Ceiling on number of audit (Ss. 224 and 233B)

 

Sub-section (113) and first proviso thereof to section 224 and sub-section (2) of section 233B has been amended by the Companies (Amendment) Act, 1988. As a result of the amendment, any partner of a firm of Chartered Accountants, who is in full time employment elsewhere is not to be taken into account while computing the ceiling on number of companies that can be under audit with the firm. A person in whole-time employment elsewhere will not be eligible to be appointed as Auditor of a company. The provisions of section 224(l B) applicable to the statutory auditors in regard to ceiling on audit, now apply to Cost Auditors also. The provisions of sub-section (IB) have been made inapplicable on and after the commencement of the Companies (Second Amendment) Act, 1999.

 

The said Amendment Act has also inserted new clause (aa) in sub-section (4) of section 224 providing that in case of an auditor appointed under section 619 by the Comptroller.

 

 

Appointment of Auditors (S. 224A and 224)

 

The relevant date of determining whether the financial institution holds 25% or more shareholding of the company is the date on which the Special Resolution is to be passed, that is, the date of Annual General Meeting. It may so happen that between the date of the notice calling the Annual General Meeting wherein Special Resolution is proposed and the actual date of the Annual General Meeting, the percentage in the shareholdings of the institution falls below 25%. In that case, it will not be necessary to pass the Special Resolution and an Ordinary Resolution will suffice. However, if during the intervening period any financial institution mentioned in section 224A(l) acquires 25% or more of the share capital of the company, the Annual General Meeting may be adjourned and a fresh notice proposing appointment of the Auditors by passing a Special Resolution may be given. (Department's Circular No. 2/76(inn6-CL. V) dated 5-6-1976).

 

Auditors of a company are appointed by the Central Government if at an annual general meeting no auditors are appointed. Such a company is required to give notice to the Central Government within 7 days of such a power of the Central Government becoming exercisable. It such a notice is not given to the Central Government, the company and every officer of the company who is in default will be punishable with fine of up to Rs. 5,000/-.

 

Where appointment by the Central Government becomes necessary the application has to be made to the Regional Director to whom powers of the Central Government under sub-sections (3), (4) and (8)(a) of section 224 have been delegated. (Notification GSR No. 506(E), dated 24-6-1985). This is no prescribed form of this application".

 

Under section 224A appointment of auditors in certain cases must be made with the approval of the company by passing a special resolution. The Department of Company Affairs has issued a clarification in connection therewith by General Circular No. 14/2001, dated 16th July, 2001 stating that the three sub-clause (a), (b) and (c) of subsection (1) of section 224A are not mutually exclusive and therefore the provisions of sub-section (1) would apply to all cases of shareholdings in any combination by any of the institutions mentioned in these three clauses.

 

Appointment of new Auditors/Removal of existing Auditors.

(S.225)

 

Failure to forward a copy of the notice of a resolution to be moved under sub-section (1) of section 225 to a retiring Auditor whom it is proposed to remove would make the resolution illegal and ineffective. (Department's Circular No. 35/6/68-CL. III, dated 18-11-1969). The Central Government is empowered under section 408(6) of the Act as amended by the Companies (Amendment) Act, 1988, to direct a company to remove its Auditor and appoint another in his place.

 

Information given in Board's report instead of in the accounts

 

S. 222 proviso-Information given in Board's report instead of in the accounts-Board Resolution

 

WHEREAS the company is required to give detailed information of value of imports, expenditure in foreign currency and earnings in foreign exchange as per paragraph 4-D of Part II of Schedule VI;

 

AND WHEREAS the said information is allowed to be given in a form of a statement annexed to the accounts of the company;

 

AND WHEREAS under proviso to section 222 of the Companies Act, 1956 the said information can be given in the Board's report instead of in the accounts.

 

NOW, THEREFORE, IT IS RESOLVED that the said information be given in the Board's report of the company for the financial year 2001-2002.

 

PRACTICE NOTES

 

1. Directors' report outside the purview of audit.-It may be noted that the directors' report by itself does not come within the purview of the audit under section 227. But if it includes any information properly required to be given in the balance sheet or profit and loss account, the audit must extend to the information so included.

 

2. Documents annexed and attached-The auditors' report is required to be attached and the profit and loss account is required to be annexed to the balance-sheet of a company. The term 'annex' apparently means that it is to be treated as forming a part of the document and the term 'attach' signifies a separate document fastened to it. The distinction between documents 'annexed' and documents 'attached' to the balance-sheet, which is made in sections 216 and 222 of the Act, is imported and should be fully appreciated. The documents 'annexed' to the balance-sheet include the list of investments and particulars required by section 372A, and any information given in a schedule where permitted to be so done. The documents and statements relating to subsidiary companies specified in section 212 are required to be 'attached' to the balance sheet. Again the directors' report and auditors' report are 'attached' to the balance-sheet. It should be noted that the auditors' report covers all documents which are 'attached' to the balance sheet. (Compendium of Statements & Standard Auditing, 4th Edn. 1995, p.a. 46, paras 15.)

 

 

Appointment of First Auditors

 

S. 224-Appointment of First Auditors-Board Resolution

 

"RESOLVED that the consent of the Board of Directors be and is hereby given to the appointment of M/s. S.B. Gupta and Co., Chartered Accountants, as first Auditors of the Company to hold office from the date of its incorporation to the conclusion of the first Annual General Meeting of the Company on a consolidated remuneration of Rs. 1,80,000/- ­for auditing the accounts of the company.

 

RESOLVED FURTHER that the Secretary of the company be and is hereby directed to give intimation of this appointment to the Auditors so appointed within seven days of the date of the resolution."

 

OR

 

"RESOLVED that M/s. ABC & Co., Chartered Accountants, be and are hereby appointed as the Auditors of the Company until the conclusion of the next Annual General Meeting and that intimation of this appointment be sent to the Auditors so appointed within seven days of the date of the resolution."

 

OR

 

"RESOLVED that M/s. ABC & Co., Chartered Accountants, the Auditors of the Company be paid a fee of Rs. 1,00,000/- for audit of the accounts of the Company for the year ending 31st March, 2002, plus out-of-pocket expenses."

 

OR

 

"RESOLVED that M/s. S.B. Gupta & Co., Chartered Accountants shall not be reappointed as Auditors of the Company after their present term expires at the next Annual General Meeting of the Company.

 

OR

 

"RESOLVED that M/s. ABC & Co., Chartered Accountants, be and are hereby appointed Auditors of the Company to fill the vacancy caused by the resignation of M/s. S.B. Gupta and Co., Chartered Accountants, to hold office until the conclusion of the next Annual General Meeting and that their remuneration be determined by the Board of Directors."

 

OR

 

"RESOLVED that M/s. A.B. Gupta & Co., Chartered Accountants, who are the retiring Auditors of the Company and who have offered themselves for re-appointment as such and who are not disqualified to act, within the provisions of section 224(1B) of the Companies Act, 1956, be and, are hereby re-appointed as Auditors of the Company to hold office until the conclusion of the next Annual General Meeting of the Company and that they may be paid a fee of Rs. 90,000/- for auditing the accounts of the company plus actual out-of-pocket expenses incurred by them."

 

OR

 

"RESOLVED that M/s. S.P. Chopra & Co., Chartered Accountants, the retiring Auditors, having offered themselves for reappointment, be and are hereby reappointed as Auditors of the Company to hold office from the conclusion of this Annual General Meeting and up to the conclusion of the next Annual General Meeting of the Company.

 

RESOLVED FURTHER that M/s. S.P. Chopra & Co., be paid by way of remuneration a fee of Rs. 60,000/- in addition to reimbursement of actual out-of-pocket expenses and that the Board of Directors of the company be and are hereby also authorised to appoint Branch Auditor of the company in consultation with M/s. S.P. Chopra & Co. and also to fix their remuneration."

 

OR

 

"RESOLVED that the consent of the Company be and is hereby given to the Board of Directors to have the accounts of the branches/department of the Company for the financial year ending 31st March, 2002, audited by a person or persons qualified for appointment as Auditors of the company in consultation with M/s. S.P. Chopra & Co., the statutory Auditors of the Company and to fix their remuneration."

 

PRACTICE NOTES

 

1. Special notice required for appointing different auditors.-If it is proposed not to appoint the existing Auditors again, a resolution as required pursuant to sub-section (2) of section 224 has to be passed. It will also be necessary to intimate the retiring Auditors also that they are not being re-appointed.

 

2. Right of representation of retiring auditors.-The retiring Auditors have a right of representation to the shareholders in writing as well as by addressing them orally at the General Meeting.

 

3. Provisions of section 224(2) mandatory.-The provisions of section 224(2) are mandatory and have to be complied with.

 

4. Obtaining certificate as to limits of audit from auditors.-Before proposing appointment/reappointment of Auditors, it is advisable to obtain a certificate from them pursuant to section 224(l) and to ensure that they are not disqualified from accepting the appointment.

 

5. Intimation to Central Government if no auditor appointed.-If no appointment is made at the General Meeting, intimation has to be given to the Central Government within seven days who shall then appoint the Auditors of the company. If any default is made in doing so, the company and every officer of the company who is in default will be punishable with fine of up to Rs. 5,000/-.

 

6. Casual vacancy be filled in by Board.-However, if there is a casual vacancy occurring during the year by way of resignation of Statutory Auditors of the company, the Board can fill in the casual vacancy and the person appointed in the vacancy shall hold office until the conclusion of the next Annual General Meeting of the company.

 

7. Special notice required for removal of first auditor.-The company may remove at the first General Meeting the first Auditors appointed by the Board and appoint in their place any other person who has been nominated for appointment by any member of the company and notice of whose nomination has been given by the company to the members not less than 14 days before the date of the meeting.

 

8. Approval of general meeting required for removal of Auditor appointed at General Meeting.-An Auditor duly appointed at the General Meeting can be removed before the expiry of his term in the General Meeting only after obtaining the approval of the General Meeting for his removal.

 

9. Fixation of remuneration of auditor appointed by Central Government of CAG.-If the appointment of an Auditor is made by the Central Government, his remuneration shall also be fixed by that Government and if an auditor is appointed under section 619 by the Comptroller and Auditor-General of India then his remuneration shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine. [Section 224(8)(aa)]

 

10. Contingencies in which retiring auditor not re-appointed.-Norm ally the retiring Auditors are reappointed as Auditors of the company unless they are disqualified for appointment (Section 224(1B)) or they have given a notice in writing to the company indicating their unwillingness for such appointment. The other contingencies in which the retiring auditors are not reappointed are (1) when a resolution has been passed at the Annual General Meeting appointing somebody else instead of the retiring Auditors or the General Meeting has expressly resolved not to appoint the retiring Auditors (ii) when a notice has been given by a member that someone else instead of the retiring Auditors be appointed as Auditors of the company and the notice has been circulated in advance amongst members that the retiring Auditors may not be reappointed.

 

11. Special Resolution required etc.-In companies where not less than 25% of the subscribed share capital of the company is held by any public financial institutions, the nationalised banks, insurance company, a Government company whether Central Government or State Government or any other financial or other institutions in which the State Government holds not less than 51% of the subscribed capital, the appointment of the Auditors shall be by passing a Special Resolution. All these three provisions are not mutually exclusive and would apply to all cases of shareholding in any combination by any of the institutions mentioned above. [General Circular No. 14 of 2001, dated 16-7-2001 of the Department of Company Affairs]. In other words, without the approval of that financial institution, no Auditor can be appointed. If this is not done, that is, no Special Resolution is passed, the company shall be deemed to have not appointed any Auditors and pursuant to sub-section (3) of section 224, the Auditors shall be appointed by the Central Government who will also fix their remuneration.

 

12. Date of determining holding of 25% of subscribed capital by financial institutions etc.-The relevant date of determining whether the financial institution holds 25% or more shareholding of the company is the date on which the Special Resolution is to be passed, that is, the date of Annual General Meeting. It may so happen that between the date of the notice calling the Annual General Meeting wherein Special Resolution is proposed and the actual date of the Annual General Meeting the percentage in the shareholdings of the institution falls below 25%. In that case, it will not be necessary to pass the Special Resolution and an Ordinary Resolution will suffice. However, if during the intervening period any financial institution mentioned in section 224A(l) acquires 25% or more of the share capital of the company, the Annual General Meeting may be adjourned and a fresh notice proposing appointment of the auditors by passing a Special Resolution may be given. (Department's Circular No. 2/76[1/1/76-CL.V], dated 5-6-1976).

 

13. Filing of form with Registrar of Companies.-The special resolution in Form No. 23 should be filed within thirty days with the Registrar of Companies concerned along with the filing fee.

 

14. Power of Central Government delegated to Regional Director.-Where appointment by the Central Government becomes necessary, the application has to be made to the Regional Director to whom powers of the Central Government under subsections (3), (4) and (8)(a) of section 224 have been delegated. (Notification No. GSR 506(E), dated 24-6-1985).

 

15. No form prescribed.-No form has been prescribed for the aforesaid application but it should disclose sufficient details, the circumstances attending the failure of the company in the Annual General Meeting to appoint an Auditor.

 

16. Removal of Auditor.-Any Auditor appointed under any of the sub-sections of section 224 except the one appointed in pursuance of provisions of section 224(5) can be removed only by the company in General Meeting with the prior approval of the Central Government.

 

Appointment and remuneration of first Auditors

(Another format)

 

S. 224-Appointment and remuneration of Auditors-Board Resolution

 

"RESOLVED that M/s. ABC & Co., the Chartered Accountants, of ____________ Nagpur 440 012, having provided a written certificate as required under proviso to section 224(l) to the effect that their ap­pointment, if made, will be in accordance with the limits specified in sub-section (1B) of section 224 of the Companies Act, 1956, be and are hereby appointed as the first Auditors of the Company to hold of­fice as such until the conclusion of the first General Meeting of the company at a remuneration of Rs. _________ Plus out-of-pocket ex­penses, if any, in addition to the aforesaid amount."

 

PRACTICE NOTES

 

1. Appointment of first Auditor.-The first Auditor or Auditors of the company shall be appointed by the Board of Directors within one month from the date of registration of the company, and the Auditor or Auditors so appointed, shall hold office until the conclusion of the first Annual General Meeting of the company.

