The Hindu Business Line : They want your MD as their MD as well

Section 316 of the Companies Act, 1956 provides that a person who is the MD of one company can be appointed as MD of another public company or a private subsidiary company by passing a resolution at the board meeting considering the said proposal with the consent of all the directors present and entitled to vote at the meeting, provided the specific notice of the meeting and the resolution to be moved thereat has been given to all directors then in India.

In addition, it will require Central Government approval under Section 269, as such appointment will not satisfy condition (d) of Part 1 of Schedule XIII, which provides that a person may be appointed as an MD or whole-time director or manager of a company without the approval of the Central Government if certain conditions are satisfied, including condition (d) that the person to be so appointed should not already be the manager, MD or whole-time director of another company.

Procedure: Hold a board meeting by giving specific notice of item of appointment and approve the appointment with the consent of all directors of the company present and entitled to vote at that meeting and pass a resolution for the appointment.

Ensure that the provisions of Section 299 regarding disclosure of interest of directors, and so on, are duly complied with. Interested directors are not entitled to vote on the resolution.

A copy of the resolution of the board or agreement executed by the company, relating to the appointment should also be filed along with Form No. 23 with the Registrar of Companies (Section 192).

As the appointment is not in accordance with the conditions specified in Schedule XIII to the Act, make an application to the Central Government in Form 25A of the Companies (Central Government) General Rules and Forms together with the prescribed fee.

Approval of the shareholders in general meeting will also have to be obtained. In case the resolution passed is a special one, a copy thereof along with Form No. 23 shall be filed with the Registrar of Companies (RoC) together with the filing fee within 30 days.

Where application is to be made to the Central Government as aforesaid:

Give general notice to all the members indicating the nature of the application to be made to the Central Government. Publish the notice in the newspaper, at least once in the principal regional language of the district in which the registered office of the company is situated and circulating in that district and at least one in an English newspaper circulating in that district (Section 640B).

Forward three copies of the general notice published in the newspaper to the stock exchange if the shares of the company are listed on a recognised stock exchange [Standard Listing Agreement].

Make the application to the Central Government and attach along therewith a copy of the notice published as aforesaid together with other specified documents. Application is to be made in Form No. 25A.

Send a copy of the application along with all the documents to the RoC concerned [Rule 20 A of the Companies (Central Government's) General Rules and Forms, 1956].

Send an abstract of the terms of the contract to all the members within 21 days from the date of entering into the contract and a memorandum clearly specifying the interest or concern of any other director in the contract, if any.

See that the MD files his consent in writing the company to act as a director, if he was not a director earlier.

Enter the name of the appointee in the Register of Directors and file Form No. 32 in duplicate with the RoC within 30 days of the appointment [Section 303].

See that the MD notifies his appointment to other companies in which he is a director, MD, manager or secretary within 20 days.

Appointment of auditors

HOW would you deal with the appointment of auditors in the following cases:

i) The first auditor has not been appointed by the board within a month of incorporation of the company.

ii) One of the two joint auditors appointed in the last annual general meeting (AGM) resigned.

iii) One of the partners of a firm of chartered accountants appointed as auditors resigned.

iv) The aggregate shareholding of a nationalised bank, LIC and IDBI exceeded 65 per cent of the paid-up share capital of the company.

i) Section 224(5) empowers the board of a company to appoint the first auditor or auditors of the company within a month of the date of registration of the company. If the board fails to exercise its powers, proviso (b) to Section 224(5) will be attracted and the company in a general meeting may appoint the first auditor or auditors. It is not necessary to convene AGM for this purpose, the appointment may be made even in an EGM.

ii) Section 224(6)(a) empowers the board to fill any casual vacancy in the office of an auditor. But where such vacancy is caused by the resignation of an auditor, the vacancy shall be filled by the company in a general meeting. As one of the joint auditors has resigned, the casual vacancy arising out of such resignation can be filled up by the company only in a general meeting. However, the remaining auditor(s) may continue to act.

iii) Where there is a change in the constitution of a firm of chartered accountants due to the retirement or death of a partner, the remaining partners can carry on the existing audit assignments standing in the firm's name, provided that the firm continues to be in practice and the companies under audit have the knowledge of the retirement or death of a partner. The firm as such is not dissolved and after reconstitution it continues to carry on its profession in the old name. There is no casual vacancy. As such the question of appointment of new auditors does not arise.

iv) Nationalised banks, LIC and IDBI are corporations owned or controlled by the Central Government. As their combined shareholdings exceed 51 per cent of the paid-up share capital of the company, the provisions of Section 619B are attracted and the auditor will have to be appointed as if it were a government company.

