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COMPANY LAW (Guideline Answers)

INTERMEDIATE EXAMINATION

JUNE 2003

Time allowed: 3 hours Maximum marks: 100

NOTE : Answer SIX questions including Question No. 1 which is COMPULSORY.

Question 1

Your company is a listed company and wants to dispose of one of its

undertakings (manufacturing glass) consequent upon its decision to stick to its
core business, viz. manufacture of paper and boards. State the relevant
provisions of the Companies Act, 1956 to be complied with and the steps to be
taken for compliance.

(20 marks)

Answer 1

According to Section 293(1) of the Companies Act, 1956 the Board of Directors of a
public company, or of a private company which is a subsidiary of a public company,
shall not except with the consent of such public company or subsidiary in general
meeting:

a. sell lease or otherwise dispose of the whole, or substantially the whole of the
undertaking of the company, or where the company owns more than one
undertaking, of the whole, or substantially the whole, of any such undertaking.
Therefore the main steps to be taken in the given case are:

1. Call for a Board Meeting, after giving notice to all the directors of the company
in prescribed manner and fix up the date, time, place and agenda for a general
meeting to pass a resolution for disposing of the undertaking, manufacturing
glass, with or without modification.
2. (i) In case of listed companies, as in the given case, the resolution should be
passed through postal ballot [under Companies (Passing of Resolution by Postal
Ballot) Rules, 2001].

i. Accordingly, the company shall send a draft notice to all the

shareholders, along with draft resolution and explaining reasons
therefor and requesting them to send their assent or dissent in
writing under the prepaid postage envelope within 30 days from the
date of posting of letter.
ii. Notice shall be sent by registered post acknowledgement due or any
method prescribed by Central Government.
iii. The Board shall appoint one scrutinizer, not in employment of the
company, who can conduct postal ballot process in a fair and
transparent manner, to be in position for 35 days from the date of
issue of Notice, and be available at the Registered office of the
company for the purpose of ascertaining the requisite majority.

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iv. The Scrutinizer shall maintain a register to record the consent or

otherwise received, mentioning the particulars of name, address,
folio number and number of shares. He shall also maintain a record
for postal ballot forms which are received in defaced and mutilated
form.
v. If the resolution is passed by requisite majority of the shareholders,
it will be deemed to have been duly passed at a general meeting
convened for that purpose.

3. Issue notices in writing at least 21 days before the date of meeting (if meeting is
also proposed to be held) proposing the ordinary Resolution with suitable
explanatory statement. Hold general meeting and pass the resolution
(Authorizations may be given to Directors, Secretary etc.)
4. Forward three copies of Notice and a copy of proceedings of general meeting to
the stock exchanges with which shares of the company are listed.
5. Effectuate the transaction by executing sale deed, conveyance deed etc.
6. File the resolution along with explanatory statement (in Form No.23 - Section
192), with concerned Registrar of Companies, within 30 days of its passing
along with fees.
7. Applicability of Section 293(2), if any shall be noted.
8. If resolution passed by general meeting, imposes some conditions as to use,
disposal or investment of the sale proceeds, then such conditions should also be
followed.

Question 2

a. Specify the conditions subject to which the following are treated as exempt deposits:

i. Debentures secured by mortgage of property. (2 marks

ii. Deposits from directors of a private company. each)
b. What are the circumstances under which approval of
members is not required for making loans and investments
and providing security/giving guarantee to other bodies
corporate? (6 marks)
c. Can a company accept deposits without issuing text of
advertisement? Explain the relevant rules. (6 marks)

Answer 2(a)(i)

Debentures secured by mortgage of property

As per Rule 2(b) (x) of the Companies (Acceptance of Deposits) Rules, 1975, the
amount raised by issue of debentures secured by mortgage of immovable property is
treated as an exempt deposit if the amount of such debentures does not exceed the
market value of such immovable property.

