CA Inter Corp Laws — Question Paper — May 2023

Yes, bona fide pledge can be made by non-owners under specific exceptions recognized in the Indian Contract Act, 1872, to facilitate mercantile transactions.

General Rule and Exception: While Section 178 of the Indian Contract Act, 1872 stipulates that the pawnor (pledgor) must be the owner of pledged goods or authorized by the owner, the law recognizes important exceptions for non-owners to pledge in defined circumstances.

Recognized Circumstances Where Non-Owners Can Pledge:

1. Mercantile Agent: A mercantile agent in possession of goods with the owner's consent can pledge them. The owner's consent to possession is deemed to include consent to pledging within the ordinary course of business transactions. This allows agents to offer goods as security for advances or loans.

2. Finder of Goods: A finder of goods can pledge them as security for recovery of necessary expenses incurred in preserving or protecting the goods. This right is based on bailment principles (Sections 168-171) where the finder becomes a bailee with a lien and pledge right to recover costs.

3. Seller Remaining in Possession: A seller who continues in possession of goods after their sale can pledge them as security for the unpaid purchase price or other claims against the buyer. The seller's retention of possession gives them authority to pledge despite having transferred ownership.

4. Buyer in Possession Before Payment: A buyer who obtains possession of goods before making full payment can pledge them. This exception facilitates credit transactions in commerce where buyers need to raise finances.

5. Re-pledging by Pledgee: Under Section 176, the original pledgee can re-pledge goods received as security to secure loans for meeting the original pledged debt. The pledgee's interest in the goods authorizes re-pledging.

Rationale: These exceptions balance protection of original owners' interests with commercial convenience essential for smooth trade and credit transactions. They recognize legitimate interests based on possession, agency relationship, or prior pledge status, allowing bona fide dealings to proceed while maintaining good faith principles.

Answer: YES, the acts of Mr. X constitute an offense under Section 138 of the Negotiable Instruments Act, 1881, subject to presentation and dishonor of the cheque.

The Critical Acts:

Mr. X has committed potentially two distinct acts: (1) drawing a cheque dated 26/07/2022 knowing funds would become insufficient, and (2) instructing the bank to stop payment of a cheque dated 01/09/2022.

Analysis of Drawing the Cheque (26/07/2022):

The cheque was issued for discharging an outstanding legally enforceable debt to Mr. R. Although funds were available at the time of issuance, they became insufficient on 29/07/2022 when Mr. X made a tax payment. If this cheque is subsequently presented for payment on or after 29/07/2022, it will be dishonored due to insufficient funds. Under Section 138 of the NI Act, 1881, any cheque issued for discharging a debt or liability that is returned unpaid due to insufficiency of funds constitutes a criminal offense. The Supreme Court has consistently held that even where insufficiency arises from subsequent withdrawals by the drawer, if the cheque for a legally enforceable obligation is dishonored, Section 138 applies.

Analysis of Stop Payment Instruction (01/09/2022 cheque):

While Section 143 of the NI Act grants a drawer the right to countermand (stop) payment of a cheque, this right cannot be exercised to evade liability under Section 138. The fact that Mr. X issued one cheque for an outstanding debt, allowed insufficiency to occur, and then issued a stop payment instruction on another cheque to the same payee demonstrates a pattern of conduct aimed at avoiding payment of a legally enforceable obligation.

Conclusion:

Mr. X's acts constitute an offense under Section 138 if the cheque dated 26/07/2022 is presented and dishonored due to insufficient funds. The stop payment instruction on the subsequent cheque cannot shield him from Section 138 liability. The drawer's conduct of intentionally reducing his account balance and then stopping further payments demonstrates consciousness of guilt and an attempt to circumvent his legal obligation.

The principle that 'no person shall be prosecuted and punished for the same offence more than once' is a fundamental protection against State oppression, rooted in the Latin maxim nemo debet bis puniri pro uno delicto. While Section 26 of the General Clauses Act, 1897 itself concerns repeal of enactments, the doctrine of double jeopardy in Indian criminal law is protected through Article 20(2) of the Constitution and Section 300 of the Criminal Procedure Code, 1973. This principle embodies three distinct aspects:

Autrefois Acquit: When a person has been acquitted of a charge by a competent court, they cannot be prosecuted and punished again for the same offence. The acquittal is final and acts as a bar to any subsequent prosecution.

Autrefois Convict: When a person has been convicted and punished for an offence, they cannot be prosecuted and punished again for that same offence, even if new evidence emerges.

Critical Conditions for Application: The protection applies only when three essential elements coincide: (1) the same person, (2) the same offence, and (3) substantially the same facts. The test for 'same offence' focuses on the essential ingredients required to prove the offence, not merely the factual circumstances. Two different statutory offences—even if arising from identical facts—are distinct offences. For example, the same act causing death may constitute both murder (Section 302 IPC) and culpable homicide (Section 304 IPC); prosecution for both does not violate this principle as they require different mens rea elements.

Constitutional Eminence: Article 20(2) of the Constitution provides that no person shall be prosecuted and punished for the same offence more than once, elevating this from a mere statutory principle to a fundamental constitutional right. This cannot be abridged even by legislative amendment without altering the Constitution itself.

Scope and Exceptions: The protection does not extend to: retrials ordered by appellate courts upon remand; prosecutions by different sovereigns/jurisdictions (each state has independent jurisdiction); civil proceedings following criminal trials (distinct legal remedies and evidentiary standards); or departmental/administrative proceedings. These are treated as separate proceedings with distinct objectives.

Rationale and Importance: This doctrine prevents harassment through multiple prosecutions, ensures finality of judicial decisions, protects individual liberty and dignity, and maintains respect for the courts' pronouncements. It acts as a crucial check on executive overreach.

PART (A): SWEAT EQUITY SHARES UNDER COMPANIES ACT, 2013

(i) Appropriateness of Size of Issue:

Section 54 of the Companies Act, 2013 restricts sweat equity issuance to 15% of paid-up capital as on the date of board meeting approving the issue, unless members approve a different limit by resolution in General Meeting.

Calculation:
- Existing paid-up capital: ₹5 Crores (50 lakh shares @ ₹10)
- Default 15% limit: ₹75 Lakhs
- Proposed issue: 15 lakh shares @ ₹5 consideration = ₹75 Lakhs = 30% of existing capital

Since 30% exceeds the 15% statutory limit, it requires specific member approval in General Meeting. The company has obtained such approval through passed resolution. Therefore, the 30% issuance is appropriate and compliant. The post-issue capital remains within ₹10 Crores authorized capital.

(ii) Justification of Lock-in Period:

Section 54(1)(f) of the Companies Act, 2013 mandates a minimum lock-in period of 5 years from date of allotment. Companies may prescribe longer periods but cannot reduce below 5 years.

The company has prescribed exactly 5 years, which satisfies the statutory minimum requirement and is justifiable. This period:
- Ensures compliance with law
- Prevents immediate profit-taking by recipients
- Ensures long-term commitment from employees and directors
- Serves the objective of motivating the workforce

PART (B): DIVIDEND POLICY - ESPS HEAVY ENGINEERING LTD

Governing Provision: Section 123 of the Companies Act, 2013

Dividends may be paid only from: (i) profits of that year, (ii) accumulated profits, or (iii) free reserves—never from capital. When current year shows losses, dividend can be paid from accumulated reserves of previous years only, subject to maintaining financial soundness.

Analysis:

The Company Secretary is CORRECT. The shareholders' demand cannot be accepted for the following reasons:

1. Loss in Current FY: Since the company incurred losses in FY 2021-22, the final dividend must be paid from accumulated reserves, not current profits. The available reserve amount limits the maximum distributable dividend.

2. Interim Dividend Already Distributed: The interim dividend of 10% has already been declared and partially distributed. Final dividend must consider remaining reserve adequacy. Total dividend (10% interim + 15% final = 25%) is within the range of previous three years (15%, 30%, 25%).

3. No Mandatory Minimum Due to Interim Payment: The fact that 10% interim was declared does not create an obligation for 20% final dividend. Dividend rates are discretionary based on financial position, not guaranteed by interim payments.

4. Previous Year Rates Not Binding: Historical dividend rates provide context but do not mandate future rates. Each year's dividend decision must be based on:
- Reserve adequacy after interim payout
- Company's financial soundness
- Board's prudent assessment under Section 123(4)

5. Shareholders' Inconsistent Claims: Shareholders claimed previous 3 years were 15%, 20%, 25% but the data shows 15%, 30%, 25%—this inconsistency weakens their position.

Conclusion: The board-recommended final dividend of 15% can be approved if accumulated reserves are adequate. The final dividend cannot be increased beyond what reserves justify without violating Section 123(4) restrictions. The Company Secretary's position is legally sound.

Answer: For member X — no proxy is allowed to represent him. For member W — only Mr. M is allowed to represent him.

Validity of Proxies Under Section 105:

Section 105 of the Companies Act, 2013 and Rule 19 of the Companies (Management and Administration) Rules, 2014 stipulate that a proxy form must be deposited at the registered office of the company not less than 48 hours before the time of the meeting. This is a mandatory requirement, and failure to comply renders the proxy appointment invalid.

Time Calculation:
The meeting is scheduled for 15th April, 2022 at 3:00 P.M. The 48-hour cutoff is therefore 13th April, 2022 at 3:00 P.M.

Mr. X and Proxy Mr. Y:
Mr. Y's proxy form was deposited on 14th April, 2022 — only 24 hours before the meeting. This is less than the required 48 hours, making the proxy form invalid. Consequently, Mr. Y cannot represent member X, despite being present at the meeting. The defect in timely deposit cannot be cured by the proxy's presence.

Mr. W and Multiple Proxies:
Mr. W appointed two proxies — Mr. M and Mr. N. However, Section 105 provides that a member may generally appoint only one proxy to attend and vote at a meeting, except in the case of members holding not less than 2% of the voting capital, who may appoint multiple proxies in proportion to their shareholding. The question does not indicate that Mr. W holds such large shareholding, so the general rule applies.

Even setting aside the restriction on multiple proxies:
- Mr. M's proxy (dated 12th April, 2022, deposited on 12th April, 2022): This was deposited 72 hours before the meeting, satisfying the 48-hour requirement. It is valid.
- Mr. N's proxy (dated 14th April, 2022, deposited on 14th April, 2022): This was deposited 24 hours before the meeting, failing to meet the 48-hour requirement. It is invalid.

Conclusion:
Only Mr. M is allowed to represent member W in the meeting. Mr. Y (for member X) and Mr. N (for member W) cannot act as proxies due to non-compliance with the mandatory 48-hour deposit requirement under Section 105 read with Rule 19 of the Companies (Management and Administration) Rules, 2014.

