Question 1

London Limited, at a general meeting of members of the company, passed an ordinary resolution to buy-back 30 percent of its equity share capital. The articles of the company empower the company for buy-back of shares. Explaining the legal provisions of the Companies Act, 2013, examine: (A) Whether company's proposal is in order? (B) Would your answer be still the same in case the company instead of 30 percent, decides to buy-back only 20 per cent of its equity share capital?

Accepted Answer

**(A) Whether company's proposal is in order?**

The proposal of London Limited is **NOT in order** for the following two reasons under **Section 68 of the Companies Act, 2013**:

**Reason 1 — Exceeds the statutory limit:** Section 68(2)(c) provides that the buy-back shall not exceed **25% of the aggregate of paid-up capital and free reserves** of the company. The proviso further specifies that buy-back of equity shares in any financial year shall not exceed **25% of the total paid-up equity capital** in that financial year. London Limited proposes to buy-back **30% of its equity share capital**, which clearly exceeds the prescribed ceiling of 25%. This renders the proposal invalid on its face.

**Reason 2 — Wrong type of resolution:** Section 68(2)(b) requires that a **special resolution** must be passed at a general meeting to authorise a buy-back (where the buy-back exceeds 10% of total paid-up equity capital and free reserves). London Limited has passed only an **ordinary resolution**, which is legally insufficient. A special resolution (requiring 3/4th majority) was mandatory in this case.

Thus, the company's proposal is **doubly defective** — both the quantum (30%) and the mode of authorisation (ordinary resolution) violate Section 68 of the Companies Act, 2013.

**(B) Would the answer be the same if buy-back is reduced to 20%?**

The answer is **still not in order**, though for only **one reason** instead of two.

If the buy-back is reduced to **20%**, it now falls wi…

Question 2

Radheshyam borrowed a sum of ₹50,000 from a Bank on the security of gold and on 30.2019 under an agreement which contains a clause that the bank shall have a right of particular lien on the gold pledged with it. Radheshyam thereafter took an unsecured loan of ₹75,000 from the same bank on 1.08.2019 for three months. On 30.09.2019 the entire secured loan of ₹50,000 and requested the bank to release the gold pledged with it. The Bank decided to continue the lien on the gold until the unsecured loan is fully repaid by Radheshyam. Decide whether the decision of the Bank is valid within the provisions of the Indian Contract Act, 1872?

Accepted Answer

**The Bank's decision to continue the lien on the gold is INVALID.**

**Concept of Particular Lien** (Section 170, Indian Contract Act, 1872): A particular lien is the right of a creditor to retain goods of a debtor as security for a debt **directly related to those goods only**. The critical feature is that it applies exclusively to the debt connected with those particular goods and cannot extend to other separate transactions or a general balance of account.

**Analysis of the Facts**: In this case, the gold was pledged as security specifically for the secured loan of ₹50,000. The bank had a particular lien only in relation to this debt. Once Radheshyam repaid the entire ₹50,000 on 30.09.2019, the debt for which the lien existed was completely discharged.

**Why the Bank's Action is Invalid**: The unsecured loan of ₹75,000 taken on 1.08.2019 is a **separate and distinct transaction** with no connection whatsoever to the gold pledged. Under Section 170, a particular lien cannot be extended beyond the specific debt for which the goods were pledged. The bank cannot use the particular lien on gold—which was granted for the secured loan—to secure an entirely different unsecured loan. This would amount to attempting to exercise a **general lien**, which is not available to banks under Section 171 of the Act unless expressly provided in the contract or by law.

**Distinction from General Lien**: Section 171 provides that a creditor may retain all goods of a debtor in their possess…

Question 3

Refer to the provisions of the Negotiable Instruments Act, 1881, examine the validity of the following: A Bill of Exchange originally drawn by B for a sum of ₹10,000 but endorsed by C only for ₹7,000.

Accepted Answer

The endorsement by C for only ₹7,000 on a Bill of Exchange originally drawn for ₹10,000 is **INVALID**.

**Legal Framework:**
Under Section 59 of the Negotiable Instruments Act, 1881, an endorsement to be valid must:
1. Be made by the maker, drawer, or a previous endorsee
2. Transfer the **entire amount** of the instrument
3. Be made on the instrument itself or paper attached to it
4. Be made before delivery

**Key Principle:**
Section 59 explicitly requires that an endorsement must transfer the **entire amount** of the negotiable instrument. An endorsement cannot be made for a partial amount as this violates the fundamental principle that a negotiable instrument represents an unconditional order/promise for a definite sum of money and cannot be split or divided.

**Application to the Facts:**
C's endorsement for only ₹7,000 out of ₹10,000 fails to comply with Section 59 because:
1. It does not transfer the entire amount of the bill (₹3,000 remains unendorsed)
2. It creates ambiguity regarding the status of the remaining ₹3,000
3. It deprives the instrument of its character as a definite and complete negotiable instrument
4. It violates the non-divisibility principle of negotiable instruments

**Consequence:**
The partial endorsement is **void and does not effect a valid transfer** of the bill. C remains liable to the holder for the entire amount of ₹10,000. Any person claiming title based on C's partial endorsement cannot acquire valid title to the instrument. C must endorse…

Question 4

Radhashyam borrowed a sum of ₹ 50,000 from a Bank on the security of gold ornaments and ₹ 10,000 under an agreement which requires each that the bank shall have a right of particular lien on the gold pledged with it. Radhashyam thereafter took an unsecured loan of ₹ 5,000 from the same bank on 1.08.2019 for three months. On 30.09.2019 he pressed the entire secured loan of ₹ 50,000 and requested the bank to release the gold pledged with it. The Bank decided to continue its lien on the gold until the unsecured loan is fully repaid by Radhashyam. Decide whether the decision of the Bank is valid within the provisions of the Indian Contract Act, 1872?

Accepted Answer

**Answer: The Bank's decision is NOT VALID.**

The bank's decision to continue its lien on the gold until the unsecured loan of ₹5,000 is repaid is not valid under the Indian Contract Act, 1872.

