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A test on drafting -- II

S. Prasanna Venkatesh examines the June 2000 CS (Final) paper on CLP-I

DESCRIBE the procedure relating to change in the name of the company. (6 marks)

Sec. 21 of the Companies Act provides that a company may, by special resolution and with the approval of the Central Government, change its name. The powers of the Central Government have, under this section, been delegated to the RoC. The procedure for name-change may be outlined as follows:

i) apply for the availability of the proposed name in Form IA and obtain the name availability letter from the RoC;

ii) board meeting has to be held for deciding the date, time, place and notice of the general meeting for passing the special resolution;

iii) general meeting should be convened in accordance with the provisions of the Act and special resolution for name-change passed thereat;

iv) Form 23 to be filed within 30 days of passing of the special resolution;

v) application has to be made to the RoC for approval of the name-change. The Act or the rules made thereunder have not prescribed any form for this purpose. However, the RoC may require particulars/documents such as: a) reasons for name-change; b) detai ls of the meeting which passed the special resolution; c) certified true copies of memorandum and articles, annual reports for the preceding two financial years, copy of Form 23 filed together with the copy of the filing fee receipt, and so on; and d) or iginal name-availability letter making the proposed name available to the company;

vi) if the name-change is approved, the RoC issues a fresh certificate of incorporation and, after which, the company may make the changes in every copy of its memorandum, articles, records, letter-heads, and so on; and

vii) a new common seal has to be prepared and kept under safe custody.

5(ii) Describe the procedure relating to redemption of debentures of the company. (10 marks)

The process of redemption of debentures, in case the debentures were not raised through a public issue, is very simple. It would be sufficient if the redemption conforms to the terms of the issue. However, if the debentures were raised through a public i ssue, SEBI guidelines regarding the redemption of debentures should be observed. The procedure to be adopted is:

a) the mode of redemption should be decided in consultation with the debenture trustees;

b) if the debentures are to be redeemed by drawing of lots, the debenture-holders should be informed about the place, date and time of the drawing and the drawing should take place in the presence of the debenture-holders. Alternatively, the debentures m ay be redeemed by purchase in the open market;

c) the stock exchange where the debentures are listed should be informed of the details of the redemption;

d) the debenture-holders concerned should be informed, and the amounts paid after the debenture certificates are surrendered to the company;

e) necessary entries should be made in the register of debenture-holders;

f) the company should follow other guidelines prescribed by SEBI as regards the drawals from the fund.

6(a) The managing director of X Ltd proposes to construct a house for his residence on a plot of land owned by his wife, and the cost of construction will be Rs. 8 lakhs. He wants to take a loan of Rs. 8 lakhs from the company. Advise him.

This is an oft-repeated and direct question. Scoring high marks in this should not have been a problem. The student should learn to identify such questions and be equipped to answer them comprehensively -- by quoting the relevant case laws, circular n umbers, date, and so on.

The provisions of Sec. 295 of the Companies Act cover grant of loan to a managing director. The section also applies to the grant of housing loans. Earlier, there were detailed guidelines as to the amount and terms on which house-building loans may be gi ven to the managing/whole-time directors. However (vide Press Note No. 4/93 dated August 20, 1993), the DCA has clarified that the companies can give house-building loans to the managing directors on such terms and conditions as are applicable to its off icers/employees.

The approval of the Central Government would be required in case the company has no scheme for grant of house-building advances to its employees or where the terms and conditions of the loans proposed to be made to the managing directors are not within t he framework of the scheme applicable to the employees.

6(b) Draft a resolution to be passed at a general meeting for the appointment of sole selling agents. (8 marks)

Nature of resolution: Ordinary

Draft resolution: ``RESOLVED THAT in accordance with the provisions of Section 294 and other applicable provisions, if any, of the Companies Act, 1956, the company hereby approves of and consents to the appointment of XY & Co., as selling agent of the co mpany for the sale of all the products of the company in the territory of Chennai for the period ending March 31, 2003, from April 1, 2000, on the terms and conditions contained in the draft agreement produced before the meeting and signed by the chairma n for identification, the material term of which is as under:

```The company is to pay commission to the selling agent at the rate of 3 per cent on the net value of sales, that is, ex-mill value, exclusive of duties or charges on the goods sold by them to the dealers in their territory'.''

Note: In this case, the details of the paid-up capital of the company and interest of the appointee in the company has not been mentioned. Hence, the students may give a note to this effect. Alternatively, it would be advisable to mention that the above resolution should be passed as a special resolution where the paid-up capital of the company is Rs. 50 lakhs or more and the resolution may be modified to include the aspect of Central Government's approval if the proposed appointee has substantial inter est in the company.

7) State the procedure to be followed in the case of reconstruction or amalgamation by transfer of undertaking. Can the transferor and the transferee company having registered office in the same State move a single petition? (16 marks)

The procedure for amalgamation or reconstruction by transfer of undertakings is specified under Sections 391 to 394 of the Companies Act, 1956. The court has been given wide powers in the sanctioning of the scheme. The procedure to be followed in the cas e of reconstruction or amalgamation by transfer of undertaking has been covered in detail by the study material of the Institute. However, here is a brief summary of the procedure:

a) Approval of the members should be obtained for the amalgamation;

b) The transferor and transferee companies, in accordance with the scheme of amalgamation, should enter into an agreement;

c) Petition has to be made to the court for the sanction of the scheme;

d) The companies should fulfil the necessary formalities, such as making of the public advertisement before making a petition for sanction of the scheme;

e) The court would consider the objections to the scheme and make its order;

f) A certified copy of the order should be filed within 30 days of making of the order with the RoC; and

g) The companies my give effect to the order thereafter.

As regards the question whether the transferor and transferee company having registered office in the same State can move a single petition, the answer would be in the affirmative, provided the other party has been made a party to the petition. In other words, both the transferor and transferee companies should be parties to the petition (W. A. Beardsell and Co. Ltd and Mettur Industries Ltd/DCA Circular No.: 14 of 73 dated June 5, 1973).

8) Decide the following in the light of relevant provisions of the Companies Act, 1956 and decided cases, if any: (4 marks each)

It has been long since questions from the winding-up chapter, and that too for 16 marks, have been asked. The question tests knowledge in the practical application of the provisions relating to winding up of a company. Many of the students might have fou nd it difficult to tackle the question.

8(i) A company had two dominant groups of shareholders. Some of the shareholders of one such group, which controlled the company till the recent past, made a petition to the court under Section 433(f) of the Companies Act citing instances of deadlock in the management. Two of the petitioners were facing charges for financial irregularities when the petition was made.

Under Section 433(f), the court may wind up a company if it is of the opinion that it is just and equitable that the company should be wound up. Order for winding up would be passed if there exists a deadlock in the management of the Company (Anglo Conti nental Produce Co Ltd). However, mere factions among the shareholders cannot form ground for passing a winding-up order.

If the case given has a total deadlock of management, then orders for winding up my be passed by the court. The fact that two of the petitioners were facing charges for financial irregularities when the petition was made, would not affect the validity of the petition made.

8(ii) The official liquidator published an announcement in a local newspaper inviting offers to take over the leasehold premises of the company under winding up on a care-taker basis. The lessor of the premises brought a suit claiming that the action of the official liquidator in seeking to handover the premises should be restored to him, as it is apparent that the company concerned does not need the premises. There was some period left for the existing lease to expire.

In the process of winding up of a company, the liquidator appointed has the powers to dispose of the assets with the sanction of the court under Section 457 of the Companies Act or without sanction of the court under Section 458. In any case, he is bound by the contracts and agreement validly entered into by the company before the winding up had commenced.

In the present case, the liquidator has to act in accordance with the terms of the lease agreement entered into with the lessor. In case he decides to dispose of the property before the lease terms expire, he still has to go by the terms of the lease agr eement for the termination of the same. His action of publishing an announcement in a local newspaper inviting offers to take over the leasehold premises of the company on a care-taker basis may not be tenable if there is no express power to this effect in the lease agreement with the original lessor.

8(iii) An ex-employee of a company filed a petition under Section 433(e) of the Companies Act stating that the company has failed to pay him the salary remaining outstanding at the time of his retirement.

Under Section 433(e), the court may wind up a company if it is unable to pay its debts. A debt must be a determined or definite sum of money payable immediately or at a future date. In Pawan Kumar vs Kaushal Leather Board Ltd it was held that a petition filed by an employee on account of non-payment of salary was held to be not maintainable. However, in the present case, the employment has terminated and the person concerned is filing the petition for non-payment of his retirement dues. If the said outs tanding is a determined sum of money not of a character which has to be ascertained, the amount due becomes a debt and consequently, the petition under Section 433(1)(e) would be maintainable.

8(iv) A company agreed to pay off its creditors in easy instalments. In spite of the facility, the company failed to make any payment. When faced with winding up petition for inability to pay its debts, the company contends that it is commercially solven t and that the winding up order cannot be passed.

A company is considered commercially insolvent when it is unable to meet its current demands and when its existing and probable assets would not suffice to meet future demands. The courts have, at the request of the company, in various suits for winding up on the ground of inability to pay debts, allowed the amounts to be paid in instalments (in ITC Ltd vs Fomento Hotels and Resort Ltd, for instance).

However, in the present case, the company had agreed to pay the amounts in instalments and had subsequently defaulted on the payment of the same. In these circumstances, the company may be considered to be commercially insolvent. The contention of the co mpany that it is commercially solvent is not tenable.

(Concluded)