Incorporation of Company and Matters Incidental Thereto – CA Inter Law Study Material

Incorporation of Company and Matters Incidental Thereto – CA Inter Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Incorporation of Company and Matters Incidental Thereto – CA Inter Law Study Material

Formation of a Company (Secs. 3,3A and 8)

Question 1.
XYZ a One Person Company (OPC) was incorporated during the year 2020-21 with an authorized capital of ₹ 45 lakh (4.5 lakh shares of ₹ 10 each), the capital was fully subscribed and paid up. Turnover of the company during 2020-21 & 2021-22 was ₹ 2 crores and ₹ 2.5 crores respectively. Promoters of the company seeks your advice, whether XYZ (OPC) can convert into any other kind of company during 2022-23. Please advise.
Answer:
Conversion of OPC into other kind of company:

As per Rule 6 of Companies (Incorporation) Rules, 2014, an OPC may be converted into a Private or Public Company, other than a company registered u/s 8 of the Act, after increasing the minimum number of members and directors to 2 or 7 members and 2 or 3 directors, as the case may be, and maintaining the minimum paid-up capital as per the requirements of the Act for such class of company and by making due compliance of Sec. 18 of the Act for conversion.

As per Sec. 18 of the Companies Act, 2013 a company of any class registered under this Act may convert itself as a company of other class under this Act by alteration of memorandum and articles of the company in accordance with the provisions of Chapter II of the Act.

Conclusion: OPC can convert voluntarily into any other kind of company after alteration of memorandum and articles of the company as required under Sec. 18.

Question 2.
Red Limited was incorporated on 1st April, 2016 is facing severe effects of depression of the economy. Owing to its bad financial status most of the members have started withdrawing their holding from the company. The company had 250 members on 10th January, 2022. By 15th January, 2022, 244 members had withdrawn their holding. No new member has invested in the company after 15th February till date. Now, Mr. A, an existing member has approached you to advise him regarding his liabilities in such a situation. [RTP-Nov. 19]
Answer:
Members severally liable in certain cases:

As per Sec. 3A of the Companies Act, 2013, if at any time the number of members of a company is reduced, in the case of a public company, below 7, in the case of a private company, below 2, and the company carries on business for more than 6 months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those 6 months and is cognisant of the fact that it is carrying on business with less than 7 members or 2 members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor.

In the given case, the number of members in the said public company have fallen below 7 [250- 244 = 6] and these members have continued beyond the specified limit of 6 months.

Conclusion: As number of members have reduced below 7 beyond the specified limit of 6 months, the reduced members of the company during the period of 1 month shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor.

Question 3.
Alfa School started imparting education on 01.04.2015, with the sole objective of providing education to children of weaker society either free of cost or at a very nominal fee depending upon the financial condition of their parents. However, on 30th March 2022, it came to the knowledge of the Central Government that the said school was operating by violating the objects of its objective clause due to which it was granted the status of a section 8 company under the Companies Act, 2013. Describe what powers can be exercised by the Central Government against the Alfa School, in such a case? [MTP-Aug. 18, March 19]
Answer:
Powers that can be exercised by the Central Government against Sec. 8 company:

Sec. 8 of the Companies Act, 2013 deals with the formation of companies which are formed to promote the charitable objects of commerce, art, science, education, sports etc. Such company intends to apply its profit in promoting its objects.

Sec. 8 companies are registered by the Registrar only when a license is issued by the C.G. to them. Since, Alfa School was a Sec. 8 company and it had started violating the objects of its objective clause, hence in such a situation the following powers can be exercised by the C.G.:

(i) Revocation of license: The C.G. may by order revoke the licence of the company where the company contravenes any of the requirements or the conditions of this sections subject to which a licence is issued or where the affairs of the company are conducted fraudulently, or violative of the objects of the company or prejudicial to public interest, and on revocation the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the register.

Before such revocation, the C.G. must give it a written notice of its intention to revoke the licence and opportunity to be heard in the matter.

(ii) Order for Winding up or Amalgamation of the company: Where a licence is revoked, the C.G. may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section. However, no such order shall be made unless the company is given a reasonable opportunity of being heard.

(iii) Order for providing amalgamation to form a single company: Where a licence is revoked and the C.G. is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, notwithstanding anything to the contrary contained in this Act, the Central Government may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order.

Question 4.
Mr. X, in association with his relative formed a company to promote education for the children of poor section. A licence was issued by the Central Government allowing the said company to be registered under section 8 of the Company. Government aids and lot of funds were contributed by public for the fulfilment of the benevolent object.

However, on the complaint against the company, C.G. came to know about the manipulation of the funds in the company and so order to revoke the licence of the company. Further, directed for the amalgamation with another company registered under this section with an object to save girl child.

Examine the legal position as to the order passed by the Central Government in the given situation in the light of the Companies Act, 2013. [MTP-Oct. 18]
Answer:
Revocation of License of Sec. 8 company:

As per the Sec. 8 of the Companies Act, 2013, the C.G. may by order revoke the licence of the company where the company contravenes any of the requirements or the conditions of this sections subject to which a licence is issued or where the affairs of the company are conducted fraudulently, or violative of the objects of the company or prejudicial to public interest.

Where a licence is revoked, the C.G. may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section.

Where a licence is revoked and where the C.G. is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, the C.G. may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order.

In the given situation, on revocation of licence, the C.G. ordered for the amalgamation of the company with the separate entity registered u/s 8 of the Companies Act, 2013. However, objects for which both the Companies formed were different.

Conclusion: Order passed by the C.G. for amalgamation with another company is not in compliance of Sec. 8 as object for which both the Companies were formed are different.

Question 5.
Alpha Herbals, a section 8 Company is planning to declare dividend in the Annual General Meeting for the Financial Year ended 31.03.2022. Mr. Chopra is holding 800 equity shares as on date. State whether the act of the company is according to the provisions of the Companies Act, 2013
[MTP – Oct20,RTP-May21]
Answer:
Declaration of dividend by Sec. 8 company:

As required by Sec. 8 of the Companies Act, 2013, the companies licenced u/s 8 of the Act (Formation of companies with Charitable Objects, etc.) are prohibited from paying any dividend to their members. Their profits are intended to be applied only in promoting the objects for which they are formed.
In the given case, Alpha Herbals, a section 8 Company is planning to declare dividend in the Annual General Meeting for the Financial Year ended 31.03.2022.

Conclusion: Proposed act of Alpha Herbals to declare dividend, is not in accordance to the provisions
of the Companies Act, 2013.

