An Overview of Corporate Reorganization – Company Law Important Questions

An Overview of Corporate Reorganization – Company Law Important Questions

Question 1.
Distinguish between: Oppression and Mismanagement. (December 2014) (4 marks)
Answer:

Basis of Distinction Oppression

Mismanagement

Meaning of the Terms The term “oppression” is not defined in the Companies Act, 2013.

Oppression, according to the dictionary meaning of the word, is an act exercised in a manner burdensome, harsh, and wrongful.

Oppression means violation of the condition of fair play. The com-plaining member must be under a burden that is unjust, harsh. It involves a lack of probity or fair dealing with a member in the matter of rights as a shareholder.

The term “mismanagement” is also not defined in the Com¬panies Act, 2013. Normally mismanagement means gross misconduct of affairs of the company or misuse of powers given to directors or members under the Companies Act, 2013.
Examples Some of the acts held as oppressive are as follows:
1. continuous refusal to register shares to remain in control over affairs of the company.2. calling board meeting with two days notices so that NRI directors cannot attend and allot shares to one group so that it comes into majority.3. issuing shares to the wife of directors for wholly elusive consideration.4. illegal removal of director one group and appointing another director without notice to one group of directors.
Some of the acts held as mismanagement are as follows:
1. not allowing the director to function as director2. reckless sanction and disbursement of loans3. serious violation of legal provisions4. acting beyond the authority of memorandum and articles.5. directors do not take serious actions in case of corruption, embezzlement, etc.6. diversion of funds

7. operation of bank accounts by unauthorized persons.

Question 2.
Distinguish between: Oppression and mismanagement application and Class action suits) (June 2018) (4 marks)
Answer:

Basis of Distinction

Oppression and Mismanagement Application

Class action suits

Meaning The term “oppression” is not defined in the Companies Act, 2013.

Oppression, according to the dictionary meaning of the word, is an act exercised in a manner burdensome, harsh, and wrongful.

The term “mismanagement” is also not defined in the Companies Act, 2013. Normally mismanagement means gross misconduct of affairs of the company or misuse of powers given to directors or members under the Companies Act, 2013.

In the case of large companies, many investors and depositors are small and they do not have time, money, and energy to fight for their rights. In such cases, some of the investors and depositors can take action on behalf of all those who are affected. This is known as a class action.
When such action can be taken? Members of a company as specified in Section 244 may apply to the tribunal for relief in cases of oppression and mismanagement.

Such application can be made in the following cases:

1. where the affairs of the company have been or being conducted in a manner prejudicial to the public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interest of the company; or

2. The material change has taken place in the management or control of the company and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interest or its members or any class of members.

Such change may relate to alteration in the board of directors, managers, or in the ownership of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever.

A such number of member(s) or depositor(s) as is indicated in Section 245(3), if they are of the opinion that the management or conduct of the affairs of the company is being conducted in a manner prejudicial to the interests of the company or its members or depositors, may file an application before the tribunal for seeking following orders, namely:

1. To restrain the company from committing ultra vires acts and breach of any provision of the company’s MOA or AOA.

2. To declare a resolution altering the MOA or AOA as void if the resolution was passed by suppression of material facts or obtained by misstatement.

3. To restrain the company and its directors from acting on such resolution.

4. To restrain the company from doing an act that is contrary to the provisions of the Act or any other law.

5. To restrain the company from taking action contrary to any resolution passed by the members.

Who can apply to Tribunal? The following members of the company shall have the right to apply under Section 241 namely:

1. In the case of a company having a share capital: 100 members of the company or 10% of the total number of members, whichever is less, or members holding not less than one-tenth of the issued capital of the company. (The applicants must have paid all calls and other sums due on their shares. Thus, holders of partly paid-up shares cannot apply).

2. In the case of a company not having a share capital: 20% of the total number of members.

However, the tribunal may on an application waive all or any of the above requirements so as to enable the member to apply under Section 241.

The requisite number of members provided in Section 245(1) shall be as under:

1. In case of a company having a share capital: 100 members or prescribed percentage of the total members, whichever is less, members holding not less than one-tenth of the issued capital of the company.

(The applicants must have paid all calls and other sums due on their shares. Thus, holders of partly paid-up shares cannot apply).

