COMPANY LAW

Wednesday, 9th October, 2019

1. Answer in True or False. Provide one bullet point reason for the same. [20 Marks]

i. The voting power of a Guarantee Company having share capital is determined by the
Guarantee.
 False.

Company limited by guarantee refers to a type of company in which members are bound to
contribute a nominal amount as cited in the MOA in case of the company’s wind up.

ii. A Small Company means a company whose paid up share capital does not exceed One
Crore Rupees.
 False.

A Small Company means a company whose paid up share capital does not exceed Rs. 50
lakhs or such higher amount but not more than Rs. 10 crores.

iii. A Small Company includes a Section 8 Company.

 True.

A Section 8 Company can also qualify as a Small Company if it meets the prescribed criteria
of having paid-up share capital and turnover below a certain threshold as well as the objects
of social welfare as stated in Section 8.

iv. A firm can be a member of a Section 8 company.

 True.

Section 8(3) states a firm may be a member of the company registered under this section.

v. The members of an unlimited company are not directly liable to the creditors of the
company.
 False.

Section 2(92) an “unlimited company” means a company not having any limit on the liability
of its members which also includes their liability to creditors

vi. A subsidiary company can be a member of the holding company.

 False.

As per Section 19 Subsidiary company not to hold shares in its holding company except as
legal representative of deceased member, as trustee, where subsidiary is a shareholder even
before subsidiary of the holding company
vii. A One Person Company may be formed as an unlimited liability company.
 False.

A One Person Company (OPC) can only be formed as a limited liability company and not as
an unlimited liability company.

viii. A Nidhi Company can issue preference shares.

 False.

A Nidhi Company is prohibited from issuing preference shares.

ix. A company, incorporated to hold the Intellectual Property of Group companies, can obtain
the status of a Dormant Company.
 True.

If a company is incorporated to hold the intellectual property of group companies and does
not carry on any business activities, it can obtain the status of a Dormant Company.

x. A Government company is a company in which not less than fifty per cent of the paid-up
share capital is held by Central or State Government or governments or partly by one and
partly by others.
 True.

As per Section 2(45) of the Act, a Government company is a company in which not less than
51% of the paid-up share capital is held by Central or State Government or governments or
partly by one and partly by others.

2. Write short notes on any two of the following [10 Marks]

i. Declaration in respect of beneficial interest in any shares
 [See April, 2022, Q. 9]

ii. Calling of Extra Ordinary General Meeting by requisitionists.

 Page 193-195

iii. Notice of Meeting and contents of Notice

 Page 195-197
 3. Write short notes on any two of the following: [10 marks]
i. Terms and Conditions for Small shareholders’ Director
 Rule 7 of Companies (Appointment and Qualification of Directors) Rules, 2014 lays down the
terms and conditions for appointment of a small shareholders’ director in a listed company
which are as under;

i. Election of small shareholders’ director:

A listed company, may upon notice of not less than:
(a) “1000 small shareholders”, or
(b) “1/10th of the total number of such shareholders”,

whichever is lower; have a small shareholders’ director elected by the small

shareholder.

ii. Notice of intention to propose a candidate:

to be submitted with the company at least 14 days before the meeting under their
signatures specifying their details and proposed director’s details.

iii. Statement by the proposed small shareholders’ director:

The notice shall be accompanied by a statement signed by the proposed director for
the post of small shareholders’ director stating:

(a) his Director Identification Number;

(b) that he is not disqualified to become a director under the Act; and
(c) his consent to act as a director of the company

iv. Independent Director and Tenure:

The small shareholders’ director should be an independent director and will have a
tenure of three years, during which he will not be liable to retire by rotation.

v. Grounds for Disqualification and Vacation:

Disqualifications and grounds for vacation of office are the same as that of any other
director. However, he shall vacate the office if –

(a) he ceases to be a small shareholder, on and from the date of cessation;

(b) he incurs any of the disqualifications specified in section 164;
(c) the office of the director becomes vacant in pursuance of section 167;
(d) he ceases to meet the criteria of independence as provided section 149 (6).