Answer 2(a)(ii)

Deposits from directors of a private company

As per Rule 2(b)(ix) of the Companies (Acceptance of Deposits) Rules, 1975, amounts
received from directors of a private company is treated as an exempt deposit, provided

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the director concerned furnishes at the time of giving the money to the Company, a
declaration in writing that the amounts are not being given out of funds acquired by
him/ her by borrowing or accepting from others.

Answer 2(b)

Pursuant to the provisions of Section 372A of the Companies Act, 1956 no approval of
the members is required in respect of making loans to and investments in and
providing/giving guarantee/security for, other bodies corporate, if the aggregate of the
loans and investments made so far, the amounts for which guarantee or security so far
provided to or in all other bodies corporate along with the investment, loans, guarantee
or security proposed to be made or given by the Board, does not exceed sixty per cent
of the paid up share capital and free reserves or hundred per cent of free reserves,
whichever is higher.

Further as per Sub-section (8) of Section 372A, no approval is required even if it

exceeds the aforesaid limits in the following cases:

I. any loan or investment made or guarantee given or security provided by-

a. a banking company, or an insurance company, or a housing finance

company in the ordinary course of its business, or a company
established with the object of financing industrial enterprises, or of
providing infrastructural facilities;
b. a company whose principal business is the acquisition of shares,
stock, debentures or other securities;
c. a private company, unless it is a subsidiary of a public company.

ii. any investment made in shares allotted in pursuance of Section 81(1)(a) by way
of rights shares.
iii. any loan made by a holding company to its wholly-owned subsidiary company.
iv. any guarantee given or any security provided by a holding company to its
wholly-owned subsidiary company.
v. any acquisition by a holding company, by way of subscription, purchases, or
otherwise, the securities of its wholly-owned subsidiary company.

Answer 2(c)

Yes, a company can accept deposits without publishing any text of advertisement in
the newspaper.

As per Rule 4A of the Companies (Acceptance of Deposits) Rules, 1975, where a

company intends to accept deposits without inviting, allowing or causing any other
person on its behalf to invite such deposits, it need not issue the advertisement. It is,
however, required to file with the Registrar of Companies a statement in lieu of
advertisement containing all the particulars required to be included in the
advertisement under the said Rules and signed by a majority of the directors on the
Board of Directors of the company as constituted at the time the board approved the
same.

The statement in lieu of advertisement is valid for six months from the date of the
closure of the financial year in which it is issued or delivered or until the date on
which the balance sheet is laid down before the company in annual general meeting

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and where the annual general meeting for any year has not been held, the latest day on
which that meeting should have been held in accordance with the provisions of
Companies Act, 1956, whichever is earlier.

A fresh statement in lieu of advertisement has to be filed with the Registrar of

Companies in each succeeding financial year for accepting deposits subsequently.

Question 3

Examine the following with reference to the relevant provisions of the Companies Act,
1956:

i. A meeting of the Board of directors of Opaque Ltd. was convened on 30th September,
2002, but the meeting did not take place for want of quorum. As a result, the company
did not hold any Board meeting for the quarter ended 30th September, 2002 and there
is a complaint that the company has violated the provisions of the Companies Act, 1956
in this regard.

ii. Hi-Fi Computers Ltd. wants to file its documents with the Registrar of Companies in
computer print-out form.

iii. A director failed to disclose his interest in a contract in which he was interested and the
same was approved at the Board meeting.

iv. Goody-Goody Ltd. proposes to appoint Johar, a relative of one of the directors of the
company, as general manager (marketing) on a monthly remuneration of Rs. 60,000.(4
marks each)

Answer 3(i)

According to Section 288(2) of Companies Act, 1956, the provisions of Section 285
relating to the holding of atleast one Board Meeting in three months and atleast four
such meetings in a year can not be deemed to have been contravened merely by reason
of the fact that a Board Meeting which had been called in compliance with the terms
of the said section could not be held for want of quorum. Thus the allegation that the
company has contravened the provisions of Section 285 in the matter of holding the
Board Meeting is not correct.

