For provisions of Section 372A relating to inter-company loans and investments

In the given question, the total paid-up share capital of the company is equal to Rs. 9,90,000 (Equity) + Rs. 1,50,000 (Preference) = Rs. 11,40,000. The total amount of free reserves available for distribution of dividends works out to Rs. 9,30,000 (comprising of General Reserves, Balance in Profit and Loss Account, Dividend Equalisation Reserves; and the balance in Securities Premium Account). The aggregate of Paid Up Share Capital and Free Reserves amounts to Rs. 20,70,000. 60 per cent of this amount works out to Ri;. 12,42,000 which is higher than the 100 per cent of Free Reserves, namely, Rs. 9,30,000. Accordingly, the company can invest by way of loans and investments in other body corporates upto Rs. 12,42,000 by passing a unanimous resolution at a meeting of Board of Directors. In the present case, the investments already made in other body corporates amount to Rs. 5 lakhs which include equity shares in A Ltd. of Rs. 1,25,000. A Ltd. being wholly owned subsidiary of XYZ Ltd. is exempted from the provisions of Section 372A. Accordingly, total investments in other body corporates already made amount to Rs. 3,75,000. The proposed investments include a loan of Rs. 10,00,000 to A Ltd. which being the wholly owned subsidiary to XYZ Ltd. shall be exempted; debentures in B Ltd. of Rs. 2,25,000 and shares of Shree Ltd. Rs. 95,000/ - which amount to Rs. 3,20,000 [Rs. 2,25,000 + Rs. 95,000). Thus, the aggregate ofloans and investments already made and proposed to be made works out to Rs. 6,95,000/- [Rs. 3,75,000 + Rs. 3,20,000] which is very much within the permissible ceiling of 60 per cent of Paid up share capital and Free reserves. Accordingly, the Board of Directors shall be within their powers to make the proposed additional investments by passing a unanimous resolution in a meeting of the Board.

The provision that the Court is to take into account the company’s contingent and prospective liabilities is important

A company which has to date paid all its debts as they fall due may still be ordered to be wound up if consideration of its assets and liabilities shows that it will or may shortly be unable to do so.

However, please note that the effect of consolidating the provisions with respect to inter-company loans and investments is that if a company proposing to make any

loan, etc., to any other body” corporate’has, or is proposing, to make any investment in. any other body corporate, then it is the aggregate of the loans, guarantees, etc., ‘and investments which cannot exceed the aforesaid ceiling.

2. Approval by way of Special Resolution. Where the aggregate of the loans/investments, etc., so far made and the amount for which guarantee or security so far provided to all other bodies corporate, alongwith investments/loan, guarantee o.r security proposed to be made or given exceeds the aforesaid limits, no loan shall be made or guarantee given or security provided unless previously authorised by a special resolution passed in a general meeting.

3. Matters to be Specified in the Notice of Special Resolution. Second proviso to sub-section (1) of Section 372-A requires that the notice of the special resolution as aforesaid, must indicate clearly:

(i) the specific limits;

(ii) the particulars of the body corporate in which loan or security or guarantee is

proposed to be given; ( iii) the purpose of the loan, security or guarantee;

(iv) specific sources of funding and such other details.

4. Rate of Interest. No loan to any body corporate shall be made at the rate of interest lower than the prevailing ‘bank rate” of interest.

5. Unanimous Approval of the Board. Sub-section (2) of Section 372-A disallows making of inter-corporate loans, guarantee, etc., investment by the Board of Directors of a company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the Directors present at the meeting.

6. Approval of the Public Financial Institution. Where any term loan is subsisting, the prior approval of the public financial institution (referred to in Section 4A) must be obtained. However, the prior approval of a public financial institution shall not be required where the aggregate of the loans, guarantees, etc., and investments so far made in all other bodies corporate alongwith the investments, loans, etf:., proposed to be made does not exceed the aforesaid limit of 60 per cent. But, the approval of the public financial institution shall be necessary where the company has made a default in repayment of loan instalment or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

7. Default in Repayment of Deposits. Sub-section (4) of Section 372-A prohibits a company which has defaulted in complying with the provisions of Section 58A to, directly or indirectly; (a) make any loan to any body corporate; (b) give any guarantee, or provide security, in connection with a loan made by any other person to, or to any other person by, any body corporate; till such default is subsisting.

8. Register of Loans [Section 372-A(S)]. Every company shall keep a register showing the following particulars with respect to every loan made, guarantee given or security provided by it in relati{}n to any body corporate(s):

(i) the name of the body corporate;

(ii) the amount, terms and purpose of the loan or security or guarantee;

(iii) the date on which the loan was made; and

(iv) the date on which the guarantee was given or security was provided in

connection with a loan.

What do yOU understnnd by trnnsfer of shares

‘shares’ the ownership of which is transferable. Tlus right to transfer

shares is given to the shareholders by Section 82 of the Companies’ Act. .

1956, which states that “the shares or the interest of any member in a company shall re a movable property. transferable in the manner prescribed 111 the

Articles rJf the company”. Commenting on transferability of the shares of a Company, Justice Noonan MacLeod observed. “shares are a peculiar kind of

movable property which cannot pass from hand to hand like bales of cotton. The property in the shares belongs to the registered shareholders and cannot

be transferred to another except according to the articles of the company [AIR 1923 Born. 423]. The Articles may impose

certain restrictions or lay down the manner in vhkh shares can be transferred, but it cannot take away this right of the shareholders right away.

A transfer of share is said to take place” When a registered shareholder transfers his shares voluntarily to another either by sale or otherwise”. Thus,

involuntary transfers by way of court auction or sale of forfeited shares do not fall within the purview of transfer of shares [Unity Co. Pvt. Lid r,-:,. Diamond

Sugar Mills).Shares and Del)Stories. With a view to ensuring free transferability of securities of public companies, The Depositories Act 1996 has

inserted a new section III A in the Companies Act. This section provides that the shares debentures of a public company whether listed or not shall be

freely transferable. The Board of Directors or the concerned depository does nt

have any discretion whether ur not to register the transfer of the security if the company will register the transfer as soon as it receives instrument of

transfer. If securities are in depository mode, the transfer will be effected by the depository immediately on receipt of the intimation iu appropriate form

from the participants. Under both the cases, the transferee shall be entitled to every right, including voting right associated with the security as soon as the

intimation about the transaction is received by the company or depository.

Procedure for the tenser of Shares. Ordinarily shares can be transferred by a person whose name appears in the Register of members and who is

holder thereof. As per Section 109, a legal representative of a deceased member, although not a member at the time of transfer, can also

transfer shares. Oral transfers are not recognized by the Act. Transfers. made during winding up are void unless sanctioned by the liquidator. in case of

voluntary winding up, or by the court in other types of winding up (Section 536).

In addition to complying with the provision of the Articles relating to the transfer of shares the following procedure must be followed before a company can

Section 150 of the Companies Act requires every company

a register of its members and enter therein the following particulars: 1. the name and address, and the occupation, if any, of each member; 2.. In the

case of a company having a share capital, tlle shares held

by each member with distinctive numbers of such shares, except where such shares are held with a depository; and the amount paid or agreed to be

considered as paid on tIlose shares;

3. the date at which each person was entered in the register as a member; and

4. tlle date at which any person ceased to be a member.

Where the company has converted any of its shares into stock and notified this conversion to the Registrar, the Register of Members must. show the

amount of stock held by each member instead of the shares so converted which were previously held by him.

In the case of joint shareholders, names of all the joint shareholders must be entered in the register and the notices, etc; be sent to the first named joint

shareholder. Who has to Maintain Register of Members? The duty to maintain register of members is that of tIle company and the person incharge oi the

secretarial department as Section 150 (2) provides that in the event of failure to maintain the register, the company, and every officer who is in default,

shall be punishable with fine which may extend to Rs. 500 for each day during which the default continues.

The managing director” of a company

company had power to me money upto Rs. 30,000 without the consent of mumbles in general meeting. They theme’s lent Rs. 50,000 to the company against debentul”es. Is the company liable Solution. On the facts of the case, directors could be imputed with the knowledge of irregularity in the transaction. The doctrine of indoor management
cannot be invoked in this case. The company is liable only upto Rs. 30,000.

of the company. The Airtimes pended that the managing dh”Cctol” could do so only on a l”Csolution of the general meeting. No such approval had hen taken. Is the company liahle on the bill ‘!

Yes, the company IS liable on the basis of rule in Truant’s CHse. An outsider is not obliged to look into the regularity of internal proceedings [Royal

Briti,h Bank Company issued a share certificate in favor of ‘A’ which appal’ently complied with the company’s articles as it was pUI’plll1cd to be signed hy two

directors and the and it had company’s seal affixed to it. In fact, the secl’etl1l’Y had forged the signatures of the and affixed the seal without .authority. Is the cel1ificate binding on the company?

No. The certificate issued is a mere forgery. Forgery is nullity. A company ClIO never be held bound by forgeries committed by its ofticers.

The doctrine of indoor management only applies to irregularities that otherwise might elect a genuine transaction, but it cannot apply to a forgery. Can the Powel’ to alter” articles be taken away by any provision in the memorandum or lII.ticles 01’ by a contract ?No. The power to alter articles is a statutory power given by Section 31 nod it cannot be neat by a contract or any provision in the memorandum or articles.

Doctrine is not applicable where a precondition is to be fulfilled

Doctrine is not applicable where a precondition is to be fulfilled before company itself can exercise a particular power Pacific Coast Coal Mines Vs.understand by Constructive Notice of the Memormdum and Articles of Association of a limited Company ADs. The Memorandum and Articles of Association becomes public documents when they are registered with the Registrar of Companies. The office of the Registrar of Companies is a public office. Anybody can inspect these documents by paying a nominal fee. Every person dealing with a company is
deemed to have notice of the contents of these documents, and is presumed to have understood them properly. This is known as Constructive Notice of Memorandum and Articles. The legal effect of this doctrine is that if a person deals with a company in a mane unhitch is inconsistent with the provisions of these documents, he cannot acquire any rights hereunder. The doctrine operates against outsider dealing with the company. It prevents an outsider from alleging that he did not know the Memorandum or the Articles of the company. Freeman & Luckier Vs. Buckhurst Park Properties Ltd.] whether or not he actually reads them, he is presumed to have read them as well as understood them properly. Oak Bank Oil Co. Vs. Crum]. If person enters into a contract with the company, he must ensure before hand that such contract falls within the powers of the company otherwise he camlet enforce it later on, it being ultra virus.
The doctrine of constructive notice of tile Memorandum and Articles, however, is not a positive doctrine but a negative one. It is like doctrine of estoppal. It does not operate against the company. It operates only against an outsider dealing with the company. However, there is one exception to the doctrine of constructive notice.

Reduction of Number of Members below statutory minimums

1. Reduction of Number of Members below statutory minimums (Sec. 45). If at any time the number of members of a company is reduced below seven (in


case of a public company) or below two (in case of a private company) and the company carries on business for more than 6 months while the number is
so reduced, every person who is a member of the company during that time (i.e., after that 6 months) and is aware of this fact shall be severally liable for
the repayment of the whole debts of the company contracted during that time and may be severally sued therefor.
2. Section 147 requires that the name of the company met be fully and properly mentioned in all documents issued by it. If an
officer of the company, or any person on its behalf, enters into any contract or Accepts any bill of exchange or orders for goods, etc. without mentioning
the name of the company as per the requirements of Sec. 147 lofter's Ac., or without an indication that he is making the contract on behalf of the company,
such a person will be personally liable for such an act, contract," etc., unless it is duly paid by the company.
3. To Establish the Relationship of Holding and Subsidiary Company. Where one company controls the management of another company. the formers
called a 'holding company' and the latter a 'subsidiary company'. Legally, they are considered .to be separate entities. In certain cases, however, a
subsidiary company may lose its separate entity. At the end of the financial year, a holding company is required to present its final accounts, together with
the final accounts of its subsidiaries, to its shareholders in accordance with provisions of Sees. 212 and 214 of the Companies Act, 1956. Thus, for
purposes of accounts, a holding company and its subsidiaries are treated as one entity. Similarly, the court may refuse the separate entity of the
subsidiary company where profits of the subsidiary company are treated as those of the holding company or where the business of the subsidiary
company is controlled by the nominees of the holding company.
4. For Investigation of Ownership of Company. Sec. 239 and Sec. 247 authorities the Central Government to appoint one or more inspectors to investigate


and report on the membership of any company for the purpose of determining the time persons who are financially interested in the company and who
control or materially influence its policy.
5. Fraudulent Trading. (Sec. 542). If in the course of winding up of a company, it appears that any business of the company has been carried on with intent
to defraud creditors of the company or any other persons or for any fraudulent purpose, those who are knowingly parties to such conduct of business may


be held responsible for all or any of the debts of the company.
6. Failure to Refund Application MO Iiey. Where the company fails to allotthe shares to the shareholders within 120 days of the issue of prospectus, it must
refund the application money to the unsuccessful applicants within the next 10 days or within 130 days of the issue of prospectus. If the company fails to
refund the application money within 130 days of the issue of prospectus, the directors of the company shall be jointly and severally liable for such refund.
7. Mis-statement in the Prospectus [Sec. 62]. The prospectus of a
company must represent to the public the true facts relating to the affairs of the company. In the case of any misrepresentations (untrue statement) in the
prospectus, then every director, promoter of the company and every other person who is responsible for such mis-statement and who authorized the
issue of prospectus shall be liable to pay compensation to the subscribers who purchased the shares on the faith of such untrue statement contained in
the prospectus. .
8. Non,.payment of Income Tax [Sec. 179 of the Income Tax Act]. When a private company is wound up and the income tax assessed on the
company whether before, or in the course of or after liquidation, in respect of any income of any previous year is unpaid, then every person who was
director
of that company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax.
9. Liability of Promoters for Pre-incorporated Contracts. Promoters of the company are persoJ1jJly liable for all those pre-incorporated contracts which are


not adapted by the company after incorporation.
10. Ultra-vireos Acts. Ultra vireos acts are those acts which are not authorized or are beyond h powers of the company. The directors of the company are
personally liable for all ultra vires acts even if they are done on behalf of the company. The ultra vires acts may be
(a) VIta-vires.the company, (b) ultra-vires the directors, if the company does not adopt those acts, and (c) if such acts are in the nature of costs.