What is meant by’ disclaimer of onerous property’ and how the same is exercised

Under Section 10 of the Companies Act, 1956, the court having jurisdiction to wind up a company is the High Court having jurisdiction in relation to the place at which the registered office of the company concerned is situated, except to the extent to whih jurisdiction has been conferred on any District Court/ (s) subordinate to the High Court. However, winding up of a company with a paid up share capital of Rs. 1lakh or more must take place in the High Court.

Meaning of Registered Office for Purposes of Section 10

Registered office for the purposes of deciding jurisdiction of the winding up court shall mean the place which has longest been the registered office of the company during six months immediately preceding the presentation of the petition for winding up.

It may be noted that even if there is an agreement that dispute shall be resolved before any specific court, winding up petition can only be filed before the court where registered office of the company is situated [G.T.e. Industries Ltd. Vs. Parasrampuria Trading & Finance (P.) Ltd. (1997) 19 SCL 536 (All)].

Again, in Haryana Telecom Ltd. Vs. Serlite Industries Ltd, the Supreme Court held that, the High Court should decide a petition for winding up a company under the Companies Act and not under the Arbitration and Counciliation Act even if there was an arbitration agreement between the parties [Business Standerd 17 July 1999].

Time specified in the Companies Act

If this is the case, it cannot be said that Mr. ‘X’ as a director of ‘B Company Ltd.’ obtains from ‘B Company Ltd.’ anything more than what he is entitled as an ordinary director of ‘B Company Ltd.
Under these circumstances, it cannot be said that Mr. ‘X’ holds a place or office of profit under ‘B Company Ltd. Hence, the prohibition contained in sub-section (1) of Section 314 does not apply to the instant case.
Discuss the validity of the arguments of the Director in the following cases:
In the General Meeting of X Ltd., held on 2.5.2000, Mr. A was appointed as a Director.
On that day, he was not holding any equity shares in X Ltd. As per the Articles of
Association of X Ltd. the share qualification is the holding of 500 equity shares. On
(. 15.6.2000 Mr. A applied for 1,000 equity shares in X Ltd. and the shares were allotted
on 10.7.2000. Mr. A claims that he was holding the qualification shares within the time
specified in the Companies Act. As per Section 270 of the Companies Act, 1956, where Articles of Association prescribe for share qualification, the same must be obtained by each director within two months after his appointment. Section 283 (1) (a) provides that the office of a director shall fall vacant if he fails to obtain qualification shares within the time specified in sub-section (1) of Section 270.
In the given case, Mr. A was appointed as a director on 2.5.2000 but he was allotted the requisite qualification shares on 10.7.2000, i.e., after the lapse of two months prescribed under Section 270 (1). Thus, the office of Mr. A shall be deemed to have fallen vacant.
There was no limit on the borrowing for the business in the memorandum of the company. But pursuant to a decision in the general meeting, the directors could
not borrow beyond the limit of the issued capital of the company without the sanction of the general meeting. The directors borrowed money beyond their powers for the business of the company. The company failed to pay back the same and argued that since the money was borrowed by directors exceeding their authority, the company has no legal liability. Examine and comment with supporting case law.

Applicable to a subsidiary company

‘x’ is a whole-time director in ‘A Company Ltd.’
A Company Ltd.’ recently floated a wholly-owned subsidiary company called ‘B Company Ltd.’ for one of its diversification projects. Mr. ‘X’ has been appointed as an ordinary director on the Board I’)f the subsidiary company. There is a proposal to pay sitting fees to him as per the
guidelines applicable to a subsidiary company. Can Mr. ‘X’ who is a whole time director of ‘A Company Ltd.’ accept sitting fees from ‘B Company Ltd.’ which is its su\)sidiary company in view of the provisions of Section 314 of the Companies Act, 1956, which says that a director of the holding company cannot hold office pr place of profit under the subsidiary company?
It may be noted that under sub-section
(1) of Section 314 prohibition is against a director of the holding company holding an office or place of profit under the
subsidiary company. Only if the office held by the director of the holding company is an office or place of profit within the meaning of sub-section
(3) of Section 314, the prohibition contained in sub-section (1) of Section 314 would apply.
Let us now traverse the definition of ‘office or place of profit’ of Section 314. In case office or place of profit is held by a director, he would be deemed to be holding an office or place of profit under the company only if he obtains from the company anything by way of remuneration over and above to which he is entitled as such director.
In the instant case, Mr. ‘X’ is an ordinary director of ‘B Company Ltd.’ and is entitled to sitting fees under the Articles of Association of ‘B Company Ltd.’ and such sitting fees presumbly is in accordance with Rule lOB of the Companies (Central Government’s) General Rules and Forms, 1956.

