CORPORATE

AND OTHER
LAWS

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Satya Sir’s Class Room Notes
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 Page
S.NO Chapter Name No
1 Preliminary and Incorporation of Companies 5
2 Prospectus and allotment of securities 29
3 Share capital and debentures 44
4 Acceptance of deposits 72
5 Registration of charges 100
6 Management and administration 108
7 Declaration and payment of dividend 133
8 Accounts of the companies 144
9 Audit and auditors 167
10 Contract of Indemnity and guarantee 183
11 Contract of bailment and pledge 189
12 Contract of agency 198
13 NI Act, 1881 207
14 General Clauses Act, 1897 225
15 Interpretation of Statute 233

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 Unit – 1 and unit -2
Preliminary and Incorporation of Companies
Short title, extent and Commencement of the Act (Section – 1):

1. Title of Act: Companies Act, 2013

2. Applicability: It is applicable to whole India

3. Commencement of the Act: Different provisions of the Act are applicable from
different dates in accordance with notifications of CG.

4. Extent of Applicability of the Act:

a) It is applicable to companies incorporated under the Law Act (or) incorporated under
previous law.

b) Banking companies except with the provisions which are inconsistent with the
provisions of Banking Regulation Act, 1949.

c) Insurance Companies except with the provisions which are inconsistent with the
provisions of Insurance Act, 1938 (or) IRDA Act, 1999.

d) Companies engaged in Generation (or) supply of electricity except with provisions

which are inconsistent with the provisions of Electricity Act, 2003.

e) Any other company governed by any Special Act, except the provisions which are
inconsistent with provisions of the Special Act.

Formation of company – (Section – 3):

1. Section – 3 deals with what are the basic requirements for incorporation of company.

2. Basic requirements

a) Company must be incorporated for lawful objects.

b) Minimum subscribers to MOA ↓

In case of public In case of private In case of OPC

company company

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 ➢ 7 or more ➢ 2 (or) more ➢ 1

3) A company formed under the Companies Act may be either:

a) Company limited by shares Section – Section 2(22): In this case liability of

shareholder is limited to the amount of unpaid portion of shares held.

b) Company Limited by guarantee - Section 2(21): In this case liability of shareholders is

limited to the extent of guarantee given in the event of winding up of the company.

c) Unlimited company Section 2(92): In this case liability of shareholders is unlimited

(i.e., it will be extended for total liability of the company).

Members Severally liabile in certain cases (Section – 3A):

1) If No. of members in the company reduced below the statutory minimum & business is
carried out for a period more than 6 months without increasing number of members, then
the members personally liable in respect of liabilities (or) obligations which are incurred
after 6 months.

Definition of small company Section – Section 2(85):

1. It is a company, other than public company

a) Paid-up capital which does not exceed Rs. 2 crores (or) such other higher amount as
may be prescribed which shall not be more than Rs. 10 Crores. And

b) Turnover of which as per Profit and Loss A/c preceding financial year doesn’t exceed
Rs. 20 Crores (or) such other higher amount as may be prescribed which shall not exceed
Rs. 100 Crores.

2) Below specified companies are not eligible for the status of Small Companies:↓

Company (or) Body

Holding Subsidiary Section – 8
Corporate governed by
Companies Companies Companies
Special Act.

Definition of Promoters 2(67):

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a) General Meaning of promoter: The person who conceives idea of the business of
company and who carries out all required activities for incorporation of the company is
called promoter.

b) As per Section 2(69), a particular person is treated as promoter of the company if any
of the below specified criteria is satisfied:-

(i)The person whose name is specified as a promoter in the prospectus (or) Annual
Return (or)

(ii) The person who controls affairs of the company directly (or) indirectly as a member
(or) creditor (or) Director (or) otherwise (or)

(iii) The person with whose advices, directions (or) instructions, the Board of Director is
accustomed to Act.

Incorporation of company (Section – 7):

(Note:- Section – 7 deals with what are the documents to be filed with ROC for
incorporation of company)

1) Application for incorporation of company must be filed with ROC within whose
jurisdiction (Area Limits) company wants to establish registered office, along with below
specified documents:-

a) The MOA & AOA duly signed by all subscribers to Memorandum of Association.

b) A Declaration by a person who is engaged in the formation of the company by an

advocate (or) CA (or) CMA (or) CS & by a person named in the AOA as Director,
Manager (or) Secretary) that all the requirements for incorporation of the company are
complied with.

c) A Declaration by each of the subscriber to MOA & by a person named as the first
Director, if any in the AOA that

• He is no convicted of any offence in connection with promotion, formation (or)

management of any company
• He has not been found (offence) guilty of any fraud (or) breach of duty to any
company during the last 5 years.

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 • All the documents filed & information provided is correct, & complete to the best
of his knowledge.

d) Address for correspondence till the time of registered office of the company is
established

e) Particulars of subscribers to MOA along with proof of identify (Name, Surname,

Qualification, Address, Nationality etc.).

f) Particulars of first Directors whose names are specified in the AOA along with proof of
identify (Name, Surname, Age, Qualification, Address, DIN etc.)

g) Particulars of interest of first Directors in other forms (or) body corporates along with
their consent to act as Director.

2) If all formalities are satisfied, then ROC will register the company & issue certificate
of incorporation.

3) ROC shall specify below specified particulars in the COI:↓

Name of the company Date of Incorporation CIN (Corporate Identity

Number)

4) The company shall maintain & preserve at its registered office copies of all documents
and information filed with ROC at the time of incorporation, till the dissolution of the
company.

5) If company was incorporated by providing false information (or) Suppression of

material fact then Tribunal may pass either of the below specified orders based on
requirements and the persons who are involved in the formation of company shall be
punishable Under Section 447:

• Change the contents of MOA & AOA (i.e., change the management of the
company)
• Direct that liability of the members become unlimited
• Winding up of the company
• Removal of name of the company

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 • Any other appropriate order

One-person Company: [ Section - 2 (62) ]

1. Minimum and Maximum No. of Members is one.

2. In case of OPC, name of the other person (nominee) shall be specified in the MOA.
Nominee will become member of OPC in the event of death of the member (or)
member has become contractually incapable person.

3. Written consent of nominee shall be obtained. Copy of written consent shall be

filed with ROC along with application form for the purpose of incorporation of
company.

4. Nominee can withdraw his consent at any point of time.

5. Member of OPC can change the name of nominee by giving intimation to the
company. Company shall give intimation to ROC.

6. Who is eligible to act as a member/ nominee of OPC?

A person is eligible to act as a member/ nominee of OPC if below specified criteria is

satisfied:

a) He shall not be a minor.

b) He shall be a natural person.

c) He shall be an Indian citizen whether resident of India or not.

Note: A person is said to be a resident of India if he has stayed in India for not less
than 120 days during previous financial year.

7. A person can act as a member of not more than one OPC at a particular point of
time.

8. A person can act as a nominee of not more than one OPC at a particular point of
time.

9. In other words, a person can act as a member of one OPC and nominee of other
OPC at a particular point of time.

10. Where a person is the member of one OPC and he becomes a member of other
OPC by virtue of (because of) nominee of that other OPC then he shall meet the
eligibility criteria within 180 days (i.e. he has to decide to which company he will act
as a member).

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 11. OPC shall not be incorporated for Section 8 purposes.

12. OPC shall not carry out non – banking financial activities.

13. OPC can be converted into either public company or private company in
accordance with Rules 4 and 7 of schedule II of Companies Act, 2013. However,
OPC shall not be converted into Section – 8 company.
2020 Nov

Answer:

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2021 Dec

Answer:

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Formation of company with Charitable Objects (Section – 8):

1) Two (or) more persons can incorporate Section – 8 companies subjected to fulfillment
of below specified conditions.

a) Objects of the company must be promotion of commerce, art, science, sports, research,
education, protection of environment social welfare (or) any useful purpose.

b) License from the Central Government must be obtained (These powers are delegated
to ROC)

c) There must be prohibition of payment of dividend & profits must be utilized for
promotion of objects.

2) Name of the company is not required to be ended words “Limited” (or) “Private
Limited”.

3) Company can alter its objects with prior approval of CG (Powers are delegated to
regional Directors).

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4) Section – 8 Company can be converted into other class of company with the prior
approval of Central Government (powers are delegated to RD (Regional Directors)

5) Partnership firm can become members of Section – 8 companies.

6) Revocation of License:

a) If the Company has defaulted to comply with specified conditions or affairs of the
company is carried out fraudulently, then Central Government can revoke license. Before
revocation of license notice in writing must be given to the company & opportunity of
being heard must be given to the company.

7) The company whose license is revoked may be either

Option 1: Amalgamate with other company having similar object.

Option 2: Assets of the company will be realized and utilized for settlement of liabilities
and balance of assets if any must transferred to other Section – 8 company having similar
objects (or) credited to “Insolvency & Bankrupt Fund”.

2021 July

Answer:

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Articles of Association (Section 5):

1. Definition of AOA Section- 2(5):

AOA refers to Articles as originally formed and altered from time to time in accordance
with provisions of Act.

2. It consists of Rules and Regulations of management of the company.

3. Contents of AOA can be altered by the company by passing a [SR]

4. Entrenchment of AOA: (2 Marks)

a) It means more protection is designed with regard to alteration AOA.

b) Companies can include entrenchment provisions subjected to below specified
Approvals:-
↓

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 In case of Private Company In case of Public Company

Entrenchment must be approved by all Entrenchment must be approved by all

members of private company members by passing a SR

Model MOA and AOA (Forms):

1. Model MOA and AOA are covered under Schedule - 1 of Companies Act, 2013.

2. Companies may use model MOA and AOA as their MOA and AOA (or) it can prepare
its own MOA and AOA.

3. Various Forms:

Table – A: MOA of companies limited by shares.

Table– B: MOA of companies limited by guarantee but not having share capital.

Table - C: MOA of companies limited by guarantee and having share capital.

Table - D: MOA of unlimited companies and not having share capital.

Table – E: MOA of unlimited companies and having share capital.

Table – F: AOA of company limited by shares.

Table – G: AOA of companies limited by Guarantee and having share capital

Table – H: AOA of company limited by Guarantee and not having share capital.

Table - I: AOA of unlimited company and having share capital.

Table – J: AOA of unlimited company and not having share capital.

Act to override MOA and AOA (Section – 6):

If there is any conflict between provisions of the Act and Provisions of MOA (or) AOA,
then Companies Act overrides the provisions of MOA and AOA.

Rectification of Name of the Company (Section 16):

1. If the Name of New Company is identical with (or) too nearly resembles the name of
existing company, then CG may direct the company to change its name.

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2. If the order is passed by CG, then the company shall change its name within 3 months
from the date of passing of order, by passing an OR.

3. If Name of the Company is identical with (or) too nearly resembles the Trade Mark of
an existing business then, he can make a complaint against the company to the Central
Government within 3 years from the date of registration of company.

4. Based on complaint the CG will give order to the company to change its name. The
company shall comply with the order within 6 months from the date of order passed by
CG by means of passing an ordinary resolution.

Execution of BOE in case of company (Section 22):

1. Any authorized person can draw, accept (or) endorse NI on behalf of the company

2. Authority to become party to the NI on behalf of the company must be given by power
of attorney.

3. If the company is having common seal, the power of attorney shall be executed by
affixing common seal.

4. If the company is not having common seal the power of attorney must be executed by
at least 2 Directors, where the company has appointed Company Secretary, then it must
be signed by a Director and CS.

Subsidiary Company [Section 2(87)] & Holding Company [Section 2(46)]:

1. One company is treated as Holding Company of Other Company if anyone of the

below specified criteria is satisfied:-

a) When one company is in a position to control the composition of Board of Director of

other company (or)

b) When one company either on its own (or) together with subsidiaries holding more than
50% of share capital (or) voting powers of other company.

Explanations:

Subsidiary of subsidiary becomes subsidiary of Holding Company (to the extent of two
layer allowed).

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Subsidiary Company not to hold shares in its Holding Company (Section – 19):

1. A company shall not hold shares of its holding company (General Statement).

2. Exceptional Cases:

However, in the below specified three cases, subsidiary company is allowed to hold
shares of its holding companies:

Case – I: When the subsidiary company holds shares of its holding company as a legal
representative of deceased member of holding company.

Case – II: When the subsidiary company holds shares of holding company as a trustee.

Case –III: When the subsidiary company is a shareholder even before it became a
subsidiary company of the holding company

3. Voting Rights: Subsidiary company can exercise Voting Rights at GM of Holding

Companies in first two exceptional cases but not in case – III.

Answer:

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Effects of incorporation (Section – 9):

1) From the date of issue of certificate of incorporation, company is said to be

incorporated.

2) Company will become separate legal entity & obtains contractual capacity.

Registered Office of Company (Section – 12):

1. A company shall establish a registered office within 30 days from the date of its
incorporation.

2. The registered office may be different from its corporate office (or) Head Office.

3. The Registered Office refers to a Physical Location where someone must present to
receive service of legal documents & Other Communications during normal business
hours.

4. A company shall furnish to the ROC verification of registered office within 30 days of
incorporation.

5. Labeling of Company: Name of the company (or) address of RO must be painted (or)
affixed at registered office & other places where business of the carried out, in a
conspicuous position & in legible letters & in local language.

6. Where a company has changed its name during the last two years, it shall paint (or)
affix along with its name, the former name so changed during the last 2 years.

7. The words “One Person Company” shall be mentioned in brackets below the name of
the company, wherever its name is printed in case of OPC.

8. Change of registered office of the company:

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Case – I: Change of registered office from one place to another place within the same
city (or) town (or) village where the registered office is established.

a) Company can change its registered office within the same city by passing Board
Resolution. Within 30 days of change of registered office, intimation must be given to
ROC.

Case – II: Change of RO from one city to other city within the same state.

a) Registered office can be changed by passing SR at GM.

b) Intimation must be given to ROC within 30 days from the date of change.

Case – III: Change of registered office of the company from one city to other city within
the same state but under different jurisdictions of ROC.

(Note: It is possible only in the states of Tamil Nadu & Maharashtra).

a) Company shall conduct GM & pass required special resolution.

b) After passing SR, an application must be sent to Regional Director for obtaining
approval

c) The Regional Director must dispose the application within 30 days from the date of
receiving application.

d) After obtaining approval of registered office, copy of approval & copy of SR must be
filed with ROC within 60 days shall register the changes within 30 days of filing
documents.

(Note: In first three cases of change of registered office of the company, not required to
make alternations in the situation clause of MOA because no change of state)

Case – IV: Change of Registered Office from one state to other state (Section – 13):

1. Company must conduct GM & Pass required SR.

2. After passing SR, an application must be sent to Central Government for obtaining
approval.

3. Central Government must dispose the application within 60 days from the date of
receiving applications.

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4. Before giving approval by CG, it shall ensure that

a) Consent of creditors, Debenture holders & other interested parties is obtained by the
company (or)

b) Company has made sufficient provision for discharge of debts (or) obligations (or)

c) Company has provided adequate security for debts (or) obligations

5. After obtaining approval of CG, copy of approval & copy of SR must be filed with
both ROCs.

6. The ROC of the state to which Registered Office of the company is shifting must
register the changes & issue fresh certificate of incorporation.

Note: With effect from 19-12-2016, these powers are delegated to Regional Director.

2021 july

Answer:

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Alteration of AOA (Section – 14):

1. AOA refers to rules & regulations of internal management of the company.

2. AOA can be altered by passing a special resolution of general meeting. However,

alteration should be subordinate to the provisions of MOA & Companies Act, 2013.

3. Private company can be converted to public company by alteration AOA in such a

manner that deleting 3 restrictive clauses specified in AOA of private company, by
passing a special resolution.

[The word “Private” should be deleted from the name of the company subsequent to
conversion and it should not be constituted as change of name of the company.

4. Conversion of public company into Private:

a) Public company can be converted into private company by alteration of AOA in such a
manner that inserting 3 restrictive clauses which are applicable to private company by
passing special resolution.

b) After passing a special resolution, an application shall be sent to Central Government

for obtaining approval.

c) Copy of Central Government approval & copy of special resolution shall be filed with
ROC within 15 days from the date of obtaining approval.

d) The ROC shall register the alterations & issue fresh “Certificate of Incorporation”.

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Alterations to be noted in every copy of AOA & MOA (Section – 15):

1. Whenever company is filing (or) submitting MOA & AOA to any other person,
company is required to provide altered MOA & altered AOA.

2. If any default in providing altered MOA & altered AOA then company & officers in
default shall be punishable with fine of Rs. 1000 for every copy.

Copies of MOA & AOA to be given to members (Section – 17):

1. Company shall provide copy of MOA, AOA & resolutions & agreements which are
required to be filed with ROC Under Section 117 to the members of the company within
7 days from the date of request, on payment of prescribed fees.

2. If company defaults to provide the copies, then company & offices in default shall be
punishable with penalty of Rs. 1000 per day during which default continues (or) 1,00,000
whichever is lower.

Commencement of business (Section – 10A):

1. The Section is applicable to the companies which are incorporated after

commencement of Companies (amendment) Ordinance, 2019, (w.e.f. 02-11-2018).

2. If the companies want to commence business after its incorporation, it has to obtain
one more certificate from ROC, called as certificate of Commencement of business”.

3. ROC will issue certificate of Commencement of business if Declaration is filed by a

Director with ROC within 180 days from the date of incorporation and the declaration
shall state that

a) Subscribers to the MOA have paid the amount in respect of shares taken (or)
subscribed.

b) Verification of registered office of the company filed with ROC Under Section 12.

c) If Declaration is not filed with ROC within 180 days, then ROC may take on initiative
to remove of the company from register of companies maintained by ROC.

d) The Declaration shall be verified by CA / CMA / CS in practice.

Conversion of Companies already registered (Section – 18):

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1) In case of conversion of one class of company into other class of company an
application shall filed with ROC along with altered MOA & altered AOA.

2) The ROC shall close the former registration of the company & shall register the new
class of company.

3) ROC shall issue fresh certificate of incorporation.

4) The debts (or) obligations (or) contracts created before conversion remain valid even
after conversion.

Effect of MOA & AOA (Section – 10):

1. Once the company is incorporated, the fundamental documents MOA & AOA are
deemed to be signed by members of the company & the company.

2. Provisions of MOA & AOA must be complied with by the members & the company.

3. Analysis of Section – 10:

↓
Company is bound to Members are bound to Members are not bound
members in respect of the company in respect Inter – se (to each other)
MOA & AOA of provisions of MOA &
AOA

Note: Outsiders are not liable to the company (or) outsiders & company are not liable to
each other based on contents of MOA & AOA. They are liable to each other based on
contract.

Doctrine of Ultra virus:

1. Ultra virus means be beyond the power of company.

2. When the activities of Board of Directors are not in accordance with provisions of
object clause of MOA, the it is called as Ultra virus activities.

3. Effects of Ultra virus Activities:

a) It is treated as void-ab-intio (i.e., no legal effect)

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b) Outsiders cannot enforce the claim against the company.

c) Company also cannot enforce the claim against outsider.

d) Ultra virus activities cannot be ratified even by all shareholders.

Note: Shareholders can ratify Ultra virus activities of Directors but intra virus of AOA.

Doctrine of Constructive Notice:

1. Once the company is incorporated, its fundamental documents MOA & AOA, become
public documents.

2. Any person can access these documents at ROC by payment of prescribed fees to
ROC.

3. If any outsider wants to deal with the company, he shall make sure that

a) The proposed contract must be in accordance with provisions of MOA & AOA.

b) The required internal formalities must be complied with

4) If required internal formalities are not satisfied then company will not be liable to
outsiders.

5) Doctrine of constructive notice was proved that very inconvenient for the outsiders to
deal with the company.

Doctrine of Indoor Management:

1. Doctrine of constructive notice was replaced by Doctrine of Indoor Management in the

year 1856 based on judgment given in Royal British Bank Vs Turquand case.

2. As per Doctrine of Indoor Management, if any outsider wants to deal with the
company he shall ensure that proposed contract must be in accordance with provisions of
MOA & AOA. He can take on assumption that required internal formalities are complied
with.

3. Even if required internal formalities are not satisfied, still company is liable to
outsider.

4. It is proved that doctrine of indoor management is very convenient for the outsiders to
deal with the company
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5. Exceptions to doctrine of indoor management:

a) Knowledge of Irregularity:

The person who is dealing with the company knows that required internal formalities are
not satisfied then he is not allowed to take the assumption that internal formalities are
satisfied & company is not liable.

b) Negligence:

When the outsiders want to deal with the company he shall make proper enquiry if there
are suspicious circumstances before formation of contract. If he has failed to make proper
enquiry then company will not be liable.

c) Forgery:

If any outsider / any person was aggrieved based on forged document of the company
then company is not be liable.

2021 Jan

Answer:

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Alteration of name of the company (Section – 13):

(One of the situation of alteration of MOA)

1. Company can change its name subsequent to the date of incorporation by complying
with below specified procedure:

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a) Special Resolution must be passed at GM

b) After passing SR, on application must be sent to Central Government for obtaining
approval.

c) After obtaining approval, copy of SR & copy of CG approval shall be filed with ROC.

d) The ROC shall register the changes & issues fresh certificate of incorporation.

e) The effective date of new name of the company is the date on which ROC issues fresh
COI.

Alteration of Object Clause (Section – 13):

Company can alter its object clause by passing special resolution.

Service of documents (Section – 20):

1. If any member (or) outsider wants to send any document (or) intimation to company
(or) officers of the company it must be sent by –

• Registered Post
• Speed Post
• Electronic Means
• Leaving it at Registered Office (Physical Delivery)
• Any other prescribed mode

2. If the company wants to send any document (or) intimation to the ROC & Members, it
must be sent by Registered Post (or) Speed Post (or) Courier Services (or) Electronic
Mode (or) leaving it at registered office (or) any other prescribed mode.

3. Member of the company can request the company to send communication through
specific mode provided they have to pay fees for specific mode.

4. Depositories shall send records of beneficiaries to the company through electronic

mans (or) any other prescribed mode.

5. If notice of GM is sent by postal services, then it is deemed to be reached on expiry of

48 hours. However, any other communications are sent by postal services, these are
deemed to be reached on the date of posting itself.

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Authentication of documents, proceeding & Contracts (Section – 21):-

1. If any contract is made by the company (or) made by any person on behalf of company
it must be authenticated by Key Managerial Personnel (KMP) or any other officer (or)
employee of the company as authorized by the Board of Directors.

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 Prospectus and Allotment of Securities [Section 23 to 42]

Public offer and Private Placement [Section 23]

1. Mode of issue of shares by the public company: Public company can issue the shares
either by

• Public Offer
• Private Placement
• Right Issue
• Bonus Issue

2. Private company may issue the shares either by

• Private Placement
• Right Issue
• Bonus Issue

3. Public Offer

The concept of public offer is not applicable to the private company. When the public
company wants to issue the shares through public offer, below specified steps to be
followed:

a) Issue of prospectus to the public, i.e. inviting the public to send share applications.

b) Receiving share application from investors

c) Allotment of shares
4. Meaning of Prospectus:

It refers to a written document consisting of significant information since the date of

incorporation and till the time of preparation of prospectus.

5. Definition of Prospectus: Section - 2(70)

It refers to a document issued and described as a prospectus and includes shelf prospectus
and red herring prospectus and any document, notice, circular or advertisement inviting
the public to subscribe the securities of body corporate.

Rules and Regulations to be followed for preparation of prospectus [Section 26]:

1. Companies Act, 2013, has not stated any provisions with regard to contents of the
prospectus. Company shall prepare the prospectus in accordance with provisions of SEBI
Act.

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2. Prospectus shall be registered with ROC before issue of prospectus to public.

3. Prospectus shall be signed by

a) Every Director & proposed Director (or) their authorized person.

b) Expert if name of expert is specified in the prospectus.

4. Provisions with regard to expert:

Definition of expert [Section 2(38)]: Expert refers to an engineer, valuer, CA, CMA, CS
or any other person who has the authority to issue certificate.
Expert shall not have the participation in the formation of company and management of
company

5. Validity of Prospectus:

Prospectus shall be issued to the public within 90 days from the date of registration of
prospectus.

6. Prospectus is not required to be issued under below specified cases:

Share application form must be accompanied with prospectus. In the below specified 2
cases share application provided by the company not required to be accompanied with
copy of prospectus:

a) When the share applications are provided to existing shareholders in accordance with
right issue.

d) When the share applications are provided for subscription of shares which are similar
in every aspect with the shares which were quoted in the Stock Exchange.

Misstatement in the prospectus [34 and 35]

1. Prospectus shall consist of

a) Total relevant information

b) The information provided in the prospectus must be true.

2. A prospectus is said to be consisting of misstatement if any of the below specified of

criteria is satisfied:

a) False statements are specified in prospectus or

b) All relevant facts which will influence the decisions of prospective investors are not
specified (Active concealment of material fact).

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3. Consequences of misstatement in the prospectus:

Case I: Civil Liability [Section 35]

a) Company, directors, Promoters and Other Persons who have authenticated the issue of
prospectus shall be liable to pay damages for the losses incurred to the persons who have
subscribed the shares of the company based on contents of prospectus.

b) Exceptions:

However, the Directors and other persons are not liable Under Section 35 even though
misstatements are in the prospectus provided Director or Other Person must withdraw
their consent by giving public notice with reasons.

Case – II: Criminal Liability [Section 34]

Directors and other persons who have authenticated issue of prospectus shall be liable
Under Section 447.

Definition of relative: [Section - 2(77)]

1. For one individual below specified persons are treated as relatives:

a) Spouse
b) Members of HUF

c) Father including step father d) Mother including step mother

e) Sister including step sister f) Brother including step brother
g) Son’s wife including step son’s wife
h) Daughter’s husband.
i) Son including step son j) Daughter.

Statutory Rule & Regulations in relation to allotment of shares [Section 39 & 40]
1. Meaning of Allotment of Shares:

Allotment refers to appropriation of shares to a particular person out of unappropriated

capital of the company. Shares of the company come into existence only on allotment.

2. Part – I [Section 39 Rules]:

a) Company must have received minimum subscription within 30 days from the date of
issue of prospectus.

b) As per SEBI Rules, minimum subscription is 90% of shares offered to public.

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Satya Sir’s Class Room Notes
c) If minimum subscription is not received within 30 days from the date of issue of
prospectus, the share application money must be refunded to the share applicants with 15
days from the date of closure of issue of shares.
d) If the company has defaulted to refund the application money within 15 days, then the
directors in default are liable to pay interest @ 15% p.a. for the delayed period, jointly
and severally.

e) Share application money shall not be less than 5% of nominal value as per Companies
Act, 2013 (25% of issue price as per SEBI Rules).

f) Company shall file a return of allotments of shares with ROC within 30 days from the
date of completion of allotment in the Form PAS – 3.

g) Penalties for non-compliance of provisions of Section 39:

Nature of non-compliance Penalty

Where the company has defaulted to refund Penalty of 1,000/- per day of default
the application money within above said 15 & subjected to maximum of
days in ease of minimum subscription has 1,00,000
not been received.

Default in filing return of allotment Penalty of 1,000/- per day of default

& subjected to maximum of
1,00,000

2021 July

Answer:

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Satya Sir’s Class Room Notes
3. Part – II Section 40 Rules:

a) Company must have obtained permission from one (or) more Stock Exchange for
listing of shares, before issue of prospectus.
b) Name of the Stock Exchanges from which permission obtained must be specified in
the prospectus.

c) Share application money received must be kept in the separate Bank A/c which is
maintained with scheduled Bank.
d) The money credited to Bank A/c shall be utilized either for

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Satya Sir’s Class Room Notes
 Crediting to the capital A/c (or) Refund the amount to share applicants
after allotment if the allotment is not made.

e) Where the company had entered into underwriting agreement before issue of
prospectus, name of underwriter shall be specified in the prospectus.

f) Meaning of underwriting agreement: - It refers to an agreement whereby underwriters

have promised that they will subscribe the shares which are not subscribed by public.

g) Ceiling limits on rate of under writing commission:

In case of shares In case of debentures

5% of issue price (or) rate specified in 2.5% of issue price or rate specified in
AOA whichever is lower AOA whichever is lower

h) Underwriting commission may be paid either out of proceeds of shares (or) profits of
the company

i) Penalties for non-compliance of provisions: -

Company shall be punishable with penalty Offices in default shall be punishable

Min → 50,000 Min → 25,000

Max → 50,00,000 Max → 3,00,000

Answer:

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Satya Sir’s Class Room Notes
Private placement: [Section 42]

1. This section is applicable to all kinds of companies.

2. Meaning of private placement: It refers to a company inviting specific group of

persons to subscribe shares (or) debentures of the company through invitation cum
application form (PAS – 4).

3. Particulars of the persons to whom invitation is sent Under Section 42 shall be

recorded in a separate register (PAS – 5)

4. In one financial year, company shall not invite not more than 200 persons to subscribe
shares (or) debentures.

5. While counting the No. of persons to whom invitation issued Under Section 42, below
specified persons shall not be considered: -

Certified institutional buyers Employees to whom shares are offered under

ESOP shares

6. However, this restriction is not applicable to (a) NBFC (b) Housing financing company
(National Housing Bank).

7. Before sending new invitation to the other group of people the earlier invitation shall
be either completed or discontinued / abandoned.

