CA Intermediate Paper-2

CHAPTER-1
PRELIMINARY
DEFINITION AND MEANING OF A COMPANY: [SEC. 2(20)]

Q-1 What is a company?
Ans. For the purpose of Companies Act, ‘company’ means a company incorporated under the Companies
Act, 2013 or any Companies Act prior to the Companies Act, 2013.
Â Not every association of persons is a company; only such association of person shall be a company,
which is registered under the Companies Act, 2013 or any previous Companies Act.
Â A company is the most dominant (common) form of business organization.
Â It means an association of persons duly registered under the Act, run by professional people
(called as Board of directors).
Â The persons who invest the funds in the company are called as members or shareholders.
CHARACTERISTICS OR FEATURES OF A COMPANY:
(1) Incorporated association:
Â A company is formed and registered by complying with the prescribed formalities prescribed
under the Act.
(2) Artificial person :
Â A company is not a natural person.
Â Consequently, a company cannot fall ill, or die or be declared as insolvent.
Â A company is an artificial person.
Â But it is not a fictitious person.
Â A company does exist but only in the eyes of the law.
Â In other words, a company exists only in contemplation of law.
(3) Separate legal entity :
Â A company is a legal person in the eyes of law distinct from its members.
Â A company is a separate person having its own rights and obligations.
(4) Perpetual succession :
Q-2 ABC Pvt. Ltd., is a Private Company having five members only. All the members of the company were
going by car to Mumbai in relation to some business. An accident took place and all of them died.
Answer with reasons, under the Companies Act, 2013 whether existence of the company has also come
to the end?
Â In case of death of a member, the shares held by him shall vest in his legal representative (or his
nominee, if a valid nomination exists).
Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 3

Â In case of insolvency of a member, the shares held by him shall vest in the official assignee or
official receiver, as the case may be.
Â This is called as transmission of shares.
Â Thus, even in case of death or insolvency of all the members, the existence of the company is not
affected since transmission of shares take place in respect of the shares held by them, and the
company will have new members.
Â It is generally said that ‘members may come and go, but the company goes on forever’.
(5) Limited liability
Nature of company Extent of liability of members
Company limited by shares Amount unpaid on the shares held by every member.
Company limited by guarantee Amount guaranteed by every member.
Company limited by guarantee and
having share capital Aggregate of amount unpaid on the shares held by a
member and the amount guaranteed by him.
Unlimited company Every member is liable to contribute to the asset of the
company until all the debts of the company are paid in
full.
(6) Common seal:
Â A company may have a common seal.
Â Common seal is the official signature of the company.
(7) Transferability of shares:
Â Shares are movable property.
Â Shares are transferable in the manner provided in articles.
Â In a private company, the right to transfer the shares is restricted.
Â In a public company, the shares are freely transferrable.
(8) Separate management:
Â The members do not participate in day-to-day affairs of the company.
Â The management of the company lies in the hands of elected representatives of members,
commonly called as Board of directors or directors or simply the Board.
Â The directors are appointed as well as removed by the members. Thus, the Act has ensured the
ultimate control of members over the company.
(9) Separate property:
Â A company can own and enjoy property in its own name.
Â Members are not owners or co-owners of the company’s property.
Â Members have no insurable interest in the property of the company.
(10) Capacity to sue and to be sued:
- A company can sue others and be sued in its own name.
Q-3 The Board of Directors of the Company proposes to convert it into a Private Company. Advise the Board
of Directors about the steps to be taken for conversion into a Private Company including reduction in
the number of members, if necessary, as per the Companies Act, 2013.
4 Chapter 1 : Preliminary
OR
Define Private Company. Briefly explain the privileges and exemptions for a private company as
provided under the Companies Act, 2013.
Ans. ‘Private company’ means a company having such minimum paid-up share capital as may be prescribed,
and which by its articles,-
Â Restricts the right to transfer its shares;
Â Except in case of OPC, limits the number of its members to 200:
Â Provided that where 2 or more persons hold 1 or more shares in a company jointly, they shall, for
the purposes of this clause, be treated as a single member:
Â Provided further that-
o Persons who are in employment of the company; and
o Persons who, having been formerly in the employment of the company, where members of
the company while in that employment and have continued to be
o members after the employment ceased, shall not be included in the number of members;
and -Prohibits any invitation to the public to subscribe for any securities of the company.
The procedure for converting a public company will require:
(i) Passing of a Special Resolution authorizing the conversion and altering the articles so as to include
therein the restrictions specified in Section 2(68)
(ii) Changing the name clause of the Memorandum of the company by omitting the word “Private”.
(iii) Obtaining the approval of the Tribunal as required by Section 14(1).
(iv) Filing of the documents along with a printed copy of the articles as altered with the Registrar
within 15 days. [Section 14 (2)]
Public company:
‘Public company’ means a company which-
Â Is not a private company;
Â Has such minimum paid up capital, as may be prescribed.
Â Provided that a company which is a subsidiary of a company, not being a private company, shall be
deemed to be a public company for the purpose of this Act even where such subsidiary company
continues to be a private company in its articles.
One Person Company (OPC) :
‘One Person Company’ means a company which has only one person as a member.
Â Provisions applicable to OPC:
¾ OPC is also private company.
¾ Except for the specific provision applicable to OPC, all the provisions of the Act and the Rules as
are applicable to a ‘private company’, shall equally apply to OPC.
¾ In case the company proposed to be formed is OPC, the memorandum must be subscribed to by
1 person.
¾ In the case of OPC, the memorandum shall state the name of a person, who, in the event of death
or incapacity of the member, shall become the member of the OPC.
¾ In the case of OPC, the words ‘One Person Company’ shall be mentioned in brackets below the
name.
¾ Every private company shall have a minimum of 2 members, However, OPC shall have 1 member
only.
¾ The number of members shall not exceed 200 in case of a private company. However, OPC shall
have 1 member only.
¾ Every private company shall have a minimum of 2 directors, however, every OPC shall have a
minimum of 1 director.
Small Company:
Q-4 Define the term ‘Small Company’ as contained in the Companies Act, 2013]
A company shall be a small company only if it satisfies both the following conditions:
Â Its paid up share capital does not exceed-
· Rs. 50 lakh; or
· Such higher amount as may be prescribed (not being more than Rs. 5 crore).
Â Its turnover (as per the last profit and loss account) does not exceed-
· Rs. 2 crore; or
· Such higher amount as may be prescribed (not being more than Rs. 20 crore).
A company shall not be a small company, if -
Â It is a public company; or
Â It is a holding company of any company; or
Â It is a subsidiary company of any company; or
Â It is a company registered u/s 8 (viz. it is a non-profit company); or
Â It is a company or a body corporate governed by any Special Act.
COMPANY LIMITED BY SHARES:
‘Company limited by Shares’ means a company having the liability of its members limited by the
memorandum to the amount, if any, unpaid on the shares respectively held by them.
Q-5 Under what circumstances a company becomes subsidiary of another company under the provisions of
the Companies Act, 2013?
‘Subsidiary company’, in relation to any other company (that is to say the holding company), means a
company in which the holding company-
Â Controls the composition of the Board of Directors; or
Â Exercises or controls more than one-half of the total voting power either at its own or together
with one or more of its subsidiary companies.
Restrictions on layers :
Provided that such class or classes of holding companies as may be prescribed shall not have layers of
subsidiaries beyond such numbers as may be prescribed.
General Circular No. 20/2013 dated 27.12.2013:
MCA has vide General Circular No. 20/2013 dated 27.12.2013, clarified that the shares held by a company or
power exercisable by it in another company in a ‘fiduciary capacity’ shall not be counted for the purpose of
determining the holding-subsidiary relationship in terms of the provision of section 2(87).
Provisions contained in the Companies (Restriction on Number of Layers) Rules, 2017:
Restriction on number of layers for certain classes of holding companies:
Â On and from the date of commencement of these Rules, no company shall have more than 2 layers of
subsidiaries.
Â However, this restriction shall not affect a company from, acquiring a company incorporated outside
India with subsidiaries beyond 2 layers as per the laws of such country.
Â For the purpose of computing the number of layers, one layer which consists of one or more wholly
owned subsidiary or subsidiaries shall not taken into account.
Provisions for existing companies:
Every company existing on the commencement f these Rules, which has number of layers of subsidiaries in
excess of the layers specified under these Rules-
Â Shall file, with the registrar a return in form CRL-1 disclosing the details specified therein, within a
period of 150 days from the date of publication of these Rules in the Official Gazette.
Â Shall not, after the date of commencement of these Rules, have any additional layer of subsidiaries
over and above the layers existing on such date; and
Â Shall not, in case one or more layers are reduced by it subsequent to the commencement of these
Rules, have the numbers of layers beyond the number of layers it has after such reduction or maximum
layers allowed under these Rules, whichever is more.Punishment for contravention:
Â If any company contravenes any provision of these Rules the company and every officer of the company
who is in default shall be punishable with fine which may extend to Rs. 10,000 and where the
contravention continuing one, with a further fine which may extend to Rs. 1000 for every day after the
first during which such contravention continues.
Non-applicability of the Rules:
Nothing continued in these Rules shall apply to the following classes of companies:
Â A banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949.
Â A Non-Banking Financial Company as defined in clause (f) of section 45-I of the Reserve Bank of India
and considered as systematically important non-banking financial company by the RBI.
Â An insurance company being a company which carries on the business of insurance in accordance with
provisions of Insurance Act, 1938 and the Insurance Regulatory Development Authority Act, 1999.
Â A government company referred to in clause (45) of section 2 of the Act.
DEFINITIONS:
Section 2 states that- In this Act, unless the context otherwise requires,—
Section:1 Abridged prospectus: means a memorandum containing such salient features of a prospectus
as may be specified by the Securities and Exchange Board by making regulations in this behalf;
Section:2 Accounting standards: means the standards of accounting or any addendum thereto for
companies or class of companies referred to in section 133;
Section 133 of the Act deals with the Central Government to Prescribe Accounting Standards. As per
the section, the Central Government may prescribe the standards of accounting or any addendum
thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section
3 of theChartered Accountants Act, 1949, in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority.
Section 133 is to be read with Rule 7 of the Companies (Accounts) Rules, 2014.
Accordingly,
I. The standards of accounting as specified under the Companies Act, 1956 shall be deemed to be the

accounting standards until accounting standards are specified by the CG under section 133.
II. Till the National Financial Reporting Authority is constituted under section 132 of the Act, the Central
Government may prescribe the standards of accounting or any addendum thereto, as recommended
by the Institute of Chartered Accountants of India in consultation with and after examination of the
recommendations made by the National Advisory Committee on Accounting Standards constituted
under section 210A of the Companies Act, 1956.
III. Further, in exercise of the powers conferred by section 133, the Central Government in consultation
with the National Advisory Committee on Accounting Standards prescribed that Companies
(Accounting Standards) Rules, 2006 and the Companies (Indian Accounting Standards) Rules, 2015
may be followed.
Section:3 Alter or Alteration : includes the making of additions, omissions and substitutions;
Section:5 Articles means-
Â The articles of association of a company as originally framed, or
Â as altered from time to time, or
Â applied in pursuance of any previous company law, or
Â applied in pursuance of this Act;
Section:6 Associate company : in relation to another company, means a company in which that other
company has a significant influence, but which is not a subsidiary company of the company
having such influence and includes a joint venture company.
Â Explanation.—For the purposes of this clause, “significant influence” means control of at least
twenty per cent of total voting power, or of business decisions under an agreement;
Â Vide Circular dated 25/06/2014 it has been clarified that the shares held by a company in another
company in a fiduciary capacity shall not be counted for the purpose of determining the relationship
of associate company.
Â Students may please note that the definition of Associate company as defined under AS 23/ Ind
AS 28 (Accounting for Investments in Associates in Consolidated Financial Statements/Investment
in Associates and Joint Ventures) is slightly different from the above definition as given in the
Companies Act, 2013.
Section:7 Auditing standards: means the standards of auditing or any addendum thereto for companies
or class of companies referred to in sub-section (10) of section 143.
Â Section 143 of the Companies Act, 2013 deals with the Powers and Duties of Auditors and Auditing
Standards. Sub-section (10) to section 143 provides that the Central Government may prescribe
the standards of auditing or any addendum thereto, as recommended by the Institute of Chartered
Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949, in
consultation with and after examination of the recommendations made by the National Financial
Reporting Authority:
Â Provided that until any auditing standards are notified, any standard or standards of auditing
specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing
standards.
Section:8 Authorised capital or Nominal capital : means such capital as is authorised by the
memorandum of a company to be the maximum amount of share capital of the company;
Section:10 Board of Directors or Board: in relation to a company, means the collective body of the
directors of the company;
Section:11 Body corporate or Corporation: includes a company incorporated outside India, but does
not include—
(i) a co-operative society registered under any law relating to co-operative societies; and
(ii) any other body corporate (not being a company as defined in this Act), which the Central
Government may, by notification, specify in this behalf;
Section:12 Book and Paper and Book or Paper : include books of account, deeds, vouchers, writings,
documents, minutes and registers maintained on paper or in electronic form;
Â As per the Companies (Specification of definitions details) Rules, 2014, “e-Form” means a form in
the electronic form as prescribed under the Act or the rules made thereunder and notified by the
Central Government under the Act;
Section:13 “Books of account” includes records maintained in respect of—
(a) all sums of money received and expended by a company and matters in relation to which the
receipts and expenditure take place;
(b) all sales and purchases of goods and services by the company;
(c) the assets and liabilities of the company; and
(d) the items of cost as may be prescribed under section 148 in the case of a company which belongs
to any class of companies specified under that section;
Â Section 148 of the Companies Act, 2013 authorises Central Government to Specify Audit of Items of
Cost in Respect of Certain Companies.
Section:15 Called-up capital : means such part of the capital, which has been called for payment;
Section:16 Charge : means an interest or lien created on the property or assets of a company or any of
its undertakings or both as security and includes a mortgage;
Section:17 Chartered Accountant : means a chartered accountant as defined in clause (b) of sub-
section (1) of section 2 of the Chartered Accountants Act, 1949 who holds a valid certificate
of practice under sub-section (1) of section 6 of that Act;
Section:20 Company: means a company incorporated under this Act or under any previous company
law;
[Refer clause 67 of section 2 (Previous Company Law) along with the above definition]
Section:21 Company limited by guarantee : means a company having the liability of its members
limited by the memorandum to such amount as the members may respectively undertake
to contribute to the assets of the company in the event of its being wound up;
Section:22 “Company limited by shares: means a company having the liability of its members limited
by the memorandum to the amount, if any, unpaid on the shares respectively held by
them;
Section:24 Company secretary or Secretary: means a company secretary as defined in clause (c) of
sub-section (1) of section 2 of the Company Secretaries Act, 1980 who is appointed by a
company to perform the functions of a company secretary under this Act;
- Exemption: This clause shall not apply to a section 8 (Formation of Companies with
Charitable Objects, etc.) company as per the Notification dated 5th June, 2015.
Section:25 Company secretary in practice: means a company secretary who is deemed to be in practice
under sub-section (2) of section 2 of the Company Secretaries Act, 1980;

Section:26 Contributory : means a person liable to contribute towards the assets of the company in
the event of its being wound up.
- Explanation— For the purposes of this clause, it is hereby clarified that a person holding fully paid-up
shares in a company shall be considered as a contributory but shall have no liabilities of a
contributory under the Act whilst retaining rights of such a contributory;
Section:28 Cost accountant: means a cost accountant as defined in clause (b) of sub-section (1) of
section 2 of the Cost and Works Accountants Act, 1959;
Section:30 Debenture : includes debenture stock, bonds or any other instrument of a company
evidencing a debt, whether constituting a charge on the assets of the company or not;
Section:31 Deposit : includes any receipt of money by way of deposit or loan or in any other form by
a company, but does not include such categories of amount as may be prescribed in
consultation with the Reserve Bank of India;
Section:34 Director : means a director appointed to the Board of a company;
Section:35 Dividend : includes any interim dividend;
Section:36 “Document” : includes summons, notice, requisition, order, declaration, form and register,
whether issued, sent or kept in pursuance of this Act or under any other law for the time
being in force or otherwise, maintained on paper or in electronic form;
Section:37 Employees’ stock option : means the option given to the directors, officers or employees
of a company or of its holding company or subsidiary company or companies, if any, which
gives such directors, officers or employees, the benefit or right to purchase, or to subscribe
for, the shares of the company at a future date at a pre-determined price;
Section:38 Expert : includes an engineer, a valuer, a Chartered Accountant, a Company Secretary, a
Cost Accountant and any other person who has the power or authority to issue a certificate
in pursuance of any law for the time being in force;
Section:39 Financial institution : includes a scheduled bank [as given under section 2(80)], and any
other financial institution defined or notified under the Reserve Bank of India Act, 1934;
Section:40 Financial statement : in relation to a company, includes—
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an
income and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to
sub-clause (iv):
Â Provided that the financial statement, with respect to One Person Company, small company
and dormant company, may not include the cash flow statement;
Â Note: Students may note that ‘Profit and Loss Account’ may also be referred as ‘Statement
of Profit and Loss’ under the Act at some places.
Â For example: Schedule III.
Section:41 Financial year : in relation to any company or body corporate, means the period ending on
the 31st day of March every year, and where it has been incorporated on or after the 1st day
of January of a year, the period ending on the 31st day of March of the following year, in
respect whereof financial statement of the company or body corporate is made up:1
Â Provided that on an application made by a company or body corporate, which is a holding company
or a subsidiary of a company incorporated outside India and is required to follow a different
financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied,
allow any period as its financial year, whether or not that period is a year:
Section:42 Foreign company : means any company or body corporate incorporated outside India which,—
(a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) conducts any business activity in India in any other manner.
Â As per the Rule given in the Companies (Specification of Definitions Details)Rules, 2014, term
“electronic mode”, means carrying out electronically based, whether main server is installed in
India or not, including, but not limited to-
(i) Business to business and business to consumer transactions, data interchange and other digital
supply transactions;
(ii) Offering to accept deposits or inviting deposits or accepting deposits or subscriptions in
securities, in India or from citizens of India;
(iii) Financial settlements, web based marketing, advisory and transactional services, database
services and products, supply chain management;
(iv) Online services such as telemarketing, telecommuting, telemedicine, education and
information research; and
(v) All related data communication services, whether conducted by e-mail, mobile devices, social
media, cloud computing, document management, voice or data transmission or otherwise;
Section : 43 Free reserves : means such reserves which, as per the latest audited balance sheet of a
company, are available for distribution as dividend:
Â Provided that—
(i) any amount representing unrealised gains, notional gains or revaluation of assets, whether
shown as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognized in equity, including surplus
in profit and loss account on measurement of the asset or the liability at fair value,
shall not be treated as free reserves;
Section:44 Global Depository Receipt : means any instrument in the form of a depository receipt, by
whatever name called, created by a foreign depository outside India and authorised by a
company making an issue of such depository receipts;
This definition is to be read with section 41 of the Companies Act, 2013 which provides for
issue of global depository receipts.
Section:45 Government company : means any company in which not less than 51% of the paid-up
share capital is held by the Central Government, or by any State Government or
Governments, or partly by the Central Government and partly by one or more State
Governments, and includes a company which is a subsidiary company of such a Government
company;
Â Example: X is a company in which 50% of shareholding is held by Central Government. Here X is
not a government company as there is no compliance of minimum holding of paid-up share
capital i.e. at least 51 % by the Central Government, or by any State Government or Governments.

Section:46 Holding company : in relation to one or more other companies, means a company of
which such companies are subsidiary companies;
Â For meaning of “subsidiary company” refer the definition given in section 2(87) of the Companies
Act, 2013.
Section:47 Independent director : means an independent director referred to in section 149(5);
Section:48 Indian Depository Receipt: means any instrument in the form of a depository receipt
created by a domestic depository in India and authorised by a company incorporated
outside India making an issue of such depository receipts;
Â This section is to be read with section 390 which deals with the offer of Indian Depository Receipts.
Section:49 Interested director : means a director who is in any way, whether by himself or through any of his
relatives or firm, body corporate or other association of individuals in which he or any of his
relatives is a partner, director or a member, interested in a contract or arrangement, or proposed
contract or arrangement, entered into or to be entered into by or on behalf of a company;
Â This definition is relevant for section 174 relating to quorum for meetings of the Board of Directors,
for section 184 relating to disclosure of interest by directors and also for section 188 relating to
related party transactions of the Companies Act, 2013.
Section:50 Issued capital : means such capital as the company issues from time to time for subscription;
Section:51 Key managerial personnel, in relation to a company, means—
(i) the Chief Executive Officer or the managing director or the manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer; and
(v) such other officer as may be prescribed;
However, till now no other officer has been prescribes
Section:52 Listed company : means a company which has any of its securities listed on any recognised
stock exchange;
Section:55 Member : in relation to a company, means—
i. the subscriber to the memorandum of the company who shall be deemed to have agreed to
become member of the company, and on its registration, shall be entered as member in its
register of members even if the subscription money has not been paid to the company;
ii. every other person who agrees in writing to become a member of the company and whose name
is entered in the register of members of the company;
iii. every person holding shares of the company and whose name is entered as a beneficial owner in
the records of a depository;
Section:56 Memorandum : means the memorandum of association of a company as originally framed
or as altered from time to time in pursuance of any previous company law or of this Act;
Section:57 Net worth : means the aggregate value of the paid-up share capital and all reserves reated
out of the profits and securities premium account, after deducting the aggregate value of
the accumulated losses, deferred expenditure and miscellaneous expenditure not written
off, as per the audited balance sheet, but does not include reserves created out of
revaluation of assets, write-back of depreciation and amalgamation;
Section:61 Official Liquidator : means an Official Liquidator appointed under sub-section (1) of section
359.
Section:62 One Person Company : means a company which has only one person as a member;
Section:63 Ordinary or special resolution : means an ordinary resolution, or as the case may be, special
resolution referred to in section 114 (Ordinary and Special Resolution);
Section:64 Paid-up share capital or share capital paid-up : means such aggregate amount of money
credited as paid-up as is equivalent to the amount received as paid- up in respect of shares
issued and also includes any amount credited as paid-up in respect of shares of the company,
but does not include any other amount received in respect of such shares, by whatever
name called;
Section:65 Postal ballot : means voting by post or through any electronic mode;
Â This definition is related to section 110 to be read with Rule 22 of the Companies (Management
and Administration) Rules, 2014 specifying the procedure to be followed for conducting of business
through postal ballot and provides the list of items of business which should be transacted only
by means of voting trough a postal ballot.
Section:66 Prescribed : means prescribed by rules made under this Act;
Section:68 Private company : means a company having a minimum paid-up share capital as may be rescribed,
and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
¾ Provided that where two or more persons hold one or more shares in a company jointly, they
shall, for the purposes of this clause, be treated as a single member:
¾ Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members
of the company while in that employment and have continued to be members after
the employment ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company;
- The requirement of having a minimum paid up share capital shall not apply to a section 8
company vide notification dated 5th June 2015.
¾ Since nothing has been prescribed so far. Thus, there is no minimum paid up share
capital to form a private company.
¾ [Exemptions given to specified IFSC public company vide notification dated 4th January,
2017.]
Section:69 Promoter:
Q-6 Who shall be considered as promoter according to the definition given in the Companies Act, 2013?
Explain.
means a person—
(a) who has been named as such in a prospectus or is identified by theB company in the annual
return, or
(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder,
director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors of the company
is accustomed to act:
¾ Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional
capacity;
Section:70 Prospectus : means any document described or issued as a prospectus and includes a red
herring prospectus or shelf prospectus or any notice, circular, advertisement or other
document inviting offers from the public for the subscription or purchase of any securities
of a body corporate;
Section:71. Public company means a company which—
(a) is not a private company;
(b) has a minimum paid-up share capital as may be prescribed:
[Exemptions given to specified IFSC public company vide notification dated 4th January, 2017. ]
¾ Provided that a company which is a subsidiary of a company, not being a private company, shall be
deemed to be public company for the purposes of this Act even where such subsidiary company
continues to be a private company in its articles ;
¾ Example: A Pvt. Ltd. is wholly owned subsidiary of AB Ltd. A Pvt. Ltd. wanted to avail exemptions
as provided to private companies. In this case since A Pvt. Ltd. is subsidiary of AB Ltd., which is a
public company, therefore A Pvt. Ltd. will be deemed to be a public company and will be not
allowed to avail exemptions provided to a private company.
¾ The requirement of having a minimum paid up share capital shall not apply to a section 8 company
vide notification dated 5th June 2015.
¾ Since nothing has been prescribed so far. Thus, there is no minimum paid up share capital to form
a public company.
Section:72 Public financial institution:
Q-7 Which of the institutions are regarded as “Public Financial Institutions” under the Companies Act,
2013?
means—
i. the Life Insurance Corporation of India, established under section 3 of the Life Insurance
Corporation Act, 1956;
ii. the Infrastructure Development Finance Company Limited, referred to in clause (vi) of sub-section
(1) of section 4A of the Companies Act, 1956 so repealed under section 465 of this Act;
iii. specified company referred to in the Unit Trust of India (Transfer of Undertaking and Repeal) Act,
2002;
iv. institutions notified by the Central Government under sub-section (2) of section 4A of the
Companies Act, 1956 so repealed under section 465 of this Act;
v. such other institution as may be notified by the Central Government in consultation with the
Reserve Bank of India:
¾ Provided that no institution shall be so notified unless—
¾ it has been established or constituted by or under any Central or State Act; or
¾ not less than fifty-one per cent of the paid-up share capital is held or controlled by the
Central Government or by any State Government or Governments or partly by the Central
Government and partly by one or more State Governments;
Section: 76 Related party:
with reference to a company, means—
(i) a director or his relative;
(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or director;
(v) a public company in which a director and manager is a director and holds along with his relatives,
more than two per cent of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act
in accordance with the advice, directions or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to
act:
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions
given in a professional capacity;
(viii) any company which is—
(A) a holding, subsidiary or an associate company of such company; or
(B) a subsidiary of a holding company to which it is also a subsidiary; This Clause (viii) shall not
apply with respect to section 188 to a private company vide Notification No. G.S.R. 464(E)
dated 5th June, 2015.
(ix) such other person as may be prescribed;
As per Rule 3 given in the Companies (Specification of Definitions Details) Rules, 2014, for the purposes
of sub-clause (ix) of clause (76) of section 2 of the Act, a director (other than an independent director)
or key managerial personnel of the holding company or his relative with reference to a company, shall
be deemed to be a related party.
Section:77 Relative, with reference to any person, means anyone who is related to another, if—
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed; Rule 4 given in the
Companies (Specification of Definitions Details) Rules, 2014 provides of the List of Relatives in
terms of Clause (77) of section 2. Accordingly,
a person shall be deemed to be the relative of another, if he or she is related to another in the
following manner, namely:-
(1) Father: Provided that the term “Father” includes step-father.
(2) Mother: Provided that the term “Mother” includes the step-mother.
(3) Son: Provided that the term “Son” includes the step-son.
(4) Son’s wife.
(5) Daughter.
(6) Daughter’s husband.
(7) Brother: Provided that the term “Brother” includes the step-brother;
(8) Sister: Provided that the term “Sister” includes the step-sister.
Section:85 Small company : means a company, other than a public company,—
i. paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be

prescribed which shall not be more than Ten crore rupees; and
ii. turnover of which as per its last profit and loss account does not exceed two crore rupees or such
higher amount as may be prescribed which shall not be more than twenty crore rupees:
Â Provided that nothing in this clause shall apply to—
(a) a holding company or a subsidiary company;
(b) a company registered under section 8; or
(c) a company or body corporate governed by any special Act;
Â Example: P Ltd. is a company registered under the Companies Act, 2013 with paid up capital of Rs.
10 Lacs and turn over 2 crore. According to section 2(85) a small company is a company other than
a public company with the paid up of capital not exceeding fifty lakh rupees and turnover not
exceeding two crore rupees. Since the P Ltd. is a public company though complying with other
requirements, it cannot avail the status of a small company.
Section:86 Subscribed capital : means such part of the capital which is for the time being subscribed by
the members of a company;
Section:87 Subsidiary company or Subsidiary : in relation to any other company (that is to say the
holding company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or together
with one or more of its subsidiary companies:
Â Provided that such class or classes of holding companies as may be prescribed shall not have layers of
subsidiaries beyond such numbers as may be prescribed. [Not yet enforced as on date 30.4.2017]
Â Explanation—For the purposes of this clause,—
(a) a company shall be deemed to be a subsidiary company of the holding company even if the
control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the
holding company;
(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another
company if that other company by exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors;
(c) the expression “company” includes any body corporate;
(d) “layer” in relation to a holding company means its subsidiary or subsidiaries;
As per the notification dated 27th December 2013, Ministry clarified that the shares held by a company
or power exercisable by it in another company in a fiduciary capacity shall not be counted for the
purpose of determining the holding –subsidiary relationship in terms of the provision of section 2(87)
of the Companies Act, 2013.
Section:88 Sweat equity shares : means such equity shares as are issued by a company to its directors
or employees at a discount or for consideration, other than cash, for providing their know-
how or making available rights in the nature of intellectual property rights or value additions,
by whatever name called;
Section:89 Total voting power : in relation to any matter, means the total number of votes which may be cast
in regard to that matter on a poll at a meeting of a company if all the members thereof or
their proxies having a right to vote on that matter are present at the meeting and cast their
votes.
q
CHAPTER-2
INCORPORATION OF COMPANY AND MATTERS
INCIDENTAL THERETO
UNIT I: PROMOTION & INCORPORATION OF COMPANIES

Promotion means the preliminary steps undertaken by the promoters to bring a company into existence,
and then to set it going.
Promoter:
Promoter means a person
(1) Who has been named as such in prospectus or is identified by company in the annual returns. OR
(2) Who has control over affairs of the company either directly or indirectly. OR
(3) The board of directors of the company are accustomed to do act as per the instruction of the said
person.
The above thing shall not apply to a person if he is acting merely on a professional capacity in the company.
Promoter are neither the agent nor trustee of the company since company has not come into the existence.
Mere Subscriber to memorandum does not make him promoter.
However he stands in fiduciary capacity towards the company.
Functions of promoter:
(1) Generating idea of starting a business and forming a company.
(2) Making feasibility study to determine proposed business is profitable or not.
(3) Taking decisions regarding fundamental questions, like
Â Start a new business or to take over an existing business.
Â Nature of the company should be formed ( Public/private/limited/unlimited)
Â Amount of authorized capital of company
(4) Preparation of MOA, AOA, Other documents as required under Companies act.
(5) Arranging the subscribers of the company.
(6) Filing the required documents with the registrar.
(7) Entering in to negotiation with the first director of the company.
(8) Entering in to pre-incorporation contracts on behalf of company for the purpose of business of company.
(9) Making arrangements for issue of shares.
Duties of promoter:
(1) Not to make secret profit.
(2) Full and fair disclosure of nature of profit to the BOD.
(3) Full and fair disclosure of interest (direct or indirect ) in transaction or contract with the company.
Remidies available to the company against the promoter:
If promoter make secret profit, The Company may
Â Cancel the contract within reasonable time (even though adopted contract and communicated
the same to other party).
Â Recover the secret profit.
Â Sue the promoters for breach of trust.
Right of promoters to receive remuneration or reimbursement:
(1) Promoter have no right to
Â Receive remuneration , or
Â Recover the expense incurred for incorporation of company on behalf of the Company,
Unless company contracted for the same AFTER incorporation.
(2) Even articles provide for remuneration and recovery of expense, the same is not binding on the company.
Private limited company Public company
Suffix: Private limited or Pvt. Suffix: limited or Ltd.

Ltd.
Basic requirement to form
Basic requirement to form company:
company:
Subscription of memorandum
Subscription of memorandum by
by
7 or more persons
2
One person Company

Suffix: OPC
Basic requirement to form
company:
Subscription of memorandum by
1 person

Limited by shares/ guarantee
OR
Unlimited company
20 Chapter 2 : Incorporation of Company and Matters Incidental Thereto

FORMATION OF OPC:
Law in respect to formation of OPC provides that -
(1) The memorandum of OPC shall state the name of other person i.e, nominee who shall become the
member of OPC in case of
x Death of the subscriber to memorandum or
x Incapacity to contract
(2) The name of nominee indicated in memorandum after his prior written approval which shall be
submitted to the registrar at the time of incorporation of company.
(3) Nominee may withdraw his consent in the prescribed manner at any time but before death or incapacity
to contract of member.
(4) Change in name of nominee:
(5) The member of OPC may at any time change name of nominee by giving notice to the company and
company shall intimate the same to the registrar.
(6) Eligibility to incorporate OPC or to be nominee:
A person shall be eligible to be a nominee of the OPC only if,
x He is a natural person.
x He is an Indian citizen.
x He is resident in India. (Resident in India means a person who has stayed in India for not less than
182 days during immediately preceding financial year)
(7) A natural person shall not be a member of more than 1 OPC at any point of time and
The said person shall not be a nominee of more than 1 OPC.
(8) A minor cannot
x Become a member of OPC.
x Become a nominee of OPC.
x Hold shares with beneficial interest in OPC.
(9) Prohibition on OPC :
x OPC cannot be incorporated or converted into Sec.8 Company.
x OPC cannot carry out Non-banking financial investment activities including investment in securities
of any Body Corporate.
x OPC cannot VOLUNTARILY convert itself into any other kind of company unless 2 years have expired
from the date of incorporation.
(10) Compulsory conversion :
x OPC shall cease to be entitled to continue as OPC, if
- Its Paid up share capital exceeds Rs.50 lakh
- Its Avg. annual T/O during the relevant period exceeds Rs.2cr
x Within 6 months, such OPC shall be required to convert itself into-
x A private company with a minimum
2 members and 2 directors.
- A public company with minimum

7 members and 3 directors.
Formation of companies with charitable object, etc. (sec 8)
Object : promotion of commerce , art , science , sports , education , research ,
social welfare , religion , charity , protection of environment or any such other object.
Restriction : prohibit the payment of Restriction / Intension : apply its profits, if any
any dividend to its members or other income in promoting its object
(1) Power of central government to issue license :
This section allows the central government to register such person or association of person as company
with limited liability without addition of words “limited” or “private limited” to its name by issuing license
with such conditions as its deems fit.
Where it is proved to the satisfaction of the central government that any company whether the limited or
any private limited company was formed the act or under any previous law with the objects specified under
the section 8 of the Companies act 2013.
(2) It on satisfaction grant license under sec.8 to such company with such restriction and regulation as it
deems fit.
(3) Privileges of limited company:
On issue of license under these section company enjoys same privileges as that of the limited company.
(4) A firm can be a member of the company registered under section 8.
(5) Alteration of memorandum & articles:
A company registered under this section shall not alter the provision of its memorandum or articles
except with the prior approval of the central government.
(6) Conversion into any other kind of company: a company registered under this section may convert into
company of any other kind only after complying with such conditions as may be prescribed.
- For conversion of section 8 company into such other kind the company needs to provide a special
resolution in its general meeting for approval of such conversion.
(7) Central government may on being satisfied by order revoke the license issued under section 8 if it feels
that the company contravenes the provision or violate the objects or affairs of company are being
conducted in detrimental manner. But before such revocation of license the C.G. must give written
notice of its intention to revoke license and opportunity of being heard should be given.
(8) On satisfaction if C.G revokes the license it may order for dissolution of such company or given order
for the amalgamation with such other company registered under this section.
(9) If on winding up of the company whose license is revoked C.G order for disposals of the assets and pay
off the liabilities of the company and if after payment of such liabilities any assets or money is left it
may order to deposit the same to the insolvency and bankruptcy fund formed under section 244 of the
insolvency and bankruptcy code, 2016.
(10) If company fails to comply with the provision of the these section then it shall be liable for a fine
varying from 10 lakhs to 1 crore rupees and directors & every officer of the company who is in default
shall be punishable with imprisonment for a term which may extend to 3 years or fine from 25000 to 25
lakhs rupees or both.

MEMORANDUM OF ASSOCIATION
MEANING:
Memorandum means the MOA Of a company as originally framed or as altered from time to time in pursuance
of any previous Companies law or of this Act.
OBJECT of registering a MOA
Â Memorandum contains the object for which the company is formed and therefor, identifies the possible
scope of its operations beyond which the actions of company cannot go.
Â It defines as well as confines the powers of the company.
Â Memorandum serves 2 purposes:
Enables the shareholders, creditors & Anyone dealing with the company will know whether
Those who deal with the company the transaction he intends to make with the company is
To know – what its power are & within the objects of the company and not ultra vires.
-what is the range of its activities
Â Memorandum contains the fundamental conditions upon which alone the company is allowed to be
incorporated.
IMPORTANCE of memorandum:
Memorandum is also called as the charter of the company because it is:
Â Key document containing: vital detail of the company.
Â Most important document as regards incorporation of the company is concerned.
ÂMost fundamental document of the company specifying:
The most important information relating to the company.
Memorandum is a public document. i.e any person (member or not) can inspect it in office of registrar.
No company can be registered without a memorandum.
It is one of the main document required to be filed with the registrar at the time of registration of the
company.
The memorandum of a company shall state/ contents of memorandum / clauses contained in the
memorandum:
I. Name clause :
Â State the name of the company.
Â In case of Public company: “Limited” shall be the last word of the name of the company.
company Private company: “Private Limited “shall be the last word of the name of the Company.
Â Requirement of the word Limited and Private Limited not apply to the company registered u/s 8.
II. Situation clause :
Â Mention the name of the state in which the registered office of the company is proposed to be
situated.
III. Object clause :
Â State the object for which the company is proposed to be incorporated and any matter considered
necessary in furtherance of.
IV. Liability clause :
Â State the liability of members of the company is limited or unlimited.
Â In case of a company limited by
Shares Guarantee
Liability to the amount unpaid, if any, the amount up to which each member
On the shares held by them. Undertakes to contribute in the event of
Winding up of the company.
Liability arise only if company is Liability of member shall be limited

Wound up while he is a member for payment of-
OR - Such debts, as the company
Within 1 year of cessation of his had incurred before he
Membership. Ceased to be a member.
- Expense of winding up of the Company.
- Adjustment of the rights of the
Contributories among themselves.
VI. Capital Clause:
(A) In case where company having share capital company needs to mention the capital clause in the
MOA.
(B) The Capital clause shall contain the following information:
(i) The amount of the share capital which the company has with which it is registered is to be
specify &
(ii) The division of the above said capital is also to be mentioned i.e., shares of the fixed amount
is to be stated.
VII. Subscription clause:
In case company having the share capital it needs to mention the below stated details;
(1) The subscription clause should state the number of the shares that the each subscriber of the MOA
has agreed to be subscribe;
(2) Every subscriber should subscribe at least 1 share which is the minimum requirement;
(3) The number of shares which are agreed to be subscribe by the subscriber should be mentioned
against the name of such subscriber.
VIII. Nomination Clause:
This clause is applicable in case where the company registered as OPC as in such situation the company is
formed by only single person so in this case the person has to mention the name of any other person who
would look after the affairs of the company & become member of the company in the event of death or
incapacity of the person who has incorporated the company.
Forms of the Memorandum
(a) There are various forms given in the Schedule I of the companies act as specified as Table A, B, C, D, &
E which are explained hereunder.
Table A Memorandum of the company limited by shares
Table B Memorandum of the company limited by guarantee & having no share capital
Table C Memorandum of the company limited by guarantee & having share capital
Table D Memorandum of an Unlimited company having no share capital
Table E Memorandum of an Unlimited company having share capital
(b) The Memorandum of the company shall be in such form as may be applicable to it as per its requirement.
RESERVATION OF NAME:
Q-1 State the condition mentioned in the Companies Act for reserving name of the company?
Ans.
Â Application for reservation of name:
- Any person may make application to the registrar.
- In such form and in such manner as may be prescribed.
- Application may be accompanied with prescribed fees.
- Thee application may be made-
(1) For reservation of name for a company proposed to be incorporated.
(2) By a company already in existence for the purpose of changing its name to a new name.
Â Reservation of name by the registrar:
On perusal of the application for reservation of name and the information and documents furnished
along with the application,
The registrar may reserve the name for a period of 60 days.
Â Situation where a name is reserved by furnishing wrong information :
If after a name is reserved by the registrar, it is found that the applicant had furnished wrong or
incorrect information, then–
(a) If the company has not been incorporated , then-
- The reserved name shall be cancelled ; and
- The applicant shall be liable to a penalty up to Rs.1 lakh
(b) If the company has been incorporated , the registrar may, after giving an opportunity of being
heard to the company, -
- Direct the company to rectify its name , and the company shall be required to rectify its
name within 3 months; or
- Strike off the name of the company from the ROC; or
- Present a petition for winding up of the company.
Â Form and fees:
An application for the reservation of the name shall be made in form no. INC.1 along with such fees as
provided in the companies (Registration offices and fees) rules, 2014 which may be approved or rejected
as the case may be by the registrar.
LEGAL REQUIREMENTS WITH RESPECT TO NAME OF A COMPANY
A. Provision contained in the Act :
Â Name of a company shall not to be identical or similar to the existing company.
o Name of a company shall not to be such that its use by the company will constitute an
offence under any law.
xÂ Name of a company shall not to be such that its use by the company is ‘undesirable’, in the opinion
of CG.
Â A company shall not be registered by a name, which contains any word or expression which is
likely to give an impression that the company is connected with , or has the approval of –
- CG ; or
- SG ; or
- Local authority ; or
- Any corporation ; or
- Body constituted by CG or SG pursuant to any law.
Â A company shall not be registered by a name, which contains such word or expression as may be
prescribed, unless previous approval of CG is obtained.
B. Provision contained in the Rule 8 of the Companies ( Incorporation ) Rules, 2014 :
Â A name shall be considered as undesirable, if it is identical to the name of a company dissolved as
a result of liquidation proceeding and a period of 2 years has not elapsed from the date of such
dissolution.
Â If the proposed name is identical with the name of a company which is strike off, then such name
shall not be allowed before the expiry of 20 years.
Â The name of the company may contain the phrase ‘ Electoral Trust ‘ , if –
- Such company is to be formed u/s 8 of the Act ;
- In accordance with the Electoral Trusts Scheme, 2013, as notified by CBDT ; &
- The name application accompanied with the affidavit to the effect that the name is to be
obtained only for the purpose of registration of companies under Electoral Trusts Scheme,
2013, as notified by CBDT.
Â The name of a company proposed to be incorporated u/s 8 shall include the words
- Foundation
- Forum
- Association
- Chambers
- Council
- Electoral trust etc
Â Every company incorporated as a “Nidhi”, shall have the last word ‘Nidhi Limited‘ as part of its
name.
Â If any company has changed its acitivities which are not reflected in its name, it shall be change its
name in line with its activities within a period of 6 months from the change of activities after
complying with all the provisions as applicable to change of name.
Â A name shall be considered as undesirable if it includes the name of registered trade mark or a
trade mark which is subject of an application for registration under the Trade Marks Act,1999,
unless the consent of the owner of such registered trade mark or applicant who has made the
application for the registration of the trade mark , as the case may be , has been obtained and
produced by the promoters.

Â The following words and combinations thereof shall not be used in the name of a company in
English or any of the languages depicting the same meaning unless the previous approval of CG
has been obtained for the use of any such words or expression :
- Board
- Authority
- Commission
- Undertaking
- National
- Union
- Central
- Fedral,
- Republic
- President
- Rashtrapati
- Small Scale Industries
- Khadi And Village Industries Corporation
- Municipal
- Punchayat
- Etc as mention in the Act
ARTICLES OF ASSOCIATION [AOA]:
“Articles” means the articles of association of a company as originally framed or as altered from time to
time or applied in pursuance of any previous Companies law or of this Act.
Â Articles are the regulations framed by the company for its own governance.
Contents of articles:
Â The articles shall contain the regulations for the management of the company.
Â The articles shall contain such matters as may be prescribed under the rules.
Â A company may include any additional matter in its articles which is considered necessary for the
management of the company.
ENTRENCHMENT:
Â Provision for entrenchment:
- The articles may contain the provision for entrenchment, i.e. certain specified provision of the
articles can be altered only by complying with such conditions or procedures as are more restrictive
than those as are applicable n case of a special resolution.
Â Manner of inclusion of the entrenchment provision:
- The provision for entrenchment may be made-
· At the time of formation of the company; or
· By an amendment of articles, with the consent of all the members, in the case of a private company;
or
· By an amendment of articles, by passing a special resolution, in the case of a public company.

Â Notice to the registrar of the entrenchment provision:
- Where the articles contain the provision for entrenchment, the company shall give notice of
such provision to the registrar, in such form and manner as may be prescribed.
- The notice to the registrar shall be given irrespective of the fact as to whether the provision
for entrenchment were contained in the articles at the time of formation of the company or
were included in the articles afterwards, by way of entrenchment.
Â Form of articles:
- Various forms of articles have been specified in table F,G,H,I and J in schedule I, as explained
here under:
Table F Articles of the Shares
Table G½ Company capital ½ Guarantee and having share

¾ ¾
TableH ¿ Limitedby capital ¿ Guarantee and having no share
Table I ½ Article of an ½ ashare capital

¾ ¾
Table J¿ Unlimitedco.having ¿ no share capital
- The articles of a company shall be in such form ( viz. Table F, G, H, I and J) as may be applicable to
it.
Provision contained in the Companies (Incorporation) Rules, 2014 w.r.t. signing of memorandum and articles:
Â The memorandum and articles shall be signed by each subscriber to the memorandum.
Â Each subscriber have to add his name, address and occupation, if any, in the presence of at least 1
witness who shall attest the signature and shall likewise sign and add his name, address and occupation,
if any.
Â The witness shall state that “I witness to subscribers, who have subscribed and signed in my presence
(date and place to be given); further, I have verified their identity details (ID) for their identification
and satisfied myself of their identification particulars as filled in”.
Â Where a subscriber to the memorandum is illiterate, he shall affix his thumb impression which shall be
described as such by the person, writing for him, who shall place the name of the subscriber against or
below the thumb impression and authenticate it by his own signature and he shall also write against
the name of the subscriber, the number of shares taken by him.
Â Such person shall also read and explain the contents of the memorandum and articles of association to
the subscriber and make an endorsement to the effect on the memorandum and articles of association.
Â The type written or printed particulars of the subscribers and witnesses shall be allowed as if it is
written by the subscriber and witness respectively so long as the subscriber and the witness, as the
case may be, affix his or her signature or thumb impression, as the case may be.
ACT TO OVER-RIDE MEMORANDUM, ARTICLES, ETC.
Â The provisions of the Companies Act, 2013 shall have effect, notwithstanding anything to the contrary
contained in –
¾ Memorandum of a company; or
¾ Articles of a company; or
¾ Any agreement executed by a company; or
¾ Any resolution passed by the company in general meeting; or
¾ Any resolution passed by the company in board meeting.
Â If any provision contained in the –
¾ Memorandum of a company; or
¾ Articles of a company; or
¾ Any agreement executed by a company; or
¾ Any resolution passed by the company in general meeting; or
¾ Any resolution passed by the company in board meeting.
Is consistent with the provisions contained in the Act, then such provision shall be void to the extent of
such inconsistency.
BINDING FORCE OF MEMORANDUM AND ARTICLES:
Â Every member is given some individual rights under the Act and the articles. If a company deprives
(take away possession) any of its members of such rights, such a member can sue the company for
enforcement of his rights.
Â The company is bound to comply with all the terms and conditions contained in the memorandum and
articles.
Therefore, the following conclusion may be drawn:
- If a company is about to commit a breach of any terms and conditions of memorandum and
articles, any member may obtain an injunction from the court thereby restraining the company
from committing such breach.
- If a company has already committed a breach of any terms and conditions of memorandum or
articles, any member may sue the company, directors and the persons responsible for such breach.
Â When memorandum and articles are registered, it shall be deemed that these documents were signed
by every member of the company individually.
Â Every member shall be bound to comply with the provisions contained in the memorandum and articles.
Â In case of non-compliance, the company may sue a member.
Â There is no privacy of contract between the members.
Â However a member may enforce his rights against another member through the company, but not
directly.
Â The memorandum and the articles do not bind a company to the outsiders. This is based on the general
rule of law that a stranger to a contract does not acquire any rights under the contract.
Â Therefore, an outsider cannot take the help of the articles to establish a contract with the company.
Q-2 Explain the limitations relating to alternation of Articles of Association of a company.
Ans. Limits on the Alteration of Articles: Every company has a right to alter its articles by following a simple
process laid down in section 14 of the Companies Act, 2013.
Generally speaking the right of a company to alter its Articles is without and restriction. However,
section 14 of the Act limits the right of the company to alter its Articles by imposing the following
restrictions:
(i) The alteration cannot override its Memorandum or in any way conflict with the provisions thereof.
(ii) It cannot not be in violation of any provision of the Companies Act or any other statute.
(iii) It cannot allow an activity which is illegal (as a company can be formed only for a lawful object).

An alteration to the Articles cannot increase the liability of its member which has been already defined
in the Memorandum.
REGISTERED OFFICE OF A COMPANY:
Q-3 What is Importance of registered office for a company?
Ans.
Â Mandatory to have a registered office:
- It is mandatory for every company to have its registered office.
- Every company shall have its registered office –
(a) Within 15 days of its incorporation; and
(b) At all times thereafter.
Â Communication to be sent at registered office:
- All communications and notices shall be sent at the registered office of the company.
- The registered office shall be capable of receiving and acknowledging all communications and
notices sent at such office.
Â Verification of registered office:
- The company shall file with the registrar, a verification of its registered office.
- The verification of registered office shall be filed-
(a) Within 30 days of incorporation of the company.
(b) In the prescribed manner.
Â Notice of change of registered office:
- Notice of every change in situation of the registered office shall be given to the registrar.
- The notice shall be given within 15 days of such change.
- The notice shall be verified in the prescribed manner.
Â Change of registered office outside the city:

- A company shall not change its registered office outside the local limits of the city, town or village
in which the registered office is situated, except with the authority of a special resolution passed
in the general meeting.
Q-4 State the procedure for shifting of registered office of a company from one state to another?
Or
M/s ABC Ltd. a company registered in the State of West Bengal desires to shift its registered office to
the State of Maharashtra. Explain briefly the steps to be taken to achieve the purpose.
Would it make a difference, if the Registered Office is transferred from the Jurisdiction of one Registrar
of Companies to the jurisdiction of another Registrar of Companies within the same State?
Or
VD Company Ltd. is registered in Tamil Nadu within the jurisdiction of the Registrar of Companies,
Chennai. The company proposes to shift its registered office to a place within the jurisdiction of Registrar
of Companies, Coimbatore. State the steps to be taken by the company to give effect to the proposed
shifting of its registered office.

Ans.
Â Change of the registered office from jurisdiction of one ROC to another ROC:
- A company shall not change its registered office from the jurisdiction of one registrar to the jurisdiction
of another registrar within the same state, unless-
(a) The company is so authorised by a special resolution passed in the general meeting; and
(b) The company has obtained the confirmation of the regional director.
- For obtaining the confirmation of the regional director, the company shall make an application to
the regional director in form no. INC.23, such application shall be accompanied by the following
documents:
(a) Board Resolution for shifting of registered office.
(b) Special Resolution of the members of the company approving the shifting of registered office.
(c) A declaration given by the key managerial personnel or any two directors authorised by the
board, that the company has not defaulted in payment of dues to its workmen and has either the
consent of its creditors for the proposed shifting or has made necessary provision for the payment
thereof.
(d) A declaration not to seek change in the jurisdiction of the court where cases for prosecution are
pending.
(e) Acknowledged copy of intimation to the chief secretary of the State as to the proposed shifting
and that the employees interest will not be adversely affected consequent to proposed shifting.
Labeling of company/ Publication of name:
Q-5 What are the condition prescribed for publication of name by company under the Companies Act,2013?
Ans.
I. The name of the company shall be engraved in legible characters on the common seal, if any, of the
company.
II. The following particulars shall be printed on all the business latters, billheads and in all its notices and
other official publications:
- Name of the company
- Address of its registered office
- The corporate identity number
- Telephone number
- Fax number, if any
- E-mail address
- Website address, if any
III. Every company shall paint or affix its name and the address of its registered office, and keep the same
painted or affixed, on the outside of every office or place in which its business is carried on, in a
conspicuous position, in legible letters, and if the characters employed therefore are not those of the
language or of one of the language in general use in the locality, also in the characters of that language
or one of those language.
IV. In case of OPC, the words ‘one person company’ shall be mentioned in bracket below the name.
V. Every company which has a website for conducting online business or otherwise, shall disclose/publish,
on the home page of the said website, the following particulars:

- Name of the company
- Address of its registered office
- The corporate identity number
- Telephone number
- Fax number, if any
- E-mail address
- The name of the person who may be contracted in case of any queries or grivances.
VI. CG may, as and when required, notify the other documents on which the name of the company shall be
printed.
Q-6 Explain the procedure for change of name of a company, as provided in the Companies Act, 2013.
Ans.
Â A company may change its name by passing a special resolution.
Â The change in name shall not have any effect unless the approval of CG obtained.
Â The approval of CG is not required, if the only change in the name of the company is-
(a) Deletion of the word ‘private’, consequent upon conversion of a private company in to a public
company; or
(b) Addition of the word ‘private’, consequent upon conversion of a public company in to a private
company.
Â The change in name shall be subject to the provisions of Sec.4(viz. the name shall not be
undesirable)
Â The company shall file with registrar-
(a) A copy of special resolution; and
(b) A copy of the order of CG approving the change of name.
Â The registrar shall –
(a) Enter the new name of the company in the register of the companies; and
(b) Issue a fresh certificate of incorporation to the company.
Â The change of name shall not be allowed to a company which has not filed annual returns or
financial statement due for filing with the registrar or which has failed to pay or repay matured
deposits or debentures or interest thereon. However if such default is made good, then, the
change of name shall be allowed.
(3) Alteration of situation clause / change of place of the registered office:
Â The alteration of the memorandum relating to the place of the registered office from one state to
another shall not have any effect unless it is approved by the central government on an application
in such form and manner as may be prescribed.
Â The CG shall dispose of the application of change of place of the registered office within a period
of 60 days.
Â Before passing of order, CG may satisfy itself that-
(a) The alteration has the consent of the creditors, debenture-holders and other persons
concerned with the company, or
(b) The sufficient provision has been made by the company either for the due discharge of all its
debts and obligations, or

(c) Adequate security has been provided for such discharge.
- The company shall within such time and manner as may be prescribed, file with the
registrar of each state a copy of the order of Cg approving the change.
- The registrar shall register the order of CG.
- The registrar of the state in which the register office of the company is to be satisfied,
shall issue a fresh certificate of incorporation indicating therein such alteration.
- The change shall not be effective until it has been duly registered by the Registrar.
(4) Alteration of object clause:
Â A company may alter its objects clause by passing Special Resolution.
Â If a company has raised money from the public by issue of a prospectus, and any part of such
money remains unutilized with the company, then, the company shall not alter its objects for
which it raised the money through prospectus unless-
(a) The company has published the prescribed details and justification for such alteration in 2
newspapers ( one English newspaper and one newspaper in vernacular language) circulating
at the place where the registered office of the company is situated;
(b) The prescribed details and jurisdiction for such change have been placed on the website of
the company, if any; and
(c) The dissenting shareholders have been given an exit opportunity by the promoters and
shareholders having control in accordance with the regulations to be specified by SEBI.
- The company shall file with the registrar a copy of SR.
- The registrar shall, within 30 days, register the alteration, and issue a certificate of registration.
- The alteration shall not be effective until it has been duly registered by the registrar.
ALTERATION OF ARTICLES :
Â Every alteration of articles shall be subject to the provisions contained in the Act and the memorandum.
Â Special Resolution is required for every alteration of articles, including alteration of articles for the
purpose of –
(a) Conversion of a private company in to public company; and
(b) Conversion of a public company in to private company.
¾ A private company may get converted into a public company, by articles (by passing a Special
Resolution) in such a manner that its articles no longer include the restrictions and limitations
required to be included in the articles of a private company.
x The conversion from private company into a public company shall take effect from the date of
alteration of articles.
¾ A public company may get converted into a private company, by-
(a) Altering its articles (by passing Special Resolution) so as to include therein the restrictions
and limitations required to be included in the articles of a private company; and
(b) Obtaining the approval of the Tribunal.
x For obtaining approval of tribunal, the company shall make an application to the Tribunal.
x The Tribunal may make such orders as it may deem fit.
x Until the approval of the tribunal is obtained, the alteration of articles shall not have any effect.

x Where the conversion is approved by the Tribunal, a copy of the order of the Tribunal approving
the alteration shall be filed with the Registrar.
x A copy of the altered articles along with the copy of the order of the Tribunal shall be as valid as if
it were originally contained in the articles.
ALTERATION OF MEMORANDUM OR ARTICLES TO BE NOTED IN EVERY COPY:
Â Every alteration of memorandum should be noted in every copy.
Â A company shall not issue any copy of memorandum or articles unless it contains every alteration
made therein.
Â The company and every officer who is in default shall be liable to a penalty of Rs.1000 for every copy of
the memorandum or articles issued without containing any alteration.
COPIES OF MEMORANDUM, ARTICLES, ETC. TO BE GIVEN TO MEMBERS
¾ Request of copies of certain documents:
x Any member of the company may demand from the company,-
(a) A copy of the memorandum;
(b) A copy of the articles; and
(c) A copy of every agreement and every resolution referred to u/s 117(Resolution and
agreements to be filed), which is not embodied in the memorandum or the articles.
x Duty of the company:
The company shall furnish to the member concerned, the documents demanded by him-
(a) Within 7 days of the request;
(b) If the member pays the prescribed fees.
Q-7 What are the requirements for change in the name where selected name resembles to any of the
existing names of the company??
Ans.
RECTIFICATION OF NAME OF COMPANY:
Â Where name is identical or similar to name of a company already registered:
(a) Where a company is registered (whether on its first registration or afterwards, on its registration
by a new name) by a name, which in the opinion of CG may direct the company to rectify its name.
(b) When such a direction is given, the company shall, within 3 months, rectify its name by passing an
ordinary resolution.
Â Where name is identical or similar to name of a registered trademark:
(a) The proprietor of a registered trade mark may make an application to CG that the name of a
company is identical with, or too nearly resembles, the registered trade mark of which he is the
proprietor.
(b) Such an application may be made by the proprietor of the registered trade mark within 3 years of
–
- Registration of the company by such name; or
- Registration of the company by such new name.
(c) On receipt of such an application, if CG is of the opinion that the name of a company is identical
with, or too nearly resembles, the registered trade mark, the proprietor of which is the applicant,

then CG may direct the company to rectify its name.
(d) When such a direction is given, the company shall, within 6 months, rectify its name by passing an
ordinary resolution.
Â Filing requirement:
(a) Within 15 days of passing an ordinary resolution for rectification of name, the company shall file
with the registrar –
- Notice of rectification of name; and
- A copy of the order of CG.
(b) The registrar shall make necessary changes in –
- The memorandum; and
- The certificate of incorporation.
Â Default in compliance with the direction:
If a company makes default in complying with direction
Liable person Penalty / Punishment
Company Fine - 1000Rs. For every day for which the default continues.
Every officer who
is in default Fine - varying from 5000Rs. To 1,00,000 Rs.
Q-8 State the conditions necessary for converting a class of company into another class of company.
CONVERSION OF COMPANIES FROM ONE CLASS TO ANOTHER CLASS/ CONVERSION OF COMPANIES ALREADY
REGISTERED :
State the conditions necessary for converting a class of company into another class of company
OR
The Directors of a company registered and incorporated in the name “Mars Textile India Ltd.” desire to
change the name of the company entitled “National Textiles and Industries Ltd.” Advise as to what procedure
is required to be followed under the Companies Act, 2013?
Ans.
According to the Companies Act, 2013, a company may convert itself in some other class of company by
altering its memorandum and articles of association.
Following is the law with respect to the conversion of the companies already registered.
1. By alteration of memorandum and articles:
- A company of any class registered under this Act may convert itself as a company of other class
under this Act by alteration of memorandum and articles of the company in accordance with the
provision of this chapter.
2. File an application to the Registrar:

- Wherever such conversion of companies is required to be done, the company shall file an
application to the registrar, who shall after satisfying himself that the provisions applicable for
registration of companies have been complied with, close the former registration of the company.
3. Issue a certificate of incorporation:

- After registering the required documents, issue a certificate of incorporation in the same manner as its
first registration.
4. No effect on the debts, liabilities etc. incurred before conversion:
- The registration of a company under this section shall not affect any debts, liabilities, obligations or
contracts incurred or entered into, by or on behalf of the company before conversion and such debts,
liabilities, obligations and contracts may be enforced in the manner as if such registration had not been
done.
SUBSIDIARY COMPANY NOT TO HOLD SHARES IN ITS HOLDING COMPANY:
Â Prohibition w.r.t. shares in holding company:
- A company shall not (either by itself or through its nominees) hold any shares in its holding
company.
- A holding company shall not allot or transfer its shares to any of its subsidiary companies.
Â Effects of contravention:
- Any allotment or transfer of its shares by a holding company to any of its subsidiary companies
shall be void.
Â Exceptions:
- The prohibition shall not apply in the following 3 cases:
(A) Shares hold as a legal representative Where the subsidiary company holds such share as
the legal representative of a deceased
member of the holding company.
(B) Shares hold as a trustee Where the subsidiary company holds such shares as a
trustee.
(C) Shares hold before the company Where the subsidiary company is a shareholder even
become a subsidiary before it became a subsidiary company of the holding
company.
- Out of above 3 cases, the subsidiary shall have a right to vote at a meeting of the holding company
only in case (A) and case (B).
Â The reference in this section to the shares of a holding company which is a company limited by guarantee
or an unlimited company, not having a share capital, shall be construed as a reference to the interest of
its members, whatever be the form of interest.
Â EXAMPLE : PRIP Ltd. Has invested 51% in the shares of SSP Pvt. Ltd. On 31st march 2017. SSP Pvt. Ltd have
been holding 2% equity of PRIP Ltd. Since 2011. SSP Pvt. Ltd. Cannot increase its equity beyond that 2%
on or after 31st march 2017. However, it could continue to hold or reduce its initial 2% stake.
SERVICE OF DOCUMENTS:
Â Companies Act, 2013, provides the mode in which documents may be served on the company, on the
members and also on the registrars.
Â Law with respect to the service of documents is as follows-
(1) Serving of documents on the company or any officer of the company:
(a) Section 20(1) applies where any document is to be served on –
- The company; or
- Any officer of the company.

(b) The documents shall be addressed to –
- The company; or
- Any officer of the company.
(c) The document shall be sent at the registered office of the company.
(d) The document shall be sent by –
- Registered post; or
- Speed post; or
- Courier; or
- Leaving it at its registered office; or
- Such electronic or other mode, as may be prescribed.
(e) The records of beneficial ownership may be sent by the depository to the company by
electronic or other mode.
(2) Service of documents on the Registrar:
(a) Sec. 20(2) applies where any documents is to be served on the registrar.
(b) The document shall be sent by –
- Speed post; or
- Courier; or
- Post
- Delivering at the office of the registrar; or
(c) Where any provision of the Act or the Rules requires that a document shall be served on the
Registrar by electronic mode only, then, such document shall be served on the Registrar by
electronic mode only.
(2) Service of documents on the members:
(a) Sec. 20(2) applies where any document is to be served on any member.
(b) The document shall be sent by –
- Speed post; or
- Courier; or
- Post
- Delivering at the address of the member; or
(c) A member may request the company to deliver to him any document by a particular mode. For
this purpose he shall have to pay such fees as may be determined by the members in the AGM.
EXEMPTION-
Section 20(2) shall apply to a Nidhi Company, subject to the modification that in the case of a Nidhi, the
document may be served only on members who hold shares of more than Rs.1000 in Face value or more than
1% of the total paid up share capital of the Nidhi whichever is less.
For other shareholders, document may be served by a public notice in newspaper circulated in the district
where the registered office of the Nidhi is situated; and publication of the same on the notice board of the
Nidhi.
EXECUTION OF BILL F EXCHANGE, ETC.

Â Negotiable instruments- when binding;
A negotiable instrument shall be deemed to have been made, accepted, drawn or endorsed on behalf
of a company if it is made, accepted, drawn or endorsed on behalf of the company by any person acting
under its authority, express or implied.
Â Authorization to execute deeds:
A company may authorize any person as its attorney to execute deeds on its behalf in any place either
in or outside India. Such authorization may be made-
i. By writing under the common seal of the company, if the company has a common seal.
ii. By a director and the Company Secretary, if the company does not have a common seal, but it has
appointed a Company Secretary.
iii By 2 directors, if the company does not have a common seal and it has not appointed a Company
Secretary.
Â A deed signed by such an attorney on behalf of the company and under his seal shall be binding on the
company.
DOCTERINE OF ULTRA VIRES:
Q-9 Explain fully the doctrine of Ultravires and state its implications.
Or
Briefly explain the doctrine of “ultravires” under the Companies Act, 2013. What are the consequences of
ultravires acts of the company?
Meaning and effect of the doctrine:
“Ultra” means beyond or in excess of and “vires” means power.
Thus, “Ultra vires” means an act or transaction beyond or in excess of the powers of the company.
x An act or transaction shall be ultra vires if-
i. It is not permitted or authorised by the Companies Act,2013;
ii. It falls outside the object clause of memorandum; and
iii. Its attainment is not included or ancillary to the attainment of main objects.
Effect of ultra vires transactions:
a. The transaction is void ab initio:
- An act which is ultra vires the company is void and of no legal effect.
- Neither the company nor the other contracting party derives any right under an ultra vires contract.
- Even ratification of an ultra vires contract by the whole body of shareholders does not make an
ultra vires contract valid or enforceable.
b. No ratification or estoppels:
- An ultra vires contract cannot become valid by estoppel or ratification.
c. Injunction against the company:

- Any member may obtain an injunction order from the court, i.e. an order of the court restraining
the company from proceeding with the ultra vires contract.
d. Personal liability of directors:
- If funds of the company are misapplied or wasted by entering in to ultra vires transactions, the
directors shall be personally liable to the company for breach of trust.
Doctrine of Indoor management:
Q-10 Explain the doctrine of ‘Indoor management’ in brief.
OR
The Secretary of a Company issued a share certificate to ‘A’ under the Company’s seal with his own
signature and the signature of a Director forged by him. ‘A’ borrowed money from ‘B’ on the strength of
this certificate. ‘B’ wanted to realise the security and requested the company to register him as a
holder of the shares. Explain whether ‘B’ will succeed in getting the share registered in his name.
Hint: doctrine is not applicable where the person dealing with the company has notice of irregularity or
when an instrument purporting to be enacted on behalf of the company is a forgery.
In the instant problem the doctrine of indoor management will not apply as the certificate is a forgery
which does not give a good title to A and thereby to B. The title of the buyer cannot be better than that
of the seller (Sale of Goods Act, 1930). Hence, ‘B’ will not succeed in getting the share registered in his
name.
OR
“The Doctrine of Indoor Management always protects the persons (outsiders) dealing with a company.”
Explain the above statement. Also, state the exceptions to the above rule.
Ans.
Â According to this doctrine, persons dealing with the company need not inquire whether internal
proceedings relating to the contract are followed correctly, once they are satisfied that the transaction
is in accordance with the memorandum and articles of association.
Â Stake holders need not enquire whether the necessary meeting was convened and held properly or
whether necessary resolution was passed properly.
Â They are entitled to take it for granted that the company had gone through all these proceedings in a
regular manner.
Â The doctrine helps protect external members from the company and states that the people are entitled
to presume that internal proceedings are as per documents submitted with the ROC.
Â The doctrine of indoor management evolved around 150 years ago in the context of the doctrine of
constructive notice.
Â The role of doctrine of indoor management is opposed to of the role of doctrine of constructive notice.
Â Whereas the doctrine of constructive notice protects a company against outsiders, the doctrine of
indoor management protects outsiders against the action of a company.
Â This doctrine also is a possible safeguard against the possibility of abusing the doctrine of constructive
notice.
Exceptions to Doctrine of Indoor Management (Applicability f doctrine of constructive notice)
Knowledge of irregularity:
In case this ‘outsider’ has actual knowledge of irregularity within the company, the benefit under the rule of
indoor management would no longer be available.

In fact, he/she may well be considered part of the irregularity.
Negligence:
If, with a minimum of effort, the irregularities within a company could be discovered, the benefit of the rule
of indoor management would not apply.
The protection of the rule is also not available where the circumstances company does not make proper
inquiry.
Forgery:
The rule does not apply where a person relies upon a document that turns out to be forged since nothing can
validate the forgery.
A company can never be held bound for forgeries committed by its officers.


