List of top Legal Studies Questions on Company Law asked in CLAT PG

The Companies Act, 2013 does not deal with insolvency and bankruptcy when the companies are unable to pay their debts or the aspects relating to the revival and rehabilitation of the companies and their winding up if revival and rehabilitation is not possible. In principle, it cannot be doubted that the cases of revival or winding up of the company on the ground of insolvency and inability to pay debts are different from cases where companies are wound up under Section 271 of the Companies Act, 2013. The two situations are not identical. Under Section 271 of the Companies Act, 2013, even a running and financially sound company can also be wound up for the reasons in clauses (a) to (e). The reasons and grounds for winding up under Section 271 of the Companies Act, 2013 are vastly different from the reasons and grounds for the revival and rehabilitation scheme as envisaged under the IBC. The two enactments deal with two distinct situations and in our opinion, they cannot be equated when we examine whether there is discrimination or violation of Article 14 of the Constitution of India. For the revival and rehabilitation of the companies, certain sacrifices are required from all quarters, including the workmen. In case of insolvent companies, for the sake of survival and regeneration, everyone, including the secured creditors and the Central and State Government, are required to make sacrifices. The workmen also have a stake and benefit from the revival of the company, and therefore unless it is found that the sacrifices envisaged for the workmen, which certainly form a separate class, are onerous and burdensome so as to be manifestly unjust and arbitrary, we will not set aside the legislation,solely on the ground that some or marginal sacrifice is to be made by the workers. We would also reject the argument that to find out whether there was a violation of Article 14 of the Constitution of India or whether the right to life under Article 21 Constitution of India was infringed, we must word by word examine the waterfall mechanism envisaged under the Companies Act, 2013, where the company is wound up in terms of grounds (a) to (e) of Section 271 of the Companies Act, 2013; and the rights of the workmen when the insolvent company is sought to be revived, rehabilitated or wound up under the Code. The grounds and situations in the context of the objective and purpose of the two enactments are entirely different.
(Extracted, with edits and revision, from the judgement in Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma v. Union of India and Ors, 2023 SCC Online SC 547)

Alastair Hudson in his book ‘Securities Law’ First Edition (Sweet & Maxwell), 2008 at page 342, refers to ‘Restricted Offers’ and noticed that there is no contravention of Section 85 of FSMA 2000, if: “(b) the offer is made to or directed at fewer than 100 persons, other than qualified investors, per EEA State”. The purpose underlying that exemption, the author says, is mainly the fact that the offer is not being made to an appreciable section of “the public” such that the policy of the prospectus rules generally is not affected. Further, the author says that “Self-evidently, while an offer to 99 ordinary members of the public would be within the literal terms of the exemption, it would not be the sort of activity anticipated by the legislation. Moreover, if a marketing campaign were arranged such that ordinary members of the people were approached in groups of 99 people at a time in an effort to avoid the prospectus rules, then that would not appear to be within the spirit of the regulations and might be held to contravene the core principle that a regulated person must act with integrity.”
I may, therefore, indicate, subject to what has been stated above, in India that any share or debenture issue beyond forty-nine persons, would be a public issue attracting all the relevant provisions of the SEBI Act, regulations framed thereunder, the Companies Act, pertaining to the public issue. Facts clearly reveal that Saharas have issued securities to the public more than the threshold limit statutorily fixed under the first proviso to Section 67(3) and hence violated the listing provisions which may attract civil and criminal liabilities. Principles of listing, which I may later on discuss, is intended to assist public companies in identifying their obligations and responsibilities, which are continuing in nature, transparent in content and call for high degree of integrity. Obligations are imposed on the issuer on an ongoing basis. Public companies who are legally obliged to list their securities are deemed to accept the continuing obligations, by virtue of their application, prospectus and the subsequent maintenance of listing on a recognized stock exchange. Disclosure is the rule, there is no exception. Misleading public is a serious crime, which may attract civil and criminal liability. Listing of securities depends not upon one’s volition, but on statutory mandate.
[Extract from Sahara India Real Estate Corporation Limited v. Securities and Exchange Board of India (SEBI), Para 89-91, Civil Appeal No. 9833/2011 (SC)]

An unpleasant tussle ensured between the TATA Sons and Cyrus Pallonji Mistry (“CPM”) in October 2016, when Mistry, who was the sixth chairman of Tata Sons, was ousted from the position of Executive Chairman of Tata Sons Limited. CPM took over as the chairman in 2012 after Ratan Tata announced his retirement. Tata Group patriarch Ratan Tata had personally asked Cyrus Mistry to resign as chairman of Tata Sons as the board had lost faith in him, but his refusal led to the removal via majority vote. Cyrus Investments Private limited and Sterling Investment Corporation Private Limited belonged to the Shapoorji Palloni Group in which CPM held a controlling interest (about 2% of the issued share capital of Tata Sons). Seven out of the nine directors of Tata Sons voted for CPM’s replacement after Farida Khambata abstained and Mistry was declared ineligible to vote as he was an interested director. Mistry challenged his removal, accusing the board of mismanagement and of oppressing minority shareholders. however, the National Company Law Tribunal (NCLT) rejected his petition. After this Mistry challenged his removal in National Company Law Appellate Tribunal (NCLAT). In 2018, NCLAT order restored Mistry as the group’s executive chairman. Tata Sons challenged that NCLAT order in Supreme Court. CPM also challenged the order for few more relief. Supreme Court stayed NCLAT’s order reinstating Cyrus Mistry as the executive chairman of Tata Sons and restoring his directorships in the holding company as well as three group companies, with a preliminary observation that the first impression of the order was “not good” and that the tribunal ‘could’ not have given consequential relief that had not been sought in the first place. Ultimately, the Supreme Court decided the case in favour of Tata Sons. One of the issues decided by Supreme Court was that “whether the case was fit to be qualified as a situation of ‘Oppression and Mismanagement’ under Section 241 of the Companies Act, 2013?”. On this issue, the Supreme Court observed that “unless the removal of a person as a chairman of a company is oppressive or mismanaged or done in a prejudicial manner damaging the interests of the company, its members or the public at large, the NCLT cannot interfere with the removal of a person as a Chairman of a Company in a petition under Section 241 of the Companies Act, 2013.” This case highlighted the point that “an executive chairman does not have sovereign authority over the company. In corporate democracy, decision making always remains with the Board as long as they enjoy the pleasure of the shareholders. Likewise, an executive chairman will continue as long as he/she enjoys the pleasure of the Board. An assumption by the executive chairman that he/she would have a free hand in running the affairs of the company is incongruous to corporate governance and corporate democracy. The Tribunal held that the concept of ‘free hand rule’ is antithesis to collective responsibility and collective decision making”.
[Based on Tata Consultancy Services Ltd. v. Cyrus Investment Pvt. Ltd., 2021 SCC 122].

…If a person enters into a transaction which is surely likely to result in loss, he cannot be accused of insider trading. In other words, the actual gain or loss is immaterial, but the motive for making a gain is essential.
The words, “likely to materially affect the price” appearing in the main part of Regulation 2(ha) gain significance for the simple reason that profit motive, if not actual profit should be the motivating factor for a person to indulge in insider trading. This is why the information in Item No.(vii) of the Explanation under Regulation 2(ha) may have to be examined with reference to the words “likely to materially affect the price”. Keeping this in mind let us now come back to the facts of the case.
Gammon Infrastructure Projects Limited (“GIPL”) was awarded a contract for the execution of a project, whose total cost was admittedly ₹ 1,648 crores. Simplex Infrastructure Limited (“SIL”) was awarded a contract for a project whose cost was ₹ 940 crores. Both GIPL and SIL created Special Purpose Vehicles and then they entered into two shareholders Agreements. Under these Agreements, GIPL and SIL will have to make investments in the Special Purpose Vehicles created by each other, in such a manner that each of them will hold 49% equity interest in the other’s project.
It means that GIPL could have acquired 49% equity interest in the project worth ₹ 940 crores and SIL would have acquired 49% equity interest in a project worth ₹ 1,648 crore.
In arithmetical terms, the acquisition by GIPL, of an equity interest in SIL’s project was worth ₹ 460 crores approximately. Similarly, the acquisition by SIL, of the equity interest in GIPL’s project was worth ₹ 807.52 crores. Therefore, the cancellation of the shareholders Agreements resulted in GIPL gaining very hugely in terms of order book value. In such circumstances an ordinary man of prudence would expect an increase in the value of the shares of GIPL and would wait for the market trend to show itself up, if he actually desired to indulge in insider trading. But the respondent did not wait for the information about the market trend, after the information became public. The reason given by him, which is also accepted by the Whole-Time Member (“WTM”) and the Tribunal is that he had to dispose of his shares as well as certain other properties for the purpose of honouring a Corporate Debt Restructuring (“CDR”) package. It is on record that if the CDR package had not gone through successfully, the parent company of GIPL namely, Gammon India Ltd., could have gone for bankruptcy.
Therefore, the Tribunal was right in thinking that the respondent had no motive or intention to make undeserved gains by encashing on the unpublished price sensitive information that he possessed.
As a matter of fact, the Tribunal found that the closing price of shares rose, after the disclosure of the information. This shows that the unpublished price sensitive information was such that it was likely to be more beneficial to the shareholders, after the disclosure was made. Any person desirous of indulging in insider trading, would have waited till the information went public, to sell his holdings. The respondent did not do this, obviously on account of a pressing necessity.
[Excerpted from the judgment delivered by Ramasubramanian, J., in Securities and Exchange Board of India v. Abhijit Rajan, CA No. 563 of 2020 (hereafter ‘A Rajan’)]

The philosophy of Corporate Social Responsibility (“CSR”) has had a long-standing history in India. India is one of the first countries in the world to create a legal framework on CSR and statutorily mandate companies to report on the same. It emanates from the Gandhian principles of trusteeship and giving back to the society. The intent of the law is to mainstream the practice of business involvement in CSR and make it socially, economically and environmentally responsible.
The Companies Act, 2013 (the ‘Act’) mandates companies meeting a certain minimum threshold in terms of turnover/net worth/net profit to undertake CSR activities as per Schedule VII of the Act. Schedule VII specifies the areas or subjects to be undertaken by the company as CSR activities. These areas broadly align with national priorities and relate to sustainable and inclusive development. The Act does not recognise any expenditure on areas/activities outside of Schedule VII as CSR expenditure. Companies (CSR Policy) Rules, 2014 prescribes the operational framework and manner in which companies should comply with CSR provisions under the Act. The mode of implementation of CSR activities, content of CSR policy, impact assessment, reporting requirements and disclosure for CSR are covered under these Rules. The CSR architecture is disclosure-based and CSR-mandated companies are required to file details of CSR activities annually in the MCA-21 registry in e-form AOC-4.
A High-Level Committee set up in 2018 to review the CSR framework recommended that Schedule VII of the Act be mapped with Sustainable Development Goals (‘SDGs’). The Committee noted that companies need to balance CSR spending between local area/areas around where it operates, and less developed regions such as aspirational districts.
The Government of India launched the ‘Transformation of Aspirational Districts’ programme (‘ADP’) in January 2018 with the aim to improve [the] socio-economic status of the least developed regions across India. The programme is based on five socio-economic themes such as – Health & Nutrition, Education, Agriculture and Water Resources, Financial Inclusion and Skill Development and improvement of basic infrastructure… As on date, 112 aspirational districts are recognised by the Government wherein Jharkhand has the highest number of aspirational districts i.e., 19 followed by Bihar (13), Odisha and Chhattisgarh (10 each). The Government has been taking various initiatives to encourage CSR in aspirational districts and to remove regional disparities.
[Source: Ministry of Corporate Affairs, Government of India “Compendium on Corporate Social Responsibility in India” (2021)]

A question regarding the scope of Section 212 of the Companies Act, 2013 was considered in Serious Fraud Investigation Office v. Rahul Modi, [2019 SCC OnLine SC 423]. The court observed that the Central Government is empowered under Section 212(1)(c) of the Companies Act, 2013 to order investigation into the affairs of a company in public interest by the Serious Fraud Investigation Office (SFIO). Section 212(3) of the Companies Act provides that the investigation orders are required to be completed within the specified time. If it not so done, what should be the consequences and whether further proceedings or investigations shall be unlawful. The provision has to be seen in the context in which it occurs in the statute. Therefore, the stipulation of Section 212(3) regarding submission of the report ‘within such period as may be specified in the order’ is not to be taken as mandatory, but as purely directory. On the objective interpretation of the statutory provision, it cannot be said that on the expiry of that period the mandate in favour of SFIO must come to an end. If it was to come to an end, the legislation would have contemplated certain results thereof. In the absence of any clear stipulation, an interpretation that with the expiry of the period, the investigation must come to an end, will cause great violence to the scheme of legislation and with the expiry of mandate SFIO would also be powerless which would lead to an incongruous situation that serious frauds would remain beyond investigation.