Meetings of Board and its Powers – CA Final Law Study Material

Meetings of Board and its Powers – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Meetings of Board and its Powers – CA Final Law Study Material

Question 1.
ABC Limited, a public limited company was incorporated on 1st April, 2020. The company has conducted four Board meetings during the financial year 2020-21 i.e. on 6th April, 2020, 28th August, 2020, 30th September, 2020 and 30th March, 2021.
(i) Has the company contravened the provisions of the Companies Act, 2013 in respect of the conduct of the meetings?
(ii) Will your answer differ if the company was incorporated under Section 8 of the Companies Act, 2013? [Nov. 16 (4 Marks)]
Answer:
Conduct of Board Meeting:

As per Sec. 173 (1) of the Companies Act, 2013, every company shall hold the first meeting of the BOD within 30 days of the date of its incorporation and thereafter hold a minimum number of 4 meetings of its BOD every year in such a manner that not more than 120 days shall intervene between two consecutive meetings of the Board.

However, the C.G. had notified that in case of Sec. 8 companies which has not committed a default in filing of its financial statements u/s 137 or annual return u/s 92 with the Registrar, Sec. 173(1) shall apply only to the extent that the BOD of such companies shall hold at least 1 meeting within 6 calendar months.

In the present case, ABC Ltd. was incorporated on 1st April, 2020 and conducted 4 Board meetings during the financial year 2020-21 on 6th April, 2020, 28th August, 2020, 30th September 2020 and 30th March 2021.

Conclusions: Considering the provisions of Sec. 173(1), following conclusions may be drawn:

(i) Company has contravened the provisions of Sec. 173(1) of the Companies Act, 2013 in respect of the conduct of the subsequent board meetings. The gap between 2 consecutive board meetings i.e. the meeting held on 6th April, 2020 and 28th August, 2020 is 143 days which is more than 20 days and similarly the gap between the meeting held on 30th Sep. 2020 and 30th March 2021 is 181 days which is again more than 120 days.

(ii) In the case of company incorporated u/s 8 of the Companies Act, 2013, since the board meetings have been conducted within every 6 calendar months, so there is no contravention of the provision related to holding of bod meetings.

Question 2.
The Board of Directors of InfoTech Consultants Limited, registered in Kolkata, proposes to hold the next board meeting in the month of Dec., 2020. They seek your advice in respect of the following matters:
(i) Can the board meeting be held In Chennai through video conferencing, when all the directors of the company reside at Kolkata?
(ii) Is It necessary that the notice of the board meeting should specify the nature of business to be transacted? [RTP – May 19]
Answer:
(i) Place for conduct of Board Meetings:

Companies Act, 2013 does not provide any provisions as to conduct of board meetings at any particular place. Sec. 173 of Companies Act, 2013 provides the provisions for holding meetings by video conferencing, sending notices, procedures at the meeting etc.

Conclusion: Board meeting can be held at Chennai even if all the directors of the company reside at Kolkata and the registered office is situated at Kolkata provided other requirements of Sec. 173 are complied with.

(ii) Requirements w.r.t. Notice of Board Meetings:

Sec. 173(3) of the Companies Act, 2013 provides that a meeting of the Board shall be called by giving not less than 7 days’ notice in writing to every director at his address registered with the company.

There is no provision in the Companies Act, 2013 as to laying down the contents of the notice. Hence, it may be construed that notice may be interpreted as intimation of the meeting and does not necessarily include the sending of the Agenda of the meeting.

However, considering the importance of Board Meetings and the responsibilities placed on the directors for decisions taken at the meetings, it is inevitable for them to be properly prepared and informed about the items to be discussed at the Board Meetings. As a matter of good secretarial practice, the notice should include full details and particulars of the business to be transacted at the Board Meetings.
The articles of association of the company may make it mandatory to do so.

Meetings of Board and its Powers – CA Final Law Study Material

Question 3.
XYZ Ltd. is a foreign collaborator in ABC Ltd. incorporated in India under the Companies Act, 2013. The foreign collaborator holds 49% of the shareholding. The Board meetings of ABC Ltd are usually held in India and sometimes meetings of the Board are called at a very short notice for which there is a provision in the Articles of Association that during such situations notices of the meetings of the Board can be sent by e-mail. State in this connection whether such a provision in the Articles of Association of a foreign collaborated company is valid.
Answer:
Requirements of Notice of Board Meetings:

As per Sec. 173 (3) of the Companies Act, 2013, a meeting of the Board shall be called by giving not less than 7 days’ notice in writing to every director at his address registered with the company and stich notice shall be sent by hand delivery or by post or by electronic means.

Proviso to Sec. 173(3) provides that a meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting.

Conclusion: From the examination of provisions of Sec. 173(3), it can be concluded that the notice of a Board meeting may be send by e-mail. However, shorter notice is legally permitted with the condition being the presence of the quorum and at least one independent director. The provision of the Articles in this regard is not relevant as the position is amply clear in the Act itself.

Question 4.
Mr. P and Mr. Q who are the directors of the Company informed the Company their inability to attend the meeting because the notice of the meeting was not served on them. Discuss whether there is any default on the part of the Company and the consequences thereof.
Answer:
Consequences of non serving the notice of board meetings:

As per Sec. 173(3) of the Companies Act, 2013, a meeting of the Board shall be called by giving not less than 7 days’ notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means.

Section 173(4) provides that every officer of the company whose duty is to give notice under this section and who fails to do so shall be liable to a penalty of ₹ 25,000.

Companies Act, 2013 does not lay down any specific provision regarding the validity of a resolution passed by the Board of Directors in case notice was not served to all the directors as stipulated in the Act. However, Supreme Court, in case of Parmeshwari Prasad v. Union of India has held that the resolutions passed in the board meeting shall not be valid, since notice to all the Directors was not given in writing. Notice must be given to each director in writing. Hence, even though the directors concerned knew about the meeting, the meeting shall not be valid and resolutions passed at the meeting also shall not be valid.

In the given case no notice, was served on Mr. P and Mr. Q who are the directors of the company.

Conclusion: Meeting shall not be considered as valid and the resolutions passed at the meeting also shall not be valid. Every officer of the company responsible for the default shall be punishable with fine of ₹ 25,000.

Question 5.
A director goes abroad for a period of more than 3 months and an alternate director has been appointed in his place u/s 161(2). During the period of absence of the original director, a board meeting was called. In this connection, with reference to the provisions of the Companies Act, 2013, advise whom should the notice of Board meeting be given to the “original director” or to the “alternate director”?
Answer:
Requirements of Notice of Board Meetings:

Section 161(2) of the Companies Act, 2013 provides that the Board of Directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting, appoint a person, not being a person holding any alternate directorship for any other director in the company, to act as an alternate director for a director during his absence for a period of not less than 3 months from India.

Section 173(3) provides that a meeting of the Board shall be called by giving atleast a 7 days’ notice in writing to every director to his registered address with the company and such notice shall be sent by hand delivery or by post or by electronic means.

In the present case, a director goes abroad for a period of more than 3 months and an alternate director has been appointed in his place u/s 161(2). During the period of absence of the original director, a board meeting was called.

Conclusion: There is no legal precedence whether the notice of the meeting is to be sent to the original director or the alternate director. But as matter of prudence the notice of the meeting may be served to both the alternate director as well as the original director who is for the time being outside India.

Meetings of Board and its Powers – CA Final Law Study Material

Question 6.
ABC Ltd. has 12 directors on its Board and has the following clause in its Articles of Association:
“The questions arising at any meeting of the Board of Directors or any Committee thereof shall be decided by a majority of votes, except in cases where the Companies Act, 2013 expressly provides otherwise.”

In one of the meetings of the Board of Directors of ABC Ltd., 8 directors were present. After completion of discussion on a matter, voting was done. 3 directors voted in favour of the motion, 2 directors voted against the motion while 3 directors abstained from voting.

You are required to state with reference to the provisions of the Companies Act, 2013 whether the motion was carried or not. It is clarified that the motion being voted upon was not concerning a matter which requires consent of all the directors present in the meeting. [May 09 (5 Marks)]
Answer:
Voting at a Board Meeting:

Regulation 68 of Table F of Schedule 1 to the Companies Act, 2013 provides that save as otherwise expressly provided in the Companies Act, 2013, questions arising at any meeting of the Board shall be decided by a majority of votes.

In the present case, similar clause exists in the Articles of Association of ABC Ltd. 8 directors out of a total strength of 12 directors were present and out of those 8 directors only 5 directors have exercised their votes. In such a case, only those directors who are present and vote on a motion are considered for determining whether the motion is carried or not. That means out of the 5 directors who voted on the motion are to be considered. Directors who did not vote will not be counted as either having voted in favour or against. Their votes will be disregarded.

Conclusion: Since number of directors who voted in favour of the motion being 3, is higher than the number of directors who voted against the motion being 2, the motion is carried or is considered to be passed by majority.

Question 7.
Examine with reference to the provisions of the Companies Act, 2013 whether notice of a Board Meeting is required to be sent to the following persons:
(i) Alternative Director;
(ii) An interested Director;
(iii) A Director who has expressed his inability to attend a particular Board Meeting;
(iv) A Director who has gone abroad (for less than 3 months). [May 13 (8 Marks), MTP – Oct. 18]
Answer:
Notice of Board meeting:
(i) Alternate Director: Sec. 173(3) of the Companies Act, 2013 makes it mandatory for every director to be given proper notice of every board meeting. There is no legal precedence whether the notice of the meeting is to be sent to the original director or the alternate director. But as matter of prudence the notice of the meeting may be served to both the alternate director as well as the original director who is for the time being outside India.

(ii) Interested director: In case of an Interested Director, notice must be given to him even though he is precluded from voting at the meeting on the business to be transacted. It is immaterial whether a director is interested or not.

(iii) A Director who has expressed his inability to attend a particular Board Meeting: In terms of section 173(3) even if a director states that he will not be able to attend the next Board meeting, notice must be given to that director.

(iv) A director who has gone abroad: A director who has gone abroad is still a director. Therefore, he is entitled to receive notice of board meetings during his stay abroad.

Question 8.
Elaborate the provisions of the Companies Act, 2013 regarding Notice of Board Meeting. Draft a notice for the first meeting of the Board of Directors of India Timber Ltd. [Nov. 15 (8 Marks)]
Answer:
Notice of Board Meeting:
Section 173(3) of the Companies Act, 2013 deals with the provisions relating to notice of Board Meetings. According,-

A meeting of the Board shall be called by giving not less than seven days’ notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means:

Provided that a meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting:

Provided further that in case of absence of independent directors from such a meeting of the Board, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if any.

Rule 3 of The Companies (Meetings of Board and its Powers) Rules, 2014, further provides that the notice of the meeting shall inform the directors regarding the option available to them to participate through video conferencing mode or other audio-visual means and shall provide all the necessary information to enable the directors to participate through video conferencing mode or other audio visual means.

As per section 173(4) of the Companies Act, 2013, every officer of the company whose duty is to give notice under this section and who fails to do so shall be liable to a penalty of ₹ 25,000.

Draft Notice:

India Timber Limited
Address: ________

Dated _______
To
Mr. ________
Address: _______
__________ (each director to be addressed individually)

Dear Sir,
Notice is hereby given that first meeting of the Board of Directors will be held at the registered office of the company at _____(address) ____ (place) on ____ (day), the ____ (date) at ____ AM/PM.
You are requested to make it convenient to attend the meeting. An option is also available to you to participate in the Board Meeting through video conferencing or audio-visual means. Kindly communicate your preference in this regard.
A copy of the agenda of the meeting is enclosed for your perusal.
Yours faithfully,
For India Timber Ltd.

(Secretary)
Enel: A copy of agenda of the meeting.

Meetings of Board and its Powers – CA Final Law Study Material

Question 9.
What are the conditions to he fulfilled for calling meetings at shorter notice than as prescribed by Companies Act, 2013.
One of the directors, a senior professional, objected to receiving the notice by e-mail. Advise him. (May 16 (4 Marks))
Answer:
Requirements of Notice of Board Meetings:

As per Sec. 173(3) of the Companies Act, 2013, a meeting of the Board shall be called by giving not less than 7 days’ notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means.

Proviso to Sec. 173(3) provides that a meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting.

Conclusion: Considering the provisions of Sec. 173 (3) it can be concluded that the senior Director’s objections to receiving the notice by email is not sustainable.

Question 10.
Examine the following with reference to the provisions of the Companies Act, 2013:
(a) The Chairman of Evergreen Limited convened a board meeting and two weeks’ notice was served on all directors of the company. Two of the independent directors on the board objected on the grounds that no proper agenda for the meeting was circulated.
(b) Sunshine Limited proposes to hold its board meeting at a shorter notice through video
conferencing. |May 17 (4 Marks), RTP-May 18]
Answer:
(a) Requirement of Agenda for Board Meetings:

As per section 173(3) of the Companies Act, 2013, a meeting of the Board shall be called by giving not less than 7 days’ notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means.

The Companies Act, 2013 does not specifically provide for sending agenda along with the notice of the meeting. However, generally as a good secretarial practice, the notice is accompanied with the agenda of the meeting.

In the present case, 2 of the independent directors on the Board has objected on the grounds that no proper agenda for the meeting was circulated.

Conclusion: Contention of the independent directors objecting on the grounds that no agenda for the meeting was circulated, does not hold good. Hence, the meeting shall be valid.

(b) Board meeting at a shorter notice through video conferencing:
Sec. 173(2) and 173(3) of the Companies Act, 2013 provides the following provisions in relation to conduct of Board meeting at a shorter notice and through video conferencing. Accordingly,

The participation of directors in a meeting of the Board may be either in person or through video conferencing or other audio-visual means, as may be prescribed, which are capable of recording and recognising the participation of the directors and of recording and storing the proceedings of such meetings along with date and time.

A meeting of the Board shall be called by giving not less than 7 days’ notice in writing to every director at his address registered with the company. Provided that a meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting.

Further, in case the independent directors are not present at such a meeting of the Board, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if any.

Conclusion: Sunshine Limited can hold a board meeting at a shorter notice through video conferencing, subject to compliance of Section 173(2) and 173(3).

Question 11.
Moonlight Limited, held its Board meeting through video conferencing. Due to technical problems, the video recording which was done could not be retrieved. The company seeks your advice for the preparation and recording of the minutes of the board meeting in the above situation, under the provisions of the Companies Act, 2013 and Rules made thereunder. [May 18 – Old Syllabus (4 Marks)]
Answer:
Preparation and Recording of Minutes of Board meeting held through vide conferencing:
Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides the provisions relating to conduct of board meetings through video conferencing or other audio-visual means. Accordingly,

At the end of discussion on each agenda item, the Chairperson of the meeting shall announce the summary of the decision taken on such item along with names of the directors, if any, who dissented from the decision taken by majority and the draft minutes so recorded shall be preserved by the company till the confirmation of the draft minutes.

The draft minutes of the meeting shall be circulated among all the directors within 15 days of the meeting either in writing or in electronic mode as may be decided by the Board.

Every director who attended the meeting, whether personally or through video conferencing or other audio-visual means, shall confirm or give his comments in writing, about the accuracy of recording of the proceedings of that particular meeting in the draft minutes, within 7 days or some reasonable time as decided by the Board, after receipt of the draft minutes failing which his approval shall be presumed.

In the present case, due to technical problems, the video recordings of a Board meeting of Moonlight Limited, could not be retrieved and the company seeks advice for the preparation and recording of the minutes of the board meeting.

Conclusion: The secretary of Moonlight Limited in consultation with the Chairman of the meeting can use the draft minutes that would have been recorded during the meeting to prepare the minutes. Further, when the same minutes will be circulated to the directors, they can give comments in writing, about the accuracy of recording of the proceedings of that particular meeting in the minutes, within 7 days or some reasonable time as decided by the Board, after receipt of the draft minutes.

Question 12.
M/s OBC Limited, at its forthcoming Board meeting decide that it will not provide the directors with the facility of participation in the said meeting through electronic mode; can the directors insist on attending the meeting through such mode? Decide as per the provisions of the Companies Act, 2013. Will your answer differ, if a Director participates in a Board Meeting through electronic mode from his end, even if the company does not provide such facility? [Nov. 18-Old Syllabus (4 Marks)]
Answer:
Participation in Board Meeting through electronic mode:

As per Sec. 173(2) of the Companies Act, 2013 the participation of directors in a meeting of the Board may be either in person or through video conferencing or other audio-visual means, as may be prescribed, which are capable of recording and recognising the participation of the directors and of recording and storing the proceedings of such meetings along with date and time.

Proviso to Sec. 173 provides that C.G. may, by notification, specify such matters which shall not be dealt with in a meeting through video conferencing or other audio-visual means. However, in this case also, if quorum exist in the meeting through physical presence of directors, any other director may participate through video conferencing or other audio-visual means.

Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014 requires that every company shall follow the procedure and make necessary arrangements for convening and conducting the Board meetings through video conferencing or other audio-visual means.

In the present case, M/s OBC Limited, at its forthcoming Board meeting decide that it will not provide the directors with the facility of participation in the said meeting through electronic mode.

It appears from the provisions of law that company is not having any option whether to allow the directors the facility of participation in Board meeting through electronic means or not. They are bound to make necessary arrangements. It is at the option of the directors whether to attend the meeting in person or through video conferencing or other audio-visual means.

