MODULE 2

PROBLEMS & SOLUTIONS

 CONTENTS
Chapter 1 Basic Concepts & Incorporation of Company 253
Chapter 2 Memorandum & Deposits 259
Chapter 3 Allotment of Shares 270
Chapter 4 Prospectus 274
Chapter 5 Shares 285
Chapter 6 Charge 309
Chapter 7 General Meeting 315
Chapter 8 Dividend 345
Chapter 9 Accounts of Company 356
Chapter 10 Audit & Auditor 373
Chapter 11 Interpretation of Statute 385
Chapter 12 Negotiable Instruments Act, 1881 393
Chapter 13 General Clauses Act 409
Chapter 14 Contract of Bailment 415
Chapter 15 Contract of Indemnity 421
Chapter 16 Contract of Agency 429
 Chapter 1
BASIC CONCEPTS &
INCORPORATION OF COMPANY
PRACTICAL QUESTION
Quest-1 Fortune Traders Ltd. was registered as a private limited company. There are 264 members
in the company as noted below:
(i) Directors and their relatives 134
(ii) Employees 100
(iii) Ex-employees (shares were allotted when they were employees) 15
(iv) 5 couples holding shares jointly in the names of husband and wife (5 x 2) 10
(v) Others 5
Total number of members 264
The Board of Directors of the company proposes to convert it into a Public company. Only
because of the fact that its member has exceeds minimum prescribed criteria. Advise the
Board of directors?
Solution A private company is one u/s 2(68), which by its Articles of Association, puts the
restrictions on maximum number of its members, who shall not exceed 200
 Provided, while computing said limit of 200 members
 Joint member shall be considered as a single member
 Employees and ex-employees shall be excluded
 In given case, Fortune Traders was registered as private company, where its board
want to convert it into a public company as in their opinion maximum no of
members have crossed limit of 200 members
Whereas in actual, members of company are
(i) Directors and their relatives 134
(ii) Employees Nil
(iii) Ex-employees (shares were allotted when they were employees) Nil
(iv) 5 couples holding shares jointly in the names of husband and wife 5
(v) Others 5
Total number of members 144
Conclusion- We may conclude that contention on part of management in incorrect, as
company has not yet exceeded its maximum limit of 200 members
Quest-2 The paid-up Share Capital of AVS Private Limited is `1 crore, consisting of 8 lacs Equity
Shares of `10 each, fully paid-up and 2 lacs Cumulative Preference Shares of `10 each,
254 Problems & Solutions Module 2
fully paid-up. XYZ Private Limited and BCL Private Limited are holding 3 lacs Equity
Shares and 1,50,000 Equity Shares respectively in AVS Private Limited. XYZ Private
Limited and BCL Private Limited are the subsidiaries of TSR Private Limited.
With reference to the provisions of the Companies Act, 2013, examines whether AVS Private
Limited is a subsidiary of TSR Private Limited? Would your answer be different if TSR
Private Limited has 8 out of total 10 directors on the Board of Directors of AVS Private
Limited?
Solution A holding company is one which has the control over the other company, whereas
Subsidiary Company means a company on which said control is exercised.
As per the law there exist an holding and subsidiary relations between 2 companies in
following circumstances:—
1. Where one company controls the composition of the Board of Directors of another
company. In such case former becomes the holding and the latter become a subsidiary
company
When a company shall be considered to have control over the composition of the Board
of Directors of another company:-If said company has the powers to appoint or remove all
or majority of the directors of the other company.
2. Where one company exercises or controls more than one-half of the voting power of
other company either directly or indirectly through its subsidiary
In given case, XYZ Private Limited and BCL Private Limited are the subsidiaries of TSR
Private Limited and holding voting power `4,50,000 in aggregate in AVS out of total voting
power of `8,00,000.
Conclusion: We may conclude that TSR Private limited is holding majority out of voting
power of AVS indirectly through its subsidiary and thus it become holding company of AVS
Situation if TSR Private Limited has 8 out of total 10 directors on the Board of
Directors of AVS Private Limited
Since in such scenario, TSR would be having control over composition of board of directors
of AVS, thus again it shall become Holding company of AVS
Quest-3 MNP Private Ltd. Is a company registered under the Companies Act, 2013 with a, Paid Up
Share Capital of `45 lakh and turnover of `3 crores. Explain the meaning of the "Small
Company" and examine the following in accordance with the provisions of the Companies
Act,2013:
(i) Whether the MNP Private Ltd. Can avail the status of small company?
(ii) What will be your answer if the turnover of the company is `1.50crore?
Solution Small company given under the section 2(85) of the Companies Act, 2013 which means a
company, other than a public company, —
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount
as may be prescribed which shall not be more than five crores rupees; &
(ii) turnover of which as per profit and loss account for the immediately preceding financial
yearlast profit and loss account does not exceed two crore rupees, or such higher amount
as may be prescribed which shall not be more than twenty crores rupees:
Exceptions: This section shall not apply to:
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;
In the given case, MNP Private Ltd., a company registered under the Companies Act, 2013
with a paid-up share capital of `45 lakh and having turnover of `3crore. As only one criteria
of share capital of `50Lakhs is met, but these cond criteria of turnover of `2crores is not yet
Chap. 1 Basic Concepts & Incorporation of Company 255
satisfied, whereas section requires both the criteria to be met in order to avail the status of a
small company, MNP Ltd. cannot avail the status of small company.
If the turnover of the company is `1.50crore, then both the requirements will be fulfilled and
MNP Ltd. Can avail the status of small company.
Quest-4 Alpha Ltd., A Section 8 company is planning to declare dividend in the Annual General
Meeting for the Financial Year ended 31-03-2018. Mr. Chopra is holding 800 equity shares
as on date. State whether the act of the company is according to the provisions of the
Companies Act, 2013.
Solution According to section 8(1) of the Companies Act, 2013, the Central Government may allow
person or an association of persons to be registered as a Company under the Companies Act
if it has been set up for promoting commerce, arts, science, sports, education, research,
social welfare religion, charity protection of environment or any such other useful object and
intends to apply its profits or other income in promotion of its objects.
As per Section 8(1) of the Companies Act, 2013, the companies having licence under
Section 8 of the Act are prohibited from paying any dividend to its members. Their profits
are intended to be applied only in promoting their objects
Thus the proposed act of Alpha Ltd., a company registered under the provisions of Section 8
of the Companies Act, 2013, to declare dividend, is not according to the provisions of the
Companies Act, 2013.
Quest-5 As at 31st March, 2018, the paid up share capital of S Ltd. is `1,00,00,000 divided into
10,00,000 equity shares of `10 each. Of this, H Ltd. is holding 6,00,000 equity shares and
4,00,000 equity shares are held by others. Simultaneously, S Ltd. is holding 5% equity
shares of H Ltd. out of which 1% shares are held as a legal representative of a deceased
member of H Ltd. On the basis of the given information, examine and answer the following
queries with reference to the provisions of the Companies Act, 2013 :
(i) Can S Ltd. make further investment in equity shares of H Ltd. during 2018-19?
(ii) Can S Ltd. exercise voting rights at Annual general meeting of H Ltd.?
(iii) Can H Ltd. allot or transfer some of its shares to S Ltd.?
Solution The paid up share capital of S Ltd. is `1,00,00,000 divided into 10,00,000 equity shares of
`10 each. Of this, H Ltd. is holding 6,00,000 equity shares.
Thus, we may conclude that H Ltd. is the holding company of S Ltd. and S Ltd. is the
subsidiary company of H Ltd. by virtue of section 2(87) of the Companies Act, 2013.
In the given case, as per the provisions of Sec 19 of the Companies Act, 2013,
(i) No company shall, either by itself or through its nominees, hold any shares in its holding
company. Therefore, S Ltd. cannot make further investment in equity shares of H Ltd.
during 2018-19.
(ii) A subsidiary company shall have a right to vote at a meeting of the holding company
only in respect of the shares held by it as a legal representative or as a trustee. Therefore,
S Ltd. can exercise voting rights at the Annual General Meeting of H Ltd. only in
respect of 1% shares held as a legal representative of a deceased member of H Ltd.
(iii) Section 19 also provides that no holding company shall allot or transfer its shares to any
of its subsidiary companies and any such allotment or transfer of shares of a company to
its subsidiary company shall be void. Therefore, H Ltd. cannot allot or transfer some of
its shares to S Ltd.
Quest-6 A group of individuals intend to form a club namely 'Budding Pilots Flying Club' as limited
liability company to impart class room teaching and aircraft flight training to trainee pilots.
It was decided to form a limited liability company for charitable purpose under Section 8 of
the Companies Act, 2013 for a period of ten years and thereafter the club will be dissolved
256 Problems & Solutions Module 2
and the surplus of assets over the liabilities, if any, will be distributed amongst the members
as a usual procedure allowed under the Companies Act.
Examine the feasibility of the proposal and advise the promoters considering the provisions
of the Companies Act, 2013.
Solution According to section 8(1) of the Companies Act, 2013, where it is proved to the
satisfaction of the Central Government that a person or an association of persons proposed to
be registered under this Act as a limited company—
(a) has in its objects the promotion of commerce, art, science, sports, education, research,
social welfare, religion, charity, protection of environment or any such other object;
(b) intends to apply its profits, if any, or other income in promoting its objects; and
(c) intends to prohibit the payment of any dividend to its members;
the Central Government may, by issue of licence, allow that person or association of persons
to be registered as a limited liability company.
In the given case, the decision of the group of individuals to form a limited liability
company for charitable purpose under section 8 for a period of ten years and thereafter to
dissolve the club and to distribute the surplus of assets over the liabilities, if any, amongst
the members will not hold good,
since there is a restriction as stated above on application of its profits or other income only in
promoting its objects.
Further, there is restriction in the application of the surplus assets of such a company in the
event of winding up or dissolution of the company
Therefore, the proposal is not feasible.
Quest-7 Herry Limited is a company registered in Thailand. It has no place of business established in
[Nov-19] India, yet it is doing online business through telemarketing in India having its main server
for online business India. State the status of company under companies Act 2013.
Solution According to section 2(42) of the Companies Act, 2013, “foreign company” means any
company or body corporate incorporated outside India which-
(a) has a place of business in India whether by itself or through an agent, physically or
through electronic mode; and
(b) conducts any business activity in India in any other manner.
Based upon the above definition, we can say that company may have its place of business in
India either in physical mode or even in Electronic mode, which even include Telemarketing
as well
In given case, Herry Limited is a company registered in Thailand. It has no place of business
established in India, yet it is doing online business through telemarketing in India having its
main server for online business India
Conclusion- Thus we may conclude that Herry Limited shall be a foreign company under the
Companies Act, 2013
Quest-8 SKP Limited (Registered in India), a wholly owned subsidiary company of Herry Limited
[Nov-19] decides to follow different financial year for consolidation of its accounts outside India.
State the procedure to be followed in this regard.
Solution "Financial year", in relation to any company or body corporate, means the period ending
on the 31st day of March every year, and where it has been incorporated on or after the 1st
day of January of a year, the period ending on the 31st day of March of the following year,
in respect whereof financial statement of the company or body corporate is made up:
Provided that where a company or body corporate, which is a holding company or a
subsidiary or associate company of a company incorporated outside India and is required to
Chap. 1 Basic Concepts & Incorporation of Company 257
follow a different financial year for consolidation of its accounts outside India, the Central
Government may, on an application made by that company or body corporate in such form
and manner as may be prescribed, allow any period as its financial year, whether or not that
period is a year
Thus, based upon the above provisions, we may conclude that SKP limited may be
allowed to follow different financial year, subject to approval from Central Govt
Quest-9 Nadeem incorporated a "One Person Company" making his sister Nisha as the nominee.
[Nov-19] Nisha is leaving India permanently due to her marriage abroad. Due to this fact, she is
withdrawing her consent of nomination in the said One Person Company. Taking into
considerations the provisions of the Companies Act, 2013 answer the questions given below.
(A) If Nisha is leaving India permanently, is it mandatory for her to withdraw her
nomination in the said One Person Company?
(B) If Nisha maintained the status of Resident of India after her marriage, then can she
continue her nomination in the said One Person Company?
Solution As per Rule 3 & 4 of the Companies (Incorporation) Rules, 2014 following the answers:
(A) Yes, it is mandatory for Nisha to withdraw her nomination in the said OPC as she is
leaving India permanently as only a natural person who is an Indian citizen and resident
in India shall be a nominee in OPC.
(B) Yes, Nisha can continue her nomination in the said OPC, if she maintained the status of
Resident of India after her marriage by staying in India for a period of not less than 182
days during the immediately preceding financial year.
Quest-10 Mahima Ltd. Was incorporated by furnishing false information’s. As per the companies Act,
[Nov-19] 2013, state the powers of the Tribunal (NCLT) in this regard.
Solution Where a company has been got incorporated by furnishing any false or incorrect information
or representation or by suppressing any material fact, the Tribunal may, on an application
made to it, on being satisfied that the situation so warrants,—
(a) pass such orders, as it may think fit, for regulation of the management of the company
including changes, if any, in its memorandum and articles, in public interest or in the
interest of the company and its members and creditors; or
(b) direct that liability of the members shall be unlimited; or
(c) direct removal of the name of the company from the register of companies; or
(d) pass an order for the winding up of the company
(e) pass such other orders as it may deem fit:
Provided that before making any such order, the company shall be given a reasonable
opportunity of being heard
Quest-11 Mr. Raja along with his family members is running successfully a trading business. He is
[Dec-20] capable of developing his ideas and participating in the market place. To achieve this, Mr.
Raja formed a single person economic entity in the form of one person company with his
brother Mr. king as its nominee of the One Person Company. Can he do so under the
provisions of the Companies Act, 2013?
Examine whether the following individuals are eligible for being nominated as Nominee of
the One Person Company as on 5th May 2020 under the above said Act.
(i) Mr. Shyam son of Mr. Raja who is 15 years old as on 5th May 2020
(ii) Ms. Devaki an India Citizen, sister of Mr. Raja stays in Dubai and India. She stayed in
India during the period from 2nd January 2019 to 16th August 2019. Thereafter she
left for Dubai and stayed there.
(iii) Mr. Ashok, an Indian Citizen residing in India who is presently a member of a ‘One
Person Company’
258 Problems & Solutions Module 2
Solution As per section 3 of the Companies Act, 2013, the memorandum of One Person Company
(OPC) shall indicate the name of the other person (nominee), who shall, in the event of the
subscriber’s death or his incapacity to contract, become the member of the company.
The other person (nominee) whose name is given in the memorandum shall give his prior
written consent in prescribed form and the same shall be filed with Registrar of companies at
the time of incorporation along with its Memorandum of Association and Articles of
Association.
Such other person (nominee) may withdraw his consent in such manner as may be
prescribed.
Therefore, in terms of the above law, Mr. King, the nominee, whose name was given in the
memorandum, can withdraw his consent as a nominee of the OPC by giving a notice in
writing to the sole member and to the One Person Company.
Following are the answers to the second part of the question as regards the eligibility for
being nominated as nominee:
(i) As per the Rule 3 of the Companies (Incorporation) Rules, 2014, no minor shall become
member or nominee of the OPC. Therefore, Mr. Shyam, being a minor is not eligible for
being nominated as Nominee of the OPC.
(ii) As per the Rule 3 of the Companies (Incorporation) Rules, 2014, only a natural person
who is an Indian citizen and resident in India, shall be a nominee or the sole member of
a One Person Company. The term “Resident in India” means a person who has stayed in
India for a period of not less than 182 days during the immediately preceding financial
year.
Here Ms. Devaki though an Indian Citizen but not resident in India as she stayed for a
period of less than 182 days during the immediately preceding financial year in India.
So, she is not eligible for being nominated as nominee of the OPC.
(iii) As per the Rule 3 of the Companies (Incorporation) Rules, 2014, a person shall not be a
member of more than one OPC at any point of time and the said person shall not be a
nominee of more than one OPC. Mr. Ashok, an Indian Citizen residing in India who is a
member of an OPC (Not a nominee in any OPC), can be nominated as nominee.
Quest-12 A public limited company has only seven shareholders. Being all the shares paid in full, one
such shareholder purchased all the shares of another shareholder in a private settlement
between them reducing the no. of shareholders to six. The company continues to carry on its
business thereafter. Discuss with reference to the Companies Act, 2013 the implications of
this transaction on the functioning of the company.
Solution Section 3A — If at any time the number of members of a company is reduced, in the case of
a public company, below seven, in the case of a private company, below two, and the
company carries on business for more than six months while the number of members is so
reduced, every person who is a member of the company during the time that it so carries on
business after those six months and is cognizant of the fact that it is carrying on business
with less than seven members or two members, as the case may be, shall be severally liable
for the payment of the whole debts of the company contracted during that time, and may be
severally sued therefor.
Conclusion:-
 Chapter 2
MEMORANDUM & DEPOSITS

PRACTICAL QUESTION
Quest-1 The Directors of a company registered and incorporated in the name “Mars Textile India
Ltd.” desire to change the name of the company entitled “National Textiles and Industries
Ltd.” Advise as to what procedure is required to be followed under the Companies Act,
2013?
Solution Procedure to be followed by Directors of “Mars Textile India Ltd.” For changing the name
of the company to “National Textiles and Industries Ltd.” Shall be as follow:—
1. For Change of Name Clause [Section 13]
A company can change its name at any time by adopting the following procedures:—
 By passing a special resolution; and
 By obtaining the approval of Central Government in writing.
2. Conditions for such alteration
The change of name shall not be allowed to a company which has defaulted in filing its
 Annual returns or
 Financial statements or
 Any document due for filing with the Registrar or
 which has defaulted in repayment of matured deposits or debentures or interest on
deposits or debentures.
3. Steps by ROC
On any change in the name of a company, the Registrar shall enter the new name in the
register of companies in place of the old name and issue a fresh certificate of incorporation
with the new name and the change in the name shall be complete and effective only on the
issue of such a certificate.
4. Other formalities:—
 Within 15 days of passing of resolution, a copy thereof shall be filled with ROC
along with copy of order by CG
 A copy of order of Central Government shall also be filled within 3 month of order.
On such communication, ROC will issue a fresh certificate of incorporation with necessary
alterations. The change of name becomes effective on the issue of said certificate only.
Quest 2 The object clause of the Memorandum of Association of LSR Private Ltd, Lucknow
authorized it to do trading in fruits and vegetables. The company, however, entered into a
Partnership with Mr. J and traded in steel and incurred liabilities to Mr. J. The Company,
subsequently, refused to admit the liability to J on the ground that the deal was ‘Ultra Vires’
the company. Examine the validity of the company’s refusal to admit the liability to J. Give
reasons in support of your answer.
260 Problems & Solutions Module 2
Solution Given problem is based on Doctrine of Ultra Vires
The term 'ultra' means beyond and the term 'vires' means powers. Thus term “Ultra vires”
means doing an act beyond the powers.
An act ultra vires of Object Clause:
 It is an act which is beyond the powers given by the memorandum of association.
 Any such acts are wholly void and inoperative as they are outside the legal powers
of the company. The company is not bound by such acts.
 Any such acts cannot be ratified even by the whole body of shareholders.
Memorandum and Articles of Association are public documents and every person dealing
the company is presumed to have the knowledge of the contents of these Documents and
also to have understood them according to their proper meaning.
This view was also upheld in case of Kotla Venkata Swami v Ram Murthy
In given case, M/s LSR Pvt. Ltd is authorised to trade directly on fruits and vegetables. It has
no power to enter into a partnership for Iron and steel with Mr. J. Such. Thus, given act is
ultra vires of object clause of company.
Conclusion: As per J who entered into partnership is deemed to be aware of the lack of
powers of M/s LSR (Pvt) Ltd. In the light of the above, Mr., J cannot enforce the agreement
or liability against M/s LSR Pvt. Ltd.
Quest 3 Under the Articles of Association of Sunshine Ltd. Company, directors had power to borrow
up to `10,000 without the consent of the general meeting. The Directors themselves lent
`35,000 to the company without such consent and took debentures of the Company. Decide
under the provisions of the Companies Act, 2013, whether the company is liable? If so, what
is the extent of liability of the company in this case?
Solution Given problem is based on doctrine of indoor management
 Every person dealing with the company is presumed to have understood the contents of
company's memorandum and articles of association.
 If he enters into a contract with the company which is contrary to the provisions of
memorandum articles of association, then he will not get any right under such contract.
 Such rule has one exception which is known as 'doctrine of indoor management'.
 According to this doctrine, a person dealing with the company is not presumed to the
knowledge of internal proceedings of the company
 This doctrine was first evolved in the case of Royal British Bank v Turquand
However, benefit under this doctrine cannot be claimed where person so dealing, has prior
knowledge of irregularity, as it was held in the case of [Howard v Patent Ivory
Manufacturing Co]
In given case, directors had power to borrow up to `10,000 without the consent of the
general meeting. The Directors themselves lent `35,000 to the company without such
consent and took debentures of the Company.
Conclusion: Benefit of Internal Management will not be available since. The directors
themselves lent `35,000/- to the company without consent of members and took debentures.
The directors had the notice of the internal irregularity and hence the company was liable to
them only for `10,000/-
Quest-4 Article of Public company clearly stated that Mr. L will be the life time solicitor of company.
Company in its General Meeting of shareholders resolved unanimously to appoint Mr. M in
place of Mr. L as the solicitor of company by altering its AOA. State with reasons, whether
the company can do so? If L files a case against the company for removal as solicitor, will
he succeed?
Chap. 2 Memorandum & Deposits 261
Or
A limited company is formed with its Articles stating that one Mr. X shall be the solicitor for
the company, and that he shall not be removed except on the ground of misconduct. Can the
company remove Mr. X from the position of solicitor even though he is not guilty of
misconduct?
Or
The Articles of Association of a Limited Company provided that 'X' shall be the Law Officer
of the company and he shall not be removed except on the ground of proved misconduct. The
company removed him even though l1e was not guilty of misconduct. Decide, whether
company's action is valid?
Solution According to Section 10 of Company Act, 2013, Upon registration, the memorandum and
articles of association bind the company and its members to the same extent as if they had
been signed by the company and each member respectively. Consequences of this shall be as
follow:—
1. Members bound to the Company-This view was also held in the case of [Boreland’s
Trustee v Steel Brothers and Co. Ltd.]
2. Company bound to the members-Company is also bound to its members in same
manner as members are bound to it.
3. Company not liable to outsider-Section 36, only create a contract between a company
and members, thus company may alter its AOA for any term as concerned with a contract
along with an outsider
In given case Article of Public company clearly stated that Mr. L will be the life time
solicitor of company. Company in its General Meeting of shareholders resolved
unanimously to appoint Mr. M in place of Mr. L as the solicitor of company by altering its
AOA.
Conclusion: Based upon the provisions of section 36, we can conclude that Company is
entitled to Remove Mr. L and he cannot succeed in bringing a suit against the company
This view was also taken in leading case of [Eley v Positive Government Life Assurance
Co. Ltd.]
Quest-5 Article of company provided a clause that incase of any surplus, company shall distribute
dividend to its members. In a particular year, company was having good profit, however
rather than ensuring dividend, company decide to issue debenture certificate to its members.
Decide in light of relevant case law.
Solution As per the provisions of Section 10 of Companies Act, 2013
Upon registration, the memorandum and articles of association bind the company and its
members to the same extent as if they had been signed by the company and each member re-
spectively.
Consequences of Binding Forces:—
1. Members bound to the Company-Memorandum and Articles constitute a contract
between the members and the companies, thus members are bound to the company by
whatever is contained in these documents. [Boreland’s Trustee v Steel Brothers and Co.
Ltd]
2. Company bound to the members- As held in the case of Wood v Odyssa Waterworks
Limited, Company is also liable to its members through content of its Memorandum and
Article.
In given case, Article of company provided a clause that incase of any surplus, company
shall distribute dividend to its members. In a particular year, company rather than ensuring
dividend, decide to issue debenture certificate to its members.
262 Problems & Solutions Module 2
Conclusion: Based upon above provisions, we may conclude that contention on part of
company is incorrect and company is liable to ensure payment of dividend to its members as
also held in the case of Wood v Odyssa Waterworks Limited
Quest-6 The Secretary of a Company issued a share certificate to 'A' under the Company's seal with
his own signature and the signature of a Director forged by him. Borrowed money from 'B'
on the strength of this certificate. 'B' wanted to realise the security and requested the
company to register him as a holder of the shares. Explain whether 'B' will succeed in
getting the share registered in his name.
Hint Given problem is based on doctrine of indoor management
 Every person dealing with the company is presumed to have understood the contents of
company's memorandum and articles of association.
 If he enters into a contract with the company which is contrary to the provisions of
memorandum articles of association, then he will not get any right under such contract.
 Such rule has one exception which is known as 'doctrine of indoor management'.
 According to this doctrine, a person dealing with the company is not presumed to the
knowledge of internal proceedings of the company
 This doctrine was first evolved in the case of Royal British Bank v Turquand
 However, benefit under this doctrine cannot be claimed in case of forgery as it was held
in the case of [Rubben v Great Fingal Consolidated]
Conclusion: Share certificate is not binding on company as it contained forged signatures.
Thus, no title could be transferred to A even if he is a bonafide purchaser since as per the
general rule forgery is nullity
Quest-7 Define the term Article of Association and also explain the law in relation to alteration of
Article
Solution  The articles of association of a company are its rules and regulations, which are framed
to manage its internal affairs.
 Just as the memorandum contains the fundamental conditions upon which along the
company is allowed to be incorporated, so also the articles are the internal regulations of
the company
 The articles play a part subsidiary to memorandum of association. They accept the
memorandum as the charter of incorporation, and so accepting it the articles proceed to
define the duties, the rights and powers of the governing body as between themselves
and the company and the mode and form in which the business of the company is to be
carried on,
The law with respect to alteration of articles is as follows:
(1) Alteration by special resolution: Company shall pass a special resolution to alter its
articles.
(2) Alteration to include conversion of companies: Alteration of articles include alterations
having the effect of conversion of—
(a) a private company into a public company; or
(b) a public company into a private company:
(3) Filing of alteration with the registrar : Every alteration of the articles and a copy of the
order of the Tribunal approving the alteration, shall be filed with the Registrar, within a
period of fifteen days
(4) Any alteration made shall be valid: Any alteration of the articles registered as above shall
be valid as if it were originally contained in the articles.
(5) Alteration noted in every copy: Every alteration made in articles of a company shall be
noted in every copy of the articles, as the case may be.
Chap. 2 Memorandum & Deposits 263
Quest-10 M/’s ABC Ltd. a company registered in the State of West Bengal desires to shift its
registered office to the State of Maharashtra. Explain briefly the stops to be taken to achieve
the purpose.
Would it make a difference, if the Registered Office is transferred from the Jurisdiction of
one Registrar of Companies to the jurisdiction of another Registrar of Companies within the
same State?
Solution For solution, please visit YouTube classes of Amit Popli, FREE for ALL STUDENTS
Quest-11 Yadav dairy products Private limited has registered its articles along with memorandum at
the time of registration of company in December, 2019. 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. One of the directors said that
they cannot make a provision against the Companies Act. You are required to advise the
company on this matter.
Solution As per section 5 of the Companies Act, 2013
Article may contain provisions for entrenchment to the effect that specified provisions of the
articles may be altered only if more restrictive conditions than a special resolution, are met.
The provisions for entrenchment shall only be made either on formation of a company, or by
an amendment in the articles agreed to by all the members of the company in the case of a
private company and by a special resolution in the case of a public company.
Where the articles contain provisions for entrenchment, whether made on formation or by
amendment, the company shall give notice to the Registrar of such provisions in prescribed
manner.
In the given case, Yadav dairy products Private Limited is a private company and wants to
protect provisions of articles regarding forfeiture of shares.
Conclusion: Company will have to pass a resolution taking permission of all the members
and it should also give notice to ROC regarding entrenchment of articles.
Quest-12 Shri Laxmi Electricals Ltd. (S) is a company in which Hanuman power suppliers Limited
(H) is holding 60% of its paid up share capital. One of the shareholder of H made a
charitable trust and donated his 10% shares in H and ` 50 crores to the trust. He appoint S as
the trustee. All the assets of the trust are held in the name of S. Can a subsidiary hold shares
in its holding company in this way?
Solution According to section 19 of the Companies Act, 2013 a company shall not hold any shares in
its holding company either by itself or through its nominees. Also, holding company shall
not allot or transfer its shares to any of its subsidiary companies and any such allotment or
transfer of shares of a company to its subsidiary company shall be void.
Following are the exceptions to the above rule—
(a) where the subsidiary company holds such shares as the legal representative of a
deceased member of the holding company; or
(b) where the subsidiary company holds such shares as a trustee; or
(c) Where the subsidiary company is a shareholder even before it became a subsidiary
company of the holding company.
In the given case, one of the shareholders of holding company has transferred his shares in
the holding company to a trust where the shares will be held by subsidiary company. It
means now subsidiary will hold shares in the holding company. But it will hold shares in the
capacity of a trustee.
Conclusion: We can conclude that in the given situation S can hold shares in H.
264 Problems & Solutions Module 2
Quest-13 Parag Constructions Limited is a leading infrastructure company. One of the directors of the
company Mr. Parag has been signing all construction contracts on behalf of company for
many years. All the parties who ever deal with the company know Mr. Parag very well.
Company has got a very important construction contract from a renowned software
company. Parag constructions will do construction for this site in partnership with a local
contractor Firozbhai. Mr. Parag signed partnership deed with Firozbhai on behalf of
company because he has an implied authority. Later in a dispute company denied to accept
liability as a partner. Can the company deny its liability as a partner?
Solution As per section 22 of the Companies Act, 2013 a company may authorise any person as its
attorney to execute deeds on its behalf in any place either in or outside India. But common
seal should be affixed on his authority letter or the authority letter should be signed by two
directors of the company or it should be signed by one director and secretary. This authority
may be either general for any deeds or it may be for any specific deed.
A deed signed by such an attorney on behalf of the company and under his seal shall bind
the company as if it were made under its common seal.
In the present case company has not neither given any written authority not affixed common
seal of the authority letter.
Conclusion: We may conclude that Mr. Parag is not legally entitled to execute deeds on
behalf of the company. Therefore, deeds executed by him are not binding on the company.
Therefore, company can deny its liability as a partner.
Quest-14 XYZ a One-Person Company (OPC) was incorporated during the year 2016-17 with an
authorized capital of` 45.00 lakhs (4.5 lakh shares of ` 10 each), The capital was fully
subscribed and paid up. Turnover of the company during 2016-17 and 2017-18 was ` 2.00
crores and ` 2.5 crores respectively. Promoter of the company seeks your advice in
following circumstances, whether XYZ (OPC) can convert into any other kind of company
during 2018-19. Please, advise with reference to relevant provisions of the Companies Act,
2013 in the below mentioned circumstances:
(a) If promoter increases the paid up capital of the company by ` 10.00 lakhs during 2018-
19.
(b) If turnover of the company during 2018-19 was ` 3.00 crores.
Solution As per Rule 3 of the Companies (Incorporation) Rules, 2014, no One Person Company
(OPC) can convert voluntarily into any kind of company unless two years have expired from
the date of its incorporation, except where the paid up share capital is increased beyond fifty
lakh rupees or its average annual turnover during the relevant period exceeds two crore
rupees.
Besides, Section 18 of the Companies Act, 2013 provides that a company of any class
registered under this Act may convert itself as a company of other class under this Act by
alteration of memorandum and articles of the company in accordance with the provisions of
Chapter II of the Act.
Based on the above provisions, we may advice as under:
(a) The promoter increases the paid up capital of the company by ` 10.00 lakh during
2018-2019, i.e., to ` 55 lakhs (45 + 10 = 55).
Conclusion: In this situation, XYZ (OPC) shall convert itself compulsory into any other kind
of company by alteration of memorandum and articles of the company in compliance with
the Provisions of the Act.
(b) Where the turnover of XYZ (OPC) during 2018-19 was ` 3.00 crore
Conclusion: Answer will remains the same. In this situation also, XYZ (OPC) shall convert
itself compulsory into any other kind of company by alteration of memorandum and articles
of the company in compliance with the Provisions of the Act.
Chap. 2 Memorandum & Deposits 265
Quest-15 Ashok, a director of Gama Electricals Ltd. gave in writing to the company that the notice for
any general meeting and of the Board of Directors' meeting be sent to him only by registered
post at his residential address at Kanpur for which he deposited sufficient money. The
company sent notice to him by ordinary mail under certificate of posting. Ashok did not
receive this notice and could not attend the meeting and contended that the notice was
improper.
Decide:
(i) Whether the contention of Ashok is valid.
(ii) Will your answer be the same if Ashok remains in U.S.A. for one month during the
notice of the meeting and the meeting held?
Solution According to section 20(2) of the Companies Act, 2013, a document may be served on
Registrar or any member by sending it to him by post or by registered post or by speed post
or by courier or by delivering at his office or address, or by such electronic or other mode as
may be prescribed.
Provided that a member may request for delivery of any document through a particular
mode, for which he shall pay such fees as may be determined by the company in its annual
general meeting.
Thus, if a member wants the notice to be served on him only by registered post at his
residential address at Kanpur for which he has deposited sufficient money, the notice must
be served accordingly, otherwise service will not be deemed to have been effected.
Thus, we may conclude as follow:-
(i) The contention of Ashok is valid as the notice was not properly served.
(ii) Company is bound to serve a valid notice to Ashok by registered post at his residential
address at Kanpur and not outside India.
Quest-16 Naveen incorporated a "One Person Company" making his sister Navita as the nominee.
Navita is leaving India permanently due to her marriage abroad. Due to this fact, she is
withdrawing her consent of nomination in the said One Person Company. Taking into
considerations the provisions of the Companies Act, 2013 answer the questions given below.
(A) If Navita is leaving India permanently, is it mandatory for her to withdraw her
nomination in the said One Person Company?
(B) If Navita maintained the citizenship of India after her marriage, then can she continue
her nomination in the said One Person Company?
Solution As per Rule 3 & 4 of the Companies (Incorporation) Rules, 2014 following the answers:
(A) Yes, it is mandatory for Navita to withdraw her nomination in the said OPC as she is
leaving India permanently as only a natural person who is an Indian citizen whether resident
in India or not shall be a nominee in OPC.
(B) Yes, Navita can continue her nomination in the said OPC
Quest-17 A group of individuals intend to form a club namely 'Budding Pilots Flying Club' as limited
liability company to impart class room teaching and aircraft flight training to trainee pilots.
It was decided to form a limited liability company for charitable purpose under Section 8 of
the Companies Act, 2013 for a period of ten years and thereafter the club will be dissolved
and the surplus of assets over the liabilities, if any, will be distributed amongst the members
as a usual procedure allowed under the Companies Act.
Examine the feasibility of the proposal and advise the promoters considering the provisions
of the Companies Act, 2013.
266 Problems & Solutions Module 2
Solution According to section 8(1) of the Companies Act, 2013,
Where it is proved to the satisfaction of the Central Government that a person or an
association of persons proposed to be registered under this Act as a limited company—
(a) has in its objects the promotion of commerce, art, science, sports, education, research,
social welfare, religion, charity, protection of environment or any such other object;
(b) intends to apply its profits, if any, or other income in promoting its objects; and
(c) intends to prohibit the payment of any dividend to its members;
the Central Government may, by issue of licence, allow that person or association of
persons to be registered as a limited liability company.
In the given case, the decision of the group of individuals to form a limited liability
company for charitable purpose under section 8 for a period of ten years and thereafter to
dissolve the club and to distribute the surplus of assets over the liabilities, if any, amongst
the members will not hold good as far as Sec 8 company is concerned as there is a restriction
u/s 8 regarding application of its profits or other income only in promoting its objects.
Further, there is also a restriction in the application of the surplus assets of such a company
in the event of winding up or dissolution of the company
Conclusion: We may conclude that the proposal is not feasible.
Quest-12 State, with reasons, whether the following statements are True or False?
(i) ABC Private Limited may accept the deposits from its members to the extent of `50.00
Lakh, if the aggregate of its paid-up capital; free reserves and security premium account
is ` 50.00 Lakh.
(ii) A Government Company, which is eligible to accept deposits under Section 76 of the
Companies Act, 2013 cannot accept deposits from public exceeding 25% of the
aggregate of its paid- up capital, free reserves and security premium account.
Solution (i) True
As per the provisions of Section 73(2) of the Companies Act, 2013 read with Rule 3 of
the Companies (Acceptance of Deposits) Rules, 2014, as amended by the Companies
(Acceptance of Deposits) Amendment Rules, 2016,
A company shall accept any deposit from its members, together with the amount of other
deposits outstanding as on the date of acceptance of such deposits not exceeding thirty five
per cent of the aggregate of the Paid-up share capital, free Reserves and securities premium
account of the company.
Provided that a private company may accept from its members monies not exceeding one
hundred per cent of aggregate of the paid up share capital, free reserves and securities
premium account and such company shall file the details of monies so accepted to the
Registrar in such manner as may be specified.
Therefore, the given statement of eligibility of ABC Private Ltd. to accept deposits from its
members to the extent of ` 50.00 lakh is True.
(ii) False
A Government company is not eligible to accept or renew deposits under section 76, if the
amount of such deposits together with the amount of other deposits outstanding as on the
date of acceptance or renewal exceeds thirty five per cent of the aggregate of its Paid-up
share capital, free Reserves and securities premium account of the company.
Quest-13 Define the term ‘Deposit’ under the provisions of the Companies Act,2013 and comment
[Nov-19] with relevant provisions that the following amount received by a company will be
considered as deposit or not.,
(i) `5,00,000/- raised by Rishi Ltd. through issue of non-convertible debenture not
constituting a charge on the assets of the company and listed on a recognised stock
exchange as per applicable regulations made by Securities and Exchange Board of India
Chap. 2 Memorandum & Deposits 267
(ii) `2,00,00/- received from Mr. T, an employee of the company who is drawing annual
salary of `1,50,000/- under a contract of employment with the company in the nature of
non-interest-bearing security deposit.
(iii) Amount of `3,00,000 received by a private company from a relative of a Director,
declared by the depositor as out of gift received from his mother.
Solution According to section 2(31) of the Companies Act, 2013, the term ‘deposit’ includes any
receipt of money by way of deposit or loan or in any other form, by a company, but does not
include such categories of amount as prescribed in the Rule 2(1) of the Companies
(Acceptance of deposit) Rules, 2014, in consultation with the Reserve bank of India.
As per Rule 2(1) of the Companies (Acceptance of deposit) Rules, 2014, following shall be
the answers—
(i) `5,00,000 raised by the Rishi Ltd. through issue of non- convertible debenture not
constituting a charge on the assets of the company and listed on recognised stock
exchange as per the applicable regulations made by the SEBI, will not be considered as
deposit.
(ii) `2,00,000 was received from Mr. T, an employee of the company drawing annual salary
of ` 1,50,000 under a contract of employment with the company in the nature of non-
interest bearing security deposit. This amount received by company from employee, Mr.
T will be considered as deposit, as amount received is more than his annual salary under
a contract of employment with the company in the nature of non-interest bearing
security deposit.
(iii) `3,00,000 received by a private company from a relative of a Director, declaring details
of the amounts so deposited as out of gift received from his mother.
This amount received by the private Company will not be considered as deposit. Here as per
the requirement, the relative of the director of the private company, from whom money is
received, furnished the declaration in writing to the effect that the amount is given out of gift
received from his mother and not being given out of funds acquired by him by borrowing or
accepting loans or deposits from others.
Quest-14 RS Ltd. received share application money of `50,000 Lakh on 01.06.2019 but failed to allot
[Jan-21] shares within the prescribed time limit. The share application money of `5.00 Lakh received
from Mr. Khanna, a customer of the Company, was refunded by way of book adjustment
towards the dues payable by him to the company on 30.07.2019. The Company Secretary of
RS Ltd. reported to the Board that the entire amount of `50.00 Lakh shall be deemed to be
‘Deposits’ as on 30.07.2019 and the company is required to comply with the provisions of
the Companies Act, 2013 applicable to acceptance of deposits in relation to this amount.
You are required to examine the validity of the reporting of the Company Secretary in the
light of the relevant provisions of the Companies Act, 2013
Solution For solution, please visit YouTube classes of Amit Popli, FREE for ALL STUDENTS
Quest-15 S Ltd acquired 10% paid up share capital of H Ltd. on 15th March 2017. H Ltd acquired
[Dec-20] 55% paid up share capital of S Ltd. on 10th March 2018. H Ltd. on 25th September 2020
decided to issue bonus shares in the ratio of 1:1 to the existing shareholders. Accordingly
bonus shares were allotted to S Ltd. Examine under the provisions of the Companies Act,
2013 and decide
(i) the validity of holding of shares by S Ltd. in H Ltd.
(ii) allotment of bonus shares by H Ltd. to S Ltd.
Solution For solution, please visit YouTube classes of Amit Popli, FREE for ALL STUDENTS
268 Problems & Solutions Module 2
Quest-16 Viki Limited engaged in the business of consumer durables. It is managed by a team of
[Dec-20] professional managers. The Company has not made default in payment of statutory dues,
and repayment of debenture/Institutional loan with interest. The Company advertised a
circular in the newspaper dated 20th September 2020 inviting the deposits from the members
and public for the first time. The latest audited financial statement of the Company revealed
the following data, as on 31.3.2020:
Paid up share capital ` 70 Crores
Securities Premium ` 20 Crores
Free Reserves ` 20 Crores
Long-term borrowings ` 50 Crores
The Company in the advertisement invited public deposit for a period of 4 Months Plan A
and Plan B for 36 Months.
(i) Explain the term 'eligible company' and calculate the Maximum amount of Deposit that
can be accepted from Public (Non-Member) for Plan A and Plan B based on latest
audited Financial Statement under the provisions of the Companies Act, 2013.
(ii) Calculate the maximum amount of deposit Viki Limited can accept from the public
under Plan B in case it is a wholly owned Government Company under the provisions of
the said Act
Solution According to Rule 2(1)(e) of the Companies (Acceptance of Deposits) Rules, 2014 "eligible
company" means a public company as referred to in sub-section (1) of section 76 of the
Companies Act, 2013, having
 a net worth of not less than one hundred crore rupees or
 a turnover of not less than five hundred crore rupees and
Which has obtained the prior consent of the company in general meeting by means of a
special resolution and also filed the said resolution with the Registrar of Companies before
making any invitation to the Public for acceptance of deposits.
Provided that an eligible company, which is accepting deposits within the limits specified
under clause (c) of sub-section (1) of section 180, may accept deposits by means of an
ordinary resolution.
Net worth of Viki Limited as per section 2(57) of the Companies Act, 2013 is ` 110 crores
Hence, Viki Limited is an eligible company, since its Net worth is in excess of ` 100 crores.
Tenure for which Deposits can be Accepted: As per Rule 3(1)(a) of the Companies
(Acceptance of Deposits) Rules, 2014, a company is not permitted to accept or renew
deposits (whether secured or unsecured) which is repayable on demand or in less than six
months. Further, the maximum period of acceptance of deposit cannot exceed 36 months.
Exception to the rule of tenure of six months: For the purpose of meeting any of its short-
term requirements of funds, a company may accept or renew deposits for repayment earlier
than six months subject to the condition that such deposits shall not exceed 10% of the
aggregate of the paid-up share capital, free reserves and securities premium account of the
company.
As per Rule 3(1)(b) of the Companies (Acceptance of Deposits) Rules, 2014, such deposits
are repayable not earlier than 3 months from the date of such deposits or renewal thereof.
Maximum Amount of Deposits: maximum twenty-five per cent. of the aggregate of its
paid-up share capital, free reserves and securities premium account of the company.
For Plan A: Since the maximum period of deposits is 4 months, the maximum amount of
deposits shall not exceed ten per cent. of the aggregate of the paid-up share capital, free
reserves and securities premium account of the company.
Maximum amount of deposits: 10% of 110 crores (70 + 20 + 20) = 11 crores.
Chap. 2 Memorandum & Deposits 269
For Plan B: Maximum amount of deposits: 25% of 110 crores (70 + 20 + 20) -11 crores
(outstanding deposit under plan A) = 16.5 crores.
In terms of Rule 3(5) of the Companies (Acceptance of Deposits) Rules, 2014, in case Viki
Limited is a wholly owned Government Company, so it can accept deposit together with the
amount of other outstanding deposits as on the date of acceptance or renewal maximum up
to thirty-five per cent. of the aggregate of its paid-up share capital, free reserves and
securities premium account.
For Plan B: Maximum amount of deposits: 35% of 110 crores (70 + 20 + 20) = 38.5 crores.
 Chapter 3
ALLOTMENT OF SHARES

PRACTICAL QUESTION
Quest-1 After receiving 80% of the minimum subscription as stated in the prospectus, a company
allotted 100 equity shares in favor of ‘X’. The company deposited the said amount in the
bank but withdrew 50% of the amount, before finalization of the allotment, for the purchase
of certain assets. X refuses to accept the allotment of shares on the ground that the allotment
is violative of the provisions of the Companies Act, 2013. Comment.
Solution According to section 39 of Companies Act, 2013, Minimum subscription means receipt of
an application for at least 90% of the shares issued. Section further states that no allotment
shall be made unless the amount of minimum subscription has been subscribed and received
by company
Company shall keep the entire amount received on application with Scheduled bank and in
case company failed in obtaining Minimum Subscription within 30 days, or such period as
may be prescribed by SEBI, the amount received shall be returned within a period of fifteen
days from the closure of the issue.
In given case, the company has received 80% of the minimum subscription as stated in the
prospectus. The company deposited the said amount in the bank but withdrew 50% of the
amount
Conclusion:-Based upon the above provision, we may conclude that allotment is in
contravention of section 39 of the Companies Act, 2013 which prohibits a company from
making any allotment of securities until it has received the amount of minimum
subscription.
Therefore, in the present case X is within his rights refuses to accept the allotment of shares
which has been illegally made by the company.
Quest-2 A public limited company which went in for Public issue of shares had applied for listing of
shares in three recognised Stock Exchanges and out of it only two had given permission for
listing. Can the company proceed for allotment of shares?
Solution Under section 40(1) of the Companies Act, 2013 every company making a public offer
shall, before making such offer, make an application to one or more recognised stock
exchange or exchanges and obtain permission for the securities to be dealt with in such
stock exchange or exchanges.
Section 40(2) further states that where a prospectus states that an application under sub-
section (1) has been made, such prospectus shall also state the name or names of the stock
exchange in which the securities shall be dealt with.
From the above it is clear that not only has the company to apply for listing of the securities
at a recognized stock exchange but also obtain permission thereof before making the public
offer.
Hence, under the Companies Act, 2013 by making the offer of shares before getting the
approval from the stock exchanges, it has violated the provisions of section 40 and under
Chap. 3 Allotment of Shares 271
section 40(5) will be punishable with a fine which shall not be less than `5 Lakhs but may
extend to `50 Lakhs and every officer in default shall be punishable with imprisonment for a
term which may extend upto one year or with a fine of not less than `50,000/- but which
may extend upto `3 Lakhs, or with both.
Quest-3 The Board of Directors of M/s Reckless Investments Ltd. has allotted shares to the investors
of the company without issuing a prospectus with the Registrar of Companies, Mumbai.
Explain the remedies available to the investors in this regard.
Solution According to Section 23 of the Companies Act, 2013, a public company can issue securities
to the public only by issuing a prospectus. Section 26(1) lays down the matters required to
be disclosed and included in a prospectus and requires the registration of the prospectus with
the Registrar before its issue.
In the given case, the company has violated with the above provisions of the Act and hence
the allotment made is void. The company will have to refund the entire moneys received and
will also be punishable under section 26(9) of the Act.
Quest-4 When is an Allotment of Shares treated as an irregular allotment? State the effects of an
irregular allotment.
Solution The Companies Act, 2013 does not separately provide for the term “Irregular Allotment” of
securities. Hence, one will have to examine the requirements of a proper issue of securities
and consider the consequences of non fulfilment of those requirements.
In broad terms an allotment of shares is deemed to be irregular when it has been made by a
company in violation of Sections 23, 26, 39 and 40. Irregular allotment therefore arises in
the following instances:
1. Where a company does not issue a prospectus in a public issue as required by section
23; or
2. Where the prospectus issued by the company does not include any of the matters
required to be included therein under section 26(1), or the information given is
misleading, faulty and incorrect; or
3. Where the prospectus has not been filed with the Registrar for registration under section
26(4);
4. The minimum subscription as specified in the prospectus has not been received in terms
of section 39; or
5. The minimum amount receivable on application is less than 5% of the nominal value of
the securities offered or lower than the amount prescribed by SEBI in this behalf; or
6. In case of a public issue, approval for listing has not been obtained from one or more of
the recognized stock exchanges under section 40 of the Companies Act, 2013
Effects of irregular allotment: The consequences of an irregular allotment depend on the
nature of irregularity. However, the Companies Act, 2013 does not mention that in case of
an irregular allotment the contract is voidable at the option of the allottee.
Under section 26(9) of the Companies Act, 2013 if a prospectus is issued in contravention of
the provisions of section 26, the company shall be punishable with fine which shall not be
less than fifty thousand rupees but which may extend to three lakh rupees and every person
who is knowingly a party to the issue of such prospectus shall be punishable with
imprisonment for a term which may extend to three years or with fine which shall not be less
than fifty thousand rupees but which may extend to three lakh rupees, or with both.
Similarly in case the company has not received the minimum subscription amount within 30
days of the date of issue of the prospectus, it must refund the application money received by
it within the stipulated time. Any allotment made in violation of this will be void and the
defaulting company and officers will be liable to further punishment as provided in section
39(5).
272 Problems & Solutions Module 2
Under section 40(5) any default made in respect of getting the approval to listing of
securities in one or more recognized stock exchange in case of a public issue, will render the
company punishable with a fine which shall not be less than five lakh rupees but which may
extend to fifty lakh rupees and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to one year or with fine which
shall not be less than fifty thousand rupees but which may extend to three lakh rupees, or
with both.
Hence, under various provisions of the Companies Act, 2013 stringent punishment has been
provided for against irregular allotment of securities but the option of going ahead with such
allotment even if desired by the allottee is not specifically permitted.
Quest-5 Explain the provisions and main contents of “Return of Allotment” under the Companies
Act, 2013.
Solution As per Section 39 of the Companies Act, 2013 read with Rule 12 of the Companies
(Prospectus and Allotment of Securities) Rules, 2014
Whenever a company having a share capital makes any allotment of its securities, the
company shall, within thirty days thereafter, file with the Registrar a return of allotment in
Form PAS – 3, along with the fee as specified
Attachments and inclusions in Form PAS 3
(a) A list of allottees states their names, address, occupation, if any, and number of
securities allotted to each duly certified by the signatory of the Form PAS – 3 as being
complete and correct as per the records of the company.
(b) In the case of securities (not being bonus shares) allotted as fully or partly paid up for
consideration other than cash, there shall be attached to the Form PAS – 3 a copy of the
contract, duly stamped, pursuant to which the securities have been allotted together with
copy of any contract of sale if relating to a property or an asset, or a contract for services
or other consideration.
(c) In the case of issue of bonus shares, a copy of the resolution passed in the general
meeting authorizing the issue of such shares shall be attached to the Form PAS –3.
Quest-6 Describe the different rules in relation to allotment of securities
Solution Rules in relation to allotment of Securities can be discussed as follow:—
1. Minimum subscriptions and application money [Section 39]
Minimum Subscription-It means receipt of an application for at least 90% of the shares
issued
No allotment shall be made unless the amount of minimum subscription has been
subscribed and received by company
Application money-It the amount which is payable on each share along with the
application for purchase or shares. This amount must not be less than 5% ofthe nominal
value ofshares.
2. Consequences in case of failure to received Minimum Subscription-Company shall
keep the entire amount received on application with Scheduled bank and in case
company failed in obtaining Minimum Subscription within 30 days, or such period as
may be prescribed by SEBI, the amount received shall be returned within such time and
manner as may be prescribed.
As per Provisions as per According to the Companies (Prospectus and Allotment of
Securities) Rules, 2014, Where the minimum subscription amount has not been
subscribed, then the application money shall be repaid within a period of fifteen days
from the closure of the issue.
Chap. 3 Allotment of Shares 273
3. Listing of public issue with recognized stock exchange [Section 40]-Every public
company, who intends to offer its shares or debentures to the public for subscription by
the issue of a prospectus, must make an application to at least one recognized stock
exchange for permission for its shares or debentures to be dealt with the stock
exchange.Such an application shall be made prior to issue of shares. Fact of Such
Application must be stated in Prospectus
 Chapter 4
PROSPECTUS

