special contracts the companies act, 2013 - yamuna sridhar

Volume II

Special Contracts

The Companies Act, 2013

- Yamuna Sridhar

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Contents

Sl. No Title Page No.

3. Special Contracts

3.1 Bailment and Pledge 3.1

3.2 Indemnity and Guarantee 3.6

3.3 Law of Agency 3.11

4. Company Law

4.1 Introduction 4.1

4.2 Corporate veil Theory 4.4

4.3 Types of Companies 4.5

4.4 Registration / Incorporation of a Company 4.9

4.5 Memorandum of Association & Articles of Association 4.12

4.6 Prospectus 4.16

4.7 Share and Share Capital 4.18

4.8 Borrowing Powers 4.23

4.9 Debuntures 4.24

4.10 Deposits 4.25

4.11 Charges 4.32

4.12 General Meetings 4.43

4.13 Distribution of Profits - Dividend 4.48

Special Contracts 2.1

2. SPECIAL CONTRACTS

2.1 BAILMENT AND PLEDGE

Contract of Bailment

A transaction where one person delivers goods to another for some purpose in the same/ altered

form

Example: Handing over a cloth to a dress maker to be stitched.

Points to ponder:

Bailor – The owner who delivers the goods

Bailee – The person to whom the goods are delivered (only possess)

Delivery of goods – Actual/ Constructive

[CMA INTER D01 & J11]

Types of Bailment

Gratuitous Bailment - A bailment, exclusively for the benefit of the bailor, in which neither the

bailor nor the bailee is entitled to any remuneration.

Examples:

A leaves his dog with a neighbour to be looked after in A’s absence on a holiday – for the

benefit of A.

Lending of a book to a friend for a week.

Non – Gratuitous(Bailment for reward) – A bailment on mutual benefit of both the parties

Example: A lets out a motor car for hire. Benefits: For A – the hire charges, For B – the use of car.

Duties of Bailor

Disclosure of all the known faults in the goods.

Example: A delivers to B, a carrier, some explosive in a case, but does not warn B. The case is

handled without extraordinary care necessary for such articles and explodes. A is liable for all the

resulting damage to men and other goods.

Points to ponder: If bailed for hire - Bailor is responsible for the damages, known or unknown

of the faults.

Example: A hires a carriage of B. The carriage is unsafe though B does not know this. A is injured.

B is responsible to A for the injury.

Pay for any extraordinary expenses incurred by the bailee.

Example: If a horse is lent of a journey, the expenses of feeding the horse would, of course,

subject to any special agreement be borne by the bailee.

The bailor is bound to indemnify the bailee for any cost or costs which the bailee may incur

because of the defective title of the bailor of the goods bailed (Section 164).


Duties of Bailee

Must take as much care as his own goods of the same bulk, quality and value as the goods bailed.

To use the goods only in the authorized manner.

The goods bailed should be separate from his own goods.

He must not set up an adverse title to the goods.

Return of goods without demand on the expiry of the time fixed/when the purpose is

accomplished.

Return of any increase or profits, accrued from the goods bailed.

Examples:

[CMA INTER D12]

Question: On 01.11.2012 Mr. Barun kept his Cow under the custody of Mr. Tarun for one month and

paid ₹ 1000 for maintenance. On 15.11.2012, the Cow gave birth of a Calf. On 30.11.12 Tarun returned

the Cow retaining the Calf - Mr. Tarun is bound to deliver the cow as well as the calf to A.

[CMA RTP J11, J12, D12]

Question: X lends a sum of ₹10,000 to Y, on the security of five shares of a Limited Company on 1st

April 2011. On 15th September, 2011, the company issues bonus shares. Y returns the loan amount of

₹ 10,000 with interest but X returns only five shares which were pledged and refuses to give the bonus

shares.

Answer: In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, any

increase or profit which may have accrued from the goods bailed.

[CMA INTER J10 & J12]

Question: Saxena lets to Mr. Menon for hire a horse for his own riding but Mr.Menon drives the

horse in his carriage. What action saxena can take?

Answer: Mr. M has not followed the conditions of Bailment. The action of using the horse in the

carriage is not as per the terms of the Bailment. It is upto Mr. S continue with or terminate the

bailment.

Effect of mixture (without bailor’s consent) when the goods are

Separable

Example: A bails 100 bales of cotton marked with a particular mark to B. B, without A’s consent,

mixes the 100 bales with other bales of his own, bearing a different mark - A is entitled to have his

100 bales returned, and B has to bear the expenses incurred in the separation of the bales, and

any other incidental damage.

Inseparable

Example: A bails a barrel of Cape flour worth ₹45 to B. B, without A’s consent, mixes the flour

with country flour of his own, worth only ₹25 a barrel. B must compensate A for the loss of his

flour.

[CMA INTER J09]

Bailee’s particular lien – The right to confer an additional value of an article

Examples:


A given a piece of cloth to B, a tailor, for making it into a suit, B promises to have the suit ready

for delivery within a fortnight, B has the suit ready for delivery. He has a right to retain the suit

until he is paid his dues.

A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is

finished, and to give a three month’s credit for the price. B is not entitled to retain the coat until

is paid.

Points to ponder:

1. The right arises only when improvement is done w.r.t. labour and skill.

2. The bailee can retain the goods until he pays for it.

3. Types of lien:

Particular Lien – The lien against the property exercised with labour and skill.

Example: A bailee’s lien

General Lien - The right to retain the property w.r.t. any payment lawfully due to him.

Example: Bankers, Policy brokers, Attorneys of High court

Termination of bailment

On death of the bailor/ bailee

On wrong usage/ disposal of the goods.

Expiry of period

Object of the bailment is received

Subject matter is destroyed

[CMA INTER D10] [RTP J12]

Finder of Lost Goods – A Special Case

The finder of the goods acts as a Bailee.

Points to ponder:

The founder must take necessary measures to trace the owner. If not, he will be guilty of

wrongful conversion of the property.

Till the owner is found out, the property in goods will vest with the finder and he can retain the

goods as his own against the whole world (except the owner, of course).

Right of lien: To retain the goods against the owner until he receives compensation for trouble

and expenses incurred in preserving the goods and finding out the owner. But, has no right to sue

the owner for any such compensation (Section 168).

Right to sue for reward: The finder can sue for any specific reward which the owner has offered

for the return of the goods. He may also retain the goods until he receives the reward. (Section

168)

Right to resale: The finder has a right to sell the goods in the following cases:

the goods are of perishing in nature

the owner cannot, with reasonable diligence, be found out

the owner is found out, but he refuses to pay the lawful charges of the finder


the lawful charges of the finder, in respect of the goods found, amount to 2/3rd of its value.

PRACTICAL PROBLEMS

[CMA INTER D13, 3 Marks]

Question: Arvind hires a carriage of Govind and agrees to pay ₹ 500 as hire charges. The carriage is

unsafe though Govind is unaware of it. Arvind is injured and claims compensation for injuries

suffered by him. Govind refuses to pay. Discuss the liability of Govind.

[CMA RTP D12, INTER D12]

Question: Goods seized by Customs Authority is a case of bailment under Indian Contract Act – Is it

a bailment?

Answer: Yes, because in this case, the possession of goods is transferred to the customs authority.

Therefore bailment exist u/s 148 of The Contract Act, 1872.

[CMA RTP D11, D12]

Question: S delivered his car to M for repairs. M completed the work, but did not return the car to S

within reasonable time, though S repeatedly reminded M for the return of car. In the meantime a big

fire occurred in the neighborhood and the car was destroyed - M is liable for the loss, although he

was not negligent, but because of his failure to deliver the car within a reasonable time.

[CMA RTP D11]

Question: W parks his car at a parking lot, locks it, and keeps the keys with himself.

Answer: Mere custody of goods does not mean possession. For a bailment to exist the bailor must

give possession of the bailed property and the bailee must accept it.

Pledge

A branch of bailment whereby an article is deposited with a lender of money/ promise as security for

the repayment of a loan/ performance of a promise

Pawnor - Bailor/Depositor/Pledgor

Pawnee - Bailee/Depositee/Pledgee

Example: Promissory notes – Pledged by endorsement or delivery

Essentials for a pledge, the delivery

The property pledged should be delivered to the pawnee.

Delivery should be in pursuance of a contract.

Delivery should be for the purpose of security.

Delivery should be upon a condition to return.

Rights of the Pawnee


Sale of goods on reasonable notice

Sue for the recovery of the amount for collateral security

Sue for the sale of goods to realize the due on him

Rights of the Pawnor

If the sale by pawnee is by not giving reasonable notice, then

Sue for the redemption of goods by depositing money treating the sale had never taken place.

Compensation for the damages on the ground of conversion.

[CMA RTP D11]

Pledge by Non-owners

A Mercantile agent, valid only if the Pawnee acts in good faith.

Seller/ buyer in possession after sale, valid only if the Pawnee acts in good faith and no notice

Pawnee having limited interest – A mortgagee with respect to the goods which he pawns.

Co-owner in possession, with the assent of others.

Person in possession under a voidable contract on the ground of misrepresentation, fraud.

PRACTICAL PROBLEMS

[CMA INTER J13]

Question: On expiry of stipulated period, the pledge can sell the pledged goods to any person.

[CMA RTP J11 & J12]

Question: X buys goods from Y on payment but leaves the goods in the possession of X. X then

pledges the goods to Z who has no notice of the sale to Y

Answer: It is an exception to the rule’ No one can possess better title than he himself’. The pledge is

valid as Z, the pledgee has obtained the goods in good faith from X without the notice of the

previous sale.


2.2 INDEMNITY AND GUARANTEE

Contract of Indemnity

A contract where one party promises to save the other party from loss caused to him by the conduct

of the promisor himself/ any other person.

Example:

A contracts to indemnify B against the consequence of any proceeding which C may take against

B in respect of a certain sum of 300 Rupees.

On a contract of insurance - In consideration of premium, the insurer promises to make good the

loss suffered by the assured on account of the destruction by fire of his property insured against

fire.

Points to ponder

Nature - Express or Implied

Indemnifier- The person who promises to indemnify or make good the loss

Indemnity holder/ Indemnified - The person whose loss is made good

Satisfies all the essentials of a contract.

The later may be inferred from the circumstances of a particular case

The contract is restricted to the reimbursement of the losses as per the definition and not related

to events or accidents.

Example: If A incurs any expenses on an act done at the request of B, he can recover the same

from B.

Rights of Indemnity Holder when sued

Under section 125, the promise in a contract of indemnity, acting within the scope of his authority, is

entitled to recover from the promise.

All damages which he may be compelled to pay in any suit in respect of any matter to which the

promise to indemnify applies.

All costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did

not contravene the orders of the promisor, and acted as if it would have been prudent for him to

act in the absence of any contract of indemnity, or if the promisor authorized him to bring or

defend the suit; and

All sums which he may have paid under the terms of any compromise of any such suit, if the

compromise was not contrary to the orders of the promisor, and was one which it would have

been prudent for the promisee to make in the absence of any contract of indemnity, or if the

promisor authorized him to compromise the suit.

Contract of Guarantee

A contract to perform the promise, or discharge the liability of a third person in case of his default.


Example: A advances a loan of ₹ 5000 to B and C promises to A that if B does not repay the loan, C

will do so.

Points to ponder:

Surety / Favoured Debtor / Guarantor – C, the person who gives the guarantee

Principal Debtor – B, the person for whom the guarantee

Creditor - A, the person to whom the guarantee is given.

Essentials (of a contract).

Guarantee – Oral/ Written.

Types - for an existing/future debt, which may be specific(for a single debt) or continuing(for a

series of transactions)

Example: S, in consideration that C will employ P in collecting the rents of C’s Zamindari,

promises C to be responsible to the amount of ₹ 5,000 for the due collection and payment by P of

these rents.

Feature - The consideration received by the principal debtor is sufficient for surety.

Example: B requests A to sell and deliver to him goods on credit. A agrees to do so, provided will

guarantee the payment of the price of the goods. C promises to guarantee the payment in

consideration of A’s promise to deliver the goods.

Points to ponder

[CMA INTER D03] Surety is a favoured Debtor - Comment

The Surety is the Favoured Debtor as the Creditor can directly proceed against the Surety if he wish

so, it is not necessary to go to the Principal Debtor.

Rights of surety

[CMA RTP J12]

The right against -

The creditor:

Before payment of guaranteed debt –may require the creditor sue the principal debtor. However

he has to bear the expenses arising therefrom.

Right to set-off or counter claim that debtor has against creditor.

On payment of guaranteed debt, right to benefit of creditor’s securities. In fact he steps into the

shoes of creditor.

The debtor :

Right to be relieved of his liability before payment has been made.(i.e. to revoke)

Right to indemnity.

The co-sureties :

In absence of any contract to the contrary, the co-sureties are liable to contribute equally.


When sureties are bound by different sums they have to contribute equally subject to maximum

sum guaranteed.

Release by creditor of one of the sureties, does not release him of the responsibility towards co-

sureties.

Example: A, B and C are sureties to D for the sum of ₹3000 lent to E. E makes default in payment. A,B

and C are liable, as between themselves, to pay ₹1000 each.

Points to ponder

If A is insolvent, then B and C has to contribute the unpaid amount and like-wise.

[CMA INTER D10]

Discharge of Surety

[CMA INTER D12, J14, 2 Marks]

Failure of consideration between the Creditor and the Principal debtor, as consideration is one of

the essential for validity.

By notice of revocation in case of a continuing guarantee

Examples: A guarantees to B, to the extent of ₹ 10,000, that C shall pay all the bills that B shall

draw upon him. B draws upon C, C accepts the bill. A gives notice of revocation, C dishonours

the bill at maturity. A is liable upon his guarantee – Specific Guarantee

[CMA RTP D11, D12]

X’ stands surety for ‘Y’ for any amount which ‘Z’ may lend to Y from time to time during the next

three months subject to a maximum of ₹ 5000. One month later X revokes the guarantee, when Z

had lent to Y ₹ 500 - X is discharged from all the liabilities to Z for any subsequent loan and liable

for ₹ 500 on default of Y since the loan was taken before the notice of revocation was given to Z

By the death of the surety as regards future transactions.

Variation in the terms of the contract without his consent.

[CMA INTER J04]

Example: C contracts to lend B 5,000 rupees on the 1st March. A guarantees repayment. C pays the

5,000 rupees to B on the 1st January - A is discharged from his liability, as the money is lent before

the said time.

Releases/ acts/makes an omission resulting in the discharge of the principal debtor. But should

be sued within the limited time.

[CMA RTP J11]

Example: D owes F ₹ 50,000/- only guaranteed by S. The debt becomes payable on 26th December

2009. F does not sue D for a year after the debt has become payable - surety is not discharged.

Making arrangements or promising to give time or not to sue him, without his consent

Duties regarding to the Surety.

[CMA INTER J02]

Example: A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B promises on

his part that he will at least once a month, see M make up the cash. B omits to see this done as

promised, and M embezzles. A is not liable to B on his guarantee.


Discharge to the extent of the value of the security,

[CMA INTER J13]

Example: Mr. Mitra guarantees payment to Mr. Basu to the extent of ₹50,000 for time to time

supply of paper by Mr. basu to Mr. Chandan. Basu supplies paper to Chandan more than the

value of ₹50,000 and Mr. chandan pays. Latter on Mr. Basu, at the request of Chandan, supplies

paper valued ₹ 60,000. This time Chandan fails to pay. What action Basu can take against Mitra.

