Test

Answer Key

Question 1.
As per section 2(85) of the Companies Act, 2013, Small company means a company, other than
a public company, —
(i) paid-up share capital of which does not exceed four crore rupees, and
(ii) turnover of which as per profit and loss account for the immediately preceding
financial year does not exceed forty crore rupees:

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act

In the instant case, as per the last profit and loss account for the year ending 31st March, 2022
of S Pvt. Ltd., its turnover was to the extent of Rs. 1.80 crore, and paid-up share capital was Rs.
80 lakh. Though S Pvt. Ltd., as per the turnover and paid-up share capital norms, qualifies for
the status of a ‘small company’ but it cannot be categorized as a ‘small company’ because it is
the subsidiary of another company (H Ltd.)

Question 2.

(i) In terms of Rule 2 (1) (c) (xvii) if a start-up company receives rupees twenty-five lakh or more
by way of a convertible note (convertible into equity shares or repayable within a period not
exceeding ten years from the date of issue) in a single tranche, from a person, it shall not be
treated as deposit.

In the given case, Zarr Technology Private Limited, a start-up company, received ₹ 30 lacs
from Ritesh in a single tranche by way of a convertible note which is repayable within a period
of six years from the date of its issue. In view of Rule 2 (1) (c) (xvii) which requires a
convertible note to be repayable within a period of ten years from the date of its issue, the
amount of ₹ 30 lacs shall not be considered as deposit.

(ii) In terms of Rule 2 (1) (c) (viii), any amount received from a person who is director of the
company at the time of giving loan to the company shall not be treated as deposit if such
director furnishes to the company at the time of giving money, a written declaration to the
effect that the amount is not being given out of funds acquired by him by borrowing or
accepting loans or deposits from others and further, the company shall disclose the details
of money so accepted in the Board's report.
 In the given case, it is assumed that Rachna was one of the directors of Polestar Traders
Limited when the company received a loan of ₹ 30 lacs from her. Further, it is assumed that
she had furnished to the company at time of giving money, a written declaration to the effect
that the amount was not being given out of funds acquired by her by borrowing or accepting
loans or deposits from others and in addition, the company had disclosed the details of money
so accepted in the appropriate Board's report. If these conditions are satisfied ₹ 30.00 lacs
shall not be treated as deposit.

(iii) By not repaying the deposit of ₹ 50.00 crores and the interest due thereon even after the
extended time granted by the Tribunal, City Bakers Limited has contravened the conditions
prescribed under Section 73 of the Act. Accordingly, following penalty is leviable:

 Punishment for the company: City Bakers Limited shall, in addition to the payment of the
amount of deposit and the interest due thereon, be punishable with fine which shall not
be less than rupees one crore or twice the amount of deposit accepted by the company,
whichever is lower but which may extend to rupees ten crores.

 Punishment for officer-in-default: Swati, being the officer-in-default, shall be punishable

with imprisonment which may extend to seven years and with fine which shall not be less
than rupees twenty-five lakhs but which may extend to rupees two crores.

Further, if it is proved that Swati had contravened such provisions knowingly or wilfully with
the intention to deceive the company or its shareholders or depositors or creditors or tax
authorities, she will be liable for action under section 447 (Punishment for fraud).

(iv) According to Rule 3 (1), a company is not permitted to accept or renew deposits (whether
secured or unsecured) which is repayable on demand or in less than six months. Further, the
maximum period of acceptance of deposit cannot exceed thirty six months.

However, as an exception to this rule, for the purpose of meeting any of its short-term
requirements of funds, a company is permitted to accept or renew deposits for repayment
earlier than six months subject to the conditions that:

(i) such deposits shall not exceed ten per cent. of the aggregate of the paid-up share
capital, free reserves and securities premium account of the company; and

(ii) such deposits are repayable only on or after three months from date of such deposits
or renewal.

In the given case of Shringaar Readymade Garments Limited, it wants to accept deposits of
Rs 50 lacs from its members for a tenure which is less than six months. It can do so if it
justifies that the deposits are required for the purpose of meeting any of its short-term
requirements of funds but in no case such deposits shall exceed 10% ten per cent of the
aggregate of its paid-up share capital, free reserves and securities premium account and
 further, such deposits shall be repayable only on or after three months from the date of such
deposits.

(v) According to section 73 (1) of the Act, no company can accept or renewal of deposits from
public unless it follows the manner provided under Chapter V of the Act (contains provisions
regarding acceptance of deposits by companies) for acceptance or renewal of deposits from
public.

However, Proviso to Section 73 (1) states that such prohibition with respect to the acceptance
or renewal of deposit from public, inter-alia, shall not apply to a housing finance company
registered with the National Housing Bank established under the National Housing Bank Act,
1987.

In the given case, it is assumed that Diamond Housing Finance Limited is registered with the
National Housing Bank and therefore the prohibition contained in section 73 (1) of the Act
with respect to the acceptance renewal of deposit from public shall not apply to it. In other
words, it being an exempted company, can accept deposits from the public from time to time
without following the prescribed manner.

Question 3.

Section 134(3)(c) of the Companies Act, 2013 provides that there shall be attached to
statements laid before a company in general meeting, a report by its Board of Directors, which
shall include a number of statements as prescribed in the sub section including Directors’
Responsibility Statement.

Further section 134(5) states that the Directors Responsibility Statement shall state that:

i. In the preparation of the annual accounts, the applicable accounting standards had been
followed along with proper explanation relating to material departures;
ii. the directors had selected such accounting policies and applied them consistently and made
judgments and estimates that are reasonable and prudent so as to give a true and fair view
of the state of affairs of the company at the end of the financial year and of the profit or
loss of the company for that period;
iii. the directors had taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of this Act for safeguarding the assets
of the company and for preventing and detecting fraud and other irregularities;
iv. that the directors had prepared the annual accounts on a going concern basis; and
v. the directors, in the case of a listed company, had laid down internal financial controls to be
followed by the company and that such internal financial controls are adequate and were
operating effectively; and
vi. the directors had devised proper systems to ensure compliance with the provisions of all
applicable laws and that such systems were adequate and operating effectively .
Question 4.

“Immovable Property” [Section 3(26) of the General Clauses Act, 1897]: ‘Immovable Property’
shall include:

(i) Land,
(ii) Benefits to arise out of land, and
(iii) Things attached to the earth, or
(iv) Permanently fastened to anything attached to the earth.
It is an inclusive definition. It contains four elements: land, benefits to arise out of land, things
attached to the earth and things permanently fastened to anything attached to the earth.
Where, in any enactment, the definition of immovable property is in the negative and not
exhaustive, the definition as given in the General Clauses Act will apply to the expression given
in that enactment.

In the instant case, Vyas sold Land along with timber (obtained after cutting trees) of fifty
tamarind trees of his land. According to the above definition, Land is immovable property;
however, timber cannot be immovable property since the same are not attached to the earth.

Question 5.

According to first proviso to section 137(1) of the Companies Act, 2013, where the financial
statements are not adopted at annual general meeting or adjourned annual general meeting, such
unadopted financial statements along with the required documents shall be filed with the
Registrar within thirty days of the date of annual general meeting and the Registrar shall take
them in his records as provisional till the financial statements are filed with him after their
adoption in the adjourned annual general meeting for that purpose.

According to second proviso to section 137(1) of the Companies Act, 2013, financial statements
adopted in the adjourned AGM shall be filed with the Registrar within thirty days of the date of
such adjourned AGM with such fees or such additional fees as may be prescribed.

In the instant case, the accounts of Sun Ltd. were adopted at the adjourned AGM held on 15th
October, 2018 and filing of financial statements with Registrar was done on 12th November,
2018 i.e. within 30 days of the date of adjourned AGM.
Question 6.

Relevant Provision:

Shelf prospectus means a prospectus in respect of which the securities or class of securities
included therein are issued for subscription in one or more issues over a certain period without
the issue of a further prospectus

According to Section 31 of the Company Act, 2013 any class or classes of companies, as the
Securities and Exchange Board may provide by regulations in this behalf, may file a shelf
prospectus with the Registrar at the stage:

(i) of the first offer of securities included therein which shall indicate a period not exceeding
one year as the period of validity of such prospectus which shall commence from the date of
opening of the first offer of securities under that prospectus, and
(ii) in respect of a second or subsequent offer of such securities issued during the period of
validity of that prospectus, no further prospectus is required.