PRACTICAL QUESTION
Quest-1 A Ltd a company want to issue shares to public, however directors of company have opted for
an alternate to avoid issuance of prospectus as they want persons of particular locality only to
become member of their company and they decided to launch an advertisement in their district
through local TV channels and local newspapers so as to attract people residing within district
to come and invest. One of the investor objected to this action by company and contended that
such step on part of company shall amount to prospectus. Decide
Solution Section 2(70) defines the Prospectus as
“Any document described or issued as a prospectus
and includes a red herring prospectus (section 32), or
shelf prospectus (section 31), or
any notice, circular, advertisement or other document inviting offers from the public for the
subscription, or purchase of any securities of a body corporate”
In given case, a company want to issue shares to persons of particular locality and they
launched an advertisement through TV channels and local newspapers so as to attract Investors
Conclusion: Based upon the above provisions, we may conclude that action taken by company
is in contravention to this act and company can not proceed to issue such shares without issuing
prospectus
Quest-2 Which are the different sources through which a public limited company can issue its share
capital
Solution Public company can issue its share capital through following modes:—
1. to public through prospectus; or
2. through private placement; or
3. through a rights issue or a bonus issue, and
4. in case of a listed company or a company which intends to get its securities listed, with the
provisions of the Securities and Exchange Board of India Act, 1992 and the rules and
regulations made there under.
Quest-3 Decide whether the offer will amount to private placement or not.
A Limited which want to raise its share capital issued a letter to certain group of persons
consisting of
1. 10 Directors who are also an employees of company along with 100 employees, where
shares are offered as stock option
2. group of 200 foreign institutional investors
3. group of 50 ex-employees
4. group of 100 persons
Chap. 4 Prospectus 275
Solution The term "private placement" means any offer of securities or invitation to subscribe securities
to a select group of persons by a company (other than by way of public offer) through issue of a
private placement offer letter
The offer of securities or invitation to subscribe securities, only to a select group of persons
who have been identified by the Board subject to maximum to 200 persons in a financial year
It does not include- qualified institutional buyers and employees of the company being offered
securities under a scheme of employees stock option as per provisions of section 62(1)(b)
In given case, considering the provisions of Section 42 in mind, we may conclude that
company has made an order to following number of persons
1. Directors who are also an employees of company along with employees, where shares are
offered as stock option = Nil, as they were allotted shares under stock option plan, thus they
have been excluded
2. Group of 200 foreign institutional investors = Nil, as they forms part of Qualified
Institutional Investors, thus have been excluded
3. group of 50 ex-employees = To be considered
4. group of 100 persons = To be considered
Conclusion: - Thus based upon the above provision, we may conclude that company has issued
an offer to 150 persons, and it can be considered as a private placement by company
Quest-4 In Question no 3 above, what would be your reply if company has used services of different
agents for attracting foreign investors and other persons
Solution According to Sec 42, no company issuing securities under this section shall release any public
advertisements or utilize any media, marketing or distribution channels or agents to inform the
public at large about such an issue.
Thus, in that scenario, an invitation by company will amount to public offer and thus all
requirements as are applicable to prospectus shall become applicable to it
Quest-5 A Limited i.e. company into manufacturing of organic chemical, recently have issued a
prospectus to public, wherein they want this public money for acquiring various machinery to
be used in their chemical manufacturing unit. However recently company has received a
lucrative order from USA, wherein customer was willing to enter into an agreement for 10
years, if company can provide them regular supply of dye chemical i.e. an object, which was
outside their main object, since Directors were having enough experience in Dye chemical as
well, thus they want to grab this opportunity with both hands.
Now regarding the requirement of funds, they decide to utilize the amount acquired through
public, wherein they are still left with 50% of fund as unspent.
As an expert they approached you for appropriate suggestion and procedure to be adopted to
accept said order
Or
Lotus valley Ltd. issued a prospectus with the object of setting up of a chain of hotels. However,
later it decided to set-up a Pharmaceutical Manufacturing unit. Keeping in view of the
provisions of the Companies Act, 2013, state whether Lotus valley Ltd. can do so and if it can
be done, also state the procedure to be followed for variation in the objects in the prospectus.
Solution Since company after raising money from public want to change their object from Organics
Chemical to Dye Chemical, thus company can follow the procedure as specified in Section 27
of Companies Act, 2013
According to the provisions of Section 27 of companies Act 2013:
Where the company has raised money from public through prospectus and has any unutilized
amount out of the money so raised, it shall not vary the terms of contracts referred to in the
prospectus or objects for which the prospectus was issued except by passing a special resolution
through postal ballot.
276 Problems & Solutions Module 2
The advertisement of the notice of resolution passed for varying the terms of any contract or
altering the objects of the prospectus shall be published simultaneously with dispatch of Postal
Ballot Notices to Shareholders. In addition, the company shall also place the notice on the
website of the company, if any.
Quest-6 ……………………… is a document, which enable the company to issue money from public for 1
year, even though for any subsequent offer within the validity of this document, company need
to issue…………………………..….., containing all such changes which have taken place since
the issue of such document
Solution 1. Shelf Prospectus
2. Information Memorandum
Quest-7 Popli Industries Limited wants to raise money through public, however promoters are quite
disconcerting after going through the requirements which are applicable to issue of prospectus.
Meanwhile, they want to exercise an option to sell these shares to a firm, which will acquire
them for partial consideration and also agrees to pay balance once the firm will succeed in
selling it to public through various options
Promoters seeks your reply to option they received. Plz guide them
Solution As per the provisions of Section 25 of Companies Act, 2013
 Where the company allots or agrees to allot any securities to issuing house
 With a view that such securities would be offered to public for sale
 Any such document by which this offer for sale to public is made
 shall be deemed to be a prospectus issued by a company and
 all provisions applicable to prospectus shall be applicable to it with specified modification.
In given case, since company want to issue money through public, without issuing prospectus
and for this they opted to sell their shares to firm, which in turn will offer these shares to public
Conclusion: Based upon the provisions of Section 25, we may conclude that selling of shares
to firm will amount to allotment to issuing house and thus any document issued by issuing
house to offer these shares to public shall be Deemed as prospectus and all applicable
provisions shall apply accordingly.
Quest-8 Raman being a Chartered Accountant was engaged in providing services to clients to arrange
loans and other money to satisfy their working capital requirements through various banks.
Y Limited, which was in need of money could not succeed in getting it because of poor
financials. They approached for assistance from Raman, who offered to charge commission of
5% and provided them surety to arrange funds through some nationalized Banks, through
falsification of balance sheet and Profit and loss of company.
Y Limited decide to go ahead with the proposal of Raman and thus they succeed in obtaining
loan from Banks worth of `10 Cr.
Later on Credit Manager of Bank, while going though website of Ministry of Corporate affairs
shocked, when he happen to see the balance sheet submitted by Y limited to Registrar of
companies as it was completely different from one being offered to bank for obtaining credit
facilities.
After getting into investigation, the whole fraud came out and banker want to punish all those
involved in said transactions, Guide the course of action available to banker
Solution According to the provisions of Section 36 of Companies Act 2013
where any person who, induces or attempts to induce another person to enter into some
agreement by making any false, deceptive or misleading statement, promise or forecast or by
any dishonest concealment of material facts, then he shall be liable for action u/s 447
Chap. 4 Prospectus 277
Attempt to induce must be to enters into any of following agreement
1. Any agreement for, the acquisition, disposal, subscribing for, or underwriting Shares or
debentures
2. Any agreement for the purpose of securing any profit to any of the parties from the yield of
shares or debentures, or from fluctuations in the value of shares or debentures
3. Any agreement for obtaining credit facilities from any bank or financial institution.
Conclusion: Based upon the facts of given case, we may conclude that Raman and company
i.e. Y Limited both have deceived Banks for getting funds and thus Bank shall be advised to
take action against them u/s 447 i.e. Fraud
Quest-9 XYZ Ltd issued a prospectus inviting the public for subscription of its equity share stating in it
that company possesses good financial health and paying dividend to its members regularly @
20% on equity share capital over past 5 years. The fact was, company was running in loss since
past 3 years and it was paying dividend to its shareholders out of accumulated profits. Mr. Amit
read the prospectus and bought 500 shares from company. Discover the mis-statement in
prospectus, he wants to rescind the contract and claim the damages from the company.
Referring to the provisions of Company Act 2013, decide whether Mr. Amit will succeed.
Solution Meaning of misleading prospectus
(a) It contain any statement which is untrue, and
(b) It omits any matter which is calculated to mislead
Liability incase of Mis-statement in prospectus
1. Criminal liability for misstatements in prospectus (Section 34): Where a prospectus,
issued, circulated or distributed under this Chapter, includes any statement which is untrue
or misleading in form or where any inclusion or omission of any matter is likely to mislead,
every person who authorizes the issue of such prospectus shall be liable under section 447:
2. Civil liability for misstatements in prospectus (Section 35)
Company and every person who—
(a) is a director of the company at the time of the issue of the prospectus;
(b) has authorised himself to be named and is named in the prospectus as a director of the
company, or has agreed to become such director,
(c) is a promoter of the company;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred in section 26,
shall, be liable to pay compensation to every person who has sustained such loss or damage.
Based upon the facts of given case, we can conclude that prospectus so issued by the company
is misleading to the extent that it failed to provide the material information that, company is
paying dividend out of its accumulated profits. Thus concerned official of company shall be
liable for criminal and civil liability.
Conclusion: Thus we can conclude that Mr. Amit will succeed in a suit against company and
contract shall be voidable at his option. He is entitled to rescind the contract within a reasonable
time.
Quest-10 With a view to issue shares to the general public a prospectus containing some false
information was issued by a company: Mr. X received a copy of the prospectus from the
company but did not apply for allotment of any shares. The allotment of shares to the general
public was completed by the company within the stipulated period. A few months later, Mr. X
bought 2000 shares through the stock exchange at a higher price which later on fell sharply, X
sold these shares at a heavy loss. Mr. X claims damages from the company for the loss suffered
on the ground the prospectus issued by the company contained a false statement. Referring to
the provisions of the Companies Act, 2013 examine whether X's claim for damages is justified.
278 Problems & Solutions Module 2
Solution Meaning of misleading prospectus
(a) It contain any statement which is untrue, and
(b) It omits any matter which is calculated to mislead
Liability incase of Mis-statement in prospectus
1. Criminal liability for misstatements in prospectus (Section 34): Where a prospectus,
issued, circulated or distributed under this Chapter, includes any statement which is untrue
or misleading in form or where any inclusion or omission of any matter is likely to mislead,
every person who authorizes the issue of such prospectus shall be liable under section 447:
2. Civil liability for misstatements in prospectus (Section 35)
Company and every person who—
(a) is a director of the company at the time of the issue of the prospectus;
(b) has authorised himself to be named and is named in the prospectus as a director of the
company, or has agreed to become such director,
(c) is a promoter of the company;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred in section 26,
shall, be liable to pay compensation to every person who has sustained such loss or damage.
In given case, Mr. X bought 2000 shares through the stock exchange at a higher price which
later on fell sharply, X sold these shares at a heavy loss
Conclusion: Based upon the above provision, we may conclude that X cannot bring any action
again the company as shares were not purchased from company, rather they were acquired from
open market.
In the case of Peek v Gurney, it was held that remedy of damages shall not be available, where
person has not acquired shares on basis of prospectus.
Quest-11 Peek Ltd. Co. issued and published its prospectus to invite the investors to purchase its shares.
The said prospectus contained false statement. Mr. X purchased some partly paid shares of the
company in good faith on the Stock Exchange. Subsequently, the company was wound up and
the name of Mr. X was in the list of contributors. Decide:
(i) Whether Mr. X is liable to pay the unpaid amount?
(ii) Can Mr. X sue the directors of the company to recover damages?
Solution 2(70) defines the Prospectus as “Any document described or issued as a prospectus and
includes a red herring prospectus (section 32), or shelf prospectus (section 31), or
any notice, circular, advertisement or other document inviting offers from the public for the
subscription, or purchase of any securities of a body corporate”
Meaning of misleading prospectus
(a) It contain any statement which is untrue, and
(b) It omits any matter which is calculated to mislead
Liability incase of Mis-statement in prospectus
1. Criminal liability for misstatements in prospectus (Section 34): Where a prospectus,
issued, circulated or distributed under this Chapter, includes any statement which is untrue
or misleading in form or where any inclusion or omission of any matter is likely to mislead,
every person who authorizes the issue of such prospectus shall be liable under section 447:
2. Civil liability for misstatements in prospectus (Section 35): Company and every person
who—
(a) is a director of the company at the time of the issue of the prospectus;
(b) has authorised himself to be named and is named in the prospectus as a director of the
company, or has agreed to become such director,
Chap. 4 Prospectus 279
(c) is a promoter of the company;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred in section 26,
shall, be liable to pay compensation to every person who has sustained such loss or damage.
In the case of Peek v Gurney, it was held that remedy of damages shall not be available, where
person has not acquired shares on basis of prospectus.
Based upon the above provision, we may conclude as follow:-
(1) Mr. X is liable to pay for balance amount on winding up of company as contributory
(2) X cannot bring any action again the company as shares were not purchased from company,
rather they were acquired from open market.
Quest-12 A company issued a prospectus. All the statements contained therein were literally true. It also
stated that the company had paid dividends for a number of years, but did not disclose the fact
that the dividends were not paid out of trading profits, but out of capital profits. An allottee of
shares wants to avoid the contract on the ground that the prospectus was false in material
particulars. Decide
Solution Meaning of misleading prospectus
(a) It contain any statement which is untrue, and
(b) It omits any matter which is calculated to mislead
Liability incase of Mis-statement in prospectus
1. Criminal liability for misstatements in prospectus (Section 34): Where a prospectus,
issued, circulated or distributed under this Chapter, includes any statement which is untrue
or misleading in form or where any inclusion or omission of any matter is likely to mislead,
every person who authorizes the issue of such prospectus shall be liable under section 447:
2. Civil liability for misstatements in prospectus (Section 35)
Company and every person who—
(a) is a director of the company at the time of the issue of the prospectus;
(b) has authorised himself to be named and is named in the prospectus as a director of the
company, or has agreed to become such director,
(c) is a promoter of the company;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred in section 26,
shall, be liable to pay compensation to every person who has sustained such loss or damage.
In given case, non disclosure of fact that the dividends were not paid out of trading profits, but
out of capital profits is a concealment of material fact, since company is required to distribute
dividend out of its revenue profit only.
Section 19 of the Indian contract Act states that, where consent to a party to a contract is
obtained by coercion, misrepresentation or fraud, aggrieved party become entitled to avoid the
contract since the same become voidable at option of aggrieved party.
Thus in given case, an allottee of shares may avoid the contract on the ground that the
prospectus was false in material particulars.
Quest-13 An allottee of shares in a Company brought action against a Director in respect of false
statements in prospectus. The director contended that the statements were prepared by the
promoters and he has relied on them. Is the Director liable under the circumstances? Decide
referring to the provisions of the Companies Act, 2013.
280 Problems & Solutions Module 2
Solution Meaning of misleading prospectus
(a) It contain any statement which is untrue, and
(b) It omits any matter which is calculated to mislead
Liability incase of Mis-statement in prospectus
1. Criminal liability for misstatements in prospectus (Section 34): Where a prospectus,
issued, circulated or distributed under this Chapter, includes any statement which is untrue
or misleading in form or where any inclusion or omission of any matter is likely to mislead,
every person who authorizes the issue of such prospectus shall be liable under section 447:
2. Civil liability for misstatements in prospectus (Section 35)
Company and every person who—
(a) is a director of the company at the time of the issue of the prospectus;
(b) has authorised himself to be named and is named in the prospectus as a director of the
company, or has agreed to become such director,
(c) is a promoter of the company;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred in section 26,
shall, be liable to pay compensation to every person who has sustained such loss or damage.
However Director may escape from his liability if he can prove that
1. He had withdrawn his consent to become director before the issue of prospectus and that it
was issued without his authority; or
2. He had reasonable ground to believe that the statement was true.
3. The prospectus was issued without his knowledge or consent and that on becoming aware
of its issue, he immediately gave reasonable public notice to that effect
Quest-14 Registrar of companies shall refuse to register a prospectus:
(a) If it is not dated
(b) Contains statement of an expert who has not signed it
(c) Contains information which is six-month-old
(d) In all the above cases
Solution (d) All the above cases
Quest-15 A prospectus issued in the form of advertisement must state:
(a) The objects for which the company has been formed
(b) The liability of members
(c) The amount of share capital of company
(d) All of the above
Solution (d) i.e. all the above
Quest-16 Private limited company can not issue their shares to public. State whether this statement is
correct and also state how these companies can raise their money through private placement
Solution This statement is true that a private limited company can not issue capital through public
offering
As per the definition of private limited company u/s 2(68), these companies are prohibited by
their article from inviting subscription for their securities from public, only option available to
private limited company is to raise it through private placement.
Chap. 4 Prospectus 281
Provisions in relation to private placement
Meaning: The term "private placement" means any offer of securities or invitation to subscribe
securities to a select group of persons by a company (other than by way of public offer) through
issue of a private placement offer letter
Conditions for private placement
1. The offer of securities or invitation to subscribe securities, only to a select group of persons
who have been identified by the Board subject to maximum to 200 persons in a financial year
It does not include. qualified institutional buyers and employees of the company being offered
securities under a scheme of employees stock option as per provisions of section 62(1)(b)
2. No fresh offer or invitation under this section shall be made unless the allotments with
respect to any offer or invitation made earlier have been completed or that offer or invitation
has been withdrawn or abandoned by the company:
Provided that, subject to the maximum number of identified persons, a company may, at any
time, make more than one issue of securities to such class of identified persons as may be
prescribed.
3. No company issuing securities under this section shall release any public advertisements or
utilize any media, marketing or distribution channels or agents to inform the public at large
about such an issue.
4. Where a company, listed/unlisted, makes an offer to allot or invites subscription to more than
the prescribed number of persons, the same shall be deemed to be an offer to the public.
5. All monies payable towards subscription of securities under this section shall be paid through
cheque or demand draft or other banking channels but not by cash.
Provided that a company shall not utilize monies raised through private placement unless
allotment is made, and the return of allotment is filed with the Registrar
6. A company making an offer or invitation under this section shall allot its securities within 60
days from the date of receipt of the application money for such securities
7. Where the company is not able to allot the securities within stated period, it shall repay the
application money to the subscribers within 15 days from the date of completion of sixty days
and if the company fails to repay the application money within the aforesaid period, it shall be
liable to repay that money with interest @ of 12 % per annum from the expiry of the sixtieth
day:
Provided that monies received on application under this section shall be kept in a separate
bank account in a scheduled bank and shall not be utilised for any purpose other than—
(a) for adjustment against allotment of securities; or
(b) for the repayment of monies where the company is unable to allot securities.
8. The proposed offer of securities or invitation to subscribe securities has been previously
approved by the shareholders of the company, by a Special Resolution
Provided that in the explanatory statement annexed to the notice for the general meeting the
basis or justification for the price (including premium, if any) at which the offer or invitation is
being made shall be disclosed.
9. The value of such offer or invitation per person shall be with an investment size of not less
than twenty thousand rupees of face value of the securities;
Quest-18 Prakhar Ltd. intends to raise share capital by issuing Equity Shares in different stages over a
certain period of time. However, the company does not wish to issue prospectus each and every
time of issue of shares. Considering the provisions of the Companies Act, 2013, discuss what
formalities Prakhar Ltd. Should follow to avoid repeated issuance of prospectus?
282 Problems & Solutions Module 2
Solution Given problem is based on the provisions of section 31 of Companies Act, 2013 i.e. Shelf
Prospectus
1. Meaning: Shelf prospectus means a prospectus in respect of which the securities or class of
securities included therein are issued for subscription in one or more issues over a certain
period without the issue of a further prospectus
2. By whom Shelf Prospectus is required to be filled: Any class or classes of companies, as
the Securities and Exchange Board may provide by regulations in this behalf, may file a
shelf prospectus with the Registrar.
3. Validity: For a period not exceeding one year which shall commence from the date of
opening of the first offer of securities under that prospectus
4. Document required along with Shelf Prospectus: For any subsequent offering within the
validity period only an 'information memorandum' for updating the information under
the specified heads is required to be filed.
5. Benefit of Filing Shelf Prospectus: A company filing a shelf prospectus with the Registrar
shall not be required to issue prospectus afresh at every stage of offer of securities by it
within a period of validity of such shelf prospectus.
Thus at the time of making any subsequent offer, company shall-
 File an updated Information memorandum
 Issue to the public, updated information memorandum along with shelf prospectus
6. Information Memorandum shall contain material facts which pertains to
 Creation of New Charge; and
 Changes in Financial position of company which has occurred between the first offer of
security, previous offer of security and the succeeding offer of security.
7. Shelf prospectus with information memorandum deemed to be prospectus: Where an
information memorandum is filed, every time an offer of securities is made with all the
material facts with the registrar, such memorandum together with the shelf prospectus shall
be deemed to be a prospectus.
Quest-20 A Ltd. issued 1,00,000 equity shares of `100 each at par to the public by issuing a prospectus.
[Jan 21] The prospectus discloses the minimum subscription amount of `15,00,000 required to be
received on application of shares and share application money shall be payable at `20 per share.
The prospectus further reveals that A Ltd. has applied for listing of shares in 3 recognized stock
exchanges of which 1 application has been rejected. The issue was fully subscribed and A Ltd.
received an amount of `20,00,000 on share application. A Ltd., then proceeded for allotment of
shares.
Examine the three disclosures in the above case study which are the deciding factors in an
allotment of shares and the consequences for violation, if any under the provisions of the
Companies Act, 2013.
Solution According to Section 39(1), no allotment of any securities of a company offered to the
public for subscription shall be made unless-
 the amount stated in the prospectus as the minimum amount has been subscribed, and
 the sums payable on application for the amount so stated have been paid to, and
received by the company by cheque or other instrument.
The amount payable on application on every security shall not be less than five per cent of
the nominal amount of the security or such other percentage or amount, as may be
specified by the Securities and Exchange Board by making regulations in this behalf.
In the question, A Ltd. issued shares to public by issuing of prospectus, disclosing minimum
subscription, sum payable on application for the amount; and the amount received on share
application is more than 5% of the nominal amount of the security.
Chap. 4 Prospectus 283
Further, it revealed that A Ltd. has applied for listing of shares in 3 recognized stock
exchanges of which one application was rejected.
In the given instance, there is compliance to section 23, as nothing is talked about matters
required to be included in the prospectus under section 26(1) and about filing with the
registrar; assuming that the said requirements have been complied with, requirement of
section 39 as regards obtaining of minimum subscription and the minimum amount
receivable on application (not less than 5% of the nominal value of the securities offered)
are fulfilled.
The provisions of section 40 of the Companies Act, 2013 states that every company
making public offer shall, before making such offer, make an application to one or more
recognized stock exchange or exchanges and obtain permission for the securities to be
dealt with in such stock exchange or exchanges.
The above provision is very clear that not only the company has to apply for listing of the
securities at a recognized stock exchange, but also obtain permission thereof from all the
stock exchanges where it has applied, before making the public offer. Since one of the
three recognized stock exchanges, where the company has applied for enlisting, has
rejected the application and the company has proceeded with making the offer of shares, it
has violated the provisions of section 40. Therefore, this shall be deemed to be irregular
allotment of shares.
Quest-21 CDS Ltd. is planning to make a private placement of securities. The Managing Director
[Jan 21] arranged to obtain a brief note from some source explaining the salient features of the issue of
private placement that the Board of Director shall keep in mind while approving the proposal on
this subject. The brief note includes, inter alia, the information/ suggestions on the following
points:
(i) A privates placement shall be made only to a select group of identified persons not
exceeding 200 in a financial year.
The aforesaid ceiling of identified persons shall not apply to the offer made to the qualified
institutional buyers but is applicable to the employees of the Company who will be covered
under the Company’s Employees Stock Option Scheme.
(ii) The offer on private placement basis shall be made only once in a financial year for any
number of identified persons not exceeding 200.
The Company solicits your remarks on the points refereed above as to whether they are valid or
not? Reasoned remark should be given in accordance with provisions of the Companies Act,
2013
Solution As per the provisions of section 42 of the Companies Act, 2013, read with Rule 14 (2) of the
Companies (Prospectus and Allotment of Securities) Rules, 2014,
Private placement shall be made only to a select group of persons who have been identified by
the Board (herein referred to as "identified persons"), whose number shall not exceed 200 or
such higher number as may be prescribed, in a financial year subject to such conditions as may
be prescribed.
It is also provided that any offer or invitation made to qualified institutional buyers, or to
employees of the company under a scheme of employees’ stock option as per provisions of
section 62(1)(b) shall not be considered while calculating the limit of two hundred persons.
As per Explanation given in this Rule, it is clarified that the restrictions aforesaid would be
reckoned individually for each kind of security that is equity share, preference share or
debenture.
284 Problems & Solutions Module 2
Referring to the above mentioned provisions, we can conclude as follows:—
(i) The company is correct in proposing that private placement shall be made only to a select
group of identified persons not exceeding 200 in a financial year. This part of the proposal
is correct.
The company is also correct in proposing that the aforesaid ceiling of identified persons
shall not apply to offer made to the qualified institutional buyers, but the company is not
correct in saying that the said ceiling is applicable to employees covered under the
Company’s Employee Stock Option Scheme. Hence, the second part of the proposal is only
partially correct.
(ii) The Companies (Prospectus and Allotment of Securities) Rules, 2014 provides that an offer
or invitation to subscribe securities under private placement shall not be made to persons
more than 200 in aggregate in a financial year.
Keeping the ceiling of 200 persons in aggregate during a financial year, offer of private
placement can be made more than once in a financial year. Therefore, the second statement is
not fully correct.
 Chapter 5
SHARES

PRACTICAL QUESTION
Quest-1 Company is in default of redemption of Preference share capital can issue further
preference share capital?
Solution As per Rule 9 of Companies (Share Capital and Debentures) Rules, 2014
A Shares which have some preferential rights over the other types of shares i.e., which enjoy
some priority over the equity shares.
A company having a share capital may, if so authorised by its articles, issue preference
shares subject to the following conditions, namely:—
(a) the issue of such shares has been authorized by passing a special resolution in the
general meeting of the company
(b) the company, at the time of such issue of preference shares, has no subsisting
default in the redemption of preference shares issued either before or after the
commencement of this Act or in payment of dividend due on any preference shares
Conclusion: Thus we may conclude that company can not issue further preference share if it
is in default of redemption of its existing preference share capital
Quest-2 Decide whether A Ltd with following details can issue equity shares with Differential Voting
rights?
Particulars 14-15 15-16 16-17
Annual Return Submitted Not Submitted Not Submitted
Financial Statement Not Submitted Submitted Submitted

Solution As per Rule 4 of Companies (Share Capital and Debentures) Rules, 2014 i.e. Equity
Shares with Differential Rights
Company limited by shares shall issue equity shares with differential rights as to dividend,
voting or otherwise, if it has not defaulted in filing financial statements and annual returns
for three financial years immediately preceding the financial year in which it is decided to
issue such shares;
Provided that a company may issue equity shares with differential rights upon expiry of five
years from the end of the financial Year in which such default was made good.
In given case, company has committed default in submission of Financial statement in 14-15
and submission of annual return in 15-16.
This rule provides that in eligibility will occur only if default is committed in submission of
both Financial Statement and annual Return. Thus, default of both statement for 3 years,
shall be in existence before company become disqualified.
286 Problems & Solutions Module 2
Conclusion: Based upon the above provisions, we may conclude that, company is justified
in its decision to issue equity shares with differential voting rights
Quest-3 The subscribed capital of a company is:
(a) never more than the issued capital
(b) never less than the issued capital
(c) always equal to the issued capital
(d) prescribed percentage of the issued capital
Solution Never more than the issued capital
Quest-4 A company may convert all or any of its fully paid up shares into stock:
(a) by passing a special resolution
(b) by passing a ordinary resolution
(c) with the approval of the Tribunal
(d) All of the above
Solution By passing an ordinary resolution
Quest-5 Part of the capital for which application have been received from the public and shares
allotted to them:
(a) Nominal capital
(b) Issued capital
(c) Subscribed capital
(d) Called up capital
Solution Subscribed capital
Quest-6 Shares which are issued by a company to its directors or employees at a discount or for a
consideration other than cash:
(a) Equity Shares
(b) Preference Shares
(c) Sweat Equity Shares
(d) Redeemable preference shares
Solution Sweat Equity Shares
Quest-7 Define the purpose for which amount of security premium can be used
Solution Meaning of Premium: - Issue of shares at a price higher than the nominal value is termed
as issue of Security at Premium.
Purpose for which amount of security premium can be used: -
1. Issuing of fully paid bonus shares to the members of the company.
2. Writing off the expenses, commission paid, or discount allowed on the issue of shares or
debentures of the company.
3. Providing for the premium payable on the redemption of preference shares or debentures
of the company.
4. Writing off the preliminary expenses of the company.
5. For the purchase of its own shares or other securities under section 68
Quest-8 Mr. Ram was working in research division of GPL Pharma, where he has invented a new
drug, company is expecting a huge profit out of its sales in upcoming year. Company in turn
want to provide adequate reward to Mr. ram in lieu of his hard work. Through issue of its
shares at even less than its nominal value. Advice the company about the course of action to
be taken.
Chap. 5 Shares 287
Solution In given case, company may opt to issue sweat equity shares to Ram, which are defined u/s
54 of Companies Act, 2013
Meaning of Sweat Equity: It means the equity shares issued by the company to its employees
or directors at a discount or for consideration other than cash.
These shares are issued to the employees or directors for providing know-how to the
company or for making available to the company the rights in the nature of intellectual
property rights or value additions, by whatever name called.
Meaning of term Employee: Employee shall means
(a) a permanent employee of the company who has been working in India or outside India,
for at least last one year; or
(b) a director of the company, whether a whole-time director or not; or
(c) an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in
India or outside India, or of a holding company of the company
Procedure for issue of sweat equity shares:
1. Sweat equity shares to be issued by the company should pertain to the class of shares
which the company has already issued.
2. Authorized by a special resolution in GM is required
3. The resolution should specify the following particulars:
(a) Number of shares.
(b) Current market price of shares.
(c) Consideration, if any, for which such shares are to be issued.
(d) Class of directors or employees to whom such shares are to be issued.
4. Regulation framed by SEBI shall be duly complied with in case shares of a company are
listed on a recognized stock exchange
Thus, we may conclude that Company can issue Sweat Equity to Ram by Complying the
provisions of section 54 as specified above
Quest-9 As on 31st December 2017, following information and figures are noticed from the Annual
Accounts for the year ended 31st March 2016 of P Ltd:
(i) Authorised Share Capital `20.00 Crores comprising of 2 Crore Equity Shares of `10
each.
(ii) Paid up Share Capital `18.00 Crores comprising of 1.80 Cr Equity Shares of `10 each
fully paid up
(iii) Outstanding Liabilities in respect of Debentures raised from Central Government =
`10 Cr i.e. 10 Lakh Debenture `100 per debentures
(iv) Now due to default in repayment of Debentures by company Central government
issued an order whereby it has been directed to company to issue 10 shares of `10
each in lieu of each Debentures
Now, as an expert, management of company has approached you for your assistance to
guide them the procedure for said conversion
Solution As per Section 62(4) of Companies Act 2013
 Where any debentures have been issued to, or loans have been obtained from,
 the Government by a company,
 the Central Government may,
 if in its opinion it is necessary in the public interest so to do, by order,
 direct that such debentures or loans or any part thereof shall be converted into shares in
the company on such terms and conditions as appear to that Government to be
reasonable in the circumstances of the case,
288 Problems & Solutions Module 2
 Such direction may be issued even if the terms of issue of such debentures or the terms
of such loans do not include a term providing for an option for such conversion.
Section further states that Central Government while issuing any such order shall
consider:
 Financial position of the company
 Rate of interest payable on the debentures or the loans
 Current market price of the shares in the company
Consequences of such order by Central Government
 Where the Government has, by an order directed that any debenture or loan or any part
thereof shall be converted into shares in a company and where no appeal has been
preferred to the Tribunal or where such appeal has been dismissed,
 the memorandum of such company shall, where such order has the effect of increasing
the authorised share capital of the company, stand altered and
 the authorised share capital of such company shall stand increased by an amount equal
to the amount of the value of shares which such debentures or loans or part thereof has
been converted into.
Quest-10 Ramesh, who is a resident of New Delhi, sent a transfer deed, for registration of transfer of
shares to the company at the address of its Registered Office in Mumbai. He did not receive
the shares certificates even after the expiry of four months from the date of dispatch of
transfer deed. He lodged a criminal complaint in the Court at New Delhi. Decide, under the
provisions of the Companies Act, 2013, whether the Court at New Delhi is competent to take
action in the said matter?
Solution According to Section 56 of the Companies Act, 2013 every company shall deliver the
certificates of all shares transferred within a period of one month from the date of receipt by
the company of the instrument of transfer.
Where any default is made in complying with the requirement of section 56, the company
shall be punishable with fine which shall not be less than twenty-five thousand rupees but
which may extend to five lakh rupees and every officer of the company who is in default
shall be punishable with fine which shall not be less than ten thousand rupees, but which
may extend to one lakh rupees
The jurisdiction binding on the company is that of the state in which the registered office of
the company is situated. Hence, in the given case the Delhi court is not competent to take
action in the matter.
Quest-11 Mr. ‘Y’, the transferee, acquired 250 equity shares of BRS Limited from Mr. ‘X’, the
transferor. But the signature of Mr. ‘X’, the transferor, on the transfer deed was forged. Mr.
‘Y’ after getting the shares registered by the company in his name, sold 150 equity shares to
Mr. ‘Z’ on the basis of the share certificate issued by BRS Limited. Mr. ‘Y’ and ‘Z’ were not
aware of the forgery. State the rights of Mr. ‘X’, ‘Y’ and ‘Z’ against the company with
reference to the aforesaid shares.
Solution According to Section 46(1) of the Companies Act, 2013,
A share certificate once issued under the common seal, if any, of the company or signed by
two directors or by a director and the Company Secretary, wherever the company has
appointed a Company Secretary”, specifying the shares held by any person, shall be prima
facie evidence of the title of the person to such shares. Therefore, in the normal course the
person named in the share certificate is the legal owner of the shares therein and the
company cannot deny his title to the shares.
Chap. 5 Shares 289
However, a forged transfer is a nullity
It does not give the transferee (Y) any title to the shares. Similarly, any transfer made by Y
(to Z) will also not give a good title to the shares as the title of the buyer is only as good as
that of the seller.
Therefore, if the company acts on a forged transfer and removes the name of the real owner
(X) from the Register of Members, then the company is bound to restore the name of X as
the holder of the shares and to pay him any dividends which he ought to have received.
In the above case, ‘therefore, X has the right against the company to get the shares recorded
in his name.
However, since both Y and Z can recover damages from company as they acted on faith of
share certificate issued by company
Quest-12 A Ltd i.e. a Public company refuses to register transfer of shares made by Mr. X to Mr. Y.
The company does not even send a notice of refusal to Mr. X. or Mr. Y respectively within
the prescribed period. Has the aggrieved party any right(s) against the company for such
refusal? Advise as per the provisions of the Companies Act, 2013
Solution As per the provisions of Sec 58 of Companies Act, 2013
Where a public company without sufficient cause refuses to register the transfer of securities
within a period of thirty days from the date on which the instrument of transfer is delivered
to the company, the transferee may, within a period of sixty days of such refusal or where no
intimation has been received from the company, within ninety days of the delivery of the
instrument of transfer, appeal to the Tribunal.
The Tribunal, while dealing with an appeal may, after hearing the parties, either dismiss the
appeal, or by order—
(a) direct that the transfer or transmission shall be registered by the company and the
company shall comply with such order within a period of ten days of the receipt of the
order; or
(b) direct rectification of the register and also direct the company to pay damages, if any,
sustained by any party aggrieved.
Conclusion: Thus, in the present case Mr. X can make an appeal before the tribunal and sue
for damages.
Quest-13 KFA Ltd is into default of loan to several bankers, consequent to such default its share price
has seen sharp reduction and has been reduced at `2 per share as against its nominal value
of `5. Around 1 year back same shares were trading at `60.
Now in event of default a scheme of corporate debt restructuring was drafted by all bankers
of company, wherein it has been decided to take over a management of company by
converting their loan into shares. Upon conversion of loan and consequent to issue of
shares, % shares of Bank increased to 52% of total share capital.
Meanwhile a group of shareholders objected to this action by contending that any such
action on part of banker will be in violation of companies Act, which restrict any issue of
shares at discount. Discuss
Solution As per the provisions of Sec 53 of companies act 2013:
The issue of shares at a discount means the issue of shares at a price less than the nominal
value.
Circumstances, where shares at discount may be issued
1. A company may issue shares at a discount to its creditors when its debt is converted into
shares in pursuance of any statutory resolution plan or debt restructuring scheme in
accordance with any guidelines or directions or regulations specified by the Reserve
Bank of India under the Reserve Bank of India Act, 1934 or the Banking (Regulation)
Act, 1949.
290 Problems & Solutions Module 2
2. In addition, according to section 53, a company may issue shares at a discount where
shares are given under section 54 of the Companies Act, 2013.
Conclusion: Thus in given case we may conclude that objection raised by shareholder is not
valid, since it was justified on part of bankers to convert such loan into shares even at
discount as per the guidelines framed by RBI
Quest-14 "Moonstar Ltd." is authorised by its articles to accept the whole or any part of the amount of
remaining unpaid calls from any member although no part of that amount has been called
up. 'A', a shareholder of the Moonstar Ltd., deposits in advance the remaining amount due
on his shares without any calls made by "Moonstar Ltd;"
Referring to the provisions of the Companies Act, 2013, state the rights and liabilities of Mr.
A, which will arise on the payment of calls made in advance
Solution Section 50 (1) of the Companies Act, 2013 states that a company may, if so authorised by
its articles, accept from any member, the whole or a part of the amount remaining unpaid on
any shares held by him, even if no part of that amount has been called up. Hence, the
Companies Act recognizes the right of a company to receive calls in advance provided it is
authorized by its Articles to do so.
In the given case Mr. A, a shareholder of the ‘Moonstar Ltd’, has deposited in advance the
remaining amount due on his shares without any calls made by ‘Moonstar Ltd’. ‘Moonstar
Ltd’ was authorized to accept the unpaid calls by its articles. Hence, there is no irregularity
in the transaction.
However, section 50(2) further provides that a member of the company limited by shares
shall not be entitled to any voting rights in respect of the amount paid by him under sub-
section (1) until that amount has been called up. Hence, Mr. A will not derive any additional
voting rights by virtue of such advance calls paid by him.
When a company receives payment in advance of calls, the rights and liabilities of the
shareholder will be as follows:—
(i) The shareholder is not entitled to voting rights in respect of the moneys so paid by him
until the same is called up.
(ii) The shareholder’s liability to the company in respect of the call for which the amount is
paid is distinguished.
(iii) The shareholder is entitled to claim interest on the amount of the call to the extent
payable according to the articles of association. If there are no profits, it must be paid
out of capital, because shareholder becomes the creditor of the company in respect of
this amount.
(iv) The amount received in advance of calls is not refundable.
(v) In the event of winding up the shareholder ranks after the creditors, but must be paid his
amount with interest, if any before the other shareholders are paid off.
The power to receive the payment in advance of calls must be exercised in the general
interest and for the benefit of the company.
Quest-15 DJA Company Limited is holding 40% of total equity shares in MR Company Limited. The
Board of Directors of MR Company Limited (incorporated on 1.1.1998) decided to raise the
paid-up Equity Share Capital by issuing further shares and also decided not to offer any
shares to DJA Company Limited on the ground that it was already holding a high
percentage of shares in MR Company Limited. Articles of Association of MR Company
Limited provides that the new shares be offered to the existing shareholders of the company.
On 1.3.2001 new shares were offered to all the shareholders excepting DJA Company
Limited. Referring to the provisions of the Companies Act, 2013 examine the validity of
decision of Board of Directors of MR Company Limited of not offering any further shares to
DJA Company Limited.
Chap. 5 Shares 291
Solution Given problem is based on sec 62 of companies act 2013, which define Pre-Emptive
right
Right of Pre-Emptive means that any further issue of shares by the company must be offered
to its existing shareholders.
Section provides that if, at any time, a company having a share capital proposes to increase
its subscribed capital by the issue of further shares, such shares should be offered to the
existing equity shareholders of the company as at the date of the offer, in proportion to the
capital paid up on those shares. The company cannot ignore a section of the existing
shareholders and must offer the shares to the existing equity shareholders in proportion to
their holdings.
Further in case of Gas Meter Ltd. v Diaphragm, & General; Leather Co. Ltd where the
facts of the case were similar to those given in the present case, the articles of Diaphragm
Co. provided that the new shares should first be offered to the existing share holders.
However, the company offered new shares to all shareholders excepting Gas Co., which
held its controlling shares. It was held that Diaphragm company had no legal authority
under the Companies Act to do so.
In the given case, DJA Company Limited is holding 40% of total equity shares in MR
Company Limited. The Board of Directors of MR Company Limited decided to raise the
paid-up Equity Share Capital by issuing further shares and also decided not to offer any
shares to DJA Company Limited on the ground that it was already holding a high
percentage of shares in MR Company Limited.
Conclusion: Thus, we may conclude that decision on part of MR Company Limited for not
to issue any further shares to DJA company limited is invalid
Quest-16 VRS Company Ltd. is holding 45% of total equity shares in SV Company Ltd. the Board of
Directors of SV Company Ltd. (incorporated on January 1, 2004) decided to raise the share
capital by issuing further Equity shares. The Board of Directors resolved not to offer any
shares to VRS Company Ltd, on the ground that it was already holding a high percentage of
the total number of shares already issued, in SV Company Ltd. The Articles of Association of
SV Company Ltd. provide that the new shares be offered to the existing shareholders of the
company. On March 1, 2007 new shares were offered to all the shareholders except VRS
Company Ltd. Referring to the provisions of the Companies Act, 2013 examine the validity
of the decision of the Board of Directors of SV Company Limited of not offering any further
shares to VRS Company Limited.
Solution Given problem is based on section 62 of Companies Act, 2013, which define Pre-
Emptive right
Right of Pre-Emptive means that any further issue of shares by the company must be offered
to its existing shareholders.
Section provides that if, at any time, a company having a share capital proposes to increase
its subscribed capital by the issue of further shares, such shares should be offered to the
existing equity shareholders of the company as at the date of the offer, in proportion to the
capital paid up on those shares. The company cannot ignore a section of the existing
shareholders and must offer the shares to the existing equity shareholders in proportion to
their holdings.
Further in case of Gas Meter Ltd. v Diaphragm, & General; leather Co. Ltd where the facts
of the case were similar to those given in the present case, the articles of Diaphragm Co.
provided that the new shares should first be offered to the existing share holders. However,
the company offered new shares to all shareholders excepting Gas Co., which held its
controlling shares. It was held that Diaphragm company had no legal authority under the
Companies Act to do so.
292 Problems & Solutions Module 2
Therefore, in the given case, SV Ltd.’s decision not to offer any further shares to VRS Co.
Ltd on the ground that VRS Co. Ltd already held a high percentage of shareholding in SV
Co. Ltd. is not valid for the reason that it is violative of the provisions of section 62(1)(a) as
also substantiated by the ruling in the above referred case.
Quest-17 Write a note on the powers of the Central Government in regard to conversion of debentures
and loans into shares of the company under the following heads:
(i) When terms of issue of such debenture or terms of loan do not include term providing
for an option of conversion;
(ii) Matters considered in determining the terms and conditions of such conversion.
(iii) Remedy available to the company if conversion or terms of conversion is not acceptable
to it.
Solution 1. Section 62 empower the Central Government to direct by an order that any part of loan
or Debentures shall be converted into shares on such terms and conditions as appear to
that Government to be reasonable even if the terms of issue of such debentures or the
terms of such loans do not include term providing for an option for such conversion.
2. Central Government shall provide due regard to the following circumstances:
(i) The financial position of the company;
(ii) The terms of issue of the debentures or the terms of the loans, as the case may be;
(iii) The rate of interest payable on the debentures or the loans;
(iv) The capital of the company, its loan liability, its reserves, its profits during the
preceding five years; and
(v) The current market price of the shares in the company.
3. If the terms and conditions of such conversion are not acceptable to the company, the
company may, within 60 days from the date of communication of such order, prefer an
appeal to the tribunal.
Quest-18 The Articles of Association of MSW Ltd. contained a provision that upto 4% of issue price of
the shares as underwriting commission may be paid to the underwriters. The Board of
directors decided to pay 5% underwriting commission. Can the Board of directors do so?
State the provisions of law in this regard as stated under the Indian Companies Act, 2013.
Solution Meaning of Underwriting Agreement
 It represents an agreement which takes place between the company and some other party
known as underwriter whereby underwriter agrees with company to acquire the that
portion of shares from company which may not be subscribed by the public.
 He is usually being paid some compensation for his services which is regarded as
underwriting commission.
Acc to the provisions of Section 40 of the Companies Act, 2013:
(i) The payment of commission should be authorized by the articles.
(ii) The amount of commission should not exceed, in the case of shares, 5% of the price at
which the shares have been issued or the amount or rate authorised by the articles
whichever is less, and in the case of debentures, it should not exceed 2-1/2%.
Based upon the provision of above section, we can conclude that the Board of Director’s
decision to pay 5% is not valid, since the payment cannot exceed 4% as provided in the
Articles of the company.
Quest-19 The Board of Directors of a company decide to pay 5% of issue price as underwriting
commission to the underwriters. On the other hand the Articles of Association of the
company permit only 3% commission. The Board of Directors further decide to pay the
commission out of the proceeds of the share capital. Are the decisions taken by the Board of
Directors valid under the Companies Act, 2013?
Chap. 5 Shares 293
Solution Meaning of Underwriting Agreement
 It represents an agreement which takes place between the company and some other party
known as underwriter whereby underwriter agrees with company to acquire the that
portion of shares from company which may not be subscribed by the public.
 He is usually being paid some compensation for his services which is regarded as
underwriting commission.
Acc to the provisions of Section 40 of the Companies Act, 2013:
(i) The payment of commission should be authorized by the articles.
(ii) The amount of commission should not exceed, in the case of shares, 5% of the price at
which the shares have been issued or the amount or rate authorised by the articles
whichever is less, and in the case of debentures, it should not exceed 2-1/2%.
Therefore, the decision of the Board of Directors to pay 5% commission to the underwriters
is invalid Secondly, decision of the Board to pay the commission out of capital is valid since
underwriting commission can be paid both out of capital as well as out of profits (Madan
Lal Fakir Chand v Shree Changdeo Sugar Mills Ltd.)
Quest-20 Unique Builders Limited decides to pay 2.5 percent of the value of debentures as
underwriting commission to the underwriters but the Articles of the company authorize only
2% percent underwriting commission on debentures. The, company further decides to pay
the underwriting commission in the form of flats. Examine the validity of the above
arrangements under the provisions of the Companies Act, 2013
Solution Meaning of underwriting Agreement:—It represent an agreement which takes place
between the company and some other party known as underwriter whereby underwriter
agrees with company to acquire the that portion of shares from company which may not be
subscribed by the public.
He is usually being paid some compensation for his services which is regarded as
underwriting commission.
Company may pay underwriting commission subject to following conditions:
(a) The payment of such commission shall be authorized in the company’s articles of
association;
(b) The commission may be paid out of proceeds of the issue or the profit of the company or
both;
(c) It may be paid either in cash or in consideration other than cash
(d) The rate of commission paid or agreed to be paid shall not exceed, in case of debentures
• 2.5 % of the price at which the debentures are issued, or
• Rate as specified in the company’s articles,
whichever is less;
As per Companies (Meeting of Board and its powers) Rules, 2014
Company having a Paid-Up share capital of `10.0 Cr or more shall not pay underwriting
commission of more than 1% except with prior approval by members through Special
Resolution
Conclusion: In view of the above the decision of Unique Builders Ltd to pay underwriting
commission exceeding 2% as prescribed in the Articles is invalid.
Quest-21 The Board of Directors of XYZ Private Limited, a subsidiary of SRN Limited, decides to
grant a loan of `2.00 lacs to P, the Finance Manager of the company getting salary of
`30,000 per month, to buy 400 partly paid-up equity share of `1,000 each of XYZ Limited.
Examine the validity of Board's decision with reference to the provisions of the Companies
Act, 2013.
294 Problems & Solutions Module 2
Solution Under section 67(3) of the Companies Act, 2013 a company is allowed to give a loan to its
employee’s subject to the following limitations:
(a) The employee must not be some key managerial personnel;
(b) The amount of such loan shall not exceed an amount equal to six months’ salary of the
employee.
(c) The shares to be subscribed must be fully paid shares
Section 2(51) defines the “Key Managerial Personnel” (KMP) whereby a KMP includes the
chief executive, company secretary, whole time director, Chief Financial Officer or any
other officer who may be prescribed.
We can assume the Mr. P being a fiancé manager is not a KMP of the company.
Keeping the above provisions of law in mind, the Board’s decision is invalid due to two
reasons:
 The amount being more than 6 months’ salary of Mr. P, which should have restricted the
loan to `1.8 Lakhs.
 The shares subscribed are partly paid shares where as the benefit is available only for
sub-scribing in fully paid shares.
Quest-22 Apex Metals Limited wants to provide financial assistance to its employees, to enable them
to subscribe for certain number of fully paid shares. Considering the provision of the
Companies Act, 2013, what advice would you give to the company in this regard?
Solution Under section 67(2) of the Companies Act, 2013 no public company is allowed to give,
directly or indirectly or by means of a loan, guarantee, or security, any financial assistance
for the purpose of, or in connection with, a purchase or subscription, by any person of any
shares in it or in its holding company.
However, section 67(3) makes an exception by allowing companies to the give loans to their
employees other than its directors or key managerial personnel, for an amount not exceeding
their salary or wages for a period of six months with a view to enabling them to purchase or
subscribe for fully paid-up shares in the company or its holding company to be held by them
by way of beneficial ownership.
Hence, Apex Metals Ltd can provide financial assistance upto the specified limit to its
employees to enable them to subscribe for the shares in the company provided the shares are
purchased by the employees to be held for beneficial ownership by them. However, the key
managerial personnel & Directors will not be eligible for such assistance.
Quest-23 ABC Company Limited at a general meeting of members of the company pass an ordinary
resolution to buy-back 30% of its Equity Share Capital. The articles of the Company
empower the company for buy-back of shares. The company further decide that the payment
for buy-back be made out of the proceed of the company's earlier issue of equity shares.
Explaining the provisions of the Companies Act 2013 and stating the sources through which
the buy-back of companies own shares be executed. Examine.
(i) Whether company's proposal is in order?
(ii) Would your answer be still the same in case the company instead of 30% decides to buy-
back only 20% of its Equity Share Capital?
Solution Under section 68 of the Companies Act, 2013 a company can purchase its own shares or
other specified securities subject to fulfilment of prescribed conditions and subject to
defined limits and procedures.
Under the various sub sections of section 68 of the Companies Act, 2013 (please see
previous answer) in the present case the following facts are note worthy:
(a) The Articles permit buy back – This is in order;
Chap. 5 Shares 295
(b) The approval of the members is by way of an ordinary resolution–This is invalid as the
resolution required is a special resolution;
(c) The buyback approved is 30% of the Equity Share Capital–The maximum limit allowed
for buy back is 25% of the aggregate of the paid up capital and free reserves. Since the
value of free reserves is not mentioned this cannot be commented upon.
(d) The company plans to pay for the buy back from the proceeds of an earlier equity issue -
This is in violation of section 68 (1) of the Act
Taking into account the above factors, the questions as asked in the problem can be
answered as under
(i) The company’s proposal for buy-back is not in order as it has passed only an ordinary
resolution and the out of the proceeds of an earlier equity issue in violation of section 68
(ii) The answer to the second question shall also be the same as the irregularity and
contravention will not be affected by the buyback being 20%.
Quest-24 Explain the circumstances in which a company cannot buy back its own shares as per the
provisions of the Companies Act, 2013. M/s Growmore Pharma Limited is planning to
buyback of its shares during the current year but the company has defaulted in the payment
of term loan & interest thereon to its bankers. The company seeks your advice as to how and
when the company can buy back its shares under these circumstances as per the provisions
of the Companies Act, 2013.
Solution Circumstances in which a company cannot buy back its own shares—
As per section 70 of the Companies Act, 2013, a company cannot buy back shares or other
specified securities directly or indirectly:
(a) Through any subsidiary company including its own subsidiaries; or
(b) Through investment or group of investment companies; or
(c) When the company has defaulted in the repayment of deposit or interest thereon,
redemption of debentures or preference shares or payment of dividend or repayment of
any term loan or interest thereon to any financial institution or bank. The prohibition
does not apply if the default has been remedied and a period of three years has elapsed
after such default ceased to subsist.
(d) Company has defaulted in filing of Annual Return (section 92), declaration of dividend
(section 123) or punishment for failure to distribute dividend (section 127) and financial
statement (section 129).
Under the Companies Act, 2013, now the company can buy- back even if it has defaulted in
the repayment of deposit or interest thereon, redemption of debentures or preference shares
or payment of dividend or repayment of any term loan or interest thereon to any financial
institution or bank, provided the default has been remedied and period of 3 years has elapsed
after such default ceased to subsist. Therefore, M/s. Growmore Pharma Limited needs to
follow the procedure as highlighted above for buy-back of shares.
Quest-25 Z Ltd has recently opted for Reduction of its share capital and have received an approval
from tribunal as well. On 7th Jan, they submitted an approval of tribunal to ROC. On 20th
Feb, company even proceeded for fresh issue and issued fresh shares to 500 new
shareholders (Partly paid up shares @ 6 each as against nominal value of 10 each).
Suddenly on 31st March, 1 creditor submitted his claim, who by his own mistake could not
be entered in list of creditors when consent was invited from all of them for sanction of
scheme of reduction. Now all members objected this claim and company even declined to
pay his claim. Creditor claimed that company has defaulted in payment and thus he is
entitled to proceed in capacity as operational creditor against the company. Decide upon
the stand taken by creditor. Also state the liability of members in this regard by stating, if
company is liable to such claim, whether liability shall arise on part of new members as
well.
296 Problems & Solutions Module 2
Solution Given problem is based on section 66 of Companies Act, 2013
As per this section, Where the name of any creditor entitled to object to the reduction of
share capital under this section is not entered on the list of creditors, and after such
reduction, the company commits a default, within the meaning of section 6 of the
Insolvency and Bankruptcy Code, 2016, in respect of the amount of his debt or claim, then
every person, who was a member of the company on the date of the registration of the
order for reduction by the Registrar, shall be liable to contribute to the payment of that debt
or claim, an amount not exceeding the amount which he would have been liable to
contribute if the company had commenced winding up on the day immediately before the
said date
Conclusion: Thus, we may conclude that even though company shall be liable to pay to its
Creditor Z, however liability to pay shall arise on part of those members who were there as a
member of the company on the date of the registration of the order for reduction by the
Registrar, but not on new members
Quest-26 As on 31st December 2014, following information and figures are noticed from the Annual
Accounts for the year ended 31st March 2014 of SKP Ltd., a Company listed with The Stock
Exchange, Mumbai:
(i) Authorised Share Capital `20.00 Crores comprising of 2 Crore Equity Shares of `10
each.
(ii) Paid up Share Capital `10.00 Crores comprising of 90 lac Equity Shares of `10 each
fully paid up and 20 lac Equity Shares of `10 each called and paid up to `5 each. The
total paid up capital is paid up in cash.
(iii) Securities Premium Account `20.00 Crores.
(iv) General Reserve `30.00 Crores.
(v) Fixed Assets Revaluation Reserve `10.00 Crores.
(vi) Outstanding Liabilities in respect of Bonus to Employees and Workers
`25.00 lacs.
(vii) Outstanding Liabilities in respect of Interest payable on Public Deposits comprising of
Fixed Deposits from general public `15.00 lacs.
Following other information is gathered from the books of account and other records of the
said Company for the period upto 31st December 2014:
I. The partly paid shares were made fully paid prior to 30th September 2014.
II. Bonus to employees and workers was paid on 15th September 2014.
III. Interest on Public Deposits was outstanding on 31st December 2014.
The Directors of SKP Ltd. wants to issue Bonus Shares on or after 1st April 2015 in the
ratio of 1:1. Advise the Directors on the matter with reference to the companies Act 2013,
What formalities company need to follow before issue of bonus shares.
Solution As per the provisions of Sec 63 of Companies Act 2013
Company may issue bonus shares subject to following conditions:—
1. The 'articles of association' of the company must authorize the issue of bonus shares.
2. Sources of Bonus issue
 Undistributed profits available for dividend
 Security Premium Account
 Capital Redemption Reserve
3. The issue of bonus share must be sanctioned (i.e., approved) by the shareholders in the
general meeting through passing of ordinary Resolution
Chap. 5 Shares 297
4. The bonus shares are issued to the existing shareholder holding fully paid-up shares. If
their shares are partly paid-up, these should be made fully paid-up
5. Other provisions:
 it has not defaulted in payment of interest or principal in respect of fixed deposits or
debt securities issued by it;
 it has not defaulted in respect of the payment of statutory dues of the employees,
such as, contribution to provident fund, gratuity and bonus
Now in given case:—

Fully Paid up share capital `9 crores

Partly paid-up capital (`each) converted into fully paid-up of `10 each `2 crores
Total paid up capital after conversion partly paid up are converted into `11 crores
fully paid-up

Capital before bonus issue `11 crores

Bonus issue 1:1 `11 crores
Capital after bonus issue `22 crores
Current authorized capital `20 crores
Conclusion: To issue bonus shares now, company shall ensure
1. Passing of O/Res for increase in authorized capital
2. Bonus issue shall be made out of free reserves built out of the genuine profits or
securities premium collected in cash only and reserves created by revaluation of fixed
assets shall not be capitalized for the purpose of issuing bonus shares.
In given case company is having sufficient reserves with them for issue of bonus shares
3. Company shall make good the interest on public deposits before proceeding for its
bonus issue.
Quest-27 Reduction of capital and cancellation of share capital are one and same thing. Discuss

