Question 1

Mr. M one of the director of Neha Pvt. Limited was of the opinion that no Corporate Social Responsibility Committee of Board was required to be formed for financial year 2019-20 but Mr. N other director was of opinion that it was required to be formed. According to your understanding which one of the two director is right and why:

Accepted Answer

**Answer: (B)**

**Mr. N is correct** because the turnover of Neha Pvt. Limited for the financial year 2018-19 was ₹ 1,010 crore, which exceeds the threshold of ₹ 1,000 crore prescribed under **Section 135 of the Companies Act, 2013**.

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 applicability of CSR provisions for a financial year is determined based on the figures of the **immediately preceding financial year**. Therefore, for FY 2019-20, the triggering financial year is FY 2018-19.

In FY 2018-19, the turnover of Neha Pvt. Limited was **₹ 1,010 crore**, which exceeds the ₹ 1,000 crore threshold. The three criteria under Section 135 are connected by **'OR'** — satisfaction of **any one** criterion is sufficient to mandate CSR Committee formation.

**Mr. M's contention is incorrect** because he only considered the net profit criterion (₹ 4 crore < ₹ 5 crore) in isolation, ignoring the turnover criterion which is independently satisfied. A company need not breach all three thresholds; breaching even one is sufficient.

Option (C) is incorrect as ₹ 4 crore net profit is not more than ₹ 2 crore in any relevant legal sense (and net profit of ₹ 2 crore is not the prescribed threshold). Option (D) is i…

Question 2

The company Neha Pvt. Limited must give preference to spend the amount of contribution towards Corporate Social Responsibility in area of:

Accepted Answer

**Answer: (D) City K of State Y**

As per **Section 135(5) of the Companies Act, 2013**, the Board of Directors shall ensure that the company spends, in every financial year, at least two percent of the average net profits towards CSR activities. The proviso to Section 135(5) further specifies that the company shall give **preference to the local area and areas around it where it operates**, for spending the amount earmarked for CSR activities.

In the present case, the registered office of **Neha Pvt. Limited** is situated in **City K of State Y**. Therefore, the company must give preference to the local area of its registered office, which is **City K of State Y**, while spending its CSR contribution.

Question 3

According to law Corporate Social Responsibility Committee shall consist of three or more directors, so for company Neha Pvt. Limited the Corporate Social Responsibility Committee will:

Accepted Answer

**Answer: (C)**

The CSR Committee of Neha Pvt. Limited **will be formed with two directors only, namely Mr. M and Mr. N**.

**Applicability of CSR — Section 135 of the Companies Act, 2013:**
Every company whose **turnover is ₹1,000 crore or more**, or net worth is ₹500 crore or more, or net profit is ₹5 crore or more during the immediately preceding financial year is required to constitute a CSR Committee. For FY 2019-20, the preceding year is FY 2018-19. Neha Pvt. Limited had a turnover of **₹1,010 crore** in FY 2018-19, which exceeds ₹1,000 crore. Therefore, the company is mandatorily required to form a CSR Committee for FY 2019-20 — Mr. M's view is incorrect.

**Composition — Proviso to Section 135(1):**
While the general rule under Section 135(1) requires the CSR Committee to consist of **three or more directors** (with at least one independent director), the **proviso** carves out an exception: where a company is **not required to appoint an independent director** under Section 149(4) of the Companies Act, 2013, its CSR Committee may consist of **two or more directors**.

Section 149(4) mandates appointment of independent directors only for listed public companies and certain classes of public companies as prescribed. A **private company** like Neha Pvt. Limited is **not required** to appoint an independent director. Accordingly, by virtue of the proviso to Section 135(1), the CSR Committee of Neha Pvt. Limited can validly be constituted with only **two directors — Mr. …

Question 4

The company Neha Pvt. Limited shall spend during financial year 2018-19 on Corporate Social Responsibility an amount of atleast:

Accepted Answer

**Answer: (A) ₹ 0.04 crore**

Under **Section 135 of the Companies Act, 2013**, every eligible company is required to spend at least **2% of the average net profits** of the company made during the **three immediately preceding financial years** on CSR activities.

For the financial year **2018-19**, the three immediately preceding financial years are FY 2015-16, FY 2016-17, and FY 2017-18, with net profits of ₹1 crore, ₹2 crore, and ₹3 crore respectively.

