Chapter 2 Meetings of The Board and Its Powers

Chapter 2 Meetings of the Board and its Powers
Chapter 2
Meetings of the Board and its Powers
Table of Sections and Corresponding Rules
Chapter XII of Companies Act, 2013 Companies (Meetings of Board and its
“Meetings of Board and its Powers” Powers) Rules, 2014
Sec. Title Rule Title

No. No.
173 Meetings of Board 3 Meetings of Board through video

conferencing or other audio-visual
means
4 Matters not to be dealt with in a

meeting through video
means
174 Quorum for Meetings of Board
175 Passing of Resolution by 5 Passing of Resolution by

circulation circulation
176 Defects in appointment of

directors not to invalidate actions
taken
177 Audit Committee 6 Committees of the Board
6A Omnibus approval for related

party transactions on annual basis
7 Establishment of Vigil Mechanism
Compiled by: Pankaj Garg

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178 Nomination and Remuneration

Committee and Stakeholders
Relationship Committee
179 Powers of Board 8 Powers of Board
180 Restrictions on Powers of Board
181 Company to contribute to

bonafide and charitable funds etc.
182 Prohibitions and Restrictions

regarding political contributions
183 Power of Board and other

persons to make contributions to
national defence fund etc.
184 Disclosure of interest by director 9 Disclosure by a director of his

interest
185 Loans to directors, etc. 10 Loans to Directors etc. u/s 185
186 Loans and Investment by 11 Loans and Investment by a

company company u/s 186 of the Act
12 Register
13 Special resolution
187 Investments of company to be 14 Investments of company to be held

held in its own name in its own name

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188 Related Party Transactions 15 Contract or Arrangement with a

related party
189 Register of contracts or 16 Register of contracts or

arrangements in which directors arrangements in which directors
are interested are interested
190 Contract of Employment with

managing or whole-time
directors
191 Payment to director for loss of 17 Payment to director for loss of

office, etc., in connection with office, etc., in connection with
transfer of undertaking, property transfer of undertaking, property
or shares. or shares
192 Restrictions on non-cash

transactions involving directors
193 Contract by One Person Company
194 Prohibition on forward dealings

in securities of company by
director or key managerial
personnel*
195 Prohibition on insider trading of

securities*
* omitted by Companies (Amendment) Act, 2017 w.e.f. 09.02.2018

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2.1 - Important Definitions (Sec. 2)
Interested Omitted by Companies (Amendment) Act 2017 w.e.f. 09.02.2018

Director
– Sec. 2(49)
Related with reference to a company, means-

party -Sec. (i) a director or his relative;
2(76) (ii) a KMP or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his
relative is a member or director;
(v) a public company in which a director or manager is a director
and holds along with his relatives, more than 2% of its paid-up
share capital;
(vi) anybody corporate whose BOD, MD or Manager is accustomed
to act in accordance with the advice, directions or instructions
of a director or manager;
(vii) any person on whose advice, directions or instructions a
director or manager is accustomed to act:
Provided that nothing in sub-clauses (vi) and (vii) shall apply to
the advice, directions or instructions given in a professional
capacity;
(viii) any body corporate which is—
(a) a holding, subsidiary or an associate company of such
company; or
(b) a subsidiary of a holding company to which it is also a
subsidiary; or

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(c) an investing company or the venturer of the company;
Investing company or the venturer of a company means a body

corporate whose investment in the company would result in the
company becoming an associate company of the body
corporate.
(ix) such other person as may be prescribed.
Rule 3 the Companies (Specification of definitions details)

Rules, 2014,
Such other person may represent, a director (other than an

independent director) or KMP of the holding company or his relative
with reference to a company, shall be deemed to be a related party.
Relative – with reference to any person, means anyone who is related to
Sec. 2(77) another, if-
(i) they are members of a HUF;

(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be
prescribed
Rule 4 the Companies (Specification of definitions details)

Rules, 2014,
A person shall be deemed to be the relative of another, if he or she is

related to another in the following manner, namely:
1. Father (term “Father” includes step-father).

2. Mother (term “Mother” includes the step-mother).
3. Son (term “Son” includes the step-son).
4. Son’s wife

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5. Daughter
6. Daughter’s husband
7. Brother (the term “Brother” includes the step-brother)
8. Sister (term “Sister” includes the step-sister).
2.2 - Meetings of Board (Sec. 173)
Frequency of First Board Every company shall hold the first meeting of the
Board Meeting BOD within 30 days of the date of its incorporation.
Meetings –
Subsequent Every Company shall hold a minimum number of 4
Sec. 173(1)
Board meetings of its BOD every year in such a manner
Meetings that not more than 120 days shall intervene
between two consecutive meetings of the Board.
Points to remember
• Every Year implies calendar year.
• In case of Sec. 8 companies which has not committed a default
in filing of its financial statements u/s 137 or annual return
u/s 92 with the Registrar, Sec. 173(1)shall apply only to the
extent that the BOD of such companies shall hold at least one
meeting within every six calendar months.
Participation The participation of directors in a meeting of the Board may be

in Board either
Meeting – • in person
Sec. 173(2)
or
• through video conferencing
or
• other audio-visual means, as may be prescribed.

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Points to remember
• Video conferencing or other audio-visual means” means

audio-visual electronic communication facility employed
which enables all the persons participating in a meeting to
communicate concurrently with each other without an
intermediary and to participate effectively in the meeting.
• “Audio visual means” should be capable of recording and
recognising the participation of the directors and of
recording and storing the proceedings of such meetings
along with date and time.
• First proviso to Sec. 173 provides that C.G. may, by
notification, specify such matters which shall not be dealt
with in a meeting through video conferencing or other audio-
visual means.
• Second Proviso to Sec. 173 is inserted by Companies
(Amendment) Act, 2017 w.e.f. 07.05.2018, which states as under:
"Provided further that where there is quorum in a meeting

through physical presence of directors, any other director
may participate through video conferencing or other audio-
visual means in such meeting on any matter specified under
the first proviso."
• Rule 3 of the Companies (Meetings of Board and its Powers)

Rules, 2014, requires the company to comply with the
procedure in case of Board Meetings through video
conferencing or other audio-visual means.
• Rule 4 of the Companies (Meetings of Board and its Powers)
Rules, 2014, specifies the matters not to be dealt with in a
meeting through video conferencing or other audio-visual means

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Rule 3 of the Meetings of Board through video conferencing

Companies or other audio-visual means
(Meetings of
A company shall comply with the following
Board and
procedure, for convening and conducting the Board
its Powers)
meetings through video conferencing or other
Rules, 2014
audio-visual means.
(1) Every Company shall make necessary

arrangements to avoid failure of video or audio-
visual connection.
(2) The Chairperson of the meeting and the
company secretary, if any, shall take due and
reasonable care -
(a) to safeguard the integrity of the meeting by
ensuring sufficient security and
identification procedures;
(b) to ensure availability of proper video
equipment or facilities for providing
transmission of the communications for
effective participation of the directors and
other authorised participants at the Board
meeting;
(c) to record proceedings and prepare the
minutes of the meeting;
(d) to store for safekeeping and marking the
tape recording(s) or other electronic
recording mechanism as part of the records
of the company at least before the time of
completion of audit of that particular year.

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(e) to ensure that no person other than the

concerned director are attending or have
access to the proceedings of the meeting
through video conferencing mode or other
audio-visual means; and
(f) to ensure that participants attending the
meeting through audio visual means are able
to hear and see the other participants clearly
during the course of the meeting:
Provided that the persons, who are differently

abled, may make request to the Board to allow a
person to accompany him.
(3) Requirements w.r.t. Notice and intimation by

directors:
(a) The notice of the meeting shall be sent to all
the directors in accordance with the
provisions of Sec. 173(3).
(b) The notice of the meeting shall inform the
directors regarding the option available to
them to participate through video
conferencing mode or other audio-visual
means.
(c) A director intending to participate through
video conferencing or audio-visual means
shall communicate his intention to the
Chairperson or the Company Secretary of
the company.
(d) If the director intends to participate
through video conferencing or other audio-
visual means, he shall give prior intimation

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to that effect sufficiently in advance so that

company is able to make suitable
arrangements in this behalf.
(e) Any director, who intends to participate in
the meeting through electronic mode may
intimate about such participation at the
beginning of the calendar year and such
declaration shall be valid for one year.
However, such declaration shall not debar
him from participation in the meeting in
person in which case he shall intimate the
company sufficiently in advance of his
intention to participate in person.
(f) In the absence of any intimation under
clause (c), it shall be assumed that the
director shall attend the meeting in person.
(4) A director participating in a meeting through
video conferencing or other audio-visual means
shall be counted for the purpose of quorum
unless he is to be excluded for any items of
business under any provisions of the Act or the
rules.
(5) With respect to every meeting conducted
visual means authorised under these rules, the
scheduled venue of the meeting as set forth in
the notice convening the meeting, shall be
deemed to be the place of the said meeting and
all recordings of the proceedings at the meeting
shall be deemed to be made at such place.

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(6) At the end of discussion of each agenda item,

the chairperson of the meeting shall announce
the summary of the decision taken on such
item along with names of directors if any who
dissented from the decision taken by majority
and the draft minutes so recorded shall be
preserved by the company till the confirmation
of the draft minutes.
(7) The minutes shall disclose the particulars of
the directors who attended the meeting
visual means.
(8) The draft minutes of the meeting shall be
circulated among all the directors within 15
days of the meeting either in writing or in
electronic mode as may be decided by the
Board.
(9) Every director who attended the meeting,
whether personally or through video
conferencing or other audio-visual means,
shall confirm or give his comments in writing,
about the accuracy of recording of the
proceedings of that particular meeting in the
draft minutes, within seven days or some
reasonable time as decided by the Board, after
receipt of the draft minutes failing which his
approval shall be presumed.
(10) After completion of the meeting, the minutes
shall be entered in the minute book and signed
by chairperson.

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Rule 4 of the Matters not to be dealt with in a meeting

Companies through video conferencing or other audio-
(Meetings of visual means
Board and
(i) the approval of the annual financial
its Powers)
statements;
Rules, 2014
(ii) the approval of the Board’s report;
(iii) the approval of the prospectus;
(iv) the Audit Committee Meetings for
consideration of financial statement including
consolidated financial statement, if any to be
approved by the Board u/s 134(1) of the Act; and
(v) the approval of the matter relating to
amalgamation, merger, demerger, acquisition
and takeover.
Points to remember
Where there is quorum presence in a meeting

through physical presence of directors, any
other director may participate conferencing
through video or other audio visual means.
Notice of • A meeting of the Board shall be called by giving not less than 7
Board days’ notice in writing to every director at his address registered
Meeting – with the company and such notice shall be sent by hand delivery
Sec. 173(3) or by post or by electronic means.
• A meeting of the Board may be called at shorter notice to
transact urgent business subject to the condition that at least
one independent director, if any, shall be present at the meeting.

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• In case of absence of independent directors from such a meeting

of the Board, decisions taken at such a meeting shall be
circulated to all the directors and shall be final only on
ratification thereof by at least one independent director, if any.
Penalty for • Every officer of the company whose duty is to give notice under
failure to this section
give notice and
– Sec. 173(4)
• who fails to do so
shall be liable to a penalty of ₹25,000.
Special Applicability • One Person Company

provisions – • Small Company
Sec. 173(5) • Dormant Company
• Private Company (if private company is a start
up)
Frequency In case of above mentioned companies, if would be

of Board a sufficient compliance, if
Meeting • at least one Board meeting is held in each half of
a calendar year; and
• gap between the two meetings is not less than 90
days.
Points to remember
• One-person company in which there is only one director on its

Board of Directors is exempted from compliance of Sec.
173(5) and 174.

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Validity of • Companies Act, 2013 and the Companies (Meetings of the Board
meeting if and its Powers) Rules, 2014 does not lay down any specific
notice not provision regarding the validity of a resolution passed by the
given to any Board in case notice was not served to all the directors as
director stipulated in the Act.
• Supreme Court, in case of Parmeshwari Prasad vs. Union of
India has held that the resolutions passed in the board meeting
shall not be valid, since notice to all the Directors was not given
in writing. Notice must be given to each director in writing.
Hence, even though the directors concerned knew about the
meeting, the meeting shall not be valid and resolutions passed at
the meeting also shall not be valid.
Voting at a • Save as otherwise expressly provided in the Act, questions

Board arising at any meeting of the Board shall be decided by a
Meeting – majority of votes.
Regulation • In case of an equality of votes, the Chairperson of the Board, if
68 of Table F any, shall have a second or casting vote.
Important Questions
Q. No. 1: ABC Limited, a public limited company was incorporated on 1st April,
2018. The company has conducted four Board meetings during the
financial year 2018-19 i.e. on 6th April, 2018, 28th August, 2018, 30th
September, 2018 and 30th March, 2019.
(i) Has the company contravened the provisions of the Companies

Act, 2013 in respect of the conduct of the meetings?
(ii) Will your answer differ if the company was incorporated under
Section 8 of the Companies Act, 2013?

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HINT: Refer Section 173(1).
(i) Gap between the meetings exceeds 120 days.

(ii) No contravention in case of Section 8 company.
Q. No. 2: The Board of Directors of Infotech Consultants Limited, registered in

Kolkata, proposes to hold the next board meeting in the month of
Dec. 2019.They seek, your advice in respect of the following matters:
(i) Can the board meeting be held in Chennai through video

conferencing, when all the directors of the company reside at
Kolkata?
(ii) Is it necessary that the notice of the board meeting should specify
the nature of business to be transacted? [RTP-May 19]
HINT: No specific provisions under the law w.r.t. matters asked in

question.
(i) Board meeting can be held in Chennai.

(ii) Though no specific requirement u/s 173, it is evitable to prepare the
agenda properly.
Q. No. 3: XYZ Ltd. is a foreign collaborator in ABC Ltd. incorporated in India

under the Companies Act, 2013. The foreign collaborator holds 49%
of the shareholding. The Board meetings of ABC Ltd are usually held
in India and sometimes meetings of the Board are called at a very
short notice for which there is a provision in the Articles of
Association that during such situations notices of the meetings of the
Board can be sent by e-mail. State in this connection whether such a
provision in the Articles of Association of a foreign collaborated
company is valid.
HINT: Refer Section 173(3). Notice can be sent by Electronic means.

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Q. No. 4: Mr. P and Mr. Q who are the directors of the Company informed the
Company their inability to attend the meeting because the notice of
the meeting was not served on them. Discuss whether there is any
default on the part of the Company and the consequences thereof.
HINT: Refer Sec. 173(3) and 173(4). Resolutions passed in the meeting
will be considered invalid.
Q. No. 5: A director goes abroad for a period of more than 3 months and an
alternate director has been appointed in his place under section
161(2). During the period of absence of the original director, a board
meeting was called. In this connection, with reference to the
provisions of the Companies Act, 2013, advise whom should the
notice of Board meeting be given to the “original director” or to the
“alternate director”?
HINT: Refer Section 161(2) and 173(3). No specific provisions in the law
regarding the person to whom the notice is to be given in such a case. In
such a situation, notice may be served on both.
Q. No. 6: ABC Ltd. has 12 directors on its Board and has the following clause in
its Articles of Association:
“The questions arising at any meeting of the Board of Directors or

any Committee thereof shall be decided by a majority of votes, except
in cases where the Companies Act, 2013 expressly provides
otherwise.”
In one of the meetings of the Board of Directors of ABC Ltd., 8

directors were present. After completion of discussion on a matter,
voting was done. 3 directors voted in favour of the motion, 2
directors voted against the motion while 3 directors abstained from
voting.

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You are required to state with reference to the provisions of the

Companies Act, 2013 whether the motion was carried or not. It is
clarified that the motion being voted upon was not concerning a
matter which requires consent of all the directors present in the
meeting. [May 09 (5 Marks)]
HINT: Refer Regulation 68 of Table F. The motion is carried or is

considered to be passed by majority.
Q. No. 7: Examine with reference to the provisions of the Companies Act, 2013
whether notice of a Board Meeting is required to be sent to the
following persons:
(i) Alternative Director;

(ii) An interested Director;
(iii) A Director who has expressed his inability to attend a particular
Board Meeting;
(iv) A Director who has gone abroad (for less than 3 months).
[May 13 (8 Marks), MTP-Oct.18]
HINT: Refer Section 173(3). Notice is required in all cases.
Q. No. 8: Elaborate the provisions of the Companies Act, 2013 regarding

Notice of Board Meeting. Draft a notice for the first meeting of the
Board of Directors of India Timber Ltd. [Nov. 15 (8 Marks)]
HINT: Refer Sec. 173(3).
Q. No. 9: What are the conditions to be fulfilled for calling meetings at shorter
notice than as prescribed by Companies Act, 2013.
One of the directors, a senior professional, objected to receiving the

notice by e-mail. Advise him. [May 16 (4 Marks)]
HINT: Refer Sec. 173(3). Objection is not sustainable.