CHAPTER-3
PROSPECTUS AND ALLOTMENT OF SECURITIES
Issue securities by a public company [Sec. 23(1)]:

Â A public company may issue securities –
Â To public, by issuing a prospectus (hereinafter referred to as ‘public offer’) by complying with the
provisions of this Part I; or
Â By way of private placement by complying with the provision of Part II; or
Â By way of a right issue or a bonus issue in accordance with the provisions of this Act and in case of
a listed company or a company which intends to get its securities listed, also with the provisions
of SEBI Act, 1992 and the Rules and regulations made thereunder.
Issue of securities by a private company [Sec. 23(2)]:
Â A private company may issue securities –
¾ By way of private placement by complying with the provisions of Part II; or
¾ By way of a right issue or a bonus issue in accordance with the provisions of this Act.
Definition of ‘public offer’:
Â The term ‘public offer’ includes –
¾ Initial public offer of securities to the public by a company;
¾ Further public offer of securities to the public by a company;
¾ An offer for sale of securities to the public by an existing shareholder, through issue of a prospectus.
Definition of securities:
“Securities” include—
Â Shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like
nature in or of any incorporated company or other body corporate;
i. derivative;
ii. units or any other instruments issued by any collective investment scheme to the investors in
such schemes;
iii. security receipt as defined in clause (2g) under section 2 of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002.
iv. units or any other such instrument issued to the investors under any mutual fund scheme. Securities
however, shall not include any unit linked insurance policy or scripts or any such instrument or
unit, by whatever name called, which provides a combined benefit risk on the life of the persons
and investment by such persons and issued by an insurer referred to in clause (9) of section 2 of
the Insurance Act, 1938.
v. any certificate or instrument (by whatever name called), issued to an investor by any issuer being
a special purpose distinct entity which possesses any debt or receivable, including mortgage
debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt
or receivable, including mortgage debt, as the case may be;
Â Government securities
i. such other instruments as may be declared by the Central Government to be securities; and
ii. rights or interests in securities;
Right and bonus issue - Right and bonus issue of securities by a private company shall be governed by
the section 62 under the chapter IV (Share capital and debentures) of this Act, whereas such issue by a
public company shall be governed by section 23, and in the case of a listed company it shall also be
governed by SEBI Act and its Regulation.
¾ The provisions of Section 23 are tabulated below:
Public Company Private Company
Public Offer
(including IPO, FPOor OFS) Yes No
Private Placement Yes Yes
Rights issue / Bonus Issue Yes Yes
Compliance with SEBI Yes for listed No
rules and regulations company or company
proposed to be listed
MATTER TO BE STATED IN THE PROSPECTUS [SEC. 26(1)]:
Q-1 State the matters to be included in the prospectus of the company while issuing securities to the
public??
Ans.
Information to be disclosed in the prospectus: (general)

(a) Address of the registered office of the company.
44 Chapter 3 : Prospectus and Allotment of Securities

(b) Name and address of company secretary, CFO, auditors, legal advisers, bankers, trustees, and
underwriters.
(c) Dates of opening and closing of the issue
(d) Declaration about the issue of allotment letters and refunds within the prescribed time
(e) A statement by the Board of Directors about the separate bank account where all monies received out
of the issue are to be transferred
(f) Details about underwriting of the issue
(g) Consent of the directors, auditors, bankers, to the issue, experts’ opinion, if any
(h) The authority for the issue and details of the resolution passed therefor
(i) Procedure and time schedule for allotment and issue of securities
(j) Capital structure of the company
(k) Main objects of public offer and terms of the present issue
(l) Main objects and present business of the company and its location
(m) Particulars relating to –
¾ Management perception of risk factors specific to the project;
¾ Gestation period of the project;
¾ Extent of progress made in the project; and
¾ Any legislation or legal action pending or taken by a Government Department or a statutory
body during immediately preceding 5 years against the promoter of the company
(n) Minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash
(o) Details of directors including their appointments and remuneration
(p) Disclosures about sources of promoter’s contribution
(q) Such other reports, as may be prescribed.
Reports to be included in the prospectus: (financial)
(1) Reports by the auditors of the company with respect to its profits and losses and assets and liabilities
(2) Reports relating to profits and losses for each of the immediately preceding 5 financial years including
such reports of its subsidiaries
(3) Reports by the auditors upon the profits and losses for each of the immediately preceding 5 financial
years
(4) Reports by the auditors upon the assets and liabilities as on the last day of each of the immediately
preceding 5 financial years
(5) Reports about the business or transaction to which the proceeds of the securities are to be applied
directly or indirectly.
(6) Such other reports, as may be prescribed.
Declaration to be included in the prospectus: (statutory)
A declaration shall be included in the prospectus regarding compliance of the provisions of the
Companies Act, 2013 and a statement to the effect that nothing in the prospectus is contrary to the provisions
of the Companies Act, 2013, the Securities Contract (Regulation) Act, 1956 and the Securities Exchange Board
of India Act, 1992 and the Rules made thereunder.

LEGAL RULES TO PROSPECTUS [SEC. 26]:
Q-2 State the circumstances/cases when the rules to issue prospectus does not apply to the company?
Ans. Non-applicability of Sec. 26(1):
Â The provisions relating to disclosure of information, reports and declaration required to be included as
per Sec.26(1) shall not apply in the following cases:
(1) Where a prospectus or form of application relating to shares or debentures is issued to the existing
members or debenture-holders of a company, whether an applicant has a right to renounce the
shares or not in favour of any other person as per Sec. 62.
(2) Where a prospectus or form of application relating to shares or debentures is issued, if such
shares or debentures are in all respects uniform with shares or debentures previously issued and
for the time being dealt in or quoted on a recognized stock exchange.
Date of prospectus:
Â The date indicated in the prospectus shall be deemed to be the last date of its publication. Delivery of
copy of prospectus to the Registrar:
(a) No prospectus shall be issued by or on behalf of a company or in relation to an intended company
unless on or before the date of its publication, there has been delivered to the Registrar for
registration, a copy of the prospectus signed by every person who is named therein as a director
or proposed director of the company or by his duly authorised attorney.
(b) Every prospectus shall, on the face of it, state that a copy has been delivered to the Registrar for
registration.
(c) The Registrar shall not register a prospectus unless the requirements with respect to its
registration are complied with and the prospectus is accompanied with the consent in writing of
all the persons named in the prospectus.
Time limit for issue of prospectus:
Â No prospectus shall be valid if it is issued more than 90 days after the date on which a copy thereof is
delivered to the Registrar.
Expert’s statement in prospectus:
Â A prospectus shall not include a statement purporting to be made by an expert unless –
(1) The expert is a person who is not, and has not been, engaged or interested in the formation or
promotion or management of the company;
(2) The expert has given his written consent to the issue of the prospectus; and
(3) The expert has not withdrawn his consent before the delivery of a copy of the prospectus to the
Registrar for registration; and
(4) A statement is included in the prospectus that the expert has given his written consent and has
not withdrawn such consent.
Definition of ‘expert’:
Â ‘Expert’ includes an engineer, a valuer, a chartered accountant, a company secretary, a cost accountant
and any other person who has the power or authority to issue a certificate in pursuance of any law for
the time being in force.
SHELF PROSPECTUS AND INFORMATION MEMORANDUM [SEC.31]:
Q-3 When a company required to issue the shelf prospectus under the provision of the Companies Act
2013? Explain the law relating to issuing & drafting of such prospectus.

Ans.
Meaning:
‘Shelf prospectus’ means a prospectus in respect of which the securities or class of securities included
therein are issued for subscription in one or more issues over a certain period without the issue of a
further prospectus.
Applicability:
x The provision of Sec.31 shall apply to any class or classes of companies, as SEBI may provide by
regulations in this behalf.
Procedure for issue of securities under shelf prospectus:
1. Filing of shelf prospectus:
Â Any class or classes of companies, as SEBI may provide by regulations in this behalf, may file a
shelf prospectus with the Registrar at the stage of the first offer of securities specified in the shelf
prospectus.
2. Validity period of shelf prospectus:
(a) The shelf prospectus shall indicate a period not exceeding 1 year as the period of validity of such
prospectus.
(b) The period of 1 year shall commence from the date of opening of the first offer of securities under
the shelf prospectus.
(c) With respect to second or any subsequent offer of such securities issued during the period of
validity of shelf prospectus, no further prospectus shall be required.
3. Information memorandum:
i. Prior to the issue of a second or subsequent offer of securities under the shelf prospectus, the
company shall be required to file an information memorandum with the Registrar.
ii. The information memorandum shall be filed with the Registrar within such time as may be
prescribed.
iii. The information memorandum shall contain all material facts relating to –
x New charges created;
x Changes in the financial position of the company as have occurred between the first offer of
securities or the previous offer of securities and the succeeding offer of securities; and
x Such other changes as may be prescribed.
4. Information of variations and opportunity to withdraw applications:
Â Where a company or any other person has received applications for the allotment of securities
along with advance payments of subscription before the making of any change, the company or
other person shall intimate the changes to withdraw their application, the company or other
person shall intimate the changes to such applicants and if they express a desire to withdraw their
application, the company or other person shall refund all the monies received as subscription
within 15 days thereof.
Constructing the term ‘prospectus’:
Â Where an information memorandum is filed, every time an offer of securities is made, the
information memorandum together with the shelf prospectus shall be deemed to be a prospectus.

RED HERRING PROSPECTUS [SEC. 32]:
Q-4 What are provision relating to Information memorandum as contained in the companies act 2013??
Ans.
Definition:
Â The expression ‘red herring prospectus’ means a prospectus which does not include complete particulars
of the quantum or price of the securities included therein.
Procedure for issue of securities under red herring prospectus:
i. A company proposing to make an offer of securities may issue a red herring prospectus prior to
the issue of a prospectus.
ii. A company proposing to issue a red herring prospectus shall file it with the Registrar at least 3
days prior to the opening of the subscription list and the offer.
iii. Upon the closing of the offer of securities, the prospectus shall be filed with the Registrar and
SEBI.
iv. Any variation between the red herring prospectus and a prospectus shall be highlighted as
variations in the prospectus.
v. The prospectus shall state –
x The total capital raised, whether by way of debt or share capital;
x The closing price of the securities; and
x Any other details as were not included in the red herring prospectus.
Construing the term ‘prospectus’:
Â A red herring prospectus shall carry the same obligations as are applicable to a prospectus.
GOLDEN RULE FOR FRAMING THE PROSPECTUS:
Q-5 Navkar limited issued the prospectus offering securities of the company to the public stating that
company has a stable financial position and is paying the divided @ 18% over last 3 years but the fact
was company was running in losses and was paying dividend out of the accumulated profits. Mr. Hitesh
by the prospectus brought 1000 shares of the company. Discovering the misstatement in the prospectus
now he wants to rescind the contract and claim damages from company.
Decide in light of companies act whether Mr. Hitesh would be able to do so??
OR
Mr. X purchased 1500 shares of the company Y ltd from the open market. Y ltd issue shares to the public
by giving false information to the public. Mr. x received the copy of prospectus and realized the
information is untrue and shares are allotted by wrongful means hence he wants to claim damages for
the loss suffered by him. Decide in the light of companies act whether the claim made by Mr. X is viable
or not?
Ans.
Meaning of ‘untrue statement’ and ‘prospectus containing untrue statement’:
Â A statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in
the form and context in which it is included.
Â Similarly, if the omission from a prospectus of any matter is calculated to mislead the investors, the
prospectus is deemed to be a prospectus in which an untrue statement is included.
Golden Rule for framing the prospectus:

(a) The prospectus must present the whole picture of the company.
(b) The prospectus must disclose all material facts truly, honestly and accurately.
(c) All facts which are likely to influence the decision regarding applying for shares must be disclosed.
(d) The prospectus should not contain any untrue or misleading statement.
CRIMINAL LIABILITY FOR MIS-STATEMENT IN PROSPECTUS [SEC.34]:
Nature of criminal liability :
Â If – a prospectus includes any statement, which is misleading; or
Omission of any matter in the prospectus is misleading
Â Then – every person who has authorized the issue of such prospectus shall be liable u/s 447.
Defences:
The person proves that –
(a) The statement or omission was immaterial.
(b) He had reasonable ground to believe that the statement was true; and
(c) He continued to believe upto the time of issue of the prospectus, that the statement was true or the
omission was necessary.
REMEDIES AGAINST THE PROMOTERS, DIRECTORS, AND EXPERTS [SEC. 35]:
Q-6 State the liability of the expert in case of misrepresentation in the prospectus. when an expert will not
be liable for the misrepresentation in the prospectus?
Ans.
(CIVIL LIABILTY FOR MISSTATEMENT IN PROSPECTUS)
When is Sec. 35 attracted? :
Â If -
- A prospectus includes any statement, which is misleading; or
- Omission of any matter in the prospectus is misleading; and
- Any person subscribes for securities acting on any such statement or omission; and
- Such person sustains any loss as a consequence thereof,
Â Then –
- Sec. 35 is attracted.
Persons liable for misstatement:
(a) the company and
(b) every person who—
i. is a director of the company at the time of the issue of the prospectus;
ii. has authorised himself to be named and is named in the prospectus as a director of the
company,
iii. has agreed to become such director, either immediately or after an interval of time;
iv. is a promoter of the company;
v. has authorised the issue of the prospectus; and
vi. is an expert

Punishment:
Every person liable for mis-statement shall be liable for –
a) payment of compensation to every person who has sustained any loss or damage;
b) Punishment for fraudulently inducing any person to invest money u/s 36.
Defences:
No person shall be liable u/s 35, if he proves that –
Â Having consented to become a director of the company, he withdraw his consent before the issue of
the prospectus, and that it was issued without his authority or consent.
Â The prospectus was issued without his knowledge or consent, and that on becoming aware of its issue,
he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.
Liability in case of fraud:
Â Where it is proved that a prospectus has been issued with intent to defraud the applicants or any other
person or for any fraudulent purpose, every person referred to in Sec. 35 shall be personally responsible,
without any limitation of liability, for all or any of the losses or damages that may have been incurred
by any person who subscribed to the securities on the basis of such prospectus.
PUNISHMENT FOR FRAUDULENTLY INDUCING PERSONS TO INVEST MONEY [SEC. 36]:
x If a person, either knowingly or recklessly makes any statement, promise or forecast which is
false, deceptive, or misleading, or deliberately conceals any material facts, so as to induce another
person to enter into, or to offer to enter into, -
a) Any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting
securities; or
b) Any agreement, the purpose or the pretended purpose of which is to secure a profit to the parties
from the yield of securities or by reference to fluctuations in the value of securities; or
c) Any agreement for, or with a view to obtaining credit facilities from any bank or financial institution.
Punishment:
- Such person shall be liable for action u/s 447.
ACTION BY AFFECTED PERSONS [SEC.37]:
x A suit may be filed or any other action may be taken u/s 34 or 35 or 36 by any person or group of persons
or any association of persons affected by any misleading statement or the omission of any matter in
the prospectus.
x Class Actions – Gift of Companies Act, 2013
Class action suit is for a group of people filing a suit against a defendant who has caused common
harm to the entire group or class.
This is not like a common litigation method where one defendant files a case against another
defendant while both the parties are available in court.
In the case of class action suit, the class or the group of people filing the case need not be present
in the court and can be represented by one petitioner.
The benefit of these type of suits is that if several people have been injured by one defendant,
each one of the injured people need not file a case separately but all of the people can file one
single case together against the defendant.

The need for these types of suits was first felt in the context of securities market during the time
of Satyam Scam, where a large group of people were cheated regarding their hard earned money
invested in Stock Market.
During that time, it was felt that it was not at all viable regarding cost effectiveness for a small
stakeholder to file a case independently against the defendant. Millions of cheated investors
during that time formed a large group and filed the case against the company, but since there was
no available legal remedy or law which can actually support this type of litigation of a group filing
charges, it became tough for those investors to take a recourse or gain advantage in the Indian
Judicial System by this method.
Class action suits in India were so far filed under the guise of public interest litigations. Courts
were free to dismiss these. These shareholders ran pillar to post right from the National Consumer
Disputes Redressal Commission up to the extent of Supreme Court and had their claims rejected.
PUNISHMENT FOR FRAUD [SEC.447]:

- Where any person is found guilty of fraud.
PUNISHMENT U/S 447:

Fraud involves public interest Any other case
Min. imprisonment 3 years 6 months
Max imprisonment 10 years
Min fine Amount involved in the fraud
Max. fine 3 times the amount involved in the fraud
Other liabilities to remain unaffected:
- The person liable u/s 447 shall continue to be liable for any other liability under this Act or any other
law for the time being in force (including repayment of any debt).
DEFINITION:
Â Fraud:
“Fraud” in relation to affairs of a company or any body corporate, includes-
• any act,
• omission,
• concealment of any fact, or
• abuse of position
committed by any person, or any other person with the connivance in any manner, with intent to deceive,
to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or
any other person, whether or not there is any wrongful gain or wrongful loss;
• Wrongful gain:
“Wrongful gain” means the gain by unlawful means of property to which the person gaining is not
legally entitled;

• Wrongful loss:
“Wrongful loss” means the loss by unlawful means of property to which the person losing is legally
entitled.
DEEMED PROSPECTUS (OFFER FOR SALE) [SEC. 25]:
Q-7 Explain the concept of the deemed prospectus under the companies act 2013?
Ans.
Meaning of deemed prospectus:
• Where a company allots or agrees to allot any securities
• With a view to all or any of those securities being offered for sale to the public
• Any document by which the offer for sale to the public is made
• Shall be deemed to be a prospectus issued by the company.
Presumption as to deemed prospectus:
Unless contrary proved, it shall be presumed that allotment or agreement to allot the securities was
made with a view to the securities being offered for sale to the public if it is shown –
a) That the offer for sale to the public was made within 6 months of allotment or agreement to allot;
or
b) That the whole consideration had not been received by the company when offer to the public was
made.
Effects of deemed prospectus:
• All enactments and Rules of law as to the contents of prospectus shall apply to deemed prospectus.
• All enactments and Rules of law as to liability in respect of mis-statement in prospectus shall apply to
deemed prospectus.
• It shall be deemed that the persons by whom the offer to the public is made were named in the
prospectus as the directors of the company.
Contents of deemed prospectus:
Contents specified u/s 26.
Net consideration received by the company in respect of the securities to which the offer relates
Time and place for inspection of contract whereunder the securities have been allotted or to be
allotted.
Signing of deemed prospectus:
• The document by which the offer for sale to the public is made (which is deemed to a prospectus
issued by the company) must be signed –
• In case the person making the offer for sale to the public is a company, by 2 directors of the company;
• In case the company making the offer for sale to the public is a firm, by not less than one-half of the
partners in the firm.
ALLOTMENT OF SECURITIES BY A COMPANY [SEC. 39]:

Q-8 State briefly the provision of the minimum subscription & consequences of non-receipt of the minimum
subscription under the Companies Act 2013?

Ans.
Minimum amount application money have been application money shall not be
subscribed, and paid and received by the company less than 5% or such other
percentage or amount as
specified by SEBI
p
Minimum amount not subscribed and application money not received
within 30 days from date of issue of prospectus, or Such other period as specified by SEBI
p
amount received shall be returned within 15 days from the closure of issue
p
Where company makes an allotment of securitie
p
shall file a return of allotment with the registrar
A. Provisions contained in the Act:
1. Conditions w.r.t. minimum subscription:
Â Where a company makes an offer to the public for subscription of its securities, no allotment of any
securities shall be made unless the following 2 conditions are satisfied:
a) The amount stated in the prospectus as the minimum subscription is subscribed.
b) The sum payable on application in respect of minimum subscription is received by the company
by cheque or other instrument.
2. Amount of application money:
Â The application money on every security shall not be less than –
- 5% of the nominal amount of the security; or
- Such other percentage or amount, as may be prescribed by SEBI by making regulations in this
behalf.
3. Time limit for minimum subscription:
i. The amount stated in the prospectus as the minimum subscription must be subscription must be
subscribed and the sum payable on application in respect of minimum subscription must be
received by the company within –
- 30 days of issue of prospectus; or
- Such other period as may be specified by SEBI.
ii. Otherwise, all moneys received by the company shall be returned within such time and manner
as may be prescribed.
4. Return of allotment:
i. Whenever a company makes any allotment of securities, it shall file with the Registrar a return of
allotment.
ii. The return of allotment shall be filed in such manner as may be prescribed.
5. Consequences of default:
¾ The company and every officer of the company who is in default shall be liable to a penalty, for
each default, of Rs.1,000 for each day during which such default continues or Rs.1lakh, whichever
is less.
B. Provisions contained in Rule 11 of the Companies (Prospectus and Allotment of Securities) Rules, 2014:
(a) Time period for repayment and consequences of non-payment:
Â If the amount stated in the prospectus as the minimum subscription is not subscribed or the sum
payable on application is not received within 30 days of issue of prospectus, then the application
money shall be repaid within a period of 15 days from the closure of the issue.
Â If any such money is not so repaid within such period, the directors of the company who are
officers in default shall jointly and severally be liable to repay that money along with interest at
the rate of 15% per annum.
b) Manner of repayment:
Â The application money to be refunded shall be credited only to the bank account from which the
subscription was remitted.
SECURITIES TO BE DEALT WITH IN STOCK EXCHANGE [SEC.40]:
Application for permission for listing:
Every company making public offer shall, before making such offer, make an application to one or more
recognised stock exchange or exchanges and obtain permission for the securities to be dealt with in
such stock exchange or exchanges.
Disclosure in prospectus:
Â The prospectus shall state the name or names of the stock exchange in which the securities shall be
dealt with.
Application moneys to be kept in separate bank account:
(a) All monies received on application from the public for subscription to the securities shall be kept in a
separate bank account in a scheduled bank.
(b) All such monies shall be utilized only when the securities have been permitted to be dealt with in the
stock exchanges specified in the prospectus and the securities have been allotted.
(c) If for any reason the company is unable to allot the securities, the company shall repay all such monies
to the applicants within such time as may be specified by SEBI.
No waiver:
Â Any condition purporting to require or bind any applicant for securities to waive compliance with any
of the requirements of this section shall be void.
Punishment:
Any contravention of the provisions of this section is punishable as follows:
I. Fine on the company:
Minimum: Rs.5lakh
Maximum: Rs.50lakh
II. Every officer who is in default:
Imprisonment upto 1 year; or
Fine: Minimum: Rs.50,000
Maximum: Rs.1lakh; or
Both.
UNDERWRITING COMMISSION [SEC. 40]:
Q-9 BOD of the company decides to pay underwriting commission to underwriters @ 5% whereas the
articles restricts the underwriting commission to the extent of 3%. Decide in the light of companies act
whether BOD can give higher commission than what is allowed in the article of company?
Ans.
A. Provisions contained in Sec.40 of the Companies Act, 2013.
Meaning of underwriter:
Â Underwriter means an intermediary who undertakes to subscribe to the securities offered by the
company in case these are not subscribed by the public, in case of an underwritten issue.
Conditions for payment:
Â A company may pay commission to any person in connection with the subscription to its securities.
Conditions prescribed under the Rules for payment of underwriting commission:
(a) the payment of such commission shall be authorized in the company’s articles of association;
(b) the commission may be paid out of proceeds of the issue or the profit of the company or both;
(c) Rate of commission : Following is the rate of commission to be paid to the person:
in case of shares in case of debentures
Â shall not exceed 5 % of the price at which Â shall not exceed 2.5 % of the priceat which
the shares are issued or the debentures are issued, or
Â a rate authorised by the articles. Â as specified in the company’s artickles.
whichever is less Â whichever is less
(d) Disclosure of the particulars : the prospectus of the company shall disclose the following particulars -
(i) the name of the underwriters;
(ii) the rate and amount of the commission payable to the underwriter; and
(iii) The number of securities which is to be underwritten or subscribed by the underwriter absolutely
or conditionally.
(e) No commission to be paid : there shall not be paid commission to any underwriter on securities
which are not offered to the public for subscription;
(f) Copy of payment of commission to be delivered to registrar: a copy of the contract for the payment of
commission is delivered to the Registrar at the time of delivery of the prospectus for registration.
For section 42 of the principal Act, the following section shall be substituted, namely:—’42.
(1) A company may, subject to the provision s of this section, make a private placement of securities.
(2) A private placement shall be made only to a select group of persons who have been identified by the
Board (herein referred to as “identified persons”), whose number shall not exceed fifty or such higher
number as may be prescribed [excluding the qualified institutional buyers and employees of the
company being offered securities under a scheme of employees stock option in terms of provisions of
clause (b) of sub-section (1) of section 62], in a financial year subject to such conditions as may be
prescribed.
(3) A company making private placement shall issue private placement offer and application in such form
and manner as may be prescribed to identified persons, whose names and addresses are recorded by

the company in such manner as may be prescribed : Provided that the private placement offer and
application shall not carry any right of renunciation.
Explanation I.—”private placement” means any offer or invitation to subscribe or issue of securities to
a select group of persons by a company (other than by way of public offer) through private placement
offer-cum-application, which satisfies the conditions specified in this section.
Explanation II.—”qualified institutional buyer” means the qualified institutional buyer as defined in
the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations,
2009, as amended from time to time, made under the Securities and Exchange Board of India Act,
1992.Explanation III.—If a company, listed or unlisted, makes an offer to allot or invites subscription, or
allots, or enters into an agreement to allot, securities to more than the prescribed number of persons,
whether the payment for the securities has been received or not or whether the company intends to
list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed
to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter.
(4) Every identified person willing to subscribe to the private placement issue shall apply in the private
placement and application issued to such person along with subscription money paid either by cheque
or demand draft or other banking channel and not by cash: Provided that a company shall not utilise
monies raised through private placement unless allotment is made and the return of allotment is filed
with the Registrar in accordance with sub-section (8).
(5) No fresh offer or invitation under this section shall be made unless the allotments with respect to any
offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or
abandoned by the company: Provided that, subject to the maximum number of identified persons
under sub-section (2), acompany may, at any time, make more than one issue of securities to such class
of identified persons as may be prescribed.
(6) A company making an offer or invitation under this section shall allot its securities within sixty days
from the date of receipt of the application money for such securities and if the company is not able to
allot the securities within that period, it shall repay the application money to the subscribers within
fifteen days from the expiry of sixty days and if the company fails to repay the application money
within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per
cent. per annum from the expiry of the sixtieth day: Provided that monies received on application
under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised
for any purpose other than—(a) for adjustment against allotment of securities; or(b) for the repayment
of monies where the company is unable to allot securities.
(7) No company issuing securities under this section shall release any public advertisements or utilise any
media, marketing or distribution channels or agents to inform the public at large about such an issue.
(8) A company making any allotment of securities under this section, shall file with the Registrar a return
of allotment within fifteen days from the date of the allotment in such manner as may be prescribed,
including a complete list of all allottees, with their full names, addresses, number of securities allotted
and such other relevant information as may be prescribed.
(9) If a company defaults in filing the return of allotment within the period prescribed under sub-section
(8), the company, its promoters and directors shall be liable to a penalty for each default of one
thousand rupees for each day during which such default continues but not exceeding twenty-five lakh
rupees.
(10) Subject to sub-section (11), if a company makes an offer or accepts monies in contravention of this
section, the company, its promoters and directors shall be liable for a penalty which may extend to the
amount raised through the private placement or two crore rupees, whichever is lower, and the company
shall also refund all monies with interest as specified in sub-section (6) to subscribers within a period
of thirty days of the order imposing the penalty.
(11) Notwithstanding anything contained in sub-section (9) and sub-section (10), any private placement
issue not made in compliance of the provisions of sub-section (2) shall be deemed to be a public offer
and all the provisions of this Act and the Securities Contracts (Regulation) Act, 1956and the Securities
and Exchange Board of India Act, 1992 shall be applicable.’.
IRREGULAR ALLOTMENT:
Q-11 When is the allotment of shares is treated as irregular? Also explains the effect of the same.
Ans.
Reason for irregular allotment Consequences
1. Public offer of securities by a company No punishment prescribed u/s 23.
without issuing a prospectus in The company and every officer of the company
contravention of Sec.23. who is in default shall be punishable with fine upto
Rs.10,000, and where the contravention is continuing
one, with a further fine upto Rs. 1000 for every day
during which the contravention continues. [Sec.450].
2. The prospectus issued by the company Company:
is misleading or does not contain the Minimum fine:Rs.50,000;
matters required to be included therein Maximum fine:Rs.3,00,000
in contravention of Sec.26.
3. The prospectus is issued to the public Every person who is knowingly a party to the issue
without first delivering to the Registrar of such prospectus:
a copy of the prospectus in contravention -Maximum imprisonment:3years; or
of Sec.26. -Minimum fine: Rs.50,000;
4. In case of a public offer of Maximum fine: Rs.3,00,000; or
securities, minimum subscription is not -both
received, but allotment of securities is made Company and every officer who is in default shall be
by the company in contravention of Sec.39. liable to a penalty, for each default, of Rs.1,000 for
5. Application money payable on securities is each day during which such default continues or
less than 5% of the nominal value of the Rs.1lakh,
security or such other percentage or whichever is less.
amount, as may be specified by SEBI in
contravention of Sec.39.
6. Return of allotment is not filed with the
Registrar after making allotment of securities
in contravention of Sec.39.
7. Public offer of securities is made by the Company:
company without first obtaining the Minimum fine:Rs.500,000;
permission for listing of securities from Maximum fine:Rs.50,00,000
any stock exchange in contravention of Sec.40. Every officer of the company who is in default:

8. Moneys received on application are not -Maximum imprisonment:1years; or
kept in a separate bank account in a schedule -Minimum fine: Rs.50,000;
bank in contravention of Sec.40. Maximum fine: Rs.3,00,000; or
-both.
VARIATION IN TERMS OF CONTRAT OR OBJECTS IN PROSPECTUS [SEC.27]:

(a) Legal requirements for variation in terms of contract or objects:
A company shall not –
I. Vary the terms of any contract referred to in the prospectus; or
II. Vary the objects for which the prospectus was issued
Unless –
III. SR is passed in GM; and
IV. The prescribed details of the notice of GM (indicating clearly the justification for such variation) are
published in 2 newspapers (one in English language and one in vernacular language) circulating in the
city in which the registered office of the company is stuated.
(b) Restriction on use of money:
Â A company which has raised any money through the issue of prospectus, shall not use such money
for buying, trading, or otherwise dealing in the equity shares of any other listed company.
(c) Exit offer to the dissenting shareholders:
Â The dissenting shareholders (viz. the shareholders who did not agree to the variation at the time
of passing SR) shall be given an exit offer by the promoter or controlling shareholders.
Â The exit price and the manner and conditions of the exit offer shall be such as may be specified.

CHAPTER-4
SHARE CAPITAL AND DEBENTURES
KINDS/TYPES OF SHARE CAPITAL: [SEC. 43]

Q-1 Explain in brief ‘Equity Share Capital’ and ‘Preference Share Capital’.
Ans.
A. Provisions of the Act:
i. Kinds of share capital:
with voting rights

Equity share
capital
With differential
rights as to
dividend, voting or
Kinds of share otherwise
capital
preference carries preferential right w.r.t

payment of dividend and
share capital repayment of capital at time
of winding up
ii. Preference share capital:

Â Share capital carrying a preferential right with respect to dividend and repayment of capital is termed
as preference share capital.
(a) Preferential right as to payment of dividend:
- In case where a dividend is declared by the company , the preference shareholders shall have a
preferential right to payment of dividend.
- Such preferential right as to payment of dividend may be –
I. With respect to a fixed rate; or
II. With respect to a fixed amount; or
III. Free of income-tax; or
IV. Subject to income-tax.
(b) Preferential right as to repayment of capital:
- In the case of winding up of the company or of repayment of capital, the preference shareholders
shall have a preferential right to the repayment of the amount of share capital paid up.
Share capital shall be deemed to be preference share capital whether or not it is entitled to either
or both of the following rights:
(a) Participation in surplus profits:
- Right to participate with the equity share capital, in the surplus profits in the case of payment of
dividend.
(b) Participation in surplus assets:
- Rights to participate with the equity share capital, in any surplus which may remain after the
entire share capital is repaid in the case of winding up.
iii. Equity share capital:
Share capital which is not preference share capital is termed as equity share capital.
iv. Applicability:
Sec. 43 applies to all companies, whether public or private.
1. Legal requirements for issue of shares with differential rights:
(a) Issue of shares with differential rights must be authorised by the articles.
(b) Issue of shares with differential rights must be authorised by passing ‘OR’.
‘OR’ shall be passed by post ballot, if the provisions of Sec. 110 are applicable to the
company.
(c) The shares with differential rights shall not exceed 26% of the total post issued paid up equity
share capital (including equity share with differential rights issued at any point of time).
(d) The company must have consistent track record of distributable profits for the last 3 years.
(e) The company has not defaulted in filing financial statements and annual returns for immediately
preceding 3 years.
(f) The company has no subsisting with respect to -
I. Payment of declared dividend; or
II. Repayment of matured deposits or interest on deposits; or
III. Redemption of debentures or interest on debentures; or
IV. Redemption of preference shares.
(g) The company has not defaulted in –
I. Repayment of any term loan from a public financial institution or State level financial
institution or scheduled Bank or interest payable thereon; or
II. Dues with respect to statutory payments relating to its employees; or
III. Crediting the amount in Investor Education and Protection Fund.
¾ However, a company may issue shares with differential rights upon expiry of 5 years from
the end of FY in which such default was made good.
(h) He company not been penalized by Court or Tribunal during the last 3 years, of any offence under
–
I. The Reserve Bank of India, 1934; or
II. The Securities and Exchange Board of India Act, 1992; or
III. The Securities Contract Regulation Act, 1956; or
IV. The Foreign Exchange Management Act, 1999; or
V. Any other special Act, under which such company is being regulated by any sectoral regulator.
62 Chapter 4 : Share Capital and Debentures

2. No conversion : The company shall not convert its existing share capital with voting rights into
equity share capital carrying differential voting rights and vice-versa.
3. Nature of rights : The holders of the equity shares with differential rights shall enjoy all other
rights such as bonus shares, rights shares, etc., which the holders of equity shares are entitled to,
subject to the differential rights with which such shares have been issued.
4. Disclosures in register of members : The Register of Members maintained u/s 88 shall contain all
the relevant particulars of the shares with differential rights issued along with details of the
shareholders.
5. Disclosures in explanatory statement : The explanatory statement to be annexed to the notice of
the general meeting in pursuance of section 102 or of a postal ballot in pursuance of section 110
shall contain the prescribed particulars.
6. Disclosures in register of members : The Board of Directors shall disclose in the Board’s Report for
the financial year in which the issue of equity shares with differential rights was completed, the
prescribed details.
7. Shares issued under the Companies Act, 1956. : The equity shares with differential rights issued
by any company as per the provisions contained in the Companies Act, 1956 and the Rules made
thereunder, shall also be regulated as per the provisions contained in Sec. 43 of the Companies
Act, 2013 and Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014.
Provisions contained in Notification No. G.S.R. 464(E) dated 5th June, 2015:0
¾ The provision of Sec. 43 shall not apply to a private company whose memorandum or articles so provide.
SHARE CERTIFICATE [SEC. 46 READ WITH SEC. 56]:
Q-2 What is the law and procedure for issuing a duplicate share certificate under the provisions of the
Companies Act, 2013 in case the original share certificate is lost or destroyed?
Ans.
1. Applicability:
Issue of share certificate is mandatory for every company having share capital, whether public or
private.
2. Meaning
A share certificate is a prima facie evidence of the fact that the person named therein is the owner
of such number of shares as are specified therein.
3. Legal requirement:
(a) The share certificate shall be issued under the common seal, if any, of the company which shall be
affixed in the presence of, and signed by –
2 directors duly authorized by the Board or the committee of the Board, if so authorised by
the Board; and
The secretary or any person authorised by the Board.
(b) In case, a company does not have a common seal, the share certificate shall be signed by 2 director
and the Company Secretary, wherever the company has appointed a Company Secretary.
(c) If the composition of the Board permits, at least one of the aforesaid 2 directors shall be a person
other than a managing director or whole-time director.
4. Rules by CG:
CG may, by Rules, prescribe –
I. Manner of issue of share certificate;
II. Manner of issue of duplicate share certificate.
III. Form of share certificate
IV. Particulars to be entered in the Register of Members

V. Other matters
5. Duplicate share certificate:
A duplicate share certificate can be issued if –
a. It is proved that share certificate has been lost or destroyed; or
b. It is defaced, mutilated or torn and is surrendered to the company.
In case of unlisted companies, the duplicate share certificate shall be issued within 3 months of
submission of complete documents with the company.
In case of listed companies the duplicate share certificate shall be issued within 45 days of
submission of complete documents with the company.
6. Shares held in dematerialized form:
Where the shares are held in dematerialized form, the records of the depository (i.e. the register
of beneficial owners) shall be the prima facie evidence of the title of the person named therein
and the number of shares specified therein.
7. Time limits for delivery of certificate (Sec. 56):
In case of allotment of secretaries to the
subscribers to memorandum Within 2 months of incorporation
In case of any allotment of shares Within 2 months of allotment
In case of any allotment of debentures Within 6 months of allotment
In case of transfer or transmission ofsecurities Within 1 month of receipt of transfer deedintimation
of transmission.
8. Estoppel created by a share certificate:
Estoppel as to title:
The company cannot deny the validity of title of a bonafide person whose name is specified in the
share certificate.
Estoppel as to amount paid up:
The company cannot deny against a bonafide person that the amount specified as being paid up
on the shares, has not actually been paid up.
VOTING RIGHTS OF SHAREHOLDERS [SEC.47] :
Q-3 Examine the different aspects of the voting rights of a member.] Voting rights of equity shareholders.
Ans.
Â Every equity shareholder shall have a right to vote on every resolution placed before the company.
Â On a poll, the voting right of every equity shareholder shall be in proportion to his share in the
paid up equity share capital of company.
Voting rights of preference shareholders:
Q-4 What are the rights of preference shareholders if dividends remained unpaid? Would your answer be
different if preference shares are non-cumulative?
ABC Ltd. has not given dividend to its preference shareholders. In this regard state the rights of
preference shareholders and non-cumulative Preference Shareholders on.
Ans.
- Every preference shareholder shall have a right to vote –
I. On such resolutions which directly affect his rights;
II. On any resolution for the winding up of the company; and
III. On any resolution for the repayment or reduction of share capital.
- On a poll, the voting right of every preference shareholder shall be in proportion to his share in
the paid up preference share capital of the company.
- If the dividend on any class of preference shares is not paid for 2 years or more, then, every
preference shareholder of such class shall have a right to vote on every resolution placed before
the company.
Proportion of voting rights:
- If the equity shareholders as well as preference shareholders have a right to vote on any resolution,
then, the voting rights of equity shareholders and preference shareholders shall be in the same
proportion which the paid up equity share capital bears to the paid up preference share capital.
Applicability:
- Sec. 47 applies to all companies, whether public or private.
- However, the provisions of Sec. 47 shall not apply to a private company whose memorandum or articles
so provide.
[Notification No. G.S.R. 464(E) dated 5th June, 2015]
VARIATIN OF SHAREHOLDERS’ RIGHTS [SEC.48]:
I. Authorization to make variation:
Â The rights attached to the shares of any class may be varied –
a. If power to make the variation is contained in the memorandum or articles;
b. If such variation is not prohibited by the terms of issue of such shares, in case no such power is
contained in the memorandum or articles.
II. Consent required for variation:
Â The rights attached to the shares of any class may be varied –
a. With the consent in writing of the holders of not less than 3/4th of the issued shares of that class;
or
b. By means of a special resolution passed at a separate meeting of the shareholders of the issued
shares of that class.
III. Consent of shareholders of other class also required:
Â If variation of rights of one class of shares affects the rights of any other class of shares, then the
consent in writing of the holders of not less than 3/4th of the issued shares of such other class
shall also be required.
Â The provisions of this section shall apply to such variation.
IV. Rights of dissenting shareholders to make an application to the Tribunal:
a. Who can make an application to the Tribunal? :
Â Holder(s) of such class of shares who –
Â Hold not less than 10% shares of such class; and
Â Had not consented to such variation or had not voted in favour of the special resolution for such
variation.
b. Time limit for making application:
Â The application shall be valid only if it is made within 21 days after the date when the consent was
given or the special resolution was passed.

c. Effect of application:
Â Variation shall not have any effect unless confirmed by the Tribunal.
d. Orders of Tribunal:
Â The Tribunal may cancel or confirm the variation.
Â The order of the Tribunal shall be binding on the shareholders.
Â The company shall, within 30 days, file the order of the Tribunal with the Registrar.
CALLS ON SHARES OF SAME CLASS TO BE MADE ON UNIFORM BASIS [SEC.49]:
Uniform call:
- A call be made uniformly on all the shares falling under the same class.
Meaning of ‘same class’:
- The shares on which different amounts have been paid up shall not be deemed to be the shares falling
under the same class.
CALLS IN ADVANCE [SEC.50]:
Q-5 X Ltd is a company who issues share to the public at a face value of Rs.10 each. The co issued share and
collected Rs.5/ share from the public and remaining will be collected later on. There is no condition
given in the article regarding collection of advance call. Mr. Y purchased 500 shares and paid Rs.10 to
the company. Now Mr. Y demands for interest on advance call paid by him @ 18%. Decide in the light of
provision of companies act whether demand raised by Y is viable or not??]
Or
[“Moonstar Ltd” is authorised by its articles to accept the whole or any part of the amount of remaining
unpaid calls from any member although no part of that amount has been called up. ‘A’, a shareholder of
the Moonstar Ltd., deposits in advance the remaining amount due on his shares without any calls made
by “Moonstar Ltd.”.
Referring to the provisions of the Companies Act, 2013, state the rights and liabilities of Mr. A, which
will arise on the payment of calls made in advance.
Ans.
(1) Meaning of ‘calls in advance’:
A member may, on his own, pay to the company whole or a part of the amount remaining unpaid
on the shares held by him, even if no part of that amount has been called up. Such amount is
referred to as ‘calls in advance’.
(2) Power to accept calls in advance:
- Specific power is required in the articles to accept the calls in advance.
(3) Interest on ‘calls in advance’:
- The company is liable to pay interest on calls paid in advance.
- The interest is payable whether or not the company has any profits, i.e. the interest may be paid
out of capital.
- The interest shall be paid at such rate as may be specified in the articles.
- The rate of interest on calls in advance shall be such as may be agreed between the board and the
member paying calls in advance, but not exceeding 12% per annum. [Regulation 18 of Table F]
4) Voting rights:
- A member is not entitled to any voting rights in respect of ‘calls in advance’ until that amount has
been called up.

(5) Other rights:
- The amount paid as calls in advance is non-refundable.
- The liability of the member to pay the future calls is extinguished to the extent of calls paid in
advance by him.
- In the event of winding up of the company, the amount paid as calls in advance along with interest
shall be repaid before repayment of capital to the members, but after all the creditors have been
paid off.
PAYMENT OF DIVIDEND IN PROPORTION TO AMOUNT PAID UP [SEC. 51]:
- Generally, dividend is paid as a proportion of nominal value of a share.
- However, the articles of company may provide the dividend shall be pay in proportion to the amount
paid up on each share.
ISSUE SHARES AT PREMIUN [SEC.52]:
Q-6 Whether a company can issue shares at premium? State the purposes for which the Share Premium
account can be used under the provisions of the Companies Act, 2013.
Or
Explain the provisions of the Companies Act, 2013, relating to the utilization, by a company, of the
amount standing to the credit of Securities Premium Account.
Ans.
Â There is no restriction contained in the Companies Act, 2013 on the sale of shares at a premium, i.e, at
a price higher than their nominal value.
Â However, SEBI guidelines have to be observed as they indicate when an issue has to be at a premium.
Â According to the guidelines issued by SEBI a company may offer shares to the public ata premium
under the following circumstances:
(1) The company or its promoter company has a minimum of three year consistent record of profitable
workings;
(2) The promoters take up at least 50% of the shares offered in the issue;
(3) The entire issue is on the same terms including the premium charged;
(4) The justification for the proposed premium is fully justified and explained in the prospectus.
The premium on any shares issued may either be received in cash or in kind. No conditions
for issue of securities at premium:
No provision is required in the articles to issue the shares at premium.
The Companies Act, 2013 does not prescribe any restriction or condition regarding issue of
shares at premium.
Where a company issues any share at a premium, the amount of premium received shall be
transferred to the ‘Securities Premium Account’.
Utilization of premium:
Â The ‘Securities Premium Account’ can be used for the following purposes:
(a) Issuing fully paid bonus shares to the members of the company.
(b) Writing off the preliminary expenses of the company.
(c) Writing off the expenses of, or commission paid or discount allowed on, issue of shares or
debentures of the company.
(d) Providing for the premium payable on the redemption of any redeemable preference shares or
debentures of the company.
(e) For buy-back of shares u/s 68.

Utilization of premium in case of certain companies:
Â In case of such class of companies, as may be prescribed and whose financial statement comply with
the accounting standard prescribed for such class of companies u/s 133, the ‘Securities Premium
Account’ can be used for the following purposes:
(a) Issuing fully paid bonus shares to the member of the company.
(b) Writing off the expenses of, or commission paid, or discount allowed on issue of equity shares of
the company.
(c) For buy back of shares u/s 68.
Utilization of premium for other purposes:
Â Where ‘Securities Premium Account’ is used for any purpose other than the purposes permitted under
the Act, the, the provisions of the Act as are applicable to reduction of share capital shall apply, as if the
‘Securities Premium Account’ were the paid up share capital of the company.
Issue of securities for cash or otherwise, is immaterial:
Â The provisions of the Act w.r.t. transfer of premium received on issue of securities to ‘Securities Premium
Account’ and utilization of ‘Securities Premium Account’ shall apply irrespective of the fact that the
securities have been issued for cash or for consideration other than cash.
PROHIBITION ON ISSUE OF SHARES AT DISCOUNT [SEC. 53]:
Q-7 Can a company issue shares at discount? What is the law, in this relation, laid down in the Companies
Act, 2013?
Or
What are the rules relating to issue of shares at a discount?
Or
Whether a company may issue shares at discount? State the conditions which must be fulfilled before
issuing the shares at discount contained in the Companies Act, 2013
Ans.
[Hint: Sec 53 & 5]
Prohibition:
Â Issue of shares at a discount is prohibited.
Â The prohibition applies to all companies, whether public or private.
Issue to be void:
Â Any issue of shares at a discount shall be void.
Punishment for contravention:
Â Fine on the company:
- Minimum: Rs.1lakh
- Maximum: Rs.5lakh
Â Every officer in default:
- Imprisonment upto 6 month or
- Fine: Minimum – Rs.1lakh; Maximum – Rs.5lakh or
- Both.
No prohibition on issue of sweat equity shares:
Â Issue of sweat equity shares does not fall within the purview of Sec.53.
Â A company may issue sweat equity shares by complying with Sec. 54.

ISSUE OF SWEAT EQUITY SHARES [SEC. 2(88) AND SEC.54]:
Q-8 Explain the meaning of ‘Sweat Equity Shares’ and state the conditions a company has to fulfill for
issuing such shares.
OR
Explain the provision relating to issue of sweat equity share
OR
A public company proposes to issue ‘sweat equity shares’ to its employees. Referring to the provision
of Companies Act, 2013 state the condition required to be fulfilled by the company.
Ans.
A. Meaning of sweat equity shares:
Concept of sweat equity shares:
Â Sweat equity shares are issued by a company to its directors or employees as a reward to them for
their contribution and efforts towards the creation of intellectual property rights for the company.
Definition of sweat equity shares [Sec. 2(88)]:
Â ‘sweat equity shares’ means such equity shares as are issued by a company to its directors
oremployees –
(a) At a discount; or
(b) For consideration, other than cash,
Â For providing their know-how or making available rights in the nature of intellectual property
rights or value additions, by whatever name called.
B. Conditions for issue of sweat equity shares:
1. Nature of shares:
Sweat equity shares must belong to a class of shares already issued by the company.
2. Authorization for issue:
Issue of sweat equity shares must be authorised by passing SR.
SR passed by the company shall specify the following pariculars:
Number of
shares
The class of
directors or
employees to SR specify the Current market
whom sweat particulars of price
equity shares are
to be issued
Consideration , if
any

REDEEMABLE PREFERENCE SHARES [SEC.55]
A. Conditions for issue of redeemable preference shares:
1. Term of preference shares:
Issue of irredeemable preference shares is prohibited.
The term of preference shares shall not exceed 20 years.
The term of preference shares may exceed 20 years, subject to the following conditions:
(a) Such preference shares are issued for Infrastructure project as specified under Schedule
VI.
(b) The company shall redeem, at the option of such preference shareholders, on an annual
basis, such percentage of preference shares as may be prescribed.
2. Power in articles:
- Authorization in the articles is required to issue the preference share.
3. Compliance of Rules:
- The conditions prescribed by CG under the Companies (share Capital and Debentures) Rules, 2014
must be complied with.
B. Conditions for redemption of preference shares:
(1) Power in articles:
• No authorization is required in the articles to redeem the preference shares.
(2) Fully paid shares:
• Preference shares can be redeemed only if they are fully paid up.
(3) Sources of redemption:
• Out of profits available for dividend.
• Out of a fresh issue of shares made for the purpose of such redemption.
(4) Premium payable on redemption:
In case of prescribed class of companies
whose financial statement comply with
AS prescribed u/s 133, - In any other case -
i. Premium payable on redemption shall be premium payable on redemption may be
provided for out of the profits of the provided for –
company; - Out of the profits of the company; or
ii. In case of preference share capital issued - Out of securities premium account.
before the commencement of this Act,
Premium payable on redemption may be
provided for
- Out of the profits of the company; or
- Out of securities premium account.
(5) Creation of CRR:
(a) Creation of CRR is mandatory, if the preference shares are redeemable out of profits.
(b) Amount to be transferred to CRR out of profits of the company = Nominal value of preference
shares redeemed out of the company.
(6) Utilization of CRR:
CRR may be utilized only for the purpose of issuing fully paid bonus shares to the members.
All the provisions of the Act relating to reduction of share capital shall apply to CRR, as
if CRR were the paid up capital of the company.

(7) Notice to Registrar:
In the prescribed
form;
along with a copy of

Within 30 days altered memorandum
(sec.64)
The notice of
redemtion of
preference
shares is to be
given to ROC :
C. Position where the company is unable to redeem the preference shares:

(1) Issue of further redeemable preference share capital is required:
· Where a company is not in a position to redeem any preference shares in accordance with
the terms of issue (hereinafter such preference shares are referred to as ‘unredeemed
preference shares’), the company may issue further redeemable preference shares equal to
the amount due in respect of the unredeemable preference shares.
· On the issue of such further redeemable preference shares, the unredeemable preference
shares shall be deemed to have been redeemed.
(2) Legal requirements:
(a) Consent of the holders of 3/4th in value of unredeemable preference shares is required.
(b) The approval of the Tribunal is required.
(c) The Tribunal shall, while granting the approval, order the redemption forthwith of
unredeemed preference shares held by such persons who have not consented to the issue
of further redeemable preference shares.
D. Provisions contained in the Rules:
Conditions for issue of preference shares:
(a) The issue of preference shares must be authorised by passing ‘SR’ in GM.
(b) At the time of such issue of preference shares, there must not be any subsisting default with
respect to –
¾ The redemption of preference shares (whether issued before or after the commencement
of this Act); or
¾ Payment of dividend due on any preference shares.
Conditions for issue of preference shares redeemable after 20 years:
Â A company may issue preference shares which are redeemable after a period of 20 years, if the following
conditions are satisfied:
The company is engaged in infrastructure projects.
The period of redemption shall not exceed 30 years.
The company shall redeem a minimum of 10% of such preference shares every year beginning
from the 21st year or earlier, on proportionate basis, at the option of the preference shareholders.

Compliance with SEBI Regulations:
A company intending to list its preference shares on recognized stock exchange shall issue the
preference shares in accordance wih the relevant regulations made by SEBI.
ALTERATION IN CAPITAL CLAUSE OF MEMORANDUM [SEC.61]:
Q-9 The Directors of Mars India Ltd. desire to alter capital clause of Memorandum of Association of their
company. Advise them, under the provisions of the Companies Act, 2013 about the ways in which the
said clause may be altered and the procedure to be followed for the said alteration.
OR
Explain the provision in brief relating to alteration of capital clause in MOA
Ans.
1. Applicability:
Sec. 61 applies to all limited companies having a share capital.
2. Nature of alterations in capital clause:
i. Increase its authorised share capital by such amount as may think fit.
ii. Consolidate and divide its share capital into shares of a larger amount than its existing shares.
- However, if the consolidation and division result in changes in the voting percentage of
shareholders, the approval of the Tribunal shall be required.
iii. Convert its fully paid up shares into stock, and reconvert sock into fully paid up shares of any
denomination.
iv. Sub-devide its shares into shares of smaller amount subject to the condition that, after such
alteration, the proportion of the amount paid up on shares and the amount remaining unpaid on
shares shall remain same as was before such alteration.
v. Cancel shares which have not been taken or agreed to be taken by any person, and diminish the
amount of its share capital by the amount of the shares so cancelled.
3. Requirements for alteration of capital:
(a) Authorization is required in the articles.
(b) OR is required to be passed in the GM.
(c) The notice of alteration of share capital is to be given to ROC –
In the prescribed
form
along with a copy of

Within 30 days altered memorandum
(sec.64)
The notice of
redemtion of
preference
shares is to be
given to ROC

4. Cancellation vis-à-vis reduction:
Â Cancellation of shares (also termed as diminution of capital) shall not be deemed to be reduction
of share capital.
5. Alteration vis-à-vis diminution:
Â ‘Alteraion of capital’ is different from ‘diminution of capital’ (also called as ‘cancellation of capital’).
Â ‘Alteration of capital’ is wider term than ‘diminution of capital’.
REDUCTION OF SHARE CAPITAL [SEC. 66]:
Q-10 Can a company limited by shares or guarantee and having share capital reduce its share capital?
Ans.
Â Modes of reduction of capital.
Â Reduction to unpaid capital:
The company may extinguish or reduce the liability on any of its shares in respect of share capital not
paid-up.
Â Cancellation of lost paid up capital:
Either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share
capital which is lost, or is unrepresented by available assets.
Â Paying off excess paid up capital:
Either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share
capital which is in excess of the wants of the company.
Legal requirements for reduction of capital:
i. Special resolution:
Reduction of share capital requires passing of a special resolution.
ii. No default w.r.t. deposits:
Reduction of share capital shall not be effected if the company has defaulted in –
Repayment of any deposits accepted by it, either before or after the commencement of this Act;
or
Payment of interest payable on such deposits.
iii. Confirmation of Tribunal:
Confirmation of the Tribunal is also required for effecting the reduction of share capital.
For obtaining the confirmation of the Tribunal, the company shall make an application to the
Tribunal.
iv. Tribunal shall secure the interest of creditors:
The Tribunal shall give notice of such application to -

CG
The Tribunal
SEBI , in the case of
The creditors of shall give notice
listed companies
the company of such
application to
the
Registrar
Â The Tribunal shall take into consideration the representations, if any, made to it, within 3 months from
the date of receipt of notice given by the Tribunal, by –
CG
The Tribunal shall take into

consideration the
The creditors of representation, if any, SEBI , in the case of
the company made to it, within 3 months listed companies
from the date of receipt of
notice given by the
Tribunal, by
the Registrar

Â If the Tribunal does not receive any If the Tribunal does not receive any representation, within 3
months from the date of receipt of notice given by the Tribunal, from CG, SEBI, the Registrar or any
creditor of the company, then, it shall be presumed that they have no objection to the reduction.
Â The Tribunal may make an order confirming the reduction of share capital if it is satisfied that every
creditor of the company –
Has been
dischared;
or
has given his has been given

consent; or security
The Tribunal may make

an order confirming the
reduction of share capital
if it is satisfied that every
creaditor of the company
Â The Tribunal may impose such terms and conditions while confirming the reduction of share capital as
it may deem fit.
Â The Tribunal shall not confirm the reduction of share capital unless –
(a) The accounting treatment proposed by the company for reduction of share capital is in conformity
with the accounting standards specified in section 133 or any other provision of this Act; and
(b) A certificate to that effect is given by the company’s auditor, and such certificate has been filed
with the Tribunal.
Â The order of confirmation of the reduction of share capital shall be published by the company in such
manner as may be directed by the Tribunal.
v. Registration of order of the Tribunal and minute approved by the Tribunal:
Â Where the reduction of share capital is confirmed by the Tribunal, the Tribunal shall approve a
minute stating –
(a) The amount of the share capital;
(b) The number of share into which the share capital is to be divided;
(c) The amount of each share; and
(d) The amount, if any, which shall be deemed to be paid-up on each share.
Â The company shall deliver to ROC for registration –
(a) A certified copy of the order of the Tribunal; and
(b) A certified copy of the minute approved by the Tribunal.
Â The registrar shall register the order of the Tribunal and the minute produced before him. He shall
issue a certificate of registration of reduction of share capital.
DIFFERENCE BETWEEN REDUVTION OF CAPITAL AND DMINUTION OF CAPITAL:
Basis ofdistinction Reduction of capital(Sec.66) Diminution of capital(Sec.61)
1. Meaning It means reduction of Cancellation of shares u/s 61 does notanyway affect
issued capital. the issued capital. It results
indiminution of authorised capital.
2. Method a) Cancellation of paid up Cancellation of shares which have
capitalwhich is lost or is not beentaken or agreed to be taken by any person.
unrepresented bythe assets
of the company.b) Return of
capital which is in excessof
needs of the company.
c) Reduction in unpaid capital.
3. Interest of
creditors Interest of creditors affected. Interest of creditors are not affected.
4. Consent of
creditors a) The consent of creditors The creditors have no right to object andtherefore there
must beobtained; orb) The is no need to obtain theconsent of the creditors.
creditors must be discharged
;orc) Reduction in unpaid
capital.
5. Approvalof
Tribunal Approval of the Tribunal is
required. Approval of the Tribunal is not required.
6. Nature of
resolution SR is required. OR is required.
7. Effect onm
emorandum Reduction may not result Diminution of capital always results inalteration of
in alterationof capital clause authorised capital resulting in analteration in capital
of memorandum. clause of memorandum.
RIGHT SHARES OR RIGHT OF PRE-EXEMPTION (FURTHER ISSUE OF SHARES) [SEC.62]:
1. Applicability of Sec.62:
· Sec 62 applies to all companies having a share capital.
· Sec 62 applies when a company proposes to issue further shares.
2. Offer of further shares to existing shareholders (i.e. Right Shares):
i. Nature of right:
Further shares shall be offered to the existing equity share holders in proportion to the paid
up share capital held by them.
Every existing shareholder shall have a right to –
Â Accept the offer of shares offered to him; or
Â Decline the offer of shares offered to him; or
Â Renounce the shares offered to him in favour of any other person (unless the article restrict
such right).
ii. Letter of offer
Further shares shall be offered to the existing shareholders by sending to each of them, a
letter of offer.
The letter of offer shall be despatched to all the existing shareholder by –
Â Registered post; or
Â Speed post; or
Â Electronic mode.
The letter of offer shall specify –
Â The member of shares offered;
Â The time (minimum 15 days maximum 30 days) within which the offer may be accepted
(however, in case of a private company, if 90% of the members give their consent in
writing or in electronic mode, the periods lesser than ‘minimum 15 days’ and ‘maximum
30 days’ shall apply, as per Notification No. G.S.R. 464(E) dated 5th June, 2015);
Â A statement that if the offer is not accepted with the time specified in the letter of
offer, the offer shall be deemed to have been declined; and
Â A statement that every shareholder has a right to renounce the shares offered to him
to any other person (unless the articles restrict such right).
iii. Disposal of shares, if offer is not accepted:
The shares which remain unsubscribed by the existing shareholders, may be disposed off by
the board of directors in such manner which is not disadvantageous to the shareholders and
the company.
Q-11 When can a Public Company offer the new shares (further issue of shares) to persons other than the
existing shareholders of the Company? Can these shares be offered to the Preference Shareholders?
[hint: point 3 & 4 , shares can be issued to any persons who may be preference shareholders as well
provided such issue is authorized by a special resolution of the company and are issued on such
conditions as may be prescribed.
OR
A listed company at Bombay Stock Exchange, intends to offer its new shares to non-members. State
whether it is permitted under the Companies Act, 2013.
Ans.
1. Offer of further shares to employees:
Further shares may be offered to the employees, if such further shares are offered –
Under Employees’ Stock Option Scheme;
Under an authority of SR passed by the company; and
By complying with such conditions as may be prescribed.
However in case of private company, instead of ‘SR’, an ‘OR’ shall be sufficient.
2. Offer of further shares to any person:
Further shares may be offered to any persons (whether or not those persons include the existing
shareholders or employees, and whether there shares are issued for cash or for consideration
other than cash), if –

The price of such shares is determined by a registered valuer (however, until a registered valuer
is appointed in accordance with the provisions of the Act, the valuation report shall be made by an
independent merchant banker who is registered with SEBI or an independent Chartered
Accountant in practice having a minimum experience of 10 years);
It is authorised by SR passed by the company; and
Conditions as may be prescribed, are complied with.
3. Allotment of shares on account of conversion of loans or debentures into shares:
Nothing in Sec.62 shall restrict the power of the company to allot shares on account of conversion
of loans or debentures into shares, provided that –
The terms of issue of such debentures or the terms of raising such loan contained a term
regarding conversion of debentures or loans into shares; and
The terms of issue of such debentures or the terms of raising such loan were approved,
before the issue of such debentures or raising loan, by passing SR.
4. Allotment of shares on account of conversion of loans or debentures into shares consequent upon
order of the Government:
1. Order of the Government directing conversion:
Â Any Government may make an order that –
Â Debentures issued to that Government by a company; or
Â Loans obtained from that Government by a company
Shall be converted into shares in the company.
5. Terms of conversion:
Â The Government may make such an order even if the terms of issue of such debentures or loans
do not contain any provision for conversion.
Â The terms of conversion of such debentures or loans shall be such as may appear reasonable to
the Government.
Â In determining the terms and conditions of conversion, the Government shall have due regard to
–
Â The financial position of the company;
Â The terms of issue of debentures or loans, as the case may be;
Â The rate of interest payable on such debentures or loans; and
Â Such other matters as it may consider necessary.
6. Conditions for making order of conversion:
Â The order for conversion can be made only if the Government is of the opinion that it is necessary
in the public interest to make an order of conversion of loans or debentures into shares.
7. Alteration of memorandum:
Â If –
Â The order of the Government has the effect of increasing the authorised share capital of the
company,
Â Then –
Â The memorandum of the company shall stand altered and the authorised share capital of the
company shall stand increased by the amount of debentures or loans converted into the shares.
8. Appeal by the company to the Tribunal:
Â If the terms and conditions of such conversion are not applicable to the company, the company
may prefer an appeal to the Tribunal.

Â The Tribunal may, after hearing the company and the Government, pass such order as it may deem
fit.
ISSUE OF BONUS SHARES – LEGAL REQUIREMENTS [SEC.63]:
1. Power in articles:
Authorization in the articles is required to issue bonus shares.
2. Recommendation of Board:
Â Bonus shares can be issued only if the Board recommends such an issue.
Â A company which has once announced the decision of its Board recommending a bonus issue,
shall not subsequently withdraw the same (Rule 7 of the Companies (Share Capital and Debenture)
Rules, 2014).
3. Ordinary resolution:
Issue of bonus shares is possible only if the authorization to issue the bonus share is obtained by
passing an OR in the GM.
4. Sources of issue:
Â Bonus shares may be issued out of –
· The free reserves; or
· The Securities Premium Account; or
· The Capital Redemption Reserve Account.
Â Bonus shares shall not be issued by capitalizing the reserves created by the revaluation of assets.
5. No default in debts:
Â Bonus shares can be issued only if the company has not defaulted in payment of principal sum or
interest on the fixed deposits or debt securities issued by it.
6. No default in statutory dues:
Â Bonus shares can be issued only if the company has not defaulted in payment of statutory dues of
the employees, such as contribution to provident fund, gratuity and bonus.
7. Compliance with prescribed conditions:
Â Conditions prescribed by CG in respect of issue of bonus shares must be complied with.
8. Issued to existing members:
Â Bonus shares can be issued only to the existing members of the company.
9. Fully paid shares:
Â Bonus shares must be fully paid up.
10. Existing shares to be fully paid up:
Â If there are any partly paid shares, they must be fully paid up before the issue of bonus shares.
11. Not to be in lieu of dividend:
Â Bonus shares shall not be issued in lieu of dividend.
DISTINCTION BETWEEN RIGHT SHARES AND BONUS SHARES:
Basis of distinction Right Shares Bonus Shares
1. Authorisation Issue of right shares does not Articles must contain a specific
require any authorization in the power empowering the
articles company to issue bonus shares.
2. Consideration When right shares are allotted, When bonus shares are allotted
the company receives the issue the company does not receive
price of shares. any money from the share
holders.

3. Shares already For issue of right shares, it is not a For issue of bonus shares, it is a
held to be fully precondition that the shares held by the precondition that shares held by
paid up existing shareholders should be fully the existing shareholders
paid up. should be fully paid up.
4. New shares to be Consideration for right shares, like Bonus shares must always
fully paid up any other issue of shares, is generally be fully paid up.
paid in installments, i.e. by way of calls.
Thus, right shares may be partly paid up.
5. Right to renounce The existing share holder has a right to No existing share holder has a right
renounce the shares offered to him. to renounce the bonus shares.
NOTICE TO BE GIVEN TO REGISTRAR FOR ALTERATION OF SHARE CAPITAL [SECTION 64]
Where–
Â a company alters its share capital in any manner specified in section 61 (1) ,
Â an order made by the Government under section 62(4) read with 62(6) has the effect of increasing
authorised capital of a company; or
Â a company redeems any redeemable preference shares,the company shall file a notice in the prescribed
form with the Registrar within a period of thirty days of such alteration or increase or redemption, as
the case may be, along with an altered memorandum.
In default : If a company and any officer of the company who is in default contravenes the provisions of
sub-section (1), it or he shall be punishable with fine which may extend to one thousand rupees for
each day during which such default continues, or five lakh rupees, whichever is less.
PURCHASE BY A COMPANY OF ITS OWN SHARES [SEC.67]:
Prohibition on buying own share:
Â No company (whether public or private) shall buy its own shares.
Â However, the right of the company to redeem the preference shares shall not be effected.
Giving financial assistance for purchases of shares:
Â General Rule:
Â No public company shall give financial assistance for purchase of its own shares or its holding company.
Â The restriction applies to every kind of financial assistance, whether it is direct or indirect, and whether
it is given by way of a loan, guarantee, provision of security or otherwise.
¾ Exception (financial assistance is permitted):
(a) Lending of money by banking company in the ordinary course of his business.
(b) The provision of money by a company.
o In accordance with any scheme.
o Approved by company through special resolution, and
o In accordance with such requirements as may be prescribed.
o For the purchase of 50 paid up shares in the company or its holding company.
o Being a purchase of shares by the trustee.
o For the benefit of employees.

(c) The giving of loans by a company.
o To persons in employment of the company.
o Other than its directors or key managerial personnel.
o For an amount not exceeding their salary or wages for a period of 6 months.
o With a view to enabling them to purchase fully paid up shares in the company or its holding
company.
Exemption to private company:
Â As per Notification No. G.S.R. 464(E) dated 5th June, 2015, the provisions of Sec. 67 shall not apply if the
following conditions are satisfied:
• The company is a private company.
• No other body corporate has invested any money in the share capital of such private company.
• The borrowings of such private company from books or financial institutions or any body corporate
is less than twice its paid up share capital or Rs.50crore, whichever is lower.
• Such a private company is not in default in repayment of such borrowings subsisting at the time of
making any transaction u/s 67.
BUY BACK OF SECURITIES [SEC.68]:
A. Sources of buy-back:
A company may buy-back its own shares or other specified securities out of –
a) Free reserves; or
b) Securities premium account; or
c) Proceeds of fresh issue of shares or other specified securities.
However, the buy-back shall not be made out of an earlier issue of same kind of shares or other
specified securities.
B. Conditions for buy-back:
(1) Power in article:
• Authorization in the article is required for buy-back.
(2) Resolution for buy back and limits on buy-back
Case I: the buy-back is authorised by passing SR Case II: the buy-back is authorised by passing a
resolution in BM only
The buy-back shall not exceed 10% of the aggregate
of paid-up equity capital and free reserves.
(a) The buy-back shall not exceed 25% of aggregate

of paid-up share capital and free reserves.
(b) The buy-back of equity shares in any FY shall
not exceed 25% of its total paid up equity
capital in that FY.c) Notice of GM, in which SR
is to be passed shall be accompanied by an
explanatory statement, stating –
- all material
facts;
- necessity for buy-back;
- class of
securities to be bought back;
- amount to be
invested under the buy-back;
- time limit for
completion of buy-back.
(3) Debt-equity ratio:
Â The ratio of debt (secured as well as unsecured debt) owed by the company must not be more
than twice the aggregate of paid up capital and free reserves after such buy-back.
Â CG may, by order, notify a higher ratio for any class or classes of companies.
(4) Fully paid shares:
Â All the securities for buy-back must fully paid-up.
(5) Time period for which offer shall remain open:
Â The offer for buy-back shall remain open for period of not less than 15 days and not exceeding 30
days from the date of dispatch of the letter of offer.
Â However, if all members of a company agree, the offer for buy-back may remain open for a period
less than 15 days.
(6) Completion of buy-back:
Â The buy-back shall be completed within 1 year of passing the resolution for buy-back (whether SR
or the Board resolution).
(7) Buy-back from whom? :
Â The buy-back may be –
(a) From the existing shareholders on a proportionate basis; or
(b) From the open market; or
(c) By purchasing the share issued to employees by way of stock option or sweat equity.
(8) Declaration of solvency:
Â The company shall file with the Registrar a declaration of solvency stating that it will not be
rendered insolvent within next 1 year.
Â In case of a listed company, declaration of solvency shall also be filed with SEBI.
(9) Extinction of shares:
Â The company shall extinguish and physically destroy the shares bought back within 7 days of
completion of buy-back.
(10) Prohibition on further buy-back:
Â Further offer of buy-back shall not be given within 1 year of closure of preceding offer of buy-
back.
(11) Prohibition of further issue:
Â The company shall not make further issue of same kind of securities within next 6 months, except
by way of –
(a) Bonus shares
(b) Issue of shares in discharge of subsisting obligations such as conversion of warrants, stock
option scheme, sweat equity or conversion of preference shares or debentures into equity
shares.
(12) Register of shares bought-back:
Â The company shall maintain a register containing the following particulars:
(a) The securities bought back
(b) The consideration paid for the securities bought back
(c) The date of cancellation of securities
(d) The date of extinguishing and physically destroying the securities
(e) Any other particulars, as may be prescribed.

