CS LLM Arjun Chhabra

(Law Maven)

CHAPTER 1 PRELIMINARY

Preliminary chapter of the Act covers

Section 1 Section 2
Short Extent (2) Commencement (3) Application Definitions
tittle (1) (4)
The To the whole of Enactment: Date: 29th Companies Clause (1) to (95)
Companies India Aug 2013 (President’s incorporated
Act, 2013 Assent) under this
Act or under
Section 1 came into any previous
force at once company law
Section 1 (3) says: This section shall come into force at once and the remaining provisions of this

Act shall come into force on such date as the Central Government may, by notification in the

Official Gazette, appoint and different dates may be appointed for different provisions of this

Act.

12 Sep, 13 98 Sections were made applicable

1 April, 14 184 Sections were made applicable

18 May, 2016 5 Sections were made applicable

1 June, 2016 37 Sections were made applicable

And so on….

Applicability Section 1 (4)

Companies Insurance Banking companies any other such body corporate,
incorporated companies Companies engaged in the company incorporated by any Act
under this generation or governed for the time being in
Act or under Governed Governed supply of by any force, as the Central
any previous by by Banking electricity special Government may, by
company law Insurance Regulation Governed by Act for notification, specify in
Act, 1938 Act, 1949 Electricity the time this behalf
Act, 2003 being in
Except in so far as the provisions of The force Example: Food
Companies Act, 2013 are inconsistent with Corporation of India
provisions of their respective Act. (FCI), National Highway
Authority of India
In other words, Where the provisions of (NHAI)
The Companies Act, 2013 are
contradictory with the Provisions of
Insurance Act, 1938, Banking Regulation

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Act, 1949 & Electricity Act, 2003. The
Provisions of Insurance Act, 1938, Banking
Regulation Act, 1949 & Electricity Act,
2003 will Prevail.

Definitions – Section 2
Relevant definitions from exam point of view
Company
Section 2 (20) Company means a
• company
• incorporated
• under this Act (The Companies Act, 2013)
• or
• under any previous company law.
Note: Definition of previous company law is given under Section 2 (67). In simple words previous
company law means any of the following laws:
(i) Act, 1866;
(ii) Act, 1882;
(iii) Act, 1913;
(iv) Ordinance, 1942;
(v) Act, 1956.

All the above Act’s was in relation to Indian companies.

Therefore, as per Section 2 (20) read with section 2 (67) company means a company incorporated
under Indian Companies Act.
Example: Reliance Industries Limited incorporated in year 1973, Tata Steel Limited incorporated
in year 1907, Infosys Limited incorporated in year 1981. Such companies are incorporated under
Companies Act, 1956 (previous company law) are also included in the above definition for being
treated as a Company.

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.
Example: Airline companies who operate through their booking agents in India will be covered
under the definition of Foreign Company under the Companies Act, 2013.

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Body corporate
Section 2 (11) Body corporate or Corporation
• includes
• a company,
• incorporated outside India,
• but dose not include

(i) A co-operative society registered under any law relating to co-operative societies; and

(ii) Any other body corporate (not being a company as defined in this Act), which the Central
Government may, by notification, specify in this behalf;

Let us understand some fundamentals about companies

/ Features of company
1. Incorporated A company is formed and registered by complying with the prescribed
association formalities prescribed under the Act.
2. Artificial
• A company is not a natural person. Consequently, a company cannot fall ill,
person
or die or be declared as insolvent.
• A company is an artificial person.
• But it is not a fictitious person. A company does exist but only in the eyes
of law. In other words, a company exists only in contemplation of law.
3. Separate
• A company is a legal person in the eyes of law distinct from its members.
legal entity
• A company is a separate person having its own rights and obligations.
4. Perpetual
• In case of death of a member, the shares held by him shall vest in his legal
Succession on
representative (or his nominee, if a valid nomination exists).
• Similarly, in case of insolvency of a member, the shares held by him shall
vest in the official assignee or official receiver, as the case may be. This is
called as transmission of shares.
• Thus, even in case of death or insolvency of all the members, the existence
of the company is not affected since transmission of shares shall take place
in respect of the shares held by them, and the company will have new
members.
• Death, insolvency, insanity etc. of any member does not affect the
continuity of the company. Thus, the life of the company does not depend
upon the life of its members.
• It is generally said that ‘members may come and go, but the company goes
on forever’. Thus, a company never dies.
5. Limited Company limited by Amount unpaid on the shares held by every member.
Liability shares

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Company limited by Amount guaranteed by every member.
guarantee
Company limited by Aggregate of amount unpaid on the shares held by a
guarantee and having member and the amount guaranteed by him.
share capital
Unlimited company Every member is liable to contribute to the assets of
the company until all the debts of the company are paid
in full.
6. Common Seal • A company may have a common seal.
• Common seal is the official signature of the company.
7. • Shares are movable property (Sec. 44).
Transferability • Shares are transferable in the manner provided in articles (Sec. 44).
of shares • In a private company, the right to transfer the shares is restricted.
• In a public company, the shares are freely transferable.
8. Separate • The members do not participate in day-to-day affairs of the company.
management • The management of the company lies in the hands of elected
representatives of members, commonly called as Board of directors or
directors or simply the Board.
• The directors are appointed as well as removed by the members.
• Thus, the Act has ensured the ultimate control of members over the
company.
9. Separate • A company can own and enjoy property in its own name.
property • Members are not owners or co-owners of the company’s property.
• Members have no insurable interest in the property of the company.

Macaura v Northern Assurance Co. Ltd.

• M virtually owned all the shares in a company.
• The timber belonging to the company was insured in the name of M.
• The timber was destroyed by fire.
• The insurance claim was rejected since M had no insurable interest.
10. Capacity to A company can sue others and be sued in its own name.
sue and be sued

Principle Of Separate Legal Entity

Meaning • A company is a legal entity separate from its members.
• It is known by its own name, has rights and liabilities of its own.
Salomon v
• Transfer of sole proprietorship business to company. Mr. Salomon was
Salomon & Co.
carrying on the business of boot manufacturing as a sole proprietor. He
Ltd.
incorporated a company named Salomon & Co. Ltd. for the purpose of
taking over this business.
• Payment of purchase consideration by the company.
(a) Total consideration £ 39,000
(b) Cash Paid £ 9,000
(c) Fully paid shares of £ 1 each issued to Salomon £ 20,000

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(d) Secured debentures issued to Salomon £ 10,000
• Constitution of Salomon & Co. Ltd. The 6 members of the family of Mr.
Salomon were issued one share each. Salomon was the managing director
of Salomon & Co. Ltd.
• Inability to pay debts by the company in liquidation. In the course of
business, the company borrowed from creditors to the extent of £ 7,000.
Due to trade depression, the company ran into financial difficulties and
eventually went into liquidation. The assets realised only £ 6,000.
• Contention of unsecured creditors - one man cannot owe money to himself.
The unsecured creditors contended that Salomon was carrying on business
in the name of Salomon & Co. Ltd. Thus, Salomon and Co. Ltd. was a mere
agent for S..
• Decision of the Court. It was held that Salomon & Co. was a real company
fulfilling all legal requirements. It had an identity different from its
members, and therefore, the secured debentures were to be paid in
priority to unsecured creditors.
Lee \ Lee’s Air • Lee was a qualified pilot.
Farming Ltd. • He virtually owned all the shares and he was the sole governing director.
• He was also receiving salary from the company for being a chief pilot under
the company. He was killed in an air accident while working for the
company.
• It was held that Lee’s widow was entitled to compensation.
Bacha F. • A company was carrying on agricultural business. The income from
Guzdar v agriculture business was exempt from tax.
Commissioner • A shareholder contended that dividend received by her was also exempt
of Income Tax from tax.
• The Court held that dividend received by a shareholder is not agricultural
income, and so dividend income is liable to be taxed.
Implications of • There can be a transfer of property from a member to the company and
the Rule of vice versa.
‘separate legal • A person can be a member, director, employee and creditor of the
entity’ company at the same time.
• A company has the rights and duties of its own.
• A company is not an agent of members or directors.

