Wednesday, September 24, 2008

Companies Act_Practical Problems_35

Company Y with a paid-up capital of Rs.50 lakhs entered into a contract with company Z in which a director of Y is holding equity shares of the nominal value of Rs.50,000. The director did not disclose his interest at the Board meeting under section 299 of the Companies Act, 1956. Is the director liable for his act?

As per Section 299, the disclosure of interest by directors do not apply to any contract or arrangement within two companies where any of the directors of one company or two or more of them together holds or hold not more than 2% of the paid up share capital in the other company. In the present case, if the holding is less than 2%, the director is not liable.

Companies Act_Practical Problems_34

Mr. Agent having ‘substantial interest’ in ABC Ltd is appointed as a Sole selling agent by the Board of Directors for a period of 5 years. The company’s paid-up share capital is Rs.49 crores. The Board did not place the matter in the AGM and communicated to Mr. Agent about his appointment, who in turn accepted the offer.
Examining the provisions of the Companies Act, 1956,
(a) Whether the appointment is in order?
(b) What course of action you would take as the Secretary of the company, in case Mr. Agent does not have substantial interest?

(i) the appointment of J is not in order, as there have been a number of violation on the part of the company as per the Companies Act, 1956. Appointment without the approval of the general meeting and without the approval of the Central Government is not valid since the company’s paid-up share capital is more than Rs.50 lakhs in this case. Moreover, since J has substantial interest in the company, approval of Central Government in Form 1 is must. Thus, the appointment of J is not in order.
(ii) the answer would not be different, as the capital (paid-up share capital) is more than 50 lakhs Rupees. In this case though the appointee (J) does not have substantial interest, but the company’s paid up share capital is more than 50 lakhs, consent of the company in general meeting (special resolution) and the approval of the Central Government is required.