(13) Other compliances:
Â Listed companies – shall comply with the regulations made by SEBI.
Â Unlisted companies – shall comply with the Rules prescribed by CG.
(14) Return of buy-back:
Â After completion of buy-back, the company shall, within 30 days, file a return containing such
particulars relating to buy-back as may be prescribed.
Â The return shall be filed with - ROC - in case of unlisted companies.
- ROC and SEBI – in case of listed companies.
(15) Disclosure in explanatory statement:
Â In case of private companies and unlisted public companies, the explanatory statement to be
annexed to the notice of GM shall contain the following disclosures:
(a) The date of BM at which the proposal for buy-back was approved by the Bard.
(b) The objective of buy-back.
(c) The class of securities intended to be purchased under the buy-back.
(d) The number of securities that the company proposes to buy-back.
(e) The method to be adopted for the buy-back
(f) The price at which the buy-back of securities shall be made
(g) A report addressed to the Board of directors by the company’s auditors stating that –
- They have inquired into the company’s state of affairs;
- The amount of payment for the securities is in their view properly determined;
- That the audited accounts on the basis of which calculation with reference to buy-back
is done is not more than 6 months old from the date of offer document; and
Provided that where the audited accounts are more than 6 months old, the calculations
with reference to buy-back shall be on the basis of unaudited accounts not older than
6 months from the date of offer document which are subject to limited review by the
auditors of the company.
- The Board of directors have formed the opinion that the company, having regard to its
state of affairs, shall not be rendered insolvent within a period of 1 year, and that such
opinion is based on reasonable grounds.
(16) Meaning of certain terms:
Â For the purpose of Sec. 68 –
(a) The term ‘specified securities’ includes ‘employee stock option’ or other securities as may
be notified by CG;
(b) The term ‘free reserve’ includes securities premium account.
TRANSFER OF CERTAIN SUMS TO CAPITAL REDEMPTION RESERVE ACCOUNT [SECTION 69]:
Â Where a company purchases its own shares out of free reserves or securities premium account, then a
sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption
reserve account and details of such transfer shall be disclosed in the balance sheet.
Â The capital redemption reserve account may be applied by the company, in paying up unissued shares
of the company to be issued to members of the company as fully paid bonus shares.
PROHIBITION FOR BUY-BACK IN CERTAIN CIRCUMSTANCES [SECTION 70]:
Â This section of the Companies Act, 2013 prohibits the company for buy back in the certain circumstances.
Â The provision says that no company shall directly or indirectly purchase its own shares or other specified
securities-
(a) through any subsidiary company including its own subsidiary companies; or
(b) through any investment company or group of investment companies; or
(c) if a default, is made by the company-
- in repayment of deposits or interest payament thereon,
- redemption of debentures or preference shares or
- payment of dividend to any shareholder or
- repayment of any term loan or interest payable thereon to any financial institutions or
banking company;
But where the default is remedied and a period of three years has lapsed after such default
ceased to subsist,there such buy-back is not prohibited.
Â No company shall directly or indirectly purchase its own shares or other specified securities in case
such company has not complied with provisions of
- Sections 92 (Annual Report),
- 123 (Declaration of dividend),
- 127 (Punishment for failure to distribute dividends), and
- section 129 (Financial Statements).
DEBENTURES [SEC. 71]:
Â Meaning: [Sec.2(30)]
Â ‘Debenture’ includes debenture stock, bonds or any other instrument of a company evidencing a debt,
whether constituting a charge on the asset of the company or not.
Â “Debenture is a name applied to certain types of documents evidencing an indebtedness which is
normally but not necessarily secured by a charge over property.” (Gower, L.C.B.)
Â Debentures are bonds issued as an acknowledgement of the amount borrowed by a company.
Â Debentures are generally secured upon the company’s property or undertaking.
Â Characteristics of ‘debenture’:
- Debenture holders are the creditors of the company.
- No debenture can carry any voting right.
- A debenture is acknowledgement of indebtedness of the company.
- The debenture specifies the payment of a specified sum payable at a certain specified rate of
interest.
- Debentures are generally issued under the seal of the company. However, it is not a legal
requirement.
- Debentures are generally secured. The debenture holders are given a charge on certain assets of
the company. However, it is possible to issue irredeemable debentures.
Q-12 Explain the meaning and significance of the ‘PariPassu’ clause in a debenture. State the particulars to
be filed with the Registrar of Companies in case of such debentures secured by a charge on certain
assets of the company.
Ans.
Â Debentures with pari-passu clause:
• The term ‘pari-passu’ means ‘ranking equally among themselves’.
• Every holder of debentures issued with pari passu clause shall be entitled to share the proceeds
of the security realized, even though these debentures were issued at different points of time.
Â Debentures without pari-passu clause:
• The debentures shall rank according to the date of issue of debentures, i.e. a debenture issued
first shall have priority over the debenture issued afterwards.

• If some debentures are issued on the same date, then the priority shall be determined according
to the serial number of the debentures issued.
Â Restriction on powers of the company:
• A company is not entitled to issue a new series of debentures:
- Having priority over an earlier series of debentures; or
- Ranking pari passu with an earlier series of debentures
- Unless such right is expressly reserved under the terms and conditions of earlier series of
debentures.
Â Legal provisions with respect to debentures
Types of Debentures
On the basis On the basis On the basis

of security of convertibility of redeemability
Convertible
Secured Redeemable
(mandatority or
optionally , partially
or fully)
Un-secured Non-convertible Irredeemable
A. Provisions of the Act:

1. Issue of debentures with an option to convert :
Â A company may issue debentures with an option to convert such debentures into shares,
either wholly or partly at the time of redemption :
Â Provided that the issue of debentures with an option to convert such debentures into shares,
wholly or partly, shall be approved by a special resolution passed at a general meeting.
2. No voting rights :
Â No company shall issue any debentures carrying any voting rights.
3. Issue of secured debentures :
• Secured debentures may be issued by a company subject to such terms and conditions as
may be prescribed in Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014.
(a) The date of redemption of secured debentures shall not exceed 10 years from the date
of issue.
However the following classes of companies may issue secured debentures for a period
exceeding 10 years but not exceeding 30 years:
i. Companies engaged in setting up of infrastructure projects.

ii. ‘Infrastructure Finance Companies’.
iii. ‘Infrastructure Debt Fund Non-Banking Financial Companies’
iv. Companies permitted by a Ministry or Department of the Central Government or
by RBI or by the National Housing Bank or by any other statutory authority to issue
debentures for a period exceeding 10 years.
(b) The secured debentures shall be secured by the creation of a change on the assets of
the company or its subsidiaries or its holding company or its associate companies,
having a value which is sufficient for the due repayment of the amount of debentures
and interest thereon.
(c) The company shall appoint a debenture trustee, and execute a debenture trust deed to
protect the interest of the debenture holders.
4. Creation of debenture redemption reserve (DRR) account:
Â Where debentures are issued by a company under this section, the company shall create a
debenture redemption reserve account
Â out of the profits of the company available for payment of dividend and the amount credited
to such account
Â shall not be utilised by the company except for the redemption of debentures.
5. Limitation on the issue of prospectus/ offer / invitation to the public:
Â No company shall issue a prospectus or make an offer or invitation to the public or to its
members exceeding five hundred for the subscription of its debentures,
Â unless the company has, before such issue or offer, appointed one or more debenture
trustees and the conditions governing the appointment of such trustees shall be such as may
be prescribed.
6. Appointment of debenture trustee(s):
Â Appointment of one or more debenture trustee is mandatory, if –
(a) The company issues a prospectus; or
(b) The company makes an offer or invitation to the public; or
(c) The company makes an offer to its members exceeding 500 in number;
Â The appointment of debenture trustee(s) shall made –
(a) Before issue of prospectus or before making such offer or invitation; and
(b) By complying with such terms and conditions as may be prescribed.
7. Debenture trustee to protect the interest of debenture holders:
Â A debenture trustee shall take steps to protect the interests of the debenture-holders and
redress their grievances in accordance with such rules as may be prescribed.
9. To pay interest and redeem the debentures:
Â A company shall pay interest and redeem the debentures in accordance with the terms and
conditions of their issue.
10. Filing of petition before the Tribunal by the debenture trustee :
Â Where at any time the debenture trustee comes to a conclusion that the assets of the
company are insufficient or are likely to become insufficient to discharge the principal amount
as and when it becomes due,

Â the debenture trustee may file a petition before the Tribunal and
Â the Tribunal may, after hearing the company and any other person interested in the matter,
by order, impose such restrictions on the incurring of any further liabilities by the company
as the Tribunal may consider necessary in the interests of the debenture-holders.
11. On failure to redeem the debentures/ to pay interest on the debentures:
Â Where a company fails to redeem the debentures on the date of their maturity or fails to pay
interest on the debentures when it is due, the Tribunal may, on the application of any or all
of the debenture-holders, or debenture trustee and, after hearing the parties concerned,
direct, by order, the company to redeem the debentures forthwith on payment of principal
and interest due thereon.
REQUIREMENTS FOR TRANSFER OR TRANSMISSION OF SECURITIES [SEC.56]:
Q-13 Ramesh, who is a resident of New Delhi, sent a transfer deed, for registration of transfer of shares to
the company at the address of its Registered Office in Mumbai. He did not receive the shares certificates
even after the expiry of four months from the date of dispatch of transfer deed. He lodged a criminal
complaint in the Court at New Delhi. Decide, under the provisions of the Companies Act, 2013, whether
the Court at New Delhi is competent to take action in the said matter?
Ans. : Section 56 of the Companies Act, 2013 deals with the transfer and transmission of securities or interest
of a member in the company.
(1) Requirement for registering the transfer of securities :
• According to the law, a company shall not register –
• a transfer of securities of the company, or
• the interest of a member in the company
• in the case of a company having no share capital, unless a proper instrument of transfer, in such
form as may be prescribed, duly stamped, dated and executed by or on behalf of the transferor
and the transferee (except where the transfer is between persons both of whose names are
entered as holders of beneficial interest in the records of a depository), specifying the name,
address and occupation, if any, of the transferee, has been delivered to the company by the
transferor or the transferee within a period of 60 days from the date of execution, along with the
certificate relating to the securities, or if no such certificate is in existence, along with the letter
of allotment of securities.
• In case of Government company , in so far as it requires a proper instrument of transfer, to be
duly stamped and executed by or on behalf of the transferor and by or on behalf of the
transferee, shall not apply with respect to bonds issued by a Government company,
• provided that an intimation by the transferee specifying his name, address and occupation,
if any, has been delivered to the company along with the certificate relating to the bond; and
if no such certificate is in existence, along with the letter of allotment of the bond :
• Provided also that the provisions of this sub-section shall not apply to a Government Company
in respect of securities held by nominees of the Government.
(2) Instrument of transfer lost/ not delivered:
Â Where the instrument of transfer has been lost or the instrument of transfer has not been
delivered within the prescribed period, the company may register the transfer on such terms as
to indemnity as the Board may think fit.

(3) Power of company to register :
Â Power of company to register shall not be effected by above provision (given under sub- section
1) on receipt of an intimation of transmission of any right to securities by operation of law from
any person to whom such right has been transmitted.
(4) Transmission of securities on an application of transferor alone:
Â Where an application is made by the transferor alone and relates to partly paid shares, the transfer
shall not be registered, unless the company gives the notice of the application, in such manner as
may be prescribed, to the transferee and the transferee gives no objection to the transfer within
two weeks from the receipt of notice.
(5) Company delivering the certificate : Every company shall, unless prohibited by any provision of law or
any order of Court, Tribunal or other authority, deliver the certificates of all securities allotted,
transferred or transmitted—
Different conditions Period of the delivering the certificates
In the case of subscribers to the Within 2 months from the date of incorporation
memorandum;
In the case of any allotment of any of Within a period of two months from the date of
its shares allotment
In the case of a transfer or transmission of Within a period of one month from the date of receipt
securities by the company of the instrument of transfer or the
intimation of transmission
In the case of any allotment of debenture. Within a period of six months from the date of allotment
Â Provided that where the securities are dealt with in a depository, the company shall intimate the
details of allotment of securities to depository immediately on allotment of such securities.
Â In case of a Specified IFSC public company, it shall deliver the certificates of all securities to subscribers
after incorporation, allotment, transfer or transmission within a period of sixty days.” – Notification
Dated 4th January, 2017
Â Whereas in case of Specified IFSC Private Company - a Specified IFSC private company shall deliver the
certificates of all securities to subscribers after incorporation, allotment, transfer or transmission
within a period of sixty days.”.- Notification Dated 4th January, 2017
(1) Transfer of security of the deceased:
• The transfer of any security or other interest of a deceased person in a company made by his legal
representative shall, even if the legal representative is not a holder thereof, be valid as if he had
been the holder at the time of the execution of the instrument of transfer.
REFUSAL OF REGISTRATION AND APPEAL AGAINST REFUSAL [SECTION 58]:
Â Section 58 of the Companies Act, 2013, deals with process of the company to be followed by on refusal
to register the transfer of securities.
i. If a private company limited by shares refuses, to register the transfer of, or the transmission of
the right to any securities or interest of a member in the company, then the company shall send
notice of the refusal to the transferor and the transferee or to the person giving intimation of
such transmission, within a period of thirty days from the date on which the instrument of transfer,
or the intimation of such transmission, was delivered to the company.

The securities or other interest of any member in a public company are freely transferable, subject
to the contract/arrangement.
ii. The transferee may appeal to the Tribunal against the refusal within a period of thirty days from
the date of receipt of the notice or in case no notice has been sent by the company, within a
period of sixty days from the date on which the instrument of transfer or the intimation of
transmission, was delivered to the company.
iii. If a public company without sufficient cause refuses to register the transfer of securities within a
period of thirty days from the date on which the instrument of transfer or the intimation of
transmission, is delivered to the company, the transferee may, within a period of sixty days of
such refusal or where no intimation has been received from the company, within ninety days of
the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal.
iv. The Tribunal, while dealing with an appeal may, after hearing the parties, either dismiss the
appeal, or by order—
(a) direct that the transfer or transmission shall be registered by the company and the company
shall comply with such order within a period of ten days of the receipt of the order; or
(b) direct rectification of the register and also direct the company to pay damages, if any,
sustained by any party aggrieved.
v. If a person contravenes the order of the Tribunal he shall be punishable with imprisonment for a
term not less than one year but may extend to three years and with fine not less than one lakh
rupees which may extend to five lakh rupees.
RECTIFICATION OF REGISTER OF MEMBER [SECTION 59]:
Â Section 59 of the Companies Act, 2013 provides the procedure for the rectification of register of members
after the transfer of securities. The provision states that-
(a) Remedy to the aggrieved for not carrying the changes in the register of members : If the name of
any person is, without sufficient cause, entered in the register of members of a company, or after
having been entered in the register, is, omitted there from, or if a default is made, or unnecessary
delay takes place in entering in the register, the fact of any person having become or ceased to be
a member, the person aggrieved, or any member of the company, or the company may appeal in
such form as may be prescribed, to the Tribunal, or to a competent court outside India, specified
by the Central Government by notification, in respect of foreign members or debenture holders
residing outside India, for rectification of the register.
(b) Order of the Tribunal : The Tribunal may, after hearing the parties to the appeal by order, either
dismiss the appeal or direct that the transfer or transmission shall be registered by the company
within a period of ten days of the receipt of the order, or direct rectification of the records of the
depository or the register and in the latter case, direct the company to pay damages, if any,
sustained by the party aggrieved.
(c) The provisions of this section shall not restrict the right of a holder of securities, to transfer such
securities and any person acquiring such securities shall be entitled to voting rights unless the
voting rights have been suspended by an order of the Tribunal.
(d) Where the transfer of securities is in contravention of any of the provisions of the Securities
Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992 or this Act or
any other law for the time being in force, there the Tribunal may, on an application made by the
depository, company, depository participant, the holder of the securities or the Securities and
Exchange Board, direct any company or a depository to set right the contravention and rectify its
register or records concerned.

(e) Default in complying with the order: If any default is made in complying with the order of the
Tribunal under this section, the company shall be punishable with fine which shall not be less
than one lakh rupees but which may extend to five lakh rupees and every officer of the company
who is in default shall be punishable with imprisonment for a term which may extend to one year
or with fine which shall not be less than one lakh rupees but which may extend to three lakh
rupees, or with both.
DIFFERENCE BETWEEN TRANSFER AND TRANSMISSION OF SHARES:
Q-18 Explain the meaning of “transmission of Shares” under the Companies Act, 2013. In what ways is
“transmission of shares” different from “Transfer of Shares”?
hint for meaning explanation Sec 56
Ans. :
Basis Transfer of share Transmission of share
1. Voluntary act or not Transfer of share is a Transmission takes place because of
voluntary act of parties. operation of law. i.e. where a
person becomes entitled to the
shares held by a deceased member by
reason of being his legal
representative.
2. Execution of transfer deed The execution of a valid No transfer deed is required if the
transfer deed is necessary. person entitled to such shares agrees
to become a member of the company.
3. Payment of stamp duty Stamp duty is payable where No stamp duty is levied in case of
shares are transferred by a transmission of shares.
member.
4. Consideration Transfer of shares is generally Transmission of shares takes place
made for some consideration. without any consideration.

CHAPTER-5
ACCEPTANCE OF DEPOSITS BY COMPANIES
DEPOSIT:
According to the section 2(31) of the Companies Act,2013, the term ‘deposit’ includes any receipt of money
by way of deposit or loan or in any other form, by a company, but does not include such categories of amount
as may be prescribed in consultation with the RBI.
According to the Companies (acceptance of deposits) Rules, 2014, following categories of amount may
not be considered as deposits-
Q-1 What os not deposit as per Rule 2(1)(c) of the Companies (Acceptance of Deposit) Rules, 2014?
Ans. :
1. Amount received from government etc.:
Any amount received from-
(a) The central government; or
(b) Any state government; or
(c) Any local authority; or
(d) A statutory authority constituted under an Act of Parliament or a State Legislature; or
(e) Any source whose repayment is guaranteed by CG or SG.
2. Amount received from foreign government etc.:
Any amount received, in accordance with the provisions of Foreign Exchange Management Act, 1999
and Rules and regulations made thereunder, from-
(a) Foreign government; or
(b) Foreign or international banks; or
(c) Foreign governments owned development financial institutions; or

(d) Foreign collaborators; or
(e) Foreign bodies corporate and foreign citizens.
3. Loan from a bank:
Any amount received as a loan or facility from any banking company.
4. Loan from PFIs:
Any amount received as a loan or financial assistance from any PFI.
5. Amount received by issue of commercial paper:
Any amount received against issue of commercial paper or any other instruments issued in accordance
with the guidelines or notification issued by the Reserve Bank of India.
6. Amount received from another company:
Any amount received by a company from any other company.
7. Amount received as application money:
Any amount received towards subscription to any securities, if such amount is appropriated only against
the amount due on allotment of the securities applied for.
- It is clarified that if the securities for which the application money was received, are not allotted
within 60 days of receipt of application money, then, such application money shall be refunded
within next 15 days, otherwise such amount shall be treated as deposit.
- If such amount is adjusted for any other purpose, such amount shall be treated as deposit.
8. Amount received from a director:
Any amount received from a director of the company or a relative of the director of the private company.
- Provided that the director of the company or a relative of the director of the private company, as
the case may be, from whom money is received, furnishes to the company at the time of giving of
money, a declaration in writing to the effect that the amount is not being given out of funds
acquired by him by borrowing or accepting loans or deposits from others and the company shall
disclose the details o money so accepted in the Board’s report.
- Rule 16A of the Companies (Acceptance of Deposits) Rules, 2014:
(a) Every company, other than a private company, shall disclose in its financial statements, by
way of notes, about the money received from the director.
(b) Every private company shall disclose in its financial statements, by way of notes, about the
money received from the directors and relatives of directors.
9. Amount raised by issue of secured debentures if-
(a) The debentures are secured by a first charge or a charge ranking pari passu with the first charge;
(b) The charge is created on any asset referred to in schedule ||| of the Act excluding intangible
assets; and
(c) The amount of such debentures does not exceed the market value of such assets as assessed by
a registered valuer.
10. Convertible debentures:
Any amount raised by issue of debentures if-
(a) Such debentures are compulsorily convertible into shares of the company; and
(b) Such conversion shall take place within 10 years.
94 Chapter 5 : Registration of Charges

11. Non-convertible debentures:
Any amount received by issue of non-convertible debenture not constituting a charge on the assets of
the company and listed on a recognised stock exchange as per applicable regulations made by SEBI.
12. Security deposit from an employee:
Any non-interest bearing security deposit received from an employee of the company not exceeding
his annual salary under a contract of employment with the company in the nature of non-interest
bearing security deposit.
13. Amount held in trust:
Any non-interest bearing amount received and held in trust.
14. Amount received in the course of business:
Any amount received in the ordinary course of business of the company-
(a) As an advance for the supply of goods or provision of services provided that such advance is
appropriated against supply of goods or provision of services within 365 days from the date of
acceptance of such advance;
(b) As security deposit for the performance of the contract for supply of goods or provision of services.
15. Amount received as advance for sale of immovable property:
Any amount received as advance for sale of an immovable property, provided that such advance is
adjusted against such property in accordance with the terms of the agreement.
- However, if the amount received as advance becomes refundable (with or without interest) due
to the reason that the company accepting the money does not have necessary permission or
approval, wherever required, to deal in the property for which the money is taken, then the
amount received shall be deemed to be a deposit.
16. Amount received as advance in certain cases:
(a) Any amount received as an advance towards consideration for providing further services in the
form of a warranty or maintenance contract as per written agreement, if the period for providing
such services does not exceed the period prevalent as per common business practice or 5 years
whichever is less.
(b) Any amount received as an advance received and as allowed by any sectoral regulator or in
accordance with directions of CG or SG.
(c) Any amount received as an advance for subscription towards publication (whether in print or in
electronic) to be adjusted against receipt of such publications.
- However, the amount received as advance shall be deemed to be deposit on the expiry of 15
days from the date such money becomes due for refund.
17. Amount brought by the promoters : Any amount brought in by the promoters of the company by way of
unsecured loan in pursuance of the stipulation of any lending financial institution or bank.
18. Amount accepted by Nidhi company : Any amount accepted by a Nidhi company in accordance with the
Rules made u/s 406 of the Act.
19. Amount received as chit : Any amount received by way of subscription in respect of a chit under the
Chit Fund Act, 1982.
20. Amount received under collective investment scheme : Any amount received by the company under
any collective investment scheme in compliance with regulations framed by the Securities and Exchange
Board of India.

21. Amount received by a start-up company : An amount of Rs.25 lakh or more received by a start-up
company, by way of a convertible note (convertible into equity shares or repayable within a period not
exceeding 5 years from the date of issue) in a single tranche, from a person.
EXPLANATION:
(a) ‘Start-up company’ means a private company incorporated under the companies Act,2013 or Companies
Act,1956 and recognised as such in accordance with notification number G.S.R.180€ dated 17th February,
2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.
(b) ‘ Convertible note’ means an instrument evidencing receipt of money initially as a debt, which is
repayable at the option of the holder, or which is convertible into such number of equity shares of the
start-up company upon occurrence of specified events and as per the other terms and conditions
agreed to and indicated in the instrument.
22. Amount received from Alternate Investment Funds etc.:

Any amount received by a company from Alternate Investment Funds, Domestic Venture Capital Funds,
Infrastructure Investment Trusts and Mutual Funds registered with the Securities and Exchange Board
of India in accordance with regulations made by it.
Meaning of DEPOSITORS:
“Depositors” means,
(a) Any member of the company who has made a deposit with the company in accordance with the provisions
of sub-section (2) of section 73 of the Act, or
(b) Any person who has made a deposit with a public company in accordance with the provisions of section
76 of the Act.
Meaning of Eligible Company:
“Eligible company” means a public company as referred to in sub-section (1) of section 76, having a net
worth of not less than 100cr Rs. Or a turnover of not less than 500cr Rs. And which has obtained the prior
consent of the company in general meeting by means of a special resolution and also filed the said

resolution with the Registrar of Companies before making any invitation to the public for acceptance
of deposits:
However, an eligible company, which is accepting deposits within the limits specified under clause (c)
of sub-section (1) of section 180, may accept deposits by means of an ordinary resolution.
Prohibition on acceptance of deposits from public:
On and from commencement of this Act, no company shall invite, accept or renew deposits under this
Act from the public except in a manner provided under this chapter of this Act.
Exception:
This sub-section with respect to the acceptance or renewal of deposit from public shall not apply to the
following company:
i. Banking company,
ii. Non-banking financial company as defined in the Reserve Bank of India Act, 1934.
iii. A housing finance company registered with the National Housing Bank established under the
National Housing Bank Act,1987, and
iv. Banking Company
ACCEPTANCE OF DEPOSITS FROM MEMBERS:
Q-2 What are the provisions contained in Act regarding acceptance of deposits from members?
Ans. :
Conditions for acceptance of deposits from members:
A company may accept deposits from its members-
- On such terms and conditions as may be agreed between the company and the members;
- Subject to the fulfillment of the following conditions:
Resolution: A resolution is passed in GM.
Rules: The company shall comply with such rules, as may be prescribed by CG.
Issue of circular to the members: The company shall issue a circular to the members inviting deposits from
them.
The circular shall include a Statement containing-
(a) Financial position of the company;
(b) Credit rating obtained by the company;
(c) Total number of depositors and amount due towards deposits in respect of any previous deposits
accepted by the company;
(d) Such other particulars, in such form and manner, as may be prescribed.
Filing of circular: The circular, along with the Statement, shall be filed by the company with the
Registrar, at least 30 days prior to the issue of the circular to the member.
Deposit repayment reserve account:
(a) The company shall deposit in a Scheduled Bank in a separate ban account a sum equal to 20% of the
amount of deposits maturing during the financial year and next financial year.
(b) Such account shall be called as the ‘deposit repayment reserve account’.
(c) The ‘deposit repayment reserve account’ shall not be utilized for any purpose, except for the
repayment of deposits.

Security w.r.t. deposits:
(a) The company may provide security for the due repayment of deposits and interest payable thereon,
and create a charge on its assets for this purpose.
(b) If the company does not secure the deposits or secure them partially, then, such deposits shall be
termed as ‘unsecured deposits’ in every circular, form, advertisement or document through which the
deposits are invited or accepted.
Repayment of deposits:
The company shall repay the deposits accepted by it, and interest thereon, in accordance with the
terms and conditions of such deposits.
Failure to repay the deposits or interest:
Application to tribunal:
If a company fails to repay any deposit or interest thereon in accordance with the terms and conditions
of such deposit, the depositor concerned may make an application to the Tribunal.
ORDERS OF THE TRIBUNAL:
a) The Tribunal may also order the company to pay to the depositor-
- Any sum due to him; and
- Any loss or damage incurred by him.
b) The Tribunal may make such other orders as it may deem fit.
Provisions contained in the Companies (acceptance of deposits) Rules, 2014.
Q-3 What are the provision contained in Companies (acceptance of deposits) Rules, 2014 regarding maximum
amount of deposits and its tenure?
Ans. :
I. Maximum amount of deposits and tenure of deposits (Rule-3):
(a) The amount of deposits outstanding together with the amount of deposits proposed to be accepted
shall not exceed 35% of the aggregate of the paid-up share capital, free reserve and securities
premium account of the company.
(b) A specified IFSC public company and a private company may accept from its members monies not
exceeding 100% of aggregate of the paid-up share capital, free reserve and securities premium
account of the company.
(c) The maximum limit in respect of deposits to be accepted from members shall not apply to following
classes of private companies:
i. A private company which is a start-up, for 5 years from the date of incorporation;
ii. A private company which fulfills all of the following conditions:
- It is not an associate or a subsidiary company of any other company;
- The borrowings of such a company from banks or financial institutions or any body
corporate is less than twice of its paid up share capital or Rs.50 crore, whichever is less;
and
- Such a company has not defaulted in the repayment of such borrowings subsisting at
the time of accepting deposits under section 73.
(d) All the companies accepting deposits shall file the details of monies so accepted with the registrar in
Form DPT-3.

(e) No company shall accept or renew any deposit which is repayable on demand or upon receiving a
notice or which is repayable within a period of less than 6 Months or more than 36 Months from the
date of acceptance of such deposit.
(f) However, a company may for the purpose of meeting any of its short term requirements of funds,
accept such short term deposits which are repayable earlier than 6 months from the date of acceptance
of such deposit subject to the condition that-
- Such deposit shall not exceed 10% of the aggregate of the paid-up share capital, free reserves and
securities premium account; and
- Such deposits are repayable not earlier than 3 months from the date of acceptance of such deposits.
II. No right of company to alter the terms (Rule-3):
- The company shall not reserve to itself a right to alter, to the prejudice or disadvantage of the
depositor, any of the terms and conditions of the deposit, deposit trust deed and deposit insurance
contract after circular is issued and deposits are accepted.
III. Deposit in joint names (Rue-3):
- Where depositors so desire, deposits may be accepted in joint names not exceeding 3, with or
without any of the clauses, namely, ‘Jointly’, ‘Either or Survivor’, ‘Anyone or Survivor’.
IV. Maximum brokerage for deposits (rule-3):
- No company shall invite or accept or renew any deposit in any form, carrying a rate of interest or
pay brokerage thereon at a rate exceeding the maximum rate of interest or brokerage prescribed
by the Reserve Bank of India for acceptance of deposits by non-banking financial companies.
- Explanation:
For the purpose of this sub-rule, it is hereby clarified that the person who is authorised, in writing,
by a company to solicit deposits on its behalf and through whom deposits are actually procured
shall only be entitled to the brokerage and payment of brokerage to any other person for procuring
deposits shall be deemed to be in violation of this rules.
V. Appointment of trustee for depositors (Rule-7):
Q-4 Is appointment of trustee by company for acceptance of deposit necessary under Companies Rule?
Ans.
(a) No company shall issue a circular or advertisement inviting secured deposits unless the company has
appointed one or more trustees for depositors for creating security for the deposits.
(b) Provided that a written consent shall be obtained from the trustee for depositors before their
appointment and a statement shall appear in the circular in the form of advertisement with reasonable
prominence to the effect that the trustees for depositors have given their concent to the company to
be so appointed.
(c) The company shall execute a deposit trust deed in form DPT-2 atleast 7 days before issuing the circular
or circular in the form of advertisement.
(d) No person including a company that is in the business of providing trusteeship services shall be
appointed as a trustee for the depositors, if the proposed trustee-
i. Is a director, key managerial personnel or any other officer or an employee of the company or of
its holding, subsidiary or associate company or a depositor in the company;
ii. Is indebted to the company, or its subsidiary or its holding or associate company or subsidiary of
such holding company;

iii. Has any material pecuniary relationship with the company;
iv. Has entered into any guarantee arrangement in respect of principal debts secured by the deposits
or interest thereon;
v. Is related to any person specified in clause (i) above.
(e) No trustee for depositors shall be removed from office after the issue of circular or advertisement and
before the expiry of his term except with the consent of all the directors present at a meeting of the
Board.
- Further, in case the company is required to have independent directors, atleast 1 independent
director shall be present in such meeting of the Board.
VIII. Registers of deposits (Rule-14):
Q-5 State the requirement for maintaining register of deposit under Companies Rules?
Ans. Every company accepting deposits shall maintain at its registered office one or more separate registers
for deposits accepted or renewed, in which there shall be entered separately in the case of each
depositor the following particulars:
(a) Name, address and PAN of the depositor/s
(b) Particulars of guardian, in case of minor
(c) Particulars of the nominee
(d) Deposit receipt number
(e) Date and the amount of each deposit
(f) Duration of the deposit and the date on which each deposit is repayable
(g) Rate of interest or such deposits to be payable to the depositor
(h) Due date for payment of interest
(i) Mandate and instructions for payment of interest and for non-deduction of tax at source, if any
(j) Date or dates on which the payment of interest shall be made
(k) Details of deposit insurance including extent of deposit insurance
(l) Particulars of security or charge created for repayment of deposits
(m) Any other relevant particulars.
IX. Return of deposits to be filed with the Registrar (Rule-16):
- Every company to which these rule apply, shall on or before the 30th day of June, of every year,
file with the Registrar, a return in Form DPT-3 along with the fee as provided in Companies
(Registration Offices and Fees) Rules, 2014 and furnish the information contained therein as on
the 31st day of March of that year duly audited by the auditor of the company.
Disclosure in the financial statement:
- Every company, other than a private company, shall disclose in its financial statement, by
way of notes about the money received from the director.
- Every private company shall disclose in its financial statement, by way of notes, about the
money received from the directors, or relatives of directors.
X. Penal rate of interest:
Every company shall pay a penal interest of 18% per annum for the overdue period in case of deposits,
whether secured or unsecured, matured and claimed but remaining unpaid.

EXEMPTION RO PRIVATE COMPANIES: [NOTIFICATION NO. G.S.R. 464(E), DATED 5TH JUNE, 2015]
Q-6 Is condition for acceptance of deposit from members apply to private company also? If not state the
exemption given to them.
Ans. Following ‘conditions for acceptance of deposits from members’ shall not apply to a private company
which accepts from its members monies not exceeding the aggregate of the paid up share capital and
free reserves, provided such company shall file the details of monies so accepted to the registrar in
such manner as may be specified:
- Issue of circular along with a statement to the members inviting deposits from them.
- Filing of the circular along with the statement, with the Registrar.
- Depositing money in ‘deposit repayment reserve account’.
- Obtaining deposit insurance.
- Certifying that the company has not defaulted in repayment of any deposit or interest thereon.
ACCEPTANCE OF DEPOSITS FROM PUBLIC BY CERTAIN COMPANIES: [SEC.76 READ WITH SEC. 73(1)]
A. Provision contained in the Companies Act.
i. Restrictions on acceptance of deposits from public [Sec. 73(1)]:
- No company shall invite, accept or renew deposits from the public, except in accordance
with the provisions of Chapter V (consisting of Sec. 73 to 76).
- Such restriction shall not apply to-
Q-7 State the companies who are exempted from the conditions given under Companies Rules for
acceptance of deposits?
Ans.
(a) A banking company;
(b) A non-banking financial company;
(c) A housing finance company registered with the National Housing Bank;
(d) Such other company as may be specified by CG.
ii. Eligible companies:
A company may accept deposits from person other than its members, only if-
(a) It is a public company; and
(b) The net worth or turnover of the company is such, as may be prescribed.
For this purpose, the prescribed limits are as under:
(1) Prescribed net worth: RS.100crore or more;
(2) Prescribed turnover: Rs.500crore or more.
iii. Conditions for acceptance of deposits from public:
- Compliance of Sec.73(2):
The company shall comply with all the legal requirements contained in Sec 73(2), i.e. conditions
for accepting deposits from the members.
- Compliance with Rules:
The company shall comply with such Rules, as may be prescribed by CG in consultation with RBI.
- Rating of deposits:
(a) The company shall obtain rating with respect to its deposits.
(b) The rating shall include the net worth of the company, liquidity and ability of the company to
repay the deposits on the due date.
(c) The rating ensures adequate safety.
(d) The rating shall be obtained from a recognised credit rating agency.
(e) The rating given to the company shall be informed to the public at the time of inviting
deposits.
(f) The rating shall be obtained every year during the tenure of deposits.
iv. Duty of the company to register the charge:
Where a company accepts secured deposits from the public,-
(a) It shall, within 30 days, create a charge on its assets in the favour of deposit-holders;
(b) The value of the assets so charged shall not be less than the amount of deposits accepted by it.
v. Applicability of Chapter V:
All the provisions of the Chapter V shall apply to the acceptance of deposits from public u/s 76, i.e. the
provisions of Sec. 73 to 75 shall also apply to the acceptance of deposits u/s 76.
B. Provisions contained in Rule 3 of the Companies (Acceptance of Deposits) Rules, 2014.
i. Maximum amount of deposits and tenure of deposits:
(a) No eligible company shall accept or renew-
- Any deposit from its members, if the amount of such deposit together with the amount
of deposits outstanding as on the date of acceptance or renewal of such deposits from
members exceed 10% of the aggregate of the paid-up share capital, free reserves and
securities premium account of the company;
- Any other deposit, if the amount of such deposit together with the amount of such
other deposits, other than the deposit referred to in clause (a), outstanding on the
date of acceptance or renewal exceeds 25% of the aggregate of the paid-up share
capital, free reserves and securities premium account of the company.
(b) No government company eligible to accept deposits u/s 76 shall accept or renew any deposit,
if the amount of such deposits together with the amount of other deposits outstanding as on
the date of acceptance or renewal exceeds 35% of the aggregate of the paid-up share capital,
free reserves and securities premium account of the company.
ii. Rating with respect to deposits:
(a) Every eligible company shall obtain, at least once in a year, credit rating for deposits accepted
by it and a copy of the credit rating shall be filed with the registrar along with the return of
deposits.
(b) The credit rating shall not be below the minimum investment grade rating for fixed deposits,
any one of the approved credit rating agencies as specified for Non-Banking Financial
Companies in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve
Bank) directions, 1998, issued by the RBI, as amended from time to time.
iii. Advertisement of circular:
- Every eligible companies intending to invite deposits shall issue a circular in the form of an
advertisement in English language in English newspaper having country wide circulation
and in vernacular language in a vernacular newspaper having wide circulation in the State in
which the registered office of the company is situated, and shall also place such circular on
the website of the company, if any.

CHAPTER-6
REGISTRATION OF CHARGES
CHARGE:
According to section 2(16) of the Companies Act, 2013 “charge” has been defined as an interest or lien
created on the property or assets of a company or any of its undertakings or both as security and includes
mortgage.
- Thus, charge is :
· An interest on lien
· Created on the property or assets
· Of a company or any of its undertakings or both
· As security and includes a mortgage.
Q-1 Why creating a charge is a necessary for companies?
Ans.
Â Generally, companies depend on share capital for funding their projects.
Â When the company raises money through borrowings, they may issue debentures or by obtaining
loans from financial institutions/banks.
Â These financial institutions/banks need a surety regarding the repayment of their funds.
Â Thus, they create a mortgage or hypothecation on the assets of the company for safe and secured
lending of the funds.
Â This creation of right on the assets and properties of the borrower companies is known as a charge on
assets.
Once charge is registered and filed, it becomes an information in public domain as to how much company
has borrowed against its assets and from whom.
Sec. 77 requires registration of every charge created on any property of the company, whether such property
is-
Â Movable or immovable
Â Tangible or intangible
Â Situated in India or outside India.
The charge shall be registered in such form, in such manner and on payment of such fees, as may be prescribed.
The prescribed form containing the particulars of the charge shall be signed by the company and the charge-
holder.
The charge and the instrument creating a charge, if any shall also be filed with the Registrar of Companies.

Q-2 What are the duties which company need to fulfill while registering a charge ?
Ans.
(1) Duty of the company to register charges : It shall be duty of the company creating a charge within or
outside India, on its property or assets or any of its undertakings, whether tangible or otherwise and
situated in or outside India, to register the particulars of the charge signed by the company and the
charge holder together with the instruments, if any, creating such charge in such form, on payment of
such fees and in such manner as may be prescribed, with the Registrar within 30 days of creation.
(2) Registration by the registrar:
Â The registrar may, on an application by the company, allow such registration to be made within a
period of 300 days of such creation on payment of such additional fees as may be prescribed.
Â Provided further that if registration is not made within a period of 300 days of such creation, the
company shall seek extension of time in accordance with section 87.
Â Provided also that any subsequent registration of a charge shall not prejudice any right acquired
in respect of any property before the charge is actually registered.
In terms of Rule-3 of the Companies (Registration of Charges) Rules, 2014,
Verification of instrument evidencing creation or modification of charge:
Â A copy of every instrument evidencing any creation or modification of charge and required to be
filed with the Registrar in pursuance of section 77, 78, or 79 shall be verified as follows:
(a) Where the instrument or deed relates solely to the property situated outside India, the copy
shall be verified by a certificate issued either under the seal, if any, of the company, or under
the hand of director or company secretary of the company or an authorised officer of the
charge holder or under the hand of some person other than the company who is interested
in the mortgage or charge;
(b) Where the instrument or deed relates, whether wholly or partly, to the property situated in
India, the copy shall be verified by a certificate issued under the hand of any director or
company secretary of the company or am authorised officer of the charge holder.
(3) Condonation of delay by Registrar:
(a) The Registrar may, on being satisfied that the company had sufficient cause for not filing the
particulars and instrument of charge, if any, within a period of 30 days of the date of creation of
the charge, allow the registration of the same after 30 days but within a period of 300 days of the
date of such creation of charge or modification of charge on payment of additional fee.
(b) The application for delay shall be made and supported by a declaration from the company signed
by its secretary or director that such belated filing shall not adversely affect rights of any other
intervening creditors of the company [The Companies (registration of Charges) Rules,2014].
(4) Issue of certificate of registration by registrar:
Â Where a charge is registered with the Registrar, a certificate of registration of such charge shall be
issued in such form and in such manner as may be prescribed to the company and, as the case may
be, to the person in whose favour the charge is created.
(5) No charge to be taken into account by the liquidator/creditor:
Â No charge created by a company shall be taken into account by the liquidator appointed under
this Act or the Insolvency and Bankruptcy Code, 2016, as the case may be or any other creditor,
unless-
i. It is duly registered under sub section (1), and

ii. A certificate of registration of such charge is given by the Registrar under sub section (2)
Â However, not registering charge shall not impact/negate any contract or obligation for the
repayment of the money secured by a charge.
Â Further, it may be noted that failure to register charge shall not absolve company’s liability in
respect of any offence under this chapter.
APPLICATION FOR REGISTRATION OF CHARGE [SECTION 78]:
Â As per section 78 of the Companies Act, 2013, where a company fails to register the charge within the
period 30 days, the person in whose favor the charge is created may apply to the Registrar for registration
of the charge along with the instrument created for charge, within such time and in such form and
manner as may be prescribed and the Registrar may, on such application, within a period of 14 days
after giving notice to the company, unless the company itself registers the charge or shows sufficient
cause why such charge should not be registered, allow such registration on payment of such fees, as
may be prescribed.
Â [For details refer Rule-3 of the Companies (Registration of Charges) Rules, 2014]
Â Provided that where registration is effected on application of the person in whose favour the charge is
created, that person shall be entitled to recover from the company the amount of any fees or additional
fees paid by him to the registrar for the purpose of registration of charge.
Rule-3 of the Companies (Registration of Charges) Rules, 2014:
Registration of creation or modification of charge:
(a) For registration of charge as provided in sub-section(1) of section 77, section 78, and section 79, the
particulars of the charge together with a copy of the instrument, if any, creating or modifying the
charge in Form No. CHG-1 (for other than debenture) or Form No. CHG-9 (for debentures including
rectification), as the case may be, duly signed by the company & the charge holder and filed with the
Registrar within a period of 30 days of the date of creation or modification of charge along with the fee.
(b) If the particulars of a charge are not filed within 30 days of the date of creation or modification of
charge, but filed within 30 days of the date of creation or modification of charge, but filed within a
period of 300 days of the date of such creation or modification, the additional fee shall be levied.
(c) If the company fails to register the particulars of the charge with the Registrar within the period of 30
days of its creation or modification, the particulars of the charge together with a copy of the instrument,
if any, creating or modifying such charge may be filed by the charge holder, in Form No. CHG-1 or Form
No. CHG-9, as the case may be, duly signed along with fee.
(d) A copy of every instrument evidencing any creation or modification of charge and required to be filed
with the Registrar in pursuance of section 77, 78, 79 shall be verified as follows:
i. Where the instrument or deed relates solely to the property situated outside India, the copy shall
be verified by a certificate issued either under the seal, if any, of the company, or under the hand
of any director or company secretary of the company or an authorised officer of the charge holder
or under the hand of some person other than the company who is interested in the mortgage or
charge;
ii. Where the instrument or deed relates, whether wholly or partly, to the property situated in India,
the copy shall be verified by a certificate issued under the hand of any director or company
secretary of the company or an authorised officer of the charge holder.
Rule-4 Condonation of delay by Registrar
(a) The Registrar may on being satisfied that the company had sufficient cause for not filing the particulars
and instrument of charge, if any, within a period of 30 days of the date of the date of creation of the
charge, allow the registration of the same after 30 days but within a period of 300 days of the date of
such creation of charge or modification of charge on payment of additional fee.
(b) The application for delay shall be made in Form No. CHG-10 and supported by a declaration from the
company signed by its secretary or director that such belated filing shall not adversely affect rights of
any other intervening creditors of the company.
Rule-5 applicability of Rule-4 in certain cases:
Rule-6 certification of registration:

(a) Where a charge is registered with the Registrar u/s 77 or u/s 78, the Registrar shall issue a certificate of
registration of such charge in Form No. CHG-2.
(b) Where the particulars of modification of charge is registered u/s 79, the Registrar shall issue a certificate
of modification of charge in Form No. CHG-3.
(c) The certificate of registration of charge issued by the Registrar in Form No. CHG-2 and the certificate of
modification of charge issued by the Registrar in Form No. CHG-3 shall be conclusive evidence that the
requirements of chapter VI of the Act and the Rules made there under as to registration of creation or
modification of charge, as the case may be, have been complied with.
SECTION 77 TO APPLY IN CERTAIN MATTERS [SECTION 79]:
Q-2 What are the matters under which modifiaction in the charge can be done???
Ans.
Modification of charge:
Â The term ‘modification’ includes variation of any of the terms of the agreement including variation of
rate of interest which may be by mutual agreement or by operation of law.
Â Even if the rights of a charge holder are assigned to a third party, it will be regarded as a modification.
Â The provisions applicable to the registration of a charge under section 77 shall apply to modification of
the charge.
Â Some examples of modification are as under:
1. Where the charge is modified by varying any terms and conditions of the existing charge by
agreement;
2. Where the modification is in pursuance of an agreement for enhancing or decreasing the limits;
3. Where the modification is by ceding a pari passu charge;
4. Change in rate of interest (other than bank rate);
5. Change in repayment schedule of loan; (this is not applicable in working loans which are repayable
on demand) and

6. Partial release of the charge on a particular asset or property.
Â Section 79 of the Companies Act, 2013, says that section 77 relating to registration of charges shall, so
far as may be, apply to-
(a) A company acquiring any property subject to a charge within the meaning of that section; or
(b) Any modification in the terms or conditions or the extent or operation of any charge registered
under that section.
- As per the Companies (Registration of charges) Rules, 2014, where the particulars of
modification of charge is registered under section 79, the Registrar shall issue a certificate of
modification of charge.
- The certificate issued by the Registrar shall be conclusive evidence that the requirements of
Chapter VI of the Act and the rules made thereunder as to registration of creation or
modification of charge, as the case may be, have been complied with.
DATE OF NOTICE OF CHARGE [SECTION 80]:
According to section 80 of the Companies Act,2013, where any charge on any property or assets of a company
or any of its undertakings is registered under section 77, any person acquiring such property, assets,
undertakings or part thereof or any share or interest therein shall be deemed to have notice of the charge
from the date of such registration.
COMPANY TO REPORT SATISFACTION OF CHARGE [SECTION 82]:

A. Company to intimate the registrar on the satisfaction of charge:
Â According to section 82 of the Companies Act, 2013, a company shall give intimation to the Registrar
in the prescribed form [Form CHG 1], of the payment or satisfaction in full of any charge registered
under this Chapter within a period of 30 days from the date of such payment or satisfaction and
the provisions of section 77(1) shall as far as may be, apply to an intimation given under this
section.
Â Provided that in case of a Specified IFSC public company, the Registrar may, on an application by
the company, allow such registration to be made within a period of 300 days of such creation on
payment of such additional fees as may be prescribed.
Â Provided that in case of a Specified IFSC private company, the Registrar may, on an application by
the company, allow such registration to be made within a period of 300 days of such creation on
payment of such additional fees as may be prescribed.
B. Notice to the holder of charge by the registrar:
Â The Registrar shall on receipt of intimation, cause a notice to be sent to the holder of the charge
calling upon him to show cause within such time not exceeding 14 days, as may be specified in
such notice, as to why payment or satisfaction in full should not be recorded as intimated to the
registrar, and if no cause is shown, by such holder of the charge, the Registrar shall order that a
memorandum of satisfaction shall be entered in the register of charges kept by him under section
81 and shall inform the company that he has done so.
Â However, no notice shall be required to be sent, in case the intimation to the Registrar in this
regard is in the specified form and signed by the holder of charge.
C. If any cause is shown, the Registrar shall record a note to that effect in the register of charge and shall
inform the company.
INTIMATION OF APPOINTMENT OF RECEIVER OR MANAGER [SECTION 84]
Â SECTION 84 OF THE COMPANIES Act, 2013 provides that if any person obtains an order for the appointment
of a receiver of, or of a person to manage, the property, subject to a charge, of a company or if any
person appoints such receiver or a person under any power contained in any instrument; he shall,
within a period of 30 days from date of passing an order or of the making of an appointment, given
notice of such appointment to the company &
Â The registrar shall, on payment of the prescribed fees register particulars of the receiver, person or
instrument in the register of charges.
Â Any person appointed above shall, on ceasing to hold such appointment given to the company & to the
registrar a notice to that effect & registrar shall register such notice.
POWER OF CG TO CONDONE THE DELAY AND ORDER RECTIFICATION BY CENTRAL GOVERNMENT IN REGISTER
OF CHARGES [SEC.87]
I. Rectification by Central Government in register of charges:
- Sec.87 of the Companies Act 2013 empowers the Central Government to make rectification in
register of charges.
- According to the provision :
1. The Central Government on being satisfied that
(i) (a) the omission to file with the Registrar the particulars of any charge created by the company or any
charge subject to which any property has been acquired by the company or any modification of such
charge; or
(b) the omission to register any charge within the time required under this chapter or the omission to
give intimation to the registrar of the payment or the satisfaction of a charge within the time
required under this chapter; or
(c) the omission or mis-statement of any particular with respect to any such charge or modification or
with respect to any memorandum of satisfaction or any other entry made in pursuance of Sec.82
or Sec.83,
- was accidental or due to any inadvertence or some other sufficient cause or it is not of a
nature to prejudice the position of creditors or shareholders of the company; or
ii) on any other grounds, it is just & equitable to grant relief,
- it may on the application of the company or any other person interested and on such terms &
condition as it may deem fit according to the Central Government it is Just & Expedient, direct that
the time for filing of the particulars of for the registration of the charge or for the giving of
intimation of payment or satisfaction shall be extended or, as case may require, that the omission
or mis-statement shall be rectified.
2. Where the Central government extends the time for registration of the charge, the order shall not
prejudice any rights acquired in respect of the property concerned before the charge is actually
registered.


CHAPTER-7
MANAGEMENT & ADMINISTRATION
REGISTER OF MEMBERS:
1. Provisions contained in the Act:
I. Applicability of Sec.88:
Â Sec 88 applies to every company, whether public or private, whether having a share capital
or not.
II. Legal requirements:
Â Every company shall keep and maintain the following registers:
(a) Register of Members (separately indicating each class of equity and preference shares
held by every member, whether residing in India or outside India)
(b) Register of Debenture-holders
(c) Register of any other security holders.
III. Form and manner of maintenance of registers:
Â All the aforesaid registers shall be maintained in such form and manner, as may be prescribed
by CG.
IV. Index of names to be a part of registers:
Â All the aforesaid registers shall contain an index of the names included therein.
V. Register and index in case of demat:
Â The register and index of beneficial owner maintained by a depository shall be deemed to
be the registers maintained by the company.
VI. Foreign registers:
Â A company may keep outside India, a part of the registers required to be maintained under
this section (termed as ‘foreign register’).
Â The foreign register shall contain the names and particulars of members, debenture-holders
or other security holders residing outside India.
Â The foreign register can be maintained only if the company is so authorised by its articles.
Â The foreign register shall be maintained in such manner, as may be prescribed by CG.
2. Provision contained in the Rules:
I. Form:
Â Every company limited by shares shall maintain the register of members in Form No. MGT-1.
II. Time limit for maintenance of register of members:
Â The register of members shall be maintained from the date of registration of the company.
Â In the case of a company existing on the date of commencement of the Companies Act, 2013,
the particulars as available in the register of members maintained under the Companies Act,
1956 shall be transferred to the new register of members, and in case additional information,
required as per the provisions of the Companies Act, 2013 and the rules made thereunder, is
provided by the members.
Â Such information may also be added in the register as and when provided.
III. Particulars to be contained in register of members in case of a company having no share capital:
Q-1 What are the particulars company required to keep when compny has no share capital?
Ans.
Â With respect to each member-
(a) His name and address (registered office address in case the member is a body corporate);
e-mail address; PAN or CIN; Unique Identification Number; if any; Father’s/ Mother’s/ Spouse’s
name; Occupation; Status; Nationality;
in case member is a minor, name of the guardian and the date of birth of the member; name and
address of nominee;
(b) Date of becoming member;
(c) Date of cessation;
(d) Amount of guarantee if any;
(e) Any other interest if any; and
(f) Instruction, if any, given by the member with regard to sending of notices etc.
IV. Particulars to be contained in other registers:
Â Every company which issues or allots debentures or any other security shall maintain a separate
register of debenture holders or security holders, as the case may be, for each type of debentures
or other securities in Form No. MGT-2.
V. Manner of maintenance of all the registers required to be maintained u/s 88:
Q-2 State the manner in which register required to u/s 88 should be maintain by company?
Ans.
a. Time limit for making entries : The entries in the registers shall be made within 7 days after the Board
of Directors or its duly constituted committee approves the allotment or transfer of shares, debentures
or any other securities.
b. Place of keeping the registers : The registers shall be maintained at the registered office of the
company unless SR is passed in GM authorizing the keeping of the register at any other place within the
city, town, or village in which the registered office is situated or any other place in India in which more
than 1/10th of the total number of members reside.
VI. Index of names to be included in Registers:
(a) Every register required to be maintained u/s 88 shall include an index of the names entered in the
respective registers and the index shall, in respect of each folio, contain sufficient indication to
enable the entries relating to that folio in the register to be readily found.
(b) The index shall not be necessary in case the number of members is less than 50.
(c) The company shall make the necessary entries in the index simultaneously with the entry for
allotment or transfer of any security in such Register.
114 Chapter 7 : Management & Administration

Q-3 When company is required to maintain foreign register? State matters and procedure for the same.
Or
State the requirement under Companies Act for maintenance of foreign register of company?
Ans.
(a) Where a company has members or debenture-holders or other security holders in any country
outside India, it may keep the foreign register in that country.
(b) Within 30 days of opening of any foreign register, the company shall file with the Registrar, a
notice of the location of the office where such foreign register is kept. The notice shall be filed
with the Registrar in Form No. MGT-3 along with the prescribed fees.
(c) In the event of any change in the location of such office or of its discontinuance, the company
shall, within 30 days of such change or discontinuance, file with the Registrar, a notice in Form No.
MGT-3.
(d) A foreign register shall be deemed to be part of the company’s register (hereinafter referred to as
the ‘principal register’) of member or of debenture holders or of any other security holders or
beneficial owners, as the case may be.
(e) The foreign register shall be maintained in the same manner as the principal register.
(f) A foreign register shall be open to inspection and may be closed, and extracts may be taken
therefrom and copies thereof may be required, except that the advertisement before closing the
register shall be inserted in at least 2 newspapers circulating in the place wherein the foreign
register is kept.
(g) Where a foreign register is kept by a company, the decision of the appropriate competent authority
in regard to the rectification of the register shall be binding.
(h) Entries in the foreign register shall be made simultaneously after the Board of Directors or its duly
constituted committee approves the allotment or transfer of shares, debentures or any other
securities, as the case may be.
(i) Within 15 days of any entry made in foreign register, the company shall transmit a copy of such
entry to its registered office in India.
(j) The company shall keep at its registered office a duplicate register of every foreign register. All
entries made in the foreign register shall be duly entered in such duplicate register.
(k) Every duplicate register shall, for all the purposes of this Act, be deemed to be part of the principal
register.
(l) No transaction with respect to any shares or debentures or any other security, registered in a
foreign register shall, during the continuance of such foreign register, be registered in any other
register.
(m) The company may discontinue the keeping of any foreign register; and keep thereupon all entries
in that register shall be transferred to some other foreign register kept by the company outside
India or to the principal register.
VIII. Authentication:
(a) The entries in the registers maintained u/s 88 and index included therein shall be authenticated
by the company secretary of the company or by any other person authorised by the Board for the
purpose, and the date of the Board resolution authorizing the same shall be mentioned.
(b) The entries in the foreign register shall be authenticated by the company secretary of the company
or person authorised by the Board by appending his signature to each entry.

IX. Penalty on failure to maintain register:
The company and every officer of the company who is in default shall be punishable with fine which
may extend to Rs. 3,00,000 and where failure is a continuing one, with a further fine which may extend
to Rs. 1,000 per day.
X. Nature of offence :
The nature of offence under this section is a compoundable offence.
DECLARATION IN RESPECT OF BENEFICIAL INTEREST IN ANY SHARE [SEC. 89]:
Q-4 State the provisions contained in Companies Act regarding declaration in respect of beneficial interest
in the shares?
Ans.
1. Filing of declaration by registered owner:

i. A person whose name is entered in the register of members of a company as the holder of shares
in that company but who does not hold the beneficial interest in such shares (hereinafter referred
to as the registered owner), shall file with the company, a declaration to that effect in Form No.
MGT-4, within a period of 30 days from the date on which his name is entered in the register of
members of such company.
ii. Where any change occurs in the beneficial interest in such shares, the registered owner shall,
within period of 30 days from the date of such change, make a declaration of such change to the
company in Form No. MGT-4.
2. Filing of declaration by the beneficial owner:
i. Every person holding and exempted from furnishing declaration or acquiring a beneficial interest
in shares of a company not registered in his name (hereinafter referred to as beneficial owner)
shall file with the company, a declaration disclosing such interest in Form No. MGT-5, within 30
days after acquiring such beneficial interest in the shares of the company;

ii. Where any change occurs in the beneficial interest in such shares, the beneficial owner shall,
within a period of 30 days from the date of such change, make a declaration of such change to the
company in Form No. MGT-5.
3. Filing of return by the company:
Where any declaration under section 89 is received by the company, the company shall make a note of
such declaration in the register of members and shall file, within a period of 30 days from the date of
receipt of declaration by it, a return in Form No. MGT-6 with the Registrar in respect of such declaration
with fee.
PENALTY FOR DEFAULT UNDER SECTION 89(5) & 89(7):
Kinds of penal provisions are included under section 89 –
1. Related to person required to make a declaration:
Section 89(5) applies to those who are required to make a declaration, but fail to do so.
The penalty for their failure, without any reasonable explanation, is fine which extends upto
Rs.50,000 and additionally Rs.1,000 per day during which the failure continues.
2. Related to company:
Section 89(7) refers to the company which fails to comply with the provisions of section 89, makes
punishable the company and every defaulting officer with fine which shall not be less than Rs.500
but which may go up to Rs.1000 with further fine of Rs.1000 per day during which the failure
continues.
POWER TO CLOSE REGISTER OF MEMBERS OR DEBENTURE HOLDERS OR OTHER SECURITY HOLDERS [SEC.91]
Q-5 Explain provision contained in Rule 10 of Companies Rule for surveying of notice of closure of members
register?
Ans. Provision contained in the Act:
1. Maximum period of closure:
a. Maximum – 45 days – in a year
b. Maximum – 30 days – at any one time.
2. Notice of closure:
a. Previous notice of the closure of register shall be given by the company.
b. The notice shall be of –
i. At least 7 days (i.e. at least 7 days before the first day of closure); or
ii. Such lesser period for listed companies as may be specified by SEBI.
c. The notice shall be given in such manner as may be prescribed.
3. Penalty for contravention:
For every day during which the register is kept closed in contravention of Sec. 91, the company and
every officer of the company who is in default shall be liable to a penalty of Rs.5,000 subject to a
maximum of Rs.1.00.000.
Provisions contained in Rule 10 of the Companies (Management and Administration) Rules, 2014:
1. Manner of giving notice in case of a private company:
A private company shall serve the notice of closure on all the members not less than 7 days prior
to closure of the register of members or debenture holders or other security holders.

2. Manner of giving notice in case of any other company:
a.
At least 7 days previous notice shall be given by advertisement –
i. At least once in a vernacular newspaper in the principal vernacular language of the
district and having a wide circulation in the place where the registered office of the
company is situated; and
ii. At least once in English language in an English newspaper circulating in that district and
having wide circulation in the place where the registered office of the company is
situated.
b. The notice shall also be published –
i. On the website, if any, of the Company; and
ii. On the website, as may be notified by CG.
ANNUAL RETURN [SEC.92]:
Provision contained in the Act:
(1) Material date for annual return:
a. Every company shall prepare an annual return in the prescribed form.
b. The annual return shall contain the particulars as they stood on the close of FY.
(2) Contents of annual return:
a. The address of registered office of the company, its principal business activities, and the particulars
of its holding, subsidiary and associate companies.
b. Its shares, debentures, and other securities and share holding pattern
c. Its indebtedness
d. Its members and debenture holders, and changes in the members and debenture-holders since
the close of the previous FY
e. Its promoters, directors, and key managerial personnel, and changes in directors and key managerial
personnel since the close of the previous FY
f. Meetings of members or a class thereof, and of the Board and its various committees, and
attendance details
g. Remuneration of directors and key managerial personnel
h. Penalty or punishment imposed on the company, directors, or officers and details of compounding
of offences and appeals made
i. Such other matters as may be prescribed.
(3) Signing of annual return:
a. The annual return shall be signed by –
i. A director; or
ii. The company secretary (if there is no company secretary, then, by a company secretary in
practice).
b. In the case of OPC and Small Company, it shall be signed by the company secretary, or if there is no
company secretary, then, by another director.
(4) Certification of annual return:
a. The annual return shall be certified by a company secretary in practice, in case of –
i. A listed company; or
ii. Any company having paid up share capital or turnover of such amount as may be prescribed
b. It shall be stated by way of certification that –
i. The annual return discloses the facts correctly and adequately; and
ii. The company has complied with all the provisions of this Act.
(5) Time limit for filing:
a. The annual return shall be filed with the Registrar within 60 days of the date on which AGM is
held.
b. If the AGM for any year is not held, the annual return shall be filed within 60 days of the last date
AGM ought to have been held, together with a Statement specifying the reasons for not holding
the AGM.
(6) Extract of annual return:
a. An extract of the annual return shall be prepared in the prescribed form.
b. Such extract shall form part of the Board’s report.
Provision contained in Rule 11 and Rule 12 of the Companies (Management and Administration) Rules, 2014:
(1) Form of annual return:
Every company shall prepare its annual return in Form No. MGT-7.
(2) Companies prescribed for certification of annual return:
The annual return shall be certified by a company secretary in practice, if –
a. The paid up share capital of the company is Rs.10crore or more; or
b. The turnover of the company is Rs.50crore or more.
(3) Form of certification of annual return:
Where the annual return is to be certified by a company secretary in practice, the company secretary in
practice shall issue the certificate in Form No. MGT – 8.
(4) Form of the extract:
The extract of the annual return shall be in Form No. MGT – 9.
(5) Preservation of copies of annual return etc.:
Copies of all annual return prepared u/s 92 and copies of all certificates and documents required to be
annexed thereto shall be preserved for a period of 8 years from the date of filing with the Registrar
(Rule 15).
PLACE OF KEEPING AND INSPECTION OF REGISTERS, RETURNS, ETC. [SEC.94]:

Provisions contained in the Act :
1. Place of keeping the registers and returns:
Q-6 Mr. Fenil along with his friends holds 17% of the total number of shares of the company. They demands
in the AGM to keep the register of the member & returns of the company at city in which they resides
i.e, in the pune. Whereas the registered office of the company is located in the Ahmedabad. 74% of the
members agree with the Fenil & also Fenil & his company demands to inspect the return by their CA.
Decide in the light of provision of the companies act whether the demand kept by the Fenil & co. is
viable or not??
Ans.
The registers and indices and copies of annual return shall be kept at –
Â The registered office of the company; or
Â Any other place in India, if –
i. More than 10% of total number of members reside at such place;
ii. SR is passed in GM; and
iii. The Registrar has been given in advance a copy of the proposed SR.
2. Period of maintenance : The registers, indices and copies of annual return shall be kept for such period
as may be prescribed by CG.
3. Inspection:
(a) The registers, indices and copies of annual return shall be open for inspection by –
- Any member or debenture-holder, other security-holder or beneficial owner, without any
fees;
- Any other person, on payment of prescribed fees.
(b) The inspection may be made during business hours.
(c) No inspection of registers and indices can be made when the registers and indices are closed in
accordance with the provision of Sec.91.
4. Extracts and copies:
(a) Any person may take extracts from the registers, indices and annual return, without payment of
any fees.
(b) Any person may require a copy of the registers, indices and annual return, on payment of prescribed
fees.
5. Effects of refusal by company:
If the company refuses to allow any inspection or taking of any extract, CG may, by order, direct an
immediate inspection or direct that the extract required shall forthwith be allowed to be taken by the
person requiring it.
Such power has been delegated by CG to the Regional Directors.
Provisions contained in Rule 14 and Rule 15 of the Companies (Management and Administration) Rules,
2014.
1. Time period of inspection:
Inspection may be made –
Â On every working day;
Â During business hours, at such reasonable time as the board may decide, subject to the condition
that at least 2 hours on every working day shall be allowed for inspection.
2. Fees for inspection:
Inspection may be made –
Â By any member, debenture holder, other security holder or beneficial owner without payment of
any fees;
Â By any other person on payment of such fee as may be specified in the articles of the company but
not exceeding Rs.50 for each inspection.
3. Fees for copies:
Â Any person may require a copy of the registers, indices and annual return, on payment of such fee
as may be specified in the articles of the company but not exceeding Rs.10 per page.
Â Such copy shall be supplied by the company within 7 days of payment of such fee.
4. Period of maintenance:
Â The register of members and the index of members shall be –
a. Preserved permanently; and
b. Kept in the custody of the company secretary of the company or any other person authorized
by the Board for such purpose.
Â The register of debenture holders or any other security holders and their indices shall be –
a. Preserved for a period of 8 years from the date of redemption of debentures or securities, as
the case may be; and
b. Kept in the custody of the company secretary of the company or any other person authorized
by the Board for such purpose.
Â Copies of all annual returns prepared u/s 92 and copies of all certificates and documents required
to be annexed thereto shall be preserved for a period of 8 years from the date of filing with the
registrar.

