Law and You > Corporate Laws > Companies Act, 2013 > Situational Problems on Companies Act, 2013, Set-01 Directors
Example 1: Directors of Great Eastern Company violates the Object Clause of the Memorandum of a company.
What is the act of Directors called?
The act of director is called an “ultra vires act”. Anything which is beyond the authority or power is called ultra-vires.
Section 4 (1)(c) of the Companies Act, 2013, states that all the objects for which incorporation of the company is proposed any other matter which is considered necessary in its furtherance should be stated in the memorandum of association of the company. A Memorandum of Association of a company is a constitution of the company. It sets out the internal and external scope and area of the company’s operation along with its objectives, powers, scope. It is a binding document which describes the scope of the company among other things. The object clause of the memorandum of the company contains the object for which the company is formed. If a company departs from its MOA, then such an act is called ultra vires. Thus, anything which is done by the company or its directors which is beyond their legal authority or which was outside the scope of the object of the company is ultra-vires.
What can be the consequence of the above act of Directors?
- Liability of The Company: There are no principles regarding the company’s liability against the damages resulting from the ultra vires act. The company itself is not bound by the act, and if company assets were used for the ultra vires transaction, the company may have the right to recover those assets or trace them.
- Breach of Warranty: The acts that a company cannot perform as mentioned under Memorandum of Association., the directors being the agent of the company are also prohibited from performing such acts.
- Liability: The consequences of a director’s ultra vires act include the act being void and unenforceable, potential personal liability for the directors.
- Injunction: The members of the company can issue an injunction against the company to prevent it from engaging in any ultra vires activities.
Example 2: At an annual General Meeting of a Company, the matter is for appointment of Director
When the retiring directors shall be deem to have been re-appointed?
A retiring director is deemed to have been re-appointed if the position is not filled at an adjourned meeting, and the meeting has not expressly resolved not to fill the vacancy. This automatic re-appointment will not apply if the director has expressed unwillingness to be re-appointed, a resolution for their re-appointment was put to a vote and lost, or the director is disqualified.
When the Board of Directors can appoint Director under Companies Act?
The Board of Directors can appoint directors under specific circumstances, such as filling vacancies or appointing an additional director, provided they are authorized by the company’s articles of association. The board can also appoint an alternate director to act during a director’s absence for a period of three months or more. These appointments require a resolution passed at a board meeting and must be subsequently approved by the shareholders in a general meeting.
Example 3: Manurewa Transport Company created floating charge on the Debentures issued by the Company.
Under what circumstances floating charge becomes fixed charge?
When physical assets such as machinery, land, or property are used as collateral to finance a loan, then charges levied on such loans are called fixed charges. When tangible assets, such as stocks, inventory, etc. are used as collateral to finance a loan, charges levied on such a loan are called floating charges.
A floating charge becomes a fixed charge, a process called crystallization, under specific circumstances such as the borrower’s default on a loan, the company ceases to carry out the business, and the company entering liquidation, or the appointment of a receiver. When a floating charge crystallizes, it becomes a fixed security on specific assets, preventing the company from using or selling them without the lender’s consent.
What remedies are available to the debenture holder, if the Company makes default in the payment of the Principal or interest?
If a company defaults on debenture payments, debenture holders have remedies including suing the company, petitioning for its winding up, or using specific performance to enforce the subscription contract. Secured debenture holders have additional remedies such as selling the company’s assets or appointing a receiver, while unsecured debenture holders have remedies similar to other creditors. The specific remedies available depend on the type of debenture and the terms of the debenture trust deed
Example 4: Mr A is already a director of 10 public companies, 5 private companies, an alternate director of one company and a director of two unlimited companies. He is appointed as a director in ABC Ltd.
Is his appointment valid? Why?
Yes, his appointment is valid. According to Section 165(1) of the Companies Act, 2013, no person shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time. The proviso attached to it lays down that the maximum number of public companies in which a person can be appointed as a director shall not exceed ten.
In this case Mr A is director in 10 + 5 + 1 + 2 = 18 companies which is below the allowed limit of 20. Similarly, He is director in 10 public companies, again with maximum possible allowed in public companies.
Who is an alternate director?
An alternate director is a temporary substitute appointed by a company’s board to take over the duties of a regular director who is absent for a period, typically at least three months, from India. This appointment must be authorised by the Articles. This appointment ensures the company’s governance and operations continue smoothly in the regular director’s absence. The alternate director holds the same authority and has the same responsibilities as the principal director, including making decisions in the company’s best interest and complying with regulations
Example 5: X & Co Ltd sent a notice convening its Annual General Meeting on 28th December 2007. This meeting was however, adjourned to 15th January 2008 on which it was duly held. However, no other General Meeting was held in 2008. When the company was prosecuted for not holding one Annual General Meeting in every year, the company contends that it did hold one meeting in 2007, and another in 2008, and therefore, the requirements of law have been complied with.
Will this defence of company succeed? Why?
The Company will not succeed in the defence. It is not the meeting of 2008. It is an adjourned meeting of 2007. According to Section 96(1) of the Companies Act, 2013, every company other than a One Person Company shall in each year hold in addition to any other meetings, a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it, and not more than fifteen months shall elapse between the date of one annual general meeting of a company and that of the next
If the Company fails to hold AGM, what are the consequences those will follow?
If a company fails to hold its Annual General Meeting (AGM), the consequences include penalties, mandatory meetings ordered by the Tribunal, and the potential for further fines. Under Section 99 of the Companies Act, 2013 the company and its officers in default can be fined up to ₹1 lakh, with an additional fine of ₹5,000 per day for each day the default continues. Additionally, any director or member can apply to the Tribunal (or Company Law Board) to order the company to hold the AGM.
Example 6: A company had issued “Cumulative Preference Shares” under the provisions of the Memorandum and Articles. Later the shareholders passed resolution to strike out the word “Cumulative” and thereafter the shares were called “Preference Shares”. Mr X a Preference Shareholder, filed a suit for a declaration that, even after such resolution, the shares still remain “Cumulative”
Will Mr X succeed? Why?
Yes, Mr X will succeed because unless there is a clear provision in the Articles to that effect, preference shares are always presumed to be cumulative. Unless otherwise stated in the terms of share issue or the company’s articles of association, or in any agreement with the shareholder, the right to receive a preference dividend is cumulative. However there is no absolute right to a dividend until it is declared out of available profits.
What is cumulative preference shares?
Preference shares where the right to a dividend accumulates if profits are insufficient in any year to pay the dividend. Once there are sufficient profits, the cumulative dividend is paid.
Example 7: ABC Ltd owed Rs 250/- (Rupees Two Hundred Fifty only) to Mr A and could not pay the same due to financial problems. Mr A sent a registered notice to the head office of the company which was not its registered office, calling for the amount. Mr A waited for 21 days and then filed a winding up petition against the company as the amount was still not paid.
Is petition likely to succeed? Why?
No, the petition will not succeed. The minimum threshold to initiate insolvency proceedings by creditors is now raised to Rs. 1 Crore in March 2020 (previously it was Rs. 1 Lakh). Thus the amount of Rs 250/- disqualify the petition.
If the notice claiming the amount of Rs 250/- is sent to registered office of the company, will the petition for winding up likely to succeed? Why?
There will no effect on the fate of the petition. It will not succeed as it is not satisfying the basic criteria as mentioned in the answer (a)
Example 8: A solicitor, on the instructions of certain gentlemen, prepared the necessary documents and obtained the registration of a company. He paid the registration fee and incurred incidental expenses. But, the company after registration refused to pay for those services and expenses.
The Solicitor wants to sue the company. Will he succeed? Why?
No, the Solicitor will not succeed as the contract for registration of company is with the promoters of the company and not with the company. Thus it is pre-incorporation Contract.
The company as separate legal entity, when it comes into existence, is not bound by any contract made on its behalf before its incorporation. A solicitor or lawyer, or chartered accountant who on the request of promoters, prepared a company’s documents and spent time and money in getting it registered, could not recover his charges from the company. The promoters who contract for a proposed company may incur personal liability.
Can the company enforce the contract entered into before its incorporation? Why?
Although promoter is personally liable for the pre-incorporation contract, but there are some scope where the promoter can shift his liability to company. He can shift to company his liability under the Specific Relief Act 1963 or he can go for novation under contract law.
Example 9: A is an auditor in 20 public companies having paid up share capital of less than Rs 25 Lakhs. He is an auditor of 5 Private Companies having paid up share capital of Rs 20 lakhs. He is also a partner in a firm of auditors.
If A is appointed as an auditor of another public company having paid up share capital less than Rs 25 Lakhs, will his appointment is valid? Why?
No, A’s appointment as an auditor of another public company is not valid, because he has already reached his maximum limit of 20 company audits as permitted under the Companies Act, 2013.
Section 141(3)(g) of the Companies Act, 2013, restricts an individual auditor from holding more than 20 company audits at any given time. The audits of One Person Companies (OPC), Dormant Companies, and Private companies having a paid-up share capital of less than ₹100 crore are specifically excluded from this ceiling limit.
Advice A on the number of companies in which he can be appointed as an auditor.
Section 141(3)(g) of the Companies Act, 2013, restricts an individual auditor from holding more than 20 company audits at any given time. The audits of One Person Companies (OPC), Dormant Companies, and Private companies having a paid-up share capital of less than ₹100 crore are specifically excluded from this ceiling limit.
Example 10: ABC Ltd posted notices to its members on 16th December 2009 for a meeting to be held on 7th November 2009
- Will the meeting is valid meeting? Why?
Section 101(1) of the Companies Act, 2013, required that a general meeting of a company be called by giving no less than twenty-one “clear days’” notice in writing. “Clear days’” notice means that the day on which the notice is served/sent and the day of the meeting itself are both excluded from the 21-day count. According to Section 20 of the Companies Act, 2013, if a document is sent by post, service is deemed to be effective at the expiration of 48 hours after the letter containing the same is posted. Therefore, an additional two days are added for postal transit when calculating the total period.
In this case notice is posted on 16th October 2009. The deemed date (after 48 hours) of posting is 18th October 2009. The date of meeting is 7th November 2009. Clear days to be calculate from 18th October 2009 to 7th November 2009 i.e. 19 days. Thus, the effective notice period is less than 21 clear days.
Since the notice period did not comply with the statutory requirement for a minimum of 21 clear days, the meeting on November 7, 2009, was not a valid meeting, unless all members entitled to vote unanimously consented to a shorter notice period, which is a permissible exception under the Act
After expiry of what time. Will the notice of meeting which is dispatched under certificate of posting be deemed to be served?
According to Section 20 of the Companies Act, 2013, if a document is sent by post, service is deemed to be effective at the expiration of 48 hours after the letter containing the same is posted. Therefore, an additional two days are added for postal transit when calculating the total period.