**Distinction between Particular and General Lien:**
Section 170 of the Indian Contract Act, 1872 defines lien as the right to retain goods until a debt or duty is satisfied. The Act recognizes two types: (1) **Particular Lien** - right to retain goods until the specific debt incurred in relation to those goods is satisfied, and (2) **General Lien** - right to retain goods until all debts are satisfied.

**Banker's General Lien Right:**
Section 171 of the Indian Contract Act provides that bankers have a right of general lien to retain goods deposited with them until all debts are satisfied. However, this right is expressly subject to the condition that **there is no agreement to the contrary**.

**Agreement Limits Lien to Particular Lien:**
In this case, the gold ornaments were pledged under an explicit agreement providing for a **particular lien only**. The agreement clearly states "the bank shall have a right of particular lien on the gold pledged with it." This agreement to particular lien constitutes an agreement to the contrary within the meaning of Section 171, thereby displacing the banker's default general lien right.

**Particular Lien Cannot Extend to Unrelated Debts:**
Under a particular lien, the bank can retain the gold only to secure the debt incurred in relation to tha…

Question 5

Refer to the provisions of the Negotiable Instruments Act, 1881, examine the validity of the following: A Bill of Exchange originally drawn by B for a sum of ₹ 10,000 but accepted by S only for ₹ 7,000.

Accepted Answer

**Validity of the Bill of Exchange:** The Bill of Exchange drawn by B for ₹10,000 but accepted by S only for ₹7,000 constitutes a **qualified acceptance** under Section 34 of the Negotiable Instruments Act, 1881. A qualified acceptance is an acceptance of a bill which contains some condition, qualification or variation with respect to the effect of the bill.

**Legal Position under Section 131:** Section 131 of the Act provides that when a bill is presented for acceptance, the drawee may accept it in the terms in which it is drawn, refuse to accept it wholly or in part, or accept it with a qualified acceptance. In this case, S's acceptance for only ₹7,000 when the bill was drawn for ₹10,000 is an acceptance for part of the amount, which falls within the scope of qualified acceptance.

**Validity and Holder's Options:** Under Section 135 of the Act, when a qualified acceptance is offered to the holder, the holder is not bound to take it. The holder has two options: (1) accept the qualified acceptance and proceed with the bill, or (2) treat the bill as dishonored and pursue his remedy against the drawer and endorsers for the full amount of ₹10,000.

**Consequences of Acceptance:** If the holder chooses to accept the qualified acceptance, the liability of the acceptor (S) becomes limited to ₹7,000 only. However, the original drawer (B) and any endorsers (if present) remain liable for the entire amount of ₹10,000. The holder can recover the remaining ₹3,000 from the drawer or end…

Question 6

The Board of Directors of Rajesh Exports Ltd., a subsidiary of Manish Ltd., decides to grant a loan of ₹3 lakh to Tushar, the finance manager of Manish Ltd., getting salary of ₹40,000 per month, to buy 300 equity shares of ₹1 each of Rajesh Exports Ltd. Examine the validity of Board's decision with reference to the provisions of the Companies Act, 2013.

Accepted Answer

The Board's decision to grant a loan of ₹3 lakh to Tushar is **INVALID** and violates the provisions of the Companies Act, 2013.

**Applicable Provision**: Section 67 of the Companies Act, 2013 permits a company to advance loans to its **managers or employees** for meeting personal obligations or liabilities, subject to specified conditions. The critical requirement is that the recipient must be an **employee of the company granting the loan**.

**Issue in the Present Case**: Tushar is the Finance Manager of **Manish Ltd.** (the parent company), not an employee of Rajesh Exports Ltd. (the subsidiary company proposing to grant the loan). Since Tushar is not an employee of Rajesh Exports Ltd., he does not fall within the scope of permissible recipients under Section 67.

**Why the Decision is Invalid**: 
1. Section 67 restricts loans only to employees of the company—an employee of a parent or related company does not qualify.
2. The Board of Rajesh Exports Ltd. lacks legal authority to grant loans outside the parameters of Section 67.
3. Granting such a loan would constitute a violation of statutory provisions, and the loan would be void **ab initio** (from the inception).

**Conclusion**: The Board's decision cannot be upheld. The proposed loan is prohibited under Section 67 of the Companies Act, 2013 because Tushar, though an employee of the parent company Manish Ltd., is not an employee of Rajesh Exports Ltd.

Question 7

A promissory note specific that three months after, A will pay ₹ 10,000 to B or his order for value received. It is to be noted that no rate of interest has been stipulated in the promissory note. The promissory note falls due for payment on 01.09.2019 and will be paid on 31.10.2019 without any interest. Explaining the relevant provisions under the Negotiable Instruments Act, 1881, state whether B shall be entitled to claim interest on the overdue amount?

Accepted Answer

**Relevant Provision — Section 80 of the Negotiable Instruments Act, 1881:**

Section 80 of the Negotiable Instruments Act, 1881 provides that when **no rate of interest is specified** in the instrument, interest on the amount due thereon shall be calculated at the rate of **18% per annum** from the date on which the same ought to have been paid by the party charged, until tender or realization of the amount due thereon, or until such date after the institution of a suit to recover such amount as the Court directs.

**Application to the Given Case:**

In the given situation, A executed a promissory note promising to pay ₹10,000 to B or his order. The promissory note **does not stipulate any rate of interest**. The note fell due on **01.09.2019** and was paid on **31.10.2019**, i.e., the payment was delayed by 2 months (61 days).

Since no interest rate was agreed upon in the promissory note, Section 80 of the Negotiable Instruments Act, 1881 will apply. B is entitled to claim interest at the statutory rate of **18% per annum** on the overdue amount of ₹10,000 for the period from 01.09.2019 (the due date) to 31.10.2019 (the date of actual payment), i.e., for a period of 61 days.