Solution: - DIFFERENCE BETWEEN REDUCTION OF CAPITAL AND CANCELLATION OF

CAPITAL
Serial Reduction of Capital Cancellation of Capital
No
1 Company need to pass Special Resolution under Company need to pass Ordinary Resolution
Section 66 under Section 61
2 Interest of creditors are affected here, thus their No such interest of Creditors is affected
consent need to be obtained or their debt need to be
satisfied
3 Reduction may or may not result in alteration under Cancellation will alter the Capital clause of
Capital clause of MOA MOA
4 Prior approval of tribunal is mandatory No such approval is required
5 It will reduce the paid-up share capital of company It will not have any impact on Paid up
share capital
298 Problems & Solutions Module 2
Quest-28 What should be the change in nominal value where an unlimited company want to convert
itself into a limited company
Solution An unlimited company having a share capital may, by a resolution for registration as a
limited company under this Act, do either or both of the following things, namely—
(a) increase the nominal amount of its share capital by increasing the nominal amount of
each of its shares, subject to the condition that no part of the increased capital shall be
capable of being called up except in the event and for the purposes of the company being
wound up;
(b) provide that a specified portion of its uncalled share capital shall not be capable of being
called up except in the event and for the purposes of the company being wound up.
Quest-29 Which are the different circumstances in which reduction of capital shall be allowed
Solution Section 66 provides details about different scenario where reduction of capital shall be
allowed, and they may be discussed as follow:—
A company may by a special resolution, reduce the share capital in any of the following
manner:—
(a) extinguish or reduce the liability on any of its shares in respect of the share capital not
paid-up; or
(b) either with or without extinguishing or reducing liability on any of its shares,
(i) cancel any paid-up share capital which is lost or is unrepresented by available assets;
or
(ii) pay off any paid-up share capital which is in excess of the wants of the company,
alter its memorandum by reducing the amount of its share capital and of its shares
accordingly
Quest-30 ABC Pvt Ltd want to give loan of `50 Lakh to its director. Company is having Paid up share
capital of `50 Lakh. Borrowing of company from banks or other financial institution is 80
Lakh with clean track record. Meanwhile company has 150 individual shareholders. Discuss
validity of such loan
Solution As per the provisions of Sec 67 of Companies Act 2013
A company cannot give loan or any financial assistance to any person to acquire its own
share or shares of its holding company
However, the provisions of Section 67 shall not apply to private companies –
(a) in whose share capital no other body corporate has invested any money;
(b) if the borrowings of such a company from banks or financial institutions or anybody
corporate is less than twice its paid up share capital or fifty crore rupees, whichever is
lower; and
(c) such a company is not in default in repayment of such borrowings subsisting at the time
of making transactions under this section.
Now in given case, since
1. No other body corporate has invested in capital of private limited company
2. Borrowing from banks or financial institution is even less than twice of paid up share
capital or `50 cr, whichever is less
3. No default in existence
Conclusion: We may conclude that company is justified in providing loan to its director as
provisions of Section 67 are not applicable to company
Quest-31 Company may issue convertible Debentures, wherein at the time of conversion Special
Resolution shall be required. Discuss about the validity of this statement
Chap. 5 Shares 299
Solution This Statement is Incorrect
As per the provisions of Sec 62(3) of Companies Act 2013
 Company can issue debentures or loan which is convertible into shares or it can also
issue debentures or loans with where shareholder has an option to subscribe for new
shares.
 Any such issue of debentures or loan must carry the terms regarding conversion thereof
into shares.
 Such debentures or loans can be issued only after issuing S/R, thus requirement of S/Res
exist at the time of issue of these debentures and not while conversion thereof
Quest-32 Mars India Ltd. owed to Sunil `1,000. On becoming this debt payable, the company offered
Sunil 10 shares of `100 each in full settlement of the debt. The said shares were fully paid
and were allotted to Sunil. Examine the validity of theses allotment in the light of the
provisions of the Companies Act, 2013.
Solution Under section 62 (1) (c) of the Companies Act, 2013 where at any time, a company having a
share capital proposes to increase its subscribed capital by the issue of further shares, such
shares may be offered to any persons provided following conditions are satisfied: -
1. Any such issue shall be authorised by S/Res passed in general meeting of company
2. Price of such shares is determined by the valuation report of a registered valuer subject
to such conditions as may be prescribed
In the present case, Mars India Ltd is empowered to allot the shares to Sunil in settlement of
its debt to him. The issue will be classified as issue for consideration other than cash must be
approved by the members by a special resolution. Further, the valuation of the shares must
be done by a registered valuer.
Quest-33 Any further shares shall be issued by company only to its existing shareholders. Discuss
along with exceptions if any
Solution This statement is Correct.
As per section 62 of Companies Act, 2013, any further issue of shares by the company must
be offered to its existing shareholders.
Exception: Even though there are certain circumstances where these shares may be offered
even to an outsider, which are as follows:—
1. Where new shares are issued to employees under a scheme of employees’ stock
option, subject to special resolution passed by company and subject to the conditions as
may be prescribed; or
Provided for private limited company, it shall be an ordinary resolution
2. Where such shares are issued to any persons, if it is authorised by a special
resolution, if the price of such shares is determined by the valuation report of a
registered valuer subject to such conditions as may be prescribed.
3. If the existing shareholders to whom the shares are offered decline to accept the shares.
4. Conversion of Debentures or loans into shares
5. Conversion of Debentures or loan into shares based upon the directions issued by
Central Government
6. Any Re-issue of forfeited shares also can be issued without being offered to the existing
shareholder. Since they are does not treated as further allotment of shares.
Quest-34 Grow Chemical Limited is planning to buyback of its shares during the current year but the
company has defaulted in the payment of interest on debentures issued by company and such
default is still in existence. The company seeks your advice as to how and when the company
can buy back its shares under these circumstances as per the provisions of the Companies
Act, 2013.
300 Problems & Solutions Module 2
Solution As per section 70 of the Companies Act, 2013, a company cannot buy back shares or other
specified securities directly or indirectly:
(a) Through any subsidiary company including its own subsidiaries; or
(b) Through investment or group of investment companies; or
(c) When the company has defaulted in
 Repayment of deposit or interest thereon,
 Redemption of debentures or preference shares or Payment of dividend or
 Repayment of any term loan or interest thereon to any financial institution or bank.
The prohibition does not apply if the default has been remedied and a period of three
years has elapsed after such default ceased to subsist.
(d) Company has defaulted in filing of Annual Return (section 92), declaration of dividend
(section 123) or punishment for failure to distribute dividend (section 127) and financial
statement (section 129).
In given case, company has defaulted in payment of interest on Debenture, which cannot be
considered as an event of default u/s 70
Conclusion: Thus, we may conclude that Grow Chemical limited can go ahead in its
decision of buy-back of shares
Quest-35 Sujeev, a shareholder, holding 2000 shares of `100 per share of Touchwood Pharma Ltd.
The company has called and collected `60 per share. Sujeev has paid `40 per share (the
balance amount not yet demanded by the company) as calls in advance. At the time of
annual general meeting of the company, he demanded that he is entitled to vote in respect of
the advance money paid by him. The directors of the company rejected his demand. He
claimed for refund of calls in advance amount paid by him with interest.
Examine the validity of Sujeev’s claim for voting or refund of money with interest with
reference to the provisions of the Companies Act, 2013.
Solution According to Section 50 of the Companies Act, 2013, a company may, if so authorized by
the Articles, accept from any member, the whole or a part of the amount remaining unpaid
on any shares by him, even if no part of that amount has been called up.
The amount so received shall be treated as calls in advance.
Consequences of calls in advance shall be as follow:—
(i) The shareholder is not entitled to voting rights in respect of the moneys so paid by him
until the same would, but for such payment, become presently payable [Section 50)].
(ii) The shareholder’s liability to the company in respect of the call for which the amount is
paid is extinguished.
(iii) The shareholder is entitled to claim interest on the amount of the call to the extent
payable according to articles of association, which shall not exceed 12% p.a.
(iv) The amount received in advance of calls is not refundable.
(v) In the event of winding up, the shareholder ranks after the creditors, but must be paid his
amount with interest, if any, before the other shareholders are paid off.
(vi) The power to receive the payment in advance of calls must be exercised in the general
interest and for the benefit of the company.
Conclusion: Thus, we may conclude that Sujeev is not entitled to vote in respect of the
moneys so paid by him until the same would, but for such payment, become presently
payable.
Quest-36 Poorva Limited refuses to register transfer of shares made by Mr. Akbar to Mr. Amar. The
company does not even send a notice of refusal to Mr. Akbar or Mr. Amar respectively
within the prescribed period. Has the aggrieved party any right(s) against the company for
such refusal? Advise as per the provisions of the Companies Act, 2013.
Chap. 5 Shares 301
Solution Given problem is based on provisions of Sec 58 of the Companies Act, 2013, which deals
with consequences in case of refusal by company to register transfer and appeal against
refusal.
In given case the company has committed the wrongful act of not sending the notice of
refusal of registering the transfer of shares.
As per Section 58, if a public company without sufficient cause refuses to register the
transfer of securities within a period of 30 days from the date on which the instrument of
transfer is delivered to the company, the transferee may, within a period of 60 days of such
refusal or where no intimation has been received from the company, within 90 days of the
delivery of the instrument of transfer, appeal to the Tribunal.
Section further provides that the Tribunal, while dealing with an appeal may, after hearing
the parties, either dismiss the appeal, or by order—
(a) direct that the transfer or transmission shall be registered by the company and the
company shall comply with such order within a period of 10 days of the receipt of the
order; or
(b) direct rectification of the register and also direct the company to pay damages, if any,
sustained by any party aggrieved.
In the present case Mr. Amar can make an appeal before the tribunal.
Quest-37 Rishi Limited’s share capital is divided into different classes. Now, Rishi Limited intends to
vary the rights attached to a particular class of shares. Advice Rishi Limited as to obtaining
consent from the shareholders in relation to variation of rights.
Solution Given problem is based on provisions of Section 48 of the Companies Act, 2013-
As per this section, where a share capital of the company is divided into different classes of
shares, the rights attached to the shares of any class may be varied as per the following
provisions:—
1. Before any such variation, company need to obtain prior approval from
1. Shareholders having 3/4th shares of such classor
2. Through Special Resolution
Provided that if variation by one class of shareholders affects the rights of any other
class of shareholders, the consent of three-fourths of such other class of shareholders
shall also be obtained and the provisions of this section shall apply to such variation.
2. Any such variation can be made only when, power of such variation is contained
1. Under MOA or AOA of company
2. Terms of issue of these shares
Right to Appeal
1. An appeal can be submitted to Tribunal by shareholder who is not willing to provide his
consent and holding at least 10% of shares of this class
2. Such appeal shall be submitted to the court within 21 days of such variation
Quest-38 As per the provisions of the Companies Act, 2013, every company is required to file with the
Registrar of Companies, the Annual Return as prescribed in section 92, in Form MGT-7.
Explain the particulars required to be contained in it.
Solution As per the provisions of Section 92 of Companies Act 2013, Every company is required to
file with the Registrar of Companies, the annual return as prescribed in Form MGT-7
Return so filed shall contains details in relation to:—
1. Its registered office, principal business activities, particulars of its holding, subsidiary
and associate companies;
302 Problems & Solutions Module 2
2. Its shares, debentures and other securities and shareholding pattern
3. Its indebtedness;
4. Its members and debenture-holders along with the changes therein since the close of the
previous financial year;
5. Its promoters, directors, key managerial personnel along with changes therein since the
close of the previous financial year;
6. Meetings of members or a class thereof, Board and its various committees along with
attendance details;
7. Remuneration of directors and key managerial personnel;
8. Penalty or punishment imposed on the company, its directors or officers and details of
compounding of offences and appeals made against such penalty or punishment;
9. Matters relating to certification of compliances, disclosures;
10. Details in respect of shares held by or on behalf of the Foreign Institutional Investors
including their names, addresses, countries of incorporation, registration and percentage
of shareholding held by them;
11. Such other matters as may be prescribed.
Quest-39 Bazaar Limited called its AGM in order to lay down the financial statements for
Shareholders’ approval. Due to want of Quorum, the meeting was cancelled. The directors
did not file the annual returns with the Registrar. The directors were of the idea that the time
for filing of returns within 60 days from the date of AGM would not apply, as AGM was
cancelled. Has the company contravened the provisions of Companies Act, 2013? If the
company has contravened the provisions of the Act, how will it be penalized?
Solution As per the provisions of section 92 of the Companies Act, 2013
Every company shall file with the Registrar a copy of the annual return, within sixty days
from the date on which the annual general meeting is held or where no annual general
meeting is held in any year within sixty days from the date on which the annual general
meeting should have been held together with the statement specifying the reasons for not
holding the annual general meeting
Section also states that if a company fails to file its annual return, the company shall be
punishable with fine which shall not be less than fifty thousand rupees but which may
extend to five lakhs rupees and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to six months or with fine which
shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with
both.
In the given case, the idea of the directors is that since the AGM was cancelled, the
provisions requiring the company to file annual returns within 60 days from the date of
AGM would not apply is incorrect.
In the above case, since the annual general meeting of Bazaar Limited should have been held
within a period of six months, from the date of closing of the financial year
Thus, the company has contravened the provisions of section 92 and shall attract the penal
provisions along with every officer of the company who is in default as specified in Section
92 of the Act.
Quest-40 Harsh purchased 1000 shares of Singhania Ltd. from Pratik and sent those shares to the
company for transfer in his name. The company neither transferred the shares nor sent any
notice of refusal of transfer to any party within the period stipulated in the Companies Act,
2013. What is the time frame in which the company is supposed to reply to transferee? Does
Harsh, the transferee have any remedies against the company for not sending any intimation
in relation to transfer of shares to him?
Chap. 5 Shares 303
Solution According to Section 58 of the Companies Act, 2013, if a public company without sufficient
cause refuses to register the transfer of securities within a period of thirty days from the date
on which the instrument of transfer is delivered to the company, the transferee may, within a
period of sixty days of such refusal or where no intimation has been received from the
company within ninety days of the delivery of the instrument of transfer, appeal to the
Tribunal.
Section further provides that the Tribunal, while dealing with an appeal may, after hearing
the parties, either dismiss the appeal, or by order—
(a) direct that the transfer or transmission shall be registered by the company and the
company shall comply with such order within a period of ten days of the receipt of the
order; or
(b) direct rectification of the register and also direct the company to pay damages, if any,
sustained by any party aggrieved;
In the given case, Harsh, can make an appeal before the tribunal for remedies that the
company shall be ordered to register transfer/transmission of securities within10 days of the
receipt of order, or rectify register and pay damages.
Quest-41 Xgen Limited has a paid-up equity capital and free reserves to the extent of `50,00,000. The
company is planning to buy-back shares to the extent of `4,50,000. The company
approaches you for advice with regard to the following
Is special resolution required to be passed?
(ii) What is the time limit for completion of buy-back?
(iii) What should be ratio of aggregate debts to the paid-up capital-and free reserves after
buy-back?
Solution Section 68 of the Companies Act, 2013 deals with the Conditions required for buy-back of
shares.
As per the Act, the company shall not purchase its own shares unless-
(a) The buy-back is authorized by its articles;
(b) A special resolution has been passed at a general meeting of the company authorizing
the buy-back: except where—
(1) the buy-back is, ten per cent or less of the total paid-up equity capital and free
reserves of the company; and
(2) such buy-back has been authorised by the Board by means of a resolution passed at
its meeting;
Section further provides that, every buy-back shall be completed within a period of one year
from the date of passing of the special resolution, or as the case may be, the resolution
passed by the Board.
Provision also specifies that ratio of the aggregate debts (secured and unsecured) owed by
the company after buy back is not more than twice the paid-up capital, security premium and
its free reserves.
As per the stated facts, Xgen Ltd. has a paid-up equity capital and free reserves to the extent
of `50,00,000. The company planned to buy back shares to the extent of `4,50,000.
Referring to the above provisions, we may conclude that
1. No, special resolution will not be required as the buyback is less than 10% of the total
paid-up equity capital and free reserves of the company, but any such buy back shall be
authorized by the Board by means of a resolution passed at its meeting.
2. Time limit for completion of buy back will be- within a period of one year from the date
of passing of the resolution by the Board.
3. The ratio of the aggregate debts (secured and unsecured) owed by the company after buy
back should not be more than twice the paid up capital and its free reserves.
The above buy-back is possible when backed by the authorization by the articles of the
company.
304 Problems & Solutions Module 2
Quest-42 M/s. Techno Ltd. maintains its Register of Members at its registered office in Mumbai. A
group of members residing in Kolkata want to keep the register of members at Kolkata.
(i) Explain with provisions of Companies Act, 2013, whether the company can keep the
Registers and Returns at Kolkata.
(ii) Does Mr. Ranjit, Director (but not a shareholder) of the company have the right to
inspect the Register of Members?
Solution As per section 94 of the Companies Act, 2013, the registers required to be kept and
maintained by a company under section 88 and copies of the annual return filed under
section 92 shall be kept at the registered office of the company:
Provided that such registers or copies of return may also be kept at any other place in India
in which more than one-tenth of the total number of members entered in the register of
members reside, if approved by a special resolution passed at a general meeting of the
company.
Thus, we may conclude that, Techno Ltd. can also keep the registers and returns at Kolkata
provided more than one-tenth of the total number of members entered in the register of
members reside in Kolkata.
(ii) As per section 94 of the Companies Act, the inspection of the records, i.e. registers and
indices, and annual return can be done by members, debenture-holders, other security
holders or beneficial owners of the company. Any other person (other than specified above)
may also inspect the Register of members of company on payment of prescribed fee
Thus, a director Mr. Ranjit, who is not a shareholder of the company, has no right to inspect
the Register of Members of company, unless he make payment of prescribed fee
Quest-43 Can equity share with differential voting rights be issued? If yes, state the conditions under
which such shares may be issued.
Solution As per Rule 4 of the Companies (Share capital and Debenture) Rules, 2014, no company
limited by shares shall issue equity shares with differential rights as to dividend, voting or
otherwise, unless it complies with the following conditions, namely:—
(1) the articles of association of the company authorizes the issue of shares with differential
rights;
(2) the issue of shares is authorized by an ordinary resolution passed at a general meeting
of the shareholders.
(3) However, where the equity shares of a company are listed on a recognized stock
exchange, the issue of such shares shall be approved by the shareholders through postal
ballot;
(4) the shares with differential rights shall not exceed twenty-six percent of the total post-
issue paid up equity share capital including equity shares with differential rights issued
at any point of time;
(5) the company is having consistent track record of distributable profits for the last three
years;
(6) the company has not defaulted in filing financial statements and annual returns for three
financial years immediately preceding the financial year in which it is decided to issue
such shares;
(7) the company has no subsisting default in the payment of a declared dividend to its
shareholders or repayment of its matured deposits or redemption of its preference
shares or debentures that have become due for redemption or payment of interest on
such deposits or debentures or payment of dividend;
(8) the company has not defaulted in payment of the dividend on preference shares or
repayment of any term loan from a public financial institution or State level financial
Chap. 5 Shares 305
institution or Scheduled Bank that has become repayable or interest payable thereon or
dues with respect to statutory payments relating to its employees to any authority or
default in crediting the amount in Investor Education and Protection Fund to the Central
Government;
(9) However, a company may issue equity shares with differential rights upon expiry of
five years from the end of the financial Year in which such default was made good.
(10) the company has not been penalized by Court or Tribunal during the last three years of
any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange
Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign
Exchange Management Act, 1999 or any other special Act, under which such
companies being regulated by sectoral regulators.
Quest-44 Earth Ltd., a Public Company offer the new shares (further issue of shares) to persons other
than the existing shareholders of the Company. Explain the conditions when shares can be
issued to persons other than existing shareholders. Discuss whether these shares can be
offered to the Preference Shareholders?
Solution As per section 62 of Companies Act, 2013, any further issue of shares by the company must
be offered to its existing shareholders.
Exception.—Even though there are certain circumstances where these shares may be
offered even to an outsider, which are as follows:—
1. Where new shares are issued to employees under a scheme of employees’ stock
option, subject to special resolution passed by company and subject to the conditions as
may be prescribed; or
Provided for private limited company, it shall be an ordinary resolution
2. Where such shares are issued to any persons, if it is authorised by a special
resolution, if the price of such shares is determined by the valuation report of a
registered valuer subject to such conditions as may be prescribed.
3. If the existing shareholders to whom the shares are offered decline to accept the shares.
4. Conversion of Debentures or loans into shares
5. Conversion of Debentures or loan into shares based upon the directions issued by
Central Government
6. Any Re-issue of forfeited shares also can be issued without being offered to the existing
shareholder. Since they are does not treated as further allotment of shares.
Preference Shareholders: From the wordings of Section 62 (1) (c), it is quite clear that these
shares can be issued to any persons who may be preference shareholders as well provided
such issue is authorized by a special resolution of the company and are issued on such
conditions as may be prescribed.
Quest-45 Transfer of shares by legal representative is valid
Or
Richa Daniel, after having obtained succession certificate, succeeded to 7,000 shares of `100
each allotted to her late father Alexender Daniel by Speed Software Limited. To pay off the
debt of her cousin Stesley, she wants to transfer whole of the 7,000 shares to her on the basis
of a duly stamped instrument of transfer which has been signed by her as well as Stesley.
Accordingly, she has delivered the required documents to the company for transfer of shares.
Solution As per section 56, the transfer of any security or other interest of a deceased person in a
company made by his legal representative shall, even if the legal representative is not a
holder thereof, be valid as if he had been the holder at the time of the execution of the
instrument of transfer.
306 Problems & Solutions Module 2
the company, on receipt of duly stamped instrument of transfer along with requisite share
certificates and succession certificate, shall transfer the shares in favour of Stesley.
Thus, even though Richa Daniel, the legal representative of Alexender Daniel, is not a
holder of 7,000 shares as per the Register of Members of the company, the transfer effected
by her in favour of her cousin Stesley is a valid transfer as if she had been the holder of
securities at the time of executing the transfer deed.
Quest-46 X Ltd. Issued a notice on 1st Feb to its existing shares holders offering to purchase one extra
[Nov-19] share for every five shares held by them. The last date to accept the offer was 15th Feb.,
2018 only. Mr. Kavi has given an application to renounce the share offered him favour of
Mr. Ravi, who is not a shareholder of the company. Examine the validity of application of
Mr. Kavi under the provisions of the Companies Act, 2013. Would your answer differ if Mr.
kavi is a shareholder of X Ltd.?
Solution According to section 62 of the Companies Act, 2013, where at any time, a company having a
share capital proposes to increase its subscribed capital by the issue of further shares, such
shares shall be offered—
to persons who, at the date of the offer, are holders of equity shares of the company
the offer shall be made by notice specifying the number of shares offered and limiting a time
not being less than fifteen days and not exceeding thirty days from the date of the offer
within which the offer, if not accepted, shall be deemed to have been declined;
unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to
include a right exercisable by the person concerned to renounce the shares offered to him or
any of them in favour of any other person; and the notice referred to in clause (i) shall
contain a statement of this right;
(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier
intimation from the person to whom such notice is given that he declines to accept the shares
offered, the Board of Directors may dispose of them in such manner which is not dis-
advantageous to the shareholders and the company.
In the instant case, X Ltd. issued a notice on 1st Feb, 2018 to its existing shares holders
offering to purchase one extra share for every five shares held by them. The last date to
accept the offer was 15th Feb., 2018 only. Mr. Kavi has given an application to renounce the
shares offered to him in favour of Mr. Ravi, who is not a shareholder of the company.
As nothing is specified related to the Articles of the company, it is assumed offer shall be
deemed to include a right of renunciation. Hence, Mr. Kavi can renounce the shares offered
to him in favour of Mr. Ravi, who is not a shareholder of the company.
In the second part of the question, even if Mr. Ravi is a shareholder of X Ltd. then also it
does not affect the right of renunciation of shares of Mr. Kavi to Mr. Ravi.
Quest-47 The Board of Directors of Rajesh Exports Ltd, a subsidiary of Manish Ltd. decides to grant a
[Jan-21] loan of `3 lakh to Bhaskar, the finance manager of Manish Ltd., getting salary of `40,000
per month, to buy 500 partly paid-up equity shares of `1,000 each of Rajesh Export Ltd.
Examine the validity of Board’s decisions with reference to the provisions of the Companies
Act, 2013.
Solution Refer Sec 67
we can conclude that the decision of the Board of Directors of Rajesh Exports Ltd. is not
valid.
Quest-48 The Authorized share capital of SSP Limited is `5 crore divided into 50 lakhs equity shares
[Dec-20] of `10 each. The Company issued 30 lakhs equity shares for subscription which was fully
subscribed. The Company called so far `8 per share and it was paid up. Later on the
Company proposed to reduce the Nominal Value of equity share from `10 each to `8 each
and to carry out the following proposals:
Chap. 5 Shares 307
(i) Reduction in Authorized Capital from `5 crore divided into 50 Lakhs equity shares of
`10 each to `4 crore divided into 50 lakhs equity shares of `8 each
(ii) Conversion of 30 Lakhs partly paid up equity shares of `8 each to fully paid up equity
shares of `8 each there by relieving the shareholders from making further payment of `2
per share.
State the procedure to be followed by the Company to carry out the above proposal under
the provisions of the Companies Act, 2013
Solution Procedure for reduction of share capital-
In order to carry out proposals by SSP Limited to reduce the nominal value of the equity
share, the company has to comply with the procedure given under section 66 of the
Companies Act, 2013 which deals with the Reduction of share capital.
Procedure
(1) A company limited by shares or limited by guarantee and having a share capital may, by
a special resolution, reduce the share capital in any manner and in particular, may—
(a) extinguish or reduce the liability on any of its shares in respect of the share capital
not paid-up; or
(b) either with or without extinguishing or reducing liability on any of its shares,—
(i) cancel any paid-up share capital which is lost or is unrepresented by available
assets; or
(ii) pay off any paid-up share capital which is in excess of the wants of the
company, alter its memorandum by reducing the amount of its share capital and
of its shares accordingly.
(2) The Tribunal shall give notice of every application made to it to the Central
Government, Registrar and the creditors of the company and shall take into
consideration the representations, if any, made to it by them within a period of three
months from the date of receipt of the notice.
(3) The Tribunal may, if it is satisfied that the debt or claim of every creditor of the
company has been discharged or determined or has been secured or his consent is
obtained, make an order confirming the reduction of share capital on such terms and
conditions as it deems fit.
(4) The order of confirmation of the reduction of share capital by the Tribunal shall be
published by the company in such manner as the Tribunal may direct.
(5) The company shall deliver a certified copy of the order of the Tribunal and of a minute
approved by the Tribunal to the Registrar within thirty days of the receipt of the copy of
the order, who shall register the same and issue a certificate to that effect.
(ii) Alteration of Share Capital:
SSP Limited proposes to alter its share capital. The Present authorized share capital `5 Crore
will be altered to `4 Crore. According to Section 61 of the Companies Act, 2013, a limited
company having a share capital may alter its capital part of the memorandum.
A limited company having a share capital may, if so authorized by its articles, alter its
memorandum in its general meeting to—
1. Cancel shares which, at the date of the passing of the resolution in that behalf, have not
been taken or agreed to be taken by any person, and diminish the amount of its share
capital by the amount of the shares so cancelled. The cancellation of shares shall not be
deemed to be reduction of share capital.
2. A company shall within 30 days of the shares having been consolidated, converted, sub-
divided, redeemed, or cancelled or the stock having been reconverted, shall give a notice
to the Registrar in the prescribed form along with an altered memorandum [Section 64
of the Companies Act, 2013].
The Company has to follow the above procedures to alter its authorized share capital.
308 Problems & Solutions Module 2
Quest-49 State the difference between shares and stock

Solution: DIFFERENCE BETWEEN SHARE AND STOCK

Difference No Share Stock
1 Shares may be fully paid up or partly paid up Stock shall be fully paid up only
2 Shares cannot be transferred in fractions Stock can be transferred in fractions
3 Shares has distinctive numbers No such distinctive numbers shall apply
for Stock
4 Shares can be issued originally Stock can not be issued originally
5 No resolution of members is required prior to Stock can be issued only after passing o
issue of shares O/R
6 No such Authorization is required for issue of Stock can be converted only when AOA
shares of company so authorized
 Chapter 6
CHARGE

PRACTICAL QUESTION
Quest-1 State the difference between fixed charge and floating charge
Hint Fixed/Specific Charge:—
A charge is said to be fixed or specific when it is made specifically to cover assets which are
ascertained and definite or are capable of being ascertained and defined, at the time of
creating the charge e.g. land, buildings, or heavy machinery.
Other Important Points
1. The company cannot deal with the property charged in the ordinary course of its
business without obtaining prior consent of lender.
2. The company can create another specific charge on the same property. However, in such
a case, the specific charge which is which is created first takes priority over the
subsequent charge.
Floating Charge: A floating charge is a charge on a class of assets present and future which
in the ordinary course of business is changing from time to time and leaves the company free
to deal with the property as it sees fit until the holders of charge take steps to enforce their
security.
Other Important Points
1. The company can deal with the property charged till the charge becomes fixed.
2. The company can create a subsequent specific charge on the same property having
priority over the floating charge.
3. The company cannot create a second floating charge, over the same property, having
priority over the first floating charge.
Quest-2 ABC Limited realized on 2nd May, 2019 that particulars of charge created on 12th March,
2019 in favour of a Bank were not filed with the Registrar of Companies for Registration.
What procedure should the Company follow to get the charge registered with the Registrar
of Companies? Would the procedure be different if the charge was created on 12th
February, 2019 instead of 12th March, 2019? Explain with reference to the relevant
provisions of the Companies Act, 2013.
Hint As per the provisions of section 77 of Companies Act, 2013
It shall be duty of the company creating a charge within or outside India, on its property or
assets or any of its undertakings, whether tangible or otherwise and situated in or outside
India, to register the particulars of the charge signed by the company and the charge holder
together with the instruments, if any, creating such charge in such form, on payment of such
fees and in such manner as may be prescribed, with the registrar within 30 days of creation.
The Registrar may, on an application by the company, allow such registration to be made
within a period of 60 days of such creation on payment of such additional fees as may be
prescribed
310 Problems & Solutions Module 2
Provided further that if the registration is not made within the period specified, the
Registrar may, on an application, allow such registration to be made within a further period
of sixty days after payment of such advalorem fees as may be prescribed
Thus, in given case, company can still opt for registration by submitting an application to
ROC and on payment of additional fee as prescribed
If the charge was created on 12th February, 2019 instead of 12th March, 2019
Still company can still opt for registration by submitting an application to ROC and on
payment of advalorem fee as prescribed
Quest-3 A charge requiring registration with Registrar of Companies was created on 1st February,
2019 by XYZ Limited. The Secretary of the Company realised on 15th March, 2019 that the
charge was not filed with the Registrar. State the steps to be taken by the Secretary to get the
charge registered with the Registrar.
Hint A charge should be registered within 30 days after the date of its creation. In this case the
charge was created on 1st Feb, 2019. Hence the particulars of charge are required to be filed
with the Registrar on or before 2nd March, 2019 [Section 77 (1)].
The Secretary of the company realised only on 15th March, 2019 that the charge was not
filed with the Registrar. It is, however, open to the Registrar to extend the time for filing of
the charge within 60 days if the company satisfies the Registrar that it had sufficient cause
for not filling the particulars within 30 days. [Proviso to Section 77(1)].
The Secretary may take advantage of this provision and immediately file the particulars of
charge with the Registrar giving adequate reasons for the delay. If the Registrar is satisfied,
he may allow registration on payment of additional fee.
Quest-4 State whether Registrar is empowered to make entry for satisfaction of charge without
intimation by company
Hint Section 83 of the Companies Act, 2013 provides powers to the registrar to make entries with
respect to the satisfaction and release of charges where no intimation has been received by
him from the company.
(i) The Registrar may, on evidence being given to his satisfaction with respect to any
registered charge,—
(a) that the debt for which the charge was given has been paid or satisfied in whole or in
part; or
(b) that part of the property or undertaking charged has been released from the charge,
enter in the register of charges a memorandum of satisfaction of the fact that part of
the property has been released from the charge, despite the fact that no intimation
has been received by him from the company.
Quest-5 Describe the term Satisfaction of charge
Or
A limited has taken a loan from IDBI Bank limited. On due date company has made payment
of such loan along with other dues. Define the formalities to be completed by company upon
completion of charge
Hint According to section 82 of the Companies Act, 2013, a company shall give intimation to the
Registrar about the payment or satisfaction in full of any charge registered under this
Chapter within a period of thirty days from the date of such payment or satisfaction
Provided that the Registrar may, on an application by the company or the charge holder,
allow such intimation of payment or satisfaction to be made within a period of three
hundred days of such payment or satisfaction on payment of such additional fees as may be
prescribed.
Chap. 6 Charge 311
The Registrar shall, on receipt of intimation, cause a notice to be sent to the holder of the
charge calling upon him to show cause within such time not exceeding fourteen days, as to
why payment or satisfaction in full should not be recorded as intimated to the Registrar.
If no cause is shown, by such holder, the Registrar shall order that a memorandum of
satisfaction shall be entered in the register of charges and hall intimate the company about it.
Quest-6 A Company realised after 300 days from creation of charge that it had failed to submit
details of creation of charge with ROC. As a Chief Finance Officer of company Top
management consulted you to provide any way out to overcome this situation.
Hint As per the provisions of section 77 of Companies Act, 2013.
It shall be duty of the company creating a charge within or outside India, on its property or
assets or any of its undertakings, whether tangible or otherwise and situated in or outside
India, to register the particulars of the charge signed by the company and the charge holder
together with the instruments, if any, creating such charge in such form, on payment of such
fees and in such manner as may be prescribed, with the registrar within 30 days of creation.
The Registrar may, on an application by the company, allow such registration to be made
within a period of 60 days of such creation on payment of such additional fees as may be
prescribed.
Provided further that if the registration is not made within the period specified, the
Registrar may, on an application, allow such registration to be made within a further period
of sixty days after payment of such advalorem fees as may be prescribed.
Provided further that if registration is not made within a period of three hundred days of
such creation, the company shall seek extension of time in accordance with section 87 by
submitting an application to Central Government.
As per section 87, The Central Government on being satisfied that—
(i) (a) the omission to file with the Registrar the particulars of any charge created by a
company; or
(b) the omission to register any charge within the time required under this Chapter; or
(c) the omission or mis-statement of any particular with respect to any such charge or
modification or with respect to any memorandum of satisfaction or other entry
made in pursuance of section 82 or section 83,was accidental or due to inadvertence
or some other sufficient cause or it is not of a nature to prejudice the position of
creditors or shareholders of the company; or
(ii) on any other grounds, it is just and equitable to grant relief,
it may on the application of the company or any person interested and, on such terms, and
conditions as it may seem to the Central Government as suitable, direct that the time for the
filing of the particulars or for the registration of the charge or for the giving of intimation of
payment or satisfaction shall be extended
(2) Where the Central Government extends the time for the registration of a charge, the
order shall not prejudice any rights acquired in respect of the property concerned before the
charge is actually registered.
Conclusion-Thus company shall be advised to submit an application in prescribed form to
Central Government seeking extension of limit u/s 87
Quest-7 State the consequences of non-registration of charge
Hint 1. The charge shall be void against the liquidator and any creditor of the company in event
of winding up of company. Thus, unregistered charge holder shall be treated as
unsecured creditor therein.
2. Money secured by charge immediately becomes payable.
312 Problems & Solutions Module 2
3. The security for the debt may not be valid but the debt itself remains good as simple
debt.
4. In case an earlier charge and a subsequent charge have been created. Said subsequent
charge would get priority over unregistered charge
Quest-8 Describe the provision in relation to opening and maintaining of Register of Charge by
company
Hint Section 85 govern the provisions in relation to Register of Charge
1. Meaning of Register of Charge- It is the register in which the particulars about the
charge created on company's assets, are entered.
2. Requirement- Every company shall create a register of charge. This register has to be
maintained by both, the Registrar of Companies as well as the company itself.
3. Where to Place this Register- Such register needs to be kept at the registered office of
the company.
4. Particular to be entered- The entries in the register of charges maintained by the
company shall be made forthwith after the creation, modification or satisfaction of
charge, as the case may be.
Entries in the register shall be authenticated by a director or the secretary of the company or
any other person authorized by the Board for the purpose.
The register of charges shall be preserved permanently and the instrument creating a charge
or modification thereon shall be preserved for a period of eight years from the date of
satisfaction of charge by the company.
Quest-9 A Limited has taken loan from Bank. Even after completion of 30 days borrower failed to
submit CHG-1 i.e. form required for registration. Top management was aware that if they
proceed to recall the loan due to non-registration, it may drag the company into liquidation,
thus as a chartered accountant they approach you for course of action available to them
Hint According to section 77 of the Companies Act, 2013, it shall be duty of the company
creating a charge, to register the particulars of the charge signed by the company and the
charge holder together with the instruments, if any, creating such charge in such form, on
payment of such fees and in such manner as may be prescribed, with the registrar within 30
days of creation.
The Registrar may, on an application by the company, allow such registration to be made
within a period of three hundred days of such creation on payment of such additional fees as
may be prescribed.
Further as per the provisions of Sec 78, where a company fails to register the charge within
the period 30 days, without prejudice to its liability in respect of any offence under this
Chapter, the person in whose favour the charge is created may apply to the Registrar for
registration of the charge within a period of fourteen days after giving notice to the company
Thus, in given case, Bank have an option:-
1. To Instruct company to submit Form CHG-1 to Registrar within 300 days after
obtaining his approval u/s 77
2. To submit form CHG-1 itself within 14 days after completion of 30 days
Quest-10 Define the term Charge and also list out the different charge which need to be registered
Hint According to section 2(16) of the Companies Act, 2013 “charge” has been defined as an
interest or lien created on the property or assets of a company or any of its undertakings or
both as security and includes a mortgage.
Section provides that the following charges must be registered with the Registrar of
Companies. Otherwise, such charges shall be void, and the charge-holders will not get the
benefit of the securities if the company goes into liquidation:—
Chap. 6 Charge 313
1. A charge for the purpose of securing any issue of debentures.
2. A charge on uncalled share capital of the company.
3. A charge on any immovable property wherever situated
4. A charge on any book debts of the company
5. A charge, not being a pledge, on any movable property of the company.
6. A floating charge on the undertaking or any property of the company including stock.
7. A charge on calls made, but not paid.
8. A charge on a ship or any share in a ship.
9. A charge on goodwill, or a patent, or a license under a patent, on a trade mark, or a copy
right.
Quest-11 Mr. Antriksh entered into an agreement for purchasing a commercial property in Delhi
belonging to NRT Ltd. At the time of registration, Mr. Antriksh comes to know that the title
deed of the company is not free, and the company expresses its inability to get the title deed
transferred in the name of Mr. Antriksh saying that he ought to have had the knowledge of
charge created on the property of the company. Explain with the help of ‘Notice of a
charge’, whether the contention of NRT Ltd. is correct?
Hint According to 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 of the
Companies Act, 2013, any person acquiring such property, assets, undertakings or part
thereof or any share or interest therein shall be deemed to have notice of the charge from the
date of such registration.
Conclusion: Based upon the above provision of law, we may conclude that contention of
NRT Ltd. is correct. And Mr. Antriksh ought to have had the knowledge of charge created
on the property of the company
Quest-12 State, with reasons, whether the following statements are True or False?
(i) The Registrar of Companies is not bound to issue notice to the holder of charge, if the
company gives intimation of satisfaction of charge in the specified form and signed by
the holder of charge.
(ii) The Registrar of Companies may allow the company or holder of charge to file
intimation within a period of 300 days of the satisfaction of charge on payment of fee
and additional fees as may be prescribed.
Hint (i) Given statement is True
According to the proviso to section 82(2) of the Companies Act, 2013, no notice shall be
required to be sent, in case the intimation to the Registrar in this regard is in the
specified form and signed by the holder of charge.
(ii) Given statement is False
As per section 77 of the Companies Act, 2013, it shall be duty of the company creating a
charge within or outside India, on its property or assets or any of its undertakings,
whether tangible or otherwise and situated in or outside India, to register the particulars
of the charge signed by the company and the charge holder together with the
instruments, if any, creating such charge in such form, on payment of such fees and in
such manner as may be prescribed, with the registrar within 30 days of creation. The
Registrar may, on an application by the company, allow such registration to be made
within a period of 60 days of such creation on payment of such additional fees as may be
prescribed.
Provided further that if the registration is not made within the period specified, the
Registrar may, on an application, allow such registration to be made within a further period
of sixty days after payment of such advalorem fees as may be prescribed
314 Problems & Solutions Module 2
Quest-13 Moon Light Ltd. is having its establishment in USA. It obtained a loan there creating a
[Jan-21] charge on the assets of the foreign establishment. The company received a notice from the
Registrar of companies for not filing the particulars of charge created by the Company on
the property or assets situated outside India. The Company wants to defend the notice on the
ground that it shall not be duty of the company to register the particulars of the charge
created on the assets not located in India. Do you agree with the stand taken by Company?
Give your answer with respect to the provisions of the Companies Act, 2013.
Hint According to section 77 of the Companies Act, 2013, it shall be duty of the company
creating a charge within or outside India, on its property or assets or any of its undertakings,
whether tangible or otherwise and situated in or outside India, to register the particulars of
the charge.
Thus, charge may be created within India or outside India. Also the subject-matter of the
charge i.e. the property or assets or any of the company’s undertakings, may be situated
within India or outside India.
In the given question, the company has obtained a loan by creating a charge on the assets of
the foreign establishment.
Hence, the stand taken by Moon Light Ltd. not to register the particulars of charge created
on the assets located outside India is not correct.
Quest-14 Rose (Private) Limited on 3rd April 2019 obtained Rs. 30 Lakhs working capital loan by
[Dec-21] offering its Stock and Accounts Receivable as security and Rs. 5 Lakhs Adhoc overdraft on
the personal guarantee of a Director of Rose (Private) Limited, from a financial institution.
(i) Is it required to create charge for working capital loan and Adhoc overdraft in
accordance with the provisions of the Companies Act, 2013?
(ii) State the provisions relating to extension of time and procedure for registration of
charges in case the above charge was not registered within 30 days of its creation
Hint As per the provisions of Section 2(16) of the Companies Act, 2013, “charge” means an
interest or lien created on the property or assets of a company or any of its undertakings or
both as security and includes mortgage.
(i) Whenever a company obtains working capital loans from financial institutions by
offering stock and Accounts Receivables as security, Rose (Private) Limited is required
to create a charge on such property or assets in favour of the lender. Hence, for ` 30
Lakhs working capital loan, it is required to create a charge on it.
Rose (Private) Limited is not required to create a charge for ` 5 Lakh adhoc overdraft
on the personal guarantee of a director. Since charge is always created on the property
or assets of a company and personal guarantee of director is not a property or asset of
company.
(ii) As per the provisions of Section 77 of the Companies Act, 2013, in case the above
charge was not registered within 30 days of creation of the charge, the Registrar may, on
an application by the company, allow such registration to be made within a period of 60
days of such creation (i.e. another 30 days are granted after the expiry of original 30
days), on payment of additional fees as prescribed.
Procedure for Extension of Time Limit: For seeking extension of time, the company is
required to make an application to the Registrar in the prescribed form. It should be
supported by a declaration from the company signed by its company secretary or a director
that such belated filing shall not adversely affect the rights of any other intervening
creditors of the company.
The application so made must satisfy the Registrar that the company had sufficient cause for
not filing the particulars and the instrument of charge, if any, within the original period of
thirty days. Only then he will allow registration of charge within the extended period.
Further, requisite additional fee or advalorem fee, as applicable, must also be paid.
 Chapter 7
GENERAL MEETING

PRACTICAL QUESTION
Quest-1 Which one of the following required ordinary resolution?
(a) to change the name of the company
(b) to alter the articles of association
(c) to reduce the share capital
(d) to declare dividends.
Solution To declare dividends
Quest-2 A resolution shall be a special resolution when the votes cast in favour of the resolution by
members are not less than ______________ the number of votes, if any, cast against the
resolution.
(a) Twice
(b) Three times
(c) One third
(d) One fourth
Solution Three times
Quest-3 Register of members, debenture holders, other security holders or copies of return may also
be kept at any other place in India in which more than ___________ of the total number of
members entered in the register of members reside, if approved by a special resolution
passed at a general meeting of the company and the Registrar has been given a copy of the
proposed special resolution in advance.
(a) one-half
(b) one-eight
(c) one-tenth
(d) one-third
Solution one-tenth
Quest-4 The Registrar may grant an extension by ________, for holding the Annual General Meeting
to any company for special reasons (except in the case of first AGM of the company).
(a) 1 Month
(b) 2 Months
(c) 3 Months
(d) 6 Months
Solution 3 Months
316 Problems & Solutions Module 2
Quest-5 Every listed company shall file with the Registrar a copy of the report on each annual
general meeting within ______ of the conclusion of the annual general meeting.
(a) 7 days
(b) 30 days
(c) 3 months
(d) 90 days
Solution 30 Days
Quest-6 Max Special Business shall be 2?
Solution This Statement is incorrect, since as per section 102 of Companies Act, 2013, every business
other than ordinary business shall be treated as special business
Quest-7 In case of Private Limited Company, max ordinary business cannot exceed 3
Solution This statement is correct, since as per section 102 of Companies Act, 2013, Following four
businesses to be transacted at Annual General Meeting shall be considered as ordinary
business:
 Consideration of financial statements and the reports of the Board of Directors and
auditors;
 Declaration of Dividend;
 Appointment of Directors in the place of those retiring.
 Appointment of and fixing of the remuneration of the auditors.
Now out of this business consisting of appointment/re-appointment/retirement of liable to
retire by rotation shall by applicable incase of public company only
Quest-8 Time limit for submission of proxy can be reduces to 2 hrs
Solution This Statement is correct, since Article of company can reduce the limit for submission of
proxy form
Quest-9 Meeting lasted for 60 hrs, at 59th hrs, demand of poll was made. Now poll shall be taken
within…...
Solution As per Section 109 of Companies Act, 2013, every time a poll is demanded, it shall be
ensured within 48 Meeting hours (i.e. Max) of its demand, thus in given case, since meeting
lasted for 60 hrs only, thus chairperson shall ensure the poll before conclusion of meeting
Quest-10 Whether Chairman by putting casting vote can ensure passing of Special Resolution
Solution This statement is incorrect, since incase of casting vote, chairperson can only have 1 vote, on
show of hand as well as on poll, thus he can ensure Ordinary Resolution but not special
resolution
Quest-11 Circumstances where poll shall be taken forthwith
Solution 1. Where demand of poll is in relation to appointment of chairperson
2. Where demand of poll is in relation to adjournment of meeting
Quest-12 A limited want to enter into a transaction with B limited, which is a Related party. A limited
want to consider 2 business at its upcoming EGM including the business with related party
i.e. B Limited, in addition they want this meeting to be convened at shorter notice. Explain
as to how A limited shall proceed provided following information is also available
Total members of A limited = 100
No of shares held by related parties in A Limited = 20,000 out of total share capital of A Ltd
of 1,00,000 shares
Chap. 7 General Meeting 317
Different agenda
1. Dealing with related party i.e. B Limited
2. Increase in authorized share capital in A limited
Solution As per the proviso to Section 101 of Companies Act, 2013 as amended by companies
Amendment Act 2017, general meeting may be called after giving shorter notice than that
specified in Section 101 if consent, in writing or by electronic mode, is accorded
thereto—
(i) in the case of an annual general meeting, by not less than 95% of the members entitled
to vote thereat; and
(ii) in the case of any other general meeting, by members of the company—
(a) holding, if the company has a share capital, majority in number of members entitled
to vote and who represent not less than 95% of such part of the paid-up share capital
of the company as gives a right to vote at the meeting; or
(b) having, if the company has no share capital, not less than 95% of the total voting
power exercisable at that meeting:
Provided further that where any member of a company is entitled to vote only on some
resolution or resolutions to be moved at a meeting and not on the others, those members
shall be taken into account for the purposes of this sub-section in respect of the former
resolution or resolutions and not in respect of the latter.".
Based upon the above provisions, we may conclude that, since upcoming meeting is Extra
Ordinary General Meeting, thus consent shall be obtained from
In respect of 1st Agenda, where B Ltd is a related party: - Atleast 50 Members i.e. Majority
excluding the related party B Ltd holding atleast 95% (1,00,000-20,000) i.e. 76,000 shares
In respect of 2nd Agenda, where B Ltd is not a related party: - Atleast 51 members i.e.
Majority holding atleast 95,000 shares
Quest-13 Decide whether following persons can appoint a valid proxy:
(i) When a body corporate is a member in the company.
(ii) When a foreign company is a member in the company.
Solution As per Section 113 of Companies Act, 2013—
 Where a body-corporate is a member of another company, it may attend the meeting of
any other company through a representative.
 The representative must be appointed by a resolution of the board of directors.
Thus in given case, we may conclude that:-
(i) Body corporate is entitled to appoint its proxy
(ii) Foreign company is also a body corporate as per Section 2(11) of Companies Act, 2013,
thus it may also appoint a proxy
Quest-14 Can EGM be held at a place situated outside India?
Solution No, EGM of a company cannot be held outside India.
However, as per the Companies Amendment Act, 2017, EGM of a company, other than a
wholly owned subsidiary of a company incorporated outside India, shall be held at a place
within India.
Quest-15 Who can be appointed as proxy?
Solution As per Section 105 of the CA, 2013, proxy need not be a member of the company and any
person can be appointed as a proxy.
318 Problems & Solutions Module 2
Quest-16 Can a member of Section 8 Company appoint any other person as its proxy?
Solution No, as per Rule 19 of Companies (Management and Administration) Rules, 2014, a member
of Section 8 Company can appoint only another member of the same company as its proxy.
Quest-17 For how many members can a person be appointed as a proxy?
Solution As per Section 105 of the CA, 2013, read with Rule 19 of the Companies (Management and
Administration) Rules, 2014, a person can act as proxy on behalf of maximum 50 members
and holding voting rights on shares not more than 10% of total share capital.
In case of a person holding proxy for a member, holding voting rights on shares for more
than 10% of total share capital, he/she cannot hold a proxy for another member in the same
company.
Quest-18 Can one member appoint more than one proxy?
Solution Yes, a person can appoint more than one proxy.
Quest-19 When can a proxy be appointed? Can a person be appointed as a permanent proxy for a
member?
Solution As per the provisions of Section 105 of the CA, 2013, proxy can be appointed by a member
any time after the notice is issued, but the same should reach the company 48 hours before
the scheduled meeting. A person cannot be appointed as a permanent proxy for a member.
Quest-20 Can a director appointed as a Chairman at the meeting of the Board for the purpose of
convening such meeting be considered as a person holding the position of Chairman of the
Company?
Solution A director appointed as a Chairman at the meeting of the Board for the purpose of convening
such meeting cannot be considered as a person holding the position of Chairman of the
company. In case a company is willing to designate a director as Chairman of the company,
a separate resolution with this affect is required and the necessary intimations shall be given
to the ROC.
Quest-21 Section 96(2) provides for holding of Annual General Meeting on a day which is not a
‘National Holiday’. Define the term ‘National Holiday’.
Solution “National Holiday” includes Republic Day i.e. 26th January, Independence Day i.e. 15th
August, Gandhi Jayanti i.e. 2nd October and such other day as may be declared as National
Holiday by the Central Government.
Quest-22 According to section 103 of Companies Act, 2013, in case of a private limited company, 2
members personally present shall be the Quorum. If Quorum is not present within half an
hour from the time appointed for holding a meeting, then the meeting shall stand adjourned,
and if at the adjourned meeting also, Quorum is not present, the members present shall be
the Quorum. If the private company has only 2 shareholders and out of these, if one cannot
attend the AGM then according to above, whether one person attending the adjourned
AGM, would be taken as quorum?
Solution No, one person cannot form quorum of an adjourned meeting. This is as per the view taken
by Department of Company Affairs, where it was held that a single person cannot by himself
constitute a quorum at the adjourned AGM.
However, if the other person attends the meeting through video conferencing, then he will be
counted for the purposes of quorum.
Quest-23 Whether show of hands under section 107 is possible in case of companies which are
covered under rule 20 of Companies (Management and Administration) Rules, 2014 relating
to voting through electronic means?
Chap. 7 General Meeting 319
Solution It has been clarified by the MCA that voting by show of hands under section 107 would not
be allowable in cases where rule 20 of Companies (Management and Administration) Rules,
2014 is applicable i.e. Voting by Electronic Mode
Quest-24 Whether concept of demand for poll u/s 109 of the Companies Act, 2013 is relevant for
companies covered under Rule 20 of Companies (Management and administration) Rules,
2014 relating to voting through electronic means.
Solution The Ministry of Corporate Affairs has clarified that for companies which are covered under
section 108 read with rule 20 of Companies (Management and Administration) Rules, 2014,
the provisions relating to demand for poll would not be relevant.
Quest-25 Whether a person who has voted through e-voting facility provided by the company can
participate in general meeting? Further, can he change his vote?
Solution It has been clarified by MCA that a person who has voted through e-voting shall not be
debarred from participation in the general meeting physically. But he shall not be able to
vote in the meeting again, and his earlier vote (cast through e-means) shall be treated as
final. Therefore, a member of the company who has voted through electronic means may
attend the general meeting and participate in the discussion, though the member is not
allowed to change his vote once casted.
Quest-26 Whether concept of proxy is relevant in respect of a general meeting wherein e-voting
facility has been provided to the members.
Solution Proxy is a facility given to a member to exercise his voting rights in case the member is
unable to attend and vote himself. Any member who has not exercised his vote
electronically, may attend and vote at the general meeting either personally or by appointing
a proxy to attend and vote on his behalf. Thus the concept of proxy is still relevant
Quest-27 Whether the provisions of quorum under section 103 requiring specified persons to be
physically present need to be complied with even in cases where electronic voting is
mandated.
Solution Section 103 requires the personal presence of certain number of members in case of public
and private companies for valid conduct of general meetings.
Personal presence of specified number of persons is, therefore, mandatory in all general
meetings even though the resolutions have been put to vote by electronic means before the
meeting.
Any embers who have voted by electronic means have a right to attend the general meeting
and their presence shall be counted for the purposes of quorum.
Quest-28 Mr. Zoey purchased the shares of Luxy Hairstyles Private Limited, at market price, in the
name of his daughter, Mila, who is 4 years old. Mr. Joe, the Director of the Company, has
approached you to advise him on the updation of said change in the register of members,
since Mila, being a minor is incompetent to contract in her capacity.
Solution  Mila i.e. a minor is not competent to enter into any contract, thus her name cannot be
entered in the register of members.
 While filing MGT – 1 and MGT – 2, the names of the minor can only be entered only if
the details of the guardian are present.
 Thus, in given case, name of Mr. Zoey shall appear in the register of members of Luxy
Hairstyles Private Limited
Quest-29 Mrs. And Mr. Taneja, recently got married and jointly purchased the shares of New Hopes
India Private Limited on 14th August 2016. Mr. Taneja intimated the company that only the
name of his wife should appear in the records of the company, for the shares purchased by
320 Problems & Solutions Module 2
them. The secretary of the company is not sure whether this is possible, given that the shares
are held in the names of both the persons.
Solution As per the Companies Act, 2013, Joint holders of shares may request the company to enter
their names on the register in some specified order, or they may even request the company to
split their holding in a manner that part of the holding is entered in the name of one holder
and part showing the name of another.
But, in given case, the condition of Mr. Taneja that only the name of his wife should appear
in the register as a member cannot be considered, even though company may ensure that the
names can be entered in the order such that the name of his wife appears first.
Quest-30 Ms. Emma gifted the shares purchased by her of the Company Bio-Optics Limited, to her
sister Cathy. Emma had purchased these shares on the occasion of her birthday in February
2017. However, neither Emma nor Cathy were aware that they had to intimate about the
transaction of transfer of such shares as a gift, to the company. Discuss the same in light of
the provisions of section 89 of the Act.
Solution As per Section 89 of Companies Act, 2013
Every person who holds or acquires a beneficial interest in share of a company shall make a
declaration to the company specifying
▪ the nature of his interest,
▪ particulars of the person in whose name the shares stand registered in the books of the
company and
▪ such other particulars as may be prescribed
If any person fails, to make a declaration as required, he shall be punishable with fine which
may extend to fifty thousand rupees and where the failure is a continuing one, with a further
fine which may extend to one thousand rupees for every day after the first during which the
failure continues.
In given case, since shares are gifted away, they become the property of the donee. Hence,
the provisions relating to declaration of beneficial interest are not applicable.
Quest-31 Big Fox Private Limited called its Annual General Meeting on 30th September, 2016 for
laying down the financial statement for approval of its shareholders for the financial year
ended 31st March 2016. However, due to want of quorum, the meeting could not take place
and was cancelled. The company has not filed the annual financial statements, or the annual
return for the year ending March 2016, with the ROC till date. The director is of the view
that since the annual general meeting did not take place, the period of 60 days for filing of
annual return is not applicable and thus, there is no contravention of section 92. Discuss.
Solution  As per the provisions of Section92, every company has to file an annual return with the
ROC in Form MGT-7 within 60 days of date on which annual general meeting was held
or the date when it must have been held.
 In given case, the annual general meeting of Big Fox Private Limited should have been
held by 30th September 2016, but it did not take place. Thus, the company has
contravened the provisions of section 92 of the Companies Act, 2013 and shall be liable
for a penalty as specified in Section 92
Quest-32 Mr. Himanshu is the director of Road Less Travelled Limited and has been appointed as a
nominee director of the company. On 6th December 2016, he expressed his interest to
inspect the register of members of the company. The company secretary refused to show him
the register. In respect of the provisions of the Companies Act, 2013, do you think that the
company secretary was right in refusing Himanshu for not showing the register of members
of the company?
Chap. 7 General Meeting 321
Solution As per the provisions of section 94 of the Act, it is clear that the inspection of the records,
i.e. registers and indices, and annual return can be done by members, debenture-holders,
other security holders or beneficial owners of the company, during business hours without
payment of any fees and by any other person on payment of such fees as may be prescribed.
Section does not entitle a director to make an inspection in to the records of the company, as
per the provisions of this section.
Thus, the company secretary was right in refusing to show the register of members to
Himanshu, since he is a director of the company.
Even though as any other person director shall have such right on payment of prescribed fee
Quest-33 Mr. Abeer filed a complaint against the company, Elixir Private Limited since it did not
serve the notice to him for attending the annual general meeting. The company, in turn,
provided the proof that they had sent the notice, by way of an email to Mr. Abeer, inviting
him to attend the annual general meeting of the company. Abeer alleges that he never
received the email. State whether the company is liable as guilty for contravening the
provisions of section 101 of the Companies Act, 2013 read with rules.
Solution As per Section 101 of Companies Act, 2013, the notice may be served
 Personally; or
 Sent through post to the registered address of the members and in the absence of any
registered office in India, to the address, within India furnished by him to the company
for the purpose of serving notice to him; or
 Through electronic mode.
As per the Companies (Management & Administration) Rules, 2014, the company’s
obligation shall be satisfied when it transmits the e-mail and the company shall not be held
responsible for a failure in transmission beyond its control.
Thus, company shall not be in default for not delivering notice via e-mail.
Quest-34 There are 5400 members of Dicey Private Limited. The company held its annual general
meeting on 1st July, 2017 at 2.00 p.m. and 28 members were present till 2.45 p.m. The
Chairman of the meeting proceeded to initiate the meeting and passed the resolutions as
discussed in the meeting. Comment whether the meeting took place as per the provisions of
Companies Act, 2013.
Solution As per the provisions of Section 103 of the Companies Act, 2013, the quorum for a Private
Limited Company shall be two members personally present. Thus, the quorum for the
annual general meeting of Dicey Private Limited was complied with and the company is not
in contravention with any of the provisions of the Companies Act, 2013.
Quest-35 Abbey Limited has 2300 members and the annual general meeting of the company is due to
be held on 23rd February, 2017 at 10.30 a.m. On the day of the meeting, 18 members were
personally present by 11.00 a.m. and the Chairman proceeded to initiate the chronicles of
the meeting. There were 5 special businesses to be discussed at the said meeting and by 2.30
p.m. Agenda 1 to 3 had been discussed and appropriate resolutions were passed. However,
due to some emergency, 4 of the members had to leave around 3 p.m. The Chairman granted
them the permission and proceeded to discuss Agenda 4 & 5 and accordingly passed
resolution as per the consent of the remaining members. Comment whether the meeting is a
properly convened meeting as per the provisions of section 103 of the Companies Act, 2013.
Solution Steps in formation of answer for this case
1. Mention about the meaning of quorum u/s 103
2. Provide the limit of quorum as applicable incase of public limited company
3. Provide conclusion (As provided below)
322 Problems & Solutions Module 2
Conclusion: In the above case, while the quorum was present at the time when the meeting
started as per section 103 of the Companies Act, 2013, however the same was absent at the
time of deciding Agenda 4 & 5.
Thus, we may conclude that where at the time of transacting business, the number of
members is less than the quorum fixed for the meeting, the business cannot be transacted
and shall be a nullity.
Quest-36 What happens in case of voting by joint shareholders? Suppose that Mr. & Mrs. Iyer are
joint shareholders of Goal Private Limited and they hold 500 shares of the company.
Regarding a particular special business being transacted at the extra-ordinary general
meeting of the company, Mr. Iyer is in the favour of the decision, whereas Mrs. Iyer is
against the resolution. Decide how should the vote be casted in case of this situation?
Solution In a situation where joint holder failed to reach to some consensus in finalizing something in
relation to general meeting, then priority shall be given in order of seniority, which is
determined on the basis of the order in which their names appear in the register of members/
shareholders.
Thus, opinion of Mr. Iyer will prevail in said case
Quest-37 Can an insolvent shareholder vote at the meeting by show of hands?
Solution Yes. Even though he has no longer any beneficial interest in the shares and the dividends are
payable only to his trustee in bankruptcy, an insolvent shareholder so long as he remains in
the register of the company as a member, is entitled to exercise his votes which are available
to him as member.
Quest-38 How does the counting happen at the time of postal ballot?
Solution Any member who is voting by way of postal ballot, has votes in proportion to his share in
the paid-up share capital of the company. Company may receive postal ballot in following 4
forms from the shareholders–
 Ballots which contain assents;
 Ballots which contain dissents;
 Ballots wherein the member has voted partially assenting, partially dissenting or using
not all his shares in any particular way; and
 Invalid ballots (due to absence/mismatch of signature, overwriting, etc.
Thus, company shall open and maintain a register to contain all such assent and dissent
Quest-39 Difference between Motion & Resolution
Solution  A motion is a proposal, and a resolution is the adoption of a motion duly made and
seconded. But every motion need not be followed by a resolution, as where a motion is
made for the adjournment of the meeting.
 A motion whether it is passed for the closure of discussion or adjournment, etc. can be
passed by an ordinary resolution unless there is a specific provisions in the articles.
Quest-40 In the annual general meeting of Black Mango Limited, the notice contained the agenda for
8 special businesses to be transacted. The Chairman decided to move all the resolutions at
one time in order to save time of the members present at the meeting. Discuss whether two
or more resolutions can be moved together as per the provisions of the Companies Act,
2013.
Solution Nothing in law impose any restriction where the Chairman of the meeting desires that two or
more resolutions should be moved together, unless any member requires that each resolution
should be put to vote separately or unless a poll is demanded in respect of any.
Chap. 7 General Meeting 323
The only case where are solution should be moved separately is the one which requires that
as regards the appointment of directors at a general meeting of a public or private company,
where two or more directors may not be appointed as directors by a single resolution.
Quest-41 The extra-ordinary general meeting of the company, Purple Banana Private Limited was
due to be held on 23rd September 2016. However, due to want of quorum, the meeting was
adjourned to a later date on 1st October 2016 and two resolutions were passed on that date.
What would be the date of passing of resolution as passed on 1st Oct 2016
Solution According to section 116 of the Companies Act, 2013, where a resolution is passed at an
adjourned meeting of—
(a) a company; or
(b) the holders of any class of shares in a company; or
(c) the Board of Directors of a company,
then, the resolution shall, for all purposes, be treated as having been passed on the date on
which it was in fact passed and shall not be deemed to have been passed on any earlier date.
Thus, in given case, said two resolutions shall be deemed to have been passed on the original
date of meeting, i.e. 1st October 2016 and not on the earlier date.
Quest-42 Describe law in relation to Maintenance and inspection of documents in electronic form
Solution As per Section 120 of Companies Act, 2013, any document, record, register or minute, etc.,
required to be kept or allowed to be inspected or copies given may be kept or inspected in
the electronic form in the manner as specified in Rule 27, 28 and 29 of the Companies
(Management and Administration) Rules, 2014.
Rule 27 of the Companies (Management and Administration) Rules, 2014:-
Maintenance and inspection of documents in electronic form.
Every listed company or a company having at least 1000 shareholders, debenture-holders
and other security holders, shall maintain its records, as required to be maintained under the
Act or rules made thereunder, in electronic form.
Rule 28 - Security of records maintained in electronic forms
Managing Director, Company Secretary or any other director or officer of the company as
the Board may decide shall be responsible for the maintenance and security of electronic
records.
Rule 29 - Inspection
Where a company maintains its records in electronic form, any duty imposed by the Act or
rules made there under to make those records available for inspection or to provide copies of
the whole or a part of those records, shall be construed as a duty to make the records
available for inspection in electronic form or to provide copies of those records containing a
clear reproduction of the whole or part thereof, as the case may be on payment of not
exceeding ten rupees per page.
Quest-43 The Requisitionist of Illusions Private Limited, a company registered in New Delhi, has
decided to call an extra-ordinary general meeting in Madrid, Spain on 2nd October 2016.
Discuss whether the general meeting can be convened on the said date
Solution No, the meeting cannot be convened in the manner as stated.
As per the Companies (Management and Administration) Rules, 2014, the requisitionist
should convene the meeting in the registered office of the company or in the same city or
town in which the registered office is situated and it should be a working day.
Quest-44 The members of the Blumove Peacocks Private Limited, holding 1/10th voting power of the
company, requisitioned a meeting on 14th August, 2016 to the Board of Directors. However,
the directors did not pay any heed to such a requisition and did not call an extra-ordinary
324 Problems & Solutions Module 2
meeting. Discuss the consequences of the contravention of the same in accordance with the
Companies Act, 2013.
Solution Member can exercise an option to opt for EGM as per Section 100(4) read with Companies
(Management & Administration) Rules, 2014 in following manner:
1. The members may requisition convening of an extraordinary general meeting, by
providing such requisition in writing or through electronic mode at least clear twenty-
one days prior to the proposed date of such extraordinary general meeting.
2. The notice shall specify the place, date, day and hour of the meeting and shall contain
the business to be transacted at the meeting. —
Explanation.—For the purposes of this sub-rule, it is here by clarified that requistionists
should convene meeting at Registered office or in the same city or town where
Registered office is situated and such meeting should be convened on working day.
3. No explanatory statement as required under section 102 need be annexed to the notice of
an extraordinary general meeting convened by the requistionists and the requistionists
may disclose the reasons for the resolution(s) which they propose to move at the
meeting.
4. The notice of the meeting shall be given to those members whose names appear in the
Register of members of the company within three days on which the requistionists
deposit with the Company a valid requisition for calling an extraordinary general
meeting.
5. Where the meeting is not convened, the requistionists shall have a right to receive list of
members together with their registered address and number of shares held and the
company concerned is bound to give a list of members together with their registered
address made as on twenty first day from the date of receipt of valid requisition together
with such changes, if any, before the expiry of the forty-five days from the date of
receipt of a valid requisition.
6. The notice of the meeting shall be given by speed post or registered post or through
electronic mode. Any accidental omission to give notice to, or the non-receipt of such
notice by, any member shall not invalidate the proceedings of the meeting.
Quest-45 In a General meeting of Alpha Limited, the chairman directed to exclude certain matters
detrimental to the interest of the company from the minutes, Mukesh, a shareholder
contended that the minutes of the meeting must contain fair and correct summary of the
proceedings thereat. Decide, whether the contention of Mukesh is maintainable under the
provisions of the Companies Act, 2013?
Solution Under section 118 of the Companies Act, 2013, there shall not be included in the Minutes of
a meeting, any matter which, in the opinion of the Chairman of the meeting:
(i) is defamatory of any person;
(ii) is immaterial to the proceeding; or
(iii) is detrimental to the interests of the company;
Further, under section 118 the chairman shall exercise absolute discretion in regard to the
inclusion or non-inclusion of any matter in the Minutes on the grounds specified above.
Conclusion: Thus, we may conclude that, the contention of Mukesh, a shareholder of Alpha
Limited is not valid because the Chairman has absolute discretion on the inclusion or
exclusion of any matter in the minutes for aforesaid reasons
Quest-46 A General Meeting was scheduled to be held on 15th April, 2016 at 3.00 P.M. As per the
notice the members who are unable to attend a meeting in person can appoint a proxy and
the proxy forms duly filled should be sent to the company so as to reach at least 48 hours
before the meeting. Mr. X, a member of the company appoints Mr. Y as his proxy and the
proxy form dated 10-04-2016 was deposited by Mr. Y with the company at its registered
Chap. 7 General Meeting 325
Office on 11-04-2016. However, Mr. X changes his mind and on 12-04-2016 gives another
proxy to Mr. Z and it was deposited on the same day with the company. Similarly, another
member Mr. W also gives two separate proxies to two individuals named Mr. M and Mr. N.
In the case of Mr. M, the proxy dated 12-04-2016 was deposited with the company on the
same day and the proxy form in favour of Mr. N was deposited on 14-04-2016. All the
proxies viz., Y, Z, M and N were present before the meeting.
According to the provisions of the Companies Act, 2013, who would be the persons allowed
to represent at proxies for members X and W respectively?
Solution As per the provisions of Section 105 of the Companies Act, 2013, every shareholder who is
entitled to attend and vote has a right to appoint another person as his proxy. It is not
necessary that the proxy shall be a member of the company.
Any provision in the articles requiring instrument of proxy to be lodged with the company
more than 48 hours before a meeting shall have effect as if 48 hours had been specified
therein.
 Where two proxy instruments by the same shareholder are lodged before the expiry of
the time required for submitting, then the proxies, submitted later on shall be counted
and
 where one is lodged before and the other after the date fixed for submission, the former
will be counted.
Thus, in case of Member X, the proxy Z will be permitted to vote, whereas in the case of
Member W, the proxy M (and not Proxy N) will be permitted to vote as the proxy
authorizing N to vote was deposited in less than 48 hours before the meeting.
Quest-47 S, a shareholder, gives a notice for inspecting proxies, five days before the meeting is
scheduled and approaches the company two days before the scheduled meeting for
inspecting the same. What is the legal position relating to his actions?
Solution As per Section 105 of the Companies Act, 2013 every member entitled to vote at a meeting
of the company shall be entitled during the period beginning twenty-four hours before the
time fixed for the commencement of the meeting and ending with the conclusion of the
meeting, to inspect the proxies lodged, at any time during the business hours of the
company, provided not less than three days’ notice in writing of the intention so to inspect is
given to the company.
In the said case, S has given proper notice. Thus, S can undertake the inspection only during
the above-mentioned period and not two days prior to the meeting.
Quest-48 A limited want to pursue following 2 agendas for upcoming general meeting of company
Agenda-1: To consider the change in business of company from Chemical to Garments,
which require Special Resolution
Agenda-2: To increase the authorized share capital of company from `10 cr to `15 cr,
which require Ordinary Resolution
Company want to change its Article, whereby company want to alter the requirement of
passing above resolutions and to insert requirement of O/Res for Agenda No. 1 and S/Res
for Agenda No. 2
Discuss the validity of decision so taken by company
Solution A resolution shall be an Ordinary Resolution when
 The notice of general meeting required under the Act has been duly given, The votes
cast (whether on a show of hands, or electronically or on a poll) including the casting
vote if any of the chairmen exceed the votes if any cast against the resolution.
326 Problems & Solutions Module 2
A resolution shall be a Special Resolution when
 The notice of general meeting required under the Act has been duly given,
 The votes cast (whether on a show of hands, or electronically or on a poll) are at least 3
times the number of votes if any cast against the resolution
 The intention to propose the resolution as a special resolution has been duly specified in
the notice calling the general meeting or other intimation given to the members.
In addition to the requirements of the Act, a company’s own articles may prescribe for
special resolution where under the Act only an ordinary resolution is necessary. However,
where the Act specifies for a special resolution, the articles cannot provide for the different
kind of resolution.
Conclusion: Thus in given case, we may conclude that Alteration in Article shall be valid
for Agenda-2, as it requires S/res in place of O/res. However, Alteration in Article which
require O/res in place of S/Res shall be void
Quest-49 To remove the Managing Director, 40% members of Global Ltd. Submitted requisition for
holding extra-ordinary general meeting. The company failed to call the said meeting and
hence the requisitionists held the meeting. Since the Managing Director did not allow the
holding of meeting at the registered office of the Company, the said meeting was held at
some other place and a resolution for removal of the Managing Director was passed.
Examine the validity of the said meeting and resolution passed therein in the light of the
companies Act, 2013.
Solution It was held by the SC in case of LIC v Escorts that, Every shareholder of a company has a
right to requisition for an extraordinary general meeting. He is not bound to disclose the
reasons for the resolution to be proposed at the meeting.
Section 100 of the companies Act contains provisions regarding holding of extraordinary
general meetings. It provides that if directors fail to call a properly requisitioned meeting,
the requisitionists or such of the requisitionists as represent not less than 1/10th of the total
voting rights of all the members (or a majority of them) may call a meeting to be held on a
date fixed within 3 months of the date of the requisition.
Where a meeting is called by the requisitionists and the registered office is not made
available to them, still meeting will remain a valid meeting and Further, resolutions properly
passed at such a meeting, are binding on the company.
Thus, in the given case, since all the above mentioned provisions are duly complied with.
Hence the meeting with the resolution removing the managing director shall be valid.
Quest-50 To remove the Managing Director, 49% members of A Ltd, submitted requisition for holding
EGM. The company failed to call said meeting and hence the Requisitionist held the
meeting. Since the managing Director did not allow the holding of meeting at a Regd office,
said meeting was held at some other place and a resolution for removal of Managing
Director was passed. Examine the validity of said meeting and Resolution passed therein in
light of Companies Act, 2013
Solution Section 100 of the Companies Act, 2013 contains provisions regarding holding of
extraordinary general meetings. It provides that if directors fail to call EGM even after the
submission of request by any member u/s 100(4), the Requisitionist or such of the
Requisitionist as represent not less than 1/10th of the total voting rights may call a meeting
themselves.
This section further provides that where a meeting is called u/s 100(4), it shall be held within
3 months from submission of requisition.
Further, It was held by the SC in case of LIC v Escorts that, Requisitionist is not bound to
disclose the reasons for the resolution to be proposed at the meeting.
Chap. 7 General Meeting 327
Where a meeting is called by the Requisitionist and the registered office is not made
available to them, still meeting will remain a valid meeting and Further, resolutions properly
passed at such a meeting, are binding on the company.
Thus, in the given case, since all the above-mentioned provisions are duly complied with.
Hence the meeting with the resolution removing the managing director shall be valid.
Quest-51 Dinesh, a director in a company, gave in writing to the company that notice for any General
Meeting and the Board of Directors' Meeting be sent to him at his address in India only by
Registered Mail and for which he paid sufficient money. The company sent two notices to
him, of such meetings, by ordinary mail, under certificate of posting. Dinesh did not receive
the said notices and could not attend the meetings and the proceedings thereof on the
ground of improper notice. Decide in the light of the provisions of the Companies Act, 2013:
(i) Whether the contention of Dinesh is valid?
(ii) Would your answer be still the same in case Dinesh remained outside India for two
months (when such notices were given, and meetings held).
Solution Acc to the provisions of Section 101, the notice may be served personally or sent through
post to the registered address of the members and, in the absence of any registered office in
India, to the address, if there be any within India furnished by him to the company for the
purpose of servicing notice to him.
If, however, a member wants to notice to be served on him under a certificate or by
registered post with or with acknowledgement due and has deposited money with the
company to defray the incidental expenditure thereof, the notice must be served accordingly,
otherwise service will not be deemed to have been effected.
Based upon the above provisions, we can conclude as follow:—
(i) The contention of Dinesh is valid as the notice was not properly served and meetings
held by the company shall be invalid.
(ii) In view of the provisions of the Companies Act, 2013, as contained in Section 102, the
company is not bound to send notice to Dinesh at the address outside India.
Quest-52 Suppose in Question 51 above, what would be your answer if Company was a Nidhi
Company, having total share capital of ` 10,00,000 divided into 1,00,000 shares of ` 10
each and Dinesh was holding 100 shares of company and no notice of meeting was served to
him by company
Solution As per Section 20 of Companies Act, 2013 i.e. Service of notice by members, this section
shall apply subject to the modification in the case of a Nidhi.
Thus, in case of Nidhi company, the document may be served only on members who hold
shares of more than one thousand rupees in face value or more than one per cent, of the
total paid-up share capital of the Nidhi whichever is less.
For other shareholders, document may be served by a public notice in newspaper circulated
in the district where the Registered Office of the Nidhi is situated; and publication of the
same on the notice board of the Nidhi.
In given case, Dinesh is holding shares of face value of `1,000 only, which are even less
than 1% of share capital
Conclusion: Thus in given case, we may conclude that contention on part of company for
not servicing any notice to Dinesh is valid, provided company served a notice through
publication in newspaper as per the provisions of section 20.
Quest-53 Dev Limited issued a notice for holding of its Annual General Meeting on 7th November,
2005. The notice was posted to the members on 16.10.2005. Some members of the company
allege that the company had not complied with the provisions of the Companies Act, 2013
with regard to the period of notice and as such the meeting was not validly called. Referring
to the provisions of the Act, decide:
328 Problems & Solutions Module 2
(i) Whether the meeting has been validly called?
(ii) If there is a short fall in the number of days by which the notice falls short of the
statutory requirement, state and explain by how many days does the notice fall short of
the statutory requirement?
(iii) Can the short fall, if any, be condoned?
Solution As per Section 101 of Companies Act, 2013, the notice may be served either—
 Personally or
 Sent through post to the registered address of the members and in the absence of any
registered office in India, to the address, within India furnished by him to the company
for the purpose of serving notice to him or
 Through electronic mode.
The length of the notice must be 21 clear days i.e. while computing the 21 days, the day of
service of the notice and day of holding of the meeting are to be excluded.
Where a notice is sent by post, It shall be deemed to be received at the expiration of the 48
hours after the letter containing the same is posted.
Based upon above provisions, we may conclude as follow:-
(i) In given case 21 clear days notice has not been served (only 19 clear days notice is
served) and the meeting is, therefore, not validly convened.
(ii) Based upon the above calculation, notice falls short by 2 days.
An AGM called at a notice shorter than 21 clear days shall be valid if consent is given in
writing or by electronic mode by not less than ninety-five per cent of the members entitled
to vote at such meeting in writing either before or during or even after the meeting,
Quest-54 A Company served a notice of General Meeting upon its members. The notice stated that a
resolution to increase the share capital of the Company would be considered at such
Meeting. A shareholder complains that the amount of the proposed increase was not
specified in the notice. Is the notice valid?
Solution Whenever any special business is to be transacted at the meeting, an explanatory statement is
required to be annexed to the notice. It shall include—
(a) the nature of concern or interest, financial or otherwise, if any, in respect of each items
of—
(i) every director and the manager, if any;
(ii) every other key managerial personnel; and
(iii) relatives of the persons mentioned in sub-clauses (i) and (ii);
(b) any other information and facts that may enable members to understand the
meaning, scope and implications of the items of business and to take decision
thereon.
(c) Where any item of special business affects any other company, the extent of
shareholding interest in that other company of every promoter, director, manager, and of
every other key managerial personnel (KMP), if the same is atleast 2 % of the paid-up
share capital of company.
In given case, A Company served a notice of General Meeting upon its members for
increase the share capital of the Company, however a shareholder complains that the amount
of the proposed increase was not specified in the notice.
Conclusion: We may conclude that notice so given is an invalid notice since it does not
contain the information which may enable the members to understand implication of
proposed agenda and assist them to take decision thereon.
Chap. 7 General Meeting 329
Quest-55 XYZ Limited called its Annual General meeting on 28th September, 2007. The notice of the
meeting was posted on 6th September, 2007. With reference to the provisions of the
Companies Act, 2013 examine whether the notice given by the company was valid.
Solution Date of Posting = 6th September 2007
Notice shall be deemed to be received on =8th September 2007
21 clear days shall be taken from 9th September and would end on 29th September
However meeting was conducted on 28th September 2007
Thus it would amount to AGM on shorter notice and company is required to obtain consent
from all members for conducting AGM at shorter notice
Quest-56 STD Ltd. convened its Board of Directors meeting on 1st August, 2008 During the course of
the meeting the date for calling annual general meeting was discussed but no decision could
be taken on it in the meeting. However, the Secretary of the company issued the notice for
calling the annual general meeting of the shareholders without taking any authority from the
Board of Directors.
State who is the proper authority to issue the notice for calling the annual general meeting
and to whom such notice is to be given.
Solution Notice calling a General meeting can only be issued by
1. Board of Directors
2. Tribunal under Section 97 and Section 98
3. Requisitionist under Section 100(4)
Thus secretary is not entitled to issue any notice without authority from BOD
Every notice calling AGM shall be issued to
1. Members
2. Legal representatives/official assignee
3. Auditors
4. Director
Quest-57 The Articles of Association of X Ltd. require the personal presence of 7 members to
constitute quorum of General Meetings; The following persons were present in the extra-
ordinary general meeting to consider the appointment of Managing Director:
(i) A, the representative of Governor of Madhya 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?
Solution For the purpose of quorum, only members present in person and not by proxy are to be
counted.
If a company is a member of another company, it may authorize a person by resolution to act
as its representative at a meeting of a latter company, then such a person shall be deemed to
be a member present in person and counted for the purpose of quorum (Section 113)
Where two or more companies which are members of another company, appoint a single
person as their representative then each such company will be counted as quorum at a
meeting of the latter company.
Again Section 112 of the Companies Act, 2013 provides that the President of India or
Governor of a State, if he is a member of a company, may appoint such a person as he thinks
fit, to act as its representative at any meeting of the company. A person so appointed shall be
330 Problems & Solutions Module 2
deemed to be a member of such a company and thus considered as member personally
present.
PSH will not be counted for the purpose of Quorum
In view of the above there are only three members personally present.
Quest-58 The quorum for a General meeting of a public company is 15 members personally present
according to the provisions of the articles of association of the company. Examine with
reference to the provisions of the Companies Act, 2013 whether there is proper quorum at a
General meeting of the company which was attended by the following persons:
(i) 13 members personally present
(ii) 2 members represented by proxies who are not members of the company
(iii) One person representing two member companies.
Solution As per Section 103 of Companies Act, 2013, Quorum means minimum number of
members that must be present in order to constitute a valid meeting.
 As per Section 113 of Companies Act, 2013, Where a company is a member of another
company, it may attend the meeting of any other company through a representative.
 The representative must be appointed by a resolution of the board of directors.
 The person so appointed is entitled to exercise the same rights and powers (including
the right to vote by proxy) on behalf of the company as the member personally present
may exercise.
(i) 13 members personally present: -They shall be considered as Member Personally
present
(ii) 2 members represented by proxies who are not members of the company-Will not
be counted as member personally present
(iii) One person representing two member companies-He shall be counted as 2 members
personally present
Thus requirement of Article i.e. 15 members personally present is satisfied and meeting can
be held as quorum is present
Quest-59 What is the concept of proxy in relation to the meetings of a Company? Decide the
appointment and rights of a proxy, under the Companies Act, 2013, in the following cases:
(i) When a body corporate is a member in the company.
(ii) When a foreign company is a member in the company.
Solution 1. Section 113 of the Companies Act, 2013 provides that where a company is a member of
another company it may attend the meeting of any other company through a
representative. The representative so appointed is entitled to exercise the same rights and
powers (including the right to vote by proxy) on behalf of the company as the individual
member of the company may exercise.
2. Foreign company can also make the use of this provision and can appoint their
Representatives. [Section 112]
Quest-60 The Chairman of the meeting of a company received a Proxy 54 hours before the time fixed
for the start of the meeting. He refused to accept the Proxy on the ground that the Articles of
the company provided that a Proxy must be filed 60 hours before the start of the meeting.
Decide, under the provisions of the Companies Act, 2013 whether the Proxy holder can
compel the Chairman to admit the Proxy?
Solution As per Section 105 of Companies Act, 2013, Every member who is entitled to attend and
vote at a meeting of the company shall be entitled to appoint another person (whether a
member or not) as his proxy to attend and vote instead of himself.
Chap. 7 General Meeting 331
 Legal Formalities regarding instrument Appointing Proxy- Proxy shall be
appointed by submission of proxy form, which shall be
 In writing
 Signed by the member/his attorney
 (If the appointer is body corporate, the instrument should be under its seal)
 In Form specified under MGT-11
Time limit for submission of proxy form: It should be submitted to the company 48 hours
before the meeting. In case Article provides any further shorter period than it should be
complied with
In given case, chairman of the meeting of a company received a Proxy 54 hours before the
time fixed for the start of the meeting, which he refused to accept on the ground that the
Articles of the company provided that a Proxy must be filed 60 hours before the start of the
meeting.
Conclusion: Any provisions contained in the Articles of a company that requires a longer
period than 48 hours before a meeting of the company for depositing a proxy shall be void.
Thus contention Proxy Holder may compel the Chairperson to accept such proxy form.
Quest-61 K, a member of MNO Limited, appoints L as his proxy to attend the general meeting of the
company. Later he (K) also attends the meeting. Both K (the member) and L (the proxy)
voted on a particular resolution in the meeting. K’s vote was declared invalid by the
chairman stating that since he has appointed the proxy and L’s vote has been considered as
valid. K objects to the decision of the Chairman. Decide, under the provisions of the
Companies Act, 2013 whether K’s objection shall be taxable.
Solution Section 105 of Companies Act, 2013 lay down the circumstances where Proxy appointed
by member may be revoked, As per this section, revocation shall be allowed
1. When a member appointing a proxy, personally attend the meeting.
2. When a member appointing a proxy, appoint another proxy at a later date, in such a case
person appointed proxy subsequently shall be treated as proxy
3. Where intimation of death or insanity is received prior to commencement of meeting
(whether original or adjourned)
4. Where intimation of transfer of shares is received by company prior to commencement
of meeting (whether original or adjourned)
Thus, we may conclude that decision by Chairman is invalid. Since K i.e. a member himself
attended a meeting and voted on resolution, it will amount to revocation of proxy. Thus any
vote put by L i.e. proxy shall be invalid
Quest-62 The articles of ABC Limited provided that only those shareholders would be entitled to vote
whose names have been there on the Register of Members for two months before the date of
the meeting. X' a member, of the ABC Limited was holding 200 equity shares of the
company. X transferred his shares to Y before one month form the date on which the meeting
was due. The name of Y could not be entered in the Register of Members as the application
of transfer of shares was pending. Y attended the meeting but he was prohibited by the
company from exercising his voting right on the ground that he has not hold his shares for
specified period as provided in the articles before the date of the meeting.
State whether Y can exercise his voting right in the meeting? State also the grounds upon
which Y may be excluded from exercising his voting rights in the meeting of the
shareholders.
Solution As per Section 106 of Companies Act, 2013, voting right of members may be restricted in
following circumstances:—
(i) In case of nonpayment of Calls due on shares
332 Problems & Solutions Module 2
(ii) In case of non-payment of other dues against the members
(iii) Where right of lien is exercised by the company in respect of shares
In given case: Articles of ABC Limited provided that only those shareholders would be
entitled to vote whose names have been there on the Register of Members for two months
before the date of the meeting.
Conclusion: we may conclude that A public limited company cannot impose any restriction
on voting right of its members on any ground other than those specified under section 106.
Since above ground of restriction is not covered under section 106, thus restriction so
imposed shall be invalid
Situation, where company is a private limited company
Section 106 shall apply to a private company; unless otherwise specified in the articles of the
company.
Thus, situation would have been different, if ABC would have been a private limited
company, since the Law allow private limited company to insert an additional condition
through its Article.
Quest-63 C, a member of LS & Co. Ltd., holding some shares in his own name on which Final call
money has not been paid, is denied by the company voting right at a general meeting on the
ground that the articles of association do not permit a member to vote if he has not paid the
calls on the shares held by him. With reference to the provisions of the Companies Act,
2013, examine the validity of company's denial to C of his voting right.
Solution As per Section 106 of Companies Act, 2013, voting right of members may be restricted in
following circumstances:—
(i) In case of non-payment of Calls due on shares
(ii) In case of non-payment of other dues against the members
(iii) Where right of lien is exercised by the company in respect of shares
Section 106 shall apply to a private company; unless otherwise specified in the articles of the
company.
In given case: C a member of LS & Co Pvt Ltd holding some shares in his own name on
which Final call money has not been paid and company denied voting right to him
Conclusion: We may conclude that company is justified in its action by imposing restriction
on voting power of C
Quest-64 Suppose in above Question, articles of the company do not contain any provision restricting
the exercise of voting right of member, then what would be your answer
Solution A member cannot be prevented from voting, even though, calls or other sum payable by him
have not been paid or the company has exercised any right of lien over his shares unless the
articles contain any such provision. Thus, is there is no such provisions in article, voting
power cannot be restricted
Quest-65 J held 100 partly paid up shares of LKM Limited. The company asked him to pay the final
call money on the shares. Due to some unavoidable circumstances he was unable to pay the
amount of call money to the company. At a general meeting of the shareholders, the
chairman disallowed him to cast his vote on the ground that the articles do not permit a
shareholder to vote if he has not paid the calls on the shares held by him. J contested the
decision of the Chairman. Referring to the provisions of the Companies Act, 2013 decide
whether the contention of J is valid
Solution As per Section 106 of Companies Act, 2013, voting right of members may be restricted in
following circumstances:—
Chap. 7 General Meeting 333
(i) In case of non-payment of Calls due on shares
(ii) In case of non-payment of other dues against the members
(iii) Where right of lien is exercised by the company in respect of shares
Section 106 shall apply to a private company; unless otherwise specified in the articles of the
company.
In given case, J a member of LKM Limited holding 100 shares on which Final call money
has not been paid and company denied voting right to him
Conclusion: We may conclude that company is justified in its action by imposing restriction
on voting power of J.
Quest-66 At a General meeting of a company, a matter was to be passed by a special resolution. Out
of 40 members present, 20 voted in favour of the resolution, 5 voted against it and 5 votes
were found invalid. The remaining 10 members abstained from voting. The Chairman of the
meeting declared the resolution as passed.
With reference to the provisions of the Companies Act, 2013, examine the validity of the
Chairman's declaration.
Solution As per Section 114 of Companies Act, 2013
A resolution shall be a Special Resolution when
 The notice of general meeting required under the Act has been duly given,
 The votes cast (whether on a show of hands, or electronically or on a poll) are at least 3
times the number of votes if any cast against the resolution
The intention to propose the resolution as a special resolution has been duly specified in the
notice calling the general meeting or other intimation given to the members.
Since, In the given problem, the votes cast in favour (20) being more than 3 times of the
votes cast against (5), if other conditions of Section 114(2) are satisfied, the decision of the
Chairman is in order.
Quest-67 For a special resolution in a Company's general meeting, 10 voted in favour, 2 against and
4 abstained. The chairman declared the resolution as passed. Is it a valid resolution as per
the provisions of the Companies Act, 2013?
Solution As per Section 114 of Companies Act, 2013
A resolution shall be a Special Resolution when
 The notice of general meeting required under the Act has been duly given,
 The votes cast (whether on a show of hands, or electronically or on a poll) are at least 3
times the number of votes if any cast against the resolution
The intention to propose the resolution as a special resolution has been duly specified in the
notice calling the general meeting or other intimation given to the members.
In given case, in a Company's general meeting, 10 voted in favour, 2 against and 4
abstained.
Conclusion: Thus, we may conclude that S/Res has been passed, as votes in favour are at
least 3 times the number of votes if any cast against the resolution
Quest-67A Difference between ordinary resolution and Special resolution
Solution Ordinary Resolution—
Section 114(1) of the Companies Act, 2013 states that a resolution shall be ordinary
resolution, if the notice required under this Act has been duly given and it is required to be
passed by the votes cast, whether on a show of hands, or electronically or on a poll, as the
case may be, in favour of the resolution, including the casting vote of the Chairman, if any,
of the Chairman, by members, who, being entitled so to do, vote in person, or where proxies
334 Problems & Solutions Module 2
are allowed, by proxy or by postal ballot, exceed the votes, if any cast against the resolution
by members, so entitled and voting.
In other words, the votes cast in the favour of the resolution exceed the votes cast against it.
Special Resolution—
As per Section 114(2) of the Act, a resolution shall be a special resolution, when–
(a) The intention to propose the resolution as a special resolution has been duly specified in
the notice calling the general meeting or other intimation given to the members of the
resolution;
(b) The notice required under this Act has been duly given; and
(c) The votes cast in favour of the resolution, whether on a show of hands, or electronically
or on a poll, as the case may be, in favour of the resolution, including the casting vote of
the Chairman, if any, of the Chairman, by members, who, being entitled so to do, vote in
person, or where proxies are allowed, by proxy or by postal ballot, are required to be not
less than 3 times the number of the votes, if any, cast against the resolution by members
so entitled and voting.
Quest-68 The minutes of the meeting must contain fair and correct summary of the proceedings
thereat. Can the Chairman direct exclusion of any matter from the minutes? Some of the
shareholders insist on inclusion of certain matters which are regarded as defamatory of a
Director of the company. The Chairman declines to do so. State how the matter can be
resolved.
Solution Under section 118 of the Companies Act, 2013 any matter which in the opinion of the
Chairman of the meeting:
(i) Reasonably be regarded as defamatory of any person;
(ii) Irrelevant or immaterial to the proceedings, or
(iii) Detrimental to the interests of the company,
The Chairman shall exercise an absolute discretion in regard to the inclusion or non-
inclusion of any matter in the minutes on the grounds specified above.
Since the Chairman has absolute discretion on the inclusion or exclusion of any matter in the
minutes, the insistence of the shareholders will be of no avail.
Quest-69 XYZ Limited held its Annual General Meeting on September 15, 2006. The meeting was
presided over by Mr. V, the Chairman of the Company’s Board of Directors. On September
17, 2006, Mr. V, the Chairman, without signing the minutes of the meeting, left India to look
after his father who fell sick in London. Referring to the provisions of the Companies Act,
2013, state the manner in which the minutes of the above meeting are to be signed in the
absence of Mr. V and by whom.
Solution As per Section 118 of Companies Act, 2013, Minutes may be defined as a process of
keeping of a record of proceedings at a meeting including decision arrived at such meeting.
Every company shall maintain minutes of all proceedings of general meetings. Entries of the
proceedings must be made in the books kept for that purpose within thirty days of every
such meeting
Signature on minutes: Each page of every such minute book should be initialed or signed.
 Last page of book shall be dated and signed by the chairman of the same meeting within
a period of thirty days
 In the event of death or inability of the chairman, by a director duly authorized by the
board for the purpose.
In given case, Mr. V, the Chairman of the said meeting left India to look after his father who
fell sick in London, when minutes of the annual general meeting were not yet recorded and
signed.
Chap. 7 General Meeting 335
Thus, we may conclude that in given case, minutes shall be signed by a director duly
authorized by the board for the purpose.
Quest-70 MN Limited held its Annual General Meeting on 27th March, 20011. Mr. M, the Chairman
of the said meeting died on 1st April, 2008, when minutes of the annual general meeting
were not yet recorded and signed. How would you deal with the situation? Would your
answer be" different in case the meeting held on 27th March, 2008 was a Board meeting?
Solution As per Section 118 of Companies Act, 2013, Minutes may be defined as a process of
keeping of a record of proceedings at a meeting including decision arrived at such meeting.
Every company shall maintain minutes of all proceedings of general meetings. Entries of the
proceedings must be made in the books kept for that purpose within thirty days of every
such meeting
Signature on minutes: Each page of every such minute book should be initialed or signed.
 Last page of book shall be dated and signed by the chairman of the same meeting within
a period of thirty days
 In the event of death or inability of the chairman, by a director duly authorized by the
board for the purpose.
In given case, Mr. M, the Chairman of the said meeting died on 1st April, 2008, when
minutes of the annual general meeting were not yet recorded and signed.
Thus we may conclude that in given case, minutes shall be signed by a director duly
authorized by the board for the purpose.
Situation if meeting held on 27th March, 2008 was a Board meeting
Section 118 also deals with maintaining of minutes of board meetings. Thus if the meeting
in above case was a Board Meeting, then minutes shall be signed by Chairman of same
meeting or chairman of succeeding meeting. In addition there is no time limit for signing
minutes for meeting of Board.
Quest-71 The Board of Directors of Alltronix Ltd, have passed resolution to the effect that no member
who is indulging in activities detrimental to the interest of the company be permitted to
examine the records or obtain certified copies thereof. A member of the Company,
considered by the Company to be acting against the interests of the Company, demands
inspection of the register of members and minutes of General Meeting and certified true
copies thereof. The Company refuses the inspection etc. on the strength of the resolution
referred to above. Examine the correctness of the refusal by the Company referring to the
provisions of the Companies Act, 2013.
Solution As per Section 118 of Companies Act, 2013, Minutes may be defined as a process of
keeping of a record of proceedings at a meeting including decision arrived at such meeting.
Every company shall maintain minutes of all proceedings of general meetings. Entries of the
proceedings must be made in the books kept for that purpose within thirty days of every
such meeting
According to the provisions contained in Section 119 (1) of the Companies Act, 1956, every
member of the Company is entitled to inspect the Register of Members without payment of
any fee subject to reasonable restrictions imposed by the company by its Articles. There is
no qualification to this right granted to every member of the company and any resolution
passed by the Board to the contrary cannot override the provisions of the Act and will
therefore be null and void. Therefore the refusal of the company in the present case is illegal.
Quest-72 30 out of 75 members of a company submitted a requisition for holding of an EGM. Main
motto was there to remove Mr. Ram i.e. a managing director. Company fails to call the
meeting consequently Requisitionists themselves called the meeting at the registered office of
the company.
336 Problems & Solutions Module 2
On the appointed day, registered office was kept under lock and key was kept by Ram
himself. Thus, members were obliged to hold the meeting elsewhere and adopted resolution
removing the managing director from office. Is the resolution valid?
Solution As per Section 100 of Companies Act, 2013: Extraordinary General Meeting may be called
by
 Board,
 Requisitionist or
 Tribunal.
Eligibility of members to call EGM:
Case A For company having share capital-Members holding at least 10% of the paid
up share capital of the company,
CaseB For company having no share capital- Members having at least 1/10 of the
total voting power
As per Companies (Management and Administration) Rules, 2014
Requisitionist shall be entitled to convene EGM. The notice of EGM by Requisitionist shall
specify the place, date, day and hour of the meeting and shall contain the business to be
transacted at the meeting.—
Requistionists should convene meeting at Registered office or in the same city or town
where Registered office is situated, and such meeting should be convened on working day.
In given case, since Company fails to call the meeting consequently Requisitionist
themselves convene the meeting at the registered office of the company.
On the appointed day, registered office was kept under lock and thus members were obliged
to hold the meeting elsewhere and adopted resolution removing the managing director from
office.
Conclusion: - We may conclude that requirement to convene the meeting at registered office
have been duly complied as law impose a restriction on convening of meeting only and there
is no restriction on conducting the meeting at place other than registered office.
Quest-73 The auditor of a company was not provided a notice of a general meeting of the company.
Company contends that since no part of the business of that meeting concerned the auditor,
no notice was required to be given to him, Advice? Whether Auditor is entitled to participate
in the meeting
Solution As per Section 101 of Companies Act, 2013
The notice of meeting may be served
 Personally or
 Sent through post to the registered address of the members and in the absence of any
registered office in India, to the address, within India furnished by him to the company
for the purpose of serving notice to him or
 Through electronic mode.
Section further requires that notice shall be send to
(i) Every member of the company.
(ii) Legal Representative/Official Assignees
(iii) Auditor of a company
(iv) Every director of company
Further As per Section 146, all notices of, and other communications relating to, any
general meeting shall be forwarded to the auditor of the company, and the auditor shall,
unless otherwise exempted by the company, attend either by himself or through his
authorised representative, who shall also be qualified to be an auditor, any general meeting
Chap. 7 General Meeting 337
and shall have right to be heard at such meeting on any part of the business which concerns
him as the auditor.
In given case, the auditor of a company was not provided a notice of a general meeting of
the company, as Company contends that since no part of the business of that meeting
concerned the auditor, no notice was required to be given to him
Conclusion: We may conclude that contention on part of company is not valid, as Auditor is
entitled to received notice of meeting whether or not he is concerned with proposed agenda
Quest-74 Jai Mata Di (Pvt.) Ltd. provides in the Articles of Association of the company, special
requirements for the forms of proxy. 'Z', a member, submits a form of proxy to the company
in the form given in Schedule MGT-11 of the Companies Act, 2013. The company rejects the
proxy.
Solution As per Section 105 of Companies Act, 2013
Every member who is entitled to attend and vote at a meeting of the company shall be
entitled to appoint another person (whether a member or not) as his proxy to attend and vote
instead of himself.
Legal Formalities regarding instrument Appointing Proxy-Proxy shall be appointed
through a proxy form
 In writing
 Signed by the member/his attorney
 (If the appointer is body corporate, the instrument should be under its seal)
 In Form specified under MGT-11
 It should be submitted to the company, 48 hours before the meeting
In given case, Jai Mata Di (Pvt.) Ltd. provides in the Articles of Association of the company,
special requirements for the forms of proxy. 'Z', a member, submits a form of proxy to the
company in the form given in Schedule MGT-11 of the Companies Act, 2013, which was
rejected by company.
Conclusion: We may conclude that Company has to accept the proxy submitted as per
Schedule MGT-11
Quest-75 The chairman counts six votes in favour and seven against the resolution. Can the chairman
cast his own vote, which he had not exercised earlier, in favour of the resolution and also
casting vote which the Articles authorize and declare the resolution as passed?
Solution Now try to make answer yourself through following steps
Step-1-Mention provisions of Section 104 i.e. Chairperson and also mention right of voting
available to chairperson
Step-2-provide problem which exist in given case
Step-3-Provide conclusion
Conclusion: Vote so cast by chairperson is not valid, since if a chairman wants to put his
vote he shall cast it along with other members, but not after declaration of result.
Quest-76 The paid-up share capital of ABC Limited is `5 lakhs consisting of 50,000 equity shares of
`10 each fully paid-up. Certain members of the company holding the following shares
requisitioned an extraordinary general meeting on 1-2-2000:
A 2,250 shares
B 2,000 shares including 500 bonus shares
C 1,000 shares including 500 right shares.
The directors have failed to call the meeting on the pretext that the articles have not
permitted the same. What is the course of action open to the aforesaid members?
338 Problems & Solutions Module 2
Solution As per Section 100 of Companies Act, 2013, Extraordinary General Meeting may be called
by—
 Board Suo motto – The Board may, whenever it thinks fit, call an extraordinary general
meeting. Wherein notice of 21 clear days shall be provided to members
 Requisitionist – Eligible requisitionist may submit requisition for convening such
meeting.
If board failed to proceed on such requisition, requisitionist may proceed to convene
meeting u/s 100(4). Any such EGM u/s 100(4) by requisitionist shall be conducted
within 3 months from submission of requisition to board of directors. For EGM u/s
100(4), procedure prescribed under company (Management and administration) rules
2014 shall be complied
 Tribunal – May also conduct such meeting u/s 98, if it become impracticable to conduct
such meeting
Section 100 further provide eligibility of requisitionist to convene such meeting, which shall
be
Case 1 For company having share capital Members holding at least 10% of the paid up
share capital of the company,
Case2 For company having no share capital Members having at least 1/10 of the total
voting power
In given case, certain members holding the following shares requisitioned an extraordinary
general meeting for ABC Limited
A 2,250 shares
B 2,000 shares including 500 bonus shares
C 1,000 shares including 500 right shares.
Conclusion: Based upon the above provisions, we may conclude that in aggregate since all
A. B & C are holding more than 10% of share capital of company (i.e.5250 shares @ `10
each out of 50,000 share of `10 each), thus directors were liable to convene said meeting
due to refusal by directors in such convening, requisitionist may convened the meeting u/s
100(4)
Quest-77 A, a non-member of XYZ Ltd, had been appointed as a director of the company. Later on, he
became Chairman of the company. In an annual general meeting of XYZ Ltd., A presided
over the meeting. Z, a member of the company, objected to his chairmanship on the ground
that A is not a member of the company. Discuss the validity of Z's claim.
Solution Try to make answer yourself through following steps
Step-1-Mention provisions of Section 104 i.e. Chairperson and how he can be appointed
Step-2-provide problem which exist in given case
Step-3-Provide conclusion
Conclusion: Company may mention name of any person as their chairman in their AOA.
Thus, it is not mandatory that such person shall be a member only, hence claim by Z is not
valid
Quest-78 Notice of meeting by electronic mode is not an ordinary notice. Comment on this statement
Solution This statement is true, since notice of meeting wherein E-Voting facility as provided u/s
108 is available shall also includes the particulars such as:-
(a) that the company is providing facility for voting by electronic means and the business
may be transacted through such voting;
(b) that the facility for voting, either through electronic voting system or ballot or polling
paper shall also be made available at the meeting and members attending the meeting
Chap. 7 General Meeting 339
who have not already cast their vote by remote e-voting shall be able to exercise their
right at the meeting;
(c) that the members who have cast their vote by remote c-voting prior to the meeting may
also attend the meeting but shall not been titled to cast their vote again;
In addition notice shall also: -
(a) indicate the process and manner for voting by electronic means;
(b) indicate the time schedule including the time period during which the votes may be cast
by remote e-voting;
(c) provide the details about the login ID;
(d) specify the process and manner for generating or receiving the password and for casting
of vote in a secure manner.
Quest-79 Whether company can withdraw the resolution proposed for voting by electronic mode
Solution As per Section 108 read with Rule 20- are solution proposed to be considered through
voting by electronic means shall not be withdrawn.
Quest-80 Discuss the validity of Notice of meeting as dispatched to members
A company want to pass a resolution for alteration in its object clause, which require
special resolution as per Section 13 of Companies Act, 2013. Requirement of proposed
agenda was specified in agenda convening meeting along with explanatory statement,
however requirement to pass S/res was not mentioned in notice
Solution As per Section 114(2) of the Act, a resolution shall be a special resolution, when—(a) The
intention to propose the resolution as a special resolution has been duly specified in the
notice calling the general meeting or other intimation given to the members of the resolution
Thus in above case, notice of meeting was invalid
Quest-81 Z Ltd i.e. a listed company submitted their Annual Return, however office of ROC refused to
accept such Return stating that it has not been signed by authorized persons on behalf of
company. In light of provisions of Companies Act, 2013 states
1. When Annual Return shall be submitted
2. In case of Listed Company, by whom its shall be signed
3. Also prescribe the relevant form no
Solution Above case is based upon the provisions of section 92 of Companies Act, 2013
1. Every company shall file with the Registrar a copy of the annual return, within 60days
from the date on which the annual general meeting is held or where no annual general
meeting is held in any year within sixty days from the date on which the annual general
meeting should have been held together with the statement specifying the reasons for not
holding the annual general meeting
2. As per the provisions of this section, the annual return, filed by a listed company or, by a
company having such paid-up capital and turnover as may be prescribed, shall be
certified by a company secretary in practice in the prescribed form, stating that the
annual return discloses the facts correctly and adequately and that the company has
complied with all the provisions of this Act.
3. Every company shall prepare its annual return in Form No. MGT.7.
Quest-82 M.H. Company Limited served a notice of general meeting upon its shareholders. The notice
stated that the issue of sweat equity shares would be considered at such meeting. Mr. 'A', a
shareholder of the M.H. Company Limited Complains that the issue of sweat equity shares
was not specified fully in the notice. Is the notice issued by M.H. Company Limited
regarding issue of sweat equity shares valid according to the provisions of the Companies
Act, 2013? Explain fully
340 Problems & Solutions Module 2
Solution According to Section 102 an explanatory statement shall be annexed to every notice if it
proposes any special business in upcoming meeting. Explanatory statement is the
responsibility of BOD. If any notice is issued without providing such statement, then it shall
be considered as Invalid Notice
In given case, notice so issued shall be taken as invalid notice as it does not contain an
explanatory statement
Quest-83 Annual General Meeting of a Public Company was scheduled to be held on 15.12.2003. Mr.
A, a shareholder, issued two Proxies in respect of the shares held by him in favour of Mr.
‘X’ and Mr. ‘Y’. The proxy in favour of ‘Y’ was lodged on 12.12.2003 and the one in favour
of Mr. X was lodged on 15.12.2003. The company rejected the proxy in favour of Mr. Y as
the proxy in favour of Mr. Y was of dated 12.12.2003 and thus in favour of Mr. X was of
dated 15.12.2003. Is the rejection by the company in order?
Solution As per Section 105 of the Companies Act, 2013, a proxy should be deposited 48 hours
before the time of the meeting. In the given case, the proxies should have, therefore, been
deposited on or before 13.12.2003 (the date of the meeting being 15.12.2003). X deposited
the proxy on 15.12.2003.
Therefore, proxy in favour of Mr. X has become invalid. Thus, rejecting the proxy in favour
of Mr. Y is unsustainable. Proxy in favour of Y is valid since it is deposited in time.
Quest-84 Zenab Limited held its Annual General Meeting on September 15, 2016. The meeting was
presided over by Mr. Venkat, the Chairman of the Company’s Board of Directors. On
September 17, 2016, Mr. Venkat, the Chairman, without signing the minutes of the meeting,
left India to look after his father who fell sick in London. Referring to the provisions of the
Companies Act, 2013, state the manner in which the minutes of the above meeting are to be
signed in the absence of Mr. Venkat and by whom.
Solution Given problem is based on Section 118 of Companies Act, 2013
As per this Section, every company shall prepare, sign and keep minutes of proceedings of
every general meeting, including the meeting called by the requisitionists and all
proceedings of meeting of any class of shareholders or creditors or Board of Directors or
committee of the Board and also resolution passed by postal ballot within thirty days of the
conclusion of every such meeting concerned.
Minutes kept shall be evidence of the proceedings recorded in a meeting.
Further as per Companies (Management and Administration) Rules 2014 read with section
118 of the Companies Act, 2013 each page of every such book shall be initialed or signed
and the last page of the record of proceedings of each meeting or each report in such books
shall be dated and signed by the chairman of the same meeting or in the event of the death or
inability of that chairman within that period, by a director duly authorized by the Board for
the purpose.
Conclusion: Thus, in above case we may conclude that the minutes of the meeting can be
signed in the absence of Mr. Venkat, by any director who is authorized by the Board.
Quest-85 Glowing Products Ltd. wishes to sell one of its line of Business and decides to call an extra
ordinary general meeting (EGM) and to pass a resolution thereat. State the material facts to
be set out in the statement to be annexed to the notice of the EGM on this special business to
be transacted at the meeting.
Solution As per Section 102(1) of Companies Act, 2013 explanatory statement shall includes:
(a) the nature of concern or interest, financial or otherwise, if any, in respect of each items
of—
(i) every director and the manager, if any;
(ii) every other key managerial personnel; and
(iii) relatives of the persons mentioned in sub-clauses (i) and (ii);
Chap. 7 General Meeting 341
(b) any other information and facts that may enable members to understand the meaning,
scope and implications of the items of business and to take decision thereon.
Further, where any item of special business to be transacted at a meeting of the company
relates to or affects any other company, the extent of shareholding interest in that other
company of every promoter, director, manager, if any, and of every other key managerial
personnel of the first mentioned company shall, if the extent of such shareholding is atleast
2% of the paid up share capital of that company, also be set out in the statement.
Quest-86 The date of approval of financial statements by the Board of Directors of KMP Ltd. is
17thJuly, 2016 and the date of notice of Annual General meeting (AGM) is 25th August,
2016. Accountant of KMP Ltd. has advised that the time gap between date of approval of
financial statements by the Board of Directors and the date of notice of AGM should be 45
days. The Directors have approached you to advise them regarding the same in view of the
provisions of Companies Act, 2013.
Solution As per the provisions of Section 101 of the Companies Act, 2013, a general meeting of a
company may be called by giving at least clear 21 days’ notice.
However, the Companies Act, 2013 does not prescribe the time limit between the date of
approval of financial statements by the Board of Directors of a company and the date of
notice of Annual General Meeting.
Thus, in the given question, Board of directors of KMP Ltd. should ensure that the gap
between the board meeting in which the financial statements are approved and the AGM,
shall contain a minimum gap of 21 clear days, unless the meeting is at a shorter notice.
Quest-87 Examine the validity of the following decisions of the Board of Directors with reference of
the provisions of the Companies Act, 2013.
(i) In an Annual General Meeting of a company having share capital, 80 members present
in person or by proxy holding more than 1/10th of the total voting power, demanded for
poll. The chairman of the meeting rejected the request on the ground that only the
members present in person can demand for poll.
(ii) In an annual general meeting, during the process of poll, the members who earlier
demanded for poll want to withdraw it. The chairman of the meeting rejected the request
on the ground that once poll started, it cannot be withdrawn.
Solution As per the provisions of Section 109 of the Companies Act, 2013
Order of demand for poll by the chairman of meeting: A poll may be ordered to be taken
by the Chairman of the meeting on his own motion, and shall be ordered to be taken by him
on a demand made in that behalf:—
(a) In the case a company having a share capital, by the members present in person or by
proxy, where allowed, and having not less than one-tenth of the total voting power or
holding shares on which an aggregate sum of not less than five lakh rupees or such
higher amount as may be prescribed has been paid-up; and
(b) in the case of any other company, by any member or members present in person or by
proxy, where allowed, and having not less than one tenth of the total voting power.
Withdrawal of the demand: The demand for a poll may be withdrawn at any time by the
persons who made the demand.
Hence, on the basis on the above provisions of the Companies Act, 2013:
(i) The chairman cannot reject the demand for poll subject to provision in the articles of
company.
(ii) The chairman cannot reject the request of the members for withdrawing the demand of
the Poll.
342 Problems & Solutions Module 2
Quest-88 Mr. Pink held 100 partly paid up shares of Red Limited. The company asked him to pay the
final call money on the shares. Due to some unavoidable circumstances he was unable to
pay the amount of call money to the company. At a general meeting of the shareholders, the
chairman disallowed him to cast his vote on the ground that the articles do not permit a
shareholder to vote if he has not paid the calls on the shares held by him. Mr. Pink contested
the decision of the Chairman. Referring to the provisions of the Companies Act, 2013 decide
whether the contention of Mr. Pink is valid.
Solution As per Section 106 of the Companies Act, 2013, articles of a company may provide that no
member shall exercise any voting right in respect of any shares registered in his name on
which any calls or other sums presently payable by him have not been paid, or in regard to
which the company has exercised any right of lien.
In the given case the articles of the company do not permit a shareholder to vote if he has not
paid the calls on the shares held by him. Therefore, the chairman at the meeting may refuse
him the right to vote at the meeting and Mr. Pink’s contention is not valid.
Quest-89 Benson Limited issued a notice with the agenda for nine businesses to be transacted in the
Annual General Meeting (two businesses were regarding appointment of Mr. Sahu and Mr.
Pranav as directors). The chairman decided to move the resolutions for all the nine
businesses together to save the time of the members present. Examine the validity of the
resolutions.
Solution As a general practice, to avoid any confusion, the resolutions are generally moved separately
in the annual general meeting.
However, there is no restriction in Companies Act, 2013 stating that if the Chairman of the
meeting desires that two or more resolutions should be moved together, unless any member
requires that each resolution should be put to vote separately or unless a poll is demanded in
respect of any.
The only occasions, where law specifically requires a resolution to be moved separately is
relating to appointment of directors at a general meeting of a public or private company,
where two or more directors cannot be appointed as directors by a single resolution.
Thus, in the given case, all the nine businesses cannot be moved together as two businesses
were regarding appointment of Mr. Sahu and Mr. Pranav as directors. Besides these two
resolutions, other seven resolutions can be moved together if the members unanimously
agree.
Quest-90 The Board of Directors of Shrey Ltd. called an extraordinary general meeting upon the
requisition of members. However, the meeting was adjourned on the ground that the quorum
was not present at the meeting. Advise the company.
Solution According to section 100 of the Companies Act, 2013, the Board of directors must convene
a general meeting upon requisition by the stipulated minimum number of members.
As per Section 103 of the Companies Act, 2013, if the quorum is not present within half an
hour from the appointed time for holding a meeting of the company, the meeting, if called
on the requisition of members, shall stand cancelled.
Therefore, in the given case, meeting shall stands cancelled and the stand taken by the Board
of Directors to adjourn it, is not proper.
Quest-91 Examine the validity of the following decisions of the Board of Directors with reference of
the provisions of the Companies Act, 2013.
In an Annual General Meeting of Vrinda Ltd. having share capital, 80 members present in
person or by proxy holding more than 1/10th of the total voting power, demanded for poll.
The chairman of the meeting rejected the request on the ground that only the members
present in person can demand for poll.
Chap. 7 General Meeting 343
Solution As per section 109 of the Companies Act, 2013
Demand of poll may be made by
(a) In the case a company having a share capital, by the members present in person or by
proxy, where allowed, and having not less than one-tenth of the total voting power or
holding shares on which an aggregate sum of not less than five lakh rupees or such
higher amount as may be prescribed has been paid-up; and
(b) in the case of any other company, by any member or members present in person or by
proxy, where allowed, and having not less than one tenth of the total voting power.
Quest-92 Heavy Metals Limited wants to provide financial assistance to its employees, to enable them
to subscribe for certain number of fully paid shares. Considering the provision of the
Companies Act, 2013, what advice would you give to the company in this regard?
Solution As per Section 67 of the Companies Act, 2013 no public company is allowed to give,
directly or indirectly and whether by means of a loan, guarantee, or security, any financial
assistance for the purpose of, or in connection with, a purchase or subscription, by any
person of any shares in it or in its holding company.
However, section 67 makes an exception by allowing companies to give loans to their
employees other than its directors or key managerial personnel, for an amount not exceeding
their salary or wages for a period of six months with a view to enabling them to purchase or
subscribe for fully paid-up shares in the company or its holding company
Thus, in given case Heavy Metals Ltd can provide financial assistance upto the specified
limit to its employees to enable them to subscribe for the shares in the company provided
amount of loan shall not exceed 6 months salary of an employee.
Quest-93 If a member of a listed company who has casted his vote through electronic voting can
attend general meeting of the company and change his vote subsequently and can he appoint
a proxy?
Solution According to Rule 20 of the Companies (Management and Administration) Rules, 2014, the
notice of the meeting shall clearly state that the members who have cast their vote by remote
e-voting prior to the meeting may also attend the meeting but shall not be entitled to cast
their vote again.
In the instant case, a member of a listed company who has casted his vote through electronic
voting can attend general meeting of the company but cannot change his vote subsequently
and is not permitted to appoint a proxy.
Quest-94 Om Limited served a notice of General Meeting upon its members. The notice stated that the
[Nov-19] following resolutions will be considered at such meeting:
(i) Resolution to increase the Authorised share capital of the company.
(ii) Appointment and fixation of the remuneration of Mr. Prateek as the auditor.
A shareholder complained that the amount of the proposed increase and the remunerations
was not specified in the notice. Is the notice valid under the provisions of the Companies
Act, 2013.
Solution As per Section 102(1) of Companies Act, 2013 explanatory statement shall includes:
(c) the nature of concern or interest, financial or otherwise, if any, in respect of each items
of—
(i) every director and the manager, if any;
(ii) every other key managerial personnel; and
(iii) relatives of the persons mentioned in sub-clauses (i) and (ii);
(d) any other information and facts that may enable members to understand the meaning,
scope and implications of the items of business and to take decision thereon.
344 Problems & Solutions Module 2
Based upon the above provision of section 102, we may conclude as follow:—
(i) In the absence of amount of proposed increase of share capital, the notice will be treated
as invalid.
(ii) Appointment and fixation of the remuneration of Mr. Prateek as the auditor is an
ordinary business and hence explanatory statement is not required.
However, considering the two resolutions mentioned in the question are to be passed in the
same meeting, thus we may conclude that notice of the meeting is invalid.
Thus, the objection of the shareholder is valid since the details on the item to be considered
are lacking.
Quest-95 PQ Limited is a public company having its registered office in Mumbai. It has 3680
[Dec 20] members. The company sent notice to all its members for its Annual general meeting to be
held on 2nd September 2019 (Monday) at 11:00 AM at its registered office. On the day of
meeting there were only 12 members personally present upto 11:30 AM. The Chairman
adjourned the meeting to same day in next week at the same time and place.
On the day of adjourned meeting only 10 members were personally present. The Chairman
initiated the meeting after 11:30 AM and passed the resolution after discussions as per the
agenda of the meeting given in notice. Comment whether the AGM conducted after
adjournment is valid or not as per the provisions of section 103 of Companies Act, 2013 by
explaining the relevant provisions in this regard.
What would be your answer in the above case, if PQ Limited is a Private company?
Solution According to section 103 of the Companies Act, 2013, unless the articles of the company
provide for a larger number, in case of a public company, fifteen members personally
present may fulfil the requirement of quorum, if the number of members as on the date of
meeting is more than one thousand but up to five thousand.
If the specified quorum is not present within half-an-hour from the time appointed for
holding a meeting of the company, the meeting shall stand adjourned to the same day in the
next week at the same time and place, or to such other date and such other time and place as
the Board may determine.
If at the adjourned meeting also, a quorum is not present within half-an-hour from the time
appointed for holding meeting, the members present shall be the quorum.
In the given case, there were only 12 members personally present on the day of meeting of
PQ Limited upto 11:30 AM. This was not in compliance with the required quorum as per the
law. In the adjourned meeting also, the required quorum was not present but in the adjourned
meeting, the members present shall be considered as quorum in line with the provisions of
section 103.
Hence, the AGM conducted by PQ Limited after adjournment is valid.
As per the provisions of section 103(1)(b), in case of a private company, two members
personally present, shall be quorum for the meeting of a company. Therefore, in case, PQ
Limited is a private company, then only two members personally present shall be the
quorum for AGM and there was no need for adjournment.
 Chapter 8
DIVIDEND

