Case Studies under Company Law – Principles | Concepts

According to Section 128 of the Companies Act, 2013, Moon Star Ltd., being a company incorporated in India with a branch office in California, is required to maintain proper books of account at its registered office in Delhi and also at its branch office in California. The books of account must give a true and fair view of the state of affairs of the company, including its branch operations. Therefore, Moon Star Ltd. must adhere to these provisions and ensure proper maintenance of books of account at both locations.

Section 141 of the Companies Act, 2013 emphasizes the importance of auditor independence. In the case of Moon Star Ltd., the investigation revealed that the auditors compromised their independence by charging substantial audit fees and consultancy income, which undermined their objectivity. This compromised independence led to the auditors signing off on inaccurate financial statements to protect the management of the company. Such instances underscore the critical need for auditors to maintain independence to ensure they can objectively report on the financial affairs of the company.

As per Section 210 of the Companies Act, 2013, shareholders holding 75% of the paid-up share capital of Moon Star Ltd. have the right to approach the Central Government to order an investigation into the affairs of the company. This provision allows shareholders to petition for an investigation if they believe it is necessary for the protection of the company’s interests.

Additionally, under Section 206 of the Companies Act, 2013, the Central Government has the authority to initiate a suo motu investigation into the affairs of Moon Star Ltd. if it deems it necessary in the public interest or in the interest of the company. Therefore, both shareholders and the Central Government have the power to order investigations into the affairs of the company under the provisions of the Companies Act, 2013.

Under Section 77(1) of the Companies Act, 2013, it is mandatory for every company, whether public or private, to register charges created on its properties or assets, whether within or outside India. The registration must be done with the Registrar of Companies within 30 days of the creation of the charge. The registration requires submission of particulars of the charge along with any related instruments and payment of prescribed fees.

In the case of Sakshi Limited acquiring an immovable property in London and creating a charge in favour of a UK bank to secure a loan, the property is situated outside India. According to Indian law, charges created on properties outside India are mandatorily required to be registered in India.

Sakshi Limited would be required to register the charge under Indian law. This ensures transparency and protection for creditors and stakeholders within India.

Section 212(2) of the Companies Act, 2013 clearly delineates the jurisdictional authority concerning investigations into corporate fraud. It states that once a case has been assigned by the Central Government to the Serious Fraud Investigation Office (SFIO), no other investigating agency of the Central Government or any State Government can proceed with the investigation. This provision is aimed at streamlining investigations and avoiding duplicity or conflicting actions by multiple agencies.

In the case of Sakshi Limited, if the central government assigned the investigation to SFIO, then the CBI must comply with this directive. The SFIO, being a specialized body under the Companies Act, 2013, is entrusted with investigating serious corporate fraud cases. Its authority supersedes that of general investigating agencies like the CBI in matters falling under the purview of the Companies Act.

Therefore, the CBI would not be justified in contesting the transfer of the investigation to SFIO once it has been officially assigned by the central government. The legal framework is designed to ensure efficient and effective investigation of corporate fraud, with SFIO possessing specialized expertise in handling such complex cases.

According to Section 91 of the Companies Act, 2013, a company may temporarily close its register of members, debenture holders, or other security holders for up to a maximum of 45 days in a financial year, with no single closure period exceeding 30 days. The closure must be preceded by at least 7 days’ notice to shareholders, or a shorter period if specified by the Securities and Exchange Board of India (SEBI) for listed companies.

In the case of Sunny Ltd., it closed its registers at one stretch for 31 days during the financial year 2017-18. This action exceeded the maximum permissible duration of 30 days for a single closure period as stipulated by Section 91. However, the total aggregate closure period of 45 days in the financial year was within the statutory limit.

While Sunny Ltd. complied with the aggregate limit, it violated the provision regarding the maximum duration for a single closure period. This non-compliance raises concerns regarding transparency and shareholder rights, as uninterrupted access to registers is crucial for investors to exercise their rights and participate effectively in company affairs.

In conclusion, while Sunny Ltd. adhered to the aggregate closure limit under Section 91 of the Companies Act, 2013, it should ensure future compliance with the maximum duration for a single closure period to uphold transparency and governance standards. This approach fosters investor confidence and aligns with best practices in corporate governance.

Under Section 213 of the Companies Act, 2013, the National Company Law Tribunal (NCLT) has the authority to order an investigation into the affairs of a company if circumstances suggest fraudulent conduct, oppression of members, or unlawful practices. Importantly, the section allows for such investigations to be initiated not only by the company itself or its shareholders but also by any other person. This includes recognized trade unions who can demonstrate that the business of the company is being conducted with intent to defraud its creditors, members, or any other person, or in a manner oppressive to its members.

In the case of Sumit Limited, objecting to the trade union’s application on grounds of locus standi is not tenable under the Companies Act. The Act explicitly allows applications from any concerned party who has reasonable grounds to suspect fraudulent or oppressive business conduct. Therefore, the recognized trade union of Water Purifier Ltd. has the legal right to make an application before the Tribunal seeking an investigation into Sumit Limited’s affairs under Section 213.

According to Section 82 of the Companies Act, 2013, a company is required to file a satisfaction of charge with the Registrar within 30 days of the company satisfying the charge in full. The law mandates that this filing includes a certificate of satisfaction of charge issued by the charge holder (in this case, the scheduled bank).

While the Act imposes strict timelines for filing, it also recognizes practical challenges that may arise, such as delays in receiving necessary documents from external parties like banks. In such cases, the company is not held liable for late filing if the delay is due to circumstances beyond its control. However, Sumit Limited should promptly initiate the process of obtaining the no due certificate and release letter from the bank. Once these documents are received, the company must file the satisfaction of charge without further delay to comply with statutory requirements under Section 82 of the Companies Act, 2013.

According to Section 134(1) of the Companies Act, 2013, financial statements, including the Balance Sheet and Statement of Profit & Loss, must be approved by the Board of Directors before being signed on behalf of the Board. The signatures must include –

The chairperson of the company, if authorized by the Board; or

Two directors of the company, one of whom shall be the managing director, if any.

Additionally, the financial statements must be signed by the CEO, CFO and Company Secretary, if appointed.

In the case of Mithi Sugar Limited, the financial statements were authenticated by Mr A and Mr B, who are directors of the company. However, the managing director, Mr R, and the Company Secretary, Mr Anupam, did not participate in the authentication process.

According to Section 134(1), the involvement of the managing director in the authentication of financial statements is mandatory when such a position exists in the company. Moreover, the Company Secretary’s signature is also required unless the company is exempted from appointing one under the law. Therefore, the authentication by only Mr A and Mr B is not valid under the Companies Act, 2013, as it does not meet the statutory requirements for approval and authentication of financial statements.

In accordance with Section 134(1) of the Companies Act, 2013, in the case of a One Person Company (OPC), the financial statements must be approved and signed by the sole director of the company. This director is responsible for ensuring that the financial statements accurately reflect the company’s financial position and performance during the financial year.

Therefore, in an OPC scenario, the authentication process involves the sole director signing all financial statements, including the Balance Sheet, Statement of Profit & Loss, and Board’s Report. This ensures compliance with the legal requirements under the Companies Act, 2013, regarding the approval and submission of financial statements to the auditor for their report.

No, a creditor is not entitled to make an application for the investigation of the affairs of Joy Ltd. to the Tribunal. According to the provisions of Section 210 of the Companies Act, 2013:

(a) Order of Central Government – The Central Government may order an investigation into the affairs of a company if –

• It receives a report from the Registrar or inspector under Section 208.
• A special resolution is passed by the company indicating that its affairs ought to be investigated.
• It deems it necessary in the public interest.

(b) Order of Tribunal – The NCLT can order an investigation into the affairs of a company if, in any proceedings before it, it determines that the company’s affairs ought to be investigated.

(c) Appointment of Inspectors – For the purpose of investigation, the Central Government may appoint one or more persons as inspectors to investigate the affairs of the company and report thereon.

Therefore, the mechanism provided under Section 210 does not empower a creditor directly to apply for an investigation. Instead, a creditor like Mr Ramesh must rely on the Central Government or the NCLT to take action based on the established criteria. Consequently, Mr Ramesh does not have the standing to directly initiate an investigation application to the NCLT.

No, the contract between XYZ Company Ltd. and ABC Ltd. for arranging finance is considered ultra vires and therefore invalid. This is because the act of arranging finance falls outside the object clause of the company’s Memorandum of Association.

According to company law principles, a company can only engage in activities that are within the scope of its Memorandum of Association. In this case –

• Ultra Vires Doctrine – The doctrine of ultra vires restricts a company from undertaking activities beyond those specified in its object clause. Any contract or activity that falls outside the specified objects is ultra vires and void.
• Object Clause – The Memorandum of Association of XYZ Company Ltd. authorizes the company to engage in other trades or businesses deemed advantageous by the board of directors. However, this general authorization does not permit the company to undertake activities that are fundamentally different from its specified objects unless the memorandum is first amended.
• Specific Purpose Requirement – The board of directors cannot use the general authorization clause to justify engaging in a business that is outside the company’s primary objects without first altering the memorandum in compliance with the legal requirements. This includes obtaining approval for any substantial changes in the company’s activities.
• Ultra Vires Contracts – Since arranging finance was not a specified object in the Memorandum of Association, and the memorandum was not amended to include this activity, the contract with ABC Ltd. is beyond the company’s powers (ultra vires) and, thus, invalid. The company has no inherent power to engage in arranging finance, and the board cannot defend this action based on the general authorization clause without prior alteration of the memorandum.

In summary, the contract entered into by XYZ Company Ltd. with ABC Ltd. for arranging finance is invalid due to its ultra vires nature, as the company did not first alter its Memorandum of Association to include such activities within its scope.