Conclusion: Considering the requirements of Sec. 173(2) and Rule 3 as stated above, it can be concluded that directors can insist the company on attending the meeting through electronic mode. Hence the demand of the question in a situation when the company does not provide such facility is of no relevance.

Note: Answer given in Suggested answer of Board of Studies of ICAI is different stating that Rule 3 is to be complied with only if a company provides the facility of participation through electronic mode but it is not his right. This option may be exercised by the director only when this facility is provided by the company to its directors.

If the company has not offered to provide facility of participation through electronic mode and the director insists to attend the meeting through electronic mode, the company may decide whether to provide the same or not Thus, it is not mandatory for companies to provide their directors with the facility of participation in meetings through electronic mode and therefore, the director cannot insist.

Meetings of Board and its Powers – CA Final Law Study Material

Question 13.
Wonderland Ltd. convened a meeting of the Board of Directors on 1st September 2020 to approve the financial statements of the Company as on 31st March, 2020. The Board has strength of 5 directors and the quorum as per Articles of Association is 3 directors physically present. While 3 directors participated in the meeting physically, the fourtli and the fifth directors participated through video conferencing. Examine the validity of the approval of financial statements in the above said Board meeting. [Nov. 19 – Old Syllabus (4 Marks)]
Answer:
Participation in Board Meeting through electronic mode:
As per Sec. 173(2) of the Companies Act, 2013 the participation of directors in a meeting of the Board may be either in person or through video conferencing or other audio-visual means, as may be prescribed, which are capable of recording and recognising the participation of the directors and of recording and storing the proceedings of such meetings along with date and time.

First Proviso to Sec. 173 provides that C.G. may, by notification, specify such matters which shall not be dealt with in a meeting through video conferencing or other audio-visual means.

Second Proviso to Sec. 173 further provides that where there is quorum in a meeting through physical presence of directors, any other director may participate through video conferencing or other audio-visual means in such meeting on any matter specified under the first proviso.

Approval of Financial statements is one of the matters which is being covered in Rule 4 of Companies (Meetings of the Board and its Powers] Rules, 2014, which cannot be dealt with in a meeting through video conferencing. However, where there is quorum presence in a meeting through physical presence of directors, any other director may participate conferencing through video or other audio-visual means.

Conclusion: As there is Quorum in a meeting through physical presence of directors, any other director may participate through video conferencing. Hence the financial statements are approved validly.

Question 14.
You are the CFO and in-charge of compliances of a listed entity. The Company is professionally managed and has earned a niche In the market for Its robust management practices. Mr. Edward, an eminent American business man, currently living ¡n Germany, joined the Company as an Executive Director. On assuming his mantle, he being a foreign director residing abroad, approached you to specifically understand the relevant provisions of the Companies Act, 2013 relating to participation of directors in Board Meetings conducted through Video Conferencing in respect of the following matters:

(i) What shall be the venue of Board Meeting through video conference?
(ii) How the statutory registers placed at the scheduled venue of the meeting shall deemed to have been signed by the directors participating through electronic mode?
(iii) Whether meetings can be convened through audio/teleconferencing i.e. without video facility?
You are required to provide correct legal-position to the above queries after examining and evaluating the provisions of the Companies Act, 2013. [Nov. 20 – New Syllabus (6 Marks)]
Answer:
Conduct of Board Meetings:
Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014, requires the company to comply with the procedure in case of Board Meetings through video conferencing or other audiovisual means.

(i) Venue of Board meetings:
With respect to every meeting conducted through video conferencing or other audio-visual means authorised under these rules, the scheduled venue of the meeting as set forth in the notice convening the meeting, shall be deemed to be the place of the said meeting and all recordings of the proceedings at the meeting shall be deemed to be made at such place.

(ii) Signing of Statutory Registers:
The statutory registers which are required to be placed in the Board meeting as per the provisions of the Act shall be placed at the scheduled venue of the meeting and where such registers are required to be signed by the directors, the same shall be deemed to have been signed by the directors participating through electronic mode, if they have given their consent to this effect and it is so recorded in the minutes of the meeting.

(iii) Conducting meetings through audio conferencing:
As per Sec. 173(2) of Companies Act, 2013, the participation of directors in a meeting of the Board may be either in person or through video conferencing or other audio-visual means, as may be prescribed.

“Video conferencing or other audio-visual” means audio-visual electronic communication facility employed which enables all the persons participating in a meeting to communicate concurrently with each other without an intermediary and to participate effectively in the meeting.
Hence, meetings cannot be convened through audio/teleconferencing i.e. without video facility.

Meetings of Board and its Powers – CA Final Law Study Material

Question 15.
Discuss the following situations with respect to the quorum.
(a) There are 9 directors in a company and out of which 2 offices of the directors have fallen vacant.
(b) There are 15 directors in a company and during discussion of a particular item, 13 of the directors are said to be ‘interested’ within the meaning of section 184(2) of the Companies Act, 2013.
Answer:
Requirements as to quorum of a Board Meeting:

(a) As per Sec. 174(1) of the Companies Act, 2013, the quorum for a meeting of the Board of Directors of a company shall be 1/3rd of its total strength or 2 directors, whichever is higher. For this purpose, any fraction of arnumber shall be rounded off as one and total strength shall not include directors whose places are vacant.
In the present case, quorum shall be higher of 1/3rd of 7, i.e. 2.33, rounded off as 3 or 2 directors. Therefore, 3 directors would constitute the quorum for the Board meetings.

(b) As per Sec. 174(3) of the Companies Act, 2013 if at any time the number of the interested directors exceeds or is equal to 2/3rd of the total strength of the Board of Directors, the number of the directors who are non-interested but present at the meeting, not being less than 2 shall constitute the quorum.

In the present case, there are in all 15 directors and the Board meeting commences with all the 15 directors. During the meeting, an item comes up for discussion in respect of which 13 happen to be “interested” directors. In this case, in spite of the excess of the interested directors being more than 2/3rd, the prescribed minimum number of non-interested directors constituting the quorum, namely, 2 are present at the meeting and can transact the particular item of business.

Question 16.
A meeting of the Board of ‘No Holiday Ltd’ was held on a national holiday on account of Ganesh Chaturthi, the day being Sunday. However due to lack of quorum, the proceedings of the meeting could not be held and therefore the Chairman of the meeting decided with the consent of the majority that the Board meeting be adjourned to next week on the same day. Whether the meeting of the Board can be held on a Sunday.
Answer:
Board Meeting to be held on Sunday:

As per sec. 173 (3) of the Companies Act, 2 013, a meeting of the Board shall be called by giving not less than 7 days’ notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means. It further provides for the board meeting to be held on shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting.

Therefore, board meeting may be held at any place on any day including a national holiday if agreed by the directors.

As per Sec. 174(4), when a board meeting is adjourned due to lack of quorum, the adjourned meeting can be held on the same day at the same time and place in the next week or if that day is a national holiday, till the next succeeding day, which is not a national holiday, at the same time and place, unless the Articles provide otherwise.

Conclusion: Since the section specifies of exclusion of only national holiday, so adjourned meeting can be held on Sunday.

Question 17.
What is the procedure to be followed, when a board meeting is adjourned for want of quorum?
Answer:
Adjournment of Board Meeting due to want of quorum:
Section 174(4) of the Companies Act, 2013 provides that,

  • if a Board meeting could not be held for want of quorum, then, unless the articles otherwise provide, the meeting shall automatically stand adjourned to the same day in the next week, at the same time and place, or
  • if that day is a national holiday, till the next succeeding day which is not a national holiday, at the same time and place.

Question 18.
Examine, with reference to the relevant provisions of the Companies Act, 2013, the validity/legality of the following:
A meeting of the Board of directors of OPQ Co. Ltd. due to be held on 30.9.2020 did not take place for want of quorum. As a result, the Company did not hold any Board meeting for the quarter ended 30.9.2020 and there is a complaint that the Company has violated the provisions of the Act in this regard. „
Answer:
Requirements as to Board Meetings: –

As per Sec. 173 (1) of the Companies Act, 2013, every company shall hold the first meeting of the BOD within 30 days of the date of its incorporation and thereafter hold a minimum number of 4 meetings of its BOD every year in such a manner that not more than 120 days shall intervene between two consecutive meetings of the Board.

As per Sec. 174(4), when a board meeting is adjourned due to lack of quorum, the adjourned meeting can be held on the same day at the same time and place in the next week or if that day is a national holiday, till the next succeeding day, which is not a national holiday, at the same time and place, unless the Articles provide otherwise.

In the present case, a meeting of the Board of directors of OPQ Co. Ltd. due to be held on 30.9.2020 did not take place for want of quorum. As a result, the Company did not hold any Board meeting for the quarter ended 30.9.2020 and there is a complaint that the Company has violated the provisions of the Act in this regard.

Conclusion: Allegation that the company has contravened the provisions of Companies Act, 2013 is not correct. It is not necessary under the Companies Act, 2013 for a company to hold board meetings on quarterly basis as long as 4 meetings are held in a year in such a manner that not more than 120 days shall intervene between two consecutive meetings of the Board.

Meetings of Board and its Powers – CA Final Law Study Material

Question 19.
The Board of directors of ABC Ltd. met thrice in the year 2020 and the 4th Meeting, though called, could not be held for want of quorum.
Examine with reference to the relevant provisions of the Companies Act, 2013, Whether any provisions of the Companies Act, 2013 have been contravened?
Or
PQR Limited held 3 board meetings till 30th Sep., 2020 during the calendar year 2020. The next board meeting was due to be held on 27th December, 2020 but for want of quorum the meeting could not be held. A group of shareholders complained that the Company has violated the provisions of section 173 of the Companies Act, 2013 in not holding the required number of board meetings. State whether PQR Limited has violated the provisions given in Sec. 173 of the Act.
Answer:
Requirements as to Board Meetings:

As per Sec. 173(1) of the Companies Act, 2013, every company shall hold the first meeting of the BOD within 30 days of the date of its incorporation and thereafter hold a minimum number of 4 meetings of its BOD every year in such a manner that not more than 120 days shall intervene between two consecutive meetings of the Board.

As per Sec. 174(4), when a board meeting is adjourned due to lack of quorum, the adjourned meeting can be held on the same day at the same time and place in the next week or if that day is a national holiday, till the next succeeding day, which is not a national holiday, at the same time and place, unless the Articles provide otherwise.

In case of adjournment of the meeting, it shall be deemed to have been held on the date on which it was started and not on the date when the adjourned meeting was held.

Conclusion: Provisions of section 173 shall not be deemed to have been contravened merely by reason of the fact that a meeting of the Board which had been called in compliance with the terms of that Section could not be held for want of a quorum. Holding of the adjourned meeting though in the next year will be treated as continuation of the 4th meeting of the previous year and will therefore not count in the meetings held in the next year but in the previous year.

Note: It is assumed here that adjourned meeting is duly held. If it is assumed that in adjourned meeting also, quorum was not present, meeting stand cancelled and it can be concluded that Sec. 173(1) has been violated.

Question 20.
The board meeting of MNO Ltd. was held on 10th May, 2020 at Chennai at 11 A.M. At the time of starting the board meeting the number of director’s present were 7. The total number of directors were 10. The board transacted ten items in the board meeting. At 12 noon after the completion of four items in the agenda 4 directors left the meeting. Examine the validity of these transactions explaining the relevant provisions of the Companies Act, 2013. [Nov. 08 (5 Marks)]
Answer:
Requirements as to quorum of a Board Meeting:

As per Sec. 174(1) of the Companies Act, 2013, the quorum for a meeting of the Board of Directors of a company shall be 1/3rd of its total strength or 2 directors, whichever is higher. For this purpose, any fraction of a number shall be rounded off as one and total strength shall not include directors whose places are vacant.

Quorum need to be present at the time of transacting each and every business.

In the present case, the board meeting of MNO Ltd. was held on 10th May, 2020 at Chennai at 11 A.M. At the time of starting the board meeting the number of director’s present were 7. The total number of directors were 10. The board transacted 10 items in the board meeting. At 12 noon after the completion of four items in the agenda 4 directors left the meeting.

Quorum for the board meeting in this case will be 1/3rd of 10 directors, i.e. 3.33, rounded off as 4 or 2 directors, whichever is higher. So, quorum required will be 4 directors. At the beginning of meeting, 7 directors were present, but after transacting 4 items of the agenda, 4 directors left, as a result number of director’s present remains at 3, which is not a valid quorum.

Conclusion: First 4 transactions have been validly transacted. Resolutions passed in respect of remaining 6 agenda items are void as only 3 directors were present at that time, which falls below the minimum quorum required.

Question 21.
The Articles of Association of Amriz Limited provides for a maximum of 15 directors. But the company has only 10 directors and for 2 of them representing Collaborators, alternate directors have been appointed. Board meeting held on 1st August, 2020 was attended by four directors including two alternate directors. Examine with reference to the relevant provisions of the Companies Act, 2013 whether quorum was present at the Board Meeting held on 1st August, 2020. Will your answer be different, if the articles provide for a quorum of six directors? [Nov. 18-Old Syllabus (4 Marks)]
Answer:
Requirements as to quorum of a Board Meeting:

As per Sec. 174(1) of the Companies Act, 2013, the quorum for a meeting of the Board of Directors of a company shall be 1/3rd of its total strength or 2 directors, whichever is higher. For this purpose, any fraction of a number shall be rounded off as one and total strength shall not include directors whose places are vacant.

  • Alternate directors shall also be included while computing quorum.
  • Quorum for the board meeting in this case will be 1/3rd of 10 directors, i.e. 3.33, rounded off as 4’or 2 directors, whichever is higher. So, quorum required will be 4 directors.

Conclusion: Quorum required was 4 directors, hence quorum was present in the meeting. However, if the Articles provide for a quorum of 6 directors, it can be said that quorum was not present in the meeting.

Question 22.
How is a resolution by circulation passed by the Board or its Committee.
Or
Some urgent itemsare leftover in the agenda of Board meeting which concludedand decision cannot be deferred till its next meeting. Advice the company about how the resolution shall be passed now.
Or
Chairman of Board of Directors of ABC Ltd. came across a matter, which required the approval by way of a board resolution. In the prevailing circumstances, it is not possible to convene and hold a Board Meeting. The Chairman approaches you to advise him of the way and the relevant procedure to obtain such approval without holding the Board Meeting. You are required to advise him on the matter as per the provisions of the Companies Act, 2013. [May 09 (5 Marks)]
Or
In the course of administration of the affairs of a limited company, Chairman of the Board of directors came across a matter which required the approval by way of a board resolution. In the prevailing circumstances, it is not possible to convene and hold a Board meeting. The chairman approaches you to advise him of the way and the relevant procedure to obtain such approval without holding the Board meeting. Advise the chairman, taking into account the relevant provisions of the Companies Act, 2013. [May 12 (8 Marks)]
Answer:
Passing of Resolution by Circulation:

Under the provisions of Companies Act, 2013, Board approvals can be taken either by a resolution passed at a Board Meeting or by means of a resolution passed by circulation. Section 175 of the Companies Act, 2013 deals with the provisions relating to passing of resolution by circulation. Accordingly, no resolution shall be deemed to have been duly passed by the Board or by a committee thereof by circulation, unless the resolution:

(a) has been circulated in draft, together with the necessary papers, if any, to all the directors, or members of the committee, as the case may be, at their addresses registered with the company in India by hand or by post or by courier, or through prescribed electronic means; and

(b) has been approved by a majority of the directors or members, who are entitled to vote on the resolution.

Rule 5 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides that a resolution in draft form may be circulated to the directors together with the necessary papers for seeking their approval, by electronic means which may include E-mail or fax.

It is also provided by Sec. 175 that if at least 1 /3 rd of the total number of directors of the company for the time being require that any resolution under circulation must be decided at a meeting, the chairperson shall put the resolution to be decided at a meeting of the Board (instead of being decided by circulation).

A resolution that has been passed by circulation shall have to be necessarily be noted in the next meeting of board or the committee, as the case may be, and made part of the minutes of such meeting.

Meetings of Board and its Powers – CA Final Law Study Material

Question 23.
Mr. M was appointed as a director at the AGM of a limited company held on 30th Sep., 2019 and he carried on his duties and functions as a director. In the month of August, 2020, it was found out that there were certain irregularities in his appointment and on 31st August, 2020, his appointment was declared invalid. But Mr. M continued to act as director even after 31st August, 2020. Whether the acts done by Mr. MTP are valid and binding upon the company?
Answer:
Validity of actions takes by directors whose appointment is considered invalid:

As per Sec. 176 of the Companies Act, 2013, act done by a person as a director shall not be deemed to be invalid, notwithstanding that it was subsequently noticed that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles ofthe company.

Proviso to Sec. 176 provides that nothing in this section shall be deemed to give validity to any act done by the director after his appointment has been noticed by the company to be invalid or to have terminated.

In the present case, Mr. M was appointed as a director at the AGM of a limited company held on 30th Sep., 2019 and he carried on his duties and functions as a director. In the month of August, 2020, it was found out that there were certain irregularities in his appointment and on 31st August, 2020, his appointment was declared invalid. But Mr. M continued to act as director even after 31st August, 2020.

