Legal Status of Registered Company – Setting Up of Business Entities and Closure Important Questions

Legal Status of Registered Company – Setting Up of Business Entities and Closure Important Questions

Question 1.
Two companies are incorporated with the same set of shareholders. Are they the same or distinct under the Companies Act, 2013? Discuss. [June 2008 (4 Marks)]
Answer:
Facts of Case: Two companies are incorporated with the same set of shareholders. Are they the same or distinct under the Companies Act, 2013 Provision: By registration a company becomes vested with corporate personality, which is independent and distinct from its members.

Even if two companies are incorporated with the same set of shareholders, they are distinct and cannot be treated as the same company. As per Section 9 From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession

E.g.: A and B have incorporated XYZ Private Limited and QPR Private Limited. Even though A and B are common shareholder still, XYZ Pvt. Ltd. and QPR Pvt. Ltd. are different.

Conclusion: By referring to the above provision and facts we can conclude that even though two companies are incorporated with the same set of shareholders they are still distinct with their own identity.

Question 2.
Common Seal acts as the official signature of a company. Comment. [Dec. 2009 (5 Marks)], [Dec. 2013 (5 Marks)]
Answer:
On incorporation, a company acquires a legal entity with perpetual succession and a common seal, if any. Since the company has no physical existence, all contracts entered into by its agents may be under the seal of the company.

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.

As per the Companies (Amendment) Act, 2015 affixation of the common seal is no longer compulsory.

Question 3.
Vayu Ltd. holds more than 50% of the nominal value of the equity capital of Stream Ltd. In these circumstances, Stream Ltd. wants to become a member of Vayu Ltd. Can Stream Ltd. do so? Discuss the rights of the said subsidiary in such a case. [Dec. 2009 (4 Marks)]
Answer:
Facts of Case: Vayu Ltd. holds more than 50% of the nominal value of the equity capital of Stream Ltd. In these circumstances, Stream Ltd. wants to become a member of Vayu Ltd.

Provision: Subsidiary company not to hold shares in its holding company [Section 19]: Subsidiary company shall not either by itself or through its nominees hold shares in its holding company and no holding company shall 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.

Exceptions: In the following circumstances, a subsidiary can hold the shares of its holding company:

  • Where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company.
  • Where the subsidiary company holds such shares as a trustee.
  • Where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company.

However, the subsidiary company referred to above shall have voting right only in respect of the shares held by it as a legal representative or as a trustee. Conclusion: Therefore, no company shall hold any interest in its holding company but in certain exception, they can hold shares in the holding company

Question 4.
State the disadvantages of the company form of organization. [June 2010 (4 Marks)]
Answer:
Some of the disadvantages of company form of organization are as follows:
1. Formalities & Expenses: The incorporation of a company is coupled with complex, cumbersome and detailed legal formalities and procedures, involving a considerable amount of time and money.

2. Corporate Disclosure: Companies are required to make maximum disclosure of corporate information, as the members of the company are have restricted access to its internal management and day to workings.

3. Separation of control from ownership: Members of a company are not having as effective and intimate control over its working as one can have in other forms of business organization.

4. Grater social responsibility: The companies are called upon to show greater responsibility in their work and are subject to greater control and regulation.

5. Grater tax burden: The tax burden on a company is more than that on other forms of business organization. A company is liable to tax without any minimum taxable limit. Also, it has to pay income tax on the whole of its income at a flat rate whereas others are taxed on a graduated scale or slab system.

6. Detailed winding-up procedure: The Act provides an elaborate and detailed procedure for winding up of companies which is more expansive and time-consuming than that which is applicable to other forms of business organization.

Question 5.
Distinguish between: Company & Corporation [June 2010 (4 Marks)], [June 2011 (5 Marks)]
Answer:
Generally speaking, an association of the persons incorporated according to the relevant law and clothed with legal personality separate from the persons constituting it is known as a corporation. Definition of the sam which is reproduced below is contained in the clause.

Body Corporate or Corporation [Section 2(11)]: “Body corporate or corporation” includes a company incorporated outside India, but does not include

  1. a co-operative society registered under any law relating to co-operative societies and
  2. any other body corporate, which are specified the Central Government by notification.

The expression corporation oi body corporate is wider than the word corn pans’.

A corporaàtion sole is a single individual constituted as a corporation in respect of some office held by him or function performed b him. The Crown or a Bishop under the English law are examples of this type of corporation. It may be noted that though a corporation sole is excluded from the definition for the purposes of the Companies Act, it continues to be a legal person capable of holding property and becoming a member of a company.