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Q. No. 10: Examine the following with reference to the provisions of the
Companies Act, 2013:
(a) The Chairman of Evergreen Limited convened a board meeting

and two weeks' notice was served on all directors of the
company. Two of the independent directors on the board
objected on the grounds that no proper agenda for the meeting
was circulated.
(b) Sunshine Limited proposes to hold its board meeting at a shorter
notice through video conferencing.
[May 17 (4 Marks), RTP-May 18]
HINT: Refer Sec. 173(3) and 173(2).
(a) Contention of the independent directors objecting on the grounds that

no agenda for the meeting was circulated, does not hold good.
(b) Board meeting at a shorter notice can be held through video
conferencing.
Q. No. 11: Moonlight Limited, held its Board meeting through video
conferencing. Due to technical problems, the video recording which
was done could not be retrieved. The company seeks your advice for
the preparation and recording of the minutes of the board meeting in
the above situation, under the provisions of the companies Act, 2013
and Rules made there under. [May 18 – Old Syllabus (4 Marks)]
HINT: ReferRule 3 of the Companies (Meetings of Board and its Powers)

Rules, 2014.
Q. No. 12: M/s OBC Limited, at its forthcoming Board meeting decide that it
will not provide the directors with the facility of participation in the
said meeting through electronic mode; can the directors insist on
attending the meeting through such mode? Decide as per the

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provisions of the Companies Act, 2013. Will your answer differ, if a

Director participates in a Board Meeting through electronic mode
from his end, even if the company does not provide such facility?
[Nov. 18-Old Syllabus (4 Marks)]
HINT: Refer Sec. 173(2) and Rule 3 of the Companies (Meetings of Board
and its Powers) Rules, 2014. Directors can insist the company on attending
the meeting through electronic mode. It is provided in Rule 3 that every
company shall follow the procedure and make necessary arrangements for
convening and conducting the Board meetings through video conferencing
or other audio-visual means. Hence the demand of the question in a
situation when the company does not provide such facility is of no
relevance.
Q. No. 13: Wonderland Ltd. convened a meeting of the Board of Directors on

1st September 2019 to approve the financial statements of the
Company as on 31st March, 2019. The Board has strength of 5
directors and the quorum as per Articles of Association is 3 directors
physically present. While 3 directors participated in the meeting
physically, the fourth and the fifth directors participated through
video conferencing. Examine the validity of the approval of financial
statements in the above said Board meeting.
[Nov. 19 – Old Syllabus (4 Marks)]
HINT: Refer 2nd Proviso to Sec. 173(2) and Rule 4 of Companies (Meetings
of the Board and its Powers) Rules, 2014. As there is Quorum in a meeting
through physical presence of directors, any other director may participate
through video conferencing. Hence the financial statements are approved
validly.

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2.3 - Quorum for meetings of Board (Sec. 174)
Quorum • 1/3rdof its total strength

required for or
Board
• 2 directors,
Meeting –
Sec. 174(1) whichever is higher.
Points to remember
• Any fraction of a number shall be rounded off as one.

• Total strength - shall not include directors whose places are
vacant.
• Participation of the directors by video conferencing or by
other audio-visual means shall also be counted for the
purposes of quorum under this sub-section.
• In case of Section 8 companies which has not committed a
default in filing of its financial statements u/s 137 or annual
return u/s 92 with the Registrar, the quorum shall be 8
members or 25% of its total strength, whichever is less.
However, it should not be less than 2 members.
Position as The continuing directors may act notwithstanding any vacancy in

to continuing the Board. If and so long as their number is reduced below the
director if quorum fixed by the Act for a meeting of the Board, the continuing
number falls directors or director may act
below • for the purpose of increasing the number of directors to that
quorum fixed for the quorum
– Sec. 174(2) or
• of summoning a general meeting of the company and for no

other purpose.

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Quorum in Where at any time the number of interested directors exceeds or is

case of equal to 2/3rdof the total strength of the Board of Directors, the
interested number of directors who are not interested directors and present
directors – at the meeting, being not less than 2, shall be the quorum during
Sec. 174(3) such time.
Points to remember
• Interested director means a director within the meaning of

Sec. 184(2).
• In case of Specified IFSC Public Company and IFSC Private
Company, Sec. 174(3) shall apply with the exception that
interested director may participate in such meeting
provided the disclosure of his interest is made by the
concerned director either prior or at the meeting.
• In case of private companies which has not committed a
default in filing of their financial statements u/s 137 or
annual return u/s 92 with the Registrar., Sec. 174(3) shall
apply with the exception that the interested directors may
also be counted towards quorum in such meeting after
disclosure of his interest pursuant to Sec. 184.
Adjournment Where a meeting of the Board could not be held for want of
of Meeting – quorum, then, unless the articles of the company otherwise
Sec. 174(4) provide,
• the meeting shall automatically stand adjourned to the same day

at the same time and place in the next week
or
• if that day is a national holiday, till the next succeeding day,

which is not a national holiday, at the same time and place.

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Points to remember
• Provisions of Sec. 174 are not applicable to One Person Company in which
there is only one director on its BOD.
Important Questions
Q. No. 14: Discuss the following situations with respect to the quorum.
(a) There are 9 directors in a company and out of which 2 offices of

the directors have fallen vacant.
(b) There are 15 directors in a company and during discussion of a
particular item, 13 of the directors are said to be ‘interested’
within the meaning of section 184(2) of the Companies Act, 2013.
HINT: (a) Refer Sec. 174(1) -Quorum Required 3 (b) Refer Sec. 174(3) –
Quorum required 2
Q. No. 15: A meeting of the Board of ‘No Holiday Ltd’ was held on a national
holiday on account of Ganesh Chaturthi, the day being Sunday.
However due to lack of quorum, the proceedings of the meeting
could not be held and therefore the Chairman of the meeting
decided with the consent of the majority that the Board meeting be
adjourned to next week on the same day. Whether the meeting of
the Board can be held on a Sunday.
HINT: Refer Section 174(4), No exclusion for meeting to be held on

Sunday. Hence meeting can be held on Sunday.
Q. No. 16: What is the procedure to be followed, when a board meeting is

adjourned for want of quorum?
HINT: Refer Section 174(4).

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Q. No. 17: Examine, with reference to the relevant provisions of the

Companies Act, 2013, the validity/legality of the following:
A meeting of the Board of directors of OPQ Co. Ltd. due to be held on

30.9.2019 did not take place for want of quorum. As a result, the
Company did not hold any Board meeting for the quarter ended
30.9.2019 and there is a complaint that the Company has violated
the provisions of the Act in this regard.
HINT: Refer Sec. 173(1) and 174(4). No provision of Companies Act,

2013 have been contravened as holding of the adjourned meeting though
in the next quarter will be treated as continuation of the 3rdmeeting.
Q. No. 18: The Board of directors of ABC Ltd. met thrice in the year 2017 and
the 4th Meeting, though called, could not be held for want of
quorum.
Examine with reference to the relevant provisions of the Companies

Act, 2013, Whether any provisions of the Companies Act, 2013 have
been contravened?
Or
PQR Limited held 3 board meetings till 30th Sep. 2018 during the
calendar year 2018. The next board meeting was due to be held on
27th December, 2018 but for want of quorum the meeting could not
be held. A group of shareholders complained that the Company has
violated the provisions of section 173 of the Companies Act, 2013 in
not holding the required number of board meetings. State whether
PQR limited has violated the provisions given in Sec. 173 of the Act.
HINT: Refer Sec. 173(1) and 174(4). No provision of Companies Act,

2013 have been contravened as holding of the adjourned meeting though
in the next year will be treated as continuation of the 4th meeting of the

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previous year and will therefore not count in the meetings held in the
next year but in the previous year.
Q. No. 19: The board meeting of MNO Ltd. was held on 10th May,2019 at
Chennai at 11a.m. At the time of starting the board meeting the
number of director’s present were 7. The total number of directors
were 10. The board transacted ten items in the board meeting. At 12
noon after the completion of four items in the agenda 4 directors left
the meeting. Examine the validity of these transactions explaining
the relevant provisions of the Companies Act, 2013.
[Nov. 08 (5 Marks)]
HINT: Refer Sec. 174(1). First four transactions have been validly
transacted. Resolutions passed in respect of remaining 6 agenda items
are void.
Q. No. 20: The Articles of Association of Amriz Limited provides for a

maximum of 15 directors. But the company has only 10 directors
and for two of them representing Collaborators, alternate directors
have been appointed. Board meeting held on 1st August, 2019 was
attended by four directors including two alternate directors.
Examine with reference to the relevant provisions of the Companies
Act, 2013 whether quorum was present at the Board Meeting held
on 1st August, 2018. Will your answer be different, if the articles
provide for a quorum of six directors?
[Nov. 18-Old Syllabus (4 Marks)]
HINT: Refer Sec. 174(1). Quorum required was 4 directors, hence

quorum was present in the meeting (Alternate directors shall also be
included while computing quorum). However, if the Articles provide for a
quorum of 6 directors. Quorum is not present in the meeting.

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2.4 - Passing of resolution by circulation (Sec. 175)
Requirements No resolution shall be deemed to have been duly passed by the

for passing Board or by a committee thereof by circulation, unless the
resolution by resolution
circulation • has been circulated in draft, together with the necessary
- Sec. 175(1) papers, if any, to all the directors, or members of the committee,
as the case may be, at their addresses registered with the
company in India by hand delivery or by post or by courier, or
through such electronic means as may be prescribed
and
• has been approved by a majority of the directors or members,

who are entitled to vote on the resolution.
However, where not less than 1/3rd of the total number of

directors of the company for the time being require that any
resolution under circulation must be decided at a meeting, the
chairperson shall put the resolution to be decided at a meeting of
the Board.
Points to remember
Rule 5 of the Companies (Meetings of Board and its Powers)

Rules, 2014 provides that a resolution in draft form may be
circulated to the directors together with the necessary papers
for seeking their approval, by electronic means which may
include E-mail or fax.
Sec. 175(2) A resolution u/s 175(1) shall be noted at a subsequent meeting of

the Board or the committee thereof, as the case may be, and made
part of the minutes of such meeting.

Page 25
Important Questions
Q. No. 21: How is a resolution by circulation passed by the Board or its

Committee.
Or
Some urgent items are left over in the agenda of Board meeting
which concluded and decision cannot be deferred till its next
meeting. Advice the company about how the resolution shall be
passed now.
Or
Chairman of Board of Directors of ABC Ltd. came across a matter,

which required the approval by way of a board resolution. In the
prevailing circumstances, it is not possible to convene and hold a
Board Meeting. The Chairman approaches you to advise him of the
way and the relevant procedure to obtain such approval without
holding the Board Meeting. You are required to advise him on the
matter as per the provisions of the Companies Act, 2013.
[May 09 (5 Marks)]
Or
In the course of administration of the affairs of a limited company,
Chairman of the Board of directors came across a matter which
required the approval by way of a board resolution. In the
prevailing circumstances, it is not possible to convene and hold a
Board meeting. The chairman approaches you to advise him of the
way and the relevant procedure to obtain such approval without
holding the Board meeting. Advise the chairman, taking into
account the relevant provisions of the Companies Act, 2013.
[May 12 (8 Marks)]
HINT: Refer Sec. 175.

Page 26
2.5 – Defects in appointment of directors not to invalidate actions taken (Sec.

176)
Validity of • No act done by a person as a director shall be deemed to be

acts of invalid, notwithstanding that it was subsequently noticed that
directors in his appointment was invalid by reason of any defect or
case of disqualification or had terminated by virtue of any provision
defective contained in this Act or in the articles of the company.
appointment • However, any act done by the director after his appointment has
been noticed by the company to be invalid or to have terminated
shall not be valid.
Important Questions
Q. No. 22: Mr. M was appointed as a director at the AGM of a limited company
held on 30th Sep., 2018 and he carried on his duties and functions
as a director. In the month of August, 2019, it was found out that
there were certain irregularities in his appointment and on 31st
August, 2019, his appointment was declared invalid. But Mr. M
continued to act as director even after 31st August, 2019. Whether
the acts done by Mr. MTP are valid and binding upon the company?
HINT: Refer Sec. 176, acts done upto 31st Aug. 2019 are considered valid
and after 31st Aug. 2019 renders invalid.
2.6 - Audit Committee (Sec. 177)
Requirement Every listed public company and such other class of classes of
of companies as may be prescribed shall constitute an Audit
Constitution Committee.

Page 27
of Audit Rule 6 of the Companies (Meetings of Board and its powers)

Committee Rules, 2014
- Sec. 177(1)
• The Board of directors of every listed public company and a
company covered under rule 4 of the Companies (Appointment
and Qualification of Directors) Rules, 2014 shall constitute an
‘Audit Committee’ and a ‘Nomination and Remuneration
Committee of the Board’.
• Rule 4 of the Companies (Appointment and Qualification of
Directors) Rules, 2014 prescribes the following companies:
(i) Public companies having paid up share capital > Rs. 10 Cr;
or
(ii) Public Companies having turnover > Rs. 100 Cr;
or
(iii) Public companies having aggregate outstanding loans,

debentures and deposits > Rs. 50 Cr.
Note: The paid-up share capital or turnover or outstanding

loans, debentures and deposits as on the last date of latest
audited F.S. shall be considered for this purpose.
Composition • The Audit Committee shall consist of a minimum of 3 directors

of Audit with independent directors forming a majority.
Committee –
• It is also required that majority of members of Audit Committee
Sec. 177(2)
including its Chairperson shall be persons with ability to read
and understand the financial statement.

Page 28
Points to remember
In case of Section 8 companies whichhas not committed a

return u/s 92 with the Registrar, requirement of majority of
independent directors in composition of audit committee is not
applicable.
Functions of Every Audit Committee shall act in accordance with the terms of
Audit reference specified in writing by the Board which shall, inter alia,
Committee – include:
Sec. 177(4) (i) the recommendation for appointment, remuneration and
terms of appointment of auditors;
In case of Govt companies, this clause to be read as “the

recommendation for remuneration of auditors”.
(ii) review and monitor the auditor’s independence and

performance, and effectiveness of audit process;
(iii) examination of the financial statement and the auditors’

report thereon;
(iv) approval or any subsequent modification of transactions

of company with related parties;
(v) scrutiny of inter-corporate loans and investments;
(vi) valuation of undertakings or assets of the company,

wherever it is necessary;
(vii) evaluation of internal financial controls and risk

management systems;
(viii) monitoring the end use of funds raised through public offers
and related matters.

Page 29
Points to remember
Provisos to Sec. 177(4)(iv) provides the following:
• Audit Committee may make omnibus approval for related

party transactions proposed to be entered into by the
company subject to such conditions as prescribed in Rule 6A.
• In case of transaction, other than transactions referred to in

Sec. 188, and where Audit Committee does not approve the
transaction, it shall make its recommendations to the Board.
• In case any transaction involving any amount not exceeding

₹1 Cr. is entered into by a director or officer of the company
without obtaining the approval of the Audit Committee and
it is not ratified by the Audit Committee within 3 months
from the date of the transaction, such transaction shall be
voidable at the option of the Audit Committee and if the
transaction is with the related party to any director or is
authorised by any other director, the director concerned
shall indemnify the company against any loss incurred by it.
• Provisions of this clause shall not apply to a transaction,

other than a transaction referred to in section 188, between
a holding company and its wholly owned subsidiary
company.
Discretionary The Audit Committee may

Powers – Sec. (a) call for the comments of the auditors about internal control
177(5) systems, the scope of audit, including the observations of the
auditors, and

Page 30
(b) review of financial statement before their submission to the

Board and
(c) may also discuss any related issues with the internal and
statutory auditors and the management of the company.
Authority to • The Audit Committee shall have authority to investigate into

Investigate – any matter in relation to the items specified in Sec. 177(4) or
Sec. 177(6) referred to it by the Board.
• For this purpose, audit committee shall have power to obtain

professional advice from external sources and have full access
to information contained in the records of the company.
Auditor’s The auditors of a company and the key managerial personnel shall
right to be have a right to be heard in the meetings of the Audit Committee
heard when it considers the auditor’s report but shall not have the right
– Sec. 177(7) to vote.
Disclosures in The Board’s report u/s 134(3) shall disclose the composition of an
Board Report Audit Committee and where the Board had not accepted any
– Sec. 177(8) recommendation of the Audit Committee, the same shall be
disclosed in such report along with the reasons therefor.
Vigil (i) Every listed company and such class of companies as may
mechanism – be prescribed shall establish a vigil mechanism for their
Sec. 177(9) & directors and employees to report their genuine concerns
177(10) or grievances.
(ii) The vigil mechanism shall provide for adequate safeguards

against victimisation of persons who use such mechanism
and make provision for direct access to the chairperson of
the Audit Committee in appropriate or exceptional cases:

Page 31
(iii) The details of establishment of such mechanism shall be

disclosed by the company on its website, if any, and in the
Board’s report.
Points to remember
Rule 7 of Companies (Meetings of Board and its Powers)

Rules, 2014 provides that following companies shall establish
vigil mechanism
• the Companies which accept deposits from the public;
• the Companies which have borrowed money from banks

and public financial institutions in excess of ₹50 crore.
Rule 7 also provides the following:
(i) The companies which are required to constitute an audit

committee shall oversee the vigil mechanism through the
committee and if any of the members of the committee
have a conflict of interest in a given case, they should
recuse themselves and the others on the committee would
deal with the matter on hand.
(ii) In case of other companies, the Board of directors shall
nominate a director to play the role of audit committee for
the purpose of vigil mechanism to whom other directors
and employees may report their concerns.
(iii) The vigil mechanism shall provide for adequate
safeguards against victimisation of employees and
directors who avail of the vigil mechanism and also
provide for direct access to the Chairperson of the Audit
Committee or the director nominated to play the role of
Audit Committee, as the case may be, in exceptional cases.

Page 32
(iv) In case of repeated frivolous complaints being filed by a

director or an employee, the audit committee or the
director nominated to play the role of audit committee
may take suitable action against the concerned director
or employee including reprimand.
Penalty for Covered u/s 178(8)

Contravention
Important Questions
Q. No. 23: MNC Ltd., a company, whose paid-up capital was ₹4 Crores, has
issued rights shares in the ratio of 1:1. The said company is listed
with Mumbai Stock Exchange. Whether the company is required to
appoint any Audit Committee and if yes, draft a suitable Board
Resolution to appoint an Audit committee covering the aspects as
provided in the Companies Act, 2013. [MTP-April 19]
HINT: Refer Sec. 177(1). Company is required to constitute audit

committee.
Q. No. 24: R Ltd. wants to constitute an Audit Committee. In this reference,

answer the following:
(a) What would be the minimum likely turnover or capital of this

company?
(b) What is the role of the Audit Committee vis a vis the statutory
auditor when the company wishes to engage them to perform
certain engagements not restricted u/s 144?
[May 16 (4 Marks)]
HINT: (a) Refer Sec. 177(1) and Rule 6. (b) Refer Sec. 177(5).

Page 33
Q. No. 25: An Audit Committee of a Public Limited Company constituted u/s

177 of the Companies Act, 2013 submitted its report of its
recommendation to the Board. The Board, however, did not accept
the recommendations. In the light of the situation, analyze
whether:
(a) The Board is empowered not to accept the recommendations of

the Audit Committee.
(b) If so, what alternative course of action, would be Board resort
to?
HINT: Refer Sec. 177(8).
(a) Board is empowererd not to accept the recommendations of audit

committee.
(b) Disclosures required in Board Report.
Q. No. 26: Explain how the provisions of the Companies Act, 2013 relating to
Audit Committee will help in achieving some of the objectives of
Corporate Governance.
Q. No. 27: Explain briefly the provisions of the Companies Act, 2013
regarding constitution of "Audit Committee". MNC Ltd. constituted
an audit committee as required by the said Act. The committee in
its report dated 30th April 2019 has pointed out various
irregularities in the financial transactions entered into by the
company. The management of the company does not agree with the
contents of the audit committee report. Explain the action that can
be taken in this regard. [May 12 (8 Marks)]
HINT: Refer Sec. 177(1), 177(8) of Companies Act, 2013 & Rule 6.

Page 34
Q. No. 28: Referring to the provisions of the Companies Act, 2013, examine
the following: XYZ Limited, a listed company has constituted an
audit committee consisting of 5 members out of whom 2 are
independent directors. Subsequently, the company increased the
composition of audit committee to six members with three
independent directors. [Nov. 16 (2 Marks)]
HINT: Composition of audit committee is not in accordance with the

provisions of Sec. 177(2) as independent directors do not have majority.
2.7 – Nomination & Remuneration Committee & Stakeholders Relationship

Committee (Sec. 178)
Nomination Constitution • The Board of Directors of every listed Public

and of company and such other class or classes of
Remuneration Nomination companies, as may be prescribed shall
Committee Committee constitute the Nomination and Remuneration
– Sec. 178(1) Committee.

• Committee should consist of 3 or more non-
executive directors out of which not less than
½ shall be independent directors.
• Chairperson of the company (whether
executive or non-executive) may be
appointed as a member of the Nomination
and Remuneration Committee but shall not
chair such Committee.

Page 35
Point to remember
Rule 6 of the Companies (Meetings of Board

and its powers) Rules, 2014 provides that the
Board of directors of every listed public
company and a company covered under Rule
4 of the Companies (Appointment and
Qualification of Directors) Rules, 2014 shall
constitute an ‘Audit Committee’ and a
‘Nomination and Remuneration Committee of
the Board’.
Functions of The Nomination and Remuneration Committee

Committee shall
– Sec. 178(2) • identify persons who are qualified to become

directors and who may be appointed in
senior management in accordance with the
criteria laid down,
• recommend to the Board w.r.t. appointment
and removal of directors
• specify the manner for effective evaluation
of performance of Board, its committees
and individual directors to be carried out
either by the Board, by the Nomination and
Remuneration Committee or by an
independent external agency and review its
implementation and compliance.

Page 36
Point to remember
The expression ‘‘senior management’’ means

personnel of the company who are members
of its core management team excluding
Board of Directors comprising all members
of management one level below the
executive directors, including the functional
heads.

Committee shall
– Sec. 178(3) • formulate the criteria for determining

qualifications, positive attributes and
independence of a director
and
• recommend to the Board a policy, relating to

the remuneration for the directors, key
managerial personnel and other employees.

Committee shall, while formulating the policy u/s 178(3)
– Sec. 178(4) ensure that—
(a) the level and composition of

remuneration is reasonable and sufficient to
attract, retain and motivate directors of the
quality required to run the company
successfully;

Page 37
(b) relationship of remuneration to

performance is clear and meets appropriate
performance benchmarks; and
(c) remuneration to directors, key managerial
personnel and senior management involves
a balance between fixed and incentive pay
reflecting short and long-term performance
objectives appropriate to the working of the
company and its goals.
Point to remember
Proviso to Sec. 178(4) amended by Companies

(Amendment) Act, 2017 w.e.f. 07.05.2018.
Amended proviso is:
“Provided that such policy shall be placed on

the website of the company, if any, and the
salient features of the policy and changes
therein, if any, along with the web address of
the policy, if any, shall be disclosed in the
Board's report.”
Stakeholder • The Board of Directors of a company which consists of more

Relationship than 1,000 shareholders, debenture-holders, deposit-holders
Committee – and any other security holders at any time during a financial
Sec. 178(5) & year shall constitute a Stakeholders Relationship Committee
178(6) consisting of a chairperson who shall be a non-executive
director and such other members as may be decided by the
Board.
• The Stakeholders Relationship Committee shall consider and
resolve the grievances of security holders of the company.

Page 38
Duty of The chairperson of each of the committees constituted under

chairperson this section or, in his absence, any other member of the
- Sec. 178(7) committee authorised by him in this behalf shall attend the
general meetings of the company.
Penalty In case of any contravention of the provisions of Sec. 177 and
– Sec. 178(8) 178,
 the company shall be punishable with fine which shall not be

less than ₹1 lakh but which may extend to ₹5 lakh, and
 every officer of the company who is in default shall be

punishable with
• imprisonment for a term which may extend to 1 year
or
• with fine which shall not be less than ₹25,000 but which
may extend to ₹1 lakh,
or
• with both.
Exception Inability to resolve or consider any grievance by

the Stakeholders Relationship Committee in
good faith shall not constitute a contravention of
this section*.
* amended by Companies (Amendment) Act,

2017 w.e.f. 07.05.2018

Page 39
Points to remember - Exemptions
• Sec. 178 shall not apply to Section 8 Companies.

• Sec. 178(2), (3), (4) shall not apply to Government company with regard to
appointment of ‘Senior management’ and other employees.
• In case of Sec. 8 and government companies, exemption is subject to the
condition that such companies has not committed a default in filing of their
financial statements u/s 137 or annual return u/s 92 with the Registrar.
Important Questions
Q. No. 29: Referring to the provisions of the Companies Act, 2013, answer the
following:
(a) Which companies are required to constitute a 'Nomination and

Remuneration Committee'?
(b) What is the composition of the above committee?
[May 15 (4 Marks)]
Q. No. 30: M/s DreamWorks Limited (an unlisted company) without any
public deposits as per the audited financial statements of the
company as at March, 31st 2019 given you the following
information:
Paid up Share Capital Rs. 20 Crores
Gross Turnover Rs. 500 Crores
Bank Borrowings Rs. 40 Crores (from a Nationalized Bank)
Other Borrowings Rs. 40 Crores (from a Public Financial

Institution)

Page 40
Mr. Gupta, a Chartered Accountant employed in the finance and

audit department of the company wants to form a Vigil Mechanism
for directors and employees of the company.
(1) Advise whether it is mandatory for M/s DreamWorks Limited

to formulate a Vigil Mechanism under the provisions of the
Companies Act, 2013 and rules framed there under.
(2) Are there any penalties that could be imposed on the company
for not formulating the Vigil Mechanism?
[May 18 – Old Syllabus (4 Marks)]
HINT: Refer Sec. 177 along with Rule 7 of Companies (Meeting of Board
and Its Power) Rules, 2014 and Sec. 178.
(1) Company is mandatorily required to formulate a vigil mechanism as

its borrowings exceeds ₹50 Crore.
(2) Penalty as prescribed u/s 178(8) will be imposed.
2.8 - Powers of Board (Sec. 179)
Entitlement • The Board of Directors of a company shall be entitled to exercise

of Board to all such powers, and to do all such acts and things, as the
exercise company is authorised to exercise and do.
powers of • However, in exercising such power or doing such act or thing, the
company Board shall be subject to the provisions contained in that behalf in
– Sec. this Act, or in the memorandum or articles, or in any regulations
179(1) not inconsistent therewith and duly made thereunder, including

regulations made by the company in general meeting:

Page 41
Exception The Board shall not exercise any power or do any act
or thing which is directed or required, whether
under this Act or by the memorandum or articles of
the company or otherwise, to be exercised or done
by the company in general meeting.
Validation No regulation made by the company in general meeting shall

of Acts of invalidate any prior act of the Board which would have been valid if
Board
that regulation had not been made.
– Sec.
179(2)
Powers to The Board of Directors of a company shall exercise the following

be powers on behalf of the company by means of resolutions passed at
exercised meetings of the Board, namely: —
by Board in (a) to make calls on shareholders in respect of money unpaid on
Meeting – their shares;
Sec. 179(3) (b) to authorise buy-back of securities u/s 68;
(c) to issue securities, including debentures, whether in or outside

India;
(d) to borrow monies;
(e) to invest the funds of the company;
(f) to grant loans or give guarantee or provide security in respect of
loans;
(g) to approve financial statement and the Board’s report;
(h) to diversify the business of the company;
(i) to approve amalgamation, merger or reconstruction;
(j) to take over a company or acquire a controlling or substantial
stake in another company;
(k) any other matter which may be prescribed.

Page 42
Note: In case of Sec. 8 companies which has not committed a

return u/s 92 with the Registrar, matters referred to in clauses
(d), (e) and (f) may be decided by the Board by circulation instead
of at a meeting.
Powers of Board - Rule 8 of the Companies (Meetings of Board

and its Powers) Rules, 2014
In addition to the powers specified u/s 179(3) of the Act, the

following powers shall also be exercised by the Board of Directors
only by means of resolutions passed at meetings of the Board:
(1) to make political contributions;

(2) to appoint or remove key managerial personnel (KMP);
(3) to appoint internal auditors and secretarial auditor.
Delegation Board may, by a resolution passed at a meeting,

of Powers to delegate the powers specified in clauses (d) to (f) on
committee, such conditions as it may specify to:
MD etc. • any committee of directors,
• the managing director,
• the manager or any other principal officer of the
company or
• in the case of a branch office of the company, the
principal officer of the branch office.
Special • The acceptance by a banking company in the

provisions ordinary course of its business of deposits of
w.r.t. money from the public repayable on demand or
Banking otherwise and withdrawable by cheque, draft,
companies order or otherwise,

Page 43
or
• the placing of monies on deposit by a banking

company with another banking company on such
conditions as the Board may prescribe,
shall not be deemed to be a borrowing of monies or,

as the case may be, a making of loans by a banking
company within the meaning of this section.
Explanations • Nothing in clause (d) shall apply to borrowings by

a banking company from other banking
companies or from the RBI, the SBI or any other
banks established by or under any Act.
• In respect of dealings between a company and its
bankers, the exercise by the company of the
power specified in clause (d) shall mean the
arrangement made by the company with its
bankers for the borrowing of money by way of
overdraft or cash credit or otherwise and not the
actual day-to-day operation on overdraft, cash
credit or other accounts by means of which the
arrangement so made is actually availed of.
Right of Nothing in this section shall be deemed to affect the right of the
company to company in general meeting to impose restrictions and conditions
imposes on the exercise by the Board of any of the powers specified in this
restrictions section.
– Sec.
179(4)

Page 44
Important Questions
Q. No. 31: A is the Director of M & Co. Ltd. A has borrowed ₹50 lacs on
reasonable terms from X for company's benefit and business. A has
no power to borrow. What will be the legal position? Please
explain. [Nov. 10 (5 Marks)]
HINT: Refer Sec. 179(3). To borrow money is within the implied

authority of a director and so the outsiders dealing with the company
are entitled to assume that every director is authorised to borrow
money on behalf of the company. In the present case, money has been
borrowed and used for the benefit of the company and its legitimate
business purposes. Therefore, the company cannot repudiate the
liability on the ground that the director ‘A’ has no power to borrow.
Q. No. 32: Out of the powers exercisable by the Board u/s 179, the board
wants to delegate to the Managing Director of the company the
power to borrow monies otherwise than on debentures. Advise
whether such a delegation is possible? Would your answer be
different, if the delegation is given to the manager or any other
principal officer including a branch officer of the company?
[MTP-April 18]
HINT: Refer Sec. 179(3). Delegation is possible.
Q. No. 33: Advise the Board of Director of Spectra Papers Ltd. regarding
validity and extent of their powers, under the provisions of the
Companies Act, 2013 in relation to the following matters:
(i) Buy-back of the shares of the Company, for the first time, upto
10% of the paid-up equity share capital without passing a
special resolution.

Page 45
(ii) Delegation of Power to the Managing Director of the company to

invest surplus funds of the company in the shares of some
companies. [May 10 (5 Marks)]
HINT: Refer Sec. 179(3), 68(2) and 186(5).
(i) Buy back upto 10% of paid up equity capital is allowed without
special resolution provided it is authorised by the Board by means of
a resolution passed at its meeting.
(ii) Delegation of power to the Managing Director to invest surplus funds
of the company in the shares of some other companies, is not in
order.
Q. No. 34: M/s. Multiplex Builders Limited is contemplating to enter into a

joint venture agreement with another construction company for
the development of landed properties located at Delhi. Since it is
not possible to convene the Board Meeting immediately, as the
directors are at different place in connection with various works,
the Managing Director seeks your advice on the following matters:
(a) Whether the resolution pertaining to the joint venture

agreement is required to be passed at the Board Meeting
convened for this purpose or whether it can be passed by
means of a circular resolution?
(b) What are the resolutions that are required to be passed only at
the meetings of the Board of Directors?
(c) The steps that are required to be taken to pass the Board
resolution by circulation.
Advise the Managing Director in the light of the provisions of the

Companies Act, 2013. [RTP-Nov. 18]
HINT: Refer Sec. 175 & 179. Resolution for Joint venture agreement may
be passed through circular resolution.

Page 46
2.9 - Restrictions on Powers of Board (Sec. 180)
Matters The Board of Directors of a company shall exercise the following

requiring powers only with the consent of the company by a special
consent of resolution, namely:
company by (a) to sell, lease or otherwise dispose of the whole or substantially
SR – Sec. the whole of the undertaking of the company or where the
180(1) company owns more than one undertaking, of the whole or
substantially the whole of any of such undertakings.
(b) to invest otherwise in trust securities the amount of
compensation received by it as a result of any merger or
amalgamation;
(c) to borrow money, where the money to be borrowed, together
with the money already borrowed by the company will exceed
aggregate of its paid-up share capital, free reserves and
securities premium, apart from temporary loans obtained
from the company’s bankers in the ordinary course of business:
Provided that the acceptance by a banking company, in the
ordinary course of its business, of deposits of money from the
public, repayable on demand or otherwise, and withdrawable by
cheque, draft, order or otherwise, shall not be deemed to be a
borrowing of monies by the banking company within the
meaning of this clause.
(d) to remit, or give time for the repayment of, any debt due from a
director.

Page 47
Points to remember
• For the purposes of this clause (a), the term “undertaking”

shall mean an undertaking in which the investment of the
company exceeds 20% of its net worth as per the audited
balance sheet of the preceding financial year or an
undertaking which generates 20% of the total income of the
company during the previous financial year.
• For the purposes of this clause (a), the expression
“substantially the whole of the undertaking” in any financial
year shall mean 20% or more of the value of the undertaking
as per the audited balance sheet of the preceding financial
year.
• For the purposes of clause (c), the expression “temporary
loans” means loans repayable on demand or within 6 months
from the date of the loan such as short-term, cash credit
arrangements, the discounting of bills and the issue of other
short-term loans of a seasonal character but does not include
loans raised for the purpose of financial expenditure of a
capital nature.
Amount of Every special resolution passed by the company in general meeting

maximum in relation to the exercise of the powers referred to in clause (c) of
borrowing sub-section (1) shall specify the total amount up to which monies
to be may be borrowed by the Board of Directors.
specified in
SR
– Sec.
180(2)

Page 48
Exception to Nothing contained in clause (a) of sub-section (1) shall affect—

Clause (a) of (a) the title of a buyer or other person who buys or takes on lease
Sec. 180(1) any property, investment or undertaking as is referred to in that
- Sec. clause, in good faith;
180(3) or
(b) the sale or lease of any property of the company where the
ordinary business of the company consists of, or comprises,
such selling or leasing.
Implications • Any SR passed by the company consenting to the transaction

of SR passed covered in clause (a) of Sec. 180(1) may stipulate such
under conditions regarding the use, disposal or investment of the sale
clause (a) of proceeds which may result from the transactions.
Sec. 180(1) • It shall not be deemed to authorise the company to effect any
- Sec. 180(4) reduction in its capital except in accordance with the provisions
contained in this Act.
Validity of No debt incurred by the company in excess of the limit imposed by

debt raised clause (c) of sub-section (1) shall be valid or effectual, unless the
in excess of lender proves that
limit • he advanced the loan in good faith
– Sec. and
180(5)
• without knowledge that the limit imposed by that clause had
been exceeded.

Page 49
Points to remember
Sec. 180 shall not apply to a private company which has not committed a
default in filing of its financial statements u/s 137 or annual return u/s 92
with the Registrar.
Important Questions
Q. No. 35: The Board of Directors of Stepping Stones Publications Ltd. at a

meeting held on 15.1.2019 resolved to borrow a sum of ₹15 crores
from a nationalized bank. One of the Directors, who opposed the
said borrowing as not in the interest of the company has raised an
issue that the said borrowing is outside the powers of the Board of
Directors. The Company seeks your advice and the following data is
given for your information:
(i) Share Capital - ₹5 crores
(ii) Reserves and Surplus - ₹5 crores
(iii) Secured Loans - ₹15 crores
(iv) Unsecured Loans - ₹5 crores
Advice the management of the company.
HINT: Refer Sec. 180(1). Proposed borrowing of ₹15 crores will exceed
the prescribed limit, so the management should take steps to convene
the general meeting and pass a special resolution.
Q. No. 36: The paid-up share capital and free reserves of XYZ Co. Limited, a
public company is ₹100 crore as on 1st April 2019. The
shareholders of the company at a general meeting held on 4th April
2019 by a special resolution authorise the board of directors of the

Page 50
company to borrow the money exceeding the paid-up share capital

and free reserves of the company to the extent required by the
board of directors. The board of directors as a result borrow money
to the extent of ₹130 crores including ₹20 crores as short-term
loans and ₹25 crore is the temporary loan for financing the
construction of a building of the company. Referring to the
provisions of Companies Act, 2013 examine the validity of the
following:
(a) The board exercising the powers for borrowing money to an

extent of ₹130 Crores.
(b) What would be your answer in case the company paid-up share
capital and free reserves increased to ₹150 crores and the
board of director borrow money to an extent of ₹140 crore
which neither includes any short-term loan nor temporary
loan for financing of the construction of building of the
company.
HINT: Refer Sec. 180(1)(c). Special resolution passed in general meeting

is defective as it does not specify the total amount upto which money
can be borrowed.
(a) Borrowings made by BOD (₹130 Cr. - ₹25 Cr.) is in violation of Sec.
180(1)(c) as it exceeds ₹100 Cr.
(b) Borrowings made by BOD (₹140 Cr.) is within the limits prescribed
by Sec. 180(1)(c), i.e. aggregate of paid up capital and free reserves.
Q. No. 37: Big Ben Ltd., a reputed public company, had advanced certain sum
of money to one of its Directors, namely, Mr. Tanmay on certain
terms and conditions and fixing the time limit for repayment
thereof. Now, Mr. Tanmay has approached the Company with a

Page 51
request to extend the time limit for repayment of balance of loan

amounting to Rs.12.00 lacs by another six months.
You are required to state with reference to the provisions of the

Companies Act, 2013, the answer to the following:
(i) Who is authorized to grant the extension as requested by Mr.

Tanmay?
(ii) Draft an appropriate notice for the meeting where such
extension may be granted. [May 09 (5 Marks)]
HINT: Refer Sec. 180(1)(d). Approval of members in general meeting by

special resolution is required.
Q. No. 38: The Balance Sheet of International Operators Ltd as at 31-03-2019

disclose the following position:
₹ in Crores
Share Capital 100
Reserves & Surplus 300
Secured Loans 150
Unsecured Loans 100
Current Liabilities 70
Mr. X, the Managing Director of the company approaches the Royal

Bank for a secured loan of ₹600 crores to finance the new projects
to be taken up shortly. The Bank seeks your advise whether it can
grant the loan of ₹600 crores on the application of Mr. X. Advise the
Royal Bank having regard to the provisions of the Companies Act,
2013. [May 11 (8 Marks)]

Page 52
HINT: Refer Sec. 180(1)(c). Proposal of the company to borrow ₹600

crores exceed the paid-up share capital and free reserves of the
company to the tune of ₹200 crores (i.e. ₹600 crores – ₹400 crores =
₹200 crores) without taking into account the existing loan. Thus, Royal
Bank should advise Mr. X, the Managing Director of the company to get
the approval of the shareholders of the company before considering the
request of the company for a loan of ₹600 crores.
Q. No. 39: Following is data relating to Prince Company Limited:
(₹)
Authorised Capital (Equity Shares) 100 crores
Paid – up Share Capital 40 crores
General Reserves 20 crores
Debenture Redemption Reserve 10 crores
Provision for Taxation 5 crores
Loan (Long Term) 10 crores
Short Term Creditors 3 crores
Board of Directors of the company by a resolution passed at its

meeting decided to borrow an additional sum of ₹90 crores from
the company’s Bankers. You being the company’s financial advisor,
advise the Board of Directors the procedure to be followed as
required under the Companies Act, 2013. [Nov. 14 (5 Marks)]
HINT: Refer Sec. 180. A general meeting need to be convened and a

special resolution is required as the borrowing exceeds the prescribed
limits.

Page 53
Q. No. 40: One of the Objects Clauses of the Memorandum of Association of

Info Company Limited conferred upon the company power to sell
its undertaking to another company with identical objects.
Company’s Articles also conferred upon the directors whereby
power was conferred upon them to sell or otherwise deal with the
property of the company. At an Extraordinary General Meeting of
the company, members passed an ordinary resolution for the sale
of its assets on certain terms and authorized the directors to carry
out the sale. Directors refused to comply with the wishes of the
members where upon it was contended on behalf of the members
that they were the principals and directors being their agents, were
bound to give effect to their (members’) decisions.
Examining the provisions of the Companies Act, 2013, answer the

following:
(a) Whether the contention of members against the non-

compliance of members’ decision by the directors is tenable?
(b) Whether it is possible for the members usurp the powers which
by the Articles are vested in the directors by passing a
resolution in the general meeting?
[Nov. 15 (4 Marks), MTP-March 18, Oct.19]
(a) Contention of the shareholders is incorrect as it is not within their

authority to approve a proposal independently of the Board of
Directors.
(b) In exercising their powers, the directors do not act as agent for the
members. The members therefore, cannot by resolution passed by a

Page 54
majority or even unanimously supersede the powers of directors or

instruct them how they shall exercise their powers. The
shareholders have, however, the power to alter the Articles of
Association of the company in the manner they like subject to the
provisions of the Companies Act, 2013.
Q. No. 41: The following information is provided in respect of M/s. Fortune

Limited under three different case scenarios on the borrowing
powers of the Board of Directors of the company. MR. Murli, the
CFO seeks your advice with explanations as to the nature of
resolution which needs to be passed under each of the case
scenarios as per the provisions of section 180 (1)(c) of the
Companies Act, 2013. Detailed workings should form part of your
answer.
Case I Case II Case III

Particulars
(₹ in Crores) (₹ in Crores) (₹ in Crores)
Equity Share Capital 150 150 150

(Paid-up)
Preference Share 50 50 50
Capital (Paid-up)
Securities Premium 50 50 50
Account
Free Reserves 20 20 20
Total 270 270 270

Page 55
Working Capital 50 50 50
Loan (repayable on
demand Existing)
from Sigma Capital
Limited
Cash Credit Limited 120 120 120

from a scheduled
bank (repayable on
demand-Existing)
6 months loan for 30 40 130

purchase of Plant &
Machinery from
scheduled bank-
(proposed)
24 months loan for 10 20 150

purchase of Plant &
Machinery from
scheduled bank-
(proposed)
Total 210 230 450
[May 19-New Syllabus (4 Marks)]
HINT: Board Resolution (Case I & Case II) and Special resolution (Case
III).

Page 56
2.10 - Company to contribute to bona fide and charitable funds, etc. (Sec. 181)
Limit on • The Board of Directors of a company may contribute to bona fide

contribution charitable and other funds.
• However, if the aggregate of contribution in any financial year,
exceed 5% of average net profits for the 3 immediately preceding
financial years, prior permission of the company in general
meeting shall be required.
Points to remember
• If the company is in existence for less than three years,

average of all preceding years may be taken.
Important Questions
Q. No. 42: The last three years’ Balance Sheet of PTL Ltd., contains the
following information and figures:
As at As at As at
31.03.2017 31.03.2018 31.03.2019
(₹) (₹) (₹)
Paid up capital 50,00,000 50,00,000 75,00,000
General Reserve 40,00,000 42,50,000 50,00,000
Credit Balance in P & L 5,00,000 7,50,000 10,00,000

A/c
Debenture Redemption 15,00,000 20,00,000 25,00,000

Reserve

Page 57
Securities Premium 2,00,000 2,00,000 2,00,000
Secured Loans 10,00,000 15,00,000 30,00,000
On-going through other records of the Company, the following is

also determined:
As at As at As at
31.03.2017 31.03.2018 31.03.2019
(₹) (₹) (₹)
Net Profit for the year 12,50,000 19,00,000 34,50,000

(as calculated in
accordance with the
provisions of the
Companies Act, 2013)
In the ensuing Board Meeting scheduled to be held on 5th

November, 2019, among other items of agenda, following items are
also appearing:
(i) To decide about borrowing from Financial institutions on long-

term basis.
(ii) To decide about contributions to be made to Charitable funds.
Based on above information, you are required to find out as per

the provisions of the Companies Act, 2013, the amount upto which
the Board can borrow from Financial institution and the amount
upto which the Board of Directors can contribute to Charitable
funds during the financial year2019-20 without seeking the
approval in general meeting. [MTP-March 19]

Page 58
HINT: Refer Section 180 and 181. Amount that can be borrowed –
₹1,07,00,000.
Amount that can be contributed to charitable funds – ₹1,10,000
Q. No. 43: The Board of directors of Very Well Ltd., are contributing every year
to a charitable organization a sum of ₹60,000. In a particular year,
the company suffered losses and the directors are contemplating to
contribute the said amount in spite of the losses. In this connection,
state whether the directors can do so?
HINT: Refer Sec. 181. Company may contribute upto 5% of average net
profit of preceding 3 years.
Q. No. 44: The Board of Directors of LM Limited propose to donate ₹3,00,000

to a school established exclusively for the benefit of children of
employees and also donate ₹50,000 to a political party during the
Financial year ending 31st March, 2019. The average net profits
during the 3 immediately preceding financial years is ₹40,00,000.
Examine with reference to the provisions of the Companies Act,
2013 whether the proposed donations are within the power of the
Board of Directors of company. [Nov. 09 (5 Marks)]
HINT: Refer Sec. 181 & 182. Donation to a school exclusively for benefit
of children of employees will not amount to donation to a charitable
fund. Hence restriction of Sec. 181 will not be applicable and Board is
empowered to make the proposed donation.
Regarding donation to political parties, limits prescribed u/s 182 has

been removed by Finance Act, 2017 and hence Board is empowered to
make the proposed donation subject to satisfaction of conditions
prescribed u/s 182.

Page 59
Q. No. 45: M/s Jai Industries Limited earned net profit for the last three years
as under:
Financial Year Net Profit (₹ in Crores)
2015-16 30
2016-17 40
2017-18 50
During the financial year 2018-19, the Board of Directors of the

company contributed to a Charitable Fund ₹1.25 crore in July, 2018.
Again, in January 2019, the Board of Directors passed resolution to
contribute to another Charitable Fund ₹1.00 crore.
Decide the validity of the decision of the Board of Directors
regarding the contribution on both the occasions with reference to
the provisions of the Companies Act, 2013. [Nov. 17 (6 Marks)]
HINT: Refer Sec. 181. Donation made in July 2018 is in accordance with
Sec. 181. However, resolution passed in Jan. 2019is not proper as
aggregate donation exceeds 5% of average net profit.
2.11 - Prohibitions and restrictions regarding political contributions (Sec. 182)
Conditions Companies Any company, other than

for making eligible to • a Government company
contribution contribute
and
- Sec 182(1)
• a company which has been in existence for less
than 3 financial years,
may contribute any amount directly or indirectly

to any political party.

Page 60
Limit on Removed by Finance Act, 2017

Contribution
Conditions • No such contribution shall be made by a

as to company unless a resolution authorising the
Resolution making of such contribution is passed at a
meeting of the BOD
and
• such resolution shall, subject to the other
provisions of this section, be deemed to be
justification in law for the making of the
contribution authorised by it.
Deemed (a) a donation or subscription or payment caused to be given by a

Contribution company on its behalf or on its account to a person who, to its
- Sec. 182 (2) knowledge, is carrying on any activity which, at the time at
which such donation or subscription or payment was given or
made, can reasonably be regarded as likely to affect public
support for a political party shall also be deemed to be
contribution of the amount of such donation, subscription or
payment to such person for a political purpose.
(b) the amount of expenditure incurred, directly or indirectly, by a
company on an advertisement in any publication, being a
publication in the nature of a souvenir, brochure, tract,
pamphlet or the like, shall also be deemed, -
(i) where such publication is by or on behalf of a political
party, to be a contribution of such amount to such political
party, and

Page 61
(ii) where such publication is not by or on behalf of, but for the
advantage of a political party, to be a contribution for a
political purpose.
Disclosure in Every company shall disclose in its profit and loss account the
P & L Account total amount contributed by it under this section during the
- Sec. 182(3) financial year to which the account relates.
Mode of • Notwithstanding anything contained in Sec. 182(1), the

contribution contribution underthis section shall not be made except by an
– Sec. account payee cheque drawn on a bank or anaccount payee
182(3A) bank draft or use of electronic clearing system through a bank

account.
• Contribution may be made through any instrument,
issuedpursuant to any scheme notified under any law for the
time being in force, for contribution to the political parties.
Penalty for • If a company makes any contribution in contravention of the

contravention provisions of this section, the company shall be punishable with
- Sec. 182(4) fine which may extend to five times the amount so contributed
and
• every officer of the company who is in default shall be

punishablewith
→ imprisonment for a term which may extend to six months
and
→ with fine which may extend to five times the amount so

contributed.

Page 62
Important Questions
Q. No. 46: M/s XYZ Ltd. was incorporated on 1st January, 2016. On 1st Nov.,
2018 a political party approaches the company for a contribution
of Rupees Ten lakhs for political purpose. Advise in respect of the
following:
(i) Is the company legally authorized to give this political

contribution?
(ii) Will it make any difference, if the company was in existence on

1st October, 2015?
(iii) Can the company be penalized for defiance of Rules of this

regard?
(i) Company is not allowed to make political contribution.

(ii) Company is allowed to make political contribution.
(iii) Company is punishable with fine u/s 182(4).
Q. No.47: The Board of Directors of LM Limited propose to donate ₹3,00,000

to a school established exclusively for the benefit of children of
employees and also donate ₹50,000 to a political party during the
Financial year ending 31st March, 2019. The average net profits
during the 3 immediately preceding financial years is ₹40,00,000.
Examine with reference to the provisions of the Companies Act,
2013 whether the proposed donations are within the power of the
Board of Directors of company. [Nov. 09 (5 Marks)]
HINT: Refer Sec. 181 & 182. Donation to a school exclusively for benefit

Page 63
of children of employees will not amount to donation to a charitable

fund. Hence restriction of Sec. 181 will not be applicable and Board is
empowered to make the proposed donation.
Regarding donation to political parties, limits prescribed u/s 182 has

been removed by Finance Act, 2017 and hence Board if empowered to
make the proposed donation subject to satisfaction of conditions
prescribed u/s 182.
Q. No. 48: X Ltd. was registered in the year 2018 under the Companies Act
2013. The management of the company decides to make donation
in the year 2019-20 to recognized political party. Advise the
management about the restrictions and the extent up to which such
donation can be made under the said Act. Will it make any
difference if X Ltd. was registered in the year 2015?
[May 11 (8 Marks)]
HINT: Refer Sec. 182. As company was in existence for period less than
3 financial years, donation is not allowed. If company was registered in
the year 2015, company may contribute any amount subject to
satisfaction of prescribed conditions.
Q. No. 49: Win Ltd. is a company incorporated 15 years ago and during the
last 3 consecutive financial years it earned profits, of Rs. 5.00 lakhs,
8.00 lakhs and 11.00 lakhs. In order to augment its business
prospects, it wants to make donations to political parties. State
with reference to the provisions of the Companies Act, 2013
whether the company can make such donations and if yes to what
extent. [May 12 (8 Marks)]

Page 64
Or
Sewak Cycles Limited is a company incorporated four years ago. It

has earned profits amounting Rs. 5 lakhs, Rs. 8 lakhs and Rs. 11
lakhs respectively during the last three financial years. The Board
of Directors of the company propose to donate a sum of Rs. 50,000
to a political party. Examine with reference to the provisions of the
Companies Act, 2013, whether the proposed donation is within the
powers of the Board of Directors of the company.
[May 15 (4 Marks)]
HINT: Refer Sec. 182. Proposed donation is within the powers of the
BOD, subject to prescribed conditions.
Q. No. 50: Srajan Ltd., a company incorporated in July 2012. The Board of
Directors of Srajan Ltd., proposed to donate Rs. 2,00,000 to a school
established exclusively for the benefit of the employees of the
company. Besides, also proposed to donate Rs.1 lac to a political
party during the financial year ending March 31, 2019. The net
profit during the financial year 2018 -2019, was Rs.35,00,000.
Evaluate the given below situations in the light of the stated facts
under the relevant provisions of the Companies Act, 2013-
(i) Whether the proposed political donation made by the Srajan

Ltd., are within the powers of the Board of Directors of the
company
(ii) Whether the contribution by Srajan Ltd. to school established
for the benefit of an employee is charitable contribution.
[MTP-Oct. 18]

Page 65
HINT: Refer Sec. 181 & 182.
(i) Proposed political donation is within the powers of the Board of

Directors of the company.
(ii) Contribution to school established for the benefit of an employee is
not a charitable contribution.
Q. No. 51: State with reference to the provisions of the Companies Act, 2013
whether the following companies can make donations to political
parties and if so the conditions to be complied with in this regard.
(i) ABCD Ltd., a Government company registered in 1991, wants

to donate a sum of Rs. 10 lakhs.
(ii) EFG Ltd., a public company registered in 2014, wishes to

contribute a sum of Rs. 5 lakhs.
(iii) RST Ltd., a company incorporated in the year 2015, decides to

contribute a sum of Rs. 3 lakhs.
(iv) Rama Ltd., wants to make political contribution of Rs. 2,000 in

cash. [Nov. 18-Old Syllabus (4 Marks)]
HINT: Refer Sec. 182. (i) Not Allowed being a government company (ii)
Allowed (iii) Allowed (iv) contribution in cash not allowed.

Page 66
2.12 - Power of Board and other persons to make contributions to national

defence fund, etc. (Sec. 183)
Contribution The Board of Directors of any company or any person or authority

to National exercising the powers of the Board of Directors of a company, or of
Defence Fund the company in general meeting, may, notwithstanding anything
contained in sections 180, 181 and section 182 or any other
provision of this Act or in the memorandum, articles or any other
instrument relating to the company, contribute such amount as it
thinks fit to the National Defence Fund or any other Fund
approved by the Central Government for the purpose of national
defence.
Disclosures Every company shall disclose in its profits and loss account the
in P & L A/c total amount or amounts contributed by it to the Fund referred to
in sub-section (1) during the financial year to which the amount
relates.
Important Questions
Q. No. 52: The Articles of Association of M/s. DEF Limited (Non-Government

Company) restricts the Company to contribute to National Defence
Fund in any financial year for a sum not exceeding Rs. 5 Lakhs. The
Articles is silent about contribution to bonafide Charitable Fund
and to a Political Party. The Company earned net profit during the
last five financial years as under:
Financial Year Net Profit (in Lakhs)
2018-19 45

Page 67
2017-18 25
2016-17 20
2015-16 15
2014-15 10
The Board of Directors proposes to contribute in July 2019 for the

first time during the financial year 2019-20:
(i) Rs. 7 Lakhs to National Defence Fund
(ii) Rs. 3 Lakhs to a bonafide Charitable Fund
(iii) Rs. 5 Lakhs to a Political Party
The Company seeks your advice on the following matters in respect

of each of the above proposals under the provisions of the
Companies Act, 2013.
(i) The appropriate approving authority;
(ii) The quantum of contribution that can be made;
(iii) The mode of payment of such contribution.
[Nov. 19 – New Syllabus (6 Marks)]
HINT: Refer Sec. 181, 182 and 183.
Approving Quantum Mode of

Authority Payment
National Board of Any Amount Any Mode

Defence Fund Directors or any (₹ 7 Lakhs)
person or
authority

Page 68
exercising the
powers of the
Board of
Directors of a
company, or of
the company in
general meeting.
Charitable Fund Board of Upto ₹ 1.50 Any Mode

Directors Lacs (5% of
30 Lacs)
Company in Above ₹ Any Mode

general Meeting 1.50 Lacs
Political Party Board of Any Amount A/c payee

Directors (₹ 5 Lakhs) cheque or an a/c
payee bank draft
or use of ECS
through a bank
account or
through any
instrument,
issued pursuant
to any scheme
notified under
any law for the
time being in
force.

Page 69
2.13 - Disclosure of interest by director (Sec. 184)
Time and Every director shall

Manner • at the first meeting of the Board in which he participates as a
of Disclosure director and thereafter at the first meeting of the Board in every
of Interest- financial year
Sec. 184(1) or
• whenever there is any change in the disclosures already made,

then at the first Board meeting held after such change,
disclose his concern or interest in any company or companies or

bodies corporate, firms, or other association of individuals which
shall include the shareholding, in such manner as may be
prescribed.
Disclosures by a director of his interest - Rule 9 of The

Companies (Meetings of Board and its power) Rules, 2014
(1) Every director shall disclose his concern or interest in any

company or companies or bodies corporate (including
shareholding interest), firms or other association of
individuals, by giving a notice in writing in Form MBP 1.
(2) It shall be the duty of the director giving notice of interest to
cause it to be disclosed at the meeting held immediately after
the date of the notice.
(3) All notices shall be
• kept at the registered office;
• preserved for a period of 8 years from the end of the financial
year to which it relates, and

Page 70
• shall be kept in the custody of the Company Secretary of the

company or any other person authorized by the Board for the
purpose.
Circumstance Every director of a company who is in any way, whether directly or

s requiring indirectly, concerned or interested in a contract or arrangement or
disclosure proposed contract or arrangement entered into or to be entered
-Sec. 184(2) into—
(a) with a body corporate in which such director or such director

in association with any other director, holds more than 2% of
shareholding of that body corporate, or is a promoter,
manager, CEO of that body corporate; or
(b) with a firm or other entity in which, such director is a partner,
owner or member, as the case may be,
shall disclose the nature of his concern or interest at the meeting

of the Board in which the contract or arrangement is discussed and
shall not participate in such meeting.
Points to remember
• Proviso to Sec. 184(2) - Where any director who is not so

concerned or interested at the time of entering into such
contract or arrangement, he shall, if he becomes concerned
or interested after the contract or arrangement is entered
into, disclose his concern or interest forthwith when he
becomes concerned or interested or at the first meeting of
the Board held after he becomes so concerned or interested.
• MCA Notifications
(a) In case of Private Companies which has not committed a

Page 71
default in filing of its financial statements u/s 137 or

annual return u/s 92 with the Registrar, Sec. 184(2) shall
apply with the exception that interested director may
participate in such meeting after disclosure of interest.
(b) In case of Section 8 companieswhich has not committed a
default in filing of its financial statements u/s 137 or
annual return u/s 92 with the Registrar, Sec. 184(2) shall
apply only if the transaction with reference to Sec. 188 on
the basis of terms and conditions of the contract or
arrangement exceeds Rs. 1 Lac.
Voidable A contract or arrangement entered into by the company

contract • without disclosure under sub-section (2)
-Sec.184(3) or
• with participation by a director who is concerned or interested

in any way, directly or indirectly, in the contract or
arrangement,
shall be voidable at the option of the company.
Penalty If a director of the company contravenes the provisions of sub-
-Sec.184(4) section (1) or subsection (2), such director shall be punishable
• with imprisonment for a term which may extend to one year
,or
• with fine uptoRs. 1,00,000
or
• with both.

Page 72
Sec. 184(5) Nothing in this section-
(a) shall be taken to prejudice the operation of any rule of law

restricting a director of a company from having any concern or
interest in any contract or arrangement with the company;
(b) shall apply to any contract or arrangement entered into or to
be entered into between two companies or between one or
more companies and one or more bodies corporate where any
of the directors of the one company or body corporate or two
or more of them together holds or hold not more than 2% of
the paid-up share capital in the other company or the body
corporate.
Important Questions
Q. No. 53: Directors of ABC Ltd. are not holding any shares in MDJ Co Ltd.
Similarly, directors of MDJ Company Limited are not holding any
shares in ABC Ltd. But wife of director “A” of ABC Ltd. hold 40% of
the paid-up share capital of MDJ Company Limited. Board of
directors of ABC Ltd. enter into a contract with MDJ company
Limited for the purchase of goods and director did not disclose his
indirect interest in MDJ Company Limited. Examine whether it has
violated any of the provisions of the Companies Act, 2013 and also
the validity of the contract.
HINT: Refer Sec. 184(2). Provisions of Sec. 184 has been violated and
contract is voidable at the option of ABC Ltd.

Page 73
Q. No. 54: X Limited enter into a contract with M and Co. Ltd. for purchase of
raw material of ₹2,50,000 at the prevailing market rate. The
directors of X Ltd. Mr. B was holding shares of the value of 1% of
the paid-up capital of M and Co. Ltd. Another director of X Ltd., Mr.
C was holding shares of the value of 1.5% of the paid-up capital of
M and Co. Ltd. Mr. B at the beginning of the year give a general
notice to X Ltd. that he was interested in M and Co. Ltd.
Mr. B claims that he had given notice to X Ltd. as required under

the Companies Act, 2013 and that his holding being only 1% is
within the limit under the Companies Act, 2013.
HINT: Refer Sec. 184(1) and 184(2). Provisions of Sec. 184 has been
violated and contract is voidable at the option of X Ltd.
Q. No. 55: Examine the validity of the following with reference to the relevant
provisions of the Companies Act, 2013:
Mr. G a director of SAM Ltd. is interested in a contract to be entered

into by the company. The articles of association of SAM Ltd.
contained a clause which prohibited the director from voting on
the resolution in respect of any contract in which he is interested.
The matter in respect of the said contract was put up for approval
of the shareholders in a general meeting. The general meeting was
attended by Mr G and he also voted on the resolution. Mr. G claims
that he has the right to vote on the resolution in the general
meeting.
HINT: Refer Sec. 184. Mr. G can vote in the general meeting as scope of
Sec. 184 is limited to Board meetings only.

Page 74
Q. No. 56: Company Y with a paid-up capital of ₹50 lakhs entered into a
contract with company Z in which a director of Y is holding equity
shares of the nominal value of ₹50, 000. The director did not
disclose his interest at the Board meeting u/s 184 of the Companies
Act, 2013. Is the director liable for his act?
Note: Refer Sec. 184(2). Director is not liable as holding is less than 2%.
(It is assumed that paid up capital of Z is also ₹ 50 Lakhs)
Q. No. 57: State the circumstances in which a director of a company is

required under the Companies Act, 2013 to disclose his interest in
a contract or arrangement to be entered into by the company.
Examine whether the validity of the contract is affected by non-
disclosure of interest by the director. [May 16 (4 Marks)]
Q. No. 58: When does a Director required to disclose his/her interest to the
company as per section 184 of the Companies Act, 2013? What are
the consequences of non-disclosure?
[May 18 – New Syllabus (4 Marks)]
HINT: Refer Sec. 184(1), 184(3) and 184(4).
2.14 - Loan to directors, etc. (Sec. 185)
Restriction No company shall, directly or indirectly, advance any loan,

over the including any loan represented by a book debt to, or give any
company guarantee or provide any security in connection with any loan
w.r.t. loans to taken by,

Page 75
directors & (a) any director of company, or of a company which is its holding
others company or any partner or relative of any such director; or
– Sec. 185(1) (b) any firm in which any such director or relative is a partner.
Conditions A company may advance any loan including any loan represented
subject to by a book debt, or give any guarantee or provide any security in
which loan connection with any loan taken by any person in whom any of the
may be given director of the company is interested, subject to the condition
– Sec. 185(2) that—
(a) a special resolution is passed by the company in general

meeting:
Provided that the explanatory statement to the notice for the

relevant general meeting shall disclose the full particulars of
the loans given, or guarantee given or security provided and
the purpose for which the loan or guarantee or security is
proposed to be utilised by the recipient of the loan or
guarantee or security and any other relevant fact; and
(b) the loans are utilised by the borrowing company for its
principal business activities.
Points to remember
For the purposes of this sub-section, the expression "any

person in whom any of the director of the company is
interested" means:
(a) any private company of which any such director is a

director or member;
(b) any body corporate at a general meeting of which not less

Page 76
than twenty-five per cent. of the total voting power may be

exercised or controlled by any such director, or by two or
more such directors, together; or
(c) any body corporate, the Board of directors, managing

director or manager, whereof is accustomed to act in
accordance with the directions or instructions of the
Board, or of any director or directors, of the lending
company.
Exception Nothing contained in Sec. 185(1) and 185(2) shall apply to-
– Sec. 185(3) (a) the giving of any loan to a managing or whole-time director-
(i) as a part of the conditions of service extended by the
company to all its employees; or
(ii) pursuant to any scheme approved by the members by a
special resolution; or
(b) a company which in the ordinary course of its business
provides loans or gives guarantees or securities for the due
repayment of any loan and in respect of such loans an
interest is charged at a rate not less than the rate of
prevailing yield of one year, three years, five years or ten
years Government security closest to the tenor of the loan; or
(c) any loan made by a holding company to its wholly owned
subsidiary company or any guarantee given or security
provided by a holding company in respect of any loan made
to its wholly owned subsidiary company; or
(d) any guarantee given or security provided by a holding
company in respect of loan made by any bank or financial
institution to its subsidiary company.

Page 77
Provided that the loans made under clauses (c) and (d) are
utilised by the subsidiary company for its principal business
activities.
Penalty Circumstances If any loan is advanced or a guarantee or
– Sec. 185(2) security is given or provided in contravention of

the provisions of Sec. 185.
Penalty over Fine ranging from Rs. 5 Lacs to Rs. 25 Lacs.

company
Penalty over Every officer of the company who is in default

Officer in shall be punishable with
default • imprisonment upto 6 months
or
• fine ranging from ₹5 lakhs to ₹25 lakhs
Penalty over The director or the other person to whom any

others loan is advanced or guarantee or security is
given or provided in connection with any loan
taken by him or the other person, shall be
punishable with
• imprisonment upto 6 months
or
• fine ranging from Rs. 5 Lacs to 25 Lacs
or
• with both.

Page 78
Points to remember
Sec. 185 shall not apply to
(i) a Government Company in case such company obtains approval of the

Ministry or Department of the C.G. which is administratively in charge of
the company, or, as the case may be, the S.G. before making any loan or
giving any guarantee or providing any security under the section.
(ii) Nidhis, provided the loan is given to a director or his relative in their
capacity as members and such transaction is disclosed in their annual
accounts by a note.
(iii) a private company -
(a) in whose share capital, no other body corporate has invested any
money;
(b) if the borrowings of such a company from banks or financial
institutions or any body corporate is less than twice of its paid-up
share capital or fifty crore rupees, whichever is lower; and
(c) such a company has no default in repayment of such borrowings
subsisting at the time of making transactions under this section.
Exemption to private company and government company is subject to the

condition that these companies has not committed a default in filing of its
financial statements u/s 137 or annual return u/s 92 with the Registrar.
Important Questions
Q. No. 59: In the light of the provisions of the Companies Act, 2013 examine
whether the following transactions in case of a public company can
be termed as loan to directors:
(i) Sale of company flat to a director at prevailing market price

out of which the director pays 50% immediately and contract
Page 79
to pay the balance amount in 10 equal annual instalments.

(ii) Making a deposit with the landlord under license agreement
for securing a residential accommodation for the managing
director of the company.
(iii) A salary advance of ₹50000 to employee who is the wife of the
managing director of the company.
(iv) Loan to a firm in which the director of the company is a
partner.
HINT: Refer Sec 185.
(i) Not considered as a transaction of loan

(ii) Not considered as a transaction of loan
(iii) May or may not considered as a transaction of loan (depends upon
the capacity in which advance is given)
(iv) Will be considered as a transaction of loan.
Q. No. 60: Mr. X is the director of several companies he has approached the
following companies in which he is a director for financial help to
start his own personal business:
(a) Expendable Industries Ltd.

(b) Expensive Gadgets Private Limited
(c) Easy Finance Ltd.
The first name company has agreed to grant a loan of ₹50 lakh. The
second company also offered another loan of ₹50 lakh. Third
company has agreed to provide guarantee for the repayment of the
loan sanction to Mr. X by a private bank to the tune of ₹1 crore.
Advise Mr. X about the legal provisions that should be complied
with under the Companies Act, 2013.
HINT: Refer Sec. 185. Loans or guarantees may be provided in

compliance of conditions stated in Sec. 185.

Page 80
Q. No. 61: Mr. DRT is a director of PCS Ltd. The said company is having
sufficient liquid funds and Mr. DRT is in dire need of funds. In order
to mitigate the hardship of Mr. DRT the board of directors of PCS
Ltd. wants to lend Rs. 5 lakhs to him and Rs. 2 lakhs to his wife.
State whether such loans can be given and if so under what
conditions. What would be your answer if the company PCS LTD
would have been PCS Private Ltd. [Nov. 12 (4 Marks)]
HINT: Refer Sec. 185. Loans cannot be given. However, in case of private
limited company sec. 185 is not applicable subject to certain conditions.
Q. No. 62: Mr. OK is director of VRS Ltd. He intends to construct a residential

building for his own use. The cost of construction is estimated at
₹1.35 Crores, which Mr. OK proposes to finance partly from his own
sources to the tune of ₹60 lacs and the balance ₹75 lacs from
housing loan to be obtained from a housing finance company. For
the purpose of obtaining the loan, he has approached the housing
finance company which has in principle agreed to grant the loan
but has put a condition. The condition put by the housing finance
company is that the Company VRS Ltd. of which Mr. OK is a director
should provide the guarantee for repayment of the loan and
interest as per the terms of the proposed agreement for granting
the loan to Mr. OK. You are required to advise Mr. OK on the matter
with reference to the provisions of the Companies Act, 2013.
[May 14 (4 Marks)]
Or
Mr. X is a director of M/s ABC Ltd. He has approached M/s Housing

Finance Co. Ltd. For the purpose of obtaining a loan of Rs. 50 lacs to
be used for construction of building his residential house. The loan
was sanctioned subject to the condition that M/s ABC Ltd. should
provide the guarantee for repayment of loan installments by Mr. X.
Advise Mr. X.

Page 81
HINT: Refer Sec. 185. Guarantee by Company VRS Ltd. of which Mr. OK
is a director, for repayment of the loan and interest as per the terms of
the proposed agreement is not allowed.
Q. No. 63: Queen Construction Company Ltd. acquired 60% of the equity paid
up share capital of ABC Ltd. Queen Construction Ltd. has planned to
expand its operation for which additional fund is required. The
Board of Directors decided to avail additional exposure of Rs. 10
crore from the Bank.
The following data is furnished as on 30th June, 2019.
Rs. in Crores
Authorised Equity share capital 25
Issued and Subscribed equity share capital 22
Paid up equity share capital 20
Capital reserve 2
Revaluation reserve 1
General reserve 3
Open cash credit limit (for working capital 5

requirement) with the bank repayable in 3
months.
Loan obtained under the hire purchase 1

agreement for acquiring vehicles.
Long term borrowing from banks and other 15

parties.

Page 82
ABC Ltd. approached Queen Construction Ltd. to grant a loan of Rs

25 lakhs and stand as guarantor for repayment of loan Rs. 10 lakhs
to be sanctioned by a bank.
The two loans (25 lakhs plus 10 lakhs) will be utilized by ABC Ltd.
for its principal business activities.
You being the financial advisor of the company, advise the board of
directors about the procedure to be followed to avail additional
exposure of Rs. 10 crore from the Bank. Also evaluate whether the
loan/ guarantee given by Queen Construction Ltd. to ABC Ltd. is
valid according to section 185 of the companies Act, 2013.
HINT: Refer Sec. 180(1)(c) and 185.
(a) Loan given by Queen Construction Ltd. to ABC Ltd is not valid as
restricted u/s 185.
(b) Guarantee given by Queen Construction Ltd to ABC Ltd. is valid as
restriction u/s 185 shall not apply.
Q. No. 64: ASP Limited, a listed company secured residential accommodation
for the use of its Managing Director by entering into a lease
arrangement with the landlord. As per the terms of the agreement,
ASP Limited deposited a sum of ₹ 10,00,000 as rental advance with
landlord. Referring to the provisions of the Companies Act, 2013,
decide whether the said deposit amount be considered as a loan
given to the Managing Director.
[Nov. 19 – Old Syllabus (4 Marks)]
HINT: Refer Sec. 185. Deposit made by the company cannot be
considered as a loan given to the Managing Director.

Page 83
2.15 - Loan and Investment by Company (Sec. 186)
Restrictions Without prejudice to the provisions contained in this Act, a

w.r.t. company shall unless otherwise prescribed, make investment
investment through not more than 2 layers of investment companies.
through >2 Note: MCA on 20.09.2017 issued Companies (Restriction on
layers number of layers) Rules, 2017. These Rules are given at the
- Sec. 186(1) end of this Chapter as Appendix.
Exception Provisions of this sub-section shall not affect —

(i) a company from acquiring any other company
incorporated in a country outside India if such
other company has investment subsidiaries
beyond 2 layers as per the laws of such country.
(ii) a subsidiary company from having any investment
subsidiary for the purposes of meeting the
requirements under any law or under any rule or
regulation framed under any law for the time being
in force.
Points to remember
Explanation given at the end of Sec. 186 defines the term
investment company as:
“the term investment company means a company whose
principal business is the acquisition of shares, debentures or
other securities and a company will be deemed to be
principally engaged in the business of acquisition of shares,
debentures or other securities, if its assets in the form of
investment in shares, debentures or other securities
constitute not less than fifty per cent. of its total assets, or if its
income derived from investment business constitutes not less
than 50% as a proportion of its gross income.".

Page 84
Limits for No company shall directly or indirectly —

Loans and (a) give any loan to any person or other body corporate;
Investments (b) give any guarantee or provide security in connection with
-Sec. 186 (2) a loan to any other body corporate or person; and
(c) acquire by way of subscription, purchase or otherwise, the
securities of any other body corporate, exceeding -
• 60% of its paid-up share capital, free reserves and securities
premium account
or
• 100% of its free reserves and securities premium account,

whichever is more.
Points to remember
• Vide General Circular No, 04/2015, dated 10/3/2015, it has

been clarified that loans and/or advances made by the
companies to their employees, other than the managing or
whole-time directors (which is governed bySec. 185) are not
governed by the requirements of Sec. 186, provided that
such loans/advances to employeesare in accordance with
the conditions of service applicable to employees and
arealso in accordance with the remuneration policy, in
cases where such policy isrequired to be formulated.
• Explanation to Sec. 186(2) is inserted by Companies
(Amendment) Act, 2017 w.e.f. 07.05.2018, which states as
under:
“For the purposes of this sub-section, the word "person" does

not include any individual who is in the employment of the
company”.

Page 85
Requirement • Where the aggregate of the loans and investment so far made,
of prior the amount for which guarantee or security so far provided to or
approval by in all other bodies corporate along with the investment, loan,
Special guarantee or security proposed to be made or given by the
resolution Board, exceed the limits specified under sub-section (2), no
– Sec. 186(3) investment or loan shall be made or guarantee shall be given or

security shall be provided unless previously authorised by a
special resolution passed in a general meeting:
• Provided that where a loan or guarantee is given or where a
security has been provided by a company to its wholly owned
subsidiary company or a joint venture company, or acquisition is
made by a holding company, by way of subscription, purchase or
otherwise of, the securities of its wholly owned subsidiary
company, the requirement of this sub-section shall not apply:
• Provided further that the company shall disclose the details of
such loans or guarantee or security or acquisition in the financial
statement as provided under sub-section (4).
Rule 11 of The Companies (Meeting of Board and its Powers)

Rules, 2014
• Where a loan or guarantee is given or where a security has been

provided by a company to its wholly owned subsidiary company
or a joint venture company
or
• acquisition is made by a holding company, by way of

subscription, purchase or otherwise of, the securities of its
wholly owned subsidiary company, the requirement of Sec.
186(3) shall not apply.

Page 86
It is also required that the company shall disclose the details of

such loans or guarantee or security or acquisition in the financial
statement as provided u/s 186(4).

Rules, 2014
• A resolution passed at a general meeting in terms of Sec.

186(3)to give any loan or guarantee or investment or providing
any security or the acquisition u/s 186(2) shall specify the total
amount up to which the Board of Directors are authorised to
give such loan or guarantee to provide such security or make
such acquisition.
• Company shall disclose to the members in the financial
statement the full particulars in accordance with the provisions
of Sec. 186(4).
Disclosures The company shall disclose to the members in the financial

in F.S. statement the full particulars of
-Sec. 186(4) • the loans given,

• investment made or guarantee given or security provided and
• the purpose for which the loan or guarantee or security is
proposed to be utilised by the recipient of the loan or guarantee
or security.
Unanimous No investment shall be made or loan or guarantee or security given

resolution by the company unless
-Sec. 186(5) • the resolution sanctioning it is passed at a meeting of the Board

with the consent of all the directors present at the meeting

Page 87
and
• the prior approval of the public financial institution concerned

where any term loan is subsisting, is obtained.
Prior approval of a public financial institution shall not be required

where the aggregate of the loans and investments so far made, the
amount for which guarantee or security so far provided to or in all
other bodies corporate, along with the investments, loans,
guarantee or security proposed to be made or given does not
exceed the limit as specified in Sec. 186(2), and there is no default
in repayment of loan instalments or payment of interest thereon as
per the terms and conditions of such loan to the public financial
institution.
Restrictions • No company, which is registered u/s 12 of the Securities and

on inter Exchange Board of India Act, 1992 and covered under such class
corporate or classes of companies as may be prescribed, shall take inter-
loans corporate loan or deposits exceeding the prescribed limit.
- Sec. 186(6) • Such companies are required to furnish in its F.S. the details of
the loan or deposits.
Rule 11(3) of The Companies (Meeting of Board and its

Powers) Rules, 2014
No company registered u/s 12 of the SEBI Act, 1992 and also

covered under such class or classes of companies which may be
notified by the C.G. in consultation with the SEBI, shall take any
inter-corporate loan or deposits, in excess of the limits specified
under the regulations applicable to such company, pursuant to
which it has obtained certificate of registration from the SEBI.

Page 88
Rate of No loan shall be given under this section at a rate of interest lower
Interest than the prevailing yield of one year, three-year, five years or ten
-Sec. 186(7) year Government Security closest to the tenor of the loan.
Points to remember
• It is clarified by the MCA that in cases where effective yield on

tax free bonds is greater than the prevailing yield of one year,
three-year, five year or ten year, Government security closest
to the tenor of the loan, there is no violation of Sec. 186(7).
• Nothing contained in Sec. 186(7) shall apply to a Sec. 8
company, in which 26% or more of the paid-up share capital is
held by the C.G. or one or more S.G. or both, in respect of loans
provided by such company for funding Industrial Research and
Development projects in furtherance of its objects as stated in
its MOA. This exemption is subject to the condition that the
company has not committed a default in filing of their
financial statements u/s 137 or annual return u/s 92 with the
Registrar.
Prohibitions No company which is in default

in case of • in the repayment of any deposits accepted before or after the
certain commencement of this Act
defaults
or
- Sec. 186(8)
• in payment of interest thereon,
shall give any loan or give any guarantee or provide any security or
make an acquisition till such default is subsisting.

Page 89
Maintenance Every company giving loan or giving a guarantee or providing

of Register security or making an acquisition under this section shall keep a
-Sec. 186 (9) register which shall contain such particulars and shall be
maintained in such manner as may be prescribed.

Rules, 2014
(1) Every company giving loan or giving guarantee or providing

security or making an acquisition of securities shall, from the
date of its incorporation, maintain a register in Form MBP 2
and enter therein separately, the particulars of loans and
guarantees given, securities provided and acquisitions made as
aforesaid.
(2) The entries in the register shall be made chronologically in
respect of each such transaction within 7 days of making such
loan or giving guarantee or providing security or making
acquisition.
(3) The register shall be kept at the registered office of the
company and the register shall be preserved permanently and
shall be kept in the custody of the company secretary of the
company or any other person authorised by the Board for the
purpose.
(4) The entries in the register (either manual or electronic) shall be
authenticated by the company secretary of the company or by
any other person authorised by the Board for the purpose.
(5) For the purpose of sub-rule (4), the register can be maintained
either manually or in electronic mode.
(6) The extracts from the register maintained u/s 186(9) may be
furnished to any member of the company on payment of such
fee as may be prescribed in the Articles of the company which
shall not exceed ₹10 for each page.

Page 90
Sec. The register referred to in Sec. 186(9) shall be kept at

186(10) the registered office of the company and —
(a) shall be open to inspection at such office; and

(b) extracts may be taken therefrom by any member,
and copies thereof may be furnished to any member
of the company on payment of such fees as may be
prescribed.
Non- Nothing contained in this section, except sub-section (1), shall

Applicability apply—
of Sec. 186
(a) to any loan made, any guarantee given or any security provided
-Sec. 186
or any investment made by a banking company, or an insurance
(11)
company, or a housing finance company in the ordinary course
of its business, or a company established with the object of and
engaged in the business of financing industrial enterprises, or
of providing infrastructural facilities;
(b) to any investment—
(i) made by an investment company;
(ii) made in shares allotted in pursuance of clause (a) of sub-

section (1) of section 62 or in shares allotted in pursuance
of rights issues made by a body corporate;
(iii) made, in respect of investment or lending activities, by a

NBFC registered under Chapter III-B of the RBI Act, 1934
and whose principal business is acquisition of securities.

Page 91
Rule 11(2) of The Companies (Meeting of Board and its
Powers) Rules, 2014
For the purposes of clause (a) of sub-section (11) of Sec. 186, the
expression business of financing industrial enterprises shall
include, with regard to a NBFC registered with RBI, "business of
giving of any loan to a person or providing any guaranty or security
for due repayment of any loan availed by any person in the
ordinary course of its business".
Powers of The Central Government may make rules for the purposes of this
C.G. to make section.
rules
- Sec. 186
(12)
Penalty For If a company contravenes the provisions of this
-Sec. company section, the company shall be punishable with fine

186(13) which shall not be less than ₹25,000 but which may
extend to ₹5 lakhs.
For Every officer of the company who is in default shall be
Officer in punishable with imprisonment for a term which may
default extend to 2 years and with fine which shall not be less
than ₹25,000 but which may extend to ₹1 lakh.

Page 92
Points to remember
Sec. 186 shall not apply to –
(a) Government company engaged in defense production;

(b) a Government company, other than a listed company, in case such company
obtains approval of the Ministry or Department of the Central Government
which is administratively in charge of the company, or, as the case may be,
the State Government before making any loan or giving any guarantee or
providing any security or making any investment under the section.
Exemption is subject to the condition that the company has not committed a
default in filing of its financial statements u/s 137 or annual return u/s 92 with
the Registrar.
Important Questions
Q. No. 65: Amar Textiles Ltd. is a company engaged in the manufacture of

fabrics. The company has investments in shares of other bodies
corporate including 70% shares in Amar Cotton Company Ltd. and
it has also advanced loans to other bodies corporate. The aggregate
of all the investments made and loans granted by Amar Textiles Ltd.
exceeds 60% of its paid-up share capital and free reserves and also
exceeds 100% of its free reserves. In course of its business
requirements, Amar Textiles Ltd. has obtained a term loan from
IDBI which is still subsisting. Now the company wants to increase
its holding from 70% to 80% of the equity share capital in Amar
Cotton Company Ltd. by purchase of additional 10% shares from
other existing shareholders. State the legal requirements to be
complied with by Amar Textiles Ltd. under the provisions of the

Page 93
Companies Act, 2013 to give effect to the above proposal.
[May 12 (8 Marks)]
HINT: Refer Section 186(2), 186(3), 186(5) and 186(9). Special

resolution required u/s 186(3). Unanimous resolution of BOD is
required u/s 186(5).
Q. No. 66: Soft and Secure Lenders Limited, has convened a Board Meeting on
25th October, 2018. One of the items of the agenda is to approve the
grant of loan of ₹20 crore to Easy Going Industries Limited, for
expansion of its business activities. At the Board Meeting, out of the
total of 6 Directors of the lending company, 5 directors were
present and except 1 director, the remaining 4 directors approved
the grant of loan of ₹20 crores to Easy Going Industries Limited.
The borrowing company has taken loans from a public financial
institution and also deposits from public. Examine the loan
proposal with reference to the provisions of the Companies Act,
2013. [Nov. 16 (4 Marks)]
HINT: Refer Sec. 186(2) and 186(5). Since the approval for the grant of
loan has not been sanctioned by passing of unanimous resolution at
board meeting, loan proposal is not in compliance with the Companies
Act, 2013.
Q. No. 67: Star Limited proposes to acquire 15% equity shares of Gain
Investments (P) Limited for 45 lakhs which has a face value of ₹35
lakhs. Star Limited has an outstanding loan of ₹15 lakhs to a public
financial institution and had not defaulted in the repayment of loan
instalments stipulated in the loan agreements. Based on the
following financial data. Advise Star Limited about the legal
position regarding the allowability of the proposed investment

Page 94
under the provisions of the Companies Act, 2013.
(Rs. In Crores)
Star Ltd. Gain Investment (P) Ltd.
Authorized Capital 1.00 3.00
Paid up Share Capital 0.50 2.00
Free Reserves 0.20 1.50
As on the date of proposition, Star Ltd. does not hold any shares of
any company. [Nov. 17 (4 Marks)]
HINT: Refer Sec. 186(2). Investment proposed by Star Limited in Gain

Investment (P) Limited is 45 lakhs, prior approval by means of a special
resolution passed at a general meeting shall be necessary.
Q. No. 68: ASK Housing Finance Company Limited is prepared to give housing
loans to the employees of M/s NEWS Pharmacy Limited subject to
the condition that the loans are guaranteed by M/s News Pharmacy
Limited. M/s NEWS Pharmacy Limited is not a listed company and
the company will be exceeding the limits prescribed under the
Companies Act, 2013 by providing the guarantees. Advise the
company about this legal requirement under the Companies Act,
2013 to give effect to the above proposal. What would be your advice
if the company was required to provide security instead of
guarantee? [May 18 – Old Syllabus (4 Marks), RTP-Nov. 18]
HINT: Refer Sec. 186(2). No legal requirements to be complied with.

Answer will not change if instead of guarantee, security is provided by the
company.

Page 95
Q. No. 69: Vogue Limited has an Authorised Capital of Rs. 250 lakhs and paid
up capital of Rs. 200 lakhs. The free reserves are there to the tune of
Rs. 150 Lakhs. The company has advanced a loan of Rs. 160 lakhs to
other companies as on 30th November, 2018. Now the company
proposes to advance an interest free loan of Rs. 60 Lakhs to its
wholly owned subsidiary Fashion Limited.
Discuss the validity of the proposed transaction with reference to

the restrictions imposed by the applicable provisions of the
Companies Act, 2013 and relevant Rules made thereunder.
[May 19 – Old Syllabus (4 Marks)]
HINT: Refer Sec. 186(2), 186(3) and 186(7). Aggregate of proposed loan
and existing loan (₹220 Lacs) exceeds the 60% of aggregate of paid up
share capital and free reserves (₹210 Lacs, i.e. 60% of 350 Lacs). Special
resolution is not required as the loan is provided to wholly owned
subsidiary. But the proposed transaction is not valid as interest free loan
are not allowed by virtue of provisions as stated in Sec. 186(7).
2.16 - Investments of company to be held in its own name (Sec. 187)
Investments All investments made or held by a company in any

to be held in • property,
name of
• security or
company
• other asset
– Sec. 187(1)
shall be made and held by it in its own name.
However, company may hold any shares in its subsidiary company

in the name of any nominee or nominees of the company, if it is
necessary to do so, to ensure that the number of members of the
subsidiary company is not reduced below the statutory limit.