Surety’s Liability is co-extensive with that of the principal debtor.

Example: A guarantees to B, the payment of a bill of exchange by C, the acceptor. The bill is

dishonoured by C. A is liable not only for the amount of the bill but also for any interest and charges

which may have become due on it.

[CMA INTER D01, J02, D08] [RTP D10]

Indemnity Guarantee

A contract by which one party promises to

another to compensate him for loss is a

contract of Indemnity.

A contract to perform the promises or discharge the

liability is a contract of Guarantee.

Two parties-the indemnifier and the

indemnified.

Three parties-the creditor, the principal debtor and

the surety

Indemnifier’s liability is primary and

independent

Surety’s liability is secondary i.e. it arises only on

default of Principal debtor.

Indemnifier’s right is contingent. Surety’s liability is subsisting.

It is a simple contract - one contract. It is composite in nature - 3 contracts.

Both the parties must be capable and

competent to contract.

The contract of guarantee is still valid even if the

Principal debtor is minor.

It is not necessary for the indemnifier to act at

the request of the indemnified.

It is necessary that the surety should give the

guarantee at the request of the debtor.

The indemnifier cannot sue third parties in his

own name, but must bring the suit in the name

of the indemnified.

The surety discharges a debt payable by the

principal debtor to the creditor. The surety can

proceed against the debtor in his own right.

PRACTICAL PROBLEMS

[CMA INTER J13]

Question: Mr. Ashoke obtains two loans from Mr.Natobar. First loan ₹3,000 guaranteed by Mr.Roy

and second loan ₹5,000. Ashoke sends a cheque of ₹2,000 to Mr.Natobar without indicating how

this amount is to be appropriated. Mr.Natobar appropriated against loan of ₹ 5000 which was

unsecured. Whether this appropriation was lawful?


[CMA INTER D12]

Question: Mr. A, Mr. B & Mr. C are sureties to Mr. D for the sum of ₹ 6000 lent to Mr. E failed to

repay on due date. Mr. A one of the sureties, disagreed to Pay. Advice whether ‘A’ is right – All the

sureties A, B and C are liable. Hence Mr. A being one of the surety is liable to pay the amount.

[CMA INTER D10]

Question: Mr. Bose is indebted to Mr. Das and Mr. Ghosh is the surety. When Mr. Bose & Mr. Ghosh

refused to pay, Mr. Das sued the surety (Mr. Ghosh) who paid the amount & cost as per orders of the

court. Can the surety recover the amount from Mr. Bose?

Answer: Yes, It is an implied condition in the contract of guarantee that the guarantor can recover the

amount from the debtor. In this case the debtor Mr. Bose did not pay the amount to his creditor Mr.

Das. Mr. Das went to court and as per order of the court, the guarantor Mr. Ghose paid the debt. Mr.

Ghose can recover the said amount from Mr. Bose.

[CMA INTER J12]

Question: In the event of principal debtor being a minor, creditor cannot recover his money, from the

surety. Comment.

[CMA INTER D08]

Question: BEE owes ₹10,000/- to CEE A mount was guaranteed by GEE. Said debt becomes payable

on 25.01.07 CEE does not sue BEE. Hence due to delay GEE is automatically discharged from his

surityship. – Comment.

Answer: In the absence of any provision in the guarantee to the contrary, mere forbearance on the

part of CEE to sue BEE does not discharge the surety i.e. Mr. GEE.

[CMA RTP J12]

Question: P contracts with Q for a fixed price to construct a house for Q within a stipulated time. Q

would supply the necessary material to be used in the construction. R guarantees P’s performance of

the contract. Q does not supply the timber as per the agreement. Is R discharged from his liability?

Answer: The surety is discharged by any contract between the creditor and the principal debtor, by

which the principal debtor is released or by any act or omission for the creditor, the legal consequence

of which is the discharge of the principal debtor. In the given case the Q omits to supply the timber.

Hence R is discharged from his liability.

[CMA RTP D09]

Question: X guarantees all advances made to C within a period of one quarter by YZ bank subject to

maximum of ₹100,000/- . What is the nature of guarantee? If X dies, whether his legal successors will

be liable to pay the amount.

Answer: This is a continuing guarantee. So X’s legal successors are liable subject to the amount of

property inherited from X.


2.3 LAW OF AGENCY

An agent

A person employed to bring a contractual relationship between the principal and the third-party.

Points to ponder: An agent has the capacity of his principal-ship during the period..

[CMA INTER J10, RTP D10]

Question: Discuss the position of an agent appointed by minor?

Answer: Minor is not supposed to take decisions. He can neither enter into a contract nor he can

appoint an agent. Such agents will deemed to be not appointed at all and their appointment will be

null and void in the eyes of law.

[CMA INTER D01]

Question: State the conditions that must be fulfilled before that doctrine can apply to the acts of an

agent.

Answer: The following are the required conditions:

1. There should be appointment by the principal of an agent.

2. The principal should confer authority on the agent to act for him.

3. The authority conferred should be such as will make the principal answerable to third parties.

4. The object of appointment must be to establish relationship between the principal and the third

party.

The relationship of agency being based on confidence between the principal and agent, no

consideration is necessary.

[CMA RTP D09 & J12]

Classification of an agency

Express Agency

Example: Power of Attorney, the authority to act on behalf of his principal in accordance with the

terms and conditions therein.

Implied Agency - by conduct, situation of parties or necessity of the case.

[CMA RTP J10]

Agency by Estoppel: A person by his conduct or statements creates a situation whereby a

certain person is believed to be his agent; he is estopped from denying the fact subsequently.

[CMA INTER D12]

Question: Mr. Barun tells Mr. Tarun in presence of Mr. Arun that he is the Agent of Arun

who maintains silence instead of denying Barun’s statement. Later on Barun sells Arun’s

Goods to Mr. Tarun. Arun now disputed Barun’s title to the goods, as Barun was not Agent

of Arun. Explain whether Arun is right.


Answer: In this case Arun cannot dispute Tarun’s ownership title to the goods. Sec 27 of Sale

of Goods Act provides that where the owner by his conduct or omission, leads the buyer to

believe that the seller has right and/or Authority to sell, he is estopped from denying the fact

afterwards. The buyer thus gets better title than the seller. This is case of sale by estoppels.

[CMA INTER D09]

Agency of Necessity: To incur unauthorized expenses to protect/ preserve it.

Example:

1. A sent a horse by railway and on its arrival at the destination there was no one to receive

it. The railway department, being bound to take reasonable steps to keep the horse alive.

2. A wife deserted by her husband and thus forced to live separate from him, can pledge

her husband credit to buy all necessaries of life according to the position of the husband

even against his wishes.

Agency by holding out: An affirmative conduct on part of principal is necessary to create an

agency by holding out.

[CMA RTP D12, D01, D11, RTP D11]

Agency by ratification: Agency arising after the event out of the authority, where either the

performance can be accepted or denied.

Example: X asked Y, his agent to construct a house for him. Y constructed a car shed also – Its

upto to X, to accept/ reject.

Types of Agents

Special Agent - An agent appointed to do a specified act or to perform a specified function

having no authority outside this special task.

General Agent - An agent appointed to do anything within the authority given to him in all

transactions, or in all transactions relating to a specified trade or matter.

Sub-Agent - An agent appointed by the original agent to whom the principal’s work is

delegated(with principal’ consent)

Mercantile Agent - Agent authority either to sell goods or consign goods for the purposes of sale,

or to buy goods, or to raise money on the security of goods”.

They are

Factors – An agent employed to sell goods (in his possession)/buy goods for his principal.

Brokers – An agent whose ordinary course of business is to make contracts with other

parties for a commission.

Del Credere Agent - Agent, who is in consideration of an extra remuneration guarantees to

his principal that the purchasers who buy on credit will pay for the goods they take.

Auctioneers - An auctioneer is an agent who sells goods by auction.


Partners - Every partner is an agent of the firm and his co-partners in a partnership firm.

Bankers – An agent of a customer buys or sells securities, collects cheques dividends, bills or

promissory notes on behalf

Points to ponder

Factors - has a right of general lien.

Brokers - No possession, so no right of lien

Del Credere Agent – Bound to pay to principal the sum owned by the party in case of failure.

Bankers – in case of balance due, has the general lien on the securities and goods on possession.

Do's of the Agent

To act within the scope of the authority strictly following the instructions.

In absence of express instructions, to follow the custom prevailing in the same kind of business.

Working with reasonable skill and diligence

Disclosure of any material information, likely to influence the making of the contract.

Prepare true accounts on reasonable notice to render.

Disclosure of extra profit.

Has to protect the interest of his deceased principal on his death.

[CMA INTER J12]

Example: Mr. A being an agent of Mr. P (who is owner of land) agrees for money to obtain Mr. B

a lease of P’s land but without the knowledge of ‘P’. Discuss the validity of this agreement.

Don'ts of the Agent

Disclosure of confidential information entrusted.

Allowing his interest to conflict the duty(like compete with his principal).

Make of secret profit.

Points to ponder: In which case, the principal is entitled to dismiss/recover the profit/ refuse to

pay the remuneration. If involves third party, the contract can be repudiated and can recover

damages.

Delegating his authority to sub-agent, except in some cases.

Authority Coupled with Interest

An agency is coupled with an interest when the agent has an interest in the authority granted to him

or in the subject matter with which he is authorized to deal.

Points to ponder:

The agent is authorized to collect money from third parties and pay himself the debt due by the

principal, but not a mere arrangement that the agent’s remuneration is to be paid out of the rents

collected by himself.


The agent is the principal and has the right to sue, or be sued to that extent of his interest in the

subject matter.

[CMA RTP D09, D10, J11 & D12]

Personal liability of the agent

In an expressed contract

Foreign principal(exception – if expressed)

Undisclosed principal(even on discovery of the principal by the third party)

Incompetent principal- The credit is presumed to have been given to the agent and not to the

principal.

Signing of a contract in his own name, without disclosing that he is acting as an agent, unless a

contrary intention appears from the body of the instrument.

Principal not in existence – The company(the alleged principal), yet to be incorporated and the

promoters are personally liable.

Breach of warranty of authority, on exceeds/ no authority from the alleged principal [Cohen v.

Wright}]

Authority coupled with interest

Trade usage or custom, unless there is a contract to the contrary.

Receipts/ payments by mistake or fraud.

Points to ponder

The agent has the right to sue the third party for the recovery of the money when paid by

mistake/fraud of the third party.

Termination of Agency

On performance

By agreement

By expiry of the period

By death / insanity/ insolvency of the principal / agency.

Dissolution of incorporated company

Destruction of the subject-matter

Renunciation of his authority by the agent

Revocation of authority by the principal

Points to ponder

Insolvency of the agent terminates only in some cases.

The agent is terminated when it becomes known to him, which terminates the sub-agent also.

Irrevocation

Death / insanity of the principal.


Authority coupled with interest.

The agent has incurred for personal liability

Exercised in part in particular with regards arising from the act already done.

PRACTICAL PROBLEMS

[CMA RTP D12, INTER J12]

Question: Jayanta, the owner of a car handovers the car with key to Partha (the mercantile agent) to

sell the car at a price not below ₹1,00,000. Partha (the agent) sold at ₹90,000 to Amitava, who buys in

good faith and without notice of reserve price/or any fraud. Partha misappropriated the money also.

Jayanta filed a suit against Amitava to recover the car. Advice with reasons whether Jayanta can

succeed.

[CMA INTER J10]

Comment – Mr. Tarafdar instruct Mr. Kinkar a merchant to buy a ship for him. Mr. Kinkar employs a

renowned ship surveyor to choose a seaworthy ship for Mr. Tarafdar. The ships turn out to be un

seaworthy and is lost. Is Mr. Kinkar, the agent responsible?

Answer: Mr. Kinkar is not responsible as Mr. Tarafder is also supposed to see the seaworthiness of

the ship before buying. Mr. Kinkar is acting as agent and he has all the rights to appoint another

person as agent as this is case of technical expertise. Mr. Kinkar cannot be charged to negligence as he

has appointed a renowned firm for the survey.

[CMA INTER D08]

Question: An Agent retained all the stock and other papers of principal unit his pending dues are

cleared by the principal. State legal position.

Answer: True: The agent has lien over stock and other papers of the principal if his fee/commission is

not paid to him. Unless some contrary measures exist in the agreement, the agent has right to retain

property, papers or stock of principal unit the amount due to him is paid to him or accounted for or

adjusted in any manner in his accounts.

[CMA INTER D08]

Question: Mr. Ramesh direct his agent to sell his Maruti car. Agent buys the car for himself but in the

name of his friend at ₹50,000/- against market price of ₹70,000/- without the consent of Mr. Ramesh.

What action Mr. Ramesh can take?

Answer: When an Agent deals on his own account in the business of Agency without the knowledge

of the Principal, the Principal may repudiate the transaction after it has come to his knowledge.

In this case the dealings of the agent have been disadvantageous to the Principal.

Hence he may repudiate the sale.


[CMA RTP D11]

Question: Mr. A of Delhi engaged Mr. S as his agent to buy a house in West Extension area. Mr.

Singh bought a house for ₹ 30 lacs in the name of a nominee and then purchased it himself for ₹ 34

lacs. He then sold the same house to Mr. A for ₹ 36 lacs. Mr. A later comes to know the mischief of

Mr. S and tries to recover the excess amount paid to S.

Answer: Mr. A is entitled to recover ₹6 lakhs from Mr. S the amount being the secret profit earned

by Mr. S out of the transaction.

[CMA RTP J11]

Question: X, a partner acting as an agent of the partnership firm transfers the firm‘s immovable

property, by virtue of implied authority.

Answer: X, the partner can act as an agent of the firm for the purpose of its business. He has implied

authority to act on behalf of the firm but the implied authority does not empower him to transfer

immovable property belonging to the firm.

[CMA INTER D10, RTP D10]

Question: X consigns a truck of mangoes to Y at Asansol via Kolkata through A. Sensing that the

mangoes may get destroyed; A sells them at Kolkata itself.

Answer: In this case A is acting as an agent of X out of necessity.

Sahasri Singar Academy 4.1

4. The Companies Act, 2013

4.1. Introduction

The Act

Earlier Act: The Companies Act, 1956

Current Act: Act to amend and consolidate the law relating to companies | Contemporary

Content: 470 Sections | 7 Schedules | 29 Chapters | Rules

Highlights:

To improve Corporate Governance

Simply Regulations

Strengthen the interests of Minority investors

Whistle Blowers (first time)

Resident Director | Woman Director

Necessity:

Changes in national / international economic environment

To facilitate expansion & growth of our economy

Applicability:

Companies incorporated under 1956 / 2013 Act

Insurance | Banking | Electricity | Special Act (except inconsistent)

CG – Notification

Characteristics / Features

Incorporated association

Artificial person

Corporate Personality

Separate Legal entity

Perpetual succession

Limited liability

Common Seal

Transferability of shares

Separate Management

Separate property

Capacity to sue and be sued

Termination of Existence

Voluntary Association for profit

Nationality and Residence

Citizenship | Experience

Limitation of action

Separate Legal Entity

Striking Feature

Unique Character

Own property

Clothed with legal personality

Enter into contracts

Open Bank Account

Same rights and powers as human being

Distinct and Separate from its members

Raise Loans | Incur Liabilities


Points to Ponder:

A person and Subscriber (MOA) are different

Even members can enter into contracts

Creditors can sue for the debts of the company

Property – Company is the owner, even though SHs contribute the capital and assets.