Conclusion: Acts done upto 31st Aug. 2020 are considered valid and acts done after 31st Aug. 2020 renders invalid.

Question 24.
MNC Ltd., a company, whose paid-up capital was ₹ 4 Crores, has issued rights shares in the ratio of 1:1. The said company is listed with Mumbai Stock Exchange. Whether the company is required to appoint any Audit Committee and if yes, draft a suitable Board Resolution to appoint an Audit committee covering the aspects as provided in the Companies Act, 2013. [MTP – April 19]
Answer:
Constitution of Audit Committee:

As per Section 177(1) of the Companies Act, 2013 the Board of Directors of every listed public company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.

In the present case MNC Ltd. is a listed public entity, therefore, will be bound to constitute an audit committee under the Act. As per Sec. 177(2) the Audit Committee shall consist of a minimum of 3 directors with independent directors forming a majority. Majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand the financial statement.

Draft Board Resolution for the constitution of an Audit Committee:
“Resolved that pursuant to the provision contained in section 177 of the Companies Act, 2013 and the applicable clause of Listing Agreement with the Mumbai Stock Exchange, an Audit Committee of the Company be and is hereby constituted with effect from the conclusion of this meeting, with members as under:

  1. Mr. A — An Independent Director.
  2. Mr. B — An Independent Director
  3. Mr. C – An Independent Director
  4. Mr. D – An Independent Director
  5. Mr. FE – Financial Executive
  6. Mr. MD — Managing Director

Further resolved that the Chairman of the Committee, who shall be an Independent Director, be elected by the committee members from amongst themselves.

Further resolved that the quorum for a meeting of the Audit Committee shall be the chairman of the Audit Committee and 2 other members (other than the Managing Director).

Further resolved that the terms of reference of the Audit Committee shall be in accordance with the provisions of section 177(4) of the Companies Act, 2013.

Further resolved that the Audit committee shall conduct discussions with the auditors periodically about internal control system, the scope of audit including the observations of the auditors.

Further resolved that the Audit Committee shall review the quarterly and annual financial statements and submit the same to the Board with its recommendations, if any.

Further resolved that the recommendations made by the Audit Committee on any matter relating to financial management including the audit report shall be binding on the Board. However, where such recommendations are not accepted by the Board, the reasons for the same shall be recorded in the minutes of the Board meeting and communicated to the shareholders.

Further resolved that the Company Secretary of the Company shall be the Secretary to the Audit Committee.

Further resolved that the Chairman of the Audit Committee shall attend the annual general meeting of the Company to provide any clarifications on matters relating to audit as may be required by the members of the company.

Further resolved that the Board’s Report/Annual Report to the members of the Company shall include the particulars of the constitution of the Audit Committee and the details of the non-acceptance of any recommendations of the Audit Committee with reasons therefor.”

Question 25.
R Ltd. wants to constitute an Audit Committee. In this reference, answer the following:
(a) What would be the minimum likely turnover or capital of this company?
(b) What is the role of the Audit Committee vis-a-vis the statutory auditor when the company wishes to engage them to perform certain engagements not restricted u/s 144? [May 16 (4 Marks)]
Answer:
Provisions relating to Audit Committee:

(a) Minimum likely Turnover or Capital of the companies required audit committee:
Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides that the Board of directors of every listed public company and a company covered under rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute an ‘Audit Committee’ and a ‘Nomination and Remuneration Committee of the Board’.

Companies prescribed under Rule 4 of the Companies (Appointment and Qualification of Directors] Rules, 2014, are:

  1. the Public Companies having paid up share capital of ₹ 10 crore or more; or
  2. the Public Companies having turnover of ₹ 100 crore or more; or
  3. the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding ₹ 50 crore.

Hence, in the present question, the likely turnover shall be ₹ 100 crore or more or capital shall be ₹ 10 crore or more.

(b) Role of Audit Committee: –
As per Sec. 177(4) of the Companies Act, 2013, every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include:

  1. the recommendation for appointment, remuneration and terms of appointment of auditors;
  2. review and monitor the auditor’s independence and performance, and effectiveness of audit process;
  3. examination of the financial statement and-the auditors’ report thereon;

As per Sec. 177(5), the Audit Committee may call for the comments of the auditors about internal control systems, the scope of audit, including the observations of the auditors, and may also discuss any related issues with the internal and statutory auditors and the management of the company.

Meetings of Board and its Powers – CA Final Law Study Material

Question 26.
An Audit Committee of a Public Limited Company constituted u/s 177 of the Companies Act, 2013 submitted its report of its recommendation to the Board. The Board, however, did not accept the recommendations. In the light of the situation, analyze whether:
(a) The Board is empowered not to accept the recommendations of the Audit Committee.
(b) If so, what alternative course of action, would be Board resort to?
Answer:
Recommendations of Audit Committee:
As per Sec. 177(8), the Board’s report u/s 134(3) shall disclose the composition of an Audit Committee and where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in such report along with the reasons therefor.

Conclusion: Considering the provisions as stated in Sec. 177(8), following conclusions maybe drawn:

(a) The Board is empowered not to accept there commendations of the Audit Committee but only under genuine circumstances and with legitimate reasons.
(b) If the Board does not accept the recommendations of the Audit Committee, it shall disclose the same in its report under section 134(3] placed before a general meeting of the company.

Question 27.
Explain how the provisions of the Companies Act, 2013 relating to Audit Committee will help in achieving some of the objectives of Corporate Governance.
Answer:
Audit Committee and Corporate Governance:
Various provisions as stated u/s 177 of Companies Act, 2013 are framed in such a manner to improve corporate governance standards and protect the interests of the public and the financial institutions who have invested in companies. These provisions may be highlighted as under:

1. Composition of Audit Committees u/s 177(2) requires the majority representation from independent directors, thereby making the functioning of these committees more transparent;

2. Proviso to section 177(2) requires the majority of members and the chairperson of the Audit Committees to be persons with ability to read and understand the financial statements, which enables a meaningful exercise of the committee’s functions by knowledgeable persons thereby increasing the effectiveness of such committees.

3. Sec. 177(4) provide the terms of reference and the functions which are to be performed by audit Committee.

4. Sec. 177(6) gives the audit committee an authority to investigate into any matter in relation to the areas of its scope of functioning or referred to it by the Board and for this shall have power to obtain professional advice from external sources and have full access to information contained in the records of the company.

5. The recommendations of the Audit Committee are binding on the Board to take appropriate corrective actions. Sec. 177(5) of the Act provides that in case the Board of Director has not accepted the recommendations of the Audit Committee, Board is bound to disclose the same with the reasons for non acceptance its report to the members of the company u/s 134(3).

Question 28.
Explain briefly the provisions of the Companies-Act, 2013 regarding constitution of “Audit Committee”. MNC Ltd. constituted an audit committee as required by the said Act. The committee in its report dated 30th April 2021 lias pointed out various irregularities in the financial transactions entered into by the company. The management of the company does not agree with the contents of the audit committee report. Explain the action that can be taken in this regard. [May 12 (8 Marks)]
Answer:
Constitution of Audit Committee:

As per Section 177(1) of the Companies Act, 2013 the Board of Directors of every listed public company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.

Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides that the Board of directors of every listed public company and a company covered under rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute an ‘Audit Committee’ and a ‘Nomination and Remuneration Committee of the Board’.

Companies prescribed under Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, are:

  • the Public Companies having paid up share capital of ₹ 10 crore or more; or
  • the Public Companies having turnover of ₹ 100 crore or more; or
  • the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding ₹ 50 crore.

As per Sec. 177(2) the Audit Committee shall consist of a minimum of 3 directors with independent directors forming a majority. Majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand the financial statement.

Action on irregularities pointed by the Audit Committee:
The recommendations of the Audit Committee are binding on the Board to take appropriate corrective actions. Sec. 177(5) of the Companies Act, 2013 provides that in case the Board of Director refuses to accept the recommendations of the Audit Committee, it bound to disclose the same with the reasons for non-acceptance, in its report to the members of the company under section 134(3) which relates to the Directors Report on Financial Statements to the members of the company.

Meetings of Board and its Powers – CA Final Law Study Material

Question 29.
Referring to the provisions of the Companies Act, 2013, examine the following: XYZ Limited, a listed company has constituted an audit committee consisting of 5 members out of whom 2 are independent directors. Subsequently, the company increased the composition of audit committee to six members with three independent directors. [Nov. 16 (2 Marks)]
Answer:
Composition of Audit Committee:

  • As per Section 177(2) of the Companies Act, 2013, the audit committee shall consist of a minimum of 3 directors with independent directors forming a majority.
  • In the given instance, XYZ Ltd. a listed company constituted an Audit committee consisting of 5 members out of which 2 are independent directors. Subsequently company increased the composition of audit committee to 6 members with 3 Independent directors.

Conclusion: Composition of audit committee is not in accordance with the provisions of Sec. 177(2) as independent directors do not have majority.

Question 30.
Referring fo the provisions of the Companies Act, 2013, answer the following:
(a) Which companies are required to constitute a ‘Nomination and Remuneration Committee’?
(b) What is the composition of the above committee? [May 15 (4 Marks)]
Answer:
(a) Companies requiring to constitute Nomination and Remuneration Committee:
As per Section 178(1) of the Companies Act, 2013, a Nomination and Remuneration Committee shall be constituted by the Board of Directors of:
(a) Every listed public company and
(b) Such other class or classes of companies as may be provided.

Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides that the Board of directors of every listed public company and a company covered under rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute an ‘Audit Committee’ and a ‘Nomination and Remuneration Committee of the Board’.

Companies prescribed under Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, are:
(a) the Public Companies having paid up share capital of ₹ 10 crore or more; or
(b) the Public Companies having turnover of ₹ 100 crore or more; or
(c) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding ₹ 50 crore.
The paid up share capital or turnover or outstanding loans, or borrowings or debentures or deposits, as the case may be, as existing on the date of last audited Financial Statements shall be considered for this purpose.

(b) Composition of Nomination and Remuneration Committee:

  • Committee should consist of 3 or more non-executive directors out of which not less than 1/2 shall be independent directors.
  • The Chairman of the company shall not chair such a committee. However, he may be appointed as a member to the committee.
  • The chairperson or in his absence, any other member of the committee authorized by him in this behalf shall attend the general meetings of the company.

Question 31.
M/s. Dream Works Limited (an unlisted company) without any public deposits as per the audited financial statements of the company as at March, 31st 2021 given you the following information:

Paid up Share Capital : ₹ 20 Crores
Gross Turnover : ₹ 500 Crores
Bank Borrowings : ₹ 40 Crores (from a Nationalized Bank)
Other Borrowings : ₹ 40 Crores (from a Public Financial Institution)

Mr. Gupta, a Chartered Accountant employed in the finance and audit department of the company wants to form a Vigil Mechanism for directors and employees of the company.

(1) Advise whether it is mandatory for M/s Dream Works Limited to formulate a Vigil Mechanism under the provisions of the Companies Act, 2013 and rules framed thereunder.
(2) Are there any penalties that could be imposed on the company for not formulating the Vigil Mechanism? [May 18 – Old Syllabus (4 Marks)]
Answer:
Vigil mechanism:
(a) As per Section 177(9) of the Companies Act, 2013, every listed company and such class of companies as may be prescribed shall establish a Vigil mechanism for their directors and employees.
Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014 has prescribed the following class or classes of companies that shall constitute Vigil mechanism:

  1. the Companies which accept deposits from the public;
  2. the Companies which have borrowed money from banks and public financial institutions in excess of ₹ 50 crore.

In the present case, Dream Works Limited does not have any public deposits. They have borrowings §S from banks and public financial institutions of ₹ 80 crores which is in excess of ₹ 50 crores. ”

Conclusion: Company is mandatorily required to form a Vigil Mechanism for directors and employees of the company as it falls within the criteria specified under Rule 7.

(b) Penalty: As per Section 178(8), in case of contravention of provisions of Section 177 and Sec. 178, the company shall be punishable with fine which shall not be less than ₹ 1 lakh but which may extend to ₹ 5 lakh.

Every officer of the company who is in default shall also be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than ₹ 25,000 but which may extend to ₹ 1 lakh or with both.

Meetings of Board and its Powers – CA Final Law Study Material

Question 32.
A is the Director of M & Co. Ltd. A has borrowed ₹ 50 lacs on reasonable terms from X for company’s benefit and business. A has no power to borrow. What will be the legal position? Please explain. [Nov. 10 (5 Marks)]
Answer:
Restrictions on powers of Board:

As per Sec. 179(3) of the Companies Act, 2013, the Board of Directors of a company shall exercise certain powers on behalf of the company by means of resolutions passed at meetings of the Board, including therein is to borrow monies.

To borrow money is within the implied authority of a director and so the outsiders dealing with the company are entitled to assume that every director is authorised to borrow money on behalf of the company.

In the present case, money has been borrowed and used for the benefit of the company and its legitimate business purposes.

Conclusion: Company cannot repudiate the liability on the ground that the director ‘A’ has no power to borrow.

Question 33.
Out of the powers exercisable by the Board u/s 179, the board wants to delegate to the Managing Director of the company power to borrow monies otherwise than on debentures. Advise whether such a delegation is possible? Would your answer be different, if the delegation is given to the manager or any other principal: officer including a branch officer of the company? [MTP-Ãpril 18, May 20]
Answer:
Delegation of Board’s Power to MD:
As per Sec. 179(3) of the Companies Act, 2013, 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:
(a) To make calls on shareholders in respect of money unpaid on their shares;
(b) To authorise buy-back of securities under section 68;
(c) To issue securities, including debentures, whether in or outside India;
(d) To borrow monies;
(e) To invest the funds of the company
(f) To grant loans or give guarantee or provide security in respect of loans;
(g) To approve financial statement an the Board’s report;
(h) To diversify the business of the company;
(i) To approve amalgamation, merger or reconstruction;
(J) To take over a company or acquire a controlling or substantial stake in another company;
(k) Any other matter which may be prescribed:

Provided that the Board may, by a resolution passed at a meeting, delegate to any committee of directors, the managing director, the manager or any other principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office, the powers specified in clauses (d) to (f) on such conditions as it may specify.

Conclusion: Considering the provisions of Sec. 179(3), it can be concluded that the power to borrow monies, may be delegated to the Managing Director or to the manager or any other principal officer including a branch officer of the company.

Meetings of Board and its Powers – CA Final Law Study Material

Question 34.
Advise the Board of Director of Spectra Papers Ltd. regarding validity and extent of their powers, under the provisions of the Companies Act 2013 in relation to the following matters:
(i) Buy-back of the sháres of the Company, for the first time, upto 10% of the paid-up equity share capital without passing a special resolution.
(ii) Delegatiöñ Of Power to the Managing Director of the company to invest surplus funds of the company in the shares of some companies. [May 10(5 Marks)]
Answer:
Powers of Board:
(1) Buy back of shares:

  • As per clause (b) of section 179(3), the Board of Directors of a company shall exercise the power to authorise buy-back of securities u/s 68, on behalf of the company by means of resolutions passed at meetings of the Board.
  • As per section 68(2), no company shall purchase its own shares or other specified securities, unless—

(a) the buy-back is authorised by its articles;
(b) a special resolution has been passed at a general meeting of the company authorising the buy-back.
However, nothing contained in this clause shall apply to a case where-

  1. the buy-back is, 10% or less of the total paid-up equity capital and free reserves of the company; and
  2. such buy-back has been authorised by the Board by means of a resolution passed at its meeting.

Conclusion: For buy-back of shares, upto 10% of the paid up share capital, a special resolution will not be required if such buy-back has been authorised by the Board by means of a resolution passed at its meeting.

(ii) Delegation of power to invest the funds:

As per clause (e) of section 179(3), the Board of Directors of a company shall exercise the power to invest the funds of the company, on behalf of the company by means of resolutions passed at meetings ofthe Board.

Proviso to Sec. 179(3) provides that the Board may, by a resolution passed at a meeting, delegate the power to invest the funds of the company by a Board Resolution passed at a duly convened Board Meeting.

However, investment in shares of other companies will be governed by Sec. 186(5) of the Companies Act, 2013, in accordance with which, no investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained.

Conclusion: Section 186(5) does not provide for delegation. Hence, the proposed delegation of power to the Managing Director to invest surplus funds of the company in the shares of some other companies, is not in order.

Question 35.
M/s. Multiplex Builders Limited is contemplating to enter into a joint venture agreement with another construction company for the development of landed properties located at Delhi. Since it is not possible to convene the Board Meeting immediately, as the directors are at different place in connection with various works, the Managing Director seeks your advice on the following matters:

(a) Whether the resolution pertaining to the joint venture agreement is required to be passed at the Board Meeting convened for this purpose or whether it can be passed by means of a circular resolution?
(b) What are the resolutions that are required to be passed only at the meetings of the Board of Directors?
(c) The steps that are required to be taken to pass the Board resolution by circulation.
Advise the Managing Director in the light of the provisions of the Companies Act, 2013. [RTP-Nov. 18]
Answer:
Powers of Board:
(a) Resolutions to be passed as circular resolution:

Under the provisions of Companies Act, 2013, Board approvals can be taken either by a resolution passed at a Board Meeting or by means of a resolution passed by circulation. Section 175 of the Companies Act, 2013 deals with the provisions relating to passing of resolution by circulation.

