Wednesday, March 12, 2014


Course Code: ECO - 08
Course Title: Company Law
Assignment Code: ECO – 08/TMA/2014-15
Coverage: All Blocks

Maximum Marks: 100
Answer All Questions:
1. Define a Company. What are its features? Explain under what circumstances a corporate veil can be lifted? (2+6+12)
Ans: Introduction: A company is an artificial person created by law, having a separate legal entity, with a perpetual succession and a common seal. It is an association of many persons who contribute money or money’s worth to a common stock and employs it for a common purpose. The common stock so contributed is denoted in terms of money and is called capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.
Joint Stock Company has been defined by many eminent authors, jurists and institutions. Some of these definitions are given below:

According to L.H.Haney – “A company is an artificial person created by law, having a separate legal entity, with a perpetual succession and a common seal.”
According to Company Act 1994 – “Company means a company formed and registered under this Act or any existing company.” [Section 2(1.c)]
According to Chief Justice Marshall – “A company is an artificial being invisible, intangible and existing only in the eyes of law.”
The system of joint stock organization is very useful for large undertakings for which large capital is required. It is an incorporated association created by law, having distinctive name, a common seal, perpetual succession, limited liability etc. formed to carry on business for profit.
Characteristics of a Company
1.       Artificial Person: A company is an artificial person, which exists only in the eyes of law. The company carries business on its own behalf. It has a right to sue and can be sued, can have its own property and its own bank account. It can also own money and be a creditor.
2.       Created by law: A company can be formed only with registration. It has to fulfill a lot of formalities to be registered. It has also to fulfill a lot of legal formalities in order to be dissolved.
3.       Separate Legal entity: A company has a separate legal entity and is not affected by changes in its membership.
4.       Perpetual succession: A company has a continuous existence. Its existence does not affected by admission, retirement, death or insolvency of its members. The members may come or go but the company may go forever. Only law can terminate its existence
5.       Limited Liability: The liability of every member is limited to the amount he has agreed to pay to the company on the shares held by him.
6.       Voluntary Association: A company is a voluntary association. It cannot compel any one to become its member or shareholder.
7.       Capital Structure: A company has to mention its maximum capital requirements in future in its memorandum of association. Its capital is divided into shares, which are easily transferable from person to person.
8.       Transferability of Shares: The shares of a company are freely transferable by its members except in case of a private company, which may have certain restrictions of such transferability.

When can Corporate Veil of A Company be lifted?
For all purposes of law a company is regarded as a separate entity from its shareholders. But sometimes it is sometimes necessary to look at the persons behind the corporate veil. The separate entity of the company is disregarded and the schemes and intentions of the persons behind are exposed to full view which is known as lifting or piercing the corporate veil. This is usually done in the following cases:
1. Determination of character- In Daimler Co Ltd. v. Continental Tyre and Rubber Co., a company was incorporated in England for the purpose of selling tyres manufactured in Germany by a German company. The German company held the bulk of the shares in the English company and all the directors of the company were Germans, resident in Germany. During the First World War the English company commenced an action to recover a trade debt. And the question was whether the company had become an enemy company and should therefore be barred from maintaining the action.
2. For benefit of revenue- The separate existence of a company may be disregarded when the only purpose for which it appears to have been formed is the evasion of taxes. In Sir Dinshaw Maneckjee, Re, the assessee was a wealthy man enjoying large dividend and interest income. He formed four private companies and agreed with each to hold a block of investment as an agent for it. Income received was credited in the company accounts but company handed the amount to him as pretended loan. Thus he divided his income in four parts to reduce his tax liability. The Court disregarded corporate entity as it was formed only to evade taxes.
3. Fraud or improper conduct- In Gilford Motor Co v. Horne, H was appointed at the managing director of the plaintiff company on the condition that he shall not solicit the customers of the company. He formed a new company which undertook solicitation of plaintiff’s customers. The company was restrained by the Court.
4. Agency or Trust or Government company- The separate existence of a company may be ignored when it is being used as an agent or trustee. In State of UP v. Renusagar Power Co, it was held that a power generating unit created by a company for its exclusive supply was not regarded as a separate entity for the purpose of excise.
5. To avoid welfare legislation- where it was found that the sole purpose of formation of new company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the SC pierced its corporate veil. –The Workmen Employed in Associated Rubber Industries Ltd. v. The Associated Rubber Industries Ltd, Bhavnagar.
6. Under statutory provisions- The Act sometimes imposes personal liability on persons behind the veil in some instances like, where business is carried on beyond six months after the knowledge that the membership of company has gone below statutory minimum (sec 45) - Madanlal v. Himatlal, when contract is made by misdescribing the name of the company (sec 147), when business is carried on only to defraud creditors (sec 542).

