BLS LLB 5 Years Sem 7 Company Law 2022-23 Question Paper with Solutions

Under section 10A of the Companies Act, 2013, a company incorporated on or after 2 November 2018 and having a share capital shall not commence any business or exercise any borrowing powers unless:

1. A director files a declaration within one hundred and eighty days of the date of incorporation, in Form INC-20A, verified as prescribed, that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of the declaration; and
2. The company has filed with the Registrar a verification of its registered office as provided in section 12(2).

Under section 272(1) of the Companies Act, 2013, a petition for winding up by the Tribunal may be presented by:

1. The company itself;
2. Any contributory or contributories;
3. The Registrar;
4. Any person authorised by the Central Government in that behalf; and
5. The Central Government or a State Government, in a case falling under section 271(b), that is, where the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality.

An offer for sale is a method of marketing securities in which a company allots or agrees to allot its securities to an issuing house or intermediary, which then offers them for sale to the public at a price.

Section 25 of the Companies Act, 2013 provides that where a company allots or agrees to allot securities with a view to their being offered for sale to the public, the document by which the offer for sale is made shall be deemed to be a prospectus issued by the company, and all the provisions of the Act as to the contents of a prospectus and as to liability for misstatements apply.

Under section 177(1) of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014, an Audit Committee of the Board must be constituted by:

1. Every listed public company; and
2. Every other public company having:
3. A paid-up share capital of ten crore rupees or more; or
4. A turnover of one hundred crore rupees or more; or
5. Aggregate outstanding loans, borrowings, debentures or deposits exceeding fifty crore rupees.

Under section 135(1) of the Companies Act, 2013, every company having, during the immediately preceding financial year:

1. A net worth of five hundred crore rupees or more; or
2. A turnover of one thousand crore rupees or more; or
3. A net profit of five crore rupees or more,

must constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, of whom at least one shall be an independent director.

For full marks, cover: the definition, the CAG audit, the Government's powers, the annual report to Parliament, and the position on fundamental rights and writs.

Section 2(45) of the Companies Act, 2013 defines a Government company as any company in which not less than fifty one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.

Its features:

1. It is a company registered under the Companies Act like any other, with its own memorandum and articles, and it is not a department of Government. It is a separate legal person, and its employees are not civil servants;
2. The majority holding may be by the Centre, by a State, by several States, or by a combination;
3. A subsidiary of a Government company is itself a Government company, even though the Government's direct holding in it may be nil.

Annual report to Parliament, section 394. Where the Central Government is a member, the annual report on the working and affairs of the company must be prepared within three months of the annual general meeting and laid before both Houses of Parliament, together with a copy of the audit report and the CAG's comments. Section 395 makes the corresponding provision for a State Government and the State legislature.

Government's powers, section 462. The Central Government may, in the public interest, exempt a class of companies from any of the provisions of the Act by notification, and Government companies have been given a number of such exemptions, for example from section 149(1) on the maximum number of directors, from the requirement of a declaration by a first-time director, and from certain provisions on the appointment and remuneration of managerial personnel.

For full marks, cover: the definition, fixed and floating with the distinction, crystallisation, registration under section 77 and the consequence of non-registration.

Section 2(16) defines a charge as an interest or lien created on the property or assets of a company or any of its undertakings, or both, as security, and includes a mortgage.

There are two kinds.

1. Fixed or specific charge

A charge on specific, identified and ascertained property, such as land, a building or a particular machine. It attaches to that property at the moment it is created, and the company cannot sell or dispose of the property free of the charge without the consent of the charge-holder.

2. Floating charge

A charge on a class of assets, present and future, which in the ordinary course of business changes from time to time, such as stock in trade, book debts or raw materials. Until it crystallises, the company remains free to deal with the assets in the ordinary course of business.

Crystallisation

A floating charge becomes fixed on:

1. The winding up of the company;
2. The appointment of a receiver;
3. The company ceasing to carry on business or ceasing to be a going concern; or
4. The happening of any event specified in the deed as causing crystallisation, which is why modern debentures contain automatic crystallisation clauses.

Registration, sections 77 to 87

Every charge created by a company on its property or assets, whether tangible or otherwise, situated in or outside India, must be registered with the Registrar within thirty days of its creation, in Form CHG-1 or, for debentures, CHG-9, signed by the company and the charge-holder.

The Registrar may allow registration within a further period of sixty days on payment of additional fees, and thereafter a further sixty days with ad valorem fees, for charges created before the 2019 amendment; for charges created after it, the outer limit is sixty days plus sixty days.

Conclusion. Charges are of two kinds, fixed and floating, and the difference lies in whether the company remains free to deal with the property charged. A fixed charge fastens on identified assets immediately and takes priority; a floating charge hovers over a changing class of assets, leaves the company free to trade until it crystallises, and then ranks after fixed charges and preferential payments. Whichever kind it is, registration under section 77 within thirty days is what makes it effective against the liquidator and other creditors, and the Act completes the scheme with satisfaction under section 82 and the register under section 85.

Both limbs must be read together, and the inclusion of "electronic mode" is what makes the definition modern: a company with no physical office in India may still be a foreign company if it carries on business here electronically. Rule 2(1)(c) of the Companies (Registration of Foreign Companies) Rules, 2014 explains electronic mode as including business to business and business to consumer transactions, data interchange and other digital supply transactions, online services, and all related data communication services, whether or not the main server is installed in India.

Chapter XXII, sections 379 to 393, regulates such companies.

1. Documents to be delivered, section 380

Every foreign company shall, within thirty days of the establishment of its place of business in India, deliver to the Registrar for registration:

1. A certified copy of the charter, statutes or memorandum and articles of the company, and if not in English, a certified translation;
2. The full address of the registered or principal office of the company;
3. A list of the directors and secretary with the prescribed particulars;

Display of name, section 382. Every foreign company shall:

1. Conspicuously exhibit on the outside of every office or place where it carries on business in India the name of the company and the country in which it is incorporated, in letters easily legible in English characters and in the local language; and
2. State the name of the company and the country of incorporation in legible English characters in all business letters, billheads and letter paper, and in all notices and other official publications; and
3. If the liability of the members is limited, state that fact in every prospectus and in all these documents and on every place of business.

Service, section 383. Any process, notice or other document required to be served on a foreign company is deemed to be sufficiently served if addressed to the person whose name and address were delivered under section 380 and left at, or sent by post to, that address, or sent by electronic mode.

4. Consequences and penalties

Section 392: if a foreign company contravenes any provision of Chapter XXII, it is punishable with a fine of not less than one lakh rupees, extending to three lakh rupees, and in the case of a continuing offence with an additional fine of fifty thousand rupees for every day; and every officer of the foreign company who is in default is punishable with imprisonment up to six months, or a fine of not less than twenty-five thousand rupees extending to five lakh rupees, or both.

Section 393 is the provision worth emphasising. Any failure by a foreign company to comply with Chapter XXII shall not affect the validity of any contract, dealing or transaction entered into by the company, or its liability to be sued in respect of it. But the company shall not be entitled to bring any suit, claim any set-off, make any counter-claim or institute any legal proceeding in respect of any such contract, dealing or transaction until it has complied.

5. Outside the Companies Act

A complete answer notes that the Companies Act is only one of three regimes. A foreign company must also comply with:

For full marks, cover: the meaning, the three sources, the two routes with their limits, the section 68(2) conditions, the post-buy-back duties and the section 70 prohibitions.

Buy-back is the purchase by a company of its own shares or other specified securities out of its own funds, permitted by section 68 of the Companies Act, 2013 as an exception to the rule against a company trafficking in its own shares.

Sources of funds, section 68(1). Only out of:

1. Its free reserves;
2. The securities premium account; or
3. The proceeds of the issue of any shares or other specified securities,

and not out of the proceeds of an earlier issue of the same kind of shares or specified securities.

Authority and limits:

After the buy-back: the securities must be extinguished and physically destroyed within seven days; no further issue of the same kind of shares within six months, except a bonus issue or the discharge of a subsisting obligation; a register of bought-back securities must be kept; and a return must be filed within thirty days.

Section 69: where the buy-back is out of free reserves or the securities premium account, a sum equal to the nominal value of the shares must be transferred to the Capital Redemption Reserve Account.

Section 70: no buy-back through a subsidiary, through investment companies, or while in default in repayment of deposits, redemption of debentures or preference shares, payment of dividend or repayment of a term loan to a bank, the bar lifting three years after the default is remedied. Nor may a company buy back if it has not complied with sections 92, 123, 127 and 129.

2. Maximum members: two hundred, section 2(68)(ii), excluding present and former employees who are members. Joint holders are counted as one member.

If they were only one person between them, the answer would be a One Person Company under section 3(1)(c), which is a private company with a single member and a nominee named in the memorandum.

At least one director must be a person who has stayed in India for a total of not less than one hundred and eighty-two days during the financial year, section 149(3), and every proposed director must have a Director Identification Number.

(b) Documents required for registration

Under section 7(1), the following must be filed with the Registrar within whose jurisdiction the registered office is proposed to be situated, through the integrated SPICe+ (INC-32) form:

1. The Memorandum of Association in e-MOA (INC-33), in the form in Table A of Schedule I for a company limited by shares, signed by all the subscribers with their particulars, and attested by a witness;
2. The Articles of Association in e-AOA (INC-34), similarly signed, or the company may adopt Table F;

7. The particulars of the first directors, their DIN, proof of identity and residence, and their consent to act as director in Form DIR-2; and
8. The particulars of the interests of the first directors in other firms or bodies corporate, with their consent.

Filed with, or shortly after, the above:

1. Form INC-22, verification of the registered office, within thirty days of incorporation, with proof of ownership or a rent agreement and a utility bill not older than two months, unless the address is given in SPICe+ itself; and
2. Form INC-20A under section 10A, the declaration of commencement of business, within one hundred and eighty days.

Preliminary steps: obtain Digital Signature Certificates for the subscribers and directors, and reserve the name through SPICe+ Part A or RUN, section 4(4). The name must not be identical with or too nearly resemble the name of an existing company and must not be undesirable in the opinion of the Central Government, section 4(2). SPICe+ also carries the applications for PAN, TAN, EPFO, ESIC, professional tax and a bank account.

2. Under section 10A, before commencing business the company must file a declaration that every subscriber has paid the value of the shares agreed to be taken. So while there is no statutory minimum, whatever the subscribers do subscribe for must actually be paid.

Conclusion. On these facts the advice to Mr. A and Mr. B is that (a) two subscribers suffice for a private company under section 3(1)(b), the maximum membership being two hundred; (b) the documents are the memorandum and articles, the declaration by a professional and by each subscriber under section 7(1), proof of the registered office, and the consent and particulars of the first directors, all now filed through SPICe+; and (c) there is no minimum paid up capital at all, that requirement having been removed in 2015. The last point carries a caveat, because under section 10A whatever the subscribers do agree to take must actually be paid before the company may commence business.

1. An ordinary resolution, section 114(1), is passed when the votes cast in favour exceed the votes cast against, that is by a simple majority, notice having been duly given; and
2. A special resolution, section 114(2), is passed when the intention to propose it as a special resolution has been specified in the notice, notice has been duly given, and the votes cast in favour are not less than three times the votes cast against, that is a three-fourths majority of the votes cast.

The resolution required for voluntary winding up is a SPECIAL RESOLUTION.

But the provision under which it is passed is no longer in the Companies Act. Sections 304 to 323, which governed voluntary winding up, were omitted by the Eleventh Schedule to the Insolvency and Bankruptcy Code, 2016 with effect from 15 November 2016. Voluntary liquidation is now governed by section 59 of the Code, notified on 30 March 2017, and section 59(3)(c) requires a special resolution of the members of the company in a general meeting requiring the corporate person to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator.

Note also that a special resolution is not merely a counting exercise. Section 114(2)(a) requires that the intention to propose the resolution as a special resolution be specified in the notice calling the meeting. Even if three-fourths had in fact voted in favour, the resolution would still fail if the notice did not say that a special resolution was proposed, because members are entitled to know the majority required before deciding whether to attend.

Three further defects on these facts, which should be given because the question asks why:

1. No declaration of solvency. Section 59(3)(a) of the Code requires, before the resolution, a declaration from a majority of the directors, verified by affidavit, that they have made a full inquiry into the affairs of the company and have formed the opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of the assets to be sold, and that the company is not being liquidated to defraud any person. The declaration must be accompanied by the audited financial statements and a record of business operations for the previous two years and a valuation report of the assets. Nothing suggests any of this was done;

If the company is in fact unable to pay its debts, voluntary liquidation is not available to it at all, because section 59(1) is confined to a corporate person which has not committed any default. Its route would then be the corporate insolvency resolution process under section 10 of the Code, initiated by the company itself, or under sections 7 or 9 by a creditor.

Conclusion. On these facts the resolution is not valid, on two independent grounds. A resolution for winding up requires a special resolution and not an ordinary one, so the majority obtained was insufficient in any event. More fundamentally, voluntary winding up no longer exists under the Companies Act, 2013 at all, sections 304 to 323 having been omitted, and the route now is voluntary liquidation under section 59 of the Insolvency and Bankruptcy Code, 2016, which is open only to a corporate person that has committed no default and which requires a declaration of solvency by the majority of the directors before the special resolution is passed.

First, breach of section 62, the pre-emptive right. Where a company having a share capital proposes to increase its subscribed capital by the issue of further shares, section 62(1)(a) requires that they be offered to persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares.

The words "in proportion" are the whole answer to part (a). An offer made only to the majority shareholders, and in a disproportionate manner, is a breach of the section on its face. Every existing equity shareholder, majority or minority, is entitled to be offered his proportionate share.

The offer must be made by a notice specifying the number of shares offered and giving a period of not less than fifteen days and not exceeding thirty days within which it must be accepted, failing which it is deemed declined. The notice must state that the shareholder has a right to renounce the shares in favour of any other person, unless the articles provide otherwise. Only after the offer is declined or the period expires may the Board dispose of the shares in a manner not disadvantageous to the shareholders and the company.

1. Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch 77: directors issued shares to themselves and their supporters to defeat a threatened change of control. The allotment was set aside, the power having been used for a purpose other than raising capital;
2. Nanalal Zaver v. Bombay Life Assurance Co. Ltd. AIR 1950 SC 172: the Supreme Court held that the power to issue further shares is in the nature of a trust, and that if the primary object is not to raise capital but to gain control, the issue can be impeached. On the facts the issue was upheld because the need for capital was genuine; and
3. Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. AIR 1981 SC 1298: a rights issue made in part to reduce a shareholder's proportion was examined against the test of bona fide exercise for the benefit of the company.

A disproportionate issue to the majority alone has the plain effect of diluting the minority's proportionate voting power and their entitlement to dividend, which is the very mischief section 62 exists to prevent.

4. Setting aside any transaction which would, if made by an individual, be deemed a fraudulent preference;
5. The removal of the managing director, manager or directors; and
6. Any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision should be made.

In practice the Tribunal may cancel or set aside the allotment, or direct that the minority be offered their proportionate entitlement, or order a buy-out of the minority at a fair value determined without regard to the impugned issue.

2. Class action, section 245. Members may apply to the Tribunal to restrain the company from committing a breach of any provision of the memorandum or articles, and to claim damages or compensation from the company or its directors for any fraudulent, unlawful or wrongful act. The minority may seek an order restraining the company from giving effect to the allotment.

Conclusion. On these facts the minority's rights are breached. Section 62(1)(a) requires that where a company proposes to increase its subscribed capital by a further issue, the shares be offered to the existing shareholders in proportion to the capital paid up on their shares, and an offer confined to the majority, or made to shareholders disproportionately, defeats the very purpose of the pre-emptive right, which is to preserve each member's proportionate stake and voting power. The minority's remedies are an application under sections 241 and 242 for oppression, a suit within the fraud on the minority exception to Foss v. Harbottle, an injunction restraining the allotment or the voting of the new shares, and a complaint to the Registrar and, if listed, to SEBI.

1. Before the transfer, the amusement park belonged to four individuals;
2. After the transfer, it belongs to one person, the company; and
3. That is a transfer of property from one legal person to four others' company, that is, to a different owner altogether. It is a conveyance and attracts duty accordingly.

The fact that Mr. Ram, Mr. Shyam, Mr. Madhav and Mr. Shri hold all the shares is immaterial. A shareholder does not own the company's property; he owns shares, which are a wholly different species of property, being, in the words of Borland's Trustee v. Steel Bros. & Co. Ltd., "the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second".

2. Macaura v. Northern Assurance Co. Ltd. [1925] AC 619. This is the closest analogue and should be given in full. Macaura owned an estate and sold the entire timber on it to a company in which he held all but one of the shares and to which he was the principal creditor. He insured the timber in his own name. The timber was destroyed by fire, and the insurers repudiated. The House of Lords held that he had no insurable interest: the timber belonged to the company, and "no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein". The same reasoning decides this problem: the four friends had a proprietary interest in the park before the transfer and only a shareholding afterwards.

3. Bacha F. Guzdar v. CIT AIR 1955 SC 74. A shareholder in a tea company claimed that sixty per cent of her dividend was exempt as agricultural income, since sixty per cent of the company's own income was agricultural. The Supreme Court rejected the claim: a dividend is not agricultural income in the hands of the shareholder, because the shareholder has no interest in the company's assets or in its income as such; his right is to a share of the profits when declared. Character does not pass through the corporate form.

But notice that lifting the veil in these cases works against the taxpayer, not for him. The doctrine exists to prevent the corporate form being used to escape a liability; it is not a facility a promoter can invoke to escape a duty by asserting that his own company is not really separate. The four friends are asking the court to disregard the personality for their own benefit, and no case supports that.

Conclusion. On these facts the four friends cannot claim the exemption. Once the amusement park was transferred to ABC Exciting Park Ltd., it passed to a person distinct in law from its members, so the transfer was a conveyance to a different person and ad valorem duty is attracted exactly as it would be on a sale to a stranger. The principle of separate legal personality cuts both ways: it is a shield the law gives the company and the members against outsiders, and not a facility a promoter may switch off by asserting that his own company is not really separate from him.

For full marks, cover: the veil and Salomon, the reason for lifting, the statutory grounds with sections, the judicial grounds each with facts, and the limit.

1. The veil

Under section 9, a company on incorporation becomes a body corporate with perpetual succession and the capacity to hold property, contract and sue in its own name. It is a person distinct from its members, and the corporate veil is the metaphor for the screen the law places between the company and those behind it.

Salomon v. Salomon & Co. Ltd. [1897] AC 22 established it. Salomon sold his boot business to a company he formed, taking 20,000 shares and £10,000 of debentures secured by a floating charge, his wife and five children holding one share each. When the company failed, the unsecured creditors contended it was a sham or Salomon's agent. The House of Lords held the company was duly incorporated, was neither agent nor trustee, and that Salomon's secured debentures ranked first.

4. Judicial lifting, with the cases

1. Fraud or improper conduct. Gilford Motor Co. Ltd. v. Horne [1933] Ch 935. Horne, bound by a covenant not to solicit his former employer's customers, formed a company and solicited through it. An injunction was granted against Horne and the company, "a mere cloak or sham".

6. Avoidance of welfare legislation. Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. AIR 1986 SC 1. A company transferred its shareholding in another company to a wholly owned subsidiary so that the dividend would not appear in its own profits and the bonus payable to workmen would fall. The Supreme Court lifted the veil, the subsidiary having no business of its own.

7. Public interest. Life Insurance Corporation of India v. Escorts Ltd. AIR 1986 SC 1370; Delhi Development Authority v. Skipper Construction Co. (P) Ltd. AIR 1996 SC 2005, reaching the personal assets of directors and their families who had collected money from the public for flats never built.

8. Determining the true character of a transaction, and to punish contempt where a company is used to breach an undertaking to the court.

For full marks, cover: the definition of debenture, the classification on four bases, the definition of charge, fixed and floating with the distinction, crystallisation, and registration.

1. Debenture

Section 2(30) provides that "debenture" includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

The classic description is Chitty J's in Levy v. Abercorris Slate and Slab Co. (1887) 37 Ch D 260: a debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of those conditions is a debenture.

The features of a debenture:

1. It is issued under the company's seal or as otherwise authorised, and is usually one of a series;

2. Types of debenture

On the basis of security:

1. Secured or mortgage debentures, secured by a fixed or floating charge on the company's assets; and
2. Unsecured or naked debentures, carrying no charge and ranking as ordinary unsecured debts.

On the basis of redemption:

1. Redeemable debentures, repayable on a fixed date or at the company's option; and
2. Irredeemable or perpetual debentures, repayable only on winding up or on the happening of a specified contingency. Under section 71(1) a company shall not issue debentures carrying any voting rights, and a perpetual debenture is permitted, though the Rules cap the redemption period at ten years, or thirty years for infrastructure companies and specified classes.

On the basis of convertibility:

1. Non-convertible debentures;

4. Types of charge

Fixed or specific charge. Created on specific, identified and ascertained property, such as land, a building or a machine. It attaches at the moment of creation, and the company cannot dispose of the property free of the charge without the charge-holder's consent.

Floating charge. Created on a class of assets, present and future, which changes from time to time in the ordinary course of business, such as stock in trade, book debts or raw materials. Until crystallisation, the company remains free to deal with those assets in the ordinary course.

Lord Macnaghten's description in Illingworth v. Houldsworth [1904] AC 355 is the one to quote: a floating charge "is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp."

1. The winding up of the company;
2. The appointment of a receiver by the debenture-holders or by the court;
3. The company ceasing to carry on business or ceasing to be a going concern; or
4. The happening of any event specified in the debenture deed as causing crystallisation, which is why modern deeds contain automatic crystallisation clauses, for example on default in payment, on the creation of a further charge, or on the levy of execution.

6. Registration, sections 77 to 87

Every charge, fixed or floating, on property within or outside India, must be registered with the Registrar within thirty days of creation, in Form CHG-1, or CHG-9 for debentures, with an extension of a further sixty days on additional fees. The Registrar issues a certificate in Form CHG-2, which is conclusive evidence of compliance.

For full marks, cover: the classification, the AGM with all its figures, the EGM with the requisition machinery, class and creditors' meetings, Board and committee meetings, and the requisites of a valid meeting.

Meetings under the Companies Act, 2013 fall into three classes: meetings of members, of creditors, and of directors.

A. Meetings of shareholders

1. Annual General Meeting, section 96

Every company other than a One Person Company must hold an AGM each year.

Default: any member may apply to the Tribunal under section 97, which may call the meeting and may direct that one member present shall be deemed to constitute a meeting; and under section 99 the company and every officer in default are liable to a fine up to one lakh rupees, with a further fine up to five thousand rupees a day for continuing default.

2. Extraordinary General Meeting, section 100

Any general meeting other than the AGM, called to transact urgent special business. All business at an EGM is special business.

It may be called:

1. By the Board on its own motion;
2. By the Board on requisition of members holding not less than one-tenth of the paid-up share capital carrying voting rights, or, in a company without share capital, one-tenth of the total voting power. The Board must proceed to call it within twenty-one days for a day not later than forty-five days from receipt of the requisition;

B. Meetings of creditors

Held under section 230 where a compromise or arrangement is proposed between a company and its creditors or any class of them. The Tribunal orders the meeting, and the scheme requires the approval of a majority in number representing three-fourths in value of the creditors or class present and voting, in person or by proxy. Creditors' meetings are also held in the course of a liquidation under the Insolvency and Bankruptcy Code, where the committee of creditors takes the decisions.

C. Meetings of directors

1. Board meetings, section 173

1. The first Board meeting must be held within thirty days of the date of incorporation;
2. Thereafter a minimum of four meetings every year, and not more than one hundred and twenty days shall intervene between two consecutive meetings;
3. A One Person Company, small company and dormant company need hold only two meetings in a year, one in each half of the calendar year, with a gap of not less than ninety days. An OPC with only one director is exempt from section 173(5) altogether;

2. Committee meetings

Of the Audit Committee (section 177), the Nomination and Remuneration Committee and Stakeholders Relationship Committee (section 178), and the CSR Committee (section 135), each governed by its own constitution and terms of reference.

D. Requisites of a valid meeting

A meeting of any class is valid only if:

1. It is properly convened by the proper authority, by a resolution of the Board or by the person empowered;
2. Proper notice is given to every person entitled to receive it, stating the day, time, place and the business, with an explanatory statement for special business;
3. The quorum is present, and remains present as the articles require;
4. A chairman presides, elected under section 104 by a show of hands if the articles do not name one;

For full marks, cover: the first auditor and subsequent appointment with rotation, the classes of person disqualified, removal under section 140 in all four of its modes, and the contents of the report under section 143(3) with the fraud reporting duty.

1. Appointment of auditors, section 139

First auditor. Appointed by the Board within thirty days of the date of registration. If the Board fails, it must inform the members, who shall appoint within ninety days at an extraordinary general meeting. The first auditor holds office till the conclusion of the first annual general meeting.

For a Government company, the first auditor is appointed by the Comptroller and Auditor-General within sixty days of registration; failing that by the Board within the next thirty days; failing that by the members within sixty days at an extraordinary general meeting.

and such an individual or firm is not eligible for re-appointment in the same company for five years from the completion of the term. The cooling-off applies also to a firm having a common partner with the outgoing firm.

Casual vacancy, section 139(8). Filled by the Board within thirty days. But if the vacancy is caused by the resignation of the auditor, the Board's appointment must also be approved by the company at a general meeting convened within three months of the Board's recommendation, and the auditor so appointed holds office till the conclusion of the next annual general meeting. In a Government company, a casual vacancy is filled by the CAG within thirty days.

Section 139(6) and (10) deal with the position where no auditor is appointed or re-appointed at an annual general meeting: the existing auditor continues to be the auditor.

2. Eligibility and disqualification, section 141

Only a chartered accountant within the meaning of the Chartered Accountants Act, 1949 may be appointed, or a firm whose majority of partners practising in India are so qualified, in which case only the partners who are chartered accountants are authorised to act and sign.

Disqualified are:

8. A person convicted by a court of an offence involving fraud and a period of ten years has not elapsed; and
9. A person who directly or indirectly renders any of the prohibited services under section 144 to the company, its holding or subsidiary company.

Section 144 is worth naming separately: an auditor shall not render to the company, its holding or subsidiary company, the services of accounting and book keeping, internal audit, design and implementation of any financial information system, actuarial services, investment advisory services, investment banking services, rendering of outsourced financial services, management services, and any other prescribed service. This is the statutory answer to the conflict of interest that destroyed Andersen.

If an auditor incurs any disqualification after appointment, he shall vacate his office, and the vacancy is a casual vacancy.

3. Removal and resignation, section 140

(a) Removal before the expiry of the term, section 140(1). The auditor may be removed before the expiry of his term only:

1. By a special resolution of the company; and

(c) Non-reappointment by the members, section 140(4). Special notice is required for a resolution at an annual general meeting appointing a person other than the retiring auditor, or providing expressly that the retiring auditor shall not be re-appointed. On receipt, the company must send a copy to the retiring auditor forthwith. The retiring auditor may make a representation in writing and request its notification to members; the company must then state the fact of the representation in the notice and send a copy to every member, and if it is received too late or the company defaults, the auditor may require it to be read out at the meeting. The Tribunal may order that it need not be sent or read out if satisfied that the rights are being abused to secure needless publicity for defamatory matter.

1. Whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary, and if not, the details and the effect on the financial statements;
2. Whether, in his opinion, proper books of account as required by law have been kept, and proper returns adequate for the audit have been received from branches not visited by him;
3. Whether the report on the accounts of any branch office audited by a person other than the company's auditor has been sent to him and the manner in which he has dealt with it;
4. Whether the company's balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;
5. Whether, in his opinion, the financial statements comply with the accounting standards;
6. The observations or comments on financial transactions or matters which have any adverse effect on the functioning of the company;
7. Whether any director is disqualified from being appointed as a director under section 164(2);
8. Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;

Section 143(12), reporting of fraud. If an auditor, in the course of the performance of his duties, has reason to believe that an offence of fraud involving an amount of one crore rupees or more is being or has been committed against the company by its officers or employees, he shall report the matter to the Central Government within the prescribed time and manner. Below that threshold, he reports to the Audit Committee or the Board, and the matter is disclosed in the Board's report. No duty of confidentiality is breached by such a report, and section 143(15) penalises a failure to report.

Where the report is qualified, the qualification, reservation or adverse remark must be read before the company in general meeting under section 145, and be open to inspection.