Answer 3(ii)

Hi Fi Computers Ltd. can file its documents with the Registrar of Companies in
computer printout form. Section 610A(1) of the Act, provides that a statement
contained in a document and included in a printed material produced by a computer,
referred to as ‘computer printout’, subject to the satisfaction of conditions given in
Section 610A(2), shall be deemed to be also a document for the purposes of this Act
and the rules there under and shall be admissible in any proceedings there under
without further proof or production of the original, as evidence of any facts or contents
of the original of which direct evidence should be admissible. The conditions in
respect of a computer printout shall be the following:

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a. the information contained in the statement reproduces or is derived from returns

and document filed by the company on paper or on computer network, floppy,
diskette, magnetic cartridge tape, CD-Rom or any other computer readable
media.;
b. while receiving returns or documents on computer media, necessary checks by
scanning the documents filed on computer media will be carried out and media
will be duly authenticated by the Registrar and;
c. the Registrar shall also take due care to preserve the computer media by
duplicating, transferring, mastering or storage without loss of data.

Answer 3(iii)

Section 299 casts a duty on every director to disclose the nature of his concern or
interest, whether direct or indirect, in a contract or arrangement or proposed contract
or arrangement entered into or to be entered into by or on behalf of the company at a
meeting of the Board of Directors.

Every director who fails to disclose his interest in any contract or arrangement shall be
punishable with fine, which may extend to Rs. 50,000. It is also provided in Section
283(1)(i) that the office of a director shall automatically become vacant if a director
acts in contravention of Section 299. Therefore, in this case the director, as he failed to
disclose the interest in a contract in which he is interested which was approved by the
Board in a meeting is liable for punishment under Section 299(4) and his office of
directorship automatically becomes vacant under Section 283(1)(i). He is also liable to
be prosecuted under Section 283(2A) and to refund to the company all remuneration
received as director after cessation of his directorship. The company is also entitled in
equity to rescind the contract and to recover whatever consideration it has given to the
other party [North West Transportation Co. v. Beatty (1887) 12 App Cas 589 (PL)]

Answer 3(iv)

According to Section 314(1B) of Companies Act, 1956 no relative of a director of a

Company shall hold office or place of profit in the company carrying a total monthly
remuneration of not less than such sum as may be prescribed [at present a sum which
is not less than Rupees Twenty thousand] except with the prior consent of the
company by a special resolution and the approval of the Central Government.

Therefore in this case as the monthly remuneration of Johar, a relative of director as

General Manager (Marketing) exceeds Rs. 20,000 the limit prescribed under Section
314(1B), Goody Goody Ltd. will have to get the prior consent of the company by
convening a general meeting and getting a special resolution passed for the
appointment and also get the approval of the Central Government before appointment
of Johar as the General Manager.

Question 4

a. The Companies (Amendment) Act, 2000 has prescribed an additional duty on the
Board of directors to include directors’ responsibility statement in
the Board’s report. Explain briefly the details to be furnished in the said statement. (4
marks)
b. Rao & Rao, a firm of chartered accountants, have to be appointed in place of Shah &
Shah, chartered accountants, as the auditors of Freebee
Ltd. Explain the steps to be taken with regard to the appointment and payment of

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remuneration to the auditors. (4 marks)

c. (i) Explain the doctrine of cypres.

i. When is a ‘trust’ extinguished? (2 marks each)

d. “A company cannot ratify its pre-incorporation contracts.” Comment.(4 marks)

Answer 4(a)

The Companies (Amendment) Act, 2000 has prescribed an additional duty on the
Board of Directors to include in the Directors’ Report, additional particulars by way of
Directors’ Responsibility Statement. Section 217(2AA) provides that the Directors’
Report shall also include a Directors’ Responsibility Statement indicating therein that:

i. in the preparation of the annual accounts the applicable accounting standards

had been followed along with proper explanation relating to material departures;
ii. 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 state of affairs at the end of the financial year and
profit and loss of the company for that period;
iii. directors had taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of the Act for
safeguarding the assets of the company and for preventing and detecting fraud
and other irregularities;
iv. the directors had prepared the annual accounts on a going concern basis [Section
217(2AA)].

