The Hindu Business Line : Balanced, wide and well-mixed

Explain the action that SEBI can take against the stockbroker under the provisions of the Securities and Exchange Board of India Act, 1992 and the factors that will be taken into account while taking such action. (8 marks)

The question could be answered by simply recollecting the provisions of Sections 15F and 15J of the SEBI Act. The reason behind testing this area may be the recent amendment resulting in enhancement of the penalty.

Dividend out of capital

WHAT is the liability of an auditor for failure to point out in his report that dividend is paid out of capital? (7 marks)

This is a straight question on auditor's liability. It would have been better if this question featured in an auditing paper.

Auditor debtor

CAN an auditor be disqualified for indebtedness in the following cases? a) Where he is recovering his fees on a progressive basis even though the job is not complete; b) Where the auditor's firm has purchased goods from the auditee company and not paid for them for over six months.

The ICAI has opined (compendium of guidance notes) that an auditor cannot be said to be indebted to the company within the meaning of Section 226(3)(d), where he is recovering his fees on a progressive basis even though the job is not complete. When the firm is indebted to the company, each and every partner of the firm also is deemed to have been indebted, and the vice versa is also true.

AS miss

THE profit and loss (P&L) account and balance-sheet of a listed company have not been prepared in accordance with some of the applicable accounting standards. Examine the responsibility of the directors and auditors in this regard under the Companies Act, 1956. (8 marks)

If a company has not complied with accounting standards in preparation of its financial statements, then Section 227(3)(d) requires the auditor to disclose such non-compliance in his report.

Section 217(2AA) requires the BOD to state such non-compliance in the director's responsibility statement.

Section 211(3B) requires disclosure of the fact of deviation from the standards, the reasons and the financial effect of such deviation in the financial statements.

Foreign cos

EXAMINE with reference to the provisions of the Companies Act, 1956 whether the following companies can be treated as foreign companies: (7 marks)

i) A company incorporated outside India having a share registration office at Mumbai.

Section 591 defines foreign company as one incorporated outside India and having a place of business in India. As per Section 602, the term place of business includes even a share transfer or share registration office. Thus the company in question is a foreign company as per Section 591.

ii) Indian citizens incorporated a company in Singapore for carrying on business there.

The company referred to in the question is not a foreign company, as it is not having a place of business in India.

Last dues

XYZ Ltd is being wound up by the court. The official liquidator, after realisation of the assets, has Rs 56,00,000 at his disposal towards payment of creditors of the company. Details of creditors are as follows: i) dues to secured creditors, Rs 40,00,000; ii) dues to workers, Rs 30,00,000; iii) taxes and duties payable to Government authorities, Rs 4,00,000; iv) unsecured creditors, Rs 80,00,000.

Since the available amount is insufficient to meet the claims of all the creditors, explain the procedure to be followed for payment of dues as provided in the Companies Act, 1956, assuming that the company has created a charge on all the assets of the company in favour of the secured creditors. (8 marks)

The security of every secured creditor shall be deemed to be subject to pari passu charge in favour of workmen to the extent of workmen's portion therein. The position is same, whether the security is realised by the secured creditor or the liquidator (Section 529).

Since all the assets are secured and the value of assets realised is less than the total amount due to the secured creditors and the workmen, there will be no amount available for distribution to the remaining two categories of creditor.

Amount payable to secured creditors = (40L/70L) x 56L = 32L

Amount payable to workmen = (30L/70L) x 56L = 24L.

Company counsel

ADVISE a company with reference to the relevant provisions of the Companies Act about sending notice of board meetings to the following directors: (7 marks)

i) Mr Rohit, a director, who intimates his inability to attend the next board meeting.

A director cannot waive his right to receive notice (Portuguese Consolidated Coffee case). Notice of board meeting should be sent even to directors who have intimated their inability to attend the meeting.

ii) Mr Bipin Ram, who has gone abroad for four months and an alternate director has been appointed in his place.

Where a director goes abroad for more than three months and an alternate director has been appointed instead under Section 313(1), to whom should the notice of board meeting be given — to the "original director" or the "alternate director"? Although there is no legal precedence in this regard, it would be a prudent practice on strictly construing Section 286 that the notice should be served to the alternate director as well as on the original director who is outside India for the time being.

iii) Mr James is a director residing abroad representing the foreign collaborator, and the Articles of Association (AoA) of the company provide for sending notice to such directors.

The Articles of the company in question requires sending notice to director residing abroad representing the foreign collaborator. Now a vital question crops up as to whether such a provision in the Articles is valid, because of the provisions of Section 286(1) which requires the service of the said notice on a director out of India at his usual address in India. Such a question is not free from doubt. In the UK, such a notice is required to be given to a director abroad only when he is within easy reach, else not.

