Results 1 to 9 of 9

Thread: IPCC - Business and Company Law Notes.

  1. #1
    anand
    Guest

    Thumbs up IPCC - Business and Company Law Notes.

    Business Law Notes

    For Full Detail You Can Download This From PDF Format

    Attached Files Attached Files

  2. #2
    anand
    Guest

    Thumbs up IPCC - Business and Company Law Notes.

    Provisions Related with Charges

    CHARGES


    Meaning/Definition of charge

    The term charge has not been defined under the Companies Act, 1956. Section 124 states that the expression "Charge" includes a mortgage.

    However, the language of section 125 use the expression "so far as any security on the company's property or undertaking is conferred thereby" makes it clear that a charge is nothing but security of its property by the company in favour of a creditor with the intent of securing his debt.

    Types of charges


    Basically, there are two types of charges:—

    1. Fixed charge: A fixed charge is a charge that without more fastens on ascertained and definite property or property capable of being ascertained and defined. A company cannot dispose the property without the consent of the charge holder.

    2. Floating charge: A floating charge is a charge on the variable property i.e. the property which keeps on changing. A special feature of this charge is that it is un identifiable with respect to the exact property on which the charge would operate until the crystallisation of the charge. A floating charge is a present security, which affects all the assets of the company expressed to be included in it. A floating security is not a future security; it is a present security, which presently affects all assets of the company expressed to be included in it.

    These charges may be created in favour of the charge holders as per terms and conditions agreed by them, like:—

    (a) Pari passu charge: In pari passu charge, security is shared between two or more lenders in proportion of their out standings. It is created with the prior consent of the existing charge holders of the company.

    (b) Exclusive charge: In exclusive charge the security on the particular property is provided to a particular lender only.

    (c) Further charges: In such cases with the consent of the first charge holders on particular assets may be provided to the further charge holders on the basis of second charge, third charge, etc. It means in case of liquidation of assets the first charge holder shall have right to recover his amount due on the company and any surplus remain on realisation of such properties shall be recovered by the second charge holder and so on.

    REGISTRATION OF CHARGES


    Charges requiring Registration

    As per section 125(4), the following kinds of charges are mandatory and these charges needs to be registered with the Registrar of Companies:—

    (a) A charge for the purpose of securing issue of debentures;
    (b) A charge on uncalled share capital;
    (c) A charge on the immovable property, wherever situated, or any interest therein;
    (d) A charge on any book debts;
    (e) A charge, not being a pledge, on any movable property;
    (f) A floating charge on the undertaking or any property of the company including stockin- trade;
    (g) A charge on calls made but not paid. Section 14 of the Banking Regulation Act, 1949 debars a bank from creating a charge on any unpaid capital;
    (h) A charge on a ship or any share in a ship;
    (i) A charge on a goodwill, patent or on a license under a patent or on a trademark or on a copyright or license under a copyright.

    Registration of charge in connection with the issue of debentures

    Section 128 allows registration of certain particulars in case where a company issues a series of debentures and the debenture holders are entitled pari passu to the benefit of a charge created for the benefit of debenture holders. The company shall file following particulars with the concerned Registrar of Companies for registration of charge under section 125(4):—

    (1) The total amount secured by the whole series.
    (2) The dates of the resolutions authorising the issue of the series and the date of the covering deed, if any, by which the security is created or defined.
    (3) A general description of the property charged.
    (4) The names of the trustees, if any, for the debenture holders.
    (5) The deed containing the charge or a duly verified copy thereof.
    (6) Particulars as to the amount or rate percent of the commission discount or allowance paid or made in connection with debentures. [Section 129]

    Following points shall be noted in this regard:—
    (a) Failure to file particulars of such charge with the Registrar of Companies shall not affect the validity of the debentures issued.
    (b) Debentures may itself contain a charge or give a reference as to any other instrument in this regard.
    (c) The particulars of charge as given above shall be filed together with the deed containing the charge, or a copy of the deed verified in the prescribed manner, or if there is no such deed, one of the debentures of the series.
    (d) The company shall file with the Registrar, particulars of the date and amount of each issue of debentures of series, if there is more than one, but failure to file such particulars shall not affect the validity of the debentures issued.
    (e) Debentures must also be registered under the Indian Registration Act.
    (f) Section 133 requires that the company shall cause a copy of every certificate of registration given under section 132, to be endorsed on every debentur e or certificate of debenture stock which is issued by the company and the payment of which is secured by the charge so registered.

    A company shall not be required to cause a certificate of registration to be endorsed on any debenture or certificate of debenture stock issued by the company, before the charge was created. [Proviso to section 133]

    If any person knowingly delivers, or authorises or permits the delivery of any debenture or certificate of debenture stock which is required to be endorsed with a copy of a certificate of registration, as stated above, without the copy being so endorsed upon it, he shall, without prejudice to any other liability, be punishable with fine which may extend to rupees ten thousand.

    Prescribed forms

    The new prescribed e-Form 8 & 10 vide Companies (Central Government's) General Rules and Forms (Amendment) Rules, 2006 (Form 13 omitted) along with the instruments evidencing the charge shall be filed in on line basis to the MCA/ROC, under the digital signatures of both the company and the creditor along with the requisite fee.

    Time-limit for filing of e-Form 8 & 10

    E-Form 8 with complete requirement must be filed within a period of 30 days from the date of creation u/s 125 or modification of charge u/s 135 on online basis with the RoC.
    The particulars of charges in connection with issue of debentures of a series shall be filed with Registrar of Companies in Form 10, along with copy of instrument creating the charge and with the required filing fees as per Schedule X to the Companies Act, 1956, within a period of 30 days after the execution of deed containing the charge or if there is no such deed, after the execution of any debentures of the series.

    The concerned RoC may allow filing requisite particulars within a period of thirty days next following the expiry of initial thirty days after the date of creation or modification of charge subject to payment of such additional fee not exceeding ten times the amount of fee specified in Schedule X of the Companies Act. However, it is expected that only one time additional filing fee shall be charged by the computer as penalty.

    Responsibility for filing particulars for registration of charge

    It shall be the duty of a company to file with the Registrar, for registration, the particulars of every charge created by the company, and of every issue of debentures of a series, requiring registration under Part V of the Companies Act.

    Particulars for registration of any charge may also be filed by any person interested therein. In this connection, it may be noted that section 134(2) provides that where registration is affected on the application of some person other than the company, that person shall be entitled to recover from the company, the amount of any fees properly paid by him to the Registrar.

    Effects of registration of charge


    Once the particulars of charge has been registered by the Registrar of Companies, it has the following effects:—

    (a) that while dealing with the company in respect of any property subject to a registered charge, the dealer is deemed to have notice of such charge as from the date of such registration.

    (b) Where any person acquires a property or any part thereof, or any share or interest therein, which is subject to charge under section 125(4) and charge has been registered with Registrar, the acquirer shall be deemed to have notice of the charge as from the date of such registration. [Section 126]

    Consequences and penalties of non-filing/registration of particulars of charge with Registrar

    It is a duty of company to file the particular of charges with the Registrar within the stipulated time for registration of particulars of charges. However, the interested parties to the charge may also file these particulars with the Registrar within the stipulated time.

    In case of non- filing and registration of these particulars the following consequences shall arise:—

    (a) all the charges covered under section 125(4) shall become void unless registered by the Registrar and when a charge becomes void under section 125, the money secured thereby shall immediately become payable by the company;
    (b) the charge will be void as against the liquidator (in the event of the company being wound up) and against the creditors, if any, so far as the company is concerned, the charge will be good and it can be enforced so long as the company does not go into liquidation;
    (c) the security becomes void but non-registration does not affect any contract or obligation of the company as to repayment of the money secured by the charge;
    (d) the company, and every officer of the company or other person who is in default, shall be punishable with fine which may extend to Rs. 5,000 for every day during which the default continues [section 142(1)]. A further fine of Rs. 10,000 may also be imposed on the company and every officer of the company who is in default of any other requirements of the Act concerning registration of a charge created by company. [Section 142(2)]


    MODIFICATION OF CHARGES



    Applicability of provisions relating to modification of charge

    Section 135 provides that the provisions of Part V of the Companies Act, 1956 as to registration of charge shall apply to modification of the charge. It can, therefore, be inferred that the provisions relating to certificate of registration of charge, etc., will also apply to modification of charge. In case of modification of charge, the particulars are also required to be furnished in E-Form 8.

    Some of the instances of modification are as follows:
    1. Change in the interest rate amount
    2. Enhancement or reduction of secured borrowing
    3. Modification due to operation of law
    4. Transfer or assignment of rights by charge-holder

    Filing of e-Form 8 or 10 for modification of charge

    A company is obliged to file particulars for modification of charge in proper manner in e- Form together with the instruments evidencing for modification of charge alongwith the adequate filing fees, within 30 days from the date of modification in the existing charge.


    SATISFACTION OF CHARGE



    Satisfaction of charge (Section-138)

    Satisfaction of charge is another important aspect relating to debts created by a charge. In case of a full and complete payment of the secured charge registered with the Registrar of Companies, it is required to file particulars for satisfaction of charge in e-Form 17 with the Registrar of Companies electronically within 30 days from the date of satisfaction or payment of full and final amount to the charge holder.

    It is a duty cast on companies to intimate to the concerned Registrar of Companies about payment in full of any charge relating to the company.

    Prescribed Form


    It shall be the duty of a company to file form-17 with the Registrar for registration, the particulars of satisfaction of charge by the company and of every issue of debentures of a series satisfied.

    Registration of satisfaction of charge by the Registrar

    If e-Form 17 is signed by both the parties and is electronically filed with Registrar the satisfaction of charge shall be registered by it and a certificate to that effect shall be given to the representative of the company or may be sent by post.

    Certificate for satisfaction of charge

    Section 140 provides that where the Registrar enters a memorandum of satisfaction in whole or in part, in pursuance of section 138 or 139, he shall furnish the company with a copy of the memorandum.


    REGISTER OF CHARGES


    Register of charges

    The Registrar of Companies is required to maintain a Register of charges, separately, in respect of each company pursuant to the provisions of section 130 of the Companies Act, 1956. The Registrar of Companies shall cause to be kept a register containing the particulars of all the charges requiring registration under Part V of the Act. Following
    provisions should be taken into consideration in this regard:—

    (i) Requirement of Registrar to maintain Register of charges: As per section 130(1) it is a duty of the Registrar of Companies to keep a Register of charges of each company containing the particulars of all the charges requiring registration under Part V of the Companies Act, 1956.

    (ii) Obligation on company to forward necessary particulars to Registrar: As per section 130(1A) every company is under an obligation to forward to the Registrar the particulars of the charges as are specified in sections 128 and 129 in the case of a charge to the benefit of which the holder of a series of debentures are entitled and in case of other charge particulars as given below, in such form and manner as prescribed and after payment of such fee as given in Schedule X of the Companies Act, 1956, being entered in the Register kept under sub-section (1) of section 130.

    Details of particulars required to be filed with the Registrar for making entry in the Register of charges are as under:—

    (1) if the charge is created by the company, the date of its creation, and if the charge was existing on property acquired by the company, the date of the acquisition of the property;

    (2) the amount secured by the charge;
    (3) short particulars of the property charged; and
    (4) the persons entitled to the charge.

    Physical inspection of Register of charges at the Registrar's Office u/s 130

    Section 130(3) provides that the Register of charges kept in pursuance of section 130 shall be open to inspection by any person on payment of fee of rupees fifty for each inspection. Under the electronic filing system introduced by the Registrar the inspection of charges may be made on payment of required fee on the portal of the Registrar by a registered user as per procedure given on the web site www.mca.gov.in.

    Register of charges maintained by a company

    Section 143 provides for the Register of charges to be maintained by a company, at its registered office. Section 143(1) says that every company shall keep at its registered office a Register of charges and enter therein all particulars of charges specifically affecting property of the company and all floating charges on the undertaking or on any property of the company. Section 136 stipulates that in the case of a series of uniform debentures, it shall be sufficient if a copy of one debenture of the series is kept at the registered office of the company. Following particulars shall be recorded in the Register of charges, to be kept by the company, in respect of each and every charge:—

    (i) a short description of the property charged;
    (ii) the amount of the charge; and
    (iii) except in the case of securities to bearer, the names of the persons entitled to the charge.

    If any officer of the company knowingly omits, or willfully authorises or permits the omission of the entries required to be made in pursuance of section 143(1), he shall be punishable with fine upto rupees five thousand.

    Powers of the Company Law Board/Central Government to condone delay


    Under section 141 the Central Government has been vested with power to condone delay and grant extension of time for filing the particulars of charges or for the registration of the charge or for giving of intimation of payment or satisfaction, if such delay was due to inadvertence or to some other sufficient cause.

    Inadvertence would cover the cases of negligence and carelessness, when it is not actuated by any fraudulent or improper motive. Delay in filing the particulars of a charge created due to inaction could not be condoned.

    The Central Government also has the power to order rectification of the Register of charges in respect of any omission or mis-statement in the register.


    You Can Also Download This From PDF Format
    Attached Files Attached Files
    Last edited by anand; 04-11-2011 at 04:47 PM.

  3. #3
    anand
    Guest

    Thumbs up IPCC - Business and Company Law Notes.

    Notes Related with Prospectus

    September 27, 2009
    Ankur Garg



    Prospectus



    The provisions regarding prospectus are applicable to both listed and unlisted public limited companies.

    A private company cannot invite public to subscribe for its shares in or debentures, therefore, it cannot issue prospectus. [Section 3(1)(iii)]

    Meanings of 'prospectus' and 'abridged prospectus'

    The term 'prospectus' under section 2(36) means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting offers from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures securities of a body corporate.

    The term 'abridged prospectus' under section 2(1) means a memorandum containing such salient features of a prospectus as may be prescribed.

    Only a public company has power and privilege to issue prospectus to public for subscription of shares in or debentures of the company. The prospectus issued by a public company shall contain matters specified in Part I of Schedule II to the Companies Act, 1956. If a public company does not issue a prospectus with reference to its formation then it has to file a statement in lieu of prospectus (SLP) with the concerned Registrar of Companies as desired by Section-70.

    Public companies can not allotment shares unless S.L.P. filed with ROC
    Section 70(1) provides that a company having a share capital, (which does not issue a prospectus on or with reference to its formation, or which has issued such a prospectus but has not proceeded to allot any of the shares offered to the public for subscription,) shall not allot any of its shares or debentures unless at least three days before the first allotment of either shares or debentures, there has been delivered to the Registrar for registration a statement in lieu of prospectus signed by every person who is named therein as a director or proposed director of the company or by his agent authorised in writing, in the form and containing the particulars set out in Part I of Schedule III and, in the cases mentioned in Part II of that Schedule, setting out the reports specified therein, and the said Parts I and II shall have effect subject to the provisions contained in Part III of that Schedule.

    Dating of prospectus
    Section 55 of the Act provides that a prospectus issued by or on behalf of a company or in relation to an intended company shall be dated, and that the date so stated in the prospectus shall be taken as the date of its publication.

    Powers of the Securities and Exchange Board of India
    Section 55A provides that the provisions contained in sections 55 to 58, 59 to 84, 108, 109, 110, 112, 113, 116, 117, 118, 119, 120, 121, 122, 206, 206A and 207, so far as they relate to issue and transfer of securities and non-payment of dividend shall—

    (a) in case of listed public companies;
    (b) in case of those public companies which intend to get their securities listed on any recognised stock exchange in India, be administered by the Securities and Exchange Board of India; and
    (c) in any other case, be administered by the Central Government.

    Content of prospectus

    As per section 56(1) of the Act, every prospectus shall state the matters specified in Part I of Schedule II and the said Parts I and II shall have effect subject to the provisions contained in Part III of Schedule II.

    Who is Authorised to issue prospectus


    As per section 56(1) of the Act, a prospectus can be issued—

    (i) by or on behalf of a company; or
    (ii) by or on behalf of any person who is or has been engaged or interested in the formation of a company.
    The prospectus can be issued on or with reference to the formation of a company.

    Application Form + Memorandum containing salient features of prospectus


    Section 56(3) of the Act, provides that form of application for shares in, or debentures of a company, must be accompanied by a memorandum containing salient features of prospectus. The memorandum containing salient features of prospectus shall contain all particulars as specified in Form 2A of the Companies (Central Government's) General Rules and Forms, 1956.

    However, section 56(3) does not apply, where form of application was issued either:—

    (i) in connection with a bona fide invitation to person to enter into an underwriting agreement with respect to the shares or debentures; or
    (ii) in relation to shares or debentures which were not offered to the public.
    Violation of Section-56 shall be punishable with fine which may extend to fifty thousand rupees. The powers of prosecution under section 56 have been delegated to the SEBI.

    Defense available to directors
    A director or other person responsible for prospectus shall not incur any liability by reason of non-compliance or contravention of prospectus provisions in the following cases: [Section 56(4)]

    (i) as regards any matter not disclosed, if he proves that he had no knowledge thereof;
    (ii) if he proves that the non-compliance or contravention arose from an honest mistake of fact on his part;
    (iii) he shows that the form of application was issued either,—

    (a) in connection with a bona fide invitation to person to enter into an underwriting agreement with respect to the shares or debentures; or
    (b) in relation to the shares or debentures which were not offered to the public;

    (iv) the non-compliance or contravention was in respect of matters which, in the opinion of the Court dealing with the case or otherwise were immaterial and having regard to the circumstances of the case, reasonably to be excused.