The Managing Director of the company

MIs. Excellent Industries Ltd. is a Multi-product Company with a paid up capital of Rs. 4 crores. A contract for the purchase of Textile Machineries and balancing Equipments valued at Rs. One crore was placed before the Board for approval. The Managing Director of the company is interested in this contract because his son-in-law in a partner of the firm selling the machineries and the equipment to the company. Explain briefly the procedure to be followed by the company to enter into the said
contract. Since the Managing Director of Mis. Excellent Industries Ltd. is interested in the contract for the purpose of textile machineries etc., the same should be approved by the Board of Directors at its meeting. It cannot be approved through resolution passed by circulation [Section 297). The company should also obtain the approval of Central Government since its paid up capital is more that Rs. 1 crore. For this purpose the following steps are to be taken:
(i) Hold a Board meeting and place the terms of the contract for consideration.
The Managing Director should disclose nature of his interest as required
under Section 299.
(ii) The Managing Director should neither take part in the discussion nor vote in respect of the said contract. His presence will also be not counted for the purpose of quorum (Section 300 and 303 of the Companies Act).
(iii) The consent of the Board must be accorded by way of a resolution passed at
the meeting of the_Board.
(iv) The particulars of the contract must be entered in the register maintained
under Section 301 which should be made available for inspection.
(v) An application to the Central Government should be made in Form 24A by enclosing (a) certified copy of the Board resolution approving the contract; (b) certified copy of the agreement containing the particulars of the contract; and (c) Bank Draft/Challan evidencing the payment of prescribed fee.
Mr. V, a chartered accountant, is a Director in PQR Limited. The Company
proposes to appoint/engage the firm V & Co. in which Mr. V is a partner in one or more of the following capacities:
j Consultants on regular retainer basis.
(H)Authorized representatives to appear before tribunals.
Discuss whether the provisions of Section 314 of the Companies Act are attracted
in the above situations.
Apparently the prohibition under sub-sections (1) and (lB) of Section 314 of the Companies Act, 1956 is not applicable to remuneration/compensation given to directors or their associates for the services of a professional nature rendered by them to the company in their professional capacity such as advocate, chartered accountant, solicitor, etc. However, prohibition will apply to them if they bind themselves on
regular retainership basis. Thereore, (i). a kctoI Q1aere c.:ountas appoient
by the company on a regulab1tE-J!lersp £!sas advlse!:t.c2ulta!lt, .mter.nal aud;tor,
etc., shall be hit by the restrictive provisions q,f sub-sectiop.s (l) aDd (lB) of Sc.Hon 3l4.
(ii) Based on the above analogy as contained above, the bare engagement of a Charactered Accountant in a particular case and the payment to him of his professional fees in that case would not attract the provisions of sub-sections (1) and (1 B) of Section 314 of the Companies Act. Engaging a person in his professional capacity for performing a particular function, say, for attending to a particular case or for undertaking a particular assignment of consultancy, or rendering advice on a specific matter, would not by itself constitute appointment to an office or place of profit in or under the company. ,But, if the terms of engagement of attend to a’Irtlie tax casesor act as adviser in all connected matters, whethr gQ.erally
or in ap—articular city or town, then even thoug,

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.

The shareholders of the company

The paid-up share capital and free reserves of XYZ Co. Limited, a public company, is Rs. 100 crores as on 1st April, 1998. The shareholders of the company at their general meeting held on 4th April, 1998, by a resolution authorised the Board of Directors of the company to borrow money “exceeding the paid-up share capital and free reserves of the company, to the extent required by the Board of Directors”. The Board of Directors as a result borrowed money to an extent of Rs. 130 crores, including Rs. 20 crores as short-term loan and Rs. 25 crores as a temporary loan for financing the construction of a building of the company.
Referring to the provisions of the Companies Act, 1956 examine the validity of the
following:
(i) The Board is exercising the powers for borrowing money to an extent of Rs.
130 crores?
(ii) What would be your answer in case the company’s paid-up share capital and free reserves increased to Rs. 150 crores and the Board of Directors borrow money to an extent of Rs. 140 crores which neither include any short-term loan nor temporary loan for financing of the construction of a building of the
company?
Ylns. The problem as asked in the question is based on the provisions of the Companies Act, 1956, as contained in Section 293(1)(d) and the Explanations I and II to that Section. The Section provides that a public company, or a private company which is a subsidiary of a public company shall not, except with the consent of such public company or subsidiary in general meeting, borrow moneys after the commencement of the Companies Act, 1956, where the money to be borrowed together with the moneys already borrowed by the company (apart from temporary loans obtained
The company desires to know from you, whether they can appoint Mr. Sharat, as the “Managing Director”, to comply with Section 269 of the Companies Act, 1956. You are requested to give a reasoned answer, duly supported by analysis of the legal
provisions applicable to the issue in question.
Section 269 of the Companies Act, provides that every company with a paid up capital of more than Rs. 5 crores shall have a “managing director” and approval of Central Government is required to appot a managing director, if the terms and conditions of appointment do not meet the requirements laid down in Schedule XIII of the Act.
It is from the facts recited in the question, that Mr. Sharat, the incumbent for the office of “managing director” is not a person resident in India. However, it is to be seen whether this is a disqualification, in terms of Schedule XIII of the Act.
Part I -: (e) of Schedule XIII, envisages that the appointee shall be eligible
only if he inter-alia, is “resident in India”, )
which includes a person who has been’staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment asa managerial person and who has come to stay in India
(i) for taking up employment in India, or
(ii) for carrying on a business or vocation in India.
From the facts given, it is clear that Mr. Sharat does not fulfil the requirements of the above Explanation in Schedule XIII and therefore is not qualified for appointrrient,
without permission of the Central Government. .

