Drafting of Agreements Under the Companies Act – Drafting, Pleadings and Appearances Important Questions
Question 1.
‘Promoter of a company is a person who does the necessary preliminary work in connection with the formation and the establishing of the company’. Comment.
Answer:
According to Section 2(69) of Companies Act, 2013, promoters means a person
a. Who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92
b. Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise
c. In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:
Note: Companies Act, 1956 did not define promoters
Functions of a promoter:
- Promoters undertake “preliminary expenses” for the incorporation of the company and later on get it reimbursed after incorporation.
- Promoters usually enter into contracts with the prospective directors, solicitors, bankers, brokers, underwriters, auditors, secretary, managers and with those who offer to sell land, plant, machinery equipment etc. for implementing the proposed proj ect. Such contracts are known as “promoters’ contracts”
Upon incorporation, a company as a matter of practice enters into fresh contracts with the third parties on the lines of the promoters’ contracts, which then become binding on the company.
Question 2.
State in brief the law regarding promoters’ contract. Draft a specimen promoters’ contract for the purchase of an industrial plot for setting-up an industrial unit of the proposed company PMQ Ltd.
Answer:
Promoters’ Contract:
- The promoters of a company usually enter into contracts to acquire some property or right for the company which is yet to be incorporated; such contracts are called preliminary or pre-incorporation contracts.
- The promoters enter into such contracts as agents for the company about to be formed.
- When the company comes into existence, it is not bound by the pre-in-corporation contracts even when it takes the benefit of the work done on its behalf. “
Note: Companies Act, 2013 does not contain any provisions about Promoter’s Contract.
Deed of Promoters’ Contract:
THE AGREEMENT made on ………….. day of ……………. between Mr. P, son of Mr …………. resident of ……………, Mr. M, son of Mr ……………….. resident of …………….. and Mr. Q, son of Mr, resident of ……………. (here in after referred to as “Promoters”) of the ONE PART which expression shall, unless repugnant to the context include their heirs, legal representatives and assigns.
AND
Mr. “V” son of Mr ………….. resident ………….. (here in after referred as “Vendor”) of the other part, which expression shall, unless repugnant to the context, include his heirs, legal representatives and assigns.
WHEREAS the promoters have been engaged in promoting and forming a company to be known as PMQ Ltd., which name has been made available to the promoters by the Registrar of Companies ………………. , consequent upon which they have filed with the Registrar memorandum of association and articles of association for registration of the company.
AND WHEREAS the memorandum and articles of association of the proposed PMQ Ltd., empower the company and its directors to enter into agreements on its incorporation on the lines of the agreement en-tered into by the promoters for the purchase of land, plant, machinery, equipment and for hiring the services of persons required for and in connection with the formation and incorporation of the company.
AND WHEREAS the Vendor is the absolute owner of industrial plot of land measuring ……………….. and situated at …………………… and is desirous of selling the same.
AND WHEREAS the promoters are desirous to buy the said plot of land for the proposed company PMQ Ltd. to set up an industrial unit on its incorporation.
NOW IT IS AGREED AND DECLARED BETWEEN AND BY THE PARTIES AS FOLLOWS:
1. That the said vendor shall sell and the promoters shall purchase the industrial Plot No …………… in consideration of ₹ ……………
2. The promoters shall pay ₹ …………… upon execution of this agreement and the balance upon the execution of the sale deed.
3. The vendor shall satisfy the promoters about the title of the vendor to the aforesaid piece of land within one month of the execution of this agreement.
4. The parties shall bear the expenses of sale equally.
5. The purchaser shall pay to the vendor the expenses for purchase of stamp.
6. The sale deed shall be executed within 3 months from the date of this agreement.
7. The vendor shall deliver actual possession of the plot of land to the promoters or the company on the date of payment of the balance of the price aforementioned and shall do all other acts that may be necessary or requisite to effectually put the promoters or PMQ Ltd., ‘ as the case may be, in such possession.
SCHEDULE OF LAND
The property bearing No……………
North ……………
South ……………
East ……………
West ……………
IN WITNESS WHERE OF the parties aforementioned have signed this deed of acceptance of the terms thereof:
1.
Witness Vendors
Purchases/Promoters of the company
PMQ Limited, under incorporation
Promoter
Promoter M
Promoter Q
2. Witness
Question 3.
Write notes on the following; Pre-incorporation contracts.
Answer:
“Pre-incorporation contracts” are those contracts which promoters of a company enter into contracts to acquire some property or right for the company which is yet to be incorporated.
Liability of the company:
- Since presence of two consenting parties is necessary for a contract, and the company before incorporation is a non-entity, the promoters cannot act as agents for the company, which has yet to come into existence. As such, the company is not liable for the acts of the promoters done before its incorporation.
- When the company comes into existence, it is not bound by the pre-in-corporation contracts even when it takes the benefit of the work done on its behalf.
Liability of promoters:
- The company, after incorporation, cannot enforce any contract made before its incorporation, which means the company cannot sue the other party to the contract if the other party fails to carry out the, contract. Promoters remain personally liable on the contract.
Kelner v. Baxter (1866) L.R.2 C.P. 174
“Promoters are personally liable for the pre-incorporation contract because they are the consenting party to the contract. ”
Rights of third party:
- Specific performance of a contract between a third party and the promoters may be successfully claimed by the third party against the company, when the company enters into possession of the property on the faith of the promoters’ contract.
Question 4.
Comment on the following; Ratification of Pre-incorporation Contract by Company.
OR
What is meant by pre-incorporation contracts? Can a company ratify a contract entered into by the promoters on its behalf before its incorporation? Explain with reasons.
Answer:
‘’Pre-incorporation contracts” are those contracts which promoters of a company enter into contracts to acquire some property or right for the company which is yet to be incorporated.
Ratification of Pre-incorporation Contract:
- When the company comes into existence, it is not bound by the pre-incorporation contracts even when it takes the benefit of the work done on its behalf.
- A company cannot ratify a contract entered into by the promoters on its behalf before its incorporation.
- The doctrine of ratification applies only if an agent contracts for a principal who is in existence and who is competent to contract at the time of the contract by the agent. Where a contract is made on behalf of principal known to both parties to be non-existent, the contract is deemed to have been entered into personally by the actual maker, i.e. the agent.
Liability of promoters:
- The company, after incorporation, cannot enforce any contract made before its incorporation, which means the company cannot sue the other party to the contract if the other party fails to carry out the contract. Promoters remain personally liable on the contract.
Kelner v. Baxter (1866) L.R.2 C.P. 174
“Promoters are personally liable for the pre-incorporation contract because they are the consenting party to the contract.
New Contracts:
A company may, if it desires, enter into a new contract, after its incor¬poration, with the other party which is known as novation of promoter’s contracts and if it makes a fresh contract in terms of the preliminary contract, the liability of the promoters comes to an end and if it does not make a fresh contract within a limited, period of time, either of the parties may rescind the contract.
Question 5.
For a proposed Smart Footwear (P) Ltd., its promoters Abhinav, Bharat and Chirag had executed a contract with New Okhla Industrial Development Authority (NOIDA), U.P. on 30th June, 2011 for purchasing an industrial plot in Sector – 1, NOIDA. The proposal was to float. Smart Footwear (P) Ltd. for manufacturing footwear in the factory to be built on the said plot. Subsequently, the company was incorporated and registered with Registrar of Companies on 15th October, 2011. It decided to adopt the promoters’ contract for buying the industrial plot from NOIDA. Draft a deed of novation of promoters’ contract. (December 2011, 8 marks)
Answer:
This Agreement made at New Delhi on 3rd day of July 2011 between M/s. New Okhla Industrial Development Authority (NOIDA), U.P. of the First part.
AND
Smart Footwear (P) Ltd. (hereinafter referred to as “the company”) of the Second part.
WHEREAS after the execution of the contract on 30th June, 2011 (hereinafter referred to as “the said contract”) between M/s. New Okhla Industrial Development Authority (NOIDA), U.P., the vendor and Shri Abhinav, Shri Bharat and Shri Chirag on behalf of the Company, the said company Smart Footwear (P) Ltd. has been incorporated under the Companies Act, 2013.
Now it is Hereby Agreed by and between the Parties Hereto as Under:
1. The said contract dated 30th June, 2011 is hereby adopted by the company and shall be binding on the said M/s. New Okhla Industrial Development Authority (NOIDA), U.P. and on the company in the same manner and shall take effect in all respects as if the company has been in existence at the date of the agreement.
2. Shri Abhinav, Shri Bharat and Shri Chirag‘who actually signed on behalf of the proposed company shall be discharged from all liability under the said contract as the company had adopted and ratified the said contracts.
IN WITNESS WHERE OF the parties here unto have put their hands and signatures and he company has caused its common seal affixed in the presence of Shri ………………….. And Shri ……………………. Two directors who have set their respective hands and signatures the day and year first herein above written in terms of the Resolution passed by the
Board of Directors in their meeting held on ……………………………….
Witnesses: Common Seal
1 ………………………… …………………………
(Signature)
Director
2 …………………………
Signatures of …
On behalf NOIDA
Question 6.
Acts going beyond the memorandum of association are ultra vires.
Answer:
The “Memorandum of Association” is a document which sets out the constitution of a company and is therefore the foundation on which the structure of the company is built.
It defines the scope of the company’s activities and its relations with the outside world.
Object Clause:
- The third compulsory clause in the memorandum sets out the objects for which the company has been formed.
- The objects clause determines the purpose and the capacity of the company. It states affirmatively the ambit and extent of powers of the company and, stated negatively, that nothing should be done beyond that ambit and that no attempt shall be made to use the company for any other purpose than that which is specified.
- The purpose of the objects clause is to enable the persons dealing with the company to know its permitted range of activities.
Acts ultra vires the memorandum of association:
- An act beyond the obj ects mentioned in the memorandum is ultra vires and void and cannot be ratified even by all members of the company.
Question 7.
Examine and discuss the following; Significance of memorandum of – association as the foundation of the corporate structure.
