CORPORATE LAWS

Saturday, 2nd April, 2022

1. Discuss the doctrine of Ultra Vires. (10)

 Page No. 63-67

2. Differentiate between any two of the following:

i. Shelf Prospectus and Red Herring Prospectus
 Page No. 82-83
ii. Non-executive Director and Independent Director


Points of Difference Non-Executive Director Independent Director

(“NED”) (“ID”)
1. Definition NED are directors who ID are non-executive directors
are not involved in the who are not related to the
day-to-day management company or its management
of the company and are in any way and are free from
not employees of the any conflicts of interest.
company.
2. Appointment NEDs can be appointed IDs are appointed by the
by the board of directors shareholders of the company
or by the shareholders on the recommendation of
of the company the Nomination and
Remuneration Committee
(NRC).
3. Tenure NEDs appointed for a Appointed for maximum term
maximum term of 5 of 5 years but they can be re-
years appointed for another term of
five years only after a cooling-
off period of three years.
4. Remuneration entitled to remuneration entitled to remuneration for
for their services their services, but are not
eligible for stock options or
any performance-linked
incentives.
5. Role provide guidance and provide an objective and
oversight to the independent perspective on
company's the company's operations and
management, but do not governance, and ensure that
involve themselves in the company complies with
the day-to-day applicable laws and
management of the regulations.
company
6. Independence NEDs may or may not be required to be independent of
independent of the the company's management
company's management and free from any conflicts of
interest.
 iii. Holding Company and Subsidiary Company
 Page No. 43-44

3. Mr. A, an Independent Director of XYZ Ltd., is diagnosed with leukaemia and proceeds on leave for
7 months to USA for treatment. The Board of Directors at a meeting appoint Mr. B for a period of
two months, as an alternate director. Articles of Association of the company do not confer upon
the Board of directors any such power to appoint anyone as an alternate director. Examine the
validity of the appointment of Mr. B.

 The appointment of an alternate director is governed by Section 161 of the Companies Act, 2013.
According to this section, an alternate director may be appointed by the Board of Directors if the
articles of association of the company permit such appointment.

In this case, since the Articles of Association of XYZ Ltd. do not confer upon the Board of Directors
any power to appoint an alternate director, the appointment of Mr. B as an alternate director is not
valid.

However, it is important to note that Section 149(4) of the Companies Act, 2013, requires that a
company shall have at least one-third of its total number of directors as independent directors. In
the absence of Mr. A, who is an Independent Director, the company may not be compliant with this
requirement. Therefore, the Board of Directors should consider appointing a new Independent
Director to ensure compliance with the Companies Act, 2013.

Alternatively, the Board may also consider exploring other options, such as allowing Mr. A to
participate in Board meetings through video conferencing or other means, if feasible, to ensure that
the company has the required number of Independent Directors on its Board.

4. Tardy Ltd. held a meeting of its Board of Directors on 1st January, 2022 at its registered office.
Though the company has 12 directors on its board, only 3 directors were present at the registered
office whilst a 4th director attended virtually. After the commencement of the meeting and while
the meeting was in progress, connection was lost and the 4th Director exited the meeting. The
remaining 3 directors carried on the proceedings of the meeting. Discuss the validity of decisions,
if any, taken by the remaining directors.
 According to Section 174 of the Companies Act, 2013, a meeting of the Board of Directors shall be
quorate if at least one-third of the total strength of the board or two directors, whichever is higher,
are present in person or through video conferencing or other audio-visual means.

In this case, only 4 out of 12 directors were present, with one attending virtually. As per the
provisions of the Companies Act, 2013, the meeting would have been quorate if at least 4 directors
 were present. However, since the virtual director lost connection and exited the meeting, only 3
directors remained present.

Therefore, the meeting would not be quorate and any decisions taken by the remaining 3 directors
would be invalid as per the provisions of the Companies Act, 2013. The decisions taken in the
meeting would not be binding on the company and would be open to challenge.

It is important for the company to ensure that the minimum quorum requirements are met before
proceeding with the meeting and taking any decisions. In this case, the company may need to
reconvene the meeting with proper notice and ensure that the minimum quorum requirements are
met before taking any decisions.

5. Discuss the reliefs available to minority shareholders against 6 wrongful conduct of the majority?
 In sequence, 245 (Introduction), 251-252, 245-246

6. Write short notes on any three of the following:

i. Public Offer and Private Placement.
 Public Offer
A Public Issue or public offering is the process of issuing shares or convertible securities in
the primary market to attract new investors. Companies issue a prospectus and invite the
general public to subscribe to shares in exchange for funds. This allows companies to raise
capital and enables the public to own a portion of the company.

Provision that regulates the Public Issue

Public offerings are regulated by statutory provisions such as the

 Companies Act, 2013

 the Securities Contract (Regulation) Act, 1956, and
 SEBI Rules and Regulations.

