Preliminary (Definitions, Features & Types of Company) – CA Inter Law Notes

Preliminary (Definitions, Features & Types of Company) – CA Inter Law Notes is designed strictly as per the latest syllabus and exam pattern.

Preliminary (Definitions, Features & Types of Company) – CA Inter Law Notes

Company And Applicability Of Act:

Meaning:

• Company is an Association of Persons formed for the purpose to achieve some common objects.
• The word ‘Company’ is derived from the Latin word (Com=with or together; panis=bread), and it originally referred to an association of persons who took their meals together.

Definition of Company – Section 2(20)
Company means company formed and registered under this Act (2013) or any other previous Companies Act.

Applicability of Companies Act

• Companies Act, 2013 is applicable to whole of India.
• Companies Act, 2013 is applicable to all companies including companies belonging to other sectors such as Banking Companies, Insurance Companies, Electricity Companies etc.

Special Act Prevail

• Provisions of Companies Act, 2013 is applicable to:
• Insurance Companies so far as it is not inconsistence with provisions of the Insurance Act, 1938 & IRDA, 1999
• Banking Companies so far as it is not inconsistence with provisions of the Banking Regulation Act, 1949
• Electricity Companies so far as it is not inconsistence with provisions of the Electricity Act, 2003
• Any other Company governed bv Special Act so far as it is not inconsistence with provisions of the Special Act

Nature And Characteristics Of Company:
Company has following characteristics:

Incorporated Association

• A company must be incorporated or registered under the Companies Act.
• Minimum number required for the purpose is 7 in case of a public company and 2 in case of a private company.

Artificial Person

• A company is created with the sanction of law and is not a human being.
• Therefore, it is called artificial; since it is clothed with certain rights and obligations, it is called a person.

Separate Legal Entity

• Unlike partnership, company is distinct from the persons who constitute it.
• On registration, the association of persons becomes body corporate by the name contained in the Memorandum.
• In the famous case of Salomon vs. Salomon & Co. Ltd., it was held that a company is at law a different person from its promoters, directors and members.

Salomon vs. Salomon & Co. Ltd.

• Salomon carried on business as a leather merchant.
• He sold his business; for a sum of £30,000 to a company formed by him along with his wife, daughter and four sons.
• The purchase consideration was satisfied by allotment of 20,000 shares of £1 each and issue of debentures worth £ 10,000 secured by floating charge on the company’s assets in favour of Mr. Salomon.
• All the other shareholders subscribed for one share of £1 each. Mr. Salomon was also the Managing Director of the company.
• The company almost immediately ran into difficulties and eventually became insolvent and winding up commenced.
• At the time of winding up, the total assets of the company amounted to £6,050; its liabilities were £10,000 secured by the debentures issued to Mr. Salomon and £8,000 owing to unsecured trade creditors.
• The unsecured sundry creditors claimed the whole of the company’s assets, viz., £6,050 on the ground that the company was a mere alias or agent for Salomon.
• It was held that contention of the trade creditors could not be maintained, because the company being in law a person quite distinct from its members could not be regarded as an agent or trustee for Salomon.
• In addition, the company’s assets must be applied in payment of the debentures as a secured creditor is entitled to payment out of the assets on which his debt is secured in priority to unsecured creditors.

Lee v$. Lee Air Farming Limited

• In Lee vs. Lee Air Farming Limited, a company was formed for manufacturing of aerial top-dressing.
• Lee, a qualified pilot, held all but one of the shares in the company and by the Articles was appointed director of the company and chief pilot.
• Lee was killed while piloting the company’s aircraft and his widow claimed compensation for his death under the Workmen Compensation Act.
• The insurance company opposed the claim on the ground that Lee was not a ‘worker’ as the same person could not be employer and the employee.
• It was held that there was a valid contract of service between Lee and the company, and Lee was, therefore, a worker. Mrs. Lee is entitled to get compensation.

Limited Liability

• The company being a separate person, its members are not as such liable for its debts.
• In the case of a company limited by shares, the liability of member is limited to the unpaid value of shares held by them. Thus, if the shares are fully paid up, their liability will be nil
• However, a company may be formed with unlimited liability of members. In case of unlimited liability, companies’ members shall continue to be liable until each paise has been paid off.
• In case of company limited by guarantee, the liability of each member shall be determined by the guarantee amount, ie., he shall be liable to contribute up to the amount guaranteed by him.
• However, in case of a guarantee company having share capital, the liability shall be limited to the aggregate of the amount remaining unpaid on the shares held by a member and the amount guaranteed by him.
• If any time number of members of company is reduced below than 7 in case of public company or 2 in case of private company and company carries on business for more than 6 months without increase in number to minimum, every member who is cognisant of fact will be severally liable for payment of whole debt incurred by company after period of 6 months.

Transferability of Shares

• Since business is separate from its members in a company form of organization, it facilitates the transfer of members’ interest.
• The shares of a company are transferable in the manner provided in the Articles of the company.
• However, in a private company, certain restrictions have to be placed on such transfer of shares but the right to transfer is not taken away absolutely.

Perpetual Exis-tence

• 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.
• Members may come and go but the company can go on forever.

Separate Property

• Company is legal person.
• It holds and owns property in its own name.
• The property of company is not the property of shareholders.
• It was held in case of Macaure vs. Northern Assurance Co. Ltd., that even where a shareholder held almost entire share capital he did not even have an insurable interest in the property of the company.

Macaure vs. Northern Assurance Co. Ltd.

• Macaure was the shareholder of a timber company. He was also a substantial creditor.
• He insured the company’s timber considering his interest as shareholder and creditor in his own name.
• Timber of company was destroyed in fire and he claimed compensation.
• The insurance company contented that the company was not property of an individual and refused to compensate.
• The Court has held that the property of company is not property of individual and insurance company was not liable.

Common Seal
What is common seal?

• A company is an artificial person. Therefore, it has to work through its directors, officers and other employees.
• However, it can be held bound by only those documents, which bear its signature.
• Common seal is the official signature of a company.

Documents re-quiring common seal

• Now, common seal has been made optional.
• Following documents require common seal, if company has common seal:
  • Power of attorney
  • Share certificate
  • Share warrant.
• Generally, documents which require authentication by a company and contract entered into by company should be signed by any Key Managerial Personnel (KMP) or any officer authorized by Board in this behalf.- Section 21

Provisions for use of common seal

• Authority to use common seal can be given only by Board Meeting. The person affixing common seal must sign the instrument.
• The common seal should be kept in custody of authorized person.