Â The foreign register of members shall be preserved permanently, unless it is discontinued and all
the entries are transferred to any other foreign register or to the principal register.
Â The foreign register of debenture holders or any other security holders shall be preserved for a
period of 8 years from the date of redemption of such debentures or securities.
Â The foreign registers shall be kept in the custody of the company secretary or any other person
authorised by the Board.
5. Form for filing SR:
Where it is proposed to keep the registers and indices (as are required to be maintained u/s 88) and
copies of annual return (filed u/s 92) at any place in India (other than the registered office of the
company), the company shall file with the Registrar a copy of the proposed special resolution at least
one day before the date of general meeting of the company in Form No. MGT-14.
REGISTERS, ETC. TO BE EVIDENCE [SEC.95]:
Â The registers and indices and copies of annual return shall be prima facie evidence of any matter
directed or authorised by the Act to be inserted therein.
REQUISITES OF A VALID GENERAL MEETING:
State the Requisite of holding a valid general meeting of the company
1. Properly called:
Â The meeting must be called by a proper authority; and
Â Proper notice must be served in the manner specified under the Act.(Sec. 101&102)
2. Properly convened:
Â Proper quorum must be present in the general meeting.(Sec.103)
Â Proper chairman must preside the meeting(Sec.104)
3. Properly conducted:
Â The business must be validly transacted at the meeting (i.e. resolution must be properly moved
and passed, and voting by show of hands and on poll must be proper)(Sec.105, 106, 107, 108,109,
112, 113, 114, 115, 116, 117, and 121)
Â Proper minutes of meeting must be prepared.(Sec. 118 and 119)
PROPER AUTHORITY TO CALL AGM:
1. Board:
Â Board has power at common law to call any GM (viz. AGM as well as EGM).
Â Sec.100 confers an express power on the Board to call an EGM, whenever the Board may deem fit.
Â An individual director has no power to call a GM.
Â Notice of a GM given by a secretary or a director is invalid if it is given without the sanction of the
Board.
Â However, the notice may be ratified by the Board.
2. Members:
Â Members who fulfil the requirements of Sec. 100 are eligible to requisition an EGM.
Â In case of failure of the Board to call the EGM within the time limits given u/s 100, the members
may themselves call an EGM as per the provisions of Sec. 100.

3. Tribunal:
Â An AGM may be called by the Tribunal u/s 97.
Â An EGM may be called by the Tribunal u/s 98.
LENGTH OF NOTICE, CONTENT OF NOTICE, AND OTICE TO WHOM? [SEC.101]
Q-7 State the companies who are exempted from the conditions given under Companies Rules for
acceptance of deposits?
State the provision relating to length & content of the notice. Also state whether notice is to be sent to
everyone? Also explain whether a shorter notice is valid or not??
OR
Reliance LTD general meeting is to be held on 28-9-18. The date on which notice of the meeting is
disposed of is 6-9-18. State whether the company has fulfilled the crietiria under the companies act for
serving of the notice for general meeting?
Ans.
1. 21 days’ notice:
(a) Any GM may be called by giving at least 21clear days’ notice.
(b) Where a notice of GM is sent by post, it shall be deemed to be served at the expiration of 48 hours
after the letter containing the same is posted.
(c) Part of the day on which the notice is deemed to be served on the member cannot be added to the
part of the day up to the time of the GM so as to make it on 1 day. Each of the 21 days must be full/
complete days.
(d) The day on which the notice is deemed to be served on the member, and the day of the GM have
to be in addition to the 21 days.
2. Manner of giving notice:
The notice shall be given –
Â In writing; or
Â By electronic mode, in such manner as may be prescribed.
3. Shorter notice:
Â Shorter notice is sufficient if consent is given for such shorter notice by at least 95% of the members
entitled to vote at such GM.
Â The consent may be given by the members –
Â In writing; or
Â By electronic mode.
4. Contents of notice:
Â The notice shall specify –
Â Place, date, day, & hour of GM; and
Â Business to be transacted at the GM (i.e. agenda)

5. Notice to whom?
members
legal
represent
ative of
the
Directora Notice should deceased
be served to member
Assignee
Auditor of the
of the insolvent
Company member
6. Effect of omission to give notice :

Â Accidental omission to give notice of GM shall not invalidate the proceedings of GM.
Â Non-receipt of notice by any person entitled to receive notice of GM, shall not invalidate the
proceedings of GM.
7. Procedure for notice given by electronic mode:
i. Electronic mode permitted : A company may give notice through electronic mode.
ii. Meaning of electronic mode : Any communication sent by a company through its authorized and
secured computer programme which is capable of producing confirmation and keeping record of
such communication addressed
Â to the person entitled to receive such communication at the last electronic mail address
provided by the member.
i. Requirement of link or Uniform Resource Locator (URL):
Â The notice made available on the electronic link or URL has to be readable, and the recipient
should be able to obtain and retain copies.
Â The company shall give the complete URL or address of the website and full details of how to
access the document or information.
1. Procedure for notice given by e-mail:
i. Modes permitted for sending notice:
Â A notice may be sent –
Â By e-mail: as a text; or
As an attachment to e-mail; or
Â As a notification providing electronic link or URL for accessing such notice.
ii. E-mail to whom? :

The e-mail shall be addressed to the person entitled to receive such e-mail –
Â As per the records of the company; or
Â As provided by the depository.
iii. Opportunity to members to register and update e-mail addresses:
The company shall provide an advance opportunity at least once in a financial year, to the
members to register their e-mail addresses and to update their e-mail addresses and to
update their e-mail addresses.
iv. Subject line in the e-mail:
The subject line in e-mail shall state –
Â The name of the company;
Â Notice of the type of meeting;
Â Place and the date on which the meeting is scheduled.
v. Opportunity to members to download software:
If notice is sent in the form of a non-editable attachment to e-mail, such attachment shall be
Â In the Portable Document Format (PDF); or
Â In a non-editable format
Together with a ‘link or instructions’ for recipient for downloading relevant version of
the software.
vi. Notice to be placed on the website:
The notice of GM shall be simultaneously placed on –
Â The website of the company, if any; and
Â Such website as may be notified by CG.
EXPLANATORY STATEMENT TO BE ANNEXED TO NOTICE [SEC.102]:
Â Where any special business is to be transacted at the company’s general meeting, then an ‘Explanatory
Statement’ should be annexed to the notice calling such GM, which must specify the nature of concern
or interest of every director or manager and every key managerial personnel and relatives of the
director/manager of the company.
Â Such a statement shall also include all the relevant information and facts that may enable the members
to understand the meaning, scope and implications of the items of business and to take decision
thereon.
Â For the purpose of understanding what special business means, let us understand the types of
businesses that are transacted at the general meetings.
Â Companies Act, 2013 sets out the 2 types of businesses transacted in GM, which are –
• Ordinary business
• Special business
ORDINARY BUSINESS:
1. Meaning:
- Ordinary Business are the following business which are transacted at the AGM of the company –
[Sec. 102(2)(a)]:

Considration of financial
statement and the
reports of the
Board of Directors and
auditors
Ordinary
Appoinment of and fixing of
business
the remuneration of the Declaration of dividend
auditors [ Sec 102(2)]
Appoinment of directors in
place of those retring
Â At any other GM no business shall be deemed as Ordinary business.

2. Explanatory statement:
Â Explanatory statement is not required for transacting any item of Ordinary business.
SPECIAL BUSINESS:
1. Meaning:
Â At an AGM all business except that specified u/s 102(2)(a) shall be deemed as special business.
Â At any other GM all business shall be deemed to be special business.
2. Full text of the resolution:
Full text of the resolution must be given in the notice for transacting every item f special business.
3. Explanatory statement:
Explanatory statement must be annexed to the notice for transacting every item of special business.
4. Contents of explanatory statement:
(a) Material facts
(b) Nature of concern or interest (financial or otherwise) of –
Â Every director and manager;
Â Every other key managerial person;
Â Relatives of every director, manager, and key managerial person.

Â Any other information and facts that may enable members to understand the meaning,
scope and implication of the items of business and to take decision thereon.
Â If special business relates to, or effects, any other company, the extent of shareholding in
that other company of every promoter, director, manager and every other key managerial
person shall be disclosed, if the extent of such shareholding is 2% or more of the paid up
share capital of that other company.
Â If special business refers to any document which is to be considered at the GM, the time and
place where such document can be inspected shall be specified in the Explanatory Statement.
5. Effects of non-disclosure:
• If, as a result of non-disclosure or insufficient disclosure in Explanatory Statement, any benefit
accrues to a promoter, director, manager or other key managerial personnel or their relatives,
such person shall hold such benefit in trust for the company, and shall compensate the company
to the extent of benefit derived by him.
QUORUM FOR GM [SEC.103]:
TATA steel limited served notice of GM to member, the notice stated the agenda for increase in share capital
of the company. One of the shareholder contended that the quantum of increase in share capital is not
mentioned in the notice hence the notice is not valid one? Decide whether contention of shareholder is
correct or not?
1. Meaning of quorum:
Â Quorum means the minimum number of members who must be present in order to constitute a
valid meeting.
2. Public company – quorum
Case Number of members as on the date of meeting Required quorum
1 Up to 1,000 5 members personally present
2 More than 1,000 but up to 5,000 15 members personally present
3 More than 5,000 30 members personally present
Â Articles may provide for a larger number as the quorum.
3. Private company – quorum:
Â 2 members personally present shall be the quorum.
Â Articles may provide for a larger number as the quorum.
4. Lack of quorum – legal effect:
Â EGM was called by requisitionists u/s 100:
The meeting shall stand cancelled.
Â Any other case:
i. The meeting shall adjourn to such day, time and place as may be determined by the Board.
ii. However, if the Board has not so determined the day, time and place, the meeting shall
adjourn to same day, time and place in the next week.
iii. At least 3 days’ notice
5. Quorum when required? :
• Quorum needs to be present only at the commencement of GM.
• Thus, quorum is not required at the time of passing each and every resolution.
CHAIRMAN OF GM [SEC. 104]:
1. Election by show of hands [Sec. 104(1)]:
Â Unless the articles of the company otherwise provide,
Â The members personally present at the meeting
Â Shall elect one of themselves to be the chairman thereof
Â On a show of hands.
2. Poll for election of chairman [Sec. 104(2)]:
Â If a poll is demanded on the election of a chairman
Â It shall be taken forthwith
Â In accordance with the provision of the Act &
Â The chairman elected on a show of hands under sub section (1)
Â Shall continue to be the chairman of the meeting
Â Until some other person is elected as a chairman as a result of the poll;
Â And such other person shall be the chairman for the rest of the meeting.
3. Summary of Sec 104:
Â Appointment as per article:
The chairman shall be appointed as per the provision contained in the articles of the company
Â Appointment as per the procedure given U/S 104:
If the articles do not contain any provision regarding the appointment of the chairman, then, the
chairman shall be appointed as follows:
(a) Members personally present shall elect one of themselves to be chairman of the company.
(b) Election of chairman shall be made by voting by show of hands.
(c) If a poll is demanded on the election of a chairman, it shall be taken forthwith
(d) During the poll, the chairman elected as a result of show of hands shall continue to be Chairman.
(e) If some other is elected as a chairman as a result of the poll, he shall be the chairman for the rest
of the meeting.
PROXIES [SEC.105]:
Q-8 State the meaning & provision related to proxies as per the companies act 2013.
Ans.
MEANING;
Â A person who is appointed by a member to attend and vote at a meeting (in the absence of the member
of the company at the meeting) id termed as ‘proxy’.
Â Thus a proxy is an agent of the member appointing him.
Â The term ‘proxy’ is also used to refer to the instrument by which a person is appointed as a proxy.
Who can appoint a proxy? :
Â Any member of a company entitled to attend and vote at a meeting of the company
Â Shall be entitled to appoint another person (whether a member or not)
Â As his proxy
Â To attend and vote instead of himself.

Restrictions on proxy:
Â CG may prescribe a class/es of companies whose members shall not be entitled to appoint a proxy.
Â A member of a company registered u/s 8 _viz. ‘not for profit company’) shall not be entitled to appoint
any other person as his proxy unless such other person is also a member of such company.
Â A person can act as proxy on behalf of members –
i. Not exceeding 50; and
ii. Holding in the aggregate not more than 10% of the total share capital of the company caring voting
rights
Â A member holding more than 10% of the total share capital of the company caring voting rights may
appoint a single person as a proxy, provided that such person shall not act as a roxy for any other person
or a shareholder of the same company.
Disclosure required in notice of GM:
Â In every notice calling a meeting of a company,
Â There shall appear with reasonable prominence a statement
Â That a member entitled to attend and vote is entitled to appoint a proxy, to attend and vote instead of
himself, and that a proxy need not be a member.
Deposit of proxy forms:
Â Any provision contained in the articles
Â Which specifies or requires a longer period than 48 hours before a meeting of the company, or depositing
with the company any instrument appointing a proxy,
Â Shall have effect as if a period of 48 hours had been specified in or required by such provision for such
deposit.
Legal requirements of proxy form
No special requirements in proxy form:

Â An instrument appointing a proxy, if in the form as may be prescribed, shall not be questioned on
the ground that it fails to comply with any special requirements specified for such instrument by
the articles.
Â Form No. MGT-11 has been prescribed for appointment of proxy.
Disabilities of proxy:
Â A proxy has no right to speak at the meeting.
Â A proxy cannot vote on show of hands.
Â A proxy is not counted for the purpose of quorum.
Rights of proxy:
Â A proxy has the right to attend the meeting.
Â A proxy has the right to vote on poll.
Â A proxy, if eligible u/s 109, has the right to demand a poll.
Inspection of proxies:
Â Any member is entitled to inspect the proxies deposited with the company.
Â Inspection can be made only if 3 days’ notice is given to the company.
Â Inspection can be made during the period beginning with 24 hours before the commencement of GM
and ending with the conclusion of such GM.
Â Inspection can be made only during business hours.
Revocation of proxy:
Â If after appointment of proxy, the member himself attends the GM, it amounts to automatic revocation
of proxy.
Â Once the proxy has voted, it cannot be revoked.
REPRESENTATIVE [SEC. 112 & 113]:
Representation of the president & governors [Sec. 112]:
Â If the President of India or Governor of a State is a member in any other company, he may authorize
such person as he thinks fit to act as his representative at any GM or class meeting of such company.
Â A person appointed as a representative is entitled to exercise the same rights and powers (including
the right to vote by proxy and postal ballot) as if he were a member of the company.
Representation of corporations at meetings of companies [Sec. 113]:
Â If a body corporate is a member in any other company, it may, by a resolution of its Board of Directors,
authorize such person as it thinks fit to act as its representative at any GM or class meeting of such
company.
Â A person appointed as a representative is entitled to exercise the same rights and powers (including
the right to vote by proxy and postal ballot) as if he were a member of the company.
Q-9 State the grounds on which restriction can be imposed in relation to voting rights in the GM?
Ans.
Manner of imposing restriction:
Â Express provision in the articles is required to restrict the voting rights of members.
Grounds imposing restriction:
1. Valid grounds:
i. Calls on shares or any other sum presently payable by the member has not been paid.
ii. The company has, and has exercised, any right of lien on shares.
2. Any other ground:
• A company shall not restrict the voting right of any member on any other ground.
Manner of voting in GM [Sec. 107 & 109]:
1. Voting by show of hands [Sec. 107]:
Â At a GM, a resolution shall be decided on a show of hands, unless –
(a) A poll is demanded u/s 109; or
(b) Voting is carried out electronically u/s 108.

Â A declaration of the result of a resolution (that the resolution has been passed or
failed, as the case may be) on a show of hands by the chairman and entry to that effect
in the minutes book shall be conclusive evidence of such fact.
· No proof of number of votes cast in favour of and against the resolution is required.
2. Voting by poll [Sec. 109]:
Â The result of the poll is demanded to be the decision of the meeting on the resolution on which
the poll is taken.
Â The provisions relating to poll are contained in Sec. 109 read with Sec. 106.
VOTING BY POLL IN THE MEETING [SEC. 109]:

Q-10 Explain the provision contained in the companies act for voting by poll in the GM.
Ans.
A. Provision of the Act:
1) Demand for poll and order for poll:
(a) Discretion to order poll :
Â A poll may be ordered to be taken, by the chairman of his own motion, i.e. without any
demand for poll by any member or proxy.
Â In other words, the chairman has suo motu power to order poll.
(b) Duty to order poll :
Â A poll shall be ordered to be taken, by the chairman if a demand for poll is made by –
In case of a company having a sharecapital In case of any other company
Any member(s) (present in person orproxy) Any member(s) (present in person
holding – or proxy) having 1/10th of total
Â 1/10th of the total voting power;or voting power.
Â Paid up share capital of not lessthan
Rs.5,00,000 or suchheigher amount as
may beprescribed.
(c) Time of ordering poll:
Â Before declaration of the result of voting on a show of hands; or
Â On the declaration of such result.
(d) Withdrawal of demand for poll:
Â The demand for poll may be withdrawn at any time by the person who made it.
(2) Time of taking poll:
Question on which poll is demanded Time of taking poll
Â Adjournment of GM The poll shall be taken forthwith.
Appointment of chairman of GM
On any other question The poll shall be taken at such time as maybe directed
by the Chairman (but within 48hours of demand for
poll)

(3) Scrutinizer’s at poll:
(a) Where a poll is to be taken, the chairman shall appoint such number of scrutinizers, as he may
deem fit.
(b) The scrutinizers shall scrutinize the poll process and votes given on the poll.
(c) The scrutinizers shall report to the chairman in such manner as may be prescribed.
(4) Chairman’s powers:
Â The chairman shall have the power to regulate the manner in which a poll shall be taken.
(5) Result of poll:
Â The result of the poll shall be the decision of the meeting on the resolution on which the poll was
taken.
– Procedure for scrutinizing the poll process:
The chairman of the GM shall ensure the following:
(a) The scrutinizers are provided with the Register of Members, specimen signatures of the members,
attendance Register and Register of proxies.
• The Polling paper shall be in Form No. MGT-12.
(b) The scrutinizers shall keep a record of the polling papers received in response to poll, by initialing
it.
(c) The scrutinizers shall lock and seal an empty polling box in the presence of members and proxies.
(d) The scrutinizers shall open the Polling box in the presence of 2 persons as witnesses after the
voting process is over.
(e) In case of ambiguity about the validity of a proxy, the scrutinizers shall decide the validity in
consultation with the Chairman.
(f) The scrutinizers shall ensure that if a member who has appointed a proxy has voted in person, the
proxy’s vote shall be disregarded.
(g) The scrutinizers shall count the votes cast on poll and prepare a report thereon addressed to the
Chairman.
(h) Where voting is conducted by electronic means under the provisions of section 108 and rules
made thereunder, the company shall provide all the necessary support, technical and otherwise,
to the scrutinizers in orderly conduct of the voting and counting the result thereof.
(i) The scrutinizers’ report shall state total votes cast, valid votes, votes in favour and against the
resolution including the details of nvalid polling papers and votes comprised therein.
(j) The scrutinizers shall submit a report to the chairman of the meeting in Form No.MGT-13.
Â The report shall be signed by the scrutinizers and, in case there is more than one scrutinizer
by all the scrutinizer.
Â The Chairman shall counter-sign the scrutinizers’ report.
(k) The chairman shall declare the result of voting poll.
Â The result may either be announced by him or a person authorized by him in writing.
RESOLUTIONS [SEC. 114-117]:
Â In lay man’s language, a resolution is the formal decision of an organization while transacting a business
at a meeting.

Â A motion which has obtained the necessarily majority vote in favour becomes a resolution.
Â So, in effect there is a difference between the 2 – Motion & Resolution.
Difference between Motion & Resolution –
Â Most matters come before a meeting by way of a motion recommending that the meeting may express
approval or disapproval or take certain action or order something to be done.
Â A motion is a proposal, and a resolution is the adoption of a motion duly made and seconded.
But every motion need not be followed by a resolution, as where a motion is made for the adjournment
of the meeting.
Â A motion whether it is passed for the closure of discussion or adjournment, etc. can be passed by an
ordinary resolution unless there is a specific provisions in the articles.
As per the Companies Act, 2013
ORDINARY AND SPECIAL RESOLUTION [SEC.114]:

Ordinary resolution – Conditions:
(a) The notice of the GM has been duly given.
(b) The vote cast in favour of the resolution are required to exceed the votes cast against the resolution.
Special resolution – Conditions:
(a) The notice of the GM has been duly given.
(b) The intention to propose the resolution as a special resolution has been duly specified in the notice of
GM or other intimation given to the members.
(c) The votes cast in favour of the resolution are required to be not less than 3 times the votes cast against
the resolution.
Manner of casting votes:
Votes may be cast by way of – Votes may be cast by– Votes cast shall include the
(1) Show of hands; (1) members present ‘casting vote’ of the chairman, ifany
in person;or
(2) Poll; (2) proxies (where proxies
are allowed)

(3) Electronically; or
(4) Postal ballot
Filing of special resolution:
Â A copy of every special resolution (together with explanatory statement) is to be filed with the Registrar
within 30 days of passing the special resolution [Sec. 117].
Use of ‘casting vote’:
Â The articles of a company may empower the Chairman to use the ‘casting vote’.
Â The chairman may cast the ‘casting vote’ only in case of equality of votes.
Â The Chairman has the direction, whether to cast the ‘casting vote’ or not.
Â ‘Casting vote’ is also termed as ‘second vote’.
Characteristics of Special Resolution:
Resolutions passed at adjourned meeting [Sec.116]

Â A resolution passed at an adjourned meeting (viz. GM or Class Meeting or Board Meeting) shall be
trated to have been passed on the date on which it was in fact passed and not on any earlier date.
RESOLUTIONS AND AGREEMENTS TO BE FILED [SEC. 117]:
1. Mandatory filing of resolutions and agreements:
The company shall file with ROC, a copy of –
Â Every resolution (together with explanatory statement, if any) which is required to be filed as per
Sec.117(3); and
Â Every agreement which is required to be filed as per Sec. 117(3).
2. Time limit:

3. Manner of filing and fees:
CG may, by Rules, prescribed –
(a) The manner of filing of such resolutions and agreements; and
(b) The fees for filing of such resolutions and agreements.
The form prescribed for this purpose is MGT-14.
4. Resolution or agreement to be embodied in articles:
Every resolution, which has the effect of altering the articles, and every agreement which is
required to be filed u/s 117(3) shall be –
(a) Embodied in the articles; or
(b) Annexed to the articles.
5. Resolution & agreement is required to be filed as per Sec. 117(3):
(a) Special Resolution.
(b) Resolution which have been agreed to by all the members, but which, if not so agreed to, would
not have been effective for their purpose unless they had been passed as special resolutions.
(c) Any resolution of the Board of Directors of the company or agreement executed by a company,
relating to the appointment, re-appointment or renewal of the appointment, or variation of the
terms of appointment, of a managing director.
(d) Resolutions or agreements which have been agreed to by any class of members but which if not
so agreed to, would not have been effective for their purpose unless they had been passed by a
specified majority or otherwise in some particular manners; and all resolutions or agreements
which effectively bind such class of members though not agreed to by all those members.
(e) Resolution passed by a member in GM authorizing the Board of Directors to –
Â Exercise the power as per Sec. 180(1)(a), viz. sell, lease or otherwise dispose off whole or
substantially the whole of the undertaking of the company; or
Â Exercise the power as per Sec. 180(1)(c), viz. borrow money exceeding the aggregate of paid
up capital & free reserves.
Within 30 days of Passing of such resolution Making of such agreement
(f) Resolution acquiring a company to be wound up voluntarily in pursuance of Sec. 59 of the Insolvency
and Bankruptcy Code, 2016.
(g) Resolution passed by the Board of directors in pursuance of Sec. 179(3) (viz. exercising such
powers as are required to be exercised by the Board by passing resolution in BM) subject to the
condition that no person shall be entitled u/s 399 to inspect or obtain copies of such resolutions
(however, in case of a private company, resolutions passed by the Board of directors in pursuance
to Sec. 179(3) need not be filed).

(h) Any other resolution or agreement as may be prescribed and placed in the public domain.
MINUTES OF GM ETC. [SEC. 118]:
1) Scope of Sec. 118:
Â Every company shall cause to be prepared, signed and kept minutes of –
Proceedings of
- (a) every GM;
- (b) meeting of any class of share holders;
- (c) meeting of any class of creditors;
(d) meeting of any class of directors;
(e) meeting of any committee of the Board; and
(f) every resolution passed by postal ballot.
(2) Manner of preparation and signing:
• The minutes shall be prepared and signed in such manner as may be prescribed.
• All the appointments made at any meeting shall be included in the minutes.
• The minutes shall be maintained in the books kept for that purpose.
• The pages of the minutes book shall be consecutively numbered.
(3) Time limits for preparation & signing:
• The minutes shall be prepared and signed within 30 days of –
(4) Discretion of Chairman:

Â No matter shall be included in the minutes, if the chairman is of the opinion that it is –
(a) Defamatory of any person; or
(b) Irrelevant or immaterial; or
(c) Detrimental to the interest of the company.
Â The chairman shall exercise absolute discretion with regard to the inclusion or noninclusion of
any matter in the minutes on any of the grounds specified above.
(5) Minutes to be correct & fair:
Â Minutes shall contain a fair and correct summary of the proceedings of the meeting.
(6) Evidential value:
Â Minutes kept as per Sec. 118 shall be evidence of the proceedings recorded therein.
(7) Compliance with secretarial standards:
Â Every company shall observe secretarial standards with respect to general meetings and Board
meetings –
(a) Specified by the Institute of Company Secretaries of India; and
(b) Approved as such by CG.
(3) Manner of signing of minutes:
Each page of every minute book shall be initialed or signed, & the last page shall be dated and signed,
as follows:
Nature of minutes book Signing by whom?
Minutes of board meetings and Â The chairman of the same meeting orthe chairman
committeemeetings of the next meeting
Minutes of GM Â The chairman of the same meeting.? In the event of
the death or inability ofthat chairman, by a director
dulyauthorised by the Board for this purpose.
Resolutions passed by postal ballot Â The chairman of the Board.? If there is no chairman of
the Board orin the event of the death or inability ofthe
chairman of the Board, by adirector duly authorized
by the Boardfor the purpose.
(4) Preservation and custody:
(a) The minutes books of GMs shall be kept at the registered office of the company, and shall be
preserved permanently.
(b) The minutes books of the board and committee meetings shall be kept at the registered office of
the company or such other place as the Board may decide, and shall be preserved permanently.
INSPECTION OF MINUTES OF GM [SEC.119]:
1. Place of keeping minutes book:
Â The minutes book shall be kept at the registered office of the company.
2. Inspection of minutes book:
i. Time of inspection:
Â Inspection can be made during business hours (subject to reasonable restrictions through
the articles or a resolution passed in GM, so that at least 2 hours in each business day are
allowed for inspection).
ii. Inspection by whom? :
Â Any member of the company may make the inspection without any charges.
iii. Copies of minute book:
Â The copies of the minute book of any GM shall be make available by the company to any
member.
Â Within 7 working days of the request made.
Â On payment of prescribed fees, viz. –
(a) Such sum as is prescribed in the articles of the company, but not exceeding Rs.10 per
page or part of a page.
(b) Free of cost, in case the member has made a request for obtaining soft copy of minutes
of any GM held during immediately preceding 3 FYs.
iv. Punishment for default:
If inspection is refused or copy is not furnished, the company shall be liable to a penalty of
Rs.25,000 and every officer in default shall be liable to a penalty of Rs.5,000 for each such refusal
or default.

v. Powers of the Tribunal:
If inspection is refused or copy is not furnished, the Tribunal may direct the company to allow
immediate inspection or direct the company to forthwith send the copy.
MAINTENANCE AND INSPECTION OF DOCUMENTS IN ELECTRONIC FORM [SEC.120]:

A. Provision contained in the Act:
1. Electronic form permitted for maintenance, inspection, and copies of documents etc.:
(a) Any document, record, register, minutes, etc. required to be kept by a company, may be kept
in electronic form.
(b) Any document, record, register, minutes, etc. allowed to be inspected by any person, may
be inspected in electronic form.
(c) Copies of any document, record, register, minutes, etc. to be given to any person by a company,
may be given in electronic form.
2. Form and manner to be prescribed:
Â The form and manner of keeping, inspection and giving copies of documents, records etc.
shall be such as may be prescribed.
3. Effect of Sec.120:
Â The provision of Sec. 120 shall not prejudice any other provision of the Act.
B. Provision contained in the Rules:
1. Companies prescribed:
2. Provisions w.r.t. existing companies:

Â In case of existing companies, data may be converted from physical mode to electronic
mode within 6 months from the date of notification of provisions of Sec. 120.
3. Manner of maintenance of records in electronic form:
Â The records shall be maintained in electronic form in such manner as the Board of directors
of the company may think fit, provided that –
(a) The records are maintained in the same formats and in accordance with all other
requirements as provided in the Act or the rules made there under;
(b) The information as required under the provisions of the Act or the rules made
thereunder should be adequately recorded for future references;
(c) The records must be capable of being readable, retrievable, and reproducible in printed
form;

(d) The records are capable of being dated and signed digitally wherever it is required
under the provisions of the Act or the rules made thereunder;
(e) The records, once dated and signed digitally, shall not be capable of being edited or
altered;
(f) The records shall be capable of being updated, according to the provisions of the Act or
the rules made thereunder, and the date of updating shall be capable of being recorded
on every updation.
Â Explanation: For the purpose of this rule, the term ‘records’ means any register, index,
agreement, memorandum, minutes, or any other document required by the Act or the rules
made thereunder to be kept by a company.
4. Persons responsible for security of records in electronic form:
The managing director
person responsible for

maintenance & security of
electronic record
any other director or officer company
of the company as the Board secretary
may decide
REPORT ON AGM [SEC.121]:

A. Provision contained in the Act:
1. Applicability:
Â Sec.121 applies only to listed public companies.
2. Legal requirement:
Â To prepare a report on each AGM:
(a) The report shall be prepared in the prescribed manner.
(b) The report shall confirm that the AGM was convened, held and conducted as per the
provisions of this Act and the rules made thereunder.
Â To file with ROC a copy of such report:

(a) The copy shall be filed within 30 days of conclusion of AGM.
(b) The company shall pay such filing fees and such additional fees as may be prescribed.
B. Provision contained in Rule-31 of the Companies (Management and Administration) Rules, 2014:
1. Manner of preparation of the report:
(a) The report on AGM shall be prepared in addition to the minutes of the AGM.
(b) The Report shall contain fair and correct summary of the proceeding of the AGM.

2. Contents of the report:
(a) The day, date, hour and venue of the AGM.
(b) Confirmation with respect to appointment of Chairman of the AGM.
(c) Number of members who attended the AGM.
(d) Confirmation of quorum.
(e) Confirmation with respect to compliance of the Act and the Rules, secretarial standards
made thereunder with respect to calling, convening and conducting the AGM.
(f) Business transacted at the meeting and result thereof.
(g) Particulars with respect to any adjournment, postponement of meeting, change in venue.
(h) Any other points relevant for inclusion in the report.
3. Signing of the report:
Â The report shall be signed and dated by the chairman of the meeting or in case of his inability
to sign, by –
(a) Any 2 directors of the company, 1 of whom shall be the managing director, if there is
any; and
(b) The company secretary of the company.
4. Filing of the report:
Â A copy of the report of AGM shall be filed with the Registrar in Form No. MGT-15 within 30
days of the conclusion of the AGM along with prescribed fees.
ANNUAL GENERAL MEETING [AGM] (SEC.96):
Applicability of Sec.96:
Â Sec.96 applies to all companies except OPC.
Â Thus, it is mandatory for all companies except OPC, to hold AGM in accordance with the provision
contained in Sec.96.
Legal requirement w.r.t notice of AGM
Â The notice of AGM shall comply with the requirements of sec.108.
Â The notice of AGM shall specify that the meeting is an Annual general meeting.
Last date for holding First AGM.
Â First AGM should be held within 9 months of close of first financial year.
Â If first AGM is so held there is no need to held AGM in the year of incorporation.
Â Registrar has no discretion to grant any extention for holding the first AGM.
Last date for holding any other AGM, viz. Subsequent AGM.
Â AGM is to be held within 6 months from close of the relevant financial year.
Â Not more than 15 months shall elapse between the date of one AGM & that of the next.
Â AGM is to be held in each calendar year
Â The three time limits given above are cumulative.
Â Non-compliance with any of them would constitute an offence under the companies Act.

Â Thus, the last date for holding AGM shall be the earliest of the above given three time limits.
Â Registrar may, for any special reason given, extend the time for holding the AGM by any period but not
exceeding 3 months.
Meaning of Financial Year [Sec.2(41)]
Â Financial year means the period for which financial statement of the company is made up.
Â Financial year means the period ending on the 31st day of March every year.
Â In case of a company incorporated on or after 1st day of January, financial year means the period ending
on 31st day of the March of following year.
Â A company existing on the commencement of the companies act 2013 shall within 2 years from the
date of such commencement align its financial year in accordance with the provision of clause (41) of
sec.2.
Time, Place and day of the AGM. [SEC.96(2)]
Â AGM shall be called during business hours that is between 9 am to 6 pm.
Â AGM shall be called for a day which is not a national holiday
Â National holiday means and includes a day declared as a national holiday by C.G
Â AGM shall be held at——————— the registered office of the company or some other place within
the city, town or village in which the registered office of the company is situated.
Exemption by C.G
Â C.G may exempt any company from the provision contained in Sec.96(2) subject to such condition as
C.G may deem fit to impose.
POWER OF TRIBUNAL TO CALL AGM [SEC. 97]:
Applicability:
Â Sec. 97 applies where default is made in holding AGM in accordance with the provisions of Sec.96.
Right of member to apply to Tribunal:
Â If AGM is not held as per the provisions of Sec. 96, any member may make an application to the
Tribunal.
POWER OF THE TRIBUNAL:
Â The tribunal may call a GM or direct the calling of a GM, which shall be deemed to be an AGM of the
company.
Â The Tribunal may give such directions as it may think fit, including a direction that 1 member present in
person or proxy shall be the quorum.
POWER OF THE TRIBUNAL TO CALL EGM [SEC. 98]:
Impracticable to call an EGM:
Â If for any reason, it is impracticable to call or to hold or conduct an EGM, the Tribunal may order an EGM
to be called, held and conducted in such manner as it thinks fit.
Power of the tribunal:
Â The Tribunal may give such directions as it may think fit (including a direction that 1 member present in
person or proxy shall be the quorum).
When are the powers exercisable by the Tribunal? :
Â The Tribunal may exercise such power –

On the On the
application of application of Suo motu.
a member; or a director; or
PUNISHMENT FOR DEFAULT IN COMPLYING WITH SECTION 96 OR 97 OR 98 [SEC. 99]:

Â If default is made in holding AGM u/s 96 or 97 or EGM u/s 98.
Â If default is made in complying with any directions of the Tribunal.
Who shall be liable?
Â The company.
Â Every officer of the company who is in default.
Amount of fine:
Â Fine up to Rs.1lakh.
Â Fine, in case of continuing default: up to Rs.5,000 per day.
EXTRA ORDINARY GENERAL MEETING (EGM) [SEC. 100]:
State the provision for calling of the EGM??
(A) EGM called by the board suo motu:
Â The board may, whenever it deem fit, call an EGM.
(B) EGM called on requisition of members:
1. Eligible members:
Eligible members
Company having a Company having a

share-capital no share-capital
Member(s) holding Member(s) holding

> 1/10th of paid up > 1/10th of total
equity share capital voting power

2. Essentials of a valid requisition:
(a) The requisition shall specify the matters for the consideration of which EGM is to be called.
The requisition shall be valid even if it does not specify the reasons for the matters proposed to
be considered.
(b) The requisition shall be signed by –
Â All the requisitionists; or
Â A requisitionist duly authorised, by all other requisitionists.
(c) The requisition shall be deposited at the registered office.
(d) The requisitions may make the requisition in writing or by electronic mode.
The requisition shall be sent –
Â In writing; or
Â By sending an electronic request and attaching therewith a scanned copy of a duly signed
requisition.
(e) The requisitionists may propose a date for holding the EGM. The requisition shall be deposited at
least 21 clear days before such proposed date for holding the EGM.
3. EGM called by the Board:
Â On receipt of a valid requisition, the Board shall within 21 days proceed to call an EGM to be held
not later than 45 days from the date of deposit of requisition.
Â The notice shall be given to those members whose names appear in the Register of Members
within 3 days of receipt of a valid requisition.
4. EGM called by Requisitionists:
Â If the Board fails to call an EGM, it may be called by the requisitionists themselves, as follows:
(a) Time period for holding EGM:
Ö The EGM shall be held within 3 months from the date of deposit of the requisition.
(b) Manner of calling EGM:
Ö The requisition shall be call the EGM in the same manner in which a meeting is called by
the Board of Directors.
(c) Rights of requisitionists:
Ö The requisitionists shall be entitled to receive a list of members from the company.
Ö The list shall be made as on 21 st day from the date of receipt of the requisition for
calling EGM together with such changes as have occurred up to 45th day from the date of
receipt of requisition for calling the EGM.
(d) Day and place for holding EGM:
Ö The requisitionists should convene the EGM on any day except national holiday.
Ö The requisitionists should convene the EGM at the registered office or in the same city
or town in which the registered office is situated.
(e) Manner of giving notice:
Ö The notice of EGM shall be given by –
¾ Speed post; or

¾ Registered post; or
¾ Electronic mode.
Ö Any accidental omission to give notice to any member shall not invalidate the
proceedings of the EGM.
Ö Non-receipt of notice by any member shall not invalidate the proceedings of the EGM.
(f) Disclosures in notice:
Ö The notice of EGM shall disclose the place, date, day and hour of the EGM.
Ö The notice shall disclose the business to be transacted at EGM, i.e. the agenda.
Ö If the resolution is to be passed as a special resolution, the notice shall disclose such a
fact.
(g) Reimbursement of expenses:
Ö All reasonable expenses incurred by the requisitionists by reason of the failure of the
Board to call EGM shall be repaid to the requisitionists by the company.
Ö The sum so repaid shall be deducted from the remuneration of the defaulting directors.
CIRCULATION OF MEMBERS’ RESOLUTIONS [SEC.111]:

1. Members eligible to make requisition u/s 111:
Â A company shall be bound to act on the requisition of such number of members as are eligible to
call an EGM u/s 100, as given hereunder:

Eligible members
Company having a Company having a

share-capital no share-capital
Member(s) holding Member(s) holding

> 1/10th of paid up > 1/10th of total
equity share capital voting power
2. Rights of requisitionists u/s 111:

Â The requisitionists are entitled to propose any resolution to the company and require the company
to move such resolution at the ensuring AGM.
Â When a resolution is so proposed, the company shall be bound to give notice of such resolution to
all its members.
Â With respect to any matter referred to in the notice of a GM, which is to be dealt with at that GM,
the requisitionists are entitled to prepare any statement with respect to such matter, and require
the company to circulate such statement to all the members.
3. Legal requirements for a valid requisition:
(a) Signed:
Â By the requisitionists.
(b) Place of deposit:
Â Registered office.
(c) Deposit of money:
Â A sum reasonably sufficient to meet the company’s expenses must be deposited by the
requisitionists along with the requisition.
(d) Time limit for deposit:
Â Where a requisition proposes a resolution:
Â The requisition shall be valid only if it is deposited atleast 6 weeks before the AGM.
Â However, if after the requisition is deposited with the company, an AGM is called on a date
within 6 weeks of the date of deposit of the requisition, the requisition shall be deemed to
have been properly deposited.
? Where a requisition requires circulation of a statement:
? The requisition shall be valid only if it is deposited atleast 2 weeks before the date of GM.

4. Check on abuse of Sec.111:
Â The company shall not be bound to circulate any statement, if CG is satisfied that the rights
conferred u/s 111 are being abused to secure needless publicity for defamatory matter.
Â CG may also order that the requisitionists shall pay to the company the cost incurred by the
company the cost incurred by the company in making application to CG, notwithstanding the
requisitionists were not a party to the application.
5. Effects of default:
Â The company and every officer of the company who is in default shall be liable to a penalty of
Rs.25,000.
RESOLUTIONS REQUIRING SPECIAL NOTICE [SEC.115]:
Q-11 Explain the provision requiring the special notice to be given before the Meeting?
Ans.
1. When is special notice required? :
i. Any provision contained in the Act may provide that special notice shall required to move a
resolution at a GM.
ii. Any provision contained in the articles of a company may provide that special notice shall be
required to move a resolution at a GM.
2. Legal requirement for special notice:
Â If special notice is required to move a resolution at a GM, then, the notice of the intention to
move such a resolution shall be given to the company by a members –
(a) holding not less than 1% of total voting power; or
(b) holding shares on which such sum not exceeding Rs.5lakh, as may be prescribed, has been
paid-up.
Â Time limit for giving special notice and signing requirements with respect to special notice (Rule
23 of the Companies (Management and Administration) Rules, 2014).
- If special notice is required to move a resolution at a GM, then the notice of the intension to
move such a resolution shall be given to the company –
(a) Not earlier than 3 months before the date of GM but at least 14 days before the GM (Excluding
the day on which such notice is given and the day of GM);
(b) Signed by –
¾ Member(s) holding not less than 1% of total voting power; or
¾ Member(s) holding paid up share capital of not less than Rs.5lakh.
3. Notice to be given to the members:
Â On receipt of special notice the company shall give notice of the intention to move the resolution,
to all its members, in such manner as may be prescribed.
Â Prescribed manner of giving notice by the company to all its members (Rule 23 of the Companies
(Management and Administration) Rules, 2014.
(a) The company shall give notice of the intention to move the resolution, to all its members
atleast 7 days before the date of GM (excluding the day on which such notice is given and the
day of GM).
(b) The notice shall be given in the same manner in which the company gives notices of GM.

(c) If it is not practicable to give the notice in the same manner as it gives notice of any GM, then,
Â The notice shall be published –
¾ At least 7 days before the date of GM (excluding the day of publication of notice and the day
of GM);
¾ In English language in an English newspaper, and
¾ In vernacular language newspaper,
¾ Both having wide circulation in the State where the registered office of the company is
situated; and
Â Such notice shall also be placed on the website, if any, of the company
4. Provisions contained in the Act requiring special notice:
(a) A resolution for appointing a person , other than the retiring auditor, as an auditor at the AGM.
[Sec. 140(4)]
(b) A resolution for expressly providing that the retiring auditor shall not be reappointed at the AGM.
[Sec. 140(4)]
(c) A resolution for removing a director before the expiry of his term of office. [Sec.169(2)]
(d) A resolution for appointing a director (in place of a director removed before the expiry of his
period of office) at the meeting at which the director is removed. [Sec.169(2)]
VOTING THROUGH ELECTRNIC MEANS [SEC.198]:
1. Applicability:
Â Sec 108 shall apply to such companies as may be prescribed by CG.
Â As per Rule 20 of Companies (Management and Administration) Rules, 2014, the prescribed classes
of companies, for this purpose, are –
Â All companies whose equity share are listed on a recognized stock exchange; and
Â All companies having 1,000 or more members.
Â However, the provisions of Sec.108 shall not apply to Nidhi Co.
2. Legal requirements:
Â A company to which Sec. 108 is applicable, shall provide to its members facility to exercise their
right to vote on resolutions proposed at GMs by electronic means.
Â Once a resolution is proposed at GM, it shall not be withdrawn.
3. Meaning of certain terms:
i. Electronic voting system:
Â Electronic voting system means a secured system based process of display of electronic
ballots, recording of votes of the members and the number of votes polled in favour or
against, in such manner that the entire voting exercised by way of electronic means gets
registered and counted in an electronic registry in a realized server with adequate cyber
security.
ii. Remote e-voting:
Â Remote e-voting means the facility of casting vote by a member using an electronic voting
system from a place other than venue of a general meeting.
iii. Voting by electronic means:

Â Voting by electronic means includes remote e-voting and voting at a GM through an electronic
voting system which may be the same as used for remote e-voting.
iv. Secured system:
Â Secured system means computer hardware, software, and procedure that –
(a) Are reasonably secure from unauthorized access and misuse;
(b) Provide a reasonable level of reliability and correct operation;
(c) Are reasonably suited to perform the intended functions; and
(d) Adhere to generally accepted security procedures.
v. Cut-off date:
Â Cut-off date means a date not earlier than 7 days before the date of GM for determining the
eligibility to vote by electronic means or in GM.
vi. Cyber security:
Â Cyber security means protecting information, equipment, devices, computer, computer
resource, communication, modification or destruction.
4. Modes of sending notice of GM:
By registered post
Modes of sending notice
By courier service
Throuh electronic means
[registered e-mail ID of the
recepient]
5. Displace of notice at website:

• The notice of GM shall also be placed on the website, if any, of the company, forthwith, after it is
sent to the members.
6. Disclosure in notice sent to the members by the company:
Â The notice shall be disclose that –
(a) The company is providing facility for voting by electronic means;
(b) The facility for voting, either through electronic voting system or ballot or polling paper shall
also be made available at the meeting and members attending the meeting who have not
already cast their vote by remote e-voting shall be able to exercise their right at the meeting;
(c) The members who have cast their vote by remote e-voting prior to the meeting may also
attend the meeting but shall not be entitled to cast their vote again.
7. Additional disclosures in notice sent to the members by the company:
Â The notice shall –
(a) Indicate the process and manner for voting by electronic means;

(b) Indicate the time schedule including the time period during which the votes may be cast by
remote e-voting.
(c) Provide the details about the login ID;
(d) Specify the process and manner for generating or receiving the password and for casting of
vote.
8. Public notice by way of advertisement:
(a) The company shall cause a public notice by way of an advertisement to be published, immediately
on completion of dispatch of notice of GM.
(b) The public notice shall be published at least 21 days before the date of GM.
(c) The public notice shall be published –
Â Atleast once in a vernacular newspaper in the principal vernacular language of the district in
which the registered office of the company is situated, and having a wide circulation in that
district; and
Â At least once in English language in an English newspaper having country-wide circulation.
(d) The public notice shall specify the following matters:
I. A statement that the business may be transacted through voting by electronic means.
II. The date and time of commencement of remote e-voting.
III. The date and time of end of remote e-voting.
IV. Cut-off date.
V. The manner in which persons who have acquired shares and become members of the
company after the dispatch of notice, may obtain the login ID and password.
VI. A statement that-
VII. Website address of the company, if any, where notice of GM is displayed.
VIII. Name, designation, address, e-mail id and phone number of the person responsible to
address the grievances connected with facility for voting by electronic means.
(e) The public notice shall be placed on the website of the company, if any.
9. Remote e-voting:
(a) The facility for remote e-voting shall remain open for not less than 3 days and shall close at 5.00
p.m., on the date preceding the date of GM.
(b) During the period when facility for remote e-voting is provided, the members of the company,
holding shares either in physical form or in dematerialized form, as on the cut-off date, may opt
for remote e-voting.
(c) Once a member has cast his vote on a resolution, he shall not be allowed to change it subsequently
or cast the vote again.
(d) A member may participate in GM even after exercising his right to vote through remote e-voting,
but he shall not be allowed to vote again.
(e) At the end of the rempte e-voting period, the facility for remote e-voting shall forthwith be
blocked.
10. Appointment of scrutinizer:
(a) The Board of Directors shall appoint one or more scrutinizers.
(b) The scrutinizers may be Chartered Accountant in practice, Cost Accountant in practice, or Company
Secretary in practice or an Advocate, or any other person who is not in employment of the company
and is a person of repute who, in the opinion of the board can scrutinize the voting and remote e-
voting process in a fair and transparent manner.
(c) The scrutinizer(s) may take assistance of a person who is not in employment of the company and
who is well-versed with the electronic voting system.
(d) The scrutinizer shall be willing to be appointed.
(e) The scrutinizer shall be available for the purpose of ascertaining the requisite majority.
(f) The scrutinizer(s) shall maintain a register to record the assent or dissent received, mentioning
the particulars of members.
(g) The register & all other papers relating to voting by electronic means shall remain in the safe
custody of the scrutinizer(s) until the chairman considers, approves and signs the minutes and
thereafter, the scrutinizer(s) shall hand over the register and other related paper to the company.
11. Voting at GM:
(a) During GM, a company may opt to provide the same electronic voting system as used during
remote e-voting.
(b) In such a case, the members attending the GM and who have not exercised their right to vote
through remote e-voting, shall be entitled to vote using the electronic voting system.
(c) At the GM, after conclusion of discussion, the chairman shall, with the assistance of scrutinizer(s)
allow voting on the resolutions, by use of polling paper or by using an electronic voting system for
all those members who are present at the GM but have not cast their votes by availing the remote
e-voting facility.
12. Declaration of result of voting:
(a) The scrutinizer(s) shall, immediately after the conclusion of voting at the GM, first count the vote
cast at the GM, and thereafter, the scrutinizer(s) shall unblock the votes cast through remote e-
voting in the presence of at least 2 witnesses not in the employment of the company.
(b) The scrutinizer(s) shall make, not later than 3 days of conclusion of the GM, a consolidated
scrutinizer’s report to the Chairman. The report shall contain the total votes cast in favour of, and
against, the resolution.
(c) The chairman shall declare the result of the voting forthwith.
(d) The manner in which members have cast their votes, that is, affirming or negating the resolution,
shall remain secret and shall not be available to the chairmen, scrutinizer or any other person till
the votes are cast in the GM.
(e) If the requsite number of votes are cast in favour of the resolution, the resolution deemed to be
passed on the date of the relevant GM.
(f) The result declared along with the report of the scrutinizer shall be placed on the website of the
company, if any, immediately after the result is declared by the chairman.
PASSING OF RESOLUTIONS BY POSTAL BALLOT [SEC.110]:
A. Provisions w.r.t. postal ballot as contained in the Act:
1. Applicability : The provisions relating to passing of resolution by postal ballot are contained in Sec. 110
read with Rule 22 of the Companies (Management and Administration) Rules, 2014.
2. Postal ballot mandatory for certain business : Every company shall transact such items of business by
postal ballot, as CG may, by notification, declare to be transacted only by means of postal ballot.
3. Postal ballot optional for certain business : Any company may use postal ballot for transacting any item
of business, other than –
Â Ordinary business; and
Â Any business in respect of which directors or auditors have a right to be heard at the meeting.
4. Manner of transacting business by postal ballot:
Â The manner of transacting business by postal ballot shall be such as may be prescribed by CG.
Â Where any business is transacted by postal ballot, such business shall not be transacted at GM.
5. Resolution deemed to be passed in GM:
Â If a resolution is assented to by the ‘requisite majority’ by means of postal ballot, it shall be
deemed to have been duly passed at GM convened in that behalf.
6. Meaning of postal ballot: ‘Postal ballot’ means voting by post or through any electronic mode. [Sec.2(65)]
B. Provisions w.r.t. postal ballot as contained in Rule 22 of the Companies (Management and Administration)
Rules, 2014 – Procedure for passing resolution by postal ballot:
1. Postal ballot mandatory for certain business:
Â The following items of business shall be transacted only by means of voting through a postal
ballot:
(a) Alteration of the Object Clause of MOA
(b) Alteration of articles for insertion or removal of provisions defining a private company
(c) Change in place of Registered office outside the local limits of any city, town or village
(d) Change in Objects for which a company has raised money from public through prospectus
and still has any unutilized amount out of the money so raised u/s 13(8)
(e) Issue of shares with differential rights as to voting or dividend or otherwise
(f) Variation in the rights attached to a class of shares or debentures or other securities
(g) Buy-back of own shares by the company
(h) Election of a small shareholders director u/s 151.
(i) Sale of the whole or substantially the whole of an undertaking u/s 180(1)(a).
(j) Giving loans, or extending guarantee or providing security in excess of the limits specified
u/s 186(3).
Â Following companies are not required to transact any business through postal ballot:
Ö One person companies
Ö All other companies having members up to 200.
2. Notice to be sent by the company:
Â The company shall send to all the shareholders, notice of postal ballot containing –
Ö Draft resolution;
Ö Reasons for passing the resolution by postal ballot;
Ö A request to the shareholders to send to the company their assent or dissent in writing on a
postal ballot within 30 days.
3. Mode of sending documents:
Â The notice of postal ballot shall be sent by –

By registered post
Notice of postal ballot

shall be sent by-
By courier service Throuh electronic means
[registered e-mail ID of the
recepient]
4. Issue of advertisement:
Â The company shall cause an advertisement to be published stating that the ballot papers have
been despatched.
Â The advertisement shall be published –
¾ Atleast once in a vernacular newspaper in the principal vernacular language of the district in
which the registered office of the company is situated, and having a wide circulation in that
district; and
¾ At least once in English language in an English newspaper having country-wide circulation.
Â The advertisement shall be published at least 5 days before the date of beginning of the voting
period.
Â The advertisement shall specify the following matters:
(a) A statement that the business is to be transacted by postal ballot.
(b) The date of completion of dispatch of notices
(c) The date of commencement of voting through postal ballot
(d) The date of end of voting through postal ballot
(e) A statement that any postal ballot received after the date of end of voting shall not be valid
(f) A statement that the members, who have not received postal ballot forms, may apply to the
Company and obtain a duplicate thereof
(g) The contact details of the person responsible to address the grievances connected with the
voting by postal ballot.
5. Notice to be placed on website:
Â The notice of the postal ballot shall also be placed on the website of the company forthwith after
the notice is sent to the members.
Â Such notice shall remain on such website till the last date for receipt of the postal ballots from the
member.
6. Appointment of scrutinizer:
Â The board of directors shall appoint one scrutinizer.
Â A person who is in the employment of the company shall not be appointed as a Scrutinizer.
Â The scrutinizer must be a person who can conduct the postal ballot voting process in a fair and
transparent manner.
Â A person shall be appointed as a Scrutinizer only if he is willing to be so appointed.
Â The Scrutinizer must be available for the purpose of ascertaining the requisite majority.
7. Register to be maintain by scrutinizer:
Â The scrutinizer shall maintain a register either manually or electronically.
Â The register shall contain, with respect to voting by shareholders by postal ballot, -
(a) His assent or dissent received;
(b) His name, address, folio number or client ID.
(c) Number of shares held by him, nominal value of such shares and whether the shares have
differential voting rights;
(d) Details of postal ballots which are received in defaced or mutilated form;
(e) Details of postal ballot forms which are invalid.
8. Safe custody of register and other papers:
Â The postal ballot received back from the shareholders and all other papers relating to postal
ballot including voting by electronic means, shall remain in the safe custody of the scrutinizer
until the chairman considers, approves and signs a minutes.
Â Thereafter, the scrutinizer shall return the ballot papers and other related papers or register to
the company who shall preserve such ballot papers and other related papers or register safely.
9. Report of the scrutinizer:
Â The scrutinizer shall submit his report as soon as possible after the last date of receipt of postal
ballots but not later than 7 days thereof.
Â The assent or dissent received after 30 days from the date of issue of notice shall be treated as if
reply from the member has not been received.
10. Prohibition on destroying postal ballot:
Â No parson shall deface or destroy the postal ballot papers received back from the shareholders.
Â No person shall declare the identity or any shareholder who has recorded his assent or dissent on
the postal ballot.
11. Display of result on the website:
The Company shall place on its

website-
Result of postal ballot. and Scrutinizer’s report
12. Resolution deemed to be passed at GM:

Â If a resolution is assented to by the ‘requisite majority’ by means of postal ballot including voting
by electronic means, it shall be deemed to have been duly passed at GM convened in that behalf.


‘REGISTER OF SIGNIFICANT BENEFICIAL OWNERS IN A COMPANY(1)
For section 90of the principal Act, the following section shall be substituted, namely : — ‘REGISTER OF
SIGNIFICANT BENEFICIAL OWNERS IN A COMPANY
(1) Every individual, who acting alone or together, or through one or more persons or trust, including a
trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per
cent. or such other percentage as may be prescribed, in shares of a company or the right to exercise, or
the actual exercising of significant influence or control as defined in clause (27) of section 2, over the
company(herein referred to as “significant beneficial owner”), shall make a declaration to the company,
specifying the nature of his interest and other particulars, in such manner and within such period of
acquisition of the beneficial interest or rights and any change thereof, as may be prescribed: Provided
that the Central Government may prescribe a class or classes of persons who shall not be required to
make declaration under this sub-section.
(2) Every company shall maintain a register of the interest declared by individuals under sub-section (1)
and changes therein which shall include the name of individual, his date of birth, address, details of
ownership in the company and such other details as may be prescribed.
(3) The register maintained under sub-section (2) shall be open to inspection by any member of the
company on payment of such fees as may be prescribed
(4) Every company shall file a return of significant beneficial owners of the company and changes therein
with the Registrar containing names, addresses and other details as may be prescribed within such
time, in such form and manner as may be prescribed.
(5) A company shall give notice, in the prescribed manner, to any person (whether or not a member of the
company) whom the company knows or has reasonable cause to believe—(a) to be a significant
beneficial owner of the company;(b) to be having knowledge of the identity of a significant beneficial
owner or another person likely to have such knowledge; or(c) to have been a significant beneficial
owner of the company at any time during the three years immediately preceding the date on which the
notice is issued, and who is not registered as a significant beneficial owner with the company as
required under this section.
(6) The information required by the notice under sub-section (5) shall be given by the concerned person
within a period not exceeding thirty days of the date of the notice.
(7) The company shall,—(a) where that person fails to give the company the information required by the
notice within the time specified therein; or(b) where the information given is not satisfactory, apply to
the Tribunal within a period of fifteen days of the expiry of the period specified in the notice, for an
order directing that the shares in question be subject to restrictions with regard to transfer of interest,
suspension of all rights attached to the shares and such other matters as may be prescribed.
(8) On any application made under sub-section (7), the Tribunal may, after giving an opportunityof being
heard to the parties concerned, make such order restricting the rights attached with the shares within
a period of sixty days of receipt of application or such other period as may be prescribed.
(9) The company or the person aggrieved by the order of the Tribunal may make an application to the
Tribunal for relaxation or lifting of the restrictions placed under sub-section (8).
(10) If any person fails to make a declaration as required under sub-section (1), he shall be punishable with
fine which shall not be less than one lakh rupees but which may extend to ten lakh rupees and where
the failure is a continuing one, with a further fine which may extend to one thousand rupees for every
day after the first during which the failure continues.

(11) If a company, required to maintain register under sub-section (2) and file the information under sub-
section (4), fails to do so or denies inspection as provided therein, the company and every officer of
the company who is in default shall be punishable with fine which shall not be less than ten lakh
rupees but which may extend to fifty lakh rupees and where the failure is a continuing one, with a
further fine which may extend to one thousand rupees for every day after the first during which the
failure continues.
(12) If any person wilfully furnishes any false or incorrect information or suppresses any material information
of which he is aware in the declaration made under this section, he shall be liable to action under
section 447.’

CHAPTER-8
DECLARATION AND PAYMENT OF DIVIDEND
Meaning:
Â A dividend is a payment made by a company to its shareholders, usually as a distribution of profits i.e.
a portion of profits earned and allocated as payable to the shareholders yearly or whenever declared.
Â A dividend is allocated as a fixed amount per share, with shareholders receiving a dividend in proportion
to their shareholding.
Â Dividend includes any interim dividend.
Â The term ‘interim dividend’ means the dividend declared between 2 AGMs.
TYPES OF DIVIDEND:
1. Dividend payable on the basis of time (when declared)
Dividend
Interim Final
dividend dividend
a. Interim dividend:
When the Board of Directors declare dividend between two AGM of the company, such dividend
is known as Interim dividend.
b. Final dividend:
When the dividend is declared at the AGM of the company, it is known as Final dividends.
Â All the provisions applicable on dividend are also applicable on interim dividend.
2. Dividend payable on the basis of Nature of shares:
Cumulative Dividend accumulates

Preference shares unless it is paid in full
Preference
shares
Non-Cumulative No arrears of dividend

Preference shares in future
Shares
Equity Dividend dependent on dividend policy and the

shares availability of profits after satisfying the rights of
preference shareholder

Â Shares can be classified in to 2 categories – preference shares and equity shares.
Â The manner of payment of dividend is dependent upon the nature of shares.
i. Preference shares:
¾ According to section 43 of the Companies Act, 2013 persons holding preference shares,
called preference shareholders, are assured of preferential dividend at a fixed rate during
the life of the company.
¾ Dividend is generally cumulative in nature and need not be paid every year in case of
deficiency of profits.
Â Types of preference shares on the basis of payment of dividend:
(a) Cumulative Preference Shares:
¾ A cumulative preference share is one that carries the right to a fixed amount of dividend or
dividend at a fixed rate.
¾ Such dividend is payable even out of future profit if current year’s profits are insufficient for
the purpose.
¾ This means that dividend on these shares accumulates unless it is paid in full and, therefore,
the shares are called Cumulative Preference Shares.
(b) Non-cumulative Preference Shares:
¾ A non-cumulative preference share carries with it the right to a fixed amount of dividend.
¾ In case no dividend is declared in a year due to any reason, the right to receive such dividend
for that year expires..
¾ It implies that holder of such a share is not entitled to arrears of dividend in future.
ii. Equity shares:
¾ Equity shares are those shares, which are not preference shares.
¾ It means that they do not enjoy any preferential rights in the matter of payment of dividend or
repayment of capital.
¾ The rate of dividend on equity shares is recommended by the Board of Directors and may vary
from year to year.
¾ Rate of dividend depends upon the dividend policy and the availability of profits after satisfying
the rights of preference shareholders.
PROCEDURE FOR DECLARATION OF DIVIDEND:
Â Final dividend:
¾ Firstly, dividend is recommended by the Board. [Sec.134]
¾ The members in the AGM may declare the dividend by passing OR declaration of dividend at an
AGM is an item of ordinary business. [Sec.102]
¾ The members may reduce the rate or amount recommended by the Board, but they cannot increase
it. [Regulation 80 of Table F]
Â Interim dividend:
¾ Interim dividend is declared by the Board.
CONDITION FOR DECLARATION AND PAYMENT OF DIVIDEND [SEC.123]
1. Sources of dividend:
160 Chapter 8 : Declaration and Payment of Dividend

Q-1 State the provision relating to sources of dividend , set off of loss and depreciation, transfer to reserve
in relation to payment of dividend?
Profits of current FY
(after providing for
depreciation)
Sourses of dividend
Moneys provided by
Undistributed profits
CG or SG in pursuance of a
of previous FY(s)
guarantee given by it.
(after providing for
depreciation)
2. Past year losses and depreciation to be set off:

Â Before any dividend is declared, the following shall be set off against the profit of the current
year:
(a) Losses of any previous FY not provided for; and
(b) Depreciation of any previous FY not provided for.
3. Depreciation:
Â Depreciation shall be provided in accordance with the provisions of schedule II.
4. Transfer to reserves:
Â Transfer to reserves is not mandatory.
Â A company may transfer to reserves such percentage of its profits as it may deem fit.
5. Declaration of dividend out of reserve:
Â If for any FY, there is inadequacy or absence of profits, but a company intends to declare dividend
out of accumulated profits of previous FYs which have been transferred to reserves, the company
shall comply with the Rules prescribed by CG.
Provisions contained in Rule 3 of the Companies (Declaration and Payment of Dividend) Rues,
2014:
Q-2 A Public Company has been declaring dividend at the rate of 20% on equity shares during the last 3
years. The Company has not made adequate profits during the year ended 31st March, 2015, but it has
got adequate reserves which can be utilized for maintaining the rate of dividend at 20%. Advise the
Company as to how it should go about if it wants to declare dividend at the rate of 20% for the year
2014-15 as per the provisions of the Companies Act, 2013.
Ans.
Â Rate:
¾ The rate of dividend declared shall not exceed the average of the rates at which dividend was
declared by the company in the immediately preceding 3 FYs.
¾ However, this condition shall not apply to a company, which has not declared any dividend in each
of the immediately preceding 3 FYs.
Â Amount drawn:
¾ The total amount to be drawn from reserves shall not exceed 1/10th of the sum of its paidup share
capital and reserves as per the latest audited FS.
Â Use of amount drawn:
¾ The amount so drawn from reserves shall first be utilized to set off the losses incurred in FY for
which the dividend is declared.
Â Balance of reserves:
¾ The balance of reserves after such drawal shall not fall below 15% of its paid-up share capital as
per the latest audited FS.
Â Compliance of Rule 3 is not required by a Government Company in which the entire paid-up share
capital is held by CG, or SG(s), or by CG and SG(s).
6. Dividend out of free reserves:
¾ No dividend shall be declared /paid by a company from its reserves other than free reserves.
7. Prohibition on declaration of dividend:
Q-3 Referring to the provisions of the Companies Act, 2013, examine the validity of the following:
The Board of Directors of ABC Limited proposes to declare dividend at the rate of 20% to the equity
shareholders, despite the fact that the company has defaulted in repayment of public deposits accepted
before the commencement of this Act.
Ans.
Â No dividend shall be declared on equity shares, if the company has not complied with –
Â This prohibition shall continue so long as the failure to comply with Sec. 73 or 74 continues.
8. Payment of dividend to whom
the registered
shareholder of shares ; or
The dividend shall be paid to-
the order of the registered the bank of the registered

shareholder, or shareholder
9. Mode of payment of dividend

¾ No dividend shall be payable except cash (i.e. dividend cannot be paid in kind)
¾ However, the dividend may be paid by cheque /dividend warrant /electronic mode.
10. Capitalization of profits permitted
¾ It is permissible to capitalize the profits or reserves by –

(a) Issue of bonus shares; or
(b) Making a bonus call.
11. Deposit of dividend in separate bank account
¾ The amount of the dividend (including interim dividend) shall be deposited in a scheduled bank
in a separate account within 5 days of declaration of such dividend.
¾ Such amount shall not be used for any purpose other than the payment of dividend.
Â This provision shall not apply to a Government Company in which the entire paid-up share capital is
held by CG, or SG(s), or by CG and SG(s) or by one or more Government Company.
UNPAID DIVDEND ACCOUNT [SEC.124]
Q-4 Explain the provision relating to unpaid dividend account?
Ans.
1. Dividend declared but remaining unpaid – Consequences:
(a) When is transfer required?
Â If a dividend declared but it remains unpaid or unclaimed for 30 days from the date of its
declaration.
(b) Where to transfer
Â The amount of unpaid or unclaimed dividend shall be transferred to a special account in any
scheduled bank.
Â Such account shall be called as ‘unpaid dividend account’.
(c) Interest for delayed transfer
Â Such transfer shall be made within 7 days of the expiry of 30 days from the date of declaration
of dividend.
(d) Statement containing details w.r.t. unpaid dividend to be placed on website
Â Within 90 days of transfer of amount to the ‘Unpaid Dividend Account’, -
Â The company shall prepare a statement containing the names, their last known addresses
and the amount of unpaid dividend to be paid to each person; and
Â The company shall place such statement –
(1) On the website of the company, if any; and
(2) On such other website as may be approved by CG.
2. Payment from the ‘Unpaid Dividend Account’:
Â A person who claims to be entitled to the unpaid dividend transferred to the ‘Unpaid Dividend
Account’ may apply to the company for payment of such amount.
3. Dividend remaining unpaid in ‘Unpaid Dividend Account’ - Consequences:
Â Transfer to Fund:
¾ Any money transferred to the ‘Unpaid Dividend Account’ of a company which remains unpaid
for 7 years from the date of such transfer shall be transferred by the company to ‘Investor
Education and Protection Fund’ (hereinafter called as the ‘Fund’).
¾ Interest accrued, if any, on such money, shall also be transferred to the Fund.