Types of public offers:

i. Initial Public Offer (IPO): IPO is the process of listing shares or securities of an
unlisted company on the stock exchange
ii. Further Public Offer (FPO): is the issuance of shares of a company that is already
listed on the stock exchange and has complied with all IPO procedures and
requirements.

Private Placement
Private Placement is a non-public offering of shares directly to a selected group of investors
like insurance companies, banks, pension funds, and mutual funds. It is cheaper than Initial
Public Offer but is limited to a small group of investors with limited risk appetite, and the
securities are not traded in the secondary market.

Any entity regardless of being a Private or Public Company can make a Private Placement by
issuing a (PPOL) “Private Placement Offer Letter”.

Certain guidelines to make a Private Placement:

 A company can issue an offer to subscribe its securities to the number of an offer to
subscribe securities to no more than 50 persons in a financial year
 qualified institutional buyers and employees of the company not counted as
investors
 If an offer is made to more than the prescribed number of persons, it will be deemed
a public offering, regardless of the company's listing status or whether payment has
been received.

Difference between Public Offer and Private Placement

Sr.N
Public Issue Private Placement
o

Public Issue is a method of In Private Placement companies

selling securities to the public sell securities directly to a few
1
where there are a large number numbers of investors or
of investors institutions

Generally small scale companies

Usually large scale companies
2 raises funds through Private
uses Public Issue to raise funds
Placement

There is no floatation cost

For Public Offering, floatation
included in the Private
3 cost is included since there is a
Placement as there is no
requirement of an underwriter
underwriter

In the case of Private

In the process of Public Issue,
Placement, there is no
the investment backers act as a
involvement of mediators since
4 mediator between the issuers
all the dealings are done
and investors of long-term funds
directly amidst the issuers and
in the capital market.
investors.
 ii. Abridged prospectus
 Page 81

iii. Woman Director

 Page 159

iv. Corporate Social Responsibility

 Page 225 – 227

7. Discuss the situations under which a company is required to constitute the Audit
Committee?
 Section 177 of the Companies Act, 2013 mandates the formation of an Audit Committee for
every listed public company:
 Composition: consisting of a minimum of three directors with independent directors
forming the majority.

 When to be formed: The committee must be constituted within a year of the

commencement of this Act

 Term of Reference: The committee must act in accordance with the terms of
reference specified by the Board which include;
i. recommendation for appointment
ii. With respect to auditors: remuneration, terms of appointment, their
review and monitoring of their independence and performance
iii. examination of the financial statement and the auditors' report thereon
iv. scrutiny of inter-corporate loans and investments
v. valuation of undertakings or assets of the company
vi. evaluation of internal financial controls and risk management systems,
and
vii. monitoring of the end use of funds raised through public offers and
related matters.

 Investigation functions: The Audit Committee is authorized to investigate any matter

related to the items specified above or referred to it by the Board, obtain
professional advice from external sources, and have full access to information
contained in the records of the company.
  Right to be heard: The auditors and key managerial personnel shall have the right to
be heard in the meetings of the Audit Committee when it considers the auditor's
report, but shall not have the right to vote.

 Averments in Board Report: The Board's report under Section 134 (3) shall disclose
the composition of an Audit Committee and where the Board had not accepted any
recommendation of the Audit Committee, the same shall be disclosed in such report
along with the reasons therefor.

 Vigil Mechanism: Every listed company shall establish a vigil mechanism for directors
and employees to report genuine concerns. It shall provide for adequate safeguards
against victimization of persons who use such mechanism and make provision for
direct access to the chairperson of the Audit Committee. The details such a
mechanism shall be disclosed by the company on its website, if any, and in the
Board's report.

8. ABC Ltd. is desirous of buying back 5,00,000 equity share at Re. 1 each our of the
following:
i. Balance of depreciation reserve fund Rs. 3 lakh
ii. Unsecured loans Rs. 1 lakh
iii. Securities premium account for Rs. 1 lakh.
Can ABC Ltd. do so?
 Section 68 of the Act deals with Power of company to purchase its own securities i.e. Buy-
Back.

Accordingly, Buy-Back can be done only from the following pools of monies:
i. free reserves
ii. securities premium account
iii. proceeds of the issue of any shares or other specified securities

ABC Ltd. can use its balance of depreciation reserve fund (which is a is a part of the free
reserves earmarked specifically to provide for depreciation of fixed assets) and securities
premium account to buy back its equity shares, as per the Companies Act, 2013. However, it
cannot use the unsecured loans for the buyback.

The maximum amount that can be used for the buyback is 25% of the aggregate of the
company's paid-up capital and free reserves. In this case, the company can use the balance
of the depreciation reserve fund and securities premium account for the buyback, which
amounts to Rs. 4 lakh (Rs. 3 lakh from depreciation reserve fund and Rs. 1 lakh from
securities premium account).
Therefore, the company can buy back a maximum of 4,00,000 equity shares at Re. 1 each,
assuming that the total amount required for the buyback is Rs. 4 lakh.

9. Write a short note on declaration in respect of beneficial interest in any shares.

 Section 89 of the Companies Act, 2013 deals with Declaration in respect of beneficial
interest in any share;
 Beneficial Interest: It specifies that if a person's name is listed in a company's
register of members as the holder of shares, but they do not hold the beneficial
interest in those shares, they must declare the name and details of the person who
does hold the beneficial interest to the company.

 Declaration of Beneficial Interest and reporting of changes: Any person who holds or
acquires a beneficial interest in shares must also declare the nature of their interest
and the particulars of the registered shareholder. If there is any change in the
beneficial interest, both the registered shareholder and the beneficial owner must
make a declaration to the company within 30 days. The company must note such
declarations in their register and file a return with the Registrar within 30 days.

 Rules by Central Government: The Central Government may make rules regarding
the holding and disclosing of beneficial interest and ownership, and failure to
comply with the requirements of this section may result in penalties.

 Penalties: If the company fails to file a return, penalties may be imposed: Rs.
1000/day with maximum of Rs. 5 Lakhs in case of company and Rs. 2 lakhs in case of
the officer

 Rights of Beneficial holders: The section does not affect a company's obligation to
pay dividends to its members. The beneficial interest in a share includes the right to
exercise or cause to be exercised any rights attached to the share or to receive or
participate in any distribution in respect of the share.

 Exemptions: The Central Government may exempt certain classes of persons from
complying with the requirements of this section.

Case law:

Where shares in Indian Company were in the name of some NRI shareholders of
Non-resident company. Indian Court had jurisdiction on the ground that shares
in beneficial interest were that of Indian Company.

Ahmed Ghurair v. Star Health Insurance (2019, SC)

 10. Zazzy Ltd. an Indian MNC is desirous of appointing Mr. Suave as a member of
Board. Mr. Suave contends that he being a foreigner, is not required to obtain
Director Identification Number (DIN). Advise Zazzy Ltd.

 As per the Section 152(3) of the Companies Act, 2013, no person shall be appointed as a director in
an Indian company, unless he has been alloted the Director Identification Number (DIN) this is
applicable whether an Indian or a foreign national. Therefore, Mr. Suave is required to obtain a DIN
in order to be appointed as a member of the board of Zazzy Ltd.

Mr. Suave if he intends to become a director in an existing company shall have to make an
application in eForm DIR-3 alongwith requisite documents such as copies of passport, address proof
with translation, if any must be Notarized and Apostilled / Consularized by the competent authority
of that foreign country.

It is important for Zazzy Ltd. to ensure that all its directors, including Mr. Suave, comply with the
requirements of the Companies Act, 2013, to avoid any legal or regulatory issues in the future.
Therefore, Zazzy Ltd. should advise Mr. Suave to obtain a DIN before his appointment as a member
of the board.

11. Write a short note on ‘resolution by circulation’. Which matters cannot be passed by the
Directors by resolution by circulation.

 Section 175 of the Act deals with passing of resolution by circulation.

 A resolution proposed to be passed by circulation should be sent in draft, along with the
necessary papers, to all the directors, including interested directors, either by hand or by
post, courier or e-mail.
 The draft resolution should be explained in detail by a note and should contain a deadline by
which the director should respond.
 The resolution is passed when it is approved by the majority of directors entitled to vote on
the resolution, unless one-third of the total number of directors requires the resolution to
be decided at a meeting.
 The resolution passed by circulation should be noted at a subsequent meeting of the Board
and shall be recorded in the minutes of the meeting.

However, certain items are prohibited from passing by circular resolution:

General Business Items

i. Noting Minutes of Meetings of Audit Committee and other Committees.

ii. Board’s Report.
iii. Matters regarding compliance with the provisions of all the laws applicable to the Company.
 iv. Appointment of Secretarial Auditors and Internal Auditors.
v. Approving Annual operating plans and budgets.
vi. Capital budgets and any updates.

Specific Items

i. Borrowing and granting of loans and investment of monies

ii. Making political contributions.
iii. Making calls of money unpaid on their shares.
iv. Approving Remuneration of Managing Director, Whole-time Director and Manager and Key
Managerial Personnels
v. Any material default obligations to and by the Company
vi. Significant problems such as labour, pollution etc.

Corporate Actions

i. Buy-Back of securities.
ii. Issue of securities
iii. Approving amalgamation, merger or reconstruction.
iv. Diversify the business.
v. Takeover another company or acquiring controlling or substantial stake in another
Company.

12. A board meeting of Hasty Ltd. was called at shorter notice to transact an urgent business.
However, only the Independent Directors could attend the meeting. Examine the validity
of resolutions passed at the meeting.