**Conclusion:** Yes, **B shall be entitled to claim interest** on the overdue amount of ₹10,000 at the rate of **18% per annum** for 61 days (01.09.2019 to 31.10.2019) as per Section 80 of the Negotiable Instruments Act, 1881, even though no rate of interest was stipulated in the promissory note. The …

Question 8

RS Ltd. received share application money of ₹50.00 Lakh on 01.06.2019 but failed to allot shares within the prescribed time limit. The share application money of ₹5.00 Lakh received from Mr. Khanra, a customer of the Company, was refunded by way of book adjustment towards the dues payable by him to the company on 30.07.2019. The Company Secretary of RS Ltd. reported to the Board that the entire amount of ₹50.00 Lakh shall be deemed to be 'Deposit' under the provisions of the Companies Act, 2013 as required to comply with the provisions of the Companies Act, 2013 applicable to acceptance of deposits in relation to this amount. You are required to examine the validity of the Company Secretary in the light of the relevant provisions of the Companies Act, 2013.

Accepted Answer

**Analysis of the Company Secretary's Position:**

The Company Secretary's claim requires examination under **Section 13 of the Companies Act, 2013**, which provides exemptions to the deposit definition. **Share application money is NOT treated as a deposit** if either: (i) shares are allotted within the prescribed period, or (ii) the money is refunded within the specified period (typically 30 days from closure of subscription list).

**Examination of Facts:**

**₹50.00 Lakh received on 01.06.2019:** The company failed to allot shares within the prescribed time limit under **Section 40 of the Companies Act, 2013**, which requires allotment within 30 days of closure of the subscription period or such extended period as approved by the Board. Once allotment is not made within this period, refund becomes mandatory.

**₹5.00 Lakh refunded on 30.07.2019:** While this amount was refunded, two issues arise: First, the refund is approximately 60 days from receipt, which exceeds the prescribed refund period. Second, the mode of refund—**book adjustment towards dues payable by the customer**—is questionable. The Companies (Prospectus and Allotment of Securities) Rules, 2014 require refunds to be made by cheque, bank transfer, or other prescribed means, not by book adjustment. Thus, this refund may not constitute a valid refund under the statutory framework.

**₹45.00 Lakh remaining amount:** This amount was neither allotted nor refunded within the prescribed period. This clearly breach…

Question 9

The Board of Directors of Dilip Telinks Ltd. consists of Mr. Choksey, Mr. Patel (Directors) and Ms. Shukla (Managing Director). The company has also employed a full-time Secretary. The Profit and Loss Account and Balance Sheet were signed by Mr. Choksey and Mr. Patel. Examine whether the authentication of financial statements of the company is in accordance with the provisions of the Companies Act, 2013?

Accepted Answer

Under **Section 134(5) of the Companies Act, 2013**, every financial statement shall be signed by: (a) the **Managing Director** (if the company has one); and (b) the **Director responsible for the financial statements** of the company.

**Analysis of Compliance:**

In the given case, Dilip Telinks Ltd. has a Board consisting of Ms. Shukla (Managing Director), Mr. Choksey (Director), and Mr. Patel (Director). The Profit and Loss Account and Balance Sheet have been signed by Mr. Choksey and Mr. Patel only.

**Non-Compliance Identified:**

The authentication of financial statements is **NOT in accordance** with Section 134(5) because **Ms. Shukla, the Managing Director, has failed to sign the financial statements**. As per statutory requirements, the Managing Director's signature is mandatory when such a position exists in the company. While Mr. Choksey and Mr. Patel (both Directors) have signed the documents satisfying the requirement for the director responsible for financial statements to sign, the absence of the Managing Director's signature constitutes a clear violation of the Act.

**Additional Points:**

The role of the full-time Secretary mentioned in the question is irrelevant to the authentication of financial statements under Section 134(5), as the Secretary's signature is not required for this purpose. However, under **Section 134(7)**, additional certification is required from the CEO/Managing Director and Chief Financial Officer or person in charge of finance, whi…

Question 10

X Ltd. is a listed company having a paid-up share capital of ₹25 crore as at 31st March 2019 and turnover of ₹100 crore during the financial year 2018-19. The Company Secretary has advised the Board of Directors that X Ltd. is not required to appoint 'Internal Auditor' as the company's paid-up share capital and turnover are less than the threshold limit prescribed under the Companies Act, 2013. Do you agree with the advice of the Company Secretary? Explain your view referring to the provisions of the Companies Act, 2013.

Accepted Answer

I **disagree with the advice of the Company Secretary**. X Ltd. is required to appoint an Internal Auditor under the Companies Act, 2013.

**Legal Requirement for Internal Auditor Appointment:**
Section 138 of the Companies Act, 2013 mandates that every company shall appoint an internal auditor. This is a general obligation that applies to all companies unless a specific exemption is available. The threshold of paid-up capital and turnover alone does NOT exempt a company from this requirement.

**Available Exemptions:**
Exemptions from appointing an Internal Auditor are provided only for specific categories of companies as per Rule 13 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014:

1. **One Person Company (OPC)** - A company with only one member, as defined in Section 2(71)
2. **Small Company** - A company that meets the definition provided in Section 2(85) of the Companies Act, 2013

A **Small Company** is defined as a company with:
- Paid-up capital not exceeding ₹5 crore, **AND**
- Revenue from operations not exceeding ₹100 crore

Both conditions must be satisfied simultaneously for a company to qualify as a Small Company.

**Analysis of X Ltd.:**
X Ltd. is a listed company with:
- Paid-up share capital: ₹25 crore (exceeds the ₹5 crore threshold)
- Turnover (Revenue from operations): ₹100 crore (at the threshold)

Since X Ltd.'s paid-up capital of ₹25 crore exceeds the prescribed limit of ₹5 crore, it **does not qualify as a Small Comp…

Question 11

Explain whether the agency shall be terminated in the following cases under the provisions of the Indian Contract Act, 1872:

Accepted Answer

**Part (i): Agency with Agent's Lien - Effect of Principal's Insanity**

Under **Section 201 of the Indian Contract Act, 1872**, agency terminates when the principal becomes of unsound mind. However, **Section 202** provides an important exception: "If the agent has any interest in the property which forms the subject-matter of the agency, he cannot be deprived of the agency by the act of the principal."