Relevant Provision: Section 105 of the Companies Act, 2013 governs the appointment of proxies. As per Section 105(6), the instrument appointing a proxy must be deposited with the company not less than 48 hours before the time of the meeting.

Determining the Deadline: The General Meeting was scheduled on 15th April 2022 at 1:00 P.M. Therefore, the last date and time by which a proxy form must be deposited = 13th April 2022 at 1:00 P.M.

(a) Case of Mr. X:
Mr. X appointed Mr. Y as his proxy. The proxy form dated 10-04-2022 was deposited with the company on 11-04-2022, which is well before the 48-hour deadline of 13-04-2022 at 1:00 P.M. Hence, Mr. Y is a valid proxy and is entitled to represent Mr. X at the meeting.

(b) Case of Mr. W:
Mr. W appointed two proxies — Mr. M and Mr. N:

- Mr. M's proxy: Dated 12-04-2022 and deposited on 12-04-2022 — this is before the 48-hour deadline. Hence, Mr. M's proxy is valid.
- Mr. N's proxy: Deposited on 14-04-2022, which is *after* the 48-hour deadline (13-04-2022 at 1:00 P.M.). Hence, Mr. N's proxy is invalid as it was not deposited within the stipulated time.

Although when a member appoints multiple proxies the later proxy ordinarily revokes the earlier one, this rule applies only when both proxies are validly deposited. Since Mr. N's proxy is invalid by virtue of late deposit, it cannot revoke Mr. M's proxy. Therefore, Mr. M is entitled to represent Mr. W at the meeting.

Conclusion: Mr. Y shall represent Mr. X, and Mr. M shall represent Mr. W. Mr. N is not entitled to act as a proxy.

Validity of the Application: VALID (with conditions)

The application filed by the Competent Authority (SFIO/Registrar of Companies) before NCLT to reopen accounts and recast financial statements for FY 2015-16 is substantially valid, though subject to procedural safeguards.

Legal Basis for Validity:

1. Grounds for Reopening: Under the Companies Act, 2013, while accounts normally cannot be amended after 5 years from the end of the financial year, fraud constitutes an exception to this limitation. Section 19 and related provisions recognize that accounts affected by fraudulent misstatement must be corrected irrespective of time elapsed when fraud is subsequently discovered.

2. NCLT Jurisdiction: The National Company Law Tribunal has been conferred jurisdiction under the Companies Act, 2013 to issue orders for reopening and recasting of financial statements when fraud is established. NCLT is the competent forum for such applications involving serious irregularities in corporate accounts.

3. Authority to File: Section 143(12) of the Companies Act, 2013 mandates that auditors report fraud to the Serious Fraud Investigation Office (SFIO). The SFIO, acting as Competent Authority, is authorized to file applications before NCLT for corrective action, including reopening of accounts.

4. Auditor's Role: The fact that Statutory Auditors have reported the fraud strengthens the application. This discharge of auditor's duty under SA 240 (Standards on Auditing) regarding auditor's responsibility to detect fraud provides credible evidentiary backing.

Conditions for Validity to be Satisfied:

1. Sufficient Evidence: SFIO investigation must provide credible and substantial evidence linking the fraud to the FY 2015-16 accounts. The reopening must be demonstrably necessary to correct fraud-affected figures.

2. Procedural Safeguards: The company must be given adequate notice and opportunity to be heard before NCLT. Natural justice must be observed throughout proceedings.

3. Reasonable Timeframe: While the 6-year gap (2015-16 to 2021-22) is significant, it is justified if the fraud was hidden and discovered only during 2021-22 investigation. However, any unreasonable delay in filing after fraud discovery could be questioned.

4. Clear Nexus: There must be established connection between the discovered fraud and the earlier financial year accounts sought to be reopened. Mere suspicion is insufficient.

Conclusion: The application is valid provided SFIO has conducted thorough investigation, documented fraud with supporting evidence, followed due process in notification, and NCLT finds the evidence credible and the reopening necessary for correcting fraudulently misstated accounts.

(a) Validity of Application by Competent Authority before NCLT for Re-opening of Accounts

The validity of the application must be examined under Section 130 of the Companies Act, 2013, which governs re-opening of accounts on the order of a Court or Tribunal.

Relevant Provisions of Section 130:

Under Section 130(1), a company shall not reopen its books of account or recast its financial statements, unless an application is made by the Central Government, Income-tax authorities, SEBI, any other statutory regulatory body or authority, or any person concerned, and the National Company Law Tribunal (NCLT) is of the opinion that it is just and proper to do so.

Re-opening is permissible only where the relevant accounts were prepared in a fraudulent manner or the affairs of the company were mismanaged during the relevant period, causing prejudice to the interest of members or others.

Important Restriction — 8-Year Limit:

As per the proviso to Section 130(1), no order for re-opening the books of account shall be made by NCLT in respect of a period earlier than eight years immediately preceding the current financial year.

Examination of Validity:

Point 1 — Authority to file: The Competent Authority conducting investigation under Section 212 of the Companies Act, 2013 acts under the authority of the Central Government through SFIO (Serious Fraud Investigation Office), which is a body established under the Central Government (Ministry of Corporate Affairs). Therefore, the Competent Authority is empowered to file such an application before NCLT as it represents the Central Government — one of the specifically authorised applicants under Section 130.

Point 2 — Ground for Re-opening: Since a fraud has been reported by the Statutory Auditors and SFIO has found it necessary to re-examine accounts, the condition that accounts were prepared in a fraudulent manner is satisfied.

Point 3 — Period of Re-opening (8-Year Limit): The current financial year is 2021-22. The application seeks re-opening for FY 2015-16. The 8-year limit runs back to 2013-14 from 2021-22. Since 2015-16 falls within the permissible 8-year window, the application does not violate the restriction.

Conclusion: The application filed by the Competent Authority before NCLT for re-opening the accounts of PQ Ltd. for FY 2015-16 is valid and legally tenable under Section 130 of the Companies Act, 2013, as all three conditions — authorised applicant, valid ground (fraud), and permissible period — are duly satisfied.

Accepting the assignment would create serious consequences for the auditors, primarily stemming from a violation of auditor independence, which is a fundamental principle under SA 200 and SA 220.

The assignment would create multiple threats to independence. First, it creates a self-review threat where the auditor would design and implement the financial information system, then audit the same system, directly reviewing their own work. Second, the financial interest in the assignment (Rs. 10 lakhs fee) creates a self-interest threat. Third, the auditor's objectivity would be compromised as they cannot objectively evaluate a system they themselves designed and implemented.

Accepting would directly violate the Code of Ethics for Chartered Accountants, which mandates independence and requires avoidance of conflicts of interest. The Code explicitly establishes independence as a fundamental principle that all chartered accountants must uphold.

Multiple regulatory consequences would follow. Under the Chartered Accountants Act, 1949, the ICAI has authority to initiate disciplinary proceedings against members who breach the Code of Ethics, potentially resulting in warnings, suspension from practice, or removal from the register. Under Companies Act, 2013 Section 140, the company could remove the auditors from their statutory position. Additionally, the National Financial Reporting Authority could investigate and initiate proceedings against the audit firm.

The audit opinion and credibility would suffer severely. Third parties such as investors, creditors, and regulators would question whether the audit is truly independent. The auditors would face difficulty expressing an unqualified opinion on the very system they designed, as they cannot objectively assess its adequacy.

Beyond regulatory action, the firm would face professional and legal consequences including damage to professional reputation, exposure to civil negligence claims, and potential criminal liability if audit deficiencies arise in relation to the system they implemented.

The auditors were correct to refuse this assignment, as designing and implementing internal control systems is the responsibility of management. The auditor's role is to objectively evaluate these systems, and accepting such assignments would fundamentally compromise this objective evaluation.

Issue: Whether Mr. Satish, as an agent of Akasha Steels, is legally justified in deducting his commission of ₹ 1,15,000 from the collected amount of ₹ 4,00,000 and remitting only ₹ 2,85,000 to the principal.

Relevant Provisions of the Indian Contract Act, 1872:

Under Section 217 of the Indian Contract Act, 1872, an agent has a right of retainer. It provides that an agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of:
(a) advances made or expenses properly incurred by him in conducting the business of agency, and
(b) such remuneration as may be payable to him for conducting such business.

Under Section 218 of the Indian Contract Act, 1872, subject to such deductions as permitted under Section 217, the agent is bound to pay to his principal all sums received on his account.

Application to the Given Case:

Mr. Satish was appointed as an agent by Mr. S.K. Jain (proprietor of Akasha Steels) for recovering money from traders. Satish collected ₹ 4,00,000 on behalf of the firm and earned a commission of ₹ 1,15,000 for his services. Instead of depositing the full ₹ 4,00,000, he deposited only ₹ 2,85,000 after retaining his commission.

Since Section 217 expressly grants an agent the right to retain his remuneration out of moneys received on account of the principal, Mr. Satish is legally entitled to deduct his earned commission of ₹ 1,15,000 before remitting the balance to Akasha Steels.

Conclusion: The act of Mr. Satish in depositing only ₹ 2,85,000 (i.e., ₹ 4,00,000 minus ₹ 1,15,000 commission) is perfectly valid and legally justified under Section 217 of the Indian Contract Act, 1872. He has merely exercised his statutory right of retainer. Akasha Steels cannot compel Mr. Satish to first deposit the full ₹ 4,00,000 and then separately claim his commission.

Reasons why SSR & Co. (Statutory Auditors) should NOT accept the assignment of designing and implementing a financial information system for ASR Ltd.:

1. Violation of Section 144 of the Companies Act, 2013:
Section 144 of the Companies Act, 2013 expressly prohibits a statutory auditor from rendering certain services to the company being audited (or its holding/subsidiary company). One of the specifically prohibited services is "design and implementation of any financial information system." Since SSR & Co. is the statutory auditor of ASR Ltd. for FY 2021-22, accepting this assignment would constitute a direct violation of Section 144.

2. Self-Review Threat to Independence:
If SSR & Co. designs and implements the financial information system (internal controls), they would subsequently be required to audit and evaluate the same system during the statutory audit. This creates a serious self-review threat, where the auditor reviews the output of their own work. The auditor can no longer be objective in evaluating the adequacy or deficiencies of a system they themselves created — undermining the very foundation of an independent audit.

3. Threat to Objectivity and Professional Independence:
Accepting the fee of ₹10 lakhs for this assignment would create a financial interest and a management threat, as designing internal control systems is essentially a management function. Under the ICAI Code of Ethics, auditors must be independent both in fact and in appearance. Taking up this role blurs the line between management responsibility and auditor responsibility, impairing independence.

