Types of Companies – Setting Up of Business Entities and Closure Important Questions

Types of Companies – Setting Up of Business Entities and Closure Important Questions

Question 1.
Company XYZ Lid. is a subsidiary of your company in which the holding of your company is 8,50,000 equity shares of ₹ 10 each fully paid up which constitutes 85% of its paid-up capital. Does XYZ Ltd. desire to issue further 8,00,000 equity shares of ₹ 10 each on which initially a sum of ₹ 3 will be paid to ABC Ltd. to meet its long-term capital requirement. On such issue of further capital XYZ Ltd., will XYZ Ltd. continue to be the subsidiary of your company? [Dec. 200J (8 Marks)]
Answer:
Facts of Case: Company XYZ Ltd. is a subsidiary of your company in which the holding of your company is 8,50,000 equity shares of ₹ 10 each fully paid up which constitutes 85% of its paid-up capital. XYZ Ltd. desires to issue further 8,00,000 equity shares of ₹ 10 each on which initially a sum of Rs. 3 will be paid to ABC Ltd. to meet its long-term capital requirement. Provision: As per Section 2(87) of the Companies Act, 2013, a company shall be deemed to be a subsidiary of another company, where the other company holds more than 51% nominal value of its equity share capital.

Nominal capital of XYZ Ltd. = 8,50,000 × \(\frac{100}{85}\) = 10,00,000 shares

The total nominal capital of XYZ Ltd. after further issue will be = 10,00,000 + 8,00,000 = 18,00,000.
Percentage of holding in XYZ Ltd. after further issue = \(\frac{8,50,000}{18,00,000}\) × 100 = 47.2296
Conclusion: As a percentage of holding in XYZ Ltd. after the further issue is less than 50%, XYZ Ltd. will be no more subsidiary company.

Question 2.
The liability of the members of a limited company can never be unlimited. Comment. [June 2007 (5 Marks)]
Answer:
Company Limited by Shares: Section 2(21): Company limited by shares means a company having the liability of its members limited by the MOA to the amount unpaid on the shares respectively held by them.

Explanation: Accordingly, no member of a company limited by shares can be called upon to pay more than the nominal amount of the shares held by him.

Fully Paid Shares: If his shares are fully paid up, he has nothing more to pay.

Partly Part Shares: In the case of partly paid shares, the unpaid portion is payable at any time during the existence of the company on a call being made.

Liability to be unlimited: Liability of the member of a limited company can be unlimited only if the conversion of the company takes place i.e., a Company limited by shares is converted into an unlimited Company.

Question 3.
Distinguish between: Holding and Subsidiary Companies. [Dec. 2010 (4 Marks)]
Answer:
Holding and Subsidiary companies are relative terms. A company is a holding company of another if the other is its subsidiary.

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

E.g.: Tata Sons Private Limited is a holding company which have subsidiaries like Tata AIG (insurance Co.), Tata Investment, Tata Capital, Tata Consultancy Services etc

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

E.g.: Tata Consultancy Services is a subsidiary of Tata Sons Limited.

Question 4.
It is always mandatory for an unlimited company to have share capital. Comment. [June 2012 (5 Marks)]
Answer:
Unlimited Company [Section 2(92)]: Unlimited company means a company not having any limit on the liability of its members. Thus, the maximum liability of the member of such a company, in the event of its being wound up might stretch up to the full extent of their assets to meet the obligations of the company by contributing to its assets.

The members of an unlimited company are not liable directly to the creditors of the company. The liability of the members is only towards the company and in the event of its being wound up only the liquidator can ask the members to contribute to the assets of the company which will be used in the discharge of the debts of the company.

An unlimited company may or may not have share capital

Question 5.
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. [June 2015 (4 Marks)]
Answer:
Facts of Case: 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

Provision: As per Section 2(92) of the Companies Act, 2013, the unlimited company means a company not having any limit on the liability of its members. Thus, the maximum liability of the member of such a company, in the event of its being wound up, might stretch up to the full extent of its assets to meet the obligations of the company by contributing to its assets. The members of an unlimited company are not liable directly to the creditors of the company.

The liability of the members is only towards the company and in the event of its being wound up only the liquidator can ask the members to contribute to the assets of the company which will be used in the discharge of the debts of the company.

Conclusion: Thus, Mahesh cannot directly sue the members of the company for recovery of his dues. He can file a claim to the liquidator of the company.