As per Sec. 179(3) of the Companies Act, 2013, the Board of Directors of a company shall exercise certain powers on behalf of the company by means of resolutions passed at meetings of the Board. Nowhere in Sec. 179(3) restricts resolution pertaining to joint venture agreement.

Conclusion: Managing Director can enter into joint venture agreement after obtaining the approval of the board by passing a circular resolution.

(b) Resolutions to be passed only at the meetings of the Board of Directors:
As per Sec. 179 (3) of the Companies Act, 2 013, 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:

  • To make calls on shareholders in respect of money unpaid on their shares;
  • To authorise buy-back of securities under section 68;
  • To issue securities, including debentures, whether in or outside India;
  • To borrow monies
  • To invest the funds of the company
  • To grant loans or give 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;
  • Any other matter as prescribed in Rule 8 of the Companies (Meetings of the Board and its Powers) Rules, 2014.

(c) Steps to be taken to pass Board Resolution by circulation:
As per Sec. 175 of the Companies Act, 2013, no resolution shall be deemed to have been duly passed by the Board or by a committee thereof by circulation, unless the resolution:

has been circulated in draft, together with the necessary papers, if any, to all the directors, or members of the committee, as the case may be, at their addresses registered with the company in India by hand or by post or by courier, or through prescribed electronic means; and has been approved by a majority of the directors or members, who are entitled to vote on the resolution.

Question 36.
The Board of Directors of Stepping Stones Publications Ltd. at a meeting held on 15.1.2021 resolved to borrow a sum of ₹ 15 crores from a nationalized bank. One of the Directors, who opposed the said borrowing as not in the interest of the company has raised an issue that the said borrowing is outside the powers of the Board of Directors. The Company seeks your advice and the following data is given for your information:

  1. Share Capital – ₹ 5 crores
  2. Reserves and Surplus – ₹ 5 crores
  3. Secured Loans – ₹ 15 crores
  4. Unsecured Loáns – ₹ 5 crores

Advice the management of the company.
Answer:
Power of Board to borrow money:

As per Sec. 180(1)(c) of the Companies Act, 2013, the Board of Directors of a company shall not borrow the money without obtaining the approval of shareholders in a general meeting through a special resolution, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.

Accordingly, the maximum borrowing which the Board of Directors can borrow, without obtaining approval of the shareholders in a general meeting, is calculated as follows:

Particulars (₹)
Paid up Share Capital 5 Crore
General Reserve (being free reserve) 5 Crore
Securities Premium
Aggregate of paid up capital, free reserve and Securities premium 10 Crore
Less: Existing borrowing

(Secured & unsecured Loan – assuming to be long term)

20 Crore
Amount upto which the Board of Directors can fur­ther borrow without the approval of shareholders in a general meeting Nil

Conclusion: Proposed borrowing of ₹ 15 years will exceed the prescribed limit, so the management should take steps to convene the general meeting and pass a special resolution.

Meetings of Board and its Powers – CA Final Law Study Material

Question 37.
The paid-up share capital and free reserves of XYZ Co. Limited, a public company is ₹ 100 crore as on 1st April 2021. The shareholders of the company at a general meeting held on 4th April 2021 by a special resolution authorise the board of directors of the company to borrow the money exceeding the paid-up share capital and free reserves of the company to the extent required by the board of directors.

The board of directors as a result borrow money to the extent of ₹ 130 crores including ₹ 20 crores as short-term loans and ₹ 25 crore is the temporary loan for financing the construction of a building of the company. Referring to the provisions of Companies Act, 2013 examine the validity of the following:

(a) The board exercising the powers for borrowing money to an extent of ₹ 130 Crores.
(b) What would be your answer in case the company paid-up share capital and free reserves increased to ₹ 150 crores and the board of director borrow money to an extent of ₹ 140 crore which neither includes any short-term loan nor temporary loan for financing of the construction of building of the company.
Answer:
Power of Board to borrow money:

As per Sec. 180(1)(c) of the Companies Act, 2013, the Board of Directors of a company shall not borrow the money without obtaining the approval of shareholders in a general meeting through a special resolution, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.

Sec. 180(2) provides that every special resolution passed by the company in general meeting in relation to the exercise of the powers referred to in clause (c) of Sec. 180(1) shall specify the total amount up to which monies may be borrowed by the Board of Directors.

In the present case, aggregate of the paid-up share capital, free reserves and securities premium of XYZ Co. Limited, is ₹ 100 crore as on 1st April 2021. The shareholders at a general meeting held on 4th April 2021 by a special resolution authorise the board of directors of the company to borrow the money exceeding the paid-up share capital and free reserves of the company to the extent required by the board of directors.

The board of directors as a result borrow money to the extent of ₹ 130 crores including ₹ 20 crores as short-term loans and ₹ 25 crore is the temporary loan for financing the construction of a building of the company.

Conclusion:

(a) Special resolution passed in general meeting is defective as it does not specify the total amount upto which money can be borrowed. Borrowings made by BOD (₹ 130 Cr. – ₹ 20 Cr.) is in violation of Sec. 180(1)(c) as it exceeds ₹ 100 Cr.

(b) Borrowings made by BOD (₹ 140 Cr.) is within the limits prescribed by Sec. 180(1)(c), i.e. aggregate of paid up capital, free reserves and securities premium.

Question 38.
Big Ben Ltd., a reputed public company, had advanced certain sum of money to one of its Directors, namely, Mr. Tanmay on certain terms and conditions and fixing the time limit for repayment thereof. NowfMr. Tanmay has approached the Company with a request to extend the time limit for repayment of balance of loan amounting to ₹ 12.00 lacs by another six months.

You are required to state with reference to the provisions of the Companies Act, 2013, the answer to the following:
(i) Who is authorized to grant the extension as requested by Mr. Tanmay?
(ii) Draft an appropriate notice for the meeting where such extension may be granted. [May 09 (5 Marks)]
Answer:
Powers of Board of Directors:
(i) Extension of time for repayment of debt by a director:
As per provisions of Section 180(l)(d) of the Companies Act, 2013, the Board of Directors of Big Ben Ltd., a public company cannot give time for the repayment of any debt due by Mr. Tanmay, a director of the company except with the consent of the Company by way of a Special Resolution passed in a General Meeting.

Accordingly, the Company in a General Meeting is authorized to grant the extension as requested by Mr. Tanmay by passing special resolution.

(ii) Notice for calling the General Meeting of the company:

BIG BEN LIMITED
Registered Office: __________
NOTICE FOR EXTRAORDINARY GENERAL MEETING

NOTICE is hereby given that an Extraordinary General Meeting of the members of the company will be held at the Registered office of the Company on ____, the ____ day of _____, 2021 at 11.00 A.M. to transact the following business:
To Pass, with or without modification, the following resolution as a Special Resolution:
“RESOLVED THAT pursuant to the provision of section 180(1)(d) of the Companies Act, 2013, consent be and is hereby accorded to the company for extending the time for the repayment of the balance amount of ₹ 12.00 Lacs advanced to Mr. Tanmay, a Director of the company, by a further period of six months ending on ___, 2021.”

FOR & ON BEHALF OF THE BOARD

Dated: Company Secretary

Notes:

(1) A member entitled to attend and vote at the Meeting is entitled to appoint a proxy to attend and vote instead of himself and such proxy need not be a member of the Company. Proxies in order to be valid must be deposited atleast 48 hours prior to commencement of the Meeting.

(2) Explanatory Statement pursuant to section 102(1) of the Companies Act, 2013 is annexed hereto.

Meetings of Board and its Powers – CA Final Law Study Material

Question 39.
The Balance Sheet of International Operators Ltd. as at 31-03-2021 disclose the following position:

Share Capital : ₹ 100 crores
Reserves & Surplus : ₹ 300 crores
Secured Loans : ₹ 150 crores
Unsecured Loans : ₹ 100 crores
Current Liabilities : ₹ 70 crores

Mr. X, the Managing Director of the company approaches the Royal Bank for a secured loan of ₹ 600 crores to finance the new projects to be taken up shortly. The Bank seeks your advise whether it can grant the loan of ₹ 600 crores on the application of Mr. X. Advise the Royal Bank having regard to the provisions of the Companies Act, 2013. [May 11 (8 Marks)]
Answer:
Power of Board to borrow money:

As per sec. 180(1)(c) of the Companies Act, 2013, the Board of Directors of a company shall not borrow the money without obtaining the approval of shareholders in a general meeting through a special resolution, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.

Accordingly, the maximum borrowing which the Board of Directors can borrow, without obtaining approval of the shareholders in a general meeting, is calculated as follows:

Particulars (₹)
Paid-up Share Capital 100 Crore
General Reserve (being free reserve) 300 Crore
Securities Premium
Aggregate of paid-up capital, free reserve and Secu­rities premium 400 Crore
Less: Existing borrowing

(Secured & unsecured Loan – assumed to be long term)

250 Crore
Amount upto which the Board of Directors can further borrow without the approval of shareholders in a general meeting 150 Crore

Conclusion: Proposal of the company to borrow ₹ 600 crores exceed the paid-up share capital and free reserves of the company to the tune of ₹ 200 crores (i.e. ₹ 600 crores – ₹ 400 crores = ₹ 200 crores) without taking into account the existing loan. Thus, Royal Bank should advise Mr. X, the Managing Director of the company to get the approval of the shareholders of the company before considering the request of the company for a loan of ₹ 600 crores.

Notes:

(1) A member entitled to attend and vote at the Meeting is entitled to appoint a proxy to attend and vote instead of himself and such proxy need not be a member of the Company. Proxies in order to be valid must be deposited atleast 48 hours prior to commencement of the Meeting.

(2) Explanatory Statement pursuant to section 102(1) of the Companies Act, 2013 is annexed hereto.
The Balance Sheet of International Operators Ltd. as at 31-03-2021 disclose the following position:

Question 40.
Following is data relating to Prince Company Limited:

(₹)
Authorised Capital (Equity Shares) 100 crores
Paid-up Share Capital 40 crores
General Reserves 20 crores
Debenture Redemption Reserve 10 crores
Provision for Taxation 5 crores
Loan (Long Term) 10 crores
Short Term Creditors 3 crores

Board of Directors of the company by a resolution passed at its meeting decided to borrow an additional sum of ₹ 90 crores from the company’s Bankers. You being the company’s financial advisor, advise the Board of Directors the procedure to be followed as required under the Companies Act, 2013. – [Nov. 14 (5 Marks)]
Answer:
Borrowing by the Company (Section 180 of the Companies Act, 2013):

As per sec. 180(1)(c) of the Companies Act, 2013, the Board of Directors of a company shall not borrow the money without obtaining the approval of shareholders in a general meeting through a special resolution, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.

Accordingly, the maximum borrowing which the Board of Directors can borrow, without obtaining approval of the shareholders in a general meeting, is calculated as follows:

Particulars (₹)
Paid-up Share Capital 40 Crore
General Reserve (being free reserve) 20 Crore
Securities Premium
Aggregate of paid-up capital, free reserve and Se­curities premium 60 Crore
Less: Existing borrowing (long term) 10 Crore
Amount upto which the Board of Directors can further borrow without the approval of shareholders in a general meeting 50 Crore
  • Debenture Redemption Reserve is not considered since it is kept apart for specific purpose of debenture redemption.
  • In the present case, the directors by a resolution passed at its meeting decide to borrow an additional sum of ₹ 90 Crore from the company bankers.

Conclusion: Borrowing of ₹ 90 Crore will be beyond the powers of the Board of directors. Thus, the management is required to convene the general meeting and pass a special resolution by the members in the meeting as required u/s 180(1)(c) of the Companies Act, 2013.

Question 41.
One of the Objects Clauses of the Memorandum of Association of Info Company Limited conferred upon the company power to sell its undertaking to another company with identical objects. Company’s Articles also conferred upon the directors whereby power was conferred upon them to sell or otherwise deal with the property of the company. At an Extraordinary General Meeting of the company, members passed an ordinary resolution for the sale of its assets on certain terms and authorized the directors to carry out the sale.

Directors refused to comply with the wishes of the members where upon it was contended on behalf of the members that they were the principals and directors being their agents, were bound to give effect to their (members’) decisions.
Examining the provisions of the Companies Act, 2013, answer the following:
(a) Whether the contention of members against the non-compliance of members’ decision by the directors is tenable?
(b) Whether it is possible for the members usurp the powers which by the Articles are vested in the directors by passing a resolution in the general meeting? [Nov. 15 (4 Marks), MTP-March 18, Oct. 19]
Answer:
Powers of Board:

As per sec. 179(1) 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. Provided that in exercising such power or doing such act or thing, the Board shall be subject to the provisions contained in that behalf in this Act, or in the memorandum or articles, or in any regulations not inconsistent therewith and duly made thereunder including regulations made by the company in general meeting.

Provided further that the Board shall not exercise any power or do any act or thing which is directed or required, whether under this Act or by the members or articles of the company or otherwise to be exercised or done by the company in general meeting.

As per Clause (a) of sec. 180(1) power-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 or any of such undertakings, can be exercised by Board only with the consent of the company by a special resolution.

In the present case, members passed an ordinary resolution for the sale of its assets on certain terms and authorized the directors to carry out the sale. The procedure followed is completely incorrect and violative of the provisions of the Act. The shareholders cannot on their own make out a proposal of sale and pass an ordinary resolution to implement it through the directors.

Conclusions: Based on the above discussion, following conclusions may be drawn:

(a) Contention of the shareholders is incorrect as it is not within their authority to approve a proposal independently of the Board of Directors.

(b) In exercising their powers, the directors do not act as agent for the members. The members therefore, cannot by resolution passed by a majority or even unanimously supersede the powers of directors or instruct them how they shall exercise their powers. The shareholders have, however, the power to alter the Articles of Association of the company in the manner they like subject to the provisions of the Companies Act, 2013.

Meetings of Board and its Powers – CA Final Law Study Material

Question 42.
The following information is provided in respect of M/s. Fortune Limited under three different case scenarios on the borrowing powers of the Board of Directors of the company. MR. Murli, the CFO seeks your advice with explanations as to the nature of resolution which needs to be passed under each of the case scenarios as per the provisions of section 180(1)(c) of the Companies Act, 2013. Detailed workings should form part of your answer.

Particulars Case I
(₹ in Crores)
Case II (₹ in Crores) Case III (₹ in Crores)
Equity Share Capital (Paid-up) 150 150 150
Preference Share Capital (Paid-up) 50 50 50
Equity Share Capital (Paid-up) 150 150 150
Preference Share Capital (Paid-up) 50 50 50
Securities Premium Account 50 50 50
Free Reserves 20 20 20
Total 270 270 270
Working Capital Loan (repayable on demand Existing) from Sigma Capital Limited 50 50 50
Cash Credit Limit from a scheduled bank (repay­able on demand – Existing) 120 120 120
6 months loan for purchase of Plant & Machinery from scheduled bank – (proposed) 30 40 130
24 months loan for purchase of Plant & Machin­ery from scheduled bank – (proposed) 10 20 150
Total 210 230 450

[May 19-New Syllabus (4 Marks)]
Answer:
Nature of resolution to be passed under the provisions of Sec. 180(1)(c):

As per Sec. 180(1)(c) of the Companies Act, 2013, the Board of Directors of a company shall not borrow the money without obtaining the approval of shareholders in a general meeting through a special resolution, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.

For this purpose, the expression “temporary loans” means loans repayable on demand or within 6 months from the date of the loan such as short-term, cash credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal character but does not include loans raised for the purpose of financial expenditure of a capital nature.

  • Aggregate of paid up capital, free reserves and securities premium in each case is ₹ 270 Cr.
  • Amount of borrowings for the purpose of Sec. 180(1) (c) will be computed as below:
Particulars Case I
(₹ in Crores)
Case II (₹ in Crores) Case III (₹ in Crores)
Working Capital Loan (repayable on de­mand Existing) from Sigma Capital Limited 50 50 50
Cash Credit Limit from a scheduled bank (repayable on demand – Existing) Not to be con­sidered Not to be con­sidered Not to be con­sidered
6 months loan for purchase of Plant & Ma­chinery from scheduled bank – (proposed) 30 40 130
24 months loan for purchase of Plant & Ma­chinery from scheduled bank – (proposed) 10 20 150
Aggregate of Borrowings for purpose of Sec. 180(1)(c) 90 110 330

Conclusion: from the workings shown above, following conclusions may be drawn:

  1. In Case I and Case II, Board resolution will be sufficient as aggregate of borrowings does not exceed aggregate of paid up capital, free reserves and securities premium.
  2. In Case III, Special resolution will be required as aggregate of borrowings exceeds aggregate of paid up capital, free reserves and securities premium.

Question 43.
The last three years’ Balance Sheet of PTL Ltd., contains the following information arid figures:
Meetings of Board and its Powers – CA Final Law Study Material 1
On-going through other records of the Company, the following is also determined:
Meetings of Board and its Powers – CA Final Law Study Material 2
In the ensuing Board Meeting scheduled to be held on 5th June, 2021, among other items of agenda, following items are also appearing:

  1. To decide about borrowing from Financial institutions on long-term basis.
  2. To decide about contributions to be made to Charitable funds.

