case study on companies act 2013 with solution

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Case Study on Section 185 and Section 186 of Companies Act 2013

An India Private Limited Company (The Company) has advanced certain amounts to one of its subsidiary namely “S Private Limited”

The Company had planned to acquire 100% stake in the subsidiary vide Share purchase agreement from the shareholders of the subsidiary.

Pursuant to the above planned purchase of shares in the subsidiary, the Company had nominated its two directors as additional directors in the subsidiary which resulted in having common directors in both the companies.

The Company also had the responsibility of running the operations of the subsidiary and for this purpose it had appointed the employees in the Subsidiary for the same. Further, to run the subsidiary company, the Company also advanced certain amounts to the subsidiary for running the operations smoothly and shown as advance in the Balance Sheet of Subsidiary Company.

Later on, there were disputes amongst the then shareholders of the subsidiary and the Company on certain matters and the company could not complete the 100% stake in the subsidiary. Due to the disputes, the Company could not recover the amounts advanced earlier and also the investment in the subsidiary. Accordingly, various legal suits were filed in the court of law.

As the Company had hired employees for the subsidiary, the Company kept on paying the salary of the staff and showed the same as advances recoverable from the subsidiary company.

Finally, the Company and the then shareholders of the subsidiary has entered into a settlement agreement in the year 2015-16 and settled the entire claim of the Company via one time full and final settlement which included investment, loans and advances etc.

The Company wants to understand whether the above said advances given attracts the provisions of Section 185 and 186 of the Companies Act, 2013 or not.

CS RAVI BHUSHAN KUMAR

Relevant provisions regarding providing of Loan to Directors, etc

Section 185(1) of the Companies Act, 2013 provides that no company shall, directly or indirectly, advance any loan , including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person:

Explanation. —For the purposes of this section, the expression “to any other person in whom director is interested” means—

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;

(b) any firm in which any such director or relative is a partner;

(d) any body corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(e) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

Analysis :

The company affianced to appoint two of its directors in the Subsidiary vide its Share Purchase, ergo both having common directors.

The pre requisite for the applicability of the provisions of Sub section 1 of Section 185 of the Companies Act, 2013 is whether the company has advanced loan to any of its directors or to any other person in whom the director is interested.

As per the terms and conditions stipulated in the covenant, the company had advanced certain amounts to the subsidiary for meeting the operational expenses. This amount of money cannot be construed to be loan to the directors of the company or any other person in whom the director is interested as the incumbents did not hold any prior interest at the time of advancing the loan, but were appointed only to fullfil the requirement of the Agreement as nominee of acquirer, thus is not repugnant to the above provisions.

Further in view of the serious implications in the event of violation of the provisions of section 185 it is absolutely necessary to understand the precise and concise meaning of word “loan” and “Advances”;

Loan has not been defined under Companies Act, 2013. Therefore we have to rely on the dictionary meaning of the term “Loan” and judicial clarification in this regard. As per dictionary meaning, loan is a sum of money or other valuables or consideration that an individual, group or other legal entity borrows from another individual, group or legal entity with the condition that it be returned or repaid at a later date with or without interest.

The Hon’ble Supreme Court in the case of Shree Ram Mills Ltd Vs. Commissioner of Excess Profit Tax, MANU/SC/0054/1954 = AIR 1953 SC 485 has defined the word “Loan” in the following words:-

At bottom this is a question of fact. Of course, money so left, could by a proper agreement between the parties, be converted into a loan, but in the absence of an agreement mere inaction on the part of the managing agents cannot convert the money due to them, and not withdrawn, into a loan. A loan imports a positive act of lending coupled with an acceptance by the other side of the money as a loan.

The Calcutta High Court in the case of Saradindu Sekhar Banerjee Vs. Lalit Mohan MANU/WB/0045/1941, AIR 1941 Cal. 538 Every loan is a debt but every debt is not a loan.

The Hon’ble Madras High Court in the case of KM. Mohammed Abdul Kadir Rowther Vs. S. Muthia Chettiar MANU/TN/0424/1959 that advance means literally a payment beforehand. In certain cases, it may be a loan but it cannot be said that a sum paid by way of advance is necessarily a loan.

The Hon’ble Privy Council in the case of Raja of Venkatagiri vs. Krishnayya Rao Bahadur MANU/PR/0017/1948 : AIR 1948 PC 150 at p. 155, has observed that ordinarily advance does not connote any idea of repayment is, hence loan is completely different from an advance as is understood in the common parlance in the sense of payment of money beforehand and which is likely to become due at some future time.

In the judgement passed by Madras High Court in K.M. Mohamad Abdul Kadir Rowther vs S. Muthiah Chettiar on 5 August, 1959, it was contended that, the advance were not to be considered as a loan , the amount was intended to be recovered, and that, therefore an obligation to repay the sum should be inferred; there being thus an obligation to repay a personal liability would subsist. The learned advocate for the appellant urged that the word ‘Advance’ itself would imply a loan. ‘Advance’ means literally a payment before hand; in certain cases it may be a loan but it cannot be said that a sum paid by way of advance is necessarily a loan, this decision was based on London Financial Association v. Kelk L.R. (1884) 26 Ch. D. 107 , where it was observed, that the words-‘advancing’ and ‘lending’ each have a different significance, the money might be ‘advanced’ without being ‘lent’.

