CA Final-Paper-4-Corporate and Economic Laws
CA Final-Paper-4-Corporate and Economic Laws
CA Final-Paper-4-Corporate and Economic Laws
PAPER-4:
CORPORATE AND
ECONOMIC LAWS
CONTENTS
Meaning of Director
According to Section 2(10) of the Companies Act, 2013 (in short ‘the Act’),
“Board of Directors” or “Board”, in relation to a company, means the collective
body of the directors of the company.
According to section 2(34) “director” means a director appointed to the Board
of a company.
The directors are the individuals who are appointed to manage the business
affairs of a company. A company is an artificial person created by law having
separate legal existence but without any physical body or mind of its own. It
needs to be managed through the human beings. Though the shareholders
being owners are physically available to manage their company but as their
number grows, all of them together may not be able to manage the affairs;
and if they do so it shall be mismanagement and nothing else. That’s why
the concept of directors has emerged. The directors (within the permissible
limit) may be elected from among the shareholders or outsiders.
Legal position of Directors
As regards legal position of directors in relation to a company, they can be
considered both agents and trustees. As agents, they bind the company as
their principal as soon as they enter into various transactions on its behalf.
The law of agency comes into play and it governs the relationship between
the company and its directors. At times, the company itself is principal as
well as agent in respect of certain acts which cannot be delegated. The
Companies Act, 2013 lays down provisions requiring as to when the company
needs to act both as principal as well as agent and when the directors need to
act as agent of the company. It may be noted that where directors are
empowered to take certain decisions, the company cannot negate them or
issue directions to the directors directing them to go for a particular decision
1
except that it may replace the directors with the ones of its choice. As
trustees, the directors are required to take care of properties, moneys, trade
secrets, etc. belonging to the company. In fact, as trustees the directors are
in a fiduciary relationship with the company (and not with any individual
shareholder) and if such relationship is broken and the company suffers
losses because of the illegal acts of the directors, the erring directors will be
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required to compensate the losses suffered by the company. The office of directorship is an office of trust.
The definition of ‘officer’ given in Section 2 (59) of the Act, inter-alia, includes ‘director’ which means a
director, at certain times, is also the officer of the company. Since an officer is an employee of the company,
the director as officer is also an employee so far as certain provisions of the Companies Act, 2013 are
concerned.
Collective body of the directors
The collective body of the directors is called the ‘Board of Directors’ or simply the ‘Board’.
It is the Board which takes decisions at its meetings and not any individual director. This is the reason why a
quorum (i.e., presence of minimum directors at the Board meetings) is prescribed so that collective decisions
are taken. At times, if permitted, the decisions can be taken by the Board without calling a meeting but in
that case too they are collective decisions.
Number of Directors:
According to section 149(1) of the companies act, 2013, every company shall have a Board of Directors
consisting of individuals as directors. Thus, any person other than individuals like a body corporate, firm or
association of persons cannot be appointed as a director.
Every company shall have-
(a) minimum number of directors:
(A) in case of a Public Company-3 Directors,
(B) in case of a Private Company-2 Directors, and
(C) in case of a One Person Company (OPC)-1 Director
(b) maximum number of directors:15 Directors
Note: If the company wants to appoint more than 15directors, it can do so after passing a special resolution.
Exemptions
(A) A Government company is exempted:
(i) from the application of Section 149 (1) (b) which requires a company to have a maximum of fifteen
directors only; and
(ii) from the application of First Proviso to Section 149 (1) which enables a company to appoint more than
fifteen directors after passing a special resolution.
However, above exemption is applicable only if such Government company has not committed a default in
filing its financial statements under Section 137 or Annual return under Section 92 with the registrar.
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(B) Similar exemption, as above, is also applicable to company incorporated under Section 8 of the Companies
Act, 2013 subject to the condition that such a company has not committed a default in filing its financial
statements under Section 137 or Annual return under Section 92 with the registrar.
Question:
The Articles of Association of Rajasthan Toys Private Limited provide that the maximum number of Directors
in the company shall not exceed 10. Presently, the company has 8 directors. Its Board of Directors desires to
increase the number of directors from 8 to 16. Advise whether under the provisions of the Companies Act,
2013, the Board can do so?
Answer:
Under Section 149(1) of the Companies Act, 2013 every company shall have a Board of Directors consisting of
individuals as directors and shall have a minimum number of 3 directors in the case of a public company, 2
directors in the case of a private company, and one director in the case of a One Person Company. The
maximum number of directors shall be 15.
The First Proviso to Section 149(1) states that a company may appoint more than 15 directors after passing a
special resolution.
From the provisions of section 149 (1) as above, though the minimum number of directors may vary depending
on whether the company is a public, private or a one-person company, the maximum number of directors is
same for all types of companies i.e., 15 directors.
In the given case since the number of directors is proposed to be increased from 8 to 16, the company will be
required to comply with the following provisions:
(i) Alter its Articles of Association as per the provisions of Section 14 of the Act by passing a special
resolution, so as to increase the number of directors in the Articles from 10 to 16;
(ii) Also take approval for increasing the maximum number of directors from 8 to 16 by means of a special
resolution passed by the members at a duly convened general meeting.
Woman director:
At least one-woman director shall be on the Board of such class or classes of companies as has been prescribed
in Rule 3 provides that the following classes of companies shall appoint at least one-woman director-
(1) every listed company;
(2) every other public company having -
(A) paid–up share capital of one hundred crore rupees or more; or
(B) turnover of three hundred crore rupees or more.
Explanation-For the purposes of having a woman director on the board, it is clarified that the paid-up share
capital or turnover, as the case may be, as on the last date of latest audited financial statements shall be
taken into account.
Compliance by a newly incorporated company: A company, which has been incorporated under the Act and
is covered by the provisions requiring appointment of a woman director, shall comply with such provisions
within a period of six months from the date of its incorporation.
Filling of Intermittent Vacancy of Woman Director: Any intermittent vacancy of a woman director shall be
filled-up by the Board at the earliest but not later than immediate next Board Meeting or 3 months from the
date of such vacancy whichever is later.
Example 1: Sheetal was occupying the office of woman director in a company but due to her sudden death
on 17th March, 2019, the intermittent vacancy so occurred was required to be filled-up at the earliest
because she was the only woman director on the board. The immediate Board meeting was held on 25th
June, 2019. The vacancy of the women director must be filled-up latest by 25th June, 2019 or within three
months from the date of such vacancy i.e., 16th June, 2019 whichever is later.
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Resident Director:
Every company shall have at least one director who stays in India for a total period of not less than one
hundred and eighty-two days during the financial year.
However, in case of a newly incorporated company the above requirement shall apply proportionately at
the end of the financial year in which it is incorporated. [Section 149(3)]
Independent Director:
Specified public companies are required to appoint independent directors on their Board with a view to
boost the level of corporate governance. Such Specified companies are the backbone of any economy and
therefore, they must be managed in the best possible manner including adhering to the specified legal
provisions. An independent director needs to have an independent mindset which should not be unduly
influenced by the other members of the Board; and if such members take any decision which is illegal or not
in the best interest of the company or economy, it must be hindered by the independent directors at the
outset.
Interested Director:
An interested director is one among the other directors who constitute Board of Directors. In fact, when an
existing director becomes interested in a transaction of the company, he is called interested director; and
he needs to disclose his interest at the appropriate forum and at appropriate time.
Executive and Non-Executive Directors:
The Board of Directors may comprise both executive and non-executive directors. The executive directors
are responsible for managing different business operations undertaken by the company. It is their
responsibility that the departments which they head operate smoothly. A whole-time director and managing
director are covered in this category of directors. In contrast, the non-executive directors participate through
Board meetings in discussions relating to framing of policies for the efficient management of the company.
Professional directors and nominee directors are covered in this category of directors. Independent directors
are a type of non-executive directors. They are not as active as executive directors on the board of the
company. They are held to be liable only if they knowingly consented to the wrongful acts.
Appointment of First Directors
Where no provision is made in the articles of a company for the appointment of the first directors, the
subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company
until the directors are duly appointed. [Section 152(1)] In case of a One Person Company (OPC), an individual
being member shall be deemed to be its first director until the director or directors are duly appointed by
the member in accordance with the provisions of this section. [Section 152(1)]
In simple words, the above provisions are discussed below:
Usually, articles of the company contain the names of the first directors. In case it is not so, then the individual
subscribers to the memorandum are deemed to be the first directors. The corporate bodies, if they are also
subscribers, shall not be capable of becoming directors. The first directors shall hold the office until the
directors are duly appointed. In fact, the term of first directors is limited to the holding of first Annual
General Meeting (AGM). So far as OPC is concerned, the individual member of the OPC is deemed as first
director. Thereafter, such member may appoint director or directors as per his requirements.
Appointment of subsequent Directors
Save as otherwise expressly provided in this Act, every director shall be appointed by the company in
general meeting.
At a general meeting, the shareholders of the company (i.e., the owners) gather and take decisions. Generally,
every director shall be appointed by the company in general meeting except where the Companies Act
expressly provides some other procedure for appointment of directors.
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For example, it is expressly provided in the Act that additional directors or alternate directors can be
appointed by the Board of Directors if the articles of the company empower Board in this respect1.
Requirements of Appointment of Director
(a) Allotment of Director Identification Number (DIN): A person shall be appointed as a director of a
company only when he has been allotted DIN under section 154 or any other number as may be
prescribed under section 153.
(b) Providing of DIN and furnishing of Declaration by the proposed Director: Every person proposed
to be appointed as a director by the company in general meeting or otherwise, shall furnish his
Director Identification Number (DIN) or such other number as may be prescribed under Section
153. Further, he shall also furnish a declaration that he is not disqualified to become a director
under this Act.
(c) Written Consent to act as Director: A person appointed as a director shall not act as a director
unless he gives his written consent to hold the office as a director. The consent shall be furnished
to the company on or before his appointment as a director in Form DIR-2.
The company shall file the consent of the director with the Registrar within 30days of such
appointment in Form DIR-12 along with the prescribed fee as prescribed.
Example 2: Mr. Naresh wants to appoint himself as director in Global Services Private Limited. Mr.
Naresh is required to apply for DIN (if he does not have the DIN) thereafter, he can be appointed
as a director in Global Services Private Limited by giving written consent in Form DIR-2 to the
company.
Global Services Private Limited shall have to file the consent of Mr. Naresh with the Registrar
within 30 days of such appointment in Form DIR-12.
(d) Explanatory Statement in case of appointment of Independent Director:In case an independent
director is appointed in the general meeting, an explanatory statement for such appointment
annexed to the notice for the general meeting, shall include a statement that in the opinion of the
Board, he fulfills the conditions specified in this Act for such an appointment.
Exemptions
Non-applicability of Section 152 (5):
(1) Section 152 (5) regarding ‘furnishing of consent to act as a director’ shall not apply in case of Government
company where appointment of the director is done by the Central Government or State Government.
(2) Similar exemption from Section 152(5) is also applicable to a section 8 company.
Note: In both the above cases, the exemption is applicable only if the company has not committed a default
in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar.
Retirement of Directors by Rotation [Section 152(6)]
Section 152 (6) deals with retirement of directors by rotation. The reason behind incorporation of such a
provision in the Statute is that at no stage a self-perpetuating management should take control of the
company. Under the model of self-perpetuating management, the board of directors is allowed to control
its own composition i.e. such board can dictate the terms like how long a director can serve, and even it can
elect and re-elect directors itself. This type of model may not be conducive to the healthy growth of the
company. In effect, shareholders are the owners of the company but they cannot usurp the powers of the
directors and interfere in the matters of managing the company. The concept of rotational directors enables
them not to re-elect a retiring directorfor whom they have an unfavourable opinion.
The provisions of Section 152 (6) are stated as under:
(a) Unless the articles provide for the retirement of all directors at every annual general meeting, not less
than two-thirds of the total number of directors of public company shall—
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(A) be persons whose period of office is liable to determination by retirement of directors by rotation;
and
(B) save as otherwise expressly provided in this Act, be appointed by the company in general meeting.