In the given case, B is appointed not merely as an agent but with a specific lien—the authority to pay himself the debts due from A out of the sale proceeds. This creates a **personal financial interest** for B in the subject-matter of the agency (the land and its proceeds). Although A subsequently becomes insane, the agency **does NOT fully terminate** as against B's interest. The agency continues to the extent necessary to protect and realize B's lien. B can still perform acts necessary to sell the land and recover his dues, even though A is now insane. This protection exists because the agent's interest vests before the principal's mental incapacity and cannot be defeated by it. However, B's authority is limited to securing his own debt and does not extend to other acts beyond this scope.

**Part (ii): Sub-agency and Revocation of Principal's Authority**

**Section 194 of the Indian Contract Act, 1872** provides that when an agent appoints a sub-agent **with the principal's consent or under principal's authority**, the sub-agent becomes the agent of the **principal direct…

Question 12

A promissory note specifies that three months after, A will pay ₹ 10,000 to B or his order for value received. It is to be noted that no rate of interest has been stipulated in the promissory note. The promissory note falls due for payment on 01.09.2019 and will be on 31.10.2019 without any interest. Explaining the relevant provisions under the Negotiable Instruments Act, 1881, state whether B shall be entitled to claim interest on the overdue amount?

Accepted Answer

**Relevant Provision — Section 80 of the Negotiable Instruments Act, 1881**

Section 80 of the Negotiable Instruments Act, 1881 deals with the right to interest when no rate of interest is specified in the instrument. It provides that when no rate of interest is specified in a negotiable instrument, interest on the amount due thereon shall be calculated at the rate of **18% per annum** from the date on which the instrument ought to have been paid by the party charged, until tender or realisation of the amount due, or until such date after institution of a suit to recover such amount as the Court directs.

**Application to the Given Facts**

In the present case, A executed a promissory note in favour of B for ₹10,000. No rate of interest was stipulated in the promissory note. The note fell due for payment on **01.09.2019**, but payment was made only on **31.10.2019**, without any interest. Thus, the promissory note was overdue for a period of **61 days** (September: 30 days + October: 31 days).

**Conclusion — B's Entitlement to Interest**

Yes, **B is entitled to claim interest** on the overdue amount of ₹10,000 for the period from 01.09.2019 to 31.10.2019. Since no rate of interest was stipulated in the promissory note, Section 80 of the Negotiable Instruments Act, 1881 will apply, and interest shall be payable at **18% per annum** on ₹10,000 for the overdue period of 61 days.

**Amount of Interest Claimable by B:**

Interest = ₹10,000 × 18/100 × 61/365 = **₹300.82 (approxim…

Question 13

RS Ltd. received share application money of ₹ 50.00 Lakh on 01.06.2019 but failed to allot shares within the prescribed time limit. The share application money of ₹ 5.00 Lakh received from Mr. Khanna, a customer of the Company, was re-utilized by way of book adjustment towards the dues payable by him to the company on 30.07.2019. The Company Secretary of RS Ltd. reported to the Board that the entire amount of ₹ 50.00 Lakh shall be deemed to be 'Deposits' and the Board is required to comply with the provisions of the Companies Act, 2013 applicable to acceptance of deposits in relation to this amount. You are required to examine the validity of the Company Secretary in the light of the relevant provisions of the Companies Act, 2013.

Accepted Answer

The Company Secretary's view is **substantially correct** that the entire ₹50.00 Lakh should be deemed 'Deposits' under the Companies Act, 2013, though certain aspects require examination.

**Relevant Legal Framework:** Section 56(1) of the Companies Act, 2013 requires that shares must be allotted within **90 days** from the date of receipt of application money. Section 73(2) specifically addresses this scenario: "If a company accepts any deposit or a part thereof from a member for subscription to shares and does not allot the shares or refuses to allot the shares within ninety days from the date of receipt of the application money, the deposit or a part thereof not allotted shall be deemed to be a deposit accepted under this chapter."

**Analysis of Facts:**

1. **Share Application Money Received:** ₹50.00 Lakh on 01.06.2019 for subscription to shares.

2. **Prescribed Time Limit:** 90 days from 01.06.2019 = approximately 30.08.2019. Shares were not allotted within this period.

3. **Status as Deposits:** Under Section 73(2), the entire ₹50.00 Lakh automatically becomes deemed 'Deposits' on expiry of the 90-day period because shares were neither allotted nor properly returned within the prescribed timeframe.

**Examination of ₹5.00 Lakh Book Adjustment:**

The re-utilization of ₹5.00 Lakh from Mr. Khanna's application by way of book adjustment towards his dues (done on 30.07.2019, within the 90-day period) is **improper and does not constitute valid allotment or return.** Th…

Question 14

The Board of Directors of Dilip Telelinks Ltd. consists of Mr. Choksey, Mr. Patel (Directors) and Mr. Shukla (Managing Director). The company has also employed a full-time Secretary. The Profit and Loss Account and Balance Sheet were signed by Mr. Choksey and Mr. Patel. Examine whether the authentication of financial statements of the company is in accordance with the provisions of the Companies Act, 2013?

Accepted Answer

The authentication of the financial statements is **NOT in accordance** with the provisions of the Companies Act, 2013.

Under **Section 134(3)** of the Companies Act, 2013, the Balance Sheet and Profit and Loss Account shall be signed by: (a) the Chief Financial Officer or Chief Accounting Officer, if any; (b) not less than two Directors of the company, of whom **at least one shall be a Managing Director, if any**; and (c) where there is a company secretary, by the company secretary.

**Defects in the present case:**

**Absence of Managing Director's Signature:** The company has Mr. Shukla as the Managing Director. Section 134(3)(b) mandates that where a company has a Managing Director, one of the signatories must be the Managing Director. However, the financial statements have been signed only by Mr. Choksey and Mr. Patel, **neither of whom is the Managing Director**. This constitutes a clear violation of the statutory requirement. The Managing Director's signature is mandatory and cannot be waived.

**Possible Absence of Company Secretary's Signature:** The company has employed a full-time Secretary. If this person functions as the **Company Secretary** as contemplated under the Companies Act, 2013, then under Section 134(3)(c), the financial statements should also have been signed by the Company Secretary. The absence of the Company Secretary's signature (if applicable) represents an additional deficiency in authentication.

