Case Studies of COMPANIES ACT,1956

Q1. On acceptance of deposits a private Company becomes a Public Company, ( TRUE/FALSE)

False. A private Company becomes a public Co. on acceptance of deposits from public through issue of advertisement. However the private Co. can accept the deposit from its shareholders, directors, from their relatives and even then the private Co. does not become a public Co. (Sec.3)

Q2. A firm can also become member of a Company which has been granted license under Section 25 of the Act.

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.

Q3. 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?

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.

Q4. 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?

if allotment of shares was made on 5th or after 5th jan, then it is valid, but if allotment was made before 5th then it is void. in the given ques proper date of allotment was not mentioned, so we have to take assumption.

Q5. 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?

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. S shall be held bound by the alteration.

Q6. 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.?

A name may be considered undesirable where it is too similar to the name of an already existing Company. 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.

Q7. 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?

Articles constitute a binding contract between the Company and its members, the shareholders shall be held bound by the stated provision in the Articles

Q8. 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 Co. liable on the bond?

Yes. The Company is liable on the bond. (Royal British Bank vs. Turquand) indoor management.

Q9. 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(TRUE/FALSE)

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.

Q10. 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?

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.

Q11. The authorised signatory of a Co. issued a share certificate in favour of MR. A, which apparently complied with the Company’s articles as it was purported to be signed by two directors and the secretary and it had the Company’s common seal affixed to it. Infact, the secretary had forged the signatures of the Directors and affixed the seal without any authority. Will the certificate be binding upon the Company?

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. 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.

Q12. 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?

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.

 

Q13. 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. Is it Correct?

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.

Q14. X Co. Ltd, intended to buy a rubber in Peru. Its prospectus contained extracts from an experts’ report giving the number of rubber trees in the estate. The report was inaccurate. Will any shareholder buying the shares of the Co. on the basis of the above representation have any remedy against the Co.? Can the persons authorising the issue of prospectus escape from their liability?

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.

Q15. 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?

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.

Q16. 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?

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 .

Q17. 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?

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.18. 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?

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.

Q.No.19. 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?

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.20. 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?

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.21. No additional information in addition to the statutory requirements can be given in the prospectus.( True or False)

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.22. 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?

No, the offer Letter issued by Co. B to the shareholders of Co. A cannot be regarded as a prospectus because the offer has been made to specified persons only and no person other than those can avail the offer. The test for determination of the nature of offer is not who receives the offer but who can avail the offer. If offer can be availed only by the person to whom offer has been made, it is not a prospectus.

Q.No.23. 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.

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.24. 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?

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.25. A Co. forfeited 1000 shares of Rs.10 each on which Rs.8 had been paid up & subsequently disposed of same for Rs.1.50 each. Examine the validity of reissue of shares?

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.26. Reserve capital can be created out of net profits of the Company? (TRUE/FALSE)

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.27. Companies are not permitted to issue shares by way of donation. (TRUE/FALSE)

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.28. Is a share warrant holder a member of the Company?

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.29. Every Company is required to keep the share certificate ready for delivery within three months from the date of allotment. (TRUE/FALSE)

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.30. Is Strict compliance with the Articles is necessary for forfeiture of shares?

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.31. The Company, without serving a proper notice, forfeited shares held by Mr. P, Can Mr. P Claim rectification of the register of members?

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.32. Instrument of transfer is not required to be executed in case of transmission. (TRUE/FALSE)

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 Co. goes into liquidation. For this no transfer deed & payment of stamp duty is required. (Sec.109)

Q.No.33. Charge can be created on Reserve Capital? (TRUE/FALSE)

False., Sec.125 of the Companies gives the list of assets on which charge can be created.
a. A charge on any immovable property.
b. A floating charge on the undertaking or any property of the Company including stock in trade.
c. A charge for the purpose of securing any issue of debentures.
d. A charge on uncalled share capital of the Company.
d. A charge on uncalled share capital of the Company.
e. A charge on calls made but not paid.
f. A charge on the book debts of the Company.
g. A charge on Goodwill, Patent, License.
h. A charge created outside India comprising property situated outside India.
i. A charge created in India comprising property outside India.
j. Purchase of a property in India but already subject to charge.
k. Purchase of a property situated abroad but already subject to charge.

The list given above does not contain “Reserve Capital’ and, thus, no charge can be created on it.

Q.34. If a Company fails to hold the AGM it may be ordered to hold the annual general meeting by the central government on an application made by any person interested in the Company. (TRUE/FALSE)

False., In accordance with the provisions of section 167 of the Act if a Company fails to hold the annual general meeting it may be ordered to hold the annual general meeting by the Central government on an application made by any member of the Company

Q.No.35. Even a single person present in the annual general meeting held on instructions of the central government constitutes valid quorum. (TRUE/FALSE)

False., Sec.167 provides that the central government while issuing instructions for holding the annual general meeting on a complaint of a member may also issue a direction that even a single member present in the meeting shall constitute a valid quorum. Thus, except where special orders are made by the C.G., single member present in the meeting will not constitute quorum.