What is the Effective Date of Increase of Authorised Share Capital?

What is the Effective Date of Increase of Authorised Share Capital?

Even though the members approval the increase in authorised capital in EGM or GM , it cannot be construed as final approval as resoloution can be rescinded or kepti in abeyance  as other formaliities have to be followed like

1. Filing of spl resolution in Form 23

2.Filing of Form 5 with fess for increase in authorised capital.

If a company passes a resolution in AGM/EGM for increase of authorised share capital.

No form 23 or form 5 is filed - No stamp-duty has been paid .

Will the company still can show the increased amount as its authorised share capital in the MOA & AOA from the date of AGM/EGM where resolution has been passed.

Hence , increase in authorised share capital needs further legal compliances to be carried over by the company untill then it cannot claim that it has increased authorised sharecapital.

Just passing the resolution is not essential but further legal compliance will have to be carried out.

For instance , in the case of merger , the approval by the court will be the relevant date and not the passing of resolution for merger.

The order of the Court approving a merger does not take effect until a certified copy of the same is filed by the company with the Registrar of Companies.

The same provision will be applicable in the case of increase of authorised share capital by a company

Any increase in the authorized share capital would come into effect immediately on passing of any valid resolution in this behalf, and filing of the requisite e-Forms 5, 23, being a ministerial act and procedural in nature, would not influence the date of increase of the authorized share capital as decided by Company Law Board in the case of 

Kobian (P)Ltd.v Kobian India (P) Ltd. (2005) 64 CLA 281 (CLB)

So from the above it should be date of passing resolution.

Thus, if a company passes a special resolution in a general meeting for increase of authorised share capital , and if it carries on the other formalities like filing of form 5 and form 23 , paying the appropriate fees to the government for increase of share capital ,then the effective date for such increase of authorised share capital will the date of passing the resolution by the members of the company.





This is a real case study . A Listed Company passed special resolution 2 year back for Increase in Auth. Capital but did not filed form 5/Form 23 due to lack of funds nor it acted on the resolution like changes in MOA/Auth. Capital in Balance Sheet. Now, it want to give effect to this resolution but penalty comes around Rs. 5 lakh so it propose to pass new resolution saying that old resolution is nullified & then pass a fresh special resolution for more or less same purpose and file to ROC in today's date.

Since the above company is a listed company and hence , there would be a few check points here : what was the authorized share capital shown in all filings by the company since the increase? What was the amount shown in the audited Balance Sheets since that date? Was the increase and no filing of forms questioned by the Auditors? What response was given to them? If you have been showing the increased amounts in annual filings as well as filings with stock exchanges, it will be very clear that the increase was acted upon, but compliances were not completed. If not, you have a valid justification that the increase was indeed, not acted upon.


If the Company in the Balance Sheet for these two years has shown the enhanced figure, then it is left with no choice than to file the penalty and the effective date of the Increase in Authorised Share Cap would be that date.

CAN THE DIRECTORS OF A COMPANY EXPEL OR REMOVE A SHAREHOLDER BY INSERTING A NEW CLAUSE IN ARTICLES ?

CAN THE DIRECTORS OF A COMPANY EXPEL OR REMOVE A SHAREHOLDER BY INSERTING A NEW CLAUSE IN ARTICLES ?

No. It is not possible. It is ultravires the provisions of the Companies Act.

Departmental Circular no.32 of 1975 dated November 1, 1975, which provides that the insertion of an article providing for expulsion of a member is ultra vires the powers of the Company.

Further, it has been held by the Supreme Court in the case of Bajaj Auto Ltd. vs. N. K. Firodia (1971) read with Article 141 of the Constitution that 'assumption by the Board of Directors of a Company of any power to expel a member by amending its Articles of Association is illegal and void'.

However , there is an alternate route is viable to make dissenting shareholder(s) less prominent  by resorting to the following:

One way to ensure that a member's influence is reduced is to have a rights / preferential issue and get shares allotted to others. The rights issue method works if the member who is to be sidelined is a minority and does not have the financial resources to match the others. Also, on record the need for a rights issue has to be established by way of a genuine business need.

To a large extent what a Company could do also depends on the provisions in the existing Articles/ Shareholders Agreement (if any), the percentage of shareholding of the existing member and whether the Comapny is a public or private company .


 

NOW COMPANIES CAN CONVENE THE BOARD MEETING THROUGH VIDEO CONFERENCING

It is not mandatory for companies to provide its directors, the facility to attend meetings through video conferencing.

Now , it is optional for the companies to organise the board meeting of the company through video conferencing. For listed companies , they have to adhere the listing rules over and above MCA rules.

v Inform every director of board meeting including that they can participate through video conference and also get confirmation from them whether they will participate in person or video conference.

v Place of meeting will be the place, where chairman or company secretary is sitting.

v A roll check will be made by chairman and every director and company secretary present in the meeting will state his name, designation, city etc.

v Record the proceedings of the meeting and preserve the same for one year.

v At the end, decision of the meeting will be announced by the Chairman.

Ref: MCA Circular 28/2011 dated 20/05/2011.

The following case law will throw some light on the subject.


In State of Maharashtra v. Dr Praful B. Desai (2003) the Supreme Court held, as to the question whether recording of evidence by video conferencing is permissible:

“Video conferencing has nothing to do with virtual realty. Advance in science and technology have now, so to say, shrunk the world. They now enable to see and here events, taking place for away, as they are actually taking place. Video conferencing is advancement in science in technology which permits one to see here and talk with someone far away with the same facility and ease as if he is present before you i.e. in your presence. In fact he/she is present before you on a screen. Except for touching one can see, here and observe as if the party is in the same room. In video conferencing both parties are in presence of each other. Recording of evidence by Video conferencing also satisfied the object of providing, in section 273, that evidence be recorded in the presence of the accused. The accused and his pleader can see the witness as clearly as if the witness was actually sitting before them. The advancement of science and technology is such that now it is possible to setup video conferencing equipment in the Court itself for recording the evidence through video conferencing.”

Why a Charge has to be registered with ROC under Section 125 of the Companies Act ,1956

INDUSTRIAL DEVELOPMENT BANK OF INDIA v. THAPAR AGRO MILLS LTD [DEL]

– No charge has been registeredUnder section 125 in favour of IDBI by the Creditor Thapar Agro Mills – IDBI obtaining decree from DRT.  Whether the decree creates a charge in the assets of the company – Held, No.Sections 125 and 460(6) – Companies Act, 1956 –

Facts:

IDBI had advanced loan of Rs. 200 lacs to the company in liquidation in August, 1992. As per loan agreement, the company in liquidation ( Thapar Agro Mills Ltd) was to allot Non Convertible Debentures (in short “NCDs”) after complying with the SEB I guidelines and other pre-requisites like appointment of trustees, creation of security etc.

However, despite various reminders, the company in liquidation neither issued NCDs to the appellant nor paid interest or other charges in accordance with the agreement. The company also failed to create security as required. Consequently, the appellant filed an application under Section 19 of the Recovery of  Debts Due to Banks and Financial Institutions Act, 1993 for recovery of Rs.2,96,22,963.00 along with pendente lite and future interest and costs of litigation, which was decreed in favour of IDBI.

However, the Official Liquidator vide order dated 06th May, 2005 rejected the appellant’s claim as secured creditor on the ground that the appellant’s charge was not registered under Section 125 of the Companies Act, 1956. In this case, neither a charge was created by the company in liquidation nor by operation of any law or by the decree of the DRT.

The order of the DRT, Chandigarh amply proves that no NCD was ever issued and hence no charge/security was created by the company. The DRT did not declare petitioner to be a secured creditor. But merely because appellant is in possession of a decree for recovery, does not mean that appellant becomes a secured creditor. In fact, every decree holder is entitled to seek sale of assets of the defendant, in the event the decree is not satisfied.

High Court is of the view that if appellant’s submissions were to be accepted, then every sundry/unsecured creditor after obtaining a decree from the Civil Court would have to be treated as a secured creditor - which is untenable in law. Consequently, as there is no charge in favour of the appellant, the appellant cannot be considered as a secured creditor.

This decision emphasizes the need to register the charge with ROC under section 125 to become a secured creditor in the case of insolvency or winding up of a company. It is not also not understandable why IDBI has not insisted to register the charge with ROC under section 125 of the Companies Act 1956.

Whether Stamp Duty is Payable when there is an increase in the Authorised Share Capital of a Company ?

Whether Stamp Duty is Payable when there is an increase in the Authorised Share Capital of a Company ?

The recent decision by High Court of New Delhi in S.E. Investments Ltd v. Union of India & Others ( Delhi) is thought provoking and mind blowing .

Increase in authorised capital – Whether stamp duty is payable on the increased quantum – Supreme Court held in negative .

The petitioner S.E Investments Ltd filed E-Form 5 for the increase of Authorised Share Capital from Rs 8.50 Crores to Rs 125 Crores. The petitioner had not paid any stamp duty for this claiming that that there exists no provision in the Delhi Stamp Act to pay stamp duty on increase in the authorised share capital . However , Delhi ROC insisted that if no stamp duty is paid by the petitioner ,then the amount of Rs 58,25,000/= deposited with ROC would be forfeited.

Opposing this , the petitioner filed a suit in the High  Court. It was held by the High Court , Delhi that the AOA and MOA are needed to be submitted at the juncture of registration of a company. At that time , stamp duty is payable in terms of either Article 10 or the Article 39 of the Schedule IA to the Act.

High Court further viewed that neither the Article 10 or Article 39 connotes to “ Increase” in the authroised share capital of the company as a basis of levy of stamp duty . It the absence of such specific provision , that permits the levy of the stamp duty on the increase in Authorised share capital , it would not be right on the part of respondent ( ROC , Delhi) to insist upon the petitioner to pay the stamp duty for the increase in authorised share capital.

High Court was of the view that the fact the petitioner earlier paid stamp duty when authorised capital was increased earlier by them cannot act as an estoppel against the Petitioner.  Further ,the announcement in the MCA site that the stamp duty of 0.05% is payable on the increase in the authorised share capital does not lend a legal acumen for such levy in the absence of any amendment to the Act to that effect.

The High Court cited the following Supreme Court verdict 

Commissioner of Wealth Tax v. Ellis Bridge Gymkhana (1998)  held that
 

“ the rule of construction of a charging section is that before taxing any person , it must be demonstrated that such person falls within the ambit of the charging section without any ambiguity used in the section. No one can be taxed by implication.  A Charging Section has to be construed strictly . If a person has not been brought within the ambit of the charging section by clear words , he cannot be taxed at all.

High Court of Delhi directed the respondent to accept the form 5 and to record the increase in share capital without insisting on the petitioner paying stamp duty thereon.  The High Court also held that petitioner is not entitled to claim the refund of stamp duty paid earlier.

CAN A PARENT COMPANY IN EUROPE CAN BE HELD LIABLE FOR LIABILITIES OF A SUBSIDIARY ?

CAN A PARENT COMPANY IN EUROPE CAN BE HELD LIABLE FOR LIABILITIES OF A SUBSIDIARY ?

A limited liability company's shareholders are nevertheless not automatically held liable for the liabilities of the subsidiary. For instance , in Kodak Ltd v Clark ,it was held that even-though parent is having about 98% stake in its subsidiary , it does not give rise to give an agency type of relationship under English law.

A particular risk arises when a parent company is being sued for the actions of the board members of the its subsidiary. If parent company has appointed majority of the directors of subsidiary to look after the interest of parent company , and if a third party sustains loss due to actions of board of subsidiary , then in such scenarios , a parent company may be sued to recover the losses sustained with their subsidiary as described in Grantham R , " Liability of Parent Companies for the Actions of the Directors of the Subsidiaries , Company Lawyer , 18 (5) (1997) p.138.

Thus , if the majority of subsidiary company's board consists of the parent company's nominee directors and if loss is sustained by a third party , then in such scenario , a third party can sue the parent company for the actions of a subsidiary company.

Further ,Italy , Germany and France are now the members of the EU and they are bound by the European Company law now.

In Akzo Nobel v European Commission ( C-97 /08 ) , it was held by ECJ that there is a rebuttable liability resumption of parent companies for their subsidiary's cartel offenses in the case of 100 % shareholding.

Further , piercing of corporate veil, under EU law , ECJ can consider subsidiary companies as a single unit for competition objectives. If the parent is a monopoly which set up ten different subsidiaries to deem it to demonstrate as if there is a competition , then ECJ could consider all companies to be a single economic unit.

Hence , ECJ would never hesitate to pierce the corporate veil when a third party sustains a loss in a subsidiary due to actions of parent company in EU.

As now Italy , France , Germany is the member nations of the EU and falls under EU Single Market , any appeal( even court in Italy or Germany may held that parent company is not liable) on query relating to Parent company liable to subsidiary debts goes to ECJ , then ECJ will give such views given by it earlier in Akzo Nobel v European Commission ( C-97 /08 ) and in Wibru / Swissair and such decisions will be binding on the member nations of EU like Italy or France.

For instance , there has been a lot of controversies in UK as regards to Human rights violation under UK law as some provisions were inconsistent with the EU Human Rights Law. There were conflicts of opinion by UK courts and ECJ.

Later , UK has completed installed the ECJ Human Rights Regulations in its Act ( now UK Human Rights Act ) so as to avoid conflict with ECJ Human Rights Act.

Whether Subsidiary company can become member in its Holding Company ?

As per section 42 , the subsidiary company is not allowed to hold shares in its holding company.
A Subsidiary Company cannot become member of a holding Company except two cases mentioned in the Section 42 of the Companies. Hence, a subsidiary  cannot invest in the shares of holding company.

However , in Himachal Telematics Ltd & Himachal Futristic Communication Ltd , it was held in the case of merger of two group companies ,the application of section 42 of the Companies Act and section 77 of the Companies Act ( buy-back of shares) will not be applicable if an order is passed by the competent court under section 391 to 394 of the Companies Act . In such cases , a court order can override any statutory violation  i.e. under section 42.

Further , the section 42 will not be applicable if the shares are held by the subsidiary's legal representative of deceased member or by any trustee .
   
One another way to hold shares is that a director of a subsidiary company can hold the shares in the Holding company by declaring a beneficial interest under section 187 C.

One another way , to allot shares to the proposed subsidiary before there exists any holding and subsidiary relations.