(b) The remaining directors in the case of any such company shall, in default of, and subject to any regulations
in the articles of the company, also be appointed by the company in general meeting.
(c) At the first annual general meeting of a public company held next after the date of the general meeting
at which the first directors are appointed and at every subsequent annual general meeting, one-third
of such of the directors for the time being as are liable to retire by rotation, or if their number is neither
three nor a multiple of three, then, the number nearest to one-third, shall retire from office.
It is to be noted that the provision regarding ‘retirement by rotation’ is applicable to a public company or a
private company which is subsidiary of a public company. In other words, a private limited company which
is not a subsidiary of a public company, is exempted and therefore, if the articles permit it can appoint all its
directors as non- rotational directors or permanent directors.
The articles of a public company may provide for the retirement of all the directors at every annual general
meeting. If such is not the case, then not less than two-thirds of the total number of directors of that public
company shall be the persons who are liable to retire by rotation. In other words, the articles must provide
that minimum two-thirds of the total number of directors shall be liable to retirement by rotation. Such
directors are called rotational directors.
The term “total number of directors” shall not include independent directors, whether appointed under the
Companies Act, 2013 or any other law for the time being in force, on the Board of a company. Thus, independent
directors are not liable to retire by rotation and therefore, they are non-rotational directors.
Further, any person appointed as a nominee director being nominated by any institution in pursuance of the
provisions of any law or any agreement (like when a financial institution that has been created by an Act of
Parliament nominates a person as its nominee director on the Board of a company which has availed financial
assistance from such institution) cannot be considered as a director liable to retire by rotation. Nominee
director may also be appointed by the Central Government or the State Government by virtue of its
shareholding in a Government company.
One-third of directors to retire at AGM: Once the number of directors who are liable to retire by rotation is
determined, only one-third out of that number shall retire. If such number is neither three nor a multiple of
three, then, the number nearest to one-third, shall be considered and such of the directors shall retire from
office.
Example3: Khatkhata Advisory Limited constituted its board with 12 directors in which 2 directors are
independent directors and 1 director is a nominee director. As per the provision of section 152 of the
Companies Act, 2013, the concept of retirement by rotation of rotational directors shall be applicable to
public company. Therefore, Khatkhata Advisory Limited shall be required to calculate the number of rotational
directors which is liable to retire by rotation.
Total number of directors who are holding their office is 12 directors. It should be noted that at least 2/3rd of
total number of directors shall be liable to retire by rotation. However, independent director and nominee
director shall not be counted in “total number of the directors”. Thus, 12 Directors less 3 Directors i.e. 9
directors shall be counted for “total number of the directors”.
Here, 6 directors (9 * 2/3rd =6) shall be liable to retire by rotation. Now, 1/3rd of directors liable to retire by
rotation (i.e. 6 * 1/3rd = 2 directors), shall actually retire by rotation at AGM.
Example 4:A company is having 6 directors. Directors liable to retire by rotation: 6 * 2/3 i.e. 4
No. of directors to retire at AGM: 4* 1/3, i.e. 1.33 or nearest to 1/3rd is 1.
Example 5:A company is having 7 directors.
Directors liable to retire by rotation 7*2/3 i.e. 4.7 or 5 (not less than two-third) No. of directors to retire at
AGM: 5* 1/3 i.e. 1.67 or nearest to 1/3rd is 2.
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Example 6:A company is having 9 directors out of which 3 are independent directors.
The ‘total number of directors’ for the purpose of calculation of number of rotational directors shall be 6 only
because 3 independent directors are to be excluded. Rest of the calculations shall be as per Example given
above.
(d) The directors who actually retire by rotation at every annual general meeting shall be those who have
been longest in office since their last appointment. If two or more directors were appointed on the
same day, retirement by rotation will be decided between them by mutual agreement among
themselves or by lot as the case may be.
The above provision (d) clarifies the basic question that after the determination of number of directors
liable to retire by rotation, who should actually retire at the AGM? For this purpose it is provided that the
directors who have been longest in the office since their last appointment are the directors who need to be
retired first. However, it may happen that some of those were appointed as directors on the same day. In that
case, if there exists any mutual understanding relating to retirement among such directors, that should be
followed; otherwise the determination shall be done by draw of lots.
(e) At the annual general meeting at which a director retires as aforesaid, the company may fill up the
vacancy by appointing the retiring director or some other person thereto.
Re-appointment: When a director is retired a vacancy is created. To fill that vacancy, the company may re-
appoint the retiring director itself at the AGM. If the retiring director is not re-appointed, the company may
appoint some other person at his place but in that case provisions of Section 1603 are to be complied with.
The clause regarding appointment of directors for filling the vacancies created by retiring directors is quite
important. However, the number of directors should not fall short of minimum directors required in a
company at any stage. However, so long as the clause regarding minimum required directors is fulfilled the
company may also resolve not to appoint anyone in place of retiring director.
In case Annual General Meeting is not held on due date, then the retirement of rotational directors cannot
be postponed to that particular date when the AGM shall be held in future. The directors who are liable to
retire must vacate the office of director immediately when the AGM is ought to have been held.
Non-rotational Directors: Remaining 1/3rdor less number of total directors (after determining the number
of rotational directors) are not liable to retire by rotation. These are called non-rotational directors. They
may also be appointed at the general meeting or as per the provisions contained in the articles of the
company.
Deemed re-appointment of retiring Directors under certain circumstances [Section 152(7)]
Section 152 (7) provides the way for deemed appointment of a retiring director as under:
(f) Adjournment of general meeting: If the vacancy of the retiring director is not so filled- up and the
meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the
same day in the next week, at the same time and place.
In case that day is a national holiday, the meeting shall be adjourned till the next succeeding day which
is not a holiday, at the same time and place.
(g) Deemed re-appointment: If at the adjourned meeting also, the vacancy of the retiring director is not
filled up and that meeting also has not expressly resolved not to fill the vacancy, the retiring director
shall be deemed to have been re-appointed at the adjourned meeting with immediate effect.
Exceptions to deemed re-appointment: In the following circumstances, a retiring director shall not be deemed
as re-appointed:
(A) if at that meeting or at the previous meeting, a resolution for the re-appointment of such director has
been put to the meeting and lost i.e., his re-appointment has not been considered favorably because of
non-passing of resolution;
(a) choose not more than the specified limit of companies, in which he wished to continue to hold the
office of director;
(b) resign his office as director in the other remaining companies; and
(c) intimate the choice made by him to each of the companies in which he was director and to the
jurisdictional Registrar. [Section 165(3)]
Any resignation so made was to become effective immediately on the dispatch thereof to the company
concerned. [Section 165(4)]
After dispatching the resignation of his office as director/non-executive director or after the completion of
the transition period of one year (i.e., after 31-03-2015), whichever was earlier, no such person would act as
director in more than the specified number of companies. [Section 165(5)]
In other words, after the completion of transition period of one year on 31-03-2015, no person is permitted
to hold more directorships than the maximum specified.
I. Removal of Director by the Shareholders: Section 169 of the Act contains provisions for removal of
directors by the shareholders. The way shareholders are empowered to appoint a director, in the same
way they can also remove a director. The procedure of removal may be in the following manner:
(a) Requirement of Ordinary Resolution: A company may, by ordinary resolution, remove a director before
the expiry of the period of his office except the following: when a director is appointed by the Tribunal
under Section 242.
(b) when as per Section 163, two-thirds or more of the total number of directors are appointed according
to the principle of proportional representation, then such directors cannot be removed.
For example, if a company has eight directors, of which six were appointed according to the principle of
proportional representation. In such a case, only two directors which were not appointed following the
system of proportional representation, can only be removed by the shareholders.
(ii) Requirement of Special Resolution in case of removal of re-appointed independent director: An
independent director re-appointed for second term under Section 149(10) shall be removed by the
company only by passing a special resolution38.
Note: Under both the clauses (i) and (ii) above, the director to be removed shall be given a reasonable
opportunity of being heard before his removal.
(iii) Special Notice: A special notice as per Section 115 shall be required for proposing any resolution to
remove a director.
Special notice under Section 115 is required to be signed by:
(i) members holding not less than 1% of total voting power; or
(ii) members holding shares on which at least Rs. 5,00,000 has been paid in the aggregate.
Such notice shall be sent by the members not earlier than 3 months but at least 14 days before the meeting
at which the resolution is desired to be moved.
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Appointment and Remuneration of
Managerial Personnel
at a specified
percentage of
the net profits of
the company or
by way of partly by one
monthly way and partly
payment or by the other
Mode of
payment
The term used in Section 197 (6) is ‘director’ which may be taken to mean all types of directors i.e., MD
or whole-time director or executive/non-executive director. Further, remuneration can be paid on
monthly basis or on the basis of specified percentage of the net profits. Even, a combination of both
the methods may also be adopted.
However, the remuneration in excess of above limits may be paid if the resolution passed by the shareholders
is a special resolution.
Explanation I.—For the purposes of Section II of this Part, “effective capital” means the aggregate of the
paid-up share capital (excluding share application money or advances against shares); amount, if any, for the
time being standing to the credit of share premium account; reserves and surplus (excluding revaluation
reserve); long-term loans and deposits repayable after one year (excluding working capital loans, over
drafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements) as
reduced by the aggregate of any investments (except in case of investment by an investment company
whose principal business is acquisition of shares, stock, debentures or other securities), accumulated losses
and preliminary expenses not written off.
Explanation 2. —
(a) Where the appointment of the managerial person is made in the year in which company has been
incorporated, the effective capital shall be calculated as on the date of such appointment;
(b) In any other case the effective capital shall be calculated as on the last date of the financial year
preceding the financial year in which the appointment of the managerial person is made.
Explanation 3- It is hereby clarified that for a period less than one year, the limits shall be pro- rated.
Thus, if a managerial person is employed for a part of the year, the remuneration payable to him shall be pro-
rated.
Limits under (B):
In case of a managerial person who is functioning in a professional capacity, remuneration as per item (A)
may be paid, if such managerial person:
· is not having any interest in the capital of the company or its holding company or any of its subsidiaries
directly or indirectly or through any other statutory structures (i.e., does not hold any shares subject to
the deeming provision below);
A managerial person shall be eligible for the following perquisites which shall not be included in the
computation of the ceiling on remuneration specified in Section II and Section III:
• Contribution to provident fund, superannuation fund or annuity fund to the extent these either
singly or put together are not taxable under the Income-tax Act, 1961;
• Gratuity payable at a rate not exceeding half a month’s salary for each completed year of service;
and
• Encashment of leave at the end of the tenure.
• In addition to the perquisites specified in paragraph 1 of this section, an expatriate managerial
person (including a non-resident Indian) shall be eligible to the following perquisites which shall
not be included in the computation of the ceiling on remuneration specified in Section II or Section
III:
• Children’s education allowance: In case of children studying in or outside India, an allowance
limited to a maximum of rupees 12,000 per month per child or actual expenses incurred, whichever
is less. Such allowance is admissible up to a maximum of two children.
• Holiday passage for children studying outside India or family staying abroad: Return holiday
passage once in a year by economy class or once in two years by first class to children and to the
members of the family from the place of their study or stay abroad to India if they are not residing
in India, with the managerial person.
• Leave travel concession: Return passage for self and family in accordance with the rules specified
by the company where it is proposed that the leave be spent in home country instead of anywhere
in India.
15. SECTION V—Remuneration payable to a managerial person in two companies:
Subject to the provisions of sections I to IV, a managerial person shall draw remuneration from one or
both companies, provided that the total remuneration drawn from the companies does not exceed the
higher maximum limit admissible from any one of the companies of which he is a managerial person.
16. PART III OF SCHEDULE V- Provisions applicable to Parts I and II
(a) The appointment and remuneration referred to in Part I and Part II of this Schedule shall be subject
to approval by a resolution of the shareholders in general meeting.
