CORPORATE LAW 1 st REVISION TEST (SYLLABUS CHAP 10 to 22 FROM CORPORATE LAW VOL I)

FULL MARKS 60 TIME ALLOWED 2 HrsQ.1 MA Ltd wants to issue shares to its promoters. Explain the steps involved in such issue 5 MarksQ.2 XYZ Ltd did not file the form MGT 9 for F.Y. 15-16 as it has not conducted AGM for that year. Advice. Also discuss the contents of MGT 9. 8 Marks

Q.3 A company is a legal person but not a citizen. Comment 2 Marks

Q.4 Which of the institutions are regarded as “Public Financial Institutions” under the companies Act 2013. 4 MarksQ.5 The object clause of the Memorandum of Association of MA Private Ltd, Lucknow

authorized it to do trading in fruits and vegetables. The company, however, entered into a partnership with Mr. J and traded in steel and incurred liabilities to Mr. T. The company, subsequently, refused to admit the liability to T on the ground that the deal was ‘Ultra Vires’ the company. Examine the validity of the company’s refusal to admit the liability to T. Give reasons in support of your answer. 5 Marks

Q.6 MT Ltd. Was in the process of incorporation. Promoters of the company signed an agreement for the purchase of certain furniture for the company and payment was to be made to the suppliers of furniture by the company after incorporation. The company was incorporated and the furniture was used by it. Shortly after incorporation, the company went into liquidation and the debt could not he paid by the company for the purchase of above furniture. As a result suppliers sued the promoters of the company for the recovery of money. Examine whether promoters can he held liable for payment under the following situations. I) when the company has already adopted the contract after incorporation?

II) When the company makes a fresh contract with the suppliers in term of pre incorporation contract? 6 Marks

Q.7 VT Ltd. IS a private company having five members only. All the members were going by car to Mumbai in relation to some business. An accident took place and all of them died. Answer with reasons, under the companies Act 2013 whether the existence of the company has also come to the end? 5 Marks

Q.8 An allottee of shares in a company brought action against a Director in respect of false statement in prospectus. The director contended that the statements were prepared by the promoters and he has relied on them. Is the director liable under the circumstances? Decide referring to the provisions of the companies Act, 2013. 5 Marks

Q.9 DA Ltd. Co. issued and published its prospectus to invite the investors to purchase its shares. The said prospectus contained false statement. Mr. V purchased some partly paid

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shares of the company in good faith on the stock Exchange. Subsequently, the company was wound up and the name of Mr. V was in the list of contributors. Decide: a) Whether Mr. V is liable to pay the unpaid amount? b) Can Mr. V sue the directors of the company to recover damages? 6 Marks

Q.10 Discuss IRREGULAR ALLOTMEN 4 MarksQ.11 Discuss function & disqualifications of debenture trustee. Also discuss provisions of DRR

& its investment. 8 MarksQ.12 Define SMALL Co. 2 Marks

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Answer to Q.1 :-If a company wants to issue shares to its Promoters and not to general Public then it is treated as a preferential issue or Private placement and Sec 42 of Company’s Act 2013 gets attracted.MA Ltd should follow the following steps for such issue:-1.Pass Special Resolution in general Meeting. 2. Issue of Private placement offer letter:- Without effecting to the provisions of section 26, a company may make private placement through issue of a private placement offer letter. 3. Offer/ invitation to number of persons: The offer of securities or invitation to subscribe securities, shall be made maximum to 50 persons or such higher number as may be prescribed, in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed. As per the Rule 14 sub-rule (2) of the Companies (prospectus and Allotment of securities) Rules, 2014,limit on membership i.e., the higher number, have been prescribed. According to it, offer of securities or invitation to subscribe securities shall be made to not more than two hundred persons in the aggregate in a financial year. However this does not include- qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock4. Offer/ invitation made to more than the prescribed number of persons: A company, listed/unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions related to public offer. 5. No issue of fresh offer/ invitation: No fresh offer or invitation shall be made, unless- • the allotments with respect to any offer or invitation made earlier have been completed, or • that offer or invitation has been withdrawn, or • abandoned by the company.6. Offer / invitation treated as public offer: Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with.