PRACTICAL QUESTION
Quest-1 The shareholders at an annual general meeting passed a resolution for payment of dividend
at a rate higher than that recommended by the directors. Discuss the validity of the
resolution under the Companies Act, 2013.
Hint As per Regulation 80 of Table F, the company in general meeting may declare dividends,
but no dividend shall exceed the amount recommended by the Board.
Thus we may conclude that shareholder cannot pass a resolution for payment of dividend at
higher rate
Quest-2 The Board of Directors of XYZ Company Limited at its meeting declared a dividend on its
paid- up equity share capital which was later on approved by the company’s Annual
General Meeting. In the meantime the directors at another meeting of the Board decided by
passing a resolution to divert the total dividend to be paid to shareholders for purchase of
investments for the company. As a result dividend was paid to shareholders after 45 days.
Examining the provisions of the Companies Act, 2013, state:
(i) Whether the act of directors is in violation of the provisions of the Act and also the
consequences that shall follow for the above act of directors?
(ii) What would be your answer in case the amount of dividend to a shareholder is adjusted
by the company against certain dues to the company from the shareholder?
Solution According to section 127 of the Companies Act, 2013, where a dividend has been declared
by a company but has not been paid within 30 days from the date of declaration to any
shareholder entitled to the payment of the dividend, every director of the company shall, if
he is knowingly a party to the default, is liable for the punishment under the said section.
In the given case, the Board of Directors of XYZ Company Limited at its meeting decided
by passing a resolution to divert the total dividend to be paid to shareholders for purchase of
investment for the company. As a result dividend was paid to shareholders after 45 days.
Thus, based on above situation, we may conclude as follow:-
(i) The Board of Directors of XYZ Company Limited is in violation of section 127 of the
Companies Act, 2013 as it failed to pay dividend to shareholders within 30 days due to
their decision to divert the total dividend to be paid to shareholders for purchase of
investment for the company.
Consequences: The following are the consequences for the violation of above provisions:
(a) every director of the company shall, if he is knowingly a party to the default, be
punishable with imprisonment which may extend to 2years and with fine which shall not
be less than one thousand rupees for every day during which such default continues; and
the company shall be liable to pay simple interest at the rate of 18% p.a. during the
period for which such default continues.
346 Problems & Solutions Module 2
(b) If the amount of dividend to a shareholder is adjusted by the company against certain
dues to the company from the shareholder, then failure to pay dividend within 30 days
shall not be deemed to be an offence as per section 127 of the Companies Act, 2013.
Quet-3 The Board of Directors of ABC Limited proposes to declare dividend at the rate of 20% to
the equity shareholders, despite the fact that the company has defaulted in repayment of
public deposits accepted before the commencement of this Act.
Solution Given problem is based on provisions of Section 123(6) of the Companies Act, 2013
According to said section, a company which fails to comply with the provisions of section
73 (Prohibition of acceptance of deposits from public) and section 74 (Repayment of
deposits, etc., accepted before the commencement of this Act) shall not, so long as such
failure continues, declare any dividend on its equity shares.
In the given instance, the Board of Directors of ABC Limited proposes to declare dividend
at the rate of 20% to the equity shareholders, in spite of the fact that the company has
defaulted in repayment of public deposits accepted before the commencement of the
Companies Act, 2013.
Conclusion: Based upon the above provision, declaration of dividend by the ABC Limited
is not valid.
Quest-4 A Public Company has been declaring dividend at the rate of 20% on equity shares during
the last 3 years. The Company has not made adequate profits during the year ended 31st
March, 2015, but it has got adequate reserves which can be utilized for maintaining the rate
of dividend at 20%. Advise the Company as to how it should go about if it wants to declare
dividend at the rate of 20% for the year 2014-15 as per the provisions of the Companies Act,
2013.
Hint As per Rule 3 of the Companies (Declaration and Payment of Dividend) Rules), 2014,
A company may declare dividend out of surplus subject to the fulfillment of the following
conditions:
(a) The rate of dividend declared shall not exceed the average of the rates at which dividend
was declared by it in the 3 years immediately preceding that year;
Provided that this sub-rule shall not apply to a company, which has not declared any
dividend in each of the three preceding financial year.
(b) The total amount to be drawn from such accumulated profits shall not exceed one-tenth
of the sum of its paid-up share capital and free reserves as appearing in the latest audited
financial statement;
The amount so drawn shall first be utilised to set off the losses incurred in the financial
year in which dividend is declared before any dividend in respect of equity shares is
declared;
(c) The balance of reserves after such withdrawal shall not fall below 15% of its paid up
share capital as appearing in the latest audited financial statement.
In the given case therefore, the company can declare a dividend of 20% provided balance of
reserves after such withdrawal shall not fall below 15% of its paid up share capital as
appearing in the latest audited financial statement.
Thus, in this case company shall put up the Dividend recommended by Board for the
approval of the members at the Annual General Meeting since the authority to declare lies
with the members of the company.
Quest-5 The Annual General Meeting of ABC Limited declared a dividend at the rate of 30 percent
payable on paid up equity share capital of the Company as recommended by Board of
Directors on 30th April, 2014. But the Company was unable to post the dividend warrant to
Mr. Ranjan, an equity shareholder of the Company, up to 30th June, 2014. Mr. Ranjan filed
Chap. 8 Dividend 347
a suit against the Company for the payment of dividend along with interest at the rate of 20
percent per annum for default period. Decide in the light of provisions of the Companies
Act, 2013, whether Mr. Ranjan would succeed? Also state the directors' liability in this
regard under the Act.
Solution Section 127 of the Companies Act, 2013 lays down the penalty for non-payment of dividend
within the prescribed time period.
Under section 127 where a dividend has been declared by a company but has not been paid
within 30 days from the date of declaration to any shareholder entitled to the payment of the
dividend:
(a) every director of the company shall, if he is knowingly a party to the default, be
punishable with imprisonment which may extend to 2 years and with fine which shall
not be less than one thousand rupees for everyday during which such default continues;
and
(b) the company shall be liable to pay simple interest at the rate of 18% p.a. during the
period for which such default continues.
Therefore, in the given case Mr. Rajan will not succeed in his claim for 20% interest as the
limit under section 127 is 18% per annum.
Quest-6 WL Limited is facing loss in business during the current financial year 2015-16. In the
immediate preceding three financial years, the company had declared dividend at the rate of
8%, 10% and 12% respectively. To maintain the goodwill of the company, the Board of
Directors has decided to declare 12% interim dividend for the current financial year.
Examine the applicable provisions of the Companies Act, 2013 and state whether the Board
of Directors can do so?
Solution Given problem is based on provisions of Section 123(3) of the Companies Act, 2013
According to this section, The Board of Directors of a company may declare interim
dividend during any financial year or at any time during the period from closure of financial
year till holding of the annual general meeting out of the surplus in the profit and loss
account or out of profits of the financial year for which such interim dividend is sought to be
declared or out of profits generated in the financial year till the quarter preceding the date of
declaration of the interim dividend
However, in case the company has incurred loss during the current financial year up to the
end of 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 company is facing loss during the current financial year 2015-16. In the
immediate preceding three financial years, the company declared dividend at the rate of 8%,
10% and 12%.
Conclusion: Based upon the above provisions, we may conclude that 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 [i.e. 8+10+12=30/3=10%].
Therefore, decision of Board of Directors to declare 12% of the interim dividend for the
current financial year is not tenable.
Quest-7 Star Ltd. declared and paid dividend in time to all its equity holders for the financial year
2014-15, except in the following two cases:
(i) Mrs. Sheela, holding 250 shares had mandated the company to directly deposit the
dividend amount in her bank account. The company accordingly remitted the dividend,
but the bank returned the payment on the ground that there was difference in surname of
the payee in the bank records. The company, however, did not inform Mrs. Sheela about
this discrepancy.
348 Problems & Solutions Module 2
(ii) Dividend amount of `50,000 was not paid to Mr. Mohan, deceased, in view of court
order restraining the payment due to family dispute about succession.
You are required to analyses these cases with reference to provisions of the Companies Act,
2013 regarding failure to distribute dividends.
Solution Both situations are based on provisions of section 127 of Companies Act, 2013
(i) Section 127 of the Companies Act, 2013 provides for punishment for failure to distribute
dividend on time. One of such situations is where a shareholder has given directions to
the company regarding the payment of the dividend and those directions cannot be
complied with and the same has not been communicated to her.
In the given situation, the company has failed to communicate to the shareholder Mrs.
Sheela about non-compliance of her direction regarding payment of dividend. Hence,
the penal provisions under section 127 will be applicable.
(ii) Section 127also provides that no offence shall be deemed to have been committed where
the dividend could not be paid by reason of operation of law.
In the present circumstance, the dividend could not be paid because it was not allowed to be
paid by the court until the matter was resolved about succession. Hence, there will not be
any liability on the company and its Directors etc.
Quest-8 Blacksmith Coal Limited suffered losses in the first and second quarter of the financial year
2015-16. In the third quarter of the year company has earned large amount of profits. In
order to maintain credibility of the company, the Board of Directors declares an interim
dividend at the rate of 25 percent on the paid-up equity share capital. The Managing
Director of the company gives the Board the following details regarding the dividend
declared in the previous 4 years:
Financial year ending 31st March Rate of Dividend declared
2012 15%
2013 15%
2014 15%
2015 30%
Examining the provisions of the Companies Act, 2013, decide the validity of the Board’s
declaration of 25% interim dividend as stated above.
Solution Given problem is based on provisions of Section 123(3) of the Companies Act, 2013
According to this section, The Board of Directors of a company may declare interim
dividend during any financial year or at any time during the period from closure of financial
year till holding of the annual general meeting out of the surplus in the profit and loss
account or out of profits of the financial year for which such interim dividend is sought to be
declared or out of profits generated in the financial year till the quarter preceding the date of
declaration of the interim dividend:
However, in case the company has incurred loss during the current financial year up to the
end of 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.
Thus, after taking into account the above provisions, the declaration of interim dividend at
the rate of 25% is violative of the provisions of the Act and therefore, invalid for there as on
s that the rate of dividends declared is in excess of the average profits of the preceding three
years, which is 20% [(15%+15%+30%)/3].
The Interim dividend proposed to be declared should not be more than 20 percent.
Chap. 8 Dividend 349
Quest-9 Mr. Ramesh had purchased shares from Mr. Bhanu on 31st December, 2015. He applied to
the company for the transfer of shares in his name but the company failed to register the
shares in his name. On 20th January, 2016, the company declared dividend. Referring to the
provisions of the Companies Act, 2013, comment whether Mr. Ramesh, is entitled to receive
the dividends?
Solution Given problem is based on provisions of Section 126 of the Companies Act, 2013
As per this section, where any instrument of transfer of shares has been delivered to any
company for registration and the transfer of such shares has not been registered by the
company, the company shall transfer the dividend in relation to such shares to the Unpaid
Dividend Account referred in section 124 unless the company is authorised by the registered
holder of such share in writing to pay such dividend to the transferee specified in such
instrument of transfer.
Applying the above provisions to given situation, the company shall transfer the dividend in
relation to Mr. Ramesh’s share to the unpaid dividend account unless the company is
authorised by Mr. Bhanu, the registered holder of such shares, in writing to pay such
dividend to Mr. Ramesh, the transferee, specified in the instrument of transfer.
Quest-10 XYZ, a Government Company (100% paid up capital is held by a State Government) has
been declaring dividend at the rate of 20% during the last 3 years. The Company has not
made adequate profits during the year ended 31st March, 2015, but it has got adequate
reserves which can be utilized for maintaining the rate of dividend at 20%. State in the light
of the Companies Act, 2013 whether the XYZ company can declare dividend for the year
2014-15.
Solution Given problem is based on provisions of Section 123(1) of the Companies Act, 2013
As per the second proviso to section 123(1) of the Companies Act, 2013, where a company,
owing to inadequacy or absence of profits in any financial year, proposes to declare dividend
out of the accumulated profits earned by it in previous years and transferred by the company
to the reserves, such declaration of dividend shall be made only in accordance with
prescribed rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014.
However as per the Notification by MCA, this proviso shall not apply to a Government
Company where the entire paid up share capital is held by the Central Government, or by
any State Government or Governments or by the Central Government and one or more State
Governments.
In the given case, therefore, the XYZ, a Government Company cannot declare dividend out
of accumulated Reserves in the financial year 2014-15.
Quest-11 Mr. Representative had purchased shares from Mr. Owner on 30th November, 2015. He
applied to the company for the transfer of shares in his name but the company failed to
register the shares in his name. On 20th January, 2016, the company declared dividend.
Referring to the provisions of the Companies Act, 2013, comment whether Mr.
Representative is entitled to receive the dividends?
Solution Given problem is based on provisions of Section 126 of the Companies Act, 2013
As per this section, where any instrument of transfer of shares has been delivered to any
company for registration and the transfer of such shares has not been registered by the
company, the company shall transfer the dividend in relation to such shares to the Unpaid
Dividend Account referred in section 124 unless the company is authorised by the registered
holder of such share in writing to pay such dividend to the transferee specified in such
instrument of transfer
Accordingly in the given situation, Mr. Representative is entitled to receive the dividend.
The company shall transfer the dividend in relation to Mr. Representative’s share to the
Unpaid Dividend Account unless the company is authorized by Mr. Owner, the registered
350 Problems & Solutions Module 2
holder of such shares, in writing to pay such dividend to Mr. Representative, the transferee,
specified in the instrument of transfer.
Quest-12 Adarsh Ltd. declared the dividend at the rate of 8% to their shareholders. Many
shareholders failed to claim the payment of dividend. Examine the legal position in the
following situations—
(i) What shall be duty of the company where the payment of dividend have not been claimed
by the shareholders.
(ii) Where the company put the unpaid dividend amount in circulation for the business
purpose.
Solution According to the section 124 of the Companies Act, 2013 where a dividend has been
declared by a company but has not been paid or claimed within thirty days from the date of
the declaration to any shareholder entitled to the payment of the dividend, the company
shall, within seven days from the date of expiry of the said period of thirty days, transfer the
total amount of dividend which remains unpaid or unclaimed to a special account to be
opened by the company in that behalf in any scheduled bank to be called the Unpaid
Dividend Account.
Default in transferring of amount:
If any default is made in transferring the total amount as referred above or any part thereof to
the Unpaid Dividend Account of the company, it shall pay, from the date of such default,
interest on so much of the amount as has not been transferred to the said account, at the rate
of twelve per cent per annum and the interest accruing on such amount shall ensure to the
benefit of the members of the company in proportion to the amount remaining unpaid to
them.
(i) Where the payment of dividend have not been claimed by the shareholders, there the
company Adarsh Ltd. shall, within seven days from the date of expiry of the said period
of thirty days, transfer the total amount of unpaid/unclaimed dividend to a special
account to be opened by the company in any scheduled bank to be called the Unpaid
Dividend Account.
(ii) Since the Adarsh Ltd. put the unpaid dividend amount in circulation for the business
purpose, it is considered as default made on the part of the company in transferring the
total amount to the Unpaid Dividend Account of the company. Here the company shall
pay, from the date of such default, interest on so much of the amount as has not been
transferred to the said account, at the rate of twelve per cent per annum.
Quest-13 R Limited did not have sufficient profits during the preceding financial year. The Board of
Directors of the company propose to declare dividend out of the accumulated profits earned
during the previous years which were transferred to some other reserves other than free
reserves. Examine the validity of the above act referring to the provisions of the Companies
Act, 2013.
Solution As per section 123(1) of the Companies Act, 2013, where a company, owing to inadequacy
or absence of profits in any financial year, proposes to declare dividend out of the
accumulated profits earned by it in previous years and transferred by the company to the
reserves, such declaration of dividend shall be made only in accordance with prescribed
rules of the Companies (Declaration and Payment of Dividend) Rules, 2014. Such dividend
shall be declared or paid by a company only from its free reserves. No other reserve can be
utilized for the purposes of declaration of such dividend.
Hence the decision of the Board of Directors of R Ltd. is not valid to declare dividend from
any reserve other than free reserves.
Quest-14 You are required to examine with reference to the provisions of the Companies Act, 2013 the
following issues pertaining to declaration and payment of dividend:
Chap. 8 Dividend 351
(i) Brix Limited has earned a profit of `1,000 crore for the financial year 2016-17. It has
proposed a dividend @ 8.75%. However, it does not intend to transfer any amount to the
reserves of the company out of the profits earned. Can Brix Limited do so?
(ii) Wilson Limited is facing loss in business during the current financial year 2016-17. In
the immediate preceding three financial years, the company had declared dividend at
the rate of 8%, 10% and 12% respectively. To maintain the goodwill of the company, the
Board of Directors has decided to declare 12% interim dividend for the current
financial year. Is the act of Board of Directors valid?
(iii) The Director of Som Limited proposed dividend at 12% on equity shares for the
financial year 2016-17. The same was approved in the Annual General Meeting of the
company held on 20th September, 2017. The Directors declared the approved dividends.
Mr. Ninja was the holder of 1,000 equity shares on 31st March, 2017, but he has
transferred the shares to Mr. Raj, whose name has been registered on 20th May, 2017.
Who will be entitled to the above dividend.
(iv) Mr. Alok, holding equity shares of face value of `10 lakh has not paid an amount of
`1 lakh towards call money on shares. Can the same be adjusted against the dividend
amount payable to him?
Solution (i) The amount to be transferred to reserves out of profits for a financial year has been left
at the discretion of the company acting vide its Board of Directors. The company is free
to transfer any part of its profits to reserves as it deems fit. There is no restriction to
transfer any specific amount (i.e. even no amount can be transferred) to the reserves
before declaration of dividend.
(ii) 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 [i.e.
(8+10+12)/3 = 30/3 =10%]. Therefore, decision of Board of Directors to declare 12%
interim dividend for the current financial year is not tenable. They can declare a
maximum 10% interim dividend.
(iii) According to section 123(5) of the Companies Act, 2013, dividend shall be payable only
to the registered shareholder of the share or to his order or to his banker. Facts in the
given case state that Mr. Ninja, the holder of equity shares transferred the shares to Mr.
Raj whose name has been registered on 20th May 2017. Since, he became the registered
shareholder before the declaration of the dividend in the Annual general meeting of the
company held on 20th September 2017, so, Mr. Raj will be entitled to the dividend.
(iv) Yes, as per law, where the dividend is declared by a company and there remains calls in
arrears and any other sum due from a member, in such case the dividend can be lawfully
adjusted by the company against any sum due to it from the shareholder.
Thus, company can adjust sum of `1 lakh due towards call money on shares against the
dividend amount payable to Mr. Alok.
Quest-15 Examine the validity of given situations as per the Companies Act, 2013:
(i) A company wants to transfer more percentage of profits to reserves than it had
transferred in the previous year.
(ii) A company wants to declare dividends out of past reserves instead of current year
profits.
Solution Section 123 of the Companies Act, 2013 deals with the provision related to the declaration
of dividend.
(i) The first proviso to 123 (1) of the Companies Act, 2013 provides that a company may,
before the declaration of any dividend in any financial year, transfer such percentage of
its profits for that financial year as it may consider appropriate to the reserves of the
company.
352 Problems & Solutions Module 2
Therefore, under the Companies Act, 2013 the amount transferred to reserves out of
profits for a financial year has been left at the discretion of the company acting vide its
Board of Directors. Therefore, the company is free to transfer any part of its profits to
reserves as it deems fit.
(ii) The second proviso to section 123(1) of the Companies Act, 2013 permits a company to
declare dividend out of the accumulated profits earned by it in previous years and
transferred by the company to the reserves subject to the rules prescribed in this behalf.
Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 provides
for the declaration of dividend out of reserves as under:
(1) The rate of dividend declared does not exceed the average of the rates at which dividend
was declared by it in the 3 years immediately preceding that year.
However, this rule will not apply if a company has not declared any dividend in each of
the three preceding financial year.
(2) The total amount to be drawn from the accumulated profits earned in previous years and
transferred to the reserves does not exceed an amount equal to 1/10th of the sum of its paid-
up capital and free reserves as appearing in the latest audited financial statement. The
amount so drawn must first be utilized to set off losses incurred in the financial year before
any dividend in respect of equity shares is declared.
(3) The balance of reserves after such drawal shall not fall below 15% of its paid-up share
capital as appearing in the latest audited financial statement.
Quest-16 Alma limited proposes to transfer more than 10% of the profits of the company to the
reserves for the current year, before the declaration of dividend @ 12%. Is Alma Limited
allowed to do so?
Solution The company is free to transfer any part of its profits to reserves as it deems fit.
Quest-17 Section 8 companies are also entitled to declare dividend to their members. Comment on this
statement
Solution This statement is incorrect.
As per section 8(1), the companies having license under Section 8 i.e. companies which are
formed with Charitable Objects, etc. are prohibited from paying any dividend to its
members. These companies are intended to be applied only in promoting the objects of the
company.
Quest-18 Referring to the provisions of the Companies Act, 2013, examine the validity of the
Following
The Board of Directors of ABC Limited proposes to declare dividend at the rate of 20% to
the equity shareholders, despite the fact that the company has defaulted in repayment of
public deposits accepted before the commencement of this Act.
Solution As per Section 123(6) of the Companies Act, 2013, a company which fails to comply with
the provisions of section 73 (Prohibition of acceptance of deposits from public) and section
74(Repayment of deposits, etc., accepted before the commencement of this Act) shall not, so
long as such failure continues, declare any dividend on its equity shares.
In the given case, the Board of Directors of ABC Limited proposes to declare dividend at the
rate of 20% to the equity shareholders, in spite of the fact that the company has defaulted in
repayment of public deposits accepted before the commencement of the Companies Act,
2013.
Thus, we may conclude that, declaration of dividend by the ABC Limited is not valid.
Quest-19 PET Ltd., incurred loss in business upto current quarter of financial year 2017-18. The
company has declared dividend at the rate of 12%, 15% and 18% respectively in the
immediate preceding three years. Inspite of the loss, the Board of Directors of the company
Chap. 8 Dividend 353
have decided to declare interim dividend @ 15% for the current financial year. Examine the
decision of PET Ltd. stating the provisions of declaration of interim dividend under the
Companies Act, 2013.
Solution According to section 123(3) of the Companies Act, 2013,
According to this section, The Board of Directors of a company may declare interim
dividend during any financial year or at any time during the period from closure of financial
year till holding of the annual general meeting out of the surplus in the profit and loss
account or out of profits of the financial year for which such interim dividend is sought to be
declared or out of profits generated in the financial year till the quarter preceding the date of
declaration of the interim dividend
However, in case the company has incurred 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 given case, Interim dividend by PET Ltd. shall not be declared at a rate higher than the
average dividends declared by the company during the immediately preceding three
financial years i.e.15%.
Thus decision of Board of Directors to declare 15% of the interim dividend for the current
financial year is tenable.
Quest-20 PQ Ltd. declared and paid 10% dividend to all its shareholders except Mr. Kumar, holding
500 equity shares, who instructed the company to deposit the dividend amount directly in his
bank account. The company accordingly remitted the dividend, but the bank returned the
payment on the ground that the account number as given by Mr. Kumar doesn't tally with
the records of the bank. The company, however, did not inform Mr. Kumar about this
discrepancy. ·Comment on this issue with reference to the provisions of the Companies Act,
2013 regarding failure to distribute dividend.
Solution According to this section:
(1) Where a dividend has been declared by a company but has not been paid or the warrant
in respect thereof has not been posted within thirty days from the date of declaration to
any shareholder entitled to the payment of the dividend, every director of the company
shall, if he is knowingly a party to the default, be punishable with imprisonment which
may extend to two years.
(2) He shall also be liable for a fine which shall not be less than 1,000 rupees for every day
during which such default continues.
(3) The company shall also be liable to pay simple interest at the rate of 18% p.a. during the
period for which such default continues.
However, the following are the exceptions under which no offence shall be deemed to have
been committed:
(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the payment of the
dividend and those directions cannot be complied with and the same has been
communicated to him;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawful y adjusted by the company against any sum due to it
from the shareholder; or
(e) where, for any other reason, the failure to pay the dividend or to post the warrant
within the period under this section was not due to any default on the part of the
company.
354 Problems & Solutions Module 2
In the instant case, PQ Ltd. has failed to communicate to the shareholder Mr. Kumar about
non-compliance of his direction regarding payment of dividend.
Conclusion-Penal provisions under section 127 will be attracted.
Quest-21 Sun Light Limited was incorporated on 22nd January, 2019 with the objects of providing
[Dec-20] software services. The Company adopted its first financial year as from 22nd January, 2019
to 31st March 2020. The financial statement for the said period, after providing for
depreciation in accordance with Schedule II of the Companies Act, 2013 revealed net profit.
The Board of Directors declared 20% interim dividend at their meeting held on 7th July,
2020, before holding its first Annual General Meeting. In the light of the provisions of the
Companies Act, 2013 and Rules made thereunder:
(i) Whether the Company has complied due diligence in declaring interim dividend?
(ii) Whether the Company can declare dividend in case it was registered under Section 8 of
the Companies Act, 2013?
(iii) What are the penal consequences in case of failure to pay the interim dividend?
Solution 1. According to section 123(3) of the Companies Act, 2013, the Board of Directors of a
company may declare interim dividend during any financial year or at any time during
the period from closure of financial year till holding of the annual general meeting out of
the surplus in the profit and loss account or out of profits of the financial year for which
such interim dividend is sought to be declared or out of profits generated in the financial
year till the quarter preceding the date of declaration of the interim dividend.
In the instant case, Sun Light Limited has complied due diligence in declaring interim
dividend as the Interim Dividend was declared by Board of Directors at their meeting
held on 7th July, 2020 before holding its first Annual General Meeting. Also, the
financial statement revealed net profit so the interim dividend can be paid out of profits
of the financial year ending 31st March, 2020.
2. According to section 8 (1) of the Companies Act, 2013, a company having licence under
Section 8 (Formation of companies with charitable objects, etc.) is prohibited from
paying any dividend to its members. Its profits are intended to be applied only in
promoting the objects for which it is formed.
3. According to section 127 of the Companies Act, 2013, where a dividend has been
declared by a company but has not been paid or the warrant in respect thereof has not
been posted within thirty days from the date of declaration to any shareholder entitled to
the payment of the dividend, every director of the company shall, if he is knowingly a
party to the default, be punishable with imprisonment which may extend to two years
and with fine which shall not be less than one thousand rupees for every day during
which such default continues and the company shall be liable to pay simple interest at
the rate of eighteen per cent per annum during the period for which such default
continues.
Quest-22 AB Limited is a public company having its registered office in Coimbatore. The company
[Dec-20] has incurred a net loss of `20 lakhs in the Financial Year (FY) 2019-20. The Board of
Directors (BOD) wants to declare dividend for the FY 2019-20. The balances of the
company as per the latest audited financial statements are as follows:
1. Equity Share Capital (`10 each) - 100 lakhs
2. General Reserve - 150 lakhs
3. Debenture redemption Reserve - 50 lakhs
The company has not declared any dividend in the preceding three financial years. Decide
whether AB Limited is allowed to declare dividend or not for the FY 2019-20 by explaining
the relevant provisions of the Companies Act in this regard.
If allowed to declare dividend then state the maximum amount of dividend that can be paid
by AB Limited as per the Section 123 of Companies Act, 2013.
Chap. 8 Dividend 355
Solution In the given case, AB Limited has not made adequate profits during the current year ending
on 31st March, 2020, but it still wants to declare dividend. Therefore, Rule 3 of the
Companies (Declaration and Payment of Dividend) Rules, 2014 will be applied.
According to the said rule, the required conditions are:
Condition I: The rate of dividend declared shall not exceed the average of the rates at which
dividend was declared by the company in the three years immediately preceding that year.
Since the company has not declared any dividend in the preceding three financial years,
hence condition I is not applicable in this case.
Condition II: The total amount to be drawn from such accumulated profits shall not exceed
10% of its paid-up share capital and free reserves as appearing in the latest audited financial
statement.
Paid-up capital + Free reserves = `(100 + 150) Lakhs (General reserves are free reserves)
= `250 Lakhs
10% thereof = `25 Lakhs
The amount so drawn shall first be utilized to set off the losses incurred in the financial year
in which dividend is declared before any dividend in respect of equity shares is declared.
The amount drawn as stated above = `25 Lakhs
Less: loss for the financial year 2019-2020 = `20 Lakhs
Amount available = `5 Lakhs
Hence, the quantum of dividend is further restricted to `5 lakhs.
Condition III: The balance of reserves after such withdrawal shall not fall below 15% of its
paid up share capital as appearing in the latest audited financial statement.
Accumulated Reserves `150 Lakhs
Proposed withdrawal declaration of dividend `5 Lakhs
Balance of Reserves `145 Lakhs
This is more than 15% of paid-up capital (i.e. 15% of `100 Lakhs) i.e. `15 lakhs. Thus, the
company can declare a dividend of `5 lakhs.
Hence, by following above provisions, AB Limited is allowed to declare dividend for the FY
2019-2020 and the maximum amount of dividend that can be paid is `5 Lakhs.
 Chapter 9
ACCOUNTS OF COMPANY

PRACTICAL QUESTION
Quest-1 The Board of directors of Bharat Ltd. has a practical problem. The registered office of the
company is situated in a classified backward area of Maharashtra. The Board wants to keep
its books of account at its corporate office in Mumbai which is conveniently located. The
Board seeks your advice about the feasibility of maintaining the accounting records at a
place other than the registered office of the company. Advise.
Solution According to section 128(1) of the Companies Act, 2013
Every company shall prepare and keep at its registered office
 books of account and other relevant books and papers and
 financial statement
for every financial year which give a true and fair view of the state of the affairs of the
company, including that of its branch office or offices, if any.
Such books of Accounts shall be kept on accrual basis and according to the double entry
system of accounting.
The company may also keep all or any of the books of accounts at any other place in India as
the Board of directors may decide.
In such a case, the company should file with the Registrar of Companies, a notice in writing
giving the full address of that place within 7 days of the Boards’ decision. (AOC-5)
Therefore, the Board of Bharat Ltd. is empowered to keep its books of account at its
corporate office in Mumbai by following the above procedure.
Quest-2 Rajasthan Textiles Limited (RTL) is a company in India with a subsidiary company M and
subsidiary company S in USA. Decide the liability of RTL with respect to the filing of the
financial statements under the Companies Act, 2013.
Solution As per the provisions of Section 129 of Companies Act, 2013
At every annual general meeting of a company, the Board of directors of the company shall
lay before the company the financial statements for the financial year.
 Where a company has one or more subsidiaries or associate, it shall, in addition to its
own financial statements prepare a consolidated financial statement of the company and
of all the subsidiaries and associates in the same form and manner as that of its own.
 The Consolidated financial statements shall also be laid before the annual general
meeting of the company along with the laying of its own financial statement.
 The company shall also attach along with its financial statement, a separate statement
containing the salient features of the financial statement of its subsidiary or subsidiaries
in Form AOC-1.
Based upon the provisions of section 129, we may conclude that RTL (holding company of
M & S) is required to prepare in addition to its own financial statements, a CFS of the
company and of all the subsidiaries in the same form and manner as that of its own.
Chap. 9 Accounts of Company 357
And thus, the CFS prepared by RTL shall include the financial statement of RTL and of its
subsidiaries M and S in USA.
Quest-3 Mr. D, one of a Director in PQR Limited was not satisfied with the performance of its
subsidiary company in financial matters. He authorized Mr. F, a financial expert, to inspect
the books of accounts of the company on his behalf. Decide, under the provisions of the
Companies Act, 2013 whether the said company can refuse to allow Mr. F to inspect the
books of accounts of its subsidiary company?
Solution As per Section 128 of the Companies Act, 2013,
Books of account and other documents maintained by the company within India shall be
open for inspection at the registered office of the company or at such other place in India by
any director during business hours, and
in the case of financial information, if any, maintained outside the country, copies of such
financial information shall be maintained and produced for inspection by any director
subject to conditions as prescribed under Rule 4 of the Companies (Accounts) Rule, 2014.
Provided that the inspection in respect of any subsidiary of the company shall be done only
by the person authorized in this behalf by a resolution of the Board of Directors.
In the given case, Mr. D being the director in PQR Limited authorized Mr. F to inspect the
books of accounts of its subsidiary company.
As per the above provision, the inspection in respect of any subsidiary of the company shall
be done only by the person authorized in this behalf by a resolution of the Board of
Directors.
Since in the given problem, Mr. F was authorized by the Mr. D at its own without seeking
approval of the Board of Directors to inspect the books of accounts of its subsidiary
company. So, company can refuse to allow Mr. F to inspect the books of accounts of its
subsidiary company.
Quest-4 XYZ Ltd. wants to maintain its books of account on cash basis.
Solution Mention the whole provision of Section 128
The Companies Act, 2013 vide section 128(1) states that the books of accounts must be
maintained on accrual basis and according to the double entry system of accounting.
No exception has been given by the Act to any class or classes of companies from the above
requirement.
Hence, it is clear that XYZ Ltd. cannot maintain its books of accounts on cash basis.
Quest-5 The Board of Directors of Vishwakarma Electronics Limited consists of Mr. Ghanshyam,
Mr. Hyder (Directors) 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?
Solution Under section 134(1) of the Companies Act, 2013 the financial statement, including
consolidated financial statement, if any, shall be approved by the Board of Directors before
they are signed on behalf of the Board by at least:
(a) The chairperson of the company where he is authorized by the Board; or
(b) Two directors out of which one shall be managing director and the Chief Executive
Officer, if he is a director in the company, and
(c) the Chief Financial Officer and the company secretary of the company, wherever they
are appointed.
358 Problems & Solutions Module 2
In the instant case, the Balance Sheet and Profit and Loss Account have been signed by Mr.
Ghanshyam and Mr. Hyder, the directors. In view of Section 134(1) of the Companies
Act, 2013, Mr. Indersen, the Managing Director should be one of the two signing directors.
Since the company has also employed a full time Secretary, he should also sign the Balance
Sheet and Profit and Loss Account.
Quest-6 Mr. Bhagvath, recently acquired 76% of the equity shares of M/s Renowned Company Ltd.,
in the hope of earning good dividend income. Unfortunately, the existing Board of Directors
have been avoiding declaration of dividend due to alleged inadequacy of profits.
Unconvinced, Mr. Bhagvath seeks permission of the Company to allow him to examine the
Books of Accounts, which is summarily rejected by the Company. Examine and advise the
provisions relating to inspection of Books of Accounts and remedy available.
Solution As per Section 128 of the Companies Act, 2013,
Books of account and other documents maintained by the company within India shall be
open for inspection at the registered office of the company or at such other place in India by
any director during business hours, and
in the case of financial information, if any, maintained outside the country, copies of such
financial information shall be maintained and produced for inspection by any director
subject to conditions as prescribed under Rule 4 of the Companies (Accounts) Rule, 2014.
Provided that the inspection in respect of any subsidiary of the company shall be done only
by the person authorized in this behalf by a resolution of the Board of Directors.
Thus, we may conclude that Mr. Bhagvath has no right to carry out an inspection of the
books of accounts of the company even though he holds 76% of the equity shares of M/s
Renowned Company Ltd.
According to Regulation 89(ii) of the Table F of the Companies Act, 2013, a member
shall have right of inspecting any account or book or document of the company only if
conferred by law or authorized by the Board or by the company in general meeting
Quest-7 The directors of Element Ltd. Want to voluntary revise the Financial statements of the
company. They have approached you to state to them the provisions of the Companies Act,
2013 regarding voluntary revision of financial statements.
Solution As per Section 131 of Companies Act, 2013
(1) If it appears to the directors of a company that—
(a) the financial statement of the company; or
(b) the report of the Board,
do not comply with the provisions of section 129 or section 134 they may prepare revised
financial statement or a revised report in respect of any of the three preceding financial years
after obtaining approval of the Tribunal on an application made by the company in such
form and manner as may be prescribed and a copy of the order passed by the Tribunal shall
be filed with the Registrar:
Provided that the Tribunal shall give notice to the Central Government and the Income-tax
authorities and shall take into consideration the representations, if any, made by that
Government or the authorities before passing any order under this section
Provided further that such revised financial statement or report shall not be prepared or filed
more than once in a financial year:
Provided also that the detailed reasons for revision of such financial statement or report shall
also be disclosed in the Board's report in the relevant financial year in which such revision is
being made.
Chap. 9 Accounts of Company 359
(2) Scope of revision
Where copies of the previous financial statement or report have been sent out to members or
delivered to the registrar or laid before the company in general meeting, the revisions must
be confined to—
(a) the correction in respect of which the previous financial statement or report do not
comply with the provisions of section 129 or section 134; and
(b) the making of any necessary consequential alternation.
Quest-8 DJA Company Limited, incorporated under the provisions of the Companies Act, 2013, has
two subsidiaries – AJD Limited and AMR Limited. All the three companies have prepared
their financial statements for the year ended 31st March, 2015. Examining the provisions of
the Companies Act, 2013, answer the following:
(i) In what manner the subsidiaries – AJD Limited and AMR Limited shall prepare their
Balance Sheet and Profit & Loss Account?
(ii) What would be your answer in case the DJA Limited – the holding company, is not
required to prepare consolidated financial statements under the Indian Accounting
Standards?
(iii) What shall be your answer in case one of the subsidiary company’s financial statements
do not comply with the Accounting Standards?
Solution (i) In accordance with the provisions of Section 129 of the Companies Act, 2013
Where a company has one or more subsidiaries or associate companies, it shall, in
addition to its own financial statements, prepare a consolidated financial statement of the
company and of all the subsidiaries and associate companies in the same form and
manner as that of its own and in accordance with applicable accounting standards, which
shall also be laid before the annual general meeting of the company. The consolidated
financial statements shall also be laid before the AGM of the company along with the
laying of its own financial statement.
The company shall also attach along with its financial statement, a separate statement
containing the salient features of the financial statement of its subsidiaries in Form
AOC-1.
(ii) According to Companies (Accounts) Rules, 2014, the consolidation of financial
statements of the company shall be made in accordance with the provisions of
Schedule III to the Act and the applicable accounting standards.
However, for a company which is not required to prepare consolidated financial
statements under the Accounting Standards, it shall be sufficient if the company
complies with provisions of consolidated financial statements provided in Schedule III
to the Act
The provisions applicable to the preparation, adoption and audit of the financial
statements of a holding company shall, mutatis mutandis, also apply to the consolidated
financial statements.
(iii) If the financial statements of a company do not comply with the accounting standards,
the company shall disclose in its financial statements the following viz.
(a) The deviation from the accounting standards,
(b) The reasons for such deviation, and
(c) The financial effects, if any, arising out of such deviation.
Quest-9 Mary Ltd is a listed company having turnover of `1200 crores during the financial year
2016-17. The CSR committee of the Board formulated and recommended a CSR project
which was approved by the Board. The company finalized the project under its CSR
initiatives which require funds @ 5% of average net profit of the company for last three
360 Problems & Solutions Module 2
financial years. Will such excess expense be counted in subsequent financial years as a part
of CSR expenditure? Advise the company.
Solution In terms of Section 135 of the Companies Act, 2013
The Board of every company covered u/s 135, shall ensure that the company spends, in
every Financial year at least 2 percent of net profits of the company made during the
immediately preceding financial years, in pursuance of its CSR policy.
There is no provision for carry forward of excess expenditure to the next year(s). The words
used in the section are 'at least'. Therefore, any expenditure over 2% would be considered as
voluntary higher spending. Hence, such excess expense will not be counted in subsequent
financial years as a part of CSR expenditure.
Quest-10 S Ltd is subsidiary of H Ltd, Which itself is subsidiary of A Ltd. Management of H Ltd has
decided not to prepare consolidated financial statement as the consolidation will be done at
level of A Ltd. Discuss the decision of Management in light of provisions of Companies Act,
2013.
Solution As per the provisions of Section 129(3)—
 Where a company has one or more subsidiaries, it shall, in addition to its own financial
statements prepare a consolidated financial statement of the company and of all the
subsidiaries in the same form and manner as that of its own.
 The Consolidated financial statements shall also be laid before the annual general
meeting of the company along with the laying of its own financial statement.
 The company shall also attach along with its financial statement, a separate statement
containing the salient features of the financial statement of its subsidiary or subsidiaries
in Form AOC-1.
 Even though proviso to said sub section require that No requirement of consolidation on
part of a company shall arise, if following conditions are satisfied:—
(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another
company and all its other members, including those not otherwise entitled to vote,
having been intimated in writing, do not object to the company not presenting
consolidated financial statements;
(ii) it is a company whose securities are not listed or are not in the process of listing on
any stock exchange, whether in India or outside India; and
(iii) its ultimate or any intermediate holding company files consolidated financial
statements with the Registrar which are in compliance with the applicable
Accounting Standards.
In given case, H Ltd has decided not to prepare consolidated financial statement as the
consolidation will be done at level of A Ltd i.e. Ultimate Parent company
Conclusion: Based upon the above provisions, we may conclude that H Ltd may be
exempted from such requirement of preparing Consolidated financial statement, if all above
conditions are satisfied
Quest-11 A Ltd is filing its Financial statement for past 10 years. Suddenly management has realized
one of its error, which they are committing of treating Capital Expenditure as revenue. Now
they want to rectify said mistake. Decide in light of Companies Act, 2013, is there any option
available to them.
Solution Given problem is based on provisions of Section 131 of Companies Act, 2013
According to this section, if it appears to the directors of a company that—
(a) the financial statement of the company; or
(b) the report of the Board,
Chap. 9 Accounts of Company 361
do not comply with the provisions of section 129 or section 134,they may prepare revised
financial statement or a revised report in respect of any of the three preceding financial years
after obtaining approval of the Tribunal on an application made by the company in such
form and manner as may be prescribed and a copy of the order passed by the Tribunal shall
be filed with the Registrar
Provided further that such revised financial statement or report shall not be prepared or filed
more than once in a financial year:
Provided also that the detailed reasons for revision of such financial statement or report shall
also be disclosed in the Board's report in the relevant financial year in which such revision is
being made.
In given case, Management of A ltd want to rectify 1 of their mistake which they are
committing over a period of time
Conclusion: Based upon the provisions of Section 131, we may conclude that A Ltd may
revise its financial statement provided
1. Revision may be in respect of any of 3 preceding 3 Financial Years
2. Reason for such revision shall be disclosed in boards report
Quest 12 Z ltd is a Listed company with Paid up capital of `10 Cr. 1 of the member raised an
objection to Board Report as finalized and contended that the same does not reflect
evaluation on performance of Management of company. Provide your opinion.
Solution As per the provisions of Section 134(3)
A report by its Board of Directors in case of
 Every listed company and
 Every other public company having a paid up share capital of 25 crore rupees or more
calculated at the end of the preceding financial year
shall include, a statement indicating the manner in which formal annual evaluation has been
made by the Board of its own performance and that of its committees and individual
directors.
Conclusion: Thus we may conclude that Board Report of Z Ltd is incomplete
Quest 13 Expenditure incurred by Foreign Holding Company for CSR activities in India on behalf of
its Indian Subsidiary would entitled the Indian subsidiary to claim it as CSR Expenditure.
Solution As per the clarification by MCA on Section 135 of Companies Act, 2013
Any expenditure incurred by Foreign Holding Company for CSR activities in India will
qualify as CSR spend of the Indian subsidiary if, the CSR expenditures are routed through
Indian subsidiaries and if the Indian subsidiary is required to do so as per section 135 of the
Act.
Quest 14 A Ltd has established a school for children of their employees. They want to consider entire
expenditure on Opening and maintenance as part of their CSR expenses. Decide. Also
describe different activities which would not qualify as CSR expenses.
Solution As per the clarification by MCA, Any CSR projects or programs or activities that benefit
only the employees of the company and their families would not qualify as CSR activity.
In addition, following activities shall also not form part of CSR activities:—
 One-off events such as marathons/awards/charitable contribution/advertisement/
sponsorships of TV programmes etc.
 Expenses incurred by companies for the fulfillment of any other Act/Statute of
regulations (such as Labour Laws, Land Acquisition Act, 2013, Apprentice Act, 1961
etc.)
362 Problems & Solutions Module 2
 Contribution of any amount directly or indirectly to any political party.
 Activities undertaken by the company in pursuance of its normal course of business.
 The project or programmes or activities undertaken outside India.
Quest 15 H Ltd is having net profit of `4 Cr and S ltd i.e. Subsidiary of H Ltd is having a net profit of
`3 Cr. State whether Section 135 is applicable to them or not.
Solution As per the clarification by MCA, Holding or subsidiary of a company does not have to
comply with section 135(1) unless the holding or subsidiary itself fulfills the criteria.
Thus, we may conclude that Section 135 is not applicable to Both H ltd and S Ltd as both of
them failed to satisfy the requirement of said section in their own
Quest 16 H Ltd is having subsidiary company in USA. Company H Ltd is listed in India. Company
provides its Financial statement at its website, however refused to provide separate
financial of its foreign subsidiary of USA. In response to a query from 1 of its member, it
replies since, subsidiary in US is not required to get its accounts audited, thus there is no
requirement to provide its financial on its website. Provide your comment on above decision
by H Ltd.
Solution Given problem is based on provisions of Section 136 of Companies Act, 2013
According to this Section
 A copy of the financial statements, including consolidated financial statements, if any,
auditor’s report and
 every other document required by law which are to be laid before a company in its
general meeting, shall be sent to every member of the company,
 to every trustee for the debenture-holder of any debentures issued by the company, and
to all persons other than such member or trustee, not less than 21 days before the date
of the meeting
As per proviso to subsection (1), every listed company having a subsidiary or subsidiaries
shall place separate audited accounts in respect of each of subsidiary on its website, if any:
Provided also that a listed company which has a subsidiary incorporated outside India i.e.
"foreign subsidiary" which is not required to get its financial statement audited under any
law of the country of its incorporation and which does not get such financial statement
audited, the holding Indian listed company may place such unaudited financial statement on
its website and where such financial statement is in a language other than English, a
translated copy of the financial statement in English shall also be placed on the website.
Conclusion: Based upon the above provision, we may conclude that H Ltd is required to
provide un-audited financials in respect of its foreign subsidiary and the same shall be
translated in English if not already in English language
Quest-17 Whether a financial statement can be send even at shorter notice. If yes then state the
circumstances
Solution As per the provisions of Section 136 of Companies Act, 2013
 A copy of the financial statements, including consolidated financial statements, if any,
 auditor’s report and
 every other document required by law to be annexed or attached to the financial
statements,
 which are to be laid before a company in its general meeting, shall be sent to every
member of the company,
 to every trustee for the debenture-holder of any debentures issued by the company, and
 to all persons other than such member or trustee, being the person so entitled, not less
than 21 days before the date of the meeting:
Chap. 9 Accounts of Company 363
Provided that if the copies of the documents are sent less than twenty-one days before the
date of the meeting, they shall be deemed to have been duly sent if it is so agreed by
members—
(a) holding, if the company has a share capital, majority in number entitled to vote and who
represent not less than ninety-five per cent. of such part of the paid-up share capital of
the company as gives a right to vote at the meeting; or
(b) having, if the company has no share capital, not less than ninety-five per cent. of the
total voting power exercisable at the meeting
Thus, we may conclude that financial statement may be send even at shorter notice subject
to consent of members as stated in section 136
Quest-18 Whether a listed company shall dispatch its financial statement to every members
Solution No, this statement is incorrect
As per the provisions of Section 136 of Companies Act, 2013
 In the case of a listed company, the provisions of Section 136 shall be deemed to be
complied with,
 if the copies of the documents are made available for inspection at its registered office
during working hours for a period of 21 days before the date of the meeting and
 a statement containing the salient features of such documents in the prescribed form
(AOC-3)
 are sent to every member of the company and to every trustee for the holders of any
debentures issued by the company
 not less than 21 days before the date of the meeting unless the shareholders ask for full
financial statements
Thus listed company is not compulsory required to dispatch its financial statement
individually to each of its members
Quest-19 Company may allow restriction of its financial statement to its members; however, no
inspection shall be allowed to members in respect of books of account
Solution This statement is correct.
Provisions regarding inspection of Books of accounts are governed by Section 128(3) of
Companies Act, 2013, whereby inspection of books of accounts shall be allowed to directors
only. Thus, members are not normally allowed to inspect books of company.
Still above stated rule has certain exceptions and there are certain cases where even a
member may inspect books of accounts.
1. Inspection in respect of any subsidiary of the company shall be done only by the person
authorized in this behalf by a resolution of the Board of Directors.
2. Regulation 89(ii) of Table F also allow facility to members
On the other hand, Section 136 is dealing with inspection of financial statement. As per this
Section A company shall allow every member or trustee of the holder of any debentures
issued by the company to inspect the documents stated under section 136 at its registered
office during business hours.
Thus, we may conclude that Company may allow restriction of its financial statement to its
members; however, no inspection shall be allowed to members in respect of books of
account
Quest-20 Drishti Ltd. Finalized its books of accounts as per the applicable provisions of the
companies Act, 2013. It also filed the Income tax return for the assessment year 2016-2017
within the due date. The Income Tax Authorities found some irregularities in the said
accounts and want the company to revise the accounts. Referring to the provisions of the
364 Problems & Solutions Module 2
Companies Act, 2013 advise whether and how the accounts of the company can be re-
opened and revised.
Or
The Income Tax Authorities in the current financial year 2019-20 observed, during the
assessment proceedings, a need to re-open the accounts of Chetan Ltd. for the financial year
2008-09 and, therefore, filed an application before the National Company Law Tribunal
(NCLT) to issue the order to Chetan Ltd. for re-opening of its accounts and recasting the
financial statements for the financial year 2008-09. Examine the validity of the application
filed by the Income Tax Authorities to NCLT.
Solution As per section 130 of the Companies Act, 2013, a company shall not re-open its books of
account and not recast its financial statements, unless an application in this regard is made
by—
(a) the Central Government,
(b) the Income-tax authorities,
(c) the Securities and Exchange Board,
(d) any other statutory regulatory body or authority or any person concerned
and an order is made by a court of competent jurisdiction or the Tribunal to the effect that—
(i) the relevant earlier accounts were prepared in a fraudulent manner; or
(ii) the affairs of the company were mismanaged during the relevant period, casting a doubt
on the reliability of financial statements:
Court or the Tribunal shall give notice to the Central Government, the Income-tax
authorities, the Securities and Exchange Board or any other statutory regulatory body or
authority concerned and shall take into consideration the representations, if any, made by
them. Section further states that the accounts so revised or re-cast, shall be final.
No order shall be made under this section in respect of re-opening of books of account
relating to a period earlier than eight financial years immediately preceding the current
financial year:
So, the accounts of Drishti Limited can be re-cast and revised in the above manner.
Quest-21 Hydra Clay Limited is having a foreign subsidiary company. The said Indian holding
company failed to furnish particulars of its foreign subsidiary company in its Balance Sheet.
Decide the liability of Hydra Clay Limited under the Companies Act, 2013.
Solution  Section 129 of the Companies Act, 2013 lays down that Where a company has one or
more subsidiaries or associate, it shall, in addition to its own financial statements
prepare a consolidated financial statement of the company and of all the subsidiaries and
associates in the same form and manner as that of its own.
 The Consolidated financial statements shall also be laid before the annual general
meeting of the company along with the laying of its own financial statement.
 The company shall also attach along with its financial statement, a separate statement
containing the salient features of the financial statement of its subsidiary or subsidiaries
in Form AOC-1.
Requirement of this section has to be complied even if subsidiary is a foreign subsidiary
Now this section further states that If a company contravenes the provisions of this section,
the managing director, the whole-time director in charge of finance, the Chief Financial
Officer or any other person charged by the Board with the duty of complying with the
requirements of this section and in the absence of any of the officers mentioned above, all
the directors shall be punishable with—
Chap. 9 Accounts of Company 365
(1) Imprisonment for a term which may extend to 1 year; or
(2) Fine which shall not be less than `50,000 but which may extend to `5 Lakhs; or
(3) Both with imprisonment and fine.
Thus, in given case, we may conclude that in event of failure by Hydra Clay limited, penalty
as specified in section 129 shall be levied
Quest-22 Explaining the provisions of the Companies Act, 2013, answer the following:
(i) Manner in which the companies are required to present the financial statements.
(ii) What kinds of companies are exempted from the preparation of the above statements in
terms of nature and the contents?
(iii) State the consequences and the penalties in case the company does not comply with the
accounting standards?
Solution As per the provisions of Section 129 of Companies Act, 2013, the financial Statements of a
company shall be prepared in such a manner so that these:
(a) Give a true and fair view of the state of affairs of the company or companies.
(b) Comply with the accounting standards notified under Section 133 of the Act.
(c) Shall be in the form or forms as may be provided for different class or classes of
companies in Schedule III to the Act.
(ii) The above provisions relating to nature and content of financial statement shall not
apply to following companies:
(a) Insurance companies.
(b) Banking companies.
(c) Company engaged in the generation or supply of electricity.
(d) Any other class of company for which a form of financial statement has been
specified in or under the Act governing such class of company.
(iii) According to section 129(5) of the Act, in case the financial statements of a company are
not prepared in compliance with the Accounting Standards, the company shall disclose
in its financial statements the following viz.
(a) The extent to which the financial statements do not comply with Accounting
Standards i.e. deviation from the Accounting Standards.
(b) The reasons for such deviation i.e. what has led the company to deviate from the
Accounting Standards.
(c) The financial effects, if any, arising out of such deviation.
As per section 129, if a company contravenes the provisions relating to preparation of
financial statements, the Managing Director, the Whole-time Director in charge of finance,
the Chief Financial Officer or any other person charged by the Board with the duty of
complying with the requirements of this section and in the absence of any of the officers
mentioned above, all the directors shall be punishable with:
(a) Imprisonment for a term which may extend to 1 year; or
(b) Fine which shall not be less than `50,000 which may extend to `5 lacs; or
(c) Both with imprisonment as well as the fine.
Quest-23 State the circumstances where company may be exempted from requirement of preparing
consolidated financial statement
Solution As per Section 129 of Companies Act, 2013
 Where a company has one or more subsidiaries or associate, it shall, in addition to its
own financial statements prepare a consolidated financial statement of the company and
of all the subsidiaries and associates in the same form and manner as that of its own.
366 Problems & Solutions Module 2
 The Consolidated financial statements shall also be laid before the annual general
meeting of the company along with the laying of its own financial statement.
However as per Rule 6 of Companies Accounts rules 2014
No consolidation shall be required if following conditions are satisfied: -
(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company
and all its other members, including those not otherwise entitled to vote, having been
intimated in writing and for which the proof of delivery of such intimation is available
with the company, do not object to the company not presenting consolidated financial
statements;
(ii) it is a company whose securities are not listed or are not in the process of listing on any
stock exchange, whether in India or outside India; and
(iii) its ultimate or any intermediate holding company files consolidated financial statements
with the Registrar which are in compliance with the applicable Accounting Standards.
Quest-24 Define functioning of National Financial Reporting Authority
Solution Section 132 of Companies Act, 2013 authorize Central Government that it may, by
notification, constitute a National Financial Reporting Authority to provide for matters
relating to accounting and auditing standards under this Act.
National Financial Reporting Authority shall—
(a) make recommendations to the Central Government on the formulation and laying
down of accounting and auditing policies and standards for adoption by companies
or their auditors, as the case may be;
(b) monitor and enforce the compliance with accounting standards and auditing standards
in such manner as may be prescribed;
(c) oversee the quality of service of the professions associated with ensuring compliance
with such standards, and suggest measures required for improvement in quality of
service and such other related matters as may be prescribed; and
(d) perform such other functions as may be prescribed.
Quest-25 Define Powers of National Financial Reporting Authority constituted under Section 132
of Companies Act, 2013
Solution National Financial Reporting Authority shall—
(a) have the power to investigate, either Suo moto or on a reference made to it by the
Central Government, for such class of bodies corporate or persons, in such manner as
may be prescribed into the matters of professional or other misconduct committed by
any member or firm of chartered accountants, registered under the Chartered
Accountants Act, 1949:
Provided that no other institute or body shall initiate or continue any proceedings in such
matters of misconduct where the National Financial Reporting Authority has initiated an
investigation under this section;
(b) have the same powers as are vested in a civil court under the Code of Civil Procedure,
1908, while trying a suit, in respect of the following matters, namely:—
(i) discovery and production of books of account and other documents
(ii) summoning and enforcing the attendance of persons and examining them on oath;
(iii) inspection of any books, registers and other documents
(iv) issuing commissions for examination of witnesses or documents;
(c) where professional or other misconduct is proved, have the power to make order for—
(A) imposing penalty of—
(I) not less than one lakh rupees, but which may extend to five times of the fees
received, in case of individuals; and
Chap. 9 Accounts of Company 367
(II) not less than five lakh rupees, but which may extend to ten times of the fees
received, in case of firms;
(B) debarring the member or the firm from engaging himself or itself from practice as
member of the Institute of Chartered Accountant of India for a minimum period of
six months or for such higher period not exceeding ten years as may be decided by
the National Financial Reporting Authority.
Quest-26 Describe the main content of Boards Report
Solution Board of Directors report shall include —
(a) The extract of the annual return as provided under sub-section (3) of section 92;
(b) Number of meetings of the Board;
(c) Directors’ Responsibility Statement;
(d) Details in respect of frauds reported by auditors under sub-section (12) of section 143
other than those which are reportable to the Central Government
(e) the state of the company’s affairs;
(f) the amounts, if any, which it proposes to carry to any reserves;
(g) the amount, if any, which it recommends should be paid by way of dividend;
(h) material changes and commitments, if any, affecting the financial position of the
company which have occurred between the end of the financial year of the company to
which the financial statements relate and the date of the report;
(i) the details about the policy developed and implemented by the company on corporate
social responsibility initiatives taken during the year;
(j) Every listed company and every other public company having a paid up share capital of
25 crore rupees or more calculated at the end of the preceding financial year shall
include (as prescribed under the Companies (Accounts) Rules, 2014), in the report by its
Board of directors, a statement indicating the manner in which formal annual evaluation
has been made by the Board of its own performance and that of its committees and
individual directors.
Quest-27 Whether a holding or subsidiary of a company which fulfils the criteria under section 135(1)
has to comply with section 135, even if the holding and subsidiary itself does not fulfill the
criteria.
Solution Holding or subsidiary of a company does not have to comply with section 135(1) unless the
holding or subsidiary itself fulfils the criteria individually
Quest-28 Define the term “Books of Accounts”
Solution “Books of account” as defined in Section 2(13) includes records maintained in respect
of—
(a) all sums of money received and expended by a company and matters in relation to which
the receipts and expenditure take place;
(b) all sales and purchases of goods and services by the company;
(c) the assets and liabilities of the company; and
(d) the items of cost as may be prescribed under section 148 in the case of a company which
belongs to any class of companies specified under that section.
Quest-29 The Board of Directors of ABC Ltd. wants to circulate unaudited accounts before the
Annual General Meeting of the shareholders of the Company. Whether such an act of ABC
Ltd. is tenable?
Solution As per Section 129 of the Companies Act, 2013at every annual general meeting of a
company, the Board of Directors of the company shall lay before such meeting financial
statements for the financial year.
368 Problems & Solutions Module 2
Section 134 further provides that signed copy of every financial statement, including
consolidated financial statement shall be issued, circulated or published along with a copy
of:
(a) any notes annexed to or forming part of such financial statement;
(b) the auditor’s report; and
(c) the Board’s report.
Conclusion: Thus, we may conclude that unaudited accounts cannot be sent to members or
unaudited accounts cannot be filed with the Registrar of Companies. Thus, such an act of
ABC Ltd,is not valid.
Quest-30 XYZ is the company who has not prepared and filed statements for the last 5 years, whether
the current directors can sign all the financial statements for the past 5 years?
Solution As per section 134 of Companies Act, 2013
Financial statements of the company shall besigned by
 the chairperson of the company where he is authorised by the Board; or
 two directors out of which one shall be managing director and
 other the Chief Executive Officer, if he is a director in the company,
 the Chief Financial Officer, if appointed; and
 the company secretary of the company, wherever they are appointed.
Therefore, if the financial statements are being prepared for the last 5 years in the current
year, the current directors can sign the financial statements for the last 5 years.
Quest-31 ABC Company is a one person company and has only one director. Who shall authenticate
the balance sheet and statement of profit & loss and the Board ‘report?
Solution In case of a One-Person Company, the financial statements shall be signed by only one
director, for submission to the auditor for his report thereon.
Quest-32 Define the different mode in which CSR activities may be undertaken by a company
Solution Section 135 of Companies Act, 2013 read with Rule 4 of the Companies (CSR Policy)
Rules, 2014 authorise the Board of a company to undertake its CSR activities approved by
the CSR Committee, through
(a) a company established under section 8 of the Act or a registered trust or a registered
society, established by the company, either singly or along with any other company, or
(b) a company established under section 8 of the Act or a registered trustor a registered
society, established by the Central Government or State Government or any entity
established under an Act of Parliament or a State legislature:
Provided that- if, the Board of a company decides to undertake its CSR activities through a
company established under section 8 of the Act or a registered trust or a registered society,
other than those specified in this sub- rule, such company or trust or society shall have an
established track record of three years in undertaking similar programs or projects;
(3) A company may also collaborate with other companies for undertaking projector
programs or CSR activities in such manner that the CSR Committees of respective
companies are in a position to report separately on such projector programs in accordance
with these rules.
Quest-33 Whether a company can undertake any CSR activity which is outside the purview of
Schedule VII
Solution Activities which may be included by companies in their CSR Policies Activities as specified
under Schedule VII only
Chap. 9 Accounts of Company 369
Statutory provision and provisions of CSR Rules, 2014, provides that while activities
undertaken in pursuance of the CSR policy must be relatable to Schedule VII of the
Companies Act, 2013, the entries in the said Schedule VII must be interpreted liberally so as
to capture the essence of the subjects enumerated in the said Schedule.
Thus, we may conclude that no activity outside Schedule VII shall be allowed as CSR
Quest-34 What would be the case, if company could not spend even 2% as required under Section 135
Solution As per Section 135 of the Companies Act, 2013, the Board of every company to which
section 135 is applicable, shall ensure that the company spends, in every Financial year at
least 2 per cent of net profits of the company made during the immediately preceding
financial years, in pursuance of its CSR policy.
Even though there is no penal provision for non-compliance of Section 135, however section
require that Board Report u/s 134 shall mention the fact of under spending along with its
reasons
Quest-35 The Annual General Meeting of R Ltd., for laying the Annual Accounts thereafter the year
ended 31st March 2016 was not held. What remedies is available with the company
regarding compliance of the provisions of section 137 of the Companies Act,2013 for filing
of copies of financial statements with the Registrar of Companies? Will it make any
difference in case the Annual Accounts were duly laid before the Annual General Meeting
held on 27th September 2016 but the same were not adopted by the shareholders?
Solution As per sections 96 of the Companies Act, 2013Annual General Meeting of company was
ought to be held by 30th September 2016. As per section 137(2) the financial statements
along with the documents required to be attached under this Act, duly signed along with the
statement of facts and reasons for not holding the annual general meeting shall be filed with
the Registrar within thirty days of the last date before which the annual general meeting
should have been held i.e. by 30th October 2016 along with such fees or additional fees as
may be prescribed.
Now in the given case, since the Annual General Meeting has been held in time on 27th
September2016, thus unadopted financial statements along with the required documents
undersection 137 shall be filed with the Registrar within thirty days of the date of annual
general meeting and the Registrar shall take them in his records as provisional till the
financial statements are filed with him after its adoption in the adjourned annual general
meeting for that purpose.
Quest-36 ABC Ltd is an unlisted public company engaged in pharma sector and has paid up capital of
rupees 10 crores and achieved turnover of rupees 200 crores during financial year 2015-16.
Is it necessary for ABC Ltd to file its financial statement in XBRL mode?
Solution The following class of companies shall file their financial statement in XBRL(extensible
Business Reporting Language) mode and by using the XBRL taxonomy:
 all companies listed with any stock exchange(s) in India and their Indian subsidiaries; or
 all companies having paid up capital of rupees 5 crores or above; or
 all companies having turnover of rupees 100 crores or above; or
 all companies which were covered under the Companies (Filing of Documents and
Forms in Extensible Business Reporting Language) Rules, 2011.
However, Banking Companies, Insurance Companies, Power Companies and Non-Banking
Financial Companies (NBFCs) and housing finance companies need not file financial
statements under this rule. ABC Ltd is required to file its financial statement in XBRL
mode.
370 Problems & Solutions Module 2
Quest-37 Rera Ltd., a company incorporated under the Companies Act, 2013 having turnover of
`100 crore, net profit `3 crore, accumulated loss of `50 crore and securities premium
`300 crore as per the audited accounts of the company for the Financial Year 2016-17.
The CFO of the company informed the directors of the company that the Corporate Social
Responsibility (CSR) committee is required to be constituted as per the Companies Act,
2013. The directors seek your advice as a professional regarding the criteria required to
constitute CSR committee and whether it is applicable to Rera Ltd. or not.
Solution As per the provisions of Section 135 of the Companies Act, 2013 read with the Companies
(Corporate Social Responsibility) Rules, 2014,
Every company including its holding or subsidiary, and a foreign company defined under
section 2(42) of the Companies Act, 2013, having its branch office or project office in India,
having—
(1) net worth of rupees 500 crore or more, or
(2) turnover of rupees 1000 crore or more or
(3) a net profit of rupees 5 crore or more
during immediate preceding financial year shall constitute a Corporate Social
Responsibility Committee of the Board.
In the present case, turnover of Rera Ltd. is `100 crore,-net profit of `3 crore and net worth
of `253 crore (Net profit + securities premium -accumulated loss= 3 + 300 – 50=253 crore).
Hence, RERA Ltd. is not fulfilling any criteria prescribed for constitution of CSR
committee. So, it is not obligatory for Rera Ltd. to constitute CSR Committee.
Assumption used by ICAI: -Since paid-up share capital value is not given in the question,
it has been presumed that accumulated losses as stated in the question is given after taking
into consideration the paid-up share capital, i.e. net of accumulated losses less paid-up share
capital.
Quest-38 State any four contents of a Directors Responsibility Statement as required under Section
134 of the Companies Act, 2013.
Solution The Directors’ Responsibility Statement referred to in 134 shall state that—
(1) in the preparation of the annual accounts, the applicable accounting standards had been
followed along with proper explanation relating to material departures;
(2) the directors had selected such accounting policies and applied them consistently and
made judgments and estimates that are reasonable and prudent so as to give a true and
fair view of the state of affairs of the company at the end of the financial year and of the
profit and loss of the company for that period;
(3) the directors had taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of this Act for safeguarding the
assets of the company and for preventing and detecting fraud and other irregularities;
(4) the directors had prepared the annual accounts on a going concern basis;
(5) the directors, in the case of a listed company, had laid down internal financial controls to
be followed by the company and that such internal financial controls are adequate and
were operating effectively.
Here, the term “internal financial controls” means the policies and procedures adopted
by the company for ensuring the orderly and efficient conduct of its business, including
adherence to company’s policies, the safeguarding of its assets, the prevention and
detection of frauds and errors, the accuracy and completeness of the accounting records,
and the timely preparation of reliable financial information; and
(6) the directors had devised proper systems to ensure compliance with the provisions of all
applicable laws and that such systems were adequate and operating effectively.
Chap. 9 Accounts of Company 371
Quest-39 The Government of India is holding 51% of the paid-up equity share capital of Sun Ltd. The
Audited financial statements of Sun Ltd. for the financial year 2017 -18 were placed at its
annual general meeting held on 31st August, 2018. However, pending the comments of the
Comptroller and Auditor General of India (CAG) on the said accounts the meeting was
adjourned without adoption of the accounts. On receipt of CAG comments on the accounts,
the adjourned annual general meeting was held on 15th October, 2018 whereat the accounts
were adopted. Thereafter, Sun Ltd. filed its financial statements relevant to the financial
year 2017-18 with the Registrar of Companies on 12th November, 2018. Examine, with
reference to the applicable provisions of the Companies Act, 2013, whether Sun Ltd. has
complied with the statutory requirement regarding filing of accounts with the Registrar?
Solution According to first proviso to section 137(1) of the Companies Act, 2013,
 where the financial statements are not adopted at annual general meeting or adjourned
annual general meeting,
 such unadopted financial statements along with the required documents
 shall be filed with the Registrar within thirty days of the date of annual general meeting
and the Registrar shall take them in his records as provisional till the financial
statements are filed with him
 after their adoption in the adjourned annual general meeting for that purpose.
According to second proviso to section 137(1) of the Companies Act, 2013, financial
statements adopted in the adjourned AGM shall be filed with the Registrar within thirty days
of the date of such adjourned AGM with such fees or such additional fees as may be
prescribed.
In the instant case, the accounts of Sun Ltd. were adopted at the adjourned AGM held on
15th October, 2018 and filing of financial statements with Registrar was done on 12th
November, 2018 i.e. within 30 days of the date of adjourned AGM.
Conclusion: Thus, we may conclude that Sun Ltd. has not complied with the statutory
requirement regarding filing of unadopted accounts with the Registrar, but has certainly
complied with the provisions by filing of adopted accounts within the due date with the
Registrar.
Quest-40 (i) Ravi Limited maintained its books of accounts under single Entry System of
[Nov-19] Accounting, Is it permitted under the provisions of the Companies Act, 2013?
(ii) State the person reasonable for complying with the provisions regarding maintenance of
Books of Accounts of a company.
(iii) whether a company can keep books of Accounts in electronic mode accessible only
outside India.
Solution (i) According to Section 128(1) of the Companies Act, 2013, every company shall prepare
“books of account” and other relevant books and papers and financial statement for
every financial year.
These books of accounts should give a true and fair view of the state of the affairs of the
company, including that of its branch office(s).
These books of accounts must be kept on accrual basis and according to the double entry
system of accounting.
Hence, maintenance of books of account under Singly Entry System of Accounting by
Ravi Limited is not permitted.
(ii) Persons responsible to maintain books
As per Section 128 (6) of the Companies Act, 2013, the person responsible to take all
reasonable steps to secure compliance by the company with the requirement of
maintenance of books of accounts etc. shall be:
372 Problems & Solutions Module 2
(a) Managing Director,
(b) Whole-Time Director, in charge of finance
(c) Chief Financial Officer
(d) Any other person of a company charged by the Board with duty of complying with
provisions of section 128.
(iii) A Company have has the option of keeping such books of account or other relevant
papers in electronic mode as per Rule 3 of the Companies (Accounts) Rules, 2014.
According to such Rule,
(a) such books of accounts or other relevant books or papers maintained in electronic
mode shall remain accessible in India so as to be usable for subsequent reference.
(b) There shall be a proper system for storage, retrieval, display or printout of the
electronic records as the Audit Committee, if any, or the Board may deem
appropriate and such records shall not be disposed of or rendered unusable, unless
permitted by law.
(c) The back-up of the books of account and other books and papers of the company
maintained in electronic mode, including at a place outside India, if any, shall be
kept in servers physically located in India on a periodic basis.
Hence, a company cannot keep books of Account in electronic mode accessible only outside
India.
 Chapter 10
AUDIT & AUDITOR

