CA FINAL PAPER 4 (LAW) MAY 2021 ADDITIONAL QUESTIONS

CA FINAL PAPER 4
Corporate and Economic Laws /Allied Laws
Sr.No. Chapter Name Page No. Number of
Questions
1 Appointment and Qualification of Directors 2-10 10

2 Meeting of Board and its Powers 11-18 8

3 Appointment & Remuneration of 19-24 5

Managerial Personnel
4 Inspection, Inquiry & Investigation 25-28 4

5 Compromise, Arrangement & 29-32 5

Amalgamation
6 Prevention of Oppression and 33-35 4
Mismanagement
7 Companies incorporated outside India 36-41 6

8 Miscellaneous Provisions 42-46 4

9 National Company Law Tribunal and 47-48 3

Appellate Tribunal
10 Winding up 49-51 4

11 Compounding of offences, Adjudication & - -

Special Court
12 Insolvency & Bankruptcy Code 2016 52-60 11

13 Prevention of Money Laundering Act,2002 61-68 11

14 The Securities Contract (Regulation) Act, 69-72 5

1956 and the Securities Contract
(Regulation) Rules, 1957
15 The Securities Exchange Board of India Act, 73-75 3
1992
16 The Foreign Exchange Management Act, 76-80 7
1999
17 The Securitisation and Reconstruction of 81-85 6
Financial Assets and Enforcement of
Security Interest Act, 2002

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CA FINAL PAPER 4 (LAW) MAY 2021 ADDITIONAL QUESTIONS

Sr.No. Chapter Name Page No. Number of

Questions
18 Corporate Secretarial Practice – Drafting of 86-87 2
Notices, Resolutions, Minutes and Reports
19 The Arbitration and Conciliation Act, 1996 88-89 3
(Only for NEW syllabus)
20 Foreign Contribution Regulation Act, 2010 90-93 4
(Only for NEW syllabus)
21 Declaration and Payment of Dividend 94-96 3
(Only for OLD syllabus)
22 Company Accounts 97-99 2
(Only for OLD syllabus)
23 Company Audit 100-101 3
(Only for OLD syllabus)
24 Interpretation of Statutes, Deeds and 102-103 4
Documents
(Only for OLD syllabus)

25 The Competition Act, 2002 104-106 4

(Only for OLD syllabus)
26 The Insurance Act, 1938, the Insurance - -
Regulatory and Development Authority
Act, 1999
(Only for OLD syllabus)

27 Overview of Banking Regulation Act, 1949 107-108 2

(Only for OLD syllabus)

CHAPTER 1. APPOINTMENT AND QUALIFICATION OF DIRECTORS

Question 1
XYZ Limited is an unlisted company having a paid-up share capital of twenty crore rupees as on
31st March, 2020 and a turnover of one hundred fifty crore rupees during the year ended 31st
March, 2020. The total number of directors is thirteen.

Referring to the provisions of the Companies Act, 2013 answer the following:

(i) State the minimum number of independent directors that the company should
appoint.
(ii) How many independent directors are to be appointed in case XYZ Limited is a listed
company? (May 2021 RTP OLD)

Answer :

According to Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014,
the following class or classes of companies shall have at least 2 directors as independent
directors:

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

In the present case, XYZ Limited is an unlisted company having a paid-up capital of

₹ 20 crores as on 31st March, 2020 and a turnover of ₹ 150 crores during the year ended
31st March, 2020. Accordingly, as per Rule 4, it must have at least 2 directors as
independent directors.

(ii) According to Section 149(4) of the Companies Act, 2013, every listed public company
shall have at least one-third of the total number of directors as independent directors. The
Explanation to Section 149(4) specifies that any fraction contained in such one- third
numbers shall be rounded off as one.

In the present case, XYZ Limited is a listed company and the total number of directors is 13.
Hence, in this case, XYZ Limited must have atleast 5 directors (1/3 of 13 is 4.33 rounded as
5) as independent directors.

Question 2
Excel Limited is a listed Company with a turnover of ₹ 60 Crore in the FY 2016-2017. The
Company appoints Ms. R as the women director on 1st March, 2017. Ms. R is already a director
in twelve companies including ten public companies. Also, Ms. R is a Chartered Accountant in
practice. Further, also, Ms. R, is a Director in Supreme Ltd. where she is acting in a professional
capacity. Since lots of proposal for the holding of directorship in various companies are lined up
before Ms. R, so in order to retain her, the Remuneration and Nomination Committee proposed
to enhance the remuneration of Ms. R from 4 Lakh per month to 6 Lakh per month. However,
Supreme Limited was running in losses in the last 2 years.

Evaluate in the light of the given facts, the following with reference to the provisions of the
Companies Act, 2013:

(i) The validity of appointment of Ms. R in Excel Limited.

(ii) Analyse the proposition of enhancement of remuneration of Ms. R in Supreme
Ltd. (NOV 2020 EXAM NEW)
Answer :

(i) According to Section 165 (1), a person shall not hold office as director, including any
alternate directorship, in more than 20 companies at the same time.

Further, out of the above limit of 20 companies, the maximum number of public companies in
which a person can be appointed as a director shall not exceed 10.

In the instant case, since the directorship held by Ms. R is already 10 in public companies, so her
appointment in Excel Limited is not valid.

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(ii) As per SECTION II OF PART II OF SCHEDULE V, Where in any financial year during the
currency of tenure of a managerial person, a company has no profits or its profits are
inadequate, it may pay remuneration to the managerial person not exceeding the limits under
(A) and (B) provided in it.

In case of a managerial person who is functioning in a professional capacity, remuneration as

per item (A) may be paid, if such managerial person possesses graduate level qualification with
expertise and specialised knowledge in the field in which the company operates.

Applicable conditions for payment of remuneration: The limits specified under items (A)
and (B) specified in the mentioned Schedule shall apply, if payment of remuneration is
approved by a resolution passed by the Board and, in the case of a company covered under
Section 178 (1), also by the Nomination and Remuneration Committee.

Since Ms. R is a Chartered Accountant in practice and acting in a professional capacity in

Supreme Ltd. So, here as per the above provision, proposal to enhance the remuneration can be
done by resolution passed by the Board. Hence the said proposal of enhancement of
remuneration of Ms. R by Nomination and Remuneration Committee in Supreme Ltd. which is a
listed company is valid. Moreover, it also does not require approval of the Central Government.

Note: As the question talk about the proposal of enhancement of remuneration by

Nomination and Remuneration Committee, this may lead to the understanding that
Supreme Ltd. is a listed company in the said question.

Question 3 (Women Director and Additional Director)

Evaluate the following cases of appointment of Director(s), with reference to the relevant
provisions of the Companies Act, 2013:

(i) Ms. Nisha was appointed a director of LMN Limited on 10th October, 2020 in place of Ms.
Rachna, who resigned from her office on 31st May, 2020 six months before expiry of term
of her office. LMN Limited had its Board meeting on 31st July 2020. Whether appointment
of Ms. Nisha is valid?
(ii) The Board of Directors of a Company appointed Mr. Sarvesh as an additional director on
30th July, 2020. Mr. Sarvesh continued to hold his office till 15th October, 2020. The
Company had its annual general meeting on 15th October, 2020 which should have held on
30th September, 2020, Whether Mr. Sarvesh can hold office till 15th October, 2020?
(NOV 2020 EXAM NEW)

Answer :

(i) As per Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014
along with Second proviso to section 149(1), any intermittent vacancy of a woman director shall
be filled-up by the Board at the earliest but not later than immediate next Board meeting or
three months from the date of such vacancy whichever is later.

In the instant case, Ms. Rachna has resigned on 31st May 2020 and the immediate board
meeting of LMN Ltd. was held on 31stJuly, 2020. Ms. Nisha was appointed on 10th October

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2020. The intermittent vacancy of women director shall be filled by 31stJuly, 2020 (immediate
Board meeting) or by 1st September, 2020 (three months from the date of vacancy of Ms.
Rachna) whichever is later.

Hence, appointment of Ms. Nisha is not valid.

(ii) As per section 161(1) of the Companies Act, 2013, Additional director shall hold office up to
the date of the next annual general meeting or the last date on which the annual general
meeting should have been held, whichever is earlier.

In the instant case, Mr. Sarvesh, the additional director shall hold office upto next AGM i.e. 30th
October 2020 or the last date on which the AGM should have been held

i.e. 30th September, whichever is earlier. But Mr. Sarvesh continued to hold office till 15th
October, 2020 which is not valid. He should hold office till 30 th September, 2020.

Question 4 (Small Shareholder Director)

Eighty-two shareholders of Perish Limited, a listed Company holding shares of nominal
value of ₹ 19,000 each proposed Mr. Babulal as a Director on the Board. The paid-up share
capital of Perish Limited is ₹ 6.2 Crore (6,20,000 equity shares of ₹ 100 each). The Company
has 800 such shareholders, who are holding shares of nominal value of 19,000 or less.
Examine with reference to relevant provisions of the Companies Act 2013, whether Mr.
Babulal can be appointed as a Director of Perish Limited?

(NOV 2020 EXAM NEW)

Answer :

According to Section 151 of the Companies Act, 2013 and Rule 7 of the
Companies(Appointment and Qualification of Directors) Rules, 2014, a listed company may,
upon notice of not less than:

(a) one thousand small shareholders; or

(b) one- tenth of the total number of such shareholders,

Whichever is lower, have a small shareholders’ director elected by the small shareholders. The
term “small shareholders” means a shareholder holding shares of nominal value of not

more than ₹ 20,000 or such other sum as may be prescribed.

In the instant case, Perish Ltd. has 800 small shareholders out of which 82 small shareholders
proposed Mr. Babulal as a director on the Board. Thus, it fulfills the requirement of one-tenth of
the total number of such shareholders (800*1/10: 80). Hence, Mr. Babulal can be appointed as a
director of Perish Ltd.

Question 5 (Vacation of Director)

Ms. Jai Shvitha is a qualified Chartered Accountant and is known for her in -depth knowledge of
Corporate and Economic Laws. She is a Woman Director in PQR Ltd. Due to her tight pre-
occupation, she could not attend any Board Meetings of the Company held for a period of 12
months though she has taken leave of absence. Despite the fact that though under Section

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167(1)(b) of the Companies Act, 2013 her office of directorship gets vacated, nevertheless, due
to her professional competency:

(i) The Board of PQR Ltd. wants to keep Ms. Jai Shvitha's Directorship in the Company and
hence proposes to waive the event of absence and/or condone her absence from
attending Board meetings.

(ii) Ms. Jai Shvitha also wants to keep the Directorship in PQR Ltd. In the light of the relevant
provisions of the Companies Act, 2013, analyse the above situations and advise the
Board on the course of action that they can adopt.
(JAN 2021 EXAM NEW)

Answer :

Section 167 of the Companies Act, 2013 contains provisions detailing out as to when the office
of a director shall become vacant. As soon as, any such event occurs, the director is required to
demit the office of director of the company. According to Section 167 (1), the office of a director
shall become vacant in case where he absents himself from all the meetings of the Board of
Directors held during a period of 12 months with or without seeking leave of absence of the
Board.

In the light of the stated provision:

(1) Ms. Jai Shvitha is required to vacate the office of director in PQR Limited. The proposal of
Board of PQR Limited to waive the event of absence or condone her absence from attending
meeting is not permissible.
(2) Ms. Jai Shvitha desires to keep the directorship in PQR Limited is also not tenable. However,
the board is advised to co-opt her as an additional director in the subsequent board
meeting as there is no prohibition in the Act for such co-option and reappointment.

Question 6

Mr. Balan is a Director of Green Tea Plantation Limited and True Spicy Agro Products Limited
for the year ended 31st March, 2019. Some irregularities were found in the affairs of Green Tea
Plantation Limited for mismanagement. Green Tea Plantation Limited did not file the financial
statements for the year ended 31st March, 2019. It also failed to pay interest on loans taken
from a Nationalized Bank for the last two years. On 5th January, 2020 his name is proposed to
be appointed as an additional Director of Standard Agro Products Limited. The company has
sought declaration from Mr. Balan and he submitted the declaration that he is not attracted by
the disqualification stated under the provisions of Section 164 of the Companies Act, 2013.
Decide under the provisions of the Companies Act, 2013:

(i) Is the declaration submitted by Mr. Balan to Standard Agro Products Limited in order?
(ii) Can he continue as a Director of Green Tea Plantation Ltd. and True Spicy Agro Products
Limited? (NOV 2020 EXAM OLD)

Answer :

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(i) Whether the declaration submitted by Mr. Balan to Standard Agro products Limited is
in order?

Yes, the declaration submitted by Mr. Balan is in order.

According to Section 164(2) of the Companies Act, 2013, a person who is or has been a director
of a Company which:

(a) Has not filed the financial statements or annual returns for any continuous three financial
years
(b) Has failed to repay the deposits accepted by it or interest thereon on due date or redeem its
debentures on due date or pay dividends declared and such failure continues for one year
or more
shall not be eligible to be re-appointed as a director of that Company or appointed in other
Company for a period of five years from the date on which the said company fails to do so.

In the present case, the financial statements of Green Tea Plantation Limited was not filed for
one year. This does not attract any disqualification. Further, non- payment of interest to the
nationalized bank is not a ground for disqualification under Section 164(2) of the Act.

(ii) Yes, Mr. Balan can continue to act as a director of Green Tea Plantation Ltd and True Spicy
Agro Products Limited as no disqualification attaches to him under Section 164(2) of the Act.

Question 7

While discussing on the agenda item for appointment of Soham as an Additional Director at the
Board meeting one of the directors made irrelevant and defamatory remarks against Soham.
The chairman, while approving the draft minutes, deleted such remarks from the minutes. At
the subsequent board meeting while confirming the minutes of the preceding meeting, the
director making such remarks objected to exclusion of his remarks from the minutes not being
valid on the part of the Chairman and thereby the Company has contravened the requirement of
the Companies Act, 2013 to maintain speaking minutes of Board meeting. You, being a
Chartered Accountant offer your opinion in the light of the provisions of the Companies Act,
2013 whether the Chairman has any right to exclude any matter from the minutes and whether
non maintenance of speaking minutes of board meeting shall result in contravention of any
provisions of the Companies Act,2013? (JAN 2021 EXAM OLD)

Answer :

RIGHT OF THE CHAIRMAN

Section 118 of the Companies Act, 2013 provides that the minutes of each meeting of the Board
of Directors shall contain a fair and correct summary of the proceedings thereat. Under Section
118 (5) of the Companies Act, 2013, there shall not be included in the Minutes of a meeting, any
matter which, in the opinion of the Chairman of the meeting:

(i) is or could reasonably be regarded as defamatory of any person;

(ii) is irrelevant or immaterial to the proceeding; or
(iii) is detrimental to the interests of the Company;
Further, under Section 118(6) the Chairman shall exercise absolute discretion in regard to the
inclusion or non-inclusion of any matter in the Minutes on the grounds specified in sub-section

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(5) above. Though non- maintenance of speaking minutes of Board Meeting shall result in
contravention to Section 118(1) of the Companies Act, 2013, nevertheless, as per the facts given
in the question, the Chairman excluded the matter which are irrelevant and defamatory in
exercise of his power under the Companies Act, 2013.

CONCLUSION:

Hence, in view of the above, the Chairman has absolute discretion to exclude any matter from
the minutes and non maintenance of speaking minutes of board meeting shall not result in
contravention of any provisions of the Companies Act, 2013.

Question 8

Mr. Ramakant, the non-independent director of Superb Industries Limited (SIL) is planning to
go abroad for 4 months for resolving of some family issues related to her daughter. The Board of
Directors of SIL proposed to appoint Mr. Subh as an alternate director in the company in place
of Mr. Ramakant.

Following were the legal issues in the given situation:

(1) Mr. Subh does not satisfy the eligibility criteria to become Independent Director
of SIL as given under section 149(6) of the Companies Act, 2013.
(2) Mr. Ramakant returned to India within 2 months before the scheduled arrival.
(3) Mr. Subh (in addition to Mr. Ramakant), to be included in the "total number of
directors" used for calculating rotational directors under sec 152(6).

Examine in the given scenario, the aforementioned legal issues in the light of the Companies Act,
2013. (MARCH 2021 MTP)

Answer :

Law Involved:

As per Section 161(2) of the Companies Act, 2013, 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 three months from India.

Provided that no person shall be appointed as an alternate director for an independent director
unless he is qualified to be appointed as an independent director under the provisions of this
Act.

Provided further that an alternate director shall not hold office for a period longer than that
permissible to the director in whose place he has been appointed and shall vacate the office if
and when the director in whose place he has been appointed returns to India.

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Provided also that if the term of office of the original director is determined before he so returns
to India, any provision for the automatic re-appointment of retiring directors in default of
another appointment shall apply to the original, and not to the alternate director.

Explanation of the facts :

In the above question, Mr. Ramakant was going abroad for personal cause related to family
issue related to his daughter, does not effect on the appointment of alternate director. Even if
Mr. Subh does not satisfy the eligibility criteria to become Independent Director of SIL, it does
not affect his appointment as an Alternate Director because Mr. Ramakant, the original director
is also not an Independent Director. Since Mr. Ramakant has returned to India within 2 months
before his scheduled arrival, Mr. Subh shall vacate the office on return of the Mr. Ramakant
(Original Director) to India.

Conclusion

Therefore, Mr. Subh can be appointed as alternate director of SIL and he shall vacate his office
on returning of Mr. Ramakant to India. The alternate director, Mr. Subh, shall not be included in
the “total number of directors” for the purpose of section 152(6) as alternate director is holding
a lternate directorship in place of the Mr. Ramakant, he has been so appointed. Further as per
the above provisos given under section 161(2), it is clearly stated that if the term of office of the
original director is determined before he so returns to India, any provision for the automatic re-
appointment of retiring directors in default of another appointment shall apply to the original,
and not to the alternate director. For this very purpose, the Mr. Subh, will not be included in the
“total number of directors” as rotational director under section 152(6) of the Companies Act,
2013.

Question 9

The Petitioners were directors in NPP Limited. Due to default in NPP Limited under section
164(2)(a) of the Companies Act, 2013 on the account of non-filing of financial statements for
continuous period of three financial years, the said Petitioners were disqualified to be as
director in one or the other companies.

They came for the legal counselling against their holding of disqualifications as directors in
order to challenge before the Tribunal. Following were the position of the petitioners: One of
the petitioner, Mr. X, was also holding directorship in GPS Ltd. and CDM Ltd. Whereas the
petitioner, Mr. Y was appointed one month before in NPP Ltd.. Whereas Petitioner, Mr. Z, was
within a year of commission of default, offered directorship by RSM Ltd.

Advise, in the light of the given facts, the following legal issues:

(a) On the validity of attracting of disqualification of Petitioners in NPP Ltd. and

vacation of their directorship.
(b) What will be consequences of default caused in NPP Ltd. on the holding of Mr. X’s
directorship in GPS Ltd. and CDM Ltd.
(c) On the validity of offered directorship to Mr. Z by RSM Ltd.
(d) Legal position of Mr. Y who was appointed one month before, in NPP Ltd.
(APRIL 2021 MTP)

Answer :

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As per the section 164 (2) of the Companies Act, 2013, no person who is or has been a
director of a company which—

(a) has not filed financial statements or annual returns for any continuous period of
three financial years; or
(b) has failed to repay the deposits accepted by it or pay interest thereon or to
redeem any debentures on the due date or pay interest due thereon or pay any
dividend declared and such failure to pay or redeem continues for one year or
more,

-shall be eligible to be re-appointed as a director of that company or appointed in other

company for a period of five years from the date on which the said company fails to do so.

Provided that where a person is appointed as a director of a company which is in default of

clause

(a) or clause (b), he shall not incur the disqualification for a period of six months from the
date of his appointment.

Further section 167 (1) of the Companies Act, 2013 states that the office of a director shall
become vacant in case he incurs any of the disqualifications specified in section 164. Provided
that where he incurs disqualification under sub-section (2) of section 164, the office of the
director shall become vacant in all the companies, other than the company which is in default.

Accordingly following are the answers to the questions:

(a) In the given case, the petitioners have incurred disqualification under sub-section (2) of
section 164, and falling under section 167, whereby the office of the directors shall become
vacant in all the companies, except in the defaulted company. The petitioners, being
disqualified under section 164(2) have to vacate the directorship in all the other companies
except in NPP Ltd.
(b) On the basis of the section 167(1), Mr. X has to vacate directorship in GPS Ltd. and CDM Ltd.
(c) Offer of directorship to Mr. Z by RSM Ltd. was within a year of commission of default, so it’s
not valid. As per section 164(2), disqualified director shall not be eligible to be appointed in
other company for a period of five years from the date on which the said company
committed the default.
(d) Petitioner, Mr. Y was appointed one month before in NPP Ltd. which is in default, he shall
not incur the disqualification for a period of six months from the date of his appointment as
he is freshly appointed.

Question 10

GSTL Ltd., a listed company, has total number of 20 directors on its board. Following is the
composition given as under:

6 directors are independent directors as per the provisions of the Companies Act, 2013,

3 directors are nominee directors appointed by State Bank of India (the financial institution
from whom GSTL has taken financial assistance) and

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2 directors are nominee directors appointed by Finance Limited to represent its interest (a
financial institution with whom the company has long-term lease agreement of land).

Advise Board of Director as to computation of total number of directors who are rotational
directors and total number of directors who are liable to retire by rotation. (APRIL 2021 MTP)

Answer :

As per Section 152(6) of the Companies Act, 2013, unless the articles provide for the retirement
of all directors at every annual general meeting, not less than two-thirds of the total number of
directors of a public company shall be persons whose period of office is liable to determination
by retirement of directors by rotation; and save as otherwise expressly provided in this Act, be
appointed by the company in general meeting.

The remaining directors in the case of any such company shall, in default of, and subject to any
regulations in the articles of the company, also be appointed by the company in general meeting.

Explanation— For the purposes of this sub-section, “total number of directors” shall not include
independent directors, whether appointed under this Act or any other law for the time being in
force, on the Board of a company.

Any person appointed as a nominee director being nominated by any institution in pursuance of
the provisions of any law or any agreement (financial institution that has been created by the
Act of Parliament) cannot be considered as a director liable to retire by rotation.

In the above question, Total number of Directors = 20 – 6 (Independent Directors) – 3

(Nominee Directors appointed by State Bank of India) = 11

The nominee directors appointed by Finance Limited to represent its interest (a financial
institution with whom the company has long-term lease agreement of land) are not deducted
from total number of directors because Finance Limited is not the financial institution set up
under the Act of Parliament.

Total number of directors who are rotational directors = 11*2/3 = 7.33= 8 (not less than 2/3rd)
Total number of directors to retire by rotation = 8*1/3 = 2.6=3 (nearest to 1/3rd)

Therefore, the total number of directors who are rotational directors and total number of
directors who are liable to retire by rotation are 8 and 3 respectively.

2. MEETINGS OF BOARD AND ITS POWERS

Question 1 (Section 180)

Dharma Ltd. in the light of prospective developments in the infrastructure of company

decided to have borrowing on long term basis from financial Institutions. In the Board
Meeting held on 15th September, 2020, following proposal of borrowing 2,00,00,000
from Financial institutions on long-term basis was also presented for consideration. As

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per the given information, in the light of relevant provisions of the Companies Act,
2013, examine the eligibility of the amount up to which the Board can borrow from
Financial institution and the state on the validity of the said proposal.
Following were the Balance Sheets of last three years of Dharma Ltd., containing
following facts and figure of financial information

Particulars As at As at As at
31.03.2018 31.03.2019 31.03.2020
₹ ₹ ₹
Paid up capital 60,00,000 60,00,000 85,00,000
General Reserve 50,00,000 52,50,000 60,00,000
Credit Balance in Profit & Loss Account 6,00,000 8,50,000 20,00,000
Securities Premium 3,00,000 3,00,000 3,00,000
Secured Loans 20,00,000 25,00,000 40,00,000

(May 2021 RTP)

Answer :

Borrowing from Financial Institutions: As per Section 180(1)(c) of the Companies

Act, 2013, the Board of Directors of a company, without obtaining the approval of
shareholders in a general meeting, can borrow money including moneys already
borrowed up to an amount which does not exceed the agg regate of paid up capital of
the company, free reserves and securities premium. Such borrowing shall not include
temporary loans obtained from the company’s bankers in the ordinary course of
business. Here, free reserves do not include the reserves set apa rt for specific purpose.
Since the decision to borrow is taken in a meeting held on 15 th September, 2020, the
figures relevant for this purpose are the figures as per the Balance Sheet as at
31.03.2020. According to the above provisions, the eligibility of Board of Directors of
Dharma Ltd. to borrow up to an amount is calculated as follows:

Particulars ₹
Paid up Capital 85,00,000
General Reserve (being free reserve) 60,00,000
Credit Balance in Profit & Loss Account (to be treated as freereserve) 20,00,000

Securities Premium 3,00,000

Aggregate of paid-up capital, free reserves and securities premium 1,68,00,000
Total borrowing power of the Board of Directors of the company, i.e.,
100% of the aggregate of paid-up capital, free reserves and securities 1,68,00,000
premium
Less: Amount already borrowed as secured loans 40,00,000
Amount up to which the Board of Directors can further borrow 1,28,00,000

Dharma Ltd. is entitled to borrow ₹1,28,00,000 through board of directors. As in the

given case, proposal of borrowing was ₹ 2,00,00,000 which is more than eligibility to
borrow, therefore, Dharma Ltd, have to seek approval of shareholders in general
meeting. As the proposal of borrowing ₹ 2,00,00,000 from Financial institutions on
long-term basis was presented for consideration in Board Meeting without approval of
shareholders in general meeting, therefore said proposal is invalid.

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Question 2
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 in 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. (November 2020
NEW)

(i) As per Sub-rule (6) of Rule 3 of the Companies (Meetings of Board and its Powers) Rules
2014, 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) Sub-rule (7) of Rule 3 of the Companies (Meetings of Board and its Powers) Rules 2014,
provides that 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, it is so recorded in the minutes of the meeting.
(iii) According to section 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. Accordingly, meeting can be convened through audio visual means
capable of recording and recognising the participation of the directors but not through audio
teleconferencing i.e, without video facility.
Question 3

Apex Ltd. is an unlisted Public Company and having 10 Directors on its Board. At a duly
convened meeting of the Board of Directors of the Company held on 14th August, 2020, it was
proposed to approve entering into contracts or arrangements with 'E Limited' and 'Q and
Associates', a partnership firm. Mr. Y and his spouse hold 2 and 1 shareholding respectively in E
Limited. Mrs. Z, spouse of Mr. Z is a partner in Q and Associates. Mr. Y and Mr. Z are the
Directors of Apex Limited. The board meeting was attended by five directors including Mr. Y
and Mr. Z. All the directors participated in the discussions and voted in favor of the resolution
except Mr. Y. The contracts were approved. However, Mr. Y and Mr. Z disclosed their respective
interests in the contracts. The earlier Board Meeting was held on 25th May, 2020. In the light of
the provisions of the Companies Act, 2013 (the Act), examine the following:
(i) Whether the Board Meeting that was held and the transactions therewith are within the

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provisions of the Act?

(ii) Under what circumstances any arrangement entered into by the Company in violation
of Section 192 of the Companies Act, 2013 dealing with non-cash transactions involving
directors shall not be held voidable? (JAN 2021 EXAM
NEW)

Answer :

According to section 173 of the Companies Act, 2013, every company shall hold minimum of 4
meetings every year but the gap between two consecutive board meetings shall not be more
than 120 days.

In the given question earlier Board Meeting was held on 25 th May, 2020. The next board
meeting was held on 14th August, 2020. Thus, this provision has been complied as the gap
between two meetings is less than 120 days.

As per section 174 of the Companies Act, 2013, the quorum for a Board Meeting shall be 1/3rd
of its total strength or two directors whichever is higher. Where at any time, the number of
interested director exceeds or is equal to 2/3 of the total strength, the quorum shall be the
number of directors who are present and not interested directors.

According to section 184 of the Companies Act, 2013, every director shall 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 the manner prescribed in Rule 9 of the
Companies (Meetings of Board and its Powers) Rules, 2014.

The section further provides that, a director of a company shall make a specific disclosure of
interest whenever he, in any way, whether directly or indirectly, is 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 per cent shareholding of that body corporate; or
(b) with a body corporate in which such director is a Promoter, Manager, Chief Executive
Officer; or
(c) with a firm or other entity in which, such director is a partner, owner or member.

According to Section 184 (5) (b), the provisions of Section 184 regarding disclosure by
interested director shall not apply to any contract or arrangement entered into or to be entered
into between two companies where any of the directors of the either company or two or more
of them together holds or hold not more than 2% of the paid-up share capital in the other
company.
As in the given case, Mr. Y holds 2% shareholding (his wife shareholding shall not be included)
in E Limited. Since, his shareholding is not more than 2%, therefore, provisions of disclosure of
interest shall not apply to him.

Similarly, the provisions related to disclosure of interest are not applicable on Mr. Z (as his wife
is a partner in Q and Associates and he disclosed his indirect interest).

As per the question five directors including Mr. Y and Mr. Z (all uninterested) attended the
board meeting which is more than 1/3rd of the strength. Thus this provision has been
complied.
Therefore, the meeting convened on 14-08-2020 is valid.

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The provisions of section 184 of the Companies Act, 2013 are also complied with, and so the
transactions of the meeting held on 14th August, 2020 are in order. However, in terms of
section 188 of the Companies Act, 2013, no contract or arrangement, in case of a company
having 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.

(ii) Where any arrangement entered into by the company in violation of the section 192(3) of
the Companies Act, 2013 dealing with non-cash transactions involving directors, shall not be
voidable:

(a) If the restitution of any money or other consideration which is subject matter of the
arrangement is no longer possible and the company has indemnified by any other person for
any loss or damage caused to it or
(b) If any rights are acquired bonafide for value and without notice of the contravention of the
provisions of this section by any other person.

Question 4

Mrs. Anjana is a director of Unique Ltd., a professionally managed, profit making, dividend
paying Company. The said company is having sufficient liquid funds and are remaining idle as of
now. With a view to deploy the idle funds, the Company proposes to provide either loans or
invest in the shares of other companies or both. Considering this the Board of Directors
delegate the powers to the Managing Director to invest upto 15 of the paid-up capital without
passing a special resolution.
In the light of Companies Act, 2013 analyze whether the action of board is correct?
(JAN 2021 EXAM NEW)

Answer :
Law Involved:
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 sixty per cent. of its paid-up share capital, free reserves and securities premium
account or one hundred per cent. of its free reserves and securities premium account,
whichever is more.

According to section 186(5) of the Companies Act, 2013, 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 term loan is subsisting, is obtained.
Thus, a unanimous resolution of the board is required. The section 186 does not provide for
delegation.

Conclusion :
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 correct.

