 255 and 256 shall not apply to a nominee director.
(d) A nominee director can be removed by Central Government only, i.e., section 283
shall not apply. Any vacancy in the office of a nominee director can only be filled by
the Central Government.
Simply speaking, the expression ‘notwithstanding’ indicates that the appointment of
nominee directors is not to be controlled by other provisions of the Companies Act, 1956,
like sections 255, 270, 283 and 284.
Meaning of the term ‘subject to’
A provision containing the word ‘subject to’ gives an overriding effect to the other
provision, i.e., other provision shall prevail over such provision in case of any
inconsistency. In other words, a provision containing the words ‘subject to’ implies that
such provision shall yield place to another provision to which it is made ‘subject to’. Thus,
the effect of a provision containing the word ‘notwithstanding’ is opposite to a provision
containing the words ‘subject to’.
For example, section 254 of the Companies Act, 1956 reads as – “In default of and
subject to any regulations in the articles of a company, subscribers of the memorandum
who are individuals, shall be deemed to be the directors of the company, until the
directors are duly appointed in accordance with section 255.” The effect of section 254 is
that, at the first instance, the effect shall be given to the articles of a company. Only when
the articles are silent, the subscribers to the memorandum who are individuals, shall be
deemed to be the directors of the company. In other words, the appointment of first
directors shall be made in accordance with the provisions of the articles of a company.
However, where the articles of a company do not contain anything regarding the
appointment of first directors, then the subscribers to the memorandum who are
individuals, shall be deemed to be the directors of the company.

Ans. to Q. No. 4(a)(i).

The provisions relating to directors’ responsibility statement are contained in Sec.
217(2AA) of the Companies Act, 1956, as explained below:
1. The directors’ responsibility statement shall be given as a part of Board’s report. The
directors’ responsibility statement shall be given whether or not the company has
complied with the provisions of the Companies Act, 1956.
Thus, the statement ‘Director’s Responsibility Statement is required to be made only
when a company has not made compliances with the provisions of the Companies
Act, 1956’ is not correct.
2. The directors’ responsibility statement shall disclose the following particulars:
(a) Compliance with Accounting standards. The directors’ responsibility
statement shall disclose that in the preparation of the annual accounts, the
applicable accounting standards had been followed along with proper
explanation relating to material departures.
(b) Consistent Accounting policies. The directors’ responsibility statement shall
disclose that the directors had selected such accounting policies and applied
them consistently and made judgments and estimates that are reasonable and
prudent so as to give a true and fair view of the balance sheet and profit/loss of
the company.
(c) Due care. The directors’ responsibility statement shall disclose that the directors
had taken proper and sufficient care for –
the maintenance of adequate accounting records in accordance with the
provisions of this Act;
safeguarding the assets of the company; and
preventing and detecting fraud and other irregularities.
(d) Going concern Assumption. The directors’ responsibility statement shall
disclose that the directors had prepared the annual accounts on a going concern
basis.
Thus, the statement ‘The contents of the Director’s Responsibility Statement shall be
such as deem fit by the directors’ is not correct.

Ans. to Q. No. 4(a)(ii).

The present problem relates to Sec. 220 of the Companies Act, 1956.
The legal position
1. Filing of annual accounts etc.
Every company must file with the registrar 3 copies of balance sheet, profit and loss
account, and all the documents which are required to be annexed or attached to the
balance sheet.
2. Time limit for filing
The above documents shall be filed –
(a) within 30 days from the date on which the balance sheet and profit and loss
account were laid at the AGM; or
(b) where the AGM has not been held, within 30 days from the latest day on which
AGM should have been held.
3. Statement of reasons to be filed with the registrar
If –
(a) the balance sheet of a company is not adopted at the AGM; or
(b) the AGM is adjourned without adopting the balance sheet; or
(c) for any financial year, the AGM has not been held,
a statement of that fact and of the reasons therefor shall be annexed to the balance
sheet and to the copies thereof required to be filed with the registrar.
Conclusion – Filing of annual accounts is mandatory
Section 220 has made it obligatory on every company to file the annual accounts with the
registrar, even if the AGM has not been held, or has been adjourned without adopting the
annual accounts.
Thus, the given statement is correct for all companies whether public or private.