Whether section 185 is talking about loan or advance or both?

Section 185(1) of the Companies Act, 2013 inter-alia provides that no company shall, directly or indirectly, advance any loan , including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person

Here words “advance any loan” are used, it is not used as “advance or loan/advance and loan”, and hence the word “advance any loan shall be read together and word advance is a verb and loan is a noun, accordingly “advance any loan” means to give any loan This section is not at all include the words ‘Advance’ as noun which means paying something in advance before it is actually due.

It is pertinent to refer to the case of Pennwalt India Ltd. v. RoC , wherein the Hon’ble High Court of Bombay has held that to ascertain whether a transaction is a loan or not, surrounding circumstances, relationship and character of the transaction and the manner in which parties treated the transactions will have to be considered. Hence, with reference to each transaction with Directors and other person in whom the Directors are interested; the nature of transactions has to be studied.

Purpose of Section 185:

It seems that legislature was intended to prohibit the flow of funds from the company to its directors or other persons in whom the Director is interested, more emphasis is likely to be laid on the fiduciary duty of the Directors and for such reason the loans, etc. to Directors and other specified person are prohibited. It simply means that a director shall not be enriched at the funds of the Company.

This provision is to curb the misuse of the powers by directors, whereby they do not use their fiduciary powers for self-benefit, and move the funds of the company away to their personal pocket directly or through any intermediaries.

Although the terms “ loans and advances ” are used together and in common parlance deemed to be synonyms of each other but in view of various judicial decision as illustrated above “Loan” and “Advance” both are two different words carrying independent meaning. In the given case the acquirer has given advances to its subsidiary company during the course of acquisition of 100% shares in accordance with Share Purchase for business purpose and to meet day to day running expenses and salary requirement of the employees appointed by the acquirer. It seems that neither it was intended by the acquirer to “advance any loan” nor has been reflected in the balance sheet of the target company the said amount as loan and we presume that the said amount has been shown as advance under sub head advance under the head “ Loan and Advance ”.

Whether there is any direct or indirect personal interest of Directors concerned?

There is no question of personal interest of directors where the Holding Company advance supports to its subsidiary company which was undergoing the course 100% acquisition. If it is not wrong to have subsidiaries, it cannot be said to be wrong to support subsidiaries. If the subsidiary does well, it augments the asset value of the holding company, therefore, the well-being of the subsidiaries is the well-being of the holding company. If the directors of the company are helping the subsidiaries, they are helping the business of the company, which is the very purpose for which they exist. Further in the given case the subsidiary company was under the process to become 100% subsidiary of the acquirer company in accordance with share purchase agreement and in pursuance of that the acquirer has already acquired 51% of shares of the target company as first trench acquisition and appointed two of its directors as its nominee directors in the subsidiary company as mandated in Share Holders Agreement and Share Purchase Agreement. Merely because of directorship in the subsidiary as the nominee of the holding company, such advance could not be treated as indirect loan to such Directors.

Meaning of Direct & Indirectly:

When section 185 is also talking about indirect loan, in the light of various judicial pronouncements illustrated above “indirect loans” will connote that the company shall not give loan through the mode of one or more intermediaries. However, the word ‘indirectly’ cannot be read as converting what is not a loan into a loan. Hence, the amount given must be strictly a loan, which is not in the nature of loan, cannot be said to be the case of an indirect loan.

Section 186(vii)- Loan and Investment by Company provides that no loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan.

An advance is not loan as discussed above hence there is no question of applicability of section 186(iii) Although the terms “ loans and advances ” are used together and in common parlance deemed to be synonyms of each other but as per various judicial decisions there is a clear line of demarcation between the two terms. Further nature and purpose of transaction of the current case do not resemble with that of loan.

Inferences Drawn

Therefore in light of the above observations and examination of the provisions of the Companies Act, 2013 and the rules framed there under and various judicial decisions cited above, we are of the opinion that the company has not contravened any provisions of Section 185 or Section 186.

(Author: CS Ravi Bhushan Kumar is Partner with SR & Associates, Noida)

Disclaimer

The conclusions reached and views expressed are matters of opinion based on my understanding of the related laws, rules, notifications, circulars, etc.
This is complete a personal opinion on the basis of imaginary facts and figure.
Companies Act
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Name: CS RAVI BHUSHAN KUMAR

Qualification: cs, company: sr & associates, location: new delhi, in, member since: 10 aug 2017 | total posts: 2, my published posts, join taxguru’s network for latest updates on income tax, gst, company law, corporate laws and other related subjects..

