Drafting of Agreements under the Companies Act – CS Professional Study Material

Chapter 8 Drafting of Agreements under the Companies Act – CS Professional Drafting, Pleadings and Appearances Notes is designed strictly as per the latest syllabus and exam pattern.

Drafting of Agreements under the Companies Act – Drafting, Pleadings and Appearances Study Material

Question 1.
Write note on the following:
Pre-incorporation contracts (June 2013, 4 marks)
Answer:
A pre-incorporation contract means a contract entered into by the promoters on the behalf of a proposed company i.e. before incorporation of a company. These contracts are usually made by the promoters to acquire some property or right for the proposed company.
Hence, a contract made by a promoter purporting to act on behalf of a company prior to its incorporation never binds the company because at the time the contract was concluded, the company was not in existence.

Further, even after incorporation such a purported contract cannot be ratified by the company [Kelnerv. Baxter (1866) L.R. 2 C.P. 174].

Even if the company takes some benefit from a contract purported to have been made before Its formation the contract is not binding on the company.

The Promoters alone remain personally liable for any contract they purport to make on behalf of the company, unless the company enters into the contract in terms of such agreement after incorporations.

A company cannot ratify a pre-incorporation contract, but it is open to it to enter into a new contract after its incorporation to give effect to a contract made before its incorporation [Howard v. Patent Ivory Co. (1888) 38 Ch D 156].

Question 2.
Write note on the following:
Pre-incorporation contracts. (Dec 2014, 4 marks)

Question 3.
Write note on the following:
Drafting of Articles of Association. (June 2017, 4 marks)
Answer:
In case of drafting the articles for a company limited by shares, the draftsman
can follow the following alternatives:

Adopt Table F of Schedule 1 in Companies Act, 2013 in full; or
Exclude Table F wholly and register own Articles suiting its requirements; or
Register own articles and in addition thereto allows Table F to apply so far as it is not modified or excluded by the articles.

Some important points which a draftsman should bear in mind while drafting the Articles are as follows:
1. Share capital, its kinds rights attached to different kinds of shares or any special privileges attached thereto should be considered and incorporated in Articles.

2. Directors – appointment of directors, their voting rights, resignations, termination etc. should be given due consideration and their rights, powers and privileges should be incorporated in Articles Proportional representations may also be looked into.

3. In Government Companies, Joint Sector Companies, Joint Ventures with foreign companies, joint venture with Government Companies, the main terms of their partnership in Share Capital as well as the management of the affairs of the company with power and authority delegation be relevantly discussed in the Articles with scope and limitations thereto to avoid any misinterpretation.

4. As far as possible, regulation given in Table F may be borrowed, even if it is not made applicable so that Article may conform to the intent and spirit of law.

5. Efforts should be made to make each article self explanatory and self interpretative to avoid misleading conclusions. Coherence and sequence of the contents should be maintained at any costs.

6. Any items which are already mentioned in Memorandum and is to be mentioned in Articles, it is better that it is put in words such as “as mentioned in Memorandum of Association” which will skip the requirement of altering Articles when Memorandum is altered.

7. No provision which a company cannot do either as per Memorandum or Companies Act or any other law, should find a place in articles:
e.g. expulsion of members. This is opposed to Company Jurisprudence and is ultra vires of the Act.

8. Where the company would require assistance from financial Institutions, provisions be made for appointment of nominee directors, conversion of loans from financial institutions into equity etc.

Question 4.
Write note on the following:
Pre-incorporation Contracts (Dec 2017, 4 marks)

Question 5.
Write note on the following :
Slump Sale agreement (Dec 2017, 4 marks)
Answer:
Slump Sale Agreement:
Slump sale is one of the widely used ways of business acquisitions. In simple words, ‘slump sale’ is nothing but transfer of a whole or part of business concern as a going concern; lock, stock and barrel. The concept of ‘slump sale’ was incorporated in the Income Tax Act, 1961 (“IT Act”) by the Finance Act, 1999 with the inclusion of Section 2(42C).

The term ‘slump sale’ is defined as transfer of one or more undertakings as a result of the sale for a lump-sum consideration without values being assigned to the individual assets and liabilities in such sales.

For looking at the meaning of word ‘undertaking’ resort has to be made to Explanation 1 to Section 2(19AA). Section 2(19AA) defines “demerger” in relation to companies. Explanation 1 to Section 2(19AA) defines “undertaking” to be any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole but does not include individual assets or liabilities.

As per definition of ‘undertaking’ even any part/division of an undertaking or * business activity as a whole can be considered.

Question 6.
Write notes on the following:
Shareholders’ agreements (June 2018, 4 marks)
Answer:
Shareholder’s Agreements:
Shareholder’s agreements (SHA) are quite common in business. In India shareholder’s agreement have gained popularity and currency only lately with bloom in newer forms of business. It is a contractual arrangement between the shareholders of a company describing how the company should be operated and the defining inter – se shareholder’s rights and obligations.

Shareholder’s Agreements are the result of mutual understanding among the shareholders of a company to which, the company generally becomes a consenting party. Sometimes, they are also referred to as share purchase agreements or investment agreements.

Question 7.
Write note on the following:
Pre-incorporation contracts and ratification thereof. (Dec 2020, 4 marks)

Question 8.
Write note on the following :
Underwriting and Brokerage Agreement. (Aug 2021, 4 marks)
Answer:
Underwriting and Brokerage Agreements
Underwriting is an insurance against risk. When shares or debentures of a company are issued to the public, they are, by and large, underwritten to ensure that all the shares or debentures issued are taken up and thus the required capital is raised.

Before entering into an underwriting arrangement with a member of any recognised stock exchange, it is the duty of the directors of the concerned company to ensure that the underwriter has sufficient financial resources to meet any obligation which may devolve upon him in the event of the issue not being fully subscribed by public.

Brokerage Agreements are those agreements in which a party agree to accept certain percentage as brokerage from other party on happening or non-happening of an event. In these agreement, one party acts as the broker for the other party.

Question 9.
Distinguish between the following:
‘Memorandum of understanding’ and ‘memorandum of association’. (Dec 2015, 4 marks)
Answer:
Memorandum of Understanding:
A document that expresses mutual accord on an issue between two or more parties.
Memorandum of understanding are generally recognized as binding, even if no legal claim could be based on the rights and obligations laid down in them. To be legally operative, a memorandum of understanding must

identify the contracting parties,
spell out the subject matter of the agreement and its objectives,
summarize the essential terms of the agreement, and
must be signed by the contracting parties.

Memorandum of Association
Memorandum of association of the company is the fundamental formation document. It is the constitution arid charter of the company. It contains the basic conditions on the strength of which the company is incorporated. Thus, it defines and confines the area of operation of the company.

It lays down the area, beyond which the action of the company cannot go. Section 4 of the Companies Act, 2013 and Table A, B, C, D and E in Schedule-I as may be applicable to such company deal with contents, form and printing and signature of memorandum of association.