Ans. to Q. No. 4(b)(i).

The given problem relates to Sec. 372A of the Companies Act, 1956, as explained below:
Section 372A applies only if a public company –
(a) makes a loan to any body corporate; or
(b) acquires the securities of any other body corporate; or
(c) gives any guarantee or provides any security to –
(i) a person who gives a loan to any body corporate; or
(ii) a body corporate which gives a loan to any other person.
Thus, Sec. 372A does not apply where a company borrows money from a person (even if
such person is a body corporate). Accordingly, the contention of the directors of ABN
Limited is correct.

Ans. to Q. No. 4(b)(ii).

The given problem relates to Sec. 295 of the Companies Act, 1956, as explained below:
Section 295 applies only if a public company –
(a) makes a loan to any specified person; or
(b) gives any guarantee or provides any security to –
(i) a person who gives a loan to any specified person; or
(ii) a specified person who gives a loan to any other person.
Every director and managing director of the company is a specified person.
In the given case, the company intends to give guarantee to a person (Mr. Ram Gopal)
who gives a loan to a specified person (Mr. Janak, the managing director). Clearly, the
case falls u/s 295, and therefore, JKL Limited can given guarantee to Mr. Ram Gopal only
with the previous approval of the Central Government.
Ans. to Q. No. 5(a)(i).
The given problem relates to Sec. 291 of the Companies Act, 1956.
The legal position
1. As per Sec. 291, the Board is authorised to do all such acts and things, which the
company is authorised to do. Thus, the powers of the Board are co-extensive with
powers of the company. Accordingly, the Board has the management of the
company.
2. The directors are the agents of the company, and not of the shareholders.
The given case
In the given case, the members, by passing a resolution in the general meeting, entered
into a sale agreement on behalf of the company, but the directors refuse to carry out such
agreement.
Conclusion
The suit of the members shall fail. If, the Board of directors are of the opinion that the
agreement entered into by the members is not in the best interests of the company, the
Board may refuse to carry out such agreement. The members cannot force the directors
to carry out the sale agreement. Even the Courts do not interfere in the management of
the company. The management of the company lies in the hands of the directors, and the
members cannot usurp the Board’s powers, or direct the Board regarding day-to-day
activities of the company.
However, the shareholders shall be authorised to exercise all the powers of the Board in
the following cases:
(a) Where the Board has been acting malafide.
(b) Where the Board is incompetent to act.
(c) If there is a deadlock in the Board.

Ans. to Q. No. 5(a)(ii).

The given problem relates to Sec. 295 of the Companies Act, 1956.
The legal position
1. As per Sec. 295, except with the previous approval of the Central Government, no
public company shall give a loan to any person specified u/s 295.
2. A director is a person specified u/s 295.
3. An advance given to a director for the purpose of carrying on business of the
company does not amount to ‘loan to a director’.
The given case and conclusion
In the given case, the travelling advance given by the company to the directors does not
attract Sec. 295, since the company has not given any financial assistance to the
directors. The travelling advance was always given to the directors for the purpose of
carrying on business of the company. It is immaterial that such advance exceeded the
actual requirement, since it is not always possible to precisely estimate the amount of
expenditure that will be incurred on the tour.

Ans. to Q. No. 5(b)(ii).