Question 6.
A group of individuals intend to form a club namely ‘Budding Pilots Flying Club’ as limited liability company to impart class room teaching and aircraft flight training to trainee pi’ots. It was decided to form a limited liability company for charitable purpose under section b of the Companies Act, 2013 for a period of ten years and thereafter the club will be dissolved and the surplus of assets over the liabilities, if any, will be distributed amongst the members as a usual procedure allowed under the Companies Act

Examine the feasibility of the proposal and advise the promoters considering the provisions of the Companies Act, 2013. [MTP-Nov. 20, May 19 (5 Marks)}
Answer:
Formation of Companies with Charitable Objects, etc.:

As per Sec. 8(1) of the Companies Act, 2013, where it is proved to the satisfaction of the C.G. that a person or an association of persons proposed to be registered under this Act as a limited company

(a) has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;
(b) intends to apply its profits, if any, or other income in promoting its objects; and
(c) intends to prohibit the payment of any dividend to its members; the Central Government may, by issue of licence, allow that person or association of persons to be registered as a limited liability company.

In the given case, the decision of the group of individuals to form a limited liability company for charitable purpose u/s section 8 for a period of 10 years and thereafter to dissolve the club and to distribute the surplus of assets over the liabilities, if any, amongst the members will not hold good, since there is a restriction as pointed out in point (b) above regarding application of its profits or other income only in promoting its objects.

Further, there is restriction in the application of the surplus assets of such a company in the event of winding up or dissolution of the company as provided in Sec. 8 of the Companies Act, 2013.

Conclusion: Proposal is not feasible as surplus, if any on dissolution, can’t be distributed amongst the members on dissolution.

Question 7.
Naveen incorporated a “One Person Company” making his sister Navita as the nominee. Navita is leaving India permanently due to her marriage abroad. Due to this fact, she is withdrawing her consent of nomination in the said One Person Company. Taking into considerations the provisions of the Companies Act, 2013 answer the questions given below.
(a) If Navita is leaving India permanently, is it mandatory for her to withdraw her nomination in the said One Person Company?
(b) If Navita maintained the status of Resident of India after her marriage, then can she continue
her nomination in the said One Person Company? [Nov. 19 {2 Marks), RTP-May 21]
Answer:
Nominee in case of OPC:

As per Rule 3 of Companies (Incorporation) Rules, 2014 as amended by Companies (Incorporation) 2^nd Amendment Rules, 2021, only a natural person who is an Indian citizen whether resident in India or otherwise shall be eligible to incorporate a One Person Company (OPC) or be a nominee for the sole member of a One Person Company.
Residential status of a person is now irrelevant in deciding whether an individual can incorporate an OPC or be a nominee for the sole member of an OPC.

Conclusion: Based on the amended provisions of Rule 3, following conclusions may be drawn:
(a) It is not mandatory to withdraw the nomination.
(b) Navita can continue the nomination as long as she remains an Indian citizen.

Question 8.
Mr. Raja along with his family members is running successfully a trading business. He is capable of developing his ideas and participating in the market place. To achieve this, Mr. Raja formed a single person economic activity in the form of One Person Company with his brother Mr. King as its nominee. On 4th May, 2022, Mr. King withdrew his consent as nominee of the One Person Company. Can he do so under the provisions of the Companies Act, 2013?
Examine whether the following individuals are eligible for being nominated as Nominee of the One Person Company as on 5th May 2022 under the above said Act

Mr. Shyam son of Mr. Raja who is 15 years old as on 5th May 2022.
Ms. Devaki an Indian Citizen, sister of Mr. Raja stays in Dubai and India. She stayed in India during the period from 2nd January 2021 to 16th August 2021. Thereafter she left for Dubai and stayed there.
Mr. Ashok, an Indian Citizen residing in India who is presently a member of a ‘One Person Company. [Nov. 20 (6 Marks)]

Answer:
Nominee in case of OPC:

As per Sec. 3 of the Companies Act, 2013, the memorandum of OPC shall indicate the name of the other person (nominee), who shall, in the event of the subscriber’s death or his incapacity to contract, become the member of the company. Such other person (nominee) may withdraw his consent in prescribed manner.
As per Rule 3 of Companies (Incorporation) Rules, 2014 as amended by Companies (Incorporation) 2^nd Amendment Rules, 2021, only a natural person who is an Indian citizen whether resident in India or otherwise shall be eligible to incorporate a One Person Company (OPC) or be a nominee for the sole member of a One Person Company.
The term “Resident in India” means a person who has stayed in India for a period of not less than 120 days during the immediately preceding financial year.
Residential status of a person is now irrelevant in deciding whether an individual can incorporate an OPC or be a nominee for the sole member of an OPC.
A natural person shall not be member of more than a One Person Company at any point of time and the said person shall not be a nominee of more than one OPC.
No minor shall become member or nominee of the OPC or can hold share with beneficial interest.

Conclusion: Applying the provisions of Sec. 3, Mr. King can withdraw his consent as nominee of the
One Person Company by giving a notice in writing to the sole member and to the OPC.

Applying the provisions of Rule 3, following conclusions may by drawn as to eligibility of various
persons for being nominated as Nominee of the One Person Company as on 5th May 2022:

Mr. Shyam, son of Mr. Raja who is 15 years old is not eligible being a minor.
Ms. Devaki, sister of Mr. Raja is eligible for being nominated as nominee, being an Indian citizen. Residential Status of Devaki is irrelevant subsequent to amendments.
Mr. Ashok, is also eligible to be nominated as nominee, as an Indian citizen who is a member of OPC at any point of time can also be a nominee of one OPC.

Question 9.
State Cricket Club was formed as a Limited Liability Company u/s 8 of the Companies Act, 2013 with the object of promoting cricket by arranging introductory cricket courses at district level and friendly matches. The club has been earning surplus. Of late, the affairs of the company are conducted fraudulently and dividend was paid to its members. Mr. Cool, a member decided to make a complaint with Regulatory Authority to curb the fraudulent activities by cancelling the licence given to the Company.
(i) Is there any provision under the Companies Act, 2013 to revoke the licence? If so, state the provisions.
(ii) Whether the Company may be wound up?
(iii) Whether the State Cricket Club can be merged with M/s. Cool Net Private Limited, a company
engaged in the business of networking? [July 21 (5 Marks), MTP-March 22]
Answer:
(i) Revocation of License of Sec. 8 company:

On revocation, the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the register. But before such revocation, the C.G. must give the company a written notice of its intention to revoke the licence and opportunity to be heard in the matter.

Conclusion: C.G. can revoke the license given to State Cricket Club as Sec. 8 company, as the affairs of the company are conducted fraudulently and dividend was paid to its members which is in contravention to the conditions given u/s 8.

(ii) Winding up of Sec. 8 company:

Where a licence of Sec. 8 company is revoked, the C.G. may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section.
However, no such order shall be made unless the company is given a reasonable opportunity of being heard.
Conclusion: Star Cricket Club may be wound up.

