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Smoothen the rough edges

N. Sethuraman examines some of the questions in an ICWA (Intermediate) model paper on corporate laws and secretarial practice for the June exams

STATE giving reasons whether the following statements are `true' or `false'. No marks will be awarded if reasons are not given.

a) Minutes of general meetings are to be filed with the Registrar of Companies within 30 days of the meeting.

b) A public company can buy back its own shares.

c) Cost audit is compulsory for all manufacturing companies and it should be done annually.

d) Under the Payment of Gratuity Act, nomination can be made by an employee in favour of any person.

e) A consumer who is affected by unfair trade practice may get remedy either under the MRTP Act or the Consumer Protection Act.

f) A money-changer can enter into all kinds of foreign exchange transactions.

g) Every company should have a whole-time secretary.

h) Immediately on seizure of goods, the collector may order confiscation of goods under the Essential Commodities Act.

i) Only after adoption of audited accounts, the board of directors of a sick industrial company can make reference to the BIFR.

j) Gratuity is payable only after the employee has completed five years of continuous service.

k) A person shall not be qualified for being appointed as an apprentice unless he has completed 18 years of age.

l) Interim dividend can be paid only after obtaining the consent of the shareholders in a general meeting. (12 x 1-1/2 = 18 marks)

2(a) Briefly explain the procedure for incorporation of a company and the documents to be filed. What is the effect of incorporation. (10 marks)

b) Under what circumstances a private company is deemed to become a public company. (6 marks)

3(a) How is the auditor of a company appointed. What are his duties and liabilities. (10 marks)

b) What are the charges that are required to be registered. Distinguish between ``fixed charge'' and ``floating charge''.

4(a) Explain the objectives of the Foreign Exchange Regulation Act. How is the Act administered. (Marks 8)

b) Explain what is ``restrictive trade practice''. Give six types of agreements requiring registration. (8 marks)

5) Write short notes on any four of the following: a) securities premium account; b) audit of government companies; c) right shares and bonus shares; d) consumer complaint under the Consumer Protection Act; and e) confiscation under the Essential Commodi ties Act. (4x4 = 16 marks)

Section II

6) Answer in brief the following: a) What is the quorum for a board meeting.

b) By oversight, notice of a board meeting is not sent to one of the directors. Comment.

c) Can a company have more than 12 directors.

d) Distinguish between annual return and annual accounts.

e) Can a person be appointed as managing director of more than one company without the approval of the Central Government.

f) Who appoints the special auditor and when?

g) What is the length of notice required for a board meeting? How is it served?

h) The auditors at the company have made certain comments on the accounts before certifying the same. Comment.

i) Is it compulsory for a director to attend all board meetings; can he send a proxy.

j) Give two instances where unanimous consent of the board is required.

k) Who should sign the directors report.

l) The accounts of the company was not adopted at the AGM. When and how are the accounts to be filed with the RoC.

7(a) Briefly explain the various statutory registers required to be maintained by a company. (8 marks)

b) State the contents of notice of general meetings. Give the provisions with regard to length of notice and persons who are entitled to notice and the manner of service of notice (8 marks)

8(a) Briefly explain the powers of the board. Is there any restriction on the powers of the board? (8 marks)

b) Explain the procedure for passing resolution by circulation. What cannot be passed by circulation. (8 marks)

9(a) Distinguish between `ordinary resolution', `special resolution' and `resolutions requiring special notice'. Give two instances in each of the resolutions. (12 marks)

b) How a public company can appoint a managing director without the approval of the Central Government? (4 marks)

10(a) Explain in brief the legal position of directors. (8 marks)

b) What is `poll'? When can it be demanded? When is it

conducted and by whom? (8 marks)

Suggested answers

1) (a) False: Minutes are not to be filed with the RoC. Only certain resolutions -- special resolution, for instance -- are to be filed within 30 days of the meeting.

b) True: A company may buy-back its own shares subject to the provisions of Sec.s 77(A)(2) and 77B.

c) False: Cost audit is compulsory only when the Central Government orders the same in respect of certain manufacturing companies, and it is done annually unless the Government orders otherwise.

d) False: As per the Payment of Gratuity Act, a nominee has to be a member of the family of the employee; it can be in favour of any person only when the member does not have a family.

e) True: Both the enactments provide remedy to a consumer in case of unfair trade practice.

f) False: A money-changer is appointed to deal in foreign currency (including coins and travellers cheques); he cannot enter into all kinds of transactions.

g) False: Only companies with a paid-up capital of Rs. 50 lakhs or more need to have a whole-time secretary.

h) False: The collector has to issue a show-cause notice to the owner of the goods and also give him reasonable opportunity to present his case, including a personal hearing, before ordering confiscation.

i) False: The board can make reference to the BIFR if it is of the opinion that the company has become sick. It need not wait for the audit of accounts to be completed.

j) True: But completion of five years' service is not required in case of death of an employee or disablement owing to accident/disease.

k) False: Any person who has completed 14 years of age and possessing the necessary qualifications and fitness may be appointed as an apprentice.

l) False: The board has the power to declare and pay the interim dividend; no approval of shareholders is required.