Case Law: Macaura v. Assurance Co. Ltd: A member does not have insurable interest in the property

of the company

Perpetual Succession

Members may come and go, but company goes on forever

No death – Legal Entity

Even an atom bomb cannot destroy a company

Limited Liability – Depends on the kind of the company

1. Limited by shares – to the extent of unpaid amount

2. Limited by Guarantee – to the extent of amount guaranteed (during wind up and adjustment of

rights of the contributories)

3. Unlimited – whole liability

Artificial Legal Person

Status:

Legal Process

No natural Birth

Clothed with rights of individuals

Capacity to sue and be sued

Non – Eligibility:

Send to jail |Take oath |Marry |Practice profession

Acting through:

Human agency - Directors (But not the agents for the members)

Authenticate the formal acts thro common seal

Common Seal

Symbol of Incorporation

Official Signature

Affixed by Officers and Employees


A relic of medieval times

Optional under the Companies (Amendment Act), 2015

Alternative mode – Authorisation by 2 Directors / Director and CS


4.2. Corporate veil theory

Corporate Veil - A legal Concept to identify the company separate from its members

Concept: Members are shielded from liability connected to the company’s action.

The members enjoy the corporate insulation.

Case Law: Salomon v Salomon and Co Ltd – A SH cannot be held liable even virtually holds the

entire capital

Lifting / Piercing of Corporate Veil –

Looking behind the company as a legal person

Court’s willingness to lift to question the control and not ownership

BSN (UK) Ltd. v. Janardan Mohandas Rajan Pillai - Evasion of tax

Statutory cases – by statue and abuse of the status

Judicial decision

Cases Case Law

Enemy Character Daimler Co Ltd Vs Continental type Rubber co Ltd

Connors Bros. v. Connors

Protection of Revenue Juggilal vs. Comm of IT

Re Sir Dinshaw Mauckjee Petit

Welfare legislation / Legal

Obligation

Workmen employed in Associated Rubber Industries

Ltd Vs Associated Rubber Industries Ltd

Formation of subsidiaries

to act as agents

Merchandise Transport Limited vs. British Transport

Commission (1982)

Prevention of Fraud or

Improper conduct

Gilford Motor Co Ltd Vs Horne

Transfer of property Jones v. Lipman

State is responsible for

PSUs

Kapila Hingorani v. State of Bihar


4.3. Types of Companies

Incorporation Size/members Control Liability Listing Sh Capital Others

Charter

Statutory

Registered

(1) Public

(2) Private

OPC /

Small /

Others

(1) Holding

(2)

Subsidiary

(3)

Associate

(1)

Unlimited

(2) Limited

by Shares /

by

Guarantee

(1) Listed

(2)

Unlisted

1. Having

2. Not

having

1. Section 8

2. Foreign

3.

Government

4. Dormant

5. Vanishing

6. Nidhi

7. producer

8. Dormant

9. PFIs

I. On the basis of liability

(a) Limited by shares – Section 2(22) | MOA | A SH is the owner of the company but not for the

company’s assets.

(b) Limited by Guarantee - Section 2(22) | MOA | guaranteed amount during wind up

Case Law: Narendra Kumar Agarwal vs. Saroj Maloo. The membership of a guarantee company may

carry privileges much different from those of ordinary SHs

(c) Unlimited Company – Whole Liability | Entitlement to claim compensation from other members

II. On the basis of members

(a) One person Company – To encourage entrepreneurship and corporatization of business

ONE

Person (Natural Person with RoI | No Minor)

Nominee (No Minor)

Director (may be more than 1 also)

in only one OPC

More about OPC….

Pvt Ltd Co

Exemptions given

Suffix OPC

Nominee – consent and withdrawal

Nominee becomes the member on the death of the original member

Change in the name of the person shall not be deemed to be alteration in the MOA

No carrying Non-Banking Financial investment activities including investment in other companies

No conversion to Sec 8 companies, but can convert to private / pub Companies


Voluntary conversion only after 2 years

(Except – paid up capital > ₹ 50 L / Avg T/O > ₹ 2 cr)

Contravention: Fine – ₹ 10,000 and ₹ 1000 / day

(b) Private Company

Restricts – Rights to transfer | Max – 200 members |Prohibits invitation to the public

Number of members: OPC – Not applicable | Joint holding – single SH

Excludes: Employees | Ex-employees cum members

Small Co: Pvt Co| paid up share capital – ₹ 50L and T/O – ₹ 2 Cr

Non-applicability – Holding / Subsidiary / Sec 8 / Special Act

(c) Public Company

Not a pvt Co | Free Transferability of shares | Members: min – 7 / Max – any | Deemed pub Co – sub

of pub co

III. On the basis of control

(a)Holding and Subsidiary companies

Controls – Composition of BoD | > ½ Total voting power | No layers of subsidiaries

Examples:

1. B is a subsidiary of A and C is a subsidiary of B. In such a case, C will be the subsidiary of A.

Likewise, if D is a subsidiary of C, D will be subsidiary of B as well as of A and so on.

(b) Associate Company

Significant Influence (20% of the voting power) | Not a subsidiary Co. | Includes Joint Venture

IV. On the basis of Capital

(a) Listed Company – Listed on any recognized Stock exchange Definition – Sec 2 of Securities

Contracts (Regulation) Act, 1956

(b) Unlisted Company – Not listed

V. Other Companies

(a) Government Company

Pub Co | 51% paid up capital by CG / SG / both | Includes – Sub of a Govt company

(b) Foreign Company

Company / Body Corporate outside India | Place of business (thro agent / e mode) in India and

conducts any business activity


(c) Formation of Companies with Charitable objects etc. (Section 8 Company)

Promote – Charitable Objects of commerce, art, science, sports, education, research, social welfare,

religion, charity, protection of environment, etc.

Applies profit to promote its object | prohibits payment of dividend

Examples: FICCI | ASSOCHAM | National Sports Club of India | CII

License:

CG’s Power | No suffix –Ltd or Pvt Ltd | Apply for Registration | same privileges as Ltd Co.

Revocation – Fraud | violation of objects | written notice by CG and opportunity of being heard

Order of CG – On revocation,

1. Amalgamate with another Sec 8 company with the similar objects

2. Wind up

Contravention:

Company: Fine - ₹ 10Ls – ₹ 1Cr

Director / Officer: Imprisonment – 3 years / Fine ₹ 25T to ₹ 25 L / both

Officer in default for Fraud – Liable under Sec 447

Others:

A partnership firm can be partner

14 days clear notice for GM, instead of 21 days

Non requirement of min number of directors and IDs | NRC | SRC

(d) Dormant Company (Status)

Formed for future project/ hold an asset or intellectual property

No SAT

Apply to the Registrar for Dormant Status

Inactive Company shall also apply

Note:

1. Inactive company: Not carrying business / operation | No SAT for 2 years | Not filed Fin,

Statements and AR for 2 years

2. Not SAT: Allotment of shares | Payments w.r.t. Fees to Registrar / other payments / maintenance of

office & records

(e) Nidhi Companies

To cultivate the habit thrift (cost cutting) and savings amongst its members | receive deposits |

Lending to its members only for their mutual benefit |Comply CG Rules (Sec 406)


(f) Public Financial Institutions (PFI)

LIC | IDFCI | UTI | CG Notification under Companies Act and RBI

Conditions: Unless under Central / State Acts or Companies Act | Govt Company


4.4. Registration / Incorporation of Company

Promoters:

The person who formed the company

Named in Prospectus

Conceived the idea

Identified in AR under sec 92

Has control over the affairs of the company

The BoD accustomed by their advice / directions / instructions

Taken steps for registration (But not in professional capacity)

Formation of Company

Pub Co – 7 / Pvt Co - 2 or more subscribers for lawful purpose and complying the Act

Incorporation of company

1. Filling of the Documents and information with the registrar

MOA – signed by Subscribers

Declaration by person involved in formation and proposed directors / officers / Secretary

Declaration by subscribers and Directors w.r.t. conviction of any offence / found guilty of fraud /

misfeasance during 5 years / documents filed are true to the best of their knowledge and belief.

Address - Registered office / correspondence

Particulars of subscribers / first directors

2. Issues: Certificate of Incorporation | Allotment of Corporate Identify Number (CIN)

3. Maintenance of copies of all documents and information at Registered Office till its dissolution

4. Furnishing of false / incorrect information / Suppression of material fact - Fraud under Sec 447

At the time of incorporation – All person is liable

Post incorporation – Promoters / First Directors / persons given declaration are liable

5. Order of Tribunal, NCLT -

Pass such orders | Unlimited Liability | Removal of Name | Wind up | others

Simplified Proforma for Incorporating Company Electronically (SPICe) – E form

Effect of Registration: Date in CoI | Exercises all functions of a body corporate

Case Law:

Hari Nagar Sugar Mills Ltd vs S. S. Jhunjhunwala | State Trading Corporation of India

Spencer & Co. Ltd Madras vs. CWT Madras | Heavy Electrical Union vs. State of Bihar

Effect of MOA and AOA: Binds the company and its members | Money paid by a member is a debt


Shares

I. Nature of Shares

Definition – a share in the share capital | Includes stock |Proportion of interest

An interest in the Company

Case Law: Borland Trustees vs. Steel Bros & Co Ltd – Share is an interest measured by a sum of

money and various rights | as per MOA and AOA | Contractual rights and legal rights for SH

Movable property – Movable Property | Transferable as per AOA | Includes Debentures also

Numbering – Distinguished by distinctive numbers | Except – Demat Shares

II. Kinds of share Capital – Not Applicable for Pvt Co

(i) Equity share Capital – voting rights | Differential rights w.r.t. dividend, voting or otherwise

Example:

Tata Motors in 2008 issued equity shares with differential rights

‘A’ equity shares with every 10 ‘A’ equity shares carrying only one voting right but 5% more

dividend. This share is traded at discount.

Future Retail, Jian Irrigation also issued equity shares with differential rights

(ii) Preference share Capital- Rights to participate in the proceeds during wind up

Points to Ponder:

Equity Share Capital: For Company limited by shares - all share capital and not preference share

capital

Preference Share Capital – preferential right w.r.t. payment of dividend and repayment during

winding up

Capital shall be deemed to be preference capital – w.r.t. dividend and capital

Classification of capital

Capital – Share Capital | Rupees divided into shares of fixed amount | contribution to the stock.

“A share is not the sum of money, it is rather an interest (and rights) measured by a sum of money”

a. Nominal / Authorised / Registered capital

Authorised by MOA | The maximum amount of share capital of the company | stamp duty is paid

accordingly | Fixed including working capital and reserve capital

b. Issued Capital

Company issues from time to time | Includes shares allotted for consideration other than cash

Schedule III – To disclose in the B/S

c. Subscribed Capital - Shares taken by public

Stating of Authorised, Subscribed and Nominal Capital in notice, advertisement, Communication /

business letter, bill head, letter paper.

Contravention: company – ₹ 5000 and Officer – ₹ 10,000


d. Called-up Capital - Capital called for payment

e. Paid-up Capital - Amount paid or credited | Capital less in arrears


4.5. Memorandum of Association & Articles of Association

Memorandum of Association (MOA)

Charter | Public Document (open for inspection) | Defines constitution, object and scope |

Foundation | an Edifice | Limitation of action |Powers of SHs, Creditors and other | Ultra vires act is

prohibited

Tables (Format): Schedule III –

Table A – Ltd by Shares

Table B – Ltd by Guarantee and having SH capital

Table C – Ltd by Guarantee and not having SH

capital

Table D – Unlimited Company

Table E – Unlimited Company and having SH

capital

More about MOA…

Contents – Clauses | Compulsory Clauses | Conditions

a. Name clause – Ltd | Pvt Ltd | OPC | Section 8 – Electoral Trust, Foundation, Forum, Association,

Chambers, Confederation, Council | Govt Co - Ltd

b. Registered office / Situation Clause - State

c. Object clause – Scope of the company| shall change its name in its activities

d. Liability clause – Ltd by shares / guarantee

e. Capital clause – Authorised Capital |share of fixed amounts | Not applicable to the company not

having share capital

f. Association / Subscription clause – Every subscriber shall take atleast one share | Indicated in the

table under the clause

Must: printed | paragraphs | consecutively numbered | signed by subscribed and witnessed and

details entered | Company enters thro’ its agents | Minor is not competent, but guardian in his

personal capacity | Not contrary to The Companies Act | All other documents should comply with

MOA.

Doctrine of Ultra vires

Ultra vires:

Beyond its powers

Not to do acts in excess of the legal powers

Presupposes limited powers

Constructive notice

Void, inoperative and not binding

Restriction on employment of Company’s fund

Exception to “Capacity to sue and be sued”

Departure of objects to the extent provided by law


Ratification by SHs: MOA – No | AOA – Yes (if done within the powers) | Directors – Yes

Disadvantage is that the company cannot change its activities in a direction agreed by all. But does

not affect the change in Object clause

Disadvantage is its advantage: Protection to the SHs and Creditors

No Intravires by estoppel / Acquiescence / Lapse of time / delay / ratification

Case Law: Ashbury Railway carriage & Iron company Ltd V Richie – w.r.t. financing (not in object

clause)

Points to Ponder:

Money lent on supplied goods / performed service cannot be recovered, unless not expended it can be

done by injunction.

Money lent for payment debts is recoverable.

Articles of Association (AOA)

Rules and Regulations for internal affairs | Bye laws of the company

Directors / officers are required to perform their functions as regards the management of the

company, its accounts and audit.

Case Law:

1. Guinness vs Land corporation of Ireland - Benefit of the creditors and outside public | Internal

regulation

2. Ashbury Railway carriage & Iron company Ltd V Richie – Subsidiary to MOA | Defines duties, the

rights and powers of the governing body | w.r.t. changes in internal regulation

3. S. S. Rajkumar vs Perfect Castings (P) Ltd – AOA is the business document | Domestic

management of the company | creates certain rights and obligations between members and the

company

Section 5: Contents and Model AOA

1. Contains Regulations for management

2. Inclusion of matters – Additional matters may be included

3. Contains provisions for entrenchment – i.e. Alteration for more restrictions only (like special

resolutions)

4. Manner of inclusion in the entrenchment provision – at the time formation / by amendment.

Pvt Co – All the members | Pub Co. – Special Resolution

5. Notice to the Registrar of the entrenchment provision

6. Forms of AOA – Schedule I | Tables F, G, H, I and J

7. Model Articles – Adopt all or any as per applicability

8. Company registered after the commencement of this 2013 Act – Not to exclude or modify

regulations.


Contents

Exclusion wholly or in part of Table F Adoption of Preliminary Contracts

SH Capital, Variation of Rights, Number and

Value of Shares

Issue of Preference Shares

Shares – Allotment | Calls | Lien | Transfer &

Transmission | Nomination | Forfeiture | Buy –

Back | SH Certificates | Dematerialisation |

Conversion of Shares to Stock

Directors – Appointment | Delagation of Powers

| Nominee Directors | MD | WTD | Manager |

Secretary | CEO | CFO | Additional Directors |

Remuneration | BoD | Meetings | Proceedings of

Meetings | Rules regarding Committees of the

BoD

Voting Rights & Proxies GMs | Proceedings | Adjournment | Voting

Rights & Proxies

Seal Audit Commitee

Borrowing Powers Dividends & Reserves | Capitalisation of profits,

Reserves

Accounts and Audit Winding up

Indemnity Secrecy

Key Differences between MOA and AOA

Characteristics MOA AOA

Objective Defines and delimits the objectives Provides Rules and Regulations

Relationship Company and outside world Company and its members

Alteration As provided in the act

Permission of RD / Tribunal is required

Special Resolution

Ultra vires Acts are void | Cannot Ratify Ratified thro’ special Resolution,

if not contrary to MOA

Doctrine of Constructive Notice

Section 399 – Inspection of documents kept by the Registrar by electronic means | Take record | get

copy or extracts including CoI.

