BLS LLB 5 Years Sem 7 Company Law 2023-24 Question Paper with Solutions

A shelf prospectus is a prospectus filed once with the Registrar by a class of companies prescribed by SEBI, in respect of one or more issues of securities or classes of securities specified in it, and which then remains valid for a period not exceeding one year from the date of opening of the first offer.

Section 31 provides that a company filing a shelf prospectus is not required to file a fresh prospectus for each subsequent offer made within that period; it files only an information memorandum in the prescribed form.

Section 2(85) of the Companies Act, 2013 defines a small company as a company, other than a public company, having:

1. A paid-up share capital not exceeding four crore rupees or such higher amount as may be prescribed, which shall not be more than ten crore rupees; and
2. A turnover as per the profit and loss account for the immediately preceding financial year not exceeding forty crore rupees or such higher amount as may be prescribed, which shall not be more than one hundred crore rupees.

Section 4(1) of the Companies Act, 2013 requires the memorandum to contain six clauses:

1. Name clause: the name of the company, with "Limited" as the last word for a public limited company, and "Private Limited" for a private limited company;
2. Registered office clause: the State in which the registered office is to be situated;
3. Objects clause: the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof;
4. Liability clause: whether the liability of the members is limited by shares, limited by guarantee or unlimited;
5. Capital clause: the amount of authorised share capital, divided into shares of a fixed amount, and the number of shares the subscribers agree to take; and
6. Subscription or association clause: the declaration by the subscribers that they desire to be formed into a company and agree to take the shares set opposite their names.

The Investor Education and Protection Fund is established under section 125 of the Companies Act, 2013. Two of the purposes for which it may be utilised are:

1. The refund of unclaimed dividends, matured deposits, matured debentures, the application money due for refund and interest thereon, to the persons entitled to them; and
2. The promotion of investors' education, awareness and protection.

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.

Why the rule exists. It is the necessary counterweight to the doctrine of constructive notice. Constructive notice deems every outsider to have read the memorandum and articles, and works against him. If it stood alone, an outsider would have to satisfy himself not only that the articles permitted the act, but that every internal condition had actually been complied with, which he has no means of doing, since the minute books and registers are not open to him. The two doctrines together produce a workable line: the outsider is bound by what is public and open to him, and protected as to what is internal and closed to him.

The exceptions. The rule does not apply where:

1. Knowledge of the irregularity. A person who actually knows of the irregularity cannot rely on the rule. Howard v. Patent Ivory Manufacturing Co. (1888) 38 Ch D 156: the directors could borrow up to £1,000 without the consent of the general meeting, and beyond that with consent. They issued debentures to themselves for £3,500 without consent. Being directors themselves, they knew of the irregularity, and the debentures were good only to the extent of £1,000.

5. Acts void ab initio or ultra vires. The rule can never validate an act which is ultra vires the company or otherwise void, because no amount of internal regularity could have made it good.
6. Negligence. Where the outsider fails to make the enquiries a reasonable person would make, he cannot rely on the rule. If an officer of the company purports to act outside the ordinary scope of his authority, the outsider must enquire: a company's accountant does not ordinarily sell its property.

Conclusion. The doctrine of indoor management protects a person dealing with a company as to everything he could not have discovered from the public documents, and it exists because commerce would be impossible if every outsider had to verify that the company's internal machinery had actually worked. Its six exceptions all follow from the limit of that reasoning: the rule presumes regularity and not authority, so it does not help a person who knew of the irregularity, who was put on enquiry by suspicious circumstances, who relied on a forgery, who never read the articles, who dealt in a matter ultra vires the company, or who was himself negligent.

Conditions, section 68(2):

1. Buy-back must be authorised by the articles;
2. The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back must not exceed twice the paid-up capital and free reserves, that is 2:1;
3. All the shares or other specified securities for buy-back must be fully paid up;
4. Where listed, the buy-back must be in accordance with SEBI regulations; and
5. No offer of buy-back shall be made within a period of one year reckoned from the date of the closure of the preceding offer.

3. It must maintain a register of the securities bought back; and
4. It must file a return of buy-back with the Registrar and SEBI within thirty days.