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case study on companies act 2013 with solution

Lender Company can waiver the interest for period of 1 year based on borrower requested due to losses incurred by borrower during difficult times in COVID 19 pandemic. This is allowed under companies act considering the spirit of business scenario.

Are there any more case laws or case studies on these section. If so can you please update ?

Sir you stated (b) any firm in which any such director or relative is a partner; as party in which director is interested . But in sec .185 i couldn’t find such provision. kindly clarify

The information you have given is very much useful sir.. A special “thanks” for you… But I need more like this…..

a very interesting and informative article for all to study & learn.

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Home » Blog » [Case Study] Procedure of Conducting Board Meetings

[Case Study] Procedure of Conducting Board Meetings

Blog | Company Law |
12 Min Read
Last Updated on 22 February, 2023

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Table of Contents

1. Board meeting

2. provisions under the companies act 2013 for conducting board meetings, 3. section 173 of companies act, 2013 – meetings of board, 3.1 minimum number of board meetings, 3.2 gist of section 173, 4. manner of participation by directors, 5. penal provision for any default/violation of section 173.

5.1 Penal provision as per section 450 of Companies Act 2013

6. Regulatory actions

7. the relevant case law on this matter, 8. details of the company, 9. regulator’s inspection/checking procedure on compliance, 10. facts of the case, 11. show cause notice and personal hearing, 12. the findings of the regulators on the submission made by pcs, 13. the order passed by the registrar of companies, 14. conclusion.

The board meeting in a company is a formal meeting of the directors of the company called to debate certain issues and problems and to make decisions to run the company smoothly in order to achieve the desired goals and objectives set. The meetings are held at definite times, at definite places. A board meeting is organized to solve some special issues, taking important decisions, or to make new policies, monitor the progress, taking note of the compliances and such other matters. No doubt planning a board meeting require a meticulous detailed preparation than the usual company / corporate events which are attended by the directors and at times, invites / experts called for the meeting for specific purposes.

Since the companies are incorporated and registered under the framework of the Companies Act, the companies are mandatorily required to follow the laid down procedure of the provisions of the Companies Act, 2013. Relating to conducting of the board meeting in a company, the following are the laid down procedure / provisions under the Companies Act 2013.

Dive Deeper: [Opinion] Consequences of failure to give notice for holding a board meeting under the Companies Act

Following are the rules and conditions laid down by Companies Act 2013 which are mandatorily required to be followed and fulfilled by the companies and board of director of a company

As per section 173(1) of Companies Act 2013, “every company shall hold the first meeting of the board of directors within thirty days from the date of company incorporation and thereafter hold board meetings in such a manner that not more than 120 shall intervene between two consecutive meetings and should be a minimum number of four meetings every year.”

We can conclude the following from the above provision that:-

(i) Every company is required to hold the first meeting of the board of directors within 30 days of the date of company incorporation. (ii) A minimum number of 4 meetings of its board of directors is required to be held every year in such a manner that not more than 120 days shall intervene between two consecutive meetings of the Board. (iii) It is observed that the Central Government may by notification direct that the provisions of this subsection shall not apply to any class or description of companies. (iv) The provisions related to a minimum number of board meetings apply to a company licensed under section 8 company only to the extent that the board of directors of such companies shall hold at least one meeting within every 6 calendar months.

As per sub-section (2) of section 173 of the Companies Act 2013, it says that “the participation of directors in a meeting of the board may be either in person or through video conferencing or other audiovisual means, as may be prescribed, which are capable of recording and recognizing the participation of the directors and recording and storing the proceedings of such meetings along with date and time: Provided that the Central Government may, by notification, specify such matters which shall not be dealt with in a meeting through video conferencing or other audiovisual means.”

Offences for default committed in section 173 of the Companies Act 2013, is not provided specifically in the Act. In such a case, the penalty will be imposable under section 450 of the Act as provided in that section. In this case also, the penalty would be levied for noncompliance as per section 450 of the Companies Act 2013.

5.1. Penal provision as per section 450 of Companies Act 2013

Section 450 of the Companies Act, 2013 spells out that if a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, Imitation or restriction subject to which any approval, condition, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be table to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.

Taxmann Research for Company & SEBI Laws.

To understand the regulatory action in cases of non-compliance relating to the conduct of board meeting, it would be worthwhile to go through a decided case law on this matter.

We shall go through a case relating an adjudication order passed by the Registrar of Companies, Gujarat, Dadra & Nagar Haveli on 13th April 2020, in the matter of M/s. D J. Shah Investment Finance Private Limited of Gandhinagar, Gujarat, under section 454(3) of the companies act 2013 read with rule 3 of the companies (adjudication of penalties) rules, 2014 for violation of section 173(1) of the Companies Act, 2013.

