N 1
ASSIGNMENT SOLUTIONS GUIDE (2015-2016) E.C.O.-8 Company Law Disclaimer/Special Note: These are just the sample of the Answers/Solutions to some of the Questions given in the Assignments. These Sample Answers/Solutions are prepared by Private Teacher/Tutors/Authors for the help and guidance of the student to get an idea of how he/she can answer the Questions given the Assignments. We do not claim 100% accuracy of these sample answers as these are based on the knowledge and capability of Private Teacher/Tutor. Sample answers may be seen as the Guide/Help for the reference to prepare the answers of the Questions given in the assignment. As these solutions and answers are prepared by the private teacher/tutor so the chances of error or mistake cannot be denied. Any Omission or Error is highly regretted though every care has been taken while preparing these Sample Answers/ Solutions. Please consult your own Teacher/Tutor before you prepare a Particular Answer and for up-to-date and exact information, data and solution. Student should must read and refer the official study material provided by the university. N Attempt all the questions. Q. 1. What do you mean by illegal association? What are its exceptions? Explain the consequences of an illegal association? Ans. ILLEGAL ASSOCIATIONS: When a company, association or partnership does not satisfy the provisions of law, it is said to be an illegal association. If a firm carrying out banking business and having more than 10 members or having more than 20 members, if a firm carry out any other business and if it is not registered under the Companies Act 1956, it is termed as illegal association. In other words we can say that when the number of members in partnership or association exceeds the statutory limit and is not registered in companies Act, then it is an illegal association. Sec 11 of the Companies Act states that no company, association or partnership consisting of more than ten persons for the purpose of carrying on the business of banking and more than twenty persons for the purpose of carrying on any other business shall be formed unless it is registered as a company under this Act, or is formed in pursuance of some other Indian law. Sec11 also describe a person as an individual and does not include bodies of individuals whether corporate or not. This can be better understood by following example. Suppose an association has three partnership firms X,Y & Z. Firm X has 5 partners and firm Y & Z have 3 partners each then the total no increases the limit specified in Sec 11 and it requires registration because the total number of members exceed 10 and it becomes an illegal association. Sec11 provides some exceptions to this also: (a) Joint Hindu Family: As per Sec 11 of the Companies Act, 1956 Joint Hindu family business can be carried out by any number of members and without being registered in any Indian law and yet it will not be called as Illegal association. But where the business is carried out with two or more joint Hindu families this act applies excluding the minor members in computing the total number of members. (b) Stock Exchange: Stock exchanges are not formed for the purpose of any business, therefore, they are not covered in Sec 11. (c) Non-profit caring Associations: Any charitable, social, religious or other non-profit associations are not covered under Sec 11. Consequences The consequences are as follows: 1. Illegal association has no legal existence, so it cannot enter into a contract. 2. It cannot be wound up under the provisions of Companies Act. 3. Every member of illegal association is personally liable for all the liabilities related to the business. 4. No suit can be filed against illegal association and also an illegal association cannot sue to recover any of its debts. 2
5. Illegality of the illegal association cannot be cured by changing or reducing the number of its members. 6. Every member of illegal association shall be punishable with fine which may be upto Rs. 10,000. Q. 2. (a) Discuss the privaileges enjoyed by a provate company. Ans. Privileges of Private Limited Company: Private Limited Companies are run mostly as family concerns without any direct involvement of the public in their activities. But in case of public company there is a need to protect the interest of its shareholders whose money is invested in the company. Therefore, many of the regulations and restrictions which apply to the public company do not apply to the private company. Notably, many companies prefer it to be private considering the kind of privileges they enjoy being private. The major privileges enjoyed by a Private Limited Company under the Companies Act, 1956 are as follows: 1. Simple and easy formation: Business can be commenced immediately on incorporation without obtaining a certificate of commencement from Registrar. 2. Number of members: Number of members required is two in a private limited company. 3. Statutory meeting and statutory report: It is not necessary to hold a statutory meeting and to send a statutory report to shareholders and file the same with the Registrar. 4. Number of directors: A private company need not have more than two directors. A proportion of directors need not retire every year. 5. Listing of shares: NListing of shares of a private company is not mandatory. 6. Quorum: Two members are required which must be personally present in the meeting to form a quorum. 7. Issue of new shares: Further shares can be issued without passing a special resolution or obtaining the Central government s approval. Private Company can also issue new shares to outsiders. It is not mandatory to offer these shares first to existing members. 