Question 1

The Board of Directors of ABC Company Limited at its board meeting declared an interim dividend on its paid-up equity shares capital which was later on approved by the company's Annual General Meeting. In the meantime, the directors diverted the amount of total dividend to be paid to shareholders for purchase of investments for the company. Due to this diversion, no dividend was paid to shareholders after 43 days of declaration. Examining the provisions of the Companies Act, 2013, state whether the act of directors is in violation of the provisions of the Companies Act, 2013. Also explain what are the consequences of the above act of directors.

Accepted Answer

**Analysis of Director's Conduct and Statutory Violation:**

Yes, the act of the directors constitutes a clear violation of the provisions of the Companies Act, 2013. The situation involves multiple breaches of the statutory framework governing dividend declaration and payment.

**Violation of Section 127 - Time Limit for Payment:**
Under Section 127 of the Companies Act, 2013, every dividend declared must be paid within **30 days** from the date of its declaration. In the present case, the dividend remains unpaid even after 43 days, which is a direct contravention of this mandatory requirement. The provision is absolute and does not provide discretion to the company or its directors to delay payment.

**Violation of Section 123 - Proper Application of Dividend Fund:**
Section 123 prescribes that dividend shall be declared or paid only in accordance with the provisions of the Act and only from profits, reserves, or accumulated profits. The diversion of dividend funds for purchasing investments constitutes a misuse of shareholder funds. The amount declared as dividend creates a legal obligation to distribute to shareholders and cannot be redirected for other corporate purposes without shareholder approval.

**Breach of Director's Fiduciary Duty:**
Under Section 166 of the Companies Act, 2013, a director must act in accordance with the Articles of Association and the provisions of the Act. Directors owe a fiduciary duty to the company and its shareholders. The diversion of divi…

Question 2

Due to urgent need of money amounting to ₹ 3,00,000, Pawan approached to Raman and asked him for the money. Raman lent the money on the guarantee of Suraj, Tarun and Usha. However, there is no contract between Suraj, Tarun and Usha. Pawan makes default in payment and Suraj pays full amount to Raman. Suraj, afterwards, claimed contribution from Tarun and Usha. Tarun refused to contribute on the basis that there is no contract between Suraj and him. Examine referring to the provisions of the Indian Contract Act, 1872, whether Tarun can escape from his liability.

Accepted Answer

**No, Tarun cannot escape from his liability to contribute.**

**Nature of Co-Surety Relationship:**
When multiple parties provide guarantee for the same debt without any differentiation, they become co-sureties to each other by operation of law. This relationship arises not from any direct contract between the sureties but from the legal status they occupy jointly as guarantors. The absence of a contract between Suraj and Tarun does not negate this legal relationship.

**Applicable Legal Provisions:**
Section 145 of the Indian Contract Act, 1872 explicitly addresses this situation. It provides: "When a surety pays money due by a principal debtor, or otherwise satisfies the claim of a creditor, he is entitled to recover from each of the co-sureties the amount which each of them ought to have contributed towards the payment of the debt." This section clearly establishes the right of contribution among co-sureties as a matter of law.

**Key Principles:**
The right of contribution granted under Section 145 is inherent to the relationship of co-suretyship and does not depend upon any express contract between the co-sureties. When Suraj paid the entire debt of ₹3,00,000 to Raman following Pawan's default, he automatically acquired the legal right to seek contribution from his co-sureties. Tarun's argument that no contract exists between him and Suraj is irrelevant and cannot absolve him of this statutory liability.

**Determination of Contribution:**
Section 146 of the Act states …

Question 3

'M' is the holder of a bill of exchange made payable to the order of 'F'. The bill-exchange contains the following endorsements in blank: First endorsement 'N', Second endorsement 'O', Third endorsement 'P' and Fourth endorsement 'Q'. 'M' gives out, without Q's consent, the endorsements by 'O' and 'P'. Decide, with reasons, whether 'M' is entitled to recover anything from 'Q' under the provisions of the Negotiable Instruments Act, 1881.

Accepted Answer

**Yes, M is entitled to recover from Q.**

**Reasons:**

**1. Nature of Endorsement in Blank:**
Under Section 51 of the Negotiable Instruments Act, 1881, an endorsement in blank specifies no endorsee. The bill becomes payable to bearer, and any person in possession becomes the lawful holder. When Q endorsed in blank, Q accepted that the bill could be freely negotiated.

**2. Q's Liability as Endorser:**
Section 137 of the Negotiable Instruments Act, 1881 establishes that an endorser is liable in case of dishonor to the holder for the time being and to all prior holders, unless the endorsement contains words excluding such liability. Q made an unconditional endorsement, thereby incurring full endorser liability to any subsequent holder.

**3. M's Status and Rights:**
M is the holder in possession of the bill with Q's endorsement. Since Q's endorsement is in blank, M qualifies as a lawful holder of the bill. M can therefore call upon Q as an endorser for payment upon dishonor.