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7. Payment of amount: All monies payable towards subscription of securities under this section shall be paid through cheque or demand draft or other banking channels but not by cash. 8. Time for allotment of securities: A company making an offer or invitation under this section shall allot its securities within 60 days from the date of receipt of the application money for such securities. 9. Default in allotment of securities: Where the company is not able to allot the securities within stated period, it shall repay the application money to the subscribers within 15 days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest @ of 12 % per annum from the expiry of the sixtieth day: 10. Separate Bank Account: Monies received on application shall be kept in a separate bank account in a scheduled bank and shall be utilised only for the following purpose- (a) for adjustment against allotment of securities; or (b) for the repayment of monies where the company is unable to allot securities. 11. No publicity required: Company offering securities under this section shall not publish any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer. 12. Filing with the registrar: Whenever a company makes any allotment of securities, it shall file with the Registrar a return of allotment, including the complete list of all security- holders, with their full names, addresses, number of securities allotted and such other relevant information. 13. In contravention of the section: If a company makes an offer or accepts monies in contravention of this section- Persons liable PenaltyCompany, Promoters, Directors- May extend to the amount involved in the offer or invitation, or Two crore rupees- whichever is higher, and Company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty.

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Answer to Q.2 :-According to section 92 of the Companies Act, 2013, every company

shall prepare an annual return in form MGT 9 containing the particulars as they stood on the close of the financial year. Every company shall file with the Registrar a copy of the annual return, within sixty days from the date on which the annual general meeting is held or where no annual general meeting is held in any year within sixty days from the date on which the annual general meeting should have been held together with the statement specifying the reasons for not holding the annual general meeting, with such fees or additional fees as may be prescribed, within the time as specified. In the given case study XYZ Ltd. Has not conducted AGM of FY 15-16 and so it is not required to file Annual Return i.e. Form MGT 9. It to be noted that even if AGM did not took place it should file Annual Return within 60 days of due date of AGM with reason of not holding AGM.

Thus from the above discussion we conclude that XYZ Ltd has contravened sec 92 & the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakhs rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both. Particulars stated in the annual return: Annual return prepared in the prescribed form shall contain the following particulars as on the close of the financial year— (a) its registered office, principal business activities, particulars of its holding, subsidiary and associate companies; (b) its shares, debentures and other securities and shareholding pattern; (c) its indebtedness; (d) its members and debenture-holders along with changes therein since the close of the previous financial year;

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(e) its promoters, directors, key managerial personnel along with changes therein since the close of the previous financial year; (f) meetings of members or a class thereof, Board and its various committees along with attendance details; (g) remuneration of directors and key managerial personnel; (h) penalty or punishment imposed on the company, its directors or officers and details of compounding of offences and appeals made against such penalty or punishment; (i) matters relating to certification of compliances, disclosures as may be prescribed;(j) details, as may be prescribed, in respect of shares held by or on behalf of the Foreign Institutional Investors indicating their names, addresses, countries of incorporation, registration and percentage of shareholding held by them; and (k) such other matters as may be prescribed

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Answer to Q.3 :-The given comment absolutely holds good because company being an artificial Person created by law is a legal Person having all the legal rights like separate entity, power to acquire, hold & sell Property both movable and immovable, tangible & intangible, right to sue & be sued but still it does not qualify as a citizen and so cannot enjoy important fundamental rights.

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Answer to Q.4 :- Public Financial Institutions: By virtue of Section 2 (72) of the Companies Act, 2013 the following institutions are defined as public financial institutions: (i) The Life Insurance Corporation of India established under the Life Insurance Act 1956 (ii) The Infrastructure Development Finance Co Ltd (iii) Specified company referred to in Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (iv) Institutions notified by the Central Government in consultation with the Reserve Bank of India (v) institutions notified by the Central Government under section 4A(2) of the Companies Act, 1956 so repealed under section 465 of this Act.

Answer to Q.5 :-

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In terms of section 4 of the Companies Act, 2013, the powers of the company are limited to powers expressly given in the “Objects Clause” of the Memorandum powers reasonably incidental or necessary to the company’s main objects . The Act further provides that the acts beyond the powers of a company are ultra vires and void and cannot be ratified even though every member of the company may give his consent . The objects clause enables the shareholders, creditors or others to know what its powers are and what is the range of its activities. The objects clause therefore is of fundamental importance to the share holders, creditors and every other person who deals with the company in any manner what so ever. A company being an artificial legal person can act only within the ambit of the powers conferred upon it by the Memorandum through the “Objects Clause”. As per constructive notice every person who enters into a contractual relationship with a company on any matter is presumed to be aware of its objects and is supposed to have examined the Memorandum of Articles of the company to ensure proper contractual agreement. If a person fails to do so, it is entirely at his own peril. It is also pertinent to note that the objects of a company may be changed by following the provisions for the change of Memorandum as laid out in section 13 of the said Act. M/s MA Pvt. Ltd is authorised to trade directly on fruits and vegetables. It has no power to enter into a partnership for Iron and steel with Mr. T. Such act cannot be treated as being within either the ‘express’ or ‘implied’ powers of the company. Mr T who entered into partnership is deemed to be aware of the lack of powers of M/s MA (Pvt) Ltd. In the light of the above, Mr, T cannot enforce the agreement or liability against M/s MA Pvt. Ltd under the Companies Act. Mr. T should be advised accordingly. This conclusion is supported by the decision reported in the case of the ‘Ganga Mata Refinery Company (Pvt) Ltd CIT’. However, under the Indian Contract Act, 1872 where a person derives any benefit either in the absence of a contract or under a void agreement, will be liable to make a reasonable payment for the value of such benefit.

