1

COMPANY LAW

DESCRIPTIVE QUESTION BANK

WITH ANSWERS

SEMESTER III OF LLB (3 YEARS COURSE)

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Q No. Questions Page

No.
1 State the nationality of company 8
2 Which companies have license to drop word limited from 8
their name
3 Who is an outsider for the company 8
4 Which company can publish shelf prospectus 8
5 Who are promoters of company 9
6 What is an allotment of shares 9
7 What does blank transfer mean 9
8 When shares can be forfeited 10
9 Who is authorized person 10
10 Define Capital Account Transaction under FEMA 1999 10
11 Write short note on Issue of shares at premium 11
12 Write short note on Role of an auditor for maintenance of 11
accounts of company
13 Write short note on Annual General Meeting 11
14 Write short note on Floating charge 12
15 Difference between private and public company 12
16 Write short note on Certificate of incorporation 13
17 What is winding up of company and how does it take place 13
18 What is indoor management 14
19 Various modes of appointment of Directors in company 15
20 Write merits of Company 15
21 State the Doctrine of Ultra Vires 16
22 What is Prospectus 16
23 Remedies available for misstatement in Prospectus 17
24 Who is Alternate Director 18
25 When does Transmission of Share takes place and how is it 18
different from transfer of shares
26 What are different types of Audit under Companies Act, 19
2013? How is an Auditor appointed and what is the tenure
of appointment of an Auditor
27 Define Debenture 20
28 What is meant by Dividend 21
29 What is ‘Joint Venture’ 21
30 How can a company alter its name clause 22
31 Who is ‘Authorised Person’ under FEMA 1999 22
32 What is voluntary winding up 22
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33 What are Capital and Current Account Transactions under 23

FEMA 1999. Give examples of each
34 Distinguish between Private and Public company 12
35 Write short note on Official Liquidator 24
36 Write short note on Cumulative and Non-Cumulative shares 24
37 What is surrender of shares? Distinguish it from forfeiture 24
of shares
38 Write short note on Doctrine of Constructive notice 25
39 Write short note on Forfeiture of shares 25
40 Explain the Doctrine of Indoor Management along with 14
exceptions if any?
41 Explain the provisions relating to appointment of Auditors? 19
42 Define ‘Member’? How Membership is acquired and how it 26
is terminated?
43 What are the compulsory clauses in the Memorandum of 27
Association
44 What is winding up of company 27
45 What are the grounds under Companies Act, 2013, by which 28
Tribunal may order winding up of a company
46 Explain the legal position of Directors 28
47 What is pre-incorporation contract 29
48 State any two requisites of valid meeting 29
49 Who is authorised person under FEMA 1999 22
50 What is Red-Herring prospectus 30
51 What is import under FEMA 1999 31
52 What is Fixed and Floating Charge 31
53 Who is promoter 9
54 What is Lien on Shares 32
55 What is joint ventures 21
56 How can a company alter its name clause 22
57 Write a short note on Rights of Members 32
58 Write a short note on Equity Shares 33
59 Write a short note on Saloman v. Saloman & Co. 34
60 Write a short note on Doctrine of Indoor Management 14
61 Write a short note on Debenture 20
62 Write a short note on DEMAT 34
63 Define 'Company' and discuss the advantages of 35
incorporation with reference to case laws
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64 Discuss the doctrine of ulta vires with special reference to 35

Ashbury railway carriage and Iron co. ltd v. Riche
65 Explain the circumstances under which the court can lift the 36
corporate veil of the company
66 Who can be shareholder 38
67 What are the rights and duties of shareholder 38
68 Discuss the provisions regarding Appointment and 39
Qualification of Directors
69 What is share warrant 39
70 Who is proxy 40
71 What is Lien on Shares 32
72 What is voluntary winding up 22
73 Distinguish between Shares and Debentures 40
74 Give any two purposes for which the security premium 41
amount can be utilised by the company
75 Who is contributory 41
76 What is cumulative preference shares 24
77 Give any two instances of Current Account Transaction 23
under FEMA 1999
78 Write a short note on Capital Account Transaction 23
79 Write a short note on Statement in lieu of prospectus 42
80 Write a short note on Joint Ventures abroad 42
81 Write a short note on Doctrine of Equity Shares 42
82 Write a short note on Distinguish between Shares and Stock 43
83 Discuss various theories of corporate personality 43
84 Define Private Company 44
85 Define Public Company 44
86 Who is promoter? Discuss his position. State his duties and 44
liabilities.
87 Explain the provisions relating to appointment of auditors 19
88 Explain the provisions relating to buy-back of shares 46
89 Discuss the contents of 'Memorandum of Association' and 47
explain the procedure for altering the object clause
90 Who is proxy 40
91 Who is contributory 41
92 Who is Alternate Director 18
93 Explain 'Transmission of Shares' 48
94 Write a Short Note on Preference Shares 48
95 Write a Short Note on Issue of Shares at discount 49
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96 Explain the rules relating to valid forfeiture of shares 25

97 What is Amalgamation of a Company and what is its 49
difference with Merger
98 Short Note on Adjudicatory Authority under FEMA 1999 49
99 Short note on Holding and Subsidiary company 50
100 Short note on merit of public company 15
101 Discuss the nature of Corporate Personality 51
102 When a person ceases to be a member of a company 52
103 What is Stock and bring out its difference from a share 53
104 Write a short note on Extra-Ordinary General Meeting 53
105 What are the compulsory clauses in the Memorandum of 54
Association? In what mode and to what extent can a
company alter these clauses?
106 Explain the provision of compulsory winding up under 54
Inability to pay debts and Just and Equitable Grounds
107 What is investment company 55
108 Which company can issue Share Warrant 55
109 What is the punishment for the person, authorising the 56
issue of prospectus, which includes untrue statement
110 Write a short note on Public Issue 56
111 Short note on Repatriation 56
112 What are the privileges and exemptions available to a 57
private company
113 Explain the Rule in Foss v. Harbottle and also state the 57
exceptions to it with the help of case laws
114 What are the remedies available to the minority 58
shareholders of a company against oppression or
mismanagement
115 What is the time limit for holding first AGM of a company 59
116 Who is Sole Selling Agent 59
117 What is Foreign Currency under FEMA 1999 59
118 Write a short note on Official Liquidator (include his powers 60
and duties)
119 What are the disadvantages of formation of company? Give 60
special emphasis on lifting the corporate veil
120 Discuss various provisions relating to name clause of MOA 61
121 Private Company enjoys more privileges than Public 12
Company, Discuss
122 Discuss the provisions regarding appointment and 62
Qualifications of Directors
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123 Explain the rule in Royal British Bank v. Turquand? Whats 14

are the exceptions to this rule
124 "The will of the majority must prevail" is the principle of 57
company management, Are there any exceptions to this
rule
125 Who are entitled to file a petition for the winding up of a 63
company
126 Distinguish between Share Warrant and Share Certificate 63
127 Discuss about the powers and duties of a director of a 64
company
128 When the statutory meeting is required to be held 65
129 Write a Short Note on Quorum 65
130 Under what circumstances, Floating Charge is converted 66
into fixed charge
131 Explain how directors can be removed 66
132 Write a short note on Conversion of a private company into 67
a public company
133 What is Shelf Prospectus 67
134 Define Foreign Exchange 68
135 Define Share 68
136 Who is disqualified from being appointed as auditor 68
137 What is minimum subscription 69
138 What is defunct company 69
139 Define person resident outside India 70
140 Provisions relating to vacation of office of director 70
141 Distinguish between Company and a Partnership 71
142 Short note on Registration of a Company 71
143 What are the necessary documents, required to be files 72
with the registrar, to obtain the registration of the company
144 What is One Person Company 72
145 What is Government Company 73
146 What is Subsidiary Company 73
147 Write a short note on Memorandum of Association 74
148 Short note on Objects Clause in a Memorandum of 75
Association. Explain the grounds on which a company can
alter its objects clause
149 Distinguish between Memorandum and Articles 75
150 State the golden rules of framing prospectus 76
151 What is the procedure for transfer of shares 76
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152 Explain the various provisions under Companies Act, 2013 77

regarding transferability of shares of public and private
companies
153 Write a short note on Calls on Shares 77
154 Can a minor become a member of Company 78
155 Short note on Kinds of Share Capital 78
156 Short note on Voting rights of preference Shareholders 79
157 Define "Share", What are the different types of shares that 79
may be issued by a company
158 Short note on Participating and Non Participating 80
Preference Shares
159 Discuss the provisions regarding purchase of its own shares 46
by a company
160 What is DIN (Director Identification Number) 80
161 Who is a Nominee Director 80
162 What shall be the Quorum of meetings of Board 81
163 What is Investor Education and Protection Fund 81
164 Write a short note on Auditor 82
165 Who can be appointed as an Auditor 82
166 Explain crystallization of a floating charge 83
167 Explain the doctrine of supremacy of majority with relevant 57
case laws and exceptions to the same
168 Write a short note on Inspection and Inquiry 83
169 Explain the process of winding up of companies under 13
companies act 2013
170 What is Export under FEMA 84
171 What is Foreign Security 85
172 Define person resident in India 85
173 What is Repatriation of Foreign Exchange 56
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1) State the nationality of company.

Ans: The nationality of a company is the country in which the company is incorporated and
registered under relevant laws of that country. All companies incorporated in India have
Indian nationality.
The meaning of Nationality and Citizenship are different. Citizenship is only for natural
persons and not for incorporated bodies.
In State Trading Corporation v. Commercial Tax Officer (AIR 1963 SC 1811), it was held that
the word “Citizen” is intended to refer only to ‘Natural Persons”. Therefore, a juristic person
like a company cannot claim the status of citizenship for the purpose of invoking
fundamental rights under Part III of the Constitution.

2) Which companies have license to drop word limited from their name?

Ans: Under Section 8 (1) of the Companies Act, 2013, a company can be issued a licence to
drop the word “Limited” from its name if
(a) it is engaged in promotion of commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of environment or any such other object and
(b) intends to apply its profits or other income in promoting those objects and
(c) intends to prohibit the payment of dividend to its members
Under Section 8 (5) existing companies can also apply for a licence if they satisfy the above
conditions.

3) Who is an outsider for the company?

Ans: An Outsider for a company may be defined as someone who is paid by a company or
organization to do a particular job, but who is not a permanent employee. The concept of an
outsider is important in the context of the Doctrine of Indoor Management which seeks to
protect the outsider from the company. Under this doctrine, also known as the Turquand
Rule because of the case Royal British Bank v. Turquand [(1856) 119 E.R 886], the outsider is
not expected to know the internal workings of a company, including irregularities, if any but
must ensure that the company’s engagement with it, is in accordance with the
Memorandum and Articles of Association of the company. The outsider is expected to know
what is enshrined in the Memorandum and Articles of Association as those are public
documents. In other words, an outsider cannot claim relief if the company has engaged with
them in contravention of what is laid down in the Memorandum and Articles of Association
but can claim relief if such relief is warranted by irregularities by the company.

4) Which company can publish shelf prospectus?

Ans: A shelf prospectus can be defined as a prospectus that has been issued by any public
company (includes a financial institution or bank) for one or more issues of securities or
class of securities as mentioned in the prospectus. When a shelf prospectus is issued then
the issuer does not need to issue a separate prospectus for each offering. The period of
validity of a shelf prospectus is one year from the opening of the first offer.
Under Section 60A of the Companies Act, 1956, only public financial institutions, public
sector banks or scheduled banks whose main object was financing could publish a shelf
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prospectus. However, Section 31 of the Companies Act, 2013 has left it to the discretion of
SEBI to determine the class of companies which may file shelf prospectus.
As per current SEBI guidelines shelf prospectus is permitted only for raising funds through
non-convertible debt securities by any of the following:
(i) Public financial institutions and scheduled banks
(ii) Issuers authorized by CBDT to issue tax free secured bonds
(iii) NBFCs registered with RBI (includes infrastructure debt NBFCs)
(iv) Housing Finance Companies registered with National Housing Bank
(v) Listed companies (listed for at least 3 years) with minimum net worth of Rs. 500 crores
and minimum credit rating 'AA' and having distributable profits for at least last three years.

5) Who are promoters of company?

Ans: In common understanding, promoters are persons who do the preliminary work
related to the formation of a company, including its promotion, incorporation, and flotation,
and solicit people to invest money in the company, usually when it is being formed.
Promoters of the company are like parents of the company who give birth to the company
as a child. Promotion includes conception of idea, incorporation, floatation and
commencement of business.
As per Section 2 (69) of the Companies Act, 2013, “Promoter” means a person—
(a) who has been named as such in a prospectus or in the company’s annual return or
(b) who controls the affairs of the company as a shareholder, director or otherwise or
(c) according to whose advice, directions or instructions the Board of Directors is
accustomed to act.

6) What is an allotment of shares?

Ans: Allotment of shares is the creation and issuing of new shares, by a company. New
shares can be issued to either new or existing shareholders. Share allotment can have
implications for any existing shareholders’ share proportion.
A public company may allot shares in the following ways:
(1) through a public offer to public with a prospectus
(2) through private placement to a select group of persons
(3) through a rights issue or a bonus issue to existing shareholders
A private company may allot shares in the following ways:
(1) through a rights issue or a bonus issue
(2) through private placement/ preferential Allotment.

7) What does blank transfer mean?

Ans: When a transferor signs the transfer form without filling in the name of transferee and
date of execution and hands over such transfer deed along with the share certificate to the
transferee to let him deal with those shares, it is called as blank transfer. Since the form
which is the transfer instrument, does not have the buyer’s name the same form can be
used to make further transfers. The process of purchase and sale can be repeated any
number of times with the blank transfer instrument.
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8) When shares can be forfeited?

Ans: A forfeited share is an equity share investment which is cancelled by the issuing
company. A share is forfeited when the shareholder fails to pay the subscription money
called upon by the issuing company.
A company can forfeit shares only when the Articles of Association of the company contain
a provision for share forfeiture. A shareholder subscribing to the shares of a company owes
the subscription price of the shares to the company. The company may call upon the
shareholder to pay the price in instalments. The instalment payments are called call money.
The call money is due from the shareholders. Non-payment of the dues can result in
forfeiture of the shares.

9) Who is authorized person?

Ans: "Authorised Person" (AP) means any person – Individual, partnership firm, LLP or body
corporate – who is appointed as such by a stock broker (including trading member) and who
provides access to trading platform of a stock exchange as an agent of the stock broker.
A stock broker may appoint one or more authorised person(s) after obtaining specific prior
approval from the stock exchange concerned for each such person. The approval as well as
the appointment shall be for specific segment of the exchange. It is mandatory for member-
brokers to enter into an agreement with the Authorised person. The agreement lays down
the rights and responsibilities of member-brokers as well as Authorised person. All
authorised persons are required to obtain a Certificate of Registration from the Exchange
without which they are not permitted to deal in securities.

10) Define Capital Account Transaction under Foreign Exchange Management act 1999

Ans: According to Section 2(e) of FEMA 1999, Capital Account transaction means a
transaction which alters the assets or liabilities, including contingent liabilities, outside India
of persons resident in India or alters the assets or liabilities in India of persons resident
outside India.
Under Section 6 (3) of FEMA 1999, capital account transactions include:
(a) Transfer or issue of any foreign security by a person resident in India.
(b) Transfer or issue of any security by a person resident outside India.
(c) Transfer or issue of any security or foreign security by any branch, office or agency in
India of a person resident outside India.
(d) Any borrowing or lending in foreign exchange in whatever form by whatever name
called.
(e) Any borrowing or lending in rupees between a person resident in India and a person
resident outside India.
(f) Deposits between persons resident in India and persons resident outside India.
(g) Export, import or holding of currency or currency notes.
(h) Transfer of immovable property outside India, other than a lease not exceeding five
years by a person resident in India.
(i) Acquisition or transfer of immovable property in India, other than lease not exceeding
five years by a person resident outside India.
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(j) Giving of a guarantee or surety in respect of any debt, obligation or other liability
incurred –
(i) by a person resident in India and owed to a person resident outside India or
(ii) by a person resident outside India.

11) Write short note on Issue of shares at premium?

Ans: When shares are issued at a price higher than the face value, they are said to be issued
at a premium. The excess of issue price over the face value is the amount of premium. The
premium on issue of shares has to be treated as capital receipt and not as revenue profits.
The premium has to be credited to a Share (or Securities) Premium Account. Shares at a
premium are generally issued by companies which have an excellent financial record, are
well managed and have a great reputation in the market.
There are no restrictions in the Companies Act on the issue of shares at a premium, but
there are restrictions on its disposal. Section 52 of the Companies Act, 2013 provides the
following modes of disposal:
(1) By issuing fully paid bonus shares to the company members (shareholders).
(2) By providing for the premium payable which is paid on redemption of any redeemable
preference shares or debentures.
(3) By writing off the preliminary expenses of the company
(4) By writing off the expenses incurred on issue of shares and debentures, the expenses
such as discount allowed or commission paid for issuing the shares.
(5) By using it to buy back own shares.

12) Write short note on Role of an auditor for maintenance of accounts of company.

Ans: The role of an auditor in a company is to help the business maintain its financial
reliability by reviewing and verifying its financial documents. Under Section 143 of the
Companies Act, 2013, and Auditor’s duties include the following:
(1) Preparation of the audit report which serves as an appraisal of the company’s financial
position.
(2) Provide an accurate opinion, including negative opinion where warranted, at all times
(3) Make inquiries, as necessary, regarding loans, advances, personal expenses charged to
the revenue account and deposits made.
(4) Assist in branch audits
(5) Comply with auditing standards
(6) Report fraud
(7) Adhere to the Code of Professional Conduct and Ethics
(8) Assist investigations.

13) Write short note on Annual General Meeting

Ans: An Annual General Meeting (AGM) is held to have an interaction between the
management and the shareholders of the company. Section 96 of the Companies Act, 2013
makes it compulsory to hold an annual general meeting to discuss the yearly results,
auditor’s appointment and so on. A company must hold its AGM within a period of six
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months from the end of the financial year and within fifteen months of the last AGM. The
first AGM can be held within nine months from the end of the financial year.
A company is required to give a clear 21 days’ notice to its members for calling the AGM.
The notice must have details of place, date and time of meeting and should be sent to all
members of the company, the statutory auditors and all directors. The notice should also
mention the business to be conducted at the AGM.
The matters discussed or business transacted in an AGM consists of:
(1) Consideration and adoption of the audited financial statements.
(2) Consideration of the Director’s report and auditor’s report.
(3) Dividend declaration to shareholders.
(4) Appointment of directors to replace the retiring directors.
(5) Appointment of auditors and deciding the auditor’s remuneration.
(6) Any other business.

14) Write short note on Floating charge

Ans: A floating charge is created on assets which are involved in the ordinary course of
business that is dynamic in nature. As these assets are not ‘fixed’ in nature, they are known
as floating charges. A company may also dispose of such assets without the permission of
the creditor.
Every business transacts on a daily basis with goods, the quantity of which keeps changing.
So, when a floating charge is created on such goods which are not constant, the creditors
own whatever goods are left after the actual transactions by the company. This is because
the business activities of the company need to continue without interruption and that is in
the interest of everyone including the creditors. Since the assets are not specific, the rights
over such assets are also not specific and hence the charge created is called a floating
charge.
In certain situations, floating charge can become a fixed charge. For instance when the
company is unable to pay its debts or is being wound up or when the creditors initiate
action to recover unpaid debts.