Section 69: Capital Redemption Reserve. Where a company buys back its shares out of free reserves or the securities premium account, a sum equal to the nominal value of the shares bought back must be transferred to the Capital Redemption Reserve Account, and the details disclosed in the balance sheet. That account may be applied in paying up unissued shares to be issued as fully paid bonus shares.

Section 70: prohibitions. No company shall directly or indirectly purchase its own shares:

1. Through any subsidiary company, including its own subsidiaries;
2. Through any investment company or group of investment companies; or
3. If a default is subsisting in the repayment of deposits or interest, redemption of debentures or preference shares, payment of dividend, or repayment of any term loan or interest to a financial institution or bank. The bar ceases once the default is remedied and three years have elapsed.

For full marks, cover: the facts, the two limbs, the justifications, the five exceptions with cases, and the statutory remedies that have overtaken it.

Foss v. Harbottle (1843) 2 Hare 461 lays down the rule of majority rule and the proper plaintiff rule.

The facts. Two shareholders of the Victoria Park Company sued five directors and a solicitor, alleging that they had sold their own land to the company at an inflated price and had otherwise misapplied its property. The company was still in existence and the majority of members had not complained. The suit was dismissed.

The two limbs.

1. The proper plaintiff rule. Where a wrong is alleged to have been done to a company, the company is prima facie the only proper plaintiff to sue for it. An individual member cannot sue on the company's behalf, because the injury is not his.

1. Ultra vires or illegal acts. No majority can ratify what the company had no power to do, so any member may sue or obtain an injunction. Bharat Insurance Co. Ltd. v. Kanhaiya Lal AIR 1935 Lah 792, where a member complained that the company's funds were being invested contrary to its memorandum.
2. Acts requiring a special majority. If a thing can be done only by special resolution and is purported to be done by an ordinary one, an individual member may sue, because the majority has not in fact been competent to do it. Edwards v. Halliwell [1950] 2 All ER 1064, where a trade union's rules required a two-thirds ballot to increase subscriptions and the increase was made without one.
3. Invasion of individual or personal rights. A member may always sue in his own name to enforce a right belonging to him as a member: the right to vote and to have his vote counted, to receive a dividend once declared, to have his name on the register, to receive notice of meetings, and to enforce the articles as a section 10 contract. Nagappa Chettiar v. Madras Race Club AIR 1949 Mad 809.

1. Sections 241 and 242: an application to the Tribunal where the affairs of the company are being conducted in a manner prejudicial or oppressive to any member, or prejudicial to the public interest or to the company's interests, with the very wide powers of section 242, including a buy-out of the minority's shares and the removal of directors. The eligibility threshold in section 244 may now be waived by the Tribunal;
2. Section 245: a class action by members or depositors, which may claim damages against the company, its directors, its auditors including the audit firm, and any expert or adviser; and
3. Sections 210 and 213: investigation into the affairs of a company on the application of members.

Conclusion. The rule in Foss v. Harbottle holds that where a wrong is done to a company, the company and not a member is the proper plaintiff, and that the court will not intervene in an irregularity the majority could ratify. The exceptions mark the cases where those reasons fail: ultra vires or illegal acts, acts needing a special majority, invasion of individual membership rights, and fraud on the minority. In India its practical work has been taken over by sections 241, 242 and 245, which give the member a direct remedy before a Tribunal with wide powers.

2. Alternate director, section 161(2)

The Board may, if so authorised by the articles or by a resolution passed by the company in general meeting, appoint a person to act as an alternate director for a director during his absence for a period of not less than three months from India.

Conditions:

1. A person already holding the office of director in the same company cannot be appointed;
2. A person cannot hold alternate directorship for more than one director in the same company; and
3. An alternate director for an independent director must be qualified to be appointed as an independent director.

Tenure: he vacates office when the original director returns to India, and his term cannot extend beyond the term of the original director. If the term of the original director expires while he is away, the provisions for automatic re-appointment of retiring directors apply to the original director and not to the alternate.

4. Casual vacancy, section 161(4)

Where the office of any director appointed by the company in general meeting is vacated before the expiry of his term in the normal course, the resulting casual vacancy may, subject to the articles, be filled by the Board of Directors at a meeting of the Board, which shall be subsequently approved by members in the immediate next general meeting.