    Non-application Section-56 [Section-56(5)]

    Section 56(5) of the Act provides that section 56 do not apply in the following cases:—

    (i) if a company issue shares or debentures of the company, to the existing members or debenture holders of the company as right issue;

    (ii) if a company issue shares or debentures which are, or are to be, in all respects uniform with the shares or debentures previously issued and for the time being dealt in or quoted on a recognised stock exchange.

    Expert's statement
    A prospectus inviting persons to subscribe for shares in or debentures of a company may contain a statement purporting to be made by an 'expert' only when the expert is a person who is not, or has not been, engaged or interested in the formation or promotion, or in the management of the company. [Section 57]
    Section 58 of the Act provides that a prospectus inviting persons to subscribe for the shares in or debentures of a company and including a statement purporting to be made by an expert shall be issued only after fulfillment of following conditions, namely:—

    (i) the expert has given his written consent to the issue of prospectus with the statement included in the form and context in which it is included, and has not withdrawn such consent before the delivery of a copy of the prospectus to the Registrar for registration;

    (ii) the statement that he has given and has not withdrawn his consent as aforesaid appears in the prospectus.

    Section 59(2) of the Act has also defined the term 'Expert', which includes an engineer, a valuer, an accountant and any other person whose profession gives authority to a statement made by him.

    A company, which includes statements of expert must ensure that:—

    (i) the expert has given his written consent to the issue of prospectus containing his statement;
    (ii) the expert's statement has been included in the prospectus in the same form and context in which he has given the same;
    (iii) the expert has not withdrawn his consent as given in writing before the delivery of a copy of a prospectus to the Registrar of Companies for registration;
    (iv) prospectus shall contain a statement that the expert has given his consent and has not withdrawn the same; and
    (v) the expert must be a person who is not or has not been engaged or interested in the formation or promotion, or in the management of the company.

    Penalty

    If any prospectus is issued in contravention of section 57 or 58 of the Companies Act, 1956, the company, and every person, who is knowingly a party to the issue thereof, shall be punishable with a fine which may extend to fifty thousand rupees. [Section 59(1)]

    Registration of prospectus and related formalities


    After approval by the Board, the prospectus will be signed by the directors or their duly constituted attorneys in writing. The Board may also authorize the company secretary or any other official to deliver a copy of prospectus to the Registrar of Companies for its registration. Delivery of a copy of prospectus to the concerned Registrar for registration is a pre-condition to issue of a prospectus by or on behalf of a company.

    Section 60(2) specify that every prospectus issued by or on behalf of a company or in relation to an intended company shall state following facts on the face of it:—

    (i) a copy of prospectus has been delivered to the concerned Registrar of Companies for registration as required by section 60 of the Companies Act, 1956;
    (ii) mention that if any documents which are required by section 60 of the Act to be endorsed on or attached to the copy so delivered to Registrar, or refer to any statements included in the prospectus which specify those documents.

    Prospectus must be issued within 90 days after the date of delivery to the Registrar
    As per Section 60(4) no prospectus shall be issued more than ninety days after the date on which a copy thereof is delivered to the concerned Registrar of Companies for registration under section 60(1) of the Act.

    If a prospectus is issued more than ninety days after the date on which a copy thereof is delivered to the concerned Registrar of Companies u/s 60(1), it shall be deemed to be a prospectus, which has not been delivered under section 60(1) to the Registrar. Person who violats the above provisions shall be punishable with fine which may extend to Rs. 50,000. [Section 60(5)]

    Shelf prospectus
    "Shelf prospectus" means a prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in that prospectus.
    Under the Act, a company must issue a full-fledged prospectus each time it accesses the capital market, it certainly leads to needless repetition more so when a company takes recourse to capital markets more than once in a given year.

    Section 60A provides that the financial institutions may issue a "shelf prospectus" for a specified time period. Such a prospectus has a limited life during which it remains on the "shelf", and is updated for any changes that may have occurred between two successive offerings.
    According to section 60A(1), any public financial institution, public sector bank or scheduled bank whose main object is financing shall file a shelf prospectus.

    Validity period of shelf prospectus
    Shelf prospectus will be valid for a period of one year from the date of opening of the first issue of securities under a shelf prospectus. Section 60A(2) provides that a company filing a shelf prospectus with the Registrar shall not be required to file prospectus afresh at every stage of offer of securities by it within a period of validity of such shelf prospectus.

    Requirement for filing of information memorandum on all material facts for changes Section 60A(3) provides that a company filing a shelf prospectus shall be required to file an information memorandum on all material facts relating to new charges created, changes in the financial position as have occurred between the first offer of securities, previous offer of securities and the succeeding offer of securities within such time as may be prescribed by the Central Government, prior to making of a second or subsequent offer of securities under the shelf prospectus.

    An information memorandum shall be issued to the public along with the shelf prospectus filed at the stage of the first offer of securities and such prospectus shall be valid for a period of one year from the date of opening of the first issue of securities under that prospectus.

    Therefore, an update of information memorandum is required to be filed every time if an offer of securities is made, such memorandum together with the shelf prospectus shall constitute the prospectus.


    Information memorandum (IM)



    Section 60B contains provisions in relation to 'information memorandum'. The procedure for circulation of information memorandum and inviting subscription are as follows:—

    (1) A public company making an issue of securities may circulate information memorandum to the public prior to filing of a prospectus. [Section 60B(l)]

    (2) It is mandatory for a company inviting subscription by an information memorandum to file a prospectus prior to the opening of the subscription lists & the offer as a redherring prospectus, at least 3 days before the opening of the offer. [Section 60B(2)]

    (3) The information memorandum and red-herring prospectus shall carry same obligations as are applicable in the case of a prospectus. [Section 60B(3)]

    (4) Any variation between the information memorandum and the red-herring prospectus shall be highlighted as variations by the issuing company. [Section 60B(4)]
    For the purposes of sub-sections (2), (3) and (4), "red-herring prospectus" means a prospectus which does not have complete particulars on the price of the securities offered and the quantum of securities offered. [Explanation to section 60B(4)]

    (5) Every variation as made and highlighted in accordance with sub-section (4) above shall be individually intimated to the persons invited to subscribe to the issue of securities. [Section 60B(5)]

    (6) In the event of the issuing company or the underwriters to the issue have invited or received advance subscription by way of cash or post-dated cheques the company or such underwriters or bankers to the issue shall not encash such subscription moneys or post-dated cheques before the date of opening of the issue, without having individually intimated the prospectus subscribers of the variation and without having offered an opportunity to such prospective subscribers to withdraw their application and cancel their post-dated cheques or stock-invest or return of subscription paid. [Section 60B(6)]

    (7) The applicant or proposed subscriber shall exercise his right to withdraw from the application on any intimation of variation within seven days from the date of such intimation and shall indicate such withdrawal in writing to the company and the underwriters. [Section 60B(7)]

    (8) Any application for subscription which is acted upon by the company or underwriters or bankers to the issue without having given enough information of any variations, or the particulars of withdrawing the offer or opportunity for cancelling the postdated cheques or stop payments for such payments shall be void and the applicants shall be entitled to receive a refund or return of its post-dated cheques or subscription moneys or cancellation of its application, as if the said application had never been made and the applicants are entitled to receive back their original application and interest at the rate of fifteen per cent, from the date of encashment till payment or realisation. [Section 60B(8)]

    (9) Upon the closing of the offer for securities, a final prospectus stating therein the total capital raised, whether by way of debt or share capital and the closing price of the securities and any other details as were not complete in the red-herring prospectus shall be filed in a case of a listed public company with the Securities and Exchange Board and Registrar, and in any other case with the Registrar only. [Section 60B(9)]

    Terms of contract mentioned in prospectus or SLP not to be varied
    A company shall not, at any time, vary the terms of a contract referred to in the prospectus or statement in lieu of prospectus without the approval of the company in general meeting. If terms of a contract mentioned in prospectus are varied subject to the approval of the company then the approval of the general meeting shall be obtained subsequently. [Section 61]

    Liability for misstatements in prospectus

    1. Civil liability
    Being a primary document in respect of every public issue of securities the prospectus of the company must not suppress any material fact or omission of which may affect the decision of the investors. There are two kinds of liabilities provided under the Companies Act, 1956 for misstatements in prospectus. One is the civil liability provided
    under section 62 and the other is a criminal liability prescribed under section 63 of the Act.

    The following persons shall be liable to pay compensation to every person who subscribes for any shares in or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of any untrue statement contained in the prospectus:—

    (a) every person who is a director of the company at the time of the issue of the prospectus;
    (b) every person who has authorised himself to be named and is named in the prospectus either as a director, or as having agreed to become a director, either immediately or after an interval of time;
    (c) every person who is a promoter of the company; and
    (d) every person who has authorised the issue of the prospectus.

    Consent given by a person as an expert in respect of his statement contained in the prospectus under section 58 or consent in writing given by any person named as auditors, etc., in the prospectus under section 60(3) shall not make such person liable as a person who has authorised the issue of the prospectus and such person can be held liable only in respect of an untrue statement, if any, purporting to be made by him as an expert.

    Defance

    However, a person shall not be liable for misstatements in prospectus under section 62(1), if he proves that:—

    (a) having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent;
    (b) the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave reasonable public notice that it was issued without his knowledge or consent;
    (c) after the issue of the prospectus and before allotment thereon, becoming aware of any untrue statement contained therein, withdrew his consent to the prospectus and gave reasonable public notice of the withdrawal and of the reasons therefor; or

    (d) (i) as regards every untrue statement not purporting to be made on the authority of an expert or of a public official document or statement, he had reasonable ground to believe, and did up to the time of the allotment of the shares or debentures, as the case may be, believe, that the statement was true; and

    (ii) as regards every untrue statement by an expert or contained in what purports to be a copy of or an extract from a report or valuation of an expert, it was a correct and fair representation of the statement; and

    (iii) as regards every untrue statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document, it was a correct and fair representation of the statement or a correct copy of, or a correct and fair extract from, the document.

    It has been provided that section 62(2) shall not apply in the case of a person liable, by reason of his having given a consent required of him by section 58, as a person who has authorised the issue of the prospectus in respect of an untrue statement, purporting to be made by him as an expert.

    2. Criminal liability
    Section 63 of the Act says that where a prospectus issued, if it includes any untrue statement, every person who authorised the issue of the prospectus shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to Rs. Fifty thousand rupees, or with both, unless he proves either that the
    statement was immaterial or that he had reasonable ground to believe, and did up to the time of the issue of the prospectus believe, that the statement was true.


    Defance



    For defending from the criminal liability to such person has to prove that:—

    (a) either that the statement was immaterial; or
    (b) that he was having reasonable ground to believe, that the statement was true and did so up to the time of the issue of the prospectus.

    However, the auditor, legal adviser, attorney, solicitor, banker and broker of the prospective company and even an expert giving his consent under section 58 will also be deemed to be persons who authorised the issue of the prospectus subject to the limited sphere of their liability.

    ground for an action in the nature of an action for misrepresentation. There must be some active misstatement of facts. The withholding of facts should be such, withholding which if not stated, makes that which is stated, absolutely false.

    It may be concluded that in order to make a prospectus fraudulent it is not necessary that there should be false representation in it; even if every word is true, the suppression of material facts may render it fraudulent. To judge its effect, it should be read as a whole. It is not necessarily enough if the prospectus refers to the contracts and puts the intending shareholder upon enquiry as to their contents. As is said that sometimes half a truth is no better than downright falsehood.

    Deemed prospectus (Section-64)

    Section 64 contains provisions as regards any document containing offer of shares in or debentures for sale shall be deemed to be prospectus. Following are the provisions in this regard:—

    (i) Where a company allots or agrees to allot any shares in, or debentures of the company with a view to all or any of those shares in or debentures being offered for sale to the public, any document by which the offer for sale to the public is made shall, for all the purposes, be deemed to be a prospectus issued by the company.

    The condition for deemed prospectus is that the intention of the company behind allotment or agreement to allot shares in or debentures is that all or any of such shares in or debentures be offered for sale to the public and all enactments and rules of law as to the contents of prospectus shall apply.

    (ii) It can be assumed that the shares in or debentures have been issued to public for subscription and the persons accepting the offer for shares in or debentures are subscribers for these shares in or debentures. But liability of persons by whom offer is made in respect of misstatements contained in the document or otherwise in respect thereof shall remain unaffected.

    Pre-conditions

    (iii) It shall, unless the contrary is proved, be evidence that an allotment of, or agreement to allot, shares in or debentures was made with a view to the shares in or debentures being offered for sale to the public if it is shown:—

    (a) that an offer of the shares or debentures or of any of them for sale to the public was made within six months after the allotment or agreement to allot; or
    (b) that at the date when the offer was made, the whole consideration to be received by the company in respect of the shares or debentures had not been received by it.

    (iv) Section 56 as applied by this section shall have effect as if it required a prospectus to state in addition to the matters specified in Part I of Schedule II and reports specified in Part II of Schedule II, the prospectus to be stated in a prospectus: [Section 64(3)]
    (a) the net amount of the consideration received or to be received by the company in respect of the shares or debentures to which the offer relates; and
    (b) the place and time at which the contracts under which the said shares or debentures have been or are to be allotted may be inspected.
    (v) The provisions of section 60 read with section 64 shall have effect as if the persons making the offer were persons named in a prospectus as directors of a company.

    Signature requirements
    (vi) Where any person making an offer to which section 64 of the Act relates is a company or a firm, it shall be sufficient if the document referred in section 64(1) is signed on behalf of the company or firm by two directors of the company or by not less than one half of the partners in the firm, as the case may be and any such directors or partner may sign by his agent authorised in writing. [Section 64(5)]
    (vii) An offer or invitation shall not be treated as made to the public if following two conditions are satisfied: [Section 67(3)]
    (a) if the offer or invitation can properly be regarded as not being calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation; or
    (b) if the offer or invitation can properly be regarded as being a domestic concern of the persons making and receiving the offer or invitation.

    Newspaper advertisements of prospectus
    Where any prospectus is published as a newspaper advertisement, it is not necessary in the advertisement to specify following, namely:—

    (i) contents of memorandum;
    (ii) signatories to memorandum;
    (iii) the numbers of shares subscribed for by signatories.

    Mandatory contents of Prospectus announcements


    Following matters must be included in the announcement of prospectus:—

    (1) Date of incorporation of the company.
    (2) Location of registered office.
    (3) Names of the Stock Exchanges where listing is proposed.
    (4) Minimum subscription.
    (5) Dates of opening, closing and earliest closing of subscription list.
    (6) Disclaimer clause of SEBI.
    (7) Capital structure of the company.
    (8) Highlights and risk factors.
    (9) Brief history of the company.
    (10) Main objects of the company.
    (11) Present business activities of the company.
    (12) Names and description of promoters/directors and changes if any.
    (13) Management of the company.
    (14) Objects of the present issue.
    (15) Cost of the project.
    (16) Means of financing.
    (17) Details of the projects includes:—
    — Location of project.
    — Requirement of plant and machinery and arrangements made there for.
    — Land and building.
    — Technical arrangements.
    — Manufacturing process.
    — Infrastructure facilities.
    — Requirement and source of raw materials.
    — Requirement of power and arrangements made therefor.
    — Requirement of water and arrangements made therefor.
    — Status of Pollution control and clearance obtained for that purpose.
    (18) Justification of premium.
    (19) Outstanding litigations/disputes against the company and promoters and its impact on the company.
    (20) Material developments since the date of the last balance-sheet.
    (21) Authority for the present issue.
    (22) Profitability projections and comments regarding appraisal, etc.
    (23) Name and address of Company Secretary and Compliance Officer.
    (24) Name and address of Legal Advisor.
    (25) Auditor.
    (26) Agents and Trustees for debentureholders.
    (27) Credit rating.
    (28) Underwriters to the issue.
    (29) Bankers to the issue and their collecting branches.
    (30) Availability of application forms and prospectus.
    (31) Lead managers to the issue.
    (32) Co-managers to the issue.
    (33) Legal Advisor to the issue.
    (34) Registrar to the issue.

    Penalty for impersonation for acquisition, etc., of shares

    Section 68A(1) provides that any person who:—

    (a) makes in a fictitious name, an application to a company for acquiring, or subscribing for, any shares in or debentures therein, or
    (b) otherwise induces a company to allot, or register any transfer of shares therein to him, or any other person in a fictitious name, shall be punishable with imprisonment for a term which may extend to five years. The provisions as contained in section 68A(1) shall be prominently reproduced in every prospectus issued by the company and in every form of application for shares, which is issued by the company to any person. It is a general practice to reproduce the provisions of section 68A(1) in bold letters in the prospectus and form of application issued by companies.

    Any person who, either knowingly or recklessly by making any statement, promise or forecast which is false, deceptive or misleading, or by any dishonest concealment of material facts, induces or attempts to induce another person to enter into or to offer to enter into:—

    (a) any agreement for, or with a view to, acquiring, disposing of, subscribing for or underwriting shares or debentures; or
    (b) any agreement the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of shares or debentures, or by references to fluctuations in the value of shares or debentures;

    shall be punishable with imprisonment for a term which may extend to five years or with a fine which may extend to one lakh rupees, or with both.


    You Can Also Download This From PDF Format
    Attached Files Attached Files
    Last edited by anand; 04-11-2011 at 04:50 PM.

  4. #4
    anand
    Guest

    Thumbs up IPCC - Business and Company Law Notes.