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Question 5** (Resolution by circulation)

There are 7 directors in BUI Limited. A resolution (relating to opening of a branch office of the
company in a place outside the state where the registered office is situated) in draft together
with necessary papers were circulated among the directors seeking their approval by
circulation. Four directors from among total seven directors approved the proposal. Three
directors, who did not approve the proposal, opposed the validity of the proposal on the
following grounds:

(i) That the resolution was circulated bye-mail and not by hand delivery or post or courier as
per the provisions of sub-section (1) of Section 175 of the Companies Act, 2013; and
(ii) Secondly, that more than l/3rd of the number of directors now require that the resolution
must be decided at a meeting of the Board of Directors and not by circulation.
Referring to and analyzing the relevant provisions of the Companies Act, 2013 and Rules made
there under, decide, whether the contention of the three directors is tenable. (JAN 2021 EXAM
NEW)

Answer :

Law Involved:
As per section 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 delivery or by post or by courier, or through such electronic means as may be prescribed
and 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.
Provided that, not less than one-third 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 of the
Board.
In light of the stated provision, following are answers to the proposals on the basis of given
ground-

Conclusion :
(i) Contention of three directors with respect to opposing of resolution passed by email, is not
valid in terms of stated Rule 5.

(ii) Contention of three directors with respect to that resolution must be decided at a meeting
of Board of Directors and not by circulation is not valid as per proviso to section 175(1).
The claim to decide the matter in the board meeting after it has been approved is not valid.
The proviso stated above requires that they should have insisted before the resolution has
been passed that the resolution should be decided at a meeting of the board.

Question 6

The Balance Sheet of RML Limited contains the following information about its financial
position as on 31st March, 2019:

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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: 31.3.2016 - ₹ 1.20 crore, 31.3.2017 - ₹ 1.50 crore and
31.3.2018 - ₹ 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 totaling ₹ 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 2020 EXAM OLD)
Answer :

(i) Borrowing from Financial Institutions:

As per Section 180(1)(c) of the Companies Act, 2013, the Board of Directors of a Company,
without obtaining the approval of shareholders in a general meeting, can borrow money
including moneys already borrowed up to an amount which does not exceed the aggregate of
paid up capital of the company, free reserves and securities premium. Such borrowing shall not
include temporary loans obtained from the Company’s bankers in the ordinary course of
business. Here, free reserves do not include the reserves set apart for specific purpose.

According to the above provisions, the Board of Directors of RML Ltd. can borrow, without
obtaining approval of the shareholders in a general meeting, up to an amount calculated as
follows:

Particulars ₹ in Crore
Paid up Capital 10
Reserves & Surplus (excluding Revaluation Reserve) 10
Credit Balance in Profit & Loss Account (to be treated as Free Reserve) 2

Aggregate of Paid-up Capital and Free Reserves 22

Total borrowing power of the Board of Directors of the 22
Company, i.e. 100% of the aggregate of Paid-up Capital, Free Reserves and
Securities Premium
Less: Amount already borrowed as secured loans 8
Amount up to which the Board of Directors can further
borrow without the approval of shareholders in a general meeting. 14

(ii) According to Section 182(1) of the Companies Act, 2013, a Company except a
Government Company and a Company which has been in existence for less than three financial
years, can make political contributions, directly or indirectly, to any political party.

Further, the contribution shall be made by a Company only after passing a resolution at a
meeting of the Board of Directors authorizing such contribution.

In view of the above provisions, RML Limited can contribute the said amount of ₹ 10,00,000 to
the concerned political parties. However, it needs to pass a Board resolution authorizing making

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of such contribution at a meeting of the Board of Directors.

Question 7

The Board meeting of A Ltd. was held on 15.03.2020. The next board meeting could not be held
during the quarter ending 30.06.2020 amid covid-19 pandemic and it was held on 01.09.2020
for approval of financial statement for the year ending 31.03.2020. Examine whether A Ltd. has
contravened any provision of the Companies Act, 2013 in this case as regards to the frequency
of the board meetings. (JAN 2021 EXAM OLD)

Answer :

LEGAL POSITION:

As per Section 173 of the Companies Act, 2013, every Company shall hold minimum of 4
meetings every year provided the gap between two consecutive board meetings shall not be
more than 120 days.
As per mandatory Secretarial Standards -1, the Company shall hold at least four Meetings of its
Board in each Calendar Year with a maximum interval of one hundred and twenty days between
any two consecutive Meetings.
In the given question, a Board Meeting of A Limited was held on 15.03.2020. The next board
meeting was held on 1.9.2020. Hence, the Board Meetings were held at a gap of more than 120
days.

CONCLUSION:

Thus, there is contravention with regard to frequency of the Board Meetings.

Question 8

Mr. Rajat, a Manging Director of XYZ Ltd. a listed company, authorised by Mr. Giri, the director in
the Board of the Company, to enter into contact with Mr. Kushal, a brother in law of Mr. Giri for
supply of furniture’s during the setup of new branch in the city. Mr. Rajat enquires with Mr. Giri
for seeking approval of the Board. Mr. Giri said that there is no need for such approval however
we may get it ratified by the Board in the meeting.
Examine the given situations in the light of the relevant provisions of the Companies Act, 2013
and answer the following:
(i) Validity of the said contract entered by the Mr. Rajat with Mr. Kushal for supply
of furniture’s for setup of new office.
(ii) Consequences in case of non –compliance for seeking of approval by the Board.

(APRIL 2021 MTP)

Answer :

As per section 188 (3) of the Companies Act, 2013, 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 and if it is not ratified by the Board or, as the
case may be, by the shareholders at a meeting within three 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 the 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.

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In the given case, Mr. Rajat, a Manging director, was authorised by Mr. Giri, the director in the
Board of the XYZ Ltd., to enter into contract with Mr. Kushal, a brother in law of Mr. Giri for
supply of furniture’s during the setup of new branch in the city. Mr. Rajat enquires with Mr. Giri
for seeking approval of the Board as per the requirement of the law and Mr. Giri stated that
there is no need for such approval however we may get it ratified by the Board in the meeting.

As per the requirement of the provision in the given case, contract entered into by a Mr. Rajat,
on being authorised by Mr. Giri with Mr. Kushal, who is his relative without obtaining the
consent of the Board, and is required to be ratified by the Board within the prescribed three
months from the date on which such contract was entered into.
(i) Therefore, the said contract entered by the Mr. Rajat with Mr. Kushal for supply of
furniture’s for setup of new office can be said to valid if same has been ratified by the Board
within the 3 months from the date on which such contract made.

(ii) In case of non-compliance of the above requirements, such a contract shall be voidable at
the option of the Board and if the contract 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.

It shall be open to the company to proceed against a director concerned (i.e., against Mr. Giri
and Mr. Rajat) who had entered into such contract in contravention of the provisions of this
section for recovery of any loss sustained by it as a result of such contract.

Such concerned directors of a company, who had entered into or authorised the contract or
arrangement in violation of the provisions of this section shall be liable to a penalty of twenty-
five lakh rupees as XYZ Ltd., is a listed company.

3. APPOINTMENT & REMUNERATION OF MANAGERIAL PERSONNEL

Question 1

You are a young women Chartered Accountant from India, having graduated from a top notch
business school in India and later on became a Certified Public Accountant (CPA) from USA. You
have a special acumen for providing scratch to end business advisory and regulatory related
solutions. Your client, M/s New Tech Software Solutions Limited (NTSSL) is a listed entity
engaged in developing customised software packages for two and three wheeler automobile
manufacturers in India and abroad. The Company follows strict corporate governance norms in
letter and spirit and has the following composition of Board of Directors:

NAME DESIGNATION/CATEGORY
Mr. X CEO and Managing Director
Mr. Y Non-Independent and Non-Executive Director
Mr. A, Mr. B, Mr. C and Mr. D Independent Directors
Mrs. E Independent Women Director

During the financial year 2019-2020, the Company made the following remuneration to its
Directors:

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Name Amount (in ₹)

Mr. X-CEO & MD Monthly remuneration of ₹ 50,000 + Commission
of
₹1,50,000 calculated as a percentage of net profits
Mr. Y Commission at the rate of 1 % of the net profit.

(i) Mr. Y was paid a fee of ₹ 1,00,000 for the services rendered by him, as a
graduate civil engineer for valuing the assets of the Company. Though he is not a
Registered Valuer, he carried out the valuation on the assumption that, valuation can
be done by a person having such qualifications and experience for registered
valuers.

(ii) Payment of ₹ 5,00,000 insurance premium towards Directors and Officers

Liability Policy to protect the Company against any negligence on the part of Mr. X,
the Managing Director. A claim of ₹ 1,00,000 was lodged with the Insurance
Company as a result of guilty of negligence of Mr. X.

With the above information, the said Company approached you seeking certain
clarifications. Clearly explaining the relevant provisions of the Companies Act, 2013
and the Rules made there under, provide your professional advise to the following
questions as raised by the Company:

(i) Whether the payments made to Mr. X and Mr. Y forms part of an overall maximum
managerial remuneration?
(ii) Whether payment of insurance premium towards Directors and Officers Liability
Policy form part of remuneration of Mr. X?
(iii) Who is the approving/recommending authority for the payments made to Mr. Y?
(NOV 2020 EXAM NEW SYLLABUS)

Answer :

(i) As per section 197(1) of the Companies Act, 2013, the total managerial remuneration
payable by a public company, to its Directors, including Managing Director and Whole-Time
Director, and its Manager in respect of any financial year shall not exceed eleven per cent. of the
net profits of that company for that financial year.

Whereas section 197(6), states that a Director or Manager may be paid remuneration by way of
a monthly payment; or at a specified percentage of the net profits of the company; or partly by
one way and partly by the other.

Further section 197(4), states that the remuneration payable to the directors of a company,
including any Managing or Whole-Time Director or Manager, shall be determined, in accordance
with and subject to the provisions of this section, either by the articles of the company, or by a
resolution or, if the articles so require, by a special resolution, passed by the company in general
meeting and the remuneration payable to a director determined aforesaid shall be inclusive of
the remuneration payable to him for the services rendered by him in any other capacity:

Provided that any remuneration for services rendered by any such director in other capacity
shall not be so included if —

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(a) the services rendered are of a professional nature; and

(b) in the opinion of the Nomination and Remuneration Committee, if the company is covered
under section 178(1), or the Board of Directors in other cases, the director possesses the
requisite qualification for the practice of the profession.

Accordingly, as per the provision, payment made to Mr. X comprising of monthly remuneration
of ₹ 50,000 and commission ₹ 1,50,000 and the payment of the premium amount of ₹ 5,00,000
on account of guilty of negligence of Mr. X, will form the part of the overall maximum managerial
remuneration.
Whereas payment made to Mr. Y comprising of commission at the rate of 1% of the net profit
will form part of the overall maximum managerial remuneration.
Further, fee of ₹ 1,00,000 rendered to him for valuing the asset of the company is the service not
given in professional capacity as he does not possess the requisite qualification for practice of
respective profession as per Rule 3(2) of the Companies (Registered Valuers and Valuation)
Rules, 2017. This payment of fees in light of section 197(4) will also form the part of the overall
maximum managerial remuneration.

(ii) As per Section 197(13),where any insurance is taken by a company on behalf of its
Managing Director, Whole-Time Director, Manager, Chief Executive Officer, Chief Financial
Officer or Company Secretary for indemnifying any of them against any liability in respect
of any negligence, default, misfeasance, breach of duty or breach of trust for which they
may be guilty in relation to the company, the premium paid on such insurance shall not be
treated as part of the remuneration payable to any such personnel:

Provided that if such person is proved to be guilty, the premium paid on such insurance shall be
treated as part of the remuneration.

In the given case claim of ₹ 1,00,000 was lodged with the Insurance company as a result of guilty
of negligence of Mr. X. Therefore, payment of the insurance premium of ₹ 5,00,000 shall be
treated as part of the remuneration of Mr. X.

(iii) According to section 197(1) of the Companies Act, 2013 remuneration payable to Mr. Y
who is neither Managing Director nor Whole time director, shall not be exceeding 1% of the
net profits of the company, as there is Mr. X (a Managing Director). Here in the given case,
payment of ₹ 1,00,000 over 1% may require the approval of the company in general
meeting by passing a Special Resolution. Since NTSSL is a listed company, so Nomination
and Remuneration Committee will recommend for payment of commission and ₹ 1,00,000
for valuation purposes for approval of Board.

Question 2

You are a leading Chartered Accountant advising corporates covering various aspects inter alia
on Corporate and Economic Laws, Corporate Tax and related matters with excellent articulation
skills and is a much sought after professional on the Board of many reputed Companies.
Recently, you have been approached by Dash Board Ltd., a loss making company seeking your
advice on the validity of the appointment of Mr. 'X', a turnaround specialist, as the Whole Time
Director of the Company w.e.f. 01.01.2020 on which date he would be above 70 years of age.
You were further informed that at the extra-ordinary general meeting of the Company held on
15.03.2020, the shareholders have not passed a special resolution with regard to the
appointment of Mr. 'X' but the votes cast in favour of the motion exceeded the votes cast against
the motion. The Company has provided you the following inputs extracted from the latest
audited Balance Sheet as at 31st March, 2020.

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S. Amount
No. (₹ InCrores)

1. Authorized Equity Share Capital 1,560

2. Paid Up Equity Share Capital 860
3. Share Application Money Account (Company is in process ofIssue (FPO)) 60
Follow on Public
4. Reserves and Surplus (including General Reserve - 600 &Revaluation 680
Reserve - 80)
5. Long Term Borrowings 800
6. Investments 160
7. Accumulated Losses 40

On the basis of the above facts and figures, Dash Board Ltd. seeks your advice in respect of the
following under the provisions of the Companies Act, 2013.

i) Validity of the appointment of Mr. 'X' as Whole Time Director.

ii) Compute the effective capital for payment of managerial remuneration.
iii) As the Company is running in losses, state the maximum amount of remuneration that can
be paid on yearly basis to each Managerial person other than a managerial personnel
functioning in a professional capacity.
iv) How is the remuneration payable to a Whole Time Director determined ? (JAN 2021 EXAM
NEW)

Answer :

(i) As per section 196(3) of the Companies Act, 2013, no company shall appoint or continue the
employment of any person as Managing Director, Whole-Time Director or Manager who is
below the age of 21 years or has attained the age of 70 years. However, where a person has
attained the age of seventy years, he may still be appointed to such office if a special resolution
is passed in this respect. In such a case, the explanatory statement annexed to the notice for
such motion shall indicate the justification for appointing such person.

Further, where no such special resolution is passed but votes cast in favour of the motion
exceed the votes, if any, cast against the motion and the Central Government is satisfied, on an
application made by the Board, that such appointment is most beneficial to the company, the
appointment of the person who has attained the age of seventy years may be made.

In the given question, the appointment of Mr. X is not valid as special resolution was not passed.
However, it could have been regularized (since the votes cast in favour exceeded votes cast
against the motion of appointment of Mr. X as Whole Time Director) by seeking approval of the
Central Government, which, if satisfied, can accord such approval.

(ii) As per Explanation 1 to Section II of Part II of Schedule V “effective capital” means the
aggregate of the paid-up share capital (excluding share application money or advances against
shares); amount, if any, for the time being standing to the credit of share premium account;
reserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable
after one year (excluding working capital loans, over drafts, interest due on loans unless funded,
bank guarantee, etc., and other short-term arrangements) as reduced by the aggregate of any

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investments (except in case of investment by an investment company whose principal business

is acquisition of shares, stock, debentures or other securities), accumulated losses and
preliminary expenses not written off.

The effective capital shall be calculated as on the last date of the financial year preceding the
financial year in which the appointment of the managerial person is made.

Calculation of Effective Capital:

Particulars Amount(₹ in
crores)
Paid up Capital (excluding share application money) 860
Add: Reserves and surplus excluding revaluation reserve 600
Add: Long term borrowings 800
Less: Investments 160
Less: Accumulated Losses 40
Effective Capital 2,060

(iii) Section II of Part II of Schedule V states that where the effective capital is ₹ 250 crore
and above, the remuneration payable shall not exceed ₹ 120 lakh plus 0.01% of the
effective capital in excess of ₹ 250 crore (i.e., 1.20 cr. + 0.181 cr. = 1.381 crore). Accordingly,
the total managerial remuneration payable by Dash Limited to each Managerial person
other than a managerial personnel functioning in a professional capacity shall be paid ₹
1.381 crore remuneration. Provided that the remuneration in excess of the above limits
may be paid if the resolution passed by the shareholders is a special resolution. Further, it
has been clarified by an explanation that if the managerial personnel is employed for a
period less than one year, the remuneration payable to him shall be pro-rated.

(iv) In terms of section 197(4) of the Companies Act, 2013, the remuneration payable to the
directors of a company including any Managing or Whole Time Director or Manager, shall
be determined in accordance of this section, either:
(i) By the articles of the company
(ii) By a resolution or
(iii) If the articles so require by special resolution, passed by the company in general
meeting.

Question 3

A Public Limited Company is finalizing its accounts for the year ended 31.3 .2020 and the Chief
Financial Officer has been asked to compute the net profit for the purpose of managerial
remuneration on the basis of the following information:
Net Profit as per the Profit and Loss Account ₹ 500.00 lakh
The Profit & Loss account includes the following items:
(i) Profit from the sale of a machinery ₹ 50.00 lakh
(ii) Profit from the sale of forfeited shares ₹ 1.00 lakh

The Profit and Loss Account does not include the following items:
(i) Interest on unsecured loans and advances ₹ 2.00 lakh
(ii) Bad debts to the extent to be written off ₹ 5.00 lakh

Calculate the correct net profit for the purpose of determining the managerial
remuneration. (NOV 2020 EXAM OLD)

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Answer :

In computing the net profits of a company in any financial year for the purpose of Section 197,
credit shall not be given for the following sums, namely:—
• profits on sales by the Company of forfeited shares;
• profits from the sale of any immovable property or fixed assets of a capital nature
comprised in the undertaking or any of the undertakings of the company, unless
the business of the company consists, whether wholly or partly, of buying and
selling any such property or assets:

In making the computation aforesaid, the following sums shall be deducted, namely:—
• interest on unsecured loans and advances;
• debts considered bad and written off or adjusted during the year of account.

Particulars Amount
₹ In Lakhs
Net Profit 500
Less: Profit from sale of Machinery 50
Less: Profit from sale of forfeited shares 1
Less: Interest on unsecured loans and advances 2
Less: Bad Debts to the extent written off 5
Balance being the Net Profit for the purpose of Managerial 442
Remuneration

Question 4

Mr. Ram and Mr. Mohan were appointed as the Whole-Time Director and Managing Director
respectively in Gopi Industries Limited (GIL). Raja Limited, a holding company of GIL, was
willing to appoint Mr. Ram as its Whole-Time Director and Mr. Mohan as Managing Director.
Enumerate the legal provision as regards the holding of office by KMPs and decide on the
eligibility of Mr. Ram and Mr. Mohan in Raja Limited as its managerial personnel in terms of the
Companies Act, 2013. What if the office of Mr. Ram is vacated due to his sudden resignation
given on 1st September 2020 in GIL? (MARCH 2021
MTP)

Answer :

As per Section 203(3) of the Companies Act, 2013, a Whole-Time Key Managerial Personnel
shall not hold office in more than one company except in its subsidiary company at the same
time.

Provided that nothing contained in this sub-section shall disentitle a Key Managerial Personnel
from being a director of any company with the permission of the Board.

Provided also that a company may appoint or employ a person as its managing director, if he is
the managing director or manager of one, and of not more than one, other company and such
appointment or employment is made or approved by a resolution passed at a meeting of the
Board with the consent of all the directors present at the meeting and of which meeting, and of
the resolution to be moved thereat, specific notice has been given to all the directors then in

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India.
In the above question, Mr. Ram cannot be appointed as Whole-time Director in Raja Ltd. because
Raja Ltd. is not the subsidiary company of GIL. Mr. Mohan can be appointed as Managing
Director in Raja Ltd. if all the conditions specified in section 203(3) are complied with.

Therefore, Mr. Ram cannot be appointed as Whole-time Director in Raja Ltd. whereas Mr.
Mohan can be appointed as Managing Director in Raja Ltd. with the unanimous resolution being
passed at the Board Meeting.

Where, if the office of Mr. Ram is vacated on 1st September 2020, the resulting vacancy shall be
filled-up by the Board at a meeting of the Board within a period of six months from the date of
such vacancy i.e. latest by 31st March, 2021.

Question 5

Earth Developers Private Limited, a Bengaluru based company is regular in filing its annual
return as well as financial statements, is having four directors but so far, no Managing Director
has been appointed. Due to the manifold increase in the construction work undertaken by the
company in the last two years, it is urgently felt that a Managing Director needs to be appointed.
Accordingly, Mr. Pranav is appointed as MD by the Board of Directors at its meeting specifying
the terms and conditions including monthly remuneration payable to him. Enumerate on the
requirement and validity of an appointment of Mr. Pranav in the given scenario in the context of
relevant law? (MARCH 2021 MTP)

Answer :

The given problem deals with the Companies Act, 2013 to be read in light of notification No. 464
(E), dated 05-06-2015 w.r.t. section 196(4), where by a private company is exempted from the
application of said section.

Section 196 (4) requires that the terms and conditions of appointment of a Managing Director
and the remuneration payable to him shall be approved by the Board of Directors at a meeting
which shall be subject to approval by a resolution at the next General Meeting of the company
and by the Central Government in case such appointment is at variance to the conditions
specified in Part I of the Schedule V.

Therefore, there is no requirement regarding the approval of appointment of Mr. Pranav as MD

in the Earth Developers Private Limited, at the immediate next General Meeting of the
shareholders. Therefore his appointment as MD in Earth Developers Private Ltd., is valid.

4. INSPECTION, INQUIRY AND INVESTIGATION

Question 1

Investigation proceeding under the provisions of the Companies Act, 2013 is being carried out
against Fishy Ltd. During the investigation, the Tribunal has a reasonable ground to believe that
a removal, transfer or disposal of funds, assets or properties o f the Company is likely to take
place in a manner that would be prejudicial to the interests of the Company. In this connection,
the Tribunal requested the Company's legal advisers and the Bankers respectively to disclose

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and furnish a copy of the communication made by them to the Company. But they refused to
disclose any information. Under the circumstances, the Tribunal wishes to pass an order to:

(i) Freeze the assets of the Company.

(ii) Punish the Company for the contravention, if any of the order of Tribunal.

(iii) Compel the legal advisers and the bankers to provide the required information.

In the light of the provisions of the Companies Act, 2013 analyse whether the Tribunal has the
power to do so in respect of the above situations. (JAN 2021 EXAM NEW)

Answer :

(i) As per Section 221 of the Companies Act, 2013, where it appears to National Company
Law Tribunal on reasonable ground to believe that removal or transfer or disposal of funds,
assets or properties of company is likely to take place in manner prejudicial to interests of
company or its shareholders or creditors or in public interest,

the Tribunal may by order direct that such transfer, removal or disposal shall not take place till
three years as may be specified in the order or may take place subject to such conditions and
restrictions as the Tribunal may deem fit.

Hence, the Tribunal may pass an order to freeze the assets of the company.

(ii) In case of any removal, transfer or disposal of funds, assets, or properties of the
company in contravention of the order of the Tribunal as specified above the company shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to
twenty-five lakh rupees.

(iii) In requirement with Section 227 of the Companies Act, 2013 even during an
investigation, the legal adviser cannot be compelled to provide information of any privileged
communication made to him in that capacity, except as respects the name and address of his
client, or by the bankers of any company, body corporate, or other person, of any information as
to the affairs of any of their customers, other than such company, body corporate, or person, to
the Tribunal or to the Central Government or to the Registrar or to an inspector appointed by
the Central Government.

Hence, the legal advisers and bankers of Fishy Ltd. cannot be compelled to provide
required information.

Question 2

The shareholders of SKM Limited are not satisfied with the performance of the company. Some
of the activities carried on· by the company are not in the interest of the company and its
members. The total number of shareholders as per the Register of Members as on 31.3.2019
was 2,000 and 450 members holding 16% of the paid up value of the shares have made an
application jointly to the Central Government to appoint an Inspector to carry out the

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investigation and find out the true picture. With reference to the provisions of the Companies
Act, 2013, mention whether the application will be accepted? Elaborate. After the filing of the
application about 100 members holding about 7% of the paid up capital had withdrawn. Decide
whether the application is maintainable or not.
(NOV 2020 EXAM OLD)

Answer :

Investigation into affairs of Company (Section 210 of the Companies Act, 2013)

Section 210 of the Companies Act, 2013 provides for Investigation into affairs of a Company.
According to this Section:

Investigation in the opinion of Central Government:

Where the Central Government is of the opinion, that it is necessary to investigate into the
affairs of a Company,—

(a) on the receipt of a report of the Registrar or Inspector under Section 208;
(b) on intimation of a Special Resolution passed by a Company that the affairs of
the Company ought to be investigated; or
(c) in public interest,
it may order an investigation into the affairs of the Company. [Sub-section (1)]

In the instant case, the shareholders’ application will not be accepted under Section 210 of the
Companies Act, 2013 because Central Government may order an investigation into affairs of the
Company only on the intimation of a special resolution passed by a Company that the affairs of
the Company ought to be investigated and then may appoint the Inspectors.

Here, 450 members holding 16% of the paid up value of the shares of the Company have made
an application to the Central Government to appoint an Inspector to carry out investigation but
it is not sufficient as the Company has not passed the special resolution.

It is immaterial that later on 100 members holding 7% of the paid up capital had
withdrawn from the application. The application is still invalid due to non passing of
Special Resolution.

Question 3

On suspicion of manipulation of accounts of RRP Private Limited for the year 2019 -20 to ease
bank finance, the Registrar seized the books of accounts and other papers and retained it for
180 days and thereafter extended the retention for next 180 days for further scrutiny. Advise
the Company whether it shall be lawful for the Registrar to seize the books for more than 180
days? What is the remedy available to the Registrar to make further scrutiny after the expiry of
180 days of retention of books if so required by him? Your advice should be given in
consultation with the provisions of Companies Act, 2013. (JAN 2021 EXAM OLD)

Answer :

According to Section 209 of the Companies Act, 2013, Registrar or Inspector on reasonable
grounds to believe that books and papers relating to the affairs of the Company may be

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destroyed, mutilated, altered, falsified or secreted, on an order of the Special Court, seize such
necessary documents.

Original Period of seizure: The Registrar or Inspector shall return the books and papers
seized as soon as may be, and in any case not later than 180th day after such seizure, to the
Company from whose custody or power such books or papers were seized.

Further period of seizure: The books and papers may be called for by the Registrar or
inspector for a further period of 180 days by an order in writing if they are needed again.

Hence, the Registrar can rightfully seize the books for more than 180 days and can also further
(after original period of 180 days) seize the books for not more than 180 days by an order in
writing is they are needed again.

Question 4

Doomed Limited wanted to reduce the rank of Mr. happy (the Chief Operations Officer of the
company) during the pendency of investigation being conducted on the company on the order
of the Tribunal as per the provisions of the Act. Doomed Ltd. made an application to Tribunal
regarding the reduction of the rank of the Mr. happy on 2nd May, 2020 and received objection of
the Tribunal on 29th May, 2020. What course of action/ remedy is available to Doomed Ltd. and
to Mr. happy as per the provisions of the Companies Act, 2013? (MARCH 2021 MTP)

Answer :

(a) As per Section 218 of the Companies Act, 2013, if during the course of any
investigation of the affairs and other matters of or relating to a company, other body
corporate or person under section 210, section 212, section 213 or section 219 or of
the membership and other matters of or relating to a company, or the ownership of
shares in or debentures of a company or body corporate, or the affairs and other
matters of or relating to a company, other body corporate or person, under section
216; or

(b) during the pendency of any proceeding against any person concerned in the conduct
and management of the affairs of a company under Chapter XVI,

such company, other body corporate or person proposes—

(i) to discharge or suspend any employee; or

(ii) to punish him, whether by dismissal, removal, reduction in rank or otherwise; or

(iii) to change the terms of employment to his disadvantage, the company, other body
corporate or person, as the case may be,

shall obtain approval of the Tribunal of the action proposed against the employee and if the
Tribunal has any objection to the action proposed, it shall send by post notice thereof in writing
to the company, other body corporate or person concerned.

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Where if, no objection is received: If the company, other body corporate or person concerned
does not receive within 30 days of making of application, the approval of the Tribunal, then and
only then, the company, other body corporate or person concerned may proceed to take against
the employee, the action proposed.

Where if objection is received: If the company, other body corporate or person concerned is
dissatisfied with the objection raised by the Tribunal, it may, within a period of thirty days of
the receipt of the notice of the objection, prefer an appeal to the Appellate Tribunal in such
manner and on payment of such fees as may be prescribed.

Order of Appellate Tribunal: The decision of the Appellate Tribunal on such appeal shall be
final and binding on the Tribunal and on the company, other body corporate or person
concerned.

In the above question, since the Doomed Ltd. have received the objection of the Tribunal within
30 days from the date of making application, so Doomed Ltd. can prefer an appeal against the
order of the Tribunal to the Appellate Tribunal within 30 days. No further appeal can be
preferred against the order of the Appellate Tribunal by the company or the employee
concerned.

Conclusion :

Therefore, Doomed Limited can prefer an appeal against the order of objection of Tribunal
within 30 days to the Appellate Tribunal and if the decision of the Appellate Tribunal is against
Mr. happy then he cannot appeal further against the order of the Appellate Tribunal.

5. Compromises, Arrangements & Amalgamations

Question 1

RMP Limited was facing acute financial difficulties as operations were continuously disrupted
and the Company was facing the brunt of:
(i) Non-Availability of Raw Materials,
(ii) Loss of demand for the Company's products,
(iii) Frequent lockdown due to workmen's unrest.

On the verge of liquidation, the Management proposed one last arrangement between creditors
and the Company, whereby, the creditors will have to forego 50%, of their dues to the Company.
This has evoked strong protest from some of the creditors who may block the arrangement.
Examine the arrangement in the light of the Companies Act, 2013 and advice the course of
action/procedure to be adopted by the company to implement the arrangement. (NOV 20
NEW)

Answer :

Procedure for adoption of the Scheme of Compromise or Arrangement (Section 230 of

the Companies Act, 2013)

The proposed scheme involves a compromise or arrangement with creditors and it attracts
section 230. Said section contains the powers of the Tribunal on the filing of application for the

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compromise or arrangement. According to this section:

(1) In the given case, a compromise or arrangement is proposed between a company

and its creditors, so the Tribunal may, on the application of the company or
creditor, order a meeting of the creditors or class of creditors, to be called, held
and conducted in such manner as the Tribunal directs.
(2) The company or any other person, by whom an application is made, shall disclose
to the Tribunal by affidavit all the material facts relating to the company.
(3) Where a meeting is proposed to be called in pursuance of an order of the
Tribunal, a notice of such meeting shall be sent to all the creditors and members
and concerned persons individually at the address registered with the company
with the statement disclosing the details of scheme.
(4) Such notice and other documents shall also be placed on the website of the
company.
(5) The Tribunal may dispense with calling of a meeting of creditor or class of
creditors where such creditors or class of creditors, having at least ninety per
cent value, agree and confirm, by way of affidavit, to the scheme of compromise
or arrangement.
(6) A notice shall provide that the persons to whom the notice is sent may vote
in the meeting either themselves or through proxies or by postal ballot to the
adoption of the compromise or arrangement within one month from the date of
receipt of such notice.
(7) Where, at a meeting held, majority of persons representing three-fourths in value
of the creditors, or class of creditors, voting in person or by proxy or by postal
ballot, agree to any compromise or arrangement and if such compromise or
arrangement is sanctioned by the Tribunal by an order, the same shall be binding
on the company, and all the creditors.
(8) The order of the Tribunal shall be filed with the Registrar by the company within
a period of thirty days of the receipt of the order.