(b) The auditor or the Secretary of the company or where the company is not required to appoint a
Secretary, a Secretary in whole-time practice shall certify that the requirement of this Schedule
have been complied with and such certificate shall be incorporated in the return filed with the
Registrar.
3
every six calendar months. This is subject to the conditions that the company
has not committed a default in filing its financial statements under Section 137
or Annual Return under Section 92 with the Registrar.
2. in case of private companies, for sub-section (5) of Section 173, the following
sub-section shall be substituted:
Thus, the directors besides meeting in person, are also permitted to meet through electronic mode i.e.
video conferencing or other prescribed audio-visual means.
Meaning of the term “video conferencing or other audio-visual means”: It refers to audio-visual electronic
communication facility employed which enables all the persons participating in a meeting to communicate
concurrently with each other without an intermediary and to participate effectively in the meeting. [as per
Explanation to Rule 3]
Essentials of audio-visual means: According to Section 173 (2), the audio-visual means should be capable of-
· recording and recognising the participation of the directors; and
· recording and storing the proceedings of such meetings along with date and time.
Matters which cannot be dealt with in a meeting through electronic mode3: The Central Government may,
by notification, specify matters which shall not be dealt with in a meeting through video conferencing and
other audio-visual means. In this respect, Rule 4 specifies the following matters which shall not be considered
in any meeting held through video conferencing or other audio-visual means:
(i) the approval of the annual financial statements;
(ii) the approval of the Board’s report;
(iii) the approval of the prospectus;
(iv) the Audit Committee Meetings for consideration of financial statement including consolidated financial
statement if any, to be approved by the board under sub-section (1) of Section 134 of the Act, and
(v) the approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover.
Rule 5 provides that a resolution in draft form may be circulated to the directors together with the necessary
papers for seeking their approval, by electronic means which may include e-mail or fax.
(ii) When a resolution cannot be passed by circulation [Proviso to Section 175 (1)]: If at least 1/3rd of the
total number of directors of the company for the time being require that any resolution under circulation
must be decided at a meeting, the chairperson shall put the resolution to be decided at a meeting of
the Board (instead of being decided by circulation).
(iii) Noting of passed resolution in next meeting [Section 175 (2)]: A resolution that has been passed by
circulation shall have to be necessarily noted in the next meeting of board or the committee thereof, as
the case may be, and made part of the minutes of such meeting.
Example 6: In respect of certain matter which did not require to be decided at a board meeting, PQR Ltd.
thought it prudent to pass resolution thereof by circulation. Accordingly, a draft resolution was circulated
among all the six directors by e-mail. Three directors did not give their consent and desired that the resolution
was required to be decided at a meeting. Would they succeed?
Companies not required to constitute a Nomination and Remuneration Committee: Following unlisted
companies are not covered by Rule 4 (1) of the Companies (Appointment and Qualification of Directors)
Rules, 2014; and therefore, are not required to constitute a Nomination and Remuneration Committee:
(a) a joint venture;
(b) a wholly owned subsidiary; and
(c) a dormant company as defined under Section 455 of the Act.
When a company ceases to constitute a Nomination and Remuneration Committee: A company which was
obligated to constitute a Nomination and Remuneration Committee, shall not be required to constitute
such Committee if it ceases to fulfill any of the three conditions relating to paid-up share capital or turnover
or outstanding loans, etc. [as laid down in Third Proviso to Rule 4 (1)9] for three consecutive years. It shall
again be required to constitute a Nomination and Remuneration Committee if it starts meeting any of such
conditions.
Clarification: Explanation to Rule 4 (1)10 clarifies that the paid-up share capital or turnover or outstanding
loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial
statements shall be taken into account.
(ii) Composition of Nomination and Remuneration Committee:
(a) The NRC shall consist of 3 or more non-executive directors out of which not less than one-half
shall be independent directors.
(b) The Chairperson (whether executive or non-executive) of the company shall not chair such a
committee. However, he may be appointed as a member of the committee.
(iii) Functions of the Nomination and Remuneration Committee: The various functions of NRC shall be as
under:
(ii) Specific disclosure of interest: According to Section 184 (2), a director of a company shall make a specific
disclosure of interest whenever he, in any way, whether directly or indirectly, is concerned or interested
in a contract or arrangement or proposed contract or arrangement entered into or to be entered into:
(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
(b) with a body corporate in which such director is a promoter, manager, Chief Executive Officer; or
(c) with a firm or other entity in which, such director is a partner, owner or member.
When to make specific disclosure of interest: The disclosure shall be made as under:
· The interested director shall disclose the nature of his concern or interest at the meeting of the Board
in which the contract or arrangement is discussed for the first time; and
· He shall not participate in such meeting. ‘Non-participation’ implies that he shall not discuss the
matter relating to such contract and also shall not vote if there happens to be a voting in this connection.
· It may happen that any director is not so concerned or interested at the time of entering into such
contract or arrangement. However, if he becomes interested after the contract or arrangement is
entered into, he shall disclose his concern or interest forthwith when he becomes so or at the first
meeting of the Board held after his becoming concerned or interested.
Exception/Modification
1. In case of a private company which has not committed a default in filing its financial statements
under Section 137 or Annual Return under Section 92 with the Registrar, the provisions of Section
184 (2) shall apply with the exception that the interested director may participate in such meeting
after disclosure of his interest.
2. In respect of a Section 8 company which has not committed a default in filing its financial statements
under Section 137 or Annual Return under Section 92 with the Registrar, the provisions of Section
184(2) shall apply only if the transaction with reference to Section 188 on the basis of terms and
conditions of the contract or arrangement exceeds one lakh rupees.
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(iii) Contract voidable at the option of company if there is non-disclosure [Section 184(3)]: A contract or
arrangement entered into by the company shall be voidable at its option if the interested director who
has a direct or indirect concern or interest in such contract or arrangement, does not disclose his
interest as required by Section 184 (2) or if such director participates in the meeting where such contract
or arrangement is discussed.
It may be noted that the contract is voidable and not void and the option of rescinding the contract lies
with the company and not with the interested director. Thus, if the company decides to honour the
contract, the interested director cannot rescind it because of irregularity.
(iv) Punishment for contravention [Section 184(4)]: If a director of the company contravenes the provisions
of Section 184 (1) and (2) i.e. does not disclose his interest or furnishes wrong information in this
respect, he shall be punishable as under:
· with imprisonment up to one year; or
· with fine up to ` one lakh; or
· with both.
(v) No restriction on directors: Nothing in Section 184 shall be taken to prejudice the operation of any rule
of law restricting a director of a company from having any concern or interest in any contract or
arrangement with the company.
(vi) Exemption from disclosure if the holding is up to two per cent: According to Section 184 (5) (b), the
provisions of Section 184 regarding disclosure by interested director shall not apply to any contract or
arrangement entered into or to be entered into between two companies where any of the directors of
the either company or two or more of them together holds or hold not more than 2% of the paid-up
share capital in the other company.
Example 11: Y Ltd. entered into a contract with Z Ltd. which has a paid-up capital of `50 lakhs. One of the
directors of Y Ltd. is holding equity shares of the nominal value of ` 50,000 in Z Ltd. but he did not disclose his
interest at the appropriate Board meeting. Is the concerned director liable for punishment for such non-
disclosure?
Answer: As per section 184 (2) of the Companies Act, 2013 the disclosure of interest by directors is not
required in any contract or arrangement between two companies where any of the directors of one company
or two or more of them together holds or hold not more than 2% of the paid-up share capital in the other
company. In the present case, the holding of the director of Y Ltd. in Z Ltd. is only 1% [i.e. (50,000/50,00,000)*100
= 1%] which is less than 2%. Therefore, he is not liable for any punishment if he does not disclose his interest
regarding holding of equity shares in Z Ltd.
DEFECTS IN APPOINTMENT OF DIRECTORS NOT TO INVALIDATE ACTIONS TAKEN [SECTION 176]
Section 176 of the Act contains protective provisions by which actions taken by a director shall not get
invalidated if subsequently it is noticed that there happened to be defects in his appointment. The validation
of actions provides a kind of protection to the company as well as the third parties. The provisions of Section
176 are stated as under:
(i) No act done by a person as a director shall be deemed to be invalid, if it was subsequently noticed that
his appointment was invalid by reason of:
any defect; or
disqualification; or
had been terminated by virtue of any provision contained in the Companies Act, 2013 or in the
articles of the company.
(ii) Acts not valid if done after noticing his appointment to be invalid or to have terminated: It is provided
that Section 176 shall not be deemed to give validity to any act done by the director after his appointment
has been noticed by the company to be invalid or to have terminated.
· the particulars of contracts or arrangements with a body corporate or firm or other entity as
mentioned under Section 184 (2), in which any director is, directly or indirectly, concerned or
interested; and
· the particulars of contracts or arrangements with a related party with respect to transactions to
which Section 188 applies.
(iii) When to make entries in the Register: As per Rule 16, the entries in the Register shall be made at once
and in the chronological order. They shall be authenticated by the Company secretary or any other
person authorised by the Board.
(iv) Register to be signed [Section 189(1)]: The register, after being duly filled and updated, shall be placed
before the next meeting of the Board and signed by all the directors present at the meeting.
(v) Disclosure to be made by a director or KMP [Section 189(2)]: Every director or key managerial personnel
(KMP) shall, within a period of 30 days of his appointment, or relinquishment of his office, as the case
may be, disclose the particulars specified in Section 184(1) relating to his concern or interest in the
other associations which are required to be included in the register or such other information relating
to himself as may be prescribed.
(vi) Register to be kept at registered office [Section 189(3)]: The register shall be kept at the registered
office of the company and it shall remain open for inspection at such office during business hours.
(vii) Preservation and custody: According to Rule 16 (3), the register shall be preserved permanently and
shall be kept in the custody of the Company Secretary or any other person authorised by the Board for
the purpose.
(viii) Extracts from register [Section 189(3) and Rule 16 (4)]: The company shall provide extracts from such
register to a member of the company on his request, within seven days from the date on which such
request is made upon the payment of such fee as may be specified in the articles of the company,
subject to a maximum of `10 per page.
(ix) Register to be produced at AGM [Section 189(4)]: The register shall be produced at the commencement
of every annual general meeting (AGM). It shall remain open and accessible during the continuance of
the meeting to any person having the right to attend the meeting. Thus, even a proxy has a right to
inspect the Register.
(x) Exceptions [Section 189(5)]: Section 189(1) shall not apply to any contract or arrangement i.e. the
particulars of a contract or arrangement shall not be entered in the Register-
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Inspection, Inquiry and Investigation
After giving a reasonable opportunity of being heard to the parties concerned, that the affairs of the company
ought to be investigated by an inspector or inspectors appointed by the Central Government and where
such an order is passed by the Tribunal, the Central Government shall appoint one or more competent
persons as inspectors to investigate into the affairs of the company in respect of such matters and to report
thereupon to it in such manner as the Central Government may direct.
Amalgamation
Amalgamation means an amalgamation pursuant to the provisions of the
Companies Act, 2013 or any other statute which may be applicable to companies
and includes ‘merger’.
Transferor Company means the company which is amalgamated into another
company.
Transferee Company means the company into which a transferor company is
amalgamated.
Merger, reconstruction and amalgamation is one of the schemes of compromise
and arrangement.
Reconstruction
It is usually of only one company while amalgamation involves two or more
companies.
‘Reconstruction’ literally means ‘building again’. It implies reorganization with
alteration or modification of rights of members or creditors or both.
Existing business is carried out in some altered form.
Reconstruction usually involves reduction in value of shares, making fully paid-
up shares as partly paid so that further amounts can be called, transfer of
undertaking to another company, take-over by another company, satisfaction of
rights of shareholders by allotting them shares in new company etc.
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Types of Amalgamations
Thus, amalgamation is blending of two or more existing undertakings into one undertaking , the shareholders
of each blending company becoming substantially the shareholders in the company which is to carry on the
blending undertakings. There may be amalgamation either by the transfer of two or more undertakings to a
new company, or by the transfer of one or more undertakings to an existing company.