4. Penal Consequences under Section 147 of the Companies Act, 2013:
Violation of Section 144 attracts penalties under Section 147 of the Companies Act, 2013. The auditor and the audit firm may be liable for punishment including fine and, in case of willful default, imprisonment. The firm's reputation and registration could also be at risk.

Conclusion: SSR & Co. rightly refused the assignment. Acceptance would violate Section 144 of the Companies Act, 2013, create a self-review threat, impair auditor independence, and expose the firm to penal consequences under Section 147.

Relevant Provisions — Indian Contract Act, 1872:

Under Section 217 of the Indian Contract Act, 1872, an agent has the right of retainer. An agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent.

Under Section 218 of the Indian Contract Act, 1872, subject to such deductions, the agent is bound to pay to his principal all sums received on his account.

Analysis of the Case:

In the given problem, Mr. Satish is appointed as agent of Akashia Steels with the specific duty of recovering money from traders. During the relevant month, the following transactions took place:

- Amount collected from clients = ₹4,00,000
- Amount deposited in firm's account = ₹2,85,000
- Amount deducted by Satish = ₹1,15,000
- Commission actually earned by Satish = ₹11,500

Under Section 217, Mr. Satish was entitled to deduct only ₹11,500, being the remuneration (commission) legitimately payable to him. Accordingly, he was obligated under Section 218 to deposit ₹3,88,500 (i.e., ₹4,00,000 − ₹11,500) into the firm's account.

However, Mr. Satish deducted ₹1,15,000 — which is ₹1,03,500 in excess of his legitimate entitlement. This excess deduction has no legal basis under the provisions of the Act.

Conclusion:

The act of Mr. Satish is NOT valid. He was legally entitled to retain only ₹11,500 as his commission. By retaining ₹1,15,000, he has wrongfully withheld ₹1,03,500 belonging to his principal, Akashia Steels. Mr. Satish is liable to pay the excess amount of ₹1,03,500 to Mr. S.K. Jain, failing which he will be in breach of his duties as an agent under Sections 217 and 218 of the Indian Contract Act, 1872.

Issue: Whether the acts of Mr. X — (i) depleting bank balance after issuing the cheque, and (ii) instructing the bank to stop payment — constitute an offence under the Negotiable Instruments Act, 1881.

Relevant Provision: Section 138 of the Negotiable Instruments Act, 1881 provides that where a cheque drawn by a person on his account for discharge of any debt or liability is returned unpaid by the bank due to insufficiency of funds or that it exceeds the arrangement made, such person shall be deemed to have committed an offence.

Essential conditions under Section 138:
(1) A cheque must be drawn on an account maintained by the drawer;
(2) It must be issued for discharge of a legally enforceable debt or liability;
(3) The cheque must be presented within three months from the date on the cheque or within its period of validity;
(4) The cheque must be returned unpaid due to insufficiency of funds or exceeding the arrangement.

Analysis of Act 1 — Deliberate depletion of funds:
Mr. X drew a post-dated cheque on 26/07/2022 dated 01/08/2022 for ₹50,000 towards outstanding dues (a legally enforceable debt). Though he had sufficient balance at the time of drawing, he deliberately made a tax payment on 29/07/2022, thereby exhausting the account balance. When Mr. R presented the cheque on 02/08/2022 (within three months of 01/08/2022), it was dishonoured due to insufficient funds. All conditions of Section 138 are satisfied. The fact that sufficient funds existed at the time of drawing is no defence — what matters is the position when the cheque is presented. Hence, this act constitutes an offence under Section 138.

Analysis of Act 2 — Stop payment instruction:
Mr. X further instructed the bank to stop payment of the cheque dated 01/08/2022. The Supreme Court has held (in *Laxmi Dyechem v. State of Gujarat*) that dishonour due to a stop payment instruction also attracts Section 138 when the underlying reason is insufficient funds or when the stop payment instruction is issued to defeat a legitimate payment obligation arising from a debt. Since Mr. X's account already had no balance and the stop payment was issued to evade payment of a genuine debt, this act also constitutes an offence under Section 138.

Conclusion: Both acts of Mr. X — deliberately depleting his bank balance after issuing the cheque and issuing a stop payment instruction — individually and collectively constitute an offence under Section 138 of the Negotiable Instruments Act, 1881. Mr. R is entitled to initiate criminal proceedings after giving the mandatory written notice to Mr. X within 30 days of dishonour, and Mr. X's liability arises if he fails to pay within 15 days of receipt of such notice, as provided under the proviso to Section 138.

Relevant Law: Section 54 of the Companies Act, 2013 read with Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014 governs the issue of sweat equity shares.

Conditions for Issue of Sweat Equity Shares: A company may issue sweat equity shares to its directors or employees for: (i) providing know-how to the company, (ii) making available rights in the nature of intellectual property rights, or (iii) providing value additions. Such shares must be of a class already issued by the company, authorized by a special resolution passed at a general meeting.

(a) Size of Issue — Whether Appropriate:

As per Rule 8(4) of the Companies (Share Capital and Debentures) Rules, 2014, the following limits on size apply:

— The sweat equity shares to be issued in any year shall not exceed 15% of the existing paid-up equity share capital of the company, or shares of an issue value of ₹5 crores, whichever is higher.

— The total cumulative sweat equity shares issued to directors and employees shall not exceed 25% of the paid-up equity share capital of the company at any point of time.

— However, for a startup company (as defined under DPIIT notification), the 25% limit is relaxed to 50% of the paid-up capital, and this higher limit applies for a period of 5 years from the date of its incorporation or registration.

To advise whether the size of issue was appropriate, the company must verify that: (i) the shares issued in the year do not exceed 15% of existing paid-up equity capital or ₹5 crores (whichever is higher), and (ii) cumulative sweat equity does not breach the 25% (or 50% for startups) cap. If the issue exceeds either of these limits, it would be non-compliant with Section 54 and Rule 8.

(b) Lock-in Period — Whether Justifiable:

As per Rule 8(5)(h) of the Companies (Share Capital and Debentures) Rules, 2014, sweat equity shares are non-transferable (locked-in) for a period of 3 years from the date of allotment. This lock-in is mandatory and applies regardless of whether the shares are allotted to a director or an employee.

During the lock-in period, the share certificates must carry a stamping or endorsement that the shares are non-transferable. The company's register of sweat equity shareholders must also record the lock-in.

The rationale for the 3-year lock-in is to ensure that the recipient (director/employee) remains committed to the company and does not immediately liquidate the benefit received, thereby aligning long-term interests. If the company has specified a lock-in period of exactly 3 years, it is fully justifiable and mandatorily required under the Rules. Any reduction below 3 years would be non-compliant. Any voluntary extension beyond 3 years by the company would be permissible as it is more restrictive.

Conclusion: The size of issue is appropriate only if it stays within the 15% annual cap or ₹5 crore (whichever is higher) and does not breach the 25% cumulative cap on paid-up capital. The lock-in period of 3 years from date of allotment is not merely justifiable — it is a statutory requirement under Rule 8(5)(h).

Part (i): Whether Section 135 of the Companies Act, 2013 applies to ABC Security Services

As per Section 135(1) of the Companies Act, 2013, CSR provisions are attracted if a company, in the immediately preceding financial year, has:
(a) Net worth of ₹500 crore or more, OR
(b) Turnover of ₹1,000 crore or more, OR
(c) Net profit of ₹5 crore or more (computed as per Section 198)

Computation of Net Worth (as per Section 2(57)):
Net worth = Paid-up capital + Free reserves + Securities Premium + P&L credit balance – Revaluation reserves – Miscellaneous expenditure not written off.

Net Worth = ₹200 + ₹200 + ₹80 + ₹50 – ₹25 – ₹10 = ₹495 crore

Note: Reserves created out of revaluation of assets (₹25 crore) are explicitly excluded from net worth under Section 2(57). Authorized share capital is irrelevant to this computation.

Turnover for FY 2022-23 = ₹100 crore.

Analysis:
- Net worth ₹495 crore < ₹500 crore threshold — criterion NOT met.
- Turnover ₹100 crore < ₹1,000 crore threshold — criterion NOT met.
- Net profit as per Section 198 is not disclosed in the question. If net profit ≥ ₹5 crore, Section 135 would be attracted.

Conclusion: Pravesh's contention is not fully correct on the basis of net worth and turnover figures alone. The company does not meet the net worth or turnover thresholds. Section 135 would apply only if the net profit as per Section 198 for FY 2022-23 is ₹5 crore or more. A blanket assertion that Section 135 applies, without reference to the net profit criterion, is incomplete.

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Part (ii): Correctness of CSR Committee Composition (Mohan Singh, Venkatesh, Uba, Bhavna)

Under the first proviso to Section 135(1) of the Companies Act, 2013, where a company is required to constitute a CSR Committee, it must consist of:
- Three or more directors, and
- At least one director shall be an independent director.

However, under the second proviso to Section 135(1), where a company is not required to appoint an independent director under Section 149(4), the CSR Committee may be formed with two or more directors (without the mandatory independent director requirement).

Further, Section 135(9) provides that if the amount required to be spent under Section 135(5) does not exceed ₹50 lakh, the company need not constitute a CSR Committee — the Board of Directors itself shall discharge those functions.

Assessment of the proposed committee:
- Four members (Mohan Singh, Venkatesh, Uba, Bhavna) satisfies the numerical requirement of three or more directors.
- However, the action is not correct unless at least one of these four members is an independent director (assuming the company is required to appoint independent directors under Section 149(4)).
- The question does not indicate that any of the four proposed members is an independent director; if none is, the composition violates Section 135(1).
- Additionally, if the company's CSR obligation (2% of average net profits) does not exceed ₹50 lakh, constituting a CSR Committee is not mandatory and the Board itself should act, as per Section 135(9).

Conclusion: The action of forming the CSR Committee with these four members is not correct in the absence of at least one independent director in the committee. The company must ensure at least one independent director is included; otherwise, the committee's constitution is non-compliant with Section 135(1) read with the Companies (Corporate Social Responsibility Policy) Rules, 2014.

The preamble is the introductory portion of a statute that enunciates the objects and reasons for enactment. It is an important aid to interpretation but not a source of substantive law.

When the Preamble Can Be Used:

The preamble can be used as an aid to interpretation in the following circumstances:

1. When Operative Provisions Are Ambiguous: When the main operative sections of the statute are ambiguous, unclear, or susceptible to multiple interpretations, the preamble can be referred to clarify the legislative intent and the mischief the Act seeks to remedy.

2. To Understand Legislative Intent: The preamble reveals the purpose and object of the legislation. When there is doubt about the scope, applicability, or meaning of a statutory provision, the preamble helps ascertain what the legislature intended to achieve.