Lifting Or Piercing Of Corporate Veil

Meaning of
• Lifting of corporate veil means ignoring the separate identity of a
lifting or
company.
Piercing the
corporate veil • Lifting of corporate veil means disregarding the corporate personality and
looking behind the real persons who are in the control of the company, and
making them liable for the wrongs done in the name of the company.
• Lifting of corporate veil is also termed as piercing the corporate veil.

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Lifting of corporate veil under judicial decisions

Protection of Dinshaw Maneckjee Pettit
revenue
• An assessee was receiving huge dividend and interest income on certain
investments.
• He formed four private companies. The whole of the investments were
transferred to these private companies.
• The interest and dividend received by these companies were within the
exempted limits under the Income Tax Act of that time.
• These companies did not have any business or asset except these
investments.
• The income received on investments by these companies was diverted to
the assessee in the form of pretended loans, which were never paid back
by him.
• The Court held that the only purpose of incorporating these private
companies was to evade taxes. Each of these companies was a sham.
Therefore, income earned by all these private companies was treated as
the income of the assessee.
Prevention of Gilford Motor Co. Ltd. v Horne
fraud or
• An employee entered into a contract with his employer that he will not
improper
solicit the customers of the employer after leaving the employment.
conduct
• After leaving the employment, the employee incorporated a company. He,
his wife and one other person were the only members of this company.
• The company started soliciting the customers of the employer.
• The Court held that the purpose of formation of the company was to avoid
a legal obligation arising from a contract, which was not permissible.
• Therefore, the company was restrained from soliciting the customers of
the employer.
Determining Daimler Co. Ltd. v Continental Tyre & Rubber Co. Ltd.
the character
• A company was formed in England for the purpose of selling tyres made
of the company
by a German company. The German company virtually held the entire share
- whether an
capital of the English company. All the directors were German residents.
enemy company
• During the First World War, the English company commenced an action to
recover a trade debt from another English company.
• It was held that the corporate personality of the company be ignored and
the persons in the ultimate control of the company shall be considered.
Since the persons controlling the company were enemies, the suit was not
maintainable.
Check Workmen employed in Associated Rubber Industries Ltd. v Associated Rubber
avoidance of industries Ltd.
welfare
• As per Bonus Act, 1965, the basis of payment of bonus is the profits
legislation

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earned.
• A company was earning huge profits. The company incorporated a
subsidiary company and transferred some valuable investments to it.
• The subsidiary company did no business, and had no assets except the
investments transferred to it.
• Looking at the purpose of formation of the subsidiary, the Court lifted
the corporate veil. It was held that the subsidiary was formed merely for
the purpose of reducing the liability of bonus payable under the Bonus
Act.
• Therefore, the profits earned by the subsidiary company were held to be
the profits of the holding company.
Where a If there is an arrangement between the shareholders and a Company to the
Company acts effect that the Company will act as agent of shareholders for the purpose of
as an agent of carrying on the business, the business is essentially of that of the
its shareholders and will have unlimited liability.
shareholders

Definitions – Section 2
Relevant definitions from exam point of view
Private Company
Section 2 (68) Private company means a

• company

• having a minimum paid-up share capital as may be prescribed,

• and which by its articles, -

(i) Restricts the right to transfer its shares;

(ii) Except in case of One Person Company, limits the number of its members to two hundred;

Provided that where two or more persons hold one or more shares in a company jointly, they
shall, for the purposes of this clause, be treated as a single member;

Provided further that-

(A) Persons who are in the employment of the company; and

(B) Persons who,

• having been formerly in the employment of the company,

• were members of the company while in that employment and

• have continued to be members after the employment ceased, shall not be included in the
number of members; and

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(iii) Prohibits any invitation to the public to subscribe for any securities of the company;

‘Since nothing has been prescribed so far. Thus, there is no minimum paid up share to from a
private company.

The requirement of having a minimum paid up share capital shall not apply to a section 8 company
(Formation of companies with charitable objects, etc.) vide notification dated 5th June 2015.

The above-mentioned exemption shall be applicable to a section 8 company which has not
committed a default in filing its financial statements under section 137 of the Companies Act,
2013, or annual return under section 92 of the said Act with Registrar.

Holding Company
Section 2 (46) Holding company in relation to one or more other companies, means a company of
which such companies are subsidiary companies;

For meaning of "subsidiary company" refer the definition given in section 2(87) of the Companies
Act, 2013

Explanation - For the purposes of this clause, the expression “company” includes anybody
corporate.

Subsidiary Company
Section 2 (87) Subsidiary company or Subsidiary, in relation to any other company (that is to say
the holding company) means a company in which the holding company-

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more then one-half of the total voting power either at its own or
together with one or more of its subsidiary companies;

Provided that such class or classes of holding companies as may be prescribed shall not have
layers of subsidiaries beyond such numbers as may be prescribed.

Explanation - For the purposes of this clause,-

(a) A company shall be deemed to be a subsidiary company of the holding company even if the
control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the
holding company;

(b) The composition of a company’s Board of Director shall be deemed to be controlled by another
company it that other company by exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors;

(c) The expression “company” includes any body corporate;

(d) "layer” in relation to a holding company means its subsidiary or subsidiaries';

As per the Companies (Specification of Definitions Details) Rules, 2014,

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As per the notification dated 27th December 2013, Ministry clarified that the share held by a
company or power exercisable by it in another company in a fiduciary capacity shall not be
counted for the purpose of determining the holding - subsidiary relationship in terms of the
provision of section 2(87) of the Companies Act, 2013.

Public Company
Section 2 (71) Public company means a company which -

(a) is not a private company; and

-
(b) has a minimum paid-up share capital as may be prescribed.

Provided that a company which is a subsidiary of a company, not being a private company, shall
be deemed to be public company for the purpose of this Act even where such subsidiary company
continues to be a private company in its articles;

Example: A Pvt. Ltd is wholly owned subsidiary of AB Ltd. A. Pvt. Ltd. Wanted to avail exemption
as provided to private companies. In this case since A Pvt. Ltd. Is subsidiary of AB Ltd, which is
a public company, therefore A Pvt. Ltd. Will be deemed to be a public company and will be not
allowed to avail exemptions provided to a private company.

The requirement of having a minimum paid up share capital shall not apply to a Section 8 company
vide notification dated 5th June 2015.

Since nothing has been prescribed so far. Thus, there is no minimum paid up share capital to
from a public company.

The requirement of having a minimum paid up share capital shall not apply to a section 8 company
(Formation of companies with charitable objects, etc.) vide notification dated 5th June 2015.

Government Company
Section 2 (45) Government company

• means any company in which

• not less than 51% of the paid-up share capital is held by

• the Central Government, or

• by any State Government or Governments, or

• partly by the Central Government and partly by one or more State Government, and

• includes a company which is a subsidiary company of such a Government company;

Example: X is a company which 50% of shareholding is held by Central Government. Here X is

not a government company as there is no compliance of minimum holding of paid-up share capital
i.e. at least 51 % by the Central Government, or by any State Government of Governments.

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Explanation. - For the purposes of this clause, the "paid up share capital" shall be construed as
"total voting power", where shares with differential voting rights have been issued.

Associate company
Section 2 (6) Associate company, in relation to another company, means a company in which that
other company has a significant influence, but which is not a subsidiary company of the company
having such influence and includes a joint venture company.

Explanation —For the purpose of this clause, —

(a) the expression "significant influence" means

• control of at least twenty percent of total voting power, or

• control of or participation in business decisions under an agreement;

(b) the expression "joint venture" means a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement;

Vide Circular dated 25/06/2014 it has been clarified that the shares held by a company in
another company in a fiduciary shall not be counted for the purpose of determining the
relationship of associated company.