Accordingly, RMP Limited is advised to file an application to the tribunal for

compromise and arrangement.

Question 2

As a part of amalgamation, Harsha Limited acquired 90% of the issued capital of Ananya
Limited. The issued, subscribed and paid up capital of Ananya Limited is ₹ 100 Crore. Out of
remaining minority shareholding of Ananya Limited, ₹ 8 Crore are held by Mr. Raju. Mr. Raju
was not satisfied with the amount decided under the scheme and therefore negotiated for a
higher price. As a result, he received an extra amount of ₹ 10 Lakh. The other minority
shareholders claim that Mr. Raju is not entitled to the entire extra amount of ₹ 10 Lakh.

Examine the validity of claim made by other minority shareholders under the relevant
provisions of the Companies Act, 2013.

Answer :

Section 236 of the Companies Act, 2013, where the shares of minority shareholders have
been acquired in pursuance of this section, and as on or prior to the date of trans fer following
such acquisition, the shareholders holding seventy-five per cent. or more minority equity
shareholding negotiate or reach an understanding on a higher price for any transfer, proposed
or agreed upon, of the shares held by them without disclosing the fact or likelihood of transfer
taking place on the basis of such negotiation, understanding or agreement,-

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the majority shareholders shall share the additional compensation so received by them with
such minority shareholders on a pro rata basis.

Accordingly, in the given case as Mr. Raju negotiated on extra amount of ͅ ₹ 10 lakh which was
entirely held by him. Therefore, the claim contended by the minority shareholders is valid
because in the light of the above stated provision the extra amount received by Mr. Raju shall be
allocated to all minority shareholders on pro rata basis.

Question 3

Genuine Spares and Accessories Limited has got a good reputation in the market and has loyal
customers. Due to the local competition and from unbranded spares, its turnover has gone
down over the years and it had ended in red with a loss of ₹ 2.00 crore for the year ended
31.3.2020 and the same trend is expected to continue for the year ended 31.3.2021. It has got a
large amount of unpaid trade creditors of ₹ 1,25,00,000 and unpaid dividends for the year
ended 31.3.2016 - ₹ 1,50,000 and 31.3.2017 - ₹ 80,000.

Even during the difficult periods of business environment, the company continued the business.
One of the directors has suggested in the meeting of the Board of Directors that the company
can compromise or make arrangements with creditors. Mr. Magesh is the Chief Accounts Officer
of the company for the last two decades. He has been entrusted with the task of finding out the
possibility of making compromise with the creditors. Enumerate the formalities to be observed
by the company with regard to (i) filing of compromise application and (ii) disclosures to be
made in the application by the company. (NOV 2020 EXAM OLD)

Answer :

Section 230 of the Companies Act, 2013 contains the powers of the Tribunal on the filing
of application for the Compromise or Arrangement. According to this section:

(i) Filing of Compromise Application:

Where a compromise or arrangement is proposed between—
a) a Company and its Creditors or any class of them; or
b) a Company and its Members or any class of them, the Tribunal may, on
the application of the-
• Company, or
• Creditor, or
• Member of the Company, or
• Liquidator in case of Company is into voluntary liquidation
order a meeting of the creditors or class of creditors, or of the members or class of members, as
the case may be, to be called, held and conducted in such manner as the Tribunal directs.

Explanation—For the purposes of this sub-section, arrangement includes a reorganization of

the Company’s share capital by the consolidation of shares of different classes or by the division
of shares into shares of different classes, or by both of those methods.

(ii) Disclosures by Applicant: The Company or any other person, by whom an

application is made, shall disclose to the Tribunal by affidavit—
a) all material facts relating to the company, such as the latest financial

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position of the company, the latest auditor’s report on the accounts of the
Company and the pendency of any investigation or proceedings against the
company;
b) reduction of share capital of the Company, if any, included in the
compromise or arrangement;
c) any scheme of corporate debt restructuring consented to by not less than
seventy-five per cent. of the secured creditors in value, including—
(i) a creditor’s responsibility statement in the prescribed form;
(ii) safeguards for the protection of other secured and unsecured
creditors;
(iii) report by the Auditor that the fund requirements of the Company
after the corporate debt restructuring as approved shall conform to
the liquidity test based upon the estimates provided to them by the
Board;
(iv) where the Company proposes to adopt the corporate debt
restructuring guidelines specified by the Reserve Bank of India, a
statement to that effect; and
(v) a Valuation Report in respect of the shares and the property and
all assets, tangible and intangible, movable and immovable, of the
company by a registered valuer.

Question 4

Examine the following situation in the light of the provisions of the Companies Act, 2013:

Total number of secured creditors are 10 and the aggregate amount of outstanding loan is ₹
10.00 crore as at 31.03.2020 as per audited financial statement. Out of them, 4 creditors
together, holding a debt of ₹9.00 crore against the company agree and confirm, by way of
affidavit, to the scheme of compromise or arrangement. Having taken on record this affidavit
the NCLT issued the order approving the scheme without calling the meeting of the creditors.
The rest of the creditors want to oppose the order of the NCLT as it has been issued without
calling the meeting of the creditors. Examine the validity of the order of NCLT.
(JAN 2021 EXAM OLD)

Answer :

LEGAL POSITION

Section 230 of the Companies Act, 2013 contains the powers of the Tribunal on filing of the
application for the compromise or arrangement.

According to Section 230(9) of the Act, the Tribunal may dispense with calling a meeting of
creditors or class of creditors where such creditors or class of creditors, having atleast ninety
percent value, agree and confirm by way of affidavit to the scheme of compromise or
arrangement.

In the present case, 4 creditors are holding 90% value of outstanding loan of secured creditors.
Hence, based on their affidavit, the Tribunal may dispense with calling of a meeting of creditors.

CONCLUSION:

Hence, order issued by NCLT is valid.

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Question 5

Examine the following situation in the light of the provisions of the Companies Act, 2013:

Total number of secured creditors are 10 and the aggregate amount of outstanding loan is
₹10.00 crore as at 31.03.2020 as per audited financial statement. NCLT sanctioned the scheme
as approved by the meeting of the creditors by requisite majority. 4 creditors having a debt of ₹
50.00 Lakh together intend to object to the scheme. Are they entitled for the same?
(JAN 2021 EXAM OLD)

Answer :
As per proviso to Section 230(4) of the Companies Act, 2013, any objection to the compromise
or arrangement shall be made only by persons holding not less than ten percent of the
shareholding or having outstanding debt amounting to not less than five percent of the total
outstanding debt as per the latest audited financial statement. In the present case, 4 creditors
are holding 5% debt and therefore, they are entitled to object to the scheme of compromise or
arrangement.
6. PREVENTION OF OPPRESSION & MISMANAGEMENT

Question 1 ** (Based on Section 243) IMP

Mr. M, a member of XYZ Ltd. filed an application before the Tribunal complaining of oppression
and mismanagement w.r.t. an agreement entered by XYZ Ltd. effecting the interest of the
company. Vide order passed by the Tribunal under section 242 of the Companies Act, 2013,
terminated the said agreement. The agreement was entered by Mr. H and Mr. G who was
managing director and the executive director of the XYZ Ltd. Mr. Rasik, with whom the XYZ Ltd
entered the agreement, filed a petition claiming the loss caused due to termination of the said
agreement. Also state the legal position of Mr. H and Mr. G holding their place of office in the
said situation. Examine the given facts and address the issues in terms of the relevant provisions
of Companies Act, 2013. (May 2021 RTP
NEW)

Answer :

As per section 243 of the Companies Act, 2013 , where an order made under section 242
terminates, sets aside or modifies an agreement which was entered by the company,
were in a manner prejudicial to the interests of the company,—

(a) such order shall not give rise to any claims whatever against the company by any person
for damages or for compensation for loss of office or in any other respect either in pursuance of
the agreement or otherwise;

(b) no managing director or other director or manager whose agreement is so terminated

or set aside shall, for a period of five years from the date of the order terminating or setting
aside the agreement, without the leave of the Tribunal, be appointed, or act, as the managing
director or other director or manager of the company:

Accordingly, Mr. Rasik, with whom the XYZ Ltd entered the agreement, filed a petition claiming
the loss caused due to termination of the said agreement, is not viable. Further, Mr. H and Mr. G,
managing director and the executive director of the XYZ Ltd. who entered agreement with Mr.

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Rasik which was ordered to be terminated by the Tribunal, shall not act as the managing
director or other director or manager of the company, for a period of five years from the date of
the order terminating or setting aside the agreement, without the leave of the Tribunal.

Question 2 ** (Based on Section 243)

Fifteen members of KUN Limited holding fifteen percent paid-up share capital (who have paid
all calls and other sums due on their shares) of the company applied to the Tribunal under
Section 241 of the Companies Act, 2013 for relief from oppression on the ground that the affairs
of the company are being conducted in a manner prejudicial to their interest. The Tribunal
admitted the application and upon enquiry found the allegation to be genuine. There upon the
Tribunal on 1st October, 2020, ordered for termination of Mr. BAP, the Managing Director of the
company, with immediate effect. Mr. BAP was appointed as the Managing Director of the
company for a period of five years with effect from 1st April, 2017 having a clause in his letter of
appointment that he would be entitled for compensation for the remaining period; in case his
services are terminated by the company before expiry of his stipulated term of service. Mr. BAP
claimed compensation for the remaining term of one and half year. KUN Limited denied to pay
the compensation but offered him to re-assume his office again after lapse of a period of three
years from 1st October, 2020. Referring to and analyzing the relevant provisions of the
Companies Act, 2013, decide, whether the claim of Mr. BAP is tenable and proposal of KUN
Limited is valid. (JAN 2021 EXAM NEW)

Answer :

As per the provisions of section 243(1) of the Companies Act, 2013, where an order made under
section 242 terminates, sets aside or modifies an agreement such as is referred to in sub section
(2) of that section:

(a) Such order shall not give rise to any claims whatever against the company by any person
for damages or for compensation for loss of office or in any other respect either in
pursuance of the agreement or otherwise;
(b) No managing director or other director or manager whose agreement is so terminated or
set aside shall, for a period of five years from the date of the order terminating or setting
aside the agreement, without the leave of the Tribunal, be appointed, or act, as managing
director or other director or manager of the company.

Provided that the Tribunal shall not grant leave under this clause unless notice of the intention
to apply for leave has been served on the Central Government and that Government has been
given a reasonable opportunity of being heard in the matter.

In terms of the provisions stated above, the contention of Mr. BAP is not tenable since he will
not be eligible to get any compensation.

KUN Limited’s proposal offering Mr. BAP to resume his office before the expiry of a period of
three years is also not valid since there is a restriction of a period of five years from the date of
termination of his service.

But, with the leave of the Tribunal, Mr. BAP can be appointed, or act, as the Managing Director of
the company, provided that the Tribunal shall not grant leave under this clause unless notice of
the intention to apply for leave has been served on the Central Government and that
Government has been given a reasonable opportunity of being heard in the matter.

Question 3

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Arctic Refrigerators Limited has got 5000 shareholders. Some of the members have decided to
file an application under Section 241 of the Companies Act, 2013, for oppression and
mismanagement. Discuss the qualification of members who have the right to apply to the
tribunal.

Due to the fresh issue of shares, the shareholding of the members who filed the petition gets
reduced to below required % of the paid up share capital. The main contention in the petition is
challenging the validity of the issue. Is the petition maintainable? Mr. Dina, one of the directors
also, wants to file an application for oppression and mismanagement. Can he do so? (NOV 2020
EXAM OLD)
Answer :

Section 244 of the Companies Act, 2013 provides for the eligibility of members who hold the
right to file the application under Section 241 for oppression and mismanagement with the
Tribunal.

Members having right to apply:

The following members of a Company shall have the right to apply under Section 241,
namely:—
in the case of a Company having a share capital, not less than one hundred members of the
company or not less than one-tenth of the total number of its members, whichever is less, or any
member or members holding not less than one tenth of the issued share capital of the Company,
subject to the condition that the applicant or applicants has or have paid all calls and other sums
due on his or their shares;

In the instant case, not less than 500 members (1/10 of 5000) have the right to apply to the
Tribunal.

Due to fresh issue of shares, the shareholding of the members who filed the petition gets
reduced to below 10 per cent, which is challenged as oppressive. The maintainability of the
petition would be reduced after determining the validity of the issue of allotment. The petition
shall be maintainable and the petitioner-member shall be entitled to relief.

It was observed in Rao (V.M.) v. Rajeshwari Ramakrishnan that the oppression complained off
must affect a person in his capacity or character as a member of the company; harsh or unfair
treatment in other capacity, e.g., as a director or a creditor is outside the purview of this chapter
i.e. for filing the petition or application for oppression and mismanagement.

Thus, Mr. Dina, one of the directors of Arctic Refrigerators Limited cannot file an
application for oppression and mismanagement.

Question 4

Anil, Sunil and Swapnil hold 33% and 34% of equity shares of SAS Private Limited respectively.
Sunil and Swapnil are directors and Swapnil is looking after the whole of the management and
administration of the company without being formally appointed as a Managing Director. Since
last there years the company is incurring heavy losses and could not declare a dividend. Being
aggrieved, Anil filed a complaint before the Tribunal on the grounds of oppression and
mismanagement of the Company such as running of a company continuously in losses, non-
declaration of dividend and managing the affairs of the company by a director who has not been
formally appointed as a managing director. The complaint is thereby made soliciting the

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directors for payment of compensation by way of salary to him as like other directors and such
other direction as may be deemed suitable by the Tribunal to remove oppression and
mismanagement of the Company. Examine the maintainability of his complaint in law in the
light of the provisions of the Companies Act, 2013. (JAN 2021 EXAM OLD) ,
APRIL 2021 MTP

Answer :

Mr. Anil has filed a complaint before the Tribunal on the grounds of oppression and
mismanagement of the Company on the following issues:

(i) Running of Company continuously in losses:

As regards obtaining relief from Tribunal, continuous losses cannot, by itself, be regarded as
oppression (Ashok Betelnut Co. P. Ltd. vs. M.K. Chandrakanth).

(ii) Non declaration of dividend:

Failure to declare dividends or payment of low dividends also does not amount to oppression.
(Thomas Veddon V.J. (v) Kuttanad Robber Co. Ltd).

(iii) Managing the affairs of the Company by a director who has not been formally
appointed as a Managing Director:

Where a person without being so appointed, was acting as a Managing Director and was
discharging his functions as such, whether with or without the knowledge of the members, a
member cannot claim that it was an act of oppression, by filing an application with the Tribunal.
Thus, Mr. Anil may not succeed in getting any relief from Tribunal.

(iv) Payment of Compensation by way of Salary

Mr. Anil has filed a complaint soliciting the direction for payment of compensation by way of
salary to him as like other directors and such other directions as may be deemed suitable by the
Tribunal to remove oppression and mismanagement of the Company. But as per decided case
laws, shareholders can share the dividend of the Company, if it is declared but cannot seek
directions to be compensated. The payment of salary is a question that concerns the Board of
Directors and not the Tribunal.

CONCLUSION

Hence, neither Mr. Anil may not succeed in getting any relief from Tribunal nor any
compensation by way of salary.

7. COMPANIES INCORPORATED OUTSIDE INDIA

Question 1

Analyse under the provisions of the Companies Act, 2013, whether the following Companies can
be considered as a Foreign Company:

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(i) A Company incorporated outside India and registered in Moscow, Russia has installed
its main server in Moscow for maintaining office automation software by cloud
computing for its client in India.
(ii) A Company which is incorporated outside India employs agents in India but has no place
of business in India.
(iii) A Company incorporated outside India and registered in Australia has authorized Mr. X
in India to source customers and subsequently to enter into contracts with them on
behalf of the Company.
(iv) A Company incorporated outside India and is registered in Mauritius. All the business
models, financial strategy, important decisions are carried and taken out at the Board
Meetings held only in India. (JAN 2021 Exam NEW)

Answer :

(i) As per the facts, a company is registered in Moscow, Russia and has installed its main
server in Moscow for maintaining office automation software by Cloud Computing for its
client in India. Thus, it can be said that this company has a place of business in India
through electronic mode and is conducting business activity in India. Hence, the above
company is a foreign company by taking into account the provisions of Section 2(42) of
the Companies Act, 2013 read with the Companies (Registration of Foreign Companies)
Rules, 2014.

(ii) In this case, a company is incorporated outside India and employs agents in India but
does not have a place of business in India. As per section 2(42) of the Companies Act,
2013, foreign company means any company or body corporate incorporated outside
India which has a place of business in India whether by itself or through an agent,
physically or through electronic mode. Since, the company though employed agent in
India but have no place of business in India, so it cannot be termed as foreign company.

(iii) In the given situation, a company is registered in Australia. It has authorised Mr. X in
India to source customers and enter into contract on behalf of the company. Thus, it can
be said that this company has both place of business in India through an agent,
physically or through electronic mode; and is conducting business activity in India.
Hence, this company is a foreign company as per the Companies Act, 2013.

(iv) In the given situation, a company is registered in Mauritius. However, it does not have a
place of business in India whether by itself or through an agent, physically or through
electronic mode; and does not conduct any business activity in India in any other
manner. Mere holding of board meetings and executing business models, financial
strategies and important decisions in India cannot be termed as conducting business
activity in India. Hence, the above company is not a foreign company as per the
Companies Act, 2013.

Question 2

Phil Heath Systems Incorporated (PHSI), is a foreign Company registered in Australia and has
established a place of business in India. The financial statements pertaining to the Indian
business operations for the year ended 31st March, 2020 were prepared by the Company.
Referring to the provisions of the Companies Act, 2013, advise the Company on the following
matters:

(i) Whether the accounts of the Company pertaining to Indian business operations shall

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be audited ? If yes, by whom ?

(ii) What is the due date for filing the audited financial statements with the Registrar of
Companies (RoC) ?
(iii) What is the effect of the contracts entered by an Indian Company with PHSI in case
PHSI has not filed financial statements with the RoC?
(iv) In which e-forrn and within what period, the annual return of the Indian operations of
the foreign company shall be filed with the Registrar of Companies? (JAN 2021 Exam
NEW)

Answer :

Phil Health Systems Incorporated (PHSI), a foreign company, is registered outside India
and has a place of business in India. As it has prepared financial statements pertaining to
the Indian business operations, it reflects conducts of business activity in India. Therefore,
provisions related to companies incorporated outside India shall be applicable to it.
Following are the answer in line with said nature of the company:

(i) According to the Companies (Registration of Foreign Companies) Rules, 2014, PHSI shall
get its accounts, pertaining to the Indian business operations, audited by a practicing
Chartered Accountant in India or a Firm or Limited Liability Partnership of practicing
Chartered Accountants.

(ii) The audited financial statements of Indian business operations of PHSI shall be delivered to
the Registrar within a period of six months of the close of the financial year of the foreign
company to which the documents relate i.e., latest by 30 th September 2020.
Provided that the Registrar may, for any special reason, and on application made in writing
by the foreign company concerned, extend the said period by a period not exceeding three
months i.e. latest by 31st December 2020.

(iii) According to Section 393 of the Companies Act, 2013, any failure by a company to comply
with the provisions of Chapter XXII of the Companies Act, 2013 (chapter XXII deals with
‘Companies incorporated Outside India’), shall not affect the validity of any contract,
dealing or transaction entered into by the company or its liability to be sued in respect
thereof.

In the instant case, non-filing of financial statements by PHSI shall not invalidate the
contracts entered by Indian companies with PHSI.

However, PHSI shall not be entitled to bring in any suit, claim any set off, make any counter
claim or institute any legal proceeding in respect of any such contract until the company
has filed the financial statements.

(iv) According to the Companies (Registration of Foreign Companies) Rules, 2014, every foreign
company shall prepare and file an annual return in Form FC-4 along with prescribed fees,
within a period of 60 days from the last day of its financial year
i.e. by 30th May 2020, to the Registrar containing the particulars as they stood on the close
of the financial year.

Question 3

(i) Puresoft Solutions Private Limited is incorporated in Singapore and more than 60% of the
paid up share capital is held by two citizens of India who are Software Engineers. The company

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wants to open a branch office in Kolkata.

Determine the status of Puresoft Solutions as per the provisions of the Companies Act, 2013.

(ii) North Sea Shipping Limited is incorporated in South Korea. It has established an office in
Paradeep. Mr. Jonathan is the Branch in charge and the Compliance Officer in India. He has
received a communication from the Chief Executive Officer in South Korea to explore the
possibilities of issuing Indian Depository Receipts to the extent of ₹ 1,000 million in financial
year 2020-21. He has approached you being financial consultant for your advice.

Advise him as per the provisions of the Companies Act, 2013. (NOV 2020 EXAM OLD)

Answer :

(i) Foreign Company [Section 2(42)]:

“Foreign Company” means any company or body corporate incorporated outside
India which-

(a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) conducts any business activity in India in any other manner.

Requirement of holding of paid up share capital [Section 379 (2) of the Companies Act,
2013]:
Where not less than 50% of the paid-up share capital, whether equity or preference or partly
equity and partly preference, of a foreign company is held by:

(i) one or more citizens of India; or

(ii) by one or more companies or bodies corporate incorporated in India; or
(iii) by one or more citizens of India and one or more companies or bodies corporate
incorporated in India,

whether singly or in the aggregate, such company shall comply with the provisions of Chapter
XXII and such other provisions of this Act as may be prescribed with regard to the business
carried on by it in India as if it were a company incorporated in India. [Section 379(2)]
In the instant case, Puresoft Solutions Private Limited is a Foreign Company and has to comply
with the provisions of Chapter XXII i.e. legal provisions for companies incorporated outside
India.

(ii) According to Section 390 of the Companies Act, 2013, and according to the Companies
(Registration of Foreign Companies) Rules, 2014, Indian Depository Receipts (IDR) means
any instrument in the form of a depository receipt created by a Domestic Depository in
India and authorized by a Company incorporated outside India making an issue of such
depository receipts.

According to Section 390, notwithstanding anything contained in any other law for the time
being in force, the Central Government may make rules applicable for—
(i) the offer of Indian Depository Receipts (IDR);
(ii) the requirement of disclosures in prospectus or letter of offer issued in connection
with IDR;
(iii) the manner in which the IDR shall be dealt with in a depository mode and by custodian
and underwriters; and
(iv) the manner of sale, transfer or transmission of IDR,

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by a Company incorporated or to be incorporated outside India, whether the company has or

has not established, or will or will not establish, any place of business in India.

According to the Companies (Registration of Foreign Companies) Rules, 2014, no Company

incorporated or to be incorporated outside India, whether the company has or has not
established, or may or may not establish, any place of business in India shall make an issue of
Indian Depository Receipts (IDRs) unless it complies with the conditions mentioned under this
Rule, in addition to the Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009 and any directions issued by the Reserve Bank of India.

Question 4

Kids Toys Limited, a company incorporated in Japan, has established its branch office in
Mumbai for business to be conducted in India. The structure of paid-up share capital of Kids
Toys Limited as at 31.03.2020 is as below:

Preference share capital held by Jiyalal, an Indian citizen: 10%

Equity share capital held by Ramlal, an Indian Citizen: 20%
Equity share capital held by Smart Toys Limited, 20%
Indian National company:

You are being a Chartered Accountant is requested to explain with reference to the provisions of
the Companies Act, 2013 whether Kids Toys Limited shall be deemed to be a foreign Company
or an Indian Company for the business carried on by it in India and for such business will it be
required to comply with the relevant provisions of the Companies Act, 2013 as if it is an Indian
Company. (JAN 2021 EXAM OLD)

Answer :

Whether Kids Toys Limited is deemed to be a Foreign Company?

According to Section 2(42) of the Companies Act, 2013, a “foreign company” means any
company or a body corporate incorporated outside India which has a place of business in India
whether by itself or through an agent physically or through electronic mode and conducts any
business activity in India in any other manner.

Accordingly, Kids Toys Limited, a Japanese Company has established a place of business in India
(branch office in Mumbai) and also carries on the business in India. Hence, this Company shall
be deemed to be a Foreign Company.

Whether the Company requires to comply with the provisions of the Companies Act, 2013
as if it is an Indian Company?

LEGAL POSITION:

As per Section 379 (2) of the Companies Act, 2013 (the Act) where not less than 50% of the
paid-up share capital, whether equity or preference or partly equity and partly preference, of a
foreign company is held by:
(i) one or more citizens of India; or
(ii) by one or more companies or bodies corporate incorporated in India; or
(iii) by one or more citizens of India and one or more companies or bodies corporate
incorporated in India,

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(iv) whether singly or in the aggregate, such Company shall comply with the
provisions of Chapter XXII (dealing with the legal provisions for ‘Companies
incorporated outside India’) and such other provisions of this Act as may be
prescribed with regard to the business carried on by it in India as if it were a
Company incorporated in India.

Accordingly, preference share capital held by Jiyalal and equity share capital held by Ramlal,
both being Indian citizens, besides equity share capital held by Smart Toys Limited, an Indian
Company, in Kids Toys Limited (Company incorporated in Japan) are 10%, 20% and 20%
respectively. In aggregate, Jiyalal, Ramlal and Smart Toys Limited are holding 50% of the paid-
up share capital of a foreign Company.

CONCLUSION
Thus, Kids Toys Limited, shall comply with the provisions of Chapter XXII and such other
provisions of this Act as may be prescribed with regard to the business carried on by it in India
as if it were a company incorporated in India.

Question 5
Delegare Limited, incorporated in Singapore desires to establish a place of business at Mumbai.
You being a practicing Chartered Accountant have been appointed by the company as a liaison
officer, for compliance of legal formalities on behalf of the company. Examining the provisions of
the Companies Act, 2013, state the documents you are required to furnish on behalf of the
company, on the establishment of a place of business at Mumbai. (MARCH 2021 MTP)

Answer :

Under section 380(1) of the Companies Act, 2013 every foreign company shall, within 30
days of the establishment of place of business in India, deliver to the Registrar for
registration the following documents:

(1) a certified copy of the charter, statutes or memorandum and articles , of the
company or other instrument constituting or defining the constitution of the
company. If the instruments are not in the English language, a certified
translation thereof in the English language;
(2) the full address of the registered or principal office of the company;
(3) a list of the directors and secretary of the company containing such
particulars as prescribed under the Companies (Registration of Foreign
Companies) Rules, 2014,
(4) the name and address or the names and addresses of one or more
persons resident in India authorised to accept on behalf of the company
service of process and any notices or other documents required to be served
on the company;
(5) the full address of the office of the company in India which is deemed to be
its principal place of business in India;
(6) particulars of opening and closing of a place of business in India on earlier
occasion or occasions;
(7) declaration that none of the directors of the company or the authorised
representative in India has ever been convicted or debarred from formation of
companies and management in India or abroad; and
(8) any other information as may be prescribed.

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According to the Companies (Registration of Foreign Companies) Rules, 2014, any

document which any foreign company is required to deliver to the Registrar shall be
delivered to the Registrar having jurisdiction over New Delhi.

Question 6

Z Limited, a Foreign Company, incorporated in Japan has a branch office in Hyderabad in India.
Mr. Bhartiya, the Indian Citizen holds preference shares of Z Limited which comprises 10% of
the paid-up share capital of the company. Deshi Limited, a company incorporated in India holds
equity shares of Z Limited which comprises 45% of the paid-up share capital of the company.
During the financial year 2019-20, there has been alteration in the particulars of the documents
mentioned under section 380 of the Act and the company has failed to submit the alterations to
the Registrar within 30 days. Analyse in the light of the applicable laws the consequences of
failure on the validity of any contracts entered into by the foreign company? (APRIL 2021
MTP)

Answer :

As per Section 379 of the Companies Act, 2013 where not less than fifty per cent of the paid-up
share capital, whether equity or preference or partly equity and partly preference, of a foreign
company is held by one or more citizens of India or by one or more companies or bodies
corporate incorporated in India, or by one or more citizens of India and one or more companies
or bodies corporate incorporated in India, whether singly or in the aggregate, such company
shall comply with the provisions of this Chapter and such other provisions of this Act as may be
prescribed with regard to the business carried on by it in India as if it were a company
incorporated in India.

As per section 393 of the Act, any failure by a company to comply with the provisions of Chapter
XXII of the Act shall not affect the validity of any contract, dealing or transaction entered into by
the company or its liability to be sued in respect thereof, but the company shall not be entitled
to bring any suit, claim any set-off, make any counter-claim or institute any legal proceeding in
respect of any such contract, dealing or transaction, until the company has complied with the
provisions of this Act applicable to it.

Chapter XXII of the Act comprises of Section 379 to 393.

In the above question, the provisions of the Companies Act, 2013 are applicable on Z Limited
because an aggregate of 55% of the paid-up share capital of the company are held by an Indian
citizen and Indian company. However, there has been non-compliance of section 380 of the Act
by Z Limited.

Therefore, Provisions of the Companies Act, 2013 apply on the company. However, there has
been violation of section 380 of the Act, so as per section 393 of the Act, the validity of any
contract entered into by the foreign company shall not be affected, the company may be sued in
respect of such contract but shall not be entitled to bring any suit in respect of such contract
until it has
complied with the relevant provisions related to the companies incorporated outside India
under the Companies Act, 2013.

8.MISCELLANEOUS PROVISIONS

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Question 1**

Digital Era Limited (DEL), is a start-up Company, incorporated in the year 2017 under the
provisions of the Companies Act, 2013. The main object of the Company is to manufacture and
market two wheelers adopting a new technology of using hydrogen as a fuel to run the vehicle
in lieu of petrol. Despite several experiments, the technology of hydrogen fuelled engine for
the two wheelers was not successful. As per the requirements of the Companies Act, 2013, no
business was commenced and no financial statements were filed with the Registrar of
Companies (RoC). Eventually the Board of Directors of the Company resolved to apply to the
RoC for getting the name of the Company struck-off from the Register of Companies.

