Corporate Laws & Other Laws

1 Preliminary

Question 1 [MTP 1 - Q2(b) – 5 marks]

MNO Limited are finalising its financial statements and found that the value of one of its properties has
increased. The company came across certain other transactions also and got confused as to what should be
included as ‘free reserves’.

The company has approached you to define to them the meaning of the term "free reserves" for dividend
distribution as per the provisions of the Companies Act, 2013.
Answer:
As per section 2(43) of the Companies Act, 2013, free reserves means such reserves which, as per the
latest audited balance sheet of a company, are available for distribution as dividend:
Provided that—
(i) any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as
a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognized in equity, including surplus in
profit and loss account on measurement of the asset or the liability at fair value,
shall not be treated as free reserves.

Question 2 [MTP 2 - Q2(b) – 5 marks]

Mr. Kaushal is a Chartered and an MBA by profession, has been appointed as an Executive Director on the
Board of XYZ Limited. His job profile includes advising the Board of Directors of the company on various
compliance matters, strategies, business plans, and risk matters relating to the company. Keeping in view of
above position whether Mr. Kaushal can be classified as the Promoter of XYZ Limited? Examine the same
under the provisions of the Companies Act, 2013.
Answer:
According to section 2(69) of the Companies Act, 2013, Promoter means a person:
(a) Who has been named as such in a prospectus or is identified by the company in the annual return; or
(b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder,
director or otherwise; or
(c) In accordance with whose advice, directions or instructions the Board of Directors of the Company
is accustomed to act.
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity.

As the job profile of Mr. Kaushal is only limited to advise the Board of Directors on various compliance
matters, strategies, business plans and risk matters relating to business of the company and that to only in
a professional capacity, he will not be classified as a Promoter of XYZ Limited.

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 Corporate Laws & Other Laws

3 Prospectus & Allotment of

Securities

Question 1 (RTP)
XYZ Limited issued a prospectus to raise funds for a new manufacturing project. After successfully raising
the funds, the company identified an investment opportunity in a different industry six months later,
requiring a significant portion of the funds. The proposed investment involved trading in equity shares of
other listed companies.

The board of directors suggested varying the original objectives for which the funds were raised to allow
this new investment and recommended passing a special resolution in the company’s general meeting. While
the promoters and controlling shareholders supported this change, some shareholders expressed concerns,
particularly regarding the deviation from the initially stated purpose of the funds.

Based on the provisions of the Companies Act, 2013, advise on the validity of the proposal to redirect the
funds toward this new investment.
Answer:
According to section 27(1) of the Companies Act, 2013, the terms of a contract referred to in the
prospectus or objects for which the prospectus has been issued can be varied, but only with the authority
of the company given by it in general meeting by way of special resolution.

The second proviso to sub-section (1) prescribes that such company is not to use any amount raised by it
through the prospectus for buying, trading or otherwise dealing in equity shares of any other listed company.

In the given question, XYZ Limited, is planning to use the amount initially raised for investing in a different
industry, which also involves trading in equity shares of other listed companies.

Though XYZ Limited has passed a special resolution for the said proposal but it cannot use any amount
raised by it through the prospectus for buying, trading or otherwise dealing in equity shares of any other
listed company. Hence, the said proposal for new investment is not valid.

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4 Share Capital and Debentures

Question 1 (RTP)
XYZ Tech Solutions Limited is a growing technology company that has seen significant contributions from
its employees and directors in the development of a ground breaking software product. To reward these
key contributors, the board proposed issuing sweat equity shares to certain employees and directors. XYZ
Tech Solutions Limited already has issued ordinary equity shares but has never issued sweat equity shares
before.

The company has a paid up equity share capital ₹ 20 crore. The company has proposed to issue sweat equity
shares worth ₹ 4 crore of face value. The company’s board has drafted a special resolution outlining the
proposed issuance of sweat equity shares and including specific details, such as the number of shares, the
current market price, consideration (if any), and the classes of directors and employees eligible to receive
the shares.

