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CORPORATE LAW- IN HOUSE MMS 11 GROUP 1 1) a) X Ltd.

, has availed a term loan from IDBI where no instalment of repayment is outstanding due to default on the part of X Ltd. Now X Ltd. wants to deposit Rs.2 Crores with Y Ltd. and the aggregate of the loan/guarantee/security given/provided or investments made alongwith the proposed deposit exceed 60% of the paid up capital and free reserves of X Ltd. State whether prior approval of IDBI is required for depositing Rs.2 Crores as above 3 Ans: Yes, prior approval of IDBI is required for depositing Rs. 2 Crore in Y Ltd. X Ltd had availed a term loan from IDBI, where it has no installment of repayment outstanding. According to Companies Act, 1956, S.372A dealing with Inter-corporate loans, where a term loan from a Public Financial Institution(PFI) is SUBSISTING then if the aggregate of the proposed loan, guarantee, provision of security or investment provided by a company, together with the existing loans, guarantees, securities already provided or investment made, if it exceeds 60% of the paid up capital and Free reserves or 100% of the Free reserves ,then Prior Approval is required. Since the caselet mentions that the proposed deposit in Y Ltd exceed 60% of the paid up capital and free reserves of X Ltd ,Prior approval is must.

b) A Special Audit is conducted by the Cost Auditor when it is demanded by the shareholders in a general meeting by passing a special resolution. The Cost Auditor is appointed by the shareholders in the same meeting and he submits his special audit report to the shareholders. Comment.

I. Under Section 233 A, it is the prerogative of the Central government to order a Special Audit if in its opinion a) the affairs of the Company are NOT being managed in accordance with sound business principles or prudent commercial practices; or b) that the company is being managed in a manner likely to cause serious injury or damage to the interests of the trade, industry or business to which it pertains or c) that the financial position of the company is such as to endanger its solvency. Hence a Special Audit cannot be demanded by the shareholders even by passing a special resolution in a general meeting. II. The Central Govt. shall also appoint a Chartered Accountant as defined under the Chartered Accountants Act, 1949 or THE COMPANYS AUDITOR HIMSELF to conduct such Audit. The Auditor so appointed is called as a Special Auditor. The Special Auditor (SA) submits the Special Audit report to the Central Govt for due diligence. 2) a) Adventurous Ltd., has incurred a loss of Rs. 75 lakhs in the financial year ended 31/03/2008. The Board of Directors want the said loss to be written off or adjusted against a credit balance of Rs. 3 Crores lying in the Securities Premium Account of M/S Adventurous Ltd . Please advise the Board in totality about the legal provisions involved under the Companies Act, 1956. 3 Ans: S.78 of the Companies Act, 1956, provides that the securities premium Account of the Company can be applied utilized for the following purposes, namely:a) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares. b) for writing off the preliminary expenses of the Company. c) in writing off the expenses of , or the commission paid or discount allowed on , any issue of shares or debentures of the company. d) in providing for premium payable on the redemption of any redeemable preference shares or of any debentures of the company. The amount lying in the Securities premium Account is treated as the Paid up Capital of the Company and The provisions of the Companies Act relating to REDUCTION of Capital shall apply to Securities Premium Account,

if it is to be utilized for purposes OTHER THAN what is mentioned above.Hence the loss of Rs. 75 lakhs in the financial year ended 31/03/2008 cannot be written off or adjusted against a credit balance of Rs. 3 Crores lying in the Securities Premium Account of M/S Adventurous Ltd

b) Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company and is not restricted to the business hours of the company.