The RoC, after satisfying that all the compliances specified under Section 248 of the Companies
Act, 2013 have been met by the Company and after publishing a notice for general public and
also in the official gazette, the name of the Company was struck-off from the Register of
Companies w.e.f 7th January,2020.

Earlier in the year 2018, Mr. Amrit, had supplied certain spares to the Company for ₹ 2,50,000
and despite his several requests, the amount was not settled by the Company. In September
2020, he came to know from his close aides that DEL has some assets available with them.
Thereafter, with a view to recover his dues from the Company, he approached you seeking
your professional guidance. As a competent professional, advise Mr. Amrit, the following, in
the light of the provisions of the Companies Act, 2013:

(i) Whether the assets of the company shall be made available for the discharge of
its liabilities even after the date of the order removing the name of the company
from the Register of Companies?
(ii) Can an aggrieved person file an appeal against the order of the RoC? If so, state
the legal provisions in this regard.
(iii) When and under what circumstances can the RoC restore the name of the
company?
(iv) State the circumstances and the time frame within which the Tribunal can order
the name of the company to be restored to the Register of Companies?
(v) Can the name of a company registered under Section 8 of the Companies Act,
2013 be removed from the Register of Companies? (NOV 2020 EXAM NEW)

Answer:

(i) Realisation of assets: According to section 248(6) of the Companies Act, 2013, the
Registrar, before passing an order under sub-section (5), shall satisfy himself that sufficient
provision has been made for the realisation of all amount due to the company and for the
payment or discharge of its liabilities and obligations by the company within a reasonable time
and, if necessary, obtain necessary undertakings from the managing director, director or other
persons in charge of the management of the company.

Provided that notwithstanding the undertakings referred to in this sub-section, the assets of
the company shall be made available for the payment or discharge of all its liabilities and
obligations even after the date of the order removing the name of the company from the
register of companies.

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Hence, the assets of the company (DEL) shall be made available for the discharge of its
liabilities even after the date of order of removing the name of the company from the register
of companies.

(ii) Appeal: According to section 252(1) of the Companies Act, 2013, any person aggrieved by
an order of the Registrar, notifying a company as dissolved under section 248, may file an
appeal to the Tribunal within a period of three years from the date of the order of the
Registrar and if the Tribunal is of the opinion that the removal of the name of the
company from the register of companies is not justified in view of the absence of any of
the grounds on which the order was passed by the Registrar, it may order restoration of
the name of the company in the register of companies.
Before passing any order under this section, the Tribunal shall give a reasonable
opportunity of making representations and of being heard to the Registrar, the company
and all the persons concerned.

(iii) Restoration of name of company: If the Registrar is satisfied, that the name of the
company has been struck off from the register of companies either inadvertently or
on the basis of incorrect information furnished by the company or its directors, which
requires restoration in the register of companies, he may within a period of three years
from the date of passing of the order dissolving the company under section 248, file an
application before the Tribunal seeking restoration of name of such company. [second
proviso to section 252(1)]

(iv) If a Company, or any member or creditor or workman thereof feels aggrieved by the
Company having its name struck off from the Register of Companies, the Tribunal on an
application made by the Company, Member, Creditor or Workmen before the expiry of
twenty years from the publication in the Official Gazette of the notice under sub section
(5) of Section 248 may, if satisfied that the Company was, at the time of its name being
struck off, carrying on business or in operation or otherwise it is just that the name of the
Company be restored to the Register of Companies, order the name of the Company to be
restored to the Register of Companies, and the tribunal may, by the order, give such other
directions and make such provisions as deemed just for placing the Company and all
other persons in the same position or nearly as may be as if the name of the Company had
not been struck off from the Register of Companies.

(v) Exemption to section 8 companies: A company registered under section 8 of the

Companies Act, 2013 cannot be removed from the register of companies. [Section 248(3)]

Question 2

After discontinuing business operations for two financial years, the directors and other
persons in charge of the management of CDR Limited with the intention of evading some
liabilities of the company, made an application to the Registrar for removal of its name. The
Registrar scrutinised the documents and allowed the name of the company to be removed
from the Registrar of Companies. A group of persons, who had supplied goods to the company
and were not paid off, incurred loss as a result of removal of the name of the company and
were aggrieved of the above action. They approached you for your advice whether they will
succeed to claim their dues from anybody and whether the persons in charge of the
management of the company shall be considered as guilty by any means. Referring to the
provisions of the Companies Act, 2013, advise them.
(JAN 2021 EXAM NEW)

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Answer :

Section 251 of the Companies Act, 2013 deals with the fraudulent application for Removal
of Name. Where it is found that an application by a company under sub-section

(2) of section 248 has been made with the object of evading the liabilities of the company or
with the intention to deceive the creditors or to defraud any other persons, the persons in
charge of the management of the company shall, notwithstanding that the company has been
notified as dissolved—

(a) be jointly and severally liable to any person or persons who had incurred loss or
damage as a result of the company being notified as dissolved; and
(b) be punishable for fraud in the manner as provided in section 447.

Here, in the given case, directors and other persons in charge of the management of the CDR
Limited, made an application to the Registrar for removal of its name from Register of
Companies on basis of not carrying on any business or operation for a period of two
immediately preceding financial years. According to section 248(2), a company may, after
extinguishing all its liabilities, by a special resolution or consent of seventy-five per cent.
members in terms of paid-up share capital, file an application to the registrar. From the given
facts, CDR Limited without extinguishing its liabilities against a group of creditors, who were
not paid off and incurred loss, applied for removal of name. In light of stated provision, it can
be concluded that CDR Limited filed an application for removal of names with the object of
evading the liabilities of the company and with the intention to deceive the creditors.
Accordingly, creditors will succeed to claim their dues from the directors and other
persons who are in charge of the management of the CDR Limited.

Question 3

Prudential Life Insurance Limited incorporated on 01.04.2019 could not commence its
business till 01.04.02020. The Company filed an application to the Registrar of Companies
with a special resolution to remove its name from the register of the companies maintained by
the Registrar and give effect to the dissolution of the Company. Rejecting the application on
the ground that the application has not been supported by approval of the regulatory
authority the Registrar asked the Company to re -submit it after marking necessary
compliances. Examine the validity of rejection of the application of Prudential Life Insurance
Limited by explaining the procedure to be followed for removal of the name of the Company
and get it dissolved under the provisions of the Companies Act 2013 (the Act) without taking a
recourse to the regular winding-up procedure provided under chapter XX of the Act. (JAN
2021 EXAM OLD) , APRIL 2021 MTP Similar Ques.

Answer :

VALIDITY OF REJECTION OF APPLICATION

Approval of the Regulatory Body in case a Company is regulated under a Special Act:

Prudential Life Insurance Ltd. is a company regulated under a Special Act, the Insurance Act,
1938. It shall obtain approval of the regulatory body, “Insurance Regulatory and Development
Authority” (IRDA) constituted or established under that Act and such approval shall be
enclosed with the application.

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Here in the given case, no approval of the regulatory body i.e ., IRDA was obtained, and
therefore, the rejection of application of Prudential Life Insurance Limited, is valid.

PROCEDURE FOR REMOVAL OF NAME OF THE COMPANY

As per Section 248(2) of the Companies Act, 2013, a Company (Prudential Life Insurance Ltd.)
may, after extinguishing all its liabilities, by a special resolution, or consent of seventy-five per
cent of members in terms of paid-up share capital, file an application to the Registrar for
removing the name of the Company from the Register of Companies on the ground that the
said Company has failed to commence its business within one year of its incorporation (i.e.
from 1/4/2019 till 1/4/2020) and the Registrar shall, on receipt of such application, cause a
public notice to be issued.

A notice issued shall be published in the prescribed manner and also in the Official Gazette for
the information of the general public.

At the expiry of the time mentioned in the notice, the Registrar may, unless contrary is shown
by the Company, strike off its name from the Register of Companies, and shall publish notice
thereof in the Official Gazette, and on the publication in the Official Gazette of this notice, the
Company shall stand dissolved.

Prudential Life Insurance Limited with approval of the IRDA, shall re-submit the application in
compliance with stated procedure and can get its name struck off from Register of Companies
and get it dissolved without taking recourse to the regular winding up procedure under the
Companies Act, 2013.

Question 4

M & N Project Engineering Services Private Limited had applied to the Registrar of Companies
to be considered as Dormant company as the project got delayed due to the non-clearance from
the National Green Tribunal. The RoC has granted the certificate to allow the status of dormant
company in May 2018. Now the company is granted clearance from National Green Tribunal.
The Board of the company wants to revive the status as active company. They seek your advice
on approval by the Registrar for revival of status as active company. (NOV 2020 EXAM OLD)

Answer :

Application for seeking status of an Active Company:

According to the Rule 8 of the Companies (Miscellaneous) Rules, 2014,

(a) An application for obtaining the status of an active company shall be made in Form MSC-4
along with fees as provided in the Companies (Registration Offices and Fees) Rules, 2014
and shall be accompanied by a return in Form MSC-3 in respect of the financial year in
which the application for obtaining the status of an active company is being filed:

However, the Registrar shall, initiate the process of striking off the name of the company if
the Company remains as a dormant company for a period of consecutive 5 years.

(b) The Registrar shall, after considering the application filed for obtaining the status of an
active company, issue a certificate in Form MSC-5 allowing the status of an active company
to the applicant.

(c) Where a dormant company does or omits to do any act mentioned in the grounds of

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application in Form MSC-1 submitted to Registrar for obtaining the status of dormant
company, affecting its status of dormant company, the directors shall within 7 days from
such event, file an application for obtaining the status of an active company.

(d) Where the Registrar has reasonable cause to believe that any Company registered as
‘dormant company’ under his jurisdiction has been functioning in any manner, directly or
indirectly, he may initiate the proceedings for enquiry under Section 206 of the Act and if,
after giving a reasonable opportunity of being heard to the Company in this regard, it is
found that the Company has actually been functioning, the Registrar may remove the name
of such Company from register of dormant companies and treat it as an active Company.

M & N Project Engineering Services Private Limited can follow the above procedure
for revival of status as active company.

9. NATIONAL COMPANY LAW TRIBUNAL AND APPELLATE TRIBUNAL

Question 1

In the capacity of an Adjudicating officer, the, Registrar passed an order against IDLE Limited, a
listed company, for not following some provisions of the Companies Act, 2013. Being aggrieved
of the order of the Adjudicating officer, IDLE Limited proceeded to the Tribunal. The Tribunal
after giving both the parties an opportunity of being heard upheld the order of the Adjudicating
authority in a modified manner. After lapse of a period of one year and five days, the Tribunal
with a view to rectify a mistake apparent from the record, amended the order passed by him
earlier, when the mistake was brought to his notice by the Adjudicating officer. IDLE Limited
approached you and contended that the stipulated period of 3 months within which the order
should be passed by the Tribunal is already over, even the delay period has exceeded the
maximum allowed condonation period of 90 days and therefore the order passed by the
Tribunal cannot be revised. Referring to and analyzing the relevant provisions of the Companies
Act, 2013, advise IDLE Limited whether its contention is tenable. Will your answer differ if IDLE
Limited has already preferred an appeal against the original order of the Tribunal before the
amendment was made by the Tribunal ?
(JAN 2021 EXAM NEW)

Answer :

As per the section 420 of the Companies Act, 2013, the Tribunal may, after giving the parties
to any proceeding before it, a reasonable opportunity of being heard, pass such orders thereon
as it thinks fit. The Tribunal may, at any time within 2 years from the date of the order, with
a view to rectifying any mistake apparent from the record, amend any order passed by it, and
shall make such amendment, if the mistake is brought to its notice by the parties. Provided that
no such amendment shall be made in respect of any order against which an appeal has been
preferred under this Act.

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In the given case, though mistake was bought to the notice of the Tribunal by Registrar, but the
time period for rectifying any mistake apparent from the record was within the prescribed
period of 2 years from the date of order, so contention of IDLE Ltd. stating that the order passed
by the Tribunal cannot be revised, is not correct.

Where if, IDLE Limited has already preferred an appeal against the original order of the
Tribunal before the amendment was made by the Tribunal, no such amendment shall be
made in respect of such order.

Question 2

Royal Productions Limited filed an application before the National Company Law Tribunal and
the application was dismissed for want of evidence and documents by the Tribunal on 2.2.2020.
The order was received by the company on 4.2.2020. Aggrieved by the order, the company
wants to file an appeal to NCLAT. It seeks the procedure to file the appeal and the time limit for
filing the appeal under the following circumstances:

(i) The Tribunal has passed the order without giving a reasonable opportunity of being heard
and the impugned order is passed ex-parte.
(ii) The order has been passed with the consent of both the parties before the Tribunal.
(NOV 2020 EXAM OLD)

Answer :

(i) Appeal to Appellate Tribunal:

According to Section 421(1) of the Companies Act, 2013, any person aggrieved by an order of
the Tribunal may prefer an appeal to the Appellate Tribunal (AT).

Period for filing of Appeal: As per Section 421(2), every appeal under sub-section (1) shall be
filed within a period of 45 days from the date on which a copy of the order of the Tribunal is
made available to the person aggrieved and shall be in such form, and accompanied by such
fees, as may be prescribed.

Provided that the Appellate Tribunal may entertain an appeal after the expiry of the said period of
forty-five days from the date aforesaid, but within a further period not exceeding 45, if it is satisfied
that the appellant was prevented by sufficient cause from filing the appeal within that period.

In the instant case, Royal Productions Limited can file an appeal within 45 days from
4.2.2020 which can further be extended by another 45 days.

(ii) When order made by consent of parties: No appeal shall lie to the Appellate Tribunal from
an order made by the Tribunal with the consent of parties. [Section 421(2)]

In the instant case, since the order has been passed with the consent of both the parties
before the Tribunal, no appeal shall lie to the AT.

Question 3

ABC Limited aggrieved by the order of Appellate Tribunal on the question of inadmissibility of
the evidences placed before it and ignoring the doctrine of res judicata on certain matter
intends to file an appeal before the Supreme Court. The order of Appellate Tribunal dated

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15.12.2019 was delivered to ABC Limited on 01.01.2020. Examine under the provisions of the
Companies Act, 2013 whether ABC Limited is entitled to prefer an appeal and if yes what is the
time limit to file an appeal before the Supreme Court against the order of the Appellate Tribunal.
(JAN 2021 EXAM OLD)

Answer :

PROVISIONS TO PREFER AN APPEAL

According to Section 423 of the Companies Act, 2013, any person aggrieved by any order of the
Appellate Tribunal may file an appeal to the Supreme Court within 60 days from the date of
receipt of the order of the Appellate Tribunal to him on any question of law arising out of such
order. Provided that, the Supreme Court may, if it is satisfied that the Appellant was prevented
by sufficient cause from filing the appeal within the said period, allow it to be filed within a
further period not exceeding 60 days.

ABC Limited may, therefore, file an appeal not on the question of admissibility of evidences
placed before it, being question of facts, but on the question of ignoring the doctrine of res
judicata, being a question of law.

TIME LIMIT TO FILE AN APPEAL

ABC Limited received the order of Appellate Tribunal on 1.1.2020. In view of the above stated
provision, ABC Limited can file an appeal to the Supreme Court within 60 days i.e. by 1st March,
2020. However, if it is satisfied that the Appellant was prevented by sufficient cause from filing
the appeal within first 60 days, it may file and appeal within a further period of 60 days.

10.WINDING UP
Question 1 (Section 328)

By an order dated 25th June, 2020, NCLT had ordered for winding up of Kamath Trading
Limited. Consequently, Official Liquidator took control for the assets and other records of the
Company. During the winding up proceedings, the Official Liquidator came across a transaction
where some of the properties of the Company was sold to a small Private Company. Mr. Nag,
who was interested in that small Private Company happened to be the brother of Director of
Kamath Trading Limited. The sale of the said properties took place on 20th March 2020 at a
price which was ₹ 58 Lakh less than the market price.

In the light of the facts given above, examine, with reference to relevant provisions of the
Companies Act 2013, what action the Tribunal can take in this regard? (NOV 2020 EXAM NEW)

Answer :

The official liquidator can invoke the provisions contained in Section 328 of the Companies Act,
2013 to recover the sale of assets of the company. According to Section 328 of the Companies
Act, 2013, if the Tribunal is satisfied that there is a preference transfer of property, movable or
immovable, or any delivery of goods, payment, execution made, taken or done by or against a
company within six months before making winding up application, the Tribunal may order as it
may think fit and may declare such transaction invalid and restore the position.

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Since in the present case, the sale of some properties took place on 20th March 2020 and the
company went into liquidation on 25th June 2020 i.e., within 6 months before the winding up of
the company and the sale has resulted in a loss of ₹ 58 lakhs to the company.

The official liquidator will be able to succeed in proving the case under Section 328 by way of
fraudulent preference as the property was sold to a small private company in which the brother
of director of Kamath Trading Limited was interested.

Hence, the transaction made will be regarded as invalid and restore the position of the
Kamath Trading Limited as if no transfer of property has been made.

Question 2

The National Company Law Tribunal (the Tribunal) issued an order for winding up of M/S
Tours & Travels Company Limited appointing Mrs. Y, a practicing Company Secretary as
Company Liquidator selecting her from amongst the insolvency professionals registered under
the Insolvency and Bankruptcy Code, 2016. While the winding up proceedings were in progress
the Mrs. Y was removed from the membership of the Institute of Company Secretaries of India
being found to be guilty on the grounds of professional misconduct. Consequently, the Tribunal
removed her from the office of Company Liquidator. Explaining the grounds on the basis of
which the tribunal may remove the Company Liquidator examine the validity of the order of the
Tribunal removing Mrs. Y from the office of Company Liquidator of M/S Tours & Travels
Company Limited under the Provisions of the Companies Act, 2013. (JAN 2021 Exam OLD)

Answer :

GROUNDS FOR REMOVAL

Removal and Replacement of Liquidator [Section 276(1) of the Companies Act, 2013]

The Tribunal may, on a reasonable cause being shown and for reasons to be recorded in writing,
remove the provisional liquidator or the Company Liquidator, as t he case may be, as liquidator
of the Company on any of the following grounds, namely:—
(a) misconduct;
(b) fraud or misfeasance;
(c) professional incompetence or failure to exercise due care and diligence in
performance of the powers and functions;
(d) inability to act as provisional liquidator or as the case may be, Company
Liquidator;
(e) conflict of interest or lack of independence during the term of his appointment
that would justify removal.

VALIDITY OF REMOVAL

Mrs. Y, practicing Company Secretary, the Company Liquidator has been removed from M/s
Tours & Travels Company Limited. This removal is valid as Mrs. Y has been removed on the
grounds of professional misconduct and ceasing to be a member of the Institute of Company
Secretaries of India shall constitute professional incompetence to act as a Company Liquidator.

Question 3

PQR Limited has purchased machinery from the vendor under hire purchase agreement.
Subsequently, before payment of last installment due on 01.08.2020 the Company went into

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liquidation in the month of July 2020 under the order of the Tribunal. Due to Liquidity problem
PQR Limited defaulted the payment of the last installment due under hire purchase agreement
for the machinery and consequently the Vendor seized the machinery from the custody of PQR
Limited on the next day of the default and sold it to the new buyer without leave of the Tribunal.
Examine the effect of the transaction of seizing and transferring the machinery by the vendor to
the new buyer in the light of the provisions of section 334 and 335 of the Companies Act, 2013
dealing with the winding up of the Company. (JAN 2021 EXAM OLD)

Answer :

According to Section 334 of the Companies Act, 2013, in the case of a winding up by the
Tribunal, any disposition of the property including actionable claims, of the Company and any
transfer of shares in the Company or alteration in the status of its members, made after the
commencement of the winding up shall, unless the Tribunal otherwise orders, be void.

Section 335 provides that, where any Company is being wound up by the Tribunal,—
(a) any attachment, distress or execution put in force, without leave of the Tribunal
against the estate or effects of the company, after the commencement of the
winding up; or
(b) any sale held, without leave of the Tribunal of any of the properties or effects of
the company, after such commencement,
-shall be void.

In the light of the stated provisions, the transaction of seizing and transferring the
machinery by the vendor to the new buyer is void.

Question 4

Insincere Limited on 22nd May, 2020 mortgaged one of the freehold land of the company in the
favor of the bank, from which Mr. Daman, a director of the company had taken housing loan for
his residential purpose. Since Insincere Ltd. had been running in losses and was unable to honor
the liabilities due towards the other creditors. As, the Board of Directors of the company was
aware of the financial crisis faced by the Insincere Ltd. and of creation of a mortgage in order to
give preference to Mr. Daman over other creditors. On 23rd September, 2020 some creditors of
the company filed a petition for the winding up before Tribunal. It passed an order for the
winding up of the company on 5th November, 2020. Discuss on the nature of the transaction of
mortgage created with bank in the given circumstances in the light of the Companies Act, 2013.
(MARCH 2021 MTP )

Answer :

Law Involved :

As per Section 328 of the Companies Act, 2013, where a company has given preference to a
person who is one of the creditors of the company or a surety or guarantor for any of the debts
or other liabilities of the company, and the company does anything or suffers anything done
which has the effect of putting that person into a position which, in the event of the company
going into liquidation, will be better than the position he would have been in if that thing had
not been done prior to six months of making winding up application, the Tribunal, if satisfied
that, such transaction is a fraudulent preference may order as it may think fit for restoring the
position to what it would have been if the company had not given that preference.

If the Tribunal is satisfied that there is a preference in transfer of property, movable or

immovable, or any delivery of goods, payment, and execution made, taken or done by or against

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a company within six months before making winding up application, the Tribunal may order as
it may think fit and may declare such transaction invalid and restore the position.

Explanation of facts:

In the above question, the company had created a legal mortgage on 22nd May, 2020 and the
creditors made a petition for winding up of the company on 23rd September, 2020, so the above
transaction of creation of legal mortgage on the freehold land of the company falls within the
ambit of section 328 of the Act.

Conclusion :

Therefore, creation of mortgage of the freehold land of the company is the transaction covered
under the fraudulent preference since the mortgage is created 6 months preceding the date of
making of winding up petition and therefore, the Tribunal may order as it may think fit and may
declare such transaction of creation of mortgage as invalid and restore the position.

11.Compounding of Offences, Adjudication & Special Court

NO QUESTION
12.Insolvency & Bankruptcy Code 2016
Question 1
X Inc Ltd is a holding company of Y Infrastructure Ltd. Insolvency resolution process was
initiated against the X Inc Ltd on 15th December 2020. In the mean time another financial
creditor initiated corporate insolvency resolution process against Y Infrastructure Ltd. Later X
Inc Ltd filed an appeal contending that resolution process against Y Infrastructure Ltd. should
not continue till corporate insolvency resolution process is decided in the case of X Inc Ltd. on
the basis of initiation of moratorium. Also the Resolution plan of X Inc Ltd. approved by CoC, was
still pending before the Adjudicating authority for its approval. In the light of given situation,
examine whether corporate insolvency resolution process initiated against the X Inc Ltd., can bar
the corporate insolvency resolution process initiated against the Y Infrastructure Ltd.?
Answer :
In the given case, both the X Inc Ltd. and Y Infrastructure Ltd. in the eyes of law are separate
entity. Further section 14 of IBC, 2016 which deals with moratorium, no where prohibits
initiation of corporate insolvency resolution process on the subsidiary company or its holding
company. Further also that a separate CIRP has been initiated against another corporate debtor
by another financial creditor, which is altogether separate and have no connection with the CIRP
initiated against X Inc Ltd. or Y Infrastructure Ltd.
Therefore, in the given case, corporate insolvency resolution process initiated against the
X Inc Ltd, which is a holding company, cannot bar the corporate insolvency resolution
process initiated against the Y Infrastructure Ltd which is its subsidiary or vice versa.

Question 2**
Pursuant to Section 33 of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) a liquidation

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order was passed against Luci Soya Limited (LSL) (Corporate Debtor) by the Adjudicating
Authority (NCLT). Mr. Solanki was appointed as the liquidator by the NCLT. Upon resuming his
mantle, Mr. Solanki started collecting claims from all the creditors within the time frame as
prescribed in the IBC, 2016. While initiating the liquidation process as per provisions of the IBC,
2016, Mr. Solanki proposed to include the equity shares of one of its subsidiary as part of the
liquidation estate in relation to the corporate debtor. Besides this, one of the unsecured
financial creditor demanded that, at the time of distribution of liquidation proceeds, his dues
may be paid before the government dues are paid. Mr. Solanki also observed that pending legal
proceedings against the corporate debtor, 'A' Ltd, an operational creditor, has filed a case with
the Arbitral Tribunal praying for an arbitral award against LSL.
On the basis of the above information and in the light of the Insolvency and Bankruptcy Code,
2016, answer the following:
(i) Whether the proposal of Mr. Solanki to include the equity shares of the subsidiary
Company of LSL as part of liquidation estate is tenable?
(ii) How should Mr. Solanki deal with the demand of the unsecured financial
creditor?
(iii) Whether 'A' Ltd will succeed in its prayer for an arbitral award against LSL?
(NOV 2020 EXAM NEW)
Answer :
(i) Liquidation estate: As per section 36 of the Insolvency and Bankruptcy Code, 2016, for the
purposes of liquidation, the liquidator shall form an estate of the assets, which will be called the
liquidation estate in relation to the corporate debtor.
Liquidation estate shall comprise all liquidation estate assets which shall include any assets
over which the corporate debtor has ownership rights, including shares held in any subsidiary
of the corporate debtor.
Hence, the proposal of Mr. Solanki to include the equity shares of subsidiary company of LSL as
part of liquidation estate is tenable.

(ii) According to section 53 of the IBC, 2016, out of proceeds from the sale of the liquidation
assets, financial debts owed to unsecured creditors shall be distri buted in priority over the
amount due to the Central Government and the State Government. [clauses (d) and (e)]
Hence, Mr. Solanki has to fulfill the demand of unsecured financial creditor, at the time of
distribution of liquidation proceeds, to pay his dues before the Government dues are paid.

(iii) Section 33(5) of the Code provides that when a liquidation order has been passed, no suit
or legal proceeding shall be instituted by or against the corporate debtor.
The institution of suits or continuation of any pending suits or proceedings against the
corporate debtor including execution of any judgment, decree or order in any court of law,
tribunal, arbitration panel or other authority.
Hence, Mr. A will not succeed in its prayer for an arbitral award against LSL.

Question 3** (IMP based on amendment)

Abhi Limited entered into an agreement with Atulya Gas Limited for purchase of natural gas,
which is not specified as an essential supply. On failure of Abhi Limited to make payments,
Atulya Gas Limited issued notice to Abhi Limited that further supply of gas would be stopped if
payments are not made immediately. On further non payment, Atulya Gas Limited filed a petition

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before NCLT for initiating Corporate Insolvency Resolution process against Abhi Limited. On
15th March, 2020 the petition was admitted, on 30th April, 2020, Atulya Gas Limited
disconnected gas supply to Abhi Limited for non-payment. As a result of disconnection of gas
supply, operations of Abhi Limited came to a halt. The Resolution professional filed a petition to
NCLT seeking Atulya Gas Limited to resume the supply of natural gas, as natural gas was an
important material for production of electricity by Abhi Limited.
Referring to the provisions of Insolvency and Bankruptcy Code, 2016, answer the following:
(i) When the moratorium period will expire in this case?
(ii) Whether Resolution Professional will be successful in his petition filed with NCLT?
(NOV 2020 EXAM NEW)
Answer :

(i) According to section 14 of the IBC, with the admission of an insolvency application and
commencement of Corporate Insolvency Resolution process, the Adjudicating authority will
declare moratorium period during which no action can be taken against the company or the
assets of the company to keep the Company as a going concern.
A calm period for 180 days is declared, during which all suits and legal proceedings etc. against
the Corporate Debtor are held in abeyance to give time to the entity to resolve its status. It is
called the Moratorium Period.
In the instant case, Atulya Gas Ltd. filed a petition before NCLT for initiating Corporate
Insolvency Resolution process against Abhi Ltd. on 15thMarch, 2020. Hence, Moratorium period
will expire within 180 days i.e. by 11th September 2020.

(ii) Section 14 also provides some exemptions under Moratorium according to which the supply
of essential goods or services to the corporate debtor as may be specified shall not be terminated
or suspended or interrupted during moratorium period.
Hence, since as per the agreement between Abhi Limited and Atyulya Gas Limited it’s specified
that natural gas is not an essential supply for production of electricity. Therefore, resolution
professional will not be successful in his petition filed with NCLT to resume the supply of Natural
Gas disconnected by Atulya Gas Ltd.

Question 4
As at 31st March, 2020, XYZ Limited had the following debts:

Creditors Nature of Debt Amount (INR in

Name Lakhs)
A Financial Debt 200
B Financial Debt 250
C Financial Debt (Related Party) - Not Regulated by the Financial 150
Sector Regulator.
D Operational Debt 150
E Operational Debt 250
Total 1000

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Due to impact of heavy losses and liquidity crunch, XYZ Limited could not pay the above debts.
Since the debts were overdue for a long time, creditor A filed an application with the
Adjudicating Authority (NCLT) to initiate a Corporate Insolvency Resolution Process against
XYZ Limited and the application was accepted. Stating the provisions of the Insolvency and
Bankruptcy Code, 2016 answer the following with reference to the above financial data:
(i) Who will all form part of the Committee of Creditors ('CoC') from the above list of
Creditors?
(ii) Whether the above Operational Creditors have a right to vote in CoC Meeting?
(iii) What is the compulsory agenda to be discussed in the first meeting of CoC ?
(iv) What shall be the quorum of the CoC meeting if it is conducted through video conferencing
?
(JAN 2021 EXAM NEW)
Answer :
(i) As per section 21 of the Insolvency and Bankruptcy Code, 2016, the Committee of
creditors shall comprise of all financial creditors of a corporate debtor. The Resolution
Professional shall identify the financial creditors and constitutes a creditors committee.
A related party of the corporate debtor cannot form part of the committee of creditors.
In the given case, A & B will form CoC.
(ii) The directors, partners and operational creditor or representative of operational
creditors do not have right to vote in the meeting of Committee of Creditors, however,
they may attend the meetings of Committee of Creditors. D & E, operational creditors
will not have a right to vote in CoC meeting.
(iii) As per section 22 of the Insolvency and Bankruptcy Code, 2016, Committee of Creditors
in its first Meeting by majority (not less than 66% of voting shares) appoint Interim
Resolution Professional or any other Insolvency Professional to act as Resolution
Professional.
(iv) Section 21 of the Insolvency and Bankruptcy Code, 2016 provides of quorum for the
meeting of committee of creditors. A meeting of committee of creditors shall quorate if
members of the committee of creditors representing at least thirty three percent of the
voting rights are present either in person or by video/audio means.