Question 10.
Distinguish between the following:
Memorandum of Association and Anides of Association (Dec 2017, 4 marks)
Answer:

Memorandum of Association	Articles of Association
1. It is the Charter of the Company which define its objects and powers.	They are the regulation for the internal management of the company and are subsidiary to the memorandum.
2. The memorandum is supreme document of the company.	While the Articles are subordinate to the memorandum.
3. Every company must have its own-memorandum.	A company limited by shares need not have Articles of its own. In such a case Table F applies.
4. The memorandum define the relationship between the company and the outsiders.	While Articles define the relationship between the company and its members.
5. Any act of the company which is ultra vires the memorandum is wholly void and cannot be ratified even by the whole body of shareholders.	Any act of the company which is ultra vires the Articles (but is intra-vires the memorandum) can be confirmed by shareholders.

Question 11.
Distinguish between the following Memorandum of Association and Articles of Association, (any fourattributes of distinction). (Dec 2021, 4 marks)
Answer:

Question 12.
In the context of Tribunal rulings on merger, discuss and decide the foNowing issues: (June 2012)
(i) Can the exchange ratio approved by shareholders of the merging company be questioned by a small group of dissenting shareholders?
(ii) Is the transferring company justified in excluding assets held on lease and license arrangement from those transferred to the transferee company? (4 marks each)
Answer:
(i) In the case of Hindustan Lever Employees Union vs. Hindustan Lever Ltd., the Court held that where the exchange ratio has been approved by a majority of person’s affected and there is no basis to doubt their judgement and valuation has been confirmed to true or fair by firms of auditors the objections to the same cannot be entertained /sustained.

In view of the above case, the exchange ratio approved by shareholders of merging companies cannot be questioned by small group of dissenting shareholders unless it is unfair and unreasonable.

(ii) In the case of Hindustan Lever Employees Union v. Hindustan Lever Ltd. the Court held that did not attach importance to the fact certain leasehold assets and properties held under licence excluded from valuation.
(a) such assets, the Court said, were not a transferable and as well as not heritable.
(b) They are in the nature of personal privilege.

Hence, the transferor company is justified, is excluding assets held on lease and license agreement from those transfer to the transferee company.

Question 13.
What is meant by ‘pre-incorporation contracts’? Can a company ratify a contract entered into by the promoters on its behalf before its incorporation? Explain with reasons. (Dec 2012, 10 marks)
Answer:
A pre-incorporation contract means a contract entered into by the promoters on the behalf of a proposed company i.e. before incorporation of a company. These contracts are usually made by the promoters to acquire some property or right for the proposed company.

Hence, a contract made by a promoter purporting to act on behalf of a company prior to its incorporation never binds the company because at the time the contract was concluded, the company was not in existence.

Further, even after incorporation such a purported contract cannot be ratified by the company [Kelnerv. Baxter (1866) L.R. 2 C.P. 174).

Even if the company takes some benefit from a contract purported to have been made before its formation the contract is not binding on the company.

Question 14.
What is meant by ‘reconstruction’ in the context of mergers and amalgamations? (June 2013, 2 marks)
Answer:
Reconstruction:
“Reconstruction” has not been defined in the Companies Act, 2013. A reconstruction normally entails the transfer of an undertaking to another company, consisting substantially of the same shareholders with a view to its being continued by the transferee company and usually resorted to for achieving one or more of the following objects:

(a) For the purpose of raising fresh capital by issuing partly paid shares in the new company in exchange for full paid up shares in the old company and calling up the balance on new shares as and when required;
(b) For extending the company’s objects otherwise than under Section 13 of Companies Act, 2013;
(c) For reorganising or rearranging the capital structure and the rights of members as between themselves;

Question 15.
Examine and discuss the following : (June 2014)
(a) Slump sale agreement as defined under the Income-tax Act, 1961. (4 marks)
(b) Significance of memorandum of association as the foundation of the corporate structure. (4 marks)
Answer:
(a) Slump Sale Agreement: Slump sale is one of the widely used ways of business acquisitions. In simple words, ‘slump sale’ is nothing but transfer of a whole or part of business concern as a going concern; lock, stock and barrel. The concept of ‘slump sale’ was incorporated in the Income Tax Act, 1961 (‘IT Act”) by the Finance Act, 1999 with the inclusion of Section 2(42C). The term ‘slump sale’ is defined as transfer of one or more undertakings as a result of the sale for a lump-sum consideration without values being assigned to the individual assets and liabilities in such sales.

(b) Memorandum of Association: Memorandum of association of the company is the fundamental formation document. It is the constitution and charter of the company. It contains the basic conditions on the strength of which the company is incorporated.

Thus, it defines and confines the area of operation of the company. It lays down the area, beyond which the action of the company cannot go. Sections 13,14 and 15 of Companies Act deal with contents, form and printing and signature of memorandum of association. Students are advised to be conversant with the above sections, as they are very relevant to drafting.

Drafting of Memorandum: Draftsmen should know that memorandum is the main edifice upon which the whole structure of the company is erected. It is the basic document fundamental to its existence. Further, it is alsd to be noted that as it is the charter of the company defining scope of its activity and extent of power it could exercise, so that its shareholders, creditors, bankers and other third parties who deal with : the company could know the range of the company’s enterprise. Based on the provisions of Section 4, the main drafting requirements of Contents of a Memorandum are summarised:

Name of the company
Registered office of the company
Objects for which the company is established
Liability clause
Capital clause
Association or Subscription clause

Question 16.
“Shareholders’ agreements (SHAs) are quite common in business today.” Elucidate. Also discuss whether they form supplements to company’s regulations and articles of association. (June 2014, 8 marks)
Answer:
Shareholders’ Agreements: Shareholders’ agreements (SHA) are quite common in business. In India shareholder’s agreement have gained popularity and currency only lately with bloom in newer forms of businesses.

There are numerous situations where such agreements are entered into family companies, JV companies, venture capital investments, private equity investments, strategic alliances and so on. Shareholders’ agreement is a contractual arrangement between the shareholders of a company describing how the company should be operated and the defining inter-se shareholders’ rights and obligations, shareholders’ agreement.

SHAs are the result of mutual understanding among the shareholders of a company to which, the company generally becomes a consenting party. Such agreements are specifically drafted to provide specific rights, impose definite restrictions over and above those provided by the Companies Act. A Shareholders’ Agreement creates personal obligation between the members signing such agreement however, such agreements do not become a regulation of the company in the way the provisions of Articles are.

In India, courts have either refused to recognize clauses in shareholders’ agreements or, even when consistent with company legislation, enforced such clauses only if they have been incorporated in the articles of association of the company. There is a series of rulings where the courts have upheld that in case of any conflict between the Articles and the SHA, the former will always prevail. Some of these are:

V.B. Rangar’a] v. V.B. Gopalakrishnan (AIR 1992 SC 453)
Shanti Prasad Jain v. Kalinga Tubes Ltd., (35 Com. Cas 351 SC)
Mafatlal Industries Ltd., v. Gujarat Gas Co. Ltd (97 Comp Cas 301 Guj),
Pushpa Katoch v. Manu Maharanl Hotels Limited ([2006] 131 Comp Cas 42 (Delhi)]

The Supreme Court in V.B. Rangara] v. V.B. Gopalakrishnan, AIR 1992 SC 453 held that a restriction which is not specified in the Articles of Association is not binding either on the company or on the shareholders. This decision was reiterated by the Bombay High Court in IL & FS Trust Co. Ltd. v. Birla Perucchinl Ltd [2004] 121 Comp Cas 335 (Bom).