 

2. Limit of Audit.-The Companies (Amendment) Act, 1974, imposed, for the first time, ceiling on the number of audits an Auditor may have by insertion of new subsections (1B) and (1C) in section 224 of the Act. Pursuant to sub-section (1B), on and from the financial year next following the commencement of the Companies (Amendment) Act, 1974, no company or its Board of Directors can appoint or re-appoint any person who is in full-time employment elsewhere or firm as its Auditor(s) if such person or firm is, at the date of such appointment or re-appointment, holding appointment as Auditor of the specified number of companies or more than the specified number of companies. Specified number shall mean holding appointment individually or as partner of a firm, in (i) twenty companies having paid-up share capital of less than rupees twenty-five lakhs; or in (ii) twenty companies out of which not more than ten shall be companies each of which has a paid-up share capital of rupees twenty-five lakhs or more.

 

3. Company to confirm to Auditor as to whether or not provisions of Section 619B attracted.-The company, in its turn, should confirm to the Auditors appointed as to whether or not the company attracts the provisions of section 619B of the Companies Act, 1956.

 

4. Provisions of section 619 applicable to companies falling within scope of section 619B.-The companies falling within the scope of section 619B are the companies where provisions of section 619 apply. These are the companies in the share capital of which not less than fifty-one per cent is held by one or more of the companies mentioned in S. 619B.

 

5. Statutory Auditor not to be appointed as Internal Auditor.-A statutory Auditor of a company cannot be an Internal Auditor of that company because in that case, the statutory Auditor cannot give an independent and objective report under section 227 and para 4(a) of the Manufacturing and Other Companies (Auditor's Report) Order, 1975. (Circular No. 29/76(1/1/76-CL.V) dt. 27-8-1976 and 5/77(1/1/76-CL.V.) dated 8-4-1977).

 

6. Re-appointment of retiring auditor.-Re- appointment of a retiring Auditor must be made by passing a resolution for that purpose in the concerned Annual General Meeting and unless such resolution is passed, he cannot be deemed to be re-appointed or automatically re-appointed in that meeting. (Circular No.5/72, dated 21-2-1972).

 

7. Statutory Auditor to hold office till actual date of next Annual General Meeting.-A statutory Auditor, appointed under section 224 of the Companies Act, 1956, shall hold office till the actual and not constructive conclusion of the next Annual General Meeting of a company.

 

8. Auditors signing Form 23B must disclose their identity.-Auditors signing Form No. 23B in the name of the firm must also disclose their identity. (Letter No. 7/26/76-IGC, dated 31-10-1977.)

 

9. No form prescribed for certificate to be sent by Auditor to Registrar.-There is no prescribed form for the certificate required to be sent by Auditors to the Registrar of Companies under section 224(IC) and it is to be in the form of a letter addressed to the Registrar. It is just an intimation and, therefore, it is not required to be registered and no filing fee is required to be paid. (Circular No. 20/75(35/3/75-CL.III) dated 22-9-1975.)

 

10. Certificate given by auditor under section 224(1C) open to inspection.-This certificate, pursuant to section 224(1C), is a document under section 2(15) of the Act and hence open to inspection under section 610(l). (Letter No. 8/10(224)76-CL.V, dated 1-8-1977.)

 

11. Companies limited by guarantee to be excluded in determining audit limit.-In determining the specified number mentioned in Explanation I to section 224(1B) and (1C), companies limited by guarantee are to be excluded because they have no share capital. (Circular No. 8/12(224)74-CL.V, dated 28-9-1974.)

 

12. Branch audit not to be included in determining audit limit.-Branch audits of Indian companies made by a Branch Auditor appointed under section 228, should not be included in determining the specified number of audits under section 224(1B) and (1C). Audit of the accounts of Indian business of a foreign company also should not be included in the calculation of the specified number because foreign companies are outside the scope of section 224 as they fall outside the definition of 'company' in section 3 of the Companies Act, 1956. (Circular No. 21/75(35/3/75-CL.III) dated 24-9-1975.)

 

13. Power of Central Government to appoint Auditor.-The Central Government can appoint Auditors only if no Auditor is appointed in the Annual General Meeting. If a subsequent Annual General Meeting cannot be held on the date on which it was convened, then the existing Auditors continue in office till the Annual General Meeting is held. (Letter No. 35/13/74-CL.III, dated 21-11-1974.)

 

Disqualifications of an auditor [S. 226(3)(e)]

 

In section 226, in sub-section (3) for clauses (e) and (f) new clause (e) will be substituted providing that a person holding any security of that company after a period of one year from the date of commencement of the companies (Second Amendment) Act, 1999, will not be qualified for appointment as an auditor of a company.

 

Auditors Report [S. 227(3)(e)(f)]

 

The auditors' report must also state in addition to whatever is provided in clauses (a) to (d) of sub-section (3) of section 227 in thick type or in italies the observations or comments of the auditors which have any advance effect on the functioning of the company and whether any director is disqualified from being appointed as director under clause (g) of sub-section (1) of section 274. Audit Report should not only follow the Guidance Notes on matters related to audit by the Institute of Chartered Accountants of India but should also go by the Statements on Standard Auditing Practices and the Statements on Auditing issued by the said Institute from time to time which constitutes the Auditing Standards generally accepted in India. SEBI by its Press Note dated 25th October, 2001 made "Segment Reporting" that is mandatory disclosure of segment wise information in the annual financial statements of the companies a must for listed companies to enhance the level of corporate governance and financial disclosure.

 

  Appointment of Internal Auditor [S. 227(4)]

 

A statutory Auditor of a company cannot also be its Internal Auditor as it will not be possible for him to give an independent and objective report under section 227 of the Act read with the Manufacturing and Other Companies (Auditor's Report) Order, 1975, under sub-section (4A) thereof. (Circular No. 29/76, dated 27th August, 1976).

 

 

Appointment of auditor other than a retiring auditor

 

S. 225-Appointment of auditor other than a retiring auditor-Board Resolution

 

WHEREAS the company has received a special notice from the member of the company for a resolution at an annual general meeting for appointing as an auditor other than M/s ____________________ the retiring auditor of the company whose term of office expires at the conclusion of the ensuing annual general meeting of the company;

 

AND WHEREAS the company has sent a copy of the notice to the retiring auditor;

 

AND WHEREAS the company has received from the retiring auditor representation in writing requesting notification of the said representation to the members of the company;

 

AND WHEREAS it is too late to send the representation to every member of the company or be read at the ensuing annual general meeting which will amount to needless publicity of defamatory matter.

 

NOW, THEREFORE, IT IS RESOLVED that an application be made to the Company Law Board pursuant to section ____________ of the Compa­nies Act, 1956 for obtaining an order directing the company not to send out copies of the representation and not to read out the repre­sentation at the ensuing annual general meeting;

 

RESOLVED FURTHER that the Secretary of the company be and is hereby authorised to make an application to the Company Law Board and to sign all documents and papers in connection therewith and to take each and every step that may be necessary in connection therewith and incidental or ancillary thereto including appointing authorised representative to appear before the Company Law Board from time to time.

 

PRACTICE NOTES

 

1. Application to the Company Law Board-The application to the concerned bench of the Company Law Board within whose jurisdiction the registered office of the company is situated should be made by way of a petition in Form No. 1 given in Annexure II of the Company Law Board Regulations, 1991 along with a fee of Rs. 500/- by way of Demand Draft. The application should be accompanied by an affidavit verifying the said petition and memorandum of appearance with copy of the board resolution or the executed vakalatnama as the case may be.

 

2. Time of giving special notice-In terms of section 190(l), special notice should be given to the company at least 14 clear days before the meeting. The meeting contemplated in the section is the original meeting. Therefore, special notice cannot be taken note of and acted upon by the company if it is received after the adjournment of meeting. [ICAI, Guidance Note No. LVI, 'Clause 9 of the First Schedule to the Chartered Accountants Act, 1949'; See also ICAI Guidance Note No. LXIII.]

 

3. Penalty for default.-If default is made by a company in complying with any of the provisions contained in section 225, the company and every officer of the company who is in default will be punishable with fine of upto Rs. 5,000/-. [Section 232].

 

Appointment of Internal Auditor

 

S. 227(4)-Appointment of Internal Auditor-Board Resolution

 

"RESOLVED that Mr. BPT, be and is hereby appointed as the 'Internal Auditor' of the Company on a basic salary of Rs ____________ per month plus dearness allowance and other perquisites as per the standard terms and conditions adopted by the Company, and that the duty and assignment of the 'Internal Auditor' be fixed by the Finance Director in consultation with the 'Statutory Auditors' of the company.

 

RESOLVED FURTHER that the service agreement, a copy of which has been tabled and authenticated by the Chairman of the meeting between the Company on one part and the said Mr. BPT on the other part, be and is hereby approved and that it be executed under the common seal of the Company in the presence of Mr. ________________________and Mr. ________________________ the Directors of the Company, and the Secretary of the company."

 

PRACTICE NOTES

 

1. Appointment of Internal Auditor a statutory compulsion.-Rule 4(A)(xv) of the Manufacturing and Other Companies (Auditor's Report) Order, 1988, framed under subsection (4A) of section 227 of the Companies Act, 1956, requires every Auditor of a manufacturing, mining company or a company rendering services or a trading or finance company covered by such order to report in relation to a company having paid-up capital exceeding rupees twenty-five lakhs, or having an average annual turnover exceeding Rs. 2 crores for a period of 3 consecutive financial years whether the company has internal audit system commensurate with its size and the nature of its business. Thus the appointment of 'Internal Auditor' to carry the internal audit functions of a company having more than rupees twenty-five lakhs paid-up capital or having an average annual turnover exceeding Rs. 2 crores for a period of 3 consecutive financial years is now a statutory compulsion. This order is also applicable to companies licensed under section 25 of the Act.

 

2. Internal audit by an employee of company.-Internal audit can be conducted by a qualified and experienced employee of the company. An Internal Auditor need not necessarily be qualified accountant and holding degrees, although a qualified accountant is preferred for such a position.

 

3. Statutory Auditor cannot be an Internal Auditor.-A Statutory Auditor cannot be appointed as an Internal Auditor of the company.

 

Appointment of Internal Auditor

(Another format)

 

S. 227(4)-Appointment of Internal Auditor-Board Resolution

 

"RESOLVED that Messrs KLM & Co., Chartered Accountants, be and are hereby appointed as Internal Auditors of the Company to introduce adequate internal control procedure as required by Manufacturing and Other Companies (Auditor's Report) Order, 1988, and shall report to the Managing Director of the company directly.

 

RESOLVED FURTHER that the Internal Auditors be paid a remuneration of Rs. 80,000/- per annum plus out-of-pocket expenses of Rs. 22,000/-."

 

PRACTICE NOTES

 

1. Statutory auditor to be appointed as Internal Auditor.-A statutory Auditor of a company cannot also be its Internal Auditor as it will not be possible for him to give an independent and objective report under section 227 of the Act read with Manufacturing and Other Companies (Auditor's Report) Order, 1988, under sub-section (4A) thereof. (Circular No. 29/76, dated 27-8-1976).

 

2. Internal Auditor to report to Managing Director.-The Internal Auditors should report to the Managing Director and their duties should be clearly defined.

 

3. Penalty for default.-If default is made by a company in complying with any of the provisions contained in section 227, the company and every officer of the company who is in default will be punishable with fine of up to Rs. 5,000/-. [Section 232]

 

Audit of accounts of branch office (S. 228)

 

In case the audit of branch office is exempt under the Companies (Branch Audit Exemption) Rules, 1961, then no branch Auditors need be appointed. An establishment which is not branch office of a company will form part of the head office for audit purposes. (Letter No. 8/16(1)/61-PR, dated 9-5-1961).

 

 

Appointment of Branch Auditor

 

S. 228- Appointment of Branch Auditor-Board Resolution

 

"RESOLVED that M/s. MDC & Co., Chartered Accountants, ____________, Bombay, be and are hereby appointed as the Audi­tors, as authorised by the members of the Company in Annual General Meeting held on the ____________, 2002 ____________ in that behalf, for auditing Bombay branch accounts of the Company for the financial year ____________ at a remuneration of Rs. ____________ plus reimbursement of any out-of-pocket expenses incurred in connection with such auditing by the said Auditors."

 

PRACTICE NOTES

 

1. Branch Auditor to be appointed by company in Annual General Meeting.-The appointment of an Auditor to audit the branch accounts of a company, should be made by the members of the company at the Annual General Meeting including fixing of remuneration payable therefor. The General Meeting may, however, authorise the Board of Directors to appoint suitable Auditor(s) for the branch office and also fix the remuneration in consultation with the company's statutory Auditor. For the appointment of a branch Auditor, procedure" laid down under section 225 has to be followed. (Extract from the minutes of the meetings of the Bombay Chambers' Company Law Sub Committee with the Secretary, Department of Company Law Administration, held on 26-1961).

 

2. Qualification of Branch Auditor.-Pursuant to the provisions of section 228, the Branch Auditor should be qualified for appointment as Auditor of the company under section 226, or where the branch office is situated in a country outside India, the branch audit may either be conducted by the company's Auditors or a person qualified as aforesaid, or by an accountant duly qualified to act as an Auditor of the accounts of the branch office in accordance with the laws of that country.

 

3. Rights and Duties of company's Auditor with regard to Branch Audit. -Notwithstanding appointment of a Branch Auditor, the company's Auditor may exercise all his rights and powers of visiting such branch including access to the books and accounts and vouchers of the company maintained at the branch office.

 

4. Power of Central Government to declare an establishment not a branch office. -Under the power vested in it under section 8, the Central Government may declare an establishment as not a branch office. 'Me provision of branch audit by a separate Auditor will not then apply and the company's Auditor would assume the responsibility of branch audit as well.

 

5. Conducting of Audit of Branch Office. -The Auditors of a company must decide whether they are to conduct the branch audit at the head office or at the branch office. (Letter No. 8/ 16(1)/61, dated 9-5-1961.)