¾ Furnishing of detail:
¾ When making a transfer to the Fund, the company shall furnish to the authority administering
the said Fund, a statement containing the details of the amount transferred to the Fund.
4. Transfer of shares in the name of the Fund:
Â All such shares in respect of which dividend has not been paid or claimed for 7 consecutive years
shall be transferred by the company in the name of the Fund.
Â At the time of such transfer of shares, the company shall also file a statement containing the
prescribed details.
Â In case any dividend is paid or claimed for any year during the said period of 7 years, the shares
shall not be transferred to the fund.
5. Right to claim the transferred shares:
Â Any person who claim such shares as have been transferred to the Fund, shall be entitled to claim
the transfer of shares from Fund.
INVESTOR EDUCATION AND PROTECTION FUND [SEC.125]:

I. Establishment:
Â Sec. 125 empowers CG to establish the Investor Education and Protection Fund (referred to as the
‘Fund’).
II. Credits to the Fund:
(a) Amount in the Investor Education and Protection Fund u/s 205C of the CA,1956
(b) Amount in the Unpaid Dividend Account of the companies transferred to the Fund u/s 124 of the
CA, 2013, and interest accrued thereon

(c) Application money received for allotment of any securities and due for refund and remaining
unpaid for 7 years, and interest accrued thereon
(d) Matured deposits remaining unpaid for 7 years, and interest accrued thereon
(e) Redemption amount of preference shares remaining unpaid for 7 years
(f) Grants by CG
(g) Donation by CG, SG, companies or any other institution
(h) Income received on the investments made from the Fund
(i) Sale proceeds of fractional shares arising out of issue of bonus shares, merger and amalgamation
and remaining unpaid for 7 years
III. Utilization of Fund:
(a) Refunds in respect of unclaimed dividends, matured deposits, matured debentures, application
money due for refund and interest thereon.
(b) Promotion of awareness among the investors
(c) Educating the investors
(d) Protection of the interest of investors
(e) Distribution of any disgorged amount among persons who have suffered losses
(f) Reimbursement of legal expenses of class action suits u/s 37 and 245
(g) Any other incidental purpose
IV. Claims from the Fund:
Â Any person who claims to be entitled to any amount transferred to the Fund, may apply to the
Authority for the payment of the money claimed.
V. Constitution of Authority for administration of Fund:
Â CG shall constitute, by notification, an Authority for administration of the Fund consisting of –
(a) A chair person;
(b) Such other members, not exceeding 7; and
(c) A chief executive officer.
VI. Administration of Fund:
Â The authority shall –
(a) Administer the Fund; and
(b) Maintain separate account and records in relation to the Fund.
Â The accounts and records shall be maintained in the form prescribed by CG after consultation with
CAG.
VII. Powers of the Authority:
Â It shall be competent for the Authority to spend money out of the Fund.
VIII. Audit of accounts:
Â The accounts of the Fund shall be audited by CAG.
Â Audited accounts and audit report shall be forwarded annually by the Authority to CG.
IX. Annual report of activities of Authority:
(a) The authority shall prepare an annual report.
(b) The annual report shall give a full account of its activities during the FY.
(c) A copy of the annual report shall be forwarded by the Authority to CG.
(d) The annual report and the audit report shall be laid before each House of Parliament.
DIVIDEND ETC TO BE HELD IN ABEYANCE [SEC. 126]:
Â Applicability of Sec.126:
¾ Sec. 126 applies where –
o A transfer deed is delivered to the company for registration, but
o The transfer of such shares is not registered by the company.
Â Effect of Sec. 126:
o Dividend in relation to such shares shall be transferred to the Unpaid Dividend Account.
o However, the dividend shall not be transferred to the Unpaid Dividend Account, but shall be paid
to the transferee, if the registered shareholder has authorized the company to pay the dividend
to the transferee.
o Any offer of right shares or bonus shares made by the company shall remain pending.
Â Over-riding effect of Sec.126:
¾ Sec. 126 shall apply notwithstanding anything contained in any other provision of the Act.
FAILURE TO DISTRIBUTE DIVIDENDS WITHIN 30 DAYS [SEC.127]:
Q-5 R ltd is a company which held its AGM on 25th September and resolution for declaration of dividend is
passed in it. One of the member didn’t receive the dividend till date as he directed to the company to
deposit the dividend in his son’s account directly but information for the same was not provided
properly to the company which the company duly communicated to the member. Now member is
demanding dividend alongwith 20% interest. Decide whether the contention of member is viable or
not?
Ans.
Â Time limit for payment of dividend:
o The dividend shall be paid (i.e. dividend warrant shall be posted) within 30 days from the date of
its declaration.
Â Punishment for default:
o Punishment for every director, who is knowingly a party to the default:
a. Imprisonment: Maximum 2 years; and
b. Fine: Minimum Rs.1000 per day for each day of default.
o Punishment to the company:
a. Pay simple interest at the rate of 18% per annum.
Â Exceptions (no default):
(a) Where dividend could not be paid by reason of the operation of any law.
(b) Where a shareholder has given directions to the company regarding payment of dividend, but
those directions cannot be complied with, and the same has been communicated to the
shareholder.
(c) Where dividend is lawfully adjusted by the company against any sum due to it from the shareholder.
(d) Where there is a dispute regarding the right to receive the dividend.

(e) Where non-payment of dividend is not due to any default of the company.
REVOCATION OF DIVIDEND:
Q-6 Reliance ltd in his GM decided to provide 12% dividend to all its member but the proposal for the same
was not put during the meeting for resolution. Certain members of the company ask to pay dividend as
once dividend is declare can not be revoke and decided to do a legal case on the company for the same.
Decide whether member can do so? Will they be successful in case against the company?
Ans.
Â No revocation of dividend:
¾ Section 127 requires payment of dividend within 30 days of its declaration.
¾ Sec.127 also covers certain circumstances in which non-payment of dividend within 30 days does
not amount to contravention.
¾ Revocation of dividend is not a ground for non-payment of dividend.
¾ Thus, ordinary a dividend once declared cannot be revoked.
Â Exceptions:
¾ Where declaration of dividend is ultra vires (i.e. where dividend is declared although the company
has not earned sufficient profit), the declared dividend can be revoked.
¾ However, if illegally declared dividend is paid, the directors shall be liable to indemnify the
company, i.e. they shall be personally liable.
¾ Where the company ceases to be going concern, declared dividend may be revoked.
INTERIM DIVIDEND [SEC. 2(35) AND SEC. 123(3)]:
Q-7 Referring to the provisions of the Companies Act, 2013, examine the validity of the following:
WL Limited is facing loss in business during the current financial year 2015-16. In the immediate preceding
three financial years, the company had declared dividend at the rate of 8%, 10% and 12% respectively.
To maintain the goodwill of the company, the Board of Directors has decided to declare 12% interim
dividend for the current financial year. Examine the applicable provisions of the Companies Act, 2013
and state whether the Board of Directors can do so?
Hint: 12% not tanable]
1. Definition : Dividend includes any interim dividend [Sec. 2(35)]
2. Meaning:
¾ Dividend declare between 2 AGMs is called as interim dividend.
¾ Interim dividend is declared by the Board.
3. Sources: Surplus in P & L Account
Sources of interim dividend
Profits of current FY
4. Restriction w.r.t. rate of interim dividend:
Â When is the restriction applicable? :
¾ Where the company has incurred loss during the current FY upto the end of immediately
preceding quarter.
Â Effect of restriction:

¾ The rate of interim dividend shall not exceed the average rate of dividend during preceding
3 FY.
5. Other points:
(a) No power is required for declaration of interim dividend.
(b) Interim dividend shall be paid within 30 days of its declaration.
(c) Once declared, interim dividend cannot be revoked.
CONSEQUENCES OF PAYMENT OF DIVIDEND OUT OF CAPITAL:
(1) Personal liability of directors:
¾ The directors shall be held personally liable to make good to the company the amount distributed
as dividend.
(2) Directors’ right of indemnity:
¾ Directors have a right of indemnity against the members who received dividends knowing that
they were being paid dividends out of capital.
(3) No liability of directors:
¾ Where dividends improperly paid out of capital have been made good out of subsequent profits,
liability ceases to attach to the directors.


CHAPTER-9
ACCOUNTS OF COMPANIES
BOOKS OF ACCOUNTS [SEC.128]

Q-1 State the provision relating to location, manner and period of maintenance of the books of accounts of
the company.
Ans.
PREPARATION OF BOOKS OF ACCOUNTS ETC.:
Â Every company shall prepare and keep books of account and other relevant books and papers and FS
(hereinafter referred to as ‘books of account etc.’) for every FY.
Â ‘Book and paper’ and ‘book or paper’ include books of account, deeds, vouchers, writings, documents,
minutes, and registers, maintained on paper or in electronic form [Clauses (12) of Sec. 2].
METHOD / MANNER OF PREPARATION:
Â The books of account etc. must -
i. Give a true and fair view of the state of the affairs of the company, including its branch office(s);
ii. Explain the transactions effected at the registered office and its branch office(s);
iii. Be prepared on accrual basis;
iv. Be prepared according to the double entry system of accounting.
Manner of maintenance of books of account etc. in electronic form:
¾ The books of account and other relevant papers may be kept in electronic mode in such manner as may
be prescribed:
¾ Rule 3 of the Companies (Accounts) Rules, 2014 prescribes the following manner:
(a) The books of account etc. shall remain accessible in India.
(b) The books of account etc. shall be retained completely in the original format, or in a format which
shall present accurately the information generated, sent or received.
(c) The information contained in the electronic records shall remain complete and unaltered.
(d) The information contained in the electronic records shall be legible.
(e) There shall be a proper system for storage, retrieval, display, or printout of the electronic records.
(f) The electronic records shall not be disposed of unless permitted by law.
(g) The back-up of the electronic records shall be kept in servers physically located in India on a
periodic basis.
(h) The company shall intimate to the Registrar on an annual basis –
i. The name of the service provider;
ii. The internet protocol address of service provider;
iii. The location of the service provider (wherever applicable);
iv. Where the books of account etc. are maintained on cloud, such address as is provided by the
service provider.
Location of books of account etc.:
Â Registered office:
o The books of account etc. shall be kept at the registered office of the company.
¾ Any other place in India:
o All or any of the books of account etc. may be kept at such other place in India as the Board
of directors may decide.
o In such a case, the company shall file with the Registrar a notice containing the full address
of such other place.
o The notice shall be filed, within 7 days, in Form No. AOC-5.
¾ Branch office:
o Where a company has a branch office (whether in India or outside India), the books of
account etc. relating to the transactions effected at the branch office may be kept at the
branch office.
o In such a case, proper summarized return must be periodically sent by the branch office at –
(a) The registered office of the company; or
(b) Such other place where books of account etc. are kept.
PRESERVATION OF BOOKS OF ACCOUNT:
¾ Every company shall preserve in good order the books of account together with the relevant vouchers.
The time period of preservation shall be –
¾ Not less than 8FYs immediately preceding the relevant FY; or
¾ If the company has been in existence for less than 8 FYs, then, for the entire period of its existence.
¾ Where an investigation of the company is ordered, CG may direct that the books of account shall
be kept for such longer period as may be directed by CG.
INSPECTION OF BOOKS OF ACCOUNT
(1) The books of account etc. maintained within India shall be open for inspection by any director –
¾ At the registered office of the company or at such other place in India where the books have been
kept;
¾ During business hours.
(2) Financial information maintained outside India may be inspected by any director subject to such
conditions as may be prescribed.
Provisions contained in Rule 4 of the Companies (Accounts) Rules, 2014:
(a) The summarised returns of the books of account of the company kept and maintained outside
India shall be sent to the registered office at quarterly intervals. Such summarized return shall be
kept and maintained at the registered office of the company and kept open to the directors for
inspection.
(b) Where any other financial information maintained outside the country is required by a director,
the director shall furnish a request to the company setting out the full details of the financial
information sought and the period for which such information is sought.
172 Chapter 9 : Accounts of Companies
(c) The company shall produce such financial information to the director within 15 days of the date of
receipt of the written request.
(d) The financial information required under Sub-rules (c) & (d) shall be sought for by the director
himself and not by or through his power of attorney holder or agent or representative.
(3) The inspection of books of account of any subsidiary company shall be made only by the person
authorised by a resolution of the Board of Directors.
(4) It shall be the duty of every officer and employee of the company to give to the person making inspection
all reasonable assistance in connection with the inspection.
PERSONS RESPONSIBLE AND PENALTY
A. Persons responsible:
i. Managing director
ii. Whole-time director in charge of finance
iii. Chief Financial Officer
iv. Any other person of a company charged by the Board with such duty
B. Punishment for contravention:
i. Imprisonment upto 1 year; or
ii. Fine:
¾ Minimum: Rs.50,000
¾ Maximum: Rs.5,00,000
iii. Both.
FINANCIAL STATEMENTS [SEC.129]:
I. Definition of ‘financial statement’ [sec. 2(40)]:
Â ‘Financial statements’ in relation to a company, includes –
(a) B/S at the end of the FY;
(b) P&L A/C for the FY (in case of a company carrying a activity not for profit, an income and
expenditure account for the FY);
(c) Cash Flow Statement for the FY;
(d) Statement of changes in equity, if applicable; and
(e) Any explanatory note annexed to, or forming part of, any document referred to in subclause
(a) to sub-clause (d).
Â Provided that the FS, with respect to One Person Company, small company, dormant company
and private company. (if such private company is a start-up) may not include the cash flow
statement.
Â Explanation:
For the purpose of this Act, the term ‘start-up’ or ‘start-up company’ means a private company
incorporated under the Companies Act,2013 or the Companies Act, 1956 and recognised as start-
up in accordance with the Notification issued by the Department of Industrial Policy and Promotion,
Ministry of Commerce and Industry.
II. Legal requirements w.r.t. financial statements [Sec.129(1)]

Q-2 Explain the legal requirement relating to the financial statement of the company
Ans.
(a) The FS shall give a true and fair view of the state of affairs of the company.
(b) The FS shall comply with the AS notified u/s 133.
i. The deviation from the AS;
ii. The reasons for such deviation;
iii. The financial effects, if any, arising out of such deviation.
(c) The FS shall be in the form or forms as may be provided for different class or classes of companies
in Schedule III.
(d) Where a company has one or more subsidiaries, it shall also prepare CFS of the company and of all
the subsidiaries in the same form and manner as that of its own. For this purpose, the term
‘subsidiary’ shall include associate company and joint venture.
(e) The provisions relating to the preparation, adoption and audit of the FS of a holding company
shall, mutatis mutandis, apply to the CFS.
Q-3 When does Consolidated Financial Statement of the company need not be prepared under the
companies Accounts rule 2014.
Ans.
III. Non-applicability:? Nothing contained in Sec.129(1) shall apply to -
Type of Company Matters
Insurance Company Banking company Matters which are not required to bedisclosed by the
Insurance Act, 1938, or theInsurance Regulatory and
DevelopmentAuthority Act, 1999
Banking company Matters which are not required to bedisclosed by the
Banking Regulation Act, 1949
Company engaged in the generation Matters which are not required to bedisclosed by the
or supply of electricity Electricity Act, 2003
Company governed by any otherLaw Matters which are not required to bedisclosed by that
law.
IV. Laying of financial statements:
Â At every AGM, the Board shall lay the following documents:
¾ FS of the company; and
¾ CFS of the company and of all the subsidiaries, if any.
V. Form and items contained in financial statements:
Â Rule 4A of the Companies (Accounts) Rules, 2014 makes the following documents:
¾ The FS shall be in the form specified in Schedule III to the Act and comply with AS or Indian
Accounting Standards, as applicable.
¾ The items contained in the FS shall be prepared in accordance with the definition and other
requirements specified in the AS or Indian Accounting Standards, as the case may be.
VI. Consolidated financial statements:
¾ The CFS which are required to be laid before the AGM, shall be prepared in the same form and
same manner in which the FS of the company are prepared.
¾ CG may provide for the consolidation of FS of companies in such manner as may be prescribed.
Â Rule 6 of the Companies (Accounts) Rules, 2014 lays down the following provisions:
(a) The consolidation of FS of the company shall be made in accordance with the provisions of
Schedule III of the Act and the applicable AS.
(b) If a company is not required to prepare CFS under the AS, it shall be sufficient if the company
complies with the provisions contained in Schedule III of the Act.
(c) Preparation of CFS shall not be required if all the following conditions are satisfied:
i. The company is wholly owned subsidiary, or is partially owned subsidiary of another
company and all its other members, having been intimated in writing and for which the
proof of delivery of such intimation is available with the company, do not object to the
company not preparing the CFS.
ii. It is a company whose securities are not listed and are not in the process of listing on
any stock exchange, whether in India or outside India.
iii. Its ultimate or any intermediate holding company files CFS with the Registrar which are
in compliance with the applicable AS.
(d) A company which does not have any subsidiary but has one or more associate companies or
joint ventures or both, is not required to prepare CFS in respect of associate companies or
joint venture or both. However, this relaxation shall be available only for the FY 2014-2015
(e) A company which does not have any subsidiary in India, but has one or more subsidiaries
incorporated outside India, is not required to prepare CFS in respect of the subsidiaries
incorporated outside India. However, this relaxation shall be available only for the FY 2014-
2015.
VII. Statement containing salient features of the subsidiary:
¾ The company shall also attach along with its FS, a separate statement containing the salient
features of the FS of its subsidiary or subsidiaries in such form as may be prescribed, viz. Form No.
AOC-1, as per Rule 5.
VIII. Exemption:
(a) CG may, by notification, exempt any class or classes of companies from complying with any of the
requirements of this section or the rules made thereunder.
(b) CG may grant such exemption on its own or on application by a class or classes of companies.
(c) CG may grant such exemption if it considers necessary to grant such exemption in the public
interest.
(d) Such exemption may be grant either unconditionally or subject to such conditions as may be
specified in the notification.
IX. Notes:
¾ For the purpose of Sec. 129, any reference to the FS shall include any notes annexed to such FS.
X. Persons responsible and Penalty:
Company Contravenes the provisions of section 129
XI. Exemption:
- Sec.129 shall not apply to the extent of application of AS 17 (Segment Reporting) to the Government
Companies engaged in defence production.
RE-OPENING OF ACCOUNTS ON COURT’S OR TRIBUNAL’S ORDER [SEC.130]:
Q-4 Explain the condition under which accounts of the company can be re opened on courts or tribunal
order.
Ans. Conditions for re-opening the books of account and recasting the FS:
(1) An application shall be made to the Court or Tribunal by –
(a) CG; or
(b) SEBI; or
(c) The income-tax authorities; or
(d) Any other statutory regulatory body or authority; or
(e) Any person concerned.
(2) An order is made by a Court or Tribunal to the effect that –
(a) The relevant earlier accounts were prepared in a fraudulent manner; or
(b) The affairs of the company were mismanaged during the relevant period, because of which doubts
are raised as to whether the FS are reliable or not.
(3) Before passing any order, the Court or Tribunal shall give notice to, and shall take into consideration
the representations, if any, made by –
(a) CG;
(b) SEBI;
(c) The income-tax authorities;
(d) Any other statutory regulatory body or authority; or
Recast account to be final:
Â The accounts revised or re-cast u/s 130 shall be final.
VOLUNTARY REVISION OF FS OR BOARD’S REPORT [SEC.131]:
Q-5 Zaveri limited is a company in which public are interested. BOD of the company during an Board
meeting discussed and felt that they are providing wrong accounting treatment to some of the
transaction carried out by the company. Now board wants to revise the accounts of preceding year for
which AGM is been already held. Decide under the light of the companies act whether the decision
taken by the board is viable or not?
Ans. Conditions for voluntary revision:
Â The BOD may decide to prepare the revised FS or a revised Board’s Report, if the following
conditions are satisfied:
(a) The Board is of the opinion that –
¾ The FS do not comply with the provisions of Sec. 129; or
¾ The Board’s Report does not comply with the provisions of Sec. 134.
(b) The FS or Board’s Report may be revised only in respect of any of the preceding 3 FY.
(c) The revision of the FS or the Board’s Report may be made only after obtaining the approval
of the Tribunal.
¾ For this purpose the company shall make an application to the Tribunal in such form
and manner as may be prescribed.
¾ Before passing any order, the Tribunal shall give notice to CG and Income Tax Authorities,
and shall take into consideration the representations, if any, made by CG and Income
Tax Authorities.
¾ The copy of the order of the Tribunal shall be filed with the Registrar.
(d) The revised FS or the Revised Board’s Report shall not be prepared more than once in a FY
(e) The detailed reasons for revision of the FS or the Board’s Report shall be disclosed in the
Board’s report prepared for the relevant FY, viz. the FY in which such revision is made.

(f) Where copies of the previous FS or Board’s Report have been sent out to members or
delivered to the Registrar or laid before the company in GM, the revisions must be confined
to –
¾ The correction in respect of which the previous FS or Board’s Report do not comply with
the provisions of Sec. 129 or Sec. 134; and
¾ The making of any necessary consequential alteration.
NATIONAL ADVISORY COMMITTEE ON AS [SEC. 210 OF THE COMPANIES ACT, 1956]:
1. Method of constitution :
Â CG shall, by notification in the Official Gazette, constitute an advisory committee to be called as
National Advisory Committee on Accounting Standards. (hereafter referred to as ‘advisory
committee’)
2. Purpose of constitution:
Â The advisory committee shall advice CG on the formulation and laying down of accounting policies
and AS for adoption by the companies.
3. Working of the committee:
Â The committee shall give its recommendations to CG on such matters of accounting policies and
standards as may be referred to it from time to time.
4. Terms of appointment of members:
(a) The members of the advisory committee shall hold office for such term as may be determined by
CG at the time of their appointment.
(b) Any vacancy shall be filled by CG.
(c) The non-official members of the Advisory Committee shall be entitled to such fees, travelling,
conveyance and other allowances as are admissible to the officers of CG of the highest rank.
5. Members of the committee:
Â The advisory committee shall consist of following members:
(a) A chairperson who shall be a person of eminence well versed in accountancy, finance, business
administration, business law, economics or similar discipline.
(b) One member each nominated by the Institute of Chartered Accountants of India, Institute of
Cost Accountants of India, and Institute of Company Secretary of India.
(c) One representative nominated by CG.
(d) One representative nominated by the RBI.
(e) One representative nominated by the Comptroller and Auditor General of India.
(f) A person who holds or has held the office of professor in accountancy, finance or business
management in any university or deemed university.
(g) The chairman of the Central Board of Direct Tax, or his nominee.
(h) Two members to represent the chambers of commerce and industry to be nominated by CG.
(i) One representative nominated by the SEBI.
FINANCIAL STATEMENT, BOARD’S REPORT, ETC. [SEC.134]:
Section 134 deals with financial statements as well as board’s report. The auditor’s report is to be attached
to every financial statement. A report by the Board of directors containing details on the matters specified,
including director’s responsibility statement, shall be attached to every financial statement laid before
company. The Board’s report and every annexure has to be duly signed. A signed copy of every financial
statement shall be circulated, issued or published along with all notes or documents, the auditor’s report
and Board’s report.
i. Authentication (i.e. approval and signing) of Financial statements [Section 134(1), (2) & (7)]:
Q-6 State the authorised person who can approve the financial statement of the company?
Ans. Financial Statement
Signed by
Chairperson Chief Executive Chief Financial Company

(authorised by the Officer Officer secretary
Board /two (if he is (if appointed) (if appointed)
directors director)
(1 shall be MD,
if any)
(a) The financial statements, including consolidated financial statement, if any, shall be approved by
the Board of Directors before they are signed on behalf of the Board at least by the following:
(1) The chairperson of the company where he is authorised by the Board; or
(2) By two directors out of which one shall be managing director and other the Chief
Executive Officer, if he is a director in the company,
(3) The Chief Financial Officer, wherever he is appointed; and
(4) The company secretary of the company, wherever he is appointed.
(b) In the case of a One Person Company, the financial statement shall be signed by only one director,
for submission to the auditor for his report thereon.
(C) The auditors’ report shall be attached to every financial statement.
(d) A signed copy of every financial statement, including consolidated financial statement, if any,
shall
be issued, circulated or published along with a copy each of—
(1) Any notes annexed to or forming part of such financial statement;
(2) The auditor’s report; and
(3) The Board’s report.
ii. Board’s report [Section 134(3) & (4)]:
(1) According to Rule 8 of the Companies (Accounts) Rules, 2014, the Board’s Report shall be prepared
based on the stand alone financial statements of the company and shall report on the highlights
of performance of subsidiaries, associates and joint venture companies and their contribution to
the overall performance of the company during the period under report” .
(2) There shall be attached to statements laid before a company in general meeting, a report by its
Board of Directors, which shall include— [Contents of Board’s Report]:
[In case of specified IFSC public & IFSC private company, if any information listed in this sub-section is
provided in the financial statement, the company may not include such information in the report of
the Board of Directors.]
(a) The extract of the annual return as provided under sub-section (3) of section 92;
(b) Number of meetings of the Board;
(c) Directors’ Responsibility Statement;
(ca) By the Companies (Amendment) Act, 2015, this is a new clause added under the Section 134(3),
whereby details in respect of frauds reported by auditors under section 143(12) other than those which
are reportable to the Central Government.
(d) a statement on declaration given by independent directors under sub-section (6) of section 149;
(e) in case of a company covered under sub-section (1) of section 178, company’s policy on directors’
appointment and remuneration including criteria for determining qualifi positive attributes,
independence of a director and other matters provided under sub-section (3) of section 178
[This clause is not applicable to the Government Company as per the Notification dated 5th of June
2015.]
(f) explanations or comments by the Board on every qualification, reservation or adverse remark or
disclaimer made—
(i) by the auditor in his report; and
(ii) by the company secretary in practice in his secretarial audit report;
(g) particulars of loans, guarantees or investments under section 186;
(h) particulars of contracts or arrangements with related parties referred to in sub-section (1) of section
188 in Form AOC-2;

(i) the state of the company’s affairs;
(j) the amounts, if any, which it proposes to carry to any reserves;
(k) the amount, if any, which it recommends should be paid by way of dividend;
(l) material changes and commitments, if any, affecting the financial position of the company which have
occurred between the end of the financial year of the company to which the financial statements
relate and the date of the report;
(m) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such
manner as prescribed under the Rule 8(3) of the Companies (Accounts) Rules, 2014 which provides for:
(n) A statement indicating development and implementation of a risk management policy for the company
including identification therein of elements of risk, if any, which in the opinion of the Boardmay
threaten the existence of the company;
(o) the details about the policy developed and implemented by the company on corporate social
responsibility initiatives taken during the year;
(p) Every listed company and every other public company having a paid up share capital of 25 crore rupees
or more calculated at the end of the preceding financial year shall include (as prescribed under the
Companies (Accounts) Rules, 2014), in the report by its Board of directors, a statement indicating the
manner in which formal annual evaluation has been made by the Board of its own performance and
that of its committees and individual directors.
This clause shall not apply to the Government Company in case the directors are evaluated by the
Ministry or Department of the Central Government which is administratively in charge of the company,
or, as the case may be, the State Government, as per its own evaluation methodology Inserted vide
Notifi dated 5th June 2015]
(q) Such other matters as contain as prescribed under the Companies (Accounts) Rules, 2014.
iii. Directors’ Responsibility Statement or contents of Directors Responsibility Statement[Section 134(5)]:
Q-7 What are the contents which are need to be added in the Director’s Responsibility statement as per
the companies act 2013
Â Directors’ responsibility statement is aimed at heighlighting the accountability of the directors with a
view to ensuring good corporate gaovernance.
Â It will make the directors accountable to safeguard the asset of the company and to take positive steps
in this regards.
Â The directors’ responsibility statement shall disclose the following particulars:
(a) Whether the applicable AS had been followed in the preparation of FS. In case of any material
departures, proper explanation shall be given.
(b) Whether 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 state of affairs of the company and of the profit and loss of the company.
(c) Whether the directors had taken proper and sufficient care –
¾ For the maintenance of adequate accounting records in accordance with the provisions of
this Act;
¾ For safeguarding the assets of the company; and
¾ For preventing and detecting fraud and other irregularities.
(d) Whether the directors had prepared the FS on a going concern basis.

(e) Whether the directors had laid down internal financial controls to be followed by the company
and whether such internal financial controls are adequate and were operating effectively, if the
company is a listed company.
¾ The term “internal financial controls” means the policies and procedures adopted by the
company for ensuring –
¾ The orderly and efficient conduct of its business, including adherence to company’s policies,
¾ The safeguarding of its assets,
¾ The prevention and detection of frauds and errors,
¾ The accuracy and completeness of the accounting records, and
¾ The timely preparation of reliable financial information.
(f) Whether the directors had devised proper systems to ensure compliance with the provisions of
all applicable laws and whether such systems were adequate and operating effectively.
iv. Disclosures relating to conservation of energy etc.:
Â As per Rule 8(3) of the Companies (Accounts) Rules, 2014, the Board’s Report shall contain the
following information and details:
(A) Conservation of energy—
(i) the steps taken or impact on conservation of energy;
(ii) the steps taken by the company for utilising alternate sources of energy;
(iii) the capital investment on energy conservation equipments;
(B) Technology absorption—
(i) the efforts made towards technology absorption;
(ii) the benefits derived like product improvement, cost reduction, product development or
import substitution;
(iii) in case of imported technology (imported during the last three years reckoned from the
beginning of the financial year)-
Ö the details of technology imported;
Ö the year of import;
Ö whether the technology been fully absorbed;
Ö if not fully absorbed, areas where absorption has not taken place, and the reasons
thereof; and
Ö the expenditure incurred on Research and Development.
(C) Foreign exchange earnings and OutgoThe Foreign Exchange earned in terms of actual inflows
during the year and the Foreign Exchange outgo during the year in terms of actual outflows.
¾ By the Companies (Accounts) Second Amendments Rules, 2015, vide Notification dated 4th
September 2015, a proviso has been inserted saying that the requirement of furnishing
information and details under this sub-rule shall not apply to a Government Company
engaged in producing defence equipment.
v. Other matters prescribed:
¾ As per Rule 8(5) of the Companies (Accounts) Rules, 2014, following other matters shall also be
disclosed in the Board’s report of every company:

(a) The financial summary or highlights.
(b) The change in the nature of business, if any.
(c) The details of directors or KMP who were appointed or have resigned during the year.
(d) The names of companies which have become or ceased to be its Subsidiaries, joint ventures
or associate companies during the year.
(e) The details relating to deposits, covered under Chapter V of the Companies Act, 2013 –
¾ Accepted during the year;
¾ Remained unpaid or unclaimed as at the end of the year;
¾ Whether there has been any default in repayment of deposits or payment of interest
thereon during the year and if so, number of such cases and the total amount involved
o At the beginning of the year;
o Maximum during the year;
o At the end of the year.
(f) The details of deposits which are not in compliance with the requirements of Chapter V of
the Companies Act, 2013.
(g) The details of significant and material orders passed by the regulators or courts or tribunals
impacting the going concern status and company’s operations in future.
(h) The details in respect of adequacy of internal financial controls with reference to the FS.
vi. Scope of Board’s Report:
¾ As per Rule 8(1) of the Companies (Accounts) Rules, 2014, the Board’s Report shall be prepared
based on the stand alone FS of the company.
¾ The Board’s Report shall contain a report on the highlights of performance of subsidiaries,
associates and joint venture companies and their contribution to the overall performance of the
company during the period under report.
vii. Board’s Report in case of One Person Company:
¾ In case of a One Person Company, Board’s Report shall mean a report containing explanations or
comments by the Board on every qualification, reservation or adverse remark or disclaimer made
by the auditor in his report.
viii. Signing of Board’s Report:
Q-8 State the authority prescribed under the companies act who can sign the Board’s report?
Â The Board’s Report and any annexures thereto shall be signed by –
¾ The chairperson of the company, if he is authorised by the Board; or
¾ At least 2 directors, one of whom shall be a managing director, if the chairperson of the company
is not so authorised.
¾ In case there is only one director, the Board’s Report and annexures thereto shall be signed by
such director.
ix. Contravention [Section 134(8)]:
Persons liable Punishment for contravention of any provision of this section
Company fine which shall not be less than `50,000 butwhich may extend to
` 25 Lacs

Every officer of the company (1) Imprisonment for a term which may extend to 3 years; or
whois in default (2) fine which shall not be less than ‘50,000but which may extend
to ‘5 Lacs; or
(3) Both with imprisonment and fine.
CORPORATE SOCIAL RESPONSIBILITY [SEC.135]
Q-9 Explain the legal provision relating to the corporate social Responsibility given under the companies
act 2013.
(i) Which Company is required to constitute CSR committee:
(a) Every company including its holding or subsidiary, and a foreign company defined under section
2(42) of the Companies Act, 2013 having its branch office or project office in India, having
(1) net worth* of rupees 500 crore or more, or
(2) turnover of rupees 1000 crore or more or
(3) a net profit of rupees 5 crore or more during any financial year shall constitute a Corporate
Social Responsibility Committee of the Board.
(b) However, the net worth, turnover or net profit of a foreign company shall be computed in
accordance with balance sheet and profit and loss account of such company as prepared in
accordance with the provisions of section 381(1) (a) and section 198 of the Act.
*“Net worth” [Section 2(57)] means the aggregate value of the paid-up share capital and all reserves
created out of the profits and securities premium account, after deducting the aggregate value of the
accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the
audited balance sheet, but does not include reserves created out of revaluation of assets, write-back
of depreciation and amalgamation.
(ii) Exclusion of Companies
Every company which ceases to be a company covered under sub section (1) of section 135 of the Act
for three consecutive financial years
(1) shall not be required to constitute a CSR Committee, and
(2) is not required to comply with the provisions as per section 135
(iii) Composition of CSR Committee :
(a) Every company to which Sec.135 is applicable, shall constitute a CSR committee of the Board.
(b) The CSR Committee shall be consisting of three or more directors, out of which at least one
director shall be an independent director.
(c) An unlisted public company or a private company which is not required to appoint an independent
director shall have its CSR Committee without such director.
(d) A private company having only two directors on its Board shall constitute its CSR Committee with
two such directors.
(e) With respect to a foreign company covered as above, the CSR Committee shall comprise of at
least two persons of which one person shall be as specified under section 380(1)(d) of the Act and
another person shall be nominated by the foreign company.
(f) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the CSR
Committee.
(iv) Duties of CSR Committee :
The CSR Committee shall,—
(a) formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be
undertaken by the company as specified in Schedule VII;
(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a);
and
(c) monitor the CSR Policy of the company from time to time.
(d) The CSR Committee shall institute a transparent monitoring mechanism for implementation of
the CSR projects or programs or activities undertaken by the company.
(v) Duties of the Board in relation to CSR :
The Board of every company referred to in sub-section (1) shall,—
(1) after taking into account the recommendations made by the CSR Committee, approve the CSR
Policy for the company and disclose contents of such Policy in its report and also place it on the
company’s website, if any, in such manner as may be prescribed; and
(2) ensure that the activities as are included in CSR Policy of the company are undertaken by the
company.
(3) The Board of every company shall ensure that the company spends, in every financial year, at
least two per cent. of the average net profits of the company made during the three immediately
preceding financial years, in pursuance of its CSR Policy. ‘Average net profit’ shall be calculated in
accordance with the provisions of Sec.198. The company shall give preference to the local area
and areas around it where it operates, for spending the amount earmarked for CSR activities.
(vi) Disclosures in Board’s Report:
Â The Board’s report shall disclose –
¾ The composition of the CSR committee
¾ The contents of CSR Policy; and
¾ The reasons for not spending the amount of 2% in pursuance of its CSR policy (in case the
company fails to spend such amount.)
(vii) Definition of CSR:
¾ Rule 2 of the Companies (CSR Policy) Rules, 2014 defines CSR as follows:
¾ “CSR” means and includes but is not limited to –
¾ Projects or programs relating to activities specified in Schedule VII to the Act; or
¾ Projects or programs relating to activities undertaken by the BOD of a company in pursuance of
recommendation of CSR committee of the Board as per declared CSR policy of the company
subject to the condition that such policy will cover subjects enumerated in Schedule VII of the
Act.
(viii) Activities not amounting to CSR:
Â As per Rule 4 and Rule 6 of the Companies (CSR Policy) Rules, 2014, following shall not amount to CSR
Activities for the purpose of Sec. 135:
¾ The CSR projects or programs or activities undertaken outside India.
¾ The CSR projects or programs or activities that benefit only the employees of the company and
their families.
Â Contribution of any amount, directly or indirectly, to any political party u/s 182.
Â Any activity undertaken in pursuance of normal course of business of a company.

(ix) Manner of implementing CSR Policy:
Rule 4 of the Companies (CSR Policy) Rules, 2014 states the various CSR activities that shall be undertaken
by the companies. Following are the CSR activities-
(1) The CSR activities shall be taken by the company as per its CSR Policy, as projects or programmes
or activities excluding activities undertaken in pursuance of its normal course of business.
(2) The Board of a company may decide to undertake its CSR activities approved by the CSR Committee,
through
(a) a company established under section 8 of the Act or a registered trust or a registered society,
established by the company, either singly or alongwith any other company, or
(b) a company established under section 8 of the Act or a registered trust or a registered society,
established by the Central Government or State Government or any entity established under
an Act of Parliament or a State legislature :
Provided that- if, the Board of a company decides to undertake its CSR activities through a company
established under section 8 of the Act or a registered trust or a registered society, other than
those specified in this sub- rule, such company or trust or society shall have an established track
record of three years in undertaking similar programs or projects; and the company has specified
the projects or programs to be undertaken, the modalities of utilisation of funds of such projects
and programs and the monitoring and reporting mechanism”.
(3) A company may also collaborate with other companies for undertaking projects or programs or
CSR activities in such manner that the CSR Committees of respective companies are in a position
to report separately on such projects or programs in accordance with these rules.
(4) Subject to provisions contained in section 135(5), the CSR projects or programs or activities
undertaken in India only shall amount to CSR Expenditure.
(5) The CSR projects or programs or activities that benefit only the employees of the company and
their families shall not be considered as CSR activities in accordance with section 135 of the Act.
(6) Companies may build CSR capacities of their own personnel as well as those of implementing
agencies through Institutions with established track records of at least three financial years but
such expenditure shall not exceed 5% of total CSR expenditure of the company in one financial
year.
(7) Contribution of any amount directly or indirectly to any political party under section 182 of the
Act, shall not be considered as CSR activity.
(x) CSR Reporting:
Â Rule 8 of the Companies (CSR Policy) Rules, 2014, makes the following provisions with respect to
CSR Reporting:
¾ The Board’s Report pertaining to any FY commencing on or after the 1st day of April, 2014 shall
include an annual report on CSR.
¾ In case of a foreign company, the balance sheet filed u/s 381 shall contain an Annexure
regarding report on CSR.
(xi) Display of CSR Policy on the website:
¾ The board shall place the contents of CSR Policy on the company’s website, if any, in such manner
as may be prescribed.
¾ As per Rule 9 of the Companies (CSR Policy) Rules, 2014 and Rule 6of the Companies (CSR Policy)
Rules, 2014, the CSR Policy and its contents shall be displayed on the company’s website, if any, as
per the particulars specified in the Annexure to the Companies (CSR policy) Rules, 2014.
(xii) CSR Activities to be in accordance with Schedule VII:
Â Activities which may be included by companies in their CSR Policies Activities as specified under
Schedule VII are as follows :
(1) eradicating hunger, poverty and malnutrition, promoting health care including preventive
health care and sanitation including contribution to the Swach Bharat Kosh set-up by the
Central Government for the promotion of sanitation and making available safe drinking
water;
(2) promoting education, including special education and employment enhancing vocation skills
especially among children, women, elderly, and the differently abled and livelihood
enhancement projects;
(3) promoting gender equality, empowering women, setting up homes and hostels for women
and orphans; setting up old age homes, day care centres and such other facilities for senior
citizens and measures for reducing inequalities faced by socially and economically backward
groups;
(4) ensuring environmental sustainability, ecological balance, protection of flora and fauna,
animal welfare, agro forestry, conservation of natural resources and maintaining quality of
soil, air and water including contribution to the Clean Ganga Fund set up by the Central
Government for rejuvenation of river Ganga;
(5) protection of national heritage, art and culture including restoration of buildings and sites of
historical importance and works of art; setting up public libraries; promotion and development
of traditional arts and handicrafts;
(6) measures for the benefit of armed forces veterans, war widows and their dependents;
(7) training to promote rural sports, nationally recognised sports, paralympic sports and Olympic
sports;
(8) contribution to the Prime Minister’s National Relief Fund or any other -fund set up by the
Central Government for socio-economic development and relief and welfare of the
Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women;
(9) contributions or funds provided to technology incubators located within academic institutions
which are approved by the Central Government;
(10) rural development projects;
(11) slum area development.
CIRCULATION OF FS & OTHER DOCUMENTS TO MEMBERS AND OTHERS [SEC.136]:
Q-9 State the legal provision relating to circulation of Financial statement to members & others under the
companies act 2013
Â This section seeks to provide that a copy of financial statements including consolidated financial
statement and auditor’s report to be sent to every member, every trustee for the debenture holder
and all other persons who are so entitled, twenty one days before the date of general meeting.
I. Documents to be circulated:
Â A copy of the following documents is required to be sent by the company:
¾ CF
¾ CFS, if any
¾ Auditor’s Report

¾ All the documents which are required to be annexed or attached to FS (here in after referred
to as ‘FS and other documents’)
II. Persons entitled:
Â A copy of the financial statements, which are to be laid before a company in its general meeting,
shall be sent to the following:
(a) every member of the company,
(b) to every trustee for the debenture-holder of any debentures issued by the company, and
(c) to all persons other than such member or trustee, being the person so entitled.
III. Time limit for circulation:
Â The FS and other documents shall be sent atleast 21 days before the date of AGM.
Â In the case of a company licenced u/s 8, the FS and other documents shall be sent atleast 14 days
before the date of AGM.
Â Where a company holds its AGM by giving a shorter notice as provided u/s 101 of the Act, it may
also circulate FS and other documents (to be laid/considered in the same AGM) at such shorter
notice.
IV. Circulation of FS and other documents in case of a listed company:
Â In the case of a listed company, it shall be a sufficient compliance with the provisions of Sec.136,
if –
(a) The copies of the FS and other documents are made available for inspection at its registered
office during working hours for a period of 21 days before the date of AGM; and
(b) A statement containing the salient features of such documents in Form AOC-3 is silent
unless the shareholder ask for full FS and other documents.
V. Manner of Circulation of FS and other documents:
Â CG may prescribe the manner of circulation of FS and other documents of companies having such
net worth and turnover as may be prescribed.
Â Rule 11 of the Companies (Accounts) Rules, 2014 makes the following provisions in this regard:
(a) Applicability:
i. all listed companies
ii. Public companies having net worth of more than Rs.1crore and turnover of more than
Rs.10crore.
(b) Manner of circulation:
Â In case of above companies, the FS and other documents shall be circulated –
i. By electronic mode, in the following 2 cases:
(1) Where a member holds shares in dematerialised form and his email ID is registered
with the Depository for communication purposes.
(2) Where a member does not hold shares in dematerialized form, but he has positively
consented in writing for receiving such documents by electronic mode.
ii. By dispatch of physical copies through any recognised mode of delivery as specified u/s 20,
in all other cases.
VI. Display at the website:
Â A listed company shall also place its FS and other documents on its website, which is maintained
by or on behalf of the company.
VII. Additional duties for a company having a subsidiary:
Â Every company having a subsidiary or subsidiaries shall, -
(a) Place separate audited FS and other documents in respect of each of its subsidiary on its
website, if any;
(b) Provide a copy of separate audited FS and other documents in respect of each of its subsidiary,
to any shareholder of the company who asks for it.
VIII. Inspection:
Â Every company shall allow every member and debenture trustee to inspect the FS and other
documents at its registered office during business hours.
FILING OF FINANCIAL STATEMENT AND OTHER DOCUMENTS WITH THE REGISTERAR [SEC. 137]:
Q-10 ABC ltd is company which held its AGM on 15th Sept. The agenda for the meeting was duly discussed
and necessary resolution was also passed where necessary. But due to some circumstances the Financial
statement of the company cannot be approved in the AGM. Board of Director is of view that nothing is
to be filied with ROC as FS is not yet approved by members. By Explaining the provision contain in the
companies act state whether the director are correct or not.
Ans.
Â This section provides that copies of financial statement including consolidated financial statement,
if any, along with all the documents annexed to financial statement and adopted at AGM shall be
filed with Registrar.
1. Where FS are adopted at the AGM:
(a) Documents to be filed:
¾ CF
¾ CFS, if any
¾ The accounts of its subsidiary or subsidiaries which have been incorporated outside
India and which have not established any place of business in India.
¾ All the documents which are required to be annexed or attached to FS (here in after
referred to as ‘FS and other documents’)
(b) Time limit for filing:
¾ The FS and other documents shall be filed with the Registrar within 30 days of the date
of AGM.
2. Where FS are not adopted at the AGM:
Q-11 The Annual General Meeting of R Ltd., for laying the Annual Accounts thereat for the year ended 31st
March, 2016 was not held. What remedies is available with the company regarding compliance of the
provisions of section 137 of the Companies Act, 2013 for filing of copies of financial statements with
the Registrar of Companies?
Ans.
(a) Filing of unadopted documents:
¾ Where the FS are not adopted at the AGM or adjourned AGM, such unadopted FS and other
documents shall be filed with the Registrar within 30 days of the date of AGM.
(b) Unadopted documents to be provisional:
¾ The Registrar shall take the unadopted FS and other documents in his records as provisional till
the FS are filed with him after their adoption in the adjourned AGM for that purpose.
(c) Filing of adopted documents:
¾ The FS and other documents adopted in the adjourned AGM shall be filed with the Registrar
within 30 days of the date of such adjourned AGM.
3. Where AGM is not held:
(a) Filing of documents:
¾ The FS and other documents
¾ Statement of facts and reasons for not holding the AGM:
(b) Time limit for filing:
¾ The FS and other documents shall be filed with the Registrar within 30 days of the last date
upto which the AGM should have been held.
4. Filing in case of OPC:
¾ OPC shall file a copy of FS duly adopted by its member, along with all the documents which are
required to be annexed or attaches to such FS, within 180 days from the closure of the FY.
5. Form and fees (Rule 12 of the Companies (Accounts) Rules, 2014):
Q-12 ABC Ltd is an unlisted public company engaged in pharma sector and has paid up capital of rupees 10
crores and achieved turnover of rupees 200 crores during financial year 2015-16. Is it necessary for ABC
Ltd to file its financial statement in XBRL mode?
Ans.
Â A copy of the financial statements, including consolidated financial statement, if any, along with all the
documents which are required to be or attached to such financial statements under this Act, duly
adopted at the annual general meeting of the company, shall be filed with the Registrar within 30 days
of the date of annual general meeting in such manner, with such fees or additional fees as may be
prescribed within the time specified under section 403.
Â The class of companies as may be notified by the CG from time to time, shall mandatorily file their FS
in the Extensible Business Reporting Language [XBRL] format.
Â CG may also specify the manner of such filing under such notification for such class of companies.
Â The term XBRL means a standard language for communication in electronic form to express, report or
file financial information for such class of companies.
Â As per Rule 3 of the Companies (Filing of Documents and forms in Extensible Business Reporting
Language) Rules, 2015 vide Notification dated 9th September, 2015, following class of companies shall
file their financial statement and other documents under this section with the registrar in e-form AOC-
4 XBRL given in Annexure I for the financial years commencing on or after 1st April, 2014 using the XBRL
taxonomy, namely—
(a) All companies listed with any stock exchange(s) in India and their Indian subsidiaries, or
(b) All companies having paid up capital of rupees 5crore or above, or
(c) All companies having turnover of rupees 100 crore or above, or
(d) All companies which were hitherto covered under the Companies( Filing of Documents and Forms
in Extensible Business Reporting Language) Rules, 2011
Provided that the companies in banking, insurance, power sector, non-banking financial companies
and housing finance companies need not file financial statements under this rule.
Â The fees or additional fees payable shall be as specified in the Companies (Registration offices and
Fees) Rules, 2014.
6. Relaxation w.r.t. audit of foreign subsidiary:
Â In case of a foreign subsidiary, which is not required to get its accounts audited as per legal
requirements prevalent in the country of its incorporation and which does not get such accounts
audited, the holding company may place on its website such unaudited accounts to comply with
requirements of Sec. 136, and file such unaudited accounts to comply with the requirements of
Sec. 137.
Â However, such unaudited accounts would need to be translated in English, if the original accounts
are not in English.
Â Further, the format of accounts of foreign subsidiaries should be, as far as possible, in accordance
with the requirements of the Companies Act, 2013.
Â In case this is not possible, a statement indicating the reasons for deviation may be placed/filed
alongwith such accounts.
7. Penalty :
Person Liable Punishment for contravention of section 137
Company with fine of ` 1,000 for every day during which the failure continues
but which shall not be more than ` 10 Lacs,
Offices—
managing director and the (1) Imprisonment for a term which may extend to 6 months or
Chief Financial Officer of the
company, if any
In their absence, any other (2) Fine which shall not be less than ` 1 lac but which may extend to
director who is charged by the ` 5 Lacs, or
Board with the
responsibility
In its absence, all the directors (3) Both with imprisonment and fi
of the company.
INTERNAL AUDIT [SEC. 138]:
Q-13 State the companies which are covered under the scope of the internal audit.
Ans.
Â Section 138 is to read withRule 13 of the Companies (Accounts) Rules, 2014 for the law related to
internal audit in a company.
(i) Companies required to appoint Internal Auditor :
I. The following class of companies shall be required to appoint an internal auditor which may be
either an individual or a partnership firm or a body corporate, namely:
(1) every listed company;
(2) every unlisted public company having-
(A) paid up share capital of 50 crore rupees or more during the preceding financial year; or
(B) turnover of 200 crore rupees or more during the preceding financial year; or
(C) outstanding loans or borrowings from banks or public financial institutions exceeding
100 crore rupees or more at any point of time during the preceding financial year; or

(D) outstanding deposits of 25 crore rupees or more at any point of timeduring the preceding
financial year; and
(3) every private company having—
(A) turnover of 200 crore rupees or more during the preceding financial year; or
(B) outstanding loans or borrowings from banks or public financial institutions exceeding
100crore rupees or more at any point of time during the preceding financial year.
Ii. The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor,
formulate the scope, functioning, periodicity and methodology for conducting the internal audit.
(i) Transitional period/legal requirements for existing copanies:
Â An existing company covered under any of the above criteria shall comply with the requirements of
section 138 and this rule within 6 months of commencement of such section.
(ii) Who is Internal Auditor/ legal requirements u/s 138:
(a) Every company to which Sec.138 is applicable, shall appoint an Internal Auditor.
(b) The internal auditor shall conduct the internal audit of the functions and activities of the company.
(c) Internal Auditor shall either be a
¾ Chartered Accountant or
¾ a Cost Accountant, or
¾ such other professional as may be decided by the Board to conduct internal audit of the
functions and activities of the company.
(d) The term “Chartered Accountant” or “Cost Accountant” shall mean a “Chartered Accountant”
or a “Cost Accountant”, as the case may be, whether engaged in practice or not’.
(e) The internal auditor may be an individual or a partnership firm or a body corporate.
(f) The internal auditor may or may not be an employee of the company.
(iii) Manner and interval of internal audit:
(a) CG may, by rules, prescribe the manner and the intervals in which the internal audit shall be
conducted and reported to the Board.
(b) The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor,
formulate the scope, functioning, periodicity and methodology for conducting the internal audit.

CHAPTER-10
AUDIT AND AUDITORS
APPOINTMENT OF AUDITOR [SECTION 139(1)]:

Applicability:
The provisions of Sec. 139(1) are applicable to all companies except –
i. Government companies;
ii. Any other company owned or controlled, directly or indirectly, by –
- CG; or
- One or more SG; or
- Partly by CG and partly by one or more SG.
Appointment and reappointment of auditors:
(a) Every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor
of the company.
(b) The auditor shall hold office from the conclusion of 1stannual general meeting (AGM) till the conclusion
of its 6th AGM and thereafter till the conclusion of every sixth meeting and the manner and procedure
of selection of auditors by the members of the company at AGM has been prescribed under the
Companies (Audit and Auditors) Rules, 2014. According to the Rules:
(c) Manner and procedure of selection and appointment of auditors :
(1)
Categories of Companies Competent authority Responsibility of the competent authority
A company which is Audit Committee (i) The competent authority shall take into
required to constitute an consideration the qualification and
under section 177 experience of the individual or the firm
proposed to be considered for appointment
as auditor and whether such qualification and
experience are commensurate with the size
and requirements of the company.
A Company which is not Board (ii) It shall have regard to anyorder or pending
required to constitute an proceeding relating to professional
Audit Committee under matters ofconduct against the proposed
section 177 auditor before the Institute ofChartered
Accountants of India orany competent
authority or any Court.
(iii) It may call for such other information from the
proposed auditor as it may deem fit.
Companies that require to constitute an audit committee
For thepurpose of constitution of Audit Committeesection 177 of the Act read with Companies (Meetings of
Board and its Powers) Rules, 2014 provides that :
The Board of directors of every listed companies and the following classes of companies shall constitute an
Audit Committee of the Board—
(i) all public companies with a paid up capital of ten crore rupees or more;
(ii) all public companies having turnover of one hundred crore rupees or more;
(iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits
exceeding fifty crore rupees or more.
Explanation : The paid up share capital or turnover or outstanding loans, or borrowings or debentures or
deposits, as the case may be, as existing on the date of last audited Financial Statements shall be taken into
account for the purposes of this rule.
(2)
Categories of Companies Competent authority Responsibility of the competent authority
A company which is Audit Committee the committee shall recommend the name of an
required to constitute an individual or a fi m as auditor to the Board for
Audit Committee under consideration
section 177
A Company which is not Board the Board shall consider and recommend an
required to constitute an individual or a fi m as auditor to the members in the
Audit Committee under ] annual general meeting for appointment
section 177
(3) If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the
appointment of an individual or a firm as auditor to the members in the AGM.
(4) If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the
recommendation to the committee for reconsideration citing reasons for such disagreement.
If the Audit Committee, after considering the reasons given by the Board, decides not to reconsider its
original recommendation, the Board shall record reasons for its disagreement with the committee and
send its own recommendation for consideration of the members in the annual general meeting; and if
the Board agrees with the recommendations of the Audit Committee, it shall place the matter for
consideration by members in the AGM.
(d) The company shall place the matter relating to such appointment for ratification by members at every
AGM. According to the Companies (Audit and Auditors) Rules, 2014, the appointment shall be subject
to ratification in every annual general meeting till the 6th meeting by way of passing of an ordinary
resolution.
If the appointment is not ratified by the members of the company, the Board of Directors shall appoint
another individual or firm as its auditor or auditors after following the procedure laid down in this
behalf under the Act.
(e) Before the appointment is made, the written consent of the auditor to such appointment, and a
certificate from him or it that the appointment, if made, shall be in accordance with the conditions as
may be prescribed, shall be obtained from the auditor.
196 Chapter 10 : Audit and Auditors

Certificate by Auditor : The Companies (Audit and Auditors) Rules, 2014 provides the content of the
Certificate. According to this, the auditor appointed shall submit a certificate that–
(A) the individual or the firm, as the case may be, is eligible for appointment and is not disqualified for
appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made
thereunder;
(B) the proposed appointment is as per the term provided under the Act;
(C) the proposed appointment is within the limits laid down by or under the authority of the Act;
(D) the list of proceedings against the auditor or audit firm or any partner of the audit firm pending with
respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
(f) The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141
[Section 141 provides provisions on eligibility, qualification and disqualification of Auditor which will
be discussed later]
(g) Communication to Auditor : Further, the company shall inform the auditor concerned of his or its
appointment, and also file a notice in the prescribed form of such appointment with the Registrar
within 15 days of the meeting in which the auditor is appointed
Here, “appointment” includes reappointment.
TERM OF AUDITOR [SECTION 139(2)]
(a) Section 139(2) provides that listed companies and other prescribed class or classes of companies (except
one person companies and small companies) shall not appoint or re-appoint—
(1) an individual as auditor for more than one term of five consecutive years; and
(2) an audit firm as auditor for more than two terms of five consecutive years.
(b) Rule 5 of the Companies (Audit and Auditors) Rules, 2014 has prescribed the following classes of
companies for the purposes of section 139(2) :]
(1) all unlisted public companies having paid up share capital of rupees 10 crore or more;
(2) all private limited companies having paid up share capital of rupees 20 crore or more;
(3) all companies having paid up share capital of below threshold limit mentioned in (2) and (3)
above, but having public borrowings from financial institutions, banks or public deposits of
rupees 50 crores or more.
(c) Cooling off Period:
(1) An individual auditor who has completed his term (i.e. one term of five consecutive years) shall
not be eligible for re-appointment as auditor in the same company for five years from the
completion of his term;
(2) An audit firm which has completed its term (i.e. two terms of five consecutive years) shall not be
eligible for reappointment as auditor in the same company for five years from the completion of
such term.
(d) Further, as on the date of appointment no audit firm having a common partner or partners to the other
audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be
appointed as auditor of the same company for a period of five years.
(e) Transitional period :
¾ Every company, existing on or before the commencement of this Act which is required to comply
with the provisions of this sub-section, shall comply with requirements of this sub-section within

a period which shall not be later than the date of the first annual general meeting of the company
held, within the period specified under sub-section (1) of section 96, after three years from the
date of commencement of this Act.”
¾ It is also provided that nothing contained in this sub-section shall prejudice the right of the
company to remove an auditor or the right of the auditor to resign from such office of the company.
ROTATION OF AUDITOR [SECTION 139(3) AND (4)]:
Q-1 Explain the concept of rotation of auditor & also explain the procedure given under the companies act
regarding rotation. Of auditor.
Ans.
(a) Members of a company may resolve to provide that—
i. in the audit firm appointed by it, the auditing partner and his team shall be rotated at such
intervals as may be resolved by members; or
ii. the audit shall be conducted by more than one auditor.
(b) The Central Government may, by rules, prescribe the manner in which the companies shall rotate their
auditors.
(c) Manner of rotation of auditors by the companies on expiry of their term as provided under the Companies
(Audit and Auditors) Rules, 2014 :
(1) The Audit Committee shall recommend to the Board, the name of an individual auditor or of an
audit firm who may replace the incumbent auditor on expiry of the term of such incumbent.
(2) Where a company is required to constitute an Audit Committee, the Board shall consider the
recommendation of such committee, and in other cases, the Board shall itself consider the matter
of rotation of auditors and make its recommendation for appointment of the next auditor by the
members in annual general meeting.
(3) For the purpose of the rotation of auditors—
i. in case of an auditor (whether an individual or audit firm), the period for which the individual
or the firm has held office as auditor prior to the commencement of the Act shall be taken
into account for calculating the period of five consecutive years or ten consecutive years, as
the case may be;
ii. the incoming auditor or audit firm shall not be eligible if such auditor or audit firm is
associated with the outgoing auditor or audit firm under the same network of audit firms.
The term “same network” includes the firms operating or functioning, hitherto or in future,
under the same brand name, trade name or common control.
iii. For the purpose of rotation of auditors,-
(A) a break in the term for a continuous period of five years shall be considered as fulfilling the requirement
of rotation;
(B) if a partner, who is in charge of an audit firm and also certifies the financial statements of the company,
retires from the said firm and joins another firm of chartered accountants, such other firm shall also be
ineligible to be appointed for a period of five years.

Illustration explaining rotation in case of individual auditor:
Number of consecutive years for Maximum number of consecutive Aggregate period which the
which an individual auditor has years for which he may be auditor would complete in the
been functioning as auditor in appointed in the same company same company in view of
the same company [in the first (including transitional period) column I and II
AGM held after the
commencement of provisions
of section 139(2)]
I II III
5 years (or more than 5 years) 3 years 8 years or more
4 years 3 years 7 years
1 year 4 years 5 years
Here,
(a) Individual auditor shall include other individuals or firms whose name or trade mark or brand is used
by such individual, if any.
(b) Consecutive years shall mean all the preceding financial years for which the individual auditor has
been the auditor until there has been a break by five years or more.
Illustration explaining rotation in case of audit firm:
Number of consecutive years for Maximum number of consecutive Aggregate period which the firm
which an audit firm has been years for which the firm may be would complete in the same
functioning as auditor in the appointed in the same company company in view of column I and
same company [in the first (including transitional period) II
AGM held after the
commencement of
provisions of section 139(2)]
I II III
10 yers 10 years
(or more than 10 years) 3 years 13 years or more
1 year 9 years 10 years

Here,
(a) Audit Firm shall include other firms whose name or trade mark or brand is used by the firm or any of its
partners.
(b) Consecutive years shall mean all the preceding financial years for which the firm has been the auditor
until there has been a break by five years or more.
(4) Where a company has appointed two or more individuals or firms or a combination thereof as joint
auditors, the company may follow the rotation of auditors in such a manner that both or all of the joint
auditors, as the case may be, do not complete their term in the same year.
(d) Here, the word “firm” shall include a limited liability partnership incorporated under the Limited
Liability Partnership Act, 2008.
APPOINTMENT OF SUBSEQUENT AUDITOR IN CASE OF A GOVERNMENT COMPANY [SECTION 130(5)]:
Â As per section 139(5), the Comptroller and Auditor-General of India shall, in respect of a financial year,
appoint an auditor duly qualified to be appointed as an auditor of companies under this Act in the case
of:
(1) a Government company; or
(2) any other company owned or controlled, directly or indirectly, by –
¾ the Central Government, or
¾ by any State Government or Governments, or
¾ partly by the Central Government and partly by one or more State Governments,
o The auditor shall be appointed within a period of 180 days from the commencement of the
financial year.
o The auditor appointed shall hold office till the conclusion of the annual general meeting.
Government company
Appointment of auditor by CAG in
respect of a financial year. Any other company owned or controlled,
by the Central Government/any State
Government /Governments partly by
theCentral Government and partly by one
within 180 days from the or more State Government
commeneement of the F/Y
FIRST AUDITORS [SECTION 139(6)]

Â Notwithstanding anything contained in sub-section (1), the first auditor of a company, other than a
Government Company, shall be appointed by the Board of directors within 30 days of the date of
registration of the company; and the auditor so appointed shall hold office until the conclusion of the
first annual general meeting.
Â If the Board fails to exercise its powers i.e. appointment of first auditor, it shall inform the members of
the company and the company may appoint the first auditor within 90 days at an extra ordinary general
meeting and such auditor shall hold office till the conclusion of the first annual general meeting.

FIRST AUDITOR [SECTION 139(7)]
Q-2 State the procedure for appointment first auditor of the government company.
Ans.
(a) in the case of a Government company or any other company owned or controlled, directly or indirectly,
by the Central Government, or by any State Government, or Governments, or partly by the Central
Government and partly by one or more State Governments, the first auditor shall be appointed by the
Comptroller and Auditor-General of India within 60 days from the date of registration of the company.
(b) In case the Comptroller and Auditor-General of India does not appoint first auditor within the said
period, the Board of Directors of the company shall appoint such auditor within the next 30 days.
(c) Further, in the case of failure of the Board to appoint such auditor within the next 30 days, it shall
inform the members of the company who shall appoint such auditor within the 60 days at an
extraordinary general meeting, who shall hold office till the conclusion of the first annual general
meeting.
TIME – LIMITS U/S 139(6) AND (7) – SUMMARY:
Govt. co., etc. Other companies
[Sec. 139(7)] [Sec. 139(6)]
Appointment by CAG 60 days N.A
Appointment by Board Next 30 days 30 days
Appointment by Members 60 days 90 days
Â The first auditor shall hold office till the conclusion of the first AGM.
Â ‘Government company’ means any company in which not less than 51% of the paid up share capital is
held by –
(a) CG; or
(b) SG(s); or
(c) Partly by CG & partly by SG(s)
Â ‘Government Company’ includes a company which is a subsidiary company of a government company.
CASUAL VACANCY [SECTION 139(8)]
(a) In the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller
and Auditor-General of India, casual vacancy of an auditor be filled by the Comptroller and Auditor-
General of India within 30 days.
(b) In case the Comptroller and Auditor-General of India do not fill the vacancy within the said period, the
Board of Directors shall fill the vacancy within next 30 days.
Â Manner of filing casual vacancy:
Case I Case II
The casual vacancy arises in a company The casual vacancy arises in any other company
whose accounts are subject to audit by
an auditor appointed by CAG
(1) such casual vacancy shall be filled (1) such casual vacancy shall be filled
within 30 days by CAG. within 30 days by the Board.

(2) in case, (2) in case the casual
CAG does not fill the casual vacancy vacancy arose due to the
within 30 days, the Board shall fill the resignation of auditor, it shall be filled
casual vacancy within next 30 days. within 30 days by the Board, and the
appointment made by the Board shall
be approved in a GM convened within 3
months of the recommendation of the
Board.
Â Time – limit u/s 139(8) – summary:
Govt. co. Other co.
Appointment by CAG 30 days N.A
Appointment by Board Next 30 days 30 days
Appointment by Members N.A 3 months (I case of resignation)
N.A (any case than resignation)
Â Tenure of office
¾ Any auditor appointed to fill a casual vacancy shall hold office till the conclusion of the next AGM.
Â Meaning of casual vacancy:
¾ The term ‘casual vacancy’ has not been defined under the Companies Act, 2013.
¾ It generally means a vacancy caused by the auditor ceasing to act as such after accepting a valid
appointment, e.g. due to death, disqualification, resignation, etc.
¾ It must be noted that a vacancy created because of resignation of an auditor falls within the
meaning of ‘casual vacancy’ as explained above.
¾ However, such a casual vacancy shall be filled up by the Board and shall be also approved by the
member in GM.
RE-APPOINTMENT OF RETIRING AUDITOR [SECTION 139(9), (10) AND (11)]:
(a) At any annual general meeting, a retiring auditor may be re-appointed at an AGM, if—
(1) he is not disqualified for re-appointment;
(2) he has not given the company a notice in writing of his unwillingness to be re-appointed; and
(3) a special resolution has not been passed at that meeting (AGM) -
¾ appointing some other auditor or
¾ providing expressly that he shall not be re-appointed.
(b) Where at any annual general meeting,
¾ no auditor is appointed or re-appointed,
¾ the existing auditor shall continue to be the auditor of the company.
AUDIT COMMITTEE’S RECOMMENDATION [SECTION 139(11)]:
Â Where a company is required to constitute an Audit Committee under section 177,
Â all appointments,
Â including the filling of a casual vacancy of an auditor under this section i.e. u/s 139(8)
Â shall be made
Â after taking into account the recommendations of such committee.

REMOVAL OF AUDITOR BEFORE THE EXPIRY OF HIS TERM [SECTION 140(1)]
Q-3 Who has power to remove the auditor before completions of his term? Also explain the procedure
relation to removal of auditor before completions of his term
Ans.
(a) The auditor appointed under section 139 may be removed from his office before the expiry of his term
only by a special resolution of the company and after obtaining the previous approval of the Central
Government (Powers are delegated to Regional Director.) by making an application in Form ADT-2 and
shall be accompanied with the prescribed fees.
(b) The application shall be made to the Central Government within 30 days of the resolution passed by
the Board.
(c) The Company shall hold the general meeting within 60 days of receipt of approval of the Central
Government for passing the special resolution.
(d) Giving opportunity of being heard (Audi Alteram Partem) : Before taking any action for removal of
auditor before the expiry of his term, the auditor concerned shall be given a reasonable opportunity of
being heard.
STEPS FOR REMOVAL OF AUDITOR
A Special Notice is received ( from Director/ Member etc.) for Removal of auditor
A Board meeting will be held ( To decide of above & than authorising the filing of
application to CG.
Application to CG ( To be made in ADT-2), within 30 days of Board
Approval of CG received
After approval from CG, Special Notice to be sent for AGM
auditor shall be given a reasonable opportunity of being heard
Auditor removal can be done only through Special Resolution
Auditor will be removed
RESIGNATION BY AUDITOR [SECTION 140(2) AND (3)]

(1) Duty of auditor:
¾ When an auditor resigns, he is required to file a statement in the prescribed form, viz. ADT-3.

(2) Contents of the statement:
¾ The statement shall indicate the reasons and other facts as may be relevant with regard to his
resignation.
(3) Filing with whom? :
¾ The statement in Form No. ADT-3 shall be filed with –
o The company;
o The registrar; and
o CAG, in the case of a Government company or a company owned or controlled by CG or SG(s)
or partly by CG and partly by SG(s).
(4) Time limit for filing:
¾ The statement shall be filed within 30 days from the date of resignation.
(5) Fine for non-filing:
¾ Minimum: Rs. 50,000
¾ Maximum: Rs. 5,00,000
o From IDT -3
Resignation by auditor o within 30 days of resignation

of Non Government co.
o From IDT -3
o within 30 days of resignation
Resignation by auditor of
Government company or
o with company, Registrar & CAG
company contrrolled by
CG or SG
APPOINTING AUDITOR OTHER THAN THE RETIRING AUDITOR [SECTION 140(4)]

Â Requirement of special notice:
(a) If the retiring auditor has not completed a consecutive tenure of 5 years or, as the case may be, 10
years, as provided under sub-section (2) of section 139, special notice shall be required for a resolution
at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing
expressly that a retiring auditor shall not be re-appointed.
(b) At an AGM, special notice shall be required for –
¾ Appointing as auditor a person other than the retiring auditor; or
¾ Providing expressly that the retiring auditor shall not be re-appointed.
Ö Copy to be sent to the retiring auditor:
¾ On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the
retiring auditor.
¾ Right of auditor to make a representation & to get it circulated:

Ö Where notice is given of such a resolution and the retiring auditor makes with respect thereto
representation in writing to the company (not exceeding a reasonable length) and requests its
notification to members of the company, the company shall, unless the representation is received
by it too late for it to do so,—
• in any notice of the resolution given to members of the company, state the fact of the
representation having been made; and
• send a copy of the representation to every member of the company to whom notice of the
meeting is sent, whether before or after the receipt of the representation by the company,
Â Duties of the company w.r.t. representation
(a) The company shall state the fact that the retiring auditor has made a representation, in any notice
of the resolution that is given to the members of the company.
(b) If a copy of the representation is not sent as aforesaid because it was received too late or because
of the company’s default, the auditor may (without prejudice to his right to be heard orally)
require that the representation shall be read out at the meeting.
(c) However, if a copy of representation is not sent as aforesaid, a copy thereof shall be filed with the
Registrar.
Â Intervention by Tribunal
¾ If the Tribunal is satisfied on an application either of the company or of any other aggrieved
person that the rights conferred by this sub-section are being abused by the auditor, then, the
copy of the representation may not be sent and the representation need not be read out at the
meeting.
¾ The application to the Tribunal may be made either by the company or by any other person who
claims to be aggrieved.
Â Non-applicablity
¾ The provision of Sec. 140(4) (viz, the provisions relating to special notice) shall not apply where
the retiring auditor has completed his tenure of 5 consecutive years/ 10 consecutive years, as
provided u/s 139(2).
AUDITOR ACTS IN A FRAUDULENT MANNER OR ABETTED OR COLLUDED IN ANY FRAUD [SECTION 140(5)]
Â On satisfaction of Tribunal that the auditor of a company has acted in a fraudulent manner etc.: Without
prejudice to any action under the provisions of this Act or any other law for the time being in force, the
Tribunal either—
suo motu;
or on an application made to it
by the Central Government; or by any person concerned,
Ö if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in
a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company
or its directors or officers, it may, by order, direct the company to change its auditors.
¾ Requirement for change of auditor: If the application is made by the Central Government and the
Tribunal is satisfied that any change of the auditor is required, it shall within 15 days of receipt of
such application, make an order that he shall not function as an auditor and the Central Government
may appoint another auditor in his place.