PRACTICAL QUESTION
Quest-1 Explain how the auditor will be appointed in the following cases:
(i) A Government Company within the meaning of section 394 of the Companies Act, 2013.
(ii) The Auditor of the company has resigned on 31st December 2013, while the Financial
year of the company ends on 31st March 2014.
(iii) A company, whose shareholders include the following:
(a) Bank of Baroda (A Nationalized Bank) holding 12% of the subscribed capital in the
company.
(b) National Insurance Company Limited (carrying on General Insurance Business)
holding 10% of the subscribed capital in the company.
(c) Maharashtra State Financial Corporation (A Public Financial Institution) holding
8% of the subscribed capital in the company
Solution (i) The appointment and re-appointment of auditor of a Government Company or a
government-controlled company is governed by the provisions of section 139 of the
Companies Act, 2013:
According to section 139(7), the first auditor shall be appointed by the Comptroller and
Auditor General of India within 60 days from the date of incorporation and in case of
failure to do so, the Board shall appoint auditor within next 30 days and on failure to do
so by Board of Directors, it shall inform the members, who shall appoint the auditor
within 60 days at an extraordinary general meeting (EGM), such auditor shall hold
office till conclusion of first Annual General Meeting.
According to Section 139(5), In case of subsequent auditor for existing government
companies, the Comptroller & Auditor General of India shall appoint the auditor within
a period of 180 days from the commencement of the financial year and the auditor so
appointed shall hold his position till the conclusion of the Annual General Meeting.
(ii) This situation relates to the creation of a casual vacancy in the office of an auditor due to
resignation of the auditor before the AGM in case of a company other government
company.
As per section 139 (8), the Board may fill any casual vacancy in the office of an auditor
within 30 days but where such vacancy is caused by the resignation of an auditor, such
appointment shall also be approved by the company at a general meeting convened
within three months of the recommendation of the Board.
Any auditor appointed in a casual vacancy shall hold office until the conclusion of the
next annual general meeting.
(iii) In the given case as the total shareholding of the three institutions adds up to 30% of the
subscribed capital of the company it is not a government company also not a deemed
Government company. Hence, the provisions applicable to non-government companies
374 Problems & Solutions Module 2
in relation to the appointment of auditors shall apply, thus in existing situation Auditor
shall be appointed in accordance with Section 139(1) or Section 139(2).
Quest-2 Parkash Carriers Limited appointed Mr. Raman as its auditor in the Annual General
Meeting held on 30th September 2009. Initially, he accepted the appointment. But he
resigned from his office on 31st October 2009 for personal reasons. The Board of directors
seeks your advice for filling up the vacancy by appointment of Mr. Albert as auditor. Advise
as per the provisions of the Companies Act, 2013.
Also suggest the procedure to be adopted in case Mr. Albert is proposed to be removed from
his office before the expiry of his term.
Solution As per section 139(8) of the Companies Act, 2013, any casual vacancy in the office of an
auditor shall in the case of a company other than a company whose accounts are subject to
audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by
the Board of Directors within thirty days, but if such casual vacancy is as a result of the
resignation of an auditor, such appointment shall also be approved by the company at a
general meeting convened within three months of the recommendation of the Board and he
shall hold the office till the conclusion of the next annual general meeting.
In Given case Since the auditor has resigned, thus casual vacancy so created can be filled up
by the Board appointing Mr. Albert. However, the appointment of Mr. Albert must be
approved by the company by passing of an ordinary resolution at a general meeting of the
company which must be convened by the Board within 3 months of the recommendation of
the Board.
Situation where company want to remove Mr. Albert
As per section 140(1) of the Companies Act, 2013, the auditor appointed under section 139
may be removed from his office before the expiry of his term only by a special resolution of
the company, after obtaining the previous approval of the Central Government in that behalf
in the prescribed manner:
Provided that before taking any action under this sub-section, the auditor concerned shall be
given a reasonable opportunity of being heard.
Therefore, in terms of section 140 (1) of the Companies Act, 2013 read with rule 7 of the
Companies (Audit & Auditors) Rules, 2014, the following steps should be taken for the
removal of an auditor before the completion of his term:
(a) The application to the Central Government for removal of auditor shall made in Form
ADT-2 and shall be accompanied with fees as provided for this purpose under the
Companies (Registration Offices and Fees) Rules, 2014
(b) The application shall be made to the Central Government within thirty days of the
resolution passed by the Board.
(c) The company shall hold the general meeting within sixty days of receipt of approval of
the Central Government for passing the special resolution.
Quest-3 One-fourth of the subscribed capital of AMC Limited was held by the Government of
Rajasthan. Mr. Neeraj a qualified Chartered Accountant was appointed as an auditor of the
Company at the Annual General Meeting held on 30th April 2014 by an ordinary resolution.
Mr. Sanjay, a shareholder of the Company objects to the manner of appointment of Mr.
Neeraj on the ground of violation of the Companies Act, 2013. Decide, whether the
objection of Mr. Sanjay is tenable? Also examine the consequences of the above
appointment under the said Act.
Solution As per the section 2(45) of the Companies Act, 2013,” Government Company means any
company in which not less than fifty-one per cent of the paid-up share capital is held by—
(i) the Central Government, or
(ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more State Governments,
Chap. 10 Audit & Auditor 375
And the section includes a company which is a subsidiary company of such a Government
company
In existing case the holding of 25% shares of AMC Ltd. by the government of Rajasthan
does not make it a government company. Hence, it will be treated as a non-government
company.
As per section 139 of the Companies Act, 2013, the appointment of subsequent auditor shall
be by members of the company through ordinary resolution except in the case of the first
auditors where the power to appoint the auditor vests with the Board of Directors.
Therefore, the contention of Mr. Sanjay is not tenable since neither the company is a
government company nor there is any provision in Companies Act requiring Special
resolution for appointment of Auditor. Thus, appointment is valid under the Companies Act,
2013.
Quest-4 Examine the validity of the following with reference to the provisions of the Companies Act,
2013: —
EF Limited appointed an individual firm, Naresh & Company, Chartered Accountants, as
Auditors of the company at the Annual General Meeting held on 30th September 2014. Mrs.
Kamala, wife of Mr. Naresh, invested in the equity shares face value of `1 lakh of EF
Limited on 15th October 2014. But Naresh & Company continues to function as statutory
auditors of the company.
Solution According to section 141(3) of the Companies Act, 2013, a person who, or his relative or
partner holds any security of the company or its subsidiary or of its holding or associate
company a subsidiary of such holding company, such person cannot be appointed as auditor
of the company.
Provided that the relative of such person may hold security or interest in the company of
face value not exceeding 1 lakh rupees as prescribed under the Companies (Audit and
Auditors) Rules, 2014.
In the case Mr. Naresh, chartered accountants, did not hold any such security. But Mrs.
Kamala, his wife held equity shares of EF Limited of face value `1 lakh, which is within the
specified limit.
Thus Naresh & Company can continue to function as auditors of the Company, since shares
as held by Mrs. Kamala are within the limit as prescribed under the Act
Quest-5 Mr. Independent who is an individual auditor wants to compute the specified number of
audits under the Companies Act, 2013 and for this purpose, he has drawn out a list of which
identify, the company which shall be/not be taken into account for the purpose of calculating
specified number of audits:
(i) Audit of Private Company
(ii) Guarantee companies not having share capital
(iii) Audit of non-profit companies
Further, he wants to know that as a member of the ICAI, whether there are any other
restrictions on him as a member in the matter of inclusion/exclusion of audit of private
companies for the purpose of calculating specified number of audit assignments. Advise.
Solution Section 141 (g) any person holding appointment as its auditor of more than twenty
companies other than one-person companies, dormant companies, small companies and
private companies having paid-up share capital less than one hundred crore rupees shall not
be eligible for appointment as Auditor. Limit of 20 companies shall be for each auditor
Thus, we may conclude as follow:
(i) Audit of Private Company – It shall be counted in total no of audit where the paid-up
capital of Company exceeds `100 Cr
376 Problems & Solutions Module 2
(ii) Guarantee companies not having share capital – If it is a public limited, then it shall be
counted. However, the same shall not be counted if it is a private limited company
(iii) Audit of non-profit companies If it is a public limited, then it shall be counted. However,
the same shall not be counted if it is a private limited company and its paid-up share
capital does not exceed `100 cr
Quest-6 An audit firm, comprising of two partners, holds office as auditor of 41 private companies
out of which paid-up capital of 20 companies exceeds 100 Cr. Such audit firm wants to
appoint as an auditor in XYZ Pvt. Ltd. Decide whether this is in consonance with the
applicable law.
Solution Section 141(g) any person holding appointment as its auditor of more than twenty
companies other than one-person companies, dormant companies, small companies and
private companies having paid-up share capital less than one hundred crore rupees shall not
be eligible for appointment as Auditor. Limit of 20 companies shall be for each auditor
In given case, an audit firm, comprising of two partners, holds office as auditor of 41 private
companies out of which paid-up capital of 20 companies exceeds 100 Cr.
Thus, such audit firm is eligible to be appointed as an auditor in XYZ Pvt. Ltd as including
the proposed audit, overall limit of audit shall be within the allowed criteria
Quest-7 The auditors of a company refuse to make their report on the annual accounts of a company
before it is signed on behalf of the Board of directors. Advise the company.
Solution The auditor is right. Since accounts are presented to auditors only after they are approved by
the Board and signed by authorized persons.
The auditor is only expected to submit his report on the accounts presented to him for audit
after conducting an examination of the necessary documents, analyzing relevant information
and test checking accounting records in order to be able to form an opinion of the financial
statements presented to him. In practice, the checking of accounts is already completed
before accounts are approved by the Board. Auditor informally approves the draft account
with notes etc., before the accounts are approved by the Board. However, auditor signs the
accounts only after these are approved by Board and signed by persons authorized by Board
of the company.
Quest-8 On recommendation of the Board of Directors of DJA Company Limited, Mr. R is appointed
at the company’s Annual General Meeting held on 1st October 2014 as the company’s
auditor for a period of 10 years. A resolution to this effect was passed unanimously with no
vote against the resolution. Explaining the provisions of the Companies Act, 2013 relating to
the appointment and re-appointment of auditors:
(i) Examine the validity of the above resolution.
(ii) What shall be your answer in case an audit firm R & Associate is appointed as the
company’s auditor?
Solution Appointment of Auditor [Section 139 of the Companies Act, 2013 and the Companies
(Audit and Auditors) Rules, 2014]:
Section 139(2) of the Companies Act, 2013, provides that listed companies and other
prescribed class or classes of companies (except one-person companies and small
companies) shall not appoint or re-appoint—
(1) an individual as auditor for more than one term of five consecutive years; and
(2) an audit firm as auditor for more than two terms of five consecutive years.
The Companies (Audit and Auditors) Rules, 2014 has prescribed the following classes of
companies for the purposes of section 139(2):
Chap. 10 Audit & Auditor 377
(1) all unlisted public companies having paid up share capital of rupees 10 crore or more;
(2) all private limited companies having paid up share capital of rupees 20 crore or more;
(3) all companies having public borrowings from financial institutions, banks or public
deposits of rupees 50 crores or more.
In the above question, status of the company is not specified, whether listed or unlisted;
amount of paid up share capital, public borrowings from financial institutions, banks or
public deposits are not known;
Thus, we are assuming that DJA Company Limited is a listed company or within the
prescribed classes of companies specified under the above said Rules
(i) As per the provisions of the Section 139(2) of Companies Act, 2013, the appointment of
Mr. R as auditor of the company for 10 years is not valid because an individual shall not
be appointed as auditor for more than one term of five consecutive years. The said
resolution is not valid.
(ii) An audit firm can be appointed as an auditor for two terms of five consecutive years.
This means that a firm can be appointed for five years and thereafter may be appointed/
reappointed for further five years. The total period for which a firm can be appointed is
10 years. A firm cannot be appointed as auditor for ten years by a single resolution.
Thus, the appointment of R & Associate as the company`s auditor for ten years by a single
resolution is not valid.
Quest-9 The auditor of Organic Foods Ltd. accepted the Certificate from Mr. Rohan who is the
manager, a person of knowledge, competence and high reputation, as to the value of the
stock in trade. The valuation of stock referred to above was found to be grossly overstated
for several years in the balance sheets of the company. As a result of the over valuation,
dividends were paid out of capital. The auditor did not examine the books of account very
minutely. If they had done so and compared the amount of stock at the beginning of the year,
with the purchases and sales during the year, they would have noticed the over valuation.
The company subsequently went into liquidation and the auditors were sued to make good
the loss caused by the wrongful payment of dividends based on the balance sheets figures.
Based on the above facts, you are required to decide, with reference to the provisions of the
Companies Act, 2013 and the decided case laws, the following issues:
(i) Whether the Auditors of the company will be liable for the loss caused to the company
by the wrongful payment of dividends based on the Balance sheets duly audited by the
Auditors.
(ii) What are the statutory duties of the Auditors in this regard?
Solution As per Section 143 of the Companies Act, 2013 It is the duty of the auditor to make a report
to the members of the company on the accounts examined by him and the balance sheet and
the profit and loss account of the company and on every document, which is annexed to the
balance sheet or profit and loss account laid before the company in general meeting.
The auditor owes a duty to the members to state whether the accounts give a true and fair
view of the affairs of the company at the end of the financial year and of the profit and loss
account of the year.
The duty of an auditor is to give information in direct and express terms and not merely to
arouse inquiry.
If he discovers that any illegal or improper payments or any other papers have been made,
his duty will be to make it public by reporting.
The auditor occupies a fiduciary position in relation to the shareholders and in auditing the
accounts maintained by the directors, he must act in the best interest of the shareholders who
are in the position of beneficiaries.
378 Problems & Solutions Module 2
But there is a limitation relating the duties to be performed by the auditor. An auditor is not
bound to be a detective and is not expected to approach his work with suspicion or with a
foregone conclusion that there is something wrong.
He is justified in believing servants of the company in whom confidence was placed by the
company. He is entitled to assume that they are honest and to rely upon their representations,
provided he takes reasonable care.
If there is anything calculated to excite suspicion, he should probe it to the bottom, but in the
absence of anything of that kind he is only bound to be reasonably cautions and careful.
This question is related to case of Kingston Cotton Mill Co.
In this case it was held that, it is not auditor’s duty to take stock. There are many matters in
which he may rely on the honesty and accuracy of others. Further auditors do not guarantee
the discovery of all frauds.
Even though, it is not the duty of auditor to examine the books of accounts very minutely,
they are supposed to examine the quantity of stock at the beginning of year with the
purchases & sales and arriving at the figures of closing stock which would have become
clear that there was overvaluation of stock.
Thus, the auditor of the company will be responsible for the violations and shall be
punishable with fine which shall not be less than `25,000 but which may extend up to `5
lakhs or four times the remuneration of the auditor, whichever is less as per provisions of
Section 147(2) of the Act.
Provided that if an auditor has contravened such provisions knowingly or willfully with the
intention to deceive the company or its shareholders or creditors or tax authorities, he shall
be punishable with imprisonment for a term which may extend to one year and with fine
which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh
rupees or eight times the remuneration of the auditor, whichever is less
Quest-10 Mr. Zed was appointed as an auditor of a company on 1st December 2015. The company
was incorporated on 1st November 2015. Mr. K, a relative of Mr. Zed was holding securities
of that company having face value of `1,10, 000. Mr. Murthy, a shareholder of the company
raised an objection on the appointment of the auditor. Referring to the provisions of the
Companies Act, 2013, comment whether the contention of Mr. Murthy is tenable.
Solution As per section 141(3)(d)(i) of the Companies Act, 2013, an auditor is disqualified to be
appointed as an auditor if he or his relative or partner is holding any security of or interest in
the company or its subsidiaries, or of its holding or associate company or a subsidiary of
such holding company.
As per proviso to this section the relative of the auditor may hold the securities or interest in
the company of face value not exceeding `1,00,000.
Referring the above provisions to the given situation, Mr. K, the relative of Mr. Zed, an
auditor, is holding securities of Face value of `1,10,000 in the company, which is in
contravention to the provisions of Section 141(3)(d)(i).
Thus, Mr. Zed is not eligible for appointment as an auditor of the company. Hence, the
contention of Mr Murthy is tenable.
Quest-11 MNR Limited incorporated on 1st January 2016 as a public limited company wants to
appoint its first auditors. Explaining the provisions of the Companies Act, 2013 in this
regard, answer the following:—
(i) What shall be your answer in case 60% of the paid-up share capital of the company is
held by the Central Government?
(ii) What shall be your answer if the Managing Director of the company wants to appoint
his close friend Mr. John, who is a Chartered Accountant holding Certificate of Practice
issued by the Institute of Chartered Accountants of India, as the company’s first
auditor?
Chap. 10 Audit & Auditor 379
Solution (i) Since 60% of the paid-up share capital of the company is held by the Central
Government, the company falls within the meaning of a government company under
section 2(45)].
As per section 139(7), in the case of a Government company or any other company
owned or controlled, directly or indirectly, by the Central Government, or by any State
Government, or Governments, or partly by the Central Government and partly by one or
more State Governments, the first auditor shall be appointed by the Comptroller and
Auditor-General of India within 60 days from the date of registration of the company.
In case the Comptroller and Auditor-General of India does not appoint first auditor
within the said period, the Board of Directors of the company shall appoint such auditor
within the next 30 days.
Further, in the case of failure of the Board to appoint such auditor within the next 30
days, it shall inform the members of the company who shall appoint such auditor within
the 60 days at an extraordinary general meeting, who shall hold office till the conclusion
of the first annual general meeting.
(ii) In the given case, the appointment of Mr. John, a practicing Chartered Accountants
holding Certificate of Practice, as the first auditor by the Managing Director of the
company by himself is in violation of the provisions of the said section. Therefore, the
Managing Director of the company is advised not to appoint the first auditor of the
company.
Quest-12 Selected Directors of Confidence Ltd. conspired with the Auditor of the company to
embezzle the accounts of the company in their interest. Tribunal on an application filed by
the certain directors passed the order for the removal of auditor. In view of the given facts
state the following—
(i) Whether the order directing removal of auditor by tribunal on an application of certain
directors is valid?
(ii) If an order of removal passed against the auditor, will he be eligible to be appointed in
other company?
Solution Given problem is based on removal of auditor by Tribunal in event of fraud u/s 140(5)
of companies Act 2013
As per the provisions of Section 140(5) of the Companies Act, 2013, Tribunal may either
• Suo motto or
• on an application made to it by the Central Government or
• by any person concerned,
if it is satisfied that the auditor of a company has acted in a fraudulent manner, it may, by
order, direct the company to change its auditors.
Section further states that if the application is made by the Central Government and the
Tribunal is satisfied that any change of the auditor is required, it shall within 15 days of
receipt of such application, make an order that he shall not function as an auditor and the
Central Government may appoint another auditor in his place:
An auditor, whether individual or firm, against whom final order has been passed by the
Tribunal under this section shall not be eligible to be appointed as an auditor of any
company for a period of five years from the date of passing of the order and the auditor shall
also be liable for action under section 447.
Based upon the above provision, we may conclude as follow: -
1. This section authorize Tribunal to pass order for removal of Auditor on ground of any
fraudulent acts. Thus, the order directing removal of auditor by tribunal on an
application of certain directors is valid
380 Problems & Solutions Module 2
2. Auditor so removed shall not be eligible for appointed as an auditor of any company for
a period of five years from the date of passing of the order and the auditor shall also be
liable for action under section 447.
Quest-13 M/s ABC is conducting Audit of H Ltd for past 10 years. Now due to requirement of Rotation
of Auditor, M/s ABC is going to retire at upcoming AGM and in its place M/s XBZ will join
as Auditor. Both Firms have common partner in form of Mr. B. Decide considering
provisions of Companies Act, about appointment of XBZ.
Solution As per the proviso to Section 139(2)
As on the date of appointment no audit firm having a common partner or partners to the
other audit firm, whose tenure has expired in a company immediately preceding the financial
year, shall be appointed as auditor of the same company for a period of five years
Conclusion: -Thus we may conclude that M/s XBZ cannot be appointed as Auditor for 5
years as Firm is having a common partner Mr. B, who was an auditor of earlier firm i.e. M/s
ABC as well
Quest-14 An audit firm, comprising of two partners, holds office as auditor of 40 private companies.
Such audit firm wants to be further appointed as an auditor in XYZ Pvt. Ltd with a paid-up
capital of 110 crore. Decide whether this is in consonance with the applicable law.
Solution As per section 141(3)(g) of the Companies Act, 2013, private companies shall also be
included in the provisions with respect to ceiling on number of audits if their paid up capital
is `100 crore or more, in other words the private companies having paid up share capital less
than 100 crore rupees shall not be included for calculation of specified number of audits. As
per the provision, a person shall not be eligible for appointment as an auditor of a company
if such person or partner is at the date of such appointment or reappointment holding
appointment as an auditor of more than twenty companies.
Since XYZ Pvt. Ltd. is with paid up share capital 110 crore and so will be included in the
prescribed ceiling limit of audit, therefore, such audit firm cannot be appointed as an auditor
of XYZ Pvt. Ltd as it will exceed the ceiling prescribed for number of audits.
Assumption: Here, it is assumed that all the 40 private companies in which the said audit
firm holds the office of auditor are having the paid-up capital of `100 crore or more.
Quest-15 Examine the validity and advice on the following matters with reference to the provisions of
the Companies Act, 2013:
(i) Prakash Carriers Limited appointed Mr. Rahul as its auditor in the Annual General
Meeting held on 30th September 2017. Initially, he accepted the appointment, but he
resigned from his office on 31st October 2017 due to personal reasons. The Board of
directors seeks advice for filling up the vacancy by appointment of Mr. Samuel as
auditor.
(ii) Managing Director of PQR Ltd. himself wants to appoint Mr. Raj, a practicing
Chartered Accountant, as first auditor of the company. Comment on the proposed action
of the Managing Director.
(iii) “Mr. P” is a practicing Chartered Accountant and “Mr. Q”, the relative of “Mr. P”, is
holding securities of “ABC Ltd.” having face value of `90,000/-. Whether “Mr. P” is
Qualified from being appointed as an Auditor of “ABC Ltd.”?
Solution (i) In the given case, as the auditor Mr. Rahul has resigned, the casual vacancy so created
can be filled up by the Board appointing Mr. Samuel. However, the appointment of Mr.
Samuel shall be approved by the company by passing of an ordinary resolution at a
general meeting of the company which must be convened by the Board within 3 months
of the recommendation of the Board.
Chap. 10 Audit & Auditor 381
Mr. Samuel will be entitled to hold office till the conclusion of the next Annual General
Meeting.
(ii) Section 139(6) of the Companies Act, 2013 lays down that “the first auditor or auditors
of a company shall be appointed by the Board of directors within 30 days from the date
of registration of the company”. In the instant case, the appointment of Mr. Raj, a
practicing Chartered Accountant as first auditors by the Managing Director of PQR Ltd
by himself is in violation of Section 139(6) of the Companies Act, 2013, which
authorizes the Board of Directors to appoint the first auditor of the company.
In view of the above, the Managing Director of PQR Ltd should be advised not to
appoint the first auditor of the company.
(iii) As per section 141 (3)(d)(i) of the Companies Act, 2013, an auditor is disqualified to be
appointed as an auditor if he, or his relative or partner holding any security of or interest
in the company or its subsidiary, or of its holding or associate company or a subsidiary
of such holding company.
As per proviso to this Section, the relative of the auditor may hold the securities or interest
in the company of face value not exceeding of `1,00,000.
In the present case, Mr. Q. (relative of Mr. P, an auditor), is having securities of `90,000
face Value in the ABC Ltd., which is as per allowed as pe the proviso to section 141
(3)(d)(i), Therefore, Mr. P will not be disqualified to be appointed as an auditor of ABC Ltd.
Quest-16 Rupa Limited, a listed company appointed M/s. VG & ASSOCIATES an audit firm as
Company's auditor in the Annual General Meeting held on 30-09-2017. Explain the
provisions of the Companies Act, 2013 relating to the appointment or reappointment of an
auditor in relation to the tenure of an auditor.
Solution Section 139(2) of the Companies Act, 2013, provides that listed companies and other
prescribed class or classes of companies shall not appoint or re-appoint-
(1) an individual as auditor for more than one term of five consecutive years; and
(2) an audit firm as auditor for more than two terms of five consecutive years.
An individual auditor who has completed his term shall not be eligible for re-appointment as
auditor in the same company for five years from the completion of his term;
An audit firm which has completed its term shall not be eligible for re- appointment as
auditor in the same company for five years from the completion of such term.
In the given case, Rupa Limited, which is a listed company, can appoint M/S VG &
ASSOCIATES an audit firm, for a term of upto 5 years.
Section 139(2), since M/S VG & ASSOCIATES is an audit firm, it can be re-appointed as
auditor for one more term
Quest-17 PKC Ltd., wants to appoint Mr. Praveen Kumar, a practicing Chartered Accountant as the
statutory auditor of the company and asked the proposed auditor to give a certificate in this
regard. What are the contents of the certificate to be issued in accordance with the
Companies (Audit & Auditors Rules, 2014)?
Solution As per proviso to section 139(1) of the Companies Act, 2013, before the appointment of
Auditor, a written consent of the auditor to such appointment, and a certificate from him or it
that the appointment, shall be in accordance with the conditions as may be prescribed, shall
be obtained.
The Companies (Audit and Auditors) Rules, 2014 provides the content of the Certificate.
According to this, the auditor appointed shall submit a certificate that –
(A) the individual or the firm, as the case may be, is eligible for appointment and is not
disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the
rules or regulations made thereunder;
382 Problems & Solutions Module 2
(B) the proposed appointment is as per the term provided under the Act;
(C) the proposed appointment is within the limits laid down by or under the authority of the
Act;
(D) the list of proceedings against the auditor or audit firm or any partner of the audit firm
pending with respect to professional matters of conduct, as disclosed in the certificate, is
true and correct.
The certificate shall also indicate whether the auditor satisfies the criteria provided in section
141.
Quest-18 Lemon & Company, Chartered Accountants a Limited Liability Partnership firm with CA. L,
CA. M and CA. N as partners, is the statutory auditor of a listed company M/s Big Limited
for past 6 years as on 01.04.2014.
CA.M is also a partner in other Chartered Accountant firm Dew & Company, Chartered
Accountants. Advise under the provisions of the Companies Act, 2013 :
(1) Can Dew & Company; be appointed as statutory auditors of M/s Big Limited and it's
another listed subsidiary M/s Dark Limited during cooling-off period?
(2) Can Lemon & Company be appointed as internal auditors of M/s Big Limited and it's
another listed subsidiary M/s Dark Limited, during such cooling-off period?
Solution According to Section 139 (2) of the Companies Act, 2013,
Listed companies and other prescribed class or classes of companies (except one-person
companies and small companies) shall not appoint or re-appoint an audit firm as auditor for
more than two terms of 5 consecutive years.
An audit firm which has completed its term (i.e. two terms of five consecutive years) shall
not be eligible for re- appointment as auditor in the same company for five years from the
completion of such term.
As on the date of appointment no audit firm having a common partner or partners to the
other audit firm, whose tenure has expired in a company immediately preceding the financial
year, shall be appointed as an auditor of the same company for a period of five years.
Applying the above provisions,
(1) Dew & Company cannot be appointed as a statutory auditor of M/s Big Limited during
the cooling–off period of Lemon & Company, as CA. M is the common partner in both
Lemon & Company and Dew & Company.
However, Dew & Company can be appointed as a statutory auditor of M/s Dark Limited (a
listed subsidiary of M/s Big Limited), during the cooling – off period.
(2) As per Section 138 (1) of the Companies Act, 2013, every listed company and other
prescribed class of companies, shall be required to appoint an internal auditor, who shall
either be a chartered accountant or a cost accountant, or such other professional (which may
be either an individual or a partnership firm or a body corporate) as may be decided by the
Board to conduct internal audit of the functions and activities of the company.
Accordingly, M/s Lemon & Company can be appointed as an internal auditor of M/s Big
Limited and in its subsidiary M/S Dark Limited (a listed company).
The provision of cooling off period as given under Section 139 of the Companies Act, 2013,
shall not be applicable on the Internal auditors.
Quest-19 Mrs. Sita, wife of CA. ‘Arjun' the statutory auditor of Stellar Builders Limited, acquired
shares in the company for a face value of `75000/- on 15th March 2018. CA ‘Arjun’ issued
his audit report on 25th April 2018. Examine the validity of this transaction under the
Companies Act, 2013. Would your answer be different if face value of the shares has been
`150000/- (market value `95000/-)
Chap. 10 Audit & Auditor 383
Solution As per Section 141(3) of the Companies Act, 2013, a person who, or his relative or partner is
holding any security of or interest in the company or its subsidiary, or of its holding or
associate company or a subsidiary of such holding company, shall not be appointed as an
auditor of the company.
However, Rule 10 of the Companies (Audit and Auditors) Rules, 2014, states that a relative
of an auditor may hold securities in the company of face value not exceeding rupees one
lakh.
In the given case Mrs. Sita, wife of CA. Arjun acquired shares in Stellar Builders Limited, in
which he was a statutory auditor on 15th March 2018. Since, the securities held by Mrs. Sita
is within the prescribed limit of `1 lakh, such a transaction is valid.
Yes, the answer will be different in case where the face value of acquired shares is
`1,50,000. Then in that case:
(i) Corrective action to maintain the limit specified (i.e., 1 lac) shall be taken by the auditor
within 60 days of such acquisition, or
(ii) Auditor has to vacate his office, since it would result in contravention of Section 141(3)
Quest-20 The Board of Directors of A Ltd. requested its Statutory Auditor to accept the assignment of
designing and implementation of suitable financial information system to strengthen the
internal control mechanism of the Company. How will you approach to this proposal, as an
Statutory Auditor of A Ltd., taking into account the consequences, if any, of accepting this
proposal?
Solution According to section 144 of the Companies Act, 2013,
An auditor appointed under this Act shall provide to the company only such other services
as are approved by the Board of Directors or the audit committee, as the case may be. But
such services shall not include designing and implementation of any financial information
system.
In the given case, the Board of directors of A Ltd. requested its Statutory Auditor to accept
the assignment of designing and implementation of suitable financial information system to
strengthen the internal control mechanism of the company.
As per the above provision of Section 144, said service is strictly prohibited.
In case the Statutory Auditor accepts the assignment, he will attract the penal provisions as
specified in Section 147 of the Companies Act, 2013.
In the light of the above provisions, we shall advise the Statutory Auditor not to take up the
above stated assignment.
Quest-21 Three chartered accountants, Mr. Robert, Mr. Ram and Mrs. Rohini, formed a Limited
[Jan-21] Liability Partnership Act, 2008 in the name of ‘R & Associates LLP’, practicing chartered
accountants. SR Ltd. intends to appoint ‘R & Associates LLP’ as auditors of the company.
Examine the validity of the proposal of SR Ltd. to appoint ‘R & Associates LLP’, a body
corporate, as an auditor of the company as per the provisions of the Companies Act, 2013
Solution As per the provisions of Section 141 (3) of the Companies Act, 2013 read with Rule 10 of
Companies (Audit and Auditors) Rule 2014, a body corporate other than a limited liability
partnership registered under the Limited Liability Partnership Act, 2008 shall not be
qualified for appointment as auditor of a company.
In the given case, proposal of SR Ltd. to appoint ‘R & Associates LLP’ as auditors of the
company is valid as the restriction marked for appointment as auditor for a body corporate is
not applicable to Limited Liability Partnership.
Quest-22 The Board of Directors of Moon Light Limited, a listed company appointed Mr. Tel,
[Dec-20] chartered Accountant as its first auditor within 30 days of the date of registration of
company to hold office from the incorporation till conclusion of its first AGM. At the first
384 Problems & Solutions Module 2
AGM, Mr. Tel was re-appointed to hold office from conclusion of first AGM till conclusion
of 6th AGM. In the light of the provisions of the Companies Act, 2013, examine the validity
of appointment/reappointment in the following cases:
(i) Appointment of Mr. Tel by the Board of Directors
(ii) Re-appointment of Mr. Tel at the first AGM in the above situation.
(iii) In case Mr. Bell. Chartered Accountant, was appointed as auditor at the first AGM to
hold office from the conclusion of its first AGM till the conclusion of 5th AGM I e., 4
years tenure.
Solution Mention provisions of Section 391(1) and (2)
(i) Appointment of Mr. Tel by the Board of Directors is valid as per the provisions of
section 139(6).
(ii) Appointment of Mr. Tel at the first Annual General Meeting is valid due to the fact that
the appointment of the first auditor made by the Board of Directors is a separate
appointment and the period of such appointment is not to be considered, while Mr. Tel is
appointed in the first Annual General Meeting, which is for the period from the
conclusion of the first Annual General Meeting to the conclusion of the sixth Annual
General Meeting.
(iii) As per law, auditor appointed shall hold office from the conclusion of 1st AGM till the
conclusion of its 6th AGM i.e., for 5 years. Accordingly, here appointment of Mr. Bell,
which is for 4 years, is not in compliance with the said legal provision, so his
appointment is not valid.
 Chapter 11
INTERPRETATION OF STATUTE

PRACTICAL QUESTION
Quest-1 Differentiate Mandatory Provision from a Directory Provision. What factors decide whether
a provision is directory or mandatory?
Solution Any provision which is mandatory, must be strictly observed; when it is ‘directory’ it would
be sufficient that it is substantially complied with.
However, we have to look to the substance and not merely the form, an enactment in
mandatory form might substantially be directory and, conversely, a statute in directory form
may in substance be mandatory.
Hence, it is the substance that counts and must take precedence over mere form.
If a provision gives a power coupled with a duty, it is mandatory: whether it is or is not so
would depend on such consideration as:
 the nature of the thing empowered to be done,
 the object for which it is done, and
 the person for whose benefit the power is to be exercised.
Quest-2 Define Grammatical Interpretation.
Solution Sometimes, occasions may arise when a choice has to be made between two interpretations –
one narrower and the other wider or bolder.
In such a situation, if the narrower interpretation would fail to achieve the manifest purpose
of the legislation, one should rather adopt the wider one.
For example, when we talk of disclosure of the nature of the concern or interest’ of a
director or the manager of a company in the subject-matter of a proposed motion, we can not
confine the words to Pecuniary Concern or Interest alone but we have to include any
concern or interest whatever.
Here a restricted narrow interpretation would defeat the very purpose of the disclosure.
The phrase and sentences are to be construed according to the rules of grammar.
Quest-3 The ‘Statute should be read as a Whole’. Explain the statement
Solution The deed/statute must be read as a whole in order to ascertain the true meaning of its several
clauses, and the words of each clause should be so interpreted as to bring them into harmony
with other provisions and the same approach would apply with equal force with regard to
Acts and Rules passed by the legislature.
One of the safest guides to the construction of sweeping general words is to examine other
words of like import in the same enactment or instrument to see what limitations must be
imposed on them.
If we find that a number of such expressions have to be subjected to limitations and
qualifications and that such limitations and qualifications are of the same nature, that
386 Problems & Solutions Module 2
circumstance forms a strong argument for subjecting the expression in dispute to a similar
limitation and qualification.
Quest-4 Explain the meaning of term ‘Proviso’. Give the distinction between proviso, exception and
Saving Clause.
Solution Proviso: proviso means to except something out of the enactment or to qualify something
stated in the enactment which would be within its purview if the proviso were not there.
The effect of the proviso is to qualify the preceding enactment which is expressed in terms
which are too general. As a general rule, a proviso is added to an enactment to qualify or
create an exception to what is in the enactment.
Ordinarily a proviso is not interpreted as stating a general rule. It is a cardinal rule of
interpretation that a proviso to a particular provision of a statute only embraces the field
which is covered by the main provision. It carves out an exception to the main provision to
which it has been enacted as a proviso and to no other.
Distinction between Proviso, exception and saving Clause
Proviso-‘Proviso’ is used to remove special cases from general enactment and provide for
them specially
Exception- Exception’ is intended to restrain the enacting clause to particular Cases
Saving Clause-‘Saving clause’ is used to preserve from destruction certain rights, remedies
or privileges already existing
Quest-5 Which are the different elements of Documents
Solution (i) Matter—This is the first element. Its usage with the word “any” shows that the
definition of document is comprehensive.
(ii) Record—This second element must be certain mutual or mechanical device employed
on the substance. It must be by writing, expression or description.
(iii) Substance—This is the third element on which a mental or intellectual element comes
to find a permanent form.
(iv) Means—This represents forth element by which such permanent form is acquired and
those can be letters, any figures, marks, symbols which can be used to communicate
between two persons.
Quest-6 How will you interpret the definitions in a statute, if the following words are used in a
statute?
(i) Means,
(ii) Includes
Give one illustration for each of the above from statutes you are familiar with
Solution Any definition of a word or expression in the definition section may either be restricting of
its ordinary meaning or may be extensive of the same.
When a word is defined to ‘mean’ such and such, the definition is ‘prima facie’ restrictive
and exhaustive, we must restrict the meaning of the word to that given in the definition
section.
But where the word is defined to ‘include’ such and such, the definition is ‘prima facie’
extensive, here the word defined is not restricted to the meaning assigned to it but has
extensive meaning which also includes the meaning assigned to it in the definition section.
Example: Definition of Director [section 2(34) of the Companies Act, 2013] — Director
means a director appointed to the board of a company. The word “means” suggests
exhaustive definition.
Definition of Whole time director [Section 2(94) of the Companies Act, 2013] — Whole
time director includes a director in the whole-time employment of the company. The word
Chap. 11 Interpretation of Statute 387
“includes” suggests extensive definition. Other directors may be included in the category of
the whole time director.
Quest-7 Many a time a proviso is added to a Section of the enactment. Explain the function of such a
proviso while carrying out the interpretation?
Solution Function of a proviso
To except something out of the enactment or to qualify something stated in the enactment
which would be within its purview if the proviso were not there.
To qualify the preceding enactment which is expressed in terms which are too general. As a
general rule, a proviso is added to an enactment to qualify or create an exception to what is
in the enactment
Quest-8 Explain the effect of usage developed by contemporary opinion through practice under any
statute with an example.
Solution Usage or practice developed under the statute is indicative of the meaning recognized to its
words by contemporary opinion.
In this connection, we have to bear in mind two Latin maxims:
(i) ‘Optima Legum interpresest consuetudo’ (the custom is the best interpreter of the law);
and
(ii) ‘Contempranea expositoest optima et fortissima in lege’ (the best way to interpret a
document is to read it as it would have been read when made).
Therefore, the best interpretation of a statute or any other document is that which has been
made by the contemporary authority.
Contemporary official statements throwing light on the construction of a statute and
statutory instruments made under it have been used as contemporanea exposition to interpret
not only ancient but even recent statutes in India.
Example: Documents issued by the Government simultaneously with the notification under
section 16(1) of the Securities Contracts (Regulation) Act, 1956 were used as
contemporanea expositio of the notification. [Desh Bandhu Gupta & Co. v Delhi Stock
Exchange Association Ltd.]
Quest-9 There is a prohibition on importation of "arms, ammunition or gun power or any other
goods" under a particular statute. How would you interpret the words "any other goods"
applying the rules of interpretation of statues? Also state when this particular rule will not
be applicable citing an example.
Solution The word “any other goods” in the given provision shall be interpreted through application
of the Rule of Ejusdem Generis.
According to this Rule, general words following specific words are to be construed (and
understood) with reference to the words that precede them.
Those general words are to be taken as applying to things of the same kind as the specific
words previously mentioned, unless there is something to show that a wider sense was
intended.
Thus, the rule of ejusdem generis means where general words are used and after specific
words, the general words would take their colour from the specific words used earlier.
Example: Where there was prohibition on importation of ‘arms, ammunition, or gunpower
or any other goods’ the words ‘any other goods’ would be meaning ‘of the same kind or
species’ and shall be construed as referring to goods similar to ‘arms, ammunition or gun
powder’
388 Problems & Solutions Module 2
Non-applicability of rule of Ejusdem Generis
The general principle of ‘ejusdem generis’ applies only where the specific words are of the
same nature. Thus, if they are of different categories, then the meaning of the general words
following those specific words remains unaffected, in other words those general words
would not take their colour from the specific words used earlier.
For example, Section 271 of companies Act empower the Tribunal to order winding up of
company on ‘just and equitable’ ground, however such ground is held to be not restricted by
the first four specific situations in which the Tribunal may wind up a company.
Quest-10 There are several provisions under the, Companies Act, 2013 which start with the words 'not
withstanding' and 'without prejudice'. Explain the nature and significance thereof, applying
the principles of Statutory Interpretation.
Solution The provision containing the word ‘notwithstanding’ which is also termed as termed as
‘non-obstante clause’ has an overriding effect on the other provision, i.e., such provision
shall prevail over the other provision.
It means, if there is any inconsistence or departure between the non-obstante clause and
another provision, it is the non-obstante clause which will prevail over the other clause.
Thus, a non-obstante clause restricts the operation and effect of all the contrary provisions.
For example, Section 163 of the Companies Act, 2013 provides option to adopt principle
of proportional representation for appointment of directors.
It reads as – “Notwithstanding anything contained in this Act,”. The effect of the non-
obstante provision is that the appointment of directors under Section 163 is not to be
affected by any other provision of Companies Act, 2013. In other words, the directors can be
appointed by way of proportional representation even if such appointment would not be
permissible under any other provision of the Act.
The words ‘without prejudice’ are used in an Act as follows:
An expression containing the words ‘without prejudice to the generality of …’ indicates that
anything contained in the provision following such words is not intended to cut down the
generality of the meaning of the preceding provision.
It means a provision enacted ‘without prejudice’ to another provision has not the effect of
affecting the operation of the other provision and any action taken under it must not be
inconstant with such other provision.
This view was upheld in the case of [Central Bank of India v State of Kerala]
Quest-11 'Preamble does not over-ride the plain provision of the Act.' Comment. Also give suitable
example.
Solution The Preamble expresses the scope, object and purpose of the Act more comprehensively.
The Preamble of a Statute is a part of the enactment and can legitimately be used as an
internal aid for construing it.
However, the Preamble does not over-ride the plain provision of the Act.
If the wording of the statute gives rise to doubts as to its proper construction, for example,
where the words or phrase has more than one meaning and a doubt arises as to which of the
two meanings is intended in the Act, the Preamble can and ought to be referred to in order to
arrive at the proper construction.
In short, the Preamble to an Act discloses the primary intention of the legislature but can
only be brought in as an aid to construction if the language of the statute is not clear.
However, it cannot override the provisions of the enactment.
Example: Use of the word ‘may’ in section 5 of the Hindu Marriage Act, 1955 provides that
“a marriage may be solemnized between two Hindus” has been construed to be mandatory in
the sense that both parties to the marriage must be Hindus as defined in section 2 of the Act.
Chap. 11 Interpretation of Statute 389
It was held that a marriage between a Christian male and a Hindu female solemnized under
the Hindu Marriage Act was void. This result was reached also having regard to the
preamble of the Act which reads: ‘An Act to amend and codify the law relating to marriage
among Hindus” [GullipoliSowria Raj v BandaruPavani]
Quest-12 How will you understand whether a provision in a statute is 'mandatory' or 'directory'?
Solution Distinction between a provision which is ‘mandatory’ and one which is ‘directory’ is that
when it is mandatory, it must be strictly observed;
when it is ‘directory’ it would be sufficient that it is substantially complied with. However,
we have to look into the substance and not merely the form; an enactment in mandatory
form might substantially be directory and, conversely, a statute in directory form may in
substance be mandatory.
Hence, it is the substance that counts and must take precedence over mere form. If a
provision gives a power coupled with a duty, it is mandatory; whether it is or is not so would
depend on such consideration as:
(i) the nature of the thing empowered to be done,
(ii) the object for which it is done, and
(iii) the person for whose benefit the power is to be exercised.
Quest-13 If it is defined as:
(i) "Company means a company incorporated under the Companies Act, 2013 or under any
previous company Law".
(ii) "Person" includes, _______ under the Consumer Protection Act, 1986.
How would you interpret/construct the nature and scope of the above definitions?
Solution The definition of a word or expression in the definition section may either be restricting of
its ordinary meaning or may be extensive of the same.
When a word is defined to ‘mean’ such and such, the definition is ‘prima facie’ restrictive
and exhaustive, we must restrict the meaning of the word to that given in the definition
section.
But where the word is defined to ‘include’ such and such, the definition is ‘prima facie’
extensive: here the word defined is not restricted to the meaning assigned to it but has
extensive meaning which also includes the meaning assigned to it in the definiti on section.
Thus,
(i) The definition is restrictive and exhaustive to the effect that only an entity incorporated
under the Companies Act, 2013 or under any previous Companies Act, shall deemed to
be company.
(ii) The definition is inclusive in nature, thereby the meaning assigned to the respective
word (here ‘person’) is extensive. It has a wider scope to include other terms into the
ambit of the definition having regard to the object of the definition.
Quest-14 Explain how 'Dictionary Definitions' can be of great help in interpreting / constructing an
Act when the statute is ambiguous.
Solution  First we refer the Act to find out if any particular word or expression is defined in it.
Where we find that a word is not defined in the Act itself, we may refer to dictionaries to
find out the general sense in which that word is commonly understood.
 However, in selecting one out of the several meanings of a word, we must always take
into consideration the context in which it is used in the Act.
 It is the fundamental rule that the meanings of words and expressions used in an Act
must take their colour from the context in which they appear.
390 Problems & Solutions Module 2
 Further, judicial decisions laying down the meaning of words in construing statutes in
‘pari materia’ will have greater weight than the meaning furnished by dictionaries.
However, for technical terms, reference may be made to technical dictionaries.
Quest-15 Sohel, a director of a Company, not being personally concerned or interested, financially or
[Jan-21] otherwise, in a matter of a proposed motion placed before the Board Meeting, did not
disclose his interest although he has knowledge that his sister is interested in that proposal.
He restrains from making any disclosure of his interest on the presumption that he is not
required by law to disclose any interest as he is not personally interested or concerned in
the proposal. He made his presumption relying on the 'Rule of Literal Construction'.
Explaining the scope of interpretation under this rule in the given situation, decide whether
the decision of Sohel is correct?
Solution Mention about Rule of Literal Construction
In the given question, Sohel (a director) did not disclose his interest in a matter placed before
the Board Meeting (in which his sister has interest), as he is not personally interested or
concerned in the proposal.
Thus, he ought to have considered broader meaning of the provision of law; and therefore,
even though he was personally not interested or concerned in the proposal, he should have
disclosed the interest
Quest-16 What is External Aid to interpretation? Explain how the Dictionary definitions are the
[Jan-21] External Aids to Interpretations?
Solution External aids are the factors that help in interpreting/construing an Act and have been given
the convenient nomenclature of ‘External Aids to Interpretation’. Apart from the statute
itself there are many matters which may be taken into account when the statute is
ambiguous. These matters are called external aids.
First we have to refer to the Act in question to find out if any Particular word or expression
is defined in it. In case we find that a word is not defined in Act itself, we may sense in
which the word is commonly understand. E.g. statutory corporation
However, in selecting one out of the several meanings of a word, we must always take into
consideration the context in which it is used in the Act.
It is the fundamental rule that the meanings of words and expressions used in an Act must
take their colour from the context in which they appear.
Further, judicial decisions laying down the meaning of words in construing statutes in ‘pari
materia’ will have greater weight than the meaning furnished by dictionaries. However, for
technical terms reference may be made to technical dictionaries.
Quest-17- “Associate words to be understood in common sense manner.” Explain this statement with
MTP-May-21 reference to rules of interpretation of statutes.
Solution Mention about Noscitur A Sociis
Quest-18- Differentiate between interpretation and construction.
MTP-May-21
Solution ‘Construction’ as applied to a written statute or document means to determine from its
known elements its true meaning or the intention of its framers. Construction involves
drawing conclusions beyond the actual expressions used in the text. This is done by referring
to other parts of the enactment and the context in which the law was made. Thus, when you
construe a statute you are attempting to ascertain the intention of the legislature.
Difference between Interpretation and Construction:
While more often the two terms are used interchangeably to denote a process adopted by the
courts to ascertain the meaning of the legislature from the words with which it is expressed,
these two terms have different connotations.
Chap. 11 Interpretation of Statute 391
‘Interpretation’ is the process by which the real meaning of an Act and the intention of the
legislature in enacting it is ascertained.
Interpretation may be either ‘legal’ or ‘doctrinal’.
It is ‘legal’ when there is an actual rule of law which binds the Judge to place a certain
interpretation of the statute.
It is ‘doctrinal’ when its purpose is to discover ‘real’ and ‘true’ meaning of the statute.
‘Legal’ interpretation is sub-divided into ‘authentic’ and ‘usual’.
It is ‘authentic’ when rule of interpretation is derived from the legislator himself;
It is ‘usual’ when it comes from some other source such as custom or case law.
‘Doctrinal’ interpretation may again be divided into ‘grammatical’ & ‘logical’.
It is ‘grammatical’ when the court applies only the ordinary rules of speech for finding out
the meaning of the words used in the statute.
On the other hand, when the court goes beyond the words and tries to discover the intention
of the statute in some other way, then it is said resort to what is called a ‘logical’
interpretation.
Quest-19- Differentiate Mandatory Provision from a Directory Provision. What factors decide whether
MTP-May-21 a provision is directory or mandatory?
Solution The distinction between a provision which is ‘mandatory’ and one which is ‘directory’ is
that when it is mandatory, it must be strictly observed; when it is ‘directory’ it would be
sufficient that it is substantially complied with.
‘May’: word ‘may’ in a statutory provision would not by itself show that the provision is
directory in nature.
In some cases the legislature may use the word ‘may’ as a matter of pure conventional
courtesy and yet intend a mandatory force.
Therefore, in order to interpret the legal import of the word ‘may’, we have to consider
various factors
The use of the word shall would not of itself make a provision of the act mandatory.
It has to be construed with reference to the context in which it is used.
Thus, as against the Government the word ‘shall’ when used in statutes is to be construed as
‘may’ unless a contrary intention is manifest.
Hence, it is the substance that counts and must take precedence over mere form. If a
provision gives a power coupled with a duty, it is mandatory: whether it is or is not so would
depend on such consideration as:
 the nature of the thing empowered to be done,
 the object for which it is done, and
 the person for whose benefit the power is to be exercised.
Quest-20 Explain along with example, meaning of words—
1. Notwithstanding
2. Save as otherwise provided
3. Without prejudiced to the other provisions
Solution Subject to
The impact of the words “subject to” when used in a provision is that when the same subject
matter is covered by that provision and by another provision or enactment subject to which it
operates and there is a conflict between them, then the latter will prevail over the former.
Example: As per Section 4 of FEMA, 1999
392 Problems & Solutions Module 2
Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own,
possess or transfer any foreign exchange, foreign security or any immovable property
situated outside India.
Notwithstanding
A clause that begins with the words “notwithstanding anything contained” is called a non-
obstante clause. Unlike the “subject to” clause, the notwithstanding clause has the effect of
making the provision prevail over others. When this term is used then the clause will prevail
over the other provision(s) mentioned therein. (K. Parasurammaiah v Pakari Lakshman)
Example: As per Section 147 of Negotiable Instruments Act, 1881
Notwithstanding anything contained in the Code of Criminal Procedure, 1973 every offence
punishable under this Act shall be compoundable.
Without prejudice
When certain particular provisions follow general provisions and when it is stated that the
particular provisions are without prejudice to those general provisions the particular
provisions would not restrict the operation and generality of the preceding general
provisions.
In other words, the particular provisions shall operate in addition to and not in derogation of
the general provisions.
Example: As per Section 147 of Negotiable Instruments Act, 1881
A drawer of a dishonored cheque shall be deemed to have committed an offence and shall,
without prejudice to any other provision of the Negotiable Instruments Act, be punishable
with Imprisonment for a term which may extend to 2 years, or with a fine which may extend
to twice the amount of cheque or with both.
Quest-21 Technical words are to be understood in technical sense: Explain the statement with regard
to applicable rule
Solution Mention about rule of literal construction
 Chapter 12
NEGOTIABLE INSTRUMENTS
ACT, 1881