But a moot point is whether a foreign director falls within the purview of the expression "a director other than a director for the time being in India." On a scrutiny of the Act one finds that while Section 53 provides for service of documents such as notices, and so on, on members by a company there is no such or similar section providing for services of notice on directors.

Getting well

OVERAMBITIOUS Ltd became sick. The shareholders and creditors of the company passed resolutions in meetings convened by the company approving a scheme of reconstruction of the company. The scheme provides for sale of vacant land and utilisation of the sale proceeds for payment of outstanding wages, sales tax dues and repayment of part of the loan taken from the bank. The unsecured creditors will have to forego 50 per cent of their claims against the company and receive debentures for the balance amount.

Advise the directors about the steps to be taken to give effect to the proposed scheme in spite of objections raised by a few shareholders and creditors. (8 marks)

Students are required to discuss the steps needed to give effect to the scheme of reconstruction. Such steps are laid down in Sections 391 to 393. The question is simple and there are no deceptives.

One too many

XYZ Company Ltd, in its annual general meeting (AGM), appointed all its directors by passing one single resolution. No objection was made to the resolution. Examine the validity of appointment of directors explaining the relevant provisions of the Companies Act, 1956. Will it make any difference if XYZ was a private company? (7 marks)

This question tests the knowledge of students on Section 263 of the Companies Act. Section 263 prohibits appointment of two or more directors by a single resolution and declares it to be void. Even if the resolution was unanimously passed, it will not make the appointment valid. If such appointment is to be valid, as a pre-requisite, a resolution that two or more directors could be appointed by passing a single resolution should be passed with no vote cast against it.

If the company happens to be a private limited company, Section 263 will have no application and, hence, two or more directors can be appointed by passing a single resolution.

This is a straight question which should have posed little difficulty to the students.

Sole selling agent

RAM and Co. Ltd, having a paid-up share capital of Rs 40 lakh, appointed on January 1, 1995, Lakshman and Co. Pvt Ltd as sole selling agent for five years with effect from January 1, 1995, with the approval of the company in a general meeting. The directors of Lakshman and Co. were holding 40,000 equity shares of Rs 10 each fully paid-up in Ram and Co. since December 1, 1994.

State with reasons whether the appointment is valid. Will your answer be different if Lakshman and Co. had acquired the aforesaid shares only on December 1, 1995? (8 marks)

This question is, basically, on the approvals required for appointment of sole selling agent having substantial interest in the appointing company. This requires the knowledge of Section 294AA of the Companies Act. If the sole selling agent is substantially interested, then his appointment would require the previous approval of the Central Government. If the paid-up capital of the appointing company is at least Rs 50 lakh, then the appointment should, in addition, be approved by the company through special resolution.

The question says that a body corporate is appointed as a sole selling agent. Such body corporate is said to be substantially interested if the beneficial interest held in the shares of the appointing company is at least 5 per cent of the paid-up capital or at least Rs 5 lakh, whichever is lesser.

In the present case, applying the above criteria the body corporate appointed as sole selling agent has substantial interest. But the paid-up capital of the appointing company is less than Rs 50 lakh. Hence, the appointment needs the following approvals:

Of the company in a general meeting (through an ordinary resolution); and

Previous approval of the Central Government (Section 294AA(2)).

The next issue here is whether the approval of the Central Government is necessary for the continuance of agents, even if the provisions of the said section to such appointment were not applicable at the time of appointment of the sole selling agent. In this connection it is clarified that in case the provisions of Section 294AA(2) of the Act 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 companies to comply with the said provisions for the continuance of the said appointment for the remaining duration of the current tenure but not during any extension thereof even if Section 294AA(2) became applicable after the appointment due to the selling agents acquiring substantial interest as defined in the explanation under the section (DCA circular).

Power tips

ADVISE the board of directors of a public company about their powers in respect of the following proposals explaining the relevant provisions of the Companies Act, 1956: (Marks 7)

i) Donation of Rs. 5,00,000 to a hospital established exclusively for the benefit of employees.

The board can donate any amount for charitable purpose related to the welfare of the employees (Section 293(1)(e)).

ii) Buyback of shares of the company for the first time up to 10 per cent of the paid-up equity share capital.

The board can, by a resolution at its meeting, authorise buyback of shares if the buyback does not exceed 10 per cent (paid-up capital + free reserves). Approval through special resolution passed at the general meeting is not required. The word "first time" has no legal significance. Probably, the examiner intended to confuse the students.

iii) Delegating to the managing director of the company the power to invest surplus funds of the company in the shares of some companies.

Section 292 empowers the board of a company to delegate to the MD the power to invest the surplus funds of the company. However, regard should be had to Section 372A, which requires the unanimous approval of the board at its meeting, if the ceiling contemplated in that section is exceeded. In such case, such power cannot be delegated.

(Concluded)

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