The provisions relating to appointment of an alternate director, additional director and
director filing a casual vacancy are explained as follows:
 Points of Additional Filling of Casual Alternate Directors
Comparison Directors Vacancies (Sec. 313)
(Sec. 260) (Sec. 262)
Appointment The Board is Unless the articles The Board is
by whom? empowered to otherwise provide, the empowered to appoint
appoint an additional Board is empowered to an alternate director.
director. fill a casual vacancy in
the office of a director.
Precondition  No precondition  Where the office of An alternate director can
for a director comes to be appointed to act in
 Board may at
appointment an end otherwise place of an original
anytime, in its
than in the normal director during the
discretion,
course, such absence of original
appoint
vacancy is called as director for a period of 3
additional
casual vacancy. months or more from the
directors.
State in which BMs are
 A casual vacancy
ordinarily held.
arising in office of a
director appointed
in GM may be filled
u/s 262.
Power to Articles must No express power in The Board must be
appoint authorise the Board articles is required to fill authorised by –
to appoint the a casual vacancy. – articles; or
additional directors.
– resolution passed at
a GM.
Method of An additional A casual vacancy can An alternate director may
appointment director may be be filled only by passing be appointed by–
appointed by – a resolution at a BM. – passing a resolution
– passing a at a BM; or
resolution at a – passing a resolution
BM; or by circulation.
– passing a
resolution by
circulation.

Ans. to Q. No. 6(a).

Ans. The given problem relates to Sec. 274(1)(g) of the Companies Act, 1956.
The legal position
1. As per Sec. 274(1)(g), a director of a public company
shall be disqualified for a period of 5 years
from being appointed as a director in any public company,
if the public company of which he is already a director –
(A) does not file – the annual accounts; and
– annual returns
 for any continuous 3 FYs
commencing on and after 1.4.1999;
or
(B) fails to – repay its deposit or interest thereon on due date; or
– redeem its debentures on due date; or
– pay dividend
and
such failure continues for 1 year or more.
2. If annual accounts and annual returns for any 3 continuous financial years are not filed,
all those persons shall be disqualified who have been directors as on the last due
date for filing the annual accounts and annual returns.
3. A director shall not be disqualified u/s 274(1)(g) if he resigns before disqualification u/s
274(1)(g) has become effective.
The given case
1. A company has not filed the annual accounts and annual returns for 2 consecutive
financial years. The annual accounts and annual returns of the 3rd financial year are
not ready.
2. The disqualification u/s 274(1)(g) shall not be attracted if the company files the annual
accounts or annual return of any of the preceding 2 financial years, i.e., the annual
accounts or annual return is belatedly filed.
Conclusion
The company is advised to file the annual accounts and annual returns of the
preceding 2 financial years, as these documents are ready. This way, the directors shall
escape the disqualification u/s 274(1)(g).
Comment
(a) In case the company is a private company, Sec. 274(1)(g) shall not be attracted,
even though the annual accounts and annual return are not filed in the third year also,
since Sec. 274(1)(g) does not apply to a private company.
(b) In case the company is a public company and it does not file the annual accounts or
annual return of any of the preceding 2 financial years, a director may still escape the
disqualification by resigning before the last date of filing annual return.

Ans. to Q. No. 6(b)(i).

The given problem relates to Sec. 314(1) of the Companies Act, 1956.
Sec. 314(1) is attracted if any director of the company is appointed at any office or place
of profit carrying any remuneration. Any appointment which attracts Sec. 314(1) must be
authorised by the members by passing a special resolution either before appointment or in
the first general meeting held after such appointment.
If any office or place of profit is held but the special resolution is not passed in the first
general meeting held after appointment, the person concerned shall immediately vacate
the office or place of profit held by him and refund to the company the entire remuneration
received by him.
In the given case, Mr. A (a director) is appointed as a secretary at a monthly remuneration
of Rs. 5,600. The office of secretary is an office or place of profit. Where office or place of
profit is held by a director, the monthly remuneration attached to such office or place of
profit is immaterial. Thus, the appointment of Mr. A as a secretary requires approval of the
members b way of a special resolution.
Since special resolution is not passed in the first general meeting, Mr. A shall have to
vacate the office of secretary w.e.f. the date of first general meeting. Also, Mr. A shall
have to refund the remuneration received by him in the capacity of secretary. However,
Mr. A shall not have to vacate the office of director since there is no such requirement
under Sec. 314(1), 283 or any other provision of the Act.

