the following queries with reference to the provisions of the
Companies Act, 2013:
(i) Can Star Furnishing Limited make further investment in equity shares
of Home Decor Limited during 2024-25?
(ii) Can Star Furnishing Limited exercise voting rights at the Annual
General Meeting of Home Decor Limited?
(5 Marks)
(b) Naveen Tools Ltd (NTL) mortgaged its factory land and building (by
equitable mortgage) on 1st March, 2023 to Goodwill Bank and availed a
credit limit of ₹ 200 lakh. Although the credit limit was sanctioned by the
Bank, but the NTL actually availed such credit facility only in the month of
August, 2023, when it issued a cheque in favour of a creditor towards the
payment of raw material purchased from it.
During the course of statutory audit, the auditor pointed out before the
management of the NTL about the non-compliance of registration of
charge with the Registrar within the stipulated time. The company officials
informed that although the mortgaged backed credit limit was sanctioned
in March 2023, but the company had not availed the facility till the month
of August, 2023.
So, the liability of registration of charge arises from the date of availment
only when the company issued a cheque from the mortgaged backed credit
limit account and not when the loan was sanctioned and credit limit was
assigned.
Further, the company management pleaded that it is the responsibility of
the financier i.e. Goodwill Bank to get the charges registered with the
Registrar since the registration of charge is to be effected in favour of the
Bank and for Bank's own benefit, so the NTL is in no way responsible for
getting registration or for delayed registration.
In the light of above facts, referring to the provisions of the Companies Act,
2013, discuss:
(i) When trigger point for the registration of charge shall arise,
(a) at the time of credit limit sanctioned by the Bank; or
(b) at the time of availing of credit limit when cheque was issued by
the company?
(ii) What are the consequences for non-registration of charge on the
Naveen Tools Ltd?
(5 Marks)
(c) Explain the rule which suggests that the 'Plain word requires no
explanation' and 'Technical words be understood in technical sense only’.
(4 Marks)
Answer
(a) (i) Can Star Furnishing Limited, make further investments in equity
shares of Home décor Limited during 2024-25?
According to section 19 of the Companies Act, 2013, a subsidiary
company is not allowed to hold shares of its holding company. The
prohibition also extends up to the nominees of the subsidiary company.
Also, a holding company shall not allot or transfer its shares to any of its
subsidiary companies and any such allotment or transfer of shares of a
company to its subsidiary company shall be void.
The prohibition does not apply to the following cases:
(a) Where the subsidiary company holds such shares as the legal
representative of a deceased member of the holding company; or
CORPORATE AND OTHER LAWS
(b) Where the subsidiary company holds such shares as a trustee; or
(c) Where the subsidiary company is a shareholder even before it
became a subsidiary company of the holding company, but in
this case, it will not have a right to vote in the meeting of holding
company.
It is also provided that the subsidiary company shall have a right to
vote at a meeting of the holding company only in respect of the
shares held by it as a legal representative or as a trustee.
In the given question Star Furnishing Limited is a subsidiary of Home
Décor Limited as it holds 60% (6,00,000/10,00,000 shares) shares of
Star Furnishing Limited. Simultaneously, Star Furnishings Limited is
holding 7% equity shares in Home Décor Limited out of which 2% are
held as a legal representative of a deceased member of Home Décor
Limited.
These shares are held by Star Furnishings Limited before Home Décor
Limited became its holding company. However, after becoming its
subsidiary, Star Furnishings Limited cannot make further investment
in Home Décor Limited.
(ii) As per second proviso to section 19, a subsidiary company shall have
a right to vote at a meeting of the holding company only in respect
of the shares held by it as a legal representative or as a trustee.
Accordingly, Star Furnishings Limited can exercise voting rights at the
Annual General Meeting of Home Décor Limited only in respect of 2%
shares held in the capacity of legal representative and not for other
5% shares.
(b) (i) According to section 77(1) of the Companies Act, 2013, it shall be the
duty of a company creating a charge to register it with the Registrar
of Companies within 30 days from the date of creation of the charge.
The obligation to register a charge arises not merely at the time of
sanctioning the credit limit but when the charge is created.
Whenever a company borrows money by way of loans including term
loans or working capital loans from financial institutions or banks or
any other persons, by offering its property or assets, as security a
charge is created on such property or assets in favor of the lender.
The Trigger point for registration of charge arises when the Bank has
sanctioned the mortgaged backed credit limit, documentation was
done, papers of the property for creation of the mortgage was
tendered by the company for creation of fixation of the credit limits.
Here, the words ‘creating a charge’ refers to the accepting of the
property papers for the purpose of creation of charge. Thus, it is the
date when the credit limits were sanctioned as assigned to the
company and not the date when the company had actually drawn a
cheque from such credit limit.
(ii) Consequence of non-registration of charge [Section 77 (3) & (4)]
No charge created by a company shall be taken into account by the
liquidator appointed under the Companies Act, 2013 or the
Insolvency and Bankruptcy Code, 2016 or any other creditor unless it
is duly registered and a certificate of registration of such charge is
given by the Registrar.
This means that the charge will become void against the liquidator
and other creditors of the company. That is to say, at the time of
winding up, the creditor whose charge has not been registered will be
reduced to the level of an unsecured creditor. Neither the liquidator
nor any other creditor will give legal recognition to a charge that is
not registered.
Another important consequence of non-registration is that the
charge-holder loses priority. Any subsequent registration of a charge
(i.e. even if it is registered within the extended period instead of
original thirty days) shall not prejudice any right acquired in respect
of any property before the charge is actually registered.
(c) Rule that suggests ‘Plain Word requires no explanation’
This Rule is called “Rule of Literal Construction”.
It is a cardinal rule of construction that a statute must be construed
literally and grammatically giving the words their ordinary and natural
meaning. Therefore, the language used in the statute must be construed
in its grammatical sense. The correct course is to take the words
themselves and arrive if possible, at their meaning without reference to
cases, in the first instance.
CORPORATE AND OTHER LAWS
If the phraseology of a statute is clear and unambiguous and capable of
one and only one interpretation, then it would not be correct to
extrapolate these words out of their natural and ordinary sense. When the
language of a statute is plain and unambiguous it is not open to the
courts to adopt any other hypothetical construction simply with a view to
carrying out the supposed intention of the legislature.
This principle is contained in the Latin maxim “absoluta sententia
expositore non indiget” which literally means “an absolute sentence or
preposition needs not an expositor”. In other words, plain words require
no explanation.
Sometimes, occasions may arise when a choice has to be made between
two interpretations– one narrower and the other wider or bolder. In such
a situation, if the narrower interpretation would fail to achieve the
manifest purpose of the legislation, one should rather adopt the wider
one.
Technical words are to be understood in a Technical sense only
This point of literal construction is that technical words are understood in
the technical sense only.
In construing the word ‘practice’ in the Supreme Court Advocates Act,
1951, it was observed that practice of law generally involves the exercise
of both the functions of acting and pleading on behalf of a litigant party.
When legislature confers upon an advocate the right to practice in a
court, it is legitimate to understand that expression as authorizing him to
appear and plead as well as to act on behalf of suitors in that court.
(Ashwini Kumar Ghose v. Arabinda Bose AIR 1952 SC 369).