8. Every invitation shall be approved by shareholders by passing special revolution.

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Satya Sir’s Class Room Notes
9. Shares/ debentures must be subscribed by the persons to whom invitation is made.
Right of renouncement is not possible.

10. Company shall make the allotment of share within 60 days from the date of receiving
application.

11. If the company has defaulted to allot the shares within 60 days then the application
money shall be refunded within 15 days from the date of expiry of 60 days.

12. If there is any delay in refunding of application money then company shall pay
interest @ 12% per annum for the delayed period.

13. Share application money received must be kept in separate bank A/c which is
maintained with scheduled Bank.

14. The money credited to bank A/c shall be utilized either for

Crediting to the capital A/c after Refund the amount to share application if
allotment allotment is not made

15. Company shall file a return allotment in the form: PAS – 3 with ROC within 15 days
from the state of allotment of shares.

16. If there is any delay in filing return of allotment with ROC then company shall be
punishable with penalty of Rs. 1000 per day of default subjected to the maximum of
25,00,000.

17. Private placement offer shall not be advertised / shall not use any media (or)
marketing channel (or) agents.
18. Through private placement offer, company can invite not more than 200 persons in
one financial year for subscribing shares (or) debentures. However, the limit of 200
persons is to be considered separately in respect of each and every kind of security.

19. Deemed public offer: Where the company has invited more than 200 persons
through private placement offer in one financial year to subscribe shares (or) debentures,
then it is called as deemed public offer. Company shall comply with SEBI Rules and
Regulations.

2021 jan

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Answers:

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Satya Sir’s Class Room Notes
Shelf prospectus: [Section - 31]

1. Meaning of shelf prospectus:

It refers to a prospectus which is prepared for more than one time issue of shares (or)
debentures over a certain period of time.

2. It is applicable to the particular class of companies as specified by SEBI (financing

companies).
3. Validity of shelf prospectus:

Validity period is 1 year from the date of 1st offer of securities.

4. Where the company wants to go for further public offer during the validity period of
shelf prospectus, company no need to prepare new prospectus. Company can issue the
shelf prospectus as a prospectus.

5. Where the Company wants to use the shelf prospectus as a prospectus, then it shall
prepare a document called as information memorandum in the Form No. PAS – 2 and
shall be filled with ROC at least one month before date of opening of subsequent offer.
6. Information memorandum shall consist of below specified particulars:

a) New charges created and

b) Significant changes in financial position between previous Offer and current offer.

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Satya Sir’s Class Room Notes
7. Where the company has received share application along with advance money before
opening of subsequent offer, then company shall give notice to the share applicant with
regard to charges created and changes in financial position before allotment and share
applicant must be given an option to withdraw his application within 15 days of receiving
notice.

8. Shelf prospectus and information memorandum together shall be constituted as a

prospectus.
2021 July

Answer:

Red – herring prospectus: [Sec 32]

1. Red herring prospectus refers to a prospectus but it doesn’t consist the particulars of
Quantum of issue and price of issue.

2. The main objective of issue of red – herring prospectus is to ascertain demand for
company’s shares & deciding the price of issue of shares.

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Satya Sir’s Class Room Notes
3. Copy of red – herring prospectus shall be filled with ROC at least 3 days before
allotment of shares.

4. After allotment of shares based on red – herring prospectus, company shall prepare a
prospectus by specifying the particulars of No. of shares allotted and share price.

5. Copy of prospectus shall be filed with ROC and SEBI

Advertisement in prospectus [Sec 30]

Below specified particulars of MOA to be specified in the prospectus: -

a) Objectives of the company.

b) Names of subscribers to MOA

c) No. of shares subscribed by subscribers to MOA

d) Capital structure of the company

e) Nature of liability of members.

Variation of objects specified in the MOA: [Sec 27]

Part – I Company can alter its object clause by passing a special resolution provided it
had not raised the money by issue of prospectus [Sec 13]
Part – II Where the company had raised the money by issue of prospectus then company
can alter its object clause by complying with below specified provisions:

1. Special resolution shall be passed through postal ballot.

2. Notice of portal ballot shall be given to members of the company.

3. Notice [PAS-1] shall be published in one English newspaper and one vernacular
newspaper which are being circulated in the city where the registered office is situated.
4. Notice shall be kept in the website of the Company.

5. Notice shall consist of below specified particulars:

→ Total amount previously raised

→ Amount already spent
→ Amount not utilized
→ Details of proposed objectives
→ Justification for alterations
→ Time limit within which proposed objects can be achieved.

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Satya Sir’s Class Room Notes
6. The dissent shareholders must be given an option to exit by means of purchasing their
shares by promoters (or) other members holding control over the interest of the company
at a price as determined by SEBI
Holding of shares/securities in dematerialized form [Section 29]

1. In case of listed companies, shares or debentures of the company are allotted /

transferred / buy back / rights shares / Bonus shares are in dematerialized form.

2. Special provisions with regard to unlisted public companies:

a) Shares or debentures of unlisted public company which were issued before 02/10/2018
must be converted into dematerialized form by complying with provisions of
Depositories Act, 1996.

b) On or after 02/10/2018, shares or debentures of unlisted public company must be

allotted / transferred / Bonus shares / right shares in dematerialized.

c) Unlisted public companies shall file a half yearly return with ROC within 60 days from
the date of close of half year in the form PAS – 6 with regard to particulars of shares (or)
debentures held in dematerialized form.
Document containing offer for of securities for sale [deemed prospectus] [Section
25]

1. Where the company allots (or) agrees to allot shares / debentures to a person with to
view to offer those securities to the public by a document, then such document is treated
as a deemed prospectus if below specified two conditions are satisfied:

a) Offer to the public shall be made within 6 months from the date of allotment (or)
agrees to allot and
b) Total consideration payable to the company is not yet paid.
2. Whatever the provisions to be complied with in relation to preparation of prospectus,
same provisions to be complied with in relation to preparation of deemed prospectus.

3. Deemed prospectus is to be signed by the person who is making offer to the public as a
director of the company.
4. Where the public offer is made by other company, then deemed prospectus is to be
signed by at least 2 directors of the other company.

5. Where the public offer is made by partnership firm, then deemed prospectus is to be
signed by majority of partners.

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Satya Sir’s Class Room Notes
6. Deemed prospectus shall consist of below specified particulars also (along with those
of prospectus):-

a) Amount of consideration for which allotment made by the company.

b) Date, time and place where the contract made with the company can be inspected.

Offer of sale of shares by a certain members of the company: [Section 28]

1. Where any member wants to transfer his shares by public offer then he shall take the
consent of Board of Directors.
2. Where the member wants to transfer his shares through public offer, then he shall issue
a document to public for inviting, such document is called as deemed prospectus.

3. Company may take the responsibility of preparation of deemed prospectus on behalf of

the member. In this case, member shall compensate the company in respect of expenses
incurred.

4. Deemed prospectus is not required to consist of below specified particulars:

a) Minimum subscription

b) Minimum requirement of application money

c) The objectives for which money will be used after raising of money.

Punishment for fraudulently inducing persons to invest money: Section: 36

Any person who, either knowingly or recklessly makes any statement which is false,
deceptive or misleading or deliberately conceals any material facts, to induce another
person to enter into

a) any agreement with a view to acquiring, disposing, subscribing or underwriting

securities or

b) any agreement for the purpose of which is to secure a profit to any of the parties by
reference to fluctuations in the value of securities or

c) any agreement with a view to obtaining credit facilities from any bank or financial
institutions,

shall be liable for action under section 447.

Action by affected persons: [Section – 37]

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Satya Sir’s Class Room Notes
A suit may be filed under section - 34 or section - 35 or section – 36 by any person, group
of persons or any association of persons affected by any misleading statement or
omission of any matter in the prospectus.

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Satya Sir’s Class Room Notes
 CHAPTER – 4

SHARE CAPITAL AND DEBENTURES

Basic Points:

1. The share capital of a company is divided into small units having a certain face value.
Each such unit is termed as share.

2. Definition of Share and Stock: Section – 2 (84)

It defines share as a share in the share capital of a company and includes stock.

Kinds of share capital: (Section – 43)

There are two kinds of share capital of a company limited by shares:

a) Equity share capital:

Shares which are not preference shares are termed as equity shares.

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Satya Sir’s Class Room Notes
b) Preference share capital:

It refers to part of the issued capital of the company which carries below specified two
preferential rights:

(i) Payment of dividend at a fixed rate before payment of dividend to equity shares; and

(ii) Repayment of paid up share capital before repayment of capital to equity shares in the
event of winding up of the company.

Classification of Capital:

1. Authorized Capital: Section – 2(8)

a) Authorized capital means the maximum capital that can be issued by a company during
its lifetime.

b) A Company cannot issue capital exceeding the authorized capital.

c) In case the company intends to issue capital exceeding the authorized capital, it has to
first increase the authorized capital.

d) The amount of authorized capital is stated in the capital clause of memorandum.

2. Issued Capital: Section – 2(50)

It is the part of authorized capital which has been issued by the company.

3. Subscribed capital: Section – 2(86)

It is the part of issued capital which has been subscribed to by the members.

4. Called up capital: Section – 2(15)

It is the part of subscribed capital which has been called by the company.

5. Paid up capital: Section – 2(64)

It is the part of called up capital which has been paid by the members. Paid up capital is
derived by deducting calls in arrears from the called up capital.

Calls on shares: Section – 49

a) When the shares are partly paid up, the company can make calls (asking the
shareholders to pay the amount called up) in respect of such partly paid-up shares.

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Satya Sir’s Class Room Notes
b) Calls on shares have to be made uniformly and there should be no differentiation for a
given class of shareholders.

c) Shares of the same nominal value on which different amount have been paid shall not
be deemed to fall under the same class.

Calls- in- advance: Section – 50

a) If it is authorized by AOA, company can accept from any member the whole or a part
of the amount remaining unpaid even if no part of that amount has been called up.

b) A member of a company is entitled for voting rights in respect of calls in advance paid
till the amounts is called by the company.

Dividend Rate: Section – 51

1) The company is permitted to pay dividend in proportion to the amount paid-up on each
share, if it is authorized by the articles.

MCQs:

1. A company may accept calls in advance only if it is authorized by

a) CG b) The court c) The Tribunal d) Its articles

2. Statement (1): A call shall be made uniformly on all the shares falling under the same
class. Statement (2): The shares on which different amounts have been paid up shall be
deemed to be the shares falling under the same class.

(a) Only statement (1) is correct (b) only statement (2) is correct
(c) Both the statements are correct (d) none of the statement is correct

Issue of shares at premium: (Section – 52)

1. When a company issues shares at a price higher than their face value, the share are said
to be issued at premium.

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Satya Sir’s Class Room Notes
2. Where a company issues shares at a premium, whether for cash or otherwise, a sum
equal to the amount of premium received shall be transferred to a separate account called
as “Securities premium account”.

3. Restriction on utilization of securities premium account:

Securities premium accounts shall be utilized for below specified purposes:

a) For issue of fully paid up bonus shares

b) For write off the preliminary expenses of the company

c) For write off the expenses of, or the commission paid or discount allowed on any issue
of shares or debentures of the company.

d) For providing premium payable on the redemption of preference shares or of

debentures of the company

e) For effecting buy back of shares of the company.

4. However, the companies which are required to prepare its financial statements by
complying with accounting standards as specified under section 133, shall utilize the
securities premium account for the below specified purposes:

a) For issue of fully paid up bonus shares

b) For write off the expenses of, or the commission paid or discount allowed on any issue
of equity shares of the company.

c) For effecting buy back of shares of the company.

2021 January

Answer:

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Satya Sir’s Class Room Notes
Prohibition on issue of shares at discount: (Section – 53)

1. Where the issue price is lower the face value of the shares, then share are said to be
issued at discount.

2. A company shall not issue shares at a discount except as provided in section 54.
Section 54 contains provisions for the issue of ‘sweat equity shares’.
3. Any issue of shares by a company at a discount shall be void.

4. Exception:

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 RBI under
the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.

5. Penalties:

a) Where any company fails to comply with the provisions of section 53then such
company and every officer who is in default shall be liable to a penalty which may extend
to an amount equal to the amount raised through the issue of shares at a discount or five
lakh rupees, whichever is less.

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Satya Sir’s Class Room Notes
b) The company shall also liable to refund all monies received with interest at the rate of
12% per annum from the date of issue of such shares to the persons to whom such shares
have been issued.

6. Other Points:

The restrictions mentioned in section 52 and 53 apply only in respect of issue of shares
(either equity or preference shares) but not to the issue of debentures.

Answer:

Issue of bonus shares (Section – 63)

1. Bonus shares refer to issue of additional equity shares to its existing equity share
holders at free of cost. Bonus shares are also called as capitalization of profits of the
company.

2. Provisions to be complied with for issue of bonus shares:

a) Sources to be utilized for issue of bonus shares:

i) Free reserves

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Satya Sir’s Class Room Notes
ii) Securities premium account

iii) Capital redemption reserve account

b) Revaluation reserve shall not be utilized for issue of bonus shares

c) AOA Authorization: Issue of bonus shares shall be authorized by AOA.

d) Issue of bonus shares shall be recommended by BOD and it must be authorized by
member at general meeting. A company which has announced the decision of its BOD
recommending a bonus issue, it shall not be withdrawn subsequently.

e) Existing equity shares shall be fully paid up shares before issue of bonus shares (i.e if
existing equity shares are partly paid up shares before issue of bonus shares, is shall be
made as fully paid up shares).

f) Company must have not defaulted in payment of interest or principal in respect of

fixed deposit or debt securities issued by the company.

g) Company must have not defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus.

h) Bonus shares shall not be issue in lieu of dividend.

3) Other points:

According to Section 123(5) of the Companies Act, 2013, it is permissible for a company
to capitalize its profits or reserves for the purpose of issuing fully paid up bonus shares
or paying up any amount which is unpaid on any shares held by the members of the
company (i.e. converting partly paid up shares into fully paid up shares).

2021 Dec:

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Answers:

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Satya Sir’s Class Room Notes
Issue of preference shares and Redemption of preference shares (Section – 55)

Case – 1: Provisions to be complied with in relation to issue of preference shares:

1. A company limited by shares can issue redeemable preference shares only. Company
shall not issue any preference shares which are irredeemable.

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Satya Sir’s Class Room Notes
2. Where the company has issued preference shares, it shall be redeemed within 20 years
from the date of issue of preference shares.

3. Exceptional case where period may exceed twenty years:

A company may issue preference shares for a period exceeding 20 years but not
exceeding 30 years for infrastructure projects subjected to condition that redemption of
10% of such preference shares beginning 21st year onwards or earlier, on proportionate
basis, at the option of such preference shareholders.

4. Issue of preference shares has to be authorized by passing a special resolution in the

general meeting of the company.

5. At the time of issue of preference shares, the company should not have subsisting
default in the redemption of preference shares which were already issued or in payment
of dividend due on any preference shares.

Part – 2: Provisions to be complied with for redemption of preference shares

1) Sources to be used for redemption of preference shares:

a) Free reserves (profits of the company which would otherwise be available for
dividend)

b) Proceeds of fresh issue of shares made for the purpose of such redemption

2) Shares must be fully paid up before redemption of preference shares.

3) Transfer to CRR:

Where preference shares are proposed to be redeemed out of profits of the company, a
sum equal to the nominal amount of the shares to be redeemed shall be transferred to
separate called as Capital redemption reserve account out of profits of the company.

Case III: Treatment of premium on redemption of preference Shares

Rule 1:- Where the companies are not required to follow provisions of Section 133, then
premium on redemption of preference shares shall be provided either out of profits (or)
securities premium.

Rule 2: - Where the companies are required to follow Section 133 provisions, then
premium on redemption shall be provided out of

Profits / Securities premium account if Profits if preference shares are issued after

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Satya Sir’s Class Room Notes
preference shares are issued on or before Commencement of Companies Act, 2013
commencement of Companies Act, 2013
(01-04-2014)

Case IV: Issue of further redeemable preference shares if a company is unable to

redeem existing preference shares or pay dividend:

Where a company is not in a position to redeem any preference shares or to pay dividend
on such shares in accordance with the terms of issue (such shares are also called as
unredeemed preference shares), then company may issue further redeemable preference
shares equal to the amount due (including dividend due thereon) in respect of the
unredeemed preference shares, and on the issue of such further redeemable preference
shares, the unredeemed preference shares shall be deemed to have been redeemed
provided below specified conditions shall be satisfied:

a) Company shall obtain the consent of preference shareholders who are holding not less
than 3/4th value of preference shares.

b) Company shall obtain the approval of Tribunal by sending an application.

Note: Before giving the approval by the Tribunal, it shall order the company that
company shall make redemptions of preference shares which are held preference
shareholders who had not given consent for issue of new preference shares in respect of
unredeemed preference shares.

Voting Rights [Section 47]

1. Basic points:

a) Meaning of resolution: It refers to a process of taking a decision by BOD with the

approval of the shareholders.

b) Meaning of voting rights: It refers to a process of giving assent or dissent by share

holders in respect of resolutions proposed by BOD

c) Basic methods of exercising VR:

Show of hands(107) Poll (109)

Every member is entitled for one voting Members are entitled to voting rights in
right irrespective of share holding proportion to paid-up share capital held.

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Satya Sir’s Class Room Notes
2. Voting rights of Equity share holders:

a) Equity share holders are entitled to exercise voting rights in respect of every resolution
placed at general meeting.

b) In poll process, Equity share holders are entitled to voting rights in proportion to paid-
up share capital held.

3. Voting rights of Preference shareholders:

a) Preference shareholders are not entitled to voting rights in respect of resolutions

transacted at general meeting.

b) Exceptions: However, Preference shareholders are entitled to exercise voting rights in

respect of below specified 3 matters:-

Winding up of co. Repayment of capital to ESH Variations of Rights of PSH

c) Where the company has not paid dividend for 2 or more years (not necessarily
consecutive) to the Preference shareholders can exercise voting rights in respect of every
resolution till the date of redemption of preference shares along with equity shareholder.

4) Exemptions to private company from Section - 47:

Private company may specify their own rules with regard to manner of exercising voting
rights in its MOA or AOA provided company must have not defaulted in complying
provisions of Section - 137 and Section – 92.

Right issue or further issue of shares (Section 62)

1. Section 62 provisions are applicable when the company wants to go for further issue of
shares.

2. Main objective of Section 62 is “allowing existing equity shareholders to retain non

- dilutive controlling power”.

3. Where the company wants to make further issue of shares, shares shall be offered to
existing equity shareholders in proportion to their paid-up share capital.

4. Intimation with regard to right issue shall be communicated to existing equity

shareholder by sending letter of offer.

5. Contents of letter of offer:

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Satya Sir’s Class Room Notes
a) No. of shares offered

b) Offer price

c) Basis for offer

d) Last date for subscription of right shares [Minimum – 15 days and Maximum –
30days]

e) Company shall declare that member can subscribe the shares on his own or renounce
to other party

f) company shall declare that if the shares neither subscribed nor renounced, then those
shares will be disposed off by BOD for advantage to the company.

6. Mode of sending letter of offer:

Letter of offer shall be sent either by registered post or speed post or courier service or
any other mode of delivery which shall have proof of delivery. This letter of offer shall
be delivered at least 3 days before the date of open of offer.

7. Exceptions of Section 62:

Case I: Unlisted Company can offer further issue of shares to its employees subjected to
fulfillment of below specified conditions:

a) It must be approved by shareholders by passing a special resolution.

b) Shares must be offered to its employees in accordance with ESOP scheme (employee
stock option scheme).

c) There must be a minimum gap of 1 year between date of grant and date of vesting of
shares.

Explanation:

Date of grant: The date on which offer is communicated to employees.

Date of vesting: The date on which right of subscribing shares is vested to employees.
Vesting period: The period during which conditions to be satisfied

d) Company can specify the lock - in period (no mandatory for specifying the lock - in
period).

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Satya Sir’s Class Room Notes
e) Options vested to employee shall not be transferred / renounced to others. Employee
stock options shall be subscribed by employees only.

f) In the event of death of employee, the options granted to employee can be subscribed
by legal representatives even if required conditions are not satisfied.

g) In the event of permanent disablement while in the employment, then No. of options
granted can be subscribed by employee even if required conditions are not satisfied.

Case II: Further issue of shares to any person subjected to fulfillment of below specified
2 conditions:

a) It must be approved by shareholders by passing a special resolution.

b) Shares must be offered at a price which shall be decided by registered values.

Case III: Company can make further issue of shares on account of convention of
debentures or loans into equity shares provided it must have been approved by
shareholders before issue of convertible debentures / loans by passing special resolution.

Case IV: Where the company issued debentures or taken loan from Government and
could not be redeemed, then Government may pass an order to the company that
conversion of debentures or loans into equity shares even though debentures/ loans are in
non - convertible nature.

Where the order passed by Government is not acceptable for the company then company
can make an appeal to the tribunal against the order passed by government. Company can
make an appeal within 60 days from the date of passing of order by Government. The
tribunal shall pass an appropriate order.

Note: Where the issued capital has become more than the authorized capital due to order
passed by Government under Section 62 then authorized capital is automatically altered
[i.e., company no need to follow provisions of Section 61 for alteration of share capital]

Restrictions on purchase of own shares or restrictions on providing loans [Section

67]

1. One company shall not purchase its own shares and shares of holding company.

2. One company shall not provide financial assistance either directly or indirectly to any
other person for purchasing shares of the company or shares of its holding company.

3. Exceptions:

a) When the banking company providing loans in their ordinary course of business.

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Satya Sir’s Class Room Notes
b) When the company is providing loans / advance to employees other than directors or
KMP (key managerial persons) and such amount of loan shall not exceed 6 months’
salaries / wages for purchasing fully paid-up shares of the company or its holding
company.

c) When the company is approved by shareholders by passing special resolution that

loans are provided for purchasing fully paid shares of the company or its holding
company and holding the shares as a trustees of employees.

2021 Jan

Answer:

Buy back of shares: [Section 68]

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1. A company can buy back its equity shares subjected to fulfillment of below specified
conditions:

a) It must be authorized by AOA

b) It must be approved by shareholders by passing a special resolution

c) Shares must be fully paid-up before buy back

d) Sources for buy back:

• Proceeds of fresh issue

• Securities premium
• Free resources

e) Ceiling limits on buy back of shares: Quantum of buy back of the shares shall not
exceed least of below specified 3 limits:

i) Amount of buy back shall not exceed 25% of aggregate of paid-up share capital and
free reserves.

ii) No. of shares buy back in one financial year shall not exceed 25% of No. of equity
shares outstanding.

iii) Debt equity ratio after buy back shall not exceed 2.

f) Board of directors can effect buy back of shares which shall not exceed 10% of
aggregate of paid-up equity share capital and free reserves by passing a Board resolution.
In this case, special resolution is not required to be passed.

g) Buy back of the shares shall be completed within 12 months from the date of passing
special resolution (or) Board resolution.

h) Restriction on further buy back of the shares: There must be at least 1 year gap
between previous buy back of the shares and further buy back of the shares.

i) The shares bought back shall be extinguished and physically destroyed within 7 days
from the date of completion of buy back.

j) Cooling Period: Company shall not make further issue of the shares for a period of 6
months from the date of completion of buy back except by way of bonus issue or
discharging subsisting obligation like conversion of preference shares or debentures into
equity shares.

k) Declaration of Solvency:

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Satya Sir’s Class Room Notes
Company shall give declaration of solvency (Form No. SH - 9) with ROC and SEBI
before effecting buy back of shares. It shall state that company will not become insolvent
for a period of 1 year from the date of completion of buy back. It shall be signed by at
least 2 directors and one of the director shall be the Managing Director.

l) Register of Buy Back:

Company shall maintain register of buy back of shares in the prescribed form (SH – 10).
It shall consist of particulars of the buyback of shares.

m) Return of Buy back:

Company shall file return of buyback with ROC and SEBI within 30 days from the date
of completion of buy back (SH - 11).

n) Transfer of free reserves to CRR [Section – 69]

Where the buyback is effected out of free reserves, then amount equal to nominal value
of the shares bought back shall be transferred to capital redemption reserve account from
free reserves.

2021 Jan

Answer:

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2021 July

Answer:

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Prohibition of buy back of shares (Section 70)

1. A company shall not purchase its shares through its subsidiary companies (i.e.,
subsidiary company shall not purchase the shares of its holding company).

2. A company shall not purchase its shares through its investing company (or) group of
investing companies.

3. Company shall not effect buy back of shares if the company has defaulted in
repayment of deposits (or) interest thereon (or) redemption of debentures (or)
Redemption of preference shares (or) dividend thereon (or) repayment of term loans
(or) interest thereon which are taken from financial institutions (or) banking companies.
However, company can effect buyback of shares after expiry of 3 years after the date on
which default is remedied.

4. Company shall not effect BB of shares if company has defaulted in complying with
provisions of Section ‒ 92, Section ‒ 123, Section ‒ 117 or Section ‒ 129.

Sweat Equity shares: [Section ‒ 54]

1. Definition [Section - 2(88)]

It refers to issue of equity shares to its employees or directors at a discount or for a

consideration other than cash, for providing know - how or any other intellectual property
rights which are in the nature of value addition to the company.

2. Provisions to be complied with for issue of sweat equity shares:

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Case I: In case of listed companies: SEBI rules and regulations to be complied with

Case II: In case of other companies: -

a) It must be authorized by shareholders by passing a special resolution.

b) Shares of that clause must have been already issued.

c) Limits on issue of sweat equity shares:

• Value of sweat equity shares issued in a year shall not exceed 15% of paid up
equity shares capital or 5 Crores whichever is higher.

• At any other point of time the total value of sweat equity shares shall not exceed
25% of the paid-up equity share capital.

• However, in case of startup companies total value of swear equity shares shall not
exceed 50% of paid-up equity share capital, for a period of 10 years from the date
of incorporation

d) Lock in period: The employees or directors to whom shares are allotted u/s 54 shall not
be transferred for a period of 3 years.

e) The value for which sweat equity shares to be issued must be valued by registered
valuer.

f) Company shall maintain a register of sweat equity shares (SH – 3).

g) Sweat equity shares shall be issued within 12 months from the date of passing special
resolution.

h) Sweat equity shareholders is ranked pari-passes with other equity shareholders (i.e.,
equal standing rights).

Alteration of Share Capital [Section 61] (alteration of contents of capital

clause of MOA)

1. If any alterations are made with regard to below specified aspects of capital clause of
MOA, then alteration of capital is said to be made: -

Authorized Capital No. of shares Nominal value of shares

2. Various situations of alteration of contents of capital clause of MOA:

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a) Sub - dividing larger denomination of shares into smaller denomination (share split).

b) Consolidation of smaller denomination of the shares into larger denomination.

(Reverse share split)

c) Converting fully paid-up shares into stock.

d) Increasing of authorized capital

e) Diminution of capital (i.e., cancellation of unissued capital (or) decreasing authorized

capital)

3. Other Points:

a) Alteration of capital share must be approved by shareholders by passing an ordinary

resolution.

b) Intimation to ROC [Section - 64]

In the event of alteration of contents of capital clause of MOA, intimation shall be given
to ROC within 30 days in form No. SH - 7 along with altered copy of MOA.

c) Authorization of AOA is required for alteration of share capital.

Stock:

• Direct issue of stock is not possible

• Stock can be issued by means of converting fully paid shares into stock

• Stock refers to consolidated amount of specific No. of shares of the company

• Stock is not having denomination and it can be transferred for any amount

SHARE CERTIFICATE [Section – 46]

1. Manner of holding of shares of the company:

Shares are held in the physical Shares are held in electronic form
form

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Company shall provide share Shares are credited to DEMAT account of
certificate to the shareholders. shareholder which is maintained by depository
participants.
It is applicable to private company
only. Depository participants are operated under the
control of depositories.

There are 2 depositories: NSDL and CDSL.

These depositories shall maintain records of

members of public company. In relation to unlisted
public company shares must be held in electronic
form w.e.f. 02-10-2018

2. Contents of share certificate:

➔ Name of the shareholder

➔ No. of shares allotted
➔ Nominal value of shares
➔ Amount paid
➔ Common seal (Not mandatory)
➔ Signatures of 2 directors [If CS is appointed, it must be signed by a director and
CS]

3. Share certificate is a prima facie evidence of title of shares of the company [The name
of the person whose name is specified in the SC shall be deemed to be the owner of the
shares].

4. Duplicate share certificate:

1. In case of original share certificate lost or destroyed, company will provide duplicate
share certificate at the request of the shareholder.

2. In case of original share certificate is torn (or) mutilated, company will provide
duplicate share certificate on surrendering of original share certificate.

TRANSFER OF THE SHARES AND TRANSMISSION OF SHARES [Section - 56]

(It is applicable private companies only)

1. Transfer of shares: It refers to shares are transferred from one person to other person
voluntarily.

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2. Transmission of shares: It refers to shares are transferred from one person to other
person by operation of law (in the event of death of shareholder or insolvency of
shareholder).