Now we will see the two types of amalgamations in detail -
Amalgamation in the Nature of Merger
Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions -
(i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and
liabilities of the transferee company.
(b) the allotment or appropriation by the transferee company of any shares, debentures, policies or other
like instruments in the company which, under the compromise or arrangement, are to be allotted or
appropriated by that company to or for any person:
Provided that a transferee company shall not, as a result of the compromise or arrangement, hold any
shares in its own name or in the name of any trust whether on its behalf or on behalf of any of its
subsidiary or associate companies and any such shares shall be cancelled or extinguished;
(c) the continuation by or against the transferee company of any legal proceedings pending by or against
any transferor company on the date of transfer;
(d) dissolution, without winding-up, of any transferor company;
(e) the provision to be made for any persons who, within such time and in such manner as the Tribunal
directs, dissent from the compromise or arrangement;
(f) where share capital is held by any non-resident shareholder under the foreign direct investment norms
or guidelines specified by the Central Government or in accordance with any law for the time being in
force, the allotment of shares of the transferee company to such shareholder shall be in the manner
specified in the order;
(g) the transfer of the employees of the transferor company to the transferee company;
(h) where the transferor company is a listed company and the transferee company is an unlisted company,—
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Prevention of Oppression and
Mismanagement
Concept
Under the Companies Act, a question arises that why would the company law even
introduce such a chapter, when all the provisions are super clear and explanatory?
The answer of the question is “law evaders always find a way to the loophole”.
We will understand this through an example – Let us imagine a situation where a
company Rexagon Private Limited, has 7 shareholders – Mr. Abhishek, Mr. Archit, Mr.
Ankur, Mr. Anupam, Mr. Himanshu, Mr. Manas and Mr. Rajan. Out of these, Mr. Abhishek,
Mr. Archit and Mr. Ankur hold around 94% shares of the company. Now, at the general
meeting of the company, when any resolution is required to be passed whether
ordinary or special, such resolution shall be passed in
the favour, if these three shareholders vote in the favour of resolution as they have
majority shareholding of the company. Therefore, the voice of the minority
shareholders i.e. Mr. Anupam, Mr. Himanshu, Mr. Manas and Mr. Rajan will be oppressed
whether individually or jointly.
This is because the corporate law works on the principle of democracy and it becomes
more vulnerable as it is reckoned with the number of shares and not with the
number of individuals involved. This is known as the famous ‘Rule of Majority’ or
which is also called the ‘Foss v. Harbottle’ Rule, which is a landmark judgement in the
history of company law. It states that the ones who hold majority of shares “rule” the
company (Foss v. Harbottle (1843) 2 Hare 461). The judgement held that if the majority
shareholders have made a decision to take or not to take a certain action, it shall be
respected. Also, the courts are not expected to ordinarily intervene to protect the
minority interest affected by the resolution.
“What happened in Foss v. Harbottle?”
In the said case, two shareholders commenced legal action against the promoters and
directors of the company alleging that they had misapplied the company’s assets and
6
had improperly mortgaged the company property. The Court rejected the two
shareholders’ plea and held that a breach of duty by the directors of the company was
wrong done to the company for which it (i.e. the company) alone could sue. In other
words, the proper plaintiff in that case was the company and not the two individual
shareholders. Thus, the Foss v. Harbottle derives two major rules or principles of the
Section 241(1) addresses complaints on the conduct of the company’s affairs, which could be a prejudicial to
public interest and prejudicial or oppressive to the members or the company.
The provision gives right to the members to move the Tribunal not only on complaints of oppression but also
on complaints that the conduct of the affairs of the company have been or are ‘prejudicial’ to them.
Thus, section 241(1)(a) also includes past acts of oppression.
This section also corresponds to the remedy for mismanagement in the affairs of the company. It states that
a member can complain that “the affairs of a company are being conducted in a manner prejudicial to public
interest or in a manner prejudicial to the interests of the company”.
So, a company can complain in case a material change in the management is likely to be prejudicial to the
interest of the members.
(2) Central Government suo moto to apply the Tribunal: The Central Government, if it is of the opinion that
the affairs of the company are being conducted in a manner prejudicial to public interest, it may itself
apply to the Tribunal for an order.
(3) Where in the opinion of the Central Government there exist circumstances suggesting that—
(a) any person concerned in the conduct and management of the affairs of a company is or has been
in connection therewith guilty of fraud, misfeasance, persistent negligence or default in carrying
out his obligations and functions under the law or of breach of trust;
(b) the business of a company is not or has not been conducted and managed by such person in
accordance with sound business principles or prudent commercial practices;
(c) a company is or has been conducted and managed by such person in a manner which is likely to
cause, or has caused, serious injury or damage to the interest of the trade, industry or business to
which such company pertains; or
(d) the business of a company is or has been conducted and managed by such person with intent to
defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful
purpose or in a manner prejudicial to public interest,
Examples
1. In case, where the shareholding of the petitioner has reduced below 10 per cent due to fresh issue/
allotment of shares, which is challenged as oppressive, the maintainability of the petition would be
reduced after determining the validity of the issue of allotment. The petition shall be maintainable
and the petitioner shall be entitled to relief.
2. The requirement of shareholding up to the prescribed percentage is mandatory. It must be shown with
the help of documentary evidences. Possession of share certificates is a prima facie proof that the
petitioner is a shareholder. There is a presumption that a share certificate is a valid title to shares.
3. The consent to be given by a shareholder is reckoned at the beginning of the proceedings. The
withdrawal of consent by any shareholder during the course of proceedings shall not affect the
maintainability of the petition.
Questions
1. ABC Private Limited is a company in which there are eight shareholders. Can a member holding less
than one-tenth of the share capital of the company apply to the Tribunal for relief against oppression
and mismanagement? Give your answer according to the provisions of the Companies Act, 2013.
2. The issued and paid-up capital of MNC Limited is Rs. 5 crores consisting of 5,00,000 equity shares of Rs.
100 each. The said company has 500 members. A petition was submitted before the Tribunal signed by
80 members holding 10,000 equity shares of the company for the purpose of relief against oppression
and mismanagement by the majority shareholders. Examining the provisions of the Companies Act,
2013, decide whether the said petition is maintainable. Also explain the impact on the maintainability
of the above petition, if subsequently 40 members, who had signed the petition, withdrew their
consent.
3. A group of shareholders consisting of 25 members decide to file a petition before the Tribunal for relief
against oppression and mismanagement by the Board of Directors of M/s Fly By Night Operators Ltd.
The company has a total of 300 members and the group of 25 members holds one –tenth of the total paid
–up share capital accounting for one-fifteenth of the issued share capital. The main grievance of the
group is the due to mismanagement by the board of directors, the company is incurring losses and the
company has not declared any dividends even when profits were available in the past years for
declaration of dividend. In the light of the provisions of the Companies Act, 2013, advise the group of
shareholders regarding the success of (i) getting the petition admitted and (ii) obtaining relief from the
Tribunal.
Concept
Companies Act, 2013 contains provisions related to winding up of companies. However,
Insolvency and Bankruptcy Code, 2016 which has into enforcement in 2016, has made
substantial changes in these provisions. Provisions for application for winding up for
“Inability to pay debts” has been omitted.
As per Section 2(94A) of the Companies Act, 2013, the term “winding up” means
winding up under this Act or liquidation under the Insolvency and Bankruptcy Code,
2016, as applicable.
MODES OF WINDING UP [SECTION 270]
The provisions of Part I of the Chapter of the Companies Act, 2013 shall apply to the
winding up of a company by the Tribunal under this Act.
CIRCUMSTANCES IN WHICH COMPANY MAY BE WOUND UP BY TRIBUNAL
[SECTION 271]
A company may, on a petition under section 272, be wound up by the Tribunal—
(a) if the company has, by special resolution, resolved that the company be wound
up by the Tribunal;
(b) if the company has acted against the interests of the sovereignty and integrity
of India, the security of the State, friendly relations with foreign States, public
order, decency or morality;
(c) if on an application made by the Registrar or any other person authorised by the
Central Government by notification under this Act, the Tribunal is of the opinion
that the affairs of the company have been conducted in a fraudulent manner or
the company was formed for fraudulent and unlawful purpose or the persons
concerned in the formation or management of its affairs have been guilty of
fraud, misfeasance or misconduct in connection therewith and that it is proper
that the company be wound up;
7
(d) if the company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive
financial years; or
(e) if the Tribunal is of the opinion that it is just and equitable that the company
should be wound up.
(3) Petition by registrar: The Registrar shall be entitled to present a petition for winding up under section
271, except on the grounds specified in clause (a) 1of that section.
Provided that the Registrar shall obtain the previous sanction of the Central Government to the
presentation of a petition:
Provided further that the Central Government shall not accord its sanction unless the company has
been given a reasonable opportunity of making representations.
If any application to the Tribunal seeking leave under this section is obtained
shall be disposed of by the Tribunal within sixty days.
(2) In case proceeding pending in appeal: Nothing in sub-section (1) shall apply to any proceeding pending
in appeal before the Supreme Court or a High Court.
Example 1: A provisional liquidator is appointed by the Tribunal for initiating the winding up process against
M/s TRS Ltd. An appeal against M/s TRS Ltd. is pending before the High Court on the date of appointment of
the provisional liquidator. The management is of the opinion that since the provisional liquidator is appointed
by the Tribunal, all the pending suits and actions can be preceded only after the permission of the Tribunal.
Verify the contention of M/s TRS Ltd.
Answer: In the light of section 279(2), permission of Tribunal is not required in case of appeal against High
Court.
Question:
Due to an unprecedented flood, all the fixed assets of a Company were damaged extensively beyond
renovation or repair. The costs of replacement of assets were huge and the sum insured on the fixed assets
did not cover all the assets. Therefore, the operations of the Company were permanently discontinued.
Meanwhile, based on a winding-up petition filed by the secured creditors, the High Court passed a winding-
up order. The workers of the Company opposed to the winding-up petition and also filed an appeal against
the winding-up order. The workers are not sure whether their appeal would be heard in the winding-up
proceedings. Examine, under the provisions of the Companies Act, 2013, whether the appeal filed by the
workers would succeed and their dues / interest will be protected in priority?
Answer:
According to section 279 of the Companies Act, 2013, when a winding up order has been passed or a provisional
liquidator has been appointed, no suit or other legal proceeding shall be commenced, or if pending at the
date of the winding up order, shall be proceeded with, by or against the company, except with the leave of
the Tribunal and subject to such terms as the Tribunal may impose.
It is further provided that any application to the Tribunal seeking leave under this section shall be disposed
of by the Tribunal within sixty days.
However, the above provision shall not apply to any proceeding pending in appeal before the Supreme
Court or a High Court.
Question:
Info-tech Overtrading Ltd. was ordered to be compulsory wound up by an order dated 10 th March, 2019 by
the Tribunal. The official liquidator who has taken control of the assets and other records of the company has
noticed that:
(i) One of the contributory whose calls are pending to be paid is about to leave India for evading payment
of calls and;
(ii) A person having books of accounts of the company his possession may abscond to avoid examination of
books of accounts in respect of the affairs of the company.
Apprehending such possibilities, Tribunal detained such contributory for next 6 month disallowing him to
leave India as well as arrest & seized books of accounts from the person which may possibly abscond to avoid
examination of the affairs of the company.
Referring to the provisions of Companies Act, 2013, answer the following in current scenario:
(i) What is the validity of Tribunal’s order for detention of contributory disallowing him to leave India?
(ii) Is it correct from Tribunal’s part to arrest and seize books of accounts from the person planning to
abscond to avoid examination of books of accounts in respect of the affairs of the company?