Ans: No. Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company. Here the phrase at all times refers to any day of the 365 days in the year. The auditor is thus entitled to have access to the books and accounts and vouchers of the company throughout the 365 days during business hours only. 3) a) The Board of Directors of XYZ Ltd. is requested by Mr. Cry, one of the directors, to extend the time period within which he has to repay the loan taken by him from the Company. Advise the Board, the legal position. 3 Ans: A)Case 1:- Approval of Central Government is taken:- As per Sec 295 of the Companies Act, 1956(loan to directors) the director is safe but he cannot get extension for repayment of loan as per sec 293(1) of the Companies Act, 1956 which is about restrictions on the Powers of Board of Directors. B)Case 2:- No approval of Central Government is taken:- As per Sec 295 of the Companies Act the director is punishable either with fine upto Rs. 50000 or imprisonment which may extend upto six months. If he has partly repaid the loan, the maximum punishment which may be imposed by way of imprisonment shall be proportionately reduced. Also he cannot get extension to repay the loan as per sec 293(1) of the Companies Act, 1956. b)WORLD COM INC, which is a foreign company, has established a branch office in India. Indian Authorities want to treat it as a person resident in India, which the foreign company disputes. 1 Please advise. Ans : A person resident in India as per Section 2(v) of FEMA, 1999 also includes an office, branch or agency in India owned or controlled by a person resident outside India. Hence WORLD COM INC. cannot dispute against the Authorities. c) Whether Company law Board confirmation is required for alteration of the objects clause? 1 Ans: The answer is NO. The alteration of the Objects clause of the Memorandum of Association does not require approval of the Company Law Board or the Regional Director. 4) a) AGM of PQR Ltd., is held beyond the statutory period prescribed under the Companies Act and no permission of Registrar of Companies(ROC) is obtained. The Board of Directors seek your views on the validity of the meeting and the consequences of the default. b) X, a member of BUSINESS LTD, desires to appoint more than one proxy to attend the General meeting on behalf of himself. Whether can he do so? c) In what way the Annual return of a company will be helpful to a banker or a financial institution contemplating to finance the company? 5) a)Mr. Lakshman, a Citizen of India, left India for employment in USA on 1st June, 2002. Mr. Lakshman purchased a flat at Bhopal for Rs. 15 lakhs in September, 2003. His brother, Mr. Govind, employed in New Delhi, also purchased a flat in the same building in September, 2003 for Rs. 15 lakhs. Mr. Govinds flat was financed by a loan from a Housing finance company and the loan was guaranteed by

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Mr. Lakshman. Examine with reference to the provisions of Foreign Exchange Management Act,1999, (FEMA) whether purchase of flat and guarantee by Ram are capital account transactions? 4 Ans: If a person has gone out of india or who stays outside india in either case for taking up employment or for carrying business or vocation or for any other puposes whch would indicate his intention to stay outside india for an uncertain period he would be treated as Resident outside India. Hence Mr Lakshman can be treated as Resident outside india. Mr Lakshman left on 1st june 2002 ,On September 2003 has not fulfilled the condition of staying in india for more than 182 days for given financial year Apr 2003-Mar2004, he cannot be considered as person resident in india for the fiscal 2003-2004. As per Capital Account transaction (Sec 6) a person resident outside india may hold, own transfer or invest in indian currency , security or any immovable property situated in india if currency, security or property was acquired held or owned by a such person when he was resident in india or inherited from a person who was resident in india. Hence Mr Lakshman purchase of flat is considered as capital transaction. Guarantee by a person resident outside india in favour of, or on behalf of, a person resident in india is permitted transaction made by resident outside india under Foreign exchange management(Permissible capital account transactions) regulations, 2000. Therefore both transaction of purchase and guarantee by Mr lakshman are capital account transaction as per FEMA. b) The Balance sheet and Profit and loss account are submitted to the ROC within 45 days of AGM. Comment. 1 Ans: Three copies of balance sheet and P/L has to be filed with ROC within 30 days from the date on which AGM was conducted. In case AGM is not held in the given financial year, within 30 days when AGM should have been held. 6) The Articles of Association of Sunrise Ltd., provide that as a qualification , a director shall hold atleast 10 shares in the Company. Mr. Rao has been appointed as a director in the meeting held on 1st May, 2008. Mr. Rao applied for 10 equity shares of the company on 30th July, 2008. The said shares were allotted to him on 20th August, 2008 when the Board meeting was held. Discuss the relevant provisions of the Companies Act, 1956 in the matter of share qualification requirements and the consequences of non-compliance thereof. Also state whether Mr.Rao has complied with the requirements in this regard. 5 Ans: a)Usually the articles of company provide for holding qualification shares for a director. The Companies Act, 1956 does not provide for any share qualification of any director but Regulation 66 of Table A provides that director must hold at least one share in the company.

b) Where a share qualification has been prescribed in Articles of Company which is a public company or a private company which is a subsidiary of a public company, the provisions of Article 270 of the companies Act 1956, is applicable where a director must take his qualification shares within 2 months after his appointment. c) Any provision in the Articles of company will be void if it requires the person to hold qualification shares before his appointment as a director or to obtain them within a shorter time than 2 months after his appointment. D) The nominal value of qualification shares shall not exceed Rs 5000/- or the nominal value of one share where it exceed Rs 5000.

e) A person acting as a director without acquiring qualification shares is punishable under section 272.A director who fails to hold qualification shares is also liable to vacate his office under section 283 of companies Act, 1956. f) In this case Mr.Rao was appointed as a director of Sunrise Ltd. On 1 st may 2008.He applies for share of the company on 30thJuly 2008 which were allotted only at the board meeting held on 20 th August 2008.Therefore he failed to hold the shares before expiry of 2 months from the date of his appointment. So Mr. Rao must vacate his office under section 283.
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