**Conclusion:** The authentication is defective…

Question 15

X Ltd. is a listed company having a paid-up share capital of ₹ 25 crore as at 31st March 2019 and turnover of ₹ 100 crore during the financial year 2018-19. The Company Secretary has advised the Board of Directors that X Ltd. is not required to appoint 'Internal Auditor' as the company's paid-up share capital and turnover are less than the threshold limit prescribed under the Companies Act, 2013. Do you agree with the advice of the Company Secretary? Explain your view referring to the provisions of the Companies Act, 2013.

Accepted Answer

I **disagree** with the Company Secretary's advice. X Ltd. is required to appoint an Internal Auditor under the Companies Act, 2013.

**Legal Framework:** Section 138 of the Companies Act, 2013 mandates appointment of an Internal Auditor for companies meeting specified criteria. The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, Rule 8(2) prescribes that a company SHALL appoint an Internal Auditor if it is:

(a) A **listed company**, OR
(b) A company with paid-up capital of **₹1 crore or more**, OR
(c) A company with **turnover of ₹10 crore or more**.

**Analysis:** X Ltd. satisfies ALL THREE conditions simultaneously. Most critically, X Ltd. is explicitly stated to be a **listed company**, which alone is a sufficient and independent criterion under Rule 8(2)(a). The listed company status triggers a mandatory requirement regardless of paid-up capital or turnover. Additionally, X Ltd. has a paid-up capital of ₹25 crore (exceeding the ₹1 crore threshold) and turnover of ₹100 crore (significantly exceeding the ₹10 crore threshold), thereby satisfying all alternative conditions as well.

**Error in Company Secretary's Advice:** The Company Secretary has committed a critical legal error by overlooking the listed company criterion. The three conditions in Rule 8(2) are **alternative criteria** connected by OR, meaning satisfaction of any single condition is sufficient to mandate Internal Auditor appointment. The Company Secretary incorrectly assumed t…

Question 16

Explain whether the agency shall be terminated in the following cases under the provisions of the Indian Contract Act, 1872:

Accepted Answer

**Part (i): Agency shall NOT be terminated**

According to Section 201 of the Indian Contract Act, 1872, an agency is terminated by the insanity of the principal. However, Section 202 establishes a critical exception: if an authority is **coupled with an interest**, it cannot be revoked by the principal and is not terminated by the principal's death or insanity as long as the interest exists.

In this case, B's authority is coupled with an interest because B was explicitly authorized to pay himself the debts due to him from A out of the sale proceeds. This creates a personal financial interest for B in the exercise of the authority, independent of A's benefit. The authority is granted not only for A's benefit but also for B's benefit to secure his debts.

Therefore, when A becomes insane, the agency does not terminate because it is coupled with an interest. B can continue to exercise authority to sell the land and pay himself from the proceeds.

**Part (ii): Agency of C is TERMINATED**

When A appoints B as agent and B appoints C as a sub-agent, C's authority is derived through and dependent upon B's authority. C is the agent of B, not directly the agent of A.

When A revokes B's authority, B ceases to be an agent of A. Since C is the sub-agent whose authority flows from B's authority, C's agency is automatically terminated upon B's authority being revoked. This occurs regardless of whether A explicitly revoked C's authority.

The reason is that a sub-agent cannot continue as…

Question 17

The role of doctrine of 'Indoor management' is opposed to that of the role of 'Constructive notice'. Comment on this statement with reference to the provisions of the Companies Act, 2013.

Accepted Answer

**Doctrine of Constructive Notice**

Under the Companies Act, 2013, certain documents of a company — such as the Memorandum of Association (MOA) and Articles of Association (AOA) — are required to be filed with the Registrar of Companies and are thus available for public inspection. The doctrine of **Constructive Notice** provides that every person dealing with a company is deemed to have notice of the contents of these registered documents, whether or not they have actually read them. This is a legal presumption that protects the company against outsiders who claim ignorance of its constitutional documents. Thus, if a person enters into a contract that is beyond the powers of the company as stated in the MOA, or violates a restriction in the AOA, they cannot claim relief on the ground that they were unaware of such restrictions.

**Doctrine of Indoor Management**

The doctrine of **Indoor Management** (also known as the Turquand Rule, originating from the case of *Royal British Bank v. Turquand*, 1856) operates in the opposite direction — it protects outsiders dealing with a company in good faith. The doctrine states that while an outsider is bound by the external public documents of the company (MOA and AOA), they are **not required to enquire into the internal workings or procedural compliance** of the company. An outsider is entitled to assume that all internal requirements and procedures prescribed by the company's constitution have been duly complied with.

For example,…

Question 18

Veena Ltd. held its Annual General Meeting on September 15, 2018. The meeting was presided over by Mr. Mohan Rao, the Chairman of the Company's Board of Directors. On September 17, 2018, Mr. Mohan Rao, the Chairman, without signing the minutes of the meeting, left India to look after his father who fell ill in London. Referring to the provisions of the Companies Act, 2013, state the manner in which the minutes of the above meeting are to be signed in the absence of Mr. Mohan Rao and by whom?

Accepted Answer

**(a) Applicable Provisions:**

The signing of minutes of general meetings is governed by **Section 118(3) of the Companies Act, 2013**, read with **Secretarial Standard-2 (SS-2)** on General Meetings issued by the ICSI (which is mandatory under Section 118(10) of the Companies Act, 2013).

**(b) Normal Rule for Signing Minutes:**

Under **Section 118(3)** of the Companies Act, 2013, the minutes of each meeting shall be signed and dated by the **chairman of the same meeting** within the period before the date of the next meeting. In the present case, Mr. Mohan Rao, as Chairman of the AGM held on September 15, 2018, was the appropriate person to sign the minutes.

**(c) Situation When Chairman is Unable to Sign:**

However, Mr. Mohan Rao left India on September 17, 2018 **without signing the minutes**, due to his father's illness in London. This constitutes a situation of **inability** on the part of the Chairman to sign the minutes.