Answer:
According to section 301 of the Companies Act, 2013, at any time either before or after passing a winding up
order, if the Tribunal is satisfied that
a contributory or
a person having property, accounts or papers of the company in his possession
(1) If any person, who is or has been an officer of a company which, at the time of the commission of the
alleged offence, is being wound up, by the Tribunal under this Act or which is subsequently ordered to
be wound up by the Tribunal under this Act—
(a) does not, to the best of his knowledge and belief, fully and truly disclose to the Company Liquidator
all the property, movable and immovable, of the company, and how and to whom and for what
consideration and when the company disposed of any part thereof, except such part as has been
disposed of in the ordinary course of the business of the company;
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Companies incorporated outside India
1. DEFINITION
Foreign Company [Section 2(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.
“electronic mode” means carrying out electronically based, whether main server
is installed in India or not, including, but not limited to -
(a) business to business and business to consumer transactions, data interchange
and other digital supply transactions;
(b) offering to accept deposits or inviting deposits or accepting deposits or
subscriptions in securities, in India or from citizens of India;
(c) financial settlements, web-based marketing, advisory and transactional
services, database services and products, supply chain management;
(d) online services such as telemarketing, telecommuting, telemedicine, education
and information research; and
(e) all related data communication services,
whether conducted by e-mail, mobile devices, social media, cloud computing,
document management, voice or data transmission or otherwise.
Example 1: Zakpak Ltd. is a shipping company incorporated in Japan. The Company
has set up a branch office in India after obtaining necessary approvals from RBI.
Branch Offices are generally considered as a reflection of the Parent Company’s office.
Thus, branch offices of a company incorporated outside India are considered as a
place of business for conducting business activity in India and will be required to
follow provisions of this chapter and such other provisions as may be specified
elsewhere under Companies Act, 2013.
Question:
9
DEJY is a Company Limited incorporated in Singapore desires to establish a branch
office at Mumbai. You being a practicing Chartered Accountant have been appointed
by the company as a liaison officer for compliance of legal formalities on behalf of
the company. Examining the provisions of the Companies Act, 2013,answer the
following:
16. COMPANY’S FAILURE TO COMPLY WITH PROVISIONS OF THIS CHAPTER NOT TO AFFECT
VALIDITY OF CONTRACTS, ETC [SECTION 393]
Any failure by a company to comply with the provisions of Chapter XXII of the Companies Act, 2013, shall not
affect the validity of any contract, dealing or transaction entered into by the company or its liability to be
sued in respect thereof. However, the company shall not be entitled to bring any suit, claim any set-off, make
any counter-claim or institute any legal proceeding in respect of any such contract, dealing or transaction,
until the company has complied with the provisions of the Companies Act, 2013, applicable to it.
Miscellaneous Provisions
REGISTERED VALUER
(i) Valuation: Where a valuation is required to be made in respect of any
property,
stocks,
shares,
debentures,
securities,
goodwill,
any other assets (herein referred to as the assets) or
net worth of a company or its liabilities
under the provision of this Act, it shall be valued by a person having such
qualifications and experience, registered as a valuer and being a member of an
organisation recognised, in such manner, on such terms and conditions as may
be prescribed and appointed by the audit committee or in its absence by the
Board of Directors of that company.
(ii) Role of Valuer: The valuer appointed under sub-section (1) shall,—
(a) make an impartial, true and fair valuation of any assets which may be
required to be valued;
(b) exercise due diligence while performing the functions as valuer;
(c) make the valuation in accordance with such rules as may be prescribed;
and
(d) not undertake valuation of any assets in which he has a direct or indirect
interest or becomes so interested at any time during a period of three
years prior to his appointment as valuer or three years after the valuation
of assets was conducted by him.
(iii) Contravention: If a valuer contravenes the provisions of this section or the rules
10 made thereunder, the valuer shall be punishable with fine which shall not be
less than Rs. 25,000 but which may extend to Rs. 1 Lakh.
the persons in charge of the management of the company shall, notwithstanding that the company has been
notified as dissolved—
(a) be jointly and severally liable to any person or persons who had incurred loss or damage as a
result of the company being notified as dissolved; and
(b) be punishable for fraud in the manner as provided in section 447.
(2) Recommendation for prosecution: The Registrar may also recommend prosecution of the persons
responsible for the filing of an application.
[V] Appeal to Tribunal [Section 252]
(1) Aggrieved person to file an appeal against the order of registrar: Any person aggrieved by an order of
the Registrar, notifying a company as dissolved under section 248, may file an appeal to the Tribunal
within a period of three years from the date of the order of the Registrar and if the Tribunal is of the
opinion that the removal of the name of the company from the register of companies is not justified in
view of the absence of any of the grounds on which the order was passed by the Registrar, it may order
restoration of the name of the company in the register of companies:
Reasonable opportunity of representations given to registrar: Before passing any order under this
section, the Tribunal shall give a reasonable opportunity of making representations and of being heard
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the Registrar,
the company and
all the persons concerned.
Restoration of name of company: If the Registrar is satisfied, that the name of the company has been
struck off from the register of companies either inadvertently or on the basis of incorrect information
furnished by the company or its directors, which requires restoration in the register of companies, he
may within a period of three years from the date of passing of the order dissolving the company under
section 248, file an application before the Tribunal seeking restoration of name of such company.
(2) Order of tribunal to be filed with register: A copy of the order passed by the Tribunal shall be filed by
the company with the Registrar within thirty days from the date of the order and on receipt of the order,
the Registrar shall cause the name of the company to be restored in the register of companies and shall
issue a fresh certificate of incorporation.
(3) Order of tribunal as it may deem just: If a company, or any member or creditor or workman thereof feels
aggrieved by the company having its name struck off from the register of companies, the Tribunal on an
application made by
the company,
member,
creditor or
workman
before the expiry of twenty years from the publication in the Official Gazette of the notice under sub-
section (5) of section 248 may, if satisfied that the company was, at the time of its name being struck off,
carrying on business or in operation or otherwise it is just that the name of the company be restored to
the register of companies,
order the name of the company to be restored to the register of companies,
and the Tribunal may, by the order, give such other directions and make such provisions as deemed
just for placing the company and all other persons in the same position as nearly as may be as if the
name of the company had not been struck off from the register of companies.
GOVERNMENT COMPANIES
[I] Annual reports on Government companies [Section 394]
As per section 2(45) of the Companies Act, 2013, “Government Company” means any company in which not
less than 51% of the paid-up share capital (equity &preference) 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.
Explanation: Here “paid up share capital” shall be construed as “total voting power”, where shares with
differential voting rights have been issued.
Section 394 of the Companies Act, 2013 provides for Annual reports on Government companies.
It provides for Annual reports on Government companies in the cases where the Central Government and
the State Government is a member of the Government Company. According to this section:
(1) Where the Central Government is a member of a Government company, the Central Government shall
cause an annual report on the working and affairs of that company to be—
(a) prepared within three months of its annual general meeting before which the comments given by
the Comptroller and Auditor-General of India and the audit report are placed under the proviso to
sub-section (6) of section 143; and
TYPES OF PENALTIES
There are five types of penalties that can be levied on the commission of the offences
that have been contemplated under the Companies Act, 2013. They are as follows:
Compoundable offences are those offences where, the complainant (one who has
filed the case) enters into a compromise, and agrees to have the charges dropped
against the accused.
Non-Compoundable offences are those which are not compoundable because of
grievous nature of offence.
ESTABLISHMENT OF SPECIAL COURT [SECTION 435]
Section 435 of the Companies Act deals with the establishment of the Special Court.
The provisions state the number of special court that may be established with the
who shall be appointed by the Central Government with the concurrence of the Chief Justice of the High
Court within whose jurisdiction the judge to be appointed is working.
OFFENCES TRIABLE BY SPECIAL COURTS [SECTION 436]
(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973,—
(a) all offences under this Act shall be triable only by the Special Court established for the area in
which the registered office of the company in relation to which the offence is committed or
where there are more Special Courts than one for such area, by such one of them as may be
specified in this behalf by the High Court concerned;
(b) where a person accused of, or suspected of the commission of, an offence under this Act is
forwarded to a Magistrate under sub-section (2) or sub-section (2A) of section 167 of the Code of
Criminal Procedure, 1973, such Magistrate may authorise the detention of such person in such
custody as he thinks fit for a period not exceeding fifteen days in the whole where such Magistrate
is a Judicial Magistrate and seven days in the whole where such Magistrate is an Executive
Magistrate:
Provided that where such Magistrate considers that the detention of such person upon or before
the expiry of the period of detention is unnecessary, he shall order such person to be forwarded
to the Special Court having jurisdiction;
(c) the Special Court may exercise, in relation to the person forwarded to it under clause (b), the
same power which a Magistrate having jurisdiction to try a case may exercise under section 167 of
the Code of Criminal Procedure, 1973 in relation to an accused person who has been forwarded to
him under that section; and
(d) a Special Court may, upon perusal of the police report of the facts constituting an offence under
this Act or upon a complaint in that behalf, take cognizance of that offence without the accused
being committed to it for trial.
(2) When trying an offence under this Act, a Special Court may also try an offence other than an offence
under this Act with which the accused may, under the Code of Criminal Procedure, 1973 be charged at
the same trial.
(3) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the Special Court may, if
it thinks fit, try in a summary way any offence under this Act which is punishable with imprisonment for
a term not exceeding three years:
Provided that in the case of any conviction in a summary trial, no sentence of imprisonment for a term
exceeding one year shall be passed:
INTRODUCTION
The Companies Act, 2013 mandates holding of at least one Annual General Meeting
and minimum four Board meetings in a year. When any of these business meetings
are to be held, it will necessarily consist of four major components:
(i) Notice of the meeting
(ii) Agenda for the meeting
(iii) Resolutions at the meeting
(iv) Minutes of the meeting
The law also recognizes the importance of these documents and has laid various
rules for drafting, laying and preserving the above documents. Hence, it becomes
imperative to properly draft these documents, which may even be used in future as
reference.
GENERAL HINTS ON DRAFTING REPORTS
Reports are too numerous to be governed by precise rules. However, a few general
hints for drafting them are given below:
(a) Collection of material or data being the foundation on which the report stands;
the writer must collect them by referring to office records, interviewing people,
visiting different places, etc., as may be necessary.
(b) The material collected as aforesaid has to be arranged in a logical sequence so
that the report, when made out, may read like a narrative.
(c) The report should have a leading and a preface explaining its purpose and nature.
(d) Its language has to be simple, clear and unequivocal short sentences are to be
preferred to long ones. It should be drafted in an impersonal manner, making
use of ‘third person’.
(e) If the report is likely to be lengthy, it should be divided into parts and appropriate
13 sub- heading should be used. The report must then contain a summary also.
Many people adopt the practice of giving the gist in one page and the matter in
detail later in the report.
To
Mr./Mrs./Ms. XYZ, Nagpur-440 012.
Dear Sir/Madam,
Notice is hereby given that a meeting of the Board of Director which will be held at the registered office of
the company at Palkaji, Mumbai-400 012 on………………(day) the (date)
20……… at… a.m./p.m. You are requested to make it convenient to attend the meeting.
A copy of the agenda of the businesses, which are likely to be transacted at the meeting, is enclosed for your
perusal.
Yours sincerely,
For PAPER WOOD LIMITED
Secretary
(Each director should be individually addressed with a copy of agenda of the meeting)
Mr ............ to second.
The Chairman to invite members to put questions regarding working of the company under review.
After the members have spoken and their queries answered, put motion to meeting and declare result.
5. Mr ............. a Director to propose:
Rupees……………… per share on the equity share capital of the company for the year ended ........ 20……
be and is hereby declare out of the current profits [or out of the
accumulated profits] of the company and that the same be paid, after deduction of income-tax at
source, to those shareholder whose names appear on the company’s register of members on………………
20…… and that divided warrants be posted within 30 days hereof only to those shareholders who are
entitled to receive payment”.
Mr ...... to second.
Put motion to meeting and declare result.
Dictionary meaning of the word ‘resolution’, is ‘a formal proposal put before a public assembly or the
formal determination of such proposal on any matter’. Derived from this meaning, a resolution is a
formal agreement as to adoption of proposal put before an assembly of persons or meeting. In the
context of company management, it is either a Board meeting or a General meeting of the members.