**4. Lack of Consent is Irrelevant:**
The critical point is that by endorsing in blank, Q voluntarily surrendered control over the bill's further negotiation. Q cannot later claim that the bill was transferred without consent and use this as a defense. An endorsement in blank is a standing authorization to any bearer to negotiate the bill further. Section 48 of the Act provides that negotiation can occur by transfer of the bill in such manner as to constitute the transferee the holder, regardless of prio…

Question 4

Chiraysh, an Indian citizen and resident of India formed "Ekta Readymade Garments Ltd." as One Person Company on 1st April 2018 with his wife Mrs. Jyoti as nominee. The authorized and paid-up share capital of the company is ₹ 15 lakhs. He got in touch with a readymade garments buyer and was expecting to receive a substantial order by August 2020 whose final delivery will be completed by December 2020. To expand the production capacity, the company decided to invest an additional capital of ₹ 10 lakhs in plant and machinery. As a result, the company's authorized and paid-up share capital is now ₹ 25 lakhs. Promoter of the company seeks your advice. Considering the case and referring to the provisions of the Companies Act, 2013, advise:

Accepted Answer

**(A) Eligibility to act as a member of OPC:**

As per **Rule 3 of the Companies (Incorporation) Rules, 2014** read with **Section 2(62) of the Companies Act, 2013**, only a **natural person** who is an **Indian citizen and resident in India** is eligible to be the member (and also the nominee) of an OPC. Additionally, such a person should **not be a member of more than one OPC** at any point of time. A **minor** cannot be a member or nominee of an OPC.

In the given case, Chiraysh being an Indian citizen and resident of India is rightly the member, and his wife Mrs. Jyoti being a natural person and Indian resident is validly the nominee.

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**(B) Whether Ekta Readymade Garments Ltd. can convert as on 1st December 2020:**

As per **Rule 6(2) of the Companies (Incorporation) Rules, 2014**, an OPC **cannot voluntarily convert** into any other form of company unless **2 years have elapsed** from the date of its incorporation, except where paid-up share capital exceeds ₹50 lakhs or average annual turnover exceeds ₹2 crores.

In the given case:
- Date of incorporation: **1st April 2018**
- Two years completed: **1st April 2020**
- Date of proposed conversion: **1st December 2020** (more than 2 years have elapsed ✓)
- Paid-up share capital: ₹25 lakhs (does not exceed ₹50 lakhs)

**Yes**, Ekta Readymade Garments Ltd. **can voluntarily convert** into any other kind of company (private or public) as on 1st December 2020, since more than 2 years have elapsed from the date of incorpo…

Question 5

'M' is the holder of a bill of exchange made payable in the order of 'P'. The bill of exchange contains the following endorsements in blank: First endorsement 'N', Second endorsement 'O', Third endorsement 'P' and Fourth endorsement 'Q'. 'M' strikes out, without Q's consent, the endorsements by 'Q' and 'P'. Decide, with reasons, whether 'M' is entitled to recover anything from 'Q' under the provisions of the Negotiable Instruments Act, 1881.

Accepted Answer

**M is entitled to recover from Q under Section 130 of the Negotiable Instruments Act, 1881.**

The bill of exchange was originally payable to P. The endorsements appear in the following sequence: N, O, P, and Q. M is the current holder. M subsequently struck out the endorsements of both P and Q without obtaining Q's consent.

**Applicable Law:** Section 130 of the Negotiable Instruments Act, 1881 provides: "The striking out of the name of an endorser does not discharge him as against the holder, unless the holder's consent is obtained."

**Analysis:** An endorser is liable to all subsequent holders of the bill. When M struck out Q's endorsement without Q's consent, this action did not discharge Q from liability. The mere striking out of an endorsement does not extinguish the endorser's liability—it only removes the endorsement from the face of the instrument. Q, having endorsed the bill, remains liable as an endorser despite the subsequent striking out of their name.

**Application:** The striking out was done without Q's consent, which means Q is not discharged from liability under Section 130. Q had incurred the obligation of an endorser by endorsing the bill, and this liability persists even after the endorsement is struck out. M, being the holder of the bill, can hold Q liable as an endorser and recover the amount of the bill from Q.

**Conclusion:** M is entitled to recover from Q because Q's liability as an endorser is not discharged by the striking out of the endorsem…

Question 6

A confusion regarding the meaning of 'financial year' arose among the finance executive and accountant of a company. Both were having different arguments regarding the meaning of financial year & calendar year. What is the correct meaning of financial year under the provision of the General Clauses Act, 1897? How it is different from calendar year?

Accepted Answer

**Definition of Financial Year under General Clauses Act, 1897**

**Section 3(24)** of the General Clauses Act, 1897 defines 'Financial Year' as the financial year as defined in the Constitution of India. As per constitutional provisions and statutory law, the **financial year in India runs from 1st April to 31st March** of the following calendar year. For example, the financial year 2025-26 means the period from April 1, 2025 to March 31, 2026.

**Key Characteristics of Financial Year:**

The financial year is the **statutory period** for which accounts are maintained, financial statements are prepared, and government budgets are formulated. It is the period used for assessing income under income tax laws, preparing financial statements under the Companies Act, 2013, and for all official government accounting purposes.

**Definition of Calendar Year**

The **calendar year** refers to the ordinary civil year that runs from **1st January to 31st December** of the same year. It follows the Gregorian calendar.

**Differences between Financial Year and Calendar Year**

1. **Duration and Timing:** Financial year runs April to March of the next year, while calendar year runs January to December of the same year. They do not coincide.

2. **Statutory Recognition:** Financial year has statutory significance under Indian law and is used for all official and legal purposes. Calendar year has no statutory significance for financial or legal purposes in India.

3. **Accounting and Report…

Question 7

Following is the extract of the Balance sheet of Betex Ltd. as on 31st March, 2020: [See balance sheet data - question prompt continues on next page]

Accepted Answer

**Incomplete Question:** The balance sheet data referred to in the question has not been provided. The prompt states '[See balance sheet data - question prompt continues on next page]' but the actual figures (share capital, reserves, liabilities, etc.) are missing. Please provide the complete balance sheet extract so that the analysis can be performed accurately.