 

6. Place of manufacture treated as branch office unless exempted. -Place of manufacture should be deemed to be a branch office with reference to its definition given under section 2(9) of the Act and must be audited in accordance with the provisions of section 228 unless it is exempted from such audit under the Companies (Branch Audit Exemption) Rules, 1961. (Letter No. 8/16(1)/61 -PR, dated 9-5-1961.)

 

7. Disclosure to be made in Branch Audit report. -The report to be submitted by the Branch Auditor under section 228(3)(c) must state whether proper books of account have been kept at the branch office or not and whether such accounts show a true and fair view of the working of the branch. (Extract from the Fiftieth Annual Report on the Working and Administration of the Companies Act, 1956-for the year ending 31-3-1961).

 

8. Penalty for default.-If default is made by a company in complying with any of the provisions contained in section 228, the company and every officer of the company who is in default will be punishable with fine of up to Rs. 5,000/-

 

Notice to the auditor for the extraordinary general meeting

 

S. 231-Notice to the auditor of the company for the Extraordinary General Meeting-Board Resolution

 

"WHEREAS section 231 entitles the auditor of the company to have notice of any general meeting of the company;

 

AND WHEREAS the auditor of the company has also expressed the desire to attend the extraordinary general meeting scheduled to be held on ____________ 2002 ____________ and also to be heard on the question of modification of balance-sheet and profit and loss account in the said meeting;

 

NOW, THEREFORE, IT IS RESOLVED that a notice of the said extra-ordinary general meeting be also served to the auditor of the company.

 

PRACTICE NOTES

 

1. Auditors' entitlement to attend general meeting. -An auditor of a company is entitled to attend any general meeting of the company and is also entitled to be heard at any general meeting of the company which he attends on any part of the business which concerns him as auditor of the company.

 

2. Provisions of section 172(2)(iii). -Service of notice of general meeting is required to be made to the auditors for the time being of the company in any manner authorised by section 53 of the Act in the case of any member or members of the company.

 

3. Non-receipt of notice. -Non-receipt of notice by accidental omission to give notice, by the auditor will not invalidate the proceedings at the general meeting under section 172(3) of the Act.

 

4. Penalty for default. -If default is made by a company in complying with any of the provisions contained in section 231, the company and every officer of the company who is in default will be punishable with fine of up to Rs. 5,000/-.

 

Application to Central Government for special audit

 

S. 233A-Application to Central Government for special audit of XYZ Ltd. Board Resolution

 

"WHEREAS this company, ABC Ltd., is a shareholder holding more than ten per cent of paid-up share capital of XYZ Ltd.;

 

AND WHEREAS the affairs of ZYX Ltd. are not being managed in accordance with sound business principles or prudent commercial practices inasmuch as huge amount is being spent on contract labour and the cold storage plant is being operated and factory is being run without any business;

 

AND WHEREAS huge amount has been spent on developing ponds for fish culture which has been banned by the State Government in the area of operation;

 

AND WHEREAS huge amount of loan has been obtained by the company endangering the solvency of the company;

 

NOW, THEREFORE, IT IS RESOLVED that a complaint be made to the Central Government under section 233-A of the Companies Act, 1956 detailing the aforesaid facts and praying for appointment of a special auditor to investigate the affairs of the Company."

 

PRACTICE NOTES

 

1. Where special audit can be ordered.-Special audit is ordered by the Central Government under the following three circumstances-

 

(a) The affairs of any company are not being managed in accordance with sound business principles or prudent commercial practices;

(b) the company is being managed in a manner likely to cause serious injury or damage to the interests of the trade, industry or business in which it deals;

(c) financial position of the company is such as to endanger its solvency.

 

The special audit so ordered may be for such period or periods as may be specified in the order itself.

 

2. Duties of special auditor.-The special auditor appointed will have the same powers and duties in relation to the special audit as auditor of a company has under section 227 of the Act. The only difference between special auditor and the statutory auditor is that instead of presenting his report to the members of a company the special auditor will present the report to the Central Government. The special auditor can be the company's auditor or he may be any chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949.

 

3. Furnishing of information. -The Central Government may direct by way of an order any person to furnish to the special auditor within a specified time such information or such additional information that may be required by the special auditor from time to time while conducting the special audit. If any such person fails to com-ply with such order, such person will be punishable with fine which may extend to rupees five hundred.

 

4. Action by Central Government.-On receipt of the report of the special auditor, the Central Government will take such action as it deems fit and proper under the provisions of the Act or any other law for the time being in force. If any action is taken by the Central Government within a period of four months from the date of the receipt of the report from the special auditor it will send a copy of the report or a copy of the relevant portion of the report with its own comments to the company and may ask the company to circulate those copies to the members or may ask the company to read the contents of those copies before the general meeting of the company held immediately thereafter.

 

5. Expenses of special audit.-The expenses of special audit including the remuneration of the special auditor is determined by the Central Government and should be paid by the concerned company. In case the company fails to pay such expenses, the said payment is recoverable from the company as an arrear of land revenue.

 

6. Penalty for default.-The Central Government may by order direct any person specified in the order to furnish to the special auditor within such time as may be specified therein such information or additional information as may be required by the special auditor in connection with the special audit and on failure to comply with such order such person will be punishable with fine of up to Rs. 5,000/-. [Section 233A(5)]

 

Appointment of Cost Auditor (S. 233B)

 

Cost Auditor cannot be appointed in the name of the firm. Such an appointment will be illegal and the report submitted will be invalid. (Letter No. 52/9/69-CL-H, dated 30-3-1971.

 

In all cases previous approval of the Central Government is required. The provisions of section 233B provide that pursuant to the directions of the Central Government when issued in this behalf, a cost auditor is to be appointed by the Board of Directors of the company with the prior approval of the Central Government. This power of Central Government simply does not envisage a power of approval but it also envisages in appropriate cases the power to disapprove. When a proposal is sent to the Central Government for appointment of a cost accountant under section 233B the provisions of section 224 are neither attracted nor the Central Government is statutorily bound to accord its approval to any and every proposal. A discretion is vested in the Central Government to examine the records and to satisfy itself whether the said proposal satisfies all the requirements and meets the norms and in case there is any impediment in appointing the proposed person as a cost accountant, the Central Government has the power to reject or disapprove the appointment of the cost account. Rakesh Singh v. Union of India, (2002) 110 Com Cases 624 (Del).

 

Appointment of Cost Auditor

 

S. 233B-Application to Central Government for Appointment of Cost Auditor-Board Resolution

 

"RESOLVED that subject to the approval of the Central Government pursuant to the provisions of sub-section (2) of section 233B read with section 224(1B), Shri XYZ, a Cost Accountant be and is hereby appointed as Cost Auditor to conduct the audit of the cost accounts of the company in respect of its Fan Unit situated at Okhla Industrial Estate for the financial year 2002 at a remuneration of Rs. 80,000/- plus actual out-of-pocket expenses."

 

PRACTICE NOTES

 

1. Appointment of a person as Cost Auditor required Central Government approval. -Previous approval of the Central Government is required for appointment of a person as Cost Auditor of the company. The application is to be made in Form No. 23C.

 

2. Person appointed as Cost Auditor to be qualified Cost Accountant. -The person appointed as Cost Auditor of the company should be qualified Cost Accountant within the meaning of the Cost and Works Accountants Act, 1959.

 

3. Obtaining of Certificate from person to be appointed to the effect that appointment if made to be in accordance with section 224(1B). -Before the appointment of any person is made by the Board as Cost Auditor, a written certificate shall be obtained from him to the effect that his appointment if made will be in accordance with provisions of sub-section (1B) of section 224.

 

4. Statutory Auditor not to be appointed as Cost Auditor. -The statutory Auditor cannot be appointed as the Cost Auditors of the company.

 

5. Cost Auditor not to be appointed in name of firm. -Cost Auditor cannot be appointed in the name of the firm. Such an appointment will be illegal and the report submitted will be invalid. (Letter No. 52/9/69-CL.II, dated 30-3-1971).

 

6. Relative not to be appointed Cost Auditor without previous Central Government approval. -No relative of a Director of firm or partner of such relative can be appointed Cost Auditor of the company except with the previous approval of the Central Government when the company has a paid-up capital of rupees one crore or more. (Proviso to section 297(l) of the Act).

 

Appointment of Cost Auditor on Central Government’s Order

 

S. 233B-Appointment of Cost Auditor on the order of the Central Government-Board Resolution

 

"WHEREAS under section 209(l)(d) of the Companies Act, 1956, the Central Government has prescribed necessary cost records to be maintained by the industry to which the company belongs;

 

AND WHEREAS the Central Government has, by an order, directed that an audit of cost accounts of the Company should be conducted in the manner specified in the said order, by an Auditor who shall be a Cost Accountant within the meaning of the Cost and Works Accountants Act, 1959;

 

AND WHEREAS, on an application made to it, the Central Government has accorded approval vide their Letter No. ____________ dt. ____________ to the appointment of Mr. MMD, a Cost Accountant, to conduct such cost audit of the Company;

 

NOW THEREFORE, IT IS RESOLVED that the said Mr. MMD be and is hereby appointed as the Cost Auditor of the Company under, section 233B of the Companies Act, 1956, to carry out audit of cost accounts of the Company for the financial year ending on ____________, 2002 ____________, within the terms approved by the Central Govern­ment vide its order No. ____________  dated the ____________, 2002 ____________, re­ferred to hereinabove at a consolidated remuneration of Rs. ____________ (Rupees ____________ only)."

 

PRACTICE NOTES

 

1. Procedure for appointing Cost Auditor. -The following procedure for appointing a Cost Auditor should be adhered to:

 

(a) The name of the Cost Auditor should be approved at a Board Meeting.

(b) Approval of the Central Government for appointing the Cost Auditor, should be obtained by making an application in Form No. 23

(c) The application should be signed by any Director, Managing or Whole time Director, Manager or the Secretary of the company.

(d) Along with the application should be sent a receipted treasury challan in token of the payment of the prescribed fees.

(e) Another Board Meeting should be held to appoint the Cost Auditor.

(f) Intimation to the Auditor as to the appointment should be given.

 

Appointment of cost auditor

(Another format)

 

S. 233B-Application to Central Government for appointment of cost auditor-Board Resolution

 

"RESOLVED that subject to the approval of the Central Government Shri SKM, Cost Accountant be and is hereby appointed as Cost Auditor for auditing cost accounts of the Company for the year ending on 31st March, 2002, as per directions issued by the Central Government vide their Letter No. 52/87/76, dated 10th May, 2001.

 

RESOLVED FURTHER that Shri SKM, Managing Director of the Company be and is hereby authorised to fix such remuneration and payment of out-of-pocket expenses as he may deem fit."

 

PRACTICE NOTES

 

1. Power of Central Government to direct audit of cost accounts. -The Central Government, in its discretion, may direct the audit of cost accounts of a company by a cost accountant. The audit of cost accounts is to be in addition to the audit of financial accounts by the statutory auditor appointed under section 224 or 224A, as the case may be. The cost audit can be ordered only in relation to a company engaged in the production, processing, manufacturing or mining activities as referred to in section 209(l)(d).

 

2. Appointment and fixation of remuneration of cost auditor.-Pursuant to the directions of the Government when issued in this behalf, the cost auditor is to be appointed by the Board of Directors of the company, with the previous approval of the Government. His remuneration is fixed by the Board of Directors. The cost auditor has the same powers and duties in relation to the audit of cost accounts, as are provided for the statutory auditor under section 227.

 

3. Report by cost auditor. -To enable the cost auditor to discharge his functions the company is obliged to give all facilities and assistance to the auditor. Further the company, within 30 days from the date of receipt of the cost audit report, is required to furnish full information and explanations on every reservation or qualification, if any, contained in the report to the Central Government. On receipt of the cost audit report and further information and explanations, if any sought, the Central Government may take such action as it may deem necessary, including issue of directions to the company to circulate the report, in whole or in part to its members along with the notice of the annual general meeting.

 

4. Cost Auditor cannot be Internal Auditor. -The cost auditor should not also be the internal auditor of a company for the period for which he is conducting the cost audit.

 

5. Requisites of appointing a Cost Auditor-The person to be appointed as Cost Auditor should be qualified Cost Accountant within the meaning of the Cost and Works Accountants Act, 1959. The company before appointing any person as Cost Auditor should obtain a written certificate from him to the effect that his appointment if made will be in accordance with the provisions of sub-section (1B) of section 224 of the Act. Cost Auditor cannot be appointed in the name of the firm.

 

6. Penalty.- For default in complying with the provisions of the section, the company is liable to be punished with fine which may extend to fifty thousand rupees, and every officer of the company who is in default is liable to be punished with imprisonment for a term which may extend to three years, or with fine which may extend to five thousand rupees or with both. The offence is compoundable by the Company Law Board under section 621A.

 

Report on audit of cost accounts

 

S. 233B-Report on audit of cost accounts by the Cost Auditor-Board Resolution

 

"WHEREAS Mr. MMD, a Cost Accountant, who was appointed as Cost Auditor, to conduct the cost audit of the Company, vide Board           resolution dated the ____________, 2002 ____________ has submitted his report in respect thereto which is hereby tabled and perused, and the com­ments and reservations made therein noted;

 

NOW THEREFORE, IT IS RESOLVED that pursuant to subsection (7) of section 233B, a full report be prepared incorporating necessary information and explanations on every reservation or qualifications made in the said report and forward the same to the Central Government along with the copy of such report."

 

PRACTICE NOTES

 

1. Submission of report by Cost Auditor.- Since the Cost audit reports are not required to be placed before the General Meeting and as the cost audit is likely to reveal certain information which may be regarded as confidential by the company, it is statutorily laid down that the cost audit report should be submitted to the Central Government and not to the Registrar of Companies, thus making the report inaccessible to the shareholders of the company or to the public. The report of the Cost Auditor is required to be sent to the Central Government and to the company within 180 days from the end of the company's financial year to which the cost audit report relates.

 

2. Cost Audit (Report) Rules, 1996. - The Central Government have framed detailed rules as to the audit of cost accounts under the Cost Audit (Report) Rules, 1996. These Rules have been superceded by the Cost Audit (Report) Rules, 2001 promulgated by the Department of Company Affairs with immediate effect. The Cost Audit Report submitted on or after 1- 10-2002 irrespective of the financial year of the company to which it relates should be in the form prescribed under these rules.

