CA Inter Corp Laws — Question Paper — July 2021

(i) Revocation of Licence under Section 8(6) of the Companies Act, 2013:

Yes, there is an express provision for revocation of licence granted to a Section 8 company. Under Section 8(6) of the Companies Act, 2013, the Central Government may by order revoke the licence of a Section 8 company if it is satisfied that:

- The company has contravened any of the requirements of Section 8 or any conditions subject to which the licence was granted; OR
- The affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public interest.

In the present case, since the affairs of State Cricket Club are being conducted fraudulently and dishonestly, and the company has been paying its members (which is against the object of a Section 8 company), the Central Government has sufficient grounds to revoke the licence. The complaint by Mr. Cool to the Regulatory Authority is a valid recourse.

Important procedural safeguard: Before revoking the licence, the Central Government must give the company a reasonable opportunity of being heard.

On revocation, the Registrar shall add the word "Limited" or "Private Limited" (as applicable) to the company's name in the register.

(ii) Whether the Company may be Wound Up — Section 8(7):

Yes, the company may be wound up after revocation of its licence. Under Section 8(7) of the Companies Act, 2013, where the licence of a Section 8 company is revoked, the Central Government may direct the company to:

- Wind up the company under Chapter XX (Winding Up provisions) of the Companies Act, 2013; OR
- Amalgamate with another Section 8 company having similar objects.

Further, upon winding up or dissolution, any surplus assets remaining after settlement of all liabilities shall not be distributed among the members. Instead, such surplus shall be transferred to another Section 8 company having similar objects, as determined by the Tribunal, or credited to the Rehabilitation and Insolvency Fund formed under Section 269 of the Act.

Thus, State Cricket Club can be wound up by order of the Central Government following revocation of its licence.

(iii) Whether State Cricket Club can merge with M/s. Cool Net Private Limited:

No, the merger is not permissible. Under Section 8(7) of the Companies Act, 2013, a Section 8 company, upon revocation of its licence, can only be amalgamated with another Section 8 company having similar objects.

M/s. Cool Net Private Limited is a company engaged in the business of networking — it is neither a Section 8 company nor does it have objects similar to promoting cricket. Therefore, State Cricket Club cannot be merged with M/s. Cool Net Private Limited. The amalgamation is restricted exclusively to another Section 8 company with analogous charitable/promotional objects.

Provisions for Removal of Second and Subsequent Auditors under Section 140(1) of the Companies Act, 2013:

Section 140(1) of the Companies Act, 2013 lays down the procedure for removal of an auditor appointed under Section 139 before the expiry of his term. The key provisions are as follows:

(i) The auditor can only be removed by a special resolution of the company.

(ii) The company must obtain the previous (prior) approval of the Central Government before passing such special resolution. The word 'previous' is of critical significance — it mandates that the Central Government's approval must be secured *before* the special resolution is passed at the general meeting.

(iii) Before taking any action for removal, the auditor concerned must be given a reasonable opportunity of being heard.

(iv) The Board of Directors passes a resolution recommending the removal and authorising the filing of an application to the Central Government. Under Rule 7 of the Companies (Audit and Auditors) Rules, 2014, such an application to the Central Government must be filed within 30 days of the Board resolution.

(v) Only after the Central Government grants approval, the company can convene a general meeting and pass the special resolution for removal.

Examination of Validity of Removal of AB & Associates:

Applying the above provisions to the given facts:

- AB & Associates were re-appointed as auditors at the AGM held on 15-03-2019.
- The Board of Directors passed a resolution recommending their removal on 31-03-2020.
- AB & Associates were removed at the general meeting held on 25-04-2020 by passing a special resolution subject to the approval of the Central Government.

The critical flaw in the procedure followed is that the special resolution was passed on 25-04-2020 subject to Central Government approval — meaning the approval of the Central Government had not yet been obtained at the time of passing the resolution. This is directly contrary to the mandatory requirement under Section 140(1) of the Companies Act, 2013, which requires the previous (prior) approval of the Central Government to be secured *before* the special resolution is passed.

The correct sequence should have been: (1) Board resolution → (2) Application to Central Government within 30 days → (3) Prior approval of Central Government → (4) Special resolution at general meeting.

Conclusion: The removal of AB & Associates by X Ltd. is not valid under the provisions of Section 140(1) of the Companies Act, 2013, since the mandatory condition of obtaining prior approval of the Central Government before passing the special resolution was not complied with. The special resolution passed 'subject to Central Government approval' does not satisfy the statutory requirement of 'previous approval.' The removal procedure must be recommenced following the correct sequence prescribed under Section 140(1) read with Rule 7 of the Companies (Audit and Auditors) Rules, 2014.

Legal Framework — Pledge under the Indian Contract Act, 1872

A pledge (also called pawn) is defined under Section 172 of the Indian Contract Act, 1872 as the bailment of goods as security for payment of a debt or performance of a promise. Mr. Flemming (Pawnor) pledged his chicken farm (including 1,00,000 live birds and 10,000 eggs) to Mr. Stefan (Pawnee) for ₹25 lakhs for one year.

Duties of Mr. Stefan as Pawnee

(a) Duty to take reasonable care: Under Section 151 of the Indian Contract Act, 1872, the pawnee (as a bailee) is bound to take as much care of the goods bailed as a man of ordinary prudence would take of his own goods of the same bulk, quality, and value.

(b) Duty not to make unauthorised use: Under Section 154, if the pawnee makes any use of the goods inconsistent with the conditions of the bailment, he is liable to make compensation to the pawnor for any damage arising.

(c) Duty to return goods on redemption: Under Section 173, the pawnee may retain the goods pledged only for payment of the debt or performance of the promise. Once Mr. Flemming repaid the ₹25 lakhs, Mr. Stefan was duty-bound to return the pledged goods immediately.

(d) Duty to return accretions (most critical duty in this case): Under Section 163 of the Indian Contract Act, 1872, in the absence of any contract to the contrary, the bailee (and by extension the pawnee) is bound to deliver to the bailor/pawnor any increase or profit which may have accrued from the goods bailed. This is the pivotal provision here.

Analysis of the Dispute

At the time of pledge: 1,00,000 live birds + 10,000 eggs.
At the time of return: 1,00,000 live birds (the original eggs hatched, adding to the bird count) + 15,000 eggs (new eggs laid by birds during the pledge period).

The 15,000 eggs are natural accretions/increase that accrued from the pledged goods during the pledge period. Mr. Stefan has no right to retain these 5,000 additional eggs. His agreement to return only 10,000 eggs is legally untenable, since the original 10,000 eggs no longer exist — they have hatched into birds. The 15,000 eggs are a fresh natural product of the pledged flock and constitute an accretion within the meaning of Section 163.

Advice to Mr. Flemming (Pawnor's Rights)

Mr. Flemming is entitled to receive:
- 1,00,000 live birds — correct, as agreed and returned by Stefan.
- 15,000 eggs — all new eggs produced during the pledge period, being natural accretions under Section 163, must be returned. Stefan cannot retain even a single egg beyond what rightfully constitutes the increase belonging to Flemming.

Mr. Flemming should assert his right under Section 163 and demand return of all 15,000 eggs. If Mr. Stefan refuses, Mr. Flemming can file a civil suit for recovery of the 5,000 additional eggs (or their market value) along with any damages caused by wrongful retention. Mr. Stefan's refusal to return the additional eggs amounts to a breach of duty as pawnee/bailee under the Indian Contract Act, 1872.

Conclusion: Mr. Stefan's action of retaining 5,000 eggs (returning only 10,000 instead of 15,000) is unlawful. Under Section 163 read with the law of pledge (Sections 172–179), all accretions belong to the pawnor. Mr. Flemming is fully entitled to recover all 15,000 eggs upon repayment of the pledged amount.

Under the Negotiable Instruments Act, 1881, Section 43 provides that the drawer of a cheque has a right to countermand (cancel) payment of a cheque as to any amount not then actually paid. Mr. Harsha, as the drawer of the cheque, validly exercised this right by issuing a stop payment instruction to his bank, and the bank correctly honored this instruction by refusing to pay the cheque.

The NGO's legal position is weak. As the payee, they cannot enforce payment of a cheque that has been stopped by the drawer. Their claim is further weakened by the fact that the NGO was fraudulent and did not fulfill the consideration for which the cheque was drawn (sponsoring education of a child). Fraud vitiates the underlying transaction, rendering the cheque null and void.

If the NGO attempts to initiate prosecution under Section 138 of the NI Act (which deals with dishonour of cheques), Harsha can raise the defense of fraud. The section requires the cheque to be drawn 'by way of' a lawful obligation. Since the underlying obligation (the NGO's promise to sponsor education) was fraudulent and never fulfilled, no lawful obligation existed, and the cheque was not validly drawn. Section 19 (holder in due course) would also be unavailable to the NGO as they cannot be innocent holders when they obtained the cheque through fraud.

Regarding his course of action, Mr. Harsha should maintain records of the stop payment instruction and bank's confirmation, gather evidence of the NGO's fraudulent nature, and safely ignore the NGO's demand notice as it has no legal basis. If the NGO files a civil suit for recovery, he should plead fraud and breach of contract as defenses. If prosecuted under Section 138, he can raise the fraud defense to show no valid obligation existed. He may also lodge a police complaint against the NGO for fraud. Mr. Harsha is fully protected under the law and should not yield to the NGO's threats.

Relevant Provision: Section 10 of the General Clauses Act, 1897

Section 10 of the General Clauses Act, 1897 provides for the computation of time in cases where a prescribed act or proceeding is to be done or taken in any Court or office on a certain day or within a prescribed period.

The provision states: *Where, by any Central Act or Regulation made after the commencement of this Act, any act or proceeding is directed or allowed to be done or taken in any Court or office on a certain day or within a prescribed period, then, if the Court or office is closed on that day or the last day of the prescribed period, the act or proceeding shall be considered as done or taken in due time if it is done or taken on the next day afterwards on which the Court or office is open.*

Application to the Facts of Ajit's Case

*Facts:* Ajit was required to submit an appeal to the High Court of Kolkata on 30th March, 2020, which was the last day for filing such appeal. On that day, the High Court was closed due to the total lockdown imposed across India on account of the COVID-19 pandemic.

*Analysis:* Since 30th March, 2020 was the last prescribed day for Ajit to submit his appeal, and the High Court of Kolkata was closed on that very day due to circumstances beyond Ajit's control (nationwide COVID-19 lockdown), the provisions of Section 10 of the General Clauses Act, 1897 are squarely attracted.

The closure of the Court on the last day of the prescribed period is a situation specifically contemplated by Section 10. It is immaterial whether the closure is due to a public holiday, natural calamity, or an extraordinary event such as a pandemic-induced lockdown — what matters is that the Court was not functioning on the last prescribed day.

Remedy Available to Ajit

By virtue of Section 10 of the General Clauses Act, 1897, Ajit is entitled to submit his appeal on the very next day on which the High Court of Kolkata reopens and resumes its functioning. Such submission shall be treated as having been made within the prescribed time limit and shall be considered as done or taken in due time. Ajit will not be deemed to have been in default or in delay.

Important Conditions and Limitations

(a) Section 10 applies only to Central Acts and Regulations made after the commencement of the General Clauses Act, 1897. If the appeal arises under such a Central Act, the protection of Section 10 is automatically available without requiring any separate application for condonation of delay.

(b) The benefit under Section 10 is automatic and self-operative — Ajit does not need to file a separate application for condonation of delay under Section 5 of the Limitation Act, 1963, as the time is extended by operation of law.

(c) The next day referred to in Section 10 means the next working day on which the Court is open, not necessarily the next calendar day. Since the lockdown was of an indeterminate duration, the appeal must be filed on the first day the High Court resumes functioning.

(d) If the matter is governed by a State Act or any other special statute containing its own computation of time provision, those specific provisions will prevail over the General Clauses Act, 1897.

Conclusion

Ajit has a clear and statutory remedy under Section 10 of the General Clauses Act, 1897. Since the High Court of Kolkata was closed on 30th March, 2020 (the last prescribed day for filing the appeal) due to the COVID-19 pandemic lockdown, Ajit can validly file his appeal on the next day the High Court reopens, and such filing will be treated as timely and within the prescribed period. He need not worry about the appeal being time-barred on account of the forced closure of the Court.

Sub-part (i): Whether Smart Solutions Private Limited qualifies as a Small Company

As per Section 2(85) of the Companies Act, 2013, a 'small company' means a company, other than a public company, which satisfies both of the following conditions as at the relevant date:

(a) Paid-up share capital does not exceed ₹50 lakhs (as prescribed under the Companies (Specification of Definitions Details) Rules, 2014, applicable for FY 2019-20); and

(b) Turnover as per its last profit and loss account does not exceed ₹2 crores.

However, the following companies are specifically excluded from the definition of small company, even if the above monetary thresholds are met:
- A holding company or a subsidiary company
- A company registered under Section 8
- A company governed by any special Act

Applying the conditions to Smart Solutions Private Limited:

- It is a private limited company — eligible to be a small company.
- Paid-up equity share capital = ₹50,00,000 = ₹50 lakhs — satisfies condition (a) (not exceeding ₹50 lakhs).
- Turnover = ₹2,00,00,000 = ₹2 crores — satisfies condition (b) (not exceeding ₹2 crores).

Regarding the holding by Nice Software Limited (public company):

Nice Software Limited holds 2,00,000 out of 5,00,000 equity shares = 40% of voting power. As per Section 2(87), a company becomes a subsidiary only if another company controls more than one-half (50%) of total voting power or controls composition of its Board of Directors. Since 40% < 50%, Smart Solutions Private Limited is NOT a subsidiary of Nice Software Limited. Mere shareholding by a public company, without crossing the 50% threshold or board control, does not affect small company status.

Conclusion: Smart Solutions Private Limited qualifies as a small company under Section 2(85). The fact that a public company holds 40% of its equity does not disqualify it, as it is neither a subsidiary nor a holding company.

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Sub-part (ii): Whether Smart Solutions Private Limited has defaulted in filing its Financial Statement

As per Section 137 of the Companies Act, 2013, every company must file its financial statements with the Registrar of Companies (ROC) within the prescribed time.

Section 2(40) defines 'financial statements' to include:
(i) Balance Sheet
(ii) Statement of Profit and Loss (or Income & Expenditure Account)
(iii) Cash Flow Statement
(iv) Statement of Changes in Equity (if applicable)
(v) Explanatory notes

However, the proviso to Section 2(40) carves out an important exemption: a one person company, a small company, a dormant company, and a private company that is a start-up are not required to include the Cash Flow Statement as part of their financial statements.

Applying the proviso:

Since Smart Solutions Private Limited is a small company (as concluded in sub-part (i)), it is exempt from preparing and filing the Cash Flow Statement as part of its financial statements. Its financial statements consist only of the Balance Sheet and the Statement of Profit & Loss (along with notes).

By filing the Balance Sheet and Profit & Loss Account within the prescribed timeline, Smart Solutions Private Limited has fully complied with Section 137 of the Companies Act, 2013.

Conclusion: Smart Solutions Private Limited has NOT defaulted in filing its financial statements. The ROC's notice alleging non-filing of Cash Flow Statement is not justified, as the company, being a small company, is statutorily exempt from including the Cash Flow Statement in its financial statements under the proviso to Section 2(40) of the Companies Act, 2013.

Section 135 of the Companies Act, 2013 prescribes the criteria for constituting a Corporate Social Responsibility Committee. A company must constitute a CSR Committee if it meets ANY of the following thresholds during any of the three immediately preceding financial years: (i) Net worth of ₹500 crore or more; (ii) Turnover of ₹1,000 crore or more; or (iii) Net profit of ₹5 crore or more.

Analysis of ABC Limited's Eligibility:

For FY 2020-21 (01-04-2020 to 31-03-2021), the "three immediately preceding financial years" are FY 2019-20, FY 2018-19, and FY 2017-18. The relevant data available is as of 31-03-2020 (end of FY 2019-20): Net Worth ₹100 crore, Turnover ₹500 crore, and Net Profit ₹1 crore.

Against the Section 135(1) thresholds:
- Net Worth (₹100 crore) < ₹500 crore ✗
- Turnover (₹500 crore) < ₹1,000 crore ✗
- Net Profit (₹1 crore) < ₹5 crore ✗

The company did not meet any of the three criteria as on 31-03-2020.

Although the Net Profit became ₹5 crore by 30-09-2020 (during FY 2020-21), this does not satisfy Section 135(1) because the criterion requires eligibility in "any of three immediately preceding financial years," not the current financial year. A company becoming eligible mid-year does not retroactively trigger the obligation for that year.

Conclusion: ABC Limited is NOT required to constitute a CSR Committee during the second half of FY 2020-21. However, if the Net Profit remains ₹5 crore or more at the end of FY 2020-21, the company will be required to constitute the committee from FY 2021-22 onwards.

PART (i): Small Company Status with Public Company Shareholding

No, Smart Solutions Private Limited shall NOT be deemed a small company. Although it satisfies the primary quantitative criteria under Section 2(85) of the Companies Act, 2013—paid-up capital of ₹50,00,000 and turnover of ₹2,00,00,000—it is expressly excluded from small company classification.

Section 2(85) provides three exceptions (proviso) to small company status. The company fails the third exception: "a company having significant equity shares held by a public company." Nice Software Limited (a public company) holds 2,00,000 fully paid-up equity shares out of 5,00,000 total shares, constituting 40% shareholding. This percentage is unquestionably significant because it represents:

• Ownership exceeding one-third of voting capital
• Substantial influence over company decisions and resolutions
• Material economic interest sufficient to control or influence policies

Therefore, despite meeting the capital and turnover thresholds, Smart Solutions is disqualified from small company status due to the public company shareholding proviso.

PART (ii): Default in Filing Financial Statement

Yes, Smart Solutions Private Limited has committed a statutory default in filing its financial statement. Under Section 129(1) of the Companies Act, 2013, every company must prepare and attach a Cash Flow Statement to its balance sheet. The only exemption from this obligation is provided in Section 149 for small companies.

Since Smart Solutions is not a small company (as established above), it cannot claim the exemption and is mandatorily required to file the Cash Flow Statement. The company's filing of its 2020-21 financial statement without the Cash Flow Statement constitutes a breach of Section 129(1) read with Schedule III. This is a clear statutory default, and the ROC's notice is legally justified. The company must rectify this non-compliance by filing the missing Cash Flow Statement within prescribed timelines.

Answer:

C is entitled to recover ₹3,000 (the full authorized amount) from either B or A despite the "not negotiable" crossing, under the Negotiable Instruments Act, 1881.

Against B (as Endorser):

Under Section 36, an endorser is liable to pay the cheque amount to any subsequent holder. Since B endorsed the cheque to C, B is liable for ₹3,000 regardless of the "not negotiable" crossing.

Against A (as Drawer):

Under Section 32, the drawer is liable to pay the cheque to the holder upon presentment. A is liable for ₹3,000 (the amount A authorized B to fill). The "not negotiable" crossing does not release drawer liability; it only affects title acquisition.

Effect of "Not Negotiable" Crossing (Section 125):

The "not negotiable" crossing means:

1. C is not a holder in due course – Under Section 125, C cannot acquire a better title than the transferor (B)

2. C's title is derivative – C's rights are subject to any defects in B's title. However, since B filled the cheque correctly for ₹3,000 (within the authority given by A), no defect exists in B's title

3. C is subject to A's defenses – A can raise any defense against C that A could raise against B

Critical Issue - Authority to Fill:

A authorized B to fill only ₹3,000. Since B filled it for ₹3,000, B acted within authority and acquired valid title. This means:
- B could validly endorse to C
- C can recover the full ₹3,000 from B or A

Note on Consideration: C paid ₹5,000 as consideration to B, but this is a separate transaction unrelated to C's rights under the cheque itself.

Important Qualification: If B had exceeded authority by filling more than ₹3,000, C would still recover only ₹3,000 from A (the authorized amount) and only ₹3,000 from B (the valid amount B could endorse). The "not negotiable" crossing would then become significant as C could not claim holder in due course protection and would be bound by the defect in B's title.

Conclusion: The "not negotiable" crossing prevents C from acquiring a better title but does not prevent C from recovering the authorized amount from either the endorser (B) or the drawer (A).

Yes, Mr. A can initiate action against the company for failure to distribute the dividend within 30 days of declaration.

Legal Framework:
Section 127 of the Companies Act, 2013 mandates that dividends declared by a company must be distributed to shareholders within 30 days from the date of declaration. Any default in distribution attracts penalty and criminal liability on the company and its officers.

Application to the Given Facts:

Timeline Analysis:
- Dividend declared: 31st March 2020
- 30-day statutory period: Expiry by 30th April 2020
- Dividend warrant posted: 22nd January 2021
- Warrant received: 5th February 2021

The company posted the dividend warrant on 22nd January 2021, which is significantly beyond the 30-day statutory period. The 30 days should have elapsed by 30th April 2020, but the warrant was dispatched after approximately 9.5 months.

Position on Postal Delay:
The postal delay (from 22nd January to 5th February 2021) is immaterial to Mr. A's right to take action. The company's statutory obligation is to dispatch the warrant within 30 days of declaration, not to ensure physical receipt by the shareholder within that period. Once the company dispatches the warrant properly, postal delays are beyond its control. However, in this case, the company itself failed to dispatch within 30 days, which is the primary breach.

Mr. A's Right of Action:
Under Section 127, Mr. A (as an aggrieved shareholder) can initiate action against the company for:
- Violation of the mandatory 30-day distribution requirement
- Recovery of interest (if applicable) as per the company's articles or statutory provisions
- Filing a complaint with the Registrar of Companies under Section 160, or pursuing civil/criminal remedies

Conclusion:
The company is clearly in breach of Section 127, and Mr. A has a valid cause of action. The defense of postal delay cannot absolve the company of its statutory duty to dispatch within 30 days from the date of declaration.

ABC Limited is NOT required to constitute a Corporate Social Responsibility Committee for the second half of FY 2020-21 (or for the entire FY 2020-21). The CSR Committee requirement under Section 135 of the Companies Act, 2013 is determined annually based on whether the company meets any of the prescribed financial thresholds in the immediately preceding financial year. For FY 2020-21, the immediately preceding financial year is FY 2019-20, and the determination must be based on the company's financial position as on 31-03-2020. As on 31-03-2020, ABC Limited's financial position is: (1) Net Worth of ₹100 crore, which is less than the prescribed threshold of ₹500 crore; (2) Turnover of ₹500 crore, which is less than the prescribed threshold of ₹1000 crore; and (3) Net Profit of ₹1 crore, which is less than the prescribed threshold of ₹5 crore. Since the company fails to satisfy any one of the three criteria as on 31-03-2020, it does not qualify for mandatory CSR Committee constitution for FY 2020-21. The fact that ABC Limited's financial position improved significantly by 30-09-2020 (Turnover reaching ₹1000 crore and Net Profit reaching ₹5 crore) does not alter the CSR Committee requirement for the current financial year. These improved figures will be relevant only for determining the CSR Committee requirement for FY 2021-22, where the company's position as on 31-03-2021 would be the determining factor. The CSR Committee requirement cannot be triggered mid-way through a financial year based on interim financial statements; the determination is made on an annual basis with reference to audited financial statements of the immediately preceding year.

Statement (i) - INVALID: The first AGM of a company shall be held within a period of 9 months (not 6 months) from the date of closing of the first financial year, as per Section 87 of the Companies Act, 2013. The statement is therefore incorrect.

Statement (ii) - PARTIALLY VALID: The Registrar does have the power to extend the time for holding the first AGM for any special reason under Section 87. However, the statement is incomplete and must be qualified. The extension permitted is limited to: (a) not exceeding 3 months at a time, and (b) not exceeding in aggregate 9 months from the date of closing of the first financial year. Thus while the Registrar's power exists, it is circumscribed by temporal limits.

Statement (iii) - VALID: All subsequent AGMs (second and onwards) shall be held within 6 months from the closing of the financial year, as per Section 86(1) of the Companies Act, 2013. This statement is correct.

Statement (iv) - VALID: There shall be a maximum interval of 15 months between two consecutive AGMs, as per Section 96 of the Companies Act, 2013. This means if an AGM is held, the next AGM must be held within 15 months. This statement is correct.

Summary: Statements (iii) and (iv) are entirely valid. Statement (ii) is valid but requires qualification regarding the limits of extension. Statement (i) is invalid as it misstates the timeline for the first AGM as 6 months instead of 9 months.

Applicable Provision: Section 138 of the Companies Act, 2013 read with Rule 13 of the Companies (Accounts) Rules, 2014 governs mandatory appointment of an Internal Auditor for certain classes of companies.

Thresholds for Unlisted Public Company (Rule 13(1)):
An unlisted public company is required to appoint an internal auditor if, during the preceding financial year, any of the following conditions are satisfied:
(a) Paid-up share capital of ₹50 crore or more; OR
(b) Turnover of ₹200 crore or more; OR
(c) Outstanding loans or borrowings from banks or public financial institutions exceeding ₹100 crore or more at any point of time; OR
(d) Outstanding deposits of ₹25 crore or more at any point of time.

Application to KSR Limited (for appointment in 2021-22, preceding FY = 2020-21):

| Criterion | Threshold | Actual (FY 2020-21) | Satisfied? |
|---|---|---|---|
| Paid-up share capital | ≥ ₹50 crore | ₹45 crore | No |
| Turnover | ≥ ₹200 crore | ₹120 crore | No |
| Outstanding bank loan (at any point) | > ₹100 crore | ₹110 crore (at time of drawdown) | Yes |
| Outstanding deposits | ≥ ₹25 crore | Not mentioned | No |

Conclusion: The bank loan obtained was ₹110 crore, meaning at the point of drawdown during FY 2020-21, the outstanding loan exceeded ₹100 crore. Even though the closing balance (₹105 crore as on 31-3-2021) and the opening balance (₹90 crore as on 31-3-2020) are relevant context, the decisive fact is that the loan at any point during FY 2020-21 stood at ₹110 crore, which breaches the ₹100 crore threshold.

Therefore, KSR Limited IS required to appoint an Internal Auditor for the year 2021-22 under Section 138 of the Companies Act, 2013.

Provisions for Appointment of First Auditor of a Government Company under the Companies Act, 2013

Appointment Authority: As per Section 139(7) of the Companies Act, 2013, the Central Government shall appoint the first auditor of a Government Company. This is a significant deviation from the general rule where the Board of Directors appoints the first auditor.

Definition of Government Company: The provisions apply to any company where not less than 51% of the paid-up share capital is held by the Central Government or any State Government or partly by both, as defined under Section 2(45).

Timing of Appointment: The Central Government must appoint the first auditor within 30 days of incorporation of the company, similar to the timeline applicable to other companies.

Qualifications: The appointed auditor must satisfy the eligibility criteria prescribed under Section 141, including not being disqualified under Section 141(3). The auditor must be a Chartered Accountant and must hold a valid certificate of practice.

Term of Office: The first auditor holds office until the conclusion of the first Annual General Meeting (AGM) of the company or until a successor is appointed, whichever is earlier.

Consent and Eligibility: Before appointment, the Central Government must obtain written consent from the proposed auditor confirming his willingness to act and his compliance with all applicable conditions.

Reappointment: After the first AGM, the company may reappoint the same auditor or appoint a new auditor as per the normal provisions of Section 139(2) by the company in General Meeting, subject to Section 140.

Removal: The Central Government retains the authority to remove the auditor as per the procedure outlined in Section 140, by giving notice to the company.

Regulatory Framework: Rule 11 of the Companies (Audit and Auditors) Rules, 2014 provides additional regulatory guidance for appointment in Government companies.

The dealer's argument is INCORRECT. The surety's liability is independent of the principal debtor's capacity to contract.

When Jack (major) is the surety:

Under Section 11 of the Indian Contracts Act, 1872, any contract made by a minor is void ab initio. Therefore, Paul's contract to purchase the smartphone is void because he lacks contractual capacity. However, this does NOT absolve Jack of liability.

The key principle is that the surety's contract with the creditor (mobile dealer) is separate and independent from the principal debtor's contract. When Jack becomes surety, he enters into a distinct contract with the dealer—not with Paul. Section 124 defines a surety as "a person who undertakes or promises to be answerable for the payment of a sum of money... if the principal debtor makes default."

Jack's liability arises from his agreement with the mobile dealer, and this agreement is valid because:
1. Jack is a major and has capacity to contract
2. The dealer extended credit based on Jack's promise of security
3. The consideration for Jack's promise is the creditor's act of forbearance (extending credit)
4. Jack's capacity is all that is required for his contract—Paul's incapacity is irrelevant

Therefore, the dealer can demand payment from Jack despite Paul's contract being void. Jack cannot use the void status of Paul's contract as a defense to escape his surety obligations. The void principal contract does not render the surety's independent contract void.

When both Paul and Jack are minors:

In this scenario, Jack's contract as surety is also void because Jack, being a minor, lacks capacity to contract under Section 11. Since the surety's own contractual capacity is essential for suretyship liability to arise, Jack cannot be held liable. The dealer would have no recourse against either party—neither against Paul (whose principal contract is void) nor against Jack (whose surety contract is void due to his minority). The dealer's attempt to recover would fail entirely.

Section 8 of the Companies Act 2013 deals with companies with charitable objects, not general private company registration requirements. However, addressing the requirements for private company registration under the Companies Act 2013:

Requirements for Private Company Registration:

A private company under Section 2(68) of the Companies Act 2013 is a company which by its articles restricts the right to transfer its shares, limits the number of members to 200, and prohibits invitation to the public to subscribe for securities. Private companies do not require government approval for formation like Section 8 companies, but must comply with general incorporation requirements.

(i) Capital Limit Under Companies Act 2013:

There is NO prescribed minimum paid-up capital limit for private companies under the Companies Act 2013. The Memorandum and Articles of Association determine the authorized capital, and companies can now be incorporated with nominal capital. Previously under the Companies Act 1956, there was a minimum paid-up capital requirement of ₹100,000 for private companies, but this has been removed in the 2013 Act to facilitate ease of doing business.

(ii) Definition of Company:

As per Section 2(20) of the Companies Act 2013, a company is defined as a company formed and registered under this Act. A company is an artificial juristic person created by law with perpetual succession and a common seal. It possesses the capacity to enter into contracts, own property, sue and be sued in its own name, and is governed by the provisions of the Companies Act 2013. The definition is broad and encompasses both public and private companies.

(iii) Regarding Stock Cricket Club Ltd and M/s Gold Cricket Limited:

The third sub-question appears incomplete or contextually unclear as presented. If the query pertains to whether a non-profit sports club (Stock Cricket Club Ltd) can invest in a profit-making company (M/s Gold Cricket Limited), this would depend on the objects clause of the club's Memorandum of Association and applicable restrictions under the Companies Act and registration rules. However, without specific case facts, a definitive answer cannot be provided. If this relates to a Section 8 company (charitable company) investing in a for-profit entity, such investment would generally be restricted to furthering the charitable objects.

The question, as presented, appears to relate to accounting records, books of account, and audit documentation obligations of AB & Co. Limited under the Companies Act, 2013 and applicable Standards on Auditing (SA). Based on the dates referenced (30-09-2019, 01-02-2020, 31-03-2020, 25-05-2020) and the topic of 'Accounting Records and Documentation', the following provisions are applicable:

(a) Maintenance of Books of Account — Section 128 of the Companies Act, 2013

Every company, including AB & Co. Limited, is required under Section 128 of the Companies Act, 2013 to prepare and maintain books of account and other relevant books and papers and financial statements for every financial year which give a true and fair view of the state of affairs of the company. Key requirements include:
- Books of account must be maintained on accrual basis and according to the double entry system of accounting.
- Books must be maintained at the registered office of the company, unless the Board of Directors decides otherwise by passing a resolution.
- If books are maintained at any place in India other than the registered office, the company must file a notice with the Registrar within 7 days.
- Books of account must be preserved for a minimum period of 8 years immediately preceding the current year.
- Where there is an investigation, the Central Government may direct preservation for a longer period.

(b) Audit Documentation — SA 230 (Audit Documentation)

Under SA 230 issued by the Institute of Chartered Accountants of India (ICAI), the auditor is required to prepare audit documentation (working papers) that provides:
- A sufficient and appropriate record of the basis for the auditor's report.
- Evidence that the audit was planned and performed in accordance with Standards on Auditing and applicable legal/regulatory requirements.

Key provisions of SA 230 relevant here:
- The auditor must assemble the final audit file within 60 days of the date of the auditor's report.
- After assembly, the auditor must not delete or discard audit documentation before the end of the retention period, which is at least 7 years from the date of the auditor's report.
- Audit documentation includes working papers prepared by the auditor, information received from the entity (including the books as of 31-03-2020), and correspondence.

(c) Subsequent Events — AS 4 (Contingencies and Events Occurring After the Balance Sheet Date)

If the question relates to the period between 31-03-2020 (balance sheet date) and 25-05-2020 (date of examination/audit sign-off), AS 4 requires the auditor and management to consider subsequent events that:
- Provide evidence of conditions that existed at the balance sheet date — these must be adjusted in the financial statements.
- Indicate conditions that arose after the balance sheet date — these may require disclosure but not adjustment.

(d) Conclusion

AB & Co. Limited must ensure its books of account as at 31-03-2020 are properly maintained under Section 128 of the Companies Act, 2013, and the auditor examining the accounts on 25-05-2020 must comply with SA 230 for documentation and AS 4 for any subsequent events between 31-03-2020 and the report date. Any information available on 01-02-2020 relevant to conditions existing on or before 30-09-2019 must be appropriately reflected in the financial statements.

Under Section 127 of the Companies Act, 2013, every company must pay any dividend within 30 days from the date of declaration. The company's statutory obligation is discharged when the dividend warrant is dispatched/posted, not when the shareholder actually receives it. Postal delays after dispatch are the responsibility of the postal service, not the company.

Key principle: The 30-day period is calculated from the date of declaration (22-01-2020), which means the company should have posted the warrant by approximately 21-02-2020. Once the warrant is posted, the company has fulfilled its obligation under Section 127. Any subsequent delay in the shareholder receiving the warrant due to postal delays does not extend the company's liability—it does not shield the company from liability, nor does it absolve the shareholder's right to sue.

Applying to the facts: The dividend was declared on 22-01-2020, and the warrant was posted on 22 January 2021. This represents a 12-month delay, far exceeding the prescribed 30-day period. The company has clearly breached Section 127. The postal delay experienced by Mr. A (receiving on 5-02-2021 instead of 22-01-2021) is immaterial to establishing the company's breach—the breach occurred at the posting stage.

Yes, Mr. A can initiate action against the company. Under Section 127, Mr. A's remedies include: (1) filing a complaint with the Registrar of Companies, who can direct the company to pay the dividend plus interest; (2) claiming interest at 12% per annum from the date of declaration (22-01-2020) until actual payment; and (3) pursuing compensation for damages caused by the unlawful delay.

If the warrant had been posted within 30 days of declaration (which appears to be the intended scenario based on typical cases), Mr. A would have no claim against the company despite postal delays in his receipt, as the company would have fully complied with its statutory obligation.

Sub-part (i): Revocation of Licence under Section 8(6) of the Companies Act, 2013

Yes, there is a specific provision for revocation of licence granted to a Section 8 company. Section 8(6) of the Companies Act, 2013 empowers the Central Government to revoke the licence of a company registered under Section 8 if:

(a) The company contravenes any of the requirements of Section 8;
(b) The conditions subject to which the licence was granted have not been complied with;
(c) The affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public interest.

In the given case, two clear grounds for revocation exist: (1) the affairs of State Cricket Club are being conducted fraudulently, and (2) dividend has been paid to members, which directly violates Section 8, as a Section 8 company is prohibited from paying any dividend to its members — its income must be applied solely towards the promotion of its objects.

On revocation, the Registrar shall enter the fact in the register and the company shall either:
- Convert its status by adding 'Limited' or 'Private Limited' to its name under the applicable provisions, OR
- Be wound up in accordance with the provisions of the Act.

Before revoking the licence, the Central Government must give the company a reasonable opportunity of being heard. Therefore, Mr. Cool's complaint to the Regulatory Authority (Central Government/Regional Director) is maintainable and the licence of State Cricket Club can be revoked under Section 8(6).

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Sub-part (ii): Whether the Company may be Wound Up

Yes. Section 8(7) of the Companies Act, 2013 specifically provides that where a licence is revoked under Section 8(6), and the Central Government is satisfied that it is essential in the public interest that the company be wound up, the Central Government may, notwithstanding anything in Chapter XX or any other provision of the Act, by order direct such winding up.

Further, apart from Section 8(7), a Section 8 company can also be wound up under the regular winding up provisions of Chapter XX (Sections 270 onwards) of the Companies Act, 2013 — either voluntarily by members, or compulsorily by the National Company Law Tribunal (NCLT) on prescribed grounds.

In the present case, since the licence is liable to be revoked due to fraudulent conduct and payment of dividend, the Central Government is empowered to order winding up of State Cricket Club in public interest.

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Sub-part (iii): Whether State Cricket Club can be Merged with M/s. Cool Net Private Limited

No, State Cricket Club cannot be merged with M/s. Cool Net Private Limited. Section 8(7) of the Companies Act, 2013 expressly provides that where a licence is revoked, the Central Government may direct amalgamation of the company only with another company registered under Section 8, and that too having similar objects.

M/s. Cool Net Private Limited is:
- A regular Private Limited company — not registered under Section 8;
- Engaged in networking business, which is entirely different from the object of promoting cricket.

Both conditions required under Section 8(7) — i.e., the transferee company must be a Section 8 company *and* must have similar objects — are absent here. Therefore, the proposed merger of State Cricket Club with M/s. Cool Net Private Limited is not permissible under the Companies Act, 2013.

Provisions for Removal of Auditor Before Expiry of Term — Section 140(1) of the Companies Act, 2013

The removal of an auditor appointed under the Companies Act, 2013 before the expiry of his term is governed by Section 140(1) of the Companies Act, 2013 read with Rule 7 of the Companies (Audit and Auditors) Rules, 2014.

The prescribed procedure is as follows:

(i) The company shall hold a Board Meeting and pass a resolution recommending the removal of the auditor.

(ii) Within 30 days of passing the Board resolution, the company shall make an application to the Central Government in Form ADT-2 seeking prior approval for removal.

(iii) The auditor concerned shall be given a reasonable opportunity of being heard before the Central Government passes its order.

(iv) After receipt of the prior approval of the Central Government, the company shall, within 60 days of such approval, hold a General Meeting and pass a Special Resolution to remove the auditor.

The critical point is that the approval of the Central Government must be obtained first (prior approval) — the special resolution at the General Meeting can only be passed *after* such approval is received, not before.

Examination of Validity of Removal of AB & Associates:

In the given case:
- AB & Associates were re-appointed at the AGM held on 30-09-2019.
- The Board of Directors passed a resolution recommending removal on 31-03-2020.
- A special resolution was passed at the General Meeting held on 25-05-2020, but this was passed subject to approval of the Central Government.

This procedure adopted by X Ltd. is contrary to the mandate of Section 140(1). The law requires that prior (previous) approval of the Central Government must be obtained before the special resolution is passed at the General Meeting. In this case, X Ltd. reversed the sequence — it passed the special resolution first and made it conditional upon future CG approval. This is not permissible under the Act.

Conclusion: The removal of AB & Associates by X Ltd. is NOT VALID. The removal is procedurally defective because the special resolution was passed at the General Meeting on 25-05-2020 without first obtaining the prior approval of the Central Government as mandated by Section 140(1) of the Companies Act, 2013. X Ltd. ought to have first applied to the Central Government in Form ADT-2 within 30 days of the Board resolution (i.e., by 30-04-2020), and only after receiving such approval, should have convened a General Meeting to pass the special resolution within 60 days of that approval.

(i) Bill of Exchange Payable on Demand — Maturity Date:

The statement that the bill will be at maturity on 04-01-2021 is incorrect and invalid.

Under Section 22 of the Negotiable Instruments Act, 1881, three days of grace are allowed only for instruments that are payable otherwise than on demand, at sight, or on presentment. Where a bill of exchange is expressly drawn as 'payable on demand', it falls within the category of demand instruments under Section 19 of the Negotiable Instruments Act, 1881, and no days of grace are applicable to such instruments.

Therefore, when the bill is presented on 01-01-2021, it becomes due and payable on 01-01-2021 itself — the day of presentment. The three days of grace cannot be added to arrive at 04-01-2021. The statement is legally incorrect.

(ii) Notice of Dishonor — Drawer's Claim:

The drawer's claim is not valid and he cannot escape liability.

Under Section 93 of the Negotiable Instruments Act, 1881, when a negotiable instrument is dishonored, the holder must give notice of dishonor to all parties whom he intends to make liable. However, Section 98 of the Negotiable Instruments Act, 1881 specifically provides that notice of dishonor is not required to be given to the maker of a promissory note or the acceptor of a bill of exchange, as these parties are themselves the primary obligors responsible for the dishonor — they are already aware of non-payment.

In the given case, the holder gave notice of dishonor to all parties except the acceptor. This is entirely in conformity with Section 98. The holder was under no legal obligation to notify the acceptor. The fact that notice was not given to the acceptor does not in any way relieve the drawer of his liability. The drawer's contention is therefore legally untenable, and he remains liable on the bill.

Facts of the Case: Mr. Flemming (Pawnor) pledged his chicken farm to Mr. Stefan (Pawnee) for ₹25 lakhs for one year. At the time of pledge: 1,00,000 live birds and 10,000 eggs. After one year, Flemming repaid the deposit. At that time: 1,09,000 live birds and 15,000 eggs. Stefan offered to return only 1,00,000 birds and 10,000 eggs, refusing to return the accretions.

Legal Provisions Applicable:

A pledge is defined under Section 172 of the Indian Contract Act, 1872 as the bailment of goods as security for payment of a debt or performance of a promise. Since pledge is a special form of bailment, the general duties of a bailee also apply to a pawnee.

Duties of Mr. Stefan as Pawnee:

1. Duty to take reasonable care (Section 151): The pawnee is bound to take as much care of the goods pledged as a man of ordinary prudence would take of his own goods of the same bulk, quality, and value.

2. Duty not to make unauthorised use (Section 154): The pawnee must not use the goods pledged beyond the purpose of the contract. Any unauthorised use makes the pawnee liable for any damage caused.

3. Duty to return accretions/increase along with the goods (Section 163): This is the most critical duty in the present case. Under Section 163 of the Indian Contract Act, 1872, in the absence of any contract to the contrary, the bailee (and by extension, the pawnee) is bound to deliver to the bailor/pawnor any increase or profit which may have accrued from the goods bailed/pledged. The pawnee holds the accretions in trust for the pawnor and cannot retain them.

4. Duty to return the goods on repayment (Section 174 read with Section 160): Once the pawnor repays the debt, the pawnee is duty-bound to return the pledged goods. The right of retainer under Section 173 ceases upon repayment.

Application to the Case and Advice to Mr. Flemming:

The increase of 9,000 live birds (hatched from the original 10,000 eggs pledged) and the 5,000 additional eggs (15,000 – 10,000) are natural accretions arising from the pledged goods.

As per Section 163 of the Indian Contract Act, 1872, Mr. Stefan is legally obligated to return all accretions along with the original goods. There is no contract to the contrary mentioned in this case.

Therefore, Mr. Stefan must return:
- 1,09,000 live birds (1,00,000 original + 9,000 hatched)
- 15,000 eggs (10,000 original + 5,000 added)

Mr. Stefan's refusal to return the additional 9,000 birds and 5,000 eggs is wrongful and contrary to the provisions of the Indian Contract Act, 1872.

Advice to Mr. Flemming: Mr. Flemming is entitled to claim the return of 1,09,000 live birds and 15,000 eggs. Since he has already repaid the ₹25 lakhs deposit, his right to the return of the pledged goods along with all accretions is absolute. He may seek legal remedy to recover the additional 9,000 live birds and 5,000 eggs wrongfully withheld by Mr. Stefan.

(i) Bill of Exchange Payable on Demand — Validity of Maturity Date:

The statement is not valid. Under Section 22 of the Negotiable Instruments Act, 1881, days of grace (3 days) are added only to instruments which are not expressed to be payable on demand, at sight, or on presentment. A bill expressed as 'payable on demand' falls squarely within the exception and therefore no days of grace are applicable.

If such a bill is presented on 01-01-2021, it becomes due and payable on the very date of presentation, i.e., 01-01-2021 itself. The claim that the bill will mature on 04-01-2021 (i.e., adding 3 days of grace) is incorrect in law. The bill is at maturity on 01-01-2021, the date of presentation.

(ii) Notice of Dishonor — Validity of Drawer's Claim:

The drawer's claim is not valid. Under Section 93 of the Negotiable Instruments Act, 1881, when a bill of exchange is dishonored, the holder must give notice of dishonor to all parties whom the holder seeks to make liable. However, Section 98 carves out specific situations where notice of dishonor is unnecessary.

Notice of dishonor is not required to be given to the acceptor of a bill of exchange, because the acceptor is the primary/principal debtor who is himself the party that has dishonored the instrument — he already has knowledge of the dishonor. Giving notice to the acceptor would serve no practical purpose as no damage can arise from its omission.

Since the holder gave notice of dishonor to all parties except the acceptor, and notice to the acceptor is not legally required, the holder has fully complied with the requirements of the Act. The drawer is not discharged from his liability and his claim is legally untenable.

In statutory interpretation, the words 'means' and 'includes' carry distinctly different implications when used in definitions. Understanding this distinction is critical for accurate statutory construction.

The word 'MEANS' in a definition is exhaustive and exclusive. When a statute defines a term using 'means', it restricts the meaning strictly to only what is explicitly stated in that definition. No extension or analogy beyond the stated scope is permitted. The definition creates fixed and closed boundaries. For example, if a definition reads 'Income means salary, wages, and commission', then income is limited solely to these three categories and nothing else. Courts interpret 'means' definitions narrowly and rigidly—they do not add items that may be similar in nature.

The word 'INCLUDES' in a definition is non-exhaustive and illustrative. When a statute defines a term using 'includes', it provides examples but does not restrict the meaning to those examples alone. It operates as an expansion beyond what is explicitly mentioned. Using the same example: 'Income includes salary, wages, and commission' means income encompasses at minimum these items, but may include other similar items as well. The definition remains open-ended and broader in scope. Courts interpret 'includes' definitions liberally, allowing for additions of similar items not specifically listed.

Key Distinction: With 'means', the list is maximum and final. With 'includes', the list is minimum and suggestive. This difference becomes critical in application. A taxpayer earning rental income would be denied the benefit of a deduction tied to a 'means' definition excluding rentals, but might succeed if the definition uses 'includes' for a broader category.

Combined Usage: When both words appear together—'A means B and includes C and D'—the structure operates as follows: 'means' sets the broad category or scope, while 'includes' within that scope provides expansive illustrations. This methodology balances precision with flexibility.

Judicial Approach: Indian courts have consistently held that when the legislature uses 'includes', it intends to expand the ordinary meaning; when it uses 'means', it intends to restrict strictly. This principle prevents arbitrary enlargement while respecting legislative intent in both cases.

Mr. Harsha has taken a valid and legally protected course of action by issuing a stop payment instruction to his bank. His legal position is strong, and the NGO's threats to sue are unlikely to succeed.

Validity of Stop Payment Instruction Under the NI Act:

Under the Negotiable Instruments Act, 1881, a drawer has an absolute right to issue a stop payment instruction to the banker at any time before the cheque is presented for payment. Once such an instruction is given, the bank is legally bound to dishonor the cheque. When the bank complies with this instruction (as in Mr. Harsha's case), the cheque is cancelled and becomes ineffective. The banker incurs no liability for non-payment, and the drawer (Mr. Harsha) incurs no liability under Section 128 of the NI Act.

Effect on the NGO's Rights:

The NGO cannot compel payment or recover the amount through the cheque because:
1. The cheque was validly dishonored due to the drawer's stop payment instruction, not due to insufficiency of funds.
2. A cheque is fundamentally a conditional payment instrument—conditional on being honored by the bank. Once stopped, the condition fails and the cheque becomes unenforceable.
3. Even if the NGO initiates proceedings under Section 138 of the NI Act (Dishonor of Cheque), the cheque was not dishonored for "insufficiency of funds," a core requirement of Section 138. Therefore, the provision may not even apply.

Defenses Available to Mr. Harsha Under Section 139:

Additionally, Mr. Harsha has a powerful defense based on failure of consideration. The cheque was issued for a specific purpose: sponsorship of education by the NGO. The underlying consideration—that the NGO would engage in genuine philanthropic activities—has completely failed because the NGO was discovered to be fraudulent and did not engage in any philanthropic work. Under the Negotiable Instruments Act and the general law of contracts, failure of consideration renders a negotiable instrument unenforceable.

Recommended Course of Action:

1. Maintain Stop Payment Status: Continue the stop payment instruction with the bank to ensure the cheque is not honored.

2. Do Not Pay the NGO: Mr. Harsha has no legal obligation to pay the NGO under the circumstances.

3. Respond to Demand Notice: Through a lawyer, Mr. Harsha should respond formally, clearly stating that (a) a valid stop payment instruction was issued, (b) the consideration for the cheque has failed due to the NGO's fraudulent nature, and (c) no legal liability exists.

4. Lodge a Police Complaint: Mr. Harsha should file a criminal complaint for fraud and cheating against the NGO for misrepresenting itself as a philanthropic organization when it was actually fraudulent. This strengthens his position and prevents the NGO from making similar misrepresentations to others.

5. Gather Evidence: Collect all documentary proof that the NGO is fraudulent—such as evidence that it did not engage in claimed activities, lack of proper registration, or other documentary support.

6. Prepare Defense If Sued: If the NGO files a case under Section 138 of the NI Act, Mr. Harsha should raise the defenses of (a) valid stop payment instruction and (b) failure of consideration, supported by evidence of fraud.

Legal Position Summary:

The NGO's legal position is extremely weak. A stop payment instruction is a valid, recognized right of the drawer that provides a complete defense. Combined with the defense of failure of consideration due to the NGO's fraudulent nature, Mr. Harsha has strong protection under the Negotiable Instruments Act. The NGO is unlikely to succeed in any legal proceedings.

The terms 'means' and 'includes' in statutory definitions have distinct legal implications and impact interpretation differently.

Meaning of 'Means': When a statute uses the word 'means', it provides an exhaustive or restrictive definition. This means the term is defined completely and exclusively. The definition covers only what is stated and nothing beyond. It is a closed definition that precludes any other interpretation or extension.

Meaning of 'Includes': When a statute uses the word 'includes', it provides an illustrative or inclusive definition. This means the term includes at least what is stated, but is not limited to only those items. The definition is non-exhaustive and allows for interpretation beyond what is explicitly mentioned. It is an open definition.

Impact on Interpretation:

1. Scope Determination: 'Means' limits the scope to a fixed and finite list, creating certainty and finality. 'Includes' expands the scope by providing examples while leaving room for other possibilities.

2. Inclusivity vs. Exclusivity: 'Means' is mutually exclusive—if something is not mentioned, it is excluded by definition. 'Includes' is cumulative—the listed items are minimum inclusions, and other similar items may be included by interpretation.

3. Interpretation Approach: Where 'means' is used, courts adopt a restrictive interpretation and do not extend the definition. Where 'includes' is used, courts can extend the meaning beyond the express words to include similar things.

4. Practical Example: If the statute states 'Family means spouse, children and parents', the definition covers only these three. If it states 'Family includes spouse, children and parents', it covers at least these three but may extend to grandparents, siblings, or other relatives.

Significance: This distinction is crucial because the choice of word directly affects the ambit and scope of statutory provisions, particularly in taxation, where a narrower or broader interpretation can materially affect the outcome.

Effect of "Not Negotiable" Crossing: Under Section 130 of the Negotiable Instruments Act, 1881, when a cheque is crossed and bears the words "not negotiable" across its face, it ceases to be a negotiable instrument and cannot be negotiated further in respect of such crossing. Even though B endorsed the cheque to C, this crossing prevents C from acquiring the status of a holder in due course. Instead, C becomes merely an assignee of the instrument, not a statutory holder.

C's Right to Recover from B: Since B endorsed and transferred the cheque to C against consideration of ₹5,000, B undertakes liability under Section 50 of the NI Act. As an endorser, B is responsible for indemnifying C in case of dishonor or defect. Therefore, C is entitled to recover the full amount of ₹5,000 from B because B accepted consideration and B's liability as endorser is unaffected by the "not negotiable" crossing.

C's Right to Recover from A: C cannot recover from A under the framework of the NI Act for the following reasons: (1) The "not negotiable" crossing prevents the cheque from being a negotiable instrument in C's hands; (2) C lacks the status of a holder in due course, which is essential for direct recovery from the drawer under the Act; (3) C's rights as an assignee are subject to all equities and defenses available to A against B; (4) A's drawer liability extends only to proper holders or holders in due course, not to assignees. If C were to pursue civil action against A, it would be outside the NI Act framework as a matter of contract law or assignment, and A could raise all defenses available against B.

Conclusion: C is entitled to recover from B only, not from A. The "not negotiable" crossing limits C's recourse to the immediate endorser (B) and prevents C from claiming holder-in-due-course rights against the drawer (A).

Share Buyback by Private Companies

A private company has the statutory right to repurchase or buy back its own issued shares, subject to conditions prescribed under the Companies Act, 2013. This mechanism allows companies to return capital to shareholders, manage capital structure, and support employee share schemes.

Conditions for Share Buyback (Section 68):

Private companies can buyback shares only if: (1) Authorized by the Articles of Association; (2) Approved by special resolution in general meeting; (3) The buyback does not exceed 25% of paid-up capital and free reserves combined; (4) Funded from free reserves, securities premium account, or proceeds of asset sale; (5) Company is not in default in payment of statutory dues; (6) Offer is made to all members proportionately.

Restrictions on Non-Banking Institutions (Section 72):

Certain entities classified as restricted persons are prohibited from purchasing shares of a company, including non-banking institutions such as Non-Banking Financial Companies (NBFCs), finance companies, insurance companies, and certain government entities. These restrictions apply to:

- Direct purchase of shares from market transactions
- Participation in buyback offers initiated by the company
- Holding shares in certain regulated sectors

These restrictions prevent concentration of shareholding in financial institutions and protect market integrity and public interest.

Buyback Process for Private Companies:

(1) Board of Directors passes resolution approving buyback; (2) Shareholders approve through special resolution in general meeting; (3) Public announcement or letter of offer issued to all members; (4) Members respond within specified period; (5) Shares are purchased and cancelled; (6) Compliance report filed with Registrar of Companies.

Requirements for Non-Banking Institutions to Participate:

Non-banking institutions cannot normally participate in buyback as restricted persons. However, exemptions or relaxations may be granted by: (1) The Reserve Bank of India (for RBI-regulated NBFCs); (2) Sector regulator in case of insurance/finance companies; (3) Ministry of Corporate Affairs in specified circumstances. Participation requires specific regulatory approval and compliance with sectoral guidelines.

Key Provisions under Companies Act, 2013:

Sections 68-79 comprehensively regulate buyback, ensuring transparency, fairness, and investor protection. The framework protects minority shareholders by requiring proportionate offers and prevents misuse of company funds. For private companies specifically, buyback is a shareholder-friendly option while maintaining statutory safeguards.

Prospectus under the Companies Act, 2013, Section 71, is an offer document inviting subscriptions or applications for debentures. Deemed Prospectus under Section 72 expands this definition to include any document, advertisement, notice, or circular that invites deposits or applications for debentures, whether or not it is formally called a prospectus.

For ABC Limited's series of debenture issuance, the following essential provisions must be incorporated:

1. Prospectus Content (Section 71): The prospectus must contain: (a) particulars of the company's directors and auditors; (b) details of authorized and issued capital; (c) auditor's report and certificate; (d) list and description of contracts essential to the business; (e) declaration of objects of the issue; and (f) disclaimers as prescribed.

2. Debenture-Specific Particulars: (a) Interest rate and payment terms; (b) redemption date and terms of redemption; (c) secured or unsecured status with security details if applicable; (d) appointment of debenture trustee(s) for protecting debenture holders' interests; (e) credit rating from recognized rating agency; (f) call/put options if any; and (g) terms of conversion if convertible debentures.

3. Deemed Prospectus Compliance (Section 72): Any circular, advertisement, or notice inviting applications for debentures is automatically treated as a prospectus. Therefore, ABC Limited must ensure all promotional materials conform to prospectus requirements, including mandatory disclaimers and prescribed particulars, even if not formally labeled as prospectus.

4. Debenture Redemption Reserve: As per the conditions of debenture issuance, a Debenture Redemption Reserve must be created from profits before redemption to ensure sufficient funds are available for repayment at maturity.

5. Statutory Filings: (a) Prospectus or memorandum must be filed with the Registrar of Companies (ROC) before inviting applications; (b) Debenture Trust Deed must be filed; (c) Copy of debenture prospectus must be filed.

These provisions ensure transparency, investor protection, and legal compliance in ABC Limited's debenture issuance.

Part (a): Is the dealer's argument correct that Jack is not liable?

The dealer's argument is NOT entirely correct. Under Section 11 of the Indian Contracts Act, 1872, a contract with a minor is void ab initio (from the beginning). Therefore, Paul (minor) cannot be held liable on the contract. However, this does not automatically absolve Jack of liability.

The critical distinction is whether Jack was actually a party to the contract:

If Jack was an actual party to the contract: Jack, being a major, has full contractual capacity and can be held liable. The fact that Paul is a minor and cannot be held liable does not shield Jack from her own obligations if she voluntarily entered into the contract in her own capacity. Jack's liability is independent of Paul's incapacity.

If Jack merely allowed her name to be used without being a party: Jack may not be held liable on the contract itself. However, under Section 65 of the Indian Contracts Act (Restitution), since the dealer provided a benefit (the smartphone) under a void contract, the dealer can claim restitution of that advantage. Jack cannot retain the benefit without compensation if she received it.

If Jack acted as a guarantor: Different principles of guarantee liability would apply, not just contractual liability.

The dealer's correct position is that Jack's lack of liability cannot be assumed merely because Paul is a minor. Liability depends on Jack's actual role and consent in the transaction.

Part (b): If both Paul and Jack are minors

If both are minors, the position changes significantly. Under Section 11, neither can enter into a valid contract. The contract would be void ab initio, and neither could be held liable on the contract itself.

However, the dealer's remedy would be Section 65 - Restitution. The dealer can recover the value of the smartphone or the goods themselves from whoever received the benefit. If the minor used and benefited from the goods, restitution can be claimed. The liability would be quasi-contractual (for unjust enrichment), not contractual. The dealer cannot claim breach of contract but can claim the value of goods provided.

The statement is substantially VALID and accurately reflects the key restrictions governing buy-back of shares under the Companies Act, 2013. It encompasses two distinct but interrelated provisions:

Restriction on Successive Buy-Back Offers (Six-Month Gap)
Section 68(2) of the Companies Act, 2013 explicitly provides that a company shall not make an offer of buy-back within six months from the date of closure of the preceding buy-back offer OR within six months from the date of closure of the preceding preferential offer made under Section 62, whichever is LATER. This ensures adequate temporal separation between successive buy-back transactions, protecting shareholder interests and market stability.

Restriction on Further Issue of Same Kind of Shares (One-Year Lock-In)
Section 68(2) further stipulates that no fresh issue of the same kind of shares (including allotment of further shares) shall be made within a period of one year from the completion of buy-back. This restriction prevents immediate dilution of shareholding and protects the buyback's effectiveness. The rationale is to ensure that the benefits of buy-back are not negated by subsequent capital dilution.

Exceptions to These Restrictions
The Companies Act, 2013 recognizes certain exceptions where these restrictions do not apply:
1. Employee Stock Option Plan (ESOP): Shares issued to employees under approved ESOP schemes are exempt.
2. Bonus Shares: Bonus shares credited out of company reserves are not subject to these restrictions.
3. Dividend Shares: Shares issued in lieu of dividend are exempted.
4. Outstanding Commitments: Shares issued in fulfillment of contracts or commitments made before buy-back completion.
5. General Meeting Approval: The one-year restriction may be relaxed upon obtaining specific approval in a general meeting.

Validity Assessment
The statement is valid and legally accurate. However, it could be enhanced by explicitly stating that these are two separate but complementary provisions—one controlling the frequency of buy-back offers, and the other controlling subsequent capital issuances. Both provisions work together to regulate capital restructuring and protect shareholder interests.

Validity: The statement is SUBSTANTIALLY CORRECT but INCOMPLETE as presented.

Correct Aspects of the Statement:

The statement accurately reflects two key cooling-off periods under the Companies Act, 2013 regarding buy-back of shares:

1. 6-Month Cooling-off Period Between Consecutive Buy-back Offers: According to Section 68 read with Schedule IV (Regulation 17) of the Companies Act, 2013, no fresh offer of buy-back shall be made within six months from the date of closure of any preceding buy-back offer. This restriction prevents frequent buy-back offers that could destabilize the capital structure and protect shareholder interests by ensuring offers are made at reasonable intervals.

2. 1-Year Cooling-off Period Before Further Issue: The statement correctly identifies that after the allotment of buy-back shares, a cooling-off period of one year must elapse before the company can make a further issue of the same kind of shares. This period allows the capital structure to stabilize and protects existing shareholders.

Critical Limitation: The Exceptions

While the statement mentions "subject to certain exceptions," it fails to specify them—a significant omission. According to Regulation 18 of Schedule IV, the 1-year cooling-off period does NOT apply to:

- Issue of shares for non-cash consideration: Shares issued for acquisition, merger, or amalgamation purposes are exempt.
- Bonus shares: No cooling-off period applies as no fresh capital is infused.
- Shares issued on exercise of conversion rights: Conversion of debentures/preference shares or exercise of warrants/options is exempt.
- Shares issued in lieu of dividend: When shares are offered as alternative to cash dividends, the restriction does not apply.
- Rights issues: Under certain circumstances, rights issues may proceed without waiting the full period.

Additional Qualifications:

The buy-back validity also depends on other conditions: board and shareholder approval, compliance with financial thresholds (net worth maintenance), authorization by articles of association, and use of only free reserves or securities premium account. These conditions must be satisfied independently of the cooling-off periods.

Conclusion:

The statement is valid in its core assertion regarding the two cooling-off periods but incomplete and potentially misleading in its presentation. The exceptions are integral to understanding the practical application of buy-back provisions and represent significant flexibility for corporate capital management. A complete and accurate understanding requires knowledge of both the restrictions and these carve-outs. The statement would benefit from explicit enumeration of the exceptions rather than merely acknowledging their existence.

Feasibility of ABC Limited's Proposal — Shelf Prospectus and Deemed Prospectus under the Companies Act, 2013

ABC Limited's proposal is feasible, provided it utilises the mechanism of a Shelf Prospectus as contemplated under Section 31 of the Companies Act, 2013.

Concept of Deemed Prospectus (Section 25): Where a company allots or agrees to allot any securities of the company for sale to any person with a view that such person shall offer them for sale to the public, any document by which such offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company. This means ABC Limited cannot simply bypass the prospectus requirement by routing debentures through intermediaries — the offer document used in such a case would still be treated as a prospectus, attracting all attendant legal obligations.

Solution — Shelf Prospectus (Section 31): To avoid the repeated and cumbersome exercise of issuing a fresh prospectus for every new series of debentures, ABC Limited can file a shelf prospectus with the Registrar of Companies at the stage of the first offer of debentures. The following key features apply:

(a) A shelf prospectus shall be valid for a period not exceeding one year from the date of opening of the first issue under that prospectus. During this period, no further prospectus is required for subsequent offers of the same or different series of debentures.

(b) Before making each subsequent offer, ABC Limited is required to file an Information Memorandum under Section 32 containing all material facts relating to new charges created, changes in financial position, and any other prescribed changes that have occurred after the filing of the shelf prospectus.

(c) The information memorandum and the shelf prospectus together constitute the basis of the subsequent offer.

Conclusion: ABC Limited's proposal to issue multiple series of debentures within one year without filing a fresh prospectus each time is legally feasible through the shelf prospectus route under Section 31. However, it must comply with the deemed prospectus provisions under Section 25 and the information memorandum requirements under Section 32 to ensure full legal compliance.

(a) Concept of Shelf Prospectus — Section 31, Companies Act, 2013

A shelf prospectus is defined under Section 31 of the Companies Act, 2013 as a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues, over a certain period, without the issue of a further prospectus. In essence, it allows a company to file one prospectus that 'sits on the shelf' and covers multiple successive issues of securities.

Eligibility: Under Section 31, any public financial institution, public sector bank, scheduled bank whose main object is financing, or any class of companies as may be prescribed by SEBI is permitted to file a shelf prospectus with the Registrar of Companies.

Validity Period: A shelf prospectus filed with the Registrar shall be valid for a period not exceeding one year from the date of opening of the first offer of securities under that prospectus. During this one-year window, no further prospectus is required at every stage of each new offer.

Information Memorandum: Instead of filing a fresh prospectus for each subsequent issue, the company is required to file an Information Memorandum with the Registrar prior to making each such subsequent offer. This memorandum must contain all material facts relating to new charges created, changes in the financial position of the company since the first offer, or any other prescribed particulars.

Feasibility of ABC Limited's Proposal:

The proposal of ABC Limited is feasible in principle, subject to eligibility. If ABC Limited qualifies as a public financial institution, scheduled bank, or falls within a SEBI-prescribed class of companies, it can file a single shelf prospectus and issue multiple series of debentures within one year without going through the full prospectus process each time. For each new series, ABC Limited will only need to file an Information Memorandum disclosing material changes, which is a significantly lighter compliance exercise.

However, if ABC Limited is an ordinary company that does not fall within any of the prescribed categories, it will not be eligible to avail of the shelf prospectus mechanism and must file a separate prospectus for each series of debentures.

Conclusion: The proposal is feasible and legally sound under Section 31 of the Companies Act, 2013, provided ABC Limited satisfies the eligibility criteria prescribed thereunder.

Relevant Provision: Section 2(31) of the Companies Act, 2013 defines 'deposit' to include any receipt of money by way of deposit or loan or in any other form, but excludes amounts as prescribed. Rule 2(1)(c)(xii) of the Companies (Acceptance of Deposits) Rules, 2014 provides a specific exclusion relevant to this case.

Rule 2(1)(c)(xii) Exclusion: Any amount brought in by the promoters of a company by way of unsecured loan is not treated as a deposit, provided:
(a) It is brought in pursuance of the stipulation of a lending financial institution or bank as a condition for granting loan to the company; AND
(b) The said loan from the promoters is repayable only after the repayment of the loan taken from the financial institution or bank.

Part 1 — SIDCL Loan Still Outstanding:
In the given case, the promoters of Jayshree Spinning Mills Limited contributed unsecured loans as margin money pursuant to the stipulation of SIDCL (State Industries Development Corporation Ltd.), which is a lending financial institution. Both conditions of Rule 2(1)(c)(xii) are satisfied — the amount was brought in at the insistence of a financial institution and is subordinate to repayment of the SIDCL loan. Therefore, the unsecured loan from promoters shall not be regarded as a Deposit under the Companies Act, 2013.

Part 2 — Entire SIDCL Loan is Repaid:
Once the entire loan obtained from SIDCL is repaid, the fundamental condition underlying the exemption under Rule 2(1)(c)(xii) ceases to hold. The promoter's unsecured loan is no longer subordinate to any outstanding institutional loan. Consequently, the unsecured loan from the promoters will lose its exempt status and shall be treated as a Deposit under the Companies Act, 2013 from that point onwards. The company must then comply with all applicable deposit regulations including acceptance, repayment, and disclosure requirements.

Statement (i): Insurance Policies covering immovable property have been held to be immovable property — This statement is INCORRECT.

Under Section 3(26) of the General Clauses Act, 1897, 'immovable property' shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth. Under Section 3(36), 'movable property' means property of every description except immovable property.

An insurance policy covering immovable property is essentially a contractual right (chose in action). The fact that the subject matter of the policy is immovable property does not transform the policy document itself into immovable property. The policy is a personal contract between the insurer and the insured, conferring a right to receive money/compensation — this is movable property. It does not fall within the definition of immovable property under Section 3(26), as it is neither land, nor a benefit arising out of land, nor a thing attached to the earth. Therefore, this statement is not valid and is incorrect in law.

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Statement (ii): The word 'bullocks' could be interpreted to include 'cows' — This statement is CORRECT.

Under Section 13(1) of the General Clauses Act, 1897, 'words importing the masculine gender shall be taken to include females', unless there is anything repugnant in the subject or context.

A 'bullock' is a castrated male bovine animal — a word that imports the masculine gender. A 'cow' is a female bovine animal. By virtue of Section 13(1), since the word 'bullock' imports the masculine gender, it shall be taken to include females, and therefore the word 'bullocks' can be interpreted to include 'cows', unless the context of the statute in question makes such an interpretation repugnant. Therefore, this statement is valid and legally sustainable under the General Clauses Act, 1897.

Foreign decisions are NOT binding on Indian courts but MAY be used as persuasive authority when interpreting Indian statutes, subject to certain conditions.

Nature of Foreign Decisions in Indian Law:
Indian courts operate under the doctrine of stare decisis, where only decisions of higher courts within the Indian judicial hierarchy (Supreme Court, High Courts) are binding. Foreign judicial decisions, including those of English courts or other common law jurisdictions, have no binding force on Indian courts. However, they can be cited and relied upon for persuasive value to strengthen legal arguments or provide interpretative guidance.

When Foreign Decisions May Be Used:
Foreign decisions may be referred to in the following circumstances:
(1) When interpreting statutes that are modeled on or similar to foreign laws, particularly English statutes given India's common law heritage;
(2) When there is an absence of established Indian judicial precedent on the issue;
(3) When the foreign court has developed well-reasoned jurisprudence on analogous legal questions;
(4) To strengthen the persuasive force of an argument, provided the foreign reasoning aligns with Indian legal principles;
(5) Particularly, English common law principles are frequently consulted as India's legal system is rooted in English law.

Limitations and Safeguards:
Despite their persuasive value, foreign decisions cannot:
(1) Override the express provisions of Indian statutes or the Indian Constitution;
(2) Supplant well-established Indian judicial precedent;
(3) Be applied mechanically without considering the Indian legal context, constitutional framework, and socio-economic conditions;
(4) Bind lower courts; courts retain discretion to accept, modify, or reject the foreign reasoning.

Judicial Practice:
Indian courts, including the Supreme Court, have occasionally referred to foreign judicial decisions while interpreting statutes—especially English decisions on interpretation principles, constitutional law, and civil procedure—but always subject to the caveat that Indian law must be independently construed. The court prioritizes the text of the Indian statute and the intent of the Indian legislature over foreign analogies.

Conclusion:
Foreign decisions serve as a persuasive tool for legal interpretation but remain subordinate to the binding authority of Indian judicial hierarchy and statutory law. Their utility lies in offering comparative perspectives and interpretative guidance, not in establishing binding legal principles for Indian courts.

Statement (i): INVALID. Section 96 of the Companies Act, 2013 provides that the first AGM of a company shall be held within a period of nine months from the date of closing of the first financial year, not six months as stated. The statement is incorrect as to the prescribed timeframe.

Statement (ii): VALID. Section 96 explicitly empowers the Registrar to extend the time within which the first AGM shall be held for any special reason, by a period not exceeding 90 days. The Registrar's discretionary authority to grant extension for reasonable causes is well-established under the Act.

Statement (iii): VALID. Section 96 clearly states that every AGM subsequent to the first AGM (i.e., the second and all subsequent AGMs) shall be held within a period of six months from the date of closing of the financial year. This is the prescribed timeline for ordinary AGMs after the first meeting.

Statement (iv): VALID. Section 96 provides that the maximum interval between two consecutive AGMs shall not exceed 15 months. This means no two AGMs can have a gap of more than 15 months. This provision ensures regular conduct of AGMs at reasonable intervals and maintains accountability to shareholders. If this maximum interval is violated, it constitutes a breach of statutory obligations and can attract penalties.

Scenario (i): Shifting Registered Office from Thane District to Mumbai District (both under ROC Mumbai)

Under Section 12 of the Companies Act, 2013 read with Rule 28 of the Companies (Incorporation) Rules, 2014, when a company shifts its registered office from one city/town/village to another city/town/village, but both locations fall within the same state and under the jurisdiction of the same Registrar of Companies (ROC), the company is required to pass a Special Resolution. Approval of the Regional Director is NOT required in such a case.

In the given scenario, both Thane (Thane District) and the new location (Mumbai District) lie within the jurisdiction of the Registrar of Companies, Mumbai. A Ltd. has passed a Special Resolution, which fulfills the prescribed requirement. Since both locations are under the same ROC, there is no need to obtain the approval of the Regional Director.

Conclusion: The decision to shift the registered office is VALID. The special resolution is the correct and sufficient authority. Non-obtaining of Regional Director approval does not invalidate the shift because RD approval is only needed when the shift is to a place under a different ROC (but within the same state), as governed by Rule 29 of the Companies (Incorporation) Rules, 2014.

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Scenario (ii): Shifting Corporate Office from Pune to Mumbai by Board Resolution

The Companies Act, 2013 (including Section 12) exclusively governs and regulates the Registered Office of a company. The Act does not recognize or regulate the concept of a 'Corporate Office' or 'Administrative Office' — these are purely operational or administrative designations used by companies for internal business purposes.

In this scenario, A Ltd.'s Registered Office is situated in Mumbai (under ROC Mumbai) and remains unchanged. The proposal is only to shift the Corporate Office (an administrative office) from Pune to Mumbai. Since the Companies Act, 2013 places no restriction, procedure, or approval requirement on shifting a corporate/administrative office, this is purely a business/management decision.

A Board Resolution is more than adequate authority for such an administrative decision. No Special Resolution, no Registrar filing, and no Regional Director approval is required.

Conclusion: The proposal to shift the corporate office from Pune to Mumbai by passing a Board Resolution is VALID and lawful. The Companies Act, 2013 is silent on corporate office relocation, and therefore no additional statutory compliance is triggered.

PART 1: INTERNAL AUDITOR APPOINTMENT REQUIREMENT

Yes, NSR Limited is required to appoint an Internal Auditor during 2021-2022.

Under Section 138 of the Companies Act, 2013, a company shall appoint an Internal Auditor if it satisfies any one of the following criteria:

1. A private company with a paid-up capital of ₹1 crore or more; OR
2. Any company (public or private, listed or unlisted) with a turnover of ₹10 crores or more.

Analysis of NSR Limited:

NSR Limited is an unlisted company. Examining the given data:

- Paid-up share capital as on 31-3-2021: ₹45 crore (exceeds ₹1 crore threshold) ✓
- Turnover for the year ended 31-3-2021: ₹175 crore (exceeds ₹10 crore threshold) ✓

Since NSR Limited meets both criteria, it is mandatorily required to appoint an Internal Auditor. The bank loan outstanding (₹90 crore) is not a criterion for internal auditor appointment and is hence not relevant for this determination.

PART 2: FIRST AUDITOR APPOINTMENT – GOVERNMENT COMPANY

Section 140 of the Companies Act, 2013 prescribes the following provisions for appointment of First Auditor of a Government Company:

1. Appointment Authority: The first auditor of a Government Company shall be appointed by the Comptroller and Auditor-General (CAG) in writing.

2. Appointment Timeline: The CAG shall make this appointment within 60 days from the date of registration of the company.

3. Default Appointment: If the CAG does not appoint an auditor within the prescribed 60-day period, the Board of Directors shall appoint the auditor within 30 days after the expiration of the 60-day period.

4. Tenure: The auditor appointed (whether by CAG or Board) shall hold office until the conclusion of the First Annual General Meeting (AGM).

5. Qualification Requirements: The auditor appointed must satisfy the conditions prescribed in Section 141 of the Companies Act, 2013, including being a qualified Chartered Accountant and not being disqualified under Section 141.

6. CAG's Authority: The CAG's appointment of the first auditor does not require approval of members or the Board.

Main Question — Whether Unsecured Loan from Promoters is a 'Deposit':

Under Section 2(31) of the Companies Act, 2013, 'deposit' includes any receipt of money by way of deposit or loan or in any other form by a company, but excludes amounts as may be prescribed by Rules.

Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014 carves out specific exclusions from the definition of 'deposit'. One such exclusion covers unsecured loans brought in by the promoters of a company in pursuance of a stipulation by a lending financial institution or bank as a condition precedent for granting a loan/subsidy to the company.

In the present case, the promoters of Jayshree Spinning Mills Limited contributed unsecured loans specifically because SIDCL required such margin money as a condition for granting subsidy. Since this loan was brought in by the promoters themselves to satisfy the stipulation of a recognised financial institution (SIDCL), it falls squarely within the exclusion. Therefore, the unsecured loan will NOT be treated as a 'Deposit'.

If the entire SIDCL loan is repaid: The rationale for the exemption is the nexus between the promoter loan and the outstanding institutional loan. Once the SIDCL loan is fully repaid, the condition/stipulation that justified the exclusion ceases to exist. Consequently, the unsecured loan from promoters will be treated as a 'Deposit' and the company must comply with all provisions governing acceptance of deposits under the Companies Act, 2013 and Rules thereunder.

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(a) Validity of Statements under the General Clauses Act, 1897:

(i) Insurance Policies covering immovable property have been held to be immovable property.

This statement is NOT valid. Under Section 3(26) of the General Clauses Act, 1897, 'immovable property' includes land, benefits arising out of land, and things attached to the earth or permanently fastened to anything attached to earth. An insurance policy is a contractual right/chose-in-action and constitutes movable property. The mere fact that the policy covers an immovable property does not alter its legal character. It does not arise out of land, nor is it attached to land. Therefore, insurance policies cannot be treated as immovable property.

(ii) The word 'bullock' could be interpreted to include 'cow'.

This statement is valid. Section 13 of the General Clauses Act, 1897 provides that in all Central Acts and Regulations, unless repugnant to the subject or context, words importing the masculine gender shall be deemed to include females. The word 'bullock' denotes a male bovine animal. Applying Section 13, words of the masculine gender include the feminine gender. Accordingly, 'bullock' can be interpreted to include 'cow' (the female bovine) unless the context of the statute expressly or impliedly restricts such inclusion.

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(b) Whether Foreign Decisions can be Used for Construing Indian Statutes:

Foreign decisions can be used as persuasive authority but are not binding on Indian courts. The following principles govern their use:

1. Parity of Legislation: When an Indian statute is modelled upon or borrowed from a foreign (especially English) statute, decisions of the courts of that country, particularly those rendered before the Indian enactment, carry significant persuasive weight in interpreting the Indian law.

2. Common Law Heritage: Since a large body of Indian legislation is derived from English law, English judicial decisions are frequently relied upon as persuasive precedents, though they do not bind Indian courts.

3. Caution Required: Where the language of the Indian provision materially differs from the foreign statute, or where Indian conditions and social context are distinct, foreign decisions should be applied with caution and may not be appropriate guides.

4. American and Commonwealth Decisions: Beyond English decisions, decisions from other common law jurisdictions (USA, Australia, Canada) may also be referred to persuasively, especially on matters of constitutional law and general legal principles.

In conclusion, foreign decisions are a legitimate but persuasive tool of statutory interpretation — they aid in understanding the intent and scope of similar provisions but do not override Indian judicial precedent.

Answer to Part (i): Persons considered as 'Officer who is in Default' under the Companies Act, 2013

As per Section 2(60) of the Companies Act, 2013, 'Officer who is in default' means any of the following officers of a company:

(a) Whole-time Director of the company.

(b) Key Managerial Personnel (KMP) as defined under the Act.

(c) Where there is no KMP — such director or directors as specified by the Board in this behalf and who has given written consent to the Board for such specification; or all the directors, if no director is so specified.

(d) Any person who, under the immediate authority of the Board or any KMP, is charged with any responsibility including maintenance, filing or distribution of accounts or records, and who authorises, actively participates in, knowingly permits, or knowingly fails to prevent any default.

(e) Any person in accordance with whose advice, directions or instructions the Board of Directors is accustomed to act (excluding persons acting in a professional advisory capacity).

(f) Every director who is aware of a contravention by virtue of receipt of Board proceedings or participation therein without objecting, or where the contravention took place with his consent or connivance.

(g) In respect of issue or transfer of shares or debentures — every director of the company, irrespective of whether or not he is aware of or responsible for the default.

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Answer to Part (ii): Who will be considered in default in the instant case?

In the case of Johnson Limited, the relevant facts are:
- The company went for a public issue of shares which was over-subscribed.
- The Board of Directors conducted the allotment of shares.
- There was no Managing Director, no Whole-time Director, and no officer or person specifically designated by the Board with responsibility for complying with the provisions of the Act.

In the instant case, the matter pertains to the issue (allotment) of shares. As per Section 2(60)(vii) of the Companies Act, 2013, in respect of the issue or transfer of any shares or debentures of a company, every director of the company shall be treated as an officer in default.

This provision applies uniformly to all directors regardless of their specific role or designation. The absence of a Managing Director, Whole-time Director, or any designated officer does not limit this liability — rather, it reinforces it, as there is also no KMP to bear primary responsibility under Section 2(60)(ii).

Additionally, since there is no KMP and no director designated by the Board under Section 2(60)(iii), all directors would independently qualify as officers in default on that ground as well.

Conclusion: In the instant case of Johnson Limited, all the directors of the company will be considered as Officers in Default in respect of the public issue of shares.

Applicable Provision: Section 119 of the Companies Act, 2013 deals with the inspection of minute books of general meetings.

(i) Right to inspect minutes book and obtain copies:

Under Section 119(1) of the Companies Act, 2013, the books containing the minutes of proceedings of any general meeting of a company shall be kept at the registered office and shall be open for inspection by any member without any charge. Since Mr. Laurel is a shareholder (member) of Hardly Limited, he is fully entitled to inspect the minutes book of general meetings free of cost during business hours.

However, regarding copies of minutes, the position is different. Under Section 119(2) of the Companies Act, 2013, any member is entitled to be furnished with a copy of any minutes, but not free of cost. The copy must be provided within seven working days of making a request, and the member is required to pay such fees as may be prescribed (₹10 per page as per the Companies (Management and Administration) Rules, 2014).

Conclusion: Mr. Laurel can inspect the minutes book free of charge, but he cannot demand copies of the minutes at free of cost — copies are available only on payment of prescribed fees.

(ii) Right to authorise a friend through power of attorney:

Under the general principle of agency — *qui facit per alium facit per se* (one who acts through another acts himself) — a member is entitled to exercise his statutory rights through an authorised agent. Section 119 of the Companies Act, 2013 confers the right of inspection on 'any member' and does not restrict this right to personal inspection only.

Accordingly, Mr. Laurel can authorise his friend to inspect the minutes book on his behalf by executing a power of attorney or written authority. The friend, acting as agent/authorised representative, would then be entitled to inspect the minutes book during business hours at the registered office of Hardly Limited.

Conclusion: Yes, Mr. Laurel can validly authorise his friend through a power of attorney to inspect the minutes book on his behalf, as the right of inspection under Section 119 is not restricted to personal exercise only.

Answer: A cannot validly ratify the action of C.

Relevant Provisions — Ratification under the Indian Contract Act, 1872:

Section 196 of the Indian Contract Act, 1872 permits a person on whose behalf an unauthorised act has been done to ratify that act, either expressly or impliedly (Section 197). Upon ratification, the act is treated as if it had been authorised from the beginning (*relation back* doctrine).

However, the right to ratify is not absolute. Section 200 of the Indian Contract Act, 1872 places a critical restriction: *An act done by one person on behalf of another without authority cannot, by ratification, be made valid if it would have the effect of subjecting a third person to damages or of terminating any right or remedy of a third person.*

In other words, ratification cannot be used to injure or prejudice the rights of a third party.

Application to the Given Case:

The lease agreement between A and B expressly provides that either party may terminate the lease by giving 3 months' notice. This is a contractual right vested in B.

C, without any prior authority from A, served a notice on B requiring him to vacate within only 1 month. This notice:
1. Was given without authority.
2. Gave only 1 month's notice, which is shorter than the contractually stipulated 3 months.

If A were to ratify C's action, the effect would be to terminate B's tenancy on a 1-month notice instead of the 3-month notice to which B is contractually entitled. This would directly terminate B's right to receive 3 months' notice before vacating — a clear prejudice to a third party (B).

This squarely attracts the prohibition under Section 200 of the Indian Contract Act, 1872. A cannot, by ratification, deprive B of his contractual right to 3 months' notice.

Conclusion:

The ratification by A of C's unauthorised action is not valid in law. Since the ratification would operate to injure B's rights as a third party — by terminating his entitlement to 3 months' notice under the lease — it is void under Section 200 of the Indian Contract Act, 1872. B is entitled to receive a proper 3-month notice before being required to vacate the premises.

Remedy available to Ajit under the General Clauses Act, 1897:

Relevant Provision — Section 10 of the General Clauses Act, 1897:

Section 10 of the General Clauses Act, 1897 provides that where any act or proceeding is directed or allowed to be done or taken in any Court or office on a certain day or within a prescribed period, and if the Court or office is closed on that day or the last day of the prescribed period, the act or proceeding shall be considered as done or taken in due time if it is done or taken on the next day afterwards on which the Court or office is open.

Application to Ajit's Case:

In the present case, 30th March, 2020 was the last day prescribed for Ajit to submit his appeal to the High Court of Kolkata. On that day, the High Court was closed due to a total lockdown across India on account of the Covid-19 pandemic. Since the Court was closed on the last day of the prescribed period, Section 10 of the General Clauses Act, 1897 comes to the rescue of Ajit.

Conclusion:

Ajit is entitled to file his appeal on the next day on which the High Court of Kolkata reopens after the closure, and such filing shall be deemed to have been made within the prescribed time limit. His appeal will not be treated as time-barred merely because he could not file it on 30th March, 2020 due to the Court being closed. Section 10 expressly protects persons in such situations by extending the time to the next available working day of the Court.