vi. Number of small shareholders’ directorship

 A person cannot hold the office of small shareholders’ director in more than two
companies at the same time, and the second company should not be in competition
with the first.

vii. No association with the company for next 3 years:

The small shareholders’ director cannot be associated with the company in any
capacity for three years after vacating the office.

ii. Disqualification of Directors

 Page 162-163,
Add:
According to Section 14 of the Appoinment and Disqualification Rule, directors must
disclose any disqualifications in Form DIR-8 before appointment. If a company fails to file
financial statements or annual returns, it must file Form DIR-9 with the names and
addresses of its directors within 30 days, or face disqualification. Any application for
removal of disqualification of directors must be made in Form DIR-10.

iii. Independent Directors

 Page No. 154-156

4. Write short notes on any two of the following: [10 Marks]

i. Board meetings through Video Conference
 [See September, 2021 Q. 10 (i)]

ii. Resolution by Circulation

 [See April, 2022 Q. 11]

iii. Vigil Mechanism

 Section 177 read with Rule 7 of the Companied (Meeting of Board and its Powers)
Rules, 2014 stipulates establishment of Vigil mechanism which is as under;

 The Companies Act mandates that every listed company, or companies

accepting deposits from the public, or those which have borrowed money
exceeding INR 50 crore from banks and financial institutions, establish a vigil
mechanism. This mechanism will allow directors and employees to report any
genuine grievances they may have.

 Companies having Audit Committee: For companies that have an audit

committee as under Section 177, this committee will oversee the vigil
mechanism. In case of conflict of interest: However, in cases where members
of the committee have a conflict of interest, they should recuse themselves,
and the remaining members will handle the matter.
  Companies not having Audit Committee: will have to nominate a director to
play the role of audit committee to oversee the vigil mechanism.

 Safeguards: The mechanism must provide adequate safeguards against

victimization of employees and directors who use it and must allow for direct
access to the Audit Committee Chairperson or the director nominated to play
the role of the Audit Committee in exceptional cases.

 Frivolous complaints: However, if there are repeated frivolous complaints,

the audit committee or nominated director may take appropriate action
against the person making such complaints, including reprimand.

 Details of Vigil Mechanism: Section 177 provides that the details such a
mechanism shall be disclosed by the company on its website, if any, and in
the Board's report.

5. Write a brief note on Oppression and Mismanagement and the right to apply for
prevention of oppression and mismanagement.
 Page 245-251

6. Write short notes on all 3 of the following:

i. Duties and liabilities of a promoter
 Who is a Promoter?

According to section 2(69) of the Companies Act,

2013 the term 'Promoter' can be defined as the
following:

i. A person who has been named as such in a

prospectus or is identified by the company in
the annual return in section 92; or
ii. A person who has control over the affairs of
the company, directly or indirectly whether as
a shareholder, director or otherwise; or
iii. A person who is in agreement with whose
advice, directions or instructions the Board of
Directors of the company is accustomed to
act.

Duties of Promoters
1. To disclose the secret profit: The promotor should not make
any secret profits. If in case he has it is his duty to disclose
the same.
2. To disclose all the material facts: The promotor of the
company must disclose all the material facts and information.
3. The promoter must make good to the company what he has
obtained as a trustee: The promotor has a fiduciary
relationship with the company. It is the duty of the promotor
to make the best for his company to whatever he has
obtained ad a trustee.
4. Duty to disclose the private arrangement: It is the duty of the
promoter to disclose all the private arrangements resulting in him
profit from the promotion of the company.

5. Act in the best interest of company: In all situations,

promoters should prioritise the company’s interest over their
personal interests.

Liabilities of Promoters
1. Liability to account for profits: The promoter is liable to
account to the company for all secret profits made by him
without full disclosure to the company.

2. Personal Liability: The promoter is personally liable for all

contracts made by him on behalf of the company until the
contracts have been discharged or the company takes over
the liability of the promoter.
 3. Liability of the misstatement in the prospectus (Section 35):
In the case of mismanagement of the prospectus, the
promotor is liable to Criminal liability (Section 34) and Civil
liability (Section 35).