 

3. Company to give explanation to Central Government. - Under sub-sections (7) and (8) of S. 233B, the company is required and may be called upon to give explanation to Central Government on qualifications contained in the cost audit report.

 

4. Penalty.-Under Rule 8 of the Cost Audit (Report) Rules, 2001, Cost Auditor is subjected to penalty of Rs. 5,000/- in case of default.

 

Furnishing information to Registrar

 

S. 234(l)-Furnishing information to Registrar-Board Resolution

 

"WHEREAS the Registrar of Companies has asked for information and explanation with respect to documents filed with the Registrar;

 

NOW THEREFORE IT IS RESOLVED that all officers of the Company do furnish the requisite information and explanation to the Managing Director who will file the necessary reply to the Registrar."

 

PRACTICE NOTES

 

1. Power of Registrar. -The Registrar of Companies has the power to ask for any information or explanation which is considered necessary while perusing any document filed with him and with respect to any matter to which such document purports to relate. Such information will be asked by the Registrar by a written order and such information shall be furnished to him in writing. The Registrar will also mention specific time within which such information or explanation is to be furnished to him by the company.

 

2. Duties of the company.-On receipt of a copy of the order of the Registrar of Companies asking for further information or explanation, it is the duty of the company and all its officers to furnish the said information asked for to the best of their knowledge and power.

 

3. Inadequate information.-If the company furnishes the information which is inadequate, the Registrar of Companies will call on the officers of the company by a written order to produce before him for inspection such books and papers as the Registrar considers necessary within the specified time mentioned in the written order and the company and all the officers of the company are duty bound to produce such books and papers before the Registrar within the specified time.

 

4. Representation from contributory/creditor.-On the representation of any contributory or creditor of a company, the Registrar may call the company for furnishing information in writing on certain matters which is specified in the written order of the Registrar and such information should be given within the specified time mentioned in the said written order. Such representation by the contributory or creditor is usually made when the business of the company is said to be carried on in fraud of its creditors or of persons dealing with the company or otherwise for a fraudulent or unlawful purpose. In this case the Registrar will also give opportunity to the company to be heard before giving any written order. Usually the identity of the contributory or creditors is kept secret by the Registrar and is disclosed only where it is found by the Registrar that such representation was frivolous or vexatious.

 

5. Penalty.-For non-compliance of the requirements of section 234 of the Act, the company and every officer of the company who is in default will be punishable with fine which may extend to rupees five thousand and in the case of continuing offence an additional fine which may extend to rupees five hundred" per day.

 

6. Compounding of offence. -If the fine is not more than rupees fifty thousand for contravention of the provisions of section 234(4)(a) the application for compounding of offence will lie before the concerned Regional Director under section 621-A (l)(b) and if the fine is more than rupees fifty thousand, then the application will lie before the concerned Regional Bench of the Company Law Board under section 621-A(l)(a).

 

Furnishing further information and explanation to Registrar

 

S. 234(7)-Furnishing further information and explanation to the Registrar on representation of contributory or creditor-Board Resolution

 

"WHEREAS the Registrar of Companies has called upon the company to furnish necessary information and explanation about a complaint received by the Registrar alleging that the activities of the Company are being carried out in fraud of its creditors;

 

NOW, THEREFORE, IT IS RESOLVED to give a suitable reply to the Registrar making it clear that the allegation received by the Registrar is totally false and frivolous and for this purpose necessary documentary evidence may be furnished to the Registrar."

 

PRACTICE NOTES

 

1. Representation by the contributory/creditor.-Registrar of Companies can also call for further information or explanation on the basis of materials placed before him by any contributory or creditor or any other person interested. The materials placed before him in connection with a company should show that the company is being carried on in fraud of its creditors or persons dealing with the company or otherwise for a fraudulent or unlawful purpose. On receipt of such representation the Registrar will first give the company an opportunity of being heard and then by a written order, ask the company to furnish in writing the required information or explanation within a specified time as is mentioned in the written order. Usually the identity of the contributory or creditor is kept secret by the Registrar and is disclosed only where it is found by the Registrar that such representation was frivolous or vexatious.

 

2. Disclosure of identity.-The identity of the person who has represented before the Registrar of Companies may be disclosed to the company by the Registrar of Companies if the Registrar is satisfied that such representation was frivolous or vexatious. But if the Registrar thinks that the representation is bona fide, the Registrar will take action and will also keep the identity of his informant secret.

 

3. Inadequate information.-If the company furnishes the information which is inadequate, the Registrar of Companies will call on the officers of the company by a written order to produce before him for inspection such books and papers as the Registrar considers necessary within the specified time mentioned in the written order and the company and all the officers of the company are duty bound to produce such books and papers before the Registrar within the specified time.

 

Request to Registrar for disclosing identity of complainant

 

S. 234(7)-Request to the Registrar for disclosing the identity of complainant-Board Resolution

 

"WHEREAS the Registrar had called upon the Company to furnish information and explanation on a complaint received by him;

 

AND WHEREAS the Company had furnished necessary documentary evidence to prove that the allegations made against the company are frivolous and vexatious;

 

NOW, THEREFORE, IT IS RESOLVED that the Registrar be requested to disclose the identity of the person who had made complaint to the Registrar, this being the statutory right of the company."

 

PRACTICE NOTES

 

1. Complaint made by contributory/creditor. -Registrar of Companies can also call for further information or explanation on the basis of materials placed before him by any contributory or creditor or any other person interested. The materials placed before him in connection with a company should show that the company is being carried on in fraud of its creditors or persons dealing with the company or otherwise for a fraudulent or unlawful purpose. On receipt of such representation the Registrar will first give the company an opportunity of being heard and then by a written order ask the company to furnish in writing the required information or explanation within a specified time as is mentioned in the written order.

 

2. Enquiry by Registrar.-On receipt of the representation, the Registrar of Companies will enquire about the matters complained in the representation and if he finds it to be frivolous or vexatious, he will disclose the identity of the informant to the company on a request made by the company.

 

 

Seizure of documents by the Registrar

 

S. 234A-Seizure of documents by the Registrar-Board Resolution

 

"WHEREAS Mr. A, the Managing Director of the Company is suspected to have destroyed, mutilated, altered, falsified or secreted the books and papers of the Company and had even handed over the possession of the rented premises of the office of the Company to the landlord and had thereupon gone into hiding;

 

NOW, THEREFORE, IT IS RESOLVED that an application be made to the Registrar of Companies alleging the aforesaid facts to enable the Registrar to make an application to the Magistrate for seizure of books and papers and for consequential orders under subsections (2) and (3) of section 234-A of the Act."

 

PRACTICE NOTES

 

1. Reasonable ground to believe.-The Registrar of Companies will make an application to the Magistrate of the first class or the Presidency Magistrate having Jurisdiction for an order to seize the books and papers of a company only if the Registrar has reasonable ground to believe and is convinced that the books and papers of the company may be destroyed, altered, mutilated, falsified or secreted.

 

2. Magistrate's order.-On receipt of the application from the Registrar of Companies, the Magistrate may by order authorise the Registrar to enter the place where such books and papers of the company are kept and to search any place or places where the books and papers of the company have to be kept and also to seize such books and papers.

 

3. Returning the papers seized. -The Registrar of Companies will return the books and papers seized by him within thirty days from the date of such seizure and will inform the Magistrate as such. Before returning the books and papers to the company the Magistrate can keep copies of them or take extract from any one of them and can also place identification marks on any part of the books and papers so seized.

 

4. Applicability of code of criminal procedure.-The search and seizure made by the Registrar of Companies of the books and papers of any company should be followed in accordance with the provisions of the Code of Criminal Procedure, 1973 relating to searches or seizures made under that Code.

 

Investigation of the affairs of XYZ Ltd.

 

S. 235(2)-Investigation of the affairs of XYZ Ltd.-Board Resolution

 

"WHEREAS this Company, ABC Ltd., is holding 11% of the paid-up share capital of XYZ Ltd.,

 

AND WHEREAS it is reliably learnt that the Managing Director of the company, pursuant to a conspiracy to take over the company, has allowed the shareholding of the non-resident shareholder, being 24% of the paid-up share capital of the company, to be acquired by Mr. X, a non-resident Indian, with a view to handover the management and control of the company in the hands of the said non-resident shareholder;

 

NOW, THEREFORE, IT IS RESOLVED that an application be made to the Company Law Board under sub-section (2) of section 235 to order an investigation into the affairs of XYZ Ltd. and for orders incidental thereto."

 

FURTHER RESOLVED that the Secretary of the Company be and is hereby authorised to make the application to the Company Law Board and sign documents and papers in connection therewith and to appoint authorised representative to appear before the Company Law Board.

 

PRACTICE NOTES

 

1. Requisite number of members.-The application is to be made to the Company Law Board for investigation of the affairs of the company by not less than two hundred members or by members holding not less than one-tenth of the total voting power of the company in case the company has a share capital and by not less than one-fifth of the members of the company mentioned in the company's register of members in case the company is having no share capital.

 

2. Procedure.-An application should be made before the Principal Bench of the Company Law Board at New Delhi by way of a petition in Form No. 1 of the Company Law Board Regulations, 1991 along with a fee of rupees two thousand five hundred.

 

3. Exercise of discretion. -An investigation into the affairs of a company by the Central Government under section 235 or 237 may seriously damage a company and should not lightly be ordered without proper material gathered and considered by experts in a reasonable manner as provided in the Companies Act, 1956. Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy, (1999) 25 CLA 177 (SC). A government corporation having majority in the Board of Directors of a company making an application for an order for investigation of affairs was held by the court to be not necessary. Punjab Agro Industries Corp. Ltd. v. Superior Genetics India Ltd., (2002) 108 Com Cases 349.

 

Application to CLB for ordering investigation

 

S. 237(b)-Application to Company Law Board with a request for ordering investigation-Board Resolution

 

“WHEREAS there are the following circumstances which suggest that the business of XYZ Ltd. is being conducted with intent to defraud its creditors, members or other persons or otherwise for a fraudulent or unlawful purpose or in a manner oppressive of its members or that the company was formed for any fraudulent or unlawful purpose, namely, that-

 

(a) ________________

(b) ________________

(c) ________________

(d) ________________

 

(here set out the circumstances)

 

OR

 

"WHEREAS there are the following circumstances suggesting that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance and other misconduct towards the company or towards its members, namely,-

 

(a) ________________

(b) ________________

(c) ________________

(d) ________________”

 

(here set out the circumstances)

 

OR

 

"WHEREAS there are the following circumstances suggesting that the members of the company have not been given all the information with respect to its affairs which they might reasonably except, including information relating to the calculation of the commission payable to a managing or other director of the company, namely: -

 

(a)

(b)

(c)

(d)

 

(here set out the circumstances)

 

NOW THEREFORE this company, ABC Ltd., a shareholder of XYZ Ltd., holding 8% of the paid-up share capital hereby RESOLVES to make an application to the Company Law Board for ordering an investigation into the affairs of XYZ Ltd., an investigation which, in the light of the aforesaid circumstances, the Company Law Board is even entitled to do on its own motion."

 

PRACTICE NOTES

 

1. Circumstances suggestive of -For making an application to the Company Law Board for investigation of company's affairs there should be circumstances which should suggest the following:

 

(a) that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose;

(b) that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members;

(c) that the members of the company have not been given all the information with respect to its affairs which they might reasonably except, including information relating to calculation of the commission payable to a managing or other director or the manager of the company.

 

2. Procedure.-An application should be made before the Principal Bench of the Company Law Board at New Delhi by way of a petition in Form No. 1 of the Company Law Board Regulations, 1991 alongwith a fee of rupees two thousand five hundred.

 

3. No direction to the Central Government by High Court.-Under sub-clause (ii) of clause (a) of section 237, a High Court cannot direct the Central Government to conduct an investigation into the affairs of a company. If can only declare the affairs of a company ought to be investigated by an inspector appointed by the Central Government. Since Company Law Board is an authority specially constituted to go into certain company matters and the remedy vested in the High Court is only discretionary one, it is appropriate that the petitioner should move the CLB first for redressal of its grievance. Safia Usman v. Union of India, 2001 Vol. I CLJ 121 (Ker).

 

4. Applicability of Civil Procedure Code.-Company Law Board ordered to dispose of the petition for investigation as an agreement was reached and recorded before it to purchase the shares of the petitioner and the said settlement was not signed by the parties as required by the Civil Procedure Code and the Court said that this was only a technicality and the said code was not applicable with all its technicalities. The compromise was therefore executable. Kuki Leather P. Ltd. v. TNK Govindaraju Chettiar & Co., (2002) 110 Com Cases 474 (Mad).

 

5. Investigation of Government Company.-A government company instead of filing an application with the Company Law Board for investigation could have a special audit carried out and could resort to necessary corrective measure. Punjab Agro, Industries Corpn. Ltd. v. Superior Genetics India Ltd., (2002) 108 Com Cases 349 (CLB).

 

6. Authority to order investigation.-In a case where the company was registered for the development of a colony, the Deputy Commissioner of the District Court ordered an inquiry in public interest into certain irregularities in the functioning of the company, it was held that the said Commissioner does not have power to order a probe into the working of the company and it can be only ordered under the provisions of the Act. Edward Ganj Public Welfare Assn. v. State of Punjab, (2002) 109 Com Cases 5 (P&H).

 

 

Authentication of inspector's report

 

S. 246-Authentication of inspector's report-Board Resolution

 

"WHEREAS the affairs of the Company had been inspected by the Central Government under section 235 of the Act on the basis of the Registrar's report under section 234 of the Act;

 

AND WHEREAS an application was made to the Registrar for disclosure of the name of the complainant which disclosure the Registrar has not yet made;

 

AND WHEREAS a copy of the investigation report of the inspector appointed under section 235 of the Act has been made available to the company;

 

AND WHEREAS it is evident from the said report of the inspector that nothing adverse has been found against the company;

 

NOW, THEREFORE, IT IS RESOLVED that an application be made to the Court for recovery of damages as also the cost and expenses suffered or incurred by the company;

 

RESOLVED FURTHER that copy of the report of the inspector be authenticated by the seat of the company for purpose of filing a copy of the said report with the court, as required by rule 10 of the Company's (Central Government's) General Rules and Forms, 1956."

 

PRACTICE NOTES

 

1. Prescribed authentication. -The copy of the report of the inspector should be authenticated either by the seat of the company whose affairs have been investigated or by a certificate of a public officer having the custody of the report under and in accordance with the provisions of section 76 of the Indian Evidence Act, 1872.

 

2. Evidentiary value of the report.-The inspector's report is admissible in any legal proceedings and is an evidence of the opinion of the inspector in relation to any matter contained in such report.

 

Expenses of Investigation

 

S. 245- Expenses of investigation to be reimbursed to the Central Government -Board Resolution

 

"WHEREAS an investigation of the company was undertaken by the Central Government under section 237 through an Inspector appointed by it;

 

AND WHEREAS the said Inspector has concluded his investigation of the company;

 

AND WHERE AS an amount of Rs. _________ has been the expenses of such investigation conducted under the direction of the Central Gov­ernment;

 

NOW THEREFORE IT IS RESOLVED that the amount of Rs. _________ being the total expenses of the said investigation be and is hereby sanctioned to be paid to the Central Government towards reimbursement of the expenses of the investigation.

 

PRACTICE NOTES

 

1. Company's liability to reimburse expenses.-The expenses of and incidental to an investigation by an inspector appointed by the Central Government should be defrayed in the first instance by the Central Government but the company or body corporate in where name proceeding are brought should be liable to the extent of the amount or value of any sums or property recovered by it as a result of the proceedings and should be liable to reimburse the Central Government in respect of the whole of the expenses unless and except in so far as the Central Government otherwise directs.

 

2. First charge on the property.-Any amount for which a company or body corporate is liable as aforesaid will be a first charge on the sums or property and the amount of expenses in respect of which any company or body corporate is liable to reimburse the Central Government should be recoverable from that company or body corporate as an arrear of land revenue.

 

Investigation of ownership of Company

 

S. 247-Investigation of ownership of Company-Board Resolution

 

"WHEREAS the company is a Private Ltd. Co. and about 50% of the share capital of the company is in the hands of a few individuals who are or have been in the employment of Mr. D.K. Chowdhury;

 

AND WHEREAS the said Mr. Chowdhury has been instrumental in putting these shareholders on the job of causing unnecessary harassment to the company and its officials by making frivolous complaints to various authorities including the Registrar of Companies;

 

NOW THEREFORE IT IS RESOLVED that an application be made to the Central Government with a request to appoint inspector to investigate and report on the membership of the company for the purpose of determining the true person who is or has been financially interested in the success or failure, whether real or apparent, of the company or who is or has been able to control or materially to influence the policy of the company."

 

PRACTICE NOTES

 

1. Application to the Central Government.-An application is made to the Central Government for investigation of ownership of any company and also for appointment of an inspector to investigate and report on the membership of any company. The purpose for making this application should be to find out the true persons

 

(a) who are or have been financially interested in the success or failure, whether real or apparent, of the company; or

(b) who are or have been able to control or materially to influence the policy of the company.

 

2. Procedure.-There is no prescribed form for making the application". The application should be made on a plain piece of paper addressed to the Additional Secretary, Department of Company Affairs, giving therein the details of the company and the grounds for making the application and also the prayer along with an application fee as per "Companies (Fees on Applications) Rules, 1999."

 

Imposition of restriction on acquisition of shares

 

S. 250-Imposition of restriction on acquisition of shares of the company­ Board Resolution

 

"WHEREAS 24% of the share capital of the company is held by Switchair AB;

 

AND WHEREAS it has come to the notice of the Company that the entire equity share capital of Switchair AB has been acquired by a foreign national known as Ramejas;

 

AND WHEREAS this acquisition is likely to result in change in management of the company which change is likely to be prejudicial not only to the interest of the company but also to public interest;

 

NOW THEREFORE IT IS RESOLVED that an application be made before the Company Law Board for imposition of restriction on these shares under sub-section (2) of section 250 and also for imposition of restrictions under sub-section (3) & sub-section (4) of section 250, depending on investigation of facts as may be ordered by the Company Law Board."

 

PRACTICE NOTES

 

1. Grounds of application.-An application is usually made to the Company Law Board for imposing of restrictions upon shares and debentures and also for prohibition of transfer of shares or debentures in connection with investigation of ownership of company or for finding out information regarding persons having an interest in a company of an investigating into the associateship with managing agent or secretaries or treasurers of a company. Such imposition of restrictions upon shares and debentures can also be made by the Company Law Board on a request made by the Central Government in connection with any investigation under sections 247, 248 or 2491. Such imposition of restrictions upon shares and debentures will be made only when the Company Law Board is of the opinion that there is good reason to find out the relevant facts about any shares and such facts cannot be found out unless the aforesaid restrictions are imposed on the company. Such restriction is usually imposed for a period of three years.

 

2. Procedure.-An application should be made before the Principal Bench of the Company Law Board at New Delhi by way of a petition in Form No. 1 of the Company Law Board Regulations, 1991 along with a fee of rupees two thousand five hundred.  

 

3. Penalty for default.-Any person contravenes the provisions of sub-section (9) will be punishable with imprisonment for 6 months or with fine of Rs. 50,000/-. Where shares in any company are issued in contravention of such of the restrictions as may be applicable to the case under sub-section (2) of section 250, the company and every officer of the company who is in default will be punishable with fine of up to Rs. 50,000/-.

 

4. Power to conduct general meeting. -In a proceeding under section 250 the Company Law Board does not have power to regulate the conduct of a general body meeting of a company. (2002) 49 CLA 70 (CLB).

 

Director from small shareholders (s. 252(l) proviso)

 

Proviso to sub-section (1) to section 252 has been inserted by the Companies (Second Amendment) Act, 1999 requiring public companies having paid-up share capital of Rs. 5 crores or more and having one thousand or more small shareholders to have at least one director elected by such small shareholders in the manner as may be prescribed. Small shareholder means a shareholder holding shares of nominal value of Rs. 20,000/- or less in an aforesaid public company.

 

First Director (S. 254)

 

The words 'in default of and subject to any regulations in the articles' in the section means that the subscribers to the memorandum will act as Directors until the appointment of Directors in a General Meeting. (Department's letter No. 8/25 (254)/64-PR, dated 195-1964). Companies having a paid-up share 'Capital of less than Rs. 2 crores but having paid-up share capital of Rs. 10 lakhs or more are required to obtain a Compliance Certificate from a secretary in whole-time practice to be filed with the Registrar of Companies mentioning therein inter alia that the Board of Directors of the Company is duly constituted and the appointment of directors, additional directors, alternate directors and directors to fill casual vacancies have been duly made as per paragraph 14 of the Form of Compliance Certificate appended to the Companies (Compliance Certificate) Rules, 2001.

 

Directors elected by small shareholders

 

S. 252(l) proviso-Directors elected by small shareholders-Board Resolution

 

WHEREAS the Company has    small shareholders holding shares of nominal value as per the list tabled and initialed by the Chairman of the meeting;

 

AND WHEREAS pursuant to proviso to sub-section (1) of section 252 the company may have at least one shareholder elected by such small shareholders where the number of such small shareholder is 1000 or more.

 

AND WHEREAS the number of small shareholders as per the aforesaid list is 4500.

 

NOW THEREFORE IT IS RESOLVED that two directors be and are hereby elected in the Board of Directors of the Company in the manner as may be prescribed.

 

PRACTICE NOTES

 

1. Director as nominee of small shareholders.-The Companies (Amendment) Act, 2000 has inserted a new proviso to sub-section (1) of section 252 giving power to small shareholders of every public company having paid up share capital of Rs. 5 crores and above to elect at least one person to be their own Director in the Board of Directors of that company. The effective date of such power to be exercised by the small shareholders is specified which will be subject to such other conditions as mentioned in the Companies (Appointment of Small Shareholders' Director) Rules, 2001. Rule 4 of the said Rules provides for the manner of election of small shareholders' director, Rule 5 provides for such director's share qualification, Rule 6 provides vacation of office of such a director so appointed and Rule 7 provides for restrictive on number of directorship of such a director.

 

2.  Small shareholders.-Small shareholders will mean shareholders having shares of nominal value of Rs. 20,000/- or less in a public company whose paid-up share capital is Rs. 5 crores or more.

 

Appointment of First Directors

 

S. 254-First Directors-Board Resolution

 

"RESOLVED that it be noted that Sarvashri XYZ, IMN and PBS, whose names are mentioned in article 110 of the Articles of Association of the Company are the first Directors of the Company."

 

OR

 

"RESOLVED that Sarvashri RSM, ABC and RAB, who have subscribed their names to the Memorandum of Association of the Company shall be deemed to be the Directors of the Company".

 

PRACTICE NOTES

 

1. Section applicable where articles do not contain provision regarding first director. -This section applies only where the articles do not contain any provision as regards the first Directors.

 

2. Subscribers to memorandum who are individuals deemed to be Directors. -Only those subscribers to the memorandum who are individuals can be deemed to be Directors by reason of section 253. The articles may, however, provide as to who shall be Directors until two-thirds or more of the Directors are elected in a General Meeting in accordance with section 255.

 

3. Words "in default of and subject to any regulations in the articles"-Meaning. -The words 'in default of and subject to any regulations in the articles' in the section means that the subscribers to the memorandum will act as Directors until the appointment of Directors in a General Meeting. (Department's letter No. 8/25(254)/64-PR, dated 19-5-1964).

 

Appointment of Director (S. 255)

 

It is not always necessary for all the first Directors to retire at the first Annual General Meeting held after the formation of a company. Except those persons named in the articles as first Directors who under a specific provision in the articles in accordance with section 255(2) need not retire at the first Annual General Meeting. Other first Directors (including the subscribers of the Memorandum of Association) should retire at the first Annual General Meeting. (Company News and Notes, dated 1st July, 1963).

 

Appointment of director in the case of a Private Company

 

S. 255-Appointment of director in the case of a Private Company-Board Resolution

 

"RESOLVED that Shri AKM, General Manager (Production) be and is hereby appointed as a director on the Board of the Company."

 

PRACTICE NOTES

 

1. Board Resolution. -Hold a Board Meeting and pass a resolution to this effect.

 

2. Provisions in Articles to apply. -In the case of a private company which is not a subsidiary of a public company the articles may provide for the appointment of all or any of its directors in such manner as may be provided therein. It is not necessary that any of them should be appointed by the company in general meeting. But where the articles do not provide otherwise the directors are to be appointed in general meeting.

 

3. Provisions of sub-section (1) of section 255 not applicable. -In the case of a private company which is not a subsidiary of a public company, the provisions of sub-section (1) relating to retirement of directions have no application and none of its directors need retire by rotation in the proportion of one-third or in any other proportion. Such company may make its own provision as regards retirement of its directors.

 

4. Directors not to retire by rotation. -In the case of a private company which is not a subsidiary of a public company it is provided that the directors have to be appointed in a general meeting. There is no provision for retirement of any director periodically. Retirement therefore depends entirely on the provisions contained in the Articles of Association of the company and in the absence of any such provision the directors are entitled to continue until removed under section 284 of the Act.

 

5. Filing with Registrar. -File Form No. 32 in duplicate within thirty days of appointment with the Registrar of Companies concerned. Penalty for default in complying with this requirement is fine of up to Rs. 500/- for every day during which the default continues.

 

Alterations of articles for appointment of directors

 

S. 255-Alterations of articles for appointment of directors-Board Resolution

 

"RESOLVED that subject to the approval of members of the Company at a general meeting article 45A as worded herein below, be inserted after article 45 of the Articles of Association of the company:

 

"45A:    All the directors of the company shall retire at every annual general meeting and directors of the company shall be appointed at every annual general meeting."

 

RESOLVED FURTHER that an Extraordinary General Meeting be held for this purpose and the Secretary of the Company be directed to issue notices of the said general meeting along with the explanatory statement as per drafts placed before this meeting and approved".

 

PRACTICE NOTES

 

1. Specific provisions in the articles. -To make all the directors retired on every annual general meeting, specific provisions to that effect must be there in the articles of association of the company. If no such provision is there in the articles, two-third of the total number of directors of the company should be retiring directors and one-third non-retiring directors. This provision is not applicable to a private company which is not a subsidiary of a public company.

 

2. Appointment by general meeting.-All the directors of the company should be appointed in a general meeting.

 

3. Board appointed directors. -Only in three cases board of directors can appoint directors of the company and they are additional directors, alternate directors and directors in casual vacancy under sections 260, 313 and 262 of the Act. Director to be appointed in a casual vacancy has to be filled by the Board of Directors only at a meeting of the Board and not by a board resolution by circulation.

 

Re-appointment of Director retiring by rotation (S. 256)

 

A Director who is to retire by rotation at an Annual General Meeting as also an additional Director appointed by the Board of Directors under section 260, cannot continue in. office after the last day on which the Annual General Meeting in each year should have been held as required by section 166(l) of the Act. B.R. Kundra v. Motion Pictures Association, (1976) 46 Comp Cases 339. If a meeting is adjourned for want of quorum and no decision is taken at the adjourned meeting on re-appointment of a Director, the Director is not deemed to be re-appointed by virtue of clause (b) of sub-section (5) of section 256 of the Act. Cardamom Marketing Co. Ltd. v. Krishna Iyer, (N) (1982) 52 Comp Cases 299 (Ker-DB).

 

Non-election of a Director retiring by rotation (S. 256)

 

A Director who is to retire by rotation at an Annual General Meeting as also an additional Director appointed by the Board of Directors under section 260 cannot continue in office after the last day on which the Annual General Meeting in each year should have been held as required by section 166(l), Re, Consolidated Nickel Mines Ltd., (1914) 1 Ch 883. Where annual general for considering reappointment of director was adjourned and that adjourned meeting was not held deliberately, retiring director claiming oppression on that ground could be deemed to have been re-appointed by operation of subsection (4) of section 256. Euro India Investments v. Cement Corpn. of Gujarat Ltd., (1992) 8 CLA 130 (GUJ).