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Answer to Q.6 :-A company cannot enter into contracts before incorporation. Since the company does not exist before its incorporation it cannot also either expressly or impliedly appoints any agents on its behalf. Such pre incorporation contracts are void and being void cannot be ratified on incorporation. The only option available to the company is to enter into a fresh contract on the same terms after incorporation if it wants to go ahead with the contract. Further, under the principle of constructive notice every person entering into a contract with a company is presumed to have knowledge of its documents such as the Memorandum, Articles and resolutions passed by members as these are public documents available for scrutiny at the registered office of a company. Hence, a person who enters into a pre incorporation contract with the promoters does so at his own peril. (i) The promoters will not be held personally liable unless they are guilty of fraud. In the present case the promoters have not been guilty of any concealment of information or deliberate misrepresentation of facts. It was clearly agreed with the suppliers of the furniture that the payment will be made by the company after its incorporation. Hence, the promoters cannot be held liable for the payment. However, as the company has used the furniture it will be bound to compensate the supplier under section 70 of the Indian Contract Act, 1872 which clearly states that where a person lawfully does anything for another person, or delivers anything to him, without intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered. Therefore, the company will be liable to compensate the supplier for the use of the furniture and restore the same to the supplier. (ii) However, in case the company can, if it desires, enter into a new contract, after its incorporation with the other party on the same terms and conditions. Such new contract will be legally enforceable on all parties concerned. Therefore, under the second scenario where the company has entered into a fresh contract with the suppliers of the furniture a legally enforceable contract has come into existence and the company will be liable. As the company has gone into liquidation the

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supplier of the furniture will rank pari passu with the other unsecured creditors in the realisation of their dues.

Answer to Q.7 :-Death of all members of a Private limited company, under the Companies Act, 2013: The most distinguishing feature of a company is its being a separate entity from its shareholders and promoters who form it. This lends stability and perpetuity to the company form of business organization. In short a company is brought into existence by a process of law and can be terminated or wound up or brought to an end only by a process of law. Its life is not impacted by the death, insolvency or retirement of any or all shareholder(s) or director(s). The provision for transferability or transmission of the shares helps to preserve the perpetual existence of company by allowing the constitution and identity of shareholders to change. In the present case, VT Ltd. does not cease to exist even by the death of all its shareholders. The legal process will be for the successors of the deceased shareholder to get the shares registered in their names by way of the process which is called “transmission of shares”. The company will cease to exist only when it is wound up by a due process of law. Therefore, even with the death of all members (i.e. 5) VT (Pvt.) Ltd. does not cease to exist.

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Answer to Q.8 :-The Director shall be held liable for the false statements in the prospectus under sections 34 and 35 of the Companies Act, 2013. Whereas section 34 imposes a criminal punishment on every person who authorises the issue of such prospectus section 35 more particularly includes a director of the company in the imposition of liability for such mis statements. The only situations when a director will not incur any liability for mis statements in a prospectus are as under: (a) No criminal liability under section 34 shall apply to a person if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary. (b) No civil liability for any mis statement under section 35 shall apply to a person if he proves that: a. Having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent; or b. The prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent. Therefore, in the present case the director cannot hide behind the excuse that he had relied on the promoters for making correct statements in the prospectus. He will be liable for mis statements in the prospectus.

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Answer to Q.9 :-False statement in Prospectus under the Companies Act,2013 (i) Yes, V is liable to pay the unpaid amount on the shares. As V has purchased partly paid shares, so he is liable for the remaining value of the shares. At the time of winding up he is liable to contribute as a contributory. The related case law in this subject matter is Peak vs. Gurney. (ii) No, V cannot sue the directors to recover damages for the misstatement in the prospectus. The shareholder must have relied on the statement in the prospectus in applying for shares offered by it to hold the responsible persons liable. If a person purchases shares in the open market, the prospectus is non operative as far as he is concerned. In the present case, Mr. V purchased shares on the stock exchange even if he did so on good faith he had not relied on the statement in prospectus. Therefore, he cannot sue the directors of the company to recover damages.

