New practical problems in Company Law, realy useful to CS Executive Programme and Professional Programme Students
Sol.: The question is based on Sec.81 of the Companies Act. As per Sec.81 if, at any time after the expiry of 2 years from the formation of the Company or after the expiry of 1 year from the first allotment of shares, which is earlier it is proposed to raise capital by allotment of further shares, it should be offered to the existing equity shareholders of the Company. In the given case applying the provisions and the ruling in the above case, MR Company’s decision not to offer any further shares to DJA Co. Ltd. on the ground that DJA Co. Ltd. already holds a high percentage of shareholding in MR Co. Ltd. is not valid for the reasons that it is against to Sec.81. Therefore Board of MR Company Limited cannot take a decision not to allot shares to DJA Company Limited unless the same is approved by the general meeting by means of special resolution required as under Sec. 81.
Sol.: Refer to Buy Back provisions (Sec.77A).
Sol.: Sources of funds: As per Sec.77A, a Company may purchase its own shares/other specified securities (herein after referred to as buy-back) out of:
a. Its free reserves Or
b. The securities premium account Or
c. The proceeds of any shares/other specified securities.
However, buyback of any kind of shares or other specified securities CAN NOT be made out of the proceeds of an earlier issue of the SAME KIND of shares/other specified securities.
Conditions: No Company shall purchase its own shares or other specified securities unless:
a. A S.R. (special resolution) has been passed in general meeting authorising the buy-back.
b. BOD. However, a resolution by the B.O.D. (board of directors) is sufficient, instead of a above, if the buy back of shares is LESS THAN OR EQUAL TO 10% of the total paid up capital (equity shares and preference shares) and free reserves.
Taking into account these two provisions, the questions as asked in the problems can be answered as under:
a. The Company’s proposal for buy-back is not in order as it has passed only an ordinary resolution and the percentage of 30% buy-back is in violation of the provisions.
b. The answer to the second question shall also be the same since there also the resolution passed by the Company is an ordinary resolution and not special resolution, through the percentage of buy-back, i.e., 20% is not violative.
Sol.: False., In general they have voting right only on matters directly relating to rights attached to preference share capital (E.g.: Resolution for winding up of Company, change in dividend rate). (Sec.87)
Exception: But they are entitled to vote on every resolution placed before Company at any meeting, if dividend on such capital in full or in part is remaining unpaid in the case of:
¡ Cumulative preference shares - If dividends are in arrears for two years preceding the date of commencement of the meeting.
¡ Non-cumulative preference shares - If dividends are has not been paid for 2 financial years immediately preceding the meeting or for any 3 years during the period of 6 years ending with the financial year preceding the meeting.
Sol.: False., Reserve capital is created out of capital of the Company. This is that part of the uncalled capital of the Company which can be called up only in the event of its winding up. A limited Company may, by a special resolution, determine that a portion of its uncalled capital shall be called up in the event of winding up for the purposes of winding up (Sec. 99).
Sol.: True. The Act permits for issue and allotment of shares for cash or some consideration other than cash either at part or at discount or at premium but there is no provision for issue and allotment of shares for no consideration. Issue of shares by way of donation would amount to issue of shares for no consideration and is, thus, invalid in law. (Sec.75)
Sol.: Sec.208 provides for payment of interest to shareholders, if following conditions are satisfied:
a. The AOA shall authorise such payment Or a S.R. shall be passed authorising such payment.
b. The permission from the C.G. shall be obtained.
c. The rate of interest will be determined by C.G. and it shall not exceed 12%.
d. Before permitting the payment, the C.G. may appoint a person for enquiry.
e. Time limit: The payment of interest shall be made only for such period as may be determined by the central government.
Sol.: Forgery does not confer any title. It is because in case of forgery there is not merely an absence of free consent but there is not consent at all. Hence a forged transfer can never confer ownership upon the transferee thereof, however genuine the transAction may appear. Thus, if a transfer is forged and the Company registers the transfer, the true owner can apply to the Company for his name to be placed back in the register. As a forged transfer is a nullity, Mr. A, the original owner continues to be the share-holder and the Company is bound to restore the name of transferor in the register of members.
A person who presents a transfer of shares for registration by a Company thereby represents that the instrument of transfer is genuine, and if it turns out to be a forgery, the Company is not stopped from denying his title to the shares, even though he did not know that the transfer was forged when he presented it. Consequently, even if the Company issues a share certificate to the person who presents the transfer, and he relies on it, the Company may remove his name from the register of members and he cannot claim damages for wrongful removal. Therefore, B the transferee is not entitled to the shares on the contrary, he is liable to indemnify the Company against the consequences of the damages which may have to be paid by the Company to the true owner of the shares.