Ans. to Q. No. 6(b)(ii).

The given problem relates to Sec. 277(1) of the Companies Act, 1956.
As per Sec. 277(1), where a person already holding 15 directorships is appointed as a
director in any other company –
(i) the new appointment shall not take effect
unless within 15 days of such appointment,
the director concerned vacates any of his earlier directorships;
(ii) the appointment shall become void
if the office is not so vacated.
The given case is discussed as follows:
 Sec. 277(1) is attracted since Mr. X is already a director in 15 companies.
 The new appointment of Mr. X in RT Ltd. (made on 23.04.2004) becomes void on
expiry of 08.05.2004 (i.e., on the expiry of 15 days of appointment).
 With respect to the new appointment of Mr. X in ST Ltd. (made on 30.04.2004), Mr. X
gets 15 days to vacate any of his earlier directorships in order to accept the
directorship in ST Ltd. This period of 15 days expires on 15.05.2004. Since Mr. X has
resigned from one of his existing directorships on 13.05.2004 (assuming that his
resignation has become effective immediately resulting in immediate vacation of office
of director), his acceptance of directorship of ST Ltd. is valid.
 However, Mr. X cannot accept directorship in RT Ltd. since it became void on the
expiry of 08.05.2004.

Ans. to Q. No. 7(a).

The required resolution is given as follows:
Subject – Appointment of a managing director
Passing Authority – Board of directors
Nature of the Resolution – Resolution with simple majority
“RESOLVED that pursuant to the approval of the remuneration committee and subject to
the approval of the company in general meeting, Mr. A, who fulfills the conditions specified
in Parts I and II of Schedule XIII to the Companies Act, 1956, be and is hereby appointed
as the managing director of the company for a period of 5 years effective from 1st June,
1998, on a monthly remuneration of Rs. 30,000 payable by way of salary, commission and
perquisites as set out in the agreement entered into with him by the company.
RESOLVED FURTHER that the duties of the managing director shall be the overall
supervision of the functioning of the company, handling day-to-day affairs of the company,
regularly reporting to Board on the activities of the company and to perform all other duties
that the Board may delegate to the managing director from time to time.
RESOLVED FURTHER that the secretary of the company be and is hereby authorised to
file the necessary returns with the Registrar of Companies and to do all acts and things as
may be necessary in this connection.”

Ans. to Q. No. 7(b).

Under section 433(e), a company may be wound up by the Court if it is unable to pay its
debts. Section 439 empowers the registrar to file a petition for winding up of the company
on the ground that the company is unable to pay its debts.
Where the liabilities of a company far exceeded its assets, the Court held that this in itself
did not mean that the company was unable to pay its debts because of the following
reasons:
 For determining the company's ability or otherwise to pay its debts, it was to be
considered whether the company was able to meet its liabilities as and when they
accrued due.
 Section 434 specifies the circumstances in which the company shall be deemed
to be unable to pay its debts. None of these grounds were satisfied in this case.
 No complaint had been made by the creditors as regards non-fulfilment of any
of their claims.
 The mere fact that certain liabilities might accrue due in future, which could
exceed the existing assets of the company, would not necessarily lead to the
conclusion that the company would be unable to meet its liabilities when they will
accrue due [ROC v Ajanta Lucky Scheme and Investments Ltd.].
The facts of the present case are exactly similar to the facts mentioned in the above case
and consequently there is no valid ground for contending that M/s. Hush Hush Ltd. is
unable to pay its debts. So, the company can defend against the winding up petition field
by the registrar and the winding up petition is likely to be failed.

Ans. to Q. No. 8(a).