D.J Shah Investment Finance Private Limited is a company incorporated on 1st June 1984 having its registered office at 619, Yash Kamal Building, Sayajigunj Vadodara Gujarat. The company falls under the jurisdiction of Registrar of Companies, Ahmedabad and the Registrar of Company is situated at Ahmedabad. The company operates in the securities, commodity contracts and other financial investments and related activities sector. The company had three directors on its board (being a private company)

As per sub-section (5) of section 206 of the Companies Act 2013, the Central Government carry out the inspection of the books of accounts of the company and after going through the records / documents of the company, the inspecting officer would take note of any non-compliance committed by the company. Such non-compliances would be reported by the inspector to the Registrar of Companies by way of submitting an inspection report.

Even if the inspection is not taking place, the Registrar of Companies (RoC) could go through the documents submitted (i.e. financial statements along with the Board report) by the company via e-filing done by the company at the MCA Portal and information could be gathered and where required the RoC could call for further information from the company in order to ascertain the facts.

In this case, the regulators during their procedural scrutiny observed from the documents filed by D.J Shah Investment Finance Private Limited at the MCA portal – from the annual report submitted by the company in form MGT-7, that the company’s board meetings were held as listed below during the financial year 2017-18 (financial year ending as on 31/3/2018)


1 meeting	Held on 30 June 2017
2 meeting	Held on 15 July 2017	The gap between these two meeting was found more than 120 days i.e. 150 days.
3 meeting	Held on 12 December 2017
4 meeting	Held on 24 March 2018

(a)

20-01-2022

Since the non-compliance of section 173(1) of the Companies Act 2013 committed by D.J Shah Investment Finance Private Limited has been observed on scrutiny, the Registrar of Companies issued Adjudication Notice to the company and its officers for the default / violation of section 173(1) of the Companies Act 2013 read with rules made thereunder

(b)

18-02-2022

Thereafter, a “written notice” for a personal hearing was issued to the company and its officers in default as per section 454(4) of the Companies Act 2013.

The personal hearing was fixed on 16-03-2022

(c)

16-03-2022

On the Scheduled date of hearing i.e. on 16.03.2022, practicing company secretary duly authorized by the company appeared and attended the hearing and made oral submissions.

The following were also stated by the authorized representative.

( )		The company has convened four board meetings during the financial year 2017-18 on 30.06.2017, 15.07.2017, 12.12.2017 and on 24.03.2018.
( )		The company has also convened a board meeting on 7-11-2017. However, the board meeting was convened at a shorter notice and the meeting could not take place as there were no quorum.
( )		In such situation, the company circulated the agenda of transfer of shares and the same were approved by circulation of resolution.
( )		The Annual Return i.e. MGT-7 filed for the financial year 2017-18 had already mentioned the date of approval of transfer of shares i.e. 07.11.2017.
( )		To justify and support this fact, the learned PCS submitted the Annual Return i.e. MGT-7 filed for the financial year 2017-18.
( )		The Learned PCS further submitted that the company is closely held private limited company with the Authorized share capital of Rs 10 Lakhs and paid up capital of Rs.8.5 Lakhs.
( )		The company has not borrowed any amount from the bank or any financial institution.
( )		The company has not made any gain or unfair advantage and there is no injury cause to public interest.
( )		The company is a compliance company and assure to take extra care in future to remain complaint.

After the hearing and the oral submissions made by the Learned PCS, the Registrar of Companies has observed from the transfer list of shares attached with MGT-7 filed under the Ministry of Corporate Affair portal vide SRN No. H25987967 dated 24-10-2019 approved through STP mode that date of board resolution i.e. 7.11.2017 as claimed by Learned PCS is not mentioned anywhere in the share transfer form attached with the annual return in form MGT-7 for the financial year 2017-18.

The Registrar of Companies further noted that the date of execution of transfer of shares as 07.11.2017 is mentioned therein, which may not assume board’s resolution date. It was also further felt by the proceeding officer hat this type of activity should be avoided since it revealed that company / directors have not performed their duly as prescribed under the companies Act 2013 and such ignorance of law should not be excused

The conclusions reached by the Registrar of Companies who is an Adjudicating officer The following are the conclusions reached by the Registrar of Companies before he passed the order on this matter.

(a) Under the above circumstances of the case, the Registrar of Companies has reasonable cause to believe that the company and its officers have violated the provisions of the Act, 2013. (b) The company has not complied with the provisions of section 173(1) of the Companies Act 2013 for which company and directors are liable to be penalized under section 450 of the companies Act, 2013 read with Rules made thereunder.

While adjudicating the quantum of penalty under section 450 of the Companies Act 2013, the adjudicating officer has taken into consideration the following factors with due regards – namely: -.

(i) The amount of disproportionate gain or unfair advantage whenever quantifiable made as a result of default. (ii) The amount of loss caused to an investor or group of investors as a result of the default. (iii) The repetitive nature of default,

The Presenting officer also, further submitted that with regard to the above factors to be considered while determining the quantum of penalty, it is noticed that the disproportionate gain or unfair advantage made by the company and its directors or loss caused to the investor as a result of the delay on the part of the company to redress the investor grievance are not available on the record.