2. In the case of a company not having a share capital: 20% of the total number of its members.

In the case of depositors, a class action can be taken by 100 depositors or a prescribed percentage of the total number of depositors, whichever is less.

Reimbursement of Legal Expenses There is no specific provision for reimbursement of legal expenses incurred in case of oppression or mismanagement through the tribunal is competent to pass such an order. Legal expenses incurred in pursuing the class action can be reimbursed from Investor Education and Protection Fund is sanctioned by Tribunal.

Question 3.
Oppression need not be continuous. Discuss. (December 2009) (5 marks)
Answer:
1. The meaning of the term “oppression” as explained by Lord Cooper in the Scottish case of Elder v. Elder & Western Ltd., (1952) Scottish Cases 49, which has been cited with approval by Wanchoo, J (afterward C J.) of the Supreme Court in Shanti Prasad v. Kalinga Tubes, (1965) 1 Comp. L.J. 193 at 204 is as under :

“The essence of the matter seems to be that the conduct complained of should at the lowest, involve a visible departure from the standards of fair dealing, on which every shareholder who entrusts his money to the company is entitled to rely.”

2. Oppression must be a continuous process. This is suggested by the words, ‘are being conducted in a manner… used in Section 241. Hence isolated acts of oppression or mismanagement will not give rise to an action under Section 241 of the Act.

3. In Shanti Pd. In Jain’s case, the court said:… “ events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up-to-date of the petition”.

Hence the given statement is incorrect.

Question 4.
What are the reliefs available to the minority shareholders against wrongful conduct of the majority? (December 2008) (7 Marks)
Answer:
Under the Companies Act, 2013 extend protection to the minority by granting various rights to minority shareholders which are discussed as below:
1. Variation of Class Rights:
The rights attached to the shares of any class can be varied as per Section 48(1) with the consent in writing of the holders of not less than three-fourth of the issued shares of that class or with the sanction of a special resolution passed at a separate meeting of the holders of the issued shares of that class. But the holders of not less than 10% of the shares of that class who had not assented to the variation may apply to the tribunal for the cancellation of the variation as per Section 48(2).

2. Scheme of reconstruction and amalgamation:
The minority is accorded protection in cases where they dissent to the scheme of reconstruction and amalgamation.

3. Operation and mismanagement:
The principle of majority rule does not apply to cases where Section 241 to 246 are applicable for the prevention of oppression and mismanagement. A member, who complaints that the affairs of the company are being conducted, in a manner oppressive to some of the members including himself, or against the public interest, may apply to the tribunal.

4. Alternative remedy to winding up:
Any member or members, who complain that the affairs of the company are being conducted in a manner oppressive to some of the members including themselves, may apply for the winding up of the company.

Question 5.
The court of law will not interfere with the internal management of companies acting within their powers. (June 2012) (5 marks)
Answer:
Power of Majority: As a company is an artificial person with no physical existence, its functions through the instrumentality of the board of directors, who is guided by the wishes of the majority. Therefore, a cardinal rule of the company law that prima facie a majority of members of a company are entitled to exercise the powers of the company and generally to control its affairs.

The principle of non-interference:
In case of difference amongst the members, the issue is decided by a vote of the majority. Since the majority of the members are in an advantageous position to run the company according to their command, the minorities of shareholders are often oppressed.

The company law provides for adequate protection for the minority shareholders when their rights are trampled by the majority. But the protection of the minority is not generally available when the majority does anything in the exercise of the powers for the internal administration of the company.

The court will not usually intervene at the instance of shareholders in matters of internal administration and will not interfere with the management of a company by its directors so long they are acting within the powers conferred on them under the articles of the company. In the other words, the articles are the protective shield for the majority of shareholders who compose the board of directors for carrying out their object at the cost of a minority of shareholders.

The principle that majority rule has certain well-established exceptions are as follows:
1. Ultra Vires Acts: Where the directors representing the majority of shareholders perform an illegal or ultra vires act for the company, an individual shareholder has the right to bring an action. The majority of shareholders have no right to confirm an illegal or ultra vires transaction of the company.

2. Fraud on minority: Where an act was done by the majority amounts to a fraud on the minority; an action can be brought by an individual shareholder.