Based on above information, you are required to find out as per the provisions of the Companies Act, 2013, the amount upto which the Board can borrow from Financial institution and the amount upto which the Board of Directors can contribute to Charitable funds during the financial year 2021-22 without seeking the approval in general meeting. [MTP-March 19]
Answer:
(a) Borrowing from Financial Institutions:

As per sec. 180(1)(c) of the Companies Act, 2013, the Board of Directors of a company shall not borrow the money without obtaining the approval of shareholders in a general meeting through a special resolution, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.

Accordingly, the maximum borrowing which the Board of Directors can borrow, without obtaining approval of the shareholders in a general meeting, is calculated as follows:
Meetings of Board and its Powers – CA Final Law Study Material 3

  • Since the decision to borrow is to be taken in a meeting to be held on 5th June., 2021, the figures relevant for this purpose are the figures as per the Balance Sheet as at 31.03.2021.
  • Debenture Redemption Reserve is not considered since it is kept apart for specific purpose of debenture redemption.

Conclusion: Board of directors can borrow upto ₹ 1,07,00,000 without passing special resolution in general meeting.

(b) Contribution to Charitable Funds:

As per section 181 of the Companies Act, 2013, the Board of Directors of a company may contribute to bona fide charitable and other funds upto 5% of its average net profits during the three financial years immediately preceding, the financial year. For contribution above this limit, prior permission of the company in general meeting shall be required.

Accordingly, the maximum contribution which the Board of Directors can make without obtaining approval of the shareholders in a general meeting is calculated as follows:
Meetings of Board and its Powers – CA Final Law Study Material 4
Conclusion: Amount that can be contributed to charitable funds without obtaining approval of the shareholders in a general meeting is ₹ 1,10,000.

Meetings of Board and its Powers – CA Final Law Study Material

Question 44.
The Board of directors of Very Well Ltd., are contributing every year to a charitable organization a sum of ₹ 60,000. In a particular year, the company suffered losses and the directors are contemplating to contribute the said amount in spite of the losses. In this connection, state whether the directors can do so?
Answer:
Contribution to Charitable funds:

As per section 181 of the Companies Act, 2013, the Board of Directors of a company may contribute to bona fide charitable and other funds upto 5% of its average net profits during the 3 financial years immediately preceding, the financial year. For contribution above this limit, prior permission of the company in general meeting shall be required.

In the instant case, the Board of directors of Very Well Ltd., are contributing every year to a charitable organization a sum of ₹ 60,000. In a particular year, the company suffered losses and the directors are contemplating to contribute the said amount in spite of the losses.

Conclusion: Board may contribute upto 5% of average net profit of preceding 3 years. For any contribution above this limit, prior permission of the company in general meeting shall be required.

Question 45.
The Board of Directors of LM Limited propose to donate ₹ 3,00,000 to a school established exclusively for the benefit of children of employees and also donate ₹ 50,000 to a political party during the financial year ending 31st March, 2021. The average net profits during the 3 immediately preceding financial years is ₹ 40,00,000. Examine with reference to the provisions of the Companies Act, 2013 whether the proposed donations are within the power of the Board of Directors of company. [Nov. 09 (5 Marks)]
Answer:
(a) Contribution to a school established exclusively for employee’s children:

As per section 181 of the Companies Act, 2013, the Board of Directors of a company may contribute to bona fide charitable and other funds upto 5% of its average net profits during the 3 financial years immediately preceding, the financial year. For contribution above this limit, prior permission of the company in general meeting shall be required.

  • In the instant case, the Board of Directors of LM Limited propose to donate ₹ 3,00,000 to a school established exclusively for the benefit of children of employee.
  • Donation made to a school exclusively established for the benefit of employees is a staff welfare expense and cannot be considered as contribution to charitable fund. Hence, provisions of sec. 181 are not attracted.

Conclusion: Proposed donation of ₹ 3,00,000 to a school is well within the powers of Board as restriction of sec. 181 will not be applicable, being donation to a school exclusively for benefit of children of employees will not amount to contribution to a charitable fund.

(b) Donation to Political parties:

As per sec. 182 of Companies Act, 2013, a government company or any other company which has been in existence for less than 3 financial years cannot contribute any amount directly or indirectly to any political party.

In other cases, contribution in any financial year can be made if a resolution authorising the making of such contribution is passed at a Board Meeting and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making of the contribution authorised by it.

Conclusion: Board is empowered to make the proposed donation subject to satisfaction of conditions prescribed u/s 182.

Question 46.
M/s Jai Industries Limited earned net profit for the last three years as under:
Meetings of Board and its Powers – CA Final Law Study Material 5
During the financial year 2020-21, the Board of Directors ofthe company contributed to a Charitable Fund ₹ 1.25 crore in July, 2020. Again, in January 2021, the Board of Directors passed resolution to contribute to another Charitable Fund ₹ 1.00 crore.
Decide the validity ofthe decision ofthe Board of Directors regarding the contribution on both the occasions with reference to the provisions of the Companies Act, 2013. [Nov. 17 (6 Marks)]
Answer:
Contribution to Charitable Funds:

As per section 181 of the Companies Act, 2013, the Board of Directors of a company may contribute to bona fide charitable and other funds upto 5% of its average net profits during the 3 financial years immediately preceding, the financial year. For contribution above this limit, prior permission of the company in general meeting shall be required.

In the instant case, the average Net Profit of M/s Jai Industries Limited in the 3 immediately preceding financial years is 40 Crores [30+40+50/3].

Board may contribute 5% of 40 Crores, i.e. ₹ 2 Cr without obtaining permission of the company in general meeting. For Contribution above ₹ 2 Cr., Board has to take the prior permission of the company in general meeting.

Conclusion: Donation made in July 2021, i.e. ₹ 1.25 Crore is in accordance with sec. 181. However, resolution passed in Jan. 2021 is not proper as aggregate donation, i.e. ₹ 2.25 Crores exceeds 5% of average net profit.

Question 47.
M/sXYZ Ltd. was incorporated on 1st January, 2018. On 1st Nov., 2020 a political party approaches the company for a contribution of ₹ 10 lakhs for political purpose. Advise in respect ofthe following:
(i) Is the company legally authorized to give this political contribution?
(ii) Will it make any difference, if the company was in existence on 1st October, 2017?
(iii) Can the company be penalized for defiance of Rules of this regard?
Answer:
Contribution to Political parties:

As per sec. 182 of Companies Act, 2013, a government company or any other company which has been in existence for less than 3 financial years cannot contribute any amount directly or indirectly to any political party.

In other cases, contribution in any financial year can be made if a resolution authorising the making of such contribution is passed at a Board Meeting and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making of the contribution authorised by it.

Conclusion: In accordance with the provisions of sec. 182, following conclusions may be drawn:

(i) Company is not allowed to make political contribution as it was not in existence for period of three years at the time of making such contribution.

(ii) Company is allowed to make political contribution subject to compliance of other conditions as stated in sec. 182.

(iii) As per sec. 182(4), if a company makes any contribution in contravention of the provisions of this section, the company shall be punishable with fine which may extend to 5 times the amount so contributed and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 6 months and with fine which may extend to 5 times the amount so contributed.

Meetings of Board and its Powers – CA Final Law Study Material

Question 48.
The Board of Directors of LM Limited propose to donate ₹ 3,00,000 to a school established exclusively for the benefit of children of employees and also donate ₹ 50,000 to a political party during the financial year ending 31st March, 2021. The average net profits during the 3 immediately preceding financial years is ₹ 40,00,000. Examine with reference to the provisions of the Companies Act, 2013 whether the proposed donations are within the power of the Board of Directors of company. [Nov. 09 (5 Marks)]
Answer:
(a) Contribution to a school established exclusively for employee’s children:

As per section 181 of the Companies Act, 2013, the Board of Directors of a company may contribute to bona fide charitable and other funds upto 5% of its average net profits during the 3 financial years immediately preceding, the financial year. For contribution above this limit, prior permission of the company in general meeting shall be required.

  • In the instant case, the Board of Directors of LM Limited propose to donate ₹ 3,00,000 to a school established exclusively for the benefit of children of employee.
  • Donation made to a school exclusively established for the benefit of employees is a staff welfare expense and cannot be considered as contribution to charitable fund. Hence, provisions of sec. 181 are not attracted.

Conclusion: Proposed donation of ₹ 3,00,000 to a school is well within the powers of Board as restriction of sec. 181 will not be applicable, being donation to a school exclusively for benefit of children of employees will not amount to contribution to a charitable fund.

(b) Donation to Political parties:

As per sec. 182 of Companies Act, 2013, a government company or any other company which has been in existence for less than 3 financial years cannot contribute any amount directly or indirectly to any political party.

In other cases, contribution in any financial year can be made if a resolution authorising the making of such contribution is passed at a Board Meeting and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making of the contribution authorised by it.

Conclusion: Board is empowered to make the proposed donation subject to satisfaction of conditions prescribed u/s 182.

Question 49.
X Ltd. was registered in the year 2019 under the Companies Act, 2013. The management of the company decides to make donation in the year 2020-21 to recognized political party. Advise the management about the restrictions and the extent up to which such donation can be made under the said Act. Will it make any difference if X Ltd. was registered in the year 2016? [May 11 (8 Marks)]
Answer:
Contribution to Political Parties:

As per sec. 182 of Companies Act, 2013, a government company or any other company which has been in existence for less than 3 financial years cannot contribute any amount directly or indirectly to any political party.

In other cases, contribution in any financial year can be made if a resolution authorising the making of such contribution is passed at a Board Meeting and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making of the contribution authorised by it.

Every company shall 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.

Contribution shall not be made except by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through any instrument under a notified scheme.

Conclusion: As company was in existence for period less than 3 financial years, donation is not allowed. If company was registered in the year 2016, company may contribute any amount subject to satisfaction of prescribed conditions.

Question 50.
Win Ltd. Is a company incorporated 15 years ago and during the last 3 consecutive financial years it earned profits, of ₹ 5.00 lakhs, ₹ 8.00 lakhs and ₹ 11.00 lakhs. In order to augment its business prospects, It wants to make donations to political parties. State with reference to the provisions of the Companies Act, 2013 whether the company can make such donations and if yes to what extent. (May 12 (8 Marks))
Or
Sewak Cycles Umited is a company incorporated four years ago. It has earned profits amounting ₹ 5 lakhs, ₹ 8 lakhs and ₹ 11 lakhs respectively during the last three financial years. The Board of Directors of the company propose to donate a sum of ₹ 50,000 to a political party. Examine with reference to the provisions of the Companies Act, 2013, whether the proposed donation is within the powers of the Board of Directors of the company. (May 15 (4 Marks))
Answer:
Contribution to Political Parties:

As per sec. 182 of Companies Act, 2013, a government company or any other company which has been in existence for less than 3 financial years cannot contribute any amount directly or indirectly to any political party

In other cases, contribution In any financial year can be made if a resolution authorising the making of such contribution is passed at a Board Meeting and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making of the contribution authonsed by it.

Every company shall 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.

Contribution shall notbe made except by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bnk account or through any instrument under a notified scheme.

Conclusion: As company was in existence for period more than 3 financial years, company may contribute any amount to political parties subject to satisfaction of conditions prescribed above.

Question 51.
Srajan Ltd., a company incorporated In July 2012. The Board of Directors of Srajan Ltd., proposed to donate ₹ 2,00,000 to a school established exclusively for the benefit of the employees of the company. Besides, also proposed to donate 1 lac to a political party during the financial year ending March 31, 2021. The net profit during the financial year 2020-2021, was ₹ 35,00,000.
Evaluate the given below situations in the light of the stated facts under the relevant provisions of the Companies Act. 2013-

  1. Whether the proposed political donation made by the Srajan Ltd., are within the powers of the Board of Directors of the company.
  2. Whether the contribution by Srajan Ltd. to school established for the benefit of an employee is charitable contribution. [MTP-Oct. 18]

Answer:
(a) Donation to Political Parties:

As per Sec. 182 of Companies Act, 2013. a government company or any other company which has been in existence for less than 3 financIal years cannot contribute any amount directly or indirectly to any political party.

In other cases, contribution in any financial year can be made if a resolution authorising the making of such contribution is passed at a Board Meeting and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making of the contribution authorised by it.

Every company shall 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.

Contribution shall not be made except by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through any instrument under a notified scheme.

Conclusion: Proposed political donation is within the powers of the Board of Directors of the company, subject to compliance of conditions of Sec. 182 as stated above.

(b) Contribution to a school established exclusively for employee’s children:

Donation made to a school exclusively for the benefit of employees is a staff welfare expense and cannot be considered as contribution to charitable fund. Hence, provisions of Sec. 181 are not attracted.

A contribution by a company is said to be charitable contribution if it is made without any object of availing any benefit for the company or for its employees and such contribution does not have any direct relation with the business of the company.

Conclusion: Proposel contribution by Srajan Ltd. to school established for the benefit of an employee is not a charitable contribution.

Meetings of Board and its Powers – CA Final Law Study Material

Question 52.
State with reference to the provisions of the Companies Act, 2013 whether the following companies can make donations to political parties and if so the conditions to be complied with in this regard.
(i) ABCD Ltd., a Government company registered in 1991, wants to donate a sum of ₹ 10 lakhs.
(ii) EFG Ltd., a public company registered in 2016, wishes to contribute a sum of ₹ 5 lakhs.
(iii) RST Ltd., a company Incorporated In the year 2017, decides to contribute a sum of ₹ 3 lakhs.
(iv) Rama Ltd., wants to make political contribution of ₹ 2,000 in cash. [Nov. 18-Old Syllabus (4 Marks)]
Answer:
Contribution to Political Parties:

As per Sec. 182 of Companies Act, 2013, a government company or any other company which has been in existence for less than 3 financial years cannot contribute any amount directly or indirectly to any political party.

In other cases, contribution in any financial year can be made if a resolution authorising the making of such contribution is passed at a Board Meeting and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making of the contribution authorised by it.

Every company shall 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.

Contribution shall not be made except by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through any instrument under a notified scheme.

Conclusion: Considering the provisions of Sec. 182 as stated above, following conclusions may be drawn:

  1. ABCD Ltd., is not allowed to make donations to political parties as it is a Government company.
  2. EFG Ltd., can contribute sum of ₹ 5 lakhs subject to compliance of conditions as stated in Sec. 182.
  3. RST Ltd., can contribute sum of ₹ 3 lakhs subject to compliance of conditions as stated in Sec. 182. (It is assumed that contribution is being made in financial year 2021-22)
  4. Rama Ltd., cannot make political contribution in cash.

Question 53.
The Balance Sheet of RML Limited contains the following information about its financial position as on 31st March, 2021:
10,00,000 Equity shares of ₹ 100 each : ₹ 10.00 crore
Reserves & Surplus which includes revaluation reserve of ₹ 2.00 crore : ₹ 12.00 crore
Credit Balance in Profit & Loss Account : ₹ 2.00 crore
Secured Loan from a Nationalized Bank : ₹ 8.00 Crore
Net Profit in the last three years were: 31.3.2018 – ₹ 1.20 crore, 31.3.2019 – ₹ 1.50 crore and 31.3.2020 – ₹ 1.80 crore.

(i) The Board of Directors decide to borrow an additional sum of ₹ 10.00 crore for the expansion. Decide whether the company is eligible to borrow the additional funds and the limit thereof.
(ii) The Board also decide to make donation to two major political parties totalling ₹ 10,00,000. Comment on the validity of the action of the Board and the maximum amount of donation which the-company can contribute. [Nov. 20 – Old Syllabus (4 Marks)]
Answer:
(i) Borrowing by the Company (Section 180 of the Companies Act, 2013):

As per Sec. 180(1)(c) of the Companies Act, 2013, the Board of Directors of a company shall not borrow the money without obtaining the approval of shareholders in a general meeting through a special resolution, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.

Accordingly, the maximum borrowing which the Board of Directors can borrow, without obtaining approval of the shareholders in a general meeting, is calculated as follows:
Meetings of Board and its Powers – CA Final Law Study Material 6

In the present case, the directors decide to borrow an additional sum of ₹ 10 Crore for the expansion.

Conclusion: Borrowing up to ₹ 14 Crore is within the powers of Board. Borrowing in excess of ₹ 14 Crore will require a special resolution.

(ii) Contribution to Political Parties:

As per Sec. 182 of Companies Act, 2013, a government company or any other company which has been in existence for less than 3 financial years cannot contribute any amount directly or indirectly to any political party.

In other cases, contribution in any financial year can be made if a resolution authorising the making of such contribution is passed at a Board Meeting and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making of the contribution authorised by it.

Conclusion: Considering the provisions of Sec. 182 as stated above, decision to make donation of ₹ 10 Lacs to political parties is valid subject to compliance of other conditions.

Question 54.
The Articles of Association of M/s. DEF Limited (Non-Government Company) restricts the Company to contribute to National Defence Fund in any financial year for a sum not exceeding ₹ 5 Lakhs. The Articles is silent about contribution to bona fide Charitable Fund and to a Political Party. The Company earned net profit during the last five financial years as under:
Meetings of Board and its Powers – CA Final Law Study Material 7

The Board of Directors proposes to contribute in July 2020 for the first time during the financial year 2020-21:

  1. ₹ 7 Lakhs to National Defence Fund
  2. ₹ 3 Lakhs to a bona fide Charitable Fund
  3. ₹ 5 Lakhs to a Political Party

The Company seeks your advice on the following matters in respect of each of the above proposals under the provisions of the Companies Act, 2013.