One-person Company
Section 2 (62) One-person Company means a company which has only one person as a member.

Small Company [Dec 21 – 2 Marks]

Section 2 (85) Small company means a company, other than a public company,-

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as
may be prescribed which shall not be more then ten crore rupees: and

(ii) turnover of which as per its last profit and loss account for immediately preceding financial
year does not exceed two crore rupees or such higher amount as may be prescribed which shall
not be more than hundred crore rupees:

Limits Till 31st March, 2021 1st April 2021 till 14th 15th September 2022
September, 2022 onwards [Current
Limit]

Maximum paid-up Maximum paid-up

Paid-up share Maximum paid-up share
share capital can be share capital is
capital capital is increased to
Rs. 50 Lakhs increased to Rs. 2
Crores Rs. 4 Crores

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Turnover (In the Maximum turnover Maximum turnover for Maximum turnover for
immediately for qualifying as a qualifying as a Small qualifying as a Small
preceding Small Company was Company is increased Company is increased to
financial year) Rs. 2 Crores to Rs. 20 Crores Rs. 40 Crores

Provided that nothing in this clause shall apply to -

(a) A holding company or a subsidiary company; _

(b) A company registered under section 8; or

(c) A company or body corporate government by any special Act;

As per the Companies (Specification of Definitions Details) Rules, 2014 for the purposes of sub-

clause (i) and sub-clause (ii) of clause (85) of section 2 of the Act, paid up capital and turnover

of the small company shall not exceed rupees four crores and rupees fourty crores respectively.

Example: H Ltd. is the holding company of S Pvt. Ltd. As per the last profit and loss account for
the year ending 31st March, 2019 of S Pvt. Ltd., its turnover was to the extent of 1.50 crores;
and paid up share capital was 40 lacs. Since S Pvt. Ltd., as per the turnover and paid up share
capital norms, qualifies for the status of a 'small company' it wants to be categorized as 'small
company'. S Pvt. Ltd. cannot be categorized as a 'small company' because it is the subsidiary of
another company (H Ltd.). [Proviso to section 2(85)].

Listed Company
Section 2 (52) Listed company means a company which has any of its securities listed on any
recognised stock exchange;

Provided that such class of companies, which have listed or intend to list such class of securities,
as may be prescribed in consultation with the Securities and Exchange Board, shall not be
considered as listed companies.

According to rule 2A of the Companies (Specification of definitions details) Rules, 2014, the
following classes of companies shall not be considered as listed companies, namely:

(a) Public companies which have not listed their equity shares on a recognized stock exchange
but have listed their -

(i) non-convertible debt securities issued on private placement basis in terms of SEBI (Issue and
Listing of Debt Securities) Regulations, 2008; or

(ii) non-convertible redeemable preference shares issued on private placement basis in terms of
SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013;
or

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(iii) both categories of (i) and (ii) above.

(b) Private companies which have listed their non-convertible debt securities on private
placement basis on a recognized stock exchange in terms of SEBI (lssue and Listing of Debt
Securities) Regulations, 2008;

(c) Public companies which have not listed their equity shares on a recognized stock exchange

but whose equity shares are listed on a stock exchange in a jurisdiction as specified in sub-

section (3) of section 23 of the Act.

Companies Based On Liabilities

Section 2 (21) Company limited Section 2 (22) “Company Section 2 (92) Unlimited
by guarantee limited by shares company

• means a company having the • means a company having means a company not having any
liability of its members the liability of its limit on the liability of its
members members.
• limited by the memorandum to
such amount • limited by the
memorandum to the
• as the members may
respectively undertake to • amount, if any, unpaid on
contribute to the assets of the the shares respectively
company in the event of its held by them.
being wound up.

Classification Of Companies
1. Basis: Size (a) Private company [Sec. 2(68)] A private company may be -
(b) Public company [Sec. 2(71)] (i) One Person Company [Sec. 2(62)]
(ii) Small Company [Sec. 2(85)]
(iii) Other than ‘One Person Company’ and
‘Small Company’.
2. Basis: Liability (a) Limited Company
(b) Unlimited Company [Sec. 2(92)]
A company in which the liability of members is limited, is termed as ‘limited
company’. A limited company may be -
(i) Company limited by guarantee [Sec. 2(21)]
(ii) Company limited by shares [Sec. 2(22)]
A company in which the liability of members is unlimited, is termed as
‘unlimited company’ [Sec. 2(92)].
3. Basis: Control (a) Holding company [Sec. 2(46)]
(b) Subsidiary company [Sec. 2(87)]
(c) Associate company [Sec. 2(6)]

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4. Basis: Listing (a) Listed company [Sec. 2(52)]
of securities on (b) Unlisted company
the stock
exchange
5. Other (a) Foreign company [Sec. 2(42)]
Companies (b) Government company [Sec. 2(45)]
(c) Companies with charitable objects etc. (Non-profit companies) (Sec. 8)

Financial Year
Section 2 (41) Financial year, in relation to any company or body corporate, means the period
ending on the 31st day of March every year, and where it has been incorporated on or after the
1st day of January of a year, the period ending on the 31st day of March of the following year, in
respect whereof financial statement of the company or body corporate is made up

“Provided that where a company or body corporate, which is a holding company or a subsidiary or
associate company of a company incorporate outside India and is required to follow a different
financial year for consolidation of its accounts outside India, the Central Government may, on an
application made by that company or body corporate in such form and manner as may be
prescribed, allow any period as its financial year, whether or not that period is a year:

Note: The term "company incorporated outside India" refers to Foreign Company incorporated
under any applicable laws for the constitution of company outside India.

Relative
Section 2 (77) Relative, with reference to any person, means anyone who is related to another,
if

(i) they are members of a Hindu Undivided Family;

(ii) they are husband and wife; or

(iii) One person is related to the other in such manner as may be prescribed;

Rule 4 given in the Companies (Specification of Definitions Details) Rules, 2014 provides of the
List of RELATIVES OF another, if he or she is related to another in the followings manner,
namely:-

(1) Father: Provided that the term "Father" includes step-father.

(2) Mother: Provided that the term “Mother” includes the step-mother.

(3) Son: Provided that the term “Son” includes the step-son.

(4) Son’s wife.

(5) Daughter.

(6) Daughter’s Husband.

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(7) Brother: Provided that the term "Brother" includes the step-brother;

(8) Sister: Provided that the term "Sister” includes the step-sister.

Share
Section 2 (84) Share means a share in the share capital of a company and includes stock;

Definitions Based On Share Capital

Section 2 (8) Section 2 Section 2 (86) Section 2 (15) Section 2 (64) Paid-
Authorised (50) Issued Subscribed Called-up capital up share capital or
capital or Nominal capital capital share paid-up
capital
means such capital means such means such part means such part of means such
as in authorized capital as of the capital the capital, which aggregate amount of
by the the company which is for the has been called for money credited as
memorandum of a issues from time being payment. paid- up.
company to be the time to time subscribed by
maximum amount for the members of
of share capital of subscription. a company.
the company.

Example: ABC Ltd. was registered with Registrar with an Authorised capital of Rs. 2,00,00,000
where each share is of Rs.10.

In response to the advertisements made by the company to buy shares in the company,
applications have been received for 10,00,000 shares but company actually issued 700,000
shares where company has called for 8 per share.

All the calls have been met in full except three shareholders who still owe for their 6000 shares
in total.