4. Liability at the time of winding up the company: During

winding up Court may make a promoter liable for
misfeasance or breach of trust and may order his public
examination

ii. Effects of Ultra Vires Transaction by a company

 Page No. 63-67

iii. Mergers and amalgamation of companies

 Section 232 discusses the process of merging and amalgamating companies under the
Companies Act, 2013.
 An application must be made to the Tribunal under Section 230 for the sanctioning
of a compromise or an arrangement proposed between a company and any such
persons mentioned in that section.
 Meeting of Creditors and members: If the compromise or arrangement is proposed
for merger or the amalgamation of any two or more companies and property or
liabilities of any company is required to be transferred to another company, the
Tribunal may order a meeting of the creditors or members, as the case may be.
 Circulation of various documents: The merging companies or the companies in
respect of which a division is proposed must circulate various documents, including
the draft of the proposed terms of the scheme, a report adopted by the directors of
the merging companies, and the report of the expert with regard to valuation, if any,
for the meeting so ordered by the Tribunal.
 After sanction by Tribunal: After the Tribunal is satisfied that the procedure has been
complied with, it may sanction the compromise or arrangement or make provision
for matters pertaining to transfer of the undertaking, property or liabilities of the
transferor company to the transferee company, the continuation by or against the
transferee company of any legal proceedings pending by or against any transferor
company, transfer of the employees.
 Certificate by Company auditor: No compromise or arrangement shall be sanctioned
unless a certificate by the company's auditor has been filed with the Tribunal to the
effect that the accounting treatment proposed in the scheme of compromise or
arrangement is in conformity with the accounting standards prescribed under
Section 133.
 Filing Order with RoC: Every company in relation to which the order is made shall file
the order with the Registrar for registration within thirty days of the receipt of
certified copy of the order.
7. M/s. ABC, a proprietary concern, filed a summary suit for recovery of amount of Rs. 38,00,000/-
against XYZ Pvt. Ltd. being the amount due for supply of Ferroliquid. XYZ Pvt. Ltd. was granted
conditional leave to defend by furnishing bank guarantee to the tune of the outstanding amount.
XYZ Pvt. Ltd. disputed the payment of the said amount on the ground that the quality of the
material supplied was not satisfactory and it was substandard. The suit was at the stage of
recording of evidence when the IBC was enacted. State Bank of India being one of the main
creditors of XYZ Pvt. Ltd. filed an application under section 7 of the IBC for initiation of corporate
insolvency resolution process. A resolution professional was appointed and requisite public
announcements were made. M/s. ABC submitted its application as an operational creditor and
was included by the resolution professional in the list of operational creditors. Resolution plan
was made, approved by the Committee of Creditors and submitted to the NCLT which granted
approval. The Resolution plan in respect of the claim of M/s. ABC had the following Note: “Claims
which are subject to disputes pending before various authorities have been verified with a
notional amount of INR 1”.

XYZ Pvt. Ltd. file an application in the suit filed by M/s. ABC, claiming that the suit was required to
be dismissed in view of the aforesaid order of the NCLT under the provisions of the IBC. It was
contended that the resolution plan specifically stipulated that no amount was payable to
operational creditors like M/s. ABC and that the liability of the petitioner to pay any amount to
M/s. ABC stood extinguished.

So the question is What advice should one give to M/s. ABC?

 As per Section 238 of the Insolvency and Bankruptcy Code, 2016, the provisions of the Code shall
have an overriding effect on any other law for the time being in force. However, this does not
prevent any aggrieved person from taking recourse to remedies available under any other law.
Further, Section 238 of the IBC specifies that the legislation shall be in addition to, and not in
derogation of the provisions of any other law currently in force.

In the present scenario, M/s. ABC had filed a summary suit for recovery of an amount due for supply
of Ferroliquid before the Insolvency and Bankruptcy Code, 2016 came into force. The fact that the
suit was at the stage of recording of evidence when the IBC was enacted means that the suit had
already been instituted and was pending before the enactment of the IBC.

As per the principles of statutory interpretation, a new law should not be construed to have
retrospective effect unless such an intention is clearly manifested by the language used in the
statute or by necessary implication.