3. To Resolve Ambiguity in Scope: When it is unclear whether a particular subject matter falls within the purview of the Act, the preamble can be consulted to determine the intended coverage and ambit of the legislation.

4. To Identify the Mischief: The preamble helps identify the mischief or defect in the existing law that the new statute seeks to remedy, which assists in purposive interpretation of ambiguous provisions.

Limitations on the Use of Preamble:

The preamble cannot be used:
- To override or contradict the clear and unambiguous language of the operative sections
- To create substantive rights or impose obligations that are not provided for in the operative provisions
- As a substitute for the operative sections when their meaning is clear
- To extend the scope of the Act beyond what is provided in its operative provisions

Fundamental Principle: The preamble is subordinate to the operative provisions. When the operative sections are clear and unambiguous, the preamble cannot be invoked to alter or modify their meaning. It serves merely as contextual aid when ambiguity exists in the substantive provisions.

Applicability of Section 135 of the Companies Act, 2013 — CSR Provisions

Step 1: Calculation of Net Worth as per Section 2(57) of the Companies Act, 2013

As per Section 2(57), Net Worth means the aggregate value of paid-up share capital and all reserves created out of profits and securities premium account, after deducting accumulated losses, deferred expenditure and miscellaneous expenditure not written off.

Key Note: Reserves created out of revaluation of assets (₹25 crores) are excluded as they are not created out of profits. Similarly, Miscellaneous Expenditure not written off is deducted.

Net Worth of ABC Security Services:
- Paid-up Share Capital: ₹200 crores
- Free Reserves (out of profits): ₹200 crores
- Securities Premium Account: ₹80 crores
- Credit Balance of P&L A/c: ₹50 crores
- Less: Miscellaneous Expenditure not written off: (₹10 crores)
- Net Worth = ₹520 crores

Step 2: Checking Applicability under Section 135(1) of the Companies Act, 2013

Section 135(1) mandates CSR compliance if, during the immediately preceding financial year, a company has:
(a) Net Worth ≥ ₹500 crores, OR
(b) Turnover ≥ ₹1,000 crores, OR
(c) Net Profit ≥ ₹5 crores (as per Section 198)

Analysis:
- Net Worth = ₹520 crores ≥ ₹500 crores → CRITERION (a) SATISFIED ✓
- Total Assets = ₹800 crores (Note: The CSR test uses Turnover, not total assets. These are distinct concepts; turnover is not provided, but this criterion need not be tested since (a) is satisfied.)
- Net Profit = ₹4 crores < ₹5 crores → Criterion (c) NOT satisfied.

Conclusion on Applicability: Since any one of the three criteria suffices, and the Net Worth criterion (₹520 crores > ₹500 crores) is satisfied, ABC Security Services attracts the provisions of Section 135 of the Companies Act, 2013 for FY 2021-22.

Note on Section 108 reference: The question refers to net profit calculated under Section 108. However, Section 108 of the Companies Act, 2013 deals with Transfer of Shares. For CSR purposes, net profit is computed under Section 198 of the Companies Act, 2013. The answer proceeds on that basis.

Step 3: Mandatory CSR Expenditure under Section 135(5)

Every qualifying company shall spend at least 2% of the average net profits of the three immediately preceding financial years (computed under Section 198). Only the current year's net profit of ₹4 crores is given; using it as the basis:

CSR Obligation = 2% × ₹4 crores = ₹0.08 crores = ₹8 lakhs

Step 4: Other Compliances required under Section 135

(a) CSR Committee: The Board must constitute a Corporate Social Responsibility Committee comprising at least 3 directors, including at least 1 Independent Director.
(b) The Committee shall formulate and recommend a CSR Policy to the Board.
(c) The Board shall ensure the company spends ₹8 lakhs on CSR activities listed in Schedule VII of the Companies Act, 2013.
(d) If the amount is unspent, it shall be transferred to a fund specified in Schedule VII (PM National Relief Fund, etc.) within 6 months of the financial year end, or to a special account called Unspent CSR Account within 30 days for ongoing projects.

Final Answer: ABC Security Services is covered under Section 135 by virtue of its Net Worth of ₹520 crores exceeding the ₹500 crore threshold, and is required to spend a minimum of ₹8 lakhs on CSR activities for FY 2021-22.

(i) Adequacy of Notice for Postal Ballot — Members' Requisition

Under Section 110 of the Companies Act, 2013 read with Rule 22 of the Companies (Management and Administration) Rules, 2014, a requisition by members to conduct business through postal ballot in place of a physical meeting must satisfy both a membership threshold and a time limit.

Membership / Capital Threshold: The requisition must be supported by members holding not less than one-tenth (1/10th) of the total paid-up capital carrying voting rights.

Required threshold: 1/10 × ₹1,00,00,000 = ₹10,00,000
Paid-up capital held by requisitionists: ₹6,00,000

Since ₹6,00,000 < ₹10,00,000, the capital threshold is NOT met.

Further, 50 members out of total 2,000 = 2.5%, which is also below the required 10% of total members (i.e., 200 members). Thus the membership threshold is also NOT met.

Time Limit: The AGM was scheduled for 21st August 2022. Under Section 101 of the Companies Act 2013, the AGM notice must be sent at least 21 days before the meeting (i.e., by 31st July 2022 at the latest). The members gave notice on 2nd July 2022, which is approximately 50 days before the AGM and well before the company would dispatch the AGM notice. Hence, the time limit is satisfied.

Conclusion on (i): The notice was given within the prescribed time but by an inadequate number of members holding insufficient paid-up capital. Therefore, the requisition does not meet the statutory threshold and L Ltd is not bound to conduct the meeting through postal ballot.

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(ii) Company's Obligation to Circulate Auditor's Representation

Under Section 140(4) of the Companies Act, 2013, where it is proposed to remove an auditor before expiry of the term, the auditor is entitled to make representations in writing to the company. The company then has a statutory obligation to:

(a) State in the notice of the resolution that representations have been received from the auditor concerned; and
(b) Send a copy of the representations to every member of the company.

In the present case, the existing auditor was appointed for a 2-year term but has served only 1.5 years. The proposed replacement by SNS & Co constitutes removal before expiry of term. The existing auditor has made a representation in writing and has requested that it be notified to members. This request falls squarely within the rights conferred by Section 140(4).

Exception: The Tribunal may, on application by the company or any aggrieved person, direct that the representation need not be sent if satisfied that the right is being abused to secure needless publicity for defamatory matter. No such order is mentioned here.

Conclusion on (ii): L Ltd is bound to send the auditor's representation to its members along with the notice of the resolution for removal, as mandated by Section 140(4) of the Companies Act, 2013.

Under Section 8 of the Negotiable Instruments Act, 1881, a holder is the payee or indorsee of a bill, promissory note, or cheque who is in possession of it, or the bearer thereof. Three essential requirements exist: the instrument must be drawn or endorsed to the person; they must be in lawful possession; and they must hold legal claim to it.

(i) A receives a promissory note drawn by his father by way of gift:
A is a holder only if the promissory note was made payable to A. Mere receipt by gift does not automatically confer holder status. The critical requirement under Section 8 is that the instrument must be drawn or endorsed TO the person claiming holder status. If the note was payable to the father or another person and given to A without proper endorsement, A would be merely a possessor, not a holder. Gift as a mode of transfer does not substitute for the legal requirement of proper drawing or endorsement.

(ii) A received a cheque for full and final settlement but is prohibited by a court order from receiving the amount:
A can be called a holder. He satisfies the definition in Section 8 because he is the payee and is in possession of the cheque. The court order creates a personal legal disability restricting his right to receive and enjoy the amount, but this does not negate his holder status. Legal disabilities affecting the right to use or realize on an instrument do not eliminate the legal position of being a holder. A is a holder subject to personal restrictions.

(iii) B, the agent of C, is entrusted with an instrument without endorsement by C, the payee:
B cannot be called a holder. While B is in physical possession, he is not the payee (C is) nor is he an indorsee (C did not endorse to B). Section 8 requires that a holder be either the payee or indorsee. B is merely a possessor holding in agency capacity. C, being the payee and not having transferred his rights by endorsement, remains the sole holder. Agency possession does not convert an agent into a legal holder.

(iv) P steals a blank cheque of A and forges A's signature:
P cannot be called a holder. A valid holder must obtain the instrument through lawful means and have it validly drawn or endorsed to him. P's acquisition is unlawful (theft) and the endorsement is forged, making both the possession and the signature invalid. Section 8's requirement of being "in possession" contemplates lawful possession. A person cannot acquire holder status through criminal acts and fraud. The instrument obtained by theft and forgery does not vest any holder rights in the perpetrator.

The Preamble is the introductory portion of a statute that states the objects and reasons for its enactment. It serves as an important aid to statutory interpretation, but only under specific circumstances.

When Preamble Can Be Used As An Aid To Interpretation:

1. When the operative part is ambiguous: The Preamble may be used to clarify the legislative intent when the operative provisions of the statute are ambiguous, obscure, or capable of multiple interpretations. It acts as a guide to resolve uncertainties in meaning.

2. To identify the mischief: The Preamble is valuable in identifying the mischief (defect or wrong) that the statute intends to remedy. This is particularly relevant when applying the mischief rule of interpretation to give effect to the legislative purpose.

3. To resolve conflicting provisions: When different sections appear to conflict or when their scope is unclear, the Preamble may be consulted to determine which interpretation aligns with the stated objectives of the statute.

4. When provisions are susceptible to multiple meanings: The Preamble may be used to determine which of several possible interpretations the legislature intended when language is capable of bearing more than one meaning.

When Preamble CANNOT Be Used:

1. When operative provisions are clear and unambiguous: If the statutory provisions are clear, explicit, and unambiguous, the Preamble cannot be used to contradict, enlarge, diminish, or restrict their scope. The plain language prevails.

2. Cannot override express words: The Preamble cannot be used to override the express and clear words contained in the operative parts of the statute.

3. Cannot extend application beyond statutory scope: The Preamble cannot be used to extend the application of the statute beyond what is expressly provided in its operative provisions.

Legal Principle:

The maxim "Preamble non est pars legis" (the Preamble is not part of the law) governs this doctrine. The Preamble is an extrinsic aid to interpretation, not an operative part of the statute itself. It is merely a means to understand legislative intent and can only be used as a supplementary tool, never as a substitute for the clear words of the statute.

Conclusion:

The Preamble serves as a valuable interpretive aid when ambiguity exists, helping courts ascertain the true intention of the legislature. However, it cannot be invoked to modify or contradict the express provisions of the law. Its role is complementary—to guide interpretation when the statute's language is unclear, not to override what is plainly stated.