**Average Net Profit** = (₹1 + ₹2 + ₹3) / 3 = **₹2 crore**

**Minimum CSR Spend** = 2% × ₹2 crore = **₹0.04 crore**

Note: The net profit of ₹4 crore for FY 2018-19 is not used for computing the CSR obligation for that same year — only the profits of the three *preceding* years are relevant for the calculation.

Question 5

The second meeting of Board of Directors of GHWX Private Limited was held on 7 September, 2018 for the financial year 2018-19. The minutes of second meeting of Board of Directors of GHWX Private Limited for financial year 2018-19 must contain:

Accepted Answer

**Answer: (D)**

As per **Section 118 of the Companies Act, 2013** read with **Secretarial Standard-1 (SS-1) on Meetings of the Board of Directors** issued by ICSI, the Minutes of a Board Meeting must contain, among other things, the **names of directors present** at the meeting.

In the second meeting of Board of Directors of GHWX Private Limited held on **7 September, 2018**, four directors — **Mr. K, Mr. N, Mr. R, and Mr. W** — were present, while **Mr. U was absent**.

Accordingly, the Minutes must contain the **names of the directors who attended the meeting**, i.e., Mr. K, Mr. N, Mr. R, and Mr. W. There is no statutory requirement under Section 118 or SS-1 to record the names of absent directors in the minutes (though attendance, including absences, may be reflected in the attendance register).

- Option (A) is incorrect — recording only the absent director's name is not required.
- Option (B) is incorrect — names of all five directors (including the absent Mr. U) need not be recorded.
- Option (C) is incorrect — there is no requirement to specifically record the name of an absent director along with one present director.
- **Option (D) is correct** — the minutes must contain the names of directors **present** at the meeting: Mr. K, Mr. N, Mr. R, and Mr. W.

Question 6

In case of the resolution talked in the case study, the minutes of second meeting of Board of Directors of GHWX Private Limited for financial year 2018-19 held on 7 September, 2018 must contain:

Accepted Answer

**Answer: (B)**

As per **Section 118 of the Companies Act, 2013** read with **Secretarial Standard-1 (SS-1) on Meetings of the Board of Directors** issued by the Institute of Company Secretaries of India (ICSI), the minutes of a Board meeting must contain the **name of every director who was present and who dissented from, or did not concur with, a resolution passed at the meeting**.

In the given case, Mr. W was present at the second Board meeting held on 7 September, 2018 and **voted against the resolution** (i.e., he dissented). Therefore, the minutes of this meeting **must contain the name of Mr. W**, who voted against the resolution.

Option (A) is incorrect because there is no requirement to record only two directors' names. Option (C) is incorrect because the law does not require recording the names of directors who voted in favour. Option (D) is incorrect because Mr. U was not even present at the meeting and thus cannot be included. The specific legal requirement is to record the name(s) of dissenting directors, not those who voted in favour or those who were absent.

Question 7

The opinion of one of the director, Mr. K was that minutes of second meeting of Board of Directors of GHWX Private Limited for financial year 2018-19 must be prepared and entered in minutes book of meeting of Board of Directors of GHWX Private Limited by the end of October, 2018 is incorrect. The opinion of Mr. K is incorrect because:

Accepted Answer

**Answer: (A)**

As per **Section 118(1) of the Companies Act, 2013**, every company is required to cause minutes of the proceedings of every meeting of the Board of Directors to be prepared and entered in the minute book within **thirty days** of the conclusion of every such meeting. Since the second Board meeting was held on **7 September, 2018**, the minutes must be entered in the minute book by **7 October, 2018** (i.e., within 30 days). Mr. K's opinion that the minutes must be entered by the end of October 2018 is incorrect because that would exceed the prescribed 30-day limit.

Question 8

G Ltd. (a company having CSR Committee as per the provision of Section 135 of the Companies Act, 2013) decides to spend and utilize half of the amount of Corporate Social Responsibility on the activities for the benefit of all the employees of G Limited and the remaining half of the amount of Corporate Social Responsibility on the activities for the benefit of family members of employees of G Limited. As per the provision of Companies Act, 2013 this would mean that:

Accepted Answer

**Answer: (B)**

Activities benefiting employees or their family members are **not recognized as valid Corporate Social Responsibility activities** under the Companies Act, 2013. Section 135 and Schedule VII of the Companies Act, 2013 enumerate eligible CSR activities, which focus on community benefit rather than employee welfare. These include eradicating poverty, promoting health and education, environmental sustainability, rural development, disaster relief, and similar activities of public benefit. Employee benefits and welfare—whether to employees or their families—are considered internal human resource functions, not CSR, and therefore do not qualify for CSR spending recognition.

