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Legal Aspects of Banking :: Companies

01. Name at least four important contents / clauses in the Memorandum of Associations of a company and What is your main purpose of examining the MOA ?

 ANS. Memorandum of Association is the charter of the Company which enables the shareholders, creditors and those dealing with the Company to know its permitted range of operations

It contains,

1.Name of the Company

2.Place of business of the company

3.Objects of the company

4.Names of the first directors of the Company

5.Share Capital of the company.

purpose : To especially examine the object clause

02.Name two documents providing conclusive evidence that a public limited company is capable of executing document with the bank


•Certificate of Incorporation

–is issued by the Registrar of Companies

–is the conclusive evidence of formation of the company

•Certificate of commencement of business

–Is issued only in case of public limited companies

purpose – The public limited companies become bound by any contract from the date of commencement of business. Examine the legal validity of the contract, if any, entered into by the bank with the company.

03.Name at least four important contents / clauses in the Articles of Association of a company What is your main purpose of examining the AOA ?

ANS. Articles of association are the rules and regulations governing the internal management of the company. It contains

–No. of directors of the company

–Procedure for conducting meetings of the shareholders

–Procedure for transfer and transmission of shares

–Borrowing powers of the company

–Officers of the company and other details

purpose : Examine the borrowing powers of the company and also to know the power for executing the documents and creating security

04.Before executing security documents, a company passes a board resolution. What are the three minimum clauses it should contain ?

ANS. The board resolution passed at the board meeting and NOT by circulation is a document empowering the company in the following aspects :

–Powers to borrow

–Authority to sign

–Affix the common seal of the company on the security documents

05. A company executed a document with a round rubber stamp (common seal) where one of the directors signed as ‘for and on behalf of the company’

•Whether it is in order, if so, why

•If not in order, why?

 ANS. It is not in order, because

–The common seal has to be made of a metallic substance. A round rubber seal is not a common seal, even if the words are mentioned thereon.

–The affixation of the common seal requires to be witnessed by at least two persons, usually directors

–Such directors cannot sign in representative capacities. They sign in the capacity of a witness

06.ABC & Co, Private Ltd. has the following liability structure as per the latest information:

Capital                         Rs. 10 lakh

Free Reserves            Rs. 30 lakh

Term Loan                   Rs. 25 lakh

Cash Credit                 Rs. 20 lakh

          The Statutory auditor comes to your branch and cites a provision of Companies Act (section 293 (i) (d) ) which says that a company cannot contract liabilities in excess of its capital and free reserves. Thus, the above contract is void ab-initio. The loan should therefore be classified as a loss asset. How would you respond to the situation?
ANS. Section 293 (i)(d) of the Companies Act is applicable for public limited companies and those private companies, which are subsidiaries of public limited companies. The section is therefore not applicable in this case.

Secondly, the provision says that the company contract debt beyond the level of capital + free reserves. The term debt refers to long term debt only.

For the company to borrow beyond the above ceiling level, it would be necessary to obtain a resolution passed in the general body meeting of the members. The resolution must NOT be passed in circulation

07.Your bank is considering a credit facility in favour of M/s. Son & Co. Ltd. to the extent of Rs.10 Cr. This company is a wholly owned subsidiary of M/s. Father & Co. Ltd. One of the stipulations of the advance is that the parent company would provide a corporate guarantee to the bank covering the full advance. The parent company has a paid up capital of Rs.5 Cr. and a total free reserve up to Rs.7 Cr.

While obtaining the documents for corporate guarantee, what are the precautions you would like to exercise? 

ANS. A guarantee provided by a public limited company is clubbed with the amount of inter-corporate deposits and loans given by it for the purpose of section 372A.

As per the provisions of section 372A, the maximum amount permissible under this head is 100% of the free reserves or 60% of the aggregate of the capital and free reserves, whichever is higher.

As per the statutory provisions, therefore, the company can provide a corporate guarantee to the maximum extent of Rs.7.00 Cr. to the bank.

 However, if the guarantee exceeds the above limit, a special resolution would be required to be passed by the guarantor company in a general meeting.

•In case, the guarantee has been provided but the special resolution was not obtained beforehand, the board may be got ratified in a general meeting within 12 months of the board resolution.

08. Who should file charge?
It is the primary duty of the company to have the charges filed with ROC in a proper manner

However, section 134 empowers every person interested in the charge to get it registered with the ROC

 09. Section 125 of the Companies Act requires a Company to file a charge within 30 days of creation thereof SAY YES OR NO.

10. A Partner has the implied authority as an agent of a Firm. Say Yes or No.

 Yes, act of a partner shall be binding on the firm, if it is done :

•in the usual business of the partnership,

•in the usual way of the business : and

•as a partner, i.e.on behalf of the firm and not solely on his behalf  a Firm.

 That is the reason why any document executed by a Partner on behalf of his Firm should also be executed by the Partner in his individual capacity, so that the individual estate of the Partner can also be called upon for repayment towards the firm’s dues first, before settling his other dues.

•In cases where different loans provided to a Firm and its partner(s) (in individual capacities) are due, the estate of the Firm shall first be utilized towards payment of the Firm’s dues, and thereafter towards payment of individual dues of the partners, if the remaining balance of the estate permits.

•Similarly, the estate of a partner shall first be utilized towards repayment of his individual loan and balance if any, in repayment of the loan provided to the Firm.

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