    Provisions Related with Dividend

    Declaration of Dividend

    DIVIDEND

    Meaning: Dividend means the portion of the profit received by the shareholders from the company's net profit, which is legally available for distribution among the members.
    Therefore, dividend is a return on the share capital subscribed for and paid to its shareholders by a company.

    Dividend defined under section 2(14A) of the Companies Act, 1956, includes any interim dividend.

    Types of dividend

    There may be two types of dividend:—
    (a) Interim dividend, and
    (b) Final dividend.

    Meaning of Interim dividend
    Dividend is said to be an interim dividend, if it is declared by the Board of directors between two annual general meetings of the company. However, all the provisions relating to the payment of dividend shall be applicable on interim dividend also.

    Meaning of Final dividend
    Dividend is said to be a final dividend if it is declared at the annual general meeting of the company. Final dividend once declared becomes a debt enforceable against the company.

    Compulsory requirement for making provisions for depreciation before payment of dividend


    As desired by section 205 of the Act, no company can pay dividend in any year without charging depreciation in the profit and loss account for the current year and that there is no balance of un provided depreciation of any earlier year or years.
    However, the Central Government has power to allow any company in the public interest to pay dividend for any financial year out of the profits for that year or any previous financial year without providing for depreciation. [Section 205(1)(c)] The application is required to be filed to the Central Government electronically in E-form-23AAC.

    Guidelines for providing depreciation before payment of dividend

    1. Provision for depreciation as per section 205(2), is a condition precedent for declaration or payment of dividend.
    2. Depreciation can be provided in any of the following ways:
    (a) To the extent specified in section 350; or
    (b) In respect of each item of depreciable asset;
    Depreciation = 95% of original cost of asset Period of life of the asset
    (c) Any other basis approved by the Central Government which has the effect of writing off by way of depreciation 95% of the original cost to the company of a depreciable asset on the expiry of the specified period; or
    (d) Any other basis approved by the Central government incase where no rate of depreciation been prescribed in respect of any asset under Schedule XIV of the Companies Act, 1956 or rules thereunder.

    3. The original cost is only for the purpose of determining the quantum of annual installment of depreciation under the straight-line method and determination of the specified period in accordance with section 205(a).
    4. Specified period in respect of any depreciable asset means the number of years at the end of which 95% of the original cost of the asset will have been provided for by way of depreciation, if depreciation were to be provided in accordance with the provision of section 350.
    5. Specified period is determined at the time of purchase of an asset in accordance with the procedures laid down in section 205(5) read with section 350 with reference to the rate of depreciation.
    6. Specified period once determined may not be re-computed.
    7. If a company has provided for depreciation on any asset in the manner mentioned in section 205(2)(b) or (c), and such asset is sold, discarded, demolished or destroyed, then the written value of such asset at the end of the financial year in which it is sold, discarded, demolished or destroyed, shall be written off in accordance with the proviso of section 350.
    8. According to the proviso of section 350, if there is any excess of the written down value of such asset over its sale proceeds or its scrap value, such excess value shall be written-off in the financial year in which the asset is sold, discarded, demolished or destroyed.
    9. The Central Government may, if it thinks necessary to do so in the public interest, allow any company to declare or pay dividend for any financial year out of the profits of the company for that year or any previous financial year(s) without providing for depreciation.
    10. If a company has not provided for depreciation for any previous financial year(s) then the company shall before declaring or paying dividend for any financial year, provide for such depreciation.
    11. Arrears of depreciation, if any, for any previous year(s) must also be provided for, before declaring any dividend.

    Compulsory transfer of certain percentage of profit to reserves

    Every company shall transfer a portion of its net profit of the year to general reserve before deciding to pay dividend. The amount of net profit transferred to reserve shall vary with the rate of dividend proposed to be paid and as per the Companies (Transfer of Profits to Reserves) Rules, 1975.

    Restriction on payment of dividend on equity shares
    A company, which has failed to redeem its preference shares as per section 80A, so long as such failure continues, shall not declare any dividend on its equity shares. [Section 205(2B)]

    Final dividend to be declared at an annual general meeting
    A final dividend is declared at an annual general meeting where, among other things, the annual accounts are considered and adopted.

    Restriction on company’s power: It is beyond the powers of the company to declare a further dividend at a general meeting after the declaration of dividend at the annual general meeting.

    However, as per Department of Company Affairs clarification vide Circular No. 22 [7/9/74-CL-II], dated 25-9-1975 a company, which could not declare a dividend at an annual general meeting, may declare the dividend at a subsequent general meeting as there is no provision in the Companies Act prohibiting the declaration of dividend at a general meeting other than the annual general meeting of the company (Regulation 85 of Table A of Schedule I) unless otherwise, provided in the Articles of Association.

    It was decided by the Calcutta High Court in Biswa Nath Pd. Khaitan v New Central Jute Mills Ltd. (1961) that a company, which could not declare a dividend at an annual general meeting, may do so at a subsequent general meeting. On the other hand, where a company has declared a dividend at a general meeting neither the company nor its directors can declare a further dividend for the same year.

    Declaration of dividend out of previous years profits transferred to the reserves
    In case if the current year's net profits are not adequate or not available, a company may draw the required amount from reserves created out of transfer of profit in previous years as per the Companies (Declaration of Dividend out of Reserves) Rules, 1975 subject to the following conditions:—

    (i) The rate of dividend declared shall not exceed the average rate of dividend declared in the five years preceding the current year or 10% of the paid-up capital, whichever is less.
    (ii) The maximum amount to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed 10% of the paid-up capital and reserves and the amount so drawn shall be first utilised for writing off losses incurred before declaration of any dividend in respect of preference or equity shares.
    (iii) The balance remaining in the reserves after such drawal shall not fall below 15% of the paid-up share capital.

    Articles authorization is necessary for payment of dividend
    Unless there is a suitable provision in the articles for authorisation for payment of dividend, the Board will not be able to recommend dividend for the approval of members.
    Similarly, unless there is a provision in the articles authorising the Board to approve for payment of interim dividend, the Board cannot take any action in respect of payment of interim dividend.

    If the articles do not contain the provis ions for authority to pay dividend, it should be suitably amended before taking any decision by the Board of directors of the company.

    Recommendation of dividend by the Board is compulsory
    If the Board does not recommend any dividend, the company in general meeting cannot consider and approve any dividend for payment. The company in general meeting cannot also increase the rate of dividend recommended by the Board.

    Board's recommendation can be withdrawn before communication to others
    Since the director's recommendation of dividend is only a proposal, it can be withdrawn by the Board before it is included in the notice for the annual general meeting.

    Dividend becomes unsecured debt after approval in the general meeting
    Where a dividend is approved by the shareholders at the annual general meeting, it becomes a debt against the company and it is deemed to be receivable by the members only if it is approved by the members in the AGM.

    Dividend shall be paid to registered shareholders
    Section 206 provides that no dividend shall be paid by a company in respect of any shares therein except:—
    (a) to the registered holders of such shares or to his order to his bankers; or
    (b) in case if the share warrants has been issued in respect of shares u/s 114, to the bearer of such warrants or to his bankers.

    In the case of joint holdings, the dividend shall be paid to the person whose name is registered first in the books.

    Dividend warrants shall be posted/sent/credited within 30 days from the date of
    approval

    Pursuant to section 207, where a dividend has been declared by a company, it has to be paid or the warrant in respect thereof has to be sent/posted within 30 days from the date of declaration to the shareholders entitled to the same. Dividend warrants in respect of interim dividend shall also be posted within 30 days from the date of approval of the Board of directors of the company.

    If the above provision could not be followed for the following reasons, no offence shall be deemed to have been committed by the company:—

    (a) where the dividend could not be paid due to reason of operation of law;
    (b) where a shareholder has given directions to the company regarding the payment of dividend and those directions could not be complied with;
    (c) where there is a dispute regarding the right to receive dividend;
    (d) where the dividend has been lawfully adjusted by the company against any sum due from the shareholder; or
    (e) where the delay is not due to default on the part of a company.

    Where dividend is not paid or warrant have not been posted within 30 days from the date of declaration to any shareholder entitled to the payment of the dividend, every director shall, if he is knowingly a party to the default, be punishable with simple imprisonment up to three years and shall also be liable to a fine up to Rs. 1,000 per day during which the default continues. The company shall also be liable to pay interest at 18% per annum for the period of default.

    Once a dividend warrant is posted at the registered address of the shareholder, it is deemed to have been paid within the meaning of section 205A. The section made failure to post the warrant, and not its non-receipt by the shareholder is an offence. The obligation to pay the dividend would be discharged when either is done.

    The registered holder may ask the company to send the dividend to his banker or to any other person, which the company is bound to honour. In the case of joint holding if the dividend is payable to a person other than the registered holder, such a request shall be signed by all the holders.

    Closure of Register of members
    A company may close the Register of members for the purpose of ascertaining who are eligible to receive dividend on the date of declaration of dividend. In case of the annual dividend, the persons who are members as on the date of the annual general meeting will be eligible to receive the dividend as the dividend is approved by the members on the day when annual general meeting is held.

    Dividend to be kept in abeyance in respect of pending of registration of transfer of
    shares lodged with the company

    Section 206A provides that where valid transfer deed has been lodged with the company which has not been registered by the company, it shall withhold payment of the dividend on such shares till the shares are registered. This section does not apparently apply to a transfer, which has been refused.
    But where the rejection is on account of reasons like difference in signature, insufficient stamp, etc., it will be desirable for the company to wait and keep in abeyance the dividend till the irregularity is removed to enable the company to register the transfer and pay the dividend to the transferee.

    Opening of a separate bank account for making payment of dividend and deposit the amount of dividend into the account within a period of 5 days of its declaration
    Section 205A state that the amount of dividend including interim dividend shall be deposited in a separate bank account within five days from the date of such declaration.
    Therefore, a company cannot use the amount even up to the period of thirty days and it is obligatory on the part of the company to keep the entire amount of the dividend into a separate bank account, which shall be exclusively utilised for payment of the dividend.
    A company which has declared dividend must open an account in a scheduled bank and transfer the entire net amount of dividend to the above account within 5 days from the date of declaration and simultaneously should dispatch the dividend warrants to the shareholders and should not wait for 37 (30+7) days to transfer the amount to that account.


    INTERIM DIVIDEND



    1. Interim dividend
    Dividend includes any interim dividend. Before declaration of interim dividend, it is legal obligation on the Board of directors of the company to satisfy that the financial position of the company is sound enough for declaration of dividend out of net profit of the company available for distribution after providing for depreciation and making the mandatory transfer of profits to reserves.

    2. The Articles must provide power to pay Interim dividend
    The Articles of the company must authorise the Board to declare interim dividend. Regulation 86 of Table 'A' provides that the Board may from time to time pay to the members such Interim dividend as appear it to be justified by the profit of the company. Where there is no power in the articles authorising the Board to pay interim dividend, the only way open to the company is to pay dividend after the same is declared at the annual general meeting. Even in respect of the latter the Articles must contain the provision therefor.

    3. Interim dividend should be declared by the Board at the meeting
    A Board meeting should be called and rate at which dividend payable must be specifically stated in the resolution passed for declaration of interim dividend.
    Declaration of interim dividend by directors does not create a debt; but declaration of dividend at a general meeting of company does.

    4. Amount of Interim dividend must be transferred to a separate bank account and payment must be paid within 5 days
    Interim dividend declared by the Board of directors of the company shall be transferred to the separate bank account within 5 days of such declaration and the amount so transferred shall not be utilised for any other purpose. The Interim dividend shall also be paid within thirty days from the date of its declaration by the Board.

    5. Mode of payment of Interim dividend
    Interim dividend shall be payable in cash and may be paid by cheque or warrant sent through the post direct to the registered address of the shareholder entitled to the payment of Interim dividend, or in the case of joint shareholders, to the registered address of that one of the joint shareholders who is first named on the register of members, or to such person and to such address as the shareholders or the joint shareholders may in writing direct.

    6. Transfer of unpaid/unclaimed Interim dividend to the Investor Education and Protection Fund

    The provisions of sections 205A and 205C shall also apply to the Interim dividend which provides that any amount of unpaid or unclaimed dividend shall be transferred after 7 years to the Investor Education and Protection Fund established by the Central Government as dividend includes Interim dividend, the company will have to comply with the provision of said sections in respect of Interim dividend.

    7. Revocation of Interim dividend cannot be made
    Section 2(14A) provides that the dividend includes interim dividend, therefore, once it has been declared and communicated, it shall become a debt for a company and cannot be revoked by the Board of directors after its declaration.

    8. Approval of members at the general meeting for Interim dividend
    If the Interim dividend is approved by the Board of directors, the amount of Interim dividend shall be included in the profit and loss account for the year and also in the directors' report alongwith the final dividend, if any, proposed for the approval of the members at the forthcoming annual gene ral meeting. When the audited accounts and directors' report are placed at the annual general meeting and adopted by the members, the interim dividend is deemed to have been approved by the company in general meeting.

    Approval of dividend is the privilege of the general meeting and the Board can pay interim dividend if so authorised by the Articles of Association subject to the regularisation of the interim dividend by the company in general meeting. The general meeting for this purpose shall be an annual general meeting only, for the profit for the financial year would not otherwise be known. [Letter No. 8/13/(205)/79-CL-V, dated 18- 7-1981].

    FINAL DIVIDEND



    1. Declaration of dividend is an ordinary business
    Section 173(1)(a)(ii) provides that the declaration of a dividend is an ordinary business to be transacted at an annual general meeting.

    2. Declaration of dividend at an extraordinary general meeting — whether
    permissible

    If the Articles of a company permits the declaration of dividend at an extraordinary general meeting, it will not be considered ultra vires. A company which could not declare a dividend at an annual general meeting can declare dividend at the ensuing general meeting. But if a company had declared final dividend at an annual general meeting, the company cannot declare further dividend for the same year.

    3. Declaration of dividend for previous years is not permissible
    A company cannot declare dividend for the past years or with retrospective effect after closing of the respective year's accounts and adoption by members in annual general meeting for that year.

    4. Recommendation of dividend by the Board
    The Board of directors of a company shall recommend in the directors' report the rate of dividend and the amount, if any, which should be paid by way of dividend. [Section 217(1)(c)]

    5. Withdrawal of recommendation of dividend

    The recommendation of dividend by directors is merely a proposal and it can be rescinded before it is included in the notice of annual general meeting sent to members of the company. Recommendation of dividend by Board of directors for declaration at the ensuing annual general meeting of the company is not a debt enforceable against the company.
    Dividend once declared at an annual general meeting becomes a debt due and enforceable against the company.

    6. Revocation of final dividend declared by the members at a general meeting

    Since, the declaration of dividend at a general meeting creates a debt enforceable against the company, it cannot be revoked even with the consent of the shareholders.

    7. Payment of dividend out of reserves
    Section 205A(3) of the Companies Act, 1956 read with the Companies (Declaration of Dividend out of Reserves) Rules, 1975 deals with the power of a company to declare dividend out of reserves.

    In case of inadequacy or in the absence of profits in any year, if any company proposes to declare dividend out of the accumulated profits earned by the company in any previous years and transferred by it to the reserves, such declaration or dividend shall be made in accordance with the Companies (Declaration of Dividend out of Reserves) Rules, 1975. The company must observe the following conditions in such case:—

    (i) There is either absence or inadequacy of profits in the year for which dividend is proposed to be declared.
    (ii) The rate of the dividend declared shall not exceed the average of the rates at which dividend was declared by it in the five years immediately preceding that year or 10% of its paid-up capital, whichever is less.
    (iii) The total amount to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed an amount equal to 1/10th of the sum of its paid up capital and free reserves and the amount so drawn shall first be utilised to set off the losses incurred in the financial year before any dividend in respect of preference or equity shares are declared.
    (iv) The balance of reserves after such drawal shall not fall below 15% of its paid-up share capital.

    8. Requirement for compulsory transfer of certain percentage of profit to reserves
    for declaring dividend

    A company may declare or pay dividend for any financial year out of the profits of the company for that financial year arrived at after providing depreciation as per section 205(2) provided it transfers to its reserves prescribed percentage (not exceeding 10%) of the profits.


    SECRETARIAL STANDARDS ON DIVIDEND



    The Institute of Company Secretaries of India has issued SS-3 namely Secretarial Standards on dividend, which apply to interim as well as final dividend of a company.



    COMPANIES (TRANSFER OF PROFITS TO RESERVES) RULES, 1975



    In exercise of the powers conferred by sub-section (2A) of section 205, read with clause (a) of sub-section (1) of section 642 of the Companies Act, 1956 (1 of 1956), the Central Government hereby makes the following Rules, namely:—

    1. Short title.—These Rules may be called the Companies (Transfer of Profits to Reserves) Rules, 1975.

    2. Percentage of profits to be transferred to reserves.—No dividend shall be declared or paid by a company for any financial year out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of subsection (2) of section 205 of the Act, except after the transfer to the reserves of the company of a percentage of its profits for that year as specified below.—

    (i) where the dividend proposed exceeds 10 per cent but not 12.5 per cent of the paid up capital, the amount to be transferred to the reserves shall not be less than 2.5 per cent of the current profits;
    (ii) where the dividend proposed exceeds 12.5 per cent, but does no exceed 15 per cent of the paid up capital, the amount to be transferred to the reserves shall not be less than 5 per cent of the current profits;
    (iii) where the dividend proposed exceeds 15 per cent, but does not exceed 20 per cent of the paid up capital, the amount to be transferred to the reserves shall not be less than 7.5 per cent of the current profits; and
    (iv) where the dividend proposed exceeds 20 per cent of the paid up capital the amount to be transferred to reserves shall not be less than 10 per cent of the current profits.

    3. Conditions governing voluntary transfer of a higher percentage.—Nothing in rule 2 shall be deemed to prohibit the voluntary transfer by a company of a percentage higher than 10 per cent of its profits to its reserves for any financial year, so however that.—

    (i) Where a dividend is declared,—

    (a) a minimum distribution sufficient for the maintenance of dividends to shareholders at a rate equal to the average of the rates at which dividends declared by it over the three years immediately preceding the financial year; or

    (b) in a case where bonus shares have been issued in the financial year in which the dividend is declared or in the three years immediately preceding the financial year, a minimum distribution sufficient for the maintenance of dividends to shareholders at an amount equal to the average amount (quantum) of dividend declared over the three years immediately preceding the financial year, is ensured:

    Provided that in a case where the net profits after tax are lower by 20 per cent, or more than the average net profits after tax of the two financial years immediately preceding, it shall not be necessary to ensure such minimum distribution.

    (ii) Where no dividend is declared, the amount proposed to be transferred to its reserves from the current profits shall be lower than the average amount of the dividends to the shareholders declared by it over the three years immediately preceding the financial year.

    4. Penalty.—If a company fails to comply with any of the provisions contained in these Rules, the company and every officer of the company in default shall be punishable with fine which may extend to five hundred rupees, and, where the contravention is a continuing one, with a further fine which may extend to fifty rupees for every day, after the first, during which such contravention continues.

    COMPANIES (DECLARATION OF DIVIDEND OUT OF RESERVES) RULES, 1975



    In exercise of the powers conferred by sub-section (3) of section 205A, read with clause (a) of sub-section (1) of section 642 of the Companies Act, 1956 (1 of 1956), the Central Government hereby makes the following Rules, namely:—

    1. Short title.
    —These Rules may be called the Companies (Declaration of Dividend out of Reserves) Rules, 1975.

    2. Declaration of dividend out of reserves.—In the event of inadequacy or absence of profits in any year, dividend may be declared by a company for that year out of the accumulated profits earned by it in previous years and transferred by it to the reserves, subject to the conditions that—

    (i) the rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the five years immediately preceding that year or ten per cent of its paid up capital, whichever is less;
    (ii) the total amount to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed an amount equal to one-tenth of the sum of its paid up capital and free reserves and the amount so drawn shall first be utilised to set off the losses incurred in the financial year before any dividend in respect of preference or equity shares is declared;
    (iii) the balance of reserves after such drawal shall not fall below fifteen per cent of its paid up share capital;
    [(iv) the Forms prescribed in these rules may be filed through electronic media or through any other computer readable media as preferred under section 610A of the Companies Act, 1956;
    (v) the electronic form shall be authenticated by the authorized signatories using digital signatures, as defined under the Information Technology Act, 2000 (21 of 2000);
    (v) the Forms prescribed in these rules, when filed in physical form, may be authenticated by authorized signatory by affixing his signatures manually.]3

    Explanation.
    —For the purposes of this rule, "profits earned by a company in previous years and transferred by it to the reserves" shall mean the total amount of net profits after tax, transferred to reserves as at the beginning of the year for which the dividend is to be declared; and in computing the said amount, the appropriations out of the amount transferred from the Development Rebate Reserve at the expiry of the period specified

    under the Income-tax Act, 1961 (43 of 1961) shall be included and all items of capital reserves including reserves created by revaluation of assets shall be excluded.
    The rates of compulsory transfer of profits to reserves have been furnished in rule 2 of the Companies (Transfer of Profits to Reserves) Rules, 1975.


    TRANSFER OF UNPAID OR UNCLAIMED DIVIDEND



    Unpaid or unclaimed dividend
    Section 205A(1), inter alia, provides that where dividend has been declared by a company but has not been paid or unclaimed or which remains unpaid within thirty days from the date of the declaration to any shareholder entitled thereto, such dividend is called unpaid or unclaimed dividend. Explanation to section 205A(1) states that the expression "dividend which remains unpaid" means any dividend the warrant in respect thereof has not been encashed or which has otherwise not been paid or claimed. It has been further clarified by the Department that the two expressions 'has not been paid' and 'the warrant in respect thereof has not been posted' used therein are used to denote two separate contingencies and hence the provisions thereof do not apply to a case where company has posted dividend warrant within 30 days from the date of declaration of dividend but the dividend warrant has not been encashed within the period of 7 days after the expiry of the 30 days. [Circular No. 28/76, dated 1-9-1976].

    Time-limit for transfer of unpaid dividend to special dividend account
    Section 205A(1) provides that the company shall, within seven days of the date of expiry of period of thirty days from the date of declaration of dividend, transfer such unpaid or unclaimed dividend to a special account. The special account will be called as unpaid dividend account of M/s. ................... Co. Ltd./Pvt. Ltd. and is to be opened by the company in a scheduled bank.

    Penalty for failure in transferring unpaid dividend to unpaid dividend account
    Section 205A(4) contains provisions as to penalty for default in transferring unpaid or unclaimed dividend to unpaid dividend account. Accordingly, the company shall pay interest @ 12% p.a. on so much of amount of unpaid or unclaimed dividend which has not been transferred to unpaid dividend account. Such interest shall be paid from the date of the default and benefit of such interest shall accrue to shareholders in proportion to the amount remaining unpaid to them.

    Transfer of unpaid dividend to Investor Education and Protection Fund
    As per sub-section (5) of section 205A any money transferred to unpaid dividend account of a Company which remains unpaid or unclaimed in the said account for a period of seven years from the date of such transfer is required to be transferred by the company to Investor Education and Protection Fund which has been established under section 205C.
    Therefore, any shareholder who has not claimed the unpaid dividend may approach the company to issue duplicate dividend warrants and get their dividend within the period of seven years plus 37 days only.


    You Can Also Download This From PDF Format
    Attached Files Attached Files
    Last edited by anand; 04-11-2011 at 04:53 PM.

  5. #5
    anand
    Guest

    Thumbs up IPCC - Business and Company Law Notes.

    Transfer and Transmission of shares
    For CA and CS Students

    Ankur Garg


    Transfer and Transmission of Shares



    Meaning of transfer and transmission
    The word 'transfer' is an act of the parties by which title to property is transferred from one person to another. The word 'transmission' is referable to devaluation of title by operation of law. It may be by succession or by testamentary transfer.

    Transfer Deed is compulsory
    Section 108 provides that a company shall not register a transfer of shares of, the company, unless a proper transfer deed in Form 7B as given in the Companies (Central Government's) General Rules and Forms, 1956 duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company, alongwith the certificate relating to the shares, or if no such certificate is in existence, alongwith the letter of allotment of the shares:

    Validity of unstamped/non-cancelled stamped on transfer deed
    Section 108 requires that where share transfer form is delivered to the Board it should be duly stamped. It means stamp of adequate value should be affixed and cancelled on transfer deed.

    Determination of valuation of shares for affixing stamps on the transfer deed
    It was held in Union of India v Kulu Valley Transport Ltd. (1958) that in case shares are not quoted, the value of the shares for the purpose of stamp means the price that the shares would fetch at the time of transfer or consideration agreed, whichever is higher.

    However, no transfer duty is applicable for transfer of shares in case of shares are in Dmat form.

    Value of share transfer stamps to be affixed on the transfer deed
    Stamp duty for transfer of shares is 25 paise for every Rs. 100 or part thereof of the value of shares as per Notification No. SO 130(E), dated 28-01-2004 issued by the Ministry of Finance, Department of Revenue, New Delhi.

    Transfer procedure not applicable under the depositories system
    Section 108(3) provides that the provisions of section 108 shall not apply to transfer of securities under the depositories system.

    Validity of transfer deed

    In the case of listed company, at any time before the date on which the register of members is closed, in accordance with law, for the first time after the date of the presentation of the prescribed form to the prescribed authority under clause (a) of section 108(1A) or within twelve months from the date of such presentation, whichever is later.
    In any other case, within two months from the date of such presentation.

    Submission of instrument for transfer to the Company
    Transfer Deed duly executed for the registration of a transfer of the shares or other interest of a member in a company may be submitted either by the transferor or by the transferee together with the relevant share certificates.

    PROCEDURE FOR TRANSFER OF PARTLY PAID UP SHARES
    Where the application is made by the transferor and relates to partly paid shares, the transfer shall not be registered, unless the company gives notice of the application to the transferee and the transferee makes no objection to the transfer within two weeks from the receipt of the notice. The notice to the transferee shall be deemed to have been duly given if it is despatched by prepaid registered post to the transferee at the address given in the instrument of transfer, and shall be deemed to have been duly delivered at the time at which it would have been delivered in the ordinary course of post.

    Time limit for issue of certificate on transfer (Section-113)

    Within a period of two months in case of unlisted companies

    Every company, unless prohibited by any provision of law or of any order of any Court, CLB or other authority, shall, within two months after the application for the registration of the transfer of any such shares, debentures or debenture stock, deliver, in accordance with the procedure laid down in section 53, the certificates of all shares transferred.

    Within a period of one month in case of a listed companies
    In the case of a listed company, the listing agreement requires that the registration of transfers will be made within 30 days of receipt of the transfer deeds.

    Penalty

    If default is made in complying with the company, and every officer of the company who is in default, shall be punishable with fine, which may extend to five thousand rupees for every day during which the default continues.

    PROCEDURE FOR EXTENSION OF VALIDITY OF TRANSFER DEED
    Where the validity period of an instrument of transfer has expired, the holder may make an application in Form 7C to the Registrar of Companies requesting for extension in the validity. The fee for such application is Rs.50 where the nominal value of the shares is upto Rs. 5,000 and the fee is Rs. 100 where the value exceeds Rs. 5000.
    The application shall be made to the Registrar of Companies, where the registered office of the Company is situated or under whose jurisdiction the transferor or transferee resides. The Registrar on satisfaction of the cause shown in the application shall extend the validity for a period of 30 days from the date of approval by the Registrar. It should be noted that further extension will not be provided by the Registrar. Therefore, the transfer deed should be lodged with the company within the extended period only.

    TRANSFERABILITY OF SHARES IN A PRIVATE COMPANY

    Private company shall restrict right to transfer its shares
    Entire shareholding of a private company may be owned by a family or other private group. Section 3(1)(iii)(a) of the Companies Act, 1956 provides that the Articles of a private company shall restrict the right to transfer the company's shares.

    Restriction on transfer not applicable in certain cases
    Restriction upon transfer of shares is in private company are not applicable in the following cases:—

    (i) on the right of a member to transfer his/her shares cannot be applicable in a case where the shares are to be transferred to his/her representative(s).
    (ii) in the event of death of a shareholder, legal representatives may require the registration of share in the names of heirs, on whom the shares have been devolved.
    (iii) in respect of shares which are proposed to be issued on a rights basis, existing members would have a right to renounce shares likely to be allotted to them. If the existing shareholders renounce their shares then these shares will be allotted to the renouncees for the first time and therefore no transfer of shares will take place.

    However, a private company may, by articles, restrict the 'right of a member to renounce his shares' otherwise, it is not possible to restrict the number of its members.

    Note: Restriction should not be in the form of prohibition and Restriction can only be by the Articles of Association

    Procedure for transfer of shares of private company
    Generally articles contain the detailed provisions as regards the procedure for transfer of shares. Usually following steps shall be followed by a private company to give effect to the transfer of shares:—

    (i) Transferor should give a notice in writing for his intention to transfer his share to the company.
    (ii) The company in turn should notify to other members as regards the availability of shares and the price at which such share would be available to them.
    (iii) Such price is generally determined by the directors or the auditors of the company.
    (iv) The company should also intimate to the members, the time limit within which they should communicate their option to purchase shares on transfer.

    If none of the members comes forward to purchase shares then the shares can be transferred to an outsider and the company will have no option, other than to accept the transfer.

    Valuation for consideration for transfer of shares of a private company
    Usually, Articles of a private company provides that the shares are to be sold under preemption clause at a fair price determined by directors or the company's auditors. It may also be provided that the fair price would be certified by the company's auditors.

    If the pre-emption clause requires that the shares are required to be offered to other members at a price certified by the directors or auditors, the Courts are not in a position to enquire into the correctness of valuation, unless there is evidence that valuation was not correctly made. If the person who made the valuation has acted negligently and failed to take into account all the necessary factors for arriving at the value of shares, in such case the transferor may sue for damages to the person who made the valuation for difference between the value of the share, as computed by the valuer, and the real value of shares.
    The Company Law Board/Tribunal ordinarily do not interfere with the valuation made by experts. Therefore, if valuation is challenged then there must be sufficient evidence in support to show that valuation is improper.

    Transfer of shares in a public company
    Section 111A(2) provides that the shares or debentures and any interest therein of a public company shall be freely transferable. Provided that if a company without sufficient cause refuses to register transfer of shares within two months from the date on which the instrument of transfer or the intimation of transfer, as the case may be, is delivered to the company, the transferee may appeal to the Company Law Board/ Tribunal and it shall direct such company to register the transfer of shares.

    Procedural steps to be followed for transfer of shares
    (i) Obtain the transfer deed Form 7B, endorsed by the prescribed authority.
    (ii) For transferring debentures, the instrument of transfer need not be in the prescribed Form 7B but this Form can be used, being convenient to do so.
    (iii) Get the transfer deed duly executed both by the transferor and the transferee or on their behalf in accordance with sections 108 and 109 of the Act and the Articles of Association, in case of shares, and also in accordance with trust deed in the case of debentures.
    (iv) The transfer deed should bear stamps according to the Indian Stamp Act and Stamp Duty Notification in force in the State concerned. The present rate of transfer of shares is 25 Paise for every one hundred rupees of the value of shares or part thereof.
    (v) See that the stamps affixed on the transfer deed are cancelled at the time or before signing of the transfer deed.
    (vi) The signatures of the transferor and the transferee in the share/debenture transfer deed must be witnessed by a person giving his signature, name and address.
    (vii) Attach the relevant share or debenture certificate or allotment letter with the transfer deed and deliver the same to the company. The share transfer deed should be deposited with the company within the time limits.
    (viii) Where the application is made by the transferor and relates to partly paid-up shares, the company has to give due notice of the amount due on shares/debentures to the transferee and the transferee shall raise objection, if any
    within two weeks from the date of receipt of the said notice.
    (ix) If signed transfer deed has been lost, affix the same stamp on a written application.
    In such case, the Board may, if it thinks fit to do so, register the transfer on such terms of indemnity as it thinks fit.
    (x) If the shares of the company are listed on a recognized Stock Exchange, then the company cannot charge any fee for registration of transfers of shares and debentures.

    Transfer of share certificate when original share certificates lost
    If the transferee lost the share certificates, according to section 111A still the transferee can be register as a shareholder of company but he has to approach the CLB praying the issuance of duplicate share certificate and the register the same in his name. However, by executing indemnity bond, company can issue duplicate share certificate.

    Difference in the signature of transferor
    It is common cause for refusal of transfer of shares due to the change or difference in the signature(s) of the transferor in the transfer deeds with the specimen signatures available in the records of the company. Generally, the signature(s) of the members changes after a period of time, and it creates a lot of time and burden on the company as well as the transferee. To avoid these situation, it is advisable to provide an option to the members for furnishing fresh specimen signatures for the records of the company.

    Refusal for transfer of shares should be exercised within two months
    Power of refusal to register transfer of shares is to be exercised by the company within two months from the date on which the instrument of transfer or the intimation of transfer, as the case may be is delivered to the company.

    Remedy for refusal of transfer of Shares

    Appeal against refusal to register transfer of shares


    In the case of refusal, the transferee, or the person who gave intimation of the transfer or transmission of shares by operation of law, as the case may be, may appeal to the Company Law Board/Tribunal against any refusal of the company to register the transfer or transmission or against any failure on its part within the period of two months as
    stated under section 111(1) of the Act, either to register the transfer or transmission or to send notice of its refusal to register the same. [Section 111(2)].

    Time limit for appeal
    Such appeal to the Company Law Board/Tribunal under section 111(2) of the Act shall be made within two months of the receipt of the notice of such refusal or, where no such notice has been sent by the company, within four months from the date on which the instrument of transfer, or the intimation of transmission, as the case may be, was delivered to the company. [Section 111(3)].

    Order of Company Law Board/Tribunal
    On appeal under section 111(2) of the Act, the Company Law Board/Tribunal may, at its discretion, make—
    (a) such interim orders, including any orders as to, injunction or stay, as it may deem fit and just;
    (b) such orders as to costs as it thinks fit; and
    (c) incidental or consequential orders regarding payment of dividend or the allotment of bonus or rights shares.


    TRANSMISSION OF SHARES


    Transmission of shares
    A transmission of shares or other interest in a company of a deceased member thereof made by the legal representative of a deceased member of the company shall be considered as transmission of shares by operation of law and will be registered by a company in the Register of Members. Execution of transfer deed not required in case of transmission of shares

    Transmission shall be subject to the liabilities, if any
    In the case of a transmission of shares, shares continue to be subject to the original liabilities, and if there was any lien on the shares for any sums due, the lien would subsist, notwithstanding the devaluation of the shares.

    Requirement of documents/evidences for transmission of shares
    Where title to shares comes to vest in another person by operation of law, it is not necessary to execute and submit transfer deed. A simple application (Appendix 2) to the company by a legal representative alongwith the following necessary evidences is sufficient:—

    (i) Certified copy of death certificate;
    (ii) Succession certificate;
    (iii) Probate;
    (iv) Specimen signature of the successor.

    No requirement of consideration and payment of stamp duty

    Since the transmission is by operation of law, neither consideration for transfer nor stamp duty is required on instruments for transmission.

    Procedure for transmission of shares
    (i) The survivors in case of joint holding can get the shares transmitted in their names by production of the death certificate of the deceased holder of shares. The company records the particulars of the death certificate and a reference number of recording entry is given to the shareholder so as to enable him to quote such number in all future correspondence with the company.
    (ii) If a member of a company dies and he leaves after him a will or letter of administration then the survivors shall get a copy of 'will' certified under the seal of a Court of competent jurisdiction. The certified copy of the will is called a 'probate' and it shall be forwarded to the company.
    (iii) If a member of a company dies without leaving a will, then succession certificate issued by a Court of competent jurisdiction shall be submitted to the company.
    (iv) In case a member of a company becomes bankrupt, the official receiver shall produce documentary evidence of his appointment from a competent Court.
    Right to dividend, rights shares and bonus shares to legal representative shall be kept in abeyance

    Appeal against refusal to register transmission of shares
    The transferee, or the person who gave intimation of the transmission by operation of law, as the case may be, may appeal to the Company Law Board/Tribunal against any refusal of the company to register the transfer or transmission or against any failure on its part as stated under section 111(1) of Companies Act, either to register the transfer or transmission or to send notice of its refusal to register. [Section 111(2)]

    Time-limit for filing an appeal
    An appeal under section 111(2) of Companies Act, 1956 shall be made within two months of the receipt of the notice of such refusal or where no notice has been sent by the company within four months from the date on which intimation of transmission was delivered to the company under section 111(3) of Companies Act, 1956.

    PROCEDURE RELATING TO TRANSMISSION OF SHARES
    (i) Transmission is devaluation of title by operation of law.
    (ii) No instrument of transfer (Transfer Deed) is necessary.
    (iii) If there was any lien on the shares or any original liabilities, it would subsist even after transmission.
    (iv) A simple application with certain documents such as death certificate, succession certificate, probate, etc., depending upon various circumstances may be sufficient for transmission.
    (v) In case of joint holding, the survivor or survivors shall only be entitled for registration and the legal heir of the deceased member shall have no right or claims.
    (vi) Dividend declared before the death of the shareholder will be payable to legal representative but dividend declared after the death of a member can be paid to him only after registration of his name and till that period it has to be kept in abeyance.
    (vii) Succession certificate is not required when probate or letter of administration is issued.
    (viii) Once succession certificate is granted, it provides full indemnity to the company to transmit the shares by operation of law.
    (ix) In case of amalgamation, no instrument of transfer is required to be executed.
    (x) In case of shares of a private company, if company refuses to register transmission, notice of such intention within two months giving reasons must be sent by the company to the person sending intimation.
    (xi) Remedies provided under section 111 are no longer applicable on listed/unlisted public companies.
    (xii) New section 111A abrogates the right of the public company to refuse registration of transfer/transmission of share and debenture on any grounds.
    (xiii) The companies, after registration of transfer, may approach the Company Law Board/Tribunal for an order of rectification in case the transfer is in contravention of any of the provisions of the Companies Act, 1956 or any other Act.

    You Can Also Download This From PDF Format
    Attached Files Attached Files

  6. #6
    anand
    Guest

    Thumbs up IPCC - Business and Company Law Notes.

    Notes Related to Indemnity and Guarantee

    INDEMNITY AND GURANTEE

    Introduction

    To “ indemnify ” means “ to make good the loss of another in certain events”. Suppose a friend of yours sends you a parcel of books from Mumbai through railway. He sends you the receipt by post which entitles you to claim the parcel from the railway. If the receipt is lost , you can claim the parcel from the railway by filling in an indemnity bond by which you undertake to make good the loss of the railway in case any other claimant comes forward to claim the parcel.


    “Guarantee“ means an agreement by which a person undertakes to answer for the payment of a debt or the performance of a duty of another in case he makes a default. Suppose you want to buy a car on hire- purchase by making monthly payments over a period of time. The car company would agree to deliver the car to you when someone on your behalf assures the company to make the monthly payments in case you make a default. This undertaking by that person would result in a contract of surety ship or guarantee.
    Contracts of indemnity and guarantee are a species of a general principles of law of contract are applicable to them.


    CONTRACT OF INDEMNITY
    A contract by of indemnity is defined by Sec. 124 as under :
    A contract by which one party promises to save the other from loss caused to him by the conduct of any other person, is called a contract of indemnity.


    Example. A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of Rs.200. This is a contract of indemnity.
    The person who promise to make good the loss is called the indemnifier ( promisor ) and the person whose loss is to be made good is called the indemnified ( promisee).
    The definition of a contract of indemnity as given in the Indian Contract Act , 1872 is not exhaustive. It does not include:

    1. implied promises to indemnify , and
    2. cases where loss arises from accidents and events not depending on the conduct of the promisor or any other person.

    CONTRACT OF GURANTEE:
    Sec. 126 defines a contract of guarantee as follows :
    A contract of guarantee is a contract to perform the promise or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called Surety, the person in respect of the default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor. A guarantee may be either in written or oral.


    Example: A request B to lend Rs.500 to C and guarantees that if C fails to pay the amount than he will pay it. This is a contract of guarantee. A , in this case, is the surety; B in this case is the principal debtor.
    A contract of indemnity and of guarantee must have all the essentials elements of a valid contract. The following two points should be noted in the connection with the contract of guarantee:



    1. Though all the parties must be capable of entering into a contract , the principal debtor may be a party incompetent to contract, e.g. a minor
    2. Consideration received by the principal debtor is sufficient for the surety
    “Anything done, or any promise made for the benefit of the principal debtor may be sufficient consideration to the surety for giving guarantee.“

    Example:
    B requests A to sell and deliver to him goods on credit. A agrees to do so provided C will guarantee the payment of the price of goods. C promise to guarantee the payment in consideration of A’s promise to deliver the goods . This is sufficient consideration for C’s promise.


    Distinction between a contract of indemnity and a contract of guarantee

    Contract of indemnity

    1. In a contract of indemnity there are two parties, viz., the indemnifier and the indemnified.
    2. The liability of the indemnifier (promisor) to indemnified (promisee) is primary and independent.
    3. there is only one contract in the case of indemnity, i.e. between the indemnifier and the indemnified.




    1. It is not necessary for the indemnifier to act at the request of the indemnified.
    2. The liability of the indemnifier arises only on the happening of the contingency.
    3. An indemnifier cannot sue a third party for loss in its own name. He can do so only if there is assignment in his favour ; otherwise he can bring suit against the third party in the name of indemnified only.


    Contract of guarantee

    1. In a contract of guarantee , there are three parties , viz., the creditor, the principal debtor and the surety.



    1. The liability of the surety to the creditor is collateral or secondary, the primary liability being that of principal debtor.



    1. In a contract of guarantee , there are three contracts: one between the principal debtor and the creditor, the second between the creditor and surety, and the third between the surety and the principal debtor.
    2. It is necessary that surety should give the guarantee at the request of the debtor.
    3. There is an existing debt or duty, the performance of which is guaranteed by the surety.
    4. A surety , on discharging the debt due by the principal debtor , can proceed against the principal debtor in its own right.







    Nature of contract of insurance.
    A contract of insurance except life insurance is a contract of indemnity.

    Rights of indemnity holder :



    According to sec. 125 an indemnity holder ( i.e. indemnified ) is entitled to recover from the promisor ( i.e. indemnifier )

    1. All damages which he may be compelled to pay in any suit in respect of a matter to which the promise to indemnify applies;
    2. all costs which he may be compelled to pay in such suits , provided he acted as any prudent man would act under the similar circumstances in his own case or with the authority of the promisor ( indemnifier); and
    3. all sums which he may have paid under the terms of any such suit provided the compromise was prudent or was authorised by the promisor(indemnifier).

    Nature of surety’s liability
    The liability of the surety is co-extensive with that of principal debtor , unless it is otherwise provided by the contract
    Example: A guarantees to B the payment of Bill of Exchange by C, the acceptor. The bill is dishonoured by C. A is liable not only for the amount of bill but also for any interest charges which may have due on it.
    KINDS OF GUARANTEE

    A guarantee may be given for the payment of debt , for the payment of the price of goods sold on credit, the good conduct or honesty of a person employed in a particular office. In last case, the guarantee is called a fidelity guarantee.

    A guarantee may be given for existing or future , debt or obligation. In the former case it is called retrospective guarantee and in latter case it is termed as prospective guarantee.
    A guarantee may be in respect of a single transaction or a number of transactions.


    Specific guarantee. When a guarantee extends to a single transaction or debt it is called as a specific or simple guarantee. It comes to an end when the guaranteed debt is duly discharged or the promise is duly performed.


    Continuing
    guarantee. When a guarantee extends to a series of transactions, it is called as continuing guarantee( Sec. 129 ). The liability of the surety in case of a continuing guarantee extends to all the transactions contemplated until the evocation of guarantee.


    Examples :
    S guarantees payment of C, a tea dealer, to the amount of Rs.10,000 for any tea he may from time to time supply to P. C supplies P with tea to the value above Rs.10,000 and P pays for it to C. Afterwards C supplies P with tea to the value of Rs.20,000P fails to pay it. The guarantee given by S is a continuing guarantee and he is accordingly liable to C to extent of Rs.10,000.



    There can be continuing guarantee for a fixed period. A continuing guarantee only speaks of continuing transactions and not the period of such transactions


    Revocation or termination of a continuing guarantee. A continuing guarantee may be revoked:

    1. By notice. A continuing guarantee may at any time be revoked by the surety as to the future transactions, by the notice to the creditor. ( Sec. 130)
    2. By the death of surety. The death of the surety generally operates as a revocation of a continuing guarantee, so far as regards future transactions ( Sec. 131 )
    3. By variance in terms of the contract. Any variance, made without surety’s consent, in the terms of the contract , between the principal debtor and the creditor, discharges the surety as to the transactions subsequent to the variance. (Sec. 133 )

    Example. A becomes surety to B for the amounts he lends to C up to Rs.10,000 at 20 percent per annum. Afterwards, when B had already lent Rs.6,000 to C they mutually agree that the rate of interest for the subsequent loans should be reduced to 10 percent only. A is discharged from the liability for the subsequent loans.

    1. By novation. A continuing guarantee can be also determined by the novation which means substitution of the new contract for the old one.
    2. Release or discharge of principal debtor. If the principal debtor is released or discharged by any contract between the creditor and the principal debtor or by any act or the omission of the creditor, the continuing guarantee is terminated.( Sec. 134 )
    3. Arrangement with the principal debtor. If without the consent of surety there is a contract between the creditor and the principal debtor, by which the creditor makes the composition of debt with the principal debtor or gives him time for the repayment of the debt or promises not to sue him, the continuing guarantee terminates .( Sec. 135 )
    4. Act or omission imparting surety’s eventual remedy. If the creditor does any act which is inconsistent with the rights of the surety or omits to do any act which his duty to the surety requires him to do and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the continuing guarantee.
    5. Loss of security. If the creditor loses, or without the consent of the surety parts with the security given to him by the principal debtor at the time of the contract , the continuing guarantee terminates. ( Sec. 141 )

    DISCHARGE OF SURETY
    A surety is discharged from liability in one of the following ways:


    1. Revocation
    (a) Revocation by the surety giving a notice( Sec. 130 ). A guarantee may be a specific guarantee or a continuing guarantee. A specific guarantee which is given for a single specific debt , cannot be revoked by the surety , as to the future transactions , by notice to the creditor.
    (b) Revocation by death. ( Sec. 131 ). The death of the surety normally operates as a revocation of a continuing guarantee so far as regards future transactions.
    The deceased surety’s estate will not be liable for any transaction entered into between the creditor and the principal debtor after the death of the surety, even if the creditor has no notice of death.

    1. Revocation by novation.(Sec. 62). Novation means substitution of a new contract for an old one either between the same parties or between the different parties, the consideration for the new contract being mutual discharge of the old contract.

    2. Conduct of the creditor
    (a) Variance in terms of contract(Sec. 133). A surety is liable for what he has undertaken in the contract in the contract. Any alteration in the terms of the contract without the surety’s consent will discharge him as to the transactions subsequent to the variance.
    Where the guarantee is a continuing one, any such alteration will discharge the surety from the liability for the transactions entered into subsequent to the variance.



    Example. C contracts to lend B Rs.5,000 on 1st March. A guarantees repayment , C pays Rs.5,000 to B on the 1st January. A is discharged from his liability , as the contract has been varied in as much as C might sue B for the money before March 1st.
    (b) Release or discharge of principal debtor( Sec. 134). The surety is discharged by any contract between the creditor and the principal debtor by which the principal debtor is released , or by act or omission of the creditor , the legal consequence of which is the discharge of the principal debtor.


    Example. A contracts with B for a fixed price to build a house for B within the stipulated time , B supplying the necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber . C is discharged from his guarantee.
    However, the omission of the creditor to sue within the period of limitation. Does not discharge the surety.
    (c)compounding by creditor with the principal debtor. ( Sec. 135 ) . A contract between the creditor and the principal debtor , by which the creditor makes a composition with , or promises to give time to or not to sue , the principal debtor , discharges the surety , unless the surety assents to such a contract.
    It should be noted that where a contract give time to the principal debtor is made by the creditor with a third person and not with the principal debtor, the surety is not discharged.( Sec. 136 )

    1. Creditor’s act or omission imparting surety’s eventual remedy( Sec. 139 ). If the creditor does any act which is inconsistent with the rights of the surety or omits to do any act which his duty to the surety requires him to do and the eventual remedy of the surety himself against the principal debtor is thereby impaired , the surety is discharged.

    Example. B contracts to build up a ship for C for a given sum to be paid by instalments as the work reaches certain stages. A becomes surety to C for B’s due performance of the contract. C , without the knowledge of A prepays to B the last two instalments. A is discharged by this prepayment.

    1. Loss of security( Sec. 141). If the creditor loses or , without the consent of the surety , parts with any security given to him at the time of the contract of guarantee , the surety discharged from the liability to the extent of the security.

    Example. C advances B , his tenant Rs.2,000 on the guarantee of A . C has also a further security for the sum by a pledge of B’s furniture. C cancels the pledge. B becomes insolvent and C sues A on his guarantee. A is discharged from the liability to the amount of the value of furniture.


    Invalid contract of guarantee
    A contract of guarantee is held to be invalid in the following cases:
    1. When guarantee is obtained by misrepresentation(Sec. 142 ): Any guarantee which has been obtained by the means of misrepresentation by the creditor or with his knowledge and assent , concerning the material part of the transaction, is invalid.
    2. When the guarantee is obtained by concealment( Sec. 143 ): Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.
    3. When the creditor acts, the condition of co-surety joining not being fulfilled ( Sec. 144 ). When a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as a co-surety , the guarantee is not valid if that other person does not join.
    4. When the contract of guarantee lacks one or more of the essential elements of the contract: A contract of guarantee , like any other contract , must have all the essential elements of a valid contract . if therefore , one or more of the essential elements is/are lacking , the contract shall become invalid.



    RIGHTS OF SURETY:
    A surety has rights against:

    • The creditor
    • The principal debtor and
    • The co-sureties

    1. Rights against the creditor:
    (a) Before payment of the guaranteed debt: A surety may, after the guaranteed debt has become due and before he is called upon to pay, require the creditor to sue the principal debtor. However, the surety will have to indemnify the creditor for any expenses or loss resulting therefrom. In case of fidelity guarantee the surety can ask the employer to dismiss the employee in the event of his proven dishonesty.
    (b) Right of set off: On being sued by the creditor the surety can rely on any set off or counter claim which the debtor has against the creditor (Bachevaise v. Lewis, (1872)]
    (c) On payment of guaranteed debt: the surety is subrogated to all the rights of the creditor and gets the right to demand from the creditor at the payment of all the securities whether they had been received before, at or after, the creation of the guarantee(Sec.141)
    Example: C advances to P, his tenant, Rs. 2,000 on the guarantee of S. C has also further security for Rs.2000 by a pledge of P’s furniture. C cancels the pledge. P becomes insolvent and C sues S on his guarantee. S is discharged from the liability to the amount of the furniture.
    (d) Right to equities: On payment of the guaranted debt the surety is entitled to all the equities which the creditor could have enforced not only the principal debtor himself but also against the person claiming through him.
    (e) Right of subrogation: Where a guaranteed debt has become due and the surety has paid all that he is liable for he is invested with all the rights which the creditor had against the principal debtor (Sec. 140). This means on payment of the guaranteed debt, the surety steps into the shoes of the creditor.


    Right against the principal debtor
    A surety has the following rights against the principal debtor:
    (a) Rights to be relieved of liability: Before the payment has been made, the surety can compel the principal debtor to relieve him from the liability by paying off the debt. But before he can do so, the debt must be ascertained.
    (b) Right to indemnify: In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety; and the surety is entitled to recover from the principal debtor, all the payments made properly (Sec. 145).
    Examples: P is indebted to C and S is the surety for the debt. C demands the payment from S and on his refusal, sues him for the amount. S defends the suit, having reasonable grounds for doing so, but is compelled to pay the amount of debt with costs. He can recover from P the amount paid by him for costs, as well as the principal debt.


    Rights against the Co-sureties:

      1. Right of Contribution. This rule is contained in Sec. 146 and 147. When a debt is guaranteed by two or more sureties, they are called co-sureties. The co-sureties are liable to contribute as agreed towards the payment of the debt to the creditor. If one of the co-sureties makes payment on the behalf of others then he has right to sue other co-sureties for their contribution.
      2. Co-Sureties liable to contribute equally (Sec. 146): If there is no contract between the co-sureties regarding their contribution towards the payment of the debt, then they are liable contribute equally.
      3. Release of Co- Surety: Where there are co-sureties, a release by the creditor of one of them does not discharge others, neither does it free the surety so released from his responsibility to the other sureties (Sec. 138)
      4. Liability of Co-sureties bound in different sums: (Sec. 147) Where the co-sureties have agreed to guarantee different sums, they have to contribute equally subject to the maximum amount guaranteed by each one. The fact that the sureties are jointly or severally liable under the contract, or without the knowledge of each other, is immaterial.

    As between the co-sureties, the right of contribution arises only when the co-surety has paid more than he is liable to pay. And if co-surety obtains from the creditor any security of the principal debtor, the other co-sureties have a right to share in the proceeds of the security.




    You Can Also Download This From PDF Format
    Attached Files Attached Files

  7. #7
    anand
    Guest

    Thumbs up IPCC - Business and Company Law Notes.

    Contract of Agency


    According to Section 182 an agent is a person employed to do any act for other or to represent another in the dealings with the third persons. The person for whom such act is done, or who is so represented, is called “principal”. The function of an agent is essentially to bring about contractual relationship between the principal and third parties. Essentials of relationship of agency. There are two essentials of the relationship of agency:

    Agreement:Agency depends on agreement but not necessarily on contract. It may arise out of an agreement which does not amount to a contract because one of the parties may lack contractual capacity, or there may be no consideration. As between the principal and the third persons, any person may become an agent. (Sec. 184)

    This leads to conclude that an agent may be a person who is not competent to the contract. The principal is liable for the acts of such an agent; the principal cannot hold the agent liable for his excess of authority. Capacity to contract is not essential to enable a person to act as an agent.
    Again no consideration is necessary to create an agency (Sec. 185). The fact that the principal has agreed to be represented by the agent is a sufficient ‘detriment’ to the principal to support the contract of agency.

    Intention to act on the behalf of principal. Whether a person intends to act on the behalf of another is a question of fact. Where a person does intend to act on the behalf of another, agency may arise although a contract between the parties provides that there is no such relationship. But the mere fact that a person says he is an agent does not make him an agent if he intends to act on his own behalf and not on the behalf of principal.

    Creation of Agency
    Agency by express agreement:
    A contract of agency may be created by an express agreement. Normally the authority given by a principal to his agent is an express authority enabling the agent to bind the principal by acts done within the scope of his authority. A person may, in such case be appointed as an agent either by word of mouth or by writing.


    Agency by implied agreement
    An authority is said to be implied when it is to be inferred from the circumstances of the case and the things spoken or written, or the ordinary course of dealing may be accounted circumstances of the case.
    Example: A owns a shop in Serampore being himself in Calcutta. He visits the shop occasionally. The shop is managed by B and he is in the habit of ordering goods from C in the name of A, for the purpose of the shop, and of paying for them out of A’s funds with A’s knowledge. B has an implied authority from A to order goods from C in the name of A for the purpose of the shop.

    Agency by estoppel:
    Where a person by his conduct or by statement has led another person to believe that a certain state of affairs exists that a certain person is his agent, he is estopped from denying the fact of that statement subsequently.
    Example: A tells T within the hearing of P that he is P’s agent. P does not object to this statement. Later on T supplies certain goods to A who pretends to be acting as an agent of P. P is liable to pay the price to T.

    Agency by holding out: It is a branch of the agency by estoppel. In this case, a prior positive act on the part of the principal is required to establish agency subsequently.

    Agency by necessity.In certain circumstances the law confers an authority on the person to act as agent for another without requiring the consent of that person. Such type is called as Agency by necessity. He has the authority in an emergency to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence.(Sec. 189).However the following are the essentials:

    1.The agent was not in position to communicate with the principal.

    2. There was an actual and definite necessity for acting on behalf of the principal.
    3. The act was done to protect the interest of the principal.
    4. The agent acted as a man of ordinary prudence and the act was done bonafide.


    Agency by ratification
    A person may act on the behalf of another without his authority in the following two ways:
    (a) Where A acts as B’s agent though he has no prior authority from B but while acting, A contemplates that he is acting for B.
    (b) Where A is B’s agent for doing a particular thing but at the time of making the contract with the third party he exceeds his authority which B had given to him.
    In both cases, B the principal, may either accept the act of the agent or reject it. If he accepts the act of the agent done without his consent later on he is said to have ratified the act of the agent. If he ratifies it, it places the parties in the same position in which they would have been if A had B’s authority at the time he made the contract.

    Effects of ratification.
    Ratification relates back to the date when the act was done by the agent. This means the agency comes into existence from the moment the agent acted and not from the time when the principal ratified it.

    Requisites of a valid ratification:


    1. The agent must purport to act as an agent for a principal who is in contemplation.The agent must contract as an agent at the time of the contract and the principal, if not named, must be identifiable.

    Example: A was authorized by P to buy wheat at a certain price. Acting in excess of his authority, A purchased wheat from X at a higher price in his own name. he did not profess to buy on behalf of P. Subsequently P ratified the act of A, but later refused to take delivery of the wheat. X brought an action against P. It was held that the contract could not be ratified because A did not purport to act as an agent for P. The action, therefore failed. [Keighley, Maxted & Co. vs. Durant, (1901) A.C. 240]

    1. The principal must be in existence at the time of the contract: In order that the intended principal may ratify the contract, he must have been in existence at the time when the contract was entered into.
    2. The principal must have contractual capacity. The agent must act on the behalf of a principal who has the contractual capacity both at the time of the contract and at the time of ratification.
    3. Ratification must be with full knowledge of facts. No valid ratification can be made by a person whose knowledge of the facts of the case is materially defective. (Sec. 198)
    4. Ratification must be done within a reasonable time. Ratification, to be effective, must be done within a reasonable time of the act purposed to be ratified. If ratification is made after the expiry of the time fixed for ratification, it will not be valid.
    5. The act to be ratified must be lawful one.
    6. The whole transaction can be ratified. The principal must ratify a transaction in toto or reject it in toto. There cannot be a partial ratification and partial rejection.
    7. Ratification may be expressed or implied. Ratification may be expressed or implied in the conduct of the person on whose behalf the acts are done. (Sec. 197)

    Example. A, without authority, buy goods for B. Afterwards B sells them to C on his own account. B’s conduct implies a ratification of the purchase made for him by A.

    1. Ratification must be communicated. Where a case is founded on ratification, it must be proved that there was communication of the ratification to the person concerned, before the act became irrevocable.
    2. Ratification can be of the acts which the principal had the power to do. The acts which the principal is incapable of doing cannot be ratified. A company, for example, cannot ratify the acts of the directors which are ultra vires the power of the company.
    3. Ratification should not put a third party to damages. Ratification which has the effect of subjecting a third person to damages or of terminating any right or interest of the third person, cannot be made. (Sec. 200)

    Agency by operation of law:
    Sometimes an agency arises by the operation of law. For example, when a company is first formed, its promoters are its agents by operation of law. Again, according to Sec. 18 of the Indian Partnership Act, 1932, a partner is an agent of the firm for the purposes of the businesses of the firm.

    Duties of agent:

    1. To carry out the work undertaken according to instructions: An agent is bound to conduct the business of his principal according to the directions given by the principal, or, in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place where the agent conduct such business. Otherwise he is liable to the principal. (Sec.211)
    2. To carry out the work with reasonable care, skill and diligence. An agent is bound to conduct the business of the agency with as much skill as is generally possessed by the persons engaged in the similar business.
    3. To communicate with the principal. It is the duty of an agent in cases of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions. (Sec.214)
    4. Not to deal on his own account. If the agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows either that any material fact has been dishonesty concealed from him by the agent. If an agent without the knowledge of his principal, deals in the business of agency on his own account, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction.(Sec. 216)
    5. To pay the sums received for the principal. The agent is bound to pay to his principal all the sums received on his account after deducting all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business and also such remuneration as may be payable to him for acting as an agent.(Sec. 217 & 218)
    6. To protect and preserve the interests on behalf of the principals representative in the case of his death or insolvency. Where an agency is terminated by the principal dying or becoming insolvent, the agent is bound to take, on behalf of the representative of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him.
    7. Not to make secret profit from the agency. The agent must not, except with the knowledge and assent of the principal, make any profit out of the transactions into which he may enter on the behalf of the principal in the course of employment beyond the commission or remuneration agreed upon between them. Any such profit must be paid over to the principal.
    8. Not to put himself in a position where interest and duty conflict. The agent must not put himself in a position where his duty and interest conflict unless he has made full disclosure of his interest to the principal.
    9. Not to delegate authority. An agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may, or from the nature of the agency, a sub-agent must, be employed.
    10. Not to use information obtained in the course of the agency against the principal

    Rights of agent against principal:

    Right of retainer. An agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made and expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as an agent. (Sec. 217)

    Right to receive remuneration . The agent has the right to receive the agreed remuneration .If the remuneration is not fixed then he has the right to recover such remuneration as is usual and customary in such business. (Sec. 219) An agent who is guilty of misconduct in the business of the agency is not entitled to any remuneration in respect of that part of the business which he has misconducted. (Sec. 220)

    Right of lien. In the absence of any contract, an agent is entitled to retain the goods, paper and other property, whether movable or immovable, of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him. (Sec.221)

    Right of indemnification
    . The principal is bound to indemnify the agent against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him, or injury caused by principal’s neglect.

    Liability of the principal.


    The principal, as a rule is not liable for the acts of the agent after the revocation of his authority.

    The revocation should be communicated to the agent. If any act is done before the revocation, the principal shall be liable.

    The revocation of agency, so far as regards third persons, does not became known to them. (Sec. 208)

    Rights and liabilities of the agent, the principal and the third parties:


    1. Position of Principal. The principal is bound by all the acts of the agent done within the scope of his actual authority. (Sec. 238)
    2. Position of agent. When an act is done by the agent, in the course of his employment as an agent and within the scope of his authority, the agent is liable neither to the principal nor to the third parties. He has a right to claim remuneration from the principal in respects of such acts.
    3. Position of third parties. As regards third parties, they can enforce the rights arising out of the contract entered into by the agent on the behalf of the principal only against the principal provided the agent:
      • Acted within the scope of his authority,
      • Did not incur any personal liability,
      • Disclosed the facts of agency to the third parties.

    4. Where the agent acts for unnamed principal:

    Where the agent discloses that he is acting for an unnamed principal. in such a case, the agent is not personally liable on the contracts entered into by him with the third parties, unless there is trade custom to the contrary. It is however essential that the unnamed principal exists when the agent enters into a contract with third party.

    1. When the agent acts for an undisclosed principal:

    Sometimes, an agent enters into a contract with third person without disclosing at all the fact of agency. He not only conceals the name of the principal but also the fact that he is an agent. This gives rise to the doctrine of undisclosed principal. The agent in such a case gives impression to the third party as if he is contracting in an independent capacity.

    Meaning and position of sub-agent.

    A sub-agent is a person employed by, and acting under the control of the original agent in the business of the agency.”(Sec. 191)
    An agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally unless by the ordinary custom of trade a sub agent may, or from the nature of the agency, a sub-agent must, be employed.”
    Exceptions: There are exceptions to the general rule as laid down in Sec. 190:

    • The custom of the trade may permit the appointment of a sub-agent.
    • The nature of the agency may be such that a sub agent may be necessary.



    Where the principal is aware of the intention of the agent to delegate his authority but does not object to it.

    • Where the unforeseen emergencies arise rendering the appointment of the sub-agent necessary.
    • Where the act to be done is purely ministerial not involving the confidence or discretion.
    • Where the power of the agent to delegate can be inferred from the conduct of both the principal and the agent.
    • Where the principal permits appointment of a sub-agent.

    Relationship between the principal and the sub-agent:
    The legal relation between the principal and the sub-agent depends upon this critical question, i.e. whether the appointment of the sub-agent is proper or improper.

    1. Where the appointment of sub-agent is proper. Where a sub-agent is properly appointed, the principal is bound by the acts of the sub-agent as if he was an agent originally appointed by the principal. The agent is responsible to the principal for the acts of the sub-agent. The sub-agent is responsible for his acts to the agent, but not to the principal except in the case of fraud or willful neglect. (Sec. 192.)
    2. Where the appointment is improper. Where an agent, without having authority to do so, has appointed a sub agent, the agent is responsible for the acts of the sub-agent to the principal and the third parties. The principal in such case, is not represented by or responsible for the acts of the sub-agent, nor is the sub-agent responsible to the principal. (Sec. 193)

    Substituted agent: A substituted agent is a person who is named by the agent holding an express or implied authority from the principal, to act for the principal. in other words, he is the agent of the principal though he is named, at the request of the principal, by the agent. (Sec. 194)
    Example: A directs B, his solicitor, to sell his estate by auction and employ an auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C is not a sub agent, but is A’s agent for the conduct of sale.


    Personal liability of agent:
    The general rule is that only the principal can enforce and can be held liable on a contract entered into by the agent except where there is a contract to the contrary. (Sec. 230)
    An agent is personally liable in the following cases:

    1. When the contract expressly provides. A person while entering into a contract with the agent may expressly stipulate that he would hold the agent personally liable in the case of the breach of the contract.
    2. When the agent acts for foreign principal. When the contract is made by an agent for the sale or the purchase the goods for a merchant residing abroad, the agent will be personally liable. (Sec. 230)
    3. When the agent acts for a concealed principal. Where an agent acts for a concealed principal, he would be personally liable, though the principal, on being discovered by the third person, will also be liable.
    4. Where the agent acts for the principal who cannot be sued. Where the principal is incompetent to enter into a valid contract, e.g. where a principal is minor, the agent will be personally liable as the credit shall be presumed to have been given to the agent and not to the principal.
    5. Where an agent acts for a principal not in existence. The promoters of a company (yet to be incorporated) sometimes enter contracts on the behalf of the company, though in such a case the alleged principal (the company) has no legal existence till the time of incorporation. In such case the agent is held to have contracted on his own account.
    6. Where an agent is liable for the breach of the warranty. Where an agent professes to act as an agent but has no authority from the alleged principal or exceeds his authority, he is personally liable for the breach of the warranty.
    7. Where the agent signs a contract in his own name in that case he is personally liable for the contract.
    8. Where the agent receives or pays money by mistake or fraud. Where an agent receives from, or pays money to, a third party by mistake or fraud, he will be personally liable to the third party.
    9. Where the authority of the agent coupled with interest. Where an agent has an interest in the subject matter of the contract entered into by him with a third party, his authority is coupled with the interest. He has, in such case, the right to sue or be sued, but only to the extent of his interest.
    10. Where the trade usage or custom makes agent personally liable.Where there is a trade usage or custom making the agent personally liable, he will be so liable unless there is a contract to the contrary.
    11. Where an agent signs the negotiable instrument in his own name without mentioning that he is signing as an agent.
    12. Where the agent acts for the pretended principal and the that principal refuses to ratify the agents act.

    TERMINATING OF AN AGENCY
    Sec. 201 describes the several modes of terminating an agency as follows:
    Termination by act of the parties:

    • Agreement: the relation of the principal and the agent is generally founded on the mutual consent. It may be brought to an end by the same process with the originated it. i.e. by agreement. The agency can be terminated at any time and at any stage by the mutual agreement between the principal and the agent.
    • Revocation by the principal: An agency may be terminated by the principal at any time by giving a notice to the agent. (Sec. 203). If the agent is appointed to do a single act, the authority may be terminated at any time before the act actually begun, the agency can only be terminated subject to any claim which the agent may have for the breach of the contract. (Sec. 204). The revocation may be expressed or implied. However when the agency is coupled with the interest the principal cant revoke the agency to the extent of such interest. Moreover if the agent has already partly exercised his authority then also the agency cant be terminated.
    • Revocation by agent: An agency may be terminated by an express renunciation on the part of the agent after giving a reasonable notice to the principal. (Sec. 203). Where the agency is for a fixed period, and the agent renounce it without a sufficient cause, he shall have to compensate the principal for any loss. Renunciation my be expressed or implied.



    Termination by operation of law:

    • Performance of the contract: The most obvious mode of putting an end to the agency is to do what agent has undertaken to do (Sec. 201). Where, therefore, the agency is for particular object, it is terminated when the object is accomplished or when the accomplishment of the object becomes impossible.
    • Expiry of time: Where the agent is appointed for a fixed period of time, it comes to an end after the expiry of that time even if the work is not completed.
    • Death: When the death of the agent or principal takes place, the agency is terminated. When such termination takes place by the death of the principal, the agent must take all responsible steps for the protection of the interests of the principal entrusted to him.
    • Insanity: An agency comes to an end when the principal or agent becomes of unsound mind. (Sec. 209)]
    • Insolvency:The insolvency of the principal puts an end to the agency though nothing is mentioned in Sec. 201 as regards insolvency of the agent. The insolvency of the agent, it is accepted, also terminates the agency.
    • Destruction of the subject matter: An agency which is created to deal with a certain subject matter will come to an end by the destruction of the subject matter.
    • Principal becoming alien enemy: Where the agent and the principal are aliens the contract of agency is valid so long as the two countries are at peace. If war breaks out between the two countries, the contract of agency is terminated.
    • Termination by sub-agent’s authority: The termination of an agent’s authority puts an end to the sub-agent’s authority also. (Sec. 210)

    Termination of agent’s authority:
    Sec. 208 deals with the question as to when termination of agent’s authority takes effect as to agent, and as to third parties. According to it, the termination of the authority of an agent takes effect as regards the agent and the third persons from the time it becomes known to them.

    Irrevocable agency
    When an agency cannot be terminated or put an end to, it is said to be an irrevocable agency in following cases:

    1. Where the agency is coupled with interest. Where an agent has an interest in the subject matter of the contract entered into by him with a third party, his authority is coupled with the interest. He has, in such case, the right to sue or be sued, but only to the extent of his interest. (sec 202)
    2. Where the agent has incurred a personal liability. When an agent incurs personal liability, the agency becomes irrevocable. The principal cannot, in such case, withdraw leaving the agent exposed to the risk or liability he has already incurred.
    3. Where the agent has partly exercised the authority: The principal cannot revoke the authority given to his agent after the authority has been partly exercised; so far as regards such acts and obligations as arise from the acts already done in agency.(Sec. 204)

    Agency coupled with interest:

    When an agency is created for securing certain benefits to the agent over and above his remuneration as an agent , it is called as agency coupled with interest. The interest should exist at the time o0f creation of the agency .The agency coupled with the interest cant be terminated even on the death or the insanity of the principal. Thus such agency is irrevocable upto the extent of such interest.

    Example. A owes Rs.500 to b and appoints him as his agent to sell his goods and pay him (B) the debt out of the sale proceeds. The authority of B is coupled with interest.


    You Can Also Download This From PDF Format
    Attached Files Attached Files
    Last edited by anand; 04-11-2011 at 04:03 PM.

  8. #8
    anand
    Guest

    Thumbs up IPCC - Business and Company Law Notes.

    Notes for Important Questions and Answers

    For Full Detail You Can Download This From PDF Format

    Attached Files Attached Files

  9. #9
    anand
    Guest

    Thumbs up IPCC - Business and Company Law Notes.

    Law Ethics and Communication Solutions


    PART—I


    Question Nos. 1 and 2 are compulsory. Attempt any eight questions from the rest.

    Qn 1. (a) A, the bailor, pledges cinema projector and other accessories with Cine Association Co-operative Bank
    Limited, the bailee, for loan. A requests the bank to allow the pledged goods to remain in his possession and promises
    to hold the same in trust for the bailee and also further promises to handover the possession of the same to the
    bank whenever demanded.

    Examining the provisions of Indian Contract Act, 1872 decide, whether a valid contract of pledge has been made
    between A, the bailor and Bank, the bailee ? [ 5 marks ]

    Ans. 1 (a) Where a mercantile agent is, with the consent of the owner, in possession of goods or the documents of
    title to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be
    as valid as if he were expressly authorized by the owner of the goods to make the same; provided that the pawnee
    acts acts in good faith and has not at the time of the pledge notice that the pawnor has no authority to pledge.

    As per the provisions above it is clearly evident that contract made between A & Bank is valid.

    (b) State with reasons whether the following statements are correct or incorrect: [ 2 x 1 = 2 marks ]
    (i) An agreement entered with a minor may be ratified on his attaining majority.
    (ii) Any variation in terms of contract made between principal debtor and a creditor without the consent of surety,
    automatically discharges the liability of the surety.

    Ans 1 (b) (i) Since the agreement with minor is void, it never becomes a contract. Hence, it cannot be ratified when
    he becomes major.

    (b) (ii) After issue of guarantee, if any variation is to be made in the terms of the contract between the principal
    debtor and the creditor surety’s consent should be obtained. If such consent is not obtained the surety is discharged
    in respect of all transactions subsequent to the variance [Section 133]. Surety is liable for transactions entered into
    before such variation.

    (c) Pick out the correct answer from the following and give reasons: [3 x 1 = 3 marks]
    (i) An agreement to subscribe or contribute a plate or prize of the value of Rs. 500 or above to be awarded to the
    winner of a horse race is
    (1) Void
    (2) Valid
    (3) Illegal
    (4) Unenforceable.
    Ans. (2) Since it creates a legal obligation.

    (ii) Substitution of new contract for an existing contract between the same parties is known as :
    (1) Remission
    (2) Alteration
    (3) Rescission
    (4) Novation.
    Ans. (4) U/s 62 under which are existing contract is substituted by a new one is called novation

    (iii) In legal terms, person who takes the instrument bonafide for value before it is overdue, in good faith, is known as
    (1) Holder in due course
    (2) Holder
    (3) Holder for value
    (4) None of the above.
    Ans. (1) It refers to a person who has because holder for a consideration and before due maturity of bill.

    Qn 2. (a) The articles of ABC Limited provided that only those shareholders would be entitled to vote whose names
    have been there on the Register of Members for two months before the date of the meeting. X, a member, of the ABC
    Limited was holding 200 equity shares of the company. X transferred his shares to Y before one month from the date
    on which the meeting was due. The name of Y could not be entered in the Register of Members as the application of
    transfer of shares was pending. X attended the meeting but he was prohibited by the company from exercising his
    voting right on the ground that he has not hold his shares for specified period as provided in the articles before the
    date of the meeting.

    State whether X can exercise his voting right in the meeting? State also the grounds upon which X may be excluded
    from exercising his voting rights in the meeting of the shareholders. [5 marks]

    Ans. According to provision of companies Act, 1956.
    - A member of a company should have qualification shares.
    - A member of a company has no voting right unless he actually acquires shares.
    - A person becomes member only when his name is entered in register of member of the company. Till then, he
    is only holder.
    - In case of transfer of share, transfer is entitled to vote when his name is entered into register of member.
    - The case is, X transfer his shares to y before one month from the date on which meeting was done and name
    of y is not entered is the register of member as the application of transfer of share is pending.

    Article of company provided that only there shareholders would be entitled to vote whose names have been there on
    register of members for two month of the above. Since transfer of shares procedure is pending and the name of y is
    not entered into register of member. Hence y is neither a shareholder nor he has right to vote.

    And x can exercise his voting right in the meeting as his name has not been struck off from register of member.
    But if transfer process is complete and x name is struck off from company’s register of member than he is excluded
    from the voting right.

    (b) State whether the following statements are true or false and give reasons: [ 2 x 1 = 2 marks ]
    (i) A share warrant is a bearer instrument and bearer is entitled to the shares specified in the share warrant.
    (ii) Every Company which is registered under the Companies Act, 1956, need not have their own Articles of
    Association.

    Ans. 2 (b) (i) True.

    Section 114 states that share warrant is a document issued by public company in conformity with statutory
    requirements under its common seal and can be transferred by mere delivery. Hence it is a bearer document and
    bearer is entitled to shares specified init.

    Ans. (b) (ii) False
    Public company having share capital can adopt table a of schedule in full but public company limited by guarantee and
    not having share capital [Section 29] must make its own article.

    (c) Pick out the correct answer from the following and give reasons: [ 3 x 1 = 3 marks ]

    (i) Statutory meeting is to be called by:
    (1) Government Company
    (2) Private Company having share capital.
    (3) Public Company having share capital
    (4) Foreign Company.

    (ii) The Securities Premium Account can not be utilised:
    (1) In writing off the preliminary expenses of the company
    (2) In writing off the expenses of commission paid on issue of share of the company
    (3) For redemption of redeemable preference shares
    (4) In providing for the premium payable on the redemption of redeemable preference shares.

    (iii) A "Statement in lieu of Prospectus" must be filed before the allotment of the shares with the Registrar of
    Companies by :

    (1) A Private Company
    (2) A Guarantee Company
    (3) A Public Company which issues the prospectus to the public
    (4) A Public Company which does not issue the prospectus to the public.

    Ans 2(c) (i) Section 165 (i), public company having share capital has to call statutory meeting after month but
    before 6 months from the date, company is entitled to commence business.

    Ans. 2 (c) (ii) Section 78 (I) Security premiums cannot be utilized for redemption of redeemable preference share.
    As per section 78 security premium amount can be utilized only for following 4 purposes: -
    (i) Writing off the preliminary expense
    (ii) Writing off the discount on issue of shares and debentures
    (iii) For issue of fully paid up bonus shares
    (iv) In providing for the premium payable on the redemption of redeemable preference shares and debentures.

    Ans 2 (c) (iii) A public company which does not issue the prospectus to the public or with reference to its formation
    has to file before three days of allotment of share with registrar of company a statement in live of prospectus.

    Qn 3. Skypark Wooden Toys Limited was established at Kolkata in the year 2005 employing 5 100 workmen. Since
    then the company suffered the losses, but minimum bonus was paid in the accounting years of 2006 and 2007. In the
    accounting year 2008 the company earned huge profits. After mitigating the previous losses the company is having
    surplus profits and wants to pay the bonus to its workmen. Skypark Wooden Toys Limited wants the legal advice on
    the following issues: [ 5 marks ]

    (a) How much minimum and maximum bonus may be paid to the workmen?
    (b) Whether the company may adjust the puja bonus already paid to the workmen while calculating the amount of
    bonus payable to workmen of that accounting year.
    (c) Company wants to give wooden toys as bonus instead in cash. Whether the Company can do so ?
    Advice the Skypark Wooden Toys Limited, stating the provisions of the Payment of Bonus Act, 1965.

    Ans. 3 (a) Payment of minimum bonus and maximum bonus: -
    Every employer shall be bound to pay to every employee in respect of every accounting year, minimum bonus which
    shall be 8.33% of the salary or wages earned by the employee during the accounting year or Rs.100, whichever is
    higher whether or not the employer has any allocable surplus in the accounting year. But if the employee has not
    completed 15 years of age at the beginning of the accounting year he will be entitled to a maximum bonus which shall
    be 8.33% of the salary or wage during the accounting year Rs.60, whichever is higher. In view of much minimum
    bonus, be bound to pay to every employee in respect of that accounting year bonus which shall be an amount in
    proportion to the salary or wage earned by the employee during the accounting year subject to a maximum 20% of
    such salary or wage.

    Ans 3. (b) As per 17 of payment of bonus act, 1965, if in an accounting year, an employer has paid any pooja bonus
    or other customary bonus to employee or has paid a part of bonus payable under the act before the date on which
    such bonus becomes payable, the employer may deduct this amount from the final bonus payable. But the amount
    may be deducted only from the bonus of that accounting year.

    Ans 3 (c) Section 19 says that all amounts payable to employee shall be paid in cash no bonus shall be paid to
    employees in the form other than cash. Hence, company can’t give wooden lays as bonus instead of cash.

    Qn 4. Mr. 'Wise' obtains! Fraudulently from 'R' a crossed cheque "Not Negotiable". He transfers the cheque to 'V, who
    gets the cheque encashed from ANS Bank Limited which is not the drawee bank. 'R' on coming to know about the
    fraudulent act of Mr. 'Wise' sues ^.NS Bank for the recovery of money. Examine with reference to the relevant
    provisions of The Negotiable Instruments Act, 1881, whether 'R' will succeed in his claim ? Would your answer be still
    the same in case Mr. 'Wise' does not transfer the cheque and gets the cheque encashed from ANS Bank himself?
    [ 5 marks ]

    Ans. 4. In not negotiable general rule is that holder in due course gets a better title than transferor. Even if transferor
    had defective title, he will give a better title to holder in due course. Section 130 states that a person taking a Cheque
    crossed generally or specially bearing it either case the word “not negotiable” shall not have a better title than the title
    of person from whom the took it.

    Hence, even if a holder in due course takes a cheque crossed not negotiable he will not have a better title
    than transferor. Hence, “not negotiable” Cheque is an exemption to rule that “holder in due course gets a better title
    than transferor.”

    It may be noted that words “not negotiable” on a cheque does not mean that it cannot be negotiated.

    Payment in due course (Section 10) means payment in accordance with the ‘APARRNET TENOR’ of instrument in good
    faith and without negligence to any person in possession there of under such circumstances which do not afford a
    reasonable ground for beliving that he is not entitled to receive payment of amount.

    It payment is made in due course, it will discharge negotiable instrument.
    a) Apprent Tenor: - It means what appears on face of instrument as intention of parties. For example – payment
    should be made on or after maturity. If made before maturity it is not a payment in due course. If bank makes
    payment of post dated cheque, this is not a payment in due course.
    b) Holder: - payment should be made to holder or any person authorized by holder in his behalf. If any instrument
    is payable to order and not endorsed by holder to any other person, then payment to possessor wasn’t be in due
    course if he is not holder or his authorized person. But if bearer instrument or if endorsed in blank, then
    payment to passessor shall be payment in due course provided suricious circumstance.
    c) Good faith no negligence not having reasonable grounds that person to whom payment is making not entitled. If
    so, make enquiry.

    Qn 5. National Steels Limited decided to forfeit the amount of gratuity of its employees A, B and C on account of
    disorderly conduct and other acts which caused loss to the property belonging to the company. A, B and C, committed
    the following acts:

    (i) A refused to surrender the occupied land belonging to the company.
    (ii) B committed theft under law involves offence of moral turpitude.
    (iii) C after superannuation continued to occupy the quarter of the company for six months.

    Against the decision of the company, A, B and C applied to the court for relief. The Company contented that the right
    to gratuity is not a statutory right and the forfeited amount of gratuity was within the law.

    Examine the contention of the company and the decision taken by the company to forfeit the amount of gratuity in the
    light of the Payment of Gratuity Act, 1972.

    Ans. 5 According to Sec. 4 (b) (a) Where the services of an employee have been terminated for any act, willful
    omission or negligence causing any damage or loss to, or destruction of property belonging to the employer, the
    gratuity of the employee shall be forfeited to the extent of such damage or loss caused to the employer, or (b) Where
    the services of an employee have been terminated for -
    (i) his riotous or disorderly conduct or any other act of violence on his part; or
    (ii) any act which constitutes an offence involving moral turpitude, in the course of his employment.

    Qn 6. State the provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 relating to the
    protection of the amount standing to the credit of an employee in the provident fund against attachment.

    Ans. The provisions of employees provident funds and miscellaneous provisions Act 1952, relating to the protection of
    the amount standing to the credit of an employee in the provident fund against attachment are the following. The
    amount standing to the credit of any member in the fund or credit of any exempted employee in provident fund shall
    not in any may be capable of, being assigned or charged and shall not be liable to attachment under any decree or
    order if any court in respect of any debt or liability incurred by the member or the exempted employee. Neither the
    official assignee appointed under the presidency town insolvency act, 1909 nor any receiver appointed under
    provincial insolvency act, 1920, shall be entitled to or have any claim on any such amount.

    The amount standing to the credit of the aforesaid categories of persons at the time of their death and payable to
    their nominees under the scheme or the rules rest in nominees. And the amount shall be free from any debt or any
    other liability by the decreased or the nominee before the death of the number or the exempted employee and shall
    also not be liable to attachment under any decree or order any court.

    Qn 7. A issues an open 'bearer' cheque for Rs. 10,000 in favour of B who strikes out the 5 word 'bearer' and put
    crossing across the cheque. The cheque is thereafter negotiated to C and D. When it is finally presented by D's
    banker, it is returned with remarks "Payment countermanded" by drawer. In response to this legal notice from D, A
    pleads that the cheque was altered after it had been issued and therefore he is not bound to pay the cheque.
    Referring to the provisions of the Negotiable Instruments Ad,, 1881 decide, whether A's argument is valid or not ?

    Ans 7. A bearer instrument is an instrument is payable to bearer when it is expressed to be so payable. It is also
    payable to bearer when the only or last endorsement was blank endorsement.

    The statement, once a bearer cheque, always a bearer cheque is often misunderstood to mean that if initially
    a cheque was a bearer cheque it can be paid across the counter even if subsequently the cheque was crossed. This is
    not the meaning of this phase at all once a bearer always a bearer does not mean that a cheque issued as a bearer
    cheque cannot be crossed or that even if crossed, it can be paid across the counter.

    A cheque payable to bearer cheque can be grossed any time, i.e. either at the time of issue or later. In such
    case, banker will have to pay the amount to another banker and not to bearer of cheque, “crossing a cheque is not
    endorsement of cheque.

    Qn 8. F, an assessee, was a wealthy man earning huge income by way of dividend and 5 interest. He formed three
    Private Companies and agreed with each to hold a bloc of investment as an agent for it. The dividend and interest
    income received by the company was handed back to F as a pretended loan. This way F divided his income into three
    parts in a bid to reduce his tax liability.

    Decide, for what purpose three companies were established? Whether the legal personality of all the three companies
    may be disregarded?

    Ans 8. As per companies Act, corporate viel indicates that the company and member are separate legal entity; Acts
    of company are not the act of its directors or managerial personal. Sometimes this corporate veil is used by the
    persons behind it for “improper purposes”. In such cases, the courts lift the veil and see who are the real beneficiaries
    behind the veil. In such cases the court will not take action against the company but will directly look to the person
    behind that. When the veil is used for evasion of taxes, the veil shall be lifted.

    Here in the question the case is similar to the famous case law of Sir Dinshaw Maneckjee petit.
    F an assessee in order to evade payment of taxes formed three companies and divided his income into three parts in a
    bid to reduces his tax liability. Hence, the legal personality of the three companies may be discarded and F the person
    concerned who formed companies to evade the taxes is liable to pay tax.