Importance of common seal

• If any deed or contract is signed by director or authorized person on behalf of the company under seal, it binds the company.
• The other party can rely on document and consider the document as authentic.

Can Sue and be Sued by Other
Company may sue or be sued in its own name.

Comparison Of Company And Other Forms Of Business
Company vs. HUF
Company:

• Any person can become member of company.
• Company is managed by its Board of Directors.
• A person cannot become member of company by birth.
• Registration of company is compulsory.

HUF

• HUF consists family members only.
• Karta manages business of HUF.
• A person becomes member of HUF by birth.
• Registration of HUF is not compulsory.

Company vs. Partnership
Company:

• Company is an artificial legal person.
• Company has perpetual succession.
• Registration of company is compulsory. Company is registered as per provisions of the Companies Act, 2013.
• Liability of members of company is limited by shares or by guarantee.
• A member is not an agent of company or of other members.
• Member cannot bind company by his act.
• Ordinary members cannot take part in management of a company. Only director can take part in management.
• Shares of a private limited company can be transferred easily.
• Company is separate legal entity.
• A single member cannot wind up a company.

Partnership Firm:

• Partnership is not a legal person.
• Partnership firm does not have perpetual succession.
• Registration of firm is optional. It is guided by Indian Contract Act, 1872 and Partnership Act, 1932.
• Liability of members is unlimited in a partnership firm.
• Partner is an agent of firm and other partners.
• Partner can bind firm by his act.
• Partners can take part in management of a firm.
• Partner can transfer his share but the assignee does not become a partner. He is only entitled to share of profits.
• Partnership is not separate legal entity.
• A partnership may be dissolved by any partner at any time.

Company vs. LLP
Company:

• Compulsory registration of company is required with the ROC.
• Name of a public company to end with the word ‘limited’ and a private company with the words ‘private limited’.
• Liability of shareholder is limited to the extent of the unpaid capital.
• Quarterly Board Meeting and Annual General Meeting are mandatory.
• Audit of accounts is compulsory, irrespective of share capital and turnover.

LLP:

• Compulsory registration of LLP is required.
• Name to end with ‘LLP’ in case of Limited Liability Partnership.
• Liability of partner is limited to the extent of contribution.
• No such meeting is required.
• Audit of accounts required, if the contribution is above ₹ 25 lakhs or if annual turnover is above ₹ 40 lakhs.

Company vs. Corporation
Company:

• A company which is created and registered under the Companies Act, 2013 or previous Companies Act is known as a Company.
• Company is defined under section 20 of Companies Act, 2013.
• Company is registered in India.
• Every company is included within meaning of corporation.

Corporation:

• The company which is formed and registered in or outside India is known as a Corporation.
• Corporation does not include co-operative society registered under Cooperative societies Act.
• Corporation is defined under section 2(11) of Companies Act, 2013.
• Corporation may be registered in or outside India.
• Every corporation may or may not be company.

Citizenship And Nationality Of Company
Concept of Citizenship

• Citizenship is available to natural person as per the provisions of Citizenship Act, 1955.
• Company is not a citizen either under Citizenship Act, 1955 or under Constitution of India.
• All fundamental rights which are available to natural person are not available to company. Company cannot be granted visa. It does not have voting right in election.

Nationality

• Company is not citizen but it has nationality, domicile and residential status.
• Domicile of company is the place of its registration.

Lifting Of Corporate Veil
What is Corpo-rate Veil?

• Company is separate legal entity from its shareholders and directors.
• As a result, shareholders or directors cannot be held responsible for any default or offence committed by company. This is popularly known as corporate veil.

When can the Corporate Veil be Lifted?

• Corporate veil can be lifted in following two situation:
• As per Companies Act
• As per judicial precedent (ie., judgment of Court)

Lifting of Corporate Veil as per Companies Act
In the following cases, the Court can order to lift corporate veil as per provisions of Companies Act, 2013, if concept of separate legal entity is misused:

Wrong or false in-formation – Section 7
Promoter can be held liable for providing any false or wrong information in relation to incorporation of company.

Mis-representa- tionin Prospectus – Sections 34-35
In case of misrepresentation in prospectus, every director, promoter and every other person, who authorizes such issue of prospectus, incurs liability towards those who subscribed for shares on the faith of untrue statement.

Failure to return application money

• In case of issue of shares by a company to the public, if minimum subscription as stated in the prospectus has not been received within 30 days from the first issue of the prospectus the company must return the application money within 15 days from closure of issue.
• If money is not paid, all directors shall be jointly liable to return the money with interest @ 15% per annum.

Ultra vires Act

• Directors and other officers of a company will be personally liable for ultra vires act.
• Ultra vires means beyond the authority.

Lifting of Corporate Veil as per Judicial Interpretation
In the following veil based on cases, the Court can order to lift corporate ast judgments delivered:

Protection of Revenue
The Court may ignore the corporate entity of a company where it is used for tax evasion or to reduce tax liability.

Sir Dinshaw Maneckjee Petit

• An assessee was earning huge income by way of dividend and interest.
• He formed four private companies and transferred his investments to each of these companies in exchange of their shares.
• The dividend and interest income received by the company was given back to Sir Dinshaw as a pretended loan.
• It was held that the company was formed by the assessee purely and simply 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 assessees as pretended loans.
• Where the medium of a company has been used for committing fraud or improper conduct, Court has lifted the veil and looked at the realities of the situation.

Protection of Faund or Improper Conduct:
Jones vs. Lipman

• L agreed to sell a certain land to I for $ 5250. He subsequently changed his mind and to avoid the specific performance of the contract, he sold it to company which was formed especially for the purpose.
• The company had L and a clerk of his solicitors as the only members.
• J brought an action for the specific per-formance against L and the company.
• The Court looked to the reality of the situation, ignored the transfer, and ordered that the company should transfer the land to J.

Determine enemy character of company:
Company being an artificial person cannot be an enemy or friend. However, during war it may become necessary to lift the corporate veil and see the persons behind as to whether they are enemies or friends. It is because, though a company enjoys a distinct entity, its affairs are essentially run by individuals.

Daimler Co. Ltd. vs. Continental Tyre & Rubber Co. Ltd.