3. Wrongdoers in control: If the wrongdoers are in control of the company, the minority shareholders’ representative action for fraud on the minority will be entertained by the court.

4. Personal actions: Individual membership rights cannot be invaded by the majority of shareholders. He is entitled to all the rights and privileges appertaining to his status as a member. An individual shareholder can insist on strict compliance with the legal rules, statutory provisions.

Question 6.
Mere lack of confidence between the majority shareholders and minority shareholders would not be enough to order for relief under Section 241. (December 2013) (4 marks)
Answer:

  1. In case of complaint of oppression, it must be shown that the conduct of majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of the consecutive story.
  2. There must be continuous acts on the part of the majority shareholders containing to the date of the petition, showing that the affairs of the company were being conducted in a manner oppressive to some members.
  3. The conduct must be burdensome, harsh, and wrongful.
  4. Mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless lack of confidence springs from the oppression of the minority by the majority in the management of the company’s affairs and such oppression must involve at least an element of lack of probity or fair dealing with a member in the matter of his proprietary right as a shareholder.

Question 7.
What do you understand by ‘class action suit’ as Introduced by the Companies Act, 2013? Explain the object behind introducing this provision in the Companies Act and the persons who can initiate such a class-action suit. (December 2017) (4 marks)
Answer:
1. Meaning of Class Action:
In the case of large companies, many investors and depositors are small and they do not have time, money, and energy to fight for their rights. In such cases, some investors and depositors can take action on behalf of all those who are affected. This is known as a class action.

2. Class Action [Section 245(1)]:
A such number of member(s) or depositor(s) as is indicated in Section 245(3), if they are of the opinion that the management or conduct of the affairs of the company is being conducted in a manner prejudicial to the interests of the company or its members or depositors, may file an application before the Tribunal for seeking following orders, namely:

3. To restrain the company from committing ultra vires acts and breach of any provision of the company’s MOA or AOA.

4. To declare a resolution altering the MOA or AOA as void if the Resolution was passed by suppression of material facts or obtained by misstatement.

5. To restrain the company and its directors from acting on such resolution.

6. To restrain the company from doing an act that is contrary to the provisions of the Act or any other law.

7. To restrain the company from taking action contrary to any resolution passed by the members.

8. As per Section 245(3), the requisite number of members provided in Section 245(1) shall be as under:

9. in case of a company having a share capital: 100 members or pre-scribed percentage of the total members, whichever is less, or members holding not less than 1/10th of the issued capital of the company. (The applicants must have paid all calls and other sums due on their shares. Thus, holders of partly paid-up shares cannot apply)

10. in the case of a company not having a share capital: 20% of the total number of its members.

In the case of depositors, a class action can be taken by 100 depositors or a prescribed percentage of the total number of depositors, whichever is less.

Question 8.
A petition signed by 100 members of a company has been moved to the Tribunal for the prevention of mismanagement. Later on, half of the members (signatories) withdrew their consent after filing the petition. Examine whether the remaining applicants (petitioners/signatories) to the petition would be successful in their complaint to Tribunal. (June 2015) (4 marks)
Answer:
1. Right to apply under Section 241 (section 244):
The following members of a company shall have the right to apply under Section 241, namely:

  • In the case of a company having a share capital:
    100 members of the company or 10% of the total number of mem¬bers whichever is less, or members holding not less than one-tenth of the issued capital of the Company. (The applicants must have paid all calls and other sums due on their shares. Thus, holders of partly paid-up shares cannot apply).
  • In the case of a company not having a share capital: 20% of the total number of members.
    However, the tribunal may, on an application waive all or any of the above requirements so as to enable the members to apply under Section 241.

2. Once the consent has been given by the requisite number of members by signing the application, the application will be made by one or more of them on behalf and for the benefit of all of them. It has been held by the Supreme Court that if the sum of the consenting members has subsequent to the presentation of the application, withdraw their consent, it would not affect the right of the applicant to proceed with the application. [Rajahmundry Electric Supply Co. v. Nageshwara Rao, AIR 1956 SC 213].

3. Obtaining consent is a condition precedent to the making of the ap¬plication and hence a consent obtained subsequent to the application is ineffective. [Makhan Lai Jain v. The Amrit Banaspati Co. Ltd I.L.R. (1954) I All. 131]

4. A person who had disposed of his shares will not be allowed to apply, [In L. Chandramurthy v. K.L. Kapsi (2005) 48 SCL 294 CLB].
As per facts given in the case, the required number of applicants had applied for relief under Section 241 and even if some of the applicants/signatories withdraw their consent, the petition can be entertained by the Tribunal.

Question 9.
Due to inadequacy of profits, the board of directors of rising Limited decided not to recommend any dividend for the financial year ended 31st March 2015. Certain shareholders of the company complained to the Company Law Board/Tribunal regarding mismanagement of the affairs of the company since the Board of the company did not recommend any dividend. Explaining the provisions of the Companies Act, 2013, examine whether the contention of the shareholders is tenable. (June 2015) (4 marks)
Answer:
1. Under Section 241 of the Companies Act, 2013, members may apply to the Tribunal in cases of oppression and mismanagement.

However, a bona fide decision consistent with the company’s MOA or AOA is not to be equated with mismanagement even if they turn out to be wrong in the circumstances or these cause temporary losses. The machinery created by the section not to be used by the minority for compelling the majority to come to terms, where the company is honestly managed.

Director’s bona fide decision not to declare dividends and to accumulate available profits into the reserve is not mismanagement. [ Thomas Vettom (VJ.)v. Kuttanad Rubber Co. Ltd. (1984) Comp. Cases 284(Ker.)].

2. Furthermore, the shareholders cannot compel the board to recommend
a dividend. The Board’s recommendations are placed in the general meeting. The general meeting can reduce the dividend, but cannot even increase the dividend as recommended by the board.

Therefore, the shareholders cannot compel the company to declare dividends and cannot charge the directors with operation and mismanagement. As discussed above:

  • The contention of shareholders shall not be tenable.
  • The act of the board of directors who acted bona fide, not to recommend any dividend shall not amount to oppression or mismanagement.

Question 10.
A demerger scheme was approved by the shareholders, secured and unsecured creditors. The scheme was neither in violation of any law nor against the public interest. However, Accounting Standard-14 was not adopted. Whether the scheme can be sanctioned? Explain. (December 2010) (4 marks)
Answer:
The Delhi High Court while approving the scheme of arrangement between Sony India Private Limited (petitioner) Sony India Software Centre Private Limited has clarified that, Accounting Standard-14 issued by the Institute of Chartered Accountants is applicable only to amalgamations and not to demerger. The above contention was upheld by the Gujarat High Court in the case of Gallops Realty (P) Limited.

In the given case, A demerger scheme was approved by the shareholders, secured and unsecured creditors. The scheme was neither in violation of any law nor against the public interest. The Accounting Standard-14 was not adopted.

Thus, the scheme of demerger can be sanctioned even if AS-14 not adopted.

Question 11.
A transferor company got approval for a scheme of amalgamation with the transferee company. An amount of I NR 5,00,000 was deposited by the transferor company in the direction of the Tribunal for settling the dues of the employee. An ex-employee of the transferor company objected to amalgamation citing that he is also entitled to for claim in the amount deposited. Will he succeed? Give reason. (December 2013) (4 marks)
Answer:
1. In the decide case Web neuron Services Ltd., In Re [(2009) 149 Comp. Cas. 61 (Delhi)], the transferor company sought approval to a scheme of amalgamation with the transferee company.

2. Employee of Transferor Company opposed the petition on the ground of non-payment of dues. The objection of the employee was overruled and the scheme was sanctioned. The reason given was that the transferor company had, in accordance with the direction of the Court, deposited an amount with the Registrar General of the Court and in case the ex-employee was found entitled to the amount, he could get it with interest.

3. The terms and conditions of service of the employees of the transferor company were not affected and there was no legal impediment in sanctioning the proposed scheme of amalgamation.

4. The scheme was to be sanctioned and the transferor company was to be wound up without formal winding-up.

Question 12.
Examining the provisions of the Companies Act, 2013, explain the powers of the Central Government to order amalgamation of companies in the public interest. (December 2016) (4 marks)
Answer:
Power of Central Government to Provide For Amalgamation of Companies In Public Interest [Section 237 of The Companies Act, 2013]
1. When the Central Government is satisfied that it is essential in the public interest that two or more companies should amalgamate, the Central Government may:

  • by order notified in the Official Gazette, provide for the amalgamation of those companies into a single company with such constitution,
  • with such property, powers, rights, interests, authorities, and privileges, and with such liabilities, duties, and obligations, as may be specified in the order.

2. The order may also provide:

  • for the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company and
  • such consequential, incidental, and supplemental provisions as may, in the opinion of the Central Government, be necessary to give effect to the amalgamation.

3. Every member or creditor, including a debenture-holder, of each of the transferor companies before the amalgamation shall have, as nearly as may be, the same interest in or rights against the transferee company as he had in the company of which he was originally a member or creditor, and in case the interest or rights of such member or creditor in or against the transferee company are less than his interest in or rights against the original company, he shall be entitled to compensation to that extent, which shall be assessed by such authority as may be prescribed and every such assessment shall be published in the Official Gazette, and the compensation so assessed shall be paid to the member or creditor concerned by the transferee company.

4. Any person aggrieved by any assessment of compensation made by the prescribed authority under sub-section (3) may, within a period of thir¬ty days from the date of publication of such assessment in the Official Gazette, prefer an appeal to the Tribunal and thereupon the assessment of the compensation shall be made by the Tribunal.

5. No order shall be made under this section unless:

  • a copy of the proposed order has been sent in draft to each of the companies concerned;
  • the time for preferring an appeal under sub-section (4) has expired, or where any such appeal has been preferred, the appeal has been finally disposed of; and
  • the Central Government has considered, and made such modifications, if any, in the draft order as it may deem fit in the light of suggestions and objections which may be received by it from any such company within such period as the Central Government may fix in that behalf, not being less than two months from the date on which the copy aforesaid is received by that company, or from any class of shareholders therein, or from any creditors or any class of creditors thereof.

The copies of every order made under this section shall, as soon as may be after it has been made, be laid before each House of Parliament.

Question 13.
Briefly discuss the merger of a ‘Subsidiary’ Company into a ‘Holding’ Company. (June 2017) (5 marks)
Answer:
1. As per Section 233(1) of the Companies Act, 2013, a scheme of merger or amalgamation may be entered into between two or more small com¬panies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed, subject to the following, namely:

  • a notice of the proposed scheme inviting objections or suggestions, if any, from the Registrar and Official Liquidators where the registered office of the respective companies are situated or persons affected by the scheme within thirty days is issued by the transferor company or companies and the transferee company;
  • the objections and suggestions received are considered by the companies in their respective general meetings and the scheme is approved by the respective members or class of members at a general meeting holding at least ninety percent of the total number of shares; each of the companies involved in the merger files a declaration of solvency, in the prescribed form, with the Registrar of the place where the registered office of the company is situated; and
  • the scheme is approved by the majority representing nine-tenths in value of the creditors or class of creditors of respective companies indicated in a meeting convened by the company by giving a notice of twenty-one days along with the scheme to its creditors for the purpose or otherwise approved in writing.

2. Section 233(2) states that the transferee company shall file a copy of the scheme so approved in the manner as may be prescribed, with the Central Government, Registrar, and the Official Liquidator where the registered office of the company is situated.

3. Section 233(3) states that on the receipt of the scheme if the Registrar or the Official Liquidator has no objections or suggestions to the scheme, the Central Government shall register the same and issue a confirmation thereof to the companies.

4. Section 233(4) provides that if the Registrar or Official Liquida¬tor has any objections or suggestions, he may communicate the same in writing to the Central Government within a period of thirty days. If no such communication is made, it shall be presumed that he has no objection to the scheme

5. As per Section 233(5) states that if the Central Government after receiv¬ing the objections or suggestions or for any reason is of the opinion that such a scheme is not in the public interest or in the interest of the creditors, it may file an application before the Tribunal within a period of sixty days of the receipt of the scheme under sub-section (2) stating its objections and requesting that the Tribunal may consider the scheme under section 232.

6. As Section 233(6) states that on receipt of an application from the Central Government or from any person, if the Tribunal, for reasons to be recorded in writing, is of the opinion that the scheme should be considered as per the procedure laid down in section 232, the Tribunal may direct accordingly or it may confirm the scheme bypassing such order as it deems fit:

If the Central Government does not have any objection to the scheme or it does not file any application under this section before the Tribunal, it shall be deemed that it has no objection to the scheme.

7. Section 233(7) states that a copy of the order under sub-section (6) confirming the scheme shall be communicated to the Registrar having jurisdiction over the transferee company and the persons concerned and the Registrar shall register the scheme and issue a confirmation thereof to the companies and such confirmation shall be communicated to the Registrars where transferor company or companies were situated.

8. Section 233(8) states that registration of the scheme shall be deemed to have the effect of dissolution of the transferor company without the process of winding up.

Question 14.
SUP Limited is a public company incorporated in India. It wants to propose a scheme of arrangement (merger) with another company in the same line of business in India. Help the company in preparing such a scheme of arrangement firstly. Secondly, help the company in taking approval of NCLT. Advice how the company should approach NCLT for its approval to the scheme and discuss grounds on the basis of which NCLT will accord its approval. (December 2017) (8 marks)
Answer:
1. In the given case, SUP Limited is a public company incorporated in India. It wants to propose a scheme of arrangement (merger) with another company in the same line of business in India. The company should approach NCLT for its approval to the scheme based on the provisions of Section 232 of the Companies Act, 2013.

2. Section 232(1) states that when an application is made to the Tribunal under section 230 for the sanctioning of a compromise or an arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Tribunal:
(a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of the company or companies involving merger or the amalga¬mation of any two or more companies; and

(b) that under the scheme, the whole or any part of the undertaking, property, or liabilities of any company (hereinafter referred to as the transferor company) is required to be transferred to another company (hereinafter referred to as the transferee company) or is proposed to be divided among and transferred to two or more companies, the Tribunal may on such application, order a meeting of the cred¬itors or class of creditors or the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal may direct.

3. As Section 232(2) states that when an order has been made by the Tribunal under sub-section (1), merging companies or the companies in respect of which a division is proposed, shall also be required to circulate the following for the meeting so ordered by the Tribunal, namely:
(a) the draft of the proposed terms of the scheme drawn up and adopted by the directors of the merging company;

(b) confirmation that a copy of the draft scheme has been filed with the Registrar;

(c) a report adopted by the directors of the merging companies ex-plaining effect of compromise on each class of shareholders, key managerial personnel, promoters, and non-promoter shareholders laying out, in particular, the share exchange ratio, specifying any special valuation difficulties;

(d) the report of the expert with regard to valuation, if any;

(e) a supplementary accounting statement if the last annual accounts of any of the merging companies relate to a financial year ending more than six months before the first meeting of the company summoned for the purposes of approving the scheme.

4. As per Section 232(4) states that an order under this section provides for the transfer of any property or liabilities, then, by virtue of the order, that property shall be transferred to the transferee company and the liabilities shall be transferred to and become the liabilities of the transferee company and any property may, if the order so directs, be freed from any charge which shall by virtue of the compromise or arrangement, cease to have an effect.

5. Section 232(5) states that every company in relation to which the order is made shall cause a certified copy of the order to be filed with the Registrar for registration within thirty days of the receipt of a certified copy of the order.

6. Section 232(6) states that the scheme under this section shall clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date

7. As per Section 232(7) states that every company in relation to which the order is made shall, until the completion of the scheme, file a statement in such form and within such time as may be prescribed with the Registrar every year duly certified by a chartered accountant or a cost accountant or a company secretary in practice indicating whether the scheme is being complied with in accordance with the orders of the Tribunal or not.

Question 15.
In a scheme of amalgamation, it was proposed that name of a transferor company shall be deemed to be the name of the transferee company. The Regional Director (RD), Ministry of Company Affairs, objected to the same on the ground that the proposed name is undesirable if it is identical with or too nearly resembling the name of an existing company. Decide if the stand taken by the RD is valid under the Companies Act, 2013. Reference may be made of decided case laws. (June 2018) (4 marks)
Answer:
1. In the decided case law, Re. Michelin India Private Limited [MANU/ TN/0817/2015] Madras High Court:
In a scheme of amalgamation, it was proposed that the name of a trans¬feror company shall be deemed to be the name of a transferee company. The Regional Director, Ministry of Corporate Affairs, objected to the same on the ground that as per General Circular of MCA on Name Availability, a proposed name is considered to be undesirable if it is identical with or too nearly resembling with the name of the company in existence and names already approved by the Registrar of companies. The transferee company shall follow the procedures and rules laid down for such a change of name.