 

Special notice for standing as Director by individuals (S. 257)

 

Sub-section (1) of section 257 has been amended by the Companies (Amendment) Act, 1988, to discourage frivolous notices to contest for election as Director of a company, by requiring a member desirous of sending a notice under section 257 to deposit a sum of Rs. 500/- with the company. This sum shall be refunded to him in case he succeeds in being elected as a Director. Otherwise it would be forfeited by the company. The deposit has to be made along with the notice in writing which may be given to the company by a person signifying his candidature for the office of Director or by any member proposing him as a candidate for that office.

 

This notice should be filed not less than 14 days before the meeting and the section does not say that such notice should be before a particular time on the last day and as such rejection of deposit of the money along with the notice rejected on the ground that it was tendered one minute later than the closing hour of the company for cash transactions was erroneous as that time limit was not applicable, inasmuch as it contravened the provisions of section 257. Oriental Benefit and Deposit Society Ltd. v. Bharat Kumar K. Shah, (2001) 103 Com Cases 947 (Mad).

 

Appointment of person other than retiring Director (S. 257)

 

Additional Directors appointed under section 260 and Directors to fill casual vacancies under section 262 are not retiring Directors within the meaning of the Explanation below sub-section (5) of section 256. The provisions of sub-section (1) of section 257 will have to be complied with. (Company News and Notes, dated 1st July, 1963). If a person who is appointed as an additional Director wants to be elected as a Director at the next Annual General Meeting, the provisions of section 257 will have to be complied with since he cannot be considered to be a Director retiring by rotation at that meeting. (Department's letter No. 8/3(270)/63-PR, dated 27-7-1963). Section 257 does not apply to wholly owned Government companies. (Notification GSR 906, dated 30th July, 1981). Appending an explanatory note to the notice to members about candidature under sub-section (1A) of section 257 is valid compliance with section 173(2) of the Act. Pazhamalai (S) v. Aruna Sugars Ltd., (1984) 55 Comp Cases 500 (Mad).

 

Right of persons other than retiring directors to stand for directorship

 

S. 257-Right of persons other than retiring directors to stand for directorship-Board Resolution

 

"WHEREAS a notice had been received from Mr. A, with. a deposit of Rs. 500/-, for his candidature as director in the last annual general meeting;

 

AND WHEREAS Mr. A has been duly appointed at the said annual general meeting;

 

NOW THEREFORE IT IS RESOLVED that the deposit of Rs. 500/- made by him be returned to him as he has been elected as director."

 

PRACTICE NOTES

 

1. Fourteen days' notice. -Any person other than retiring director may stand for directorship in a company provided he or some members intending to propose him gives not less than fourteen days notice in writing to the company alongwith deposit of rupees five hundred. In the said notice, the intention of the member to propose the other person as a candidate for the office of the directorship in the company should be made clear. The deposit of rupees five hundred will be refunded to the person if he succeeds in getting elected as a director.

 

2. Company's duty.-On receipt of such notice the company should serve individual notices on the members of the company not less than seven days before the date of the meeting to inform its members of the candidature of a person other than the retiring director for the office of director or a member's intention to propose him as such as the case may be. The company can also advertise such candidature or intention not less than seven days before the meeting in atleast two newspapers circulating in the place of registered office of the company instead of serving individual notices on the members. One of the newspapers should be an English newspaper and the advertisement should be in English and the other newspapers should be a regional language newspapers and the advertisement should be in the regional language of the place where the registered office of the company is situated. A company cannot refuse to circulate to its members at their annual general meeting proposal of names for directorship by one of the member. Gopal Vyas v. Sinclair Hotels and Transportation Ltd., (1990) 3 CLA 210 (Cal).

 

3. Private companies exempted. -The provisions of section 257 of the Act are not applicable to a private company unless it is a subsidiary of a public company.

 

4. Procedure mandatory.-Non-compliance of the procedure prescribed for the appointment of new directors in place of the retiring directors such as non-circulation of notice of proposal required by section 257 would render the appointment invalid. Namita Gupta v. Cachar Native Joint-Stock Co. Ltd., (1999) 98 Com Cases 655 (CLB-PB).

 

Individual notices for persons other than retiring directors to

stand for directorship

 

S. 257-Individual notices sent for persons other than retiring directors to stand for directorship-Board Resolution

 

"WHEREAS a notice had been received from a member proposing the candidature of Mr. A as director of the Company with a deposit of Rs. 500/-;

 

AND WHEREAS the notice of the annual general meeting has already been dispatched to the members;

 

NOW THEREFORE IT IS RESOLVED that individual notices be served on members about candidature for the office of directorship received from a member, there being more than 10 days left for the holding of the annual general meeting."

 

PRACTICE NOTES

 

Same as given under Resolution No. 552.

 

Advertisement of persons other than retiring directors to

stand for directorship

 

S. 257-Advertisement given of persons other than retiring directors to stand for directorship-Board Resolution

 

"WHEREAS a notice had been received from a member proposing the candidature of Mr. A as director of the company with a deposit of Rs. 500/-;

 

AND WHEREAS the notice of the annual general meeting has already been dispatched to the members;

 

NOW THEREFORE IT IS RESOLVED under the proviso of subsection (1-A) of section 257 of the Act that instead of serving individual notices upon the members the candidature of the director as aforesaid be advertised in the Statesman and Amrita Bazar Patrika, who English dailies circulated in Calcutta where the registered office of the company is situate. Secretary of the company be and is hereby authorised to have the draft of the advertisement approved by the Managing Director before issuing the same "

 

PRACTICE NOTES

 

Same as given under Resolution No. 552.

 

 Increase in the number of Directors (S. 258)

 

Where the number of Directors as authorised by the Articles of Association is seven but if there are only five Directors functioning, appointment by a resolution of the General Meeting of two more Directors does not require a separate resolution of the company as it is implicit in the resolution to increase the number. Laljibhai C. Kapadia v. Lalji B. Desai, (1973) 43 Comp Cases 17 (Bom). Only the Board of Directors have the power of increasing or reducing the number of directors and make proposal for the same to the general body. A shareholder case make a proposal of this kind through a requisition. Ravi Shankar Taneja v. Motherson Triplex Tools (P) Ltd., (2001) 4 Comp LJ 102 (CLB).

 

Appointment of additional Director (S. 260)

 

An additional Director who is appointed as a Managing Director will continue to be a Managing Director after his election as Director at the Annual General Meeting. (No. 1/212(160)/76/CL.V, dated 17-3-1977).

 

A Director appointed as an additional Director vacates his office on the last day on which the Annual General Meeting could have been called as required by section 166 and cannot continue in office thereafter on the -ground that the meeting was not or could not be called within the time prescribed by that section. Krishna Prasad Pilani v. Colaba Land & Mill Co., (1959) 29 Comp Cases 273. This is also followed in Dushyant D. Anjaria v. Wall Street Finance Ltd., (2001) 105 Com Cases 655 (Bom).

 

Where the articles of a company provide that additional Directors shall hold office only until the next following ordinary General Meeting of the company, it has been held that the moment when such meeting began additional Directors were no longer in office and their office ceased just before the meeting. Eyre v. Milton Proprietary Ltd., (1936) 2 Ch 244 (CA). A power given to the Board by the articles did not take away the inherent power of the company in General Meeting to appoint Directors. Worcester Corstry Ltd. v. Witting, 1936 Ch 640. Appointment of additional director in a subsidiary company to marginalise the authority of two of the five shareholders owning the holding company would be an act of oppression. S. James Fredrick and another v. Mrs. Minnie R. Fredrick and others, (2000) 36 CLA 371 (CLB-PB).

 

Appointment of additional Directors

 

S. 260-Appointment of additional Directors-Board Resolution

 

"RESOLVED that Mr. BNP, be and is hereby appointed an Additional Director of the Company pursuant to article __________ of the Articles of Association of the Company."

 

PRACTICE NOTES

 

1. Procedure to be followed for appointing Additional Director. -For appointing an additional Director, the following procedure should be adopted:

 

(a)        Articles of Association should be examined to see whether they authorise the Board to appoint Additional Director (Section 260); if not, the articles should be changed suitably.

(b)        In the case of a public company or its subsidiary, written consent of the person to be appointed as an Additional Director should be obtained. There is no prescribed form for this. This formality of obtaining consent is not, however, necessary where the Director immediately before such appointment, was already a Director of the company, (Section 264(l)). For private companies also written consent from the proposed Director should be got and filed in the company, even though the same need not be filed with the Registrars.

(c)        A Board Meeting should be called to appoint the Additional Director to hold office till the next Annual General Meeting (Section 260).

(d)        He has to notify about his appointment to other companies in which he is a Director, Managing Direct or Manager or Secretary within twenty days (Section 305).

(e)        Form No. 32, in duplicate, should be filed within thirty days of his appointment with the Registrar (Section 303(2)).

(f)        Necessary entries should be made in the Register of Directors of Directors' shareholdings, etc. (Sections 303(l) and 307).

(g)        Care should be taken to see that the number of Directors and additional Directors together do not exceed the maximum strength fixed for the Board by the articles.

 

2. Additional Director holds office up to the date of next Annual General Meeting.-In terms of the provisions of section 260, (invariably articles of a company also provide to the same effect), an Additional Director holds office only up to the date of the next Annual General Meeting of the company or at the latest up to the last day on which the Annual General Meeting should have been called, as for the provisions of section 166, and cannot continue thereafter on the ground that such Annual General Meeting could not be held within the statutory prescribed time. Krishna Prasad Pilani v. Colaba Land & Mills Co. Ltd., (1959) 20 Com Cases 273.

 

3. Words "up to"-Meaning. -The words 'up to' appearing in the first proviso to section 260, mean the same thing as the word 'until' means. The word 'until' may be read as both inclusive or exclusive of the date mentioned but it has been judicially held; Eyres v. Milion Proprietary Ltd., (1936) 2 Ch 244 (CA), that 'until' used in the articles of a company with regard to the holding of office of additional Directors means inclusive of the date of the Annual General Meeting mentioned and as soon as the Annual General Meeting started, additional Directors were no longer in office. From this, it is easy to infer that additional Directors appointed by the Board should hold office just up to the commencement of the next Annual General Meeting (Letter No. 8/3(260)/63-PR, dated 5-2-1963).

 

4. Special Notice required for electing Additional Director as Director. -If additional Directors appointed by the Board are elected as Directors in the next Annual General Meeting, provisions of section 257 must be compiled with because they cannot be regarded as Directors retiring by rotation at that meeting (Letter No. 8/3(260)/63-PR, dated 27-7-1963).

 

5. Additional Director appointed as Managing Director ceases to hold office. -If the Additional Director is also appointed as the Managing Director of the company, then the latter appointment ceases simultaneously with the Additional Director's cessor of office at the commencement of the next Annual General Meeting.

 

6. Additional Director on re-election continues as Managing Director. -If such a person is again re-elected as a full-fledged Director in the Annual General Meeting, then he continues to be the Managing Director for the period for which he is so elected at that meeting and for the period for which his appointment is approved by the Central Government. (Letter No. 8/21(260) 76-CL.V, dated 17-3-1977).

 

7. Compliance Certificate.-Companies having a paid-up share capital of less than Rs. 2 crores but equal to or more than Rs. 10 lakhs are required to obtain a Compliance Certificate from a secretary in whole-time practice to be filed with the Registrar of Company mentioning therein inter alia that the appointment of additional director has been duly made as per paragraph 14 of the Form of Compliance Certificate appended to the Companies (Compliance Certificate) Rules, 2001.

 

Appointment of Additional Director

(Another format)

 

S. 260-Appointment of Additional Director-Board Resolution

 

"RESOLVED that Shri ZYX, be and is hereby appointed as Additional Director of the Company pursuant to section 260 of the Companies Act, 1956, and article 160 of the Articles of Association of the company."

 

PRACTICE NOTES

 

1. Articles to empower Board. -Ensure that the Board is empowered by the Articles of Association to appoint additional Director. Also ensure that the appointment of additional Director is within the number fixed by the Articles of Association.

 

2. Alteration of Articles to empower Board to appoint Additional Directors.-If there is no power to appoint Additional Directors under the Articles of Association of the company, it would be advisable to alter the Articles of Association and provide for a specific article enabling the Board to appoint additional Director.

 

3. Additional Director to hold office till next Annual General Meeting. -The Additional Director shall hold office till the commencement of the next Annual General Meeting of the company and will be eligible for re-appointment as a Director at that meeting.

 

4. Additional Director ceases if not elected. -If Additional Director is not elected at that meeting, he will cease to be the Director of the company.

 

5. No prohibition to his reappointment.-There is, however, no prohibition to the Board of Directors to again appoint him as Additional Director at the Board Meeting held after the Annual General Meeting.

 

6. Additional Director appointed as Managing Director continues to hold office.-An Additional Director who is appointed as a Managing Director will continue to be a Managing Director after his election as Director at the Annual General Meeting. (No. 8/212 (16on6/CL. V), dated 17-3-1977).

 

7. Special Notice required for electing Additional Director as Director. -An Additional Director holds office and does not retire by rotation at the next Annual General Meeting and he is required to comply with the provisions of section 257 for seeking election as Director at the said meeting. The provisions of section 264 and section 303 are also required to be complied with.

 

Re-appointment of Additional Director

 

S. 260-Re -appointment of additional Director-Board Resolution

 

"RESOLVED that Mr. X, who was appointed as an Additional Director at the meeting of the Board of Directors of the Company held on 15th December, 2001, and whose term expires at the Annual General Meeting of the company scheduled to be held on 29th June, 2002, and for the appointment of whom the Company has received a notice under section 257 of the Act from a member proposing his candidature for the office of a Director, be and is hereby appointed as a Director of the Company whose period of office will be liable to determination by retirement by rotation."

 

PRACTICE NOTES

 

1. Additional Director to vacate office on last day of Annual General Meeting.-A Director appointed as an Additional Director vacates his office on the last day on which the Annual General Meeting could have been called as required by section 166 and cannot continue in office thereafter on the ground that the meeting was not or could not be called within the time prescribed by that section. Krishna Prasad Pilani v. Colaba Land & Mills Co., (1959) 29 Comp Cases 273.