Amount of various share capital

Authorized share capital = Rs 2,00,00,000 (2 crores)

Subscribed capital= 10,00,000 x 10 = Rs 1,00,00,000 (1 Crore)

Issued capital= 7,00,000x 10 = Rs 70,00,000

Called-up capital = 7,00,000 x 8= Rs. 56,00,000

Paid-up capital = 56,00,000 (6000 x 8) = Rs 55,52,000

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Member
Section 2 (55) Member, in relation to a company, means -

(i) The subscriber to the memorandum of the company who shall be deemed to have agreed to
become members of the company, and on its registration, shall be entered as member in its
register of members even if the subscription money has not been paid to the company;

(ii) Every other person who agrees in writing to become a member of the company and whose
name is entered in the register of members of the company;

(iii) Every person holding shares of the company and whose name is entered as a beneficial owner
in the records of a depository;

Other Relevant Definitions Under Section 2

(1) Abridged Prospectus means a memorandum containing such salient features of a prospectus
as may be specified by the Securities and Exchange Boards by making regulations in this behalf;

(2) Accounting standards means the standards of accounting or any addendum thereto for
companies or class of companies referred to in section 133;

Section 133 of the Act deals with the Central Government to Prescribe Accounting Standards.
As per the section, the Central Government may prescribe the standards of accounting or any
addendum thereto, as recommended by the Institute of Chartered Accountants of India,
constituted under section.3 of the Chartered Accountants Act, 1949, in consultation with and
after examination of the recommendations made by the National Financial reporting Authority.

Section 133 is to be read with rule 7 of the Companies (Accounts) Rules, 2014. Accordingly,
(i) The standards of accounting as specified under the Companies Act, 1956 shall be deemed to
be the accounting standards are specified by the Central Government under section 133.

(ii) Till the National Financial Reporting Authority is constituted under section 132 of the Act,
the Central Government may prescribe the standards of accounting or any addendum thereto, as
recommended by the Institute of Chartered Accountants of india in consultation with and after
examination of the recommendations made by the National Advisory Committee on Accounting
Standards constituted under section 210A of the Companies Act, 1956.

Further, in exercise of the powers conferred by section 133, the Central Government in
consultation with the National Advisory Committee on Accounting Standards prescribed

That Companies (Accounting Standards) Rules, 2006 and the Companies (Indian Accounting
Standards) Rules, 2015 may be followed.

(3) Alter or Alteration includes the making of additions, omissions and substitutions;

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(4) Appellate Tribunal means the National Company Law Appellate Tribunal constituted under
section 410;

(5) Articles means-

+ The articles of association of a company as originally framed, or
+ As altered from time to time, or
+ Applied in pursuance of any previous law, or
+ Applied in pursuance of this Act;

(7) Auditing standard means the standards of auditing or any addendum thereto for companies
or class of companies referred to in sub-section (10) to section 143. Section 143 of the
Companies Act, 2013 deals with the powers and duties of Auditors and Auditing Standards. Sub-
section (10) to section 143 provides that the Central Government may prescribe the standards
of auditing or any addendum thereto, as recommended by the Institute of Chartered
Accountants if India, constituted under section 3 of the Chartered Accountant Act, 1949, in
consultation with and after examination of the recommendations made by the National Financial
Reporting Authority;

Provided that until any auditing auditing standards are notified, any standard or standards of
auditing specified by the Institute of Chartered Accountant of India shall be deemed to be the
auditing standards.

(9) Banking company means a banking company as defined in clause (c) of section 5 of the Banking
Regulation Act, 1949;

(10) Board of Directors or Board, in relation to a company, means the collective body of the
directors of the company;

(12) Books and Paper and Books or Paper include books of account, deeds, vouchers, writings,
documents, minutes and registers maintained on paper or in electronic from;

As per the companies (Specification of definitions details) rules, 2014, “e-Form" means a from
in the electronic from as prescribed under the Act or the rules made thereunder and notified
by the Central Government under the Act;

(13) “Books of account” includes records maintained in respect of-

(i) all sums of money received and expended by a company and matters in relation to which the
receipts and expenditure take place;

(ii) all sales and purchase of goods and service by the company;

(iii) the assets and liabilities of the company; and

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(iv) the items of cost as may be prescribed under section 148 in the case of a company which
belong to any class of company specified under that section;

Section 148 of the Companies Act, 2013 authorises Central Government to Specify Auditing of
Items of Cost in Respect of Certain Companies.

(14) Branch office, in relation to a company, means any establishment described as such by the
company;

(16) Charge means an interest or lien created on the property or assets of a company or any of
its undertaking or both as security and including a mortgage;

(17) Chartered Accountant means a chartered accountant as defined in clause (b) of sub-section
(1) of section (2) of the Chartered Accountant Act, 1949 who holds a valid certificate of practice
under subsection (1) of section 6 of that Act;

(18) Chief-up capital (CEO) means an offer of a company, who has been designated as such by it;

(19) Chief Financial Officer (CFO) means a person appointed as the chief Financial Officer of a
company;

These definitions of CEO & CFO should be read with section 2(51) and 203 which deals with the
definition and appointment of key Managerial Personnel (KMP) of the Companies Act, 2013.

(26) Contributory means a person liable to contribute towards the assets of the company in the
events of its being wound up.

Explanation - For the purposes of this clause, it is hereby clarified that a person holding fully
paid-up shares in a company shall be considered as a contributory but shall have no liabilities of
a contributory under the Act whilst retaining rights of such a contributory.

(27) Control shall include the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a persons or persons acting individually or in
concert, directly or indirectly, including by virtue of their shareholding or management right or
shareholders agreements or voting agreements or in any other manner;

(30) Debenture includes debenture stock, bonds or any other instrument of a company,
evidencing a debt, whether constituting a charge on the assets of the company or not;

“Provided that -

(a) the instruments referred to in Chapter III - D of the Reserve Bank of India Act, 1934; and

(b) such other instrument, as may be prescribed by the Central Government in consultation with
the Reserve Bank of India, issued by a company, shall not be treated as debenture;”

(34) Director means a director appointed to the board of a company;

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(35) Dividend includes any interim dividend;

(36) “Document” includes summons, notice, requisition, order, declaration, from and register,
whether issued, sent or kept in pursuance of this Act or under any other law for the time being
in force or otherwise, maintained on paper or in electronic from;

(37) Employees’ stock option means the option given to the directors officers or employees of a
company or of its holding company or subsidiary company or companies, if any, which gives such
directors, officers or employees, the benefit or right to purchase, or to subscribe for, the
shares of the company at a future date at a pre-determined price;

(38) Expert includes an engineer, a valuer, a Chartered Accountant, a Company Secretary, a Cost
Accountant and any other persons who has the power of authority to issue a certificate in
pursuance of any law for the time being in force;

(40) Financial statement in relation to a company, includes-

(i) A balance sheets as at the end of the financial year;

(ii) A profit and loss account, or in the case of a company carrying on any activity not for profit,
an income and expenditure account for the financial year;

(iii) Cash flow statement for the financial year;

(iv) A statement of changes in equity, if applicable; and

(v) any explanatory note annexed to, or forming part of, any documents referred to in sub-clause
(i) to sub-clause (iv):

Provided that the financial statement, with respect to One Persons Company small company and
dormant company, may not include the cash flow statement.

(43) Free reserves means such reserves which, as per the lasts audited balance sheet of a
company, are available for distribution as dividend;

Provided that -

(i) Any amount representing unrealized gains, national, gains or revaluation of assets, whether
shown as a reserve or otherwise, or

(ii) Any change in carrying amount of an asset or of a liability recognized in equity, including
surplus in profile and loss account on measurement of the asset or the liability at fair value,

Shall not be treated as free reserves;

(51) Key managerial personnel, in relation to a company, means -

(i) The Chief Executive Officer or the managing director or the manager;

(ii) The company secretary;

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(iii) The whole-time director

(iv) The Chief Financial Officer;

(v) such other officer, not more than one level below the directors who is in whole-time
employment, designated as key managerial personnel by the Board; and

(vi) such other officer as may be prescribed.

Note: However, till now no other officer has been prescribed.