Question 8

In what way are the following terms considered as external aid in the interpretation of statutes:

Accepted Answer

**External aids** are materials outside the statute that assist in understanding its true meaning and legislative intent. The following are recognised as external aids:

**Historical Setting** refers to the historical circumstances, social, economic, political, and legal conditions existing at the time of enactment of the statute. It aids interpretation in the following ways: (i) It helps identify the **mischief or problem** that the statute was intended to remedy, which is essential to the rule of mischief; (ii) It provides context for understanding why certain provisions were enacted and what evil the legislature sought to cure; (iii) It illuminates the legislative intent by showing the state of prior law and the gaps or defects the new statute addressed; (iv) It assists in interpreting ambiguous provisions by reference to the circumstances that prompted their inclusion. For example, understanding the state of monopolistic trade practices preceding the Monopolies and Restrictive Trade Practices Act helps interpret its provisions. Historical setting is thus crucial for purposive and contextual interpretation.

**Use of Foreign Decisions** are judicial pronouncements from courts of other countries that provide persuasive authority in interpretation. They aid interpretation as follows: (i) They are **not binding** but offer **persuasive guidance** on principles of statutory construction and legal reasoning; (ii) They are particularly valuable when the statute contains language…

Question 9

Explain the provisions of e-voting in an annual general meeting in the following cases as per the Companies Act, 2013:

Accepted Answer

**Part (i): E-voting in Joint Demat Accounts**

In the case of joint Demat holdings, as per **Section 108 of the Companies Act, 2013** and **Regulation 44 of SEBI (LODR) Regulations, 2015**, only the **first named shareholder** is entitled to vote in the e-voting system. Therefore, **'A' will cast the vote** in the e-voting system, and **'B' (the wife) cannot exercise voting rights** on the jointly held shares.

The rationale is that joint holdings cannot have conflicting votes, and the law permits only the first holder to vote to avoid any deadlock or dispute. In physical voting, all joint holders can vote jointly, but in e-voting, this facility is restricted to the first holder only.

**Part (ii): E-voting Period and Closing Time**

As per **Rule 20 of the Companies (Management and Administration) Rules, 2014**, the e-voting period shall:
• **Commence**: 4 (four) days prior to the date of the AGM
• **End**: At 5:00 PM (17:00 hours) on the date immediately preceding the date of the AGM

For an AGM scheduled on **07-09-2020**:
• **E-voting Period Starts**: 03-09-2020 (3rd September 2020)
• **E-voting Period Ends**: 06-09-2020 (6th September 2020) at **5:00 PM**

This ensures a sufficient window for shareholders to cast their votes electronically before the actual AGM is held.

Question 10

Examine the validity of the following with reference to the relevant provisions of the Companies Act, 2013:

Accepted Answer

**Validity of Refusal to Convene EGM for Lack of Explanatory Statement**

**Relevant Provisions:** Section 100 and Section 102 of the Companies Act, 2013 govern the convening of Extraordinary General Meetings (EGMs) on requisition and the requirement of an explanatory statement respectively.

**Provisions Relating to Requisition of EGM (Section 100):**

Under **Section 100(2)** of the Companies Act, 2013, the Board of Directors is bound to call an EGM on the requisition of members holding, on the date of receipt of requisition, not less than **one-tenth of the paid-up share capital** of the company carrying voting rights.

As per **Section 100(4)**, the requisition shall:
- Set out the **matters for consideration** at the proposed meeting;
- Be **signed by the requisitionists**; and
- Be sent to the **registered office** of the company.

The Board is required to, within **21 days** from receipt of a valid requisition, call a meeting to be held within **45 days** from the date of receipt of such requisition.

**Provisions Relating to Explanatory Statement (Section 102):**

Under **Section 102(1)** of the Companies Act, 2013, where any items of special business are to be transacted at a general meeting, a statement setting out all **material facts concerning each item of special business** shall be annexed to the notice of the meeting. This obligation is cast upon the **company (i.e., the Board of Directors)**, not upon the requisitionists.

**Analysis and Conclusion:**

The on…

Question 11

RD Ltd issued a prospectus. All the statements contained therein were literally true. It also stated that the company had paid dividends for a number of years but did not disclose the fact that the dividends were not paid out of trading profits but out of capital profits. An allottee of shares claims to avoid the contract on the basis that the prospectus was false in material particulars. Decide that the argument of shareholder, as per the provisions of the Companies Act, 2013, is correct or not?

Accepted Answer

The shareholder's argument is **CORRECT**. The prospectus is misleading and constitutes misrepresentation despite containing literally true statements.

**Principle of Half-Truths and Implied Misrepresentation:**
Under company law, a prospectus can be misleading not only through express false statements but also through **omission of material facts**. Statements that are literally true but create a false impression by withholding crucial information constitute implied misrepresentation. This principle is embedded in Section 24 of the Companies Act, 2013, which requires prospectuses to contain all **material particulars**.

**Materiality of Omitted Fact:**
The source of dividends—whether paid from **trading profits** or **capital profits**—is a material particular that substantially affects:
- The financial health and stability of the company
- The **sustainability of future dividends**
- The investor's investment decision and expected returns
Payment from capital indicates erosion of capital and unsustainable distributions, fundamentally different from earnings-based dividends.

**Application of Section 24, Companies Act, 2013:**
A prospectus must disclose all material facts necessary for informed decision-making. By stating that dividends were paid while concealing that they came from capital (not profits), the prospectus **misleads investors about the company's profitability and financial position**. This creates a false narrative of consistent earnings performance.

**Reli…

Question 12

Referring to the provisions of the Companies Act, 2013, regarding appointment of director, answer the following:

Accepted Answer

**Sub-part (i): Appointment of First Auditor of a Government Company**

As per **Section 139(7) of the Companies Act, 2013**, in the case of a **Government company** (i.e., a company owned or controlled, directly or indirectly, by the Central Government), the **Comptroller and Auditor General of India (C&AG)** shall appoint the first auditor within **60 days** from the date of registration of the company.