(iii) Amalgamation of Sec. 8 company with another company:

A company registered under this section shall amalgamate only with another company registered under this section and having similar objects.

Conclusion: State Cricket Club cannot be merged with Cool Net Private Limited as the objects of
both the companies are different and not similar.

Question 10.
What is the minimum number of persons required to form a private company and a public company? Explain the consequences when the number of members falls below the minimum prescribed limit [MTP-Nov. 21}
Answer:
Minimum number of persons required to form a company:
As per Sec. 3 of the Companies Act, 2013, a company may be formed for any lawful purpose by:
(a) 7 or more persons, where the company to be formed is to be a public company;
(b) 2 or more persons, where the company to be formed is to be a private company; or
by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration.

Consequences when the number of members falls below the minimum prescribed limit:

As per Sec. 3A of the Companies Act, 2013, if at any time the number of members of a company is reduced, in the case of a public company, below 7, in the case of a private company, below 2, and the company carries on business for more than six months while the number of members is so reduced, then every person who is a member of the company during the time that it so carries on business after those six months and is cognizant of the fact that it is carrying on business with less than 7 members or 2 members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time and may be severally sued therefore.

Question 11.
Chhavish, an Indian citizen and resident of India formed “Ekta Readymade Garments Ltd.” as One Person Company on 1st April 2020 with his wife Mrs. Jyoti as nominee. The authorized and paid-up share capital of the company is ₹ 35 lakhs. He got in touch with a readymade garments buyer and was expecting to receive a substantial order by August 2022 where final delivery will be completed by December 2022. To expand the production capacity, the company decided to invest an additional capital of ₹ 10 lakhs in plant and machinery. As a result, the company’s authorized and paid-up share capital is now ₹ 45 Lakhs. Promoter of the company seeks your advice. Considering the case and referring the provisions of the Companies Act, 2013, advice:

(A) Who is eligible to act as a member of OPC?
(B) Whether “Ekta Readymade Garments Ltd.” can convert into any other kind of company as on 1st December 2022?
(C) If the company increases its paid-up share capital by ₹ 30 lakhs in August, 2021, can it be converted in any other kind of company immediately? [Dec. 21 (3 Marks)]
Answer:
Provisions related with One Person Company:

1. Persons eligible to act as a member of OPC:

As per Rule 3 of the Companies (Incorporation) Rules, 2014, Only a natural person who is an Indian citizen whether resident in India or otherwise shall be eligible to incorporate a One Person Company (OPC) or be a nominee for the sole member of a One Person Company.
The term “Resident in India” means a person who has stayed in India for a period of not less than 120 days during the immediately preceding financial year.
A natural person shall not be member of more than a One Person Company at any point of time and the said person shall not be a nominee of more than one OPC.

2. Conversion of OPC into other company as on 01st Dec. 2022:

As per Rule 6 of the Companies (Incorporation) Rules, 2014, OPC may be converted into a Private or Public Company, other than a company registered u/s 8 of the Act, after increasing the minimum number of members and directors to 2 or 7 members and 2 or 3 directors, as the case may be, and maintaining the minimum paid-up capital as per the requirements of the Act for such class of company and by making due compliance of Sec. 18 of the Act for conversion.

3. Conversion of OPC into other company in Aug. 2021:

Rule 3 of the Companies (Incorporation) Rules, 2014 which provides that OPC cannot convert voluntarily into any kind of company unless 2 years have expired from the date of incorporation of OPC, except where the paid-up share capital is increased beyond ₹ 50 Lacs or its average annual turnover during the relevant period exceeds ₹ 2 Crore has been deleted by the Companies (Incorporation) 2nd Amendment Rules, 2021 w.e.f. 01.04.2021.

Hence, OPC can be converted into a Private or Public Company, other than a company registered u/s 8 of the Act, any time after complying with the provisions as stated in Rule 6.

Question 12.
Sai along with his six friends desires to incorporate a Section 8 Company under the Companies Act, 2013. He is seeking your advice in the following matters:

What is the minimum paid-up capital requirement in case of a Section 8 Company?
Whether a firm can be member of the Section 8 Company?
Whether the Section 8 Company can pay dividend to its members?
Advise, Sai with reference to the provisions of Companies Act, 2013. [MTP-April 22]

Answer:
Provisions Related with Sec. 8 Company:

The requirement of having a minimum paid up share capital shall not apply to a Sec. 8 company.
Yes, under section 8(3) of the Companies Act, 2013, a firm may be a member of the company registered under section 8.
As per Sec. 8(1)(c) of the Companies Act, 2013, Sec. 8 company cannot pay dividend to its members as it prohibits the payment of dividends to its members.

Question 13.
One of the matters contained in the articles of Dhimaan Foundation, incorporated as a limited company under section 8 of the Companies Act, 2013, was altered by passing a special resolution in its general meeting and thereafter, intimation for the same was given to Registrar of Companies. However, such alteration in the articles was opposed by Dhwa) & Co., a partnership firm which is its member that there such alteration was not valid.
Advise, as per the provisions of the Companies Act, 2013, whether the contention of Dhwa} & Co. was valid and whether it can be a member in such company? [RTP-May 22]
Answer:
Provisions related with Sec. 8 company:

As per Sec. 8 of the Companies Act, 2013, a company registered under this section shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government (the power has been delegated to Registrar of Companies]. Also, a firm may be a member of the company registered under section.
In the given situation, one of the matters of articles of Dhimaan Foundation was altered by passing a special resolution in its general meeting and thereafter, intimation for the same was given to Registrar of Companies.

Conclusion: It is necessary to take previous approval of the Registrar of Companies to alter the provisions of memorandum or articles, which was not done in the present case and thus the contention of Dhwaj & Co. was valid.
Also, Sec. 8 allows a firm to be a member of such company and hence, Dhwaj & Co. can be its member.

incorporation of Company and Commencement of Business (Secs. 7,9 and 10A)

Question 14.
Mahima Ltd. was incorporated by furnishing false information. As per the Companies Act, 2013, state the powers of the Tribunal (NCLT) in this regard. [Nov. 19 (5 Marks)]
Answer:
Powers of Tribunal in case a company is incorporated by furnishing any false information:

As per Sec. 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—

(a) 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
(b) direct that liability of the members shall be unlimited; or
(c) direct removal of the name of the company from the register of companies; or
(d) pass an order for the winding up of the company; or
(e) pass such other orders as it may deem fit.