Tenure: the director so appointed holds office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated.

The vacancy must be casual, that is, arising from death, resignation, disqualification or vacation of office, and not from retirement by rotation, which is not a casual vacancy but the ordinary expiry of a term.

The reason is that Mr. Ram holds three distinct capacities, and the law treats each separately:

1. As a shareholder holding 95%, his rights are those of a member, and members rank last in a winding up, after every creditor has been paid;
2. As Managing Director, he is an officer of the company; and
3. As a secured debenture-holder, he is a creditor of the company whose debt is secured by a charge on its assets.

His claim for Rs. 50,000 arises entirely in the third capacity. That he also owns 95% of the shares and manages the company is legally irrelevant to it. The company is a person distinct from its members, and there is nothing to prevent that person from owing money to one of its own members, or from giving him security for it.

(b) The principle

The governing principle is the separate legal personality of a company, and the case is Salomon v. Salomon & Co. Ltd. [1897] AC 22, which is this problem almost exactly.

Salomon converted his boot business into a company, taking 20,000 fully paid shares out of 20,007 and debentures of £10,000 secured by a floating charge. His wife and five children held one share each. When the company failed, the assets sufficed to pay the debentures but left nothing for the unsecured trade creditors. The liquidator argued that the company was a sham, a mere alias or agent for Salomon, and that Salomon should indemnify it.

The qualification

State this, because a complete answer shows it knows the limit of the rule. Mr. Ram's claim could be defeated if the corporate veil were lifted, and it could be lifted if the debentures were shown to be a sham rather than a genuine debt: if, for example, no money was ever advanced, or the charge was created when the company was already insolvent and in order to prefer him over existing creditors. In a liquidation under the Code, such a transaction could be attacked as a preference under section 43, an undervalued transaction under section 45, or a fraudulent trading transaction under section 66, and section 339 of the Companies Act provides similarly.

There is nothing in the facts to suggest any of that. On the facts as given, the debenture is a genuine secured debt and Mr. Ram must be paid.

However, it was proved that the prospectus was issued with the intention to defraud the applicants.

For full marks, cover: rescission and damages against the company, compensation under section 35, the effect of the finding of intent to defraud, the list of persons liable, the criminal liability, and the defences.

(a) The rights of Mr. Bhola Ram

He has four remedies, and they lie against different defendants.

4. Prosecution under sections 34 and 36. He may set the criminal law in motion. Section 34 makes every person who authorises the issue of a prospectus containing an untrue or misleading statement liable for fraud under section 447, and section 36 punishes any person who fraudulently induces persons to invest money.

He may also join in a class action under section 245, or a suit under section 37, which expressly allows a person, group of persons or association of persons affected by any misleading statement or inclusion or omission in a prospectus to file a suit or take any other action under sections 34, 35 and 36.

(b) The liability, and who bears it

Who is liable, section 35(1):

1. Every person who is a director of the company at the time of the issue of the prospectus. Both directors who signed are caught;
2. Every person who has authorised himself to be named and is named in the prospectus as a director, or as having agreed to become a director either immediately or after an interval of time;
3. Every person who is a promoter of the company;

That is the crucial sentence on these facts, since the question states the fraudulent intent as proved. The consequences are:

1. The liability is personal and unlimited, not limited to the amount of the subscription or to any statutory cap; and
2. It extends to losses of any person who subscribed, not only the plaintiff.

Criminal liability. Under section 34 read with section 447, the punishment for fraud is imprisonment for a term not less than six months and extending to ten years, and a fine not less than the amount involved in the fraud and extending to three times that amount. Where the fraud involves public interest, the minimum term is three years. A public issue on a fraudulent prospectus is the paradigm case of a fraud involving public interest.

The defences, section 35(2), which the defendants will raise and which should be stated so the answer is balanced. A person is not liable if he proves:

1. That, having consented to become a director, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent;

Conclusion. On these facts Mr. Bhola Ram may rescind the allotment and recover his money from Chinpak Holdings Ltd., and he may in addition claim compensation under section 35 from every director who signed, from the auditor and from the CFO, each of whom authorised the issue of the prospectus. The statutory defences of withdrawal of consent and of honest belief on reasonable ground are available in principle, but none of them is available to a person who was himself party to the fraud, so where intent to defraud is established the second and third defences cannot in practice be made out. Sections 34 and 36 add criminal liability under section 447.