Further to this, the Presenting officer also added that it is difficult to quantify the unfair advantage made by the company and its directors for the loss caused to the investors in a default of this nature.

The Presenting Officer further submitted that it is observed from the balance sheet of the company that as at 31.03.2021 that the paid-up capital if the company is Rs 8,50 lacs and the turnover is Rs. 93.76 lacs.

It is also observed that the company D.J Shah Investment Finance Private Limited is a subsidiary of Premier Solution Private Limited. Hence, the company does not fall under the ambit of a “small company”. In view of the above facts, the provisions of imposing lesser penalty as per the provisions of section 446B of the companies Act, 2013 do not apply to the company.

Having considered the facts and circumstances of the case and submissions made by the Presenting officer and reply submitted by the company and its directors, vide letter dated 01-01-2022 along with oral submission made by the Learned practicing company secretary during the hearing and after taking into accounts the factors above, the Registrar of Companies imposed a penalty on company and its directors as per the table below for violation of section 450 of the Companies Act2013 by passing the adjudication order. The order also stated that the ROC is of the opinion that penalty is commensurate with the foresaid failure committed by the company and its directors.

1. Non-compliance reg. gap between Board Meetings more than 120 days during the financial year 2017-18.


Non compliance reg. Gap between Board Meetings more than120 days	Company	10,000	30 days * 1000 = 30000	40,000	40,000
	Director	10,000	30 days * 1000 = 30000	40,000	40,000
	Director	10,000	30 days * 1000 = 30000	40,000	40,000
	Director	10,000	30 days * 1000 = 30000	40,000	40,000
Total				1,60,000	1,60,000

(Penalty calculated for reg. gap between Board Meetings more than 120 days during FY 2017-18 between two Boards’ Meeting viz. 15-07-2017 & 12.12.2017)

2. The company and directors shall have to make the payment of penalty individually for the company and by its directors (out of their own pocket) by way of e-payment (available on Ministry website – www.mcs.gov.in) under “pay miscellaneous fees” category in MCA fee and payment services within 90 [ninety] days of this order and the challan/SRN generated after payment of penalty through online mode shall be required to be filed in INC-28 to the office of the RoC.

3. The order also stated that appeal if any against this order may be filed in writing with the Regional Director, North western Region, Ministry of Corporate Affairs, ROC Bhavan, Opp. Rupal Park, NR. Ankur Bus Stand, Namnapura, Ahmedabad, Gujarat, within a period of sixty days from the date of receipt of this order in Form ADJ setting forth the grounds of appeal and shall be accompanied by the certified copy of this order. [section 454 of the companies Act 2013 read the Companies (Adjudicating of Penalties) Rules, 2014 as amended by Companies (Adjudication of Penalties) Amendment Rules, 2019.)

4. The order also stated the concerned parties may take note that as per the provisions of section 454(8) (i) of the Cornpones Act, 2013, where company does not pay the penalty imposed by the Adjudicating Officer or the Regional Director within a period of Ninety days (90 days) from the date of the receipt of the copy of order, the company shall be punishable with fine which shall not be less than twenty five thousand rupees but which may extend to five lakhs rupees. Further as per of Section 454(8) (ii) of the Companies Act, 2013,where an officer of a company who in default does not pay the penalty within a period of Ninety days (90 days) from the date of receipt of the copy of the order, such officer shall be punishable with imprisonment which may extend to six months or with fine, which shall not be less than twenty five thousand rupees but which may extend to one lakh rupees or with both.

5. The order also further drawn the attention with respect to section 454[8) of the Companies Act, 2013 that in the event of noncompliance of this order, which provides that in case of default in payment of penalty, prosecution will be filed under section 454(8) (ii) the Companies Act, 2013 at the cost of the company and its officers without any further notice.

6. Finally the order ended with a note that the adjudication notice stand disposed of with this order.

From the above decided case, one can come to an conclusion, even though the a minimum number of 4 meetings of the company is conducted every year, it is mandatory that the meetings are to be conducted in such a manner that not more than 120 days shall intervene between two consecutive meetings of the board as required under the provisions of the Companies Act 2013.

It again goes to say that the company and its directors are to be very careful and ensure the absolute compliance called for under the provisions of the Companies Act 2013, failing which the regulators could take action against the company attracting fine and penalty and also spending considerable time on the matter to be resolved.

References:- 1. Companies Act 2013 2. Companies (Meeting of Board and its powers) Rules 2014 3. Companies ( Management and Administration) Amendments Rules 2021 4. Companies (Adjudication of Penalties) Rules 2014 5. Adjudication order dated 13th April 2022 passed by the Registrar of Companies, Gujarat, Dadra & Nagar Haveli in the matter of M/s. D J. Shah Investment Finance Private Limited of Gandhinagar, Gujarat, under section 454 (3) of the companies act 2013 read with rule 3 of the companies (adjudication of penalties) rules, 2014 for violation of section 173(1) of the Companies Act, 2013.

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Case study on Companies Act

Amiysam Ltd. is an unlisted public company, registered under GST, incorporated since 2010, with seven directors on its board, and is engaged in the manufacturing and selling of chemical products through its several units across the country. It also exports its chemical products to certain European & Middle East countries. Visam (P) Ltd. (VPL) is another company engaged in manufacturing and selling of only one chemical product named, 'KOH'. Its 55% equity shares were recently acquired by Amiysam Ltd. during F.Y. 2021-22, due to which the paid-up capital of VPL increased from ₹ 8 crore to ₹ 12 crore. For acquiring such shares, Amiysam Ltd. paid a cash consideration of ₹ 10 crore to VPL and the fair value of non-controlling interest on the date of acquisition of such shares of VPL was ₹ 3 crore. VPL had incurred a loss of ₹ 4 lakhs during F.Y. 2020-21 as per its Income Tax Return (ITR) which was brought forward by it.

Thereafter, VPL appointed Mr. Divarkar, as its whole-time company secretary and Mr. Devraj as its managing director, respectively, which are also serving on the same positions in its holding company, Amiysam Ltd. After being appointed as managing director in VPL, Mr. Devraj acquired its 1000 shares with face value of ₹ 100/share at issue price of ₹ 130/share whereas the fair market value of such shares was ₹115/ share. On 25th August, 2021, VPL sold its two machineries to Mr. Devraj, wherein one machinery was sold in exchange of a vehicle of Mr. Devraj and the other machinery was sold for ₹1,20,000, respectively, the WDV of which at the time of sale was ₹90,000. However, such other machinery was reacquired by VPL on 10th September, 2021, at a cost of ₹ 1,40,000.(Para 2)

The CFO of Amiysam Ltd., Mr. Digpal, told Mr. Devraj that from F.Y. 2021-22 onwards, the financial statements of Amiysam Ltd. would be required to be prepared on consolidation basis as the company has acquired its first subsidiary, VPL, during F.Y. 2021-22. However, Mr. Devraj told him that he is of the view that, there would be no requirement to do so as Amiysam Ltd. is an unlisted company and also all the members of the company would beintimated in writing that for F.Y. 2021-22, the company will not be preparing consolidated financial statements and will only issue standalone financial statements for the said year. (Para3)

Mr. Praveen has been appointed as the engagement partner for conducting the audit of Amiysam Ltd. for F.Y. 2021-22 on behalf of Ved & Co. for the 3rd consecutive year. For the current year's audit, Mr. Praveen planned to use the audit evidence from previous year's audit about the operating effectiveness of specific controls. For that purpose, he decided to obtain audit evidence for the significant changes that may have occurred in those controls subsequent to the previous audit. After obtaining audit evidence on the same, Mr. Praveen concluded that there were certain factors that indicated there have been changes in the controls that would require retesting the controls during the current year's audit and reliance cannot be made on the audit evidence obtained in the previous audit about such controls. (Para 4)

Mr. Devraj consulted Mr. Praveen on the issue of standalone financial statements by Amiysam Ltd. to which Mr. Praveen explained him the statutory requirements applicable in the case and accordingly, Mr. Devraj was compelled to change his decision. Rao & Co. is another firm of Chartered Accountants, in which Mr. Praveen is having 22% profit sharing ratio. The management of VPL proposed Rao & Co. to provide internal audit services to VPL from F.Y. 2021-22 onwards. However, Mr. Praveen told the management that due to certain legal restrictions, Rao & Co. would not be able to provide internal audit services to VPL.(Para 5)

From above details please answer below-mentioned questions

1 (i) With reference to the information given under Para 2, explain the manner in which VPL would have appointed MrDivarkar and Mr. Devraj, respectively? (ii) With reference to the information given under Para 3, explain what statutory requirements, Mr. Praveen would have explained to Mr. Devraj that would have made him change his contention?

2. With reference to the information given under Para 2, whether there were any restrictions for VPL to sale its machinery to Mr. Devraj in exchange of a vehicle and if yes, then what legal requirements would have been followed by it?

3. (i) With reference to the information given under Para 5, due to what legal restrictions, Rao & Co. would not be able to provide internal audit services to VPL?

(ii) With reference to the information given under Para 4, what was the responsibility of Mr. Praveen in the given case with respect to his planning to use the audit evidence from the previous audit and whether it can be said that he has adhered to his responsibility?

(iii) With reference to the information given under Para 4, due to presence of what type of factors, Mr. Praveen might have considered to retest the controls and not to rely upon the audit evidence obtained in the previous audit about such controls?.

1(I) As per Section 203(2) of the Companies Act, 2013,

Every whole-time key managerial personnel of a company shall be appointed by means of a resolution of the Board. The resolution shall contain the terms and conditions of the appointment including the remuneration.
A whole-time key managerial personnel shall not hold office in more than one company at the same time except in its subsidiary company. As per third proviso to Section 203(2) of the Companies Act, 2013, if a person is MD or manager in some other company, it is permissible for a company to appoint him as its managing director.