Question 6.
Distinguish between: Holding and Subsidiary Companies [Dec. 2010 (4 Marks)]
Answer:
Holding and Subsidiary companies are relative terms. A company is j a holding company of another if the other is its subsidiary.

Holding Company [Section 2(46)]: Holding company, in relation to one j or more other companies, means a company of which such companies are j subsidiary companies.

Subsidiary Company [Section 2(87)]: Subsidiary company in relation to any other company (that is to say the holding company), means a company | in which the holding company:
(a) Controls the composition of the Board of Directors or
(b) Exercises or controls more than 50% of the total voting power either on its own or together with one or more of its subsidiary companies.

However, prescribed class or classes of holding companies shall not have layers of subsidiaries beyond the prescribed limit.

Question 7.
The managing director and other directors of the company are not liable to be sued for the dues against the company. Comment. [June 2011 (5 Marks)]
Answer:
As per Section 9 of Company Act, 2013 On incorporate on company shall be a body corporate by the name contained in the memorandum, 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.

A company is a body corporate, can sue and be sued in its own name.

In Abdul Haq v. Das Mai an employee was not paid a salary for several months. He filed suit against directors for the recovery of the amount of salary. It was held that he will not succeed because the remedy lies against the company and not against the directors or members of the company. Conclusion: The Managing Director and other directors of the company are not liable to be sued for the dues against the company

Question 8.
A shareholder is personally liable for the acts of the company if he holds virtually the entire share capital of the company. [June 2012 (5 Marks)], [Dec. 2013 (5 Marks)]
Answer:
The Company is vested with a corporate personality quite distinct from individuals who are its members. 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 the case of a company limited by shares, liability is limited up to the unpaid amount on shares.

In the leading case of Salomon v. Salomon & Co. Ltd., it was held that the company separate a distinct person from its members and it is immaterial whether the member has a large or small proportion of share capital. As a separate legal person, a company liable for its own activities and members are not personally liable for the acts of the company.

Question 9.
In an annual general meeting of Amar Pvt. Ltd., all the shareholders were killed in a bomb blast. State, whether the company is still in existence? [Dec. 2014 (4 Marks)]
Answer:
As per Section 9 by registration under the Companies Act, 2013 a j company becomes vested with corporate personality, which is independent j and distinct from its members.

The membership of an incorporated company may change either because j one shareholder has transferred his shares to another or his shares devolve j on his legal representatives on his death or he ceases to be a member. J Thus, perpetual succession denotes the ability of a company to maintain [ its existence by the constant succession of new individuals who step into T the shoes of those who cease to be members of the company.

Professor L.C.B. Gower rightly mentions, “Members may come and go, but the company can go on forever. During the war, all the members of one private company, while in general meeting, were killed by a bomb, but the company survived – not even a hydrogen bomb could have destroyed it”.

Question 10.
Reliable Ltd. holds 75% of the paid-up share capital in Trust Ltd. j Board of Directors of Trust Ltd. decides and resolves to hold 10% of the paid-up share capital in Reliable Ltd. The Board’s proposal was also approved by Trust Ltd. in its general meeting. However, certain members j of Trust Ltd. objected to the decision on the ground that both the Board’s proposal and the resolution of the general meeting are in violation of the | provisions of the Companies Act, 2013. Examine. [Dec. 2015 (4 Marks)] ]
Answer:
Facts of Case: Vayu Ltd. holds more than 50% of the nominal value of the equity capital of Stream Ltd. In these circumstances, Stream Ltd. wants to become a member of Vayu Ltd.

Provision: Subsidiary company not to hold shares in its holding company [Section 19]: Subsidiary company shall not either by itself or through its nominees hold shares in its holding company and no holding company shall 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.

Exceptions: In the following circumstances, a subsidiary can hold the shares of its holding company:

  • Where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company.
  • Where the subsidiary company holds such shares as a trustee.
  • Where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company.

However, the subsidiary company referred to above shall have voting right only in respect of the shares held by it as a legal representative or as a trustee. Conclusion: Therefore, no company shall hold any interest in its holding company but in certain exception, they can hold shares in the holding company

Question 11.
San Industries Private Limited Company has its paid-up share capital ( of ₹ 40 lakhs and turnover of ₹ 10 Crore as per the last audited Balance Sheet. Examining the provisions of the Companies Act, 2013, decide whether the company will be treated as a small company.
What would be your answer in case the company is governed by any special Act? [June 2017 (5 Marks)]
Answer:
Facts of Case: San Industries Private Limited Company has its paid-up share capital of ₹ 40 lakhs and turnover of ₹ 10 Crore as per the last audited Balance Sheet.

Provision: Small Company [Section 2(85)]: Small company means a private company-

  1. Paid-up share capital of which does not exceed ₹ 50 lakh or such higher amount as may be prescribed which shall not be more than ₹ 10 Crore and
  2. Turnover of which as per its last profit and loss account does not exceed ₹ 2 Crore or such higher amount as may be prescribed which shall not be more than ₹ 100 Crore.

Nothing in this definition shall apply to (This means following companies cannot be small companies)
(a) Holding or a subsidiary company
(b) Company registered u/s 8 or
(c) Company or body corporate governed by any Special Act.

San Industries Private Ltd. shall be treated as a small company if its paid-up share capital’ is below ₹ 50 lakh AND ‘turnover’ is below ₹ 2 Crore. Conclusion: As per facts given in the case, the paid-up share capital of the company is ₹ 40 lakh and turnover is ₹ 10 Crore. Thus it fulfils only one criterion and not both and hence it cannot be treated as a small company.

Question 12.
TP Private Ltd. Company registered under the Companies Act, 2013 with paid-up capital of ₹ 35 lakh and turnover of ₹ 2.5 crores. Explain the meaning of “Small Company” and examine the following in accordance with the provision of the Companies Act, 2013:
(i) Whether the TP Pvt. Limited can avail the status of ‘Small Company’?
(ii) Will your answer be different if the turnover of the company is ₹ 1 crore? [Dec .2019 (5 Marks)]
Answer:
Part 1: Facts of Case: San Industries Private Limited Company has its paid-up share capital of ₹ 40 lakhs and turnover of ₹ 10 Crore as per the last audited Balance Sheet.

Provision: Small Company [Section 2(85)]: Small company means a private company-

  1. Paid-up share capital of which does not exceed ₹ 50 lakh or such higher amount as may be prescribed which shall not be more than ₹ 10 Crore and
  2. Turnover of which as per its last profit and loss account does not exceed ₹ 2 Crore or such higher amount as may be prescribed which shall not be more than ₹ 100 Crore.

Nothing in this definition shall apply to (This means following companies cannot be small companies)
(a) Holding or a subsidiary company
(b) Company registered u/s 8 or
(c) Company or body corporate governed by any Special Act.

San Industries Private Ltd. shall be treated as a small company if its paid-up share capital’ is below ₹ 50 lakh AND ‘turnover’ is below ₹ 2 Crore. Conclusion: As per facts given in the case, the paid-up share capital of the company is ₹ 40 lakh and turnover is ₹ 10 Crore. Thus it fulfils only one criterion and not both and hence it cannot be treated as a small company.

Part 2: If its turnover is ₹ 1 Crore then it can be treated as a ‘small company.

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. [Dec. 2017 (5 Marks)]
Ans. As per Section 9 of the Companies Act, 2013 the company is vested with a corporate personality quite distinct from individuals who are its members. Being a separate legal entity it bears its own name and acts under a corporate name. It has a seal of its own. Its assets are separate and distinct from those of its member.

Members (Shareholders) of a company are not the agents of the company and so they cannot bind the company by their acts. The company does not hold its property as an agent or trustee for its members and they cannot sue to enforce its rights, nor can they be sued in respect of its liabilities Thus, to clarify, since members of the company are not agents of the company, the company cannot be held liable for their (members) acts.

Question 14.
ABC Ltd. holds 75% equity share capital of DEF Ltd. and controls the composition of the Board of Directors of DEF Ltd. ABC Ltd. goes for public issue for raising further share capital. Board of Directors of ABC Ltd. allot 10% of the issue to DEF Ltd. Referring to the provisions of the Companies Act, 2013 examine the validity of Board’s decision to allow 10% of the issue to DEF Ltd. holds a certain number of shares as a legal representative of a deceased member of ABC Ltd. and has a right to vote at a general meeting of ABC Ltd. in respect of such shareholding, will this right be affected by the issue of 10% to DEF Ltd. by ABC Ltd.? [Dec. 2017 (4 Marks)}
Answer:
As per Section 19, subsidiary company shall not either by itself or through its nominees hold shares in its holding company and no holding company shall 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.

Therefore, no company shall hold any interest in its holding company. Exceptions: In the following circumstances, a subsidiary can hold the shares of its holding company:
(a) Where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company.
(b) Where the subsidiary company holds such shares as a trustee.
(c) Where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company.

However, the subsidiary company referred to above shall have voting right only in respect of the shares held by it as a legal representative or as a trustee.

Keeping in view of the above provisions, ABC Ltd. (Holding Company) cannot allot shares to DEF Ltd. (Subsidiary Company) in its public issue. However, DEF Ltd. can continue to hold its shares already held as legal representative of a deceased member of the holding company. It can also exercise its voting rights in relation to such shares.

Question 15.
The separate personality of a company is a statutory privilege and it must be used for legitimate business purposes only. Discuss. [Dec. 2008 (4 Marks)], [Dec. 2014 (4 Marks)]
Answer:
When seven or more person in the case of a public company and two or more person in the case of a private company form a company as per provisions of Companies Act, 2013 they are clothed with corporate personality and their association known by the name of the company. However, sometimes this veil of corporate personality is used for some dishonest and fraudulent purpose in that case Court will look into reality and remove the corporate veil.

In the following case, the courts have lifted the corporate veil.
1. Prevention of fraud and misconduct: Where the medium of a company has been used for committing fraud or improper conduct, the Courts have lifted the veil and looked at the realities of the situation. [Gilford Motor Co. v. Horne]

2. Company acting as an agent: Where the company is, in reality, an agency or trust for someone else and the corporate facade is used to cover up that agency or trust.

3. Protection of public policy: Where the doctrine conflicts with public policy, Courts have lifted the corporation veil for protecting the public policy. [Connors v. Connors Ltd.]

4. Enemy character of the company: Court will lift the corporate veil if the company has an enemy character. [Daimler Co. Ltd. v. Continental Tyre & Rubber Co.]

5. Evasion of taxes: Where the veil has been used for evasion of taxes and duties, the court upheld the piercing of the veil to look at the real transaction.

6. To protect labour welfare legislation: Where the purpose of company formation was to avoid’ the welfare legislation, the Court will lift the corporate veil.

7. Use of corporate veil for hiding criminal activities: Where the defendant used the corporate structure as a device to conceal his criminal activities (evasion of customs and excise duties), the Court could lift the corporate veil and treat the assets of the company as the realizable property of the shareholder.

Question 16.
Rani is a wealthy lady enjoying a large dividend and interest income. She has formed three private companies and 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 bid to reduce her tax liability. Discuss the legality of the purpose for which the three companies were formed. [June 2010 (5 Marks)]
Answer:
Facts of Case: Rani is a wealthy lady enjoying a large dividend and interest income. She has formed three private companies and 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 bid to reduce her tax liability.
Provision: When a company is formed as per provisions of the Companies Act, 2013 they are clothed with corporate personality and their association is known by the name of the company. However, sometimes this veil of corporate personality is used for a dishonest and fraudulent purpose. In such cases, Court will look into reality and remove the corporate veil.

As per the facts given in the case, Rani has formed the four companies to avoiding tax and the company is nothing more than the assessee himself. Rani is using the advantage of corporate personality to evade taxes.

Conclusion: Thus, applying the above principle Rani and four companies will be treated one and the same person.

Question 17.
Explain clearly the meaning of ‘lifting of corporate veil’ in relation to a company incorporated under the Companies Act, 2013. Examining the 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 and
(b) Where the acts of a company are opposed to workmen? [Dec. 2015 (4 Marks)]
Answer:
When seven or more persons in the case of a public company and two or more persons in case of the private company form a company as per the provisions of Companies Act, 2013 they are clothed with corporate personality and their association known by the name of the company. However, sometimes this veil of corporate personality is used for some dishonest and fraudulent purpose in that case Court will look into reality and remove the corporate veil.

Improper Conduct: Where the medium of a company has been used for committing fraud or improper conduct, the Courts have lifted the veil and looked at the realities of the situation. [Gilford Motor Co. v. Horne]

Avoid Welfare Legislation: Where the purpose of company formation was to S avoid the welfare legislation, the Court will lift the corporate veil. [Workmen of Associated Rubber Industries Ltd v. Associated Rubber Industries Ltd.]

Setting Up of Business Entities and Closure Questions and Answers

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