Page 96
Deposit of Nothing in this section shall be deemed to prevent a company—

shares, (a) from depositing with a bank, being the bankers of the company,
securities any shares or securities for the collection of any dividend or
etc. with interest payable thereon; or
bankers (b) from depositing with, or transferring to, or holding in the name
– Sec. 187(2) of, the SBI or a scheduled bank, being the bankers of the
company, shares or securities, in order to facilitate the transfer
thereof:
Provided that if within a period of six months from the date on
which the shares or securities are transferred by the company
to, or are first held by the company in the name of, the SBI or a
scheduled bank as aforesaid, no transfer of such shares or
securities takes place, the company shall, as soon as practicable
after the expiry of that period, have the shares or securities re-
transferred to it from the SBI or the scheduled bank or, as the
case may be, again hold the shares or securities in its own
name; or
(c) from depositing with, or transferring to, any person any shares
or securities, by way of security for the repayment of any loan
advanced to the company or the performance of any obligation
undertaken by it;
(d) from holding investments in the name of a depository when
such investments are in the form of securities held by the
company as a beneficial owner.

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Maintenance Where in pursuance of clause (d) of sub-section (2), any shares or

of register securities in which investments have been made by a company are
– Sec. 187(3) not held by it in its own name, the company shall maintain a
register which shall contain such particulars as may be prescribed
and such register shall be open to inspection by any member or
debenture-holder of the company without any charge during
business hours subject to such reasonable restrictions as the
company may by its articles or in general meeting impose.
Rule 14 of Companies (Meetings of Board and its Powers)

Rules, 2014
(1) Every company shall, from the date of its registration, maintain
a register in Form MBP 3 and enter therein, chronologically, the
particulars of investments in shares or other securities
beneficially held by the company but which are not held in its
own name and the company shall also record the reasons for
not holding the investments in its own name and the
relationship or contract under which the investment is held in
the name of any other person.
(2) The company shall also record whether such investments are
held in a third party’s name for the time being or otherwise.
(3) The register shall be maintained at the registered office of the
company. The register shall be preserved permanently and
shall be kept in the custody of the company secretary of the
company or if there is no company secretary, any director or
any other officer authorised by the Board for the purpose.
(4) The entries in the register shall be authenticated by the
company secretary of the company or by any other person
authorised by the Board for the purpose.

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Penalty – Over the If a company contravenes the provisions of this section,

Sec. 187(4) company the company shall be punishable with fine which shall
not be less than ₹25,000 but which may extend to
₹25,00,000.
Over the Every officer of the company who is in default shall be

Officer in punishable with imprisonment for a term which may
default extend to six months or with fine which shall not be less
than ₹25,000 but which may extend to ₹1 lakh rupees,
or with both.
2.17 - Related Party Transaction (Sec. 188)
RP Except with the consent of the BOD given by a resolution at a

Transactions meeting of the Board and subject to such conditions as may be
requiring prescribed, no company shall enter into any contract or
consent of arrangement with a related party with respect to—
BOD at Board (a) sale, purchase or supply of any goods or materials;
Meeting (b) selling or otherwise disposing of, or buying, property of any kind;
- Sec 188(1) (c) leasing of property of any kind;
(d) availing or rendering of any services;
(e) appointment of any agent for purchase or sale of goods,
materials, services or property;
(f) such related party's appointment to any office or place of
profit in the company, its subsidiary company or associate
company; and
(g) underwriting the subscription of any securities or derivatives
thereof, of the company.

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Meaning of means any office or place-

“Office or (i) where such office or place is held by a director,
Place of if the director holding it receives from the
Profit” company anything by way of remuneration
over and above the remuneration to which he is
entitled as director, by way of salary, fee,
commission, perquisites, any rent-free
accommodation, or otherwise;
(ii) where such office or place is held by an
individual other than a director or by any firm,
private company or other body corporate, if the
individual, firm, private company or body
corporate holding it receives from the company
anything by way of remuneration, salary, fee,
commission, perquisites, any rent-free
accommodation, or otherwise.
Contract or arrangement with a related party - Rule 15 of The

Companies (Meeting of Board and its Powers) Rules,2015
A company shall enter into any contract or arrangement with a

related party subject to the following conditions, namely:
(1) The agenda of the Board meeting at which the resolution is

proposed to be moved shall disclose-
(a) the name of the related party and nature of relationship;
(b) the nature, duration of the contract and particulars of the
contract or arrangement;

Page 100
(c) the material terms of the contract or arrangement including

the value, if any;
(d) any advance paid or received for the contract or
arrangement, if any;
(e) the manner of determining the pricing and other
commercial terms, both included as part of contract and not
considered as part of the contract;
(f) whether all factors relevant to the contract have been
considered, if not, the details of factors not considered with
the rationale for not considering those factors; and
(g) any other information relevant or important for the Board
to take a decision on the proposed transaction.
(2) Where any director is interested in any contract or
arrangement with a related party, such director shall not be
present at the meeting during discussions on the subject
matter of the resolution relating to such contract or
arrangement-
Contracts No contract or arrangement, in the case of a company having a

requiring paid-up share capital of not less than such amount, or transactions
prior not exceeding such sums, as may be prescribed, shall be entered
approval of into except with the prior approval of the company by a
company resolution.
- 1st Proviso
to Sec. 188(1)

Page 101

Rules,2015
For the purposes of first proviso to sub-section (1) of section 188,

except with the prior approval of the company by a resolution, a
company shall not enter into a transaction or transactions, where
the transaction or transactions to be entered into,
(a) as contracts or arrangements with respect to clauses (a) to (e)

of Sec. 188(1), with criteria as mentioned below –
(i) sale, purchase or supply of any goods or materials, directly
or through appointment of agent, amounting to 10% or
more of the turnover of the company or Rs. 100 Cr.,
whichever is lower;
(ii) selling or otherwise disposing of or buying property of any
kind, directly or through appointment of agent, amounting
to 10% or more of net worth of the company or Rs. 100
Cr., whichever is lower;
(iii) leasing of property of any kind amounting to 10% or more
of the net worth of the company or 10% or more of
turnover of the company or Rs. 100 Cr., whichever is
lower;
(iv) availing or rendering of any services, directly or through
appointment of agent, amounting to 10% of the turnover
of the company or Rs. 50 Cr., whichever is lower:
Explanation: It is hereby clarified that the limits specified

above shall apply for transaction or transactions to be
entered into either individually or taken together with the
previous transactions during a financial year.

Page 102
(b) is for appointment to any office or place of profit in the

company, its subsidiary company or associate company at a
monthly remuneration exceeding Rs. 2.50 Lacs; or
(c) is for remuneration for underwriting the subscription of any
securities or derivatives thereof, of the company exceeding 1%
of the net worth.
Explanation: The Turnover or Net Worth referred above shall

be computed on the basis of the Audited Financial Statement
of the preceding Financial year.
Points to remember
First proviso to Sec. 188(1) shall not apply to-
(a) a government company in respect of contracts or

arrangements entered into by it with any other
government company;
(b) a government Company other than a listed company in
respect of contracts or arrangements other than those
referred to in clause (a), in case such Company obtains
approval of the Ministry or Department of the Central
Government which is administratively in charge of the
Company, or, as the case may be, the State Government
before entering into such contract or arrangement.
Exemption is subject to the condition that company has not

committed a default in filing of its financial statements u/s
137 or annual return u/s 92 with the Registrar.

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Voting on • No member of the company shall vote on such resolution, to

Resolution approve any contract or arrangement which may be entered
– 2ndand into by the company if such member is a related party.
3rdproviso to • However, this restriction shall not apply to a company in
Sec. 188(1) which 90% or more members, in number, are relatives of

promoters or are related parties.*
*inserted by Companies (Amendment) Act, 2017 w,e.f.

09.02.2018.
Points to remember
Second proviso to Sec. 188(1) shall not apply to
(a) private companies;

(b) a government company in respect of contracts or
arrangements entered into by it with any other government
company;
(c) a government Company other than a listed company in
respect of contracts or arrangements, in case such Company
obtains approval of the Ministry or Department of the
Central Government which is administratively in charge of
the Company, or, as the case may be, the State Government
before entering into such contract or arrangement.
Exemption in case of private company and Government

company is subject to the condition that such companies which
has not committed a default in filing of their financial
statements u/s 137 or annual return u/s 92 with the Registrar.

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Transactions Nothing contained in Sec. 188(1) shall apply to any transactions

at arm’s entered into by the company in its ordinary course of business
length basis other than transactions which are not on an arm’s length basis.
- 4thProviso to
Sec. 188(1)
Exception to The requirement of passing the resolution under 1st proviso shall
1st proviso not be applicable for transactions entered into between a holding
- 5thProviso to company and its wholly owned subsidiary company whose

Sec. 188(1) accounts are consolidated with such holding company and placed
before the shareholders at the general meeting for approval.
Points to remember
Explanation to Rule 15 of The Companies (Meeting of Board

and its Powers) Rules,2015 - In case of a wholly owned
subsidiary, the resolution passed by the holding company
shall be sufficient for the purpose of entering into the
transactions between the wholly owned subsidiary and the
holding company.
Disclosure Every contract or arrangement entered u/s188(1) shall be

Requirement referred to in the Board’s report to the shareholders along with
-Sec. 188(2) the justification for entering into such contract or arrangement.
Voidable • Where any contract or arrangement is entered into by a director

contract or any other employee, without obtaining the consent of the
- Sec. 188(3) Board or approval by a resolution in the general meeting

u/s188(1)

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and
• if it is not ratified by the Board or, as the case may be, by the
shareholders at a meeting within 3 months from the date on
which such contract or arrangement was entered into,
such contract or arrangement shall be voidable at the option of the

Board or as the case may be, of shareholders
and
if the contract or arrangement is with a related party to any

director, or is authorised by any other director, the directors
concerned shall indemnify the company against any loss incurred
by it.
Recovery of Without prejudice to anything contained in sub-section (3), it shall

any loss be open to the company to proceed against a director or any other
- Sec. 188(4) employee who had entered into such contract or arrangement in
contravention of the provisions of this section for recovery of any
loss sustained by it as a result of such contract or arrangement.
Penalty for Any director or any other employee of a company, who had
contravention entered into or authorised the contract or arrangement in
– Sec. 188(5) violation of the provisions of this section shall-
in case of be punishable with

listed • imprisonment for a term which may extend to 1
company year
or
• with fine ranging from Rs. 25,000 to Rs. 5 Lacs
or
• both

Page 106
in case of be punishable with fine ranging from Rs. 25,000 to

any other Rs. 5 Lacs.
company
Points to remember
• Transactions arising out of Compromises, Arrangements and

Amalgamations dealt with under specific provisions of the Companies Act,
2013, will not attract the requirements of section 188 of the Companies Act,
2013.
Important Questions
Q. No. 70: M/s Kith and Kin Consultants Private Limited seeks your legal
advice regarding the following appointments relating to directors
and their relatives:
(a) Miss Niece, a relative of a director is to be appointed as Chief

Public Relations Officer on a salary of ₹65,000 per month.
(b) Mr. Well connected, a relative of the director is to be appointed
as chief executive officer on a consolidated salary of ₹2,55,000
per month.
(c) Mr. Nephew, who is a relative of one of the directors, is to be
appointed as the managing director on the monthly salary of
₹2,80,000 plus other perquisites as applicable to other
executives of the company.
Advice explaining the relevant provisions of the Companies Act,

2013.
HINT: Refer Sec. 188. Provisions of Sec. 188 need to be complied with in
case of (a) and (b).

Page 107
Q. No. 71: Reliable Casting Ltd. is a subsidiary of Unique Machinery Ltd. The
board of directors of the respective companies have made the
following appointments on a consolidated monthly salary of
₹2,52,000 with effect from 1st June 2019.
(a) Mr. X a director of Unique Machinery Ltd. as factory manager of

Reliable Casting Ltd.
(b) Mr. Y, a director of Reliable Castings Ltd. as Purchase Manager
of Unique Machinery Ltd.
(c) Mr. Z, relative of a director of Unique Machinery Ltd. as Sales
manager of Unique Machinery Ltd.
(d) Mr. A not related to any director of both the companies, as Chief
Accountant of Unique Machinery Ltd. but his relative has been
appointed as additional director of Unique Machinery Ltd. with
effect from 1stSep. 2019.
Explain the legal requirement to be complied with under the

Companies Act, 2013 to give effect to or continuation of the above
appointments of employees.
HINT: Refer Sec 188. Provisions of Sec. 188 need to be complied with in
case of (a) and (c).
Q. No. 72: Sweet Tea Limited wants to sell its tea by entering into contract
with the following parties:
(a) Tea Bros. a partnership firm in which a director of Sweet Tea

Limited is a partner.
(b) R & T Private Limited in which one of the director of Sweet Tea
Limited is a member.
(c) Strong Tea Limited in which one of the directors of Sweet Tea
Limited is a director holding 3% of the paid-up capital of Strong
Tea Limited.

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Advise the steps that should be taken by Sweet Tea Limited taking
into account the relevant provisions of the Companies Act, 2013 for
entering into contracts in which the directors are interested.
[May 14 (8 Marks)]
HINT: Refer Section 188 and 2(76) of Companies Act, 2013 and Rule 15
of The Companies (Meeting of Board and its Powers) Rules,2015.
Q. No. 73: Discuss “Related Party Transactions” under the Companies Act,
2013, with specific reference to the nature of transactions which fall
under the purview of the Companies Act, 2013. [Nov. 16 (4 Marks)]
HINT: Refer Sec. 188(1) and Rule 15.
Q. No. 74: The Board of Directors of M/s ABC Motors Ltd. made the following
appointments at its meeting held on 1st January, 2018:
(i) Mr. X, a Director of its subsidiary company, namely, M/s ABC

Forgings Ltd., was appointed as purchase manager on a
consolidated salary of Rs. 1,00,000 per month with effect from 1st
January, 2018.
(ii) Mr. Y was appointed as the sales manager on a consolidated

salary of Rs. 1,50,000 per month with effect from 1st January,
2018.
Answer the following, explaining the relevant provisions of the

companies Act:
(i) Does the appointment of Mr. X require the approval of the

members in a general meeting of the company?
(ii) Mr. P, a relative of Mr. Y was appointed as a Director of M/s ABC

Motors Ltd. on 1st August, 2018. Does it affect the continuation of
Mr. Y as the Sales Manager? [Nov. 18-Old Syllabus (4 Marks)]

Page 109
HINT: Refer Sec. 188 and Rule 15 of the Companies (Meetings of Board
and its Powers) Rules, 2014.
(i) Appointment of Mr. X, a director of ABC Ltd. as Purchase Manager of

ABC Motor Ltd. does not fall under the provisions of Sec. 188 as
appointment is made in the holding company. Hence, appointment of
Mr. X does not require the approval of members in general meeting.
(ii) Appointment of Mr. Y as Sales Manager of ABC Motors Ltd. does not
fall under the provisions of Sec. 188 as at the time of appointment as
Mr. Y is not related to any directors of the company. However,
continuation of Mr. Y as a sales manager will lead to conflict of
interest and will affect the continuation unless ratified by the Board.
Q. No. 75: M/s. Tristar Ltd. (an unlisted public limited company) with the
annual turnover of ₹700 crores entered into a contract of
purchasing of raw material from M/s. PTC Pvt. Ltd. during the year
2018. M/s. Tristar Ltd. appointed Mr. Sudhir, a Director of the
Company, to act in this deal of transaction on behalf of the company.
Mr. Sudhir is also one of the member of M/s. PTC Pvt. Ltd. Mr. Sudhir
settled the said transaction of purchase for ₹85 crores and entered
into the contract. After a few transactions executed under the
contract, the Board of M/s. Tristar Ltd. finds degradation in the
quality of the raw material supplied. Further, in a board meeting
this contract was challenged considering it as a related party
transaction and in contravention to Sec. 188(1) of the Companies
Act, 2013 read with rules framed thereunder. During the period Mr.
Sudhir was appointed as director in a newly incorporated company
M/s Raaga Limited.

Page 110
In the light of the given facts, examine the following situations as per
the Companies Act, 2013.
(i) What is the legal position of the contract entered between M/s.
Tristar Ltd. through its director Mr. Sudhir, and M/s. PTC Pvt.
Ltd.?
(ii) Is there any contravention of section 188 (1)? If yes, then state
the liability of the wrongdoer.
(iii) Comment upon the appointment of Mr. Sudhir as a Director in

M/s Raaga Limited.
[MTP-Aug. 18, Oct. 18, May 19 – New Syllabus (6 Marks)]
HINT: Refer Sec. 188 and Rule 15 of the Companies (Meetings of Board
and its Powers) Rules, 2014.
(i) Contract is voidable at the option of the Board or as the case may be
of shareholders.
(ii) Company may proceed against the director to recover the loss and
Penalty provisions will be applied over the director.
(iii) There is no issue in appointment of Mr. Khurana as a director in
Raaga Ltd.
2.18 - Register of contracts or arrangements in which directors are interested

(Sec. 189)
Registers • Every company shall keep one or more registers giving separately
to be the particulars of all contracts or arrangements to which Sec.
maintained 184(2) or Sec. 188 applies.
– Sec. • Registers shall be prepared in such manner and containing such

189(1) particulars as may be prescribed. Rule 16 of the Companies
(Meetings of the Board and its Powers) Rules, 2014 requires that

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register shall be maintained in Form MBP 4.