The modus operandi is as under:

(a) The person so appointed or employed as managing director should be managing director or manager of one, and of not more than one, other company. (b) Such appointment or employment is made or approved by a resolution passed at a meeting of the Board with the consent of all the directors present at the meeting. (c) Further, specific notice of such meeting, and of the resolution to be moved thereat has been given to all the directors then in India.

In the given instance, VPL would have appointed Mr. Divarkar, as its whole time company secretary by passing a board resolution that should have contained the terms and conditions of the appointment of Mr. Divarkar including his remuneration. As Mr. Devraj is also holding office as managing director in Amiysam Ltd., Visam Ltd. would have appointed him by passing a board resolution with the consent of all the directors present at the meeting and a specific notice of such meeting and the of the resolution to be moved would have been given to all the directors then in India. It is presumed that Mr. Devraj is holding office as managing director/ manager of only Amiysam Ltd. apart from VPL.

1(ii) Section 129(3) of the Companies Act, 2013, has made the consolidation of financial statements mandatory. It states that where a company has one or more subsidiaries, it shall, in addition to the financial statements provided above (i.e. standalone financial statements), prepare consolidated financial statements of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with its financial statements under section 129 (2).

Exemptions from preparation of CFS: As per Rule 6 of Companies (Accounts) Amendment Rules, 2016, preparation of CFS by a company is not required if it meets the following conditions:

(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company and all its other members, including those not otherwise entitled to vote, having been intimated in writing and for which the proof of delivery of such intimation is available with the company, do not object to the company not presenting consolidated financial statements;

(ii) it is a company whose securities are not listed or are not in the process of listing on any stock exchange, whether in or outside India; and

(iii) its ultimate or any intermediate holding company files consolidated financial statements with the Registrar which are in compliance with the applicable Accounting Standards.

(iv) In the given instance, Mr. Devraj contended that there would be no requirement to prepare CFS, as Amiysam Ltd. is an unlisted company and all the members of the company would be intimated in writing that the company will not prepareconsolidated financial statements and will only issue standalone financial statements for F.Y. 2021-22. However, Mr. Praveen, the audior of Amiysam Ltd. would have explained to Mr. Devraj the aforesaid provisions of the Companies Act, 2013, and told him that even though if it is presumed that the first two conditions as aforesaid might be satisfied by Amiysam Ltd. but still it is not having holding company of its own that would be preparing consolidated financial statements and filing the same with the Registrar and thus, the third condition would remain unsatisfied because of which it would be required to prepare consolidated financial statements.

2. According to Section 192(1) of the Companies Act, 2013, no company shall enter into an arrangement by which—

(a) a director of the company or its holding, subsidiary or associate company or a person connected with him acquires or is to acquire assets for consideration other than cash, from the company; or

(b) the company acquires or is to acquire assets for consideration other than cash, from such director or person so connected. Relaxation of restriction: The above restriction shall be relaxed i.e. the company may enter into an arrangement involving non-cash transactions as stated above, if prior approval for such arrangement is accorded by a resolution of the company in general meeting.

Where the director or connected person is a director of its holding company, approval shall also be required to be obtained by passing a resolution in general meeting of the holding company.

Contents of notice issued for approval of resolution: The notice for approval of the resolution in general meeting issued by the company or holding company shall include the particulars of the arrangement. It shall also include the value of the assets involved in such arrangement duly calculated by a registered valuer.

In the given instance, VPL entered into a non-cash transaction with its managing director, Mr. Devraj by selling its machinery in exchange of a vehicle. For doing so, VPL would have taken prior approval for such arrangement vide a resolution in its general meeting and also as Mr. Devraj is a director of its holding company, Amiysam Ltd., as well, prior approval would also have been taken by passing a resolution in the general meeting of Amiysam Ltd.

Further, the contents of notice of aforesaid meetings would have included the particulars of such arrangement between VPL and Mr. Devraj and the value of the assets involved in such arrangement duly calculated by a registered valuer.

3(i) Section 144 of the Companies Act, 2013, prescribes certain services not to be rendered by the auditor. An auditor appointed under this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be, but which shall not include any of the following services (whether such services are rendered directly or indirectly to the company or its holding company or subsidiary company), namely:

(a) accounting and book- keeping services; (b) internal audit; (c) design and implementation of any financial information system; (d) actuarial services; (e) investment advisory services; (f) investment banking services; (g) rendering of outsourced financial services; (h) management services; and (i) any other kind of services as may be prescribed.

Further, in case of auditor being an individual, either himself or through his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual, shall be termed as rendering of services directly or indirectly by the auditor; and in case of auditor being a firm, either itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners, shall be termed as rendering of services directly or indirectly by the auditor.