2) (a) Incorporation of a company: According to Sec. 12 of the Companies Act, any seven or more persons (for forming a public company) or two or more persons may form a company with/without limited liability, where the company to be formed is a private c ompany associated for any lawful purpose.

Procedure for registration: Approval of the Registrar for the proposed name to be obtained. Undesirable names, identical names will not be permitted.

The documents to be filed at the time of registration are: a) the memorandum of association (MoA) of the company duly signed by seven subscribers in case of a public company and two in the case of private company; each subscriber should take at least one share and there should be a witness for the signature;

b) the articles of association (AoA);

c) an agreement, if any, which the company proposes to enter into with any individual for appointment as its managing director or whole-time director/manager;

d) a statutory declaration in Form 1 by an advocate, an attorney of a High Court, a secretary, a chartered accountant in whole-time practice and who is engaged in the formation of the company, or a director, manager or secretary of the company that all t he requirements of the Act with regard to registration have been complied with.

In addition to these, the following documents are to be filed in the case of a public company: a) if the first directors are appointed by the articles: i) written consent of each director to act in Form No. 29; and ii) an undertaking to take and pay for qualification shares.

The following documents are usually filed at the time of registration even though they can be filed after incorporation: i) the address of the registered office of the company; and ii) particulars of directors in Form 32.

With these, necessary fees for registration depending on the capital of the company should also be filed.

As per Sec. 34, on the registration of the memorandum of the company, the Registrar shall certify that the company has been incorporated. From the date of incorporation, the subscribers to the memorandum become a body corporate by the name contained in t he memorandum, capable of exercising all the functions of an incorporated company. The company becomes a separate legal entity having perpetual succession and a common seal, but with limited liability.

b) Sec. 43A of the Companies Act gives the circumstances under which a private company is deemed to become a public company; this is by operation of law. The circumstances are: a) 25 per cent of the paid-up capital of the private company should be held b y one or more bodies corporate -- that is, public companies or deemed public companies; b) if the average annual turnover exceeds the prescribed amount (now Rs. 25 crores), the private company becomes a public company on the expiry of three months from the end of the financial year; c) if the private company holds 25 per cent or more of the paid-up capital of a public company, the private company shall become a public company from the date of such holding; and d) if a private comp any accepts after making invitation by an advertisement or renews deposits from the public. However, deposits accepted from members and directors and relatives of directors are excluded.

3(b) Registration of charges: Charge is a security given by the company to the creditor. Sec. 125 of the Companies Act requires the following charges created by a company to be registered with the RoC within 30 days of the creation of the charge: a) for securing any issue of debentures; b) on uncalled capital of the company; c) on any movable property, wherever situated; d) on any book debts of the company; e) on any movable property (excluding pledge); f) floating charge on undertaking, including stock -in-trade; g) on calls made but not paid; h) on a ship or share in a ship; and i) on goodwill, patent, licence, trademark and copyright.

A fixed charge is a specific charge on a particular asset of the company whereas floating charge is on a class of assets of the company. A floating charge does not attach to any definite property, but covers property of a fluctuating type, such as stock- in-trade. It is an equitable charge on the assets of a company as a going concern. It remains dormant until some event occurs or act is done which causes it to crystallise.

In a fixed charge, the company cannot deal with the asset charged without the concurrence of the creditor, but in a floating charge, the company can deal with the property by way of sale, mortgage, and so on, without reference to the creditor.

4(b) The definition of Restrictive Trade Practice as given in Sec. 2(O) of Act must be stated. The answer should highlight that RTP has the effect of preventing, distorting, or restricting competition in any manner and that it tends to manipulate prices or terms of delivery in such a manner as to impose on consumers unjustified costs or restrictions.

The various agreements to be registered are given in Sec. 33. These include: tie-in sales, exclusive dealing, collective price fixation, resale price maintenance, collective bidding, controlling output/supply, discriminatory dealing, collective boycott, and so on.

5(a) Securities premium account: Sec. 78 deals with this account, which was earlier known as `share premium account'.

The premium on issue of shares is transferred to this account, which can be used only for the following purposes (for all other purposes, it is treated as paid-up capital of the company). It cannot be refunded to the shareholders or used for payment of d ividend.

It can be used for: i) issue of fully-paid bonus shares; ii) writing off preliminary expenses; c) writing off commission or discount on shares/debentures of the company; and iv) premium payable on redeemable preference shares or debentures of the company .

b) Audit of Government companies: As per Sec. 619, the auditor of a government company shall be appointed by the Central Government on the advice of the Comptroller and Auditor General of India.

The CAG can direct how the audit of accounts should are be carried out; the CAG may also carry out a supplementary or test audit. The auditor shall forward a copy of the report to the CAG who shall have the right to comment upon the audit. The comments o f the CAG shall be placed at the AGM.

c) Right shares and bonus shares: Both these shares are issued to existing shareholders. Whenever a public company issues further capital after two years of incorporation or one year after the first allotment of shares, it has to offer the further shares to the existing shareholders in the same proposition. This is called right shares and the shareholders have to pay and take up the shares or they can renounce it in favour of a third party or reject the offer.

Bonus shares are issued out of reserves; it is given free and the shareholder has no option but to take up the shares, for which, no money need be paid; they are fully paid.

d) Consumer complaint under the Consumer Protection Act: It is an allegation in writing by a consumer that i) the trader has adopted an unfair or restrictive trade practice; ii) the goods are defective or the services deficient; and iii) the prices charg ed are higher than what is fixed under any law or the price marked on the package.

e) Confiscation under the Essential Commodities Act: Under the EC Act, the collector of a district has the power to order confiscation of essential commodities. As confiscation implies deprivation of ownership, the collector will have to follow a procedu re. As soon as the goods are seized, they are produced before the collector who will then have to issue a show-cause notice to the owner asking why the goods cannot be confiscated in view of the violation of the EC Act. The owner should also be given a r easonable opportunity to present his case, which includes personal hearing.

Section II

6(a) The quorum for a meeting of the board is one-third the total strength of the board (any fraction rounded off as one) or two directors, whichever is higher.

b) Notice of every board meeting is to be sent in writing to all the directors at their usual address in India. If the company has not sent the notice to any director, the meeting is invalid and the officer who has defaulted will be liable for a fine of Rs. 100.

c) Yes. However, in the case of a public company, if the increase in number of directors is more than 12, it will have to be approved by the Central Government.

d) Annual return is filed as per Schedule V and contains details of the structure of share capital, indebtedness, list of directors, and so on. It is to be filed within 60 days of the annual general meeting (AGM). Annual accounts are prepared to give the final position of the company as at the end of the financial year; it consists of the balance-sheet and profit and loss (P&L) account as per Schedule VI. Three copies of the accounts are to be filed within 30 days of the AGM; the accounts are circulated to the members and adopted.

e) Yes. As per Schedule XIII, he can draw remuneration from the companies concerned, which must not exceed the higher maximum limit admissible from any one of the companies.

f) Under Sec. 233 A, the Central Government may appoint a special auditor if it is of the opinion that the affairs of the company are not being managed in accordance with sound business principles or prudent commercial practices, go against the interests of the industry/public or the financial position is such as to endanger its solvency.

g) The Companies Act has not prescribed any length of notice. Reasonable notice is to be given and should be served in writing to all the directors at their usual address in India.

h) As per Sec. 217(3), the board will have to give information and its explanation to any reservation, qualification or adverse remark contained in the auditors report.

i) It is not compulsory. However, if a director absents himself for three consecutive meetings of the board or for three months, whichever is longer, without obtaining leave of absence from the board, he will have to vacate his office -- a proxy canno t be sent.

j) Unanimous approval of the board is required under: i) Sec. 316 for appointment of a person as the managing director or manager, if he is already managing director or manager of some other company; ii) Sec. 372 for purchase by company of shares in othe r companies within the limit prescribed under that section.

k) The board's report shall be signed by the chairman on behalf of the board; otherwise, it shall be signed by two directors, including the managing director, if any.

l) Even if the shareholders have not adopted the accounts, the copies of the same shall be filed within 30 days of the AGM along with a statement giving reasons for non-adoption of accounts.

7(b) Contents of notice: i) every notice of a general meeting shall specify the place, the day and the time of the meeting and should contain the agenda (list of business) to be transacted at the meeting;

ii) it should contain a statement that a member entitled to attend and vote at the meeting may appoint a proxy and the proxy need not be a member of the company;

iii) an explanatory statement should be annexed to the notice with regard to any special notice to be transacted at the meeting;

iv) the explanatory statement should give the material facts about the business, including the interest or concern of every director, and, if any document is to be approved, the details of the place at which the document can be inspected by the member; a nd

v) in case of AGM, the balance-sheet, P&L account, directors report and the report of the auditors shall be sent along with the notice.

Length of notice: In case of general meetings, a public company has to give 21 clear days' notice before the meeting; the day of despatch of notice and the day of the meeting shall be omitted. Notice can be sent by post, in which case, it will be effect ive only after the expiry of 48 hours from the posting of notice.

The notice may be send personally or by post to the address given by the member to his address in India. In case of members who have not given their address in India, advertisement published in the local newspaper that the notice of the meeting has been sent to all the members will suffice.

A general meeting may be called at shorter notice if all the shareholders agree in writing for an AGM and, in the case of other meetings, if shareholders having 95 per cent of the voting power agree.

Persons entitled to notice: Notice of every meeting shall be sent to: i) every member of the company; ii) the legal representative of the member, in case of death or insolvency of the member; iii) the auditors of the company; and iv) the public trustee i f the shares are held in trust.

8(a) Powers of the board: A company is a legal fiction. Even though it is a separate legal entity, it cannot act on its own; it has to act through certain persons who are called directors. Collectively, the directors are called the board. According to Se c. 291, the board of directors shall be entitled to exercise all the powers of the company subject to the restrictions contained in the Companies Act, the MoA and the articles.

Theboard cannot exercise those powers which are required to be exercised by the company in general meeting. As per Sec. 293, the board of a public company can exercise the following powers only with the consent of the company in a general meeting:

a) sell, lease, or dispose of the undertaking of the company; b) remit or give time for repayment of loan taken by director; c) invest compensation received on compulsory acquisition in investments other than trust securities; d) borrow money in excess o f the paid-up capital and free reserves of the company; and e) contribute to charitable and other funds not directly relating to the business of the company, 5 per cent of the average net profits for three years or Rs. 50,000, whichever is greater.

8(b) Resolution by circulation: Sec. 289 of the Companies Act provides for passing of resolution by circulation by the board. As per this section, a draft of the resolution is to be sent to all the directors in India (not less than the quorum fixed for a board meeting) and it should be passed by majority of them. Such a resolution is as effective as a resolution passed in a board meeting.

However, Sec. 292 requires the following matters to be discussed and decided only at a duly constituted board meeting:

a) power to make calls on shares in respect of unpaid share capital of the company; b) power to issue debentures; c) power to borrow money otherwise than on debentures; d) power to invest the funds of the company; and e) power to give loans.

Similarly, as per Sec. 262, casual vacancy in the board may be filled up only at a board meeting. At the time of voluntary winding up, declaration of solvency can be done only at a meeting of the board (Sec. 488)

10(a) This is a popular and frequently asked question. The points to be covered are:

i) company, being an artificial person, acts through the directors;

ii) the directors may be considered as agents as they act on behalf of the company; but in a strict legal sense, they are not agents as the company cannot give directions and the directors act according to their discretion;

iii) directors may be considered as trustees as they are bound to manage the assets of the company for the benefit of shareholders and should not take any unfair advantage; but they are not trustees as the property of the company is not transferred to th em;

iv) directors are not employees, as the relationship of master and servant -- except in few case -- does not exist;

v) directors are commercial men entrusted with the management of the company for the benefit of shareholders and they stand in fiduciary relationship with the company.

10(b) Poll: As per Sec. 177, at any general meeting of members, the sense of the meeting is to be ascertained by show of hands in the first instance; in case of show of hands, each member personally present will have one vote irrespective of his sharehol ding. Proxies are not entitled to vote.

As per Sec. 179, a poll can be demanded before or on the declaration of the result of any voting on show of hands. In a poll, each member will have a vote according to the number of shares held by him -- even proxies can vote at the poll.

A poll can be initiated by the chairman himself on his own volition, or it can be demanded by a specified number of members. In the case of public companies with share capital members holding one-tenth the share capital or members who hold share capital with an aggregate paid-up value of not less than Rs. 50,000.

In the case of private companies, poll can be demanded by a member if the total number of persons present is less than seven and by two members if the members present are more than seven. Even proxies can demand poll if these conditions are fulfilled.

Time of taking poll: i) a poll demanded on adjournment to be taken immediately; and ii) a poll demanded on any other ground (other than election of chairman) can be taken within 48 hours.

The poll is taken as per the directions of the chairman, who shall appoint two scrutineers to check the votes and submit a report to him about the result.