If the C&AG does not make the appointment within the said 60 days, the **Board of Directors** of the company shall appoint the first auditor within the **next 30 days**.

If the Board also fails to appoint within those 30 days, it shall inform the **members of the company**, who shall appoint the first auditor within **60 days** at an **Extraordinary General Meeting (EGM)**.

The first auditor so appointed shall hold office until the conclusion of the **first Annual General Meeting (AGM)** of the company.

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**Sub-part (ii): Filling of Casual Vacancy caused by Resignation — Government Company vs. Other Company**

When Mr. Kanal (auditor of XYZ Ltd., a Government company) resigned on 31st December, 2020 before the end of the financial year (31st March, 2021), a **casual vacancy** arises in the office of auditor.

**Provisions for a Government Company [Section 139(8)(ii)]:**

As XYZ Ltd. is a Government company, its accounts are subject to audit by an auditor appointed by the **C&AG**. Therefore, any casual vacancy (including one arising from resignation) shall be filled b…

Question 13

Referring to the provisions of the Negotiable Instruments Act, 1881 give the answer of the following:

Accepted Answer

**Part (i): Material Alteration – Addition of 'On Demand'**

No, adding the words 'on demand' to a promissory note that was originally silent on time of payment does NOT constitute a **material alteration** under the Negotiable Instruments Act, 1881.

Under **Section 87** of the NIA, 1881, an alteration is material only if it alters the liability of any party to the instrument, such as altering the date, sum payable, time of payment, place of payment, or the payee's name in a manner that changes the effect of the instrument.

However, **Section 106** of the NIA provides that a promissory note on which no time of payment is specified is payable **on demand**. This is the legal position by operation of law. When the holder added 'on demand' to the instrument, no change in legal liability occurred. The instrument was already deemed payable on demand before this addition. The words merely clarify and give express effect to what the law had already established. Since the legal effect and liability of the instrument remain unchanged, the addition of 'on demand' is not a **material alteration**. It is a clarification rather than a substantive change.

**Part (ii): Shreya as Holder in Due Course**

No, Shreya is **not a holder in due course** of the cheque.

As per **Section 9** of the NIA, 1881, a "holder in due course" is defined as a person who, **for consideration**, became the possessor of a negotiable instrument before it was overdue, when it was complete and regular on the fac…

Question 14

Explain the Mischief Rule—the role in Heydon's case for interpretation of statute. Also give four matters it considers in construing an Act.

Accepted Answer

The **Mischief Rule** is a rule of statutory interpretation that seeks to identify and remedy the defect or 'mischief' in the law existing before the statute was passed. Rather than interpreting words literally, this rule looks at the purpose the legislation intended to achieve and construes the Act in a way that advances that purpose.

**Heydon's Case (1584)** established the foundational framework for the Mischief Rule. In this landmark case, the court held that when interpreting a statute, the court should look to the legislative intent behind the enactment and interpret the words in a manner that suppresses the mischief the Act was designed to remedy while advancing the remedy Parliament intended. This approach prioritizes legislative purpose over strict literal meaning.

The **Four Matters** to be considered in construing an Act under the Mischief Rule are:

**1. The Common Law Before the Act:** The court must examine what the law was before the statute was enacted—what the pre-existing legal position was.

**2. The Mischief or Defect:** The court must identify the defect, gap, or mischief in the common law for which no adequate remedy existed. This is the problem Parliament sought to address.

**3. The Remedy Appointed:** The court must determine what remedy Parliament has appointed or provided through the statute to cure this mischief.

**4. The True Reason for the Remedy:** The court must discern the true reason and object behind the remedy Parliament chose—the legisl…

Question 15

Examine that following offers of ABC Limited are in compliance with provisions of the Companies Act, 2013, related to private placement or should these offers be treated as public:

Accepted Answer

**Section 42 of the Companies Act, 2013** deals with private placement, while **Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014** prescribes the conditions. The key provision is that an offer of securities shall be treated as a private placement only if made to **not more than 50 persons during any financial year**, with qualified institutional buyers (QIBs) excluded from this count. If this limit is exceeded, the offer must be treated as a public offer and requires issuance of a prospectus.

**(i) 55 persons + 4 QIBs for equity shares:** The 4 QIBs are excluded from the 50-person limit as per Rule 14. The remaining 55 non-QIB persons **exceed the threshold of 50 persons**. Therefore, this offer **should be treated as a public offer** and **does not comply** with private placement provisions. A prospectus must be issued. The company is **in violation** of Section 42 and Rule 14.

**(ii) Additional 125 persons for debentures:** When another offer is made before allotment in the same financial year, the count of persons accumulates. Total persons offered to = 55 (from part i) + 125 (new offer) = **180 persons** (excluding QIBs). This **far exceeds the 50-person limit** and both offers collectively **should be treated as public offers**. Both offerings **fail to comply** with private placement provisions.

**(iii) Public company issuing in private placement:** **No, a public company cannot issue securities through private placement under Section 42.…

Question 16

Explain the Mischief Rule/the rule in Heydon's case for interpretation of statute. Also give instances if it considers in construing an Act.

