PAPER – 3 : BUSINESS AND CORPORATE LAWS

QUESTIONS
The Indian Contact Act, 1872
1. Under what circumstances the doctrine of Supervening Impossibility is not applicable?
2. What is Bailment? Explain the rights and duties of Bailor.
3. M advances to N Rs.5,000 on the guarantee of P. The loan carries interest at ten percent per
annum. Subsequently, N becomes financially embarrassed. On N’s request, M reduces the
interest to six per cent per annum and does not sue N for one year after the loan becomes due.
N becomes insolvent. Can M sue P?
4. X invites Y (a well-known film actor) to his daughter’s engagement and dinner party. Y accepts
the invitation and promised to attend. X made special arrangements for Y at the party but he did
not turn up. X enraged with Y’s behaviour, wanted to sue for the loss incurred in making special
arrangements. X is seeking your advice.
The Sale of Goods Act, 1930
5. What are the exceptions to the doctrine of ‘Caveat Emptor’?
6. Define ‘Condition’ and ‘Warranty’ under the Sale of Goods Act, 1930. When can a breach of
warranty be treated as a breach of condition and vice-versa?
7. Mr.Jayanth sells and consigns certain goods to Mr.Srikanth for cash and sends the Railway
Receipt to him. Mr.Srikanth becomes insolvent and while the goods are in transit, he assigns the
Railway Receipt to Mr.Naveen, who does not know that Mr.Srikanth is insolvent. Mr.Jayanth
being an unpaid seller wants to exercise his rights. Advise:
(a) Whether Mr.Jayanth can exercise the right of stoppage of goods in transit.
(b) Would your answer be different if Mr.Naveen was aware of Mr.Jayanth’s insolvency before
the assignment of the Railway Receipt in favour of Mr.Naveen ?
The Indian Partnership Act, 1932
8. Is registration of a partnership firm compulsory under the Indian Partnership Act, 1932? Discuss
the effects of non-registration of a firm.
9. What are the rights and duties of a minor in relation to partnership business?
10. What is the procedure of giving public notice of any matter in respect of Partnership Firm?
The Negotiable Instruments Act, 1881
11. What do you mean by an Indorsement? Briefly explain the types of an Indorsement.
12. A Bill of Exchange is dishonoured by the acceptor. Explain the provisions of “Noting” and
“Protest” under the Negotiable Instruments Act, 1881.
13. X obtained by means of fraud from Y, a cheque crossed "not negotiable" and got encashed at a
bank other than the drawee bank. Y sues the bank for conversion. Is the bank liable?
14. On a Bill of Exchange for Rs.1 lakh, X’s acceptance to the Bill is forged. ‘A’ takes the Bill from his
customer for value and in good faith before the Bill becomes payable. State with reasons whether
‘A’ can be considered as a ‘Holder in due course’ and whether he (A) can receive the amount of
the Bill from ‘X’.
The Payment of Bonus Act, 1965
15. Explain the provisions relating to Minimum and Maximum Bonus. Is there any exemption for
Payment of Minimum Bonus under payment of Bonus Act, 1965?
16. What deductions are allowed under the Third Schedule of the Payment of Bonus Act, 1965 in
determining the ‘Available Surplus’, in case of a non-banking company?
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17. State with reasons whether the following persons are entitled to receive bonus under the Payment
of Bonus Act, 1965:
(i) A dismissed Employee.
(ii) An apprentice.
(iii) A Retrenched Employee.
The Employees Provident Fund and Miscellaneous Provisions Act, 1956
18. An employee working in an establishment covered by the E.P.F. and M.P. Act, 1952, leaves his
employment and takes up employment in another establishment. State in this connection:
(i) How shall the amount accumulated to his P.F. account be transferred?
(ii) What steps shall be taken if the establishment in which he has joined is not covered by the
Act?
(iii) What would be your answer if the establishment in which he was previously working is not
covered by the Act?
19. Explain briefly the mode of recovery that may be followed by the recovery officer under the
Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 for recovering the amount
due from an employer.
20. Describe the provisions of the Employees Provident Fund and Miscellaneous Provisions Act,
1952 in relation to the protection against attachment of provident fund of an employee. When the
contribution made by an employee to provident fund is treated as preferential payment in case of
insolvency of an employer?
The Cooperative Societies Act, 1912 including the Multi-State Cooperative Societies Act, 2002
21. Under what circumstances, the Registrar may cancel the registration of a society under Co-
operative Societies Act, 1912. What are the powers of liquidator in this connection?
22. A society registered under the Cooperative Societies Act, 1912, likes to invest its surplus funds in
the securities of a Public Limited. Whether it is permitted and state other modes of investments
under the Act?
23. What are the conditions for registering a society under Multi-state Co-operative Society Act,
1984?
24. What are the qualifications and disqualification of Auditors of Multi-state Co-operative Societies
under the Multi-state Co-operative Societies Act, 2002.
The Companies Act, 1956
25. How can a person acquire membership of a public company? Explain in brief, whether
shareholders and members are similar?
26. Explain the provisions relating to furnishing of an “Abridged form of Prospectus” by a company
under the Companies Act, 1956. State the circumstances where the said document is not
required to be accompanied with the share application form?
27. Who is an “expert” under the Companies Act, 1956? What is the extent of liability of an expert for
any mis-statement in the report given by him in relation to publication of prospectus? When he is
not liable?
28. What is a floating charge? State the characteristics of a floating charge. When does it crystallise?
29. Explain the consequences of failure to get the shares listed in Stock Exchanges named in the
prospectus by a public company, under the provisions of the Companies Act, 1956.