¾ Ineligibility of auditor to be appointed: An auditor, whether individual or firm, against whom
final order has been passed by the Tribunal under this section shall not be eligible to be appointed
as an auditor of any company for a period of five years from the date of passing of the order and
the auditor shall also be liable for action under section 447.
¾ Explanation I.—It is hereby clarified that the case of a firm, the liability shall be of the firm and
that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any
fraud by, or in relation to, the company or its director or officers.
¾ Explanation II.—For the purposes of this Chapter the word “auditor” includes a firm of auditors.
ELIGIBILITY, QUALIFICATIONS AND DISQUALIFI- CATIONS OF AUDITORS [SECTION 141]
Â Section 141 of the Companies Act, 2013 provides for eligibility, qualifications and disqualifications of
auditors. This section deals with :
Qualifications of an auditor [Section 141(1) & (2)] :
(a) A person shall be eligible to be appointed as auditor of a company only if he is a Chartered Accountant
within the meaning of the Chartered Accountants Act, 1949.
(b) A firm whereof majority of partners practising in India are qualified for appointment as aforesaid may
be appointed by its firm name to be auditor of a company.
(c) Where a firm including a Limited Liability Partnership is appointed as an auditor of a company, only the
partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.
Disqualifications of auditors [Section 141(3)] :
(a) The following persons shall not be qualified for appointment as auditor of a company—
(1) A body corporate other than a limited liability partnership registered under the Limited Liability
Partnership Act, 2008;
(2) an officer or employee of the company;
(3) a person who is a partner, or who is in the employment, of an officer or employee of the company;
(4) a person who, or his relative or partner—
i. is holding any security of or interest in –
¾ the company or its subsidiary, or
¾ of its holding or associate company or
¾ a subsidiary of such holding company :
Provided that the relative may hold security or interest in the company of face value not exceeding Rs.
1,00,000 as prescribed under the Company (Audit and Auditors) Rules, 2014.
¾ The Company (Audit and Auditors) Rules, 2014 provides that a relative of an auditor may hold
securities in the company of face value not exceeding Rs.1 Lac.
¾ Further, the above condition shall, wherever relevant, be also applicable in the case of a company
not having share capital or other securities.
¾ If the relative acquires any security or interest above the prescribed threshold i.e.Rs.1 Lac, the
corrective action to maintain the limits as specified above shall be taken by the auditor within
sixty days of such acquisition or interest.
ii. is indebted –
¾ to the company, or
¾ its subsidiary, or

¾ its holding or
¾ associate company or
¾ a subsidiary of such holding company,
in excess of ` 5 Lacs; or
iii. has given a guarantee or provided any security in connection with the indebtedness –
¾ of any third person to the company, or
¾ its holding or
¾ associate company or
¾ a subsidiary of such holding company,
in excess of ` 1 Lac.
(5) a person or a firm who, whether directly or indirectly, has business relationship with the –
¾ company, or
¾ its holding or associate company or
¾ subsidiary of such holding company or
¾ associate company.
According to the Companies (Audit and Auditors) Rules, 2014, the term “business relationship” shall be
construed as any transaction entered into for a commercial purpose, except–
¾ commercial transactions which are in the nature of professional services permitted to be rendered
by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or
the regulations made under those Acts;
¾ commercial transactions which are in the ordinary course of business of the company at arm’s
length price-like sale of products or services to the auditor, as customer, in the ordinary course of
business, by companies engaged in the business of telecommunications, airlines, hospitals, hotels
and such other similar businesses.
(6) a person whose relative is a director or is in the employment of the company as a director or key
managerial personnel;
(7) a person who is in full time employment elsewhere or a person or a partner of a firm holding
appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment
holding appointment as auditor of more than 20 companies other than one person companies, small
companies and private companies having paid- up share capital less than one hundred crore rupees.
Ceiling numbers of audits
Â Before appointment is given to any auditor, the company must obtain a certificate from him to the
effect that the appointment, if made, will not result in an excess holding of company audit by the
auditor concerned over the limit laid down in section141 (3) (g) of the Companies Act, 2013 which
prescribes that a person who is in full time employment elsewhere or a person or a partner of a firm
holding appointment as its auditor, if such person or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than twenty companies;
(8) a person who has been convicted by a court of an offence involving fraud and a period of 10 years has
not elapsed from the date of such conviction;

(9) on the date of appointment in consulting and specialised services as provided in section 144 (section
144 deals with certain services not to be tendered by auditor).
VACATION OF OFFICE BY AN AUDITOR [SECTION 141(4)]
Â If a person appointed as an auditor of a company incurs any of the disqualifications specified in Section
141(3), he shall be deemed to have vacated his office. Such vacation shall be deemed to be a casual
vacancy in the office of the auditor.
REMUNERATION OF AUDITORS [SECTION 142]
Â Section 142 of the Companies Act, 2013 provides for remuneration of auditors. According to this section
(a) The remuneration of the auditors of a company shall be fixed by the company
¾ in general meeting or
¾ in such manner as the company in general meeting may determine.
(b) In the case of first auditor, remuneration may be fixed by the Board.
(c) The remuneration mentioned aforesaid shall, in addition to the fee payable to an auditor, include
¾ the expenses, if any, incurred by the auditor in connection with the audit of the company
and
¾ any facility extended to him.
Â But the remuneration does not include any remuneration paid to him for any other service rendered by
him at the request of the company.
POWERS AND DUTIES OF AUDITORS AND AUDITING STANDARDS [SECTION 143]
Â Powers of Auditors [Section 143(1)]:
(a) Access to books of accounts and vouchers:
¾ Every auditor of a company shall have a right of access at all times to the books of accounts and
vouchers of the company, whether kept at the registered office of the company or at any other
place.
(b) Entitled to have necessary information and explanation:
¾ He shall be entitled to require from the officers of the company such information and explanations
as the auditor may consider necessary for the performance of his duties as auditor.
(c) Access to record of all its subsidiaries:
¾ The auditor of a company which is a holding company shall also have the right of access to the
records of all its subsidiaries in so far as it relates to the consolidation of its financial statements
with that of its subsidiaries.
¾ Duties of Auditors
Q-4 State the duties mention under sec 143 of the companies act for the auditor while doing audit of the
company.
Ans.
(a) Matters of inquiry :
The auditor shall inquire into the following matters, namely—
(1) Whether loans and advances made by the company
¾ on the basis of security
¾ have been properly secured

¾ and whether the terms on which they have been made
¾ are prejudicial to the interests of the company or its members;
(2) Whether transactions of the company
¾ which are represented merely by book entries
¾ are prejudicial to the interests of the company;
(3) Where the company
¾ not being an investment company or a banking company,
¾ whether so much of the assets of the company as consist of shares, debentures and other securities
¾ have been sold
¾ at a price less than that at which they were purchased by the company;
(4) Whether loans and advances made by the company
¾ have been shown as deposits;
(5) Whether personal expenses
¾ have been charged to revenue account;
(6) Where it is stated in the books and documents of the company
¾ that any shares have been allotted for cash,
¾ whether cash has actually been received in respect of such allotment,
¾ and if no cash has actually been so received,
¾ whether the position as stated in the account books and the balance sheet
¾ is correct, regular and not misleading:
The Statement on reporting under section 227(1)(A)
¾ These are specific enquiries to be made during course of Audit
¾ It is not required to report unless has any special comments to make on any of the items if
satisfied, no further duty to report.
¾ Only enquiries and not investigations
(b) The auditor shall make a report to the members of the company on the following :
(1) On the accounts examined by him; and
(2) On every financial statements which are required by or under this Act to be laid before the
company in general meeting; and
(3) The auditor shall state in his report as to whether the accounts examined by him and FS give a true
and fair view of –
¾ The statement of company’s affairs as at the end of its FY;
¾ The profit or loss for the year; and
¾ Cash flow for the year.
(4) The auditor shall state in his report such other matter as may be prescribed.
(c) The auditor while making the report shall take into account
¾ the provisions of the Act,
¾ the accounting and auditing standards and

¾ matters which are required to be included in the audit report under the provisions of this Act or
¾ any rules made thereunder or under any order made under section 143(11).
The auditor shall express his opinion of the accounts and financial statements examined by him. He
shall express the opinion which according to him and to the best of his information and knowledge, the
said accounts, financial statements give a true and fair view of the state of the company’s affairs as at
the end of its financial year and profit or loss and cash flow for the year and such other matters as may
be prescribed.
(d) The auditors’ report shall also state—
(1) whether he has sought and obtained all the information and explanations
¾ which to the best of his knowledge and belief were necessary for the purpose of his audit
¾ and if not, the details thereof and the effect of such information on the financial statements;
(2) whether, in his opinion, proper books of account as required by law have been kept by the company
¾ so far as appears from his examination of those books
¾ and proper returns adequate for the purposes of his audit have been received from branches not
visited by him;
(3) whether the report on the accounts of any branch office of the company
¾ audited under sub-section (8) by a person other than the company’s auditor
¾ has been sent to him
¾ under the proviso to that sub-section and the manner in which he has dealt with it in preparing his
report
(4) whether the company’s balance sheet and profit and loss account dealt with in the report are in
agreement with the books of account and returns;
(5) whether, in his opinion,
¾ the financial statements comply with the accounting standards;
(6) the observations or comments of the auditors on financial transactions or matters
¾ which have any adverse effect on the functioning of the company;
(7) whether any director is disqualified from being appointed as a director under sub section (2) of section
164;
(8) any qualification, reservation or adverse remark
¾ relating to the maintenance of accounts and other matters connected therewith;
(9) whether the company has adequate internal financial controls system in place
¾ and the operating effectiveness of such controls;
As per the rule 10A inserted by the Companies (Audit and Auditors) Amendments Rules, 2014 vide
Notification dated 14th October, 2014 that for purposes of this clause under section 143(3), for the
financial years commencing on or after 1st April, 2015, the report of the Auditor shall state about
existence of adequate internal financial controls system and its operating effectiveness.
(10) such other matters as may be prescribed.
¾ Rule 11 of the Companies (Audit and Auditors) Rules, 2014 provides that the auditor’s report shall
also include their views and comments on the following matters, namely :
(1) whether the company has disclosed the impact, if any, of pending litigations on its financial
position in its financial statement;
(2) whether the company has made provision, as required under any law or accounting standards,
for material foreseeable losses, if any, on long term contracts including derivative contracts;
(3) whether there has been any delay in transferring amounts, required to be transferred, to
the Investor Education and Protection Fund by the company.
(4) whether the company had provided requisite disclosures in its financial statements as to
holdings as well as dealings in Specified Bank Notes during the period from 8th November,
2016 to 30th December, 2016 and if so, whether these are in accordance with the books of
accounts maintained by the company”
Reasons to be given [Sec. 143(4)]:
¾ Where any of the matters is answered in the negative or with a qualification, the auditor’s report shall
state the reason for the answer.
Audit of Government Companies [Section 143(5), (6) & (7)]:
Directions by CAG to the auditor [Sec. 143(5)]
(a) The auditor of a Government company is appointed by the Comptroller and Auditor-General of India
under section 139(5) or section 139(7).
(b) In the case of a Government company or any other company owned or controlled, directly or indirectly,
by the Central Government, or by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, the Comptroller and Auditor-General of
India shall appoint the auditor under section 139(5) or 139(7) and direct such auditor the manner in
which the accounts of the Government company are required to be audited
¾ and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller
and Auditor-General of India.
(c) The audit report among other things, include the following:
¾ the directions, if any, issued by the Comptroller and Auditor-General of India,
¾ the action taken thereon and
¾ its impact on the accounts and financial statement of the company.
Right of CAG to conduct supplementary audit or supplement the audit report [Sec. 143(6)]:
(a) The Comptroller and Auditor-General of India shall within 60 days from the date of receipt of the audit
report have a right to,—
(1) conduct a supplementary audit of the financial statement of the company
¾ by such person or persons as he may authorise in this behalf; and
¾ for the purposes of such audit,
¾ require information or additional information to be furnished to any personor persons, so
authorised, on such matters,
¾ by such person or persons, and
¾ in such form, as the Comptroller and Auditor-General of India may direct; and
(2) comment upon or supplement such audit report.
(3) Any comments given by the Comptroller and Auditor-General of India upon, or supplement to,
¾ the audit report shall be sent by the company
¾ to every person entitled to copies of audited financial statements under section 136(1) and
¾ also be placed before the annual general meeting of the company
¾ at the same time and in the same manner as the audit report.
Â Test Audit [Sec. 143(7)]:
¾ For Government Company or Company controlled by State Government or Central Government,
the Comptroller and Auditor- General of India may,
¾ if he considers necessary, by an order,
¾ cause test audit to be conducted of the accounts of such company, without prejudice to the
provisions related to Audit and Auditors.
¾ The provisions of section 19A of the Comptroller and Auditor-General’s (Duties, Powers and
Conditions of Service) Act, 1971, shall apply to the report of such test audit.
Audit of accounts of branch office of company [Section 143(8)]
(a) Branch office in India – Appointment of auditor:
Where a company has a branch office, the accounts of that office shall be audited either by:
i. the company’s auditor appointed under section 139, or
ii. by any other person qualified for appointment as an auditor of the company under section 139.
(b) Branch office outside India:
If the branch office is situated in a country outside India, the accounts of the branch office shall be
audited either by:
i. the company’s auditor or
ii. by an accountant or by any other person duly qualified to act as an auditor of the accounts of the
branch office in accordance with the laws of that country.
(c) Duties and powers of the company’s auditor:
¾ The duties and powers of the company’s auditor with reference to the audit of the branch and the
branch auditor, shall be such as may be prescribed.
Duties and powers of the company’s auditor prescribed under the Rules (Rule 12)
Â The duties and powers of the company’s auditor with reference to the audit of the branch and the
branch auditor, if any, shall be as contained in sub- sections (1) to (4) of section 143.
Â The provisions regarding reporting of fraud by the auditor shall also extend to such branch auditor to
the extent it relates to the concerned branch.
(d) Report of Branch Auditor:
¾ The branch auditor shall prepare a report on the accounts of the branch examined by him and
¾ send it to the auditor of the company
¾ who shall deal with it in his report in such manner as he considers necessary.
¾ The provisions of regarding reporting of fraud by the auditor shall also extend to such branch
auditor to the extent it relates to the concerned branch.
Compliance with auditing standards [Section 143(9) and 143(10)]
(1) Nature of duty:
¾ Every auditor shall comply with the auditing standards
(2) CG to prescribe auditing standards:
¾ Stages in prescribing the auditing standards are as follows:
i. At the first stage, ICAI recommends the Standard of Auditing.
ii. At the second stage, these Standards of Auditing shall be examined by the National Financial
Reporting Authority (NFRA).
¾ NAFRA may also make its own recommendations.
iii. At the third stage, CG examines the recommendations made by NAFRA.
¾ Then, CG may prescribe, after consultation with NAFRA, the Auditing Standards.
(3) Position, until Auditing Standards are notified:
¾ Until any Auditing Standards are notified, any standard or S
¾ tandards of Auditing specified by ICAI shall be deemed to be the Auditing Standards.
Additional matters to be reported in case of specified companies [Section 143(11)]:
Â In respect of such class or description of companies, as may be specified in the general or special order
Â by the Central Government may, in consultation with the National Financial Reporting
Â direct, the auditor’s report shall also include a statement on such matters as may be specified therein.
¾ Accordingly, CARO, 2016 [Companies Auditor Report Order] is issued in pursuance of Section 143
(11) of Companies Act 2013 for inclusion of the matters specified therein in auditors’ report.
¾ CARO 2016 issued by MCA should be complied by the statutory auditor of every company on
which it applies.
¾ CARO 2016 applicable to every company including a foreign company as defined in clause (42) of
Section 2 of the Companies Act 2013.
Â Until the National Financial Reporting Authority is constituted under section 132, the Central
Government may hold consultation required under this sub- section with the Committee chaired by
¾ an officer of the rank of Joint Secretary or equivalent in the Ministry of corporate Affairs and
¾ the committee shall have the representatives from the Institute of Chartered Accountants of
India and
¾ Industry Chambers and
¾ also special invitees from the National Advisory Committee on Accounting Standards and
¾ the office of the Comptroller and Auditor-General of India.
Reporting of frauds by auditors [Section 143(12)]:
Q-5 A Ltd is a company having share capital of Rs. 5 crores and it is a public company. During the audit of the
company auditor notice that one of the director is involved in the cash embezzlement to the tune of Rs.
2 crores. State the duty of the auditor regarding reporting of such fraud under the companies act 2013
Reporting of frauds involving Rs1crore or above [Sec.143(12)
Ans.
(1) Notwithstanding anything contained in this section, if an auditor of a company in the course of the
performance of his duties as auditor,
¾ has reason to believe that an offence of fraud involving amount of Rs.1crore or above (as prescribed
under the Rule 13)
¾ is being or has been committed in the company by its officers or employees,
¾ the auditor shall report the matter to the Central Government
¾ within such time and in such manner prescribed in Rule 13 of the Companies (Audit and Auditors)
Rules, 2014 which is as under :

The auditor shall report the matter to the Central Government as under:
(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately
but not later than 2 days of his knowledge of the fraud, seeking their reply or observations within 45
days;
(b) on receipt of such reply or observations, the auditor shall forward
¾ his report and the reply or
¾ observations of the Board or the Audit Committee along with his comments (on such reply or
observations of the Board or the Audit Committee)
¾ to the Central Government within 15 days from the date of receipt of such reply or observations;
(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within
the stipulated period of 45 days, he shall forward
¾ his report to the Central Government
¾ along with a note containing the details of his report that was earlier forwarded to the Board or
the Audit Committee for which he has not received any reply or observations;
(d) the report shall be sent to –
Â the Secretary,
Â Ministry of Corporate Affairs in a sealed cover by
¾ Registered Post with Acknowledgement Due or
¾ by Speed Post
¾ followed by an e-mail in confirmation of the same;
(e) the report shall be on the letter-head of the auditor containing
¾ postal address,
¾ e-mail address and
¾ contact telephone number or mobile number and
¾ be signed by the auditor with his seal and
¾ shall indicate his Membership Number; and
(f) The report shall be in the form of a statement as specified in Form ADT-4
(g) These provisions shall also apply, mutatis mutandis, to –
¾ A cost auditor during the performance of his duties u/s 148; and
¾ A secretarial auditor during the performance of his duties u/s 204.
Reporting of frauds involving less than Rs1crore [Sec.143(12)]:
(2) In case of a fraud involving lesser than the specified amount i.e. Rs.1crore, the auditor shall report the
matter to –
¾ the audit committee constituted under section 177 or
¾ to the Board in other cases
within such time and in such manner prescribed in Rule 13 of the Companies (Audit and Auditors) Rules,
2014.
(a) As per the Rule 13 of the Companies (Audit and Auditors) Rules, 2014.In case of a fraud involving lesser
than the amount specified in sub- rule (1),

¾ the auditor shall report the matter to Audit Committee constituted under section 177 or
¾ to the Board
¾ immediately but not later than 2 days of his knowledge of the fraud and he shall report the matter
specifying the following :
(i) Nature of Fraud with description;
(ii) Approximate amount involved; and
(iii) Parties involved.
(b) The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule
(3) during the year shall be disclosed in the Board’s Report (as per Rule – 13):
(i) Nature of Fraud with description;
(ii) Approximate Amount involved;
(iii) Parties involved, if remedial action not taken; and
(iv) Remedial actions taken.
No liability of auditor [Sec. 143(13)]:
Â No duty to which an auditor of a company may be subject to shall be regarded as having been contravened
by reason of his reporting the matter referred above if it is done in good faith.
Provisions applicable to other auditors [Sec. 143(14)]:
Â The provision of this rule shall also apply, mutatis mutandis, to –
¾ a Cost Auditor and
¾ a Secretarial Auditor
¾ during the performance of his duties under section 148 and section 204 respectively.
Penalty for non compliance of section 143(15):
If any auditor, the cost accountant in practice conducting cost audit under section 148 or the company
secretary in practice conducting secretarial audit under section 204 do not comply with the provisions of
section 143(12) (reporting about the offence to the Central Government), he shall be punishable with –
Â fine which shall not be less than 1 Lacs but which may extend to 25 Lacs.
AUDITOR NOT TO RENDER CERTAIN SERVICES [SECTION 144]
Section 144 of the Companies Act, 2013 provides for Auditor not to render certain services. According to this
section:
1. Services to be approved:
¾ An auditor appointed under this Act shall provide to the company only such other services as are
approved by –
¾ the Board of Directors or
¾ the audit committee, as the case may be.
2. Prohibited services:
¾ An auditor shall not provide any of the following services (whether such services are rendered
directly or indirectly to the company or its holding company or subsidiary company), namely—
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
(i) any other kind of services as may be prescribed. [However no other kind of services has
been prescribed till date]
3. Discontinuation of existing non-audit services:
¾ An auditor or audit firm who or which has been performing any non-audit services
¾ On or before the commencement of this Act
¾ Shall comply with the provisions of this section
¾ Before the closure of the first FY after the date of such commencement.
4. Meaning of ‘directly and indirectly’:
¾ for the purpose of this sub-section,
¾ The term “directly or indirectly” shall include
¾ rendering of services by the auditor,—
i. in case of auditor being an individual,
¾ either himself or
¾ through his relative or
¾ any other person connected or associated with such individual or
¾ through any other entity, whatsoever,
¾ in which such individual has significant influence or control, or
¾ whose name or trade mark or brand is used by such individual;
ii. in case of auditor being a firm,
¾ either itself or
¾ through any of its partners or
¾ through its parent, subsidiary or associate entity or
¾ through any other entity, whatsoever,
¾ in which the firm or any partner of the firm has significant influence or control, or
¾ whose name or trade mark or brand is used by the firm or any of its partners.
AUDITORS TO SIGN AUDIT REPORTS, ETC. [SECTION 145]
(a) signing and certification:
¾ Section 145 of the Companies Act, 2013 provides for auditors to sign audit reports, etc.
¾ According to this section:
¾ The person appointed as an auditor of the company shall sign
¾ the auditor’s report or
¾ sign or certify
¾ any other document of the company in accordance with the provisions of sub-section (2) of
section 141
(i.e. in case of firm including LLP, only Chartered Accountants are authorised to act and sign).
(b) Qualifications to be read in general meeting and inspection thereof:
¾ The qualifications, observations or comments on financial transactions or matters, which have
any adverse effect on the functioning of the company mentioned in the auditor’s report shall be
¾ read before the company in general meeting and
¾ shall be open to inspection by any member of the company.
AUDITORS TO ATTEND GENERAL MEETING [SECTION 146]:
Section 146 of the Companies Act, 2013 provides for auditors to attend general meeting. According to this
section:
(a) Right of the auditor to receive notices of GM:
¾ All notices of, and
¾ other communications relating to, any general meeting
¾ shall be forwarded to the auditor of the company.
(b) Duty of the auditor to attend GM:
¾ The auditor shall,
¾ unless otherwise exempted by the company, attend either
¾ by himself or
¾ through his authorised representative,
¾ who shall also be qualified to be an auditor, any general meeting.
(c) Right of the auditor to be heard at GM’s:
¾ The auditor shall have right to be heard at such meeting on any part of the business which concerns
him as the auditor.
10. PUNISHMENT FOR CONTRAVENTION [SECTION 147]
Â Section 147 of the Companies Act, 2013 provides for punishment for contravention. According to this
section:
(i) Penalty on company [Section 147(1)]:
¾ If any of the provisions of sections 139 to 146 (both inclusive) is contravened,
o the company shall be punishable
¾ with fine which shall: Minimum: Rs.25,000
Maximin: Rs. 5 Lacs.
(ii) Penalty on officers [Section 147(1)]:
¾ If any of the provisions of sections 139 to 146 (both inclusive) is contravened,
o every officer of the company who is in default shall be punishable with
¾ imprisonment for a term which may extend to 1 year or
¾ With fine which shall: Minimum: Rs.10,000
¾ Both with imprisonment and fine

(iii) Penalty on auditor [Section 147(2) & (3)]:? If an auditor of a company contravenes any of the
provisions of section 139, section 143, section 144 or section 145,
¾ the auditor shall be punishable
¾ with fine which shall: Minimum: Rs.25,000
¾ If an auditor has contravened such provisions knowingly or willfully with the intention to
deceive the company or its share holders or creditors or tax authorities, he shall be punishable
with
¾ imprisonment for a term which may extend to 1 year and
¾ fine which shall: Minimum: Rs.1 Lac
(a) Further, where an auditor has been convicted as above, he shall be liable to—
(1) refund the remuneration received by him to the company; and
(2) pay for damages to –
¾ the company, statutory bodies or authorities or to any other persons
¾ for loss arising out of incorrect or misleading statements of particulars made in his audit
report.
(iv) Measures to ensure prompt payment of damages [Section 147(4)]:
¾ The Central Government shall, by notification,
¾ specify any statutory body or authority or an officer
¾ for ensuring prompt payment of damages to the company or the persons.
¾ Such body, authority or officer shall after payment of damages to such company or persons
¾ file a report with the Central Government in respect
¾ of making such damages
¾ in such manner as may be specified in the said notification. .
(v) Liability of Audit firm [Section 147(5)] :
¾ Where, in case of audit of a company being conducted by an audit firm,
¾ it is proved that the partner or partners of the audit firm
¾ has or have acted in a fraudulent manner or abetted or colluded in
¾ any fraud by, or in relation to or by,
¾ the company or its directors or officers,
¾ the liability, whether civil or criminal as provided in the Companies Act, 2013, or in any other law
for thetime being in force,
¾ for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly
andseverally and shall also be liable under section 447.
CENTRAL GOVERNMENT TO SPECIFY AUDIT OF ITEMS OF COST IN RESPECT OF CERTAIN
COMPANIES/ POWER OF CG T ORDER MAINTENANCE OF COST RECORDS AND CONDUCT OF COST AUDIT
[SECTION 148]:
Section 148 of theCompanies Act, 2013 provides theprovisions for Central Government to specify audit of
items of cost in respect of certain companies. According to this section:
1. Order by CG for maintenance of cost records:
(i) Notwithstanding anything contained in the provisions related to audit and auditor (Chapter X),
the Central Government may, by order, in respect of such class of companies -
¾ engaged in the production of such goods or
¾ providing such services as may be prescribed,
¾ direct that particulars relating to –
o the utilisation of material or
o labour or
o to other items of cost as may be prescribed
o shall also be included in the books of account kept under section 128 by that class of
companies.
(ii) The Central Government shall, before issuing such order
¾ in respect of any class of companies regulated under a special Act,
¾ consult the regulatory body constituted or established under such special Act.
2. Order by CG for conduct of cost audit:
(i) If the Central Government is of the opinion, that it is necessary to do so, it may, by order,
¾ direct that the audit of cost records of class of companies,
¾ which are covered aforesaid and which have a
¾ net worth of such amount as may be prescribed or
¾ a turnover of such amount as may be prescribed,
¾ shall be conducted in the manner specified in the order.
3. Appointment of Cost Auditor by Board:
¾ The cost audit shall be conducted by a Cost Accountant in practice.
¾ Only a cost accountant in practice or a firm of Cost accountant in practice can be appointed as a
cost auditor.
¾ who shall be appointed by the Board on such remuneration as may be determined by the members
in such manner as may be prescribed.
¾ Rule 14 of the Companies (Audit and Auditors) Rules, 2014 provides that—
(1) in the case of companies which are required to constitute an audit committee-
¾ the Board shall appoint an individual, who is a cost accountant in practice, or a firm of cost
accountants in practice, as cost auditor on the recommendations of the Audit committee, which
shall also recommend remuneration for such cost auditor;
¾ the remuneration recommended by the Audit Committee under (A) shall be considered and
approved by the Board of Directors and ratified subsequently by the shareholders;
(2) in the case of other companies which are not required to constitute an audit committee, the Board
shall appoint an individual who is a cost accountant in practice or a firm of cost accountants in practice
as cost auditor and the remunerationofsuchcostauditor shall beratified byshareholders subsequently.

Companies required to constitute Companies not required toconstitute Audit
Audit Committee Committee
(a) The Board shall appoint (a) The Board shall appoint thecost auditor.
the cost auditor on the (b) The remuneration of such costauditor shall
recommendation of the be ratified byshareholders subsequently
Audit committee.
(b) The Audit Committee shall
recommend the remuneration
forcost auditor.
(c) Such remuneration asrecommended
by the AuditCommittee shall be
consideredand approved by the Board
of Directors.
(d) Then this remunerationsubsequently
to be ratified bythe shareholders.
Â No person appointed under section 139 as an auditor of the company (i.e. company auditor) shall be
appointed for conducting the audit of cost records.
4. Compliance with Cost Auditing Standards:
¾ Cost auditor to comply with cost auditing standards: The auditor conducting the cost audit shall
comply with the cost auditing standards.
¾ Here, the expression “cost auditing standards” mean such standards as are issued by the Institute
of Cost and Works Accountants of India, constituted under the Cost and Works Accountants Act,
1959, with the approval of the Central Government.
¾ An audit conducted under section 148 shall be in addition to the audit conducted under section
143.
5. Qualifications, disqualifications, rights, duties and obligations of cost auditor:
¾ The qualifications, disqualifications, rights, duties and obligations applicable to auditors (i.e.
applicable to company auditor) shall,
¾ so far as may be applicable,
¾ apply to a cost auditor appointed under section 148 and
¾ it shall be the duty of the company to give all assistance and facilities to the cost auditor appointed
under this section for auditing the cost records of the company.
6. Cost Audit Report:
¾ The report on the audit of cost records shall be submitted by the cost accountant in practice to the
Board of Directors (BoD) of the company.
¾ A company shall within 30 days from the date of receipt of a copy of the cost audit report furnish
to the Central Government –
¾ with such report
[Vide Notification dated 9th September, 2015 under the rule 4 of the Companies(Filing of Documents
and forms in Extensible Business Reporting Language) Rules, 2015, a company is required to furnish
cost audit report and other documents to the Central Government shall file such report and other
documents using the XBRL taxonomy given in Annexure III for the financial year commencing on
or after 1st April, 2014 in e-form CRA-4 specified under the Companies(Cost Records and Audit)
Rules, 2014.]
¾ along with full information and explanation on every reservation or qualification contained therein.
(xi) If, after considering the cost audit report and the information and explanation furnished by the
company,
¾ the Central Government is of the opinion that
¾ any further information or explanation is necessary,
¾ it may call for such further information and explanation
¾ and the company shall furnish the same within such time as may be specified by that Government.
Contravention:
Â If any default is made in complying with the provisions of section 148,—
¾ The company and every officer of the company who is in default shall be punishable in the
manner as provided in section 147(1);
¾ the cost auditor of the company who is in default shall be punishable in the manner as provided
in sub-sections (2) to (4) of section 147.
Â The provisions of section 143 shall mutatis mutandis apply to the cost accountant in practice conducting
cost audit under section 148.

Constitution of National Financial Reporting Authority, have also been notified 132.
(1) The Central Government may, by notification, constitute a National Financial Reporting Authority to
provide for matters relating to accounting and auditing standards under this Act.
(2) Notwithstanding anything contained in any other law for the time being in force, the National Financial
Reporting Authority shall—(a) make recommendations to the Central Government on the formulation
and laying down of accounting and auditing policies and standards for adoption by companies or class
of companies or their auditors, as the case may beb) monitor and enforce the compliance with
accounting standards and auditing standards in such manner as may be prescribed;(c) oversee the
quality of service of the professions associated with ensuring compliance with such standards, and
suggest measures required for improvement in quality of service and such other related matters as
may be prescribed; and(d) perform such other functions relating to clauses (a), (b) and (c) as may be
prescribed.
(3) The National Financial Reporting Authority shall consist of a chairperson, who shall be a person of
eminence and having expertise in accountancy, auditing, finance or law to be appointed by the Central
Government and such other members not exceeding fifteen consisting of part-time and full-time
members as may be prescribed: Provided that the terms and conditions and the manner of appointment
of the chairperson and members shall be such as may be prescribed: Provided further that the
chairperson and members shall make a declaration to the Central Government in the prescribed form
regarding no conflict of interest or lack of independence in respect of his or their appointment: Provided
also that the chairperson and members, who are in full-time employment with National Financial
Reporting Authority shall not be associated with any audit firm (including related consultancy firms)
during the course of their appointment and two years after ceasing to hold such appointment.
(4) Notwithstanding anything contained in any other law for the time being in force, the National Financial
Reporting Authority shall—(a) have the power to investigate, either suo motoor on a reference made
to it by the Central Government, for such class of bodies corporate orpersons, in such manner as may

be prescribed into the matters of professional or other misconduct committed by any member or firm
of chartered accountants, registered under the Chartered Accountants Act, 1949:Provided that no other
institute or body shall initiate or continue any proceedings in such matters of misconduct where the
National Financial Reporting Authority has initiated an investigation under this section;(b) have the
same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit,
in respect of the following matters, namely:—(i) discovery and production of books of account and
other documents, at such place and at such time as may be specified by the National Financial Reporting
Authority;(ii) summoning and enforcing the attendance of persons and examining them on oath;(iii)
inspection of any books, registers and other documents of any person referred to in clause (b) at any
place;(iv) issuing commissions for examination of witnesses or documents;(c) where professional or
other misconduct is proved, have the power to make order for—(A) imposing penalty of—(I) not less
than one lakh rupees, but which may extend to five times of the fees received, in case of individuals;
and(II) not less than five lakh rupees, but which may extend to ten times of the fees received, in case
of firms;(B) debarring the member or the firm from engaging himself or itself from practice as member
of the Institute of Chartered Accountant of Indiareferred to in clause (e) of sub-section (1) of section 2
of the Chartered Accountants Act, 1949 for a minimum period of six months or for such higher period
not exceeding ten years as may be decided by the National Financial Reporting Authority. Explanation.—
For the purposes of his sub-section, the expression “professional or other misconduct” shall have the
same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949.
(5) Any person aggrieved by any order of the National Financial Reporting Authority issued under clause
(c) of sub-section (4), may prefer an appeal before the Appellate Tribunal in such manner and on
payment of such fee as may be prescribed.
(6) The National Financial Reporting Authority shall meet at such times and places and shall observe such
rules of procedure in regard to the transaction of business at its meetings in such manner as may be
prescribed.
(7) The Central Government may appoint a secretary and such other employees as it may consider necessary
for the efficient performance of functions by the National Financial Reporting Authority under this Act
and the terms and conditions of service of the secretary and employees shall be such as may be
prescribed.
(8) The head office of the National Financial Reporting Authority shall be at New Delhi and the National
Financial Reporting Authority may, meet at such other places in India as it deems fit.
(9) The National Financial Reporting Authority shall cause to be maintained such books of account and
other books in relation to its accounts in such form and in such manner as the Central Government may,
in consultation with theComptroller and Auditor-General of India prescribe.
(10) The accounts of the National Financial Reporting Authority shall be audited by the Comptroller and
Auditor-General of India at such intervals as may be specified by him and such accounts as certified by
the Comptroller and Auditor-General of India together with the audit report thereon shall be forwarded
annually to the Central Government by the National Financial Reporting Authority.
(11) The National Financial Reporting Authority shall prepare in such form and at such time for each financial
year as may be prescribed its annual report giving a full account of its activities during the financial year
and forward a copy thereof to the Central Government and the Central Government shall cause the
annual report and the audit report given by the Comptroller and Auditor-General of India to be laid
before each House of Parliament.

CHAPTER-1
THE INDIAN CONTRACT ACT, 1872
UNIT: 1 CONTRACT OF INDEMNITY AND GUARANTEE
Q-1 Explain the contract of indemnity AND Rights of indemnifier

Ans. As per section 124 of the act, “A contract by which one party Promises to save the other from loss caused
to him by the conduct of Promisor himself or the conduct of any person is called a “CONTRACT OF
INDEMNITY”.
INDEMNIFIER: There are two parties in this form of contract. The party who promises to indemnify/ save the
other party from loss is known as “indemnifier” where as the party who is promised to be saved against the
loss is known as “indemnified”
Example: {1} Virat may contact to indemnity Anushka against the consequences of any proceedings which
Ranvir may take against Anushka in respect of sum of 5,000/ advance by Anushka to Ranvir in consequences,
when Anushka who is called upon to pay the sum of money to Ranvir fails to do so, Ranvir would be able to
recover the amount from Virat as provided in section 124
In a conract of indemnity, the promise i.e., indemnity holder acting within the scope of his authority is
entitled to recover from the promisor.
v RIGHTS OF INDEMNIFIER:
1. All damages which he may be compelled to pay in any suit
2. All cost which he may have been compelled to pay in bringing/ defending the suit AND
3. All sums which he may have paid under the terms of any Compromise of suit.
It may be understood that the rights contemplated under section 125 are not exhaustive. The indemnity
holder indemnified has other rights besides those mentioned above. If he has incurred a liability and that
liability is absolute, he is entitled to called upon his indemnifier to save him from the liability and to pay it
off.
Q-2 What are the rights of the indemnity holder when sued?
Ans. According to the section 125 of the indian contract act, 1872 the Indemnity holder i.e. promisee in a
contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor.
(i) All damages which he may be compelled to pay in any suit in respect of any matter to which the
promise to indemnify applies,
(ii) All costs which he may be compelled to pay in any such suit, if in bringing or defining it, he did not
contravene the orders of the promisor, and acted as it would have been prudent for him to act in
absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit.

(iii) All sums which he may have paid under the terms of any compromise of any such suit, if the compromise
was not contrary to the orders of the promisor, and was one which it would have been prudent for the
promisee to make in the absence of any contract of indemnity, or if the promisor authorised him to
compromise the suit.
Section 125 is by no means exhaustive, which deals only with his rights in the event of his being sued. The
indemnity holder has other rights besides those mention above. If he has incurred a liability and that
liability is absolute he is entitled to call upon his indemnifier to save him from that liability and to pay it off.
Q-3 Explain the contract of guarantee
Ans. Meaning : As per section 126;
A contract of guarantee is a contract to Perform the promise made or discharge liability incurred Third
person in case of his default.
There are three parties in a contract of guarantee.
SURITY: Person who gives the guarantee,
PRINCIPAL DEBTOR: Person in respect of whose default the guarantee is given,
CREDITOR: Person to whom the guarantee is given.
Any guarantee given may be ORAL OR WRITTEN.
Example: where Chandanimam obtains housing loan from LIC Housing and If Hitesh sir promises to pay LIC
Housing in the event of Chandanimam falling to repay, it is a contract of guarantee.
Q-4 Describe the nature of surety’s liability
Ans. As per section 128 of the act, the liability of the surety is co extensive with that of the principal debtor
unless it is otherwise provided by the contract.
Thus it can be seen:
i) The liability of surety is the same as that of the principal debtor
ii) Where a debtor cannot be held liable on account of any defect in the document, the liability of the
surety also ceases
iii) Surety’s liability continues even if the principal debtor has not been sued or is omitted from being
sued. This is for the reason that the liability of the Surety is seprate on the guarantee.
Q-5 Point out the circumstances in which a surety is discharged from liability
By the conduct of the creditor
Ans. As per section 126 discharge of surety is a person who promises to undertake the responsibility to
perform the promise or discharge the liability of third person in case of his default.
· A surety is said to be discharge when his liability come to an end.
· A surety may be discharge from his liability by the conduct of the creditor in the following cases:
(1) Variance in terms of contract (section: 133): Any variance, made without the surety’s consent, in
terms of the contract between the principal debtor and the creditor, discharge the surety as
transactions subsequent to the variance.
(2) Release or discharge of principal debtor (section: 134): The surety is discharged by any contract
between the creditor and principal debtor by which the principal debtor is released, or by any act or
omission of the creditor, the legal consequences of which is the discharge of the principal debtor.
226 Chapter 1 : The Indian Contract Act, 1872

But in the following cases the surety will not be discharge even through the principal debtor has
been released.
(a) If the principal debtor is discharged by operation of law E.g.discharge/insolvency
(b) If creditor omits to sue the principal debtor within the period of limitation.
(3) By impairing surety’s remedy (section: 139): if the creditor does any act which is inconsistent with
the rights of surety, or omits to do any act which the duty to the surety requires him to do ,and the
eventual remedy of surety himself against the principal debtor is there by impaired, the surety is
discharged.
(4) Compounding by creditors with the principal debtor (section: 135): Any Contract between the
principal debtor and the creditor by which the Creditor makes composition with, or promises to
given time to, or not to Sue, the principal debtor, discharges the surety, unless the surety assents to
such contact.
(a) Where a contract to give time to the principal debtor is made by the creditor with a third
person, and not with the principal debtor (section: 137)
(b) Mere forbearance on the part of the creditor to sue the principal debtor to enforce any other
remedy against him does not discharge the surety
(section: 137)
(c) Where there are co sureties, release by the creditor of one of them does not discharge the
order, neither does it free the surety so released from his responsibility to the other sureties
(section: 138)
(5) By loss of security (section: 141): if the creditor loses or without the consent Of the surety, parts
with any security given to him at the time of contract of Guarantee , the surety is discharged from
liability to the extent of the value of Security.
Q-6 Explain the meaning of continuing guarantee and aspects regarding the revocation of continuing
guarantee ?
Ans. In continuing guarantee, the liability of surety continues till the performance or the discharge of all the
transaction entered into or the guarantee is withdrawn.
As per section 129 of the act “A guarantee which extends to a series of transaction is called “continuing
guarantee”
Example: where Hiteshsir promises to pay Chandanimam be responsible, so long Chandanimam employs
only Palaksir to collect his rentals from tenants for an amount of RS.5000, there is a continuing guarantee by
Hiteshsir to Chandanimam so long Palaksir is employed as rent collector. In other words Hiteshsir stands a
guarantor Chandanimam for rent collected by Palaksir.
There are two important aspects regarding the revocatiuon of continuing guarantee are
I. By notice : The first aspect is “ the continuing guarantee may at any time be revocked by the surety
as to future transaction by notice to creditors”
However no revocation is possible where a continuing relationship is established.
Example: where ‘A’ becomes surety of ‘C’ for ‘B’s conduct as manager in C’s bank and ‘B’ is appointed
on the faith of this guarantee, “A” is precluded from annulling the guarantee so long as B acts as
manager in C’s bank.
II. By death of surety: The second aspect is upon the death of surety, the continuing guarantee is
revoked for all future transaction in the absence of any conrtact to the contrary.
Q-7 Explain the right of surety against the principal debtor and creditor
OR
What are the rights of a surety against the principal debtor and Co Surities:
Ans. After the performing of the promise or discharging of liability of the Principal debtor, surety acquires
various right against the parties.
The right of surety are contained in section 140 and section 141 of the act.
These are:
(1) Against the principal debtor:
a. Right of subrogation : Where a guaranteed debt has become due or default of the principal debtor
to perform a guaranteed duty has taken place, the surety upon payment or performance of all that
he is liable for is vested with all rights which the creditor had against the principal debtor.
the right of surety is known as the right of surety subrogation namely the right to stand in the
shoes of the creditor.
b. Right to securities: The surety is entitled to the benefits of all securities made available to the
creditor by the principal debtor whether the surety was aware of its existence or not.
c. Right to recover the amount paid/Right to indemnity: the surety is entitled to recover from the
principal debtor whatever sums he has rightfully paid.
In this connection the following principles were laid down in Reed VS. Norris
The claim of surety is restricted to that smaller amount which he may have paid under the principal
of “accord and satisfaction”
Surety can also claim indemnity for any special damages which he has suffered while discharging
his duties.
Surety can claim even if he has paid a time barred debt as it is a rightful payment though there are
contrary views on this issue.
d. Surety right against the creditor : Following are the rights of sureties against the creditor.
e. Right of subrogation: The surety gets the right of subrogation for all payments and performance
he is liable. The right would accrue only when the surety has paid the amount in Example: where
a creditor had the right to stop the goods or seller lien, surety would enjoy the same right after he
has paid the amount [imperial bank VS. kathereine docks 1877 5 Ch.D]
f. Right to securities: Surety is entitled for all securities which the debtor has provided to creditor
whether surety is aware of it or not. Where a creditor losses any of security by default or negligence
the liability of the surety abates proportionately. if a creditor does not hand over the securities to
surety he can be compelled to do so.
Example: he is entitled for mortgage rights which the secured creditor has. But the surety is not
entitled for any security provided subsequent to the contract of guarantee.
g. Right to sue: Surety has a right to require the creditor to sue for and recover the guaranteed debt.
This right of surety is known as right to file a ‘quia timet action’ against the debtor. There is of
course an inherent risk of having to indemnity the creditor for delay and expense.
h. Right to dismiss: Surerty has a right to call upon the creditor to dismiss the person from service if
the person whose fidelity is guaranteed by surety is persistently dishonest.
i. Right to claim set off : Surety has a right of set off against the principal debtor exactly as a creditor
would have.
j. Right of option on the claim of the funds: Surety also can compel the creditor where he has claim
on two funds , to resort to that fund first on which surety has no claim.
h. Right to claim : Surety can claim that he is not liable on the guarantee to the creditor, say because
he was a minor
This is on the principle that the liability of the surety is Co extensive with that of the principal debtor
Q-8 Define contract of indemnity and contract of guarantee and state the when guarantee is considered
invalid?
OR
State the circumstances when a guarantee can be treated as invalid:
Ans. Contract of indemnity:
Section 124 of the Indian contract act,1872 says that “A contract by which one party promises to save
other from loss caused to him by the conduct of the promisor himself, or the conduct of any person” is
called a “contract of indemnity”
Contract of guarantee:
As per sec.126 of the Indian contract act says that “A contract to perform the promise made or discharge
liability incurred by a third person in case of his default” is called as “contract of guarantee”.
The conditions under which the guarantee is invalid or void are stated in section 142,143 and 144 of the
Indian contract act are:
(a) Mis representation: when the guarantee has been obtained by means of mis representation made
directly by the creditor or made with his knowledge and mis representation relates to material parts
of the transaction.
(b) Silence as to material circumstances: when the creditor has obtained any guarantee by means of
keeping silence as to material circumstances.
The expression “keeping silence” implies intentional concealment of a material fact , as distinct
from a mere non disclosure thereof. There must exist some element of fraud. [Balakrishna VS. Bank
of bangal (1891) 15 Bom. 585].
Example: thus rasid engages krish as clerk to collect money for him and krish fails to account for
some of his receipts. Thereupon, rasid calls upon krish to furnish security for his duly accounting the
receipts. Viarat gives the required guarantee. Rasid doesnot tell virat of the fact of a previous
misappropriation by krish and thereafter krish again makes a default. The guarantee would be
invalid.
(c) Failure of joining of other person as co surety: When a contract of Guarantee is entered into on the
condition that the creditor shall not act upon it until another person has joined in it as co surety and
that other party fails to join as such.
Q-9 Distinction between contract of indemnity and contract of guarantee
Ans.

SR.NO. Basis Contract of indemnity Contract of guarantee
1 Meaning According to section 124 a According to section 126 a contract of
contract by which one party guarantee is a contract to perform
promises to save the other the promise or to discharge the
from loss caused to him by liability of a third person
the conduct of the promisor in case of his default.
himself or by the conduct of
any other person is called
contract of indemnity
2 Parties Two:i.e. indemnifier Three: i.e. creditor
indemnified debtor
surety
3 Natrure of liability The liability of indemnifier The liability of surety collateral
is primary in nature and secondary
4 Nature of contract The contract of indemnity is The contract of guarantee is for
for the reimbursement of a loss. the security of creditor.
5 Can sue OR The indemnifier cannot sue the The surety can after paying
Cannot sue third party even after making the creditor, sue the principal debtor
good the loss unless there is in his own name
an assignment is his favour.
6 How the liability The liability of the indemnifier There is an existing debt or duty
arises? arises only on the happening the performance of which is guaranteed
of the contingency. by the surety.
7 Number of contacts Only one contract between There are three contract :
indemnifier and indemnified. Between creditor and principal
debtor Creditor and the surety
Between surety and principal debtor
Q-10 Mr. obama, is employed as a cashier on a monthly salary of Rs. 5,000 by HDFC bank for a period of three
years. Modi gave surety for obama’s good conduct. After nine months,the financial position of the
bank deteriorates. Then obama agrees to accept a lower salary of Rs.1,500 per month from bank. Two
months later, it was found that obama has misappropriated cash since the time of appointment. What
is the liability of modi?
Ans. The creditor makes any variance ( i.e. change in terms ) without the consent of surety, then
sutrety is discharged as to the transaction subsequent to the change. In the instant case modi is liable
as a surety for the loss suffered by the bank due to misappropriation of cash by mr.obama during the
first nine months but not for misappropriation committed after the reduction in salary. [section 133,
Indian contract act, 1872]
Q-11 Ritik owes Abhi a debt guaranteed by john. Abhi does not sue Ritik for a year after the debt has become
payable. In the meantime, Ritik becomes insolvent is john discharged? Decide with refrence to the
provision of the Indian contract act, 1872.
Ans. Discharge of surety:
The problem is based upon on the provision of section 137 of the Indian contract act, 1872 relating to
discharge of surety. The section states that mere forbeaerance on the part of the creditor to sue the
principal debtor and /or to enforce any other remedy against him would not, in the absence of any
provision in the guarantee to the contrary, discharge the security.
In view of these provision, john is not discharged from his liability as a surety.
Q-12 Saif becomes guarantor for Sara for the amount which may be given to him by salim within 6 months.
The maximum limit of the said amount is Rs. 2lakhs. After two months Saif withdraws his guarantee.
upto the time of revocation of guarantee, Salim had given to Sara Rs. 20,000.
1. Whether Saif is discharged from his liability to Salim for any subsequent loan.
2. Whether Saif is liable if Sara fails to pay the amount of Rs. 20,000 to salim?
Ans. Discharge of surety by revocation (problem) :
As per section 130 of the Indian contract act, 1872 a specific guarantee cannot be revoked by the surety
if the liability has already accured.
A continuing guarantee may, at any time, be revoked by the surety, as to future transactions, by notice
to the creditor, but the surety remains liable for transaction already entered into.
As per the above provision, the answer is yes. Saif is discharged from all the subsequent loans because
it’s a case of continuing guarantee. Where as in second case
(ii) saif is liable for payment of Rs. 20,000 to salim because the transaction has already completed.
Q-13 Jiya contract with Priya for a fixed price to construct a house for Priya within a stipulated time. Priya
would supply the necessary material to be used in construction. Kriya guarantees Jiya’s performance
of the contract. Priya does not supply the material as per the agreement. Is kriya discharged from his
liability.
Ans. According to section 134 of the Indian contract act,1872, the surety is discharged by any contract between
the creditor and the principal debtor, by which the principal debtor is released or by any act or omission
for the creditor, the legal consequences of which is the discharge of the principal debtor. In the given
case the Priya omits to supply the timber. Hence kriya is discharged from his liability.
Q-14 C, the holder of an overdue bill of exchange drawn by A as surety for B, contracts with X to give time to
B. IS A discharged from his liability?
Ans. According to section 136 of the Indian contract act,1872 where a contract to give time to the principal
debtor is made by the creditor with a third person and not with the principal debtor, the surety is not
discharged. In the given questions the contract to give time to the principal debtor is made by the
creditor with X who is third person. X is not the principal debtor.
Hence A is not discharged.
Q-15 What are the principles of law of guarantee with regard to contribution of the same debt between the
co sureties?
Ans. Contribution as between co sureties:
The principal in this regard is laid down in section 146 of the Indian contract act,1872 which is as
follows:
“when two or more persons are co sureties for the same debt, or duty either jointly, or severally and
whether under the same or different contracts and whether with or without the knowledge of each
other, the co sureties in the absence of any contract to the company. Are liable, as between themselves,
to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal
debtor”
A co surety is entitled to recover from other securities the amount he has paid but the right arises only
if the surety has paid an amount beyond his share of the debt to the creditor. For only then does it
become certain that there is ultimately a case for contribution at all.
A judgement against the surety at the suit of the creditor for the full amount of guarantee will have the
same effect as payment made for these parties and would entitle the surety or his representative to a
declaration of the right to contribution on the very same principle by which the rights of company
trustees in respect of amount which they are made liable to pay are setteled.
Liabilities of two sureties are not affected by mutual agreement between them. This principle has
been laid down in section 132 which runs thus, where two person, contract with a third party to undertake
a certain liability, and also contract with each other that one of them shall be liable only on the default
of the other the third person under the first contract is not affected by the existence of the second
contract, although such third person may have been aware of its existence.
This position is applicable when the liability is undertaken jointly by two parties in respect of the same
debt but not in different debts.
[pogoes vs. bank of bangal (1877)
Q-16 ‘ Amit’ stands surety for ‘bikram’ for any amount which ‘chander’, may lend to ‘bikram’ from time to
during the next three months subject to a maximum amount of Rs. 1,00,000. One month later,’ amit’
revokes the surety, when ‘chander’ had already lent to ‘bikram’ Rs.10,000 referring to the provisions of
the Indian contract act,1872.decide:
(i) Whether AMIT is discharged from all the liabilities to chander for any subsequent loan given to
bikram?
(ii) What would be your answer in case Bikram makes a default in paying back to chander the already
borrowed amount of Rs.10,000?
Ans. Revocation of continuing guarantee: The problem as asked in the question is based on the provision of
the Indian contract act 1872, as contained in section 130 relating to the revocation of a continuing
guarantee as to future transaction which can be done mainly in the following two ways:
1. By notice: a continuing guarantee may at any time be revoked by the surety as to future
transacation, by notice to the creditor.
2. By death of surety: as per the section 131 of the Indian contract act, the death of surety operates,
in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as
regard future transactions.
So far as the transaction before revocation are concerned, the liability of the surety for previous transaction
remains.

i. Thus applying the above provisions in the given case, Amit is discharged from all liabilities to chander
for any subsequent loan.
ii. Ans. in 2nd case would differ. i.e. Amit is liable to chander for Rs.10,000 on default of bikram since the
loan was taken before the notice of revocation was given to chander.
SHORT QUESTIONS / ANSWERS
Q-1 What is contract of indemnity?
Ans. As per section 124 of the indain contract act, a contract by which one party promises to save the other
from loss caused to him by the conduct of the promisor himself or by the conduct of any other person,
is called a contract of indemnity.
Q-2 What is contract of guarantee?
Ans. According to section 126 of the Indian contract act as a contract to perform the promise or discharge the
liability of a third person in case of his default. The person who gives the guarantee is called the
“surety” the person for whom the guarantee is given is called the “principal” debtor and the person to
whom the guarantee is given the called the creditor.
Q-3 What is a continuing guarantee and how is it revoked?
Ans. According to sec 129 of the Indian contract act defines a continuing guarantee as an against which
extends to a series of transaction.
How revoked?
1. Express revocation [sec. 130]
2. Death of surety [sec. 131]
Q-4 What is the meaning of consideration of guarantee?
Ans. A contract of guarantee must also be supported be lawful consideration. But however, it is not necessary
that something must have been done for the benefit of the guarantor.
Anything done for the benefit of the principal debtor is a sufficient consideration to support the
promise of guarantor.
According to section 127 of the Indian contract act that “anything done, or any promise made for the
benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee.
Q-5 Define the essential element of bailment
Ans.
1. Delivery of goods
2. Contract
3. Specific goods shall be returned
4. Every kind of movable goods other than money and actionable claims
5. Change of possession of goods
6. Bailor delivers his goods to the bailee for some definite purpose
Q-6 Kinds of bailment
Ans. Bailment broadly classified into two catagories:
1. Gratuitous bailment
2. Non gratuitous bailment

Q-7 Duties of bailor
Ans.
1. To disclose known faults in goods
2. Repay bailee’s expenses
3. Duty to identified the bailee
4. Duty to compensate bailee for breach of warranty
5. Duty to claim back the goods.
Q-8 Rights of bailor
Ans.
1. Right to enforce bailee’s performance
2. Right to claim damages
3. Right to claim compensation against unauthorized use of goods
4. Duty to terminate the contract
5. Right to demand return goods along with accretion to, if any.
Q-9 Duties of bailee
Ans.
1. Duty to take reasonable care of the goods while they are in his possession
2. Duty to make any unauthorized use of the goods bailed
3. Duty not to mix the goods bailed with his own goods
4. Duty to return the goods in accordance with the contract
5. Duty to return any accretion to the goods.
Q-10 Rights of bailee
Ans.
1. To claim compensation for any loss arising from non disclosure of known defects in the goods
2. Right of lien
3. Right against wrongful deprivation of or injury to goods
Q-11 Essential of pledge
Ans.
1. Delivery essentials
2. Deliver goods as a security
3. Only movable goods can be pledged
Q-12 Rights of pawnee

Ans.
a. Right of retainer
b. Right to retention to subsequent debts
c. Right to seek reimbursement of extra ordinary expenses

d. Right to use
Q-13 Right of a pawnor
Ans.
a. Right to redeem
b. Right to use
c. Right to take care of the goods
d. Right to receive increase or profit from the goods
Q-14 How non owners create a valid pledge of goods
Ans. Some non owners may also create a valid pledge of goods, such as
1. Mercantile agents
2. Co owner
3. By person having a limited interest
4. By person having a possession of goods under voidable contract
Q-15 What is the basic distinction between bailment and pledge
Ans. All the pledges are bailment but all the bailment are not a pledges.
Q-16 What is gratuitous bailment?
Ans. No consideration passes between the bailor and the bailee and the bailor is not responsible for the
damages in respect of the faults which were not known to him.
Q-17 Different forms of bailment
Ans. Following are the popular forms of bailment
1. Delivery of goods by one person to another to be held for the bailor’s use
2. Goods given to a friend for his own use without any charge
3. Hiring of goods
4. Delivering goods to a creditor to serve as security for a loan
5. Delivering goods for repair with or without remuneration
6. Delivering goods for carriage
Q-18 If the bailee, with the consent of the bailor, mixes the goods of the bailor with his own goods, the
bailor and the bailee shall have an interest, in production to their respective shares, in the mixure thus
produced, it is:
Ans. The statement is correct.
Q-19 What is contract of indemnity?
Ans. In terms of section 124 of the act, “ a contract by which one party promises to save the other from loss
caused to him by the conduct of the promisor himself or the conduct of any person is called a “ contract
of indemnity”.
Q-20 What is contract of guarantee?
Ans. A contract to perform the promise or discharge the liability of a third person in case of his default.
Q-21 What is continuing guarantee?
Ans. A guarantee which extends to a series of transaction is called a “ continuing guarantee”
Q-22 In which situation surety is discharged if the principal debtor is discharged?
Ans.
a. By a contract
b. Any act
c. Any omission the result of which is the discharge of principal debtor
Q-23 Rights of surety against the principal debtor and creditor
Ans. After the performing of the promise or discharging of the liability of the principal debtor, surety acquires
various rights against the parties.
The rights of surety are contained in section 140 and 141 of the act.
These are :
{1} Against the principal debtor
(a) Right of subrogation
(b) Right to securities
(c) Right to recover the amount paid/ right to indemnity
{2} Against the creditor
(a) Right of subrogation
(b) Right to securities
(c) Right to sue
(d) Right to dismiss
(e) Right to claim set off
(f) Right of option on the claim of the funds
(g) Right to claim
Q-24 In which circumstances guarantee can be treated as invalid?
Ans. Following are the circumstances when a guarantee can be treated as invalid.
i. Mis representation
ii. Silence as to material circumstances
iii. Failure of joining of other person as co surety.
Mcqs:
1. In a contract of guarantee a person , who promises to discharge another’s liability is called:
a. Principal debtor
b. Creditor
c. Indemnifier
d. Surety
Ans. { D. surety}
2. In a contract of guarantee there are:
a. One contract
b. Two contract

c. Three contract
d. Four contract
Ans. {C. three contract}
3. X contract to save Y against consequences of any proceedings which Z may take against Y in respect of
certain sum of 5000 rupees.this is a
a. Contract of guarantee
b. Quasi contract
c. Contract of indemnity
d. Void contract
Ans. {C. contract of indemnity}
4. The promise in a contract of indemnity, acting within the scope of his authority, is entitled recover from
the promisor
a. all damages which he may compelled to pay in any suit in respect to any matter to which he
promise to indemnity applies
b. all costs which he may be compelled to pay in any such suit
c. all sums which he may have paid under the terms any compromise of any such suit
d. all of the above
Ans. {d. all of the above}
5. Section 128 of the Indian contract act, 1872 provides:
a. surety’s liability
b. continuing guarantee
c. revocation of continuing guarantee
d. consideration for guarantee
Ans. {a. surety’s liability}
6. A guarantee which extends to a series of transaction is known as:
a. Specific guarantee
b. Continuing guarantee
c. (a) and (b)
d. None
Ans. { b. continuing guarantee}
7. The death of surety operates in the absence of any contract to the contrary, as a revocation of continuing
guarantee, so far as regards future transaction it is given in:
a. Sec 131
b. Sec 132
c. Sec 133
d. Sec 134
Ans. {a. sec 131}
8. A continuing guarantee may be revoked for future transaction:

a. Before five months
b. Within three months
c. At any time
d. May not be revoked
Ans. { c. at any time}
9. Section 133 of Indian contract act,1872 provides…….

a. Discharge of surety by variance in terms of a contract
b. Surety’s liability
c. Release of one cosurety does not discharge other
d. Implied promise to indemnity surety
Ans. { a. discharge of surety by variance in terms of a contract}
10. In a contract of guarantee, the person to whom guarantee is given is known as:
a. Creditor
b. Surety
c. Principal debtor
d. Debtor
Ans. {a. creditor}

UNIT: 2 BAILMENT AND PLEDGE
Q-1 What is bailment?
Ans : Meaning of bailment:
Bailment etymologically means ‘handing over’ OR ‘change of possession’
AS PER SECTION 148 OF THE INDIAN CONTRACT ACT, Bailment is an act whereby goods are delivered by one
person to another for some purpose, on a contract, that the goods shall, when the purpose is accomplished,
be returned or otherwise disposed of according to the direction of the person delivering them.
Bailor : the person who delivers the goods is called bailor.
Bailee: the person to whom the goods are delivered is called bailee.
For example: where ‘dhoni’ delivers his car for repair to’ virat’, ‘ dhoni’ is the bailor and ‘virat’ is bailee .
Q-2 State the essential element of a contract of bailment.
Ans. Meaning of bailment :
Section 148 of the Indian contract act, 1872 defines the term “bailment”
A bailment is delivery of goods by one person to another for some purpose upon a contract that they shall,
when the purpose is accomplished, be returned.
Following are the essential element of a contract of bailment:
1. Delivery of goods: the essence of bailment is delivery of goods by one person to another person.
2. Bailment is contract: in bailment, the delivery of goods is upon a contract that when the purpose is
accomplished, the goods shall be returned to the bailor.
3. Return of goods in specific: the goods are delivered for some purpose and it is agreed that specific
goods shall be returned.
4. Ownership of goods: in a bailment, it is only the possession of goods which is transferred and the
bailor continues to be the owner of the goods.
5. Property must be movable: bailment is only for movable goods and never for immovable goods or
money.
Q-3 Explain the different forms of bailment
Ans. Following are popular form of bailment:
(1) Delivery of goods by one person to another to be held for the bailor’s use
(2) Goods given to a friend for his own use without any charge
(3) Hiring of goods
(4) Delivering goods to a creditor to serve as security for loan.
(5) Delivering goods for repair with or without remuneration.
(6) Delivering goods for carriage
Q-4 Explain the rights and duties of bailor?
Ans. Bailor : the person who delivers the goods.
Rights of bailor:
(1) To enforce bailee’s duties such as right to claim damages, compensation, if any.
(2) To terminate the contract of bailment.
(3) To demand back the goods.
(4) To claim increase or profit from goods bailed.
Duties of bailor:
(1) bailor has to disclose all the facts/ faults about bailed goods to bailee.
(2) Under gratuitous bailment, bailor has to reimburse expenses incurred by bailee, if any.
(3) Bailor has to compensate the loss on bailed goods to bailee, if any.
(4) Bailor has to accept the goods after purpose is accomplished.
Q-5 General issues of bailment
Ans. In bailment both custody and possession must change but not the ownership. But where a person is in
custody without possession he does not become a bailee.
Example: servant of a master who are in custody of goods of the master do not become bailees.
Possession and custody do not however mean physical delivery of goods. Constructive delivery could
also create a bailor and bailee relationship. This arises in situation where the bailee is already in
possession of goods but agrees to be a bailee through a contract.
Deposite of money in a bank is not bailment since the money returned by the bank would not be
identical currency notes.
Similarly depositing ornaments in a bank locker is not bailment, because ornaments are kept in a
locker whose key are still with the bank. The ornaments are in possession of the owner though kept in
a locker at the bank.
Q-6 Explain the care to be taken by bailee
Ans. The bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence with
regard to quantity, bulk and value would take.
In such a case he will not be responsible, in the absence of special contract, for any special loss or
distruction or deterioration of the bailee, since he has taken as much care as a man of ordinary prudence.
For example: if X bails his ornaments to Y and Y keeps these ornaments in his own locker at his house
along with his own ornaments and if all the ornaments are lost/stolen in a riot Y will not be responsible
for the loss of X. if on the other hand X specifically instructs Y to keep them in a bank, but Y keeps them
at his residence, then Y would be responsible for the loss
Bailee has right to terminate: the bailee has the right to terminate a contract of bailment if the bailor
does any thing inconsistent with bailment conditions.
Q-7 Explain the duties and rights of bailee
Ans. In addition to the two important duties of having to take care of the goods bailed and being responsible
for loss/ injury/ damage to goods, bailee has other following duties under the act.
Duties of bailee:
i. Bailee has no right to make unauthorized use of goods bailed
ii. Bailee has no right to mix the goods bailed with his own goods without the consent of the bailor.
iii. Bailee has to return the goods on expiration of period of bailment.
iv. Bailee has a duty to return any extra profit accuring from goods bailed.
· Where Shyam bails his cow to ram and if the cow gives birth to a calf, ram must return both the cow
and the calf to shyam.
v. Bailee has duty not to do anything inconsistent with the condition of bailment.
Rightsof bailee:
i. To claim compensation for any loss arising from non disclosure of known defects in the goods.
ii. To claim indemnification for any loss or damage as a result of defective title.
iii.To deliver back the goods back to the bailor whether or not the bailor has the right to the goods.
iv. To deliver back the goods to joint bailers according to the agreement or direction.
v. To exercise his “right of lien”. The right of lien is a right to retain the goods and is exercisable where
charges due in respect of goods retained have not been paid.
vi. To take action against third parties if that party wrongfully denies the bailee of his right to use the
goods.
Q-8 Explain the rights and duties of finder of goods
Ans. The duties of “finder of goods” are that of the bailee. Such a “finder of goods” is as good as a bailee and
he enjoys all the rights and carries all the responsibilities of a bailee.
Apart from the above, the “finder of lost goods” can ask for reimbursement for expenditure incurred
for preserving the goods but also for searching the true owner. If the real owner refuses to pay
compensation, the finder cannot sue but retain the goods so found.
Further where the real owner has announced any reward, the finder is entitled to receive the reward.
The right to collect the reward is a primary and a superior right even more than the right to collect the
reward is a primary and a superior right even more than the right to seek reimbursement of expenditure.
Lastly the finder though has no right to sell the goods found in normal course, he may sell the goods if
the real owner cannot found with reasonable efforts or if the owner refuses to pay the lawful charges
subject to the following conditions:
1) When the article is in danger of perishing and losing the greater part of the value or
2) When the lawful charges of the finder amounts to two/third or more of the value of the article
found
Q-9 State the difference between general lien and particular lien
Ans.
SR.No Points General Lien Particular Lien
1. Rights It is right to detain/retain It is right excercisable only on
any goods of the bailor for such goods in respect of which
general balance of account charges are due.
outstanding.
2. Recognization A general lien is not automatic It is automatic.
but is recognized through on
agreement. It is excercised by
the bailee only by name.

3. Applicability It can be excercised against goods It comes to play only when some
even without involvement of labour labour or skill is involved.
or skill.
4. Examples: Bankers, factors, wharfingers, Bailee, finder of goods, pledgee,
policy bankers etc. are entitled to unpaid seller, agent, partner etc
general lien. are entitled to particular lien.
Q-10 What do you mean by pledge? What is pawnor’s right to redeem?