Sub-part (i): Whether Interim Dividend Can Be Declared During Current Year Losses & Correct Rate

As per the proviso to Section 123(3) of the Companies Act 2013, the Board of Directors is empowered to declare interim dividend during any financial year out of the surplus in the profit and loss account or out of profits of the financial year for which it is declared, or out of profits generated in the financial year up to the quarter preceding the date of declaration.

The company CAN declare interim dividend even if it has incurred losses during the current financial year. However, the proviso to Section 123(3) imposes a restriction: where the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.

In the given case, the dividend rates for the immediately preceding three financial years were 15%, 20%, and 25%.

Correct Maximum Rate of Interim Dividend = (15% + 20% + 25%) ÷ 3 = 20%

Therefore, the company may declare interim dividend, but the rate must not exceed 20%. The interim dividend declared at 10% is valid and within the permissible limit under the said proviso.

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Sub-part (ii): Decision of Company Secretary & Correct Rate of Final Dividend

The shareholders demanded that since interim dividend of 10% had already been declared, the final dividend should not be less than 20%. The Board had recommended a final dividend of 10%.

As per Section 123(1) of the Companies Act 2013, a company may declare dividend in any general meeting. However, the dividend declared at the general meeting shall not exceed the amount recommended by the Board of Directors. The shareholders in a general meeting have the power only to confirm or reduce the dividend as recommended by the Board — they cannot increase the dividend beyond the Board's recommendation.

The shareholders' demand for a final dividend of 20% (in excess of the Board's recommendation of 10%) is therefore not legally valid under the Companies Act 2013. The general meeting is bound by the Board's recommendation.

Moreover, there is no provision under the Companies Act 2013 that mandates a minimum total dividend (interim + final combined) based on prior year averages or linking it to interim dividends already paid. The restriction of the three-year average applies only to interim dividend declared during a loss year, not to final dividend.

Conclusion: The company secretary's decision upholding the Board's recommendation of 10% as the correct and maximum permissible final dividend is correct. The shareholders cannot, in the general meeting, demand or pass a resolution to enhance the final dividend beyond 10%. The correct rate of final dividend is 10% as recommended by the Board.

Relevant Provisions — Section 2(85) of the Companies Act, 2013 (as amended by the Companies (Amendment) Act, 2020 read with the Companies (Specification of Definitions Details) Amendment Rules, 2021, effective 1st April 2021):

A 'small company' means a company, other than a public company, whose:
(i) Paid-up share capital does not exceed ₹4 crore (or such higher amount as may be prescribed, not exceeding ₹10 crore); AND
(ii) Turnover as per its last profit and loss account does not exceed ₹40 crore (or such higher amount as may be prescribed, not exceeding ₹100 crore).

However, the following companies cannot be classified as a small company, even if they satisfy both the above financial thresholds:
- A holding company or a subsidiary company;
- A company registered under Section 8 (charitable/not-for-profit companies);
- A company or body corporate governed by any special Act.

Analysis of the Given Case:

S Pvt. Ltd. is a private company, which satisfies the basic requirement (not a public company). For the year ending 31st March, 2022:
- Paid-up share capital: ₹80 lakhs — within the ₹4 crore threshold. ✓
- Turnover: ₹1.80 crores — within the ₹40 crore threshold. ✓

Thus, on the basis of financial criteria alone, S Pvt. Ltd. would qualify as a small company. However, S Pvt. Ltd. is a subsidiary company of H Ltd. (its holding company). Under the proviso to Section 2(85), a subsidiary company is expressly excluded from the definition of a small company, regardless of whether it meets the financial thresholds.

Conclusion:

The contention of the company secretary is correct. S Pvt. Ltd. cannot be categorised as a small company because it is a subsidiary of H Ltd. The exclusion under the proviso to Section 2(85) of the Companies Act, 2013 applies squarely to S Pvt. Ltd. The fact that its paid-up capital and turnover are within the prescribed limits is irrelevant, as the statutory disqualification on account of being a subsidiary company is an absolute bar to such categorisation.

Nature of Guarantee: The guarantee given by 'S' to 'V' for all transactions to be done between 'V' and 'B' during March 2022 is a continuing guarantee as it covers a series of transactions over a period of time.

Applicable Provision — Section 131 of the Indian Contract Act, 1872: This section provides that the death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions. The guarantee is automatically revoked upon the surety's death with respect to all transactions entered into after the date of death.

Analysis of Transactions:

Transactions BEFORE death of 'S' (05.03.2022):
- ₹30,000 supplied on 01.03.2022 — covered by guarantee (before death)
- ₹20,000 supplied on 03.03.2022 — covered by guarantee (before death)
- Total liability of heirs: ₹50,000

For these transactions, the continuing guarantee was in force when they occurred. The legal heirs of 'S' are liable for the estate of the deceased surety to the extent of these transactions.

Transaction AFTER death of 'S':
- ₹40,000 supplied on 10.03.2022 — this is a future transaction occurring after 'S' died on 05.03.2022. By operation of Section 131, the death of 'S' revoked the continuing guarantee for all future transactions. The fact that 'V' was aggrieved by 'S's death is legally irrelevant and does not extend the guarantee.

Conclusion: The legal heirs of 'S' are liable only for ₹50,000 (₹30,000 + ₹20,000) and not for the full ₹90,000 claimed by 'V'. The claim of ₹40,000 in respect of goods supplied on 10.03.2022, after the death of 'S', cannot be enforced against his legal heirs, as the continuing guarantee stood revoked upon his death under Section 131 of the Indian Contract Act, 1872.

Issue: Whether 'R' can file a suit for recovery of the cheque amount when the cheque was endorsed in his favour by 'B' but was never delivered to him, and 'R' merely found it in 'B's drawer after 'B's death.

Applicable Law: Section 46 of the Negotiable Instruments Act, 1881.

Legal Position under Section 46, NI Act, 1881: Section 46 expressly provides that the making, acceptance, or endorsement of a promissory note, bill of exchange, or cheque is completed by delivery, actual or constructive. Without delivery, the act of endorsement alone does not transfer property in the instrument or create any right in the transferee.

Analysis of the Given Facts:

'A' drew a cheque for ₹ 20,000 payable to 'B' and validly delivered it to 'B'. 'B' thus became the holder of the cheque. 'B' endorsed the cheque in favour of 'R', however, he did not deliver the cheque to 'R' — he kept it in his own table drawer. Subsequently, 'B' died and 'R' found the cheque in 'B's drawer.

The critical point here is that endorsement without delivery is incomplete negotiation. 'R' never received delivery — actual or constructive — from 'B'. 'R' merely found the cheque in 'B's possession (drawer). Such finding does not constitute delivery by 'B' to 'R'. Therefore, 'R' did not become a holder of the cheque within the meaning of the NI Act, 1881, as the transfer was never completed.

Conclusion: Since the endorsement by 'B' in favour of 'R' was not accompanied by delivery, 'R' does not acquire any title or enforceable right over the cheque. 'R' cannot file a suit for recovery of the amount of the cheque. The negotiation of the instrument remained incomplete, and 'R's possession through mere finding does not cure the absence of delivery.

Declaration of Interim Dividend Despite Current Year Losses

Yes, a company can declare interim dividend even if it has incurred losses during the current financial year, provided it has accumulated profits from previous years. This is permissible under Section 123(3) of the Companies Act 2013.

Conditions for Interim Dividend Declaration:

When declaring interim dividend, the following conditions must be satisfied:

(1) Source Requirement: The interim dividend must be paid from:
- Profits of the current financial year up to the end of the quarter immediately preceding the interim dividend declaration, PLUS
- Accumulated profits of preceding financial years

(2) Maximum Dividend Limit: The Board must ensure that the total interim dividends declared in a financial year do not exceed the lower of:
- Fifty percent (50%) of the profit earned in the immediately preceding financial year, OR
- For a new company: 50% of the average profits of the three immediately preceding financial years

(3) Accumulated Profit Requirement: Even if the current year shows losses, interim dividend can be paid if accumulated profits are sufficient, provided the maximum limit is not exceeded.

Correct Rate of Interim Dividend:

The correct rate of interim dividend should be determined keeping in view:

(1) Equality: The rate must be uniform for all shareholders of the same class of shares. However, different classes of shares may have different dividend rates as per the articles.

(2) Compliance with Statutory Limits: The rate must not cause the total dividend (including interim dividend) for the financial year to exceed 50% of the preceding year's profit or the available accumulated profits.

(3) Prudent Dividend Policy: The Board should ensure the rate is sustainable, considering the company's liquidity position, capital adequacy, operational cash flows, and future capital requirements.

In summary, while losses in the current year do not prevent interim dividend declaration, the company must have sufficient accumulated profits and the interim dividend must comply with the statutory ceiling of 50% of the preceding year's profit.

The decision of the company secretary acting independently would be incorrect. Under the Companies Act 2013, the secretary is merely an administrative officer with no authority to unilaterally decide dividend rates.

Proper Authority and Procedure: Section 123 of the Companies Act 2013 mandates that dividends can only be declared or paid on the recommendation of the Board of Directors and approval by members in a general meeting. The secretary's role is limited to implementing decisions already authorized by the Board and members, not making independent decisions.

Limitations of Secretarial Powers: The company secretary is a principal officer responsible for compliance, record-keeping, and administrative functions. Powers relating to dividend declaration are not delegated to the secretary and remain vested exclusively with: (1) the Board of Directors, which formulates dividend policy and recommends dividend rates based on profitability, reserves, capital requirements, and statutory constraints; (2) the Members/Shareholders in general meeting, who have the final authority to approve, reduce, or refuse the dividend recommended by the Board.

Statutory Constraints on Dividend Rate: The correct dividend rate must satisfy: (a) adequate profits as per Section 123(1) - dividend shall be payable only out of current year profits or accumulated profits; (b) reserve requirements - a minimum reserve as prescribed must be maintained before distributing profits; (c) solvency test - dividend payment should not render the company insolvent; (d) dividend should not exceed the rate recommended by the Board.

Determination of Correct Rate: The Board should determine the dividend rate considering: (1) profitability and cash flows, (2) capital expenditure requirements, (3) debt obligations, (4) industry norms and shareholder expectations, (5) regulatory compliance, and (6) long-term growth strategy. Only after Board recommendation and member approval should the secretary execute the dividend payment.

Conclusion: The secretary's independent decision is ultra vires (beyond authority). The correct procedure requires Board approval followed by shareholder sanction in general meeting before any dividend rate is finalized.

Relevant Provision — Section 2(85) of the Companies Act, 2013

A 'small company' means a company, other than a public company, whose:
(i) paid-up share capital does not exceed ₹2 crores (as revised by the Companies (Specification of Definitions Details) Amendment Rules, 2021); AND
(ii) turnover, as per the last profit and loss account, does not exceed ₹20 crores (as revised by the same Amendment Rules, 2021).