MOA and AOA are public documents available on payment of nominal fees.

Duty of outsider to inspect its documents and conformity.

Presumption / Implied Notice that the person has not only read but also has knowledge of the

contents of the documents and understood in its true perspective

A person cannot acquire any rights under the contract when a company has entered in ultra vires act

Doctrine of Indoor Management - Turquand’s Rule


Exception to the Doctrine of Constructive Notice

Case Law: D. Royal British Bank V Turquand – If an act is authorised by MOA / AOA, an outsider is

entitled to assume all the detailed formalities for doing that act

Exceptions:

a. Actual or Constructive Knowledge of irregularity:

Case Law:

1. Howard v Patent Ivory Manufacturing Company

The directors of a company could borrow upto £1,000 without the sanction of members in GM

The consent of the shareholders was required to borrow in excess of £1,000

The directors themselves lent £3,500 to the company, internal irregularity – company is liable

only for £1,000

2. Morris v Kansseen – A director cannot defend an allotment | validity of Director’s appointment

b. Negligence – suspicious circumstances or unusual magnitude of transactions

Case Laws:

1. Anand Bihari Lal v Dinshaw & Company- the third party could not enforce a contract against

the company (contract entered by an accountant to sell the property) even-though the third party

acted bonafide

2. Haughton & Co. v Nothard Lowe & Mills Ltd – Apply one company’s money for the payment of

debt in another company by a director

c. Forgery:

Case Law: Ruben v Great Fingall Consolidated Company: Forgery of signature by the secretary for

two directors is not defect in consent but absence of consent. Hence the certificate is invalid, even

though the holder of the certificate is not aware of this.


4.6. Prospectus Introduction

A Comparison:

The Indian Contract Act, 1872 The Companies Act, 2013

Invitation to an offer - Prospectus

Offer - Application

Acceptance - Allotment

Nature:

- Information booklet

- Offer document

- Any document as prospectus inviting offers to the public

- Notice

- Circular

- Advertisement

- Red Herring | Shelf Prospectus

Contents: Financial Information | Reports

Golden rules to prospectus: No Untrue Statement | Ex: Dividend Paid out of reserve

Preferential basis or Private Placement (Other than the issue of Prospectus)

- Select / group of persons

- Cash / other than cash

(i) SR

(ii) Price – Value

- AOA

- SR

- Fully paid (at allotment)

- Explanatory statement

- within 1 year - SR valid (else another SR)

- Less than 50% earlier FY

- Not included QIB and employee ESOP

Types / Classifications of Prospectus

1. Shelf Prospectus

- One or more issues (certain period) max 1 year

- For multiple to the public

- No separate / only one prospectus

- Submitted at 1st stage but information to be given in PAS 2

- New charges

- Changes in financial position

- Other changes

- File prior issue 1 month prior

2. Red Herring

- No price / quantum, key details)

- A Prospectus Prior to Prospectus

- B/f 3 days of opening of subscription list

- Same as prospectus, highlight if any variation)

- On closing


3. Abridged Prospectus (AP)

- Salient features of prospectus

- No application without AP

- Issue B/f subscription clause

Non – Applicability:

- Underwriting

- Not offered to public

- Penal provision 10 - Rs.50,000

4. Offer for Sale (OFS)

- Members (Existing SHs) to Public through prospectus

- Company - Intermediary (Issue house / Merchant banker)

- conditions as applicable to prospectus

Additional information:

- Net amount of consideration

- Inspection of the contract with mention time & place

Conditions:

- Make OFS within 6 months to the public after allotment / agree to allot

- The whole consideration to be received by the company in respect of the company has not

been received at the date when the offer is made

Sign by Intermediary: Company - 2 directors | Firm - ½ partners

Nature: Deemed prospectus

Others:

- Whole / part of the shares

- Consult with board

- Individual / Body Corporate

- Collectively authorize

- Reimburse expenses to the company

Non-Applicability:

- Minimum subscription

- Minimum application value

- BOD - utilization of money

- Other provision


4.7. Share and Share Capital

Shares

I. Nature of Shares

Definition – a share in the share capital | Includes stock |Proportion of interest

An interest in the Company

Case Law: Borland Trustees vs. Steel Bros & Co Ltd – Share is an interest measured by a sum of

money and various rights | as per MOA and AOA | Contractual rights and legal rights for SH

Movable property – Movable Property | Transferable as per AOA | Includes Debentures also

Numbering – Distinguished by distinctive numbers | Except – Demat Shares

II. Shares and Stock

Shares Stock

- Sum of money

- Rights (bundle of rights) & Liabilities

- Interest & Mutual convert

- Right in profit - Dividend

- Going concern / Winding up

- Sum of money but “Bundle of rights”

- Not a debt

- Numbering

III. Kinds of share Capital – Not Applicable for Pvt Co

(i) Equity share Capital – voting rights | Differential rights w.r.t. dividend, voting or otherwise

Issued at:

- Par (equal to FV)

- Premium, more than FV)

- Discount (less than FV) [Exception: only Sweat Equity]

(ii) Equity shares with differential voting rights

- With voting share (no conversion)

- With differential voting rights / dividend

- AOA

- OR (Postal ballot)

- Not less than 26% (Post – issue)

- Track record

- Filling (i) Final Returns

(ii) Dividend

(iii) Redemption

(iv) Deposit

(v) Interest

- Not penalized Court / Tribunal

Example: Tata Motors in 2008 issued equity shares with differential rights

‘A’ equity shares with every 10 ‘A’ equity shares carrying only one voting right but 5% more

dividend. This share is traded at discount.

Future Retail, Jian Irrigation also issued equity shares with differential rights


(iii) Preference share Capital-

- Owners likes only preferred

- Rights to participate in the proceeds during wind up - Surplus profit / Assets

- Capital shall be deemed to be preference capital – w.r.t. (% of return – dividend) and capital

- Voting rights: Only when dividend not given)

Types:

Redemption: (i) Redeemable | (ii) Irredeemable

Accumulation: (i) Cumulative | (ii) Non – Cumulative

Conversion: (i) Convertible | (ii) Non-Convertible

Note:

Equity Share Capital: For Company limited by shares - all share capital and no preference share

capital

Preference Share Capital – preferential right w.r.t. payment of dividend and repayment during

winding up

Sweat Equity Shares

- Meant for IPR

- Issued at discount / consideration other than cash

- To employees (in/out India) for atleast 1 year

- Directors (Includes WTD)

- 3 Years Lock – in period

- Subsidiary also

- Register SH-3

Nature: Class already issue | Pari-paasu shares

Resolution:

- No Special Resolution

- Current Market Price, How Much)

- Consider, what price)

- within 1 year from SR after 1 year from commencement of business

Securities Premium Account:

- Fully paid bonus

- Write off - preliminary expenses

- Write off - comm./ Discount - Debentures

- Premium - Redemption - Preference Shares / Debentures

- Buy – back shares

- No Banking co

- No Trust (fully paid) - Benefits of employees

Nature: SP A/C | Sanctity - Right consider

Buy – Back of Shares:

- From FR/SP / Fresh proceeds

- BR - 10% (Paid-up + FR)

- SR (i) 25% (Paid-up + FR)

(ii) 25% (Paid-up equity)

- DE Ration 2:1 (after Paid-up + FR)


- Within 1 year (i) Resolution

(ii) Solvency

(iii) Next buy-back

- Existing / open market/

- Destroy within 7 days

- No shares issue within 6 months

- CRR - FR/SP

Reduction of Share Capital:

Cases: Accumulated business loss | Assets of reduced or doubtful value | Excess in wants of a

company

Nature

- Reduction is on unpaid capital

- Part is also allowed

- Tribunal to CG/ Registrar/ SEBI/ Crs

- AOA

- SR + Court approval (discretionary)

- Notice to CG (RD) | Registrar | SEBI | Crs [Take the representations within 3 months]

- Alter MOA

- Publish as reduced

Non – Applicability: Arrears in the Repayment of Deposits & Interest

Methods of Reduction:

Methods Illustration

Share Capital: 1,00,000 shares * ₹ 10 each = ₹

10,00,000

FV: ₹ 10 | Paid -up: ₹ 7 | Unpaid-up: ₹ 3

(a)Extinguish / Reduce – not paid Reduce

₹ 3 unpaid value (FV: ₹ 7 | Paid-up: ₹ 7 |

Unpaid: ₹ 0)

₹ 2 unpaid value (FV: ₹ 8| Paid-up: ₹ 7 |

Unpaid: ₹ 1)

(b)With / Without extinguishing / Reducing –

Paid up

P/L – ₹ 1L

Reduce

₹ 1 paid value (FV: ₹ 9| Paid-up: ₹ 6 | Unpaid:

₹ 3)

(i)cancel: Lost / unrepresented by available

assets

(ii)pay-off: Excess of the wants of the company

A comparison between Reduction & Dimunition

Reduction Dimunition

- On Issued Capital

- 3 Methods

- Creditor consent Required

- SR + Court Approval Required

- On Authorised Capital

- No such methods

- No such

- OR + No Court required

Right Shares:

- Right to accept or renounce (with value)

- Letter of offer

- Loan / Debentures – conversion


Bonus Shares:

- AOA + ‘Recommend - Board’

- SR

- FR / SP / CRR

- No default - Debts and statutory dues

- Fully paid

- Not for dividend

Employees Stock Option Plan:

- Future / Pre-determined Price

- Employee not include Sweat equity

- Stock option (Accept or Reject)

- SR / OR (Pvt co.)

Allotment of Shares:

- Appropriate the unappropriated capital

- Shares into existence - within 60 days

- Minimum amount as prescribed in prospectus

- File PAS-3 (within 30 days)

- List of allotees - name / address / occupation / no,of securities

- Copy of contract (stamped)

(i) W.r.t. property / Assets / Other securities

(ii) May be fully / Partly paid (except for bonus share)

- If no copy of contract, the particulars & valuation report

- For bonus issue, GM resolution

App. Amt not less than 5% of FV / prescribe

Proper Authority

- BOD / Committee / if not qualified but known later

- Similar to acceptance under Indian contract Act

- Reasonable law

- Absolute / Unconditioned

- Communicated

- Against application only

- Not in contravention (ex: allotment to a minor)

Irregular Allotment

- Prospectus / to registrar + No fraud + Issue ,listed SEBI)

- Min. Sub. + Min. Amount (less than 5%)

- PAS - 3

- Separate A/c

Refund of money

- Min. amount has not been subscribed

- App. Money not received within 30 days (date of issue of prospectus)

- Repay within 15 days from the closure

- Else directors - Jointly & Severable - 5% later

Penal Provision

- Company + Officers


- (1000 per day / 1 lakhs) WEL

Time limit - 60 days / Application money

Share Certificates - Prima facie evidence

Time of Delivery Nature

2 Months Subscribers from the date of allotment for Subscribers

On allotment of shares

1 Month Transfer / Transmission

6 Months On allotment of shares

Redemption of Preference Shares

Redeemable

- Max 20 years (Exception: Infrastructure projects, annual basis 10%)

- Check: No default in redemption and dividend PS

- AOA / SR

- Fully paid-up, Sources

i) Profits for dividend

ii) Fresh issue of shares

- If premium, Sources

i) Profits

ii) B/F commencement of this Act

iii) Profits (SP A/c)

- Others (out of profits and SP A/c)

- If from profits CRR is mandatory (NV of Shares) from profits

- Notice to registrar

- within 30 days (with AOA)

Irredeemable

- If not redeemed on time

- Issued redeemable preference shares

- Consent 3/4th of parties + approval of Tribunal

- For discount - redeem

- Limit fully paid up + FR (Temporary Loans)

Note:

- CRR for fully paid bonus shares

- Not Similar to reduction of share capital


4.8. Borrowing Powers

Eligible Companies: Trading Co | Others by MOA – Object Clause

A comparison – Shares and Debuntures

Shares Debenture

- capital

- Dividend

- App. Of profits

- Varies

- Not at discount

- No purchase of own share

- No security

- No trust

- No redemption

- Shares to security - No

- No bearer shares

- Last in sequence during winding up

- Debt

- Interest

- Charge on profits

- Fixed

- May be at discount

- Purchase & Cancel

- Security

- DRT

- Redemption

- Deb – Shares

- Bearer debentures

- Preferred b/f SHs

Types:

Period:

Long term - 5 years & above

Short term – less than 1 year

Medium term - 2 years

Secured & Unsecured

Syndicated Borrowing (Large)

Public / Private (Deb / Bonds)

Bilated (particular financial position)

Ultra vires Borrowings:

MOA / Trading Co.

i. Void-ab-initio

ii. No ratification

iii. No securities to lender

But right of lender

i. Trace-injunction (injunction recovery)

ii. Lawful debt (suit against directors)

iii. Asset acquisition - charge on assets

iv. Directors liable

Directors - Intra virus but ultra vires ‘Doctrine of Indoor Management’


4.9. Debuntures Forms of Debt: ECB | Debuntures | Bank Loan | Public Fixed Deposits

Debenture & debenture stock - bonds - secured?

- Company property or undertaking

- Holders - Crs

- No voting rights

- certain %

- Series of debentures

- Pari-passu clause (may or based on date may not be)

Types:

Redeemable Irredeemable

- Secured or unsecured

- Convertible (partly / wholly) / Non-convertible

- Registered / bearers

- Perpectual

Secured Debuntures:

Redemption:

- 10/30 years

- Infrastructure projects

- Infrastructure finance

- Infrastructure debt

- Ministry / Department of CG/ RBI/ NHB or OR

Charge Creation: Co | Sub | Holding

Disqualification of Debenture Trustee:

- More than 500 nos - Debenture trustee / Trust Deed

- Redress - grievances––

- Liability of breach of trust

i. DRR

ii. Source of profits

iii. Dividend utilize

iv. For redemption of debentures

- Indemnity - 3/4th value

i. Decree of specific performance

- File to Tribunal

i. Insufficient facts

- Redeem/ intent

Debunture Redemption Reserve - 25% of o/s debentures

Exception

- All India FI (AIFIs) public issue or

private placement

- Banking co.

