The Hindu Business Line : Bigfish on the prowl in Badwill Co

A GROUP of shareholders of Badwill Machineries Ltd filed an application before the Company Law Board (CLB) alleging various acts of fraud and mismanagement by Mr Bigfish, the managing director of his associates. During the course of hearing before the CLB, the authorised representative of the said company contended that the alleged transactions had taken place seven years ago and the company has already removed the Managing Director, who was responsible for such transactions and, hence, there is no case before the CLB to interfere in the working of the company.

Against the submissions on behalf of the company, the applicants submitted that although the fraudulent transactions were done in past and the Managing Director has been removed, but the company is still controlled by the persons, who are in league with the erstwhile Managing Director and are working as his henchmen.

State the merits of the applicants' arguments and the powers of the CLB.

(8 marks)

The CLB's powers under Section 402 are very wide, any directions for the administration and management can be given.

In Shoe Specialities Ltd vs Standard Distilleries & Breweries (P) Ltd & Others (reported in Chartered Accountant, March 1997), it was held that when a case of oppression is made out, it is within the powers of CLB to end the matter and make such orders as it thinks fit. While considering to end the matters complained of and when given the power to make any such order as it thinks fit to rectify the same, the CLB is empowered to remove the Board of directors so that the affairs of the company could be set right.

Heading and title

EXPLAIN the usefulness of `Heading and title' of a chapter in an Act and `marginal notes of a Section' as internal aids in interpreting the provisions of a statute. (4 marks)

It is a simple, straightforward question. `Heading and title' to a section serve the same purpose while interpreting that section, which preface serves to the whole Act. `Marginal notes', except in case of the Constitution of India, do not form part of the statute and should, therefore, be ignored.

Inter-corporate loan

ABC Forgings Ltd proposes to make a loan of Rs 5 lakh to PQR Ltd, a company in which two directors of ABC hold 30 per cent of the total equity share capital. The proposed loan together with the inter-corporate loans and investments already made do not exceed 60 per cent of paid-up share capital and 100 per cent of free reserves in ABC. (4 marks)

As per Section 372A, as the loan is within the prescribed ceilings, the only requirement shall be passing of a resolution at a meeting of the board of directors with the consent of all the directors present. However, if there has been a default in the repayment of the loan or interest to a public financial institution, prior approval of such financial institution should also be obtained, if the default is still subsisting.

Again, Section 295 also gets attracted here inasmuch as the directors of ABC Forgings hold 30 per cent of equity share capital of PQR Ltd. As per Section 295(1)(d), no loan can be given by a company without the approval of the Central Government to any body corporate at a general meeting of which not less than 25 per cent of the total voting power may be exercised or controlled by any director of the lending company, or by two or more such directors together.

Thus, Central Government approval is necessary in this case as well.

Accept or reject

PMC is director in 14 public limited companies as on July 30, 2003. He continues to be so till September 24, 2003. The following companies appointed PMC as a director at their respective annual general meetings (AGMs) held on dates mentioned against their names.

i) PQR Ltd (AGM held on September 29, 2003);

ii) BCD Private Ltd (September 25, 2003);

iii) City Traders Association (a company registered under Section 25 of the Companies Act, 1956 — AGM on September 26, 2003);

iv) TSP Ltd (September 25, 2003).

State with reference to the relevant provisions of the Companies Act, 1956 the options available to PMC in respect of accepting or not accepting the appointment of director of the above companies. (8 marks)

As per Section 277(2), where a person already holding the office of director in 14 companies or less is appointed, after the commencement of the Companies (Amendment) Act, 2000 as a director of other companies, making the total number of his directorships more than 15, he shall choose the directorships which he wishes to continue to hold or to accept, so, however, that the total number of the directorships, old and new, held by him shall not exceed 15.

None of the new appointments of director shall take effect until such choice is made; and all the new appointments shall become void if the choice is not made within 15 days of the day on which the last of them was made.

However, as per Section 278, directorships in certain companies shall not be included for the purposes of Section 277. These, inter alia, include directorship in private company and Section 25 company.

Accordingly, on September 25, 2003, appointment in TSP Ltd alone shall be added to the directorship of PMC, thus raising his total directorships to 15. Thus, the case shall be covered under Section 277(1) and not under Section 277(2). As per Section 277(1), he should make a choice of 15 companies within 15 days in the present case, from September 29, 2003.

To pay or not to pay

EXAMINE whether the payment of following remuneration to non-executive directors (directors who are neither in the whole-time employment of the company nor managing director) is in accordance with the provisions of the Companies Act, 1956: (7 marks)

i) Sitting fee payable to directors is increased from Rs 3,000 to Rs 6,000 per meeting by amending the articles of association.

Not valid, since the sitting fee cannot exceed Rs 5,000. (Candidates should, however, note that w.e.f. July 24, 2003, maximum sitting fee that may be paid has been raised to Rs 20,000 in case of companies having a paid up share capital and free reserves of Rs 10 crore and above or turnover of Rs 50 crore and above. Other companies can pay up to Rs 10,000.]

ii) Commission payable to non-executive directors is calculated on the basis of book profits arrived at after providing for depreciation as per the straight-line method.

