Directors – Company Law Important Questions

Directors – Company Law Important Questions

Question 1.
Mr. Solid, a young professional of 29 years, has stayed in India for 150 days in the previous financial year. He does not hold any shares in Happy Retails Limited, which is quoted (listed) company. Small shareholders have decided among themselves that he is proposed to be appointed as small shareholders director who shall not be liable to retire by rotation and his tenure shall be for five years from the date of joining the office of director. Examining the provisions of the Companies Act, 2013, state whether Mr. Solid can be so appointed as small shareholder’s director. (June 2017) (4 marks)
Answer:
1. As per Section 151 of the Companies Act, 2013:
A listed company may have one director elected by small shareholders. Small shareholders mean a shareholder holding shares of the nominal value of not more than twenty thousand rupees or such other sum prescribed.

2. As per Rule 7 of the Companies (Appointment and Qualification) Rules, 2014:
The appointment of Small Shareholders director shall be subject to applicable provisions except:

  • He shall not be liable to retire by rotation
  • His tenure shall not exceed a period of three consecutive years.
  • On the expiry of the tenure, the small shareholder director shall not be eligible for re-appointment.
    In light of the above-discussed provisions, Mr. Solid can be appointed as Small Shareholder Director for 3 years and not for 5 years.

Question 2.
Johnson, a director in Disha Ltd. proceeds on leave for 8 months to France for personal reasons. The Board of Directors at a meeting appoints Peter for a period of two months, as an alternate director. Article of Association of the company does not confer upon the Board of directors any such power to appoint anyone as an alternate director. Referring to the provisions of the Companies Act, 2013, examine the validity of the above appointment. What shall be your answer in case the Board appoints Peter for the entire period of Johnson’s leave? (December 2015) (4 marks)
Answer:
Under Section 161(2) of the Companies Act, 2013, Conditions for appointment of an alternate director:

  1. The Board of Directors of a company must be authorized by its articles or by a resolution passed by the company in a general meeting for the appointment of the alternate director.
  2. The person in whose place the Alternate Director is being appointed should be absent for a period of not less than 3 months from India.
  3. The person to be appointed as the Alternate Director shall be the person other than the person holding any alternate directorship for any other Director in the company or holding directorship in the same company.
  4. If it is proposed to appoint an Alternate Director to an Independent Director, it must be ensured that the proposed appointee also satisfies the criteria of Independence as per section 149(6) of the Companies Act, 2013.

In the given case, if Articles of Association of Disha Ltd. do not confer power to appoint an alternate director, Disha Ltd can appoint an alternate director in place of Mr. Johnson by passing a resolution in a general meeting.

Question 3.
Newly incorporated Abhay Limited has not mentioned the names of the first directors of the company in the Articles of Association. Referring to the provi¬sions of the Companies Act, 2013, advise the Board of Directors regarding the appointment of the first directors of the company. What would be your answer in case the company is a Person Company? Also, state whether provisions of the Act are applicable to a Private Limited company. (June 2017) (4 marks)
Answer:
1. The provisions of Section 152(1) of the Companies Act, 2013 is applicable to all companies, whether public or private.

2. The first directors of most of the companies are named in their articles. Regulation 60 of Table F provides that the number of the directors and the names of the first directors shall be determined in writing by the subscribers of the memorandum or a majority of them. If they are not so named in the articles of a company, then subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed.

3. In the case of a One Person Company, an individual being a member shall be deemed to be its first director until the director(s) are duly appointed by the member in accordance with the provisions of Section 152 Thus, subscribers of Abhay Ltd. are deemed to be first directors of the Company. As discussed above, the provisions are applicable to all companies.

Question 4.
The Board of Directors of Goodwill (India) Ltd. wishes to appoint an alternate director on the Company’s Board in the absence of Mr. Prince, a director, who proceeded on leave. Referring to the provisions of the Companies Act, 2013, state the conditions to be satisfied before the Board appoints such a director. What shall be the tenure of such alternate director in case Mr. Prince incurs a disqualification and ceases to be a director? (December 2017) (4 marks)
Answer:

  1. Section 161(2) of the Act empowers the Board if so authorized by its articles or by a resolution passed by the company in general meeting, to appoint a director (termed as ‘alternate director’) to act in the absence of an original director during his absence for a period of not less than three months from India.
  2. A person can be appointed as an alternative director only for one director and not for more than one director.
  3. If the term of office of the original director is determined before he so returns to India, any provisions for the automatic re-appointment of the retiring director shall apply to the original and not to the alternate director.
  4. As per Section 167 of the Companies Act, 2013, the office of a director shall become vacant in case he incurs any of the disqualifications specified in Section 164.

Hence, if the original director attracts disqualified and cease to be a director then the person appointed as an alternate director in the place of the original director automatically ceases to be a director.

Question 5.
R Systems Ltd. is holding 40% of the paid-up share capital of ATC Aviation Pvt. Ltd. R Systems Ltd. appointed a representative director in ATC Aviation Pvt. Ltd. to safeguard its interest. The Board of Directors of R Systems Ltd. wishes to know whether the director appointed by them shall be treated as a nominee director. Advice the Board. (June 2018) (4 marks)
Answer:
1. Section 161(3) of the Companies Act, 2013, provides that subject to the articles of a company, the Board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a Government company.

2. A nominee director means a director appointed by a third Parties e.g. financial institution or Bank which has provided financial assistance to the Company.

3. In the given case, R Systems Ltd. is holding 40% of the paid-up share capital of ATC Aviation Pvt. Ltd. R Systems Ltd. appointed a representative director in ATC Aviation Pvt. Ltd. to safeguard its interest.

Thus, R System Ltd. appointed nominee director in ATC Aviation Pvt. Ltd., if there is a provision in Articles of Association of ATC Aviation Pvt. Ltd. to that effect.

Question 6.
In Bright Ltd, the vacancy of a director is caused by the death of Mohan, a director of the company, after three months of his joining the company as a director. The Board of the company, therefore, appointed Sumit in his place but did not seek approval of the company in a general meeting. Referring to the provisions of the Companies Act, 2013, examine the validity of Sumit’s appointment. (December 2015) (4 marks)
Answer:
1. Section 161(4) provides that if any vacancy is caused by death or resig¬nation of a director appointed by the shareholders in general meeting, before the expiry of his term, the Board of directors can appoint a director to fill up such vacancy.

2. The appointed director shall hold office only up to the term of the director in whose place he is appointed.

3. Section 161(4) in the case of a public company, if the office of any direc¬tor appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board which shall subsequently be approved by the members in the immediate next general meeting.

4. The person so appointed shall hold office only up to the day up to which the director in whose place he has been appointed, would have held office if he had not vacated as aforesaid.

However, where a person appointed by the Board vacates his office it is not a case of casual vacancy and cannot be filled by the Board in the place.

In view of above provisions, vacancy caused by the death of Mohan, a director of Bright Ltd. can be filed by the Board of Directors at a meeting of the Board which shall be subsequently approved by the members in the immediate next general meeting.

Question 7.
Write a short note on alternate directors. (June 2010) (4 marks)
Answer:
1. Section 161(2) of the Companies Act, 2013, empowers the Board if so authorized by its articles or by a resolution passed by the company in general meeting, to appoint a director (termed as ‘alternate director’) to act in the absence of an original director during his absence for a period of not less than three months from India. Section 161(2) of the Companies Act, 2013, applies to all companies whether public or private.

2. The person to be appointed as the Alternate Director shall be the person other than the person holding any alternate directorship for any other Director in the company or holding directorship in the same company.

3. If it is proposed to appoint an Alternate Director to an Independent Director, it must be ensured that the proposed appointee also satisfies the criteria of Independence as per Section 149(6) of the Companies Act, 2013.

4. Terms of Office of an Alternate Director:
An alternate director shall not hold office for a period longer than that permissible to the director in whose place he has been appointed and shall vacate the office if and when the director in whose place he has been appointed returns to India.