• Such register or registers shall be placed before the next meeting
of the Board and signed by all the directors present at the meeting.
Disclosures Every director or KMP shall, within a period of 30 days of his

by director appointment, or relinquishment of his office, as the case may be,
or KMP to disclose to the company the particulars specified in Sec. 184(1)
be entered relating to his concern or interest in the other associations which are
in register required to be included in the register under that sub-section or such
– Sec. other information relating to himself as may be prescribed.

189(2)
Place at • The register referred to in Sec. 189(1) shall be kept at the

which registered office of the company
registers to and
be kept –
• it shall be open for inspection at such office during business hours
Sec. 189(3)
and
• extracts may be taken therefrom, and copies thereof as may be

required by any member of the company shall be furnished by the
company to such extent, in such manner, and on payment of
prescribed fees (Maximum of ₹10 per page).
Register to • The register to be kept under this section shall also be produced at
be the commencement of every AGM of the company
produced and
at AGM
• shall remain open and accessible during the continuance of the
– Sec.
meeting to any person having the right to attend the meeting.
189(4)

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Exceptions Nothing contained in Sec. 189(1) shall apply to any contract or

– Sec. arrangement—
189(5) (a) for the sale, purchase or supply of any goods, materials or
services if the value of such goods and materials or the cost of
such services does not exceed ₹5 lakhs in the aggregate in any
year; or
(b) by a banking company for the collection of bills in the ordinary
course of its business.
Penalty – Every director who fails to comply with the provisions of this section
Sec. 189(6) and the rules made thereunder shall be liable to a penalty of ₹25,000.
Points to remember
In case of section 8 companies which has not committed a default in filing of

their financial statements u/s 137 or annual return u/s 92 with the Registrar,
Section 189 shall apply only if the transaction with reference to section 188 on
the basis of terms and conditions of the contract or arrangement exceeds ₹1
lakh.
Important Questions
Q. No. 76: Broadway Infrastructure Limited entered into a contract with Royal
forgings, in which wife of Mr. Patrick, a director of the company is a
partner. The contract is for supply of certain components by the firm
for a period of three years with effect from 1st September, 2019 on
credit basis. Explain the requirements under the Companies Act,
2013, which should have been complied with by Broadway
Infrastructure Limited before entering into contract with Royal
forgings.

Page 113
What would be your answer in case Royal forgings is a private

Limited company in which wife of Mr. Patrick is holding shares?
[RTP-Nov. 19]
HINT: Refer Sec. 184, 188 and 189. If the value of the contract or
transaction is exceeded than limit specified, prior approval of
shareholders is required to be obtained. Assuming that it is within limits
specified under the Act, consent of shareholders is not required.
If Royal forgings is a private limited company, provisions of Sec. 188 are

applicable to it, as Patrick’s wife is member of Royal forgings private
limited.
Sec. 184 is not applicable as Mr. Patrick, director of Broadway

Infrastructure Limited is neither director nor holding any shares in Royal
Forgings Private Limited. Shares held by Mr. Patrick's wife are not to be
considered. Hence the provisions of Section 184 are not attracted.
2.19 - Contract of employment with managing or whole-time directors (Sec.

190)
Keeping Every company shall keep at its registered office,

copy of (a) where a contract of service with a managing or whole-time
contract at director is in writing, a copy of the contract; or
registered (b) where such a contract is not in writing, a written memorandum
office setting out its terms.
– Sec.
190(1)

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Inspection The copies of the contract or the memorandum kept u/s 190(1) shall
of contract be open to inspection by any member of the company without
– Sec. payment of fee.
190(2)
Penalty – Over the If any default is made in complying with the provisions
Sec. 190(3) company of Sec. 190(1) or 190(2), the company shall be liable to a
penalty of ₹25,000.
Over the Every officer of the company who is in default shall be

Officer liable to a penalty of ₹5,000 for each default.
Exception – The provisions of this section shall not apply to a private company.
Sec. 190(4)
2.20 - Payment to director for loss of office, etc. in connection with transfer of
undertaking, property or shares (Sec. 191)
Restrictions No director of a company shall, in connection with—

over (a) the transfer of the whole or any part of any undertaking or
directors on property of the company; or
receiving (b) the transfer to any person of all or any of the shares in a
any payment company being a transfer resulting from—
– Sec. 191(1) (i) an offer made to the general body of shareholders;
(ii) an offer made by or on behalf of some other body
corporate with a view to a company becoming a subsidiary
company of such body corporate or a subsidiary company
of its holding company;

Page 115
(iii) an offer made by or on behalf of an individual with a view

to his obtaining the right to exercise, or control the
exercise of, not less than 1/3rd of the total voting power at
any general meeting of the company; or
(iv) any other offer which is conditional on acceptance to a
given extent,
receive any payment by way of compensation for loss of office or as

consideration for retirement from office, or in connection with such
loss or retirement
• from such company or

• from the transferee of such undertaking or property, or
• from the transferees of shares or
• from any other person, not being such company,
unless particulars as may be prescribed with respect to the

payment proposed to be made by such transferee or person,
including the amount thereof, have been disclosed to the members
of the company and the proposal has been approved by the
company in general meeting.

Rules,2015
No director of a company shall receive any payment by way of

compensation in connection with any event mentioned in Sec.
191(1) unless the following particulars are disclosed to the
members of the company and they pass a resolution at a general
meeting approving the payment of such amount -

Page 116
(a) name of the director;

(b) amount proposed to be paid;
(c) event due to which compensation become payable;
(d) date of Board meeting recommending such payment;
(e) basis for the amount determined;
(f) reason or justification for the payment;
(g) manner of payment - whether payable in cash or otherwise and
how;
(h) sources of payment; and
(i) any other relevant particulars as the Board may think fit.
Payment to Nothing in sub-section (1) shall affect any payment made by a

MD. WTD or company to a MD or WTD or manager of the company by way of
Manager compensation for loss of office or as consideration for retirement
– Sec. 191(2) from office or in connection with such loss or retirement subject to
limits or priorities, as may be prescribed.

Rules,2015
• Any payment made by a company by way of compensation for

the loss of office or as a consideration for retirement from office
or in connection with such loss or retirement, to a MD or WTD or
manager of the company shall not exceed the limit as set out u/s
202.
• No payment shall be made to the MD or WTD or manager of the
company by way of compensation for the loss of office or as
consideration for retirement from office (other than notice pay

Page 117
and statutory payments in accordance with the terms of

appointment of such director or manager, as applicable) or in
connection with such loss or retirement if -
(a) the company is in default in repayment of public deposits or
payment of interest thereon;
(b) the company is in default in redemption of debentures or
payment of interest thereon;
(c) the company is in default in repayment of any liability,
secured or unsecured, payable to any bank, public financial
institution or any other financial institution;
(d) the company is in default in payment of any dues towards
income tax, VAT, excise duty, service tax or any other tax or
duty, by whatever name called, payable to the Central
Government or any State Government, statutory authority or
local authority (other than in cases where the company has
disputed the liability to pay such dues);
(e) there are outstanding statutory dues to the employees or
workmen of the company which have not been paid by the
company (other than in cases where the company has
disputed the liability to pay such dues); and
(f) the company has not paid dividend on preference shares or
not redeemed preference shares on due date.
Requirement If the payment u/s 191(1) or 191(2) is not approved for want of
of Quorum – quorum either in a meeting or an adjourned meeting, the proposal
Sec. 191(3) shall not be deemed to have been approved.

Page 118
Amount Where a director of a company receives payment of any amount in

received by contravention of Sec. 191(1) or the proposed payment is made
director before it is approved in the meeting, the amount so received by the
deemed to director shall be deemed to have been received by him in trust for
be received the company.
in trust
– Sec. 191(4)
Penalty If a director of the company makes any default in complying
– Sec. with the provisions of this section, such director shall be liable
191(5)* to a penalty of ₹1 lakh.
*As amended by Companies (Amendment) Act, 2019 w.e.f.

02.11.2018
Important Questions
Q. No. 77: The register of contracts or arrangement u/s 189 of the companies
Act, 2013 is maintained at the registered office of Fortune Ltd.
under the custody of the Company Secretary. The AGM was held in
different place but in the same town where the registered office is
situated. Mr. Semar, a shareholder of the company and Mr. Raj,
proxy of a shareholder insisted for producing the said register at
the commencement of the AGM for inspection. The Company
Secretary refused to produce the register stating that being the
statutory register it has to be maintained at the registered office
only. Examine whether Mr. Semar and Mr. Raj will succeed in their
attempt under the provisions of the companies act, 2013?
Also identify the particulars to be disclosed to the members of a

Page 119
company to pass a resolution approving any payment by way of

compensation for loss of office of a director as per the provisions of
section 191 of the companies Act, 2013 read with Rule 17 of the
Companies (Meetings of Board and its Powers) Rules, 2014.
HINT: Refer Sec. 189 and Rule 17.
Considering the requirements of Sec. 189(4), it can be concluded that

Mr. Semar and Mr. Raj will succeed in their attempt.
2.21 - Restriction on non-cash transactions involving directors (Sec. 192)
Conditions No company shall enter into an arrangement by which-

for entering (a) a director of the company or its holding, subsidiary or
into non-cash associate company or a person connected with him acquires
transaction or is to acquire assets for consideration other than cash,
with from the company; or
directors (b) the company acquires or is to acquire assets for
– 192(1) consideration other than cash, from such director or
person so connected, unless
• prior approval for such arrangement is accorded by a
resolution of the company in general meeting
and
• if the director or connected person is a director of its holding

company, approval under this sub-section shall also be
required to be obtained by passing a resolution in general
meeting of the holding company.

Page 120
Points to remember
• Cash Transactions with Directors are governed by Section

188.
• The term “person connected with him” is nowhere
defined in law, it may be construed as his relative or
partner.
Inclusions in The notice for approval of the resolution

the notice – • by the company
Sec. 192(2)
or
• holding company in general meeting, shall include

• the particulars of the arrangement along with
• the value of the assets involved in such arrangement duly
calculated by a registered valuer.
Consequences Any arrangement entered into by a company or its holding

of violation company in contravention of the provisions of this section shall
be voidable at the instance of the company unless—
- 192(3)
(a) the restitution of any money or other consideration which is
the subject matter of the arrangement is no longer possible
and the company has been indemnified by any other person
for any loss or damage caused to it;
or
(b) any rights are acquired bona fide for value and without notice
of the contravention of the provisions of this section by any
other person.

Page 121
Important Question
Q. No. 78: In what way does the Companies Act, 2013 restricts the non-cash
transactions involving directors of a public limited company?
Explain. [Nov. 14 (8 Marks)]
2.22 - Contract by One Person Company (Sec. 193)
Recording • Where OPC limited by shares or by guarantee enters into a

of terms of contract with the sole member of the company who is also the
contract director of the company, the company shall, unless the contract is
– Sec. in writing, ensure that the terms of the contract or offer are
193(1) contained in a memorandum or are recorded in the minutes of

the first meeting of the BOD of the company held next after
entering into contract.
• However, this requirement shall not apply to contracts entered
into by the company in the ordinary course of its business.
Intimation Company shall inform the Registrar about every contract entered
to ROC – into by the company and recorded in the minutes of the meeting of
Sec. 193(2) its BOD u/s 193(1) within a period of 15 days of the date of
approval by the BOD.
----------------------------

Page 122
Scanner of Past Exam Questions – New Syllabus
Attempt Q. Topic Suggested Answer Marks

No. / Hint*
4(a) Practical Illustration on Sec. Refer Q. No. 63 8

180(1)(c) & 185
5(a) Practical Illustration on Sec. 189 & Refer Q. No. 77 8

May 18
Rule 17
6(a) Theory Question on Sec. 184(1) and Refer Q. No. 58 4

184(5)
Nov. 18 No Questions asked 0
May 19# 1(b) Practical Illustration on Sec. 185 & Refer Q. No. 75 6
Rule 15
6(a) Practical Illustration on Sec. Refer Q. No. 41 4

180(1)(c)
Nov. 19# 1(b) Practical Illustration on Sec. 181, Refer Q. No. 52 6

182 and 183
May 20
Nov. 20
May 21
Nov. 21
*detailed answers are given in Scanner.

#From May 2019 exam, questions are covered only for Descriptive Part of Paper.
-------------------

Page 123
Appendix I
Companies (Restriction on number of layers) Rules, 2017
Restriction on • No company, other than a company belonging to a class

Number of specified in Rule 2(2), shall have more than 2 layers of
layers of subsidiaries:
Subsidiaries – • However, this restriction shall not affect a company from
Rule 2(1) acquiring a company incorporated outside India with
subsidiaries beyond two layers as per the laws of such
country.
• For computing the number of layers under this rule, one layer
which consists of one or more wholly owned subsidiary or
subsidiaries shall not be taken into account.
Exceptions – The provisions of this rule shall not apply to the following classes
Rule 2(2) of companies, namely: -
(a) A banking company as defined in clause (c) of section 5 of the

Banking Regulation Act 1949;
(b) A non-banking financial company as defined in clause (f) of
Section 45-l of the RBI Act, 1934, which is registered with the
RBI and considered as systematically important non-banking
financial company by the RBI;
(c) An insurance company being a company which carries on the
business of insurance in accordance with provisions of the
Insurance Act,1938 and the lRDA Act, 1999;
(d) A Government company referred to in clause (45) of section
2 of the Act.

Page 124
No derogation The provisions of this rule shall not be in derogation of the

as to Proviso proviso to sub-section (1) of section 186 of the Act.
to Sec. 186(1)
– Rule 2(3)
Requirements Every company other than a company referred to in Rule 2(2),

to be fulfilled existing on or before the commencement of these rules, which
by existing has number of layers of subsidiaries in excess of the layers
companies specified in Rule 2(1) -
having more (i) shall file, with the Registrar a return in Form CRL- 1
than 2 layers disclosing the details specified therein, within a period of
of 150 days from the date of publication of these rules in the
subsidiaries – official Gazette;
Rule 2(4) (ii) shall not, after the date of commencement of these rules,
have any additional layer of subsidiaries over and above
the layers existing on such date; and
(iii) shall not, in case one or more layers are reduced by it
subsequent to the commencement of these rules, have the
number of layers beyond the number of layers it has after
such reduction or maximum layers allowed in sub-rule (1),
whichever is more.
Penalty • If any company contravenes any provision of these rules the
– Rule 2(5) company and every officer of the company who is in default
shall be punishable with fine which may extend to ₹10,000 and
• where the contravention is a continuing one, with a further
fine which may extend to ₹1,000 for every day after the first
during which such contravention continues.
-------------------------

Page 125

Chapter 2 Meetings of The Board and Its Powers

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Chapter 2 Meetings of The Board and Its Powers

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Chapter 2 Meetings of the Board and its Powers

Meetings of the Board and its Powers

Table of Sections and Corresponding Rules

Sec. Title Rule Title

173 Meetings of Board 3 Meetings of Board through video

4 Matters not to be dealt with in a

174 Quorum for Meetings of Board

175 Passing of Resolution by 5 Passing of Resolution by

176 Defects in appointment of

177 Audit Committee 6 Committees of the Board

6A Omnibus approval for related

7 Establishment of Vigil Mechanism

Compiled by: Pankaj Garg

178 Nomination and Remuneration

179 Powers of Board 8 Powers of Board

180 Restrictions on Powers of Board

181 Company to contribute to

182 Prohibitions and Restrictions

183 Power of Board and other

184 Disclosure of interest by director 9 Disclosure by a director of his

185 Loans to directors, etc. 10 Loans to Directors etc. u/s 185

186 Loans and Investment by 11 Loans and Investment by a

187 Investments of company to be 14 Investments of company to be held

Compiled by: Pankaj Garg

188 Related Party Transactions 15 Contract or Arrangement with a

189 Register of contracts or 16 Register of contracts or

190 Contract of Employment with

191 Payment to director for loss of 17 Payment to director for loss of

192 Restrictions on non-cash

193 Contract by One Person Company

194 Prohibition on forward dealings

195 Prohibition on insider trading of

* omitted by Companies (Amendment) Act, 2017 w.e.f. 09.02.2018

Compiled by: Pankaj Garg

2.1 - Important Definitions (Sec. 2)

Interested Omitted by Companies (Amendment) Act 2017 w.e.f. 09.02.2018

Related with reference to a company, means-

Compiled by: Pankaj Garg

(c) an investing company or the venturer of the company;

Investing company or the venturer of a company means a body

(ix) such other person as may be prescribed.

Rule 3 the Companies (Specification of definitions details)

Such other person may represent, a director (other than an

Relative – with reference to any person, means anyone who is related to

Sec. 2(77) another, if-

(i) they are members of a HUF;

Rule 4 the Companies (Specification of definitions details)

A person shall be deemed to be the relative of another, if he or she is

1. Father (term “Father” includes step-father).

Compiled by: Pankaj Garg

2.2 - Meetings of Board (Sec. 173)

Participation The participation of directors in a meeting of the Board may be

Compiled by: Pankaj Garg

• Video conferencing or other audio-visual means” means

"Provided further that where there is quorum in a meeting

• Rule 3 of the Companies (Meetings of Board and its Powers)

Compiled by: Pankaj Garg

Rule 3 of the Meetings of Board through video conferencing