Registrar of Companies

Thus, based on the above provisions, it can be concluded that the members contention in this case shall not be tenable, as under (a) above, J is not required to file his consent to act as director with the Registrar of Companies. J has, therefore, not violated any of the provisions of the Act.
The answer in the second case would also be the same as it is covered under © above. Hence J is not required to file his consent to act as director on his re-appointment with the Registrar of Companies.
After serious disagreement and difference of opinion among the shareholders of the company in the last annual general meeting, some of the directors took the steps as noted below. Discuss the validity and effect of the following:
(i) Mr. John, the managing director sends his notice of resignation.
(ii) Mr. Paul, an ordinary director verbally resigns and not in writing.
(iii) Mr. David, another ordinary director, had sent his resignation, but withdrew it
before the Soard meeting was held for accepting his resignation.
(i) Mr. John, the managing director cannot resign merely by giving a notice. In his case a formal acceptance of resignation by the company is essential so as to make it complete and effective. This is because he occupies two positions or possesses two capacities, viz., one that of a director, and the other that of manager or officer of the company in the sense of a whole time employee.
An employee cannot give up office at his pleasure simply by giving notice. The notice or the letter of resignation is required to be approved or accepted by the company and the officer concerned has to be relieved of his duties and responsibilities attached to the office which he has resigned from. (Achutha Pal (v) Registrar of Companies (1956) 36 Camp.
(ii) A director can resign from his office in the manner laid down in the Articles of the company. Where Articles do not contain any provision in this regard, a director may still resign at any time by giving a reasonable notice to the company. In Latchford premier Cinema vs. Ennion it was held that a verbal notice accepted at a meeting is sufficient, even if the articles provide for resignation in writing.
Thus,rrbal resignation cannot be held valid unless accepted at a meeting of the
Board/Shareholders.
Even written notice of resignation to be valid must be addressed to the company
t to any third party.
( iii) Once a director has given a notice of resignation, he cannot withdraw it except w the consent of the company properly considered by the directors. It makes no difference that the withdrawal is sought before the Board’s meeting. However, where articles provide that a director may resign only if the Board consents, the resignation shall not be effective until the Board’s consent is given and the resignation may be
withdrawn in the meantime.
With reference to the provisions of the Companies Act, 1956, examine the validity of the following:
(a) Appointment of Mr. Salak, a minor, as a Director of MRN (Pvt.) Ltd.
(b) Mr. Smart was appointed as the Managing Director of a public limited company
for a period of 5 years effective from 1.4.1993. It is noticed that he performed certain acts on behalf of the company in which he was appointed after the expiry of his term. Some of the aggrieved parties have questioned the validity
(a) Section 274 deals with disqualification of directors. Section 274(2) permits a private company to provide that a person shall be disqualified for appointment as a director On any groun ls in addition to those specified in sub-section(l). In the case of a minor, though there is nO provision in the Act expressely disqualifying him, as he is not competent to contract, he cannot file either with the company or with the Registrar any valid consent to act as director as required by Section 264. But Section 264 applies .only to public companies and private companies which are their subsidiaries; there is nothing prohibiting a director of other private companies in the absence of any contrary provision in the Articles. Therefore, Mr. Balak may be appointed as a director of MRN (Pvt.) Limited.
(b) Section 290 validates only the acts of a person acting as a director if it was subsequently discovered that his appointment was invalid by reason of any defect or disqualification or was terminated by virtue of any provision contained in the Act or in the Articles. It does not extend to validating the acts of a perspn acting as managing director (M. D.) except as regards his acts, if any, as a director. Further it was held in Varkey Souriar v. Keraleeya Banking Co. Ltd. (1957) 27 CC 591 that where an M. D. ceased to hold office any subsequent act of his would not be valid as it was not an irregular exercise of power, but exercise of power by a person who has nO authority at all.

Approval of Central Government

As the company is incurring losses, the remuneration may be paid in accordance with Section II of Part II of Schedule XIII without approval of Central Government. He may be paid remuneration by way of salary, dearness allowance, perquisites and other allowances not exceeding ceiling limit of Rs. 10,50,000 [now Rs. 24,00,000 w.e.f. 2. 3.
2000] per annum or Rs. 87,500 [now Rs. 2,J!.e.f. 2. 3. 200’61 perlOnth’. He is
also eligible to the following perquisites which shall not be included in the computation of ceiling on remuneration.
(a) contribution to P.F., super-annuation fund or annuity fund to the extent not
taxable under Income Tax Act.
(b) gratuity payable at a rate not exceeding half months’s salary for each com
pleted year of service; and
(c) encashment of leave at the end of tenure.
an existing rotational director of M RN Company Limited whose term expired at the Company’s Annual General Meeting held on 30th September, 1997, was reappointed at the same meeting. J accepted the reappointment and resumed the office without filing his consent with the concemed Registrar of Companies on his reappointment. A group of members of the company object to J’s continuation as director, since J did not file his consent ‘with the Registrar within the stipulated period as required under the Companies Act, 1956. Examining the provisions of the Act, decide:
(i) Whether the members’ contention shall be tenable and whether J has violated
the provisions of the Companies Act, 1956 in this regard?
(ii) What would be your answer in case J is a person named as director of the
company in the Company’s Articles of Association registered with the Registrar
of Companiesof the Companies Act, 1956 requires every person proposed as a candidate for the office of the director to sign and file with the company his consent to act as a director, if appointed. Further, sub-section
(2) of Section 264 requires a person appointed as a director to sign and file with the Registrar his consent in writing to act as such director. The consent with the Registrar must be filed within 30 days of his appointment. However, the consent with the Registrar is not required to be filed n the case of :
(a) a director re-appointed after retirement by rotation or immediately on the
expiry of his term of office; or
(b) an additional or alternate director, or person filling a casual vacancy in the office of
a director under Section 262, appointed as a directororre-appointed as an additional
or alternate director, immediately on the expiry of his term of office; or
(c) a person named as director of the company under its Articles as first
registered.