As per **Section 118(3) of the Companies Act, 2013**, in the event of **death or incapacity** of the Chairman, the minutes may be signed by a Director duly authorised by the Board of Directors for the purpose. **Secretarial Standard-2 (SS-2)**, paragraph 12.3, further provides that in the event of **death or inability** of that Chairman to sign, the minutes may be signed by a **Director who was present at the Meeting** and is duly authorised by the Board.

**(d) Manner of Signing in This Case:**

In view of the above, the minutes of the AGM of Ve…

Question 19

CDS Ltd is planning to make a private placement of securities. The Managing Director arranged to obtain a brief note from some source explaining the salient features of the issue of private placement that the board of Directors shall keep in mind while approving the proposal on this subject. The brief note includes, inter alia, the information / suggestions on the following points:

(i) A private placement shall be made only to a select group of identified persons not exceeding 200 in a financial year. The aforesaid ceiling of identified persons shall not apply to the offer made to the qualified institutional buyers but is applicable to the employees of the Company who will be covered under the Company's Employees Stock Option Scheme.

(ii) The offer on private placement basis shall be mad…

Accepted Answer

**Point (i) - PARTIALLY CORRECT (requires clarification):**

The statement correctly identifies that private placement shall be made only to identified persons not exceeding 200 in a financial year, and that this ceiling does not apply to qualified institutional buyers. This aligns with Section 42(1) of the Companies Act, 2013.

However, the statement is **INCORRECT regarding employees covered under Employees Stock Option Scheme (ESOP)**. Section 42(1) provides three exemptions from the ceiling of 200 identified persons: (i) Qualified Institutional Buyers (QIBs); (ii) current members of the company; and (iii) **employees of the company and its holding, subsidiary or associate company covered under an approved employees stock option scheme**. Therefore, **ESOP employees are also excluded from the ceiling of 200**, not included within it. The ceiling applies only to other identified persons. The note's implication that ESOP employees count within the 200 limit is contrary to the statutory exemption.

**Point (ii) - INCORRECT:**

The statement that private placement "shall be made only once in a financial year" is **not supported by the Companies Act, 2013**. Section 42 does not restrict the frequency of private placement offerings.

A company may make **multiple private placements** during a financial year, provided the aggregate number of identified persons across all such offerings in that financial year does not exceed 200. The statutory ceiling applies to the total cumulati…

Question 20

CDS Ltd. is planning to make a private placement of securities. The Managing Director arranged to obtain a brief note from some source explaining the salient features of the issue of private placement that the Board of Directors shall keep in mind while approving the proposal on this subject. The brief note includes, inter alia, the information / suggestions on the following points: (i) A private placement shall be made only to a select group of identified persons not exceeding 200 in a financial year. The afforded ceiling of identified persons shall not apply to the qualified institutional buyers but is applicable to the employees of the Company who will be covered under the Company's Employees' Stock Option Scheme. (ii) The offer on private placement basis shall be made only in a financi…

Accepted Answer

**Remarks on the Points in the Brief Note — Private Placement under Section 42 of the Companies Act 2013**

**Point (i) — Partially Valid**

The note correctly states that a private placement shall be made to a select group of identified persons **not exceeding 200 in aggregate in a financial year**. This is in accordance with Section 42(2) read with Section 42(3) of the Companies Act 2013, read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules 2014.

The note is **correct** in stating that the ceiling of 200 identified persons shall **not apply to Qualified Institutional Buyers (QIBs)**. The proviso to Section 42(2) explicitly excludes QIBs from this limit.

However, the note is **incorrect** in stating that the ceiling of 200 persons **is applicable** to employees of the company covered under the Employees' Stock Option Scheme (ESOP). The proviso to Section 42(2) also **excludes employees of the company** being offered securities under a scheme of employees' stock option framed in terms of Section 62(1)(b) of the Companies Act 2013 from the ceiling of 200 persons. Therefore, ESOP employees, like QIBs, do **not** count towards the 200-person limit.

**Conclusion on Point (i):** The statement regarding QIBs is valid. The statement that the 200-person ceiling **applies** to ESOP employees is **invalid** — ESOP employees are equally excluded from the ceiling of 200 persons.

---

**Point (ii) — Valid**

The note states that the offer on a private plac…

Question 21

Referring to the provisions of the Companies Act, 2013, examine the validity of the following:

SafeR Limited having a net worth of ₹ 130 crore wants to accept deposits from its members. It has approached you to advise whether it falls within the category of an eligible company ? What special care has to be taken while accepting such deposits from members ?

Accepted Answer

**Eligibility of SafeR Limited as an Eligible Company:**

SafeR Limited with a net worth of ₹130 crore can be examined for eligibility under Section 73 of the Companies Act, 2013, read with the Companies (Acceptance of Deposits) Rules, 2014. An **eligible company** as defined in Rule 2(f) must satisfy all four of the following criteria:

1. **Net Worth Requirement**: Net worth not less than ₹100 crore — SafeR Limited with ₹130 crore clearly satisfies this criterion.

2. **Registration Period**: Must have been registered for not less than 7 years.

3. **No Default History**: Must not have defaulted in repayment of deposits or interest thereon, or in compliance with Chapter V provisions or the Rules.

4. **Sick Company Status**: Must not be classified as a sick company under the Sick Industrial Companies Act, 1985, or by NCLT.

Based on the information provided, SafeR Limited satisfies the net worth criterion. However, **validity depends on satisfying all four conditions**. Assuming the company meets the remaining criteria (registration period, no default history, and not being a sick company), it would be classified as an **eligible company** and therefore competent to accept deposits from its members.

**Special Care Required While Accepting Deposits from Members:**

Several safeguards must be implemented during deposit acceptance:

**Authorization and Governance:** Deposits must be authorized by the Memorandum and Articles of Association of the company. The Board of Director…

Question 22

Referring to the provisions of the Companies Act, 2013, examine the validity of the following: Safari Limited having a net worth of ₹ 130 crore wants to accept deposits from its members. It has approached you to advise whether it falls within the category of an eligible company? What special care has to be taken while accepting such deposits from members?