Answer:
Memorandum of Association is one of the most essential pre-requisites for incorporating any form of company under the Companies Act, 2013. As:
- The Memorandum of Association is the constitution and charter document of the company. It is the foundation on which the structure of the company is built.
- The first step in the formation of a company is to prepare a document called the memorandum of association.
- It provides the name, registered office of the company, Objects of the Company, the Liability of Members, Capital Clause and Subscription Clause.
- It lays down the area, beyond which the action of the company cannot go i.e. the acts beyond the memorandum are ultra vires.
- Section 4 of the Companies Act, 2013 and Tables A, B, C, D and E of Schedule I deal with contents, form and printing and signature of memorandum of association.
- It defines the scope of the company’s activities and its relations with the outside world.
- Section 3 of the Act provides the mode of incorporation of a company which is done by subscribing the name of members to the memorandum and complying with the requirements of this Act in respect of its registration.
Question 8.
Distinguish between the following ‘Memorandum of understanding’ and ‘memorandum of association’.
Answer:
Memorandum of Understanding
- Memorandum of Understanding is a document that expresses mutual accord on an issue between two or more parties.
- To be legally operative, a memorandum of understanding must
a. Identify the contracting parties.
b. Spell out the subject matter of the agreement and its objectives.
c. Summarize the essential terms of the agreement.
d. Must be signed by the contracting parties
Memorandum of Association
- Memorandum of Association is the constitution and charter document of the company. It is the foundation on which the structure of the company is built.
- It lays down the area, beyond which the action of the company cannot go.
- Section 4 of the Companies Act, 2013 and Tables A, B, C, D and E of Schedule I deal with contents, form and printing and signature of memorandum of association.
- It defines the scope of the company’s activities and its relations with the outside world.
- An act beyond the objects mentioned in the memorandum is ultra vires and void.
Question 9.
In the light of judicial pronouncements discuss the following; Articles of Association regulate the internal management of a company.
OR
Articles of Association are Company’s internal rules and regulations, ex-plain with relevant case laws.
Answer:
According to Section 2(5) of the Companies Act, 2013,: ‘articles’ means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act.
The articles of association of a company are its bye-laws or rules and regulations that govern the management of its internal affairs and the conduct of its business.
Subordinate to Memorandum of Association:
It is framed with the object of carrying out aims and objects of the company as contained in Memorandum and if necessary it may clarify anything contained in Memorandum. They are subordinate to and are controlled by the memorandum of association.
Form of Articles of Association:
Schedule I of the Companies Act, 2013 provides forms for Articles of Association (AOA) in tables F, G, H, I and J for different types of companies.
Public Document:
Articles, as a public document of the company, have evidentiary value in matters which involve dealing of the company with its own members or third parties.
Judicial precedents on Articles of Association:
Guinness vs. Land Corporation of Ireland 22 Ch.D 348, 381
“There is an essential difference between the memorandum and the articles. The memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. They are conditions introduced for the benefits of the creditors, and the outside public, as well as of the shareholders. The articles of association are internal regulations of the company.”
SS Raj Kumar vs. Perfect Castings Private Limited (1968)
“Articles regulate the domestic management of the company and create rights and obligations between the members and the company It is the bye-laws of the company.”
Question 10.
Write a note on the following; Drafting of Articles of Association.
OR
“Articles of association of a company are public documents and have evidentiary value in matters which Involve dealing of a company with its own members or third parties”
Discuss the statement and also state the important aspects to be kept in view while drafting the articles of association of a company.
Answer:
As per Section 5(1) of Companies Act, 2013,: the articles of a company shall contain the regulations for management of the company.
The articles of association of a company are its bye-laws or rules and regulations that govern the management of ks internal affairs and the conduct of its business.
Public Document:
Articles of association are a public document of the company and holds evidentiary value in matters which involve dealing of the company with its own members or third parties.
Some important points which a draftsman should bear in mind while drafting the Articles are as follows:
- Share capital, its kinds, rights attached to different kinds of shares.
- Directors, appointment of directors, resignations, termination their rights, powers and privileges etc.
- In Government Companies, Joint Sector Companies, Joint Ventures with foreign companies, joint venture with Government Companies, the main terms of their partnership in share capital as well as the management.
- Regulation given in Table A may be borrowed, even if it is not made applicable.
- Each article should be self-explanatory and self interpretative to avoid misleading conclusions.
- Any items which are already mentioned in Memorandum and is to be mentioned in Articles, it is better that it is put in words such as as mentioned in Memorandum of Association” which will skip the requirement of altering Articles when Memorandum is altered.
- No provision which a company cannot do either as per Memorandum or Companies Act or any other law, should find a place in articles.
- Where the company would require assistance from financial Institutions, provisions is made for appointment of nominee directors, conversion of loans from financial institutions into equity etc.
- After drafting. Articles, a proper balancing should be done with Memorandum’s contents, as to coverage, in consistencies with it, contradictions occurred etc. to enable proper modification in time.
Question 11.
Surya Power Ltd. proposes to insert an article in its articles of association enabling it to buy-back its shares. It seeks your professional advice on the draft articles. Advise.