(53) Manager means an individual who, subject to the superintendence, control and direction of
the Board of Directors, has the management of the whole, or substantially the whole, of the
affairs of a company, and includes a director or any other person occupying the position of a
manager, by whatever name called, whether under a contract of service or not;

(54) Managing Director means a director who, by virtue of the articles of a company or an
agreement with the company or a resolution passed in its general meeting, or by its Board of
Directors, is entrusted with substantial powers of management of the affairs of the company
and includes a director occupying the position of managing director, by whatever name called.

Explanation - For the purposes of this clause, the power to do administrative acts of a routine
nature when so authorised by the Board such as

• the power to affix the common seal of the company to any document or

• to draw and endorse any cheque on the account of the company in any bank or

• to draw and endorse any negotiable instrument or

• to sign any certificate of share or to direct registration of transfer of any share,

shall not be deemed to be included within the substantial powers of management;

Explanation - For any individual to be called as managing director, an individual shall first be a
director duly appointed by the Company under the provisions of the Companies Act, 2013. This
also implies that an individual who is not a director in the company cannot be appointed as
Managing Director of that company.

(56) Memorandum means the memorandum of association of a company as originally framed or as

altered from time to time in pursuance of any previous company law or of this Act;

(57) Net worth means the aggregate value of the paid-up share capital and all reserves created
out of the profits and securities premium account, P/L Dr. or Cr. after deducting the aggregate
value of the accumulated losses, deferred expenditure and miscellaneous expenditure not
written off, as per the audited balance sheet, but does not include reserves created out of
revaluation of assets, write-back of depreciation and amalgamation;

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(58) Notification means a notification published in the Official Gazette and the expression
“notify” shall be construed accordingly;

(59) Officer includes any director, manager or key managerial personnel or any persons in
accordance with whose directions or instructions the Board of Directors or any one or more of
the directors is or are accustomed to act;

(60) Officer who is in default, for the purpose of any provisions in this Act which enacts that an
officer of the company who is in default shall be liable to any penalty or punishment by way of
imprisonment, fine or otherwise, means any of the following officer of a company, namely:-

(i) Whole-time director (WTD)

(ii) Key managerial personnel (KMP)

(iii) Where there is no key managerial personnel, such director or directors as specified by the
board in this behalf and who has or have given his or their consent in writing to the Board to
such specification, or all the directors, if no director is so specified;

(iv) Any persons who, under the immediate authority of the Board or any key managerial
personnel, is charged with any responsibility including maintenance, filing or distribution of
accounts or records, authorizes, actively participates in, knowingly permits, or knowingly fails to
take active steps to prevent, any default;

(v) Any person in accordance with whose advice, direction or instructions the board of director
of the company is accustomed to act, other then a person who gives advice to the Board in a
professional capacity;

(vi) Every director, .in respect of a issue or transfer of any shares of a company, the share
transfer agents, registrars and merchant bankers to the issue or transfer;

Example: In a company, a default was committed with respect to the allotment of shares by the
officers. In company there were no managing director, whole time director, a manager,
secretary, a person charged by the Board with the responsibility of complying with the provisions
of the Act, and neither any director/directors of the company may be treated as officers in
default.

(63) Ordinary or special resolution means an ordinary resolution, or as the case may be, special
resolution referred to in section 114 (Ordinary and Special Resolution);

as is equivalent to the amount received as paid-up in respect of share issued and also includes
any amount credited as paid-up in respect of share of the company, but does not include any
other amount received in respect of such shares, by whatever name called;

(65) Postal ballot means voting by post or through any electronic mode; This definition is related
to section 110 to be read with Rule 22 of the Companies (Management and Administration) Rules,

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2014 specifying the Procedure to be followed for Conducting of business through postal ballot
and provides the list of items of business which should be transacted only by means of voting
through postal ballot.

(66) Prescribed means prescribed by rules made under this Act;

(69) Promoter means a person -

(a) who has been named as such in a prospectus or is identified by the company in the annual
return, or

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

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

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

(70) Prospectus means any documents described or issued as a prospectus and includes a red
herring prospectus or shelf prospectus or any notice, circular, advertisement or other documents
inviting offers from the public for the subscription or purchase of any securities of a body
corporate;

(74) Register of companies means the register of companies maintained by the Registrar on
paper or in any electronic mode under this Act;

(75) Registrar means a Registrar, an Additional Registrar, a Join Registrar, a Deputy Registrar
or an Assistant Registrar, having the duty of registering companies and discharging various
functions under this Act;

(76) Related Party, with reference to a company, means -

(i) a director or his relative;

(ii) a key managerial personnel or his relative;

(iii) A firm, in which a director, manager or his relative is a partner;

(iv) A private company in which a director or manager or his relative is a member or director;

(v) A public company in which a director and manager is a director and holds along with his
relatives, more then two per cent of its paid up share capital;

(vi) Any body corporate whose Board of Directors, managing director or manager is accustomed
to act in accordance with the advice, direction or instructions of a director or manager;

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(vii) Any persons on whose advice, direction or instructions a director or manager is accustomed
to act:

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, direction or
instructions given in a professional capacity;

(viii) any body corporate which is - .

(A) a holding, subsidiary or an associate company of such company;

(B) a subsidiary of a holding company to which it is also a subsidiary; or

(c) an investing company or the venture of the company.

Explanation - For the purpose of this clause, “the investing company or the venture of a company”
means a body corporate whose investment in the company would result in the company becoming
an associate company of the body corporate.

This Clause (viii) shall not apply with respect to section 188 to a private company vide Notification
No. G.S.R. 464(E) dated 5th June, 2015

(ix) Such other person as may be prescribed;

As per Rule 3 given in the Companies (Specification of Definitions Details) Rules, 2014, for the
purpose of sub-clause (ix) of clause (76) of section 2 of the Act, a director (other than an
independent director) or key managerial personnel of the holding company or his relative with
reference to a company, shall be deemed to be a related party.

Example: (1) XYZ Pvt. Ltd has two subsidiary companies, y Pvt. Ltd and Z Pvt. Ltd. Here as per
the section 2(76) (viii) (B), Y Pvt. Ltd and Z Pvt. Ltd. are related parties. However, as per the
notification No. G.S.R. 464(E) dated 5th June, 2015, clause (viii) shall not apply with respect to
section 188 to a private company. Therefore Y Pvt. Ltd. And Z Pvt. Ltd are not related parties
for the purpose of section 188. However, if Y Pvt. Ltd and Z Pvt. Ltd. Have common common
directors, then they will be deemed to be related parties because of section 2(76)(iv).

(2) Now suppose, XYZ Ltd. A public company, has two subsidiary companies, Y Pvt. Ltd. And Z
Pvt. Ltd. Here as per section 2(71), a private company which is a subsidiary of a public company
will deemed to be a public company, so Y Pvt. Ltd and Z Pvt. Ltd will not be eligible to avail
exemption under the Notification No. G.R.S. 464(E) dated 5th June, 2015 Therefore, as per
section 2(76)(viii)(B), Y Pvt. Ltd and Z Pvt. Ltd are related parties. In addition XYZ Ltd. Will also
be related Party to Y Pvt. Ltd and Z Pvt. Ltd.

(78) Remuneration means any money or its equivalent given or passed to any person for services
rendered by him and includes perquisites as defined under the Income Tax Act, 1961

(88) Sweat equity share means such equity shares as are issued by a company to its director or
employees at a discount or for consideration, other then cash, for providing their know-how or
making available rights in the nature of company if all the members there of or their proxies

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having a rights in the nature of intellectual property right or value additions, by whatever name
called;

(89) Total voting power, in relation to any matter, means the total no of votes which may be cast
in regard to that matter on a poll at a meeting of a company if all the members there of proxies
having a right to vote on the matter are present at the meeting and cast their votes;

(90) Tribunal means the National Company Law Tribunal constituted under section 408;

(91) "Turnover" means the gross amount of revenue recognised in the profit and loss account
from the sale, supply, or distribution of goods or on account of services rendered, or both, by a
company during a financial year;'.

(93) Voting right means the right of a member of a company to vote in any meeting of the
company or by means of postal ballot;

Questions & Answers Including Module Questions

Question 1
Jagannath Oils Limited is a public company and having 220 members of which 25 members
were employee in the company during the period 1st April, 2006 to 28th June 2016. They
were allotted shares in Jagannath Oils Limited first time on 1st July, 2007 which were sold
by them 1st August, 2016. After some time, on 1st December, 2016, each of those 25
members acquired shares in Jagannath Oils Limited which they are holding till date. Now
company wants to convert itself into a private company. State with reasons:
(I) Whether Jagannath Oils Limited is required to reduce the number of members.
(II) Would your answer be different if above 25 members were the employee in Jagannath
Oils Limited for the period from 1st April, 2006 to 28th June, 2017? [MTP Nov 21 - 4
Marks]

Answer
According to Section 2(68) of Companies Act, 2013, “Private company” means a company
having a minimum paid-up share capital as may be prescribed, and which by its articles, —
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two
hundred:
Provided that where two or more persons hold one or more shares in a company jointly,
they shall, for the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and

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(B) persons who, having been formerly in the employment of the company, were members
of the company while in that employment and have continued to be members after the
employment ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company.

(I) Following the provisions of Section 2(68), 25 members were employees of the company
but not during present membership which was started from 1st December 2016 i.e. after
the date on which these 25 members were ceased to the employee in Jagannath Oils
Limited. Hence, they will be considered as members for the purpose of the limit of 200
members. The company is required to reduce the number of members before converting it
into a private company.

(II) On the other hand, if those 25 members were ceased to be employee on 28th June
2017, they were employee at the time of getting present membership. Hence, they will not
be counted as members for the purpose of the limit of 200 members and the total number
of members for the purpose of this sub-section will be 195. Therefore, Jagannath Oils
Limited is not required to reduce the number of members before converting it into a
private company.
Question 2
Flora Fauna Limited was registered as a public company. There are 230 members in the company
as noted below:

(a) Directors and their relatives 50

(b) Employees 15
(c) Ex-Employees (Shares were allotted when they were employees) 10
(d) 5 couples holding shares jointly in the name of husband and wife (5*2) 10
(e) Others 145
The Board of Directors of the company propose to convert it into a private company. Also advise
whether reduction in the number of members is necessary. [May 22 – 6 Marks]

Answer
According to section 2(68) of the Companies Act, 2013, "Private company" means a company
having a minimum paid-up share capital as may be prescribed, and which by its articles, except
in case of One Person Company, limits the number of its members to two hundred.

However, where two or more persons hold one or more shares in a company jointly, they shall,
for the purposes of this clause, be treated as a single member.

It is further provided that -

(A) persons who are in the employment of the company; and

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(B) persons who, having been formerly in the employment of the company, were members of the
company while in that employment and have continued to be members after the employment
ceased,
shall not be included in the number of members.

In the instant case, Flora Fauna Limited may be converted* into a private company only if the
total members of the company are limited to 200. Total Number of members

(i) Directors and their relatives 50

(ii) 5 couples (5*1) 5
(iii) Others 145
Total 200
Therefore, there is no need for reduction in the number of members since existing number of
members are 200 which does not exceed maximum limit of 200.

The provisions relating to conversion of public company to private company is covered in the
Chapter 2 – Incorporation of Company and Matters incidental thereto.
Question 3
The paid-up share capital of Altar Private Limited is Rs. 1 crore, consisting of 8 lacs Equity
Shares of Rs. 10 each, fully paid-up and 2 lacs Cumulative Preference Shares of Rs.10 each,
fully paid-up. New Private Limited and Ultra Private Limited are holding 3 lacs Equity Shares
and 50,000 Equity Shares respectively in Altar Private Limited. New Private Limited and Ultra
Private Limited are the subsidiaries of PQR Private Limited. With reference to the provisions
of the Companies Act, 2013 examine whether Altar Private Limited is a subsidiary of PQR
Private Limited? Would your answer be different if PQR Private Limited has 8 out of 9
Directors on the Board of Altar Private Limited? [May 19 RTP]

Answer
In terms of section 2 (87) of the Companies Act 2013 "subsidiary company" or “subsidiary", in
relation to any other company (that is to say the holding company), means a company in which
the holding company—

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total voting power either at its own or
together with one or more of its subsidiary companies:

Explanation. —For the purposes of this clause, —

(a)a company shall be deemed to be a subsidiary company of the holding company even if the
control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the
holding company;

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(b)the composition of a company's Board of Directors shall be deemed to be controlled by

another company if that other company by exercise of some power exercisable by it at its
discretion can appoint or remove all or a majority of the directors.

In the present case, New Pvt. Ltd. and Ultra Pvt. Ltd. together hold less than one half of the
total share capital i.e., less than one-half of total voting power. Hence, PQR Private Ltd. (holding
of New Pvt. Ltd. and Ultra Pvt. Ltd) will not be a holding company of Altar Pvt. Ltd.

However, if PQR Pvt. Ltd. has 8 out of 9 Directors on the Board of Altar Pvt. Ltd. i.e., controls
the composition of the Board of Directors; it (PQR Pvt. Ltd.) will be treated as the holding
company of Altar Pvt. Ltd.
Question 4
(i) Herry Limited is a company registered in Thailand. It has no place of business established in
India, yet it is doing online business through telemarketing in India having its main server for
online business outside India. State the status of the Company under the provisions of the
Companies Act, 2013. [Nov 19] 2 marks

(ii)SKP Limited (Registered in India), a wholly owned subsidiary company of Herry Limited
decided to follow different financial year for consolidation of its accounts outside India. State
the procedure to be followed in this regard. [Nov 19] 2 marks

Answer
(i) According to section 2(42) of the Companies Act, 2013, “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.

According to Rule 2(1)(c)(iv) of the Companies (Registration of Foreign Companies) Rules, 2014,
“electronic mode” means carrying out electronically based, whether main server is installed in
India or not, including, but not limited to online services such as telemarketing, telecommuting,
telemedicine, education and information research.

Looking to the above description, it can be said that being involved in telemarketing in India
having its main server for online business outside India, Herry Limited will be treated as foreign
company.

(ii) Where a company or body corporate, which is a holding company or a subsidiary or associate
company of a company incorporated outside India and is required to follow a different financial

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year for consolidation of its accounts outside India, the Central Government may, on an
application made by that company or body corporate in such form and manner as may be
prescribed, allow any period as its financial year, whether or not that period is a year.

Any application pending before the Tribunal as on the date of commencement of the Companies
(Amendment) Act, 2019, shall be disposed of by the Tribunal in accordance with the provisions
applicable to it before such commencement.

Also, a company or body corporate, existing on the commencement of this Act, shall, within a
period of two years from such commencement, align its financial year as per the provisions of
this clause.

SKP Limited is advised to follow the above procedure accordingly.

[Note: This answer is based on the assumption that Herry limited is a foreign Company
registered outside India as inferred from part (i) of the question]
Question 5
(a) Teresa Ltd. is a company registered in New York (U.S.A.). The company has no place of
business established in India, but it is doing online business through data interchange in India.
Explain with reference to relevant provisions of the Companies Act, 2013 whether Teresa Ltd.
will be treated as Foreign Company. NOVEMBER, 2018 (6 Marks)

Answer
(a) According to section 2(42) of the Companies Act, 2013, 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.