However, the Supreme Court in 2003 in its decision in M.S. Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd. (2003 117 Comp Cas 19 SC ) not disagreeing with the decision in V.B. Rangaraj case mentioned above, but distinguishing itself from the facts in that judgment, held that a restriction in relation to identified members on identified shares of a private company did not amount to restriction of transferability of shares perse.

Question 17.
In the light of judicial pronouncements, discuss the following:
In view of limited precedential value of many High Courts’ decisions, it. is difficult to come to clear and crisp answers as to the enforceability of shareholders’ agreements. (Dec 2014, 4 marks)
Answer:
Shareholders’ agreement are the result of mutual understanding among the shareholders of a company to which, the company generally becomes a consenting party. Such agreements are specifically drafted to provide specific rights, impose definite restrictions over and above those provided by the Companies Act. A shareholders’ agreement (SHA) creates personal obligation between the members signing such agreement however, such agreements do not become a regulation of the company in the way the provisions of Articles are.

While shareholders’ agreements are enforceable in England regardless of whether they have been incorporated in the articles of association of the company, in India courts have either refused to recognize clauses in shareholders agreements (SHA) or, even when consistent with company legislation, enforced such clauses only if they have been incorporated in the articles of association of the company. There is a series of rulings where the courts have upheld that in case of any conflict between the Articles and the SHA, the former will always prevail. Some of these are:

V.B. Rangaraj Vs. V.B. Gopalkrishnan (AIR 192 SC 453)

Shanti Prasad Jain Vs. Kalinga Tubes Ltd., (35 Com Cas 351 SC)
Mafatlal Industries Ltd. Vs. Gujarat Gas Co. Ltd. (97 Comp Cas 301 Guj),
Pushpa Katoch Vs. Manu Maharani Hotel Limited ([206] 131 Comp Cas 42 (Delhi))

The Supreme Court in V.B. Rangaraj Vs. V.B. Gopalakrishnan, AIR 192 SC 453 held that a restriction which is not specified in the articles of association is not binding either on the company or on the shareholders. This decision was reiterated by the Bombay High Court in IL & FS Trust Co. Ltd. v. Birla Peruchini Ltd. [204] 121 Comp Cas 35 (Bom).

While the landmark decision of the Supreme Court in V.B. Rangaraj case mentioned above is often cited in the context of shareholders’ agreements, most other decisions have been rendered by the High Courts in various states especially the Bombay High Court. The decisions on shareholders’ agreertients are not uniformly inclined in a direction. The High Court decisions are limited in their applicability as they are susceptible to disagreements by other High Courts, thereby conferring limited precedential value. It is difficult to come to clear and crisp answers as to enforceability of shareholders’ agreements.

In Western Maharashtra Development Corporation Ltd. Vs. Bajaj Auto Ltd. [(2010)154 Company Cases 593(Bom)], it was held that such clauses are to hamper the free transferability of shares and in violation of the Companies Act, and hence, are not enforceable.

Subsequently in the case Of Meser Holdings Limited Vs. Shyam Madanmohan Ruia and Ors [(2010) 98 CLA 325] the Division Bench of Bombay High Court over ruled its judgement in Western Maharashtra Development Corporation Ltd. and provided a more liberal interpretation and recognised the rights inter se among shareholders in case of restrictions on transfer of shares.

Question 18.
Rise Ltd. wants to engage Kapil as its managing director. The Chairman of the company wants you to prepare and submit to him a draft specimen agreement of service with Kapil as a managing director of the company. Draft the same and also mention the precautions you will take while drafting the above agreement. (June 2015, 10 marks)
Answer:
Specimen Agreement of Service as a Managing Director of a Company THIS AGREEMENT is made on the …………….. day of …………….. 2015 between ……………………… Ltd., a company incorporated under the Companies Act, 2013 and having its Registered Office at ……………………. (hereinafter called “Company”) of the one part and Mr ………………… son of Mr ………………….. resident of ………………… (hereinafter called “the Managing Director” of the other part).

It is hereby agreed as follows:
1. The company hereby appoints subject to the approval of the Government of India under Section 203 of the Companies Act, 2013, Mr …………………. as Managing Director of the company for period of five years with effect from ………………… and the Managing Director hereby agrees to serve the company in such capacity for a period of five years with effect from …………………

2. The Managing Director shall exercise and perform such powers and duties as the Board of Directors of the company (hereinafter called “the Board”) shall, from time to time, determine and subject to any directions and restrictions, from time to time, given and imposed by the Board and subject to the restrictions contained hereinafter, he shall have the general control, management and superintendence of the business of the company with power to appoint and dismiss employees (other than officers of the company drawing a basic pay of ₹ 3,000/- and above per month) and to enter into contracts on behalf of the company in the ordinary course of business and to do and perform all other acts and things, which in the ordinary course of business he may consider necessary or proper or in the interest of the company.

3. Without prejudice to the generality of the powers vested in the Managing Director under the preceding clause hereof, the Managing Director shall be entitled to exercise the following powers-
(a) With Board’s approval singly or together with other authorised officer(s) of the company, to open and operate on any banking or other account and to draw, make, accept, execute, endorse, discount, negotiate, retire, pay, satisfy and assign cheques, drafts, bills of exchange, promissory notes, hundies, interest and dividend warrants and other negotiable or transferable instruments or securities;

(b) Together with other authorised officer(s) of the company to borrow moneys with or without security, but not exceeding ₹ 5 lakhs at a time from one party;

(d) To engage employees and other servants for the company at a basic salary not exceeding ₹ 3,000/- per month within the budget sanctioned by the Board;
(e) To increase the salary or the remuneration of any employee or servant of the company whose basic salary does not exceed ₹ 2,000/- per month. General increments must be with the Board’s approval;

4. The Managing Director shall, throughout the said term, devote the whole of his time, attention and abilities to the business of the company and shall obey the orders, from time to time, of the Board and in aii respects conform to and comply with the directions and regulations made by the Board and shall faithfully serve the company and use his utmost endeavour to promote the interest thereof.

5. The company shall pay to the Managing Director during the continuance of this agreement in consideration of the performance of his duties –
(a) a salary at the rate of ₹ ………………… per month;

(b) the actual travelling expenses incurred by the Managing Director in or about the business of the company;

(c) the actual entertainment expenses and approved club membership fees reasonably incurred by the Managing Director in or about the business of the company;

(d) the actual hospital and medical expenses which have been incurred by the Managing Director for himself, his wife, dependent parents and his minor children, provided that such expenses during the three consecutive financial years shall not exceed ?

