Question 1

MNP Limited is a registered public company having the following members: Promoter: 15, Employees: (blank), Public: 15, Members holding shares purely[?]: 12, Other Members: 13. The Board of Directors of MNP Limited proposes to convert the company into a private limited company. Referring to the provisions of the Companies Act, 2013, advise:
i) Whether the company can be converted into a private company?
ii) Whether certain number of members need to be reduced before proposing the private company?

Accepted Answer

**i) Whether MNP Limited can be converted into a private company: YES**

Under Section 2(68) of the Companies Act, 2013, a private company is defined as a company with a **maximum of 200 members**. The term "members" refers to the registered shareholders of the company.

MNP Limited currently has the following members:
- Promoter: 15
- Employees: 0 (blank)
- Public: 15
- Members holding shares purely: 12
- Other Members: 13
- **Total Members: 55**

Since MNP Limited has 55 members, which is **well within the statutory limit of 200 members**, the company satisfies the basic requirement for conversion to a private company. The conversion can be effected by:
1. Passing a **special resolution** under Section 13(1)(h) of the Companies Act, 2013
2. Amending the **Memorandum of Association (MOA)** and **Articles of Association (AOA)** to incorporate restrictions on share transfer and remove provisions relating to public invitations
3. Implementing restrictions on transferability of shares as required for private companies

**ii) Whether certain number of members need to be reduced: NO**

No reduction of members is required before proposing conversion to a private company. The current membership of 55 is already **within the permissible limit of 200 members** prescribed for private companies under Section 2(68). The company does not need to liquidate or reduce the member base to meet statutory requirements.

**Key Requirements for Conversion:**
While member reduction is not necessary…

Question 2

SKIP Limited (the Company) was incorporated on 01.04.2019. The balances extracted from its audited financial statement are as given below:

| Financial Year (FY) | Net Profit before tax | Net Profit after tax (figure Income Tax computation) |
|---|---|---|
| 2019-20 | ₹ 3.60 crore | ₹ 3.75 crore |
| 2020-21 | ₹ 7.60 crore | ₹ 5.25 crore |

The Company proposes to allocate the minimum required amount for CSR Activities to be undertaken during FY 2021-22, if it is mandatory. You are requested to advise the Company in this regard and compute the minimum amount to be allocated, if so required, taking into account the relevant provisions of the Companies Act, 2013.

Accepted Answer

**Applicability of CSR under Section 135 of the Companies Act, 2013:**

As per **Section 135(1)** of the Companies Act, 2013, CSR provisions are applicable to every company which, in the **immediately preceding financial year**, has:
- Net worth of ₹500 crore or more, OR
- Turnover of ₹1,000 crore or more, OR
- **Net profit of ₹5 crore or more**

For determining CSR obligation in **FY 2021-22**, the immediately preceding financial year is **FY 2020-21**.

Net Profit (as per financial statements) for FY 2020-21 = **₹7.60 crore**, which exceeds ₹5 crore.

Therefore, **CSR is mandatory** for SKIP Limited in FY 2021-22.

**Computation of Minimum CSR Amount:**

As per **Section 135(5)** of the Companies Act, 2013, every company covered under Section 135(1) shall spend at least **2% of the average net profits** made during the **three immediately preceding financial years**.

However, the company was incorporated on **01.04.2019** and has completed only **two financial years** (FY 2019-20 and FY 2020-21) before FY 2021-22. As per the **proviso to Section 135(5)**, where the company has not completed three financial years since incorporation, the average net profits shall be calculated in respect of the financial years during which the company has been in operation.

Important: For CSR purposes, **net profit as per financial statements** (i.e., net profit before tax as per books of accounts) is to be used. The 'Net Profit after tax (Income Tax computation)' figures represent amounts…

Question 3

SKS Limited issued 8%: 1,50,000 Redeemable Preference Shares of ₹ 100 each in the month of May, 2010, to be redeemed within a period of 10 years. Due to the Covid-19 pandemic, the Company is neither in a position to redeem nor pay the stated terms of issue. The Company with the consent of Redeemable Preference Shareholders of 70% in value, made a petition to the Tribunal (NCLT) to accord approval to issue further redeemable preference shares equal to the amount due. Will the petition be maintainable in the light of the provisions of the Companies Act, 2013? Can the company include the dividend unpaid in the balance sheet regarding the amount due to redeem redeemable preference shares?

Accepted Answer

**Part 1: Maintainability of NCLT Petition**

The petition in its current form would **NOT be maintainable**.

Under Section 55(3) of the Companies Act, 2013, redeemable preference shares shall be redeemed only out of: (a) Profits otherwise available for dividend, OR (b) Proceeds of fresh issue of shares made for the purpose of redemption.

Issuing new redeemable preference shares equal to the amount due (principal + unpaid dividends) is problematic because:

1. **Issuance does not constitute redemption:** Merely issuing new RPS refinances the old liability rather than redeeming it. The proceeds from fresh RPS issue must be used to redeem existing RPS; they cannot simply substitute the old obligation with a new one.

2. **Statutory restrictions override shareholder consent:** Section 55 imposes mandatory statutory restrictions. The 70% consent of redeemable preference shareholders, while significant, cannot override or circumvent the mandatory provisions of Section 55(3). Shareholder consent alone is insufficient to bypass statutory requirements.

3. **Procedural alternative:** However, the company CAN file a petition under **Section 58** of the Companies Act, 2013 (Powers of NCLT regarding compromises and arrangements). If the company seeks to modify or extend the redemption terms through a proper scheme of arrangement with the consent of required shareholders, the NCLT may sanction such modification. This would require proposing a structured compromise, not merely issuing n…

Question 4

Ramit has given authority to Prem to buy certain goods at market rate. Prem buys the goods at a higher rate than the market rate. Afterwards, Ramit comes to know that the goods purchased belonged to Prem himself. Decide, whether, Ramit is bound by ratification does?

Accepted Answer

**Answer: Ramit is NOT bound by ratification and is entitled to repudiate the transaction.**

**Relevant Law:** Section 215 of the Indian Contract Act, 1872 deals with the right of a principal when the agent deals on his own account in the business of the agency.

**Rule under Section 215:** If an agent deals on his own account in the business of the agency without first obtaining the consent of his principal and acquainting him with all material circumstances, the principal may **repudiate the transaction** if it is shown that:
(a) any material fact was **dishonestly concealed** from him by the agent, or
(b) the dealings of the agent have been **disadvantageous** to the principal.

**Application to the given case:**

Prem was authorised by Ramit to purchase goods at **market rate**. Prem, however:
1. Purchased the goods at a **rate higher than the market rate** — exceeding his authority, and
2. The goods purchased actually **belonged to Prem himself** — a clear conflict of interest which was not disclosed to Ramit.

Prem thus acted on his own account (as seller) while purportedly acting as Ramit's agent (as buyer), without disclosing this material fact to Ramit. This amounts to **dishonest concealment** of a material circumstance. Additionally, the transaction was **disadvantageous** to Ramit as he paid more than the market rate.

Both conditions under Section 215 of the Indian Contract Act, 1872 are satisfied.

**Conclusion:** Even if Ramit had initially ratified the purcha…

Question 5

Hari authorises Bharal, a merchant in Mumbai, to recover debt from Bankley & Co. Bharat instructs Deepak, a solicitor, to take legal proceedings against Bankley & Co. for recovery of the money. Explain the legal position of Deepak, referring to provisions of the Indian Contract Act, 1872, related to agency.

Accepted Answer

**Legal Position of Deepak — Sub-Agency under the Indian Contract Act, 1872**

In this case, Hari is the **principal**, Bharat is the **agent**, and Deepak is the **sub-agent** appointed by Bharat to take legal proceedings against Bankley & Co.

**Whether the appointment of Deepak is valid:**

Under **Section 190 of the Indian Contract Act, 1872**, an agent cannot lawfully employ another person to perform acts which he has expressly or impliedly undertaken to perform personally, **unless** (i) the ordinary custom of trade permits sub-delegation, or (ii) the **nature of the agency** makes it necessary to employ a sub-agent.

Here, Bharat is a merchant — not a solicitor or legal professional. The act of initiating legal proceedings against Bankley & Co. requires professional legal expertise that Bharat cannot reasonably be expected to possess. Therefore, the **nature of the agency** makes it necessary for Bharat to appoint a solicitor. The delegation to Deepak is thus a **valid appointment of a sub-agent**.

**Definition of Sub-Agent:**

Under **Section 191**, a sub-agent is a person employed by and acting under the control of the original agent in the business of the agency. Deepak qualifies as a sub-agent since he is employed by Bharat (the agent) to carry out part of the agency work.