2. What are Articles of Association? Is it compulsory for the company to register its Articles of Association? Comment, and discuss the restrictions on alteration of Articles of Association. (20)
Ans: Articles of Association: According to section 2(2) of the companies act, 1956 ‘Articles” means the Articles of association of a company as originally framed and altered from time to time in pursuance if any previous companies law or of the present act. The articles of association are the rules and regulation of a company framed for the purpose of internal management of its affairs.
The Articles of association of a company are subordinate to and are controlled by the memorandum of association. The articles are framed mainly for carrying out the aims and objects of the Memorandum of Association. Memorandum defines the area or business of the company.  A company cannot operate beyond the limits of its memorandum.  At the same time an Article contains the rules and regulations of the business of the company.  Therefore, Article is subordinate to, and controlled by the Memorandum.
Registration of the Articles.
Every private company, an unlimited company and a company limited by guarantee must have their own Article and it should be registered with the Registrar of Companies along with the memorandum as per the Section 26 of the Companies Act, 1956.  But it is not necessary for a Company limited by shares to have their own Articles. It may either have its own articles or it may adopt either wholly or partly Table A of Schedule I of the companies Act as Table A of schedule I of the Companies Act will automatically apply to such companies unless it has been excluded or modified.   There are three options for the company limited by shares.  They are:
1.  It may adopt Table A in full or
2.  It may wholly exclude Table A and set out its own Articles in full;
3.  It may set out its own Articles and adopt part of Table A.
If such a company goes in for the first alternative, then it is not necessary to get any Article of Association Registered.  It has only to endorse on the face of the Memorandum of Association that it has adopted Table A as its Articles of Association.
It is important to note that The articles of a private limited company must contain the following details:
1.  If the company has a share capital, the amount of share capital with which the company is to be registered.
2.  The number of members with which the company is to be registered.
In the case of a company limited by guarantee, the articles should state the number of members with which the company is to be registered as per Section 27 (2) of the companies Act. The articles of association must be printed, divided into paragraphs, numbered consecutively and signed by each subscriber of the Memorandum of Association in the presence of at least one witness who shall attest the signature and shall likewise add his address, description and occupation, if any as per Section 30.
Limitations on Alternation of Articles
According to the provisions of the act and to the conditions contained in its Memorandum of Association, a company may by passing a special resolution alter or add to its Articles of association. The company must file with the Registrar of Companies a copy of special resolution within 1 month from the date of its passing
The altered Articles of association will bind the member in the same form as the original articles.
Limitations to alteration: The alteration made in the articles will be valid, until they fall within any one of the following given below:
1.       The alteration must not authorize anything expressly or impliedly forbidden by the companies Act.
2.       The alteration must not extend or modify the Memorandum of Association.
3.       The alteration must not contain anything illegal.
4.       The alteration must not be inconsistent with any alteration made by Company Law Board.
5.       The alteration must be bonafide for the benefit of the company as a whole.
6.       The alteration must not make the Articles of association unaltered as it is regarded bad in law.
7.       Retrospective operation of Articles of association.
8.       The alteration must not constitute fraud on the minority by a majority.
9.       An alteration of Articles of association to effect a conversion of a public company into a private company cannot be made without the approval of Central Government.
10.   There cannot be alteration of the Articles of association so as to compel an existing member to take or subscribe for more shares or in any way extend liability to contribute to shares capital, unless he gives his consent in writing.
11.   A company cannot justify breach of contract with third parties or avoid a contractual obligation by altering Articles of association.