Question 6.
Distinguish between: Small Company and Inactive Company [June 2016 (4 Marks)]
Answer:
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 profit and loss account for the immediately preceding financial year 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.

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 2 financial years or
  • Which has not filed financial statements and annual returns during | the last 2 financial years.

Question 7.
Distinguish between: Subsidiary Company & Associate Company [Dec. 2016 (5 Marks)]
Answer:
Following are an associate company: the main points of distinction between subsidiary & Associate Company

Points Subsidiary Company Associate Company
Meaning A subsidiary company means a company in which the holding company controls the composition of the Board of Directors or exercises or controls more than 5Oö of the total voting power either at its own or together with one or more of its subsidiary companies. Associate company in relation to another company means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.
Holding Paid-up capital Holding, the company holds more than 50% share capital in the subsidiary company. In associate companies, one company held’s more than 20% but less than 50% of share capital.
Control The holding company has major control over the subsidiary company. In associate companies, one company has only significant influence over other companies but not major control.
Section The term ‘subsidiary company’ is defined in Section 2(87). The term ‘associate company’ is defined in Section 2(6).

Question 8.
The paid-up share capital of PKA India Pvt. Ltd. is ₹ 20 Crore, consisting of 150 lakh fully paid-up Equity Shares of ₹ 10 each and 50 lakh | fully paid-up Cumulative Preference shares of ₹ 10 each. PKA India Capital Pvt. Ltd. and PKA Tele Services Pvt. Ltd. are holding 55 lakh and 25 lakh Equity Shares respectively in PKA India Pvt. Ltd.
PKA India Capital Ltd. and PKA India Tele Services Pvt. Ltd. are subsidiaries of Lord Krishna Pvt. Ltd. Referring to the provisions of the Companies Act, 2013 examine whether PKA India Pvt. Ltd. is a subsidiary of Lord Krishna Pvt. Ltd.?
Would your answer be different if Lord Krishna Pvt. Ltd. has five out of a total of seven directors on the Board of Directors of PKA India Pvt. Ltd.? [June 2019 (5 Marks)]
Answer:
Provision: Subsidiary Company [Section 2(87)]: Subsidiary company or subsidiary, 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 5096 of the total voting power either at its own or together with one or more of its subsidiary companies.]

Analysis: The PKA India Capital Pvt. Ltd. holds Rs. 550 Lakhs in PKA India Pvt. Ltd. and PKA India Tele Services Pvt. Ltd. holds Rs. 250 Lakhs in PKA India Pvt. Ltd. And PKA India Capital Pvt. Ltd. and PICA India Tele Services Pvt. Ltd. both are subsidiaries of Lord Krishna Ltd. The total equity share capital of PKA India Pvt. Ltd. is Rs. 1500 Lakhs.

From the above, it is clear that PKA India Capital Pvt. and PKA India Tele Services Pvt. Ltd. collectively holds 800 lakhs equity share capital in PKA India Pvt. Ltd and both of them are subsidiaries of Lord Krishna Ltd. Conclusion: India Pvt. Ltd together with its subsidiaries viz. PKA India Capital j Pvt. and PKA India Tele Services Pvt. Ltd. Accordingly, PKA India Pvt. Ltd shall become an indirect subsidiary of Lord Krishna Ltd.

Part 2: Lord Krishna Private Limited appoints 5 out of 7 directors: If Lord Krishna Pvt. Ltd. is in a position to control the composition of the Board of Directors of PKA India Pvt. Ltd., it will be a subsidiary company as per Section 2(87) of the Companies Act, 2013.

Question 9.
A Company registered under section 8 can be registered as a Small Company under the provisions of the Companies Act, 2013. Comment. [June 2019 (4 Marks)]
Answer:
As per Section 2(85) of the Companies Act, 2013, a 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 profit and loss account for the immediately preceding financial year 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. Conclusion: Thus, a company registered u/s 8 cannot be treated as a small company within the meaning of Section 2(85) of the Companies Act, 2013.

Question 10.
A private limited company wants to increase its subscribed capital by offering further issues of shares to friends and relatives of directors by Board Resolution. Is it valid as per law? [Dec. 2004 (5 Marks)]
Answer:
Provision:
(a) Definition of Private Company-Section 2(68):
Private company means a company which by its articles

  1. restricts the right to transfer its shares
  2. except in the case of One Person Company, limits the number of its members to two hundred
  3. prohibits any invitation to the public to subscribe to any securities of the company

(b) A private company by its articles must prohibit any invitation to the public to subscribe to any securities. However, it can raise capital privately from selected people.