PRACTICAL QUESTION
Quest-1 Mr. X executes a promissory note in the following form, 'I promise to pay a sum of `10,000
after three months'. Decide whether the promissory note is a valid promissory note.
Solution Invalid, as promissory note cannot be made payable to bearer
Quest-2 State whether the following statements are promissory notes or not?
(a) "I acknowledge myself to be indebted to L in `20,000 to be paid on demand, for value
received".
(b) "Mr. Ravi, I.O.U. `15,000".
(c) "I promise to pay G `18,000 and all other sums which shall be due to him".
(d) "I promise to pay G `21,000 when he delivers the goods".
(e) "I promise to pay K `200 and deliver one quintal of paddy".
Solution (a) valid- since There is a valid promise to pay
(b) Invalid- Since it is just an acknowledgement of debt
(c) Invalid- since amount is not certain
(d) Invalid- since conditional
(e) Invalid- since only amount to be mentioned
Quest-3 Referring to the provisions of the Negotiable Instruments Act, 1881, examine the validity of
the following Promissory Notes:
(i) I owe you a sum of `20,000. 'A' tells 'B'.
(ii) 'X' promises to pay 'Y' a sum of `10,000, six months after 'Y's marriage with 'Z'
Solution According to Section 4: Definition of PN
(i) It is not a promissory note in the first case, since there is no promise to pay.
(ii) In the second case also it is not a promissory note since as it is probably that Y may not
marry.
Quest-4 S writes "I promise to pay 'B' a sum of `500, seven days after my marriage with 'C'. Is this a
promissory note?
Solution According to Section 4: Definition of PN
In the given case the promise to pay is conditional as it depends upon an event, which may
not happen. Hence, it is not a promissory note.
Quest-5 Which of the following is a bill of exchange? Give reasons.
(a) "To Ram, Dear Ram, we hereby authorize you to pay on our account, to the order of Jai,
the sum of six thousand rupees."
394 Problems & Solutions Module 2
(b) "`500." "Pay to my order the sum of five hundred rupees, for value received." It is
neither signed by any person as drawer nor addressed to any person as drawee. It is
accepted by Jai.
Solution (a) Invalid Bills of exchange, since there is no order to pay
(b) Invalid Bills of exchange, since for a valid bills of exchange signatures of maker are
essential
Quest-6 What is the difference between a cheque and a bill of exchange?
Solution Distinction between a cheque and a bill of exchange
1. In a cheque the drawee is always a bank, whereas in a bill the drawee may be a ‘bank’ or
any other person.
2. In a cheque day of grace are not allowed, whereas in a bill three days of grace are
allowed for payment.
3. Notice of dishonor is not needed in a cheque, whereas notice of dishonor is usually
required in case of a bill.
4. A cheque can be drawn to bearer and made payable on demand, whereas a bill cannot be
bearer, if it is made payable on demand.
5. Cheque does not require presentment for acceptance. It needs presentment for payment.
Bill, sometimes, require presentment for acceptance and it is advisable to present them
for acceptance even when it is not essential to do so.
6. Cheque does not require to be stamped in India, whereas bill must be stamped according
to the law.
7. A cheque may be crossed, whereas a bill cannot be crossed.
8. A cheque being a revocable mandate, the authority may be revoked by countermanding
payment, and is determined by notice of the customer’s death or insolvency. This is not
so in the case of a bill.
Quest-7 State with reasons whether each of the following instruments is bearer or order:
(a) A bill is drawn payable to X or bearer.
(b) A bill is drawn payable to X who endorses it in blank in favour of Y.
(c) A bill is drawn payable to X.
(d) A bill is drawn payable to X or order.
Solution (a) Bearer, since word Bearer is written
(b) Bearer, since endorsement in blank took place
(c) Order, since not a bearer
(d) Order, since not a bearer and payable to order
Quest-8 A draws a bill of exchange on B, payable to C or order. C endorsed it to D without
consideration. On maturity bill is dishonored. Whether D can sue C for the payment?
Solution No, since consideration is missing between both of them
Quest-9 A draws a bill on B and B accepts it without consideration. A endorses that bill to C without
consideration. C endorses it to D for value consideration. TO whom D can sue
Solution D being a Holder for consideration can sue all prior parties
Quest-10 A draw a bill on B for `1000 payable to the order of A. B accept the bill but later on
dishonor it for non-payment. A sued B on the bill. B proves that it was accepted for Value of
`800 and as on accommodation for balance. How much A can recover from B?
Chap. 12 Negotiable Instruments Act, 1881 395
Solution As per the provisions of Section 44 of Negotiable Instruments Act 1881
“A” can only recover `800 from “B” as both of them are in immediate relation, but if such
instrument is obtained by HDC, then such HDC can recover the entire amount of `1,000
Quest-11 State with reasons whether each of the following instruments is an Inland Instrument or a
Foreign Instrument:
(a) A bill drawn in Delhi upon a merchant in Agra and accepted payable in London.
(b) A bill drawn in Jaipur upon a merchant in London and accepted payable in Agra.
(c) A bill drawn in Jaipur upon a merchant in London and accepted payable in London.
(d) A bill drawn in London on a merchant in Agra and endorsed in Jaipur.
Solution (a) Inland Bill u/s 11
(b) Inland Bill u/s 11
(c) Foreign Bill u/s 12
(d) Foreign Bill u/s 12
Quest-12 A draw a bill on B. B accepts the bill without any consideration. The bill is transferred to C
without consideration. C transferred it to D for value. Decide-.
(i) Whether D can sue the prior parties of the bill, and
(ii) Whether the prior parties other than D have any right of action intense?
Solution Section 43 of the Negotiable Instruments Act, 1881
(i) According to provisions of the aforesaid section 43, in case the bill which was drawn
without consideration comes into the hands of Holder for Consideration ultimately, then
such Holder for Consideration is entitled to sue any of the prior parties i.e. A, B or C.
(ii) Section 43 has clearly lays down that a negotiable instrument which is made, drawn,
accepted, endorsed or transferred without consideration creates no obligation of payment
between the parties to the transaction prior to the parties who receive it on consideration.
Thus, prior parties other than D are not entitled to sue each other due to lack of consideration
Quest-13 P draws a bill on Q for `10,000. Q accepts the bill. On maturity the bill was dishonored by
non-payment. P files a suit against Q for payment of `10,000. Q proved that the bill was
accepted for value of `7,000 and as an accommodation to the plaintiff for the balance
amount `3,000. Referring to the provisions of the Negotiable Instruments Act, 1881 decide-
whether P would succeed in recovering the whole amount of the bill.
Solution Provision of section 44
According to the above provision, if a bill consists of an amount for which no consideration
has been transferred, then parties who are standing in immediate relation to each other can
only recover the amount for which consideration has been moved.
Thus, in given problem, P can only recover `7,000 from Q.
Quest-14 A owes a certain sum of money to B. A does not know the exact amount and hence he makes
out a blank cheque in favour of B, signs and delivers it to B with a request to fill up the
amount due, payable by him. B fills up fraudulently the amount larger than the amount due,
payable by A and endorses the cheque to C in full payment of dues of B. Cheque of A is
dishonored. Referring to the provisions of the Negotiable Instruments Act, 1881, discuss the
rights of B and C.
Solution Provision of section 20
According to the provisions of above section, once a blank instrument comes into the hands
of HDC, such HDC is entitled to recover the amount mentioned on the instrument provided
such amount does not exceed the amount covered by stamp
396 Problems & Solutions Module 2
Thus C i.e. HDC can recover the amount mentioned on instrument from A as well as B
B i.e. Holder can recover only the amount which A is liable to pay.
Quest-15 P, the holder of a Bill of Exchange, transfers it to Q without consideration. Q also transfers
it to R without consideration. R transfers it to X for consideration. X transfers it to Y without
consideration. State giving reasons whether Y can recover the amount on such instrument
from X or P.
Solution Provision of section 43
According to the provisions of above section, any holder who derives his title from holder
for consideration is entitled to recover the amount from transferor for consideration and all
prior parties.
Thus, Y cannot recover it from X, however he can recover the mount from R and all prior
parties including P
Quest-16 ‘A’ sign, as maker, a blank stamped paper and gives it to 'B’ and authorizes him to fill it as
a note for `500, to secure an advance which 'C' is to make to 'B', 'B' fraudulently fills it up
as a note for `2,000, payable to 'C', who has in good faith advanced `2,000. Decide, with
reasons, whether' C' is entitled to recover the amount, and if so, up to what extent?
Solution As per the provisions of Section 20 of Negotiable Instruments Act, 1881
 " When one person signs and delivers to another
 a paper stamped, in accordance with the law relating to negotiable instruments then in
force in India
 and either wholly blank or having written thereon an incomplete negotiable
instrument,
 he thereby gives prima facie authority to the holder thereof to make or complete, as
the case may be, upon it a negotiable instrument
 for any amount specified therein not exceeding the amount covered by the stamp.
 The person, so signing shall be liable upon such instrument, in the capacity he signed
the same to any holder in due course, for such amount
 Provided that no person other than holder in course, shall recover from the person
delivering the instrument anything in excess of the amount intended by him to be paid
there under."
Conclusion: Based upon the above provisions, we may conclude that “C” can recover
`2,000
Quest-17 Bal Bharti executed a promissory note in favour of Kulbhushan for `1 crore. The said
amount was payable three days after sight. Kulbhushan, on maturity, presented the
promissory note on 1st January, 2015 to Bal Bharti. Bal Bharti made the payments on 4th
January, 2015. Kulbhushan wants to recover interest for one day from Bal Bharti. Advise
Bal Bharti, in the light of provisions of the Negotiable Instruments Act, 1881, whether he is
liable to pay the interest for one day?
Solution Section 24 of the Negotiable Instruments Act, 1881 states that whereas bill or note is
payable after date or after sight or after happening of a specified event, the time of payment
is determined by excluding the day from which the time begins to run.
Therefore, in the given case, Bal Bharti will succeed in objecting to Kulbhushan’s claim. As
Bal Bharti paid rightly “three days after sight” which was 4th January. Since the bill was
presented on 1st January, Bal Bharti was required to pay only on the 4th and not on
3rdJanuary, 2015 as contended by Bal Bharti.
Quest-18 Ascertain the 'Date of maturity' of a bill payable 120 days after the date. The Bill of
exchange was drawn on 1st June, 2005.
Chap. 12 Negotiable Instruments Act, 1881 397
Solution Day of presentment for sight is to be excluded i.e. 1st June, 2005. The period of 120 days
ends on 21st September, 2005 (June 29 days + July 31 days + August 31 Days + September
29 days = 120 days). Three days of grace are to be added. It falls due on 2nd October, 2005,
which happens to be a public holiday. As such it will fall due on 1st October, 2005 i.e., the
preceding Business Day.
Quest-19 Bharat executed a promissory note in favour of Bhushan for `5 crores. The said amount was
payable three days after sight. Bhushan, on maturity, presented the promissory note on 1st
January, 2008 to Bharat. Bharat made the payments on 4th January, 2008. Bhushan wants
to recover interest for one day from Bharat. Advise Bharat, in the light of provisions of the
Negotiable Instruments Act, 1881, whether he is liable to pay the interest for one day?
Solution Section 24 of the Negotiable Instruments Act, 1881 states that where a bill or note is payable
after date or after sight or after happening of a specified event, the time of payment is
determined by excluding the day from which the time begins to run.
Therefore, in the given case, Bharat will succeed in objecting to Bhushan's claim. Bharat
paid rightly "three days after sight". Since the bill was presented on 1st January, Bharat was
required to pay only on the 4th and not on 3rd April, as contended by Bharat.
Quest-20 A Bill is drawn payable at No. A-17 CA apartments, Mayur Vihar, New Delhi, but does not
contain drawee’s name. Mr. Vinay who resides at the above address accepts the bill. Is it a
valid Bill?
Solution Yes, it is a valid Bill and Mr. Vinay is liable thereon. The drawee may be named or
otherwise indicated in the Bill with reasonable certainty. In the present case, the description
of the place of residence indicates the name of the drawee and Mr. Vinay, by his acceptance,
acknowledges that he is the person to whom the bill is directed (Gray vs. Milner )
Quest-21 Discuss with reasons, whether the following persons can be called as a 'holder' under the
Negotiable Instruments Act, 1881:
(i) X who obtains a cheque drawn by Y by way of gift.
(ii) A, the payee of the cheque, who is prohibited by a court order from receiving the amount
of the cheque.
(iii) M, who finds a cheque payable to bearer, on the road and retains it.
(iv) B, the agent of C, is entrusted with an instrument without endorsement by C, who is the
payee.
(v) B, who steals a blank cheque of A and forges A's signature.
Solution (i) Yes, X can be termed as a holder because he has a right to possession and to receive the
amount due in his own name.
(ii) No, he is not a 'holder' because to be called as a 'holder' he must be entitled not only to
the possession of the instrument but also to receive the amount mentioned therein.
(iii) No, M is not a holder of the Instrument though he is in possession of the cheque, so is
not entitled to the possession of it in his own name.
(iv) No, B is not a holder. While the agent may receive payment of the amount mentioned in
the cheque, yet he cannot be called the holder thereof because he has no right to sue on
the instrument in his own name.
(v) No, B is not a holder because he is in wrongful possession of the instrument.
Quest-22 The drawer, 'D' is induced by 'A' to draw a cheque in favour of P, who is an existing person.
'A' instead of sending the cheque to 'P'. Forgoes his name and pays the cheque into his own
bank. Whether 'D' can recover the amount of the cheque from 'A's banker. Decide.
Solution According to the Provisions of Section 42 of the Negotiable Instrument Act, 1881, an
acceptor of a bill of exchange which is drawn in a fictitious name and payable to the
398 Problems & Solutions Module 2
drawer's order is not, by reason that such name is fictitious, relieved from liability to any
holder in due cause.
In given case, P is not a fictitious payee and D, the drawer can recover the amount of the
cheque from A's bankers
Quest-23 A induced B by fraud to draw a cheque payable to C or order. A obtained the cheque, forged
C's endorsement and collected proceeds to the cheque through his Bankers. B the drawer
wants to recover the amount from C's Bankers.
Decide in the light of the provisions of Negotiable Instruments Act, 1881—
(i) Whether B the drawer, can recover the amount of the cheque from C's Bankers?
(ii) Whether C is the Fictitious Payee?
(iii) Would your answer be still the same in case C is a fictitious person?
Solution I. In this case B, the drawer can recover the amount of the cheque from C's bankers
because C's title was derived through forged endorsement.
II. Here C is not a fictitious payee because the drawer intended him to receive payment.
III. The result would be different if C is not a real person or is a fictitious person or was not
intended to have the payment.
Quest-24 B obtains A's acceptance to a bill of exchange by fraud. B endorses it to C who is a holder in
due course. C endorses the bill to D who knows of the fraud. Referring to the provisions of
the Negotiable Instruments Act, 1881, decide whether D can recover the money from A in
the given case.
Solution In this case, even though D was aware of the fraud, but he himself was not a party to it. He
obtained the instrument from C who was a holder in due course. So, D gets a good title and
can recover from A.
Quest-25 X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to the order of
Z. The bill is duly accepted by Y. M obtains the bill from X thus becoming its holder in due
course. Can Y avoid payment of the bill? Decide in the light of the provisions of the
Negotiable Instruments Act, 1881.
Solution The problem is based on the provision of Section 42 of the Negotiable Instruments Act,
1881. In case a bill of exchange is drawn payable to the drawer's order in a fictitious name
and is endorsed by the same hand as the drawer's signature, it is not permissible for the
acceptor to allege as against the holder in due course that such name is fictitious.
Accordingly, in the instant case, Y cannot avoid payment by raising the plea that the drawer
(Z) is Fictitious.
Quest-26 J accepted a bill of exchange and gave it to K for the purpose of getting it discounted and
handing over the proceeds to J.K having failed to discount it returned the bill to J. J tore the
bill in two pieces with the intention of canceling it and threw the pieces in the street. K
picked up the pieces and pasted the two pieces~, together, in such manner that the bill
seemed to have been folded for safe custody, rather than cancelled. K put it into circulation
and it ultimately reached L, who took it in good faith and for value. Is J liable to pay the bill
under the provisions of the Negotiable Instruments Act, 1881?
Solution L is a Holder in due course, because he acquired the bill in good faith and for value. (Section
9)
J cannot deny the validity of the bill since no drawer or acceptor of a bill shall, in a suit by a
holder in due course be permitted to deny the validity of the bill as originally drawn.
(Section 120)
Thus, L is entitled to recover the bill amount from all prior parties including J since a holder
in due course has the right to sue all the prior parties (Section 36)
Chap. 12 Negotiable Instruments Act, 1881 399
Quest-27 Give the answer of the following:—
(a) A draws a cheque in favour of M, a minor. M endorses the same in favour of X. The
cheque is dishonored by the bank on grounds of inadequate funds. Discuss the rights of
X.
(b) A promissory note was made without mentioning any time for payment. The holder
added the words “on demand” on the face of the instrument. Does this amount to
material alteration?
(c) A draws a cheque for `100 and hands it over to B by way of gift. Is B a holder in due
course? Explain the nature of his title, interest and right to receive the proceeds of the
cheque.
(d) A cheque is drawn payable to “B or order”. It is stolen and the thief forges B’s
endorsement and endorses it to C. The banker pays the cheque in due course. Can B
recover the money from the banker?
Solution (a) As per Section 26, a minor may draw, endorse, deliver and negotiate the instrument so
as to bind all parties except himself. Therefore, M is not liable. X can, thus, proceed
against A.
(b) As per the provision of the Negotiable Instruments Act, 1881 this is not a material
alteration as a promissory note where no date of payment is specified will be treated as
payable on demand. Hence adding the words “on demand” does not alter the business
effect of the instrument.
(c) B is a holder but not a holder in due course as he does not get the cheque for value and
consideration. His title is good and bona fide. As a holder he is entitled to receive `100
from the bank on whom the cheque is drawn
(d) According to Section 85, the drawee banker is discharged when he pays a cheque
payable to order when it is purported to be endorsed by or on behalf of the payee. Even
though the endorsement of Mr. is forged, the banker is protected, and he is discharged.
The true owner, B, cannot recover the money from the drawee bank.
Quest-28 M drew a cheque amounting to `2 lakh payable to N and subsequently delivered to him.
After receipt of cheque N endorsed the same to C but kept it in his safe locker. After some
time, N died, and P found the cheque in N's safe locker. Does this amount to Indorsement
under the Negotiable Instruments Act, 1881?
Solution No, P does not become the holder of the cheque as the negotiation was not completed by
delivery of the cheque to him. (Section 48, the Negotiable Instruments Act, 1881)
Quest-29 M owes money to N. Therefore, he makes a promissory note for the amount in favour of N,
for safety of transmission he cuts the note in half and posts one half to N. He then changes
his mind and calls upon N to return the half of the note which he had sent. N requires M to
send the other half of the promissory note. Decide how a right of the parties are to be
adjusted.
Solution The question arising in this problem is whether the making of promissory note is complete
when one half of the note was delivered to N. Under Section 46 of the N.I. Act, 1881, the
making of a P/N is completed by delivery, actual or constructive. Delivery refers to the
whole of the instrument and not merely a part of it. Delivery of half instrument cannot be
treated as constructive delivery of the whole. So, the claim of N to have the other half of the
P/N sent to him is not maintainable. M is justified in demanding the return of the first half
sent by him. He can change his mind and refuse to send the other half of the P/N.
Quest-30 X by inducing Y obtains a Bill of Exchange from him fraudulently in his (X) favour. Later, he
enters into a commercial deal and endorses the bill to Z towards consideration to him (Z)
for the deal. Z takes the bill as a Holder- in-due-course. Z subsequently endorses the bill to
400 Problems & Solutions Module 2
X for value, as consideration to X for some other deal. On maturity the bill is dishonored. X
sues Y for the recovery of the money.
With reference to the provisions of the Negotiable Instruments Act, decide whether X will
succeed in the case?
Solution The problem stated in the question is based on the provisions of the Negotiable Instruments
Act, 1881 as contained in Section 53. The section provides: ‘Once a negotiable instrument
passes through the hands of a holder in due course, it gets cleansed of its defects provided
the holder was himself not a party to the fraud or illegality which affected the instrument in
some stage of its journey. Thus, any defect in the title of the transferor will not affect the
rights of the holder in due course even if he had knowledge of the prior defect provided he is
himself not a party to the fraud. (Section 53).
Thus, applying the above provisions, it is quite clear that X who originally induced Y in
obtaining the bill of exchange in question fraudulently, cannot succeed in the case. The
reason is obvious as X himself was a party to the fraud.
Quest-31 X, a legal successor of Y, the deceased person, signs a Bill of Exchange in his own name
admitted a liability of `50,000 i.e. the extent to which he inherits the assets from the
deceased payable to Z after 3 months from 1st January, 2002. On maturity, when Z presents
the bill to X, he (X) refuses to pay for the bill on the ground that since the original liability
was that of Y, the deceased, therefore he is not liable to pay for the bill.
Referring to the provisions of the Negotiable Instruments Act, 1881 decide whether Z can
succeed in recovering `50,000 from X. Would your answer be still the same in case X does
not state the limit in the bill and the liability is more than the assets he inherits from Y.
Solution The problem is based on the provisions of the Negotiable Instruments Act, 1881 as
contained in Section 29. A legal representative of a deceased person who signs his own
name on a negotiable instrument, is personally liable for the entire amount thereon, unless he
expressly limits his liability to the extent of the assets received by him as such (Section 29).
 Applying the above provisions to the given problem Z is entitled to recover
`50,000/- from X. X cannot refuse to pay the amount since he has inherited the assets of
the deceased. He will be liable to the extent of the full amount of the bill even if he
inherits the property valued less than the amount of the bill. Thus, in the first case he
will be liable to full amount of `50,000/-. In the second case since he has made a limit in
the instrument itself before signing on it, his liability will be only to the extent of
`50,000/- and not to the extent of the full amount as given on the instrument though he
might have inherited the property of value greater amount than that of the instrument.
Quest-32 Raman is the payee of an order cheque. John steals the cheque and forges Raman’s
signatures and endorses the cheque in his own favour. John then further endorses the
cheque to Anil, who takes the cheque in good faith and for valuable consideration.
Examine the validity of the cheque as per provisions of the Negotiable Instruments Act, 1881
and also state whether Anil can claim the privileges of a Holder in Due course.
Solution Forgery confers no title and a holder acquires no title to a forged instrument. A forged
document is a nullity. The property in the instrument remains vested in the person who is the
holder at the time when the forged signatures were put on it. Forgery is also not capable of
being ratified. In the case of forged endorsement, the person claiming under forged
endorsement even if he is purchaser for value and in good faith, cannot acquire the rights of
a holder in due course. Therefore, Anil acquires no title on the cheque. (Mercantile Bank v
D’Silva, 30 Bom LR 1225).
Quest-33 Is notice of dishonor necessary in the following cases:
(a) X having a balance of `1,000 with his bankers and having no authority to over draw,
drew a cheque for `5,000/-. The cheque was dishonored when duly presented for
repayment.
Chap. 12 Negotiable Instruments Act, 1881 401
(b) X, drawer of a Bill informs Y, the holder of the bill that the bill would be dishonored on
the presentment for payment.
Solution Notice of dishonor is not necessary in both the cases. [Section 98 of the Negotiable
Instruments Act, 1881].
Quest-34 A, a major, and B, a minor, executed a Promissory Note in favour of C. Examine with
reference to the provisions of the negotiable Instruments Act, 1881 the validity of the
Promissory Note and State whether it is binding on A and B.
Solution The promissory note executed by A and B is valid even though a minor is a party to it. B,
being a minor is not liable; but his immunity from liability does not absolve the other joint
promissory, viz., A from liability [Sulochona v Pondiyan Bank Ltd.,]
Quest-35 X, a major, and M, a minor, executed a promissory note in favour of P. Examine with
reference to the provisions of the Negotiable Instruments Act, the validity of the promissory
note and whether it is binding on X and M.
Solution In view of the provisions of Section 26, the promissory note executed by X and M is valid
even though a minor is a party to it. M, being a minor is not liable; but his immunity from
liability does not absolve the other joint promisor, namely X from liability [Sulochana v
Pandiyan Bank Ltd]
Quest-36 A, a broker draws a cheque in favour of B, a minor. B indorses the cheque in favour of C,
who in turn indorses it in favour of D. Subsequently, the bank dishonored the cheque. State
the rights of C and D and whether B, can be made liable?
Solution According to Section 26 of the Negotiable Instruments Act, 1881 a minor may draw,
endorse, deliver and negotiate a negotiable instrument to bind all parties except himself.
Therefore, C and D cannot claim from B, who being a minor does not incur any liability on
the cheque. C can claim payment from A, the Drawer, only and D can claim against C, the
endorser and A, the drawer.
Quest-37 Difference between Negotiation and Assignment

Solution: DIFFERENCE BETWEEN NEGOTIATION AND ASSIGNMENT

S No. Negotiation Assignment
1. In case of Negotiation, consideration Here Consideration needs to be proved
is always presumed
2. Instrument payable to bearer are Assignment is always done by mean of a Written and
negotiated by delivery only, whereas Registered Docs under the Provisions of Transfer of
instrument payable to order are Property Right, 1882.
negotiated by endorsement and
delivery
3. Title of HDC is better than that of Title of assignee is subject to all equities in the title of
transferor assignor. In Other words, assignee gets the right of
assignor only
4. Negotiation can be done only in Assignment can be done in respect of other instrument
respect of negotiable instruments also, in addition to negotiable instruments
.

Quest-38 A is a payee holder of a bill of exchange. He endorses it in blank and delivers it to B. B

endorses it in full to C or order. C without endorsement transfers the bill to D. State giving
reasons whether D as bearer of the bill of exchange is entitled to recover the payment from
A or B or C.
402 Problems & Solutions Module 2
Solution Yes, Once a Bearer always a Bearer
Quest-40 A bill of exchange is drawn payable to X or order. X endorses it to Y, Y to Z, Z to A,A to B
and B to X. State with reasons whether X can recover the amount of the bill from Y, Z, A and
B, if he has originally endorsed the bill to Y by adding the words ‘Sans Recours..
Solution In the problem X, the endorser becomes the holder after it is negotiated to several parties.
Normally, in such a case, none of the intermediate parties is liable to X. This is to prevent
‘circuitry of action’. But in this case X’s original endorsement is ‘sans recours’ and
therefore, he is not liable to Y, Z, A and B. But if the bill is negotiated back to X, all of them
are liable to him and he can recover the amount from all or any of them (Section 52 para 2).
Quest-41 'N' is the holder of a bill of exchange made payable to the order of 'P', The bill of exchange
contains the following endorsements in blank:
First endorsement 'P'
Second endorsement 'a'
Third endorsement 'R'
Fourth endorsement 'S'
'N' strikes out, without S's consent, the endorsement by 'a' and 'R'. Decide with reasons
whether 'N' is entitled to recover anything from 'S' under the provisions of Negotiable
Instruments Act, 1881.
Solution As per Section 82 of Negotiable Instruments Act, 1881
If the holder of an instrument cancels the name of any of the parties liable under the
instrument with the intention to discharge him, such party and any subsequent parties
deriving their title from such party are discharged from the liability to the holder.
Thus, N will not be entitled to recover anything from S
Quest-42 What do you mean by an acceptance of a negotiable instrument? Examine validity of the
following in the light of the provisions of the Negotiable Instrument Act, 1881:
(i) An oral acceptance
(ii) An acceptance by mere signature without writing the word "accepted".
Solution (i) It is one of the essential elements of a valid acceptance that the acceptance must be
written on the bill and signed by the drawee. An oral acceptance is not sufficient in law.
Therefore, an oral acceptance of the bill does not stand to be a valid acceptance.
(ii) The mere signature of the drawee without the addition of the words 'accepted' is a valid
acceptance.
Quest-43 What are the essential elements of a valid acceptance of a Bill of Exchange? An acceptor
accepts a “Bill of Exchange” but write on it “Accepted but payment will be made when
goods delivered to me is sold.” Decide the validity.
Solution The essentials of a valid acceptance are as follows:
1. Acceptance must be written: The drawee may use any appropriate word to convey his
assent. It may be sufficient acceptance even if just signatures are put without additional
words. An oral acceptance is not valid in law. ‘
2. Acceptance must be signed: A mere signature would be sufficient for the purpose.
Alternatively, the words ‘accepted’ may be written across the face of the bill with a
signature underneath; if it is not so signed, it would not be an acceptance.
3. Acceptance must be on the bill: The acceptance should be on the face of the bill
normally, but it is not necessary. An acceptance written on the back of a bill has been
held to be sufficient in law. What is essential is that must be written on the bill; else it
creates no liability as acceptor on the part of the person who signs it.
Chap. 12 Negotiable Instruments Act, 1881 403
4. Acceptance must be completed by delivery: Acceptance would not be complete, and the
drawee would not be bound until the drawee has either actually delivered the accepted
bill to the holder or tendered notice of such acceptance to the holder of the bill or some
person on his behalf.
5. Where a bill is drawn in sets, the acceptance should be put on one part only. Where the
drawee signs his acceptance on two or more parts, he may become liable on each of
them separately.
6. Acceptance may be either general or qualified: An acceptance is said to be general when
the drawee assents without qualification order of the drawer. The qualification may
relate to an event, amount, place, time etc. (Explanation to Section 86 of the Negotiable
Instruments Act, 1881). In the given case, the acceptance is a qualified acceptance since
a condition has been attached declaring the payment to be dependent on the happening
of an event therein stated.
As a rule, acceptance must be general acceptance and therefore, the holder is at liberty to
refuse to take a qualified acceptance. Where, he refuses to take it, the bill shall be
dishonored by non-acceptance. But, if he accepts the qualified acceptance, even then it binds
only him and the acceptor and not the other parties who do not consent thereto (Section 86).
Quest-44 Mr. Wise obtains from Mr. Decent, a cheque crossed ‘Not Negotiable’ fraudulently. He later
transfers the cheque to Mr. T, who gets the cheque encashed from Bank, which is not the
Drawee Bank. Mr. Decent comes to know about the fraudulent act of Mr. Wise, he sues Bank
for the recovery of money. Examine with reference to the relevant provisions of the
Negotiable Instruments Act, 1881, whether Mr. Decent will be successful in his claim.
Would your answer be still the same in case Mr., Wise does not transfer the cheque and gets
the cheque encashed from Bank himself?
Solution According to Section 130 of the Negotiable Instruments Act, 1881 a person taking cheque
crossed generally or specially bearing in either case the words ‘Not Negotiable’ shall not
have or shall not be able to give a better title to the cheque than the title the person from
whom he took it, had. In consequence, if the title of the transferor is defective, the title of the
transferee would be vitiated by the defect.
Thus, based on the above provisions, it can be concluded that if the holder has a good title,
he can still transfer it with a good title, but if the transferor has a defective title, the
transferee is affected by such defects, and he cannot claim the right of a holder in due course
by proving that he purchased the instrument in good faith and for value.
In the given case as Mr. Wise had obtained the cheque fraudulently from Mr. Decent, so he
had no title to it and is not capable of giving better title to the cheque or money to the Bank;
and as such the bank would be liable for the amount of the cheque for encashment. (Great
Western Railway Co. v London and Country Banking Co.)
In case, where Mr., Wise does not transfer the cheque and gets the cheque encashed from
Bank himself. The answer would not change and shall remain the same for the reasons given
above.
Thus Mr. Decent in both the cases shall be successful in his claim from the bank.
Quest-45 State whether the following alterations are material alterations under the Negotiable
Instruments Act, 1881?
(i) The holder of the bill inserts the word "or order" in the bill,
(ii) The holder of the bearer cheque converts it into account payee cheque,
(iii) A bill payable to X is converted into a bill payable to X and Y.
Solution (i) Not a Material Alteration
(ii) Material Alteration authorised by Act Material Alteration
404 Problems & Solutions Module 2
Quest-46 A issues an open 'bearer' cheque for `10,000 in favour of B who strikes out the word 'bearer'
and put crossing across the cheque. The cheque is thereafter negotiated to C and D. When it
is finally presented by D's banker, it is returned with remarks "Payment countermanded" by
drawer. In response to this legal notice from D, A pleads that the cheque was altered after it
had been issued and therefore he is not bound to pay the cheque. Referring to the provisions
of the Negotiable Instruments Act, 1881 decide, whether A's argument is valid or not?
Solution Any change made in the instrument that causes it to speak a different language from what it
originally intended, or which changes the legal identity of the instrument in its terms or in
relation or parties there to is a material alteration.
In this problem, -the cheque bears two alterations when it is presented to the paying banker
(i) the word 'bearer' has been struck off and (ii) the cheque has been crossed, Both of these
alterations do not amount to material alteration under the provisions of the Act and hence the
liability of any including the drawer is not at all affected. 'A' is liable to pay the amount of
the cheque to the holder.
Quest-47 A cheque payable to bearer is crossed generally and marked "not negotiable". The cheque is
lost or stolen and comes into possession of B who takes it in good faith and gives value for
it. B deposits the cheque into his own bank and his banker presents it and obtains payment
for his customer from the bank upon which it is drawn. The true owner of the cheque claims
refund of the amount of the cheque from B.
Solution  Section 130 of the Negotiable Instruments Act, 1881 provides that a person taking a
cheque crossed generally or specially, bearing in either case the words 'not negotiable',
shall not have, and shall not be capable of giving a better title to the cheque than that
which the person from whom he took it had.
 In view of these provisions, B, even though he was a holder in due course, did not
acquire any title to the cheque as against its true owner.
 B is liable to repay the amount of the cheque to the true owner. He can, however,
proceed against the person from whom he took the cheque.
 In the given case, both the collecting banker and the paying bankers would be
discharged from their respective liability. Since the collecting banker, in good faith and
without negligence, had received payment for B, who was its customer of the cheque
which was crossed generally.
The paying banker on whom the crossed cheque was drawn, had paid the same in due
course, the banker would also not be liable to the true owner.
Quest-48 A issues a cheque for `25,000/- in favour of B. A has sufficient amount in his account with
the Bank. The cheque was not presented within reasonable time to the Bank for payment and
the Bank, in the meantime, became bankrupt. Decide under the provisions of the Negotiable
Instruments Act, 1881, whether B can recover the money from A?
Solution Since all the requirements of Section 84 are getting satisfied, thus the drawer is discharged
from the liability to pay the amount of cheque to B. However, B can sue against the bank for
the amount of the cheque applying the above provisions.
Quest-49 'A' draws a cheque for `50,000. When the cheque ought to be presented to the drawee bank,
the drawer has sufficient funds to make payment of the cheque. The bank fails before the
cheque is presented. The payee demands payment from the drawer. What is the liability of
the drawer
Solution Based upon the above provisions since the payee has not presented the cheque to the
drawer's bank within a reasonable time when the drawer had funds to pay the cheque, and
the drawer has suffered actual damage, the drawer is discharged from the liability.
Chap. 12 Negotiable Instruments Act, 1881 405
Quest-50 X draws a cheque in favour of Y. After having issued the cheque he informs Y not to present
the cheque for payment. He also informs the bank to stop payment. Decide, under provisions
of the Negotiable Instruments Act, 1881; whether the said acts of X constitute an offence
against him?
Solution In the case of [Modi Cements Ltd. v Kuchil Kumar Nandi] It was held by Supreme Court
held that once a cheque is issued by the drawer, a presumption under Section 139 of the
Negotiable Instruments Act, 1881 follows and merely because the drawer issues a notice
thereafter to the drawee or to the bank for stoppage of payment, it will not preclude an action
under Section 138.
Quest-51 J. a shareholder of a Company purchased for his personal use certain goods from a Mall
(Departmental Store) on credit. He sent a cheque drawn on the Company's account to the
Mall (Departmental Store) towards the full payment of the bills. The cheque was dishonored
by the Company's Bank. J, the shareholder of the company was neither a Director nor a
person in-charge of the company. Examining the provisions of the Negotiable Instruments
Act, 1881 State whether J has committed an offence under section 138 of the Act and decide
whether he (J) can be held liable for the payment, for the goods purchase from the Mall
(Departmental Store).
Solution In the Case of [HNB Mulla Feroze v C.Y. SomayaJulu] It was held by Andhra Pradesh
High Court that although the petitioner has a legal liability to refund the amount to the
appellant, petitioner is not the drawer of the cheque, which was dishonored, and the cheque
was also not drawn on an account maintained by him but was drawn on an account
maintained by the company.
Hence, it was held that the petitioner J could not be said to have committed the offence
under Section 138 of the Negotiable Instrument Act, 1881. Therefore, J also is not liable for
the cheque but legally liable for the payments for the goods.
Quest-52 A cheque was dishonored at the first instance and the payee did not initiate action. The
cheque was presented for payment for the second time and again it was dishonored. State in
this connection whether the payee can subsequently initiate prosecution for dishonor of
cheque.
Solution Supreme Court in Sadanandan Bhadran v Madhavan Sunil Kumar (1998) 4 CLJ 228 held
that Section 138 does not put any embargo upon the payee to successively present a
dishonored cheque during the period of validity.
It is not uncommon for a cheque being presented again and again within its validity period in
the expectation that it would be encashed.
As per Supreme Court, the combined reading of sections 138 and 142 leave no room for
doubt that cause of action within the meaning of section 142(c) arises and can arise only
once.
Thus on each presentation of the cheque and its dishonor, a fresh right to initiate such
prosecution shall arise if it has not been initiated earlier.
Quest-53 Ram draws a cheque of `1 lakh. It was a bearer cheque. Ram kept the cheque with himself.
After some time, Ram gives this cheque to Shyam as a gift on his birthday. Decide whether
Shyam is having a valid title over the cheque and whether Shyam is a holder in due course
or not in relation to this cheque as per the Section 9 of the Negotiable Instruments Act 1881.
Solution Refer provisions of Section 9
In the instant case, Ram draws a cheque for `1 lakh and hands it over to Shyam by way of
gift.
Here, Shyam’s title is good and bonafide. As a holder he is entitled to receive `1 lakh from
the bank on whom the cheque is drawn.
406 Problems & Solutions Module 2
Even though Shyam is not a holder in due course as he does not get the cheque for value and
consideration.
Quest-54 On a Bill of Exchange for `1 lakh, X’s acceptance to the Bill is forged. ‘A ‘takes the Bill
from his customer for value and in good faith before the Bill becomes payable. State with
reasons whether ‘A’ can be considered as a ‘Holder in due course ‘and whether he (A) can
receive the amount of the Bill from ‘X’.
Solution According to section 9 of the Negotiable Instruments Act, 1881 ‘holder in due course’
means any person who for consideration becomes the possessor of promissory note, bill of
exchange or cheque if payable to bearer or the payee or endorsee thereof, if payable to order,
before the amount in it became payable and without having sufficient cause to believe that
any defect existed in the title of the person from whom he derived his title. As ‘A’ in this
case prima facie became a possessor of the bill for value and in good faith before the bill
became payable, he can be considered as a holder in due course.
But where a signature on the negotiable instrument is forged, it becomes a nullity. The
holder of a forged instrument cannot enforce payment thereon. In the event of the holder
being able to obtain payment in spite of forgery, he cannot retain the money. The true owner
may sue the holder
A holder in due course is protected when there is defect in the title. But he derives nontitle
when there is entire absence of title as in the case of forgery.
Hence ‘A’ cannot receive the amount on the bill.
Quest-55 Decide about the consequences, where a promissory note carry amount which are different
in words and figure
Solution As per the provisions of Section 18 of Negotiable Instruments Act 1881, If the amount
undertaken or ordered to be paid is stated differently in figures and in words, the amount
stated in words shall be the amount undertaken or ordered to be paid.
Quest-56 Who is the competent authority to issue a promissory note 'payable to bearer'?
Solution A promissory note cannot be made payable to the bearer (Reserve Bank of India Act, 1934).
Only the Reserve Bank or the Central Government can make or issue a promissory note
'payable to bearer'.
Quest-57 A owes a certain sum of money to B. A does not know the exact amount and hence he makes
out a blank cheque in favour of B, signs and delivers it to B with a request to fill up the
amount due, payable by him. B fills up fraudulently the amount larger than the amount due,
payable by A and endorses the cheque to C in full payment of dues of B. Cheque of A is
dishonored. Referring to the provisions of the Negotiable Instruments Act, 1881, discuss the
rights of B and C.
Solution As per Section 20
Quest-58 M drew a cheque amounting to `2 lakh payable to N and subsequently delivered to him.
After receipt of cheque N endorsed the same to C but kept it in his safe locker. After some
time, N died, and P found the cheque in N’s safe locker. Does this amount to Indorsement
under the Negotiable Instruments Act, 1881?
Solution No, P does not become the holder of the cheque as the negotiation was not completed by
delivery of the cheque to him. (Section 48, the Negotiable Instruments Act, 1881)
Quest-59 What are the characteristics of any negotiable instruments?
Solution 1. Freely transferable.
In case payable to bearer- Merely by giving delivery
In case payable to Order- By endorsement as well as delivery.
Chap. 12 Negotiable Instruments Act, 1881 407
2. Title of transferee i.e. HDC is good- Provided he gets instrument
 before due date,
 for value consideration and
 in good faith.
Thus, even if the title of transferor is defective, still title of transferee would not be
affected.
3. NI can be transferred indefinitely
Quest-60 Vikram accepts a Bill of Exchange for `50,000 which is an accommodation bill drawn by A
on 1st January 2020 to be payable at Mumbai on 1st July 2020. A transfers the bill to B on
1st February 2020 without any consideration. B further transfers it to C on 1st March 2020
for value. Then C transfers it again to D on 1st April 2020 without consideration. D holds
the bill till maturity and on the due date of payment he presented the bill for payment but the
bill is dishonoured by Vikram.
Discuss the rights of A, B, C and D to recover the amount of this bill as per the provisions of
the Negotiable Instruments Act, 1881.
Solution Refer Provisions of Section 43
In view of the above provisions,
A and B have no right to recover the bill amount.
C, being a holder for consideration and the subsequent party D have right to recover the
amount of the bill from their respective prior parties
Quest-61 Mr. X executed an account payee cheque on the name of the Mr. B for the amount of rupees
20,000. Mr. B submitted the cheque in the bank. Later B finds that no amount has been
credited to his account. In fact, the amount has been credited to some other person with the
same name.
State the legal position of B with respect to the Negotiable Instruments Act, 1881.
Solution Restrictive crossing or A/c Payee Crossing - Where a cheque crossed generally or
specially also contain the words' A/c Payee only' it is known as restrictive crossing.
Restrictive crossing provides a direction to the paying banker that proceeds of a cheque
shall be deposited only in the account of 'payee' whose name is mentioned in the cheque.
This crossing to be valid must be either with general crossing or with special crossing
In given case Mr. X executed an account payee cheque on the name of the Mr. B for the
amount of rupees 20,000. Mr. B submitted the cheque in the bank. Later B finds that no
amount have been credited to his account. In fact the amount has been credited to some other
person with the same name.
Conclusion: We may conclude that Mr. B can hold the bank with whom the cheque is
deposited for the credit (collecting banker), liable for negligence for wrongful conversion of
funds to the other account.
Quest-62 Mr. V draws a cheque of `11,000 and gives to Mr. B by way of gift. State with reason
whether Mr. B is a holder in due course as per the Negotiable Instrument Act, 1881?
Solution According to section 9 of the Negotiable Instrument Act, 1881, "Holder in due course"
means—
 any person, who for consideration
 becomes the possessor of a negotiable instrument, if payable to bearer, or the payee or
endorsee thereof, if payable to order,
 before the amount mentioned in it became payable, and
 without having sufficient cause to believe that any defect existed in the title of the
person from whom he derived his title.
408 Problems & Solutions Module 2
In given case, Mr. V draws a cheque of `11,000 and gives to Mr. B by way of gift.
Thus Mr. B is holder but not a holder in due course since he did not get the cheque for
consideration.
Quest-63 Bholenath drew a cheque in favour of Surendar. After having issued the cheque; Bhole nath
requested Surendar not to present the cheque for payment and gave a stop payment request
to the bank in respect of the cheque issued to Surendar. Decide, under the provisions of the
Negotiable Instruments Act, 1881 whether the said acts of Bholenath constitute an offence?
Solution As per the facts stated in the question, Bholenath (drawer) after having issued the cheque,
informs Surender (drawee) not to present the cheque for payment and as well gave a stop
payment request to the bank in respect of the cheque issued to Surender.
Section 138 of the Negotiable Instruments Act, 1881, states that once a cheque is drawn on
an account maintained by the drawer with his banker for payment of any amount of money
to another person out of that account for the discharge in whole or in part of any debt or
liability, is informed by the bank unpaid either because of insufficiency of funds to honour
the cheques or the amount exceeding the arrangement made with the bank, such a person
shall be deemed to have committed an offence.
Once a cheque is issued by the drawer then merely because the drawer issues a notice
thereafter to the drawee or to the bank for stoppage of payment, it will not preclude an action
under Section 138.
Same view was also upheld in the case of [Modi Cement v Kuchil Kumar Nandi]
Thus, the act of Bholenath, of stop payment constitutes an offence under the provisions of
the Negotiable Instruments Act, 1881.
Quest-64 State the rules laid down by the Negotiable Instruments Act, 1881 for ascertaining the date
of maturity of a bill of exchange.
Solution 1. For PN/BE payable after a stated number of month[Section 23] - If a promissory
note or bill of exchange is made payable a stated number of months:—
 After date or
 After sight or
 After certain event,
it becomes payable three days after the corresponding date of month after the stated
number of months (section 23).
2. Situation, where month does not have any corresponding day - If the month in which
the period would terminate has no corresponding day, the period shall be terminating on
the last day of such month.
3. For PN/BE payable after a stated number of days [Section 24] - In calculating the
date at which promissory note or bill made a certain number of days:—
 After date or
 After sight or
 After certain event,
is at maturity, the day of the date of presentation for acceptance or sight or of protest for
acceptance or on which the event happens shall be excluded.
4. Situation where day of Maturity is a Public Holiday [Section 25] - When the day on
which a promissory note or bill of exchange is at maturity is a public holiday, the
instrument is deemed to be due on preceding business day.
 Chapter 13
GENERAL CLAUSE ACT

PRACTICAL QUESTION
Quest-1 X owned a land with fifty tamarind trees. He sold his land and the (obtained after cutting the
fifty trees) to Y. X wants to know whether the sale of timber tantamount to sale of immovable
property. Advise him with reference to provisions of "General Clauses Act, 1897”.
Solution As per Section 3(26) of the General Clauses Act, 1897]: ‘Immovable Property’ shall
include:
(i) Land,
(ii) Benefits to arise out of land, and
(iii) Things attached to the earth, or
(iv) Permanently fastened to anything attached to the earth.
Thus, definition of immovable property is an inclusive one. It contains four elements: land,
benefits to arise out of land, things attached to the earth and things permanently fastened to
anything attached to the earth.
In the instant case, X sold Land along with timber (obtained after cutting trees) of fifty
tamarind trees of his land. According to the above definition, Land is immovable property;
however, timber cannot be immovable property since the same are not attached to the earth.
Quest-2 Explain briefly any four effects by repeal of an existing Act by central legislation
enumerated in Section 6 of the General Clauses Act, 1897.
Solution As per Section 6 of the General Clauses Act, 1897
Where any Central legislation or any regulation made after the commencement of this Act
repeals any Act, the repeal shall not:
1. Revive anything not enforced or prevailed during the period at which repeal is affected
or;
2. Affect the prior management of any legislation that is repealed, or anything performed
or undergone or;
3. Affect any claim, privilege, responsibility or debt obtained, ensued or sustained under
any legislation so repealed or;
4. Affect any punishment, forfeiture or penalty sustained with regard to any offence
committed as opposed to any legislation or
5. Affect any inquiry, litigation or remedy with regard to such claim, privilege, debt or
responsibility or any inquiry, litigation or remedy may be initiated, continued or insisted.
Quest-3 What is a Document as per the Indian Evidence Act, 1872?
Solution As per Section 3 of the Indian Evidence Act, 1872, ‘document’ means any matter expressed
or described upon any substance by means of letters, figures or marks or by more than one
of those means, intended to be used, or which may be used, for the purpose of recording that
matter.
For Example: A writing is a document, any words printed, photographed are documents.
410 Problems & Solutions Module 2
Quest-4 What is the meaning of service by post as per provisions of The General Clauses Act, 1897?
Solution As per Section 27 of the General Clauses Act, 1897, where any legislation or regulation
requires any document to be served by post, then unless a different intention appears, the
service shall be deemed to be affected by:
(i) properly addressing
(ii) pre-paying, and
(iii) posting by registered post.
A letter containing the document to have been affected at the time at which the letter would
be delivered in the ordinary course of post.
Quest-5 Mr. Ram, an advocate has fraudulently deceived his client Mr. Shyam, who was taking his
expert advice on taxation matters. Now, Mr. Ram is liable to a fine for acting fraudulently
both under the Advocates Act, 1961 as well as the Income Tax Act, 1961. State the provision
as to whether his offence is punishable under the both the Acts, as per the General Clauses
Act, 1897.
Solution As per Section 26 of General Clause Act, where an act or omission constitutes an offence
under two or more enactments, then the offender shall be liable to be prosecuted and
punished under either or any of those enactments but shall not be punished twice for the
same offence.
Thus, Mr. Ram shall be liable to punished under the Advocates Act, 1961 or the Income Tax
Act, 1961, but shall not be punished twice for the same offence.
Quest-6 A notice when required under the Statutory rules to be sent by “registered post
acknowledgment due” is instead sent by “registered post” only. Whether the protection of
presumption regarding serving of notice by “registered post” under the General Clauses
Act is tenable? Referring to the provisions of the General Clauses Act, 1897, examine the
validity of such notice in this case.
Solution As per the provisions of Section 27 of the General Clauses Act, 1897, where any legislation
or regulation requires any document to be served by post, then unless a different intention
appears, the service shall be deemed to be affected by:
1. properly addressing,
2. pre-paying, and
3. posting by registered post.
A letter containing the document to have been affected at the time at which the letter would
be delivered in the ordinary course of post.
Therefore, in view of the above provision, since, the statutory rules itself provides about the
service of notice that a notice when required under said statutory rules to be sent by
‘registered post acknowledgement due’, then, if notice was sent by ‘registered post’ only it
will not be the compliance of said rules. However, if such provision was not provided by
such statutory rules, then service of notice if by registered post only shall be deemed to be
affected.
Quest-7 Define the term Good Faith as per General Clause Act, 1897
Solution Mention about good faith
Quest-8 As per the provisions of the Companies Act, 2013, a whole time Key Managerial Personnel
(KMP) shall not hold office in more than one company except its subsidiary company at the
same time. Referring to the Section 13 of the General Clauses Act, 1897, examine whether a
whole time KMP can be appointed in more than one subsidiary companies?
Chap. 13 General Clause Act 411
Solution Companies Act, 2013 provides that whole time key managerial personnel shall not hold
office in more than one company except in its subsidiary company at the same time. With
respect to the issue that whether a whole time KMP of holding company be appointed in
more than one subsidiary companies or can be appointed in only one subsidiary company.
It can be noted that Section 13 of General Clauses Act, 1897 provides that the word
‘singular’ shall include the ‘plural’, unless there is anything repugnant to the subject or the
context.
Thus, a whole time key managerial personnel may hold office in more than one subsidiary
company as per the present law
Quest-9 The Companies Act, 2013 provides that the amount of dividend remained unpaid/unclaimed
on expiry of 30 days from the date of declaration of dividend shall be transferred to unpaid
dividend account within 7 days from the date of expiry of such period of 30 days. If the
expiry date of such 30 days is 30.10.2018, decide the last date on or before which the
unpaid/unclaimed dividend amount shall be required to be transferred to a separate bank
account in the light of the relevant provisions of the General Clauses Act, 1897?
Solution Section 9 of the General Clauses Act, 1897 provides that, for computation of time, in any
legislation or regulation, it shall be sufficient, for the purpose of excluding the first in a
series of days or any other period of time to use the word “from” and for the purpose of
including the last in a series of days or any other period of time, to use the word “to”.
As per the facts of the question the company shall transfer the unpaid/unclaimed dividend to
unpaid dividend account within the period of 7 days.
For computing this limit of 7 days, 30th October 2018 will be excluded and 6th November
2018 shall be included, i.e. 31st October, 2018 to 6th November, 2018 (both days inclusive).
Quest-10 Referring to the provisions of the General Clauses Act, 1897, find out the day/date on which
the following Act/Regulation comes into force. Give reasons also,
(1) An Act of Parliament which has not specifically mentioned a particular date.
(2) The Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) (Fifth Amendment) Regulations, 2015 was issued by SEBI vide
Notification dated 14th August, 2015 with effect from 1st January, 2016.
Solution (1) According to section 5 of the General Clauses Act, 1897, where any Central Act has not
specifically mentioned a particular date to come into force, it shall be implemented on
the day on which it receives the assent of the President in case of an Act of Parliament.
(2) If any specific date of enforcement is prescribed in the Official Gazette, the Act shall
come into enforcement from such date.
Thus, in the given question, the SEBI (Issue of Capital and Disclosure Requirements) (Fifth
Amendment) Regulations, 2015 shall come into enforcement on 1st January, 2016 rather
than the date of its notification in the gazette.
Quest-11 As per a Rule of an Educational Institution, every student may come on weekends for extra
classes but every student shall appear on a weekly test conducted in the institute, which can
be analysed in terms of General Clause Act, as:
(a) Attending weekend classes is optional but appearing in weekly test is compulsory
(b) Attending weekend classes is compulsory but appearing in weekly test is optional
(c) Attending weekend classes and appearing in weekly test, both are compulsory for
students
(d) Attending weekend classes and appearing in weekly test both are optional for students.
Solution (a)
412 Problems & Solutions Module 2
Quest-12 The act by which the operation of a previous Act comes to an end, is called as ___________
(a) The Repealing Act
(b) The Consolidating Act
(c) The Amending Act
(d) Analogous Act
Solution (a)
Quest-13 ‘Repeal’ of provision is different from ‘deletion’ of provision. Explain as per the General
Clauses Act, 1897.
Solution In Navrangpura Gam Dharmada Milkat Trust v Rmtuji Ramaji
It was decided that ‘Repeal’ of provision is in distinction from ‘deletion’ of provision.
‘Repeal’ ordinarily brings about complete obliteration (abolition) of the provision as if it
never existed, thereby affecting all incoherent rights and all causes of action related to the
‘repealed’ provision while ‘deletion’ ordinarily takes effect from the date of legislature
affecting the said deletion
Quest-14 What do you understand by the term “Good faith”. Explain it as per the provisions of the
[Nov-19] General Clouse Act, 1897. Mr. X purchased a watch from Mr. Y carelessly without proper
enquiry. Whether the purchase made could said to be made in Good Faith.
Solution The question of good faith under the General Clauses Act is one of fact. It is to determine
with reference to the circumstances of each case.
The term “Good faith” has been defined differently in different enactments.
This definition of the good faith does not apply to that enactment which contains a special
definition of the term “good faith” and there the definition given in that particular enactment
has to be followed.
Definition under this Act may be applied only if there is nothing contrary in subject, and if
that is so, the definition is not applicable.
In the given problem in the question, Mr. X purchased a watch from Mr. Y carelessly
without proper enquiry. Such a purchase made could not be said to be made in good faith as
it was done without due care and attention as is expected with a man of ordinary prudence.
An honest purchase made carelessly without making proper enquiries cannot be said to have
been made in good faith so as to convey good title.
Quest-15 PK and VK had a long dispute regarding the ownership of a land for which a legal suit was
[Jan-21] pending in the court. The court fixed the date of hearing on 29.04.2018, which was
announced to be a holiday subsequently by the Government. What will be the computation
of time of the hearing in this case under the General Clauses Act, 1897?
Solution According to Section 10 of the General Clauses Act, 1897, where by any legislation or
regulation, any act or proceeding is directed or allowed to be done or taken in any court or
office on a certain day or within a prescribed period then, if the Court or office is closed on
that day or last day of the prescribed period, the act or proceeding shall be considered as
done or taken in due time if it is done or taken on the next day afterwards on which the
Court or office is open.
In the given question, the court fixed the date of hearing of dispute between PK and VK, on
29.04.2018, which was subsequently announced to be a holiday.
Applying the above provisions we can conclude that the hearing date of 29.04.2018, shall be
extended to the next working day.
Quest-16 Income Tax Act, 1961 provides that the gratuity paid by the government to its employees is
[Jan-21] fully exempt from tax. You are required to explain the scope of the term ‘government’ and
clarify whether the exemption from gratuity income will be available to the state
Chap. 13 General Clause Act 413
Government Employees? Give your answer in accordance with provisions of the General
Clauses Act, 1897.
Solution According to section 3(23) of the General Clauses Act, 1897, ‘Government’ or ‘the
Government’ shall include both the Central Government and State Government.
Hence, wherever, the word ‘Government’ is used, it will include Central Government and
State Government both.
Thus, when the Income Tax Act, 1961, provides that gratuity paid by the government to its
employees is fully exempt from tax, the exemption from gratuity income will be available to
the State Government employees also.
Quest-17 Mrs. K went to a jewellary shop to purchase diamond ornaments. The owners of jewellary
[Dec-20] shop are notorious and indulging in smuggling activities. Mrs. K purchased diamond
ornaments honestly without making proper enquiries. Was the purchase made in Good faith
as per the provisions of the General Clauses Act, 1897 so as to convey good title?
Solution In the instant case, the purchase of diamond ornaments by Mrs. K from a Jewellary Shop,
the owners of which are notorious and indulged in smuggling activities, made in good faith,
will not convey good title.
As per section 3(22) of the General Clauses Act, 1897, a thing shall be deemed to be done in
“good faith” where it is in fact done honestly, whether it is done negligently or not.
The definition of good faith as is generally understood in the civil law and which may be
taken as a practical guide in understanding the expression in the Indian Contract Act, 1872 is
that nothing is said to be done in good faith which is done without due care and attention as
is expected with a man of ordinary prudence.
An honest purchase made carelessly without making proper enquiries cannot be said to
have been made in good faith so as to convey good title.
Quest-18 There are two ways to reach city A from city B. The distance between the two cities by
[Dec-20] roadways is 100 kms and by water ways 80 kms. How is the distance measured for the
purpose of any Central Act under the provisions of the General Clauses Act, 1897?
Solution Section 11 of the General Clauses Act, 1897]: In the measurement of any distance, for the
purposes of any Central Act or Regulation made after the commencement of this Act, that
distance shall, unless a different intention appears, be measured in a straight line on a
horizontal plane.
Quest-19 Mr. Apar and Mr. New, both aspiring Chartered Accountants have met in a conference for
[Dec-20] CA students. Both are having an argument about the meaning of Financial Year. They have
approached you as a senior in the profession to guide them about the meaning of Financial
Year as per the provisions of the General Clauses Act, 1872. Also, brief them about the
difference between a calendar year and financial year.
Solution According to section 3(21) of the General Clauses Act, 1897, financial year shall mean the
year commencing on the first day of April.
The term Year has been defined under Section 3(66) as a year reckoned according to the
British calendar. Thus, as per General Clauses Act, Year means calendar year which starts
from January to December.
Difference between Financial Year and Calendar Year: Financial year starts from first day of
April but Calendar Year starts from first day of January.
Quest-20 "The act done negligently shall be deemed to be done in good faith." Comment with the help
[MTP-May- of the provisions of the General Clauses Act, 1897.
21]
414 Problems & Solutions Module 2
Solution A thing shall be deemed to be done in “good faith” where it is in fact done honestly, whether
it is done negligently or not;
The question of good faith under the General Clauses Act is one of fact.
It is to determine with reference to the circumstances of each case.
Thus, anything done with due care and attention, which is not malafide is presumed to have
been done in good faith. For eg: An authority is not acting honestly where it had a suspicion
that there was something wrong and did not make further enquiries
The term “Good faith” has been defined differently in different enactments. This definition
of the good faith does not apply to that enactment which contains a special definition of the
term “good faith” and there the definition given in that particular enactment has to be
followed. This definition may be applied only if there is nothing repugnant in subject or
context, and if that is so, the definition is not applicable.
Quest-21 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.
Solution According to section 27 of the General Clauses Act, 1897, where any legislation or
regulation requires any document to be served by post, then the service shall be deemed to
be effected by:
(i) Properly addressing
(ii) Pre-paying, and
(iii) Posting by registered post.
A letter containing the document to have been effected at the time at which the letter would
be delivered in the ordinary course of post.
The facts of the question are similar to a decided case law in the case of Jagdish Singh v
Nattu Singh, wherein it was held by the Supreme Court that where a notice is sent to the
landlord by registered post and the same is returned by the tenant with an endorsement of
refusal, it will be presumed that the notice has been served.
Conclusion:—Thus, in the given question it can be deemed that the notice was rightfully
served on Mr. Vyas.
 Chapter 14
CONTRACT OF BAILMENT

PRACTICAL QUESTION
Quest-1 In a bailment there is a transfer of possession right for ever.
Solution Incorrect, As per the provisions of section 148 of the Indian Contract Act, 1872, there is
no transfer of possession right forever.
The delivery is intended for a temporary purpose. There will be no contract of bailment if
the whole property is transferred and things delivered are not specifically returned or
accounted for.
Quest-2 A bailment is the delivery of goods by one person to another for some purpose.
Solution Correct, The most important feature of bailment is that the goods must be delivered to the
bailee for some purpose.
Quest-3 The Delivery of goods by one person to another as security for the payment of a debt is
called
(a) Bailment
(b) Pledge
(d) Mortgage
(e) Hypothecation.
Solution Pledge
Quest-4 Deposit of money in a Bank Amounts to Bailment.
Solution No, since money are not included in term goods
Quest-5 Placing of Ornament in Bank locker will amount to Bailment
Solution No, since there is no delivery
Quest-6 Mr. G delivered a shopkeeper to repair a watch on the payment of `100. Subsequently the
shopkeeper refused to repair it for the `100 and also claimed to retain the watch until he is
paid for the work done. Decide the right of G by examining the provision of the Indian
Contract Act, 1872.
Solution This given problem is related to the Bailment given in the Indian Contract Act, 1872. As
per provisions of Section 170- The bailee has a right to claim his lawful charges and in case
bailor refuses to pay it, bailee is entitled to retain the goods until the charges due in respect
of those goods are paid.
However, this right can be exercised when the services have been performed entirely and
the remuneration has become due. Bailee’s particular lien in contracts of service may be
lost if he does not complete the work within the agreed time or reasonable time.
416 Problems & Solutions Module 2
In the given case, it is clearly expressed by the shopkeeper to repair the watch on the
payment of `100. However later his refusal to repair the watch, does not complete the work
for which he has promised and therefore he losses his right to exercise particular lien and
nothing could be claimed under it.
Thus, the shopkeeper was not entitled to retain the watch.
Quest-7 A hires a carriage of B and agrees to pay `500 as hire charges. The carriage is unsafe,
though B is unaware of it. A is injured and claims compensation for injuries suffered by
him. B refuses to pay. Discuss the liability of B.
Solution According to Section 150, of the Indian Contract Act, 1872, if the goods are bailed for hire,
the bailor is responsible for damages, whether he was aware about the existence of such
types of faults in the goods bailed or not.
Thus in given case, B is liable to compensate A for the injuries suffered even if he has no
knowledge of the defect in the carriage.
Quest-8 A, the bailor, pledges cinema projector and other accessories with Cine Association Co-
operative Bank Limited, the bailee, for loan. A requests the bank to allow the pledged
goods to remain in his possession and promises to hold the same in trust for the bailee and
also further promises to handover the possession of the same to the bank whenever
demanded. Examining the provisions of Indian Contract Act, 1872 decide, whether a valid
contract of pledge has been made between A, the bailor and Bank, the bailee?
Solution According to the provisions as contained in section 149 of Indian Contract Act, 1872,
delivery may be by any of the following modes:-
(i) Actual
(ii) Symbolic
(iii) Constructive
In the given case, delivery by attornment to the bailee (bank) while goods remain in
custody of A proves that delivery is constructive in nature.
The transaction was therefore a valid pledge.
Quest-9 A bailee need not return accretion to the goods to the bailor on the completion of the
Contract of Bailment.
Solution Incorrect: It is the responsibility of the bailee to deliver to the bailor any accretion or
profit accruing from the goods bailed.
Quest-10 A contract of bailment becomes void, if the bailee does any act with regard to the goods
bailed, which is inconsistent with the conditions of bailment.
Solution Incorrect: If the bailee does any act with regard to the goods bailed, inconsistent with the
condition of bailment, the contract of bailment becomes Voidable at the option of the
bailor.
Quest-11 Sunil delivered his car to Mahesh for repairs. Mahesh completed the work, but did not
return the car to Sunil within reasonable time, though Sunil repeatedly reminded Mahesh
for the return of car. In the meantime, a big fire occurred in the neighborhood and the car
was destroyed. Decide whether Mahesh can be held liable under the provisions of the
Indian Contract Act, 1872.
Solution As per Section 160, it is the duty of the bailee to return or deliver the goods bailed
according to the bailor’s direction, without demand as soon as the time for which they were
bailed has expired.
If the bailee fails to do so, he is responsible to the bailor for the loss or destruction of the
goods.
Hence, in the given case. Mahesh is liable for the loss
Chap. 14 Contract of Bailment 417
Quest-12 State the difference between general lien and particular lien

Particular lien General lien

It is available against those goods in respect of It is available against all goods whether in respect of
which some charges are due. which claims are due or not.
It is available only to specific bailee like bankers,
It is available to every bailee factors, Wharfinger’s, attorneys of High Court and
policy brokers.
It is available only when some service involving It is available even when no such service has been
the exercise of labor or skill has been rendered. rendered.