3. Explain the main Clauses of Memorandum of Association and also explain the procedure of making alteration in the different clauses of Memorandum of Association.  (20)
Ans: Memorandum of Association: Section 2 (28) of the act defines Memorandum as “Memorandum means the Memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company’s law or of this act”.
Memorandum of association is the document which contains the rules regarding constitution and activities and objects of the company. It is fundamental charter of the company. Its relation towards the members and the outsiders are determined by this important document. One of the essentials for the registration of a company is memorandum of association (sec 33). It is the first step in the formation of a company. Its importance lies in the fact that it contains the fundamental clauses which have often been described as the conditions of the company’s incorporation.
Memorandum of association is divided into 5 clauses:
1.       Name clause
2.       Registered office clause
3.       Objects clause
4.       Liability clause and
5.       Capital clause
1. Name clause: Name of every company limited by shares or by guarantee must end by the word 'Ltd.' or 'Pvt. Ltd.' except companies exempted u/s 25.  The name must not be undesirable or most not resemble the name of any other registered company.
2. Registered office clause: Must contain the name of state is which registered office is situated.  Actual address of registered office is notified to ROC within 30 days of incorporation.
3. Object clause: It Sets out object or vires of the company. The objects must be legal and not be against the provision of the companies Act, 1956. It is divided into two parts: main objects and other objects.
4. Liability clause: States that liability of members is limited to the amount unpaid on their shares and in case of company limited by guarantee the amount which every member undertakes to contribute to the assets of the company in the event of its winding up.
5. Capital clause: Every company having a share capital, the amount of share capital with which the company is proposed to be registered and the division of its shares into a fixed denomination.
1. Alteration of name (sec 21): A company may change its name at any time by passing a special resolution and with the prior approval of the Central Government. Where a company has been registered with a name which is undesirable, the same may be changed by an ordinary resolution and with the prior approval of the Central Government. In such a case the central government may also within 12 months of registration direct the company to rectify its name and the company must change the name within 3 months from the date of direction unless the time is extended. The new name would also require the prior approval of the Central Govt. The British Diabetic Society was compelled to change its name to something that would not impinge the goodwill of the British Diabetic Association (British Diabetic Association v. The Diabetic Society).
When a company changes its name, the Registrar of Companies has to enter the new name in the register and a new certificate of incorporation must be issued with necessary alterations. However, it should be noted that no approval will be required if the change consists merely addition or deletion of the word “private” consequent on the conversion of a public company into a private company or vice versa.
2. Alteration of registered office clause (sec 17): Shifting of registered office from one State to another is a complicated affair. For this purpose, sec 17 requires:
a)  A special resolution of the company.
b) The sanction of the Company Law Board.
The Board can confirm the alteration only if the shifting of the registered office from one state to another is necessary for any purposes detailed in sec 17(1).
3.  Alteration of objects (sec 17):  A company may alter its objects with the passing of a special resolution. The confirmation of the Company Law Board is not required for this purpose. An alteration of the objects is allowed only for the purposes mentioned in sec 17(1).
4. Alteration of liability clause: Liability of shareholders can be increased by express approval of each and every member. (Sec. 38)  However in case the company is a club or similar association and alteration in the memorandum requires the member to pay recurring charge at a higher rate, although he does- not agree in writing to be bound by the alteration.  Liability of directors, MD or managers can be made unlimited by passing a special resolution if the article so permit and getting consent of such officer.  Unlimited liability of shareholders can be made limited by:
a. Pass a special resolution and fill it within 30 days.
b. Obtain tribunal sanction and fill it within 3 months of the date of order.
c. Alteration will be effective from date of registration.
5. Alteration of capital clause: Alteration of share capital (Sec. 94): If article provides, by passing an ordinary resolution, following can be altered:
a. Increase in authorised capital
b. Consolidate or sub-divide the whole or any part of existing shares into shares of larger or smaller denominations.
c. Convert its fully paid up shares into stock or vice-versa.
d. Cancel its unsubscribe shares by diminishing authorised capital.
If article doesn't provide, first alter the article by passing special resolution.  File copy of resolution and altered memorandum within 30 days to ROC.