According to Sec.84(1) of the Companies Act, a share certificate specifying any shares held by any member is a prima face evidence of the title of the member to such shares of the Company has issued a share certificate to the transferee and he has sold the shares to an innocent purchaser, the Company cannot deny his title, for the certificate stops it from doing so. Therefore the innocent purchaser is entitled to compensation from the Company.
Sol.: A forged transfer is a nullity. It does not give the transferee concerned any title to the shares. Since the forgery is an illegality therefore it cannot be a source of a valid transfer of a title. Although the innocent purchaser acting in good faith could validly and reasonably assume that the person named in the certificate as the owner of the shares was really the owner of the shares represented by the certificate. Even then the illegality cannot be converted into legality. Therefore, in this case Company has right to refuse to do the transfer of the shares in the name of the transferee B.
Here, as regards to the liability of A against ‘B’, A does not stand directly responsible according to provisions of Company law as he has already committed forgery which is illegal but A is liable to compensate the Company as he has lodged the forged transfer and the Company has suffered the loss.
As regards to the liability of the Company towards B, the Company shall be liable to compensate to B so far as the Company had issued a certificate to transfer and was, therefore, stopped from denying the liability accruing from its own Act. Further as the Company has refused to register him as a shareholder, Company has to compensate B. However, in this case the interest of the original shareholder will be protected.
Sol.: Section 84(2) provides that a certificate may be renewed or a duplicate of a certificate may be issued if such certificate:
a. Is proved to have been lost or destroyed or
b. Having been defaced or mutilated or torn is surrendered to the Company.
For the term and conditions on which duplicate certificates may be issued, Companies (issue of Share Certificates) Rules.1960 has to be followed. A duplicate share certificate cannot be issued unless:
a. The consent of the Board is taken.
b. Payment of fees, if any, not exceeding Rs.2 is made by the shareholder.
c. Proper evidence and indemnity to the satisfaction of the Company is furnished.
d. Out of pocket expenses estimated to be incurred by the Company in investigating the evidence, as the Board may think fit, are deposited with the Company.
e. The fact that the certificate is duplicate should be inscribed with the words “duplicate issued in lieu of share certificate no”.
f. Mutilated defaced or torn certificates surrendered shall be defaced by a cancellation mark and destroyed after three years with the authority of the Board.
A Company can, however, issue a duplicate share certificate only to a registered shareholder.
Sol.: No, the share warrant holder is not member of the Company. As per Sec.115 on issue of share warrant the Company shall strike out name of the person from its register of members. As per Sec.41 of the Act, a person can become a member of the Company by agreeing in writing to become the member of the Company and whose name is entered in the Register of Members of the Company.
Sol.: False., Under Sec.113 every Company is required to deliver (Not ready for delivery) the share certificates within a period of 3 months from the date of allotment and within 2 months from the date on which the certificates are lodged with the Company for transfer.
Sol.: Under section 113 of the Act, the NCLT has been vested with the powers to extend the duration within which the certificates for debentures are to be delivered by the Company to the debenture holders. The NCLT is not vested with similar powers in respect of share certificates.
Sol.: A public Company limited by shares, if so authorized by its articles, may, with the previous approval of the Central Government, with respect to any fully paid-up shares, issue under its common seal, a warrant stating that the bearer of the warrant is entitled to the shares therein specified. The words used in the section are “fully paid-up shares”. Under the section, there is no distinction between the equity shares and preference shares and thus, the Company can issue share warrants in respect of fully paid preference shares also. (Sec.114)
Sol.: A Company may, if so authorised by the articles, accept from any member the whole or a part of the amount remaining unpaid on any shares, although no part of that amount has been called up.
Rights & Liabilities of payment of calls in advance:
a. Voting rights: The shareholders are not entitled to voting rights in respect of the calls so paid in advance by them until the same would become presently payable.
b. Liability: The shareholder's liability in respect of the call for which the advance call is paid, is extinguished.
c. Interest: The shareholder is entitled to claim interest on the amount of the call. If there are no profits, interest must be paid out of capital. The rate of interest can be up to as provided in articles of association. Table A provides payment of interest at 6% p.a.
d. Non refundable: The amount received as calls in advances is not refundable.
e. Rank before: In the event of winding up, the shareholder must be paid of his amount with interest, if any, before other shareholders are paid off.