Quest-13 State with reasons whether the following statements are correct or incorrect: A pledge of
documents of title to goods by a mercantile agent is a valid pledge.
Solution Correct, as per section 178 of the Indian Contract Act, 1872, a pledge by mercantile agent
will be valid if the agent is in possession of goods or documents of title to the goods and if
such possession is with the opinion of the owner. And Pawnee acted in good faith.
Quest-14 State with reasons whether the following statements are correct or incorrect:
If the pawnor makes a default in the payment of debt, or performance of duty, as agreed,
the pawnee has a right to sell the thing pledged for which no reasonable notice of the sale
is required. (1 mark)
Solution Incorrect, As per Section 176 of the Indian Contract Act, 1872 in case of default in
payment by Pawnor, Pawnee has a right to sell the thing pledged on giving the pawnor
reasonable notice of the sale.
Any sale made by the pawnee without giving a reasonable notice will be void.
Quest-15 Difference between Bailment and Pledge

DIFFERENCE BETWEEN CONTRACT OF BAILMENT AND PLEDGE

Basis of Difference Contract of Bailment Contract of Pledge
1. Purpose Bailment might be for any purpose Pledge means a bailment for some specific
purpose i.e. as security for payment of debt
2. Usage of goods Bailee is entitled to use the goods Pawnee cannot use the goods pledged
as per the terms of Bailment
3. Right to sell Bailee can either retain the goods or After providing a due notice pawnee has a
he can sue the bailor for his dues right to sell them

Quest-16 M lends a sum of `5,000 to B, on the security of two shares of a Limited Company on 1st
April 2016. On 15thJune, 2016, the company issued two bonus shares. B returns the loan
amount of `5,000 with interest but M returns only two shares which were pledged and
refuses to give the two bonus shares. Advise B in the light of the provisions of the Indian
Contract Act, 1872.
Solution Given case is based on the provisions of Section 163 of the Indian Contract Act, 1872. As
per the section, “in the absence of any contract to the contrary, the bailee is bound to
deliver to the bailor, any increase or profit which may have accrued from the goods bailed.”
Applying the provisions to the given case, the bonus shares are an increase on the shares
pledged by B to M. So M is liable to return the shares along with the bonus shares and
hence B the bailor, is entitled to them also.
418 Problems & Solutions Module 2
Quest-17 Ravi sent a consignment of goods worth `60,000 by railway and got railway receipt. He
obtained an advance of `30,000 from the bank and endorsed and delivered the railway
receipt in favor of the bank by way of security. The railway failed to deliver the goods at
the destination. The bank filed a suit against the railway for `60,000. Decide in the light of
provisions of the Indian Contract Act, 1872, whether the bank would succeed in the said
suit?
Solution As per Sections 178 and 178A of the Indian Contract Act, 1872 the deposit of title deeds
with the bank as security against an advance constitutes a pledge.
As a pledge, a banker’s rights are not limited to his interest in the goods pledged and thus
pledgee would have all such remedies that the owner of the goods would have against
them.
In Morvi Mercantile Bank Ltd. v Union of India, the Supreme Court held that the bank
(pledgee) was entitled to recover not only the amount of the advance due to it, but the full
value of the consignment.
However, the amount over and above his interest is to be held by him in trust for the
pledgor. Thus, the bank will succeed in this claim of `60,000 against Railway.
Quest-18 Mr. Avinash wanted a loan for expanding his business, from ABC Bank. Mr. Avinash has
pledged the stock of his business to obtain the loan from bank. However, the expansion of
business did not reap the desired results and Mr. Avinash was not able to repay the loan.
Now, ABC bank wants to retain the stock for adjustment of their loan. Advise, ABC Bank
whether they can retain the stock for the adjustment of their loan and also for payment of
interest. Give your answer as per the provisions of the Contract Act, 1872.
Answer According to the Indian Contract Act, 1872, the pawnee may retain the goods pledged, not
only for payment of the debt or the performance of the promise, but for the interest, of the
debt, and all necessary expenses incurred by him in respect of the possession or for the
preservation of the goods pledged.
Hence, ABC Bank can retain the stock of business of Mr. Avinash, not only for adjustment
of the loan but also for payment of interest.
Quest-19 Srushti acquired valuable diamond at a very low price by a voidable contract under the
Nov 19 provisions of the Indian Contract Act, 1872.The voidable contract was rescinded. Srushti
pledged the diamond with Mr. VK. Is this a valid pledge under the Indian Contract Act,
1872?
Answer Given problem is based on Indian Contract Act, 1872
According to the general rule, any pledge by non owner shall be invalid, even though
there are certain exception to this rule
Pledge by person in possession under a Voidable contract
Where a person obtains possession of goods under a Voidable contract the pledge created
by him is valid provided:
(a) The contract has not been rescinded before the contract of pledge,
and
(b) the Pawnee acts in good faith
In the given case, Srushti acquired valuable diamond at a very low price by a voidable
contract under the provisions of the Indian Contract Act, 1872.The voidable contract was
rescinded. Srushti pledged the diamond with Mr. VK.
Conclusion:—Since before pledge, contract was rescinded by the aggrieved party. Thus,
we may conclude that pledge shall not be valid
Chap. 14 Contract of Bailment 419
Quest-20- Mr. Sharad has recently shifted from Delhi to Noida. During the shifting some of the
MTP-May-21 furniture was damaged. Mr. Sharad gave the items to Asian Arts, Greater Noida for repair,
refabrication, and painting, etc. Asian Arts deals in the sale of furniture and repair thereof.
It was decided that the whole work will be done on a lumpsum amount of `50,000. In
between this period, the workshop at Asian Arts caught fire and there was no fault of the
proprietors. Goods bailed by Mr. Sharad along with another furniture destroyed in this fire
incident. Mr. Sharad has lost furniture due to fire at workshop of Asian Arts. What is the
correct statement considering there was no specific contract?
(a) Asian Arts is liable, because fire took place at his place
(b) Asian Arts is liable, because bailment is on going
(c) Asian Arts is not liable because risk of any loss during bailment is need to bear by
bailor.
(d) Asian Arts is not liable because fire is not due to any negligence of their part.
Answer Asian Arts is not liable because risk of any loss during bailment is need to bear by bailor.
Quest-21- Megha lends a sum of `20,000 to Bhim, on the security of two shares of a Prema Limited
MTP-May-21 on 1st April 2019. On 15th June, 2019, the company issued two bonus shares. Bhim returns
the loan amount of `20,000 with interest but Megha returns only two shares which were
pledged and refuses to give the two bonus shares. Advise Bhim in the light of the provisions
of the Indian Contract Act, 1872.
Answer According to the provisions of the Indian Contract Act, 1872.
“In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor,
any increase or profit which may have accrued from the goods bailed.”
In the given question, Megha received 2 bonus shares on the 2 pledged shares of Prema
Limited.
Thus, based upon the above provisions, we may conclude that, the bonus shares are
accretion on the shares pledged by Bhim to Megha. So, Megha is liable to return the shares
along with the bonus shares.
Thus, Bhim the bailor, is entitled to receive the original shares as well as bonus shares
Quest-22- As per the Indian Contract Act, 1872, answer the following:
MTP-May-21 (i) Definition of Pledge, pawnor and pawnee
(ii) Essential characteristics of contract of pledge
Answer 1. As per the provisions of Section 172 of Indian Contract Act, 1872
The bailment of goods as security for payment of a debt or performance of a promise is
called “pledge”.
The bailor is in this case called the “pawnor”.
The bailee is called the “pawnee”.
2. Since Pledge is a special kind of bailment, all the essential of bailment are also
essentials of Pledge. Apart from that, the characteristics of the pledge are:
(1) There shall be a bailment of security against payment or performance of the
promise.
(2) The subject matter of pledge is goods.
(3) Goods pledged for shall be in existence
(4) There shall be delivery of goods from pledger to pledgee.
Quest-23- Radheshyam borrowed a sum of `50,000 from a Bank on the security of gold on 1.07.2019
Jan 21 under an agreement which contains a clause that the bank shall have a right of particular
lien on the gold pledged with it. Radheshyam thereafter took an unsecured loan of `20,000
420 Problems & Solutions Module 2
from the same bank on 1.08.2019 for three months. On 30.09.2019 he repaid entire secured
loan of `50,000 and requested the bank to release the gold pledged with it. The Bank
decided to continue the lien on the gold until the unsecured loan is fully repaid by
Radheshyam. Decide whether the decision of the Bank is valid within the provisions of the
Indian Contract Act, 1872?
Answer Section 171 empowers the banker with general right of lien in absence of a contract
whereby it is entitled to retain the goods belonging to another party, until all the dues are
discharged.
Thus, in the first instance, the banker under an agreement has a right of particular lien on
the gold pledged with it against the first secured loan of `50,000/-, which has already been
fully repaid by Radheshyam.
Conclusion:—Bank’s decision to continue the lien on the gold until the unsecured loan of
`20,000/- (which is the second loan) is not valid.
Quest-24 State whether the following will amount to Bailment or not?
(i) Mrs. X delivered an old gold jewellery to Mr. Neeraj i.e. a goldsmith for making new out
of it, every morning she used to receive the unfinished jewellery and put it into a box kept
at Mr. Neeraj’s shop. She use to kept the keys of box with herself
Answer No, since valid delivery is essential for valid bailment and in this case there is no delivery
(ii) V Parks his car at a Parking lot, locks it and keep the keys with himself
Answer No, since valid delivery is essential for valid bailment and in this case there is no delivery
(iii) Seizure of goods by custom authority
Answer Valid bailment, since delivery is involved
(iv) X entered a restaurant for dinner. His coat was taken by a waiter who hung it on a hook
behind X. When X rose to leave, coat was gone. Who is responsible and why?
Answer Valid bailment, since delivery is involved
 Chapter 15
CONTRACT OF INDEMNITY

PRACTICAL QUESTION
Quest-1 X asks Y to beat Z and promises to indemnify Y against the consequences. Y beats Z and is
fined `1,000. Can Y claim `1,000 from X?
Solution According to section 124 of Indian contract Act, "a contract of indemnity is a, contract by
which one party promises to save the other from loss caused to him either by the conduct of
the promisor himself or by the conduct of any third party.”
Looking at the definition of Indemnity, we may conclude that since it is a contract, thus it
must satisfy all conditions of valid contract shall be satisfied in order to constitute a valid
contract of indemnity
In given case, X asks Y to beat Z and promises to indemnify Y against the consequences. Y
beats Z and is fined `1,000.
Conclusion: Based upon the above provisions, we may conclude that since object was
unlawful, thus it can not be treated as a valid contract of indemnity
Quest-2 HARI sold material to NAMIT. Decide whether the agreement of guarantee valid in
following cases:
Case (a): If AJAY agrees to pay for the goods in default of NAMIT.
Answer: Consideration received by the principal debtor is a sufficient consideration to the
surety for giving the guarantee.
In given case, since no consideration is involved from creditor to either principal debtor or
surety, thus not a valid contract of guarantee
Case (b): If AJAY requests HARI to allow a credit period of 1 year to NAMIT and in lieu
promises that, he will pay for the goods if NAMIT defaults. HARI agrees.
Answer: Valid contract of guarantee, since consideration in form of extension of credit
period from creditor to principal debtor would be a valid consideration for surety to
discharge his liability towards creditors
Quest-3 Difference between Contract of Indemnity and Contract of Guarantee

Basis of Difference Contract of Indemnity Contract of Guarantee

1. Meaning It is a contract made for Compensating It is a contract, to perform the
losses of another party caused to him either promise or discharge liability of third
by the conduct of the parties or from an party in case of his default.
event or accident.

2. Number of Parties There are two parties in a contract namely In a contract of guarantee, there are
indemnity holder and indemnifier. three parties, the principal debtor,
creditor and the surety
422 Problems & Solutions Module 2

Basis of Difference Contract of Indemnity Contract of Guarantee

3. Number of In indemnity there is only one contract that There are three contracts in
Contract is between indemnity holder and guarantee.
indemnifier One between principal debtor and
creditor, another between surely and
creditor and third one between
principal debtor and surety.
4. Nature of liability Under contract of indemnity, the liability In a contract of guarantee, the
of indemnifier who makes promise to liability of the surety is secondary in
compensate the loss, is primary in nature nature

Quest-4 A guarantees payment to a grocer to the amount of `2,000 for any grocery that is being
purchased time to time by Y. Grocer supplies more than the value of `2000 which is paid by
the A. Afterwards grocer again supplies the grocery to the value of `8,000. State the liability
of A.
Solution According to Section 129 of the Indian Contract Act, 1872 a guarantee which extends to a
series of transactions is called a ‘continuing guarantee’. The liability of the surety in such a
guarantee continues until the performance or discharge of all the transactions entered into or
the guarantee is withdrawn.
In the given case guarantee given by A was a continuing guarantee and thus he is
accordingly liable to grocer to the extent of `2000.
Quest-5 Z guarantees payment to Y of the price of the four laptops sets to be sold by Y to X and to be
paid for in a month. Y delivers the sets to X. X pays for them. Later on Y delivers three more
sets to X. State the liability of Z.
Solution Given problem is based on concept of Particular guarantee, which may be defined as
guarantee available for particular transaction only and which terminate upon completion of
such transaction
In this case, the guarantee given by Z is not a continuing but infact it is a specific guarantee.
Therefore in the given case Z is not liable for the price of the three sets which are supplied
later to Y.
Quest-6 Ravi stand as Surety for Ajay in some loan transaction with Bank. Discuss the right of
Surety in following cases
1. At the time of Loan Ajay Mortgaged the property worth of `10.0 Lacs and availed a loan
of `50.0 Lacs. However without informing Ravi, Bank released the security of Ajay
Answer: Where the principal debtor has given securities in addition of guarantee, of the
debt. In case he fails to repay and the surety becomes liable to pay. The surety is entitled to
those securities which are held by the creditor.
Even if surety has no knowledge of such security, still above entitlement would exist.
If the creditor loses or without the consent of surety, parts with, any security, the surety is
discharged from his liability to that extent.
Thus in given case, liability of Ravi shall be reduced by `10 Lakh
2. Ajay helped the bank in recovery of some loan from one of its defaulter and consequent to
which, he was entitled to receive `1,00,000 as commission.
Answer: If the principal debtor has got any cross claim against the creditor, the surety
becomes entitled to set off that claim against the creditor.
Thus, in given case, liability of surety shall be reduced by `1,00,000
Chap. 15 Contract of Indemnity 423
3. Ajay committed a default in Repayment of Loan and his o/s was `11.40 Lacs, Bank waive
his right to Recover `2.0 Lacs
Answer: If there has been some reduction in the amount of debt being guarantee by the
surety. The surety is entitled to such reduction.
Thus, in given case, liability of surety shall be reduced by `2,00,000
Quest-7 A, B and C as sureties for D, enter into three separate bonds, of different amounts-A for
`20,000, B for `40,000 and C for `10,000. Discuss the liability of A, B, C if D makes default
to the extent of (a) `30,000 (b) `90,000
Solution Case-(a)-Where amount of default is `30,000
Particulars Liability of “A” Liability of “B” Liability of “C”
Default 10,000 10,000 10,000
Max Liability 20,000 40,000 10,000
Liability upon default 10,000 10,000 10,000
Case-(b)-Where amount of default is `90,000
Particulars Liability of “A” Liability of “B” Liability of “C”
Default 30,000 30,000 30,000
Max Liability 20,000 40,000 10,000
Liability upon default for A and C, 20,000 10,000
since it has crossed max limit
Balance liability 60,000
(90,000-30,000)
Liability upon default 40,000
Balance amount of `20,000 (90,000 – 70,000) shall be recovered by creditor from
principal debtor directly

Quest-8 Mr. P was a surety for Q for an overdraft given by a bank. The bank gave a blank guarantee
form to Q who filled it with the amount guaranteed to be `30,000. The bank refused to give
the overdraft for more than `25,000. Q altered the amount from `30,000 to `25,000 and
submitted the document to the bank. State whether P is discharged from his liability by the
act of the Q.
Solution The given problem is based on the section 133 of the Indian Contract Act, 1872.According
to which when any variance in the terms of the contract between the principal debtor and the
creditor is made without the surety’s consent, the surety is discharged as to transactions,
subsequent to the variance.
But, if the variation is unsubstantial and not disadvantageous to the surety, there the surety is
not discharged from his liability [M.S. Anirudhan v Tomco’s Bank].
Accordingly in the problem, surety i.e., Mr. P is not discharged from his liability because the
alteration of amount from `30,000 to `25,000 is unsubstantial and advantageous to the
surety.
Quest-9 A’ stands surety for ‘B’ for any amount which ‘C’ may lend to B from time to time during
the next three months subject to a maximum of `50,000. One month later A revokes the
guarantee, when C had lent to B `5,000. Referring to the provisions of the Indian Contract
Act, 1872 decide whether ‘A’ is discharged from all the liabilities to ‘C’ for any subsequent
424 Problems & Solutions Module 2
loan. What would be your answer in case ‘B’ makes a default in paying back to ‘C’ the
money already borrowed i.e. `5,000?
Solution The problem is relating to the revocation of a continuing guarantee as to future transactions
which can be done mainly in the following two ways:
1. By Notice: A continuing guarantee may at any time be revoked by the surety as to future
transactions, by notice to the creditor.
2. By death of surety: 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.
(Section 131).
Based upon the above provisions, A is discharged from all the liabilities to C for any
subsequent loan.
In next case A is liable to C for `5,000 on default of B since the loan was taken before the
notice of revocation was given to C.
Quest-10 Ravi becomes guarantor for Ashok for the amount which may be given to him by Nalin
within six months. The maximum limit of the said amount is `1 lakh. After two moths Ravi
withdraws his guarantee. Upto the time of revocation of guarantee, Nalin had given to
Ashok `20,000.
(i) Whether Ravi is discharged from his liabilities to Nalin for any subsequent loan.
(ii) Whether Ravi is liable if Ashok fails to pay the amount of `20,000 to Nalin?
Solution As per section 130 of the India Contract Act, a specific guarantee cannot be revoked by the
surety if the liability has already accrued.
A continuing guarantee may, at any time, be revoked by the surety, as to future transactions,
by notice to the creditor, but the surety remains liable for transactions already entered into.
Thus—
(i) Ravi is discharged from all the subsequent loan because it’s a case of continuing
guarantee.
(ii) Ravi is liable for payment of `20,000 Nalin because the transaction has already
completed
Quest-11 Explaining the provisions of the Indian Contract Act, 1872, answer the following:
(i) A contract with B for a fixed price to construct a house for B within a stipulated time. B
would supply the necessary material to be used in the construction. C guarantees A’s
performance of the contract. B does not supply the material as per the agreement. Is C
discharged from his liability?
(ii) C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by
B, contracts with X to give time to B. Is A discharged from his liability?
Solution (i) According to Section 134 of the Indian Contract Act, 1872, the surety is discharged by
any contract between the creditor and the principal debtor, by which the principal debtor
is released or by any act or omission of the creditor, the legal consequence of which is
the discharge of the principal debtor. In the given case, B omits to supply the timber.
Hence C is discharged from his liability.
(ii) According to Section 136 of the Indian Contract Act, 1872, where a contract to give
time to the principal debtor is made by the creditor with a third person and not with the
principal debtor, the surety is not discharged. In the given question the contract to give
time to the principal debtor is made by the creditor with X who is a third person. X is not
the principal debtor. Hence A is not discharged.
Chap. 15 Contract of Indemnity 425
Quest-12 Mr. X, is employed as a cashier on a monthly salary of `2,000 by ABC bank for a period of
three years. Y gave surety for X’s good conduct. After nine months, the financial position of
the bank deteriorates. Then X agrees to accept a lower salary of `1,500/- per month from
Bank. Two months later, it was found that X has misappropriated cash since the time of his
appointment. What is the liability of Y?
Solution If the creditor makes any variance (i.e. change in terms) without the consent of the surety,
then surety is discharged as to the transactions subsequent to the change. In the instant case
Y is liable as a surety for the loss suffered by the bank due to misappropriation of cash by X
during the first nine months but not for misappropriations committed after the reduction in
salary. [Section 133, Indian Contract Act, 1872].
Quest-13 B owes C a debt guaranteed by A. C does not sue B for a year after the debt has become
payable. In the meantime, B becomes insolvent. Is A discharged? Decide with reference to
the provisions of the Indian Contract Act, 1872.
Solution The problem is based on the provisions of Section 137 of the Indian Contract Act, 1872
relating to discharge of surety. The section states that mere forbearance on the part of the
creditor to sue the principal debtor and/or to enforce any other remedy against him would
not, in the absence of any provision in the guarantee to the contrary, discharge the surety. In
view of these provisions, A is not discharged from his liability as a surety.
Quest-14 Star gives to Sun a continuing guarantee to the extent of `15000 for the groceries to be
supplied by Sun to Moon from time to time on credit. Afterwards, Moon became
embarrassed, and without the knowledge of Star, Moon and Sun contract that Sun shall
continue to supply Moon with groceries for ready money, and that the payments shall be
applied to the then existing debts between Moon and Sun.
Examining the provision of the Indian Contract Act, 1872, decide whether Star is liable on
his guarantee given to Sun.
Solution Given problem is based on provisions of the Indian Contract Act, 1872 as contained in
Section 133.
The section provides that any variance made without the surety’s consent in the terms of the
contract between the principal debtor and the creditor, discharges the surety as to
transactions subsequent to the variance.
In the given problem all the above requirements are fulfilled.
Conclusion: Therefore, Star is not liable on his guarantee for the vegetable supplied after
this new arrangement. The reason for such a discharge is that the surety agreed to be liable
for a contract which is no more there, and he is not liable on the altered contract because it is
different from the contract made by him.
Quest-15 Shambhu becomes guarantor for Aman for the amount which may be given to him by
Naveen within 6 months. The maximum limit of the said amount is `1 lakh. After two months
Shambhu withdraws his guarantee. Up to the time of revocation of guarantee, Naveen had
given to Aman `20,000.
(i) Whether Shambhu is discharged from his liabilities to Naveen for any subsequent loan.
(ii) Whether Shambhu is liable if Aman fails to pay the amount of `20,000 to Naveen?
Solution As per section 130 of the India Contract Act, 1872, a continuing guarantee may, at any time,
be revoked by the surety, as to future transactions, by notice to the creditor, but the surety
remains liable for transactions already entered into.
Thus, a specific guarantee cannot be revoked by the surety if the liability has already
accrued.
426 Problems & Solutions Module 2
(i) In the given situation, Shambhu is discharged from all the subsequent loans because it’s
a case of continuing guarantee.
(ii) Shambhu is liable for payment of `20,000 to Naveen because the transaction has already
completed.
Quest-16 Ravi becomes guarantor for Ashok for the amount which may be given to him by Nalin
within six months. The maximum limit of the said amount is `1 lakh. After two months Ravi
withdraws his guarantee. Upto the time of revocation of guarantee, Nalin had given to
Ashok `20,000.
(i) Whether Ravi is discharged from his liabilities to Nalin for any subsequent loan.
(ii) Whether Ravi is liable if Ashok fails to pay the amount of `20,000 to Nalin?
Solution As per section 130 of the India Contract Act, 1872 a specific guarantee cannot be revoked by
the surety if the liability has already accrued. A continuing guarantee may, at any time, be
revoked by the surety, as to future transactions, by notice to the creditor, but the surety
remains liable for transactions already entered into.
As per the above provisions, the answer is Yes. Ravi is discharged from all the subsequent
loans because it’s a case of continuing guarantee. Where as in second case (ii) Ravi is liable
for payment of `20,000 to Nalin because the transaction has already completed.
Quest-17 Mr. Dwasin urgent need of money amounting`5,00,000. He asked Mr. K for the money. K
lent the money on the sureties of A, Band N without any contract between them in case of
default in repayment of money by D to K. D makes default in payment. B refused to
contribute, examine whether B can escape liability?
Solution As per the provisions of the Indian Contract act, 1872
“when two or more persons are co-sureties for the same debt and whether under the same or
different contracts and whether with or without the knowledge of each other, the co-sureties
in the absence of any contract to the contrary, are liable, as between themselves, to pay each
an equal share of the whole debt, or of that part of it which remains unpaid by the principal
debtor”.
Thus, we may conclude that on the default of D in payment, B cannot escape from his
liability. All the three sureties A, B and N are liable to pay equally, in absence of any
contract between them.
Quest-18 Explaining the provisions of the Indian Contract Act, 1872, answer the following:
(i) A contracts with B for a fixed price to construct a house for B within a stipulated time. B
would supply the necessary material to be used in the construction. C guarantees A’s
performance of the contract. B does not supply the material as per the agreement. Is C
discharged from his liability?
(ii) C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by
B, contracts with X to give time to B. Is A discharged from his liability?
Solution (i) As per the Indian Contract Act, 1872, the surety is discharged by any contract between
the creditor and the principal debtor, by which the principal debtor is released or by any
act or omission of the creditor, the legal consequence of which is the discharge of the
principal debtor.
In the given case, B does not supply the necessary material as per the agreement.
Hence, C is discharged from his liability.
(ii) As per the Indian Contract Act, 1872, where a contract to give time to the principal
debtor is made by the creditor with a third person and not with the principal debtor, the
surety is not discharged.
In the given question the contract to give time to the principal debtor is made by the
creditor with X who is a third person. X is not the principal debtor. Hence, A is not
discharged.
Chap. 15 Contract of Indemnity 427
Quest-17 ’C’ advances to ‘B’ `2,00,000 on the guarantee of ‘A’, ‘C’ has also taken a further security
for the same borrowing by mortgage of ‘B’ Furniture worth `2,00,000 without knowledge of
‘A’,‘C’ cancel the mortgage. After 6 month’s ‘B’ become insolvent and ‘C’ sues ‘A’ on his
guarantee. Decide the liability of ‘A’ if the market value of furniture is worth R.80,000,
under Indian Contract Act, 1872.
Solution According to section 141 of the Indian Contract Act, 1872,
A surety is entitled to the benefit of every security which the creditor has against the
principal debtor at the time when the contract of suretyship is entered into, whether the
surety knows of the existence of such security or not; and, if the creditor loses, or, without
the consent of the surety, parts with such security, the surety is discharged to the extent of
the value of the security.
In the instant case, C advances to B, `2,00,000 rupees on the guarantee of A. C has also
taken a further security for `2,00,000 by mortgage of B’s furniture without knowledge of A.
C cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A is
discharged from liability to the amount of the value of the furniture i.e. `80,000 and will
remain liable for balance `1,20,000.
Quest-18 Mr. CB was invited to guarantee an employee Mr. BD who was previously dismissed for
[Dec-20] dishonesty by the same employer. This fact was not told to Mr. CB. Later on, the employee
embezzled funds. Whether CB is liable for the financial loss as surety under the provisions of
the Indian Contract Act, 1872?
Solution As per section 143 of the Indian Contract Act, 1872,
Any guarantee which the creditor has obtained by means of keeping silence as to material
circumstances, is invalid.
In the given instance, Mr. CB was invited to give guarantee of an employee Mr. BD to the
same employer who previously dismissed Mr. BD for dishonesty.
This fact was not told to Mr. CB.
Conclusion: We may conclude that, maintaining silence as to previous dismissal of Mr.
BD for dishonesty is a material fact and if Mr. BD later embezzled the funds of the
employer, Mr. CB will not be held liable for the financial loss as surety
Quest-19 Mr. X agreed to give a loan to Mr. Y on the security of four properties. Mr. A gave
[Dec-20] guarantee against the loan. Actually Mr. X gave a loan of smaller amount on the security of
three properties. Whether Mr. A is liable as surety in case Mr. Y failed to repay the loan?
Solution As per the provisions of section 133 of the Indian Contract Act, 1872, any variance, made
without the surety’s consent, in the terms of the contract between the principal [debtor] and
the creditor, discharges the surety as to transactions subsequent to the variance.
In the given instance, the actual transaction was not in terms of the guarantee given by Mr.
A.
The loan amount as well as the securities were reduced without the knowledge of the surety.
Conclusion: Thus, we may conclude that Mr. A is not liable as a surety where Y failed to
repay the loan.
Quest-20 Satya has given his residential property on rent amounting to `25,000 per month to Tushar.
[Dec-20] Amit became the surety for payment of rent by Tushar. Subsequently, without Amit's consent,
Tushar agreed to pay higher rent to Satya. After a few months of this, Tushar defaulted in
paying the rent.
(i) Explain the meaning of contract of guarantee according to the provisions of the Indian
Contract Act, 1872.
(ii) State the position of Amit in this regard.
428 Problems & Solutions Module 2
Solution 1. Meaning of contract of guarantee-Mention Sec 126
2. According to the provisions of section 133 of the Indian Contract Act, 1872,
where there is any variance in the terms of contract between the principal debtor and creditor
without surety’s consent, it would discharge the surety in respect of all transactions taking
place subsequent to such variance.
In the instant case, Satya (Creditor) cannot sue Amit (Surety), because Amit is discharged
from liability when, without his consent, Tushar (Principal debtor) has changed the terms of
his contract with Satya (creditor).
Quest-21 Whether following contract will be of Indemnity or Guarantee
“Mr. X contracts with the Government to return to India after completing his studies at
University of Cambridge and serve the Government for a period of 5 years. If Mr. X fails to
return to India”
Solution For solution, please visit YouTube classes of Amit Popli, FREE for ALL STUDENTS
Quest-22 X, a shareholder of a company lost his share certificate. He applied for the duplicate. The
company agreed to issue the same on the term that X will compensate the company against
the loss where any holder produces the original certificate.
Solution For solution, please visit YouTube classes of Amit Popli, FREE for ALL STUDENTS
Quest-23 ‘A’ obtains housing loan from LIC Housing and if ‘B’ promises to pay LIC Housing in the
event of ‘A’ failing to repay
Solution For solution, please visit YouTube classes of Amit Popli, FREE for ALL STUDENTS
Quest-24 X and Y go into a car showroom where X says to the dealer to supply latest model of Wagon
R to Y, and agrees that if Y fails to pay, the car showroom will recover its money from X.
Solution For solution, please visit YouTube classes of Amit Popli, FREE for ALL STUDENTS
Quest-25 A engages B as clerk to collect money for him. B fails to account for some of his receipts,
and A in consequence calls upon him to furnish security for his duly accounting. C gives his
guarantee for B’s duly accounting. A does not acquaint C, with B’s previous conduct. B
afterwards make default.
Solution The guarantee is invalid.
Any guarantee which has been obtained by the means of misrepresentation made by the
creditor, or with his knowledge and assent, concerning a material part of the transaction, is
invalid (section 142)
 Chapter 16
CONTRACT OF AGENCY

PRACTICAL QUESTION
Quest-1 State whether following ratification are valid or in valid:
(a) RAM sells goods which were purchased by RAM's agent without RAM's instruction.
Answer: Valid Ratification
(b) RAM ratifies the acquisition of goods by JAI, i.e. his agent who acquired those goods in
his own name without RAM's authority.
Answer: Invalid, since act done in personal name cannot be ratified
(c) RAM a minor, on attaining majority ratifies the agreement made on his behalf during his
minority.
Answer: Invalid, since Principal must have the age of majority when the contract was
entered
(d) RAM ratifies 60% of the purchase of goods by JAI, his agent who acquired those goods
on behalf of RAM without his authority.
Answer: valid, any partial ratification would amount to ratification of whole amount
(e) RAM ratifies the act of JAI who withdrew money after forging RAM's signature.
Answer: Invalid, since an invalid act cannot be ratified
(f) A company ratifies the contracts entered into by the promoters.
Answer: Invalid, since principal must be in existence at the time when the contract was
entered
(g) A company ratifies the act done by a director on behalf of a company which is ultra-
vires the company.
Answer: Invalid, since an ultra vires act cannot be ratified
Quest-2 Define the term irrevocable agency
Solution The principal can revoke authority of an agent at any time, before the authority has been
exercised so as to bind the principal. Such revocation may be either express or implied by
the conduct of the parties.
However, the principal is not empowered to revoke agent's authority under the
following situation and such agency is known as 'Irrevocable Agency'.
Agency coupled with interest: [section 202] - "Where the agent has himself an interest in the
property which forms the subject matter of agency, the agency cannot, in the absence of an
express contract, be terminated to the prejudice of such interest.
Where agent has incurred personal liability - No agency can be terminated, where the agent
has incurred his personal liability
Where the agent has partly exercised his authority - it becomes irrevocable, as far as acts
which has already done in the agency. [section 204]
430 Problems & Solutions Module 2
where agency was for a fixed period - In circumstances where agency was for a fixed period,
principal must make adequate compensation to agent, for pre mature revocation of agency
relationship
Quest-3 Define the difference between agency by Estoppel and Agency by Holding out
Solution Agency by estoppels - If some person, either by the words of mouth or in writing or by his
conduct induces another person to believe that someone is working as his agent, in reality he
is not his agent.
Such transaction will be binding on the person so representing and he will be liable as
principal. Such agency is known as agency by estoppel.
Agency by holding out - This agency comes into existence when principal himself holds out
that someone is his agent.
Quest-4 Mr. Ahuja of Delhi engaged Mr. Singh as his agent to buy a house in West Extension area.
Mr. Singh bought a house for `20 lakhs in the name of a nominee and then purchased it
himself for `24 lakhs. He then sold the same house to Mr. Ahuja for `26 lakhs. Mr. Ahuja
later comes to know the mischief of Mr. Singh and tries to recover the excess amount paid to
Mr. Singh. Is he entitled to recover any amount from Mr. Singh? If so, how much? Explain.
(4 marks)
Solution As per the Indian Contract Act 1872, Duties of Agent shall be as follow:—
1. Reasonable care-An agent must carry his act with a reasonable care, and diligence. In
case of any loss to principal due to negligence, agent would be personally liable to him.
2. Directions of Principal-An agent is required to perform his task according to directions
of principal.
3. Use of Diligence-It’s a duty of agent to use all reasonable diligence in communicating
with his principal and in obtaining his instructions.
4. Not to act at his own-An agent must not act at his own, while dealing with third party.
5. Secret Profit-An agent is not expected to earn any secret profit in any transaction made
by him with third party.
6. Account for Personal gain-The agent is bound to pay all sums received by him on
behalf of his principal. Even though deduction of money in respect of advances made or
expenses-incurred by him in performing his duty is permissible.
Where an agent without the knowledge of the principal, deals in the business of agency on
his own account, the principal may:—
1. Repudiate the transaction
2. Claim from the agent any benefit which may have resulted to him from the transaction.
Thus Mr. Ahuja is entitled to recover `6 Lakhs from Mr. Singh.
Quest-5 P appoints A as his agent to sell his estate. A, on looking over the estate before selling it,
finds the existence of a good quality Granite-Mine on the estate, which is unknown to P.A.
buys the estate himself after informing P that he (A) wishes to buy the estate for himself but
conceals the existence of Granite-Mine. P allows A to buy the estate, in ignorance of the
existence of Mine. State giving reasons in brief the rights of P, the principal, against A, the
Agent. What would be your answer if A had informed P about the existence of Mine before
he purchased the estate, but after two months, he sold the estate at a profit of `1 lac?
Solution As per the Indian Contract Act 1872, Duties of Agent shall be as follow:—
1. Reasonable care-An agent must carry his act with a reasonable care, and diligence. In
case of any loss to principal due to negligence, agent would be personally liable to him.
2. Directions of Principal-An agent is required to perform his task according to directions
of principal.
Chap. 16 Contract of Agency 431
3. Use of Diligence-It’s a duty of agent to use all reasonable diligence in communicating
with his principal and in obtaining his instructions.
4. Not to act at his own - An agent must not become a principal party to the transaction as
against his principal. Except where he obtains the consent of his principal and after
disclosing to the principal all the material facts in respect of the transaction.
5. Secret Profit-An agent is not expected to earn any secret profit in any transaction made
by him with third party.
6. Account for Personal gain-The agent is bound to pay all sums received by him on
behalf of his principal. Even though deduction of money in respect of advances made or
expenses-incurred by him in performing his duty is permissible.
In given case, P appoints A as his agent to sell his estate. A, wishes to buy the estate for
himself but conceals the existence of Granite-Mine.
Conclusion: We may conclude that A is liable to compensate principal any gain which he
has made out of such transaction
Situation where A had informed P
If A had informed 'P' about the existence of mine before he purchased the estate, the act of
the agent would have been valid.
Quest-6 Sunil borrowed a sum of `3 lakh from Rajendra. Sunil appointed Rajendra as his agent to
sell his land and authorized him to appropriate the amount of loan out of the sale proceeds.
Afterwards, Sunil revoked the agency. Decide under the provisions of the Indian Contract
Act, 1872 whether the revocation of the said agency by Sunil is lawful?
Solution The given problem is based on the provision related to ‘agency coupled with interest’.
According to Section 202 of the Indian Contract Act, 1872 an agency becomes irrevocable
where the agent has himself an interest in the property which forms the subject-matter of the
agency, and such an agency cannot, in the absence of an express provision in the contract, be
terminated to the prejudice of such interest. In the instant case the rule of agency coupled
with interest applies and does not come to an end even on death, insanity or the insolvency
of the principal.
Thus, when Sunil appointed Rajendra as his agent to sell his land and authorized him to
appropriate the amount of loan out of the sale proceeds, interest was created in favor of
Rajendra and the said agency is not revocable. The revocation of agency by Sunil is not
lawful.
Quest-7 Aditya holds a lease from Birla which is terminable on three months’ notice. C, an
unauthorized person gives notice of termination to Aditya. Examine with reference to the
provisions of the Indian Contract Act, 1872, whether Aditya is bound by termination of
Lease.
Solution The given problem is based on section 200 of the Indian Contract Act, 1872 which deals
with the provisions related to the ratification of unauthorized act cannot injure third person.
Provisions says that an act done by one person on behalf of another, without such other
person’s authority, which if done with authority, would have the effect of subjecting a third
person to damages, or of terminating any right or interest of a third person cannot, by
ratification, be made to have such effect.
According to the given situation, Aditya holds a lease from Birla which is terminable on
three months’ notice. C, an unauthorized person gives notice of termination of lease to
Aditya.
Accordingly, the notice given by C (unauthorized person) if, ratified, would terminate
Aditya’s right or interest in the lease property. So, such an unauthorized act of C, cannot be
ratified by Birla, to binding on Aditya.
432 Problems & Solutions Module 2
Quest-8 A owns a shop in Serampore, living himself in Calcutta, and visiting the shop occasionally.
The shop is managed by B, and he is in the habit of ordering goods from C in the name of A
for the purposes of the shop, and of paying for them out of A’s funds with A’s knowledge.
Discuss in the light of the provisions of the Indian Contract Act, 1872, whether B is
authorised to conduct the business in the name of A.
Solution According to the section 187 of the Indian Contract Act, 1872, an authority is said to be
express when it is given by words spoken or written. An authority is said to be implied when
it is to be inferred from the circumstances of the case and things spoken or written, or the
ordinary course of dealing, may be accounted circumstances of the case.
In the given instance, the shop of A was managed by B and the conduct of business as to the
ordering of goods from C and transaction related to that was made from the A’s fund and
with A’s knowledge. This reflects according to the above provision that B has an implied
authority from A to order goods from C in the name of A for the purposes of the shop.
Quest-9 K is the wife of A. She Purchased a saree on Credit from B. B Demanded the amount from A.
A refused to make the payment. B filed a suit against A for the same amount. Decide in light
of Indian Contract Act, whether B would succeed.
Or
Aarthi is the wife of Naresh. She purchased some sarees on credit from M/s Rainbow Silks,
Jaipur.
M/s Rainbow Silks, Jaipur demanded the amount from Naresh. Naresh refused. M/s
Rainbow Silks, Jaipur filed a suit against Naresh for the said amount. Decide in the light of
provisions of the Indian Contract Act, 1872, whether M/s Rainbow Silks, Jaipur would
succeed?
Solution According to Indian Contract Act, 1872, Where any husband and wife are living together,
the wife is presumed to be an agent of her Husband. Thus, the husband is bound to pay the
bills for household credit purchased by her wife provided the following conditions are
satisfied:—
1. Husband and wife must be living together
2. They are living in a Domestic establishment of their own and wife should be in charge
of domestic establishment.
3. Wife must purchase the Article suited to the style in which they are living
Thus if all above conditions are satisfied wife shall be assumed as an agent and husband is
liable
In given case, K is the wife of A. She Purchased a saree on Credit from B. B Demanded the
amount from A. A refused to make the payment. B filed a suit against A for the same
amount.
Conclusion: Based upon the assumption that all above conditions are satisfied we may
conclude that A is liable to bear the cost of sarees as purchased by his wife K.
Quest-10 Provide the amount of Interest in following agency which are coupled with interest
Case-1 Ravi lends 1,00,000 to Namit. At the time of Recovery, Namit refused to pay,
however agreed to transfer his Car to Ravi and authorized him to sell it off to recover his
dues.
Answer: Amount of interest shall be `1,00,000
Case-2 Suppose in above case, Ravi was a Car dealer and he also demanded a commission
which he normally charged as Dealer in addition to his dues.
Answer: Amount of interest shall be `1,00,000
Chap. 16 Contract of Agency 433
Quest-11 Mr. Yadav of Delhi engaged Mr. Shekhawat as his agent to buy a house in West Extension
area. Mr. Shekhawat bought a house for `50 lakhs in the name of a nominee and then
purchased it himself for `60 lakhs. He then sold the same house to Mr. Yadav for `62 lakhs.
Mr. Yadav later comes to know the mischief of Mr. Shekhawat and tries to recover the
excess amount paid to Mr. Shekhawat. Is he entitled to recover any amount from Mr.
Shekhawat? If so, how much? Explain.
Solution Drishti Ltd. Finalized its books of accounts as per the applicable provisions of the
Companies Act, 2013. It also filed the Income tax return for the assessment year 2016-2017
within the due date. The Income Tax Authorities found some irregularities in the said
accounts and want the company to revise the accounts. Referring to the provisions of the
Companies Act, 2013 advise whether and how the accounts of the company can be re-
opened and revised.
Drishti Ltd. Finalized its books of accounts as per the applicable provisions of the
Companies Act, 2013. It also filed the Income tax return for the assessment year 2016-2017
within the due date. The Income Tax Authorities found some irregularities in the said
accounts and want the company to revise the accounts. Referring to the provisions of the
Companies Act, 2013 advise whether and how the accounts of the company can be re-
opened and revised.
Quest-12 Ashish appoints Megha, a minor, as his agent to sell his watch for cash at a price not less
than `1700. Megha sells it to Diwan for `1200. Is the sale valid? Explain the legal position
of Megha and Diwan, referring to the provisions of the Indian Contract Act, 1872.
Solution As per the provisions of Section 184 of the Indian Contract Act, 1872, as between the
principal and a third person, any person, may become an agent, but no person who is not of
the age of majority and of sound mind can become an agent, so as to be responsible to his
principal.
A person in order to be an agent must have authority to contract. So, minor has no capacity
to contract but may have authority to act as agent. An agent brings about a contractual
relationship between the principal and third persons and therefore his contractual capacity is
immaterial Thus, if a person who is not competent to contract is appointed as an agent, the
principal is liable to the third party for the acts of the agent.
Conclusion: Since in the given case, Diwan gets a good title to the watch, thus we may
conclude that Megha is not liable to Ashish for her negligence in the performance of her
duties.
Quest-13 Star gives to Sun a continuing guarantee to the extent of `15000 for the groceries to be
supplied by Sun to Moon from time to time on credit. Afterwards, Moon became
embarrassed, and without the knowledge of Star, Moon and Sun contract that Sun shall
continue to supply Moon with groceries for ready money, and that the payments shall be
applied to the then existing debts between Moon and Sun.
Examining the provision of the Indian Contract Act, 1872, decide whether Star is liable on
his guarantee given to Sun.
Solution Given problem is based on provisions of the Indian Contract Act, 1872 as contained in
Section 133.
The section provides that any variance made without the surety’s consent in the terms of the
contract between the principal debtor and the creditor, discharges the surety as to
transactions subsequent to the variance.
In the given problem all the above requirements are fulfilled.
Conclusion: Therefore, Star is not liable on his guarantee for the vegetable supplied after
this new arrangement. The reason for such a discharge is that the surety agreed to be liable
for a contract which is no more there, and he is not liable on the altered contract because it is
different from the contract made by him.
434 Problems & Solutions Module 2
Quest-14 Shambhu becomes guarantor for Aman for the amount which may be given to him by
Naveen within 6 months. The maximum limit of the said amount is `1 lakh. After two months
Shambhu withdraws his guarantee. Up to the time of revocation of guarantee, Naveen had
given to Aman `20,000.
(i) Whether Shambhu is discharged from his liabilities to Naveen for any subsequent loan.
(ii) Whether Shambhu is liable if Aman fails to pay the amount of `20,000 to Naveen?.
Solution As per section 130 of the India Contract Act, 1872, a continuing guarantee may, at any time,
be revoked by the surety, as to future transactions, by notice to the creditor, but the surety
remains liable for transactions already entered into.
Thus, a specific guarantee cannot be revoked by the surety if the liability has already
accrued.
(i) In the given situation, Shambhu is discharged from all the subsequent loans because it’s
a case of continuing guarantee.
(ii) Shambhu is liable for payment of `20,000 to Naveen because the transaction has already
completed.
Quest-15 ABC Ltd. sells its products through some agents and it is not the custom in their business to
sell the products on credit. Mr. Pintu, one of the agents sold goods of ABC Ltd. to M/s.
Parul Pvt. Ltd. (on credit) which was insolvent at the time of such sale. ABC Ltd. sued Mr.
Pintu for compensation towards the loss caused due to sale of products to M/s. Parul Pvt.
Ltd. Will ABC Ltd. succeed in its claim?
Solution As per the Indian Contract Act, 1872
An agent is bound to conduct the business of his principal according to the direction given
by the principal, or, in the absence of any such directions, according to the custom which
prevails in doing business of the same kind at the place where the agent conducts such
business. When the agent acts otherwise, if any loss be sustained, he must make it good to
his principal, and, if any profit accrues, he must account for it.
In the given case, Mr. Pintu, one of the agents, sold goods of ABC Ltd. to M/s Parul Pvt.
Ltd. (on credit) and company was insolvent while such sale. Also, it is not the custom in
ABC Ltd. to sell the products on credit.
Hence, Mr. Pintu must make compensation for loss to ABC Ltd.
Quest-16 Rahul, a transporter was entrusted with the duty of transporting tomatoes from a rural farm
to a city by Aswin. Due to heavy rains, Rahul was stranded for more than two days. Rahul
sold the tomatoes below the market rate in the nearby market where he was stranded fearing
that the tomatoes may perish. Can Aswin recover the loss from Rahul on the ground that
Rahul had acted beyond his authority?
Solution As per the provisions of the Indian Contract Act, 1872
An agent has authority, in an emergency, to do all such acts for the purpose of protecting his
principal from loss as would be done by a person of ordinary prudence, in his own case,
under similar circumstances.
In the given case, Rahul, the agent, was handling perishable goods like ‘tomatoes’ and can
decide the time, date and place of sale, not necessarily as per instructions of the Aswin, the
principal, with the intention of protecting Aswin from losses.
Thus, Rahul acts in an emergency as a man of ordinary prudence, so Aswin will not succeed
against him for recovering the loss.
Quest-17 "An agent is neither personally liable nor can he personally enforce the contract on behalf
of the principal." Comment.
Chap. 16 Contract of Agency 435
Solution According to section 230 of the Indian Contract Act, 1872, in the absence of any contract
to that effect, an agent cannot personally enforce contracts entered into by him on behalf of
his principal, nor is he personally bound by them. Thus, an agent cannot personally enforce,
nor be bound by, contracts on behalf of principal.
Presumption of contract to the contrary: But, such a contract shall be presumed to exist in
the following cases:
(1) Where the contract is made by an agent for the sale or purchase of goods for a merchant
resident abroad/foreign principal;
(2) Where the agent does not disclose the name of his principal or undisclosed principal;
and
(3) Where the principal, though disclosed, cannot be sued.
Quest-18 Explain whether the agency shall be terminated in the following cases under the provisions
[Jan-21] of the Indian Contract Act, 1872:
(i) A gives authority to B sell A’s land B, and to pay himself, out of the proceeds, the debts
due to him from A. Afterwards, A becomes insane.
(ii) A appoints B as A’s agent to sell A’s land B, under the authority of A, appoints C as
agent of B. Afterwards, A revokes the authority of B but not C. What is the status of
agency of C?
Solution (i) According to section 202 of the Indian Contract Act, 1872, where the agent has himself
an interest in the property which forms the subject matter of the agency, the agency
cannot, in the absence of an express contract, be terminated to the prejudice of such
interest.
In other words, when the agent is personally interested in the subject matter of agency,
the agency becomes irrevocable.
In the given question, A gives authority to B to sell A’s land, and to pay himself, out of
the proceeds, the debts due to him from A.
As per the facts of the question and provision of law, A cannot revoke this authority, nor
it can be terminated by his insanity.
(ii) According to section 191 of the Indian Contract Act, 1872, a “Sub-agent” is a person
employed by, and acting under the control of, the original agent in the business of the
agency.
Section 210 provides that, the termination of the authority of an agent causes the termination
(subject to the rules regarding the termination of an agent’s authority) of the authority of all
sub-agents appointed by him.
In the given question, B is the agent of A, and C is the agent of B. Hence, C becomes a sub -
agent.
Thus, when A revokes the authority of B (agent), it results in termination of authority of sub-
agent appointed by B i.e. C (sub-agent).
Quest-19 X has made an agency agreement with Y to authorize him to purchase goods on the behalf of
[Dec-20] X for the year 2020 only. The agency agreement was signed by both and it contains all the
terms and conditions for the agent. It has a condition that Y is allowed to purchase goods
maximum upto the value of `10 lakhs only. In the months of April 2020, Y purchased a
single item of `12 lakhs from Z as an agent of X. The market value of the item purchased
was `14 lakhs but a discount of `2 lakhs was given by Z. The agent Y has purchased this
item due to heavy discount offered and the financially benefit to X.
After delivery of the item Z has demanded the payment from X as Y is the agent of X. But X
denied to make the payment stating that Y has exceeded his authority as an agent therefore
he is not liable for this purchase. Z has filed a suit against X for payment.
436 Problems & Solutions Module 2
Decide whether Z will succeed in this suit against X for recovery of payment as per
provisions of The Indian Contract Act, 1872.
Solution An agent does all acts on behalf of the principal but incurs no personal liability. The liability
remains that of the principal unless there is a contract to the contrary.
An agent also cannot personally enforce contracts entered into by him on behalf of the
principal. In the light of section 226 of the Indian Contract Act, 1872, Principal is considered
to be liable for the acts of agents which are within the scope of his authority. Further section
228 of the Indian Contract Act, 1872 states that where an agent does more than he is
authorised to do, and what he does beyond the scope of his authority cannot be separated
from what is within it, the principal is not bound to recognise the transaction.
In the given case, the agency agreement was signed between X and Y, authorizing Y to
purchase goods maximum upto the value of `10 lakh. But Y purchased a single item of `12
lakh from Z as an agent of X at a discounted rate to financially benefit to X. On demand of
payment by Z, X denied saying that Y has exceeded his authority therefore he is not liable
for such purchase. Z filed a suit against X for payment.
As said above, liability remains that of the principal unless there is a contract to the contrary.
The agency agreement clearly specifies the scope of authority of Y for the purchase of
goods, however he exceeded his authority as an agent. Therefore, in the light of section 228
as stated above, since the transaction is not separable, X is not bound to recognize the
transaction entered between Z and Y, and therefore may repudiate the whole transaction.
Hence, Z will not succeed in his suit against X for recovery of payment.