As per the Rule given in the Companies (Specification of Definitions Details) Rules, 2014, the
term “electronic mode”, means carrying out electronically based, whether main server is
installed in India or not, including, but not limited to-

(i) Business to business and business to consumer transactions, data interchange and other
digital supply transactions;
(ii) Offering to accept deposits or inviting deposits or accepting deposits or subscriptions in
securities, in India or from citizens of India;
(iii) Financial settlements, web-based marketing, advisory and transactional services, database
services and products, supply chain management;

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(iv) Online services such as telemarketing, telecommuting, telemedicine, education and
information research; and
(v) All related data communication services, whether conducted by e-mail, mobile devices, social
media, cloud computing, document management, voice or data transmission or otherwise;

In the given question, Teresa Ltd. will be treated as a foreign company within the meaning of
section 2(42) of the Companies Act, 2013 since it is doing online business through data
interchange in India even though the company has no place of business established in India.
Question 6
Explain the conditions and the manner in which a company may issue Global Depository Receipts
in a foreign country.

Answer
The Companies (Issue of Global Depository Receipts) Rules, 2014, lays the conditions and the
manner in which a company may issue depository receipts in a foreign country.
Conditions for issue of depository receipts–

(1) Passing of resolution

(2) Approval of shareholders
(3) Depository receipts shall be issued by an overseas depository bank
(4) Compliance with all the provisions, schemes, regulations etc.
(5) Compliance report to be placed at the meeting

Manner for issue of depository receipts –

(1) The depository receipts can be issued by way of public offering or private placement or in
any other manner prevalent abroad and may be listed or traded in an overseas listing or trading
platform.
(2) The depository receipts may be issued against issue of new shares or may be sponsored
against shares held by shareholders of the company in accordance with such conditions as the
Central Government or Reserve Bank of India may prescribe or specify from time to time.
(3) The underlying shares shall be allotted in the name of the overseas as depository bank and
against such shares, the depository receipts shall be issued by the overseas depository bank
abroad.
Question 7
What does the term Financial Statements include in relation to a company under the Companies
Act, 2013? Which companies need not prepare a cash flow statement?
(4 Marks)

Answer
According to section 2(40) of the Companies Act, 2013, Financial statement in relation to a
company, includes—

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(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit,
an income and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause
(i) to sub-clause (iv):

Provided that the financial statement, with respect to one-person company, small company,
dormant company and private company (if such private company is a start-up company) may not
include the cash flow statement.
Question 8
BC Private Limited and its subsidiary KL private limited are holding 90,000 and 70,000 shares
respectively in PQ Private Limited. The paid-up share capital of PQ Private Limited is 30 Lakhs
(3 Lakhs equity shares of 10 each fully paid). Analyse with reference to provisions of the
Companies Act, 2013 whether PQ Private Limited is a subsidiary of BC Private Limited. What
would be your answer if KL Private Limited is holding 1,60,000 shares in PQ Private Limited and
no shares are held by BC Private Limited in PQ Private Limited? [Dec 21 – 3 Marks]
Answer:
Subsidiary company [Section 2(87)]
Subsidiary company in relation to any other company (that is to say the holding company),
means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or
together with one or more of its subsidiary companies.

In the instant case, as BC private limited together with its subsidiary KL private limited
holding more than one-half of the total paid up share capital (voting power) in PQ private
limited i.e., 90000 equity shares are held by BC private limited plus 70000 equity shares
are held by KL private limited respectively in PQ private limited amounting to 160000 equity
share out of total equity shares of 300000.

In the light of the above provision and facts of the case:

1. PQ private limited is subsidiary of BC private limited.

2. In the second case also, the answer would be the same as above, i.e., PQ private limited is
subsidiary of BC private limited irrespective of the fact that no shares are held by BC
Private Limited in PQ Private Limited.

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Question 9
The paid-up capital of Ram Private Limited is Rs.10 Crores in the form of 7,00,000 Equity
Shares of Rs.100 each and 3,00,000 Preference Shares of Rs. 100 each. Lakhan Private
Limited is holding 3,00,000 Equity Shares and 3,00,000 Preference Shares in Ram Private
Limited. State with reason, Whether Ram Private Limited is subsidiary of Lakhan Private
Limited? (MTP Oct 21 - 4 Marks)
Answer:
According to Section 2(87) of Companies Act, 2013 “subsidiary company” in relation to any
other company (that is to say the holding company), means a company in which the holding
company—
(a) controls the composition of the Board of Directors; or
(i) exercises or controls more than one-half of the total voting power either at its
own or together with one or more of its subsidiary companies:

It is to be noted that Preference share capital will also be considered if preference

shareholders have same voting rights as equity shareholders.

In the instant case, Ram Private Limited is having paid-up capital of Rs.10 Crores in the
form of 7,00,000 Equity Shares of Rs.100 each and 3,00,000 Preference Shares of Rs.100
each. Lakhan Private Limited is holding 3,00,000 Equity Shares and 3,00,000 Preference
Shares in Ram Private Limited.

As in the given problem it is not clear that whether Preference Shares are having voting
rights or not, it can be taken that there is no voting right with these shares. On the basis
of provisions of Section 2(87) and facts of the given problem, Lakhan Private Limited is
holding 3,00,000 Equity Shares of total equity paid up share capital of Ram Private Limited.

Therefore, as Lakhan Private Limited does not exercises or controls more than one-half of
the total voting power in Ram Private Limited, Ram Private Limited is not subsidiary of
Lakhan Private Limited.
Question 10
Narendra Motors Limited is a government company. Shah Auto Private Limited is a private
company having share capital of ten crores in the form of ten lacs shares of Rs. 100 each.
Narendra Motors Limited is holding five lacs five thousand shares in Shah Auto Private
Limited. Shah Auto Private Limited claimed the status of Government Company. Advise as
legal advisor, whether Shah Auto Private Limited is government company under the
provisions of Companies Act, 2013? [RTP Nov 21]
Answer:
According to the provisions of Section 2(45) of Companies Act, 2013, Government Company
means any company in which not less than 51% of the paid-up share capital is held by-

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(i) the Central Government, or
(ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more State Governments, and
the section includes a company which is a subsidiary company of such a Government
company.

According to Section 2(87), “subsidiary company” in relation to any other company (that is
to say the holding company), means a company in which the holding exercises or controls
more than one-half of the total voting power either at its own or together with one or more
of its subsidiary companies.

By virtue of provisions of Section 2(87) of Companies Act, 2013, Shah Auto Private Limited
is a subsidiary company of Narendra Motors Limited because Narendra Motors Limited is
holding more than one-half of the total voting power in Shah Auto Private Limited. Further
as per Section 2(45), a subsidiary company of Government Company is also termed as
Government Company. Hence, Shah Auto Private Limited being subsidiary of Narendra
Motors Limited will also be considered as Government Company.
Question 11
Mike Limited company incorporated in India having Liaison office at Singapore. Explain in
detail meaning of Foreign Company and analysis on whether Mike Limited would be called
as Foreign Company as it established a Liaison office at Singapore as per the provisions of
the Companies Act, 2013? [Dec 20 - 3 Marks]
Answers:

Foreign company [Section 2 (42)] Company [Section2 (20)]

Means any company or body corporate means a company incorporated under

incorporated outside India which, — this Act or under any previous company
(a) has a place of business in India whether by law.
itself or through an agent, physically or
through electronic mode; and
(b) conducts any business activity in India in
any other manner.
In the instant case mike limited incorporated in India having liasion office at singapore.
Conclusion:
In the light of the above provision and facts of the case we conclude that Mike limited
cannot be called as foreign company because the basic condition to be called as foreign
company is that the company must be incorporated outside India. In the present case Mike
limited is incorporated in India i.e. incorporated under this Act (Companies Act, 2013) or

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under any previous company law. Therefore, mike limited can be called as company but
cannot be called as foreign company.
Question 12
Manicar Limited has allotted equity shares with voting rights to Nanicar Limited worth Rs.
10 Crores and issued Non-Convertible Debentures worth Rs.30 Crores during the Financial
Year 2017-18. After that total Paid-up Equity Share Capital of the company is Rs.100
Crores and Non-Convertible Debentures stands at Rs.150 Crores.
Define the Meaning of Associate Company and comment on whether Manicar Limited and
Nanicar Limited would be called Associate Company as per the provisions of the Companies
Act, 2013? [MTP Nov 21 – 3 Marks]
Answer:
As per Section 2(6) of the Companies Act, 2013, an Associate Company in relation to
another company, means a company in which that other company has a significant influence,
but which is not a subsidiary company of the company having such influence and includes a
joint venture company. The term “significant influence” means control of at least 20% of
total share capital, or control of business decisions under an agreement.