(a) What the company must do

First, the company continues to exist. The death of a member does not affect it. A company has perpetual succession under section 9, and is a person distinct from its members (Salomon v. Salomon & Co. Ltd.). It is not dissolved, and its contracts, property and liabilities are unaffected.

Second, the shares of the deceased members pass by transmission. Transmission is the vesting of shares by operation of law on death, insolvency or lunacy, as distinguished from transfer, which is a voluntary act. Under section 56(2), the legal representative of a deceased member may:

1. Be registered as a member himself, on producing the succession certificate, probate or letters of administration; or
2. Transfer the shares to another person, and such a transfer is as valid as if he had been a member at the time of the execution of the instrument of transfer.

No instrument of transfer and no stamp duty is required for transmission, and the transmission is subject to the same restrictions as a transfer under the articles.

2. Six months from January 2023 expires in July 2023;
3. It is now October 2023, and the company has been carrying on business with five members for about nine months.

The grace period has therefore expired, and the five surviving members are exposed to unlimited several liability for debts contracted since July 2023.

The action the company must take is accordingly urgent:

1. Register the legal representatives of the five deceased members as members by transmission, which restores the number to ten and cures the defect;
2. If the representatives do not wish to be registered, procure them to transfer the shares to other persons, so that the number of members is at least seven;
3. Update the register of members under section 88 and record the transmissions; and
4. Consider, if the survivors do not wish to continue as a public company, a conversion into a private company under section 14 read with section 18, which requires only two members.

2. It reaches only members who knew of the shortfall; and
3. It does not touch the deceased members' estates or the legal representatives before registration.

If Ranaji's dues arose before July 2023, section 3A gives him nothing, and he must proceed under route 2.

Route 2: initiate a corporate insolvency resolution process under section 9 of the Insolvency and Bankruptcy Code, 2016. Rs. 5 crore is far above the minimum default threshold of one crore rupees under section 4 of the Code. As an operational creditor he must:

1. Deliver a demand notice in Form 3, or a copy of the invoice demanding payment, under section 8;
2. Wait ten days. If the company neither pays nor raises a pre-existing dispute, then
3. File an application under section 9 before the National Company Law Tribunal, with the invoice, an affidavit that no dispute is pending, and a certificate from a financial institution confirming non-payment.

Conclusion. On these facts the answer to (a) is that Peshwa Ltd. must restore its membership at once, because section 3A provides that where the number of members falls below the statutory minimum and the company carries on business for more than six months, every person who is a member during that time and knows of the fact becomes severally liable for the whole of the debts contracted after those six months, and loses the protection of limited liability. Since the deaths were in January 2023 and it is now October, that period has expired. The answer to (b) is that Mr. Ranaji may proceed against the members personally for the debt so contracted, and his practical remedy for the company's own default is an application under section 9 of the Insolvency and Bankruptcy Code, 2016.

2. Give any guarantee or provide security in connection with a loan to any other body corporate or person; or
3. Acquire by way of subscription, purchase or otherwise the securities of any other body corporate,

exceeding sixty per cent of its paid-up share capital, free reserves and securities premium account, or one hundred per cent of its free reserves and securities premium account, whichever is more.

The arithmetic on these figures:

Other conditions worth naming. The rate of interest on any loan given must not be lower than the prevailing yield of a one year, three year, five year or ten year Government Security closest to the tenor of the loan. A company in default in the repayment of deposits or interest is barred until the default is made good. Every company must keep a register in Form MBP-2 of loans, guarantees, securities and investments made. And investments must be held in the company's own name under section 187.

(b) The borrowing limit

Borrowing is governed not by section 186 but by section 180(1)(c), which is a limit on the Board's authority rather than on the company's capacity.

The Board may not, except with the consent of the company by a special resolution, borrow money where the money to be borrowed, together with the money already borrowed by the company, will exceed the aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company's bankers in the ordinary course of business.