Answer 4(b)

In the given case as Rao & Rao, chartered accountants have to be appointed as the
auditors of Freebee Ltd. in place of Shah & Shah, the provisions and procedure given
in Section 225 have to be complied with. According to Section 225 of the Companies
Act, 1956 if a person other than a retiring auditor has to be appointed, a special notice
shall be required for passing a resolution at an Annual General Meeting. On receipt of
notice of such resolution, the company shall send a copy to the retiring auditor who
may make representation in writing with a request to notify to members of the
company. The company shall send the representation to the members in accordance
with Sub-section (3) of Section 225 (unless the representations are received too late,
whereupon they may be read out at the meeting). Thereafter, a general meeting has to
be convened to pass the ordinary resolution by simple majority. A written certificate
from the proposed auditor to the effect that appointment if made, will be in accordance
with the limits specified in Section 224(1B) shall also be obtained. If the company is
listed, the requirements of the listing agreement also have to be complied with and the
stock exchanges have to be informed accordingly.

Answer 4(c)(i)

Cypres means near to it. Where the object/mode of a Charitable Trust specified by the
settler is or subsequently becomes incapable of performance, impossible,
impracticable or un-lawful, the Trust will not necessarily fail but the Court has power
to apply the Trust to some other charitable object/mode as nearly as possible
resembling the mode specified by the author. This power of the Court is called the
Doctrine of Cypres. This doctrine applies to charitable object, which is general and not

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specific.

Answer 4(c)(ii)

A Trust is extinguished:

a. when its purpose is completely fulfilled;

b. when its purpose becomes unlawful;
c. when the fulfillment of its purpose becomes impossible by destruction of Trust
property or otherwise;
d. when the Trust being revocable, is revoked.

Answer 4(d)

Preliminary or pre-incorporation contracts are contracts purported to be made on

behalf of a company before its incorporation. Before incorporation, a company is non
existent and has no capacity to contract. Hence, a contract made by a promoter
purporting to act on behalf of a company prior to its incorporation never binds the
company because at the time the contract was concluded, the company was not in
existence. Further, even after incorporation such a purported contract cannot be
ratified by the company [Kelner v. Baxter (1866) L.R. 2 C.P. 174]. Even if the
company takes some benefit from a contract purported to have been made before its
formation the contract is not binding on the company. The promoters alone remain
personally liable for any contract they purport to make on behalf of the company,
unless the company enters into the contract in terms of such agreement after
incorporation. A company cannot ratify a pre-incorporation contract, but it is open to it
to enter into a new contract after its incorporation to give effect to a contract made
before its incorporation [Howard v. Patent Ivory Co. (1888) 38 Ch D 156].

Question 5

a. “A company is a separate person from its members.” Explain the

circumstances under which the court may disregard the company’s
corporate personality. (8 marks)
b. State the steps to be taken for converting a ‘private company’ into a ‘public
company’. (8 marks)

Answer 5(a)

A company in the eyes of law is regarded as an entity separate from its members. It
has an independent corporate existence. Any of its members can enter into contracts
with the company in the same manner as any other individual. Further from the juristic
point of view a company is a legal person distinct from its members. It has its own
corporate personality. This principle is referred to in the ‘veil of incorporation’. The
effect of this principle is that there is a fictional veil between the company and its
members. However, while by fiction of law a corporation is a district entity, yet in
reality it is an association of persons who are in fact the beneficial owners of all the
corporate property. The circumstances or the cases in which the courts have
distinguished the corporate personality are:

1. Protection of Revenue: The courts may ignore the corporate entity of a company
where it is used for Tax evasion. [CIT v. Meenakshi Mills Ltd., AIR 1967
S.C.819]