**Legal Consequences under Section 192 (Proper Appointment):**

Since the appointment is proper, the following consequences follow under **Section 192**:

1. **Hari (Principal) is bound** by an…

Question 6

Examine the validity of the following statements with reference to the Negotiable Instruments Act, 1881:
(i) When payment on an instrument is made in the course, both the instrument and the parties to it are discharged.
(ii) Alteration of rate of interest specified in the Promissory Note is not a material alteration.
(iii) Conversion of the blank indorsement into an indorsement to bearer is not a material alteration and it does not require authorisation.

Accepted Answer

**Statement (i): VALID**

When payment on an instrument is made in due course, both the instrument and the parties to it are discharged. This statement is **correct and valid**. Section 82 of the Negotiable Instruments Act, 1881 explicitly provides that when a negotiable instrument is paid in due course to a person entitled to receive it, the instrument is discharged, and all parties to it are also discharged. 'Due course' means payment made by or on behalf of the drawee or maker to the holder in good faith and without negligence. The discharge is complete and absolute.

**Statement (ii): INVALID**

Alteration of the rate of interest specified in a Promissory Note IS a material alteration, making this statement **false**. Section 87 of the NI Act, 1881 defines material alteration as an alteration that changes the effect of the instrument. The section specifically enumerates material alterations, including changes to: the amount payable, the date of maturity, time or place of payment, the rate of interest, the tenor of the instrument, and the number or order of endorsements. Alteration of the rate of interest is explicitly listed as a material alteration. Therefore, increasing or decreasing the rate of interest without authority renders the instrument invalid as against the party whose liability is affected, as per Section 88.

**Statement (iii): VALID (with clarification on wording)**

This statement requires careful interpretation. If construed to mean that a blank indorseme…

Question 7

HD Software Private Limited is engaged in the business of providing software services. The company received an advance payment later via signed with a clause that the fee in be initially agreed. However, the company was not finalized. Explain all relevant disclosure provisions of the Company Act, 2013.

Accepted Answer

**Relevant Disclosure Provisions under the Companies Act, 2013 for HD Software Private Limited**

HD Software Private Limited, being a company engaged in software services, received an advance payment from a client; however, the contract fee/terms were not finalised at the time of receipt. The following provisions of the **Companies Act, 2013** and allied rules are relevant for disclosure:

**1. Section 128 – Maintenance of Books of Account:**
Every company is required to maintain books of account on an **accrual basis** using **double entry system**. The advance received must be recorded as a liability (deferred revenue / advance from customer) since the performance obligation has not yet been fulfilled and the contract terms are not finalised. The books must reflect the true position of such receipts.

**2. Section 129 – Financial Statements and Schedule III:**
Financial statements must present a **true and fair view** of the state of affairs of the company. Under **Schedule III (Part I – Balance Sheet)** to the Companies Act, 2013:
- The advance received, where the contract is not finalised, should be classified under **'Other Current Liabilities'** as **'Advance from Customers'**.
- It cannot be recognised as revenue, since the performance conditions and fee are not agreed upon.
- **Notes to Accounts** must disclose the nature of such advances, the fact that the contract is pending finalisation, and any contingent obligations arising therefrom.

**3. Section 134 – Board's…

Question 8

Chartered Accountants are statutory auditors of the firm has a period of 5 years in Bangalore manner and carried by fixed to two.

Accepted Answer

**Part (a): Right of Shareholder to Inspect Minutes Book**

Mr. Ram, as a shareholder of PQR Ltd., has a **statutory right to inspect the minutes book** of the company under **Section 119 of the Companies Act, 2013**. This right is not discretionary but mandatory for the company to provide.

The key provisions are: (1) The shareholder can inspect the minutes book **free of charge** without requiring payment of any fee. (2) The inspection must be conducted at the **registered office of the company during business hours**. The shareholder cannot demand inspection at any other location or time. (3) The shareholder has the right to obtain **certified extracts** of the minutes, for which a reasonable fee may be charged as prescribed. (4) However, the company may **refuse inspection if it believes** the inspection would be **prejudicial to the interests of the company or state security**. Such refusal must be based on genuine grounds and not arbitrary. (5) The minutes book is a statutory record maintained by every company and includes minutes of all board meetings and shareholder meetings. The right under Section 119 is applicable to all shareholders equally, regardless of the number of shares held.

**Part (b): Credit Rating for Raising Public Deposits**

When any company (whether established under Indian or English law, if operating in India) seeks to raise **public deposits**, it must comply with the **credit rating requirements under Section 76 of the Companies Act, 2013** and …

Question 9

Mr. Trish deposited 100 bags of groundnut in the factory of Mr. Paise for safe keeping. M. Paise has kept all the other goods bags in the factory with the consent of Mr. Trish and has stored inside in the warehouse.