In a government company, the auditor will be appointed or reappointed by the Comptroller and Auditor General (C&AG) of India. Hence, the company in this case must apply to the C&AG of India for appointment of auditors [Section 619].

Voting rights in producer company

STATE the voting rights of a member of a producer company in the following cases: i) where all its members comprise of individuals; ii) where all its members comprise of producer institutions only; and iii) where members comprise a mix of individuals and producer institutions.

Where the membership consists solely of individual members, the voting rights shall be based on a single vote for every member, irrespective of his shareholding or patronage of the producer company.

In a case the membership consists of producer institutions only, the voting rights of such institutions shall be determined on the basis of their participation in the business of the producer company in the previous year, as may be specified by Articles. However, during the first year of registration of a producer company, the voting rights shall be determined on the basis of the shareholding by such producer institutions.

Where members of producer companies a mix of individuals and producer institutions, voting rights shall be as in above.

Foreign co accounts

WHAT obligations are cast upon a foreign company with respect to its accounts: i) relating to its business in India; ii) relating to its business world wide? Can these accounts be inspected by any person in India?

Three copies of balance sheet and profit and loss account of Indian business accounts of a foreign company duly audited by a practicing chartered accountant in India, in the form prescribed in Schedule VI shall be filed with the Registrar within nine months of the close of the financial year (Section 594). The aforesaid accounts have to be filed with the principal registrar (that is, the RoC, New Delhi) and the Registrar concerned having jurisdiction over the principal place of business of the foreign company (Section 597).

The RoC at New Delhi may extend the period for filing audited account up to three months. Indian accounts have to be drawn up in Indian rupees.

Position regarding world accounts: Three copies of balance-sheet and profit and loss account, including documents relating to every subsidiary of the foreign company, as submitted by it to the prescribed authority in the country of its incorporation under the provisions of the law in that country, shall be filed with the Registrar of the State concerned and also with the Registrar at New Delhi.

World accounts shall be delivered to these Registrars within nine months from the close of the financial year of the foreign company. The Registrar at New Delhi, may, however, extend this period by three months (Rule 18A of the Companies (Central Government's) General Rules and Forms, 1956).

Inspection of accounts of a foreign company: The P&L account of Indian business of a foreign company which, if incorporated under this Act, would be deemed to be that of a private company shall not be open to inspection by any person other than a member of the company.

Interested MD

EXCELLENT Industries Ltd is a multi-product company with a paid-up capital of Rs 4 crore. A contract for the purchase of textile machinery and balancing equipment valued at Rs 1 crore was placed before the board for approval. The managing director of the company is interested in this contract because his son-in-law is a partner of the firm selling the machinery and the equipment to the company. Explain briefly the procedure to be followed by the company to enter into the said contract.

Since the MD of Excellent Industries is interested in the contract for the purpose of textile machinery, and so on, the same should be approved by the board of directors at the meeting. It cannot be approved through resolution passed by circulation (Section 297).

The company should also obtain Central Government approval since its paid-up capital is more than Rs 1 crore. For this, the following steps need to be taken:

Hold a board meeting and place the terms of the contract for consideration. The MD should disclose nature of his interest as required under Section 299.

The MD should neither take part in the discussion nor vote in respect of the said contract. His presence will also be not counted for the purpose of quorum (Sections 300 and 303 of the Companies Act).

The consent of the board must be accorded by way of a resolution passed at the meeting of the board.

The particulars of the contract must be entered in the register maintained under Section 301, which should be made available for inspection.

An application to the Central Government should be made in Form 24A by enclosing a) certified copy of the board resolution approving the contract; b) certified copy of the agreement containing the particulars of the contract; and c) bank draft/challan evidencing the payment of prescribed fee.

(To be concluded)

(Suggested answers to a model paper on corporate laws for CA (Final))

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