Since **neither the 50% spent on employee activities nor the 50% spent on family member activities** qualifies as valid CSR spending under the statutory framework, the **total amount of corporate social responsibility spending by G Limited for that financial year would be zero**. This means G Limited would still need to spend the full CSR amount mandated under Section 135(5) on activities that genuinely fall within Schedule VII of the Companies Act, 2013.

Question 9

The minute book of General meetings of Alpha Limited will be kept at:

Accepted Answer

**Answer: (C)**

According to **Section 409 of the Companies Act, 2013**, every company shall keep minute books of the proceedings of every general meeting, and such minute books shall be **kept at the registered office of the company**. The location is statutorily mandated and cannot be changed by members, employees, or officials. This ensures centralized safekeeping, accessibility for regulatory inspection, and compliance with statutory requirements. The other options wrongly suggest discretion of members (A), employees (B), or officials (D), which have no authority to determine this statutory requirement.

Question 10

R purchases some goods on credit from S, payable within 3 months. After 2 months, R makes out a blank cheque in favour of S, signs and delivers it to S with a request to fill up the amount due, as R does not know the exact amount payable by him. S fills up fraudulently the amount larger than the amount payable by R and endorses the cheque to C in full payment of S's own due. R's cheque is dishonoured. Referring to the provisions of the Negotiable Instruments Act, 1881, C:

Accepted Answer

**Answer: (A)**

C can claim the full amount from R because C qualifies as a holder in due course and can invoke the protections of **Section 20 of the Negotiable Instruments Act, 1881** regarding inchoate instruments.

**Legal Analysis:**

**Status as Holder in Due Course:** C satisfies all requirements: (i) received the cheque complete and regular on its face; (ii) took it before apparent dishonour; (iii) gave value by discharging S's debt to C; (iv) took it in good faith without notice of the fraud (C had no reason to suspect S's fraudulent completion).

**Section 20 Doctrine:** When R signed and delivered the blank cheque with authority to complete, R made an inchoate instrument. Section 20 provides that once such an instrument is completed and reaches a holder in due course, the maker is bound by its completion *even if completed beyond the authority given or fraudulently*. This operates as an **estoppel** against the drawer.

**Why R Cannot Defend:** Although S fraudulently overfilled the cheque, R cannot raise this defense against C because: (1) R voluntarily signed and delivered a blank cheque; (2) R is estopped from denying its validity against a holder in due course; (3) R's remedy is to pursue S for the fraud separately, not to avoid liability to C.

**Claim Against S:** C can also claim against S as an endorser for the full amount, but the primary and stronger claim is against R under the estoppel doctrine.

**Key Principle:** The doctrine of inchoate instruments …

Question 11

MNP Ltd. has a paid up share capital of ₹ 10 crore and free reserves of ₹ 50 crore, as on 31st March, 2019. The company made a loss of ₹ 40 lakh after providing for depreciation for the year ended 31st March, 2019 and as a result, the company was not in a position to declare any dividend for the said year out of profits. However, the Board of directors of the company announced the declaration of dividend of 20% on the equity shares payable out of free reserves. The average dividend declared by the company in the last three years is 25%. Referring to the provisions of the Companies Act, 2013, examine the validity of declaration of dividend.

Accepted Answer

**Validity of Declaration of Dividend out of Free Reserves by MNP Ltd.**

As per **Section 123(1) of the Companies Act, 2013**, a company may, in the event of inadequacy or absence of profits in any year, declare dividend out of free reserves, subject to such rules as may be prescribed. The relevant rules are contained in **Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014**, which prescribes four conditions that must be cumulatively satisfied.

**Condition 1 — Rate of dividend shall not exceed the average rate of the last three years:**
The rate of dividend declared out of free reserves shall not exceed the average of the rates at which dividend was declared in the three immediately preceding years. In this case, the declared rate is **20%**, whereas the average dividend of the last three years is **25%**. Since 20% < 25%, **this condition is satisfied**.