Accepted Answer

The Mischief Rule (Rule in Heydon's case, 1584) is a purposive method of statutory interpretation used when literal interpretation proves insufficient or leads to absurd results. It requires courts to identify and remedy the mischief (defect or problem) that the statute was enacted to cure. The rule operates through a **four-step analysis**: (1) ascertain what the common law position was before the statute; (2) identify what mischief or defect existed in that common law; (3) determine what remedy the statute provided; and (4) interpret the statute in a manner that suppresses the mischief and advances the intended remedy. Unlike the literal rule, which strictly follows grammatical meaning, the Mischief Rule prioritizes **legislative intent and purpose** over strict textual construction. **Instances Where the Rule is Applied**: The rule is invoked when **statutory language is ambiguous or unclear** — courts look to the statute's purpose to resolve ambiguity. When **literal interpretation produces absurd or unreasonable results** that could not have been contemplated by the legislature, the Mischief Rule enables adoption of a reasonable interpretation. When a statute is enacted to **remedy a known defect in prior law**, the rule ensures interpretation advances this curative objective. The rule applies when there are **gaps or omissions** in statutory language that impede achieving the Act's purpose. It extends the statute's application to **analogous cases** falling within the m…

Question 17

Answer the following questions according to the Companies Act, 2013, in above case:

Accepted Answer

**Part (A): Sources that can be used to issue Bonus Shares**

Under **Section 63(1) of the Companies Act, 2013**, a company may issue fully paid-up bonus shares to its members out of:
(i) **Free Reserves** — including general reserve, surplus in profit & loss account, etc.
(ii) **Securities Premium Account** — collected under Section 52.
(iii) **Capital Redemption Reserve Account** — created on redemption of preference shares.

**Revaluation Reserve** cannot be used for issuing bonus shares, as gains arising from revaluation of assets are unrealised and notional in nature. If the original case listed sources such as General Reserve, Securities Premium, Capital Redemption Reserve — all three are valid. Any Revaluation Reserve listed is **not** a permissible source.

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**Part (B): Amount to be Capitalised from Free Reserves**

After receipt of the final call of ₹2 each on 90,000 equity shares, all shares become fully paid-up.

Bonus ratio: **1 share for every 4 shares held**.

Number of Bonus Shares = 90,000 ÷ 4 = **22,500 shares**

Assuming face value of ₹10 per share (standard denomination):

Amount to be Capitalised = 22,500 × ₹10 = **₹2,25,000**

This amount of ₹2,25,000 is to be transferred from Free Reserves (or other permissible sources) to the Share Capital Account by way of capitalisation.

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**Part (C): Can Bonus Shares be issued if Final Call was NOT made?**

**No**, the company cannot issue bonus shares if the final call was not made.

Section **63(2)(e) of th…

Question 18

Diya Limited, incorporated under the provisions of the Companies Act, 2013, has two subsidiaries – Jai Limited and Vijay Limited. All three companies have prepared their financial statements for the year ended 31st March, 2021. Examining the provisions of the Companies Act, 2013, explain in what manner the subsidiaries – Jai Limited and Vijay Limited shall present their Balance Sheet and Statement of Profit and Loss?

Accepted Answer

**Presentation by Subsidiaries – Jai Limited and Vijay Limited:**

Under the Companies Act, 2013, the subsidiaries shall present their Balance Sheet and Statement of Profit and Loss as follows:

**Standalone Financial Statements Only:** The subsidiaries are required to prepare their **standalone (individual) Balance Sheet and Statement of Profit and Loss** reflecting their own financial position and performance separately from the holding company. These are not consolidated statements.

**Format Compliance:** The Balance Sheet and Statement of Profit and Loss must be presented in the format prescribed under **Schedule III** of the Companies Act, 2013. The format specifies the classification and presentation of assets, liabilities, income, and expenses in a standardized manner.

**Accounting Standards:** The financial statements shall be prepared in accordance with applicable **Accounting Standards** – either Ind AS (Indian Accounting Standards) or AS (Accounting Standards), as applicable based on company classification and size criteria prescribed by the Ministry of Corporate Affairs.

**No Consolidated Requirement for Subsidiaries:** As per **Section 129** of the Companies Act, 2013, only the holding company (Diya Limited) is mandated to prepare consolidated financial statements. The subsidiaries are **not required** to prepare consolidated statements. Consolidated financial statements are the responsibility of entities holding subsidiaries, associates, or joint ventures.

*…

Question 19

The Companies Act, 2013 has prescribed an additional duty on the Board of directors to include in the Board's Report a 'Directors' Responsibility Statement'. Briefly explain any three matters to be furnished in the said statement.

Accepted Answer

The **Directors' Responsibility Statement** as mandated by Section 134(3) of the Companies Act, 2013 requires the Board to confirm certain matters in the Board's Report. Any three of the following key matters are:

**1. Accounting Standards Compliance**: The directors confirm that in preparation of annual accounts, the applicable accounting standards have been followed and proper explanation has been furnished relating to any material departures. This ensures financial statements are prepared in accordance with prescribed standards, enhancing comparability and reliability of reported figures.

**2. Maintenance of Adequate Accounting Records**: The directors confirm that proper and sufficient care has been taken for maintaining adequate accounting records in accordance with the Companies Act, 2013 for safeguarding company assets and for preventing and detecting fraud and other irregularities. This underscores the importance of robust documentary evidence and accountability of all financial transactions.

**3. Internal Financial Controls**: The directors confirm that they have laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively during the financial year. This ensures the company possesses appropriate systems to guarantee the integrity of financial reporting and effectiveness of operations.

Other matters that may be included are: selection and consistent application of accounti…

Question 20

What are the provisions of the Companies Act, 2013 relating to the appointment of 'Debenture Trustee' by a company? Whether the following can be appointed as 'Debenture Trustee'?