  1. The appropriate approving authority;
  2. The quantum of contribution that can be made;
  3. The mode of payment of such contribution. [Nov. 19 – New Syllabus (6 Marks)]

Answer:
Contribution to Charitable Funds, Political Parties and National Defence Fund:

As per Section 181 of the Companies Act, 2013, the Board of Directors of a company may contribute to bona fide charitable and other funds upto 5% of its average net profits during the 3 financial years immediately preceding, the financial year. For contribution above this limit, prior permission of the company in general meeting shall be required.

As per Sec. 182 of Companies Act, 2013, a government company or any other company which has been in existence for less than 3 financial years cannot contribute any amount directly or indirectly to any political party. In other cases, contribution in any financial year can be made if a resolution authorising the making of such contribution is passed at a Board Meeting and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making of the contribution authorised by it.

As per Sec. 183 of Companies Act, 2013, the Board of Directors of any company or any person or authority exercising the powers of the Board of Directors of a company, or of the company in general meeting, may, notwithstanding anything contained in sections 180,181 and section 182 or any other provision of this Act or in the memorandum, articles or any other instrument relating to the company, contribute such amount as it thinks fit to the National Defence Fund or any other Fund approved by the Central Government for the purpose of national defence.
Meetings of Board and its Powers – CA Final Law Study Material 8
Meetings of Board and its Powers – CA Final Law Study Material 9

Meetings of Board and its Powers – CA Final Law Study Material

Question 55.
Directors of ABC Ltd. are not holding any shares in MDJ Co. Ltd. Similarly, directors of MDJ Company Limited are not holding any shares in ABC Ltd. But wife of director “A” of ABC Ltd. hold 40% of the paid-up share capital of MDJ Company Limited. Board of directors of ABC Ltd. enter into a contract with MDJ Company Limited for the purchase of goods and director did not disclose his indirect interest in MDJ Company Limited. Examine whether it has violated any of the provisions of the Companies Act, 2013 and also the validity of the contract.
Answer:
Circumstances in which disclosure of Interest by director is necessary:

Sec. 184(2) of the Companies Act, 2013 provides that every director of a company, who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into with a body corporate in which such director or such director in association with any other director, holds more than 2% shareholding of that body corporate shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.

In the instant case, Directors of ABC Ltd. are not holding any shares in MDJ Co. Ltd. Similarly, directors of MDJ Company Limited are not holding any shares in ABC Ltd. But wife of director “A” of ABC Ltd. hold 40% of the paid-up share capital of MDJ Company Limited. Board of directors of ABC Ltd. enter into a contract with MDJ Company Limited for the purchase of goods and director did not disclose his indirect interest in MDJ Company Limited.

Validity of the contract on non-disclosure of interest: Sec. 184(3) of Companies Act, 2013 provides that a contract or arrangement entered into by the company without disclosure u/s 184(2) or with participation by a director who is concerned or interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company.

Conclusion: Provisions of sec. 184(2) has been violated and contract is voidable at the option of ABC Ltd.

Question 56.
X Limited enter into a contract with M and Co. Ltd. for purchase of raw material of ₹ 2,50,000 at the prevailing market rate. The director of X Ltd. Mr. B was holding shares of the value of 1% of the paid-up capital of M and Co. Ltd. Another director of X Ltd., Mr C was holding shares of the value of 1.5% of the paid-up capital ofM and Co. Ltd. Mr. B at the beginning of the year give a general notice to X Ltd. that he was interested in M and Co. Ltd.

Mr B claims that he had given notice to X Ltd. as required under the Companies Act, 2013 and that his holding being only 1% is within the limit under the Companies Act, 2013. Comment.
Answer:
Disclosure of interest by directors:

As per sec. 184(1), 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 shareholding, in such manner as may be prescribed.

Sec. 184(2) of the Companies Act, 2013 provides that every director of a company, who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into with a body corporate in which such director or such director in association with any other director, holds more than 2% shareholding of that body corporate shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.

In the present case, X Limited enter into a contract with M and Co. Ltd. for purchase of raw material of ₹ 2,50,000 at the prevailing market rate. The director of X Ltd. Mr. B was holding shares of the value of 1% of the paid-up capital of M and Co. Ltd. Another director of X Ltd., Mr. C was holding shares of the value of 1.5% of the paid-up capital of M and Co. Ltd.

Mr. B at the beginning of the year give a general notice to X Ltd. that he was interested in M and Co. Ltd. Mr B claims that he had given notice to X Ltd. as required under the Companies Act, 2013 and that his holding being only 1% is within the limit under the Companies Act, 2013.

Conclusion: Aggregate shareholding of Mr. B and Mr. C in M and Co. Ltd. exceeds 2% of paid-up capital, discourses required u/s 184(2). Notice given by Mr. B u/s 184(1) is not sufficient. Hence, it can be concluded that provisions of sec. 184 have been violated and contract is voidable at the option of X Ltd.

Question 57.
Examine the validity of the following with reference to the relevant provisions of the Companies Act, 2013:
Mr. G a director of SAM Ltd. is interested in a contract to be entered into by the company. The articles of association of SAM Ltd. contained a clause which prohibited the director from voting on the resolution in respect of any contract in which he is interested.

The matter in respect of the said contract was put up for approval of the shareholders in a general meeting. The general meeting was attended by Mr G and he also voted on the resolution. Mr. G claims that he has the right to vote on the resolution in the general meeting.
Answer:
Director’s right to vote in general meeting in respect of a contract in which he is interested:

As per sec. 184(2) of the Companies Act, 2013, every director of a company, who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into with a body corporate in which such director or such director in association with any other director, holds more than 2% shareholding of that body corporate shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.

In the present case, Mr. G, a director of SAM Ltd. is interested in a contract to be entered into by the company. The matter in respect of the said contract was put up for approval of the shareholders in a general meeting. The general meeting was attended by Mr G and he also voted on the resolution. Mr. G claims that he has the right to vote on the resolution in the general meeting.

Restriction imposed u/s 184 is in relation to resolutions moved at Board Meetings and not at the general meetings. No specific restriction imposed under the provisions of Companies Act, 2013, which prohibits a director to vote on a resolution in a general meeting in which he is interested. Any provision in the Articles, restraining a director from voting in the general meeting on a contract in which he is interested shall be invalid.

Conclusion: Claim of Mr. G is correct and he can vote in the general meeting as scope of sec. 184 is limited to Board meetings only.

Question 58.
Company Y with a paid-up capital of ₹ 50 lakhs entered into a contract with company Z in which a director of Y is holding equity shares of the nominal value of ₹ 50,000. The director did not disclose his interest at the Board meeting u/s 184 of the Companies Act, 2013. Is the director liable for his act?
Answer:
Disclosure of interest by director:
As per section 184 (2] of the Companies Act, 2013 the disclosure of interest by directors do not apply to any contract or arrangement within 2 companies where any of the directors of one company or 2 or more of them together holds or hold not more than 2% of the paid-up share capital in the other company.

In the’present case, the holding of the director of Y company in company Z is only 1% [(50,000/50,00,0003*100%].

Conclusion: Applying the provisions of sec. 184(2), it can be concluded that director is not liable.

Note: It is assumed that paid up capital of Z is also ₹ 50 lakhs.

Meetings of Board and its Powers – CA Final Law Study Material

Question 59.
State the circumstances in which a director of a company is required under the Companies Act, 2013 to disclose his interest in a contract or arrangement to be entered into by the company. Examine whether the validity of the contract is effected by non-disclosure of interest by the director. [May 16 (4 Marks]]
Answer:
Circumstances in which disclosure of Interest by director is necessary:

Sec. 184(2) of the Companies Act, 2013 provides that every director of a company, who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into –

(a) with a body corporate in which such director or such director in association with any other director, holds more than two percent shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or

(b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be,
shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.

Proviso to sec. 184(2) provides that where any director who is not so concerned or interested at the time of entering into such contract or arrangement’, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested.

Validity of the contract on non-disclosure of interest: Sec. 184(3) of Companies Act, 2013 provides that a contract or arrangement entered into by the company without disclosure u/s 184(2) or with participation by a director who is concerned or interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company.

Question 60.
When does a Director required to disclose his/her interest to the company as per section 184 of the Companies Act, 2013? What are the consequences of non-disclosure? [May 18-New Syllabus (4 Marks)]
Answer:
Disclosure of interest by a Director:
As per sec. 184(1), 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 shareholding, in such manner as may be prescribed.

Consequences of Non-Disclosure:

  • Sec. 184(3) provides that a contract or arrangement entered into by the company without disclosure shall be voidable at the option of the company.
  • Sec. 184(4) provides that Director shall be punishable with imprisonment for a term which may extend to 1 year or with fine upto ₹ 1,00,000 or with both.

Question 61.
In the light of the provisions of the Companies Act, 2013 examine whether the following transac-tions in case of a public company can be termed as loan to directors:
(i) Sale of company flat to a director at prevailing market price out of which the director pays 50% immediately and contract to pay the balance amount in 10 equal annual instalments.
(ii) Making a deposit with the landlord under license agreement for securing a residential accommodation for the managing director of the company.
(iii) A salary advance of ₹ 50,000 to employee who is the wife of the managing director of the company.
(iv) Loan to a firm in which the director of the company is a partner.
Answer:
Loans to directors etc.
As per Sec. 185 of the Companies Act, 2013, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,

(a) any director of company, or of a company which is its holding company or any partner or relative of any such director; or
(b) any firm in which any such director or relative is a partner.

In accordance with provisions of sec. 185:

(i) Sale of company flat to a director at prevailing market price out of which the director pays 50% immediately and contract to pay the balance amount in 10 equal annual instalments is a transaction in nature of credit sale and cannot be considered as a transaction of loan.

(ii) Amount deposited with the landlord under license agreement for securing a residential accommodation for the managing director of the company cannot be considered as a transaction of loan as it is the company and not the director who has entered into the transaction.

(iii) Salary advance of ₹ 50,000 to employee who is the wife of the managing director of the company cannot be considered as a transaction of loan if the advance is paid to the wife of the managing director in her capacity of an employee as per the rules applicable to other employees of the company.

(iv) Loan to a firm in which a director of the company is a partner will be considered as a transaction of loan covered u/s 185.

Question 62.
Mr. X is the director of several companies he has approached the following companies in which he is a director for financial help to start his own personal business:
(a) Expendable Industries Ltd.
(b) Expensive Gadgets Private Limited
(c) Easy Finance Ltd.
The first name company has agreed to grant a loan of ₹ 50 lakh. The second company also offered another loan of ₹ 50 lakh. Third company has agreed to provide guarantee for the repayment of the loan sanction to Mr. X by a private bank to the tune of ₹ 1 crore. Advise Mr. X about the legal provisions that should be complied with under the Companies Act, 2013.
Answer:
Loans to directors etc.

As per Sec. 185 of the Companies Act, 2013, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any Security in connection with any loan taken by:

(a) any director of company, or of a company which is its holding company or any partner or relative of any such director; or
(b) any firm in which any such director or relative is a partner.

However, the restriction as mentioned above shall not apply to-

(a) the giving of any loan to a managing or whole-time director-

  1. as a part of the conditions of service extended by the company to all its employees; or
  2. pursuant to any scheme approved by the members by a special resolution; or

(b) a company which 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 rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan.

In case of a private limited company, provisions of sec. 185 of the Companies Act, 2013 shall not apply subject to compliance of following conditions:

(a) no other body corporate has invested any money in share capital of such company;
(b) borrowings of such company from banks or financial institutions or any body corporate is less than twice of its paid-up share capital or ₹ 50 crore, whichever is lower; and
(c) no default in repayment of such borrowings subsist at the time of making transactions u/s 185.
(d) company has not committed a default in filing of its financial statements u/s 137 or annual return u/s 92 with the Registrar.

Conclusion:

  • Expendable Industries Ltd. and Easy Finance Ltd. may grant loan if they fall under any of the exceptions provided u/s 185.
  • Expensive Gadgets Private Limited may grant loan provided it satisfied the conditions as stated above for private limited company.

Meetings of Board and its Powers – CA Final Law Study Material

Question 63.
Mr. DRT is a director of PCS Ltd. The said company is having sufficient liquid funds and Mr. DRT is in dire need of funds. In order to mitigate the hardship of Mr. DRT the board of directors of PCS Ltd. wants to lend ₹ 5 lakhs to him and ₹ 2 lakhs to his wife. State whether such loans can be given and if so under what conditions. What would be your answer if the company PCS LTD. would have been PCS Private Ltd. [Nov. 12 (4 Marks)]
Answer:
Loan to Director and his relative:
As per Sec. 185 of the Companies Act, 2013, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,
(a) any director of company, or of a company which is its holding company or any partner or relative of any such director; or
(b) any firm in which any such director or relative is a partner.

In the instant case, board of directors of PCS Ltd. wants to lend ₹ 5 lakhs to Mr. DRT, the director of the company and ₹ 2 lakhs to his wife.

Conclusion: Granting loan to director or relative of such director is in violation of section 185 of the Companies Act, 2013.

If PCS Ltd. would have been PCS Private Ltd. than provisions of sec. 185 of the Companies Act, 2013 shall not apply over it subject to following conditions:
(a) no other body corporate has invested any money in share capital of such company;
(b) borrowings of such company from banks or financial institutions or any body corporate is less than twice of its paid-up share capital or ₹ 50 crore, whichever is lower;
(c) no default in repayment of such borrowings subsist at the time of making transactions u/s 185; and
(d) company has not committed a default in filing of its financial statements u/s 137 or annual return u/s 92 with the Registrar.

Question 64.
Mr. OK is director of VRS Ltd. He intends to construct a residential building for his own use. The cost of construction is estimated at ₹ 1.35 Crores, which Mr. OK proposes to finance partly from his own sources to the tune of ₹ 60 lacs and the balance ₹ 75 lacs from housing loan to be obtained from a housing finance company. For the purpose of obtaining the loan, he has approached the housing finance company which has in principle agreed to grant the loan but has put a condition.

The condition put by the housing finance company is that the Company VRS Ltd. of which Mr. OK is a director should provide the guarantee for repayment of the loan and interest as per the terms of the proposed agreement for granting the loan to Mr. OK. You are required to advise Mr. OK on the matter with reference to the provisions of the Companies Act, 2013. [May 14 (4 Marks)]
Or
Mr. X is a director of M/s ABC Ltd. He has approached M/s Housing Finance Co. Ltd. For the purpose of obtaining a loan of ₹ 50 lacs to be used for construction of building his residential house. The loan was sanctioned subject to the condition that M/s ABC Ltd. should provide the guarantee for repayment of loan instalments by Mr. X. Advise Mr. X.
Answer:
Loans to Directors etc.:

As per Sec. 185 of the Companies Act, 2013, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,

(a) any director of company, or of a company which is its holding company or any partner or relative of any such director; or
(b) any firm in which any such director or relative is a partner.

In the present case, a loan was sanctioned by a housing company to the director subject to the condition that the company in which Mr. OK is a director should provide the guarantee for repayment of loan and interest.

Conclusion: Guarantee by Company VRS Ltd. of which Mr. OK is a director, for repayment of the loan and interest as per the terms of the proposed agreement is not allowed.

If any loan is advanced or a guarantee or security is given or provided in contravention of the above provisions,

  • the company shall be punishable with fine which shall not be less than ₹ 5 lakh but which may extend to ₹ 25 lakh,
  • every officer of the company who is in default shall be punishable with imprisonment upto 6 months or fine ranging from ₹ 5 lakh to ₹ 25 lakhs, and

the director or the other person to whom any loan is advanced or guarantee 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 ₹ 5 lakh but which may extend to ₹ 25 lakh, or with both.

Question 65.
Queen Construction Company Ltd. acquired 60% of the equity paid up share capital of ABC Ltd. Queen Construction Ltd. has planned to expand its operation for which additional fund is required. The Board of Directors decided to avail additional exposure of ₹ 10 crore from the Bank.
The following data is furnished as on 30th June, 2020.
Meetings of Board and its Powers – CA Final Law Study Material 10
ABC Ltd. approached Queen Construction Ltd. to grant a loan of ₹ 25 lakhs and stand as guarantor for repayment of loan ₹ 10 lakhs to be sanctioned by a bank.

The two loans (25 lakhs plus 10 lakhs) will be utilized by ABC Ltd. for its principal business activities.

You being the financial advisor of the company, advise the board of directors about the procedure to be followed to avail additional exposure of ₹ 10 crore from the Bank. Also evaluate whether the loan/ guarantee given by Queen Construction Ltd. to ABC Ltd. is valid according to section 185 of the Companies Act, 2013. [May 18 – New Syllabus (8 Marks)]
Answer:
Procedure to be followed to avail borrowing of ₹ 10 Crore:

Sec. 180(1)(c) of Companies Act, 2013 provides that without the consent of the company by a special resolution, the Board of Directors of a company are not allowed to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.