**Condition 2 — Amount drawn shall not exceed 1/10th of (Paid-up Share Capital + Free Reserves):**
The total amount to be drawn from accumulated free reserves shall not exceed **one-tenth of the sum of paid-up share capital and free reserves** as per the latest audited financial statements. The maximum permissible withdrawal = 1/10 × (₹10 crore + ₹50 crore) = **₹6 crore**. The total amount actually drawn (loss set-off of ₹0.40 crore + dividend of ₹2 crore) = **₹2.40 crore**, which is less than ₹6 crore. **This condition is satisfied**.

**Condition 3 — Losses must be set off before declaring dividen…

Question 12

Discuss with reasons, whether the following persons can be called as a 'holder' under the Negotiable Instruments Act, 1881:

Accepted Answer

Under **Section 8 of the Negotiable Instruments Act, 1881**, a 'Holder' is defined as any person who has possession of a bill, note or cheque, or of an instrument payable to order, indorsed in blank or to him, and includes the payee or indorsee thereof in possession. The definition requires two elements: (1) **lawful possession** of the instrument, and (2) proper legal status—either as payee, indorsee with endorsement, or possession of a bearer instrument.

**(i) X who obtains a cheque by way of gift:** **X is a holder.** Reasoning: The mode of acquiring possession (gift) is irrelevant to holder status. What matters is that X has lawful possession of the instrument as the payee. The cheque is drawn in X's favor or properly endorsed to X. The law does not distinguish between purchase, gift, or other lawful modes of acquisition. X satisfies both essential elements—possession and proper legal entitlement as payee.

**(ii) A, the payee, prohibited by court order from receiving:** **A is still a holder.** Reasoning: The status of 'holder' under Section 8 is determined by possession and legal entitlement to the instrument itself, not by external legal disabilities. A's status as payee in possession makes A a holder regardless of the court order. However, the court order creates a **disability in enforcement**—A cannot claim payment or negotiate the cheque due to the legal prohibition, but this does not extinguish A's holder status. The distinction between being a holder and having …

Question 13

Mr. Vyas is the owner of House No. 20 in Geeta Colony, Delhi. He has rented two rooms in this house to Mr. Iyer. The Income Tax Authority has served a show cause notice to Mr. Vyas. The said notice was received by Mr. Iyer and returned the notice with an endorsement of refusal. Decide with reference to provisions of 'General Clauses Act, 1897', whether the notice was rightfully served on Mr. Vyas.

Accepted Answer

**Answer: The notice was NOT rightfully served on Mr. Vyas.**

**Applicable Law:** Section 27 of the General Clauses Act, 1897, provides that when a notice is to be served by post, service shall be deemed to be effected when the letter would, in the ordinary course of post, be delivered at the specified address. However, this provision requires that the notice actually reaches and is delivered at the correct address.

**Analysis:**

**1. Return with Refusal Endorsement:** The critical issue is that the notice was returned to the sender with an endorsement of refusal by Mr. Iyer. When a notice is returned as "refused," it indicates that the notice was not successfully delivered in the ordinary course of postal service. Under Section 27, service is deemed complete only when the letter would be delivered at the address—not when it is rejected and returned.

**2. Service Through Unauthorized Person:** Although substituted service (service through someone other than the addressee) is permissible at the specified address, this must be to a person authorized to receive it on behalf of the addressee or to a family member living at the address. Mr. Iyer is merely a tenant renting two rooms from Mr. Vyas. He has no authority to receive legal notices on behalf of Mr. Vyas and is not a family member. The law does not contemplate service through a third-party tenant unrelated to the assessee.

**3. Burden of Proof:** The burden of proving valid service lies with the Income Tax Authority. …

Question 14

Explain the function of 'proviso' as an internal aid to construction.

Accepted Answer

A **proviso** is a qualifying clause within a statute that operates as an exception to the general rule prescribed in the main enacting clause. It is typically introduced by the words 'Provided that' and functions to restrict, limit, or carve out exceptions from the principal provision. As an **internal aid to construction**, a proviso serves critical functions in statutory interpretation.

**Functions as Internal Aid to Construction:**

**Clarification of Legislative Intent**: A proviso clarifies the exact scope and application of the main provision by specifying exceptions and qualifications intended by the legislature. It reveals which persons, circumstances, or situations are excluded from the operation of the main rule, thereby exposing the true legislative will.