Accepted Answer

**Provisions for Appointment of Debenture Trustee under Companies Act, 2013:**

Section 117 of the Companies Act, 2013 mandates that a company shall appoint a trustee to protect the interests of debenture holders. A **Debenture Trustee** is a custodian appointed to safeguard debenture holders' rights and enforce compliance with debenture conditions. The Act specifies strict disqualifications to ensure independence and impartiality of the trustee.

**Key Disqualifications under Section 117:**

No person can be appointed as Debenture Trustee if they:
1. Are a director, manager, or officer of the company or its subsidiary/associate company
2. Hold shares in the company exceeding ₹ 500 (or prescribed amount)
3. Are a creditor of the company for an amount exceeding ₹ 500 (or prescribed amount)
4. Have given a guarantee for repayment of debentures issued by the company
5. Are a minor, of unsound mind, or undischarged insolvent
6. Are disqualified by court order or under Section 164 of the Act
7. Are already trustee for another debenture issue of the same company (unless exceptions apply)

**Answers to Sub-questions:**

**(i) Shareholder with shares of ₹ 10,000:** **Cannot be appointed.** Under Section 117, a shareholder holding shares exceeding ₹ 500 is disqualified. Since ₹ 10,000 exceeds ₹ 500, this person is ineligible for appointment as Debenture Trustee.

**(ii) Creditor owed ₹ 999:** **Cannot be appointed.** The company's creditor for an amount exceeding ₹ 500 cannot be appoi…

Question 21

Discuss the following situations in the light of 'Deposit provisions' as contained in the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014, as amended from time to time:

Accepted Answer

**(i) Convertible Note — Deposit or Not?**

Under **Rule 2(1)(c)(xix)** of the **Companies (Acceptance of Deposits) Rules, 2014**, an amount received by a **start-up company** by way of a **convertible note** is excluded from the definition of 'deposit', provided:
- It is received in a **single tranche of ₹25 lacs or more**, AND
- The note is convertible into equity shares or repayable within a period **not exceeding 5 years** from the date of issue.

In the present case, Moon Technology Private Limited is a start-up company. However, **two conditions are violated**: (a) the amount is ₹20 lacs, which is **less than the minimum threshold of ₹25 lacs**, and (b) the repayment period is **6 years**, which **exceeds the permissible 5 years**. Since neither condition is satisfied, the exemption is not available. The amount received from Prem will **constitute a 'deposit'** under the Companies Act, 2013.

**(ii) Deposits from Members for Tenure Less Than Six Months**

Under **Section 73(2) of the Companies Act, 2013** read with **Rule 3(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014**, a company may accept deposits from its members for a minimum period of **6 months and maximum of 36 months**.

However, there is a **specific proviso** to Rule 3(1)(c) which permits a company, for the purpose of meeting **short-term requirements of funds**, to accept deposits repayable **not earlier than 3 months** from the date of acceptance (i.e., tenure between 3 months and less than 6…

Question 22

On 1st April, 2020 the company has made final call at ₹ 2 each on 90,000 Equity Shares. The Call Money was received by 25th April, 2020. Thereafter the company decided to capitalize its reserves by way of bonus @ 1 share for every 4 shares to existing shareholders.

Accepted Answer

**Sub-part (A): Sources Eligible for Bonus Issue**

As per **Section 63(1) of the Companies Act, 2013**, a company may issue fully paid-up bonus shares out of the following sources:

1. **Free Reserves** — General Reserve, Profit & Loss Account balance, and other free reserves built from genuine profits.
2. **Securities Premium Account** — Collected under Section 52 of the Companies Act, 2013.
3. **Capital Redemption Reserve (CRR)** — Created on redemption of preference shares or buyback of equity shares.

Important restrictions under Section 63(2): Reserves created by revaluation of assets **cannot** be used for bonus issue. Any reserve that is not distributable as dividend (other than the three listed above) is also ineligible.

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**Sub-part (B): Amount to be Capitalised from Free Reserves**

Step 1 — Determine the number of fully paid shares after final call:
After receipt of final call money on 25th April 2020, the total fully paid-up shares = **90,000 shares**.

Step 2 — Determine bonus shares to be issued:
Bonus ratio = 1 share for every 4 existing shares
Bonus shares = 90,000 ÷ 4 = **22,500 shares**

Step 3 — Amount to be capitalised (assuming face value ₹10 per share):
Amount = 22,500 × ₹10 = **₹2,25,000**

This amount is to be transferred from the eligible sources (Free Reserves / Securities Premium / CRR) to the Share Capital Account. The journal entry would be:
**Dr. Free Reserves / Securities Premium / CRR A/c ₹2,25,000**
**Cr. Bonus to Shareholders A/c ₹2,25,0…

Question 23

Mr. Raman, a Chartered Accountant, was appointed as an auditor of Surya Distributors Ltd., in the AGM of the company held in August, 2020, in which he accepted the assignment. Later in November, 2020, he joined as a partner in the Consultancy firm where Mr. Som is also a partner. Mr. Som is also working as a finance executive of Surya Distributors Ltd. Explaining the provisions of the Companies Act, 2013, decide whether Mr. Raman is required to vacate the office as auditor.

Accepted Answer

**Yes, Mr. Raman is required to vacate the office as auditor** based on the disqualification provisions of the Companies Act, 2013.

**Relevant Provision:** Section 141(3)(f) of the Companies Act, 2013 disqualifies any person from being an auditor who is **a partner, or is in employment, of any person who is a director of, or holds any other office or place of profit in, the company**, other than that of auditor or of a person whose advice on technical, commercial or other specialised matters is not an integral part of the management of the company.

**Analysis of the Situation:**

Mr. Som holds the position of **finance executive** in Surya Distributors Ltd., which constitutes an "office or place of profit" within the meaning of the Companies Act. In November 2020, Mr. Raman **joined as a partner** in the same consultancy firm where Mr. Som is also a partner. This partnership creates a direct relationship between Mr. Raman and Mr. Som, who simultaneously holds office in the company.