2. Madras High Court held that the general circular of the Ministry of Corporate Affairs does not have any mandatory effect and is merely advisory in character. High Court also considered Section 13 of the Companies Act, 2013 and observed that Chapter XV of Companies Act, 2013 is a complete code by itself on a subject of arrangement/compromise and reconstruction comprehensive enough to include a change in the name consequent on the amalgamation or arrangement.

Thus, the objection raised by Regional Director (RD) is not valid/tenable.

Question 16.
On 3rd December 2018, the Registrar of Companies applied to the Regional Director for seeking sanction to file a winding-up application against a company. On the next day i.e. on 4th December 2018 the Regional Director granted its sanction. Examine the validity of the Regional Director’s action. (December 2018) (3 Marks)
Answer:
1. As per Section 272(3) of the Companies Act, 2013, the Registrar shall be entitled to present a petition for winding-up as per Section 271, with specified exceptions.

However, the Registrar shall obtain the previous sanction of the Central Government to the presentation of a petition the Central Government shall not accord its sanction unless the company has been given a rea¬sonable opportunity of making representations.

2. Powers of Central Government under Section 272 have been delegated. to Regional Directors.

3. Further, Registrar shall obtain the previous sanction of the Regional Director and the Regional Director shall not accord its sanction unless the company has been given a reasonable opportunity of making representations.

4. As per facts given in the case, the registrar of the company applied to the Regional Director for seeking sanction to file a winding-up application against a company, and on the next day, the regional director granted its sanction which shows that reasonable opportunity of making representations to the company is not given by the Regional Director.

Hence, the sanction of the Regional Director is not valid.

Question 17.
In a case pertaining to oppression and mismanagement, the respon¬dents pleaded that the legal heirs of a deceased member whose name is still on the register of members are not entitled to apply before Tribunal, as the only member of the company can complain about oppression and mismanagement. Thus, legal heirs have no locus stand. Examine this argument in the light of decided cases. Comment. (December 2018) (3 marks)
Answer:
In the decided case of Worldwide Agencies Pvt. Ltd. and Another v. Margaret T. Decor and others, Comp. Cas. Vol. 67 (1990), 807 (SC):
The legal representatives of a deceased member whose name is still on the register of members are entitled to hie a petition under section 241 of the Companies Act, 2013 for relief against oppression or mismanagement.

The contention of the respondent that the legal representative of a deceased member whose name is still on the register of members are not entitled to hie a petition under Section 241 of the Companies Act, 2013 for relief against oppression or mismanagement is not correct.

Thus, such legal representatives can file petitions for relief against oppression or mismanagement.

Question 18.
XYZ Ltd. sold a mine, owned by it for INR 28.20 crore. A minority shareholder brought an action for damages against their directors and against the company itself stating that the real value of the mine was INR 100.00 crore. With reference to provisions of the Companies Act, 2013 state whether the action for damages is maintainable. (June 2019) (3 marks)
Answer:
1. A company is an artificial person with no physical existence, it functions through the instrumentality of the Board of Directors who is guided by the wishes of the majority.

2. A cardinal rule of company law that prima facie a majority of members of a company are entitled to exercise the powers of the Company and generally to control its affairs.

3. In the given case, XYZ Ltd. sold a mine, owned by it for INR 28.20 crore.

A minority shareholder brought an action for damages against their directors and against the company itself stating that the real value of the mine was INR 100.00 crore.

4. In the decided case, Pavlides v. Jensen (1956) Ch. 565, a minority share¬holder brought an action for damages against three directors and against the company itself on the ground that they have been negligent in selling a mine owned by the Company for £ 82,000, whereas its real value was about £ 10,00,000. It was held that the action was not maintainable.

Thus, the. action jot damages is not maintainable.

CS Executive Company Law Questions and Answers

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