The arithmetic:

Note the date. Section 180(1)(c) as originally enacted read "paid-up share capital and free reserves". The words "and securities premium" were inserted by the Companies (Amendment) Act, 2017 with effect from 9 February 2018. On the pre-2018 text the answer to (b) would have been Rs. 350 lakhs, not Rs. 400 lakhs. A textbook printed before 2018 gets this arithmetic wrong.

Conclusion. On these facts the answer to (a) is Rs. 240 lakhs, being sixty per cent of the aggregate of paid up capital, free reserves and securities premium, which at Rs. 400 lakhs yields Rs. 240 lakhs and exceeds the alternative limb of one hundred per cent of free reserves and securities premium at Rs. 200 lakhs, section 186(2) directing that whichever is more be taken. Anything beyond that needs a special resolution under section 186(3). The answer to (b) is Rs. 400 lakhs, that being the aggregate of paid up capital, free reserves and securities premium, beyond which section 180(1)(c) requires a special resolution; the inclusion of the securities premium dates only from the amendment of 9 February 2018, so an older textbook gives Rs. 350 lakhs.

For full marks, cover: each committee's source, which companies must have it, its composition and its functions, and the point that the Risk Management Committee comes from SEBI and not from the Companies Act.

Board committees are the means by which the Board delegates detailed and continuous oversight to a small group of its own members, most of them independent, so that the tasks most exposed to conflict of interest are not left with the executive management.

1. Audit Committee, section 177

Which companies. Every listed public company, and such other classes of companies as may be prescribed, namely every public company having:

1. Paid-up share capital of ten crore rupees or more; or
2. Turnover of one hundred crore rupees or more; or
3. Aggregate outstanding loans, borrowings, debentures or deposits exceeding fifty crore rupees.

Powers. It may call for the comments of the auditors about internal control systems, the scope of audit including the observations of the auditors, and a review of financial statements before their submission to the Board, and may discuss any related issues with the internal and statutory auditors and the management. It may investigate any matter in relation to the items specified or referred to it by the Board, and for that purpose has power to obtain professional advice from external sources and full access to the records of the company. The auditors and key managerial personnel have a right to be heard but do not have a right to vote.

Vigil mechanism, section 177(9). Every listed company, and every company which accepts deposits from the public or has borrowed money from banks and public financial institutions in excess of fifty crore rupees, must establish a vigil mechanism for directors and employees to report genuine concerns. It must provide adequate safeguards against victimisation of persons who use it, and direct access to the chairperson of the Audit Committee in appropriate cases. Where a company has an Audit Committee, the committee oversees the vigil mechanism.

If the Board does not accept a recommendation of the Audit Committee, it must record the reasons in the Board's report. That single requirement is what gives the committee its force.

4. To formulate the criteria for determining qualifications, positive attributes and independence of a director; and
5. To recommend to the Board a policy relating to the remuneration for the directors, key managerial personnel and other employees.

The policy must ensure that the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required; that the relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and that remuneration to directors, key managerial personnel and senior management involves a balance between fixed and incentive pay reflecting short and long term performance objectives. The policy must be placed on the company's website and its salient features disclosed in the Board's report.

3. Stakeholders Relationship Committee, section 178(5) to (7)

Which companies. Any company which has more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year. Note that the test is the combined number of security holders, not paid-up capital or turnover, and it applies to any company, not only a public one.

Where it comes from. Regulation 21 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 requires a Risk Management Committee for the top 1000 listed entities by market capitalisation, and for a listed entity which has outstanding SR equity shares. The requirement began with the top 100 entities, was extended to the top 500 and then to the top 1000 with effect from 5 May 2021.

Composition. Minimum three members, with a majority of them being members of the Board, including at least one independent director, and for the top 1000 entities at least one member of the committee must be an independent director. The chairperson shall be a member of the Board, and senior executives may be members. It must meet at least twice in a financial year, with a gap of not more than one hundred and eighty days between two meetings.

Functions. To formulate a detailed risk management policy covering financial, operational, sectoral, sustainability including ESG-related risks, information and cyber security risks; to lay down measures for risk mitigation and business continuity; to monitor and evaluate the implementation of the policy; to review the appointment, removal and terms of remuneration of the Chief Risk Officer, if any; and to report to the Board.