3. Procedure to be followed for transfer of shares:

a) Instrument of transfer of shares (ITS) must be executed. (Form: SH - 4)

b) Instrument of transfer of shares must be duly executed.

Name of the transferor and Date of execution of Address of transferee must

transferee must be instrument of transfer of be specified
specified. shares must be specified.

Stamps must be affixed

Signed by transferor and
transferee

4. Duly executed instrument of transfer of shares must be submitted to the company at its
registered office along with share certificate, within 60 days from the date of execution of
instrument of transfer of shares.

5. In case of non – availability of share certificate, copy of letter of allotment shall be

submitted.

6. In case of transfer of partly paid-up shares and instrument of transfer of shares is

submitted to the company by the transferor, company shall give notice (SH - 5) to the
transferee before registration of transfer of shares. Transferee can raise the objections
within 2 weeks from the date of receiving notice.

7. Where all required formalities are satisfied then company shall register transfer of
shares.

8. Consequences of registration of transfer of shares:

a) Transferor’s name is removed

b) Transferee’s name will be entered

9. New share certificate will be given to the transferee.

10. Procedure to be followed for transmission of shares:

In the event of death of the shareholder, his legal representative is having either of the
below specified 2 options:

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a) He can become share holder by sending intimation of transmission of shares.

b) He can transfer shares to third party even without becoming shareholder. He will
execute instrument of transfer of shares as a transferor.

Time limit for delivery of share certificate:

Situation Time limit

a) To the subscribers to MOA Within 2 months from the date of incorporation of

company

b) In case of allotment of shares Within 2 months from the date of allotment of

shares

c) In case of transfer/ transmission Within 1 month from the date of submission of

of shares instrument of shares to the company (or) intimation
of transmission shares to the company.

Refusal of registration of transfer of shares and appeal against refusal [Section 58]

1. Where the private company has refused the registration of transfer of shares, it shall
give notice of refusal to the both transferor and transferee and company shall specify the
reasons for refusal.

2. Company shall give notice of refusal within 30 days from the date of receiving
instrument of transfer of shares.

3. If transferee has not satisfied with reasons specified by the company then he can send
an appeal to tribunal within 30 days from the date of receiving notice.

4. Where the notice of refusal is not sent by the company then transferor can make an
appeal to tribunal within 60 days from the date of sending instrument of transfer of shares
to the company.
5. The tribunal shall pass an appropriate order. It shall be fulfilled by the company within
10 days from the date of passing of order.

Blank Transfer: [General concept and applicable to private company]

1. Meaning:

Where transferor has transferred the shares by executing instrument of transfer of shares
without specifying the name of transferee and enables the buyer to deal with shares, then
it is called as blank transfer.

2. Holder of bank transfer deed can transfer the shares to other party by mere delivery.

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3. The person (subsequent buyer) whoever writing his name as a transferee in the
instrument of transfer of shares and submitting to the company, such person is treated as
transferee

Forged Transfer: [General concept and applicable to private company]

1. Where the signature of shareholder is forged and other person became shareholder
based on forged instrument of transfer of shares, then it is called as forged transfer.

2. Consequences of forged transfer:

Case I: When the person who has forged the shareholder’s signature became
shareholder

a) Name of original shareholder shall be re - entered in the register of member.

b) Company shall pay damages to the original shareholder for losses incurred.

c) The person who has submitted forged instrument of transfer of shares shall be
punishable u/s 57.

Case II: When innocent party became SH based on forged transfer

a) Name of original shareholder shall be re - entered in the register of member.

b) Company shall pay damages to the original shareholder for losses incurred.

c) The person who has submitted forged instrument of shares to the company shall be
punishable u/s 57 unless he has proved that he became shareholder based on forged blank
transfer.
Case III: When the innocent person became shareholder based on share certificate
issued by the company.

a) Name of original shareholder shall be re - entered in the register of member.

b) Company shall pay damages to the original shareholder for losses incurred.

c) The person who has submitted forged instrument of shares to the company shall be
punishable u/s 57 unless he has proved that he became shareholder based on forged blank
transfer.

d) Company shall pay damages to the person who became shareholder based on share
certificate issued by the company.

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Punishment for personation (unauthorized representation) of shareholder [Section
57]

Where any person personates the shareholders to receive share certificate or to receive
money, then he shall be punishable with imprisonment not less than 1 year and not more
than 3 years & penalty not less than 1 lakh and not more than 5 lakhs.

Variation of shareholders Rights [Section 48]

1. Company can change the rights attached to particular class of shareholders subjected to
fulfillment of below specified conditions:

a) MOA (or) AOA shall consist of provision with regard to variation of rights of
shareholders.

b) Where the MOA or AOA is silent, still company can vary the rights provided terms
and conditions of issue of that class of shares shall not prohibit the variation of the rights.

c) Consent of that class of shareholders must be obtained who are holding not less than
3/4th of total value of that class of shares (or) by passing special resolution at that class
meeting of shareholders.

d) In case of variation of rights of any class of shares causes change in the rights of other
class of the shares, then consent of other class of shareholders who are holding not less
than 3/4th value of that other class shall also be obtained.

e) The shareholder of that class who have not given consent for variation of rights and
holding not less than 10% of the value of the shares can make an appeal to the tribunal
within 21 days from the date of passing resolution. In this case, decision taken by the
company with regard to variation of rights is not effective until it is confirmed by the
tribunal.

f) In case of variation of the rights intimation shall be given to the ROC within 30 days
from the date of passing of resolution.

Definition of Member [Section - 2(55)]

The term member includes:

a) Subscribers to Memorandum of Association are deemed to be the members of

company from the date of incorporation [Company shall enter their names in the register
of members immediately subsequent to the date of incorporation]

b) The persons who sent application to the company for entering their names in the
register of members. [In case of allotment (or) transfer (or) transmission of shares]

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c) The persons who are holding shares in dematerialized form and his name entered in the
records of depository

Rectification of register of shareholder [Section 59]

1. Where any other person’s name unnecessarily entered in the register of member (or)
unnecessary delay taken place in registration of transfer (or) transmission of shares (or)
any person holds shares of the company in demat form but not entered his name in
records of depository, then such persons can make an appeal to the tribunal.

2. Tribunal shall pass an order to the company for rectification of register of member
after proper enquiry

3. Company shall make rectifications in the register of member within 10 days from the
date of order passed by Tribunal.

Reduction of Capital [Section – 66]

1. In the below specified cases reduction of capital is said to be effected:

a) Extinguish or reduce the liability on any its shares in respect of the share capital not
paid – up;

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.

2. Procedure to be followed for effecting the reduction of capital:

a) Reduction of capital shall be approved by members by passing the special resolution.

b) Company shall obtain the approval of Tribunal by sending an application to the
Tribunal after passing the special resolution.

c) The company shall also alter its memorandum by reducing the amount of its share
capital and if its shares accordingly.

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d) No such capital reduction shall be made if the company is in arrears in the payment of
any deposits accepted by it or interest payable thereon.

e) The Tribunal shall give notice of every application made to it to the Central
Government, Registrar, SEBI (in case of listed companies) and creditors of the company
and shall take into consideration the representations made to it by that Government,
Registrar, SEBI and the creditors within a period of 3 months from the date of receipt of
the notice.

Where no representations has been received from the Central Government, Registrar, the
SEBI or the creditors within the said period, it shall be presumed that they have no
objections to the reduction.

f) Before giving the approval, the Tribunal shall satisfy that

i) the debt or claim of every creditor or the company has been discharged or has been
secured or his consent is obtained

ii) the accounting treatment proposed by the company for such reduction is in conformity
with the accounting standards specified in Section – 133 or any other provisions of this
Act and a certificate to that effect by the company’s auditor has been filed with the
Tribunal.

g) 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.

h) Company shall deliver a certified copy of the order of the Tribunal to the ROC within
30 days from the date of receipt of order and ROC shall register the same.

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 Unit - 5
ACCPTANCE OF DEPOSITS
Basic Points:-

1. Definition of Deposits [Section 2(31)]

The term deposit includes any receipt of money by way of deposit (or) loan (or) in any
other form by a company but doesn’t include such categories of amount as may be
prescribed in consultation with R.B.I.

2. Deposits must be repaid within specified time frame.

3. Deposits maybe secured (or) unsecured

4. Private company can accept deposits from its members only.

5. Public company can accept deposit from its members & from public also.

6. Amounts not considered as Deposits:

Below specified amounts are not treated as deposits:

i) Any amount received from the Central Government or a state Government, or from any
other source whose repayment is guaranteed by the CG or a SG, or any amount received
from a local authority, or any amount received from a statutory authority constituted
under an Act of Parliament of a State Legislature.

ii) Any amount received from foreign Governments, foreign or international banks,
multilateral financial institutions etc. subject to the provisions of Foreign Exchange
Management Act, 1999 and rules and regulations made thereunder.

iii) Any amount received as a loan or facility from any banking company or from State
Bank of India or its subsidiary banks or from a notified banking institution or from any
co-operative bank.

iv) Any amount received as a loan or financial assistance from Public Financial
Institutions.

v) Any amount received against issue of commercial paper or any other instruments
issued in accordance with the guidelines or notification issued by Reserve Bank of India.

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vi) Any amount received by a company from any other company.

vii) Any amount received and held pursuant to an offer made in accordance with the
provisions of the Act towards subscription to any securities (including share application
money or advance towards allotment of securities, pending allotment), so long as such
amount is appropriated only against the amount due on allotment of the securities applied
for.

Explanation:

If the securities for which application money or advance for such securities was received
cannot be allotted within 60 days from the date of receipt of the application money or
advance for such securities and such application money or advance is not refunded to the
subscribers within 15 days from the date of completion of 60 days, such amount shall be
treated as a deposit under these rules.

(If allotment is not made within 60 days from the date receiving share application
money, it must be refunded within 15 days from the date of expiry of 60 days. If the
share application money is not refunded within 15 days, then it is treated as
deposits. [General Statement: Share Application money is not treated as deposits].)

viii) Any amount received from the director of the company or relative of the director of
the private company. It is required to furnish a declaration in writing to the company that
the amount is not being given out of funds acquired by him by borrowings or accepting
loans or deposits from others and company shall disclose the details of money so
accepted in the Board’s report.

ix) Any amount raised by the issue of bonds or debentures secured by a first charge or a
charge ranking pari passu with the first charge on any assets referred to in Schedule III of
the Act excluding intangible assets of the company or bonds or debentures compulsorily
convertible into shares of the company within 10 years.

However, if such bonds or debentures are secured by the charge of any assets referred to
in Schedule III of the Act, excluding intantible assets, the amount of such bonds or
debentures shall not exceed the market value of such assets as assessed by a registered
valuer.

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x) Any amount raised by issue of non-convertible debenture not constituting a charge on
the assets of the company and listed on a recognized stock exchanges as per applicable
regulations made by SEBI.

xi) Any amount received from an employee of the company not exceeding his annual
salary under a contract of employment with the company in the nature of non-interest
bearing security deposit.

xii) Any non-interest bearing amount received or held in trust.

xiii) Any amount received in the course of business or for the purpose of business of the
company:

a) as an advance for the supply of goods or provision of services and such advance is
appropriated against supply of goods or provision of services within a period of 365 days
from the date of acceptance of such advance. However, in case of any advance which is
subject matter of any legal proceedings before any court of law, the said time limit of 365
days shall not apply.

b) Advance received in connection with consideration for an immovable property under

an agreement provided that such advance is adjusted against such property in accordance
with the terms of agreement.

c) Advance received under long term projects for supply of capital goods except those
covered under item (b) above.

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However, it is clarified that if the amount received under item (a), (b) and (c) above
becomes refundable (with or without interest) due to the reasons that the company
accepting the money does not have necessary permissions or approval, to deal in the
goods or properties or services for which the money is taken, then the amount received
shall be deemed to be a deposit under these rules.

Further, by way of explanation it is clarified that for the purpose of this rule the amount
shall be deemed to be deposit on the expiry of fifteen days from the date they become due
for refund.

d) Security deposit for the performance of the contract for supply of goods or provision
of services.

e) Advance received for providing services in the form of a warranty or maintenance

contract, if the period for providing such services does not exceed the period prevalent as
per common business practice or five years, from the date of acceptance of such service
whichever is less.

f) Advance received and allowed by any sectoral regulator or in accordance with

directions of Central or State Government.

g) Advance for subscription towards publication, whether in print or in electronic to be

adjusted against receipt of such publications.

xiv) Any amount brought in by the promoters of the company by way of unsecured loan
subject to the fulfillment of following conditions:

a) the loan is brought because of the stipulation imposed by the lending institutions on the
promoters to contribute such finance

b) the loan is provided by the promoters themselves or by their relatives or by both; and

c)such exemption shall be available only till the loan of financial institution or bank are
repaid and not thereafter.

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xv) Any amount accepted by a Nidhi company in accordance with the rules made under
section 406 of the Act.

xvi) Any amount received by way of subscription in respect of a chit under the Chi Fund
Act, 1982.

xvii) Any amount received by the company under any collective investment scheme in
compliance with regulations framed by the SEBI.

xviii) An amount of 25 lakhs rupees or more received by a start-up company, by way of a

convertible note (convertible into equity shares or repayable within a period not
exceeding 10 years from the date of issue) in a single tranche, from a person.

Explanations:

1) “Start-up company” means a private company incorporated under the Companies Act,
2013 or Companies Act, 1956 and recognized as such in accordance with Notification
dated 19-02-2019 issued by the Department for promotion of industry and internal trade.

2) “Convertible note” means an instrument evidencing receipt of money initially as a

debt, which is repayable at the option of the holder, or which is convertible into such
number of equity shares of the start – up company upon occurrence of specified events
and as per the other terms and conditions agreed to and indicated in the instrument.

xix) Any amount received by a company from alternative investment funds, domestic
venture capital funds, infrastructure investment trust, real estate investment trust and
mutual funds registered with the SEBI in accordance with regulations made by it.

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Definition of depositor:

The term Depositor means:

a) any member of the company who has made a deposit with the company in accordance
with the provisions of Section – 73 (2)

b) Any person who has made a deposit with a public company in accordance with the
provisions of Section -76

In other words:

Any member of a private company or public company who has deposited money with his
company is a “depositor”

Any person (even if not a member of the company) who has deposited money with a
public company is also a “depositor”.

Acceptance of deposits from members Section – 73(2)

Note: Both public companies & private companies can accept deposits from members.

Company can accept deposits from members subjected to compliance of below

specified conditions:

1. Required Resolution to be passed in general meeting for acceptance of deposits from

members.

2. Insurance of Circular:

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a) Company shall prepare a circular in Form DPT – 1.

b) Circular shall state below specified particulars:

Financial Credit rating Amount of deposits previously accepted &

position of the obtained names of the depositors.
company
c) Circular must be sent to members through registered post (or) speed post (or)
electronic means.

d) Circular must be published in English Newspaper & Vernacular Newspapers which are
circulated in the state where registered office of the company is situated.

e) Certificate of statutory auditor must be attached to circular. This certificate must state
that company has not defaulted in repayment of deposit (or) interest thereon. If default
was made then period of 5 years must have been elapsed from the date on which default
was remedied.

f) Authorized authority of issue of circular is Board of Directors.

g) The Advertisement shall remain valid at the earliest of below specified dates:

➢ Up to six months from the closure of FY in which it is issued.

➢ The date on which AGM was conducted

(If AGM was not conducted, the last date on which AGM must have been conducted is
considered).

h) If the company wants to accept deposits after validity period of circular, then company
shall prepare new circular.

i) Copy of circular shall be filed with ROC within 30 days from the date of issue of
circular to members.

3. Requirement of DRR A/C (Deposit Repayment Reserve):

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On (or) before 30th April of every financial year, company must deposit the amount in the
Bank A/c maintained with Scheduled Bank, which shall not be less than 20% of deposits
maturing in the following FY. It should be utilized for repayment of deposit.

4. Provision of security:

The company may provide security for the due repayment of the amount of deposit or the
interest thereon. If security is provided, the company shall take steps for the creation of
charge on the property or assets of the company.

It may be noted that in case a company does not secure the deposits or secures such
deposits partially, then the deposits shall be termed as unsecured deposits. It shall be
quoted in every circular or advertisement in any document relating to invitation or
acceptance of deposits.

5. Tenure for which deposits can be accepted:

a) A company is not permitted to accept or renew deposits (whether secured or

unsecured) which is repayable on demand or in less than 6 months. Further, the
maximum period of acceptance of deposit cannot exceed 36 months.

b) However, company can accept deposits for a period less than 6 months but it should
not be less than 3 months.

c) The amount of deposits accepted for a period of less than 6 months shall not exceed
10% of aggregate of paid-up share capital, Free Reserves & Securities Premium.

6. Maximum Amounts of deposits from members:

a) In case of public company, acceptance of deposits from members shall not exceed 35%
of aggregate of paid-up share capital, Free Reserves & Security Premium.

b) In case of private company, acceptance of deposits from members shall not exceed
100% of aggregate of paid-up share capital, Free Reserves & Security Premium.

c) No maximum limit in respect of acceptance of deposits from members for the below
specified private companies: ↓

A private company which is a startup A private company

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 company, for a period of 5 years from a) Which is not a subsidiary (or)
the date of its incorporation. associate of any other company.
b) Borrowings from bank (or) FI (or)
Body Corporates is less than twice
of paid-up share capital (or) Rs. 50
Crores. WEL.

6) Ceiling rate of interest & Brokerage payable on deposits:

a) A company can pay any rate of interest on deposits (or) brokerage on acceptance of
deposits which shall not exceed the rate of interest (or) brokerage specified by R.B.I. in
case of non-banking financing companies for acceptance of deposits.

b) Brokerage can be paid only to the persons who are authorized to solicit deposits from
the members of the company on behalf of company.

7) Application form for deposits:

a) If any person wants to deposit the money with the company, he shall submit an
application form to the company which will be provided by the company to the proposed
depositor.

b) In the application form there must be a Declaration that deposits are made not out of
borrowings.

8) Deposits in Joint Names:

a) In case the depositor so desire, deposits may be accept in joint names not exceeding
three. A joint deposit may be accepted with or without any of the clauses, namely,
“jointly”, “either or survivor”, “first named or survivor”. These clauses operate on
maturity.

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9) Nomination:

a) Nomination refers to the process of specifying name of the nominee.

b) Depositor can make the nomination at any point of time.

c) Deposits will be vested with the nominee in the event of death of the depositor.

10) Deposit Receipt:

a) Company shall provide deposit receipt to the depositor or his agent within 21 days
from the date of receipt of cash (or) realization of cheque.

b) Deposit receipt must be signed by the authorized officer of the company.

c) Contents of Deposit Receipt:

• Name of the depositor

• Date of deposit
• Tenure
• Due date
• Rate of interest

11) Repayment of Deposits:

a) Company shall repay the deposits as per agreed terms & conditions.

b) If the company has defaulted to repay deposits as per agreed terms & conditions, the
depositors can make an appeal to the Tribunal. The Tribunal will pass an appropriate

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order for repayment (or) payment of damages for losses. For the delayed period company
shall pay penal interest @ 18% p.a.

12) Premature repayment of Deposits:

a) Premature repayment means making repayment of deposits before agreed due date.

b) Depositors can compel the company for premature repayment only after 6 months but
before agreed due date.

c) In case of premature repayment, Rate of Interest will be reduced by 1% from agreed

rate of interest.

d) While calculating the period for which interest to be paid, any portion of the year
which is less than 6 months must be ignored. If the portion of the year is 6 months or
more, it must be considered as a full year.

e) Reduction of rate of interest is not applicable in the following cases:↓

Where the premature repayment is made Where the premature repayment is made
for compliance of maximum limit in during the war time (war risk) to the
relation to acceptance of amount of personnel of Naval, Military (or) Air
deposits Forces.

13. Register of Deposits:

a) Every company accepting deposits shall maintain one or more separate registers for
deposits accepted or renewed at its registered office.

b) Following particulars shall be entered separately in the case of each depositor:

• name, address and PAN of depositor

• particulars of guardian, in case of a minor
• particulars of nominee
• deposit receipt number
• date and amount of each receipt
• Duration of the deposit and the date on which each deposit is repayable

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 • Rate of interest on such deposits to be payable to the depositor
• Due date for payment of interest
• Mandate and instructions for payment of interest and for non-deduction of tax at
source, if any
• Date or dates on which the payment of interest shall be made
• Particulars of security or charge created for repayment of deposits
• Any other relevant particulars

c) the entries shall be made within seven days from the date of issuance of the receipt
duly authenticated by a director or secretary of the company or by any other officer
authorized by the Board for this purpose.

d) the said register shall be preserved in good order for a period of not less than either
years from the financial year in which the latest entry is made in the register.

14) Deposit trustees (Appointment of trustees for Depositors):

a) Company shall appoint one (or) more trustees for creating security for deposits.

b) A written consent must be obtained before appointment of trustees.

c) It shall be specified in the circular that trustees are appointed & they have given their
consent to act as trustees.

d) Deposit trust deed must be executed in form DPT – 2, at least 7 days before issue of
circular. [Deposit trust deed consists of Rules & regulations to be followed by trustees for
protecting interest of depositors].

e) Below specified persons shall not be appointed as deposit trustees’:-

• KMP, Directors, Employees, Officers of the company (or) its holding company
(or) subsidiary company (or) associate company (or) depositors of the company or
their relatives.
• The person who is indebted to the company (or) its holding (or) subsidiary (or)
associate company or subsidiary of such holding company
• The person who is having pecuniary (Business Relationship) interest with the
company

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 • The person who has given guarantee in respect of deposits accepted by the
company

f) Trustees shall not be removed before expiry of their tenure unless with the consent of
all Directors at Board Meeting. In case the company is required to have independent
directors, at least one independent director shall be present in such meeting of the Board.

15) Return of Deposits:

a) A duly audited return of deposit in DPT – 3 containing particulars of deposits as on

31st March of every year, shall be filed with ROC on (or) before 30th June of that year.

It is clarified by way of explanation that DPT – 3 shall be used to include particulars of

deposits or particulars of transactions not considered as deposits or both by every
company (other than a Government company).

16) No right to alter:

The company has no right to alter any of the terms and conditions of the deposit, deposit
trust deed and deposit insurance contract which may prove detrimental to the interest of
the depositors after circular or circular in the form of advertisement is issued and deposits
are accepted.

17) Disclosures in financial statements:

A public company shall disclose in its financial statement by way of note about the
money received from its directors. In case of a private company it shall disclose in its
financial statements by way of note about the money received from the directors or the
relative of directors.

Exemptions to certain Private Companies:

Provisions with respect to issue of circular, filing the copy of such circular with the
registrar, depositing of certain amount and certification as to no default committed, shall
not apply to below specified private company:

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Acceptance of Deposits from Public by Eligible Companies (Section – 76)

1) Only eligible companies can accept deposits from the public.

2) A public company having net worth of not less than Rs. 100 Crores (or) turnover not
less than Rs. 500 Crores are called as eligible companies.

3) Eligible companies can accept deposits from the public subjected to compliance of
below specified provisions:

a) Passing of Special resolution:

The eligible company is required to obtain the prior consent by means of a special
resolution in general meeting and also file the said resolution with the ROC before
making any invitation to the public for acceptance of deposits.

However, an eligible company, which is accepting deposits within the limits specified
under section – 180 (1) (c ), may accept deposits by means of an ordinary resolution.

(b) Obtaining of credit rating:

• The eligible company shall be required to obtain the rating from a recognized
credit rating agency.
• The given rating which ensures adequate safety shall be informed to the public at
the time of invitation of deposits from the public. Further, the rating shall be
obtained every year during the tenure of deposits.

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 • Copy of the credit rating which is being obtained at least once in a year shall be
sent to the ROC along with the return of deposit in form DPT-3.
• The credit rating shall not be below the minimum investment grade rating or other
specified credit rating for fixed deposit. It shall be obtained from any one of the
approved credit rating agencies as specified for Non-Banking financial companies
in the NBFC acceptance of deposits (Reserve Bank) Directions, 1998, as amended
from time to time.

c) Charge creation on assets necessary if the deposits are secured:

• Every company which accept secured deposits from the public shall within 30
days such acceptance, create a charge in its assets.
• The amount of charge shall not be less than the amount of deposits accepted.
• The company accepting secured deposits shall create security by way of charge on
its tangible assets only.
• The company cannot create charge in intangible assets.
• Total value of security should not be less than the amount of deposits accepted
and interest payable thereon.
• The market value of assets subject to charge shall ne assessed by a registered
valuer.
• The security shall be created in favour of a trustee for the depositors on specific
movable and immovable property of the company.

d. Tenure for which deposits can be accepted:

a) A company is not permitted to accept or renew deposits (whether secured or

unsecured) which is repayable on demand or in less than 6 months. Further, the
maximum period of acceptance of deposit cannot exceed 36 months.

b) However, company can accept deposits for a period less than 6 months but it should
not be less than 3 months.

c) The amount of deposits accepted for a period of less than 6 months shall not exceed
10% of aggregate of paid-up share capital, Free Reserves & Securities Premium.

e) Deposit trustees (Appointment of trustees for Depositors):

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i) Company shall appoint one (or) more trustees for creating security for deposits.

ii) A written consent must be obtained before appointment of trustees.

iii) It shall be specified in the circular that trustees are appointed & they have given their
consent to act as trustees.

iv) Deposit trust deed must be executed in form DPT – 2, at least 7 days before issue of
circular. [Deposit trust deed consists of Rules & regulations to be followed by trustees for
protecting interest of depositors].

v) Below specified persons shall not be appointed as deposit trustees’:-

• KMP, Directors, Employees, Officers of the company (or) its holding company
(or) subsidiary company (or) associate company (or) depositors of the company or
their relatives.
• The person who is indebted to the company (or) its holding (or) subsidiary (or)
associate company or subsidiary of such holding company
• The person who is having pecuniary (Business Relationship) interest with the
company
• The person who has given guarantee in respect of deposits accepted by the
company

vi)Trustees shall not be removed before expiry of their tenure unless with the consent of
all Directors at Board Meeting. In case the company is required to have independent
directors, at least one independent director shall be present in such meeting of the Board.

f) Maximum amount of deposits:

An eligible company is permitted to accept or renew deposits as under:

i) From its member:

The amount of such deposit together with outstanding deposits from the members as on
the date of acceptance or renewal can be maximum 10% of the aggregate of its paid – up
share capital, free reserves and securities premium account.

ii) from persons other than its members: The amount of such deposit together with the
amount of outstanding deposits (excluding deposits from members) on the date of

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acceptance or renewal can be maximum 25 % of the aggregate of its paid up share
capital, free reserves and securities premium account.

g) Maximum amount of acceptable deposit in case of an eligible government

company: Such a company is permitted to accept or renew any deposit together with the
amount of other outstanding deposits as on the date of acceptance or renewal maximum
up to 35% of the aggregate of its paid – up share capital, free reserves and securities
premium account.

h) Issue of circular in the form of advertisement:

• An eligible company intending to invite deposits is required to issue a circular in

the form of an advertisement in DPT – 1.
• Such advertisement shall be published in English in an English newspaper and in
Vernacular language in a vernacular newspaper. Both newspapers should have
wide circulation in the state in which the registered office of the company is
situated.
• If the company has its website, the circular shall also be placed on the website.
• Such advertisement shall be issued on the authority and in the name of Board of
directors of the company.
• At lease thirty days before the issue of the advertisement, its copy duly signed by
a majority of the directors who approved the advertisement or otherwise signed by
their duly authorized agents is required to be delivered to the ROC for
registration.
• The advertisement shall remain valid till the earliest of the following dates:

i) up to six months from the closure of the financial year in which it is

issued; or

ii) the date on which the financial statements are laid before the company at
the AGM. In case no AGM has been held, the latest day on which the AGM
should have been held as per the relevant statutory provisions.

• Fresh Advertisement: A fresh advertisement shall be issued, in each succeeding

financial year, for inviting deposits during that financial year.

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 • Issue and effective dates: The date on which the advertisement appeared in the
newspaper shall be taken as the date of the issue of advertisement.

I) Ceiling rate of interest & Brokerage payable on deposits:

• A company can pay any rate of interest on deposits (or) brokerage on acceptance
of deposits which shall not exceed the rate of interest (or) brokerage specified by
R.B.I. in case of non-banking financing companies for acceptance of deposits.
• Brokerage can be paid only to the persons who are authorized to solicit deposits
from the members of the company on behalf of company.

J) Application form for deposits:

• If any person wants to deposit the money with the company, he shall submit an
application form to the company which will be provided by the company to the
proposed depositor.
• In the application form there must be a Declaration that deposits are made not out
of borrowings.

K) Deposits in Joint Names:

• In case the depositor so desire, deposits may be accept in joint names not
exceeding three. A joint deposit may be accepted with or without any of the
clauses, namely, “jointly”, “either or survivor”, “first named or survivor”. These
clauses operate on maturity.

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L) Nomination:

• Nomination refers to the process of specifying name of the nominee.

• Depositor can make the nomination at any point of time.
• Deposits will be vested with the nominee in the event of death of the depositor.

M) Deposit Receipt:

• Company shall provide deposit receipt to the depositor or his agent within 21 days
from the date of receipt of cash (or) realization of cheque.
• Deposit receipt must be signed by the authorized officer of the company.