Copy of the Board resolution

concerned or interested in the variation, a memorandum clearly specifying the nature of the concern or interest of such other director must also be sent to every member.
Copy of the Board resolution must also be filed with the Registrar of Companies
The increased remuneration may be paid even if the company has no profits or its profits are inadequate (para 1, Section II, Part II of Schedule XIII).
(b) Removal of a Director. Section 284 provides that a company may, by ordinary resolution passed in general meeting after due receipt and service of a special notice, remove a director before the expiry of his term of office. Section 284 applies to both public as well as private companies. A private company can have permanent director or life directors. Even such a permanent or life director can be removed (except a permanent or life director having been in office on or before April 1, 1952).
Section 283 provides that the office of a director shall become vacant if he is removed in pursuance of Section 284. A private company which is not a subsidiary of a public company may, by its Articles, provide that the office of director. shall be vacated on any grounds in addition to those specified in Sections 283(1) and 283(3). The Articles cannot, therefore, provide that the director for life shall not be liable to be removed. A provision like that would run contrary to the provisions of Sections 283 and 284 and would, therefore, be hit by the provisions of Section 9 which specifies that the provisions of the Act have overriding effect on clauses in the Memorandum or Articles or any agreement, if they are not in conformity with the provisions of the Act.
In view of the above the proposed action of removal of X by passing an ordinary resolution in general meeting is valid, subject to compliance of the procedure laid down in Section 284.
P. 38.- M The Managing Director of Mis Speculative Builders Ltd. has resigned as the company was not doing well and also incurring losses. The Board of Directors have decided to appoint Mr. Reliable aged 71 years as the new Managing Director, because of his proven track record ot, nearly 50 years, turning sick companies into profitable ones. The only condition put forth by Mr. Reliable is that he should be paid the maximum permissible salary and perquisites as provided in the Companies Act without requiring the approval of Central Government. The effective capital of the company is Rs. 20 crores. Advise the company about (i) the procedure to be followed for the appointment of Mr. Reliable and (ii) the quantum of remuneration payable to him.
With a view to giving greater freedom to companies in regard to managerial remunration and appointment, Schedule XIII to the Companies Act was amended in 1996., a copany will have fullfreJ:.ctomtQ point a manageersoha? attained the age of 70 yearswIf11.out approval of the Central GOvernment, provided his appointment i,:; approved by special resolution. Thus, by passin speci,!!resolution in general meetingM,r=-Reliable can be appointed as Managmg Directw.
The appointment may be made without the approval of Centrl Goven(ment, if
such appointment is made in accordance with the conditions specified in Parts I & II
of Schedule XIII and a return in the prescribed Form No. 25 C is filed within 90 days from the date qf such appointment

Restrictions on the number of directorships

(i)Restrictions on the number of directorships to be held by an individual and
whether he can accept the new appointment in view thereof.
(ii)What are the companies to be excluded for the purpose of calculating the
ceiling on the appointment of directors? . According to Section 275 of the Companjes Act, 1956, a person cannot hold office at the same time as director in more than 20 companies, excluding: (a) a private company which is not subsidiary or holding company of a public company, (b) an unlimited company, (c) an association not for profit, and (d) a company in which such person is only an alternate director (Sections 275 and 278). In making the calculation as aforesaid, any company referred to in clauses (a), (b) and (c) of sub-section (1) of Section 278, shall be excluded for a period of three months from the date on which the company ceases to fall within the purview of those clauses.
As per the Companies (Amendment) Act 2000, the number is now reduced to 15.
Thus, applying the above provisions, 0 who is a director already in 19 public limited companies and accepts the directorships of the companies stated in the question can accept the directorships as follows:
(i) He can accept directorship in BC Private Ltd. provided the number has not reached 20’. Directorship in BC Private Ltd. will be counted within 20’ as the company in question is the holding company of a public limited company.
(ii) Since RM Company is an unlimited company, 0 can accept the directorship in the company, as directorship of an unlimited company is not counted in the said 20 .
(iii) Alternate directorship is also not counted in the 20’. Therefore, D can accept
the directorship in this company (MJ & Co.) also.
Thus, he can accept the directorships in all these cases.
(a) Mr. Ram was appointed as Managing Director of Prudential Company Limited in accordance with Schedule XIII for a period of 5 years with effect from 1 st January, 1996 on a monthly remuneration of Rs. 30,000. The Board of Directors of the company propose to increase the remuneration of the Managing Directorto Rs. 40,000 per month with effect from 1 st January, 1998. Advise the Board of Directors about the legal requirements under the Companies Act, 1956 to give effect to the proposal. State whether the increased remuneration can be paid as minimum remuneration in the event of
os or inadequacy of profit. .
(b Mr. X is named as a director for life in the Articles of Association of Mis XYZ
Pn e Limited which was incorporated on 1 st April, 1977. The Articles of Association of the company also provide that he cannot be removed by the members in general meeting. Some of the members want to remove ‘X’ by passing an ordinary resolution in general meeting. State with reference to the relevant provisions of the Companies
Act, 1956 whether the proposed action is valid
(a)
Increasing the Remuneration of a Managing Director. It is proposed to increase the remuneration of the managing director from Rs. 30,000 p.m. to Rs. 40,000 p.m. w.eJ. 1.1.1998. Though effective capital of the company is not known, as the companies having effective capital of le.:;s than l CLore can pay up to Rs. 40,000 p.m:’ to their managing directors, the proposed increase is within limits laid down in Part II of Schedule XIII to the Companies Act. So the company is competent to increase the remuneration of the managing director and approval of the Central Government is not required under Section 310. Government has also issued a clarification to that effect.
The Board of Directors may pass a resolution increasing the remuneration subject to the approval of the company in general meeting as required under para 1 of Part III of Schedule XIII.
As the resolution has got the effect of varying the terms of appointment of the managing director, the company shall send an abstract of the terms of the variation to every member of the company within 21 days of passing of the Board resolution [Section 302(2)]. If any other director of the company is
The ceiling has been further raised to Rs. 75,000 (w.e.f. 2.3.2000).
As per the Companies (Amendment) Act, 2000, the number is now reduced to 15.