The passing of a resolution should be construed as the manner in which a meeting formally acts
expressing the intent and purpose of the meeting and if it is a meeting of members, it means the will
of the company, and if it is a meeting of the Board of directors, it means the exposition of the intent of
the executive action initiated or to be initiated subject to the limiting and regulatory force of the
different statute.
Hints on drafting of resolution
While framing the resolution, it is to be ensured that:
(i) They should be expressed clearly and in precise terms, and not vaguely, whether they embody the
decisions of the directors or are those passed at general meeting.
(ii) All identification of instruments, persons, etc., referred to in the resolution are properly made.
(iii) If the resolution is being passed in pursuance to the provisions of the Act, it refers to relevant section or
sections.
(iv) If the resolution is such as requires the approval of the Central Government/National Company Law
Tribunal or confirmation of the Court, it states that effect.
(v) If the resolution is to be effective immediately, it is drawn to show that effect.
(vi) The resolution is confined to one subject matter.
Wherever possible, lengthy resolutions should be divided into paragraphs and arranged in their logical order
having regard to the subject matter of the resolution.
Members’ resolution
Resolutions that may be passed by a company are of two kinds:
(i) Ordinary resolution and
(ii) Special resolutions
Dear Sir/Madam,
The following resolution, which is intended to be passed as a resolution by circulation as provided in Section
175 of the Companies Act, 2013, is circulated herewith as per the provisions of the said section.
If only you are Not Interested in the resolution, you may please indicate by appending your signature in the
space provided beneath the resolution appearing herein below as a separate perforated slip if you are in
favour or against the said resolution. The perforated slip may please be returned if and when signed within
days of this letter.
However, it need not be returned if you are interested in the resolution.
CA Final | Paper 4 | Corporate and Economic Laws -262-
Yours faithfully, (Secretary)
………………..Ltd.
Resolution by circulation passed by the directors as per
circulation effected………… 20…..
Resolved ..................................... that………………..………………..………………..………………..………………..………………..
[Set out the resolution intended to passed]
*For/Against
Signature
*Strike off whichever is inapplicable.
Question:
1. Mr. N is appointed as an additional Director by the Board of Directors of MNR Company Limited at its
meeting held on 1st October, 2018 for a period as permitted by law.
Draft a resolution and state the body which appoints N.
2. R Ltd., a listed entity, wants to constitute an Audit Committee. Draft a board resolution covering the
following matters [compliance with Companies Act, 2013 and SEBI (LODR) Regulations to be ensured].
(1) Member of the Audit Committee
(2) Chairman of the Audit Committee
(3) Any 2 functions of the said Committee
3. Elaborate the provisions of the Companies Act, 2013 regarding Notice of Board Meeting. Draft a notice
for the first meeting of the Board of Directors of India Timber Ltd.
4. Draft a Specimen Board Resolution passed in the meeting of the Board of Directors of a recently
incorporated BLM Limited for obtaining Goods and Service Tax (GST) Registration in the GST System
Portal.
Answer:
1. Appointment of Additional Director: Resolution (Section 161 of the Companies Act, 2013)
According to section 161(1) of the Companies Act, 2013, the articles of a company may confer on its
Board of Directors the power to appoint any person as an additional director at any time.
Board Resolution
Resolution passed at the meeting of the board of directors of MNR Company Limited held at its registered
office situated at ________ on ______ (day), the____ (date) at _____ A.M.
“Resolved that pursuant to the Articles of Association of the company and section 161(1) of the
Companies Act, 2013, Mr. N is appointed as an Additional Director of the MNR Company Limited with
effect from 1st October, 2018 to hold office up to the date of the next annual general meeting or the last
date on which the annual general meeting should have been held, whichever is earlier.
Resolved further that Mr. N will enjoy the same powers and rights as other directors. Resolved further
that Mr Secretary of MNR Company Limited be and is hereby authorised to electronically file necessary
returns with the Registrar of Companies and to do all other necessary things required under the Act.”
Assumption: As the question is silent about the Articles of Association, it is assumed that Articles of
Association has conferred the power to appoint the additional director on the Board of Directors of
MNR Company Limited.
(Secretary)
4. Resolution passed at the meeting of Board of Directors of BLM Limited held at its registered office
situated at ________ (Address of the place) on ————————(Day), the____ 2019 at A.M.
RESOLVED THAT the Board do hereby appoint Mr.____ , Director of the company as Authorized Signatory
for enrolment of the Company on the Goods and Service Tax (GST) System Portal and to sign (physically
or digitally as and when required) and submit various documents electronically and/or physically and
to make applications, communications, representations, modifications or alterations and to give
explanations on behalf of the Company before the Central GST and/or the concerned State GST
authorities as and when required.
FURTHER RESOLVED THAT Mr. ______, Director of the company be and is hereby
authorized to represent the Company and to take necessary actions on all issues related to goods
and service tax including but not limited to presenting documents/records etc. on behalf of the Company
representing for registration of the Company and also to make any alterations, additions, corrections,
to the documents, papers, forms, etc., filed with tax authorities and to provide explanations as and
when required.
FURTHER RESOLVED THAT Mr. _______, Director of the company be and is hereby authorized on behalf of
the company to sign the returns, documents, letters, correspondences etc. physically/digitally and to
represent on behalf of the company, for assessments, appeals or otherwise before the goods and
service tax authorities as and when required.
1 DEFINITIONS
1. Contract
“Contract means a contract for or relating to the purchase or sale of
securities.”[Section 2(a)]
Example 4
Mr. Vivaan is having 400 shares of M/s Travel Everywhere Limited and the current price of these shares
in the market is INR 100. Vivaan’s goal is to sell these shares in 6 months’ time. However, he is worried
that the price of these shares could fall considerably, by then. At the same time, Vivaan doesn’t want
to sell off these shares today, as he conjectured that the share price might appreciate in the near
future. How should Mr. Vivaan protect his security and reduce the risk of loss on the share price?
In this case, Vivaan may opt for ‘Option’ derivative contract, which is an agreement to buy or sell a set
of assets at a specified time in the future for a specified amount. However, it is not obligatory for him to
hold the terms of the agreement, since he has an ‘option’ to exercise the contract.
Example 5: if the current market price of the share is INR 100 and he buy an option to sell the shares to
Mr. Rosesh at INR 200 after three-month, so Vivaan bought a put option.
Now, if after three months, the current price of the shares is INR 210, Mr. Vivaan may opt not to sell the
shares to Mr. Rosesh and instead sell them in the market, thus making a profit of INR 110. Had the
market price of the shares after three months would have been INR 90, Mr. Vivaan would have obliged
the option contract and sold those shares to Rosesh, thus making a profit, even though the current
market price was below the contracted price. Thus, here, the shares of Travel Everywhere Private
Limited are the underlying asset and the option contract is a form of derivative.
attachment & attachment of the attachment and sale arrest & detention of appointing a receiver
sale of movable bank accounts; of immovable the person in prison; for the management
property; property; of the movable and
immovable properties,
Shall be empowered to seek the assistance of the local district administration while exercising the
above powers.
The recovery of amounts by a Recovery Officer pursuant to non-compliance with any direction issued
by the Board under section 12A, shall have precedence over any other claim against such person.
The expression “Recovery Officer” here means any officer of the Board who may be authorised, by
general or special order in writing to exercise the powers of a Recovery Officer.
Continuance of proceedings (Section 23JC)
When Legal representative is liable: Where a person dies, his legal representative shall be liable to pay any
sum which the deceased would have been liable to pay, if he had not died, in the like manner and to the same
extent as the deceased:
Provided that, in case of any penalty payable under this Act, a legal representative shall be liable only in case
the penalty has been imposed before the death of the deceased person.
(a) any proceeding for disgorgement, refund or an action for recovery before the Recovery Officer under
this Act, except a proceeding for levy of penalty, initiated against the deceased before his death shall
be deemed to have been initiated against the legal representative, and may be continued against the
legal representative from the stage at which it stood on the date of the death of the deceased and all
the provisions of this Act shall apply accordingly;
(b) any proceeding for disgorgement, refund or an action for recovery before the Recovery Officer under
this Act, except a proceeding for levy of penalty, which could have been initiated against the deceased
if he had survived, may be initiated against the legal representative and all the provisions of this Act
shall apply accordingly.
Quantum of liability of Legal representative: Every legal representative shall be personally liable for any sum
payable by him in his capacity as legal representative if, while his liability for such sum remains undischarged,
he creates a charge on or disposes of or parts with any assets of the estate of the deceased, which are in, or
may come into, his possession, but such liability shall be limited to the value of the asset so charged,
disposed of or parted with.
The liability of a legal representative under this section shall, be limited to the extent to which the estate of
the deceased is capable of meeting the liability.
Explanation.—For the purposes of this section ‘’Legal representative” means a person who in law represents
the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased
and where a party sues or issued in a representative character, the person on whom the estate devolves on
the death of the party so suing or sued.
2
exercised or done by that Board.
(4) The Chairman and members referred to in clauses (a) and (d) of sub-section (1)
shall be appointed by the Central Government and the members referred to in
clauses (b) and (c) of that sub-section shall be nominated by the Central
Government and the [Reserve Bank] respectively.
The Chairman and other members shall have the right to relinquish office at any time before the expiry of
their tenure by giving a notice of three months in writing to the Central Government.
Term of office: As per the rules framed in this regard, the Chairman and Whole time Members may hold office
for a period of 5 years subject to the maximum age limit of 65 years and can be re-appointed by the Central
Government.
Removal of Members of the Board [Section 6]
The Central Government shall remove a member from office if he—
(a) is, or at any time has been, adjudicated as insolvent;
(b) is of unsound mind and stands so declared by a competent court;
(c) has been convicted of an offence which, in the opinion of the Central Government, involves a moral
turpitude;
(d) has, in the opinion of the Central Government, so abused his position as to render his continuation in
office detrimental to the public interest :
Provided that no member shall be removed under this clause unless he has been given a reasonable
opportunity of being heard in the matter.
Question:
1. A group of complainants have alleged that Mr. Z, a Member of the Securities and Exchange Board of
India (SEBI) has pecuniary interest in some of the cases that came up before the Board and that he
misused his position and therefore, he should be removed from his office. The complainants seek your
advice. Advise.
until the expiry of 3months from the date of receipt of such notice or
Which
untila person duly appointed as his success or enters upon his office or
until the expiry of his term of office, ever is the earliest
Penalty for alteration destruction, etc., of records and failure to protect the electronic database
of Board [15HAA]
Any person, who—
(a) knowingly alters, destroys, mutilates, conceals, falsifies, or makes a false entry in any information,
record, document (including electronic records), which is required under this Act or any rules or
regulations made thereunder, so as to impede, obstruct, or influence the investigation, inquiry, audit,
inspection or proper administration of any matter within the jurisdiction of the Board.
Explanation— For the purposes of this clause, a person shall be deemed to have altered, concealed or
destroyed such information, record or document, in case he knowingly fails to immediately report the
matter to the Board or fails to preserve the same till such information continues to be relevant to any
investigation, inquiry, audit, inspection or proceeding, which may be initiated by the Board and
conclusion thereof;
(b) without being authorised to do so, access or tries to access, or denies of access or modifies access
parameters, to the regulatory data in the database;
(c) without being authorised to do so, downloads, extracts, copies, or reproduces in any form the regulatory
data maintained in the system database;
(d) knowingly introduces any computer virus or other computer contaminant into the system database and
brings out a trading halt;
(e) without authorisation disrupts the functioning of system database;
(f) knowingly damages, destroys, deletes, alters, diminishes in value or utility, or affects by any means,
the regulatory data in the system database; or
For purpose of considering the limit of committees on which a director can serve, all listed and unlisted
public companies will be included, but other companies (private companies, foreign companies, section 8
companies) will be excluded.
Further, only two committees i.e. Audit committee and Stockholders’ Relationship Committee shall be
considered for purpose of the limit, i.e. membership of other committees will not be considered [Regulation
26(1) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015]
Corporate governance requirements with respect to Subsidiary Companies of listed company:
Regulation 24 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 also apply to listed
subsidiary, if it has subsidiaries.