- NBFCs (with registered RBI)

i. 25% ,public issue)

ii. 0 (Private placement)

i. FIs

Invent b/f 30th April

- Strictly less than 15% (31st March)

- Deposit (Sch. Bank / No charge / gain)

- Unencumbered securities of CG/ SG/

Indian notified 20 (a) to (d) & (ee) & (f)

/ Trust Act

- Only for redemption

Meeting: Convene by D. trustee | Writing less than 1/10th value


4.10. Deposits Introduction:

Receipt of money – Deposit / Loan / other form

External Finance

Cost effective

A receipt of finance

To control the malpractices

To safeguard the investors made the investment [Sec 76]

Private Company - From Members only

Statutory / Regulating Provisions: Else Prohibited

Chapter V: Sec 73 to 76 of The Companies Act, 2013

The Companies (Acceptance of Deposits) Rules, 2014

Non – Applicability: Sec 73(1) & Rule 1(3)

Banking Company | NBFCs (RBI) | Housing Finance Company (NHB Act, 1987) | CG + RBI

Consultation

“NOT” Deposits: Sec 2(31) | Rule 2(1)(c): Any amount received from

(i) CG | SG | other source (guaranteed by CG/ SG) | Local Authority | Statutory Authority (Act of

Parliament / State Legislature)

(ii) Foreign Govts | Foreign / International Banks

Multilateral Financial Corporations (International Finance Corporation, Asian Development Bank,

Commonwealth Development Corporation and International Bank for Industrial and Financial

Reconstruction)

Development Financial Institutions, Foreign Export Credit agencies, foreign collaborators, foreign

bodies corporate Foreign - Citizens | Authorities | PROI

(*FEMA, 1999 | Rules and Regulations)

(iii) Loan / facility from Banking Company / SBI / Subsidiary Banks

Banking Institutions

- notified by CG under Sec 51, Banking Regulation Act, 1949

- New Bank, Sec 2(d) or Sec 2(b) of Banking Companies (Acquisition and Transfer of

Undertakings) Act, 1970 and 1980

- Co-Operative Bank, Sec 2(b-ii), RBI, 1934

(iv) Loan / Financial Assistance – PFI (CG + RBI) | RFI| Insurance Companies / Scheduled Banks (RBI

Act, 1934)

(v) Issue of CP / Instrument (RBI Guidelines)

(vi) By a company from another company

(vii)Towards subscription of shares - Share Application Money

- Advance (Pending Allotment – if not allowed within 60 days & not refunded within 15

days from 60 days)

- Adjustment for other purpose, not treated as refund.


(viii)Person – Director / Relative of a Director

Provided:

Declaration to the company is given

Not from Loans / Deposits from others

Disclosure in Board’s Report

(ix) Issue of Bonds / Debentures (First charge / pari paasu Charge – Sch III / Excluding Intangible

Assets / Not exceeding MV)

Bonds / Debentures (Compulsory Convertible within ten years)

(ixa) Issue of Non-Convertible debenture (No charge) | Listed – SEBI

(x) Employee (not exceeding his annual salary – Contract of Employment | Non - interest bearing

security deposit)

(xi) Non - interest bearing amount received and held in trust

(xii) Business (* Refundable (with / without interest) | No permission – Goods / Services)

(a) *Advance – Supply of Goods / provision of services – appropriated within 365 days (NA- Legal

proceedings)

(b) *Advance – Immovable Property – Agreement / Arrangement – provided adjusted

(c) Security Deposit – Performance of the contract – Goods / Services

(d) *Advance – Long term projects – Capital Goods (except (b))

(e) Advance – Future services – warranty / maintenance contract (written agreement / arrangement)

– period (WEL: Common parlance / 5 years)

(f) Advance – Received / allowed – Sectoral Regulator – CG/SG

(g) Advance – Subscription towards publication (print / electronic)

(xiii) Promoters – Unsecured Loan (Lender: FIs / Banks)

Conditions: (a) Brought in by stipulation (b) promoters/ relatives (c) Exempted - until repayment

(xiv) Nidhi Company – Sec 406, The Companies Act, 2013.

The following is considered as deposits unless specifically excluded

(a) Amount received by the company– Instalments / others – Promise / offer to give returns in

cash / kind – on completion of period

(b) Additional contribution of (a) made by the company

(xv) Subscription of chit (Chit Fund Act, 1982)

(xvi) CIS – as per SEBI

(xvii) ₹ 25 L or more – Start – up Company – Convertible Note (to Equity or repayable in 10 years) –

Single tranche

[Start-up Company: Private Company | Recognised by DPIIT

Convertible Note: Instrument evidencing Receipt of money initially as debt – Convertible to Equity

Shares of Start – up company]

(xviii) Amount – Alternate Investment Funds | Domestic Venture Capital Fund | Infrastructure

Investment Trusts | Real Estate Investment Trusts | Mutual Funds (Reg with SEBI)

DPIIT - Department for Promotion of Industry and Internal Trade


Tenure: 6 months to 36 months [Sec 73 (2), Rule 3]

Exception: Earlier than 6 months, but nor repayable earlier than 3 months

- Meeting short term requirements

- Accept / Renew

- Not more than 10% of paid-up share capital + FR + SP

Depositor / Deposit Holder: Member (deposited as per sec 73(2)) | Any person (deposited as per Sec

76 & Rule 2(1)(d))

Acceptance Limit: Deposits (+ outstanding) [Sec 73(2), Rule 2 (3, 4, & 5)]

Type of Company % of paid-up share capital + FR + SP

Members Public

Eligible Company 10%

25%

Non- Eligible

Company

(Sec 73 (2))

35% Prohibited

Govt Company - 35%

Exception IFSC Public Company | Private Company – Not exceeding 100% (File form

DPT 3)

Non – Applicability Private Company

(i) Start-up – 10 years from the date of incorporation or

(ii) (a) Not an Associate / Subsidiary

(b) Borrowings (from Banks / FI / Body Corporate) < WEL (2* Paid up share

capital / ₹ 50Crs)

(c) No default in repayment of borrowings subsisting at the time of

acceptance of deposits

Eligible Company:

A public company [Sec 76(1)]

- Net worth – not less than ₹ 100 crs

- T/O – Not less than ₹ 500 crs

- Prior Consent (SR in GM) | Filed with RoC b/f inviting the public

- OR, if within the limits as specified in Sec 180(1)

Acceptance of Deposits: From Members (Private & other Company) | Public (Eligible Companies)

From Members: Conditions – Sec 73(2)

(i) Resolution – GM

(ii) RBI Consultation + Conditions

(a) Circular (DPT 1) – Financial Position | Credit Rating | Total number of depositors | Previous

deposit dues | Other particulars

(b) File to Registrar within 30 days b/f the date of issue

(c) DRR


(d) Omitted

(e) Certification – No default (+ Interest) b/f or a/f commencement | Default made good & Five

years elapsed

(f) Secured Deposits: Security (Deposit + Interest) – Deposit Insurance / Charge Creation (in

favour of a Trustee)

Furnishing of deposit receipts to depositors [Rule 12]:

- Includes Agents | within 21 days | Signed by an officer authorised by the BoD

- Content: Date of Deposit | Name & Address | Amount | Rate and periodicity of Interest |

Repayable Date

Maintenance of liquid assets and creation of DRR Account [Sec 73(5), Rule 13]:

- A specific Reserve

- Deposit not less than 20% in Separate Bank A/C in Scheduled Bank

- on or b/f 30th April of each year

Exemptions:

Private Companies: [No compliance under 73(2) (a) to (e) | Follow only 73(2)(f)]

- Amount – Not exceeding 100% of paid – up share capital + FR + SP

- Start – up – 10 years

- Conditions:

Not an Associate / Subsidiary

Borrowings from Banks / FIs / Body Corporate | WEL (less than twice of paid-up share

capital / ₹ 50 cr)

No default in repayment

- File DPT -3 to Registrar

Specified IFSC Public Company: A unlisted Public Company | Licensed | RBI / SEBI / IRDA – IFSC

(Multi services SEZ)

[No compliance under 73(2) (a) to (e) | Follow only 73(2)(f)]

- Amount – Not exceeding 100% of Paid – up share capital + FR

- File DPT -3 to Registrar

From Public:

- Eligible Company | Compliance as per Sec 73(2) | CG + RBI

- Rating (Net worth | Liquidity | Ability to repay) @ invitation to the public

- Secured (Create charge within 30 days | Amount – not less than the amount of deposits)

Tenure: 6 months to 36 months [Sec 73 (2), Rule 3]

Exception: Earlier than 6 months, but nor repayable earlier than 3 months

- Meeting short term requirements

- Accept / Renew

- Not more than 10% of paid up share capital + FR + SP

Rate of interest / Payment of brokerage [Rule 3 (6)]: Not to exceed the maximum rate prescribed by

RBI for NBFC.


Types of Deposits: Secured / Unsecured | Payable on demand / on notice

Joint Names [Rule 3 (2)]: Max 3 names | Clauses (not mandatory): “Jointly”, “Either or Survivor”,

“First named or Survivor”, “Anyone or Survivor”

Broker [Rule 3(6)]: Person authorised in writing

Alteration of terms & conditions [Rule 3(7)]:

- No right reserved to company

- To disadvantage the Depositor

- Deposit / Deposit Trust Deed / Deposit Insurance Contract

- Circular issued & deposits accepted

Credit Rating [Rule 3(8)]:

- Atleast once in a year

- File Form DPT 3 to RoC

- Rating not below Minimum investment grade rating / Specified Credit Rating

- Agency: Specified for NBFCs (NBFC Acceptance of Public deposits (Reserve Bank)

Directions, 1998)

Forms & Particulars of Advertisements / Circulars [Rule 4]:

- Circular to members in DPT 1 | Newspaper – English & Vernacular

- Certification (Statutory): No default (+ Interest) b/f or a/f commencement | Default made

good & Five years elapsed

- Upload – website

- Circular – Issued in authority, BoD

- Issued not less than thirty days b/f the date of issue signed by majority of directors

- Circular (Advertisement) - Valid 6 months: WEL (Close of FY / FS in AGM / AGM been

held)

- Fresh circular (advertisement) in each succeeding year

- Date of issue [newspaper - Date of advertisement |Circular – Date of dispatch

Deposit Trustees (DT) [Rule 7]:

- Written Consent – Appointment (one or more trustees) | Include in Circular

- Execute Trust Deed | DPT 3 | 7 days b/f issue of circular / advertisement

- Remove – consent of all Directors present in the BM (atleast one ID in BM)

Who cannot be DTs?

- Director | LMP | Officer | Employee - Includes Relative

- Depositor

- Person indebted to the company

- Having material pecuniary relationship

- Enter in Guarantee Arrangement – Secured Principal Debts

[*Company includes Holding / Subsidiary / associate]


Duties of DTs [Rule 8]:

- Ensure: Sufficient amount (including O/S Deposits) for charge creation

- Satisfy: Not inconsistent content in the Circular w.r.t. Deposit scheme / Trust Deed /

Compliance

- Ensure & Steps to Remedy: Company does not commit any breach of covenants and

provisions of the trust deed

- Meet: Deposit Holders, as and when required

- Supervise: Implementation – Charge creation

- Such acts: security becomes enforceable

- Other Acts: Protection of interest of DHs

- Resolve Grievances

Meeting of depositors with DTs [Rule 9]:

- Request in writing | signed | 1/10th of Depositors (+O/S) in value

- Happening of an event – default | affects the interest of the Depositors

Nomination [Sec 72, Rule 11]: Nominate any person

Registers of deposits [Rule 14]:

- Maintain at Registered office

- One or more Registers

- Entries within 7 days | authenticated by Director / Secretary / Authorised Officer

- Preserve for not less than 8 years from the latest entry

Contents:

Name, address and PAN

Guardian’s Details, if

Minor

Nominee’s

Particulars

Deposit Receipt Number Security & Charge

Creation

Date & Amount Duration

Repayable

date

Interest - Rate (%)|Due dates

Mandates & Instructions |

No TDS, if any

others

General provisions regarding premature repayment of deposits [Rule 15]:

- Reduce the rate of interest payment by 1%

Non - Applicability:

(a)Rule 3

(b)War risk | Related benefits:

– Naval / military / Air forces

– Personnel / family

– Application made by Associations / Societies – Emergency under Article

352, CoI

Part of the year: Less than 6 months – Exclude | More than 6 months – Reckoned

as one year

Company shall permit to renew for higher rate of interest, in accordance with terms and conditions, a

period longer than the unexpired period


Return of Deposits (includes reporting of “What is not a deposit?’)

- Periodic Return

- On or b/f 30th June, every year

- File DPT 3 + fee

- Furnish by 31st March of every year

[* DPT 3: Form to file return & / or “Not a deposit” by every company other than a Govt Company

Additional Requirement – One time return within 90 days from 31st March, 2019]

Disclosure in FS [Rule 16A]: As notes

Other than Private Company – If received from Director

Private Company – If received from Director / his relatives

Penal rate of Interest [Rule 17]: 18% p.a. |overdue period | matured & claimed but remains unpaid

Power of Central Govt to decide certain Questions [Rule 18]: w.r.t. applicability | with RBI

Applicability of sections 73, 74 and 75 to eligible companies [Rule 19]:

Earlier Deposits: follows 1956 Act | Fresh deposits – follows Ch – V, 2013 Act

Statement Regarding Deposits existing as on the Date of Commencement of the Act [Sec 74(1)(a),

Rule 20]: File DPT 4

Miscellaneous:

Sec 73 (3) - Repayment as per terms and conditions

Sec 73 (4) - On failure of repayment, the depositor may apply to Tribunal & it orders / directs for the

sum due | Loss | Damage

Sec 74(1) - Deposits (includes Interest) b/f 2013 Act - Unpaid / becomes due after

– File within 3 months (All deposits / interest / arrangements for repayment)

– Repay (WEE: within 3 months / expiry period) [Renewal as per Chapter V]

Sec 74 (2) - Tribunal (applied by the company) allow further time based on financial condition for

repayment

Sec 75(1) – Defraud the Depositors / Fraudulent Purpose – Criminal Liability – Sec 447

Sec75(2) – Person / Group of Persons / AOPs – File suit / proceedings / other action – For loss

Penal Provisions:

Provisions Penalty

Company Officer

Failure for repayment

[Sec 74 (3)]

₹ 1 cr to ₹ 10 cr Imprisonment – 7 years / Fine – ₹ 25L to ₹ 2

crs

Contravention of Rules

[Rule 21]

₹ 5000 | Continuing: ₹ 500 / day for every day

Contravention of Sec 73/

76

WEL (₹ 1 cr / 2x

amount) to ₹ 10crs

Imprisonment – 7 years / Fine – ₹ 25L to ₹ 2

crs

Criminal Liability – Sec

447

- w.r.t Company / SHs / DHs / Crs / Tax

Authorities


4.11. Charges

Introduction:

A right created by the company to the Cr who extended financial assistance, but not a transfer

A security – secured loans / debentures / other borrowings - Towards repayment of debt

Includes Mortgage

Debt - Existing | Future

Legal right of Cr

– Not absolute / special

– Enforced only if terms and conditions of the loan are not met

- By order of the court

Gets priority to unsecured loans on waterfall arrangement

Statutory / Regulatory Provisions:

The Companies Act, 2013 Companies (Registration of Charges) Rules, 2014

Rule 12, Companies (Registration of offices

and Fees) Rules, 2014

Registration of Charges by Secured Creditor

with Central Registry under SARFAESI.

Legislative Intent:

- Sec77

- Protection to the Lender

- To make public – all encumbrances

- Two - fold purpose:

1. Prevent Company to borrow on the same assets.

2. Provide clear information to the lender

- CERSAI [The Central Registry of Securitization, Asset Reconstruction and Security Interest of

India]

- Single & centralized Registry for Equitable Mortgages (Mortgage on Single Property)

Definition [Sec 2(16)]:

An interest/lien

On Company’s property /assets / undertakings

Security

Includes Mortgage

Essential Features:

Min 2 parties – Charge Creator | Charge Holder

Subject Matter – Current / Future Assets

Intention – written

Charge and Sec 100, TPA Act: All provisions relating to mortgage is applicable

Comparison with 1956 Act: Only 9 type were required for registration, where else now it covers any

interest / lien created for security is covered

Note: Interest: Legal Share – Property / Right / title / interest / privileges / Powers / Immunity

Lien: A legal right / Interest | A right to possess]

Why charge creation?