Contents of Deposit Receipt:

• Name of the depositor

• Date of deposit
• Tenure
• Due date
• Rate of interest

N) Repayment of Deposits:

• Company shall repay the deposits as per agreed terms & conditions.
• If the company has defaulted to repay deposits as per agreed terms & conditions,
the depositors can make an appeal to the Tribunal. The Tribunal will pass an
appropriate order for repayment (or) payment of damages for losses. For the
delayed period company shall pay penal interest @ 18% p.a.

O) Premature repayment of Deposits:

a) Premature repayment means making repayment of deposits before agreed due date.

b) Depositors can compel the company for premature repayment only after 6 months but
before agreed due date.

c) In case of premature repayment, Rate of Interest will be reduced by 1% from agreed

rate of interest.

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d) While calculating the period for which interest to be paid, any portion of the year
which is less than 6 months must be ignored. If the portion of the year is 6 months or
more, it must be considered as a full year.

e) Reduction of rate of interest is not applicable in the following cases:↓

Where the premature repayment is made Where the premature repayment is made
for compliance of maximum limit in during the war time (war risk) to the
relation to acceptance of amount of personnel of Naval, Military (or) Air
deposits Forces.

P) Register of Deposits:

a) Every company accepting deposits shall maintain one or more separate registers for
deposits accepted or renewed at its registered office.

b) Following particulars shall be entered separately in the case of each depositor:

• name, address and PAN of depositor

• particulars of guardian, in case of a minor
• particulars of nominee
• deposit receipt number
• date and amount of each receipt
• Duration of the deposit and the date on which each deposit is repayable
• Rate of interest on such deposits to be payable to the depositor
• Due date for payment of interest
• Mandate and instructions for payment of interest and for non-deduction of tax at
source, if any
• Date or dates on which the payment of interest shall be made
• Particulars of security or charge created for repayment of deposits
• Any other relevant particulars

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c) the entries shall be made within seven days from the date of issuance of the receipt
duly authenticated by a director or secretary of the company or by any other officer
authorized by the Board for this purpose.

d) the said register shall be preserved in good order for a period of not less than either
years from the financial year in which the latest entry is made in the register.

Q) Return of Deposits:

a) A duly audited return of deposit in DPT – 3 containing particulars of deposits as on

31st March of every year, shall be filed with ROC on (or) before 30th June of that year.

It is clarified by way of explanation that DPT – 3 shall be used to include particulars of

deposits or particulars of transactions not considered as deposits or both by every
company (other than a Government company).

R) No right to alter:

The company has no right to alter any of the terms and conditions of the deposit, deposit
trust deed and deposit insurance contract which may prove detrimental to the interest of
the depositors after circular or circular in the form of advertisement is issued and deposits
are accepted.

S) Disclosures in financial statements:

A public company shall disclose in its financial statement by way of note about the
money received from its directors. In case of a private company it shall disclose in its
financial statements by way of note about the money received from the directors or the
relative of directors.

Punishment for violation of Section 73 and Section 76: (Section 76A)

Company shall be punishable with fine Rs. Officers to default

one Crore (or) twice of the amount of a) Imprisonment up to 7 years (or)
deposits accepted WEL, b) Fine

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 Min – Rs. 25 Lakhs
Max – Rs. 2 Crores (or)
Both

Repayment of deposits accepted before commencement of Companies Act, 2013

(Section – 74):

[Effective date of Commencement of Companies Act, 2013 with regard to acceptance of

deposits is → 01-04-2014].

1) The deposits which were accepted before Commencement of Companies Act, 2013
must be repaid as per agreed tenure & conditions (or) within 3 years from the
Commencement of Companies Act, 2013 whichever is earlier.

2) In case of non-compliance↓

Company shall be punishable with Officers to default shall be punishable with

fine c) Imprisonment up to 7 years (or)
Min → Rs. 1 Crore d) Fine
Min – Rs. 25 Lakhs
Max → Rs. 10 Crores
Max – Rs. 2 Crores (or)
Both

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2021 Dec

Answer:

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 95
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2021 May:

Answer:

2021 Jan

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Answer:

2020 NOV

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Answer:

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 Registration of charges:- Unit 6
Basic Points:

Meaning of Charges: It is refer to a process of creation of security (i.e. Company has

provided its property as a security to the lender in respect of amount borrowed).

The term ‘charge’ includes:

Pledge: Hypothecation: Mortgage:

Movable property given as Immovable property given

a security Movable property as security
given as a security

 Possession will be given  Possession will be with  Title Deeds of property

to under borrower only given to leader
Ex.: Gold Loan Ex.: Bike Loan from Ex.: land papers
S.B.I.

Types of charges:

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 Fixed Charges: Floating Charges:

 Where the property which is  Where the property which is subjected to charge is
subjected to charge is definite not definite / not certain property, then it is called
/certain property, then it is called fixed charge.
fixed charge. Ex.: Current Assets
Ex: Fixed Assets  Nature of property which is subjected to floating
 Nature of property which is change is being changed from one status to other
subjected to fixed charge is status.
remained unchanged.  Property which is subjected in floating charge can
 Property which is subjected to be sold even without the consent of charge holder.
fixed charge cannot be sold except  If company has defaulted to repay the loan
with the consent of charge holders amount, then charge holder cannot enforce the
(ten creditors) security. He shall file a suit against the company
 If company has defaulted to repay for enforcement of security. Court shall convert
the loan amount, then charge the floating charge into fixed charge for the
holder can enforce (take) the purpose of enforcement of security of floating
security & realise the security charge.
Duty to register the charges: [Section 77]
1. Every charge shall be registered with the ROC (whether charge is created in India or
outside India, whether property is in India or outside India).

2. Time limit for registration of charges:

Case I: When the charge is created before 2-11-2018

a) Charge shall be registered within 30 days of its creation. If the company has defaulted
to register the charges within 30 days, then it is allowed to register the charges within 300
days of its creation on payment of additional fees.

b) Where the Company has defaulted to register the charges within 300 days, then
Company can register the charges within 6 months from the date of 02-11-2018.

Case II – When the charge is created on or of the 02-11-2018

a) It shall be registered within 30 days of creation. In case of default to register the

charges within 30 days, it can be registered within 60 days of its creation on payment of
additional fees.

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b) In case of default within 60 days, company is allowed to register the charges within
further 60 days on payment of “Advalorem fees”.

3. Form of registration of charges:

a) Instrument of creation of charges shall be prepared in form no. CHG - 1 and it shall be
signed by company and charge holder.

b) Where the Company issued secured debentures, it shall be registered with ROC by
filing CHG – 9.
4. Verification of instrument of creation of charge:

Where the property is situated outside Where the property is situated partially
India. / totally in India.

It must be verified by a Director / It must be verified by a Director /

Secretary / Any Other Authorised Secretary (or) Authorised Officer (&)
Officer / charge holder and any other charge holder
person who is having interest in the
property.

5. Consequences of non-registration:

Unregistered charge is also treated as valid debt but unregistered charge holder doesn’t
have priority in the event of liquidation (i.e., unregistered charge holder is having status
of unsecured creditor)

6. Certification of registration of charges:

Where all the formalities are satisfied with regard to registration of charges, then ROC
shall complete the registration of charges and issues certificate of registration of charges
[CHG – 2] to the company and charge holder.

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2020 Nov

Answer:

------------------------------------------------------------------------------------------------------------

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2021 Jan

Answer:

Registration of charges by charge holder: [Section – 78]

1. Where the company has defaulted to the register the charges within 30 days then
charge holder can send an application to ROC for registration of charges.
2. ROC shall send notice to the company with regard to application sent by charge holder
before registration of charges based on application of charge holder.

3. ROC shall register the charges based on application sent by charge holder if company
has not raised any objection within 14 days of sending notice.

4. Charge holder can recover the expenditure incurred for registration of charges from the
company.

5. ROC shall reject the application sent by charge holder of company itself wants to
register charges.

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Modification of charge: [Section – 79]

Sec 79

Part – I Section - 79(a) Part – II Section - 79(b)

Acquisition of assets which is subjected Modification of charge:
to charge: Modification of charge means alteration
In this case, old charge shall be vacated of terms & condition of charges
as new charge is created. It shall be subsequent to creation of the charge
registered with ROC in accordance with with the mutual consent of company &
provisions of Section 77. charge holder.
→ It shall be registered within 30 days
from the date of modification.

If company defaulted to register the modification of charge within 30 days, then company
may be allowed to register within 300 days from the date of modification.

If all provisions are complied with, then ROC shall register the modification of charge
and issues certificate of modification of charge [CHG – 3].

Registration of charges is constituted as consecutive notice (deemed notice) [Section

80]

Once the charges are registered, it is having an effect that notice of creation of the charge
given to the public

Registration of satisfaction of charge: [Section 82]

1. Where the charge is satisfied in full, satisfaction of charge shall be registered with
ROC (CHG – 4) within 30 days of satisfaction. [Company can register within 300 days if
it has defaulted to do so within 30 days along with payment of additional fees]

2. Before registration of satisfaction of charge by ROC, the ROC shall give notice to the
charge holder and inviting objections, if any. ROC shall register the satisfaction of charge
and issues certificate of satisfaction of charge (CHG – 6) if charge holder has not raised
any objections within 14 days of sending notice.

3. Notice is not required to be sent to charge holder if application for registration of

satisfaction of charge is filed by charge holder.

4. Instrument of creation of the charges, modification of charges and satisfaction of

charges shall be maintained for a period of 8 years from the date of satisfaction.

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Power of ROC to register satisfaction of charge: [Section 83]

1. ROC has a right to register the satisfaction of charge even if intimation of satisfaction
of charge is not given by the Company or charge holder.
2. ROC must have received intimation of satisfaction of charge through reliable resources
for registration of satisfaction of charge on its own.

3. ROC shall give notice of registration of satisfaction of charge to the company and
charge holder within 30 days from the date of registration.
4. ROC shall give certificate of satisfaction of charge to the Company and charge holder
in Form No. CHG – 5

Notice of appointment of the receiver [Section 84]

1. Charge holder can appoint the receiver in respect of property which is subjected to
charge in beloved specified 2 cases: -

When it is specified in the instrument of When the charge-holder obtains order

creation of charge. from Court of Law.

2. After appointment of receiver, notice of appointment to be given to the company and

ROC in CHG – 6 within 30 days of appointment.

Punishment for contravention of provisions: [Section 86]

1. Where the Company has defaulted to comply with required provisions of charges then
Company shall be punishable with the penalty of not exceeding Rs. 5,00,000 and officers
in default shall be punishable with the penalty to the extent of Rs. 50,000.

2. If any officer intentionally providing false particulars to the ROC, then he shall be
punishable Under Section 447

Order of rectification of register of charges: [Section 87]

Where the Company has defaulted to register the modification of charge or satisfaction of
charge within the prescribed time limits, then CG may pass on order to ROC to enter the
particulars of modification or satisfaction even after prescribed time limits if application
is made by Company to the central government in CHG – 8 and showing appropriate
reasons.

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Definition of charge: 2(14)

It refers to creation of lien (pledge) or interest (Hypothecation) in respect of property (or)

assets of the company (or) undertakings (or) both as a security & includes mortgage.

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 Unit ‒ 7

MANAGEMENT AND ADMINISTRATION [Section 88 – 122]

Annual General meeting: (Section 96)

Types of meetings in case of company: -

Board Meetings Shareholders Meeting

General Meetings Class Meetings

1. Every company other than OPC shall conduct the AGM in respect of each and every
financial year.

2. Objectives of conductAGM
AGM:-
(Section 96) EGM (Section 100)

a) To give opportunity to the members to b) To allow the members for

raise queries about functioning of the participating in the decision making
company process.

3. Time limits for conducting AGM:

Case I: In case of first AGM

Gap between date of AGM and date of closing of financial year shall not exceed 9
months.

Case II: In case of subsequent AGM:

Subsequent AGM shall be conducted at the earliest of below specified 3 dates:

a) Gap between date of AGM and date of closing of financial year shall not exceed 6
months.

b) Gap between 2 AGMs shall not exceed 15 months.

c) There must be one AGM for every calendar year.

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4. Extension of Time Limit:

a) In relation to first AGM, ROC shall not extend time limit.

b) In relation to subsequent AGMs, ROC may extend the time limit by a period not
exceeding 3 months on showing appropriate reasons.

5. Date, time and place of conducting AGM:

a) AGM can be conducted on any date which shall not be the national holiday.

b) AGM shall be conducted during business hours. (9 A.M. – 6 P.M.)

c) AGM shall be conducted at the registered office of the company or at some other place
within the same city or town before the registered office of the company is situated.

Exceptions:

a) Unlisted companies may conduct AGM at any place in India provided approval of
members shall be obtained in advance.

b) Central government may grant exemption to any company from applicability of

provisions with regard to date, time and place on showing appropriate reasons.

2021 July

Answer:

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Notice of General meeting: [Section 101]

1. Where the company wants to conduct general meeting, it shall give not less than 21
days notice to its members. 21 days must be interpreted as 21 clear days.

2. “Clear days” refers to while calculating of No. of days, date of meeting and date of
sending the notice shall be extended.

3. Mode of sending notice of general meeting

By hand delivery Postal services Electronic means

4. Where the notice of general meeting is sent by postal services, then notice is deemed to
be reached on expiry of 48 hours.

5. Persons entitled to receive notice of GM:

a) Members
b) LR of deceased members
c) Official assignee of insolvent member
d) Directors
e) Auditors

6. Contents of notice of General meeting:

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a) Date, time and place of conducting GM.

b) Agenda (i.e., list of business matters to be transacted)

7. In case of accidental omission to give notice, then meeting will not be invalidated.
However, in case of deliberate omission to give notice, then meeting will be invalid.

Explanatory statement [Section 102]:

1. As per Section – 102 business matters which are transacted at AGM shall be classified
into 2 types

Ordinary Business Matters Special Business Matters

1. Adoption of financial statements Other than ordinary business matter any
including board report and auditors business matter is called as special
report business matter. Explanatory statement is
2. Declaration of dividend request to be added.
3. Appointment of auditor and fixing
remuneration
4. Appointment of Director in the place
of retiring Directors

2. Explanatory statement is not required to be added in notice of general meeting in case

of ordinary business matters.

3. In relation to EGM, all business matters shall be treated as special business matters and
explanatory statement is required to be added.

4. Contents of explanatory statements:

a) Interest of Directors, managers, KMP and their relatives in the proposed special
business matters.

b) Other relevant facts and information that enables members to understand the special
business matter properly.

c) Where the special business transaction is in the nature of dealing with the other
company and in that other company director, promoters, manager, KMP (or) their
relatives holding ≥ 2% of paid-up share capital, then such fact must be disclosed.

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d) Where the special business transaction is in the nature of approval of any document,
then the place, time and date where such document can be inspected by members before
the date of meeting shall be specified.

5. Consequences of non- disclosure:

a) Directors, Manager, Promoter, KMP (or) their relatives shall compensate the company
in respect of benefit received without disclosure.

b) Penalty: They shall be punishable with the penalty of Rs. 50,000 (or) 5 times of benefit
received whichever is the higher.

Extraordinary General Meeting: [Section 100]

1. EGM by Board:

a) EGM is also called as additional shareholders meeting. It is conducted in between two

AGMs.

b) EGM will be conducted to transact urgent business matter which cannot be postponed
till the next AGM.

c) Generally, BOD is authorized to conduct EGM for transacting urgent business matters.

2. EGM by requisition:

a) Members of the company who are holding ≥ 10% of paid-up share capital (or) voting
rights can deposit requisition at the registered office of company, for conducting EGM

b) Company shall proceed to conduct the EGM within 21 days & EGM shall be
conducted within 45 days from the date of depositing the requisition.

c) Where the BOD has defaulted to conduct the EGM within 45 days, then requistionists
can conduct EGM within 3 months from the date of depositing requisition. They shall
conduct EGM in accordance with provisions of Companies Act, 2013.
d) Company shall compensate the requisitionists in respect of expenses incurred for
conducting EGM. The same amount will be recovered by the company from director’s
remuneration.

2021 Dec

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Answer:

Quorum [Section – 103]

1. Meaning of quorum:

Min No. of members required to be presented at GM for transacting business matters. If

any resolutions are passed without required quorum, then such resolutions are invalid.

2. Quorum size:

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Unless AOA otherwise specified

a) In case of Private Company – 2 members

b) In case of Public Company –

When No. of members ≤ When No. of When No. of members >

1000 members > 1000 ≤ 5000
Quorum Size: 5 Member 5000
Quorum Size: 15 Quorum Size: 30 Members
Member

Note: However, AOA may specify the higher quorum \

3. Required Quorum to be presented within half – an – hour from specified time. Where
the required quorum is not presented within half an hour then

In case of EGM by In case of AGM or EGM by Board, Meeting

requisition will be adjourned to same day, same time and
Meeting is automatically place in the next week unless some other day
dissolved decided by BOD

4. Company shall give not less than 3 days’ notice to the members in respect of adjourned
meeting. If it is not practicable to give individual notices, then notice can be published in
2 newspapers (one vernacular language and English language).

5. If the required quorum is not presented even at adjourned meeting, then the members
attended shall be treated as valid quorum.

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Answer:

Proxy [Section – 105]

1. Proxy refers to an agent or representative of member of the company. He is appointed

for attending GM and exercising voting rights on behalf of member of the Company

2. Proxy need not be the member of the company.

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3. A person can act as a proxy for not more than 50 members. Where two or more
members appoint same person as a proxy, then paid-up share capital held by two or more
members shall not exceed 10% of total paid-up share capital

4. Where any member holds more than 10% of paid-up share capital and appoints other
person as a proxy and such other person shall not act as a proxy for other members

5. Proxy (MGT – 11) form shall be deposited at the registered office of the company at
least 48 hours before the meeting. Where the AOA specified that proxy is required to be
deposited more than 48 hours before the meeting, then it shall be considered as invalid.

6. In the notice of General meeting, company shall specify that every member has a right
to appoint the proxy.

7. Abilities and inabilities of the proxy:

• He can attend GM • He is not considered for the

• He can demand a poll purpose quorum
• He can exercise voting rights in the • He cannot exercise VR in show of
poll process hands process
• He cannot speak at the general
meeting

8. Any member can inspect the proxies which are deposited with the company during 24
hours before the meeting and at the time of conclusion of meeting provided he shall give
not less than 3 days of his intention to do so.

9. Revocation of proxy:

a) Where the new proxy is appointed, then old proxy is automatically revoked. However,
new proxy is valid if it is deposited at least 48 hours before the meeting.

b) If member personally attends the meeting, proxy is automatically revoked unless proxy
has not exercised voting rights (if proxy exercises voting rights proxy is not revoked).

Answer:
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Representative of President of India and Governor of state (Section – 112)

He can exercise the rights at the general meeting as of member of the Company (He has
same rights like that of a member).

Representative of Body corporate: (Section 113)

Representative of body corporate is having same rights at general meeting as of members

of the Company (No inabilities).

Modes of Exercising Voting Rights: [Section 107 to 110]

1. Meaning of VR:

It refers to process of giving assent or dissent by the members in respect of resolutions

proposed by Board of Directors.

2. No. of methods of exercising voting rights:

Section 107 Section 108 Section 109 Section 110

Voting by show of Voting by Voting by poll Resolution by
hands electronic means Postal Ballot

Voting by Show of hands [Section 107]

1. Generally every resolution at GM will be transacted through show of hands process

because it is more time saving and economical.
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2. Only the members who attended the meeting in person can only exercise voting rights
in show of hands process.

3. Every member is entitled for only one voting right not withstanding of paid-up share
capital held by members.

Voting by Poll [Section 109]

1. Chairman of the GM has to conduct the poll process if it is demanded by members (or)
proxies who are holding net less than 10% of paid-up share capital (or) 5,00,000 paid up
of share capital.

2. Members / proxies can demand the poll process on or before declaration of result of
show of hands process.

3. Members (or) proxies whoever demanded the poll process, they can withdraw their
demand before starting the poll process.

4. Chairman shall conduct the poll process within 48 hours from the time of demand.
However, in the below specified 2 cases poll must be conducted immediately:

When the poll is demanded on account When the poll is demanded on the
of adjournment of meeting account of electron of Chairman

5. Scrutinizer:

a) Chairman shall appoint required No. of scrutinizers.

b) Duties of scrutinizers:

• He shall prepare poll papers [MGT – 12]

• Distribute poll papers to members and proxies.

• He shall prepare the report after completion of poll process [MGT – 13]

• He shall forward the report to Chairman within 7 days

• Chairman shall declare the result of poll process based on report of the scrutinizer

Voting by Electronic Means [Section 108]

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1. It is applicable to listed public companies and other companies where the No. of
members are 1000 or more.

2. Provision of Sections 107 and 109 are not applicable to the companies if provisions of
Section 108 are applicable.

3. Procedure to be followed for transacting business matters through electronic means:

a) In the notice of general meeting, company shall state that members are entitled to
exercise voting rights through electronic means.

b) Company shall state the procedure to be followed for exercising VR through electronic
means.
c) Members can exercise VR either through remote e – voting (or) at general meeting by
means of attending the GM.

d) Where any member has exercised VR through electronic means, then he is not allowed
to exercise VR at general meeting but he is allowed to attend GM.

e) Notice of GM shall be sent through electronic means, registered post, speed post (or)
courier service.

f) Notice of GM must be kept in the website of the Company.

g) Notice of GM must be published in 2 newspapers (one vernacular language and one

English language) which are being circulated in the district where the registered office of
the Company is situated.

h) Remote e-voting facility shall be given for a period not less than 3 days and it shall be
closed at 5 p.m. of preceding day of general meeting. (it should be opened at least 3 days
before GM).

i) Cut - off date shall not be earlier than 7 days before the date of GM (No transfer of
shares should be done 7 days prior to GM).

j) In this case, Chairman of the GM shall decide whether resolution is passed or not based
on total VR (Total VR includes VR exercised through remote and VR exercised at GM).

2021 Dec

Answer:
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Chairman of the meeting: [Section 104]

1. Generally, name of Chairman of meeting is specified in the AOA.

2. Where the name of the Chairman is not specified in the AOA (or) Chairman has not
attended the meeting within half – an – hour:

a) Members whoever attended the meeting, one among themselves shall be elected as a
Chairman by show of hands.

b) After election of the Chairman by show of hands, if poll is demanded, then the
Chairman who is elected by show of hands process shall conduct the poll process
immediately.

c) The person who is elected as a Chairman by poll process shall act as a Chairman for
the rest of meeting.

3. Duty of Chairman:

a) He shall ensure that meeting shall be conducted in accordance with provisions of

Companies Act, 2013.
b) Chairman shall maintain decorum at the meeting.

c) Casting vote (2nd vote / additional vote):

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Chairman is entitled for casting vote if it is authorized by AOA. Chairman can exercise
casting vote when No. of votes cast in favor of resolution is equal to No. of votes cast
against resolution, in order to decide the resolution.

Types of resolutions [Section 114]

Ordinary Resolution Special Resolution

(> 50%) (≥ 75%)
When No. of votes cast in favour of Where the No. of votes cast in favour of
resolution is more than No. of votes cast resolution is not less than 3 times of No.
against the resolution, then OR is said to of votes cast against the resolution, then
be passed. SR is said to be passed.

Restriction on voting rights: [Section 106]

1. Where it is specified in the AOA, then Company can restrict its members from
exercising VR only in the below specified 2 cases:

a) When the member has defaulted to pay call money on shares (where there are call in
arrears)

b) When the Company is exercising lien on shares.

2. Other Points:

a) Where the forfeited shares are reissued as partly paid up shares, then new shareholder
is also not entitled to exercise voting rights until the unpaid portion is paid.

2. In case of joint shareholding, the priority in which the joint shareholders names are
entered in the register of member, in that priority order only joint shareholders can
exercise voting rights.

Resolution passed in adjourned meeting [Section – 116]

If any resolution is passed in at adjourned meeting, it shall be treated that resolution is

passed at adjourned meeting only, but not at earlier date.

Resolution requiring special notice [Section 115]

1. AOA may authorize its members to send special notice with regard to below specified
matters for transacting at the AGM:

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a) Proposing that a particular person to be appointed auditor in place of retiring auditor.

b) Proposing that retiring auditor shall not be reappointed

c) Removal of Director before expiry of term.

d) Appointment of a particular person as a director in place of retiring director.

2. Special notice can be sent by one (or) more members who are holding not less than 1%
of paid-up share capital (or) 5,00,000 whatever the case may be.

3. Members shall send the special notice to the company not earlier than 3 months before
the meeting (or) at least 14 days before the meeting.

4. Company shall send copy of special notice to the members at least 7 days before the
meeting. If it is not practicable to send individual notices, then Company can publish
special notice in 2 newspapers at least 7 days before the meeting.

Minutes: [Section 118]

1. Minutes refer to summary of proceedings of meeting.

2. Distinct book shall be maintained for minutes. Separate minutes to be maintained in

respect of

• General meeting

• Class meeting

• BOD meeting

• Committee meeting

3. Minutes shall consist of true and fair summary of proceedings of the meeting. Where
the Chairman of General meeting is of the opinion that matters entered in the minutes is
in the nature of ‒

a) Defamatory of any person

b) Irrelevant (or) immaterial

c) Detrimental to the interest of the company, then such matters shall be removed from
the minutes. Chairman is having absolute discretion with regard tic contents of minutes.

4. Minutes shall be prepared within 30 days from the date of conclusion of meeting. Each
and every page of minutes shall be initiated and last page of minutes shall be signed by

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Chairman of the meeting within 30 days. In the event of death of the Chairman or
inability of Chairman, then it shall be signed by any Director who is authorized by BOD.

2021 Jan

Answer:

Inspection of minutes of General meeting [Section 119]

It shall be maintained at It is a permanent It shall be under the custody

registered office of the Law record of CS (or) any Director as
authorized by BOD

Minutes of Board meeting:

• It shall be maintained at the registered office of the company or some other place
as authorized by BOD.

• It is permanent record.

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 • It shall be under the custody of CS (or) any director as authorized by Board of
Directors.

Inspection of minutes:

1. Members can inspect the minutes of GM at registered office of the Company during
business hours. However, company can specify the reasonable restrictions with regard to
inspection of minutes.

2. Company shall give not less than 2 hours time for inspection of minutes. Inspection of
minutes by member shall be at free of cost.

Copies of minutes:

1. Company shall provide copy of minute of general meeting within 7 working days from
the date of the request on payment of prescribed fees. Fees shall not exceed Rs. 10 per
page (or) part of page.

2. If Company has defaulted to provide copy of minutes, member can make an appeal to
Tribunal. Company shall provide copy of minutes immediately after order is passed by
Tribunal.

Soft copies:

1. Member can request the company to provide soft copy of minutes of GM of immediate
preceding 3 years. Company shall provide within 7 working days from the date of
request, at free of cost.

2021 July

Answer:

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Voting by Postal Ballot: [Section 110]

1. Definition of Postal Ballot: postal ballot includes voting by post (or) electronic means

2. It is not applicable below specified companies:

a) Company to which Section 108 is applicable

b) The companies where the No. of members not exceeding 200

3. List of business matters to be transacted through postal ballot:

a) Alteration of object clause

b) Change of registered office of the company outside local limits

c) Buy back of shares

d) Conversion of Private Company into Public Company or vice – versa

e) For variation of rights of shareholder.

f) For issue of shares with differential rights.

g) For appointment of the small shareholder director

h) For granting of loans to directors exceeding the specified limits.

i) For sale of whole or substantially whole of the undertaking

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4. Procedure to be followed for passing of resolution through PB:

a) Notice of postal ballot shall be sent to members of the Company either by registered
post / speed post / Electronic means / Courier service.

b) Notice of postal ballot shall state that members shall send their assent or dissent within
30 days from the date of sending notice.

c) Notice of PB must be kept in the website of the company. It must be published in 2

newspapers

d) If member is sending his assent or dissent after 30 days, it shall not be considered.

e) Chairman shall appoint the one scrutinizer for passing resolution through postal ballot.

f) Scrutinizer shall prepare the report within 7 days from the date of expiry of 30 days,
based on postal ballot papers received from members.

g) Chairman shall declare whether resolution is passed or not, based on repost of

scrutinizer.

5. Company can transact any other business matter through postal ballot except below
specified matters:

Ordinary Business Matters Any other business matter in respect of which

Directors (or) auditors has a right to be heard

Report on AGM: [Section 121]

1. Section 121 is applicable to listed companies. Company shall prepare the report on
AGM in the Form No: MGT – 15. It shall be filed with ROC within 30 days from the
date of conclusion of AGM.

2. It shall be signed by Chairman of AGM. In the event of death or inability of Chairman,

then it shall be signed by 2 Directors and one of them shall be Managing Director. In case
of no managing director, report on AGM shall be signed by one director and company
secretary.

3. Contents of report on AGM:

a) Date, time and place of meeting

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b) Confirmation of appointment of Chairman

c) Confirmation of present of valid quorum.

d) No. of members attended the meeting

e) No. of business matters transacted

f) Result of transaction of business matters.

g) Other relevant particulars.

4. Report on AGM shall be prepared in addition to minutes of GM.

Minutes and inspection of registers in Electronic Form [Section 120]

1. In case of listed companies and other companies where the No. of members ≥ 1000,
required registers and documents may be maintained in electronic form

2. Where the documents / registers are maintained in electronic form, then the facility of
inspection shall also be provided in electronic form

3. Copies also required to be provided in E – form only and fees shall not exceed Rs. 10
per page (or) part of page.

Conducting the AGM by Tribunal [Section 97]

1. Where the company did not conduct the AGM for any financial year, any member of
the company can send an application to Tribunal for conducting AGM.

2. Tribunal shall give appropriate directions to the company for conducting AGM.
Directors of the Company shall conduct the AGM in accordance with directions of
tribunal

3. Tribunal may give direction that one member or one proxy shall also be constituted as
valid quorum.

Conducting the EGM tribunal [Section 98]

1. Where it is not practicable for the directors or members to conduct EGM, then any
director or member can send an application to the tribunal for conducting EGM

2. Tribunal shall give appropriate directions for conducting EGM. Tribunal may give
direction that one member / proxy shall also be constituted as a valid quorum.

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Penalty for non – compliance of provisions of Section 96 – 98: [Section 99]

1. Where the company has defaulted to comply with provisions of Section 96 to 98, then
Company and officers in default shall be punishable with penalty not exceeding Rs.
1,00,000 and Rs. 5,000 for every day of default.

Register of members [Section – 88]

1. Every company shall maintain register of members in respect of every class of equity
shares and preference shares.

2. Register of members shall be maintained in the form MGT – 1.

3. Contents of register of members:

a) Name of the member

b) Date of allotment or transfer

c) No. of shares held.

d) Paid-up amount.

e) Address for correspondence

f) Particulars of nominee

g) Other important particulars.

3. Register of members shall be maintained at the registered office of the company

It may be kept at some other place within It may be kept at any place within India
the same city where registered office of provided more than 1/10th of the
the company is situated provided it shall members are residing at that place and it
be approved by SH by passing SR shall be approved by SR.

4. Where the No. of members in the company ≥ 50, company shall maintain index of
members also.

5. Particulars of the members residing in India and residing outside India shall be
maintained separately.

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6. Where the shares allotted or transferred in favor of any member are attached by Court
(or) any other competent authority, such particulars shall be entered in the register of
members

7. Foreign Register:

a) It is optional to maintain foreign register

b) Meaning of foreign register: Maintenance of register of member in any foreign

country where the members of the company are residing.

c) It is the part of principal register. Intimation shall be given to ROC within 30 days
from the date of maintenance of register (Notice shall be given in the Form No. MGT –
3).

d) Every entry in the foreign register shall be intimated to registered office within 15
days.

e) In case of discontinue of foreign register, then it shall be transferred to other foreign

register or principal register.

f) Particulars of members shall be entered in the register of members within 7 days from
the date of allotment or registration of transfer of shares.

g) Where the register of members is maintained by depositors (NSPL, (DSL), then it is

deemed to be maintained by the company.

8. Where the Company has issued the debentures, Company shall maintain register of
debenture holders in the Form No. MGT – 2 (Rules & Regulations to be followed for
maintenance of the MGT – 2 is same as of MGT – 1).

Declaration in respect of Beneficial Interest of any share [Section 89]

1. Meaning of beneficial interest: Where any person is entitled for benefits or right
attached to shares even if his name not entered in register of member, then he is called as
person holding beneficial interest.

2. The person whose name entered in register of member but not entitled for beneficial
interest, then he is called as registered owner. He shall give intimation to the company in
Form No. MGT – 4.

3. The person who is holding beneficial interest shall give intimation to the company in
the Form No. MGT – 5.

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4. The Company shall give notice of beneficial interest to the ROC within 30 days from
the date of receiving intimation from registered owner and other person who is holding
beneficial interest.

5. Where intimation of beneficial interest is not given to the Company, then benefits of
the shares will be entitled by Registered Owner.

Power to close Register of Members (or) Register of DH: [Section 91]

1. Company can close its register of member or register of DH for a period not exceeding
45 days in a year but one time not exceeding 30 days provided below specified conditions
to be satisfied:

a) Company shall give not less than 7 days’ notice to its members (or) DH

b) In case of listed company or proposed listed Company, notice shall be kept in website
and notice shall be published in 2 newspapers.

Annual Return: [Section 92]

1. Every company shall file Annual Return with ROC in respect of each and every
financial year.

2. Time Limit:

a) Annual return shall be filed with ROC within 60 days from the date of conducting
AGM.

b) Where the AGM was not conducted then annual return shall be filed with ROC within
60 days from the date on which AGM must be conducted.

3. Form of annual return:

In case of OPC, small companies and In case of Other Companies

start up Private Companies

MGT – 7A MGT – 7

4. Contents of Annual Return:

Below specified particulars to be added which were stood at the closing of financial year:

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a) Registered office, principal business activities, particulars of holding company,
subsidiary company and associate company.

b) Shares, debentures and other securities and shareholding pattern.

c) Its members and debenture holders and any changes therein since the date of closing of
previous financial year

d) Promoters, directors and KMP along with changes there in since the close of previous
financial year

e) Remuneration to Directors and KMP (total remuneration of directors in case of Private

Company)

f) Meetings of members, directors and any other meetings and attendance there of

g) Penalty and punishments imposed on the company, directors and officers and
compounding of offences and appeal to tribunal against penalties or punishments

h) Certification of compliance of provisions

i) Particulars of foreign institutional buyers

j) Any other important relevant particulars.

5. Signing of Annual Return:

In case of OPC / Small company In case of Other Companies

To be shall be signed by CS. If no CS, it Annual return shall be signed by a

shall be signed by a Director Director and CS. If there is no CS, it shall
be signed by CS in the practice.

6. Certification of Annual Return:

a) Where the Company is a listed Company (or) other companies in which paid-up share
capital is 10 Crores and more (or) turnover is 50 Crores or more, annual return shall be
certified by CS in practice in the Form No. MGT – 8.

b) CS in practice shall certify that annual return is prepared in accordance with the
provisions of Companies Act. Copy of MGT – 8 shall be filed with ROC along with
annual return.

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Place of keeping and inspection of Registers, Returns etc. [Section 94]

a) Registers specified u/s 88 and copy of Annual return shall be kept at the registered
office of the company.

b) These returns and registers may be maintained at any other place within India provided
it must be approved by SH by passing SR and more than 1/10 th of members of the
company residing at that place.

c) Members or debenture holders can inspect the registers & returns at free of cost during
business hours on working days.

d) Other persons can inspect the same on payment of prescribed fees which shall not
exceed 50/- per inspection.

e) Members or DH can take copy of registers and returns on payment of the fees which
shall not exceed Rs. 10 per page or part of page. Copies shall be provided within 7
working days from the date of demand.

f) Company can specify reasonable restrictions with regard to registers and returns.
Company shall provide not less than s hours’ time for inspection of RR.

g) Register of members is the permanent of record. Register of DH shall be maintained

for a period of 8 years from the date of redemption. Copy of annual return shall be
maintained for a period of 8 years from the date of filing to the ROC.

h) It shall be under the custody of CS or any other person authorized by the BOD.

Registers and returns to be evidences [Section – 95]

The matters entered in the registers and returns are prima facie true unless the contrary in
proved.

Applicability of the Chapter VII to OPC [Section – 122]

1. When the member of the OPC gives intimation to the company that ordinary resolution
is passed / SR is passed, then resolution is deemed to be passed on date of intimation.

2. The date on which mattes are entered in the minutes, on that date meeting is deemed to
be conducted. Minutes are to be signed by members.

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Unit – 8 Payment and declaration of Dividend: [Section 123 to 127]

Basic points:

1. Payment of dividend refers to appropriation of profits of the company to its owners

(or) members (or) equity shareholders.

2. Steps involved in the distribution of final dividend:

a) Dividend will be recommended by Board of Directors after closing of FY.

b) Dividend will be approved by equity share holders at AGM (Members cannot approve
the dividend rate which is beyond the rate recommended by Board of Directors)

c) Dividend shall be pad within 30 days from the date of declaration

3. Steps involved in payment of interim dividend:

a) Interim dividend refers to dividend declared and paid during the current FY in respect
of current financial year [another meaning: dividend is declared after closing of FY but
before AGM].

b) It is declared by BOD [No approval shareholders required]

c) AOA authorization is required

Procedure to be followed for declaration of dividend: - [Section 123]

1. Sources for payment of dividend:

• Current financial year profits after providing depreciation

• Accumulated profits

• Amount provided by Central Government/ State Government in pursuance of

guarantee made by Government.

Note:

• Free reserves shall be used for payment of dividend (operating profits)

• Revaluation Reserves (or) Notional Gains shall not be utilized for payment of
dividend.

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2. Restrictions on rate of dividend:

Case – I Case – II
When the company is paying When the company is paying dividend out of
dividend out of current previous year profits, below specified 3 restrictions
financial year profits → No to be complied with:
restrictions with regard to
rate of dividend but carry a) Rate of dividend shall not exceed the average
forward losses shall be set rate of dividend of preceding 3 financial years
off before utilizations of
current years’ profits for b) Amount withdrawn from the free reserves for
payment of dividend. payment of div shall not exceed 10% of aggregate
paid-up share capital & free reserves.

c) Balance of free reserves after withdrawn shall

not be less than 15% of paid-up share capital.

d) Amount withdrawn from the free reserves for

payment of dividend shall be first utilized for write
off of current years’ losses.

3. Above specified conditions are not applicable to government companies where 100%
of paid up share capital is held by Central Government (or) State Government.

4. Dividend shall be paid to the registered shareholders.

5. Amount of dividend shall be deposited in the bank A/c which is maintained with the
scheduled bank within 5 days from the date of declaration.

6. Mode of payment of dividend: Dividend shall be paid either by ‒

• Cash

• Cheque

• Dividend warrant

• Crediting Bank A/c of share holder

7. Prohibition for payment of dividend:

a) Where the company has defaulted to comply with provisions of Section 73 and Section
74, company shall not pay the dividend till the time of non – compliance.

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b) Section 8 companies are prohibited to pay the dividend.

8. Transfer of profits to reserves: There is no restriction for transfer of part of the

profits to reserves before declaration of dividend.

9. Interim dividend:

Whatever the provisions applicable for declaration and payment of final dividend, same
provisions are applicable for declaration and payment of interim dividend except below
specified provisions:

a) Sources for payment of interim dividend: -

Profits earned during the current financial year Accumulated profits

till the date of ending of preceding quarter
before the date of declaration of interim Where the company is
dividend. paying interim dividend out
of accumulated profits, the
dividend rate shall not
exceed average dividend
rate of preceding 3 years.

10. Dividend rate to be applied in proportion to nominal value but not in proportion to
market price.

Answer:

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------------------------------------------------------------------------------------------------------------

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Answer:

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Punishment for non – payment of dividend within 30 days of declaration: Section
127

1. Dividend shall be paid within 30 days from the date of declaration.

2. Where the company wants to pay the dividend through dividend warrants, then it shall
be sent within 30 days from the date of declaration. There is no non – compliance of the
provisions even if dividend warrant is not reached to members within 30 days provided it
must be sent within 30 days of declaration.

3. Punishment:

Punishment for Directors on default: Punishment for the company:

➢ Imprisonment up to 2 years Company shall pay 18% interest p.a. for
➢ Min penalty of 1000 per day for the the period securing which default
period of securing which default continues
continues

4. Exceptions from punishment:

In the below specified cases company and directors in default are not punishable even if
dividend is not paid within 30 days of declaration:

a) Where the dividend is not paid due to operation of law.

b) Where the dividend is not paid due to instructions given by the shareholders & such
instructions cannot be complied.

2021 July

Answer:

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2021 Dec:

Answers:

Unpaid Dividend Account: - [Section – 124]

1. Where the dividend is not paid or not claimed within 30 days from the date of
declaration, then unpaid (or) unclaimed dividend shall be transferred to separate Bank
account which is maintained with Scheduled Bank within 7 days from the date of expiry
of above said 30 days. This Bank account is called as unpaid dividend account.

2. Where there is any delay in transferring of unpaid or unclaimed dividend to the Bank
account, company shall transfer interest also @ 12% p.a. for the delayed period.
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3. The amount transferred to the account shall be utilized for payment of dividend to the
shareholders subsequently whenever the claim is made by shareholders.

4. Company shall prepare a report consisting of particulars of unpaid dividend within 90

days from the date of transfer of unpaid dividend to the unpaid dividend account and it
must be placed in the website of the company (or) some other website as specified by
Central Govt.

5. Where the unpaid dividend is not claimed by a shareholder for a period of 7 years from
the date of transfer of amount then such amount shall be credited to investor Education
Protection fund. Company shall also transfer shares to the IEPF in respect of dividend
was unpaid for 7 years.

Dividend held in Abeyance (suspension/ temporary postponement) [Section 126]

1. Where the shareholder has submitted instrument of transfer for registration of transfer
of shares & registration of transfer not yet effected before declaration of dividend, then
dividend shall be transferred to unpaid dividend account unless transferor has given
instruction to the company that dividend will be paid to transferee.

2. Where the shareholder has submitted instrument of transfer of shares and registration
of transfer of shares not yet effected before declaration of bonus shares or right shares,
then such bonus shares or right shares shall be held in abeyance. These bonus / right
shares shall be offered to transferee after completion of registration of transfer of shares.

Investor education and protection fund [Section – 125]

This section prescribes provisions to be complied with in relation to below specified

matters:

a) Source of funds (what are the amounts to be credited to IEPF Account)

b) Utilization of fund (what are the purposes for which fund to be utilized)

c) Administration of fund.

Part – 1 (Sources of funds)

Following amounts to be credited to the fund:

a) Amount given by the Central Government: The amount given by the Central
Government by way of grants after due appropriation made by Parliament.

b) Donations : Donations given by the Central Government, State Government,

companies or any other institutions for the purposes of the fund.

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c) Amount laying in the unpaid dividend account: The amount laying in the unpaid
dividend account of companies which is transferred by them to the fund under section
124.

d) Amount in IEPF: The amount laying in the investor education and protection fund
under section – 205C of the Companies Act, 1956.

e) Income from Investments: The interest or other income received out of investments
made from the fund.

f) Amount received through disgorgement of disposal of securities: Amount received

through disgorgement or disposal of securities seized from a person who has been
convicted for personation for acquisition of securities as provide under section – 38.

Note: Disgorgement is the legally enforced repayment of ill-gotten gains imposed on

wrongdoers by the courts.

g) Application money: The application money received by companies for allotment of

any securities and due for refund (only if such amount has remained unclaimed and
unpaid for a period of seven years from the date it became due for payment).

h) Matured deposits: Matured deposits with companies other than banking companies
(only if such amount has remained unclaimed and unpaid for a period of seven years
from the date it became due for payment).

i) Matured debentures: Matured debentures with companies (only if such amount has
remained unclaimed and unpaid for a period of seven years from the date it became due
for payment).

j) Interest: Interest accrued on the amount of matured deposits and matured debentures.
k) Amount received from sale proceeds: Amount received from sale proceeds of
fractional shares arising out of issuance of bonus shares, mergers and amalgamations for
seven or more years.

l) Redemption amount: Redemption amount of preference shares remaining unpaid or

unclaimed for seven or more years.

m) All those shares in whose case dividend have not been claimed or paid for seven
consecutive years or more, and all resultant benefits arising out of shares held by the
authority.

n) All grants, fees and charges received by the authority under these rules.

Part – 2 Utilization of the fund:

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Fund shall be utilized for the below specified purposes:

a) Refund of unclaimed dividends, matured deposits, matured debentures, the application

money due for refund and interest thereon.

b) Promotion of investor’s education, awareness and protection.

c) Distribution of any disgorged amount among eligible and identifiable applicants for
shares or debentures, shareholders, debenture holders or depositors who have suffered
losses due to wrong actions by any persons, in accordance with the orders made by the
court which had ordered disgorgement.

d) Reimbursement of legal expenses incurred in pursuing class action suits under section
– 37.

e) Any other purpose incidental thereto in accordance with the rules framed under the
Investor education and protection fund authority.

Part – 3: Other Provisions

a) In terms of Notification dated 13.01.2016, the Ministry of Corporate Affairs, an

authority is being constituted for the administration and maintenance of accounts as well
as other relevant records of the fund.

b) The Secretary, Minister of Corporate Affairs shall be the ex-officio chairperson of the
Authority. In addition, there shall be six members (maximum limit 7) and a chief
executive officer who shall be the convenor of the authority.

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c) The authority shall administer the Fund and maintain separate accounts and other
relevant records in relation to the fund in such form as may be prescribed after
consultation with the Comptroller and auditor general of India.

d) The accounts of the Fund shall be audited by the CAG at such intervals as may be
specified by him. Such audited accounts together with the audit report thereon shall be
forwarded annually by the authority to the CG.

Answer:

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 Accounts of the companies [Section 128 to 138]
Books of accounts to be maintained by the company [Section – 128]

1. Basic points:

a) Every company shall maintain books of accounts, books and papers in respect of each
& every FY

b) Definition of books of accounts [Section - 2(13)]

It includes records to be maintained in respect of

• Receipts & payments
• Assets & liabilities
• Sales & purchases
• Items of cost as specified u/s 148

c) Definition of books and papers [Section - 2 (12)]

It includes BOA, deeds, records, writings, minutes, vouches and other required
documents

d) BOA shall be prepared on accrual basis as in accordance with double entry system

e) Accounting transactions accounted for in books of accounts shall show true & fair
view.

2. Books of accounts of branch office:

a) Books of accounts of all branches shall be maintained in accordance with the above
specified Rules & Regulations.

b) Books of accounts of foreign branches shall be sent to the registered office of the
company once in a quarter.

3. Place of maintenance of Books of accounts:

a) Books of accounts and Books and papers shall be maintained at registered office of the
company.

b) Company may maintain the Books of accounts at some other place in India in
accordance with decision taken by BOD. Where the decision is taken, it shall be
communicated to ROC within 7 days from the date of taking decision taken in form
AOC – 5.

4. Persons responsible for maintenance of Books of accounts:

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Below specified persons are responsible for maintenance of Books of accounts:

a) Managing Director
b) Chief Financial Officer (CEO)
c) Whole Time Director (in charge of finance)
d) Any other authorized person by BOD

5. Inspection of Books of accounts by BOD:

a) Board of Director can inspect books of accounts during business hours.

b) BOD can inspect Books of accounts of subsidiary company also provided must be
authorized by board resolution.

c) Where any director of the company has requested the company to provide Books of
accounts of the company which are maintained outside India, then company shall provide
within 15 days of request. The director shall make the written request individually but not
through agent or power of attorney holders.

d) Employees & officers of the company who are responsible for preparation of Books of
accounts shall provide proper assistance to the directors in relation to inspection of Books
of accounts.

6. Period of maintenance of Books of accounts:

a) Company shall maintain BOA & books & papers for a period of 8 years immediately
preceding the relevant financial year.

b) Where the company has been incorporated for a period less than 8 years before the
current financial year, then company shall maintain Books of accounts & books and
papers of entire period of the company.

c) Where the investigation order passed against the company under Schedule – XIV by
Central Government then company shall maintain the Books of accounts for a period
more than 8 financial years.

7. Maintenance of BOA electronic made:

a) Company may maintain Books of accounts & books & papers in electronic mode.

b) Where the company wants to maintain Books of accounts in electronic form, below
specified provisions must be complied with:

i) Books of accounts maintained in electronic form must be accessible in India

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ii) Books of accounts & books & papers shall be maintained in original form in which it
is generated or sent or received

iii) Books of accounts and books & papers received from branches shall be maintained in
the original format in which it is received

iv) Books of accounts and books and papers must be capable of storage, retrieval,
copying & printout based on requirements.

v) Books of accounts and books & papers must be maintained in electronic devices where
it can be shown in legible form.

vi) Company shall maintain backup in servers which shall be located in India.

vii) Below Particulars of the service providers shall be informed to ROC annually:
• Name of service provider.
• IP address of service provider
• Particulars of the service provider
• Where Books of accounts are maintained in cloud, address of the cloud services.

viii) From the financial year beginning from 01/04/2022, where the company wants to
maintain BOA in electronic form, company shall use the software which must have the
feature of recording of Audit tail (Record of edit log).

Financial statements [Section – 129]

1. Basic points:

Every company shall prepare financial statements in respect of every financial year.

2. Definition of financial statements [Section - 2 (40)]

It includes

a) Balance sheet

b) Statement of profit & loss [Statement of income & expenditure in case of NPO]

c) Cash flow statement

d) Statement of changes in equity.

e) Explanatory notes with regard to above statements

However, in case of one person company, small company. dormant company and startup
private company, financial statements do not include cash flow statement.

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3. Definition of financial year [Section - 2 (41)]:

a) Financial year refers to the period ending on 31st March where the company is
incorporated on or after 1st Jan but before 31st March then financial year shall be ending
on 31st March of the following year.

b) Where one company is the holding (or) subsidiary (or) associate company of other
company which is incorporated in other country and such other company to require to
prepare consolidated financial statements for the period other than April to March, then
Central Government, based on application, may give permission to one company for
closing financial year other than on 31 st March.

4. Financial statements shall be prepared in accordance with Schedule III of companies

Act, 2013. Schedule III is divided into 2 parts.

Part – I Part – II
FS shall be prepared as per FS shall be prepared as per companies
companies (Accounting (Indian Accounting Standards) Rules, 2015.
Standard) Rules, 2006

5. Financial statements shall be prepared in such a manner that it shall provide true and
fair view of affairs of the company.

6. Non – applicability:

Above specified provisions are not required to be complied with by the below specified
companies:

a) Insurance Companies

b) Banking Companies

c) Electricity Companies

d) Any other clause of Companies for which any other special provisions are specified.

7.Laying of Financial statements:

At every AGM, BOD of the company shall lay the Financial statements before GM
8. Consolidated Financial statements:

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a) Where the company has one or more subsidiaries, then it shall prepare CFS along stand
alone for financial statements.

b) CFS shall be prepared in accordance with above specified Rules or Regulations.

c) Exemption from preparation of CFS:

If the below specified conditions are satisfied then company is not required to prepare
CFS:

i) Company shall be the subsidiary of other company, intimation shall be given to other
members that CFS will not be prepared and other members have not raised objections.

ii) Company shall not be the listed company (or) & not having proposal to list its shares.

iii) Ultimate holding company shall prepare CFS.

9. Other points:

a) Where the financial statements are prepared not in accordance with applicable
accounting standards then below specified particulars shall be disclosed in financial
statements:

i) Aspects of deviation

ii) Reasons for deviation

iii) Financial effect due to deviation

b) Central Government on its own (or) based on application sent by any company, it may
grant exemption from all (or) any provisions of Section – 129 in the public interest, either
conditionally (or) unconditionally.

Copy of FS to be filled with ROC [Section 137]

1. Every company shall file financial statements in the form: AOC – 4 and consolidated
financial statements in the form AOC - 4 CFS along with the required documents after
adoption of FS at the AGM, within 30 days from the date of conclusion of AGM.

2. XBRL form (extendable business reporting language):

As per companies (filing of documents and forms in XBRL form) rules 2015, below
specified companies shall prepare its financial statements in form: e – form AOC - 4
XBRL:

a) Companies listed in India and their Indian subsidiaries.

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b) Companies having paid-up share capital of 5 crores (or) more.

c) Companies having turnover of 100 crores (or) more

d) Companies which are required to prepare its financial in accordance with companies
(Indian Accounting Standard) Rules 2015.

Where any company which is required to prepare its financial statement in XBRL form in
respect of any financial year, then company shall prepare its financial statement in XBRL
form only in respect of every succeeding financial year even though required criteria is
not satisfied.

Below specified companies are not required to prepare its FS in XBRL form:

Non-Banking Housing Financing Company engaged in

Financial Co. (NBFC) companies (HFC) Business of Banking &
insurance sector

3. Accounts of foreign subsidiaries:

a) Where the company is having foreign subsidiary it shall file accounts of foreign
subsidiaries with ROC along with financial statements.
b) Where the accounts of foreign subsidiary are not subjected to audit as per applicable
rules of such foreign country then the company shall file unaudited accounts of foreign
subsidiaries.

c) Where the accounts of foreign subsidiaries prepared in other than English language
then the company shall file translated copy of accounts of foreign subsidiaries.

d) Where the accounts of the foreign subsidiaries are prepared not in accordance with
rules followed by the holding company then as far as possible, accounts of foreign
subsidiaries shall be prepared in accordance with rules followed by the company. If it is
not possible, company shall disclose the reasons.

4. Filling of FS by OPC:

Copy of financial statements shall be filed with ROC within 180 days from the date of
closure of the financial year.

5. Filing of FS in case of not conducting AGM:

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Where the company has defaulted to conduct the AGM in respect of any financial year
then company shall file copy of financial statements within 30 days from the last date on
which AGM must have been conducted.

6. Provisional FS (Unadopted FS):

Where the financial statements are not adopted at AGM then the unadopted financial
statement shall be filed with ROC as provisional financial statements within 30 days from
the date of conducting original AGM.

After adoption of financial statements at adjourned AGM, copy of adapted financial

statements shall be filed within 30 days from the date of adjourned AGM.

7. Other points (NBFC):

NBFC shall prepare its financial statements in the form: AOC - 4 NBFC & consolidated
financial statements in the form AOC - 4 CFS NBFC

Internal Auditor [Section 138]:

1. Meaning of Internal Audit:

It refers to the process of evaluation of efficiency and effectiveness of functions or

activities of the organization by the internal auditor.

2. Eligibility for appointment of internal auditor:

a) Internal auditor may be either individual (or) partnership firm (or) body corporate.

b) Internal auditor may be either CA (or) Cost Accountant (or) any Other professional as
decided by BOD.

c) Internal auditor need not be the employee

3. Appointment of Internal Auditor:

Below specified companies are required to appoint the Internal Auditor.

Listed a) Unlisted Co. where paid-up Private Co. ***

Companies share capital ≥ 50 Crores. a) Turnover 200 Crores during
(or) preceding FY
b) Turnover ≥ 200 Crores during (or)
the preceding financial year b) Outstanding loans and
(or) borrowings from banks (or)

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 c) Outstanding loans and financial institutions exceeding
borrowings from banks (or) 100 Crores on any day during
financial institutions the preceding FY
exceeding 100 Crores on any
day during the preceding FY
(or)
d) Outstanding deposits ≥ 25
Crores at any time during the
preceding FY

Answer:

2021 july

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Answer:

Right to receive copies of Fiancial statement: [Section 136]

1. Company shall send copy of financial statements including CFS, audit report and other
required documents to the members of the Company and trustees of debenture holders at
least 21 days before AGM.

2. However, the company may send copy of FS & other required documents even before
less than 21 days before the AGM provided it must be approved by majority of
shareholders who attended at the meeting and holding not less than 95% of paid-up share
capital of the members attended at the meeting.

3. Special provisions in case of listed companies:

a) Listed companies can keep the copy of financial statements and other required
documents at registered office for inspection during working hours at least 21 days before
the AGM.

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b) In this case, company shall prepare a document consisting salient features of financial
statements and other documents and it shall be sent to members and trustees of debenture
holders at least 21 days before the AGM.

c) Company shall provide copy of FS and other required documents to the members
whoever made the request to the company.

d) Company shall place the accounts of its subsidiaries in the website of company. Copy
of accounts of the subsidiaries shall be sent to the members provided request to be made
by members.

e) Where the foreign subsidiaries accounts are not subjected to audit then company shall
place the unaudited accounts of foreign subsidiaries.

f) Where the foreign subsidiaries prepared the accounts in the language other than
English then company shall place translated copy of accounts foreign subsidiaries.

4. Mode of sending the copy of FS:

In case of listed companies & other public companies having net worth exceeding 1
Crore and turnover exceeding 10 Crores, then in accordance with below specified
manner: -

By electronic mode by means of sending In other cases it is to be sent through the

e-mail to the registered mail address of mode specified Under Section 20 of
the members Companies Act, 2013.

Order of Tribunal (or) Order of Court to reopen books of accounts and recast of
financial statements [Section 130]

1. Tribunal or the Court of Law may pass the order to the company to reopen BOA &
recast the FS if complaints are made by the Central Government (or) Income Tax
Authorities (or) SEBI (or) any other statutory regulatory authorities against the company.

2. Before passing the order by the Court of Law (or) Tribunal, it shall take presentations
from the Central Govt. or Income Tax Authorities or SEBI or Any Other Statutory
Regulatory Authority

3. Court of Law can pass the order for reopen of books of accounts of not earlier than 8
previous years of current financial years. However, Court may pass the order to reopen
the books of accounts of earlier of 8 previous years when in company is required to
maintain the books of accounts for a period more than 8 years based on order of Central
Govt.

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Board Report [Section 134]

1. Steps to be followed for preparation of Board Report:

Step: 1 Preparation of financial statements including in the CFS, if any.

Step: 2 Financial statements must be approved by BOD before submission of financial

statements to auditors for starting the audit process.

Step: 3 Before submission of financial statement to the auditors, FS must be

authenticated by below specified persons:

• Chairperson as authorized by the Board

• If no chairperson, any two Directors and one of them shall be MD (Managing
Director)
• Chief Financial Officer (CFO)
• Chief Executive Officer (CEO)
• Company Secretary (CS)

Answer:

Step: 4 Auditor shall prepare the audit report based on financial statements.

Step: 5 Based on financial statements and Audit Report, the Directors of the company
shall prepare the Board Report.

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Step: 6 Financial Statements, Audit Report and Board Report shall be laid before the
AGM.

2. Contents of the board report:

i) Web address where the Annual Report is placed.

ii) Number of meetings of Board of Directors during the financial year

iii) Directors responsibility statement

iv) Details in respect of frauds reported by the Auditors.

v) A statement of declaration by the Independent Director

vi) Companies policy on appointment and fixing the remuneration of the directors.

vii) Amount proposed by directors with regard to declaration of dividend.

viii) Amount of loans, guarantees and investments Under Section 186

ix) Details of CSR activities of the company

x) Explanations with regard to qualifications made by auditor in the audit report.

xi) Contracts and arrangements with the related parties refereed Under Section 168 in the
form AOC – 2

xii) Statement of affairs of the company

xiii) Proposal of transfer of profits of the company to the reserves.

xiv) Particulars with regard to financial effect occurred after closing of financial year but
before preparation of Directors’ Report.

xv) Particulars with regard to conservation of energy, absorption of technology and

foreign exchange earnings and foreign exchange outflow during the financial year.

xvi) Other relevant particulars.

3. Contents of director’s responsibility statement:

a) It shall state that financial statements are prepared in accordance with applicable
accounting standards and reasons for deviations, if any

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b) It shall state that financial statements are prepared in accordance with the selected
accounting policies which are being followed consistently. Statement of profit and loss in
prepared on prudent basis by providing provisions for uncertain losses.

c) It shall state that internal financial controls are designed and implemented effectively.

d) It shall state that a particular system is designed for ensuring the compliance of
provisions of applicable laws and acts.

e) Any other relevant information

4. Signing of Board Report:

Board report is to be signed by chairperson as authorized by Board of Directors. If no

chairperson, it is to be signed by any 2 directors and one of whom shall be Managing
Director.

5. Exemption from preparation of Board Report: OPC and small companies are not
required to prepare the Board Report.

6. Abridged Board Report: The Central Government may prescribe an abridged

Board’s report for the purpose of compliance with this section by OPC or small company.

7. Board’s report in case of OPC: A board report containing explanations or comments

by the Board on every qualification, reservation or adverse remark or disclaimer made by
the auditor in his report.

Voluntary revision of FS and Board Report: [Section 131]

1. Board of Director can send an application to Tribunal for revision of financial

statements (or) Board Report in respect of preceding 3 financial years if financial
statements were not prepared as per sec – 129 (or) board report was not prepared as per
section - 134.

2. Tribunal shall take the representation of Central government and Income tax
authorities before giving permission for revision of financial statements (or) Board
Report.

3. The Company shall give intimation to ROC with regard to approval of the tribunal.

4. Company is allowed to revise the financial statements (or) Board Report of a particular
preceding year only once.

Constitution of NFRA (National Financial Reporting Authority) [Section -132]

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1. NFRA was constituted by the Central government by issue of notification (01/10/2018
w.e.f)

2. Objective of NFRA: It is constituted for providing matters in relation to accounting

and auditing standards.

3. Functions of NFRA:

a) Give recommendations to the Central Government on formulation and laying down of

accounting & auditing policies and accounting & auditing standards to be followed by
companies.

b) Monitor and ensure that compliance of accounting & auditing standards by the
companies or class of companies to which it is applicable.

c) Oversee the quality of services performed by the professional persons associated with
the ensuring the compliance of accounting standards and auditing standards.

d) Any other relevant matters relating to above specified 3 functions.

4. Powers of NFRA:

a) NFRA on its own (or) based on order passed by Central government it may conduct
investigation into the professional misconduct of the persons who are engaged in
ensuring the compliance of accounting standards and auditing standards.

b) If professional misconduct is proved then

In case of individual: In case of Audit Firm:
Penalty: Penalty:-
Min – 1 Lakh Min – 5 Lakhs
Max – 5 times of fees Max – 10 times of fees
[And]
Debarring from accepting any kind of audit for a period not less than 6 months & not
exceeding 10 years.

5. Composition of NFRA:

a) It consists of 1 chairperson who is the person of eminence in accounts, law, auditory

(or) Finance.

b) Other members not exceeding 15 members whether on fuel time or part time basis.

c) NFRA will discharge their functions through various divisions.

d) Head office of NFRA is situated in New Delhi.

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e) Accounts of NFRA it is to be prepared in accordance with rules framed by chair person
with consultation of CAG (Comptroller and auditor general of India)

f) Accounts of NFRA must be audited by CAG & audit report shall be forwarded to the
CG.

g) NFRA shall prepare the Annual Report after closing of the FY and forward the same to
CG.

6) List of companies which are under the control / Monitor / supervision of NFRA:

a) Companies listed in India (or) outside India

b) Unlisted public companies having paid up share capital ≥ 500 Crores (or) turnover ≥
1000 Crores (or) Aggregate of loans, debentures or deposits ≥ 500 Crores as on 31 st
March of preceding financial year.

c) Insurance, banking & electricity companies.

d) Any other company as specified by CG in the public interest.

Any company which is incorporated outside India, it is the subsidiary (or) associate
company of the companies incorporated in India referred above and turnover (or) net
worth of such foreign subsidiary is exceeding 20 % of consolidated net worth (or)
turnover.

Note: Where any company is ceased to be under the control of NFRA due to required
criteria not satisfied then still company shall be under the control of NFRA for a period of
3 years.

7. Other points:

A company or body of corporate other than the companies governed by these rules, shall
inform the NFRA with 30 days of commencement of NFRA Rules, in the form of NFRA
– 1 (particulars of auditors).

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CORPORATE SOCIAL RESPONSIBILITY [Section – 135]

1. The Companies Act, 2013 lays down the provisions requiring corporates to
mandatorily spend a prescribed percentage of their profits on certain specified activities
for social upliftment in discharge of their social responsibility.

2. Companies required to constitute CSR Committee:

a) Every company having net worth of Rs. 500 crores or more, or turnover of Rs. 1,000
crore or more, or net profit of Rs. 5 crores or more during the immediately preceding
financial year shall constitute a corporate social responsibility committee of the Board
consisting of 3 or more directors, out of which at least one director shall be an
independent director.

b) Where a company is not required to appoint an independent director under section

149(4), it shall have in its corporate social responsibility committee two or more
directors.

c) Every company including its holding or subsidiary, and a foreign company defined
under section – 2(42) having its branch office or project office in India, which fulfills the
criteria specified in section – 135 of the Act shall comply with the provisions of section –
135 of the Act.

d) Net worth [Section – 2(57)]:

It means the aggregate value of the paid-up share capital and all reserves created out of
the profits, securities premium account, after deducting the aggregate value of the
accumulated losses, deferred expenditure and miscellaneous expenditure not written off,
as per the audited balance sheet, but does not include reserves created out of revaluation
of assets.

e) Exclusion of companies:

Every company which ceases to be a company covered under section – 135 of the Act for
three consecutive financial years shall not be required to comply with the provisions of
section – 135.

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2021 July:

Answer:

3. Duties of CSR Committee:

a) It shall formulate and recommend to the Board, a CSR policy which shall indicate the
activities to be undertaken by the company as specified in Schedule VII.

b) Recommend the amount of expenditure to be incurred on the activities.

c) Monitor the CSR of the company from time to time.

4. Amount of contribution to CSR:

a) The Board of every company shall ensure that the company spends in every financial
year, atleast 2% of the average net profits of the company made during the three
immediately preceding financial years.

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b) Where the company has not completed the period of three financial years since its
incorporation, Board shall ensure that company spends atleast 2% of net profit of the
made during immediately preceding financial year.

c) The company shall give preference to the local area and areas around it where it
operates, for spending the amount for specified CSR activities.
d) If the company fails to spend such amount, the Board shall specify the reasons for not
spending the amount in the Board report and transfer such unspent amount to a Fund
specified in Schedule VII, within a period of 6 months of the expiry of the financial year.

e) If the company spends an amount in excess of the requirements specified under this
section, such excess amount may be set – off in the succeeding financial years.

f) Any amount remaining unspent under this section which is pursuant to any ongoing
project, such unspent amount shall be transferred to a special account, to be opened in
any scheduled bank to be called the unspent csr account, within 30 days from the end of
financial year. It shall be spent within a period of 3 financial years from the date of such
transfer. If company fails to spend within a period of 3 financial years from the date of
transfer, company shall transfer the amount to a fund specified in Schedule – VII, within
a period of 30 days from the date of completion of the third financial year.

5. Calculation of Net profit:

Net profit means the net profit of a company as per its financial statement prepared in
accordance with the applicable provisions of the Act, but shall not include the following,
namely:

a) any profit arising from any overseas branch or branches of the company, whether
operated as a separate company or otherwise; and

b) any dividend received from other companies in India, which are covered under and
complying with the provisions of section – 135.

6. CSR Expenditure:

a) The Board shall ensure that the administrative overheads shall not exceed 5% of total
csr expenditure of the company for the financial year.

b) Any surplus arising out of the CSR activities shall not form part of the business profits
of a company and shall be ploughed back into the same project or shall be transferred to
the Unspent csr account and spent for specified csr activities or transfer such surplus to a
fund specified under schedule – VII, within a period of 6 months of the expiry of the
financial year.

c) Where a company spends an amount in excess of required amount, such excess amount

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may be set off against required amount to be spent up to immediate succeeding three
financial years.

7. When the company is not required to constitute a CSR committee:

Where the amount to be spent by a company does not exceed 50 lakhs, the requirement of
constitution of CSR committee shall not be applicable and the functions of such
committee shall be discharged by the board of directors.

8. CSR Implementation:

1. The Board shall ensure that the CSR activities are undertaken by the company itself of
through

a) a company established under section 8 of the Act, or a registered public trust or a

registered society, registered under section 12A and 80G of the Income Tax Act, 1961,
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 trust or a registered

society, established by Central Government or State Government or

c) any entity established under an Act of Parliament or a state legislature or

d) a company established under section 8 of the Act, or a registered public trust or a

registered society, registered under section 12A and 80G of the Income Tax Act, 1961,
and having an established track record of at least three years in undertaking similar
activities.

2. Every entity who intends to undertake any CSR activity, shall register itself with the
Central Government by filling the form CSR – 1 electronically with the ROC, with effect
from the 1st date of April 2021.This rule shall not effect the CSR projects or programmes
approved prior to the 1st day of April 2021,

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Exceptions:

Below specified activities are not treated as CSR activities:

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Power of CG to prescribe accounting standards: [Section 133]

Central Government has the power to prescribe accounting standards as recommended by

ICAI in consultation with NFRA.

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 Audit & Auditors [Section 139 to 148]

Qualification, Eligibility and Disqualification of Auditors: [Section 141]

Part – I: Eligibility and Qualification Section 141(1) & 141(2):

1. Individual or Partnership firm (including (LLP) are eligible to be appointed as auditors

for the company.

2. An individual can be appointed as auditor for the company if he is a CA and holding

certificate of practice (COP) as specified order CA, 1949.

3. Partnership firm can be appointed as an auditor for the company provided below
specified conditions to be satisfied:-

Majority of partners of partnership The partners who is authorized to sign the audit
firm shall be CA in practice in report on behalf of partnership firm shall be the
India. CA.

Answer:

Part – II: Disqualification of Auditor: [Section 141 (3)]

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1. Below specified persons are disqualified to be appointed as auditor of the company:

i) Body Corporate:

ii) Officer (or) Employee of the company

iii) Any person who is the partner of officer (or) employee of the company.

iv) The person who is in employment with officer (or) employee of the Company.

v) Any person (or) his relative (or) partners holding any securities (or) interest in the
company (or) its subsidiary company (or) holding Company (or) associate Company (or)
subsidiary of such holding Company(fellow subsidiary).

Explanation – 1: Relatives may hold the securities (or) interest in the company to the
extent of 1,00,000 of Nominal Value.

If relatives acquire securities (or) interest in the Company exceeding the prescribed limit
subsequent to the appointment, then auditor shall take the corrective action within 60
days.

vi) A person (or) his relatives (or) partners has taken loan from the company (or) its
subsidiary company (or) holding Company (or) associate Company (or) subsidiary of
such holding Company (fellow subsidiary) exceeding 5,00,000.

vii) A person or his relatives or partners has provided guarantee or security in respect of
obligations of third person to the company (or) its subsidiary company (or) holding
Company (or) associate Company (or) subsidiary of such holding Company(fellow
subsidiary) exceeding 1,00,000.

viii) A person whose relatives are directors (or) KMP of the Company

ix) A person who is in full time employment elsewhere

x) A person (or) his partners has the business relationship with the company (or) its
subsidiary company (or) holding Company (or) associate Company (or) subsidiary of
such holding Company (fellow subsidiary).

Explanation: 1 Business relationship must be interpreted as commercial relationship (for

earning profits).

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2. A person can be appointed as an auditor even if he or his firm has commercial
relationship with company in the below specified 2 cases:

• Rendering services to the company which are allowed under CA Act, 1949.
• Commercial dealings with the Company as a customer in case of companies
engages in hotel, hospital, telecommunication, airlines, (or) other related services
and Company is charging arm length prices.

xi) A person (or) his partner if appointed as an auditor of the Company, then exceeding
the limits prescribed under Companies Act, 2013 with regard to ceiling limit on accepting
to audit.

Explanation: 1

Prescribed ceiling limit is 20 company audits per CA in practice. While counting the
ceiling limits below specified Company shall not be considered:

• One person Company

• Small company
• Private company is having paid-up share capital less than 100 crores.

xii) A person who has been convicted for an offense involving the fraud and period of 10
years are not elapsed / expired from the date of conviction.

xiii) A person directly (or) indirectly rendering services which are not allowed Under
Section 144 to the Company (or) holding company (or) subsidiary company.

2021 Dec

Answer:

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Part – III: Vacation of office by auditor [Section – 141(4)]

Where the disqualification specified Under Section 141(3) is attracted subsequent to

appointment as an auditor of the Company, then office of the auditor is automatically
vacated.

Appointment of Auditor: [Section 139]

Part – I: Formalities to be complied with relating to appointment of auditor [Section

139(1)]

1. Auditor shall be appointed at first AGM subsequent to the date of incorporation, by

members of the Company

2. Procedure to be followed for selection of auditor:

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 Case – I Case – II

Where the Audit Committee is required to be Where the Audit Committee is

constituted not required to be constituted
Step 1: Audit Committee will make Step 1: BOD will recommend
recommendations to BOD. the name of Auditor to the
Step 2: If BOD are agree with Audit Committee Members.
then name of auditor will be forwarded to
members.
Step 3: If BOD disagree then recommendations of
Audit Committee will be reverted back to Audit
Committee for reconsideration.

Note: Before selection of auditor by BOD (or) Audit Committee they shall consider
below specified aspects:

a) Experience and qualification of auditor

b) Nature and size of organization

c) Proceedings (or) orders pending against proposed auditor in the Court (or) before any
other competent authority with regard to professional misconduct.

3. Where the Company proposes to appoint a particular person (or) audit firm as an
auditor, company shall obtain below specified documents from the proposed auditor:-

a) Written consent

b) A certificate stating the below specified matters.

He is eligible & not Acceptance of Particulars of proceedings &

disqualified to be Company audit is within orders pending in the Court /
appointed as an auditor the limits specified ICAI / Any Other Competent

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 under Act Authority.

4. Notice with regard to appointment of Auditor:

a) Notice shall be given to the auditor after his appointment by the company.

b) Intimation shall be given to ROC in the form no: ADT – 1 within 15 days from the
date of appointment.

c) Where the companies which are not under the control of NFRA, company shall give
intimation and particulars with regard to appointment of auditor to the NFRA within 15
days from the date of appointment in the form no. NFRA – 1

Part II: Term of auditor [139(2)]

1. Individual shall not be appointed as an auditor for a term exceeding “one term of 5
consecutive years”.

2. Audit firm shall not be appointed as an auditor for a term exceeding “2 terms of 5
consecutive years (10 years)”.

3. Cooling Period:

After expiry of above specified period the auditor (or) audit firm shall not be eligible to
appoint as an auditor in the Company for a period of 5 years.

4. Provisions of Section 139 (2) are to be complied with by the below specified
companies:

a) Listed Company

b) Unlisted public Company having paid up share capital ≥ 10 Crores

c) Private company having paid up share capital ≥ 50 Crores

5. 139 (2) is not applicable to small companies & OPC

6. Transitional Period:

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Companies existing on (or) before commencement of this Act (01/04/2014), no need to
comply with these provisions for a period of 3 years (i.e., till 01-04-2017) from the date
of commencement of the act.

7. Where the outgoing audit firm (which has completed tenure of 2 terms of 5
consecutive years) and incoming audit (audit firm which is being considered for
appointment) having common partner / partners, then incoming audit firm is not eligible
to be appointed as auditor for the Company for a period of 5 years)

Part III: Rotation of auditors [139(3) and (4)]

1. Where the auditor of the Company has completed their tenure as specified under
section 139 (2), Board of Directors shall select the new auditor on their own (or) based on
recommendations of audit committee and forward the recommendations to members at
AGM.

2. Where the Company is in existence before commencement of Companies Act, 2013,

the tenure of service rendered by the existing auditor shall be considered while applying
the provisions of rotation of auditor

3. Rotation of auditor refers to appointing the new auditor in the place of existing auditor
who has completed the allowable tenure of service continuously.

4. Where the outgoing auditor and incoming auditor are related to same network, then
incoming auditor is not eligible to be appointed.

5.Where the partner of outgoing audit firm who is the in charge of audit firm and signing
authority of financial statements of the Company retired from the outgoing audit firm and
admitted in the incoming audit firm, then incoming audit firm is not eligible to be
appointed as an audit for the Company for a period of 5 years.

Part IV: Appointment of first auditor [139(6)]

1. First auditor shall be appointed by BOD within 30 days from the date of incorporation.

2. If BOD have defaulted to appoint the first auditor within 30 days, then first auditor
shall be appointed at EGM within 90 days from the date of incorporation.

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Answer:

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Part V: Appointment of first auditor in case of Government Company [Section - 139
(7)]

1. In case of Government Company, first auditor shall be appointed by CAG (Controller

Audit General of India) within 60 days from the date of incorporation.

2. If CAG defaulted to appoint the first auditor within 60 days, then BOD shall appoint
the first auditor within next 30 days.

3. If BOD has defaulted to appoint the first auditor within next 30 days, then first auditor
must be appointed at the EGM by the members within 60 days [from the date of expiry of
first 60 days i.e., next 30 days]

Note: - First auditor shall hold the office till the conclusions of the first AGM. He can re -
appointed at AGM again. The tenure of 5 years or 10 years will be calculated from such
appointment.

2021 July

Part VI: Appointment of auditor in case of Government Companies [139(5)] (from

2nd year onwards)

In case of Government Companies, auditor will be appointed by the CAG within 180
days from the date of commencement of the financial year.

Part VII: Filling up casual vacancy [ Section – 139(8)]

In case of Government Company In case of other than Government

Company

➢ It shall be filled by CAG within 30 ➢ It shall be filled by BOD within 30

days. days
➢ If CAG has defaulted to fill the casual ➢ However, where the casual vacancy
vacancy, than it shall be filled by due to resignation, it shall be filled by
BOD within next 30 days BOD, but it shall be approved by
members in GM within 3 months

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 from the date of casual vacancy.

Part VIII: Re - appointment of Retiring Auditor [139 (9), (10), (11)]

Retiring auditor is automatically re-appointed if below specified conditions are satisfied:

-

a) He is not disqualified for appointment

b) He has not expressed his willingness to not to continue as an auditor

c) Special notice as specified Under Section 115 not received by the company.

Note: Where the auditor is not appointed (or) not reappointed, then retiring auditor is
deemed to be reappointed.

Removal of Auditor, Resignation of Auditor and special notice given [Section – 140]

Part I – Removal of Auditor [Section 140(1)]

1. Company can remove the auditor before expiry of term [139 (2)] subjected to
fulfillment of the below specified conditions:

a) Board resolution shall be passed. (Majority of BOD must agree)

b) After passing board resolution, application in the form no. ADT – 2 shall be sent to
CG for obtaining approval within 30 days from the date of passing board resolution.

c) Company shall conduct general meeting and pass the required SR within 60 days from
the date of obtaining the approval of the CG.

d) Opportunity of being heard shall be given to the auditor before removal.

2021 July

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Answer:

Part II – Resignation by the Auditor [140 (2) & 140 (3)]

1. Auditor can resign from his office before expiry of term specified u/s 139(2) by
sending notice of resignation in the Form No. ADT – 3 to the Company and ROC within
30 days from the date of resignation.

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2. He shall disclose the reasons for resignation in the notice of resignation.

3. However, in case of Government company notice of resignation shall be given to

CAG, Company and ROC.

Part III – Special notice received by the company with regard to reappointment 140
(4)

1. Where the Company has received special notice that retiring auditor shall not be
reappointed (or) appointing other person as auditor, then retiring auditor shall not be
reappointed.

2. Copy of special notice shall be sent immediately to the retiring auditor.

3. Auditor can prepare his representations not exceeding reasonable length and requesting
the company to send copy of representations before AGM. If it is not possible to send the
representations to the numbers before the AGM, then Company may read the
representations at AGM.

4. Where the auditor has abused the right of preparation of representations, then
Company can refer the representations to tribunal.

5. If tribunal is satisfied that the auditor has abused his power, then tribunal shall pass the
order that representation is not required to be sent to members (or) representations not
required to be read at the AGM.

Part IV – Auditor acted fraudulently / abetted / collusion with management [140 (5)]

1. Where the auditor has carried out fraudulent activities (or) abetted (or) collusion with
the management (or) BOD (or) Company, then the interested party can make a compliant
to the CG.

2. If the Central Government is satisfied that auditor has committed fraudulent activities,
then it shall forward application to tribunal.

3. The tribunal, within 15 days of receiving application from the CG, shall pass the order
to the Company that Company shall change the auditor. New auditor shall be appointed
by CG.

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4. The auditor or audit firm who is removed under this section is not eligible to be
appointed as an auditor in any Company for a period of 5 years from the date of order
passed by tribunal. The auditor shall be punishable u/s 447 also.

5. If the auditor of the Company is the audit firm, then the audit firm & the partners who
were involved in fraudulent activities shall be punishable under this section.

Remuneration of Auditor [Section 142]

1. Remuneration of auditor is decided by the company at GM (or) company may specify

the procedure to be followed for deciding the remuneration

2. Remuneration of first auditor is decided by Board of Directors.

3. Amount of remuneration of auditor includes:

a) Expenses incurred by the auditor in connection with audit (and)

b) Facilities extended to the auditor in connection with audit

4. Where the auditor has rendered any other additional services at the request of the
company, then he can charge additional amount (or) separate amount, it shall not be
considered as a part of auditors’ remuneration.

Prohibited services: [Section 144]

1. Auditor of the Company shall not render below specified services either directly (or)
indirectly to the Company or its subsidiary Company (or) its holding Company: -

a) Accounting and book keeping services (preparation of BOA and FS)

b) Internal audit

c) Design and implementation of Financial Information System

d) Actuarial services (Valuation services)

e) Investment advisory services

f) Investment banking services.

g) Rendering of outsourced financial services

h) Management services.

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i) Any other services specified under the act.

2. Interpretation of

Directly And Indirectly

a) It includes individual himself, a) Audit Firm

b) Relatives b) Partner of the firm
c) Any other person associated with the c) Entity in which audit firm or its
auditor partners has significant influence.
d) Any entity in which the auditor has d) Entity whose name or trademark or
the significantly influence brand name used by the audit firm or
e) Entity where name (or) trademark or its partners.
brand name used by the auditor

Signing of Audit Report [Section 145]

1. Audit report shall be signed by the auditor. If the auditor of the Company is the audit
firm, then audit report shall be signed by partner of the firm who shall be a Chartered
Accountant.

2.The qualifications, observations or comments added in the audit report which are
adversely affecting the functioning of the Company, then the audit report shall be read
before GM & audit report shall be kept open for inspection by the members.

Auditor to attend General Meeting [Section 146]

1. All notices and other communications relating to general meeting shall be forwarded to
the auditor.

2. Auditor unless exempted by the Company shall attend a General Meeting either by
himself or through his authorized representative who shall eligible to be appointed as an
auditor.

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3. The auditor has a right to attend any GM where the business matter proposed to be
transacted relating to the auditor.

Punishment for contravention of provisions [Section 147]

1. Where the Company has defaulted to comply with the provisions of 139 to 146, then

Company shall be punishable with Officers in default shall be punishable with the
penalty of penalty of
Min – 25,000 Min – 10,000
Max – 5,00,000 Max – 1,00,000

2. Where the auditor has defaulted to comply with the provisions of 139, 144 (or) 145

Case I: If there is no intention to deceive the company (or) other parties then auditor
shall be punishable with the penalty of min – 25,000; max – 5,00,000 (or) 4 times of
remuneration whichever is lower.

Case II: If there is an intention to deceive the company (or) shareholders (or) creditors
(or) Income Tax Authorities, then auditor shall be punishable.

a) With the imprisonment which may be extended up to 1 year (and)

Min – 50,000

b) Penalty
Max – 2,50,000 (or) 5 times of remuneration whichever is
lower

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c) Where the auditor is convicted as per this Section, then he shall be liable to refund the
remuneration received from the Company to the company and Payment of damages to the
interested parties who incurred losses due to non – compliance of provisions by the
auditor.

Cost Audit [Section 148]

1. Cost Audit is not mandatory for every company.

2. It is applicable to Company or list of companies as specified by CG by notification.

3. Cost records to be maintained by the companies in accordance with provisions of

Section - 128.

4. Cost audit to be conducted by cost accountant in practice or cost audit firm.

5. Cost auditor is appointed by Board of Directors. Where the audit committee is required
to be constituted, then cost auditor shall be appointed by BOD with the recommendations
of the audit committee.

6. Remuneration of cost auditor shall be decided by BOD and it must be ratified by

members subsequently.

7. Auditors of the Company is not eligible to be appointed as Cost Auditor even though
he is having required qualifications.

8. Cost audit report shall be sent to the BOD and BOD shall forward the same report to
the Central Government.

9. Whatever the disqualifications & other provisions are applicable to the auditor, same
provisions are applicable to cost auditor.

10. Cost auditor shall prepare the cost audit report in the XBRL format in the form:- e–
form CRA - 4.

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 INDIAN CONTRACT ACT [15M – 20M]

Part – I Contract of Indemnity and Guarantee

Definition of contract of indemnity:

It refers to a contract whereby one person (indemnifier) promises to indemnify the other
person (indemnity holder) if other person has suffered any losses due to activities of one
person (or) third person or happening of a specific uncertain event

Example: General Insurance Contracts are treated as “Contract of Indemnity”.

Parties to the Contract of Indemnity: -

Indemnifier Indemnity holder

The person who has made a promise to The person to whom promise is made to
pay the compensation pay the compensation

Essential Elements of Contract of Indemnity:

Given contract is treated as Contract of Indemnity if below specified conditions are

satisfied:

a) There must be a promise to pay the compensation for losses incurred.

b) Losses must be resulted due to activities of the promisor (or) third person (or)
happening of any specific uncertain event.

c) All required essential elements of valid contract must be complied with.

Contract of Guarantee:

It refers to a contract where by one person (surety) promises to fulfill the obligations to
the other person (creditor) if third party defaults to fulfill the obligation (principal
debtor).

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Parties to the Contract of Guarantee:-

Creditor Debtor (principal debtor) Surety

Who has a right to enforce Who has an obligation to Who has an obligation to
the claim / repayment of repay the debt repay the debt if debtor
claim defaults to repay

Essential Elements of Contract of Guarantee:

a) Nature of Liability:

• Principal Debtor’s liability is primary and unconditional.

• Surety’s liability is secondary and conditional.

b) Consideration:

• Contract of guarantee is treated as valid, even if there is no consideration to

surety.

• If there is a consideration to creditor and principal debtor, it is considered as

lawful consideration to surety also. No fresh / new consideration is required for
surety.

c) Capacity of the Parties:

• Principal Debtor is not required to have contractual capacity.

• Contract of guarantee is treated as valid even if principal D is not having
contractual capacity.
• Creditor and surety must have the contractual capacity.
d) No. of Contracts:

Contract of guarantee is also called as triplicate contract.

It includes total 3 contracts as specified below

(i) Between creditor and creditor
(ii) Between surety and creditor (contract of indemnity)
(iii) Between surety and debtor

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e) All other required essential elements must be complied with.

Types of Guarantee:

a) Specific Guarantee:
Where the guarantee is given for specific transaction, then it is called as specific
guarantee
b) Continuing Guarantee:

Where the guarantee is given for series of transactions, then it is called as continuing
guarantee

Surety can revoke his continuing guarantee by giving notice to the creditor.

In case of revocation of continuing guarantee

Surety is not liable for future Surety’s liability remains the same for
transaction transactions taken place before revocation

In the case of death of surety, then continuing guarantee is automatically revoked in

respect of future transactions. But property of surety will remain liable for the
transactions which were taken place before the date of death of surety.

Nature of Liability of Surety:

Unless otherwise specified in the contract of guarantee, surety’s liability is co-extensive

with that of Principal Debtors [i.e., whatever the amount for which PD is liable, for the
same amount surety is liable).

Rights of Surety:

Where the Principal debtor has defaulted to fulfill the obligations, then surety shall fulfill
the obligations. In the event of fulfillment of obligations by surety, the surety will have
below specified rights:

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Case I: Rights against Principal Debtor:

Right of subrogation / Right of Indemnity:

When the surety has fulfilled the obligations of principal debtor, then surety will step into
the shoes of the creditor i.e., surety will have same rights against the principal debtor as
in case of creditor.

Case II Rights against the Creditor:

Right to claim Security:

If any security is provided to the creditor by the principal debtor, it can be recovered by
surety from the creditor at the time of fulfillment of obligation by surety.

Right of sett-off:

If any amount is receivable by PD from creditor, such amount can be Set-off by the
surety at the time fulfillment of obligation.

Right to claim Proportionate Reduction:

In the event of insolvency of principal debtor, surety is not liable for the amount which
cannot be recovered from the property of principal debtor.

Case III Right against co- Sureties:

Meaning of co – Sureties: Where 2 or more persons have jointly given guarantee in

respect of obligations of principal debtor such two / more persons are called as co-
sureties.

Co sureties are jointly and severally liable. Unless otherwise agreed, co sureties are liable
to contribute equally.

If any co – surety has performed the obligation in excess of his share, then he can claim
contribution from remaining co – sureties equally.

Where any limits are specified in respect of co – sureties, still co – sureties are liable to
contribute equally within their limits.

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Discharge of Surety:

In the below specified cases, surety’s liability / obligation comes to an end:

a) Revocation of continuing guarantee by giving notice.

b) Revocation of continuing guarantee in the event of death.

c) Alteration of terms of the contract of guarantee:

If the terms & conditions of contract of guarantee are altered without the consent of
surety, then surety is automatically discharged

Note: - Where the alterations are made without the consent of surety and which is
beneficial for the surety, then surety shall not be discharged.

d) When the composition / compounding is made with the creditor by the principal
debtor:

• When the creditor has agreed that forbearance to sue against the principal debtor
against principal debtor, then surety is automatically discharged.

• If the creditor has extended time to the principal debtor for fulfillment of
obligation at the request of principal debtor (with an intention to deceive surety),
then surety is automatically is discharged.

Note:

1. Mere forbearance to sue on the part of creditor doesn’t discharge the surety.

2. Extension of time limit by the creditor at the request of 3rd party doesn’t discharge the
surety.

e) Where any act (or) omission of the creditor discharges the principal debtor from his
obligation, then surety is also automatically discharged.

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Differences between contract of indemnity and contract of guarantee:

Basis of difference Indemnity Guarantee

No. of parties 2 parties (i.e., 3 parties (principal debtor,
indemnifier & indemnity creditor & surety)
holder)
Nature of liability Indemnifier liability is Principal debtor’s liability:
primary & unconditional Primary & unconditional
Surety: Secondary &
conditional
Time of liability Indemnifiers’ liability Surety is liable if principal
will be arised on debtor defaults to pay the
happening of contingent money / fulfill obligation
event
Time to act The indemnifier need not Surety will act at the request
act at the request of of principal debtor.
indemnity holder
Purpose Reimbursement of Providing security in respect
contingent losses of obligations of principal
debtor.
Contractual Indemnifier and Principal debtor need not
capacity indemnity holder must have contractual capacity
have the contractual
capacity
Right to sue the 3rd Indemnifier cannot sue a Surety can sue the principal
party third party because there debtor for recovery of
is no priority of contract amount

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 UNIT 2: - BAILMENT AND PLEDGE

Definition of Bailment:

It refers to a contract whereby one person (bailer) is delivering the goods to other person
(bailee) for some purpose, on accomplishment of purpose goods must be returned (or)
disposed according to the directions of bailer.

Parties to the Contract of Bailment: -

Bailer Bailee
The person who has delivered the goods The person to whom goods have been
delivered

Essential elements of contract of Bailment:

a) There must be a delivery of goods for some purpose.

b) Goods must be returned after accomplishment of purpose.

c) Other essential elements of valid contract must be satisfied.

Types of Bailment:

1. Non- gratuitous Bailment:

Bailment is made for the benefit of both the parties.

2. Gratuitous bailment:

Bailment is made either for the benefit of bailor or benefit of bailee.

Duties of Bailor / Rights of Bailee:

a) Duty to disclose faults in the goods:

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 • Bailor shall disclose faults in the goods bailed. Where the bailor has failed to
disclose the faults and bailee has incurred the losses due to non - disclosure of
faults, then bailor shall indemnify the bailee for losses.

• However, in case of gratuitous bailment, bailor is liable for only in respect of

known faults.

2. Duty to bear the extraordinary expenses:

Where the bailee has incurred any extraordinary expenses in respect of goods bailed, then
bailor shall indemnify the bailee.

Where bailee has incurred any ordinary expenses in respect of goods bailed.

In case of Non – In case of GB for the In case of GB for the

gratuitous bailment benefit of bailee benefit of bailor
→ Bailor no need to → No need to indemnify → Bailor shall
indemnify indemnify

3. Duty to indemnify the bailee in case of pre-matured termination of entailment:

• If bailor requires the bailee to return the goods before completion of purpose (or)
expiry of specific period, then it is called as pre-matured termination of bailment.

• Pre matured termination is not possible in case of non–gratuitous bailment.

• Where the bailee has incurred any losses due to pre-matured termination of
gratuitous bailment, then bailor shall indemnify the bailee.
4. Duty to accept return of the goods:

• Where the bailee has returned the goods in accordance with terms and conditions
of bailment contract, bailor shall accept the return of goods.

• Where the bailor has failed to accept the return of goods then he shall indemnify
the bailee for custody expenses incurred.

Duties of Bailee / Rights of Bailor: -

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1. Duty to take the reasonable care:

• Bailee shall take reasonable care in respect of goods bailed (care to be taken as a
man of ordinary prudence).

• If the bailee has defaulted to take reasonable care and goods are damaged, then
bailee shall indemnify the bailor.

• Where the goods are damaged due to Act of God (or) reasons beyond the control
of bailee, then he no need to indemnify the bailor.

2. Duty to indemnify the bailor in case of inconsistent use of Goods:

• Where the bailee is using the goods not in accordance with the terms and
conditions of bailment contract (inconsistent use of goods) then contract of
bailment is treated as voidable contract at the option of Bailor.

• If the goods are damaged due to inconsistent use of the goods, then bailee shall
indemnify the bailor.
3. Duty to return accretion of (automatic increase) goods:
Bailee shall return the accretion of goods to the bailor.
4. Duty to return the goods bailed:

• Bailee shall return the goods to the bailor in accordance with the terms and
conditions of bailment contract.

• Where the bailee has failed to return the goods in accordance with terms and
conditions of the bailment and goods are damaged due to any reason, then bailee
shall indemnify the bailor.

5. Duty to not to mix the goods:

• Bailee shall not mix his own goods with goods bailed.

• In case of mixing of bailee’s goods with the bailors’ goods, then consequences
will be as follows:

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 Situation Effect
1. Goods are mixed with the Both the parties will have
consent of bailor proportionate share
2. Goods are mixed without the Separation charges to be borne by
consent of bailor and goods are bailee.
seperable
3. Goods are mixed without the Both the parties will bare
consent of bailor and goods are proportionate share and bailee shall
not separable indemnify the bailor for losses
incurred due to unauthorized mixing
of goods

6. Duty to not to set up adverse title:

Bailee shall not ask the bailor to prove the legal ownership before returning of goods. If
bailee shall incurred any losses due to defective title of bailor, then bailor shall indemnify
the bailee.

Termination of Bailment:

In the below specified cases, bailment contract is said to be discharged:

1. Where the bailment contract is made for specific period, contract is automatically
discharged on expiry of the period.

2. Where the bailment contract is made for specific purpose, one accomplishment of
purpose, contract is automatically discharged.

3. Where the goods are destroyed subsequent to the formation of bailment contract, then
contract is automatically discharged.

4. In the event of death of the bailor or bailee, gratuitous bailment is automatically

discharged.

5. In case of inconsistent use of goods, at the option of the bailor, contract is

automatically terminated.

Particular Lien and General Lien:

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Particular Lien:

a) Lien refers to one person retains the possession of the goods of other person until his
claim is satisfied.

b) Bailee can exercise the particular lien if below specified conditions are satisfied:

• He must have rendered labour work or any work involving skill in respect of
goods bailed.

• Agreed Remuneration is not paid by bailor in respect of retained goods

c) Where the goods are returned by bailee to the bailor, then bailee cannot exercise right
of lien but he can sue against the bailor.

d) When the bailee is exercising right of lien, then he cannot sue against the bailor.

General Lien:

Where the bailee has a right to retain the goods for general balance (i.e., in respect of any
amount due from the bailor), then it is called as general lien.

It can be exercised by banker, factor, wharfinger, policy broker and attorneys

Note: General lien can be exercised by any bailee provided it shall be specified in the
terms and conditions of bailment contract.

Pledge:

Definition:
Where the bailment contract is made for providing security in respect of repayment of
debt (or) fulfillment of obligation, such bailment contract is called as pledge.

Parties to the pledge contract:

a) Debtor / bailor / pawner / pledger: The person who has borrowed the money and
provided his movable property as a security

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b) Creditor / bailee / pledger / pawnee: The person who has lent the money and
received the movable property as a security
Rights and Duties of the pledger:

1. Same as in case of bailor (Bailor/Debtor)

2. Additional points:

• Pledger shall repay the debt in accordance with agreed terms and conditions of
pledge contract.

Rights and duties of Pledgee ( Bailee / Creditor ):

1. Same as in case of bailee.

2. Additional points:

Pledgee is having a right to recover the debt. If the pledger has defaulted to repay the
debt, then pledgee can sell the goods pledged provided notice of sale of goods shall be
given to pledger.

If sale proceeds are ‒

Less than the amount recoverable More than the amount recoverable
from pledger, then pledgee can from pledger, then pledgee shall pay
recover the deficit amount separately the excess amount to the pledger.

Finder of Lost Goods:

1. Where any person who has traced out the goods belonging to other person, then the
person who has traced out the goods is called as finder of lost goods.

2. Finder of lost goods is having an obligation as of bailee.

3. Duties of Finder of lost goods:

a) He shall take appropriate steps to find out true owner.

b) He shall take reasonable care in respect of goods found until true owner is traced out.

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4. Rights of finder of lost goods:

a) He can exercise right lien for recovering (cannot sue for expenses) expenses incurred
and reward (if any declared).
b) He can sue the true owner for recovering declared reward but he cannot sue for
recovering expenses incurred.

c) Right of sale:

Case I: When the goods are perishable.

Case II: When the true owner could not be found even search with due diligence

Case III: When the lawful charges are not less than 2/3rd of value of goods found.

Pledge by Non – Owner:

Goods can be delivered as a security either by owner of the goods (or) authorized agent
pf owner of goods.

The person who has delivered the goods as a security is neither owner nor authorized
agent, then it is called as pledge by non – owner. It is not enforceable.

Exceptions:

However, in the below specified cases, pledge by non – owner is treated as valid: -

Case I - Pledge by mercantile agent:

Pledge is treated as valid even if mercantile agent is a non – owner provided below
specified conditions to be satisfied:

a) Pledger must be the mercantile agent

b) He must have the possession of goods with the consent of true owner

c) Pledgee must have acted in the good faith

Case II - Pledge by the person who obtained possession of goods under voidable
contract:

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Pledge contract is treated as valid if pledger is a non – owner provided below specified
conditions to be satisfied: -

a) Pledger must have obtained the possession of goods under voidable contract
b) Goods must have been pledged before contract is rescinded by the aggrieved party.

c) Pledgee must have acted in the good faith.

Case III - Pledge by the person who is having limited interest

Pledge by non-owner is treated as valid if below specified conditions are satisfied:

a) Pledger must have the limited interest in the goods pledged (finder of lost goods)

b) Pledger must have the possession of the goods at the time of pledge.

c) Pledgee must have acted in good faith

Case IV - Pledge by one of the joint owners

Pledge by non – owner is treated as valid if the below specified conditions are satisfied:

a) Pledger must be one of the joint owner.

b) Pledger must have the possession of goods with the consent of other joint owners.

c) Pledgee must have acted in the good faith.

Case V - Pledge by seller who is having possession of goods even after sale

Pledge by non – owner is treated as valid if below specified conditions are satisfied:

a) Pledger must be the seller of the goods.

b) Pledger must have the possession of goods with the consent of buyer.

c) Pledgee must have acted in the good faith.

Difference between Contract of Bailment and Contract of Pledge:

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Basis of difference Contract of Bailment Contract of Pledgee
Definition
Purpose Goods are delivered for any Goods must be delivered for
purpose providing security in respect of
repayment of debt (or)
fulfillment of obligations
Consideration Consideration need not be Consideration must be there for
required for formation of formation of valid pledge
bailment contract
Right to use Bailee can use the goods in Pledgee shall not use the goods
accordance with terms and unless specific authorization
conditions of bailment given by pledger
contract
Right to sell Bailee shall not sell the goods If Pledger has defaulted to repay
bailed the debt, then pledger can sell
the goods after giving notice to
pledger.

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 CONTRACT OF AGENCY

Basic Points:

Contract of agency was not defined under Indian Contract Act, 1872. However, below
specified terms are defined

Agent Principal
Where any person has been authorized to carry The person on whose behalf an
out activities on behalf of other person (or) one agent is carrying out activities or
person has been authorized to represent the the person who is represented by
other person by forming contract with 3rd an agent, then such person is
person, then such one person is called as an called as an principal
agent

Who can act as a Principal?

Any person can act as a principal provided he must have contractual capacity.
Who can be appointed as an agent?
Any person can be appointed as an agent whether he is having contractual capacity or not
(i.e., even minor, unsound person can also be appointed as an agent).

Liability of Principal:

When the agents activities are When the agents activities are not
within the scope of authority, then within the scope of authority, then
principal is liable principal is not liable but agent is
personally liable

Consideration: It is not necessary for formation of the valid contract of agency

Modes of formation of Contract of Agency (COA):

Express Mode:

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 Oral mode Written mode
Contract of agency is made Contract of agency is made by creating written
based on words spoken contract. Written contract of agency is also called
as power of attorney

Implied Mode:

It means contract of agency is made based on circumstances or conduct of the parties.

Various implied modes of creation of contract of agency:

a) Agency by necessity:

Principal is liable in respect of activities of agent even though agent has acted beyond the
scope of authority provided below specified conditions to be satisfied:

• The agent is not in a position to communicate with principal

• Activities shall be carried out for protecting principal from incurring losses.

b) Agency by estopped/ holding out:

Where one person makes the other person to believe that agent is authorized to do
particular activities but actually agent wasn’t authorized, then principal is liable to 3rd
party even if agent has acted beyond the scope of authority.

c) Agency by ratification: (Ratification means approval of past unauthorized activities)

Where the agent has acted beyond the scope of authority, the principal can ratify the
unauthorized activities subjected to fulfillment of below specified conditions:-

• Agents activities must be lawful activities.

• Ratification must be communicated to third party

• Third party shall not incur any losses due to ratification

• Ratification shall be made within the reasonable time

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 • Ratification shall be made for whole transaction.

• Activities shall be carried out in the capacity of agent

Extent of Agent’s Authority:

For determining / ascertaining the scope of authority of the agent below specified rules to
be considered: -

• Agent can carry out the activities for which he has been appointed

• Agent can carry out all required incidental activities based on nature of the
business (or) customs of trade

Sub Agent:

1. Agent of the agent is called as sub agent.

2. Sub agent means working under the control / supervision of the original agent.

3. Validity of appointment of sub agent.

a) Unless otherwise specified, appointment of sub agent is not valid. It is based on the
principle that “delegators non potest delegare”.

b) Contract of agency is made based on fiduciary relationship / capacity (i.e., Principal is

having trust & confidence on agent that activities delegated to agent are expected to be
carried out by agent personally)
c) Exceptions:

However, the originally agent can delegate the powers to the sub agent in the below
specified cases:

• When the authorization is given by principal for appointment of sub agent

• Appointment of sub agent is necessary based on usage of trade.

• In case of unforeseen circumstances are arised.

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Consequences of appointment of sub agent:

In case of sub agent is properly In case of sub agent is improperly

appointed appointed
Principal is liable to third party.
Agent is liable to the principal. Agent is liable to third party and
principal.
Sub agent is liable to agent. Sub agent is liable to agent.
Note: sub agent is liable to the principal Note: Sub agent is liable to the principal.
also if there is a misconduct / willful
omission

Substituted Agent:

1. It refers to a person appointed by the agent for the acts of the principal and with the
knowledge and consent of principal.

2. Where the agent has an authority either expressly (or) impliedly to name the other
person for the purpose of principal, such other person is called as substituted agent

3. Substituted agent is working under the control of the principal.

4. Principal is liable for the activities of substituted agent.

5. Agent is not liable in respect of activities of substituting agent provided he had taken
reasonable care as a man of ordinary prudent person while selecting the substituted agent.
Difference between sub agent and substituted agent

Basis Sub Agent Substituted Agent

Control Sub agent working under the He is working under the control of
contract of agent the principal
Delegation of The agent delegates power to The principal delegates power to the
powers the sub agent substituted agent
Privity of No privity of contract There is a privity of contract between
contract between principal and sub principal & substituted agent
agent
Liability Sub agent is liable to the Substituted agent is liable to the
agent in respect of his principal in respect of his activities
activities

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Liable to third Agent is liable for the Principal is liable for activities of
party activities of the sub agent substituted agent
Remuneration Sub agent can claim He can claim remuneration from
remuneration from agent principal

Agency coupled with interest:

1. Where the COA is made for providing additional interest [Benefit] to the agent in
excess of the regular remuneration to the agent, then such contract of agency is called as
agency coupled with the interest.

2. Agency coupled with the interest cannot be terminated until interest of agent is
satisfied.

Duties of the Agent:

1. Duty to execute Mandate:

Agent has to fulfill the obligations for which he has been appointed. If the agent has
defaulted to carry out the required activities and principal has incurred losses, then agent
shall pay the compensation to principal.

2. Duty to follow the instructions/customs:

• Agent shall carry out the activities in accordance with instructions of the
principal.
• In the absence of instructions of the principal, activities shall be carried out as per
the customs which are prevails at the place where activities are carried out by an
agent

• If agent has defaulted to follow the instructions (or) customs and principal has
incurred losses, then agent shall indemnify the principal

3. Duty to take reasonable care and exercise still:

Agent shall take the reasonable care and exercise the required skill which is necessary for
based on nature of the business.
4. Duty to communicate the principal:
In case of difficult times agent shall give communication to the principal and asking for
the suggestions / instructions to be followed.

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5. Duty to render true accounts:

Agent shall prepare the accounts in respect of activities carried out by him on behalf of
the principal. Agent shall provide not only the accounts to the principal but also provide
vouchers.

6. Duty to not to delegate authority: - Refer the sub agent concept

7. Duty to hand over the money (or) amount to the principal:

The amount collected by the agent in the business of agency on behalf on the principal,
shall be handed over to the principal.
8. Duty to avoid the conflict of the interest: (Duty to not to deal on his own account)
Where the agent has dealt the contract of agency on his own account, then principal can
repudiate the contract of agency if the agent has dishonestly concealed the material fact
(or) it is disadvantageous to the principal
9. Duty to not to make secret profits:
Where the agent has received any excess benefit without the knowledge of the principal,
such excess benefit is called as secret profits and it shall be returned to the principal.
10. Duty to not to share confidential information obtained from contract of agency with
other person.

Personal Liability of agent to third parties:

1. Unless otherwise agreed, an agent cannot personally enforce contract entered into by
him on behalf of his principal and agent is not personally bound. He can neither sue nor
be sued on contracts made by him on his principal’s behalf.

2. However, in the following exceptional cases, the agent is personally liable:

a) Foreign Principal:

When an agent has entered into a contract for the sale or purchase of goods on behalf of a
principal resident abroad, then the agent is personally liable for the performance of such
contract.

b) Undisclosed Principal:

When the agent does not disclose the name of principal then the agent is personally liable
for the performance of such contract.

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c) Non - existence or incompetent principal: Where the principal cannot be sued, then
agent is personally liable.

d) Pretended agent:

If the agent pretends but he is not an actual agent, then pretended agent is personally
liable.

e) When agent exceeds authority:

When the agent exceeds his authority, then agent is personally liable.

Rights of third party against principal (or) agent:

1. Third party cannot enforce the claim against the agent if agent has acted in accordance
with the terms and conditions of the agency.

2. However, in the below specified cases, the third party can where the claim against
principal or agent or both:

a) Where the agent has not disclosed the name of the principal while forming the contract
with the third party and third party subsequently came to know that activities are done
behalf of the principal then

The third party can enforce the (or) The third party can repudiate the contract
contractual obligations either if he is proving that “I would not enter
against principal (or) agent (or) into contract if principal had tried to form
both the contract”.

Termination of agency:

Termination of agency means putting an end to the legal relationship between principal
and agent.

1. Revocation:

a) An agency may be terminated by the principal revoking the authority of the agent.

b) Principal may revoke the authority given to his agent at any time before the authority
has been exercised. However, the principal cannot revoke the authority given to his agent
after the authority has been partly exercised by the agent.

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c) If there is mature revocation of agency without sufficient cause, the principal must
compensate the agent for such revocation.

d) When the principal revokes the agent’s authority, he must give reasonable notice of
such revocation to the agent. If notice is not given then principal is liable to pay damages
to the agent for losses caused.

e) Revocation of agency may be express or implied in the conduct of the principal.

2. Renunciation by agent:

a) An agent may renounce the business of agency in the same manner in which the
principal has the right of revocation.

b) If the agency is for a fixed period, the agent would have to compensate the principal
for any premature renunciation without sufficient cause.

c) A reasonable notice of renunciation is necessary.

d) If the agent renounces without proper notice, he shall pay compensation to principal
for losses incurred.

3. Completion of business (purpose):

When the contract of agency is formed for completion of particular purpose, the contract
of agency is automatically terminated on completion of purpose.

Example: The authority of an agent appointed to sell goods, contract of agency is

automatically terminated when the goods are sold.

4. Death or insanity:

An agency is automatically terminated on the death or insanity of the principal or the

agent.

5. Principal’s insolvency:

An agency is terminated on the principal being adjudicated insolvent.

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6. On expiry of time:

Where an agent has been appointed for a fixed term, the agency is automatically
terminated on expiry of the period whether the purpose of agency has been accomplished
or not.

Other important points:

1. When the agent is personally interested in the subject matter of agency (agency
coupled with the interest) the agency becomes irrevocable until the interest of the agent is
satisfied.

2. The effective date of revocation of agency is the date on which communication of

revocation is reached to the date.

3. When an agency is terminated by the principal dying or becoming unsound mind, the
agent is bound to take all reasonable steps for the protection and preservation of the
interests entrusted to him on behalf of the representatives of his late principal.

4. The termination of the authority of an agent causes the termination of the authority of
all sub – agents appointed by him.

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 Negotiable Instruments Act, 1881 [10M – 15M]

1. NI refers to an instrument in writing which entitles a person to receive certain amount

of money from other person.

2. The term NI includes –

Promissory Note (PN) BOE Cheque

Promissory Note: (Section 4)

It is an instrument in writing containing unconditional undertaking signed by maker to

pay certain sum of money only to (or) to the order of certain person (or) to the bearer of
instrument.

Parties to the Promissory Note:

Maker Payee

The person who has made a promise to The person to whom amount is
pay the amount payable.

Essential Elements of the PN:

If below specified criteria is satisfied, then given written document is treated as a PN:-

1. It must be in writing (i.e., oral promise to pay is not treated as PN)

2. It shall consist of the words which shall give the meaning of “Promise to pay the
amount”.

Examples:

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Satya Sir’s Class Room Notes
i) Mere acknowledgement of debt is not treated as valid promissory note. (Mr. A says “I
owe you” to Mr. B Rs. 1,000).

It is not treated as PN because it gives the meaning of mere acknowledgement of debt.

ii) Mr. A promises to pay Rs. 1,00,000 to Mr. B in the event of death of Mr. C → it is
treated as valid PN because promise to pay is certain as death is certain to happen.

iii) Mr. A promises to pay Rs. 1,00,000 to Mr. B if Mr. C dies on or before 15-08-2021
→ it is not treated as PN because death of a person within specified time limit is
uncertain.

3. Names of parties must be certain.

4. There must be promise to pay money only.

5. It must be signed by maker.

6. There must be promise to pay certain sum of money.

7. It must be stamped as per Indian Stamp Act.

Bills of Exchange: (Section 5)

It is an instrument in writing containing an unconditional order, signed by maker,

directing certain person to pay certain sum of money only to (or) to the order of certain
person (or) to the bearer of instrument.

Parties to the BOE:

Drawer: The person who gives direction to pay the amount.

Drawee (Acceptor): The person to whom direction is made to pay the amount.

Payee: The person to whom the amount is payable.

Essentials Elements of BOE:

1. It must be in writing.

2. It must consist of words which shall give the meaning of unconditional direction /
order to pay the amount.

3. Names of the parties must be certain.

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4. There must be order to pay money only.

5. It must be signed by maker / drawer.

6. It must be accepted by drawee.

7. There must be order to pay certain sum of money.

8. It must be stamped as per Indian Stamp Act.

Cheque: [Section 6]

It is also the BOE but drawn on specified banker & payable on demand.

Parties to the cheque:

Drawer Drawee Payee

Banker
The person who gives the The bank on which The person to whom the
direction to the banker to cheque is drawn amount is payable in
pay the money (A/c respect of cheque.
holder)

Essential Elements of Cheque:

Same as in case of BOE except below specified provisions:

a) It doesn’t require acceptance of drawee banker

b) It is not required to be stamped as per Indian Stamp Act.

Classification of NI:

Bearer NI: It refers to amount in respect of NI is payable to any person whoever having
possession of NI on due date. At the time of creation, every NI is order NI. However,
order NI will become bearer NI subsequently due to “Blank Endorsement”.

Order NI: It refers to amount is payable to a particular person whose name is specified
in NI.

Time NI: Amount in respect of NI is payable on a particular date (Due Date).

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Demand NI: Amount in respect of NI is payable at any time based on demand is made
by holder of NI.

Cheque is always demand NI. BOE (or) PN may be either Demand NI (or) Time NI.

In the below specified cases given NI is treated as Demand NI:-

• When the time is not specified

• When it is expressed to the paid at Sight / Presentment / Demand

Endorsement:

Meaning: It refers to holder of NI makes his signature (writes his name) on the face of
NI (or) back side of NI (or) any slip of paper annexed to NI for the purpose of
negotiation.

Slip of paper on which negotiation is made is called as Alonge.

Parties to the Endorsement:

Endorser Endorsee

The person who has made the The person is whose favour
endorsement endorsement is made.

Types of Endorsement:

Blank (or) General Endorsement:

Where the holder of NI makes the endorsement without specifying the name of endorsee,
then it is called as “Blank Endorsement”. In this case, order instrument is converted into
Bearer Instrument.

Full (or) Special Endorsement:

Where the holder of NI makes the endorsement of specifying the name of the endorsee,
then it is called as full / special endorsement. In this case, order instrument is being
continued as order instrument.

Restrictive Endorsement:

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Where the endorsement is made by restricting further negotiation, then it is called as
restrictive endorsement.

Partial Endorsement:

Where the holder of NI transfers right to receive part of the amount specified in the NI,
then it is called as partial endorsement.fIt doesn’t operate as a valid endorsement.

Conditional Endorsement:

It means endorser will specify some conditions at the time of endorsement. There are 4
types of conditional endorsements:

a) Sans Recourse Endorsement:

Where the endorser has made the endorsement in such a manner that he will not be liable
in respect of NI subsequently, then it is called as Sans recourse Endorsement.

b) Facilitative Endorsement:

Where the endorser has waived his rights, then it is called as Facultative Endorsement.

Ex: Endorser has forgiven his right to receive notice of dishonor.

c) Sans Frais Endorsement:

Where the endorser doesn’t require the subsequent parties to incur expenditure for the
endorser, then it is called as Sans Frais Endorsemet.

d) Liability of endorser on happening of contingent event:

If the endorser has specified any conditions in respect of his liability to pay the amount,
then he will be liable only on happening of uncertain event (or) fulfillment of conditions.

Negotiation:

It refers to one person transfers negotiable instrument to other person in order to

constitute that other person is the holder of the NI.

