Introduction to Company Law – Company Law Important Questions

Introduction to Company Law – Company Law Important Questions

Question 1.
Distinguish between “company” and “corporation”. (4 marks) (June 2010 & June 2011)
Answer:
1. Section 2(20) of the Companies Act, 2013: “Company” means a company incorporated under this Act or under any previous company law. In common law, a company is a “legal person” or “legal entity” separate from, and capable of surviving beyond the lives of its members. A company is rather a legal device for the attainment of the social and economic end. It is, therefore, a combined political, social, economic, and legal institution.

Thus, the term company has been described in many ways:

  • “It is a means of cooperation and organization in the conduct of an enterprise”.
  • It is “an intricate, centralized, economic and administrative structure run by professional managers who hire capital from the investor(s)”.
  • Section 2(11) of the Companies Act, 2013: “Body corporate” or “cor¬poration” includes a company incorporated outside India, but does not include:

2. a co-operative society registered under any law relating to co-operative societies; and

3. any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify on this behalf;

Generally, the expression “corporation” or “body corporate” is wider than the word “company”.

Question 2.
Distinguish between “Partnership Firm” and “Company”. (4 marks) (December 2013)
Answer:
The main points of distinction between a partnership firm and a company are as follows:

Basis of Distinction Partnership Firm Company
Separate Legal Entity A partnership firm is not distinct from the several persons who form the partnership. A company is a distinct legal person.
Entity’s Agent Partners are the agents of the firm. A partner can dispose of the property and incur liabilities as long as he acts in the course of the firm’s business. Members of a company are not its agents. A member of a company cannot dispose of the property and incur liabilities in the course of the company’s business.
Right to contract A partner cannot contract with his firm. A member can contract with his company.
Transfer Rights A partner cannot transfer his share and make the transferee a member of the firm without the consent of the other partners. A company’s share can ordinarily be transferred.
Perpetual Succession The death or insolvency of a partner dissolves the firm unless otherwise provided. A company has perpetual succession, i.e. the death or insolvency of a shareholder, or all of them does not affect the life of the company.
Auditing of Accounts The accounts of a firm are audited at the discretion of the partners. A company is required to have its accounts audited annually by a chartered accountant
Partner’s/ Shareholder’s Liability A partner’s liability is always unlimited. The liability of shareholder may be limited either by shares or a guarantee

Question 3.
Write a short note on disadvantages of company form of organization. (4 marks) (June 2010)
Answer:
The company form of the organization suffers from the following drawbacks:
1. The difficulty of Formation: A lot of legal formalities are required to be performed at the time of registration. The shares will have to be sold during a particular time. The promotion of a company is both expensive and risky.

2. Separation of Ownership and Management: The ownership and management of the public company are in different hands. The owners ie., shareholders play an insignificant role in the working of the company. On the other hand, control is in the hands of those who have no stakes in the company. There is no direct relationship between efforts and rewards. The profits of the company belong to shareholders and the Board of Directors are paid only a commission.

3. Excessive State Regulations: A large number of rules and regulations are framed for the working of the companies. The companies will have to follow rules even for their internal working. The government tries to regulate the working of the companies because large public money is involved. The formalities are many and the penalties for their non-com¬pliance are heavy.

4. Delay in Decision-making: In a company form of organization, no single individual can make a policy decision. All important decisions are taken either by the Board of Directors or are referred to the general house. So many opportunities may be lost because of a delay in decision-making.

Question 4.
Distinguish between ‘small company’ and ‘inactive company’. (4 marks) (June 2016)
Answer:
‘Small company’ [Section 2(85) of the Companies Act, 2013]: A small company has been defined as 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 ten crore rupees; and
  2. turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:

Provided that nothing in this clause shall apply to:
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act.

‘Inactive Company’ [Section 455 of the Companies Act, 2013]:
Where a company is formed and registered under the Companies Act, 2013 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.

Question 5.
What do you understand by the term illegal association? What are the rights and liabilities of members of an illegal association? (5 marks) (December 2008)
Or
Write a short note on; Illegal association. (4 marks) (June 2013)
Answer:
1. In simple words, the association consisting of more than 100 members and formed for carrying business but not registered either under the Companies Act or any other Indian Laws is known as an Illegal association.

2. Section 464(1) of the Companies Act, 2013: No association or partnership consisting of more than a such number of persons as may be prescribed shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof unless it is registered as a company under this Act or is formed under any other law for the time being in force.

The number of persons who may be prescribed under this section shall not exceed 100. Further, rule 10 of the Companies (Miscellaneous) Rules, 2014, prescribes 50 persons in this regard.
1. Section 464(2) of the Companies Act, 2013: Nothing in sub-section (1) shall apply to:
(a) a Hindu undivided family carrying on any business; or
(b) an association or partnership, if it is formed by professionals who are governed by special Acts.