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Answer to Q.10 :-The section 39 of the Companies Act, 2013 deals with the allotment of securities. If any of the following condition is not satisfied then its an irregular allotment i. Prohibition on allotment: No allotment of any securities of a company shall be offered to the public for subscription unless the minimum amount(stated in the prospectus) has been subscribed. if not stated that it minimum 90 % of shares. ii. Payment of amount: The amount payable on application on every security shall not be less than five per cent of the nominal amount of the security, or such other percentage or amount, as may be specified by the Securities and Exchange Board i.e. 25 % of issue price. iii. Where no minimum amount is so received: Within a period of thirty days from the date of issue of the prospectus, or such other period as may be specified by the Securities and Exchange Board, the amount received shall be returned within such time and manner as may be prescribed. iv. Filing with the registrar a return of allotment: *Wherever any company makes any allotment of securities, it shall file with the registrar a return of allotment. v. In case of default: The company and its officer are in default shall be liable to fine varying from Rs.1000/- to 1 lakh.

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Answer to Q.11 :- Function of debenture trustee:- It shall be the duty of every debenture trustee to

1. ensure that the assets of the company on which charge is created are sufficient to cover the repayment of the principal amount of secured deposits outstanding and interest accrued thereon;

2. ensure that the company does not commit any breach of covenants and provisions of the trust deed;

3. take such reasonable steps as may be necessary to procure a remedy for any breach of covenants of the trust deed

4. take steps to call a meeting of the holders of debentures as and when such meeting is required to be held.

Disqualification of debenture trustee:- Person shall be appointed as a debenture trustee, if he- i. Beneficially holds shares in the company; ii. Is a promoter, director or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary or associate company; iii. Is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee; iv. Is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company; v. Has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon; vi. Has any pecuniary relationship with the company amounting to two per cent or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, or whichever is lower, during the two immediately preceding financial years or during the current financial year;

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vii. Is a relative of any promoter or any person who is in the employment of the company as a director or key managerial personnel; Creation of debenture redemption reserve (DRR) account: As per the Companies (Share Capital and Debentures) Rules, 2014, the company shall create a Debenture Redemption Reserve for the purpose of redemption of debentures, in accordance with the conditions given below- (a) the Debenture Redemption Reserve shall be created out of the profits of the company available for payment of dividend; (b) the company shall create Debenture Redemption Reserve (DRR) in accordance with following conditions:- (i) No DRR is required for debentures issued by All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking Companies for both public as well as privately placed debentures. For other Financial Institutions (FIs) within the meaning of clause (72) of section 2 of the Companies Act, 2013, DRR will be as applicable to NBFCs registered with RBI. (ii) For NBFCs registered with the RBI under Section 45-IA of the RBI (Amendment) Act, 1997, ‘the adequacy’ of DRR will be 25% of the value of debentures issued through public issue as per present SEBI (Issue and Listing of Debt Securities) Regulations, 2008, and no DRR is required in the case of privately placed debentures.(iii) For other companies including manufacturing and infrastructure companies, the adequacy of DRR will be 25% of the value of debentures issued through public issue as per present SEBI (Issue and Listing of Debt Securities), Regulations 2008 and also 25% DRR is required in the case of privately placed debentures by listed companies. For unlisted companies issuing debentures on private placement basis, the DRR will be 25% of the value of debentures.(c) every company required to create Debenture Redemption Reserve shall on or before the 30th day of April in each year, invest or deposit, as the case may be, a sum which shall not be less than fifteen percent, of the amount of its debentures maturing during the year ending on the 31st day of March of the next year, in any one or more of the following methods, namely:- (i) in deposits with any scheduled bank, free from any charge or lien;

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(ii) in unencumbered securities of the Central Government or of any State Government;

Answer to Q.12 :-Small Company - Small company is defined under section 2(85) of companies act ,2013.as per this section small company means a company other than public company.

Paid up share capital of which does not exceed 50 lakhs rupee or such higher amount as may be prescribed which shall not be more than 5 crore rupees; or

Turnover of which as per its last profit and lose account does not exceed 2 crore rupees or such higher amount as may be prescribed which shall not be more than 20 crore rupees;

Provided nothing in this clause shall apply to :- A holding company or a subsidiary compamy A company registerd under section 8;or A company or body corporate governed by any special Act.

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