The Majority Rule governs the internal management of the company. As such if any wrong
is done to the company, the proper plaintiff to institute a suit is the company itself and the
Court would not interfere at the instance of the individual shareholders [Foss v Harbottle].
However, if the majority misuses its powers to defraud or oppress the minority, an action
can be brought by an individual member.
Three directors holding 75% of the share capital of the company used their positions as
directors and obtained a contract in their own names. As it amounted to breach of duty
towards the company, they called a general meeting in which a resolution was passed to
the effect that the company had no interest in the contract. It was held that directors
utilised the contract belonging to the company for their personal gain and it amounted to a
fraud on the minority. The company could claim profits realised by the directors [Cook v
Deeks (1916) 1 AC 554].
The facts of the given case are identical to the facts specified in the above case and so it
can be said that the minority shareholders will succeed.

Ans. to Q. No. 8(b)(i).

As per Sec. 294, the appointment of the sole selling agent must be approved by the
members in the first general meeting held after the appointment of the sole selling agent.
The sole selling agreement must incorporate such condition (i.e., the appointment shall
cease to be valid if it is not approved in the first general meeting). If there is no such
condition, the agreement will be void ab initio even if it is approved by the general
meeting. As such, the provisions regarding incorporation of this condition are mandatory
[Arantee Manufacturing Corporation v Bright Bolts Pvt. Ltd.].
Thus, the given statement is incorrect.

Ans. to Q. No. 8(b)(ii).

As per Sec. 294AA(2), A company shall not appoint any person having a substantial
interest in the company as a sole selling agent, unless such appointment has been
previously approved by the Central Government.
Substantial interest means beneficial interest in the shares of the company exceeding Rs.
5 lakhs or 5% of paid up share capital of the company, whichever is less. Beneficial
interest may be held by any of the following persons:
(i) In case of an individual. Beneficial interest may be held by such individual together
with any of his relatives.
(ii) In case of a firm. Beneficial interest may be held by one or more partners of the firm
together with any of their relatives.
(iii) In case of a body corporate. Beneficial interest may be held by such body
corporate together with one or more of its directors and any of the relatives of
directors.
In the given case, BNM Marketing is proposed to be appointed as sole selling agent of
XYZ Private Limited. None of the partners of BNM Marketing or any of the their relatives
do not hold any share capital in XYZ Private Limited. Thus, BNM Marketing does not have
substantial interest in XYZ Private Limited and so, the provisions of Sec. 294AA(2) are not
attracted in this case.
As per Sec. 299, a director shall disclose his interest in every contract or arrangement in
which he is concerned or interested. If relative of a director is concerned or interested, the
director is interested [Fateh Chand Kad v Hind Sons (Patiala) Ltd.].
Thus, the directors of XYZ Private Limited whose relatives are partners in BNM Marketing
shall disclose their interest in the first Board meeting in which contract relating to
appointment of BNM Marketing as sole selling agent is first considered. However, the
provisions of Sec. 300 are not attracted since XYZ Private Limited is a private company.

Ans. to Q. No. 9(a)(i).

As per section 617, Government Company means any company –
(a) in which not less than 51% of the paid up share capital is held –
- by the Central Government; or
- by any State Government(s); or
- jointly by the Central Government and any State Government(s).
(b) which is a subsidiary of a Government company.
Thus, the statement ‘a company in which 50% or more of equity share capital is held by
the Central Government or the State Government, is called as a Government Company’ is
incorrect since the relevant criterion is 51% or more of the paid up share capital (Paid up
equity share capital + Paid up preference share capital) and not 50% or more of the paid
up equity share capital.
Ans. to Q. No. 9(a)(ii).
As per Sec. 594, the world accounts and Indian business accounts, and list of all the
places of business established in India shall be filed with the registrar within 9 months
from the close of the financial year of the foreign company. The registrar at New Delhi
may extend the said period by 3 months.
Thus, the statement ‘a foreign company shall file the world accounts and Indian business
accounts within 6 months of holding its annual general meeting’ is incorrect.

Ans. to Q. No. 9(a)(iii).