(e) The Managing Director shall be entitled to use the company’s car, all the expenses for maintenance and running of the same including salary of the driver to be borne by the company;

(f) The company shall provide the Managing Director with rent free furnished accommodation and will pay electricity and water charges;

(g) He shall also be entitled to use the company’s telephone at his residence, the charges whereof shall be borne by the company;

(h) The Managing Director shall be entitled to participate in any provident fund and gratuity fund or scheme for the employees which the company may establish;

6. The Managing Director shall not during the period of his employment and without the previous consent in writing of the Board, engage or interest himself either directly or indirectly in the business or affairs of any other person, firm, company, body corporate or concern or in any undertaking or business of a nature similar to or competing with the company’s business and further shall not, in any manner, whether directly or indirectly, use, apply or utilise his knowledge or experience for or in the interest of any such person, firm, company, body corporate or concern as aforesaid or any such competing undertaking or business as aforesaid.

7. The Managing Director shall not, during the continuance of his employment or any time thereafter, divulge or disclose to any person, firm, company, body corporate or concern, whatsoever or make any use whatever for his own or for whatever purpose of any confidential information or knowledge obtained by him during his employment of the business or affairs of the company or of any trade secrets or secret processes of the company and the Managing Director shall, during the continuance of his employment hereunder, also use his best endeavours to prevent any other person, firm, company, body corporate or concern from doing so.

8. Any property of the company or relating to the business of the company, including memoranda, notes, records, reports, plates, sketches, plans, or other documents which may be in the possession or under the control of the Managing Director or to which the Managing Director has at any time access, shall at the time of the termination of his employment be delivered by the Managing Director to the company or as it shall direct and the Managing Director shall not be entitled to the copyright in any such document which he hereby acknowledge to be vested in the company or its. assigns and binds himself not to retain copies of any of them.

9. The whole interest of the Managing Director in the said improvement, invention or discovery and in all future improvements thereon at any time discovered or invented by the Managing Director alone or in conjunction as aforesaid, shall be the sole and absolute property of the Company and the Managing Director, if and whenever required by the Company during the period of employment or after the termination thereof shall at the expense of the Company, join with the Company in applying for letters patent, design registration or other forms of protection in India.

10. If the Managing Director shall at any time be prevented by ill-health or accident from performing his duties hereunder, he shall inform the Company and if he shall be unable by reason of ill-health or accident for a period of sixty days in any period of twelve consecutive calendar months to perform his duties hereunder, the Company may terminate his employment.

11. The Company shall be entitled to terminate this agreement in the event of the Managing Director being guilty of misconduct or such inattention to or negligence in the discharge of his duties or in the conduct of the Company’s business or of any other act of omission or commission inconsistent with his duties as the Managing Director or any breach of his agreement.

12. If before the expiration of this agreement the tenure of office of the Managing Director shall be determined by reason of a reconstruction or amalgamation whether by the winding up of the Company or otherwise, the Managing Director shall have no claim against the Company for damages.

13. The Company shall be at liberty from time to time to appoint a person or persons to be Managing Director(s) jointly with the Managing Director. The Managing Director hereby agrees that he will not, at any time, after the termination of this agreement, represent himself as being in any way connected with or interested in the business of the company. IN WITNESS WHEREOF the parties hereto have set their hands the day, month and the year first above written.

Witnesses:
1.
2.

for and on behalf of the company
Managing Director

Question 19.
State in brief the law regarding promoters’ contract. Draft a specimen promoters’ contract for the purchase of an industrial plot for setting-up an industrial unit of the proposed company PMQ Ltd. (June 2015, 8 marks)
Answer:
A Specimen of Promoters’ Contract for the Purchase of an industrial Plot for setting up Industrial Unit of the Proposed Company PMQ Ltd.

THE AGREEMENT made on …………………. day of …………………. between Mr. A, son of Mr …………………. resident of …………………. Mr. B, son of Mr …………………. resident of …………………. and Mr. C, son of Mr …………………. resident of …………………. (hereinafter referred to as “promoters”) of the one part which expression shall, unless repugnant to the context include their heirs, legal representatives and assigns and Mr. “V” son of Mr …………………. resident …………………. (hereinafter referred as “Vendor”) of the other part, which expression shall, unless repugnant to the context, include his heirs, legal representatives and assigns.

WHEREAS the promoters have been engaged for quite sometime in the past in promoting and forming a company to be known as PMQ Ltd., which name has been made available to the promoters by the Registrar of Companies consequent upon which they have filed with the Registrar memorandum of association and articles of association for registration of the company;

AND WHEREAS the memorandum and articles of association of the proposed PMQ Ltd., empower the company and its directors to enter into agreements on its incorporation on the lines of the agreement entered into by the promoters for the purchase of land, plant, machinery, equipment and for hiring the services of persons required for and in connection with the formation and incorporation of the company;

AND WHEREAS the Vendor is the absolute owner of industrial plot of land measuring …………………. and situated at …………………. and is desirous of selling the same;

AND WHEREAS the promoters and desirous to buy the said plot of land for the proposed company PMQ Ltd. to set up an industrial unit on its incorporation.

NOW IT IS AGREED AND DECLARED BETWEEN AND BY THE PARTIES AS FOLLOWS:
1. That the said vendor shall sell and the promoters shall purchase the industrial Plot No …………………. situated in the ………………….
Industrial Area, …………………. bounded on North by …………………. on South by …………………. on East by …………………., and on West by …………………. in consideration of the payment, by the promoters on the date of this agreement, of the sum of ₹ …………………. and the balance of ₹ …………………. on the date of the appearance of the vendor and the promoters before the Sub-Registrar …………………. at the time of registration of the deed of sale to this agreement.

2. The vendor shall satisfy the promoters or PMQ Ltd., if incorporated by then, about the title of the vendor to the aforesaid piece of land within one month of the execution of this agreement and the promoters dr their attorney shall be entitled to ask for such information as may be necessary to ascertain the title of the vendor and the vendor shall be bound to allow inspection of the title deeds relating to the plot of land at his place within two months of the date of this agreement. On the satisfaction of the .promoters as to the title of the vendor in respect of the said plot of land, the parties shall complete the transaction of the sale within six months of the date of this agreement.

3. The parties shall bear the expenses of sale equally. The purchaser shall pay to the vendor the expenses for purchase of stamp, a fortnight before the expiry of the period fixed for this agreement for completion of the sale and the promoters shall also at the same time deliver to the vendor a draft of the deed of sale which the vendor shall, if in proper form, execute at his expense in favour of the purchasers and present the same for registration on or before the date fixed for the completion of the sale transaction.

4. The vendor shall deliver actual possession of the plot of land to the promoters or the company on the date of payment of the balance of the price aforementioned and shall do all other acts that may be necessary or requisite to effectually put the promoters or PMQ Ltd., as the case may be, in such possession.

5. In case there found to be any error or misdescription in area or the boundaries or the other specifications of the plot of land agreed to be conveyed to the promoters of PMQ Ltd. or PMQ Ltd., as the case may be, corresponding decrease or increase in price relating to the area and rectification of misdescription of the specification relating to boundaries etc. shall be permissible and shall not form any ground for avoiding this agreement for sale of the plot of land.

IN WITNESS WHEREOF the parties aforementioned have signed this deed of acceptance of the terms thereof.

