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Tuesday, January 8, 2008

Department of Company Affairs

Thus, the company, Madhurima Ltd., is required to obtain Central Government’s apval, from the Department of Company Affairs, Government of India for the
appointment of Mr. Sharat as its managing Directo
Examine whether the following transactions can be considered as a loan to a Director requiring approval of the Central Government under Section 295 of the Companies Act:
(i)An advance payment of salary of Rs. 10,000 to an employee who is the wife
of the Managing Director.
(ii)A Public Company secures residential accommodation for the use of its
Managing Director by entering into a lease arrangement under which the
company has to deposit a certain amount with the landlord to secure compliance with the terms of the Lease.Agreement.
(iii) A Public Company purchases a flat which is subsequently sold to a Director at the prevailing market price, out of which the Director pays 50 percent immediately and contracts to pay the balance in 10 equal annual instalments.
fC.A.
(i) This transaction does not per se amount to a loan so as to violate Section 295 of Companies Act, 1956. The burden of proving otherwise lies with the prosecution. Thus, in the absence of any evidence that there has been circumvention of the Section
by disguising the loan to the wife of a director, who is an employee, as salary advance
the Court refused to accept the case of prosecution - M.R. Electronic Components Ltd..vV. Assistant Registrar of Companies (1987) 61 Compo Cas. 8 (Mad.).
(ii) The deposit of money by the company with the landlord to secure residential accommodation for its managing director can in no way be considered a loan to a director under Section 295. It is no concern of the managing director on what terms the company secures premises for residential accommodation for him.
(iii) In a petition in Dr. Fredie Ardeshir Mehta v. Union of India seeking quashing of a prosecution launched tmder Section 295, the Bombay High Court came to the conclusion that a company selling one of its flat to one of its directors on receiving half price in cash and agreeing to accept the balance in instalments does not amount to giving of a loan to the director. It is a credit sale. It cannot even be described as an indirect loan.
The Bombay High Court observed that the Section 295 refers to an indirect loan to a director, what it means is that the company shall not give a loan to a director through the agency of one or more intennediaries. The word ‘indirectly’ in the Section cannot be read as converting what is not a loan into a loan. Thus, there was no contravention of Section 295 (1)
Papa Group of companies known for their business repute have been advocating for payment of donations to political parties as one of the methods of funding elections. The group has recently floated a company by name MIs. Papa Computers Ltd. and in the very first year of its working made a net profit of Rs. 6 crores. Examine with reference to the provisions of the Companies Act, whether the said company can make political donations and what is the maximum limit up to which a
company can make political donations. According to Section 293 A of the Companies Act, 1956, no Government Company and no other company which has been in existence for less than three financial years shall contribute any amount directly or indirectly to any political party or for any political purpose to any person. Thus, in the present case, Mis. Papa Computers Ltd. cannot make any political donation because the company has not been in existence for a period of three years.

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