Sol.: Yes. Forfeiture of shares is governed by the provisions of the articles of association of the Company and there should be strict compliance with the procedural formalities in respect of forfeiture of shares.
1. When entitled to remedy:
a. If a Company refuses to register the transfer or transmission of shares or debentures, it shall, within 2 months from the date on which the application for transfer or transmission was delivered to the Company, send notice of such refusal to the applicant, giving reasons for such refusal.
b. The applicants may appeal to the NCLT against any refusal of the Company to register the transfer or transmission, or against any failure to send notice of its refusal within 2 months.
2. Time limit for application:
a. Within 2 months of receipt of notice of refusal or
b. Where no reply has been received within 4 months of lodging documents for registration.
3. NCLT Decision. NCLT after the enquiry, direct the Company to accept the transfer/transmission or to rectify its register. NCLT has the power to pass interim orders including suspending the voting rights till the enquiry is complete. It may also direct the Company to pay the damages to the aggrieved person.
4. The order of NCLT shall be complied within 10 days of the receipt of the order.
a. Default in complying with the order of NCLT will invite the Company and every officer of the Company who is in default punishable with a fine which may extend to Rs.10,000 and with a further fine which may extend to Rs.1000 per day during which the default continues.
b. Default in complying with this section will invite the Company and every officer of the Company who is in default punishable with a fine which may extend to Rs.500 per day during which the default continues.
Sol.: Yes. Mr. P can claim rectification of register of members of the Company where shares held by him are forfeited by the Company without serving a proper notice for the same. (Sec.111)
Sol. True., when the shares are transferred under the operation of law, either on the death of the shareholder or on his becoming insolvent or when the shareholder is the Co. and such Co. goes into liquidation. For this no transfer deed & payment of stamp duty is required. (Sec.109)
Sol.: If transfer is of partly paid up shares and application for transfer is made by transferor transfer not to be registered by the Company, unless Company gives notice of application to the transferee, and transferee makes no objection to the transfer within two weeks from the receipt of notice. Notice deemed to be duly given if despatched by prepaid registered post to the transferee at address given in instrument of transfer. Board of Directors on satisfaction of above steps, recognise the transferee as new holder. (Sec.110)
Sol.: False., Sec.125 of the Companies gives the list of assets on which charge can be created.
a. A charge on any immovable property.
b. A floating charge on the undertaking or any property of the Company including stock in trade.
c. A charge for the purpose of securing any issue of debentures.
d. A charge on uncalled share capital of the Company.
e. A charge on calls made but not paid.
f. A charge on the book debts of the Company.
g. A charge on Goodwill, Patent, License.
h. A charge created outside India comprising property situated outside India.
i. A charge created in India comprising property outside India.
j. Purchase of a property in India but already subject to charge.
k. Purchase of a property situated abroad but already subject to charge.
The list given above does not contain “Reserve Capital’ and, thus, no charge can be created on it.
Sol.: The concept of partial satisfaction of charge is not there. Satisfaction shall be in full only. These amounts to modification of charge and the Company will have to file particulars of modification of charge, for registration. (Sec.135)
Sol.: False., Charge can be created even on assets which will come into Company’s possession at any future date e.g. future debts, current assets etc. This is called floating charge.
Characteristics of a floating charge:
a. It is a charge on a class of assets of the Company, both present and future. It does not mean only those assets which were in existence when the charge was created.
b. The class of assets charged is one which in the ordinary course of business, is changing from time to time.
c. Until some steps are taken to enforce the charge by the creditors, the Company may continue to deal with the assets charged in the ordinary course of business.
d. The possession of assets charged is not given to the charge (i.e. creditors).
Sol.: The prescribed particulars of the charge together with the copy of instrument of charge shall be filed with the Registrar within 30 days after the date of the creation of charge. In this case particulars of charge have not been filed within the prescribed period of 30 days.
However, the Registrar is empowered to extend the period of 30 days by another 30 days on payment of such additional fee not exceeding 10 times the amount of fee specified on Schedule X. Taking advantage of this provision, ABC Ltd., should immediately file the particulars of charge with the Registrar and satisfy the Registrar that it had sufficient cause for not filing the particulars of charge within 30 days of creation of charge.