1. Witness
2. Witness
3. Witness
4. Witness

Vendor
Purchasers/Promoters of the
Company
PMO Limited, under incorporation.
A
B
C

Question 20.
Comment on the following:
Acts going beyond the memorandum of association are ultra vires. (Dec 2015, 4 marks)
Answer:
The Memorandum of the company should state the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof;
The objectives of the company may be categorized as:

the main objects to be pursued by the company on its incorporation;
subjects incidental and ancillary to the attainment of the main objects; and
other objects not included in (i) and (ii) above.

An act beyond the objects mentioned in the memorandum is ultra vires and void and cannot be ratified even by all members of thecompany. There is no restriction on objects except it should be legal and lawful.

Question 21.
What do you understand by slump sale. (Dec 2015, 4 marks)

Question 22.
Draft a specimen underwriting agreement as per the requirements of the Companies Act, 2013. (Dec 2015, 8 marks)
Answer:

Specimen Underwriting Agreement

Name and address of the firm of brokers
who agree to act as underwriters.
(Letter form)

Ref. No

Date ………………..

The Board of Directors
(Name and address of the company
for whose public issue the firm
agrees to act as underwriter)

Dear Sir(s),

Re: Proposed Public Issue of Equity Shares
We, hereby record the terms on which we (hereinafter referred as “underwriters”) have agreed to underwrite ………………… Equity Shares of the aggregate nominal value of ₹ ……………….. out of the total issue of ………………….. Equity Shares to be offered to the public at ₹ /- each for cash at par.

1. The prospectus as approved by the underwriters will be delivered to the Registrar of Companies …………………….. on or before ………………… for registration in accordance with the provisions of Rule 13 of the Company (Prospectus and Allotment of Secretaries) Rules, 2014.

Sufficient number of copies of the prospectus and application forms shall be printed and made available to the underwriters, brokers and members of the public who intend to apply for the Equity Shares as soon as possible thereafter.

2. Underwriters shall be entitled to arrange sub-underwriting with respect to their respective commitments for their own account on terms to be arranged at their discretion with their sub-underwriters.

3. If by the closing date of the subscription list or such earlier date as may be agreed to by the underwriters, the Equity Shares offered to the public are not subscribed in full by the public and the application money payable in respect thereto is not received by you, you will within 14 days or such extended time as may be agreed to by the underwriters, notify the underwriters in writing as to the amount/number of Equity Shares which have not been so subscribed.

The underwriters shall within 21 days after the receipt of such intimation apply for and subscribe such unsubscribed amount/number of Equity Shares and pay or procure to be paid the money payable on application in respect of such Equity Shares in proportion that the amount underwritten by each of them bears to the total amount of the issue.

4. In determining the amount/number of Equity Shares to be taken up by the underwriters the following factors shall be taken into consideration: (a) In no circumstances will the underwriters be liable to take up Equity Shares more than the amount underwritten by them.

(b) All applications made before the closing of the subscription list by the underwriters, or on forms of application bearing the stamp of the underwriters, and not withdrawn in the meantime shall be taken into account in pro tanto reduction of the liability of the underwriters under this underwriting agreement.

(c) After scrutiny of the applications received, the total shortfall shall first be allocated among all persons who have underwritten the issue and who have not fulfilled their quota, in proportion to the amount underwritten by each of them.

(d) Credit shall be given to each underwriter who has not fulfilled his quota in relation to applications made by members of the public independently proportionately to the amount underwritten by each underwriter, any amount or such credit being in excess of the commitment of any underwriter being similarly shared proportionately by the others.

5. Subject to the terms of the prospectus, you will allot Equity Shares for which applications have been received as soon as possible and despatch Equity Share Certificates within six months of such allotment.

6. In consideration of the underwriting you will, within 14 days from the date on which we shall have fulfilled our obligation, pay the underwriters a commission at the rate of two and a half per cent on the issue of the amount/number of Equity Shares underwritten by the underwriters.

7. Notwithstanding anything stated above the underwriters shall have the option to be exercised by them at any time prior to the date fixed finally for publication of the “Announcement” of terminating underwriting arrangement in the event of a complete breakdown or dislocation of business in the financial markets of the cities of Kolkata, Mumbai, Madras and New Delhi due to war, insurrection, civil commotion or any other serious or sustained or political or industrial disturbances or if the whole present basis of Stock Exchange prices in any such city should undergo substantial change through the occurrences of such catastrophe or similar event at present not foreseen. In the event of Cinderwriters exercising such option they shall be released from all obligations arising out of the underwriting agreement.

8. Our offer is valid subject to your subscription list opening on or before ………………….

Please acknowledge receipt of this letter and intimate to us your acceptance of the terms and conditions mentioned above.

Thanking you,
Yours faithfully,
For ……………………..

Question 23.
In the light of judicial pronouncements, discuss the following:
In case of any conflict between the articles of association and the shareholder’s agreement, the former will always prevail. (June 2016, 4 marks)

Question 24.
Comment on the following with reference to ratio in leading case:
Shareholders’ agreements are generally not enforceable in India. (Dec 2016, 4 marks)
Answer:
Shareholders’ agreements (SHA) are quite common in business. In India shareholder’s agreement have gained popularity and currency only lately with bloom in newer forms of businesses. Shareholders’ agreement is a contractual arrangement between the shareholders of a company describing how the company should be operated and the defining inter-se shareholders’ rights and obligations.

A SHA creates personal obligation between the members signing such agreement however, such agreements do not become a regulation of the company in the way the provisions of Articles are. Though the international views on enforceability of SHA are split but to a large extent courts are inclined towards favouring SHA as long as they are not found to be detrimental to the minority stakeholder’s rights. The US Courts have largely accepted shareholder agreements. [Blount v. Taft 246 S.E. 2d 763 at 769(1978)].

While shareholders’ agreements are enforceable in England regardless of whether they have been incorporated in the articles of association of the company, in India courts have either refused to recognize clauses in shareholders agreements or, even when consistent with company legislation, enforced such clauses only if they have been incorporated in the articles of association of the company. There is a series of rulings where the courts have upheld that in case of any conflict between the Articles and the SHA, the former will always prevail.

The Supreme Court in V.B. Rangaraj v. V.B. Gopalakrishnan, AIR 1992 SC 453 held that a restriction which is not specified in the articles of association is not binding either on the company or on the shareholders. This decision was reiterated by the Bombay High Court in IL & FS Trust Co. Ltd. v. Birla Perucchini Ltd. [2004] 121 Comp Cas 335 (Bom).