Answer:
The following clause may be incorporated in the Articles of Association enabling the company to buy back its own shares:
“Notwithstanding anything contained in these Articles, the Board of Directors may, when and if thought fit, buy back such of the Company ‘s own shares or securities as it may think necessary, subject to such limits, upon such terms and conditions, and subject to such approvals, as may be permitted by the law”
Question 12.
Examine and comment on the following; A civil suit for removal of director for malfeasance is maintainable if the articles of association provide for civil suit instead of the Companies Act, 2013 provisions.
Answer:
Whether a civil court has jurisdiction to entertain a suit for removal of directors on the ground of malfeasance can be understood from the following case laws:
Prakash Roadlines Ltd. and another v. Vijaya Kumar Narang 1995 83 Comp. Cas. 569
“When a person has contributed to company’s shareholding, he has a right to participate in matter of electing or removing a director. The Court held that such rights should be considered as member’s right inherent as they are allowed to directly participate in company’s management”
Khetan Industries Pvt. Ltd. vs. Manju Ravindra Prasad Khetan (AIR 1995 Born 43, 1994)
“The appointment and removalof directors is specifically governed by provisions of the Act and the High Court stated that the specific remedy provided under the Act has to be available of by a person seeking relief and no suit can lie to civil court.”
Conclusion
The aforesaid case laws make it clear that although member’s rights which are individual rights can be enforced, however if a specific remedy is provided under law, the same should be availed.
Since, the right to appoint and/or remove the directors of a company being a creature of the Companies Act which itself provides machinery for the enforcement of the said right, the Civil’s Court jurisdiction is impliedly barred in such matters.
Question 13.
Explain the following; Concept of entrenchment in the Companies Act, 2013.
Answer:
The entrenchment provisions allow certain clauses in the articles to be amended upon satisfaction of certain conditions or restrictions greater than those prescribed under the Companies Act.
- Section 5(3) of Companies Act, 2013: provides that the articles may contain that specified provisions of the articles may be altered only if conditions or procedures that are more restrictive than those applicable in the case of a special resolution, are met or complied with.
- This provision acts as a protection to the minority shareholders and is of specific interest to the investment community.
- As per Section 5(4) of Companies Act, 2013, the provisions for entrenchment referred to in section 5(3) shall be made either:
a. On formation of a company,
b. By an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company. - As per Section 5(5) of Companies Act, 2013, Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar.
- Such Notice shall be given in Form INC-32(SPICe) along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 at the time of incorporation of a company or in the case of existing companies the same shall be filed in Form No. MGT-14 within 30 days from the date of the entrenchment of the articles, as the case may be along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014.
Question 14.
Distinguish between the following; Memorandum of Association and Articles of Association.
Answer:
The following are the difference between Memorandum of Association and Articles of Association:
| Memorandum of Association | Articles of Association |
| 1. The Memorandum of Association contains the fundamental conditions upon which alone company is allowed to be incorporated. | The Articles of Association are the internal regulations of the company. |
| 2. Memorandum lays down the area beyond which the activities of the Company cannot go. | Articles provide for regulation inside that area. Thus, Memorandum lays down the parameters for the Articles. |
| 3. Memorandum of Association can be altered only under certain circumstances and in the manner provided in the Act. | Articles can be altered by the members by passing a special resolution only. |
| 4. Memorandum of Association cannot include any clause contrary to the provisions of the Companies Act. | The Articles of Association are subsidiary both to the Companies Act and the Memorandum of Association. |
Question 15.
What are Underwriting and Brokerage Agreements? Draft a Sample of Brokerage Agreement. Assume facts.
Answer:
“Underwriting” is an insurance against risk. Shares or debentures of a company are issued, they are, by and large, underwritten to ensure that all the shares or debentures issued are taken up and thus the required capital is raised by the company.
Role of underwriters
If the issue is undersubscribed, the Board may call the Underwriters to subscribe the same. It must be ensured by the directors of a company that the underwriter has sufficient financial resources to meet any obligation. Such an agreement with the Underwriter is known as an Underwriting Agreement.
Commission:
As per Companies Act, 2013
Company pays certain commissions to the underwriters for their service which shall not exceed the rate prescribed in rules made under section 40(6) of Companies Act, 2013.
As per Company (Prospectus and Allotment of Securities) Rules, 2014 As per Rule 13 company may pay commission, whether absolute or conditional, subject to the following conditions, namely:
a. The payment of such commission shall be authorized in the company’s articles of association.
b. The commission may be paid out of proceeds of the issue or the profit of the company or both.
c. The rate of commission paid shall not exceed, in case of shares, five per cent of the price at which the shares are issued or a rate authorised by the articles, whichever is less, and in case of debentures, shall not exceed two and a half per cent of the price at which the debentures are issued, or as specified in the company’s articles, whichever is less.
d. The prospectus of the company shall disclose the name of the underwriters, the rate and amount of the commission payable to the underwriter and the number of securities which is to be underwritten or subscribed by the underwriter absolutely or conditionally.
e. There shall not be paid commission to any underwriter on securities which are not offered to the public for subscription.
f. A copy of the contract for the payment of commission is delivered to the Registrar at the time of delivery of the prospectus for registration.
Agreement for Acting as Broker to an Issue
XYZ Brokerage firm
Address
Contact No.
Ref. No……………..
To,
Mr. A Date……………
The Board of Director
(Name and address of the company for
whose public issue the firm agrees to act as broker)
Dear Sir,
Re: Proposed public issue of Shares of ₹ ………………….. each for cash at par of ………………….. Ltd. We, the undersigned, hereby testify and consent to act as Brokers to the Issue of Shares/Debentures of ₹ …………………. each for cash at par as captioned above by Ltd. and to our name being inserted as Brokers in the prospectus which the company intends to issue in respect of the proposed issue of capital and we hereby authorise the said company to deliver this consent to the Registrar of Companies …………………. pursuant to Section 40(6) of the Companies Act, 2013.
As required under Rule 13 of the Company (Prospectors and Allotment of Secreteries) Rules, 2014, we are agreeable to accept one and a half per cent on the issue price as brokerage on allotment made in respect of applications bearing our rubber stamp as brokers.
Thanking you,
Yours faithfully,
For……………………..
XYZ Brokerage Firm
Question 16.
Draft a specimen underwriting agreement as per’the requirements of the Companies Act, 2013.
Answer:
Name and address of the firm of brokers who agree to act as underwriters
Ref. No………………………
Date………………………
To
The Board of Directors,
(Name and address of the Company for whose
public issue the firm agrees to act as underwriter)
Dear Sir,
Re: Proposed Public Issue of Equity Shares
We, hereby record the terms on which we (hereinafter ref erred as “underwriters”) have agreed to underwrite Equity Shares of the aggregate nominal value of ₹ ……………………. out of the total issue of ………………………… Equity Shares to be offered to the public at ₹ ……….. /- each for cash at par.
1. The prospectus as approved by the underwriters will be delivered to the Registrar of Companies …………………….. on or before ………………….. for registration in accordance with the provisions of Rule 13 of the Company (Prospectors and Allotment of Secretaries) Rules, 2014.
2. Sufficient number of copies of the prospectus and application forms shall be printed and made available to the underwriters, brokers and members of the public who intend to apply for the Equity Shares as soon as possible thereafter.
3. Underwriters shall be entitled to arrange sub-underwriting with respect to their respective commitments.
4. If by the closing date of the subscription, the Equity Shares offered to the public are not subscribed in full by the public and the application money payable is not received by you, you will within 14 days, notify the underwriters in writing as to the amount/number of Equity Shares which have not been so subscribed.
5. The underwriters shall within 21 days after the receipt of such intimation apply for and subscribe such unsubscribed amount/number of Equity Shares.
6. In determining the amount/number of Equity Shares to be taken up by the underwriters the following factors shall be taken into consideration:
(a) In no circumstances will the underwriters be liable to take up Equity Shares more than the amount underwritten by them.
(b) After scrutiny of the applications received, the total shortfall shall first be allocated among all persons who have underwritten the issue and who have not fulfilled their quota, in proportion to the amount underwritten by each of them.
7. Subject to the terms of the prospectus, you will allot Equity Shares for which applications have been received as soon as possible and despatch Equity Share Certificates within six months of such allotment.
8. In consideration of the underwriting you will, within 14 days from the date on which we shall have fulfilled our obligation, pay the underwriters a com¬mission at the rate of two and a half per cent on the issue of the amount/ number of Equity Shares underwritten by the underwriters.
9. An underwriter reserves right to “Announcement” of terminating underwriting arrangement in the event of a complete breakdown or dislocation of business in the financial markets of the cities of Calcutta, Bombay, Madras and Delhi due to war, insurrection, civil commotion or any other serious or sustained or political or industrial disturbances. In the event of underwriters exercising such option they shall be released from all obligations arising out of the underwriting agreement.
Our offer is valid subject to your subscription list opening on or before ……………………
Please acknowledge receipt of this letter and intimate to us your acceptance of the terms and conditions mentioned above.
Thanking you,
Yours faithfully,
For…………………
Question 17.
Write notes on the following; Shareholders’ agreements.
Answer:
→ “Shareholders’ Agreement” is a contractual arrangement between the shareholders of a company describing how the company should be operated and defining shareholders’ rights and obligations. It is also known as share purchase agreement.
→ Shareholder’s Agreements are the result of mutual understanding among the shareholders of a company to which, the company generally becomes a consenting party.
Enforceability:
In India courts have either refused to recognize clauses in shareholders agreements or, even when consistent with company legislation, enforced such clauses only if they have been incorporated in the articles of association of the company.
Question 18.
In the light of judicial pronouncements discuss the following; A re-striction which is not specified in the Articles of Association is not binding either on the company or the shareholders.
OR
In case of any conflict between the articles of associations and the share-holder’s agreement, the former will always prevail.
OR
Shareholders’ agreements are generally not enforceable in India.
OR
“Shareholders’ agreements (SHAs) are quite common in business today.” Elucidate. Also discuss whether they form supplements to company’s regulations and articles of association.
OR
In the light of judicial pronouncements, discuss the following; In view of limited precedential value of many High Court’s decisions, it is difficult to come to clear and crisp answers as to the enforceability of shareholder’s agreement
Answer:
→ In India courts have either refused to recognize clauses in shareholders agreements or, even when consistent with company legislation, enforced such clauses only if they have been incorporated in the articles of association of the company.
→ The Supreme Court in landmark case on this subject, V.B. Rangaraj v. V.B. Gopalakrishnan AIR 1992 SC 453, held that
“A restriction which is not specified in the articles of association is not binding either on the company or on the shareholders.”
→ Decision of V.B. Rangaraj’s case was reiterated by the Bombay High Court in IL & FS Trust Co. Ltd. v. Birla Perucchini Ltd. [2004] 121 Comp. Cas. 335 (Bom.).
→ In Western Maharashtra Development Corporation Ltd. v. Bajaj Auto Ltd. (2010) 154 Company Cases 593 (Bom.), it was held that:
“Such clauses are to hamper the free transferability of shares and in violation of the Companies Act, and hence, are not enforceable. ”
→ Western Maharashtra Development Corporation’s case referred above was overruled by the Division Bench of Bombay High Court in the case of Holdings Limited v. Shyam Madanmohan Ruia and Ors. (2010) 98 CLA 325
Conclusion:
The decisions on shareholders’ agreements are not uniformly inclined in a direction. The High Court decisions are limited in their applicability as they are susceptible to disagreements by other High Courts, thereby conferring limited precedential value. It is difficult to come to clear and crisp answers as to enforceability of shareholders’ agreements
Question 19.
Appellate authorities under the Companies Act, 2013 on refusal of transfer of Shares.
OR
What are the rights available again refund of transfer of shares by a company?
Answer:
Section 58 of Companies Act, 2013, deals with refusal of registration and appeal against refusal.
Appeals before NCLT
For private companies
- If a private company limited by shares refuses, to register the transfer of, or the transmission of any securities or interest of a member in the company, it shall within a period of thirty days from the date on which the instrument of transfer; or the intimation of such transmission send a notice of the refusal to the transferor and the transferee or to the person giving intimation, giving reasons for such refusal.
The transferee may appeal to the Tribunal: - Against the refusal within a period of thirty days from the date of receipt of the notice.
- In case no notice has been sent by the company, within a period of sixty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the company.
For public companies
- If a public company without sufficient cause refuses to register the transfer of securities within a period of thirty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, is delivered to the company, the transferee may:
- Within a period of sixty days of such refusal appeal to the Tribunal.
- Where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer or intimation of transmission appeal to the Tribunal.
- The Tribunal, while dealing with an appeal may, after hearing the parties:
- Dismiss the appeal
- Direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within a period of ten days of the receipt of the order; or
- Direct rectification of the register and also direct the company to pay damages if any, sustained by any party aggrieved.
Contravention of order of Tribunal:
If a person contravenes the order of the Tribunal under this section, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
Appeals before NCLAT:
Section 421(1) of the Companies Act, 2013 provides that any person aggrieved by an order of NCLT may prefer an appeal to the Appellate Tribunal (NCLAT) by making an appeal petition within 45 days of the aforesaid NCLT order.
Appeals before Supreme Court:
In terms of Section 423 of the Act, any person aggrieved by any decision or order of NCLAT may file an appeal to the Supreme Court within sixty days from the date of receipt of the order of the Appellate Tribunal to him on any question of law arising out of such order.
Question 20.
ABC Ltd. employed Joy as its President and provided him rent free accommodation as part of conditions of employment. The agreement contained a clause stipulating employee’s right to retain the accommodation upon termination of service for a particular period. Joy’s services were terminated within six months of appointment. He refused to surrender the accommodation to the company.
This accommodation was owned by ABC Consultants (P) Ltd. which was a sister concern of ABC Ltd. The accommodation owned had given permission to Joy to occupy it as an employee of ABC Ltd. On Joy’s refusal to handover the accommodation upon termination of employment, ABC Ltd. filed a complaint against Joy under section 630 of the Companies Act, 2013 and also under IPC section.
The Judicial Magistrate of First Class (JMFC) discharged Joy of the charges levied against him. But on appeal, the High Court quashed the JMFC’s order. On what grounds should Joy prefer an appeal to the Supreme Court against the impugned order of the High Court? Cite relevant case law, if any.
Answer:
Joy may prefer an appeal to the Supreme Court on the following grounds:
- That the High Court has misconstrued the nature of the allegation made in the complaint and it has wrongly held that the said complaint and the material on record prima facie disclose that Joy (the Appellant) is wrongfully withholding the property of the complainant company and thus liable under section 452 of the Companies Act, 2013.
- That the dispute between the parties is of a civil nature.
- That the Employer Co. was not the lessee of the flat and except for the permission granted by ABC Consultants (P) Ltd. to it and Joy (the Appellant), it has no right, title or interest in that flat.
In the case of Jagdish Chandra Nijhawan v. S. K. Saraf (1999) 1 SSC 119, similar to the aforesaid facts, the Supreme Court upheld the contention of the Appellant and observed that the High Court did not appreciate the material aspects of the case properly. The Apex Court set aside the order passed by the High Court and restored the discharge order passed by the Judicial Magistrate.
Question 21.
Rise Ltd. wants to engage Kapil as its managing director. The Chairman of the company wants you to prepare and submit to him a draft specimen agreement of service with Kapil as a managing director of the j company. Draft the same and also mention the precautions you will take j while drafting the above agreement.
Answer:
THIS AGREEMENT is made on the ………………………… day of …………………. 2015 between ………………………… Ltd:, a company incorporated under the Companies Act, 2013 and having its Registered Office at ………………… (hereinafter called “Company” of the ONE PART.
AND
Mr ………………… son of Mr ………………… resident of ………………… (hereinafter called “the Managing Director”) of the OTHER PART.
NOW THIS DEED WITNESSETH AS UNDER:
1. The company here by appoints under Section 203 of the companies Act, 2013, Mr ……………… as Managing Director of the company for period of five years with effect from ……………..
2. The Managing Director hereby agrees to serve the company in such capacity for a period of five years with effect from ……………..
3. The Managing Director shall exercise and perform such powers and duties as the Board of directors of the company shall, from time to time, determine, and subject to any directions and restrictions, from time to time, given and imposed by the Board.
4. Subject to the restrictions contained hereinafter, he shall have the general control, management and superintendence of the business of the company.
5. The Managing Director may enter into contracts on behalf of the company in the ordinary course of business and to do and perform all other acts and things necessary in the interest of the company.
6. The Managing Director under the preceding clause hereof, the Managing Director shall be entitled to exercise the following powers:
a. To open and operate on any banking or other account and to draw, make, accept, execute, endorse, discount, negotiate, retire, pay, satisfy and assign cheques, drafts, bills of exchange, promissory notes, hundis, interest and dividend warrants and other negotiable or transferable instruments or securities.
b. Together with other authorised officer(s) of the company, borrow moneys with or without security, but not exceeding ₹ five lakhs at a time from one party, invest funds of the company in approved securities not exceed ₹ twenty lakhs in one financial year.
c. To incur capital expenditure up to a sum of ₹ five lakhs during any financial year.
d. To engage employees at a basic salary not exceeding ₹ 10,000/- per month.
e. To increase the salary or the remuneration of any employee not exceed ₹ 5,000/-
f. To enter into contracts for the purchase of goods and hiring of services.
g. To institute, prosecute, defend litigation on behalf of the company.
7. The Managing Director shall, throughout the said term, devote the whole of his time, attention and abilities to the business of the company.
8. The company shall pay to the Managing Director:
a. Salary at the rate of ₹…………….. per month.
b. Actual travelling expenses incurred by the Managing Director in or about the business of the company.
c. Actual entertainment expenses and approved club membership fees.
d. Actual hospital and medical expenses which have been incurred by the Managing Director for himself, his wife, dependent parents and his minor children not exceed ₹…………………
e. Provident fund and gratuity fund for the employees which the company may establish.
f. The Managing Director shall be entitled to such increments from time to time.
9. The Managing Director shall not during the period of his employment, and without the previous consent in writing of the Board, engage or interest himself either directly or indirectly in the business or affairs of any other form.
10. The Managing Director shall not, during the continuance of his employment or any time thereafter, divulge or disclose to any confidential information or knowledge obtained by him during his employment of the business or affairs of the company.
11. If the Managing Director shall at any time be prevented by ill-health or accident from performing his duties hereunder permanently, the Company may terminate his employment.
12. The Company shall be entitled to terminate this agreement in the event of the Managing Director being guilty of misconduct or such in attention to or negligence in the discharge of his duties.
13. The Company shall be at liberty to appoint any person to be Managing Director jointly with the Managing Director.
14. The Managing Director hereby agrees that he will not, at any time, after the termination of this agreement, represent himself as being in any way connected with or interested in the business of the company.
IN WITNESS WHERE0F the parties hereto have set their hands the day, month and the year first above written:
Witnesses: For and on behalf of the company
1.
2. Managing Director
Question 22.
Comment on the following; Amalgamation and procedure to be followed for amalgamation of Companies.
Answer:
→ Amalgamation is defined as the combination of one or more companies into a new entity. It includes:
a. Two or more companies join to form a new company. (A Ltd. + B Ltd. = C Ltd.)
b. Absorption or blending of one by the other (A Ltd. + B Ltd. = A Ltd.)
→ Sections 230-240 of Companies Act, 2013 and the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 deals with matters relating to Compromises, Arrangements, and Amalgamations.
Effect of amalgamation
- The amalgamating company loses its existence and its shareholders become the shareholders of amalgamated company.
- All the property of the amalgamating company becomes the property of the amalgamated company by virtue of the amalgamation.
- All the liabilities of the amalgamating company become the liabilities of the amalgamated company by virtue of the amalgamation.
- Shareholders holding not less than three-fourths in value of the shares in the amalgamating company become shareholders of the amalgamated company by virtue of the amalgamation.
Process of merger and amalgamation
1. An application for merger or amalgamation shall be filed with Tribunal (NCLT) by both the transferor and the transferee company in the form of petition under sections 230-232 of the Companies Act, 2013 for the purpose of sanctioning the scheme of amalgamation.
2. Where more than one company is involved in a scheme, such application may, at the discretion of such companies, be filed as a joint application.
3. The scheme of amalgamation comprising of various parts containing details about Transferor Company, Transferee Company, details of assets and liabilities, necessity and advantages of the merger, employees, exchange ratio etc. should be drafted.
4. Petition to the Tribunal for merger & amalgamation shall be submitted in Form No. NCLT-1 along with following documents:
a. A notice of admission in Form No. NCLT-2
b. An affidavit in Form No. NCLT-6.
c. A copy of Scheme of compromise and arrangement (Merger & Amalgamation)
d. The applicant shall also disclose to the Tribunal in the application, the basis on which each class of members or creditors has been identified for the purposes of approval of the scheme. Obtaining the approval of the Board of Directors of the companies involved.
5. The Tribunal upon hearing the application may either give relevant directions/order for conducting the meeting of the creditors or class of creditors, or of the members or class of members or may dismiss the application for any appropriate reason.
6. The Notice of the meeting pursuant to the order of Tribunal shall be given in Form No. CAA-2.
7. Obtaining approval of the stock exchanges in case of listed companies.
8. Obtaining approvals or No objection from Regional Director/ Official Liquidator, Income tax authority, CCI etc. and other regulators such as RBI/IRDA/DOT etc.
9. Filing of final petition with NCLT for approving the Scheme.
10. Obtaining order for approval for scheme of merger/ amalgamation from the National Company Law Tribunal.
11. Filing the copy of the order with MCA and post order compliances.
Question 23.
What is meant by ‘reconstruction’ in the context of mergers and amalgamations?
Answer:
“Reconstruction” normally entails the transfer of an undertaking to another company, consisting substantially of the same shareholders with a view to its being continued by the transferee company. Reconstruction has not been defined in the Companies Act, 2013.
Reconstruction is resorted to for achieving one or more of the following objects:
a. For the purpose of raising fresh capital by issuing partly paid shares in the new company in exchange for full paid up shares in the old company and calling up the balance on new shares as and when required.
b. For extending the company’s objects otherwise than under Section 13 of Companies Act, 2013.
c. For reorganizing or rearranging he capital structure and the rights of members as between themselves.
Question 24.
Write notes on the following; Slump Sale agreement.
Or
Examine and discuss the following; Slump scale agreement as defined under the Income-tax Act, 1961.
Answer:
- Slump Sale agreement means transfer of entire business or part of business as a going concern. The entire transfer is done on a lump sum consideration. The assets and liabilities are not evaluated individually.
- As per Income Tax Act, 1961
The concept of ‘slump sale’ was incorporated in the Income Tax Act, 1961 by the Finance Act, 1999 with the inclusion of Section 2(42C) - In slump sale the value of consideration cannot be bifurcated and it can be bifurcated than it would cease to fall under category of slump sale.
For example: In a transaction of slump sale, some value is assigned to land for purpose of stamp duty then the transaction will continue to be treated as slump sale. - The slump sale involves finding a buyer, making valuation for slump sale, making valuation for slump sale, making the term sheet and entering into an MOU with prospective buyer, discharge of lump sum consideration and execution of agreement. The executed agreement needs to be registered and stamp duty paid.
Question 25.
Define Slump Sale. Discuss the steps involved in carrying out Slump Sale.
Answer:
The concept of ‘slump sale’ was incorporated in the Income Tax Act, 1961 by the Finance Act, 1999 with the inclusion of section 2(42C). The term ‘slump sale’ is defined as transfer of one or more undertakings as a result of the sale for a lump-sum consideration without.values being assigned to the individual assets and liabilities in such sales. .
Slump Sale is carried out through following steps:
1. Find Buyer
The seller has to find the potential buyers. Before opting for slump sale there are various issues that needs to be analyzed especially the impact of capital gain tax to the seller and stamp duty to the buyer in the light of business strategies.
2. Sign MoU/Term sheet
Once the buyer company is selected, there is need to sign MoU (Memorandum of Understanding) which helps the buyer company to get access to seller entities information for making due diligence, valuation etc.
3. Make Valuation
Valuation is a process of determining the value of assets and liabilities of business. It is one of the most important aspects of slump sale process, as seller wants maximum valuation for its business whereas buyer wants it at lowest end. Valuation of business is mandatory for listed company.
4. Deal Structuring
A deal should be structured considering agreement between buyer and seller. It should be time, cost and compliance effective.
5. Slump sale agreement
Deal needs to be executed through agreement, capturing all slump sale clauses, effecting objectives predetermined and executed by both parties. The executed agreement needs to be registered as per applicable Stamp Act.