If the charge was created on 12th Feb., 2001, then the Co. has to apply to the NCLT under Sec.141 and seek extension of time for filing the particulars for registration. The Co. must satisfy the NCLT that the omission was accidental or due to some other sufficient cause or was not of the nature to prejudice creditors, or that it is just and equitable to grant relief on the other grounds. On such satisfaction, the NCLT may extend the term for the registration of charge on such terms and conditions as it may think fit.
Sol.: According to sec.174 of the Companies Act 1956, if within half an hour from the time appointed for holding a meeting of the Company, a quorum is not present, the meeting shall stand adjourned to the same day in the next week, at the same time and place unless the directors determine otherwise. No Fresh notice is, therefore, required to hold the adjourned meeting. Besides, no quorum is necessary in the adjourned meeting. Thus, the adjourned meeting in question is valid.
Sol.: The Chairman after ascertaining the sense of the meeting by show of hands, that 6 votes are in favour and 7 are against the resolution, may before declaration of result cast his vote in favour of the resolution and also the casting vote and declare the resolution as passed.
Sol.: Section 174 of the Companies Act, 1956 stipulates that unless the articles of association of the Company provide for a larger number, two members personally present shall constitute quorum in case of Private Company. Hence a private Company may provide a larger number for quorum. The general principle is that if no quorum is present, the meeting and the proceedings are void. However, there can be situations when quorum becomes immaterial. If all the members are present, it is immaterial that the quorum required is more than the total number of members thus in this case. Mr. Doubtful cannot successfully challenge the resolution.
Sol.: In this case quorum for a General meeting is six members to be personally present. For the purpose of quorum, only those members are counted who are entitled to vote on resolution proposed to be passed in the meeting. Again, only members present in person and not by proxy, are to be counted. Hence, proxies whether they are members or not will have to be excluded for the purpose of quorum.
If a Company is a member of another Company, it may authorize a person through resolution to act as its representative at a meeting of the other Company, then such a person shall be deemed to be a member present in person and counted for the purpose of quorum (Section 187).
Where two or more companies appoint a single person as their representative, then each of such company will be counted quorum at a meeting of the latter Company.
Again, section 187 a provides that the President of India or Governor of State if he is a member of a Company may appoint such person, as he thinks fit, to Act as his representative at any meeting of the Company. A person so appointed shall be deemed to be a member of such a Company and, thus considered as member personally present.
In view of the above there are only four members personally present, namely, Mr. G and Mr. L (representing three Companies and thus effectively equal to three members) Mr A and Mr. B the preference shareholders have been excluded since the agenda being the appointment of Managing Director, their rights cannot be said to be directly affected and therefore, they shall not have any voting rights. Thus it can be said that the requirement of quorum being six, four members personally present shall not constitute a valid quorum.
Sol.: Each page of the minute book should be signed and in the last page of the record of proceedings of each meeting in the minutes book shall be dated and signed by the Chairman of the said meeting. In the event of death or inability of the chairman, by the director duly authorised for the purpose. The Company Secretary cannot carry out the said function, although he had been authorised by the Chairman.
Sol.: False., Provisions of section 193(1A)(b) provides that the minutes of the proceeding of the general meeting shall be signed by the chairman of the same meeting within a period of 30 days or in the event of death or inability of the chairman by a Director duly authorized by the Board for the purpose.
Sol.: Quorum is the minimum number of members of a Co. whose presence is necessary for commencing the meeting. If within half an hour for the time appointed for holding a meeting of the Co., a quorum is not present, the annual general meeting shall stand adjourned to the same day in the next week, at the same time and place or to such other day and at such other time and place as determined by the Board. In the present case, as the quorum is not present within 10 minutes of the scheduled time of holding the annual general meeting, the legal position is that the people present will have to wait for another 20 minutes to ascertain whether requisite quorum is present or not, before any decision regarding the conduct of the meeting can be taken.
Sol.: According to the provisions of Section 166(2) read with Section 171(1) every Annual General Meeting should be called with at least 21 clear days notice and must be held on a day other than a public holiday i.e., it should be held on a working day during business hours. It is clarified that if any day is declared by the Central Government to be a public holiday after the issue of the notice convening such a meeting, it shall not be deemed to be a public holiday in relation to the meeting. In view of the above mentioned provisions, XYZ Ltd. cannot hold the AGM on Sunday, the 30th June as Sunday is a public holiday.
Sol.: The Company is under obligation to accept such requests subject to the condition that the expenses to be incurred by the Company for giving the notice by registered post are deposited by the member with the Company, in advance. (Sec.53) In the given case since Mr. X has not deposited any such amount the Company is under no obligation to accept request.