At least one independent director on the board of directors of the listed entity shall be a director on the
board of directors of an unlisted material subsidiary, whether incorporated in India or not.
Term “material subsidiary” shall mean a subsidiary, whose income or net worth exceeds 20% of the
consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately
preceding accounting year.
The Audit Committee of the holding company shall also review the financial statements, in particular the
investments made by the subsidiary company. The minutes of the Board meetings of the subsidiary company
shall be placed for review at the Board meeting of the holding company. The Management should bring to
notice of Board of holding company all significant transactions and arrangements entered into by unlisted
subsidiary company.
Listed entity shall not dispose of shares in its material subsidiary without special resolution in general
meeting.
Disclosures of events or information:
All material disclosures should be made. Following are the disclosures given in Regulation 30 of SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015.
(i) payments due in connection with foreign trade, other current business, services, and short-term
banking and credit facilities in the ordinary course of business.
(ii) payments due as interest on loans and as net income from investments.
(iii) remittances for living expenses of parents, spouse and children residing abroad, and
(iv) expenses in connection with foreign travel, education and medical care of parents, spouse and
children; [Section 2(j)]
4. “Person resident in India” means:
(i) a person residing in India for more than 182 days during the course of the preceding financial year
but does not include—
a person who has gone out of India or who stays outside India, in either case—
for or on taking up employment outside India, or
for carrying on outside India a business or vocation outside India, or
for any other purpose, in such circumstances as would indicate his intention to stay outside
India for an uncertain period;
a person who has come to or stays in India, in either case, otherwise than:
for or on taking up employment in India, or
for carrying on in India a business or vocation in India, or
for any other purpose, in such circumstances as would indicate his intention to stay in India
for an uncertain period;
(ii) any person or body corporate registered or incorporated in India,
(iii) an office, branch or agency in India owned or controlled by a person resident outside
India,
(iv) an office, branch or agency outside India owned or controlled by a person resident in
India; [Section 2(v)]
5. “Person Resident Outside India” means a person who is not resident in India;[Section 2(w)]
6. “Repatriate to India” means bringing into India the realised foreign exchange and
(i) the selling of such foreign exchange to an authorised person in India in exchange for rupees,
or
(ii) the holding of realised amount in an account with an authorised person in India to the extent
notified by the Reserve Bank.
It includes use of the realised amount for discharge of a debt or liability denominated in foreign
exchange and the expression “repatriation” shall be construed accordingly;[Section 2(y)]
7. “Adjudicating Authority” means an officer authorised under sub-section (1) of section 16(1);[Section
2(a)]
8. “Appellate Tribunal” means the Appellate Tribunal for Foreign Exchange established under section
18; [Section 2(b)]
9. “Currency” includes all currency notes, postal notes, postal orders, money orders, cheques, drafts,
travelers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such
other similar instruments, as may be notified by the Reserve Bank. [Section 2(h)]
10. “Currency Notes” means and includes cash in the form of coins and bank notes; [Section 2(i)]
11. “Export”, with its grammatical variations and cognate expressions means;
(7) For the purposes of this section, the term “debt instruments” shall mean, such instruments as may be
determined by the Central Government in consultation with the Reserve Bank.]
A capital account transaction as stated earlier is a transaction, which alters the assets or liabilities,
including contingent liabilities, outside India of persons resident in India or persons resident outside
India. The section gives a liberty by providing that any person may sell or draw foreign exchange to or
from an authorised person for capital account transactions. However, the liberty to do so is subject to
the provisions of sub-section (2) and (2A), which states that the Reserve Bank and the Central
Government may specify class or classes of capital account transactions, which are permissible limit
upto, which the foreign exchange shall be admissible for such transactions and the conditions which
may be placed on such transactions.
Capital account transaction is basically split into the following categories under Foreign Exchange
Management (Permissible capital account transactions) Regulations, 200011 -:
(I) transaction, which are permissible in respect of persons resident in India and outside India.
(II) transaction on which restrictions cannot be imposed; and
(III) transactions, which are prohibited.
Permissible Transactions
Under Sub-section (2) of Section 6, the RBI has issued the Foreign Exchange Management (Permissible
Capital Account Transactions) Regulations, 2000. The Regulations specify the list of transaction, which are
permissible in respect of persons resident in India in Schedule-I and the classes of capital account
transactions of persons resident outside India in Schedule-II.
Further, subject to the provisions of the Act or the rules or regulations or direction or orders made or issued
thereunder, any person may sell or draw foreign exchange to or from an authorised person for a capital
account transaction specified in the Schedules; provided that the transaction is within the limit, if any,
specified in the regulations relevant to the transaction.
SCHEDULE I
The list of permissible classes of transactions made by persons resident in India is:
(a) Investment by a person resident in India in foreign securities.
DEFINITIONS
Some key definitions as appearing in Section 2 are explained as below:
1. “Asset reconstruction” means acquisition by any asset reconstruction
company of any right or interest of any bank or financial institution in
any financial assistance for the purpose of realization of such financial
assistance [Section 2(1)(b)]
2. “Asset reconstruction company (ARC)” means a company registered with
Reserve Bank under section 3 for the purposes of carrying on the business
of asset reconstruction or securitisation, or both. [Section 2(1)(ba)]
An ARC is not a banking company although it is regulated by RBI. Such
company cannot carry out any other business other than securitisation
or reconstruction.
The term “financial assistance” means any loan or advance granted or
any debentures or bonds subscribed or any guarantees given or letters
of credit established or any other credit facility extended by any bank or
financial institution; [Section 2(1)(k)]
The purpose of acquisition by asset reconstruction company is to realise
such assets and not to stay invested by becoming the shareholders of
the company. However, it has the right to take over the management of
the business, subject to RBI’s guidelines from time to time. Such realised
amount should be held and applied towards redemption of investments
and payment of returns assured to the QIBs
3. “Borrower” means any person who has been granted financial assistance
by any bank or financial institution or who has given any guarantee or
created any mortgage or pledge as security for the financial assistance
2
granted by any bank or financial institution and includes a person who
becomes borrower of an asset reconstruction company consequent upon
acquisition by it of any rights or interest of any bank or financial institution
in relation to such financial assistance or who has raised funds through
issue of debt securities. [Section 2(1)(f)]
Exemption from stamp duty: Any document executed by any bank or financial institution as mentioned
above, in favour of the ARC acquiring financial assets for the purposes of asset reconstruction or
securitisation shall be exempted from stamp duty in accordance with the provisions of section 8F of the
Indian Stamp Act, 1899.
Provided that the above stated sub-section shall not apply where the acquisition of the financial assets
by the asset reconstruction company is for the purposes other than asset reconstruction or securitisation.
Such exemption is provided in order to encourage banks or FIs to resolve non-performing assets (NPA)
issues by offloading it to ARCs.
In case where bank or financial institution is a lender in relation to any financial assets acquired by the
ARC: Then such ARC shall, on such acquisition, be deemed to be the lender and all the rights of such
bank or financial institution shall vest in such company in relation to the subject financial assets.
Effect on implementation and execution of legal document: All contracts, deeds, bonds, agreements,
powers-of-attorney, grants of legal representation, permissions, approvals, consents or no-objections
under any law or otherwise and other instruments of whatever nature which relate to the said financial
asset and which are subsisting or having effect immediately before the acquisition of financial asset
and to which the concerned bank or financial institution is a party or which are in favour of such bank or
financial institution shall, after the acquisition of the financial assets, be of as full force and effect
against or in favour of the ARC, as the case may be, and may be enforced or acted upon as fully and
effectually as if, in the place of the said bank or financial institution, securitisation company or
reconstruction company, as the case may be, had been a party thereto or as if they had been issued in
favour of ARC, as the case may be.
Pending Suit, appeal or other proceeding is not prohibited: If, on the date of acquisition of financial
asset, any suit, appeal or other proceeding of whatever nature relating to the said financial asset is
pending by or against the bank or financial institution , the same shall not abate, or be discontinued or
be, in any way, prejudicially affected by reason of the acquisition of financial asset by the ARC, as the
case may be, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or
against the ARC, as the case may be.
On acquisition of financial assets, the ARC, may with the consent of the originator, file an application
before the Debts Recovery Tribunal or the Appellate Tribunal or any court or other Authority for the
purpose of substitution of its name in any pending suit, appeal or other proceedings and on receipt of
such application, such Debts Recovery Tribunal or the Appellate Tribunal or court or Authority shall pass
orders for the substitution of the ARC in such pending suit, appeal or other proceedings.
Dispose of appeal as per the RDDBFI Act, 1993: the Debts Recovery Tribunal under section 17 or the Appellate
Tribunal under section 18 shall, as far as may be, dispose of the appeal in accordance with the provisions of
the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI), 1993 and rules made thereunder.
Appeal to High Court in certain cases (Section 18B)
Any borrower residing in the State of Jammu and Kashmir4 and aggrieved by any order made by the Court of
District Judge under section 17A-
may prefer an appeal, to the High Court having jurisdiction over such Court, within 30 days from the
date of receipt of the order of the Court of District Judge.
Requirement for preferring an appeal: No appeal shall be preferred unless the borrower has deposited,
with the Jammu and Kashmir High Court, 50% of the amount of the debt due from him as claimed by the
secured creditor or determined by the Court of District Judge, whichever is less.
Provided further that the High Court may, for the reasons to be recorded in writing, reduce the amount to
not less than 25% of the debt referred here.
Money Laundering
It is a highly sophisticated act to cover up or camouflage the identity/origin of illegally
obtained earnings so that they appear to have derived from lawful sources.
It is the process by which illegal funds and assets are converted into legitimate funds
and assets. In other words it is basically the process of
converting illegal/ black money of a person in a legal or white money. It is the process
used by
criminals’ to wash their “tainted” money to make it “clean.”
The is known to have been legislated basically to sub- serve twin purpose. Firstly to
prevent money laundering and secondly to provide for confiscation of property derived
from, or involved in money laundering, and to ensure curbing of the tendency of
committing scheduled offences.
There are multiple methods through which black money is made, laundered and huge
profit is made, some of them are:
Cash Smuggling: Moving cash from one location to another or depositing the
cash in Swiss Bank Account;
Structuring: Cash is broken down into formal receipts to buy money orders etc.
Smaller amounts are hard to detect;
Laundering via Real Estate: Buying a land for money and then selling it making
the profits legal.
Stock Markets scams
Creating bogus companies and booking false incomes
Hawala
Drug Trafficking;
Bribery and Corruption;
Kidnapping and Extortion.
3 If left unchecked, money laundering can erode a nation’s economy by changing the
demand for cash, making interest and exchange rates more volatile, and by causing
high inflation in countr ies where criminal elements are operating. The draining of
huge amounts of money from normal economic growth poses a real danger for the
financial health of every country which in turn adversely affects the global market.
Direct to audit the records: If at any stage of inquiry or any other proceedings before him, the Director having
regard to the nature and complexity of the case, is of the opinion that it is necessary to do so, he may direct
the concerned reporting entity to get its records, audited by an accountant from amongst a panel of
accountants, maintained by the Central Government for this purpose. The expenses of, and incidental to, any
such audit shall be borne by the Central Government.
In case of non-compliance with the obligations under this chapter by the reporting entity and others: If the
Director, during inquiry, finds that a reporting entity /its designated director on the Board /any of its employees
has failed to comply with the obligations under this Chapter, then , he may
(a) issue a warning in writing; or
(b) direct such reporting entity or its designated director on the Board or any of its employees, to comply
with specific instructions; or
(c) direct such reporting entity or its designated director on the Board or any of its employees, to send
reports at such interval as may be prescribed on the measures it is taking; or
CA Final | Paper 4 | Corporate and Economic Laws -417-
(d) by an order, impose a monetary penalty on such reporting entity or its designated director on the Board
or any of its employees, which shall not be less than ten thousand rupees but may extend to one lakh
rupees for each failure.