8. Managerial remuneration: Rules regarding the total managerial remuneration which does not exceed eleven percentage of the total net profit shall not apply to the private company. 9. Types of shares: A private company can issue share capital of any type. 10. Allotment of shares: A private company can allot its shares to the shareholders before the minimum subscription is paid. 11. Need not declare dividend: A private company is not required to declare its dividend. 12. Directors need not hold qualification shares: Directors of a private company need not possess any share qualifications. The company which is not the subsidiary of a public company is termed as independent private company. Independent private Company enjoys some additional advantage than private companies which are as follows: 1. A private independent company can issue any kinds of share capital, further issue of share of capital, voting rights, issue of shares with disproportionate rights and termination of disproportionate excessive voting rights. 2. Articles of private company may provide for regulations relating to general meetings without being subject to the provisions of companies Act. The provision may relate to the notice of meetings, quorum etc. 3. Any amount of managerial remuneration can be paid to the directors and the same is not restricted to any particular proportion of the net profits. 4. Private company can appoint a firm or body corporate to an office or place of profit under the company. 5. Statutory notice, etc., is not required for a person to stand for election as a director. 6. In independent private company, sanction is not required by the Central Government to affect increase in the number of directors beyond 12 or the number fixed by articles of association. 7. Central Government s sanction is not required to modify any provision relating to appointment of managing, whole-time or non-rotational directors. 8. Central Government s approval is not required for appointment of managing or whole-time director or manager. 9. Directors of a private company need not posses any share qualifications. 10. Certain restrictions on powers of board of directors do not apply to an independent private company. 11. Prohibition against loans or guaranteeing the loans or providing security for loan to any of its directors does not apply. 3
12. Prohibition against participation in board meetings by interested director does not apply. 13. There is no restriction on remuneration payable to directors. 14. There is no restriction on appointment of managing director. 15. Provisions relating to method of determination of net profits and ascertainment of depreciation do not apply. 16. There is no restriction on making loans to other companies. An independent private company can lend money to other companies under the same management. 17. There is no prohibition against purchase of shares, etc., in other companies in the same group. 18. Central Government cannot exercise its power to prevent change in board of directors which is likely to affect the interest of company prejudicially. However, an independent private company can only enjoy these exemptions as long as it complies with any of the three restrictions stated in its Articles. Also, it shall lose these privileges if it becomes the subsidiary of any public company. (b ) Explain the ways in which a promoter is given remuneration. Ans. Remuneration of Promoters: Apart entirely from the issue of secret profits, the promoter may still incur expenses and liabilities which he will wish to pass on to the newly formed company. In the promotion of a private company, for example, Nthe promoter will incur registration costs and may incur legal expenses, printing costs for stationery, the cost of leasing of new premises, advertising copy and so on. A promoter has no right to get remuneration from the company for his services. Therefore, he is not liable to recover any remuneration unless there is any specified contract related to this. In certain cases, the Articles of the company specifically provide that payment should be made to promoters of the company. A promoter may be rewarded by the company for efforts undertaken by him in forming the company in several ways. The more common ones are: (1) The company may pay lump sum for the services rendered. (2) The promoter may make profits on transactions entered by him with the company after making full disclosure to the company and its members. (3) The promoter may sell his property for fully paid shares in the company after making full disclosures. (4) The promoter may be given an option to buy further shares in the company. (5) The promoter may be given commission on shares sold. (6) The articles of the Company may provide for fixed sum to be paid by the company to him. However, such provision has no legal effect and the promoter cannot sue to enforce it but if the company makes such payment, it cannot recover it back. The amount of payment and the manner should be disclosed in the prospectus, if it is paid within two years preceding the date of prospectus. Q. 3. Explain the doctrine of Indore Managment. What are its exceptions? Discuss with examples. Ans. Doctrice of Indoor Mangement: The doctrine of constructive notice seeks to protect the company against the outsiders; the principal of indoor management operates to protect the outsiders while dealing with the company. According to this doctrine, as laid down in the Royal British Bank case, persons dealing with a company are not bound to inquire into the regularity