The given problem relates to Sec. 593 of the Companies Act, 1956.
As per Sec. 593, time limit for filing the alterations is as follows:
(a) 31st January of the following year. Alterations in the following particulars shall be
filed on or before 31st January of the year following the year in which the alteration
was made:
(i) Constitution of the company.
(ii) Address of the registered or principal office of the company.
(iii) Directors and secretary of the company.
(b) 30 days. Alterations in the following particulars shall be filed within 30 days of the
alteration:
(i) Person authorised to accept service of notice on behalf of the company.
(ii) Principal place of business in India.
Thus, the statement ‘any alteration in the documents filed by a foreign company shall be
intimated to the registrar within 30 days’ is partially incorrect.

Ans. to Q. No. 9(b).

The given problem relates to Sec. 287 of the Companies Act, 1956.
As per Sec. 287, the quorum required for a Board meeting is as follows:
(a) As per section 287(2), the quorum shall be higher of –
(i) 1/3rd of total strength (any fraction contained in that one-third shall be rounded
off as one); or
(ii) 2 directors.
(b) If the quorum is not present as per section 287(2) and the number of interested
directors exceed or is equal to 2/3rd of total strength, then proviso to section 287(2)
shall get attracted. Accordingly, the quorum shall be higher of -
(i) number of remaining directors present at the meeting (i.e., disinterested
directors); or
(ii) 2 directors.
‘Total strength’ means the total strength of the Board of directors of a company, as
reduced by the number of directors whose places are vacant at that time.
Applying the provisions of Sec. 287, the problems asked are answered as follows:
(i) Total strength = 11
Quorum required as per Sec. 287(2) = 4 (11 x 1/3 = 3.66; fraction 0.66 rounded off as
one)
Directors present in the Board meeting = 3
 Since the directors present are less than the quorum required, the quorum is not
present. Therefore, as per Sec. 288, the Board meeting shall stand adjourned to the
same day, time and place in the next week (unless the articles otherwise provide).
(ii) Total strength = 11
Quorum required as per Sec. 287(2) = 4 (11 x 1/3 = 3.66; fraction 0.66 rounded off as
one)
Directors present in the Board meeting = 7
Interested directors = 5
Disinterested directors = 2
Since the disinterested directors present in the Board meeting (i.e., 2) are less than
the quorum required (i.e., 4), the quorum is not present as per Sec. 287(2).
Also, the proviso to Sec. 287(2) is not attracted in the given case since the interested
directors (i.e., 5) are not equal to more than 2/3rd of total strength (i.e., 8), and so, the
quorum is not present. Therefore, as per Sec. 288, the Board meeting shall stand
adjourned to the same day, time and place in the next week (unless the articles
otherwise provide).
In the case of a private company, interested directors are also counted in quorum. In
this case, if the company is a private company, all the 7 directors shall be counted
while determining quorum. Since the required quorum is only 4, the quorum is present
if it is assumed that the company is a private company.
(iii) Total strength = 5
Quorum required as per Sec. 287(2) = 2 (5 x 1/3 = 1.66; fraction 0.66 rounded off as
one)
Quorum as per articles = 3
Quorum required for Board meetings = 3 (being higher of quorum as per Sec. 287(2)
or the quorum required as per articles)
Directors present in the Board meeting = 5
Interested directors = 3
Disinterested directors = 2
Since the disinterested directors present in the Board meeting (i.e., 2) are less than
the quorum required (i.e., 3), the quorum is not present as per Sec. 287(2).
Also, the proviso to Sec. 287(2) is not attracted in the given case since the interested
directors (i.e., 3) are not equal to more than 2/3rd of total strength (i.e., 4), and so, the
quorum is not present. Hence the meeting cannot be validly convened. Therefore, the
allotment of shares at the aforesaid meeting is not valid.
In the case of a private company, interested directors are also counted in quorum. In
this case, if the company is a private company, all the 5 directors shall be counted
while determining the quorum. Since the required quorum is only 3, the quorum is
present if it is assumed that the company is a private company.