Making any loan to its directors without the previous approval

Making any loan to its directors without the previous approval of the Central Government in that behalf. However, the Court said that the essential requirement of a loan is the advance of money (or some article) upon the understanding that it shall be returned; it mayor may not carry interest. The debt here arose not out of an advance but out of the sale of the flat by the company to the managing director. The company gave time to the managing director to pay a part of the purchase price. The managing director was thus given official accommodation by the company in the matter of payment of the debt. Such official accommodation was not and did not amount to a 10arl When refers to an indirect loan to a director, what it means is that the com 1i.hall not give
a loan to a director through the agency of one or more intermediarie&. 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.
With reference to the provisions of the Companies Act, 1956 examine the validity of the following:
0, who is a director already in 19 public limited companies, accepts the directorships
of the following companies:
(i) BC Private Limited, which is the holding company of a public limited company.
(ii) RM Company which is an unlimited company.
(iii) MJ & Company Ltd., as an alternate director.
Or
Mr. Influential is already a director of 19 companies. He is being appointed as a director of another company named MIs. Expensive Remedies Ltd. Advise Mr. Influential in regard to the following:

The Company Law Board

The Company Law Board shall if, after giving a reasonable opportunity to the company, the managing director and other officers at fault comes to the conclusion that the appointment has been made in contravention of the requirements of Schedule XIII, make an order declaring that a contravention of the requirements of Schedule XIII has taken place [Section 269(9)].
On making of an order by the Company Law Board under sub-section (9):
(a) the company shall be liable to a fine which may extend to Rs. 50,000;
(b) every officer of the company who is in default shall be liable to a fine of
Rs. 1,00,000; and
(c) the appointment of the managing director shall be deemed to have come to an end and the person so appointed shall, in addition to being liable to pay a fine of Rs. 1,00,000, refund to the company the entire amount of salaries, commissions and perquisites received or enjoyed by him between the date of
his appointment and the passing of such order Contravention of the aforesaid provisions of sub-section (10) make the managing director and every other officer in default liable to imprisonment up to 3 years and a continuing fine @ Rs. 500 for every day of default.
Validity of the acts. However, sub-section (12) provides that all acts done by a managing director whose appointment has been found to be in contravention of Schedule XIII shall (if acts so done are valid otherwise) be valid notwithstanding the aforesaid order made by the Company Law Board.
Mis International Carrier Ltd. purchased a flat in Mumbai to give residential accommodation to Shri Ravi Mehta, the Managing Director. At the time of purchase of flat, the Managing Director was given an option to buy the flat during the course of his employment. The Managing Director exercised his option and paid the company half of the purchase price and requested for time to pay the balance amount in three equal
half-yearly instalments at 10% interest per annum. Examine whether the arrangement’The facts of the problem are based on the case of Dr. Fredie Ardeshir Mehta vs. Union of India (1991) 70 Compo Cas. 210 (Born.). In this case the Bombay High Court held that when a company gives official accommodation in the matter of payment of debt to one of its directors, it is not, and does not amount to, a ioan and company cannot be prosecuted for contravention of provisions of Section 295. The Court held that Section 295(1) prohibits a company from, directly or indirectly,