2. Section 464(3) of the Companies Act, 2013: Every member of an association or partnership carrying on business in contravention of sub-section (1) shall be punishable with a fine which may extend to one lakh rupees and shall also be personally liable for all liabilities incurred in such business.

3. The members of an illegal association are individually liable in respect of all acts or contracts made on behalf of the association; they cannot either individually or collectively, bring an action to enforce any contract so made or to recover any debt due to the association. [Wilkinson v. Levison (1925) 42 T.L.R. 97].

Note: The provision of “common seal” is not mandatory now as per the Companies Act, 2013.

Question 6.
The Common Seal of a company has to be affixed on all letters and documents of the company. Comment (5 marks) (December 2008)
Or
The Common Seal of a company has to be affixed on all letters In documents of the company. Comment (5 marks) (December 2009)
Answer:

  • The Company acquires a separate legal entity having no physical existence require a common seal to enter into all contracts by its agents
  • The Common Seal acts as the official signature of a Company.
  • The Name of the Company must be engraved on its common seal.
  • As per the Companies (Amendment) Act, 2015, affixation of the common seal is no longer compulsory.

Thus, it is incorrect to say that the Common Seal of a company has to be affixed on all letters and documents of the company.

Question 7.
The common seal acts as the official signature of a company. Comment (5 marks) (December 2013)
Answer:

  • The Company acquires a separate legal entity having no physical existence requires a common seal to enter into all contracts by its agents.
  • The Common Seal acts as the official signature of a Company.
  • The Name of the Company must be engraved on its common seal.
  • A rubber stamp does not serve the purpose of the Common Seal of the Company.
  • As per the Companies (Amendment) Act, 2015, affixation of the common seal is no longer compulsory.

Thus, it is correct to say that: Common seal acts as the official signature of a company.

Question 8.
The common seal can be used by any employee irrespective of his desig¬nation. Comment (5 marks) (June 2014)
Answer:

  • The Company acquires a separate legal entity having no physical existence requires a common seal to enter into all contracts by its agents.
  • The Common Seal acts as the official signature of a Company.
  • The Name of the Company must be engraved on its common seal. A rubber stamp does not serve the purpose of the Common Seal of the Company.
  • As per the Companies (Amendment) Act, 2015, affixation of the common seal is no longer compulsory.
  • As per the provisions of the Secretarial Standard 8: Affixing of Common Seal:
    1. The Person in whose presence the common seal is affixed should sign every instrument to which the seal of the Company is so affixed.
    2. The common seal should be affixed to any instrument only by the authority of a resolution of the Board or a committee authorized by the board.
    3. The common seal should be affixed in the presence of the managing director or any two directors, and the company secretary or other person as the Board may authorize for the purpose. The Article may provide for affixing of a common seal in any other manner.

Thus, the given statement is not correct that a Common seal can be used by any employee irrespective of his designation.

Question 9.
A shareholder who holds 99% of the share capital of a company can be held responsible for the acts of the company. Comment (5 marks) (June 2012)
Answer:

  1. The Company having its separate legal entity, distinct from its members.
  2. As one of the main features of the Company is a separate legal entity, the company having its own legal identity irrespective of the identity of its member.
  3. A company, being a separate legal entity different from its members, can enter into contracts for the conduct of the business in its own name.
  4. In the leading case Salomon v. Salomon and Co. Ltd. (1897) A.C. 22
  5. The case has clearly established the principle that once a company has been validly constituted under the Companies Act, it becomes a legal person distinct from its members, and for this purpose, it is immaterial whether any member holds a large or small proportion of the shares, and whether he holds those shares as beneficially or as a mere trustee.

Thus, even if the shareholder holding 99% of the share capital of the Company, the shareholder cannot be held responsible for the acts of the Company.

Question 10.
A shareholder is personally liable for the acts of the company if he holds virtually the entire share capital of a company. Comment (5 marks) (December 2013)
Answer:

  • The Company having its separate legal entity, distinct from its members.
  • As one of the main features of the Company is a separate legal entity, the company having its own legal identity irrespective of the identity of its member.
  • A company, being a separate legal entity different from its members, can enter into contracts for the conduct of the business in its own name.
  • In leading case Salomon v. Salomon & Co. Ltd. (1897) A.C. 22.

The case has clearly established the principle that once a company has been validly constituted under the Companies Act, it becomes a legal person distinct from its members, and for this purpose, it is immaterial whether any member holds a large or small proportion of the shares, and whether he holds those shares as beneficially or as a mere trustee.

Thus, the given statement is not correct that the shareholder is personally liable for the acts of the company if he holds virtually the entire share capital of a company.

Question 11.
A company incorporated under the Companies Act, 2013 being an artificial person, is not entitled to sue a natural person or to sue another company incorporated under the Companies Act, 2013. Comment (5 marks) (December 2015)
Answer:

  • A company is a body corporate can sue and be sued in its own name.
  • A company’s right to sue arises when some loss is caused to the Company i.e. to the property of the Company.
  • Hence, the company is entitled to sue for damages in libel or slander as the case may be [Floating Services Ltd. v. MV San Francisco Diploma (2004) 52 SCL 762 (Guj.)]. A company, as a person distinct from its members, may even sue one of its own members.
  • All legal proceedings against the Company are to be instituted in its own name and the company may bring an action against anyone in its own name.

Thus, it is incorrect to say that: A company incorporated under the Companies Act, 2013 is an artificial person, is not entitled to sue a natural person or to sue another company incorporated under the Companies Act, 2013.

Question 12.
A company incorporated under the Companies Act, 2013 never dies except when it is wound-up as per law. Comment (5 marks) (December 2015)
Answer:

  1. A company being an artificial person does not die a natural death.
  2. The Company is created by law, carries business affairs according to the law throughout its life, and ultimately is effaced by law.
  3. The existence of a company is ended up by following the procedures of winding up as prescribed under the Companies Act, 2013.
  4. Sometimes, the companies adopt other corporate strategies like amalgamation and reconstruction.

Thus, the given statement is partly true as a company incorporated under the Companies Act, 2013 never dies naturally except as per law. The strategy to exit may be different either it may be winding up or amalgamation or reconstruction.

Question 13.
Members of a company incorporated under the Companies Act, 2013 are the agents of the company. Therefore, the company can be held liable for its acts. Comment (5 marks) (December 2017)
Answer:

  • The Company is vested with a corporate personality distinct from its members.
  • As a separate legal entity, it bears its own name and acts under a corporate name.
  • Its assets are separate and distinct from those of its members.
  • The Company having the seal of its own.
  • A shareholder holding virtually entire share capital cannot be held liable for the acts of the Company.
  • The shareholders are not the agents of the Company and so they cannot bind by their acts.

Thus, the given statement is incorrect.

Question 14.
In an Annual general meeting of Amar Private Limited, all the shareholders were killed in a bomb blast. State, whether the company is still in existence? (4 marks) (December 2014)
Answer:

  • A company being an artificial person cannot be incapacitated by illness and it does not have an allotted span of life.
  • The death, insolvency, or retirement of its members leaves the company unaffected.
  • The death of all members will not result at the end of the Company.
  • The company has perpetual succession.
  • Legal heirs of deceased members will be members of the company. Thus, even on the death of all members of Amar Private Limited, their legal heirs will be new members and the company continue to carry on business.

Question 15.
Six persons are the only members of Tab (Private) Limited all of them went to the USA on a pleasure trip by airplane. On the way, the plane crashed and all the six members died. Does Tab (Private) Limited still exist? Decide. (4 marks) (December 2016)
Answer:

  1. A company being an artificial person cannot be incapacitated by illness and it does not have an allotted span of life.
  2.  The death, insolvency, or retirement of its members leaves the company unaffected.
  3. The death of all members will not result at the end of the Company.
  4. The company has perpetual succession.
  5. Legal heirs of deceased members will be members of the company.

To sum up, even on the death of all six members of Tab (Private) Limited, their legal heirs will be new members and the company continues to carry on business.

Question 16.
Three companies incorporated with the same set of shareholders are treated as the same companies under the Companies Act, 2013. Comment (5 marks) (December 2017)
Answer:

  1. The Company having its separate legal entity, distinct from its members.
  2. As one of the main features of the Company is a separate legal entity, the company having its own legal identity irrespective of the identity of its member.
  3. If three companies incorporated with the same set of shareholders, they are treated as distinct and cannot be treated as the same company just because the shareholders are the same.
  4. The legal identity of the Company is not affected by its shareholders. Thus, the given statement is incorrect.

Question 17.
Rani is a wealthy lady enjoying large dividend and interest income she has formed 3 private companies in agreed with each of them to hold a block of investment as an agent for it income received was credited in the accounts of the company but the company handed back the amount to her as a pretended loan. This way, she divided her income into three parts in a bit to reduce her tax liability. Discuss the legality of the purpose for which the three companies were formed. (5 marks) (June 2010)
Answer:

  1. Where the company is incorporated by a person only for the purpose of evading tax, the court has the discretion to disregard the corporate entity.
  2. The facts given in the question are similar to the leading case of In Ref. Dinshaw Manekji. Petit AIR 1927 BOMBAY 37
  3. In this case, an assessee was earning huge income by way of dividends and interest. He formed four private companies and transferred his investments to each of these companies in exchange for their shares. The dividend and interest income received by the company was given back to Sir Dinshaw as a pretended loan.
  4. It was held that the company was formed by the assessee purely and simply as a means of avoiding tax. It did no business but was created simply as a legal entity to ostensibly receive the dividends and interest and to hand them over to the assessee as pretended loans.
  5. Based on the above-cited judgment, it may be decided that the legal personality of all three companies may be disregarded.

Question 18.
“Separate personality of a company is a special privilege. In case of dishonest or fraudulent use of privilege, the corporate veil can be lifted.” Discuss. (4 marks) (June 2014)
Answer:

  1. The separate personality of a company is a statutory privilege and it must be used for legitimate business purposes only.
  2. Where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality.
  3. The Court will break through the corporate shell and apply the principle/ doctrine of what is called “lifting of or piercing the corporate veil”.
  4. On lifting the corporate veil, promoters or directors can be held personally liable.
  5. It can be lifted in the following situations:
  6. Trading with Enemy. [Decided Case law: In Daimler Co. Ltd. v. Con-tinental Tyre & Rubber Co. (1916) 2 A.C. 307]
  7. Evasion of taxes. [Decided Case Law: Re. Sir Dinshaw Maneckjee Petit,
    AIR 1927 Bom. 371]
  8. To protect labor welfare legislature. [Decided Case Law: Workmen Employed in Associated Rubber Industries Ltd. v. The Associated Rubber Industries Ltd. AIR 1986 SC 1]
  9. For prevention of fraud and misconduct. [Decided Case Law: Gilford Motor Co. v. Horne [1993] Ch. 935]

Question 19.
Write a short note on ‘Lifting of corporate veil’. (5 marks) (December 2014)
Answer:

  1. The separate personality of a company is a statutory privilege and it must be used for legitimate business purposes only. Where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality.
  2. The Court will break through the corporate shell and apply the principle/ doctrine of “lifting or piercing of the corporate veil”.
  3. The Court will look behind the corporate entity and take action as though no entity separate from the members existed and make the members of the controlling persons liable for debts and obligations of the company.
  4. The corporate veil is lifted when in defense proceedings, such as for the evasion of tax, an entity relies on its corporate personality as a shield to cover its wrongdoings. [BSN (UK) Ltd. v. Janardan Mohandas Raj an Pillai [1996] 86 Comp. Cas. 371 (Bom).]
  5. However, the shareholders cannot ask for the lifting of the veil for their purposes. This was held in Premlata Bhatia v. Union of India (2004) 58 CL 217 (Delhi) wherein the premises of a shop were allotted on a license to the individual licensee. She set up a wholly-owned private company and transferred the premises to that company without Government consent. She could not remove the illegality by saying that she and her company were virtually the same people.

Question 20.
Explain clearly the meaning of ‘lifting of Corporate Veil’ in relation to a company incorporated under the Companies Act, 2013. Examining judicial decisions, state whether the ‘corporate veil’ can be lifted in the following cases:
(a) Where the corporate veil has been used for improper conduct?
(b) Where the acts of the companies are opposed to workmen? (5 marks) (December 2015)
Answer:
Meaning of ‘lifting of Corporate Veil’
1. The separate personality of a company is a statutory privilege and it must be used for legitimate business purposes only. Where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality.

2. The Court will break through the corporate shell and apply the principle/ doctrine of what is called “lifting of or piercing the Corporate Veil”.

The Court will look behind the corporate entity and take action as though no entity separate from the members existed and make the members of the controlling persons liable for debts and obligations of the company.
(a) Judicial Decisions where the corporate veil has been used for improper conduct:

  • In Jones v. Lipman (1962) I. W.L.R. 832: A agreed to sell certain land to B. Pending completion of formalities of the said deal, A sold and transferred the land to a company which he had incorporated with a nominal capital of £100 and of which he and a clerk were the only shareholders and directors. This was done in order to escape a decree for specific performance in a suit brought by B.
  • The Court held that the company was the creature of A and a mask to avoid recognition and that in the eyes of equity A must complete the contract since he had the full control of the limited company in which the property was vested, and was in a position to cause the contract in question to be fulfilled.

(b) Judicial Decisions where the acts of the companies are opposed to work¬men:

  • The Workmen Employed in Associated Rubber Industries Ltd. v. Associated Rubber Industries Ltd. AIR 1986 SC 1: The facts of the case were that a new company was created wholly by the principal company with no assets of its own except those transferred to it by the principal company, with no business or income of its own except receiving dividends from shares transferred to it by the principal company ie. only for the purpose of splitting the profits into two hands and thereby reducing the obligation to pay bonus.
  • The Supreme Court of India held that the new company was formed as a device to reduce the gross profits of the principal company and thereby reduce the amount to be paid by way of bonus to workmen. The number of dividends received by the new company should, therefore, be taken into account in assessing the gross profit of the principal company.

CS Executive Company Law Questions and Answers

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