Question 8.
Write a short note on independent directors. (June 2010) (4 marks)
Or
Write a short note on independent directors. (December 2011) (4 marks)
Or
Write a short note on independent directors. (June 2013) (4 marks)
Or
In terms of the provisions of the Companies Act, 2013, answer the following:
(i) Which companies are required to have independent directors?
(ii) What is the tenure of independent directors in the number of terms for with such a director can be appointed? Are independent directors required to hold meetings of their own without the presence of non-independent directors? (December 2015) (4 marks)
Answer:
1. An independent director means a director other than a managing director or a whole-time director or a nominee director who does not have any material or pecuniary relationship with the company/directors. Basically, an independent director is a non-executive director. Section 149(6) of the Act prescribes the criteria for independent directors

2. Section 149(4) read with Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 provides the following companies to have a specified number of independent directors.

All Listed public companies At least 1 /3rd of the total number of Directors as Independent Directors.
Other Public Companies:

  • paid up capital of INR 10 crore or more,
  • turnover of INR 100 crore or more,
  • outstanding loans, debentures, and deposits of INR 50 crore or more.
At least 2 independent Directors.

3. In case a company covered under this rule is required appoint higher number of independents directors due to composition of its audit com-mittee and then they shall appoint such higher number of independent directors.

4. Further if there is any intermittent vacancy of an independent director then it shall be filled up by the board of directors within 3 months from the date of such vacancy or not later than immediate next board meeting, whichever is later.

However, the following classes of unlisted public company shall not be covered under sub-rule as above:

  • a joint venture;
  • a wholly owned subsidiary; and
  • a dormant company as defined under Section 455 of the Companies Act, 2013.

Question 9.
Three Singapore Nationals who have never been to India have decided to be the shareholders holding 100% equity shares and the only directors of a private company in India in the year 2015 which is not a subsidiary of a public company. (June 2016) (5 marks)
Answer:
1. As per Section 149 of the Companies Act, 2013, every company shall have a Board of Directors consisting of Individuals as directors and shall have minimum three directors in the case of a public company, two directors in the case of a private company and one director in the case of One Person Company.

2. Every company shall have at least one director who has stayed in India for a total period of not less than 182 days during the financial year.

In the given case, three Singapore Nationals who have never been to India have decided to be the shareholders holding 100% equity shares and the only directors of a private company in India in the year 2015 which is not a subsidiary of a public company.

Thus, they should appoint at least one director who should be present in India for at least 182 days during the financial year.

Question 10.
Write notes on resident director. (June 2016) (4 marks!
Answer:
Section 149(3) of the Companies Act, 2013, provides that every company shall have at least one director who has stayed 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 requirement under this sub-section shall apply proportionately at the end of the financial year in which it is incorporated.

Question 11.
In what way does the Companies Act, 2013 and Rules made there under regulate the appointment of women director in a company? Explain. (June 2015) (4 marks)
Answer:
1. Second proviso to Section 149( 1) read Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014 following class of companies must have at least one Women Director.

All Listed Companies
Public Companies with

2. Paid-up Share Capital of INR 100 crore or more, or

3. Turnover of INR 300 crore or more.

Note: The paid-up share capital or turnover, as on the last date of latest audited financial statements shall be taken into account. .

4. Additionally for listed entities SEBI vide recent notification provides that the Board of directors of the top 500 listed entities shall have at least one independent woman director by April 1,2019 and the Board of directors of the top 1000 listed entities shall have at least one independent woman director by April 1, 2020.

However, the top 500 and 1000 entities shall be determined on the basis of market capitalisation, as at the end of the immediate previous financial year.

5. Vacancy of a Women 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.

Question 12.
Divine Industries (Pvt.) Ltd. has a turnover of INR 350 crores during the financial year 2014-2015. The bankers of the company have advised the company to compulsorily appoint a woman director in the company as re¬quired under the Companies Act, 2013. Referring to the provisions of the Act, examine the validity of the banker’s advice. What would be your answer in case the company in question is a public limited company? (December 2016) (4 marks)
Answer:
1. Second proviso to Section 149( 1) read Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014 following class of companies must have at least one Women Director.

All Listed Companies
Public Companies with

2. Paid-up Share Capital of INR 100 crore or more, or
Turnover of INR 300 crore or more.

Note: The paid-up share capital or turnover, as on the last date of latest audited financial statements shall be taken into account.

3. Additionally for listed entities SEBI vide recent notification provides that the Board of directors of the top 500 listed entities shall have at least one independent woman director by April 1,2019 and the Board of directors of the top 1000 listed entities shall have at least one independent woman director by April 1, 2020.

However, the top 500 and 1000 entities shall be determined on the basis of market capitalisation, as at the end of the immediate previous financial year.

4. Vacancy of a Women 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.

As per the facts of the given case, Divine Industries (Pvt.) Ltd. are not required to appoint women director irrespective of its turnover.

Hence, advice given by bankers to Divine Industries (Pvt.) Ltd. is not tenable.

Question 13.
Distinguish between: Non-executive Director and Independent Di-rector. (June 2015) (4 marks)
Answer:
1. Non-executive Director:

  • Non-executive directors do not get involved in the day-to-day running of the business.
  • Non-executive directors participate and execute work through Board Meetings
  • All non-executive directors are not Independent directors.

2. Independent Director:

  • An independent director in relation to a Company means a direc-tor other than a managing director or a whole time director or a nominee director.
  • The additional condition that a person fulfils the conditions laid down in Section 149(6) of the Companies Act, 2013.
  • All Independent directors are non-executive directors.

Question 14.
Distinguish between: Appointment of directors by nomination and Appointment of directors against casual vacancy. (June 2016) (4 marks)
Answer:

Basis of Distinction Appointment of Director by Nomination Appointment of Director against casual vacancy
Meaning Appointment of director by nomination means appointing a director by a third parties like financial institution or a bank which has provided financial assistance to the company. Appointment of director against casual vacancy means

appointing a director due to vacancy caused by reason of death, resignation, disqualification or failure of an elected director to accept the office or for any reason other than retirement by rotation.

Term of Office Term of office of nominee director depends upon his appointment. For example, nominee director appointed by financial institution continues to be a director until loan is fully repaid. Any person appointed to fill the casual vacancy shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated.
Provisions in Articles Director nominated under statutory powers can be appointed even if there is no provision in Articles of Association of the Company. In the case of a public company, if the office of any director appointed by the company in gen eralmeeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company be filled by the board of directors at a meeting of the Board.
Appointment In certain cases i.e. pursuant to loan agreement appointment of nominee director becomes necessary. It is not obligatory for the company to fill a casual vacancy and the Boar d may resolve to keep vacancy unfilled

Question 15.
Is it mandatory for all directors to obtain DIN? Discuss. (December 2008) (4 marks)
Answer:

  1. 1. Section 158 specified that every person or company shall mention the DIN in return, information or particulars as required to be furnished under this Act, in case such return, etc. relates to the director or contain any reference of any director.
  2. MCA-21 has introduced the concept of Director Identification Number (DIN) which is mandatory, unique, and lifetime identification for all existing and prospective directors.
  3. In the Era of e-filing, DIN is a prerequisite for filing certain company-related documents.
  4. All existing and any person who intends to be a director of a company should apply for DIN first.
  5. DIN has to be obtained by the directors of the company before commencing the procedure for incorporation of a company.

Question 16.
Director Identification Number is not mandatory for directors of foreign companies having branch offices in India. (December 2011) (5 marks)
Or
Director Identification Number (DIN) is not mandatory for directors of foreign companies having branch offices in India. (June 2013) (5 marks)
Answer:

  1. DIN is a unique number once obtained is valid for the lifetime of a director.
  2. Section 158 specified that every person or company shall mention the DIN in return, information or particulars as required to be furnished under this Act, in case such return, etc. relates to the director or contain any reference of any director.
  3. MCA-21 has introduced the concept of Director Identification Number (DIN) which is mandatory, unique, and lifetime identification for all existing and prospective directors.
  4. All existing and any person intending to be appointed as a director is required to obtain the Director Identification Number (DIN).
  5. DIN is also mandatory for directors of Indian Companies who are not citizens of India.
    However, DIN is not mandatory for directors of the foreign company having branch offices in India.