In the given instance, Mr. Praveen is having significant influence in Rao & Co. by having a profit sharing ratio of more than 20% in the said firm and Mr. Praveen is also a partner in Ved& Co. which is the company auditor of Amiysam Ltd., the holding company of VPL.

Now, if Rao & Co. provides internal audit services to VPL, it will amount to indirect provision of a prohibited service by Ved& Co. to the subsidiary company of a company of which it is an auditor and therefore, Rao & Co. would not be able to provide internal audit services to VPL.

3(ii) As per Standard of Auditing 330, 'The Auditor's Responses to Assessed Risks', if the auditor plans to use audit evidence from a previous audit about the operating effectiveness of specific controls, the auditor shall establish the continuing relevance of that evidence by obtaining audit evidence about whether significant changes in those controls have occurred subsequent to the previous audit.

The auditor shall obtain this evidence by performing inquiry combined with observation or inspection, to confirm the understanding of those specific controls, and:

(a) If there have been changes that affect the continuing relevance of the audit evidence from the previous audit, the auditor shall test the controls in the current audit.

(b) If there have not been such changes, the auditor shall test the controls at least once in every third audit, and shall test some controls each audit to avoid the possibility of testing all the controls on which the auditor intends to rely in a single audit period with no testing of controls in the subsequent two audit periods.

In the given instance, for the current year's audit, Mr. Praveen planned to use the audit evidence from the previous year's audit about the operating effectiveness of specific controls and accordingly, as required by SA 330, he obtained audit evidence for the significant changes that may have occurred in those controls subsequent to the previous audit on the basis of which he concluded that there were certain factors that indicated that there have been changes in the controls that would require retesting the controls during the current year's audit and reliance cannot be made on the audit evidence obtained in the previous audit about such controls.

Thus, on the basis of given facts, it appears that Mr. Praveen has adhered to his responsibility with respect to his planning to use the audit evidence from the previous audit about the operating effectiveness of specific controls, as per SA 330, as aforesaid.

3(iii) As per SA 330, 'The Auditor's Responses to Assessed Risks', factors that may decrease the period for retesting a control, or result in not relying on audit evidence obtained in previous audits at all, include the following:

A deficient control environment.

Deficient monitoring of controls.
A significant manual element to the relevant controls.
Personnel changes that significantly affect the application of the control.
Changing circumstances that indicate the need for changes in the control.
Deficient general IT-controls.

Thus, due to presence of any of such aforesaid factors, Mr. Praveen might have considered to retest the controls and not to rely upon the audit evidence obtained in the previous audit about such controls.

DISCLAIMER: The case law presented here is only for sharing knowledge and information with readers. The views are personal. In case of necessity do consult with professionals for better understanding and clarity on subject matter.

Published by

FCS Deepak Pratap Singh (Associate Vice President - Secretarial & Compliance (SBI General Insurance Co. Ltd.)) Category Corporate Law Report

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Case Studies on Corporate Laws

The ‘Case Study’ Model of discussion and analysis has been widely accepted and acknowledged as a celebrated mode of teaching by premier institutions like the Harvard Business School and the Kennedy School of Business. Off late, its relevance has massively increased as more and more academic institutions, especially those focusing on business and law, have made the shift from the traditional Q/A pattern to a more cohesive ‘Case Study Model’

Cases are narratives, situations, selective data and statements that present real-life simulations and as such, put to fore unresolved and thought-provoking issues, which are likely to occur, in varying magnitude and complexities, in our practical lives also. As against the traditional Q/A pattern, where more often than not, the problems have a single solution, Case Studies encourage participants to engage in critical thinking and to identify the several solutions for a given set of facts. Unlike problem sets, they do not break the problem down into clear steps, and frequently have no single “right” answer. Cases provide a rich contextual way to introduce new material and create opportunities to apply the law – they not only encourage an out-of-the-box thinking, but also help the participants to identify the problems in the first place, which are generally hidden beneath the usual facts and figures.

This concept is very similar to the practical situations, we as professionals, come across in our everyday lives – as professionals and consultants, we are expected to pinpoint such opportunities/ problems camouflaging behind routine statements and facts, so as to deliver holistic and efficient solutions, which are not necessarily limited to any singular act and/ or provision thereof.

In view of increasing relevance of the Case Study Method, we at Vinod Kothari & Company bring to you our weekly analysis of diverse cases which encapsulate practical situations and complexities so as to understand the hands-on application of the provisions under various laws – all at once. In our two-fold exercise, we invite the varying views of professionals, India and abroad, on the cases put up – which shall thereafter, be discussed and deliberated via audio-video discussions on our YouTube Channel – “Vinod Kothari & Company”

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CA Foundation Paper 2A Business Laws : Chapter 5 : The Companies Act, 2013 Notes, Charts & Lectures All Compilation AT One Place in PDF

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Chapter 5: The Companies Act 2013

The Companies Act, 2013: Essential features of company, corporate veil theory, Classes of companies, types of share capital, Incorporation of company, Memorandum of Association, Articles of Association, Doctrine of Indoor Management.

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