However, the following categories of companies are expressly excluded from the definition of small company, even if they satisfy the above financial thresholds:
1. A holding company
2. A subsidiary company
3. A company registered under Section 8 of the Companies Act, 2013
4. A company or body corporate governed by any special Act

Analysis of the Facts

In the given case:
- S Pvt. Ltd. is a private company — this condition is satisfied.
- Paid-up share capital: ₹80 lakhs — this is within the prescribed limit of ₹2 crores. ✓
- Turnover: ₹1.80 crores — this is within the prescribed limit of ₹20 crores. ✓

Despite satisfying both the financial criteria, S Pvt. Ltd. is a subsidiary company of H Ltd. Section 2(85) of the Companies Act, 2013 expressly disqualifies subsidiary companies from being treated as small companies, irrespective of their paid-up capital and turnover.

Conclusion

The contention of the Company Secretary is correct. S Pvt. Ltd. cannot be categorised as a small company under Section 2(85) of the Companies Act, 2013, because it is a subsidiary of H Ltd. The exclusion of subsidiary companies from the definition of small company is absolute and overrides the financial thresholds. Accordingly, the Board of Directors cannot avail the benefits and relaxations available to small companies.

(a) Definition of 'Deposit' under Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014:

Note: The question refers to 'Depositories Act, 2013' but the relevant provision governing acceptance of deposits by companies is Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014 framed under Section 73 of the Companies Act, 2013.

As per Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014, 'deposit' includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include certain specified amounts enumerated in clauses (i) to (xix) thereof.

(b) Whether ₹5,00,000 received from Mr. Raj constitutes a 'Deposit':

Relevant Exclusion — Rule 2(1)(c)(x): The definition of deposit specifically excludes any amount received from an employee of the company, not exceeding his annual salary, under a contract of employment with the company, in the nature of non-interest bearing security deposit.

Application of the Rule to Mr. Raj's case:

Condition 1 — Is Mr. Raj an employee? Yes, Mr. Raj is an employee of DSP Trading Pvt. Ltd. under a contract of employment. ✓

Condition 2 — Is it non-interest bearing? Yes, the security deposit is expressly stated to be non-interest bearing. ✓

Condition 3 — Is it in the nature of a security deposit? Yes, it is described as a security deposit as per the contract terms. ✓

Condition 4 — Does it not exceed annual salary? The security deposit amount is ₹5,00,000 and Mr. Raj's annual salary is ₹5,00,000. The amount does not exceed his annual salary. ✓

Conclusion: Since all four conditions of Rule 2(1)(c)(x) are satisfied, the amount of ₹5,00,000 received from Mr. Raj will NOT be considered as a 'deposit' under the Companies (Acceptance of Deposits) Rules, 2014. It falls within the excluded category and DSP Trading Pvt. Ltd. is not required to comply with the deposit acceptance provisions of Section 73 of the Companies Act, 2013 in respect of this amount.

Definition of Deposit: As per Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014, 'deposit' means any receipt of money by way of deposit or loan or in any other form, by a company. However, the Rules also provide a specific list of amounts that shall not be considered as 'deposit'.

Relevant Exclusion — Employee Security Deposit: Rule 2(1)(c)(x) of the Companies (Acceptance of Deposits) Rules, 2014 specifically excludes from the definition of deposit — *any amount received from an employee of the company, not exceeding his annual salary, under a contract of employment with the company in the nature of a non-interest bearing security deposit.*

This exclusion is subject to the condition that the amount must not exceed the employee's annual salary.

Application to the Given Case:

In the present case, Mr. Raj is an employee of DSP Trading Pvt Ltd with an annual salary of ₹5,00,000. He has paid a non-interest bearing security deposit of ₹5,30,000 to the company.

The exclusion under Rule 2(1)(c)(x) applies only to the extent the amount does not exceed his annual salary, i.e., up to ₹5,00,000.

The amount of ₹5,00,000 (equal to annual salary) is not a deposit — it falls within the exclusion.

The excess amount of ₹30,000 (i.e., ₹5,30,000 − ₹5,00,000), which is over and above the annual salary, does not qualify for the exclusion and hence will be treated as a deposit under the Companies (Acceptance of Deposits) Rules, 2014.

Conclusion: Out of the total ₹5,30,000 received from Mr. Raj, ₹5,00,000 is NOT a deposit (excluded under Rule 2(1)(c)(x)), while ₹30,000 IS a deposit and must be treated accordingly under the provisions of the Companies Act, 2013.

The statement represents an ideological principle of repeal theory, yet Section 6 of the General Clauses Act, 1897 significantly qualifies this absolute position through important exceptions.

The Principle Explained:
The assertion suggests that a repealed enactment is deemed to have never existed retroactively. However, this creates chaos for transactions, rights, and obligations completed under the repealed law. The General Clauses Act addresses this by implementing a balanced approach.

Effect of Repeal Under Section 6:
Section 6 states that repeal of any enactment shall not affect: (a) any right, privilege, obligation or liability acquired, accrued or incurred under that enactment before the repeal takes effect; (b) any penalty, forfeiture or punishment incurred in respect to any offence committed against that enactment before repeal; (c) any investigation, legal proceeding or remedy in respect of such rights, privileges, obligations or liabilities.

Key Implications:

Prospective Effect: The repeal operates prospectively from the date specified. It does not nullify past transactions or retroactively unmake completed acts.

Protection of Vested Rights: Any right or privilege acquired before repeal remains valid and enforceable. For example, property transferred under a repealed Transfer of Property Act clause remains validly transferred.

Continued Liability: Obligations or liabilities incurred under the repealed law persist. Debts contracted under the old law remain collectable.

Pending Proceedings: Legal proceedings initiated under the repealed enactment may continue under the old law or be transferred to the new law depending on the saving clause.

Penalties and Offences: Criminal liability for offences committed under the repealed law continues, preserving deterrence and justice.

Qualification of the Principle:
While theoretically the repealed law "never existed," practically it continues to govern all events, transactions, rights and liabilities that crystallized before repeal. This protects legitimate expectations and maintains legal continuity. Complete retroactive annihilation would render all past acts invalid, defeating the rule of law and creating insurmountable confusion.

Conclusion:
Section 6 embodies the principle that repeal is prospective, not retroactive. The repealed law figuratively ceases to apply only for future matters, not for completed transactions or acquired rights. This balances the theoretical principle with practical justice and legal certainty.

The statement that 'Whenever an Act is repealed, it must be considered as if it had never existed' is partially misleading and does not accurately represent the law on repeal under the General Clause Act, 1897.

Actual Legal Position: Under Section 6 of the General Clause Act, 1897, the repeal of an Act does NOT retrospectively nullify its effects or wipe out acts done under it. The repeal is essentially prospective in operation.

Key Effects of Repeal:

1. Prospective Effect: The repealed Act ceases to have effect from the date of repeal onwards. No new acts or transactions can be initiated under the repealed Act after repeal. However, this does not extend backwards to invalidate prior acts.

2. Validation of Past Acts: All acts, transactions, and proceedings done under the repealed Act before its repeal remain valid and enforceable. They are not wiped out or nullified by the subsequent repeal.

3. Preservation of Vested Rights: Any rights, titles, powers, or privileges acquired or vested under the repealed Act are preserved and protected. These do not disappear with the repeal. For instance, property rights or contractual rights created under the old law remain intact.

4. Continuing Liabilities and Enforcement: Obligations or liabilities incurred under the repealed Act remain enforceable against the person. Offences committed under the repealed Act can still be prosecuted even after its repeal.

5. Pending Proceedings: Proceedings initiated under the repealed Act can be continued and completed under the same legal provisions (unless the repealing Act explicitly provides otherwise).

Underlying Principle: This approach is founded on fairness, certainty, and protection of legitimate expectations. It ensures that persons who acted in good faith under a law that was valid at that time do not suffer unexpected adverse consequences merely because the law was subsequently repealed.

Conclusion: Repeal does NOT mean an Act 'never existed.' Instead, it operates prospectively, preserving all rights, liabilities, and acts under the repealed Act. This strikes a balance between enabling legislative reform and protecting vested interests.

The Doctrine of Contemporanea Expositio is a principle of statutory interpretation that relies on the understanding and practical construction given to a statute by those who were contemporaries with its enactment. When ambiguous or unclear language appears in legislation, the interpretation accepted and acted upon by government officials, administrators, and courts during or immediately after the statute came into force serves as strong evidence of legislative intent.

Key Characteristics:

The doctrine is based on the premise that those responsible for administering the statute at the time of its enactment possessed the clearest understanding of its meaning and purpose. The contemporaneous exposition provides insight into what the legislators actually intended, as opposed to what we might interpret today. This includes the practical construction given through administrative practice, government circulars, notifications in official gazettes, and early judicial pronouncements.

Application in Interpretation:

When a statute contains ambiguous provisions, courts consider how the statute was interpreted and applied in practice during its initial period. If government departments, revenue authorities, and courts uniformly adopted a particular interpretation and acted upon it consistently, this creates a strong presumption that such interpretation reflects the true legislative intent. This approach is particularly valuable when the original legislative history or parliamentary debates are unavailable or unclear.

Conditions for Application:

The doctrine is applicable only when certain conditions are satisfied. First, the contemporaneous exposition must be consistent and uniform across different agencies and courts, not sporadic or isolated instances. Second, it must not contradict the plain and clear language of the statute—the doctrine cannot override explicit statutory text. Third, it must have been continuously followed over a considerable period, indicating settled practice rather than occasional aberrations. Fourth, the exposition must relate to the actual operation and administration of the statute.

Legal Significance:

While contemporanea expositio carries substantial persuasive authority, it is not absolutely binding. Courts recognize it as important evidence of legislative intent, but they may depart from it if convinced that such interpretation was erroneous or based on misunderstanding. Additionally, subsequent practice that deviates from the original exposition may gradually change the accepted interpretation, though this requires consistent new practice over time.

Distinction from Other Doctrines:

This doctrine differs from cuius est dare loguitur (the burden lies on the one who gives) and from subsequent practice or acquiescence. While contemporanea expositio looks to the earliest understanding, subsequent practice addresses changes over time. The doctrine is also distinct from legislative intent derived from legislative debates or reports, as it focuses on actual administrative conduct rather than stated intentions.

Practical Illustration:

In tax law, if provisions of the Income Tax Act were consistently interpreted by the Income Tax Department in a particular manner since the statute's enactment, and courts upheld such interpretation, contemporanea expositio would support continuance of that interpretation even if the statutory language appears capable of alternative construction. However, if Parliament subsequently enacts amendments or clarifications contradicting the contemporary exposition, the new legislative pronouncement supersedes the older interpretation.

