About Low Mortgage Rate

No one species of property, from which a tax may be collected

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West Virginia

Constitution, 1872, art. 10, sec. 1. Taxation shall be equal and uniform throughout the state, and all property, both real and personal, shall be taxed in pro- portion to its value, to be ascertained as directed by law. No one species of property, from which a tax may be collected, shall be taxed higher than any other species of property of equal value.

Present Law. Code, 1906. In West Virginia mort- gages are taxable as personal property (sec. 747, 794). Debts may be deducted from credits (Laws, 1907, c.

80, sec. 67).

Wisconsin

Constitution, 1848, art. 8, sec. 1. The rule of tax- ation shall be uniform, and taxes shall be levied upon such property as the legislature shall prescribe.

Present LCKW. Laws, 1903, c. 378. In Wisconsin, whenever any taxable real estate is subject to mort- gage, the mortgage is deemed an interest in the real estate and assessed and taxed in the assessment district where the real estate is located. The interests of the mortgagor and mortgagee may be separately assessed, or at the option of the mortgagor, both may be as- sessed and taxed together. If separately assessed, the interest of the mortgagor is to be taken for only sucb amount as remains after deducting the assessed value of the interest of the mortgagee from the as- sessed value of the entire real estate, and the valua- tion of the interest of the mortgagee is to be accord- ing to the true value, but not to exceed the just valu- ation which should be placed upon the mortgaged real estate if unencumbered. If both interests are as- sessed together without separate valuation, they are assessed to the mortgagor or occupant, the same as un- encumbered real estate, and the combined valuation of both interests is not to exceed the just valuation which should be placed upon the real estate, if unen- cumbered.

The deduction of debts from credits is not allowed in the case of any mortgage required to be assessed as an interest in real estate.

The law does not apply to mortgages held by in- surance companies or other persons or associations ex- empt from taxation nor to mortgages on property as- sessed by a state board of assessment, nor to mort- gages upon property of persons, associations, or cor- porations taxed by license fee or other special method. The law applies only to mortgages upon property sub- ject to direct assessment and taxation under the gen- eral assessment and tax laws of the state.

Wyoming

Constitution, 1889, art. 15, sec. 11. All property, except as in this constitution otherwise provided, shall be uniformly assessed for taxation, and the legislature shall prescribe such regulations as shall secure a just valuation for taxation of all property, real and per- sonal.

Laws, 1907, c. 602. Mortgages are included in the classification of all personal

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Tennessee

Constitution, 1870, art. 2, sec. 28. All property real, personal or mixed, shall be taxed. All property shall be taxed according to its value, that value to be ascertained in such manner as the legislature shall di- rect, so that taxes shall be equal and uniform through- out the state.

Present Law. Laws, 1907, c. 602. Mortgages are included in the classification of all personal property liable to assessment (sec. 8, class 7). In a suit brought to collect any chose in action, if the defend- ant can prove that the holder did not give in such credit for taxation for the preceding year, the owner is to be taxed with all the court costs of the case (sec. 14).

Texas

Constitution, 1876, art. 8, sec. 1. Taxation shall be equal and uniform. All property in this state, whether owned by natural persons or corporations, other than municipal, shall be taxed in proportion to its value, which shall be ascertained as may be provided by law.

Present Law. Rev. St. 1897. Mortgages are tax- able as personal property, and personal property for the purposes of taxation is deemed to include all mon- eys at interest due the person to be taxed over and above what he pays interest for, while the term “credits” means all demands secured by deed or mort- gage (sec. 5063, 5064).

Utah

Constitution, 1895, art. 13, sec. 2. All property in the state, not exempt under the laws of the United States or under this constitution, shall be taxed in pro- portion to its value, to be ascertained as provided by law. (The word “property” includes money and credits.)

sec. 12. Nothing in this constitution shall be con- strued to prevent the legislature from providing a stamp tax or a tax based on income, occupation, li- censes, franchises or mortgages.

Present Law. St. 1898, Laws, 1905. Mortgages are taxable as personal property. The assessor may require a statement of all solvent credits, secured or unsecured, from any person. He may deduct from the sum total of such credits only such debts secured or unsecured as may be owing by the person assessed (Laws, 1905, c. 125). The county recorders must transmit to the assessor of the county in which the mortgagee resides a complete abstract of all mortgages remaining unsatisfied on the records of his office, Stat- utes, (sec. 2531).

Vermont

Constitution, 1793, c. 1, art. 9. No part of any per- son’s property can be justly taken from him, or ap- plied to public uses, without his own consent, or that of the Representative Body of the freemen. Previous to any law being made to raise a tax, the purpose for which it is to be raised ought to appear evident to the legislature to be of more service to the community than the money would be if not collected.

Present Law. St., 1906, sec. 504. Mortgages are taxable as personal property (sec. 559). The town clerk is required to prepare a statement of all mort- gages, together with the amount secured, for the use of the listers.

Virginia

Constitution, 1902, art. 13, sec. 168, All property, except as herein provided, shall be taxed; all taxes whether state, local, or municipal, shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.

Present Law. Laws, Ex. Session, 1903, c. 148. It would seem that mortgages are taxable in two ways in Virginia. First, all bonds, notes, and other evi- dences of debt, whether secured by deed of trust, judgment or otherwise, are subject to a tax of twenty- five cents on every hundred dollars of value for the expenses of government, and a further tax of ten cents on every hundred dollars of the value for the’ support of the free public schools (sec. 8 and 9). Second, every contract relating to real estate or per- sonal property, whether it be a deed or not, is sub- ject to a tax of fifty cents when admitted to record. When the consideration exceeds three hundred, but does not exceed one thousand dollars, the tax is to be one dollar and where the consideration exceeds one thousand dollars, an additional tax of ten cents on every one hundred or fraction, is levied. Deeds of trust and mortgages given by railroad and other in- ternal improvement companies are subject to the same tax. In the case of railroads the amount of the mort- gage indebtedness, subject to the rate as levied, de- pends upon the proportional number of miles of the line within and without the state (sec. 13).

Washington

Constitution, 1889, art. 7, sec. 1. All property in the state, not exempt under the laws of the United States, or under this constitution, shall be taxed in proportion to its value, to be ascertained as provided by law.

History. During the extraordinary session of the legislature held in 1901 (c. 2), a law was passed pro- viding that mortgages and all credit for the purchase of real estate were not to be considered as property for the purposes of taxation. This law remained in force until the present law was enacted in 1907.

Present Law. Laws, 1907, c. 48. Under the pres- ent law all moneys and credits are exempt from taxa- tion. The law states that all mortgages, notes, ac- counts, moneys, certificates of deposit, tax certificates, judgments, state, county, municipal, and school dis- trict bonds and warrants, are not to be considered as property for the purposes of taxation, and no deduction is to be allowed on account of an indebtedness owed.

Tax payers are required to make a re- turn under oath

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Pennsylvania

Constitution, 1874, art. 9, sec. 1. All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.

Present Law. Dig. 1894, vol. 2, p. 1963. ff. sec. 1, 2. All personal property mortgages are specifically mentioned owned, held, or possessed, by any person or corporation, is taxable annually for state purposes at the rate of four mills on each dollar of its value.

sec. 3, 6. Tax payers are required to make a re- turn under oath, showing the property held, owned, or possessed by them in their own right, or in any other capacity. If they refuse to make out this re- turn properly verified by oath, the assessor must make it out from the information he is able to obtain, and after this list is revised and corrected by the county commissioners or board of revision, 50 per cent is added to form the aggregate amount for taxation.

sec. 8, 10. The register of deeds keeps a separate list containing detailed information relating to each mortgage recorded in his office, this list is filed each month in the commissioner’s office or with the board of revision of taxes. If the mortgagee resides in an- other county, a certified statement containing the in- formation required for assessment is transmitted to the proper officers of the county where he does reside.

sec. 11, 12. The county commissioners, or board of revision of taxes, with the information in their pos- session, prepare statements and deliver them to the assessors showing the number and amount of mort- gages held by each person within the different assess- ment districts of the county. With this list at hand, the assessor is able to compare and check up the re- turns made and sworn to by each person and corpora- tion.

sec. 18, 19. The tax is collected and paid to the county and city treasurers, and they in turn pay it to the state treasurer. Three-fourths of the net amount collected from mortgages and other forms of personal property is returned to the counties for their own use.

sec. 26. It is unlawful for any person or corpora- tion loaning money at interest to require the borrower to pay the taxes imposed by this act, and in all cases where the taxes are paid by the borrower, the law re- quires that such payments be deemed usury and pun- ishable as such. This law was amended in 1899 (no. 39) and in 1905 (no. 134), but no material change was made.

Rhode Island

Constitution, 1842, art. 4, sec. 15. The general as- sembly shall, from time to time, provide for making new valuations of property for the assessment of taxes, in such manner as they deem best.

Present Law. Laws, 1905, c. 1246. In Rhode Is- land mortgages are taxable as personal property. Both real and personal property are taxable (sec. 2) and personal property for the purposes of taxation is deemed to include debts due from solvent persons (sec. 5).

South Carolina

Constitution, 1895, art. 10, sec. 1. The general assem- bly shall provide by law for a uniform and equal rate of assessment and taxation, and shall prescribe regu- lations to secure a just valuation for taxation of all property, real, personal and possessory.

Present Law. Code of Laws, 1902, vol. 1, sec. 260, 268, 271. In South Carolina mortgages are taxable as personal property.

South Dakota

Constitution, 1889, art. 11, sec. 2. Ail taxes to be raised in this state shall be uniform on all real and personal property, according to its value in money.

Present Law. Rev. Code, 1903. Mortgages are taxable as personal property. Credits are held to mean and include all claims and demands secured by deeds or mortgages due or to become due (sec. 2052), and all resident tax payers are required to list all mon- eys and credits, moneys loaned or invested (sec. 2058).

Compiled Laws, 1897. Property under mortgage or lessor, unless it is listed by the mortgagee, or lessee (sec. 4022).

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New Mexico

Compiled Laws, 1897. Property under mortgage or lessor, unless it is listed by the mortgagee, or lessee (sec. 4022).

New York

History. In New York mortgages used to be taxed as personal property (Laws 1896, c. 908). In 1905 (c. 729) an annual tax of five mills was imposed on each dollar of the amount of the principal debt or obligation secured. After the necessary expenses were paid, the amount remaining was distributed equally between the county and the state. At the present time a recording tax of fifty cents on the one hun- dred dollars, or major fraction thereof, is levied. This law was passed in 1906 (c. 532) and amended in 1907 (c. 340).

Present Law. Laws, 1906, c. 532 and Laws, 1907, c. 340.

Laws, 1907, c. 340, sec. 290. Under the New York law the word mortgage is defined to include every mortgage on real property, mortgages where part of the security is personal or other property, exec- utory contracts, and contracts or agreements by which the indebtedness, secured is added to or increased.

Laws, 1907, c. 340, sec. 293 b. This definition does not include correction mortgages or mortgages in which additional security is given but the debt is not increased.

Laws, 1907, c. 340, sec. 293. The recording tax imposed amounts to fifty cents for each one hundred dollars, or major fraction of the principal- debt or obligation secured. The exemptions of the minor fraction does not hold for mortgages of less than one hundred dollars, all mortgages no matter how small must pay a recording tax of at least fifty cents.

Laws, 1907, c. 340, sec.: 293 a. As a rule holders of mortgages -made prior to July 1, 1906, may pay the recording tax and have their mortgages exempt from the personal property tax which they would otherwise be subject to.

. Laws, 1907, c. 340, sec. 293 c. Mortgages for in- definite amounts or for contract obligations are taxed as. if equal in amount to the property given as secur- ity, unless the owner files with the recording officer a sworn statement of the maximum amount secured or which, under any contingency, may be secured by the mortgage. If this is done, the amount given in the sworn statement is taken as the basis for assessment.

Laws, 1906, c. 532, sec. 294. When any mortgage is recorded, a receipt showing that the tax has been paid is recorded with the instrument.

Laws, 1907, c. 340, sec. 295. No mortgage of real property which is subject to taxation is to be released, discharged of record or received in evidence in any action or proceeding, no assignment of or agreement extending- any mortgage is to be recorded, and no mortgage is to be foreclosed unless the taxes have been paid as provided by law.

Laws, 1907, c. 340, sec. 296. Mortgages made by corporations in trust to secure the payment of bonds or obligations issued or to be issued thereafter, may contain a statement of the amount advanced, or ac- crued, or which is then secured by the mortgage; the tax payable on the recording of the mortgage is then computed on the basis of the amount stated to be se- cured. Whenever an additional amount is to be ad- vanced under the original mortgage, a statement must be filed and the additional taxes paid.

Laws, 1907, c. 340, sec. 297. When the property given as security is located in more than one county, or partly within and partly without the state, the state board of tax commissioners determines the propor- tion of the tax that should go to each county or to the state of New York.

Laws, 1907, c. 340, sec. 298. The first of each month the recording officer of the county pays to the county treasurer, after deducting the necessary ex- penses of his office as allowed by the act, all moneys received from taxes on mortgages. In the counties of New York, Kings, Queens, and Richmond, the money is paid to the chamberlain of the city of New York. The treasurers of the counties and the cham- berlain of the city of New York, after deducting the necessary expenses of their offices, transmit one-half of the net amount collected to the state treasurer. The remaining portion in the counties of New York, Kings, Queens, and Richmond, is to be paid into the general fund of the city of New York to be applied to the reduction of taxes, and in the other counties, the remaining portion is to be held by the respective county treasurer subject to the order of the board of supervisors. In the end this money is used for the payment of school taxes and for state, county, city, village, and town expenses.

Laws, 1906, c. 532, sec. 300. The state board of tax commissioners has general supervisory powers over all recording officers and may make such rules and regulations as it deems proper and the state comp- troller has general supervisory powers over all county treasurers and the chamberlain of the city of New York.

North Carolina

Constitution, 1876, art. 5, sec. 3. Laws shall be

passed taxing, by uniform rule, all moneys, credits, in-

vestments in bonds, stocks, joint stock companies, or

MORTGAGE TAXATION 47

otherwise ; and also all real and personal property, ac- cording to its true value in money.

Present Law. Laws, 1907, c. 258, sees. 14, 32.

Mortgages are taxable as personal property.

North Dakota

Constitution, 1889, sec. 176. Laws shall be passed taxing by uniform rule all property according to its true value in money.

Present Law. Rev. Codes, 1905. Mortgages are taxable as personal property in North Dakota. Both real and personal property are taxable (sec. 1481) and credits are defined to include all claims and demands secured by deeds or mortgages, due or to become due (sec. 1480). The amount of credits is an item in- cluded in the list which the tax payer is required to make out (sec. 1496).

Ohio

Constitution, 1851, art. 12, sec. 2. Laws shall be passed taxing by a uniform rule, all moneys, credits, investments in bonds, stocks, joint stock companies, or otherwise; and also all real and personal property according to its true value in money.

Present Law. Ann. St., 1906. Mortgages in Ohio are subject to taxation as personal prop- erty. Both real and personal property is taxable (sec. 2731) and tax payers are required to list all money loaned on pledge or mortgage of real estate, although a deed or other instrument may have been given, if the deed or other instrument is considered merely as security (sec. 2734).

If any person required to list property fails to do so or only returns a portion of his taxable property, the county auditor must ascertain as near as practic- able the true value of the property that ought to have been listed for a period not exceeding five years next preceding the year in which the inquiries and correc- tions were made. The amount for each year is multi- plied by the tax rate for that year and the owner taxed for the whole amount (sec. 2781a). A penalty of fifty per cent was added for omitted property (sec. 2781). The court held that that part of the law was invalid but maintained that it could be disregarded without affecting the validity of the statute in other respects (Gager Treas. v. Prout, et al., 48 O. S. 89, 1891).

Oklahoma J

Constitution, 1907, art. 10, sec. 5. The power of taxation shall never be surrendered, suspended, or con- tracted away. Taxes shall be uniform upon the same class of subjects.

Oregon

History. In 1882 a law was passed (p. 64) provid-

ing that the mortgage and the mortgage debt were, for

the purposes of assessment and taxation, to be treated

as land cr real property ; both the mortgage and the

debt were to be assessed and taxed to the mortgagee

1 1908 Laws not yet obtainable.

in the county, city, or district, in which the land or real property given . as security was situated. This law applied only to mortgages secured by property lo- cated within a single county, and not to mortgages secured by property partly within and partly without the county. All such mortgages were to be void.

A mortgage lawfully made was to be considered as an indebtedness and the mortgagor was entitled to the same deduction from his assessment as other debtors.

The circuit court of Oregon declared the law uncon- stitutional in the case of Dundee, etc. Co. v. School District (10 Sawyer 52, 1884). The court maintained that an act which provided for the taxation of mort- gages on land in no more than one county, there be- ing mortgages on land in more than one county was void for want of’uniformity required by sec. 1 of art. 9 of the constitution of the state. This law was amended (Laws, 1885, p. 9), so that mortgages issued by railroad corporations were to be legal, even if the land given as security was situated in more than one county. Later (Laws, 1889, p. 30) this same pro- vision was made applicable to mortgages given by cor- porations manufacturing iron or steel or working any iron, go d or silver mines.

During 1893 session of the legislature (Laws, 1893, p. 6) the entire mortgage tax law was repealed and no deduction of indebtedness from assessment was to be allowed in any case.

Many interesting cases have arisen under the law of 1882. In one case (Munford v. Sewell, 11 Ore- gon 67, 1883) the court held that the state had power to tax a mortgage as such, in the county where re- corded, irrespective of the residence of the owner of the mortgage, and that all law taxing mortgages owned by non-residents did not impair the obligation of con- tracts, whether the mortgage contracts were made be- fore or after the passage of the law. The court main- tained that the security could not be enforced in any other jurisdiction and that the question was wholly one of power, and, since the power of the state over the mortgage was as exclusive and complete as over the land mortgaged, the mortgage was subject to taxation by the state, unless there was a constitutional limita- tion to the contrary.

In the case of Savings and Loan Society v. Mult- nomah county (169 U. S. 421, 1898) the supreme court of the United States held that the statute of Oregon of 1882 taxing mortgages on land in that state to the mortgagees in the counties where the land lay, did not, as applied to mortgages owned by citizens of other states and in their possession outside of the state of Oregon, contravene the fourteenth amendment of the constitution of the United States. The court fur- ther held that the result of the law was that nothing was taxed but the real estate mortgaged, the interest of the mortgagee therein being taxed to him, and the rest to the mortgagor.

Constitution, 1859, art. 9, sec. 1. The legislative as- sembly shall provide by law for uniform and eqr rate of assessment and taxation ; and shall prescribe such regulations as shall secure a just valuation for taxation of all property, both real and personal, (ex- cepting such only as may be especially exempted by law).

Present Lazv. Laws, 1907, c. 268. In Oregon at the present time mortgages are taxable as personal property (sec. 1, 3).

Taxes shall be levied and collected by general laws and for public purposes only

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Montana

Constitution, 1889, art. 12, sec. 2. Taxes shall be levied and collected by general laws and for public purposes only. They shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax.

Present Law. St. 1895. In Montana mortgages are taxable as personal property. The term “credits” is defined to mean those solvent debts, secured and unsecured, owing to a person (sec. 3680, 6^th.). The assessor must require a statement under oath from each person; this statement to contain a list of all mortgages held by them (sec. 3701.). As an aid in the work of assessment the county clerk is required to transmit annually to the assessor a complete abstract of all unsatisfied mortgages, deeds of trust, contracts, and other obligations, by which any debt is secured.

If the property given as security is located in more

than one county, it is the duty of the assessor to trans-

mit such information to the state board of Equaliza-

tion. The board then fixes the proportional value to

be assessed in each county. Similar difficulties arising

Nebraska

Constitution, 1875, art. 9, sec. 1. The legislature shall provide such revenue as may be needful, by levying” a tax by valuation, so that every person and corporation shall pay a tax in proportion to the value of his, her, or its, property and franchises.

Present Law. Ann. St., 1903. In Nebraska mortgages are taxable as personal property. Prop- erty owners are required to list all moneys vested or loaned by them, either as principal or agent, (sec. 10427). In Nebraska according to law, the actual value of the taxable property is ascertained, but it is only assessed at 20 per cent of such valuation (sec. 10411).

It is the duty of the register of deeds, county clerk, county judge, clerk of the district court, and all other county officers, to assist the county assessor in the examination of the records of their respective offices, and to give to the county assessor any information in their possession that will assist him in his work of assessment (sec. 10513).

Nevada

Constitution, 1864, art. 10, sec. 1. The legislature shall provide by law for a uniform and equal rate of assessment and taxation.

Present Lazv. Comp. Laws, 1900. In Nevada mortgages are taxable as personal property. The term “personal property” includes all moneys at in- terest secured by mortgage or otherwise (sec. 1082). Court Decisions. The court has held that a debt secured by mortgage is subject to taxation, although the mortgagee is indebted to an amount equal to or exceeding the amount of his mortgage; (Drexler v. Tyrrell, 15 Nev. 114, 1880) and that the legislature under the constitution, cannot exempt money at in- terest secured by mortgage (State v. Carson Sav- ings Bank, 1882, 17 Nev. 146).

New Hampshire

Constitution, 1792 as amended 1902. Part second, art. 6. The Public Charges of Government or any part the~e”cf may be raised by taxation upon polls, estates, and other classes of property, including fran- chises and property when passing by will or inherit- ance.

Present Law. St. 1901, title 9, c. 55, sec. 7. In New Hampshire mortgages are taxable as personal property. Personal property liable to taxation in- cludes money on hand or at interest more than the owner pays interest for, money loaned on any mort- gage, pledge, obligation, note, or other security, whether on interest or interest to be paid or received in advance.

New Jersey

History. In New Jersey, legislation relating to mortgage taxation began as early as 1868. All mort- gages on real and personal property within Passaic, Morris, Hudson, Union and Essex counties, and within the city of New Brunswick were to be exempt from taxation in the hands of any inhabitant of the state (c. 382). It would seem that mortgages in the other counties were to be taxed and that real and per- sonal property was to be assessed at its full and fair value without any deduction for mortgages (c. 523).

The next year (1869) a law was passed (c. 511) providing that all mortgages upon real estate, chattels or personal property taxable by law in Hudson, Union, and Essex counties, in the county of Passiac, except the townships of West-Midford, Pompton and Wayne, and in the city of New Brunswick, were to be exempt from taxation when held by any inhabitant, corpora- tion or association residing or located in the counties .or cities enumerated, but were not to be exempt when held by any inhabitant, corporation, or association re- siding or located in any other county or place in the state.

In 1876 it was made lawful for the owners of lands situated in the counties of Hudson, Essex, Union, Ber- gen, and Passaic, and the cities of Trenton, New Brunswick, and Camden, to agree with the holders of any mortgage then in existence or thereafter made not to apply for any deduction from the taxable value of the lands given as security because of any mort- gage (c. 121, sec. 1). In cases where agreements had been entered into and broken, the mortgage was to be- come due and payable and the amount which the mort- gagee paid in taxes was to be added to the principal of the debt with interest (c. 121, sec. 2).

In the same year a general law was passed (Laws, 1876, c. 122) stating that no mortgage was to be as- sessed for taxation unless a deduction has been claimed by the owner of the land and allowed by the assessor. If the mortgage was separately assessed, it was to be taxed in the township or city where the mortgaged land was situated.

A similiar law, more definite and more carefully drawn, was passed in 1893, the main provisions of which were as follows : that no mortgage on real or personal property, or both, whether given by individ- uals or corporations, or the debt secured by such mortgages, was to be assessed for taxation unless a deduction had been claimed by the owner of the mort- gaged property and allowed by the assessor (c. 283). This law was repealed in 1903 (c. 209) and another law enacted (c. 208, sec. 10). The law as passed in 1903 was amended in 1904 and again in 1905 (Laws, 1904, c. 112, sec. 10; 1905, c. 161) and is now the present law of the state.

Constitution, 1844, art. 4, sec. 7, par. 12. Property shall be assessed for taxes under general laws, and by uniform rules, according to its true value.

Present Law. Laws, 1903, c. 208, sec. 10, as amended by Laws, 1904, c. 112 and Laws, 1905, c. 161. No mortgage or debt secured by mortgage on real property which is taxed in the state is to be listed for taxation, and no deduction from the assessed value of the real property is to be made by the assessor on account of any mortgage debt, but instead the mort- gagor is entitled to credit on the interest payable on the mortgage for as much of the tax as is equal to the tax rate applied to the amount due on the mort- gage. Exception is made to this rule where the par- ties have otherwise agreed, or where the mortgage is an investment of funds not subject to taxation, or where the parties have lawfully agreed that no deduc- tions shall be made from the taxable value of the lands by reason of the mortgage. Mortgages and debts secured by mortgages on property exempt from taxation are also to be exempt.

The legislature shall provide a uniform rule of taxation, except on property paying specific taxes

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Michigan

Constitution, 1850, art. 14, sec. 11. The legislature shall provide a uniform rule of taxation, except on property paying specific taxes, and taxes shall be levied on such property as shall be prescribed by law.

Present Law. Complied Laws, 1897. In Michigan mortgages are taxab’e as personal property, (sec. 3824, 3831)

Minnesota

Constitution, art. 9, sec. 1. The power of taxation shall never be surrendered, suspended, or contracted away. Taxes shall be uniform upon the same class of subjects, and shall be levied and collected for public purposes. (Amendment passed in 1906)

Present Lam’. Laws, 1907, c. 328. In Minnesota mortgages are subject to a registration tax of fifty cents on the one hundred dollars, or major fraction thereof. A mortgage is defined as any instrument creating or evidencing a lien of any kind on real property, real estate, or land, given or taken as se- curity for a debt, even though such debt may also be secured in part by a lien upon personalty. An execu- tory contract for the sale of land is also treated as a mortgage, the unpaid balance to be considered as the face value. The law does not apply to correction mortgages, mortgages taken in good faith by persons or corporations whose personal property is expressly exempt from taxation by law, or to mortgages of per- sons or corporatioins whose property is taxed upon the basis of gross earnings, or other method of commuta- tion in lieu of all other taxes.

The tax imposed amounts to fifty cents on each one hundred dollars, or major fraction thereof, of the principal debt or obligation secured by real property situated within the state.

If the real estate given as security is situated partly within and partly without the state, the tax imposed by the state of Minnesota is in the proportion that the value of the real estate within the state bears to the value of the entire property given as security, and if the real property given as security is situated in more than one county of the state, the entire tax is first paid in the county where the mortgage is presented for record, and then this amount is divided between or among the counties in the same ratio as the assessed value of the real property covered by the mortgage in each county bears to the assessed value of all the property described in the mortgage. In the case of a mortgage given in trust, to secure the payment of bonds or other obligations to be issued, a statement may be incorporated, showing the amount already is- sued or to be issued forthwith. The tax is computed upon this amount and no obligations issued in excess of this aggregate are to be valid for any purpose unless the additional tax is paid and the receipt properly en- dorsed.

All mortgages together with the debts or obligations secured and the papers evidencing such debts, are to be exempt from all other taxes if the provisions of this law have been complied with, but the payment of this tax does not exempt such property from the opera- tions of the law relating to the taxation of gifts and inheritances, or those governing the taxation of banks, savings banks, or trust companies.

The tax imposed by this act is paid to the treasurer of the county in which the mortgaged land or some part of it, is situated. A receipt showing that the tax has been paid is endorsed on the mortgage by the treasurer, is countersigned by the county auditor and then the mortgage together with the receipt is re- corded by the register of deeds. Neither the mort- gage, papers relating to its foreclosure, nor any as- signments or satisfaction is to be registered, unless the tax has been paid, and in addition to this, neither the mortgage nor any record of it is to be received as evidence in any court or to have any validity as no- tice unless the provisions of this act have been com- plied with.

All mortgages recorded prior to April 30, 1907, may become taxable under the provisions of this law if the owner pays the tax upon the amount of the debt se- cured and obtains the treasurer’s receipt showing that the payment has been made. This receipt is then re- corded on -the margin of the mortgage record.

36 MORTGAGE TAXATION

The taxes paid to the county treasurers are to be apportioned and distributed in the same manner as the real estate taxes paid upon the real estate described in the mortgage.

Mississippi

Constitution, 1890, sec. 112. Property shall be as- sessed for taxes under general laws and by uniform rules according to its true value.

Present Law. Code, 1906, sees. 4258, 4266. Mort- gages in Mississippi are taxable as personal property. Money loaned at interest either within or without the state, is to be assessed and taxed to the owner at his place of residence.

Missouri

History. A joint resolution was drawn up in 1899 (Laws, 1899, p. 383) providing for an amendment to the constitution whereby mortgages and mortgaged property were to be taxable under a law very similar to the California law of 1879. This amendment was adopted by the people in 1900 (Laws 1905, p. 315). In a case arising under the law the court held that this amendment so discriminated between corporations and persons a corporation being for the purpose of taxa- tion a “person” within the fourteenth amendment as to deny to railroads and other quasi public corpora- tions “the equal protection of the law,” in that it re- quired the value of farm lands to be lessened, for taxation purposes, by the value of such security, but did not permit the value of the property of such cor- porations to be decreased by the value of their bonded and other indebtedness. The constitutional provision was held unconstitutional. (Russell v. Croy, 164 Mo. 69, 1901)

A California case involving the same question was declared constitutional (C. P. R. R. Co. v. Board of Equalization, 60 Cal. 35, 1882), and unfortunately when a group of similar California cases were carried to the Supreme court of the United States they were decided upon other grounds. (118 U. S. 394. See also 18 Fed. Rep. 385.) After the law was declared unconstitutional in Missouri a joint resolution was passed in 1901 to repeal it (Laws 1901, p. 261), and it was repealed by a vote of the people in 1902 (Laws 1905, p. 317).

Constitution, 1875, art. 10, sec. 3. Taxes may be levied and collected for public purposes only, they shall be uniform upon the same class of subjects with- in the territorial limits of the authority levying the tax, and all taxes shall be levied and collected by gen- eral laws. sec. 4. All property subject to taxation shall be taxed in proportion to its value.

Present Law. Ann. St. 1906. In Missouri at the present time mortgages are taxable as personal prop- erty. The term “credits” is defined to include all money loaned and all indebtedness by deed, contract, mortgage or pledge of property of whatsoever kind, (sec. 9123), and the list of every taxable person must contain an aggregate statement of all solvent notes secured by mortgage or deed of trust (sec. 9144).

The county recorders are required to keep a mort- gage list with such information as may be necessary to enable the assessor to place all mortgages on the assessment rolls (sec. 9173).

present law is but a modification of the law as passed in 1881 (Laws, 1881, c. 304)

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History. The present law is but a modification of the law as passed in 1881 (Laws, 1881, c. 304). Constitution, 1780, Pt. Second c. 1, sec. 1, art. 4. The general court has power to impose and levy pro- portional and reasonable assessment, rates, and taxes, upon all the inhabitants of, and persons resident and estate lying, within the said commonwealth.

Present Law. Rev. Laws, 1902, c. 12 and 13. In Massachusetts mortgages are taxed as an interest in the real estate, and the parties to the mortgage may enter into a contract as to the payment of the taxes.

c. 12, sec. 16. If any person has an interest in real estate, not exempt from taxation, as holder of a duly recorded mortgage, the amount of his interest is to be assessed as real estate in the place where the land lies, and the mortgagor is to be assessed only for the value of the real estate, after deducting the assessed value of the interest of the mortgagee. If the estate is situ- ated in two or more places, the amount of the mort- gagee’s interest assessed in each is to be in proportion to the assessed value of the land given as security.

c. 12, sec. 17. The mortgagee’s interest in the real estate is not to be assessed at a greater sum than the fair cash valuation of the land and buildings.

c. 12, sec. 45. The mortgagor or mortgagee may bring to the assessor of the city or town where the real estate lies, a statement, under oath, of the amount se- cured, together with the name and residence of every holder of an interest therein, either as mortgagor or mortgagee.

c. 13, sec. 36. If a mortgagee of land situated in the place of his residence gives a written notice to the collector that he holds a mortgage on certain de- scribed land, the demand for payment is to be made on the mortgagee instead of the mortgagor.

c. 13, sec. 64. When the mortgagee pays taxes that should have been paid by the mortgagor, the amount paid is added to the obligation; and when the mort- gagor pays taxes that should have been paid by the mortgagee, the amount paid is deducted from the mortgage debt, unless in either case the parties have otherwise agreed in writing 1 .

Michigan

History. According to the law of 1882 (Acts no.

9, sec. 13) and the law of 1885 (Acts no. 153, sec. 13) mortgages were required to be listed as personal property. The mortgage was taxed in the same man- ner in 1887, Acts no. 262, but a more determined effort was made to get all the mortgages in the state. The plan followed was to have the registers of deeds report all mortgages recorded in their offices, to the supervi- sors and assessing officers of their respective counties, and to the registers of deeds of other counties where the mortgagee had his place of residence. In 1891 (Acts no. 200) a law was passed providing that mort- gages were to be taxed as an interest in the real es- tate, and that each party should pay taxes on his re- spective interest. Nothing was contained in the law forbidding contracts. In a case brought under this law, the court held that it was constitutional and that the mortgagor would, as under former statutes, be bound to pay the entire tax, subject only to the relief afforded him if the tax assessed against the mortgage interest was paid by the mortgagee, and that there was no obstacle in the act to prevent an agreement by the mortgagor to pay all taxes which might in the future be assessed against all interests in real prop- erty owned by him, including the interest as granted by the mortgagee. (Common Council v. Assessors, 91 Mich. 78, 1892.) The court also held that it was within the power of the parties to the mortgage to enter into an agreement that the mortgagor should pay the taxes assessed against the property, and that it was not the purpose of the legislature to limit that power. (Latham v. Board of Assessors, 91 Mich. 509, 1892.)

The law of 1891 was repealed in 1893 (Laws, no. 206) and the old law providing for the taxation of mortgages as personal property reenacted. The con- tract that the mortgagor is to pay a.l taxes on the mortgage or indebtedness secures, is very common in the mortgage forms in Michigan at the present time. The court has held that a covenant in a mortgage to pay all taxes levied upon the mortgaged property, “or upon or on account of this mortgage or the indebted- ness secured hereby,” is an agreement to pay the per- sonal tax assessed against the mortgagee on account of the mortgage, and that an agreement by a mort- gagor to pay the taxes assessed upon the mortgage as the personal property of the mortgagee is usurious where the lender knew that the aggregate of interest and taxes would exceed the maximum rate of in- terest allowed by statute, but it is not usurious where he believed it would not exceed that rate. (Green v. Grant, 134 Mich. 462, 1903)

Taxation shall be equal and uniform throughout the territorial limits

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Louisiana

Constitution, 1 1898, art. 225. Taxation shall be equal and uniform throughout the territorial limits of the A constitutional amendment Is now pending, providing for the ex- emption of mortgages from taxation. authority levying the tax, and all property shall be taxed in proportion to its value, to be ascertained as directed by law.

Present Law. Rev. Laws, 1904, vol. 2, p. 1541, sec. 1 ; p. 1548, sec.10. In Louisiana mortgages are tax- able as personal property. Property subject to tax- ation includes money loaned at interest and the as- sessors are required to examine the records for such taxable property.

Mortgage notes, and indebtedness and all evidences of indebtedness are taxable only at the situs and domi- cile of the holder or owner. (Laws of 1908, act 170.)

Maine

Constitution, 1819, art. 9, sec. 8. “All taxes upon real and personal estate, assessed by authority of this state, shall be apportioned and assessed equally ac- cording to the just value thereof.”

Present Law. St., 1903, c. 9. In Maine mortgages are taxed as personal property. Personal estate for the purpose of taxation includes money at interest and all obligations for money (sec. 5).

Maryland

History. In 1874 (c. 483, sec. 2) Maryland passed a law exempting mortgages from assessment and tax- ation ; the law was repassed in 1880 (c. 122, sub. sec. 2, 3) and the exemption was made to apply only to mortgages on property wholly within the state. The law requiring all mortgages without exception to pay an eight per cent gross receipt tax was passed in 1896 (c. 120) and remained in force until 1904 (c. 405) when it was repealed in so far as it app-ied to certain enumerated counties and to Baltimore City and in the other counties where the law still remained in force all the revenue was to go to the county and not three- fourths to the county and one-fourth to the state, as formerly. Later (1906, c. 794) Dorchester was again placed in the list of counties where the income tax from mortgages was to be collected.

Constitution, 1867, as amended, Dec’aration of Rights, art. 15. Every person in the state, or person holding property therein ought to contribute his pro- portion of public taxes for the support of the govern- ment, according to his actual worth in real or personal property.

art. 3, sec. 51. The general assembly may by law provide for the taxation of mortgages upon the prop- erty in this state and the debts secured thereby in the county or city where such property is situated.

Present Law. St. 1904, vol. 2, art. 81, sec. 183. All mortgages in Worcester, Wicomico, Somerset, Carroll, Howard, Montgomery, Frederick, Washing- ton, 1 Garrett, 2 and Dorchester counties are required to pay annually a tax of eight per cent upon the gross

amount of interest covenanted to be paid each year on mortgages held by them. The tax is due and pay- able in the county where the mortgage is recorded and 1 Not included In law as passed In 1908.

The exact status of the law with regard to Garrett county Is doubtful (1908). all the taxes collected from this source are to be ap- plied exclusively for county purposes (Laws, 1906, c. 793, sec. 1). Mortgages recorded for only a part of the year pay taxes in proportion to the time recorded (sec. 184).

Any contract contained in a mortgage executed af- ter the passage of the law in which the mortgagor agrees to pay any or all taxes on the mortgage, debt, or the interest covenanted to be paid, is to be null and void (sec. 185), and mortgagees are required to take oath that they have not required and will not re- quire the mortgagor or any person for him to pay the tax as levied. This oath is to be repeated if the mortgage is assigned at any time (sec. 186). Any mortgagor paying the tax that should have been paid by the mortgagee, is entitled, upon satisfactory proof, to have the amount paid with interest at 6 per cent de- ducted from the mortgage debt (sec. 188).

The clerk of the circuit court in the counties where the law applies, is required to render to the board of county commissioners a list of all mortgages recorded, released, and assigned during each month ; this list to contain all the information necessary to enable the board to levy the tax. If the mortgagee refuses to pay the tax when due, his interest may be sold in the same manner as other property is sold for taxes (sec. 187).

Constitution, 1857, art. 1, sec. 18.

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Iowa

Constitution, 1857, art. 1, sec. 18. Private property shall not be taken for public use without just com- pensation first being made.

Present Law. Code, 1S97. The system of double taxation of mo i gages prevails in Iowa (sec. 1308, 1310). In order to get a more complete assessment of property, and especially of debts secured by mort- gages, a law usually known as the tax ferret law was enacted. The present law was passed in 1900 (Laws, 1900, c. 50), Supp. to code, 1907, sec. 1407a and pro- vides that the board of supervisors of any county may contract in writing with any person to assist the proper officers in the discovery of property not listed and as- sessed as required by law. The total charges, fees, and expenses, are not to exceed fifteen per cent of the taxes paid into the county treasury.

Court Decisions. A case was brought to compel a bank to pay taxes on its moneys and credits. The sum which was given under the heading, “Moneys and Credits” was intended to represent the difference as returned by the assessor and the par value of the capi- tal stock of the bank. The court held that where property had been listed and assessed by the assessor, a county treasurer has no authority to enter an addi- tional assessment based on the difference between the assessed value and the actual value as found by him. Savings Bank v. Trowbridge, 124 la. 514, 1904.

Kansas

Constitution, 1859, art. 11, sec. 1. “The legislature shall provide for a uniform and equal rate of assess- ment and taxation.”

Present Law. St., 1905.. .In Kansas mortgages are taxable as personal property. Both real and personal property are subject to taxation (sec. 8230), and per- sonal property is defined to include mortgages and all evidences of debt secured by lien on real estate (sec. 8231). The abstract of the assessment roll which ii forwarded to the state auditor by the county clerk con- tains a statement of the amount of mortgages held in the county (sec. 8340).

Kentucky

Constitution, 1891, sec. 171. “Taxes shall be levied and collected for public purposes only. They shall be uniform upon all property subject to taxation within the territorial limits of the authority levying the tax; and all taxes shall be levied and collected by general laws.”

Present Law. St., 1903, Acts, 1906. In Kentucky mortgages are taxable as personal property. Both real and personal property are subject to taxation (sec. 4020). The amount of notes secured by mortgages is included in the schedule which the tax payer is re- quired to fill out. This schedule gives the value as fixed by the person assessed and by the assessor (sec. 4058).

Each county clerk is required to make out a list of all purchase money notes, mortgage notes, and other obligations for money due, except those owned by banks or trust companies. This list is to be sent to the county assessor and is to contain all the informa- tion necessary to enable the assessor to place such forms of property on the assessment roll. No mort- gage or assignment is to be recorded unless the resi- dence and post office address of the owner or holder is given. Acts, 1906, c. 22, art. 2, sec. 10.

Constitution, 1870, art. 9, sec. 1.

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Illinois

Constitution, 1870, art. 9, sec. 1. “The general as- sembly shall provide such revenue as may be need- ful by levying a tax, “by valuation, so that every per- son and corporation” shall pay a tax in proportion to the value of his, her or its property.”

Present Law. Rev. St., 1905, c. 120. In Illinois mortgages are taxable as personal property. Every person is required to list all moneys loaned by him as owner or agent (sec. 6). Where a deed for real estate is held for the payment of a sum of money, the sum thus secured is considered personal property and is listed and assessed as credits (sec. 21) ; personal property, like real estate in Illinois, is assessed at one- fifth of its listed value (sec. 312). The usual deduc- tion of debts from credits is allowed (sec. 27).

Indiana

Constitution, 1851, sec. 193. The general assembly shall provide, by law, for a uniform and equal rate of assessment and taxation ; and shall prescribe such regulations as shall secure a just valuation for taxa- tion of all property, both real and personal.

Present Laiv. Ann. St., 1901, vol. 3, sec. 8417a, as amended by Laws 1903, c. 27, sec. 36. In Indiana mortgagors may have the amount of the mortgage in- debtedness, not exceeding seven hundred dollars, still unpaid on the first day of March, deducted from the assessed valuation of the mortgaged premises for that year, and the amount remaining after the deduction has been made is to form the basis for assessment for the real estate. In no case is a deduction to be al- lowed greater than one-half of the assessed value of the real estate.

sec. 8417b. Any person wishing to avail himself of the provisions of the law is required to file with the auditor of the county where the estate is situated, a sworn statement of the amount of the mortgage in- debtness unpaid on the first of March. The mort- gagor must also give the name and residence of the mortgagee, assignee, owner, or holder of the mort- gage, together with the record and page where the in- strument is recorded and a brief description of the real estate given as security.

sec. 8417c. Where the mortgage indebtdness is li- able for taxation in a county other than the one in which the real estate is situated, it becomes the duty of the auditor to certify and transmit a copy of this sworn statement as made by the mortgagor to the au- ditor of the county where the mortgagee, assignee, or holder of the mortgage resides.

Court Decisions. In a case brought into the Su- preme Court to test the constitutionality of the law, the court held that the act of 1899 authorizing the de- duction for the purpose of taxation, of mortgage in- debtedness, not exceeding $700, from the assessed valuation of real estate, such deduction not to be greater than one-half of the assessed valuation thereof, was not violative of the provisions of the state consti- tution requiring equality and uniformity in taxation, nor of the fourteenth amendment of the United States constitution relative to the right to the equal protection of the laws. State, ex rel. v. Smith, 158 Ind., 543, 1901.

Constitution, 1885, art. 9, sec. 1.

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Constitution, 1885, art. 9, sec. 1. The legislature shall provide for a uniform and equal rate of taxa- tion, and shall prescribe such regulations as shall se- cure a just valuation of all property, both real and personal, excepting such property as may be exempted by law for municipal, educational, literary, scientific, religious, or charitable purposes.

Present Laiv. Gen. St., 1906. In Florida mort- gages are taxed as personal property. Both real and personal property are subject to taxation (sec. 428). Credits are included under personal property (sec. 432), and are defined to mean every claim and demand for money. The assessment roll should contain a statement of a’l mortgages except those given for pur- chase money (sec. 512).

Georgia

Constitution, 1877, art. 7, sec. 2, par. 1. “All taxes shall be uniform upon the same class of subjects, and ad valorem on all property subject to be taxed within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.”

Present Law. Code, 1895, Mortgages in Georgia are taxable as personal property. Both real and per- sonal property are subject to taxation (sec. 767), and tax payers are required to make a return of the gross value of their notes and other obligations for money (sec. 833).

Idaho

Constitution, 1889, art. 7, sec. 5. “All taxes shall be uniform upon the same class of subjects within the territorial limits, of the authority levying the tax, and shall be levied and collected under general laws, which shall prescribe such regulations as shall secure a just valuation for taxation of all property, real and per- sonal : Provided, That the legislature may allow such exemptions from taxation from time to time as shall seem necessary and just.”

Present Law. Laws, 1907, p. 178. In Idaho the legislature took advantage of this provision and ex- empted all dues and credits secured by mortgage, trust deed, or other lien. This law has been in force since 1895. (Laws 1895, p. 48.)

Laws, 1907 (c. 160 as amended by c. 253, Laws, 1907)

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Laws, 1907 (c. 160 as amended by c. 253, Laws, 1907). The Connecticut law contains a provision which permits any person to take or send any note, bond, or other chose in action, or a description of it, to the state treasurer, and pay a state tax of 2 per cent on the face amount for five years, or for a longer or shorter time at the same rate. The treasurer makes an endorsement upon the contract or gives a receipt stating that the tax has been paid. The instrument is then exempt from all other taxes. The state treas- urer classifies all notes, bonds, choses in action upon which the state tax has been paid according to assess- ment districts, and sends these lists to the town c’erks.

History. Laws, 1897 (c. 381 as amended by c. 25, Laws, 1898). It was the duty of the assessor to list for state and county purposes, at three-fourths of their value, all investments paying interest or yielding an in- come. Mortgages were included under investments. All such property, whether situated within the state or elsewhere, whether owned or held in trust, was to be assessed, unless it was taxed in some other state or county. It was declared to be the intention of the act to tax the owner and not the borrower or debtor, and any person asking, demanding, contracting for, or receiving any money or consideration on account of the tax or in reduction of the tax, or any person who imposed or tried to impose the tax or any part of it upon a debtor, was to be deemed guilty of a mis- demeanor and subject to a heavy fine.

Where the creditor was a non-resident, the debtor was liable for the tax in the first instance, but must deduct the amount paid from the interest due or ac- cruing on the debt. If the creditor refused to allow this deduction, he was to forfeit all the accrued inter- est and the debtor was not to make any payment to a creditor living outside of the state until the tax had been paid.

Railroads and other companies paying a stipulated tax in lieu of all other taxes were not included under the provisions of the law.

The tax amounted to thirty cents on the one hun- dred dollars of the assessment as made and returned by the assessor, and, as a rule, one-fourth of the money collected from this source went to the state, and three- fourths to the county.

In the case of E. G. & T. Co. v. Donahoe (3 Pen- ij< class="msoIns">’s Del. Rep. 191, 1901) the court held this law unconstitutional. The original act was for the purpose of equalizing taxation for state and county purposes. The amendment considered municipal taxation a? well without proper designations in the title. The court held that so much of the amending act as related to taxation for municipal purposes was unconstitutional and void under the constitution because not embraced within the title of the act, and that since the uncon- stitutional part could not be separated from the resi- due without emasculating the statute, that, therefore, the act as amended was unconstitutional and void.

Constitution, 1876, art. 10, sec. 3. All taxes shall be uniform upon the same class of subjects

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Constitution, 1876, art. 10, sec. 3. All taxes shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws, which shall prescribe such regulations as shall secure a just valuation for taxation of all property, real and personal.

Present Law. Mills’ St., 1905, sec. 3806. In Colo- rado mortgaged property is taxed to the mortgagor and the mortgagee as such is exempt. Whenever any property within the state is mortgaged, the property .and the notes, mortgage, deed of trust, trust deed, contract or other conveyance is to be assessed as a unit; the value of this unit for assessment purposes is to be equal to the value of the property only. Such contracts are not to be otherwise returned or assessed.

sec. 3924o. If the mortgagor fails or neglects to pay the tax, the mortgagee may pay it and include the amount with interest in any judgment rendered on the mortgage.

Connecticut

History. In the session laws of Connecticut for 1836-37 (c. ‘12, sec. 2) a statement may be found to the effect that mortgages were to be taxed to the owner as personal property. By 1852 it would seem that the custom had grown up of taxing mortgages as an interest in the property. At least the law stated .that whenever in the ‘making of ariy tax list, any real estate was omitted or abated because of any indebted- ness, secured by a mortgage, the indebtedness was to be taxed in the town or district in which the real es- tate was situated. (Laws, 1852, c. 67, sec. 1.) If the creditor was a resident of the town or district in which the mortgaged property was situated, the amount deducted from the value of the property because of the mortgage debt was simply added to his list, but if he was a non-resident, a statement of his credits was made out and notice sent. He might then appear be- fore the assessors or board of relief and show cause why such indebtedness should not be taxed to him. (Laws, 1852, c. 67, sec. 2.) A law somewhat simi- lar was passed in 1865 (c. 93, sec. 1), and in 1867 it was provided that no greater amount of indebtedness was to be deducted from the list of any person than the assessed value of the property for which the in- debtedness was contracted. (Laws, 1867, c. 25.) The present law, the main .provisions of which were passed in 1875 (c. 27), carried out the ideas intro- duced much earlier _ and provided for the taxation of mortgages as an interest in the real estate to an amount equal to the assessed value of the mortgaged land.

Constitution, 1818, art. 1, sec. 11. The property of no person shall be taken for public use without just compensation therefor.

Present Law. Gen. St., 1902, sec. 2319. Money lent at interest and secured by a mortgage which con- tains an agreement that the borrower is to pay the taxes, is to be exempt from taxation to an amount equal to the assessed value of the mortgaged land. The excess of any such loan over the value of the real estate is assessed and taxed in the town where the lender resides.

sec. 2323. Money secured by mortgage upon real estate, where there is no agreement that the borrower shall pay the taxes, is assessed to the owner, but is assessed in the town where the real estate is situated and not at the residence of the mortgagee.

sec. 2326. The rule that tax payers need not list property located outside of the state if they can prove that such property has already been assessed, does not apply to money loaned at interest to non-residents. Such property must be listed.

Constitution, art. 13, sec. 4. A mortgage, deed of trust, contract

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Constitution, art. 13, sec. 4. A mortgage, deed of trust, contract, or other obligation by which a debt is secured, shall, for the purposes of assessment and tax- ation, be deemed and treated as an interest in the property affected thereby. Except as to railroad and other quasi-public corporations, in case of debt so se- cured, the value of the property affected by such mort- gage, deed of trust, contract, or obligation, less the value of such security, shall be assessed and taxed to the owner of the property, and the value of such se- curity shall be assessed and taxed to the owner there- of, in the county, city, or district in which ,the prop- erty affected thereby is situate. The taxes so levied shall be a lien upon the property and security, and may be paid by either party to such security; if paid by the owner of the security, the tax so levied upon the property affected thereby shall become a part of the debt so secured ; if the owner of the property shall pay the tax so levied on such security, it shall consti- tute a payment thereon, and to the extent of such pay- ment, a full discharge thereof; provided, that if any such security or indebtedness shall be paid by any such debtor or debtors, after assessment and before the tax levy, the amount of such levy may likewise be retained by such debtor or debtors, and shall be com- puted according to the tax levy for the preceding year. Present Law. Sec. 4, art. 13, of the constitution still remains in force, but sec. 5 has been repealed.

Statutes, 1907, c. 368, sec. 1. With minor changes- in the punctuation and wording, sec. 4 of the consti- tution is reproduced in the statutes, but that part of the statutes that formerly corresponded to sec. 5 of art. 13 of the constitution has been materially changed since the repeal of that section in 1906. Now the par- ties to any mortgage are given the right to provide by contract that the debtor shall pay all or any taxes or assessments on the money loaned, or on the mortgage, deed of trust, or other lien, or on the property covered or the obligation secured. Such contracts are to be valid and constitute a waiver by the debtor of all rights to treat the payment of such tax or assessment as a payment on the amount loaned or secured.

sec. 7. To assist in the work of assessment, the re- corder is required to transmit annually to the assessor a complete abstract of all mortgages remaining un- satisfied on the records of his office; this abstract to embrace all information requisite for the assessor. If partial payment has been made, the owner is author- ized to make the proper deductions. This information would be of use to the assessor only in cases where no agreement had been entered into between the debtor and creditor as to the payment of the taxes.

The constitution of 1849 (art. 11, sec. 13) stated that taxes

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History. The constitution of 1849 (art. 11, sec. 13) stated that taxes shou d be uniform and equal throughout the state and that all property should be taxed in proportion to its value. The statutes enac- ted about the same time (1849-50, c. 52, sec. 2, 4) provided that mortgages were to be taxed as personal property. In 1851 (c. 6, sec. 21) a special clause was incorporated, and money loaned at interest was made subject to a tax of one dollar for each one hundred dollars of value. This system was used for one year only, when change was made and mortgages were made taxable as an interest in the real estate (St. 1852, c. 3, sec. 13) the mortgagee to pay taxes on the money secured by the mortgage, and the mortgagor on the value of the property less the value of the mort- gage. The next year (1853) the mortgagor was re- quired (c. 167, art. 10, sec. 9) to pay taxes on the value of the property without deduction, and the mort- gagee on the amount of money lent (c. 167, art. 1, sec. 1). In addition to this persons engaged in the business of lending money were subject to a license tax of ten cents for every one hundred dollars of busi- ness estimated to have been done (c. 167, art. 3, sec. 1).

This system continued until 1870 when an effort was made to re ieve the owners of encumbered real estate from double taxation (St. 1869-70, c. 424, 485). The law read as follows : “No mortgage or lien given and held upon real estate, or the debt thereby secured, or promissory note secured by mortgage, shal be as- sessed upon the books of any assessor, state, county, or otherwise.” At first the courts held that mort- gages were property, and as such could not be exempt from taxation under the constitution (People v. Eddy, 43 Cal. 331, 1872; Lick v. Austin, 43 Cal. 590, 1872). Later the court practica’ly reversed these decisions and stated that mortgages should not be taxed because such action would violate the constitutional requirement providing that all taxation should be uniform and equal and that property should be taxed in proportion to its value. The court held that a tax on the mort- gage and on the property given as security was a case of double taxation, and, as such, forbidden by the con- stitution. (People v. Hibernia Bank, 51 Cal. 243, 1876). See Savings and Loan Society v. Austin, 46 Cal. 415, 1873).

The present constitution in California was adopted in 1879 and did contain two sections relating to the taxation of mortgages. Under sec. 4, art. 13, mort- gages were to be taxed as an interest in the real es- tate, and each party to the contract was to pay taxes on his respective interest ; sec. 5 stated that all con- tracts by which a debtor was obligated to pay any tax or assessment on money loaned, or on any mortgage, deed of trust or other lien, were to be null and void. Court decisions practical’y annulled that part of the law forbidding contracts, for in the case of London and San Francisco Bank v. Bandman (120 Cal. 220, 1898) the court held that an allegation and finding which did not state that the agreement of the mort- gagor to pay the taxes was part of the mortgage con- tract, was not broad enough to establish an agreement violative of the constitution.

Sec. 5 was actually repealed in November, 1906 (See Const. St., 1907) and the question of repealing sec. 4 is to be voted on by the people in November, 1908 (St. 1907, p. 1159).

Revised Statutes, 1901. In Arizona (sec. 3847) property under mortgage

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Revised Statutes, 1901. In Arizona (sec. 3847) property under mortgage or lease is listed by and taxed to the mortgagor or lessor, unless it is listed by the mortgagee or lessee. With certain enumerated exceptions (sec. 3834) all property is subject to taxa- tion, but double taxation is not permitted. Liabilities may be deducted from solvent debts (sec. 3835). Constitution, 1874, art. 16, sec. 5. All property sub- ject to taxation shall be taxed according to its value, that value to be ascertained in such manner as the gen- eral assembly shall direct, making the same equal and uniform throughout the state.

Present Law. Dig. of St., 1904. In Arkansas mortgages are taxed as personal property. The law requires (sec. 6873) that all property, including mon- eys and credits, shall be taxed, and credits are defined (sec. 6872) as the excess of the sum of all legal claims and demands over and above the sum of legal bona fide debts which the person owes. Every person (sec. 6899) is required to list all moneys loaned by him, but is not required (sec. 6902) to list a greater portion of any credits than he believes can be collected.

Court Decisions. A note given for land, and the land itself, are both subject to taxation; the note as property of the holder, and the land as property of the purchaser. Ouachita County v. Rumph, 43 Ark. 525, 1884.

In Pennsylvania mortgages are uniformly subject to a tax of four mills on the dollar

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In Pennsylvania mortgages are uniformly subject to a tax of four mills on the dollar; the proceeds from this source are divided between the state and the counties.

Mortgagees in certain enumerated counties of Mary- land are required to pay a tax of eight per cent upon the gross amount of interest covenanted to be paid on mortgages held by them.

Idaho and Washington exempt mortgages from tax- ation by law.

In Alabama, Minnesota, New York and Virginia mortgages are subject to a recording or privilege tax paid at the time of recording depending on the amount

of the tax of the mortgage debt All other states tax mortgages as personal property. History. In Alabama prior to 1903 mortgages were subject to taxation as personal property (Code, 1896, vol. 1, sec. 3911, sub sec. 7). In 1903 (Acts, 1903, p. 227) a privilege tax of fifteen cents on every one hundred dollars was imposed at the time of record- ing. The present law was passed in 1907, and is but a slight modification of the law of 1903.

Constitution, 1901, art. 11, sec 1. All taxes levied on property in this state shall be assessed in exact pro- portion to the value of such property.

Present Lau>, Acts, 1907, p. 455, sec. 1. No mort- gage, deed of trust, contract of conditional sale, or other instrument in the nature of a mortgage executed so as to convey real property or any interest in real or personal property situated within the state is to be received for record unless a privilege tax has been paid. This tax amounts to fifteen cents, if the in- debtedness secured is one hundred dollars or less ; and an additional fifteen cents is added for every addi- tional one hundred dollars or fraction thereof. The law states definitely that the tax is to be paid by the lender. When the mortgage is presented to the judge of probate of the county in which any of the property conveyed is situated and the tax is paid, the probate judge makes a certification to that effect on the instru- ment, and then the mortgage may be recorded in any county where property given as security is situated without any additional tax, except the fee for record- ing. An extension or renewal contract is subject to the same tax as the original mortgage. If the tax prescribed by this act has been paid, neither the mort- gage nor the debt secured is to be subject to an ad valorem tax, either for state, county, or municipal purposes. The probate judge receives 5 per cent of the amount collected by him as compensation for his services. Of the remainder, one-third is paid to the county treasurer of the county in which the taxes are collected, and two-thirds to the state treasurer. If the land which is given to secure the debt is situated in more than one county of the state, then, this one- third is divided among the county treasurers in pro- portion to the value of the property given as security in each county. In cases where only part of the prop- erty is within the state, the proportional part within and without is determined by the state board of com- promise, and the taxes paid accordingly.

It is made a misdemeanor, punishable by a fine, for the probate judge to file for record any mortgage upon which the taxes have not been paid.

Only exceptions to the laws taxing mortgages as personal property

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Only exceptions to the laws taxing mortgages as personal property will be noted here. When objec- tions were raised to the system of double taxation the natural solution of the problem was to tax mortgages as an interest in the real estate. When this is done the vital question is whether or not the parties to the mortgage are permitted to enter into a contract con- cerning the payment of the taxes. If this privilege is not granted and the law is enforced then each party to the mortgage must pay taxes on his respective in- terest the mortgagee on the value of the mortgage at the situs of the property and the mortgagor on the value of the real estate minus the indebtedness. If contracts are permitted then the mortgagor usually agrees to pay all taxes on the encumbered property and the mortgagee is exempt, the theory being that the mortgagor will get the loan at a reduced rate of interest by agreeing to relieve the mortgagee from all obligations with regard to taxes.

Both systems have been tried. California is the best example of a state where contracts were not per- mitted. This system prevailed there from the time of the adoption of the second constitution in 1879 un- til the court held that separate contracts were permis- sible (120 Cal. 220, 1898). The objectional part of the constitutional provision was repealed in 1906 and a new law passed in 1907 permitting contracts. Mis- souri had a similar law (1900) but the supreme court of the state declared it unconstitutional on the ground that since the mortgages of certain corporations were not to be treated as an interest in the real estate, such corporations were thus deprived of the equal protec- tion of the law provided for under the fourteenth- amendment.

At the present time mortgages in California, Conn- ecticut, Massachusetts, New Jersey and Wisconsin are taxable as an interest in the real estate and the parties to the mortgage are permitted to enter into a contract concerning the payment of the taxes. Michigan and Oregon had similar laws but they were both silent with regard to contracts. The Michigan court in La- tham v. Board of Assessors (91 Mich. 509, 1892) held tfiat such agreements were permissible. In both states the laws have since been repealed (1893).

If the actual enforcement and working out of the laws are considered, Colorado belongs in the same class as Massachusetts and Wisconsin. The law pro- vides that the mortgage and the property given as se- curity are to be assessed as a unit and that the mort- gages are not to be returned or assessed. In Indiana a somewhat different system prevails. The mortgagor may have the amount of the mortgage indebtedness not exceeding seven hundred dollars de- ducted from the assessed value of the mortgaged prem- ises. In no case can this deduction be greater than one half of the assessed value of the real estate. If this deduction is claimed and allowed the mortgage debt or that portion of it which is taxable is assessed as personal property to the mortgagee at his place of residence.

What do you mean by regression analysis; explain in your own words

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Regression analysis:

In “Statistical Methods” has defined Regression as, “The measure of the average relationship between two or more variables in terms of the original units of the data”.

Morris Hamburg has defined Regression Analysis as, “The method by which estimates are made of the values of a variable from knowledge of the values of one or more other variables and to the measurement of the errors involved in this estimation process”.

Correlation analysis attempts to study the relationship between the two variables x and y. Regression analysis attempts to predict the average x for a given y. in Regression it is attempted to quantify the dependence of one variable on the other. Example; There are two variables x and y. y depends on x. the dependence is expressed in the form of the following equation:

Y=a+bx

Regression analysis used to estimate the values of the dependent variables from the values of the independent variables.

Regression analysis uses to get a measure of the error involved while using the regression line as a basis for estimation.

Regression coefficient is used to calculate correlation coefficient. The square of correlation coefficient measures the degree of association of correlation that prevails between the given two variables.

Correlation coefficient measures the degree of co variability between the given variables x and y. the regression analysis uses to study the ‘nature of relationship’ between the given variables; the value of one variable is predicted based on another.

Correlation analysis does not study cause and effect relationship of the given variables. It is not stated that one variable is the cause and other the effect. In regression analysis one variable is taken as dependent and another independent. Here there is possibility to study the cause and effect relationship.

In statistics, regression analysis examines the relation of a dependent variable (response variable) to specified independent variables (explanatory variables). The mathematical model of their relationship is the regression equation. The dependent variable is modeled as a random variable because of uncertainty as to its value, given only the value of each independent variable. A regression equation contains estimates of one or more hypothesized regression parameters ("constants"). These estimates are constructed using data for the variables, such as from a sample. The estimates measure the relationship between the dependent variable and each of the independent variables. They also allow estimating the value of the dependent variable for a given value of each respective independent variable.

Uses of regression include curve fitting, prediction (including forecasting of time-series data), modeling of causal relationships, and testing scientific hypotheses about relationships between variables.

Briefly explain the concepts of Correlation in your own words

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Types of Correlation are given below:

a. Positive of Negative

b. Simple, Partial and Multiple

c. Linear and Non-Linear

a. Positive Correlation: Both the variables (X and Y) will vary in the same direction. If variable X increases, variable Y also will increase; if variable X decreases, variable Y also will decrease.

Negative Correlation: The given variables will vary in opposite direction. If on variable increases, other variable will decrease.

b. Simple, Partial and Multiple Correlations: In simple correlation, relationship between two variables are studies. In partial and multiple correlations three or more variables are studies. Three or more variables are simultaneously studied in multiple correlation. In partial correlation more than two variables are studied, but the effect on one variable is kept constant and relationship between other two variables is studied.

c. Linear and Non-Linear Correlation: It depends upon the constance of the ration of change between the variables. In linear correlation the percentage change in one variable will be equal to the percentage change in another variable. It is not so in non-linear correlation.

Method of Studying Correlation::

The various methods of studying correlation are given below.

a. Scatter Diagram Method.

b. Graphic Method

c. Karl Pearson’s Coefficient of Correlation

d. Concurrent Deviation Method

e. Method of Least Squares

In probability theory and statistics, correlation, also called correlation coefficient, indicates the strength and direction of a linear relationship between two random variables. In general statistical usage, correlation or co-relation refers to the departure of two variables from independence. In this broad sense there are several coefficients, measuring the degree of correlation, adapted to the nature of data.

A number of different coefficients are used for different situations. The best known is the Pearson product-moment correlation coefficient, which is obtained by dividing the covariance of the two variables by the product of their standard deviations.

Write down the properties of Chi-square distribution

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Ans. Properties of $χ 2$ distribution:

1. Mean of $χ 2$ distribution = Degrees of freedom = V

2. SD of $χ 2$ distribution = √2V

3. Median of $χ 2$ distribution divides the area of the curve into two equal parts, each part being 0.5

4. Mode of $χ 2$ distribution is equal to degrees of freedom less 2 i.e., V-2

5. $χ 2$ values are always positively skewed.

6. $χ 2$ values increase with the increase in the DF, there is a new $χ 2$ distribution with every increase in the no. of degrees of freedom.

7. The lowest value of $χ 2$ is zero and the highest is infinity i.e. 0 < $χ 2$ <

8. When two chi-squares γ 2\1 and χ2/2 are independent following $χ 2$ distribution with n₁ and n₂ degrees of freedom, their sum χ2/2 +χ2/2 will follow $χ 2$ distribution with n₁+ n₂ degrees of freedom.

9. When V>30, √2 $χ 2$ - √2V -1 approximately follows the standard normal distribution.

Chi-Square Distribution:

This article is about the mathematics of the chi-square distribution. For its uses in statistics, see Chi-Square Test.

Explain Type I and Type II errors in testing of Hypothesis

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Types of hypothesis:

A proposition may take the form of asserting a causal relationship (such as "A causes B"). A proposition often (but not necessarily) involves an assertion of causation. For example, if a particular independent variable changes, then a certain dependent variable also changes. This formulation, also known as an "If and Then" statement, applies whether or not a proposition asserts a direct cause-and-effect relationship.

A hypothesis about possible correlation does not stipulate the cause and effect per se, only stating that "A is related to B". Investigators may have more difficulty in verifying causal relationships than other correlations, because quite commonly intervening variables also become involved, possibly giving rise to the appearance of a possibly direct cause-and-effect relationship, but which (upon further investigation) turn out to have some other, more direct causal factor not mentioned in the proposition. Also, a mere observation of a change in one variable, when correlated with a change in another variable, can actually mistake the effect for the cause, and vice-versa (i.e., potentially get the hypothesized cause and effect backwards).
Empirical hypotheses that experimenters have repeatedly verified may become sufficiently dependable that, at some point in time, they become considered as "proven". Some people may succumb to the temptation to term such hypotheses "laws", but they would do so mistakenly, since by definition a hypothesis explains and a law describes (for example, a law can state: "Matter can neither be created or destroyed, only changed in form"). More accurately, one could refer to repeatedly verified hypotheses simply as "adequately verified", or as "dependable".
Statistics features a rather more general concept of a hypothesis: this involves making assertions about the probability distributions or likelihoods of events.
Statisticians use two kinds of hypothesis: first, the null hypothesis or H0; secondly, the alternative hypothesis or H1. To give the simplest non-trivial example, one might formulate two hypotheses about tossing a coin:
• H0: coin-tossing operates "fairly" (equally likely to fall "Heads" or "Tails")
• H1: coin-tossing operates in a biased manner to give a 90% probability of falling "Heads"
No finite sequence of results could utterly falsify either hypothesis. However, various statistical approaches (such as Bayesian statistics and classical statistics (i.e. t-tests)) can quantify the strong intuition that H1 appears much less likely than H0 if, in 1,000 tosses, 495 came out "Heads" — and much more likely if 895 came out "Heads". In more complex sciences, researchers generally evaluate experiments statistically rather than as simple verifications or falsifications.
A hypothesis (from Greek ὑπόθεσις) consists either of a suggested explanation for a phenomenon or of a reasoned proposal suggesting a possible correlation between multiple phenomena. The term derives from the Greek, hypotithenai meaning "to put under" or "to suppose." The scientific method requires that one can test a scientific hypothesis. Scientists generally base such hypotheses on previous observations or on extensions of scientific theories.

Type I and Type II errors:
Rejecting a null hypothesis when it is true is called a Type I error, and its probability ( Which, as we have seen, is also the significance level of the test) is symbolized α (alpha). Alternatively, accepting a null hypothesis when it is false is called a Type II error, and its probability is symbolized β (beta). There is a trade-off between these two errors: the probability of making one type of error can be reduced only if we are willing to increase the probability of making the other type or error. With an acceptance region this small, we will rarely accept a null hypothesis when it is not true, but as a cost of being this sure, we will often reject a null hypothesis when it is true.
Put another way, in order to get a low β, we will have to put up with a high α. To deal with this trade-off in personal and professional situations, decision makers decide the appropriate level of significance by examining the costs or penalties attached to both types of errors.

When Type I error is preferred:
Suppose that making a Type I error (rejecting a null hypothesis when it is true) involves the time and trouble of reworking a batch of chemicals that should have been accepted. At the same time, making a Type II error (accepting a null hypothesis when it is false) means talking a chance that an entire group of users of this chemical compound will be poisoned. Obviously, the management of this company will prefer a Type I error to a Type II error and, as a result, will set very high levels of significance in its testing to get low β s.

When Type II error is preferred:
Suppose, on the other hand, that making a Type I error involves disassembling an entire engine at the factory, but making a Type II error involves relatively inexpensive warranty repairs by the dealers. Then the manufacturer is more likely to prefer a Type II error and will set lower significance levels in its testing.

Write short notes on Interval estimates

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Interval estimation:
The purpose of gathering samples is to learn more about a population. We can compute this information from the sample data as either point estimates, An Interval estimate describes a range of values within which a population parameter is likely to lie.

Interval estimation:

In statistics, interval estimation is the use of sample data to calculate an interval of possible (or probable) values of an unknown population parameter. The most prevalent forms of interval estimation are confidence intervals (a frequentist method) and credible intervals (a Bayesian method).

* Behrens-Fisher problem
* fiducial inference

Other common interval estimation are

* Tolerance interval
* Prediction interval - used mainly in Regression Analysis.

What is the criteria of a good estimator, explain the points in your own word

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There are two number of estimates about a population:

1. A point estimate and

2. An interval estimate:
Estimator:

In statistics, an estimator is a function of the observable sample data that is used to estimate an unknown population parameter; an estimate is the result from the actual application of the function to a particular set of data. Many different estimators are possible for any given parameter. Some criterion is used to choose between the estimators, although it is often the case that a criterion cannot be used to clearly pick one estimator over another. To estimate a parameter of interest (e.g., a population mean, a binomial proportion, a difference between two population means, or a ratio of two population standard deviation), the usual procedure is as follows:

1. Select a random sample from the population of interest.
2. Calculate the point estimate of the parameter.
3. Calculate a measure of its variability, often a confidence interval.
4. Associate with this estimate a measure of variability.

There are two types of estimators: Point Estimators and Interval Estimators.

1. A point Estimate: is a single number that is used to estimate an unknown population parameter. A point estimate is often insufficient, because it is either right or wrong. If you are told only that her point estimate of enrollment is wrong, you do not know how wrong it is, and you cannot be certain of the estimate’s reliability. If you learn that is off by only 10 students, you would accept 350 students as a good estimate of future enrollment.

Point estimation:

In statistics, point estimation involves the use of sample data to calculate a single value (known as a statistic) which is to serve as a "best guess" for an unknown (fixed or random) population parameter.

More formally, it is the application of a point estimator to the data.

Point estimation should be contrasted with Bayesian methods of estimation, where the goal is usually to compute (perhaps to an approximation) the posterior distributions of parameters and other quantities of interest. The contrast here is between estimating a single point (point estimation), versus estimating a weighted set of points (a probability density function).

2. An interval estimator: is a range of values used to estimate a population parameter. It indicates the error in two ways: by the parameter lying within that range.

Interval estimation:

In statistics, interval estimation is the use of sample data to calculate an interval of possible (or probable) values of an unknown population parameter. The most prevalent forms of interval estimation are confidence intervals (a frequentist method) and credible intervals (a Bayesian method).

* Behrens-Fisher problem
* fiducial inference

Other common interval estimation are

* Tolerance interval
* Prediction interval - used mainly in Regression Analysis

Criteria of a good estimator:

1. Unbiasedness: This is a desirable property for a good estimator to have. The term unbiasedness refers to the fact that a sample mean is an unbiased estimator of a population mean because the mean of the sampling distribution of sample means taken from the same population is equal to the population mean itself. We can say that a statistic is an unbiased estimator if, on average, it tends to assume values that ate the same extent as it tends to assume values that are below the population parameter being estimated.

2. Efficiency: Another desirable property of a good estimator is that it be efficient. Efficiency refers to the size of the standard error of the statistic. If we compare two statistics from a sample of the same size and try to decide which one is the more efficient estimator, we would pick the statistic that has the smaller standard error, or standard deviation of the sampling distribution. Suppose we choose a sample of a given size and must decide whether to use the sample mean or the sample median to estimate the population mean. If we calculate the standard error of the sample mean and find it to be 1.05 and then calculate the standard error of the sample median and find it to be 1.6, we would say that the sample mean is a more efficient estimator of the population mean be cause its standard error is smaller. It makes sense that an estimator with a smaller standard error (with less variation) will have more chance of producing an estimate nearer to the population parameter under consideration.

3. Consistency: A statistic is a consistent estimator of a population parameter if as the sample size increases, it becomes almost certain that the value of the statistic comes very close to the value of the population parameter. If an estimator is consistent, it becomes more reliable with large samples. Thus, if you are wondering whether to increase the sample size to get more information about a population parameter, find out first whether your statistic is a consistent estimator. If it is not, you will waste time and money by taking larger samples.
Consistency:

A Consistent Estimator is an estimator that converges in probability to the quantity being estimated as the sample size grows without bound.

An estimator tn (where n is the sample size) is a consistent estimator for parameter θ if and only if, for all ε > 0, no matter how small, we have

\lim_{n\to\infty}\Pr\left\{ \left| t_n-\theta\right|<\epsilon \right\}=1.

It is called strongly consistent, if it converges almost surely to the true value.

4. Sufficiency: An estimator is sufficient if it makes so much use of the information in the sample that no other estimator could extract from the sample additional information about the population parameter being estimated.
Efficiency:

Main article: Efficiency (statistics)

The quality of an estimator is generally judged by its mean squared error.

However, occasionally one chooses the unbiased estimator with the lowest variance. Efficient estimators are those that have the lowest possible variance among all unbiased estimators. In some cases, a biased estimator may have a uniformly smaller mean squared error than does any unbiased estimator, so one should not make too much of this concept. For that and other reasons, it is sometimes preferable not to limit oneself to unbiased estimators; see estimator bias. Concerning such "best unbiased estimators", see also Cramér-Rao bound, Gauss-Markov theorem, Lehmann-Scheffé theorem, Rao-Blackwell theorem.

State Central Limit Theorem. Explain in your own words

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A Central Limit Theorem is any of a set of weak-convergence results in probability theory. They all express the fact that any sum of many independent and identically-distributed random variables will tend to be distributed according to a particular "attractor distribution". The most important and famous result is called The Central Limit Theorem which states that if the sum of the variables has a finite variance, then it will be approximately normally distributed (i.e., following a Gaussian distribution).

Since many real processes yield distributions with finite variance, this explains the ubiquity of the normal probability distribution.

Several generalizations for finite variance exist which do not require identical distribution but incorporate some condition which guarantees that none of the variables exert a much larger influence than the others. Two such conditions are the Lindeberg condition and the Lyapunov condition. Other generalizations even allow some "weak" dependence of the random variables. Also, a generalization due to Gnedenko and Kolmogorov states that the sum of a number of independent random variables with power-law tail distributions decreasing as 1/|x|α+1 with 0 < α < href="http://en.wikipedia.org/wiki/L%C3%A9vy_skew_alpha-stable_distribution" title="Lévy skew alpha-stable distribution">Lévy distribution as the number of variables grows. This article will only be concerned with the central limit theorem as it applies to distributions with finite variance.
History:

“The central limit theorem has an interesting history. The first version of this theorem was postulated by the French-born English mathematician Abraham de Moivre, who, in a remarkable article published in 1733, used the normal distribution to approximate the distribution of the number of heads resulting from many tosses of a fair coin. This finding was far ahead of its time, and was nearly forgotten until the famous French mathematician Pierre-Simon Laplace rescued it from obscurity in his monumental work Théorie Analytique des Probabilités, which was published in 1812. Laplace expanded De Moivre's finding by approximating the binomial distribution with the normal distribution. But as with De Moivre, Laplace's finding received little attention in his own time. It was not until the nineteenth century was at an end that the importance of the central limit theorem was discerned, when, in 1901, Russian mathematician Aleksandr Lyapunov defined it in general terms and proved precisely how it worked mathematically. Nowadays, the central limit theorem is considered to be the unofficial sovereign of probability theory. ”

See Bernstein (1945) for a historical discussion focusing on the work of Pafnuty Chebyshev and his students Andrey Markov and Aleksandr Lyapunov that led to the first proofs of the C.L.T. in a general setting.
Proof of the central limit theorem:

For a theorem of such fundamental importance to statistics and applied probability, the central limit theorem has a remarkably simple proof using characteristic functions. It is similar to the proof of a (weak) law of large numbers. For any random variable, Y, with zero mean and unit variance (var(Y) = 1), the characteristic function of Y is, by Taylor's theorem,

\varphi_Y(t) = 1 - {t^2 \over 2} + o(t^2), \quad t \rightarrow 0

Where o (t2 ) is "little o notation" for some function of t that goes to zero more rapidly than t2. Letting Yi be (Xi − μ)/σ, the standardised value of Xi, it is easy to see that the standardised mean of the observations X1, X2, ..., Xn is just

Z_n = \frac{n\overline{X}_n-n\mu}{\sigma\sqrt{n}} = \sum_{i=1}^n {Y_i \over \sqrt{n}}.

By simple properties of characteristic functions, the characteristic function of Zn is

\left[\varphi_Y\left({t \over \sqrt{n}}\right)\right]^n = \left[ 1 - {t^2 \over 2n} + o\left({t^2 \over n}\right) \right]^n \, \rightarrow \, e^{-t^2/2}, \quad n \rightarrow \infty.

But, this limit is just the characteristic function of a standard normal distribution, N(0,1), and the central limit theorem follows from the Lévy continuity theorem, which confirms that the convergence of characteristic functions implies convergence in distribution.

Write short notes on Simple Random Sampling

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In statistics, a Simple Random Sample is a group of subjects (a sample) chosen from a larger group (a population). Each subject from the population is chosen randomly and entirely by chance, such that each subject has the same probability of being chosen at any stage during the sampling process. This process and technique is known as Simple Random Sampling, and should not be confused with Random Sampling.

In small populations such sampling is typically done "without replacement", i.e., one deliberately avoids choosing any member of the population more than once. An unbiased random selection of subjects is important so that in the long run, the sample represents the population. However, this does not guarantee that a particular sample is a perfect representation of the population. Simple random sampling merely allows one to draw externally valid conclusions about the entire population based on the sample. Although simple random sampling can be conducted with replacement instead, this is less common and would normally be described more fully as simple random sampling with replacement.

Conceptually, simple random sampling is the simplest of the probability sampling techniques. It requires a complete sampling frame, which may not be available or feasible to construct for large populations. Even if a complete frame is available, more efficient approaches may be possible if other useful information is available about the units in the population.

Advantages are that it is free of classification error, and it requires minimum advance knowledge of the population. It best suits situations where not much information is available about the population and data collection can be efficiently conducted on randomly distributed items. If these conditions are not true, stratified sampling or cluster sampling may be a better choice.

Simple Random Sampling:

Simple Random Sampling selects samples by methods that allow each possible sample to have an equal probability of being picked and each item in the entire population to have an equal chance of being included in the sample.

Suppose we have a population of four students in a seminar and we want samples of two students at a time for interviewing purposes. The table below illustrates all of the possible combinations of samples of two students in a population size of four, the probability of each sample being picked, and the probability that each student will be in a sample.

Discuss briefly the Continuous Probability Distribution

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The Normal Distribution/ Continuous Probability, also called the Gaussian distribution, is an important family of continuous probability distributions, applicable in many fields. Each member of the family may be defined by two parameters, location and scale: the mean ("average", μ) and variance ("variability", σ²), respectively. The Standard Normal Distribution is the normal distribution with a mean of zero and a variance of one (the green curves in the plots to the right). Carl Friedrich Gauss became associated with this set of distributions when he analyzed astronomical data using them ^[1], and defined the equation of its probability density function. It is often called the bell curve because the graph of its probability density resembles a bell.

The importance of the normal distribution as a model of quantitative phenomena in the natural and behavioral sciences is due to the central limit theorem. Many psychological measurements and physical phenomena (like noise) can be approximated well by the normal distribution. While the mechanisms underlying these phenomena are often unknown, the use of the normal model can be theoretically justified by assuming that many small, independent effects are additively contributing to each observation.

The normal distribution also arises in many areas of statistics. For example, the sampling distribution of the sample mean is approximately normal, even if the distribution of the population from which the sample is taken is not normal. In addition, the normal distribution maximizes information entropy among all distributions with known mean and variance, which makes it the natural choice of underlying distribution for data summarized in terms of sample mean and variance. The normal distribution is the most widely used family of distributions in statistics and many statistical tests are based on the assumption of normality. In probability theory, normal distributions arise as the limiting distributions of several continuous and discrete families of distributions.

So far in this subsection, we have been concerned with discrete probability distributions (Binomial and Poisson). In this section, we shall turn to cases in which the variable can take on any value within a given range and in which the probability distribution is continuous.

A very important continuous probability distribution is the normal distribution. Several mathematicians were instrumental in its development, including the eighteenth-century mathematician-astronomer Karl Gauss. In honour of his work, the normal probability distribution is often called the Gaussian distribution.

There are two basic reasons why the normal distribution occupies such a prominent place in statistics. First, it has some properties that make it applicable to a great many situations in which it is necessary to make inferences by taking samples. In subsequent units, we will find that the normal distribution is a useful sampling distribution. Second, the normal distribution comes close to fitting the actual observed frequency distributions of many phenomena, including human characteristics (weights, heights, and IQs), outputs from physical processes (dimensions and yields), and other measures of interest to managers in both the public and private sectors.

Write short notes on Bernoulli distribution. Also write the use of Bernoulli process

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In probability theory and statistics, the Bernoulli distribution, named after Swiss scientist Jakob Bernoulli, is a discrete probability distribution, which takes value 1 with success probability $p$ and value 0 with failure probability $q = 1 - p$ . So if X is a random variable with this distribution, we have:

Definition:

A Bernoulli process is a discrete-time stochastic process consisting of a finite or infinite sequence of independent random variables X₁, X₂, X₃,..., such that

For each i, the value of X_i is either 0 or 1;
For all values of i, the probability that X_i = 1 is the same number p.

In other words, a Bernoulli process is a sequence of independent identically distributed Bernoulli trials. The two possible values of each X_i are often called "success" and "failure", so that, when expressed as a number, 0 or 1, the value is said to be the number of successes on the ith "trial". The individual success/failure variables X_i are also called Bernoulli trials.

Independence of Bernoulli trials implies memory lessness property: past trials do not provide any information regarding future outcomes. From any given time, future trials are also a Bernoulli process independent of the past (fresh-start property).

Random variables associated with the Bernoulli process include:

The number of successes in the first n trials; this has a binomial distribution;
The number of trials needed to get r successes; this has a negative binomial distribution.
The number of trials needed to get one success; this has a geometric distribution, which is a special case of the negative binomial distribution.

The problem of determining the process, given only a limited sample of Bernoulli trials, is known as the problem of checking if a coin is fair.

Bernoulli distribution:

One widely used probability distribution of a discrete random variable is the binomial distribution. It describes a variety of processes of interest to managers. The binomial distribution describes discrete, not continuous, data, resulting from an experiment known as a Bernoulli process, after the seventeenth-century Swiss mathematician Jacob Bernoulli. The tossing of a fair coin a fixed number of times is a Bernoulli process, and the outcomes of such tosses can be represented by the binomial probability distribution. The success or failure of interviewees on an aptitude test may also be described by a Bernoulli process. On the other hand, the frequency distribution of the lives of fluorescent lights in a factory would be measured on a continuous scale of hours and would not quality as a binomial distribution.

Use of the Bernoulli process:

We can use the outcomes of a fixed number of tosses of a fair coin as an example of a Bernoulli process. We can describe this process as follows:

1. Each trial (each toss, in this case) has only two possible outcomes: heads or tails, yes or no, success or failure.

2. The probability of the outcome of any trial (toss) remains fixed over time with a fair coin, the probability of heads remains 0.5 for each toss regardless of the number of times the coin is tossed.

3. The trials are statistically independent; that is, the outcome of one toss does not affect the outcome of any other toss.

Briefly explain relative frequency of occurrence in your own words

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Relative Frequency of Occurrence:-

In statistics the frequency of an event i is the number ni of times the event occurred in the experiment or the study. These frequencies are often graphically represented in histograms.

We speak of absolute frequencies, when the counts ni themselves are given and of (relative) frequencies, when those are normalized by the total number of events:

f_i = \frac{n_i}{N} = \frac{n_i}{\sum_i n_i}

Taking the fi for all i and tabulating or plotting them leads to a frequency distribution.

The Relative Frequency Density of occurrence of an event is the relative frequency of i divided by the size of the bin used to classify i.

For example: If the lower extreme of the class you are measuring the density of is 15 and the upper extreme of the class you are measuring is 30, given a relative frequency of 0.0625, you would calculate the frequency density for this class to be:

Rel.freq / (Upper Extreme of Class - Lower Extreme of Class) = Density

0.0625 / (30 - 15) = 0.0625 / 15 = 0.0041666.. That is: 0.00417 to 5 S.F.

In biology, relative frequency is the occurrence of a single gene in a specific species that makes up a gene pool.

The Limiting Relative Frequency of an event over a long series of trials is the conceptual foundation of the frequency interpretation of probability. In this framework, it is assumed that as the length of the series increases without bound, the fraction of the experiments in which we observe the event will stabilize. This interpretation is often contrasted with Bayesian probability.

Frequency is the measurement of the number of occurrences of a repeated event per unit of time. It is also defined as the rate of change of phase of a sinusoidal waveform.

Relative Frequency of Occurrence:-

Question like : “What is the probability that I will live to be 85 ? or “ what are the chances that I will below one of my stereo speakers if I turn my 200 –watt amplifier up to wide open?” or “what is the probability that the location of a new paper plant on the river near our town will cause a substantial fish kill?. We quickly see that we may not be able to state in advance, without experimentation, what these probabilities are. Other approaches may be more useful.

In the 1800s, British statisticians, interested in a theoretical foundation for calculating risk of losses in life insurance and commercial insurance, began defining probabilities from statistical data collected on births and deaths. Today, this approach is called The relative frequency of Occurrence. It defines probability as either:

1. The observed relative frequency of an event in a very large number of trials, or

2. The proportion of times that an event occurs in the long run when conditions are stable.

This method used the relative frequencies of past occurrences as probabilities. We determine how often something has happened in the past and use that figure to predict the probability that it will happen again in the future.

For example. Suppose an insurance company knows from past actuarial data that of all males 40 years old, about 60 out or every 100,000 will die within a 1 – year period. Using this method, the company estimates the probability of death of that age group as:

___60____ or 0.0006

1000

A second characteristic of probabilities established by the relative frequency of occurrence method can be shown by tossing one of our fair coins 300 times. Here we can see that although the proportion of heads was far from 0.5 in the first 100 tosses, it seemed to stabilize and approach 0.5 as the number of tosses increased.

In statistical language, we would say that the relative frequency becomes stable as the number of tosses becomes large (if we are tossing the coin under uniform conditions). Thus, when we use the relative frequency approach to establish probabilities, our probability figure will gain accuracy as we increase the number of observations. Of course, this improved accuracy is not free; although more tosses of our coin will produce a more accurate probability of head occurring, we must bear the time and the cost of additional observations.

One difficulty with the relative frequency approach is that people often use it without evaluating a sufficient number of outcomes. If you heard someone say, “My aunt and uncle got the flu this year, and they are both over 65, so everyone in that age bracket will probably get the flu, “you would know that your friend did not base his assumptions on enough evidence. His observations were insufficient data for establishing a relative frequency of occurrence probability.

Explain the limitations of statistics in your own words

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Limitations of Statistics:

1. Statistics does not deal with qualitative data. It deals only with quantitative data: Statistical methods can be applied only to numerically expressed data. Qualitative characteristics can be studied only if an alternative method of numerical measurement is introduced.

2. Statistics does not deal with individual fact: Statistical methods can be applied only to aggregate of facts. Single fact cannot be statistically studied.

3. Statistical inferences (conclusions) are not exact: Statistical inferences are true only on an average. They are probabilistic statements.

4. Statistics can be misused: Increasing misuse of Statistics has led to increasing distrust in statistics.

5. Common men cannot handle statistics properly: Only statisticians can handle statistics properly. An illogical analysis of statistical data leads to statistical fallacies.

Statistics is a mathematical science pertaining to the collection, analysis, interpretation or explanation, and presentation of data. It is applicable to a wide variety of academic disciplines, from the physical and social sciences to the humanities. Statistics are also used for making informed decisions.
Statistical methods can be used to summarize or describe a collection of data; this is called descriptive statistics. In addition, patterns in the data may be modeled in a way that accounts for randomness and uncertainty in the observations, and then used to draw inferences about the process or population being studied; this is called inferential statistics. Both descriptive and inferential statistics comprise applied statistics. There is also a discipline called mathematical statistics, which is concerned with the theoretical basis of the subject.

Liability of Past Members

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A past member (i.e., List B contributory) shall not be liable to contribute

1. If he had ceased to be a member of the company one year or more before the

commencement of the winding-up.

2. In respect of any debt or liability of the company contracted after he ceased to

be a member.

3. If it appears to the Court that the present members will be able to satisfy the

contributions required to be made by them.

If a company goes into liquidation more than a year after the forfeiture of certain shares for non-payment of calls, the owners of such shares would be liable not as contributories, but as debtors of the company {Ladies’ Dress Association Ltd. V s. Pulbrook (1900) 2 QB 376]. The only effect of forfeiture is that the shares pass out of their hands, but the liability incurred previously to pay the call money remains [Shiromani Sugar Mills Ltd. Vs. Debi Prasad (1950) 20 Compo Cas. 296 (All)].

If transferees fail to pay the calls made in respect of the shares transferred to them, the shares will be forfeited for the benefit of the company; and the transferors will be liable to be placed on the list of contributories as past members of the company, if the shares were transferred within a year before the commencement of winding-up

[Accidental Marine Insurance Corpn., In re (1869) 4 Ch. App. 266]. Successive transfers of

the same shares made immediately before one year of winding-up would result in all the past owners of the said shares being treated as past members. However, their liability as contributories would arise only if it is apparent that the present members are unable to satisfy the debts of the company [Land Credit Company of Ireland, Humby’s case, In re 20 WR 718 and Kellock Vs. Enthoven (1874) LR 9 QB 241].

It may be noted that the plea of voidability or illegality of contract to take shares cannot be taken after winding-up to avoid liability as a contributory. The contract so vitiated should be sought to be set aside before the company goes into liquidation. The original contract may supply the reason for his name having been placed on the register in respect ( f the shares, but after the winding-up his liability in respect of the shares arises ex lege and ex contractu [Hansraj Gupta Vs. N.P. Asthana (1932) 2 Compo Cas. 543 (PC) and Mahomed Akbar Abdulla Fazalbhoy Vs. Official Liquidator (1950) 20 Compo Cas 26 (Bom.). On a winding up order being made the liability of a contributory becomes an absolute statutory liability. The unpaid calls can be recovered even though barred by limitation when the winding-up order is made [People’s Insurance Co. Ltd., In re (1962) 32 Compo Cas. 632 (Punj.) and T. M. Mathew Vs. Industrial Bank Ltd. (1972) 42 Compo Cas. 55 (Ker.)].

SECRETARIAL PRACTICE

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SECRETARIAL PRACTICE
1. Draft:
(a) the notice of the first Board meeting,
(b) the agenda of the first Board meeting,
(c) the agenda of the subsequent Board meeting, and
(d) a notice cancelling a Board meeting and issuing notice for a fresh Board
meeting.
(a) Notice of the First Board Meeting
ABC Ltd.
To
(Director)
Dear Sir /Madam,
This is to inform you that the first meeting of the Board of Directors will be held
at the Registered Office of the company on 5th September at 3 p.m. to transact the
business as per the enclosed agenda.
1. Election of the chairman of the meeting.
2. To produce the Certificate of Incorporation, the Memorandum and the Ar
ticles of Association.
3. Election of the Chairman of the Company.
4. Appointment of Managing Director, Secretary, Solicitors, Auditors and
Bankers.
5. Adoption of the company’s seal.
6. Fixing quorum for the Board’s meeting.
7. Consideration and approval of the opening of a Bank account and its opera
tion.
8. Approval of the statement of preliminary expenses by the promoters.
9. Authorising the Secretary to purchase books and registers as are necessary.
10. Consideration and approval of the draft of prospectus.
11. Consideration and adoption of the preliminary contracts and underwriting
contracts.
12. Consideration of the application to the stock exchange for the listing of shares. 13. Any other business with the permission of the Chair.
14. Fixing the date of the next Board meeting.
(c) Agenda of the Subsequent Board Meeting
Agenda
1.To read and approve the minutes of the last Board meeting.
2.To consider application for transfer of shares.
3.To consider letter of resignation of the Manager of Kanpur Branch.
4.To consider trading returns for the quarter ended 19....
5.To fix the date for the closure of Register of members.
6.To consider the annual accounts of the company for the year ended........
7.To consider the Auditors’ report and the draft of the Directors’ report.
8.To consider appropriation of profit and recommendation of dividends.
9.To take note of Directors liable to retire by rotation.
10.To authorise the Secretary to print the annual accounts and other documents
and to issue notice of the annual general meeting.
11.To consider any other business with the permission of the Chair.
Draft the minutes of the first Board meeting of a public limited company. YLns.
Minutes of the First Board Meeting
Minutes of meeting of the Board of Directors held at on day of Ltd.
Present in Attendance

Provision contrary to the specific provisions

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It may be noted that Articles cannot contain a provision contrary to the specific provisions of the Act. Any such stipulation .shall be void. Again, Section 36 of the Companies Act constitutes a binding relationship between the company and the members; not between the company and the Directors. Thus, under the present law, service of notice to James at his foreign address is not mandatory. However, in view of the present liberalised scenerio, law needs to be amended.
The Board of Directors of MIs. Infotech Consultants Limited, registered in Calcutta, proposes to hold the next Board meeting in the month of May, 2000. They seek your advice in respect of the following matters:
(i)Can the Board meeting be held in Chennai, when all the Directors of the
company reside at Calcutta?
(ii)Whether the Board meeting can be called on a public holiday and that too after
business hours as the majority of the Directors of the company have gone to
Chennai on vacation.
Is it necessary that the notice of the Board meeting should specify the nature
of business to be transacted?
Advise with reference to the relevant provisions of the Companies Act.
(i)Place of Board Meeting. Section 301(5) provides, inter alia, that the register of contracts shall be kept at the Registered Office of the Company. The said register has to be made available at the Board meeting also. Accordingly, if a Board meeting is held at a place other than the Registered Office, it will involve removal of the register of contracts outside the Registered Office and thus resulting in violation of the provisions of Section 301(5). The Department of Company Affairs has, however, clarified that it would be sufficient compliance with the provisions of Section 301(5) if the company gives adequate notice to its shareholders, either once for all or from time to time indicating the prescribed periods during business hours and the days on which they may inspect the register kept under Section 301(2) at the Registered Office. In view of the aforesaid clarification, it is clear that it is legally possibly to hold Board meeting at any place if the requisite notice to shareholders has been given. Thus, in the given
problem, the Board meeting may be held in Chennai.

(ii) Board Meetings on Public Holidays. Under Section 288(1) adjourned Board meeting cannot be held on a public holiday. The Company Law Board has, therefore, advised that Section 288 does not prohibit a company from holding its original Board meetings on public holiday except where Articles of Association provide otherwise. Accordingly, the Board meeting may be held on a public holiday. Again, the Act is
silent about the time of holding the Board meeting. Therefore, there should be no objection to the meeting being held outside the business hours.
(iii) Agenda of the Board Meeting. The Companies Act does not require an agenda for the meeting of the Directors to accompany the notice thereof. Section 286 only requires that notice of every meeting of the Board of Directors of a company shall be given to every director. Thus, any business can he transacted at a Board meeting. However, in case of some matters, prior notice is a practical necessity. These include appointment as Managing Director of a person who is already Managing Director /Manager of another company (Section 316); inter-company loans and investments (Section 372 A); appointment of a person as Manager who is already Managing Director /Manager of another company (Section 386).
P. 10. Cosmos Ltd. has 11 directors out of which 4 were abroad. One of such directors had left his foreign address for all communications. In regard to an urgent matter, which could not wait till the next meeting, it circulated a resolution for approval of the directors, 4 out of 7 directors in India approved the resolution. Cosmos Ltd.
claimed that the resolution was passed. Examine. For provisions of the Act, see Answer to Accordingly, resolution is invalid. The resolution by circulation must have been approved by all the directors in India, seven directors who were in India or by majority of total number of directors who were entitled to vote, Le., six directors.

Relevant provisions of the Companies Act

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Section 286 of the Companies Act, 1956 provides that notice of every meeting of the Board of Directors of a company shall be given in writing to every Director for the time being in India, and at his usual address in India to every other Director (Sub-section (1)). Where however, notice is not given as required but all Directors attend the meeting and do not object to the absence of notice, or where the absentee Directors do not complain of want of notice, the proceedings at the meeting will not be invalid, especially, if they are ratified at a subsequent meeting at which the absentee Directors are present. It is open to a regularly constituted meeting of the Board of Directors to ratify that action which, though unauthorised, is done on behalf of the company. Ratification generally relates back to the date of the act ratified. [Bharat Fire tlnd General Insurance Co. Ltd. Vs. Parmeshwari Prasad Gupta, AIR 1968, Delhi; see also Parmeshwari Prasad Gupta Vs. Union of India (1974)
On the basis of the above, answer to the first question is that the meeting and proceedings both are quite valid. Answer to the second question is that the Board of Directors are quite competent to ratify the decisions at a later regularly constituted meeting of the Board. The ratification in this case will relate back to the date of the act ratified.
Advise the company with reference to the relevant provisions of the Companies Act about sending notice of board meetings to the following Directors:
(i)Mr. Rohit, a Director, states that he will not be able to attend the next board meeting.
(ii) Mr. Bipin Ram goes abroad for four months from 4.1.1999 and an alternate
Director has been appointed in his place.
(iii)Mr. James is a Director residing abroad representing the foreign collaborator
and the Articles of Association of the company provide for sending notice to
such Directors.
According to Section 286 of the Companies Act, 1956 notice of every board meeting shall be given in writing to every Director for the time being in India and at his usual address in India to every other Director.
(i)Notice should be given even if Mr. Rohit expressed his inability to attend the next Board meeting. Otherwise Section 286(1) will be violated. [In re: Portuguese Consolidated Copper Mines Ltd. (1889) 42, Ch. D. 160 (CA)].
(ii) Although there is no legal precedent in this regard, it would be a prudent practice (under Section 286) that notice should be served to both, the alternate. Director as well as the original Director Mr. Bipin Ram, who is outside India, at his usual address in India.
(iii)In the case of a company having foreign collaboration, Articles generally provide that notice ofBoard Meeting should be sent by Air Mail. But a question crops up whether such provision is valid, as Section 286 (1) requires service of such notice to a Director to be sent at his usual address in India.

Total strength of Directors

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The proviso to Section 287(2) cannot also be availed of as the interested Directors, who are three, are not equal to or more than two-thirds of the total strength of Directors. The figure representing two-thirds will be 4 by rounding off fraction, if any. Hence, it can be assumed that the allotinent made at the Board meeting will not be valid.
As per Section 288 of the Companies Act, 1956 if a meeting of the Board could not be held for want of quorum, then unless the Articles provide otherwise, the meeting shall automatically stand adjourned to, the same day in the next week, at the same time and place or if that day is a public holiday till the next succeeding day which is not a public holiday.
Sub-section (2) of Section 288 further provides that the provisions of Section 285 shall not be deemed to have been contravened merely by reason of the fact that meeting of the Board which has been called in compliance with the terms of that section, could not be held for want of quorum.
©. According to Section 286 of the Companies Act, 1956, notice of every meeting of the Board shall be given in writing to every Director in India and to every other Director at his usual address in India. As this is a compulsory requirement, failure to do so will make the meeting and the resolution passed at the meeting null and void. [Kllldip Singh Dhillon Vs.
Paragon Utility Financiers (P) Ltd.’”(1988)
The Companies Act contains no provision either specifically permitting
or prohibiting inspection by the shareholders of the minutes of the meet
XYZCompany Limited calls a meeting of the Board of Directors without giving notice to Directors as required under the Companies Act, 1956. The meeting is attended by all the Directors. None of the Directors of the company objected to the absence of notice. The proceedings of the meeting are ratified later by the Board of
I Directors at a regularly constituted meeting.
Decide giving reasons for your answer whether:
(i) the meeting and the proceedings are valid?
(ii)the Board of Directors are competent to ratify at a later meeting the above
proceedings

Accordance with the provisions of the Companies Act

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In a Board meeting, a few Directors raise disagreements on the minutes of the earlier Board meeting alleging that the decisions were recorded wrongly.
Advise the Chairman
The minutes of a Board meeting once recorded cannot be changed. However the current meeting, the disagreeing Directors, with the permission of the Chairman,
may move a motion for passing a resolution modifying the earlier resolutions recorded in the minutes which, they feel, have been wrongly recorded.
During the year 1993, A Ltd. held four meetings of the Board on 2nd Jan. 1993, 10th May 1993, 16th Oct. 1993 and 31 st Dec. 1993. Examine whether this was in accordance with the provisions of the Companies Act, 1956?
As per Section 285 of the Companies Act, in case of every company, a meeting of its Board of Directors shall be held at least once in every three calendar months and at least four such meetings shall be held in every year. In the present case no meeting was held during the quarter July-September, 1993. Hence Section 285 has been violated.
(a) The Articles of Association of a company fixed 3 as the quorum for a meeting of the Board. At a meeting of the Board, all the 5 Directors were present. They allotted the shares of the company to 3 of the Directors.
Is it valid.? .
(b) A meeting of the Board of Directors of a company was convened to be
held on 30th December, 1994, but the meeting could not be held for want
of quorum. The last meeting of the Board of Directors was held on 14th August, 1994. Advise.
(c)By an oversight, a notice of meeting of the Board was not sent to one of
the Directors who was in India. Is the meeting valid?
(d) A member wants to inspect the minutes book of the meetings of the
Board. Advise.
(a)The provisions in regard to quorum for a Board meeting are contained in Section 287 of the Companies Act, 1956. It is provided therein that the quorum for a Board meeting shall be one-third of the total number of Directors of a company (any fraction contained in that one-third shall be rounded off as one) or two Directors whichever is higher. It is further provided that where at any time the number of interested Directors exceeds or is equal to two-thirds of the total strengths, the number of disinterested Directors present at the meeting being not less than two shall form the quorum. The company is, however, free to fix a higher quorum for the Board meeting.
Viewed in the context of the above provisions, the company has fixed the quorum for a Board meeting at 3. In this case, out of five Directors present at the meeting, the number of interested Directors is three. As such, the remaining two Directors who are n01 interested donot cons.titute a quorum and hence the meeting cannot be validly convened. Therefore, the allotment of shares at the aforesaid meeting is not valid, (Re: Sir Hormllsji & Wadia AIR 1921 Bombay 372).

The Board of Directors of a public company

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The Board of Directors of a public company met on three times in the previos year, the fourth meeting though called could not be held for want of quorum on two occasions successivy. Discuss whether any provisions of the Companies Act has been contravened.
Or
Examine, with reference to the relevant provisions of the Companies Act, 1956.
the validity/legality of the following:
A meeting of the Board of Directors of OPO Co. Ltd. due to be held on 30.9.2001 did not take place for want of quorum. As a result, the Company did not hold any Board meeting for the quarter ended 30.9.2001 and there is a complaint that the company
has violated the provisions of the Act in this regard. [C.A. (Final) Nov., 2001J
As per Section 285 of the Companies Act, 1956, a company must holg
of its Board of Directors at least once in every three calendar monthsanatl\ere should be ac least four meetings of the Board every year. But, Section 288(2) provides that
where a meeting was called but could not be held for want of quorum, there is no contravention of any provisions of the Companies Act, 1956.
The Auditor of a company wanted to see the minutes book of Directors’ meetings. The Chairman of the company refused on the ground that matters of confidential nature were contained therein. Advise the Auditor.
Under Section 227(1) of the Act, the Auditor of a company has the right of access at all times to all books and information which he considers necessary for the proper performance of his duties, even though the information is of a confidential nature. He has, accordingly, a statutory right to inspect the Director’ minutes book. In case, he is denied access to it, he should state that in his report alongwith the reasons therefor. The Board of Directors are bound to give the fullest information and explanations in their report on the accounts of the company, on every reservation, qualification or adverse remark contained in the Auditor’s report.

resolution by circulation

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Thus, no ‘resolution by circulation’ can be passed if the number of Directors then present in India is less than the number which is necessary to form the quorum had there been a meeting of the Board. Similarly, no ‘resolution by circulation’ can be passed by a Committee of Directors if at the relevant time the number of Directors present in India out of the total number of Directors forming the committee is less than the quorum fixed for the committee.
Since passing a resolution by circulation does not involve any meeting, neither any notice nor any agenda showing the items of the business is necessary. However, Section 289 requires that while sending the draft of the resolution necessary papers are also sent therewith. “Necessary Papers” would refer to those papers or documents which would explain the purpose of the resolution as also the urgency for passing the same by circulation.
PRACTICAL PROBLEMS
1. The Articles of Association of a company provide that the meeting of the Board of Directors ofthe company will be held on the last Friday of every month. The Secretary of the company as a result does not serve the notice to the individual Directors of the company. Consequently, a meeting of the Board of Directors was held on 23rd February, 1996. The meeting was attended by all the Directors with the exception of two Directors out of a total of 10 Directors and certain resolutions were passed. The two absentee Directors object to the meeting and the proceedings of the meeting for want of notice. Referring to the provisions of the Companies Act, 1956, decide:
(i) Whether the objection raised by the two absentee Directors is valid?
(ii) Would your answer be the same in case the Secretary of the company, instead
of sending notice on a usual format to the individual Directors, sent a copy of
the Articles of Association to each one of the Directors?
Period and form of notice. Section 286 does not specify any form of notice or period of notice. Usually, a week’s notice is considered sufficient. However, if the Articles provide that Board meetings will be held on fixed days of every month or where the directors are duly informed that in future all meetings of the Board will be held on a fixed day of every month (say, first Saturday of every month), it will be sufficient compliance with the statute-A Chettiar Firm V s. Kaleshwar Mills [1957] But, even where meetings are held on a fixed day of every month, a notice is usually sent to the Directors as a reminder.

Specifically permits delegation

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Regulation 77 of Table A specifically permits delegation, stating that the Board may, subject to the provisions of the Act, delegate any of its powers to committees consisting of such number of members of its body as it thinks fit. Any committee so formed shall conform to any regulations that may be imposed on it by the Board in the exercise of powers delegated to it.
The resolution delegating the powers generally contains the extent of authority granted to the Committee. The Committee cannot further delegate its powers unless specifically empowered or authorised in this regard.
The provisions relating to the meetings of a committee of directors are by and large the same as those of the directors’ meetings. For example, a chairman presides over the meetings, questions arising at any meefing of a committee shall be determined by a majority of votes of members present and in case of tie, the chairman shall have a
casting vote .
Minutes of the proceedings are also to be made but these shall not be open for inspection to general public (Section 193).
© Directors’ Attendance Book
In order that the names of Directors attending a Board meeting may be properly recorded and to fix responsibility for acts done at a meeting, it is necessary to maintain
Section 289 of the Companies Act, 1956 deals with ‘resolution by circulation’. It may be noted that only the Directors and their committees are authorised to pass a resolution by circulation. Under the Act certain powers are exercisable by the Board by passing resolutions at the duly convened Board meetings only. For instance, Section 292 specifically confers certain powers on the Board to be exercised by Board only at its meetings. But where the Act is 1’ilent, the Board is empowered to take decisions by passing resolutions by circulation.
Further, Section 289 provides that no resolution shall be deemed to have been duly passed by the Board or by a Committee thereof by circulation, unless the resolution has been circulated in draft, together with necessary papers, if any, to all the Directors, or to all the members of the committee, then in India (not being less than the quorum fixed for a meeting of the Board or Committee, as the case may be), and to all other Directors or members at their usual address in India, and has been approved by such
. of the Directors as are then in India, or by a majority of such of them, as are entitled to
vote on the resolution.

Explanations to the Directors

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At the Meeting.
(I) To obtain signatures of the Directors present in the Directors’ Attendance Book.
(2) To help the Chairman by ascertaining whether quorum is present or not as per Articles.
(3) To read the notice of the meeting if required or if requested by the Chairman.
(4) To read the Minutes of the last Board meeting if requested by the Chairman and to obtain the signature of the Chairman to the minutes when it is
. approved by the meeting.
(5) To assist the Chairman in conducting the meeting including taking of votes.
(6) To supply necessary information and explanations to the Directors when required.
(7) to take notes of the proceedings in the agenda paper including exact terms of the resolutions passed.
After the meeting.
(I) To prepare the minutes from his own and Chairman’s agenda notes and enter the same in the Minutes Book within 30 days of the meeting.
(2) To circulate the minutes amongst the Directors.
(3) In case of a Board meeting held to approve the draft profit and loss account and balance sheet, appropriation suggested by the Board, etc., to allow inspection of the draft by the Auditors.
(4) Where some agreement has been approved, to arrange for the sealing of the agreement with the Common Seal, after entering the same in the Seal Book.
(5) To carry out the instructions issued to him by the Board meeting and to carry out the statutory duties specifically imposed on him.
(6) To start collecting and preparing materials for the next
Board meeting.
(a) Disinterested Quorum
As per Section 287 of the Companies Act, the Quorum of a Board meeting shall be 1/3rd of the total strength of the Board or two Directors, whichever is higher. In computing the total strength, the nun;tber of Directors whose places are vacant at the time as well as interested Directors shall be excluded. If at any time the number of interested Directors exceeds or is equal to 2/3rd of the total strength, then the remaining disinterested directors (not being less than two) shall be the quorum.
(b) Committee of Directors.
Directors must, as a general rule, act at Board meetings. The maxim ‘Delegatus non-protest delegare’, that is, a delegatee cannot further delegate, applies to Directors, the Directors being agents enjoying delegated authority of the company. However, the rule is not inflexible. Delegation as per the provisions of the Articles will be proper and valid. A delegation may be made by the Board of any of its powers to a committee consisting of its own members if it is authorised by Articles or the Act.
Section 292 specifically empowers the Board to delegate the following powers to
a committee of Directors, etc.:
(a) to borrow moneys otherwise than on debentures;
(b) to invest the funds of the company; and
© to make loans.

State the provisions relating

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Where minutes of proceedings of any Board meeting have been properly kept,
until the contrary is proved:
(i) the meeting shall be deemed to have been duly called and held;
(ii) all proceedings thereat to have duly taken place;
(iii) all appointments of Directors made at the meeting shall be deemed to be
valid (Section 195).
State the provisions relating to signing of minutes of a Board meeting.
Explain the duties of a company secretary in connection with Board meetings.
Duties of Company Secretary with respect to Board Meetings
The Secretary plays an important role in the holding of Board meetings. As the principal officer of the company, he must ensure that every Board meeting is properly convened and duly constituted and that the provisions of the Act, Articles and standing orders are complied with in the conduct of these meetings. The principal duties of the Secretary relating to Board meetings may be outlined as follows:
Before the Meeting.
(I) If the date, time and place of the Board meeting have not been fixed by the preceding meeting, to fix the same in consultation with the Chairman of the Board.
(2) To prepare the agenda in consultation with the chairman or as directed by the authority convening Board meetings. In the absence of such provision, to ‘prepare and issue notice of the meeting as per directions of the Chairman or the Board. Also to ensure that the length of the notice is as per Articles.
(3) To send notice of the meeting alongwith the agenda to all Directors in India and at the usual addresses in India of all directors not in India.
(4) To receive resolutions from Directors proposed to be discussed at the meeting and circulate them among other Directors.
(5) To issue invitation letters to Solicitors, Auditors, etc., who are required to attend the meeting by special invitation.
(6) To prepare and keep in readiness statements and reports regarding the company’s trading activities, documents including cheques, contracts, transfer instruments, etc., for sealing and signatures, and other materials likely to be required at the meeting.
(7) To keep ready the Bank pass book and certificate of cash balances, the Minutes Book of Board Meetings, indexed copies of Memorandum and Articles, the company’s seal, etc.
(8) To arrange for the seating arrangement, stationery and other equipment necessary for holding the meeting.

Proceedings of Board meetings

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“RESOLVED that the following powers be and are hereby delegated to Sarvashri X, Y and Z and they are empowered to exercise the power so long’ as they are in the service of the company and notwithstanding change in their designations.”
(a) State the provisions of the companies Act, 1956 regarding the recording and
signing of minutes of proceedings of Board meetings.
(b) What matters must be contained in the minutes of a Board meeting?
(e) Can a Director insist that his dissent be recorded in the minutes of Board
meeting on a particular decision?
(d) What presumptions are to be drawn from the minutes of a Board meeting?
J2Lns .
(a)
As per Section 193 of the Companies Act, 1956, every company must cause minutes of all proceedings of every meeting of its Board of Directors to be entered in the book kept for the purpose, within 30 days of the conclusion of such meeting. The pages of the book are to be consecutively numbered and each page is to be initialled or signed and the last page of the record of proceedings of each meeting must be dated and signed by the chairman of the said meeting or the chairman of the next succeeding meeting. In no case the minutes are to be attached to the minutes book by pasting or otherwise.
(b) The minutes of each Board meeting must contain a fair and correct summary of the proceedings thereat, including all appointments of officers. They must also contain the names of the Directors present at the meeting. In respect of each resolution passed at the meeting, the names of the Directors, if any, dissenting from, or not concurring in, the resolution must be stated (Section 193).
© As stated above, the minutes of Board meeting must contain the names of the
Directors, if any, dissenting from any resolution passed at the meeting. Accordingly, a Director can insist that his dissent be recorded in the minutes. However, the Chairman of the meeting may, in his discretion, not include any matter in the minutes which in his opinion is, or could reasonably be regarded as, defamatory of any person or is irrelevant or immaterial to the proceedings or is detrimental to the interests of the company, The chairman of the meeting shall exercise an absolute discretion in regard to the inclusion or non-inclusion of any matter in the minutes on the grounds specified above.

Minutes of Board Meetings

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Minutes of Board Meetings
While preparing minutes of the proceedings of the meetings of the Board of Directors of a company, !here are certain important statutory requirements, which should be taken care of. These are:
(a) Minutes of the meeting may be drafted in the form of a series of paragraphs
numbered consecutively with relevant headings;
(b) Minutes should give contents of the item giving serial number of the item in
the Agenda, brief subject heading, full terms of the resolutions adopted
including the statistical details, etc.
© Place, date and time of the meeting should be stated.
(d) Give names of the Directors present at the meeting [Section 193(4)(a)].
(e) Give names of the Directors absent and asking for the grant of leave of absence
by Board.
(j) Give names of the Directors, if any, dissenting from or not concurring in the
resolutions under respective items of business.
(g) Mention notice given by Directors, if any, with regard to their directorships
in other companies and their shareholdings as per Section 299 (3) of the Act.
(h) Ref:::rence about interested directors abstaining from volting is necessary. (i) Mention the fact of unanimity of decisions of Directors as contemplated in
Sees. 316, 372A and 386. (j) Incorporate the appointments of officers made at the Board meetings. (k) Chairman’s initials on every page and full signatures along with date on the
last page is necessary .
While drafting minutes of the Board meeting with regard to the delegation of powers, both financial and administrative, to officers, care should be taken to so draft the resolutions as to provide for automatic cancellation of the power delegated when the delegatee ceases to be in employment of the company. Likewise, during the course of employment of a person in the company, the designation of delegatees is frequently change on promotion or otherwise. Care should be taken so that necessity of going to the ‘Board too often may be ayoided. In such cases, it will be useful to adopt the following type of a resolution:

Quorum at the time of transacting the business

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Quorum need not be present throughout the Board meeting.
The transactions at a Board meeting, the notice of which was not sent to one
of the Directors.
(a)Section 287 of the Companies Act, 1956 provides that quorum for a meeting of the Board of Directors shall be 1/3rd of its total strength or two Directors, whichever is higher.
‘Total strength’ means the total strength as determined in pursuance of the Act, after deducting therefrom the number of the Directors, if any, whose places may be vacant at the time. It further provides that where the number of interested Directors exceeds or is equal to 2!3rds of the total strength, the number of the remaining Directors, who are not interested being not less than two, shall be the quorum during that time.
In the Board meeting, no business can be transacted unless a quorum is present at the time of transacting the business. Even if a quorum was present when the meeting began, a resolution, passed after the quorum ceased to be there, is invalid. It is required to be present throughout the meeting.
However, if the Articles of Association of a company contain an article on the lines of Regulation 75 of Table A, as given below, the acts of the Board shall be valid for certain purposes although the members present were less than the specified minimum.
“Regulation 75. The continuing Directors may act notwithstanding any vacan .
cy in the Board but if and so long as their number is reduced below the quorum fixed by the Act for a meeting of the Board, the continuing Directors may act for the purpose of increasing the number of Directors to that fixed for the quorum, or for summoning a general meeting but for no other purpose.”
(M As per Section 286 of the Companies Act, 1956 notice of every meeting of the
Board of Directors of a company shall be given in writing to all the Directors
for the time being in India. If notice of the meeting is not given to one of the
Directors, meeting of the Board of Directors is invalid and the resolution
passed at such meeting is inoperative. In Parmeshwari Pd. Gupta Vs. Union of
India (1974), the Supreme Court held that notice to all directors was essential
for the validity of any resolution passed at the meeting. Where, however,
notice is not given as required but all the Directors attend the meeting and do
not object to the absence of notice, the proceedings of the meeting will not be
invalid.

Board of Directors

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The company can recover the amount of Rs. 5 lakhG paid on the ground that
Mr. Doubtful is not entitled to any compensation, because he is guilty of corrupt
practices
According to Section 318, compensation can be paid for loss of office but only to a managing director or manager-director or a whole-time director. The compensation payable is limited to the average remuneration actually earned by such director during the three years period immediately preceding the date on which he ceased to hold the office and multiplied for the unexpired period of his term or for three years, whichever is shorter. Further, no compensation will be payable to such a director if the company goes into winding up within a period of 12 months from the date of cessation of his office.
Proviso to sub-section (4) of Section 318] Again, the company is not bound to pay compensation to Mr. Doubtful if he had been found guilty of any fraud or breach of trust or gross negligence and mismanagement of the affairs of the company [Section 318 (3) (e)]. However, it is not proper for the company to withhold the payment of compensation on the basis of allegations alone unless there is a proper
Deepika, one of the directors in XYZ Company Limited, did not attend the Board of Directors’ meetings from January 1 to March 31, 1992, without obtaining leave from the Board, though the company had sent her notices for the meetings. Two meetings were held between, 1st January 1992 and 31st March, 1992. There were five meetings of the Board of Directors, held during the financial year 1991-92, out of which Deepika had attended three meetings. The last meeting attended by her was held on 1st December, 1991. There were no further meetings of the Board of Directors in Derember, 1991. After the commencement of the new financia year 1992-93 (commencing 1st April 1992), the company called a meeting of the Board of Directors on 1st May, 1992, for which no notice was sent to Deepika, on the ground that she had ceased to be a director under the Companies Act. The meeting was held as scheduled and certain important decisions were taken thereat. Deepika, on coming to know of the meeting on 1st May, 1992, challenges the company’s calling of the Board of Directors’ meeting and decisions taken thereat, on the ground of omission on the part of the company to send notice for the meeting to her, and wants to restrain fuecompany from implementing the decisions taken at the meeting. Decide, giving reasons:
(i)Whether Deepika would succeed in restraining the company from im
plementing the decisions taken at the meeting of the Board of Directors?
(ii)Would your answer be still the same in case Deepika had attended only
two of the five meetings prior to 1st }anu:uy, 1992? (May, 1992)
XYZ Company Limited calls a meeting of the Board of Directors without giving notice to Directors as required under the Companies Act, 1956. The meeting is attended by all the Directors. None of the Directors of the company objected to the absence of notice. The proceedings of the meeting are ratified later”by the Board of Directors at a regularly constituted meeting.
Decide giving reasons for your answer whether:
(i)The meeting and the proceedings are valid?
(ii) The Board of Directors is competent to ratify at a later meeting the above

Company Law Board

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As per Section 388B, the Central Government has the power to make a reference to the Company Law Board against any managerial personnel. The reference can be made on grounds including that the person concerned has, in the conduct and management of the affairs of the company, been guilty of fraud, misfeasance or persistent negligence. Thus, the Central Government, if satisfied with the contents of the complaint may make a reference to the Company Law Board with a request to inquire into the case and record a finding whether or not Mr. Clever is a fit and proper person to hold the office of Managing Director. The application made to CLB must contain a concise statement of the circumstances and material as the Central Government may consider necessary for the purpose of the enquiry. The CLB will hear all the parties viz.
(1) The Central Government;
(2) the Respondent, Mr. Clever; and
(3) the Company.
The CLB has powers to pass any interim order to the effect that the respondent Mr. Clever shall not discharge any of the duties of his office until further orders and appoint a suitable person in place of the respondent.
At the conclusion of the hearing, the CLB will record its finding. If the finding of the CLB is against the respondent, the Central Government, by order, shall remove him from office, as provided in Section 388 E (1) of the Companies Act, 1956.
The person against whom such an order is passed is debarred from holding the post of director, etc., for a period of 5 years from the date of order of removal. Also, no compensation is payable to him for termination of office.
Mr. Doubtful was appointed as Managing Director of Carefree Industries Ltd. for a period of five years with effect from 1.4.1998 on a salary of Rs. 121akhs per annum with other perquisites. The Board of Directors of the company, on coming to know of certain questionable transactions, terminated the services 0f the Managing Director from 1.3.2001. Mr. Doubtful termed his removal as illegal and claimed compensation from the company. Meanwhile, the company paid a sum of Rs. 51akhs on ad hoc basis to Mr. Doubtful pending settlement of his dues. Discuss whether:
(i)The company is bound to pay compensation to Mr. Doubtful, and, if so, how
much.

Public financial institution created by special Act

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The present problem is based on the facts of T.R. Pratt (Born.) Ltd. v. £.D. Sasoon & Co. Ltd. (1936) 6 Compo Cas. 90. In this case, it was held that the money having been borrowed and used for the benefit of the principal Le., the company either in paying its debts, or for its legitimate business, the company cannot repudiate its liability on the ground that the directors had no authority from the company to borrow.
Your company’s articles of association do not contain any provision for nomination of director by a financial institution. The company has borrowed long-term funds from the lOBI and ICICI Ltd. ‘A’ and ‘B’ are nominated by the said lenders respectively on the Board of your company. Advise whether the company can accept
the nominations.
In case of some financial institutions, the relevant Act by which they have been constituted, provides for right of nomination by them to all assisted companies. This provision supersedes the provisions in the Companies Act, 1956 and the Articles of Association of the assisted companies in regard to the appointment, retirement of directors,. holding of qualification shares, determination of directors liable to retire by rotation, etc. lOBI is a public financial institution created by special Act of the Parliament and that Act has overriding provision in this regard.,Therefore, its nominee’ A’ can be appointed on the Board of the conwany even if the articles of the company do not contain any provision in this regard. .
However, ICICI Ltd. is a company’registered under the Companies Act, 1956. Therefore, in case of appointment of nominee of ICICI Ltd. the provisions of the Companies Act, 1956 have to be complied with. In such case nominee director can be appointed only if there is provision in the Articles of Association of the company and if such nomination is in conformity with the provisions of Section 255 and 256 and other related provisions of the Companies Act, 1956. Therefore, for the appointment of B who is nominee of ICICI Ltd., the company will have to amend its Articles of Association to incorporate a provision for nomination of director by Financial Institution before he is appointed on the Board. This nomination should be within overall
maximum number of directors fixed by Articles. .
X Ltd. is being managed by Mr. Clever as the Managing Director. Serious allegations have been made by some shareholders and creditors of the company that the Managing Director has misused his position and caused enormous loss to the company. The said shareholders and creditors of the company make a complaint to the Central Govemment to intervene and provide relief to them. Their main prayer is that the Managing Director should be removed from the post. Explain the powers ofthe Central Government in this regard.

Liability under the Companies Act

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The following provisions of the Companies Act, 1956 make directors personally liable

to third parties: .

(a) Prospectus. Failure to state any particulars as per the requirements of Section 56 and Schedule II or mis-statement of facts in a prospectus renders a

director personally liable for damages to the third party. Section 62 provides that a director shall be liable to pay compensation to every person who

subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of any untrue statement

included therein. He may, however, escape liability where he proves his innocence.

(b) With Regard to Allotment. Directors may also incur personal liability for:

· irregular allotment, i.e., allotment before minimum subscription is raised or without a copy of the statement in lieu of prospectus having been filed with the

Registrar of Companies [Sec. 71 (3)].

· for failure to repay application money in case of minimum subscription having not been received [Sec. 69 (5)].

· for failure to repay application money when application for listing of securities is not made or is refused [Sec. 73].

(c) Unlimited Liability. Directors will also be held personally liable to the third parties where their liability is made unlimited in pursuance..of Section 322 (i.e.,

vide Memorandum) or Section 323 (i.e., vide alteration of Memorandum by passing a special resolution).

(d) Fraudulent Trading. Directors may also be made personally liable for the debts or liability of a company by an order of the Court under Section 542.

Such an order shall be made by the Court where directors have been found guilty of fraudulent trading.

Discuss the liabilities of directors (a) to the company I and (b) to third parties,

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Liability to the Company

The liability of a director to the company may arise from :

(i) breach of fiduciary duty,

(ii) ultra-vires acts,

(iii) negligence, and

(iv) breach of trust and misfeasance

(i) Breach of Fiduciary Duty. Where a director acts dishonestly in disregard to the interests of the company, he will be held liable for breach of fiduciary

duty. Most of the powers of directors are ‘powers in trust’ and, therefore, should be exercised in the interest of the company and not in the interest of the

directors or any section of members. Thus, where the directors, in order to forestall a takeover bid, transferred the unissued shares of the company to

trustees to be held for the benefit of the employees, and an interest free loan from the company was advanced to the trustees to enable them to pay for

the shares, it was held to be a wrongful exercise of the fiduciary powers of the directors [Hogg vs. Cramphom Ltd. (1966) 3 All ER 420].

(ii) Ultra-vires Acts. Directors are supposed to act within the parameters of the provisionf of the Companies Act, Memorandum and Articles of Association

since these lay down the limits to the activities of the company and accordingly to the powers of the Board of Directors. The directors shall be held

personally liable for acts beyond the aforesaid limits being ultra vires. Thus, where the directors pay dividends or interest out of capital, they will be liable to

indemnify the company for any loss or damage suffered due to such act.

(iii) Negligence. The directors shall be deemed to have acted negligently in discharge of their duties and consequently liable for any loss or damage

resulting therefrom where they fail to exercise reasonable care, skill and diligence. However, error of judgement will not be deemed as negligence. It may

be noted that the directors cannot be absolved of the liability for negligence by any provision in the Articles [Section 201]. The Court may,

however, award relief to directors against such liability under Section 633 of the Act.

(iv) Breach of Trust and Misfeasance. Directors are the trustees for the moneys and property of the company handled by them, as well as the exercise of

the powers vested in them. If they act dishonestly or malafide in the exercise of their powers and performance of their duties, they will be liable for breach

of trust and may be required to make good the loss or damage suffered by the company by reason of such malafide acts. They shall also be accountable

to the company for any secret profits they might have made in transactions on behalf of the company.

Directors can also be held liable for their acts of ‘misfeasance’, i.e., misconduct or wilful misuse of powers. However, misconduct which is not wilful shall

not amount to’misfeasance’.Where a director has misapplied or misappropriated money or property of the company or has been guilty of breach of trust or misfeasance, the Court

may order him to repay the money or restore the property or to pay compensation [P.K. Nedangadi vs. Malayalee Bank Ltd., AIR 1971 S.c. 829].

(b) Liability to Third Parties

The discussion on liability of directors towards third parties may be grouped as under:

Duty to Attend Board Meetings. A number of powers of the company

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are exercised by the Board of Directors in their meetings held from time to time.

Although a director is not expected to attend all the meetings but if he fails to attend three consecutive meetings or all meetings for a period of three months whichever is longer, without permission, his office shall automatically fall vacant.

(g) Duty to Convene General Body Meetings. To convene statutory, annual general meeting and also extraordinary general meetings.

(h) Duty to Prepare Accounts. To prepare and place at the AGM alongwith the balance sheet and profit and loss account a report on the company’s affairs.

(i) Duty to Make Declaration of Solvency. To make a declaration of solvency in the case of a members’ voluntary winding up.

2. General Duties

General duties of directors are as follows:

(a) Duty of Good Faith. The directors must act in the best interest of the company. Interest of the company implies the interests of present and future

members of the company on the footing that the company would be continued as a going concern.

Accordingly, a director’should not make any secret profits. He should also not exploit to his own use the corporate opportunities.

(b) Duty of Care. A director must display care in performance of the work assigned to him. He is, however, not expected to display an extraordinary care

but that much care only which an ordinary prudent man would take in his own case [Re, City Equitable Fire Insurance Co.].

Section 201 states that a provision in the company’s Articles or in any agreement that excludes the liability of the directors for negligence, default,

misfeasance, breach of duty or breach of trust, is void. The company cannot even indemnify the directors against such liability.

(c) Duty not to Delegate. Director being an agent is bound by maxim ‘Delegatus non protest delegare’ which means ‘a delegatee cannot further delegate’.

Thus, a director must perform his functions personally. A director may, however, delegate in the following cases:

(i) where permitted by the Companies Act or Articles of the company.

(it) having regard to the exigencies of business certain functions may be delegated

to other officials of the company.

Section 256 further provides that if the AGM fails to fill up the vacancy caused by retirement and the meeting has not expressly

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resolved not to fill the vacancy it shall stand adjourned to the same day, time and place in the next week. If the adjourned meeting also fails to elect a director to fill up the

vacancy, the retiring directors shall be deemed to have been re-appointed unless the meeting has already resolved not to fill up the vacancy or a resolution

for re-appointment of a retiring director had already been moved in a meeting and lost, or he has expressed in writing his unwillingness to continue or he

has become disqualified or a resolution, whether special or ordinary, is required for his appointment or re-appointment.

It may be noted that aforesaid provisions of Sections 255 and 256 are applicable to a public company and a private company which is a subsidiary of a

public company.

Retirement of Directors where AGM is not held. A director who is to retire by rotation at an annual general meeting cannot continue in office after the last

day on which the AGM should have been held as required by Section 166 of the Companies Act. If

the AGM is not held on the last day on which it should have been held in accordance

money received by the directors shall be held in trust for the shareholders who have

sold their shares. .

Section 320 also provides that in pursuance of any agreement relating to any of the above transfers, if the director receives any payment from the

transferee within one year before or within 2 years after the transfer, it shall be accounted for to the company unless the director proves that it is not by

way of compensation for loss of office.Section 321 further provides that if the price paid to a retiring director for his share in the company is in excess of the price paid to other shareholders or

any other valuable consideration has been given to him, it shall also be regarded as compensation and should be disclosed to the shareholders.

. State the provisions of the Companies Act, 1956 relating to retirement of directors by rotation. In what manner does retirement of directors by

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What is the maximum number of directors who can be appointed in a public company on non-rotational basis, i.e., not subject to retirement in an annual general meeting? How is the appointment of such directors regulated in a private company?

Ylns. A company may have two types of directors-retiring and non-retiring. According to the Companies Act, unless the Articles provide for the retirement

of all the directors at every annual general meeting, at least 2/3rds of the total number of directors must retire by rotation. The rest will be non-retiring

directors [Sec. 255]. Thus, the strength of non-rotational directors can in no case be more than 1/3^rd of the total number of directors.

Regarding the manner in which the retirement of directors by rotation and filling up

of these vacancies will take place, Section 256 of the Companies Act provides as follows:

At the first annual general meeting of shareholders and at each subsequent annual general meeting, 1/3^rd of the retiring directors or the number nearest to

1/3^rd must retire by rotation. The retirement will take place in order of seniority, i.e., the longest in office shall retire first. In case of directors appointed on

the same date, the order of retirement will be determined by mutual agreement or by draw of lots. All retiring directors shall, however, be eligible for

re-election.

To illustrate, if a company has a total strength of nine directors and Articles do not

provide for retirement of all of them, then 2/3rds, i.e., 6 of them must be retiring directors. The other 3 shall be non-retiring directors. At the first annual

general meeting (AGM) and at each subsequent AGM, 1/3^rd of them or the number nearest to 1 /3^rd, in this case 2 directors, shall retire by rotation and

the vacancies filled up by election.

The listed companies, have to elect small shareholders’ nominee through postal ballot

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whereas unlisted companies may appoint such small

shareholders’ nominee if a majority of small shareholders recommend his candidature for the post of director in their meeting. The procedure for postal

ballot itself is very cumbersome for which a company has to follow new provisions introduced in Section 192A for passing of resolution by postal ballot.

3. In the Explanation to Section 192A it is stated that for the purpose of the said section, postal ballot includes voting by electronic mode. The term

‘electronic mode’ has a very wide connotation. Hence, it needs to be clearly specified as to what will be the instruments for the electronic mode. Whether

use of internet will be permissible to facilitate voting by electronic mode, needs to be specially clarified.

Court has been obtained for his appointment in pursuance of that

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The above grounds are similar to those provided under section 274 of the Act for disqualification of directors except the ground contained in clause (g) of

sub-section (1) of Section 274. Omission of this ground in above Rule appears to be a drafting lapse and therefore, needs correction.

(x) Vacation of office. Rule 6 provides that a person appointed as small shareholders’ director shall have to vacate the office if

(a) such person ceases to be a small shareholder, on and from such date on which he ceased to be a small shareholder;

(b) he has been rendered disqualified by virtue of sub-rule (1) of Rule (5);” (c) he fails to pay any call in respect of shares of the company held by him,

whether alone or jointly with others, within six months from the last date

fixed for the payment of the call;

(d) he absents himself from three consecutive meetings of the Board of directors, or from all meetings of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board;

(e) he, or any firm of which he is partner or any private company of which he is a director, accepts a loan, or any guarantee or security for a loan, from the

company in contravention of Section 295;

(fJ he acts in contravention of section 299;

(g) he becomes disqualified by an order of Court under Section 203; and (11) he is removed in pursuance of Section 284.

Certain practical difficulties with respect to appointment of small shareholders’ director

1. As per the Companies (Appointment of Small Shareholders’ Director) Rules, 2001, the appointment of small shareholders’ director has to be supported

by 1 /10^th of the total number of small shareholders, which is an onerous requirement. Only investors who are part of a strong investor association will

be able to mobilize such support and apply for directorship. However, there are only a few investor associations with a membership of a few hundreds.

The notice seeking such an appointment requires at least 100 signatories support. To find one hundred amongst their numbers who own shares of a

particular company would be even more difficult. In many cases signatures of more than 100 shareholders may be required, as at least l/lOth of the total

number of small shareholders have to support the move for appointment of small shareholders’ director. In case of a company which has 10,000 small

shareholders, at least 1 / 10^th, Le., 1,000 shareholders have to support his move, a number which would be very difficult to mobilize. Due to spread of the

equity cult, there are many companies in which the number of small

. shareholders may be in lakhs; for them this provision may be unworkable. Again, though Section 252 and aforesaid rules are also applicable to unlisted

public companies, in reality only a few unlisted companies are likely to have 1,000 or more small shareholders.

The rules also empower the company to act sue moat to elect a small shareholders’ director from amongst shareholders

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(vi) A nominee of the small shareholders would not be eligible for appointment as whole time director or managing director of the company.

(vii) The tenure of such director shall be a maximum of three years and he need not retire by rotation. The person can be elected for another period of

three years on expiry of his tenure.

(viii) A person shall not hold office as small shareholders’ director in more than two companies.

(ix) Disqualifications. Rule 5 provides that a person shall not be capable of being appointed as small shareholders’ director of a company if

(a) he has been found to be of unsound mind by a Court of competent

jurisdiction and the finding is in force;

(b) he is an undischarged insolvent;

pending;

(d) he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six

months, and a period of five years has not elapsed from the date of expiry of the sentence;

(e) he has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the

last date fixed for the payment of the call; or

if) an order disqualifying him for appointment as director has been passed by a Court in pursuance of Section 203 and is in force, unless the leave

The Companies (Amendment) Act, 2000 has provided for the appointment of ‘small shareholders’ director’. State the provisions of the

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Some of the small shareholders of Mis Progressive Industries Ltd. approach you for advice regarding appointment of one of them as a director of the

company. Explain the meaning of a small shareholder and the legal position regarding appointment of a

director by such small shareholders. [CA. (Final) Nov. 2001]

.9lns .

Appointment of Small Shareholders’ Director

For provisions of the Companies Act, please see answer to Question 12.

Rules

The Department of Company Affairs, in this regard, ha.s prescribed the Companies (Appointment of the Small Shareholders’ Director) Rules, 2001.

These Rules, inter alia, provide for

the following:

(i) Small shareholders intending to propose a person as their representative on the Board of the company would be required to give 14 days notice prior to

shareholders meeting.

(ii) The proposed name would have to be endorsed by signatures of at least 100

small shareholders who together represent at least a tenth of the total small shareholders in a company.

(iii) The nominee would necessarily have to be a small shareholder of the company.

(iv) The proposed nominee shall give, in writing, his consent to represent small shareholders.

(v) Listed public companies shall elect the small shareholders nominee through a postal ballot while unlisted company shall appoint such nominee if majority of the small shareholders recommend his candidature at their meeting.

Government, and shall become void, if and in so far as it is disapproved by the Central Government

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But, if the increase in the number will not make the

total number of directors more than twelve, no approval of the Central Government shall be necessary. Again, the approval of the Central Government

shall not be necessary where Articles, as originally registered, provide for maximum number

of directors beyond twelve and the increase sought though beyond twelve is within the maximum provided by such Articles. Thus, if say, the Articles of a

company provide for maximum strength of the Board at ten (present strength also being ten) and the company proposes to raise it to twelve, it shall only

need special resolution to be passed at the meeting of shareholders for the purpose. But, if the strength is proposed to be increased to thirteen or more,

besides members’ resolution, approval of the Central Government shall also be necessary. However, if the maximum strength of the Board as contained

in the Articles (as originally registered) is already more than twelve, say fifteen raising the strength of the Board up to the maximum as contained in the

Articles shall require ordinary resolution only. Thus, if in the latter situation, the present strength of the Board is ten and is proposed to be raised to fourteen

(i.e., within the maximum permissible under the Articles, viz., fifteen), only an ordinary resolution shall be sufficient. No approval of the Central Government

shall be necessary.

Minimum and Maximum Number of Directors

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State the provisions of the Companies Act, 1956 relating to the minimum and

maximum number of directors that a company can have. How can the number of directors be increased or reduced?

5tns. Section 252 provides that every public company must have at least 3 directors and every private company must have at least 2 directors.

A public company having

(a) ,a paidup capital of five crore rupees or more;

(b) one thousand or more small shareholders;

may have a director elected by such small shareholders in the manner as may be prescribed...

For the purposes of this sub-section “small shareholder” means a shareholder holding shares of nominal value of twenty thousand rupees or less in a

public company to which this Section applies.

This is the minimum legal requirement as to the number of directors. The Articles of a company may, and usually do, fix the minimum and maximum

number of directors of its Board. For instance, the Articles may fix 6 as the minimum and 10 as the

maximum number of directors for the Board. .

For the purpose of maximum limit fixed by the Articles, directors appointed by the Central Government under Section 408 of the Act or by the Company

Law Board under Section 397 or 398 of the Act are not to be taken into account. Similarly, nominee directors appointed by the public financial institutions

are also not to be counted within the maximum limit fixed by the Articles.

Increase or Reduction in the Number of Directors [Sees. 258 and 259]

A company in general meeting may, by ordinary resolution, increase or reduce the

number of its directors within the limits fixed in that behalf by its Articles.

In certain cases, the increase in number of directors also requires the approval 6f the Central Government. Section 259 provides that if a public company,

How far the acts of a Director,wil,1 be valid, if his appointment is not valid

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Section 290 provides that the acts done by a person as a director shall be valid inspite of the fact that his appointmnt may afterwards be

discovered to be invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in the Companies Act or in the

Articles.

The aforesaid provision is designed to protect persons dealing with the company such as creditors and purchasers of shares and debentures.

Acts of a Director will not be valid: Section 290, however, does not apply to an appointment, which is from the very beginning illegal or no appointment at

all. It will not apply to the case of a director, whose term of office has expired but who wrongly continues to act as such director. It does not apply where a

director from the very beginning knew that his appointment was defective.

The effect of Section 290 may be summarised as follows: (a) A party to a transaction may rely on the Section if he does not know of any

irregularity in the appointment of a director.

(b) If the parties knew the facts but the defect was not present in their minds at the time of transaction, this Section will validate the

(c)

knowledge of facts constituting the defect is immaterial [Kamal Distillery Co. vs. Ladli Pd. AIR 1960 Pimj. 655].

of this Section.

(d) A transferee from a party to the transaction is not protected by the Section if

the transferor was not entitled to the protection of this Section.

(e) An act done by a director shall not be valid after his appointment has been shown

to the company to be invalid or to have terminated (proviso to Sec. 290).

The proviso doesn’t require that the invalidity must be established in a Court of Law. If the irregularity constituting invalidity is brought to the notice of the

director or the company that will satisfy the requirements of the proviso [Charterbridge Corprn. Ltd. v. Lloyds Bank Ltd. (1970)].

if) The Section does not validate the acts of persons such as the managing director, manager or secretary [Varkey Souriar vs. Keraleeya Banking Co. Ltd.

(1957) 27 Compo Cas. 591].”

(g) It does not validate an ultra-vires act.

After transferring second preferences in F’s papers to the appropriate candidate, the tally is

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A - 200

B - 101 (95+6)

C - 96 (93 + 3)

D - 102 (86 + 16)

E - 92 (62+30)

F - 62

G - 101

Band D get elected having obtained the quota. Now, E, who has got the next lowest first preference of 92, is eliminated. His ballot papers are scrutinised

and it is found that there are 27 second preferences on C. These become C’s votes. Now, C’s votes will be 96 + 27 = 123. Thus, A, B, C, D and G get

elected.

In the case of cumulative voting, a shareholder has, for each share held, as many votes as the number of directors to be elected. H, for example, 4

directors are to be appointed, each share will carry four votes. A shareholder holding 100 shares will have 400 votes. He may cast all the 400 votes

in.favour of one candidate or he may distribute his votes over some candidates. The four candidates getting the higher number of votes will get elected.

Thus, minority shareholders may cast all their votes in favour of their nominees and shall be able to place a number of directors on the Board

proportionate to their shareholdings.

Discuss the mode of appointment of non-rotational nominee directors on the Board of an assisted company by a financial institution.

Section 255 of the Companies Act, 1956 provides that unless the Articles provide for the retirement of all directors at every annual general meeting, not

lessthan 2/3rds of the total number of directors shall be liable to retire by rotation. Sub-section (2) of Section 255 provides that the remaining directors shall, in

default of and subject to any regulation in the Articles of the company, also be appointed by the company in general meeting. Therefore, it would be

necessary for the company to specifically provide in its Articles, or amend its Articles to provide, for appointment of a non-rotational director by the

assisting financial institution. Therefore, the Articles have to be first amended and only subsequently the appointment can be made. It should be ensured

that the total number of non-rotational directors does not exceed 1/3^rd of the total strength of the Board.

Can directors be appointed by proportional representation

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Ordinarily, directors are appointed by simple majority vote on the resolutions moved for their appointment. As a result majority shareholders

controlling 51 per cent or more votes may elect all directors and a substantial minority, as high as 49 per cent, may find no representation on the Board. In

order to enable the minority shareholders to have a proportionate representation on the Board, Section 265 of the Companies Act gives an option to

companies to appoint directors through a system of proportional representation. The Section provides that a company may provide in its Articles for the

appointment of not less than 2/3^rd of the total directors according to the principle of proportional representation by Single transferable. vote or some

system of cumulative voting or otherwise. BJlt such appointment shall be made once in every tTiree years (Sec. 265). Under the system of single

transferable vote, a quota ot votes is fixed. A person gets elected if he gets the required number of first preference votes fixed as quota.

The quota shall be obtained by dividing the total number of votes cast by the total

number of seats plus one and adding one to the result.

Now, let us see how this system works.

Illustration.

Let it be assumed that 5 directors are to be elected and 7 candidates A, B, C, D, E, F &

G are contesting. . -

The first preferences are counted

A gets 200 votes

B gets 95 votes

C gets 93 votes

D gets 74 votes

E gets 60 votes

F gets 58 votes

G gets 20 votes

Total votes polled b

600

Quota = 5 + 1 + 1 = 101 votes

A gets more than quota and he is declared elected, and since A has surplus 99 votes in his

favour, papers are scrutiIUsed and the second preferences found in them are counted. \

It is found that second preferences are: (

D - 25 E - 5 F - 10 G - 160

Total 200

The vacancies caused by the retirement of a director by rotation

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should be filled up at

the same meeting or at an adjourned meeting. If it is not so done, the retiring director

shall be deemed to have been re-appointed at such adjourned meeting except in the

following cases:

1. at any previous meeting, a resolution for his re-appointment was put to vote,

but was lost; or

2. the retiring director has, in writing, expressed his unwillingness to continue; or 3. he is not qualified or is disqualified for appointment; or

4. a special or ordinary resolution is necessary for his appointment orre-appoint

ment by virtue of any provisions of the Companies Act; or

5. it is resolved to appoint two <;>r more directors by a single resolution [Section

263 (2) rroviso).

6. it is resolved not to fill the vacancy.

5. Is it necessary that all the directors of newly incorporated company must retire at the first annual general meeting?

.9Lns. Please see under the heading ‘Appointment of Directors at General Meeting’ in answer

toQ.3.

6. State in relation to a public company:

(a) When additional directors can be appointed and for what period?

(b) When an altemate director can be appointed and for what period?

Can an altemate director be said to be interested in a contract or arrangement in which the original director was interested but the alternate director ha
no interest whatsoever?
Section 313 provides that the Board of directors of a company may, if so authorised by its Articles or by a resolution passed by the company in a general

meeting, appoint an alternate director to act for director during his absence for a period not less than three mo!\ths from the State in which meetings of the

Board are ordinarily held.

Appointment of Directors by the Central Government

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The Central Government has been empowered to appoint directors on, an order passed by the Company Law Board. The Company Law Board may so

order either on a reference by the Central Government or on the application of not less than 100 members of the company or of members holding not less

than l/lOth of the total voting power. Such appointments shall be so ordered by the Company Law Board where it finds that the affairs

of the company have been conducted in a manner oppressive to any member of the’ company or in a manner prejudicial to the interests of the company

or to public interest. Such a director may be appointed for any term but not exceeding three years.

The Central Government may remove any such director from his office at any time and appoint another person to hold office in his place ISec. 408(4)].

In lieu of passing an order as aforesaid, the Company Law Board may direct the company to amend its Articles so as to provide for election of directors by

the system of proportional representation. It may also direct that until new directors are appointed in pursuance of order aforesaid, such number of

persons, as it may specify as being necessary to effectively safeguard the interest of the company / shareholders or public interest, shall hold office as

additional directors of the company [Sec. 408 (2)].

A person appointed by the Central Government in pursuance of the above

provisions shall not be :

(a) considered for the purpose of reckoning 2/3rds or any other proportion of the total number of directors of the company [Sec. 408(3)],

(b) required to hold qualification shares [Sec. 408(4)], and

The provisions of this Section are applicable to both public and private companies.

4. State the circumstances under which a director retiring at an AGM shall be deemed to have been reappointed even though no such appointment was

made.

fC.A. (Final) November, 1986J

Director appointed in general meeting not assuming office

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No casual vacancy arises if a director appointed by the company in general meeting does not

assume office (e.g., resigns or dies before assuming office). There is no question of someone vacating any office if he had never assumed that office. The

words” director appointed by the company in general meeting” used in Section 262(1) must be read with the words following, i.e., “is vacated before his

term of office will expire” - M.K. Srinivaan v. W.S. Subsrahamanya Ayyar [1932] 2 Compo Cas. 147.

(c) Alternate Director (Sec. 313). The Board of Directors of a company may, if so authorised by its Articles or by a resolution passed by the company in

general meeting, appoint an alternate director to act for a director dug his absence for a period of not less than three months from the State in which

meetings of the Board are ordinarily held.

An alternate director is not an agent of the original director.

Tenure. An alternate director shall not hold office as such for a period longer than that permissible to the original director in whose place he has been

appointed and shall vacate office if and when the original director returns to the State in which meetings

of the Board are ordinarily held. .

The Department of Company Affairs has clarified that the alternate Director vacates his office whether or not the original Director attends the Board

meetings on his return to the State-Letter No. 6/16(313)/68-PR, dated 5.2.1968.

4. Appointment of Directors by Third Parties

The Articles may empower a third party, e.g., a vendor of a business to the company to appoint directors (British Murac Syndicate vs. Alperton Rubber

Co.), Similarly, a banking company or a financial institution which has advanced loans to the company may appoint their nominees on the Board. However,

if the company refuses to accept a nominee of the third party, can the third party claim specific performance? Perrins and Jeffreys in their Company Law

observe, “It is doubtful whether the Court will grant either specific performance or an injunction in such case, and probably the third party’s only remedy in

case of breach is an action for damages, since the Court is loath to force on a company directors of whom the members do not approve.”

Department of Company Affairs.

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Should an Additional Director be required to hold qualification shares? A person who is appointed as a director must not suffer from any disqualification.

This rule equally applies to the requirement of share qualification where the Articles so provide. An additional director is nonetheless a director and,

therefore, is subject to requirements as to qualification including share qualification in the same manner as any other director.

(b) Casual Vacandes (Sec. 262). A casual vacancy is one that arises in the office of a director appointed by the general meeting otherwise than by

retirement or the expiration of the time fixed for the appointment. Section 262 authorises the Board of Directors to fill a casual vacancy at its meeting

subject however to any regulations contained in the Articles.

It may be noted that as per Section 262 vacancy in the office of a Director appointed by the company in general meeting only is a casual vacancy. Thus,

where a vacancy is caused in the office of a Director appointed by the Board of Directors, strictly speaking, it

is not a casual vacancy. Thus, if ‘A’—a director appointed by the general meeting - dies

and ‘B’ is appointed in his place by the Board. B resigns. Can the vacancy so caused be filled by the Board as a casual vacancy? The Department of

Company Affairs, while recognising that, strictly speaking, it is not a casual vacancy has allowed it to be filled as a casual

. vacancy by the Board. Certain authors are, however, of the opinion that such a vacancy should be filled by appointing an Additional Director and not as a

casual vacancy so that

the tenure shall be up to next AGM only and then the appointment may be regularised.

Tenure. Section 262(2) provides that a person appointed to fill a casual vacancy shall hold office only up to the date up to which the Director in whose

place he is appointed would have peld office if it had not been vacated. Thus, if Ram is elected a Director and resigns after a month, Bharat appointed in

his place would continue for the whole period for whi Ram, if he had not resigned, would have continued.

Filling of Casual Vacancy by a Private Company. Section 262 does not apply to a private company which is not a subsidiary of a public company.

Can an Additional Director be appointed as a ManaginglWholetime Director

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Since any director can be appointed as a managing or wholetime director, an additional director being a director, there should be no objection to the

appointment of an additional director as a managing or wholetime director. However, the

tenure of an additional director is limited to the holding of the annual general meeting (AGM) and if the company at the AGM does not re-appoint him as a

director, he will automatically vacate his office as managing or wholetime director

also. It is because no. person who is not a director can function as a managing or wholetime director. The aforesaid view has also been endorsed by the

Appointment of Directors to be Voted on Individually (Sec. 263). Section 263 prescribes the mode of voting on appointment of directors

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According to

Section 263, two or more directors cannot be appointed by a single resolution unless a resolution is first unanimously passed that it shall be so made.

However, the following companies are exempted:

(a) a private company which is not a subsidiary of a public company; (b) government company; and

3. Appointment of Directors by the Board The rd of Directors may appoint a director:

Ja).-crs an additional director; or

-- --- 1: --..

l (b) to fill a casual vacancy; or

(d as an aitemate director.

(a) Additional Director (See. 260). The Board of Directors are empowered, if so permitted by ArtiCles, to appoint additional directors. As to the number

that may be appointed as additional directors, Section 260 states that in no case the total number of the directors and additional directors together shall

exceed the maxhnum strength fixed for the Board by the Articles.

It may be noted that without-a power given in the Articles, the Board of Directors cannot appoint additional directors. The Section applies o all companies-

public as well as private [Needle Industries (lndill) Ltd. vs. Needle Industries Neway (lndill) Holdings Ltd. AIR 1981 SC 1298]

Is a resolution passed at Board meeting necessary for appointment of additional.

directors?: Unlike in case of filling a casual vacancy which can be done only in a regular meeting of the Board (Section 262), tf}e appointment of additional

directors may be made either at a meeting of the Board or by passing a resolution by circulation as provided in Section 289.

Tenure of Additional Director: As noted above, an additional director is entitled to hold office only up to the date of the next annual general meeting of the

company. But, in case annual general meeting is not held on time, can the stay of the additional director be extended thereby? In Krishna Prasad Pilani v.

Colaba Land and Mills Company [1959] 29 Compo Cas. 273, it was held that a director appointed as an additional director vacates his office, at the latest,

on the last date on which the annual meeting could have been called as required by Section 166, and cannot continue in office thereafter on the ground

that the meeting was not or could not be called within the time prescribed by that Section. The expression “up to the date of the annual general meeting”

means “up to the date when the next Annual General Meeting ought to be held at the latest.”

In Ador-Samill Ud. v.Indocan Engg. Systems Ltd. [1999] 35 CLA 224 (CLB-N. Delhi), it was held that for application of Section 260, time limit fixed under

Section 166 alone is relevant and not that under Section 210.

Powers of Additional Directors. Additional directors will enjoy the same powers and rights as other directors. Through this route, the Board of Directors

can, therefore, appoint competent persons on the Board who may find it difficult to come through election.

Consent to Act as Director. Section 264 requires that every person

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(other than a director retiring by rotcition or otherwise or a person who has under

Section 257 signified his candidature for the office of a director) proposed as a candidate for the office of a director shall sign, and file with the company,

his consent in writing to act as a director, if appointed.

Further, sub-section (2) of Section 264 requires a person appointed as a director to sign and file with the Registrar his consent in writing to act as such

director. The consent with the Registrar must be filed within 30 days of his appointment.

However, the consent with the Registrar shall not be required to be filed in the

case of:

(a) a director re-appointed after retirement by rotation or immediately on the expiry of his term of office; or

(b) an additional or alternate director, or a person filling a casual vacancy in the office of a director under Section 262, appointed as a director or

reappointed as an additional or alternate director, immediately on the expiry of his term

of office; or

(c) a person named as director of the company under its Articles as first registered. Further, it may be noted that the aforesaid provisions of Section 264

do not apply

to the appointment of a director of an independent private company.

Appointment of Directors other than those retiring (Sec. 157)

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Section 257 recognises the right of any person, whether a member of the company or not, to contest election as a director at any general meeting of the

company. This right to contest election as a director accrues to him as soon as he or some member of the company, acting on his behalf, serves on the

company fourteen clear days’ notice, signifying his candidature for the office of director.

In order to discourage frivolous notice to contest election as a director, the Amendment Act, 1988 introduced a provision for a deposit of Rs. 500. This

amount of deposit shall be refunded if the person proposed/contesting succeeds in getting elected, otherwise the amount is forfeited.

On notice of candidature being received (14 clear days before the general meeting), the company shall inform its members of the candidature by either (z)

serving individual notices on the members not less than seven days before the meeting, or (it) by advertising such candidature not less than seven days

before the meeting in at least two newspapers circulating in the place where the registered office of the company is located, of which one must be in the

English language and the other in the regional language of that place.

In Smt. Namita Gupta vs. Cachar Native Joint Stock Co. lid. [1999] 98 Compo Cas. 655 (CLB-N. Delhi), it was observed that normally there should be

individual reSolution relating to rejection of election of a retiring director and a separate resolution for election of a new director in that place, after following

the procedure as per Section 257.

A member cannot be debarred from contesting election to the Board. Even if a meeting of the company amends the Article to this effect, it will be a moot

point whether the amendment will be valid.

In Dineker Rai Desai vs. R.P. Bhasin (1986) 60 Compo Cas. 14 (Delhi), on a petition u/ s 397/398 praying for the holding of election, the company judge

directed amendment of the existing election rules to the effect that a person who had been a member of the executive committee for 2 years was not

entitled to contest without a gap of one year.

shareholders. [Swapan Dasgupta vs. Navin Chand Suchanti (1988) 3 Compo L. J. 76 (Cal.)].

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In reply to a query: ‘Whether under the law it is compulsory for the private compairies to have rotational directors?’, the Deptt. of Company Affairs

expressed the following views:

In the case of a private company which is not a subsid of a public company, it is not compulsory under the law that they must have rotational directors

unless the Articles of Association of the company so require.

In the absence of any provision in the Articles, directors of an independent private company are entitled to continue until removed underSection2S4 (ie.,

through general body resolution). This decision was delivered in the case of S. Labh Singh vs. Patlaser Mech. Works (P) Ltd. (1987) 61 Compo cas. 6.0.

If the directors do not hold a general ting in time, can they continue till the meeting is held? The Delhi High Court in B.R. Kundrevs. Motion Pictures

Association held that directors cannot prolong their tenure by not holding a meeting in time. The directors due to retire by rotation must vacate office at the

latest on the last day on which an annual general meeting ought to have been held as per Section 166-Ador Samia Ltd. vs.lndocan Engineering Systems

Ltd. (1999). Retiring directors are, however, eligible for re-election.

Deemed appointment of a retiring Director

‘1he vacancies caused by the retirement of a director by rotation should be filled up at the same meeting or at an adjourned meeting. If it is not so done,

the retiring director shall be deemed to have been appointed at such adjourned meeting except where:

1. at any previous meeting, a resolution for his re-appointment was put to vote, but was lost; or

2. the retiring director has, in writing, expressed his unwillingness to continue; or 3. he has been disqualified; or

4. a special or ordinary resolution is necessary for his appointment; or

5. it is resolved to appoint two or more directors by a single resolution [Section 263(2) Proviso];

6. it is resolved not to fill the vacancy.

Appointment of Directors How are the Directors appointed?

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The discussion on appointment of a director may be grouped under the following heads :

1. Appointment of First Directors,

2. Appointment at General Meeting,

3. Appointment by the Board of Directors, .

4. Appointment by Third Parties, and

5. Appointment by Central Government.

1. Appointment of First Directors (Sec. 254)

The first directors are usually appointed by name in the Articles or in the manner provided therein. Where the Articles do not provide for the appointment of

first directors, those of the subscribers to the Memorandum who are individuals shall be deeme@Uo be first directors of the company, subject to the

regulations of the company’s Articl ere all subscribers to the memorandum are body corporates,office until the directors are duly appointed in

accordance with the provisions of Section 255 (Section 254).

2. Appointment of Directors at General Meeting (See. 255)

According to Section 255, the directors must be appointed by the company in general

meeting. In the case of a public company or of a private company which is a subsidiary

of a public company, unless the Articles provide for the retirement of all directors at every annual general meeting, at least two-thirds of the total number of

directors must

be persons whose period of office is liable to determination by rotation. In other words, only

one-third of the total number of directors can be non-rotational directors.

Section 256 states that of the directors subject to retirement by rotation, one-third or a number near to one-third shall retire at an annual general mting.ln

the first place, those directors shall retire who have been longest in office since their last appointment. As between persons appointed on the same day,

retirement is to be determined by mutual consent and in case of default, by lots.’

So far’ as a private company, which is not a subsidiary of a public company, is concerned, if its Articles are silent as to the appointment of directors or do

not specifically provide for appointment of directors otherwise than in general meeting then the directors are to be appointed in general meeting by the

Besides, directors are also treated as officers of the cpany for certain matters

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matters and are bracketed with the manager, secretary, etc. for this purpose. As

‘officers in default’, they are liable to certain penalties for failure to comply with the provisions of the Act.

To sum up, we may quote Jessel, M.R., in Forest of Dean Coal Mining Co., Re (1878), who observed: Directors have sometimes been called as trustees

or commercial trustees, and sometimes they have been called managing partners; it does not matter much what you call them so long as you understand

what their real position is, which is that they are really commercial men managing a trading concern for the benefit of themselves and of all the

shareholders in it. They stand in a fiduciary position towards the company in respect of their powers and capital under their control.

directors incur a personal liability in the following circumstances

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However, directors incur a personal liability in the following circumstances: 1. Where they contract in their names;

2. Where they use the rompany’s name incorrectly, e.g., by omitting the word ‘limited’ ; 3. Where the contract is signed in such a way that it is not clear

whether it is the

principal (the company) or the agent who is signing; and

4. Where they exceed their authority, e.g., where they borrow in excess of the limits imposed upon them (Weeks vs. Propert).

Directors as Trustees

A trustee is a person in whom is vested the legal ownership of the assets which he administers for the benefit of another or others. Directors are regarded

as trustees of the company’s assets, and of the powers that vest in them because they administer those assets and perform duties in the interest of the

company and not for eir own personal advantage. In Ramaswamy Iyenger vs. Brahmayya and Co., the Madras High Court held, “The directors of a

company are trustees for the company, and with reference to their power of applying funds of the cOmpany and for misuse of the power they could be

rendered liable as trustees and on their death the cause of action survives

against their legal representatives.” .

Besides, almost all the powers of directonl, e.g., of allotting shares, making calls, forfeiting shares, accepting or rejecting transfers, etc. are powers in

trust. “They have been made liable to make good money which they have misapplied, upon the same

Accordingly, where a director accepts employment under the company under a separate contract of service, in addition to thedirectorship, he is aJso

treated as anemployee or servant of the company. He shall, in such a case, be entitled to remuneration and other benefits admissible to employees, in

addition to his remuneration as Director under the Act. The Companies Act recognises situations of this nature. Sections 314 and 318, for instance,

provide for a director holding an office or place of profit under a company.

Legal Position of Directors

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To what extent can the directors of a company be considered its trustees,

agents or managing partners of the company?

Are the directors employees of a company? Discuss in the light of relevant case laws.

It is difficult to define the exact legal position of the director of a company. The Companies Act makes no effort to define their position. They have at

various times been describedby judges as agents, trustees or managing partners. In the words of Bowen, L.J.,

“Directors are described sometimes as agents, sometimes as trustees and sometimes as managing partners. But each of these expressions is used

not as exhaustive of their powers and responsibilities but as indicating useful points of view from which they may for the moment and for the particular

purpose be considered.”

Directors as Agents

“Directors may correctly be described as agents of the company,” Cairns, L.J. observed, “The company itself cannot act in its own person; it can only act

through directors, and the case is, as regards those directors, merely the ordinary case of principal and agent.” The ordinary rules of agency will,

therefore, apply to any contract or transaction made by them on behalf of the company. Thus, where the directors contract in the name and on behalf of

the company, it is the company which is liable on it and not the directors.

Directors as agents make the company liable even for contempt of curt. In Vineet Kumar Mathur v. Union of India [1996] 20 CLA 213 (SC), the Supreme

Court directed the company on 15.1.1993 to dose the plant w.e! 1.4.1993 as the Pollution Control Board (PCB) refused to certify that the plant has attained

In Oriental Metal Pressing Wor (Pvt.) Ltd. vs. B.K. Thakoor (1961),

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the Supreme Court pointed out why it is necessary that only an individual should be

director of a company. It was held that the office of director being to some extent an office of trust, there should be somebody readily available who can be

held responsible for the failure to carry out the trust, and it might be difficult to fix that responsibility if the director was a corporation or an association of

persons.

The aforesaid requirement that only individuals should be appointed as directors does not extend to deemed directors coming within the provisions of

Section 7 of the Companies Act, for instance, a holding company will be deemed to be a director for purposes of Section 7, as all or the majority of the

directors of a subsidiary company are accustomed to act according to its directions:

Definition of a Director

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1. (a) Define a ‘Director.’ When is a person “deemed to be a director”?

(b) Can a firm or a body corporate be appointed director of a company?

jfns.

(a) Definition of a Director

Section 2(13) of the Companies Act, 1956 defines a ‘director’ as “any person occupying the position of a director by whatever name called.” Thus, itis not

the name by which a person

. is called but the position he occupies and the functions and duties which he discharges that determine whether in fact he is a director or not. In re, Forest

of Dean Coal Mining Co., it was stated that function is everything; name matters nothing. So long as a person is duly appointed by the company to control

the company’s business and authorised by the Articles to contract in the company’s name and on its behalf, he functions as a director.

The Articles of a company may, therefore, designate its Directors as governors, members of the governing council or the board of management, or give

them any other title, but so far as the law is concerned they are simply directors:

Similarly, in the case of associations or other bodies registered as companies under Section2S (that is companies whose object is not profit-maldng but

furtherance of art, science, commerce, culture, etc.), the members of the executive committee or other governing body are Directors for purposes of the

Act, though they are not called by that name.

Deemed Director [Section 7]. For certain purposes, the Companies Act, 1956 treats as director the person in accordance with whose directions or

instructions the Board of Directors of a company is accustomed to act. This widened definition of a director, however, merely operateSio impose liabilities

or prohibition on a person who would not otherwise be cla as a Director. But, before a person can be deemed as a Director and his liability invoked, it

shall have to be categorically established that the Board of Directors werENlccustomed to act according to his directions and instructions. Acting casually

or once jn a while on certain instructions cannot be considered as sufficient evidence to this effect. A ‘deemed Director’ under English Law is called as

Is it compulsory for companies to appoint a Managing Director? [May, 1991J

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1. (a) Define a ‘Director.’ When is a person “deemed to be a director”?

(b) Can a firm or a body corporate be appointed director of a company?

jfns.

(a) Definition of a Director

Section 2(13) of the Companies Act, 1956 defines a ‘director’ as “any person occupying the position of a director by whatever name called.” Thus, itis not

the name by which a person

. is called but the position he occupies and the functions and duties which he discharges that determine whether in fact he is a director or not. In re, Forest

of Dean Coal Mining Co., it was stated that function is everything; name matters nothing. So long as a person is duly appointed by the company to control

the company’s business and authorised by the Articles to contract in the company’s name and on its behalf, he functions as a director.

The Articles of a company may, therefore, designate its Directors as governors, members of the governing council or the board of management, or give

them any other title, but so far as the law is concerned they are simply directors:

Similarly, in the case of associations or other bodies registered as companies under Section2S (that is companies whose object is not profit-maldng but

furtherance of art, science, commerce, culture, etc.), the members of the executive committee or other governing body are Directors for purposes of the

Act, though they are not called by that name.

Deemed Director [Section 7]. For certain purposes, the Companies Act, 1956 treats as director the person in accordance with whose directions or

instructions the Board of Directors of a company is accustomed to act. This widened definition of a director, however, merely operateSio impose liabilities

or prohibition on a person who would not otherwise be cla as a Director. But, before a person can be deemed as a Director and his liability invoked, it

shall have to be categorically established that the Board of Directors werENlccustomed to act according to his directions and instructions. Acting casually

or once jn a while on certain instructions cannot be considered as sufficient evidence to this effect. A ‘deemed Director’ under English Law is called as

Explain the liability of a director for:

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(i) errors of judgement,

(ii) negligence, and

(iii) misfeasance. [November, 19921

41. What is the maximum extent up to which remuneration to managerial personnel in a public company and a private company which is subsidiary of

public company, may be paid by these companies? What is included in such remuneration? What is the position under the Companies Act for such

payment, where

the profits of the company are inadequate? [May 4, 1992J

42. Certain number of directors of D Company Limited were to retire by rotation at the Annual General Meeting, which ought to have been held latest by

30^th June, 1991. Due to some reasons, the Annual General Meeting could not be held within the time limit. The Board of Directors of DCompanx Limited

bypassing resolution at a specially convened meeting of the Board allowed these directors to continue till the Annual General Meeting was held. The

shareholders of the company challenge the decision of the Board and ask the Board of Directors to remove these directors on the ground that the

resolution of the Board of Directors is not valid one. Considering the provisions of the Companies Act, decide giving reasons whether :

(1) Shareholders’ contention is tenable?

(2) What would be your answer in case Articles of Association of the Company provided for the retirement of all the directors at the Annual General

Meeting? [November, 1993J

43. (a) State the powers of the Board of Directors of a company, which it may exercise only

by passing resolutions at the meetings of the Board. [November, 19911

(b) What are the powers which the Board of Directors may exercise only with

the consent of the company in general meeting? [November, 19911

Who is a ‘director’? What are his qualifications and disqualifications

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J holds the office of managing director of a private company for life. The company’s Articles empower him to appoint a person to be the managing

director in succession to him. J, therefore, in the exercise of his powers, appoints by will D as the managing director to hold office after the former’s death.

Some members of the company challenge the provision of the Articles and question the validity of the appointment

of D. Examine the validity of the contention of the members. [May, 1993]

36. Explain: “Directors are not the servants of the company they represent.” Discuss the true position of the directors in a company. [May, 1993]

37. What are the restrictions imposed by the Companies Act, 1956 on the powers of a company to appoint a Managing Director? [May, 1993]

38. A was appointed director of a company in its Annual General Meeting. He took over the office and started acting on behalf of the company as its

director. Subsequently, it was found that the appointment of the director was not valid because in the meeting where he was appointed certain members

who had voted were not qualified to vote and certain members had voted twice by mistake. There were also certain mistakes in the counting of votes. As

such, the appointment of the director was held to be invalid. Would the acts of A, done by him as

director, be valid and binding upon the company? [November, 1992]

39. A, a Chartered Accountant, in addition to being a director of the company, was rendering professional services to the company’.. To secure his

professional services for a further period of 5 years, the company passed a resolution at its annual general meeting agreeinto pay “him fE;?e, subject to

a maximum of Rs. 15,000 per annum for a period of 5 years. The company then requested the Central Government to accord its approval to the payment

of remuneration to the director, in terms of proviso to Section 309 (1) of the Companies Act. While stating that the petitioner possessed the requisite

qualifications for rendering

professional services, the Central Government directed that the remuneration payable to him shall not exceed Rs. 7,000 per annum for 5 years. How do

you

react to the decision of the Central Government? [November, 1992J

What are the restrictions under the Companies Act in the matter of loans by a company

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to its Directors and their relatives? Would you consider sale of

a company’s flat to its Director as a lom, if the consideration for the sale of flat is

to be paid in instalments by the Director? [May, 1994]

30. Mr. X was convicted for an offence under the Companies Act, 1956 and was fined Rs. 3,000 in June, 1993. He was appointed Managing Director of a

Public Company for a period of 5 years with effect from 1^st August, 1993 on a consolidated remuneration of Rs. 6,000 per month. The appointment was

duly approved by the company in its General Meeting held on 30^th September, 1993. The company continuously suffered losses for the last 3 financial

years ended 31.3.91,31.3.92 and 31.3.93. and on account of these losses about 60 per cent of the net worth of the Company was eroded. The Company

did not seek the approval of the Central Government for the appointment of Mr. X as Managing Director. Discuss the following:

(i) The validity of appointment of Mr. X as Managing Director and of the acts done by him as Managing Director.

(ii) Will your answer be different if Mr. X was appointed without remunera tion? [May, 1994]

31. Explain whether it is in order for a Director liable to retire by rotation at the next

Annual General Meeting to continue to function as a Director in the following cases :

(i) The company defaulted in holding the Annual General Meeting.

(ii) The Annual General Meeting was held in time but the vacancy caused by his retirement was not filled up. . [May, 1994]

32. Explain whether it is in order for a company to continue to pay its Directors, sitting fees at the rate of Rs. 3,000 for each Board Meeting as provided in its Articles of Association even after it has become a Deemed Public Company.

[May, 1994]

33. A is the managing director of a public limited company with a paid-up capital of Rs. 5 crores. He is also a partner of a firm of which the other partners

are his wife and two sons. The company proposes to enter into a contract with the firm for the sale of its own products of the value of Rs. 3 lakhs, on

credit.

(j) When can such a contract be entered into?

(ii) What are the duties of A in such a case?

(iii) Will it make any difference if the contract is entered into with a private limited company in which the wife of the Managing Director and his two sons are members? [November, 1993]

Act., when he is already holding position of a Managing Director in a Private

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The Board of Directors of MI s ABC Motors Limited made the following appoint ments at its meeting held on 1^st January, 1994 :

(i) Mr. X, a Director of its subsidiary company, namely, MI s ABC Forgings Limited, was appointed as Purchase Manager on a consolidated salary of Rs. 11,000 per month with effect from 1^st January, 1994.

(ii) Mr. Y was appointed as the Sales Manager on a consolidated salary of Rs. 11,000 per month with effect from 1^st January, 1994. Answer the following explaining the relevant provisions of the Companies Act:

(i) Does the appointment of Mr. X require the approval of the members in a general meeting of any company? Will your answer be different ifMI s ABC Motors Limited is the subsidiary of MI s ABC Forgings Limited?

(ii) Mr. P, a relative of Mr. Y, was appointed as a Director of Mis ABC Motors Limited on 1^st January, 1995. Does it affect the continuation of Mr. Y as the Sales Manager? [May, 1995]

26. “While in general the Directors of a company cannot hold an office or place of profit, yet there are cases where it is so possible for a director to hold

such an office or place of profit.” Discuss. When shall a director’s office or place of profit be deemed to be an ‘office or place of profit’ under the

Companies Act, 1956? [November, 1994]

27. What are the rights and liabilities of the Directors for their ultra vires acts? Is it in order for a company to indemnify the Directors against all liabilities

that may be

incurred by him? [November,1994]

28. Explain the manner in which a Director is required to disclose his interest at a Board of Directors meeting. What consequences shall follow for

non-disclosure of interest by such a Director? In what cases is he not required to make a disclosure ofhis interest?

[May, 1994]

‘X’ was appointed as Managing Director for life by the Articles of Association

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of a private company incorporated on 1^st June, 1970. The Articles also

empowered ‘X’ to appoint a successor. ‘X’ appointed by will’ G’ to succeed him after his death. Answer the following:

(i) Can ‘G’ succeed ‘X’ as Managing Director after the death of ‘X’?

(ii) Is it possible for the company in general meeting to remove ‘X’ from his office of directorship during his life-time? [November, 19951

23. The Board of Directors of a public company in the private sector having made

an average net profit of Rs. 1 crore during the last 3 financial years propose to donate

during the current year the following amounts:

(i) Rs. 1,00,000 to a school run exclusively for the benefit of employees,

(ii) Rs. 40,000 to a general charitable fund, and

(iii) Rs. 4,00,000 to a political party.

Advise the Board of Directors about their powers in respect of the above explain

ing the relevant provisions of the Companies Act. [May, 1995]

24. State briefly the legal requirements to be complied with by a public company to give effect to the following proposals:

(i) Payment of Rs. 50,000 as minimum remuneration to the ordinary directors in a financial year when the company has suffered a loss. The directors

have been receiving remuneration by way of commission on net profits within the prescribed limits.

(ii) Payment of minimum remuneration to a wholetime director in a financial year when the company has suffered a loss. The appointment has been made

in accordance with the conditions specified in Schedule XIII to the Companies Act and he is being remunerated by way of commission on net profits.

(iii) Appointment of a person as Managing Director without remuneration in accordance with the conditions specified in Schedule XIII to the Companies

With reference to the povisions of the Companies Act, 1956

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examine whether continuation of the following directors in their office is valid:

(i) R, an additional director who does not hold any qualification shares at the time of appointment, continues to be in his office without holding the necessary qualification shares.

(ii) M, who was appointed as additional director at the Board meeting held on 31^st December, 1994, continues to be in his office on the ground that the

Annual General Meeting for the year 1995 was not held as required under the Act. Will your answer be different if M was also appointed as managing

director for a period of 5 years with effectfrom 1^st January, 1995 at the same

board meeting? [May, 19961

20. The Articles of Association of Mis XY Limited provide for the retirement of directors by rotation and all the five directors are in positions. How many

directors are liable to retire at the ensuing annual general meeting?

Will it make any difference if Mr. X, a wholetime director, is not liable to retire

by rotation? Explain. [November, 19951

21. (a) A person has been appointed as a Managing Director of a public company in contravention of the requirements of Schedule xm without the

approval of the Central Government. How can this appointment be terminated by the Central Government?

(b) Examine the possibilities of the following with reference to the relevant

provisions of the Companies Act, 1956:

(i) Filing of unaudited Balance Sheet with the Registrar of Companies.

(ii) Filing of non-adopted Balance Sheet with the Registrar of Companies and preparation of subsequent year’s accounts with the balances taken from such Balance Sheet. [November, 1995]

With reference to the provisions of the Companies Act, 1956

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examine the validity of the following:

D, who is a director already in 19 public limited companies, accepts the directorships of the following companies:

(i) BC Private Limited, which is the holding company of a public limited company. (ii) RM Company which is an unlimited company.

(iii) MJ & Company Ltd. as an alternate director. [November, 19971

16. Mr. Ram was appointed as Managing Director of Prudential Company Limited in accordance with Schedule xm for a period of 5 years with effect from

1^st January, 1996 on a monthly remuneration of Rs. 30,000. The Board of Directors of the company propose to increase the remuneration of the

Managing Director to Rs. 40,000 per month with effect from 1^st January, 1998. Advise the Board of Directors about the legal requirements under the

Companies Act, 1956 to give effect to the proposal. State whether the increased remuneration can be paid as minimum remuner

or inadequacy of profit. [November, 19971

17. Mr. X is named as a director for life in the Articles of Association of Mis XYZ Private Limited which was incorporated on 1^st April, 1977. The Articles of

Association of the company also provide that he cannot be removed by the members in general meeting. Some of the members want to remove ‘X’ by

passing an ordinary resolution in general meeting. State with reference to the relevant provisions of the Companies Act, 1956 whether the proposed action

is valid. [November, 19971

18. A private company which has become a deemed public company seeks your advice on the following matters:

(i) Maximum remuneration that can be paid to a director who is neither in the wholetime employment of the company nor a managing director and the

minimum remuneration that can be paid to such a director in the event of loss in any financial year.

(ii) Payment of sitting fees to directors at Rs. 3,000 per board meeting as per

the Articles of Association. [May, 19961

I, an existing rotational director of MRN Company Limited

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whose term expired at the Company’s Annual General Meeting held on 30^th September,

1997, was reappointed at the same meeting. I accepted the reappointment and resumed the office without filing his consent with the concerned Registrar

of Companies on his reappointment. A group of members of the company objected to]’s continuation as director, since I did not file his consent with the

egistrar within the stipulated period as required under the Companies Act, 1956. Examining the

provisions of the Act, decide: .

(i) Whether the members’ contention shall be tenable and whether I has

violated the provisions of the Companies Act, 1956 in this regard?

(ij) What would be your answer in case I is a person named as director of the

company in the Company’s Articles of Association registered with the

Registrar of Companies? [May, 19981

12. With reference to the provisions of the Companies Act, 1956, examine the validity of the following:

(i) Appointment of Mr. Balak, a minor, as a Director of MRN (Private) Limited.

(ii) Mr. Smart was appointed as the Managing Director of a public limited company for a period of 5 years effective from 1.4.1993. It is noticed that he

performed certain acts on behalf of the company in which he was appointed, after the expiry of his term. Some of the aggrieved parties have

questioned the validity of the Managing Director’s acts. [May, 19981

13. The paid-up share capital and free reserves of XYZ Co. Limited, a public company, is Rs. 100 crores as on 1^st April, 1998. The shareholders of the

company at their general meeting held on 4^th April, 1998, by a resolution authorised the Board of Directors of the company to borrow money “exceeding

the paid-up share capital and free reserves of the company, to the extent required by the

Board of Directors”. The Board of Directors as a result borrowed money to an extent of Rs. 130 crores, including Rs. 20 crores as short-term and Rs. 25

crores as temporary loan for financing the construction of a building of the company.

Referring to the provisions of the Companies Act, 1956 examine the validity of the following:

(i) The Board’s exercising the powers for borrowing money to an extent of Rs. 130 crores?

(ii) What would be your answer in case the company’s paid-up share. capital and free reserves increased to Rs. 160 crores and the Board of Directors

borrow money to an extent of Rs. 140 crores which neither include any short-term loan nor temporary loan for financing the construction of a

building of the company? [May, 19981

14. Is it possible for a retiring director to continue in his office beyond the date of the Annual General Meeting which had to be adjourned due to

disturbances at the

meeting? Explain. [May, 19981

Mr. Nanavati holding 3 percent shares in OPQ Ltd

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., became a director of this company on 1.5.2000. The company, prior to his appointment as director,

had commenced transactions with A Ltd. In the next Board meeting to be held on 10.5.2000, the Board proposes to discuss about price revisions sought

for by A Ltd. Briefly explain:

(i) Whther Mr. Nanavati should make a disclosure of his interest in A Ltd., assuming that the company is going to have transactions with A Ltd. on a

continuous basis; if yes, when and how? When should it be renewed?

(ii) Can he vote in the price revision resolution in the Board Meeting?

You are informed that Mr. Nanavati holds 1.5 per cent of the share capital of A Ltd. and that his wife holds another 3 per cent of the share capital of A Ltd.

[November, 2000]

8. After serious disagreement and difference of opinion among the shareholders of the

company in the last annual general meeting, some of the directors took the steps as

noted below. Discuss the validity and effect of the following:

(i) Mr. John, the managing director sends his notice of resignation.

(ii) Mr. Paul, an ordinary director verbally resigns and not in writing.

(iii) Mr. David, another ordinary director, had sent his resignation, but withdrew it before the Board meeting was held for accepting his resigna tion. [May, 1999]

9. The managing Director of M/ s Speculative Builders Ltd. has resigned as the

company was not doing well and also incurring losses. The Board of Directors have decided to appoint Mr. Reliable aged 71 years as the new Managing Director, because of his proven track record of nearly 50 years, turning sick

companies into profitable ones. The only condition put forth by Mr. Reliable is that he should be paid the maximum permissible salary and perquisites as

provided in the Companies Act without requiring the approval of Central Government. The effective capital of the company is Rs. 20 crores. Advise the

company about (i) the procedure to be followed for the appointment of Mr. Reliable, and (ij) the

quantum of remuneration payable to him. [May, 19991

10. James Brown, Blue Brown, Vasisht Beg and Ramen Roy are the directors ofJohn Brown and Company Limited. Vasisht Beg and Ramen Roy did not

attend the Board meeting which was properly convened. At the said Board meeting two additional directors were appointed. They are wife and brother of

James Brown and Blue Brown respectively, the directors who attended the board meeting. Explain with reference to the relevant provisions of the

Companies Act whether the directors who attended the Board meeting are entitled to vote on the subject matter and whether the appointment of additional

directors is valid.

Discuss the validity of the arguments of the Director in the following cases:

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(i) In the General Meeting of X Ltd., held on 2.5.2000, Mr. A was appointed as a Director. On that day, he was not holding any equity shares in X Ltd. As per

the Articles of Association of X Ltd. the share qualification is the holding of 500 equity shares. On 15.6.2000 Mr. A applied for 1,000 equity shares in X Ltd.

and the shares were allotted on 10.7.2000. Mr. A claims that he was holding the qualification shares within the time specified in the Companies Act.

(ii) X Ltd. entered into a contract with M & Co. Ltd. for the purchase of raw materials for Rs. 2,50,000, at the prevailing market rate. Mr. B, the Director, of X

Ltd. was holding shares of the values of 1 per cent of the paid up capital of M & Co. Ltd. Another Director, of X Ltd., Mr. C was holding shares of the value

of 1.5 per cent of the paid up capital of M & Co. Ltd. Mr. B., at the beginning of the year, gave a general notice to X Ltd., that he was interested in M & Co.

Ltd., but did not disclose the nature of interest. Mr. B claims that he had given notice to X Ltd., as required under the Companies Act and that his holding

being only 1 per cent is within the limit prescribed under

the Companies Act. [November, 2000]

Examine whether the following transactions can be considered as a loan to a Director requiring approval of the Central Government under Section 295

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(i) An advance payment of salary of Rs. 10,000 to an employee who is the wife of the Managing Director.

(ii) A Public Company secures residential accommodation for the use of its Managing Director by entering into a lease arrangement under whic the

company has to deposit a certain amount with the landlord to secure compliance with the terms of the Lease Agreement.

(iii) A Public Company purchases a flat which is subsequently sold to a Director at the prevailing market price, out of which the Director pays 50 per cent

immediately and contracts to pay the balance in 10 equal annual instalments. [November,.19991

2. Papa Group of Companies known for their business repute have been advocating for payment of donations to political parties as one of the methods of

funding elections. The group has recently floated a company by name M/ s. Papa Computers Ltd. and in the very first year of its working made a net

profit of Rs. 6 crores. Examine with reference to the provisions of the Companies Act, whether the said company can make political donations and what is

the maximum limit

up to which a company can make political donations. [November, 19991

3. M/ s. Excellent Industries Ltd. is a Multi-product Company with a paid up capital of Rs. 4 crores. A contract for the purchase of Textile Machineries and

Balancing Equipments valued at Rs. One crore was placed before the Board for approval. The Managing Director of the company is interested in this

contract because his son-in-law is a partner of the firm selling the machineries and the equipment to the company. Explain briefly the procedure to be

followed by the company to

enter into the said contract. [November, 19991

4. Mr. V, a chartered accountant is a Director in PQR Limited. The Company proposes to appoint/ engage the firm V & Co. in which Mr. V is a partner in

one or more of the following capacities;

(i) Consultants on regular retainer basis.

(ii) Authorised representatives to appear before tribunals.

Discuss whether the provisions of Section 314 of the Compahies Act are attracted

in the above situations. [May, 2000]

5. Can a company pay compesation to its directors for loss of office? Explain briefly the relevant provisions of the Companies Act; 1956 in this regard.

[May, 2000]

THE COMPANY-MEANING AND NATURE

2007-12-26T06:35:00.000-08:00

A partnership firm is A company is governed by the governed by the partnership Memorandum of Association deed and may be altered at and Articles of Association and any time with the consent of can be altered according to the all partners.procedure laid down in the Act. Each partner is an agent of A member of company is not the firm and of other partners an agent of the company or of and therefore, binds the firm other members and therefore, and
other partners of the does not bind the company or firm.other members by his acts. Manage mer+ vests in the M11nagement vests in the Board hands of the partners except of Directors elected by the in the case of a dormant or shareholders. 1 sleeping partner. A partner cannot tr:mster his interest in the firm without the consent of all other partners Accounts of the partnership tirm need not be audited by an auditor.A partnership firm can be wound up at any
time by any partner, if it is, 'at will' without legal formalities. In the case of a private company also the transfer of shares requires the prior permission of the

board of directors. But in the ease of a public company a shareholder can transfer his shares freely without restrictions. Accounts of a company mu:;;t be
audited by an Auditor. In the case of a company, no one member can require it to be wound up at will and winding up involves legal formalities.

Foreign Currency Management and Exchange Risk Management and External Financing

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1) Exchange risk
a) Spot Exchange Transactions
b) Forward Exchange Transactions
2) Exchange risk management
a) Forward market
b) Foreign currency swap
c) Arbitrage
I. Space Arbitrage
II. Time Arbitrage
d) Long term rollover cover
Exchange Risk
The price payable to a foreign buyer can be in seller or buyer’s currency or an
international currency such s US $.
The seller may prefer another currency in the following cases...
1) If his own currency is depreciating rapidly in value.
2) His government prefers to have some other currency.
3) The seller himself wishes to make payment abroad, where another currency
is more acceptable.
The buyer will also have to purchase the necessary foreign exchange to make
payments.
An exchange rate represents the number of currency units of one currency that
can be exchanged for another country’s currency units.
Exchange rates are established for two types of transactions…
1) Spot Exchange transactions
2) Forward Exchange transactions
1) Spot Exchange Transactions
They occur when currencies are traded for immediate delivery.
2) Forward Exchange Transactions
They occur when purchases & sellers contracted to buy & sell currencies for
delivery at a future date.
In case of specific rate of exchange & at a specific future date.
Exchange Risk Management
1) Forward Market
A company can protect itself against exchange rate fluctuations by use of
forward or future market.
One locks in the rate of exchange by entering into contract to buy specific
currency at specific time at a specific exchange ratio.
A future contract is a guarantee to obtain conversion at a specified exchange
rate.
2) Foreign currency swap
This is agreement between two parties to exchange one currency for another at
a simultaneous spot & forward transaction.
In swap deal buying & selling involves same currency of the same value at
different maturities.
a) Simultaneous purchase of currency on spot & its forward sale or vice versa.
b) Simultaneous purchase & sale, both forward for different maturities.
A foreign currency is said to be at a premium, if that currency is costlier under
the forward rate than under the spot rate.
When the foreign currency is cheaper in forward market than in spot market, it
is to be at a discount.
3) Arbitrage
It is a method of making profits from exchange dealings.
Arbitrage is a situation where a guaranteed profit can be made by purchasing &
selling a currency simultaneously is one or more foreign exchange markets.
Arbitrage profits arise because of …
a) The difference in exchange rates at two different exchange centers.
b) The difference due to interest yield, which can be earned at different
exchanges.
1) Space
Arbitrage
It is highly probable that when two markets are separated by physical
distance the exchange rates may vary.
This is a situation, when speculator executes two or more
simultaneous contracts to buy & sell currencies in two or more capital
markets for delivery on the same day.
2) Time
Arbitrage
Here an investor benefits by executing a spot and a forward contract
to buy & sell a currency.
4) Long term rollover cover
The major risk faced by a borrower of foreign currency is that of adverse spot
exchange rate fluctuations, from the time of borrowing to the time of repayment.
Financial Multinational Organizations
External Financing
1) Commercial
Banks
This provides foreign currency loans for international operations as
they do for the domestic operations.
These banks also provide facility to over draw.
2) Discounting
of trade Bills
This is used as a short term financing method.
3) Eurocurrency
Markets
When the currency is deposited outside the country of origin, it is
termed as Eurocurrency.
4) Euro Bond
Markets
Eurobond market has emerged as another significant source of
capital.
Euro bands are primarily sold in countries other than that of the
country in whose currency the bond is denominated.
5) Development
Banks
EXIM Band in United States
6) International
Agencies
International Finance Corporation and World Bank assist developing
countries by financing projects in private & public sectors.
Modes of Payment in International Trade
Most of the transactions are performed on credit basis on account of the
following reasons…
1) Intensive competition & increase in number of sellers have given buyer the
option to purchase goods from seller who can offer him the most for his money.
2) Credit terms have become one of the most important factors in negotiating a
sale.
3) Credit insurance has reduced the risk of credit extension.
1) Open Account The seller debits the account of the importer whenever he
exports goods.
2) Consignment
sale
The exporter has selling agents abroad.
Sale is made by the agent for and on behalf of the exporter.
3) Deferred
payments
In case of expensive capital equipment or machinery.
The importer pays a part of the price in advance & another part
on receiving the shipping documents.
The unpaid balance is generally guaranteed by the importer’s
bank.
4) Bank transfers The importer makes payment to a local bank in home currency
which arranges for payment to the payee abroad in the currency
of his country.
a) Telegraphic
Transfer (TT)
It is also known as cable transfer.
Its correspondent branch telegraphically to pay money to the
payee abroad.
It is the quick mode of remitting funds. No stamp duty is payable
on such transfer.
b) Mail transfer
(MT)
The local bank is sent to its correspondent or branch by post or
mail, surface or air.
It also does not require any stamp.
In this case, delays in payment to the exporter who will charge
interest for the periods.
c) Banker’s draft
or cheque
A draft is issued at the request of the remitter.
5) Bills of
exchange
Bills are prepared in triplicate, each copy is known as a via.
In case of only one copy is made, it is called solo bill.
The documentary bill is sent by the exporter’s bank to its branch
or correspondent.
6) Letters of Credit This is the most common method of remittance used in the
export trade.
Kinds of letters of Credit
1) General & special letters of capital.
A general letter of credit is one addressed by the issuing bank to the world
generally requesting that advance by made to a third person by any one to
whom it is shown.
A special letter of credit.
2) Open (Clean) and documentary letters of capital
An open letter of credit is one in which the issuing bank undertakes to honor the
bill draw under the credit without security of any documents.
Banker only at the request of customers of very sound financial position.
A documentary letter of credit is one in which the issuing bank undertakes to
honor the bill drawn under it only if it receives with it certain documents of title.
3) Fixed & revolving letters of credit
A fixed letter of credit – the issuing banker specifies the amount up to which
and the period in which beneficiary can draw one or more bills.
In case of revolving credit, the issuing banker specifies the total amount up to
which the bills drawn may remain outstanding at a time & not the total amount
up to which the bills can be drawn.
4) Revocable & irrevocable letters of capital
The issuing banker reserves to itself the right to concede or modify the credit at
any moment it likes without notice to the beneficiary.
A letter of credit, unless stated to be irrevocable, is presumed to be always
revocable.
An irrevocable letter of credit is one, which can not be withdrawn by the issuing
banker without the consent of the beneficiary.
5) Confirmed an unconfirmed letters of credit
A confirmed letter of credit is on where the advising banker of the exporter’s
country.
It is confirmation to an irrevocable credit.
The advising banker takes up on itself the liabilities as that of the issuing
banker.