Mr. Raman is now a **partner of a person (Mr. Som) who holds office in the company**. This falls directly under the disqualification criteria specified in Section 141(3)(f). The exception to this provision applies only to persons whose advice is technical, commercial, or specialised and **not integral to the management** of the company. However, a finance executive's advice on financial matters is clearly **integral to the management and operation** of the company, so this exception is not appli…

Question 24

Managing Director of ABC Ltd. himself appointed Mr. Akash, a practicing chartered accountant as first auditor of the company. Is it a valid appointment? Also explain the provisions of the Companies Act, 2013, in this regard?

Accepted Answer

**The appointment is NOT valid.** The Managing Director acting individually cannot appoint the first auditor of the company.

Under **Section 139(1) of the Companies Act, 2013**, the first auditor of a company shall be appointed by the **Board of Directors** collectively within 30 days of incorporation and before the first Annual General Meeting. The statute vests this authority in the Board as a whole, not in any individual Director, including the Managing Director.

A single individual, regardless of position, cannot unilaterally appoint an auditor. This requirement exists to ensure that auditor appointment is an independent Board decision and to maintain the auditor's autonomy from any single person's influence.

**Correct Procedure under Companies Act, 2013:**

According to **Section 139(1)**, if the Board of Directors fails to appoint an auditor within 30 days of incorporation, the auditor shall be appointed by the company in General Meeting. Once appointed, the auditor holds office for a term of 5 consecutive financial years (as per amended provisions).

**Eligibility Criteria:** The person appointed must satisfy the conditions under **Section 141**, which requires that the auditor must be a Chartered Accountant in practice and must not be disqualified under the provisions of Section 141 (such as not being suspended from practice, not being in lien, etc.).

In this case, even though Mr. Akash is a practicing chartered accountant (and thus eligible), the appointmen…

Question 25

The Board of Directors of ABC Company Limited at its board meeting decided upon its paid-up equity shares capital which was later on approved by the company's Annual General Meeting. In the meantime, the directors diverted the amount of total dividend to be paid to shareholders for purchase of investments for the company. Due to this diversion payment was paid to shareholders after 45 days of declaration. Examining the provisions of the Companies Act, 2013, state whether the act of directors is in violation of the provisions of the Companies Act, 2013. Also explain what are the consequences of the above set of directors.

Accepted Answer

**Yes, the act of directors is a violation of the Companies Act, 2013.**

**Violations:**

**1. Delay in Payment (Section 123):** Section 123 of the Companies Act, 2013 mandates that declared dividend must be paid to shareholders within 30 days of declaration by the AGM. Payment after 45 days breaches this statutory requirement.

**2. Improper Diversion of Dividend (Section 123 & Section 166):** The diversion of declared dividend funds to purchase company investments is a fundamental breach. Under Section 123, declared dividends must be paid to shareholders from profits/reserves allocated for distribution. Diverting these funds violates the purpose of dividend declaration. Under Section 166, directors must act in good faith and in the interests of the company and its members—using declared dividend funds for corporate investments breaches this fiduciary duty.

**Consequences for Directors:**

**1. Interest Liability (Section 127):** The company must pay interest to shareholders at the rate prescribed by the Central Government (currently 13% p.a. as notified by MCA) from the date of declaration until payment is made.

**2. Penalties (Section 451):** The company and every director in default are liable to a fine up to ₹1,00,000 and/or imprisonment up to 6 months for the first offense. For subsequent offenses, the fine extends to ₹2,00,000 and/or imprisonment up to 5 years.

**3. Individual Director Liability:** Each director who participated in or approved the diversion can be …

Question 26

Due to urgent need of money amounting to ₹ 3,00,000, Pawan approached to Raman and asked him for the money. Raman lent the money on the guarantee of Suraj, Tarun and Usha. However, there is no contract between Suraj, Tarun and Usha. Pawan makes default in payment and Suraj pays full amount to Raman. Suraj, afterwards, claimed contribution from Tarun and Usha. Tarun refused to contribute on the basis that there is no contract between Suraj and him. Examine referring to the provisions of the Indian Contract Act, 1872, whether Tarun can escape from his liability.

Accepted Answer

**Relevant Provision — Section 146 of the Indian Contract Act, 1872 (Co-sureties' Right of Contribution)**

Section 146 of the Indian Contract Act, 1872 provides that **co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit**. This right of contribution among co-sureties does **not** depend upon the existence of any direct contract between the co-sureties themselves. It arises by operation of law from the fact that they are all sureties for the same debt to the same creditor.

**Analysis of the Given Case:**

In the given problem, Suraj, Tarun, and Usha are all **co-sureties** for the debt of ₹3,00,000 owed by Pawan to Raman. When Pawan defaulted, Suraj discharged the entire liability by paying ₹3,00,000 to Raman. Suraj is therefore entitled to claim **equal contribution** from the other co-sureties, i.e., Tarun and Usha.

Tarun's argument that there is **no contract between him and Suraj** is not a valid defence. Section 146 does not require a direct contract between co-sureties as a prerequisite for the right of contribution. The right flows automatically from their common position as co-sureties for the same principal debt.

**Conclusion:**

Tarun **cannot escape his liability**. By virtue of Section 146, each of the three co-sureties (Suraj, Tarun, and Usha) is liable to contribute equally. Suraj can claim ₹1,00,000 each from Tarun and Usha. The absence of a contract between co-sureties does not af…

Question 27

Dya Limited, incorporated under the provisions of the Companies Act, 2013, has two subsidiaries – Jai Limited and Vijay Limited. All the three companies have prepared their financial statements for the year ended 31st March, 2021. Examining the provisions of the Companies Act, 2013, explain in what manner the subsidiaries – Jai Limited and Vijay Limited shall prepare their Balance Sheet and Statement of Profit & Loss?