Advise the chairman of your company

Advise the chairman of your company on the following
The managing director of the company has requested for an advance of Rs. 2
lakhs to meet the medical expenses to be incurred abroad for his dependent father.
According to Schedule XIII of the Companies Act, 1956 perquisites payable to the managing director include medical expenses incurred for the managing director and his family. As per explanation ‘family’ includes dependent parents of the managing director.
Schedule XIII as amended by GSR No. 48E dated 1-2-1994 and according to the revised schedule a company having profits in a financial year may pay remuneration by way of salary, dearness allowance, perquisites, commission and other allowances not exceeding five per cent of its net profit for one such managerial person, and if there are more than one such managerial persons, ten per cent for all of them together. Thus, the request of the managing director for an advance of Rs. 2lakhs to meet the medical expenses can be entertained if it is in line with these limits.
In case the. company is not having any profits or the profits are inadequate Schedule XIII lays down the maximum remuneration payable to the managerial personnel inclusive of all allowances. If the remuneration to be paid to the managing director inclusive of the medical advance desired is in excess of the limit of Schedule XIIl, approval of the Central Government will be required.
. Shri Prakash Chand was appointed as the Managing Director of Mis Sun Fabrics Ltd. , for a period of 5 years with effect from 1.4.1996 on a remuneration of Rs. 50,000 per month with other perquisites which are in excess of the limits laid down in Schedule XIII to the Companies Act. The Central Govemment has received a complaint in this regard, as the company has not sought the approval of the Central Government for the said appointment. Examine the powers of the Central Government in such a situation. Also examine the validity of the acts of Shri Prakash Chand as Managing
Director Sub-section
(7) of Section 269 provides that where the Central Government SI/O mota or on any information received by it is, prima facie, of the opinion that any appointment has been made without the approval of the Central Government in contravention of the requirements of Schedule XIII, it shall be competent for the Central Government to refer the matter to the Company Law Board for decision.
Sub-section (8) requires that, on receipt of the aforesaid reference, the Company Law Board shall issue a notice to the company, the managing director and other officers at fault, to show cause as to why such appointment should not be terminated and penalties provided under sub-section (1) be not imposed.

General meeting in favour of

The director can exercise his voting right at a general meeting in favour of
a contract in which he is interested.
Advise the chairman of a large-size public limited company of legal and
procedural aspects of the following:
(i)The managing director needs an advance of Rs. 5 lakhs as loan for building
iS own residential house.
ii) he chairman wants to take certain furniture items at book value from the
company’s guest house, for use by his son.
(iii) The chairman wants to release company’s advertisement in a souvenir being
brought out by a trade union having affiliation with a political party. The
advertisement is at a cost of Rs. 20,000.
(i)A public limited company is prohibited by Section 295 of the Companies Act, 1956 from giving loan or giving any guarantee or providing any security in connection with a loan made by any other person to its directors without obtaining prior approval of the Central Government.
However, the Department of Company Affairs has clarified that public limited companies may give house building loans to their directors, including managing directors/whole-time directors without obtaining prior approval of the Central Government, provided such loans are given on such terms and conditions as are applicable to the company’s other officers and employees.
Therefore, in the given case, the company may give to its managing director an advance of Rs. 5 lakhs as loan for building his own residential house provided the company has a scheme for giving house building loans to its other officers and employees. However, if the company has no such scheme for its employees, it will have to secure prior approval of the Central Government under the said section for giving the proposed advance as house building loan to its managing director.
(ii) Section 297 of the Companies Act, 1956 lays down that no director or his relative shall enter into any contract for the sale, purchase or supply of any goods, materials or services, with the company, without the consent of the company’s Board of Directors and if the paid-up capital of the company is Rs. 1 crore or above prior approval of the Central Government is also required.
However, the sectiop-provides certain exceptions but the given case is not covered by any of the exceptions.as the proposed purchase is not at the prevailing market price
but at book value, which parently is much less than the prevailing market value
is the company regularly trading in or doing business of sale and purchase of furnit
(iil) Section 293A of the Companies Act, 1956 lays down that no 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.
However, a company, which has been in xistence for more than three years may contribute any amount or amounts, directly or indirectly, to any political party or for any political purpose to any person provided that the aggregate of the amounts so contributed in any financial year shall not exceed five per cent of its average net protits determined in accordance with the provisions of Sections 349 and 350 of the Act, during the three immediately preceding financial years.
Assuming that the company in question has been in existence for three or more years, it can issue the proposed advertisement in the souvenir of the trade union having political affiliation at a cost of Rs. 20,000 provided this amount and all other such amounts paid in the financial year are within the ceiling of 5% of the company’s average net profits of the three immediately preceding years.
P. 32. Whether a company can appoint an alternate director in place of a managing
director? Give reasons. [G.S. (Final) Dec., 1994J
Ylns. Section 313 of the Companies Act, 1956 provides that the Board of Directors of a company may, if so authorised by its Articles or by a resolution passed by the company in general meeting, appoint an alternate director to act for a director (hereinafter called the original director) during his absence for a period of not less than three months from the State in which meetings of the Board are ordinarily held.
An alternate director is like any other director. In respect of compliance with the provisions of the Act, he is in the same position as any other director as regards his rights, duties and liabilities as a director. Taking this statutory position of an alternate director into consideration, an alternate director may be appointed in place of a managing director.
However, another view has also been expressed according to which an alternate director shall not be appointed in place of a managing director, because the appointment of a managing director is a contractual appointment and is very much related to his qualifications, experience, specialised knowledge and expertise relating to the principal business of the company for which he has been so appointed. However, during his absence the Board may appoint a committee of directors to look after the day-to-day business and affairs of the company.