Ans: Meaning of pledge:
AS PER SECTION 172 OF THE INDIAN CONTRACT ACT, 1872 defines pledge as the bailment of goods as
security for payment of debt or performance of a promise. When goods have been pledged, the bailor
is called in this case the pawner and the bailee, the pawnee.
In case of pledge no transfer of any interest in property take place, but a special right to property is
carved out in favour of the pledge, i.e. he has right to disposed of the property in certain circumstances.
Pawnor’s right to redeem: as per provision laid down under section 177 of the Indian contract act, 1872
if a time is stipulated for the payment of debt or performance of the promise, for which the pledge is
made, and the pawnor makes default, he may redeem the goods pledged at my subsequent time
before the goods are sold, but in that case, he must pay, in addition, any expenses occasioned by the
default.
The period for suit against a pawnee to recover things pledged is 3 years from the date of pawnee’s
refusal to do so after demand. (the limitation act 1963 = schedule, 70)
Q-11 Explain the pawnee’s right.
Ans. Pawnee: person who receives the goods as security.
Following are the rights of pawnee:
(a) Right of retainer : Pawnee has right to retain the goods pledged not only for payment of debt or
performance of a promise but also for recovery of debts and all expenses incureed for preservation
of goods pledged. Where Mukesh pledged stock of goods for certain loan from a bank, the bank has
a right to retain the stock not only for adjustment of the loan but also for payment of interest.
(b) Right to retention to subsequent debts: Pawnee has a right to retain the goods pledged towards
subsequent advances as well, however subject to such right being specifically contemplated in the
contract.
(c) Right to seek reimbursement of extraordinary expenses: Pawnee has a right to seek reimbursement
of extraordinary expenses incurred. However his right to retain the goods shall not extend to such
extraordinary expenses but is restricted to ordinary expenses.
(d) Right to sue: In the event of Pawnor failing to redeem the debt or perform the promise, the Pawnee
has a right to sue the goods which he has retained. He can in the alternative, under certain
circumstances, sell the goods after giving a reasonable notice, to the Pledgor.
The two rights naimely the right to sell are alternative rights and not cumulative rights .

Q-12 Explain the rights of a pawnor.
Ans. Pawnor: person who pledged goods as security
Following are the rights of Pawnor:
(a) Right to redeem: Pawnor has a basic right to redeem the goods pledged by performing his promise.
(b) Right to sue: Pawnor has a right to sue, but within a period of 3 years in view of provison of limitation
act only in event of Pawnee refusing to return the goods even after payment of debt etc.
(c) Right to take care of the goods: Pawnor has a right to demand Pawnee to take all reasonable care and
preservation of the goods pledged.
(d) Right to receive increase or profit from the goods: Pawnor is entitled to receive the increase or profit
from the goods if there is any increase/ profit relating to it during the pledged period.
Q-13 Distinction between bailment and pledge
Ans.
SR.No. Points Bailment Pledge
1. As a purpose: In regular bailment the goods Under pledge goods are bailed
are bailed for other purpose than as a security for a loan or a
the two referred above. performance of promise.
2. As to right of A bailee can, if the terms so Pledgee has a right to use the goods.
using goods: provide, use the goods.
3. Consideration: May or may not be There is always a consideration
consideration.
4. Discharge of Bailment is discharge as the Pledge is discharge on the payment
contract: purpose is accomplished or of debt or performance of promise
after specified time.
Q-14 Shan hires a carriage of roy and agrees to pay Rs.500 as hire charges. The carriage is unsafe, though roy
is unaware of it. Shan is injured and claims compensation for injuries suffered by him. Roy refuses to
pay. Discuss the liability of Roy.
Ans. Problem asked in question is based on the provision of the Indian contract act,1872 as contained in
section 150. The section provides that if the goods are bailed for hire, the bailor is responsible for such
damage, whether he was or was not aware of the existence of such faults in the goods bailed.
Accordingly, applying the above provisions in the given case Roy is responsible to compensate Shan for
the injuries sustained even if he was not aware of the defect in the carriage.
Q-15 Ricky bails his jewelry with Kriti on the condition to safeguard in bank’s safe locker. However, Kriti kept
in safe locker at his residents, where he usually keeps his own jewelry. After a month all jewelry was
lost in a religious riot. Ricky filed a suit against Kriti for recovery. Referring to provision of the Indian
contract act, 1872, state whether Ricky will succeed.
Ans. Reffering to section 152 of the Indian contract act,1872 kriti liable to compensate Ricky for his negligence
to keep jewelry at his resident. Here Ricky and agreed to keep the jewelry at the bank’s safe locker and
not at the latter’s residence.

Q-16 Sunil delivers his car to Mahesh for repairs. Mahesh completed the work , but did not return the car to
Sunil within reasonable time , though Sunil repeatedly reminded Mahesh for the return of the car. In
the meantime a big fire occurred in the neighborhood and the car was destroyed. Decide whether
Mahesh can be held liable under the provisions of the Indian contract act,1872.
Ans. The problem asked in the question is based on provision of section 160 and section 161 of the Indian
contract act,1872. Accordingly, it is the duty of bailee to return or deliver the goods bailed. According to
bailor’s directions, without demand, as soon as the time for which they were bailed has expired, or the
purpose for which they were bailed has been accomplished. Delivered or tendered at the proper time,
notwithstanding the exercise of reasonable care on his part.
Therefore, applying the above provisions in the given case, Mahesh is liable for the loss, although he
was not negligent, but because of his failure to deliver the car within a reasonable time.(shaw & co.v.
symmons & sons)
Q-17 Ambani lends a sum of Rs.5,000 to Malia, on the security of two shares of a limited company on 1st April
2007. The company issued two bonus shares. MALIA returns the loan amount of Rs.5,000 with interest
but AMBANI returns only two shares which were pledged and refuses to give the two bonus shares.
Advise MALIA in the light of the provisions of the Indian contract act,1872.
Ans. Bailee’s duties and liabilities: the problem asked in the question is based on the provision of section
163(4) of the Indian contract act,1872. As per the section, “in the absence of any contract to the contrary,
the bailee is bound to deliver to the bailor, any increase or profit which may have accured from the
goods bailed.”
Applying the provision to the given case, the bonus shares are an increase on the shares pledged by
MALIA to AMBANI . so Ambani is liable to return the shares along with the bonus shares and hence
MALIA the bailor, is entitled to them also. (motilal VS. Bai Mani).
Q-18 Shahid gives umbrella to Mira during raining season to be used for two days during examination. Mira
keeps the umbrella for a week. While going to Shahid’s house to return the umbrella, Mira accidently
slips and the umbrella is badly damaged. Who bear the loss and why?
Ans. Mira shall have to bear the loss since she failed to return the goods within the agreed time, she shall be
responsible to the bailor for any loss, destruction or deterioration of the goods from that time
notwithstanding the exercise of reasonable care on his part.
Q-19 Rahi sent a consignment of goods worth RS. 60,000 by railway and got railway receipt. He obtained an
advance of RS. 30,000 from the bank and endorced and delivered the railway receipt in favour of the
bank by way of security. The railway failed to driver the goods at the destination. The bank filed a suit
against the railway for RS.60,000. Decide in the light of provisions of the Indian contract act, 1872,
whether the bank would succeed in the said suit?
OR
Aarohi sent a consignment of mobile phones worth RS.60,000 to aastha and obtained a railway receipt
therefore. Later, he borrowed a loan of RS.40,000 from star bank and endorsed the railway receipt in favour
of bank as security. In transit the consignment of mobile phones was lost. The bank fails a suit against the
railway for a claim of RS.60,000 the value of the consignment. The railway contended that the bank is
entitled to recover the the amount of loan. i.e. RS.40,000 ONLY. Examining the provision of the Indian
contract act,1872. Decide, whether the contention of the railway is valid.
OR

X sent a consignment of goods worth RS.2,90,000 by railway and got railway receipt for the same. He obtained
an advance of RS. 2,60,000 from the bank and endorsed and delivered the railway receipt in favour of the
bank by way of security for the advance. The railway failed to deliver the goods at the destination. The bank
filed a suit against the railway for RS. 2,90,000 . decide in the light of provision of the Indian contract act,1872,
whether the bank would succeed in the said suit?
Ans. Rights of bailee:
As per section 178 and section 178A of the Indian contract act, 1872 the deposits of title deeds with the
bank as security against an advanced constitutes a pledge. As a pledge, a banker’s right are not limited
to his interest in the goods pledged. In case of injury to the goods or their deprivation by a third party,
the pledge would have all such remedies that the owner of the goods would have against them. In
Morvi Mercantile Bank Ltd. Vs. union of india, the supreme court held that the bank was entitled to
recover not only the amount of the advance due to it, but the full value of consignment. However the
bank will succeed in this claim of RS.60,000/ 2,90,000 against railway.
Q-20 Examine whether the following constitute a contract of “bailment” under the provision of the Indian
contract act, 1872:
i. Kirti parks his cars at a parking lot, locks it, and keeps the keys with himself.
ii. Seizure of goods by customs authorities.
Ans.
i. No. mere custody of goods does not mean possession. For a bailment to exist the bailor must give
possession of the bailed property and the bailee must accept it, section 148 of the Indian contract
act,1872 is not applicable.
ii. Yes, the possession of the goods is transferred to the custom authorities. Therefore bailment exists
and section 148 is applicable
Q-21 Difference between gratuitous bailment and non gratuitous bailment
Ans.
SR.No. Basis of distinction Gratuitous bailment Non gratuitous bailment.
1 Meaning Bailment without any If some charges are paid either
charge or reward is called by the bailee or the bailor
as gratuitous bailment. in consideration of bailment of goods,
it is called as non gratuitous bailment.
2 Consideration No consideration is present Consideration is always present
in case of gratuitous bailment. in case of non gratuitous bailment.
3 Liability for non The bailor is liable to disclose The bailor must disclose to
disclosure of unknown only such faults as are known bailee all the faults in the
faults to him. goods, whether or not such fault is
known to him.
4 Duty of pay ordinary In case of gratuitous bailment In case of non gratuitous bailment,
necessary expenses for the benefit of the bailor, bailee is not entitled to recover

the bailor is liable to reimburse any necessary expenses incurred
to bailee all the necessary by him.
expenses incurred by bailee.
5 Right of pre mature Bailor has the right to terminate Bailor has no right to terminate
termination of the gratuitous bailment at the non gratuitous bailment
bailment anytime even though the before the expiry of period
bailment was for a particular of bailment.
period.
Q-22 Difference between bailee’s particular lien and bailee’s general lien
Ans.
Sr.No. Basis of distinction Bailee’s particular lien(sec. 170) Bailee’s general lien(sec.171)
1 Nature of right Particular lien gives right to retain General lien gives right to
only such goods in respect of which retain any goods belonging
charges due remain unpaid. to another person for any
amount due from him.
2 Condition for Particular lien can be excercised General lien may be exercised even
excercising lien only when some labour or skill has though no labour or skill has been
been expended on the goods, expended on the goods.
resulting in an increase in
value of goods.
3 Right to whom? Every bailee is entitled to General lien can be excercised by
particular lien. only such person as are specified
u/s 171.[e.g. bankers, factors,
wharfingers, policy broker.]
Any other bailee may exercise
general lien if there is an
agreement to this effect.
State with reasons whether the following statement are correct or incorrect:
(1) A pledge of documents of title to goods by a mercantile agent is a valid pledge.
Answer: Correct: As per section 178 of the Indian contract act, 1872, a pledge by mercantile agent will
be valid if the agent is in possession of goods or document of title to the goods and if such possession
is with the opinion of the owner.
(2) If the pawnor makes a default in the payment of debt, or performance of duty, as agreed, the pawnee
has a right to sell the thing pledged for which no reasonable notice of the sale is required.
Answer: Incorrect: As per section 176 of the Indian contract act, 1872, if the pawnor makes any default

in payment of the debt or performance of duty as agreed, the pawnee has a right to sell the thing
pledged on giving the pawnor reasonable notice of the sale. A sale made by the pawnee without giving
a reasonable notice will be void.
(3) Bailee has no right to mix the goods bailed with his own goods without the consent of the bailor.
Answer: correct
(4) Depositing of ornaments in a bank locker is a bailment.
Answer: Incorrect: Depositing ornaments in a bank locker is not bailment because ornaments are kept
in a locker whose key are still with the owner and not with the bank. So the ornaments are still in
possession of the owner though kept in a locker at the bank.
(5) The pledge has right to claim any damages suffered because of defective title of pledgor.
Answer: Correct
SHORT QUESTIONS
Q-1 State the name of the parties under bailment?
Answer: There are namely two parties under bailment.
{1} Bailor: the person delivering goods to the other person for same purpose is called bailor.
{2} Bailee: the person to whom the goods are delivered for some purpose is called bailee.
Q-2 Examples of bailment:
Answer.
a. Delivery of cloth for stiching purpose
b. Delivery of goods for the purpose of repair
c. Delivery of goods for the purpose of safe custody
Q-3 Deposit of money in a bank amounts to bailment
Answer.A deposit of money with a banker does not become bailment because banker is bound to return not
the same currency notes but only an equivalent value.
Q-4 Explain the meaning of lien
Ans. Lien is a right of person to retain the possession of goods of another person so long as some claim upon
that person is not satisfied by him.
Q-5 Person entitled to general lien
Answer.The right of general lien has been conferred on the following kinds of bailees :
(1) Banker (2) Factor (3) wharfingers (4) attorneys of a high court (5) policy brokers.
Q-6 Meaning of finder of goods
Answer.Finder of goods means a person who finds the goods lost by some another person.
Q-7 Essential of bailment
Answer.It is a delivery of movable goods by one person to another. According to section 149 the delivery of
goods may be actual or constructive.
The goods are delivered for some purpose.
The goods are delivered subject to the condition that when the purpose is accomplished the goods are
to be returned in specie or disposed of according to the directions of the bailor, either in original form
or in altered form.

Q-8 Duties of the bailee
Ans.
i. Duty to take reasonable care of goods delivered to him [sec 151]
ii. Duty not to make unauthorized use of goods entrusted to him [sec 154]
iii. Duty not to mix goods bailed with his own goods [sec 155]
iv. Duty to return the goods [sec 165]
v. Duty to deliver any accretion to the goods [sec 163]
Q-9 Rights of bailor
Ans.
i. Enforcement of bailee’s duties
ii. Right to terminate bailment if the bailee uses the goods wrongfully [sec 153]
iii. Right to demand return of the goods at any time in case of gratuitous bailment [sec 159]
Q-10 Essential feature of a valid pledge
Ans.
Delivery of possession
Delivery should be upon a contract
Delivery should be for the purpose of security
Delivery should be upon condition to return
Q-11 What is the duties of pawnor
Ans.
Duty to repay the loan
Duty to pay expenses in case of default
Q-12 What is the duties of pawnee
Ans.
Duty not use of pledged goods
Duty to return the goods
Q-13 What is the right of pawnor

Ans.
Right to redeem the goods pledged
Right to receive the increase
Q-14 What is the right of pawnee
Ans.
Right to retain the pledged goods
Right to extra ordinary expenses
Right in case of default of the pawnor
Right to sell the goods
Q-15 What is the requisites of bailment
Ans.
Contract
Delivery of possession
For some purpose
Return of specific goods
Q-16 Finder of lost goods and Rights of finder of goods
Ans.
1. Right of lien
2. Right to sue for reward
3. Right of sale
a. If owner can not be found
b. If charges are 2/3 rd of value of goods and owner refuses to pay
c. If goods are perishable in nature
Q-17 Obligation of finder of lost goods
Ans.
1. Take reasonable care of goods
2. Not to use for his own purpose
3. Not to mix goods with own goods
4. Try to find out the true owner of goods
Q-18 Termination of bailment
Ans.
Doing an act inconsistent with terms of bailment
At desire of the bailor in case of gratuitous bailment
On expiry of periods
On accomplishment of objects
Death of the bailor or bailee
Q-19 Use of pledge
Ans.
Securing loans
Pawning property for cash
Guaranteeing that contracted work will be done.
Q-20 Parts of pledge
Ans.
Two seprate parties
A debt or obligation
A contract of pledge
MULTIPLE CHOICE QUESTIONS :

1. The delivery of goods by one person to another as security for the payment of a debt is called.
a. Bailment b. Pledge
c. Mortgage d. Hypothecation
Answer: (b) pledge
2. The delivery of goods by one person to another for some specific purpose and time is known as :
a. Mortgage b. Pledge
c. Bailment d. Charge
Answer: (c) bailment
3. Bailment means………..
a. Temporary delivery of goods b. Permanent delivery of goods
c. Partly delivery of goods. d. None
Answer: (a) temporary delivery of goods
4. What is an essential element of a valid pledge?
a. Delivery of bills b. Delivery of goods
c. Price d. None
Answer: (b) delivery of goods
5. Lien of a pawnee is called…….
a. Right to destroy b. Right to use
c. Right to retainer d. None of these
Answer: (c) right to retainer
6. The pledge is a contract of…..
a. Bailment b. Agency
c. Guarantee d. Mortgage
Answer: (a) bailment
7. The finder of goods has right of
a. Lien b. Purchase
c. Succession d. None
Answer: (a) lien
8. A finder of goods is subject to the same responsibility as that of a………
a. Bailor b. Surety
c. Purchaser d. Bailee
Answer: (d) bailee
9. Bailee should care the goods as per……..
a. As owner b. As principal
c. As a man of ordinary prudence d. As a servant
Answer: (c) as a man of ordinary prudence
10. It is necessary in bailment

a. Transfer of possession b. Transfer of ownership
c. Transfer of goods d. Transfer of property
Answer: (a) transfer of possession
11. When goods are lent to person to the used by him on free of cost. That is ………………contract.
a. Pawn b. Hire
c. Gift d. Comodatum
Answer: (d) comodatum
12. This is not kind of bailment………..
a. Contract of bank locker b. Comodatum
c. Hire agreement d. Pawn
Answer: (a) contract of bank locker
13. Which type of lien have a bailee?
a. Specific lien b. General lien
c. Special lien d. Implied lien
Answer: (a) specific lien
14. Which matter pertains to kaliya perumal vs/. vishlaxami?
a. For bailment b. For guarantee
c. For mortgage d. For agency
Answer: (a) for bailment
15. Bailment by several joint owners is dealt under which of the following sections in Indian contract act
1872?
a. Sec. 169 b. Sec. 159
c. Sec. 163 d. Sec. 165
Answer: (d) sec. 165
16. It is not essential element of contract of bailment………

a. Purchase of goods b. Doing contract
c. Delivery of goods d. Return of goods in specific time
Answer: (a) purchase of goods
17. The bailment of goods as security for payment of a debt or performance of a promise is called:
a. Pledge b. Bailment
c. Contingent contract d. Agreement
Answer. (a) pledge

UNIT: 3 AGENCY
Q-1 State the meaning of agency and its salient features.

Ans. Meaning of agency:
As per section 182 of the Indian contract act,1872 does not define the word “agency”. However, the
word “agent” is defined “as a person employed to do any act for another or to represent another in
dealings with third persons.”
The third person for whom the act is done or is so represented is called “principal”.
Thus “agency” is a comprehensive word used to describe the relationship between one person and
another, where the first mentioned person brings the second mentioned person into legal relation
with others.
The rule of agency is based on the maxim “Quit facit per alium, facit per se.”
Salient feature of agency:
i. Basis: the basic essence of “agency” is that the principal is bound by the acts of the agent and is
answerable to third parties.
ii. Consideration not necessary: unlike other regular contracts, a contract of agency does not need
consideration.
iii. Capacity to employ an agent: A person who is competent to contract alone can employ an agent.
In other words, a person in order to act as principal must be a major and of sound mind.
iv. Capacity to be an agent: a person in order to be an agent must have authority to contract. In other
words, an agent brings about a
v. relationship between the principal and third persons.
Q-2 What is agency by ratification?
Ans. Agency by ratification:
A person may act on behalf of another without his knowledge or consent. Later on such another person
may accept the act of the former or reject it. If he accepts the act of the former done without his
consent, he is said to have ratified that act and it places the parties in exactly the same position in
which they would have been, the former had later’s authority at the time he made the contract.
Likewise, when an agent exceeds the authority bestowed upon him by the principal may ratify the
unauthorised act.
Q-3 Modes of creation of agency
Ans. There are five general methods of creating agency.
These are
i. Agency by actual authority: a contract of agency can be express or implied. whether it is express or
implied, it can be by words spoken or written. While the express contract is often expressed in clear
terms, implied contracts are created by circumstances.
ii. Agency by ratification: agency is also created by subsequent ratification or approach. The ratification
becomes necessary because the agent acts without the knowledge or the approval of principal.
Following are the rules of ratification:
(a) Ratification can be made only by a person who was in existence at the time of act.
(b) Ratification must be by a person for whom the act was done, professing him to be a principal. This
implies competency on the part of the person ratifying the act.
(c) Ratification would date back to the date of the act, and validate it.
(d) Ratification may either be express or implied by the conduct of the person on whose behalf the act was
done.
(e) Ratification must be of the whole act and not just for a part of the act.
(f) Ratification of the acts of an agent cannot be such as to create any liability to third parties or cause any
injury or damage to third parties.
(g) Ratification cannot be done if the person ratifying is in knowledge of facts which are materially defective.
(h) Illegal acts cannot be ratified.
(i) Acts which are void ab intio cannot be ratified.
(j) Ratification would be restricted to certain limitation to which original acts are limited and ratification
can be to that portion of exceeded authority by an agent.
iii. Agency of ostensible authority: where the authority of the principal is inferred by the conduct of the
principal, there the agency through ostensible authority is born.
Here the agent’s authority ostensible and the principal is bound by the act of the agent. Ostensible
authority happens on account of estoppels and holding out.
(a) Agency by estopples: If a person permits or represents another to act on his behalf, so that a
reasonable person would infer that the relationship of principal and agent had been created then he
will be stopped from denying his agent’s authority and getting himself relieved from his obligation
to a third party by proving that no such relationship infact existed. For example: ‘Hiteshsir’ informs
‘Chandanimam’ in the presence and within hearing of ‘Palaksir’ that ‘Palaksir’ is his agent Later
‘Chandanimam’ enters into a contract with ‘Palaksir’ thinking that ‘Palaksir is the agent of ‘Hiteshsir’
. In a situation like this neither ‘Palaksir’ nor ‘Hiteshsir’ can refuse the obligations under the contract.
‘palaksir’ had become the agent of ‘Hiteshsir’ by estoppel. ‘Palaksir’ will be treated as agent of
‘Hiteshsir’ even if he was not an agent at all.
A principal cannot privately revoke or restrict the authority of his agent, which he has allowed in
public.
(b) Agency by holdind out: under the principal of holding out, anyone who holds himself out as an agent
of another, then a relationship of agent and principal gets in place.
The process of holding out happens through willful conduct done to create a deliberate impression.
In such case person concerned is estopped from denying that he is the agent of principal.
The doctrine of holding out is also applicable in case of partnerships.
The law of partnership also adopts the principal of agency to a large extent.
However, under ‘holding out ‘ principle following condition are required to be present:
(1) Statement or conduct of misrepresentation
(2) A genuine not necessarily a fraudulent misrepresentation and
(3) The third person should prove that he entered into the transaction believing the statement
so made.
iv. Agency by necessity: Sometimes circumstances would compel and a relation of agency would fall in
place. This is often out of necessity.
For example: a caption of a ship can borrow money at other ports where are no agent to act on behalf
of the owner, to carryout repairs.
The caption becomes an agent by necessity.
To constitute an agency by necessity following condition must be fulfilled.
(1) Agent should be in a position of not being able to communicate in time with the principal
(2) There must have been an actual and for the benefit of principal
(3) The agent must have acted bona fide and for the benefit of principal
(4) The agent must have adopted most reasonable and practicable course of action.
v. Agency by actual authority and apparent authority: actual authority to act as agent stems from a
consent. The consent to act may be oral or in writing. Some time the authority can also be “implied
authority”.
The implied authority is incidental or usual or customary.
It would depend on the circumstances of the case.
The authority of the agent is “apparent” where the principal represents or is regarded by law as having
represented that another has authority.
Under the doctrine of “apparent authority”, the ‘principal’ is bound to third parties by the acts of that
person though he had not given such authority or had limited the authority by instructions not made
known to third party.
The notion of apparent authority is essentially confined to relationship between the principal and
third party.
Q-4 Expalin the duties and obligation of an agent
Ans.
i. Duty in conducting principal’s business: the agent should conduct the business of the principal as per
the direction of the principal or in the absence of any direction as per the custom prevalent in business.
ii. Requirement as to skill and diligence : agent must act always as a person with diligence and skill
normally exercised in the trade. He would otherwise be reasonable to compensate the principal for
any loss suffered by the principal for want of his skill.
Where ‘A’ acts as an agent for ‘B’ and sells rice to ‘C’ in the usual course of business without verifying
about C’s solvency and if ‘C’ goes insolvent, then ‘A’ is responsible for losses arising to ‘B’.
iii. Agents duty to account: the agent has to maintain and render proper accounts to principal whenever
demanded. He is bound to pay the principal all sums received. He is bound to maintain accounts even
if the contract is illegal or void.
iv. Duty to communicate: the agent must in order to obtain instruction, communicate and conduct the
principal as a man of ordinary diligence.
Q-5 Explain the right of an agent?
Ans.
i. Right of lien on principal’s property: An agent is entitled to retain the goods, properties and books for
any remuneration, commission etc due to him. The possession of such property should be however
lawful.
ii. Right of indemnification for lawful acts: The principal is bound to indemnify the agent against all
consequences of lawful acts done in exercise of his authority. For example: ‘Angelina’ of delhi
appoints ‘babita’ of Mumbai as agent to sell his merchandise. As a result of ‘babita’ contracts to deliver
the merchandise to various parties. But ‘angelina’ fails to send the merchandise to ‘babita’ and ‘babita’
faces litigations for non performance . here ‘angelina’ is bound to protect ‘babita’ against the litigations

and all costs, expenses arising out of that.
iii. Right of indemnification against acts done in good faith: Where the agent acts in good faith on the
instruction of principal, agent is entitled for indemnification of any loss or damage from the principal.
Where ‘Pihu’ appoints ‘ Anu’ as his agent and directs him to sell certain goods which in fact turned out
to be not those belonging to Pihu and if third parties sue ‘Anu’ for this act, ‘Anu’ is entitled for
reimbursement and indemnification for such act done in good faith. However the agent cannot claim
any reimbursement or indemnification for any loss etc arising out of acts done by him in violation of
any penal laws of the country.
iv. Right of retention: The agent can retain, out of the sums received from the principal, such amounts
forwards reimbursement of expenditure, remuneration and advances paid by him on account towards
the business and render accounts only for the balance.
v. Right of remuneration: The agent in the normal course is entitled for remuneration as per the contract.
In the absence of any agreed amount of remuneration, he is entitled for usual remuneration which is
customary in the business. However he is not entitled for any remuneration for acts done through
misconduct/negligence.
Q-6 Explain the personal liability of the agent
Ans. The general rule is that only the principal can inforce, and can be held on, a contract entered into by the
agent except when there is a contract to contract. However , the following cases an agent is personally
held liable:
i. When the contract expressly provides for his personal liability.
ii. When the agent acts for a principal
iii. When he acts for a principal who cannot be sued, E.g.; minor
iv. Where he signs a contract in his own name.
v. Where he acts for a principal not in existence. E.g. ; promoter of a company under formation.
vi. Where he is liable for breach of warranty.
vii. Where he receives or pays money by mistake or fraud.
viii. Where the agency is coupled with interest.
Q-7 Briefly explain the principal is liable for the acts of an agent and state under what circumstances an
agent is personally liable.
Ans.
Principal’s liability for agent’s acts :
1. When the agent exceed his authority principal is liable for such acts.
2. Principal is bound by notice given to agent in the course of business.
3. A principal is liable where has by words or conduct induced a belief in the contracting party that the act
of the agent was within the scope of his authority
4. The principal is liable for misrepresentation or fraud of his agent acting within the scope of his actual
or apparent authority during the course of the agency business.
Agent is personally liable:
1. When the contact expressly provides for the personal liability of the agent
2. When the agent signs a negotiable instrument in his own name without making it clear that he is
signing as agent.

3. Where the agent acts for a principal, who cannot be sued on account of his being a foreign sovereign,
ambassador,etc.
Q-8 Explain the principal liability for agent’s act to third parties
Ans. The liability of the principal to third parties would fall under following categories:
(a) When agents act within the scope of his authority: The principal is liable for the acts of the agent done
within the scope of his authority. Where there are specific restrictions on the authority of the agent,
then the principal is not bound by it.
(b) Principal is bound by notice given to agent: The principal is bound by the notice given to the agent.
Knowledge of the agent is knowledge of the principal. Knowledge of a bank manager is knowledge of
the bank. Therefore the principal is bound except where the agent does acts that fraudulent.
(c) Liability by estoppels: Where the agency is by the doctrine of estoppel, the principal is bound by the
same doctrine.
(d) Liability for misrepresentation: The principal is liable for any fraud or misrepresentation done by the
agent within his authority regardless of the fact that the act has resulted in benefit to the agent or the
principal. No liability where agent exceeds the authority. The principal is not liable for acts of an agent
done in excess of authority. Sometimes the acts can be seprated as “within the authority” and “beyond
the authority”. Principal is bound for those acts which are within the authority. But where acts are not
separable, the principal may repudiate the entire transactions.
(e) Unnamed principal: Where the existence of the principal is known but his name is not known, the
principal is liable for the acts of the agent. Third parties can sue the principal for the acts of the agent,
unless agent refuses to disclose the identity of the principal.
Q-9 State the Termination of agent’s authority
Ans. The termination of the agency arises and is based on the doctrine of revocation.
In terms of section 201 of the act, following are the circumstances when the authority conferred on the
agent gets terminated:
(a) Revocation of authority by the principal
(b) Renunciation of agency by the agent
(c) Completion of business of agency
(d) Death or insanity of principal or agent and
(e) Insolvency of the principal
The rights of the principal to revoke the authority of the agent and the rights of the agent to renounce are
each exercised at their will and pleasure.
Following are the general principles in this regard:
(a) Even where the agent gets interested in the subject matter, that would not be a ground for the
principal to terminate the agency. The agency becomes an agency coupled with interest.
(b) The principal cannot revoke the authority after the authority has been exercised.
(c) The agent’s authority cannot be revoked if the agent has partially exercised the authority.
(d) Where there is an implied or express the contract, agency may continue for a period of time. the
agency cannot be terminated without compensation.
(e) Reasonable notice must be given for termination, otherwise the agent is entitled for compensation.
(f) Revocation and remuneration must be express or implied.

Q-10 Explain the “Undisclosed Principal” and the mutual rights of principal, agent, and third party.
Ans. Meaning of “Undisclosed principal” :
An “ Undisclosed principal” comes into play where an agent having the authority to contract, does not
disclose the fact, concealing not only the name of the principal but also the fact that there is a principal,
here the agent gives an impression that he acts on his own.
In “Undisclosed principal”, the mutual rights, of principal, agent, and third party are as follows:
i. The liability of the agent is his own since he has not disclosed that there is a principal
ii. Where the third party comes to know about the existence of the principal he can sue the agent or
the principal.
iii. The third party’s interest would stand protected evenly, and would not suffer even if the principal
surfaces and intervenes at a later date.
iv. Third party has a right to refuse, if the principal discloses himself, on the ground that had he
known about the principal he would not have entered into the contract.
Q-11 Explain the sub agent. And position of sub agent vis a vis third parties where the sub agent is properly
appointed.
Ans. MEANING OF SUBAGENT: Sub agency refers to case where an agent appoints another agent.
The appointment of sub agent is not lawful, because the agent is a delegatee and a delegate cannot
further delegate.
This is based on the latin principle “ delegates non potest delegare “
The appointment of a sub agent would be valid if the terms of appointment originally contemplated it.
Sometimes customs of the trade may provide for appointment of sub agents.
In both these case the sub agent would be treated as the agent of the principal.
Position of sub agent vis a vis third parties where the sub agent is properly appointed.
(a) Where the sub agent is properly appointed: where a sub agent is properly appointed, the principal is
bound by his acts and is therefore responsible to the third parties as if he were an agent originally
appointed by the principal.
(b) In the case of appointment without authority: in case where the appointment of sub agent takes place
without authority. The principal is not bound by the act of sub agent and the sub agent is not bound to
the principal.
It is the agent who is the principal of sub agent.
Where the sub agent purportedly acts in the name of first principal, that first principal may ratified the
act of sub agent.
However if the sub agent acts in his own name or in the name of the agent who has without authority
delegated to the sub agent the business which is in fact of the principal cannot ratified such acts of sub
agent.
Q-12 Explain the meaning of substituted agent/ co agent.
Ans. Meaning of substituted agent:
“Person is named by the agent expressly or impliedly to act for the principal in the business of agency.”
Substituted agents are not sub agent.
They are agent of the principal.
Where the principal appoints an agent and if that agent identifies another person to carry out the acts

ordered by principal, then the second person is not to be treated as a sub agent but only as an agent of
the original principal.
For example:
‘Swiny ‘ directs ‘Jimmy’ his solicitor to sell his property by auction and ‘Jimmy’ appoints ‘Sendy’ an
auctioneer.
In this regard, ‘Sendy’ is an agent of ‘swiny’ and not a sub agent.
While selecting a “Substituted Agent” the agent is bound to exercise same amount of diligence as a
man of ordinary prudence and if he does so he will not be responsible for acts or negligence of the
substituted agent.
For example:
‘Mahi’ consigns goods to ‘Rahi’ a merchant for sale. ‘Rahi’ in due course employs an auctioneer in
goods to sell goods of ‘mahi’ and also allows him to receive the proceeds of sale. The auctioneer
becomes insolvent afterwards without handing over the proceeds. Here ‘Rahi’ will not be responsible
to ‘Mahi’ as he has discharged his duties as a man of ordinary prudence and diligence.
Q-13 Sonu appoints Sweety, a minor, as his agent to sell his watch for cash at a price not less than Rs.700.
Sweety sells it to Titu for Rs. 350. Is the valid? Explain the legal position of ‘Sweety’ and ‘Titu’,
reffering to the provisions of the Indian contract act,1872 .
Ans. According to the provision of section 184 of the Indian contract act, 1872 as between the principal and
a third person, any person even a minor may become an agent. But no person who is not of the age of
majority and of sound mind can become an agent. But no person who is not of the age of majority and
of sound mind can become an agent, so as to be responsible to his principal.
Thus, if a person who is not competent to contract is appointed as an agent, the principal is liable to the
third party for the acts of the agent.
Thus, in the given case, ‘Titu’ gets a good title to the watch. ‘Sweety’ is not liable to ‘sonu’ for his
negligence in the performance of his duties.
Q-14 Briefly explain the modes of creation of an agency relationship.
Ans. The law recognizes various modes to create the agency, which are as follows:
I. Agency by actual authority
II. Agency by ratifaction
III. Agency by ostensible authority
IV. Agency by necessity
V. Actual authority and apparent authority.
Q-15 Twinkle is wife of Akshay. She purchased some sarees on credit from kanu. Kanu demanded the amount
from Akshay. Akshay refused. Kanu filed a suit against act,1872, whether kanu would succeed?
Ans. Problem on agency:
Problem asked in the question is based on the provisions related with the modes of creation of agency
relationship under the Indian contract act, 1872.
Agency may be created by a legal presumption, in case of cohabitation by a married woman (i.e. wife
is considered as an implied agent, of her husband.) if wife lives with her husband, there is a legal
presumption that a wife has authority to pledge her husband’s credit for necessaries. But the legal
presumption can be rebutted in the following cases:
I. Where the goods purchased on credit are not necessaries.
II. Where the wife is given sufficient money for purchasing anything on credit or contracting debt.
III. Where the trader has been expressly warned not to give credit to his wife.
IV. Where the wife is forbidden from purchasing anything on credit or contracting debts.
In the wife lives apart for no fault on her part, wife has authority to pledge her husband’s credit for
necessaries. This legal presumption can be rebutted only in cases (iii) and (iv).
Applying the above conditions in the given case “Kanu” will succeed. He can recover the said amount
from “Akshay” if sarees purchased by “Twinkle” are necessaries for her.
Q-16 ‘Tom’ instructs ‘Jerry’, a transporter , to send a consignment of appeals to Mumbai. After covering half
the distance, ‘Jerry’ found that the appeals will perish before reaching Mumbai. He sold the same at
half the market price. ‘Tom’ sued ‘Jerry’. Will he succeed?
Ans. An agent has the authority in an emergency to do all such acts as a man of ordinary prudence would do
for protecting his principal from losses which the principal would have done under similar circumstances.
A typical case is where the ‘Agent’ handling perishable goods like ‘apples’ can decide the time, date
and place of sale, not necessarily as per instruction of the principal, with the intention of protecting
the principal from losses. Here the agent acts in an emergency situation and ‘Tom’ will not succeed
against him.
Q-17 Mr.patel of delhi engaged Mr.shukla as his agent to buy a houswe in west extension area. Mr.shukla
bought a house for Rs. 20 lakhs in the name of a nominee and then purchased himself for Rs.24 lakhs.
He then sold the same house to Mr. patel for Rs. 26 lakhs. Mr. patel later comes to know the mischief
of Mr.shukla and tries to recover any amount from Mr.shukla? If so, how much? Explain.
Ans. The problem in this case, is based on the provision of the Indian contract act,1872 as contained in
section 215 read with section 216. The two sections provide that where an agent without the knowledge
of the principal, deals in the business of agency on his own account, the principal may:
(1) Repudiate the transaction, if the case shows, either that the agent has dishonestly concealed any
material fact from him, or that the dealings of the agent have been disadvantageous to him.
(2) Claim from the agent any benefit, which may have resulted to him from the transaction.
Therefore, based on the above provisions, Mr.patel is entitled to recover Rs. 6 lakhs from Mr. shukla being
the amount of profit earned by Mr.shukla out of the transaction.
Q-18 Aanya, who owes Beena Rs. 10,000, appoints Beena as his agent to sell his landed property at delhi and
after paying himself (beena) what is due to him, to hand over the balance to Aanya. Can Aanya revoke
his authority delegated to Beena?
Ans. According to section 202 of the Indian contract act, 1872 where the agent has himself an interest in the
property which forms the subject matter of the agency, the agency cannot, in the absence of an express
contract, be terminated to the prejudice of such interest.
In the instant case, the doctrine of agency coupled with interest applies. Therefore, Aanya cannot
revoke the authority delegated to Beena.
Q-19 Shahid borrowed a sum of Rs.5 lakh from Rajesh. Shahid appoints Rajesh as his agent to sell his land and
authorized him to appropriate the amount of loan out of the sale proceeds. Afterwards, Shahid revoked
the agency. Decide under the provisions of the Indian contract act,1872 whether the revocation of the
said agency by Shahid is lawful?

Ans. The given problem is based on the provision related to ‘agency coupled with interest.’ According to
section 202 of the Indian contract act,1872 an agency becomes irrevocable where the agent has himself
an interest in the property which forms the subject matter of the agency, an such an agency cannot, in
the absence of an express provision in the contract, be terminated to the prejudice of such interest. In
the instant case the rule of agency coupled with interest applies and does not come to an end even on
death, insanity or the insolvency of the principal.
Thus, when Shahid appointed Rajesh as his agent to sell his land and authorized him to appropriate the
amount of loan out of the sale proceeds, interest was created in favour of Rajesh and the said agency
not revocable. The revocation of agency by Shahid is not lawful.
Q-20 Comment on a following:
“Principal is not always bound by the acts of a sub agent”
Ans. This statement is correct.
Normally, a sub agent is not appointed, since it is a delegation of power by an agent given to him by his
principal. The governing principal is, a delegate cannot delegate. {Latin version of this principal is,
“delegates non potest delegare”} however, there are certain circumstances where an agent can appoint
sub agent.
In case of proper appointment of a sub agent, by virtue of section 192 of the Indian contract act,1872 the
principal is bound by and is held responsible for the acts of the sub agent . their relationship is treated
to be as if the sub agent is appointed by the principal himself.
However, if a sub agent is not properly appointed, the principal shall not be bound by the acts of the
sub agent. Under the circumstances the agent appointing the sub agent shall be bound by these acts
and he shall be bound to the principal for the acts of sub agent.
Q-21 Priya appoints Ajay as his agent to sell his estate. Ajay, on looking over the estate before selling it, finds
the existence of a good quality granite mine on the estate, which Is unknown to Priya. Ajay buys the
estate himself after informing Priya that Ajay wishes to buy the estate for himself but conceals the
existence of granite mine. Priya allows Ajay to buy the estate, in ignorance of the existence of mine.
State giving reason in brief the rights of Priya, the principal, against Ajay, the agent.
What would be your answer if Ajay had informed Priya about the existence of mine before he purchased
the estate, but after two months, he sold the estate at a profit of Rs. 1 lakhs?
Ans. Agent’s duty to disclose all material circumstances & his duty not to deal on his own account without
principal’s consent. ( section 215 and section 216 of the Indian contract act) the problem is based on
section 215 & 216 of the Indian contract act, 1872.
According to section 215, if an agent deals on his own account in the business of the agency, without
obtaining the consent of his principal and without acquainting him with all material circumstances,
then the principal may repudiate the transaction. On the order hand, section 216 provides that, if an
agent, without the knowledge of his principal, acts on his account in the business of this agency, then
the principal may claim any benefit which may have accured to the agent from such a transaction.
Hence in the first instance, though Priya had given his consent to Ajay permitting the latter to act on his
own account in the business of agency, Priya may still repudiate the sale as the existence of mine, a
material circumstances, had not been disclosed to him.

In the second instance, p had knowledge that Ajay was acting on his own account and also that the mine
was existence, hence Priya cannot repudiate the transaction under section 215.
Also, under section 216, he cannot claim any benefit from Ajay as he had knowledge that Ajay was
acting on his own account in the business of the agency.
Q-22 State with reason whether the following statement is correct or incorrect:
Ratification of agency is valid even if knowledge of the principal is materially defective.
Ans. Incorrect : Section 198 of the Indian contract act,1872 provides that for a valid ratification, the person
who ratifies the already performed act must be without defect and have clear knowledge of the facts
of the case. If the principal’s knowledge is materially defective, the ratification is not valid and hence
no agency.
Q-23 State with reasons whether the following statement is correct or incorrect:
No consideration is necessary to create an agency
Ans. Correct: Unlike other regular contract, a contract of agency does not need consideration. In other
words, the relationship between the principal and agent need not be supported by consideration as
per section 185 of the Indian contract act, 1872.
SHORT QUESTIONS :
Q-1 What is agency?
Ans. The Indian contract act, 1872 does not define the word ‘agency’.however, the word “agent” is defined
as “ a person employed to do any act for another or to represent another in dealings with third person”
the third person is called “principal”.
Thus “agency” is a comprehensive word used to describe the relationship between one person and
another, where the first mentioned person brings the second mentioned person into legal relation
with others.
Q-2 Salient feature of agency
Ans.
i. Basis
ii. Consideration not necessary
iii. Capacity to employ an agent
iv. Capacity to be an agent
Q-3 Modes of creation of agency
Ans.
a. Agency by actual authority
b. Agency by ratification
c. Agency by ostensible authority
d. Agency by necessity
e. Actual authority and apparent authority
Q-4 Rights of an agent
Ans.
1. Right to remuneration

2. Right of lien on principal’s property
3. Right of retention
4. Right of indemnification for lawful acts
5. Right of indemnification against acts done in good faith
Q-5 Duties and obligation of an agent
Ans.
1. Duty in conducting principal’s business
2. Requirements as to skill and diligence
3. Agents duty to account
4. Duty to communicate
Q-6 Principal’s liability for agent’s act to third parties:
Ans.
a. When agent acts within the scope of his authority
b. Principal is bound by notice given to aent
c. Liability by estopples
d. Liability for miserepresentation
e. Unnamed principal
Q-7 Termination of agent’s authority:
Ans. In terms of section 201 of the act, following are the circumstances when the authority conferred on the
agent gets terminated:
a. Revocation of authority by the principal
b. Renunciation of agency by the agent
c. Completion of business of agency
d. Death or insanity of principal or agent and
e. Insolvency of the principal
Q-8 What is the meaning of sub agent?
Ans. Person appointed by the original agent in the business of agency under his direction and control and
being responsible to the principal for acts of a sub agent.
Q-9 What is the meaning od substituted agent/ co agent?
Ans. Person is named by the agent expressly or impliedly to act for the principal in the business of agency.
Q-10 What is the meaning of irrevocable agency?
Ans. Agency which cannot be terminated by the principal.
Q-11 Meaning of undisclosed principal
Ans. Where agent not discloses the existence of his principal and the fact of his being agent of the principal,
there the principal of such agent is known as undisclosed principal.
Q-12 What is the meaning of unnamed principal?
Ans. Where the existence of the principal is known but his name is not known, the principal is liable for the
acts of an agent. Third parties can sue the principal for the acts of the agent, unless agent refuses to
disclose the identity of the principal.

MULTIPLE CHOICE QUESTIONS :
(1) A without B’s authority let outs B’s flat to C. afterwards B accepts rent of the flat from C. it is an agency
by :
a. Holding out b. Estoppels
c. Ratification d. Necessity
Answer: C. an agency by ratification:
The acceptance of rent by B amounts to implied ratification by B of A’s act of let outing flat to C.
(2) An agency in which the agent himself has interest in the subject matter of agency is called:
a. Agency by estoppels b. Agency by holding out
c. Agency by necessity d. Agency coupled with interest
Answer. D. agency coupled with interest
(3) Who may be a principal?
Answer. Competent to contract
(4) …………….Is forbidden by law.
a. Valid contract
b. Illegal agreement
c. Voidable contract
d. Unenforceable contract
Answer. b. illegal agreement
(5) Drawing cash from ATM , sale by fall of hammer at an auction sale, etc. are example of..
a. Express contract
b. Implied contract
c. Tacit contract
d. Unlawful contract
Answer. b. implied contract


CHAPTER-2
NEGOTIABLE INSTRUMENT ACT
INTRODUCTION
• Negotiable instrument is such which can be easily converted in to money.
• This is because it was not practicable for a trading community to carry on with bulk of currency in force,
therefore this instrument is made and based on requirement this instrument is easily converted into
cash whenever the person needs.
• Objective of this act is to legalise system by which instrument contemplate by it could pass from hand
to hand by negotiation .it deals with promissory notes,bills of exchange and cheque. This are negotiable
instrument.
MEANING OF NEGOTIABLE INSTRUMENT
• Instrument Which is transferable by delivery, like cash , and is also capable of being sued upon by
person holding it for time being. The property in such an instrument passes to bona fide transferee for
value.
• Section13 of Negotiable Instrument Act does notodefine NI but mentions three kinds of it namely bills,
notes and cheque. But Transfer of Properties act speaks of instruments which are for the time being, by
law of custom, “Negotiable”.
• Thus in India , Government Promissory notes, Shah jog Hundis , Delivery orders and Railway Receipts
for goods have been negotiable by usage or custom of trade. (Pg.2.1 Q.1PM) (Pg.2.1SM).
QUESTION & ANSWERS
1.) What is promissory note? Explain the essential elements of promissory note?
Ans. A promissory note’ is an instrument in writing (not being a bank-note or a currency note) containing an
unconditional undertaking signed by maker.
To pay certain sum of money only to-
• The certain person or
• The order of the certain person.
Essential characteristic of promissory note.
(a) In writing : an oral promise is not sufficient.
(b) Express promise to pay : there must be an express promise to pay mere acknowledgement ofindebtness
is not sufficient. there must be an express promise not sufficient.
Example :
o I acknowledge myself to be indebted to B in Rs.5000, to be paid on demand for the value received”. the
promise to pay is definite and therefore this is a valid promissory note”.
Mr .B I.O.U Rs 1000.” there is no promise to pay and therefore this is not a valid promissory note.

(c) definite and unconditional promise: I promise to pay is dependent upon an event which is certain to
happen, although the time of its happening is uncertain,, the promise to pay is unconditional .
• “ I promise to pay Rs 500 seven days after y marriage with C the promise is conditional since the
promise is dependent upon marriage of promise with C, which may or may not happen.
• “ I promise to pay B Rs 500 on D’s death”, the promise is not conditional, but definite since death
of D is c .Therefore ,the promissory note is valid.
(d) signed by the maker:
• A promissory note must be signed by the maker
• The signature must be on any part of the instrument.
( e) promise to pay certain sum:
“I promise to pay B Rs. 500 and all other sums which shall be due to him.” Since the amount
payable is not certain, it is not a valid promissory note.
“I promise to pay B Rs. 500 first deducting therefrom any money which he owes me.” Since, the
amount payable is not certain, it is not a valid promissory note.
(f) Promise to pay money only:
‘’I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next.’’ It is not a valid
promissory note since the promisor is required to deliver his black horse also, which is not ‘money’.
(g) Payee must be certain :
The name of payee must be specified in the promissory note, otherwise it will be invalid.
(h) Stamped :
A promissory not must be stamped. o
2.) What is bill of exchange? Explain the essential characteristic of bill of exchange?
Ans. A ‘bill of exchange’ is an instrument in writing containing an unconditional order signed by the maker
irecting a certain person to pay a certain sum of money only to ÿ
a certain person; or
the order of a certain person; or
the bearer of the instrument.
Â Essentials characteristics of a bill of exchange :
(a) It must be in writing
(b) It must contain an express order to pay
(c) The order to pay must be definite and unconditional
(d) It must be signed by the drawer
(e) The sum contained in the order must be certain
(f) The order must be to pay money only
(g) Drawer, drawee and payee must be certain (usually, same person is the drawer and payee)
(h) It must be stamped.
3.) Define”cheque” under the negotiable instrument Act,1881.what are the difference between a cheque
and a bill of exchange?
Ans. A Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise
272 Chapter 2 : The Negotiable Instruments Act, 1881

than on demand (i.e., it is always payable on demand)
and it includes —
‘the electronic image of truncated cheque’; and
‘a cheque in electronic form’.
Essentials characteristics of a cheque:
(a) It must be in writing.
(b) It must contain an express order to pay .
(c) The order to pay must be definite and unconditional.
(d) It must be signed by the drawer.
(e) The sum contained in the order must be certain.
(f) The order must be to pay money only.
(g) Drawer, drawee and payee must be certain.
(h) It is always drawn upon a specified banker.
(i) It is always payable on demand.
A cheque must contain all the characteristics of a bill of exchange.
A cheque does not require
(a) stamping; or
(b) acceptance.
4.) Difference between bill of exchange and promissory note?
o

Bill of exchange Promissory note
1.) Promise to pay 1.) Order to pay
2.) Maker and payee cannot be same person 2.) Maker may be Payee
3. ) 2 Parties 3.) 3 parties
4.) No need for Acceptance. 4) Acceptance is required
5.) Maker has primary liability. 5) Maker has secondary liability
Ans.
5.) Explain the types of negotiable instrument?
Ans.
The various types of negotiable instrument are as follows.
1) Bearer Instruments:A person who is a holder of a bearer instrument can obtain the payment of the
instrument.
2) Order Instruments :It is an instrument which is expressed to be so payable or which is expressed to be
payable to a particular person and does not contain any words prohibiting transfer or indicating the
intention that it shall not be transferable.
3.) Inland Instruments: An instrument drawn or payable in India or drawn India upon some persons resident
there in even though it is made payable in foreign country.
4) Foreign Instrument: An instrument which is not an Indian Instrument is Foreign Instrument.
5) Demand Instrument:A promissory note, bill of exchange, in which no time for payment is specified is

an instrument payable on demand.
6) Time Instruments : Time Instruments are those which are payable at sometime in future. Therefore an
instrument payable after a fixed period or on happening of an event which is certain to happen then
this is known as Time Instruments.
7.) Ambiguous Instruments : An instrument which in form is such that it may either be treated as bill of
exchange or promissory note then it is, known as Ambiguous instrument.
8.) Inchoate / Incomplete Instrument : When one person signs and delivers to another a paper stamped in
accordance with law relating to Negotiable instrument and either wholly blank or having written
thereon an incomplete instrument and thereby gives prima, facie authority to holder thereof to make
or complete the same for any amount not exceeding certain amount is known as Inchoate or Incomplete
Instrument.
6.) What are the protection available to paying banker as well as protection available to collecting banker?
Ans. Protection available to paying banker.
Role:
To pay the amount of cheque according to direction of drawer.
Precaution:
Banker must make payment in Due Course.
Payment in good faith and without negligence and apparent defect on instrument.
Protection :
Even if the payment of cheque is made to wrongful person the paying bank will not be liable to drawer
& true owner.
Protection available to collecting banker.
o
Precaution :
To make collection for its customer for crossed cheque.
Banker must make collection in due course in good faith without negligence and apparent tenure of
instrument.
Protection:
Even if Collection is made for wrongful purpose than collecting banker is not liable to true owner.
However collecting banker do not have protection in case of open cheque so they always cross the
cheque for their own safety.
7.) Explain the meaning of negotiation? And its essential elements?
Meaning (Sec. 14)
“When
a promissory note, bill of exchange or cheque
— is transferred to any person,
— so as to constitute the person the holder thereof, the instrument is said to be negotiated.”
Â Essential elements of Negotiation:
(a) The instrument must be transferred from one person to other person. (b) Intention of transfer
must be to make the transferee the holder of the instrument. Thus, if A hands over a Bill of
exchange to B merely for safe custody, the bill is not negotiated to B.

8.) what is endorsement? Explain the various kinds of endorsement and its effect?
Ans. When
the holder of the instrument
puts signature
on the face or back of the negotiable instrument or on a slip ofpaper(called allonge) annexed
thereto,
— for the purpose of negotiation, it is called endorsement.”
The various kind of endorsement are:
Blank/General:An endorsement is to be blank or general where the endorser merely writes his signature
on the back of the instrument and the instrument so endorsed becomes payable to bearer.
Special/Full: If the endorser signs his name and adds a direction to pay the amount mentioned in the
instrument to , or to the order of the specified person then it is known as Special Endorsement.
Restrictive: An endorsement is restrictive which prohibits or restricts the further negotiation of an
instrument.
Partial: When the endorser agrees to transfer only part of the amount of the instrument to the endorsee
then it is known as partial endorsement and generally it is not valid except the acceptor as well as
endorsee agrees to the same.
Sans recourse endorsement:In this type of instrument the endorser makes it clear that he will not incur
any liability to the endorsee or subsequent holders in case of dishonour.
The effects of endorsement will be if
Â Endorsement in blank: o
order instrument gets converted in to bearer for whole instrument for all parties.
Bearer instrument remains bearer.
(A) Endorsement in full :order instrument remains order.
Bearer instrument get converted in order from view point of endorser in full& all subsequent parties
I.e for all parties prior to endorser still remains payable to bearer.
9.) Difference between Negotiation and Assignment ?
Ans.
Negotiation Assignment
Meaning 1.) Transfer for value and 1. Transfer of right available under any
good faith gives title contract
of HIDC
Document 2.) negotiable instrument 2.) any document
Purchaser title 3.) better title 3.) Same title
Mode 4.) delivery or endorsement
& delivery 4.) Any mode
Consideration 5.) assumed 5.) Needs to be proved
10) Explain the meaning of ‘Holder’ and privileges of ‘Holder in due course’ under the provision of negotiable
instrument act 1881 ?
Ans.
(a) Meaning of holder.
The ‘holder” of a negotiable instrument means any person
(1) who is entitled to possess the instrument in his own name, and
(2) who is entitled to receive the amount due thereon.
Example: Where a person obtains possession of an Instrument by theft or under a forged endorsement,
he is not a holder, as he cannot recover the payment of the Instrument.
Holder in due Course [Sec. 9] :
Every holder of negotiable instrument will be treated as ‘Holder in due course’, If he has obtained the
instrument
I. for consideration.
II. before maturity, and
III. in Good faith. i.e. without sufficient cause to believe that any defect existed in the title of the
person from whom he derived his title.
Â Privileges of holder in due course.
1.) An inchoate instrument,if property stamped , is valid, if subsequently comes in hands of holder in due
course.(sec.20)
2.) Every prior party to a negotiable instrument is liable to holder in due course until the instrument is
duly satisfied.(sec.36)
3.) The acceptor of a bill of bill of exchange cannot plead against a holder in due course that the bill is
drawn in fictitious name.(sec.42)
4.) No effect of conditional delivery.
5) No one can deny the original validity of the instrument .(sec20)
11.) Difference between” Holder “and “Holder in due course”?
Ans.
Holder Holder in due course
Consideration 1.) Person becomes holder 1.) person becomes holder only on
without consideration payment of consideration
Maturity 2.) person become holder even 2.) must acquire instrument before
after maturity maturity
Good faith 3.) person becomes holder 3.) must acquire instrument in
even having the knowledge good faith
of defect in title of instrument
Special privilege No special privilege Enjoy specia privilege u/ s
20,36,42,43,46,53.
12.) What is meant by ‘Sans Recourse Endorsement ‘of a bill of exchange? How does it differ from ‘sans
Frais endorsement ‘?
Ans.

Â Sans recourse endorsement.
It means the endorsement is done in such a way that the endorser (the person who is going to
transfer the instrument) to the endorse (the receiver of the instrument), sings and write the words
sans recourse while transfering the endorser himself exclude from the liablity .whereas the other
persons related with the instrument are liable to endorser. this is sans recourse endorsement.
Example
SAN RECOURSE
A B C
Here, A endorse to B and While B is endorsing to C while writing the words sans recourse it means B
excludes liablity and other person are liable to the instrument.
Â Sans frais endorsement.

It is the endorsement in the way that the endorse writes on the instrument with the word (sans frais)
means he himself exclude for the liablity of any expenses that would accrue on the instrument now
the other person related to instrument are liable but excluding the person who has transfer by writing
the word (sans frais).
Example :
SAN FRAIS
A B C n
Here B while endorsing to C Write the words sans frais in the instrument it means he is excluded from
liability only for expenses.
13.) Explain the terms “Acceptance of honour” and Condition of valid acceptance of 12. honour as used in
the negotiable instrument Act, 1881?
Ans. Meaningsec (7)
`When a bill has been dishonoured and it has been noted or protested for non-acceptance, the holder
may allow any other person to accept it for the honour of the drawer or any one of the endorsers. The
person so accepting the bill is called ‘acceptor for honour’.
Condition of valid acceptance of honour.
(A) The bill must have been dishonoured for non-acceptance.
(B) The bill must have been noted or protested for non-acceptance.
(C) Such Acceptance must be made with the consent of the holder.
(D) The acceptor for honour must not already be liable on the bill (Sec. 108).
(E) It must be indicated on the bill that for whose honour, the bill is accepted. However, if the acceptance
does not indicate for whose honour, acceptance is made, it is deemed to be made for the honour of the
drawer (Sec. 110).
(F) It must be duly signed by acceptor for honour.

14.) When the presentment for payment is excused?
Ans. According to (sec 76), the payment is excused when,
1.) The maker, drawee, or acceptor intentionally prevents presentment of the Instrument.
2.) The instrument is payable at the business place of the maker, acceptor or drawee of the note, bill or
cheque, and such place on the due date during the usual business hours is closed.
3.) The instrument is payable at a specified place, and neither the maker, acceptor or drawee, nor their
authorized person is present, during the usual business hours.
4.) The instrument is not payable at a specified place, and the payer cannot be found after reasonable
search.
5.) There is a promise to pay notwithstanding non-presentment.
6.) Presentment for payment is waived either expressly or impliedly.
7.) The drawer could not suffer damage for want of presentment.
8.) The bill is dishonoured by non-acceptance
9.) `The drawer is a fictitious person or the drawer and the drawee are the same person.
10.) Presentment becomes impossible.
15.) When the dishonour of negotiable instrument made? Explain in detail?
Ans. A bill may be dishonoured by non-acceptance or by non-payment, while a promissory note and a
cheque are dishonoured by non-payment only.
Dishonour by Non-Acceptance (Sec. 91) :
A bill of exchange is dishonoured by non-acceptance in any one of the following ways:
1.) When the drawee gives a qualified acceptance;
2.) If there are several drawee( who are not partners) and all of them do not accept;
3.) If the drawee does not accept the bill within 48 hours from the time of presentment;
4.) When presentment for acceptance is excused, and the bill is not accepted;
5.) When the drawee is incompetent to contract;
6.) If a drawee in case of need is mentioned in a bill, the bill is deemed to be dishonoured, only when if it
is also dishonoured by such drawee in case of need (Sec. 115).
Dishonour by Non-Payment:
In the following two cases, the bill, note or cheque shall be treated as dishonoured by non-payment-
• When the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment
(See. 92).
• When presentment for payment is excused and the instrument remains unpaid on maturity (Sec. 76).
16.) Explain the provision of “Noting” and “Protest” under the negotiable instrument Act.1881?
Ans. Meaning.
When a promissory note or bill of exchange has been dishonoured, the holder May cause such dishonour
to be noted by a notary public. Noting is optional. Notary makes a formal demand upon the maker or
drawee or acceptor, for acceptance or payment, as the case may be. On refusal, he records the noting
on the Instrument.
i. e. A minute is prepared containing the date of dishonour, reason for such dishonour, etc. and is
attached to the instrument.
Contents:
a) The fact of dishonour;
b) The date of dishonour;
c) The reasons for such dishonour;
d) If the instrument has not been expressly dishonoured, the reason why the holder treats it as
dishonoured; and
e) The Noting charges.
Protesting [Sec. 10]
Meaning.
When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment,
the holder may cause such dishonour to be noted and certified by a notary public. Such certificate is
called a protest.
Protest for Better Security [Sec. 100]
• When the acceptor of a bill has become insolvent or his credit has been publicly impeached before the
maturity of the bill, the holder MAY, within a reasonable time, through a Notary Public, demand a
better security from the acceptor.
• If the acceptor refuses to give a better security, the fact may also be noted and certified by the Notary
Public. Such certificate is called a ‘protest for better security’.
• The acceptor is not bound to give such security. On a refusal by the acceptor to give a better security,
the holder has no immediate right of action against the drawer and the endorsers. He shall have to wait
till the maturity of the bill.
Contents [Sec. 101] :
1.) The Instrument or a literal transcript of the instrument. .
2.) The name of the person for whom and against whom the instrument has been protested.
3.) The fact of and reason for dishonour.
4.) The place and time of dishonour.
5.) The signature of the Notary Public.
6.) In case of acceptance for honour or payment for honour, the name of the person accepting or paying
and the name of the person for whose honour it is accepted or paid.
16.) What are the penalties in case of dishonour of cheque? And interest in case of dishonour?
Ans. Sec. 138 : Dishonour of cheque for insufficiency etc. of Funds
Where a cheque is dishonoured by ‘the bank’ due to insufficiency of funds, the drawer shall be punished
with
a) imprisonment, which may extend to 2 year or
b) a fine which may extend to twice the amount of the cheque orboth.
However, the above rules are subject to the following provisions :
a) The cheque should have been issued for a legally enforceable debt .
b) The cheque should have been presented by the payee or the holder in due course within its validity
period .
c) The payee or the holder in due course of the cheque should have given notice of demand within 30

days to the drawer on receipt of information of dishonour of cheque from the bank.
d) The drawer has failed to pay within 15 days of the receipt of said notice, and
e) The payee or holder in due course of the cheque dishonoured should have made a complaint within 1
month of cause of action arising u/s 138.
Interest on bill in case of dishonour :
Interest of 6% to 18% p.a. in case where no specific rate of interest is mentioned in bill.
When a specific rate is mentioned in the bill itself then that rate will prevail.
17.) What do you understand by “Material alteration” and explain its effects under the negotiable
instrument Act,1881?
Ans. `Meaning:
l It is an alteration which changes the rights/duties or liabilities of parties to N.I.
Following points not considered as Material Alteration:
• Alteration done before issue of N.I with consent of parties.
• Correction of mistake.
• To carry out common intention of parties.
• Addition of word ‘on demand’ where no time is mentioned.
• Crossing of cheque.
Effects of Material alteration:
• All parties prior to material alteration will be discharged from liability.
• Parties doing Material Alteration & Subsequent parties are not discharged from liabilities.
• Any person given their consent to material alteration are not discharged from the liabilities.
18.) State briefly the rules laid down under the negotiable instrument act for determining the date of
maturity of a bill of exchange?
Ascertain the date of maturity of a bill of payable hundred days after sight and which is presented for
sight on 4th may,2000.?
Ans .
Calculation of maturity of bill of exchange:
The maturity of a bill , not payable on demand, at sight,or presentment,is at maturity on third day after the
day on which it is expressed to be payable (section 22,para 2 of negotiable instrument act,1881). three days
are allowed as a days of grace. No days of grace are allowed in the case of bill payable on demand at sight or
presentment.
• Bill made payable at stated no of months after date
• period terminate on correspond with the day on which instrument dated.
• Bill made payable after sight
• terminates on the day of month which corresponds with the day on which tit is presented for acceptance
• Bill made payable after certain event period terminates on the day ofthe month which corresponds
with the day on which the event happens.
• If month in which the period would terminate has no corresponding day , the period terminates on the
last day of such month.

• When the last day of grace falls on a day which is a public holiday , the instrument is due and payable
on the preceding business day.
Answer to problem.
In this case the day of presentment of for sight is to be excluded i.e. 4th may 2000.
Period of 100 days ends on 12th august 2000 ( may 27 days + June30 days+ July 31days + august 12 days ).
Three days of grace are to be added . it falls due on 15th august 2000 which happens to be a public holiday.
As such it will fall due on 14th august 2000. i.e. the next preceding business day.
20.) What is meant by “Payment of Honour” in respect of bill of exchange ? when can the payment of
honour be made ? what are the rights of “Payer of Honour”?
Ans. Payment for honour: payment which is made by a person for honour of any party liable of bill after it
has been protested for non- payment.
Following conditions are essential for the payment of honour.
• The bill mus have been noted or protested for non-payment.
• The person paying or his agent declares before notary public for whose honour he pays.
• Such declaration must have been recorded by notary public .
• Payment must be made for honour of any party liable on the bill or not ( section 113)
Rights of the payer for honour:
• any person making payment for honour is entitled to all the rights, in respect of the bill, of holder at
the time of such payment .
• he may recover from the party for whose honour he pays all sums so paid with interest thereon and all
expenses properly incurred in making such payment.
21.) state the various types of hundis under the Negotiable Instrument Act 1881?
Ans.
Shah Jog Hundi :
It is always payable to respective holder instead of being payable to bearer.
Jokhmi Hundi :
It is drawn against goods shipped on the vessel mentioned in the Hundi.
Jawabee Hundi:
This is form of Hundi which is used for remitting money from one place to another.
Nam-jog Hundi :
The bill is payable to party named therein or his order.
Darshani Hundi:
This is a Hundi payable at sight.
Miadi Hundi :
This is otherwise called a muddati hundi ,that is a Hundi which is payable after a specified time.
Dhanijog Hundi:
A Hundi which is payable to dhani i.e owner.
Firman jog Hundi :
Which can be payable to order it can be negotiated by endorsement and delivery.
PRACTICAL QUESTIONS
Q.1) Explain the meaning of ‘Holder’ and ‘Holder in due course’ of a negotiable instrument. The drawer, ‘D’
is induced by ‘A’ to draw a cheque in favour of P, who is an existing person. ‘A’ instead of sending the
cheque to ‘P’ forgoes his name and pays the cheque into his own bank. Weather ‘D’ can recover the
amount of the cheque from ‘A’s banker. Decide. (compare with question 13)
Ans. The problem is based upon the privileges of a ‘holder in due course’. Section 42 of the Negotiable
Instrument Act, 1881, states that an acceptor of a bill of exchange drawn in a fictitious name and
payable to the drawer’s order is not, by reason that such name is fictitious, relieved from liability to
any holder in due cause claiming under an endorsement by the same hand as the drawer’s signature,
and purporting to be made by the drawer. In this problem, P is not a fictitious payee and D, the drawer
can recover the amount of the cheque from A’s bankers.
Q 2) Discuss with reasons, whether the following persons can be called as a ‘holder’ under the Negotiable
Instruments Act, 1881
¾ X who obtains a cheque drawn by Y by way of gift.
Ans: Yes, X can be termed as a holder because he has a right to possession and to receive the amount due
in his own name.
¾ A, the payee of the cheque, who is prohibited by a court order from receiving the amount of the
cheque.
Ans: No, he is not a ‘holder’ because to be called as a ‘holder’ he must be entitled not only to the possession
of the instrument but also to receive the amount mentioned therein.
¾ M, who finds a cheque payable to bearer, on the road and retains it.
Ans: No, M is not a holder of the Instrument though he is in possession of the cheque, so is not entitled to
the possession of it in his own name
¾ B, the agent of C, is entrusted with an instrument without endorsement by C, who is the payee.
Ans: No, B is not a holder. While the agent may receive payment of the amount mentioned in the cheque,
yet he cannot be called the holder thereof because he has no right to sue on the instrument in his own
name.
¾ B, who steals a blank cheque of A and forges A’s signature.
Ans: No, B is not a holder because he is in wrongful possession of the instrument.
Q3) M drew a cheque amounting to ‘ 2 lakh payable to N and subsequently delivered to him. After receipt
of cheque N endorsed the same to C but kept it in his safe locker. After sometime, N died, and P found
the cheque in N’s safe locker. Does this amount to Endorsement under the Negotiable Instruments Act,
1881?
Ans. No, P does not become the holder of the cheque as the negotiation was not completed by delivery of
the cheque to him. (Section 48 , the Negotiable Instruments Act, 1881).
Q4) M owes money to N. Therefore, he makes a promissory note for the amount in favour of N, for safety
of transmission he cuts the note in half and posts one half to N. He then changes his mind and calls
upon N to return the half of the note which he had sent. N requires M to send the other half of the
promissory note. Decide how a rights of the parties are to be adjusted?
Ans. The question arising in this problem is whether the making of promissory note is complete when one
half of the note was delivered to N. Under Section 46 of the N.I. Act, 1881, the making of a P/N is
completed by delivery, actual or constructive. Delivery refers to the whole of the instrument and not
merely a part of it. Delivery of half instrument cannot be treated as constructive delivery of the whole.