FIs may lend only for safe funds

Security creation for the lent amount

Execute Loan Agreements| Hypothecation Agreements | mortgage deeds | other


Consent (Give / reject) required for Second Charge created in favor of different CR | Ranks pari-paasu

Insist for Registration

Registerable charges: An indicative list

1. Issue of Debentures / Deposits

2. Uncalled share capital | On call money (Called and unpaid)

3. On Tangible / Intangible

4. Movable / Immovable Property [+ Mortgage by title deeds] [Case Laws: Wallis v Simmonds

(Builders)Ltd]

5. On any Book debt [Case Law: Paul and Frank Ltd v Discount Bank Overseas Ltd]

6. A lien on Sub freight [Case Laws: Welsh Irish Ferries Ltd, Ladenberg & Co. v Goodwin]

7. Floating Charge (Includes stock in trade)

8. Ship / share in a ship

9. Charge / Assignment on Insurance Policies

10. Pledge margin money (+ shares) – Pledge of shares

Example: Company A is a member of Company B. Company B supplied goods on credit to Co A.

(Thro AOA) Lien is created on trade debts due from members

Kinds of Charges

I. Basis - Nature of Charge:

Fixed / specific Charge

Company to give up its right to dispose of the property

[Charge Holder gets priority over the subsequent transfers]

Property: Ascertained / Definite [Ex: Land / Building / Plant & Machinery]

Priority during wind-up / Liquidation

Floating Charge:

Property: Not definite | Not specific

In ordinary course of business| fluctuating type [Ex: Stock in trade]

The security remains dormant until freezed / crystallised

Company has the right to deal over the assets until takes the enforcement – The company can sell /

mortgage / lease (w.r.t. MOA)

The creation of a floating charge leaves the company free to create a legal and equitable mortgage on

the same property until the floating charge crystallises

II. Basis – Conditions:

Pari-paasu Charge: Charge shared by more than one lender | Prior consent required

Exclusive Charge: To a particular lender

Further / Second Charge: Charge already created provided to other lenders. First charge holder gets

priority on liquidation.

III. Basis - Registration: Registered Charge | Unregistered Charge

IV. Basis – country: Within India | Outside India

V. Basis – Property: Tangible / Intangible

Floating Charge – In detail:

Crystallisation:

- Liquidation of the company

- Ceases to carry on the business

- On happening of the specified event

- DH / CR take steps to enforce their security [Appointing receiver]


Case Laws:

1. Parmanent Houses (Holdings) Ltd. 1988 BCLC 563(CH D)

• The debenture mentioning that the charge shall crystallize on happening of an event or

default in payment.

• The payment was not made on demand by bank,

• No longer a floating charge at the time when receiver was appointed

2. Government Stock Investment Co. Ltd. v. Manila Railway Co. Ltd. - Held, the mortgagee had

priority

• The debentures with floating charge

• Three months’ interest became due

• DH took no steps. So, the charge did not crystallize but remained floating.

• The company then made a mortgage of a specific part of its property

Effect of Crystallisation:

Gets converted into a fixed charge

Has priority over any subsequent equitable charge and other unsecured creditors.

Note: Preferential creditors (priority as secured creditors) get priority over the claims of the debenture

holders having floating charge

Postponement: In favour of the following persons, if they act before the crystallization of the security:

(a) a landlord who distrains for rent;

(b) a creditor who obtains a garnishee order absolute;

(c) a judgement creditor who attaches goods of the company and gets them sold

(But if the goods are not sold and the debenture holders take action in the meantime, the floating

charge has priority);

(d) the employees of the company, as well as other preferential creditors in the event of winding-up

of the company;

(e) the supplier of goods to the company under a hire-purchase agreement on terms that goods are to

remain the property of the seller until they are paid for in full

(But hire-purchase agreement is to be made before or after the issue of the debentures with a floating

charge.)

Are Debenture-holders – Secured Creditors?

General Law – No, if secured with a floating charge

But, the deed creating the floating charge may contain a clause restricting the power of the company

to create charges in priority to or pari passu with it.

But, still a person who takes mortgage without notice of floating charge gets priority.

But, such a contingency can be safeguarded by registering the charge.

Deemed notice: From the date of registration

Restraint on the Power to Create Charges with Priority to a Floating Charge:

Restricting Clause - Insertion for priority / pari passu

“After ranking” - Notice of the charge & Restriction

But still Mortgage is valid – Not aware of the existence of the charge | Aware of charge but not aware

of the restriction

“Specific charge” in floating charge – Specific charge is postponed as from the date when the floating

charge crystallises by the appointment of a receiver.


Invalidity of Floating Charge:

Remains afloat | Valid only against unsecured CR, except on imminent situation

Invalid [Sec332] –

- Created within 12 months immediately preceeding the commencement of the winding up

proceedings of a company, unless solvency proved.

- Still valid to the extent of the amount of any cash paid together with interest @ 5% p.a. /

notified by the Govt.

Charge compared with Mortgage:

A mortgage is the transfer of an interest in specific immoveable property for the purpose of securing

the payment of money advanced or to be advanced by way of loan, an existing or future debt or the

performance of an agreement which may give rise to pecuniary liability.

Features Mortgage Charge

Creation By the act of the parties. By the act of parties / by operation of law

Registration Transfer of Property Act,

1882.

By the act of parties – Requires Registration

By operation of law – No registration required

Term Fixed May be in perpetuity

Transfer transfer of an interest in

specific immovable

property

Not a transfer, it is only a right to receive

payment out of a particular property

Transferee gets the property free from charge

if purchased with value and with no notice of

charge

Validity against

subsequent transferees

Good Good against notice

Personal Liability unless excluded by express

contract.

No personal liability is created.

Except: In case of result of a contract

Charge compared with Pledge:

Both are the result of voluntary act of parties

Both create security but the nature of the security is different

Pledge Charge

- A bailment of personal property

- Delivery of goods: A debtor (owner/his agent) to his

creditor [Redelivered on fulfillment]

- As security for debt / engagement / other obligation

- Till the debt is repaid (+ interest)

- Redeemable on certain terms

- The title not being changed during the continuance of

the pledge

- An implied power of sale on default

- Not a transfer of property

- A right created in favour of one

“The lender” - immovable property of

another

“The borrower” - as security for

repayment evidencing charge


Registration:

Non-Applicability: In RBI consultation

Additional / Advalorem Fees:

Period of delay Small Companies and One

Person Company

Other Companies

Up to 30 days of Delay (up to 60

days from the date of Creation)

3 x normal fee 6 x normal fee

More than 30 days and up to 90

days delay (up to 120 days from

the date of Creation)

3 x normal fees + An advalorem

fee - 0.023 per cent (secured

amount/ max ₹ 1L)

6 x normal fees + An advalorem

fee - 0.05 per cent (secured

amount/ max ₹ 5L)

Note:

1. Sec77 restricts the ability of the company to register charge after expiry of 120 days

2. Defeats the transparent information to the public

3. This situation also deprives genuine lenders to recover their dues. This also gives wrong picture

of charges on the property of the company, when third party takes search of MCA for registration

of charges.

4. Subsequent Registration will not prejudice the right of the former charge holder in creation of the

subsequent charge


Illustration: Date of Creation: Dec 1, 2019 | Amount Secured: ₹ 500 Crores

Particulars Date Fees (assuming normal fees – ₹ 400

Small Company| OPC Others

Upto 30days December 30, 2019 ₹ 400 ₹ 400

More than 30

days

and up to 60

days

Dec 31, 2019 to Jan 29,

2020

Additional fees

3 x ₹ 400 = ₹ 1200 6x ₹ 400 = ₹ 2400

More than 60

days

and up to 120

days

Jan 30, 2020 to Mar 29,

2020

Additional + Advalorem

fees

₹ 1200 + ₹ 1L* = ₹ 1,01,200

*0.025% x ₹ 500 crores = ₹

12.5 L

(subject to ₹ 1L)

₹ 2400 + ₹ 5L* = ₹

5,05,400

*0.05% of ₹ 500 crores =

₹ 25L

(subject to ₹ 5L)

Application for registration of charge by the charge-holder (Financing Institution):

Case – Where the company didn’t register within 30 days

File form to Registrar [CHG 1 / CHG 9]

Registrar sends notice to the company

The company may either register itself or show sufficient cause for non - registration

On failure from the company side, Registrar allows registration within 14 days from the date of notice

Recover the fee (+ Additional / Advalorem fee)

Certificate of Registration / Modification of Charge [Sec 77(2), Rule 6]:

Registrar issues: Certificate of registration – Form No.CHG-2 | Certificate of modification of charge in

Form No.CHG-3

Nature: Conclusive evidence [Compliance - Chapter VI, Rules]

Liquidator (Companies Act / IBC, 2016) takes into account only the registered charge

However, this does not prejudice any contract or obligation for the repayment of the money secured

by a charge

Modification of Charge: [Registration as per Sec77]: Variation

- Terms

- Rate of interest

- Increase / decrease – borrowings

- Change / swap of security

- Extension of time for repayment (Mutual agreement / operation of law)

- Rights of a charge holder assigned to a third party

Acquiring Property subject to a Charge:

- Follows Sec 77 as it is, (w.r.t. the same time limit also), even if the charge is already registered

- New creation / modification

- Modification of terms as per SERFASAI

[Securitization and Reconstruction of Financial Assets and Enforcement of Interest Act, 2002]


Verification of Instruments [Rule3(4)]:

A copy of every instrument evidencing any creation / modification / filed with Registrar

The copy of the instrument / deed shall be verified by a certificate issued w.r.t. Property

i. Outside India - Company (with seal) / Director / CS / authorised officer of CH / other person

interested in Mortgage or charge.

ii. In India (wholly / partly) - Director / CS / authorised officer of CH

Satisfaction of Charge [Sec 82]:

File Form No CHG 4 (+ Fee) | within 30 days | on payment

Delay filling -300 days | Company / Charge Holder | Additional Fees

SCN - If filed by the Company, the Registrar issues a notice to the holder of the charge not exceeding

fourteen days

If cause not shown - Deemed satisfaction | If cause shown – Takes note

And the Registrar intimates to the company, its status

No SCN: If mandatory attachment (Letter from the CH w.r.t. Payment) made with CHG 4

Power of registrar to make entries of satisfaction in absence of intimation from the company:

Tin case of failure for the company to send intimation to the Registrar on satisfaction of the charge,

The registrar may on receipt of satisfactory evidence of satisfaction register memorandum of

satisfaction.

The evidences may be

- (a) The debt for which the charge was given has been paid or satisfied in whole or in part

- (b) Part of the property or undertaking charged has been released from the charge

- (c) Part of the property or undertaking ceased to form part of the company’s property or

undertaking.

The Registrar may enter in the register of charges a memorandum of satisfaction. Section 83(2) states

that the Registrar shall inform affected parties within thirty days of making the entry in the registrar

of charges.

Certificate of registration of satisfaction of charge [Sec 82 / 83, Rule 8 ]: Form No.CHG-5

Notice of Charge [Sec 80 follows from Sec 77]:

- Any person acquiring such property, assets, undertakings or part thereof or any share or

interest

- Deemed / Complete knowledge of charge from the date the charge is registered

Register of Charges Maintained in ROC’s Office [Sec81]:

RoC maintains charge particulars of every company

Particulars maintained in MCA portal – Deemed Register

Open for Inspection on payment of fee [Physical mode at Registered Office– before MCA 21]

Details – Creation, Modification and Satisfaction

Intimation of appointment of receiver or manager [Sec 84]: File CHG.6 (+ fee)

- Within 30 days from the order of appointment

- Notice to the company and Registrar

- Registrar registers

- particulars of the receiver, person or instrument in the register of charges

- The appointed person (ceases to hold office) – Notice to the company and Registrar


Company’s Register of Charges [Sec 85, Rule 10]:

- Form No. CHG.7

- Updated entries w.r.t. creation, modification and satisfaction

- Authentication – Director / Secretary / authorised person

- Preserved permanently | Instrument creating a charge or modification – 8 years + Copy of

instrument

Contents:

i. Sl. No

ii. Charge ID

iii. Date of creation of charge / Acquisition

of property subject to charge

iv. Date of registration of creation of charge

v. Short description of the property charged

vi. Period and amount secured by the charge

vii. Names and addresses of the charge holder

viii. Particulars of the terms and conditions

ix. Description of the instrument creating /

modifying the charge

x. Date of modification of charge

xi. Date of registration of modification of charge

xii. Particulars of modification

xiii. Date of satisfaction and its registration

xvi. Facts and date of condonation of delay, if any

xvii. Reasons for delay in filing for registration of

creation, modification / satisfaction, if any

Inspection of Charges [Sec 85(2)]:

- Any member or creditor - without fees

- Other person | Fee | Reasonable restriction (AOA)

- Liquidator or any other creditor take into account the unregistered charges

Consequences of Non-Registration of Charge: Void as against the liquidator / CR

Case Law: ONGC Ltd v. Official Liquidators of Ambica Mills Co Ltd

- the ONGC had not been able to point out whether the so called charge, on the basis of which it

was claiming preference as a secured creditor, was registered or not.

- It was held that in the light of this failure, ONCG could not be treated as a secured creditor in

view of specific provisions of section 125 and the statutory requirement under the said section.

- This does not, however, mean that the charge is altogether void and the debt is not

recoverable.

- So long as the company does not go into liquidation, the charge is good and may be enforced.

Void against the liquidator:

- The liquidator on winding up of the company can ignore the charge and can treat the

concerned creditor as unsecured creditor.

- The property will be treated as free of charge i.e. the creditor cannot sell the property to

recover its dues.

Void against any creditor of the company:

- If any subsequent charge is created on the same property and the earlier charge is not

registered, the earlier charge would have no consequence and the latter charge if registered

would enjoy priority. In other words, the latter charge holder can have the property sold in

order to recover its money.

Case Law: Independent Automatic Sales Ltd. v. Knowles &Foster (1962) 32 Comp Cas

- Thus, non-filing of particulars of a charge does not invalidate the charge against the company

as a going concern.


- It is void only against the liquidator and the creditors at the time of liquidation.

- The company itself cannot have a cause of action arising out of non-registration

Punishment for Contravention [Sec 86]:

1. Contravention of Ch VI | Company: ₹ 5L | Officer: Fine - ₹ 50,000

2. Wilfully furnishing - False / incorrect information / knowingly suppresses any material information

| Attracts Sec 447

Particulars of Charges: To file with the Registrar

(a) date and description of instrument creating charge

(b) type of charge

(c) total amount secured by the charge

(d) date of the resolution authorising the creation of the charge (in case of issue of secured debentures

only)

(e) general description of the property charged

(f) in case of acquisition of property subject to charge, details relating to the existing charge on the

property so acquired

(g) a copy of the deed/instrument containing the charge duly certified or if there is no such deed, any

other document evidencing the creation of the charge to be enclosed

(h) principal terms and conditions and extent and operation of the charge and name and address of

the charge holder particulars of all joint charge holders is mandatory if number of charge holder is

more than one.