Question 17.
A Foreign National was intended to be appointed to the Board of MNC in India. He contends that Director Identification Number (DIN) is not required for him as he is a foreign national. Whether his contention is correct? (December 2013) (4 marks)
Answer:

  1. DIN is a unique number once obtained is valid for the lifetime of a director.
  2. MCA-21 has introduced the concept of Director Identification Number (DIN) which is mandatory, unique, and lifetime identification for all existing and prospective directors.
  3. All existing and any person intending to be appointed as a director is required to obtain the Director Identification Number (DIN).
  4. DIN is also mandatory for directors of Indian Companies who are not citizens of India.

However, DIN is not mandatory for directors of foreign companies having branch offices in India.
Hence, if Foreign National is to be appointed to the Board of MNC in India, DIN will be necessary.

Question 18.
Directors ought not to misuse the trust interested in them. Comment (December 2010) (5 marks)
Answer:
1. Directors are trustees for the company i.e. the directors are persons selected to manage the affairs of the company for the benefit of the shareholders.

2. Director stands in a fiduciary position towards the company in regards to the powers conferred on them by the Companies Act, 2013 and by the articles of association of the company and also with regard to the funds of the company which is under their control.

3. To some extent, directors are also trustees for the properties of the company. Directors are accountable for their proper use and are required to refund or restore the same if improperly used.

4. Directors are always been considered and treated as trustees of money which comes to their hands or which is actually under their control; and ever since joint-stock companies were invented directors have been held liable to make good, money which they have misapplied upon the same footing as if they were trustees.

To sum up, directors are trustees of the money is of the company, but not of the debts due to the company. They are trustees also in respect of powers of the company that are conferred upon them for example powers of:
(a) issuing and allotting shares,
(b) approving transfers of shares
(c) making calls on shares and
(d) forfeiting shares for non-payment of calls.
They must exercise this power solely for the benefit of the company.

Thus, directors ought not to misuse the trust entrusted to them.

Question 19.
Enumerate the disqualification of directors mentioned in section 164 of the Companies Act, 2013. (December 2010) (8 marks)
Answer:
Section 164(1) provides that a person shall not be eligible for appointment as a director of a company, if –
(a) He is of unsound mind and stands so declared by a competent court;

(b) He is an undischarged insolvent;

(c) He has applied to be adjudicated as an insolvent and his application is pending;

(d) He has been convicted by a court of any offense, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence.

However, if a person has been convicted of any offense and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company.

(e) An order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;

(f) He has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;

(g) He has been convicted of the offense dealing with related party transac¬tions under section 188 at any time during the last preceding five years; or

(h) He has not complied with Section 152(3). (i.e. not allotted DIN)

(i) He has not complied with the provisions of Section 165(1) (i.e. appointed as a director in more than 20 companies).

Question 20.
Manish, a director of QPR Limited, defaulted in filing annual accounts and annual returns with ROC for a continuous period of three financial years ended 31st March 2016. Based on the provisions of the Companies Act, 2013, validate the following:
(i) Whether Manish can continue to be director of QPR Ltd. when he is also a director in UV Ltd? Also, narrate whether he can be reappointed in QPR Ltd. as well as UV Ltd.
(ii) If the defaulting company is a private limited company, what would be your answer? (December 2013) (4 marks)
Answer:
Section 164(2) also provides that no person who is or has been a director of a company which:
(a) Has not filed financial statements or annual returns for any continuous period of three financial years; or
(b) Has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay the interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more, shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

Keeping in view of the provisions of Section 164(2) of the Companies Act, 2013:

  1. Manish can continue to be director of QPR Ltd. and in UV Ltd. till his term is over. However, he cannot be reappointed in QPR Ltd. and UV Ltd. as directors for 5 years.
  2. Provisions of Section 164(2) of the Companies Act, 2013, are applicable to all companies whether it is a public company or a private company.

Hence, if the defaulting company is a private limited company answer is still the same i.e. Manish cannot be reappointed in QPR Ltd. and UV Ltd. as director for 5 years.

Question 21.
Mr. X is a director of Greenfield Industries Limited. He is a man of wild knowledge of commercial matters. The company has not filed financial statements with the Registrar of Companies for the year endi|d 31st March 2014, 31st March 2015, and 31st March 2016. However, it has filed the annual returns for those years in compliance with the provisions of the Companies Act, 2013. Considering Mr. X’s huge experience, Redfield Industries Limited wants to induct him as a director on its Board. Referring to the provisions of the Companies Act, 2013, examine the validity of such a proposition. (June 2017) (4 marks)
Answer:
Section 164(2) also provides that no person who is or has been a director of a company which –
(a) Has not filed financial statements or annual returns for any continuous period of three financial years; or

(b) Has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay the interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more, shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of Eve years from the date on which the said company fails to do so.

Keeping in view of the above provisions, Mr. X director of Greenfield Ltd. is disqualified to be appointed as a director in that Company as well as in other companies.

Thus, Mr. X cannot be appointed as a director in Redfield Ltd.

Question 22.
A housing company has sold a Hat to its Managing Director by ac¬cepting 50% in cash and balance in installment. Decide whether this transaction attracts the provision pertaining to loan to directors under section 185. If so, validate the transaction. (December 2014) (4 marks)
Answer:
In Freddie Ardeshir Mehta. Union of India (1991) 1 CompLJ 437 (Bom.), it was held that if the company sells one of its flats to one of its directors on receiving half the price in cash and agreeing to accept the balance in installments does not amount to giving of loan to the director.

In view of above, the observation made by Accounts Department that purchasing flat by Managing Director will tantamount to providing house building advance is not correct.

Question 23.
A person other than a retiring director is eligible for appointment as director. Examine (December 2012) (4 marks)
Answer:
Right of persons other than retiring directors to stand for directorship [Section 160 of the Companies Act, 2013]:
1. A person who is not a retiring director shall be eligible for appointment to the office of a director at any general meeting, if he, or some member intending to propose him as a director, has, not less than fourteen days before the meeting, left at the registered office of the company, a notice in writing under his hand signifying his candidature as a director or, as the case may be, the intention of such member to propose him as a candidate for that office. Such a person may be a member or a non-member, an additional director or a director to fill a casual vacancy, or an alternate director or a nominee director.

2. Such notice must come along with the deposit of one lakh rupees or such higher amount as may be prescribed which shall be refunded to such person or, as the case may be, to the member, if the person proposed gets elected as a director or gets more than twenty-five of total valid votes cast either on a show of hands or on the poll on such resolution.

In the case of Nidhi Company, instead of Rupees One Lakh, the deposit of Rupees ten thousand is required with the notice.

The requirements of deposit of amount shall not apply in case of appointment of an independent director or a director recommended by the Nomination and Remuneration Committee, if any, constituted under sub-section (1) of section 178 or a director recommended by the Board of Directors of the Company, in the case of a company not required to constitute Nomination and Remuneration Committee.

3. Section 160 is not applicable to Government Company where the entire paid-up share capital is held by Central Government jointly or severally or in case of a subsidiary of Government Company in which the entire paid-up capital is held by that Government Company.

Further, Section 160 is not applicable to Private Companies, Section. 8 Companies whose article provides for the election of directors by Ballot.

Question 24.
The Board of Directors of Zest Ltd. appoints Pavan as a director under section 161 by passing a resolution by circulation. The appointee now seeks your advice about the tenure of his appointment. Advise him (June 2012) (4 marks)
Answer:
According to Section 161 (1) of the Companies Act, 2013, the Articles of Association of a Company may confer on its Board of Directors the power to appoint any person as an additional director at any time who shall 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.

The appointment of an additional director may be made either at a meeting of the Board or by circular resolution.

Question 25.
In a public limited company, certain directors who guaranteed the company’s debts retired, and new directors were appointed in their places and they also signed the guarantee bonds. There was no agreement to show that the earlier guarantee had ceased to be operative. The bank who is the beneficiary exercised its option and demanded the repayment. The retired directors contended that they have already retired and they are not liable to the bank on strength of the bond. Is the contention valid? Decide the case with regard to the provisions of the Companies Act, 2013? (December 2014) (4 Marks)
Answer:
1. In the decided case, Bank of Baroda v. Official Liquidator (1992) 73 Com Cases 688 (MP), it was held that where certain directors who had guaranteed the company’s debts retired and new directors were appointed in their place who also signed the guarantee bond and there was no agreement to show that the earlier guarantee had ceased to be operative it was held that all the directors including retired directors were liable jointly and severally under guarantee.