For full marks, cover: the veil and Salomon, why it is lifted, the statutory grounds with sections, the judicial grounds each with its case and facts, and the limit.

1. The veil

On incorporation a company becomes, under section 9, a body corporate with perpetual succession and power to hold property, contract and sue in its own name. It is a person distinct from its members. The metaphor of a veil describes the screen that the law places between the company and the persons 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 held one share each. On the company's failure, the unsecured creditors argued that the company was a sham or the agent of Salomon. The House of Lords held the company was duly incorporated, was not the agent or trustee of Salomon, and that his secured debentures ranked first.

3. Determination of enemy character. Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd. [1916] 2 AC 307. The respondent was registered in England but all its shares except one were held by German residents and all its directors were German. The House of Lords held the court could look at the persons in de facto control, and that the company took on enemy character, so that trading with it during the war would be trading with the enemy.

4. Tax evasion. Sir Dinshaw Maneckjee Petit, Re AIR 1927 Bom 371. The assessee, a man of great wealth, formed four private companies and transferred his investments to each, the income being credited in the companies' accounts and then returned to him as a pretended loan. The Bombay High Court held the companies were formed purely as a means of avoiding super-tax and were the assessee himself in another form. See also Juggilal Kamlapat v. Commissioner of Income Tax AIR 1969 SC 932.

7. Company used to avoid welfare legislation. Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. AIR 1986 SC 1, where a company transferred its shareholding in another company to a wholly owned subsidiary so that the dividend income would not appear in its own profits and the bonus payable to workmen would be reduced. The Supreme Court lifted the veil, holding the subsidiary had no business of its own and existed only to reduce the bonus.

8. Improper use for contempt or to defeat a court's order, and to determine the true character of a transaction.

4. The limit

The veil is not lifted merely because a company is a one-man company, because a group is under common ownership, or because lifting it would produce a result the court prefers. Salomon itself was a one-man company. In Adams v. Cape Industries plc [1990] Ch 433 the English Court of Appeal refused to treat a group as a single economic entity, holding that the court is not free to disregard Salomon "merely because it considers that justice so requires", and that a motive of using the corporate structure to limit future liability is not by itself improper.

For full marks, cover: what winding up is and how it differs from dissolution, the two modes as they now stand, the full Tribunal procedure step by step, the liquidator's powers and duties, the order of payment under section 53, and voluntary liquidation.

1. Meaning

Winding up is the process by which the life of a company is brought to an end and its property administered for the benefit of its creditors and members. A liquidator is appointed, takes control of the assets, realises them, pays the debts in the statutory order, and distributes the surplus among the members.

Winding up is not dissolution. Winding up is the process; dissolution is the event at the end of it, when the company ceases to exist and its name is struck off. During winding up the company continues to exist and retains its corporate personality and its property, though its business is carried on only so far as is necessary for a beneficial winding up.

3. Winding up by the Tribunal, step by step

Step 1: a ground under section 271. The company may be wound up if it has by special resolution resolved to be so wound up; if it 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; if on an application by the Registrar or an authorised person the Tribunal finds the affairs conducted fraudulently or the company formed for a fraudulent or unlawful purpose or those concerned guilty of fraud, misfeasance or misconduct; if there has been default in filing financial statements or annual returns for five consecutive financial years; or if the Tribunal thinks it just and equitable.

Inability to pay debts is no longer a ground, having gone to the Insolvency and Bankruptcy Code.

Step 2: the petition, section 272. Presented by the company, any contributory, the Registrar, any person authorised by the Central Government, or the Central or State Government. It must be accompanied by a statement of affairs in the prescribed form. The Registrar may present a petition only with the previous sanction of the Central Government, and only after giving the company a reasonable opportunity of making representations.

4. Section 279: no suit or other legal proceeding shall be commenced or continued against the company except with the leave of the Tribunal; and
5. The Tribunal constitutes a winding up committee to assist and monitor the liquidation.

Step 5: the Company Liquidator, sections 275 and 276. The Tribunal appoints a Company Liquidator at the time of passing the order, from a panel maintained by the Central Government of insolvency professionals. His terms and conditions and fee are fixed by the Tribunal. He may be removed on the ground of misconduct, fraud, professional incompetence, inability to act, or conflict of interest.