Question 25.
Draft a petition for prevention of Oppression & Mismanagement u/s 241 of The Companies Act, 2013 with NCLT. Assume facts. (June 2017, 8 marks)
Answer:
Petition for prevention of Oppression & Mismanagement u/s 241 of
The Companies Act, 2013 with NCLT
Before the NCLT, New Delhi

In the matter of XYZ Garments having its Registered Office at ………………., Delhi

And
Mr. P s/o ……………….. r/o ……………….
Mr. Q s/o ……………… r/0 ……………..
Mr. R s/o …………… r/o …………….. Petitioners
Vs.
Mr.D s/o ………………. r/o ………………..
Mrs. D w/o …………………… r/o ………………. Respondents

The petitioners submit as under:

That XYZ is a registered company under the provisions of the Companies Act having its Head Office in Delhi.
That P,Q & R are the shareholders of the company having an aggregate shareholding of 40%, i.e. more than 10% required to file this petition.
That Mr. D and Mrs. D have gained interest in a new company and are diverting the orders of XYZ to new company which is detrimental to the interests of XYZ Ltd.
XYZ in their Annual General Meeting held on have removed Mr. & Mrs. D from Directorship of the Company after following the process laid by law. Certified copies of minutes and returns filed with the Registrar of Companies are enclosed.
That the petitioner feels that the oppressive methods of respondents should be stopped forthwith. The petitioners have already suffered irreparable loss.
In view of above this petition is filed to seek appropriate orders restraining Mr. and Mrs. D to act as Director of the company and to prevent them to continue with their oppressive methods.
The petition has been made bona fide in interest of justice.
Affidavit verifying the petition is annexed.
Prescribed filing fee of ? is enclosed.
It is hereby prayed that:
(a) An order may be issued preventing Mr. and Mrs. D from continuing to their oppressive methods.
(b) Any other order that this Hon’ble Tribunal may think fit & proper in the circumstances of the case.

For & on behalf of petitioner
Sd/-

Place:
Date:

Question 26.
In the light of judicial pronouncements, discuss the following: (June 2018)
(a) A restriction which is not specified in the Articles of Association is not binding either on the company or the shareholders. (4 marks)
(b) Articles of Association regulate the internal management of a company. (4 marks)
Answer:
(a) While shareholder’s agreements are enforceable in England regardless of whether they have been incorporated in the articles of association of the company, in India courts have either refused to recognize clauses in shareholders agreements or, even when cosistent with company legislation, enforced such clauses only if they have been incorporated in the articles of association of the company. In a series VB Rangaraj vs. VB Gopalakrishna, (A.I.R. 1992S.C. 453)the courts have held that in case of any conflicts between the articles and shareholders agreement, the former will always prevail.

(b) The Articles of Association of a company are its internal rules and regulations that are framed to manage its internal affairs. Just as the Memorandum of Association contains the fundamentals conditions upon which a company is allowed to be incorporated, so too the articles are the internal regulations of the company (Guinness vs. Land Corporation of Ireland, 22 Ch. D 348, 381). It is referred to as the magna carta of the company. It regulates the domestic management of the company and creates rights and obligations between the members and the company [SS Raj Kumar vs. Perfect Castings Private Limited (1968)]. It is the bye – laws of the company.

Question 27.
Draft a Resolution for appointment of ‘David’ as Company Secretary pursuant to Section 203 of The Companies Act, 2013. (June 2019, 5 marks)
Answer:
Board resolution to be passed at a meeting and not by circulation: “Resolved that pursuant to Section 203 of the Companies Act, 2013 and Rule 8 and Rule 8A of Companies appointment and remuneration of Managerial Personnel Rules 2014 and other applicable provision (including any modification or re-enactment thereof), if any, of the Companies Act, 2013 Mr. David, holding the prescribed qualification under Section 2(24) of the Companies Act, 2013, be and is hereby appointed as Company Secretary of the company w.e.f 1^st April 2019, on the terms specified in the draft agreement/ appointment letter, placed on the table, a copy of which was initialed by the Chairman for the purpose of identification.”

“Resolved further that, Mr. David, Company Secretary, shall perform the duties which are required to be performed by a secretary under the Companies Act, 2013 and any other duties assigned to him by the Board or the Chief Executive Officer.”

“Resolved further that, Mr. X, Director be and is hereby authorised to sign and file the necessary forms/documents with the Registrar of companies and make entries, as appropriate, in the registers of the company.”

Question 28.
Discuss the following :
Bank was authorised by its Articles to issue bonds. The directors issued bond to ‘A’ without the requisite resolution. A filed a suit for recovery of the money against the company. The company resisted the suit on the ground that there was no resolution passed. Will ‘A’ succeed ? (June 2019, 4 marks)
Answer:
This case relates to the doctrine of indoor management. This doctrine protects the outsider against the company. According to this doctrine, the person entering into a transaction with the company only needed to satisfy that his proposed transaction is not inconsistent with the articles and memorandum of the company. He is not bound to see the internal irregularities of the company and if there are any internal irregularities, the company will still be liable to honour its part of the contract as that outside person has acted in the good faith and he did not know about the internal arrangement of the company.

This doctrine was laid down in the case of Royal British Bank v. Turquand. It was held that “Outsiders are bound to know the external position of the company, but are not bound to know its indoor management.” Therefore, on the basis of this doctrine, ‘A’ will succeed to recover his money.

Question 29.
Articles of Association are Company’s internal rules and regulations, explain with relevant case laws. (June 2019, 4 marks)
Answer:
Articles of Association is one of the important document for incorporation of a limited company. Articles are rules and regulations for management of internal affairs of the company. It constitutes a contract between the company and its members and among its members inter se. It is framed with the object of carrying out aims and objects of the company as contained in Memorandum and if necessary it may clarify anything contained in Memorandum.

The article of a company contains the regulations for management of the company and other such matters, as may be prescribed. The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with.

The provisions for entrenchment referred above shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company. Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed.

Guinness Vs. Land Corporation of Ireland (1882):
There is an essential difference between the memorandum and the articles. The memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. They are conditions introduced for the benefits of the creditors, and the outside public, as well as of the shareholders. The articles of association are internal regulations of the company.

Question 30.
Explain the following :
Concept of entrenchment in the Companies Act, 2013. (Dec 2019, 4 marks)
Answer:
The concept of entrenchment is given under section 5 of the Companies Act, 2013, which are as follows:

Section 5 (3) of the Companies Act, 2013 states that the articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with.

Section 5 (4) of the Companies Act, 2013 states that the provisions for entrenchment referred to in section 5 (3) shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company.

Section 5 (5) of the Companies Act, 2013 states that Where the articles contain the provisions for entrenchment, the company shall give notice to the Registrar of such provisions in Form No INC-32(SPICe) as the case may be, along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 at the time of incorporation of the company or in case of existing companies, the same shall be filed in Form No. MGT.14 within thirty days from the date of entrenchment of the articles, as the case may be, along with the fee as provided in the Companies (Registration’offices and fees) Rules, 2014.

Question 31.
‘Registrar of Companies is the Primary Regulatory Authority for the companies.’ Comment on this statement. (Dec 2020, 5 marks)
Answer:
Registrar of the Company [section 2(75)] of the Companies Act, 2013 as “Registrar” means a Registrar, an Additional Registrar, a Joint Registrar, a Deputy Registrar or an Assistant Registrar, having the duty of registering companies and discharging various functions under this Act.

Registrars of Companies appointed under Section 396 of Companies Act, 2013 are vested with the primary duty of registering companies in States and Union Territories and ensuring that such companies comply with legal requirements under the Act.

These offices function as a registry of records, relating to the companies registered with them.

The records are available for inspection by the public on payment of the prescribed fee.

The Central Government exercises administrative control over these offices through the respective Regional Directors.

Therefore, it will be correct to say that ‘Registrar of Companies (ROC) is the Primary Regulatory Authority for the Companies’.