• A company was incorporated in England for the purpose of selling tyres made in German by German Company.
• All directors of company were German residents. Except one shareholders, all shareholders of company were German Residents.
• During the First World War the English company filed suit to recover trade debt. At that time, war was going on between Germany and England.
• It was held that company was an alien enemy and therefore contract of selling tyres made in Germany would be void. Company cannot recover trade debt.

Subsidiary to act as an agent

• In Merchandise Transport Limited vs. British Transport Commission, a transport company wanted to obtain licenses for its vehicles but it could not do so if it made the application in its own name.
• It, therefore, formed a subsidiary company and the application for licenses was made in the name of the subsidiary.
• The vehicles were transferred to the subsidiary.
• Held, the parent and the subsidiary company were one commercial unit and the application for licenses was rejected.

To avoid welfare legislation
Where it was found that the sole purpose for the formation of the new company was to use device to reduce the amount to be paid by way of bonus to workmen, the Supreme Court upheld the piercing of the veil to look at the real transaction. – Workmen of Associated Rubber Industry Ltd. vs. Associated Rubber Industry Ltd.

Advantages And Disadvantages Of Company
Advantages:
As compared to other forms of business organisation, company has advantages of corporate personality, limited liability, perpetual succession, transferability of shares, separate property, capacity to sue and autonomy.

Disadvantages
Company or corporate form of business has following disadvantages:

Formalities

• To incorporate company, detailed legal formalities and procedures are required to be followed.
• After incorporation, working of company must be as per provisions of the Companies Act.
• Audit and maintenance of books and registers are mandatory.

Disclosure of Information

• Company is required to disclose certain information to its members.
• Members have restricted access to internal management of company.

Separation of Control
Members cannot act in their individual capacity for or on behalf of company

Greater Social Responsibility
Company has to show greater responsibility in their working.

Tax burden
Company has to pay more tax as compared to other form of business.

Detailed Winding up
Winding up procedure is lengthy, expensive and time consuming for company.

Illegal Association – Section 464
What is Illegal Association?

• Section 464 of the Companies Act, 2013 provides that no company, association or partnership consisting of more than
• 100 persons for carrying on the business can be formed unless it is registered under the Companies Act or is formed under some other Law. However, Rule 10 of Companies (Miscellaneous) Rules, 2014 prescribed 50 maximum number of members for this purpose.
• Thus, if such an association is formed and not registered under the Companies Act or any other Law, it will be regarded as an ‘illegal association’ although none of the objects for which it may have been formed is illegal.

Exemptions
Non-Profit Earning Association
All charitable, religious, scientific, literary, social and other association including clubs not having their objects as the acquisition of gain are excluded from the section 464.

HUF

• Section 464 is not applicable to Hindu Undivided Family carrying on any business without registration with any number of family members.
• However, where two HUF join hands to carry or business, the provision of section 464 become applicable.
• However, for calculating the number of members of such as association, the minor members shall be excluded.
• As regards to adult members, both male and female members shall be taken into account.

Association of Professionals
An association or partnership formed by professionals who are governed by Special Acts are exempted.

Consequences of Illegal Association
Personal Liability
Every member is personally liable for all liabilities incurred in the business.

Punishment
Members are punishable with fine, which may extend up to ₹ 1,00,000.

Limitations

• Such an association cannot enter into any contract.
• Such an association cannot sue any of its members or any outsider, not even if the association is subsequently registered as a company.
• It cannot be sued by a member or an outsider for any debts due to it because it cannot contract for any debt.

No winding up

• It cannot be wound up even under the provisions relating to winding up of unregistered companies.
• The profits made by an illegal association are, however, liable to assessment to income tax. – Gopaji Co. vs. C.I.T.A.

Always illegal:
The illegality of an illegal association cannot be cured by subsequent reduction in the number of its members.-Kumar Swami Chettiar vs. M.S.M. Chinnath- ambi Chettiar

Classification Of Companies
Broadly, company can be classified in following manner:

• On the basis of incorporation
• On the basis of liability
• On the basis of control
• On other criteria

Companies on the Basis of Incorporation

• Charter Company
• Statutory Company
• Registered Company

Companies on the Basis of Liability

• Company limited by shares
• Company limited by guarantee
• Unlimited Company

Companies on the Basis of Control

• Government Company
• Holding and Subsidiary Company
• Foreign Company
• Associate Company

Companies on the Basis of Other Criteria

• Private Company
• Public Company
• One Person Company (OPC)
• Small Company
• Association not for Profit (le. section 8 company)
• Producer Company
• Investment Company
• Dormant Company
• Public Financial Institution (PFI)
• Nidhi Company

Companies On The Basis Of Incorporation
Charter Company
A company created by the grant of a charter by the king or queen is called a Chartered Company.

Statutory Company

• Company which is created by Special Act of Parliament is known as statutory company.
• The provisions of the Companies Act, 2013 do not apply to it.

Examples
Reserve Bank of India, Life Insurance Corporation of India, etc.

Registered Company
Company for which promoters have taken steps to incorporate it and obtained certificate of incorporation is known as registered company.

Companies On The Basis Of Liability
Company Limited by Shares – Section 2(22)

• In case of company limited by shares, liability of members is limited by the Memorandum of company.
• Here, liability of members is limited to the extent of unpaid value of shares held by them.

Example:
If person is holding equity share of ₹ 10 on which he has paid ₹ 8. His liability will be ₹ 2. Company cannot demand more than ₹ 2 when share was issued at par.

• If shareholder has paid full value of his share, he is not liable to pay any further amount.
• Here, the liability of the member is limited but liability of company is never limited.
• The liability of members can be enforced at any time during the existence and also during the winding-up of the company.

Company Limited by Guarantee – Section 2(21)

• In this kind of company, member is liable to pay amount of guarantee he has given at the time of becoming member of company.
• Company limited by Guarantee can be further classified as under:
  • Company limited by Guarantee and having share capital
  • Company limited by Guarantee and not having share capital

Guarantee Company having share capital

• The liability of a member of a guarantee company having share capital is dual:
  • amount guaranteed by him; and
  • amount unpaid on shares held by him
• Member can be demanded to pay call money at any time but he can be asked to pay guaranteed amount during winding

Guarantee Com-pany not having share capital

• In this kind of company, liability of member is limited to amount of guarantee given by him.
• This liability can be enforced only at the time of winding up of company.

Unlimited Company Definition – Section 2(92)
A company which has no limit on the liability of its members is an unlimited company.

Provisions

• In the case of an unlimited liability company, the liability of each member extends to the whole amount of the company’s debt and liabilities.
• Liability of members of an unlimited company is similar to that of the partners but unlike the liability of partners, the members of the company cannot be directly proceeded against.
• Company being a separate legal entity, the claims can be enforced only against the company.
• An unlimited company may or may not have share capital.

Articles of Company
The Articles of Association of an unlimited company must state the number of members with which the company is to be registered and, if the company has share capital, the amount of share capital with which the company is to be registered.

Conversion of limited company into unlimited company
A company registered as limited company cannot be converted into unlimited company.

Conversion of unlimited company into limited company – Section 18

• A company registered as an unlimited company can be converted into a limited liability company.
• Any debt, liabilities, applications or contracts entered or incurred by unlimited company before such conversion are not affected by such conversion.
• Company needs to alter its Articles and Memorandum in accordance of provisions of Act at the time of conversion.

Companies On The Basis Of Control
Government Company Definition – Section 2(45)

• Government Company means any company in which not less than 51% of the paid-up share capital is held by:
• The Central Government; or a Any State Government(s); or
• Partly by the Central Government and partly by one or more State Governments.
• A subsidiary of a Government Company is also treated as a Government Company.

Legal status of Government Company

• Government Company is neither a Government department nor a Government establishment.
• Employees of a Government Company are not the employees of the Central or State Government.
• A Government Company can be woundup like any other company registered under the Act.

Holding and Subsidiary Company
Subsidiary company – Definition – Section 2(87)

• ‘Holding’ and ‘Subsidiary’ companies are relative terms.
• A company is holding company of another, if the other is its subsidiary.
• According to section 2(87) of the Companies Act, 2013, a company shall be deemed to be a subsidiary of another, in any of the following case:
  • The other company controls the composition of its Board of Directors
  • The other company holds more than half in nominal value of its share capital
  • It is a subsidiary of a third company which itself is a subsidiary of the controlling company
• Here, total share capital includes; equity shares and convertible preference shares.

Control of Composition of Board of Directors
The composition of the Board of directors of a company shall be deemed to be controlled by the other, if the latter has the power, without the consent or concurrence of the other persons to appoint or remove all or majority of the directors.

Meaning of word ‘Control’ – Section 2(27)
Control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

Important Note:
A private company which is subsidiary of public company is treated as public company.

Subsidiary com-pany’s holding in Holding company – Section 19

• As per section 19 of Companies Act, 2013, subsidiary company cannot hold any shares into its holding company either by itself or through its nominee.
• Holding company should not allot or transfer any of its shares to its subsidiary. If transfer is made, it is void.
• However, subsidiary company can hold shares in holding company in following situation:
  • It can hold shares as legal representative of deceased member of holding company.
  • It can hold shares as trustee.
• It has become shareholder before it became a subsidiary company of holding company.

Holding Company – Definition – Section 2(46)

• Holding company means a company which controls another company.
• Company shall not have more than two layers of subsidiaries. However, this provision is not applicable to Banking Company, Registered NBFC, Government Company and Insurance Company.

Foreign Company
Definition – Section 2(42)

• A foreign company means a company or body corporate incorporated outside India which—
  • Has a place of business in India by itself or through an agent, physically or through electronic mode.
  • Conduct any business activity in India in other manner.
• Place of business includes a share transfer office or share registration office.

Explanation of Electronic mode

• Electronic mode means carrying out following activities electronically:
• Business to Business (B2B) and Business to Consumer transactions, data interchange and other digital supph transactions,
• Offer to accept deposit or accepted deposit or subscription of securities, in India or from citizen of India,
  Financial settlements,
  • Web based marketing,
  • Advisory and transactional services,
  • Data base services and products,
  • Supply chain management,
  • Online services such as telemarketing, telecommuting, telemedicine, education and information research and
  • All related to data communication services, Whether conducted by email, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise.

Example
Online B2C platforms, online travel companies with joint ventures with several airlines etc., selling tickets of these airlines on their online portals or Indian airline companies with joint ventures with foreign entities selling tickets through agents in India would also be covered under definition of Foreign Company.

Activities held as not constituting ‘Carrying on of business’
Following activities by foreign company in India has been held as not constituting ‘carrying on of business’:

• carrying small transactions
• conducting meetings of directors
• operating bank accounts a procuring orders
• creating or financing of debts, charges, etc. on property

Associate Company – Section 2(6)

• ‘Associate Company’, in relation to another company, means a company in which that other company has a significant influence.
• Subsidiary Company of the company and Joint Venture Company are not included within meaning of Associate Company.
• ‘Significant influence’ means control of at least 20% of total share capital, or of business decisions under an agreement.
• Total share capital means paid up equity shares and convertible preference shares.

Companies On The Basis Of Other Criteria
Private Company – Section 2(68)

• ‘Private company’ means a company which by its Articles:
• restricts the right to transfer its shares except in case of One Person Company, limits the number of its members to two hundred prohibits any invitation to the public to subscribe for any securities of the company
• Where two or more persons hold shares in a company jointly, they shall be treated as a single member to count total number of members for private company.
• Employee or ex-employee who are members of company are not included while counting limit of 200 members.

Public Company – Section 2(71)
Public Company means a company which is not a private company.

One Person Company (OPC)
Definition – Section 2(62)
One person company’ means a company which has only one person as a member.

Provisions

• One Person Company shall have minimum one director. It means, it may have more than one director.
• It is kind of private company.
• OPC can be formed either as:
  • Company limited bv shares; or
  • Company limited by guarantee; or
  • Unlimited company.

Who can incorporate OPC?

• Natural person who is an Indian citizen can:
  • Incorporate OPC;
  • Be a nominee of an OPC.
• Minor cannot become member or nominee of OPC.

Prohibition for OPC

• OPC cannot be converted in to section 8 Company.
• OPC cannot carry out Non-Banking Financial Management activities (NBFC)
• OPC cannot be converted voluntary into any other kind of company (ie. private or public) within period of 2 years from the date of incorporation.

Privileges or benefits to OPC
Following benefits are available to OPC:

• Financial statement does not include cash flow statement
• Need not to hold AGM
• Need not to prepare report on AGM
• Financial statement and Board’s report can be signed by one director
• Need not to appoint Independent Director
• A proportion of directors need not to retire by rotation every year
• Limit of managerial remuneration under section 197(1) is not applicable

Small Company
Definition – Section 2(85)

• It means company other than public company which has:
• Paid up share capital not exceed than ₹ 50 Lacs or such higher amount as may be prescribed which shall not be more than ₹ 10 crore; and
• Turnover not more than ₹ 2 Crore or such higher amount not exceeding ₹ 100 Crore as per profit and loss account of its immediately preceding financial year
• Following cannot be considered as small company:
• Holding company or subsidiary company a Section 8 company
• Company or body corporate governed by Special Act

Exemption or benefits available
Following exemptions are available to small company:

• Financial statement does not include cash flow statement
• Need not to prepare report on AGM a Need not to appoint Independent Director
• A proportion of directors need not to retire by rotation every year
• Directorship in small company is not counted for maximum number of direc¬torship under Act.
• At least one board meeting in half calendar year
• Limit of managerial remuneration under section 197(1) is not applicable

Association not for Profit – Section 8
What is Association not for profit?
‘Association not for profit’ is an association which is formed not for making profits but for promotion of commerce, art, science, religion, charity or any other useful social purpose.

Procedure
Procedure for incorporation of section 8 Company is explained in Chapter No. 2.

Exemption or privileges available

• Section 8 has been granted following benefits:
• No requirement to use word ‘Pvt. Ltd.’ or ‘Limited’ in the name of company
• No stamp duty is payable at the time of registration of company
• Firm can be member of section 8 Company

Restriction

• Section 8 company cannot:
• Alter its AOA or MOA without consent of Central Government
• Pay dividend or distribute its profit among members

Producer Company
‘Producer Company’ means a body corporate having objects or activities specified in section 58IB and registered as Producer Company under Companies Act, 1956.

Investment Company
‘Investment Company’ means company whose principle business is the acquisition of shares, debenture or other securities. – Explanation to section 186

Dormant Company

• Company which has no significant accounting transaction or inactive company may get status of dormant company by application to Registrar.
• ‘Inactive Company’ means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years.
• ‘Significant Accounting Transaction’ means any transaction other than:
  • Payment of fees by a company to the Registrar
  • Payments made by it to fulfil the requirements of this Act or any other law
  • Allotment of shares to fulfil the requirements of this Act
  • Payments for maintenance of its office and records.

Public Financial Institution (PFI) – Section 2(72)

• Public Financial Institution means:
• LIC, IDFC (Infrastructure Development Finance Company Limited)
• Institutions notified by Central Government under Previous Act (1956)
• Other institution as notified by Central Government in consultation with RBI.
• However, institution should not be notified as public financial institution unless:
• It shall be established by Central or State Act other than companies Act.
• Not less than 51 % is held by State or Central Government

Nidhi Company – Section 406

• Company which is incorporated as nidhi company with the object of cultivating the habit of cost cutting and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefits.
• Nidhi Company is required to comply with such rules as prescribed by Central Government.

Some Definitions
Body Corporate – Section 2(11)

• Body corporate includes a company incorporated outside India, but does not include:
• a co-operative society registered under any law relating to co-operative societies; and
• any other body corporate, which the Central Government may, by notification, specify in this behalf
• Body corporate is also known as corporation.

Key Managerial Personnel – Section 2(51)
Key Managerial Personnel means:

• the Chief Executive Officer or Managing Director or Manager
• the company secretary
• the Whole-time Director
• the Chief Financial Officer;
• such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and
• such other officer as may be prescribed

Manager – Section 2(53)
‘Manager’ means an individual who, subject to the superintendence, control and directions of the Board of directors, has the management of the whole or substantially the whole of the affairs of the company, and includes a director or any other person occupying the position of a manager, by whatever name called and whether under a contract of service or not.

Managing Director – Section 2(54)
Section 2(54) defines ‘Managing Director’ as a director who, by virtue of an agreement with the Company or of a resolution passed by the company in General Meeting or by its Board of directors, or by virtue of its Memorandum or Articles of Association, is entrusted with substantial powers of management which would not otherwise be exercisable by him.

Net Worth – Section 2(57)
As per section 2(57) net worth means an aggregate value of:

• The paid up share capital,
• All reserves created out of profits, and
• Securities premium account and debit or credit balance in profit and loss account,

After deducting the aggregate value of:

• Accumulated losses,
• Deferred expenditure, and
• Miscellaneous expenditure not written off.

Officer – Section 2(59)
‘Officer’ includes any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors are accustomed to act.

Officer in Default – Section 2(60)

• Any of the following officer shall be regarded as officer in default for any offence committed or contravention committed by company:
• Whole-time Director
• Key Managerial Personnel
• where there is no KMP, director(s) as specified by the Board in this behalf and who has given his consent in writing to the Board to such specification, or all the directors, if no director is so specified
• any person who, under the immediate authority of the Board or any KMP, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default
• any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity
• every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance
• in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer

Related Party – Section 2(76)

• ‘Related party’, with reference to a company, means:
• a director or his relative;
• a Key Managerial Personnel or his relative;
• a firm, in which a director, manager or his relative is a partner;
• a private company in which a director or manager or his relative is a member or director;
• a public company in which a director or manager is a director and holds along with his relatives, more than 2% of its paid-up share capital;
• any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
• any person on whose advice, directions or instructions a director or manager is accustomed to act;
• any body corporate which is’1 :
  • a holding, subsidiary or an associate company of such company; or
  • a subsidiary of a holding company to which it is also a subsidiary; or
• an investing company or the venturer of the company ’W.e.f. 5th June 2015, a holding subsidiary/associate/fellow subsidiary company of Private Company shall not be its related party.
• a director other than independent director or key m anagerial personnel of the holding company or his relative

Relative – Section 2(77):
Relative, with reference to any person, means anyone who is related to another, if:

• they are members of a Hindu Undivided Family;
• they are husband and wife; or
• one person is related to the other in such manner as may be prescribed;

As per Rule 4 of Companies (Specification of Definitions Details) Rules, 2014, a person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely:

• Father (includes step-father)
• Mother (includes the step-mother)
• Son (includes the step-son)
• Son’s wife
• Daughter
• Daughter’s husband
• Brother (includes the step-brother)
• Sister (includes the step-sister)

Whole time Di-rector – Section 2(94)
Section 2(94) of the Companies Act, 2013 defines ‘Wholetime Director’ as a director in the whole-time employment of the company.

Comparison Of Company And Other Forms Of Business
Proprietorship and OPC

Matter	Proprietorship	OPC
Legal entity	It is not legal entity.	It is separate legal entity.
Liability	Unlimited liability of owner or promoter.	Limited liability of member and promoter.
Registration	Registration of proprietorship is not required.	Registration of OPC is man­datory.
Perpetual succes­sion	Principle of perpetual succes­sion is not observed.	Principle of perpetual succes­sion is observed.

OPC and Private Company

Matter	OPC	Private Company
Incorporation	It requires one person for incorporation.	It requires at least two persons for incorporation.
Person	OPC can be incorporated by natural person.	Private company can be in­corporated either by natural or artificial person.
Number of Members	OPC has only one member.	Private company should have minimum two members and maximum number of mem­bers should not be more than 200.
No. of Company by one person	One natural person can incor­porate only one OPC.	One natural person can incor­porate any number of private company.
Exemption	OPC has been granted many exemptions as compared to private company and public company.	Private company has been granted many exemptions as compared to public company.

Public Company and Private Company

Matter	Public Company	Private Company
Minimum Num­ber of members	It should have at least 7 mem­bers.	It should have at least 2 mem­bers.
Maximum Members	No limit.	Maximum number of mem­bers should not be more than 200 excluding past and present employees of company.
Transfer of shares	Shares are freely transferable.	Transfer of shares is restricted.
Public offer of shares	It can invite public to subscribe shares of company.	It cannot invite public to sub­scribe shares of company.
No. of directors	It should have at least 3 di­rectors.	It should have at least 2 di­rectors.
Privileges	It does not enjoy privileges.	It enjoys various privileges under Companies Act, 2013 as compared to public company.

Company limited by Shares and Company limited by Guarantee

Matter	Company limited by Shares	Company limited by Guar­antee
Share capital	It must have share capital.	It may have share capital.
Liability of mem­bers	Limited to amount unpaid on shares.	Limited to the amount of guarantee. If such company has share capital also, the liability on unpaid amount of shares shall be in addition to the amount of guaranteed.
Demand of lia­bility	Unpaid amount on shares can be demanded at any time before winding up or during winding up.	Guarantee amount can be de­manded only when company- goes in liquidation.
Raising funds	It can raise initial funds from members.	It cannot raise initial funds from members, unless it has a share capital too.

Practice Questions

Question 1.
Explain a company as a partner.
Answer:
Any natural person capable to enter in to contract or artificial person can
be partner. A company being legal person can enter into contract in its own name. Therefore, company can become partner, if its object clause authorises it to enter in to partnership. Company cannot enter into any business which is not supported by its object clause of MOA.

Question 2.
Company form of business organization is not a popular form of business organization. Is it correct?
Answer:
Statement is false. Company form of organisation is popular form of business organisation due to its advantages like; separate personality, limited liability, perpetual succession, flexibility and autonomy.

Question 3.
Two companies are incorporated with the same set of shareholders. Are they same or distinct under the Companies Act, 2013? Discuss.
Answer:
No. Company is separate legal entity. If all shareholders of both companies are same, they cannot be treated as same company.

Question 4.
The entire assets of a company are acquired by another company. Will it constitute taking over the management of the company? Why?
Answer:
No. It will not be treated as takeover of management of company under Companies Act, 2013. Company is separate legal entity and capable to hold property in its name.

Question 5.
Common seal of a company will have to be affixed on all the letters and documents of the company. Comment
Answer:
It is incorrect to say that common seal of company is required to be affixed on all letters and documents of company. Provision of common seal has now become optional. It means, if the company has common seal, it has to be affixed. If company has no common seal, there is no point of affixing it on letters and documents.

Question 6.
An association of 105 members (not being HUF) started banking business without being registered. After one year, six members retired. Thereafter, three members instituted a suit for partition of the association. Discuss the fate of suit.
Answer:
As per section 464, an association consisting more than 100 members is an illegal association if it is not registered either under Companies Act or any other Act. Any reduction in number of illegal association will not convert it in to legal association.
In view of above provision, it can be said that retirement of 6 members from illegal association will not affect its status. Any member of illegal association cannot file suit against association.

Question 7.
Rani is a wealthy lady enjoying large dividend and interested 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 reduce her tax liability. Discuss the legality of the purpose for which the three companies were formed.
Answer:
The Court may ignore corporate entity of a company where it is used for tax evasion. In the given case, Rani has formed three companies for tax evasion and therefore principle of separate legal entity shall not be applicable. Based on principle of lifting of corporate veil, Rani will be held liable.

Question 8.
Comment the following: A shareholder who holds 99% of the share capital of a company can be held liable for the acts of the company.
Answer:
Shareholder cannot be held liable for act of company even though he is holding majority or all shares of 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. If so, how?
Answer:
Company is still in existence. Death or incapacity of members of company do not affect the existence of company. Company has perpetual succession.

Question 10.
Vayu Ltd. holds more than 50% of 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.
Answer:
As per section 19, subsidiary company cannot be member of the holding company.

Question 11.
A government company is neither a government department nor a government establishment. Comment.
Answer:
Statement is correct. Company is separate legal entity from its shareholders. Therefore, government company is neither a government department nor a government establishment.

Question 12.
Masons (Pvt.) Ltd. is a private limited company as per the Articles of association of the company. However, a public company acquired shares in Masons (Pvt.) Ltd. thereby making the company, Masons (Pvt.) Ltd., a ‘ subsidiary of that public company. State the impact of such acquisition of shares by a public company on Masons (Pvt.) Ltd.
Answer:
When private company becomes subsidiary company of public company, such private company is treated as public company.

Question 13.
Mahesh is a creditor of an unlimited company. The company was wound-up. Mahesh, therefore, wants to sue the members of the company to recover the dues. Advise Mahesh regarding the remedy available to him.
Answer:
Creditor of unlimited company cannot sue its member to recover due amount.

Question 14.
ABC Ltd. is a company incorporated under the Companies Act, 2013. The paid-up share capital of the company is held as under :

• Government of India – 20%
• Government of Andhra Pradesh – 20%
• Government of Tamil Nadu – 10%
• Government of Maharashtra – 10%

Explaining the provisions of the Companies Act, 2013, state whether the said company be called a ‘Government company’ and also state whether the employees of a Government company can claim their salaries from the Government of India.
Answer:
Yes it is Government Company. Central and State Governments together holding more than 50% of its paid up capital. Employees of Government Company are not government employees and therefore, they cannot claim their salaries from Government of India.

Question 15.
Reliable Ltd. holds 75% of the paid-up share capital in Trust Ltd. 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 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.
Answer:
Reliable Ltd. holds 75% of paid up share capital in Trust Ltd. It means, Trust Ltd. is subsidiary company of Reliable Ltd. As per section 19, subsidiary company cannot hold or subscribe any shares of holding company. Therefore, resolution passed by Board and General Meeting of Trust Ltd. is in contravention of section 19. Objection by certain shareholders is valid.

Question 16.
The Karta of joint Hindu family ‘A’, consisting of 31 adult members and the karta of another joint Hindu family ‘B’, consisting of 21 adult members enter into partnership without getting registered under the Companies ‘ Act, on behalf of their families. After two years, some dispute arose and they sought the help of the Court. Can the Court interfere?
Answer:
It is illegal association. Court cannot interfere in matter of illegal association.

Question 17.
S & Co. was formed with S, his wife, daughter and four sons as its subscribers and the only members. The company took over the shoe business of S for ₹ 30,000 giving him, as consideration 20,000 shares of ₹ 1 each and debentures worth ₹ 10,000 with a charge on the company’s assets. All members, except S purchased one share each. S and his two sons constituted the Board of directors of the company. Due to general trade depression, the company went into liquidation. The assets of the company amounted to ₹ 6.000 whereas its creditors amounted to ₹ 17,000. ₹ 10,000 due to S (secured by the charge on company’s assets) and ₹ 7,000 due to unsecured creditors. S claims the assets of the company as his debt is secured by the charge over them. On the other hand, the unsecured creditors are contending that they should be paid in priority over S as the company and S is one and the same person. Who is entitled to assets?
Answer:
Company is separate legal entity from its directors and members. Secured creditor is entitled to money first. Refer case of Salomon vs. Salomon in paragraph No. 2

Question 18.
A company was promoted to carry on the business of crop-spraying from the air. X, one of its promoters, held bulk of its shares and was its Managing Director. Subsequently, the company entered into a service agreement with him and engaged him, as its chief pilot also. While flying one of the aircrafts of the company, in the course of business, he died in air-crash. His wife has claimed compensation under the provisions of the Workmen’s Compensation Act. The claim is being resisted by the solicitor of the company who contends that X and the company were one and the same person and a person cannot employ himself, no compensation is payable. Decide.
Answer:
Company and X are not one and same person. Company is separate legal entity. Refer case of Lee vs. Lee Air Farming Limited Compensation is payable.

Question 79.
M holds all the shares (except one) in a timber concern and is also its substantial creditor. He gets company’s timber insured in his own name. Unfortunately the timber is destroyed by fire and M claims the reimbursement of loss from the insurance company. Is the insurance company liable to M?
Answer:
Insurance company is not liable. Refer case of Macaure vs. Northern Assurance Co. Ltd., in paragraph No. 2.

Question 20.
L agreed to sell his land to J but decides afterwards not to carry out the agreement. To avoid the possibility of an order of specific performance to enforce the sale, he works out a plan on the basis of the principle of separate legal entity of a company. As per the plan he forms a company with himself and a clerk of his solicitor as its only shareholders and directors. He transfers the land to the company and offers nominal damages to J who refused to accept it and seeks your advice in the matter. Advise him.
Answer:
Refer case of Jones vs. Lipman, in paragraph No. 5. J may be advised to apply to the Court under lifting of corporate veil.

Question 21.
The State Trading Corporation of India is incorporated as a private company under the Companies Act, 2013. All the shares are held by the President of India and two secretaries in their official capacities. Is the Corporation a citizen of India?
Answer:

Question 22.
Explain the consequence and remedy, if any, in respect of the following situation:
A private company has contravened the provisions of section 2(68) of the Companies Act, 2013.
Answer:
If any private company contravene provision of section 2(68), it lost status of private company. All provisions of Companies Act, 2013 as applicable to public company shall be applicable to such private company.
Private company may apply to Tribunal for relief if failure was not intentional. Tribunal may grant relief on just and equitable grounds.

Question 23.
The paid up share capital of XYZ (P.) Ltd. is ₹ 20 lakhs consisting of 2,00,000 equity shares of ₹ 10 each fully paid up. ABC (P.) Ltd. and its subsidiary DEF (P.) Ltd. are holding 60,000 and 50,000 shares respectively in XYZ (P.) Limited.
Examine with reference to the provisions of the Companies Act, 2013 whether XYZ (P.) Ltd. is a subsidiary of ABC (P.) Ltd. Would your answer be different if DEF (P.) Ltd. is holding 1,10,000 shares in XYZ (P.) Ltd. and no shares are held by ABC (P.) Ltd. in XYZ (P.) Ltd.?
Answer:
Please refer the definition of Holding and subsidiary company.
ABC (P.) Ltd. is a holding company of XYZ (P.) Ltd. ABC (P.) Ltd. holds total 1,10,000 equity shares (Le. 60,000 equity shares by itself and 50,000 equity shares through its subsidiary). Answer will remain same in the second case.

Question 24.
Whether a private company having paid-up share capital of ₹ 40 lakhs and turnover of ₹ 20 crores as per last audited balance sheet will be treated as small company?
Answer:
No. It is not small company. Turnover is more than ₹ 2 cr.

Question 25.
A company X, its Managing Director and another director hold respectively 1 / 3rd number of shares in another company Y, and thus together they hold all the shares of company Y. Is Y a subsidiary of company X?
Answer:
No. Company X is holding 1 /3rd of share capital of Y Ltd. Shares held by Managing Director and another director are in their personal capacity and not on behalf of company.

Question 26.
40% of the paid-up share capital of A Ltd. is held by the Central Government and 11% by public institutions like the Life Insurance Corporation of India and the Unit Trust of India. Is A Ltd. Government Company?
Answer:

Question 27.
Can a company form a One Person Company (OPC) as its subsidiary?
Answer:
In terms of Rule 3 of the Companies (Incorporation) Rules, 2014, only a natural person who is an Indian citizen and resident in India is eligible to incorporate OPC. Therefore, the question of any ‘body corporate’ or other form of organizations being the single member does not arise.

Past Examination Questions

Question 1.
State the circumstances under which a company becomes the subsidiary of another company under the provisions of the Company Law. (CA May 1995)
Answer:

Question 2.
Explain clearly the meaning of a ‘private ‘and ‘public’ company as per Companies Act, 2013. (CA November 2002)
Answer:

Question 3.
State the conditions of restriction with which a private company is incorporated under the Companies Act, 2013. (CA November 2003)
Or
The Articles of Association of a private limited company contain provisions restricting the right to transfer shares and limiting the number of members to 200. What restrictions are generally incorporated in the Articles in restricting the right to transfer shares? (CA May 2005)
Answer:

Question 4.
Some of the creditors of M/s Get Rich Quick Ltd. have complained that the company was formed by the promoters only to defraud the creditors and circumvent the compliance of legal provisions of the Companies Act, 2013. In this context they seek your advice as to the meaning of corporate veil and when the promoters can be made personally liable for the debts of the company. (CA November 2004)
Answer:

Question 5.
What is meant by a Guarantee Company? State the similarities and dissimilarities between a Guarantee Company and a Company having share capital. (CA November 2004)
Answer:

Matter	Guarantee Company	Company having share capital
Share capital	It may or may not have share capital.	It must have share capital.
Liability of members	Liability of members will be limited upto amount of guarantee given by them.	Liability of member will be limited upto unpaid value of shares.
Demand of Amount	Guaranteed amount can be demanded only at the time when company goes in winding up.	Unpaid amount can be called any time.
Raising of funds	Initial amount of fund is raised from members.	Initial amount is not raised from members unless it is guarantee company having share capital.

Question 6.
ABC Pvt. Ltd., Company is a Private Company having five members only. All the members of the company were going by car to Mumbai in relation to some business. An accident took place and all of them died. Answer with reasons, under the Companies Act, 2013 whether existence of the company has also come to the end? (CA May 2008)
Answer:
Death of all members will not result into end of company. Company has perpetual succession. Legal heirs of deceased members will be members of company.

Question 7.
What will be the consequence in case if a private company incorporated under the provision of Companies Act, 2013 defaults in complying with conditions constitution a private company. (CA November 2008)
Answer:
If private company contravenes provisions of section 2(68), it shall lose all privileges and exemptions available to it under Companies Act, 2013. Provisions of Companies Act are applicable to it as if it were not a private company. However, private company may apply to Tribunal to get relief. The Tribunal may grant relief to such private company on being satisfied that contravention was not intentional.

Question 8.
XYZ company private limited desirous of raising funds through acceptance of deposits from the public seeks your advise on the matter. You being the financial advisor of the company, advise the company whether acceptance of deposits from the public in the given case be valid under the provisions of the Companies Act, 2013. (CA June 2009)
Answer:
Private company cannot accept deposits from public. Private company can accept deposits from its members and directors subject to provisions of deposits.

Question 9.
The paid up share capital of ABC Pvt. Ltd. is ₹ 1 crore consisting of 8,00,000 equity shares of ₹ 10 each fully paid-up and 2,00,000 cumulative preference shares of ₹ 10 each fully paid-up. PQR Pvt. Ltd. and MNO Pvt. Ltd. are holding 3,00,000 equity shares and 1,50,000 equity shares respectively in ABC Pvt. Ltd. PQR Pvt. Ltd. and MNO Pvt. Ltd. are the subsidiaries of UMC Pvt. Ltd. Examine with reference to the provisions of the Companies Act, whether ABC Pvt. Ltd. is a subsidiary of UMC Pvt. Ltd. Will your answer different if UMC Pvt. Ltd. controls the composition of Board of Directors of ABC Pvt. Ltd.? (CA June 2009)
Answer:
ABC Pvt. Ltd. is a subsidiary of UMC Pvt. Ltd. UMC Pvt. Ltd. holds more than one half of share capital of ABC Pvt. Ltd. In second case, answer would remain same.

Question 10.
F, an assessee, was a wealthy man earning huge income by way of dividend and interest. He formed three Private Companies and agreed with each to hold a block of investment as an agent for it. The dividend and interest income received by the company was handed back to F as a pretended loan. This way F divided his income into three parts in a bid to reduce his tax liability.
Decide, for what purpose three companies were established? Whether the legal personality of all the three companies may be disregarded? (CA June 2009)
Answer:
Where company is incorporated by person only for the purpose of evading tax, the Court has discretion to disregard the corporate entity. The facts given in the question is similar to the leading case of Dinshaw Manekji.

Question 11.
In a private limited company it is discovered that there are in fact, 205 members. On an enquiry, it is ascertained that 7 of such members had been employees of the company in the recent past and that they acquired their shares while they were still employees of the company. Is it necessary to convert the company into public limited company? (CA November 2009)
Answer:
Ex-employees, who are members of company are not counted for calculating 200 members limit. In the given case, 7 members of company are ex-employees and hence not counted in total maximum number of members for determining status of private company. As the number is within 200 (Le. here, 198) company is not required to be converted into public company.

Question 12.
The XYZ Traders Association was constituted by four Joint Hindu Families consisting of 101 major and 2 minor members. The Association was carrying on the business of trading as retailers with the object for acquisition of gains. The Association was not registered as a company ‘ under the Companies Act, 2013 or any other law.
State whether the XYZ Traders Association is having any legal status? Will there be any change in the status of this Association if the members of the XYZ Traders Association subsequently were reduced to 98? (CA November 2009, 2014)
Answer:
Association consisting more than 100 members and formed for carrying business but not registered either under Companies Act or any other Indian Laws is illegal association. Provision of illegal association is not applicable when members of HUF is carrying business. But, when two or more HUFs carry on business together, provision of illegal association is applicable.
Accordingly, XYZ Traders Association constituted by four HUFs is illegal association as it is not registered and consisting more than 100 members. Illegal association will not be regarded as legal on reduction in number of its members.

Question 13.
The concept of legal personality of a company is absolute nature. Comment (CAMay 2014)
Answer:
Statement is incorrect. In certain cases, the separate legal entity of company is ignored, which is termed as lifting of corporate veil.

Question 14.
Anson Limited held equity shares in Booban Limited. Later on, Anson Limited became subsidiary company of Booban Limited. Decide under the Companies Act, 2013, whether it is necessary for Anson Limited to surrender the equity shares of Booban Limited? (CA November 2014)
Or
State, giving reason, whether the following statement is correct or incorrect: A subsidiary company cannot hold shares of its holding company. (CA May 2016)
Answer:
Shares were acquired by Anson Ltd. before it become subsidiary company of Booban Ltd. Therefore, it is not necessary to surrender shares. – Section 19