Contract is entered into with a private company

The contract can be entered into with a firm in which are the Managing Director along with his wife and two sons a partner
only if the foll6wing conditions are fulfilled:
1. The consent of the Board of Directors is obtained.
2. The previous approval of Central Government is also taken, (Since
. the paid-up capital of company is more than Rs. 1 crore).
(ii) Duties of R in the given case are:
(a) He should disclose his interest at a meeting of the Board.
(b) He can give a general notice to the Board and take reasonable steps
to ensure that it is read at the first meeting of the Board.
(c) He should not participate in the discussion or vote in the proposed
contract, nor should his presence be counted for the purpose of r.’::\ forming a quorum at the time of any such discussion or voting.
‘0iJI In case where the contract is entered into with a private company in which
wife of Mr. R (MD) and his sons Sand T are members, the situation is different, Section 297 (1) is attracted only in circumstances where Director himself is a member/director of a private company. Consequently the restriction for entering into contract by interested director will not apply in the present case as R, the Managing Director, is neither a director nor a
member of the private company. .
(b) applicable for both direct and indirect loans given to directors. As
per Section 295 loans to directors require approval of Central Government. A loan essentially means that it is an advance of money or of some articles upon the understanding. that it shall be returned and mayor may not carry interest. The Bombay High Court in the case of Dr Fredie Ardeshir Mehta vs. Union of India [(1991) 70 Compo cas. 210] seeking quashing of a prosecution launched under Section 295, came to the conclusion that selling of one of the flats to one of its directors on receiving half price in cash and agreeing to accept the balance in instalments is a credit sale by the company and cannot be described even as an indirect loan. Hence the transaction in question will not attract Sectio 295.
P. 30.9l.. The Articles of Association of a company states that a director shall not vote in respect of a contract in which he is interested. In a resolutipn put up for approval of the shareholders, can a director exercise is voting right in favour of a contract in which
he is interested. a director exercises his voting right’a a shareholder, he is free to vote in his own best interests like any other shareholder.......
A provision in the articles of association of a company stating that a director shall not vote in respect of a contract in which he is interested does not preclude him from voting thereon as a shareholder in the general meeting of the company. A shareholder may vote as he pleases even when his interests are different from or opposed to those of the company. Shareholders are not tmstees for the company or for one another.
However, in Cooks vs. Deeks, it was held that if directors use their position as directors to obtain for themselves the property of the company, as for example, by means of a beneficial contract, they cannot, by using their voting power as shareholders in general meeting, prevent the company from claiming the benefit of it.
Further Section 182 makes it clear that a public company or a private company which is subsidiary of a public company shall not put any restriction on voting right of members on any ground except those specified in Section 181 (i.e. restriction on exercise of voting right of members who have not paid calls or on shares in regard to which the company has exercised any right of lien).

Chairman of Board Meetings

Regulation 76 (1) of Table A provides that the Board may elect. a chairman of its meetings and determine the period for which he is to hold office. Normally, the Directors elect one of them to be the Chairman of the Board who continues to be such until he ceases to be a Director or some other Director is appointed as the Chairman.

Thus, essentially a Chairman is a Director who is authorised to preside over the Board and general meetings. In some companies, it is the practice to appoint an Executive Director, viz., the Managing Director or whole-time Director, as Chairman of the Board and there are other companies who elect a Non-Executive Director as Chairman of the Board.

Regulation 76 (2) provides that if no Chairman is elected or if at any meeting, the Chairman is not present within five minutes after the time appointed for holding the meeting, the Directors present may choose one of their number to be the chairman of the meeting.

From the aforesaid provisions, it is thus clear that only a Director can be the Chairman of ttle Board meetings. However, since a Director need not be a shareholder also, unless Articles prescribe for share qualification for Directorship, a nonshareholder Director may be elected as the Chairman.

Agenda of Board Meeting

The law does not require an agenda “for the meeting of the Directors. Section 286 requires that notice of every meeting of the Board of Directors of a company shall be given in writing to every Director. Thus, any business can be transacted at a Board meeting. In Dr. T.M. Paul vs. City Hospital (Pvt.) Ltd. (1999) 97 Compo Cas. 216, the Kerala High Court held that there is no provision for issuance of an agenda for meetings of the Board of Directors. Matters not included in the agenda can be considered with the permission of the Chairman under the residuary clause in the agenda. However, if the Director had convened the meeting with the object of getting the resolutions passed, but deliberately omitted them in the agenda, it will amount to

active concealment of a fact and will amount to fraud. .

However, in case of some matters prior notice is necessary. Section 316 (appointment as Managing Director of a person who is already Managing Director/Manager of another company), Section 372(A) [inter-company loans and investments] and Section 386 (appointment of a person as Manager who is already Managing Director /Manager of another company), stipulate that notice of the resolution to be passed thereat is required to be given to every Director in India. It would follow, therefore, that in such cases it would be incumbent on the company to circulate the agenda along with a copy of the proposed resolutions in respect of every such item. Besides the foregoing, in view of the enormity and importance of the matters coming up before the Board, if details of the items for discussion in the Board meeting are not circulated in advance, no meaningful discussion can take place in the Board meeting, for none of the outside Directors will be aware of the matters to be discussed in Board meetings. Therefore, good company practice demands that the agenda containing business to be transacted with short notes on each ite should be circulated along with the notice or at least one week before the date of the meeting.

Usually, a good part of the Board agenda consists of routine items. There are important items also like reports on the working of the company, approval of capital projects, matters calling for major policy decisions, etc.

!tis advisable to circulate along with the notes on agenda, the proposed resolutions

to be moved at the meeting and to be passed by the Directors.

If a meeting of the Board could not be held for want of quorum

Board Meetings on Public Holidays. Under Section 288 (1) of the Companies Act, 1956, adjourned Board meeting cannot be held on a public holiday. The sub-section (1) of Section 288 reads:

“If a meeting of the Board could not be held for want of quorum, then unless the Articles otherwise,provide, the meeting shall automatically stand adjourned till the same day in the next week, at the same time and place or if that day is a public holiday, till the next succeeding day which is not a public holiday at the same time and place.”

Can an Original Board Meeting be held on a public holiday? Section 288(1) disallows holding of an adjourned meeting of the Board of Directors on a public holiday. There is no other Section either on the subject. The Department of Company Affairs has, however, clarified that Section 288(1) does not prohibit a company from holding its original Board meetings on public holidays unless its Articles provide otherwise [Taxmann’s Circulars & Clarifications, 1992 edn., p. 294].

Place of Board’s Meetings. Section 301(5) provides, inter alias, that the Register of contracts in which Directors are interested shall be kept at the registered office of the company. Again, sub-section (2) requires the Register to be placed before the meeting of the Board. Accordingly, if a Board meeting is held at a place other than the registered office, it will involve removal of the Register of contracts outside the registered office and thus result in violation of the provisions of Section 301(5).

The Department of Company Affairs has, however, clarified that it would be sufficient compliance with the provisions of Section 301(5) if the company gives adequate notice to its shareholders, either once for all or from time to time indicating the precise periods during business hours and the days on which they may inspect the register kept under Section 301 (2) at the registered office. In view of the Government’s clarification, it is clear that it is legally possible to hold Board meetings at any place if the requisite notice to shareholders has been given.

Quorum. According to Section 287, the quorum for a meeting of the Board of Directors shall be 1/3^rd of its total strength (any fraction contained in that 1/3^rd to be rounded off to one) or two Directors, whichever is higher.

The quorum for a Board Meeting

As per Section 287 (2) the quorum for a Board Meeting is one-third of the total strength (fraction being rounded off to one) or two directors whichever is higher. In the present case 1/3 of 11 is 3.66 rounded off to 4. Though none of the three directors present in the meeting were interested in any of the items, the required quorum was not present at the outset and the meeting cannot be said to be valid.
(ii) Section 287 of the Act prescribes the quorum for a meeting of the Board of Directors of a Company. It provides that the quorum for the meeting of the Board of Directors shall be one-third of its total strength or two directors whichever is higher. Any fraction contained in one-third is to be rounded off as one. The proviso to Section 287 provides that where at any time the number of interested directors
exceeds or is equal to 2/3rd of the total strength, the remaining directors (non-in- .
terested) not being less than 2 shall form the quorum. In the present case cited in the question, of the seven directors present at the meeting five directors are interested. This number is neither equal to, nor does it exceed two-thirds of the total strength which is 11. In view of this the presence of two directors not interested in the agenda, does not form a quorum and hence the meeting is not a valid one.
(iii) A director who fails to disclose his interest contravening the provisions of Section 299 shall be deemed to have vacated his office in terms of Section 283( i) of the Companies Act. He ceases to be a director from the date of which the resolution passed approvirig the transaction. Further, the director is liable to
a fine of Rs. 50,000 under Section 300.
(a) R is the managing director of a public company with a paid-up capital of Rs. 200 lakhs. He is also a partner of the firm in which the other partners are his wife and two sons. The company proposes to enter into a contract with the firm for sale of its products of the value of Rs. 5 lakhs on credit.
(i) When can the contract be entered into?
(ii) What are the duties of R in such a case?
(Hi) Will it make any difference if the contract is entered into with a private company
in which the wife of R and his two sons 5 and T are members? .
(b) A company sold one of its flats to one of the directors and received 50% of the price in cash and agreed to receive the balance in instalments. Would you consider this as a loan granted to director attracting the provisions of Section 295

Proper Authority to Call Meeting.

Proper Authority to Call Meeting. It must be ensured that the notice for the Board meeting is issued by proper authority. Regulation 73(2) of Table A provides that a Director shall, at any time, summon a meeting of the Board.

A meeting convened by the Secretary, without authority, may be ratified by the Directors at a Board meeting.

Notice-Whom to be given? The notice of the Board meeting must be given to every Director. If Director is improperly or accidentally excluded from a meeting of the Board, he may sue for declaration of the entire proceedings of the meeting as invalid. However,

if no notice is given as required, but all the Directors are either present or those who are absent do not complain about non-service of notice, then the proceedings of the meeting will not be invalid [Bharat Fire & General Insurance Co. Ltd. v. P.P. Gupta, A.I.R. 1968 Del. 68]. Also, if the proceedings of the meeting are subsequently ratified by another meeting of the Board where the absent Directors of the previous meeting are present, then, the proceedings of the earlier meeting is not vitiated.. ,

Contents. The notice of the Board meeting must state the date, time and pIace of the meeting.

Unless the Articles otherwise provide, the nature of the business to be transacted

need not be specified. However, a copy of the Agenda is usually sent along with the notice.

Time and Place of Board Meetings. The notice must state the date, time and place of the meeting.

Unlike the provisions of the Act regarding annual meetings, there is no provision in the Act specifying that Board meetings must be held at the registered office of the company r during business hours and on a day which is not a public holiday. Thus, Board meetings may be held at any place and outside business hours according to the convenience of the Directors.