• issue a warning in writing
• direct to comply with specific instructions
• Periodical reports may be asked
• Impose penalty (10,000 to 1 Lakh per failure)
Copy of order to be forwarded to the reporting entity: The Director shall forward a copy of the order passed
to every banking company, financial institution or intermediary or person who is a party to the proceedings.
No civil or criminal proceedings: Act gives immunity to reporting entity, its directors and emplyees, against
civil or criminal proceedings for furnishing information under clause (b) of sub-section (1) of section 12.
(Section 14)
Whereas as per Section 15 the Central Government may, in consultation with the Reserve Bank of India,
prescribe the procedure and the manner of maintaining and furnishing information by a reporting entity
under section 11A, 12(1) & 12AA(1) for the purpose of implementing the provisions of this Act.
Appellate Tribunal [Section 25]
The Appellate Tribunal constituted under section 12(1) of the Smugglers and Foreign Exchange Manipulators
(Forfeiture of Property) Act, 1976, shall be the Appellate Tribunal for hearing appeals against the orders of
the Adjudicating Authority and the other authorities under this Act.
Question:
The Adjudicating Authority appointed under the Prevention of Money Laundering Act, 2002 issued an order
attaching certain properties of XYZ Limited alleged to be involved in money laundering for a specified
period. The company aggrieved by the order of the Adjudicating Authority seeks your advice about the
remedy that is available under the Act. Advise explaining the relevant provisions of the Prevention of Money
Laundering Act, 2002.
Answer:
Establishment of Appellate Tribunal
According to section 25 of the Prevention of Money Laundering Act, 2002, t he Appellate Tribunal constituted
under sub-section (1) of section 12 of the Smugglers and Foreign Exchange Manipulators (Forfeiture of
Property) Act, 1976 shall be the Appellate Tribunal for hearing appeals against the orders of the Adjudicating
Authority and the other authorities under this Act.
4
territories;
Example 1: Whether a Company incorporated in India under the Companies Act,
2013 having its operations in 2 or more countries is to be treated as a MNC under
FCRA, 2010?
Answer. No
(1) No person having a definite cultural, economic, educational, religious or social programme- shall accept
foreign contribution unless such person obtains a certificate of registration from the Central Government.
However,
any association registered with the Central Government under section 6 , or
granted prior permission under that section of the Foreign Contribution (Regulation) Act, 1976, as
it stood immediately before the commencement of this Act, shall be deemed to have been
registered or granted prior permission, as the case may be, under this Act and such registration
shall be valid for a period of five years from the date on which this section comes into force.
(2) Acceptance of foreign contribution after obtaining prior permission of the Central Government: Every
person may, if it is not registered with the Central Government, accept any foreign contribution only
after obtaining the prior permission of the Central Government and such prior permission shall be valid
for the specific purpose for which it is obtained and from the specific source.
Forms for Application under Section 11
An application for certificate of registration by a person under Section 11(1) for acceptance of foreign
contribution shall be made electronically online in Form FC-3A [with an affidavit executed by each
office bearer and key functionary and member in Proforma ‘AA’.
(a) Judicial authority – the term judicial authority is not defined in the Act. The Supreme Court in SBP v.
Patel Engineering5 observed “A judicial authority as such is not defined in the Act. It would certainly
include the court as defined in Section 2(e) of the Act and would also, in our opinion, include other
courts and may even include a special tribunal like the Consumer Forum.” Therefore, it is a concept
wider than courts as ordinarily understood and would include special tribunals and quasi-judicial
authorities. The functions performed would include reference to arbitration. Every court would be a
judicial authority, but every judicial authority would not be a court.
The Court performs many important functions. It is the primary judicial organ in respect of a particular
arbitration. In other words, it performs the Supervisory function as regards that arbitration. This
supervisory function would include granting of interim measures, challenge to an arbitral tribunal,
review of an award, enforcement of awards, etc.
(c) Supreme Court or High Court or any person or institution designated by such Court (Section 11)
Supreme Court and High Court are entrusted with a specific task that of appointment of arbitrators
upon request of a party. The Supreme Court would be the authority for appointing an arbitrator in case
of international commercial arbitration, while High Court would be the authority for appointing an
arbitrator in case of domestic arbitrator. The Act also authorizes any person or institution so designated
by the Supreme and High Court to appoint the arbitrators.
Definition of Arbitration Agreement
Arbitration is a private method of dispute resolution. Under the Indian law, every individual has the right to
approach the court for resolution of his/her dispute that may involve infringement of right(s) vested upon
that individual. This protection is so stringent that it cannot be contracted away. The Indian Contract Act,
1872, however, notes an exception in favour of arbitration.7
Arbitration cannot happen without the parties consenting to submit their dispute to arbitration. Consent of
the parties, therefore, is the most fundamental requirement for an arbitration to happen. The document
which notes this consent is referred to as the arbitration agreement. In other words, an arbitration agree-
ment records the consent of the parties that in the event of a dispute between them that matter instead of
being taken to court, will be submitted for resolution to arbitration. Arbitration agreement, therefore.is
necessary to start arbitration.8
In India, arbitration agreement is governed by the Arbitration and Conciliation Act, 1996 in particular
sections 2(1)(b) and 7.
Section 2(1)(b) - In this Part, unless the context otherwise requires “arbitration agreement”
means an agreement referred to in section 7.
Section 7 Arbitration Agreement -
(1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or
certain disputes which have arisen or which may arise between them in respect of a defined legal
relationship, whether contractual or not.
(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a
separate agreement.
(3) An arbitration agreement shall be in writing.
(4) An arbitration agreement is in writing if it is contained in –
When an appointment is made jointly by both parties, both parties have to agree upon who the arbitrator
would be. Usually one party writes to other party forwarding a list of names of potential arbitrators. If the
other party approves one name from the list, then that individual would be the arbitrator. If not then the
other party would propose new names to the first party. This would go on till both parties agree upon one
name.
Example 10: When a joint appointment was required, Party 1 sent the following names to Party 2 - Sunil,
Peter, Meenakshi, Iqbal, and Anil. None of them was acceptable to Party 2, which sent the following names
to Party 1 –Akram, Shameek, Sebastian, Aarti, Debasish. From this list, Party 1 was agreeable for Shameek
and informed Party 2. In this case ,Shameek would be the arbitrator and would be considered to be jointly
appointed.
CA Final | Paper 4 | Corporate and Economic Laws -474-
The Insolvency and Bankruptcy
Code, 2016
6
CA Final | Paper 4 | Corporate and Economic Laws -475-
From the above it is evident that insolvency is a state and bankruptcy is a conclusion. A bankrupt would
be a conclusive insolvent whereas all insolvencies will not lead to bankruptcies. Insolvency situation
can be resolved through resolution mechanism under the Code and a failed resolution mechanism
would lead to liquidation process in relation to corporates and bankruptcy process in relation to
individuals under the Code
Relationship between Bankruptcy, Insolvency & Liquidation
Bankruptcy is a legal proceeding involving a person or business that is unable to repay outstanding debts.
The bankruptcy process begins with a petition filed by the debtor, or by the creditors. All of the debtor’s
assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.
In lucid language, if any person or entity is unable to pay off the debts, it owes, to their creditor, on time or
as and when they became due and payable, then such person or entity is regarded as “insolvent”.
Liquidation is the winding up of a corporation or incorporated entity. There are many persons that can
initiate proceedings to cause the Liquidation, those being:-
The Regulatory Bodies;
The Directors of a Company;
The Shareholders of a Company; and
An Unpaid Creditor of a Company
In nut shell, insolvency is common to both bankruptcy and liquidation. Not being able to pay debts as and
when they became due and payable are the leading cause of Liquidations and is the only way that can cause
a natural person to become a bankrupt.
Objectives: A sound legal framework of bankruptcy law was required for achieving the following objectives:-
Improved handling of conflicts between creditors and the debtor: It can provide procedural certainty
about the process of negotiation, in such a way as to reduce problems of common property and reduce
information asymmetry for all economic participants.
Avoid destruction of value: It can also provide flexibility for parties to arrive at the most efficient
solution to maximise value during negotiations. The bankruptcy law will create a platform for
negotiation between creditors and external financiers which can create the possibility of such
rearrangements.
Drawing the line between malfeasance and business failure: Under a weak insolvency regime, the
stereotype of “rich promoters of defaulting entities” generates two strands of thinking:
(a) the idea that all default involves malfeasance and
(b) the idea that promoters should be held personally responsible for defaults of the firms that they
control.
Clearly allocate losses in macroeconomic downturns: With a sound bankruptcy framework, these losses
are clearly allocated to some people. Loss allocation could take place through taxes, inflation, currency
depreciation, expropriation, or wage or consumption suppression. These could fall upon foreign
creditors, small business owners, savers, workers, owners of financial and non-financial assets,
importers, exporters.
The recommendations of the Bankruptcy Law Reforms Committee (BLRC) led to the enactment of the
Insolvency and Bankruptcy Code, 2016 (“IBC or code”) on May 28, 2016.
The IBC, consolidating all existing insolvency-related laws, has brought about a revolutionary change
in the form of a robust, modern and sophisticated insolvency framework. This framework seeks to
achieve a resolution for corporate debtors in distress and failing that, their liquidation in a time bound
manner.
Notice to rectify the defect in the application: Provided that the Adjudicating Authority shall, before rejecting
the application, give a notice to the applicant to rectify the defect in his application within seven days of
receipt of such notice from the Adjudicating Authority.
Procedure for conduct of meeting of CoC: The members of the committee of creditors may meet in person or
by such electronic means. All the meeting of CoC shall be conducted by the RP. Notice of meeting shall be
served to the following:
The resolution applicant shall obtain the necessary approval pursuant to the resolution plan approved,
within a period of one year from the date of approval of the resolution plan by the Adjudicating Authority or
within such period as provided for in such law, whichever is later.
Provided that where the resolution plan contains a provision for combination, as per section 5 of the
Competition Act, 2002, the resolution applicant shall obtain the approval of the Competition Commission of
India under that Act prior to the approval of such resolution plan by the committee of creditors. [Section 31]
Liabilities for previous offences:
(1) Notwithstanding anything to the contrary contained in this Code or any other law for the time being in
force, the liability of a corporate debtor for an offence committed prior to the commencement of the
corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted
for such an offence from the date the resolution plan has been approved by the Adjudicating Authority
under section 31, if the resolution plan results in the change in the management or control of the
corporate debtor to a person who was not -
(a) a promoter or in the management or control of the corporate debtor or a related party of such a
person; or
(b) a person with regard to whom the relevant investigating authority has, on the basis of material in
its possession, reason to believe that he had abetted or conspired for the commission of the
offence, and has submitted or filed a report or a complaint to the relevant statutory authority or
Court:
Provided that if a prosecution had been instituted during the corporate insolvency resolution
process against such corporate debtor, it shall stand discharged from the date of approval of the
resolution plan subject to requirements of this sub-section having fulfilled:
On rejection of resolution plan due to failure to meet the requirements, the Adjudicating Authority may
direct the Board to propose the name of another insolvency professional to be appointed as a liquidator.
The Board shall propose the name of another insolvency professional 29along with written consent from the
insolvency professional in the specified form within ten days of the direction issued by the Adjudicating
Authority.
Liquidation estate:
According to section 36 of the Code, for the purposes of liquidation, the liquidator shall form an estate of the
assets, which will be called the liquidation estate in relation to the corporate debtor.
The liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors.
Comprising of liquidation estate: The liquidation estate shall comprise all liquidation estate assets which
shall include the following:—
r. any assets over which the corporate debtor has ownership rights , including all rights and interests
therein as evidenced in the balance sheet of the corporate debtor or an information utility or records
in the registry or any depository recording securities of the corporate debtor or by any other means as
may be specified by the Board, including shares held in any subsidiary of the corporate debtor;
Order in cases of undervalued transactions: As per Section 48, following order of the adjudicating authority
may be passed: