In the given problem, it is stated that the company had increased its paid-up capital to Rs 3.5 crore in April 1, 1998. It is also stated that the company had been reporting profits since its inception. This enables us to infer that the pre-issue net worth is greater than the prescribed minimum since 1998.

The catch here is the phrase "the company has not declared any dividend so far though it has made good profits from the commencement of commercial operations on January 1, 1995". What is relevant is the availability of distributable profits and not actual distribution. Thus, the second condition is also fulfilled.

Here, the issue size is also within the prescribed limit, fulfilling the last condition.

Hence, the company is eligible to make the public issue.

`Notwithstanding'

EXPLAIN the rules relating to interpretation of the terms `subject to' and `notwithstanding' used in the provisions of an Act. State the effect of the term `notwithstanding anything contained in this Act' used in Section 408 of the Companies Act empowering the Central Government to prevent oppression or mismanagement. (8 marks)

This is a simple question on interpretation of statutes requiring understanding of phrases, which are usually employed in an enactment to avoid collusion among its provisions.

Section 408 opens with the words "Notwithstanding anything contained in this Act". This is a non-obstante clause, which vests overriding powers in the Government to nominate directors to prevent oppression and mismanagement. This expression indicates that, the appointment of directors under this section is not to be controlled by the maximum number or other proportion, if any, fixed by the provisions of the Act.

A new trend with respect to interpretation of statutes has been set by not lifting questions straight from the institute study material.

Additional director

MR RAM is a director of ABC Ltd, XYZ Ltd and PQR Ltd. ABC Ltd was regular in filing annual returns, but did not file annual accounts for the year ended March 31, 2002. Further, ABC Ltd failed to pay interest on loans taken from a public financial institution from January 1, 2002, onwards and also failed to repay the matured deposits on due date from April 1, 2002, onwards.

Mr Ram is proposed to be appointed as additional director of MN Ltd on June 1, 2003. MN Ltd has sought a declaration from Mr Ram to the effect that the disqualification specified in Section 274(l)(g) of the Companies Act, 1956 is not applicable in his case. Mr Ram seeks your advice on the following: i) Whether it is in order for him to give the declaration sought by MN Ltd in view of the defaults committed by ABC Ltd; ii) Whether he can continue as a director in XYZ Ltd and PQR Ltd and also seek reappointment when he retires by rotation at the annual general meetings of respective companies to be held in September 2003.

Advise explaining the relevant provisions of the Companies Act, 1956. Would your answer be different, if Mr Ram resigned his office of director in ABC Ltd on December 31, 2002? (8 marks)

As per the facts, ABC Ltd has failed to file annual accounts relating to the preceding financial year. This does not attract Section 274(1)(g) since the default is for only one year.

However, the act of defaulting the payment of interest on loans or repayment of matured deposits, even after one year from the due date, attracts the application of Section 274(1)(g). Thus, Mr Ram is disqualified for appointment as director either in ABC Ltd, or any other public company for a period of five years.

This section speaks only about disqualification and not about vacation. Thus he will not vacate his office in the existing companies. However, he cannot be reappointed in such companies.

If he resigns from ABC Ltd on December 31, 2002, he will not be disqualified as per Section 274(1)(g). The reason is, the disqualification becomes operative only after a period of one year from the due date.

This a good question requiring an in-depth understanding and proper application of this section.

Audit committee

A PRIVATE company having a paid-up capital of Rs 6 crore has been converted into a public company. The company proposes to constitute an Audit Committee. Draft a board resolution covering the following matters taking into account the provisions of the Companies Act, if any, in this regard: i) members of the audit committee; ii) chairman of the audit committee; iii) quorum for a meeting of the audit committee; iv) any two main functions of the committee.

Every public limited company having a paid-up capital of not less than Rs 5 crore shall have an audit committee as per Section 292A of the Companies Act. Since the company in question has a paid-up capital of Rs 6 crore it shall have an audit committee. The resolution for constitution of audit committee should be drafted bearing in mind the provisions of Section 292A.

This question seeks to assess the ability of the students in drafting resolutions.

Managerial remuneration

SUPREME Technologies Ltd proposes to appoint Mr E and Mr F as whole-time directors for a period of three years with effect from June 1, 2003. The company proposes to pay a consolidated salary of Rs 80,000 per month to each of them. Mr D, the managing director of the company, has been appointed for a period of five years with effect from January 1, 2001, on a remuneration payable in the form of commission at the rate of 5 per cent of net profit subject to a minimum remuneration of Rs 80,000 per month.

The effective capital of the company at the end of the financial year ending December 31, 2002, is Rs 4.5 crore and it has been increased to Rs. 5.5 crore on April 1, 2003, by way of right issue of equity shares. The company did not repay public deposits on the date of maturity from January 1, 2003 onwards, but the default was made good on April 1, 2003.

The company seeks your advice on the steps to be taken to comply with the requirements of Section 269 read with Schedule XIII to the Companies Act, 1956 with regard to the proposed appointment of Mr E and Mr F as whole-time directors. Advise explaining the relevant provisions. (8 marks)

This is a question on managerial remuneration, requiring application of knowledge on schedule XIII. Here the information as to whether the company has adequate profits for the purpose of managerial remuneration is absent. It seems the examiner requires the students to answer the question under both the situations.

Where the company is having adequate profits, the maximum managerial remuneration permissible under schedule XIII is restricted to 10 per cent of the profits (where there are more than one managerial personnel). Since the details regarding the profit are not available, it is not possible to comment on the compliance of schedule XIII.

In case the company is not having adequate profits, schedule XIII has fixed the maximum permissible remuneration based on the effective capital of the company. But if the company had defaulted in repayment of any of its debts or debentures or interest payable there on for a continuous period of 30 days in the preceding financial year before the date of appointment of such managerial personnel, then no managerial remuneration can be paid during such inadequacy.

In the present case, the company has committed such default and, hence, no remuneration can be paid under schedule XIII.

Here, the details regarding the effective capital of the company are of no use and the intention of the examiner may be to create doubts in the minds of the students. If the terms of remuneration are not in accordance with schedule XIII, then Central Government approval will have to be obtained under Section 269.

(To be concluded)

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