 

2. Additional Director to vacate office before meeting. -Where the articles of a company provide that additional Directors shall hold office only until the next following ordinary General Meeting of the company, it has been held that the moment when such meeting began Additional Directors were no longer in office and their office ceased just before the meeting. Eyre v. Milton Proprietary Ltd., (1936) 2 Ch 244 (CA).

 

3. Inherent power of company to appoint Directors. -A power given to the Board by the articles did not take away the inherent power of the company in General Meeting to appoint Directors. Worcester Corstry Ltd. v. Witting, 1936 Ch 640.

 

4. Filing of form with Registrar of Companies. -File Form Nos. 29 and 32 with the Registrar of Companies concerned within thirty days by paying the requisite filing fee.

 

5. Board's power to co-opt. -Power of Board of directors to co-opt directors is not impaired by its strength declining below minimum required for quorum, in view of subsection (1) of section 252 read with Regulation 75 of Table A Schedule I. Shailesh Harilal Shah v. Matushree Textiles Ltd., (1994) 14 CLA 177 (Bom).

 

Filling up of casual vacancies

 

S. 262-Appointment of director to Fill up casual vacancies-Board Resolution

 

"RESOLVED that Mr. CDK, be and is hereby appointed as a Director of the Company to fill up the casual vacancy caused due to Mr. KRN vacating his office as a Director of the Company before the expiry of his term of office and that Mr. CDK is to hold office till the date the outgoing Director Mr. KRN would have held office."

 

PRACTICE NOTES

 

1. Articles to empower company to rill in casual vacancy. -There must be provisions in the Articles of Association of the company for the Board of Directors to fill the casual vacancy caused due to any Director vacating his office before his term of office has expired in the normal course. The articles of a company usually repeat the provisions of section 262. The Board of Directors should exercise the power of filling a casual vacancy on the Board only at a meeting of the Board and not by means of a resolution by circulation or otherwise.

 

2. Duration of office of appointee on casual vacancy.-Pursuant to sub-section (2) of section 262, if the Board fills up a casual vacancy, the person appointed would hold office for the entire period for which the person in whose place he was appointed, would have held office.

 

3. Filing of written consent with company. -Written consent from the person who is proposed to be appointed in the casual vacancy should be filed with the company. There is no prescribed form for this.

 

Filling up of casual vacancy (S. 262)

 

The casual vacancy means a vacancy caused by death, resignation, insolvency etc. and not by efflux of time. M. K. Srinivasan v. W. S. Ayyar, AIR 1932 Mad 100.

 

Filling up of casual vacancy

(Another format)

 

S. 262-Appointment of director to Fill up of casual vacancy-Board Resolution

 

"RESOLVED that Mr. XYZ, be and is hereby appointed as a Director of the Company in the casual vacancy caused by the resignation of Mr. ABC pursuant to section 262 of the Companies Act, 1956, and article 161 of the Articles of Association of the Company."

 

PRACTICE NOTES

 

1. Alteration of Articles to empower directors to fill up casual vacancy.-If there is no provision in the Articles of Association analogous to section 262, first alter the Articles of Association to empower the Directors to fill up the casual vacancy.

 

2. Appointment to be made at Board. -Appointment has to be made at the meeting of the Board of Directors and not by means of a resolution by circulation or otherwise.

 

3. Appointee to hold office for the period for which the Director in whose vacancy he is appointed. -The appointee shall hold office for the same period for which the Director in whose vacancy he is appointed, would have held the office.

 

4. Casual vacancy does not make Board invalid unless number falls below prescribed minimum. -A casual vacancy or vacancies in the Board does not make the Board invalid unless the number of the remaining number falls below the prescribed minimum.

 

5. Casual vacancy-Meaning.-The casual vacancy means a vacancy caused by death, resignation, insolvency etc. and not by efflux of time. M.K. Srinivasan v. W.S. Ayyar, AIR 1932 Mad. 100.

 

6. Filing of forms with Registrar of Companies. -Form Nos. 29 and 32 are to be filed with are Registrar of Companies concerned within thirty days along with the requisite filing fee. The effect of filing Form No. 32 with the Registrar of Companies on the resignation of a director of a company will take effect from the date of resignation. S.B. Sarkar v. Amman Steel Corporation, (2002) 110 Com Cases 50 (Mad).

 

7. Compliance Certificate.-Companies having a paid-up share 'Capital of less than Rs. 2 crores but equal to or more than Rs. 10 lakhs are required to obtain a Compliance Certificate from a secretary in whole-time practice to be filed with the Registrar of Companies mentioning therein inter alia that the appointment of director in casual vacancy has been duly made as per paragraph 14 of the Form of Compliance Certificate appended to the Companies (Compliance Certificate) Rules, 2001.

 

Variation of the terms of agreement with Managing Director

 

Ss. 268/310/311-Variation of the terms of agreement with Managing Director-Board Resolution

 

"RESOLVED that subject to the approval of the Company at a Gen­eral Meeting and the Central Government, clause _________ of the agreement dated the _________, 2002 _________, between the company and Mr. OPW, the Managing Director of the Company, which requires unfurnished accommodation to be provided, be and is hereby amended by substitution of the word 'furnished' in place of 'unfurnished'."

 

PRACTICE NOTES

 

1. Central Government approval required. -Board's power to fix the remuneration and terms and conditions of appointment of Managing Director is subject to the provisions in the articles of the company. In the absence of any provision in the articles or if the articles so require the members in a General Meeting may fix the remuneration. Where the remuneration payable exceeds the percentage specified in S. 309/198, approval of the Central Government is also called for. The variation of any vital terms/conditions of appointment including those relating to remunerations of the Managing Director would also require approval of the Central Government. The prescribed form for this purpose are Form Nos. 25A, 25B and 25C. The application to be made in this form to the Central Government must be accompanied by the following documents:

 

(i) Two copies of the notices to be published under section 640B;

(ii) Certified true copies of both the agreements, revised and original;

(iii) A copy of the receipt of the treasury challan obtained for payment of prescribed fees.

 

2. Forms prescribed. -A copy each of the applications, along with all the documents, should also be sent to the Registrar of Companies.

 

  Amendment of provision relating to Managing/whole-time

or non-rational Directors (S. 268)

 

The insertion of a new provision in the articles relating to the appointment or reappointment of a Managing or Whole-time Director or a Director not liable to retire by rotation, as distinct from an amendment of existing provision in this regard in the Articles of Association of the company etc. does not need approval of the Company Law Board under this section. The approval of the Company Law Board would be required under section 268 only when an existing provision in the Articles of Association is amended. (Department's letter No. 1(120)/CL-1/65, dated 4-11-1965). Removal of managing director does not amount to amendment of provisions relating to terms of his contract of appointment requiring Central Government's approval under this section. Sunil K Alagh v. Britannia Industries Ltd., (1993) 11 CLA 68 (Bom).

 

 Appointment/re-appointment of Managing/Whole-time Director

(S.269)

 

The Central Government's approval is not necessary if the person to be appointed is eligible under Part I of Schedule XIII introduced by the Companies (Amendment) Act, 1988. The Central Government's approval is required only for the appointment of a Managing Director and not for his removal. Pyare Lal Gupta v. Aggarwal, (DP) (1983) 53 Comp Cases 586. Appointment of a Whole-time Company Secretary as a Part-time Director on the Board of Directors of the company does not require approval of the Central Government under section 269(l) of the Act so long as substantial powers of management of the affairs of the company are not vested in the incumbent. (Department's letter No. 16/39-CL VIII/85, dated 26-6-1987). Section 269 does not apply to a Government company. (Notification GSR 23 5, dated 31st October, 1978).

 

 

Director nominated by a body corporate

 

S. 268-Appointment of director nominated by a body corporate-Board Resolution

 

"WHEREAS the Chairman has placed before the meeting a letter dated _________ from M/s __________________ appointing Shri __________________ as their nominee on the Board of the Company on and from _________ ;

 

AND WHEREAS the said Shri __________________ has consented to act as a director of the company vide his letter dated _________ a copy of which is placed before the meeting;

 

NOW THEREFORE IT IS RESOLVED that the said letter be noted and taken on record, and that the secretary be directed to file the nec­essary returns relating to the appointment of Shri __________________  with the Registrar of Companies."

 

PRACTICE NOTES

 

1. Return in Duplicate. -Within thirty days of such appointment a return in duplicate in Form No. 32 should be filed with the Registrar of Companies along with requisite filing fee as prescribed under Schedule X of the Act.

 

2. Private Companies Exempted. -Private Companies which are not subsidiaries of public companies are exempted to take Central Government's approval for making amendment in any provision in the appointment of nominee director.

 

 

Director nominated by financial institution

 

S. 268-Appointment of director nominated by financial institution-Board Resolution

 

"RESOLVED that the nomination of Mr. SKM, Dy. General Manager, IDBI, as Director on the Board with effect from 11th April, 2002, in place of Mr. AKM, be and is hereby noted.

 

RESOLVED FURTHER that appreciation and gratitude of the Board for unstinted and continued co-operation and valuable advice tendered by Mr. AKM all through the period of his Directorship be communicated to him."

 

PRACTICE NOTES

 

1. Articles must contain power. -The Articles of Association of the company must contain power for the appointment of a nominee Director. If not, amend the Articles of Association.

 

2. Approval of Central Government for amendment of Articles when required. -Approval of the Central Government for insertion of new provision in the Articles is not required. However, approval of the Central Government is required only when the existing provision in the articles of association is to be amended.

 

3. Nominee director not liable to retire by rotation.-The directors nominated by the financial institutions shall be non-rotational Directors. They shall not be liable to retire by rotation.

 

4. Directorships not to exceed ten in inter-connected undertakings. -The total number of Directorships should not exceed ten in number in inter-connected undertakings. In case it is exceeded approval of the Central Government is required.

 

5. Removal of nominee Director.-The Director nominated by the financial institution can be removed by it at any time.

 

6. Filing of forms with Registrar of Companies. -Ensure to file Forms No. 29 and 32 with the Registrar of Companies concerned within thirty days of appointment.

 

 Expenses Incurred on Travelling and Transportation of Personal

Effects of Managing or whole-time Director or manager (S. 269)

 

With regard to the clarification whether it would be in order for companies to meet the expenses on travel of the managing or whole-time director or manager and his family members and on transportation of his personal effect from the place of his duty to his home town or to a place where he intends to settle, on expiry of his tenure, it is clarified that these expenses are not in the nature of perquisites and are not therefore, covered in Schedule XIII (though Schedule XIII does contain a provision in regard to reimbursement of expenses incurred on joining duty and return to the home country in respect of expatriate managerial personnel). The companies, should therefore, incur expenses on travel of the managing or whole-time director or manager and his family members and on transportation of his personal effects from his place of duty to his home town or to a place where he intends to settle, on expiry of his tenure, provided the relevant travelling rules of the company provide for incurring such expenditure. No approval of Central Government would be required in such cases. [Circular No.9193; F. No. 1/4/92-CL.V, dated 28-7-19931.

 

 

Appointing Managing Director/whole-time Director

 

S. 269-Appointing Managing Director/Whole -time Director-Board Resolution

 

"RESOLVED that subject to the approval of the Central Government under section 269 and other applicable provisions of the Companies Act, 1956, Mr. ABM, be and is hereby appointed as the Managing Director of the Company for a period of five years commencing from the _________, 2002 _________, on the remuneration and on the terms and condi­tions as embodied in the draft agreement, a copy of which is tabled and authenticated by the Chairman."

 

PRACTICE NOTES

 

1. Mode of appointing Managing Director. -Managing Director may be appointed in any one of the following four ways in terms of section 2(26):

 

(i) By an agreement with the company;

(ii) By a resolution passed by the company in General Meeting;

(iii) By a resolution passed by the Board of Directors;

(iv) By Memorandum/Articles of Association.

 

2. Filing of resolution of agreement with Registrar of Companies. -A copy of the resolution of the Board or agreement executed appointing the Managing Director should be filed with the Registrar in Form No. 23 within thirty days of the passing or making thereof (Section 192).

 

3. Obtaining of consent of Director. -Con sent in writing of the Director should be obtained by the company indicating that he is willing to act as a Director after appointment (if he was not a Director before his appointment as Managing/Whole-time Director).

 

4. Appointment of an executive on Board.-If an executive is taken on the Board, he becomes a deemed Whole-time Director by virtue of the Explanation given in section 269 and, thus, he will also have to be appointed in the same manner.

 

5. Managing Director on his cessation as Director ceases to be Managing Director. -The moment a person appointed as Managing Director ceases to be a Director, he also ceases to be the Managing Director even though his appointment may have been approved by the Central Government.

 

6. Additional Director appointed as Managing Director ceases to hold office on his cessation as Additional Director. -An additional Director, if appointed as a Managing Director, also ceases to be a Managing Director as soon as his additional directorship ceases at the commencement of the next Annual General Meeting. Such is also the case with the Managing Director who is an Alternate Director so that he too ceases to be the Managing Director as soon as the original Director comes back.

 

7. Where Central Government approves appointment for five years but Annual General Meeting approves for lesser period, appointment ceases on expiry of lesser period. -Where the appointment of a Managing Director is approved by the Central Government for a period of five years but the Annual General Meeting of the company approves him for lesser period than five years, then he ceases to be a Managing Director on the expiry of the lessor period. Of course, again he may be appointed without interruption for a further period covered under the Central Government's approval and in that case no fresh approval is necessary.

 

8. Managing Director continues to be an employee even on his non-election as Director. -A Managing Director can continue to be an employee of the company even after his non-election as a Director in the Annual General Meeting and such continuance will not require approval of the Central Government. But, if the articles of the company provide for such continuance of office of a Managing/Whole-time Director as an employee, then it should be approved by the Central Government under section 268 on the principle that the office becomes non-rotational. (Letter No. 8/21(260)/76-CL, V, dated 17-3-1977.

 

9. Section not applicable to private company becoming deemed public company until re-appointment due. -The provisions of section 269 do not apply to a person who is a Managing Director or Whole-time Director of a private company becoming a deemed public company under section 43A until his re-appointment is due. (Letter No. 8/11/43A/61-PR, dated 25-1-1961).