Accepted Answer

**The subsidiaries – Jai Limited and Vijay Limited – shall prepare their Balance Sheet and Statement of Profit & Loss in the following manner as per the Companies Act, 2013:**

**Standalone Financial Statements Basis**: The subsidiaries shall prepare their own separate and standalone financial statements showing their individual financial position and performance. These statements represent only the subsidiaries' own operations and transactions, and are not consolidated with the parent company's figures at this stage.

**Applicability of Section 129**: Under **Section 129 of the Companies Act, 2013**, every company, including subsidiaries, is required to prepare financial statements (Balance Sheet and Statement of Profit & Loss) for every financial year. Subsidiaries are subject to the same statutory requirement and must prepare their financial statements in the form and manner prescribed for any other company, without any exemption.

**Prescribed Form and Format**: The Balance Sheet and Statement of Profit & Loss shall be prepared strictly in the form and format prescribed under **Schedule III of the Companies Act, 2013**. Both statements must follow this standardized format with appropriate classification and presentation of assets, liabilities, income, and expenses.

**Accounting Standards and Policies**: The subsidiaries shall follow the applicable **Indian Accounting Standards (Ind AS)** or other prescribed accounting standards depending on their applicability. The accou…

Question 28

The Companies Act, 2013 has prescribed an additional duty on the Board of directors to include in the Board's Report a 'Directors' Responsibility Statement'. Briefly explain any three.

Accepted Answer

The **Directors' Responsibility Statement** is a mandatory component of the Board's Report as prescribed by **Section 134(5) of the Companies Act, 2013**. It requires the Board to include statements confirming their responsibilities on several key matters. Any three of the following are significant:

**1. Accounting Policies and Fair Presentation**: Directors must state that they have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company as at the end of the financial year and of the profit or loss for that year.

**2. Maintenance of Accounting Records and Asset Safeguarding**: Directors must declare that they have taken proper and sufficient care for maintaining adequate accounting records in accordance with the Act. They must confirm that proper systems have been established to safeguard the company's assets and to prevent and detect fraud and other irregularities.

**3. Going Concern Basis**: Directors must confirm that the annual accounts have been prepared on a going concern basis. This statement reflects the Directors' assessment that the company will continue its operations and meet its obligations in the foreseeable future.

(Alternatively, directors may confirm establishment of **internal financial controls** that are adequate and operating effectively, or **processes to ensure compliance** with all applicable laws and r…

Question 29

What are the provisions of the Companies Act, 2013 relating to the appointment of 'Debenture Trustee' by a company? Whether the following can be appointed as 'Debenture Trustee'?

Accepted Answer

**Provisions Relating to Appointment of Debenture Trustee under the Companies Act, 2013:**

As per **Section 71(5) of the Companies Act, 2013**, no company shall issue a prospectus or make an invitation to the public for subscription of its debentures unless the company has, before such issue, appointed one or more **debenture trustees**. The names of the debenture trustees must be stated in the prospectus.

**Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014** provides detailed provisions. A company shall execute a **debenture trust deed** within 60 days of allotment of debentures to protect the interests of debenture holders.

**Persons who CANNOT be appointed as Debenture Trustee [Rule 18(1)]:**

The following persons are disqualified from being appointed as Debenture Trustee:
1. A **body corporate**.
2. A person who is **beneficially entitled to shares** of the company having a face value exceeding **₹1,000**.
3. A person who is **indebted to the company** (i.e., a creditor) for an amount **exceeding ₹1,000**.
4. A person who has **given any guarantee or provided security** in connection with the indebtedness of any third person to the company, or for repayment of debentures issued by the company.
5. A **director, Key Managerial Personnel (KMP), or any officer or employee** of the company or its subsidiary, holding, or associate company.
6. A person who is a **relative** of any director or KMP of the company.

**Whether the following can be appointed as …

Question 30

A confusion, regarding the meaning of 'financial year' arose among the finance executive and accountant of a company. Both were having different arguments regarding the meaning of financial year & calendar year. What is the correct meaning of financial year under the provision of the General Clauses Act, 1897? How it is different from calendar year?

Accepted Answer

**Definition of Financial Year under the General Clauses Act, 1897**

Section 3 of the General Clauses Act, 1897 defines **'financial year'** as the period of twelve months commencing on the 1st day of April in any year and ending on the 31st day of March in the next year. For example, FY 2025-26 runs from 1st April 2025 to 31st March 2026. This is the standard period for maintaining books of accounts, preparing financial statements, and calculating taxable income in India.

**Definition of Calendar Year**

A **'calendar year'** is the period of twelve months commencing on the 1st day of January in any year and ending on the 31st day of December of the same year. For example, CY 2025 runs from 1st January 2025 to 31st December 2025. This follows the natural/common convention adopted worldwide and is not statutorily defined for Indian accounting purposes.

**Key Differences between Financial Year and Calendar Year**

**Period of Operation**: The financial year starts on 1st April and ends on 31st March, whereas the calendar year runs from 1st January to 31st December. They overlap by three months (January to March) and differ by nine months (April to December).

**Statutory Relevance**: The financial year is the mandatory period prescribed under the General Clauses Act, 1897, the Income Tax Act, 1961, and the Companies Act, 2013 for maintaining accounts and calculating assessable income in India. The calendar year has no statutory mandate under Indian tax or company laws.

**A…

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