For this purpose, temporary loans mean loans repayable on demand or within 6 months from the date of the loan such as short-term, cash credit arrangements, but does not include loans raised for the purpose of financial expenditure of a capital nature.

In the present case, aggregate of Paid up capital and free reserves will amount to ₹ 23 Crore. Capital Reserve and revaluation reserves are not free reserves, hence not considered. Existing Borrowings other than temporary loans are 16 Cr, Hence, Board is allowed to borrow only ₹ 7 Cr. without consent of company. However, to avail borrowing of ₹ 10 Cr., Board of Directors are required to take steps to convene the genera! meeting and pass special resolution for borrowing of ₹ 10 Cr.

Validity of Loans and Guarantee given to Subsidiary company as per Section 185:

Asper section 185(3) of the Companies Act, 2013, holding company cannot give any loan to its subsidiary other than wholly owned subsidiary company.

However, no restriction applies if any guarantee is given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company, provided the loan made is utilised by the subsidiary company for its principal business activities.

Conclusions:
(a) Loan given by Queen Construction Ltd. to ABC Ltd. is not valid as restricted u/s 185.
(b) Guarantee given by Queen Construction Ltd. to Bank for loan sanctioned to ABC Ltd. is valid as restriction u/s 185 shall not apply.

Meetings of Board and its Powers – CA Final Law Study Material

Question 66.
ASP Limited, a listed company secured residential accommodation for the use of its Managing Director by entering into a lease arrangement with the landlord. As per the terms of the agreement, ASP Limited deposited a sum of ₹ 10,00,000 as rental advance with landlord. Referring to the provisions of the Companies Act, 2013, decide whether the said deposit amount be considered as a loan given to the Managing Director. [Nov. 19 – Old Syllabus (4 Marks)]
Answer:
Loans to directors etc.
As per Sec. 185 of the Companies Act, 2013, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,

(a) any director of company, or of a company which is its holding company or any partner or relative of any such director; or
(b) any firm in which any such director or relative is a partner.

Conclusion: In accordance with provisions of Sec. 185, amount deposited with the landlord under license agreement for securing a residential accommodation for the managing director of the company cannot be considered as a transaction of loan as it is the company and not the director who has entered into the transaction.

Question 67.
Decide in the light of the Companies Act, 2013, on the following proposals of loans for consideration before the Honesty Ltd.
(1) Loan to its director, Mr. A for construction of residential house as a personal loan.
(2) Loan to Mr. B, its whole time Director.
(3) Loan to X Ltd. in the ordinary course of business and the rate prescribed is not less than bank rate prescribed by the reserve bank. [MTP-Oct. 20]
Answer:
Loans to Directors etc.
As per Sec. 185(1) of the Companies Act, 2013, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,
(a) any director of company, or of a company which is its holding company or any partner or relative of any such director; or
(b) any firm in which any such director or relative is a partner.

As per Sec. 185(3) of the Companies Act, 2013, provisions of Sec. 185(1) shall not apply:
(a) where any loan is given to a managing or whole-time director-

(a) as a part of the conditions of service extended by the company to all its employees; or

  1. pursuant to any such scheme which is approved by the members by a special resolution.

(b) where a company in the ordinary course of its business:

  1. provides loans or gives guarantees or securities for the due repayment of any loan; and
  2. in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan.

Conclusion: Based on the provisions as stated above, following conclusions may be drawn:

(1) In the first case it would violate the Sec. 185(1) of the Companies Act, 2013. Honesty Ltd. is not permitted, to advance any loan, or to give any guarantee or providg any security in connection with any loan taken by Mr. A (director) of the company.

(2) In the second case, as per Sec. 185(3), restrictions imposed in Sec. 185(1), will not apply to giving of loan to Mr. B, the whole-time director if it is given as a part of the conditions of service extended by the company to all its employees.

(3) In third case, if it is loan given to a company in the ordinary Course of business for due repayment of any loan and lending rate is not less than the bank rate prescribed by the Reserve bank, the restrictions imposed u/s 185(1) will not apply to such transactions.

Question 68.
Amar Textiles Ltd. is a company engaged in the manufacture of fabrics. The company has investments in shares of other bodies corporate including 70% shares in Amar Cotton Company Ltd. and it has also advanced loans to other bodies corporate. The aggregate of all the investments made and loans granted by Amar Textiles Ltd. exceeds 60% of its paid-up share capital and free reserves and also exceeds 100% of its free reserves. In course of its business requirements, Amar Textiles Ltd. has obtained a term loan from IDBI which is still subsisting.

Now the company wants to increase , its holding from 70% to 80% of the equity share capital in Amar Cotton Company Ltd. by purchase ! of additional 10% shares from other existing shareholders. State the legal requirements to be i complied with by Amar Textiles Ltd. under the provisions of the Companies Act, 2013 to give effect to the above proposal. [May 12 (8 Marks))
Answer:
Legal provisions as to making Loan and Investments by the company:
Section 186 of Companies Act, 2013 provides the provisions relating to giving loans and making investment in other companies. Accordingly, Amar Textiles Ltd. need to comply with the below mentioned legal requirements:

(a) Special Resolution:
As per Sec. 186(2) of the Companies Act, 2013, no company shall directly or indirectly, give any loan to any person or other body corporate; give any guarantee or provide security in connection with a loan to any other body corporate or person; and acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more.

Sec. 186(3) provides that where the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceed the limits specified under sub-section (2), no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting.

In the present case, aggregate of the investments in shares and loans granted to other bodies corporate exceeds 60% of the paid-up share capital and free reserves and also 100% of the free reserves, it is therefore, necessary for the Amar Textiles Ltd., to pass a special resolution before increasing its holding from 70% to 80%.

Special resolution shall specify the total amount up to which the Board of Directors are authorised to make such acquisition.

(b) Disclosures in financial statements:
As per Sec. 186(4), the company sfiall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security.

(c) Unanimous resolution of Board and Prior Approval of Public Financial Institution:

As per Sec. 186(5), no investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained.

However, prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified in section 186(2), and there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

In the present case, Amar Textiles Ltd., had obtained a term loan from IDBI which is not a public financial institution and therefore the provisions of Section 186(5) are not attracted even if such loan is still subsisting. The company is not required to obtain prior approval of IDBI for making any further investment.

So, as per Sec. 186(5), investment proposal must be passed at the Board meeting by a unanimous decision of all the directors present at the meeting.

(d) Maintenance of register:

As per Sec. 186(9) every company giving loan or giving a guarantee or providing security or making an acquisition under this section shall keep a register which shall contain such particulars and shall be maintained in manner as prescribed by Rule 12.

Meetings of Board and its Powers – CA Final Law Study Material

Question 69.
Soft and Secure Lenders Limited, has convened a Board Meeting on 25th October, 2020. One of the items of the agenda is to approve the grant of loan of ₹ 20 crore to Easy Going Industries Limited, for expansion of its business activities.

At the Board Meeting, out of the total of 6 Directors of the lending company, 5 directors were present and except 1 director, the remaining 4 directors approved the grant of loan of ₹ 20 crores to Easy Going Industries Limited. The borrowing company has taken loans from a public financial institution and also deposits from public. Examine the loan proposal with reference to the provisions of the Companies Act, 2013. [Nov. 16 (4 Marks)]
Answer:
Loan by company:
Sec. 186 of Companies Act, 2013 provides the provisions relating to giving loans and making investment in other companies. Accordingly,

As per Section 186(2) of the Companies Act, 2013, no company shall directly or indirectly (a) give any loan to any person or other body corporate; (b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and (c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more.

As per Sec. 186(5), no investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting is obtained,

In the instant case, Soft and Secure Lenders Limited convened a board meeting and to approve grant of loan of ₹ 20 Crore to Easy Going Industries Limited. However, at the Board meeting, out of the total of 6 directors, 5 directors were present and except 1 director, the remaining 4 directors approved the grant of loan.

Conclusion: Since the approval for the grant of loan has not been sanctioned by passing of unanimous resolution at board meeting, loan proposal is not in compliance with the Companies Act, 2013.

Question 70.
Star Limited proposes to acquire 15% equity shares of Gain Investments (P) Limited for 45 lakhs which has a face value of ₹ 35 lakhs. Star Limited has an outstanding loan of ₹ 15 lakhs to a public financial institution and had not defaulted in the repayment of loan instalments stipulated in the loan agreements.

Based on the following financial data. Advise Star Limited about the legal position regarding the allowability of the proposed investment under the provisions of the Companies Act, 2013.
Meetings of Board and its Powers – CA Final Law Study Material 11
As on the date of proposition, Star Ltd. does not hold any shares of any company. [Nov. 17 (4 Marks)]
Answer:
Investments in other body corporates:
As per clause (c) of Section 186(2), no company shall directly or indirectly acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more.

Sec. 186(3) provides that where the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceed the limits specified under sub-section (2), no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting.

As per Sec. 186(5), No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained.

However, prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified in Sec. 186(2), and there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

In the instant case, Star Limited has proposed to acquire 15% equity shares of Gain Investments (P) Limited for ₹ 45 lakhs. Maximum investment that Star Limited can make will be higher of:
(a) 60% of Paid up capital and free reserves = 42 Lacs.
(b) 100% of Free Reserves = 20 Lacs

Conclusion: Since, the investment proposed by Star Limited in Gain Investment (P) Limited is 45 lakhs, which is more than ₹ 42 lacs, prior approval by means of a special resolution passed at a general meeting shall be necessary. Though Star Limited has not defaulted in the repayment of loan instalments of the loan taken from public financial institutions, but the amount of investment proposed exceeds the limit calculated in accordance with the provision specified u/s 186(2), it will need to take prior approval of the public financial institution also.

Question 71.
ASK Housing Finance Company Limited is prepared to give housing loans to the employees of M/s NEWS Pharmacy Limited subject to the condition that the loans are guaranteed by M/s News Pharmacy Limited. M/s NEWS Pharmacy Limited is not a listed company and the company will be exceeding the limits prescribed under the Companies Act, 2013 by providing the guarantees.

Advise the company about this legal requirement under the Companies Act, 2013 to give effect to the above proposal. What would be your advice if the company was required to provide security instead of guarantee? [May 18 – Old Syllabus (4 Marks)]
Answer:
Loans and Investment by the company:

As per Section 186(2) of the Companies Act, 2013, no company shall directly or indirectly (a) give any loan to any person or other body corporate; (b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and (c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more.

Explanation provided in Section 186(2) of the Companies Act, 2013 states that for the purposes of this sub-section, the word “person” does not include any individual who is in the employment of the Company.

In the instant case, the loans are to be guaranteed by M/s. News Pharmacy Limited for its employees which falls within the purview of the explanations which includes guarantees given for the employees.

Conclusion: Sec. 186(2) shall not be applicable in the situation as cited n the question. M/s NEWS Pharmacy Limited can give the guarantee without any condition on the limits imposed in the Section 186(2). Hence, there are no legal requirements to be fulfilled under the Companies Act, 2013 to give effect to the above proposal.

Meetings of Board and its Powers – CA Final Law Study Material

Question 72.
Vogue Limited has an Authorised Capital of Rs. 250 lakhs and paid up capital of Rs. 200 lakhs. The free reserves are there to the tune of Rs. 150 Lakhs. The company has advanced a loan of Rs. 160 lakhs to other companies as on 30th November, 2020. Now the company proposes to advance an Interest free loan of Rs. 60 Lakhs to its wholly owned subsidiary Fashion Limited.

Discuss the validity of the proposed transaction with reference to the restrictions Imposed by the applicable provisions of the Companies Act, 2013 and relevant Rules made thereunder. [May 19- Old Syllabus (4 Marks)]
Answer:
Interest free loan to wholly owned subsidiary:

As per Sec. 186(2) of the Companies Act, 2013, no company shall directly or indirectly give any loan to any person or other body corporate exceeding 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more.

Sec’ 186(3) provides that where the aggregate of the loans along with the loan proposed to be made or given by the Board, exceed the limits specified u/s 186(3), no loan shall be made unless previously authorised by a special resolution passed in a general meeting. However, requirement of special resolution is not applicable where the loan has been provided by a company to its wholly owned subsidiary company.

Sec. 186(7) provides that no loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three-year, five years or ten-year Government Security closest to the tenor of the loan.

In the present case, a company having paid up capital of ₹ 200 lakhs and free reserves of ₹ 150 Lakhs is proposing to advance an interest free loan of ₹ 60 Lakhs to Its wholly owned subsidiary. The company has already a loan of ₹ 160 lakhs to other companies.

Conclusion: Aggregate of proposed loan and existing loan (₹ 220 Lacs) exceeds the 60% of aggregate of paid up share capital and free reserves (₹ 210 Lacs, i.e. 60% of 350 Lacs). Special resolution is not required as the loan is provided to wholly owned subsidiary.

But the proposed transaction is not valid as interest free loans are not allowed by virtue of provisions as stated in Sec. 186(7).

Question 73.
M/s Kith and Kin Consultants Private Limited seeks your legal advice regarding the following appointments relating to directors and their relatives:
(a) Miss Niece, a relative of a director is to be appointed as Chief Public Relations Officer on a salary of ₹ 65,000 per month.
(b) Mr. Well connected, a relative of the director is to be appointed as chief executive officer on a consolidated salary of ₹ 2,5 5,000 per month.
(c) Mr. Nephew, who is a relative of one of the directors, is to be appointed as the managing director
on the monthly salary of ₹ 2,80,000 plus other perquisites as applicable to other executives of the company.
Advice explaining the relevant provisions of the Companies Act, 2013.
Answer:
Validity of Appointment of directors relatives:

As per Sec. 188(1) of Companies Act, 2013, except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company.

The expression “office or place of profit” means any office or place:

(i) where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(ii) where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise.

Proviso to Sec. 188(1) provides that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution.

Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 prescribes the limits and conditions subject to which a company may entered into related party transactions. Accordingly:

Agenda of the Board meeting at which the resolution is proposed to be moved shall disclose the complete particulars of the proposed transaction.

Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.

Prior approval of company by a resolution will be required, where transaction to be entered into is for appointmentto any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding ₹ 2.50 Lacs.

Conclusion: Considering the provisions as stated above, following conclusions may be drawn;

(i) Appointment of Miss Niece, a relative of director, as Chief Public Relations Officer is a related party transaction. Hence conditions as stated above need to be complied with. However, prior approval of company by resolution is not required as the monthly remuneration does not exceed ₹ 2,50,000.

(ii) Appointment of Mr. well connected, a relative of director as CEO, is a related party transaction. Hence conditions as stated above need to be complied with. Prior approval of company by resolution is also required as the monthly remuneration exceeds ₹ 2,50,000.

(iii) Appointment of Mr. Nephew, a relative of director as managing director, is not covered within the preview of Sec. 188 as managing director does not draw anything more than the remuneration to which he is entitled to as a director, the office of managing director cannot be said to be an office or place of profit.

Meetings of Board and its Powers – CA Final Law Study Material

Question 74.
Reliable Casting Ltd. is a subsidiary of Unique Machinery Ltd. The board of directors of the respective companies have made the following appointments on a consolidated monthly salary of ₹ 2,52,000 with effect from 1st June 2020.
(a) Mr. X a director of Unique Machinery Ltd. as factory manager of Reliable Casting Ltd.
(b) Mr. Y, a director of Reliable Castings Ltd. as Purchase Manager of Unique Machinery Ltd.
(c) Mr. Z, relative of a director of Unique Machinery Ltd. as Sales manager of Unique Machinery Ltd.
(d) Mr. A not related to any director of both the companies, as Chief Accountant of Unique Machinery Ltd. but his relative has been appointed as additional director of Unique Machinery Ltd. with i effect from 1 st Sep. 2020.
Explain the legal requirement to be complied with under the Companies Act, 2013 to give effect to or continuation of the above appointments of employees.
Answer:
Validity of Appointment relating to Directors and their relatives:

Legal provisions of Sec. 188:

As per Sec. 188(1) of Companies Act, 2013, except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company.

The expression “office or place of profit” means any office or place:

(i) where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(ii) where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise.

Proviso to Sec. 188(1) provides that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution.

Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 prescribes the limits and conditions subject to which a company may entered into related party transactions. Accordingly:

  • Agenda of the Board meeting at which the resolution is proposed to be moved shall disclose the complete particulars of the proposed transaction.
  • Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.
  • Prior approval of company by a resolution will be required, where transaction to be entered into is for appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding ₹ 2.50 Lacs.

Conclusion: Considering the provisions as stated above, following conclusions may be drawn;

(i) Appointment of Miss Niece, a relative of director, as Chief Public Relations Officer is a related party transaction. Hence conditions as stated above need to be complied with. However, prior approval of company by resolution is not required as the monthly remuneration does not exceed ₹ 2,50,000.

(ii) Appointment of Mr. well connected, a relative of director as CEO, is a related party transaction. Hence conditions as stated above need to be complied with. Prior approval of company by resolution is also required as the monthly remuneration exceeds ₹ 2,50,000.

(iii) Appointment of Mr. Nephew, a relative of director as managing director, is not covered within the preview of Sec. 188 as managing director does not draw anything more than the remuneration to which he is entitled to as a director, the office of managing director cannot be said to be an office or place of profit.