(i) In case the e-Form is to be filed for modification of charge, enter the charge identification number

allotted at the time of registration of the charge and such charge ID entered for modification should

be open charge ID and not satisfied

(j) Details relating to involvement of consortium finance is involved, joint charge is involved pari

passu ranking if applicable the charge holder(s)

(k) In case the asset charged is an immoveable property, the details like a ‘Plot Unit’ or ‘Dwelling

Interest’ and furnish the related details viz.,

– Evaluated Price of Asset as on Security Interest Creation date

– Nature of Property

– Plot ID number

– All other location related field details

– The fields for latitude and longitude are mandatory in the Charge Forms

Rectification by Central Government In Register Of Charges [Sec 87]:

- Power Delegated to Regional Director

- On satisfaction of

(a) Omission of intimation to the Registrar

(b) Omission / Misstatement – previous filling and entry made w.r.t. Sec 82 , 83

- Accidental / due to inadvertence / other sufficient cause

- it is not of a nature to prejudice the position of CR / SHs or shareholders of the company,

On the application of the company / person interested – Direct to extend the time for giving the

intimation and further rectified

Sec 87, Rule 12:

- Form CHG 8 | Apply to CG


- Direct – Rectification w.r.t. sec 82, 83 | Extension of time for satisfaction of charge, if not made

within 300 days

Case Law: Times Bank Ltd vs Shri Sharda Parmeshwari textiles Ltd.

The Central Government is empowered to permit rectification only in respect to mis-statement /

commission of particulars and No power to determination of validity of a charge / Consequent

deletion of a charge

Procedure for Registration of Creation / modification / Satisfaction of charges

A. Authorisation of the Board: Ensure

- SR

- Sec 180(1)(a) – to sell / lease / dispose – undertakings in favour of FIs / Banks / Lenders on

agreement

[Not applicable for Private company, Follow AOA]

- Borrowings in limits [NA – Private Company]

- BR passes

- Authorise Director / MD – to execute, sign, file and Register the charge documents

B. Filling of Forms:

E Form MGT 14 - for Resolution

SR (Sec 180(1)(a) & (c))[NA: Private Co. | if borrowings within the limits and approved by the

company]

BR (Sec 179 (3)) [NA: Private Co]

E form for Charge Creation / Modification:

CHG 1 – Other than Debuntures | CHG 9 – Debuntures within 30 days

[The order passed by the CG is to be filled in Form No. 28]

Attachments: certified True copy – Instrument evidencing a charge

Instruments – subject to charge

CHG 4 – On Satisfaction within 30 days

CHG 8 – Apply to CG [] Rectification / Extension of time – Reg]

Make entries in the Register

Registration of Charges under the SARFAESI Act, 2002 by Banking Company:

The Central Registry – A Central Registration System, Ch IV - SARFAESI Act.

Object:

- To create a public data base

- Encumbrances created on properties

- To secure loans and advances – Banks / FIs / Transactions of SARFAESI Act

Mandatory and Additional Compliance for registration of securitisation, asset reconstruction or

creation of security interest by the securitisation company or reconstruction company or the secured

creditor

Particulars of creation, modification or satisfaction of security interest on the CERSAI portal:

1. Immovable property - Mortgage other than mortgage by deposit of title deeds

2. Hypothecation - Plant and Machinery, stocks, debts including book debts or receivables, whether

existing or future.

3. Intangible assets – know - how, patent, copyright, trademark, license, franchise or any other

business or commercial right of similar nature


4. Any ‘under construction’ residential or commercial or a part thereof by an agreement or instrument

other than mortgage.

Note: Sec 20(4) - Registration with Central Registry is not in derogation of the provisions of the Act

and has no effect on priority and validity of the charge.


4.12. General Meetings Introduction:

Gathering / Assembly / Get together of persons for lawful business

SHs Meeting

A compulsory meeting

A right of the SH

A platform to express their will in regard to the management of the affairs of the company

Primary purpose: Opportunity | participate in the Meeting | Decision making (vesting

powers)

Every gathering / meeting is NOT a Company meeting

Intentional Missed out, invalidates the meeting

To take approval of certain businesses

General Meetings – “In Detail” – “3Cs & 2Ps”

Properly Called Properly Convened Properly Conducted

Proper Authority

Proper Notice

Proper Quorum

Proper Chairman

Proper Business

Proper Minutes

1. Called with Proper Authority and Proper Notice

(a) Proper Authority

BOD - AGM/ EGM

Member - EGM

Tribunal - AGM/ EGM

Not by single director /

individual

Sanctioned by BOD

(b) Proper Notice

21 clear days (48 hours)

Sec.8 Companies - 14 clear days

Contents: Date/ Place/ Day/ Time

Short notice – 95% consent from member

To Whom: Director/ Member [ LR/ OA] Auditor(s)

Invalidate– Intentionally [Accidental / Non-receipt]

2. Convened with Proper Quorum and Proper Chairman

a. Proper Quorum

Private – 2

Public (depending on number of members)

Number of members Upto 1000 1000 to 5000 More than 5000

Quorum 5 15 30


Note:

No Quorum necessary for Adjourned AGM

Quorum counts the Member present

EGM (by members) – Cancelled, if no Quorum

Representatives

• Representative - President / Governor

• Body corporate - BR authorization

Proxy - to attend & vote

Nature - Agent

Need not be a member (except Sec.8 company)

Upto 50 members & Aggregate > 10% share capital

Time limit - 48 hours before meeting

Notice with proxy form (member - Writing / Signed)

Non- Applicable: Company have no share capital

Do’s - Attend meeting

Don’ts – Not to speak, Vote on show off hands

Valid Revocation - Proxy not vote

Inspection: 3 days notice | hours before meeting till the start

b. Proper Chairman

AOA

Show off hands

Demand for poll

Chairman continue till then

3. Conducted with Proper Business

a. Proper Business

Business

Voting - Show off hands / Poll / Postal ballot (E-voting)

Resolution

Types of Business

i. Ordinary

Adoption of A/c’s

Dividend

Appointment / Re-Appiontment of director

Appointment of Auditor / Statutory Auditor

ii. Special – other than Ordinary

Explanatory statement

Compensate the benefit -

Director / Officer / Member /

KMP > 2% Paid up Capital


iii. Resolutions requiring Special Notice

As per Act / AOA

1% Voting power (or) > 5,00,000 Paid-up Capital

Notice by members to the company [Not earlier than 3 months but b/f 14 days]

Company to give notice to members b/f 7 days

Cases:

Appointment of Auditor other than retiring auditor

Not reappointing the retiring auditor

Removing a director before the term ends

Appointing a director at which the director is removed

Poll

1 Share = 1 Vote

Different votes may be casted

Chairman - Suo moto

Demand - 1/10th (atleast) / Paid-up share capital > 5,00,000

Scrutinizers

Resolution: Ordinary Resolution – Majority | Special Resolution - 3:1 [MGT-14 with 30 days]

Postal Ballot:

- By post / e mode / No voting personally

- Provide facility to the members

- NA: Ordinary Business | Directors / Auditor’s right to be heard at the meeting

- In the form of resolution (+explanatory statement)

- Prior notice – To receive assent / dissent

Special Cases:

- Object clause MOA alter

- Insert / Remove – AOA

- Change of reg office outside the local limits

- Change in objects (if money raised thro public and is untilised)

- Shares with Differential rights - Vote / Dividend

- Variation – w.r.t. voting / dividend – shares / debuntures

- Buy-back

- Small shareholder director

- Sale of whole / Part of Undertaking

- Loans / Guarantee / providing security -

- Exceeding 60% (paid-up share capital + FR + SP ) or 100% (FR +SP)

- Non – applicable - OPC / upto 200 members


Chairman’s Extra Vote: In the case of Tie-up

b. Proper Minutes

Summary

Including of all except chairman – defamatory / Immoral / Interest

Within 30 days (meeting held / Postal ballot)

Pages to be numbered

Presumption

ICSI – SS 2 [NA: OPC / notified companies]

Sign - Chairman / Death or disability – BOD

Penalty - 25,000 / Officer – 5,000 / Tampering - 2 years or 25,000 to 1,00,000

Annual General Meeting [AGM]

First AGM

• Within 9 months from the end of FY

• No need - in the year of

Incorporation

• Extension by Registrar

• Exempt OPC holding AGM

Subsequent AGM

• Within 6 months

• Every year

• Gap - 15 months

• Extension - 3 months

• No extension 1st AGM

When? Time: 9am to 6pm

• Not on a National Holiday

• Tribunal calls for AGM

• Penalty - 1,00,000 / 25,000 day


Extra-Ordinary General Meeting [EGM] shall be called by

BoD Member Tribunal

To execute the business:

By themselves

By Requisition of SHs

– 1/10th of paid-up share capital or 1/10th

voting power

1/10th Paid-up capital or 1/10th

Voting power

Propose a date (21 clear days)

To be held within 45 days

Not 45 days within 3 months

Member, Director -

Apply

Except: OPC

Miscellaneous:

1. Class Meeting

A SH meeting

To a particular class of SH

Rules of GM apply

Conducted to alter the changes of that respective class

Supported by Special Resolution

Mentioning in the AR is a must

2. Circulation of members’ resolution – Sec 111

On requisition in writing to the members

Proposed resolution

Signed by the requisitionist (2 or more copies) deposited at Reg Office

- If requires notice of resolution - not less than six weeks b/f meeting

- Other cases- Not less than 2 weeks.

Sum – deposited / tendered to meet the expenses of the Company

Call an AGM within 6 weeks (Although not deposited, deemed to be properly deposited)

NA: If CG declares a right | publicity on defamatory

Default attracts fine - company and office


4.13. Distribution of Profits – Dividend

Introduction:

Divisible profit - Profit / portion of profit | Legally distributed | Profits available for dividend to SHs

Note: All profits are not Divisible profit

Dividend –

A reward to a SHs | A share of the after- tax profit | A right and not an obligation

Distributed w.r.t. number / class of shares held by them

BoDs - Decides / recommends | Amount / timing | Current Earnings / Reserves (past earnings)

Requires SHs approval

Profit that shares with the SHs

Declared out of profit [If declared in absence, Director’s own pocket]

Distribution of Company’s Earnings

Inherits from the Company – Not from the act / MOA / AOA (it only regulates)

Right to claim arises only after declared

Not a dividend - Distribution of discount coupons [SS3]

Waiver of right to receive dividend – (Not in Act) AOA | full / part

Declared Dividend – Debt to a company | No revocation possible

Dividend Warrant – Warrant used to encash

Unpaid Dividend – Dividend not paid / claimed | Warrant not encashed

Interest and Dividend

Nature Interest Dividend

Meaning / Nature Money - Charge against profit Percentage / Appropriation of profit

To whom paid to Lenders, Crs , DH SH – Equity / Preference

Mandatory of profits Yes No

Rate Fixed Depends

Definition:

Dividend:

- Companies Act, 2013 [Sec 2(35)]: Includes Interim dividend

- SS3 – Distribution of any sums to members out of profits and wherever permitted out of free

reserves

Free Reserves [Sec 2 (43)]: Reserves available for distribution of dividend

Not a FR : unrealised gains | Notional gains | Revaluation of assets | Changes in carrying amount of

an A/L on measurement fair values


Types

I. Basis - Time

a. Final Dividend

- Dividend recommended by BoDs and declared by members at AGM [SS3]

- Declared dividend is a debt, which becomes enforceable

- Sec 134(3)(k) – State in Directors’ report

b. Interim Dividend

- Declared by BoDs between two AGMs [SS3]

- Follows same provisions as Final Dividend

II. Basis – Shares

a. Preference Shares

- Preferential right on payment of dividend

- Fixed amount / Fixed rate

- Not a debt – Not to sue for payment [Except: As per AOA, if company’s profit apply]

i. Cumulative Preference Shares:

- Fixed amount / rate

- Payable out of future profit if current year profits are insufficient

- Accumulates dividend

ii. Non – Cumulative Preference Shares:

- Fixed amount of dividend

- No accumulation of dividend

b. Equity Shares

- Any amount – based on level of profit and Company’s needs

- varies from year to year

- depends on Dividend policy & profits

- Paid after satisfying the rights of Preference SH.

Declaration of Dividend [Sec 123]:

Sec 51 – Pay dividend in proportion to the amount paid up on each share, if AOA authorizes

SS3 – Declared on recommendation of BoD at BM


Reg 43, SEBI (LODR) Regulations, 2015 – Listed Entity | To declare & Disclose – as per share basis

only

A. Sources of Dividend [Sec 123(10]:

a. Profits - related

- Out of profits (CY) after providing depreciation

- Out of Profits (PYs) after providing depreciation and undistributed

- Both of CY and PY

Note: In computation – Exclude

- unrealised gains

- Notional gains

- Revaluation of assets

- Changes in carrying amount of an A/L on measurement fair values

b. Money – CG /SG – in pursuance of Guarantee

[SS3 – Declaration of dividend only on repayment of deposits withinterest]

No declaration of dividend, if default (includes extended time given by Tribunal) exists in

- Redemption – Debuntures / Creation of DRR

- Redemption – preference Shares / Creation of CRR

- Payment of CYs / PYs declared dividend

- Repayment of Term loan – Bank / FIs

B. Transfer percentage of Profits to Reserves: CY | B/f declaration

C. Absence / Inadequacy of Profits: PYs Accumulated profits transferred to FR

Conditions:

1. Rate of dividend < Avg (rates of 3 PYs dividend)

2. Drawing from Accumulated profit < 1/10th (paid-up capital + FR as per latest financials)

3. Utilisation of drawn amount – To set off the losses

Note:

1. Balance of Reserves not to fall below 15% (paid-up capital) after withdrawal

2. NA – Govt Company

D. From FR only

E. Declaration of Dividend by set off of previous losses and depreciation against the profit of the

Company for the CY

F. Manner of providing depreciation: Schedule II of the Act

G. Declaration of interim dividend:

- Out of Surplus in P/L A/C

- Profits of FY –


- Profits in FY till the quarter preceeding the date of declaration (If incurred losses, Rate of

dividend < Avg (rates of 3 PYs dividend))

SS3: BoD to consider the financial results to satisfy the position w.r.t.

a. Full Year’s Depreciation

b. Tax including deferred Tax

c. Other anticipated loss

d. Dividend for preference shares

e. Loss – during CY and the immediate preceding quarter

Interim Dividend:

Rate of Dividend < Avg (Rate of 3 preceding years)

Not to be issued in case of loss / inadequacy of profit

H. Deposit in Special Account of a Schedule Bank [Sec 123 (4)]:

- includes Interim Dividend

- within 5 days

- NA – Govt Company, if holds entire share capital

SS3 – Deposit within 5 days and pay within 30 days | Intervening holidays to be included

I. Only to registered SHs [Sec 125(5)]: Paid to Registered SH | Banker | “to his order” | Pay in Cash

Note: Nidhi Company – Credit in Members A/c if not claimed within 30 days from the date of

declaration.

J. Payment of Dividend: Deposit in 5 days in Scheduled Separate Bank A/C | Pay within 30 days |

Include intervening holidays

K. Capitalization of Profits: Does not affect issue of Fully paid up Bonus Shares / paying up any

unpaid amount

L. Mode of Payment: In Cash / Cheque / Warrant / E mode

M. NA [Declaration / Payment] [Sec 123 (6)]: Non – Repayment of deposits: On failure of Sec 73 and

74


Unpaid Dividend A/C [Sec 124]:

A special A/C opened by the company in any Scheduled Bank [Sec 124(1)]

- “Unpaid Dividend A/C of Company Limited / Company (Private) Limited”

- Transfer

- Not paid / claimed dividend

- Within 30 days from the date of declaration

- Within 7 days (from 30 days)

Apply for payment of money [Sec 124 (4)]: To the company by that person

Details on Website [Sec 124(2)]:

- Within 90 days of transfer to unpaid dividend A/C

- Statement – Names / Last known address / Amount

- Website - Company’s / approved by CG

Effect of Non- Transfer [ Sec 124 (3)]: Interest @ 12% p.a.

