The Hindu Business Line : Make place for Master Balak on the board

Section 274 deals with disqualification of directors. Section 274(2) permits a private company to provide that a person shall be disqualified for appointment as a director on any grounds in addition to those specified in sub-section (1). In the case of a minor, though there is no provision in the Act expressly disqualifying him, as he is not competent to contract, he cannot file either with the company or with the Registrar any valid consent to act as director as required by Section 264.

But Section 264 applies only to public companies and private companies which are their subsidiaries; there is nothing prohibiting a director of other private companies in the absence of any contrary provision in the Articles.

Therefore, Mr Balak may be appointed as a director of MRN (P) Ltd.

Debts or not

STATE, with reasons, whether the following are `debts' for the purpose of Section 433(e) of the Companies Act, 1956: i) contingent or conditional liability; ii) non-payment of dividend declared; iii) non-payment of salary to an employee; iv) non-payment to a creditor of a disputed liability.

Section 433 of the Companies Act, 1956 provides for the circumstances in which the company may be wound up by the court. Clause (e) of Section 433 provides that the court may wind up a company if it is unable to pay its debts.

Contingent or conditional liability: It is not a debt unless the contingency or the condition has already happened or have been satisfied and debt crystallised. So long as the matter remains contingent or its crystallisation depends on fulfilment of a condition and such condition has not been satisfied, it is not a debt under Section 433(e).

Non-payment of dividend declared: Dividend once declared at the annual general meeting of the company, becomes a debt and it is to be paid in the manner laid down in the Companies Act (Hari Prasad vs Amalgamated Commercial Traders (P) Ltd — 1964 34 Com. Case. 209 Madras). Hence, non-payment of dividend, declared is a debt under Section 433(e).

Non-payment of salary to an employee: The High Court of Madhya Pradesh held that this is not debt. The court observed that there is a difference between `debt' and `salary'. The `salary' is a remuneration paid to a person or an employee in lieu of services rendered by him, whereas a `debt' is not remuneration.

`Debt' is something which is borrowed by a person on settled terms and conditions and rates of interest, and can be resettled between the parties (Pawan Kr. Khullar vs Kaushal Leather Board Ltd — AIR (1996) MP 85 The Chartered Accountant, March, 1997). However, the Andhra Pradesh High Court held that `unpaid salary' of an employee is also a debt. In Capt. B. S. Damagry vs VIF Airway Ltd (1998 16 SCL 349 (AP), the court observed that the `unpaid salary' of an employee is liable to be recovered from the employer, because the employer is obliged to pay it to the employee for the services rendered by him.

Debt is a sum which is to be recovered from a person who is obliged to pay the same and, therefore, no line of demarcation can be drawn between a `remuneration due to the recovered' and a `sum which is to be recovered' because a person is to pay for the price of the goods/service which has been purchased by him on credit. Therefore, unpaid `salary' is also a debt.

In the Indo French Time Industries Ltd (2002 35 SCL 592) case, the Bombay High Court held that an employee who has not been paid his legal or statutory dues cannot be considered as a creditor under company law. The court further observed that in view of the above and in the presence of expeditious and special remedy provided by various labour laws, it would be absolutely unreasonable to allow an unpaid employee/labour union to present a petition for winding-up of a company.

Non-payment to a creditor of a disputed liability: The Supreme Court, in Madhusudan Goverdhandas and Co. vs Madhuwoolen Industries (P) Ltd (1972 42 Comp. Cases 125), held that where the petition for the winding up of the company is based on the ground of the inability of the company to pay its debts, if the debt is bona fide disputed and the defence is a substantial one, the court will not order winding up. Hence, it is not a debt under Section 433(e).

O&M

A GROUP of shareholders consisting of 25 members decides to file a petition before the Company Law Board for relief against oppression and mismanagement (O&M) by the board of directors of Fly By Night Operators Ltd. The company has a total of 300 members and the group of 25 members holds one-tenth of the total paid-up share capital accounting for one-fifteenth of the issued share capital.

The main grievance of the group is that owing to mismanagement by the board, the company is incurring losses and the company has not declared any dividends even when profits were available in the past years for declaration of dividend. Advise the group of shareholders regarding the success of i) getting the petition admitted; and ii) obtaining relief from the CLB.

Section 399 of the Companies Act provides for the right to apply to the CLB for relief against O&M. This right is available only when the petitioners hold the prescribed limit of shares as indicated:

i) In the case of a company having a share capital, not less than 100 members of the company or not less than the one-tenth of the total number of its members, whichever is less or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant(s) have paid all calls and other dues on the shares.

ii) In the case of a company not having share capital not less than one-fifth of the total number of its members.

Since the group of shareholders do not have number 100 or hold one-tenth of the issued share capital or one-tenth of the total number of members, they have no right to approach the CLB for relief.

However, the Central Government, if it is of the view that circumstances exist which make it just and equitable so to do, may authorise any member(s) to apply to the CLB [Section 399 (4)].

So, members may approach the Central Government to authorise them to approach the CLB in spite of deficiency in numbers.

iii) As regards obtaining relief from CLB, continuous losses cannot, by itself, be regarded as oppression (Ashok Betelnut Co. (P) Ltd vs M. K. Chandrakanth).

Similarly, failure to declare dividends or payments of low dividends also does not amount to oppression (Thomas Vekkon vs Kuttanand Rubber Co. Ltd.). Thus, the shareholders may not succeed in getting any relief from the CLB.

Home loan to director

ADVANCE of a loan of Rs 5 lakh to the managing director by the company for building his own residential house.

A public limited company is prohibited by Section 295 of the Companies Act, 1956 from giving loan or giving any guarantee or providing any security in connection with a loan made by any other person to its directors without obtaining prior approval of the Central Government.

However, the Department of Company Affairs has clarified that public limited companies may give house building loans to their directors, including managing directors/whole-time directors without obtaining prior approval of the Central Government, provided such loans are given on such terms and conditions as are applicable to the company's other officers and employees.

Therefore, in the given case, the company may give to its Managing Director an advance of Rs 5 lakh as loan for building his own residential house provided the company has a scheme for giving house building loans to its officers and employees.

However, if the company has no such scheme for its employees, it will have to secure prior approval of the Central Government under the said section for giving the proposed advance as house building loan to its managing director.

No approval required

NO PERMISSION of the Central Government shall be required if the remuneration drawn from one or more companies is within the ceiling of Schedule XIII, and not as mentioned in the article `They want your MD as their MD as well', which appeared in these columns (Business Line, April 12, 2004).

(Concluded)

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

The second part of the article appeared on April 12, 2004.

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