4. (a) What is a ‘Call on Shares’? What are the essentials of a Valid Call?  (10)
Ans: Definition: A call on Shares may be defined as "A demand made by the company on its share holders to pay whole or part of the balance remaining unpaid on each share at any time during the life time of a company".
For example: The price of a share is Rs.100/-. At the time of applying for shares, the investor has to pay Rs.5/- of the nominal value of share i.e. Rs.5, so Rs.95/- is balance on each share. As and when the company needs money its asks its share holders to pay, suppose the company asks its shareholders to pay 
per share, that is known as calls on shares.
Essentials of a valid calls on shares:
(1) Board Meeting for passing a call resolution: A meeting of the Board of Directors will be called. In this meeting a resolution will be passed regarding making a call. The resolution must specify the amount of 
call money, the date and place of its payment.
(2) Closing of the Register of member and the Share Transfer Book: In the same Board meeting a resolution is passed, whereby the secretary is given permission to close the transfer book and the register of members for a period of about 15 days.
(3) Preparing the call lists: After closing the transfer book, the work of preparing the call lists from the register of member, is under taken by the secretary. A call lists shows details like name and address of the share holders, numbers of shares held by them, the amount due on the call etc. This helps the secretary in sending call letters to the members.
(4) Drafting call letters: The secretary prepares a draft of the all letter in consultation with the chairman of the company. He gets the call letters printed in the required quantity. A call letter is divided into three parts. They are: (i) A call letter proper, (ii) A call receipt, (iii) A call slip.
(5) Issuing call letters / Dispatch of call notice: After the preparation of call lists, the secretary issues a call letter to the share holders on their registered address. He also publishes a call notice in a leading newspaper for the information of shareholders.
(6) Arrangement with bankers for call money: The has to make necessary arrangement with the bankers of the company to receive call money from the members. Accordingly instructions are given to the bankers. The amount receive on calls is credited to a separate account called a "Call Account". After receiving the call money, bankers arrange to send the amount to the company. The call letter and call receipt are returned to the shareholder with necessary entries, signature and stamp.
(7) Entries in the call list and the register of members: After receiving the call money, bankers return call letter and call receipt to the members and send all call slips to the company's office. The secretary then makes entries against the respective names in the call lists and the register of members.
(8) Preparing list of Defaulters: The secretary prepares a list of those members who have not paid the call money on the stipulated date. Such a list is called a list of defaulters. It is placed before the Board for necessary action. Unpaid call money by members is called as "Calls in Arrears".
(b) Give the circumstances when person ceases to be a member of a Company.  (10)
Ans: Termination of Membership: A person may cease to be a member of a company, at any time, one of the following ways:
(1) When he transfers his shares and the transfer is duly registered in the books of the company.
(2) By forfeiture of shares for non-payment of calls, if articles so provide.
(3) By a valid surrender of shares. It is a short cut to forfeiture as it involves no legal formalities.
(4) When the company sells the shares, in exercise of its right or line over them, by giving a 14 days’ notice to a debtor shareholder.
(5) When a shareholder dies and his shares stand transmitted to his legal representative, upon registration of the share, in the succes­sor's name.
(6) When he is declared insolvent and the Official Assignee dis­claims the shares under his right of 'disclaimer of onerous properly.'
(7) By repudiating the contract of membership on the ground of misrepresentation in the prospectus or on the ground of irregular allotment.
(8) By conversion of share certificate into share warrant, unless the articles provide otherwise. In this case one ceases to be a 'member' in the strict sense of the term, that is, his name being removed from the Register of Members, although he continues to be a shareholder of the company.

5. (a) Write an explanatory note on Quorum. (10)
Ans: Quorum (Section 174)
 ‘Quorum’ means the minimum number of members who must be present in order to constitute a valid meeting and transact busies thereat. The quorum is generally fixed by the Articles. If the Articles of a company do not provide for a large quorum, the following rules apply:
Ø  For public company –any 5 person personally present.
Ø  For private company – any 2 person personally present.
Ø  Note- Articles may provide for larger quorum but not for shorter quorum.

Rules relating to Quorum:
1)      Only members present in person are counted not the proxies.
2)      Preference shares holders are not counted.
3)      Joint holders are treated as single members.
4)      A member present in two capacities as an individual member and as a trustee may be counted as two members.
5)      In case a company is the member of another company then the representative shall be treated as a member not as a proxy.
6)      In case the president of India or Governor of state is member and sends representatives, such representative shall be treated as a member and not as a proxy.

Course of action in case of quorum not being present at the general meeting [section 174]:
1)      If within ½ hour from the time appointed for holding the meeting the quorum is not present, the meeting if called upon the requisition of members, shall stand dissolve.

2)      In any other case, the meeting shall be adjourned to the same day in the next week, at the same time and place or to such other day, time and place as the Board of Directors may determine and notify accordingly.

3)      If at the adjourned meeting also, quorum is not present within ½ hour from the appointed time, the member present shall be quorum, even if the number of member be one.

(b) Explain the grounds of compulsory winding up of a Company. (10)
Ans: Grounds for Compulsory Winding up of a Company:
There are following six reasons for the compulsory winding up of the joint stock company:
1. Special resolution: A company may be wound up by the court if a special resolution is passed for this Purpose.
2. Failure to commence business: When the company does not commence business within a year from its incorporation or suspends business for a year.
3. Statutory report or meeting: Where default is made in submitting the statutory report to the registrar's office or in holding the statutory meeting within prescribed time or any two consecutive annual general meetings under section 305 (b) in company ordinance 1984.
4. Reduction in number of members: Where the number of members of public company is reduced below seven or in case of private company below two.
5. Inability to pay its debts: Where the company is unable to pay its debts in the following situation.
a. If a creditor whose debt exceeds. Rs.50, 000 or one percent of its paid up capital whichever is less under section 306 (a) Has served notice requiring payment and is not paid within 30 days.
b. If execution in favour of creditor remains unsatisfied or
c. If the court is fully satisfied that the company is quite unable to pay its debts.
6. Court's decision: When the court is of the opinion that it is just and equitable that the company should be wound up due to its mismanagement, dead-lock, fraudulent or any other reasonable grounds.