However, before making any order-

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

Question 15.
Mr. Dinesh incorporated a new Private Limited Company under the provisions of the Companies Act, 2013 and desires to commence the business immediately. Please advise Mr. Dinesh about the procedure for commencement of business as laid under the provisions of the Section 10A of the Companies Act, 2013. [MTP-April 21]
Answer:
Commencement of Business:
As per Sec. 10A of the Companies Act, 2013, a company incorporated after 02.11.2018 and having a share capital shall not commence any business or exercise any borrowing powers unless:

(a) A declaration is filed by a director within a period of 180 days of the date of incorporation of the company in such form and verified in such manner as may be prescribed, with the Registrar that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration; and

(b) The company has filed with the Registrar a verification of its registered office as provided in Sec. 12(2).
Mr. Dinesh has to comply with the above requirements and procedure for commencing the business of the company.

Question 16.
Sapphire Private Limited has registered its articles along with memorandum as on 1st July 2022. The directors of the company seek your advice regarding effect of registration of the company on the company itself and on its members. [May 22 (3 Marks)]
Answer:
Effects of Registration of a company:

As per Sec. 9 of the Companies Act, 2013, from the date of incorporation (mentioned in the certificate of incorporation), the subscribers to the memorandum and all other persons, who may from time to time become members of the company, shall be a body corporate by the name contained in the memorandum.
Such a registered company shall be:

capable of exercising all the functions of an incorporated company under this Act and
having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and
to sue and be sued, by the said name.

Memorandum of Association (Sec. 4) & Articles of Association (Sec, 5)

Question 17.
Yadav Dairy Products Private Limited has registered its articles along with memorandum at the time of registration of company in December, 2019. Now directors of the company are of the view that provisions of articles regarding forfeiture of shares should not be changed except by a resolution of 90% majority. While as per section 14 of the Companies Act, 2013 articles may be changed by passing a special resolution only. Hence, one of the directors is of the view that they cannot make a provision against the Companies Act, 2013. You are required to advise the company on this matter. [RTP-May 20]
Answer:
Provisions for entrenchment:

Sec. 5 of the Companies Act, 2013 deals with the provisions relating to entrenchment. Accordingly,

1. The article may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if more restrictive conditions than a special resolution, are met.
2. The provisions for entrenchment shall only be made either on 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.
3. Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in prescribed manner.

In the present case, Yadav Dairy Products Private Limited is a private company and wants to
protect provisions of articles regarding forfeiture of shares.

Conclusion: Company is allowed to make provision for entrenchment. For this purpose, company will have to pass a resolution taking permission of all the members and it should also give notice to Register of Companies regarding entrenchment of articles.

Question 18.
The directors of Smart Computers Limited borrowed a sum of money from Mr. Tridev. The company’s articles provided that the directors may borrow on bonds such sums as may, from time to time, be authorized by resolution passed at a general meeting of the company. The shareholders claimed that there had been no such resolution authorizing the loan, and therefore, it was taken without their authority and the company is not bound to repay the loan to Tridev. In the light of the contention of shareholders, decide whether the company is bound to pay the loan. [MTP-May 20]
Answer:
Doctrine of Indoor Management:

As per Doctrine of Indoor Management, persons dealing with the company need not enquire whether internal proceedings relating to the contract are followed correctly, once they are satisfied that the transaction is in accordance with the memorandum and articles of association.
Stakeholders need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the company had gone through all these proceedings in a regular manner.
This doctrine helps to protect external members from the company and states that the people are entitled to presume that internal proceedings are as per documents submitted with the Registrar of Companies.
Thus, what happens internal to a company is not a matter of public knowledge. An outsider can only presume the intentions of a company, but not know the information he/she is not privy to.

Conclusion: Based on the principles of doctrine of indoor management as stated above, it can be concluded that Mr. Tridev being a person external to the company, need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. Even if the shareholders claim that no resolution authorizing the loan was passed, the company is bound to pay the loan to Mr. Tridev.

Question 19.
The persons (not being members) dealing with the company are always protected by the doctrine of Indoor management. Explain. Also, explain when doctrine of Constructive Notice will apply.
(Nov. 18 (6 Marks); MTP-Oct. 21)
Answer:
Doctrine of Indoor Management:

Doctrine of indoor management protects outsiders against the actions of a company. As per this doctrine, persons dealing with the company need not inquire whether internal proceedings relating to the contract are followed correctly, once they are satisfied that the transaction is in accordance with the memorandum and articles of association.

Stakeholders need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the company had gone through all these proceedings in a regular manner.

The doctrine helps to protect external members from the company and states that the people are entitled to presume that internal proceedings are as per documents submitted with the Registrar of Companies.

The doctrine of indoor management is opposite to the doctrine of constructive notice. Whereas the doctrine of constructive notice protects a company against outsiders, the doctrine of indoor management protects outsiders against the actions of a company. This doctrine also is a safeguard against the possibility of abusing the doctrine of constructive notice.

Exceptions to Doctrine of Indoor Management (Applicability of doctrine of constructive
notice):

1. Knowledge of irregularity: In case an ‘outsider’ has actual knowledge of irregularity within the company, the benefit under the rule of indoor management would no longer be available. In fact, he/she may well be considered part of the irregularity.

2. Negligence: If, with a minimum of effort, the irregularities within a company could be discovered, the benefit of the rule of indoor management would not apply. The protection of the rule is also not available where the circumstances surrounding the contract are so suspicious as to invite inquiry, and the outsider dealing with the company does not make proper inquiry.

3. Forgery: The rule does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers.

Question 20.
The Articles of Association of a Company may contain provisions for entrenchment under section 5 of the Companies Act, 2013. What is meant by entrenchment provisions in this context? Also state the relevant provisions of the said Act dealing with Entrenchment Provisions. [Nov. 20 (3 Marks)]
Answer:
Entrenchment provisions:
Meaning of Entrenchment: Usually an article of association may be altered by passing special resolution but entrenchment makes it more difficult to change it. So, entrenchment means making something more protective.
Provisions as to entrenchment: Provisions related to entrenchment are contained in Sec. 5 of the Companies Act, 2013. Accordingly,

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 as 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 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 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 21.
The role of doctrine of “Indoor Management” is opposed to that of the role of “Constructive Notice”. Comment on this statement with reference to the Companies Act, 2013. [Jan. 21 (5 Marks)]
Answer:
Doctrine of Indoor Management and Doctrine of Constructive Notice:

Every company is required to prepare a Memorandum and Articles of Association. These documents when registered with ROC becomes public documents and are open and accessible to all. The person whosoever deals with the company, whether he is a shareholder or an outsider has the means of ascertaining the powers of the company and the extent to which these powers have been delegated to Directors. Every person dealing with the company is presumed to have read these documents. This deemed knowledge of the two documents and their contents is known as the Doctrine of constructive notice of memorandum and articles.