15) Difference between private and public company

Ans: (1) A private company is a closely held one and requires at least two or more persons,
for its formation. On the other hand, a public limited company is owned and its shares
traded publicly. It requires a minimum of seven persons for its setup.
(2) Most Public Limited Companies are listed on a recognized stock exchange and their
shares traded. Shares of private companies are not listed or traded.
(3) A private limited company can have a maximum of 200 members whereas there is no
limit to the number of members of a public company.
(3) A private company requires a minimum of 2 directors while a public company requires a
minimum of 3.
(4) The shares of a private company are not freely transferable while those of a public
company are.
(5) Private companies cannot issue securities (shares, debentures etc.) to public while a
public company can.
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(6) A private company can start business immediately after receiving certificate of
incorporation. Public company can only start business after receiving certificate of
commencement.
(7) In a private company two or more directors can be appointed by a single resolution. In a
public company only one director can be appointed by a single resolution.
(8) In a private company, directors are not required to file consent to act as a director. In
public filing of consent is mandatory.
(9) In a private company, directors are not required to retire by rotation. In a public
company, two-thirds of the directors (other than independent directors) are required to
retire by rotation.

16) Write short note on Certificate of incorporation

Ans: Certificate of Incorporation is a legal document issued by the Ministry of Corporate

Affairs (MCA) once a company is registered. A Certificate of Incorporation is the certificate
which specifies the birth of the company as a separate legal entity. The Certificate of
Incorporation specifies the date from which the company is registered and contains the
name and address of the company. A private limited company can commence business
immediately after receiving the Certificate of Incorporation while a public limited company
can commence only after receiving the certificate of commencement.
An application for a Certificate of Incorporation has to be filed with the Registrar within
whose jurisdiction the registered office of a company is proposed to be situated along with
the following documents and information:
(a) the memorandum and articles of the company
(b) a declaration that all requirements of the Companies Act have been complied
(c) an affidavit from the first subscribers and first directors that they have not been
convicted or found guilty of any offence under the Act and in the formation of the company.
(d) the address for correspondence
(e) the names and other particulars of every subscriber to the memorandum with proof of
identity
(f) the names and other particulars of first directors of the company with Director
Identification Number and proof of identity
(g) the interests of the first directors in other firms along with their consent to act as
directors.

17) What is winding up of company and how does it take place?

Ans: Winding up of a company is defined as a process by which the life of a company is brought to
an end and its property administered for the benefit of its members and creditors. An administrator,
called the liquidator, is appointed and he takes control of the company, collects its assets, pays debts
and finally distributes any surplus among the members in accordance with their rights. At the end of
winding up, the company will have no assets or liabilities. When the affairs of a company are
completely wound up, the dissolution of the company takes place. On dissolution, the company's
name is struck off the register of the companies and its legal personality as a corporation comes to
an end.
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As per section 270 of the Companies Act, 2013 a company can be liquidated either by way of
voluntary winding up or by a tribunal. Winding up of a company takes place by a tribunal by
designating a liquidator in case, the company is unable to pay its debts or the company is acting
against the interest or morality of India, security of state or, the company has undertaken fraudulent
activities or any other unlawful business or any person or management connected with the
formation of the company is found guilty of fraud or any kind of misconduct or it is deemed just and
equitable to the tribunal to wind up the company or the company has passed a special resolution to
that effect or has spoiled any kind of friendly relations with foreign or neighbouring countries or the
company has not filed its financial statements or annual returns for preceding for five consecutive
years.

A company can be wound up in any of the following ways-

(1) Voluntary winding up by mutual agreement of the members of the company.

(2) Winding up under the supervision of the court

(3) Liquidation under Insolvency and Bankruptcy Code 2016.

18) What is indoor management?

Ans: The “Doctrine of Indoor Management’ also known as the ‘Turquand’s Rule’ is an old established
principle which protects outsiders, who have entered into any contract with the Company from any
wrongs following from internal irregularities of the company. According to this doctrine, persons
dealing with the company need not inquire whether internal proceedings relating to the contract are
followed correctly, once they are satisfied that the transaction is in accordance with the
memorandum and articles of association. The rationale behind this doctrine is that the
Memorandum and Articles of Associations are public documents and hence can be inspected by the
public. But whatever is happening internally in the company is not known to the public. The Doctrine
of Indoor Management is the converse of the Doctrine of Constructive Notice, which seeks to
protect the interest of the company from outsiders.

This doctrine arose from the case, Royal British Bank vs Turquand [(1856) 6 E&B 327], The facts of
the case are as follows:

Mr. Turquand was the official Manager of a company. The company had given a bond to the Royal
British Bank, to secure its own drawings on its current account with the bank. The bond was given
under the company's seal, signed by two Directors and the Secretary. The company’s articles
provided for such borrowing subject to authorization by special resolution at a general meeting of
the Company. When the company was sued, it alleged that the appropriate resolution for issuance
of such a bond was not passed. The Court held the bond to be valid and the company liable because
there was no requirement to look into the company's internal workings.

There are certain exceptions to claim under the Doctrine of Indoor Management. These are:

(1) If the outsider has knowledge of the irregularity i.e. had constructive notice of the irregularity
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(2) If there is forgery

(3) If there is negligence on the part of the outsider

(4) Acts done by an officer of a company which are beyond the scope of his apparent authority.

19) Write various modes of appointment of Directors in company?

Ans: Directors in a company may be appointed in the following ways:

1. By Signatures to the Memorandum - The Articles of a company usually name the first directors by
or prescribe the method of appointing them.

2. By Company in the General Meeting - Subsequent directors are appointed by the company in a
general meeting. At least two-thirds of the total number of directors are mandated to retire by
rotation.

3. By Board of Directors – A Board is empowered to appoint additional directors. Such additional

directors can hold office till the next annual general meeting. The Board is also empowered to
appoint casual directors and alternate directors caused by casual vacancies or absence of directors
for more than three months from date on which meeting is ordinarily held.. Such casual director or
alternate director can hold office till the time the original director would have held.

4. By Third Parties - The articles may permit the third parties for the appointment of director as their
nominee, but the number of directors so appointed should not exceed one- third of the total
number of directors and they are not liable to retire by rotation. The third party can be a Vendor, a
banker, debenture holder etc.

5. By Proportional Representation – Can be appointed by voting through show of hands or by ballot.

6. By the Central Government - Central Government may appoint the directors but not more than
two in number and for the period not exceeding 3 years. This is done to ensure that company is not
run against the interest of members or the public or the company itself.

20) Write merits of Company?

Ans: The primary merits of company form of ownership are as follows:

1. Limited Liability:

The liability of shareholders, unless and otherwise stated, is limited to the face value of shares held
by them or guarantee given by them.

2. Perpetual Existence:

Deaths, insanity, insolvency of shareholders or directors do not affect the company’s existence. A
company is a separate legal entity with perpetual succession.
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3. Professional Management:

In a company a large number of directors are elected by the shareholders and are experienced
persons held in regard by the shareholders. A company also professional managers for the day-to-
day management.

4. Expansion Potential:

As there is no limit to the maximum number of shareholders in a public limited company, expansion
of business is easy by issuing new shares and debentures.

5. Transferability of Shares:

Shareholders have the choice to disinvest by selling to others who see potential in investing.

6. Diffusion of Risk:

As the membership is very large, the whole risk is well spread out.

21) State the Doctrine of Ultra Vires?

Ans: The doctrine of ultra vires under Indian company law is a fundamental law that lays down that
if any act of the company or any contract entered into by the directors, on behalf of the company, is
beyond the powers vested in the directors and company by the object clause of the Memorandum
of Association and according to the Articles of Association (MOA), it is considered null and void. Such
null and void acts/contracts are not legally binding on the company. The term ‘ultra vires’ applies to
those acts that are performed beyond the legal powers stipulated under the objects clause.

The doctrine of ultra vires acts as a safeguard for the creditors and investors of the company as it
prevents the company from using the money of the investors for any purpose other than those
mentioned under the objects clause. The creditors are also assured of the fact that the funds of the
company will not be utilized in any unauthorized trade/business or activity. It also acts as a check on
the activities of the directors who must act within the scope of powers given to them by the MOA.

22) What is Prospectus?

Ans: A prospectus is a formal document provided by the company when a company wants to sell its
securities or bonds to the public, it contains all the necessary details about the sale, that includes the
company's financial position, the number of shares offered and types of securities being offered.

For any document to be considered as a prospectus, it should satisfy the following conditions:

(1) The document should invite the subscription to public share or debentures, or it should invite
deposits.

(2) Such an invitation should be made to the public.

 17

(3) The invitation should be made by the company or on the behalf company.

(4) The invitation should relate to shares, debentures or such other securities

There are four types of prospectus

(1) Red Herring Prospectus – A preliminary registration document for companies looking to float an
IPO for book building issues. Exact price and quantity of shares is not mentioned.

(2) Shelf Prospectus – A prospectus issued for more than issue of a class of securities

(3) Abridged Prospectus – A summary of a prospectus

(4) Deemed Prospectus – When a company offers securities for sale and allots or agrees to
allot securities.

23) What are the remedies available for misstatement in Prospectus?

Ans: For misstatements in the prospectus, the company, the directors, promoters and others who
authorized the issue will be liable for as under:

(1) Civil Liability and Liability under the Law of Contract - An aggrieved shareholder has remedies
against the company, its directors, promoters and experts and he can

(i) rescind the contract and claim refund of the amount subject to the following:

(a) There must be an untrue statement.

(b) The misstatement must be material to the contract of issuing shares.

(c) The shareholders must have relied on the untrue statement.

(d) The statement must have induced the shareholder to purchase the shares.

(e) The shareholder must apply for rescission within a reasonable time and before
the liquidation of the company.

(f) The shareholder should not have affirmed the contract for purchase of shares.

(ii) Claim damages for fraud provided he can prove that the misstatement was made
fraudulently.

Under the general law, the aggrieved shareholder can recover damages from all or any of the
persons responsible for the issue of the prospectus. The necessary thing is to prove that there is a
fraudulent misstatement or non-disclosure. Thus, the directors, promoters, experts, and others who
have authorized the issue of the prospectus are also liable to compensate the aggrieved shareholder
for the loss or damages he may have to incur because of the untrue statement.
 18

If a material fact has been omitted from the prospectus, (a) the person responsible for the issue shall
be fined up to Rs.50,000 and (b) the aggrieved shareholder can recover damages from the persons
responsible for the issue.

A misrepresentation or untrue statement in the prospectus is treated as a fraud and invites

punishment as prescribed in Section 447 of the Companies Act, 2013. As per Section 447 a
person guilty of fraud shall be punishable with imprisonment for a term ranging from six
months to 10 years. He is also liable to a fine, which can extend to three times the amount
involved in the fraud.

24) Who is Alternate Director?

Ans: Alternate Director is appointed in place of a director who is temporarily unavailable for a period
of more than 3 months from INDIA. The appointment of Alternate Director must be authorized by
the Articles of the company otherwise the Articles first need to altered.

The Alternate Director has to vacate the office as and when the original Director returns to India or
when the tenure of the Original Director expires. If the tenure of the original director is terminated
before his return, the provision for the automatic re-appointment of a retiring director shall be
applied to the original director and not to the Alternate Director.

The number of directors in a company, as per the 2013 Act, shall not exceed 15. This is also pertinent
to the appointment of alternate directors as the company cannot appoint an alternate director if the
company already houses the maximum number of directors.

25) When does Transmission of Share takes place and how is it different from transfer of
shares?

Ans: Transmission of shares takes place due to the operation of law when the holder is no
more or has become lunatic or insolvent. It also takes place when the holder of shares is a
company, and that company has wound up. The transferee will be given the rights to the
shares, and the transmission is recorded only when the transferee gives proof of
entitlement to the shares. In case of the death of the holder of the shares, the same will be
transferred to the legal representative and in case of insolvency to the official assignee.
Transfer of shares refers to the intentional transfer of title of the shares between the
transferor (one who transfers) and the transferee (one who receives). The main differences
between transfer and transmission of shares are as under:
(1) While transfer of shares is a voluntary act, transmission of shares happens by operation
of law
(2) Transfer of shares is initiated by the transferor (current owner) while transmission
happens at the instance of the legal heir or receiver.
(3) Transfer is effected through a deliberate act or agreement between transferors and
transferee whereas transmission of shares is caused by insolvency, lunacy, death, or
inheritance.
(4) For a transfer a transfer deed is essential. For transmission no transfer deed is required.
(5) In transfer stamp duty is applicable. In transmission there is no stamp duty.
 19

(6) In transfer, right and liabilities of the transferor cease to exist. In transmission they
continue.

26) What are different types of Audit under Companies Act, 2013? How is an Auditor
appointed and what is the tenure of appointment of an Auditor??

Ans:

1. The different types of Audit under the Companies Act, 2013 are:

(1) Internal Audit under Section 138

(2) Statutory Audit under Section 139

(3) Cost Audit under Section 148

(4) Secretarial Audit under Section 204.

The first auditor is appointed by the Board of Directors by passing a Board Resolution within a period
of 30 Days from the date of incorporation of the company. In case that is not done, Board has to
communicate the same to shareholders and the shareholders of the company shall appoint at the
Extraordinary General meeting within a period of 90 days from the date of receiving intimation from
the Board of Directors. Such auditor shall hold office till the conclusion of first AGM.

The Subsequent Auditor shall be appointed at the first AGM by the shareholders of the company by
passing an Ordinary Resolution and such auditor shall hold office for next 5 years.

In case of a casual vacancy caused by death or disqualification or resignation of the auditor, the
casual vacancy is to be filled by the Board of Directors by passing Board Resolution within a period of
30 days. If the casual vacancy is caused by resignation, the appointment has to be approved by the
shareholder within a period of 3 months.

An Auditor can be appointed for 5 years and can be reappointed for another period of 5 years after
which there is a compulsory colling period of 5 years.

2. Disqualification of the Auditor.

As per Section 141 (3) of the Companies Act, 2013, the following are disqualified from being an
auditor

(a) a body corporate (other than a limited liability partnership)

(b) an officer or employee of the company

(c) a person who is a partner of, or is employed by, an officer or employee of the company

(d) a person or whose relative or partner holds security of or interest in the company or its affiliate
companies

(e) a person having business relationship with the company or its affiliates
 20

(f) a person whose relative is a director or a key managerial personnel of the company

(g) a person who is in full time employment elsewhere or is an auditor of more than 20 companies

(h) a person, convicted for fraud within ten years of date of conviction

(i) a person whose subsidiary or associate firm is engaged in consulting and specialised services as
provided in section 144.

3. Resignation of the Auditor.

An auditor may choose to resign but such resignation will be subject to the provisions stipulated
under Section 140 (2) which requires the him to file within thirty days from the date of resignation, a
statement in the prescribed form with the company and the Registrar, and in case of government
companies also with the Comptroller and Auditor-General of India, indicating the reasons and other
facts as may be relevant with regard to his resignation.

27) Define Debenture.

Ans: In terms of Section 2 (30) of the Companies Act, 2013, a debenture is described as an
instrument of a company evidencing a debt, with or without charge on the assets of the company. A
debenture is a written instrument acknowledging a debt under the common seal of the company. It
contains a contract for repayment of principal after a specified period or at intervals and for
payment of interest at a fixed rate payable periodically generally at fixed half yearly dates.

Debentures can be unsecured or secured. If secured, they are secured with a charge on specified
fixed assets of the company. Debentures could be Redeemable or Perpetual i.e. irredeemable. If the
former, they are payable after a specific period of time. If the latter then they are not payable after a
specific period of time but claims can be made in the event of default by the company in paying
interest or on bankruptcy. There are different types of debentures which are as under:

(1) Non-Convertible Debentures, which do not get converted to shares and are repaid after the
specified period.

(2) Partly Convertible Debentures, which are converted partly into shares while the balance
continues as a debt instrument.

(3) Fully Convertible Debentures are those which are fully converted into shares and after such
conversion the investors no longer remain creditors but become shareholders of the company.

(4) Optionally Convertible Debentures in which the debenture holder has an option t convert into
shares.
 21

28) What is meant by Dividend?

Ans: The word “Dividend” has origin from the Latin word “Dividendum” which means a thing to be
divided. Dividend means the portion of the profit received by the shareholders from the company’s
net profit, which is legally available for distribution among the members. Dividend can be paid on
both Equity and Preference shares..

As per Section 51 of the Companies Act, 2013, dividend payment is required to be in proportion to
the amount paid-up on each share.

Dividend can be interim or final. Interim dividend is distributed before the end of the financial year
whereas final dividend is declared at the after the financial year at the Annual General Meeting.

Dividend has to be paid out of the net profits and after providing for all depreciation.

29) What is ‘Joint Venture’?

Ans: As per the provisions of the Companies Act 2013, a joint venture is defined as a joint
arrangement, whereby the parties that have joint control of the arrangement have the rights to its
net assets. In Faqir Chand Gulati v. Uppal Agencies Pvt. Ltd. and Anr. [(2008) 10 SCC 345], the
Supreme Court held that “joint venture” connotes a legal entity in the nature of a partnership
engaged in the joint undertaking of a particular transaction for mutual profit or an association of
persons or companies jointly undertaking some commercial enterprise wherein all contribute assets
and share risks. Indian Accounting Standards 27 covers Consolidated and Separate Financial
Statements in case of Joint Ventures.

Joint Ventures can be in one of four forms as under:

(1) A simple Partnership agreement wherein the partners decide to share the profits of the business
carried on by all or any of them the acting on behalf of all.

(2) A Strategic Alliance in which the parties do not contract as the shareholders of a company or
partners in a partnership but come together and collaborate as independent and separate
contractors.

(3) A Company wherein a new legal entity is created with its own rights and obligations.

(4) A Limited Liability Partnership which is a modification of a general partnership limits the liability
of the partners.
 22

30) How can a company alter its name clause?

Ans: As per Section 13 of the Companies Act 2013, a company may change its name by passing a
special resolution in general meeting and receiving approval from the Central Government.

Change in Name clause of the Company involves alteration of Memorandum and Articles of
Association of the Company.

The company is required to check with the Registrar of Companies of the availability of the new
name proposed before passing the Special Resolution and effecting the change.

31) Who is ‘Authorised Person’ under FEMA 1999.

Ans: As per Section 2 (c) of FEMA, “authorised person” means an authorised dealer, money changer,
off-shore banking unit or any other person authorised to deal in foreign exchange or foreign
securities by Reserve Bank of India.

Reserve Bank, currently, issues authorisation under Section 10(1) of the Foreign Exchange
Management Act, 1999, in four categories as under:

(1) Authorised Dealers Category-I: These are select banks which can carry out all permissible current
and capital account transactions as per directions issued from time-to-time

(2) Authorised Dealers Category-II: These are select entities which can carry out specified non-trade
related current account transactions such as all the activities permitted to Full Fledged Money
Changers and any other activity as decided by the Reserve Bank

(3) Authorised Dealers Category-III: These select financial and other institutions which can carry out
specific foreign exchange transactions incidental to their business / activities

(4) Full Fledged Money Changers: These are select registered companies authorised to undertake
purchase of foreign exchange and sale of foreign exchange for specified purposes viz. private and
business travel abroad.

32) What is voluntary winding up?

Ans: Voluntary winding up of a company is a self-imposed wind-up and dissolution of a company

that has been approved by its shareholders. Such a decision will happen once a company's
leadership decides that the company has no reason to continue operating. It is not ordered by a
court.

Voluntary winding up may take place either by passing of a special resolution or by passing an
ordinary resolution by the members as a result of expiry of its time period as fixed by the Articles of
Association or the completion of the project or event for which it was constituted.
 23

For a company to be eligible for voluntary winding up, it has to ensure that it has not committed any
defaults.

A majority of the Directors of the company should give a declaration of solvency stating that:

They have made a full inquiry into the affairs of the corporate and they have formed an opinion that
either the corporate has no debts or will be able to pay them in full out of the asset proceeds as and
when they be sold during the liquidation process and that the company is not being liquidated to
defraud any person.

It is pertinent to note that with the passing of the Insolvency and Bankruptcy Code, 2016, a company
can now be wound up under the Companies Act, 2013 only by the tribunal. The concept of voluntary
winding up which was earlier available has now been removed.

33) What are Capital and Current Account Transactions under FEMA 1999. Give examples
of each

Ans: According to Section 2 (e) of FEMA 1999, Capital Account transaction means a transaction
which alters the assets or liabilities, including contingent liabilities, outside India of persons resident
in India or alters the assets or liabilities in India of persons resident outside India.

According to Section 2 (j) of FEMA, 1999, current account transaction means a transaction other
than a capital account transaction and includes:

(i) payments due in connection with foreign trade, other current business, services, and short-term
banking and credit facilities in the ordinary course of business

(ii) payments due as interest on loans and as net income from investments

(iii) remittances for living expenses of parents, spouse and children residing abroad

(iv) expenses in connection with foreign travel, education and medical care of parents, spouse and
children

Capital Account transactions can include Indian Party making investment in equity shares/capital
contribution in a foreign entity or acquiring an immovable property outside India.

Current Account transactions can include payments for living expenses or expenses connected with
foreign travel or foreign education.

34) Distinguish between Private and Public company

Covered in Qs 15 on page 6 and 7

 24

35) Write short note on Official Liquidator

Ans: The Official Liquidators are officers appointed by the Central Government under Section 359 of
the Companies Act, 2013 and are attached to various High Courts. The Official Liquidators are under
the administrative charge of the respective Regional Directors, who supervise their functioning on
behalf of the Central Government.

As per Section 360 of the Companies Act, 2013, the Official Liquidator has powers to exercise all the
powers as may be exercised by a Company Liquidator and conduct inquiries or investigations, if
directed by the Tribunal or the Central Government, in respect of matters arising out of winding up
proceedings.

The Liquidator has the following duties:

(1) To investigate into the affairs of a company from its inception

(2) To recover and realize the company’s assets

(3) To form winding up committee and to make reports

In the performance of his duties the Liquidator is expected to act impartially with skill and diligence
and confidentially.

36) Write short note on Cumulative and Non-Cumulative shares

Ans: Cumulative and Non-cumulative shares are in relation to Preference Shares. Cumulative
preference shares are a class of preferred shares that entitles an investor to dividends that were
missed in earlier years because the company had no surplus or made a loss in those years. By
contrast, non-cumulative is a type of preference shares that does not entitle investors to reap any
missed dividends. In other words, if the company does not make profits, in a given year, the arrears
of dividend are paid to the cumulative preference shareholders in a subsequent year in which the
company makes profit. Non-cumulative preference shareholders are not entitled to such arrears. If
nothing is mentioned in the nomenclature of preference shares, they are presumed to be
cumulative.

37) What is surrender of shares? Distinguish it from forfeiture of shares.

Ans: Surrender of shares means the return of shares by the shareholder to the company for
cancellation. Holder in this case voluntarily abandons all his shares in favour of the company.

Generally, surrender of shares refers to the voluntary act of surrender of shares by the shareholder
for cancelling the allotment of shares whereas forfeiture of shares refers to the cancellation of
allotment of shares to the shareholders by the company due to non-payment of instalments
(application money or call money).
 25

Surrender happens at the instance of the shareholders whereas Forfeiture happens at the behest of
the company for non-payment of application or call money.

Forfeiture is a time consuming process while surrender is faster.

In Forfeiture, the shareholder’s reputation is impacted while in surrender it is not.

38) Write short note on Doctrine of Constructive notice

Ans: The Doctrine of Constructive Notice is a doctrine to protect a company from claims of outsiders
who engage in contracts with the company. Essentially, the doctrine specifies that whenever an
outsider deals with a company, he is presumed to have knowledge of the documents filed by the
company with the Registrar of Companies and which are in the public domain. Such documents are
most frequently the Memorandum and Articles of Association.

In Kotla Venkataswamy v. Chinta Ramamurthy (AIR 1934 Madras 579), the articles of the company
stipulated that any mortgage of company property would have to signed by three officials i.e. the
Managing Director, a Working Director and the Company’s Secretary. A deed of mortgage in favour
of the plaintiff was signed only by the Secretary and one Working Director. The Madras High Court
considered the Mortgage Deed invalid and held that the plaintiff could not claim since the mortgage
deed was not executed in terms of the Articles of the company.

The doctrine frequently goes further than mere Memorandum and Articles of Association to include
all other documents which have ti be mandatorily filed with the Registrar of Companies. These could
include Special Resolutions, particulars of charges, details about appointment and removal of
directors etc. as long as these documents available for public inspection.

Since the Doctrine of Constructive Notice often creates hardship for an outsider who deals with
officers of a company and may not necessarily know the details of the Memorandum and Articles of
Association, it is not unknown for courts to have taken a more flexible view in favour of outside
parties. Thus, for example, in Charnock Collieries Ltd. v. Bhoolanath, [(1912) 39 ILR Cal 810] and in
Dehra Dun Mussorie Electric Tramway Company Ltd. v. Jagmandardas, (AIR 1932 All 141), the couts
held the transactions binding on the company even though they were not in terms of the Articles of
the company.

39) Write short note on Forfeiture of shares

Ans: When shares are allotted by a company to an applicant, the applicant, now a shareholder, has
to pay the allotment money and any call amount called for by the company. If he fails to do so, the
company can take the shares back subject to certain conditions. This taking back of shares by the
company is termed as Forfeiture of Shares.

The requirements for a valid forfeiture are:

(1) The power to forfeit must be mentioned in the Articles of the company

(2) The shareholder should have been served a proper notice calling upon him to pay
 26

(3) The shareholder should have defaulted in paying within the specified period

(4) The directors must pass a resolution that the shares have been forfeited

(5) The right of forfeiture should be exercised in good faith.

40) Explain the Doctrine of Indoor Management along with exceptions if any?

Covered in Qs 18 on page 8.

41) Explain the provisions relating to appointment of Auditors?

Covered as part of Qs 26 on page 13-14

42) Define ‘Member’? How Membership is acquired and how it is terminated?

Ans: In terms of Section 2 (55) of the Companies Act, 2013, a member in relation to a company,
means

(i) the subscriber to company’s memorandum and who would be considered to have agreed to
become a member of the company, and on its registration, shall be entered as member in its register
of members

(ii) every other person who agrees in writing to become a member of the company and whose name
is entered in the register of members of the company

(iii) every person holding shares of the company and whose name is entered as a beneficial owner in
the records of a depository

In companies limited by shares every member gets shares and hence a member is a shareholder.
However, in a company not limited by shares such as a company limited by guarantee there are no
shareholders and hence members are not shareholders.

Membership is acquired in one of the following ways:

(1) By subscribing to the memorandum of the company

(2) By transfer of shares

(3) By transmission of shares

(4) By purchase of qualification shares

(5) By allotment of shares

(6) By amalgamation of companies

 27

(7) By estoppel or holding out

Membership is terminated in one of the following ways:

(1) By transfer of shares

(2) By death of member

(3) By forfeiture of shares

(4) By surrender of shares

(5) By winding up or dissolution of the company

(6) By amalgamation of companies

43) What are the compulsory clauses in the Memorandum of Association?

Ans: The compulsory clauses of the Memorandum of Association of a company are as follows:

Name clause – gives the name of the company and provides protection against usage of the same
name

Registered Office Clause – provides the location of the company’s registered office

Object Clause – states the objects of the company for which it is proposed to be incorporated

Liability Clause – declares the liability of members of the company

Capital Clause – states the amount of the nominal or authorised or registered capital

Subscription Clause - states the purpose of the subscribers to incorporate the company, agreeing to
take the shares in the company

One-Person Company Clause (Nominee Name) – is applicable only to one person companies.

44) What is winding up of company?

Ans: Winding up means bringing the existence of a company to an end. Once winding up
commences the Liquidator takes charge to recover the money and other assets of the company and
to pay debts and liabilities of the company. Winding up is of three types

(1) Winding up by the Tribunal i.e. compulsory winding up

(2) Voluntary winding up

(3) Winding up subject to the supervision of the court

 28

45) What are the grounds under Companies Act, 2013, by which Tribunal may order
winding up of a company?

Ans: Under Section 271 of the Companies Act, 2013 the grounds for winding up by Tribunal are:

(a) if the company is unable to pay its debts;

(b) if the company passes a special resolution, resolving that the company be wound up by the
Tribunal;

(c) if the company has acted against the interests of the sovereignty and integrity of India, the
security of the State, friendly relations with foreign States, public order, decency or morality;

(d) if the Tribunal has ordered the winding up of a sick company under Chapter XIX

(e) if the Tribunal is of the opinion that the affairs of the company have been conducted in a
fraudulent manner or that the company was formed for a fraudulent or unlawful purpose

(f) if the company has defaulted in filing its financial statements or annual returns with the Registrar
of Companies for five consecutive financial years

(g) if the Tribunal is of the opinion that it is just and equitable that the company be wound up.

46) Explain the legal position of Directors?

Ans: While the Companies Act, 1956 defined a Director as any person occupying the position of
Director by whatever name called, the Companies Act, 2013 provides a narrower definition laying
down that a Director means a director appointed to the Board of Directors of a company. In this
background, the legal position of a Director is not amenable to a simple definition. At different
points of time and in different circumstances, courts have described Directors as agents, organs,
trustees or even managing partners. Directors have also been referred to as “servants” by some. In a
way, therefore Directors could be perceived to be performing any of these roles.

As Agents: Since the company is not a natural person, it can only act through its directors as agents.
Hence a Principal and Agent relationship is one way to see the legal position of directors. In Bhajekar
v. Shankar [(1934) 4 Co. Cases, 434), it was held that just as a Principal can ratify an unauthorised act
of an agent, so can a company ratify an unauthorised act of the directorsas long as it is within the
powers of the company/

As Trustees: Since Directors have control over and administer the properties of the company for the
company’s benefit, Directors can be regarded as Trustees. This view was expressed by the Madras
High Court in Ramaswamy Iyer v. Brahmayya & co. Ltd. [(1966) 1 Co. Law Journal, 107].

As Organs: In this perception, the directors are seen as the “brain” and “nerve centre” of a company
as the company can and does act only through them. This view was expressed in Bath v. Standard
 29

Land Co. [(1910) 2 Ch. D 408]. In State Trading Corporation v. CTO (AIR 1963 SC 1811), the court
stated “where the brain functions, the corporation is said to function”.

As Managing Partners: Some experts view the Director as Managing Partners as opposed to the
ordinary shareholders who are regarded as Dormant Partners.

As Servants: Whole time directors who are also employees i.e. holding office of profit are no
different from other employees drawing salaries and hence are akin to servants of the company.

47) What is pre-incorporation contract

Ans: A pre-incorporation contract is an agreement that is made by a person at the behest of a

company or corporation that does not exist at the time of signing such agreement. These
agreements are generally entered into by the promoters as there are preliminary contracts and
expenses incurred before an organization takes form.

Before the date of incorporation the company does not exist and hence has no capacity to contract.
A person who purports to contract as an Agent for a non-existent Principal is personally liable on the
contract as was held in Kelner v. Baxter [(1866) LR 2 CP 174]. A contract entered into with a non-
existent person is void as was held in Newborne v. Sensolid (GB) Ltd. [(1954) 1 QB 45].

In Imperial Tea Manufacturing Co. Ltd. v. Munchershaw (1889 13 Bom 415), it was held by the
Bombay High Court that a pre-incorporation contract to allot shares after the company was
incorporated cannot be said to be for the purposes of the company and hence was not enforceable.

To make a pre-incorporation contract binding on the company after its incorporation, a new contract
(could be through novation of the original contract) has to be entered into. However, there have
been cases wherein the actions of the company have been interpreted by the courts to have bound
the company by adoption of pre-incorporation contracts after its incorporation. In Jai Narayan
Parasrampuria v. Pushpa Devi Saraf [(2006) 113 Co. Cases 794], the Supreme Court held that the
very fact that the company files a suit for declaration of the ownership of a property purchased by it
before incorporation shows that the company had opted to adopt that transaction.

48) State any two requisites of valid meeting

Ans: There are two types of meetings – Annual General Meeting and Extraordinary General Meeting
as per Sections 96 and 100 of the Companies Act, 2013 respectively.

The requisites for a meeting are as under:

(1) Notice of clear 21 days to every member, legal representative of deceased member, assignee of
insolvent member, auditors and every director (Section 101)
 30

(2) Quorum as per the articles of the company subject to the minimum requirements set out in
Section 103 (5 if total members upto 1000, 15 if total members above 1000 upto 5000 and 30 if
more than 5000)

(3) Presence of Chairman either as per articles or elected by members present (Section 104)

(4) Passage of resolutions through voting. Ordinary and Special Resolutions to be passed by simple
and 3/4th majority respectively (Section 114)

(5) Proxy in place of members entitled to vote on behalf of member (Section 105)

(6) Minutes to record fair and correct summary of meeting in Minute Book within 30 days (Section
118)

49) Who is authorised person under FEMA 1999

Covered in Qs. 31 on page 15

50) What is Red-Herring prospectus

Ans: Red-herring prospectus is provided for in Section 32 of the Companies Act, 2013. A Red-herring
prospectus also known as the offer document, is prepared by the merchant bankers as a preliminary
registration document for companies looking to float an IPO for book building issues. A Red-herring
prospectus is required to be filed with the Registrar of Companies at least three days prior to the
issue of the prospectus. The document essentially clarifies why the company wishes to raise money
from the public, how the money will be put to use and the risks involved in investment. Thus, this
document includes information about the company’s financials, business operations, its standing in
the industry it operates in, promoters, and listed or unlisted peers.

What it does not include is details of the number or price of shares being offered, or the amount of
issue. If the price is undisclosed, the number of shares and lower and upper price bands are
declared. Alternatively, the issuer can announce the issue size and the number of shares can be
specified later on. The price can only be determined after the bidding process is over.

A Red-herring prospectus carries the same obligations as applicable to a prospectus and any
variation between the Red-herring prospectus and a prospectus shall be highlighted as variations in
the prospectus.

Upon the closing of the offer the prospectus stating therein the total capital raised and the closing
price of the securities and any other details as are not included in the red herring prospectus shall be
filed with the Registrar and SEBI.
 31

51) What is import under FEMA 1999

Ans: Section 2 (p) of FEMA, 1999 defines import to mean bringing into India any goods or services.

Import of Goods and Services into India is allowed in terms of Section 5 of FEMA, 1999. Overall
Import trade is regulated by the Directorate General of Foreign Trade (DGFT) under the Ministry of
Commerce & Industry. Reserve Bank of India also issues directions to Authorized Persons under
Section 11 of FEMA.

Except for goods included in the negative list which require licence under the Foreign Trade Policy in
force, AD Category - I banks can freely open letters of credit and allow remittances for import. Such
remittance for making payments for imports into India, have to be effected after ensuring that all
the requisite details are made available by the importer and the remittance is for bona fide and
permitted trade transactions. In terms of the extant regulations, remittances against imports should
be completed no later than six months from the date of shipment, except in cases where amounts
are withheld towards guarantee of performance, etc. Deferred payment upto five years, are treated
as trade credits and covered under Reserve Bank’s guidelines for External Commercial Borrowings
and Trade Credits.

52) What is Fixed and Floating Charge

Ans: A fixed charge is a charge which relates to specific assets of a company and is generally created
on fixed assets like property such as land, buildings, or anything static. Though less common, charges
can also be created on intangibles such as trademarks, copyrights, patents etc. A company cannot
dispose off the property without the consent of the charge holder i.e. the creditor and hence the
control over the asset charged lies with the creditor though the physical possession may be with the
company.

A floating charge is created on assets which are involved in the ordinary course of business that is
dynamic in nature. As these assets are not ‘fixed’ in nature, they are known as floating charges. A
company may also dispose of such assets without the permission of the creditor since the business
activities of the company need to continue without interruption. The creditors own whatever goods
are left after the actual transactions by the company. The rights over such assets are also not specific
and hence the charge created is called a floating charge.

In certain situations floating charge can become a fixed charge. For instance when the company is
unable to pay its debts or is being wound up or when the creditors initiate action to recover unpaid
debts.

53) Who is promoter

Covered in Qs 5. On page 3
 32

54) What is Lien on Shares

Ans: In the case of a company lien on a share means that the member would not be permitted to
transfer his shares unless he pays his debt to the company. The articles generally provide that the
company shall have a first lien on the shares of each member for his debts and liabilities to the
company. The right of lien is not inherent but must be clearly provided for in the articles. The articles
may give the right of lien over share either for unpaid calls or for any other debt due by the member
of the company. The company may have lien on fully paid-up shares. The lien also extends to the
dividends payable on the shares.

The death of a shareholder does not destroy the lien. The right of lien can be exercised even through
the claim has become barred by law of limitation. Where the liability of the shareholder towards the
company is disputed by him, it does not deprive the company of its right of lien on the shares. But a
company will not be able to exercise its right of lien where the shareholder has mortgaged his shares
before he has incurred any liability to the company and the company has notice of it. Similarly, a
company will lose its lien if registers a transfer of shares subject to the lien.

55) What is joint ventures

Covered in Qs. 29 on pages 14-15

56) How can a company alter its name clause

Covered in Qs 30. On page 15

57) Write a short note on Rights of Members

Ans: The rights of members include:

(1) Right to appoint and/or remove directors.

(2) Right to attend and vote at general meetings.

(3) Right Inspect statutory registers and minute books.

(4) Right to appoint and fix remuneration of Auditors

(5) Receive copies of financial statements.

(6) Right to make fundamental corporate decisions such as change of registered office, change in
objects of company, increase in authorised capital, change or amendment in Articles of Association,
matters connected with Mergers, Acquisitions and take over, Matters relating to winding up

(7) Rights as shareholders – to receive share certificates, to transfer shares, to receive rights/bonus
shares etc.

(8) Right to receive dividends

 33

(9) Right to approach Tribunal against oppression and mismanagement

(10) Right to receive surplus assets at the time of winding up of the company

(11) Right to class action suit against mismanagement, misappropriation, corruption or fraud

58) Write a short note on Equity Shares

Ans: An equity share, normally known as ordinary share is part of a company’s capital and
represents a part ownership with each shareholder being a fractional owner of the company. This is
the main source of capital for an organization.

Equity share capital remains with the company. It is given back only when the company is closed.
Equity Shareholders possess voting rights and select the company’s management. The dividend rate
on the equity capital is not fixed and depends on the surplus remaining after appropriation of a
company’s profits.

Equity shareholders are members of the company and hence enjoy a number of rights with regard to
the affairs and management of the company. Equity shares are issued as part of a public offer or as
rights and/or bonus to existing shareholders. The overall equity capital with a company can be
classified in one of the following types:

(1) Authorized Share Capital which is the maximum equity capital permitted

(2) Issued Share Capital which is the aggregate of equity shares actually issued

Subscribed Share Capital - which is the aggregate of equity shares actually subscribed to by the
public

Paid Up Capital which is the aggregate of equity shares actually paid for by the subscribers to the
capital

Difference between Share and Stock

(1) Stock is the aggregate of fully paid up shares whereas share represents one unit of ownership in
the company’s share capital

(2) Shares are represented by share certificates while stocks are represented by Stock Certificates.

(3) Shares may or may not be fully paid whereas stock is always fully paid

(4) Shares have distinctive numbers whereas stocks need not be unnumbered

(5) A company cannot directly issue stock. It must first issue shares and then convert the same into
stock
 34

59) Write a short note on Saloman v. Saloman & Co.

Ans: Salomon v A Salomon & Co Ltd ([1896] UKHL 1) is a landmark UK company law case, in which
the House of Lords ruled that a company had an existence of its own as a separate legal person and
hence upheld the doctrine of corporate personality.

FACTS: Salomon transferred his business of boot making, initially run as a sole proprietorship, to a
company (Salomon Ltd.), incorporated with members comprising of himself and his family. The price
for such transfer was paid to Salomon by way of shares, and debentures having a floating charge on
the assets of the company. Later, when the company's business failed and it went into liquidation,
the issue of Salomon's right of recovery against the secured debentures standing before claims of
unsecured creditors came up. Arguing against that claim, the liquidator sought make Salomon
personally liable for the company's debt referring to the corporate set-up as a sham.

ISSUE: Whether, regardless of the separate legal identity of a company, a shareholder/controller

could be held liable for its debt, over and above the capital contribution, so as to expose such
member to unlimited personal liability?

JUDGMENT: The Trial Court and the Appeals Court had ruled against Salomon. The House of
Lords over-turned the decision and held that a company is a separate legal entity distinct
from its members and thereby insulated M. Salomon, the founder of A. Salomon and
Company, Ltd., from personal liability to the creditors of the company he founded. The
court also upheld firmly the doctrine of corporate personality, as set out in the Companies
Act, so that creditors of an insolvent company could not sue the company's shareholders to
pay up outstanding debts.

60) Write a short note on Doctrine of Indoor Management

Covered in Qs. 18 on page 8

61) Write a short note on Debenture

Covered Qs 27 on pages 13-14

62) Write a short note on DEMAT

Ans: A DEMAT account (short for "dematerialized account") is an account to hold financial
securities (equity or debt) in electronic form. In India, demat accounts are maintained by
two depository organisations, National Securities Depository Limited and Central Depository
Services Limited. A depository participant (DP), such as a bank or a stockbroker, acts as an
intermediary between the investor and the depository. Each intermediary may have Demat
account charges that vary as per volume held in the account, type of subscription, and terms
and conditions between a depository organisation and a DP. After the introduction of the
depository system by the Depository Act of 1996, the process for sales, purchases and
transfers of shares became significantly easier and also mitigated risks associated with
paper securities. can open demat accounts with DPs without worrying about security of
their investments as the DPs are appointed by the central depositories only after grant of
 35

Certificate of Registration by SEBI. Demat accounts also help to minimize the time for
transfer of shares.

63) Define 'Company' and discuss the advantages of incorporation with reference to case
laws

According to Lord Justice Lindley a company is an association of persons who contribute money or
money’s worth to a common stock employed in some trade or business and who share the profit
and loss arising therefrom. Prof. Haney defines a company as an artificial person created by law,
having a separate entity, with perpetual succession and a common seal (not mandatory under
Companies Act, 2013).

The main advantages of constituting a company are:

(1) It has a separate legal existence distinct from that of the shareholders i.e. the owners.

(2) It has Limited Liability and hence the shareholders will not be personally liable for the company’s
debts

The above two features of a company were highlighted in the landmark case of Salomon v. Salomon
& Co. Ltd ([1896] UKHL 1)

(3) It provides easy transferability of shares

(4) It can hold and dispose of property as a separate legal entity (Highlighted in Gramophone &
Typewriter Co. Ltd. v. Stanley [(1908) 2 KB 856])

(5) It has the capacity to sue in its own name (Highlighted in Aspro Travel Ltd. v. Owners Abroad plc
[(1996) 1 WLR 132]

(6) Its succession is perpetual. Unless it is wound up and dissolved a company does not die.
(Highlighted in K/9 Meat Supplies Ltd., Re, [1966 (3) All E.R. 320])

(7) It provides the right environment for professional management

(8) The set-up of a company is democratic when compared to a proprietary ot partnership firm

(9) It has substantial flexibility in raising finance including capital

64) Discuss the doctrine of ulta vires with special reference to Ashbury railway carriage
and Iron co. ltd v. Riche

Ans: In the context of a company, anything done by the company or its directors which is beyond
their legal authority or which is outside the scope of the object of the company is Ultra Vires. In
essence, the Doctrine of Ultra Vires propounds that a company must engage only in those business
activities which are listed in the objects clause of its memorandum. All other activities would be ultra
vires as they would fall outside the scope of its permitted businesses. The rationale for restricting a
 36

company to the line of businesses set out in its memorandum is to protect its shareholders, creditors
and to protect public interest. An oft quoted remark which said that, if a company was allowed to
keep changing its business without any restriction, a person who bought shares in a old mining
company may find himself holding the shares of a fried fish shop, drives home the importance of the
doctrine.

The doctrine of ultra-vires first time originated in the classic case of Ashbury Railway Carriage and
Iron Co. Ltd. v. Riche [(1878) L.R. 7 H.L. 653]. Ashbury Railway Carriage and Iron Co’s memorandum
authorised it to lend on hire, railway carriages, wagons and railway plants and carry on the business
of mechanical engineers and general contractors. The company contracted with M/s. Riche to
finance construction of a railway line. The contract was also ratified by the shareholders. Later on,
directors repudiated the contract on the ground of its being ultra-vires of the memorandum of the
company. Riche filed a suit, demanding damages from the company and arguing that the words
“general contracts” in the objects clause of the memorandum meant any kind of contract.

Holding the contract ultra-vires the memorandum of the company, the House of Lords determined
the contract to be null and void. The House interpreted the term “general contracts” in the context
of the preceding words mechanical engineers, and opined that the term only meant any such
contracts as related to mechanical engineers. They added that even if every shareholder of the
company had ratified, it would still have been null and void as it was ultra-vires the memorandum of
the company. Memorandum of the company cannot be amended retrospectively, and any ultra-vires
act cannot be ratified.

65) Explain the circumstances under which the court can lift the corporate veil of the
company

Ans: Lifting or piercing the corporate veil means disregarding the corporate personality and looking
for the real person who is in the control of the company. In United States V. Milwaukee Refrigerator
Transit Co. [142 F.247 (1906)] , it was observed that

“A corporation is considered to have a separate legal entity as a general rule……but when the notion
of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the
law will regard the corporation as an association of persons.”

In Life Insurance Corporation of India v. Escorts Limited and Others [(1986) 1 SCC 264], the Supreme
Court laid down two major instances when the corporate veil can be lifted. These are:

(A) Statutory provisions

(1) Officer in Default (Section 5 of the Companies Act, 1956) deals with individuals involved in
wrongful or illegal

(2) Reduction of Membership (Section 45 of the Companies Act, 1956) – When membership is less
than 7

(3) Improper use of Name (Section 147 of the Companies Act, 1956)
 37

(4) Misrepresentation in prospectus (Sections 26 (9), 34 and 35 of the Companies Act, 2013)

(5) Fraudulent conduct (Section 339 of the Companies Act, 2013)

(6) Failure to refund application money (Section-39 (3) of the Companies Act, 2013)

(7) For investigation of ownership of company (Section 216 of the Companies Act, 2013)

(8) Furnishing False Statements (Section 448 of the Companies Act, 2013)

(9) Inducing persons to invest in the company using falsehood, deception etc. (Section 36 of the
Companies Act, 2013)

(10) Repeated Defaults (Section 449 of the Companies Act, 2013)

(B) Judicial Grounds

(1) Fraud or Improper Conduct (Gilford Motor Co Ltd v Horne [1933] Ch 935)

(2) Tax Evasion (Re: Dinshaw Maneckjee Petit v. Unknown [(1927) 29 BOMLR 447])

(3) Determination of Enemy Character (Daimler Co Ltd v Continental Tyre and Rubber Co (Great
Britain) Ltd ([1916] 2 AC 307)

(4) Ultra-vires acts (Ashbury Railway Carriage and Iron Co. Ltd. v. Riche [(1878) L.R. 7 H.L. 653)

(5) Public Interest/Public Policy (Case: Jyoti Limited vs. Kanwaljit Kaur Bhasin & Anr [1987 62
CompCas 626 Delhi])

(6) Agency Companies in which Agent is guilty of improper action (New Tirupur Area Development v.
State Of Tamil Nadu)

(7) Negligent Activities (Chandler v Cape PLC [2012] EWCA Civ 525)

(8) Sham companies (Gilford Motor Co Ltd v Horne [1933] Ch 935)

(9) Companies intentionally avoiding legal obligations.

 38

66) Who can be shareholder

Ans: Any person who is competent to contract can be a shareholder. Thus, minors and persons of
unsound mind cannot be a shareholder. Neither can an insolvent person be a shareholder. A
company can become the shareholder of another company provided the memorandum of the
investing company permits such investments.

67) What are the rights and duties of shareholder

Ans: The rights of shareholders include:

(1) Right to appoint and/or remove directors.

(2) Right to attend and vote at general meetings.

(3) Right Inspect statutory registers and minute books.

(4) Right to appoint and fix remuneration of Auditors

(5) Receive copies of financial statements.

(6) Right to make fundamental corporate decisions such as change of registered office, change in
objects of company, increase in authorised capital, change or amendment in Articles of Association,
matters connected with Mergers, Acquisitions and take over, Matters relating to winding up

(7) Rights as shareholders – to receive share certificates, to transfer shares, to receive rights/bonus
shares etc.

(8) Right to receive dividends

(9) Right to approach Tribunal against oppression and mismanagement

(10) Right to receive surplus assets at the time of winding up of the company

(11) Right to class action suit against mismanagement, misappropriation, corruption or fraud

The shareholders of any company have a responsibility to ensure that the company is well
run and well managed. They do this by monitoring the performance of the company and
raising their objections or giving their approval to the actions of the management of the
company. In so doing, they should participate in general body meetings and should consult
on the matters of finance and other topics. Shareholders should be in touch with other
members of the company so that they can see the work progress of the company.
 39

68) Discuss the provisions regarding Appointment and Qualification of Directors

Ans: The provisions for appointment of directors are:

(1) Only an individual (natural person) can be a director

(2) A public company must have a minimum of three and maximum of fifteen directors

(3) At least one-third must be independent directors

(4) Every listed company and every company with share capital of Rs. 100 crores or more and/or
turnover of Rs 300 crores or more must have at least one woman director

(5) A listed company must have one director elected by small shareholders

(6) Directors should be appointed in a General Meeting

(7) A director must have been allotted Director Identification Number (DIN)

(8) At least two-thirds of directors should retire by rotation.

Section 164 of the lays down the disqualifications for a Director. If the disqualifications do not exist,
an individual is qualified to be a Director. The disqualifications are:

(1) he is of unsound mind

(2) he is an undischarged insolvent or his application for being adjudicated as insolvent is pending;

(3) he has been convicted by a court of any offence and imprisoned for at least six months and five
years has not elapsed from the date of expiry of the sentence. If however, the imprisonment
exceeded seven years he will not eligible at all.

(4) if there is a court or tribunal order in force disqualifying him for appointment as a director

(5) he has not paid any calls in respect of any shares of the company for more than six months

(6) he has been convicted, in the preceding five years, of the offence of dealing with related party
transactions under section 188

(7) he has not obtained a Director Identification Number

69) What is share warrant

Ans: Share Warrant is a document issued by a company under its common seal, stating that
its bearer is entitled to the shares or stock specified therein. Share warrants are negotiable
instruments and are transferable by mere delivery without registration of transfer. Coupons
are attached to each warrant, bearing the dates on which the dividend will be paid by the
company as they cannot know who the shareholder or who is entitled to the dividends. The
person who produces the appropriate coupon can receive payment of the dividend.
 40

Warrants are essentially a right or interest in securities. Since warrants are essentially a right
or interest in securities, it shall be treated as a security under the Securities Contracts
(Regulation) Act, 1956.

For accounting purposes, the amount received against share warrants shall be shown under
the head Shareholder’ funds on the liability side.

70) Who is proxy

Ans: A Proxy is a person who represents a shareholder at the meeting of the company. He acts as an
Agent and at the behest of the shareholder. Section 105 (1) of the Companies Act, 2013 provides for
the appointment of a proxy who is entitled to attend the meeting and vote in a poll during the
meeting, but he will not have the right to speak or vote otherwise than in a poll. Further, a proxy
cannot be appointed in respect of companies which have been prescribed by the Central
Government as such companies in which a member is not entitled to appoint a proxy. The person
attending as proxy is also subject to the limitation of not representing more than fifty members or
more than a prescribed number of shares.

The facility of a proxy is very commonly used by the Foreign Investors who do not have a physical
presence in India. Frequently they are represented by their custodians or custodial bankers.

71) What is Lien on Shares

Covered in Qs 54 on page 24

72) What is voluntary winding up

Covered in Qs. 32 in pages 15-16

73) Distinguish between Shares and Debentures

Ans: The distinction between shares and debentures are as under:

(1) While shares represent the company-owned capital, debentures represent borrowed
capital.
(2) The person who holds the ownership of the shares is called as Shareholder. The person
who holds the ownership of the debentures is called as Debenture holder.
(3) The shareholders are the owners of the company while the debenture holders are
creditors.
(4) Shareholders receive dividends while Debenture holders receive interest.
(5) Dividends are paid out of the profits and are normally not paid if the company does not
make profits. Interest to debenture holders has to be paid irrespective of whether the
company makes profits or not.
(6) Shareholders possess voting rights while debenture holders do not.
 41

(7) Shares cannot be converted into Debentures whereas debentures can be converted into
shares. If the debentures are issued as convertible debentures shares are bound to be
issued either for a part or for the full amount of the debenture.
(8) Trust deed is not carried out in the shares whereas when the debentures are issued to
the public, a trust deed has to be carried out.

74) Give any two purposes for which the security premium amount can be utilised by the
company

Ans: Section 52 of the Companies Act, 2013 provides the following utilisations for the security
premium account:

(1) To issue fully paid bonus shares to the company members (shareholders).

(2) To provide for the premium payable which is paid on redemption of any redeemable preference
shares or debentures.

(3) To write-off off the preliminary expenses of the company

(4) To write-off the expenses incurred on issue of shares and debentures; the expenses such as
discount allowed or commission paid for issuing the shares.

(5) To buy back own shares.

75) Who is contributory

Ans: As per Section 2 (26) of the Companies Act, 2013, contributory means a person liable to
contribute towards the assets of the company in the event of its being wound up. The
explanation to the sections clarifies that a person holding fully paid-up shares in a company
shall be considered as a contributory but shall have no liabilities of a contributory under the
Act whilst retaining rights of such a contributory.

In terms of the Companies Act, 1956 contributories included

(1) Present and past members (member not more than a year back)
(2) Legal Representatives of a Deceased Member
(3) The Official Assignee or Receiver of a Contributory
(4) Liquidator of a Body Corporate
(5) Directors/Managers whose Liabilities are unlimited

76) What is cumulative preference shares

Covered as a part of Qs 36 on page 17

77) Give any two instances of Current Account Transaction under FEMA 1999

Covered as a part of Qs 33 on page 16

 42

78) Write a short note on Capital Account Transaction

Covered as a part of Qs 33 on page 16

79) Write a short note on Statement in lieu of prospectus

Ans: The Statement in Lieu of Prospectus is a document filed with the Registrar of the
Companies ( ROC ) when the company has not issued prospectus to the public for inviting
them to subscribe for shares or the company issued prospectus but because minimum
subscription has not been received the company has not proceeded for the allotment of
shares.. The statement must contain the signatures of all the directors or their agents
authorized in writing. Such a statement is generally issued when Capital is being raised from
known sources. The minimum subscription is not required to be stated in such a statement.

80) Write a short note on Joint Ventures abroad

Ans: "Joint Venture (JV)"/ "Wholly Owned Subsidiary (WOS)" means a foreign entity formed,
registered or incorporated in accordance with the laws and regulations of the host country
in which the Indian party/Resident Indian makes a direct investment;

A foreign entity is termed as JV of the Indian Party/Resident Indian when there are other
foreign promoters holding the stake along with the Indian Party. In case of WOS entire
capital is held by the one or more Indian Party/Resident Indian.

The setting up of joint ventures abroad are governed by RBI’s regulations on Overseas Direct
Investments.

81) Write a short note on Doctrine of Equity Shares

Ans: Equity shares are the permanent source of capital for a company. There is no
requirement of creating a charge over the assets of the company when equity shares are
issued. The liability of the equity shares is not required to be paid. The company does not
have any obligation to pay dividend to the shareholders.

An equity share, normally known as ordinary share is part of a company’s capital and represents a
part ownership with each shareholder being a fractional owner of the company. This is the main
source of capital for an organization.

Equity share capital remains with the company. It is given back only when the company is closed.
Equity Shareholders possess voting rights and select the company’s management. The dividend rate
on the equity capital is not fixed and depends on the surplus remaining after appropriation of a
company’s profits.

Equity shareholders are members of the company and hence enjoy a number of rights with
regard to the affairs and management of the company. Equity shares are issued as part of a
public offer or as rights and/or bonus to existing shareholders.
 43

82) Write a short note on Distinguish between Shares and Stock

The primary distinction between shares and stock are as under:

(1) Stock is the aggregate of fully paid-up shares whereas share represents one unit of ownership in
the company’s share capital

(2) Shares are represented by share certificates while stocks are represented by Stock Certificates.

(3) Shares may or may not be fully paid whereas stock is always fully paid

(4) Shares have distinctive numbers whereas stocks need not be unnumbered

83) Discuss various theories of corporate personality

Ans: The theories of corporate personality are as under:

(1) Fiction Theory – Main proponents were Savigny, Salmond and Holland. Believes in the fictitious
creation of personality merely by law. Savigny called it ‘persona ficta’ and gave the name juridical
person.

(2) Realistic Theory – Also known as the Sociological Theory. Main proponents were Gierke,
Maitland, Pollock, and Geldart. Maintains that a corporation has a real psychic personality and not
created merely by the law. The theory believes that collective will is, in psychology, different from
will of the individual.

(3) Concession Theory – Exponent Jhering. The theory asserts that It is by concession alone that the
legal personality is granted, created or recognized.

(4) Bracket Theory – Also known as the Symbolist Theory, it was developed by Vareilles-Sommieres.
It says that the corporate personality has the rights and liabilities for its members. The corporation
and its members are merely separated by brackets. The brackets are the corporation and within
those enclosed brackets, there are rights and liabilities of its members.

(5 Purpose Theory – According to this theory, there is no such corporate personality. The rights and
duties attached to corporate personalities are nothing but subjectless properties since rights and
duties can be attached only to natural persons.

(6) Organism Theory – This proposes that corporate personality is similar to that of an organism
which has members as limbs, head, and other organs to satisfy its interdependent functions.

(7) Ownership Theory - Founded by Brienz, Demelius, and Bekker and developed by Planiol.
This theory emphasized that there are not really two types of persons but merely single
ownership and collective ownership.
 44

84) Define Private Company

Ans:
(1) A private company is a closely held one and requires at least two or more persons, for its
formation.
(2) Shares of private companies are not listed or traded.
(3) A private limited company can have a maximum of 200 members.
(4) A private company requires a minimum of 2 directors.
(5) The shares of a private company are not freely transferable.
(6) Private companies cannot issue securities (shares, debentures etc.) to public.
(7) A private company can start business immediately after receiving certificate of
incorporation.
(8) In a private company two or more directors can be appointed by a single resolution.
(9) In a private company, directors are not required to file consent to act as a director.
(10) In a private company, directors are not required to retire by rotation.

85) Define Public Company

Ans:
(1) A public company is publicly owned and its shares traded publicly. It requires a minimum
of seven persons for its setup.
(2) Most Public Limited Companies are listed on a recognized stock exchange and their
shares traded.
(3) There is no limit to the number of members of a public company.
(4) A public company requires a minimum of 3 Directors.
(5) The shares of a public company are freely transferable.
(6) Public companies can issue securities (shares, debentures etc.) to public.
(7) A Public company can only start business after receiving certificate of commencement.
(8) In a public company only one director can be appointed by a single resolution.
(9) In public companies filing of consent by Directors to act as Director is mandatory.
(10) In a public company, two-thirds of the directors (other than independent directors) are required
to retire by rotation.

86) Who is promoter? Discuss his position. State his duties and liabilities.

Ans: As per Section 2 (69) of the Companies Act, 2013, “Promoter” means a person—
(a) who has been named as such in a prospectus or in the company’s annual return or
(b) who controls the affairs of the company as a shareholder, director or otherwise or
(c) according to whose advice, directions or instructions the Board of Directors is
accustomed to act.

Promoters are persons who do the preliminary work related to the formation of a company,
including its promotion, incorporation, and flotation, and solicit people to invest money in
the company, usually when it is being formed. Promoters of the company are like parents of
the company who give birth to the company as a child. Promotion includes conception of
idea, incorporation, floatation and commencement of business.

The Promoters are liable for:

 45

(1) Any misstatements in the Prospectus

(2) Refund of money within prescribed time if minimum subscription is not received
(3) for any fraud etc. detected during the course of winding up
(4) Pre-incorporation contracts i.e. contracts entered into before the birth of the company.

87) Explain the provisions relating to appointment of auditors

Covered as part of Qs 26 on page 13-14

 46

88) Explain the provisions relating to buy-back of shares

Ans:
Buy-Back is a corporate action in which a company buys back its shares from the existing
shareholders usually at a price higher than market price. When it buys back, the number of shares
outstanding in the market reduces. Section 68 (1) of the Companies Act, 2013, provides for buy-back
of shares as long as the payment for the buy-back is made from (a) its free reserves or (b) the
securities premium account or (c) the proceeds of the issue of any shares or other specified
securities.

If the buy-back is more than 10% of the total paid-up equity capital and free reserves and/or if it is
not authorised by the Board through a resolution then (a) the buy-back must be authorised by the
company’s articles and (b) a special resolution must be passed at a general meeting authorising it.

The other conditions for a buy-back offer are:

(i) the buy-back should not be more than 25% of paid-up capital and free reserves

(ii after the buy-back, ratio of debt to paid-up capital and free reserves should not be more than 2:1

(iii) the shares to be bought back should be fully paid-up

(iv) if the shares are listed, the buy-back should be in accordance with SEBI regulations

(v) A buy-back cannot be done within one year of the closure of an earlier buy-back

The advantages of buy-back are:

(i) It provides an alternative mode to reduce capital without any Court/CLB(NCLT) approval

(ii) it improves the earnings per share

(iii) it improves return on capital and return on net worth

(iv) it provides another exit route to shareholders when shares are undervalued or thinly traded;

(v) it enhances consolidation of stake in the company.

(vi) it helps to prevent unwelcome takeover bids

(vii) it helps return surplus cash to shareholders

(viii) it helps to achieve optimum capital structure

(ix) it helps to support share price during periods of sluggish market condition

(x) it helps to utilise equity more efficiently

 47

89) Discuss the contents of 'Memorandum of Association' and explain the procedure for
altering the object clause

Ans:

The Memorandum of Association consists of the following clauses:

Name clause – gives the name of the company and provides protection against usage of the same
name

Registered Office Clause – provides the location of the company’s registered office

Objects Clause – states the objects of the company for which it is proposed to be incorporated

Liability Clause – declares the liability of members of the company

Capital Clause – states the amount of the nominal or authorised or registered capital

Subscription Clause - states the purpose of the subscribers to incorporate the company, agreeing to
take the shares in the company

One-Person Company Clause (Nominee Name) – is applicable only to one person companies.

Under the Companies Act, 2013, the Objects Clause can be altered by passing a special
resolution. However, if a company has raised money from the public through a prospectus
and still has any unutilised amount out of the money so raised, it must, in addition to the
special resolution, comply with the following requirements:
(1) It must publish the details of the special resolution in one English and one vernacular
newspaper in circulation at the place of its registered office and also place the same on its
website, along with the justification for such a change.
(2) The dissenting shareholders who did not vote in favour of the special resolution must be
given an opportunity to exit.
(3) A copy of the special resolution passed should be registered with the ROC within 30
days. Thereafter the ROC certifies within 30 days.
(4) The alteration takes effect only after the registration process with the ROC. If this is not
done the alteration becomes void and inoperative.

90) Who is proxy

Covered in Qs. 70 on pages 31-32

91) Who is contributory

Covered in Qs. 75 on page 33

92) Who is Alternate Director

Covered in Qs. 24 on pages 11-12

 48

93) Explain 'Transmission of Shares'

Transmission of shares takes place due to the operation of law when the holder is no more
or has become lunatic or insolvent. It also takes place when the holder of shares is a
company, and that company has wound up. The transferee will be given the rights to the
shares, and the transmission is recorded only when the transferee gives proof of
entitlement to the shares. In case of the death of the holder of the shares, the same will be
transferred to the legal representative and in case of insolvency to the official assignee.
Transfer of shares refers to the intentional transfer of title of the shares between the
transferor (one who transfers) and the transferee (one who receives). Thus, the essential
elements of a transmission of shares are:

(1) Transmission of shares happens by operation of law and is therefore, different from
transfer of shares which is a voluntary act.
(2) Transmission happens at the instance of the legal heir or receiver.
(3) Transmission of shares is caused by insolvency, lunacy, death, or inheritance.
(4) Unlike a transfer, no transfer deed is required for a transmission.
(5) In transmission there is no stamp duty.
(6) The rights and liabilities of the transmitter continue in a transmission unlike in a transfer
in which rights and liabilities of the transferor cease to exist.

94) Write a Short Note on Preference Shares

Preference shares are shares which entitle the holders to a fixed dividend, whose payment
takes priority over that of ordinary (equity) share dividends.
Preference shareholders do not have a right to vote on resolutions of the company barring
exceptions like where their interests are affected or where dividends have not been paid for
two years or more.
When the company goes into liquidation preference shareholders are paid back before the
ordinary shareholders.
Preference Shares could be of different types as under:
(1) Cumulative and Non-cumulative Preference shares – In Cumulative arrears of dividend
for past years when profits were not made are accumulated and paid whereas in Non-
cumulative such arrears are not accumulated. If the nomenclature does not mention the
kind of preference share it is presumed to be cumulative as established in Foster v. Coles,
Foster & Sons Ltd. [(1906) 22 TLR 555].
(2) Participating and Non-Participating Preference Shares – Participating Shares entitle the
holder to a share in surplus profits left after paying all dividends while Non-Participating
shares do not so entitle. If nomenclature does not mention, it is presumed to be non-
participating.
(3) Redeemable and Non-Redeemable Preference Shares – In the case of Redeemable
Preference Shares they are redeemed after a stipulated period of time. Theoretically
Irredeemable preference shares are not redeemable. However, Section 55 of the Companies
Act does not permit the issue of irredeemable preference shares and limits the tenor to 20
years though that can be exceeded for infrastructure projects.
 49

95) Write a Short Note on Issue of Shares at discount

Ans:
Shares are said to be issued at a discount when they are issued at a price lower than their
face value. The difference between the face value and the price at which they are being
offered is referred to as ‘discount’.
Section 53 of the Companies Act, 2013 prohibits the issue of shares at a discount unless they
are sweat-equity shares. If a company issues shares at a discount the transaction would be
void and the company would be liable to a penalty from Rs 1 to 5 lakhs. Every Officer who is
in default is also punishable with imprisonment for a term upto 6 months and/or a fine
between Rs. 1 to 5 lakhs.
It is pertinent to note that shares issued at a discount to creditors under a scheme of
compromise and arrangement/settlement is not to be treated as an issue of shares at a
discount as held in Re. Maneckchowk & Ahmedabad Mfg. Co. Ltd. [(1970) 40 CoCases 819].

96) Explain the rules relating to valid forfeiture of shares

Covered in Qs. 39 on page 18

97) What is Amalgamation of a Company and what is its difference with Merger?

Ans:
An amalgamation usually takes place when a bigger and financially stronger entity takes over a
smaller one. A merger happens when two or more companies who share similar operations or are
engaged in the same line of business combine to expand their services or diversify their activities.

An amalgamation can be in the nature of purchase or merger. Amalgamation in the nature of

purchase is when one company acquires another where the transferor’s business is discontinued.
Amalgamation in the nature of merger, on the other hand, combines the assets and liabilities,
including the interest of the shareholders as well as the business of the parties to the amalgamation.

A merger can be horizontal, vertical, or conglomerate. A horizontal merger is entered into

for the purpose of reducing or eliminating one or several competing companies in the
market. A vertical merger is where one company provides raw materials or services to the
business or businesses it is acquiring. A conglomerate merger is entered into with the goal
of diversifying business activities.

98) Write a Short Note on Adjudicatory Authority under FEMA 1999

Ans:
Section 16 of the Foreign Exchange Management Act, 1999 (FEMA), provides for the
aappointment of that –

By publishing an order in the Official Gazette, the Central Government may appoint officers
as the Adjudicating Authorities under the provisions of Chapter IV of the Foreign Exchange
Management Act for holding enquiry.
 50

b. When it is found that any person has committed contravention under Section 13 of the
Act. The Adjudicating Authority will issue a notice to such person to appear and to show
cause within a period which will be specified and to know why inquiry should not be held
against him. The period cannot be less than 10 days from the date when the notice is
served. In that notice it needs to be added the nature of contravention which is committed
by him.
If after an inquiry, the Adjudicating Authority is satisfied that a contravention has been
committed, he may impose a penalty under Section 13 of the Act. If the person against
whom the order of penalty is passed, fails to pay within 90 days the Adjudicating Authority
can also issue an order of arrest against him.
Any person aggrieved with the order of the Adjudicating Authority can also file an appeal to
a Special Director. He can even file an appeal with the Appellate Tribunal against the order
of the Adjudicating Authority or even the order of the Special Director. Any appeal has to be
filed within 45 days of the receipt of the order.

99) Write a short note on Holding and Subsidiary company

Ans:
As per Section 2(46) “holding company”, in relation to one or more other companies, means a
company of which such companies are subsidiary companies. Effectively, a holding company is one
which is registered with the purpose of controlling other companies. The holding company may own
another legal entity through the ownership of shares or by controlling its management.

A subsidiary company is a company whose control lies with another company. The company that
holds the control is termed as a Parent Company or Holding Company. As per Section S.2 (87) of the
Companies Act, 2013, "'subsidiary company", in relation to any other company (that is the holding
company), means a company in which the holding company-

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at its own or together
with one or more of its subsidiary companies

Subsidiary companies are frequently used by large business corporations to expand their
businesses into different areas and different locations. Since each company is a separate
legal person, keeping companies separate can help to insulate the holding company from
potential financial or legal issues faced by a subsidiary company.

100) Write a short note on merit of public company

Covered in Qs. 20 on page 9.

 51

101) Discuss the nature of Corporate Personality

The theory of Corporate Personality propounds that a company is a Legal Person, separate from and
capable of surviving beyond the lives of its members. The concept of Corporate Personality was first
ruled in the landmark case of Salomon v. Salomon ([1896] UKHL 1) in which the court held that a
company had an existence of its own as a separate legal person and hence upheld the doctrine of
corporate personality.

The intrinsic characteristics of a corporate personality are:

(1) Separate Legal Entity – a separate existence which is different from its members

(2) Limited Liability – the liability of the members is limited by shares of by guarantees

(3) Artificial legal person – Since it is not a natural person it has to act through a board of directors

(4) Perpetual succession – A company remains in perpetual existence beyond the existence of its
members, unless dissolved by law..

(5) Common Seal – A requirement since the company cannot sign like a natural person

On an academic level there are five theories of corporate personality. These are as under:

(1) Fiction Theory – Main proponents were Savigny, Salmond and Holland. Believes in the fictitious
creation of personality merely by law. Savigny called it ‘persona ficta’ and gave the name juridical
person.

(2) Realistic Theory – Also known as the Sociological Theory. Main proponents were Gierke,
Maitland, Pollock, and Geldart. Maintains that a corporation has a real psychic personality and not
created merely by the law. The theory believes that collective will is, in psychology, different from
will of the individual.

(3) Concession Theory – Exponent Jhering. The theory asserts that It is by concession alone that the
legal personality is granted, created or recognized.

(4) Bracket Theory – Also known as the Symbolist Theory, it was developed by Vareilles-Sommieres.
It says that the corporate personality has the rights and liabilities for its members. The corporation
and its members are merely separated by brackets. The brackets are the corporation and within
those enclosed brackets, there are rights and liabilities of its members.

(5 Purpose Theory – According to this theory, there is no such corporate personality. The rights and
duties attached to corporate personalities are nothing but subjectless properties since rights and
duties can be attached only to natural persons.

(6) Organism Theory – This proposes that corporate personality is similar to that of an organism
which has members as limbs, head, and other organs to satisfy its interdependent functions.

(7) Ownership Theory - Founded by Brienz, Demelius, and Bekker and developed by Planiol. This
theory emphasized that there are not really two types of persons but merely single ownership and
collective ownership.
 52

102) When a person ceases to be a member of a company

A person can cease to be a member of a company for any of the following:

(1) Transfer – A "transfer" of shares occurs if an existing member sells all of his shares to a
third party.

(2) Forfeiture – Where a company's articles authorize the directors to forfeit a member's
shares and the director’s forfeit all of the shares held by a member, the member will cease
to be a member from the date specified in the articles as the effective date for forfeiture.
(3) Surrender of Shares – A person's membership will come to an end if he surrenders all his
shares to the company with the approval of the directors.
(4) Death – When a person dies, his membership of a company will come to an automatic
end by virtue of the provisions of the Law of Succession. The shares previously held by him
become, legally, the property of his personal representative.
(5) Bankruptcy – When a person becomes bankrupt, his membership of a company will
come to an end under the provisions of the Bankruptcy Act which vest a bankrupt's property
in his trustee in bankruptcy
(6) Sale by a Company in exercise of lien – A company, like an unpaid seller under the Sale of
Goods Act, has a right of lien on its shares as security for the balance of their price. If the
Company sells ALL the shares held by a member, the membership will come to an end from
the moment the buyer's name is entered in the register.
(7) Buy-back of shares by the company
(8) Redemption of redeemable preference shares – If a member's entire holding consist
exclusively of redeemable preference shares and all of these shares are redeemed by the
company, he will cease to be a member from the date on which his name is removed from
the register of members.
(9) Repudiation by an infant – An infant member has a common law right to repudiate his
membership of a company if there has been a total failure of consideration because the
shares have become worthless
(10) Liquidation or winding up – A company's liquidation terminates membership of all
former members, from the moment it becomes effective.
(11) Rescission of Contract – A shareholder who rescinds a contract of purchase of shares or
allotment by reason of a vitiating element or otherwise ceases to be a member
(12) Disclaimer by trustee in bankruptcy
 53

103) What is Stock and bring out its difference from a share

(1) Stock represents the holder's part-ownership in one or several companies. Meanwhile, 'share'
refers to a single unit of ownership in a company. For example, if X has invested in stocks, it could
mean that X has a portfolio of shares across different companies.

(1) Stock is the aggregate of fully paid up shares whereas share represents one unit of ownership in
the company’s share capital

(2) Shares are represented by share certificates while stocks are represented by Stock Certificates.

(3) Shares may or may not be fully paid whereas stock is always fully paid

(4) Shares have distinctive numbers whereas stocks need not be unnumbered

(5) A company cannot directly issue stock. It must first issue shares and then convert the same into
stock.

104) Write a short note on Extra-Ordinary General Meeting

Ans:
Section 100 of the Companies Act, 2013 empowers the Board to call for an Extra-Ordinary General
Meeting for matters requiring immediate consideration by members, which cannot be deferred till
next Annual General Meeting. All general meetings, other than Annual General Meeting, shall be
called as Extra-Ordinary General Meetings (EGM) . All business which are transacted at EGM shall be
deemed special. Such a meeting can be called by the Board on a suo moto basis or by the members
holding one-tenth of the total shares or one-tenth of the voting rights. EGM shall be held at a place
within India except in case of a wholly owned subsidiary of a company incorporated outside India.

The notice and quorum requirements for an EGM is the same as an AGM. These are as under:

(1) Notice of clear 21 days to every member, legal representative of deceased member, assignee of
insolvent member, auditors and every director (Section 101)

(2) Quorum as per the articles of the company subject to the minimum requirements set out in
Section 103 (5 if total members upto 1000, 15 if total members above 1000 upto 5000 and 30 if
more than 5000)

(3) Presence of Chairman either as per articles or elected by members present (Section 104)

(4) Passage of resolutions through voting. Ordinary and Special Resolutions to be passed by simple
and 3/4th majority respectively (Section 114)

(5) Proxy in place of members entitled to vote on behalf of member (Section 105)

(6) Minutes to record fair and correct summary of meeting in Minute Book within 30 days (Section
118).
 54

105) What are the compulsory clauses in the Memorandum of Association? In what mode
and to what extent can a company alter these clauses?

Ans:
The compulsory clauses of the Memorandum of Association of a company are as follows:

Name clause – gives the name of the company and provides protection against usage of the same
name

Registered Office Clause – provides the location of the company’s registered office

Object Clause – states the objects of the company for which it is proposed to be incorporated

Liability Clause – declares the liability of members of the company

Capital Clause – states the amount of the nominal or authorised or registered capital

Subscription Clause - states the purpose of the subscribers to incorporate the company, agreeing to
take the shares in the company

One-Person Company Clause (Nominee Name) – is applicable only to one person companies.

The Name Clause, Registered Office Clause and Objects Clause can be altered by passing a special
resolution. For altering the Name approval of Central Government is required (not for private
company) while Central government has to be kept informed for alteration of Registered Office
Clause. Capital Clause can be altered by an ordinary resolution provided the Articles authorise the
same. A company registered with limited liability cannot alter the Liability clause to make the liability
of members unlimited. As for the Subscription Clause, once a subscriber has affixed his signature and
other details on the Memorandum, he cannot withdraw his name.

106) Explain the provision of compulsory winding up under Inability to pay debts and Just
and Equitable Grounds

Ans:
Under Section 271 of the Companies Act, 2013, a company may be wound up by the
Tribunal in seven situations, two of which are its inability to pay debts and for just and
equitable reasons.

Three cases in which a company is deemed to be unable to pay its debts are:
(1) Statutory Debts in which a creditor, to whom the company owes Rs. one lakh or more,
has served a notice to the company and the company fails to pays within three weeks.
(2) If execution of any decree or order of a Court in favour of a creditor is returned
unsatisfied.
(3) On account of commercial insolvency.
 55

A company can also be wound up by the Tribunal on the ground that it is just and equitable
to do so. A just and equitable winding up petition is a bespoke petition that is designed to
deal with a range of shareholder disputes in a company. This is an omnibus clause giving
ample discretion to the Tribunal. However, there has to be a sufficiently strong ground and
an order will not be granted if it is seen that the petitioner has not pursued other effective
remedies. Common reasons for the winding up on this ground are:
(1) If the company’s main object has failed
(2) There is no possibility of doing business except at a loss
(3) There is deadlock in management
(4) There is oppression on minority shareholders
(5) If the company is akin to a Partnership Firm
(6) In public interest.

107) What is investment company

Ans:
As per Explanation (a) to Section 186 of the Companies Act, 2013, an investment company
means a company whose principal business is the acquisition of shares, debentures or other
securities.

Sub-section of Section 186 stipulates that no company shall directly or indirectly —

(a) give any loan to any person or other body corporate;
(b) give any guarantee or provide security in connection with a loan to any other body
corporate or person; and
(c) acquire by way of subscription, purchase or otherwise, the securities of any other body
corporate,

exceeding sixty per cent of its paid-up share capital, free reserves and securities premium
account or one hundred per cent of its free reserves and securities premium account,
whichever is more.

108) Which company can issue Share Warrant 7

Ans:

Share warrants are instruments that give their holder the right to buy the stock of the
issuing company at a predetermined price within a stipulated time frame. The share warrant
is a bearer document issued by the company under the common seal of the company
stating that the bearer is entitled to the shares mentioned therein. As share warrant is a
negotiable instrument, it is transferred by endorsement and by mere delivery like any other
negotiable instrument.
A public company, limited by shares may, if so authorized by its Articles, with the previous
approval of the Central Government and in respect of fully paid-up shares, issue a share
warrant under its common seal. A private company cannot issue share warrant.
 56

109) What is the punishment for the person, authorising the issue of prospectus, which
includes untrue statement

Ans:
A misrepresentation or untrue statement in the prospectus is treated as a fraud and invites
punishment as prescribed in Section 447 of the Companies Act, 2013. As per Section 447 a
person guilty of fraud shall be punishable with imprisonment for a term ranging from six
months to 10 years. He is also liable to a fine, which can extend to three times the amount
involved in the fraud. If the fraud involves public interest the term of imprisonment shall not
be less than 3 years. Since a prospectus involves a public issue, it is very likely that the
misrepresentation or untrue statement in the prospectus will be deemed to involve public
interest.

110) Write a short note on Public Issue

Ans:
A public issue or public offer is covered under Section 23 of Part I of Chapter III of the
Companies Act, 2013. The explanation to the section defines a "public offer" to include an
initial public offer or further public offer of securities to the public by a company, or an offer
for sale of securities to the public by an existing shareholder, through issue of a prospectus.
Section 24 of the Act specifies that a public issue by a “listed” or “to be listed” company
would be governed by the regulations of SEBI.
Section 25 states that any document by which the offer for sale to the public is made shall
be deemed to be a prospectus.
Section 26 stipulates what all should be contained in the prospectus.
Section 29 specifies that public offer of securities should be in dematerialised form.
Public issues provide a convenient source of capital or long-term funding for a company.
Public offers are generally made for shares or convertible debentures or non-convertible
debentures.

111) Write a short note on Repatriation

Ans:
Repatriation refers to converting any foreign currency into one’s local currency.
In the context of FEMA, 1999, repatriation refers to bringing into India realised foreign
exchange and—
(i) the selling of such foreign exchange to an authorised person in India in exchange for
rupees, or
(ii) the holding of realised amount in an account with an authorised person in India to the
extent notified by the Reserve Bank.
 57

112) What are the privileges and exemptions available to a private company

Ans:
The various privileges and exemptions available to a private company are as under:
(1) A private company can be incorporated with only two members.
(2) It can start business immediately on receipt of certificate of incorporation
(3) Its minimum capital requirements are less
(4) Since it cannot issue a prospectus, the stringent provisions of law relating to a public
issue do not apply to it
(5) Restrictions on appointment and remuneration of managerial personnel don’t apply to it
(6) The quorum at a shareholders meeting is 2 members
(7) It can provide financial assistance for purchase of its shares
(8) It can accept deposits from its members
(9) It need not prepare reports on each AGM
(10) It need not appoint independent directors
(11) It can include a clause in its memorandum or articles for non-applicability of the
provisions of Sections 43 and 47 of the Companies Act. These sections deal with kinds of
share capital and voting rights of shareholders respectively
(12) It is not subject to the restrictions of Sec 67 regarding purchase of own shares
(13) It can insert a clause in its articles that the provisions of Sections 101 to 107 and Sec
109 (dealing with notice of meetings, quorum, proxies & voting) will not apply to it
(14) The provisions of Sec 160 dealing with persons other than retiring directors who wish to
stand for directorship do not apply to it
(15) It can appoint more than one director through a single resolution
(16) In a private company, directors are not required to retire by rotation
(17) In a private company, directors are not required to file consent to act as a director
(18) It is not subject to restrictions on the power of the Board under Sec 180
(19) It is not subject to the restrictions on loans to directors
(20) Sec 196 (4) and Sec 196 (5) containing provisions for appointment of Managing
Directors Whole-time Directors and Managers do not apply to it.

113) Explain the Rule in Foss v. Harbottle and also state the exceptions to it with the help
of case laws

Ans:
Foss v. Harbottle [(1843) 67 ER 189] is a leading English precedent in corporate law which
established the principle of 'Majority Rule' which means that the decisions and choices of the
majority will prevail over those of the minorities. The premise on which the rule was established was
that if the actions of directors of the company, ratified by the majority of members, did cause loss
such loss was caused to the company and not to the individual shareholder as long as the actions
were within the scope of the powers as per the memorandum and articles of the company. In effect
any action taken within the powers specified under the memorandum and articles and ratified by
the majority of the members could not be challenged by the minority.

However, there are certain exceptions to the application of this rule which are as under:
 58

(1) Ultra Vires acts, that are not in line with the memorandum and articles & objects of the company
[held in Bharat Insurance Co. Ltd. v. Kanhaiya Lal (AIR 1935 Lah 742)]

(2) Acts which amount to a fraud on the minority [Menier v. Hooper’s Telegraph Works Ltd [(1874) 9
C. App. 350] in which the act of compromising a suit against a third party was held to be a fraud to
benefit the majority at the expense of the minority]

(3) Acts requiring a special majority and where such special majority ratification was not obtained
[Nagappa Chettiar v. Madras Race Club (1949) 1 MLJ 662]

(4) Where control is in the hands of wrong-doers [Glass v. Atkin (1967) 65 DLR 501]

(5) Acts which deprive shareholders of the individual legal or other rights [Pender v. Lushington
(1877) 6 Ch. D. 70 in which the right to vote of a member even if it disagreed with the majority was
upheld]

(6) If there is oppression and mismanagement. These are covered in Sections 241 to 246 of the
Companies Act, 2013 [Elder v. Elder & Watson Ltd. (1952 SC 49 Scotland]

114) What are the remedies available to the minority shareholders of a company against
oppression or mismanagement

Ans:
The provisions relating to Oppression and Mismanagement are laid down in Chapter XVI (Sections
241 to 246) of the Companies Act, 2013.

Section 241 lays the ground for any aggrieved member of the company to file a complaint
application with the Tribunal –

(1) if the affairs of the company were/are conducted prejudicial to public interest or to him or other
member/s or

(2) if any material change is effected without factoring in the other interest groups or any class of
shareholders or

(3) if there is a change in management or control prejudicial to members.

Section 242 gives wide powers to the Tribunal including restrictions in transfer or allotment of
shares, termination / setting aside of agreements, removal of the managing director, manager or any
of the directors of the company, recovery of undue gains made by managing director, manager or
director, manner of appointing of Managing Director of the company, appointment of directors to
report to the Tribunal etc.

Section 243 deals with the consequences of termination or modification of certain agreements.

Section 244 lays down who all have the right to apply under section 241.
 59

Section 245 provides for class action by members and depositors to restrain the company from any
ultra vires action and to claim damages from directors, auditor or any expert or advisor for
fraudulent, unlawful or wrongful act or conduct.

Section 246 deals with the application of provisions of sections 337 to 341 (penalty for frauds by
officers, liability if proper accounts not kept, liability for fraudulent conduct of business, Tribunal’s
power to assess damages against delinquent directors, etc. and extension of liability to partners or
directors in firms or companies) to an application made to the Tribunal Sections 241 and 245.

115) What is the time limit for holding first AGM of a company

Ans:
As per Section 96 of the Companies Act, 2013, a company is required to convene first AGM
within 9 months from the end of first Financial Year and thereafter every year within six
months of the end of its Financial Year. The maximum period between two AGMs is 15
months. A minimum notice of 21 days has to be given to every member

116) Who is Sole Selling Agent

Ans:
A Sole Selling Agent means an individual, firm or company who or which is appointed by the
company and given exclusive rights to sell the specified products of the company in a
particular area. The relationship of the company and its Sole Selling Agent is one of a
Principal and an Agent and is governed by the provisions of the Indian Contract Act, 1872
regarding Agents. Sole Selling Agents are not employees of the Company. Generally the Sole
Selling Agent exclusively sells the product of that company or brand and not that of any
others. The Sole Selling Agent will be given remuneration or commission for the task
undertaken.

While a Selling Agent is not defined in the Companies Act, Section 294 of the Act of 1956
had provisions for the appointment of Sole Selling Agents and stipulated that such
appointment required approval of company in a General Meeting.

117) What is Foreign Currency under FEMA 1999

Ans:
As per Section 2 (m) of FEMA, 1999, “foreign currency” means any currency other than Indian
currency

As per Section 2 (n) of FEMA, 1999 “foreign exchange” means foreign currency and includes —

(i) deposits, credits and balances payable in any foreign currency,

(ii) drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian
currency but payable in any foreign currency,
 60

(iii) drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or
persons outside India, but payable in Indian currency.

Generally transactions under the provisions of FEMA, 1999 are restricted to those in freely
convertible foreign currency or exchange.

118) Write a short note on Official Liquidator (include his powers and duties)

Ans:
The Official Liquidators are officers appointed by the Central Government under Section 359 of the
Companies Act, 2013 and are attached to various High Courts. The Official Liquidators are under the
administrative charge of the respective Regional Directors, who supervise their functioning on behalf
of the Central Government.

As per Section 360 of the Companies Act, 2013, the Official Liquidator has powers to exercise all the
powers as may be exercised by a Company Liquidator and conduct inquiries or investigations, if
directed by the Tribunal or the Central Government, in respect of matters arising out of winding up
proceedings.

The Liquidator has the following duties:

(1) To investigate into the affairs of a company from its inception

(2) To recover and realize the company’s assets

(3) To form winding up committee and to make reports

In the performance of his duties the Liquidator is expected to act impartially with skill and diligence
and confidentially.

119) What are the disadvantages of formation of company? Give special emphasis on
lifting the corporate veil?

Ans:
The disadvantages of forming a company are:
(1) Excessive formalities to be complied with
(2) Heavy expenses for complying with the requirements of the law and the rules framed
thereunder
(3) Publicity and loss of privacy since a lot of information about the company is in the public
domain through its filings with the ROC
(4) Denail of some fundamental rights which are available only to natural persons
(5) Possibility of control even without majority holding since other shares are widely
dispersed
(6) Possibility of fraud because of size and spread and of the business itself and the
shareholders
 61

(7) Potential Lifting of the Corporate veil against the Doctrine of a separate personality as a
separate legal entity. Such lifting of corporate veil can be on judicial grounds or because
statutory requirements such as:
(i) To determine the enemy character of a company
(ii) Company formed to escape legal obligation
(iii) Liability for ultra-vires acts
(iv) Public Interest/Public Policy
(v) Protection of revenue
(vi) Avoidance of welfare legislation
(vii) Economic offences
(viii) Formation of subsidiary to act as an agent
(ix) For determination of technical competence of the company
(x) Reduction of Membership below the statutory minimum
(xi) Fraud or Fraudulent Conduct
(xii) Mis-statements/Misrepresentation in prospectus
(xiii) Mis-description of Name
(xiv) Failure to return application money
(xv) ) For investigating company’s ownership
(xvi) For contravention in respect of deposits raised
(xvii) For Inspector to conduct investigation into affairs of related companies

120) Discuss various provisions relating to name clause of MOA

Ans:
(1) The name clause in the MOA must have the words Limited or Private Limited at the end
of the name
(2) Application for reserving the name prior to applying for incorporation
(3) Name cannot be identical or closely resembling another company’s name
(4) Name cannot use words prohibited by law such as UNO, WHO, Gandhi, Nehru etc.
(5) Name cannot such as would constitute an offence under any law
(6) Name cannot use a name which could convey an impression that there is a linkage with
government. Thus, usage of words like National is prohibited
(7) Name cannot contain words like Bank, Stock Exchange unless NOC is issued by RBI/SEBI
(8) Name must be displayed outside every place of business of the company
(9) Name can be changed only after passing a special resolution and obtaining approval of
Central Government
(10) If Central Government advises company to change name under Section 16 of
Companies Act, 2013, the change must be carried out within prescribed time. Non-
compliance can make company liable to fine of Rs. 1,000 per day of default. Every Officer in
default is punishable with a fine ranging from Rs. 5,000 to Rs. 1,00,000.

121) Private Company enjoys more privileges than Public Company, Discuss

Covered in Qs. 15 on page 6

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122) Discuss the provisions regarding appointment and Qualifications of Directors

Ans:
The provisions for appointment of directors are:

(1) Only an individual (natural person) can be a director

(2) A public company must have a minimum of three and maximum of fifteen directors

(3) At least one-third must be independent directors

(4) Every listed company and every company with share capital of Rs. 100 crores or more and/or
turnover of Rs 300 crores or more must have at least one woman director

(5) A listed company must have one director elected by small shareholders

(6) Directors should be appointed in a General Meeting

(7) A director must have been allotted Director Identification Number (DIN)

(8) At least two-thirds of directors should retire by rotation.

Section 164 of the lays down the disqualifications for a Director. If the disqualifications do not exist,
an individual is qualified to be a Director. The disqualifications are:

(1) he is of unsound mind

(2) he is an undischarged insolvent or his application for being adjudicated as insolvent is pending;

(3) he has been convicted by a court of any offence and imprisoned for at least six months and five
years has not elapsed from the date of expiry of the sentence. If however, the imprisonment
exceeded seven years he will not eligible at all.

(4) if there is a court or tribunal order in force disqualifying him for appointment as a director

(5) he has not paid any calls in respect of any shares of the company for more than six months

(6) he has been convicted, in the preceding five years, of the offence of dealing with related party
transactions under section 188

(7) he has not obtained a Director Identification Number

123) Explain the rule in Royal British Bank v. Turquand? Whats are the exceptions to this
rule?

Covered in Qs. 18 on page 8

 63

124) "The will of the majority must prevail" is the principle of company management, Are
there any exceptions to this rule

Covered in Qs. 113 on page 48

125) Who are entitled to file a petition for the winding up of a company

Ans:
Under Sec 272 of the Companies Act, 2013, a petition for winding up can be filed by the
following persons:
(1) The company itself
(2) Creditors
(3) Contributories/Shareholders
(4) Registrar of Companies
(5) Any person authorised by the Central Government in that behalf
(6) The Central Government or State Government on the ground that the company has
acted against the sovereignty and integrity of India

126) Distinguish between Share Warrant and Share Certificate

Ans:
The following are the major differences between Share Certificate and Share Warrant:

(1) A share certificate is the documentary evidence which proves the possession of the
shares whereas a share warrant is the document of title which states that the holder of the
instrument is entitled to the shares.
(2) The issue of share certificate is compulsory for every company limited by shares but the
issue of a share warrant is not compulsory.
(3) A Share Certificate is issued against the shares, irrespective of whether the shares are
fully or partly paid up whereas Share Warrant is issued by the public company only against
fully paid up shares.
(4) Share Certificate is issued by both public and private companies, whereas Share Warrant
is issued only by a public limited company.
(5) Share Certificate is to be issued within 3 months of the allotment of shares, but there is
no such time limit specified in the Companies Act for the issue of Share Warrant.
(6) A share certificate is not a negotiable instrument whereas a Share Warrant, is a
negotiable instrument.
(7) Issue of a Share Warrant require prior Central Government approval whereas issue of a
Share Certificate does not.
(8) A Share Certificate can be originally issued, but not a Share Warrant.
 64

127) Discuss about the powers and duties of a director of a company

Powers of Directors

Section 179 of the Companies Act, 2013, lays down the broad rule that the Board of Directors of a
company can exercise all such powers and do all such acts as the company is authorised to do
subject to the restriction that they cannot do anything which is required to be done in a general
meeting either as per the requirements of the Act or the articles of the company. The Act also lays
down that, certain powers must necessarily be exercised at a meeting of the Board of Directors.
These include:

(1) to fill casual vacancies in the Board (Section 161)

(2) to enter into a contract or arrangement with a related party (Section 188)

(3) to recommend the rate of dividend to be declared

(4) to make political contributions (Section 182)

(5) to appoint key managerial personnel (Section 203 (3))

(6) to give a loan to or invest in any other body corporate (Section 186 (5))

Duties of Directors

As per Section 166 of the Act, and provisions elsewhere in the Act, the duties of Directors include:

(1) to act in accordance with the articles of the company

(2) to act in good faith in order to promote the objects of the company for the benefit of its
members as a whole, and in the best interests of the company, its employees, the shareholders, the
community and for the protection of environment.

(3) to exercise his duties with due and reasonable care, skill and diligence and to exercise
independent judgment.

(4) to not involve himself in a situation of interest in conflict with the interest of the company

(5) to not achieve or attempt to achieve any undue gain or advantage for himself or to his relatives,
partners, or associates

(6) to not assign his office

(7) to appoint first auditors of the company within thirty days from the registration of the company
(Section 139 (6))

(8) to regularly attend Board meetings

(9) to convey/call the AGMs and EGMs (Sections 96 & 100)

 65

(10)to place at AGM a report of the Board along with company’s Balance She and P&L A/c. (Sections
102, 129 & 134)

(11) to authenticate and approve annual financial statements (Section 134)

(12) to disclose interest, if any, in a contract or arrangement of the company (Section 184)

(13) to not participate in discussions or vote on any contract in which he has an interest (Sections
184 & 188)

(14) to make a declaration of solvency in case of voluntary winding up.

128) When the statutory meeting is required to be held

Statutory Meeting was provided for in Section 165 of the Companies Act, 1956 i.e. the old
Act.
A statutory meeting is held once during the life of a company.
A statutory meeting should be held between a minimum period of one month and a
maximum period of six months after the commencement of business of the company.
Private companies and government companies are not bound to hold any statutory
meetings. Only public limited companies are bound to hold statutory meetings within the
specified period of time.
The Board of Directors must forward a statutory report to every member of the company.
This report must be sent at least 21 days before the meeting.
The main objective of the statutory meeting is to make the members familiar with the
matters regarding the promotion and formation of the company.
The shareholders receive particulars related to shares taken up, moneys received, contracts
entered into, preliminary expenses incurred, etc.
The shareholders also get a chance to discuss business ideas and methods and the future
prospects of the company.

129) Write a Short Note on Quorum

A ‘Quorum’ in simple words means the minimum number of members that have to be
present in a meeting. Under the Companies Act, 2013, the quorum for a General Meeting, a
Board Meeting and an Extraordinary General Meeting is enumerated within its provisions.
Section 103 of the Act stipulates the quorum required for a General Meeting which is as
under:
(1) For public companies:
(i) 5 members if the total members in the company does not exceed 1000.
(ii) 15 members if the total members is more than 1000 but less 5000.
(iii) 30 members if the total members is more than 5000.

(2) For private companies the quorum is 2 members

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Under Section 174 (1) of the Act, the quorum for a board meeting must be 1/3rd of the total
number of directors or 2 directors whichever is the higher number.

The Act also contains provisions regarding the conditions for holding meetings in case the
quorum stipulations are not met.

130) Under what circumstances, Floating Charge is converted into fixed charge

Ans:
A floating charge is created on assets which are involved in the ordinary course of business
that is dynamic in nature. As these assets are not ‘fixed’ in nature, they are known as
floating charges.
However, in certain circumstances the floating charges can get converted into a fixed
charge. Such circumstances are as under:
(1) When the company is unable to pay its debts
(2) When the company is being wound up
(3) When the creditors initiate action to recover unpaid debts.

The conversion of Floating Charge to Fixed Charge is referred to as crystallization. Once a

Floating Charge gets converted to a Fixed Charge, the underlying assets can neither be sold
nor used by the company in its business operations.

131) Explain how directors can be removed

Ans:
A Director can be removed from the Board in one of the following situations:
(1) If the office of the director is vacated for any of the disqualification enumerated in Sec
167 (1).
(2) Where the Director Himself Gives his Resignation (Sec 168)
(3) Under Section 169 (1) a company may, by ordinary resolution, remove a director, not
being a director appointed by the Tribunal under section 242 subject to:
(i) a special notice to be issued of such resolution to remove a director or to appoint
somebody in place of a director so removed
(ii) On receipt of notice of a resolution to remove a director, the company shall
forthwith send a copy thereof to the director concerned, and the director shall be
entitled to be heard on the resolution at the meeting
(iii) Where notice has been given of a resolution to remove a director and the
director concerned makes a representation in writing and requests its notification to
members the company shall, if the time permits it to do so, provide the fact of the
representation to members in the notice of the resolution and send a copy to every
member. If a copy of the representation is not sent due to insufficient time or for the
company‘s default, the director may without prejudice to his right to be heard orally
require that the representation shall be read out at the meeting.
 67

132) Write a short note on Conversion of a private company into a public company
Ans:
The conversion of a private company into a public company can take place in one of the
following ways:
(1) By choice – It will entail a change in the Memorandum to delete the word Private from
the name and a change in the Articles by deleting one or more of the statutory provisions
applicable to a private company
(2) Conversion by default – For not complying with any of the requirements applicable to a
private company

If a company chooses to convert, it has to ensure that:

(1) The number of members is a minimum of 7 and that of directors a minimum of 3
(2) The capital is the minimum required for a public company
(3) It has not defaulted in the filing of Statutory Returns

For conversions the necessary resolution needs to be passed at a General Meeting. The
procedure involves:

(1) Convening a Board Meeting to fix the day, date, time and venue of the General Meeting
and to approve the draft notice convening the General Meeting along with the explanatory
statement. Pass resolution for conversion of private limited Company into a public
Company.

(2) Convening Extraordinary General Meeting with a minimum 21 days clear notice
for passing the resolution for conversion of the Company into a public Company and
consequently, alteration of memorandum and articles of association thereof.

Thereafter necessary filings have to be done with the ROC.

While a company becomes a public company from the date the resolution is passed and the
Articles changed, the change in the name of the company will be complete and effective
from the date of issue of the fresh Certificate of Incorporation.

133) What is Shelf Prospectus

Ans:
A shelf prospectus can be defined as a prospectus that has been issued by any public company
(includes a financial institution or bank) for one or more issues of securities or class of securities as
mentioned in the prospectus. When a shelf prospectus is issued then the issuer does not need to
issue a separate prospectus for each offering. The period of validity of a shelf prospectus is one year
from the opening of the first offer.

Under Section 60A of the Companies Act, 1956, only public financial institutions, public sector banks
or scheduled banks whose main object was financing could publish a shelf prospectus. However,
Section 31 of the Companies Act, 2013 has left it to the discretion of SEBI to determine the class of
companies which may file shelf prospectus.
 68

134) Define Foreign Exchange

Ans:
As per Section 2 (n) of FEMA, 1999 “foreign exchange” means foreign currency and includes —

(i) deposits, credits and balances payable in any foreign currency,

(ii) drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian
currency but payable in any foreign currency,

(iii) drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or
persons outside India, but payable in Indian currency.

135) Define Share

Ans:
As per Section 2(84) of the Companies Act, 2013, a share in the share capital of the
company, including stock, is the definition of the term ‘Share’. In other words, a share is a
measure of the interest in the company’s assets held by a shareholder.
Section 44 of the Companies Act, 2013, classifies shares as movable properties. Also, they
are transferable in the manner prescribed in the Articles of the company. Further, Section
45 of the Act mandates the numbering of every share.
According to Section 43 of the Companies Act, 2013, the share capital of a company can be
Preferential Share Capital and/or Equity Share Capital. Preference shares generally carry a
fixed rate of dividend and their holders do not have voting rights. Dividend on Equity Shares
depends on the Profits/Surplus of the company. Equity Shareholders have voting rights.
Shares are considered as a type of security as defined in Securities Contracts Act, 1956.

136) Who is disqualified from being appointed as auditor

As per Section 141 (3) of the Companies Act, 2013, the following are disqualified from being an
auditor

(a) a body corporate (other than a limited liability partnership)

(b) an officer or employee of the company

(c) a person who is a partner of, or is employed by, an officer or employee of the company

(d) a person or whose relative or partner holds security of or interest in the company or its affiliate
companies

(e) a person having business relationship with the company or its affiliates

(f) a person whose relative is a director or a key managerial personnel of the company
 69

(g) a person who is in full time employment elsewhere or is an auditor of more than 20 companies

(h) a person, convicted for fraud within ten years of date of conviction

(i) a person whose subsidiary or associate firm is engaged in consulting and specialised services as
provided in section 144.

137) What is minimum subscription

Ans:
Minimum subscription refers to the minimum amount which a company should raise at the
time of issuing capital. The requirement for minimum subscription applies to all companies
which raise funds from the public. If the company successfully raise the amount of minimum
subscription, it is allowed to retain the capital. If, on the other hand, the company is unable
to obtain the minimum subscription successfully, it is required to refund the application
deposit. The provisions relating to minimum subscription are contained in Sec 39 of the
Companies Act, 2013.

According to current SEBI regulations, every company needs a minimum subscription of 90%
of the issued amount on the date of closure.

138) What is defunct company

Ans:
A defunct company is a company who has no asset and no liability and failed to commence
business within one year of incorporation. Effectively, a defunct company is a company that
is not involved in any business activities.

Such companies’ names get removed from the Register of Companies under section 248 of
the companies act, 2013, where the Registrar has reasonable cause to believe that a
company has failed to commence its business within one year of its incorporation or is not
carrying on any business or operation for a period of two immediately preceding financial
years and has not made any application within the prescribed period for obtaining the
status of a dormant company under section 455. The Registrar of Companies (ROC) should
send a notice to the company, and every director of the company stating the intention to
remove the name and seek the representation of the company in 30 days. The companies
can also apply for voluntary removal of name from the registrar.
 70

139) Define person resident outside India

Ans:
Under FEMA 1999, a person resident outside India is a person who is in India for 182 days or
less during the preceding financial year other than (1) if he comes to or stays in India for
taking up employment, or (2) if he comes to or stays in India to carry on a business or
vocation or (3) if he comes to or stays in India for any purpose with intention to stay in India
for an uncertain period.

A person resident outside India would also include those who may have been resident in
India for more than 182 days in the preceding financial year but has –

1. gone out of India for taking up employment

2. gone abroad for carrying out a business.

3. gone abroad for any purpose that indicates intention to stay abroad for an uncertain
period.

140) Explain the provisions relating to vacation of office of director

Ans:
The provisions relating to vacation of office of Director are contained in Sec 167 (1) of the
Companies Act, 2013 and these are as under:

(a) he incurs any of the disqualifications specified in section 164

(b) he absents himself from all the meetings of the Board of Directors held during a period
of twelve months
(c) he acts in contravention of the provisions of section 184 relating to entering into
contracts or arrangements in which he is directly or indirectly interested
(d) he fails to disclose his interest in any contract or arrangement in which he is directly or
indirectly interested, in contravention of the provisions of section 184
(e) he becomes disqualified by an order of a court or the Tribunal
(f) he is convicted by a court of any offence, whether involving moral turpitude or otherwise
and sentenced in respect thereof to imprisonment for not less than six months
(g) he is removed in pursuance of the provisions of the Companies Act, 2013
(h) he, having been appointed a director because of holding office or employment in the
holding/subsidiary/associate company, ceases to hold such office or employment.
 71

141) Distinguish between Company and a Partnership

(1) When two or more persons agree to carry on a business and share the profits & losses
mutually, it is known as a Partnership firm. A company is an association of persons who
invests money towards a common stock, for carrying on a business and shares the profits &
losses of the business.
(2) A partnership is governed by the Indian Partnership Act, 1932 while a company is
governed by the Indian Companies Act, 2013
(3) A Partnership firm is created by mutual agreement between the partners whereas a
company is created by incorporation under the Companies Act.
(4) Registration of partnership is voluntary while registration of a company is obligatory
(5) A partnership requires a minimum of 2 persons whereas a company’s minimum
membership requirements are 2 for a Private company and 7 for a.
(6) A Partnership can have a maximum of 100 partners. For companies if private the
maximum number is 200. There is no limit to the in case of a private company and a public
company can have unlimited number of members.
(7) Audit is not mandatory for a Partnership whereas it is mandatory for companies
(8) Management of a partnership is by the partners themselves.
(9) The Liability of a partnership is unlimited for the owners/partners whereas for a public
company it is limited to amount of unpaid capital.
(10) There no minimum capital requirement for a partnership whereas it essential for a
company.
(11) A partnership does not have any requirement to use specific words in its name whereas
a company is required to use ‘Limited’ or ‘Private Limited’.
(12) Partnership firms have negligible formalities on dissolution whereas a company has
onerous requirements.
(13) A partnership firm is not a separate legal entity whereas a company is.
(14) A partnership firm cannot enter into contracts in its own name because it is not a
separate legal entity. Since companies are legal persons they can enter into contracts.

142) Write a short note on Registration of a Company

Ans:
The Registration of a company is the process of its incorporation and gain the status of a
separate legal person. The first step in the formation of a company is the approval of the
name by the Registrar of Companies (ROC) in the State/Union Territory in which the
company will maintain its Registered Office. This approval is provided subject to certain
conditions: for instance, there should not be an existing company by the same name.
Further, the last words in the name are required to be "Private Ltd." in the case of a private
company and "Limited" in the case of a Public Company. Once a name is approved, it is valid
for a period of six months, within which time Memorandum of Association and Articles of
Association together with miscellaneous documents should be filed.

The Memorandum of Association and Articles of Association are the most important
documents to be submitted to the ROC for the purpose of incorporation of a company. The
Memorandum of Association is a document that sets out the constitution of the company. It
 72

contains, amongst others, the objects and the scope of activity of the company besides also
defining the relationship of the company with the outside world.
The Articles of Association contain the rules and regulations of the company for the
management of its internal affairs.

Once a company is registered, ROC issues a Certificate of Incorporation and the company is
formed as a separate legal entity.

143) What are the necessary documents, required to be files with the registrar, to obtain
the registration of the company
The documents required for registration are:
(1) Memorandum and Articles of Association duly stamped
(2) Declaration of compliance, duly stamped
(3) Notice of the situation of the registered office of the company
(4) Particulars of Directors, Manager or Secretary
(5) Authority executed on a non-judicial stamp paper, in favour of one of the subscribers
to the Memorandum of Association or any other person authorizing him to file the
documents and papers for registration and to make necessary corrections, if any
(6) The ROC's letter (in original) indicating the availability of the name
(7) Tax documents (PAN and TAN)
(8) Copy of agreement if any, which the proposed company wishes to enter into with any
individual for appointment as its managing or whole-time director or manager
(9) Power of Attorney from subscribers
(10) No objection letters from directors/promoters
(11) Proof of identity and address of Directors/Promoters/Subscribers
(12) Form 18
(13) Form 32 (except for section 25 company)
(14) Form 29 (only in case of public companies)

144) What is One Person Company

Section 2 (62) of the Companies Act, 2013, defines one person company (OPC) as a private company
with only one director and one shareholder. However, it can have more than one director, and up to
a maximum of 15. The concept of a one person company has been introduced for the first time,
giving individual entrepreneurs, doing business as sole proprietors, an opportunity to avail of the
benefits of limited liability without a second person to form a company.

To ensure perpetuity and continuity, the memorandum of association of an OPC is required to

indicate the name of another person (nominee), who shall, in the event of the subscriber’s death or
his incapacity to contract, become the member of the company.

Only Indian residents can set up an OPC and the words ‘One person Company’ has to be a part of the
name of the company as per Section 12 (3) of the Act. The paid up capital of an OPC cannot exceed
50 lakhs and its average annual turnover cannot exceed 2 crores. A person can incorporate a
maximum of 5 OPCs. [Rule 2.1(2)]

OPCs have been provided with a number of exemptions and therefore have lesser compliance
related obligations.
 73

145) What is Government Company

Ans:
According to Sec 2 (45) ―Government company means any company in which not less than
fifty-one per cent of the paid-up share capital is held:
(1) by the Central Government, or
(2) by any State Government or Governments, or
(3) partly by the Central Government and partly by one or more State Governments.

A subsidiary of a government company is also deemed to be a Government company.

All the provisions of the Companies Act apply to a Government company subject to the
following

(1) The Auditor is appointed by the Comptroller and Auditor General of India
(2) Wherever Central Government holds shares of a company a report on the working and
affairs of the company along with its audit report has to be placed before both Houses of
Parliament.
(3) Wherever any State Government holds shares of a company a report on the working and
affairs along with the Audit Report has to be placed before the State Legislature.

146) What is Subsidiary Company

Ans:
A subsidiary company is a company whose control lies with another company. The company that
holds the control is termed as a Parent Company or Holding Company. As per Section S.2 (87) of the
Companies Act, 2013, "'subsidiary company", in relation to any other company (that is the holding
company), means a company in which the holding company-

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at its oWn or together
with one or more of its subsidiary companies

Subsidiary companies are frequently used by large business corporations to expand their businesses
into different areas and different locations. Since each company is a separate legal person, keeping
companies separate can help to insulate the holding company from potential financial or legal issues
faced by a subsidiary company.
 74

147) Write a short note on Memorandum of Association

Ans:
A Memorandum of Association (MoA) represents the charter of the company. It is a legal document
prepared during the formation and registration process of a company to define its relationship with
shareholders and it specifies the objectives for which the company has been formed. The company
can undertake only those activities that are mentioned in the MoA. As such, the MoA lays down the
boundary beyond which the actions of the company cannot go.

MoA helps the shareholders, creditors and any other person dealing with the company to know the
basic rights and powers of the company. Also, the contents of the MoA help the prospective
shareholders in taking decision about investing in the company. MoA must be signed by at least 2
subscribers in case of a private limited company, and 7 members in case of a public limited
company.

MoA consists of the following clauses :

(1) Name Clause, specifying the name of the company with the words Limited or Private Limited
depending on whether it is a public or private company.

(2) Registered Office Clause, specifying the name of the State in which the registered office of the
company is situated.

(3) Object Clause, setting out the objective with which the company is formed. The objectives can be
further divided into the following 3 subcategories:

(i) Main Objective, stating the main business of the company

(ii) Incidental Objective, which is ancillary to the attainment of main objectives of the company

(iii) Other objectives, specifying any other objects the company may pursue

(4) Liability Clause, stating the liability of the members of the company. In case of a company limited
by shares, the liability of the members is restricted by the amount unpaid on their share.

(5) Capital Clause, which details the maximum capital that the company can raise (authorised
capital) and an explanation of the division of such capital into the number of shares of a fixed
amount each.

(6) Subscription Clause, which is a declaration, by the members signing the memorandum, to take
shares in the company.
 75

148) Write a short note on Objects Clause in a Memorandum of Association. Explain the grounds
on which a company can alter its objects clause

The Objects clause is perhaps the most significant and lengthiest clause in the Memorandum of
Association of a company. The Objects Clause sets out the objective with which the company is
formed. The objectives can be further divided into the following 3 subcategories:

(i) Main Objective, stating the main business of the company

(ii) Incidental Objective, which is ancillary to the attainment of main objectives of the
company

(iii) Other objectives, specifying any other objects the company may pursue

The Objects Clause is an important clause since any company performing an act beyond the objects
makes it ultra vires.

The grounds for altering the Objects clause can be any of the following:

(1) To carry on the business on a larger scale by enhancing the scope of its business activities.

(2) To attain the goals already set by new and more improved methods.

(3) To undertake additional business activities which can be combined with the existing business.

(4) To sell or dispose of any part of the business improve economic viability.

(5) To expand its objectives in the background of a potential amalgamation/merger plan.

149) Distinguish between Memorandum and Articles

The differences between the Memorandum of Association (MOA) and Articles of Association
(AOA) is as under:
(1) The MOA defines the character of the company and the scope of its activities. The AOA
defines the rules and regulations of the company.
(2) The MOA is the main document of the Company which is subordinate to the Companies
Act. The AOA is the subsidiary document of the company and is subordinate to the
Companies Act as well as the MOA.
(3) The MOA establishes the relation between the company and outsiders. The AOA defines
the relation of the company with its members.
(4) Altering the MOA requires a special resolution and an approval of the Statutory
Authority. AOA can be altered merely by a special resolution.
(5) Acts outside the MOA are ultra vires and cannot be ratified. Acts outside the AOA can be
ratified as long as they are within the MOA.
(6) MOA is a fundamental and necessary document. AOA is a secondary document.
 76

150) State the golden rules of framing prospectus

Ans:
The Golden Rule of Prospectus has a meaning and a moral in it, which says whatever information
comes from the company to the public, through the medium of a prospectus, must be true, fair and
accurate. The Golden Rule for framing a prospectus was laid down by Justice Kindersley in the case
of New Brunswick and Canada Railway and Land Company v. Muggeridge [(1860) 1 Dr & Sm 381].
According to the ‘Golden Rule’ the following must be kept in mind when preparing the prospectus of
a company:

(1) The prospectus must be truthful in all respects

(2) The public is invited to invest on the faith of the representation contained in the prospectus.

(3) The true nature of the company should be disclosed. If any concealment has been made, it would
amount to misrepresentation

(4) The prospectus may be deemed false if there is suppression of material facts

In Rex v. Kylsant [(1932) 1 KB 442] also known as the Royal Mail case, the prospectus stated that the
company had been paying dividends in the past The truth was that the company was incurring
substantial losses in the past few years and the dividends were paid out of realised capital gains. It
was held that the prospectus was false and misleading.

151) What is the procedure for transfer of shares

Ans:
The basic procedure for transfer of shares in a Public Company involves the following:

(1) A deed of Share transfer (form SH-4) must be duly executed by both transferor and transferee

(2) The Deed of Transfer must be duly stamped

(3) Witness is required for the signatures of transferor and transferee

(4) The relevant share certificate or allotment letter should be attached

(5) The deed of share transfer must be deposited with the company within sixty days from the date
of execution

(6) On receiving the share transfer deed, the company’s board shall by passing a resolution register
the transfer subject to the documentation being in order.
 77

152) Explain the various provisions under Companies Act, 2013 regarding transferability of
shares of public and private companies

Ans:
Under Section 44 of the Companies Act, 2013, shares of a company are moveable property and
hence are transferable in the manner as provided in the company’s articles of association.

For transfer of shares of a public company, a proper instrument of transfer, in such form as may be
prescribed (share transfer form), duly stamped, dated and executed by or on behalf of the transferor
and the transferee us required. The same has to delivered to the company by the transferor or the
transferee within a period of sixty days from the date of execution along with the share certificate/s
and the company has to deliver the transferred certificate within a period of one month from the
date of receipt.

As per Section 2 (68) of the Act, a private company’s articles has to restrict the right to transfer its
shares. In the background of this restriction the transfer of shares of a private company follows the
following process:

1. The member who wants to transfer his share shall place a request to the company and for the
offer to sell to be made to the existing members of the company

2. After receiving notice of intention to transfer the shares, company will place this as an agenda
item at the Board Meeting & a notice to all existing members will be sent for them to indicate if
they are interested in purchasing the shares

3. If no other existing member is ready to purchase the shares then the company shall send the
letter to the member who wanted to sell stating that he can now sell to an outsider

4. Thereafter, the shareholder who wanted to sell can submit the share transfer deed, duly
executed, to the Company.

5. After receiving the Share Transfer deed along with the Share Certificate, the company is required
to pass a Board Resolution & register the transfer of share.

153) Write a short note on Calls on Shares

Ans:
(1) "Calls on shares" means the demand made by the company on its shareholders holding partly
paid shares to pay part or full unpaid amount on the shares. As and when the company needs
money it asks its shareholders to pay. This is known as calls on shares.

(2) The power to make calls generally vests in the Board of Directors.

(3) The calls should be made by passing a resolution at the meeting of the Board.

(4) The call money should not exceed 50% of the face value of the share at one time. However,
companies may have their own Articles and raise this limit.
 78

(5) There must be at least 30 days interval between two successive calls.

(6) When a call is made a letter known as “Call Letter” or “Call Notice” should be sent to all the
shareholders of the same class.

(7) The notice should also specify the amount of the call, place of payment etc. and should be sent at
least 14 days before the last date for payment. (10) If a member fails to pay call money, he is liable
to pay interest not exceeding the rate specified in the Articles or terms of issue. The directors are
free to waive the payment of interest.

(8) A defaulting member will not have any voting right till call money is paid by him.

154) Can a minor become a member of Company

Ans:
No. To be a member or shareholder of a company, a person must be competent to contract. Since a
minor is not competent to contract, he cannot be a member of a Company. However, an agreement
in writing for a minor to become a member may be signed by his lawful guardian on behalf of the
minor. A minor can be admitted to the membership of a company limited by shares by means of
transfer of shares if the shares are fully paid up and there is no additional liability.

155) Write a short note on Kinds of Share Capital

Ans:

Capital is essentially of two categories viz. Preference Shares and Equity Shares. Preference Shares
are generally accompanied with a fixed rate of return whereas in equity shares the returns, in the
form of dividends, are not fixed but depend on the profits of a company.

Equity share capital can be classified into the following types:

(1) Authorised/Nominal/Registered Capital: This is the amount of capital a company is authorised to

raise from the public by selling shares and is mentioned. As per Section 2 (8) of the Companies Act,
2013, authorised capital means such capital as is authorised by the memorandum of a company to
be the maximum amount of share capital of the company.

(2) Issued Capital: This is the part of the authorised capital issued to the public for subscription

(3) Subscribed Capital: This is the part of the issued capital which is subscribed by the public

(4) Called-Up Capital: This is the part of the issued capital that subscribers are called to pay

(5) Uncalled Capital: This is the part of issued capital for which the company has not called for
payment and hence is unpaid

(6) Paid-Up Capital: This is the amount actually paid by the shareholders
 79

156) Write a short note on Voting rights of preference Shareholders

Ans:
In general, and under normal circumstances, Preference Shareholders do not have voting
rights. However, under Sec 47 (2) of the Companies Act, 2013 a preference shareholder has
the right to vote only on resolutions which directly affect the rights attached to his
preference shares and on any resolution for the winding up of the company or for the
repayment or reduction of its equity or preference share capital. His voting right shall be in
proportion to his share in the paid-up preference share capital of the company.
There are two provisos to the provisions above.
The first proviso states that the voting right of the preference shareholders together, as
against the equity shareholders together should be proportionate to the paid-up capital in
respect to preference shares as against the paid-up capital in respect to equity shares.
The second proviso mentions that in case the dividend hasn’t been paid to the preference
shareholders for a consecutive period of two years or more, then such preference
shareholders get an automatic right to vote in all the resolutions placed before the
company, similar to the status of equity shareholders in terms of voting rights.
Section 123 of the Act permits payment of dividends only if the company makes profit. The
question therefore, arises whether in such a situation i.e. when dividends are not declared,
does the preference shareholder have any voting rights. This matter was settled in Ram
Parshottam Mittal v. Hill Crest Realty SN BHD [(2009) 8 SCC 709] in which the Supreme
Court ruled that in such situations preference shareholders will have the right to vote on all
resolutions.

157) Define "Share", What are the different types of shares that may be issued by a
company

Ans:
Share is defined to mean a share in the Share Capital of a company and it includes stock [Sec
2 (84)]. Under Sec 44 of the Act shares are to be regarded as movable property. Thus a share
is a right to a specified amount of the share capital of a company.

There are two main types of shares which are Preference Shares and Equity or Ordinary
shares.

Preference shares entitle the shareholder to a fixed rate of dividend and can be further
classified as under:
(1) Cumulative and Non-Cumulative Preference Shares based on whether the arrears of
dividends would be accumulated or not.
(2) Participating and Non-Participating Preference Shares depending on whether or not the
shareholder will be entitled to a share in the surplus after all dividends have been paid.
(3) Redeemable and Irredeemable depending on whether the shares would be redeemed or
not. However, under Companies Act, 2013 irredeemable shares are no longer permitted to
be issued.
Equity shares can be issued through a public issue or as seat equity shares to employees and
directors or as bonus shares to existing shareholders.
 80

158) Write a short note on Participating and Non Participating Preference Shares

Ans:
After the preference shareholders receive their fixed dividend and the equity shareholders
have also been paid, there may be some surplus profits left for distribution. Similarly when a
company is wound up after paying both the equity and preference shareholders there may
be a surplus. If the preference shareholders are entitled to a share in such surplus profits,
the preference shares are called participating preference shares. If they are not so entitled,
the shares are referred to as non-participating preference shares.
If, however, nothing is said about such preference shares are presumed to be non-
participating as brought out in Will v. United Lanket Plantations Co. Ltd. [(1912) 2 Ch. D.
571].

159) Discuss the provisions regarding purchase of its own shares by a company

Covered in Qs. 88 on page 37

160) What is DIN (Director Identification Number)

Ans:
DIN is an unique Director Identification Number allotted by the Central Government to any
person intending to be a Director or an existing director of a company.

It is an 8-digit unique identification number that has lifetime validity. Through DIN, details of
the directors are maintained in a database.

DIN is specific to a person, which means even if he is a director in two or more companies,
he has to obtain only one DIN. And if he leaves a company and joins some other, the same
DIN would work in the other company as well.

Whenever a return, an application or any information related to a company is submitted

under any law, the director signing such return, application or information is require to
mention his DIN below the signature.

161) Who is a Nominee Director

Ans:
A nominee director is an individual nominated by an institution, including banks and financial
institutions, on the board of companies where such institutions have some ‘interest’. The ‘interest’
can either be in form of financial assistance such as loans or investment into shares. Such strategic
investment may have a direct bearing on the profitability of a nominator and therefore, the
appointment of nominee director becomes essential to facilitate monitoring of the operations and
business of the investee company. As per Section 161(3) and the Explanation of Section 149(7)[1], a
Nominee Director is nominated by any financial institution in pursuance of the provisions of any law
for the time being in force or of any agreement, or appointed by Central Government or State
Government, or any other person to represent its interest.
 81

The primary purpose of the Appointment of Nominee Director is to represent the interest of
Nominator and safeguard the interest of Nominator. A Nominee Director monitors the activities,
operations and development in the investee Company.

162) What shall be the Quorum of meetings of Board

Ans:
Under Section 174 (1) of the Act, the quorum for a board meeting must be 1/3rd of the total
number of directors or 2 directors whichever is the higher number. Participation of the
directors by video conferencing or by other audio-visual means shall also be counted for the
purposes of quorum under this sub-section. Any fraction of a number shall be rounded off
as one. The total strength shall not include directors whose places are vacant.

If, for want of a quorum, a meeting of the Board could not be held then, unless the articles
of the company otherwise provide, the meeting shall automatically stand adjourned to the
same day at the same time and place in the next week or if that day is a national holiday, till
the next succeeding day, which is not a national holiday.

163) What is Investor Education and Protection Fund

Ans:
Investor Education and Protection Fund (IEPF) has been established under provision of the
Companies Act, 2013.

The amounts such as dividends, applications money, matured deposits etc, which have remained
unpaid or unclaimed for a period of 7 years are required to be transferred to the IEPF.

The Amounts credited to IEPF are maintained under the Consolidated Fund of India (Article 266 of
the Constitution).

The fund is utilized for promoting investor awareness and protection of investor interests.

The Fund is also utilised for distribution of any disgorged amount among eligible applicants for
shares or debentures, shareholders, debenture-holders or depositors who have suffered losses due
to wrong actions by any person, in accordance with the orders made by the Court.

For administration of Investor Education and Protection Fund, the Government of India in 2016,
established Investor Education and Protection Fund Authority under the provisions of section 125 of
the Companies Act, 2013. The Authority is under the Ministry of Corporate Affairs.
 82

164) Write a short note on Auditor

Ans:
The role of an auditor in a company is to help the business maintain its financial reliability by
reviewing and verifying its financial documents. Under Section 143 of the Companies Act,
2013, and Auditor’s duties include the following:
(1) Preparation of the audit report which serves as an appraisal of the company’s financial
position.
(2) Provide an accurate opinion, including negative opinion where warranted, at all times
(3) Make inquiries, as necessary, regarding loans, advances, personal expenses charged to
the revenue account and deposits made.
(4) Assist in branch audits
(5) Comply with auditing standards
(6) Report fraud
(7) Adhere to the Code of Professional Conduct and Ethics
(8) Assist investigations

The first auditor is appointed by the Board of Directors by passing a Board Resolution within
a period of 30 Days from the date of incorporation of the company The Subsequent Auditor
shall be appointed at the first AGM by the shareholders of the company by passing an
Ordinary Resolution and such auditor shall hold office for next 5 years.

An Auditor can be appointed for 5 years and can be reappointed for another period of 5 years after
which there is a compulsory cooling period of 5 years.

165) Who can be appointed as an Auditor

Ans:
Under Sec 141 (1) of the Companies Act, 2013, a person shall be eligible for appointment as
an auditor of a company only if he is a chartered accountant. A firm in which the majority of
partners are practising Chartered Accountants in India) are also eligible for appointment as
auditor subject to the proviso that only those partners who are Chartered Accountants shall
be authorised to act and sign on behalf of the firm.

Section 141 (3) lays down who all are not eligible for appointment as auditor and the list
includes:
(1) a body corporate other than a limited liability partnership
(2) an officer or employee of the company
(3) a person who is a partner, or who is in the employment, of an officer or employee of the
company
(4) a person who has security interest, or is indebted to or has given a guarantee for the
company
(5) a person having business relationship with company
(6) a person related to a director or key managerial personnel of the company
(7) person who has been convicted for fraud in within last ten years
 83

166) Explain crystallization of a floating charge

Ans:
The conversion of Floating Charge to Fixed Charge is referred to as crystallization. Once a
Floating Charge gets converted to a Fixed Charge, the underlying assets can neither be sold
nor used by the company in its business operations.

A floating charge is created on assets which are involved in the ordinary course of business
that is dynamic in nature. As these assets are not ‘fixed’ in nature, they are known as
floating charges.
However, in certain circumstances the floating charges can get converted into a fixed
charge. Such circumstances are as under:
(1) When the company is unable to pay its debts
(2) When the company is being wound up
(3) When the creditors initiate action to recover unpaid debts.

167) Explain the doctrine of supremacy of majority with relevant case laws and exceptions
to the same

Covered in Qs. 113 on page 48

168) Write a short note on Inspection and Inquiry

Ans:
Investigation, Inquiry and Inspection are defined in Chapter XIV of the Companies Act, 2013 under
Sections 206 to 229 where the main objective of the Central Government was to protect the interest
of Shareholders.

Power to investigate, inspect and inquire is vested in Section 206 of the Companies Act where on
scrutiny of any document filed by any company or information received by Registrar he is of the
opinion that further information or explanation of documents relating to the Company is necessary
he may by written notice require the company

(a) to furnish in writing such information or explanation or

(b) to produce such documents, within such reasonable time as may be specified in the notice

If, within the time specified, no information or explanation is furnished or if the information or
explanation is inadequate, the Registrar can call on the company to produce for his inspection
further books of account, books, papers and explanations.
 84

If the Registrar is satisfied that the business of a company is being carried on for a fraudulent or
unlawful purpose or not in compliance with the provisions of this Act or if the grievances of investors
are not being addressed, he can call on the company to furnish any information or explanation and
carry out such inquiry as he deems fit. If the Central Government is satisfied that the circumstances
so warrant, direct the Registrar or an inspector appointed by it to carry out an inquiry and if the
business is being carried on for a fraudulent or unlawful purpose, every officer of the company who
is in default shall be punishable for fraud in the manner as provided in section 447.

Section 207 (3) vests the Registrar or Inspector with the powers of a Civil court under the Code of
Civil Procedure while trying a suit in respect of the following:

(a) the discovery and production of books of account and other documents

(b) summoning and enforcing the attendance of persons and examining them on oath

(c) inspection of books, registers and other documents of the company

The Registrar or Inspector, as the case may be is required to submit a report of the inquiry or
inspection conducted under Sections 206 & 207. The Registrar or Inspector is always vetsed with the
powers of search and seizure.

Under Section 210, if the Central Government is of the opinion, that it is necessary to investigate
into the affairs of a company or when an order is passed by a Court or Tribunal, it may order an
investigation and may appoint one or more persons as inspectors to investigate into the affairs of
the company and to report thereon.

Under Section 212, the Central Government can even assign the investigation to the Serious Frauds
Investigation Office.

169) Explain the process of winding up of companies under companies act 2013

Covered in Qs. 17 on pages 7-8

170) What is Export under FEMA

Ans:
In terms of Section 2 (l) of FEMA 1999, export is defined as:
(i) the taking out of India to a place outside India any goods and/or
(ii) provision of services from India to any person outside India

The regulations of RBI provide further granularity by defining export to include the taking or
sending out of goods by land, sea or air, on consignment or by way of sale, lease, hire-
purchase, or under any other arrangement, and in the case of software, also includes
transmission through any electronic media.
 85

171) What is Foreign Security

Ans:
As per Section 2 (o) of FEMA, 1999 “foreign security” means any security, in the form of shares,
stocks, bonds, debentures or any other instrument denominated or expressed in foreign currency
and includes securities expressed in foreign currency, but where redemption or any form of return
such as interest or dividends is payable in Indian currency.

172) Define person resident in India

Ans:
In terms of Sec 2 (v) of FEMA, 1999, a person resident in India means:

(1) A person residing in India for more than 182 days during the course of the preceding
financial year. However, it does not include a person who has gone out of India or who stays
outside India –

(i) For or on taking up employment outside India, or

(ii) For carrying on outside India a business or vocation outside India, or

(iii) For any other purpose, in such circumstances as would indicate his intention to
stay outside India for an uncertain period

(2) Any person or body corporate registered or incorporated in India

(3) An office, branch or agency in India owned or controlled by a person resident outside
India.

(4) An office, branch or agency outside India owned or controlled by a person resident in
India.

173) What is Repatriation of Foreign Exchange

Covered Qs. 11 on page 47