Question 5
Omega Limited is undergoing a Corporate Insolvency Resolution Process under the Insolvency
and Bankruptcy Code, 2016 (lBC Code, 2016). Mr. Ravi was appointed as the Resolution
Professional. On perusal of the books of accounts of Omega Limited, Mr. Ravi noted a few
undervalued transactions had taken place during a period of six months preceding the
insolvency commencement date. However, despite having sufficient information, he did not
report such transactions to the Adjudicating Authority. Now, the members of Corporate Debtors
propose to make an application to the Adjudicating Authority to report the undervalued
transactions. Referring to the provisions of IBC Code, 2016, answer the following :-
(i) Whether the members of Corporate Debtors have a legal right to do so?
(ii) What orders the Adjudicating Authority can pass In such a situation?
(JAN 2021 EXAM NEW)
Answer :
As per section 47 of the Insolvency and Bankruptcy Code, 2016 where an undervalued
transaction has taken place with any person within the period of one year preceding the

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insolvency commencement date under section 46 of the Code, and the liquidator or the
resolution professional has not reported it to the Adjudicating Authority, a creditor, member or
a partner of a corporate debtor, may make an application to the Adjudicating Authority to
declare such transactions void and reverse their effect.
(i) Yes, in terms of above stated provision, members of corporate debtors have a legal right to
file an application to the Adjudicating Authority to report the undervalued transactions.
(ii) The Adjudicating Authority, after examination of the application is satisfied that—
(a) undervalued transactions had occurred; and
(b) liquidator or the resolution professional, after having sufficient information or
opportunity to avail information of such transactions did not report such transaction
to the Adjudicating Authority.
Adjudicating Authority shall pass an order—
(a) restoring the position as it existed before such transactions and reversing the effects.
(b) requiring the Board to initiate disciplinary proceedings against the liquidator or the
resolution professional as the case may be.

Question 6
NYM Garments Limited was incorporated under the Companies Act, 1956. Now, the company is
under the Insolvency proceedings and the application is pending before the Adjudicating
Authority. AVR Fabrics Limited is the supplier to NYM Garments Limited and a sum of ₹
10,00,000 is outstanding as on 31st January, 2020. A notice was issued by the advocate of AVR
Fabrics Limited to NYM Garments on 1st February, 2020 to make the payments. The notice was
delivered at the registered office of NYM Garments Limited on 4th February, 2020. AVR Fabrics
Limited has not received any payment or reply from the corporate debtor, NYM Garments
Limited till 13th February, 2020. The Corporate Creditor, AVR Fabrics Limited, seeks your advice
regarding the admission of application by NCLT on the following issues:
(i) The procedure for filing the application and the documents to be submitted to the
Tribunal.
(ii) If the Corporate Debtor, NYM Garments Limited, disputed the amount of claim by
a reply on 25th February, 2020, stating the amount outstanding was ₹ 8,00,000
only and not ₹ 10,00,000 as claimed by AVR Fabrics Limited.
(iii) If the Corporate Debtor, NYM Garments Limited, has paid an amount of ₹ 7,00,000
in full settlement of the outstanding due. (NOV 2020 EXAM OLD)

Answer :
(i) Procedure for filing the application and documents to be submitted to the Tribunal:
As per Sections 8 & 9 of the Insolvency and Bankruptcy Code, 2016, an Operational Creditor
shall on the occurrence of default i.e. on the date the amount became due (on 31st January,
2020), shall send a demand notice and a copy of invoice to the Corporate Debtor. The Corporate
Debtor shall within a period of ten days of receipt of demand notice (i.e. on 4th February, 2020)
or copy of invoice, intimate to the Operational Creditor about the existence of a dispute, if there
is any and record of pendency of any suit or arbitration proceedings.
After the expiry of ten days (i.e., latest by 14th February), if the Operational Creditor does not
receive his payment or the confirmation of a dispute that existed even before the demand notice
was sent, then, as per the law, AVR Fabrics Limited (Operational Creditor) may file an
application before the Adjudicating Authority for initiating a corporate insolvency resolution

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process.
The operational creditor shall, along with the application furnish the following documents to
the Tribunal:
(a) a copy of the invoice demanding payment or demand notice delivered by the
operational creditor to the corporate debtor;
(b) an affidavit to the effect that there is no notice given by the corporate debtor
relating to a dispute of the unpaid operational debt;
(c) a copy of the certificate from the financial institutions maintaining accounts
of the operational creditor confirming that there is no payment of an unpaid
operational debt by the corporate debtor, if available;
(d) a copy of any record with information utility confirming that there is no
payment of an unpaid operational debt by the corporate debtor, if available;
and
(e) any other proof confirming that there is no payment of an unpaid
operational debt by the Corporate Debtor or such other information, as may
be prescribed.

(ii) Intimation of existence of dispute

The reply of the Corporate Debtor, NYM Garments Limited as to the existence of dispute
relating to amount of claim, will not be considered by the Adjudicating Authority as the dispute
is intimated beyond the period of 10 days from the date of receipt of demand notice i.e., on 25th
February, 2020. However, the application made by AVR Fabrics Limited will be admitted by the
NCLT.

(iii) Full settlement of dues

Where a Corporate Debtor NYM Garments Limited has paid an amount of ₹ 7,00,000 in full
settlement of the outstanding due, the same shall be, within a period of ten days of the receipt of
the demand notice brought to the notice of the operational creditor by sending an attested copy
of the record of electronic transfer of the repayment of the amount from the bank account of the
corporate debtor. Accordingly, the Adjudicating Authority can reject the application of the
Operational Creditor if it is proved that the Corporate Debtor, NYM Garments Limited, had paid
₹7,00,000/- in full settlement of the outstanding dues.

Question 7
(i) Superfine Limited is under the Insolvency proceedings under the Insolvency and
Bankruptcy Code, 2016 and Mr. Rakesh is the Interim Resolution Professional (IRP). He collated
the details of all claims from the financial creditors, operational creditors and others. The
number of financial creditors are 12 in numbers having a total claim of ₹ 6.00 crore out of which
two financial creditors (Mr. A and Mr. D) are also operational creditors of the company. Mr. A
whose total claim is ₹ 50.00 lakh includes an operational credit for supply of material - ₹ 10.00
lakh. Similarly Mr. D whose total claim of ₹ 20 lakh includes ₹ 5.00 lakh for supply of materials to
Superfine Limited. How shall the committee of creditors be constituted by IRP?
(ii) During the proceedings it came to the knowledge of IRP that Mr. P is a relative of the
Managing Director of Superfine Limited who is a financial creditor for ₹ 5.00 lakh. He informed
the IRP to participate in the meeting of COC. Discuss the validity of Mr. P's request. (NOV 2020
EXAM OLD)
Answer :

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(i) Constitution of Committee of Creditors (CoC):

As per Section 21 of the Insolvency and Bankruptcy Code after the collation of all claims
received against the Corporate Debtor and determination of the financial position of the
corporate debtor, the interim resolution professional shall constitute a Committee of Creditors.
The Committee of Creditors shall comprise of all financial creditors of a corporate debtor. The
Resolution Professional shall identify the Financial Creditors and constitute a Committee of
Creditors.
Where a Creditor is both a Financial and an Operational Creditor
Where any person is a Financial Creditor (FC) as well as an Operational Creditor (OC), such
person shall be a financial creditor to the extent of the financial debt owed by the corporate
debtor, and shall be included in the Committee of Creditors, with voting share proportionate to
the extent of financial debts owed to such creditor.
(ii) As per proviso to Section 21(2) of the Insolvency and Bankruptcy Code, a Financial
Creditor, if he is a related party of the Corporate Debtor, shall not have any right of
representation, participation or voting in a meeting of the Committee of Creditors.
As Mr. P who is a Financial Creditor, is a relative of the Managing Director of Superfine Limited,
the Corporate Debtor, his request to participate in the meeting of CoC does not hold valid.
Question 8
Oil & Gas Energy Limited (Corporate Debtor) borrowed a loan of ₹ 100 crore for its expansion
project from State Bank of India (SBI), Bank of India (BOI) and Punjab National Bank (PNB)
under the consortium arrangement in the proportion of 50%, 30% and 20% respectively. The
corporate insolvency process has begun by order of the Tribunal on an application made by the
Financial Creditor. The Interim Insolvency Resolution Professional (IIRP) constituted a
Committee of Creditors (CoC) which noted that total financial debt owed by the Corporate
Debtor is ₹ 500 crore in aggregate. You are requested to state which of the members of the
consortium shall be the member of CoC and what shall be their voting share in the CoC as per
the provisions of the Insolvency and Bankruptcy Code, 2016. (JAN 2021 EXAM OLD) APRIL
2021 MTP
Answer:
Members of Committee of Creditors (CoC)
In case of Joint Financial Creditors: As per the provisions of the Insolvency and Bankruptcy
Code, 2016, where the corporate debtor owes financial debts to two or more financial creditors
as part of a consortium or agreement, each such financial creditor shall be part of the
Committee of Creditors (CoC) and their voting share shall be determined on the basis of the
financial debts owed to them. Voting share shall be based on the proportion of financial debt
owed to such financial creditor in relation to the financial debt owed by the Corporate debtor.
(Section 5(28)).
On the basis of above provision, SBI, BOI and PNB shall be the members of CoC and their voting
share in the CoC shall be in proportion of their debt ( i.e. in proportion of 50%, 30% and 20%
respectively) to the total debt of the Corporate Debtor ( loan amount of ₹ 100 crore under
consortium arrangement).
Voting Share in the CoC
The Interim Insolvency Resolutional Professional (IIRP) noted total financial debt (₹ 500 cr.)
owed by the Oil & Gas Energy Ltd. Therefore, the voting share of SBI, BOI and PNB in the given
case shall be as under:
SBI = (50% X ₹100 Crore) / ₹500 Crore = 10%
BOI = (30% X ₹100 Crore) / ₹ 500 Crore = 6%

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PNB= (20% X ₹100 Crore) / ₹ 500 Crore = 4%

Question 9
XYZ Limited, an unlisted company with total assets of ₹ 90 Lakh as per financial statement as on
31st March, 2019, defaulted in the payment of the financial debt against the financial creditor
Mr. A. Mr. A filed an application for initiation of insolvency process against XYZ Limited under
the fast track corporate insolvency resolution process by 31st May, 2020. Discuss the relevancy
for disposal through the mechanism of the fast track corporate insolvency resolution process
and the legal position of holding of fast track corporate insolvency resolution process by Mr. A
in terms of the IBC, 2016. Compute the time period for completion of the fast track process in
the said situation. (JAN 2021 EXAM OLD)

Answer :
Relevancy and Legal Position
The Central Government has notified the following class of corporate debtors on whom the
provisions pertaining to the fast track corporate insolvency resolution process shall be
applicable –
(a) small company under Section 2(85) of Companies Act
(b) a start-up (other than partnership firm) as defined by Ministry of Commerce and
Industry
(c) an unlisted company with total assets not exceeding ₹ one crore as per financial
statement immediately preceding the financial year.
VALIDITY
Hence, taking into account the above notification, the application filed by Mr. A for initiation of
insolvency process against XYZ Limited under the fast track corporate insolvency resolution is
valid.
Computation of time period for completion of fast track insolvency resolution process
According to Section 56 of the Code, the fast track corporate insolvency resolution process shall
be completed within a period of ninety days from the insolvency commencement date. The
corporate insolvency resolution process shall commence from the date of admission of
application (Section 10). The Adjudicating Authority shall within a period of 14 days of receipt
of application admit/ reject the application.
Accordingly, as XYZ Ltd. has filed application on 31st May 2020, the said application can be
admitted by 14th June 2020 and the fast track insolvency resolution process can be completed
latest by 12th September 2020.

Question 10
Defaulter Limited, an unlisted company registered in India with total assets amounting to Rs. 3
crore and turnover of Rs. 50 lakh as per financial statement immediately preceding the financial
year was facing financial crisis. The financial creditors of the fi rm wanted to file a petition for
initiating the insolvency resolution process with the Adjudicating Authority. The financial
creditors want an early recovery of their dues. In view of the above position, state whether
insolvency process can be initiated under fast track process under the IBC and maximum period
for the completion of process? (MARCH 2021 MTP)
Answer :

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Vide Notification no. SO 1911(E) dated 14-6-2017, read with section 55(2) of the Insolvency
and Bankruptcy Code, the Central Government prescribed the following class of corporate
debtors on whom the provisions pertaining to the fast track corporate insolvency resolution
process are applicable-
(a) Small company under section 2(85) of the Companies Act
(b) A start-up (other than partnership firm)
(c) An unlisted company with total assets not exceeding Rupees one crore as per
financial statement of immediately preceding the financial year.
As per section 56 of the Code, the fast track corporate insolvency resolution process shall be
completed within a period of 90 days from the insolvency commencement date. The
Adjudicating Authority may on receipt of an application extend the duration of such process by
45 days.
Provided that any extension of fast track corporate insolvency resolution process under this
section shall not be granted more than once.
In the above question, the fast track insolvency resolution process is not applicable on the
Defaulter Ltd. because the total assets exceed rupees one crore, so the financial creditors of the
company cannot file an application under the fast track insolvency. Turnover of the company
has no relevance in deciding whether fast track corporate insolvency resolution is applicable on
the company or not.
Therefore, an application for fast track insolvency resolution cannot be made. The
insolvency resolution process shall be completed within 180 days from the insolvency
commencement date and extendable by maximum 90 days.

Question 11
. XYZ Bank Ltd. the secured creditor, decided to realize its security interest by informing
liquidator of such security interest and identify assets subject to which such security interest
has to be realized. Liquidator denied the XYZ Bank Ltd. to enforce its security interest as said
secured creditor is not a part of Committee of creditors. Throw a light on the stated situation
and examine on the validity of the stand taken by the Liquidator.(MARCH 2021 MTP)
Answer :
As per Provisions laid down in section 52 of the Insolvency and Bankruptcy Code, 2016, an
option is given to secured creditor to realize its security interest by informing liquidator in
respect of such security interest and identify assets subject to which such security interest has
to be realized. Therefore, it is not mandatory under Code proceedings for financial creditor to
be a part of CoC (Committee of Creditors) to enforce its security interest. Hence, application
filed by Financial creditor was to be accepted.
Therefore the stand taken by the liquidator on his denial to the XYZ Bank Ltd. to enforce its
security interest on the account that secured creditor is not a part of Committee of creditors, is
not valid.
Question 60
Discuss on the statement “Resolution applicant ineligible if connected person is
ineligible”. (APRIL 2021 MTP NEW)
Answer :
As per explanation to section 29A of the Insolvency and Bankruptcy Code, "Connected
person" means—
(i) any person who is the promoter or in the management or control of the

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resolution applicant; or
(ii) any person who shall be the promoter or in management or control of the
business of the corporate debtor during the implementation of the resolution
plan; or
(iii) the holding company, subsidiary company, associate company or related party of
a person referred to in clauses (i) and (ii).
Thus, if resolution applicant associated with any 'connected person' who is ineligible under
section 29A of Insolvency & Bankruptcy Code, will be ineligible as 'resolution applicant' and
hence cannot submit a resolution plan.

Question 12
(i) X Inc Ltd is a holding company of Y Infrastructure Ltd . Insolvency resolution process was
imitated against the X Inc Ltd on 15th December 2020. In the mean time another financial
creditor initiated corporate insolvency resolution process against Y Infrastructure Ltd. Later X
Inc Ltd filed an appeal contending that resolution process should not continue till corporate
insolvency resolution process is decided in the case of X Inc Ltd.in the basis of initiation of
moratorium. Also the Resolution plan of X Inc Ltd. was approved by CoC was still pending
before the Adjudicating Authority for its approval. In the light of given situation, examine
whether corporate insolvency resolution process initiated against the X Inc Ltd, can be bar the
corporate insolvency resolution process initiated against the Y Infrastructure Ltd ?

(ii) Mr. OP, an operational creditor filed an application for corporate insolvency resolution
process. He did not propose for the appointment of an interim resolution professional (IRP) in
the application. State the provisions given by the Code to resolve the issue of non- appointment
of IRP including his term of appointment. (APRIL 2021 MTP OLD)

Answer :
(i) In the given case, both the X Inc Ltd. and Y Infrastructure Ltd. in the eyes of law are separate
entity. Further section 14 of the IBC, which deals with moratorium, nowhere prohibits initiation
of corporate insolvency resolution process on the subsidiary company or its holding company.
Further also that a separate CIRP has been initiated against another corporate debtor by
another financial creditor, which is altogether separate and have no connection with the CIRP
initiated against X Inc Ltd or Y Infrastructure Ltd.
Therefore, in the given case, corporate insolvency resolution process initiated against the X Inc
Ltd, which is a holding company, cannot bar the corporate insolvency resolution process
initiated against the Y Infrastructure Ltd which is its subsidiary or vice versa.
(ii) Appointment of IRP: As per Section16 of the Code where the application for corporate
insolvency resolution process is made by an operational creditor and no proposal for an interim
resolution professional is made in the said application, the Adjudicating Authority shall make a
reference to the Board (IBBI) for the recommendation of an insolvency professiona l who may
act as an interim resolution professional.
The Board (IBBI) shall recommend the name of an insolvency resolution professional to the
Adjudicating Authority against whom no disciplinary proceedings are pending, within ten days
of the receipt of a reference from the Adjudicating Authority.
Period of appointment of IRP: The term of the Interim Resolution Professional shall continue
from his appointment till the date of appointment of the resolution professional by CoC in its
first meeting under Section 22 of the Code.

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13.PREVENTION OF MONEY LAUNDERING ACT, 2002

Question 1

Comment upon nature of offence committed under the Prevention of Money Laundering Act? In
the case, a spouse sold their property in 175 lakh to Mr. Y. In lieu of the sale, they obtained
amount 100 lakh through RTGS in his account and rest amount of 75 lakh in cash which he
transferred to wife’s offshore bank account . Examine the liability of the spouse in the given case
in the light of the PMLA, 2002. Also state whether they will be liable to be released on bail. May
2021 RTP

Answer :

Nature of offence committed under the Act: Section 45 of the PMLA, 2002, provides that
the offences under the Act shall be cognizable and non-bailable. Person accused of an offence
under this Act shall not be released on bail or on his own bond unless-

(i) The Public Prosecutor has been given an opportunity to oppose the application for such
release and

(ii) Where the Public Prosecutor opposes the application, the court is satisfied that there are
reasonable grounds for believing that he is not guilty of such offence and that he is not likely to
commit any offence while on bail.

Exceptions: In case of any person who is under the age of 16 years or in case of a woman or in
case of a sick or infirm or is accused either on his own or along with other co-accused of money-
laundering a sum of less than one crore rupees, may be released on bail, if the Special Court so
directs.

As per the said section the spouse is liable for commission of an offence of money laundering by
transferring an unaccounted money obtained through sale of their property to an offshore bank
account of his wife with an intent to evade tax. As the husband and his wife, i.e., the spouse
jointly acted in the commission of the act of money-laundering of a sum less than one crore
rupees, so the wife may be released on bail, if the Special Court so directs. Whereas the Husband
shall be released on bail on his own bond only on compliance with stated provision.

Question 2

Three Companies belong to Gopal group based out of Bengaluru. Each of the three companies
are into businesses as under:

Company A Chit Funds

Company B Housing Finance

Company C Payment System Operator

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In the light of the relevant provisions of the Prevention of Money Laundering Act, 2002, examine
the following:

(i) Who is a "beneficial owner" under the Prevention of Money Laundering Act,
2002?
(ii) Whether each of the above businesses fall within the definition of "Financial
Institution"?
(iii) What are the obligations of a financial institution regarding maintenance of
records?
(iv) Whether a Civil Court have jurisdiction to entertain any suit or proceeding in
respect of any matter which the Appellate Tribunal is empowered by or under
this Act?
(v) Can an injunction be granted by any Court or other Authority in respect of any
action taken or to be taken in pursuance of any power conferred on the Appellate
Tribunal? (NOV 2020 EXAM NEW)
Answer :

(i) “Beneficial owner” means an individual who ultimately owns or controls a client of a
reporting entity or the person on whose behalf a transaction is being conducted and
includes a person who exercises ultimate effective control over a juridical person. As in the
given case, Company A, Company B, and Company C belongs to Gopal Group, who exercises
ultimate control over them, therefore, Gopal Group is the Beneficial owner.

(ii) “Financial institution” means a financial institution as defined in clause (c) of section 45 I
of the Reserve Bank of India Act, 1934 and includes a chit fund company, a housing finance
institution, an authorised person, a payment system operator, a non- banking financial
company and the Department of Posts in the Government of India.
In the instant case, Company A, Company B and Company C falls within the definition of
“Financial Institution” conducting the business of chit fund, housing finance institution,
payment system operator respectively.

(iii) Section 12 of the Prevention of Money Laundering Act, 2002 provides for the obligation of
Banking Companies, Financial Institutions and Intermediaries i.e. the reporting entity to
maintain records of transactions.

Maintenance of records: According to sub-section 12 (1), every reporting entity shall–

• maintain a record of all transactions, including information relating to transactions

(mentioned in next point) in such manner as to enable it to reconstruct individual
transactions;
• furnish to the Director information relating to such transactions, whether attempted or
executed, the nature and of value;
• maintain record of documents evidencing identity of its clients and beneficial owners
as well as account files and business correspondence relating to its clients.

(iv) Civil court not to have jurisdiction [Section 41]

No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any
matter which the Director, an Adjudicating Authority or the Appellate Tribunal is
empowered by or under this Act to determine.

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Injunction: No injunction shall be granted by any court or other authority in respect of any
action taken or to be taken in pursuance of any power conferred by or under this Act on the
Appellant Tribunal.

Question 3

The Adjudicating Authority under the Prevention of Money Laundering Act, 2002 (the Act)
made an order under Section 8(3), confirming the provisional attachment of property made
under Section 5(1) of the said Act. Mr. Rana, owner of the attached property, aggrieved by the
order, wanted to make an appeal to the Appellate Tribunal. However, before making an appeal
Mr. Rana is adjudicated as an insolvent. Explain, with reference to the relevant provisions of the
said Act, whether appeal could be made to Appellate Tribunal in the present case? (NOV 2020
EXAM NEW)

Answer :

Continuation of proceedings in the event of death or insolvency [Section 72 of PMLA,

2002]

Where-

(a) any property of a person has been attached under section 8 and no appeal against the order
attaching such property has been preferred; or
(b) any appeal has been preferred to the Appellate Tribunal, and-
(i) in a case referred to in clause (a), such person dies or is adjudicated an insolvent
before preferring an appeal to the Appellate Tribunal; or
(ii) in a case referred to in clause (b), such person dies or is adjudicated an insolvent
during the pendency of the appeal,

then, it shall be lawful for the legal representatives of such person or the official assignee or the
official receiver, as the case may be, to prefer an appeal to the Appellate Tribunal or as the case
may be, to continue the appeal before the Appellate Tribunal, in place of such person and the
provisions of section 26 shall, so far as may be, apply, or continue to apply, to such appeal.

Hence, in the instant case, the appeal can be made to the Appellate Tribunal by the official
assignee or the official receiver of Mr. Rana.

Question 4

By means of an order in writing, the Adjudicating Authority (AA) appointed under the
Prevention of Money Laundering Act, 2002, attached certain properties under Section 8 of the
Act belonging to Mr. AAA alleged to be involved in money laundering. Aggrieved by the order of
the AA, Mr. AAA preferred an appeal before the Appellate Tribunal (AT). Subsequently, after
proper hearing, an order was passed by the AT upholding the decision of the AA. Aggrieved by
the order of the AT, Mr. AAA preferred a further appeal before the Honorable High Court. During
the pendency of the appeal before the High Court, unfortunately, Mr. AAA dies. In the light of the
provisions of the Prevention of Money Laundering Act, 2002 :

(i) What is the time limit for preferring an appeal before the High Court against the order
of the AT ?

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(ii) By how many days an extension of time can be sought if the appellant was prevented
by sufficient cause from filing the appeal within the said period ?
(iii) On the death of Mr. AAA can the appeal be further continued in the High Court? If so,
by whom?
(iv) What will be the position if Mr. AAA dies before appeal has been preferred in the
Honorable High Court ?
(v) What shall be the jurisdiction of the High Court, if the Central Government is the
aggrieved party? (JAN 2021 EXAM NEW)

Answer :

(i) According to Section 42 of the Prevention of Money Laundering Act, 2002, a person
aggrieved by any order of the Appellate Tribunal can file an appeal to the High Court within
60 days from the date of communication of the order on question of law/fact.

(ii) The High Court, if satisfied that the appellant was prevented by sufficient cause from filing
the appeal within the said period, it can allow filing of appeal within a further period not
exceeding sixty days.

(iii) On the death of Mr. AAA, the appeal filed with High Court can be continued even after the
death of Mr. AAA by legal representatives of Mr. AAA. [Section 72(2)]
(iv) In case Mr. AAA dies before filing an appeal with High Court, it shall be lawful for the legal
representative of Mr. AAA to prefer an appeal with High Court. [Section 72(2)]

(v) Where the Central Government is the aggrieved party, the High Court within the
jurisdiction of which the respondent, or in a case where there are more than one
respondent, any of the respondents, ordinarily resides or carries on business or personally
works for gain shall be the jurisdiction. [Section 42]

Question 5

SSG Bank Limited has recently started its operations. The bank approached you for your advice
regarding the maintenance of records as a reporting entity in terms of the provisions of the
Prevention of Money Laundering Act, 2002. Referring to and analyzing the relevant provisions
of the Prevention of Money Laundering Act, 2002, advice the Bank. (JAN 2021 EXAM NEW)

Answer :

Section 12 of the Prevention of Money Laundering Act, 2002, provides for the obligation of
Banking Companies, Financial Institutions and Intermediaries i.e. the reporting entity to
maintain records of transactions. SSG Bank Limited have been advised to maintain records in
the compliance to said section.

Accordingly, every reporting entity shall –

(i) maintain a record of all transactions, including information relating to transactions covered
under point (ii) below, in such manner as to enable it to reconstruct individual
transactions. Here records shall be maintained for a period of five years from the date of
transaction between a client and the reporting entity .

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(ii) furnish to the Director within such time as may be prescribed, information relating to such
transactions, whether attempted or executed, the nature and value of which may be
prescribed;
(iii) maintain record of documents evidencing identity of its clients and beneficial owners as
well as account files and business correspondence relating to its clients. The records here
shall be maintained for a period of five years after the business relationship between a
client and the reporting entity has ended or the account has been closed, whichever is later.

Question 6

What is a Scheduled Offence under the Prevention of Money Laundering Act, 2002 (PMLA)? An
Export house has committed an offence under Section 135 of the Customs Act, 1962 by
undervaluing the exported item. The declared value of the export item is ₹ 50 lakhs. Under
which part of the Schedule of the PML Act, will this violation be classified as an offence? (NOV
2020 EXAM OLD)

Answer :

The term “Scheduled Offence" has been defined in clause (y) of sub-section (1) of Section 2 of
the Prevention of Money Laundering Act, 2002.

Accordingly, it means –

(a) the offenses specified under Part A of the Schedule; or

(b) the offenses specified under Part B of the Schedule if the total value involved in
such offenses is one crore rupees or more; or
(c) The offenses specified under Part C of the Schedule.

An offence under Section 135 of the Customs Act, 1962 by undervaluing the exported
items is covered under Part A of the Schedule.

Question 7

The Reporting Authority failed to provide additional information called for by the Director
under section 12A. Consequently, after inquiry, he imposed penalty on the Reporting Authority
under section 13. Examine, under the provision of the Prevention of Money Laundering Act,
2002, the maximum monetary penalty the Director can impose for contravention of section 12A
and state, what is the remedy available to the Reporting Authority aggrieved by the order of the
Director.

(JAN 2021 EXAM OLD)

Answer :

Maximum Monetary Penalty

According to Section 13 of the Prevention of Money Laundering Act, 2002, the maximum
monetary penalty the Director can impose for contravention of Section 12A is not less than ten
thousand rupees but may extend to one lakh rupees for each failure.

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Remedies Available

According to Section 26 of the Act, any reporting entity aggrieved by any order of the Director
may prefer an appeal to the Appellate Tribunal within a period of 45 days from the date on
which a copy of the order made by the Director is received.

Appellate Tribunal may, after giving an opportunity of being heard, entertain an appeal after the
expiry of the said period of forty-five days if it is satisfied that there was sufficient cause for not
filing it within that period.

Question 8

In the case, the Director, on the basis of information in his possession, has reason to believe that
Mr. X, is in possession of proceeds of crime involved in money-laundering. He authorised Mr. Y,
officer subordinate to him to seize property found as a result of such search. Mr. Y seized the
said property on 10.2.2020 and filed an application requesting for retention of such property
seized before Adjudicating Authority. Enumerate the law as regards the retention of the seized
property and Compute the time period for retention of such seized property by Mr. Y.
(MARCH MTP 2021)

Answer :

Retention of seized property

As per section 20 of the Prevention of Money Laundering Act, 2002 [PMLA], property seized
under section 17 or 18 of the Prevention of Money Laundering Act or frozen under section
17(1A) of the Prevention of Money Laundering Act can be retained by authorised officer, if he
has reason to believe that such property is required to be retained for adjudication under
section 8 of Prevention of Money Laundering Act .The property can be retained for a period of
180 days from day on which the asset was seized or frozen. Details of property seized or frozen
have to be informed to Adjudicating Authority in prescribed manner.

The seized property is required to be returned to person from whom it was seized after 180
days, unless Adjudicating Authority permits retention of property beyond this period.

Time period for retention of such seized property : As per section 17(4) of the PMLA, 2002,
the authority seizing any record or property under sub-section (1) or freezing any record or
property under sub-section (1A) shall, within a period of thirty days from such seizure or
freezing, as the case may be, file an application, requesting for retention of such record or
property seized under sub-section (1) or for continuation of the order of freezing served under
sub-section (1A), before the Adjudicating Authority.

As Mr. Y seized the property of Mr. X on 10.2.2020. He can file an application requesting
for retention of such property seized before Adjudicating Authority latest by 13th March,
2020.

Question 9

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State on the nature of liability caused on an offence committed under the Prevention of Money
Laundering Act, 2002. (MARCH 2021 MTP)

Answer :

Money Laundering basically is knowingly dealing with proceeds of crime, directly or indirectly.
The Act provides both for civil and criminal liability.

Criminal liability under the Prevention of Money Laundering Act

Crime which results in tainted money is a separate offence under various laws as specified in
Schedule to Prevention of Money Laundering Act. These offences are punishable under those
Acts. The punishment is to the person/s who is/are involved in actually committing that offence.

The offence as specified in section 4 of the Prevention of Money Laundering Act is a separate
offence. The punishment under section 4 of Prevention of Money Laundering Act is not only to
those who are actually involved in dealing with tainted money but also on those who are
knowingly involved, directly or indirectly, in dealing with proceeds of crime.

This is a criminal offence, which will be tried by special courts designated for this purpose
under section 2(z) of the Prevention of Money Laundering Act. The trial will be both for charges
under the specific Act which is a crime and also offence of money laundering under Prevention
of Money Laundering Act. However, it is not 'joint trial'.