As per Section 309, which provides for remunerating the non-executive directors by way of commission, profits have to be calculated as per Section 198(1) which in turn requires profits to be arrived at as per Sections 349 and 350.

Section 350 requires depreciation to be calculated based on either the written-down value (WDV) or straight-line methods. Thus, the payment is in order.

iii) Guarantee commission has been paid to one of the non-executive directors for having guaranteed the term loans obtained from a financial institution.

Guarantee commission paid to a director is not part of remuneration since there is independent consideration to support and is allowed (Suessen Textile Bearings Ltd vs UOI 1984).

Merger worries

ABC Company Ltd was amalgamated with and merged in XYZ Company Ltd. Some workers of ABC refuse to join as workers of XYZ and claim compensation for premature termination of service. XYZ resists the claim on the ground that their services are transferred to XYZ by the order of amalgamation and merger and, therefore, the workers must join service of XYZ and cannot claim any compensation. Examine whether the workers' contention is correct. [8 marks]

An order under Section 394 does not transfer automatically a contract of personal services which are in their nature incapable of being transferred (previously existing between an individual and the transferor company) to the transferee company (Noxes vs Dancaster Amalgamated Collieries Ltd., 1940 3 All. ER. 549 HL).

Thus, the workers cannot be compelled to join XYZ and shall be entitled to receive compensation.

Director A

THE board of directors of XYZ Ltd appointed Mr A as a director in the casual vacancy caused by the resignation of Mr X. Mr A is proposed to be reappointed as a director at the annual general meeting, when he vacates his office.

Examine with reference to the relevant provisions of the Companies Act whether Mr A can be considered as a `retiring director' and state the legal requirements to be fulfilled to give effect to the proposed appointment of Mr A as a director at the annual general meeting. [7 marks]

Section 257 procedure is required to be followed. Mr A shall, however, not be required to file his consent with the RoC under Section 264 because of the exemption available to such appointee.

Producer procedure

AN EXISTING society seeks your advice as to its eligibility to be registered as a `producer company' under the Companies Act, 1956 and the procedure to be followed for such registration. Advise explaining the relevant provisions of the Companies Act, 1956. [8 marks]

Candidates are expected to write in brief the provisions of Sections 581J to 581N introduced by the Companies (Amendment) Act, 2002.

Loaded accountant

THE board of directors of a company proposes to charge the chief accountant of the company with the duty of ensuring compliance with the Companies Act, 1956 relating to maintenance of proper books of account and preparation of balance-sheet and profit and loss account in accordance with the law (Draft a Board Resolution for this purpose).

What are the consequences in case of default, when such a resolution is passed? Is it possible for the board of directors to pass such a resolution, when the company is managed by the managing director? (7 marks)

The question requires i) board's resolution; ii) consequences in case of default, if the resolution in question is passed; and iii) the authority of the board of directors to pass such a resolution. If such a resolution is passed, the chief accountant shall be liable as an officer-in-default as per Section 5 of the Companies Act, 1956. However, directors cannot escape liability. Again, the board shall be empowered to pass such a resolution if the company is being managed by managing director, a managing director enjoys only delegated authority from the board of directors.

21-month year

S LTD is a subsidiary company of H Ltd. The financial year of H Ltd is from April 1 to March 31, whereas the financial year of S Ltd is July 1 to June 30 every year. This is now causing difficulties particularly in view of the requirement of reporting and circulating the consolidated annual accounts as required by Accounting Standard AS-21.

The board of directors of H Ltd decides that the accounting year of S Ltd for the year July 1, 2002 to June 30, 2003, be extended from the current 12 months to 21 months, that is, July 1, 2002 to March 31, 2004, so that the financial years of the holding company and the subsidiary company end on the same date.

State the provisions of the Companies Act, 1956 in this respect and mention the steps to be taken in this regard. (7 marks)

As per Section 210(4), the financial year of a company shall not exceed 15 months. The RoC may, under special circumstances, extend it to 18 months.

However, Section 213(1) empowers the Central Government to extend the financial year of a subsidiary company to any period with a view to enable it to synchronise its financial year with that of the holding company.

An order for extension of the financial year of the holding company or its subsidiary(ies) can be passed by the Central Government on an application made to it by the company or with the consent of the board of directors of the company whose financial year is to be extended.

No form of application has been prescribed for this purpose and the application may be made in the form of a letter to the Central Government, which, however, should be accompanied by requisite fee as laid down in the Companies (Fees on Applications) Rules, 1968, as amended.

Co governance

WHAT is meant by `corporate governance'? Explain how the provisions of the Companies Act relating to audit committee will help in achieving some of the objectives of `corporate governance'. (8 marks)

The provisions of Section 292A are to be narrated in an analytical manner, stating as to how these provisions help achieve transparency and protect the interests of members, creditors and others dealing with the company.

(Suggested answers to the November 2003 CA (Final) paper on corporate laws and secretarial practice.)

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