The company has approached you to advise them about the issue of the said sweat equity shares, in line with
the provisions of the Companies Act, 2013.
Answer:
According to section 54(1) of the Companies Act, 2013, a company may issue sweat equity shares if all of
the following conditions are fulfilled:
a. Share of that class must be already issued
b. Issue is authorised by a special resolution passed by the company;
c. Resolution specifies the details regarding the number of shares, the current market price,
consideration, if any, and the class or to be issued;

The special resolution authorising the issue of sweat equity shares shall be valid for making the allotment
within a period of not more than 12 months from the date of passing.

During a year, the maximum amount/limit for which sweat equity shares can be issued is higher of:
a. 15% of the existing paid up equity share capital or
b. Shares of the issue value of ₹5 crore.

The issuance of sweat equity shares (cumulative, including all previous issues, if any) shall not exceed 25%
of the paid-up equity capital of the company at any time.

In the given question, the company has proposed to issue sweat equity shares to the tune of ₹ 4 crore.
However, the maximum limit to which it can issue such shares is- Higher of:
a. 15% of the issued paid up share capital, i.e. ₹ 3 crore, or
b. 5 crores

Thus, company can issue sweat equity shares to the tune of ₹ 5 crore. However, the company cannot issue
such shares more than 25% of the paid-up equity capital= 25% of ₹ 20 crore= ₹ 5 crore.
Hence, the company can issue sweat equity shares of ₹ 4 crore.

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 Corporate Laws & Other Laws

5 Acceptance of Deposit by
Company

Question 1 [MTP 2 - Q2(a) – 5 marks]

Samay Publishing Limited facing acute cash crunch wants to utilise a portion of ‘Deposit Repayment Reserve
Account’ to pay off its short-term creditors who are pressing hard for repayment of ₹ 20,00,000. Is it
justified to use funds lying in ‘Deposit Repayment Reserve Account’ in this manner? Give your answer as per
the provisions of the Companies Act, 2013.
Answer:
Rule 13 of the Companies (Acceptance of Deposits) Rules, 2014, states that the amount deposited in the
‘Deposit Repayment Reserve Account’ shall not be used by a company for any purpose other than repayment
of deposits.

In the given question, Samay Publishing Limited wants to utilise a portion of ‘Deposit Repayment Reserve
Account’ to pay off its short-term creditors. Since there is a prohibition, Samay Publishing Limited is not
permitted to utilise its ‘Deposit Repayment Reserve Account’ to pay off its short-term creditors.

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6 Registration of Charges

Question 1 (RTP)
PQR Limited, a manufacturing company, is in the process of expanding its operations. To support this
expansion, PQR Limited has acquired a plot of land along with the buildings on it from ABC Limited, another
company in the same industry. The property, however, is subject to an existing charge, created in favor of
a bank as security for a loan taken by ABC Limited. This charge had been registered by ABC Limited at that
time. The directors of PQR Limited are of the opinion that as the charge for the property was already
created, there is no further obligation to be fulfilled from the side of PQR Limited.

After negotiations, the bank, as the charge holder, consents to the sale and transfer of the property to
PQR Limited with the condition that PQR Limited must register a new charge over the acquired property as
security for its own loan obligations.

Advise whether the contention of directors of PQR Limited is correct. Give your answer in terms of the
provisions of the Companies Act, 2013.
Answer:
The provisions of relating to registration of charges shall, so section 77 far as may be, apply to:
(a) a company acquiring any property subject to a charge within the meaning of that section; or
(b) any modification in the terms or conditions or the extent or operation of any charge registered
under that section.

According to section 79(a) of the Companies Act, 2013, in case of a property where charge is already
registered and if it is sold with the permission of the holder of charge, it shall be the duty of the company
acquiring it to get the charge registered in accordance with section 77.

According to the provisions of section 77, when a company acquires property that is subject to an existing
charge, it is the duty of the acquiring company (PQR Limited in this case) to register the charge as its own.
This means that PQR Limited must create a fresh charge over the acquired property and register it with
the Registrar of Companies (RoC) as per section 77.

Now upon acquisition, it is PQR Limited’s responsibility to ensure that the previous charge is effectively
discharged and that the new charge is registered in its name, reflecting PQR Limited as the current owner
and debtor of the charge. Hence, the contention of directors of PQR Limited that since the charge for the
property was already created, there is no further obligation on part of PQR Limited, is not correct.