Therefore, the provisions of the IBC should not be applied retrospectively to extinguish or invalidate
a pre-existing claim which was pending before the enactment of the IBC.

Further, the resolution plan approved by the NCLT has a note stating that claims which are subject to
disputes pending before various authorities have been verified with a notional amount of INR 1. This
means that the resolution plan does not fully resolve or extinguish the claim of M/s. ABC, and the
liability of XYZ Pvt. Ltd. to pay the amount due to M/s. ABC remains subject to the outcome of the
ongoing dispute.

Case Laws

The Supreme Court said that the claims that are uncertain and pending a decision should be given a
notional value of just INR 1 because it's important for anyone interested in buying the company to
know exactly how much liability they are taking on. If these claims are later decided to be worth
more than one rupee, it would cause problems for the buyer. Therefore, it's important to deal with
them upfront and not allow them to be decided later.

Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2019, SC)

Fourth Dimension (“FDSL”) had initiated an arbitration proceeding against Ricoh India, the CD, which
was pending on the date of commencement of the CIRP. FDSL’s claim was provided a notional value
of INR 1 by the RP. Thereafter, the successful resolution plan sought to extinguish all pending
litigations including the one initiated by FDSL. The Supreme Court disallowed extinguishment of the
pending arbitration proceedings, thereby paving the way for FDSL to continue the stalled arbitration
proceedings against the CD post completion of the CIRP.

Fourth Dimension Solutions Ltd. v. Ricoh India Ltd (2022, SC)

Therefore, M/s. ABC should continue pursuing their claim in the summary suit filed against XYZ Pvt.
Ltd. despite the approval of the resolution plan by the NCLT. XYZ Pvt. Ltd. cannot contend for
dismissal of the Summary Suit.

ii. Discuss the arguments that could be made to the court on behalf of M/s. ABC?
 If M/s. ABC wishes to pursue their claim in the summary suit filed against XYZ Pvt. Ltd., they
could make the following arguments before the court:

1. The suit was filed before the Insolvency and Bankruptcy Code, 2016 came into force
and was pending before the enactment of the IBC. As such, the provisions of the IBC
should not be applied retrospectively to extinguish or invalidate a pre-existing claim.

2. The resolution plan approved by the NCLT has a note stating that claims which are
subject to disputes pending before various authorities have been verified with a
notional amount of INR 1. This means that the resolution plan does not fully resolve
or extinguish the claim of M/s. ABC, and the liability of XYZ Pvt. Ltd. to pay the
amount due to M/s. ABC remains subject to the outcome of the ongoing dispute.
 3. The fact that XYZ Pvt. Ltd. has filed an application in the summary suit claiming that
the suit should be dismissed in view of the NCLT order indicates that they
themselves do not consider the dispute with M/s. ABC to be fully resolved by the
resolution plan.

4. The quality of the material supplied by M/s. ABC was not disputed by XYZ Pvt. Ltd. in
their application under Section 7 of the IBC. The dispute pertained only to the
payment of the amount due, which is the subject matter of the summary suit.

5. M/s. ABC has a legitimate and bona fide claim against XYZ Pvt. Ltd. for the amount
due for the supply of Ferroliquid, and they should not be deprived of their right to
pursue the same merely because of the approval of the resolution plan by the NCLT.

In support of these arguments, M/s. ABC could refer to the provisions of the Insolvency and
Bankruptcy Code, 2016, as well as relevant case laws such as the decision of the Hon’ble
Bombay High Court in the case of Tata Steel BSL Ltd. v. Varsha Maheshwari (2019, Bombay
HC), which held that the civil suit pending before the Trial Court cannot be extinguished
merely because the Resolution Plan came into existence, which stood approved by the
Adjudicating Authority as well as the Appellate Authority.

M/s. ABC could also cite the principle of natural justice and the right to a fair hearing, as
enshrined in the Constitution of India, and argue that they should be given an opportunity to
present their evidence and arguments in support of their claim in the summary suit.

8. Write short notes on both of the following:

i. Fast track corporate insolvency resolution process
 IBC Bare Act Pg. 119-120

ii. Offenses under the IBC

 IBC Bare Act Pg. 129-134

Question 8 ---- Securities Law