Step 6: the statement of affairs, section 272(4) and 274. Where a petition is presented by a person other than the company, the Tribunal may direct the company to file its objections along with a statement of affairs within thirty days, extendable by a further thirty days. Failure to do so forfeits the right to oppose the petition, and the directors and officers concerned are punishable.

5. Invite and settle claims of creditors and distribute the sale proceeds; and
6. Do all such acts as are necessary for winding up and distributing the assets.

Step 9: the list of contributories, sections 285 and 295. The Tribunal settles the list of contributories, distinguishing between those who are contributories in their own right and those who are representatives of others, and may make calls on them for the payment of money due on their shares.

Step 10: proof of debts and payment, section 53 of the IBC. The liquidator invites and adjudicates claims. The order of priority is:

1. The insolvency resolution process costs and liquidation costs in full;
2. Workmen's dues for the period of twenty-four months preceding the liquidation commencement date, and debts owed to a secured creditor who has relinquished his security, ranking equally between and among them;
3. Wages and unpaid dues owed to employees other than workmen for twelve months;
4. Financial debts owed to unsecured creditors;

1. A declaration by 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 out of the proceeds of the assets to be sold, and that the company is not being liquidated to defraud any person;
2. The declaration accompanied by the audited financial statements and a record of business operations for the previous two years, and a valuation report of the assets prepared by a registered valuer;
3. Within four weeks of the declaration, a special resolution of the members appointing an insolvency professional as liquidator, and, where the company owes debt, the approval of creditors representing two-thirds in value of the debt within seven days of the special resolution; and
4. Notice to the Registrar and to the Board within seven days of the resolution or the creditors' approval.

The liquidation is deemed to have commenced from the date of the resolution. On completion, the liquidator applies to the Adjudicating Authority, the NCLT, for an order of dissolution.

For full marks, cover: the three definitions with their sections, the seven transactions in section 188, the approval machinery and thresholds, the arm's length exemption, the consequences of contravention, and the related provisions in sections 177 and 184.

1. Relative, section 2(77)

A person is a relative of another if:

1. They are members of a Hindu Undivided Family;
2. They are husband and wife; or
3. One person is related to the other in such manner as may be prescribed.

Rule 4 of the Companies (Specification of Definitions Details) Rules, 2014 prescribes eight relationships: father, including step-father; mother, including step-mother; son, including step-son; son's wife; daughter; daughter's husband; brother, including step-brother; and sister, including step-sister.

8. Any body corporate which is a holding, subsidiary or associate company of the company, or a subsidiary of a holding company to which it is also a subsidiary, or an investing company or the venturer of the company; and
9. Such other person as may be prescribed, namely any person who is a director, other than an independent director, or key managerial personnel of the holding company or his relative.

Clauses (6) and (7) do not apply to advice, directions or instructions given in a professional capacity. A company's lawyer, auditor or consultant does not become a related party merely because the Board acts on his advice.

Note the asymmetry between clauses (4) and (5). A private company is a related party if a director or manager or his relative is merely a member, however small the holding. A public company is a related party only if the director or manager is himself a director of it and holds with his relatives more than 2%. The reason is that a small shareholding in a widely held public company gives no influence, whereas membership of a private company usually does.

Approval by the members. Where the transaction exceeds the limits prescribed in Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, prior approval of the company by a resolution is also required. The thresholds are expressed as percentages of turnover or net worth, or as absolute amounts, according to the transaction. For example, sale, purchase or supply of goods or materials amounting to ten per cent or more of turnover; selling, disposing of or buying property amounting to ten per cent or more of net worth; leasing of property amounting to ten per cent or more of turnover; availing or rendering services amounting to ten per cent or more of turnover; and appointment to any office or place of profit at a monthly remuneration exceeding two and a half lakh rupees.

Note that the requirement was originally a special resolution and was reduced to an ordinary resolution by the Companies (Amendment) Act, 2015, because the special majority had made ordinary group transactions difficult for companies with concentrated promoter holdings.