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 Corporate Laws & Other Laws

10 Audit & Auditors

Question 1 (RTP)
HD Software Limited is engaged in the business of providing software services. The company appointed its
statutory auditors (not the first auditor). The Board of directors of the company informed the auditor that
the fees shall be fixed by the Board of directors only.

But the auditor objected to the same. Now the directors have approached you to advise them whether they
can solely fix the remuneration of the auditor.
Answer:
Section 142 of the Companies Act, 2013, provides for remuneration of auditors. According to this section
the remuneration of the auditors of a company shall be fixed by the company in general meeting or in such
manner as the company in general meeting may determine. However, the Board may fix remuneration of the
first auditor appointed by it.

The remuneration shall, in addition to the fee payable to an auditor, include the expenses, if any, incurred
by the auditor in connection with the audit of the company and any facility extended to him but does not
include any remuneration paid to him for any other service rendered by him at the request of the company.

As per the facts of the question and stated provision, remuneration of the appointed statutory auditors of
a company shall be fixed by the company in general meeting or in such manner as the company in general
meeting may determine as they are not the first auditor.
Hence, the contention of the Board of directors that they can fix the remuneration of the auditor on their
own is not valid.

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11 Foreign Company

Question 1 [MTP 2 – Q6(b) – 5 marks]

XYZ Limited, a company incorporated outside India and to which provisions of Chapter XXII of the
Companies Act, 2013 are applicable, entered into a contract with ABC Limited, an Indian company, for the
supply of machinery. After the machinery was delivered, ABC Limited failed to make the payment citing
defects in the machinery.

XYZ Limited discovered that it had failed to comply with certain provisions of Chapter XXII of the
Companies Act, 2013, relating to the registration of foreign companies in India. Despite this, XYZ Limited
intends to file a suit against ABC Limited for payment.

Discuss whether XYZ Limited can initiate legal proceedings against ABC Limited in light of the non-
compliance with Chapter XXII of the Companies Act, 2013.

Give your answer as per the provisions of the Companies Act, 2013 [read along with the Companies
(Registration of Foreign Companies) Rules, 2014].
Answer:
According to section 393 of the Companies Act, 2013, any failure by a company to comply with the provisions
of Chapter XXII of the Companies Act, 2013, shall not affect the validity of any contract, dealing or
transaction entered into by the company or its liability to be sued in respect thereof. However, the company
shall not be entitled to bring any suit, claim any set-off, make any counter-claim or institute any legal
proceeding in respect of any such contract, dealing or transaction, until the company has complied with the
provisions of the Companies Act, 2013, applicable to it.

In this given question, XYZ Limited, a company incorporated outside India, has failed to comply with certain
provisions of Chapter XXII of the Companies Act, 2013, which governs the registration and compliance
requirements for foreign companies operating in India.

According to the Companies Act, 2013, non-compliance with Chapter XXII does not affect the validity of
any contract, dealing, or transaction entered into by the company. Therefore, the contract between XYZ
Limited and ABC Limited remains valid, and ABC Limited is still legally bound to fulfill its contractual
obligations, including the payment for the machinery supplied.

Further, XYZ Limited cannot bring a suit, claim any set-off, make any counter-claim, or institute any legal
proceeding related to the contract as it has not complied with certain provisions of Chapter XXII.

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13 Interpretation of Statutes

Question 1 [MTP 1 – Q4(c) – 4 marks]

Does an explanation added to a section widen the ambit of a section?
Answer:
Normally a Proviso is added to a section of an Act to except something or qualify something stated in that
particular section to which it is added. A proviso should not be, ordinarily, interpreted as a general rule.
Usually, a proviso is embedded in the main body of the section and becomes an integral part of it.

The effect of the proviso is to qualify the preceding enactment which is expressed in terms which are too
general.

It is a cardinal rule of interpretation that a proviso or exception to a particular provision of a statute only
embraces the field which is covered by the main provision. It carves out an exception to the main provision
to which it has been enacted as a proviso and to no other. (Ram Narain Sons Ltd. vs. Assistant Commissioner
of Sales Tax, AIR 1955 SC 765).

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14 Foreign Exchange Management

Act, 1999

Question 1 (RTP)
Ravi, an Indian citizen, works as a software engineer for an international company. During the previous
financial year (2023-2024), Ravi resided in India for 200 days. However, in April of the current financial
year, he accepted a job offer in Canada and left India with a long-term work visa, planning to settle in
Canada indefinitely.

Analyse the residential status of Ravi for the financial year 2024-2025, as per the provisions of the Foreign
Exchange Management Act, 1999.
Answer:
As per section 2(v) of the Foreign Exchange Management Act, 1999, the term ‘person resident in India’
means the following entities:
A person who resides in India for more than 182 days during the preceding financial year.

The following persons are not persons resident, in India even though they may have resided in India for
more than 182 days.
(a) A person who has gone out of India or stays outside India for any of the three purposes given below,
(b) A person who has come to or stays in India otherwise than for any of the three purposes given
below;
Three Purposes
i) For or on taking up Employment
ii) For carrying on a business or Vacation
iii) For any other purpose in such circumstances as would indicate stay for his intention an
uncertain period.

Ravi's Residential Status: Ravi resided in India for more than 182 days in the preceding financial year, which
would typically qualify him as a "person resident in India." However, his decision to leave India for long-term
employment in Canada changes his status. According to the provision, a person who has left India for the
purpose of employment abroad is not considered a "person resident in India" even if they meet the 182-day
requirement. Thus, Ravi does not qualify as a resident for the current financial year.

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 Corporate Laws & Other Laws

The Limited Liability

15 Partnership Act, 2008

Question 1 (RTP)
Amit and Priya are partners in XYZ LLP, a consulting firm. Recently, Priya moved to a new address but forgot
to notify the LLP within the required period. A month later, Amit’s cousin, Ramesh, expressed interest in
joining XYZ LLP as a partner, and after a few discussions, he was accepted as a new partner.

However, XYZ LLP did not immediately update the Registrar of Companies (RoC) regarding Priya’s address
change or Ramesh’s admission as a partner. Two months after Ramesh joined, the LLP filed a notice with the
RoC about these changes.

Advise the LLP about the default on part of LLP about the non compliance in respect to not informing the
ROC about:
(i) Priya’s address change
(ii) Ramesh’s admission as a partner.
Answer:
According to section 25 of the Limited Liability Partnership Act, 2008,
(1) Every partner shall inform the LLP of any change in his name or address within a period of 15 days of
such change.

(2) A LLP shall—

(a) where a person becomes or ceases to be a partner, file a notice with the Registrar within 30 days
from the date he becomes or ceases to be a partner; and
(b) where there is any change in the name or address of a partner, file a notice with the Registrar
within 30 days of such change.

(3) A notice filed with the Registrar under sub-section (2)—

(a) shall be in such form and accompanied by such fees as may be prescribed;
(b) shall be signed by the designated partner of the LLP and authenticated in a manner as may be
prescribed; and
(c) if it relates to an incoming partner, shall contain a statement by such partner that he consents to
becoming a partner, signed by him and authenticated in the manner as may be prescribed.

(i) Priya’s Address Change: Under the provision, Priya was required to inform XYZ LLP of her address change
within 15 days of the move. Following that, XYZ LLP was required to file a notice with the RoC within 30
days of being notified of Priya's new address. As Priya did not inform the LLP about change of address and
consequently LLP did not file a notice regarding the change in address of Priya with the Registrar, XYZ LLP
is not in compliance with the required timeline.

(ii) Ramesh’s Admission as a Partner: For new partners, XYZ LLP must file a notice with the RoC within 30
days of a person becoming a partner. This notice should include Ramesh’s consent statement, signed by him
and authenticated as prescribed. The delay in filing means XYZ LLP did not meet the 30-day requirement.

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Question 2 [MTP 1 - Q4(b) – 5 marks]

Define the term ‘Financial Year’ as per the provisions of the Limited Liability Partnership Act, 2008.
Answer:
Financial Year: According to section 2(1)(l) of the Limited Liability Partnership Act, 2008, “Financial year”,
in relation to a Limited Liability Partnership (LLP), means the period from the 1st day of April of a year to
the 31st day of March of the following year.
However, in the case of a LLP incorporated after the 30th day of September of a year, the financial year
may end on the 31st day of March of the year next following that year.

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