ii) In Parween Woodcraft Co. Ltd, Mr James was named in the list of first directors. He, however, died before he could assume office. How can the problem regarding the appointment of a director be solved in this case? [CA Final) Nov. 1998]

As per Section 262, the vacancy in question is not casual and cannot, therefore, be filled by the board.

Accordingly, it will be necessary for the subscribers to the memorandum (who will then be only members) to convene a meeting for the appointment of the director.

To the extent to which the articles do not make any other provision in this behalf subscribers who would be entitled to requisition a meeting may call the meeting.

A meeting is not necessary if all the subscribers concur in the appointment.

Sole-selling agents

Ram and Co. Ltd, having a paid-up share capital of Rs 40 lakh, appointed on January 1, 1999, Lakshman & Co. Pvt Ltd as a sole selling agent for five years with effect from January 1, 1999, with the approval of the company in a general meeting.

The directors of Lakshman & Co. were holding 40,000 equity shares of Rs 10 each fully paid-up in Ram & Co. Ltd since December 1, 1998. State with reasons whether the appointment is valid. Will your answer be different if Lakshman & Co. acquired the aforesaid shares only on December 1, 1999. [CA (Final) May 1989]

Under Section 294-AA, no company can, except with the prior approval of the Central Government, appoint any individual, firm or body corporate, who or which has a substantial interest in the company as sole selling agent of that company.

A person holding paid-up capital exceeding Rs 5 lakh or 5 per cent of the paid-up capital of the company, whichever is less, is deemed to have substantial interest in that body corporate (Explanation to Section 294-AA).

Thus, Ram & Co. should have obtained prior approval of the Central Government for appointing Lakshman & Co. as a sole selling agent, as the latter holds 10 per cent of the paid-up capital of the former company. The appointment is accordingly not valid.

The situation would have been different if the shares were acquired by Lakshman & Co. on December 1, 1999. According to a clarification issued by the DCA, if the provisions of Section 294-AA(2) are not attracted to the appointment of sole selling agents at the time of entering of agreement with them, it will not be obligatory on the company to comply with the said provisions for continuance of said appointment for the remaining duration of the current tenure, even if the provisions of Sections 294-AA(2) become applicable after the appointment due to the sole selling agent acquiring substantial interest.

Hence, Lakshman & Co. can continue as sole selling agents for a period of five years, that is, up to December 31, 2003, if it acquired the shares only on December 1, 1999, that is, after its appointment on January 1, 1999.

Accounts and audit accounts

Take It Easy Holdings Ltd. has filed the annual accounts for the year ended March 31, 1998, with the Registrar of Companies, Kolkata.

The Registrar, after examination of the accounts, issued a show-cause notice to the company and its directors as to why prosecution proceedings should not be launched for not disclosing the true and fair view of the state of affairs of the company.

After careful examination you find that the Registrar is justified in issuing the show-cause notice.

Advise as to how the company and its directors can save themselves from the prosecution proceedings under the provisions of the Companies Act. [CA (Final), May 1999]

According to Section 621A of the Companies Act, 1956, notwithstanding anything contained in the Code of Criminal Procedure, 1973, any offence punishable under the Act not being an offence punishable with imprisonment only or with imprisonment and also with fine, may be compounded by the CLB or the regional director on payment of such compounding fees as may be specified in the order.

Further, the compounding fee in any case cannot exceed the maximum amount of fine fixed for such offence under the Act. In case the final amount fixed in the Act is more than Rs 50,000 (as per the Companies (Amendment) Act, 2000), then the compounding will be done by the CLB and in case it is Rs 50,000 or less the regional director will be the authority for compounding the matter (with the court's approval).

In the instant case, the offence relates to non-disclosure of true and fair view of the state of affairs as provided in Section 211(1) of the Act.

According to Section 211(8), the default carries a fine of Rs 10,000 or imprisonment for a period of six months or both.

Thus, the offence under Section 211 can be compounded by the regional director with the court's approval under Section 621A(7)(a).

The compounding authority has the power to give necessary directions to make good the default while passing the compounding order and levying the compounding fee.

(Edited extracts from Lectures on Corporate Laws and Secretarial Practice. Book courtesy: Vidya Sadan, New Delhi.)

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