Companies Act 2013: Compensation and Appointments

Case Study 1: A Ltd.

• Mr. Shyam, the managing director, was removed from A Ltd. with compensation for early termination.
• The original tenure of Mr. Shyam was up to 31.12.2022.
• The remuneration drawn by Mr. Shyam since the date of his joining the office is:
  • FY 2018-19: Rs 55 lakhs
  • FY 2019-20: Rs 62 lakhs
  • FY 2020-21 (up to 31.05.2020): Rs 13 lakhs
• The company's data as on 31.03.2020:
  • Paid-up Share Capital: Rs 1000 lakhs
  • Share Application Money: Rs 200 lakhs
  • General Reserve: Rs 500 lakhs
  • Revaluation Reserve: Rs 250 lakhs
  • Securities Premium Account: Rs 300 lakhs
  • Long-term loan: Rs 400 lakhs
  • Funded Interest Term Loan: Rs 100 lakhs
  • Working Capital Loan: Rs 200 lakhs
  • Mutual Fund Investments: Rs 350 lakhs
  • Miscellaneous Expenditure not written off: Rs 50 lakhs
• Mr. Tushar was appointed as the new managing director of A Ltd. on 1.08.2020.
• The company decided to pay remuneration to Mr. Tushar as per Section 197(4) of the Companies Act, 2013.
• Additional perquisites/remuneration for FY 2020-21:
  • Dearness Allowance: Rs 7 lakhs
  • House Rent Allowance: Rs 5 lakhs
  • Contribution to Annuity Fund: Rs 6 lakhs
  • Reimbursement of direct taxes: Rs 4 lakhs
  • Additional Remuneration per month: Rs 2 lakhs
  • Sitting fees payable for a board meeting: Rs 1 lakh

Case Study 2: Senior Ltd.

• Senior Ltd. is an Indian company registered under the Companies Act, 2013.
• The company has two subsidiaries: Small Ltd. and Junior Ltd.
• The company formulated a scheme wherein every employee is entitled to a loan equivalent to 30 times the monthly salary.
• Ms. Radha, the Finance Manager, applied for a loan of Rs 50 lakhs to purchase a house.
• The management sanctioned the loan of Rs 50 lakhs to Ms. Radha.
• Ms. Radha got married to Mr. Raj, the Managing Director, two months after the loan was sanctioned.
• The company sold one of its flats to Mr. Raj for Rs 80 lakhs, with Rs 50 lakhs paid in cash and the balance in 30 instalments.
• Some members questioned whether the Rs 50 lakhs paid by Mr. Raj was from his own pocket or taken from the company through an indirect route.
• The company's balance sheet extracts:
  • Paid-up Capital - Equity: Rs 100 crores
  • Paid-up Capital - Preference: Rs 50 crores
  • Revaluation Reserve: Rs 10 crores
  • Securities Premium Reserve: Rs 15 crores
  • General Reserve: Rs 5 crores
  • Capital Redemption Reserve: Rs 2 crores
  • Equity Investment in Small Ltd.: Rs 80 crores
  • Equity Investment in Junior Ltd.: Rs 60 crores
  • Outstanding Balance in Loan - Raj: Rs 20 lakhs
  • Outstanding Balance in Loan - Radha: Rs 30 lakhs
• Senior Ltd. wants to give a guarantee to HDFC Bank in favor of Junior Ltd. for a loan of Rs 50 crores.
• Senior Ltd. also wants to give a guarantee to SBI for a loan of Rs 50 crores to Small Ltd.

Case Study 3: Little Star Private Limited (LSPL)

• LSPL is a fully integrated setup from taking a 3D model as input to the design and manufacturing of tools to the manufacturing of finished products.
• The company is also into Engineering Services with headquarters in Mumbai, India.
• LSPL has a marketing office with warehouse facility in Poland, fully owned and controlled by it.
• On 1st January 2017, LSPL shipped engineering products to LTS, Poland, and to a customer in the UK.
• The total value of Exports of LSPL during the calendar year 2017 was USD 12 million.
• LSPL entered into a Supply (Export) Agreement with Drakes Group (DG) in the UK for the supply of two machines.
• The agreement terms:
  • The exact value of each machine can be ascertained only after the export to the UK.
  • An advance of GBP 1 million is to be remitted to India by DG to LSPL.
  • Interest shall be payable on the advance payment by LSPL to DG up to the date of the bill of lading of the first shipment.
  • The first machine is to be supplied within 15 months from the date of receipt of the advance payment.
  • The second machine is to be supplied within 27 months.
• LSPL also established a marketing office in Dubai, UAE, for conducting normal business activities.
• LSPL sponsored a T20 cricket match in Dubai and approached the State Bank of India for remittance of USD 250,000 towards sponsorship fees.
• LSPL is holding certain properties in the form of residential flats in UAE ready for sale.
• LSPL entered into an Agency Agreement with Prestige Real Estate LLC (PREL) in UAE for the sale of properties.
• The agreement terms:
  • LSPL grants PREL the exclusive rights to sell all the residential flats in UAE.
  • Any and all offers and negotiations in regards to the said properties shall be conducted by PREL.
  • PREL shall do everything possible to entertain and vet offers made.
  • Any offers considered valid should be reported to the Seller within 2 days, and it shall be at the discretion of LSPL to accept or decline.
  • LSPL agreed to remit PREL a flat commission of a certain percentage of the final sale price.### Remittance under LRS
• Remittance of more than USD 100,000 for buying lottery tickets abroad is prohibited under LRS.
• No other option is applicable as the correct answer is not provided.

WRPC Limited (WRPC)

• WRPC is a Mumbai-based company with 35% share capital held by the Central Government, 15% by the Government of Maharashtra, and 10% by the Government of Karnataka.
• The company manufactures corrosion-resistant overhead transmission and distribution products.
• Internal auditors raised concerns about internal control irregularities.
• WRPC defaulted in complying with statutory requirements, leading to a notice from the Registrar of Companies, Mumbai.
• The company received Show Cause Notices from Revenue Officials on GST and Income-tax related issues.
• The Board of Directors consisted of 14 Directors.

CBPL and PISCO Electronics

• CBPL is a Delhi-based company and PISCO Electronics is a Pune-based company, both being major component suppliers to WRPC.
• CBPL has a paid-up capital of ₹100 crore and a turnover of ₹315 crore as on 31.03.2019 and ₹350 crore as on 31.03.2020.
• PISCO Electronics has a paid-up capital of ₹50 crore and a turnover of ₹275 crore as on 31.03.2019 and ₹305 crore as on 31.03.2020.

Ullal Pharma Limited (UPL)

• UPL is an unlisted company with its Registered Office at Baidebettu, District Udupi, Karnataka.
• The company is a market leader in semi-synthetic penicillin and has a presence in key therapeutic segments.
• UPL has three group companies and has duly filed its Annual Accounts, Annual Returns, and other documents with the jurisdictional Registrar of Companies (ROC).
• ROC issued a notice to UPL asking for information and explanations on certain matters, including books of accounts, ledger abstracts of all Inter-Company Accounts, all documents relating to sales, and all Bank Statements and Cash Books.

Rajeev, Director (Finance) of UPL

• Rajeev had exclusive responsibilities to supervise sales accounts and inter-company transactions.
• He was found to be evasive and willfully disobeying the directions given by the ROC.
• Rajeev was convicted and punished with imprisonment for a period of six months and a fine of ₹70,000 under Section 207 (4) (i).

Notice to Venkatesh and Lokesh

• Venkatesh, ex-Whole-time Director, and Lokesh, ex-Chief Financial Officer (CFO) of UPL, received separate notices from the ROC.

• Both argued that the notice served on them was not valid since they are no longer associated with the company and, while in service, they had acted only in their capacity as officers of the company.### Case Study 1: Lotus Switchgears Limited (LSL)

• LSL is a manufacturer, exporter, and supplier of electrical products based in Shivamogga, Karnataka.

• The company is facing difficulties and appointed Raghuram as an Executive Director to overcome them.

• Raghuram's appointment was invalid due to certain defects and disqualification, but he participated in several Board Meetings and assented to various decisions.

• The Board of Directors of LSL decided that Raghuram shall make good the losses, if any, for the period he remained Executive Director, but all the resolutions passed during his period shall be valid and stand good.

Lotus Switchgears Limited (LSL) - Net Worth

• Net Worth of LSL is ₹ 100 crore, calculated by adding Paid-up Capital, General Reserves, and Securities Premium Account, and deducting Accumulated Losses and Deferred Revenue Expenditure.
• The company's net worth is relevant to determine whether Shruta Components Private Limited (SCPL) is an undertaking of LSL.

Service Contracts

• Raman, an investor, was informed that only copies of the written Memorandum setting out the terms and conditions of the service could be provided for inspection, as no written Service Contracts with Arjun, Ramesh, and Ripudaman were available.
• The company and every defaulting officer may be liable to a penalty for non-production of Service Contracts for inspection.

Political Contributions

• LSL made political contributions and incurred expenses during the financial year 2020-21.
• The company disclosed ₹ 11,00,000 as political contributions and ₹ 3,00,000 as 'Advertisement and Business Promotion Expenses' in its financial statements.

Case Study 2: Kumar Beverages Limited (KBL) and Akshay Beverages Limited (ABL)

• Kumar Beverages Limited (KBL) is a listed company, and Akshay Beverages Limited (ABL) is an unlisted company.
• The two companies have been in negotiation for a merger, with KBL transferring all of its assets and liabilities to ABL.
• The merger proposal is subject to various factors, such as elimination of competition, scaling up of operations, economies of large-scale business, and increase in market share.

Merger Procedure

• The companies filed a petition with the National Company Law Tribunal (NCLT) for the purpose of sanctioning the Scheme of Merger.
• The NCLT ordered the required meeting and gave directions for conducting the meeting.
• A certified copy of the Order was filed with the Registrar of Companies for registration.

Effective Date of Merger

• The merger scheme shall be effective from the 'appointed date', being the completion of 15 days from the date of receipt of the certified copy of the Order of the NCLT.

Implementation of Merger

• The actual implementation of the Scheme of merger is expected to take some time.
• The Board of Directors of ABL will discuss the manner of disposing of the books and papers of KBL once the implementation procedure is completed.

Liabilities of Directors

• Neelesh, a Director of KBL, committed various offences by contravening different provisions of the Companies Act, 2013.
• Neelesh contended that the wrongful acts were committed before the merger, and therefore, he should be relieved from all liabilities, punishments, and penalties for the offences earlier committed.

This quiz covers provisions of the Companies Act, 2013 related to compensation for premature termination and appointments of company officers.