of any internal proceedings. In other words, while persons contract with a company, they are entitled to assume that the provisions of the Articles have been observed by the officers of the company. It is no part of the duty of an outsider to see that the company carries out its own internal regulations. It is sufficient if the act is not ultra vires. The doctrine of constructive notice operates against the person who has failed to inquire. But the doctrine of indoor management can be invoked by the person dealing with the company and cannot be invoked by the company. [Royal British Bank v Turquand]. In this case, the directors of the company were authorised by the articles to borrow on bonds such sums of money as should from time to time by a special resolution of the Company in a general meeting, be authorised to be borrowed. A bond under the seal of the company, signed by two directors and the secretary was given by the Directors to the plaintiff to secure the drawings on current account without the authority of any such resolution. Then Turquand sought to bind the company on the basis of that bond. Thus, the question arose whether the company was liable on that bond. 4
The Court of Exchequer Chamber overruled all objections and held that the bond was binding on the company as Turquand was entitled to assume that the resolution of the company in general meeting had been passed. Exceptions 1. Knowledge of Irregularity: When a person dealing with the company has actual or contractual knowledge of irregularity as regards internal management, he cannot claim the benefit under the rule of indoor management. 2. Negligence: Where a person who deals with the company do not read the document to find whether the proposed transaction is within the scope of the company or not, he cannot claim any benefit under the doctrine of indoor management. 3. Forgery: When a person relies upon a document that turns out to be forged, then this rule does not apply. In the case of, [Ruben v. Great Fingal Consolidated Company] secretary of the company issued a share certificate under the two forged signatures of the directors. The holder of the share certificate wanted to be registered as a member of the company but the company refused him. The share certificate holder has no means to find out the genuiness of the signatures. Therefore, it was held that the doctrine of indoor management is not applicable to cases of forgeries. 4. Act outside the scope of apparent authority: When an office do something which would not ordinarily be within the powers, the person dealing with him must make proper inquires and satisfy him self as to the officers authority. N Q. 4. (a) Explain the various in which a person may become a member of a company. Ans. Modes of Becoming a Member: There are various ways to become a member: 1. Membership by subscription: The subscribers of the memorandum of a company shall be deemed to have agreed to become members of a company, and on its registration, shall be entered as members in its register of members. [Sec 41(1)]. Neither application nor allotment of shares is necessary. Even if its name is not entered in the register of members, he will still be treated as a member of the company. 2. Membership by application and allotment of shares: Apart from subscribers, every other person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company. An application for shares is an offer to take shares and allotment of shares is necessary to constitute them as members of the company. 3. By Transfer of shares: Shares of a public company can be purchased from open market and it is easily transferable. Thus, when the transfer of shares is affected and his name is entered in the register of member of company, he becomes a member. 4. By Transmission of shares: On the death of any person, his legal representatives have a right (by operation of law i.e. by transmission) to hold shares of the deceased member registered in their names. In such case, he becomes the member. 5. By Qualification shares: Where a person can be appointed as a director of a public company and has signed and filed an undertaking to take and pay of his qualification shares, he shall, as regards those shares, be in the same position as subscriber to the memorandum and he is deemed to have become the member of the company. [Sec 266] 6. By beneficial ownership: Every person holding equity share capital of a company and whose name is entered as beneficial owner in the records of the depository, shall be deemed to be a member of the concerned company. [Sec 41(3)] (b) What is a Share Certificate? When must is be issued? What are the effects of a Share Certificate? Ans. The Share Certificate is a document issued by the company and is primafacie evidence to show that the person named therein is the holder (title) of the specified number of shares stated therein. Share certificate is issued by the company to the (share holder) allottee of shares. Share Certificate is a certificate issued by a company, under its common seal signed by one or more of its directors and its secretary, specifying the number of shares held by the named member and showing the distinctive numbers of the shares. It is an evidence of title to the shares. It can be issued even when the shares are partly paid up. A holder of a share certificate is a member of a company enjoying all the rights of membership. A share certificate discloses: (i) The name of the shareholder. (ii) The number of shares. 5
(iii) Distinctive number of the shares. (iv) Amount paid up on the value of shares. The company has to issue within three months from the date of allotment of sharees. In case of default, the allottee may approach the central government. In case of transfer of shares, the share certificate must be ready for delivery within two months after the shares are lodged with the company for transfer. If default is made in complying with the above provisions, the company and every officer of company who is in default is liable to punishment by way of fine which may extent to Rs. 500 for every day of default. The allotee must give notice to the company reminding of its obligation and even then, if default is not made good within 10 days of the notice, the allotee may apply to the Company Law Board for direction to the company to issue such share certificate in accordance with the Act. Application for this purpose must be made with the concerned regional branch of the Company Law Board by way of petition. The company may renew or issue a duplicate certificate if such certificate is proved to: (a) have been lost or destroyed or (b) having being defaced or mutilated or torn or is surrendered to the company. However, if the company, with the intention to defraud issues duplicate certificate, the company shall be punishable with the fine upto Rs. 10000 and every officer of the company who is in default with imprisonment upto six months or fine up to Rs. N10000 or both. Once a share certificate is issued by the company, the name of the person in whose favour it has been issued, becomes the registered shareholder. Effects of Share Certificate: Following are the effects of a share certificate: 1. Evidence of Title: Share certificate is only an evidence of title and is not a document of title. It is not a negotiable instrument. When the share certificate is issued, the company stopped from denying the title of person to the shares whose name is mentioned in the certificate, provided that person has acquired the shares in good faith. However, it is not a conclusive proof of title of holder. If a person has obtained shares on the basis of a forged transfer, the company can refuse to register the transfer of shares. 2. Estoppels as to Payment: Share certificate states the amount paid on them. A company is estopped from stating that the amount stated as having been paid on the shares has not been paid. Duplicate Share Certificate: A shareholder must keep his share certificate in safe custody or in case of shares which are traded in de-mat mode, with the depository. The company may renew or issue a duplicate certificate if such certificate is proved to: (a) have been lost or destroyed, or (b) having being defaced or mutilated or torn or is surrendered to the company. However, if the company, with the intention to defraud issues duplicate certificate, the company shall be punishable with the fine up to Rs. 10000 and every officer of the company who is in default with imprisonment up to 6 months or fine up to Rs. 10000 or both. Once a share certificate is issued by the company, the name of the person in whose favour it has been issued becomes the registered shareholder. Nobody can then deny the fact of his being the registered shareholder of the company. Similarly, if the certificate states that on each of shares a certain amount has been paid up, nobody can deny the fact that such amount has been paid up. Q. 5. Explain the powers and duties of a Director. Ans. Most of the powers of directors are powers in trust and, therefore, should be exercised in the interest of the company and, not in the interest of the directors or, any section of members. General Powers of Board [Sec 291] (1) Subject to the provisions of this Act, the Board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do: Provided that the Board shall not exercise any power or do any act or thing which is directed or required, whether by this or any other Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting. Provided further that in exercising any such power or doing any such act or thing, the Board shall be subject to the provisions contained in that behalf in this or any other Act, or in the memorandum or articles of the company, or 6
in any regulations not inconsistent therewith and duly made there under, including regulations made by the company in general meeting. (2) No regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made. Certain powers to be exercised by board only: According to Sec 292, of the Companies Act, the Board of directors of a company shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at meetings of the Board : (a) the power to make calls on shareholders in respect of money unpaid on their shares; (b) the power to issue debentures; (c) the power to borrow money otherwise than on debentures; (d) the power to invest the funds of the company; and (e) the power to make loans. Provided that the Board may, by a resolution passed at a meeting, delegate to any committee of directors, the managing director, the manager or any other principal officer of the company, but the board shall specify the limits of such delegation. Other powers to be exercised at board meeting: There are certain other powers which are exercised only at board meeting as follows: N 1. To fill vacancies in the board. 2. The power to make declaration of solvency in the case of members voluntary winding up. 3. To make investments in companies in the same group. 4. To receive notice of disclosure of directors interest in any contract or arrangement with the company. 5. The power of sanctioning a contract in which directors, their relatives and firms are interested. Every resolution, delegating the power to borrow money otherwise, than on debentures shall specify, the total amount outstanding at any one time, upto which money may be borrowed by the delegate. Powers to be exercised with the sanction in general meeting: [Sec 293] The Board of directors of a public company, or of a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting: (a) Sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company. (b) Remit, or give time for the repayment of, any debt due by a director [except in the case of renewal or continuance of an advance made by a banking company to its director in the ordinary course of business] (c) Invest, (except trust securities), the amount of compensation received by the company in respect of the compulsory acquisition of any undertaking or property of the company. (d) Borrow money after where the money to be borrowed, together with the money already borrowed by the company (apart from temporary loans obtained from the company s bankers in the ordinary course of business), will exceed the aggregate of the paid-up capital of the company and its free reserves, that is to say, reserves not set apart for any specific purpose; or The expression temporary loans mean loans repayable on demand or within six months from the date of the loan such as short term, cash credit arrangements, the discounting of bills and the issue of other short term loans of a seasonal character, but does not include loans raised for the purpose of financing expenditure of a capital nature. (e) Contribute to charitable and other funds not directly relating to the business of the company or the welfare of its employees, amounts exceeding in any financial year fifty thousand rupee, or five per cent, of its average net profits during the three financial years whichever is greater. Every resolution passed by the company in general meeting shall specify the total amount up to which money may be borrowed by the Board of directors. Like- wise every resolution passed by the company in general meeting to contribute to charitable and other funds shall specify the total amount which may be contributed to charitable and other funds in any financial year. There is no exhaustive list defining the duties of the Board of directors towards the company and shareholders. Based on the analysis of the provisions, of Companies Act, 1956 with regard to a director, directors are bound by certain duties such as the duty to act within the scope of their authority and to exercise due care in the performance 7
of their corporate tasks. The duties of directors vary according to the nature and size of the company. But in all cases in discharging the duties of his position, he must act honestly and without negligence, that is, with that amount of care which an ordinary person will be expected to take, as if the business of the company is his own. The duties of directors can be classified under following heads: (a) General duties, and (b) Statutory duties I. General Duties 1. Duty of good faith: They must act bona-fide in the interest of the company. They should not make any secret profits. 2. To file return of allotments: A company must file with the Registrar, within a period of 30 days, a return of the allotments, stating the specified particulars. Failure to file such return shall make the directors liable as officer in default. A fine, upto Rs.500 per day, till the default continues may be levied. 3. Duty to disclose interest: A Director, who is interested in a transaction of the company, must disclose his interest to the Board. The disclosure must be made at the first meeting of the Board, held after he has become interested. This is because a director stands in a fiduciary capacity with the company and, therefore, he must not place himself in a position in which his personal interest conflicts with his duty. 4. Duty of reasonable care: They must discharge their duties with care and diligence. 5. They must attend Nthe Board meeting regularly: A number of powers of the company are exercised by the Board of directors in their meetings, held from time to time. Although, a director may not be able to attend all the meetings, but, if he fails to attend three consecutive meetings or, all meetings for a period of three months, whichever is longer, without permission of the Board, his office shall, automatically, fall vacant. 6. Duty not to delegate: They must perform the duties personally. They can delegate only certain functions as permitted by the articles. II. Statutory Duties: Some of the important duties laid down in the Companies Act are listed below: 1. To sign a prospectus and deliver it to the Registrar before its issue to the public. 2. To see that all money received from applicants for shares are kept in a scheduled bank. 3. Not to allot shares before receiving minimum subscription. 4. To forward a statutory report to all its members at least 21 days before the date of the meeting. 5. To appoint first auditor of the company. 6. To hold the meetings at least once in three months. 7. If a director is interested in a contract, to disclose the nature of his interest. 8. To call for annual general meeting every year. 9. To convene Statutory, Annual General Meeting (AGM) and also Extraordinary General Meetings. 10. To file all statutory returns with prescribed authorities. 11. To make a declaration of solvency in the case of a Members voluntary winding up. The nature of duties of director would depend not only on the nature of the company s business but also on the manner in which the work of the company is distributed between directors and other officials. A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. 8