Accepted Answer

**Nature of the Contract:** The arrangement between Mr. Trish and Mr. Paise constitutes a contract of **Bailment** as defined under **Section 148 of the Indian Contract Act, 1872**. Mr. Trish is the **bailor** (the person delivering the goods) and Mr. Paise is the **bailee** (the person to whom goods are delivered). The 100 bags of groundnut are delivered for the specific purpose of **safe keeping**, which is a gratuitous or non-gratuitous bailment depending on whether any reward is charged.

**Duty of Care by the Bailee:** As per **Section 151 of the Indian Contract Act, 1872**, the bailee is bound to take as much care of the goods bailed as a man of ordinary prudence would take of his own goods of the same bulk, quality, and value. Since Mr. Paise has stored the goods inside the warehouse (having kept them in the factory initially), he must ensure they are stored safely.

**Mixing of Goods with Consent — Section 156:** The question states that Mr. Paise kept all other goods (his own goods/third-party goods) together with Mr. Trish's 100 bags of groundnut **with the consent of Mr. Trish**, and then stored them in the warehouse. This situation is governed by **Section 156 of the Indian Contract Act, 1872**.

As per Section 156, if the bailee, **with the consent of the bailor**, mixes the goods of the bailor with his own goods, the bailor and the bailee shall have an interest in proportion to their respective shares in the mixture so produced.

**Effect:** Since mixing occurre…

Question 10

What will be the consequences in case the ground-nut bag were not delivered under the provisions of the Indian Contract Act, 1872? Explain the provisions which Mr. Trish under the above said Act ?

Accepted Answer

**CONSEQUENCES OF NON-DELIVERY UNDER THE INDIAN CONTRACT ACT, 1872**

When the ground-nut bag is not delivered as per the contract, the following consequences arise:

**1. Breach of Contract:** Non-delivery constitutes a material breach of the sales contract, entitling the buyer to seek remedies under the Act.

**2. Right to Damages:** Under **Section 73** (Compensation for Loss or Gain Arising from Breach), the buyer can claim damages for losses directly arising from non-delivery. The seller becomes liable to pay compensation equivalent to the difference between the contract price and market price at the date of delivery.

**3. Right to Sue for Non-Delivery:** Under **Section 65** of the ICA, 1872, the buyer has the explicit right to sue the seller for damages in case of non-delivery of goods.

**4. Liquidated Damages:** If the contract stipulates a penalty clause or liquidated damages for non-delivery, the buyer can claim such damages under **Section 74**, provided the clause is genuine pre-estimate of loss and not a penalty.

**5. Right to Repudiate Contract:** If non-delivery is a breach of essential condition (warranty), the buyer may repudiate the contract and claim recovery of advance payment, if any.

**6. Interest:** The buyer is entitled to claim interest on the amount payable under **Section 75** (Interest Payable as Damages).

**RELEVANT PROVISIONS UNDER THE INDIAN CONTRACT ACT, 1872:**

**Section 31** defines **Delivery** as the voluntary transfer of possession o…

Question 11

What is the effect of proviso 7 Does it qualify the main provisions of the enactment? Explain it with reference to Interpretation of Statutes.

Accepted Answer

A **proviso** is a qualifying clause in a statute that restricts, limits, or creates an exception to the main provision of an enactment. **Yes, it definitively qualifies the main provisions.** The proviso's sole function is to carve out an exception or modify the operation of the main rule.

**Effect of a Proviso:**

The proviso operates as a qualification or restriction on the main provision. It narrows the application of the general rule rather than extending it. The fundamental principle is that a proviso cannot enlarge or extend the scope of the main provision—it can only restrict or except.

**Key Principles of Statutory Interpretation:**

1. **Not an Independent Clause**: A proviso does not stand alone. It must be read together with the main provision to which it relates. It is intrinsically connected to and dependent upon the main enactment.

2. **Cannot Enlarge Scope**: A proviso can never extend the ambit of the main provision beyond its original contemplation. It can only narrow or restrict the application of the main rule or create a carved-out exception.

3. **Strict Construction**: Provisos are construed strictly and narrowly. They apply only when their specific conditions are explicitly met. Any ambiguity is resolved in favor of the main provision.

4. **Dependent on Main Provision**: For a proviso to apply, the main provision must first be satisfied or would have applied but for the proviso. The proviso operates within the framework of the main provision.

5. *…

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