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2. Prevention of fraud or improper conduct: The legal personality of a company

may also be disregarded where the machinery of incorporation has been used for
same fraudulent purpose like defrauding creditors or defeating or circumventing
laws. [Gilford Motor Co. v. Horne (1933) 1Ch 935].
3. Determination of character of a company i.e. whether it is enemy: A company
may assume an enemy character when persons in defacto control of its affairs
are resident in an enemy country. In such a case, the court may examine the
character of persons in real control of the company.
4. Where the company is a Sham: The courts also lift the veil of the corporate
personality where a company is a mere cloak or sham.
5. Company avoiding legal obligations: Where the use of an incorporated company
is being made to avoid legal obligations, the court may disregard the legal
personality of this company and proceed on the assumption as if no company
existed.
6. Company acting as an agent or trustee of the shareholder: Where the company is
acting as an agent for its shareholders, the shareholders will be liable for the acts
of the Company.
7. Avoidance of welfare legislation: Where the courts find that there is avoidance
of welfare legislation, it will be free to lift the corporate veil.
8. Protecting public policy: The courts invariably lift the corporate veil or
disregard the corporate personality of a company to protect the public policy
and prevent transactions contrary to public policy. [Connors Bros. v. Connors
(1940) 4 All E.R. 179].

Answer 5(b)

The conversion of a Private Company into a Public Company can be grouped under
the following heads:

1. Conversion by choice: Under Section 44 of the Companies Act, 1956, a Private

Company can be converted into a Public Company by:

a. Altering its Articles of Association by a Special Resolution so that

they no longer include the restrictive provisions of Section 3(1)(iii)
and other provisions with regard to privileges of a private company;
b. Deletion of the word “Private” by altering the name of the
Company by means of a Special Resolution;
c. Filing of copies of Special Resolution mentioned above with the
Registrar of Companies in Form No.23;
d. Filing of Prospectus or Statement in lieu of prospectus with the
Registrar of Companies;
e. Increase in the number of Members to 7 and increase the number of
Directors to 3;
f. Enhancing the paid-up Capital to at least Rs.5 lakhs.
g. Surrendering the original Certificate of Incorporation and obtaining
a fresh Certificate of Incorporation, issue a general notice in the
newspaper in relation to the same, arrange for a common seal, have
the stationery printed with a new name, and correct all boards,
records and registers.

2. Conversion by default: Under Section 43, if the Private Company fails to

comply with the four restrictive provisions of Section 3(1)(iii) the company
ceases to be a Private Company and all the provisions of the Act relating to
Public Company become applicable to it.

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3. Conversion by Operation:

i. Pursuant to Section 43A(11), the concept of deemed Public Company has

been removed from the scope of the Act.
ii. Pursuant to Section 3(1)(iv)(c) where a private company is a subsidiary of
a company which is not a private company, becomes a public company,
i.e. the necessary steps as detailed above are to be taken up, though
nothing is specifically provided in the Act.

Question 6

a. Can an annual general meeting be called at a shorter notice? Would your

answer be different if it were an extra-ordinary general meeting? (4 marks)
b. In a public company where the articles of association require presence of
six members to constitute the quorum, can the following persons be treated
as members for the purpose of constituting the quorum:

l - X, a representative of Governor of a State;

l - Y and Z, preference shareholders;
l - A, representing B Ltd. and C Ltd.; and
l - P, Q, R and S who were proxies. (4 marks)

a. Explain the powers of the Company Law Board to prevent oppression and
mismanagement. (8 marks)

Answer 6(a)

According to Section 171(1) of the Companies Act, 1956 a general meeting may be
called by giving not less than 21 days’ notice in writing. However Section 171(2)
provides that an Annual General Meeting may be called by giving a shorter notice
with the consent of all the members entitled to vote at the meeting and in case of any
other meeting (including extraordinary meeting) (a) with the consent of members
holding not less than 95% of such part of the paid up share capital of the company as
gives a right to vote at the meeting or (b) having, if the company has no share capital
having not less than 95 percent of the total voting power exercisable at that meeting.