Accepted Answer

**Eligible Company — Meaning under Section 76 of the Companies Act, 2013:**

An **eligible company** is defined as a **public company** that has either:
(i) a **net worth of not less than ₹100 crore**, OR
(ii) a **turnover of not less than ₹500 crore**,
and which has obtained prior consent of the company in general meeting by a **special resolution**, complying with prescribed rules.

**Applicability to Safari Limited:**

Safari Limited has a **net worth of ₹130 crore**, which exceeds the threshold of ₹100 crore prescribed under Section 76 of the Companies Act, 2013. Provided Safari Limited is a **public company**, it **qualifies as an eligible company** and is permitted to accept deposits from its members.

**Special Care to be taken while accepting deposits from members:**

As per Section 73(2) read with the **Companies (Acceptance of Deposits) Rules, 2014**, the following conditions must be complied with:

1. **Special Resolution**: Pass a special resolution in the general meeting (applicable to eligible companies under Section 76) before accepting deposits.

2. **Circular to Members**: Issue a circular to all members containing prescribed particulars (financial position, credit rating, details of deposits, etc.) before acceptance.

3. **Filing with ROC**: File a copy of the circular with the **Registrar of Companies** at least **30 days** prior to the date of issue.

4. **Deposit Repayment Reserve Account**: Deposit at least **20% of the amount of deposits maturing** duri…

Question 23

Moon Light Ltd. is having an establishment in USA. It obtained a loan there creating a charge on the assets of the foreign establishment. The Company received a notice from the Registrar of Companies for not filing the particulars of charge created by the Company on the property or assets situated outside India. The Company wants to defend the notice on the ground that it is not be the duty of the company to register the particulars of the charge created on the assets not located in India. Do you agree with the stand taken by the Company ? Give your answer with respect to the provisions of the Companies Act, 2013.

Accepted Answer

**No, the Company's stand is not correct.** Under Section 73 of the Companies Act, 2013, every company must file the particulars of every charge created on the property or assets of the company with the Registrar of Companies within 30 days of creation of the charge. The Act does not distinguish or exempt charges based on the geographical location of the assets. Since the assets of the foreign establishment constitute the "property and assets of the company," charges created on them must be filed with the ROC just as charges on domestic assets must be. The Company's assertion that foreign assets are beyond the registration requirement is therefore incorrect and not supported by law. Under Section 74 of the Companies Act, 2013, if the particulars of a charge are not filed within the prescribed period, the charge becomes void as against the liquidator and any creditor of the company. Moon Light Ltd. was under a mandatory obligation to register the charge created on the assets of its USA establishment with the Indian ROC.

Question 24

Moon Light Ltd. is having its establishment in USA. It obtained a loan there creating a charge on the assets of the foreign establishment. The Company received a notice from the Registrar of Companies for not filing the particulars of charge created by the Company on the property or assets situated outside India. The Company wants to defend the notice on the ground that it is not the duty of the company to register the particulars of the charge created on the assets not located in India. Do you agree with the stand taken by the Company? Give your answer with respect to the provisions of the Companies Act, 2013.

Accepted Answer

**The stand taken by Moon Light Ltd. is NOT correct and cannot be sustained.**

**Relevant Provision — Section 77 of the Companies Act, 2013:**

As per **Section 77(1) of the Companies Act, 2013**, it shall be the **duty of every company** creating a charge —
- within or **outside India**,
- on its property or assets or any of its undertakings,
- whether **tangible or otherwise**, and
- situated **in or outside India** —

to register the **particulars of the charge** signed by the company and the charge-holder, together with the instruments (if any) creating such charge, with the **Registrar of Companies (ROC)** within **30 days** of its creation, in the prescribed form and on payment of prescribed fees.

**Analysis of Moon Light Ltd.'s Position:**

Moon Light Ltd. has created a charge on its assets situated in the USA (outside India) in connection with a loan obtained there. The company contends that since the assets are not located in India, there is no obligation to register the charge under Indian law.

This contention is **legally untenable**. Section 77 explicitly covers charges on property or assets **situated outside India** as well. The obligation to register is not limited to assets within Indian territory — it extends to **all charges created by the company**, regardless of the location of the assets.

**Conclusion:**

Since Moon Light Ltd. is a company incorporated in India (with an establishment abroad), it is bound by the provisions of the Companies Act, 2013. T…

Question 25

PK and VK had a long dispute regarding the ownership of a land for which a legal suit was pending in the court. The Court fixed the date of hearing on 29.04.2018, which was announced to be a holiday subsequently by the Government. What will be the consequence of time of the hearing in this case under the General Clauses Act, 1897 ?

Accepted Answer

Under the General Clauses Act, 1897, when a date fixed for a court hearing is subsequently declared as a public holiday, the hearing stands automatically postponed to the next working day. This is a consequence of the provisions of the General Clauses Act dealing with the effect of holidays on time-bound proceedings. In this case, the hearing fixed for 29.04.2018 shall be adjourned and held on the next succeeding day which is not a public holiday (i.e., 30.04.2018 or such next working day). The postponement takes effect by operation of law without requiring an explicit adjournment order from the Court. Both parties are presumed to be aware of the holiday declaration and the automatic postponement. This rule exists to ensure that judicial proceedings are not hindered by closure of courts on public holidays and that the rights and interests of litigants are adequately protected.

Question 26

PK and VK had a long dispute regarding the ownership of a land for which a legal suit was pending in the court. The Court fixed the date of hearing on 29.04.2018, which was announced to be a holiday subsequently by the Government. What will be the consequence of time of the hearing in this case under the Criminal Clauses Act, 1897?

Accepted Answer

**Consequence under the General Clauses Act, 1897:**

This question is governed by **Section 10 of the General Clauses Act, 1897** (not the Criminal Clauses Act — likely a typographical error in the question; the applicable statute is the General Clauses Act, 1897).

**Section 10 of the General Clauses Act, 1897** deals with the computation of time when the last day or a fixed day for doing an act falls on a public holiday.