Dividend and IEPF

Investor Education and Protection Fund [Sec 125]:

- CG’s establishment

- Credit [Sec 125(2)]:

a. Amount by CG – grants (after due appropriation made by Parliament by law)

b. Donations – CG / SG(s) / Company / Other Institution

c. Amount from Unpaid Dividend A/C as per Sec 124

d. Amount in CG’s General Revenue A/C (Sec 205A (5), The Companies Act 1956) and

remaining unpaid / Unclaimed

e. Amount in IEPF – Sec 205C, The Companies Act, 1956


f. Interest / other Income from Investments made from this fund

g. Amount received under Sec 38 (4)

h. Application money (for allotment) but due for refund

i. matured deposits with companies other than banking companies

j. matured debentures with companies

k. Interest accrued on the amounts referred to in clauses (h) to (j)

l. Sale proceeds - Fractional shares | Bonus Issue / Merger and amalgamation | 7 or

more years;

m. Unpaid / Unclaimed (7 or more years) Redemption amount on preference shares

n. such other amount as may be prescribed

- Rule 6(5), IEPF (Accounting, Audit, Transfer & Refund) Rules, 2016

i. Sec 125 (2) – Clauses (a) to (n)

ii. Shares as per Sec 124(6)

iii. Resultant benefits as per Clause (b)

iv. Grants / Fees / Charges received by the authority

v. Sums from other sources (by Govt’s decision)

vi. all Earned income of the Authority

vii. Amount

– Sec 10B (3), Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970,

– Sec 10B, Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980

- Sec 38A(3), SBI Act, 1955

- Sec 40A, SBI (Subsidiary Bank) Act, 1959

viii. all other sums of money collected by the Authority as envisaged in the Act

Not a part of the fund – Clauses (h) to (j) | Unless remained unclaimed/ unpaid for a period of

seven years from the date it became due for payment.

Utilisation of IEPF [Sec125(3)]:

a. Refund – Unclaimed dividends / matured deposits / matured debentures / application

money due for refund

b. Protection of Investor’s Education, Awareness and Protection

c. Distribution of any disgorged amount among eligible and identifiable applicants


- Shareholders / Debenture-holders / Depositors

- suffered losses

- due to wrong actions by any person,

- orders made by the Court

d. Reimbursement of legal expenses | Class action suits | Sec 37 and 245 | members,

debenture-holders or depositors | Sanctioned by the Tribunal

e. Incidental purpose in accordance with Rule 3, IEPF Authority (Accounting, Audit,

Transfer and Refund) Rules, 2016

Transfer to IEPF:

Money - [Sec 124 (5)]:

- Fund – Sec 125 (1)

- Money in Unpaid Dividend A/C + Interest

- Unpaid / unclaimed for 7 years

- Statement to the Fund’s Administrative Authority

- Evidence – Receipt

Shares – [Sec 124 (6)]:

- Transfer (Money + Shares) in the name of IEPF

- Form IEPF – 4, Rule 6(5), IEPF (Accounting, Audit, Transfer & Refund) Rules, 2016

- Claimant to follow procedure and submit documents for claiming

Offence & Penalty [ Sec 124 (7)]: Company – ₹ 5L- ₹ 25L | Officer ₹ 1L to ₹ 5L

Procedure for Transfer: Rule 5, IEPF (Accounting, Audit, Transfer & Refund) Rules, 2016

1. Remitted online | IEPF 1 | within 30 days becoming due

2. Transferred amount as per Sec 205C, 1956 Act, if failed to file the statement (even if not in excel

format)

- File Form No IEPF 1A + Excel template | within 60 days of notification

3. May also be remitted by EFT, as specified by CG

4. The authority enters the details in the Register (Physical / Electronic) | Each company, every Year |

Reconciles on monthly basis

5. Abstract of Receipts – By designated bank | Monthly | within 7 days

6. Maintain the record file (Rule 5(1)) | Same format | with Supporting documents | Authority’s

power to inspect


7. Identification of Unclaimed amount

- WEE (Within 60 days of AGM / date of AGM to be held) and every year till the completion of 7

years period

- Furnish IEPF 2 and upload on its website – Own / Authority / specified by CG | Seperately for

each of the 7 years

- Contents: Names and Address | Nature of amount | Amount | Due date of transfer to IEPF |

others

Right to Dividend, Rights Shares and Bonus Shares to be held in Abeyance Pending Registration

of Transfer of Shares [Sec 126]:

Instrument of transfer delivered to company and shares not registered, shall

a. Transfer the dividend to Unpaid Dividend A/C , unless authorized by the registered holder in

writing to the transferee

b. Keep in abeyance, any offer of Right Shares (Sec 62 (1)(a)) and Issue of fully paid – up bonus shares

(Sec 123(5)(proviso 1))

Punishment for failure to distribute the dividends [Sec 127]:

- Unpaid / warrant not issued - declared dividend

- Within 30 days from the date of declaration

- Director: Imprisonment – 2 years | Fine ₹ 1000 / day | If continues- SI @ 18% p.a.

- Exceptions:

a. Reason for operation of law

b. Cannot comply the SH’s Directions (the same is communicated)

c. Dispute regarding the right to dividend

d. Lawful adjustment against any sum due

e. Not a company’s default

Nidhi Company – Dividend < ₹ 100 | Announced in Newspaper – Local language | Displayed in the

notice board

Dividend and Beneficial Owner (BO):

Sec 89 (9) – Dividend to member and not BO

Paid to BO on SHs instruction (Sec 123 (5) includes “to his order”)

Case Law: “Rameswar Lal Sanwarmal vs Commissioner of IT, Assam” – Deemed Dividend


Dividend & other type of Companies:

Sec 8 Company – Sec 8(1) | Prohibited

Nidhi Company -

- Rule 18, Nidhi Rules, 2014 | < 25% or higher amount as approved by RD (recorded reasons

in writing)

- Conditions:

- Transfer equal amount to GR

- No default in repayment – Matured deposits + Interest

- In compliance with Nidhi’s Rules

Producer Company – Dividend as “Limited Return”

- Sec 581A (c), 1956 Act (not repealed by 2013 Act)

- Max rate of dividend as per AOA

- Sec 581E, 1956 Act: Patronage Bonus to members who are in participation of the business |

Cash / Shares / as decided in AGM

Patronage Bonus – Bonus issued after making the provision of payment of limited return and

reserves

Company limited by Guarantee: A company for Non-profit purpose

- Profits are reinvested and used for promoting its non-profit activities

- Act does not prohibit

- AOA provides that all the income of the company shall be applied for promotion

- No portion is paid / transferred as dividend / bonus / by way of profits to the members

Claiming of Unclaimed / Unpaid Dividend:

Apply to the company | within 7 years | Else dividend + shares transferred to IEPF

Procedure for declaration and Payment of Interim Dividend

1. Verify for authorisation – AOA, else alter

2. Issue Notice for BM– Not less than 7 days / shorter notice – urgent business

Content: Time / Date / Venue / Details of business

3. Listed Company – Notify SEs atleast 2 working days in advance (excluding the date of intimation &

meeting)

[Reg 29, SEBI (LODR) Regulations, 2015]


4. @BM

a. - Satisfy the financial position | Earned adequate profits (after providing full year’s

depreciation)

- Personal liability for wrong declaration (proforma of P/L A/C )

- Provisions made for working expenses and depreciation

- In case of loss – Dividend < Avg (3 years dividend)

b. Quantum of dividend

c. entitilement

d. Closure of RoM for dividend payment and record date

e. Notice in Newspaper - atleast 7 days | reg closure

f. Open Separate Bank A/C

g. Printing of dividend warrants

h. Authority to sign the warrants

j. Pass a resolution – Equity Shares

k. Interim dividend - Preference Shares (generally paid annually)

5. Listed Company – Imm within 30 mins of BM | after close of market hours | + Financial position


5. Listed Company

- Publish notice (atleast 7 days before) of book closure in Newspaper

- Notice in advance

- Recommend / Declare dividend atleast 5 working days before the record date

- Time gap between 2 Book Closure dates: atleast 30 days

- On per share basis only

7. Close – RoM and Share Transfer Register

8. BM – Approve Registration of Transfer / transmission (lodged prior to book closure) and dispatch

share certificates to the transferees

9. Round off to nearest rupee

10. Open “Interim Dividend A/C of _____” and deposit within 5 days | Give authority to bank to

honor warrants

11. Listed company – Pay thro RTI & STA | ECS (Local / Regional / National), NEFT


Maintain Details

- Relevant bank details from the depositories and investors

- Physical Payment Instructions (In case of failure / unavailability of MICR, IFSC) | Mandate –

Bank A/C details

12. Make arrangements with other banks (as determined by SEs) for payment of dividends at par

13. Prepare a statement of SH – Name | Ledger Folio No | No of shares | Dividend payable

14. w.e.f. AY 2021-2022, Dividend from Domestics Company is taxable in the hands of the SHs | NO

DDT

15. Dividend Warrants

Printing – Sufficient no (in consultation with Banker) | Approval from RBI for MICR facility

Signing authorized person

16. No RBI approval is required for payment of dividend to shareholders abroad, in case of

investment made on repatriation basis.

17. List of Members - Two copies [1. Self - sticking labels | 2. To secure receipt from the Post Office] |

Names & Addresses

18. For the shares for which transferred before book closure but not registered, keep in “Unpaid

Dividend A/C ___” unless authorization

19. Dispatch Dividend warrants within 30 days | Joint SHs – first named

20. Send sufficient number of cancelled dividend warrant forms with MICR code allotted by the RBI,

to the bank for circulation to the branches where the dividend warrants will be payable at par.

21. Instructions to all the specified branches of the bank that dividend should be paid at par should be

sent by the Bank

22. Publish a Company notice in a newspaper – to give effect for dividend warrants |To get in touch

in 15 days if not received

23. In case of receipt after expiry of currency / lost in transit, Issue bank cheques and / or cheques

(after satisfying that it is not encashed)

24. Arrangements for transfer to “Unpaid dividend A/C of _______” within 7 days after expiry of 30

days.

25. Confirm interim dividend in the next Annual General Meeting.

Procedure for Declaration and Payment of Final Dividend

1. Issue Notice for BM - Contents: Time / Date / Venue / Details of business

2. Listed Company – Notify SEs atleast 2 working days in advance (excluding the date of intimation &

meeting)


3. Hold BM


a. Approve the annual accounts

b. Recommend – Quantum / Source of dividend

c. AGM – Time / Date / Venue

d. Approve Notice of AGM | Authorize CS / competent person to issue notice

e. Closure of RoM / Share transfer Registers [Sec91 and SEBI (LODR) Reg, 2015]

Listed Company – the date should follow a holiday | not to clash with clearance program (& consult)

5. Transfer to reserves (% as it considers appropriate)

6. Listed Company – Intimate to SE | Imm within 30 mins of BM | Dividend + Appropriation +

Sources

[Reg 29 & 30, SEBI (LODR) Regulations, 2015]

7. Listed Company

- Publish notice (atleast 7 days before) of book closure in Newspaper

- Notice in advance

- Recommend / Declare dividend atleast 5 working days before the record date

- Time gap between 2 Book Closure dates: atleast 30 days

- On per share basis only

8.Declare and disclose the dividend on per share basis only.

[Reg 43, SEBI and Sec 51 – Not to forfeit unclaimed dividends b/f the claim becomes debarred by law,

shall be annulled in appropriate cases]

9. Listed Company – Top 500 listed entities | market capitalization

- Formulate a dividend policy | Disclose in ARs and websites

- Include parameters:

- Circumstances that SHs may or may not expect dividend

- Financial parameters

- Internal / Extetrnal factors

- Policy to use retained earnings

- parameters to adopt with various classes of shares

[In case of change / addition of above – disclose in the AR and website]

10. Close – RoM and Share Transfer Register


11. Amount of Dividend – Directors’ Report - As appropriation of Profits | B/S – “Proposed

Dividend” (“Current Liabilities & Provision – “Provisions”)

12. BM – Approve Registration of Transfer / transmission (lodged prior to book closure) and mail

share certificates to the transferees

13. Hold AGM | Pass OR | SHs cannot declare the higher dividend than the Board’s

recommendation.

Note:

- No further declaration of dividend at an EGM (even though no provisions exists on the same)

- Pro-rata basis

[A method of dividing something between a number of participants in proportion to some factor]

- Preference Shares – fixed rate

- Paid proportionately to the amounts paid / credited as paid on the shares. But shall rank for

dividend [Sch I, Table F, Article 83(3)]

14. Prepare a statement of SH – Name | Ledger Folio No | No of shares | Dividend payable

15. w.e.f. AY 2021-2022, Dividend from Domestics Company is taxable in the hands of the SHs | NO

DDT

16. Round off to nearest rupee

17. Open “Dividend A/C of _____” and credit within 5 days

18. Listed company – Pay thro RTI & STA | ECS (Local / Regional / National), NEFT

Maintain bank details from the investors

19. Dividend Warrants

Printing – Sufficient no (in consultation with Banker) | Approval from RBI for MICR facility

Signing authorized person

20. No RBI approval is required for payment of dividend to shareholders abroad, in case of

investment made on repatriation basis.

21. List of Members - Two copies [1. Self - sticking labels | 2. To secure receipt from the Post Office] |

Names & Addresses

22. For the shares for which transferred before book closure but not registered, keep in “Unpaid

Dividend A/C ___” unless authorization

23. Dispatch Dividend warrants within 30 days | Joint SHs – first named

24. Send sufficient number of cancelled dividend warrant forms with MICR code allotted by the RBI,

to the bank for circulation to the branches where the dividend warrants will be payable at par.


25. Instructions to all the specified branches of the bank that dividend should be paid at par should be

sent by the Bank

26. Publish a Company notice in a newspaper – to give effect for dividend warrants |To get in touch

in 15 days if not received

27. In case of receipt after expiry of currency / lost in transit, Issue bank cheques and / or cheques

(after satisfying that it is not encashed)

28. Arrangements for transfer to “Unpaid dividend A/C of _______” within 7 days after expiry of 30

days.

Procedure for declaration of dividend out of reserves

1. BM

- Issue notice

- Take decision because of inadequacy / absence of profits

- Fix – Date / Time / venue for AGM

- Authorize CS / other Competent person

2. Ensure compliance of Companies (Declaration and Payment of Dividend), Rules 2014

3. Calculation purpose – Net profit after tax is alone considered

4. Computation Purpose: Include: Development Rebate Reserve | Exclude – All items of Capital

Reserves (Revaluation Reserve)

5. Listed Company – Inform SE within 30 mins of closure of BM

6. Issue notice of AGM – 21 clear days | Hold the meeting and pass resolution

7. Listed Company – Forward notices copies and AGM proceedings to SE

8. Open separate bank account and credit the amount within 5 days of declaration of dividend

9. Issue dividend warrants within 30days from the date of declaration of dividend

10. Follow other steps from the declaration of final dividend