    Qn 9. Annual General Meeting of MGR Limited is convened on 28th December, 2008. 5 Mr. J, who is a member of the
    company, approaches the company on 28th December, 2008 and demands inspection of proxies lodged with the
    company. Explain the legal position as stated under the Companies Act, 1956 in this regard.

    Ans 9. Annual General meeting of MGR Limited was held on 28th December, 2008. Mr. J being a member of the
    company has the right to demand inspection of proxies lodged with the company.

    Proxy forms can be inspected by any member entitled to vote at the meeting. He has to give three day’s
    notice in writing of his intention to inspect. Proxy forms can be inspected during the period of 24 hours before
    commencement of the meeting and till conclusion of the general meeting. [Section 176 (7)]. [Thus if prior notice of
    three days is not given, company can refuse inspection of proxy forms.

    Qn 10. India Cosmetics Limited was a registered company Under Indian Companies Act, 5 1956. Lateron, another
    company, India Cosmetics and Accessories Limited was formed and registered. Being similarity in the names of both
    Companies, India Cosmetics Limited lodged the complaint against India Cosmetics and Accessories Limited to the
    Registrar of Companies stating that there is sufficient similarity between these two names which may mislead or
    defraud to the public. India Cosmetics and Accessories Limited is intending to alter its name.
    Advice the India Cosmetics and Accessories Limited to alter the name of the Company according to the provisions of
    the Companies Act, 1956.

    Ans. 10. Following are the provisions of the companies act, 1956 regarding alteration of the company which may be
    followed by Indian cosmetics and accessories limited to alter the name of the company –

    Section 21 of Act states that a company may change its name by passing special resolution and by obtaining prior
    approval of Central government. Bu if only change name is deletion of the word “private central government
    permission is not required but a special resolution is required.

    Section 22 states that if by inadvertance, a name has been registered which is identical with too nearly resembles the
    name of an existing company, the in company “may change it by passing an ordinary resolution and after getting
    precious written permission of central government as to the changed name.

    Section 22, further states that central government is empowered to direct a company, within 12 months of its
    registration, to RACTIFY, its name; if by inadvertence; it has been registered with a name similar to that of an existing
    company. If a company is so directed by the central government, it much change the name within 6 months of
    direction and for the purpose, company shall pass an ordinary resolution and get prior approval of central government,
    in writing. The central government may extend this to 6 months. If the company makes default in complying with
    direction of central government, then company and every officer of the company in default is liable is penalty of
    Rs.1000 each per day during which default continues.

    Qn 11. While sanctioning working limit, the rate of interest has been fixed at a specified 5 percentage above the bank
    rate as notified by the Reserve Bank of India. There was a change in the interest rate due to Reserve Bank of India
    notification issued later. The Bank insisted on filing a return of modification of charges. Is the stand of bank correct?
    Discuss, in the light of the provisions of the Companies Act, 1956.

    Ans. 11. Section 135 of the Act provides that ‘whenever the terms or conditions or the extent or operation of any
    charge registered under this part are or is modified, it shale be the duty of company to send to the registrar the
    particulars of such modifications and the provisions of this part as to registration of a charge shall apply to
    modification of the charge.”

    The term modification includes variation of any of the terms of the agreement including variation of rate of interest
    which may be by mutual agreement or by operation of law. Even if the rights of a charge holder are assigned to a
    third party, it will be regarded as a modification what constitutes modification.

    1. Where the charge is modified by varying any terms and conditions of the existing charge by agreement.
    2. where the modification is in pursuance of an agreement for enhancing or decreasing the limits.
    3. where the modification is by ceding a pari passu charge
    4. change in rate of interest (other than bank rate)
    5. charge in repayment schedule of loan; (this is not applicable in working capital loans which are repayable on
    demand) and
    6. partial release of the charge on a particular asset or property.

    Qn 12. What is meant by "Abridged Prospectus"? Is it necessary to furnish abridged form 5 of prospectus along with
    the application form for shares. Under what circumstances an abridged prospectus need not accompany the detailed
    information regarding prospectus along with the application form?

    Ans. Abridozed form of Prospectus: - Section 56(3) permits a company to issue a memorandum containing the salient
    features of prospects as prescribed. This is also abridged form of prospectus. This section further requires that a
    company must furnish a copy of prospectus (full) to a person of request is made by the person before close of
    subscription list also, the company may attach full prospectus with application form, is so desires.

    Central government has prescribed “Form No. 2A” as abridged prospectus. The share application form and abridged
    prospectus should have same distinctive number. An abridged prospecting is not required to be issued in same four
    cases when a prospectus is not required.


    PART—II

    Question No. 13 is compulsory. Attempt any two questions from the rest.

    Qn 13. (a)
    "To maintain social contract between society and business, the trusteeship relations are essential".
    Describe the role of business ethics in this reference. [ 5 marks ]

    Ans. 13 (a)
    Role of Business Ethics: -

    • Role of corporate Governance.
    • Role of middlemen between society & business.
    • Business relation in sense of ethics to the governing society.
    • Society and business aims to cultivate and share knowledge and ideas in order to assist business to enhance their commitment in societies.
    • Society & business seeks to provide a platform for diverse academic and practitioner communities to debate a broad spectrum of social issues and disciplinary perspectives.
    • General business ethics is the term to determine the fundamental purposes of a company.
    • Corporate social responsibility (CSR) – Term under which rights and duties existing between companies and society is debated.
    • Different Ethics related to society & business : -

    - Accounting Information.
    - Human resource management
    - Sales & marketing
    - Production
    - Intellectual property, knowledge & skills.

    (b) Explain the factors that influence ethical behaviour of an employee. List out some examples of various ethical
    issues faced in a workplace. [ 5 marks ]

    Ans 13 (b) Ethical decisions in an organization are influenced by three factors; individual moral standards, the
    influence of managers and co-workers and the opportunity to engage in misconduct. In fact, the activities and
    examples set by co-workers, along with rules and policies established by the firm, are critical in gaining consistent
    ethical compliance in an organization. If the company ethical compliance in an organization. If the company fails to
    provide good examples and direction for appropriate conduct, confusion and conflict will develop and result in the
    opportunity for unethical behaviour. In addition, haring sound personal values contributes to an ethical workplace.
    Some examples of ethical issues faced by an individual in the work place are:-

    1) Relationship with suppliers and business partners:
    a) Bribery and immoral entertainment.
    b) Discrimination between suppliers.
    c) Dishonesty in making and keeping contracts.

    2) Relationship with customers.
    b) Unfair pricing
    c) Cheating customers
    d) Dishonest advertising
    e) Research confidentiality.

    3) Relationship with employees
    a) Discrimination in hiring and treatment of employees.

    4) Management of resources
    a) Misuse of organisational funds.

    Qn 14. What is meant by Stakeholders? Describe those stakeholders who are being affected by or can affect the
    Organisation. [5 marks]

    Ans 14. Past beliefs utter that the shareholders or investors are the only person to whom the management is
    accountable. But now, the activities of corporate entity also affect other sections of the society and therefore, the
    management is accounting of the society and therefore the management is accountable to them as well.

    Stakeholders of a corporate entity include employees, trade unions, customers, shareholders and investors,
    suppliers and the community at large.

    The individuals, groups or other organisations which are affected by, or can affect the organisation in pursuit
    of its goals are as under: -

    a) Employees.
    b) Trade unions.
    c) Customers.
    d) Shareholders and investors.
    e) Suppliers.
    f) Local communities.
    g) Government
    h) Competitors.

    Qn 15. Answer any two out of four. You are required to state whether the statement is correct or incorrect with
    brief reasons. [ 2 x 2 ½ = 5 ]
    (a) Ethical behaviour is not essential to work environment at the workplace.
    (b) In the long run those business firms who do not respond to society's needs favourably will survive.
    (c) There is no economic growth without ecological costs.
    (d) ‘Consumer interest' and 'Public interest' are synonymous.

    Ans 15. (a) False
    In today’s business environment every business organisation has employees who hail from diverse cultural and
    religious background and whose outlook on ethics might be completely different and may even be contrasting in some
    cases. It is therefore the role of an employer to lay down a clear code of ethics prescribing what is right and wrong in
    order or achieve uniformity in action and eliminate a scope for ambiguity, therefore ethical behaviour is important at
    the work place.

    (b) False
    Assumption of a set of social obligations by business is an integral element of ethical conduct of business social
    obligations form part of ethical and moral obligations of business. The objective of social responsibility promotes the
    commercial and economic objectives of business and boosts the public image of business.

    (c) True
    Brundtland report stated that economic growth has to be environmentally sustainable. There is no economic growth
    without ecological costs. One must realize that increased development and higher GNP are responsible for the higher
    economic growth.

    (d) False.
    Often, consumer interest and public interest are considered synonymous. But they are not and need to be
    distinguished. Many governmental policies framed for public interest are anti-competitive in nature which ultimately
    affects the consumer and his interest.

    Qn 16. Explain the reasons for unethical behaviour among finance and accounting professional. [ 5 marks ]

    Ans. 16. Some of the reasons for unethical behaviors among finance and accounting professional are as under : -

    1. Emphasis on short term result: - Companies which are intent on showing false accounts in the short term in order
    to raise capital from the markets adopt unethical tactics. This is one of the principal reasons for the downfall of
    the company.
    2. ignoring small unethical issues : - Companies which do not take adherence to ethics seriously and tolerate small
    derivations from ethical guidance are paving the way for their own downfall, as these small deviations gradually
    seep into more critical aspects and there comes a point when they becomes uncontrollable.
    3. economic cycles: - when economy is booming it needs to ensure that it follows practices which are ethical and
    they need to be careful and vigilant in order to prepare itself it times of depression and ensure that the effect of
    depression on the company’s financial statements is limited and the company is in a position to bear the losses
    and at the time make the situation acceptable for the shareholders.
    4. accounting rules: - in the fore of globalisation of accounting standards, makes compliance with accounting
    standards becomes difficult and it is equally difficult to identity variations from these complex set of requirements.
    The complexity in identifying abuses may promote unethical behaviour.


    PART—III


    Question No. 17 is compulsory. Attempt any two questions from the rest.

    Qn 17. (a) Explain the factors which are responsible for the growing importance of communication of an organisation. [ 5 marks ]

    Ans 17 (a) Following are the factors which are responsible for growing importance of communication in an organization : -

    (a) Growth in the size and multiple locations of organisations: Most of the organisations are growing larger and larger in size. The people working in these organisations maybe spread over different states of a country or over different countries. Keeping in touch with them, sending across directions and getting feedback will be possible only when communication lines are kept working effectively.
    (b) Growth of trade unions: Over the last so many decades trade unions have been growing strong. No management can be successful without taking the trade unions into confidence. Only through effective communication can a meaningful relationship be built between the management and the workers.
    (c) Growing importance of human relations: Workers in an organisation are not like machines. They have their own hopes and aspirations. Management has to recognise them above all as sensitive human beings and work towards a spirit of integration with them.
    (d) Public relations: Every organisation has a social responsibility, especially towards the customers, government, suppliers and the public at large. Communication with them is the only way an organisation can project a proper image of itself.
    (e) Advances in Behavioral Sciences: Modern management is deeply influenced by exciting discoveries made in behavioral sciences like Psychology, Sociology, Transactional Analysis etc. All of them throw light on subtle aspects of human nature and help in developing a positive attitude towards life and building up meaningful relationships. And this is possible only through communication.
    (f) Technological advancements: The world is changing very fast, owing to scientific and technological advancements. These advancements deeply affect not only methods of work but also the composition of groups.

    In such a situation proper communication between superiors and subordinates becomes very necessary.

    (b) Draft a circular for employees insisting on punctuality. [ 5 marks ]
    Ans.

    Circular

    1. All staff to be in OFFICE by 08:45 am (from 18/2/2009 to 25/2/2009).
    2. Individuals coming late to be shown as leave without pay, even if there is balance of leave to the person.
    (Employees please note that the regular office time is 9.00 am, so if the employee is reaching to office at 8.50 am but
    he comes earlier to regular time that is 9.00am. Is it ethical to show him on Leave without Pay even if he has surplus
    EL and CL in balance)

    Regards
    A B C

    Qn 18. What is meant by "Active listening"? State the importance of 'Active listening' in 5 the business communication
    skills.

    Ans. Active listening is a may of listening that focuses either on what the other person is saying and confirms
    understanding of both the contract of the message and the emotions and feelings underlying the message to ensure
    that understanding is accurate.

    Active listening is important for several reasons: -
    (i) It aids the organisation is carrying out its mission
    (ii) It provides information about the happenings in the organisation.
    (iii) It avoids misunderstanding and thereby helps to build strong interpersonal relationship.
    (iv) It is a very useful method of solving problems in an organisation.
    (v) It helps in understanding people and improving the work environment making it more favourable for work.

    Qn 19. A partnership firm was constituted by A, B and C partners, carrying on the business of shoe manufacturing.
    Lateron, Nickson Shoe Manufacturing Co. Limited proposed to purchase the business of the firm to the partners of the
    firm. The partners unanimously consented to it and agreed to dissolve the firm. Draft a Partnership Dissolution Deed
    in this respect. [ 5 marks ]

    Ans. Deed of Dissolution of partnership. This deed of dissolution of partnership made in New Delhi on 3rd march 2008
    between

    (a) Mr. A age 44 years, son of Mr. Balmant K. Sharma, residing at 124 Khari Bavali, New Delhi – 110201 C hereinafter
    referred to partner A, and (b) Mr. B & C Aged 51 years and 48 years, sons of Mr. Mohan K. Lohia, residing at 12 Old
    Ganga Road new Delhi – 110135 (hereinafter referred to as partner B and C) hereby witnessed as follows :-
    Whereas partners A, B and C had entered into a partnership vide partnership deed dated 1-4-92 and whereas
    they were carrying on business of partnership in the name of Ratan Traders at New Delhi.
    And whereas they parties have agreed and decided to dissolve the partnership and close the partnership
    business w.e.f 31-3-2008;

    It is hereby mutually agreed as follows:-

    (1) The partnership business being carried by partners is name of Ratan traders be dissolved w.e.f 31-3-08.
    (2) Partners A B and C have signed necessary notice to be submitted to registrar and firms and agree to sign such further papers and documents as may be required.
    (3) Partners A has agreed to look after the work of setting accounts and finalizing work of dissolution.
    (4) Partner B shall be no change of books of accounts and dissolution matters till the formalities in respect of dissolution are completed. Expenses of dissolution shall be borne by partner C.
    (5) Business of partnership firm including its assets, goodwill and liabilities will be taken by nickson shoe manufacturing co. ltd. and shall be carried on by them partner c will collect dues to the partnership firm as a the date of dissolution of firm.
    (6) Partner B agree that he will complete all formalities and procedures as required under income tax act sales tax act, and other tax laws all partners will ensure that all tax liabilities of the dissolved partnership firm once duly discharged.
    In witness whereof, the parties to this deed of dissolution have signed the deed in presence of witnesses, on the date
    mentioned in the first paragraph of this partnership deed.

    Qn 20. SVA Limited dispatched Bonus Share Certificate to Mr. R. R did not receive the Bonus Share Certificate as it
    was lost in the transit. R applied to the Company to issue the Bonus share certificate in duplicate. SVA Limited asked
    Mr. R to submit an Indemnity Bond so that Bonus Share Certificate in duplicate may be issued to him. Draft an
    Indemnity Bond to be given by R to the company for seeking release of Bonus Share Certificate in duplicate.
    [ 5 marks ]

    Ans 20.
    INDEMNITY BOND
    To
    SVA Limited
    28, Houston Road
    Banglore.

    I. R, 44 years, son of Mr. Bankant K. Sharma and Mrs. Revati A Sharma, Age 39 years, wife of Mr. Ashok B Sharma,
    both residing at 124, Khari Bavali, New Delhi – 110006, hereby state as follows : -

    1) I a shareholder of your company holding 1000 equity shares bearing serial no 11356001 to 11356100 of your
    company.
    2) The bonus share certificate dispatched was in transit and I believe that it has been irretrievably last.
    3) Have not transferred or sold the shares, have not pledged or deposited the original share certificate by way of
    security or otherwise
    4) I agree to return the bonus share certificate forthwith for cancellation, if anytime found by me.
    5) I have requested you to issue a duplicate certificate to me.
    6) In consideration of the company agreeing to issue duplicate certificate as aforesaid, I including my heiress,
    successors, executors and administrators, hereby agree to save, deferred and keep harmless and indemnify and
    keep indemnified the SUA Company ltd. its successors, assignees.
    7) Events and directors against all claims, actions, demands, losses, damages, cots, charges and expenses, which
    may be made on you or incurred by you directly or indirectly, in respect of lost share certificate, issue of duplicate
    share certificate and any writer arising out of issue of the duplicate share certificate.
    8) In the event of our failure to compensate the company / its agents in any action, suits and proceedings, the
    company can have lien in general on all the securities which I an now holding and also the dividend declared or
    payable on the said securities or in witness thereof, the indemnify bond has been signed in number on 25th June
    2007.

    Signature
    Before me – Notary Public

    Note: - (All names, information address of persons in drafts are illusory; they are only for the purpose of drafting the answers)


    You Can Also Download This From PDF Format
    Attached Files Attached Files

Tags for this Thread

Bookmarks

Posting Permissions

  • Register / Login to post new threads
  • Register / Login to post replies
  • Register / Login to post attachments
  • You may not edit your posts
  •