Question 32.
What do you understand by the term Entrenchment provisions under Memorandum and Articles of Association of a company. (Dec 2020, 4 marks)
Answer:
Section 5(3) of the Companies Act, 2013 contains the provision for the entrenchment. The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures that are more restrictive than those applicable in the case of a special resolution, are met or complied with.

The Companies Act 2013, recognizes an interesting concept of entrenchment. Essentially, the entrenchment provisions allow for certain clauses in the articles to be amended upon satisfaction of certain conditions or restrictions greater than those prescribed under the Act (such as obtaining 100% consent of members). This provision acts as a protection to the minority shareholders and is of specific interest to the investment community. This shall empower the enforcement of any pre-agreed rights and provide greater certainty to investors, especially in joint ventures.

The provisions for entrenchment referred to in section 5(3) shall be made either
(a) on formation of a company, or (b) by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company.

Where the articles contain the provisions for entrenchment, the company shall give notice to the Registrar of such provisions in Form No.lNC.2 or SPICe+ (Simplified Proforma for Incorporating company Electronically Plus: INC-32) as the case may be, along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 at the time of incorporation of the company or in case of existing companies, the same shall be filed in Form No. MGT.14 within thirty days from the date of entrenchment of the articles, as the case may be, along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 at the time of incorporation of the company or in case of existing companies, the same shall be filed in Form No. MGT.1 4 within thirty days from the date of entrenchment of the articles, as the case may be, along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014.

Question 33.
Discuss the salient points to be kept in mind as a Company Secretary while drafting a contract of Appointment of a person as Managing Director of the Company. (Dec 2021, 4 marks)
Answer:
While drafting a Contract of appointment of a person as a Managing Director following points require to be kept in mind:

The person who is being appointed as Managing Director (MD) should be a Director of the Company, and
He must be entrusted with substantial power of the Management.
Usually the Articles of Association (AOA) of Companies empower the Board of Directors to appoint one or more of the Directors as Managing Director(s) and fix their remuneration subject to the provisions of section 196, 197, 198, 199, 200 and other applicable provisions of the Companies Act, 2013 and rules made thereunder.
The Board of Directors critically examine the draft agreement for appointment of Managing Director and after having approved the same with or without modification, authorises one of the Director to sign and execute the same on behalf of the Company.
It should, therefore, be made sure that the person executing the agreement on behalf of the Company should be authorized by the Board of Directors.

Question 34.
In the light of Judicial pronouncement(s) discuss the following:
Enforceability of Shareholders Agreement in India. (Dec 2021, 4 marks)
Answer:
Enforceability of Shareholders Agreement in India :-

Shareholders’ agreements are quite common in business.
In India shareholder’s agreement gained popularity and currency only lately with bloom in newer forms of business.
Shareholders agreement is a contractual arrangement between the Shareholders and of a Company describing how the Company should be operated and the defining inter-se shareholders’ rights and obligations.
A Shareholders agreement creates personal obligation between the members signing such agreement.
Although, such agreement does not become a regulation of the Company in the way the provisions of Articles are.
Though the international view on enforceability of shareholders’ agreement are split but to a large extent courts are inclined towards favouring Shareholder’s agreement as long as they are not found to be detrimental to the minority stakeholder’s rights.
The US Courts have largely accepted shareholder agreements.
While shareholders agreements are enforceable in England regardless of whether they have been incorporated in the articles of association of the Company, in India courts have either refused to recognize clauses in shareholders’ agreement or, even when consistent with company legislation, enforced such clause only if they have been incorporated in the article of association of the Company.
There is a series of rulings where the courts have upheld that in case of any conflict between the Articles and Shareholder’s agreement, the former will always prevail.

Question 35.
Draft the following as per the instructions (Assume facts, if required):
Specimen Agreement by a company adopting the contract made on its behalf before its incorporation. (June 2022, 4 marks)

Question 36.
Examine and comment on the following:
Applicant company’s request to convene an extraordinary general meeting was rejected by the respondent company on the ground that the Company Secretary is not authorised to sign the request. The Company Law Board upheld the ground. In the light of decided case law, critically evaluate the correctness or otherwise of the decision of the Company Law Board. (June 2012, 10 marks)
Answer:
The case is similar to that of IFCI Ltd. vs. TFCI Ltd,
Decision : The decision of the Tribunal is liable to be quashed.
Reason : Fact of the case is RESPONDENT COMPANY did not reply to Applicant company’s letter does not mean that any legal presumption can be drawn that the requisition was not sanctioned by the Board of Director and/or Company Secretary of RESPONDENT COMPANY did not have the authority to requisition the Extraordinary General Meeting (EGM).

The fact is the Board of Director of RESPONDENT COMPANY has vide its resolution given specific authority to Company Secretary (CS) to sign on the legal documents.

Under Section 2 (36) of the Companies Act, 2013 define a document to include a requisition.

Result: (1) If the RESPONDENT COMPANY BOARD minutes are read in conjunction With as per Section 2 (36) of the Companies Act, 2013, it is apparent that the Company Secretary of RESPONDENT company was sanctioned by Board of director by prior of ordinary authorisation to requisition an extra ordinary General Meeting of the company.

Also during the course of hearing of the appeal, it was not controverted before the Tribunal that the minutes of board meeting had been given to Applicant Company as an annexure with initial petition filed by the RESPONDENT COMPANY under Section 169, which was later dismissed as premature.

(2) RESPONDENT COMPANY’S after that:
Board resolution passed in favour of its company secretary as a measure of abundant precaution did not prove that there was no prior authorisation in favour of RESPONDENT COMPANY, Company Secretary when requisition was issued.

In view of the above discussion, the reasoning given by the Tribunal in the impugned order is unsustainable/not maintainable.

Question 37.
ABC Ltd. employed Joy as its President and provided him rent free accommodation as part of conditions of employment. The agreement contained a clause stipulating employee’s right to retain the accommodation upon termination of service for a particular period. Joy’s services were terminated within six months of appointment. He refused to surrender the accommodation to the company. This accommodation was owned by ABC Consultants (P) Ltd. which was a sister concern of ABC Ltd. The accommodation owner had given permission to Joy to occupy it as an employee of ABC Ltd. On Joy’s refusal to handover the accommodation upon termination of employment, ABC Ltd. filed a complaint against Joy under section 630 of the Companies Act, 2013 and also under IPC sections. The Judicial Magistrate of First Class (JMFC) discharged Joy of the charges levied against him. But on appeal, the High Court quashed the JMFC’s order On what grounds should Joy prefer an appeal to the Supreme Court againsi the impugned order of the High Court? Cite relevant case law, if any. (June 2013, 10 marks)
Answer:
Joy may prefer an appeal to the Supreme Court on the following grounds:
1. That,the High Court has misconstrued the nature of the allegation made in the complaint and it has wrongly held that the said complaint and the material on record prima facie disclose that Joy (the Appellant) is wrongfully withholding the property of the complainant company and thus liable under section 452 of the Companies Act, 2013.

2. That the dispute between the parties is of a civil nature.

3. That the Employer Co. was not the lessee of the flat and except for the permission granted by ABC Consultants (P) Ltd. to it and Joy (the Appellant), it has no right, title or interest in that flat.