 

10. Central Government approval not required where appointment is as per Schedule XIII. -Central Government's approval is not required in cases where the appointment is in accordance with the provisions of Schedule XIII introduced in the Companies Act by the Companies (Amendment) Act, 1988.

 

 

Appointment of Managing Director

(Another format)

 

S. 269-Appointing Managing Director-Board Resolution

 

"RESOLVED that subject to the sanction of the Central Government, MR. A.B., be and is hereby appointed as the Managing Director of the Company for a period of five years from _________ 2002, on a monthly remuneration of Rs. 80,000/- per month plus the perquisites set out in the attached sheet placed before this meeting.

 

RESOLVED FURTHER that the duties of the Managing Director shall be the overall supervision of the functioning of the company, handling day to day affairs of the Company, appointment and termi­nation of services of employees, operating bank accounts, signing cheques, promissory notes, bills of exchange, regularly reporting to the Board on the activities of the Company and to perform all other duties that the Board may delegate to the Managing Director from time to time."

 

PRACTICE NOTES

 

1. Central Government approval not required when appointment made in accordance with Schedule XIII. -Approval of Central Government is not required in case the appointment of Managing Director is made in accordance with the conditions specified in Schedule XIII to the Act.

 

2. Filing of return in Form No. 25C. -While filing the return in Form No. 25-C within 90 days a copy of the resolution passed by the Board of directors and/or shareholders in the general meeting is required to be enclosed with the return. If this Form No. 25C is filed belatedly it would not attract the provisions of section 637B(b), since the said Form is a document and delay in filing the same with the Registrar of Companies falls within the ambit of section 611. For such belated filing Registrar of Companies should charge additional fee at the rate standardised by Press Note No. 2/95 dated 21-3-1995. [General Circular No. 15 of 2002, dated 15-6-2002.]

 

3. Minimum Remuneration.-Although minimum monthly remuneration under Schedule XIII Part II Section II is Rs. 75,000/- or Rs. 1,50,000/- as the case may be for a company which have no profits or inadequate profits a company may at its discretion pay remuneration less than this amount per month.

 

4. Maximum Remuneration.-For companies having no profits or inadequate profits maximum remuneration under Schedule XIII Part II, Section II (A) and (B) is Rs. 24 lakhs per annum or Rs. 48 lakhs per annum or Rs. 2 lakhs or 4 lakhs per month respectively provided the companies comply with certain conditions mentioned therein. A company can also pay remuneration exceeding Rs. 48 lakhs per annum or Rs. 4 lakhs per month if it complies with the conditioned mentioned under paragraph (C) therein.

 

For companies in special economic zones remuneration of Rs. 20 lakhs per month is allowed.

 

 

Re-appointing Managing Director/Whole-time Director

 

S. 269-Re -appointing Managing Director/Whole -time Director-Board Resolution

 

WHEREAS the company had sufficient profits to pay Mr. ABC, the Managing Director of the Company as per Schedule XIII, in his last tenure of appointment;

 

"AND WHEREAS the Company does not have sufficient profits and the payment of remuneration to him on re-appointment will exceed the ceiling given in Schedule XIII;

 

"NOW THEREFORE it is RESOLVED that subject to the approval of the Central Government under section 269 and other applicable provisions of the Companies Act, 1956, Mr. ABC, the Managing Director of the Company, be and is hereby re-appointed as Managing Director of the Company for a further period of five years from _________ on a remu­neration to be sanctioned in this behalf by the general body and on the terms and conditions contained in the agreement, a draft of which is placed before the meeting and initialled by the Chairman."

 

PRACTICE NOTES

 

1. Procedure prescribed for appointment to be followed for every re-appointment. -For every re-appointment of the Managing Director, the procedure prescribed for appointment will have to be followed. The term "appointment" includes “re-appointment.”

 

2. Central Government's approval not needed. -If the re-appointment is within the terms and conditions of Schedule XIII of the Act then Central Governments' approval is not required. Only requirement is to file a return in Form No. 25C within ninety days from the date of re-appointment with the Registrar of Companies.

 

3. Penalty for default.-If the appointment of a person as a managing or whole-time director or a manager requiring approval of Central Government is not approved by the Central Government, the person so appointed shall vacate his office as such managing or whole-time director or manager on the date on which the decision of the Central Government is communicated to the company and if he omits or fails to do so, he shall be punishable with fine of upto Rs. 5,000/- for every day during which he omits or fails to vacate such office.

 

4. Compliance Certificate.-Companies having a paid-up share capital of less than Rs. 2 crores but equal to or more than Rs. 10 lakhs are required to obtain a Compliance Certificate from a secretary in whole-time practice to be filed with the Registrar of Companies mentioning therein inter alia that the appointment of managing director/whole-time director has been made in compliance with the provisions of section 269 read with Schedule XIII to the Act and approval of the Central Government has been obtained in respect of appointment where it is not in terms of Schedule XIII as per paragraph 15 of the Form of Compliance Certificate appended to the Companies (Compliance Certificate) Rules, 2001.

 

 

Reference to Company Law Board by Central Government for appointment made without Govt. Approval

 

S. 269(7)-Reference to Company Law Board by Central Government for appointment made without Govt. approval-Board Resolution

 

WHEREAS the company is a member of ASBC Co. Ltd. holding 10,000 equity shares of Rs. 10/- each;

 

AND WHEREAS the company has got information that the Managing Director of the said company was appointed without the approval of the Central Government;

 

AND WHEREAS under section 269(7) of the Company Act, 1956, the Central Government, if on any information received by it is of the opinion that any appointment of Managing Director has been made under section 269(2) without the approval of the Central Government in contravention of the requirement of schedule XIII, can refer the matter to the Company Law Board for decision.

 

NOW, THEREFORE, IT IS RESOLVED that an application be made to the Central Government pursuant to section 269(7) of the said Act.

 

RESOLVED FURTHER that the Secretary of the Company be and is hereby authorised to make an application to the Central Government and to sign any documents and papers in connection therewith and to take every step that may be necessary for making the said application to the Central Government or in connection therewith or incidental or ancillary thereto.

 

PRACTICE NOTES

 

1. No prescribed form of application-There is no prescribed form of application to be made to the Central Government under section 269(7) and such an application may be made in the form of a letter along with certified true copy of the board's resolution authorising the Secretary to make the application and other documentary evidence necessary to prove prima facie case of contravention of Schedule XIII for appointment of a Managing Director of the company without the necessary approval of Central Government.

 

2. Company Law Board's order-Once the reference is made to the CLB by the Central Government under section 269(7) and after hearing the sides of both the parties including the complainant and the company, the CLB will give its order by taking a decision whether actually the appointment of a Managing Director has been made in contravention of the requirements of Schedule XIII. Once such order is made by the CLB the appointment of the Managing Director or the whole time Director, as the case may be, will come to an end on and from the date of the said order and the Managing Director/Whole Time Director, as the case may be, has to vacate office as such. There is a provision under section 10F by the concerned company to make an appeal to the High Court within 60 days from the date of communication of the order of the CLB to the company on any question of law arising out of such order.

 

3. Effect of CLB's order.-On the making of an order by the Company Law Board under sub-section (9) of section 269, the company shall be liable to a fine of up to Rs. 50,000/-, every officer of the company who is in default shall be liable to, a fine of up to Rs. 1,00,000/- and the appointment of the managing or whole-time director or manager, as the case may be, shall be deemed to have come to an end and the person so appointed shall in addition to being liable to pay a fine of up to Rs. 1,00,000/-, refund to the company the entire amount of salaries, commission and perquisites received or enjoyed by him between the date of his appointment and the passing of such order.

 

4. Penalty for default.-If a company contravenes the provisions of sub-section (10) of section 269 or any direction given by the Company Law Board under that sub-section, every officer of the company who is in default and the managing or whole-time director or the manager, as the case may be, shall be punishable with imprisonment for a term of 3 years and shall also be liable to a fine of up to Rs. 500/- for every day of default.

 

 

Disqualification of Director

 

S. 274-Vacation of office due to disqualification of Director-Board Resolution

 

WHEREAS Mr. IJ, a Director of the Company had failed to pay the calls in respect of Shares held by him;

 

AND WHEREAS more than six months have elapsed from the last day fixed for the payment of call and Mr. IJ had thus vacated office as Director of the company;

 

"NOW THEREFORE IT IS RESOLVED that it be noted that Mr. IJ had vacated office as Director of the Company on _________ conse­quent on his having failed to pay the calls in respect of shares held by him and more than six months have elapsed from the last day fixed for the payment of call.

 

RESOLVED FURTHER that the Secretary of the Company be directed to inform Mr. IJ accordingly."

 

PRACTICE NOTES

 

1. Grounds of disqualification. -There are six grounds of disqualification mentioned under section 274(l) of the Act. The disqualification of conviction by court of any offence involving moral turpitude and sentenced for that and the disqualification of nonpayment of calls can be removed by the Central Government.

 

2. Additional Grounds of disqualification.-A private company which is not a subsidiary of a public company may provide for additional grounds of disqualification in its articles of association apart from the disqualifications mentioned under section 284(l) of the Act.

 

3. Disqualification of Special Director.-Section 16(5) of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) provides that the appointment of a Special Director under section 16(4) of the said Act shall be valid and effective not withstanding anything to the contrary contained in the Companies Act, 1956 or in any other law for the time being in force and in view of this over-ridding effect the Special Directors appointed under SICA should not be liable to be disqualified for appointment as directors by virtue of section 274(l)(g). [General Circular No. 11/2001, dated 25-5-2001.]

 

4. Nominee Director not liable for Disqualification -Nominee directors appointed by the Public Financial Institutions and companies established under the Act of Parliament having non obstinate provisions over the companies Act, 1956 like IDBI, LIC, UTI, IDBI etc. in their respective statutes will not be liable to be disqualified for appointment as directors. [General Circular No. 8/2002, dated 22-3-2002].

 

 

Removal of disqualifications

 

S. 274-Application to the Central Government for removal of disqualifications-Board Resolution

 

"WHEREAS Mr. A, a director of the Company was caught at Delhi Airport while returning from USA, with a ten dollar note in his pocket which he had not disclosed to the Custom Officials and the Metropolitan Magistrate, Delhi sentenced him to six months' imprisonment;

 

AND WHEREAS the said director vacated the office of directorship of the Company, pursuant to the provisions of clause (d) of subsection (1) of section 274;

 

AND WHEREAS he had vacated his office of directorship immediately;

 

AND WHEREAS the High Court of Delhi had, on appeal, reduced the sentence to a day's imprisonment;

 

NOW THEREFORE IT IS RESOLVED that an application be made to the Central Government for removal of the disqualification incurred by the said director by making an application under clause (a) of subsection (2) of section 274."

 

PRACTICE NOTES

 

1. Six specific disqualifications.-There are the following six disqualifications of a director or a company which will make him incapable of being appointed as a director:

 

(a) he has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force;

(b) he is an undischarged insolvent;

(c) he has applied to be adjudicated as an insolvent and his application is pending;

(d) he has been convicted by a court of any offence involving moral turpitude and sentenced in respect thereof to Imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence;

(e) he has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; or

(f) an order disqualifying him for appointment as director has been passed by a court in pursuance of section 203 and is in force unless the leave of the court has been obtained for his appointment in pursuance of that section.

 

2. Removal of disqualifications.-The Central Government has been given power to remove disqualifications of a director convicted by a court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months and also for a disqualification incurred by any director for non-payment of any call in respect of any shares of the company held by him. Such removal of disqualification will be made by the Central Government by notification in the Official Gazette. There is no prescribed form for making an application to the Central Government for removing any disqualification.

 

3. Additional grounds of disqualifications.-A private company which is not a subsidiary of a public company can provide for additional disqualification by its articles of association.

 

 

Removal of disqualification for non-payment of calls

 

S. 274-Application to the Central Government for removal of disqualification for non-payment of calls-Board Resolution

 

"WHEREAS one thousand equity shares of Rs. 100/- each, Rs. 50/- being paid-up per share, had been acquired by Mr. A, a director, along with his brother, Mr. B and the shares were held in their joint names;

 

AND WHEREAS the Company had made a call for payment of the balance amount of Rs. 50/- per share of the said shares held by him jointly with his brother;

 

AND WHEREAS more than six months have elapsed from the last day fixed for the payment of the call money and the call money has yet not been paid;

 

AND WHEREAS, by reason of non-payment of call money, Mr. A had to vacate his office as director in terms of clause (e) of sub-section (1) of section 274;

 

AND WHEREAS Mr. A has now paid the entire amount due on the call;

 

AND WHEREAS by reason of technical lapse Mr. A had to vacate his office as director in terms of clause (e) of sub-section (1) of section 274;

 

NOW THEREFORE IT IS RESOLVED that an application be made to the Central Government for removal of his disqualification in terms of clause (b) of sub-section (2) of the said section 274."

 

PRACTICE NOTES

 

1. Seven specific disqualifications.-There are the following six qualifications of a director or a company which will make him incapable of being appointed as a director:

 

(a) he has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force;

(b) he is an undischarged insolvent;

(c) he has applied to be adjudicated as an insolvent and his application is pending;

(d) he has been convicted by a court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence;

(e) he has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last

day fixed for the payment of the call; or

(f) an order disqualifying him for appointment as director has been passed by a court in pursuance of section 203 and is in force unless the leave of the court has been obtained for his appointment in pursuance of that section.

(g) such person is already a director of a public company which­-

 

(A) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the 1st April, 1999; or

(B) has failed to repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more:

 

Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of 5 years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (a) or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in clause (B).

 

2. Removal of disqualifications. -The Central Government has been given power to remove disqualifications of a director being convicted by a court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months and also for a disqualification incurred by any director for non-payment of any call in respect of any shares of the company held by him. Such removal of disqualification will be made by the Central Government by notification in the Official Gazette. There is no prescribed form for making an application to the Central Government for removing any disqualification.

 

3. Additional grounds of disqualifications.-A private company which is not a subsidiary of a public company provide for additional disqualification by its articles of association.