Civil Liability i.e. confiscation of tainted property

In addition to criminal liability, the property involved in money laundering can be attached and
frozen by Central Government and later confiscated.

Question 10

Based on the provisions of the PMLA,2002, analyse with reasons, the contentions of the
Adjudicating Authority with regard to the following:

(a) Whether interest created in a property prior to event of money laundering leading up to the
attachment of property, takes priority over the attachment?

(b) Whether a mere nexus between the attached property where it did not qualify as "proceeds
of crime" under the PMLA and the party accused of money laundering was sufficient for the
attachment to take place? (APRIL 2021 MTP)

Answer :

(a) As per Section 5(4) of the Prevention of Money Laundering Act, 2002, nothing in this section
shall prevent the person interested in the enjoyment of the immovable property attached under
Section 5(1) from such enjoyment.

“Person interested”, in relation to any immovable property, includes all persons claiming or

entitled to claim any interest in the property.

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Accordingly, an order of attachment under money laundering Act is not said to be illegal merely
because a person interested (i.e., third party) had a prior interest in such property and further
issuance of an order of attachment under PML Act cannot, by itself, render illegal the prior
statutory right of a person interested in attached property.

Therefore, interest created in a property prior to attachment of property, takes priority over
attachment.

(b) According to Section 5 of the Prevention of Money Laundering Act, 2002, where the Director
or any other officer for the purposes of this section, has reason to believe, on the basis of
material in his possession, that—

(a) any person is in possession of any proceeds of crime; and

(b) such proceeds of crime are likely to be concealed, transferred or dealt with
in any manner which may result in frustrating any proceedings relating to
confiscation of such proceeds of crime under this Chapter,

he may, by order in writing, provisionally attach such property for a period not exceeding one
hundred and eighty days from the date of the order, in such manner as may be prescribed.

Hence, it is necessary that the attached property should qualify as ‘proceeds of crime’.

However, mere nexus between the attached property whether it qualify as a proceeds of crime

/ not, the party accused of money laundering, is sufficient for the attachment of such property to
take place.

Question 11

Discuss the jurisdiction for the nature of offences triable by the special court under the
Prevention of Money Laundering Act. What will be the consequences, if the court which has
taken cognizance of the scheduled offence, is other than the offence of money laundering on
which Special Court has taken cognizance upon a complaint made by an authority. (APRIL
2021 MTP)

Answer :

Section 44 of the Prevention of Money Laundering states that an offence punishable under
section 4 and any scheduled offence connected to the offence under that section shall be triable
by the Special Court constituted for the area in which the offence has been committed.

A Special Court while trying the scheduled offence or the offence of money-laundering shall hold
trial in accordance with the provisions of the Code of Criminal Procedure, 1973, as it applies to a
trial before a Court of Session.

Further , as per clause (c) of section 44 of the PMLA, if the court which has taken cognizance of
the scheduled offence is other than the Special Court which has taken cognizance of the
complaint of the offence of money-laundering , it shall, on an application by the authority
authorised to file a complaint under this Act, commit the case relating to the scheduled offence

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to the Special Court and the Special Court shall, on receipt of such case proceed to deal with it
from the stage at which it is committed.

14.THE SECURITIES CONTRACTS (REGULATION) ACT, 1956

Question 1

MNK Limited has incurred heavy losses during the preceding 3 consecutive financial years and
has a negative net worth of ₹ 525 crore as at 31st March, 2020. Trading in securities of Company
has remained suspended, for a period of more than 9 months. CSE, a recognized Stock Exchange,
delisted the securities of MNK Limited. Mr. Y was having 25,000 shares of MNK Limited,
purchased at ₹ 100 per share, aggrieved against the decision of the Stock Exchange to delist the
securities of MNK Limited. Referring to the provisions of the Securities Contracts (Regulation)
Act, 1956, examine:

(i) Whether CSE, a recognized Stock Exchange can delist the securities of MNK Limited?
(ii) If yes, state the grounds for delisting. (NOV 2020 EXAM NEW)

Answer :

(i) A recognised stock exchange may delist the securities, after recording the reasons, from
any recognised stock exchange on any of the ground or grounds as may be prescribed
under this Act. The securities of a company shall not be delisted unless the company
concerned has been given a reasonable opportunity of being heard.

In the instant case, MNK Limited has incurred losses during the preceding 3 consecutive
financial years and it has negative net-worth of ₹ 525 crore. Trading in securities of the
company has remained suspended for a period of more than 9 months.

Hence, on the said grounds (covered under Rule 21 of SCR Rules, 1957) CSE, a recognized stock
exchange, can delist the securities of MNK Limited.

(ii) As per Rule 21 of SCR Rules, 1957, MNK Limited is said to have incurred losses during the
preceding 3 consecutive years and has negative net-worth and remained suspended for
more than 6 months in trading of securities.

Question 2

Securities and Exchange Board of India (SEBI) in the interest of trade has amended the bye-laws
of the ROS Stock Exchange, by written order, specifying the reasons there for, ordered for
amendment of the bye-laws of ROS Stock Exchange Limited immediately. Aggrieved of the said
order of the SEBI, ROS Stock Exchange Limited seeks your advice whether the act of the SEBI is
tenable since such amendment was neither published in the Official Gazette of India nor in the
Official Gazette of the state in which the Stock Exchange is situated. Referring to and analyzing
the relevant provisions of the Securities Contract (Regulation) Act, 1956, advise the Stock
Exchange. (JAN 2021 EXAM NEW)

Answer :

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As per the provisions of section 10(1) of the Securities Contract (Regulation) Act, 1956(SCRA),
the Securities and Exchange Board of India(SEBI), may either on a r equest in writing received
by it in this behalf from the governing body of a recognized stock exchange or on its own
motion, if it is satisfied after consultation with the governing body of the stock exchange that it
is necessary or expedient so to do and after recording its reasons for so doing, make bye laws
for all or any of the matters specified in section 9 or amend any bye laws made by such stock
exchange under that section.

As per provisions of section 10(2) of SCRA, where in pursuance of this section any bye laws
have been made or amended, the bye laws so made or amended shall be published in the
Gazette of India and also in the official Gazette of the state in which the principal office of the
recognized stock exchange is situate and on the publication thereof in the Gazette of India, the
bye laws so made or amended shall have effect as if they had been made or amended by the
recognized stock exchange concerned.

As per the provisions of 10(4) of the SCRA, the making or the amendment or revision of any bye
laws under this section shall in all cases be subject to the condition of previous publication:

Provided that if the SEBI is satisfied in any case that in the interest of the trade or in the public
interest any bye laws should be made, amended or revised immediately, it may by order in
writing specifying the reasons therefor, dispense with the condition of previous publication.

In term of the proviso to section 10(4) as stated above, it can be concluded that the act of
the SEBI is valid and accordingly it should be advised to the stock exchange.

Question 3

Softskin Soaps and Consumer Goods Limited has applied to Delhi Stock Exchange to list its
securities. The Board of the Stock Exchange after one month refused to list the securities and
returned the application. The information of refusal is received by the company on 10th April
2020. The company is aggrieved by the refusal of stock exchange. What is the remedy available
under the Securities Contracts (Regulations) Act, 1956? (NOV 2020 EXAM OLD)

Answer :

Right of appeal against refusal of Stock Exchange to list securities of Public Companies
(Section 22 A)

Where a recognized stock exchange acting in pursuance of any power given to it by its bye-
laws, refuses to list the securities of any Public Company or Collective Investment Scheme, the
Company or scheme shall be entitled to be furnished with reasons for refusal, and may –

within 15 days from the date on which the reasons for such refusal are furnished to it, or where
the Stock Exchange has omitted or failed to dispose of, within the time specified in
corresponding provisions of Companies Act, 2013, the application for permission for the shares
or debentures to be dealt with on the Stock Exchange, within 15 days from the date of expiry of
the specified time or within such further period, not exceeding one month, as the Securities
Appellate Tribunal (SAT) may on sufficient cause being shown, allow, appeal to SAT against

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such refusal, omission or failure, as the case may be, and thereupon, SAT may, after giving the
stock exchange an opportunity of being heard –

vary or set aside the decision of the Stock Exchange, or

where the Stock Exchange has omitted or failed to dispose of the application within the
specified time, grant or refuse the permission

and where the SAT sets aside the decision of the recognized Stock Exchange or grants the
permission, the Stock Exchange shall act in conformity with the orders of Central Government.

In the instant case, Softskin Soaps and Consumer Goods Limited can follow the above
provisions.

Question 4
Bharti Limited, a company listed on Bharat Stock Exchange Limited (a recognised stock
exchange in India) had been incurring losses continuously during the preceding 3 years but its
net worth has not become negative till date. The stock exchange decided to delist the securities
of the company after giving an opportunity of being heard to the company. Mr. Binay (the
investor) who holds equity shares up to 10% of the total equity share capital of the company
has suffered heavy losses due to delisting of securities by the stock exchange. You have been
hired by Mr. Binay to consult him regarding the Security Laws. Examine the given situation and
mention the various grounds of delisting under SCRA and the remedies available to Mr. Binay in
the light of the Securities Contract (Regulation) Act, 1956 [SCRA]. (MARCH 2021
MTP)
Answer :

As per section 21A of the Securities Contracts (Regulation) Act, 1956 read with Rule 21 of
the Securities Contract (Regulation) Rules, 1957, a recognised stock exchange may delist the
securities, after recording the reasons therefor, from any recognised stock exchange on any of
the ground or grounds as may be prescribed under this Act:

Provided that the securities of a company shall not be delisted unless the company concerned
has been given a reasonable opportunity of being heard.

A listed company or an aggrieved investor may file an appeal before the Securities Appellate
Tribunal against the decision of the recognised stock exchange delisting the securities within
fifteen days from the date of the decision of the recognised stock exchange delisting the
securities.
Following are the grounds namely for delisting :—

(a) the company has incurred losses during the preceding three consecutive years and it has
negative net worth;
(b) trading in the securities of the company has remained suspended for a period of more than
six months;
(c) the securities of the company have remained infrequently traded during the preceding
three years;
(d) the company or any of its promoters or any of its director has been convicted for failure to
comply with any of the provisions of the Act or the Securities and Exchange Board of India
Act, 1992 or the Depositories Act, 1996 or rules, regulations, agreements made thereunder,
as the case may be and awarded a penalty of not less than rupees one crore or
imprisonment of not less than three years;

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(e) the addresses of the company or any of its promoter or any of its directors, are not known
or false addresses have been furnished or the company has changed its registered office in
contravention of the provisions of the Companies Act; or
(f) shareholding of the company held by the public has come below the minimum level
applicable to the company as per the listing agreement under the Act and the company has
failed to raise public holding to the required level within the time specified by the
recognized stock exchange.

In the above question, the net worth of the company has not become negative . Therefore,
either the company or Mr. Binay may file an appeal before the Securities Appellate Tribunal
against the decision of the recognised stock exchange within 15 days from the date of the
decision.

Question 5

'X' Stock Exchange Limited was granted recognition by Securities and Exchange Board of India
(SEBI). The stock brokers of the Stock Exchange did not pay much heed to the concept of
governance and focused on increasing their wealth and snubbed the protection of investors.
Their activities were against the interest of the trade and general public.

(i) Examine whether the Central Government / SEBI has the power to withdraw the
recognition granted to 'X' Stock Exchange Limited under the provisions of Securities
Contracts (Regulations) Act,1956?

(ii) Whether a person can be a member of an unrecognized Stock Exchange for the purpose
of performing any contracts in Securities? (APRIL 2021 MTP)
Answer :

(i) Section 5(1) of the Securities Contracts (Regulations) Act, 1956 states that if the Central
Government/ SEBI is of the opinion that the recognition granted to a stock exchange under the
provisions of this Act, should, in the interest of the trade or in the public interest, be withdrawn,
the Central Government or SEBI may serve on the governing body of the stock exchange, a
written notice that the Central Government or SEBI is considering the withdrawal of the
recognition for the reasons stated in the notice and after giving an opportunity to the governing
body to be heard in the matter, the Central Government/SEBI may withdraw the recognition
granted to the stock exchange.

Thus, Central Government/ SEBI can withdraw the recognition of ‘X’ Stock Exchange Limited
on the grounds that their activities were against the interest of the trade and general public.

(ii) As per section 19 of the Securities Contracts (Regulations) Act, 1956, no person shall
organise or assist in organising or be a member of any stock exchange (other than a recognised
stock exchange) for the purpose of assisting in, entering into or performing any contracts in
securities, except with the approval of Central Government or SEBI.

Hence, no person can be a member of an unrecognised Stock exchange for the purpose of
performing any contracts in Securities, except with the approval of Central Government or SEBI.

15.THE SECURITY & EXCHANGE BOARD OF INDIA ACT, 1992 SEBI

💡SEBI (ICDR) Regulations are now excluded.

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Question 1

(i) Mr. Ganesh has been appointed as the Investigating Authority by Securities and
Exchange Board of India to investigate the affairs of a listed company on the reasoning that the
transactions in securities are being dealt in a manner detrimental to the investors.
The Investigating Officer has taken over charge and the custody of hooks and documents after
due approval of the Magistrate. He is unable to complete the investigation within 180 days. The
Board of Directors of the company filed an application with SEBI to return the books and
documents. Discuss the validity of the request of the Board of Directors of the company.
During the investigation, one of the directors of the company had refused to answer the
questions and produce the books and documents. What is the punishment that can be imposed
on him under the provisions of the SEBI Act, 1992?

(ii) What do you understand by the term "Cease and desist proceedings"? Can such a
proceedings be initiated against any listed public company for the violation of insider trading?
(NOV 2020 EXAM OLD)
Answer :

(i) Validity of the Request of the Board of Directors

The given problem is based on Section 11C of the Securities and Exchange Board of India Act,
1992 which deals with the provision related to investigation of the affairs of such intermediary
or persons associated with the securities market.

Where the Board has reasonable ground to believe that the transactions in securities are being
dealt with in a manner detrimental to the investors or the securities market; it may, at any time
by order in writing, direct any person ( i.e., Investigating Authority) specified in the order to
investigate the affairs of such intermediary or persons associated with the securities market and
to report thereon to the Board.

The Investigating Authority may during the investigation keep in its custody any books,
registers, other documents and record produced for six months and thereafter shall return the
same to any intermediary or any person associated with securities market by whom or on
whose behalf the books, registers, other documents and record are produced.
Where the Investigating officer who has taken over the charge and custody of books and
documents is unable to complete the investigation within 180 days, he shall return the same to
person associated with securities market by whom or on whose behalf the books, registers,
other documents and record are produced. The Investigating Authority may call for any book,
register, other document and record if they are needed again.

As per the provision, Board of Directors of the Company need not require to file an application
with SEBI to return the books and documents. The investigating Authority, Mr. Ganesh may
keep books and documents during the investigation for six months under his custody and
thereafter shall return the same.

Punishment

If during the investigation, one of the Director without reasonable cause, refused to answer and
produce the books and documents, such person shall be punishable with:
Imprisonment for a term which may extend to one year, or with fine, which may extend to one
crore rupees, or with both, and also with a further fine which may extend to five lakh rupees for
every day after the first during which the failure or refusal continues.

(ii) As per the Section 11D of the Securities and Exchange Board of India Act, 1992 the

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term “Cease and desist proceedings” means that if the Board finds, after causing an inquiry to be
made, that any person has violated, or is likely to violate, any provisions of this Act, or any Rules
or Regulations made thereunder, it may pass an order requiring such person to cease and desist
from committing or causing such violation.
Yes, as the per proviso to the said section, where the Board has reasonable grounds to believe
that any listed public company has indulged in insider trading or market manipulation, such
proceedings can be initiated against it for violation of insider trading.

Question 2

Mr. Robert, aged 64 years as on 31.01.2016, was appointed ‘Presiding Officer’ of Securities
Appellate Tribunal (SAT) on 01.02.2016 for a term of 5 Years. He served to the Central
Government the notice of resignation from the office of ‘Presiding Officer’ on 01.10.2020. The
Central Government issued an order appointing his successor which shall take effect on
01.12.2020. Explaining the provisions of the Securities and Exchange Board of India Act, 1992,
(the SEBI Act) determine the date on which Mr. Robert shall vacate his office.(JAN 2021 EXAM
OLD)

Answer :

PROVISION RELATING TO HOLDING OFFICE:

According to Section 15N of the Securities and Exchange Board of India Act, 1992, the Presiding
Officer or every Judicial or Technical Member of the Securities Appellate Tribunal shall hold
office for a term of five years from the date on which he enters upon his office, and shall be
eligible for reappointment for another term of maximum five years:

Provided that no Presiding Officer or the Judicial or Technical Member shall hold office after he
has attained the age of seventy years.

According to Section 15Q, the Presiding Officer or any other Member of a Securities Appellate
Tribunal may, by notice in writing under his hand addressed to the Central Government, resign
his office.

Provided that the Presiding Officer or any other Member shall, unless he is permitted by the
Central Government to relinquish his office sooner, continue to hold office-
• until the expiry of three months from the date of receipt of such notice or
• until a person duly appointed as his successor enters upon his office or
• until the expiry of his term of office,
whichever is earlier.

CALCULATION OF DATE OF VACATION OF OFFICE

In the given question, Mr. Robert was appointed as presiding officer of SAT on 1.2.2016 (when
he was 64 years of age). Thus, he can hold office till 31.01.2021. However, he resigns on
1.10.2020 i.e. before the expiry of his term. The Central Government issued an order appointing
has successor which shall take effect on 1.12.2020. Hence, Mr. Robert has to continue in office
earlier of the following:
(i) 31.12.2020 – expiry of three months from the date of receipt of such notice, or
(ii) 1.12.2020- until a person duly appointed as his successor enters upon his office,
or
(iii) 31.01.2021- until the expiry of his term of office, Thus, Mr. Robert shall vacate his
office by 01.12.2020.

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Question 3

David is a Managing Director of Dynamic Power Limited, a listed public company. His wife
consolidated her shareholding of Dynamic Power Limited within a very short span of time.
David shared with her the information of unpublished adverse financial results of Quarter-4.
Taking a call of this information she sold her shares in the market at a handsome price. The
market prices of Dynamic Power Limited steeply fell after Q-4 results were published. Some
investors made a complaint to SEBI alleging that David and Dynamic Power Limited are
indulged in insider trading and manipulating the market prices with a request to issue cease
and desist order for protection of investors’ interest. Explain under the provisions of the
Securities and Exchange Board of India Act, 1992, (the SEBI Act) the powers that can be
exercised by SEBI to pass cease and desist order.
(JAN 2021 EXAM OLD)

Answer:

POWERS THAT CAN BE EXERCISED BY SEBI TO PASS CEASE AND DESIST ORDER

LEGAL POSITION

According to Section 11 D of the SEBI Act, 1992, if the Securities and Exchange Board of India
(the Board) finds after causing an inquiry to be made that any person has violated or is likely to
violate any provisions of this Act or any Rules or Regulations made thereunder, it may pass an
order requiring such person to cease and desist from committing or causing such violation
provided that the Board shall not pass such order in respect of any listed Public Company or a
Public Company (other than intermediaries specified under Section 12) which intends to get its
securities listed on any recognized stock exchange unless the Board has reasonable grounds to
believe that such Company has indulged in insider trading or market manipulation.

Conclusion

In the present case, after causing inquiry, if SEBI has reasonable grounds to believe that
Dynamic Power Limited and its Managing Director, David has indulged in insider trading or
market manipulation, it may pass an order requiring such person to cease and desist from
committing or causing such violation.

16.FOREIGN EXCHANGE MANAGEMENT ACT, 1999

Question 1

A foreign tourist comes to India and he purchases a antiques from a shop. He would like to pay
US$ 30 in cash to the shopkeeper. Comment in the light of the FEMA, whether shopkeeper is
permitted to accept foreign currency? (MAY 2021 RTP)

Answer :

As per section 3 of the FEMA, save as otherwise provided in this Act, rules or regulations
made thereunder, or with the general or special permission of the Reserve Bank, no person
shall receive otherwise than through an authorised person, any payment by order or on
behalf of any person resident outside India in any manner.

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Where any person in, or resident in, India receives any payment by order or on behalf of any
person resident outside India through any other person (including an authorised person)
without a corresponding inward remittance from any place outside India, then, such person
shall be deemed to have received such payment otherwise than through an authorised person.

Here, in the given case, the foreign tourist wanted to pay foreign currency in cash on purchase
of antiques to shopkeeper which as per section 3, is not permissible to any person to receive
any payment by order or on behalf of any person resident outside India in any manner except
received through an authorised person.

Therefore, the Shopkeeper cannot accept cash as it will be a receipt otherwise than through
Authorised Person except where the shopkeeper have taken a money changers license to accept
foreign currency.

Question 2

Under the auspices of the Foreign Exchange Management Act, 1999, (the Act) examine whether
the given situations fall under "Current Account Transactions" or not as defined in the Act?

(i) Mr. S, a resident in India, imports machinery from a vendor in UK for installing in his
factory.
(ii) An Indian resident, imports machinery from a vendor in US for installing in his factory on a
credit period of 3 months.
(iii) An Indian resident, transfers US$ 1,000 to his NRI brother in New York as "gift". The funds
are sent from resident's Indian Bank account to the NRI brother's Bank account in New
York.
NOV 2020 EXAM NEW

Answer :

i. An Indian resident imports machinery from a vendor in UK for installing in his factory.
As per FEMA, it does not alter (create) an asset in India for the UK vendor. It does not
create any liability to a UK vendor for the Indian importer. Once the payment is made,
the Indian resident or the UK vendor neither owns nor owes anything in the other
country. Hence it is a Current Account Transaction.

ii. An Indian resident imports machinery from a vendor in UK for installing in his factory
on a credit period of 3 months. Under FEMA, it is a liability outside India. However,
under definition of Current Account Transaction [S. 2(j)(i)], “short-term banking and
credit facilities in the ordinary course of business” are considered as a Current Account
Transaction. Hence import of machinery on credit terms is a Current Account
Transaction.

iii. An Indian resident transfer US$ 1,000 to his NRI brother in New York as “gift”. The funds
are sent from resident’s Indian bank account to the NRI brother’s bank account in New
York. As per FEMA, once the gift is accepted by the NRI, no one owns or owes anything
to anyone in India or USA, the transaction is over. Hence it is a Current Account
Transaction.

Question 3**

GOGU Limited, a resident company in India, has achieved a turnover of ₹ 20,000 crore during
the financial year 2019-20. The paid-up share capital and Free Reserves of the company as on

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31st March, 2020 as per the audited financial statements was ₹ 1500 crore and ₹ 500 crore
respectively. The company is planning to make an investment of INR 7800 crore in an Overseas
Joint Venture in Singapore. The company approached you whether it can make the desired
investment under the terms of automatic route for direct investment during the financial year
2020-21. The equivalent currency in US $ comes to around USD 1.05 billion. Referring to the
Foreign Exchange Management (Transfer of Issue of Any Foreign Security) (Amendment)
Regulations, 2004 and notifications issued by the Reserve Bank of India, decide whether there is
any restriction in the above investment. (JAN 2021 EXAM NEW)

Answer :

Automatic route for direct investment or financial commitment outside India: As per
Regulation 6 of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security)
(Amendment) Regulations, 2004, an Indian Party has been permitted to make investment/
undertake financial commitment in overseas Joint Ventures (JV) or Wholly Owned Subsidiaries
(WOS), as per the ceiling prescribed by the Reserve Bank.
With effect from July 03, 2014, it has been decided that any financial commitment (FC)
exceeding USD 1 (one) billion (or its equivalent) in a financial year would require prior approval
of the Reserve Bank even when the total FC of the Indian Party is within the eligible limit under
the automatic route [i.e., within 400% of the net worth (Paid up capital+ Free Reserves) as per
the last audited balance sheet].

Here, ‘Indian Party’ includes a company incorporated in India.

As per the facts of the question and provision of law, GOGU Limited (Indian party) will require
prior approval of the Reserve Bank of India even though its total financial commitment is within
the eligible limit under automatic route [i.e. {400% of (1500+500) =₹ 8,000 crore}], because
financial commitment is more than USD 1 billion.

Question 4

Mr. D has been arrested at the Chennai Airport in connection with certain offenses under the
Foreign Exchange Management Act, 1999. The Adjudicating Authority (AA) imposed a fine of ₹ 5
lakh on him. In order to secure the penalty, AA directs the officials to confiscate the deposit of ₹
10 lakh lying in the account of D maintained at a nationalized Bank in New Delhi. Comment
upon the validity of the confiscation proposal of the Adjudicating Authority for the levy of
penalty under the relevant provisions of FEMA, 1999. (NOV 2020 EXAM OLD)

Answer :

Law involved:
Section 13(1) of FEMA, 1999 deals with the levy of penalty on the person who contravenes
any provision of the Act.

Explanation :

In the present case, the Adjudicating Authority has levied a penalty of ₹5 lakhs on Mr. D. The
Adjudicating Authority, may, if he thinks fit, in addition to any penalty which he may impose for
such contravention, direct that any currency, security or any other money or property in respect
of which the contravention has taken place shall be confiscated to the Central Government and
further direct that the foreign exchange holdings, if any of the person committing such
contravention or any part thereof, shall be brought back into India or shall be retained outside
India in accordance with the directions made in this behalf.

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Explanation: For the purpose of this sub-section, “property” in respect of which the
contravention takes place shall include:

a) Deposits in a Bank where the said property is converted into such deposits
b) Indian currency where the said property is converted into such deposits
c) Any other property which has resulted out of the conversion of that property

Conclusion:

In view of this power, the Adjudicating Authority can confiscate the deposits of ₹10,00,000/-
lying in the Nationalized Bank in New Delhi.

Question 5** (IMP)

ABC Limited is a Startup recognized by the Central Government. The company is intending to
raise External Commercial Borrowing under automatic route of US$ 5 million for 2 years in the
form of partially convertible preference shares.

You are required to advise the company on the Maturity, Forms and Amount of External
Commercial Borrowing permitted as per guidelines contained in the master circular issued by
Reserve Bank of India. (JAN 2021 EXAM OLD)

Answer :

BACKGROUND

As per the stated facts, ABC Limited is a startup recognized by Central Government. It intended
to raise External Commercial Borrowings (ECB) under automatic route of US$ 5 million for 2
years in the form of partially convertible preference shares.

Master Circular

As per Master Circular No. 5/2018-19 issued by the Reserve Bank of India on External
Commercial Borrowing (ECB) guidelines, AD Category-I banks are permitted to allow Startups
to raise ECB under the automatic route with:

(a) Minimum average maturity period of 3 years,

(b) In the ‘form’ of loans or non-convertible, optionally convertible or partially
convertible preference shares,
(c) Amount limited to USD 3 million or equivalent per financial year either in INR or
any convertible foreign currency or a combination of both.

Accordingly, in order to raise the ECB under automatic route by ABC Limited (a startup), is
required to comply with the above requirements.

Question 6

Mr. Janak, a person resident outside India i.e. USA has invested in five residential immovable
properties under construction in Mumbai.
Each property was negotiated at ₹ 1.50 crore with the companies owned by builders. This
amount was to be paid in two instalments i.e. 50% on immediate basis on booking and the
balance on possession of properties. The above transaction was done by the companies owned
by builders through two brokers from USA on commission basis.
Mr. Janak as per term and conditions remitted 50% of the amount of all six immovable

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properties directly to the Builders.

Answer the following explaining the provision of the Foreign Exchange Management Act, 1999:
A. Whether investment by Mr. Janak and payment of commission on this transaction
is permissible?
B. How much maximum amount of commission can be paid to each broker?
(JAN 2021 EXAM OLD)

Answer :

INVESTMENT BY JANAK AND PAYMENT OF COMMISSION:

The investment in immovable properties in India by Mr. Janak a resident outside India i.e. USA is
a capital account transaction which is a permissible capital account transaction as per Schedule
II of the Foreign Exchange Management (Permissible Capital Account Transaction) Regulations
which permit acquisition and transfer of immovable property in India by a person resident
outside India.
As per Schedule III of the FEM (Current Account Transaction) Rules 2000, remittances by persons
other than individuals of Commission, per transaction, to agents abroad for sale of residential
flats or commercial plots in India exceeding USD 25,000 or five percent of the inward
remittance whichever is more, shall require prior approval of the Reserve Bank of India.

In view of the facts of the question and stated provisions:

(A) Yes, the investment by Mr. Janak and payment of commission on this transaction
is permissible.

(B) CALCULATION OF MAXIMUM AMOUNT OF COMMISSION

The maximum amount of commission payable to each broker shall be:

No. of properties X Amount of each property X % of inward remittance X Commission % /

number of brokers
= (5X1,50,00,000 X 50% X 5 %) / 2
= (5X75,00,000 X 5/100) / 2
= 18,75,000/2
= ₹ 9,37,500 to each broker.

Question 7

What is an overseas direct investment? Differentiate between Automatic Route and Approval
Route for direct investment? (MARCH 2021 MTP)

Answer :

Direct investment outside India/overseas direct investment means investments, either under
the Automatic Route or the Approval Route, by way of:
(i) contribution to the capital or subscription to the Memorandum of a foreign
entity or
(ii) purchase of existing shares of a foreign entity either by market purchase or
private placement or through stock exchange, signifying a long-term interest in
the foreign entity (JV or WOS).
Difference between Automatic Route and Approval Route for direct investment

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Automatic route for direct investment or financial commitment outside India: An Indian Party
has been permitted to make investment/ undertake financial commitment in overseas Joint
Ventures (JV)/ Wholly Owned Subsidiaries (WOS), as per the ceiling prescribed by the Reserve
Bank.
With effect from July 03, 2014, it has been decided that any financial commitment (FC)
exceeding USD 1 (one) billion (or its equivalent) in a financial year would require prior approval
of the Reserve Bank even when the total FC of the Indian Party is within the eligible limit under
the automatic route [i.e., within 400% of the net worth (Paid up capital + Free Reserves) as per
the last audited balance sheet].

Approval route for direct investment or financial commitment outside India:

(i) Prior approval of the Reserve Bank would be required in all other cases of direct
investment (or financial commitment) abroad.
(ii) Reserve Bank would, inter alia, take into account the following factors while
considering such applications:
(a) Prima facie viability of the JV / WOS outside India;
(b) Contribution to external trade and other benefits which will accrue to India
through such investment (or financial commitment);
(c) Financial position and business track record of the Indian Party and the
foreign entity; and
(d) Expertise and experience of the Indian Party in the same or related line of
activity as of the JV / WOS outside India.

Therefore, under the approval route (proposals not covered by the conditions under the
automatic route) prior approval of the Reserve Bank would be required. For which a specific
application in Form ODI with the documents prescribed therein is required to be made through
the Authorized Dealer Category – I banks.

17.SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS

AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002

Author’s Note:

As per ICAI notification dated 24.06.2019 ,section No. 20 and onwards are excluded from
syllabus.