The Doctrine of Contemporaneous Exposition is a fundamental principle of contract interpretation which states that when the same word, phrase, or expression appears in different parts of a document executed at the same time, it must be given the same meaning throughout the instrument, unless the context clearly indicates otherwise.

Nature and Basis: This doctrine is rooted in the principle that parties are presumed to use consistent language with consistent intention. When parties employ identical terminology in multiple clauses or sections of a contemporaneous agreement, courts presume they intended the same legal effect and meaning in each instance. The doctrine reflects the objective theory of contracts—that parties' words should be interpreted according to their ordinary and uniform meaning.

Scope of Application: The doctrine applies to contracts, deeds, wills, and other legal instruments executed simultaneously. It is particularly useful when resolving ambiguities by establishing internal consistency. If a term is defined once and appears elsewhere in the same document, that definition guides subsequent interpretations. This ensures coherence and reflects the presumed common purpose.

Limitations and Exceptions: The doctrine is not absolute and yields to clear contextual differences. A specific provision may override a general one, even if identical words appear in both. If the surrounding context unambiguously indicates that the same words bear different meanings in different parts, the doctrine does not apply. Additionally, express provisions and manifest contrary intention of the parties will override the presumption of uniform meaning. Technical terms used in specialized contexts may also have different interpretations if context justifies.

Principle of Construction: The doctrine must be applied alongside other canons of interpretation. It cannot contradict the primary objective of discerning the parties' actual intention. Where custom, usage, or specialized meaning is evident, those may supersede the uniform meaning presumption. The doctrine is a tool for consistency, not for imposing artificial uniformity where substance suggests otherwise.

Note on the question: The sub-questions ask about the legal heirs of 'S' (the surety), which implies that S died on 10.03.2022 (the narrative reference to 'B' dying appears to be a transcription error — the coherent reading, consistent with the sub-questions and the governing provision, is that S (surety) died on that date). The answer is framed accordingly.

Legal Framework: The guarantee given by S covers all transactions between V and B during March 2022. This is a continuing guarantee as defined under Section 129 of the Indian Contract Act, 1872, since it extends to a series of transactions.

The governing provision for the effect of a surety's death is Section 131 of the Indian Contract Act, 1872, which states: *"The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions, from the moment of death."*

(i) Liability of legal heirs of S for ₹ 90,000:

S's guarantee stands revoked from the moment of S's death (10.03.2022) for all future transactions. V's ignorance of S's death is irrelevant — Section 131 does not provide any protection to the creditor based on lack of notice of the surety's death.

Transactions before S's death:
- Supply on 01.03.2022: ₹ 30,000 — valid, covered by guarantee
- Supply on 03.03.2022: ₹ 20,000 — valid, covered by guarantee
- Sub-total (pre-death): ₹ 50,000 → S's estate is liable

Transaction after S's death:
- Supply on 10.03.2022: ₹ 40,000 — guarantee stands revoked as to this future transaction
- S's estate is NOT liable for ₹ 40,000

Conclusion: The legal heirs of S are liable only to the extent of ₹ 50,000, not ₹ 90,000. V cannot recover the ₹ 40,000 post-death supply from S's estate.

(ii) If estate of S is worth only ₹ 45,000:

Even though the legal liability of S's estate is ₹ 50,000, the recovery is limited to the actual worth of the estate. A legal heir is liable only to the extent of the assets inherited from the deceased. Therefore, V can recover a maximum of ₹ 45,000 from the estate of S. The remaining ₹ 5,000 (i.e., ₹ 50,000 − ₹ 45,000) cannot be recovered from S's heirs personally, as their personal liability does not extend beyond the inherited estate.

(a) Remedy available to Mr. Dnakar:

Yes, Mr. Dnakar has a remedy against the company under Section 35 of the Companies Act, 2013, which deals with civil liability for misstatements in a prospectus.

Under Section 35(1), where a person has subscribed for securities of a company on the basis of a prospectus which contains any untrue statement, the following persons shall be liable to pay compensation to every person who has sustained any loss or damage as a result of such untrue statement:
- The company;
- Every director at the time of issue of the prospectus;
- Every person named as a director;
- Every promoter;
- Every person who authorised the issue of the prospectus; and
- Every expert who gave consent to include their report in the prospectus.

In the given case, the prospectus issued by MBL Pharmaceutical Limited contained extracts of an expert's report on oncology research which was found to be untrue. Mr. Dnakar purchased shares relying on this report. Since he suffered loss/damage due to the untrue statement made in the prospectus, he is entitled to claim compensation from the company (and the expert) under Section 35(1) of the Companies Act, 2013.

(b) Circumstances where an Expert is NOT Liable:

An expert shall not be liable for any untrue statement in the prospectus if they prove any of the following circumstances under Section 35(2) of the Companies Act, 2013:

1. Prospectus issued without knowledge or consent: The prospectus was issued without their knowledge or consent, and on becoming aware of its issue, they forthwith gave reasonable public notice that it was issued without their knowledge or consent.

2. Withdrawal of consent before registration: Having given their consent, they withdrew it in writing before the delivery of a copy of the prospectus to the Registrar for registration.

3. Withdrawal after registration but before allotment: After delivery of the prospectus for registration but before allotment, they became aware of the untrue statement, withdrew their consent in writing, and gave reasonable public notice of such withdrawal and the reasons therefor.

4. Reasonable grounds to believe the statement was true: They were competent to make the statement and had reasonable grounds to believe, and did believe up to the time of allotment of shares, that the statement was true.

In the present case, since no such circumstances appear to have been exercised by the expert, the expert and the company remain fully liable to compensate Mr. Dnakar.

Remedy available to Mr. Diwakar:

Under Section 35(1) of the Companies Act, 2013, where a person has subscribed for securities of a company on the faith of a prospectus which contains an untrue statement, and sustains any loss or damage as a result thereof, the company and every person who authorised the issue of such prospectus shall be liable to pay compensation to every person who has so sustained loss or damage.

In the given case, the prospectus issued by MBL Pharmaceutical Limited contained extracts of an expert's report on oncology research which was found to be untrue. Mr. Diwakar purchased shares relying on this expert's report. Since he sustained loss on the basis of an untrue statement in the prospectus, Mr. Diwakar has a remedy — he can claim compensation under Section 35(1) of the Companies Act, 2013 from the company, its directors, promoters, and the expert whose report was included.

The expert is also a person who is liable under this section since the untrue statement was made purportedly on his authority and was included in the prospectus with his consent (as required under Section 26(4) of the Companies Act, 2013, which mandates that no statement purporting to be made by an expert shall be included in a prospectus without his written consent).

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Circumstances where an Expert is NOT Liable [Section 35(2) of the Companies Act, 2013]:

An expert shall not be liable under Section 35 if he proves any of the following:

(a) Withdrawal of consent before registration: That having given his consent to the inclusion of the statement in the prospectus, he withdrew his consent in writing before the registration of the prospectus with the Registrar of Companies, and the prospectus was issued without his authority or consent.

(b) Withdrawal of consent after registration but before allotment: That after the registration of the prospectus but before allotment, he became aware of the untrue statement and withdrew his consent in writing and gave reasonable public notice of such withdrawal and the reasons therefor.

(c) Reasonable belief in truth of statement: That he was competent to make the statement, had reasonable grounds to believe, and did believe up to the time of allotment of securities, that the statement was true.

In the present case, since the expert's report was found to be untrue and there is no indication that the expert withdrew his consent or had reasonable grounds to believe the statement was true, the expert cannot take shelter under any of the above defences. Hence, both the company and the expert are liable to compensate Mr. Diwakar for the loss suffered.

Whether 'R' can recover the cheque amount under the Negotiable Instruments Act, 1881:

No, 'R' cannot recover the cheque amount. The answer rests on the definitions of 'Holder' and 'Holder in Due Course' under the Negotiable Instruments Act, 1881.

Under Section 8 of the Negotiable Instruments Act, 1881, a 'Holder' means the person entitled *in his own name* to the possession of the instrument and to receive or recover the amount due thereon from the parties thereto. Mere physical possession does not make a person a 'Holder' — the possession must be *lawful* and the person must be *entitled* to it.

Under Section 9 of the Negotiable Instruments Act, 1881, a 'Holder in Due Course' is a person who obtains the instrument for valuable consideration, in good faith, and before maturity, without notice of any defect. Such a person acquires a better title than the transferor.

Application to the present case:

The cheque was drawn by 'A' in favour of 'B' — it is an order instrument (payable to a specific person). For such an instrument to be validly negotiated, endorsement by 'B' followed by delivery is mandatory under Section 48 of the Negotiable Instruments Act, 1881.

'R' merely *found* the cheque lying in 'B's table drawer after 'B's death. 'R':
- Did not obtain the cheque through endorsement by 'B'
- Did not give any consideration for the cheque
- Is a mere finder, not a lawful holder

Since 'R' is only a finder and not a 'Holder' as defined under Section 8, 'R' has no legal title to the instrument and cannot maintain a suit for recovery of ₹20,000.

Conclusion: 'R' cannot recover the cheque. The right to recover would vest in the legal heirs/representatives of 'B', who succeed to B's entitlement as the named payee.

Conditions for Issue of Bonus Shares under Section 63 of the Companies Act, 2013:

A company may issue fully paid-up bonus shares to its members out of (i) its free reserves, (ii) the securities premium account, or (iii) the capital redemption reserve account, subject to the following conditions:

(a) The issue must be authorised by the Articles of Association of the company.

(b) The bonus issue must be recommended by the Board of Directors and authorised by the shareholders in a general meeting.

(c) The company must not have defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it.

(d) The company must not have defaulted in payment of statutory dues to employees such as contribution to Provident Fund, Gratuity, and Bonus.

(e) Partly paid-up shares outstanding on the date of allotment, if any, must be made fully paid-up before the bonus issue.

(f) Bonus shares shall not be issued in lieu of dividend.

Whether M/s Frontline Limited may proceed with the Bonus Issue:

Proposed bonus ratio: 1 share for every 2 shares held.

Number of new bonus shares to be issued = 20,00,000 ÷ 2 = 10,00,000 shares.

Capital to be capitalised = 10,00,000 × ₹10 = ₹1,00,00,000.

Sources available for capitalisation:

| Source | Amount (₹) |
|---|---|
| Free Reserves | 50,00,000 |
| Securities Premium Account | 25,00,000 |
| Capital Redemption Reserve | 25,00,000 |
| Total | 1,00,00,000 |

Total funds available = ₹1,00,00,000, which is exactly equal to the amount required for capitalisation.