As per Section 10, where any act or proceeding is directed or allowed to be done or taken on a certain day, and that day happens to be a **public holiday**, then such act or proceeding shall be considered as duly done or taken if it is done or taken on the **next day afterwards, not being itself a public holiday**.

**Application to the given case:**

In the case of PK and VK, the Court had fixed **29.04.2018** as the date of hearing. Subsequently, the Government declared 29.04.2018 as a **public holiday**.

As per Section 10 of the General Clauses Act, 1897, since the fixed date of hearing (29.04.2018) falls on a public holiday, the hearing will be held on the **next working day** (i.e., the next day that is not a public holiday) — which would be **30.04.2018**, assuming it is not a holiday.

**Conclusion:** The date of hearing will automatically shift to the next day which is not a public holiday, and neither party nor the court needs to take any separate action for this rescheduling.

Question 27

Income Tax Act, 1961 provides that the gratuity paid by the government to its employees is fully exempt from tax. You are required to explain the scope of the term 'government' and clarify whether the exemption from gratuity clause available to the State Government Employees ? Give your answer in accordance with the provisions of the General Clauses Act, 1961.

Accepted Answer

The term **'Government'** in the context of gratuity exemption under the Income Tax Act, 1961 is defined in accordance with the **General Clauses Act, 1961**. According to **Section 3(26) of the General Clauses Act, 1961**, the term 'Government' means **the Government of India and the Government of any State**. This definition applies to all statutes, including the Income Tax Act, 1961, unless a contrary intention appears.

Under **Section 10(10) of the Income Tax Act, 1961**, gratuity received by employees from the Government is fully exempt from income tax. Since the General Clauses Act, 1961 explicitly defines 'Government' to include State Governments alongside the Central Government, the scope of the gratuity exemption extends to both.

**State Government employees are fully covered under the gratuity exemption**. Gratuity received by an employee of a State Government from that State Government is entirely exempt from income tax under the said provision. The exemption is not restricted to Central Government employees alone; it applies equally to State Government employees as the term 'Government' in the Income Tax Act is interpreted to include all State Governments as per the General Clauses Act, 1961.

Question 28

Income Tax Act, 1961 provides that the gratuity paid by the government to its employees is fully exempt from income tax. You are required to explain the scope of the term 'government' and clarify whether the exemption from gratuity under the Act will be available to the State Government Employees? Give your answer in accordance with the provisions of the General Clauses Act, 1897.

Accepted Answer

Under the General Clauses Act, 1897, the term **'Government'** ordinarily refers to the Government of India (Union Government). Section 3 of the General Clauses Act provides that in the construction of every Central Act, the expression 'Government' shall mean the Government of India, unless the Act expressly provides a different intention.

In the Income Tax Act, 1961, Section 10(10)(ii) specifically deals with gratuity exemption and explicitly states that the exemption applies to gratuity received in respect of service as an employee of **the Government of India or a State Government** (or any prescribed authority). By expressly including **'State Government'** in the gratuity exemption provision, the Legislature has clearly expressed its different intention to extend the scope beyond merely the Union Government to include State Governments as well.

This application of the interpretative principles under the General Clauses Act demonstrates that when a statute expressly states a different intention from the ordinary meaning of 'Government', that stated intention must prevail. Therefore, **gratuity paid by a State Government to its employees is fully exempt from income tax** under Section 10(10)(ii) of the Income Tax Act, 1961. State Government employees are entitled to the same gratuity exemption as Central Government employees.

Question 29

What is External Aid to interpretation ? Explain how the Dictionary definitions are the External Aids to interpretations ?

Accepted Answer

**External Aids to Interpretation** are materials and sources located outside the statute or legal document itself, which are used to understand the true meaning, context, and legislative intent of the law. They provide supplementary assistance when the language of the statute is ambiguous or unclear, helping courts arrive at a reasonable and just interpretation.

**How Dictionary Definitions are External Aids to Interpretation:**

**1. Establishing Ordinary Meaning** — Dictionary definitions provide the plain, ordinary meaning of words used in a statute. When statutory language employs common words without special definition, courts refer to standard dictionaries to ascertain what the legislature ordinarily intended those words to convey. This prevents arbitrary or strained interpretations.

**2. Resolving Ambiguity** — When a statutory term is ambiguous or susceptible to multiple meanings, dictionary definitions serve as an objective standard to select the most reasonable and contextually appropriate meaning. Different dictionaries may be consulted—general dictionaries for ordinary words, technical dictionaries for specialized terms used in commerce, medicine, or science.

**3. Understanding Technical and Specialized Terms** — Statutes often employ technical or specialized vocabulary. Dictionary definitions, particularly from specialized dictionaries, clarify the technical meaning intended by the legislature. For example, terms like "assessment," "depreciation," or "income"…

Question 30

What is External Aid to interpretation? Explain how the Dictionary definitions are the External Aids to interpretations?

Accepted Answer

**External Aid to Interpretation** refers to external sources or materials that lie outside the statute itself but are used to aid in the interpretation and construction of statutory provisions. These aids help ascertain the true intention and meaning of the legislature when words in the statute are ambiguous, unclear, or capable of multiple meanings.

**Nature of External Aids:** External aids are distinguished from internal aids (such as preamble, headings, illustrations, schedules which form part of the statute). External aids are supplementary tools used when the statute's language alone does not provide clear meaning or when ambiguity persists after applying rules of interpretation.

**Dictionary Definitions as External Aids to Interpretation:** Dictionary definitions serve as important external aids to statutory interpretation in the following manner:

**Establishing Ordinary Meaning:** Dictionaries provide the plain, ordinary, and common meaning of words as understood in everyday language and usage. When statutory language uses common words, dictionary definitions help establish what the legislature likely intended by employing those specific words. This principle is based on the premise that the legislature uses words in their ordinary sense unless context suggests otherwise.

**Clarifying Ambiguous or Technical Terms:** When statutory words are ambiguous or have multiple meanings, dictionaries help distinguish between various interpretations and select the most appro…

CA Inter Corp Laws

Drill 5 questions from this paper — instant grading

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Write it like this

1The skeleton

2Examiner-rewarded phrases

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Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap