Companies Act, 2013 – CA Foundation Law Study Material

This Companies Act, 2013 – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Companies Act, 2013 – CA Foundation Business Law Study Material

Question 1.
What is meant by the lifting of the corporate veil? What are the instances in which the corporate veil may be lifted?
OR
There are cases where company law disregards the principle of corporate personality or the principle that the company is a legal entity distinct from its shareholders or members. Elucidate.
Answer:
‘Lifting the veil’ means looking behind the company as a legal person ie., disregarding the corporate entity and paying regard instead to the realities behind the legal form. Where the courts ignore the corporate personality and concern themselves directly with the members or directors, the corporate veil may be said to have been lifted.

The following are the cases where company law disregards the principle of corporate personality or the principle that the company is a legal entity distinct and separate from its shareholders or members:

1. To determine the character of the company i.e. to find out whether the company is an enemy or a friend:
The Court may rend the veil for ascertaining whether a company is an enemy company. Unlike a natural person, a company does not have a mind or conscience; therefore, it cannot be a friend or foe. It may, however, be characterized as an enemy company, if its affairs are under the control of the people of an enemy country. For this purpose, the Court may examine the character of the persons who are really at the helm of affairs of the company, which was done in the leading case of Daimler Co. Ltd. vs. Continental Tyre & Rubber Co. Ltd.

2. Company is formed to evade taxes:
Where a corporate entity is used to evade or circumvent tax, the Court can disregard the corporate entity [Juggilal v. Commissioner of Income Tax AIR (SC)].
19.3
Thus where the company is used as a means of evasion of taxes, then for protection of revenue of the Government, the corporate veil may be lifted. [Sir Dinshaw Maneckjee Petit, Re AIR 1927 Bom. 371].

3. Company is formed to avoid a legal obligation/welfare legislation:
Where the sole purpose for the formation of the company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the Supreme Court upheld the piercing of the veil to look at the real transaction (The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar v. The Associated Rubber Industries Ltd., Bhavnagar and another).

4. Formation of subsidiaries to act as agents:
A company may sometimes be regarded as an agent or trustee of its members, or of another company, and may therefore be deemed to have lost its individuality in favor of its principal & the disqualifications of the principal shall be treated as that of the agent. Here the principal will be held liable for the acts of that company, as was held in the case of Merchandise Transport Limited v. British Transport Commission (1982).

5. Company formed for fraud/improper conduct or to defeat law:
The corporate veil may be lifted if the company is formed to – (a) defeat the law; (b) defraud creditors; (c) avoid legal obligations (arising by way of a contract). Where the device of incorporation is adopted for some illegal or improper purpose, e.g., to defeat or circumvent the law, to defraud creditors, or to avoid legal obligations. [Gilford Motor Co. v. Horne & Jones v. Lipman]

6. To determine the technical competence of the company:
A company is an artificial entity and therefore it cannot be judged for competence and experience. In some cases where the technical compe¬tence of the company is to be ascertained, such as to determine the eligibility of the company for a certain contract, then the experience, qualification, and competence of the members shall be treated as that of the company. Thus corporate veil shall be lifted as was done in the case of New Hori¬zons Ltd. v. UOI (1997).

Companies Act, 2013 – CA Foundation Law Study Material

Question 2.
Define OPC and state the rules regarding its membership. Can it be converted into a non-profit company under section 8 or a private company?
Answer:
One person company
Section 2(62) of the Companies Act, 2013 defines one person company (OPC) as a company that has only one person as a member. The following are the rules regarding membership of OPC:

1. There can be only one person as a member of OPC.
2. The memorandum of OPC shall indicate the name of the other person, who shall, in the event of the subscriber’s death or his incapacity to contract, become a member of the company.
3. The other person whose name is given in the memorandum shall give his prior written consent in the prescribed form and the same shall be hied with the Registrar of companies at the time of incorporation.
4. Such other person may be given the right to withdraw his consent.
5. The member of OPC may at any time change the name of such other person by giving notice to the company and the company shall intimate the same to the Registrar.
6. Any such change in the name of the person shall not be deemed to be an alteration of the memorandum.
7. Only a natural person who is an Indian citizen and resident in India (person who has stayed in India for a period of not less than 182 days during the immediately preceding one calendar year)—

  • shall be eligible to incorporate an OPC;
  • shall be a nominee for the sole member of an OPC.

8. No person shall be eligible to incorporate more than one OPC or become a nominee in more than one such company.
9. No minor shall become a member or nominee of the OPC or can hold share with beneficial interest.

OPC cannot be incorporated or converted into a company under section 8 of the Act. However, it may be converted into a private or public company. OPC cannot voluntarily convert itself into any kind of company unless two years have expired from the date of incorporation, except where the paid-up share capital is increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceed two crore rupees.

Question 3.
State the limitations of the Doctrine of Indoor Management under the Companies Act, 2013.
Answer:
The Doctrine of Indoor Management or Turquand Rule has limitations of its own. That is to say, it is inapplicable to the following cases, namely:

a. Actual or constructive knowledge of irregularity
The rule does not protect any person when the person dealing with the company has notice, whether actual or constructive, of the irregularity. [Howard vs. Patent Ivory Manufacturing Co.]

b. Suspicion of Irregularity/Negligence
The doctrine is not applicable in the case of negligent persons. If an officer of the company acts in a manner, which would not ordinarily be within his powers, the person dealing with him must make proper inquiries and satisfy himself as to the officer’s authority. If he fails to make an inquiry, he cannot rely on the rule. Where the transaction is unusual or not in the ordinary course of business, it is the duty of the outsider to make the necessary inquiry. The protection of the ‘‘Turquand Rule” is also not available where the circumstances surrounding the contract are suspicious and therefore invite inquiry. [Anand Bihari Lai vs. Dinshaw & Co.]

c. Forgery
The doctrine of indoor management applies only to irregularities that might otherwise affect a transaction but it cannot apply to forgery which must be regarded as a nullity. Forgery may in circumstances exclude the ‘Turquand Rule’. [Ruben vs. Great Fingall Consolidated]

Companies Act, 2013 – CA Foundation Law Study Material

Question 4.
Explain the meaning of Guarantee Company? State the similarities & dissimilarities, between a Guarantee Company & Company Limited by Share.
Answer:
“Company limited by guarantee” means a company having the liability of its members limited by the memorandum, to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.

These companies may or may not have a share capital In the case of a guarantee company with a share capital, the members are required to purchase shares of a fixed amount and also give a guarantee for a further sum in the event of winding up. Generally, guarantee companies are formed for non-trading purposes. Such as promotion of commerce, art, science, sports, etc., and do not aim for profit. The Chambers of Commerce, charitable institutions, sports clubs, are generally organized as guarantee companies.

The common features between a ‘guarantee company’ and ‘the company having share capital’ are legal personality and limited liability. In the latter case, the member’s liability is limited by the amount remaining unpaid on the share, which each member holds. Both of them have to state in their memorandum that the members’ liability is limited.

POINTS OF DISTINCTION COMPANY LIMITED BY SHARES COMPANY LIMITED BY GUARANTEE
Purpose: Profit/non-profit both. Generally not for profit.
Usefulness: When initial funds are required to be raised to commence business. Only where no working funds are needed or where these funds can be held from other sources like endowment, fees, charges, donations, etc.
Transfer of interest May not be restricted. Restricted & different than that of those limited by shares
Liability of members Limited to amount unpaid on shares. Limited to amount guaranteed.
Amount Called Unpaid amount on shares may be called even before winding up. Amount guaranteed can be called only on winding up. If company has a share capital, unpaid amount on shares can be called before winding up.
Share capital Must have share capital May or may not have share capital
To start Raises initial funds from, members Does not raise initial funds from members, unless it has a share capital.

Question 5.
When a company is registered, it is clothed with a legal personality. Explain.
OR
What is the meaning of “Certificate of Incorporation” under the provisions of the Companies Act, 2013? What are the effects of the registration of a company?
Answer:
A company can be incorporated by complying with the formalities prescribed u/s 7 of the Companies Act, 2013. Application in the prescribed form must be made, along with the documents prescribed for this purpose and fees, to the Registrar within whose jurisdiction, the registered office of the company is proposed to be situated. The Registrar on being duly satisfied as to the compliance of all the requirements, relating to the incorporation of a company, as prescribed under the Companies Act, 2013 and the rules made thereunder, shall register all the documents and information in the register and issue a certificate of incorporation in the prescribed form to the effect that the proposed company is incorporated under this Act. The certificate of incorporation shall also indicate the unique identity number allotted to the company le. the Corporate Identity Number, which shall be a distinct identity for the company.

When a company is registered and a certificate of incorporation is issued by the Registrar, the following important consequences follow:

  1. The company becomes a distinct legal entity. Its life commences from the date mentioned in the certificate of incorporation.
  2. It becomes a body corporate and it acquires a perpetual succession.
  3. It is capable of suing and being sued in its corporate name.
  4. Its property is not the property of the shareholders. The shareholders have a right to share in the profits of the company when realized and divided. Likewise, any liability of the company is not the liability of individual shareholders.

From the date of incorporation mentioned in the certificate, the company becomes a legal person separate from the incorporators; and there comes into existence a binding contract between the company and its members as evidenced by the Memorandum and Articles of Association. It has perpetual existence until it is dissolved by liquidation or struck out of the register.

A legal personality emerges from the moment of registration of a company and from that moment the persons subscribing to the Memorandum of Association and other persons joining as members are regarded as a body corporate or a corporation in aggregate and the legal person begins to function as an entity. A company on registration acquires a separate existence and the law recognizes it as a legal person separate and distinct from its members.

Companies Act, 2013 – CA Foundation Law Study Material

Question 6.
Define a Small Company as defined under the Companies Act, 2013.
Answer:
Small Company: Small company given under section 2(85) of the Companies Act, 2013 which means a company, other than a public company—
1. paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; and

2. turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:
Exceptions: This section shall not apply to:

  • a holding company or a subsidiary company;
  • a company registered under section 8; or
  • a company or body corporate governed by any special Act.

Question 7.
Explain the concept of Dormant company as envisaged in the Companies Act, 2013.
Answer:
Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.
“Inactive company” means a company that has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years.
“Significant accounting transaction” means any transaction other than

  • payment of fees by a company to the Registrar;
  • payments made by it to full the requirements of this Act or any other law;
  • allotment of shares to full the requirements of this Act; and
  • payments for maintenance of its office and records.

Companies Act, 2013 – CA Foundation Law Study Material

Question 8.
Differentiate between the Memorandum of Association & Articles of Association.
Answer:

MOA AOA
Power is the charter and constitution of the company. The articles are subordinate to the memorandum. If there is a conflict between the two, the memorandum shall prevail.
Ultra vires Acts done by a company beyond the scope of the memorandum are absolutely void (ineffective). They cannot be ratified even by the unanimous vote of all the shareholders. Articles of association govern the internal relationship between the company and its members, Ac Is done the company beyond its Articles can be ratified by the shareholders.
Registration Every company must have its own memorandum. It must be compulsorily filed for registration. It must be in the following forms: Model: A, B, C, D, E of Schedule I Every company must have its own Articles. ¡t must be compulsorily filed for registration. It must be in the following forms:

Model: F, G, H, 1, J of Schedule I

Alteration MOA cannot be altered easily. AOA can be altered if it is desired by the 3/4th majority.
Nature Memorandum of association contains the basic conditions on which the company is incorporated. It provides for the name, situation objects, capital, and liability of the company. Articles of association are the rules governing the internal management of the company. It provides for rules and procedures for the conduct of its business.
Scope It determines the objects, scope, and extent of the activities of the company. It governs the way in which the objects of the company are to be carried out.

Question 9.
State whether a non-profit organization can be registered as a company under the Companies Act, 2013. If so, what procedure does it have to adopt?
Answer:
Formation of companies with charitable objects etc. (Section 8 company)
Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to

  • Promote the charitable objects of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, etc.
  • Such company intends to apply its profit in promoting its objects and
  • Prohibiting the payment of any dividend to its members.

Examples of section 8 companies are FICCI, ASSOCHAM, National Sports Club of India, CD, etc.

Power of Central Government to issue the license—

  • Section 8 allows the Central Government to register such person or association of persons as a company with limited liability without the addition of words ‘Limited’ or ‘Private Limited’ to its name, by issuing license on such conditions as it deems fit.
  • The Registrar shall on application register such person or association of persons as a company under this section.
  • On registration, the company shall enjoy the same privileges and obligations as of a limited company.

Note: Central Government has delegated the power to grant licenses to the ROC.

Companies Act, 2013 – CA Foundation Law Study Material

Question 10.
Examine with reasons whether the following statements are correct or incorrect with reasons:

  1. A private company must have a minimum of two members while a public company must have a minimum of seven members
  2. Affixing of Common Seal on the company’s documents is compulsory.
  3. A company being an artificial person cannot own property & cannot sue or be sued

Answer:
(1) Correct. According to the provisions of section 3 of the Companies Act, 2013, which deals with the basic provisions for incorporation of a company, in the case of the public company a minimum of 7 persons is required to form a company to carry on the purpose as illustrated in the MOA of the company, by subscribing their name to the MOA. Similarly, a minimum of 2 persons is required to form a private company.

(2) Incorrect. As per the Companies (Amendment) Act, 2015, the common seal has been made optional by omitting the words “and a common seal” from Section 9 of the Act, with a view to providing an alternative authorization for the purpose of creation of contract by a company. This amendment provides that in case a company does not have a common seal, the authentication shall be made by any key managerial personnel or an officer or employee of the company, duly authorized by the Board on this behalf.

(3) Incorrect: A company is an artificial person and has a separate legal entity independent of its members. As a consequence, a company can enter into contracts in its own name, acquire and transfer/sell property in its own name and can also sue and be sued in its own name.

Question 11.
What is meant by Doctrine of Constructive Notice?
Answer:
Section 399 provides that the memorandum and articles when registered with the Registrar of Companies ‘become public documents’ and then they can be inspected by anyone on payment of a nominal fee. Therefore, any person who contemplates entering into a contract with the company has the means of ascertaining the powers of the company and is thus, presumed to have read these documents and understood them in their true perspective. This is known as the “doctrine of constructive notice”.

Even if the party dealing with the company does not have actual notice of the contents of these documents it is presumed that he has an implied (constructive) notice of them. Consequently, if a person enters into a contract which is beyond the powers of the company, as defined in the memorandum, or outside the limit set on the authority of the directors as per the memorandum or articles, he cannot, as a general rule, acquire any rights under the contract against the company.

By constructive notice is meant

  • Whether a person reads the documents or not, he is presumed to have knowledge of the contents of the documents. He is not only presumed to have read the documents but also understood them in their true perspective, and
  • Every person dealing with the company not only has the constructive notice of the memorandum and articles but also of all the other related documents, such as Special Resolutions, etc., which are required to be registered with the Registrar.

Thus, if a person enters into a contract that is beyond the powers of the company as defined in the memorandum, or outside the authority of directors as per memorandum or articles, he cannot acquire any rights under the contract against the company.

Question 12.
Briefly explain the doctrine of ‘ultra vires’ under the Companies Act, 2013. What are the consequences of ultra vires acts of the company?
Answer:
The meaning of the term ultra vires is simply “beyond (their) powers”. The legal phrase “ultra vires” is applicable only to acts done in excess of the legal powers of the doers. This presupposes that the powers in their nature are limited.
It is a fundamental rule of Company Law that the objects of a company as stated in its memorandum can be departed from only to the extent permitted by the Act, thus far and no further. In consequence, any act done or a contract made by the company which travels beyond the powers not only of the directors but also of the company is wholly void and inoperative in law and is therefore not binding on the company.

The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires transaction nor can it sue on it. Since the memorandum is a “public document”, it is open to public inspection. Therefore, when one deals with a company one is deemed to know about the powers of the company. If in spite of this if a person enters into a transaction that is ultra vires the company, he cannot enforce it against the company.

Further, an act that is ultra vires the company being void, cannot be ratified by the shareholders of the company. The leading case through which this doctrine was enunciated is that of Ashbury Railway Carriage and Iron Company Limited v. Riche (1875).
The following are the consequences of an ultra vires act of the company:

  • An act ultra vires the company is null and void and thus wholly inopera¬tive. Neither the company can sue nor be sued against on such a contract made for an ultra vires act.
  • An act that is ultra vires the company cannot be ratified even by the unanimous consent of all the shareholders.
  • An act that is ultra vires the company cannot become ultra vires’ by reason of estoppel, acquiescence, the lapse of time, delay, or ratification.
  • The directors shall be held personally liable to the third parties who contracted for an ultra vires transaction on behalf of the company.

Companies Act, 2013 – CA Foundation Law Study Material

Question 13.
What is meant by the entrenchment of provisions in the Articles of Association?
Answer:
The articles may contain provisions for entrenchment (to protect something) to the effect that specified provisions of the articles may be altered only if conditions or procedures that are more restrictive than those applicable in the case of a special resolution, are met or complied with.

The provisions for entrenchment shall only be made either on the formation of a company or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company.

Where the articles contain provisions for entrenchment, whether made on the formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed.

Question 14.
What do you mean by ‘Companies with charitable purpose’ (Section 8) under the Companies Act, 2013? Mention the conditions of the issue & revocation of the license of such company by the Government.
Answer:
“Companies with Charitable Objects” (Section 8) refers to the companies incorporated for a purpose other than earning profits. Such companies which carry on activities other than those of a commercial nature can be incorporated after obtaining a license u/s 8.
The Central Government issues a license for incorporation of a company under section 8 if it is duly satisfied that

  • the proposed company is being incorporated to promote the charitable objects of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, etc.
  • such a company intends to apply its profits in promoting its objects only &
  • company prohibits the payment of any dividend to its members.

The Central Government may by order revoke the license of the company:

  • where the company contravenes any of the requirements of the conditions of section 8, subject to which the license is issued or
  • where the affairs of the company are conducted fraudulently, or
  • where the affairs of the company are conducted in a manner that is violative of the objects, or
  • in a manner prejudicial to the public interest.

Before such revocation, the Central Government must give notice of its intention to revoke the license to the company and must also award the company, a reasonable opportunity of being heard.

Question 15.
The Articles of Association of XYZ Ltd. provides that the Board of Directors has the authority to issue bonds provided such issue is authorized by the shareholders by a necessary resolution in the general meeting of the company. The company was in dire need of funds & therefore it issued the bonds to Mr. X without passing any such resolution in the general meeting. Can Mr. X recover the money from the company? Decide, referring to the relevant provisions of the Companies Act, 2013. (C.A. Foundation RTP May 2018)
Answer:
As per the provisions of The Doctrine of Indoor Management, if an act is authorized by the AOA/MOA, then the outsider dealing with the company, is entitled to assume that all the formalities concerned with the act in question, have been complied with by the company in a regular manner, provided he has knowledge of the formalities mentioned in the MOA/AO A. Thus if the outsider has knowledge of the contents of these public documents and has understood them in their true perspective, then doctrine offers protection to the outsider and allows him to enforce the said contract against the company.

The facts of the case are similar to the leading case, of The Royal British Bank v. Turquand, where the directors of RRB Ltd. issued a bond to Turquand. The AOA empowered the directors to issue such bonds under the authority of a proper resolution. In fact, no such resolution was passed. Notwithstanding that, it was held that T could sue on the presumption of Doctrine of Indoor Management. Thus it can be concluded applying the above provisions and the ruling of the leading case, that Mr. X can recover the money from the company, assuming that all the required formalities for passing the resolution have duly complied.

Companies Act, 2013 – CA Foundation Law Study Material

Question 16.
Krishna, an assessee, was a wealthy man earning huge income by way of dividends and interest. He formed three private companies and agreed with each to hold a block of investment as an agent for them. The dividend and interest income received by the companies was handed back to Krishna as a pretended loan. This way Krishna divided his income into three parts in a bid to reduce his tax liability. Decide for what purpose the three companies were established? Whether the legal personality of the three companies may be disregarded?
Answer:
A company on being incorporated acquires a separate legal existence. Its existence is distinct and separate from its members. This principle of a separate legal entity may be referred to as the veil of incorporation. Generally, the law does not disregard this ‘corporate veil’ and does not concern itself directly with the members of the directors of the company. However, in certain exceptional cases, the law shall disregard the corporate entity and pay regard to the realities behind the legal facade, in order to render justice. One of the circumstances where the corporate veil is lifted is for the protection of revenue of the Government. Thus where the corporate entity is being used as a means of evasion of taxes there the corporate veil shall be lifted.

In the given case, Krishna an assessee earning huge dividend and interest income, formed three private companies and agreed to hold the investments as an agent, and received back the dividend & interest income as a pretended loan, with the intention to reduce his taxation liability.
Thus it is evident that the three private companies have been incorporated to merely serve as a means for evading taxes by Krishna & the corporate veil shall be lifted and the separate entity shall be disregarded. The dividend and interest income shall be deemed to be that of Krishna and he shall be liable to pay tax on the same, as was held in the leading case of Sir Dinshaw Maneckjee Petit.

Question 17.
Ravi Private Limited has borrowed t 5 crores from Mudra Finance Ltd. This debt is ultra vires to the company. Examine whether the company is liable to pay this debt? State the remedy if any available to Mudra Finance Ltd.
Answer:
A company cannot depart from the provisions contained in its M.O.A., however imperative may be the departure. It cannot enter into a contract that is beyond the power confessed on it by the M.O.A. If it does so, the contract shall be regarded as ultra vires and therefore void ab initio. The impact of an ultra vires transaction is that neither the company nor the third party has a right to sue on it. Since the memorandum is a public document by virtue of its being filed with the R.O.C., the parties who come to contract with the company, are deemed to have a knowledge of the contents of the M.O.A. If in spite of this the person enters into an ultra vires transaction, he cannot enforce the same against the company. Further money has been advanced to a company, in an ultra vires transaction, generally, it cannot be recovered by the lender. However, if the company has not yet expended the money then the company can be stopped from parting with the same by means of a suit for injunction and the lender shall be entitled to take back the same in species.

In the given case Ravi Private Limited has borrowed ₹ 5 crores from Mudra Finance Ltd. which is ultra vires, which implies that Ravi Pvt. Ltd. has borrowed the amount beyond the limit prescribed in the M.O.A. of the company. Applying the above-stated effect of the doctrine of ultra vires, it can be concluded that since the act of Ravi Pvt. Ltd. is ultra vires the company, the transaction shall be treated as void ab initio. However the lender i.e., Mudra Finance Ltd. shall be entitled to stop Ravi Pvt. Ltd. from parting with the money lent and take back the property in species.

Question 18.
ABC Pvt. Ltd., is a Private Company having five members only. All the members of the company were going by car to Mumbai in relation to some business. An accident took place and all of them died. Answer with reasons, under the Companies Act, 2013 whether the existence of the company has also come to the end?
Answer:
The company on its incorporation enjoys perpetual succession on account of its separate legal entity. The members may come and go but the company shall continue to be in existence forever until the company is legally wound up. Further, since the shares are transferable, in the event of the death of the members, the shares shall be transmitted to their legal representatives. Thus the company, ABC Pvt. Ltd. shall continue to be in existence, in spite of the death of its members in the given case.

Companies Act, 2013 – CA Foundation Law Study Material

Question 19.
The paid-up Share Capital of AVS Private Limited is ₹ 1 crore, consisting of 8 lacs Equity Shares of ₹ 10 each, fully paid-up and 2 lacs Cumulative Preference Shares of ₹ 10 each, fully paid-up. XYZ Private Limited and BCL Private Limited are holding 3 lacs Equity Shares and 1,50,000 Equity Shares respectively in AVS Private Limited. XYZ Private Limited and BCL Private Limited are the subsidiaries of TSR Private Limited. With reference to the provisions of the Companies Act, 2013, examine whether AVS Private Limited is a subsidiary of TSR Private Limited? Would your answer be different if TSR Private Limited has 8 out of a total of 10 directors on the Board of Directors of AVS Private Limited?
Answer:
Section 2(87) defines “subsidiary company” in relation to any other company (that is to say the holding company), means a company in which the holding company:

  • controls the composition of the Board of Directors; or
  • exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:

For the purposes of this section:

  • a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (z) or sub-clause
  • is of another subsidiary company of the holding company;
  • the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

Further the term “Total Share Capital”, means the aggregate of the:

  • Paid-up equity share capital; and
  • Convertible preference share capital. Thus applying the above-stated provisions, in both the above cases, AVS Pvt. Ltd. will be the subsidiary of TSR Pvt. Ltd. Total share capital of AVS Pvt. Ltd. is 8,00,000 shares out of which TSR Pvt. Ltd. is holding 4,50,000 shares through its subsidiaries.

Question 20.
The Articles of a company required that all deeds etc. should be signed by the M.D., the Secretary, and an Executive Director on behalf of the company. A deed of mortgage was signed by the Managing Director on behalf of the company in favor of Z. Can it be a valid deed?
Answer:
Hint: Doctrine of constructive Notice; The Articles require the deed to be signed by 3 persons. Z should have consulted the Articles of Association of the company to ascertain the authority of signing the deed. Even if, the M.D. has signed it in good faith, the deed is still not valid. Z can’t claim on the basis of the deed. The concept is that since the Articles is a public document, on being filed with the ROC, Z is presumed to have known its provisions. This principle was laid in Kotla Venkateswami v. Ramamurthy AIR 1934 Mad 579.

Question 21.
The Object Clause of Memorandum of Association of ABC Pvt. Ltd. Authorized the company to carry on the business of trading in Fruits and Vegetables. The Directors of the company in recently concluded Board Meeting decided and accordingly, the company ordered for fish for the purpose of trading. FSH Limited supplied fish to ABC Pvt. Ltd. Worth ₹ 36 lakhs. The members of the company convened an extraordinary general meeting and negated the proposal of the Board of Directors on the ground of ultra vires acts. FSH Limited being aggrieved of the said decision of ABC Pvt. Ltd. seeks your advice. Advise them.
Answer:
Hint:- Doctrine of ultra vires’, Company being an artificial person can enter into those contracts as are warranted by terms of the object clause of its MOA. A company can depart from the objects stated in MOA only to the extent permitted by the Act, thus far and no further. Thus any act done or any contract made by the company which travels beyond the powers not only of the directors but also of the company is wholly void inoperative and is therefore not binding on the company.

In the given case the object clause of MOA of ABC Pvt. Ltd. authorizes to carry on the business of trading in fruits & vegetables only, whereas the company enters into a contract with FSH Ltd. for the purchase of fish worth ₹ 36 lakhs. Thus the contract is ultra vires the company and shall not be binding on the company. Further ratification of ultra vires transactions cannot be done even by the whole body of shareholders. Thus FSH Ltd. has no remedy against the company. It can hold the directors of ABC Pvt. Ltd. personally liable.

Question 22.
FAREB Limited was incorporated by the acquisition of Fareb & Co., a partnership firm, which was earlier involved in many illegal activities. The promoters furnished some false information and also suppressed some material facts at the time of incorporation of the company. Some members of the public (not being directors or promoters of the company) approached the National Company Law Tribunal (NCLT) against the incorporation status of FAREB Limited. NCLT is about to pass the order by directing that the liability of the members of the company shall be unlimited.
Given the above, advise on whether the above order will be legal and mention the precaution to be taken by NCLT before passing the order in respect of the above as per the provisions of the Companies Act, 2013.
Answer:
Hint According to the provisions of Section 7(7) of the Companies Act, 2013, where a company has been got incorporated by furnishing false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal may, on an application made to it, on being satisfied that the situation so warrants,

  • pass such orders, as it may think fit, for regulation of the management of the company including changes, if any, in its memorandum and articles, in public interest or in the interest of the company and its members and creditors; or
  • direct that liability of the members shall be unlimited; or
  • direct removal of the name of the company from the register of companies; or
  • pass an order for the winding-up of the company; or
  • pass such other orders as it may deem fit.

Provided that before making any order:

  • the company shall be given a reasonable opportunity of being heard in the matter; and
  • the Tribunal shall take into consideration the transactions entered into by the company, including the obligations, if any, contracted or payment of any liability.

Further where it is proved that a company has been incorporated as aforesaid, then the promoters, the persons named as the first directors, and the persons making a declaration at the time of incorporation of the company shall each be .liable for action for fraud under section 447.
In the given case, the decision of NCLT to direct that the liability of the members of FAREB Ltd. shall be unlimited is legally valid as per the above-stated provisions. However, before passing any such direction, NCLT shall grant FAREB Ltd., the opportunity of being heard and shall take into consideration the transactions entered into by company, including the obligations if any contracted or payment of any liability.

Question 23.
A company registered under Section 8 of the Companies Act, 2013, earned huge profits during the financial year ended on 31st March 2018 due to some favorable policies declared by the Government of India and implemented by the company. Considering the development, some members of the company wanted the company to distribute dividends to the members of the company. They approached you to advise them about the maximum amount of dividend that can be declared by the company as per the provisions of the Companies Act, 2013. Examine the relevant provisions of the Companies Act, 2013, and advise the members accordingly.
Answer:
According to provisions of section 8 of the Companies Act, 2013, a company can be incorporated for not-for-profit purposes under a license from Central Government provided the following conditions have complied

  • The company is formed to promote the charitable objects of commerce, art, science, sports, education, research, social welfare, religion, charity protection of the environment, etc.
  • Such a company intends to apply its profits/surplus in the promotion of its objects and
  • The payment of dividends to its members is prohibited.

In the given case the member of a Section 8 company is desirous that the company should distribute dividends out of the huge profits earned by the company, among its members.

Thus applying the above-stated provisions it is evident that distribution of dividends is prohibited and therefore the claim of the members is not tenable.

Question 24.
Mr. X had purchased some goods from M/s. ABC Limited on credit. A credit period of one month was allowed to Mr. X. Before the due date Mr. X went to the company and wanted to repay the amount due from him. He found only Mr. Z there, who was the factory supervisor of the company, Mr. Z told Mr. X that the accountant and the cashier were on leave, he is in¬charge of receiving money and he may pay the amount to him. Mr. Z issued a money receipt under his signature.

After two months M/s. ABC Limited issued a notice to Mr. X for non-payment of the dues within the stipulated period. Mr. X informed the company that he had already cleared the dues and he is no more responsible for the same. He also contended that Mr. Z is an employee of the company to whom he had made the payment and being an outsider, he trusted the words of Mr. Z as duty distribution is a job of the internal management of the company. Analyze the situation and decide whether Mr. X is free from his liability.
Answer:
The Doctrine of Indoor Management is an exception to the Doctrine of Constructive Notice. An outsider who has read the public documents (MOA & AOA) containing the powers of the company and the extent to which they have been delegated to its officers and understood them in their true perspective, can assume that the internal operations and management of the company have been performed regularly, in respect of the contract that he is desirous of entering into with the company. However, there are certain limitations to this doctrine.

One of the exceptions to the Doctrine of Indoor management is knowledge/ suspicion of irregularity. The protection under the doctrine does not extend to those persons who have behaved negligently. Thus when the circumstances are such which invite inquiry & for example when an officer of the company is purporting to act in a matter, which is apparently outside the usual scope of his authority, then the outsides are under a duty to make the necessary inquiry. If the outsider fails to make an inquiry as such then he cannot seek protection under the Doctrine of Indoor Management and the company shall not be bound by the transaction. This was also held in the case of Anand Behari Lai v. Dinshaw & Co.

In the given case Mr. X makes the payment to Mr. Z the factory supervisor. The act of receiving money on behalf of the company falls beyond the apparent authority of a factory supervisor. The nature of the transaction was such which required Mr. X to enquire as to Mr. Z’s authority.

Thus applying the above-stated provisions it can be concluded that Mr. X is not free from his liability towards the company as he failed to enquire about Mr. Z’s authority despite the suspicious circumstances. members in the company as noted below:

  • Directors and their relatives                                                                     190
  • Employees                                                                                                15
  • Ex-Employees (Shares were allotted when they were employees)           10
  • 5 couples holding shares jointly in the name of husband and wife (5*2) 10
  • Others                                                                                                        5

The board of Directors of the company proposes to convert it into a private company. Also, advise whether the reduction in the number of members is necessary.
Answer:
Hint: Provisions of section 2(68) of Companies Act, 2013. Definition of a private company. In Computing the number of members joint shareholders are treated as a single member. Further, the number of present employees & past employees who continue to be members even after termination of employment shall not be included in the number of members.

In the given case Flora Fauna Limited can be converted into a private company provided the restrictions of a private company are incorporated in the area of the company and due procedure for conversion, under the Act is duly complied with. Further Flora Fauna Ltd. would be required to have its number of members Limited to 200.

Presently the total number of members are:

  • Directors & their relatives                                       =190
  • 5coup]es[joint shareholders counted as a  single] =5
  • Other                                                                       = 5
    Total                                                                              200 [excluding present & ex-employees]

Therefore since the number of members does not exceed 200, no reduction in the number of members is required for conversion.

Companies Act, 2013 – CA Foundation Law Study Material

Question 26.
Sound Syndicate Ltd. a public company, its articles of association empower the managing agents to borrow both short and long-term loans on behalf of the company. Mr. Liddle the director of the company, approached Easy finance Ltd., a non-banking finance company for a loan of Rs. 25,00,000 in name of the company. The lender agreed and provided the said loan. Later on, Sound Syndicate Ltd. refused to repay the money borrowed on the pretext that no resolution authorizing such loan have been actually passed by the company and the lender should have enquired about the same prior to providing such loan. Hence the company is not liable to pay such a loan. Analyze the above situation in terms of the provisions of Doctrine of Indoor Management under the Companies Act, 2013 and examine whether the contention of Sound Syndicate Ltd. is correct or not?
Answer:
According to the provisions of Doctrine of Indoor Management, an outsider while entering into contracts with a company is entitled to assume, due & regular compliance of all the formalities & internal proceedings required on the part of the company for the purpose of the contract, provided the outside has the knowledge, of the scope of authority of the company as contained in the MoA and also of the extent to which the authority has been delegated to the officials of the company. Thus an outsider can plead protection against the internal irregularities in the operations of the company & hold the company liable under the contract, only if he has the knowledge of MoA as well as the AoA and has understood their terms in their true perspective. In case the third party (outsider) has no knowledge of MoA & AoA then it cannot seek remedy under Doctrine of Indoor Management.

In the given case sound Syndicate Ltd. contracts with Easy Finance Ltd. to borrow a loan of Rs. 25,00,000. The AoA of sound Syndicate Ltd. empowers its managing agents (i.e. directors) to borrow loans on its behalf. Thus applying the above-stated provisions to the given case it can be concluded that if Easy Finance Ltd. had the knowledge of the AoA of Sound Syndicate Ltd. & was aware of the power of its directors to borrow loans on behalf of the company, then the fact, that no resolution authorizing the directors was actually passed, shall be of no consequence & Easy Finance Ltd. can hold the company liable for the loan. The passing of resolution authorizing the loan is a matter of internal management of the company which will be presumed to have been regularly performed, provided Easy Finance Ltd. has the knowledge of the AoA of Sound Syndicate Ltd. Thus the contention of Sound Syndicate Ltd. is not correct.

Question 27.
The Memorandum and Articles of Association of a company were delivered to the Registrar of Companies for registration on January 6, 2018. On January 8th, 2018, the Registrar issued the certificate of incorporation but dated it January 6th, 2018. On that very day (January 6th, 2018) the company made an allotment of its shares. The allotment was challenged that it was made before the actual issue of the certificate of incorporation. How would you decide and why?
Answer:
Hint: According to the provisions of The Companies Act, 2013, a company comes into existence the moment it is incorporated and a certificate of incorporation is issued. The company acquires a separate legal entity, from the date mentioned in the certificate and becomes competent to enter into a contract in its own name, purchase assets, incur liabilities in its own name and sue and be sued in its own name. Thus in the given case, the company has acquired a separate legal entity from the date of its incorporation as appearing in the certificate, i.e. 6th January 2018. Therefore the contract for allotment of shares made by the company is valid.

Companies Act, 2013 – CA Foundation Law Study Material

Question 28.
Popular Products Ltd. is a company incorporated in India, having a total Share Capital of Rs. 20 Crores. The Share capital comprises 12 Lakhs equity shares of Rs. 100 each and 8 Lakhs Preference Shares of Rs. 100 each. Delight Products Ltd. and Happy products Ltd. hold 2,50,000 and 3,50,000 shares respectively in Popular Products Ltd. Another company Cheerful products Ltd. holds 2,50,000 shares in Popular Products Ltd. Jovial Ltd., is the holding company for all the above three companies namely Delight Products Ltd.; Happy products Ltd; Cheerful products Ltd. Can Jovial Ltd., be termed as a subsidiary company of Popular Products Ltd., if it Controls the composition of directors of Popular Products Ltd. State the related provision in the favour of your answer.
Answer:
According to the provisions of section 2(46) of the Companies Act, 2013, a company is a holding company in relation to one or more other companies, which means a company of which such companies are subsidiary companies. Further section 2(87) defines the subsidiary company in relation to any other company (holding company), which means a company in which the holding company –

  • controls the composition of the Board of Directors; or
  • exercises or controls more than one-half of the total share capital either on its own or together with one or more of its subsidiary companies.

A company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clauses (z) & (it) is of another subsidiary company of the holding company.

In the given case subsidiaries of Jovial Ltd. – Delight Products Ltd.; Happy Products Ltd. & Cheerful Products Ltd. hold 2,50,000; 3,50,000 & 2,50,000 shares respectively in Popular Ltd. The total shareholding of these subsidiaries amounts to 8,50,000 shares which is more than half of the total share capital of Popular Ltd. of 12,00,000 No. of shares. Thus Jovial Ltd. is controlling more than half of the share capital of Popular Ltd. through its subsidiaries.

Further, if Jovial Ltd. is in a position to exercise control over the composition of the Board of Directors of Popular Ltd. then also Jovial Ltd. shall be regarded as the holding company of Popular Ltd. Thus it can be concluded that Jovial Ltd. is not the subsidiary, but is rather the holding company of Popular Ltd.

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