2. In the given case, in a public limited company, certain directors who guaranteed the company’s debts retired, and new directors were appointed in their places and they also signed the guarantee bonds. There was no agreement to show that the earlier guarantee had ceased to be operative. The bank who is the beneficiary exercised its option and de¬manded the repayment. The retired directors contended that they have already retired and they are not liable to the bank on strength of the bond.

Thus, the contention of retired directors is not correct and they are liable to the bank.

Question 26.
Kruger Holdings Ltd. promoted Ms. Bhavna and designated her as the Director (Administration). Examine the validity of such a designation under the provisions of the Companies Act, 2013. (June 2016) (4 marks)
Answer:
1. As per Section 2(36) of the Companies Act, 2013, a director means a director appointed to the Board of the Company. Mere giving designation as the director is not relevant.

2. If Company wants to appoint any person as a director then it can appoint him in Annual General Meeting or if during two Annual General Meet-ing director has to be appointed then such person can be appointed as additional director as per Section 161(1) of the Companies Act, 2013.

3. As per Section 161(1) of the Companies Act, 2013, the articles of associ¬ation of a company may confer on its Board of Directors the power to appoint any person as an additional director at any time who shall hold office up to the date of the next Annual General Meeting or the last date on which the Annual General Meeting (AGM) should have been held, whichever is earlier.

Thus, it is advised to the Kruger Holdings (P.) Ltd. to appoint Ms. Bhavna as additional director in Board Meeting and she will hold the office till the next Annual General Meeting. In the next AGM she can be appointed as a regular director. As far as the designation of “Director (Administration) is concerned, the company can use any suitable designation to identify the work of the director.

Question 27.
Barkha Ltd. has four directors on Its Board. A Board meeting was convened which was attended by only two directors, where Rekha was appointed as an additional director. Rekha is related to both the directors. Referring to the provisions of the Companies Act, 2013, examine the validity of the appointment. (December 2016) (4 marks)
Answer:
1. In the decided case, Shailesh Harilal Shah v. Matushree Textiles Ltd. (1994) 2 Comp LJ 291 at 301: AIR 1994 Bom. 20]:
The appointment as an additional director of a person who is related to a director has been held not to violate the requirement of Section 184 because such appointment does not constitute any “contract or arrangement” of the Company with the sitting director.

2. The director in question was not accordingly disentitled from participation and voting at a meeting of the Board.

3. In the given case, Barkha Ltd. has four directors on its Board. A Board meeting was convened which was attended by only two directors, where Rekha was appointed as an additional director. Rekha is related to both the directors.

Thus, Rekha not disentitled from participation and voting at a meeting of the Board.

Question 28.
Five Board meetings were held in Asha Ltd. during the period from January to June in the calendar year 2016. Rajeev, an additional director, attended none of these meetings. For the first two meetings, he sought leave of absence from the Board but did not inform the Board for the remaining three meetings. Examining the provisions of the Companies Act, 2013, decide whether he is disqualified to act as a director. (December 2016) (4 marks)
Answer:
1. As per Section 161 of the Companies Act, 2013, the additional director shall 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.

2. As per Section 167 of the Companies Act, 2013, the office of a director shall become vacant if he absents himself from all the meetings of the Board of Directors held during a period of 12 months with or without seeking leave of absence of the Board.

3. In the given case, Five Board meetings were held in Asha Ltd. during the period from January to June in the calendar year 2016. Rajeev, an additional director, attended none of these meetings. For the first two meetings, he sought leave of absence from, the Board but did not inform the Board for the remaining three meetings.

Thus, the office of Rajeev, director of Asha Ltd. vacated as he is absent from all board meetings in a calendar year.

However, he is not disqualified to become a director as per Section 164 of the Companies Act, 2013.

Question 29.
The Chairman and Managing Director of Progressive Limited resigned on 6th May 2015 as such but the company filed Form No. DIR 12 with the ROC stating the date of resignation as 15th March 2016. The company is-sued various cheques to its investors in the repayment of their deposits after 6th May 2015 which were bounced. The investors filed a complaint against the former Chairman and Managing Director. Will the Chairman and Managing Director be liable in the instant case? (December 2011) (4 marks)
Answer:
1. According to section 168 of the Companies Act, 2013, a director may resign from its office by giving notice with the reasons of resignation in writing to the company. The Board shall on receipt of such a notice from a director take note of the same.

2. The company shall within 30 days from the date of receipt of notice of resignation from a director, intimate the registrar in Form DIR-12 and post the information on its website if any as provided in Rule 15 of the Companies (Appointment and Qualification of Directors) Rules, 2014.

3. The Board shall place the facts of such resignation by the director in the Report of Directors laid in immediately following the general meeting by the company. The Director may within 30 days from his resignation, forward to the registrar a copy of his resignation along with reasons for resignation with reasons.

4. The resignation shall be effective from:

  • the date on which the notice is received by the company or
  • the date specified by the Director in the notice whichever is later.

5. When all the Directors resign at the same time under section 167, in such case the required number of directors are to be appointed by the promoter or, the Central Government. The Directors so appointed shall hold office till the Directors are appointed by the company in general meeting.

However, the Director shall be liable even after his resignation for the offenses which occurred during his tenure.

As Managing Director of Progressive Ltd has resigned on 6the May 2015. However, the company filed Form DIR-12 on 15th March 2016.

Thus, the Chairman and managing director are not liable for cheques to its investors in the repayment of their deposits after 6th May 2015 which were bounced.

Question 30.
Pawan, the Managing Director of ABC Limited, resigned on 10th May 2012. The company has filed e-form Number 32 with the Registrar of Companies mentioning the date of resignation as 5th July 2013. The compa¬ny issued various cheques to its investors in the repayment of the deposits after 10th May 2012 and the said cheques were dishonored. The investors filed complaints against the company and Pawan, the former Managing Director of the company. Discuss and advise whether Pawan shall be liable or not. (June 2014) (8 marks)
Answer:
1. According to Section 168 of the Companies Act, 2013, a director may resign from its office by giving notice with the reasons for resignation in writing to the company. The Board shall on receipt of such a notice from a director take note of the same.

2. The company shall within 30 days from the date of receipt of notice of resignation from a director, intimate the registrar in Form DIR-12, and post the information on its website if any as provided in Rule 15 of the Companies (Appointment and Qualification of Directors) Rules, 2014.

3. The Board shall place the facts of such resignation by the director in the Report of Directors laid in immediately following the general meeting by the company. The Director may within 30 days from his resignation, forward to the registrar a copy of his resignation along with reasons for resignation with reasons.

4. The resignation shall be effective from:

  • the date on which the notice is received by the company or
  • the date specified by the Director in the notice whichever is later.

5. When all the Directors resign at the same time under section 167, in such case the required number of directors are to be appointed by the promoter or, the Central Government. The Directors so appointed shall hold office till the Directors are appointed by the company in general meeting.

However, the Director shall be liable even after his resignation for the offenses which occurred during his tenure.

As Managing Director of ABC Ltd. has resigned from 10th May 2012 and form filed on 5th July 2013, the resignation is effective whichever is later amongst two dates. Thus, Mr. Pawan Managing Director is liable.

Question 31.
Paras, a director of Spike (Pvt.) Ltd resigns from the office of direc¬tor. He has forwarded a copy of his resignation to the company and the Registrar of Companies (ROC) in time. The company, however, has not filed a relevant forms to the ROC. Explaining the provisions of the Companies Act, 2013 in this regard, decide the status of Paras. (June 2016) (4 marks)
Answer:
1. According to Section 168 of the Companies Act, 2013, a director may resign from its office by giving notice of the reasons for resignation in writing to the company. The Board shall on receipt of such a notice from a director take note of the same.

2. The company shall within 30 days from the date of receipt of notice of resignation from a director, intimate the registrar in Form DIR-12 and post the information on its website if any as provided in Rule 15 of the Companies (Appointment and Qualification of Directors) Rules, 2014.

3. The Board shall place the facts of such resignation by the director in the Report of Directors laid in immediately following the general meeting by the company. The Director may within 30 days from his resignation, forward to the registrar a copy of his resignation along with reasons for resignation with reasons.

4. The resignation shall be effective from:

  • the date on which the notice is received by the company or
  • the date specified by the Director in the notice whichever is later.

5. When all the Directors resign at the same time under section 167, in such case the required number of directors are to be appointed by the promoter or, the Central Government. The Directors so appointed shall hold office till the Directors are appointed by the company in general meeting.

However, the Director shall be liable even after his resignation for the offenses which occurred during his tenure.

As per facts given in the case, Paras, a director of Spike (Pvt.) Ltd. has forwarded a copy of the resignation to the Company and ROC in time and hence his resignation is valid and effective. It is irrelevant whether the company files the form with ROC or not.

Question 32.
Mr. Sunil Goyal, a director of XYZ Limited wants to go on a foreign trip. He wants to assign his office to the Vice President of the company. Mr. Sunil Goyal seeks your advice on whether he can do so. Referring to the provi¬sions of the Companies Act, 2013, advise him in the matter. (June 2017) (4 marks)
Answer:

  1. In terms of the provisions of Section 166 of the Companies Act, 2013, A director of a company shall not assign his office and any assignment so made shall be void.
  2. In the given case, Mr. Sunil Goyal a director of XYZ Limited wants to go on foreign trip. He wants to assign his office to the Vice President of the company.

Thus, Mr. Sunil Goyal a director of XYZ Limited cannot assign his office to the Vice President of the company.

Question 33.
Power to borrow money includes the power to give security. Com¬ment. (December 2010) (5 marks)
Answer:
1. The power to borrow includes the power to give security, which may take the form of a mortgage, charge, hypothecation, lien, guarantee, pledge, etc. The creditor’s position becomes safer when security is given.

2. A company, like a natural person, can give security. Normally, the debentures and other borrowings of the company are secured by a charge on the assets of the company.

3. Every company may necessarily possess certain powers which are implied, such as, a power to appoint an act by agents and where it is a trading Company, a power to borrow and give security for the purposes of its business, and also a power to sell. Such powers are incidental and can be inferred from the powers expressed in the memorandum.
[Oak Bank Oil Co. v. Crum (1882) 8 App Cas 65],

4. The principle underlying the exercise of such powers is that a company in carrying on the business for which it is constituted must be able to pursue those things which may be regarded as incidental to or consequential upon that business.
[Egyptian Salt and Soda Co. v. Port Said Salt Association].

Question 34.
State the provisions of the Companies Act, 2013 relating to Loans to directors. (June 2012) (6 marks)
Answer:
1. A company cannot directly or indirectly advance any loan, including any loan representing by a book debt to its directors or to any other person in whom the directors are interested.

Similarly, a company cannot directly or indirectly give any guarantee or provide any security in connection with any loan taken by its directors or to any other person in whom the director is interested.

2. No provision in certain cases:
The provision of Section 185 shall not apply to:

3. The giving of any loan to a managing or whole-time director as a part of the condition of service extended by the company to all its employee or pursuant to any scheme approved by the members by a special resolution or

4. A company that in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the RBI.

5. If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of Section 185, the company shall be punishable with a fine which shall not be less than INR 5,00,000 but which may extend to 25,00,000.

6. The director or the other person to whom any loan is advanced or guar¬antee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable:

  • with imprisonment which may extend to 6 months or
  • with fine which shall not be less than INR 5,00,000 but which may extend to 25,00,000 or
  • with both

7. As per Rule 10 of the Companies (Meeting of Board and its Powers) Rules, 2014. Section 185 does not apply to the following transactions.

  • Any loan made by a holding company to its wholly-owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly-owned sub¬sidiary company is exempted from the requirements under this section.
  • Any guarantee given or security provided by holding company in respect of loan made by any bank or a financial institution to its subsidiary company.
    However, such loans are utilized by the subsidiary company for its principal business activities.

Question 35.
Can the board of directors of a company delegate any of its power to others? Discuss. (June 2013) (4 marks)
Answer:
1. The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely:

  • To make calls on in respect of money unpaid on shares.
  • To authorize buy-back of securities under Section 68
  • To issue securities, including debenture, whether in or outside India.
  • To borrow monies.
  • To invest the funds of the company
  • To grant loans or give a guarantee or provide security in respect of loans.
  • To approve financial statement and the board’s report
  • To diversify the business of the company.
  • To approve amalgamation, merger, or reconstruction.
  • To take over a company or acquire a controlling or substantial stake in another company.

2. The specified power to borrow monies, to invest the funds of the company, and to grant loans or give guarantee or provide security in respect of loans by the board may be delegated to:

  • committee of directors,
  • managing director,
  • manager or
  • the principal officer of the company or
  • the principal officer of the branch office.

3. Every resolution of the board delegating the powers must specify:

  • the total amount to be borrowed
  • the total amount that may be invested and the nature of the investment
  • the total amount up to which loans may be made.

4. Rule 8 of the Companies (Meeting of Board and its Powers) Rules, 2014

  • prescribes that the following power shall be exercised by the board by passing a resolution at a board meeting only:
  • power to make political contributions.
  • power to appoint or remove KMP.
  • power to appoint internal auditors and secretarial auditors.

Question 36.
The Board of directors of Nav Avlar Ltd. passed a resolution for the issue of rights shares. However, certain shareholders of the company raised an objection as to whether the company needed additional capital. Discuss the validity of the counter-move taken by the shareholders and the resolution passed by the Board. (June 2012) (4 marks)
Answer:
In terms of the provisions of Section 179 of the Companies Act, 2013:
The board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorized to exercise and do. However, in exercising such power or doing such act or thing, the board shall be subject to the provisions contained in the Companies Act, 2013, or in the memorandum or articles or in any regulations made by the company in general meeting.

Thus, the Board shall not exercise any power or do any act or thing which is to be exercised or done by the company in general meeting.

The directors shall exercise their powers bona fide and in the interest of the company. The directors while exercising their powers do not act as agents for the majority or even all the members and so the members cannot by resolution passed by a majority or even unanimously supersede the director’s powers, or instruct them how they shall exercise their powers.

In Milan Sen v. Guardian Plasticate Ltd (1998) 2 Comp LJ 320, the directors passed a resolution for rights issue which was questioned by certain shareholders. The Calcutta High Court held that the question of whether the company needed additional capital was a question that should primarily be decided by the directors of the company and if they were of the view that further capital in the form of rights issue was required, the court would not be allowed to disturb the same unless there were extreme circumstances of mala fide or breach of trust.

Thus, shareholders of a company will succeed only if they are able to show that directors are exercising their power mala fidely or in breach of trust.

Question 37.
Explain the prohibitions and restrictions regarding political contributions by a company. (June 2014) (4 marks)
Answer:
1. According to Section 182 of the Companies Act, 2013, a company, other than a government company and a company that has been in existence for less than three financial years, may contribute any amount directly to any political party. Further, the contribution under this section shall not be made except by an account payee cheque drawn on a bank or an account payee bank draft or use of an electronic clearing system through a bank account.

2. The Finance Act, 2017 amended section 182 of the Companies Act, 2013, accordingly the limit on the maximum amount that can be contributed by a company to a political party has been removed. Hence a company now can contribute any percentage without any limit.

3. The contribution must be authorized by the board in its meeting by resolution and such resolution deemed to be the justification in law for such contribution. The donation may be directly or indirectly. The contribution so made if or likely to affect the public support for a political party deemed to be the contribution for political purpose.

4. If the expenditure incurred on advertisement in any publication souvenir, brochure, tract, pamphlet or the like is deemed as a political contribution if such publication is by or on behalf of a political party or if not, then for the advantage to such political party for a political purpose.

5. Every company is required to disclose in its profit and loss account the total amount contributed by it under this section during the financial year to which the account relates.

Question 38.
In what way does the Companies Act, 2013 regulate the payment made by companies towards contribution to political parties for political purposes? Explain. (June 2015) (4 marks)
Answer:
1. According to Section 182 of the Companies Act, 2013, a company, other than a government company that has been in existence for less than three financial years, may contribute any amount directly to any political party. Further, the contribution under this section shall not be made except by an account payee cheque drawn on a bank or an account payee bank draft or use of an electronic clearing system through a bank account.

2. The Finance Act, 2017 amended section 182 of the Companies Act, 2013, accordingly the limit on the maximum amount that can be contributed by a company to a political party has been removed. Hence a company now can contribute any percentage without any limit.

3. Every company is required to disclose in its profit and loss account the total amount contributed by it under this section during the financial year to which the account relates.

4. Deemed political contribution:
If the expenditure incurred on advertisement in any publication souvenir, brochure, tract, pamphlet, or the like is deemed as a political contribution. if such publication is by or on behalf of a political party or if not, then for the advantage to such political party for a political purpose.

Question 39.
The powers of the directors of a company are co-extensive with those of the company. Comment (June 2015) (5 marks)
Answer:
1. The Board of Directors of a Company shall be entitled to exercise all such powers and to do all such acts and things as the Company is authorized to exercise and do.

However, in exercising such power or doing such act or thing, the Board shall be subject to the provisions contained in the Companies Act, 2013, or in the memorandum or articles or in any regulations made by the company in general meeting.

2. It is evident and clear that subject to the restrictions contained in the Companies Act, 2013, Memorandum of Association, and Articles of Association, the powers of directors are co-extensive with those of the Company itself.

Thus, the Board shall not exercise any power or do any act or thing which is to be exercised or done by the Company in general meeting.

Question 40.
Bright Products Ltd. wishes to sell one of its undertakings for which it decided to call an extraordinary general meeting (EOGM) and to pass a resolution thereat. State the material facts to be set out in the explanatory statement to be annexed to the notice of the EOGM on this special business to be transacted at the meeting. (June 2016) (4 marks)
Answer:
1. As per Section 180(l)(a) of the Companies Act, 2013, the board of directors can exercise the following powers only with the consent of the company by special resolution to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.

2. As per Section 102 of the Companies Act, 2013, in case of special busi¬ness items to be transacted at a general meeting, a statement setting out the following material facts, shall be annexed to the notice calling the meeting:

3. The nature of concern or interest, financial or otherwise in respect of each item of:

  • Every director and the manager, if any
  • Every other key managerial personnel and
  • Relatives of the persons mentioned above.

4. Any other information and facts that may enable members to understand the meaning, scope, and implications of the items of business and to take a decision thereon.

5. In accordance with the provisions, for selling one of the undertakings of the Company explanatory statement annexed to the notice must specify the following material facts:

  • General nature of business of the Company.
  • Role of undertaking in the business of the Company.
  • Nature of assets and liabilities of the undertaking.
  • Reasons for the sale of the undertaking.
  • The financial effect after sales on the balance sheet and income of the Company.
  • Major terms and conditions relating to the sale of the undertaking.
  • The fact that sale of undertaking requires approval of shareholder in terms of Section 180.
  • The nature of interest, if any of the director, manager, and Key Managerial Personnel (KMPs).

Question 41.
It is mandatory for every director of a company to disclose his interest or the nature of his concern in other companies in which he is a director. Comment (June 2016) (5 marks)
Answer:
1. Section 184(1) of the Companies Act, 2013, states that every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the disclosure of shareholding held by him in Form MBP-1.

2. Consequences of non-disclosure of Interest:
As per Section 184(4) of the Companies Act, 2013, in case of default such director shall be liable to a penalty of one lakh rupees.

3. Vacation of Office of Director:
Under Section 167 of the Companies Act, 2013, the office of a director shall become vacant in case he acts in contravention of the provisions of Section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested.

Thus, it is mandatory for every director of a company to disclose his interest or nature of his concern in other companies in which he is the director.

Question 42.
Explaining the provisions of the Companies Act, 2013, state the duties of the Nomination and Remuneration Committee. (June 2016) (4 marks)
Answer:
1. Constitution of Nomination and Remuneration Committee [Section 178]: The board of directors of every listed company and other prescribed classes of the company shall constitute the nomination and remuneration committee comprising of three or more non-executive directors out of which not less than one half shall be independent directors. The chairperson of the company may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such committee.

2. Duties of Nomination and Remuneration Committee [Section 178(2)]: The Nomination and Remuneration Committee shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the board their appointment and removal and shall carry out an evaluation of every director’s performance.

3. The Nomination and Remuneration Committee shall formulate the criteria for determining qualifications, positive attributes, and independence of a director and recommend to the board a policy, relating to the remuneration for the directors, KMP, and other employees.

  • The Nomination and Remuneration Committee shall while formulating the policy ensure that the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully.
  • The relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and
  • Remuneration to directors, key managerial personnel, and senior management involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals. Such policy shall be disclosed in the board’s report.

Question 43.
Examining the provisions of the Companies Act, 2013, relating to the constitution of a ‘Nomination and Remuneration Committee’ and ‘Stake¬holders Relationship Committee’, answer the following:
(i) Is it mandatory for a listed company to constitute such a committee? Also, state whether it is mandatory for a non-listed public company having paid-up share capital of INR 5 crore to constitute such committees?
(ii) What shall be the composition of the committee in case the company is required to constitute such committees? (December 2015) (4 marks)
Answer:
Constitution of Nomination and Remuneration Committee [Section 178(1)]:
1. The board of directors of every listed public company and other prescribed classes of companies shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one-half shall be independent directors.

2. The chairperson of the company may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such a Committee.

3. As per Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014, the board of director of the following classes of companies shall constitute an audit committee and nomination and remuneration committee of the board:

  • All public companies with paid-up share capital of INR 10 crore or more;
  • All public companies having turnover of INR 100 crore or more;
  • All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding INR 50 crores or more.

Constitution of Stakeholders Relationship Committee [Section 178(1)]:
The Board of Directors of a company which consists of more than 1,000 shareholders, debenture- holders, deposit holders, and any other security holders at any time during the financial year shall constitute a Stakeholder Relationship Committee consisting of a chairperson who shall be a non-executive director and such other members as may be decided by the board.

As per the provisions discussed above:
1. It is mandatory for a listed company to constitute such committees.
In the case of a non-listed public company having a paid-up share capital of 5 crores, it is not necessary to constitute such committees.

2. Nomination and Remuneration Committee shall consist of three or more non-executive directors out of which not less than one-half shall be independent directors.

Stakeholders Relationship Committee shall consist of a chairperson who shall be a non-executive director and such other members as may be decided by the Board.

Question 44.
The balance sheet of Duck Ltd. shows a paid-up capital of INR 5 Crore and a free reserve of INR 2 Crore. Due to the heavy financial requirements of the company, it plans to apply for a loan of INR 8 Crore with XYZ Bank Ltd. Advise the company on the formalities to be fulfilled. Also advise on the alternative course of action, if any. (December 2013) (4 marks)
Answer:
As per Section 180(l)(c), the Board of Directors of a company
1. cannot borrow a sum which together with the monies already borrowed exceeds the aggregate of the paid-up share capital of the Company and

2. its free reserves apart from temporary loans obtained from the company’s bankers in the ordinary course of a business unless they have received the prior sanction of the company by a special resolution in a general meeting.

As per the facts given in the case, the total paid-up capital and its free reserves of Duck Ltd. is INR 7 Crores and the company intend to apply for a loan of INR 8 crores which exceed the aggregate of the paid-up share capital of the Company and its free reserves; thus sanction by a special resolution in general meeting is necessary. On the other hand, Duck Ltd. can take a loan up to INR 7 crore bypassing board resolution, and complying with the provisions of its article and approval of shareholders by way of special resolution will not be necessary.

Question 45.
Net profits of QPR Ltd. during the following years as disclosed in the statement of profit and loss are as under:

Financial year ended Net profit (INR in Crore)
31st March, 2013 10
31st March 2014 12
31st March 2015 08

The Board of directors of the company at its meeting decides to contribute to a charitable organisation, for charitable purposes, a sum of INR 3 crore out of the net profits of the financial year ended 31st March 2015. This contribution has been made by the Board without seeking approval of shareholders in general meeting.
In light of the provisions of the Companies Act, 2013, examine the validity of the contribution made by the company. What shall be your answer in case the Board decides to contribute INR 1 crore only? (December 2015) (4 marks)
Answer:
Company to contribute to charitable funds [Section 181 of the Companies Act, 2013]:
1. The Board of directors of the Company may contribute to bona fide charitable and other funds. However, if contribution to charitable and other funds exceeds 5% of its average net profits for the three imme-diately preceding financial years, prior permission of the Company in general meeting shall be required.

2. As per the facts given in case, the Board of Directors of PQR Ltd. desires to contribute INR 3 crore to a charitable organization, which is more than 5% of its average net profits for the three immediately preceding financial years, hence prior permission of the Company in general meet¬ing shall be required.

3. If the Board of Directors of PQR Ltd. desires to contribute INR 1 crore to a charitable organization, answer will be still same that is to say prior permission of the Company in general meeting shall be required as INR 1 crore is more than 5% of its average net profits of the three immediately preceding financial years.

Working Note:
Average Net profit = \(\frac{10 \text { crore }+12 \text { crore }+8 \text { crore }}{3}\) = INR 10 Crore
5% of Average Net Profit =10 Crore × 596 = INR 0.5 Crore

Question 46.
Board of directors of Divine Ltd. decides to enter into a contract whereby Manish, a director of the company shall acquire certain assets from the company for consideration other than cash, without seeking approval of the company in its general meeting. Certain shareholders of the company object to the set decision of the Board. Referring to the provisions of the Companies Act, 2013, examine the validity of the Board’s decision and state whether the contention of the shareholder shall be tenable. (December 2015) (4 marks)
Answer:
1. Under Section 192 of the Companies Act, 2013, Restriction on non-cash transactions involving Directors:
No company shall enter into following non-cash transaction:

  • A director of the Company or its holding, subsidiary or associate company or a person connected with him acquires assets for consideration other than cash from the company, or
  • The Company acquires assets from director or person connected with directors.

2. Non-cash transactions can be entered into by the Company only with the approval of shareholder in general meeting.

3. If the director or connected person is a director of its holding company, approval shall also be obtained by passing a resolution in general meeting of the holding company.

4. Notice of general meeting approving non-cash transaction under Section 192(2) of the Companies Act, 2013:
The notice for approval of the resolution by the Company or holding company in general meeting shall include the particulars of the arrangement along with the value of the assets duly calculated by a registered valuer.

As per the facts given in case, the board of directors of Divine Ltd. decides to enter into a contract whereby Manish, a director of the Company shall acquire certain assets from the Company for consideration other than cash, without seeking approval of the Company in general meeting, which is not valid as per Section 192 of the Companies Act, 2013. The Company should have taken approval of shareholder in general meeting by way of passing special resolution.

Question 47.
Serious Ltd. is having three factories in Chennai. The company wants to sell one of the Factory. Can the company sell its factory? Further, assuming that the company has also borrowed credit facilities from the bank, explain the statutory provisions under the Companies Act, 2013. (June 2018) (4 marks)
Answer:
1. As per Section 180(1) of the Companies Act, 2013, the board of directors of a public company shall exercise the following powers only with the consent of the company by a special resolution:

  • Sell, Lease or dispose of the whole of the undertaking of the company;
  • Invest the amount of compensation received by it as a result of any merger or amalgamation;
  • Borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed the aggregate of its paid-up share capital and free reserves and securities premium;
  • However, if the amount borrowed is a temporary loan from the company’s bankers in the ordinary course of business then this clause is not applicable, hence member approval by way of special res¬olution is not required.
  • Remit, or give time for the repayment of any debt due from a director.

2. The undertaking shall mean an undertaking in which the investment of the company exceeds 20% of its net worth as per the audited balance sheet of the preceding financial year or an undertaking that generates 20% of the total income of the Company during the previous financial year.

As per the facts of the case, Serious Ltd. is having three factories in Chennai. The company wants to sell one of the Factory. Thus, Serious Ltd. can dispose of its undertaking by passing a special resolution if the investment in its undertaking proposed to sell exceeds 20% of its net worth as per the audited balance sheet of the preceding financial year or if such undertaking generates 20% of the total income of the Company during the previous financial year.

However, if the proposed undertaking to be sold does not fulfill the criteria stated above then such undertaking can be sold by passing a resolution at the board meeting subject to compliance of provisions of the article of association of the Company.

If a Serious Ltd. also has borrowed facilities from the bank then prior approval of the bank should also be taken if the loan agreement contains a provision regarding disposal of any assets or undertaking subject to prior approval of the Bank.

Question 50.
The Managing Director of a public limited company applied for purchasing a company’s flat. The price of the flat is INR 40 lakh. The Man¬aging Director suggested that he may be allowed to pay INR 20 lakh and the balance of INR 20 lakh may be recovered from his salary in 40 installments. Accounts Department observed that it will tantamount to providing house building advance to the Managing Director which is not covered by the rules of the company. Being the Company Secretary of the company, you have been asked by the board of directors to examine and submit a note stating the rules in this regard and action to be taken for considering the request. IfSlI (December 2011) (8 marks)
Answer:
In the decided case, Freddie Ardeshir Mehta v. Union of India (1991) 1 Comp LJ 437 (Bom.), it was held that if the company sells one of its flats to one of its directors on receiving half the price in cash and agreeing to accept the balance in installments does not amount to giving of loan to the director.

In the given case, the Managing Director of a public limited company applied for purchasing a company’s flat. The price of the flat is INR 40 lakh. The Managing Director suggested that he may be allowed to pay INR 20 lakh and the balance of INR 20 lakh may be recovered from his salary in 40 installments. Accounts Department observed that it will tantamount to providing house building advance to the Managing Director which is not covered by the rules of the Company.

In view of above, the observation made by Accounts Department that purchasing flat by Managing Director will tantamount to providing house building advance is not correct.

Question 51.
In a Limited Company, the Managing Director terminated an employee on the charge of various misconducts. The aggrieved employee filed a writ petition before the High Court challenging the dismissal contending that the Managing Director had no power to do so and the proper authority was the Board of directors. During the pendency of writ, the Board of directors passed a resolution ratifying the action of the Managing Director. The High Court while setting aside the Managing Director’s dismissal order, allowed the writ petition. The managing director appealed to the Supreme Court. Decide the case having regard to the judicial pronouncements in the matter. (December 2014) (8 marks)
Answer:
1. In the decided case of Maharashtra State Mining Corpn. v. Sunil (2006) 5 SCC 96, the appellant corporation’s Managing Director terminated the respondent’s services for various misconducts. The respondent filed a writ petition challenging the said dismissal order on the ground that the managing director had no authority to do since the same was vested in the appellant’s Board of Directors. While the said petition was pending, the board of directors passed a resolution ratifying the Man¬aging Director’s impugned action.

2. The High Court, while setting aside the impugned termination order, allowed the respondent’s writ petition. Appellant appealed to the Supreme Court. The appeal was allowed. According to Supreme Court, the High Court was right when it held that an act by a legally incompetent authority was invalid. But it was entirely wrong in holding that such an invalid act cannot be subsequently rectified by the ratification of the competent authority.

3. In the instant case, the managing director’s order dismissing the respondent from the service was admittedly ratified by the board of directors and the board of directors unquestionably had the power to terminate the services of the respondent. However, the order of the managing director had been ratified by the board of directors, such ratification related back to the date of the order and validated it.

Therefore, the instant appeal was allowed, the impugned judgment and order of the High Court was quashed and the dismissal order was upheld as ratification assumed an invalid act if it was retrospectively validated.

Question 52.
Anil, a shareholder holding 9% equity shares of the company, who is not holding any directorship wants to stand for directorship in Pritam Ltd. in its next annual general meeting. State the procedure lor appointment of Anil as per the provisions of the Companies Act, 2013. (December 2018) (5 marks)
Answer:
1. Right of persons other than retiring directors to stand from directorship [Section 160 of the Companies Act, 2013]:
A person who is not a retiring director shall be eligible for appointment or to the office of a director at any General Meeting.

2. Such a person or some member intending to propose him as a director has to give a notice in writing at least 14 days before the meeting. A sum of rupees 1 lakh shall be deposited along with the notice.

However, the requirement of a deposit of amount rupees 1 lakh shall not apply in case of the appointment of an independent director or director recommended by the nomination and remuneration committee.

3. The amount deposited will be refunded to such person or to the member if the person proposed gets elected as a director or gets more than 25% of the total valid vote cast either on a show of hands-on poll on such resolution.

4. On receipt of notice as stated above, the company shall inform its members about the candidature of the person proposed as a director in the prescribed manner.
Thus, Anil can stand for directorship in Pritam Limited after compliance with the above-stated provisions.

Question 53.
In a general meeting, a motion was put for the removal of small shareholders’ director. A small shareholder contended that only small shareholders are entitled to vote on this motion as it is related to the removal of small shareholders’ director and the motion should be passed as a special resolution. Is the argument valid? Analyze with reference to the provisions of the Companies Act, 2013 (December 2018) (4 marks)
Answer:
1. All types of directors including a small shareholders director can be removed by the company after complying with the provisions of section 169 of the Companies Act, 2013.

2. As per applicable provisions of the Section ordinary resolution is required to be passed from the removal of the director.

3. In the given case, in a general meeting, a motion was put for the removal of small shareholders’ directors. A small shareholder contended that only small shareholders are entitled to vote on this motion as it is related to the removal of small shareholders’ director and the motion should be passed as a special resolution.

Hence, the contention of the small shareholder’s directors that only small shareholders are entitled to vote on a motion to remove him from a position of small shareholder director and that special resolution is required for such removal is incorrect.

Question 54.
SRM Ltd. has paid INR 15 lakh as an insurance premium on behalf of its Company Secretary and Managing Director for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty, or breach of trust for which they may be guilty in relation to the company. Can the company pay such an insurance premium? Discuss refer¬ring to the provisions of the Companies Act, 2013. (December 2018) (4 marks)
Answer:
1. As per Section 197(13) of the Companies Act, 2013. A company may take insurance on behalf of its MD, WTD, Manager, CEO, or CS for indemnifying any of them against any liability in respect of any negligence, default misfeasance, breach of duty, or breach of trust for which they may be guilty.

2. The premium paid on such insurance shall not be treated as part of the managerial remuneration.
However, if such a person is proved to be guilty, the premium paid on insurance shall be treated as part of the remuneration.

3. In the given case, SRM Ltd. has paid INR 15 lakh as an insurance premium on behalf of its Company Secretary and Managing Director for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty, or breach of trust.

Thus, SRM Limited can pay an insurance premium of 15 lakh on behalf of its company secretary and managing director for indemnifying any of them against any liability in respect of any negligence default, misfeasance, breach of duty, or breach of trust for which they may be guilty.

Question 55.
On 5th January 2018 in a general meeting, a motion for the removal of a director was put to vote. The Chairman declared the motion passed as an ordinary resolution by show of hands. In the next general meeting held on 28th September 2018, a member questioned the validity of the said resolution which was declared as passed by the Chairman alleging that majority votes were against the motion and asked the chairman to disclose a number of votes cast in favor of and against the said resolution. Referring to the provisions of the Companies Act, 2013 discuss if the demand of members is tenable. (December 2018) (4 marks)
Answer:
1. As per the provisions of Section 107 of the Companies Act, 2013:
At any General Meeting, a resolution put to the vote of the meeting shall in the first instance be decided on a show of hands.

2. A declaration by the chairman of the meeting of the passing of a resolu¬tion by show of hands shall be conclusive evidence of the fact of passing of such resolution unless a poll is demanded before immediately on a declaration by the chairman.

3. In the given case, on 5th January 2018 in a general meeting a motion for removal of a director was put to vote. The Chairman declared the motion passed as an ordinary resolution by show of hands. In the next general meeting held on 28th September 2018, a member questioned the validity of the said resolution which was declared as passed by the Chairman alleging that majority votes were against the motion and asked the chairman to disclose a number of votes cast in favor of and against the said resolution.

Thus, a member cannot question the validity of the resolution in the next general meeting which was declared as passed in the earlier General Meeting.

Question 56.
“A” Ltd., a public company wants to appoint Alternate Directors.
Examine the validity of acts of the company with reference to provisions of
Companies Act, 2013 in following cases :
(i) ‘D’ a director was absent for a period of two and half months. It is proposed to appoint an alternate director.
(ii) ‘E’ a director was absent for 4 months. It is proposed to appoint T’ as an alternate director in the place of E\ ‘F’ is already acting as an alternate director in “A” Ltd. for a director ‘G’ who was absent for 5 months.
(iii) Can the said appointment, if permitted, be passed by circular resolution? (June 2019) (1 + 2 + 2 = 5 marks)
Answer:
1. Section 161(2) of the Companies Act, 2013, empowers the Board if so authorized by its articles or by a resolution passed by the company in general meeting, to appoint a director (termed as ‘alternate director’) to act in the absence of an original director during his absence for a period of not less than three months from India. Section 161(2) of the Companies Act, 2013, applies to all companies whether public or private.

2. The person to be appointed as the Alternate Director shall be the person other than the person holding any alternate directorship for any other Director in the company or holding directorship in the same company.

3. If it is proposed to appoint an Alternate Director to an Independent Di¬rector, it must be ensured that the proposed appointee also satisfies the criteria of Independence as per Section 149(6) of the Companies Act, 2013.

As per the provisions of the above-mentioned provisions:
L Mr. D is absent for a period less than 3 months and hence alternate director cannot be appointed for him. ii Mr. E is absent for a period of more than 3 months and hence an alternate director can be appointed for him. However, Mr. F cannot be appointed as an alternate director for Mr. E as Mr. F is already acting as an alternate director for Mr. G. Advisable to appoint some other person as an alternate director who is not a director in the Company and who is not appointed as an alternate director for any other director in the Company.

Hi, An alternate director cannot be appointed by passing a resolution by circulation.

Question 57.
‘X’ was appointed as an Additional Director of Precious Ltd w.e.f. 21st November 2018 in a casual vacancy caused by the unexpected death of “P” by way of a circular resolution passed by the Board of directors. With reference to the provisions of the Companies Act, 2013 advise the company on the validity of the appointment of ‘X’ and his continuation as Additional director. (June 2019) (4 marks)
Answer:
1. As per Section 161(1) of the Companies Act, 2013, the additional direc¬tor shall 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.

2. The articles of a company may confer on its Board of Directors the power to appoint any person as an additional director.
However, a person who fails to get appointed as a director in a general meeting cannot be appointed as an additional director.

3. An additional director can be appointed by passing a resolution by circulation.

Thus, the appointment of Mr. X as an additional director by circular resolution is valid.

Question 58.
On 4th September 2018. Varun was appointed as Managing Director of Astha Ltd. by the Board of directors subject to the approval of the members at the next general meeting. On 10th September 2018, Varun in the capacity of managing director executed an agreement with Shabeer to purchase some machines. On 3rd October 2018 members in the general meeting did not approve the appointment of Varun. Later on, the company refuses to accept de¬livery of machines from Shabeer on the ground that the agreement was executed by Varun whose appointment is not approved by the members. Is the refusal of the company valid on the said ground? Examine. (December 2018) (4 marks)
Answer:
1. As per Section 196( 5) of the Companies Act, 2013, where an appointment of managing director, whole-time director, or manager is not approved by the Company at a General Meeting any act done by him before such approval shall not be deemed to be invalid.

2. As per the given case law, on 4th September 2018. Varun was appointed as Managing Director of Astha Ltd. by the Board of directors subject to the approval of the members at the next general meeting. On 10th September 2018, Varun in the capacity of managing director executed an agreement with Shabeer to purchase some machines. On 3rd October 2018 members in the general meeting did not approve the appointment of Varun. Further, the company refuses to accept delivery of machines from Shabeer on the ground that the agreement was executed by Varun whose appointment is not approved by the members.

Thus, the contract of purchase of machines executed incapacity of managing director by Varun is binding on the Company even though his appointment is not approved by the company in General Meeting.

CS Executive Company Law Questions and Answers

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