LLM Group 2 Business Law Corporate Law 2019 Question Paper with Solutions

For full marks, cover: three limbs. Managerial personnel as section 2(51) defines them and sections 196, 197 and 203 regulate them, with the remuneration ceiling stated as a number; the Board through the paper's own four words, rights, duties, liabilities and disabilities, with section 166 and section 164 doing most of the work; and meetings as two distinct systems with the notice, quorum and majority rules given as figures, because those are what an examiner can mark.

Managerial personnel and the administration of the company

Section 2(51) defines key managerial personnel exhaustively: the Chief Executive Officer or the managing director or the manager; the company secretary; the whole-time director; the Chief Financial Officer; and such other officer, not more than one level below the directors, in whole-time employment and designated as such by the Board.

Section 196 governs the appointment of the managing director, whole-time director or manager: no company may appoint a managing director and a manager at the same time; the term may not exceed five years at a time, and reappointment may not be made earlier than one year before expiry; the appointee must be between twenty one and seventy years of age, appointment beyond seventy requiring a special resolution or, since 2017, an ordinary resolution with the Central Government's satisfaction; he must not be an undischarged insolvent, must not have suspended payment to creditors and must not have been sentenced to imprisonment for more than six months; and the appointment must be approved by the Board and by the company in general meeting and comply with Schedule V or be approved by the Central Government.

The role, as distinct from the machinery, is the point to state. Section 179(1) vests in the Board all the powers the company may exercise, so managerial personnel act by delegation; section 179(3) lists the powers exercisable only at a Board meeting, with a proviso permitting borrowing, investment and lending to be delegated to a committee, the managing director, the manager or a principal officer; and section 180 reserves four decisions to the members by special resolution. Administration is therefore a three-tier structure: the members hold the largest powers, the Board holds the residue and delegates the day to day, and the key managerial personnel execute and are liable as officers in default within section 2(60).

The Board: rights

Section 149(1) fixes the composition: three directors for a public company, two for a private company, one for a One Person Company, a maximum of fifteen beyond which a special resolution is needed, at least one woman director in prescribed classes, and, under section 149(4), at least one third independent directors in a listed public company; section 149(3) requires one director resident in India for one hundred and eighty two days.

The Board: duties

Section 166 codified the duties for the first time in Indian law. A director must act in accordance with the articles; act in good faith to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment; exercise his duties with due and reasonable care, skill and diligence and exercise independent judgment; avoid any situation of conflict; not achieve any undue gain for himself or his relatives, partners or associates, and if he does, pay an equivalent amount to the company; and not assign his office, any assignment being void.

Three provisions enforce them. Section 184 requires disclosure of interest at the first Board meeting of each financial year and before any contract, an interested director not counting in the quorum. Section 188 requires Board approval, and above thresholds a members' resolution, for related party transactions. Sections 185 and 186 restrict loans to directors and cap loans and investments at sixty per cent of paid-up capital, free reserves and securities premium, or one hundred per cent of free reserves and securities premium, whichever is higher.

The Board: disabilities

The paper's word means the disqualifications and the restrictions on office. Section 164(1): unsound mind so declared; undischarged insolvent; a pending insolvency application; conviction with a sentence of not less than six months where five years have not elapsed, and permanent disqualification on a sentence of seven years or more; an order of disqualification by a court or Tribunal; calls unpaid for six months; conviction under section 188 in the preceding five years; and non-compliance with section 152(3) on the Director Identification Number.

Section 164(2) disqualifies for five years a person who is or has been a director of a company that has not filed financial statements or annual returns for three continuous financial years or has defaulted for a year in repaying deposits, redeeming debentures or paying declared dividend. Section 165 caps directorships at twenty, of which ten may be public companies. Section 167 vacates the office on a disqualification, on absence from all Board meetings during twelve months, on contravening section 184, and on conviction. Section 169 permits removal by ordinary resolution after special notice and a hearing.

The legal mechanisms for conducting meetings

Two systems, and they must not be run together.

The machinery. Section 101, twenty one clear days' notice, with shorter notice on the consent of ninety five per cent of the members entitled to vote. Section 102, an explanatory statement for special business. Section 103, quorum of five, fifteen or thirty members personally present for a public company according to its membership, and two for a private company, with the adjournment rules in section 103(2) and (3). Section 105, a proxy who may not speak and may vote only on a poll, and who, under Rule 19(2) of the Companies (Management and Administration) Rules, 2014, may not act for more than fifty members holding in the aggregate not more than ten per cent of the total share capital carrying voting rights.

Section 109, a poll on the demand of members holding one tenth of the voting power or five lakh rupees of paid-up capital. Sections 108 and 110, electronic voting and postal ballot for prescribed companies and items. Section 114, the ordinary resolution by simple majority and the special resolution requiring the votes in favour to be not less than three times the votes against. Sections 117, 118 and 119, filing of resolutions, minutes within thirty days as evidence of the proceedings, and members' inspection.

Two decisions that govern meetings and the division of power

Life Insurance Corporation of India v. Escorts Ltd., (1986) 1 SCC 264, decided on 19 December 1985, is the leading Indian case on the requisitioned meeting. The Life Insurance Corporation, holding a large stake in Escorts, requisitioned an extraordinary general meeting to remove several directors before the expiry of their terms and appoint others. The company resisted, arguing among other things that the Corporation, as an instrumentality of the State, must disclose the reasons for the resolutions it proposed.

The Supreme Court held that a shareholder, including a State instrumentality acting as a shareholder, has the same right as any other member to requisition a meeting and is not bound to disclose his motives; the duty to give an explanatory statement of material facts lies on the management in respect of business it brings, not on the requisitionists. The case is the practical guarantee behind section 100: the power to call a meeting would be worth nothing if the board could demand reasons first.

Conclusion. Administration runs through three tiers: the members, who hold the four powers in section 180 and act at meetings governed by sections 96 to 122; the Board, which holds every other power under section 179(1) and acts at meetings governed by sections 173 to 175; and the key managerial personnel under sections 2(51), 196, 197 and 203, who execute what is delegated for remuneration the Act caps at eleven per cent of net profits. The Board's rights are collective and its individual rights procedural; its duties are those in section 166; its liabilities run to the company, to outsiders and to the State, qualified for independent directors by section 149(12); and its disabilities are the disqualifications in section 164 and the vacation provisions in section 167.