In the above case are similar to Jagdish Chandra Nijhawan v. S. K. Saraf, (1999) 1SCC 119. In this case the, Supreme Court upheld the contention of the Appellant and observed that the High Court did not appreciate the material aspects of the case properly. The Apex Court set aside the order passed by the High Court and restored the discharge order passed by the Judicial Magistrate.

Question 38.
Surya Power Ltd. proposes to insert an article in its articles of association enabling it to buy-back its shares. It seeks your professional advice on the draft articles. Advise. (Dec 2015, 5 marks)
Answer:
Model article on Buy-back of shares for Surya Power Limifed:
“Notwithstanding anything contained in these Articles, the Board of Directors may, when and if thought fit, buy-back such of the Company’s own shares or securities as it may think necessary, subject to such limits, upon such terms and conditions, and subject to such approvals, as may be permitted by the law”.

Question 39.
Discuss the following :
The directors of the company were authorised under the Articles of Association of Company to borrow ₹ 20,000 without the consent of shareholders in general meeting. The directors themselves let ₹ 50,000 to the company without such consent. Is the company held liable for ₹ 50,000. (June 2019, 4 marks)
Answer:
This problem refers to the exception to the rule of doctrine of indoor management. The doctrine is not applicable where a person had express or implied knowledge of the irregularity. Despite knowing about this fact if a person lends money ultra vires articles, it cannot seek protection under the rule of indoor management.

In the case of Howard vs. Patent Ivory Company, the article of the company empowered directors to borrow up to 1000 pounds only. However, they could extend the limit of 1000 pound by consent in general meeting. Without such permission, they took 3500 pounds from one of the directors who took debentures. Later on, the company refused to pay back. The court held that the company is only liable to pay back 1000 pounds because the director had noticed about the limit and condition.

Similarly in this case, the company is liable for only ₹ 20,000 which was authorized by Article of Association. The company will not be held liable for ₹ 50,000 as this amount was in excess of the borrowing capacity of the company under Articles of Association.

Drafting of Agreements under the Companies Act Notes

Promoter
As per Section 2(69) of the Companies Act, 2013, Promoter” means a person;
(a) Who has been named as such in a prospectus or is identified by the company in the annual return referred to in Section 92; or

(b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is, accustomed to act

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity.

Promoters’ Contract – Pre-lncorp-oration Contracts
Companies Act, 2013 does not contain any provisions about Promoter’s Contract. The promoters of a company usually enter into contracts to acquire some property or right for the company which is yet to be incorporated, such contracts are called preliminary or pre-incorporation contracts. The promoters generally enter into such contracts as agents for the company about to be formed.

Memorandum of Association
Memorandum of association of the company is the fundamental formation document. It is the constitution and charter of the company. Sections 4 of the Companies Act, 2013 and Table A, B, C, D and E in Schedule I as may be applicable to such company deal with contents, form and printing and signature of memorandum of association.

Article of Association
The provisions regarding Articles of a company are contained in Section 5 of the Companies Act, 2013 and Table F, G, H, I and J in the Schedule I of the Companies Act, 2013. An article of Association is another equally important document for incorporation of a limited company. Articles are rules and regulations for management of internal affairs of the company.

Drafting of Articles
Some important points which a draftsman should bear in mind while drafting the Articles are as follows:
1. Share capital, its kinds rights attached to different kinds of shares or any special privileges attached thereto should be considered and incorporated in Articles.

3. As far as possible, regulation given in Table F may be borrowed, even if it is not made applicable so that Article may conform to the intent and spirit of law.

4. Efforts should be made to make each article self explanatory and self interpretative to avoid misleading conclusions. Coherence and sequence of the contents should be maintained at any costs.

Underwriting and Brokerage Agreements
Underwriting is an insurance against risk. When shares or debentures of a company are issued, they are, by and large, underwritten to ensure that all the shares or debentures issued are taken up and thus the required capital is raised.

Shareholders’ agreements
Shareholders’ agreements (SHA) are quite common in business. In India shareholder’s agreement have gained popularity and currency only lately with bloom in newer forms of businesses. There are numerous situations where such agreements are entered into – family companies, JV companies, venture capital investments, private equity investments, strategic alliances, and so on.

Shareholders’ agreement is a contractual arrangement between the shareholders of a company describing how the company should be operated and the defining interse shareholders’ rights and obligations, shareholders’ agreement. SHAs are the result of mutual understanding among the shareholders of a company to which, the company generally becomes a consenting party.

Contract of Appointment with Managing Director
According to Section 2(54) of the Companies Act, 2013, “managing director” means “a director who, by virtue of the article of a company an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company, and includes a director occupying the position of a managing director, by whatever name called.”
While drafting a contract of appointment, the following points have to be taken care of:

The person who is being appointed as managing director must be a director of the company; and He must be entrusted with substantial powers of management.

Contract of Appointment with Managing
Section 2(53) of the Companies Act, 2013 defines “Manager” means an individual who, subject to the superintendence, control and direction of the Board of directors, has the management of the whole, or substantially the whole, of the affairs of the company, and includes a director or any other person occupying the position of a manager, by whatever name called, and whether under a contract of service or not.

The above definition highlights the following points, which must be borne in mind by the secretary while drafting an agreement for the appointment of a manager:

a manager has to be an individual only;
a manager has the management of the whole, or substantially the whole, of the affairs of the company;
a manager functions subject to the superintendence, control and direction of the Board of directors of the company;
a manager may be under a contract or not.

Contract of Appointment with Secretary
The position of Secretary in a company is a very important one. He is the person who acts as liaison between the Board of Directors and the shareholders on the one hand, with the Departmental Division heads and with the world at large on the other hand. Every information from various departments, divisions, branches, executives, departmental heads, shareholders, creditors, debtors, bankers, financial institutions, Government departments and others concerned with the company converges in his office. He gathers all the information, arranges it in a useful manner, furnishes it with explanations etc.

Compromise and arrangements
Sections 230 to 240 of the Companies Act, 2013 provide various methods of company re-organisation or reconstruction. The various terms used for reorganisation are arrangement, reconstruction, amalgamation, merger, take-over, etc. They are distinct terms but they have many common features and to a great extent they overlap.

The expression “arrangement” is of wider import and include reconstruction and amalgamation. “Arrangemenf has been defined in explanation to section 230(1) of Companies Act, 2013 as including a reorganisation of the company’s share capital by the consolidation of shares of different classes, or by the division of shares into shares of different classes, or by both those methods.

Slump Sale Agreement
Slump sale is one of the widely used ways of business acquisitions In simple words, ‘slump sale’ is nothing but transfer of a whole or part of business concern as a going concern; lock, stock and barrel. The concept of ‘slump sale’ was incorporated in the Income Tax Act, 1961 (“IT Act”) by the Finance Act, 1999 with the inclusion of Section 2(42C). The term ‘slump sale’ is defined as transfer of one or more undertakings as a result of the sale for a lump-sum consideration without values being assigned to the individual assets and liabilities in such sales.

Drafting of Agreements under the Companies Act – Drafting, Pleadings and Appearances Study Material

Leave a Comment Cancel Reply