30. Briefly explain the effects of Irregular allotment under the Companies Act 1956.
31. What are the different types of meeting, under companies Act, 1956. Explain the statutory
meeting.
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32. Ashok Ltd issued a notice for holding of its AGM on 7th November, 2005. The notice was posted
to the members on 16th October, 2005. Some of the members alleged that the company had not
complied with the provisions of the Act with regard to the period of notice and as such the
meeting was not validily called. Decide.
(i) Whether the meeting has been validly called?
(ii) If there is a shortfall in the number of days by which the notice falls short of the statutory
requirement. State and explain by how many days the notice fall short of the statutory
requirement?
(iii) Can the shortfall, if any, be condoned?

SUGGESTED ANSWERS/HINTS

1. Non-Application of Doctrine of Supervening Impossibility: Events which make the

performance of the contract impossible subsequent to formation of the contract known as
supervening or subsequent impossibility. The effect of such impossibility is that it makes the
contract void and the parties are discharged from further performance of the contract and thereby
contract is discharged, (Section 56, Indian Contract Act, 1872). There are certain exceptions.
The doctrine of supervening impossibility does not apply in the following cases:
(i) Performance becoming difficult: A contract is not discharged merely because its
performance turns out to be difficult or burdensome. The parties will not be released from
their obligations on account of rise or fall of price, depreciation or appreciation of currency
obstacle to the execution of the contract or becoming more expensive or less profitable.
(ii) Commercial impossibility: Performance cannot be excused on the ground of commercial
impossibility. A contract is not discharged merely because the necessary raw material is
available at a very high rate or the expectation of higher profit will not be realized or the
performance of contract has become costlier or the necessary transport is available at
exorbitant rates or the contract has become costlier in terms of money or labour.
(iii) Default of third person: If the contract cannot be performed because of the default of a third
person on whose work or conduct the promisor relied, the promisor is not discharged on the
ground of frustration.
(iv) Strikes, lockouts, riots or civil disturbances: A contract is not discharged automatically on
the ground of supervening impossibility due to a strike by the workers or lock-out by the
owners or outbreak of riots or outbreak of some civil disturbance coming in the way of
performance of the contract. However, the parties to the contract may agree to the contrary
by making a clear provision in this regard.
(v) Partial impossibility: If a contract is made for the fulfillment of several objects, the failure of
one or more of them does not discharge the contract.
(vi) Self-Induced frustration: If frustration is imposed by the conduct of the party himself, or by
the conduct of those for whom he is responsible, or by party’s deliberate or negligent act or
choice, the contract is not discharged.
2. Bailment is defined as an act whereby goods are delivered by the person to another for some
purpose upon a contract that the goods shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them.
Bailor – the person who delivers the goods
Bailee- the person to whom the goods are delivered.
Bailors duties and rights
Duties
(i) Bailor has to disclose all the facts/faults about bailed goods to bailee.
(ii) Under gratuitous bailment, bailor has to reimburse expenses incurred by bailee, if any.
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(iii) Bailor has to compensate the loss on bailed goods to bailee, if any.
(iv) Bailor has to accept the goods after purpose is accomplished.
Rights
(i) To enforce bailee’s duties such as right to claim damages, compensation, if any.
(ii) To terminate the contract of bailment.
(iii) To demand back goods.
(iv) To claim increase or profit from goods bailed.
3. M cannot sue P, because a surety is discharged from liability when, without his consent, the
creditor makes any change in the terms of his contract with the principal debtor, no matter
whether the variation is beneficial to the surety or does not materially affect the position of the
surety (Sec.133, Indian Contract Act, 1872).
4. No. ‘X’ cannot sue ‘Y’ for his loss. Because the agreement was a kind of social nature and lacked
the intention to create legal relationship.
5. The term Caveat Emptor means let the buyer beware; i.e. it is the duty of the buyer to select the
goods of his requirement. The seller is in no way responsible for the bad selection of the buyer
and not bound to disclose the defects in the goods which is selling. If the goods turn out to be
defective, the buyer cannot hold the seller responsible. This is known as the doctrine of ‘Caveat
Emptor’. This doctrine is however, subject to the following exceptions;
1. Where the buyer makes it known to the seller the particular purpose for which the goods are
required, so as to show that he relies on the seller’s skill or judgement and the goods are of
a description which is in the course of seller’s business to supply, it is the duty of the seller
to supply such goods are reasonable fit for that purpose.
2. Where the goods are sold by description there is an implied condition that the goods shall
correspond with the description (Section 15 of Sale of Goods Act, 1930).
3. Where the goods are bought by description from a seller who deals in goods of that
description there is an implied condition that the goods shall be of merchantable quality. But
where the buyer has examined the goods this rule shall apply if the defects were such which
ought to have been revealed by an ordinary examination (Section 16(2)).
4. Where the goods are bought by sample, this rule of Caveat Emptor does not apply if the bulk
does not correspond with the sample (Section 17).
5. Where the goods are brought by sample as well as description, the rule of Caveat Emptor is
not applicable in case the goods do not correspond with both the sample and description
(Section 15).
6. An implied warranty or condition as to quality or fitness for a particular purpose may be
annexed by the usage of trade and if the seller deviates from that, this rule of Caveat Emptor
is not applicable.
7. Where the seller sells the goods by making some misrepresentation or fraud and the buyer
relies on it or when the seller actively conceals some defect in the goods so that the same
could not be discovered by the buyer on a reasonable examination, then the rule of Caveat
Emptor will not apply. In such a case the buyer has a right to avoid the contract and claim
damages.
6. “Condition” and “Warranty”
Section 12(2) of the of the Sale of Goods Act, 1930 defines a condition as a stipulation essential
to the main purpose of the contract, the breach of which gives rise to a right to treat the contract
as having repudiated.
Section 12(3) of the Sale of Goods Act, 1930 defines a warranty as a stipulation collateral to the
main purpose of the contract, the breach of which gives rise to a claim for damages but not a right
to repudiate the contract.
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X buys a car from Y for touring purposes. The car is unfit for touring purpose. Here X can
repudiate the contract since “touring purpose” is a condition for buying the car.
On the other hand, the horn of the car is defective. X cannot repudiate the contract, since
defective horn is only a warranty and horn can be repaired or replaced.
Whether a stipulation is a condition or a warranty depends in each case, on the construction of
contract. `Condition’s and `Warrantees’ may be either express or implied.
A warranty cannot be treated as a condition because it is a lesser importance to the concerned
parties. But a condition may be treated as a warranty under the following circumstances:
(1) The buyer altogether waives the performance of the condition.
(2) The buyer elects to treat the breach of the condition as breach of warranty and claims
damages only.
(3) Where the contract is non-severable and the buyer has accepted either the whole goods or
any part thereof.
(4) Where the fulfilment of a condition or warranty is excused by law by reason of impossibility
of performance or otherwise.
7. (a) Mr. Jayanth cannot exercise the right of stoppage of goods in transist, because the goods
are being taken by Mr.Naveen in good faith and for consideration.
(b) Yes, Mr. Jayanth in this case can exercise his right of stoppage of goods in Transit, as Mr.
Naveen has not acted in good faith. (Refer to section 27 of The Sale of Goods Act,1930.
8. The registration of a firm is not compulsory. But an unregistered firm suffers from certain
disabilities and so registration is necessary. The effects of non-registration as provided in Section
69 of the Indian Partnership Act, 1932 are:
(a) In an unregistered firm, a partner cannot file a suit against the firm on any other partner for
enforcing his right conferred in the Act.
(b) No suit can be filed on behalf of an unregistered firm against any third party for the purpose
of enforcing a right arising from a contract.
(c) An unregistered firm or any partner thereof cannot claim setoff in a suit instituted against the
firm by a third party to enforce a right arising from a contract.
But the non-registration of a firm does not attract the following rights :
(i) The right of a third party to sue the firm or any other partner.
(ii) The right of a partner to sue for dissolution of firm or for accounts of a dissolved firm or
any right or power to realise the property of a dissolved firm.
(iii) The power of official Assignee or Receiver to realise the property of an insolvent
partner.
(iv) The rights of firms having no place of business in India.
(v) A suit for set off not exceeding Rs.100/- in amount which is of a nature cognizable by
Small Causes Court.
9. A minor in real terms is not a partner in a partnership firm. His minority is a disqualification for him
to become a partner, since an agreement with a minor is void ab-initio. But Section 30 of the
Indian Partnership Act, 1932 provides that though a minor cannot be a partner in a firm, he with
the consent of all the partners for the time being, may be admitted to the benefits of partnership
by an agreement executed by his guardian on his behalf with the other partners.
Section 30 states the rules, which govern the rights and liabilities of a minor admitted to the
benefits of partnership. These are :-
1. A minor has a right to his agreed share of the profits and share of the property of the firm.
2. He has a right to have access to inspect and copy the accounts of the firm.
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3. He can sue the partners for accounts or for payment of his share. But he can exercise this
right only when he severs his connection with the firm and not otherwise. The amount of his
share in such a case shall be determined as upon a dissolution.
4. The minor is not liable personally to third parties for the debts of the firm, but his liability is
limited only upto his share in the partnership assets and profits.
5. The minor is not entitled to take part in the conduct of the business as he has no
representative capacity to bind the firm.
6. On attaining majority or on knowing that he had been admitted to the benefits of partnership,
whichever date be later, the minor must decide within six months whether he would or would
not like to become a partner in the firm. He has to give public notice of his decision. If he
does not give public notice, to this effect, he is treated to be a partner in the firm.
7. When a minor elects to remain as a partner, or fails to give public notice of not remaining as
a partner in the firm, he comes personally liable to the third parties for all the debts and
obligations of the firm with retrospective effect i.e. from the date of his being admitted to the
benefits of partnership.
8. Where the minor elects not to be a partner in the firm, his rights and liabilities continue to be
those a minor upto to the date of his giving public notice and shall not be liable for any acts
of the firm done after the date of the public notice.
9. If after attaining majority but before electing to become a partner the minor represents or
knowingly permits himself to be represented as a partner in the firm, he will be personally
liable to the person who has on the faith of such representation granted credit to the firm on
the ground of `holding out'.
10. Procedure of public notice: In every case where the public notice of any matter in respect of
partnership firms is required to the given under the Indian Partnership Act, 1932, it must be given
by publication in the Official Gazette and in at least one vernacular newspaper circulating in the
district where the firm to which it relates has its place or principal place of business.
In the case of registered firms, apart from the aforesaid notification, a notice is also required to be
served on the Registrar of firms under section 63 where the matters relate to (a) the retirement or
expulsion of a partner, or (b) dissolution of the firm, or (c) the election, on attaining majority, to be
or not to be a partner, by a person who as a minor was admitted to the benefit of partnership.
If notice of retirement is published only in local newspaper but not given to Registrar of firms and
in Government Gazette, it is not sufficient to absolve retiring partner from liability to third parties.
11. The Indorsement consists of the signature of the holder made on the back of the negotiable
instrument with the object of transferring the instrument. If there is no space on the instrument,
the Indorsement may be made on a slip of paper attached to it. This attachment is known as
“Allonge”.
According to Section 15 of the Negotiable Instruments Act, 1881 “ when the maker or holder of a
negotiable instrument signs the same, otherwise than as such maker, for the purpose of
negotiation, on the back or face therefore or on slip of paper annexed thereto, or so signs for the
same purpose a stamped paper intended to be completed as negotiable instrument, he is said to
indorse the same, and is called the indorser.”
Types of Indorsements.
1. Indorsement in Blank
2. Indorsement in Full
3. Restrictive Indorsement
4. Indorsement sans recourse
5. Conditional Indorsement
6. Facultative Indorsement
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7. Partial Indorsement
8. Sans frais Indorsement
12. The law related to the noting and protest of negotiable instruments is enshrined in Section 99 to
104A of the Negotiable Instruments Act, 1881.
Noting: According to section 99, when a promissory note or bill of exchange has been
dishonoured by non-acceptance, or non-payment the holder may cause such dishonour to be
noted by a notary public upon the instrument, or on a paper attached thereto, or partly upon each.
Such note must be made within a reasonable time after dishonour, and must specify the date of
dishonour, the reason for the dishonour or if the instrument has not been expressly dishonoured,
the reason why the holder treats it as dishonour and the notary’s charges.
Protest: According to section 100, when a promissory note or bill of exchange has been
dishonoured by non-acceptance or non-payment, the holder may within a reasonable time, cause
such dishonour to be noted and certified by a notary public. Such certificate is called a protest.
The contents of a protest are laid down in section 101 of the Act. According to section 102, when
a promissory note or bill of exchange is required to be protested, notice of such protest must be
given instead of notice of dishonour, in the same manner and subject to the same conditions, but
the notice may be given by the notary making the protest. Under section 103, all bills of
exchange drawn payable at some other place than the place mentioned as the residence of the
drawee, and which are dishonoured by non-acceptance, may, without further presentation to the
drawee, be protested for non-payment in the place specified for payment, unless paid before or at
maturity.
Neither noting nor protesting is compulsory in the case of inland bills. But under section 104,
every foreign bill must be protested for dishonour, when such protest is required by law of the
country where the bill was drawn. The merit of protest and noting is that it would become good
prima-facie evidence in a court of law that the instrument has been dishonoured. It is pertinent to
note that as per section 119 the court is bound to recognise a protest, but it may or not recognise
noting.
13. According to Section 130 of Negotiable Instruments Act, 1881 that a person taking a cheque
crossed generally or specially, bearing in either case the words "not negotiable", shall not have,
and shall not be capable of giving, a better title to the cheque than that which the person from
whom he took it had. The effect of this section is that if the holder has a good title, he can still
transfer it with a good title; but if the transferor has a defective title, the transferee is affected by
such defects, and he cannot claim the right of a holder in due course by providing that he
purchased the instrument in good faith and for value. As X in the case in question had obtained
the cheque by fraud, he had no title to it and could not give to the bank any title to the cheque or
the money; and the bank would be liable for the amount of the cheque for conversion. A similar
decision was taken in Great Western Railway Co. vs. London and Country Banking Co. (1901d)
A.C. 414 the facts whereof are exactly the same as the example cited above.
14. According to section 9 of the Negotiable Instruments Act, 1881 ‘holder in due course’ means any
person who for consideration because the possessor of a promissory note, bill of exchange or
cheque if payable to bearer or the payee or endorsee thereof, if payable to order, before the
amount in it became payable and without having sufficient cause to believe that any defect
existed in the title of the person from whom he derived his title.
As ‘A’ in this case prima facie became a possessor of the bill for value and in good faith before
the bill became payable, he can be considered as a holder in due course.
But where a signature on the negotiable instrument is forged, it becomes a nullity. The holder of
a forged instrument cannot enforce payment thereon. In the event of the holder being able to
obtain payment in spite of forgery, he cannot retain the money. The true owner may sue on tort
the person who had received. This principle is universal in character, by reason where of even a
holder in due course is not exempt from it. A holder in due course is protected when there is
defect in the title. But he derives no title when there is entire absence of title as in the case of
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forgery. Hence ‘A’ cannot receive the amount on the bill.

15. Payment of minimum bonus (Section 10): Subject to the other provisions of the Payment of
Bonus Act,1965, every employer shall be bound to pay to every employee in respect of the
accounting year, a minimum bonus which shall be 8.33 per cent of the salary or wages earned
by the employee during the accounting year or one hundred rupees, whichever is higher,
whether or not the employer has any allocable surplus in the accounting year but if employee
has not completed 15 years of age at the beginning of the accounting year he will be entitled to a
minimum bonus which shall be 8.33% of the salary or wage during the accounting year or Rs.60,
whichever is higher.
Payment of maximum bonus (Section 11):
Where in respect of any accounting year referred to in section 10, the allocable surplus exceeds
the amount of minimum bonus payable to the employees under that section, the employer shall, in
lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting
year bonus which shall be an amount in proportion to the salary or wages earned by the
employee during the accounting year subject to a maximum of twenty per cent of such salary or
wages.
In computing the allocable surplus under this section, the amount set on or the amount set off
under the provisions of section 15 shall be taken into account in accordance with the provisions of
that section.
Power of exemption (Section 36):
Though the Act creates liability on the part of employer to pay the minimum bonus and confers a
right to the workmen, as mentioned in Section 10, the obligation and right is subject to exemption
under Section 36. If the appropriate government having regard to the financial position and other
relevant circumstances of any establishment or class of establishment is of opinion that it will note
be in public interest to apply all or any of the provisions of this Act thereto, it may by notification in
the official gazettee, exempt for such period as may be specified therein and subject to such
conditions as it may think fit to impose, such establishment or class of establishments from all or
any of the provisions of this Act. There are two stages in Section 36.
(1) The Government shall consider the financial position and other relevant circumstances of an
establishment or class of establishment.
(2) It should be of the opinion that it would not be in the public interest to apply all or any of the
parovisions of the Act.
The expression `financial position' include loss suffered by the establishment during the
accounting year. The expression `other relevant circumstances' will include every consideration
as to whether the workmen had principally contributed to the financial loss of the company during
that accounting year.
If the bonus liability is negligible compared to loss suffered, company should not be relieved of
liability to pay minimum bonus. If the losses sustained by the employer is not due to any
misconduct on the part of employees, the employer is liable to pay statutory minimum bonus. [J.K.
Chemicals Ltd. v. Govt. of Maharashtra (1996) Bombay H.C.].
16. Deduction allowed under Third schedule (The payment of Bonus Act, 1965): According to
section 6 of Payment of Bonus Act, 1965 the available surplus in respect of any accounting year
shall be the gross profits for that year after deducting therefrom the sums referred to the section.
The third Schedule of the Act states the prior changes to be deducted from gross profits in
respect of a company other than a banking company (a non-banking company) as follows:
1. The dividends payable on its preference share capital for the accounting year calculated at
the actual rate at which such dividend are payable;
2. 8.5% of its paid-up equity share capital as at the commencement of the accounting year.
3. 6% of its reserves shown in the balance sheet as at the commencement of the accounting
year, including any profit carried forward from the previous accounting year.
Where the employer is a foreign company within the meaning of section 591 of the Companies
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Act, 1956, the total amount to be deducted under this item shall be 8.5% of the aggregate of the
value of the net fixed assets and the current assets of the company in India after deducting the
amount of its current liabilities (other than any amount shown as payable by the company to its
Head Office whether towards any advance made by the Head Office or otherwise or any interest
paid by the company to its Head Office) in India.
17. Dismissed employee: According to section 9 of the Payment of Bonus Act, 1965, an employee
shall be disqualified from receiving bonus under the Act, if he is dismissed from service for-fraud
or riotous or violent behaviour while on the premises of the establishment; theft, misappropriation
or sabotage of any property of the establishment.
Hence, if any employee is dismissed on the above grounds, he is not entitled to receive bonus.
But a dismissed employee who has been reinstated with back wages is entitled to bonus.
[Gannon India Ltd. vs. Niranjan Das (1984)]
Apprentice: An apprentice is not an employee within the meaning of section 2(3) of the Payment
of Bonus Act, 1965. As the apprentice is specifically excluded from the definition of term
‘employee’, he cannot be an employee who is entitled to receive bonus under the Act (Wheel and
Rim Co. vs. Govt. of TN).
Retrenched employee: He is eligible to get bonus provided he has worked for minimum
qualifying period i.e. he has worked in the establishment for not less than 30 working days in an
accounting year as required under section 8. (East Asiatic Co. (P) Ltd. vs. Industrial Tribunal).
18. (a) (i) Section 17-A of EPF & MP Act, 1952 provides for the transfer of accounts of an
employee in case of his leaving the employment and taking up employment in another
establishment and to deal with the case of an establishment to which the Act applies
and also to which it does not apply. The option to get the amount transferred is that of
the employee.
(ii) Where an employee of an establishment to which the Act applies leaves his
employment and obtains re-employment in another establishment to which the Act does
not apply, the amount of accumulations to the credit of such employee in establishment
left by him shall be transferred, within such time as may be specified by the Central
Government in this behalf, to the credit of his account in the provident fund of the
establishment in which he is re-employed, if the employee so desires and the rules in
relation to that provident fund permit such transfer [Sub-Section (1)].
(iii) Conversely, when an employee of an establishment to which the Act does not apply
leaves his employment and obtains re-employment in another establishment to which
the Act applies, the amount of accumulations to the credit of such employee in the
provident fund permit, may be transferred to the credit of his account in the fund or as
the case may be, in the provident fund of the establishment in which he is employed
[Sub-Section (2)].
19. Recovery of money due from employers: Where any amount is an arrear under section 8, of
EPF & MP Act, 1952 the authorised officer may issue to the Recovery Officer a certificate under
his signature specifying the amount of arrears. The Recovery Officer, on receipt of such
certificate shall proceed to recover the amount specified therein from the establishment or as the
case may be, the employer by one or more of the modes mentioned below:
(a) attachment and sale of the movable or immovable property of the establishment or, as the
case may be, the employer;
(b) arrest of the employer and his detention in prison;
(c) appointing a receiver for the management of the movable or immovable properties of the
establishment or, as the case may be, the employer (Section 8B);
The attachment and sale of any property under section 8B shall first be effected against the
properties of the establishment. Where such attachment and sale is insufficient for recovery the
whole of the amount of arrears specified in the certificate, the Recovery Officer may then take
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proceedings against the property of the employer for recovery of the whole or any part of such
arrears.
The authorised officer may issue a certificate under section 8B(1) not withstanding that
proceedings for recovery of the arrears by any other mode have been taken [Section 8B(2)].
Notwithstanding that a certificate has been issued to the Recovery Officer for the recovery of the
amount, the authorised officer may grant time for the payment of the amount, and thereupon the
recovery officer shall stay the proceedings until the expiry of the time so granted [Section 8E].
20. Section 10 of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 provides
that the amount standing to the credit of any member in the Fund or credit of any exempted
employee in a provident fund shall not in any way be capable of being assigned or charged and
shall not be liable to attachment under any decree or order of any court in respect of any debt or
liability incurred by the member or the exempted employee. Neither the Official Assignee
appointed under the Presidency Town Insolvency Act, 1909 nor any Receiver appointed under the
Provincial Insolvency Act, 1920, shall be entitled to or have any claim on, any such amount.
The amount standing to the credit of the aforesaid categories of persons at the time of their death
and payable to their nominees under the scheme or the rules of the Provident Fund shall, subject,
to any deduction authorized by the said scheme or rules, vest in the nominees. And the amount
shall be free from any debt or other liability incurred by the deceased or the nominee before the
death of the member or of the exempted employee.
Contribution to P.F. being treated as Preferential Payment (Section 11): If the employer
is adjudged an insolvent or if the employer is a company and an order for winding thereof has
been made, the amount due from the employer mentioned in Section 11(a) and (b) must be
included among the debts which are to be paid in priority to all other debts under Section 49 of
the Presidency Towns Insolvency Act, Section 61 of the Provincial Insolvency Act, and Section
530 of the Companies Act, 1956 in the distribution of the propriety of the insolvent or the assets of
the company. In other words, this payment will be a professional payment provided the liability
therefore has accrued before the order of the adjudication or winding up is made.
21. The corporate existence of a society under Co-operative Societies Act, 1912 shall continue till its
registration is cancelled by the Registrar. The Registrar may cancel the registration of a society
in the following circumstances:
(i) If the Registrar, after an inquiry has been held by him under Section 35 of the Act, into the
constitution, working and financial condition of a registered society, or after an inspection of
the books of a society has been made under Section 36, or on receipt of an application
made by three-fourths of the members of a society, is of opinion that the society ought to be
dissolved. The cancellation takes effect after the expiry of two months from the date of the
order of cancellation, if no appeal is preferred against the order by any member within that
period. If, however, an appeal is presented within that period, the cancellation takes effect
only when it is confirmed by the appellate authority i.e., the State Government (Section 39).
(ii) Where it is a condition of the registration of a society that it should consist of at least ten
members, and it is proved to the satisfaction of the Registrar that the number of the
members has been reduced to less than ten. In this case, the cancellation takes effect from
the date of the order (Sections 40 and 41).
The effect of such cancellation is that the society ceases to exist as a corporate body from the
date the cancellation takes effect (Section 41) and the Registrar may appoint a competent person
to be liquidator of the society (Section 42).
Powers of Liquidator (Section 42) : The liquidator shall have the following powers :
(i) to institute and defend suits and other legal proceedings on behalf of the society by his
name of office;
(ii) to determine the contribution to be made by the members and past members of the society
respectively to the assets of the society;
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(iii) to investigate all claims against the society, and subject to the provisions of this Act, to
decide questions of priority arising between claimants;
(iv) to determine the persons by whom and the proportions in which the costs of the liquidation
are to be borne; and
(v) to give such directions relating to the collection and distribution of the assets of the society
as may seem to him to be necessary for winding up the affairs of the society.
In so far as is necessary for carrying out the purpose of Section 42, the liquidator may exercise
certain additional powers, e.g., to summon and enforce the attendance of witnesses; to compel
the production of documents by the same means and in the same manner as is provided for by
the Civil Procedure Code. These additional powers are, however, exercisable subject to any rules
that may be made for this purpose.
22. The Investment decision is based on the rules of such society. If rules permit, then a society can
make an investment. However, A society registered under the Co-operative Societies Act, 1912
may invest or deposit its funds in the following:
(i) in the Government Savings Bank or
(ii) in any of the Securities of the Indian Trust Act, 1882.
(iii) in the shares or on the security of any other registered society. or
(iv) with any bank or person carrying on the business of banking approved for this purpose by
the Registrar; or
(v) in any other manner permitted by the rules. (Section 32).
23. The following are the conditions for registration under section 5 of The Multi-State Co-operative
Societies Act, 1984:
1. Its main objectives are to serve the interests of members in more than one State.
2. The objectives are to promote the economic and social betterment of its members through
mutual aid and in accordance with the co-operative principles which are stated in the first
schedule of the Act.
3. It facilitates the other Multi-State Co-operative Societies, or other Co-operative Societies, or
both.
4. The application for registration must fulfill the conditions as per the provisions of the Act and
the Rules framed.
5. There is no other Multi-State Co-operative Society with the identical objects and the same
area of operation.
6. The proposed bye-laws of the Society are not contrary to the provisions of the Act and the
Rules.
7. The proposed bye-laws of the Society do not conflict with the Co-operative principles as
specified in the first Schedule to the Act.
8. The proposed Society should have reasonable prospects of being a viable unit.
24. Qualifications and disqualifications of auditors (Section 72, the Multi-state Co-operative Societies
Act, 2002)
A person shall not be qualified for appointment as an auditor of a Multi-State Co-operative Society
unless he is a chartered accountant within the meaning of the Chartered Accountants Act, 1949
(38 of 1949).
None of the following persons shall be qualified for appointment as auditor of a Multi-State Co-
operative Society-
(a) a body corporate;
(b) an officer or employee of the Multi-State Co-operative Society;
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(c) a person who is a member, or who is in the employment of an officer or employee, of the
Multi-State Co-operative Society;
(d) a person who is indebted to the Multi-State Co-operative Society or who has given any
guarantee or provided any security in connection with the indebtedness of any third person
to the Multi-State Co-operative Society for an amount exceeding one thousand rupees.
A person shall also not be qualified for appointment as an auditor of a Multi-State Co-operative
Society if he is, by virtue of sub-section (2), disqualified for appointment as an auditor of any other
body corporate or Multi-State Co-operative Society or co-operative society.
If an auditor becomes subject, after his appointment, to any of the disqualifications as specified
above, he shall be deemed to have vacated his office as such.
25. (a) Modes of Acquiring Membership: A person may become a member of the company in any
one of the following ways:
1. By subscribing to the memorandum of association: The persons who subscribe
(i.e. sign) to the memorandum of association are deemed to have agreed to become
the members of the company. And on the registration of the company, their names are
entered as members on the register of members [Section 41].
2. By application and allotment of shares: A person, who agrees in writing to become
a member of the company and whose name is entered in the register of member is also
a member of the company [Section 41(2)]. The person intending to become a member
has to make an application to the company for the purchase of its shares. On valid
allotment, the name of the shareholder is entered in the register of member.
3. By agreeing to take qualification shares: A director of a public company is
appointed when he takes or signs an undertaking to take and pay for his qualification
shares. When a director signs and files with the Registrar an undertaking to take and
pay for his qualification shares, he is in the same position as subscriber of the
memorandum of association [Section 266(2)].
4. By transfer of shares: The Companies Act provides that the shares of a public
company are freely transferable. Thus, one person may transfer his shares to any
other person. On the registration of transfer of shares, the transferee becomes the
member of the company.
5. By succession: The legal heirs of the deceased member/shareholder get a right to be
a member of the company and be registered as a member of the company on the basis
of the succession certificate. The company on the basis of the Succession Certificate
enters their name in the Register of Members.
A member and a shareholder: In the parlance of Company Law, the two words “member”
and “shareholder”, are similarly used by common people, thereby giving an impression that
they are synonymous but in fact they can be differentiated on the following grounds:
(1) A registered member may not be a shareholder, since a company may not be having
Share Capital. For example, a company limited by guarantee and not having a share
capital, does have members but not shareholders. But a registered shareholder is a
member, since his name appears in the Register of Members maintained by the
company.
(2) A person who owns a share warrant (bearer), is not a member since his name does not
appear in the Register of Members maintained by the company. He is a shareholder
only [Section 115(1)].
(3) A legal representative of a deceased member is a shareholder but not a member, till he
applies for registration and his name is entered in the Register of members.
26. Abridged form of Prospectus: The abridged prospectus (in Form 2A) and the share application
form should bear the same printed number. The investor may detach the share application form
along with the perforated line after he has had an opportunity to study the contents of the
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abridged prospectus, before submitting the same to the company or its designated bankers. The
same procedure also be followed while making available copies of the prospectus under Section
56 of the Companies Act, 1956.
There are, however, certain exceptions to the above provisions where an abridged prospectus
containing all the prescribed details need not accompany the application forms sent out. These
exceptions are:
1. In the case of bona fide underwriting agreement. (Section 56(3)(a).
2. Where the shares or debentures are not offered to the public. (Section 56(3)(b).
3. Where the offer is made only to existing members or debenture-holders of the company
whether with or without the right of renunciation. (Section 56(3)(a).
4. In the case of issue of shares or debentures which are in all respects similar with those
previously issued and dealt in on a recognized stock exchange. (Section 56(5)(b).
The Companies (Amendment) Act, 1988 permits a company to furnish along with the application
forms for shares/debentures an abridged form of prospectus, instead of the full, prospectus, which
however, is to be furnished on demand. The memorandum containing salient features of the
prospectus accompanying the application form shall be as per rules prescribed by the Central
Government in this behalf. It is, however, open to a company to attach full prospectus along with
the application forms.
The Government has recently revised the format of this Memorandum (abridged prospectus) to
provide for greater disclosure of information to prospective investors so as to enable them to take
an informed decision regarding investment in shares and debentures.
27. Meaning of Expert and his liability: The term ‘Expert’ includes an engineer, valuer, accountant
or any other person whose profession gives authority to the statement made by him. These
experts have been included in the Provisions of Companies Act, 1956 under Section 59(2). The
report of an expert cannot be included in a prospectus if he is in any way connected with the
formation or promotion or management of the company (Section 57).
An expert is liable for any mis-statement in the prospectus unless
(a) he has given his written consent to the issue of the prospectus and has not withdrawn such
consent before the delivery of the copy of the prospectus to the Registrar for Registration
and
(b) Unless a statement as to his consent and non-withdrawal of it appears in the prospectus
(Section 58).
Section 59(1) provides a penalty of fine extending to Rs.50,000/- for the company and any
other person who is knowingly a party to the issue of a prospectus in contravention of these
provisions.
When an expert is not liable:
An expert who would be liable by reason of having given his consent to the issue of
prospectus containing a statement made by him will not be liable if he proves:
(i) that having given his consent to the issue of the prospectus, he withdraw it in writing
before the delivery of a copy of the prospectus for registration; or
(ii) that he was competent to make the statement and he had reasonable ground to
believe, and did up to the time of allotment of the shares or debentures believe, that the
statement was true [Section 62(3)].
An expert can also claim indemnity against the persons who included his name in the
prospectus in case where he has not given his consent, or he has withdrawn his consent
before the issue of the prospectus.
28. Floating charge: A floating charge is an equitable charge which is created on some assets
which is constantly changing e.g., a change on stock in trade, book debts, etc. The company can
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deal in such asset in its normal course of business until the charge becomes fixed on the
happening of an event. Debentures usually create a floating charge on the assets of the
company.
Characteristics of a floating charge:
(1) It is charge on a class of assets of the company, both present and future.
(2) That class is one which in the ordinary course of the business of the company, would be
changing from time to time.
(3) It is contemplated that until some steps are taken by or on behalf of those interested in the
charge, the company may carry on its business in the usual way.
Crystallisation is the conversion of a floating charge into a fixed charge on the assets in the
class charged at the moment of crystallisation. A floating charge crystallises or gets fixed
when:
(i) the company goes into liquidation.
(ii) the company ceases to carry on business, or
(iii) a received is appointed, or
(iv) a default is made in paying the principal on interest and the holder of the charge brings
an action to enforce his security specified in the deed.
29. Listing of Shares: Every public company is required before issuing shares for public subscription
by issue of prospectus, to make an application for listing the security in one or more recognised
stock exchanges [section 73(1)]. The prospectus shall state the names of the stock exchanges to
which application has been made. If the permission has not been granted by the stock exchange
or each stock exchange before the expiry of 10 weeks from the date of the closing the
subscription the allotment made shall become void. [Section 73(1A)]. An appeal may be preferred
against the decision of any recognised stock exchange refusing the aforesaid permission for
enlistment under section 22 of the Securities Contracts (Regulation) Act, 1956 and then such
allotment shall not be void, until the dismissal of the appeal. It shall be deemed that permission
has not been granted if the application for permission has not been disposed of within the period
specified in section 73(1A) i.e. before the expiry of 10 weeks from the closing of the subscription
lists [section 73(5)]. Where the permission has not been applied for or having been applied for,
has not been granted, the application money received must be refunded to the applicants
forthwith without any interest. If the money is not refunded with 8 days after the company
becomes liable to repay it, the company and every director of the company who is in default shall,
on and from the expiry of the eighth day be jointly and severally liable to repay the money with
interest at such rate which shall not be less than 4% and not more than 15% as may be
prescribed, having regard to the length of the period of delay in making the repayment of such
money [section 73(2)]. All moneys received as application and allotment money shall be kept in a
separate bank account maintained with a scheduled bank until the permission is granted, failure
to do so is a punishable offence [section 73(3)].
30. Effect of Irregular allotment: When the shares are not allotted in pursuance of Section 69 and
70 (i.e. without receiving the minimum subscription and without filing a prospectus or statement in
lieu of prospectus to the registrar before the allotment) such an allotment is an irregular allotment.
Inspite of the stringent provision of Section 69 and 70 one may find that allotment has been made
in utter contravention thereof. The directors may choose to take a chance and proceed to allot
shares although minimum subscription has not reached or a prospedctus or statement in lieu of
prospectus has not been filed. Such an allotment is not void initio but as irregular.
The applicant for the shares may avoid the allotment, if he does so within the time specified by
Section 71, namely:
(a) where the allotment was made before the statutory meeting within 2 months after the holding
of statutory meeting of the company and not later; or
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(b) where no statutory meeting is required to be held by the company, within 2 months after the
date of allotment and not later; or
(c) where the allotment was made after the statutory meeting, within 2 months of allotment (and
not later) the allotment shall be voidable despite the fact that the company is in the course of
being wound up.
Within the aforesaid period, the allottee must intimate to the company that he wants to avoid the
allotment. If legal proceedings are required to be taken, these need not be within the period of
two months provided the notice of avoidance was served on the company within the aforesaid
time but they should be reasonably prompt thereafter if they are required to be brought.
Furthermore, Section 71(3) makes every director of a company, who knowingly contravenes or
authorizes the contravention of any of the provisions of Section 69 or Section 70 with respect to
allotment, liable to compensate the company and the allottee for any loss, damages or costs
which they have sustained or incurred thereby. But the proceedings for such compensation can
only be taken within 2 years from the date of allotment. As the allotment is voidable at the option
of the shareholder, the shareholder may keep the shares and yet sue the directors who have
knowingly contravene either of the two sections i.e. 69 and 70 to compel them to make good the
loss to him as a result of the irregular allotment.
31. Types of Meetings under Companies Act, 1956:
1. Meetings of shareholders or members :
(a) Statutory meeting.
(b) Annual general meeting.
(c) Extraordinary general meeting.
(d) Class meetings.
2. Meeting of debenture holders.
3. Meetings of creditors and contributories in winding up.
4. Meeting of creditors otherwise than in winding up.
5. Meeting of directors:
(a) Board meeting.
(b) Committee meeting.
Statutory Meeting (Section 165) : Every public company limited by shares or limited by
guarantee and having a share capital must hold a general meeting of the members of the
company which may be called the statutory meeting. It is to be convened after not less than one
month but within six months from the date which the company is entitled to commence business
(sub-section 1).
A meeting held prior to statutory period of one month is not a statutory meeting. The notice for
such a meeting must say that it is intended to be statutory meeting [Gardner Vs. Iredel (1912) I
Ch.700].
32. (i) 21 days’ clear notice of an AGM must be given [Section 171]. In case notice is sent by post,
then section 53(2) provides that the notice shall be deemed to have been received on expiry
of 48 hours from the time of its posting. For working out clear 21 days, the day of the notice
and the day of the meeting shall be excluded. Accordingly, 21 clear days’ notice has not
been served and the meeting is, therefore, not validly convened.
(ii) Worked as per (I) above, notice falls short by 2 days (i.e. Notice should have been posted on
14.10.05). In other words, notice of the general meeting must have been sent at least 25
days before the date of the meeting i.e. 7th November, 2005 (where the notice is sent by
post)
(iii) According to section 171(2), an AGM called at a notice shorter than 21 clear days shall be
valid if consent is accorded thereto by all the members entitled to vote thereat. Thus, if all
the members of the company approve to the shorter notice, shortfall may be condoned.