 As per the provisions of the Section 173 Companies Act, 2013, a board meeting shall be called by
giving not less than seven days' notice in writing to every director. The meeting may be called at
shorter notice if there is an urgent business that needs to be transacted. However, for such a
meeting, at least one independent director of the company must be present, if there are any on the
board. If there are no independent directors on the board, the resolutions passed at such a meeting
will not be valid.

In the given scenario, if the board meeting of Hasty Ltd. was called at shorter notice to transact an
urgent business, and only the independent directors could attend the meeting, the resolutions
passed at the meeting will be valid. This is because the presence of at least one independent director
is mandatory for a board meeting called at shorter notice, and in this case, that requirement has
been fulfilled.
 As a Solicitor I would advice Hasty Ltd. to note in the minutes of the meeting the reasons for calling
the meeting at shorter notice and the presence of only the independent directors in such situation.
This will help in avoiding any future disputes regarding the validity of the resolutions passed at the
meeting.

13. Discuss the meaning of ‘Corporate Person’ under the Insolvency & Bankruptcy Code, 2016.
Can the National Highway Authority of India be considered a ‘Corporate Person’?
 Government companies, defined under Section 2(45) of the Companies Act, 2013 mean any
company where at least 51% of paid-up share capital is held by the central or state government,

The Insolvency and Bankruptcy Code, 2016 (“IBC”) under section 2 states that it shall be applicable
to any company incorporated under any Companies Act unless prohibited by special legislation.
Section 3(7) of the IBC also defines a “corporate person” to include any company as defined in
section 2(20) of the Act.

An interpretation of the above definitions leads us to the inference that government companies are
not expressly exempted from the applicability of the IBC. However, there are judicial precedents
which hold that government companies that perform sovereign functions would fall within the ambit
of the definition of “person” under section 3(23) of IBC and, by virtue of being governed by special
statute, the IBC will not apply to them.

In Hindustan Construction Company Limited v. Union of India (2020, SC), the Supreme Court held
that government companies fall within the IBC's ambit, but government bodies performing
sovereign functions, such as the National Highways Authority of India, cannot be taken over by a
resolution professional or wound up under the IBC.

The Madras High Court in TANGEDCO v. Union of India (2021, Madras HC) reiterated that companies
substantially owned by the government are not exempt from being subject to insolvency
proceedings under the IBC, but disputes governed by special statutes fall outside the IBC's purview.
Eventually, The Ministry of Power confirmed that state-owned power distribution and generation
companies, such as TANGEDCO, fall within the IBC's purview and are not exempt from insolvency
proceedings as they are government companies under the Companies Act, 2013.

14. Define any 3 of the following terms under the IBC

i. Security Interest
 Section 3(31) Pg. 30 IBC

ii. Dispute
 Section 5(6) Pg. 32 IBC

iii. Financial Creditor

 Section 5(7) Pg. 32 IBC

iv. Financial Debt

 Section 5(8) Pg. 32-33 IBC
15. Will the institution or continuation of a proceedings under Section 138 of Negotiable
Instruments Act, 1881 be covered under moratorium?

 A moratorium as defined in Section 14 of the Insolvency and Bankruptcy Code 2016 (IBC), is
a time during which no new suits or continuations of existing ones against a corporate
debtor can be filed.

in the case of P. Mohanraj and Others v. Shah Brothers Ispat Private Limited (2021, SC)
where the question arose whether the institution or continuation of a procedure under
section 138 read with section 141 of the Act can be deemed to be covered by section 14 of
the Code.

The Supreme Court ultimately observed that that the moratorium clause will only apply to
the corporate debtor, and that the statutory liability of the natural people stated in section
141 of the NI Act, i.e., the persons in control of the corporate debtor's business, will remain
in effect. The implication of this decision is that any criminal actions brought against the
corporation for cheque dishonouring under section 138 of the NI Act will be deferred during
the period of moratorium relevant to insolvency proceedings. But not against the company's
directors and other officials who have been charged with cheque dishonouring the
proceedings would continue.

This judgment has overruled judgments on this issue such as the case of MBL Infrastructure
Limited v. Manik Chand Somani (2019, Calcutta HC) before the Calcutta High Court wherein
it was held that the scope of the moratorium in winding up proceedings initiated under the
Companies Act, 2013 would not cover proceedings under Section 138 of the Negotiable
Instruments Act and further reaffirmed the decision of Tayal Cotton Private Limited v State
of Maharashtra (2018, Bombay HC), which was before the Bombay High court wherein it
was held that a criminal proceeding would be an exception to an application for moratorium
under section 14 of the Insolvency and Bankruptcy Code.

The P. Mohanraj judgement was eventually followed by the Madras HC in Nag Leathers (P)
Ltd. v. Muzain Hides (2022, Madras HC)