Answer 6(b)

According to Section 174 of the Act, unless the articles of association of the company
provide for a larger number, five members personally present in the case of public
company and two members personally present in the case of any other company, shall
be the quorum of the meeting of the company. Thus quorum represents the number of
members in whose presence the meeting of a company can commence its
deliberations. Articles in the given case stipulate a limit of 6 members.

i. Mr. X a representative of Governor of State is considered as a member (Section

187-A);
ii. Mr. Y & Z being preference share holders cannot be considered as members;
iii. Since Mr. A is representing Corporate bodies, his presence will be counted
(Section 187);
iv. Proxies will not be considered as Members hence P, Q, R & S are not
considered as members.

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Answer 6(c)

In pursuance of Section 397 and 398, CLB has the powers to make such orders, as it
may deem fit with a view to bringing to an end or preventing matters complained of,
whereby the affairs of a company are being conducted in a manner prejudicial to the
public interest, or in a manner oppressive to any member or members, or in respect of
a material change in the ownership, management, or membership which is prejudicial
to the interests of the company or public at large.

According to Section 402 of Companies Act 1956, the Company Law Board may
without prejudice to the generality of it’s powers under Section 397 or 398, provide
for-

a. regulation of the conduct of the company’s affairs in future;

b. the purchase of the shares or interests of any members of the company by other
members thereof or by the company;
c. in the case of a purchase of its shares by the company, as aforesaid, the
consequent reduction of its share capital.
d. the termination, setting aside or modification of any agreement, howsoever
arrived at, between the company on the one hand and any of the following
persons namely, the managing director, any other director and manager, upon
equitable terms and conditions;
e. termination, setting aside or modification of any agreement between the
company and a person not referred to above [in (d)] provided due notice of
termination, setting aside or modification to the party concerned is given and
that modification is done only after obtaining the consent of party concerned.
f. Setting aside of any transfer, delivery of goods, payment, execution or other act
relating to property made or done by or against the company within 3 months
before the date of the application, under Section 397 and 398, which would, if
made or done by or against an individual, be deemed to be a fraudulent
preference in his insolvency.
g. Any other matter for which, in the opinion of Company Law Board, it is just and
equitable that a provision should be made.

Question 7

a. Acrid Ltd. maintains the minutes book of the Board meetings in loose leaf
system and gets them bound once in three months. Can it do so? Board
meetings were held on 24th March, 2002 and 15th April, 2002. Ronie, who
was the chairman of these two meetings died on 1st May, 2002, without
signing the minutes of the Board meeting held on 15th April, 2002. How
should the minutes be signed and by whom? (5 marks)
b. Explain the procedure for passing the resolution by circulation under
Section 289 of the Companies Act, 1956. (5 marks)
c. No company can appoint a person as its sole selling agent, if he has a
substantial interest in that company, without prior approval of the central
government. Explain ‘substantial interest’. (6 marks)

Answer 7(a)

Section 193(1) of the Companies Act, 1956 enjoins that the minutes of all proceedings
of every general meeting and of every meeting of Board of Directors or a committee
thereof, must be entered within 30 days of the conclusion of the relevant meeting in

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the books kept for that purpose with their pages consecutively numbered. The
Department of Company Affairs, however has expressed that it would refrain from
taking any action against the company which maintained its minutes in the loose leaf
form, provided that adequate safeguards are taken against falsification and loose
leaves are bound in books at reasonable intervals say six months. In this case since the
Minutes Book leaves are bound once in 3 months (Jan. - March 2002) the same is in
order.

The Minutes of the Board Meeting are required to be written in a period of 30 days
from the date of the meeting held. [Section 193(1)]. But there can not be any instances
that the same must be signed with in a period of 30 days from the date of the Board
Meeting (Dept. Circular 25/76 dated 1.9.76) According to Section 193(1A) minutes of
a Board Meeting may be signed by the Chairman of the said meeting or the Chairman
of the next succeeding meeting.

In this case Mr. Ronie who was the Chairman of the Board Meeting held on 24.3.02
and 15.4.2002 died on 1.5.2002 without signing the minutes of meeting held on
15.4.2002. The Chairman of the Board Meeting held after 15th April 2002 for the first
time may sign the minutes of Board Meetings held on 15.4.2002 in accordance with
Section 193(1A)(a).