**Restrictive Function**: A proviso operates strictly as an exception. It cannot expand, enlarge, or extend the scope of the main provision beyond its plain meaning. The proviso's function is restrictive—to narrow down and limit the application of the principal clause, never to broaden it.

**Contextual and Harmonious Reading**: A proviso must be read and interpreted together with the main provision as an integrated part of the statute. Both must be construed harmoniously so that every word and phrase gives meaning and effect to the legislative intent. An interpretation should be adopted that renders both the main clause and the proviso effective and meaningful.

**Removal of Ambiguity**: When the main section …

Question 15

New Limited appointed an individual firm, Naresh & Company, Chartered Accountants, as Auditors of the company at the Annual General Meeting held on 30 September 2019. Mrs. Reena, wife of Mr. Naresh, invested in the equity shares face value of ₹ 1 lakh of New Limited on 15 October 2019. But Naresh & Company continues to function as statutory auditors of the company. Advice, Naresh & Company on the continuation of such appointment, as per provisions of the Companies Act, 2013.

Accepted Answer

**Issue:** Whether Naresh & Company can continue as auditors following Mrs. Reena's (wife of partner Mr. Naresh) acquisition of ₹1 lakh equity shares.

**Applicable Law:** Section 141(3)(d)(i) of the Companies Act, 2013 provides that a person shall be disqualified from appointment as an auditor if "he or any of his relatives holds, at any time during the previous two financial years or during the financial year in which he is proposed to be appointed, any security of or interest in the company, **other than security of or interest having face value not exceeding ₹1 lakh or of such nominal value as may be prescribed**."

**Analysis:**

Section 141(3)(d)(i) disqualifies an auditor or their relative from holding any interest in the company being audited, with a critical exception: holdings with face value **not exceeding ₹1 lakh** are permitted.

In the given case:
- Mrs. Reena (a relative of auditor Naresh) acquired equity shares of face value **exactly ₹1 lakh** on 15 October 2019
- This holding falls **within the permissible limit** specified under the exception
- The appointment was made on 30 September 2019 (before the shareholding), and at that time, no disqualification existed
- The subsequent acquisition on 15 October 2019 does not create a disqualification as it is within the ₹1 lakh threshold

**Conclusion and Advice:**

Naresh & Company **is eligible to continue** as statutory auditor of New Limited. Mrs. Reena's shareholding of ₹1 lakh face value does not attract dis…

Question 16

The Board of Directors of Vishwakarma Electronics Limited consists of Mr. Ghanshyam (Director), Mr. Hyder (Director) and Mr. Indersen (Managing Director). The company has also employed a full time Secretary. The Profit and Loss Account and Balance Sheet of the company were signed by Mr. Ghanshyam and Mr. Hyder. Examine whether the authentication of financial statements of the company was in accordance with the provisions of the Companies Act, 2013?

Accepted Answer

The authentication of financial statements by Mr. Ghanshyam and Mr. Hyder is **NOT in accordance with Section 134(1) of the Companies Act, 2013**.

**Requirement under Section 134(1):**
Section 134(1) mandates that financial statements shall be approved by the Board and authenticated by—
(a) the Chief Executive Officer, or the Managing Director, or any person appointed by the Board as Chief Financial Officer or Chief Executive Officer; **AND**
(b) the Company Secretary or the Managing Director or any other Director.

The word "and" creates a mandatory conjunction—both categories of signatories must be present.

**Analysis of Current Signatories:**
Mr. Ghanshyam and Mr. Hyder are both Directors. They satisfy category (b) of the authentication requirement as Directors are eligible signatories under that category. However, neither satisfies category (a), which requires the signature of the Chief Executive Officer, Managing Director, or Chief Financial Officer.

**Deficiency Identified:**
The financial statements lack authentication by a signatory from category (a). Mr. Indersen, the Managing Director, has not signed the financial statements despite being the primary signatory prescribed under category (a). The full-time Company Secretary, also eligible under category (b), is similarly absent as a signatory.

**Required Procedure:**
According to Section 134(1), the financial statements must be authenticated by Mr. Indersen (Managing Director) in conjunction with either the Compan…

Question 17

Green Ltd. was dealing in export of rubber to specified foreign countries. The company was willing to purchase rubber trees in A.P. State. The prospectus issued by the company contained some important extracts of the expert report and number of trees in A.P. State. The report was found untrue. Mr. Andrew purchased the shares of Green Ltd. on the basis of the expert's report published in the prospectus. However, he did not suffer any loss due to purchase of such shares. Will Mr. Andrew have any remedy against the company? State also the circumstances where an expert is not liable under the Companies Act, 2013.

