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BCOC-135: Company Law

BCOC-135: Company Law

IGNOU Solved Assignment Solution for 2021-22

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Assignment Solution

Assignment Code: BCOC–135/TMA/2021-22

Course Code: BCOC–135

Assignment Name: Company Law

Year: 2021-2022

Verification Status: Verified by Professor

 

Note: Attempt all the questions.

 


Section – A

 


Q1) What is an illegal association? What are its consequences? (5+5)

Ans) No association or partnership of more than 50 persons shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof, unless it is registered as a company under this Act or is formed under any other law for the time being in force, according to Section 464 of the Companies Act, 2013 and Rule 10 of the Companies (Miscellaneous) Rules, 2014. As a result, if such an association is created without being registered under the Companies Act or any other law, it will be regarded as a 'Illegal Association,' notwithstanding the fact that none of the objects for which it was founded are illegal.

 

Exceptions

A Hindu undivided family (HUF) conducting any business, that is, a joint Hindu family, may conduct any business, even for profit, with any number of members without being registered or formed in accordance with any Indian laws as required by Section 464 of the Act, and it will not be an illegal association. When two Hindu families join forces to run a business, however, the provisions of Section 464 apply. Minor members must, however, be eliminated when calculating the number of members of such an association. When it comes to adult members, both male and female members must be taken into account.

 

If it is founded by professionals who are governed by particular Acts, it is referred to as an association or partnership.

 

Consequences

Following are the effects of an association being illegal:

  1.  

  2. Every member of such an organisation or partnership that does business is subject to a fine of up to one lakh rupees.

  3. All liabilities incurred in the business are personally responsible to each member.

  4. Such an organisation is unable to enter into any contracts.

  5. An association like this cannot sue any of its members or anybody else, even if the association is later incorporated as a corporation.

  6. Because it cannot contract any debt, it cannot be sued by a member or an outsider for any debts owed to him.

  7. Even under the provisions relating to the winding-up of unregistered corporations, it cannot be wound up.

  8. Can a member of an illegal association sue for partition, dissolution, or accounts? In the case of Mewa Ram v. Ram Gopal, the question was addressed before the Allahabad High Court. It was held that if an association was illegal and the business had been carried on for a number of years, none of its members could sue for partition because partition would entail realising the company's assets and paying its debts, which are the same things that would be done in a suit for dissolution of partnership or winding-up of a company.

  9. While an unregistered business can be closed down, an illegal association cannot be closed down because the law does not recognise its existence.

  10. An illegal association's illegality cannot be remedied by reducing the number of its members.

  11. The gains made by an illegal association, on the other hand, are subject to income tax assessment.

 

Q2) Define a private company. State its privileges and exemptions. (2+8)

Ans) In contrast to a publicly traded company, a private limited company is any sort of corporate entity with "private" ownership that is utilised in various countries, with certain changes from country to country. The advantage of forming a private limited corporation is that liability is limited. Shares, on the other hand, can only be sold to other shareholders in the corporation, making it impossible to liquidate.

 

A private firm has the following benefits and exemptions:

 

A private business can be formed with a minimum of two members (as opposed to seven in the case of a public company) [Section 3].

 

Minimum Number of Directors: A private corporation can have no more than two directors; however a public company must have at least three [Section 149].

 

Quorum for General Meetings: In the case of a private company, the quorum required for the general meeting of the shareholders is 2 members personally present as opposed to 5, 15, or 30 members personally present depending on the number of members as of the meeting date being up to 1000, 5000, or more than 5000; in the case of a public company, the quorum required for the general meeting of the shareholders is 2 members personally present as opposed to 5, 15, or 30 members personally present depending on the number of members as of (Section 103).

 

Managerial Salary: A private firm is free from the rules of section 197, which sets an overall limit of 11% of net earnings for managerial remuneration. As a result, a private corporation may pay its executives a bigger share of profits or in any other way it sees fit [Section 197]. Non-rotational directors are allowed to serve on a private company's board of directors [Section 152].

 

Filling Casual Vacancies: A private corporation is exempt from the regulations relating to the way of filling casual vacancies among directors and the duration of the term of office of those thus appointed [Section 161].

 

Specific Disqualifications for Director Appointment: A private company's articles of association may include special disqualifications for director appointment in addition to those set forth in sections 164 (1) and (2) [Section 164 (3)].

 

Number of Directorships: No person can be a director of more than 10 public businesses, but he can be a director of up to 20 private firms [Section 165], as long as none of those companies is a public company, a holding company, or a subsidiary of a public company.

Section 149 exempts a private business from the necessity of appointing independent directors.

The formation of an audit committee of the Board of Directors is not required for a private corporation [Section 177].

 

Types of Shares: According to MCA Notification of 5.6.2015, a private company may issue shares other than equity or preference shares if so, provided in its Memorandum or Articles of Association.

 

Rights Issue: A private firm may close its rights issue offer before the required time of 15 days in the case of a rights issue under section 62. To put it another way, it is not required to keep its rights issue available for a minimum of 15 days. - See MCA. The date of the notification is 5.6.2015.

 

ESOPs: A private firm may pass an ordinary resolution rather than a special resolution to issue shares to its employees under an Employee Stock Option Scheme - see MCA. The date of the notification is 5.6.2015.

 

Loan for Acquisition of Own Securities: If the following conditions are met, a private corporation may grant loans for the purchase of its own securities:

  1. No other body corporate should have invested any money.

  2. Borrowing from banks, FIIs or bodies corporate should be less than double of its paid-up capital or Rs. 50 crores, whichever is lower.

  3. The private company should not have defaulted in repayment of borrowings as may be existing on the date of the transaction.

 

Exemption from Filing Board Resolutions: A private company has been exempted from filing resolutions of the Board of directors with the Registrar of Companies.

 

Participation of Interested Director in Board Meeting: Under section 184, an interested director of a private company can participate in the Board meeting after declaring his interest.

 

Q3) Explain and illustrate doctrine of indoor management. What are the exceptions to this rule? (2+8)

Ans) For corporate transactions, the concept of constructive notice proved too inconvenient, especially where the company's directors or other officials were permitted by the articles to exercise specific powers subject only to certain previous approvals or punishments from the shareholders. It was impossible to tell if those sanctions and permissions had been achieved or not since investors, suppliers, creditors, and other outsiders were afraid to ask the directors pointed questions about whether those sanctions had been received or to provide the required resolutions.

 

Naturally, if you want to buy a 'bond' or 'debenture' issued by a firm, you won't require the company's directors to provide a shareholders' resolution authorising them to issue such bonds before you subscribe. Similarly, you will not ask a director for a power of attorney or other necessary paperwork authorising him to make purchases on behalf of the firm if he approaches you to buy certain things worth a few thousands of rupees.

 

And if you do, you may lose a valuable customer for good. Because there is no way of knowing whether necessary sanctions and approvals have been obtained before a particular officer exercises powers that, according to the articles, can only be exercised with certain approvals, those dealing with the company can assume that if the directors or other officers are engaging in those transactions, they have obtained the necessary sanctions. The 'doctrine of indoor management,' as it is known, was originally established in the case of Royal British Bank vs. Turquand.

 

Exceptions to the Doctrine of Indoor Management

However, the aforementioned 'doctrine of indoor management' is subject to some exclusions based on specific instances. In other words, an outsider engaging with the corporation cannot obtain relief on the basis of "indoor management" in the following circumstances:

 

Where the Outsider had Knowledge of Irregularity: The regulation does not protect someone who is aware, either explicitly or implicitly, that the person operating on behalf of the corporation lacks authority. Thus, a person who conducts a transaction despite knowing that the directors do not have the right to do so cannot claim protection under the rule of indoor management.

 

The articles of a corporation permitted the directors to borrow up to one thousand pounds only in Howard vs. Patent Ivory Co. They may, however, exceed the maximum of £1000 with the approval of the company's Articles of Association Principal Documents general meeting. They borrowed 3,500 pounds from one of the directors who took debentures without obtaining such consent.

 

The business declined to pay the money. The debentures were only good to the extent of a thousand pounds since the director was aware of the internal irregularity or was considered to be aware of it. As a result, the corporation was only responsible to them for £1,000 in damages.

 

No Knowledge of Articles: The rule cannot be applied to someone who did not consult the memorandum and articles and so did not depend on them. T was a director of the investment company in Rama Corporation vs. Proved Tin & General Investment Co. He signed a contract with the Rama Corporation and received a check from it, claiming to be acting on behalf of the corporation. The articles of incorporation did state that one of the directors could assign his or her duties to another. The people at Rama Corporation, on the other hand, had never read the articles. Later, it was discovered that the company's directors had not delegated their authority to T. The plaintiff relied on the indoor management rule. They couldn't, because they didn't even realise power could be delegated.

 

Forgery: The rule of indoor management does not apply to transactions that are void or illegal from the start, such as counterfeiting. When it comes to forgeries, there isn't only a lack of free consent; there is no consent at all. Because the person whose signatures have been forged is unaware of the transaction, the question of whether or not his permission is free does not arise. There is no transaction since there is no permission. As a result, the person's title isn't flawed; rather, there is no title at all.

 

As a result, no matter how brilliant the fake is, the person has no rights. The applicants were denied registration as members of the company after the secretary of the firm faked the signatures of two of the directors required under the articles on a share certificate and issued the certificate without permission. In Ruben vs. Great Fingal Consolidated, the certificate was declared null and void, and the certificate holder was barred from using the doctrine of indoor management.

 

Negligence: The 'doctrine of indoor management' does not reward irresponsible behaviour in any way. When an officer of a firm does anything that is not normally within his jurisdiction, the person dealing with him must make appropriate inquiries and assure himself of the officer's authority. He is barred from relying on the Rule if he fails to undertake an inquiry. An individual who was a sole director and primary shareholder of a firm put into his own account cheques written in favour of the company in Al Underwood vs. Bank of Liverpool. The bank should have inquired about the director's authority, the court held. The bank was under investigation and hence could not rely on the ostensible authority of the director.

 

In B. Anand Behari Lal vs. Dinshaw & Co. (Bankers) Ltd., a company's accountant transferred some of the company's property to Anand Behari. The transfer was declared void in response to an action brought by him for breach of contract. It was pointed out that an accountant's apparent authority did not include the ability to transfer the company's immovable property.

 

Others: Doctrine is also inapplicable non situations where a pre-condition must be met before a firm can exercise a certain power. In other words, in Pacific Coast Coal Mines vs. Arbuthnot, the act was not only ultra vires the directors/officers, but it was also ultra vires the corporation itself.

 

Q4) Who can be a director? State the modes of appointment of directors. (2+8)

Ans) Any person who is legally capable of contracting and has obtained a DIN may be appointed as a director of the firm. The following topics may be discussed in relation to the appointment of a director:

Appointment of First Directors (Section 152): The first directors are usually appointed by name or in the way specified in the articles. When the articles of incorporation do not allow for the appointment of first directors, the individual subscribers to the memorandum are regarded to be the company's first directors until the directors are officially constituted. A member of a One Person Company is presumed to be the company's initial director until the member duly appoints the director or directors in line with the provisions of this section.

 

By Shareholders in General Meeting: Except if the Act allows otherwise, every director must be appointed by the company in general meeting, according to section 152(2). In the event of a public business, rotating directors must account for at least two-thirds of the total number of directors*. The remaining directors shall also be appointed by the company in general meeting, unless the articles of incorporation provide otherwise. In the event of a private firm, the appointment of directors - If the articles of a private business are silent on the appointment of directors or do not specifically provide for appointment of directors other than at a general meeting, the shareholders must appoint the directors in a general meeting. - In the matter of Swapan Das Gupta v. Navin Chand Suchanti, the Calcutta High Court.

 

Manner of Rotation: One-third of the rotational directors, or the number closest to one-third, shall retire from office at the first annual general meeting of a public company held following the date of the general meeting at which the first directors are appointed, and at each succeeding annual general meeting. At each annual general meeting, the directors who have served the longest in office since their last appointment will retire via rotation. Individuals who became directors on the same day may retire if they reach an agreement. If no such agreement exists, the outcome will be decided by a random drawing of lots. The firm may replace the vacancy at the annual general meeting at which a director retires as mentioned by appointing the retiring director or another person to the position.

 

Appointment of a Director Other than a Retiring Director [Sec. 160]: The procedure for appointing a person other than a retiring director is outlined in Section 160 and Rule 13 of the Companies (Appointment and Qualification of Directors) Rules, 2014. If any person, other than the retiring director, wishes to stand for directorship or if any member proposes a person for directorship, he must notify the company 14 days before the general meeting of his intention to do so, and the company must notify the members at least seven days before the general meeting.

 

The following information must be provided:

  1. Individual notices are served on members in two ways: electronically to those who have submitted their email addresses to the company for communication purposes, and in writing to everyone else.

  2. By posting a notice of such candidacy or intention on the company's website, if one exists.

    However, if the company advertises such candidature or intention not less than seven days before the meeting in a vernacular newspaper in the principal vernacular language of the district in which the company's registered office is located, and circulating in that district, and at least once in an English newspaper circulating in that district, it will not be necessary for the company to serve individual notices to the members as aforesaid.

 

In addition, the candidate or member who intends to propose him as a director must deposit a sum of Rs. 1 lakh or such higher amount as may be prescribed, which will be refunded to such person or, as the case may be, to the member, if the person proposed is elected as a director or receives more than twenty-five percent of total valid votes cast on such resolution either by show of hands or by poll. Independent directors, directors recommended by the Nomination and Remuneration Committee, and directors approved by the Board of Directors are not required to make a deposit.

 

Individual Voting on Director Appointments: Section 162 specifies the method of voting on director appointments. A move to appoint two or more people as directors by a single resolution cannot be made at a company's general meeting unless a resolution to that effect is passed unanimously first. A motion for approving a person for appointment or proposing a person for appointment as a director is treated as a motion for his appointment under Subsection (3).

 

By Board of Directors: The Board of directors may also appoint directors in the following cases:

 

i) Additional Directors (Section 161): Additional directors may be appointed by the Board of Directors if the Articles allow it. However, it is important to ensure that the overall number of directors, including the additional director, does not exceed the Articles' maximum number. Such an additional director may only serve until the following annual general meeting, or until the last day on which the annual general meeting should have been conducted, whichever comes first.

 

ii) Alternate Director (Section 161): A business's Board of Directors may designate an alternate director to act for a director during his absence from India for a period of not less than three months if so, authorised by its articles or by a resolution passed by the company in general meeting. A person who holds an alternate directorship for another director in the firm, on the other hand, will not be selected. No one may be chosen as an alternate director for an independent director unless he or she is eligible to be an independent director under the requirements of this Act.

 

iii) Director Against a Casual Vacancy (Section 161): If the position of any director becomes vacant for whatever reason before the end of his term of office, the Board of Directors may fill the vacancy at its meeting pursuant to the Articles' provisions. Death, resignation, insanity, insolvency, and other factors can result in a vacancy. The person nominated by the Board to fill the casual vacancy shall serve only until the date on which the director in whose stead he is appointed would have served.

 

iv) Nominee Directors: The Board may appoint any person as a director nominated by any institution in accordance with the provisions of any law currently in force or of any agreement, or by the Central Government or the State Government by virtue of its shareholding in a Government company, subject to the company's articles.

 

Appointment of Resident Director: The Companies Act of 2013 established the idea of resident director for the first time. Section 149, sub-section (3), states that every firm must have at least one director who has spent at least one hundred and eighty-two days in India during the previous calendar year.

 

Appointment of Independent Director: Section 149, paragraph (4), requires that at least one-third of the total number of directors be independent directors, and the Central Government may prescribe the minimum number of independent directors for any class or classes of public companies. An independent director is not a managing director, a full-time director, or a nominee director.

 

Q5) Who can be appointed as an auditor of a company? What are the disqualifications of an auditor? (7+3)

Ans) The requirements and disqualifications for the appointment of an auditor are outlined in Section 141(1) of the act.

 

  1. Only Chartered Accountants, who hold a valid certificate of practise under the Chartered Accountants Act, 1949, are eligible for appointment or reappointment as auditors, often known as statutory auditors. (Section 141(1))

  2. Only the partners who are Chartered Accountants are entitled to act and sign on behalf of the firm when a firm, including a limited liability partnership, is appointed as an auditor or reappointed.

 

The following persons/entities cannot be appointed as an auditor of a company:

  1. A legal entity that is not a limited liability partnership as defined by the Limited Liability Partnership Act of 2008.

  2. The company's officer or employee.

  3. A person who is a partner or who is employed by the company as an official or employee.

  4. A person, a relative, or a partner who:

  5. Is a security or interest in the company, a subsidiary, a holding or associate company, or a subsidiary of such a holding company held? The relative may, however, retain a security or interest in the company with a face value of one thousand rupees or such other amount as may be prescribed.

  6. Is owed more than the sum prescribed by the corporation, its subsidiary, its holding or associate company, or a subsidiary of such holding company; or

  7. Has given a guarantee or supplied any security in connection with any third-party debt owed to the company, its subsidiary, its holding or associate company, or a subsidiary of such holding company in the amount prescribed.

  8. A person or a firm that has a business relationship with the company, its subsidiary, its holding or associate company, or a subsidiary of such holding or associate company of such character as may be prescribed, whether directly or indirectly.

  9. A relative who is a director or who works for the company as a director or senior managerial employee.

  10. A person who is employed full-time elsewhere or a person or a partner of a firm who is the firm's auditor. If such person or partner is an auditor for more than twenty companies at the time of such appointment or reappointment.

  11. A person who has been convicted of a fraud-related offence and has not served a ten-year sentence.

  12. A person who, directly or indirectly, provides the company or a subsidiary company with any banned service.

 

Disqualification due to Fraudulent Acts

The Tribunal is satisfied that the auditor, directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by or in relation to the Company, or the directors or officers direct the company to change the auditors, either Suo Motu (on its own) or on an application by the Central Government or by any person concerned. The Tribunal may direct, and the Central Government may appoint any other Auditor, within fifteen days after receiving an application from the Central Government. For a period of five years following the date of the final order, an auditor against whom a final order has been issued is ineligible to be appointed as an auditor of any corporation. He will be prosecuted for the crime of fraud.

 

Disqualification due to Professional Misconduct

The National Financial Reporting Authority (NFRA) has the authority to bar a member or firm from being appointed as an auditor or internal auditor for undertaking any audit of financial statements, internal audit of functions or activities of any company or body corporate, or performing any valuation as provided under Section 247 in the event of professional or other misconduct. The prohibition would last at least six months but might last up to ten years [(Section 132(4)].



Section – B

 


Q6) What books of accounts are to be kept by a company? (2+4)

Ans) The Books of Account include record maintained with respect to:

  1. The total amount of money received and spent by the company, as well as the items for which receipts and expenditures are made.

  2. The company's sales and purchases of items.

  3. The company's assets and liabilities.

  4. Section 2(13) specifies the cost components that may be required.

 

Every company must prepare and keep at its registered office books of account and other relevant books and papers, as well as financial statements, for each financial year that give a true and fair view of the company's state of affairs, including that of its branch office or offices, if any, and explain transactions effected both at the registered office and at its branches, and such books must be kept on an accrual basis and using the double entry system of accounting.

 

Unless the Board of Directors decides otherwise, the books of account should be retained at the company's registered office. In this scenario, the company must notify the Registrar in writing of the full address of the alternative location within seven days. The branch office must send proper summarised returns to the Head Office or other designated location.

 

The Company may keep electronic books of account and other necessary documentation. (Section 128 of the Code of Federal Regulations) (1). Proper books of account are those books of account that are required to display and explain transactions and the financial situation of the company's business. Cost Accounting records and stock records are also part of the right books of account. Companies engaged in the manufacturing of such goods or performing such services, as may be prescribed, may be required by the Central Government to keep detailed cost records, including the use of material, labour, and other cost elements.

 

Q7) Under what circumstances a company can be wound up. (6)

Ans) Winding up by the Tribunal: Winding up may be ordered by the Tribunal in following cases, which are grounds for compulsory winding up:

  1. If a firm has decided to be wound up by the Tribunal through a special resolution.

  2. If the company's actions have been detrimental to India's sovereignty and integrity, the state's security, friendly ties with foreign countries, public order, decency, or morality.

  3. If the Tribunal finds, on an application made by the Registrar or any other person authorised by the Central Government by notification under the Act, that the affairs have been conducted fraudulently, or that the Company was formed for fraudulent and unlawful purposes, or that the persons involved in the formation or management of its affairs have been guilty of fraud, misfeasance, or misconduct in connection therewith, and that it is proper that the company be wound up,

  4. If the company has failed to file its financial statements or annual reports with the Registrar for the last five financial years in a row.

  5. If a firm is unable to pay its debts, it is said to be insolvent.

  6. If the Tribunal finds that winding up the firm is just and equitable, the company will be wound up (Section 271)

 

Winding Up by Special Resolution: The Tribunal may order the corporation to be wound up by a special resolution passed by the Company. The Tribunal must determine whether the resolution is in the company's best interests or is not in the public interest. The winding up may not be ordered if this is not the case. Even if a special resolution is not passed, the corporation might submit a petition for winding up with the Tribunal (Section 272). A firm that does not have its name on the register of companies is ineligible to file a winding-up petition.

 

Company Acting Against the Sovereignty and Integrity of India, Security of the State, the Friendly Relations with Foreign States, Public Order, Decency and Morality: If a firm is working against the interests of India's sovereignty and integrity, state security, cordial relations with foreign governments, public order, decency, and morality, the Central or State Governments may file a petition with the Tribunal on this basis. The Act does not define the terms 'decency' and 'morality.'

 

Affairs being Conducted in a Fraudulent or Unlawful Manner: On this basis, the Registrar or any other person authorised by the Central Government may apply to the Tribunal for winding up.

 

The Tribunal has the authority to order the winding up of a company for the following reasons:

  1. The company's affairs are being managed fraudulently; or the company was founded for a fraudulent or unlawful purpose.

  2. Those involved in the company's formation or management have committed fraud, misfeasance, or misconduct in connection therewith.

 

It should be emphasised that, in addition to the above provisions, the Central Government has the authority to submit a petition for winding up in the event of an inspector's report on an investigation.

 

Default in Filing Financial Statements or Annual Returns with to the Registrar

 

The corporation must submit two documents to the Registrar: financial statements and an annual return. If you have not filed these paperwork for the previous five financial years, you may be required to wind up your business. This provision cannot be used if the default period is two, three, or four years. Again, if the default is related to the non-filing of financial statements or annual returns, winding up may be required. It is not necessary for both financial statements and yearly returns to be set to default. The default must be for the five consecutive financial years immediately preceding the default. It means that failure to pay in the previous year is not a reason for the company to be wound up under the clause.

 

Inability to Pay its Debts

When a firm is unable to pay its debts, it is declared insolvent:

 

If a creditor to whom the company is owed an amount in excess of one lakh rupees has served on the company, by causing it to be delivered at its registered office, by registered post, or otherwise, a demand requiring the company to pay the amount due, and the company has failed to pay the sum within twenty-one days after receipt of such demand, or to provide adequate security, or to restructure or compound the debt to the reason, the company is in default.

 

If any execution or other procedure issued in response to a decree or order of a court or tribunal in the company's favour is returned unsatisfied in whole or in part; or

 

If it is proven to the satisfaction of the Tribunal that the company is unable to pay its debts, the Tribunal must consider the firm's contingent and prospective liabilities in assessing whether the company is unable to pay its debts.

 

Just and Equitable

The Act contains no definitions for these terms. According to A. Ramaiya, the power under this provision should be used only "where there is a strong base" since "businesses should be entrusted to self-governance and self-determination as much as feasible through the views of the majority of shareholders." If there is another remedy available, the Tribunal should not impose an order for winding up on this reason. It's a last-ditch solution.

 

The following grounds, based on leading cases, have been held as “Just and Equitable”:

 

Loss of Substratum: It means that the company's sole purpose or main objectives, for example, it fails to obtain a patent for an invention on the assumption that it will be granted, or it fails to acquire the business for which the company was formed, or it fails to construct a building on the grounds that the local authority did not grant permission. The Court established the following standard to evaluate whether the company's substratum had vanished:

  1. Where the company's subject matter has vanished; or the object for which it was incorporated has substantially failed.

  2. It is impossible to carry on the company's business except at a loss, implying that there is no reasonable hope of achieving the company's goal of making a profit.

  3. The company's existing or probable assets are insufficient to meet the company's existing liabilities.

 

Illegality of Objects and Fraud: If a corporation's objectives are illegal or become illegal as a result of a change in the law, the company will be closed down by the Tribunal. The Tribunal will also close a company if it is marketed in order to commit a major fraud or deceit on the people who are encouraged to subscribe for its shares.

 

Deadlock in Management: If there are just two members of a private company's board of directors, and they are not on speaking terms. Despite the fact that the articles provide for one director to have a casting vote at board meetings and for disagreements to be resolved through arbitration, the Tribunal will issue a winding up order. If one of the three directors refuses to attend a meeting to form a quorum because of a loss of trust in the Board of Directors.

 

Bubble Company: If the company exists just on paper and has never conducted business.

 

Oppression: Where the majority shareholder has adopted an aggressive policy toward the minority under Section 241, a winding up petition may be filed. Furthermore, any member of a corporation may file a complaint alleging that the corporation's affairs have been or are being conducted in a manner that is harmful to the public interest or oppressive to him and other members. The Tribunal can order a winding up under section 242 (1b) on "just and equitable" grounds.

 

Other: If the number of members falls below the legal minimum, the company might be wound up on "just and equitable grounds." Similarly, if a corporation does not follow democratic ideals of fairness or lacks commercial morality, or if directors accuse each other, the Tribunal might order the company's winding up.

 

Q8) Discuss the Constitution powers of national company law tribunal. (2+4)

Ans) The powers of National Company Law Tribunal are as follows:

 

The Power as a Civil Court: On the following topics, the Tribunal will have the same powers as a civil court under the Code of Civil Procedure of 1908:

  1. Summoning and compel the attendance of any person, as well as questioning him under oath;

  2. Requiring records to be discovered and produced;

  3. Receiving affidavit evidence;

  4. Requisitioning any public record, document, or a copy of such record or document from any office, subject to the provisions of sections 123 and 124 of the Indian Evidence Act 1972;

  5. Issuing commissions for witness or document examination;

  6. Whether a representation is dismissed for default or decided ex parte;

  7. Section 424 applies to any other matter that may be regulated (2).

 

Execution of an Order: The Tribunal's orders may be enforced in the same way that a court's decree in a lawsuit.

 

Power to Punish for Contempt: Under the provisions of the Contempt of Court Act 1970, the Tribunal will have the same power and jurisdiction to penalise for contempt as the high court (Section 425).

 

Power to Seek Assistance of Chief Metropolitan Magistrate etc.: The Tribunal may request the assistance of a Chief Metropolitan Magistrate, Chief Judicial Magistrate, or other court for the purpose of seizing property, books of account, or other documents in any case relating to the winding up of a company or the rehabilitation of a sick company.

 

Q9) Explain the provisions of companies act 2013 relating to unpaid and unclaimed dividends. (6)

Ans) According to Section 124, if a company declares a dividend but does not pay or claim it within thirty days of the declaration to any shareholder entitled to payment of the dividend, the company must transfer the total amount of the unpaid or unclaimed dividend to a special account to be opened by the company in that behalf in any scheduled bank to be c within seven days of the date of expiry of the said thirty-day period.

 

Within ninety days after making any transfer to an unpaid dividend account, the company must compile a statement comprising names, their last known addresses, and the unpaid dividend to be paid to each person, and post it on the company's website, if one exists, or any other website.

 

If the corporation fails to transfer the complete amount, it must pay interest on the portion of the money that has not been transferred from the date of the default, at a rate of 12 percent per annum. Anyone wishing to receive a dividend must submit an application to the corporation. All money transferred to an unpaid dividend account that has been unpaid or unclaimed for seven years must be transferred to the Investor Education and Protection Fund established under section 125(1), which will be managed by the fund's administrating authority, which will issue a receipt to the company.

 

The corporation shall transfer all shares in the name of the aforementioned Fund that have not had a dividend paid or claimed for seven years or longer. Any claimant of the above-mentioned shares, on the other hand, shall be allowed to demand the transfer of shares from the Investor Educational Protection Fund in accordance with such procedure and on the submission of such documents as may be prescribed.

 

Penalty: If the company fails to comply with any of the provisions of this section, the company shall be fined not less than five lakh rupees but not more than twenty-five lakh rupees, and each officer of the company who is in default shall be fined not less than one lakh rupees but not more than five lakh rupees.

 

Q10) Distinguish between member and shareholder. (6)

Ans) In everyday speech, the terms 'member' and 'shareholder' are interchangeable. However, there is a legal distinction between the two. A shareholder is someone who owns or controls a company's stock, whereas a member is someone whose name is on the Register of Members. A person can be a member but not a shareholder in some situations, or a shareholder but not a member in others.

 

The following are the major points of distinction:

  1. There will be no shareholders in a company limited by guarantee with no share capital.

  2. When a person transfers his shares, he ceases to be the owner of those shares but remains a member of the company until the transferee's name is substituted.

  3. The legal representatives of a deceased member immediately become shareholders, but they do not become members until their names are put in the Register of Members.

  4. Even if he is no longer a shareholder, a person whose shares are forfeited or who has surrendered his shares to the business may be held accountable as a member to contribute to the company's assets if winding-up begins within twelve months of his ceasing to be a member.

 

Shareholders are people who own shares in a company, whereas members are those who make up the company as a legal entity and whose names are listed in the Register of Members.

 

 

Section – C

 


Q11) How is first auditor appointed? (5)

Ans) Within thirty days of the company's registration, the Board of Directors shall designate the first auditors. The first auditor/auditors will serve until the first annual general meeting concludes. If the Board does not select the first auditor, members must elect first auditors at an extraordinary general meeting.

 

According to section 139(1), the corporation appoints an auditor from the completion of the first annual general meeting until the sixth annual general meeting, and thereafter until the conclusion of each subsequent sixth meeting. If the annual general meeting is postponed, the auditor must stay until the postponed meeting is completed. At each annual general meeting, the item relating to such nomination will be put to the members for ratification. Members of the annual general meeting appoint the subsequent auditor/auditors by passing an ordinary resolution. The company has the right to fire the auditor before his or her term is over. Similarly, an auditor may leave from his position before the end of his term, but he must disclose his reasons explicitly.

 

A single person cannot serve as an auditor for more than twenty businesses. Only public and private firms with a paid-up capital of Rs. 100 crore or more are eligible for consideration. This counting excludes one-person enterprises, small businesses, and private companies with paid-up capital of less than Rs. 100 crore.

 

Q12) When can registrar refuse registration of a prospectus? (5)

Ans) Section 26 (7) states that the Registrar may not register a prospectus unless all of the requirements of Section 26 have been met and the prospectus is accompanied by the written consent of all of the persons identified in the prospectus.

 

The Registrar will refuse to register a prospectus if the following conditions are met:

  1. It isn't labelled with a date.

  2. It does not include matters, reports, or declarations that must be included.

  3. It includes statements or reports from specialists involved or interested in the company's establishment, promotion, or management.

  4. It includes a statement purportedly made by an expert that does not include a statement that he has provided his written consent to the issue of the prospectus and has not withdrawn that consent before the prospectus is sent to the Registrar for registration.

  5. Every individual identified as a director or proposed director of the company, or his lawfully authorised attorney, does not sign a copy given to the Registrar.

 

Q13) Write short note on issue of share at a premium. (5)

Ans) A corporation may issue securities at a premium if it can sell them for more than par value or face value, for example, Rs. 100 per share for Rs. 120, generating a premium of Rs. 20 per share. The Act contains no requirements or limits governing the premium issue of shares by a corporation. The Act does, however, place restrictions on how the premiums earned on securities might be used.

  1. To begin with, the premium cannot be considered profit and so cannot be issued as a dividend. The same can, however, be capitalised and distributed as bonus shares.

  2. Second, whether the premium is paid in cash or in kind, the amount of the premium must be recorded in a separate account known as the "security premium A/c."

  3. Third, the value of the share premium must be treated with the same reverence as the share capital.

 

The share premium can only be used for the following purposes, according to Section 52 (2):

  1. Members will receive fully paid bonus shares.

  2. The balance of the company's preliminary expenses is written off.

  3. Writing off any commissions paid, discounts granted, or expenditures spent when the corporation issues shares or debentures.

  4. Providing for the premium to be paid upon redemption of the company's redeemable preference shares or debentures.

  5. Under section 68, for the purchase of its own shares or other securities.

 

Company court cannot sanction a resolution to that effect unless the articles of association of the company authorise use of the share premium account for reasons other than those listed in section 78(2) [now section 53] - Hyderabad Industries Ltd., In re [2004] 53 SCL 376 (AP).

 

However, the Rajasthan High Court held in Mangalam Cement Ltd., In re [2008] 86 SCL 153 that a firm can use credit balance in a securities premium account to fulfil deferred tax due (Raj.).

 

No firm can be allowed to write off or adjust the loss against the share premium account unless and until the share capital is reduced and the share premium account is correspondingly reduced - Hyderabad Industries Ltd., In re [2004] 53 SCL 376 (AP).

In addition, the Court's consent or sanction is not required in this situation for the use of the share premium account for the purposes specified in section 78(2) [now section 53].

 

Q14) Explain the provisions of companies act 2013 with regard to proxy. (5)

Ans) The provisions of Proxies under Section 105 of the Companies Act, 2013 and Rule 19 of the Companies (Management and Administration) Rules, 2019 are explained in this article. The purpose of this article is to describe how Shareholders/Members can appoint a proxy. Right of Proxies, Limits on Appointment as a Proxies, Penalty for Violations of Proxies Provisions, Invitation to appoint Proxy, Proxy Forms, Inspection of Proxy Forms, and so on.

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