The doctrine of indoor management is opposite to the doctrine of constructive notice. The doctrine of constructive notice protects a company against outsiders, the doctrine of indoor management protects outsiders against the actions of a company. Doctrine of .indoor management is also a safeguard against the possibility of abusing the doctrine of constructive notice.

Exceptions to Doctrine of Indoor Management (Applicability of doctrine of constructive notice):

Question 22.
Mr. Shyamlal is a B. Tech in computer science. He has promoted an IT start up and got it registered as a Private Limited Company. Initially, only he and bis family members are holding all the shares in the company. While drafting the Articles of Association of the company, it has been included that Mr. Shyamlal will remain as a director of the company for lifetime. Mr. Mehra, a close friend of Mr. Shyamlal has warned him (Mr. Shyamlal) that in future if 75% or more shares in the company are held by non-family members then by passing a Special Resolution, the relevant articles can be amended and Mr. Shyamlal may be removed from the post of director. Mr. Shyamlal has approached you to advise him for protecting his position as a director for lifetime. Give your answer as per the provisions of the Companies Act, 2013. [MTP-April 21]
Answer:
Entrenchment provisions:
Provisions related to entrenchment are contained in Sec. 5 of the Companies Act, 2013. Accordingly,

The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of special resolution are met or complied with.
Usually, an article of association may be altered by passing a special resolution but entrenchment makes it one difficult to change it. So, entrenchment means making something more protective.

Manner of inclusion of the entrenchment provision:
Provisions of entrenchment shall only be made either on formation of a company, or by an amendment in the Articles of Association as agreed to by all the members of the company in the case of a private company and by a special resolution in case of a public company.

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

Conclusion: In the given case, Mr. Shyamlal can get the articles altered which is agreed to by all the members whereby the amended article will say that he can be removed from the post of director only if, say, 95% votes are cast in favour of the resolution and give notice of the same to the Registrar.

Registered Office of company (Sec. 12)

Question 23.
XY Ltd. has its registered office at Mumbai in the State of Maharashtra. For better administrative conveniences the company wants to shift its registered office from Mumbai to Pune (within the State of Maharashtra, but from Mumbai ROC to Pune ROC). What formalities the company has to comply with under the provisions of the Companies Act, 2013 for shifting its registered office as stated above? Explain.
Answer:
Formalities to be complied with for shifting of registered office within the State:

Sec. 13 of the Companies Act, 2013 provides for the process of altering the Memorandum of a
company.
As the Registered Office clause In the Memorandum only names the state In which its registered
office is situated, a change in address from Mumbal to Pune, does not result in the alteration of the
Memorandum and hence the provisions of Sec. 13 do not apply in this case.
However, as per requirement of Sec. 12(5) of the Companies Act, 2013 which deals with the registered office of company, the change in registered office from one town or city to another in the same state, must be approved by a special resolution of the company.
Further, as the registered office is shifted from one ROC to another, company will have to seek
approval of Regional Director.

Question 24.
XY Ltd. has its registered office at Mumbai in the State of Maharashtra. For better administrative conveniences the company wants to shift its registered office from Mumbai to Nagpur (within the State of Maharashtra, under the Mumbai ROC Jurisdiction). What formalities the company has to comply with under the provisions of the Companies Act, 2013 for shifting its registered office as stated above? Explain. [MTP-April 19, Oct. 19]
Answer:
Formalities to be complied with for shifting of registered office within the State:

Sec. 13 of the Companies Act, 2013 provides for the process of altering the Memorandum of a company.
As the Registered Office clause in the Memorandum only names the state in which its registered office is situated, a change in address from Mumbai to Pune, does not result in the alteration of the Memorandum and hence the provisions of Sec. 13 do not apply in this case.
However, as per requirement of Sec. 12(5) of the Companies Act, 2013 which deals with the registered office of company, the change in registered office from one town or city to another in the same state, must be approved by a special resolution of the company.
Further, as the registered office is within the jurisdiction of same ROC, company is not required to seek approval of Regional Director.

Question 25.
Examine the validity of the following different decisions/proposals regarding change of office by A
Ltd, under the provisions of the Companies Act, 2013:

The Registered office is shifted from Thane (Local Limit of Thane District) to Dadar (Local limit of Mumbai District), both places falling within the jurisdiction of the Registrar of Mumbai, by passing a special resolution but without obtaining the approval of the Regional Director.
The Registered office is situated in Mumbai, Maharashtra (within the jurisdiction of the Registrar, Mumbai, Maharashtra State) whereas the Corporate Office is situated in Pune, Maharashtra State (within the jurisdiction of Die Registrar, Pune). A Ltd. proposes to shift its corporate office from Pune to Mumbai under the authority of a Board resolution.
The registered office situated in certain place of a city is proposed to be shifted to another place within the local limits of the same city under the authority of Board Resolution. (July 21 (5 Marks)]

Answer:
Change of registered Office:
Provisions relating to change of registered office of the company are covered u/s 12 of the Companies
Act, 2013.

1. Shifting of Registered office from Thane to Dadar (one District to another District) falling under jurisdiction of same ROC i.e. Registrar of Mumbai: As per Sec. 12 of the Companies Act, 2013, change in registered office outside the local limit from one town or city to another in the same state, may take place by virtue of a special resolution passed by the company. No approval of regional director is required. Accordingly, said proposal is valid.

2. Shifting of Corporate Office from Pune to Mumbai: Sec. 12 talks about shifting of Registered office only. In this case, corporate office is being shifted from Pune to Mumbai under the authority of Board resolution. Hence, shifting of corporate office under the board resolution is valid.

3. Shifting of Registered Office within the same city: As the registered office is shifted within the same city, said proposal is valid in terms it has been passed under the authority of Board resolution.

Alteration of the Memorandum (Sec. 13)

Question 26.
The object clause of the Memorandum of Vivek Industries Ltd., empowers it to cany on real-estate business and any other business that is allied to it. Due to a downward trend in real-estate business the management of the company has decided to take up the business of Food processing activity. The company wants to alter its Memorandum, so as to include the Food Processing Business in its objects clause. Examine whether the company can make such change as per the provisions of the Companies Act, 2013?
Answer:
Alteration of Objects Clause of Memorandum

As per Sec. 13 of the Companies Act, 2013, a company may alter the provisions of its memorandum with the approval of the members by a special resolution.
Special Resolution so passed by the members of the company should be filed with the Registrar.
The Registrar shall register any alteration to the Memorandum with respect to the objects of the company and certify the registration within a period of 30 days from the date of filing of the special resolution by the company.
It is also provided that no alteration in the Memorandum shall take effect unless it has been registered with the Registrar as above.

Question 27.
Vintage Security Equipment Limited is a manufacturer of CCTV cameras. It has raised flOO crores through public Issue of its equity shares for starting one more unit of CCTV camera manufacturing. It has utilized 10 crores rupees and then it realized that its existing business has no potential for expansion because government has reduced customs duty on import of CCTV camera hence imported cameras from china are cheaper than its own manufacturing. Now it wants to utilize remaining amount in mobile app development business by adding a new object in its memorandum of association.
Does the Companies Act, 2013 allow such change of object If not then what advise will you give to company. If yes, then give steps to be followed. [RTP-Nov. 19]
Answer:
Alteration of Objects Clause of Memorandum:

As per Sec. 13 of the Companies Act, 2013 a company, which has raised money from public through prospectus and still has any unutilised amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and:

1. the details in respect of such resolution shall also be published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, if any, indicating therein the justification for such change;

2. the dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control in accordance with SEBI regulations.

Special Resolution so passed by the members of the company should be filed with the Registrar.
The Registrar shall register any alteration to the Memorandum with respect to the objects of the company and certify the registration within a period of 30 days from the date of filing of the special resolution by the company. Alteration will be effective only after this certificate by ROC.

Conclusion: Considering the provisions as stated above, it can be concluded that company can add the object of mobile app development in its memorandum and divert public money into that business after complying with the requirements of Sec. 13.

Alteration Utioles (Secs. 14 and 15)

Question 28.
The Board of Directors of Sindhu Limited wants to make some changes and to alter some Clauses of the Articles of Association which are to be urgently carried out, which include the increase in Authorized Capital of the company, issue of shares, increase in borrowing limits and increase in the number of directors.

Discuss about tike provisions of rite Companies Act, 2013 to be followed for alteration of Articles of Association. (RTP-Nov. 18)
Answer:
Alteration in Articles of Association:
Sec. 14 and 15 of the Companies Act, 2013, vests companies with power to alter or add to its articles.
The law with respect to alteration of articles is as follows:

Alteration by special resolution: Subject to the provisions of this Act and the conditions contained in its memorandum, if any, a company may, by a special resolution alter its articles.
Filing of alteration with the registrar: Every alteration of the articles and a copy of the order of the Tribunal approving the alteration, shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of fifteen days in such manner as may be prescribed, who shall register the same.
Any alteration made shall be valid: Any alteration of the articles registered as above shall, subject to the provisions of this Act, be valid as if it were originally contained in the articles.
Alteration noted in every copy: Every alteration made in articles of a company shall be noted in every copy of the articles, as the case may be. If a company makes any default in complying with the stated provisions, the company and every officer who is in default shall be liable to a penalty of one thousand rupees for every copy of the articles issued without such alteration.

RECTIFICATION OF NAME OF COMPANY (SEC. 16)

Question 29.
Manglu and friends got registered a company in the name of Taxmann Advisory Private Limited. ‘ Taxmann is a registered trade mark. After 5 years When the owner of trade mark came to know about the same, it filed an application with relevant authority. Can the company be compelled to , change its name by the owner of trade mark? Can the owner of registered trade mark request the company and then company changes its name at its discretion? [MTP-April 22]
Answer:
Rectification of Name of Company:

As per Sec. 16 of the Companies Act, 2013 if a company is registered by a name which:

1. in the opinion of the C.G., is identical with the name by which a company had been previously registered, it may direct the company to change its name. Then the company shall by passing an ordinary resolution change its name within 3 months.
2. is identical with a registered trade mark and owner of that trade mark apply to the C.G. within 3 years of Incorporation or registration of the company, it may direct the company to change its name. Then the company shall change its name by passing an ordinary resolution within 6 months.

Company shall give notice of change to ROC along with the order of C.G. within 15 days of change.
In case of default, company and defaulting officer are punishable.

In the given case, owner of registered trade mark is filing objection after 5 years of registration of company with a wrong name. While it should have filed the same within 3 years.

Conclusion: Company cannot be compelled to change its name. However, as per Sec. 13, company can anytime change its name by passing a special resolutrnn and taking approval of C.G. Therefore, if
owner of registered trade mark requests the company for change of its name and the company
accepts the same then it can change its naine voluntarily by following the provisions of Sec. 13.

Conversion of companies already registered (Sec. 18)

Question 30.
XYZ a One Person Company (OPC) was incorporated during the year 2020-21 with an authorized capital of 145.00 lakhs (4.5 lakh shares of ₹ 10 each), The capital was hilly subscribed and paid up. Turnover of the company during 2020-21 and 2021-22 was ₹ 2.00 crores and ₹ 2.5 crores respectively. Promoter of the company seeks your advice in following circumstances, whether XYZ (OPC) can convert into any other kind of company during 2022-23.

Please, advise with reference to relevant provisions of the Companies Act, 2013 in the below mentioned circumstances:

(i) If promoter increases the paid-up capital of the company by 110.00 lakhs during 2022-23.
(ii) If turnover of the company during 2022-23 was 13.00 crores. (MTP-April 19, RTP-May 19, MTP-Nov. 20, Nov. 18 (4 Marks)]
Answer:
Conversion of OPC into other kind of company:

Earlier, few restrictions were imposed by Rule 3 of Companies (Incorporation] Rules, 2014, on OPC as to conversion into other kind of companies. However, these provisions have been omitted by the Companies (Incorporation] 2nd Amendment Rules, 2021.

As per Rule 6 of Companies (Incorporation] Rules, 2014, an OPC may be converted into a Private • or Public Company, other than a company registered u/s 8 of the Act, after increasing the minimum number of members and directors to 2 or 7 members and 2 or 3 directors, as the case may be, and maintaining the minimum paid-up capital as per the requirements of the Act for such class of company and by making due compliance of Sec. 18 of the Act for conversion.

Conclusion: OPC can convert voluntarily into any other kind of company in both the cases after
alteration of memorandum and articles of the company as required under Sec. 18.

Sendee of Documents (Sec. 20)

Question 31.
Explain the previsions of the Companies Act, 2013 relating to the ‘Service of Documents’ on a company and the members of the company. [MTP-March 21, Nov. 21]
Answer:
Service of Documents:
Sec. 20 of the Companies Act, 2013 provides the provisions relating to service of documents. Accordingly,

(i) Serving of document to company: A document may be served on a company or an officer thereof by sending it to the company or the officer at the registered office of the company by registered post or by speed post or by courier service or by leaving it at its registered office or by means of such electronic or other mode as may be prescribed.

However, in case where securities are held with a depository, the records of the beneficial ownership may be served by such depository on the company by means of electronic or other mode.

(ii) Serving of document to Member: Save as provided in the Act or the rule thereunder for filing of documents with the registrar in electronic mode, a document may be served on Registrar or any member by sending it to him by post or by registered post or by speed post or by courier or by delivering at his office or address, or by such electronic or other mode as may be prescribed. However, a member may request for delivery of any document through a particular mode, for which he shall pay such fees as may be determined by the company in its annual general meeting.

Question 32.
Ashok, a director of Gama Electricals Ltd. gave in writing to the company that the notice for any general meeting and of the Board of Directors meeting be sent to him only by registered post at his residential address at Kanpur for which he deposited sufficient money. The company sent notice to him by ordinary mail under certificate of posting. Ashok did not receive this notice and could not attend the meeting and contended that the notice was improper. Decide:
(i) Whether the contention of Ashok is valid.
(ii) Will your answer be the same if Ashok remains in U.S.A. for one month during the notice of
meeting and the meeting held? [RTP-Nov. 20, MTP-April 22)
Answer:
Service of Documents:

As per Sec. 20(2) of the Companies Act, 2013, a document may be served on Registrar or any member by sending it to him by post or by registered post or by speed post or by courier or by delivering at his office or address, or by such electronic or other mode as may be prescribed.
However, a member may request for delivery of any document through a particular mode, for which he shall pay such fees as may be determined by the company in its AGM.
In the present case, Mr. Ashok wants the notice to be served on him only by registered post at his residential address at Kanpur for which he has deposited sufficient money. So, notice must be served accordingly, otherwise service will not be deemed to have been affected.

Conclusion: Considering the provisions as stated above, following conclusions may be drawn:

Contention of Ashok is valid as notice was not properly served.
Company is bound to serve notice to Ashok by registered post at his residential address at Kanpur and not outside India.

Miscellaneous Provisions

Question 33.
Explain in the light of the provisions of the Companies Act, 2013, the circumstances under which a subsidiary company can become a member of its holding company.
Answer:
Circumstances in which a subsidiary company can become a member of its holding company:
As per Sec. 19 of the Companies Act, 2013, a subsidiary company cannot either by itself or through its nominees hold any shares in its holding company and no holding company shall allot or transfer its shares to any subsidiary companies. Any such allotment or transfer of shares in a company to its subsidiary is void. The section however does not apply where:

the subsidiary company holds shares in its holding company as the legal representative of a deceased member of the holding company,
the subsidiary company holds such shares as a trustee, or
the subsidiary company was a shareholder in the holding company even before it became its subsidiary.

Question 34.
Parag Constructions Limited is a leading infrastructure company. One of the directors of the company Mr. Parag has been signing all construction contracts on behalf of company for many years. All the parties who ever deal with the company know Mr. Parag very welt Company has got a very important construction contract from a renowned software company.

Parag Constructions will do construction for this site in partnership with a local contractor Firoz bhai. Mr. Parag signed partnership deed with Firoz bhai on behalf of company because he has an implied authority. Later in a dispute company denied to accept liability as a partner. Can the company deny its liability as a partner?
Answer:
Execution of bills of exchange, deeds etc:

As per Sec. 22 of the Companies Act, 2013 a company may authorise any person as its attorney to execute deeds on its behalf in any place either in or outside India. But common seal should be affixed on his authority letter or the authority letter should be signed by two directors of the company or it should be signed by one director and secretary. This authority may be either general for any deeds or it may be for any specific deed.
A deed signed by such an attorney on behalf of the company and under his seal shall bind the company as if it were made under its common seal.
In the present case company has not neither given any written authority not affixed common seal of the authority letter. It means that Mr. Parag is not legally entitled to execute deeds on behalf of the company.

Conclusion: Deeds executed by Mr. Parag are not binding on the company, as he is not legally entitled to execute deeds on behalf of the company. Hence, company can deny its liability as a partner.

Question 35.
S Ltd. is a company in which H Ltd, is holding 60% of its paid-up share capital. One of the shareholders of H Ltd. made a charitable trust and donated his 10% shares in H Ltd. and ! 50 crores to the trust. He appoints S Ltd. as the trustee. All the assets of the trust are held in the name of S Ltd. Can a subsidiary hold shares in its holding company in this way? [RTP-Nov. 19]
Answer:
Subsidiary company not to hold shares in its holding company:

As per Sec. 19 of the Companies Act, 2013 a company shall not hold any shares in its holding company either by itself or through its nominees. Also, holding company shall not allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void.

However, there are three exceptions to the above mentioned provisions:

(a) where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or
(b) where the subsidiary company holds such shares as a trustee; or
(c) where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company but in this case, it will not have a right to vote in the meeting of holding company.

In the given case, one of the shareholders of holding company has transferred his shares in the holding company to a trust where the shares will be held by subsidiary company. It implies that subsidiary will hold shares in the holding company. But it will hold shares in the capacity of a trustee.
Conclusion: S Ltd. can hold shares in H Ltd in its capacity as a trustee.

Question 36.
As at 31st March, 2022, the paid-up share capital of S Ltd. is ₹ 1,00,00,000 divided into 10,00,000 equity shares of ₹ 10 each. Of this, H Ltd. is holding 6,00,000 equity shares and 4,00,000 equity shares are held by others. Simultaneously, S Ltd. is bolding 5% equity shares of H Ltd. out of which 1% shares are held as a legal representative of a deceased member of H Ltd. On the basis of the given information, examine and answer the following queries with reference to the provisions of the Companies Act, 2013:
(i) Can S Ltd. make further investment in equity shares of H Ltd. during 2022-23?
(ii) Can S Ltd. exercise voting rights at Annual general meeting of H Ltd.?
(iii) Can H Ltd. allot or transfer some of its shares to S Ltd.? [May 19 (4 Marks)]
Answer:
Subsidiary company not to hold shares in its holding company:

The paid-up share capital of S Ltd. is ₹ 1,00,00,000 divided into 10,00,000 equity shares of ₹ 10 each. Of this, H Ltd. is holding 6,00,000 equity shares.
Hence, H Ltd. is the holding company of S Ltd. and S Ltd. is the subsidiary company of H Ltd. by virtue of Sec. 2(87) of the Companies Act, 2013.
As per Sec. 19 of the Companies Act, 2013 a company shall not hold any shares in its holding company either by itself or through its nominees. Also, holding company shall not allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void.
However, there are three exceptions to the above mentioned provisions:

The subsidiary company referred to above shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee, as referred to in clause (a) or clause (b).

Conclusion: Based on the provisions of Sec. 19 as stated above, following conclusions may be drawn:

S Ltd. cannot make further investment in equity shares of H Ltd.
S Ltd. can exercise voting rights at the AGM of H Ltd. only in respect of 1% shares held as a legal representative of a deceased member of H Ltd.
H Ltd. cannot allot or transfer some of its shares to S Ltd.

Question 37.
Give answer in the following cases as per the Companies Act, 2013:
(i) X Ltd., holds 20 lacs shares in ABZ Ltd. In 202 2, ABZ Ltd. controls the composition of the Board of directors of X Ltd. and transfers certain shares to it. State whether such transfer of shares by ABZ Ltd. to X Ltd. is valid.
(ii) In continuation of above facts, Mr. R is a member of the ABZ Ltd. He met an accident. Mr. N (son
of Mr. R), is one of the directors of the X Ltd. He was also a nominee of shares held by Mr. R. Being a legal representative and nominee, Mr. N gets transferred the shares of Mr. R. State on the validity of the transfer of such shares to Mr. N of X Ltd. [MTP-Oct. 18]
Answer:
Subsidiary company not to hold shares in its holding company:

As per section 2(84) of the Companies Act, 2013, X Ltd. is a subsidiary company of ABZ Ltd. as ABZ Ltd. controls the composition of the Board of Directors of X Ltd.
As per Sec. 19 of the Companies Act, 2013 a company shall not hold any shares in its holding company either by itself or through its nominees. Also, holding company shall not allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void.
However, there are three exceptions to the above mentioned provisions:

Conclusion: Based on the provisions as stated above, following conclusions may be drawn:

Transfer of shares by ABZ Ltd. to X Ltd. is valid as X Ltd. already holds shares in ABZ Ltd. before becoming its subsidiary.
Mr. N being the legal representative of the deceased member of the Holding company, was entitled for the holding of shares of ABZ Ltd. This situation falls within the purview of exemption stating that subsidiary company who holds shares as the legal representative of a deceased member of the holding company, is entitled to hold the shares of the holding company.

Question 38.
S Ltd acquired 10% paid up share capital of H Ltd on 15th March 2019. H Ltd acquired 55% paid up share capital of S Ltd on 10th March 2020. H Ltd. on 25th September, 2022 decided to issue bonus shares in the ratio of 1:1 to the existing shareholders. Accordingly, bonus shares were allotted to S Ltd. Examine under the provisions of the Companies Act, 2013 and decide
(i) the validity of holding of shares by S Ltd. in H Ltd.
(ii) allotment of Bonus shares by H Ltd. to S Ltd. [Nov. 20 (4 Marks)]
Answer:
Subsidiary company to hold shares in its holding company:

As per Sec. 19 of the Companies Act, 2013 a company shall not hold any shares in its holding company either by itself or through its nominees. Also, holding company shall not allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void.
However, this shall not apply where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company.
In the given case, H Ltd. has acquired 55% paid up share capital of S Ltd. on 10th March 2020. Whereas, S Ltd. has been holding 10% paid up share capital of H Ltd. since 15th March, 2019. The said instance as asked in the question falls under the exception stated above.

Conclusion: Based on the provisions of Sec. 19 as stated above, following conclusions may be drawn:

Holding of shares by S Ltd. in H Ltd. is valid as the subsidiary company is a shareholder even before it became a subsidiary company of the holding company.
Allotment of bonus shares by H Ltd. to S Ltd. is also valid.

Question 39.
Kavya Ltd. has a paid up share-capital of f 80 crores. Amjali Ltd. holds a total of ₹ 50 crores of Kavya Ltd. Now, Kavya Ltd. is making huge profits and wants to expand its business and is aiming at investing in Amjali Ltd. Kavya Ltd. has approached you to analyse whether as per the provisions of the Companies Act, 2013, they can hold 1/10th of the share capital of Amjali Ltd. [MTP-March 21]
Answer:
Subsidiary company not to hold shares in its holding company:

As per Sec. 2(87) of the Companies Act, 2013, “subsidiary company”, in relation to any other company (that is to say the holding company), means a company in which the holding company:

1. controls the composition of the Board of Directors; or
2. exercises or controls more than 1/2 of the total voting power either at its own or together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

However, there are three exceptions to the above mentioned provisions:

Conclusion: Since, Kavya Ltd. is holding more than one half (50 crores out of 80 crores) of the total share capital of Kavya Ltd., Amjali Ltd. is holding of Kavya Ltd.
Kavya Ltd. cannot acquire the shares of Amjali Ltd. as the acquisition of shares does not fall within the ambit of any of the exceptions provided in section 19.

Question 40.
AB Limited issued equity shares of ₹ 1,00,000 (10,000 shares of f 10 each) on 01.04.2022 which have been fully subscribed whereby XY Limited holds 4,000 shares and PQ Limited holds 2,000 shares in AB Limited. AB Limited is also holding 20% equity shares of RS Limited before the dale of issue of equity shares stated above. RS Limited controls the composition of Board of Directors of XY Limited and PQ Limited from 01118,2022. Examine with relevant provisions of die Companies Act,
(i) Whether AB Limited is a subsidiary of RS Limited?
(ii) Whether AB Limited can hold shares of RS Limited?
(iii) Whether AB Limited can vote at Annual General Meeting of RS Limited held on 30.09.2022? [RTP-Nov. 21]
Answer:
Determination of status of Subsidiary company:

As per Sec. 2(87) of the Companies Act, 2013, “subsidiary company”, in relation to any other company (that is to say the holding company), means a company in which the holding company:

1. controls the composition of the Board of Directors; or
2. exercises or controls more than 1/2 of the total voting power either at its own or together with one or more of its subsidiary companies:

Further a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in point (i) or point (ii) above, is of another subsidiary company of the holding company.

As per Sec. 19 of the Companies Act, 2013 a company shall not hold any shares in its holding company either by itself or through its nominees. Also, holding company shall not allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void.
However, this shall not apply where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company.
In the given case, RS Limited controls the composition of Board of Directors of XY Limited and PQ Limited Considering the provisions of Sec. 2(87), RS Ltd. is a holding company of XY Limited and PQ Limited.
XY Limited & PQ Limited holds 4,000 & 2,000 shares respectively in AB Limited, considering 1 share = 1 vote, XY Limited and PQ Limited together holds more than one-half (50%) of the total voting power.

Conclusion: Based on the provisions as stated above following conclusions may be drawn:

As subsidiaries (XY Limited and PQ Limited) of RS Limited holds more than 50% voting power of AB Limited, hence AB Limited will be deemed to be a subsidiary of RS Limited.
AB Limited was holding 20% of equity shares of RS Limited even before it became a subsidiary company of the RS Limited (i.e. on 01.08.2022), hence AB Limited can hold shares in RS Limited in accordance with the exception covered u/s 19.
Subsidiary company shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee but not where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company. Therefore, AB Limited cannot vote at AGM of RS Ltd. held on 30.9.2022.

Incorporation of Company and Matters Incidental Thereto – CA Inter Law Study Material

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