Sol.: False., What the Act prohibits is only their exercise of voting but not the attendance of the meeting. Further they have the right to receive the notice of general meeting of the Company and therefore, the right of preference shareholder to attend the general meeting of the Co. is implied.
Sol.: False., In accordance with the provisions of section 165 only public Companies having share capital or public Companies limited by guarantee and having share capital are required to hold the statutory meeting and, thus, a Company limited guarantee and having no share capital is not required to hold annual general meeting.
Sol.: False., In accordance with sub-section (5) of section 165, a copy of the statutory report is required to be filed with the Registrar immediately after having been sent to the shareholders.
Sol.: False., In accordance with the provisions of section 167 of the Act if a Company fails to hold the annual general meeting it may be ordered to hold the annual general meeting by the Central government on an application made by any member of the Company.
Sol.: False., Sec.167 provides that the central government while issuing instructions for holding the annual general meeting on a complaint of a member may also issue a direction that even a single member present in the meeting shall constitute a valid quorum. Thus, except where special orders are made by the C.G., single member present in the meeting will not constitute quorum.
Sol.: False., All ordinary businesses are normally transacted through ordinary resolutions except the appointment of auditor under Sec. 224A where the appointment of auditor is required to be made by passing a special resolution. All special businesses are not compulsorily required to be transacted by special resolution. The kind of resolution depends on the provisions of the Act & Articles of the Co.
Sol.: False., 30th June & 31st December have been declared as public holiday under the negotiable Instrument Act, 1881 only for the limited purpose of closing of accounts of banks\treasuries etc, and, thus, these two dates shall not be treated as public holiday for the purpose of holding annual general meeting of the Company.
Sol.: True. In the case of LIC Vs. Escorts Ltd. the Supreme Court has laid down that every shareholders has statutory right to call an extraordinary general meeting and he is not bound to disclose the reason for the resolution proposed to be moved at the general meeting.
Sol.: True. Sec.174 provides that “If within half an hour from the time appointed for holding a meting of the Company, a quorum is not present, the meeting, if called, upon the requisition of members, shall stand dissolved”.
Sol.: As per Reg.49 of Table A, quorum should be present at the commencement of the meeting and subsequent absence thereof will not invalidate the proceedings. In case of own articles, in the absence of a provision similar to Reg.49, then it is presumed that quorum should be present throughout the meeting.
Sol.: False., The provisions of the Act provide that the articles of a Company cannot provide more than 48 hours time for lodging the proxy. This even, if articles of Company require proxy to be deposited more than 48 hours before the commencement of the meeting, that shall have effect as if 48 hours time has been provided. However, Companies are free to provide any time less than 48 hours for the same purpose in their articles.
Sol.: False., Section 177 provides that, at any general meeting, a resolution put to vote of the meeting shall, unless a poll is demanded, be decided on a show of hands. Therefore, the poll is to be taken only when demanded.
Sol.: True. In accordance with the provisions of section 175 and section 180 of the Act, poll demanded on the question of election of chairman and on a question of adjournment of the meeting shall be taken immediately.
Sol.: False, Section 187 provides that the Companies shall be represented in the general meeting of the other Companies through any person duly authorized by a resolution and that the presence of such person in the general meeting shall be considered as personal presence of the body corporate represented by him.
Sol.: Yes, the meeting can proceed, as scheduled. According to Sec.166 (2) of the Companies Act, 1956 an annual general meeting must be held on a day which is not a public holiday. But if the date of AGM becomes a public holiday after issue of notice - Meeting can be held on such public holiday.
Sol.: The shareholder contention is right and he is entitled to the notice of the annual general meeting. According to section 172 of the Companies Act, 1956, notice of every general meeting of a Company shall be given to every member of the Company. A preference shareholder is also a member because, under the Companies Act, every shareholder- whether ordinary or preference- is a member. As such, he is entitled to the notice of the meetings. In the given problem, the preference shareholder should have been issued a notice and the contention of the secretary is wrong.
Sol.: Yes, the person representing one Company under Sec. 187 of the Companies Act, 1956, and also himself as a member shall be counted as two persons for purposes of quorum at general meetings of a Company. This is because of the fact that a person representing a Company Sec. 187 is deemed to be a member of the Company. As he presents himself in two different capacities, he is to be counted as two persons.
Curtsy : Master Mind for CA/CS/CWA
Curtsy : Master Mind for CA/CS/CWA