Accepted Answer

Yes, Mr. Andrew has remedies against Green Ltd. even without suffering loss. **Remedy Without Loss:** (1) **Rescission of Contract** — Under general principles of misrepresentation in the Indian Contract Act, Mr. Andrew can apply to court for rescission to unwind the purchase contract. This remedy does not require proof of actual loss; the investor can return the shares and claim refund of purchase money. (2) **Criminal Remedy** — Under Section 34 of the Companies Act, 2013, if the prospectus contains false statements with intent to deceive, criminal action can be initiated against the company and its directors. Criminal liability does not require proof of actual loss. (3) **Restitution** — The company may be ordered to refund the amounts paid, as restitution is a remedy separate from damages and does not depend on proving loss. **Caveat:** Under Section 35(1), civil damages for expert's misstatement require proof of actual loss suffered. Therefore, Mr. Andrew cannot claim damages without demonstrating loss, but rescission and criminal remedies remain available. **Circumstances Where Expert Is NOT Liable Under Section 35(2):** An expert is not liable for misstatement in a prospectus in the following circumstances: (1) **Lack of Awareness** — The expert was not aware that the prospectus had been issued or was about to be issued. (2) **Withdrawal of Consent** — The expert, on becoming aware of the prospectus, gave reasonable public notice that it had been issued without authori…

Question 18

The Articles of Association of Ajad Ltd. require the personal presence of 7 members to constitute quorum of General Meetings. The company has 965 members as on the date of meeting. The following persons were present in the extra-ordinary meeting to consider the appointment of Managing Director: (i) A, the representative of Governor of Uttar Pradesh. (ii) B and C, shareholders of preference shares. (iii) D, representing Y Ltd. and Z Ltd. (iv) E, F, G and H as proxies of shareholders. Can it be said that the quorum was present in the meeting?

Accepted Answer

**Answer: YES, quorum is present at the meeting.**

For determining whether quorum exists, only **members** can be counted as per **Section 103 of the Companies Act, 2013**. The presence must be physical or through authorized representatives. Let us analyze each category of persons present:

**1. A – Representative of Governor of Uttar Pradesh:**
The Governor is not a member of the company unless explicitly stated to hold shares. A is merely a government official attending on behalf of the state, not as a shareholder. **A does NOT count towards quorum.** Count: 0

**2. B and C – Preference Shareholders:**
Preference shareholders are **members** of the company. They are entitled to attend general meetings. Under **Section 85 of the Companies Act, 2013**, preference shareholders have full voting rights at general meetings except for specific matters (increasing/modifying rights, redemption, creation of new class, or creation of reserve fund). Since the meeting is for appointment of Managing Director—not one of the excepted matters—B and C have voting rights and are counted as present members. **Count: 2**

**3. D – Representing Y Ltd. and Z Ltd.:**
Under **Section 113 of the Companies Act, 2013**, a corporation may appoint a person as its representative to attend and vote on its behalf. The representative is deemed to be present in place of the corporate member. Since D represents **two separate corporate members** (Y Ltd. and Z Ltd.), D's presence at the meeting signifies that…

Question 19

K Limited, a subsidiary of Old Limited, decides to give a loan of ₹ 4,00,000 to the Human Resource Manager, who is not a Key Managerial Personnel of K Limited, drawing salary of ₹ 30,000 per month, to buy 500 partly paid-up equity Shares of ₹ 1000 each in K Limited. Examine the validity of company's decision under the provisions of the Companies Act, 2013.

Accepted Answer

**Applicable Provision:** Section 67(3) of the Companies Act, 2013 provides an exception to the general prohibition on a company giving loans for purchase of its own shares. Under this exception, a company may give a loan to an employee (other than a **Key Managerial Personnel**) for the purpose of purchasing **fully paid-up shares** of the company or its holding company, subject to the following conditions:

1. The loan amount must not exceed **six months' salary** of the employee.
2. The shares to be purchased must be **fully paid-up**.
3. The beneficiary must **not be a Key Managerial Personnel (KMP)**.