Conclusion: So, further issue of shares to friends and relatives of directors by Board Resolution is valid as per law.

Question 11.
A private company incorporated under the Companies Act, 2013 may issue debentures to any number of persons and can accept deposits from the public. Comment. [Dec. 2017 (5 Marks)]
Answer:
1. Definition of Private Company: As per Section 2(68) of the Companies Act, 2013, a private company means a company, which has a minimum paid-up capital as may be prescribed, and by its articles:

  • Restricts the right to transfer its shares.
  • Limits the number of its members to 200 excluding past and present employees.
  • Prohibits any invitation to the public to subscribe to any securities.

2. Private Placement – Section 42: Under Section 42 read with Section 2(68), it may issue such security to any person (number of persons not exceeding 200).

3. Deposits – Section 73(2) along with notification: Private company may accept from its member’s monies not exceeding one hundred percent of the aggregate of the paid-up share capital and free reserves accept deposits from its members on such terms and conditions as may be agreed after passing of the special resolution and as per rules prescribed by RBI.

4. Conclusion: A private company may issue debentures to any number of persons. The only condition is that an invitation to the public to subscribe for debentures is prohibited.

Question 12.
Bindu Mediatech Private Ltd. is having paid-up capital of ₹ 40 lakh, its Securities Premium Account is ₹ 30 lakh and its free reserves are ₹ 30 lakh. The company has accepted ₹ 95 lakh as loans from its members and a term loan from a scheduled bank to the extent of ₹ 75 lakh. State whether the company can accept loans/deposits from its members. Is there any maximum limit up to which the company can accept a loan/ deposit from its members? Discuss the applicability of exemptions to the Private Ltd. Company from some of the provisions of Section 73 of the Companies Act, 2013. (Assume the Company has not made any defaults in loan repayments). [Dec. 2019 (5 Marks)]
Answer:
Provision: MCA has provided certain exemptions to private limited companies for accepting loans/deposits from its members. Accordingly, clause (a) to (e) of sub-section (2) of section 73 of the Companies Act, 2013 shall not apply to the following private companies:

  1. which accept money not exceeding 100 % of the paid-up capital and free reserves and securities premium.
  2. start-up company for 5 years from its incorporation.
  3. a private company that fulfills the following conditions:
    (a) which is not an associate or a subsidiary of any other company,
    (b) if the borrowings of such a company is less than twice of its paid-up share capital of rupees fifty crores, whichever is less; and
    (c) such company has not defaulted in repayment of such borrowings subsisting at the time of acceptance of deposits.

Provided that the company referred to in clause (1), (2), or (3) above shall file the details of monies accepted to the registrar in such manner as may be specified.

Conclusion: In this case, Bindu Mediatech Private Limited, is having a [ paid-up share capital of Rs.40 lakh, Free Reserves of Rs.30 lakh, and share [ premium of Rs.30 lakh. Hence, the company can accept loans up to Rs.100 lakh. Since the company has already accepted Rs.95 lakh as loans from its | members it can further accept Rs.5 lakh from its members as loan/deposits

Question 13.
The distinction between Public Company & Private Company [Dec. 1999 (8 Marks)]
Answer:
Following are the main points of distinction between public and private company:

Points Public Company Private Company
Meaning The minimum number of persons required to form a public company is 7 and no restriction on maximum

a number of members.

The minimum requirement is only 2 persons and the maximum limit is 200 persons.
No. of directors It must have at least 3 directors. It must have at least 2 directors.
Subscription for shares & debenture A public company can invite the general public to subscribe to the shares or debentures of the company. A private company is prohibited by its Articles to subscribe to the shares or debentures of the company.
Transfer of shares Shares of public companies are freely transferable. In a private company, the transferability of shares is restricted by Articles.
Special privileges There are no special privileges enjoyed by a public company. A private company enjoys some special privileges under the Companies Act, 2013.

Question 14.
Masons Pvt. Ltd. is a private limited company as per the Article of Association of the company. However, a public company acquired shares in Masons Pvt. Ltd. thereby making Masons Pvt. Ltd., a subsidiary of that public company. State the impact of such acquisition of shares by the public company on Masons Pvt. Ltd. [June 2015 (4 Marks)J
Answer:
Facts of Case: Masons Pvt. Ltd. is a private limited company as per the Article of Association of the company. However, a public company acquired shares in Masons Pvt. Ltd. thereby making the Masons Pvt. Ltd., a subsidiary of that public company

Provision: Section 2(71): Public company means a company that is not a private company and has a minimum paid-up capital as may be prescribed.

A company that is a subsidiary of a public company shall be deemed to be a public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.

Conclusion: Thus, if a public company acquires shares in Masons Pvt. Ltd. making it a subsidiary of that public company, the Masons Pvt. Ltd. will be treated as a public company under the Companies Act, 2013 even though Masons Pvt. Ltd. continues to be a private company in its articles.

Question 15.
One person company shall be formed only as a company limited by shares. Comment. [June 2015 (5 Marks)]
Answer:
One Person Company [Section 2(62)]: One Person Company means a company that has only one person as a member. Subscribers/Members [Section 3(1 )(c)]: The only person is required to form One Person Company who becomes a member by subscribing his name to the memorandum

Type of OPC [Section 3(2)]: An OPC may be formed either as a Company limited by shares or a Company limited by guarantee; or an Unlimited liability company.

Conclusion: Hence One Person Company is a private company that may be formed as a company limited by shares or guarantee or unlimited company.

Question 16
Axar is in plant research and he has invented a process for extracting bio-fuel from certain plants, now he is proposing to commercialize his invention by promoting a Person Company (OPC). But he proposes his name and his wife’s name as directors of the Company. As a Company Secretary clarify Axar on the number of shareholders and directors OPC can have. Also brief him the provisions on Board, Annual General Meeting, signing of Financial statements, Board’s Report and Annual Return. [Dec. 2019 (5 Marks)]
Answer:
Facts of Case: Axar is in plant research and he has invented a process for extracting bio-fuel from certain plants, now he is proposing to commercialize his invention by promoting a Person Company (OPC). But he proposes his name and his wife’s name as directors of the Company. As a Company Secretary clarify Axar on the number of shareholders and directors OPC can have.

Provision: One Person Company means a company which has only one < person as a member. [Section 2(62)]
As per section 149(1) of the Companies Act, 2013, One Person Company ¥ may have more than one director on its Board. But an OPC should have only one member. Hence, Axar may incorporate an OPC and he and his wife may be the directors of the company.

As per section 173(5) of the Companies Act, 2013, it is required to hold at least one meeting of the Board of Directors in each half of a calendar year and the gap between the two meetings should not be less than ninety days. For an OPC having only one director, the provisions of section 173 (Meetings of the Board) and section 174 (Quorum for meeting of Board) of the Companies Act, 2013 will not apply.

As per section 96(1) of the Companies Act, 2013, OPC need not hold an annual general meeting. As per section 92(1) of the Companies Act, 2013, the annual return shall be signed by the Company Secretary, or where there is no Company Secretary, by the director of the company.

Conclusion: Thus, Axar can incorporate OPC with one member only. However, OPC can have more than one director and hence he and his wife can become directors in OPC.

Question 17.
Explain the concept of Producer Company. [June 2006 (4 Marks)]
Answer:
Producer Company [Section 378B of Companies Act, 2013]: A producer company means a body corporate, having objects or activities specified in Section 378B and registered as a producer company.

Hence, the objectives for which producer companies may be formed are laid down in Section 378B.

Every producer company shall deal primarily with the produce of its active members for carrying out any of its specified objects.

This means there is an obligation on the producer company to deal primarily with the active members in conducting its activities.

Question 18.
Directors of ABC Ltd. want to incorporate a producer company. ABC Ltd. itself is in the production and harvesting business. You are the company secretary of ABC Ltd. You are requested to advise the Board of ABC Ltd. about the incorporation of such a producer company and set out its objectives as per relevant provisions of the Companies Act. [Dec. 2017 (8 Marks)]
Answer:
Objects of Producer Company [Section 378B of the Companies Act, 2013]: The objects of the Producer Company shall relate to all or any of the following matters, namely:
(a) Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the Members or import of goods or services for their benefit. However, the Producer Company may carry on any of the specified activities either by itself or through other institutions.

(b) Processing including preserving, drying, distilling, brewing, venting, canning, and packaging of the produce of its Members.

(c) Manufacture, sale, or supply of machinery, equipment, or consumables mainly to its Members.

(d) Providing education on the mutual assistance principles to its members and others.

(e) Rendering technical services, consultancy services, training, research and development, and all other activities for the promotion of the interests of its Members.

(f) Generation, transmission, and distribution of power, revitalization of land and water resources, their use, conservation, and communications relatable to primary produce.

(g) Insurance of producers or their primary produce.

(h) Promoting techniques of mutuality and mutual assistance.

(i) Welfare measures or facilities for the benefit of Members as may be decided by the Board.

(j) Any other activity, ancillary or incidental to any of the activities referred to in clauses (a) to (i) or other activities which may promote the principles of mutuality and mutual assistance amongst the Members in any other manner.

Question 19.
Distinguish between: Limited Liability Partnership and Producer Company [Dec. 2010 (4 Marks)]
Answer:
Following are the main points of distinction between LLP and Producer Company:

Points Limited Liability Partnership Producer Company
Meaning Limited liability partnership means a partnership formed and registered under the Limited Liability Partnership Act, 2008. A producer company means a body corporate, having objects or activities specified in Section 58IB of the Companies Act, 1956 and registered as a producer company.
Governing Law Limited liability partnerships are governed by the Limited Liability Partnership Act, 2008. Companies are governed by the Companies Act, 1956.
Internal rules & regulation Internal rules and regulations of LLP’s are governed by the LLP agreement. Internal rules and regulations of the producer companies are governed by the MOA & AOA.
Meetings In the LLP Act, there is no stipulation for a meeting of partners either periodically or compulsory at the year-end. Every producer company must hold AGM every year. A meeting of the board shall be held not less than once every 3 months and at least 4 board meetings shall be held every year
Business In an LLP, each partner has the authority to do so unless expressly prohibited by the partnership terms. In the case of a producer company, no individual director can conduct the business of the company.
Remuneration There are no provisions in the LLP Act, 2008 regulating the remuneration payable to designated partners. The Companies Act, 1956 regulates the remuneration payable to directors.
Borrowing power There are no restrictions on the borrowing powers of the LLP. There are restrictions on borrowings power on the producer companies.
Accounts The LLP can choose to maintain the accounts on a cash basis/accrual basis. Producer companies have to keep their accounts on an accrual basis.
Audit The audit of LLP is not compulsory if the capital contributed does not exceed ₹ 25 lakh or if the turnover does not exceed ₹ 40 lakhs. Audit of a producer company is compulsory.
Company Secretary The appointment of Company Secretaries is not provided in the LLP Act, 2008. Every producer company having an average annual turnover exceeding ₹ 5Crore in each of 3 consecutive financial years shall have a whole-time secretary.

Question 20.
Write a short note on Government Companies [June 2008 (4 Marks)]
Answer:
Government Company [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 by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such | a Government company. j

E.g: A Ltd is a holding company that has a subsidiary company i.e, B Limited. In j A Limited 80% shares are held by Central Government. B Limited is a subsidiary of a government company A Limited therefore B Limited is also a Government company.

E.g.: BHEL-Bharat Heavy Electricals Limited is a Government Company

Question 21.
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. [Dec. 2015 (4 Marks)]
Answer:
Facts of the case: ABC Ltd. is a company incorporated under the Companies Act, 2013. The paid-up share capital of the company is held as: Government of India 20%, Government of Andhra Pradesh 20%, Government of Tamil Nadu 10%, Government of Maharashtra 10%.

Provisions: As per Section 2(45) of the Companies Act, 2013, government company means any company in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.

Conclusion: As per the facts given in the case, more than 51% of capital is held in ABC Ltd. by the Central Government and State Government; hence it is a government company.

Whether employees of Government company can claim salaries from Government of India Employees of government companies are not government servants, they have no legal right to claim that the Government should pay their salary or that the additional expenditure incurred on account of revision of their pay scales should be met by the Government. It is the responsibility of the company to pay them the salaries. [A.K. Bindal v. Union of India]

Question 22.
43% of the paid-up share capital of V4C Ltd. is held by the Central Government and 8% is held by the Life Insurance Corporation of India and Unit IVnst of India (Public Institutions). Analyze the definition of ‘Government Company’ under the provisions of the Companies Act, 2013 and decide whether V4C Ltd. is a Government Company. [Dec. 2018 (5 Marks)]
Answer:
Facts of Case: 43% of the paid-up share capital of V4C Ltd. is held by the Central Government and 8% is held by the Life Insurance Corporation of India and Unit Trust of India (Public Institutions).

Provision: Section 2(45) of the Companies Act, 2013 defines a Government company as any company in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments.

Thus, in determining whether a company is a Government Company or not the holding by the Central and State Government has to be considered and the shares held by the public institution have to be ignored.

Conclusion: Accordingly, V4C Ltd. cannot be treated as a Government Company.

Question 23.
A representative of a foreign company in India was only receiving orders from customers. State whether the place where the orders so received be termed as a place of business. [June 2005 (4 Marks)]
Answer:
A foreign company means a company that is incorporated outside India under the law of that other country and has a place of business in India.

If a representative of a foreign company in India merely receives the orders from customers it cannot be said that it has ‘place of business in India. Hence, Sections 379 to 393 of the Companies Act, 2013 are not applicable and need not be complied with.

Question 24.
To consider a body corporate as a foreign company, a place of business in India is to be established. State the activities that do not constitute carrying of business in India. [June 2015 (4 Marks)]
Answer:
A Foreign Company means a company that is incorporated outside India under the law of that other country and has a place of business in India.

The following activities are held as not constituting “carrying on of business”:

  • Carrying small transactions.
  • Conducting meetings of shareholders or even directors.
  • Operating bank accounts.
  • Transferring of shares or other securities.
  • Operating through independent contractors.
  • Procuring orders.
  • Creating or financing of debts, charges, etc. on property.
  • Securing or collecting debts or enforcing claims to property of any kind.

Question 25.
Referring to the provisions of the Companies Act, 2013, state as to when shall a company incorporated outside India be considered as a ‘foreign company’ within the meaning of the Companies Act, 2013. Also examining the provisions of the Act, state whether in the following cases, the company shall be considered as a ‘foreign company’ :
(i) A company incorporated outside India has a representative in India, who on behalf of the company merely receives orders from the customers.
(ii) Company incorporated outside India holds its Board meetings and general meetings in India. [Dec. 2015 (4 Marks)]
Answer:
As per Section 2(42) of the Companies Act, 2013, the foreign company means any company or body corporate incorporated outside India which:
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode and
(b) conducts any business activity in India in any other manner.

In simple words, a foreign company means a company that is incorporated outside India under the law of that other country and has a place of business in India. A foreign company has to comply with the provisions of Sections 379 to 393 of the Companies Act, 2013.

If a representative of a foreign company in India merely receives the orders from customers it cannot be said that it has ‘place of business in India. Hence, Sections 379 to 393 of the Companies Act, 2013 relating to foreign companies are not applicable and need not be complied with.

Similarly, conducting board meetings and general meetings in India by a foreign company has held to be not “carrying on of business”.

Question 26.
Act advise Ireland Ltd. a pharma firm incorporated in Ireland :
(i) has a share transfer office in Kanpur;
(ii) directors of the company frequently stayed in a hotel in Noida and Mumbai for looking after matters of business, the company does not have any physical office or property in India.
As a practicing Company Secretary, advise under the provisions of the Companies Act, 2013, whether the company will be treated as having a place of business in India? [June 2019 (5 Marks)]
Answer:
Provision: As per Section 2(42) of the Companies Act, 2013, the foreign company means any company or body corporate incorporated outside India which:
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode and
(b) conducts any business activity in India in any other manner.

Situation 1: Share Transfer Office in Kanpur

Provision: As Section 386(c) of the Companies Act, 2013, states that the expression “place of business” includes a share transfer or registration office.

Conclusion: Share Transfer office in Kanpur constitutes a place of business in India

Situation 2: Directors frequently stayed in a hotel in Noida and Mumbai

Landmark Case: In Tovarishestvo Manufacture Liudvig Rabenek, it was held that where representatives of a company incorporated outside the 4 countries frequently stayed in a hotel in England for looking after a matter of g business, it was held that the company had a place of business in England. >

In certain cases, it was held that mere holding of property cannot amount 2 to having a place of business.

Conclusion: Keeping in view of the above discussion it can be concluded that Actavis Ireland Ltd. has a place of business in India as directors of the company frequently stayed in a hotel in India at Noida and Mumbai for looking after matters of business.

Setting Up of Business Entities and Closure Questions and Answers

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