216083

CODE NO.: 216083

DATE: 27 April 2022

TIME: 2 PM

SUBJECT: Company Law 2

Question No. Marks [Figures]

TOTAL

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Question No. 1 –

Fact-

M/s Sunshine Industries Ltd has a capital of 11 crores and nine directors. The corum for a
meeting, according to its AOA or articles of association, is 1/3rd or 3. They signed an
agreement with BlueBell (Pvt) Ltd. For the purpose of obtaining raw materials. M.R. A and B
were directors of both the preceding and subsequent companies, holding 30 percent of the
shares in each. Both of these directors did not make any declaration concerning their
shareholding in BlueBell (Pvt) Ltd, according to the facts. They also attended the meeting in
accordance with the quorum requirement and voted in favour of the deal. BlueBell (Pvt) Ltd
now wants to enforce the contract?

Issue-

The key question here is whether the contract is lawful because A and B conducted in a
related party transaction, which is illegal under the Companies Act of 2013, without their
disclosure.

Applicable laws-

Section 2 (76), Section 184, Section 188 of companies act 2013

Section 184 requires director to make disclosures about his interest in a contract, if he is any
way related to the company, for instance section 184 (2) (a) with a body corporate in which
such director or such director in association with any other director, holds more than two per
cent. shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer
of that body corporate; or section 188 related party transaction: does not allow without a clear
resolution and acceptance of board, sail or lease of goods with a body corporate where there
is interested people involved in transaction, red along with 1st provision of section 188.

Further section 188 provision 2 requires for a disclosure, of interested director or any person
holding public office, should be done through a resolution through a board singing a contract,
should be approved. (i) where such office or place is held by a director, if the director holding
it receives from the company anything by way of remuneration over and above the
remuneration to which he is entitled as director, by way of salary, fee, commission,
perquisites, any rent-free accommodation.

Analysis-

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Aand B directors are clearly interested directors as defined in section 2 subsection 76, and
they are required to disclose their interests under section 184 of the Companies Act 2013 and
section 188 of the Companies Act 2013. They hold 30% of the company, which is more than
2%.

If the criteria of sections 184 and 188 are met, the transaction is not a related party
transaction. As a result, the contract can be completed after the requirements set forth in
sections 184 and 188 have been met. The criteria are that I the two directors must declare
their interests to the Board under Section 184; and (ii) the Board of Directors must consent by
resolution at a meeting of the Board and subject to any conditions that may be imposed, as
required by Section 188.Applying the legal standards to the given facts, none of them are
fulfilled, therefore this is a related party transaction.

In a related party transaction, the corporation has the ability to bring contract violations
against the other party at any time. Here, BlueBell (Pvt) Ltd has the ability to render a
contract voidable, but it also has the ability to enforce the contract. Sec184 (3) states that a
contract or arrangement entered into by the business without disclosure under subsection (2)
or with involvement by a director who is concerned or interested in the contract or
arrangement in any manner, directly or indirectly, is voidable at the company's discretion.

If it's a public company-

The requirements are essentially the same, but they'll be considered a related party under
Section2subsection76 (v) a public company in which a director or manager is a director or
holds more than two percent of its paid-up share capital with his relatives; here they clearly
control more than two percent. As a result, the requirement would rise.

Question No. 2

(a) Mr. X, who was formerly the director of ABC Ltd., a SEL subsidiary, has been appointed
SEL's Purchase Manager. It is said that Mr. X's appointment will not require the approval of
any company's members in a general meeting. To back up this claim, the Companies Act of
2013 sections 2(76) and 188 are examined closely.

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Any directors or their family, key managerial staff or their relatives are considered connected
parties under Section 2(76), which defines the word. A linked party would also include any
holding, subsidiary, or affiliate corporation.

Furthermore, Section 188 of the Companies Act of 2013 puts forth specific recommendations
for dealing with such circumstances. Its provisions are outlined and explained below.

First, this rule forbids a corporation from engaging in related party transactions or entering
into a contractor arrangement with a related party. However, the section itself contains a
solution to the problem. As a result, if the Board of Directors' permission is obtained by a
resolution at a Board meeting, a related party transaction may be approved.

The Companies (Meetings of Board and its Powers) Rules, 2014 have incorporated further
cautions for such transactions. A related party transaction involving an office or profit centre
in the holding, subsidiary, or associate firm, when the salary exceeds 2.5 lakhs per month,
requires permission from members at a general meeting, according to these guidelines.

As a result of applying the preceding sections to the actual reality situation, it may be found
that the appointment of Mr.X does not need member approval at a general meeting. This is
because, despite the fact that Mr. X is a linked party, his monthly compensation does not
exceed 2.5 lakhs. As a result, lifting the prohibition on the transaction would require the
Board's assent via a resolution, but no general meeting is required.

Even if SEL were a subsidiary of ABC Ltd., the answer would be the same since the related
party definition and the duties that come with it would still apply. Any holding, subsidiary, or
affiliate company is deemed a connected party, as shown in the preceding sections.

(b)

Facts-

Mr. Y was hired as SEL's sales manager on January 1, 2015, with a salary of Rs. 10000.
From January 1, 2016, Mr. P, a relative of Mr. Y, will be appointed as a director of the
company.

Issue-

Will Mr. P's appointment have an impact on Mr. Y's sales manager position?

Analysis-

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Any key managerial person, director, or their relative is considered a connected party under
Section 2(76) of the Companies Act, 2013, and any dealings with them are subject to Section
188 of the Companies Act, 2013. Mr. P's appointment comes after Mr. Y's promotion to sales
manager, potentially creating a conflict of interest. As a result, Mr. Y's continued
employment as sales manager would require board permission under Section 188(3) of the
Companies Act, 2013.

Question No. 3

The concept of oppression and mismanagement aims to guarantee that dominant owners'
actions do not harm the interests of minority shareholders. If discovered in the event of extra
issuing of new shares, 'oppressive' behaviour is defined as one that lacks in probity, is unfair,
and causes detriment to the exercise of a shareholder's legal and property rights, and is
forbidden. When two conditions are met, the mismanagement remedy is applied. First, there
must be a major change in the firm's management or control, which might occur in a variety
of ways, including changes in the board of directors, the CEO, or the company's ownership.
Second, such a change must be the reason why the company conducts its activities in a way
that is detrimental to the company's or its shareholders' interests.

The reasons for behaviour are examined, as well as if there are any illegal intents on the part
of the parties, according to the norms of fairness and probity granted to shareholders, which
can only be anticipated from partners in a commercial venture. Furthermore, if their actions
are in the best interests of the firm, any aftereffects of shareholders profiting at the expense of
other shareholders are only incidental and are not considered oppressive conduct or
mismanagement. The claim is maintained only if it can be demonstrated that the powers are
utilised for non-essential reasons such as the maintenance or acquisition of control over the
company's affairs.

In this scenario, the majority shareholders, Y & Z, were not obligated to accept the minority
shareholders' demand that the additional shares be allocated entirely to existing stockholders.
Furthermore, because the general meeting resolved that new shares should not be granted to
current owners but rather to others, there was no violation of the Companies Act, and the
resolution was valid and followed correct legal procedure for passage. Furthermore, there is
no evidence that this was not done in the company's best interests.

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In the case of S.P. Jain v. Kalinga Tubes, it was held that even if it could be proven that the
majority group was afraid that because they didn't have any money, the appellant group
would take up the entire new issue and thus gain majority control of the company, and that
this was the reason why the issue was resolved in general meeting to be issued to others
rather than existing shareholders, that it would not be conscionable. Because the people who
are issued the shares are not benamidars of the majority shareholders and are independent
investors, the situation cannot be regarded as unjust or oppressive. There can be no evidence
of deception because Y & Z will not gain in any manner from the problem to outsiders.

There were also no data available prior to the meeting that may indicate oppression or
mismanagement from the start or before this specific resolution was enacted. However, even
if the majority rule has been tacitly rejected in some circumstances, it has not been entirely
overridden, and it is the only element that may favor X in this case. The majority rule
stipulates that a majority of shareholders must obtain voting power in order to decipher
tyranny. However, given the totality of the facts, this would not be sufficient to sustain X's
claim. As a result, X will be unable to win in their claim against Y & Z since there was no
behavior that was oppressive, harsh, or unlawful.

Question No. 4

Section 67 of the Companies Act, 2013, talks about “Restrictions on purchase by company or
giving of loans by it for purchase of its shares.”

Section 67(2) forbids public companies to “give, whether directly or indirectly and whether
by means of a loan, guarantee, the provision of security or otherwise, any financial assistance
for the purpose of, or in connection with, a purchase or subscription made or to be made, by
any person of or for any shares in the company or in its holding company.”

However, under Section 67(3), certain exceptions are made to this rule.

The one most relevant to us in this regard is Section 67(3)(c), which reads as follows:

“(3) Nothing in sub-section (2) shall apply to—

(c) the giving of loans by a company to persons in the employment of the company other than
its directors or key managerial personnel, for an amount not exceeding their salary or wages
for a period of six months with a view to enabling them to purchase or subscribe for fully

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paid-up shares in the company or its holding company to be held by them by way of
beneficial ownership…”

We must determine if XYZ Ltd. is a public company since Section 67(2) only applies to
public corporations. Despite the fact that the facts do not expressly say whether it is a public
business, it does not have Pvt. (for private company) or OPC (for one person company) in its
name, and hence may be presumed to be one. As a result, XYZ Ltd is subject to the Section
67(2) bar.

In this case, because it is an employee who is purchasing company stock, we must consider
whether the Section 67(3)(c) exemption may be used.

P is a financial manager in the given circumstance. As a result, he is not a director or a

significant management figure. As a result, he may possibly be given money to acquire
business stock. For the next six months, however, this money cannot surpass his wage. P
earns Rs. 30000 per month, hence his pay is 30000*6=180000 rupees, or Rs. 1.8 lakh, spread
out over six months. The loan amount of 2 lakh is certainly more than this. Furthermore, the
loans can only be used to buy fully paid-up shares of the firm, but only partially paid-up
shares are being evaluated for acquisition in this situation. P cannot be awarded the loan for
these two reasons, and the Board's decision is invalid.

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