The other formalities related to such repeated/subsequent issue of shares–

A company filing a shelf prospectus shall be required to file an information memorandum

containing all material facts relating to new charges created, changes in the financial position of
the company as have occurred between the first or previous offer of securities and the
succeeding offer of securities and such other changes as may be prescribed, with the Registrar
within the prescribed time, prior to the issue of a second or subsequent offer of securities under
the shelf prospectus.

Conclusion:

Thus, Prakhar Ltd. can follow the above provisions and can issue a shelf prospectus.

Question 7.

As per section 139(6) of the Companies Act, 2013, the first auditor of a company, other than a
Government company, shall be appointed by the Board of Directors within thirty days from the
date of registration of the company and such auditor shall hold office till the conclusion of the
first annual general meeting

Whereas Section 139(1) of the Companies Act, 2013 states that every company shall, at the
first annual general meeting (AGM), appoint an individual or a firm as an auditor of the company
who shall hold office from the conclusion of 1st AGM till the conclusion of its 6th AGM and
thereafter till the conclusion of every sixth AGM.
As per section 139(2), no listed company or a company belonging to such class or classes of
companies as may be prescribed, shall appoint or re-appoint an individual as auditor for more
than one term of five consecutive years.

As per the given provisions following are the answers:

(i) Appointment of Mr. Tel by the Board of Directors is valid as per the provisions of
section 139(6).
(ii) Appointment of Mr. Tel at the first Annual General Meeting is valid due to the fact that
the appointment of the first auditor made by the Board of Directors is a separate
appointment and the period of such appointment is not to be considered, while Mr. Tel is
appointed in the first Annual General Meeting, which is for the period from the conclusion
of the first Annual General Meeting to the conclusion of the sixth Annual General Meeting.
(iii) As per law, auditor appointed shall hold office from the conclusion of 1st AGM till the
conclusion of its 6th AGM i.e., for 5 years. Accordingly, here appointment of Mr. Bell,
which is for 4 years, is not in compliance with the said legal provision, so his appointment
is not valid.

Question 8.

Section 203(3) of the Companies Act, 2013 provides that whole time key managerial personnel
shall not hold office in more than one company except in its subsidiary company at the same
time. With respect to the issue that whether a whole time KMP of holding company be appointed
in more than one subsidiary companies or can be appointed in only one subsidiary company.

It can be noted that Section 13 of General Clauses Act, 1897 provides that the word ‘singular’
shall include the ‘plural’, unless there is anything repugnant to the subject or the context. Thus,
a whole time key managerial personnel may hold office in more than one subsidiary company as
per the present law.

Question 9

(i) As per section 141 (3)(d)(i) of the Companies Act, 2013, read with Rule 10 of the Companies
(Audit and Auditors) Rules, 2014, a person is disqualified to be appointed as an auditor if
he, or his relative or partner holding any security of or interest in the company or its
subsidiary, or of its holding or associate company or a subsidiary of such holding company.
Hence, Maninder is disqualified to be appointed as an auditor in Gajendra Ltd. as he holds
securities in the Narender Ltd. (associate company of Gajendra Ltd.)

(ii) As per section 141(3)(d)(ii) a person is disqualified to be appointed as an auditor if he, or

his relative or partner is indebted to the company, or its subsidiary, or its holding or
associate company or a subsidiary of such holding company, in excess of Rs. 5 Lacs.
Hence, Dinesh is not disqualified as the limit of indebtedness for the auditor or his relative
is exceeding Rs.5,00,000 and in this case Dinesh's son owes only Rs. 99,000.
(iii) As per section 141(3)(h), a person who has been convicted by a court of an offence involving
fraud and a period of 10 years has not elapsed from the date of such conviction , shall not
be qualified to be appointed as an auditor of a company.
Though Rajender was convicted by a court for an offence involving fraud but as a period of
10 years have elapsed, hence, Rajendra is qualified to be appointed as statutory auditor of
Gajendra Ltd.

MCQ

1. B
2. A
3. D
4. C
5. B
6. C
7. B
8. C
9. B
10. C
11. A
12. C
13. A
14. B
15. D
16. C
17. C
18. D
19. A
20. C