Answer 7(b)

The procedure for passing resolution by circulation as under Section 289 of the
Companies Act, 1956 is as follows:

a. Circulate the draft of the resolution in duplicate with the necessary papers if
any, to all the directors then in India not being less in number than the quorum
for Board Meeting and to all other directors at their usual addresses in India for
approval by signing one copy of the resolution and sending it back to the
company.
b. If all or majority of the above directors as are entitled to vote on the resolution
approve the resolution, the resolution, shall be deemed to have been duly passed
by the Board.
c. Record the resolution having been passed by circulation in the minutes of the
immediate next board inserting.
d. See that the resolution does not pertain to the matters, which can not be passed
by the Board by circulation. [Section 262(1), 292(1)(a), (1)(aa), (1)(b), (1)(c),
(1)(d), (1)(e), 297, 299, 307, 316, 386, 372A etc.]
e. Enclose a copy of the circular resolution to the Agenda of the ensuing
immediately next board meeting. Resolutions so passed may also be noted
alongwith decisions thereof mentioning therein as notes that the said resolution
was approved by so many number of directors and a certain number of directors
dissented from it, and recorded in the minutes of such meeting.

Answer 7(c)

Section 294AA provides that no company shall appoint any individual, firm or body
corporate, who or which has a substantial interest in the company, as sole selling agent
of that company unless such appointment has been previously approved by Central
Government. According to Explanation (b) to Section 294AA, the ‘substantial
interest’ is defined as under:

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Substantial interest -

i. in relation to an individual means the beneficial interest held by such individual

or any of his relatives, whether singly or taken together in the shares of the
company, the aggregate amount paid-up on which exceeds five lakhs of rupees
or five percent of the paid-up share capital of the company, whichever is lesser;
ii. in relation to a firm, means the beneficial interest held by one or more partners
of the firm or any relative of such partner, whether singly or taken together, in
the shares of the company, the aggregate amount paid up on which exceeds five
lakhs of rupees or five percent of the paid-up share capital of the company,
whichever is lesser;
iii. in relation to a body corporate, means the beneficial interest held by such body
corporate or one or more of its directors or any relative of such director, whether
singly or taken together in the shares of the company, the aggregate amount paid
up on which exceeds five lakhs of rupees or five percent of paid-up share capital
of company, whichever is lesser.

Question 8

a. When can a company commence its business? (3 marks)

b. Prabhavi is already director in 14 companies. He is being appointed as a
director of another company named Growfast Ltd. Advise Prabhavi in
regard to the following:
i. Restrictions on the number of directorship to be held by an
individual and whether he can accept the new appointment in view
thereof.
ii. Which are the companies to be excluded for the purpose of
calculating the ceiling on the appointment of directors? (3 marks
each)
c. Facts and Figures Ltd., stood surety for Amiable Pvt. Ltd. (not a subsidiary
company) for a bank loan to that company for repayment with interest at
15% of Rs. 10 lakh. This amount is about 3% of its paid-up equity capital.
The company also had a reasonable amount in free reserves. Taneja, a
director of a Facts and Figures Ltd., was a member of Amiable Pvt. Ltd. Do
you think that Facts and Figures Ltd. or Taneja had committed any
violation of the Companies Act, 1956? Answer with reasons. (3 marks)
d. Madan was appointed as a director of Sure Success Ltd. in a casual
vacancy on 3rd March, 2001 and vacated that office on 30th September of
that year. In the annual general meeting held on 28th September, 2002,
Madan was appointed as a director against a regular vacancy on the Board.
As he had already served the company as a director, no consent was filed
with the Registrar of Companies. However, the Registrar on receiving the
Form No. 32 from the company, issued a notice to the company alleging
non-compliance with the requirements of Section 264 of the Companies
Act, 1956 in the matter of appointment of Madan as a director. Examine
the matter and give your opinion in this regard for consideration of the
Board of the company. (4 marks)

Answer 8(a)

A private company or a company having no share capital may commence business and
exercise its various powers immediately after it is incorporated. A public company
having share capital on the other hand must obtain certificate to commence business
from the Registrar of Companies before it can commence its business or exercise its

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borrowing powers.