The term “Total Share Capital”, means the aggregate of the -

(a) Paid-up equity share capital; and
(b) Convertible preference share capital.

In the given case, as Manicar Ltd. has allotted equity shares with voting rights to Nanicar
Limited of Rs. 10 crores, which is less than requisite control of 20% of total share capital
(i.e. 100 crore) to have a significant influence of Nanicar Ltd. Since the said requirement
is not complied, therefore Manicar Ltd. and Nanicar Ltd. are not associate companies as
per the Companies Act, 2013.

Further holding/allotment of non-convertible debentures has no relevance for ascertaining

significant influence. Hence the issue of non-convertible debentures will not make both the
companies Associate Company.
Question 13
(a) The information extracted from the audited Financial Statement of Smart Solutions
Private Limited as at 31st March, 2020 is as below:

(1) Paid-up equity shares capital Rs. 50,00,000 divided into 5,00,000 equity shares (carrying
voting rights) of Rs. 10 each. There is no change in the paid-up share capital thereafter.
(2) The turnover is Rs. 2,00,00,000.

It is further understood that Nice Software Limited, which is a public limited company, is
holding 2,00,000 equity shares, fully paid-up, of Smart Solutions Private Limited. Smart

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Solutions Private Limited has filed its Financial Statement for the said year with the
Registrar of Companies (ROC) excluding the Cash Flow Statement within the prescribed
time line during the financial year 2020-21. The ROC has issued a notice to Smart Solutions
Private Limited as it has failed to file the cash flow statement along with the Balance Sheet
and Profit and Loss Account. You are to advise on the following points explaining the
provisions of the Companies Act, 2013:

(i) Whether Smart Solutions Private Limited shall be deemed to be a small company whose
significant equity shares are held by a public company?

(ii) Whether Smart Solutions Private Limited has defaulted in filing its financial
statement? (6 Marks) July 21
Answer:
(i) Smart Solutions Private Limited is a small company
Since the company satisfies the condition with respect to ‘paid up capital not exceeding Rs. 4
crore' as well as the condition with respect to 'turnover not exceeding Rs. 40 crore':
since it is not a subsidiary of any public company (since Nice Software Limited does not exercise
or control more than 50% of the total voting power of Smart Solutions Private Limited).

(ii) Smart Solutions Private Limited has not made any default in filing its financial statement
since it is a small company, and so it is not required to file cash flow statement as a part of its
financial statement.
Question 14:
MNP Private Ltd. is a company registered under the Companies Act, 2013 with a Paid Up
Share Capital of Rs. 45 lakh and turnover of Rs. 3 crores. Explain the meaning of the "Small
Company" and examine the following in accordance with the provisions of the Companies
Act
2013:
(i) Whether the MNP Private Ltd. can avail the status of small company?
(ii) What will be your answer if the turnover of the company is Rs. 1.50 crore?
Answer:
MNP Private Ltd. is a small company:
since the company satisfies the condition with respect to 'paid up capital not exceeding
Rs. 4 crore' as well as the condition with respect to ‘turnover not exceeding Rs. 40 crore'.

If the turnover of MNP Private Ltd. is Rs. 1.5 crore:

even then, the answer shall remain same.
Question 15:
ABC Private Ltd. has two wholly owned subsidiary companies, D Private Limited and E
Private Limited. Examine, whether, D Private Limited and E Private Limited will be treated

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as related party as per the provisions of the Companies Act, 2013? [May 22 – 3 Marks]

Answer:
According to section 2(76)(viii) of the Companies Act, 2013, Related party, with reference

to a company, means any body corporate which is -

(A) a holding, subsidiary or an associate company of such company;

(B) a subsidiary of a holding company to which it is also a subsidiary; or

(C) an investing company or the venturer of the company;

In the given question, D Private Limited and E Private Limited are wholly owned subsidiary

companies of ABC Private Ltd. According to stated clause (B), above, D Private Limited and

E Private Limited are related parties.

However, as per the Notification No. G.S.R. 464(E) dated 5th June, 2015, clause (viii) shall

not apply with respect to section 188 to a private company, though being a related parties.

Question 16:
H Ltd. is the holding company of S Pvt. Ltd. As per the last profit and loss account for the
year ending 31st March, 2022 of S Pvt. Ltd., its turnover was Rs. 1.80 crores; and paid up
share capital was Rs. 80 lakhs. The Board of Directors wants to avail the status of a small
company. The company secretary of the company advised the directors that the company
cannot be categorized as a small company. In the light of the above facts and in accordance
with the provisions of the Companies Act, 2013, you are required to examine whether the
contention of practicing company secretary is correct, explaining the relevant provisions
of the Act. [May 23- 5 Marks] [Self-test Question]
Question 17:
Hastprat Ltd. is an unlisted public company, having five directors in its board which includes
two independent directors.
Sankul (P) Ltd., is subsidiary company of Hastprat Ltd., actively carrying on its business,
having paid up capital of Rs. 1.5 crore with 40 members and turnover of Rs. 18 crore,
respectively and the said company is not a start-up company.

In the context of aforesaid case-scenario, please answer to the following question(s): -

Whether Sankul (P) Ltd. is mandatorily required to prepare cash flow statement for the
financial year as a part of its financial statements?

Provide your answer by analyzing Sankul (P) Ltd. into following category of companies: -
(i) One person company, (ii) Small company, (iii) Dormant company and (iv) Private company,
respectively.

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Answer:
According to section 2(10) of the Companies Act, 2013,
Financial statement in relation to a company, includes—
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not for
profit, an income and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in sub-
clause (i) to sub-clause (iv):

Provided that the financial statement, with respect to one person company, small company,
dormant company and private company (if such private company is a start-up) may not
include the cash flow statement.

For considering the applicability of preparation cash flow statement in case of Sankul (P)
Ltd., it is required first to be analyzed that Sankul (P) Ltd. does not fall in any of the
categories of companies mentioned under proviso to section 2(10) of the Companies Act,
2013:

(i) One person company – It is given that the company is having 40 members and also its
name does not contain the words ‘OPC’, so it is not a one person company.

(ii) Small company – A company which is a subsidiary company cannot be categorized as a

small company as per proviso to section 2(85) even though its paid up capital and turnover
are within the prescribed limits and accordingly, as Sankul (P) Ltd. is a subsidiary company
of Hastprat Ltd., it cannot be considered as small company also.

(iii) Dormant company – It is given that the company is actively carrying on its business, so
it cannot be also categorized as a dormant company based upon the facts given.

(iv) Private company (which is a start-up) – It is given that Sankul (P) Ltd. is not a start-
up company and also, as per proviso to section 2(71) of the Act, a company which is a
subsidiary of a company, not being a private company, shall be deemed to be public company
for the purposes of this Act even where such subsidiary company continues to be a private
company in its articles.

So, Sankul (P) Ltd. shall be deemed to be a public company as it is subsidiary of Hastprat
Ltd., an unlisted public company and so it will not fall into this category of exemption as
well.

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Thus, it can be concluded that Sankul (P) Ltd. is mandatorily required to prepare cash flow
statement for the financial year as a part of its financial statements as it does not fall in
any of the categories of companies mentioned under proviso to section 2(10) of the
Companies Act, 2013.

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