Question 1

Glow Bright Limited, engaged in business of printing of advertisement material, took a term
loan of ₹ 5 Crore from a Bank against security created as first charge on its printing machines.
Glow Bright Limited made default in re-payment of term loan to the Bank. Consequently, the
Bank issued notice to the Company under SARFAESI Act, 2002 to discharge its liabilities.
Answer the following with reference to provisions of SARFAESI Act, 2002:

(i) What is the maximum period within which Glow Bright Limited must pay its
liabilities?
(ii) What if, Glow Bright Limited failed to discharge its liabilities within the specified
time limit?

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(NOV 2020 EXAM NEW)

Answer :

(i) Period of payment for discharge of liability: As per section 13 of the SARFAESI Act,
2002, where any borrower, who is under a liability to a secured creditor under a security
agreement, makes any default in repayment of secured debt or any instalment thereof, and
his account in respect of such debt is classified by the secured creditor as non-performing
asset(NPA), then, the secured creditor may require the borrower by notice in writing to
discharge in full his liabilities to the secured creditor within sixty days from the date of
notice failing which the secured creditor shall be entitled to exercise all or any of the rights
under Section 13(4).

(ii) In case of failure to discharge the liability: if the borrower fails to discharge his liability
in full within the above specified period, the secured creditor may take recourse to one or
more of the following measures to recover his secured debt: -
 take possession of the secured assets of the borrower including the right to
transfer by way of lease, assignment or sale for realising the secured asset;
 take over the management of the business of the borrower including the right to
transfer by way of lease, assignment or sale for realising the secured asset;
 appoint any person (hereafter referred to as the manager), to manage the secured
assets the possession of which has been taken over by the secured creditor;
 require at any time by notice in writing, any person who has acquired any of the
secured assets from the borrower and from whom any money is due or may become
due to the borrower, to pay the secured creditor, so much of the money as is
sufficient to pay the secured debt.
Glow Bright Ltd. must act in compliance with the stated provisions for payment of the term loan
to the Bank and in case of failures, bank may take the said measures to recover the secured debt.

Question 2

Good Heart Limited had borrowed ₹ 15 crore from XYZ Bank Limited and ₹ 25 crore from AB
Bank Limited by providing appropriate security. Good Heart Limited could not pay the dues of
the bankers due to recession in business. Consequently, XYZ Bank Limited and AB Bank Limited
took over the management of Good Heart Limited. After managing the business for some
months, the bankers were successful in realizing their dues from the business of Good Heart
Limited. By that time, the bankers had converted part of the debts of Good Heart Limited into
equity shares of the company and thereby had acquired controlling interest in Good Heart
Limited. Referring to and analyzing the relevant provisions of the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, decide
whether XYZ Bank Limited and AB Bank Limited are obliged to restore the management of the
business to Good Heart Limited.

(JAN 2021 EXAM NEW)

Answer :

According to section 13(4) of the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, if the borrower fails to discharge his liability in full
within the specified period, the secured creditor may for the purpose of recovering his secured

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debt, take over the management of the business of the borrower including the right to transfer
by way of lease, assignment or sale for realising the secured asset.

It is also provided that where the management of whole of the business or part of the business
is severable, the secured creditor shall take over the management of such business of the
borrower which is relatable to the security for the debt.

Obligation of secured creditor: The secured creditor is under an obligation to restore the
management of the business of the borrower, on realisation of his debt in full, in case of
takeover of the management of the business of a borrower by such secured creditor.

Provided that if any secured creditor jointly with other secured creditors or any asset
reconstruction company or financial institution or any other assignee has converted part of its
debt into shares of a borrower company and thereby acquired controlling interest in the
borrower company, such secured creditors shall not be liable to restore the management of the
business to such borrower.

In the given question, XYZ Bank Limited and AB Bank Limited (secured creditor jointly with
other secured creditors) had converted part of the debts of Good Heart Limited into equity
shares of the company and thereby had acquired controlling interest in Good Heart Limited.
Hence, the XYZ Bank Limited and AB Bank Limited are not obliged to restore the management of
the business to Good Heart Limited.

Question 3

High Growth Housing and Finance Limited is incorporated as a Public Limited company in 2010
and its net owned fund as on 31.3.2019 was ₹ 250 crore. The Board of Directors have decided to
commence a business of securitisation and to apply to Reserve Bank of India. From the financial
statements of the company it is seen that the company had incurred a net loss of ₹ 2.00 crore in
2014 and posted good profits in the subsequent years till 2019. The Board seeks your advice
with regard to the conditions to be fulfilled for grant of approval by RBI as an ARC.

(NOV 2020 EXAM OLD)

Answer :

Registration of ARCs (Section 3 of SARFAESI Act, 2002)

Commencement of business of securitisation or asset reconstruction: A Company can

commence or carry on the business of securitisation or asset reconstruction only after obtaining
a certificate of registration granted under this Section and having the net owned fund of not less
than one hundred crore rupees or such other higher amount as the Reserve Bank, may, by
notification, specify.

Conditions: The Reserve Bank may, for the purpose of considering to grant its approval for the
application for registration of an ARC to commence or carry on the business of securitisation or
asset reconstruction, as the case may be, require to be satisfied, by an inspection of records or
books of such ARC, or otherwise, that the following conditions are fulfilled, namely:-

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(i) that the ARC has not incurred losses in any of the three preceding financial years;

(ii) that such ARC has made adequate arrangements for realisation of the financial assets
acquired for the purpose of securitisation or asset reconstruction and shall be able to
pay periodical returns and redeem on respective due dates on the investments made in
the company by the qualified buyers or other persons;

(iii) that the directors of ARC have adequate professional experience in matters related to
finance, securitisation and reconstruction;

(iv) that any of its directors has not been convicted of any offence involving moral turpitude;

(v) that a sponsor of an ARC is a fit and proper person in accordance with the criteria as
may be specified in the guidelines issued by the Reserve Bank for such persons;

(vi) that ARC has complied with or is in a position to comply with prudential norms specified
by the Reserve Bank.

(vii) that ARC has complied with one or more conditions specified in the guidelines issued by
the Reserve Bank for the said purpose.
In the instant case, the net owned funds of High Growth Housing and Finance Limited is ₹ 250
Crore and it has not incurred losses in any of the three preceding financial years.

Accordingly, the Board is advised to follow the above conditions to get the approval from
RBI as an ARC.

Question 4

Anush Properties Private Limited have availed a term loan from a nationalized bank on the
security of a house property of a director. When the company received a copy of the
Memorandum of Title Deeds registered with the Sub-Registrar, it is found that there are some
discrepancies in the description of the property and the value of the mortgaged property. The
company seeks your advice regarding the rectification of such mistakes with the office of sub-
Registrar and Central Registry. Advise. (NOV 2020 EXAM OLD)

Answer :

Modification of security interest registered under this Act (Section 24 of SARFAESI, 2002)

Whenever the terms or conditions, or the extent or operation, of any security interest registered
under this Act, are, or is, modified it shall be the duty of the ARC to send to the Central Registrar,
the particulars of such modification. Thus, the company can follow the above procedure to
rectify the mistakes in the description of the property and the value of the mortgaged property.

Question 5

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Perpetual Limited is an Asset Reconstruction Company (ARC) under the SARFAESI Act, 2002.
During the financial year 2020-2021, Mr. Param one of the director of the company in urgent
need of money transferred 10% of his shareholding to Mr. shariff (another director of the
company) which increased Mr. Shariff’s shareholding to 20%. Perpetual Ltd. also appointed Mr.
Vikram as CEO for managing the overall operations and resources of a company. However, for
the said purposes, Perpetual Limited did not take approval of the Reserve Bank of India. RBI
cancelled the certificate of registration granted to Perpetual Limited. Perpetual Ltd. contended
that decision of RBI is inappropriate as transfer of shareholding and appointment of CEO is not a
substantial change in management. Discussion on the validity of decision of the RBI in the light
of the applicable Law. (MARCH 2021 MTP)

Answer :

As per section 3(6) of the SARFAESI Act, 2002, every asset reconstruction company, shall obtain
prior approval of the Reserve Bank for any substantial change in its management including
appointment of any director on the board of directors of the asset reconstruction company or
managing director or chief executive officer thereof or change of location of its registered office
or change in its name:

Provided that the decision of the Reserve Bank, whether the change in management of a
securitisation company or a reconstruction company is a substantial change in its management
or not, shall be final.

Explanation— For the purposes of this section, the expression “substantial change in
management” means the change in the management by way of transfer of shares or change
affecting the sponsorship in the company by way of transfer of shares or amalgamation or
transfer of the business of the company.

In the above question, there has been change in shareholding of directors which falls under the
“substantial change in management” including appointment of CEO and the decision of the
Reserve Bank as to whether the change in management of the asset reconstruction company a
substantial change in management is or not, shall be final.

Therefore, the decision of the Reserve Bank, shall be final and will be held valid.

Question 6

Mr. Raman decided to prefer an appeal under section 18(1) of the SARFAESI Act, 2002 against
the measures taken by the secured creditor. Mr. X lodged a caveat on 1st January 2021 claiming
a right to appear before the appellate tribunal on the hearing of such an appeal. After caveat
lodged, Mr. X served notice of caveat by registered post on Mr. Raman. An appeal was filed
before the appellate Tribunal by Mr. Raman on 15th March, 2021. Appellant Tribunal served a
notice of appeal filed by the Mr. Raman on caveator. Discuss on the validity period of the
enforcement of the caveat in the given case and on the legality of lodged caveat. (APRIL
2021 MTP)

Answer :

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Right to lodge a caveat (Section 18C)

As per section 18C of the SARFAESI, where an application or an appeal is expected to be made
or has been made under section 17(1) or section 17A or section 18(1) or section 18B, any
person claiming a right to appear before the Tribunal or the Court of District Judge or the
Appellate Tribunal or the High Court, as the case may be, on the hearing of such application or
appeal, may lodge a caveat in respect thereof

Where a caveat has been lodged, such caveat shall not remain in force after the expiry of the
period of ninety days from the date on which it was lodged unless the application or appeal has
been made before the expiry of the period.

Here in the given problem, caveat was lodged on 1st January 2021 by Mr. X and an appeal was
filed before the appellate Tribunal by Mr. Raman on 15th March, 2021. As per the stated
provision caveat shall remain in force for the period of ninety days from the date on which it
was lodged. Therefore, the validity period of the enforcement of the caveat in the given case was
till 1st of April, 2021. Since in the given case appeal was filed before 1st April, 2021, so the said
caveat holds to be good entitling Mr. X to appear on the hearing of an appeal filed by Mr. Raman.

18.CORPORATE SECRETARIAL PRACTICE – DRAFTING OF

NOTICES, RESOLUTIONS, MINUTES AND REPORTS
Question 1

The Board of Directors of Zion Spinning and Weaving Mills Limited have decided to pass a
resolution regarding the fixation of salary of General Manager (Technical) by way of circulation
among the directors who are away from the Registered Office. Draft a notice with the specimen
resolution. (NOV 2020 EXAM OLD)

Answer :

Specimen Board Resolution – Passed by Circulation

Zion Spinning and Weaving Mills Ltd.

To

Mr , Director

……………….……………

……………….……………

(Address in India only).

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Dear Sir,

The following resolution, which is intended to be passed as a resolution by circulation as

provided in Section 175 of the Companies Act, 2013, is circulated herewith as per the provisions
of the said section.

If only you are Not Interested in the resolution, you may please indicate by appending your
signature in the space provided beneath the resolution appearing herein below as a separate
perforated slip if you are in favour or against the said resolution. The perforated slip may please
be returned if and when signed within days of this letter.

However, it need not be returned if you are interested in the resolution.

Yours faithfully,

(Secretary)

Zion Spinning and Weaving Mills Ltd.

Resolution by circulation passed by the directors as per

circulation effected………… 20…..

“RESOLVED that subject to the approval by the shareholders in a general meeting and pursuant
to the provisions of the applicable provisions of the Companies Act, 2013, the salary of Mr. ,
General Manager (Technical) be and is hereby fixed at:

(1) Salary: ₹ per month

(2) Perquisites, Benefits and Facilities …………………………….
(3)
with effect from 1st ___(Month), 20__ for a period of years.

“RESOLVED FURTHER that the Secretary of the company be and is hereby directed and
authorized to file necessary returns with the Registrar of Companies and to do all other
necessary things required under the provisions of the Companies Act, 2013.”

[Set out the resolution intended to passed]

*For/Against

Signature

*Strike off whichever is inapplicable.

Question 2

Draft a specimen resolution of approval of Directors’ report of the financial year 2020-

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2021. (MARCH 2021 MTP)

Answer :

“Resolved that the draft of the Directors ‘Report for the year ended 31st March, 2020, as
submitted before the meeting, duly initiatalled by the Chairman of the meeting for the purpose
of identification, be and is hereby considered and approved by the Board and that the same be
signed on behalf of the Board of Directors of the company by Mr….. Director and Mr … Director.

Resolved further that pursuant to provisions stipulated under sub-section 3 of the Section 179
of the Companies Act, 2013 read with Companies (Meetings of Board and the powers) Rules,
2014, all the directors of the company be and is hereby severally authorised to file the
resolution with the Registrar of Companies,…. Along with requisite e-Form.”

19.ARBITRATION AND CONCILATION ACT, 1996

(Only For New Syllabus)
Question 1

Anil, who is a Chartered Accountant with his own independent practice, is the arbitrator in an
arbitration between Tata Tea Inc., and Suzuki Ltd.

scenarios I - Prior to starting his practice, Anil had worked for five years with Tata Tea Inc.

II – During the proceedings before the arbitral tribunal, Anil would allow Tata Tea to take many
liberties, for instance taking as much time for making oral arguments, cross examining the
witnesses, for submitting documents, etc. Also the proceedings were adjourned (postponed)
whenever so requested by Tata Tea. When Suzuki Motors wanted to take extra time they were
not allowed. In few instances when they were permitted, they are asked to pay heavy cost to
Tata Tea for delaying the proceedings..

Suziki Ltd. on the basis of above scenarios wanted to challenge the appointment of Mr. Anil.
State whether the appointment of Mr. Anil as an arbitrator can be challenged? (MAY 2021
RTP)

Answer :

As per section 12 of the Arbitration and Conciliation Act, 1996, when a person is approached in
connection with his possible appointment as an arbitrator, he shall disclose in writing any
circumstances-

a. such as existence either direct or indirect of any past or present relationship with or
interest in any of the parties or in relation to the subject matter in dispute, whether
financial, business, professional or other kind, which is likely to give rise to justifiable
doubts as to his independence or impartiality; and
b. which are likely to affect his ability to devote sufficient time to the arbitration and in
particular his ability to complete the entire arbitration within a period of twelve months.

In the first case Anil had worked for five years with Tata Tea Inc. In this situation the law
would deem Anil to be lacking independence.

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In second case, arbitrator by his / her behaviour gives an impression that he is favouring
one party over the other.

An arbitrator may be challenged only if circumstances exist that give rise to justifiable
doubts as to his independence or impartiality. In the given scenarios, it would be deemed
that Anil to be lacking independence and whereas in the second case it clearly reflects that
arbitral tribunal favours and is partial towards Tata Tea, and therefore lacks impartiality.
Yes, appointment of Mr. Anil as an arbitrator can be challenged.

Question 2

Shyam started a fresh juice shop and contacted Naresh for supply of fruits and vegetables. Most
of the communication between them happened over email. On the email, they decided the
payment, terms and other conditions of service. For initial 5 months, Shyam was regular in
making payment to Naresh for the fruits bought, but later on stopped making payments. Naresh
filed a suit against Shyam in a Magisterial Court but Shyam contended that the matter should be
settled through Arbitration. Referring to provision of the Arbitration and Conciliation Act, 1996,
state, whether the contention of Shyam is correct? (NOV 2020 EXAM NEW) Similar
Ques. In APRIL 2021 MTP

Answer :

Arbitration is a private method of dispute resolution. Under the Indian law every individual has
the right to approach the court for resolution of his/her dispute that may involve infringement
of right(s) vested upon that individual. This protection is so stringent that it cannot be
contracted away. The Indian Contract Act, 1872 however notes an exception in favour of
arbitration.

Arbitration cannot happen without the parties consenting to submit their dispute to arbitration.
Consent of the parties therefore is the most fundamental requirement for an arbitration to
happen. An arbitration agreement records the consent of the parties that in the event of a
dispute between them that matter instead of being taken to court, will be submitted for
resolution to arbitration. Arbitration agreement therefore is necessary to start arbitration.

In the instant case, there is no express arbitration agreement between the parties (Naresh
&Shyam) as regards to reference of disputes for arbitration. Further, Naresh filed a suit against
Shyam in the Magisterial court but Shyam contended that the matter of dispute should be
settled through Arbitration. Here, since no express arbitration agreement was made between
the parties, Shyam contention to submit the dispute for arbitration, is not correct. Even the
court cannot refer the parties to arbitration unless there's a written consent by parties by way
of joint application or memo or an affidavit.

Question 3

By virtue of the arbitration agreement between Mr. C and Mr. P, a matter between them which
could not be resolved smoothly, was referred to the arbitrator tribunal having three arbitrators.
Two among the arbitrators were of the opinion that Mr. C has to pay a compensation of ₹ 2
crore to Mr. P. The third arbitrator was of the opinion that Mr. P is not eligible to get any

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compensation from Mr. C. The award was then written and signed by the first two arbitrators,
while the third arbitrator refused to sign. The fact that the third arbitrator refused to sign and
the reason behind that was stated in the award. Mr. C contended that since all the arbitrators
did not sign, the award is invalid. In the light of the provisions of the Arbitration and
Conciliation Act, 1996, decide, whether the contention of Mr. C is tenable?
(JAN 2021 EXAM NEW)

Answer :

According to Section 31(1)(a) of the Arbitration and Conciliation Act, 1996, it requires that
an arbitral award to be in writing and having the signature of majority of the members of
the arbitral tribunal. It is not an award unless these two conditions are fulfilled. It is quite
possible that a particular arbitrator may not agree with the contents of the award. Therefore,
the law only requires majority of the arbitrators to sign. The law however requires the award to
note why the signature of an arbitrator was missing.

In the instant case, the arbitral award is written and signed by two arbitrators along with the
fact and the reason of refusal to sign by third arbitrator. So, this award is valid.

Hence, the contention of Mr. C that since all the arbitrators did not sign, the award is
invalid, is not tenable.

20.FOREIGN CONTRIBUTION (REGULATION) ACT, 2010

ONLY FOR NEW SYLLABUS
Question 1

X, is an association having certificate of registration transfers the Foreign Contribution received

by it to another organization? Whether X can validity transfer the foreign contribution. If yes,
then what is the process to do so? Is there any restriction on transfer of funds to other
organization?
(MTP MAY 19)

Answer

Provisions and Explanation: ***Revised through May 2021 Amendments

Transfer of Foreign Contribution:

➢ As per Sec .7 of FCRA, 2010, no person who is registered and granted certificate or has
obtained prior permission under this Act; and receives any foreign contribution, shall
transfer such foreign contribution to any other person.
➢ However, such person may transfer, with the prior approval of the Central Government, a
part of such foreign contribution to any other person who has not been granted a
certificate or obtained permission under this Act in accordance with the rules made by
the Central Government.
Conclusion:
X cannot transfer the Foreign Contribution received by it to another organization in compliance
of Sec.7.
Earlier, foreign contribution accepted with the permission of the Central Government
could be transferred to any other person who is registered under FCRA, 2010 or has

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obtained prior permission. It can be seen that the legislature has placed a blanket
prohibition on transfer of foreign contribution received by any person to any other
person. The intention is to prevent recipients of foreign contribution acting as mere
conduits or facilitating agents for obtaining foreign contribution.

Important Note : The relevance of Rule 24 in the light of the blanket prohibition is
debatable. Central Government may refuse to grant permission citing section 7 as
amended. Nevertheless, an amendment to the rules or a clarificatory circular would
enable better compliance on this matter.
Restrictions on transfer of funds:
Rule 24 of FCRR, 2011, prescribes the procedure for transferring foreign contribution to any
unregistered person as under:
(1) A person who has been granted a certificate of registration or prior permission u/s 11 and
intends to transfer part of the foreign contribution received by him to a person who has not
been granted a certificate of registration or prior permission under the Act, may transfer
such foreign contribution to an extent not exceeding ten per cent of the total value thereof
and for this purpose, make an application to the Central Government in the prescribed Form
(Form FC-5).
(2) Application shall be accompanied by a declaration to the effect that:
➢ The amount proposed to be transferred during the financial year is less than 10% of the
total value of the foreign contribution received by him during the financial year;
➢ The transferor shall not transfer any amount of foreign contribution until the C.G approves
such transfer.
(3) A person who has been granted a certificate of registration or prior permission u/s 11 shall
not be required to seek the prior approval of the C.G for transferring the foreign
contribution received by him to another person who has been granted a certificate of
registration or prior permission under the Act provided that the recipients has not been
proceeded against under any of the provisions of the Act.
(4) Both the transferor and the recipient shall be responsible for ensuring proper utilisation of
the foreign contribution so transferred and such transfer of foreign contribution shall be
reflected in the returns in Form to be submitted by both the transferor and the recipient.

Question 2

X, a registered association transfers the Foreign Contribution received by it to another person?

Comment upon the validity of said act of X in terms of Foreign Contribution (Regulation) Act,
2010?
(May 2021 RTP)

Answer:

In the light of section 7 of the FCRA, 2010, no person who –

o is registered and granted a certificate or has obtained prior permission under this
Act; and
o receives any foreign contribution,

shall transfer such foreign contribution to any other person.

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According to the section, the act of X, an association of transferring the Foreign

Contribution another person, is not valid.

Question 3
An Association registered under the Foreign Contribution (Regulation) Act, 2010 (the Act)
received donation from a club registered in Singapore. The Association proposes:

(i) To transfer 10% of the donation to "Home for Aged Society", an unregistered person and
15% to "Welfare Club" a registered person under the Act,
(ii) To invest portion of the donation in Chits promising high returns.
In the light of provisions of the Foreign Contribution (Regulation) Act, 2010 decide whether
the Association can carry out the above proposals and if so state the procedures to be
followed under the said Act?
(Nov.18 Exm.)
Answer: ***Revised through May 2021 Amendments

(i) According to Section 7 of the Foreign Contribution (Regulation) Act, 2010, no person who is
registered and granted a certificate or has obtained prior permission under this act and
receives any foreign contribution, shall transfer such foreign contribution to any other person.

However, that such person may transfer, with the prior approval of the Central Government, a
part of such foreign contribution to any other person who has not been granted a certificate or
obtained permission to an extent not exceeding ten per cent of the total value thereof and for
this purpose, make an application to the Central Government in prescribed Form. [Read with
Rule 24 of FCRR, 2011]

In the instant case, the association cannot transfer 10% of the donation to “Home for Aged
Society” an unregistered person after making an application to the Central Government in
prescribed form and cannot also transfer 15% to “Welfare Club” a registered person under the
Act.
Note : Important Note : The relevance of Rule 24 in the light of the blanket prohibition is
debatable. Central Government may refuse to grant permission citing section 7 as
amended. Nevertheless, an amendment to the rules or a clarificatory circular would
enable better compliance on this matter.
(ii) According to proviso to Section 8 of the FCRA, 2010 any foreign contribution shall not be
used for speculative business.

Speculative activities have been defined in Rule 4 of FCRR, 2011 as under: -

✓ any activity or investment that has an element of risk of appreciation or depreciation of the
original investment, linked to market forces, including investment in mutual funds or in
shares;
✓ participation in any scheme that promises high returns like investment in chits or land or
similar assets not directly linked to the declared aims and objectives of the organization or
association.
In the instant case, the association cannot invest portion of the donation in Chits
promising high returns.
Question 4 (IMPORTANT QUES BASED ON AMENDMENT)

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CA FINAL PAPER 4 (LAW) MAY 2021 ADDITIONAL QUESTIONS

Bharat Sevak, an NGO granted a certificate of registration to receive foreign contribution in

terms of the provisions of the Foreign Contribution (Regulation) Act, 2010. The organization
intends to invest some of the contribution amount in some mutual funds, which is projected to
give good results and thereby strengthening the financial position of the organization. Bharat
Sevak is also planning to defray around 65% of the amount of foreign contribution received
towards administrative expenses. Advise the organization in the light of the provisions of the
Foreign Contribution (Regulation) Act, 2010, whether it can give effect to the above two
proposals.
(JAN 2021 EXAM NEW)

Answer :

Restriction to utilize foreign contribution for administrative purpose [Section 8 of

Foreign Contribution (Regulation) Act, 2010 read with Rule 4 of FCR, Rule 2011]

Every person, who is registered and granted a certificate or given prior permission under this
Act and receives any foreign contribution, shall—
(a) utilise such contribution for the purposes for which the contribution has been received:

Provided that any foreign contribution or any income arising out of it shall not be used
for speculative business;

(b) not defray such sum, exceeding fifty twenty percent per cent of such contribution,
received in a financial year, to meet administrative expenses.

Provided that administrative expenses exceeding twenty per cent of such contribution
may be defrayed with prior approval of the Central Government.

(i) In the instant case, Bharat Sevak intends to invest some foreign contribution in mutual fund
which is a speculative activity under Rule 4 of FCR, Rule 2011. Thus, Bharat Sevak cannot
give effect to this proposal.

(ii) Bharat Sevak is planning to defray around 65% of the amount towards administrative
expenses. This proposal is also not valid as it is exceeding 20% of contribution. But this
proposal can be given effect if prior approval of Central Government has been taken.

21.DECLARATION AND PAYMENT OF DIVIDEND

(Only for Old Syllabus)
Question 1

The Board of Directors of Future Fashions Limited at its meeting recommended a dividend on
its paid-up equity share capital which was later on approved by the shareholders at the Annual
General Meeting. Thereafter, the directors at another meeting of the Board passed a board
resolution for diverting the total dividend to be paid to the shareholders for purchase of certain
short-term investments in the name of the company. As a result, dividend was paid to
shareholders after 45 days.

Examining the provisions of the Companies Act, 2013, state whether the act of directors is in
violation of the provisions of the Act and if so, state the consequences that shall follow for the
above violative act.
Answer :

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According to Section 124 of the Companies Act, 2013, where a dividend has been declared by a
company but has not been paid or claimed within 30 days from the date of the declaration, the
company shall, within 7 days from the date of expiry of the said period of 30 days, transfer the
total amount of dividend which remains unpaid or unclaimed to a special account to be opened
by the company in any scheduled bank to be called the Unpaid Dividend Account.

Further, according to Section 127 of the Companies Act, 2013, where a dividend has been
declared by a company but has not been paid or the warrant in respect thereof has not been
posted within 30 days from the date of declaration to any entitled shareholder, every director of
the company shall, if he is knowingly a party to the default, be liable for punishment.

In the present case, the Board of Directors of Future Fashions Limited at its meeting
recommended a dividend on its paid-up equity share capital which was later on approved by
the shareholders at the Annual General Meeting. Thereafter, the directors at another meeting of
the Board decided by passing a board resolution for diverting the total dividend to be paid to
the shareholders for purchase of certain short-term investments in the name of the company. As
a result, dividend was paid to shareholders after 45 days.

i. Since, declared dividend has not been paid within 30 days from the date of the declaration
to any shareholder entitled to the payment of dividend, the company shall, within 7 days
from the date of expiry of the said period of 30 days, transfer the total amount of dividend
which remains unpaid or unclaimed to a special account to be opened by the company in
any scheduled bank to be called the Unpaid Dividend Account.
ii. The Board of Directors of Future Fashions Limited has violated section 127 of the
Companies Act, 2013 as it failed to pay dividend to shareholders within 30 days due to its
decision to divert the total dividend to be paid to shareholders for purchase of certain
short-term investments in the name of the company.

Consequences: The following are the consequences for violation of the above provisions:

(a) Every director of the company shall, if he is knowingly a party to the default, be punishable
with maximum imprisonment of two years and shall also be liable for a minimum fine of
rupees one thousand for every day during which such default continues.

(b) The company shall also be liable to pay simple interest at the rate of 18% p.a. during the
period for which such default continues.

Question 2

The Balance Sheet of MDL Limited as on 31st March, 2019 is as follows:

(i) Paid up share capital - 8,00,000 equity shares of ₹ 100 each - ₹ 8.00 crore and
2,00,000 Preference Shares of ₹ 10 each carrying 10% preference dividend - ₹
2.00 crore - Totaling ₹ 10 crore.
(ii) Reserves & Surplus - ₹ 23 Crore
(iii) Rate of Dividend declared by the company for the year ended 31.3.2016 - 15%;
for the year ended 31.3.2017 - 20% and for the year ended 31.3.2018 - 25%.
(iv) For the year ended 31.3.2019, the Net Profit after taxation was ₹ 1 crore.
(v) The Board of Directors have decided to maintain the rate of dividend at the rate of
15% for the year ended 31.3.2019.
(vi) Unclaimed dividend for the year ended 31.3.2018 - ₹ 1,00,000.

One of the directors objected to the declaration of dividend stating that surplus is to be
preserved for future expansion. The Board seeks your advice about the declaration of dividend

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as per the Companies Act, 2013 and rules made there under. (NOV 2020 EXAM
OLD)

Answer :

As per second proviso to Section 123(1) of the Companies Act, 2013, in the event of
inadequacy or absence of profits in any year, a company may declare dividend out of the
accumulated profits earned by it in the previous years and transferred by the Company to the
reserves. However, such declaration shall be subject to the following conditions as prescribed
by the Ministry of Corporate Affairs under Rule 3 of Companies (Declaration and Payment of
Dividend) Rules, 2014.

(i) The rate of dividend declared shall not exceed the average of the rates at which
dividend was declared by it in the three years immediately preceding that year,
(ii) The total amount to be drawn from such accumulated profits shall not exceed
one- tenth of the sum of its paid-up capital and free reserves as appearing in the
latest audited financial statement.
(iii) The amount so drawn shall first be utilized to set-off the losses incurred in the
financial year in which the dividend is declared before any dividend in respect of
equity shares is declared.
(iv) The balance of reserves after such withdrawal shall not fall below 15% of its paid-
up share capital as appearing in the latest audited financial statement.

Calculation and Conclusion based on the above Rule

Condition (i)
Average rate of dividend declared by the Company in the three years immediately preceding
that year = (15% +20%+ 25% = 60% /3 years) = 20%
The proposed dividend = 15%. The proposed dividend is below the average rate of dividend
declared in the three years immediately preceding that year.
Hence, the first condition is satisfied.