Post-bonus issue check against Authorised Capital:

Post-issue paid-up shares = 20,00,000 + 10,00,000 = 30,00,000 shares (₹3,00,00,000).

Authorised share capital = 50,00,000 shares (₹50,00,00,000).

Since 30,00,000 < 50,00,000, the post-bonus paid-up capital is within the authorised capital limit — no increase in authorised capital is required.

Conclusion: M/s Frontline Limited may proceed with the bonus issue, provided the other conditions (Articles authorisation, Board recommendation, shareholder approval, no default in statutory/debt obligations, and no partly paid shares) are also satisfied.

Registration of Charge as Notice to Third Parties

As per Section 80 of the Companies Act, 2013, where any charge on any property or assets of a company or any of its undertakings is registered under Section 77, any person acquiring such property, assets, undertakings or any share or interest therein shall be deemed to have notice of the charge from the date of such registration.

In the given case, City Bakers Limited created a charge on its office building in favour of DNB Bank Ltd. and the charge was duly registered within 20 days from the date of creation (which is well within the prescribed 30-day limit under Section 77). Since the charge has been validly registered, any person who wishes to lend money to City Bakers Limited against the security of the same office building shall be deemed to have constructive notice of the existing charge from the date of its registration. Such a person cannot claim ignorance of the charge. Therefore, yes, the registration of charge shall be deemed to be a notice to any person intending to deal with or lend against the security of that property.

Extension of Time Limit for Registration of Charge

Under Section 77(1) of the Companies Act, 2013, it is the duty of every company creating a charge to register the particulars of the charge with the Registrar of Companies (ROC) within 30 days from the date of its creation.

However, if the charge is not registered within 30 days, the Act provides for extension in the following manner:

First Extension — By Registrar (up to 300 days): The Registrar may, on an application made by the company, allow registration of the charge within a period of 300 days from the date of creation of the charge, on payment of such additional fees as may be prescribed. This extension is available provided the application is made before the expiry of the 300-day period.

Second Extension — By Central Government (beyond 300 days): If the charge is not registered even within the extended period of 300 days, the company must seek further extension in accordance with Section 87 of the Companies Act, 2013. Under Section 87, the Central Government, on being satisfied that the omission to register was accidental, due to inadvertence, or some other sufficient cause, or that it is just and equitable to grant relief, may — on an application by the company or any person interested — direct that the time for registration be extended on such terms and conditions as it deems just and expedient.

Consequence of Non-Registration: If a charge is not registered, it shall not be taken into account by the liquidator or any other creditor — meaning the charge becomes void against the liquidator and creditors of the company, though the underlying debt remains enforceable.

Conclusion: In the given situation, since the charge was registered within 20 days (within the normal 30-day window), no extension was required. The registration is valid and serves as deemed notice to all third parties under Section 80.

(a) Correctness of Praveen's Contention regarding Section 135:

As per Section 135(1) of the Companies Act, 2013, every company having net worth of ₹500 crore or more, OR turnover of ₹1,000 crore or more, OR net profit of ₹5 crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility (CSR) Committee of the Board.

The facts of the case indicate that the CSR Committee was constituted on 30th April, 2022. This implies the company satisfies at least one of the above prescribed thresholds. Therefore, Praveen's contention is correct — L Ltd is required to form a CSR Committee and comply with the CSR provisions under Section 135. Had none of the thresholds been met, the company would not have been obligated to constitute the committee.

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(b) Correctness of Decision regarding CSR Committee Composition:

As per Section 135(1) of the Companies Act, 2013 read with Rule 5 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, where the company is required to appoint an Independent Director under Section 149(4), the CSR Committee shall consist of three or more directors, of whom at least one shall be an Independent Director.

The proposed CSR Committee comprises: Mohan Singh (MD), Venkateah (Director), Lala (Director), and Bhatnaya (Independent Director) — total 4 directors, including 1 Independent Director.

This satisfies the statutory requirement of minimum 3 directors with at least 1 Independent Director. Therefore, the decision is correct and in compliance with the applicable provisions.

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(c) Adequacy of Members and Time Limit for Special Notice:

For appointing a person other than the retiring auditor, a Special Notice is required under Section 140(4) read with Section 115 of the Companies Act, 2013.

As per Section 115(1), the special notice must be given by members holding not less than 1% of total voting power, OR holding shares on which an aggregate paid-up value of not less than ₹5 lakhs has been paid. The notice must be given to the company at least 14 days before the meeting at which the resolution is to be moved (exclusive of the day of notice and the day of meeting).

Time Limit Calculation: The AGM is on 21st August, 2022 and the notice was sent on 2nd July, 2022 — a gap of approximately 50 days, which is well in excess of the required 14 days. The time limit condition is satisfied.

Adequacy of Members: The case does not specify the exact voting power or paid-up value of shares held by the members who sent the notice. The company must verify whether those members satisfy either the 1% voting power threshold or the ₹5 lakh paid-up value threshold. If they do, the notice is valid; if not, it is inadequate.

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(d) Whether the Company is Bound to Send Representation of SNS & Co. to Members:

As per Section 140(4)(ii) of the Companies Act, 2013, on receipt of a special notice to appoint a new auditor, the company must forthwith send a copy to the retiring auditor (SNS & Co.). If the retiring auditor makes a representation in writing and requests that it be notified to members, the company is obligated to:

1. State the fact that a representation has been made, in any notice of the resolution given to members, and
2. Send a copy of the representation to every member to whom notice of the meeting is sent.

Exception: If the copy is received too late to be sent to members, or if the Tribunal (on application by the company or aggrieved person) is satisfied that the rights are being abused, the company may be relieved of this obligation.

In the present case, SNS & Co. sent the representation upon receiving the notice, and there is no indication it was received too late or that there was any abuse of rights. Therefore, the company (L Ltd) is bound to send the representation of SNS & Co. to its members along with the notice of the AGM.

Under the Negotiable Instruments Act, 1881, a 'Holder' is defined in Section 8 as the payee or indorsee of a negotiable instrument who is in possession of it, or the bearer thereof. The essential requirements are: (1) the person must be either the payee, indorsee, or bearer, and (2) the person must be in possession of the instrument. Let us examine each case:

(i) X receives a promissory note drawn by his father by way of gift – YES, X can be called a holder.
X is the payee or indorsee of the instrument and is in possession of it. The mode of acquisition (by gift) does not disqualify him from being a holder. The definition of holder does not impose any restriction on how the instrument is acquired or received. Since X meets both essential requirements—he is the payee/indorsee and is in actual possession—he qualifies as a holder under the Act.

(ii) A received a cheque for full and final settlement of dues but is prohibited by court order from receiving the amount – YES, A can be called a holder.
A is the payee of the cheque and is in actual possession of it. The court order creates a personal disability that prevents A from personally receiving/encashing the amount, but this does not affect A's status as a legal holder of the instrument. A retains the right to endorse and transfer the cheque to a third party, which is a fundamental right of a holder. The court order is a personal restriction on A's ability to claim the amount, not on A's holder status. Therefore, A is a holder, though with limited rights of recovery.

(iii) B, the agent of C, is entrusted with an instrument without endorsement – NO, B cannot be called a holder.
Although B is in possession of the instrument, B is not the payee or indorsee. The instrument is entrusted to B without endorsement, meaning C (the payee) has not transferred his title to B through a valid endorsement. B is merely an agent or custodian holding the instrument on behalf of C. Mere possession by an agent without proper endorsement does not make the agent a holder in law. Only C, being the payee, is the holder, and B can only act as C's representative or trustee. For B to become a holder, there must be a valid endorsement by C in B's favour.

(iv) P steals a blank cheque of A and forges A's signature – NO, P cannot be called a holder.
Although P may be in physical possession of the cheque, P cannot be a holder for multiple reasons: First, P acquired the cheque through theft, which is not a valid mode of acquisition. Second, the signature is forged, making the instrument defective and void ab initio. Third, Section 54 of the Act requires that to acquire holder rights, a person must acquire the instrument in good faith and for value; P's acquisition through criminal means clearly violates this. A holder of a stolen cheque with forged signature cannot claim any rights, and P would be liable to prosecution for forgery and theft. Therefore, P is not a holder but a criminal in possession of an invalid instrument.

Part (a): Conditions for Bonus Issue and Feasibility for Frontline Limited

Under the Companies Act 2013, the conditions for issuing bonus shares are: (1) The company must have free reserves or securities premium account (or both) available; (2) No accumulated losses exist on the balance sheet; (3) Preference dividend for the preceding 5 years must have been paid (if any preference shares are issued); (4) The bonus issue shall not exceed the issued capital immediately before the issue; (5) The bonus must be issued out of free reserves or securities premium account only; and (6) Board approval and shareholder approval (by ordinary resolution) are required.

Analysis for Frontline Limited: The company proposes 1 bonus share for every 2 shares held. Current issued shares: 2,00,000; Bonus shares to be issued: 1,00,000 (value ₹10,00,00,000). Available reserves for bonus: Free Reserves (₹50,00,000) + Securities Premium Account (₹25,00,000) = ₹75,00,000 total. Note that Capital Redemption Reserve cannot be used for bonus issue purposes. The shortfall is ₹9,25,00,000. The company CANNOT proceed with the proposed bonus issue as the available reserves of ₹75,00,000 are insufficient to capitalize ₹10,00,00,000 required for the bonus. Additionally, the bonus issue shall not exceed the issued capital (₹2,00,00,000), which would be satisfied if funds were available, but the primary constraint is the insufficiency of free reserves and securities premium.

Part (b): Charge Registration and Notice; Extension Provisions

Deemed Notice: Under Section 77 read with Section 79 of the Companies Act 2013, when a charge is registered with the Registrar within 30 days from the date of its creation, such registration is deemed to constitute constructive notice to any person dealing with the company or seeking to lend money against the same property. The registration on the public register is open for inspection, and any lender is presumed to have notice of all registered charges. Therefore, the creditor (DNB Bank Ltd.) obtained constructive notice through proper registration, and this notice protects the bank's charge against subsequent claims.

Extension of Time for Registration: The time limit for charge registration is 30 days from creation. Under Section 81 of the Companies Act 2013, where the charge is not registered within 30 days, the company may apply to the National Company Law Tribunal (NCLT) for extension of time. The NCLT may extend the time by periods of 30 days each (not exceeding 30 days per extension). The total extension cannot exceed 90 days, making the absolute outer limit 120 days from the date of charge creation. Applications for extension must be filed before the expiry of the current time period (initially before the 30-day period expires). If registration is delayed beyond the maximum extended period without NCLT approval, the charge becomes void as against the company and its creditors, though it remains valid as against the company itself.