In order to obtain this certificate the Company must comply with the provisions of
Section 149 of the Companies Act. The procedure for obtaining the certificate varies
with the fact whether the company has issued a prospectus or not. If the company has
issued a prospectus then the procedure stated in Section 149(1) becomes applicable
and if it has not issued a prospectus then the procedure laid down in Section 149(2)
shall apply.

Answer 8(b)(i)

According to Section 275 of the Companies Act, 1956, no person shall, save as
otherwise provided in Section 276, hold office at the same time as director in more
than 15 companies. Also, Section 277(2) provides that if a person already holding the
office of director in 14 companies or less is appointed, as a director of other
companies making the total number of his directorships more than 15, he shall choose
the directorships which he wishes to continue to hold or accept, so however the total
number of directorships, old and new, held by him shall not exceed fifteen. In the
present case, Prabhavi is already a director in 14 companies. Therefore, he can be a
director or Growfast Ltd. as the total number of directorships does not exceed 15.

Answer 8(b)(ii)

According to Section 278 of the Companies Act, 1956 the following companies are
excluded for calculating the limit of 15 companies:

i. a private company which is neither a subsidiary nor a holding company of a

public company.
ii. An unlimited company.
iii. An association not carrying on business for profit or which prohibits the
payment of a dividend.
iv. A company in which the person is only an alternate director, that is to say, a
director who is only qualified to act as such during the absence or incapacity of
some other director.

In making the above said calculation, any company referred in (i) to (iii) above shall
be excluded for a period of 3 months form the date on which the company ceases to
fall with in purview of these clauses.

Answer 8(c)

Section 372A(b) of the Companies Act, 1956 provides that no company shall, directly
or indirectly give any guarantee or provide security, in connection with a loan made by
any other person to, or to any other person by, any other body corporate, exceeding
60% of its paid up share capital and free reserves, or hundred percent of its free
reserves, whichever is more. With the given facts, as Facts and Figures Ltd. stood
surety for an amount which is about 3% of its paid up equity capital, there is no
apparent violation on its part.

Also, Section 299 of the Act provides that every director of a company who is in any
way, whether directly or indirectly, concerned or interested in a contract or
arrangement, or proposed contract or arrangement, entered into/ to be entered into, by
or on behalf of the company, shall disclose the nature of his concern or interest at a

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meeting of Board of Directors. However, nothing in Section 299 applies to any

contract or arrangement entered into or to be entered into between two companies
where any of the directors of the one company or two or more of them together holds
or hold not more than two percent of the paid-up share capital in the other company.
Therefore before entering into such surety contract, compliance on the part of Taneja
should be/ should have been ensured.

Answer 8(d)

According to Section 264(2) of Companies Act, 1956, a person other than a director
re-appointed after retirement by rotation or immediately on the expiry of his term of
office or an additional or alternate director, or a person filling a casual vacancy in the
office of a director under Section 262, appointed as a director or re-appointed as an
additional or alternate director immediately on the expiry of his term of office, or a
person named as a director of the company under its articles as first registered, shall
not act as a director of the company unless he has within thirty days of his
appointment signed and filed with the Registrar his consent in writing to act as such
director. The principle underlying is that a person who is already a director and is only
seeking re-appointment need not file his consent in writing, as his functioning as a
director is itself evidence of consent. An additional and alternate director are also not
required to file consent [Laljibhai C.Kapadia v. Laljibhai B Desai (1973) 43 Com
cases 17 AIR 1972 Bom. 276]. However, persons who were directors but had ceased
to be directors for some reason or other, before the general meeting at which they are
to be reappointed, should file the consent; i.e. when there is an interval, however small
it may be, between the time of closure of tenure and the time of reappointment, the
consent must be filed. Therefore, consent should be obtained from Madan.The use of
‘immediately’ indicates that there should be no intervening period between the expiry
of the term of office and reappointment.

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