Disclosure. Every contract or arrangement entered into under section 188(1) must be referred to in the Board's report to the shareholders, along with the justification for entering into it. Particulars are given in Form AOC-2.

Consequences of contravention, section 188(3) and (4).

1. Where a contract is entered into by a director or any other employee without obtaining the consent of the Board or approval by resolution, and is not ratified by the Board or the company within three months, the contract is voidable at the option of the Board or of the shareholders;
2. If the contract is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it; and
3. The company may proceed against a director or any other employee who entered into the contract in contravention to recover any loss sustained by it.

Penalty, section 188(5). In the case of a listed company, a penalty of twenty-five lakh rupees, and in the case of any other company, a penalty of five lakh rupees, on the director or employee concerned.

Section 185: loans to directors and to persons in whom directors are interested are separately restricted, and section 186 governs loans and investments generally.

For listed entities, Regulation 23 of the SEBI LODR Regulations is stricter still: all related party transactions require the prior approval of the Audit Committee, and a material related party transaction, one exceeding one thousand crore rupees or ten per cent of annual consolidated turnover, whichever is lower, requires the prior approval of shareholders, with no related party voting, whether or not it is a party to the particular transaction.

Conclusion. Sections 2(76), 2(77) and 188 work as a single scheme: the list of relatives fixes the personal relationships, the definition of related party builds on it to catch the corporate ones, and section 188 then requires Board approval, and shareholder approval above the prescribed thresholds, for the seven kinds of transaction it names. The controlling idea is disclosure and abstention rather than prohibition, because a related party transaction is not wrong in itself; what is objectionable is a director voting on his own bargain. Hence no related party may vote on the resolution, and for a listed company Regulation 23 of the SEBI Listing Regulations adds a materiality threshold of its own.

This is the question set in place of the printed English Q.3(4). It is what the Marathi half of this paper prints at Q.3(4), and it is what the invigilator wrote on the English page. See the note at the head of this volume.

For full marks, cover: the Board as the primary convening authority and the three fallbacks, the twenty-one clear days with the shorter notice provision, and the quorum ladder with the consequences of no quorum.

(a) Who can call an AGM?

1. The Board of Directors. The primary authority. An annual general meeting is called by the Board by passing a resolution at a Board meeting fixing the day, time and place and approving the notice. There is no other body with a general power to convene it.

4. Requisitionists, section 100. Members may requisition an extraordinary general meeting, and if the Board does not call it, may call it themselves. This power does not extend to an annual general meeting. A member who wants an AGM held must go to the Tribunal under section 97.

(b) The notice period

Under section 101(1), a general meeting may be called by giving not less than clear twenty-one days' notice, either in writing or in electronic mode in the manner prescribed.

"Clear" twenty-one days means twenty-one full days, excluding both the day on which the notice is served or deemed to be served and the day of the meeting. Where the notice is sent by post, it is deemed served on the expiry of forty-eight hours after it is posted, so in practice a further two days must be allowed.

Shorter notice. The proviso permits a general meeting to be called on shorter notice if consent is given in writing or by electronic mode:

1. In the case of an annual general meeting, by not less than ninety-five per cent of the members entitled to vote at that meeting; and

Time and place, section 96(2). The meeting must be held during business hours, that is between 9 a.m. and 6 p.m., on a day that is not a National Holiday, and either at the registered office of the company or at some other place within the city, town or village in which the registered office is situate.

(c) The quorum

Section 103(1) fixes the quorum. Unless the articles provide for a larger number:

Two points that are regularly examined:

1. The words are "personally present". A member represented by a proxy is not counted for the quorum, although a proxy may vote on a poll. A representative of a body corporate appointed under section 113 is counted as personally present; and

Conclusion. On these facts the answer to (a) is that the Board of Directors calls an annual general meeting by a resolution passed at a Board meeting, and if the company defaults the Tribunal may on the application of any member call or direct the calling of one under section 97. The answer to (b) is not less than twenty one clear days' notice in writing or electronically, shorter notice being permissible with the consent of not less than ninety five per cent of the members entitled to vote. The answer to (c) is that under section 103 the quorum is two members personally present in a private company, and in a public company five, fifteen or thirty according as the members are up to one thousand, up to five thousand, or more.