So the claim of N to have the other half of the P/N sent to him is not maintainable. M is justified in
demanding the return of the first half sent by him. He can change his mind and refuse to send the other
half of the P/N.
Q5) P draws a bill on Q for Rs.10,000. Q accepts the bill. On maturity the bill was dishonored by non-
payment. P files a suit against Q for payment of Rs.10,000. Q proved that the bill was accepted for value
of Rs.7,000 and as an accommodation to the plaintiff for the balance amount i.e. Rs.3,000. Referring to
the provisions of the Negotiable Instruments Act, 1881 decide whether P would succeed in recovering
the whole amount of the bill ?
Ans. P would succeed to recover Rs.7,000 only from Q and not the whole amount of the bill because it was
accepted for value as to Rs.7,000 only and an accommodation to P for Rs.3,000.
Q6) Ascertain the date of maturity of a bill payable hundred days after sight and which is presented for
sight on 4th May, 2017 ?
Ans. In this case the day of presentment for sight is to be excluded,
I.e. 4th May, 2017. The period of 100 days ends on 12th August, 2017 (May 27 days + June 30 days + July
31 days + August 12 days).
i. Three days of grace are to be added. It falls due on 15th August, 2017 which happens to be a public
holiday. As such it will fall due 14th August, 2000.
Q7) A draws a bill on B. B accepts the bill without any consideration. The bill is transferred to C without
consideration. C transferred it to D for value. Decide-
Whether D can sue the prior parties of the bill, and
Ans: D can sue any of the parties i.e. A, B or C, as D arrived a good title on it being taken with consideration.
Whether the prior parties other than D have any right of action inter se?
Ans: As regards to the second part of the problem, the parties before D i.e. A, B, and C have no right of
action inter se.
Q 8) Decide which of the following are Promissory notes:
(a) “I promise to Pay B or order `500”
(b) “I acknowledge myself to be indebted to B in ` 1,000, to be paid on demand, for value received.”
(c) ”Mr B I.O.U ‘ 1,000.”
(d) “ I promise to pay B “500 and all other sums which shall be due to him.”
(e) “ I promise to pay B “500 first deducting there out any money which he may owe me.”
(f) ” I promise to pay B ‘ 500 seven days after my marriage with C.
(g) I promise to pay B ‘ 500 on D’s death, provided D leaves me enough to pay that sum.
(h) I promise to pay B ‘ 500 and to deliver to him my black horse on 1st January next.
Ans. The instruments respectively marked (a) and (b) are promissory notes. The instruments respectively
marked (c), (d), (e), (f), (g) and (h) are not promissory notes.
Q9) A draws a cheque for ‘ 5,000 and hands it over to B by way of gift.
Ans. B is a holder but not a holder in due course as he does not get the cheque for value and consideration.
His title is good and bonfide. As a holder he is entitled to receive 5000 from the bank on whom the
cheque is drawn. But if not received he cannot sue for it.
Q 10) On a Bill of Exchange for ‘ 1 lakh, X’s acceptance to the Bill is forged. ‘A’ takes the Bill from his customer
for value and in good faith before the Bill becomes payable. State with reasons whether ‘A’ can be
considered as a ‘Holder in due course’ and whether he (A) can receive the amount of the Bill from ‘X’.
Ans. ‘A’ in this case prima facie became a possessor of the bill for value and in good faith before the bill
became payable, he can be considered as a holder in due course.
But where a signature on the negotiable instrument is forged, it becomes a nullity. The holder of a
forged instrument cannot enforce payment thereon. In the event of the holder being able to obtain
payment in spite of forgery, he cannot retain the money. The true owner may sue on tort the person
who had received. This principle is universal in character; by reason where of even a holder in due
course is not exempt from it. A holder in due course is protected when there is defect in the title. But
he derives no title when there is entire absence of title as in the case of forgery. Hence ‘A’ cannot
receive the amount on the bill.
Q11) Bharat executed a promissory note in favour of Bhushan for 5 crores. The said amount was payable
three days after sight. Bhushan, on maturity, presented the promissory note on 1st January, 2017 to
Bharat. Bharat made the payments on 4th January, 2017. Bhushan wants to recover interest for one day
from Bharat. Advise Bharat, in the light of provisions of the Negotiable Instruments Act, 1881, whether
he is liable to pay the interest for one day?
Ans. Bharat will succeed in objecting to Bhushan ’s claim. Bharat paid rightly “three days after sight”. Since
the bill was presented on 1st January, Bharat was required to pay only on the 4th and not on 3rd
January, as contended by Bhushan.
Q12) A is the holder of a bill of exchange made payable to the order of B, which contains the following
endorsements in blank-
First endorsement to “B”.
Second endorsement to “Peter Williams”.
Third endorsement to “Wright & Co”.
Fourth endorsement to “John Rosario”.
This bill A puts in suit against John Rozario and strikes out, without John Rosario’s consent, the
endorsements by Peter Williams and Wright & Co.
Ans: A is not entitled to recover anything from John Rosario.
Q13) X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to the order of Z. The bill is
duly accepted by Y. M obtains the bill from X thus becoming its holder in due course. Can Y avoid
payment of the bill?
Ans. Y cannot avoid payment by raising the plea that the drawer (Z) is fictitious. The only condition is that
the signature of Z as drawer and as endorser must be in the same handwriting.
Q 14) A cheque is drawn payable to “B or order”. It is stolen and the thief forges B’s endorsement and
endorses it to C. The banker pays the cheque in due course. Can B recover the money from the banker
?
Ans. According to Section 85, the drawee banker is discharged when he pays a cheque payable to order
when it is purported to be endorsed by or on behalf of the payee. Even though the endorsement of Mr.
B is forged, the banker is protected and he is discharged. The true owner, B, cannot recover the money
from the drawee bank.(If Signature of original Drawer i.e. Mr.A was forged then banker was not
protected..
Q15) X issued a post dated cheque to Y on the account of discharge of its liability. Further, X instructed to the
bank to make the stop payment due to unavailability of the adequate amount in the account. Is penalty
under section 138 attracted?
Ans. Yes, X will be liable for dishounour of cheque.
Q16) A promoter who has borrowed a loan on behalf of company, who is neither a director nor a person-in-
charge, sent a cheque from the companies account to discharge its legal liability. Subsequently, the
cheque was dishonoured and the compliant was lodged against him. Is he liable for an offence under
section 138 ?
Ans. In this case, The promoter is neither a director nor a person-in-charge of the company and is not
connected with the day-to-day affairs of the company and had neither opened nor is operating the
bank account of the company. Further, the cheque, which was dishonoured, was also not drawn on an
account maintained by him but was drawn on an account maintained by the company. Therefore, he
has not committed an offence under section 138.
Q17) “I promise to pay ‘B’ a sum of Rs.500, seven days after my marriage with ‘C’. Is this a promissory note?
Ans. In the given case S promises to pay Rs.500. It is possible that ‘S’ may never marry ‘C’ and the sum may
never become payable. Hence, the promise to pay is conditional as it depends upon an event, which
may not happen. Hence, it is not a promissory note.
Q18) Do the following alterations of a negotiable instrument render the instrument void?
(a) The holder of a bill alters the date of the Instrument to accelerate or postpone the time of
payment
Ans. Yes
(b) The drawer of a negotiable instrument draws a bill but forgets to write the words “or order”.
Subsequently, the holder of the instrument inserts these words-
Ans. No.
( c) A bill payable three months after date is altered into a bill payable three months after sight.
Ans. Yes.
(d) A bill was dated 1992 instead of 1993 and subsequently the agent of the drawer corrected the
mistake.
Ans. No.
(e) A bill is accepted payable at the Union Bank, and the holder, without the consent of the acceptor,
scores out the name of the Union Bank and inserts that of the Syndicate Bank.
Ans. Yes
Q19) A negotiable instrument was endorsed by P to A to B to X to V and back to A. Can A sue P In the instant
case? Would your answer be different if A in original endorsement had signed sans recourse.
Ans. · Here A is person who is a prior party to the instrument. He negotiated it to B, B to X, X to Y and Y again
to this very A. On account of this last endorsement, A should have right to claim money from X, Y and B.
The rule is that every prior party is liable to every subsequent party. As a result the prior party (i.e., A)
having taken back the instrument subsequently he (i.e.. A) becomes a ‘subsequent’ party. Therefore,
A, by reason of the last endorsement mentioned above, comes to have the rights to claim money from
Y, X or B. A is permitted by law to sue Y,X or B then Y, X or B in their turn can sue A because of A prior
endorsement. This will lead to a circuity of action. Thus A, in the above case cannot sue Y, X or B.
· But A can sue P since the latter is prior to A’s original endorsement. If, however A, in original endorsement,
had signed “sans recourse” there could be no circuity of action and A could sue Y, X or B.
Q20) B obtains A’s acceptance to a bill by fraud. B endorses it to C who takes it as a holder in due course. C
endorses the bill to D who knows the fraud. Can D recover from A?
Ans. · Yes; D can recover the amount from A as he derived the title from C who is a holder in due course.
Moreover, D is not a party to the fraud. Once, the title has been found of the defect, not withstanding
notice of the fraud, D shall get a good title.

· According to Section 53 of the Negotiable Instruments Act, 1881 any defect in the title of the transferor
will not affect the rights of the holder in due course even if he had knowledge of the previous defect
provided he himself is not a party to the fraud.
Q21) Will C have the right of further negotiation in the following cases: (B signs the Endorsements)
(i) ‘Pay C for my use’ _ No.
(ii) ‘Pay C’ - Yes.
(iii) ‘Pay C or order for the account of B’ - No.
Q22) B issued a cheque for Rs. 1,25,000 in favour of S. B had sufficient amount in his account with the Bank.
The cheque was not presented within reasonable time to the Bank for payment and the Bank in
the meantime, became insolvent. Decide, under the provisions of the Negotiable Instrument Act, 1881
whether S can recover the money from B.
Ans. The drawer is discharged since
• The drawer has sufficient balance when the cheque ought to be presented for payment;
• The holder has defaulted in presenting the cheque for payment within a reasonable time;
• The drawer has suffered actual damages due to the failure of the bank after issue of cheque but
before presentation of the cheque.
23.) A cheque payable to bearer is crossed generally and is marked “not negotiable”. The cheque is lost or
stolen and comes into possession of ‘B’ who takes it in good faith and gives value for it. B deposits the
cheque into his own bank and his banker presents it and obtains payment for his customer from the
bank upon which the cheque is drawn. Can both the bankers, viz., banker paying the cheque and the
banker collecting it plead exoneration from their liability ?
Ans. Yes : A person who takes a cheque crossed ‘not o
negotiable’ has no better title to keep such a cheque
than his immediate transferor, and the true owner can always reclaim it or the amount of it, although
the banker who pays the cheque and the banker who collects it are protected, provided the payment
and the collection have been made in good faith and without negligence [Sec. 128 & 130]
24.) D draws a Hundi in favour of M and N endorsed it in favour of P. P claimed the amount of the Hundi from
D, who contended that as between him and M there was no consideration, he was not liable. Examine
the validity or otherwise of the contention.
Ans
Section 43 of the Negotiable Instruments Act provides that a negotiable instrument
made,drawn,accepted, endorsed, or transferred without consideration creates no obligation of
payment between the parties to the transaction.
But, if any such party has transferred the instrument with or without endorsement to a holder for
consideration, such holder may recover the amount due on such instrument from the transferor
for consideration or any prior party thereto. Thus, assuming P to be the holder for consideration
he shall have the right to claim the amount of the Hundi from D.
Contention of D is not valid.


MULTIPLE CHOICE QUESTIONS
1. Which of the following is a valid promissory note?

(a) “A, I owe you some amount”.
(b) “A, I owe you RS. 1000”.
(c) “I, promise to pay A or order RS. 1000”.
(d) “I promise to pay the bearer RS. 1000”.
2. A person who is ordered to pay the amount of bill of exchange is known as
(a) Drawer (b) Drawee (c) Payee (d) Creditor.
3. Acceptance is required only in case of;
(a) Bill of Exchange (b) Cheque (c) Promissory Note (d) All of these.
4. A bill drawn in favour of a minor is;
(a) Void (b) Valid but not negotiable
(c) Valid (d) None of these.
5. The presentment for sight is required only in case of a;
(a) Bill of exchange. (b) Promissory note (c) Cheque (d) Both (a) and (b).
6. The presentment for payment is required in case of a
(a) Bill of exchange. (b) Promissory note (c) Cheque (d) All of these.
7. Which one of the following is not the characteristic of a negotiable instrument?
(a) It must be in writing. (b) It must be freely transferable.
(c) It must be registered (d) It must contain definite amount of money.
8. In legal terms, a person who receives a negotiable instrument in good faith and for valuable consideration
is known as
(a) Holder. (b) Holder in due course (c) Holder for value. (d) Holder in rights.
9. A negotiable instrument payable to order can be transferred by
(a) Simple delivery. (b) Endorsement.
(c) Endorsement and delivery.(d) Registered post.
10. An endorsement made by an endorser by signing his name and also by writing the name of the endorse,
is known as
(a) General endorsement. (b) Special endorsement.
(c) Restrictive endorsement (d) None of these.
11. Person named in the instrument to whom money is directly to be paid-
(a) drawer (b) acceptor (c) maker (d) payee
12. Days of grace be provided to the instrument of maturity is-
(a) 1 (b) 2 (c) 3 (d) 5
13. Party to negotiable instrument can be discharged from liablity to-
(a) Cancellation (b) payment (c ) release (d) all of the above

14. Validity period of presentment of cheque in bank is-
(a) 3 months (b) six months (c ) 1 year (d) 2 year
15. Offence commited under negotiable instrument act can be -
( a ) Compoundable (b) non compoundable
(c ) non compoundable and non bailable (d) bailable
16. Which of the following is not applicable to negotiable Instrument?
(a) It must be in writing (b) It must be transferable
(c) It must be registered (d) It must be signed.
17. ‘A’ sings the instrument in the following manner. State the instrument which cannot be considered as
promissory note:
(1) I promise to pay B or order Rs. 500
(2) I acknowledge myself to be indebted to B Rs. 1,000 to be paid on demand, for value received
(3 ) I promise to pay B Rs. 10,000 after three months
(4) I promise to pay B Rs. 500 seven days after my marriage with C.
18.) A Promissory-note drawn jointly by X, a minor and Y, a major is:
(1) void (2) valid but not negotiable
(3) valid but can be enforced only against Y
(4) None of the above.
19. A negotiable instrument that is payable to order can be transferred by:
1. Simple delivery 2. Endorsement and delivery
3. Endorsement 4. Registered Post
20. In legal terms, a person who takes the instrument bonafide for value before it isoverdue, in good faith,
is known as-
(1) Holder in due course (2) Holder
(3) Holder for value (4) None of the above
21. A negotiable instrument drawn in favour of a minor is :
(1) void (2) void but not enforceable
(3) valid (4) None of the above.
22. P, obtains a cheque drawn by M by way of gift,here P is a :
1. holder in due course 2. holder for value
3. holder 4. None of the above
23. sec6 of negotiable instrument act 1880 deals with -
(a) promissory note (b) bill of exchange
(c ) cheque (d) none of the above
24. The number of parties to bill of exchange is -
(a) 2 ( b) 4
(c ) 6 (d) 3

25. The instrument must be taken in a good faith and with a-
(a) Profit motive (b) consideration
(c ) interest (d) legal relation
SAY YES OR NO
1. When a note is drawn in this form; “I promise to pay Rs. 500 to B only”. Can it be called a negotiable
instrument?
ANS. NO
2. A bill is made payable to “Saroj Sehgal”. Saroj Sehgal endorses it in blank and negotiates it,Is the bill
payable to bearer?
ANS. YES
3. A bill is drawn by an agent acting with the scope of his authority upon his principal. Can the holder
thereof treat it at his option as a note or bill.?
ANS. YES
4. A draws a bill on B and negotiates it away. B is fictitious drawee. Can the holder of the bill treat it as
note made by A ?
ANS. YES
5. A bill is drawn .Pay to X or order the sum of one thousand rupees. In the margin theamount stated is Rs.
100. What is the amount of the bill for ?
ANS. RS.1000
6. When is a negotiable instrument, dated 30th August (in a year) and made payable three months after
date, deemed to be at maturity ?
ANS. 3 rd december
7. A bill of exchange is addressed to Swapan Ganguli. Anil Banerjee writes an acceptance on it. Can Anil
Banerjee bind himself by such acceptance?
ANS. NO
8. Where there are several drawees of a bill, who are not partners, can any one of such drawees accept it
for another without that other’s authority ?
ANS NO
9. A who is the holder of a bill transfers it to B without consideration. B transfers it to C without
consideration. C transfers it to D for value. D transfers it without consideration to E. (a) Can E recover
the amount of the bill from A? (b) Has E any right against D ? Say Yes or No.
ANS. NO
10. A owes to B Rs. 500. B draws a bill on A for Rs. 1,000. A to accommodate B and at his request, accept it.
B sues A on the bill. Can he recover Rs. 1,000 ?
ANS. NO
11. A agrees to supply a quantity of paper to B. B accept a bill for Rs. 1,000 drawn by A, being the price of the
paper. The paper is delivered to B but it turns out to be of a quality different from the stipulated one,
and worth Rs. 500 only. B retains the paper. A sues B on the bill. Is B bound to pay Rs. 1,000 to A ?

ANS. YES
12. X accepts a bill for Rs. 1,500. This is the agreed price of two bales of cotton to be supplied by Y to X, Y
delivers only one bale to X, Y sues X on the bill. Can Y recover Rs. 1,500 from X ?
ANS. NO
13. X owes to Y Rs. 2,000 and makes a promissory note for the amount payable to Y. X dies and the note is
subsequently found amongst his papers. Can Y sue on the note even if it was later on delivered to him
?
ANS. NO
14. A, the holder of a negotiable instrument payable to bearer, which is in the hands of A.s banker who is
at the time the banker of B, directs the banker to transfer the instrument to B.s credit in the banker.s
account with B. The banker does so and according now possesses the instrument as B.s agent. Can the
instrument be deemed to have been negotiated ?
ANS. YES
15. A is the holder of a bill payable to .A or order.. A by simple delivery transfers the bill without endorsing
it to B. Can .B. deemed to be a holder in due course ?
ANS. NO


CHAPTER-3
THE GENERAL CLAUSES ACT, 1897
INTRODUCTION :-
Â The General Clauses Act, 1897 contains ‘Definition’ of some words and some general principles of
interpretation.
Â Which shall be applicable to all Central Acts and Regulations where there is no definition in those Acts
or regulation that emerge with the provisions of the Central Acts or in those, Unless there is anything
repugnant(contrary).
Â The General Clauses Act has been enacted to shorten language andto avoid the repetition of the same
words in the same course of the same piece of legislation.
Â It provides general definitions which shall be applicable to Central Acts and Regulations.
Â It provides General principles of Interpretation.
THEORY QUESTIONS :-
Q-1 State the object, scope and applicability of the General Clauses Act, 1897?
Answer
Object:
i. It shortens the language of central Acts.
ii. To provide, as far as possible, for uniformity of expression in Central Acts, by giving definitions of a
series of terms in common use.
Scope :
Â Applicable to whole of India except Jammu and Kashmir,
Â It came force on 11th march, 1897.
Applicability :
Â Its application made under a reference to all Central legislation and also to rules and regulations made
under a Central Act.
Â If a central Act is extended to any territory, the General Clauses Act would also deemed to be applicable
in that territory and would apply in the construction of that Central Act.
Â Voluntary applicable by court certain case.
Â The provisions of General Clauses Act are mere rules of interpretation and it apply automatically in
each and every case.
Â The General Clauses Act would also deemed to be applicable in that territory and would apply in
construction of that Central Act.

Â It may also be noted that though Act does not, in terms apply to State laws, it is evident that State
General Clauses Act of 1897,
Â For, otherwise divergent rules of construction and interpretation would apply, and as a result, great
confusion might ensue.
Q-2 What is meant by preamble?
Â Every Act has a preamble which expresses the scope, object and purpose of the Act.
Â It is the main source for understanding the intention of lawmaker behind the Act.
Â Preamble is accepted as an aid to construction of the Act.
Â Basic Understanding of an Act.
Â In order to understand the preamble of the Act, it is required to know ‘Act’.
Â Shortly, The preamble to an Act discloses the primary intention of the legislature.
Â Discloses primary intention of legislature.
Â E.g.:-
(1) Preamble of Negotiable Instrument Act, 1881 states –”An Act to define and amend the law
relating to Promissory Notes, Bills of Exchange and Cheques.”
(2) Preamble of Companies Act,2013 states- “An Act to consolidate and amend the law relating
to companies.”
Q-3 What is meant by ‘Definition’?
Â Every Act has Definition,
Â But definition include- words
Â Which are not defined in the Definition if the Act,
Â Refer General Clauses Act for the meaning of such words.
Q-4 What is the difference between “means” and “include”?
Â The definitions which use word “means” shall exclusive definitions and exactly define the term.
Â The definitions which use word “include” they do not define the word but are inclusive in nature.
Â Where the word is defined to “include”, the definition is ‘prima facie’ extensive.
Â The word defined is not restricted to the meaning assigned to it but has extensive meaning which
also includes the meaning assigned to it in the definition section.
Q-5 What is the difference between “Shall” and “May”?
Â The word “shall “ is used to raise a presumption of something which is mandatory or imperative
while the word ‘may’ is used to cannot something which is not mandatory but is only directory or
enabling.
Â While interpreting any provision if law, the word “shall” and “may” have to be given almost
importance to understand what is mandatory and what is optional or directory under law.
Â The use of word “shall” with respect to one matter use of word ‘may’ with respect to another
matter in this statutes, will normally lead to the conclusion.
Q-6 Defined the following:-
Applicable to all the Central Act and regulations unless such laws contains separate definition of their
own.
1. “Act” [section 3(2)]:-
294 Chapter 3 : The General Clauses Act, 1897

In reference to an offence or civil wrong.
Includes a series of Act and illegal omission.
2. “Affidavit” [Section 3(3)]:-
‘Affidavit’ shall include affirmation and declaration in the case of persons by law allowed to
affirm o declare instead of swearing.
The definition is inclusive in nature.
It states that Affidavit shall include affirmation and declarations.
3. Central Act[section 3(7)]:-
It mean Act of Parliament and shall Include:-
o Act of the Dominion Legislature or of the Indian Legislation Passed before the
commencement of the Construction
o Before the commencement by the Governor General in council or the Governor General,
acting in a legislative capacity.
o The date of the commencement of the constitution is 26th January, 1950.
4. Central Government[section 3(8)]:-
A. Anything done before the commencement of the constitution, mean the Government General
in council, as the case may be and shall include:-
9 The Government of a province, the Principle Government acting within the scope of the
authority given to it under that sub-section &
9 In relation to the administration of a Chief Commission’s province, the Chief Commissioner
acting within the scope of the authority given to him.
B. After the commencement of the constitution of the constitution, mean the President and shall
include:-
9 The Government of a state, the state Government acting within the scope of the authority
given to it under that clause,
9 The chief commissioner or the Lieutenant Governor or the Government of a neighbouring
state or other authority acting within the scope of the authority given to him or it, as the
case may be.
9 In relation to the administration of a Union territory, the administrator thereof acting
within the scope of the authority given to him .
5. ‘Commencement’[section 3(13)]:-
It is used with reference to an Act or regulation, shall mean the say on which the Act or Regulation
comes into force.
The theory of a statutes being “in operation in a constitutional sense” through it is not in fact in
operation, has no validity.
6. ‘Document’[section 3(18)]:-
It shall include any matter written expressed or described upon any substance
By means of letter, figures or marks or
By more than one of those means which is intended to be used or
Which may be used, for the purpose or recording that matter.
E.g.:- Books of accounts, Registers, Files.
7. ‘Enactment’[section 2(19)]:-
It shall include a Regulation (as hereinafter therein) any and Regulation of Bengal.
It has been held that an ‘enactment’ would include any Act (or a provision contained therein)
made by the Union Parliament or the state Legislature.
‘Enactment’ is defined to include also any provision of this Act.
8. ‘Financial Year’?
It is commencing on the first day of April.
As per the General Clauses Act, Calendar year means year which starts from January to December.
Year u/s 3(66) as per British Calendar.
9. ‘Good Faith’[section 3(22)]:-
A thing shall be deemed to be done in ‘Good Faith’ where it is in fact done honestly,
Whether it is done negligent or not,
The question of good faith under General Clauses Act is one of fact.
It is to determine with reference to the circumstances of each case.
The term ‘Good Faith’ has been defined differently in different enactment.
The definition of good faith as is generally understood in the civil law and which may taken as
a practical guide in understanding the expression
In the contract Act is that nothing is said to be done in good faith which is done without due care
and
Attention as is expected with a man of ordinary prudence.
An honest purchase made carelessly without making proper enquiries cannot be said to have
been made in good faith so as to convey good title.
It means act is done honesty whether it is done negligently or not,
With a good intention,
10. ‘Government’[section 3(23)]:-
It shall include the both Central Government and State Government.
11. ‘Government Securities’[section 3(24)]:-
It shall mean securities of the Central Government
Government securities” shall mean securities of the Central Government or of any State
Government, but in any Act or
Regulation made before the commencement of the Constitution shall not include securities of
the Government of any Part B State.
12. ‘Immovable Property’[section 3(26)]:-
It shall include:
i. Land,
ii. Benefits to arise out of land, and
iii. Thing attached to the earth, or
iv. Permanently fastened to anything attached to the earth.
In any enactment, the definition of immovable property is in negative and

Not exhaustive, the dentition as given in the General Clauses Act will apply to the expression
given in that enactment.
E.g.:-
1. Trees are immovable property because trees are benefits arise out of the land and attached
to the earth.
2. Right of way to access from one place to another, may come within the dentition of
Immovable property where to right to drain of water is not immovable property.
13. ‘Imprisonment’[section 3(27)]:-
“Imprisonment” shall mean imprisonment of either description as defined in the Indian
PenalCode,.
14. ‘Indian Law’ [section 3(29)]:-
It shall mean any Act. Ordinance, Regulation, rule, order, bye laws or other instrument which
before the commencement of the Constitution,
Had the force of law in any province of India or part thereof or
But does not include any Act of parliament of the United Kingdom or
Any Order in Council, rule or other instrument made under such Act.
15. ‘Month’[section 3(35)]:-
It shall mean a month reckoned according to the British calendar.
16. ‘Movable Property’[section 3(36)]:-
It shall mean that property of every description, except immovable property.
Any property which is not immovable property is movable property.
17. ‘Oath’[section 3(37)]
It shall include affirmation and declaration in the case of person by law allowed to affirm or
declare instead of swearing.
18. ‘Offence’[section 3(38)]:-
It shall mean any Act or omission made punishable by any law for the time being in force.
Any Act or omission which is if done, is punishable under any law for the time being in force, is
called offence.
19. ‘Official Gazette’[section 3(39)]:-
It shall mean that:-
The Gazette of India or,
The official Gazette of state.
It means registered newspaper or journal of Governor General of Government.
20. Person[section 3(42)]:-
It shall include:-
Any company or,
Association or,
Body of individuals, whether incorporated or not.

21. Registered[section 3(49)]:-
Used with the reference to a Document,
Shall mean registered in India under the law for the time being in force for the registration of
document.
22. Rule[section 3(51)]:-
It shall mean a rule made in exercise of a power conferred by any enactment, and
Shall include a Regulation made as a rule under any enactment.
23. Schedule[section 3(52)]:-
It shall mean a schedule to the Act or Regulation in which the word occurs.
24. Sub-section[section 3(61)]:-
It shall mean sub-section of the section in which the word occurs.
25. Swear[section 3(62)]:-
It is with its grammatical variations and cognate expression,
Shall include affirming and declaring in the case of persons by law allowed to affirm or declare
instead of swearing.
26. Writing[section 3(65)]:-
The word ‘writing’ shall be construed as including reference to printing, lithography,
photography and
Other modes of representing of reproducing words in visible forms.
27. Year[section 3(66)]:-
It shall mean a year reckoned according to the British calendar.
Q-7 Rules regarding coming into operation of Enactment.
Answer:-
Â Where any Central Act has not specifically mentioned a particular date to come into force,
Â It shall be implemented on the day on which it receives the assent of the Governor General in case
of Central Acts, made before the commencement of the Indian Constitution and/or,
Â The president in case of an Act of Parliament.
Â Where any Central Act is not expressed to come into operation on particular day, then it shall come
into operation on the day on which it receives the assent.
Â In the case of a Central Act made before the commencement of the Constitution, of the
governorgeneral, And in the case of an Act of Parliament, of the President.
Example:-
1. The companies Act, 2013 received assent of President India on 29th August, 2013 were notified in
Official Gazette on 30th August, 2013 with the enforcement of the Act.
The Act came into enforcement on the date of its publication in the Official Gazette.
2. SEBI (issue of Capital and Disclosure Requirements) Regulations, 2015 was issued by SEBI vide Notified
dated 14th August, 2015 with effect from 1 January, 2016. This regulation shall come into enforcement
on 1st January, 2016 rather than the date of its notification in the gazette.
Q-8 Explaining in detail the concept of Repeal.
Answer:-
Repeal (section 6)
Â Where this Act, or any (Central Act) or Regulation made after the commencement of this Act,
Â Repeals any enactment hitherto made or hereafter to be made, then, unless a different intention
appears,
Â The repeal shall not- Revive anything not in force or existing at the time at which the Repeal takes
effect, or
Â Affect the previous operation of any enactment so repealed or anything
Â Duly done or suffered thereunder, or
Â Affect any right, privilege, obligation or liability acquired,accrued or incurrent under any enactment
so repealed, or
Â Affect any penalty, forfeiture orpunishment incurred in respect of any offence committed against
any enactment so repealed, or
Â Affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation,
liability, penalty, forfeiture or punishment as aforesaid.
Â Revive anything not enforced or prevailed during the period at which repeal is effected or,
Â Affect the prior management of any legislation that is repealed or anything performed or undergone
or,
Â Affect any claim, privilege, responsibility or debt obtained, ensured or sustained under any legislation
so repealed or,
Â Affected any punishment forfeiture or penalty sustained with regard to any offence committed as
opposed to any legislation or,
Â Affect any inquiry, litigation or remedy with regard to such claim, privilege, debt or responsibility or
any inquiry, litigation or remedy may be initiated, continued or insisted.
Case Laws
(1) State of Uttar Pradesh v/s Hirendra Pal Singh
Supreme Court held what whenever an Act is repealed it must be consider as if it had never existed.
Obtained the Act except certain purpose u/s 6.
(2) Kolhapur Canesugar v/s Union of India
Supreme court held section 6 only applies to repeals and
Not to omissions and applies when the repeal is of a Central Act or Regulation and not of a Rule.
‘Repeal of Act making textual amendment in Act or Regulation’[section 6A]:-
Â Repeal of Act making textual amendment in Act or Regulation -
Â Where any (Central Act) or Regulation made after the commencement of this Act repeals any
Â Enactment by which the text of any (Central Act) or
Â Regulation was amended by the express omission, insertion or substitution of any matter, then,
Â Unless a different intention appears, therepeal shall not affect the continuance of any such
amendment made by the enactment sorepealed and in operation at the time of such repeal.
‘Revival of repealed enactment’ (section 7):-
(1) In any Central Act or Regulation made after the commencement of this Act, it shall be necessary, for
the purpose of reviving, either wholly or partially, any enactment wholly or partially repealed,

expressed to state that purpose.
(2) This section applies also to all Central Acts made after the third day of January, 1968 and to all
Regulation made on or after the 14th say of January, 1887.
Q-9 Explain the concept of Time, Gender and Number?
Answer:-
TIME (section 10)
Â In any Legislation or Regulation, it shall be sufficient
Â For the purpose of excluding the first in a series of days or Any other period of time to use the word
‘from’,
Â And for the purpose of including the last in a series of days or any other period of time, to use the
word ‘to’.
Gender and Number:
Â In all legislature and Regulations, unless there is anything repugnant in the subject or context:
1. Masculine Gender shall be taken to include females.
2. Words in singular shall include the plural and vice-versa.
Q-10 Explain the Rules Regarding Computation of Time.
Answer:-
Â Where by any Legislature or Regulation,
Â Any Act or proceeding is directed or allowed to be done or taken in any Court or Office on a certain day
or within a prescribed period,
Â Then, if Court or Office is closed on that day or last day of the prescribed period,
Â The Act or proceeding shall be considered as done or
Â Taken in due time if it is done or taken on the next day afterwards on which the Court or Office is open.
Q-11 What is the difference between Power and Functionaries?

Answer:-
‘Power conferred to be exercisable from time to time’
1. Where by any Central Act or Regulation made after the commencement of this Act, any power is
conferred then unless a different intention appears that power may be exercised form time to time as
occasion requires.
2. This section applies to all Central Act and Regulations made on or after the fourteen day of January,
1887.
‘Power to appoint to include power to appoint ex-officio’
Â Where by any Legislature or Regulation,
Â A power to appoint any person to fill any office or execute any function is conferred,
Â Then unless it is otherwise expressly provided,
Â Any such appointment may be made either by matter or by virtue of office.
‘Power to appoint to include power to suspend or dismiss’

Â The authority having for the time being power to make the appointment shall,
Â Have power to suspend or dismiss any person appointed,
Â Whether by itself or any other authority in exercise of that power.
‘Substitution of functionaries’
1. In any Central Act or Regulation made after the commencement of this Act, it shall be sufficient, for the
purpose of indicating the application of a law to every person or number of persons for the time being
executing the function of an office, to maintain the official title of the officer at present executing the
function, or that of the officer by whom the functions are commonly executed.
2. This section should also applies to all Central Act made after the third day of January,1868 and to all
Regulations made on or after the fourteen day of January,1887.
‘Official Chief’s and Subordinates’

Â The law related to chief or superior of an office shall apply to the deputies or subordinates lawfully
performing the duties of that office in the place of their superior, to prescribed the duty of superior.
Q-12 Describe the service of post.
Answer:-
Â Where any legislation or regulationrequires any document to be served by post, then unless a different
intention appears, the service shall be deemed to be effected by:
I. Properly addressing
II. Pre-paying , and
III. Posting by registered post.
Â A letter containing the document to have been effected at the time at which the letter would be
delivered in the ordinary course of post.
Case Law:-
1. In United Commercial Bank v. Bhim Sain Makhija, A notice when required under the statutory rules to
be sent by ‘registered post acknowledgement due’ is instead sent by ‘registered post only’, the
protection of presumption regarding service of notice under ‘registered post’ under this section of the
Act neither tenable not based upon sound exposition of law.
2. In Jagdish Singh v. Natthu Singh, it was held that where a notice is sent to the landlord by registered
post and the same is returned by the tenant with an endorsement of refusal, it will be presumed that
the notice has been served.
3. In Smt. VANDANA GULATI V. Gurmeet Singh alias Maganlal Singh, it was held that where notice sent by
registered post to person concerned at proper address is deemed to be served upon him due course
unless contrary is proved. Endowment ‘not claimed/not met’ is sufficient to prove deemed service of
notice.
Q-13 What is meant by offence?
Answer:-
Â Offence punishable under two or more enactment (passing of law).
Â Offence shall be liable to be prospected and punished under
Â Either or any those enactment,
Â Shall not be punished twice for the same offence.

Â ‘Offence’ shall mean any act or omission madepunishable by any law for the time being in force.
Â Any act or omission which is if done, is punishable under any law for the time being in force, is called
as offence.
Filling the Blanks :-
1. Words which are not _________ in the definition of the Act, the _______ of such words may be taken
form General Clauses Act, 1897.
2. The General Clauses Act, 1897 consolidate and extend the General Clauses Act,______ and ________.
3. The main objectives of the General Clauses Act, 1897 are ____________________ and
__________________.
4. Preamble to an Act discloses the ___________________ of the legislature.
5. ‘May’ is used to something which is __________ or ____________.
6. ‘Government’ shall include both the ____________________ and __________________.
7. ‘Imprisonment ’ shall mean imprisonment of either description as defined in the
_________________________.
8. ‘Official Gazette’ shall mean ____________________ or __________________.
9. Person shall include ___________ or ____________ or ________________.
Answers:
1. Defined, meaning
2. 1868, 1887
3. Shorten the language, uniformity of expression
4. Primary intention
5. Directory, enabling
6. Central government, state government
7. Indian penal code
8. The gazette if India, The official Gazette of a state
9. Company, Association, Body of individual
MCQS :-
1. The General Clauses Act, 1897 intends to:

(a) Provide general definitions.
(b) Applicable to all Central Act and Regulations.
(c) Applicable where there is no definitions, unless there is anything repugnant in
(d) All of the above.
2. Legislature similar to the General Clauses Act are called:
(a) Interpretation Act. (b) General Act.
(c) Special Act. (d) None of the above.
3. Person shall include:
(a) Any company (b) Association
(c) BOI whether incorporated or not (d) All of the above
4. Official Gazette shall mean:
(a) The gazette of India (b) The official Gazette of a state
(c) (a) and (b) both (d) None of the above
5. Affidavit shall include:
(a) Affirmation and declaration
(b) In case of person allowed affirming or declaring instead of swearing
(c) Both (a) and(b) (d) None of the Above
6. Document shall include:
(a) Any matter written expressed or describe upon any substance
(b) By means of letters or figures or by more than one of those means
(c) Which is intended to be used or which may be used for the purpose of recording that matter
(d) All of the above
7. Financial year means:
(a) Commencing on the first day of April
(b) The term has been define u/s 3(66) as a British calendar
(c) Start from January to December in GCA
8. The preamble discloses the
(a) primary intension (b) expresses the scope object and purpose
(c) both (a) and (b) (d) None of the above
9. Immovable property shall include:
(a) Land, thinks attached to the earth (b) Benefits to arise out of land
(c) Things permanently fastened to anything attached to the earth
10. Government securities shall include:
(a) Central Government (b) State Government
(c) Both (a) and (b) (d) None of the above
11. The General Clauses Act is one of the oldest Acts, came into force on:
(a) 01st April, 1897 (b) 11th March, 1897
(c) 16th March, 1897 (d) 01st April, 1868
12. The preamble is most in any legislation, it:
(a) Provides definition in the Act.
(b) Expresses scope, object and purpose of the Act.
(c) Provides summary of the entire Act.
(d) None of the above.

13. Which of the following is not an immovable property:
(a) Land (b) Building
(c) Timber
(d) Machinery permanently attached to the land
Answers:
(1) (d) (2) (a) (3) (a) (4) (d) (5) (c)
(6) (c) (7) (d) (8) (c) (9) (d) (10) (c)
(11) (b) (12) (b) (13) (c)

CHAPTER-4
INTERPRETATION OF STATUTES, DEEDS AND DOCUMENTS
BASIC CONCEPT
1. Statutes:-
It means the law and regulation of every sort without considering from which source they emanate
(originate).
‘Statutes’ has been defined as the written will of the legislature solemnly expressed according to
the forms necessary to constitute it the law the state. Normally, the term denotes an Act enacted by
legislature authority.
E.g.:- parliament of India
‘Law’ is the defined as including any ordinance, order, bye-law, rule, regulation, notification and the
like.
Shortly ‘statutes’ written law in contradiction to written law.
2. Document (section 3, Indian Evidence Act,1872):-

It means any matter expressed or described upon any substance by means of letters, figures or
marks or by more than one of those means intended to be used or which may be used for the
purpose of recording that matter.
Document may comprise of following elements:-
Matter:- It usage with the word ‘any’ shows that definition of document is comprehensive.
Record:- it must be certain mutual or mechanical device employed on the substance. It must be by
writing, expression or description.
Substance:- This is the element on which a mental or intellectual elements comes to find a
permananent form.
Means:- This is the element by which such permanent form is acquired and those can be letters, any
figures marks, symbols which can be used to communicate between two person.
3. Deed:-
Deeds are the instrument through all instrument man not be deeds.
In India no distinction seems to be made between instrument and deeds.
In legal language ‘deeds’ as an writing purporting to effect some legal disposition.

4. Instrument:-
The ‘Instrument’ is the formal writing of any kind, such as an agreement, deed, Charter or orcord,
drawn up abd executed in a technical form.
It also means a formal legal document having legal effect, either as creating Liability or as affording
evidence of it.
SHORT QUESTION
Q-1 What is Interpretation?
Answer:-
It is the process of ascertaining the true meaning of the words used in the statutes. It is the process by
which the real meaning of the Act (or document) and the intention of the legislature in enacting it is
ascertained. It is the process of understanding of any legislation which commences with ascertaining
the background of the statutes, the circumstances in which enacted becomes necessary and finally
reading the law wer-batting(as it is).
Q-2 What is Interpretation? What are the classification of interpretation?
Answer:-
Interpretation means the process by which the court seek to ascertain the meaning of the legislation
through the medium of the authoritative from in which it is expressed.
Classification of interpretation
A) Legal interpretation
B) Doctrinal
Legal Doctrinal
Authentic Grammatical
Usual Logical
(A) Legal interpretation

Legal:- legal binds the judge to place a certain interpretation of statutes.
Legal interpretation is divided into ‘authentic’ and ‘usual’.
It is ‘authentic’ when rule of interpretation is derived from the legislator himself; it is ‘usual’ when
it comes from some other source such as custom or case law.
(B) Doctrinal interpretation
It is the ‘Doctrinal’ when its purpose is to discover ‘real’ and ‘true’ meaning of the statutes.
‘Doctrinal’ interpretation may again be divided into two categories i.e. ‘Grammatical’ and ‘Logical’.
308 Chapter 4 : Interpretation of Statutes, Deeds and Documents

It is ‘Grammatical’ when the court applies only ordinary rules of speech for finding out the meaning of the
words used in the statutes; and when the court goes beyond the words and tries to discover the intention
of the statutes in some other ways, then it is said resort to what is called a ‘Logical Interpretation.
Q-3 What is meant by Interpretation and construction?
Answer:-
It is worthwhile to note, the difference between the terms ‘Interpretation’ and ‘Construction’. The
cardinal rule of construction of a statute is to read it literally, which means by giving to the words used
by the legislature their ordinary, natural and grammatical meaning. If such reading leads to absurdity
and the words are susceptible(liable to) of another meaning, the court may adopt the some.
If no such alternative construction is possible, the court must adopt the ordinary rules of literal rules of
literal interpretation.
Q-4 What is the difference between Interpretation and Construction?
Answer:-
Interpretation differs from construction. Interpretation is of finding out the true sense of any form and
the construction us the drawing of conclusion respecting that lie beyond the direct expression of the
text.
It is the moral authority and duty of court to give effect to the meaning of an Act when can be equitably
gathered from the word used.
Q-5 What are the secondary rules of interpretation?
Answer:-
1. Effect of usage
2. Associated words to be understood in common sense manner :-
‘Noscitus A Sociis’ (it is known by its associates)
When two or more words which are capable of analogous(similar or parallel) meaning are couples
together, they to the understood in their cognate sense (i.e. akin in origin, nature or quality).
LONG QUESTIONS
Q-1 What is meant by interpretation?
Answer:-
Â It is the process of ascertaining the true meaning of the words in the statutes.
Â It is the process of understanding of any legislation which commences with ascertaining the
background of the statutes, the circumstances in which enactments becomes necessary, and finally
reading the law verbatin(mutatis mutandis-as it is).
Â There are, however times when the said process leaves in respect of the meaning of certain words,
expressions and provisions of the laws.
Â These doubts can be resolved by taking assistance of certain rules of construction, principles of
interpretation and other aids.
Â Supreme court observed that principles of interpretation can be applied only if there is an
ambiguity(confusion) in a provision.
Q-2 What is the rule of literal interpretation?
Answer:-
1. Basic:-
• It is a primary rule of interpretation of statutes.
• It is the cardinal rule of construction that words, sentences and phrases of a statutes should be read in
their ordinary, nature and grammatical meaning so that they nay have effect in their widest amplitude.
2. Maxim:-
‘absoluta sentential expositore non indiget’
• Which means a simple preparation needs no expositor i.e. when you have plain words capable of only
interpretation, no explanation to them is required.
• When the matter of which should have been, but has not been, provided for in a statutes cannot be
supplied by courts as to do so would amount to legislation and would not be construction.
3. Essence:-
• It is based on ‘litera legis’.
• Chart:-
Litera Legis
Literal
Ligal Analysis
Understanding
It is the cardinal rule of construction that words, sentences and phrases of a statutes should be read in
their ordinary, natural and grammatical meaning so that they may have effect in their widest
amplitude(scope).
4. Need:-
• When the language of the statutes is plain and unambiguous and admits of only one meaning, no
question of construction of a statutes arises, for the Act speaks for itself.
• The meaning must be collected from the expressed intention of legislature.
• A word which has a definite and clear meaning should be interrupted with that meaning only,
irrespective of its consequences.
• Sometimes, occasion may arise when a choice has to be made between two interpretations, One
narrower and the other wider or bolder. In such a situation, If the narrower interpretation would
fail to achieve the manifest(to understand the meaning of ) purpose of the legislation, one should
rather adopt the wider one.
5. Understanding:-
This rule of literal interpretation can be read and understood under the following headings:-
“Reasonable corrections are not to over-ride plain terms of a statutes”.

Chart:-
Different headings for literal construction
Natural and Explanation Exact meaning, Technical words

grammatical leading to loose in technical
meaning meaning sense
I. Natural and grammatical meaning:-

• Statutes are to be first understood in their natural, ordinary or popular sense and must be
construed according to their pain, literal and grammatical meaning.
• If there is any inconsistency with any express intention or declared purpose of the statutes, or
it involves any absurdity, repugnancy, inconsistency, the grammatical sense must be modified,
extended or abridge only to avoid such an inconvenience, but no further.
II. Explanation of the rule:-
• It is meant that the words must be qualified that natural, ordinary and popular meaning which
they have in relation to the subject matter with reference.
III. Exact meaning preferred to loose meaning:-
• This is the another point regarding the rule of literal construction that exact meaning is preferred
to loose meaning in an Act of parliament as every word has a secondary meaning too.
IV. Technical words in technical sense:-
• This point of literal construction is that technical words are understood in the technical sense
only.
6. Examples:-
• Disclosure of the nature of concern or interest, financial or otherwise of a director or the
manager of a company in the subject matter of a proposed motion we have to interpret
containing any information and facts that may enable members to understand the meaning,
scope and implications of the items of business and to take decision thereon.
7. Non applicability:-
• When the literal meaning results in absurd and unreasonable results, the quotes would discard(not
to use) literal interpretation. Similarly where the statutes is ambiguous and it becomes necessary
to unfold(open) the legislative intent, the quote would follow the logical interpretation.
Q-3 What is the rule of reasonable interpretation?
Answer:-
1. Basic:-
• It is a primary rule of interpretation of statutes.
• The rule follows a very premises that statutes has a purpose and inters as per law and should be
read as a whole. The interpretation consistent of all the provision of the statutes should be
adopted. The rule of harmonious construction is the thumb rule to interpretation of any statutes.
2. Maxim/Doctrine:-
“ut res magis valeat quam pereat”
• Meaning thereby that words of statutes must be construed so as to lead to sensible meaning.
3. Essence:-
• It is based on “Ratio legis”.
Chart:-
Ratio legis
Reasonable /
Legal analysis
logical understanding
• Two meaning are possible, one making the statutes absolutely vague and meaningless and
other leading to certainty and a meaningful interpretation, in such case the later interpretation
should be followed.
4. Need:-
• Ordinary meaning is absurd (confusing).
• Literal interpretation fails to achieve purpose of Act.
• When there is no perfect draftsman ship of law.
5. Understanding:-
• Generally the words or phases of a statutes are to be given their ordinary meaning a statutes must
be construed in such a manner so as to make it effective and operative.
6. Examples:-
• The rule provide that if the disciplinary committee(reports the respondent as guilty) the council
can order inquiry.
• In ICAI v/s price water house, the council referred a complaint to DC.
• If literal interpretation is applied then council can be inquiry only if DC reports the responded
quit but council is a body superior to DC.
• Applying reasonable interpretation council may initiate inquiry even if DC doesn’t reports the
respondent guilty.
7. Non applicability:-
i. When ordinary meaning is clear.
ii. Reasonable construction leads to absurdity.
Q-4 What is meant by harmonious construction?
Answer:-
1. Basic :-
• It is the primary rule of interpretation of statutes.
• When there is a conflict in provision than you follow most efficient and strict rule that provide
good effect.
2. Maxim :-
———————————————————————————————————
3. Essence :-
• Provisions needs to be reconciled and Act needs to be read as a whole in a manner that all
provisions are complied with.
4. Need :-
• Act is drafted to be interpreted as a whole but many a time for single matter more than one
provision exist.
• When there is conflict between two or more parts of the statutes then the rule of harmonious
construction needs to be adopted.
• The rule follow very simple premise that every statutes has a purpose and intent as per law and
should be read as a whole.
5. Understanding :-
• Where there are in an enactment two or more provisions which cannot be reconciled with each
other, they should be so interpreted, wherever possible as to give to all of them.
• This is what is known as the rule of harmonious construction. An effort should be made to interpret
a statute in such a way as harmonious with the object of the statutes.
• The rule of harmonious construction is applicable only when there is a real and not merely apparent
conflict between the provisions of an Act, and one of them has not been made subject to the
other.
• When after having construed their context the words are capable of only a single meaning, the
rule of harmonious construction disappears and is replaced by the of literal construction.
6. Example :-
• Write time limit of subsequent AGM(S) from Companies Act,2013 Section 96.
• Double payment or deposit for the same period is not envisaged, nor it can be, therefore, for
construing the meaning of entire amount due as occurring in sub-section (4) of Section 20 of the
Act, sub-section (6) of Section 30 will have to be read along with it and not in isolation. It would
also save sub-section (6) of Section 30 from becoming OTIOSE. The anomalies and differentiation
in the deposits made under sub-sections (1) and (2) of Section 30, though the effect is the same,
would also be saved. It would only harmonize the construction of the two provisions, namely,
sub-section (4) of Section 20 and sub-sections (2) and (6) of Section 30 of the Act. Provisions of one
Section of a statute can not be used to defeat those of another unless it is impossible to effect re-
conciliation between them. (See Raj Krushna v. Vinod Kanungo, AIR (1954) SC 202 and Sultana
Begum (Supra) as also Mohd Sher Khan v. Raja Seth, AIR (1922).
7. Non applicability :-
• When there is a notwithstanding provision then one provision has an overriding effect on other
due to non abstante clause.

Q-5 What is meant by Beneficial Construction?
OR
What is meant by Rule of Purposive Construction?
OR
What is meant by Rule of Heydon For Interpretation?
OR
What is meant by Mischief Rule of Interpretation?
Answer:-
1. Basic:-
• It is an advantageous rule of interpretation for members of the society which preserves them
from any kind of hardship being created through the law on the subject-matter they are fighting
for.
2. Maxim:-
‘quo facit per alium facit per se’
He who acts through another is deemed to act in person.
3. Essence:-
• The rule which is also known as ‘purposive construction’ or mischief rule, enables construction of
four matters in construing an Act.
• Where the language used in a statutes is capable of more than one interpretation, the rule enables
consideration of four matters in constructing(understanding) an act.
I. What was the law before the meaning of the Act,
II. What was the mischief or defect for which the law did not provided,
III. What is the remedy that the Act has provided,
IV. What is the reason for the remedy(solution).
• The rule then direct that the court must adopt that construction which shall suppress(to stop/to
reduce) the mischief and advance(to give) the remedy.
4. Need:-
• Ambiguous(confusing) word.
• Literal interpretation defeats the intention of the Act.
• Extended meaning is required.
5. Understanding:-
• Even in a case where the usual meaning of language used falls short of the whole object of the
legislature a more extended meaning may be attributed(given) to the words, provided they are
fairly susceptible(liable to be used with it) of it.

6. Example:-
i. In the case of Sant Ram V/s Ranjinderlal, the Supreme Court said that welfare legislation must be
interpreted in a Third World perspective favouring the weaker and poor section. It has also been
laid down in the case of labour legislation that courts should not stick to grammatical constructions
but also have regard to ‘technological purpose and protective intendment’ of the legislation.
Interpretation of labour legislation should be done by the court with more concern with the
colour, the context and the content of the statute rather than its literal import.
ii. In smith V/s Hughes, applying Hydon’s rule, the word “street” was construed. Before enactment
of Act, prostitutes were harassing people walking on street. So, there was enactment of street
offences Act which provide remedy that prostitutes were prohibited to stand on street.
The court then construed the word “street” and held that the act also applies to prostitutes who
attracted attention of passerby from balconies or windows or private premises so, street meaning
was extended to any place from where passerby can be accessed.
7. Non-applicability:-
I. When clear words are used in statutes.
II. Fiscal statutes likes taxation laws.
Q-6 What is meant by rule of ejusdem generis?
Answer:-
1. Basic:-
• Ejusdem Generis is a Latin term which means “of the same kind” it is used to interpret loosely
written statutes. Where a law lists specific classes of persons or things and refers to them in
general, the general statements only apply to the same kind of person or things specifically
listed.
2. Maxim :-
• Ejusdem generis- words of some class or spieces(types).
• If the particular words exhaust the whole genus, the general word following there particular
words is constructed as embracing a larger genus.
3. Essence:-
• General words following specific words needs to be construed with reference to words preceding
then.
4. Need:-
• Statutes contain an enumeration (description) of specific words.
• The subject of enumeration constitute a class or category.
• That class or category is not exhausted by the enumeration.
• The general terms follow enumeration.
• There is no indication of a different legislative intent.
5. Understanding:-
• Where specific words are used and after those specific words, some general words are used, the
general words would take their colour(feel) from the specific words used earlier.

6. Examples:-
I. If a law refers to automobiles, truck, motorcycles and other motor-powered vehicles, “vehicles”
would not include airplanes, since the list was of land-based transportation. The term Ejusdem
Generis in other words means words of a similar class. The rule is that where particular words
have a common characteristic any general words that follow should be construed as referring
generally to that class, no wider construction should be afforded.
II.
• Words used in Act, “television, music system or any other electronic items.”
• Specific words used:- television, music, system
• General words used:- any other electronic items
• The general words will be construed with reference to specific words preceding.
• Specific words are related to electronic items related to entertainment.
• Ratio- electronic item in above provision related to entertainment.
• Electronic wrist watch-no electronic item in above provision since not related to entertainment.
7. Non-applicability:-
• The principle of Ejusdem Generis is not a universal aaplicable.
• When provision are exhaustive, complete and clen.
Q-7 What is meant by rule of Exceptional Construction:-
Answer:-
1. BASIC:- It is the primary rule of interpretation.
2. Maxim:- “utres magis valeat quam pereat”
Meaning thereby hat it is better for a thing have effect than to be made void.
3. Essence:-
• Despite the general rule that full effect must be given to every word, if no sensible meaning can
be fixed to a word or phrase, or if it would defeat the real object of the enactment, it should be
eliminated.
• The words of a statute must be so construed as to give a sensible meaning to them, if at all
possible.
4. Need:-
• The rule of exceptional construction stands for the elimination of statutes and words in a
statutes which defeat the real object of the statutes or make no sense. It also stands for construction
of words ‘and’, ‘or’, ‘may’, ‘shall’, ‘and ‘must’.
5. Understanding:-
I. The word ‘or’ is normally disjunctive and ‘and’ is normally conjunction. However, at times they
are read as vice versa to give to the manifest intention of the legislature. E.g.:- In the Official
Secrets Act, 1920, as per section 7 any person who attempts to commit any offence, or solicits or
incites or endeavours to persuade another person to commit an offence, or aids(health) or abets(to
get it done through others) and does any act preparatory to the commission of an offence.
The word ‘and’ in bold is to be read as ‘or’.
II. ‘May’, ‘must’ and ‘shall’:-

• The distinction between a provision which is ‘mandatory’ and one which is ‘directory’ is that
when it is mandatory, it must ne strictly observed, when it is ‘directory’ would be sufficient that
it is substantially complied with.
• An enactment in mandatory from might substantially be directory and, conversely, a statutes in
directory from may in substance be mandatory.
a. ‘May’:-
It is well settled that enabling words are construed as compulsory, wherever the object
of the power is to give effect to a legal right, the use of the word ‘may’ in a statutory
provision would not by itself show that the provision is directory in nature.
E.g.:- when the word ‘may’ should be interpreted to convey a mandatory force.
‘may’ is often read as ‘shall’ or ‘ must when there is something in the nature of the
thing to be done, which makes it the duty of the person on whom the power is conferred
to exercise the power.
b. ‘Shall’:-
¾ As against the Government the word ‘shall’ when used in statutes is to be construed as
‘may’ unless a contrary intention is manifest.
¾ For ascertaining the real intention of the legislature, the court may consider amongst
other things:
9 The nature and design of the statute,
9 The consequence which would flow from construction it one way or the other,
9 The impact of other provisions by resorting to which the necessity of complying
with the provision in question can be avoided,
9 Whether or not the statutes provides any penalty if the provision in question is
not complied with,
9 If the provision in question is not complied with, whether the consequences
would be trivial or serious
9 Most important of all, whether the object of the legislation will be defected or
furthered.
Q-8 What are the other(secondary) rules of interpretation?
Answer:-
A. Effect of usage:-
1. Basic:-It is the secondary rule of the interpretation.
2. Maxim:-
9 ‘Optima Legum interpresest consuetudo’
Meaning thereby the custom is the best interpreter of the law.
9 ‘contempuranea expositoest optima et fortissimo in lege’
Meaning thereby the best way to interpret a document is to read it as it would have been read when
made.
3. Essence:-
• Usage or practice developed under the statute is indicative of the meaning recognized to its
words by contemporary(traditional) opinion.

· A uniform practice continued under an old statutes and inaction of the legislature to amend the
same are important factors to show that the practice so followed was based on correct
understanding of the law.
4. Need:-
¾ Statutes and documents should be interpreted as they would have been at the time when they
were enacted/written.
B. Associated Words to be Understood in Common Sense Manner:-

1. Basic:- Where two words or expression are coupled together one of which generally excludes the
other.
2. Maxim:-
“Noscitur A sociis “
It is knows by its associates that is to say ‘the meaning of a word is to be judged by the company it
keeps.’
3. Essence:-
when two or more words which are capable of analogous(similar or parallel) meaning are coupled
together, they are to be understood in their cognate sense[i.e. akin in origin, nature or quality].
International Aids to interpretation/ construction
(A) Long Title :-
¾ An enactment would have what is known as a ‘Short Title’ and also a ‘Long Title’. The ‘Short
Title’ merely identifies the enactment and is chosen merely for convenience, the ‘Long Title’
on the other hand, describes the enactment and does not merely identify it.
¾ It is now settled that the long title of an Act is a part of the Act. We can, therefore, refer to it to
ascertain the object, scope and purpose of the Act and so is admissible as an aid to its
construction.
¾ Example: Full title of the Supreme Court Advocates(Practice in High Courts) Act, 1951 specify
that is an Act to authorize Advocate of the Supreme Court to practice as of right in any High
Court.
(B) Preambles:-
¾ The Preamble expresses the scope, object and purpose of the Act more comprehensively than
the Long title. The preamble may recite the ground and the cause of making a statutes and evil
which is sought to be remedied by it.
¾ The preamble to an Act discloses the primary intention of the legislature but can only be
brought in as an aid to construction if the language of the statutes is not clear. However, it
cannot override the provision of the enactment.
(C) Heading and Title of a Chapter:-
• if we glance through any Act, we should generally find that a number of its sections applicable
to any particular object are grouped together, something in the form of Chapter, Prefixed by
Heading and/or Titles. These Heading and Titles prefixed to sections or groups of sections can
legitimately be referred to for the purpose of construing the enactment or its parts.
(D) Marginal Notes:-
Although there is difference of opinion regarding resort to Marginal Notes for construing an

enactment, the generally held view is that the Marginal Notes appended to a Section cannot be
used for construing the Section.
(E) Definitional Sections/ Interpretation Clauses:-
The legislature has the power to embody in a statutes itself the definition of its language and
it is quite common to find in the statutes ‘definitions’ of certain word expressions used in the
body of the statutes.
Construction of definitions may understood under the following heading:-
I. Restrictive and extensive definition
II. Definition subject to a contrary context
I. Restrictive and extensive definition:-

The definition of a word or expression in the definition section may either be restricting of its
ordinary meaning or may be extensive of the same.
When a word is definition to ‘mean’ such and such, the document is ‘prima facie’ restrictive
and exhaustive we must restrict the meaning of the word to that given in the definition section.
But where the word is defined to ‘include’ such and such, the definition is ‘prima facie’
extensive. Here the word defined is not restricted to the meaning assigned to it but has extensive
meaning which also includes the meaning assigned to it in the definition section.
II. Definition subject to a contrary context:-
When a word is defined to bear a number of inclusive meaning, the sense in which the word is
used in a particular provision must be ascertained from the context of the scheme of the Act,
the language of the provision and the object intended to be served thereby.
F. Illustrations:-
We would find that many, through not all, sections have illustrations appended to them. These
illustrations follow the text of the Sections and therefore, do not form a part of the Sections.
G. Proviso:-
The normal function of a proviso is to except something out of the enactment or to qualify something
stated in the enactment which would be within its purview if the proviso were not there.
Distinction between proviso, exception and saving Clause

There is said to exist difference between provisions worded as ‘Proviso’, ‘Exception’, or ‘Saving Clause’.
Differences
Exception Proviso Saving Clause

“Exception” is intended to “Proviso” is used to “Saving Clause” is used to preserve
restrain the enacting clause to remove special causes from destruction certain rights,
particular clause. from general enactment remedies or privilegs already existing.
and provide for them
specially.

H. Explanation:-
An Explanation is at times appended to a section to explain the meaning of the of the section. An
Explanation may be added to include something within the section or to exclude something from it. An
Explanation should normally be so read as to harmonise with and clear up any ambiguity in the main
section. It should not be so construed as to widen the ambit of the section.
I. Schedules:-
The Schedules from part of an Act. Therefore, they must be read together with the Act for all purpose
of construction.
External Aids to Interpretation/ Construction
Society does not function in a void. Everything done has its reasons, its background, the particular
circumstances prevailing at the time, and so on. These factors apply to any enactment as well. These factors
are of great help in interpreting / ‘External Aids to Interpretation’. Apart from the statute itself there are
many matters which may be taken into account when the statute is ambiguous. These matters are called
external aids.
(a) Historical Setting: The history of the external circumstances which led to the enactment in question is
of much significant in construing any enactment. We have, for this purpose, to take help from all those
external or historical facts which are necessary in the understanding and comprehension of the subject
matter and the scope and object of the enactment.
(b) Consolidating Statute & Previous Law: The Preambles to many statutes contain expressions such as
“An Act to consolidate” the previous law, etc. In such a case, the Courts may stick to the presumption
that it is not intended to alter the law. They may solve doubtful points in the statute with the aid of
such presumption in intention, rejecting the literal construction.
(c) Usage: Usage is also sometimes taken into consideration in construing an Act. The acts done under a
statute provide quite often the key to the statute itself. It is well known that where the remaining of
the language in a statute is doubtful, usage – how that language has been interpreted and acted upon
over a long period – may determine its true meaning.
(d) Dictionary Definition: First we have to refer to the Act in question to find out if any particular word or
expression is defined in it. Where we find that a word is not defined in the Act itself, we may refer to
dictionaries to find out the general sense in which that word is commonly understood. However, in
selecting one out of the several meaning of a word, we must always take into consideration the
context in which it is used in the Act.
(e) Use of foreign Decision: Foreign decision of countries following the same system of jurisprudence as
ours and given on laws similar to ours can be legitimately used for construing our own Acts. However,
prime importance is always to be given to the language of the Indian statutes. Further, where guidance
can be obtained from Indian decisions, reference to foreign decision may become unnecessary.
Rules of Interpretation/ Construction of Deeds and Documents
Â The first and foremost point that has to be borne in mind is that one has to find out what a reasonable
man, who has taken care to inform himself of the surrounding circumstances of a deed or a document,
and of its scope and intendment, would understand by the words used in that deed or document.
Â It is inexpedient to construe the terms of one deed by reference to the terms of another. Further, it
is well established that the same word cannot have two different meaning in the same document,
unless the context compels the adoption of such a rule.
Â The Golden Rule is to ascertain the intention of the parties to the instrument after consideration all
the words in the document/deed concerned in their ordinary, natural sense. For this purpose, the

relevant portions of the document have to be considered as a whole. The circumstances in which the
particular words had been used have also to be taken into account.
Â Very often, the status and training of the parties using the words have also to be taken into account
as the same words are used by an ordinary person in one sense and by a trained person or a specialist
in quite another one sense. It may happened that the same word understood in one sense will give
effect of the clause ineffective. In such a case the word should be understood in the former and not
the latter sense.
Â It may also happen that there is a conflict between two or more clauses of the same document. An
effort must be made to resolve the conflict by interpreting the clauses so that all the clauses are
given effect to. If, however, it is not possible to give effect to all of them, then it is the earlier clause
that will over-ride that latter one.
Â Similarly, if one part of the document is in conflict with another part, attempts should always be
made to read the two parts of the document harmoniously, if possible.
Â If that is not possible, then the earlier part will prevail over the latter one which should, therefore,
be disregarded.


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CHAPTER-1

DEFINITION AND MEANING OF A COMPANY: [SEC. 2(20)]

Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 3

Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 7

Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 9

Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 11

Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 13

Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 15

UNIT I: PROMOTION & INCORPORATION OF COMPANIES

Private limited company Public company

Suffix: Private limited or Pvt. Suffix: limited or Ltd.

One person Company

20 Chapter 2 : Incorporation of Company and Matters Incidental Thereto

Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 21

22 Chapter 2 : Incorporation of Company and Matters Incidental Thereto

Liability arise only if company is Liability of member shall be limited

26 Chapter 2 : Incorporation of Company and Matters Incidental Thereto

Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 27

Table G½ Company capital ½ Guarantee and having share

Table I ½ Article of an ½ ashare capital

Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 29

Â Change of registered office outside the city:

30 Chapter 2 : Incorporation of Company and Matters Incidental Thereto

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32 Chapter 2 : Incorporation of Company and Matters Incidental Thereto

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34 Chapter 2 : Incorporation of Company and Matters Incidental Thereto

2. File an application to the Registrar:

Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 35

36 Chapter 2 : Incorporation of Company and Matters Incidental Thereto

EXECUTION OF BILL F EXCHANGE, ETC.

38 Chapter 2 : Incorporation of Company and Matters Incidental Thereto

Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 39

40 Chapter 2 : Incorporation of Company and Matters Incidental Thereto

Issue securities by a public company [Sec. 23(1)]:

Information to be disclosed in the prospectus: (general)

44 Chapter 3 : Prospectus and Allotment of Securities

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46 Chapter 3 : Prospectus and Allotment of Securities

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48 Chapter 3 : Prospectus and Allotment of Securities

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50 Chapter 3 : Prospectus and Allotment of Securities

PUNISHMENT FOR FRAUD [SEC.447]:

PUNISHMENT U/S 447:

Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 51

ALLOTMENT OF SECURITIES BY A COMPANY [SEC. 39]:

52 Chapter 3 : Prospectus and Allotment of Securities

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Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 57

VARIATION IN TERMS OF CONTRAT OR OBJECTS IN PROSPECTUS [SEC.27]:

58 Chapter 3 : Prospectus and Allotment of Securities

KINDS/TYPES OF SHARE CAPITAL: [SEC. 43]

with voting rights

preference carries preferential right w.r.t

ii. Preference share capital:

62 Chapter 4 : Share Capital and Debentures

Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 63

Navkar Institute | CA Intermediate | Paper 2 : Corporate and Other Laws 65