Condition (ii)
(Amount in Rs)
(a) Amount required for declaration of Dividend to Equity Shareholders 1,20,00,000
@15% on ₹ 8 crore
(b) Amount available for the Current Year (Net Profit) 1,00,00,000
(c) Less: Amount required for Preference Dividend @10% on ₹ 2 crore 20,00,000

(d) Net amount available after Preference Dividend 80,00,000

(e) Amount required to be drawn from the Reserves (a)-(d) 40,00,000

As per the second condition, the amount that can be withdrawn shall not exceed 10% of the
paid-up capital and free Reserves i.e. 10% of ₹ 33 crore (Rs 10 crore plus ₹ 23 crore)
= 10% of ₹33 crore = ₹3.30 crores.
Since the requirement is ₹ 40,00,000 only, it satisfies this condition.
The balance in Reserves and Surplus after withdrawal will be ₹ 22,60,00,000 i.e. (₹ 23,00,00,000
minus ₹ 40,00,000)

Condition (iii)

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As per the third condition, there is no loss to be set-off in the current year. There is an
inadequacy of profit only.

Condition (iv)

As per the fourth condition, the balance in the Reserves and Surplus after withdrawal as per the
second condition, should not fall below 15% of its paid up capital i.e. 15 % of
₹ 10 crore (i.e. ₹8 crore plus ₹ 2 crore) = ₹ 1,50,00,000/-
Since the balance after the withdrawal is more than the amount i.e. ₹ 22,60,00,000/-, the fourth
condition is also satisfied.

Advice to the Board

MDL Limited can declare dividend at the rate of 15% of the paid up capital. Accordingly, the
objection of one of the directors to the declaration of dividend is not correct.

NOTE:
1. The paid up capital of Preference shares is taken at ₹ 2 Crores
2. The figures of Reserves and Surplus as given in the question is assumed as Free Reserves
available for distribution of dividend.

Question 3

The Board of Directors of KM Limited has approved annual financial statements for the financial
year 2019-20 showing net profit of ₹ 50 crore. The Board of Directors proposed dividend @
10% to the equity shareholders without transfer of any amount to reserves of the company for
the financial year 2019-20 in the board meeting held on 31-07-2020 and was approved by the
shareholders in the annual general meeting held on 30 -09-2020.

It is observed from the annual financial statements referred above that the company failed to
comply with the provisions of Section 73 of the Companies Act, 2013 and the failure continued
for 3 months. The above failure was finally complied on 31 -12-2019 by the company.

KA Limited, an associate company of KM Limited is registered under section 8 of the Companies

Act, 2013. The Board of Directors of KA Limited proposed dividend @ 9% to its equity
shareholders for the financial year 2019-20 in the board meeting held on 30-06- 2020 and was
approved by the shareholders in the annual general meeting held on 31- 07-2020.

Answer the following explaining the provisions of the Companies Act, 2013:

A. Can KM Limited declare dividend without transfer of any amount to reserves?

B. Does the failure to comply with the provisions of section 73 of the Companies Act, 2013
have any impact on the declaration of dividend by the shareholders of KM Limited in the
given situation?
C. Can KA Limited declare dividend to its equity shareholders @ 9% mentioned above?
(JAN 2021 EXAM OLD) ,Similar Ques in April 2021 MTP

Answer :

A. BACKGROUND: As per the given facts, KM Limited have a net profit of ₹50 crore for the
financial year 2019-2020. The Board of Directors proposed a dividend @ 10% to the equity
shareholders. However, it has not transferred any amount to the reserves of the Company for
the financial year 2019-2020.

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DIVIDEND DECLARATION WITHOUT TRANSFER TO RESERVES:

LEGAL POSITION: As per the First Proviso to Section 123 (1)(b) of the Companies Act, 2013, a
Company may, before the declaration of any dividend in any financial year, transfer such
percentage of profits for that financial year as it may consider appropriate to the reserves of the
Company. Such transfer is not mandatory and the percentage to be transferred to reserves is to
be decided at the discretion of the Company.

CONCLUSION: In the light of the above, KM Limited can declare dividend even without transfer
of any amount to reserves.

B.IMPACT OF DECLARATION OF DIVIDEND

LEGAL POSITION: Section 123(6) of the Companies Act, 2013, provides that a Company which
fails to comply with the provisions of Section 73 (dealing with ‘Prohibition on Acceptance of
Deposits from Public’) shall not, so long as such failure continues, declare any dividend on its
equity shares. Here, in the given case, the failure was complied on 31.12.2019 itself.

CONCLUSION: Hence, it does not have any impact on the proposed dividend by the Board of
Directors in the Board meeting held on 31.07.2020 and approved by the shareholders of KM
Limited in the annual general meeting held on 30.09.2020.

C.DECLARATION OF DIVIDEND BY SECTION 8 COMPANY:

LEGAL POSITION: According to Section 8 (1) of the Companies Act, 2013 a Company having a
licence under Section 8 (‘Formation of Companies with Charitable Objects’, etc.,) is prohibited
from paying any dividend to its members. Their profits are intended to be applied only in
promoting the objects of the Company.

CONCLUSION

Therefore, KA Limited cannot declare dividend to its equity shareholders @ 9%.

22. COMPANY ACCOUNTS

(Only for Old Syllabus)
Question 1

PDP Limited has one Wholly-owned subsidiary AB Limited and one Joint Venture Company,
KRN Limited in which PDP Limited has got 60% share. PDP Limited has got plans to go for
listing with National Stock Exchange at the end of 2020. The Managing Director, Mr. P, is
interested to prepare the Consolidated Financial Statements for the year ended 31.3.2020. The
Chief Financial Officer, Mr. G, has not agreed to such a proposal. You are required to advise the
company and to decide the validity of the views of the Managing Director and the CFO as per the
relevant provisions of the Companies Act, 2013.
(NOV 2020 EXAM OLD)

Answer :

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As per Section 129 (3) of the Companies Act, 2013 where a Company has one or more
subsidiaries, associate companies, it shall in addition to financial statements provided under
sub-section (2), prepare a consolidated financial statement of the Company and of all the
subsidiaries in the same form and manner as that of its own which shall also be laid before the
annual general meeting of the Company along with the laying of its financial statement. The
consolidation of financial statements shall be made in accordance with the provisions of
Schedule III of the Act and the applicable Accounting Standards.

Exemptions from preparation of CFS (Consolidated Financial Statements):

As per Rule 6 of the Companies (Accounts) Amendment Rules, 2016, preparation of consolidated
financial statements by a Company is not required if it meets the conditions stated therein
including a Company whose securities are not listed or are not in the process of listing on any
stock exchange, whether in or outside India;
In the given instance, PDP Limited has one Wholly Owned Subsidiary (AB Limited) and a Joint
Venture Company (KRN Limited) but is not listed with NSE. The Company has got plans to go
for listing at the end of 2020 with NSE and therefore, it cannot be said to be in the process of
listing with any Stock Exchange.
Whereas, the Managing Director, Mr. P is interested to prepare the Consolidated Financial
Statements (CFS) for the year ended 31.3.2020. Hence, in line with the above stated law, PDP
Limited is not required to prepare CFS.

Therefore, the view of CFO, Mr. G holds good and the proposal of Mr. P, the Managing
Director is invalid.

Question 2

Kalpana Powergen Private Limited invited the applications for appointment of Chief Financial
Officer (CFO) and Internal Auditor for the Company. Mr. Mahesh Mitra with educational
Qualification of M.Com. and LL.B. from a reputed university and having practical experience as a
practicing lawyer for five years was appointed ‘CFO’ and ‘Internal Auditor’ by the Managing
Director of the Company. The following balances have been extracted from the audited financial
statement of the Company for the year ended 31st March, 2020.

Paid-up Share Capital ₹ 100 crore

Turnover ₹200 crore
Outstanding Loan from banks ₹ 10 crore

You are required to examine under the provisions of the Companies Act, 2013 as to (i) whether
it was mandatory for Kalpana Powergen Private Limited to appoint CFO and Internal Auditor
and (ii) whether the appointment of Mr. Mahesh Mitra as a ‘CFO’ and an ‘Internal Auditor’ at the
same time shall be deemed to be valid considering his educational and professional
qualification.
(JAN 2021 EXAM OLD)

Answer :

(a) Whether it is mandatory to appoint CFO and Internal Auditor

LEGAL POSITION
As per Section 138 of the Companies Act, 2013 read with Rule 13 of the Companies (Accounts)
Rules, 2014, an Internal Auditor shall either be a Chartered Accountant or a Cost Accountant, or
such other professional as may be decided by the Board to conduct internal audit of the

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functions and activities of the Company.

Further the stated Rule provides that every Private Company with following requirements, shall
be required to appoint an Internal Auditor-
(1) Turnover of two hundred crore rupees or more during the preceding financial year; or
(2) Outstanding loans or borrowings from banks or public financial institutions exceeding
one hundred crore rupees or more at any point of time during the preceding financial
year.

CONCLUSION
In the light of stated provisions, Kalpana Powergen Private Limited mandatorily requires to
appoint an Internal Auditor, as the turnover of the Company is ₹ 200 crore.

However, appointment of CFO, who is whole-time key managerial personnel, is not mandatorily
required to be appointed in a Private Company as per Section 203 read with Rule 8 of the
Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014.

(ii) Whether the appointment of Mr. Mahesh Mitra as a CFO and an Internal Auditor at the
same time be deemed to be valid

Appointment of CFO: For the appointment of a CFO in a Private Company, no educational

qualifications has been prescribed by law. Hence, it is discretionary for the Company to consider
the educational qualification of Mr. Mahesh Mitra possessing M.Com and LLB from a reputed
university as a valid qualification for holding the position of CFO in a Company. Hence, the
appointment of Mr. Mahesh as a CFO by the Managing Director shall be deemed to be valid
provided the Managing Director has been delegated with the powers to appoint the officers and
employees of the Company without any restrictions.

Appointment of an Internal Auditor

As per the Rules, for the appointment of an Internal Auditor, Mr. Mahesh Mitra is falling under
the class of “any other professionals.” The term professionals is a wider term which may include
a Company Secretary, or a Lawyer etc., Therefore, the Board of Directors of Kalpana Powergen
Private Limited in its discretion may consider the law profession of Mr. Mahesh Mitra as a valid
professional qualification for his appointment as an Internal Auditor who may be an employee
of the Company.

However, an Internal Auditor under Section 138 of the Companies Act, 2013 has to be appointed
by the Board of Directors at its meeting. In the given case, the incumbent for the post of Internal
Auditor has been appointed by the Managing Director who is not the competent authority for
such appointment. Hence, the appointment of Mr. Mahesh as an Internal Auditor shall not be
deemed to be a valid appointment. Therefore, the appointment of Mr. Mahesh Mitra as CFO and
as an Internal Auditor at the same time shall not be valid.

23. COMPANY AUDIT

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(Only For Old Syllabus)

Question 1

One-fourth of the subscribed capital of AMC Limited was held by the Government of Rajasthan.
Mr. Neeraj, a Chartered Accountant, was appointed as an auditor of the Company at the Annual
General Meeting held on 30 April, 2019 by an ordinary resolution. Mr. Sanjay, a shareholder of
the Company, objects to the manner of appointment of Mr. Neeraj on the ground of violation of
the Companies Act, 2013. Decide whether the objection of Mr. Sanjay is tenable? Also examine
the consequences of the above appointment under the said Act. (May 2021 RTP OLD)

Answer :
As per Section 2(45) of the Companies Act, 2013, the holding of 25% shares of AMC Ltd.by
the Government of Rajasthan does not make it a government company. Hence, it will be
treated as a non-government company.

Under section 139 of the Companies Act, 2013, the appointment of an auditor by a
company vests generally with the members of the company except in the case of the first
auditors and in the filling up of the casual vacancy not caused by the resignation of the auditor,
in which case, the power to appoint the auditor vests with the Board of Directors. The
appointment by the members is by way of an ordinary resolution only and no exceptions
have been made in the Act whereby a special resolution is required for the appointment of the
auditors.

Therefore, the contention of Mr. Sanjay is not tenable. The appointment is valid under the
Companies Act, 2013.

Question 2

Mr. Rajan is a Chartered Accountant and is practising as an individual in the name of Rajan & Co.
He is the Statutory Auditor of RYR Limited for the last 10 years. The share capital of the
company as on 31.3.2013 was ₹ 2.50 crore. Over the period of time the Paid up Share capital has
been increased by way of issue of bonus shares and rights shares. The Paid up capital as on
31.3.2019 was ₹ 10.20 crore. The Annual General Meeting for the company was held on
20.9.2019. Can Mr. Rajan continue as the Statutory Auditor of the company? (NOV 2020 EXAM
OLD)

Answer :

As per Section 139 (2) of the Companies Act, 2013, listed companies and other prescribed
class or classes of companies (except one person companies and small companies) shall not
appoint or re-appoint (1) an individual as an Auditor for more than one term of five consecutive
years and (2) an audit firm as Auditor for more than two terms of five consecutive years.

Further Rule 5 of the Companies (Audit and Auditors) Rules, 2014, has prescribed certain
classes of companies for the purpose of Section 139(2) including all unlisted public companies
having paid-up share capital of Rupees 10 crore or more.

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In the instant case, the paid-up share capital of the Company as on 31.03.2019 is ₹ 10.29 Crore.
Mr. Rajan, is practicing in his individual capacity and is the statutory auditor of RYR Limited for
the last ten years.

Since Mr. Rajan had already been statutory Auditor of RYR Limited for more than one term of
five consecutive years and the paid-up share capital is more than ₹10 crore, he cannot continue
as the Statutory Auditor of RYR Limited.

Note: The question is silent whether the Company is a Listed Company or an Unlisted Company.
If a candidate writes his answer from the listed company point of view, due credit must be given
as the answer will be the same.

Question 3

Examine whether the following persons are eligible for being appointed as auditor under the
provisions of the Companies Act, 2013:

(i) Mr. RM is a practicing Chartered Accountant and Mr. ST, who is a relative of Mr. RM is
holding securities of ABC Limited having face value of ₹ 80,000 (market value ₹ 1,20,000).
Directors of ABC Limited want to appoint Mr. RM as an auditor of the company.

(ii) Mr. RS is a practicing Chartered Accountant indebted to XYZ Limited for ₹ 7 lakh.
Directors of XYZ Limited want to appoint Mr. RS as an auditor of the company. (JAN 2021
EXAM OLD)

Answer

(i) BACKGROUND

In the given case, Mr. RM, is a practicing Chartered Accountant, and Mr. ST, a relative of Mr. RM, is holding
securities of face value of ₹ 80,000 (Market Value ₹ 1,20,000) of ABC Ltd.

AUDITOR APPOINTMENT OF Mr. RM LEGAL POSITION

As per Section 141 (3)(d)(i) of the Companies Act, 2013, an Auditor is disqualified to be appointed as an
Auditor if he, or his relative or partner holds any security of or interest in the Company or its Subsidiary or
of its Holding or Associate Company or a Subsidiary of such Holding Company. Provided that the relative of
the Auditor may hold securities in the Company of face value not exceeding ₹1,00,000 as prescribed under
Rule 10 of the Companies (Audit and Auditors) Rules, 2014.

In the present case, Mr.ST (relative of Mr.RM, the auditor) is holding securities of ABC Limited having a
face value of ₹80,000 (market value ₹1,20,000) which is not exceeding the face value of ₹1,00,000.

CONCLUSION

Therefore, Mr. RM will be eligible to be appointed as an Auditor of ABC Ltd.

(ii) AUDITOR APPOINTMENT OF Mr. RS LEGAL POSITION

As per Section 141(3)(d)(ii) of the Companies Act, 2013 read with Rule 10 of the Companies (Audit and
Auditors) Rules 2014, an Auditor is disqualified to be appointed as an Auditor if he or his relative or

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partner is indebted to the Company or its Subsidiary or its Holding or Associate Company or a Subsidiary
of such Holding Company in excess of ₹5 lakh.

In the present case, Mr. RS, a practicing Chartered Accountant, is indebted to XYZ Limited for ₹ 7 lakh
which is in excess of limit prescribed i.e., ₹ 5 Lakh.

CONCLUSION

Therefore, Mr. RS cannot be appointed as an Auditor of XYZ Limited.

24.INTERPRETATION OF STATUTES, DEEDS AND DOCUMENTS

(Only For Old Syllabus)
Question 1

In the interpretation of a statute, 'proviso' plays a major role in clarifying the true intention of
the legislature to bring such an enactment. Define the term "Proviso". Enumerate the difference
between "Proviso", "Exceptions" and "Saving clause". (NOV 2020 EXAM OLD)

Answer :

Proviso: The normal function of a “proviso” is to except something out of the enactment or to
qualify something stated in the enactment which would be within its purview if the proviso
were not there. The effect of the proviso is to qualify the preceding enactment which is
expressed in terms which are too general. As a general rule, a proviso is added to an enactment
to qualify or create an exception to what is in the enactment. Ordinarily a proviso is not
interpreted as stating a general rule.

Distinction between Proviso, Exception and saving Clause

There is said to exist difference between provisions worded as ‘Proviso’,’ Exception’, or ‘Saving
Clause’.

Exception is intended to restrain the enacting clause to particular cases.

Proviso is used to remove special cases from general enactment and provide for them specially.

Saving Clause is used to preserve from destruction certain rights, remedies or privileges
already existing.

Question 2

What do you understand by ‘Document’? Explain its elements. (JAN 2021 EXAM OLD)

Answer :

MEANING OF ‘DOCUMENT’

‘Document’: Generally understood, a document is a paper or other material thing giving

information, proof or evidence of anything. The Law defines ‘document’ in a more technical
form.
Section 3(18) of the General Clauses Act, 1897 states that the term ‘document’ shall include any

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matter written, expressed or described upon any substance by means of letters, figures or
marks, or by more than one of those means which is intended to be used, or which may be used,
for the purpose of recording this matter.

ELEMENTS OF DOCUMETS

Generally, documents comprise of following four elements:

(i) Matter—This is the first element. Its usage with the word “any” shows that the
definition of document is comprehensive.
(ii) Record—This second element must be certain mutual or mechanical device
employed on the substance. It must be by writing, expression or description.
(iii) Substance—This is the third element on which a mental or intellectual elements
comes to find a permanent form.
(iv) Means—This represents fourth element by which such permanent form is
acquired and those can be letters, any figures, marks, symbols which can be used
to communicate between two persons.

Question 3

Explain how to distinguish the term ‘mandatory’ and ‘directory’ while i nterpreting the
provision. Section 5 of the Hindu Marriage Act, 1955 provides that a “a marriage may be
solemnized between two Hindus………”. State whether this provision is mandatory or
directory.(JAN 2021 EXAM OLD)
Answer :

Practically speaking, the distinction between a provision which is ‘mandatory’ and one which is
‘directory’ is that when it is mandatory, it must be strictly observed; when it is ‘directory ‘it
would be sufficient that it is substantially complied with. However, we have to look to the
substance and not merely the form.

An enactment in mandatory form might substantially be directory and, conversely, a statute in

directory form may in substance be mandatory. Hence, it is the substance that counts and must
take precedence over mere form. If a provision gives a power coupled with a duty, it is
mandatory: whether it is or is not so would depend on such consideration as:

• the nature of the thing empowered to be done,

• the object for which it is done, and
• the person for whose benefit the power is to be exercised

Example: Use of the word ‘may’ in section 5 of the Hindu Marriage Act, 1955 provides that “a
marriage may be solemnized between two Hindus…..” has been construed to be mandatory in
the sense that both parties to the marriage must be Hindus as defined in Section 2 of the Act. It
was held that a marriage between a Christian male and a Hindu female solemnized under the
Hindu Marriage Act was void.

Thus, although the provision use the word ‘may’, the substance of the provision is
mandatory and not directory.

Question 4

Gaurav Textile Company Limited has entered into a contract with a Company. You are invited to
read and interpret the document of contract. What rules of interpretation of deeds and
documents would you apply while doing so? (APRIL 2021 MTP)

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Answer :

The rules regarding interpretation of deeds and documents are as follows:

(1) One has to find out what reasonable man, who has taken care to inform himself of the
surrounding circumstances of a deed or a document, and of its scope and intendments,
would understand by the words used in that deed or document.
(2) It is inexpedient to construe the terms of one deed by reference to the terms of another.
Further, it is well established that the same word cannot have two different meanings in the
same documents.
(3) The Golden Rule is to ascertain the intention of the parties of the instrument after
considering all the words in the documents/deed concerned in their ordinary, natural
sense.
(4) The circumstances in which the particular words have been used have also to be taken into
account.
(5) It has also to be considered that very many words are used in more than one sense. It may
happen that the same word understood in one sense only will give effect to all the clauses
in the deed.
(6) It may also happen that there is a conflict between two or more clauses o f the same
documents. An effect must be made to resolve the conflict by interpreting the clauses so
that all the clauses are given effect.

25.THE COMPETITION ACT, 2002

(Only For Old Syllabus)
Question 1

Examine with reference to the relevant provisions of the Competition Act, 2002 the following:
(b) Whether a Government Department supplying water for irrigation to the Agriculturists
after levying charges for water supplied (and not a water tax) can be considered as an
‘Enterprise’.
(ii) Whether a person purchasing goods not for personal use, but for resale can be
considered as a ‘consumer.’
(May 2021 RTP)

Answer :

Enterprise: The term ‘enterprise’ is defined in section 2(h) of Competition Act, 2002.
Accordingly, ‘enterprise’ means a person or a department of the Government, who or which is
engaged in any activity, relating to the production, storage, supply, distribution, acquisition or
control of articles or goods, or the provision of services of any kind. But the term does not
include any activity of the Government relatable to sovereign functions of the Government
including all activities carried on by the departments of the Central Government dealing with
atomic energy, currency, defence and space.
Certain specific activities of Government departments like dealing with atomic energy, etc. and
sovereign functions of the Government (like police, defence, etc.) are excluded fr om the
purview of the said terms. Hence, a Government department engaged in the activity of providing
service in the form of supply of water for irrigation to the agriculturists after levying charges
can be considered as an ‘enterprise’ within the meaning of section 2(h) of Competition Act,
2002.

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Consumer: The term ‘consumer’ is defined in section 2(f) of Competition Act, 2002.
Accordingly, ‘consumer’ means any person who buys any goods for a consideration, which has
been paid or promised or partly paid and partly promised, whether such purchase of goods is
for resale or for any commercial purpose or for personal use.
Hence, it is not necessary that a person must purchase the goods for personal use in order to be
considered as a ‘consumer’ under Competition Act, 2002. Even a person purchasing goods for
resale or for any commercial purpose will also be considered as a ‘consumer’ within the
meaning of Section 2(f) of Competition Act, 2002.

Question 2

High Energy Oil Engines Limited and All Power Batteries Limited have entered into an
arrangement to combine their business activities whose total present turnover is ₹ 7,000 crores
as per the latest financial information. After receiving information about the amalgamation of
the two companies, the Competition Commission passed an order approving the combination
with certain modifications and to report within 30 working days. Even ninety days after the
intimation of order, the companies have not made the modification as proposed by the
Commission.

Comment on the consequences of non-acceptance of modifications by the companies as per the

relevant provisions of the Competition Act, 2002. (NOV 2020 EXAM OLD)

Answer :

Consequence of non-acceptance of the modification [Section 31(9) of the Competition Act,

2002]: If the parties fail to accept the modification proposed by the Commission within thirty
working days or within a further period of thirty working days, the combination shall be
deemed to have an appreciable adverse effect on competition and be dealt with in accordance
with the provisions of this Act.

As per Sub-section 10, where the Commission has directed that the combination shall not take
effect or the combination is deemed to have an appreciable adverse effect on competition under
sub-section (9), then, without prejudice to any penalty which may be imposed or any
prosecution which may be initiated under this Act, the Commission may order that

(a) the acquisition referred to in clause (a) of section 5; or

(b) the acquiring of control referred to in clause (b) of section 5; or
(c) the merger or amalgamation referred to in clause (c) of section 5,
shall not be given effect to.

The Commission may however, if it considers appropriate, frame a scheme to implement its
order.

Question 3

The Government of India is planning to do massive banking reforms through the merger of
some of the nationalized banks in other nationalized banks to pool their synergy and make them
a competitive and vibrant device in economic development of the nation. It is likely that the
asset value or turnover of the acquirer nationalized bank and the targeted bank will cross the
threshold prescribed under the Competition Act, 2002. Examine, explaining the relevant
provisions of the said Act whether such merger shall constitute ‘combination’ and shall it be
deemed to be void.
(JAN 2021 EXAM OLD)

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Answer :

Provisions of the Competition Act, 2002 relating to Combination

As per Section 5 of the Competition Act, 2002 (the Act), the acquisition of one or more
enterprises by one or more persons or merger or amalgamation of enterprises shall be a
combination of such enterprises and persons or enterprises, if any acquisition where the parties
to the acquisition, being the acquirer and the enterprise whose control, shares, voting rights or
assets have been acquired or being acquired jointly have, in india, the assets of the value of
₹2000 crore or turnover more than ₹ 6000 crore respectively (limits as enhanced by the Central
Government vide Notification No. S.O.675 E dated march 4, 2016).

As per Section 6 of the Act, no person or enterprise shall enter into a combination which causes
or is likely to cause an appreciable adverse effect on competition within the relevant market in
India and such a combination shall be void.

However, Vide Notification S.O. 2828(E) dated 30th August, 2017, in exercise of the powers
conferred by clause (a) of Section 54 of the Competition Act, 2002 , the Central Government in
the public interest hereby exempts, all cases of reconstitution, transfer of the whole or any part
thereof and amalgamation of nationalized banks, under the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer
of Undertakings) Act, 1980, from the application of provisions of Sections 5 and 6 of the
Competition Act, 2002 for a period of ten years from the date of publication of this notification
in the Official Gazette.

CONCLUSION

Hence, in the instant case, the merger of some of the nationalized banks into other nationalized
banks shall not constitute ‘combination’ and it shall not be void.

Question 4

The Government of India is planning to do massive banking reforms through the merger of
some of the nationalized banks in other nationalized banks to pool their synergy and make them
a competitive and vibrant device in economic development of the nation. It is likely that the
asset value or turnover of the acquirer nationalized bank and the targeted bank will cross the
threshold prescribed under the Competition Act, 2002. Examine, explaining the relevant
provisions of the said Act whether such merger shall constitute ‘combination’ and shall it be
deemed to be void.
(APRIL 2021 MTP)

Answer :
Provisions of the Competition Act, 2002 relating to Combination

As per Section 5 of the Competition Act, 2002 (the Act), the acquisition of one or more enterpris
es by one or more persons or merger or amalgamation of enterprises shall be a combination of
such enterprises and persons or enterprises, if any acquisition where the parties to the
acquisition, being the acquirer and the enterprise whose control, shares, voting rights or assets
have been acquired or being acquired jointly have, in India, the assets of the value of Rs.2000
crore or turnover more than Rs. 6000 crore respectively (limits as enhanced by the Central
Government vide Notification No. S.O.675 E dated march 4, 2016).

As per Section 6 of the Act, no person or enterprise shall enter into a combination which causes
or is likely to cause an appreciable adverse effect on competition within the relevant market in

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India and such a combination shall be void.

However, Vide Notification S.O. 2828(E) dated 30th August, 2017, in exercise of the powers
conferred by clause (a) of Section 54 of the Competition Act, 2002 , the Central Government in
the public interest hereby exempts, all cases of reconstitution, transfer of the whole or any part
thereof and amalgamation of nationalized banks, under the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer
of Undertakings) Act, 1980, from the application of provisions of Sections 5 and 6 of the
Competition Act, 2002 for a period of ten years from the date of publication of this notification
in the Official Gazette.

Hence, in the instant case, the merger of some of the nationalized banks into other
nationalized banks shall not constitute ‘combination’ and it shall not be void.

26.THE INSURANCE ACT, 1938

ONLY FOR OLD SYLLABUS

NO QUESTION

27. THE BANKING REGULATION ACT, 1949

(Only For Old Syllabus)
Question 1

The Central Government have decided to acquire Aspire Bank Ltd. and passed the orders in
consultation with Reserve Bank of India. Do you agree that the Central Government has got the
right to acquire a bank? The total number of shareholders as on the date of acquisition is 1000
and about 220 shareholders holding 30% of shareholding of Aspire Bank Limited who are
aggrieved by the acquisition and the compensation amount determined. Therefore these
shareholders have requested the Central Govt. to refer the matter to Tribunal. Are the
shareholders justified in their request? (NOV 2020 EXAM OLD)

Answer :

According to Section 36AE of the Banking Regulation Act, 1949, if Central Government is of
the opinion that the Banking Company has failed to comply with the direction given to it by RBI
relating to policy matters under Sections 21 and 35A and/ or the bank is being managed in a
manner detrimental to the interest of the depositors or that of to the banking policy, or for
better provision of credit generally or of credit to any particular section of the community or in
any particular area; it is necessary to acquire the undertaking of such banking company, it
(Central Government) may after consultation with RBI as it thinks fit, by notified order, acquire
the undertaking of such banking company with effect from such date as may be specified in this
behalf by the Central Govt.

Hence, taking into account the above provision, the Central Government can acquire Aspire
Bank Ltd.

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As per Section 36AG, any shareholder aggrieved with the amount of compensation may request
the Central Govt. to refer the matter to Tribunal to be constituted under Section 36 AH. If the no.
of representation received is not less than one-fourth of the number of shareholders holding not
less than one-fourth of the paid-up share capital of the acquired bank, the Central Govt. shall
constitute a Tribunal for the purpose.

In the instant case, out of 1000 shareholders of the company, 220 shareholders holding 30% of
shareholding of Aspire Bank Ltd have requested the Central Government to refer the matter to
Tribunal but 220 shareholders are not justified in their request because though they are holding
not less than one-fourth of the paid up share capital of the bank but they are less than one-
fourth of the number of shareholders (1000*1/4: 250).

Question 2

ABC Bank acquired a building from one of the customer on default of loan financed by it on 01-
01-2014. The said building cannot be used by the bank due to location non suitability. The bank
is trying to dispose of the building but the price intended is not being offered. The management
of the bank decided to wait for some more time for selling the building. Explain the provisions in
this regard under the Banking Regulation Act, 1949 and advise bank whether it can hold it?

(JAN 2021 EXAM OLD)

Answer :

Disposal of Non-Banking Assets (Section 9 of the Banking Regulation Act, 1949)

LEGAL PROVISIONS

No Banking Company shall hold any immovable property except such as is required for its own
use, for any period exceeding seven years from the acquisition thereof or from the
commencement of this Act, whichever is later or any extension of such period as in this section
provided, and such property shall be disposed off within such period or extended period, as the
case may be.

Provided that the Banking Company may, within the period of seven years as aforesaid, deal or
trade in any such property for the purpose of facilitating the disposal thereof.

Provided further that the Reserve Bank may in any particular case extend the aforesaid period
of seven years by such period not exceeding five years where it is satisfied that such extension
would be in the interests of the depositors of the banking company.

CONCLUSION

In the instant case, ABC Bank can wait till 31.12.2020 to dispose off the building and this period
can be extended for further 5 years by RBI.

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