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Question 2 (a) Silk Segment Private Ltd. (SSPL) is a wholly owned subsidiary of Silk Block Ltd. (SBL) a listed public limited company. The Board of Directors of Silk Segment Private Ltd. have collectively decided upon the proposal to grant loans of ₹ 15,00,000 and ₹ 20,00,000 to Mr. Sohan and Ms. Subarna respectively for the purchase of fully paid-up shares in Silk Segment Private Ltd. Mr. Sohan is the Deputy Marketing Manager of Silk Segment Private Ltd. with a monthly salary of ₹ 1,00,000; whereas Ms. Subarna, a qualified Chartered Accountant, is the Chief Financial Officer of Silk Segment Private Ltd. with a monthly salary of ₹ 2,00,000. In view of provisions of the Companies Act, 2013, decide: (i) Whether the proposed loans to Mr. Sohan as well as Ms. Subarna can be disbursed by the company keeping in view that Silk Segment is a private limited company? (ii) Whether the answer would be different in case only 25% shares of SSPL are held by SBL? (b) The following are the extracts from the financial statements of BUI Private Limited, which is neither a start-up nor it is an associate or subsidiary company of any other company. Particulars Amount ` Authorised Capital: 10,00,000 Equity Shares of ₹ 100 each 10,00,00,000 Paid-up Share Capital: 8,00,000 Equity Shares of ₹ 100 each 8,00,00,000 Securities Premium Reserve Account 2,00,00,000 General Reserves 5,00,00,000 Term Loan from LMR Bank Limited 12,00,00,000 Cash Credit Loan (For Working Capital) 5,00,00,000 The company has never failed to file the Annual Return and Financial Statements with the Registrar. The company has already successfully repaid all the monies which were accepted earlier in the form of deposits along with due interest. Since the company was successful in implementation of its housing project by utilizing the money accepted in the form of deposits, the Board was interested to accepting deposits once more and take up another housing project in NOIDA since the members of the company were having sufficient surplus money which they wanted to invest in the company to start the project. However, their condition was that the same will be provided by them if the company accepts them in the form of deposits and the applicable provisions of the Companies Act, 2013 and Rules made thereunder are strictly complied with. But, the Board of Directors of BUI Private Limited were not in support of depositing any amount in any Deposit Repayment Reserve Account for the purpose of repayment of the said deposits, since the repayment was to be made out of the amount received from the customers who were going to book for the flats in the housing project. Two proposals came for review to the Board, out of which only one proposal was to be selected. The Board wanted you to advise them in choosing the appropriate deposit scheme. Proposal 1 - Acceptance of Deposits of ₹ 20,00,00,000, to be repaid with interest @ 7% per annum; CORPORATE AND OTHER LAWS Proposal 2 - Acceptance of Deposits of ₹ 14,00,00,000, to be repaid with interest @ 8% per annum. Referring to the applicable provisions of the Companies Act, 2013, the Rules made thereunder and the notifications issued in this respect, advise the Board stating the justification in support of your advice. (c) State what do you understand by the term 'document' as per the General Clauses Act, 1897? Discuss which of the following will be treated as a document: (i) Power of Attorney (ii) Cheque

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Detailed Solution & Explanation

(a) (i) According to section 2(71) of the Companies Act, 2013, (the Act) a Public Company means a company which— (a) is not a Private Company; and (b) has a minimum paid-up share capital as may be prescribed: Provided that, a company which is a subsidiary of a company, not being a private company, shall be deemed to be a public company for the purposes of this Act even where such subsidiary company continues to be a private company in its Articles. As per section 2(51) of the Act, Key Managerial Personnel (KMP), in relation to a company, includes the Chief Financial Officer. According to section 67(2) of the Companies Act, 2013, Public Company shall not give any financial assistance: 1. Whether directly or indirectly and whether by means of a loan, guarantee, the provision of security or otherwise. 2. For the purpose of, or in connection with, a purchase or subscription made or to be made, by any person of or for any shares in the company or in its holding company. As per section 67(3) of the Act, a company may provide the financial assistance, in case of lending money by a company to its employees (other than its directors or key managerial personnel), not exceeding six-month salary of the employees to enable them to buy or subscribe fully paid shares in the company or its holding company and to hold them by way of beneficial ownership. In the given question, Silk Segment Private Ltd. (SSPL) is a wholly owned subsidiary of Silk Block Ltd. (SBL). Thus, SSPL will also be deemed as a public company [by virtue of Section 2(71)]. Hence, considering the above provisions we can answer the following to the questions asked: (i) Mr. Sohan is the Deputy Marketing Manager of SSPL; hence loan may be provided to him upto the limit of his 6 months’ salary i.e. ₹ 6,00,000. Thus, proposal to grant loan of ₹ 15,00,000 to Mr. Sohan for purchase of shares in SBL is not valid. Ms. Subarna is a KMP (being the Chief Financial Officer of SSPL), hence, proposal to grant loan to her for purchase of shares in SBL is not valid. (ii) Section 67 of the Act shall not apply to private companies in whose share capital no other body corporate has invested any money. In case where Silk Block Ltd. (SBL) held only 25% shares of Silk Segment Private Ltd. (SSPL), the latter would not be termed as a subsidiary of the former and hence would not be a deemed public company. It will still be regarded as a private limited company. Further, SBL is holding shares in SSPL, thus SSPL will not fall in the exempted class of private companies and accordingly, the provision of section 67(3) of the Companies Act, 2013 shall apply. In view of the above provisions, the answer would remain the same in case only 25% shares of SSPL are held by SBL. (b) Exemption to certain Private Companies: Notification No. GSR 464 (E) dated 5th June 2015, provided certain exemptions to Private Limited Companies relaxing the provisions of the Companies Act 2013 with respect to certain restrictions for acceptance of deposits. The restrictions specified in the clauses (a) to (e) of sub-section (2) of section 73 with respect to certain restrictions for acceptance of deposits like issue of circular, filing the copy of such circular with the Registrar, CORPORATE AND OTHER LAWS depositing of certain amount and certification as to no default committed shall not apply to a private company. They are as follows: (A) which accepts from its members monies not exceeding one hundred percent of the aggregate of the paid-up share capital, free reserves and securities premium account; or (B) which is a start-up, for five years from the date of its incorporation; or (C) which fulfils all of the following conditions, namely:- (a) which is not an associate or a subsidiary company of any other company; (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 not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section. In the present case, BUI Private Limited was not in support of depositing any amount in any Deposit Repayment Reserve Account for the purpose of repayment of the deposits. Also, since BUI Limited does not satisfy the conditions given in clause (C) above, as its borrowings from banks is not less than twice of its paid-up share capital or fifty crore rupees, whichever is lower, (i.e. 8 crore*2=₹ 16 crore and amount already borrowed is ₹ 17 crore (i.e Term Loan of ₹ 12 crore and Working Capital of ₹ 5 crore), it has to go for the restricted amount as stated in clause (A) above, i.e. not exceeding one hundred percent of aggregate of the paid-up share capital, free reserves and securities premium account. Therefore, the maximum amount of deposit it can accept from members will be limited to ₹ 15 crore. In terms of the options given in the question, the company has no option but to choose Proposal 2 — Acceptance of Deposits of ₹ 14,00,00,000, to be repaid with interest @ 8% per annum. (c) According to section 3(18) of the General Clauses Act, 1897, ‘Document’ shall include: - any matter written, expressed or described upon any substance; - by means of letters, figures or marks or by more than one of those means; - which is intended to be used or which may be used, for the purpose or recording that matter. For example, books, file, painting, inscription and even computer files are all documents. However, it does not include Indian Currency Notes. (i) Power of Attorney It is a written legal instrument by which a person (the principal) authorizes another person (the agent) to act on their behalf. It meets the criteria of a document as it is written or expressed, contains information describing the authority granted and is intended to record and communicate the legal relationship. (ii) Cheque A cheque is a negotiable instrument that directs a bank to pay a specified sum of money from the drawer's account to the payee. It qualifies as a document because it is written or printed, records details such as the amount, date, and parties involved and serves as evidence of a financial transaction. Hence, both a Power of Attorney and a Cheque fall within the definition of a "document" within the meaning of Section 3(18) of the General Clauses Act, 1897. They are tangible representations of written information intended for legal or transactional purposes.

Key Concepts to Understand

Working Capital

The excess of current assets over current liabilities, representing the short-term liquidity available to a business for its day-to-day operations. Positive working capital indicates good short-term financial health.

Acceptance

When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Acceptance must be absolute and unqualified (Section 7, ICA 1872). A conditional acceptance is a counter-offer.

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