Conclusion: Considering the provisions of Sec. 188 and Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, following conclusions may be drawn:

(i) Appointment of Mr. X, a director of Unique Machinery Ltd. as Factory Manager of Reliable Casting Ltd. is a related party transaction. Reliable Casting Ltd. is a subsidiary of Unique Machinery Ltd. Hence conditions as stated under Sec. 188 and Rule 15 need to be complied with. Prior approval of company by resolution is also required as the monthly remuneration exceeds Validity of Appointment of directors relatives:

As per Sec. 188(1) of Companies Act, 2013, except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company.

The expression “office or place of profit” means any office or place:

(i) where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(ii) where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise.

Proviso to Sec. 188(1) provides that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution.

Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 prescribes the limits and conditions subject to which a company may entered into related party transactions. Accordingly:

Agenda of the Board meeting at which the resolution is proposed to be moved shall disclose the complete particulars of the proposed transaction.

Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.

Prior approval of company by a resolution will be required, where transaction to be entered into is for appointmentto any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding ₹ 2.50 Lacs.

Conclusion: Considering the provisions as stated above, following conclusions may be drawn;

(i) Appointment of Miss Niece, a relative of director, as Chief Public Relations Officer is a related party transaction. Hence conditions as stated above need to be complied with. However, prior approval of company by resolution is not required as the monthly remuneration does not exceed ₹ 2,50,000.

(ii) Appointment of Mr. well connected, a relative of director as CEO, is a related party transaction. Hence conditions as stated above need to be complied with. Prior approval of company by resolution is also required as the monthly remuneration exceeds ₹ 2,50,000.

(iii) Appointment of Mr. Nephew, a relative of director as managing director, is not covered within the preview of Sec. 188 as managing director does not draw anything more than the remuneration to which he is entitled to as a director, the office of managing director cannot be said to be an office or place of profit.

₹ 2,50,000.

(ii) Appointment of Mr. Y, a director of Reliable Casting Ltd. as Purchase Manager of Unique Machinery Ltd. does not fall under the provisions of Sec. 188 as appointment is made in the holding company.

(iii) Appointment of Mr. Z, relative of director of Unique Machinery Ltd. as Sales manager, is a related party transaction. Hence conditions as stated under Sec. 188 and Rule 15 need to be complied with. Prior approval of company by resolution is also required as the monthly remuneration exceeds ₹ 2,50,000.

(iv) Appointment of Mr. A as Chief Accountant of Unique Machinery Ltd. does not fall under the provisions of Sec. 188 as at the time of appointment Mr. A is not related to any directors of the company. Subsequent appointment of a relative of Mr. A as a director in the company shall not affect the appointment of Mr. A. However, continuation of Mr. A as a Chief Accountant will lead to conflict of interest and will affect the continuation unless ratified by the Board.

Question 75.
Sweet Tea Limited wants to sell its tea by entering into contract with the following parties:
(a) Tea Bros, a partnership firm in which a director of Sweet Tea Limited is a partner.
(b) R & T Private Limited in which one of the director of Sweet Tea Limited is a member.
(c) Strong Tea Limited in which one of the directors of Sweet Tea Limited is a director holding 3% of the paid-up capital of Strong Tea Limited.
Advise the steps that should be taken by Sweet Tea Limited taking into account the relevant provisions of the Companies Act, 2013 for entering into contracts in which the directors are interested. [May 14 (8 Marks)]
Answer:
Contract of Sale, purchase or supply of good with the Related parties:

As per Sec. 188(1) of the Companies Act, 2013, except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to sale, purchase or supply of any goods or materials.

As per Sec. 2(76), related party, with reference to a company, means-

(i) a director or his relative;
(ii) a KMP or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or director;
(v) a public company in which a director or manager is a director and holds along with his relatives, more than 2% of its paid-up share capital;
(vi) any body corporate whose BOD, MD or Manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:
(viii) any body corporate which is-

(a) a holding, subsidiary or an associate company of such company; or
(b) a subsidiary of a holding company to which it is also a subsidiary; or
(c) an investing company or the venturer of the company;

(ix) such other person as may be prescribed.

Conclusion: As per the definition of related party as per Sec. 2 (76), all the three parties stated in the question are related parties and hence provisions of Sec. 188 and Rule 15 need to be complied with.

Steps to be taken:

(i) Consent of the Board of Directors is required for related party transactions.

(ii) Agenda of the Board meeting at which the resolution is proposed to be moved shall disclose the complete particulars of the proposed transaction.

(iii) Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.

(iv) Prior approval of company by a resolution will be required, where transaction to be entered into is for sale, purchase or supply of any goods or materials amounting to 10% or more of the turnover of the company.

Meetings of Board and its Powers – CA Final Law Study Material

Question 76.
Discuss “Related Party Transactions” under the Companies Act, 2013, with specific reference to the nature of transactions which fall under the purview of the Companies Act, 2013. [Nov. 16 (4 Marks)]
Answer:
Related Party Transactions:
Sec. 188(1) of the Companies Act, 2013 deals with the related party transactions. As per Sec. 188, except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to:

(a) sale, purchase or supply of any goods or materials;
(b) selling or otherwise disposing of, or buying, property of any kind;
(c) leasing of property of any kind;
(d) availing or rendering of any services;
(e) appointment of any agent for purchase or sale of goods, materials, services or property;
(f) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and
(g) underwriting the subscription of any securities or derivatives thereof, of the company.

Proviso to Sec. 188(1) provides that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution.

Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 prescribes the limits and conditions subject to which a company may entered into related party transactions.

Question 77.
The Board of Directors of M/s ABC Motors Ltd. made the following appointments at its meeting held on 1st January, 2020:

(i) Mr. X, a Director of its subsidiary company, namely, M/s ABC Forgings Ltd., was appointed as purchase manager on a consolidated salary of ₹ 1,00,000 per month with effect from 1st January, 2020.
(ii) Mr. Y was appointed as the sales manager on a consolidated salary of ₹ 1,50,000 per month with effect from 1st January, 2020.
Answer the following, explaining the relevant provisions of the Companies Act:
(i) Does the appointment of Mr. X require the approval of the members in a general meeting of the company?
(ii) Mr. P, a relative of Mr. Y was appointed as a Director of M/s ABC Motors Ltd. on 1st August, 2020. Does it affect the continuation of Mr. Y as the Sales Manager? [Nov. 18-Old Syllabus (4 Marks)]
Answer:
Validity of Appointment in related party transactions:

Legal provisions of Sec. 188:

Investments in other body corporates:
As per clause (c) of Section 186(2), no company shall directly or indirectly acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more.

Sec. 186(3) provides that where the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceed the limits specified under sub-section (2), no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting.

As per Sec. 186(5), No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained.

However, prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified in Sec. 186(2), and there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

In the instant case, Star Limited has proposed to acquire 15% equity shares of Gain Investments (P) Limited for ₹ 45 lakhs. Maximum investment that Star Limited can make will be higher of:
(a) 60% of Paid up capital and free reserves = 42 Lacs.
(b) 100% of Free Reserves = 20 Lacs

Conclusion: Since, the investment proposed by Star Limited in Gain Investment (P) Limited is 45 lakhs, which is more than ₹ 42 lacs, prior approval by means of a special resolution passed at a general meeting shall be necessary. Though Star Limited has not defaulted in the repayment of loan instalments of the loan taken from public financial institutions, but the amount of investment proposed exceeds the limit calculated in accordance with the provision specified u/s 186(2), it will need to take prior approval of the public financial institution also.

Conclusion: Considering the provisions of Sec. 188 and Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, following conclusions maybe drawn:

(i) Appointment of Mr. X, a director of ABC Ltd. as Purchase Manager of ABC Motor Ltd. does not fall under the provisions of Sec. 188 as appointment is made in the holding company. Hence, appointment of Mr. X does not require the approval of members in general meeting.

(ii) Appointment of Mr. Y as Sales Manager of ABC Motors Ltd. does not fall under the provisions of Sec. 188 as at the time of appointment as Mr. Y is not related to any directors of the company. However, continuation of Mr. Y as a Sales Manager will lead to conflict of interest and will affect the continuation unless ratified by the Board.

Question 78.
M/s. Tristar Ltd. (an unlisted public limited company) with the annual turnover of ₹ 700 crores entered into a contract of purchasing of raw material from M/s. PTC Pvt. Ltd. during the year 2020. M /s. Tristar Ltd. appointed Mr. Sudhir, a Director of the Company, to act in this deal of transaction on behalf of the company. Mr. Sudhir is also one of the member of M/s. PTC Pvt. Ltd. Mr. Sudhir settled the said transaction of purchase for ₹ 85 crores and entered into the contract.

After a few transactions executed under the contract, the Board of M/s. Tristar Ltd. finds degradation in the quality of the raw material supplied. Further in a board meeting this contract was challenged con-sidering it as a related party transaction and in contravention to Sec. 188(1) of the Companies Act, 2013 read with rules framed thereunder. During the period Mr. Sudhir was appointed as director in a newly incorporated company M/s Raaga Limited.

In the light of the given facts, examine the following situations as per the Companies Act, 2013.

(i) What is the legal position of the contract entered between M/s. Tristar Ltd. through its director Mr. Sudhir, and M/s. PTC Pvt. Ltd.?
(ii) Is there any contravention of section 188 (1)? If yes, then state the liability of the wrongdoer.
(iii) Comment upon the appointment of Mr. Sudhir as a Director in M/s Raaga Limited. [MTP-Aug. 18, Oct. 18, May 19 – New Syllabus (6 Marks)]
Answer:
(i) Validity of Contracts with Related Parties:

As per Sec. 188(1) of Companies Act, 2013, except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to sale, purchase or supply of any goods or materials or appointment of any agent for purchase or sale of goods, materials, services or property;

Proviso to Sec. 188(1) provides that no contract or arrangement, in the case ofa company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution.

As per Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, except with the prior approval of the company by a resolution, a company shall not enter into a transaction as to sale, purchase or supply of any goods or materials, directly or through appointment of agent, amounting to 10% or more of the turnover of the company.

In the given case, turnover of the company is Rs. 700 crore. 10% of the turnover is ₹ 70 cr.

Conclusion: Contract is voidable at the option of the Board or as the case may be of shareholders. According to section 188(3) of the Companies Act, 2013.

(ii) Consequences of contravention of Sec. 188:

As per Sec. 188(3), where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a resolution in the general meeting u/s 188(1) and it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within 3 months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the Board or as the case may be, of shareholders and if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

As per Sec. 188(4), it shall be open to the company to proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement.

As per Sec. 188(5), any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall:

(i) in case of listed company, be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than ₹ 25,000 but which may extend to lakh, or with both; and

(ii) In case of any other company, be punishable with fine which shall not be less than ₹ 25,000 but which may extend to ₹ 5 lakh.

(iii) Appointment of Mr. Sudhir as a director in Raaga:
As per Sec. 164 of Companies Act, 2013, a person shall not be eligible for appointment as a director of a company, where he has been convicted of the offence of dealing with related party transactions under section 188 at any time during the last preceding 5 years.

In the given instance, Mr. Sudhir was not convicted, only levied with-the penalty, against the offence dealt with related party transactions u/s 188, so he can be appointed as a director in M/s Raaga Ltd.

Question 79.
Broadway Infrastructure Limited entered into a contract with Royal forgings, in which wife of Mr. Patrick, a director of the company is a partner. The contract is for supply of certain components by the firm for a period of three years with effect from 1st September, 2020 on credit basis. Explain the requirements under the Companies Act, 2013, which should have been complied with by Broadway Infrastructure Limited before entering into contract with Royal forgings.
What would be your answer in case Royal forgings is a private Limited company in which wife of Mr. Patrick is holding shares? (RTP-Nov. 19]
Answer:
Requirements in case of contract with Related Parties:

The contract for supply of components entered into between Broadway Infrastructure Limited and Royal forgings, a partnership firm (in which wife of Mr. Patrick, a director of the company is a partner) attracts Sections 184,188 and 189 of the Companies Act, 2013.

As per Sec. 188, company cannot enter into contract with firm for supply or purchase of goods or material where director of company or his relative is partner of firm without approval of Board of directors at board meeting.

As per Sec. 184, interested directors must disclose his interest at board meeting at which said business is to be discussed. Interested directors should not take partin the discussion or voting at board meeting. If he does vote, his vote shall not be counted. In case of Private limited Company interested director can participate in the board meeting after disclosure of interest.

As per Sec. 189, prescribed particulars of the contract must be entered into the Register of Contract in which directors are interested in Form MBP-4. Every entry made in Register should be authenticated by Company Secretary of company or any other person authorized by Board. After each entry in the register, it shall be placed before the next board meeting and shall be signed by all the directors present thereat.

Conclusion: Based upon discussion of the above provisions, following conclusions may be drawn:

If the value of the contract or transaction is exceeded than limit specified, prior approval of shareholders is required to be obtained. Question does not suggest value of transaction. Assuming that it is within limits specified under the Act, consent of shareholders is not required.

If Royal forgings is a private limited company, provisions of Sec. 188 are applicable to it, as Patrick’s wife is member of Royal forgings private limited.

Section 184 is not applicable as Mr. Patrick, director of Broadway Infrastructure Limited is neither director nor holding any shares in Royal Forgings Private Limited. Shares held by Mr. Patrick’s wife are not to be considered. Hence the provisions of Section 184 are not attracted.

Meetings of Board and its Powers – CA Final Law Study Material

Question 80.
The register 0f contracts or arrangement u/s 189 of the Companies Act, 2013 is maintained at the registered office of Fortune Ltd. under the custody of the Company Secretary. The AGM was held in different place but in the same town where the registered office is situated. Mr. Semar, a shareholder of the company and Mr. Raj, proxy of a shareholder insisted for producing the said register at the commencement of the AGM for inspection.

The Company Secretary refused to produce the register stating that being the statutory register it has to be maintained at the registered office only. Examine whether Mr- Semar and Mr. Raj will succeed in their attempt under the provisions of the Companies Act, 2013?

Also identify the particulars to be disclosed to the members of a company to pass a resolution approving any payment by way of compensation for loss of office of a director as per the provisions of section 191 of the Companies Act, 2013 read with Rule 17 of the Companies (Meetings of Board and its Powers) Rules, 2014. [May 18 – New Syllabus (8 Marks)]
Answer:
Register maintained u/s 189 to be produced at AGM:

Sec. 189(4) of Companies Act, 2013 provides that register to be kept under this section shall also be produced at the commencement of every annual general meeting of the company and shall remain open and accessible during the continuance of the meeting to any person having the right to attend the meeting.

In the present case, the register of contracts or arrangement u/s 189 of the Companies Act, 2013 is maintained at the registered office of the company under the custody of the Company Secretary. The AGM was held in different place but in the same town where the registered office is situated. Mr. Semar, a shareholder of the company and Mr. Raj, proxy of a shareholder insisted for producing the said register at the commencement of the AGM for inspection. The Company Secretary refused to produce the register stating that being the statutory register it has to be maintained at the registered office only.

Conclusion: Considering the requirements of Sec. 189(4), it can be concluded that Mr. Semar and Mr. Raj will succeed in their attempt.

Particulars to be disclosed to members to pass a resolution approving any payment by way of compensation for loss of office of a director as per the provisions of Sec. 191 of the Companies Act, 2013 read with Rule 17 of the Companies (Meetings of Board and its Powers) Rules, 2014.

No director of a company shall receive any payment by way of compensation in connection with any event mentioned in Sec. 191(1) unless the following particulars are disclosed to the members of the company and they pass a resolution at a general meeting approving the payment of such amount –

(a) name of the director;
(b) amount proposed to be paid;
(c) event due to which compensation become payable;
(d) date of Board meeting recommending such payment;
(e) basis for the amount determined;
(f) reason or justification for the payment;
(g) manner of payment – whether payable in cash or otherwise and how;
(h) sources of payment; and
(i) any other relevant particulars as the Board may think fit.

Question 81.
In what way does the Companies Act, 2013 restricts the non-cash transactions involving directors of a public limited company? Explain. [Nov. 14 (8 Marks)]
Answer:
Restrictions over Non-Cash Transactions with directors:
Section 192 of the Companies Act, 201J provides for restrictions on non-cash transactions involving directors. Accordingly,

(i) No company shall enter into an arrangement by which—
(a) a director of the company or its holding; subsidiary or associate company or a person connected with him acquires or is to acquire assets for consideration other than cash, from the company; or
(b) the company acquires or is to acquire assets for consideration other than cash, from such director or person so connected,
unless prior approval for such arrangement is accorded by a resolution of the company in general meeting and if the director or connected person is a director of its holding company, approval shall also be required to be obtained by passing a resolution in general meeting of the holding company.

(ii) The notice for approval ofthe resolution by the company or holding company in general meeting shall include the particulars of the arrangement along with the value of the assets involved in such arrangement duly calculated by a registered valuer.

(iii) Any arrangement entered into by a company or its holding company in contravention of the provisions of this section shall be voidable at the instance of the company unless –
(a) the restitution of any money or other consideration which is the subject-matter of the arrangement is no longer possible and the company has been indemnified by any other person for any loss or damage caused to it; or
(b) any rights are acquired bona fide for value and without notice of the contravention of the provisions of this section by any other person.

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