Types of negotiation: -

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 Negotiability by mere delivery Negotiation by endorsement & delivery

It is required in case of bearer instrument It is required in case of order instrument

Procedure to be followed for calculation of due date in case of time NI:

1. Due date is required to be calculated in case of time negotiable instrument.

2. Due date refers to the date on which amount is payable in respect of Time NI.

3. Rules to be followed:

a) When the amount in respect of NI is payable after specified No. of months, then due
date is “corresponding date of the month in which credit period is expired plus 3 grace
days”.

b) When the NI is payable after specified No. of months and the month in which the
credit period is expired doesn’t have the corresponding date the due date is “last date of
the amount in which credit period is expired plus 3 grace days”

c) Where the NI is payable after specified No. of days, then due date

Date of NI drawn + credit period (or) While calculating the due date, the
+ 3 grace days date on which NI drawn shall be
excluded.

d) Where the due date is the public holiday, then immediately preceding business day
shall be considered as due date.

e) Where the due date is declared as public holiday subsequent to creation of NI, then
succeeding business day is treated as “due date”.

Holder and Holder in due course (HDC):

Holder: A person is treated as holder of NI if below specified conditions are satisfied:

a) He must have the possession of NI

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b) He is entitled to have the possession in his name

c) He has a right to enforce the amount.

Holder in Due Course:

A person is treated as HDC of NI if below specified conditions are satisfied: -

a) He must have obtained the NI for lawful consideration

b) He must have the possession of instrument in his name.

c) He must have obtained instrument before maturity date.

d) He must have obtained NI Instrument in good faith (i.e., he doesn’t have the
knowledge of defective title of prior party)

He can enforce claim against all prior parties even though prior party’s title is defective.

Crossing of Cheque:

Based on mode of payment in respect of the cheques, it is classified into 2 types: -

Open cheque Crossed cheque

Drawee banker (paying banking) will Drawee banker will make the payment
make the payment over cash counter of through collecting banker of the holder of
the drawee bank. the cheque.

2. Meaning of crossing of the cheque:

A cheque is said to be crossed if it bears 2 parallel transverse lines across the face of
cheque.

3. Types of crossing of the cheque:

Nature of crossing Explanation

a) General crossing It bears 2 parallel transverse lines only. Name of the collecting

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 bankers is not specified. Amount shall be paid to any
collecting banker of the holder.

b) Special crossing Name of the collecting banker is specified. Amount shall be

paid to only specified collecting banker

c) A/c payee or It refers to adding the words “A/c payee” either to general
Restrictive crossing (or) the special crossing.
crossing • Amount will be paid only to the payee in whose favour
initially cheque was drawn.
• It restricts further negotiation.

d) Non-negotiable It refers to adding the words “Not negotiable” either to general

crossing or special crossing.
• Transferee will not get better than that of transferor even
though transferee is a HDC.
• It doesn’t restrict the further negotiation.

Penalties for dishonor of the cheque: - [Section - 138 to 142]

Where the cheque is dishonored due to insufficiency of funds, then drawer of the cheque
shall be punishable with the imprisonment to the extent of 2 years (or) penalty to the
extent of twice of cheque amount (or) both if below specified conditions are satisfied:

a) Cheque must have been issued for discharging legally enforceable debt (or) obligation.

b) Cheque must be presented within 3 months from the date of issue of cheque.

c) Dishonor must be due to insufficiency of funds.

d) Holder / payee of the cheque shall give notice of dishonor to the drawer of cheque
within 30 days from the date of receiving notice dishonor from the drawee banker &
asking the drawer to pay the amount.

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e) Drawer of the cheque has defaulted to make the payment within 15 days from the date
of receiving notice of dishonor.

Additional Points: Penalties for dishonor due to insufficiency of funds

a) Where the cheque is dishonored due to countermanding of payment, then it shall be

treated as dishonored due to insufficiency of funds.

b) Where the drawer of the cheque is company and it is dishonored due to insufficiency
of funds, then company and other persons who are in-charge of the company are
responsible for carrying out activities of the company are punishable Under Section 138
to 142

c) Where the drawer of the cheque is partnership firm and it is dishonored due to
insufficiency of funds, then partnership firm and its authorized partners are punishable.

d) Partners of the PF (or) in-charge of the Co. may not be punishable even if cheque is
dishonored due to insufficiency of fund provided they must prove to the Court of Law
that cheque was issued without their knowledge (or) they have exercised due diligence
for making payment.

Acceptance:

1. Validity of bills of exchange is based on acceptance given by drawee.

2. Acceptance of bill refers to “drawee signifies his assent in respect of order / direction
added in bills of exchange”.

3. Mere signature of the drawee is also treated as valid acceptance (i.e., no need to add
any other additional words).

4. When the drawee gives acceptance, then he will become acceptor.

5.Where the drawer of the bill has negotiated the bill before obtaining of acceptance of
drawee the subsequent holder shall present the bill for acceptance in accordance with
below specified rules and regulations: -

a) Bill to be presented to the drawee / drawer in case of need / acceptor for honor for
obtaining acceptance.

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b) Place of presentment: Bill shall be presented at specified place. If the place is not
specified it shall be presented either at place of business (or) residence of drawee.

c) Date of presentment: It shall be presented on specified date. If date is not specified, it

can be presented on any date but before due date.

d) Time of presentment: It shall be presented at specified time. If time is not specified,

it can be presented during business hours.

e) Holder shall give not more than 48 hours’ time to the drawee for giving acceptance.

Dishonor due to non – acceptance: [This concept is applicable only in case of BOE]

In the below specified cases, the holder of bill can treat that bill is dishonored due to non
– acceptance: -

1. When the drawee is a fictitious person.

2. When the drawee is a contractually incapable person.

3. When the drawee fails to give acceptance within 48 hours of presentment.

4. When the drawee has given qualified acceptance (conditional acceptance).

5. When the drawee could not be found even after search with due diligence.

6. When the drawee refuses to give acceptance on some other ground even though bill is
duly presented for acceptance.

Inland bill and foreign bills: -

Foreign Negotiable
Inland Negotiable Instrument
Instrument

If any of the below specified two criterias are satisfied When the given NI is not in
then given NI is treated as inland negotiable instrument: the nature of the inland NI,
- then it is treated as foreign NI

a) When the NI is drawn in India and payable in India (Drawn outside India)

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 (or)
b) Drawn in India and on a person who is resident of
India

Liabilities / Obligations in case of Foreign NI: -

1. Maker of PN / drawer of Cheque / drawee of bills of exchange of foreign negotiable

instrument are liable in accordance with provisions / rules of the place / country where
the instrument in drawn.

2. Maker / acceptor of bill / endorser are liable in accordance with rules of the place /
country where the amount is payable in respect of foreign NI.

Negotiation Back

1. Where any endorser has made negotiation in favor of prior party, then negotiation back
is said to be made.

2. In case of Negotiation Bank, all intermediate parties are automatically discharged.

3. Where the person to whom negotiation back is made, if he had made Sans Recourse
endorsement earlier, then he can enforce the claim against the intermediate parties in the
event of dishonor.

Cancellation of Endorsement: -

In case of cancellation of endorsement by the holder of NI, then prior parties whose rights
were damaged / destroyed / impaired, then such prior parties are automatically discharged
as if amount paid in respect of NI.

Conversion of Blank Endorsement into Full Endorsement:

1. Where the holder of the bearer instrument adds direction to pay in favor of other party
above the endorser’s signature, then it is called as conversion of blank endorsement into
full endorsement.

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2. The person who has converted blank endorsement into full endorsement, it is called as
endorser in full.

3. The person in whose favor direction to pay is added by endorser in full, can make
further negotiation either by mere delivery (or) endorsement and delivery.

4. The endorser in full is not liable in respect of NI except to the person to whom NI is
transferred by the endorser in full.

5. The person in whose favor Blank Endorsement is converted into full endorsement

He is not liable if he has made He is liable if he has made negotiation by

negotiation by mere delivery. endorsement and delivery.

Acceptor for Honour: (This concept is applicable to bills of exchange)

The holder of BOE may allow the stranger (acceptor for honor) to give acceptance if
below specified conditions are satisfied: -

1. Bill must be dishonored due to non – acceptance.

2. Bill must be noted / protested on account of dishonor due to non – acceptance.

3. Acceptor for honour must specify the name of the prior party for whose honor
acceptance is made.

4. Acceptor for honour must specify his signature.

Liabilities / Obligations of acceptor for honor:

1. Acceptor for honor is liable to make payment to the subsequent parties of the person
for whose honor acceptance is given if below specified conditions are satisfied: -

a) Bill must be presented for payment with the drawer

b) Bill must be dishonored due to non – payment

c) Bill must be noted (or) protested on account of dishonor due to non–payment.

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2. Where the acceptor for honour has made the payment in respect of bill, then he is
entitled to collect the amount from the party for whose honor acceptance is given and
prior parties of that person.

Protection to the Drawee Banker / Paying Banker: -

1. Protection to drawee banker refers to drawee banker is allowed to debit the Bank A/c
of drawer of cheque if payment is made in respect of cheque issued by drawer of the
cheque.

2. There will be a protection to drawee banker if payment is made in respect of cheque

must be in the nature of “Apparent tenor of instrument” [Payment in due course].

Note:

• In case of endorser’s signature is forged and payment is made in respect of the

cheque, there will be a protection to drawee banker.
• In case of drawer’s signature is forged and payment is made in respect of the
cheque, there will not be a protection to drawee banker.

Protection to Collecting Banker:

There will be a protection to collecting banker if the below specified conditions are
satisfied:-

• Cheque must be a crossed cheque

• Cheque must be crossed before get into the hands of collecting banker.
• Collecting banker must have acted in the good faith

Inchoate NI: - (Incomplete NI)

1. Where the NI is incomplete with regard to amount and authorizes the other person to
complete the NI by specifying the amount in accordance with agreed terms & conditions,
then it is called as inchoate NI.

2. Where the amount specified in the inchoate NI is not in accordance with the agreed
terms and conditions: -

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 Amount specified doesn’t exceed the Amount specified exceeds the value of
value of stamps affixed stamps affixed.
→ Holder cannot enforce the claim / → No one can enforce the payment
payment. However, HDC can including HDC
“enforce the payment”.

Dishonor of NI: - There are 2 reasons for dishonor of NI

Dishonor due to non-acceptance Dishonor due to non – payment

→ It is relevant in case of BOE → It is relevant for all kinds of NI

→ When the drawee refuses to give the → When the maker or acceptor or drawer
acceptance, then bill is said to be refuses to make payment on due date,
dishonored due to non – acceptance then NI is said to be dishonored due to
non - payment

Rules and regulations to be followed for giving notice of dishonor

1. Mode of giving notice of dishonor: Notice of dishonor may be given either by oral
mode (or) written mode

2. Time Limit: Notice of dishonor shall be given within the reasonable time

3. To whom notice to be given:

a) Notice of dishonor to be given to prior party against whom the holder wants to enforce
the claim.

b) If the notice of dishonor is not given to prior party within the reasonable time, the prior
parties whoever has not received the notice, are automatically discharged.

c) Where the notice of dishonor is posted but not reached to the prior party, then notice is
deemed to be given (i.e. prior party is not discharged).

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d) In case of death of the prior party, notice of dishonor shall be given to his legal
representatives. If notice of dishonor is given to deceased person in ignorance of the
death, the notice is deemed to be given.

4. Place of giving notice of dishonor:

Notice of dishonor to be given at the place of business (or) residence of prior party.

5. Effect of not giving notice of dishonor:

If notice of dishonor is not given, then the party who is entitled to receive, is
automatically discharged.

Notice of dishonor is excused:

In the below specified cases, notice of dishonor is not required to be given:- (Prior parties
will not be discharged even though they did not receive notice of dishonour).

1. Waiver: Where the prior party has waived the right to receive notice of dishonor, then
notice of dishonor is not required to be given (i.e. prior has made facultative
endorsement).

2. When the cheque is dishonoured due to countermanding of payment, then notice of

dishonor not required to be given to drawer of the cheque.

3. When the prior party will not incur any losses / damages due to not serving the notice
of dishonor.

4. When the prior party could not be found even after search with due diligence.

5. When the prior party has made a promise to pay the amount to the holder in the event
of dishonor.

6. When the drawee / acceptor of BOE is a fictitious person, then drawer and acceptor
both are same person (i.e., signature of drawer and acceptor is in the same hand writing).
Notice of dishonor is not required to be given to drawer of the bill.

7. When the promissory note is not negotiable, then notice of dishonor is not required to
be created.

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Ambiguous NI: Where the given NI may be treated either as PN (or) BOE, then it called
as ambiguous NI.

Discharge of NI:- It is classified into 2 types

Discharge NI Discharge of parties to NI

Total parties to the NI are discharged from Only one (or) more parties are discharged
their liabilities from their liabilities but not all the parties

1. By payment:

When the maker of promissory note / Drawer of cheque / acceptor of bills of exchange
makes the payment in respect of NI, then total parties are automatically discharged.

2. By cancellation:- (cancellation of endorsement)

Where the holder of NI (or) his authorised agent cancels the name of prior party, then
such prior party and subsequent parties of the prior party are automatically discharged.

3. Waiver:

Where the holder of NI (or) authorised agent of holder of NI releases any prior party by
means of separate agreement, then such prior party and subsequent parties are
automatically discharged.

4.When the holder of BOE gives more than 48 hours time to the drawee for giving
acceptance without the consent of prior parties, then the prior parties whose consent is
not taken, such parties are automatically discharged.

5. When the drawee has given emotional acceptance:

Where the holder of BOE treats the conditional acceptance as a valid acceptance, then the
prior parties whose consent is not taken are automatically discharged.

6. When the cheque is not duly presented for payment:

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Where the holder of the cheque has defaulted to present the cheque within the validity
period of cheque and drawer of cheque has incurred any losses due to insolvency of
drawee banker, then drawer of cheque is automatically discharged to the extent of losses
incurred.

7. Material Alteration:

Material alterations are said to be made in respect of the NI if any of the below specified
criteria is satisfied:

a) When there is a change in the character of NI.

b) When there is a change in made of operation of NI.

c) When there is a change in rights & obligations of the banker.

Authorised Material Alterations:

Below specified material alterations are permitted under NI Act (No party will be
discharged):

a) Converting order NI into bearer NI and vice-versa

b) Converting open cheque into crossed cheque.

c) Doing any activity in-respect of NI for carrying out common intentions of the parties.

Filling blanks in inchoate NI When the holder has added the words “payable on
demand” in case of demand NI

Where any unauthorized material alterations are made by the holder of NI, then the prior
parties whose consent is not taken are automatically discharged.

ESCROW:

1. It is also called as conditional NI.

2. It is not enforceable as per provisions of NI Act.

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3. If it is reached to holder in due course, then it can be enforced by HDC as per NI Act
even if conditions are not satisfied.

Drawee in case (DIN) of Need:-

1. Where the drawer of bill (or) any other subsequent endorser specifies name of the other
person in bill, then such other person is called as drawee in case of need.

2. Where the name of drawee in case of deed is specified in the bill, then bill is not
treated to be dishonoured until it is also dischonoured by drawee in case of need.

When the title of prior party is defective:

1. Where the NI is reached to HDC, then he can enforce the claim against all prior parties
even though transferor’s title is defective.

2. Where the signature on NI is forged (maker / drawer / acceptor), then there is no

validity of creation of NI and holder cannot enforce the amount even though he’s a HDC.

Accommodation Bill:-

1. Where the bill is drawn and accepted without the consideration, then it is called as
accommodation bill.

2. It is drawn and accepted for providing financial assistance to the drawer.

3. Drawer of accommodation bill cannot enforce the amount against the drawee of bill,

Negotiation of the NI even after dishonor due to non-acceptance and non-payment

NI can be negotiated even after dishonor due to non-acceptance (or) non-payment but
transferee can enforce the claim only against the transferor.

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 General Clauses Act - 1897
Basic Points / Introduction:-

1. It consists of

a) Definitions of certain terms and

b) General principles of Interpretations

2. These definitions and principles of interpretation are applicable in the absence of

definition of a particular word in the Central Acts and Regulations.

Definitions of General Clauses Act, 1897

Government 3(23):

“Government” (or) “The Government” shall include both the Central Government and
State Government

Hence, wherever the word “Government” is used, it will include CG and SG both.

Answers:

Immovable Property 3(26):

Land

Land Benefits to Arise out of land

Immovable Property Shall Include
Things attached to Earth
Section 3(26)
Things permanently fastened 225
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2021 July

Answers:

Good Faith (Section – 3(22):

a) A thing shall be deemed to be done in “Good Faith” where it is done honestly whether
it is done negligently (or) not.

b) A particular person’s activity is said to be in Good Faith (or) not will be decided based
on facts and Circumstances.

c) Where any person has carried out activities with due care and attention which is not
mala fide (deceiving / Manipulating), then it can be presumed that the activities are said
to be in Nature of Good Faith.

d) The expression of “Good Faith” was not defined in the Indian Contract Act, 1872.

d) Therefore, as per provisions of General Clauses Act, 1897, Good Faith is not said to be
in the contract if any party entered into the contract without making proper enquiry and
such contract is treated as invalid.

Answers:
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Affidavit 3(3):

a) The term “Affidavit” is not defined in the Act.

b) It is in inclusive in Nature

c) Affidavit includes Affirmation & Declaration (Written Document)

d) Affidavit is a written statement confirmed by Oath (or) Affirmation for use as evidence
in Court (or) before Any Authority.

Coming into Operation of Enactment (Section 5)

[Effective date of the Central Act (or Central Government Regulations]

1. Where any Central Act has not specifically mentioned a particular date from which it is
effective (or) applicable, it shall be effective from the date on which it received Assent of
the POI and publication of Notification in the Official Gazette.

2. Where, if any date is specified in the Official Gazette, then Act shall be effective from
the Specified Date.

Commencement and Termination of Time (Section - 9):

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If Central Enactment (or) Regulations has specified any period from one specific date to
other specific date in relation to compliance of any provisions, then for the purpose of
counting a series of days first day must be excluded and last day must be included.

Computation of Time (Section – 10)

If any Contract Act has directed a particular person to do a Specific Activity (or) Any
Court has given an order to carry out particular Activity on a particular date (or) within a
specific period, and Office of Authority (or) Court is closed on a particular date (or) last
date of period, then the person is deemed to carried out Activities duly when he has
carried out such Activities on the Next Day afterwards on which Court (or) Office is
opened.

Answers:

Answers:

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Measurement of Distances (Section – 11)

In the measurement of any distance for the purpose of Central Act (or) Regulations, the
distance must be measured in straight line on a horizontal plane unless different
intentions appears.

Nov 2020

Answers:

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Answers:

Answer:

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Duty to be taken Prorate in Enactments (Section – 12)

In any Central Act (or) Central Rules if any amount of Tax (or) Excise Duty (or) Customs
Duty (or) Any other Amount payable with reference to a particular amount, then amount
to be collected from a person must be on the basis of pro-rata.

Example:

If Companies Act has specified that registration charges Rs. 10,000, if authorized capital
of proposed company is 50,00,000, then A Limited is incorporated with Authorized
Capital of Rs. 30,00,000. What is the amount of Resignation fees to be collected?

The amount of registration fees to be collected from A Limited must be based on Pro-rata
basis Rs. 6,000/-

Gender and Number (Section - 13):

In the Central Act (or) Central Rules, unless otherwise specified,

a) Words importing (using) the Masculine Gender shall include females also (Feminine
Gender).

b) Words in singular shall include the plural and Vice Versa.

Provisions as to offence Punishable under two (or) more Enactments (Section - 26):

If any offence is punishable under more than one enactment (or) more than one Central
Act, then the offender must be punishable under either of the enactment, but not under all
enactments.

Meaning of Service by Post (Section 27)

Unless otherwise specified in the Central Act (or) any Central Rules if any document is
required to be sent by post, then document is deemed to be sent, if below specified
criteria is satisfied:-

Letter must be Postal charges must be pre- Letter must be sent by Registered
properly addressed paid Post

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Effect of Repeal (Section – 6)

(Repeal means Permanent discontinuance of an Act ‒ No longer law is applicable)

When an Act is repealed, it must be considered as if it had never existed.

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 INTERPRETATION OF STATUTES

Objectives the Act:

➢ Rules to be followed for interpretation of statutes

➢ Various internal aids and external aids to be followed for interpretation

Important terms to be considered for better interpretation of statutes:

1. Statute:

a) Statute is an Act of Parliament.

b) In India Statute means an enacted law i.e., the law either enacted by the Parliament or
by the state legislature.

c) In India the constitution provides for passing of bill in Lok Sabha and Rajya Sabha and
finally after obtaining the assent of the President of India to it, it becomes an Act of
Parliament or Statute.

2. Document:

a) General meaning: A document is a paper or other material thing which giving

information, proof or evidence of any thing.

b) Section – 3 of the Indian Evidence Act, 1872 states that 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.

3) Instrument:

a) It is a formal writing of any kind, such as an agreement, deed, character or record,

drawn up and executed in a technical form.

b) I also mean a formal legal document having legal effect, either as creating a right or
liability or as affording evidence of it.

4) Interpretation:

a) It refers to a process by which the court seeks to ascertain the meaning of legislature
through the medium of words in which it is express.

b) Interpretation is resorted in order to resolve any ambiguity in the statute.

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Construction:

Construction involves drawing conclusions beyond the actual expressions used in the
text. This is done by referring to other parts of the enactments 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.

INTERNAL AIDS TO INTERPRETATION / CONSTRUCTION:

1. Long Title:

a) Long title of an Act is a part of the Act.

b) We can refer to it to ascertain the object, scope and purpose of the Act.

Example:

The Emblems & Names (Prevention of Improper Use) Act, 1950

2. Preamble:

a) The preamble expresses the scope, object and purpose of the Act.

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b) Preamble to Negotiable Instrument Act, 1881 states “ An Act to define and amend the
law relating to Promissory Note, Bills of Exchange and Cheque”.

c) It is a part of the Statue and can legitimately be used for construing it.

d) Where the wording of the statute give rise to the doubts as to its proper construction or
where the words / phrases have more than one meaning and a doubt arises as to which of
the two meanings is intended in the Act, then the Preamble can and ought to be referred
to in order to arrive at the proper construction.

e) Example:

Section 5 of Hindu Marriage Act, 1995 – “marriage may be solemnized between two
Hindus”

Preamble of the Act reads “An act to amend and codify the law relating to marriage
among Hindus. Therefore “may” is read as “Shall”.

3. Heading or title of chapter:

a) We would generally find that a number of its sections referring to a particular subject
are grouped together, sometimes in the form of chapters or headings or titles.

b) Headings may sometimes be referred to know the scope of section in the same way as
the preamble.

c) Heading cannot control or override the section.

4. Proviso:

a) Exception to the section.

b) The normal function of proviso is 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.

5. Explanation:

a) It is furtherance of what is given in the section itself.

b) Sometimes an explanation is added to a section of an Act for the purpose of explaining

the main provision contained in that section.

c) If there is some ambiguity in the provision of the main section, the explanation is
inserted to harmonise and clear up any ambiguity in the main section.

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6. Illustrations:

a) Act itself gives examples, which facilitates easy interpretation of law.

b) Illustrations do not lay down any substantive law. Therefore, illustrations cannot
modify the contents of the section.
c) Indian Contract Act, 1872contains may illustrations.

7. Schedules:

a) They form part of the statue and must be read together.

b) However, in case of conflict the enactment shall prevail over the schedule.

8. Marginal notes:

a) Marginal notes are summaries and side notes often found at the side of a section or
group of sections in the act, purporting to sum up the effect of that section or sections.

b) They are not a part of the enactment because they were not present when the act was
passed in Parliament. Marginal notes are inserted after the act has been so passed.

9. Definitional sections:

There can be three ways of writing a definition:

a) When a word is defined to mean: the definition is prima facie restrictive and
exhaustive. We must restrict the meaning of the word to that given in the definition
section.

b) When the word is defined to include: the definition is prima facie extensive and its
meaning can also comprise of something more in addition to the meaning assigned to it in
the definitional clause.

c) When a word is defined to means and includes: here again the definition would be
exhaustive.

10. Read the statue as a whole:

It is the elementary principal that construction of a statute is to be made of all its parts
taken together and not of one part only.

The deed 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.

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EXTERNAL AIDS TO INTERPRETATION / CONSTRUCTION:

Apart from the statute itself there are many matters are called as external aids. Some of
these factors are enumerated below:

a) Historical setting:

The history of the external circumstances which led to the enactment in question is of
much significance in construing any enactment.

b) Consolidating statutes and previous law:

The preambles to many statutes contain expressions such as “an act to consolidate” the
previous law, etc.

c) Usage:

Where the meaning of the language in a statute is doubtful, how that language has been
interpreted and acted upon over a long period may determine its true meaning.

d) Earlier & later acts and analogous Acts:

The general principal is that where there are different statutes in ‘pari materia’ (i.e. in an
analogous case), though made at different times, or even expired and not referring to each
other, they shall be taken and construed together as one system and as explanatory of
each other.

e) Dictionary definitions:

First we have to refer to the Act in question 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 meaning of a word, we must always take into
consideration the context in which it is used in the Act.

f) Use of foreign decisions:

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Foreign decisions of countries following the same system of jurisprudence as ours and
given on laws similar to ours can be legitimately used for construing our own Acts.

However, prime importance is always to be given to the language of the Indian Statute.
Where guidance can be obtained from Indian decisions, reference to foreign decisions
may become unnecessary.

RULES OF INTERPRETATION / CONSTRUCTION:

Over a period, certain rules of interpretation / construction have been recognized.

However, these rules are considered as guides only and are not inflexible. These rules can
be broadly classified into two types:

I. PRAMARY RULES:

1. Rules of Literal Construction:

a) It is a cardinal rule of construction that a statute must be construed literally and

grammatically giving the words their ordinary and natural meaning.

b) Where the words of a statute are clear and unambiguous, then these words should be
construed in their natural and ordinary sense and it is not open to the court to adopt any
other hypothetical construction. This is called the rule of literal construction.

3) This principal is contained in the Latin maxim “ obsoluta sentential expositore non
indeget” which literally means “plain words require no explanation”.

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4) This point of literal construction is that technical words are understood in the technical
sense only.

2. Rule of Reasonable Construction:

a) When grammatical interpretation leads to certain absurdity, it is permissible to depart

there from and to interpret the provision of the statutes in a manner so as to avoid that
absurdity.

b) This departure from the grammatical construction is permissible only to the extent it
avoids such absurdity and no further. This is also called the Golden Rule of
Interpretation.

3) Rule of Harmonious Construction:

It is a recognized rule of interpretation of statutes and deeds that the expressions used
therein should ordinarily be understood in a sense in which they best harmonize with the
object of the statute. The opposite of harmony is conflict. This rule is applied when there
is a conflict between two provisions of a statute.

4. Heydon’s case or Mischief Rule:

a) Where the language used in a statute is capable of more than on interpretation, the
most firmly established rule for construction is the principal laid down in heydon’s case.

b) The intention of this rule is always to make such construction as shall suppress the
mischief and advance the remedy according to the true intention of the legislation.

c) For the true and sure interpretation of all statutes in general, four things are to be
considered:
• What was the law before the making of the act?
• What was the defect, mischief, hardship caused by the earlier law?
• How does the act of Parliament seek to resolve or cure the mischief or deficiency?
• What are the true reasons for the remedy?

5. Rule of beneficial construction:

Beneficial construction will be given to a statute, which brings into effect provisions for
improving the conditions of certain classes of people who are under privileged or who
have not been treated fairly in the past. In such cases it is permissible to give an extended
meaning to words or clauses in enactments.

6. Rule of exceptional construction:

a) The words of statute must be construed so as to give a sensible meaning to them if

possible. It may be quite opposite to grammatical meaning.

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b) “And” and “or”

• “And” is a practical joining words and sentences and expressing the relation of
connection or addition. The word “and” is normally conjunctive.

• The word “or” is a disjunctive particle that marks an alternative, generally

corresponding to “either”, as “either this or that”.

• But sometimes “and” is read as “or” and vice versa to give effect to the manifest
intention of the legislature as disclosed from the context.

7. Rule of ejusdem generis:

a) The term ‘ejusdem generis’ mean ‘of the same kind or species’.

b) Where specific words pertaining to a class or category or genus are followed by

general words, the general words shall be construed as limited to the things of the same
kind as those specified.

c) This rule applies when

• The statute contains an enumeration of specific words
• The subject of enumeration constitutes a class or category
• That class or category is not exhausted by the enumeration
• General terms follow the enumeration and
• There is no indication of a different legislative intent

II. Secondary rules of interpretation:

1. Doctrine of Noscitur a Socii:

When two or more words which are capable of analogous (similar) meaning are coupled
together, they are to be understood in their cognate (related) sense.

Example: 1

In construing the words, ‘cosmetics, perfumery and toilet goods’, the word ‘perfumery’
can only refer to such articles of perfumery as are used as cosmetics and toiletries. Thus,
it cannot cover ‘Agarbathi’.

2. Doctrine of Expressio unis est exclusio alterius:

It refers to express mention of one thing implies the exclusion of another.

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Example: 1

Section 36(1)(ix) of the IT Act applies only to companies; it implies that it is not
applicable to other persons (family planning expenses).

2021 Dec

Answer:

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2021 Dec

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2021 July

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2020 Nov

Answer:

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Answer:

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Answer:

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