**Analysis of the given case:**

**Condition 1 — Six months' salary limit:**
The HR Manager's monthly salary is ₹30,000. Six months' salary = ₹30,000 × 6 = **₹1,80,000**. The proposed loan is ₹4,00,000, which **exceeds** ₹1,80,000. This condition is **violated**.

**Condition 2 — Fully paid-up shares:**
The loan is proposed for purchase of **500 partly paid-up** equity shares of ₹1,000 each in K Limited. Section 67(3) permits loans only for **fully paid-up shares**. Since the shares are partly paid-up, this condition is **violated**.

**Condition 3 — Employee is not KMP:**
The HR Manager is expressly stated to not be a KMP of K Limited. This condition is **satisfied**.

**Conclusion:** The decision of K Limited is **not valid** under Section 67(3) of the Companies Act, 2013, as it violates two mandatory conditions — (i) the loan of ₹4,00,000 exceeds the permissible ceiling…

Question 20

Yadav Dairy Products Private limited has registered its articles along with memorandum at the time of registration of company in December, 2014. Now directors of the company are of the view that provisions of articles regarding forfeiture of shares should not be changed except by a resolution of 90% majority. While as per section 14 of the Companies Act, 2013 articles may be changed by passing a special resolution only. Hence, one of the directors is of the view that they cannot make a provision against the Companies Act, 2013. You are required to advise the company on this matter.

Accepted Answer

The company's directors are correct that they can entrench the forfeiture of shares provision. The apparent conflict between Section 14 and the desired entrenchment is resolved by **Section 5 of the Companies Act, 2013**, which explicitly permits such entrenchment.

**Understanding Section 5 - Entrenchment of Articles:**

Section 5 of the Companies Act, 2013 permits a company to provide in its articles that any provision cannot be altered, amended, or repealed except by a resolution passed by a specified majority. For companies incorporated on or after 1st April 2014 (including Yadav Dairy Products Private Limited, registered in December 2014), the minimum specified majority must be **two-third of the voting strength** or any higher majority.

The proposed 90% majority requirement **exceeds the statutory minimum of 2/3** and is therefore permissible under Section 5.

**Interplay between Section 5 and Section 14:**

These sections work together, not in conflict:
- **Section 14** provides the general rule: articles may be altered by passing a special resolution (75% majority)
- **Section 5** creates a specific exception: if a provision is entrenched, it can ONLY be altered by the specified higher majority, not by special resolution alone

The director's concern stems from misreading this relationship. Section 5 is the statutory safeguard that permits entrenchment despite the general provision in Section 14.

**Procedure for Entrenchment:**

The company should follow this proced…

Question 21

Pankaj appoints Shruti as his agent to sell his estate. Shruti, on looking over the estate before selling it, finds the existence of a good quality Granite-Mine on the estate, which is unknown to Pankaj. Shruti buys the estate herself after informing Pankaj that she (Shruti) wishes to buy the estate for herself but conceals the existence of Granite-Mine. Pankaj allows Shruti to buy the estate, in ignorance of the existence of Mine.

Accepted Answer

**Part (a) - Pankaj's Rights Against Shruti (Concealment Case)**

Under the Indian Contract Act, 1872, Pankaj has the following rights:

1. **Right to Rescind the Contract** — Shruti, as an agent, owed a fiduciary duty of full disclosure to Pankaj. By concealing the existence of the valuable granite mine, Shruti obtained Pankaj's consent through fraudulent misrepresentation. Since consent was procured by fraud, Pankaj can rescind the sale agreement and claim the estate back.

2. **Claim under Section 216** — Although Shruti was appointed to *sell* the estate (not buy it), Section 216 principles apply: an agent cannot acquire property for themselves which they are instructed to sell for their principal without explicit consent. Pankaj can either **(a) claim the goods/estate back, or (b) claim the profit made by Shruti** under Section 216(2).

3. **Claim under Section 215** — Section 215 states that an agent must account for all profit made in the course of employment which arises from the agency. The information about the granite mine was discovered during Shruti's agency. Shruti must account to Pankaj for any profit arising from knowledge of this mine.

4. **Damages for Breach of Fiduciary Duty** — Shruti breached her fiduciary obligation to act in Pankaj's best interest and to disclose material information. Pankaj can recover damages for losses suffered due to this breach.

In sum, Pankaj's strongest position is rescission of the contract and recovery of the estate, or alter…

CA Inter Corp Laws

Drill 5 questions from this paper — instant grading

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap