Q.No.1. Both the shareholders of the Private Company died in a car accident. Decide whether Company’s existence also comes to an end.
Sol.: The Company’s existence is not affected by the death of its shareholders, since the Company has separate legal entity. This is clearly established in Salomon Vs. Salomon & Co. Ltd, Lee Vs. Lee Air farming Ltd & Kandoli tea Co. Ltd. cases. Further the Company has having perpetual succession.
Q.No.2. In a private Company, after the death of Mr.X entire capital of the company is held by his son Y. Decide, whether Y can continue business of the co. with single shareholder.
Sol.: In such a situation, Y can continue to carry on the business of the Company but, in accordance with the provisions of Sec.45 of the Act, if the same position continues for more than six months, then y will become personally liable for all the liabilities of the Company contracted after six months from the date he becomes only shareholder.
Q.No.3. The number of members in a public Company became reduced to six on the 10th September, 1988, the Company incurs trade debts on 11th September, 1988, 2nd February, 1989 and 17th March, 1989. How far are the remaining six members liable for the debts?
Sol.: The remaining six members are liable for the debts incurred after 6 months of the reduction in the number of members below the statutory minimum specified in Sec. 45 of the Companies Act, 1956 i.e., for debt contracted on 17th March, 1989.
Q.No.4. A public limited Company has only seven shareholders, all the shares being paid in full. All the shares of one such shareholder are sold by the court in an auction and purchased by another shareholder. The Company continues to carry on its business thereafter. Discuss the liabilities of the shareholders of the Company.
Sol.: The problem in question relates to reduction of membership below the statutory minimum. Section 12 of the Companies Act requires a public Company to have a minimum of seven members. If at any time the membership of a public Company falls below seven and it continues’ for more than six months, then according to Section 45 of the Companies Act, 1956, every such member who was aware of this fact, would be individually (personally) liable for the debts contracted after six months.
Thus, in the above problem the remaining members shall incur personal liability for the debts contracted by the Company:
a. If they continued to carry on the business of the Company with that reduced membership (i.e., 6) beyond six months period.
b. Only those members who knew this fact of reduced membership shall be liable, for instance, one of the members who was abroad and thus not aware of these developments, shall not be liable.
c. The liability shall extend only to the debts contracted after six months from the date of auction of that member’s shares.
Q.No.5. In a private limited Company it is discovered that there are, in fact, 54members. On an enquiry, it is ascertained that 6 of such members have been employees of the Company in the recent past and that they acquired their shares while they were still employees of the Company. Is it necessary to convert the Company into a public limited Company?
Sol.: As per Section 3(1)(iii), a Company to be registered as a private Company must restrict its membership to 50 only. But, however, in counting this number of 50 members, employee members and ex-employee members (i.e., those who become members while in the employment of the Company but now having retired still continue to retain membership) are to be excluded. Thus, in the given case, the Company shall continue to be a private Company. There is no need for conversion.
Q.No.6. BS & Co. Ltd. is registered as a Public Limited Company. The shareholding pattern of the Company is under.
| Category | |
| Directors & their relatives Employees Ex-employees (shares were allotted when they were employees) Six couples holding shares jointly in the names of husband and wife (6 x 2) Others Total: | 36 18 09 12 06 |
| 81 |
The Board of directors of the Company proposes to convert it into a private Company. Advise the Board of directors about the steps to be taken for its conversion into a private Company including reduction in the numbers of members, if necessary.
Sol.: A public limited Company may be converted into private limited Company only if the number of members is limited to 50 excluding Sec.3(1)(iii):
a. Persons who are in the employment of the Company
b. Persons who became members during the course of their employment & continue to be members even after their employment ceases.
c. Further if two or more members hold shares in a Company jointly they shall be treated as a single member.
The number of members is only 48 for this purpose as noted below:
| Directors and their relatives Joint holding treated as single Others | 36 6 6 |
| 48 |
Hence the Company can be converted into private limited Company.
Q.No.7. The paid up share capital of Advanced Castings Pvt. Ltd is Rs.1,00,00,000 consisting of 8,00,000 Equity shares of Rs.10 each fully paid up and 2,00,000 cumulative Preference shares of Rs.10 each fully paid up. Quality Forgings Pvt. Ltd. and Supreme Engineering Pvt. Ltd. are holding 3,00,000 Equity shares and 1,50,000 Equity shares respectively in Advanced Castings Pvt. Ltd. Quality Forgings Pvt. Ltd. and Supreme Engineering Pvt. Ltd are the subsidiaries of Unique Machineries Pvt. Ltd. Examine whether Advanced Castings Pvt. Ltd. is a subsidiary of Unique Machineries Pvt. Ltd. Will your answer be different, if Unique Machineries Pvt. Ltd. controls composition of Board of Directors of Advanced Casting Pvt. Ltd.?
Sol.: Holding & Subsidiary Co.’s. According to section 4 of the Companies Act, a Company (Assume S Ltd.) shall be deemed to be a subsidiary of another Company (Assume H Ltd.), if & only if:
1. Control on BOD. That the H Ltd. controls the composition of Board of directors of S Ltd. Or
2. Control by ownership.
a. Where S Ltd. is an existing Company in which the preference shareholders are having voting rights, H Ltd. controls more than half of the total voting power of S Ltd. (E + P)
b. Where S Ltd. is a newly formed Company, H Ltd. holds more than half in the nominal value of S Ltd. equity share capital (Only E) Or
3. Chain relation. If S Ltd. is a subsidiary of A Ltd. which is subsidiary of H Ltd., then the Company S Ltd. is subsidiary of H Ltd.
Further shares held by any person as a nominee for the Co. shall be treated as being held by the said
If Unique Machineries Pvt. Ltd. control the composition of the Board of Directors of Advance Castings Pvt. Ltd., it will also be treated as holding Company by virtue of Sec.4. Hence the answer will not be different.
Q.No.8. The paid-up share capital of XYZ (Private) Co. Limited is Rs.20 lakhs consisting of 2,00,000 Equity Shares of Rs.10 each fully paid up. ABC (Private) Limited and its subsidiary DEF (Private) Limited are holding 60,000 and 50,000 shares respectively in XYZ (Private) Co. Limited. Examine with reference to the provisions of the Companies Act, 1956, whether XYZ (Private) Limited is subsidiary of ABC (Private) Limited. Would your answer be difference if DEF (Private) Limited is holding 1,10,000 shares in XYZ (Private) Co. Limited and no shares are held by ABC (Private) Limited in XYZ (Private) Co. Limited?
Sol.: Write about Holding & Subsidiary Companies in the above Question.
Further shares held by any person as a nominee for the Company shall be treated as being held by the said Company. Thus, the shares held by a subsidiary shall be treated as held by the holding Company.
Here ABC Private Limited is holding 60,000 shares in XYZ Private Limited and 50,000 shares held by DEF private limited. Therefore, ABC Limited will be deemed to be holding 1,10,000 Equity shares in XYZ Limited i.e. more than half in nominal value of the Equity Share Capital of XYZ Private Ltd. Hence XYZ Private Limited is subsidiary of ABC Private Limited.
The answer will remain the same in the second case but holding-subsidiary relationship is established by virtue of Chain relationship i.e. a subsidiary of one Company’s subsidiary will also be considered as the subsidiary of the second mentioned Company.
Q.No.9. Due to oversight some of the share transfers were registered in the Company due to which the number of members in a private Company increased from 28 to 52. What is the effect of such transfers and what is the remedy available to the Company.
Sol.: In that case, since the number of shareholder’s has crossed 50, the Company will be named as public Company. However the NCLT, on being satisfied that the failure to comply with the conditions laid down by Sec.3 was accidental or un intentional and it is just and equitable to grant relief, may, on the application of the Company or any other person interested and on such conditions as seem to the NCLT reasonable, order that the Company be relieved from such consequences as aforesaid.
Q.No.10. On acceptance of deposits a private Company becomes a Public Company.
Sol.: False. A private Company becomes a public
Q.No.11. By obtaining the license from the Central Government under section 25 of the Act a Company shall dispense with the word “limited” or “private limited” from its name.
Sol.: False. Under section 25, it is not compulsory to dispense with the word Limited or a Private Limited, but it is only an optional at the wish of the Company. Because, the object of registration of a Company u/s 25 is not only to dispense the use of words Limited or Private Limited as a part of its name but to avail the exemption which may be granted to such Companies from the provisions of this Act by the Central Government.
Q.No.12. A firm can also become member of a Company which has been granted license under Section 25 of the Act.
Sol.: Yes, Sec.25 of the Companies Act permits a firm to be a member of any association or Company licensed under this section. Infact this is the only one case which permits the partnership firm to become a member of a Company.
Q.No.13. On revocation of License granted by the Central Government under section 25 the Company may continue to carry on the same Activities which were being carried on by it prior to such revocation.
Sol.: True. On revocation of license granted by the Central Government under Sec.25, the association or the Company may continue to carry on the same activities which were being carried on by it prior to such revocation. The impact of the revocation of license is:
a. The Company will have to add a word ‘Limited’ or ‘Private Limited’ at the end of its name.
b. It will cease to enjoy the exemptions granted by the Central Government to such Companies.
Q.No.14. Two joint Hindu families carry on a business as joint-owners. The first family consists of 3 brothers and their respective sons being 12 in number. The second family consists of the father, 4 major sons and 2 minor sons. Is the association illegal?
Sol.: Sec.11 of the Companies Act, 1956, provides that no firm, association or Company consisting of more than 20 persons for doing any business (10 in case of banking business) shall be formed unless it is registered as a Company under the Companies Act. An association formed in violation of the above provision of the Companies Act is termed as an illegal association and does not have any legal existence and recognition. However, in computing the aforesaid number of members, viz., 10 in case of a banking business and 20 in case of any other business, minor members of the families constituting the association are not taken into account. Accordingly, in the given problem, the first family consists of 15 members (3 brothers + 12 sons) and the second family that of 5 members (1 father + 4 sons and ignoring 2 minor sons). The total number of the members of the two families constituting the association thus comes to 20. The association is not an illegal Association.
Q.No.15. The Registrar of Companies issued a Certificate of Incorporation Actually on 8th January, 1999. However, by mistake, the certificate was dated “5th January, 1999”. An allotment of shares was made before the Company was incorporated?
Sol.: The allotment of shares is valid. Sec.35 of the Companies Act, 1956 provides that a certificate of incorporation issued by the Registrar in respect of any association shall be conclusive evidence of the fact that all the requirements of the Act have been compiled within respect of registration, and that the association is a Company authorised to be registered and duly registered under the Act.
Jubilee cotton mills ltd..
a. The registrar issued a certificate of incorporation on Jan 8th but dated it Jan 6th which was the date he received the documents.
b. On Jan 6th, the Company made an allotment of shares to Lewis.
Held, that the certificate was conclusive evidence of incorporation on Jan 6th and that the allotment was not void on the ground that it was made before the Company was incorporated.
Q.No.16. A Limited Company is formed with its articles stating that one Mr. Srivastava shall be the solicitor for the Company, and that he shall not be removed except on the ground of misconduct. Can the Company remove Mr. Srivastava from the position even though he is not guilty of misconduct?
Sol.: As between outsiders and the Company, Articles do not give any right to outsiders against the Company, even though their names might have been mentioned in the Articles. An outsider cannot take advantage of the Articles to form a claim thereon against the Company. Thus, in the given case, Company shall succeed in removing Mr.Srivastava as the solicitor of the Company without incurring any obligations.
Q.No.17. A Company, in which the directors hold majority of the shares, altered its articles so as to give power to directors to acquire shares of any shareholder, who competed with the Company’s business, to transfer his shares, at their full value, to any nominee of the directors. S had some shares in the Company, and he was in competition with the Company. Is S bound by the alteration?
Sol.: The power of the members to effect alteration in the Articles by passing special resolution is limited in as much as the alteration must be bonafide and in the interest of the Company. In the given case, alteration requires taking over the shares of only those who competed with the Company’s business. Therefore, empowering the directors to take over shares of such members seems to be in the general interest of the Company as a whole and hence shall be valid. S shall be held bound by the alteration.
Q.No.18. Advise Asiatic Government Security Life insurance Co. Ltd. Whether it can seek an injunction against ‘The New Asiatic Insurance Co. Ltd.’ Which was subsequently formed restraining it from having in its name the word ‘Asiatic’ on the ground that it has caused confusion and can deceive the public.
Sol.: The Companies Act, 1956 permits the promoters of a Company to choose any suitable name for the Company provided the name chosen is not undesirable.
A name may be considered undesirable where it is too similar to the name of an already existing Company. In the present problem since the two Companies are in insurance business, it may lead to a natural inference on the part of the public that the two are interrelated because of the word ‘Asiatic’ which is quite an imaginary word and does not mean anything. Mere addition of the word ‘New’ is not likely to give an otherwise impression. Therefore, on a suit by Asiatic Government Security Life Insurance Co. Ltd., Court is likely to advise the New Asiatic Insurance Co. Ltd. to change its name.
Q.No.19. The Articles of a Company provided that the shares of a member who became bankrupt would be offered for sale to other shareholders at a certain price. Is the provision binding on the shareholders?
Sol.: The facts of the given problem are based on the decided case of Bore land Trustee vs. Steel Bros. & Co. Ltd., in which case, the provisions in the Articles were held to binding on the members. It was held that ‘Shares having been purchased on these terms and conditions, it is impossible to say that those terms and conditions are not to be observed”. Thus, since Articles constitute a binding contract between the Company and its members, the shareholders shall be held bound by the stated provision in the Articles.
Q.No.20. The plaintiffs contracted with a director of the defendant Company and gave him a cheque under the contract. The Director could have been authorised under the Company’s articles, but was not in fact so authorized. The plaintiff had not seen the Articles. The Director misappropriated the cheque and the plaintiffs sued the
Sol.: The problem relates to the protection that the outsider may claim against lack of authority on the part of the officers of the Company. The rule commonly known as the Doctrine of Indoor Management was first laid down in the case of The Royal British Bank vs. Turquand. However, it has been held that the rule of indoor management cannot be invoked in favour of a person who had no knowledge of the Articles of the Company. It is because; in such a case the person cannot assume that the power (of which he has no knowledge) has been exercised.
Thus, in the present case, Company shall not be held liable by the Act of the director who has transacted beyond the scope of his authority. A principal can be held liable for the frauds of his agent only to extent they are committed within the scope of the authority conferred upon him.
Q.No.21. A Company issued a bond under its common seal signed by two Directors. The Articles provided that the directors might borrow on bond such sums as they should be authorized by an ordinary resolution of the Company. No such resolution was passed. Is the
Sol.: Yes. The Company is liable on the bond. The outsiders dealing with the Company are entitled to assume that as far as the internal proceedings of the Company are concerned, everything has been regularly done. They are bound to read the registered document and to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the Memorandum or Articles. (Royal British Bank vs. Turquand). The gist of the rule is that persons dealing with limited liability Companies are not bound to inquire into their indoor management and will not be affected by irregularities of which they had no notice. The rule is based on public convenience and justice.
Q.No.22. The Memorandum of Association of a Company was signed by two adult members and by a guardian of the other five minor members, the guardian signing separately for each minor member. The Registrar registered the Company and issued under his hand a certificate of incorporation. The plaintiff contended that
a. Conditions of registration were not duly complied with, and
b. That there were no seven subscribers to the Memorandum. Will the Court uphold his contention?
Sol.: The Certificate of incorporation is conclusive for all purposes. According to Section 35 of the Companies Act, 1956, a certificate of incorporation given by the Registrar in respect of any association shall be conclusive evidence that all the requirements of this Act have been complied with in respect of registration and matters incidental thereto, and therefore the association will be considered as a company duly registered under this Act.
Q.No.23. The authorised signatory of a
Sol.: According to the doctrine of Indoor management, persons dealing with the Company are presumed to have read the registered documents and to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more i.e. they need not enquire into the regularity of internal proceedings as required by M&A.
But, this rule cannot be applied to forgery. In the case of forgeries, the Acts done in the name of the Company are void abinitio. A
Ruban Vs. Great Fingual Ltd.:
¡ The plaintiff was the transferee of a share certificate issued by the defendant co. under its seal.
¡ The certificate was issued by the Company’s secretary, who affixed the seal and forged the signature of two directors.
¡ The certificate was held to be void.
Hence, it can be concluded that in the instant case, the certificate issued by the secretary by having forged the signatures of the directors and affixed the seal without any authority will not be binding upon the Company.
Q.No.24. ABC (Pvt.) Ltd. was incorporated in 10th June, 1996. A similar Company with identical name and same objects was also incorporated on 10th June1997. ABC (PVT.) Ltd. came to know about this and filed a petition on 10th January, 1998. Explain remedies available to the first
Sol.: If a Company is inadvertently registered with a name which in the opinion of the Central Government, is identical with or too nearly resembles, the name by which a Company in existence has been previously registered, the Company registered later (Sec.22):
a. May change its name, by ordinary resolution and with the previous approval of the Central Government Or
b. The change Shall also be carried out if a direction is received from the Regional director. When so directed by the Regional director the Company shall, by ordinary resolution and with the previous approval of the Central Government, change its name within a period of 3 months or the extended period.
In the given case ABC (Pvt.) Ltd. can complain to the Regional director to issue suitable directions to the Company incorporated on 10th June, 1997 for change of its name. In this case, the Company filed a petition on 10.1.1998 within 12 months of date of registration of second Company and so the complaint shall be accepted.
Q.No.25. Eight signatories to the memorandum out of total ten were subsequently found to be forged. The memorandum was presented for registration and of registration was issued. The existence of the Company was disputed that the registration of the Company is void. Decide?
Sol.: The Company’s registration cannot be void because, under Section 35 of the Act, a certificate of incorporation is a conclusive evidence of the fact that all the statutory requirements of the Act in relation to registration of the Company have been complied with.
Q.No.26. The registered office clause of the memorandum of association of A ltd. does not contained name of the city. Because of this registrar of Companies refused to registered the memorandum of association. Is it Correct?
Sol.: No., Sec.13 states that the registered office clause shall contain the name of the State in which the registered office of the Company is situated. Further, it may be noted that the address of the registered office is not stated in the memorandum of association. If this was done, every change there in would require the amendment of the memorandum, which is a difficult procedure. Therefore the address is stated in AOA.
Q.No.27. A Company filed a petition before the NCLT for shifting its registered office to another state. The S.G. objected against such shifting on the ground that it would adversely effect the government revenues and employment. Decide whether objection of the State Government is tenable.
Sol.: The objection of the State Government is not tenable. In Minerva Mills Ltd. Vs. Government of Maharashtra the court refused to accept the contention of the State on the ground of loss of revenue.
Q.No.28. It is not necessary to present a copy of Articles of Association to the Registrar of the Companies at the time of incorporation of the Public Company limited by shares.
Sol.: Sec.26 provides that the Companies limited by guarantee, private limited Companies, and unlimited Companies must have their own articles of association, while a public Company limited by shares may or may not have its own articles. Since in this case it is a public company limited by shares it is not necessary to present a copy of articles of association to ROC and in such a case Table A of Schedule I (Model articles) shall be deemed to be the Company’s articles.
Q.No.29. The promoters of your Company, incorporated on 9th April, 1996, had entered into a contract with M on 8th March, 1996 for supply of goods. After incorporation, your Company does not want to proceed with the contract. As a Company secretary, advise the management.
Sol.: Pre-incorporation contracts in general are void and hence not binding on the Company. However, as per the Specific Relief Act, 1963 the party to the contract can enforce the contract against the Company if: (i) the Company had adopted the same after incorporation; and (ii) the contract is warranted by the terms of incorporation. Thus, unless the Company adopts the contract, the other party cannot enforce the same against the
Q.No.30. Promoters made an application for registration of a Company in the name of MCN Association. At the time of application, another Company was already registered with the similar name but it was defunct for more than 10 year. Decide whether new Company can be registered in a name which is similar to any other existing Company’s name.
Sol.: A new Company cannot be registered with a name which is quite similar to any other existing Company’s name. But in the opinion of department of Company affairs it is possible if the exiting Company is a defunct Company (Non operational) for a long time.
Q.No.31. XYZ Co. Ltd. was in the process of incorporation. Promoters of the Company signed an agreement for the purchase of certain furniture for the Company and payment was to be made to the suppliers of furniture by the Company after incorporation. The Company was incorporated and the furniture was used by it. Shortly after incorporation, the Company went into liquidation and the debt could not be paid by the Company for the purchase of above furniture. As a result suppliers sued the promoters of the Company for the recovery of money. Examine whether promoters can be held liable for payment in the following cases:
a. When the Company has already adopted the contract after incorporation?
b. When the Company makes a fresh contract with the suppliers in terms of pre-incorporation contract?
Sol.: The promoters remain personally liable on a contract made on behalf of a Company which is not yet in existence. Such a contract is deemed to have been entered into personally by the promoters and they are liable to pay damages for failure to perform the promises made in the Company’s name, even though the contract expressly provided that only the Company shall be answerable for performance.
Further, a Company cannot ratify a contract entered into by the promoters on its behalf before its incorporation. The Company can, if it desires, enter into a new contract, after its incorporation with the other party. The contract may be on the same basis and terms as given in the pre-incorporation contract made by the promoters.
It is, therefore, safer for the promoters Acting on behalf of the Company about to be formed to provide in the contract that: (a) if the Company makes a fresh contract in terms of the pre-incorporation contract, the liability of the promoters shall come to an end; and (b) if the Company does not make a fresh contract within a limited time, either of the parties may rescind the contract.
Thus applying the above principles, the answers to the questions can be:
a. The promoters in the first case will be liable to the suppliers of furniture. There was no fresh contract entered into with the suppliers by the Company. Therefore, promoters continue to be held liable in this case for the reasons given above.
b. In the second case obviously the liability of promoters comes to an end provided the fresh contract was entered into on the same terms at that of pre-incorporation contract.
Q.No.32. X Co. Ltd, intended to buy a rubber in
Sol.: In the event of any mis-statement in a prospectus, the allottees have certain remedies against the Company as well as those responsible for the issue of the prospectus. Thus, in the present case, the allottee shall have the right to claim compensation from the Company for any loss that he might have sustained in terms of the value of shares. But, his claim against those responsible for issue of prospectus shall not succeed since they made the statement on the basis of the report of an expert whom they believed to be competent. However, expert can be proceeded against.
Q.No.33. X a furniture dealer, entered into a contract with the Company for furnishing the Company’s office before it could obtain certificate of commencement of business. Can X recover the price of the furniture?
Sol.: A contract made by a public Company after incorporation but before it is entitled to commence business is provisional only, and is not binding on the Company. But as soon as the certificate to commence business is obtained the contract becomes binding on the Company automatically. In this case, X can enforce the contract and recover the price of the furniture from the Company after it obtains the certificate of commencement of business.
Q.No.34. A applied for 200 shares on the basis of a prospectus which contains some mis-statement. The shares are allotted to him. A afterwards transfers the shares to B. Can B bring an Action for a rescission on the ground of mis-statement?
Sol.: If there is a mis-statement of material information in a prospectus and if it has induced any shareholder to purchase shares, he can rescind the contract and claim damages from the Company. However, to claim relief, privity of contract is necessary. Thus, whereas ‘A’ could have obtained the aforesaid relief, ‘B’ who has purchased shares from ‘A’ and not from the Company cannot proceed against the Company (Peek Vs. Gurney).
Q.No.35. Amar subscribed shares issued by F Ltd. The prospectus of F Ltd. included a statement which was misleading in the forms and contents. On the faith of the prospectus believing it to be a true, Amar subscribed for shares and sustained loss. Can Amar sue for compensation of loss? If so, who will be sued for such loss?
Sol.: Yes, Amar can sue for compensation of loss. Sec.62 of the Companies Act provides that an allottee is entitled to claim compensation from directors, promoters and any other persons who authorised the issue of the false prospectus, for damages sustained by reason of any untrue statement in it. However, he will have to prove that misrepresentation was of material fact; he Acted on misrepresentation and has suffered damages in consequence.
The following persons are liable to pay compensation for loss or damage sustained by reason of untrue statement included in a prospectus:
a. Every person who is a director of the Company at the time of issue of prospectus.
b. Every person who has authorised himself to be named and is named in the prospectus either as a director, or as having agreed to become a director, either immediately or after an interval of time;
c. Every person who is a promoter of the Company; and
d. Every person who has authorised the issue of the prospectus.
Mr. Amar having sustained loss because of having believed the facts given in the prospectus issued by F Ltd. to be true, can sue the four categories of persons mentioned above for compensation of his loss. Apart, from above, the allottee may sue the Company for damages for deceit.
Q.No.36. All statements in a prospectus issued by X & Co. Ltd. were literally true, but it failed to disclose that the dividends stated in it as paid were not paid out of revenue profits, but out of realised capital profits. The statement that the Company had paid dividends for a number of years was true. But the Company had incurred losses for all those years, however, no disclosure of this was made in the prospectus. An allottee of shares wanted to avoid the allotment on the ground that the prospectus did not disclose this fact which, in his opinion, was very material. Would he succeed?
Sol.: In the given case the Allottee of shares would succeed and he can avoid the contract on the grounds of untrue statement included in the prospectus. As per Sec.65 a prospectus shall be deemed to include an untrue statement:
a. If it contains a statement which is misleading in the form or content.
b. There is an Omission of any matter.
Nothing should be stated as fact which is not so, and no fact should be omitted. Thus it is not necessary that there should be false representation in prospectus, even every word included in it is true, the suppression of material facts may render it fraudulent.
Q.No.37. An allottee of shares in the Company has brought an action against director Q in the Company in respect of false statements in the prospectus. The director has contended that the statements were prepared by promoters and he had relied on them. Is the director liable?
Sol.: Sec.62 lays down civil liabilities for misstatements in prospectus. It renders every Directors liable for any misstatement in prospectus. Sec.62(2), however, lays down the circumstances under which the director concerned shall not be held liable. One of the plea that the director can take is that he had reasonable ground to believe and did upto the time of allotment of shares or debentures believe that the statement was true. In the instant case the director can absolve himself of the liability if he proves that he had reasonable grounds to believe and did believe that the statement prepared by the promoters was true. The onus of proof is on the director.
Q.No.38. No additional information in addition to the statutory requirements can be given in the prospectus.
Sol.: False., Sec.56 of the Act provides that the prospectus must contain matters specified in Part II of that Schedule. The section does not contain any negative provision regarding inclusion of additional information in the prospectus. Any additional information which may useful to the investors i.e. the contents given in Sec.56 are only minimum.
Q.No.39. In a scheme of amalgamation shareholders of Company ‘A’ was offered shares of Company ‘B’ in lieu of shares held by them in Company ‘A’. The offer letter issued by Company B to the shareholders of Company A can be regarded as prospectus?
Sol.: No, the offer Letter issued by Co. B to the shareholders of
Q.No.40. The Directors of Vijay Electronics Ltd. allotted to themselves certain rights shares for which no application was made by certain shareholders as required by Section 81 of the Companies Act. Discuss the validity of their action specially in view of the fact that market price of shares of the Company is 50% above par.
Sol.: If no application is made by the shareholders to whom the offer is made under Section 81 of the Companies Act, 1956, the Board of Directors may dispose of the shares in such a manner as they think most beneficial to the Company. Therefore, unless shares were allotted to directors on terms unfavourable to the Company, the allotment would be valid.
Q.No.41. The Board of Directors of a Company reissued shares which were forfeited for non-payment of calls. As a Company secretary, tell whether Return of Allotment is required to be field?
Sol.: Return of allotment is required to be field only in case of allotment of shares. Allotment means an act of appropriation by the Board of directors of the Company out of previously unappropriated capital of the company to persons who have made application for shares. Since reissue of forfeited shares is not an allotment of shares no return of allotment need to filled.
Q.No.42. What is the remedy available to a Company if stock exchanges refuse to accept its application for listing of shares or debentures?
Sol.: Every Company going for public issue shall make an application to stock exchange(s) for obtaining the permission for listing of such shares or debentures. The prospectus shall state that application has been made for obtaining listing permission and names of such stock exchange(s). If the permission has not been applied for or having applied for has not been granted by the stock exchange(s) before the expiry of 10 weeks from the date of the closing of the subscription list the allotment made shall become void. [Sec.73(1)]. An appeal may be preferred against the refusal with Securities Appellate Tribunal & in the allotment shall not be void until the dismissal of appeal.
Q.No.43. A
Sol.: Reissue can be at any price provided that the total sum paid by the original owner of shares together with the reissue price is not less than the par value. In other words, the discount on re-issue should not exceed the amount forfeited on those shares. The allotment is invalid since the shares have been reissued a price less than the amount remaining unpaid.
Q.No.44. The prospectus of a Company stated that application has been made to
Sol.: Every company going for public issue shall make an application to stock exchange(s) for obtaining the permission for listing of such shares. The prospectus shall state that application has been made for obtaining listing permission and names of such stock exchange(s). If the permission has not been applied for or having applied for has not been granted by the all the stock exchanges before the expiry of 10 weeks from the date of the closing of the subscription list the allotment made shall become void. Therefore allotment is void in this case.
Q.No.45. Dowell Co. Ltd issued 10,000 shares of Rs. 10 each. The entire issue was under written by ICICI; but before the prospectus was issued the entire capital was subscribed by the friends of directors of the Company. Would ICICI be entitled to receive any underwriting commission?
Sol.: ‘Underwriting’ means ‘Guaranteeing’. It is a contract entered between the Company and underwriters for the purpose - in case the whole or an agreed portion of the shares or debentures are not applied for, then the underwriters will themselves apply for unsubscribed shares or debentures. As a return for the services rendered by them, the underwriters get U/C. It is payable even if the underwriters are not called upon to take any shares.
Q.No.46. As per the audited balance sheet of Dowell Ltd. as at 31st March, 1999, the details of share capital and reserves and surplus are as under.
| Equity Share Capital Reserves and surplus: Profit and loss account General reserves Share premium | 300.00 62.75 12.00 25.00 |
Break up of unsecured loans as at 31st March, 1999 in given below:
| Deposits from public Deposits from shareholders | 13.00 3.62 |
Compute the limits up to which Dowell Ltd. can accept further deposits from public & shareholders.
Sol.: As per Balance Sheet of Dowell Ltd. as at 31.3.99.
| Paid up capital: Equity Share Capital Share Premium Free Reserves: Profit and Loss a/c General Reserves | 300.00 25.00 62.75 12.00 | 325.00 84.75 |
| 409.75 |
[Rs. in lakhs]
| Particulars | From shareholders | From public |
| Limit up to which Dowell can accept deposits 10% of Rs. 409.50 lakhs 25% of Rs. 409.50 lakhs Deposits as at 31st March, 1999 Maximum further deposits that can be accepted. | 49.95 3.62 | -- 102.375 13.00 |
| 46.33 | 89.375 |
Q.No.47. M Company Limited issued 2,00,000 Equity shares of Rs. 10 each. You are allotted 100 shares. Explain any ten rights you have as a member of the Company.
Sol.: Refer to question rights of members in membership lesson (10th lesson).
Q.No.48. Is a person, holding Pref. shares in a Co., deemed to be a member of that
Sol.: Yes, a person holding preference shares in a Company is a member of that Company Membership in a Company can be obtained, by acquiring shares in it and such shares may be equity or preference. As such, a person holding preference shares shall be deemed to be its member.
Q.No.49. Can a subsidiary Company hold shares in its holding Company? S Ltd. held shares of H Ltd. before becoming its subsidiary. Will it be necessary for S Ltd. to surrender those shares on its becoming a subsidiary of H Ltd.?
Sol.: As per Section 42, a body corporate cannot be a member of a Company which is its holding Company and any allotment or transfer of shares in a Company to its subsidiary shall be void; except:
a. Where the subsidiary holds shares in the holding Company in the capacity of a legal representative of a deceased shareholder, or
b. Where the subsidiary holds shares as trustee, or
c. Where the subsidiary was a member before the commencement of this Act or it held shares in the holding Company before it become its subsidiary. In these case the subsidiary can continue to hold the shares but, without to vote at meetings of the holding Company.
Since S Limited held shares of H Limited before it become its subsidiary, as per the provisions of Section 42, it is not necessary for S Limited to surrender those shares on its becoming a subsidiary of H Limited. S Limited in this case can continue to hold the shares of H Limited, but S Limited will not have the right to vote at meeting of H Limited in respect of the shares held by it.
Q.No.50. Shyam’s name appears in the register of members of a Company. He contends that he is not a member. The Company maintains that Shyam had orally agreed to become the member. Is the contention of Shyam correct?
Sol.: Yes; the contention of Shyam is correct. According to Section 41 (2) of the Companies Act, 1956, every person who agrees in writing to become a member of the Company and whose name is entered in its register, shall be a member of the Company. Agreement in writing can be either by way of application for allotment of shares or by transfer/transmission of shares. The subscribers to the memorandum of a Company are deemed to have agreed to become members of the Company and their names shall be entered in register of members on registration of the Company. There is no provision for becoming a member of the Company by oral agreement.
Q.No.51. DJA Co. Ltd. is holding 40% of total equity shares in MR Co. Ltd. The Board of Directors of MR Co. Ltd. (incorporated on 1.1.1998) decided to raise the paid-up Equity Share Capital by issuing further shares and also decided not to offer any shares to DJA Co. Ltd. on the ground that it was already holding a high percentage of shares in MR Co. Ltd. Articles of Association of MR Co. Ltd. provides that the new shares be offered to the existing shareholders of the Co. On 1.3.2001 new shares were offered to all the shareholders excepting DJA Co. Ltd. Referring to the provisions of the Companies Act, 1956 examine the validity of decision of Board of Directors of MR Co. Ltd. of not offering any further shares to DJA Co. Ltd.
Sol.: The question is based on Sec.81 of the Companies Act. As per Sec.81 if, at any time after the expiry of 2 years from the formation of the Company or after the expiry of 1 year from the first allotment of shares, which is earlier it is proposed to raise capital by allotment of further shares, it should be offered to the existing equity shareholders of the Company. In the given case applying the provisions and the ruling in the above case, MR Company’s decision not to offer any further shares to DJA Co. Ltd. on the ground that DJA Co. Ltd. already holds a high percentage of shareholding in MR Co. Ltd. is not valid for the reasons that it is against to Sec.81. Therefore Board of MR Company Limited cannot take a decision not to allot shares to DJA Company Limited unless the same is approved by the general meeting by means of special resolution required as under Sec. 81.
Q.No.52. A Public Company proposes to purchase its own shares. State the source of funds that can be utilised by the Company for purchasing its own shares and the requirements to be complied with by the Company under the Companies Act before and after the shares are so purchased.
Sol.: Refer to Buy Back provisions (Sec.77A).
Q.No.53. ABC Company Limited at a general meeting of members of the Company pass an ordinary resolution to buy-back 30% of its Equity Share capital. The articles of the Company empower the Company for buy-back of shares. The Company further decide the payment for buy-back to be made out of the proceeds of the Company’s earlier issue of equity shares. Explaining the provisions of the Companies Act, 1956, and stating the sources through which the buy-back of Companies own shares be executed. Examine.
a. Whether Company’s proposal is in order?
b. Would your answer be still the same in case the Company instead of 30% decide to buy-back only 20% of its Equity Share Capital’s
Sol.: Sources of funds: As per Sec.77A, a Company may purchase its own shares/other specified securities (herein after referred to as buy-back) out of:
a. Its free reserves Or
b. The securities premium account Or
c. The proceeds of any shares/other specified securities.
However, buyback of any kind of shares or other specified securities CAN NOT be made out of the proceeds of an earlier issue of the SAME KIND of shares/other specified securities.
Conditions: No Company shall purchase its own shares or other specified securities unless:
a. A S.R. (special resolution) has been passed in general meeting authorising the buy-back.
b. BOD. However, a resolution by the B.O.D. (board of directors) is sufficient, instead of a above, if the buy back of shares is LESS THAN OR EQUAL TO 10% of the total paid up capital (equity shares and preference shares) and free reserves.
Taking into account these two provisions, the questions as asked in the problems can be answered as under:
a. The Company’s proposal for buy-back is not in order as it has passed only an ordinary resolution and the percentage of 30% buy-back is in violation of the provisions.
b. The answer to the second question shall also be the same since there also the resolution passed by the Company is an ordinary resolution and not special resolution, through the percentage of buy-back, i.e., 20% is not violative.
Q.No.54. Preference shareholders have same voting rights as the equity shareholders.
Sol.: False., In general they have voting right only on matters directly relating to rights attached to preference share capital (E.g.: Resolution for winding up of Company, change in dividend rate). (Sec.87)
Exception: But they are entitled to vote on every resolution placed before Company at any meeting, if dividend on such capital in full or in part is remaining unpaid in the case of:
¡ Cumulative preference shares - If dividends are in arrears for two years preceding the date of commencement of the meeting.
¡ Non-cumulative preference shares - If dividends are has not been paid for 2 financial years immediately preceding the meeting or for any 3 years during the period of 6 years ending with the financial year preceding the meeting.
Q.No.55. Reserve capital can be created out of net profits of the Company?
Sol.: False., Reserve capital is created out of capital of the Company. This is that part of the uncalled capital of the Company which can be called up only in the event of its winding up. A limited Company may, by a special resolution, determine that a portion of its uncalled capital shall be called up in the event of winding up for the purposes of winding up (Sec. 99).
Q.No.56. Companies are not permitted to issue shares by way of donation.
Sol.: True. The Act permits for issue and allotment of shares for cash or some consideration other than cash either at part or at discount or at premium but there is no provision for issue and allotment of shares for no consideration. Issue of shares by way of donation would amount to issue of shares for no consideration and is, thus, invalid in law. (Sec.75)
Q.No.57. Interest can be paid on share capital. Comment.
Sol.: Sec.208 provides for payment of interest to shareholders, if following conditions are satisfied:
a. The AOA shall authorise such payment Or a S.R. shall be passed authorising such payment.
b. The permission from the C.G. shall be obtained.
c. The rate of interest will be determined by C.G. and it shall not exceed 12%.
d. Before permitting the payment, the C.G. may appoint a person for enquiry.
e. Time limit: The payment of interest shall be made only for such period as may be determined by the central government.
Q.No.58. 500 equity shares in 'XYZ' Limited were acquired by Mr. 'B'. But the signature of Mr. 'A', the transferor, on the transfer deed was forged. Mr. 'B'. After getting the shares registered by the Company in his name, sold 200 equity shares to Mr. 'C' were not aware of the forgery. What are the rights of Mr. 'A', 'B' and 'C' against the Company with reference to the aforesaid shares?
Sol.: Forgery does not confer any title. It is because in case of forgery there is not merely an absence of free consent but there is not consent at all. Hence a forged transfer can never confer ownership upon the transferee thereof, however genuine the transAction may appear. Thus, if a transfer is forged and the Company registers the transfer, the true owner can apply to the Company for his name to be placed back in the register. As a forged transfer is a nullity, Mr. A, the original owner continues to be the share-holder and the Company is bound to restore the name of transferor in the register of members.
A person who presents a transfer of shares for registration by a Company thereby represents that the instrument of transfer is genuine, and if it turns out to be a forgery, the Company is not stopped from denying his title to the shares, even though he did not know that the transfer was forged when he presented it. Consequently, even if the Company issues a share certificate to the person who presents the transfer, and he relies on it, the Company may remove his name from the register of members and he cannot claim damages for wrongful removal. Therefore, B the transferee is not entitled to the shares on the contrary, he is liable to indemnify the Company against the consequences of the damages which may have to be paid by the Company to the true owner of the shares.
According to Sec.84(1) of the Companies Act, a share certificate specifying any shares held by any member is a prima face evidence of the title of the member to such shares of the Company has issued a share certificate to the transferee and he has sold the shares to an innocent purchaser, the Company cannot deny his title, for the certificate stops it from doing so. Therefore the innocent purchaser is entitled to compensation from the Company.
Q.No.59. A’ Commits forgery and there by obtains a certificate of transfer of shares from a Company and transfers the shares to ‘B’ for value Acting in good faith. Company refuses to transfer the shares to ‘B’. Whether the Company can refuse? Decide the liability of ‘A’ and of the Company towards ‘B’.
Sol.: A forged transfer is a nullity. It does not give the transferee concerned any title to the shares. Since the forgery is an illegality therefore it cannot be a source of a valid transfer of a title. Although the innocent purchaser acting in good faith could validly and reasonably assume that the person named in the certificate as the owner of the shares was really the owner of the shares represented by the certificate. Even then the illegality cannot be converted into legality. Therefore, in this case Company has right to refuse to do the transfer of the shares in the name of the transferee B.
Here, as regards to the liability of A against ‘B’, A does not stand directly responsible according to provisions of Company law as he has already committed forgery which is illegal but A is liable to compensate the Company as he has lodged the forged transfer and the Company has suffered the loss.
As regards to the liability of the Company towards B, the Company shall be liable to compensate to B so far as the Company had issued a certificate to transfer and was, therefore, stopped from denying the liability accruing from its own Act. Further as the Company has refused to register him as a shareholder, Company has to compensate B. However, in this case the interest of the original shareholder will be protected.
Q.No.60. Sushil, a shareholder, holding 100 shares in XYZ Ltd. applied to the Company for issuing of a duplicate shares certificate. As a Company secretary advise the Company with particular reference to the circumstances and conditions subject to which duplicate shares certificates can be issued.
Sol.: Section 84(2) provides that a certificate may be renewed or a duplicate of a certificate may be issued if such certificate:
a. Is proved to have been lost or destroyed or
b. Having been defaced or mutilated or torn is surrendered to the Company.
For the term and conditions on which duplicate certificates may be issued, Companies (issue of Share Certificates) Rules.1960 has to be followed. A duplicate share certificate cannot be issued unless:
a. The consent of the Board is taken.
b. Payment of fees, if any, not exceeding Rs.2 is made by the shareholder.
c. Proper evidence and indemnity to the satisfaction of the Company is furnished.
d. Out of pocket expenses estimated to be incurred by the Company in investigating the evidence, as the Board may think fit, are deposited with the Company.
e. The fact that the certificate is duplicate should be inscribed with the words “duplicate issued in lieu of share certificate no”.
f. Mutilated defaced or torn certificates surrendered shall be defaced by a cancellation mark and destroyed after three years with the authority of the Board.
A Company can, however, issue a duplicate share certificate only to a registered shareholder.
Q.No.61. Is a share warrant holder a member of the Company?
Sol.: No, the share warrant holder is not member of the Company. As per Sec.115 on issue of share warrant the Company shall strike out name of the person from its register of members. As per Sec.41 of the Act, a person can become a member of the Company by agreeing in writing to become the member of the Company and whose name is entered in the Register of Members of the Company.
Q.No.62. Every Company is required to keep the share certificate ready for delivery within three months from the date of allotment.
Sol.: False., Under Sec.113 every Company is required to deliver (Not ready for delivery) the share certificates within a period of 3 months from the date of allotment and within 2 months from the date on which the certificates are lodged with the Company for transfer.
Q.No.63. Under Sec.113 the NCLT can grant extension of time for delivery of shares certificates.
Sol.: Under section 113 of the Act, the NCLT has been vested with the powers to extend the duration within which the certificates for debentures are to be delivered by the Company to the debenture holders. The NCLT is not vested with similar powers in respect of share certificates.
Q.No.64. Share warrants can be issued against fully paid up preference share also.
Sol.: A public Company limited by shares, if so authorized by its articles, may, with the previous approval of the Central Government, with respect to any fully paid-up shares, issue under its common seal, a warrant stating that the bearer of the warrant is entitled to the shares therein specified. The words used in the section are “fully paid-up shares”. Under the section, there is no distinction between the equity shares and preference shares and thus, the Company can issue share warrants in respect of fully paid preference shares also. (Sec.114)
Q.No.65. X Ltd. is authorised by its articles to accept the whole or any part of the amount of remaining unpaid calls from any member although no part of that amount has been called up. `X’ a shareholder of the X Ltd., deposits in advance the remaining amount due on his shares without any calls made by X Ltd. Discuss the rights and liabilities of Mr. X, which will arise on the payment of calls in advance.
Sol.: A Company may, if so authorised by the articles, accept from any member the whole or a part of the amount remaining unpaid on any shares, although no part of that amount has been called up.
Rights & Liabilities of payment of calls in advance:
a. Voting rights: The shareholders are not entitled to voting rights in respect of the calls so paid in advance by them until the same would become presently payable.
b. Liability: The shareholder's liability in respect of the call for which the advance call is paid, is extinguished.
c. Interest: The shareholder is entitled to claim interest on the amount of the call. If there are no profits, interest must be paid out of capital. The rate of interest can be up to as provided in articles of association. Table A provides payment of interest at 6% p.a.
d. Non refundable: The amount received as calls in advances is not refundable.
e. Rank before: In the event of winding up, the shareholder must be paid of his amount with interest, if any, before other shareholders are paid off.
Q.No.66. Strict compliance with the Articles is necessary for forfeiture of shares.
Sol.: Yes. Forfeiture of shares is governed by the provisions of the articles of association of the Company and there should be strict compliance with the procedural formalities in respect of forfeiture of shares.
Q.No.67. A Company refuses to register transfer of shares made by X to Y. The Company does not even send a notice of refusal to X or Y within the prescribed period. Has the aggrieved party any right(s) against the Company for such a refusal? Advise.
Sol.:
1. When entitled to remedy:
a. If a Company refuses to register the transfer or transmission of shares or debentures, it shall, within 2 months from the date on which the application for transfer or transmission was delivered to the Company, send notice of such refusal to the applicant, giving reasons for such refusal.
b. The applicants may appeal to the NCLT against any refusal of the Company to register the transfer or transmission, or against any failure to send notice of its refusal within 2 months.
2. Time limit for application:
a. Within 2 months of receipt of notice of refusal or
b. Where no reply has been received within 4 months of lodging documents for registration.
3. NCLT Decision. NCLT after the enquiry, direct the Company to accept the transfer/transmission or to rectify its register. NCLT has the power to pass interim orders including suspending the voting rights till the enquiry is complete. It may also direct the Company to pay the damages to the aggrieved person.
4. The order of NCLT shall be complied within 10 days of the receipt of the order.
5. Penalty.
a. Default in complying with the order of NCLT will invite the Company and every officer of the Company who is in default punishable with a fine which may extend to Rs.10,000 and with a further fine which may extend to Rs.1000 per day during which the default continues.
b. Default in complying with this section will invite the Company and every officer of the Company who is in default punishable with a fine which may extend to Rs.500 per day during which the default continues.
Q.No.68. The Company, without serving a proper notice, forfeited shares held by Mr. P Can Mr. P Claim rectification of the register of members.
Sol.: Yes. Mr. P can claim rectification of register of members of the Company where shares held by him are forfeited by the Company without serving a proper notice for the same. (Sec.111)
Q.No.69. Instrument of transfer is not required to be executed in case of transmission.
Sol. True., when the shares are transferred under the operation of law, either on the death of the shareholder or on his becoming insolvent or when the shareholder is the Co. and such
Q.No.70. Before registering transfer of partly paid up shares the Company is required to give a registered notice to the transferor.
Sol.: If transfer is of partly paid up shares and application for transfer is made by transferor transfer not to be registered by the Company, unless Company gives notice of application to the transferee, and transferee makes no objection to the transfer within two weeks from the receipt of notice. Notice deemed to be duly given if despatched by prepaid registered post to the transferee at address given in instrument of transfer. Board of Directors on satisfaction of above steps, recognise the transferee as new holder. (Sec.110)
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