KSLU Solved Question Papers
Company Law
Previous Year Question Paper with Solution
B.A. LL.B. (Five Years) · Sem 6
2017 Jun Examination
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Mumbai
B.A. LL.B. (Five Years) Sem 6 Company Law 2017 Jun Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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Contents
The questions below are the paper as Karnataka State Law University set it at the 2017 Jun examination, in the order it was set.
MarksPage
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2017 Jun examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 13 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1What are the disadvantages of incorporation of a company. Explain.[16]
Answer
For full marks, cover: what incorporation gives (section 9 of the Companies Act 2013) and why it has a price; the disadvantages grouped under five heads, each explained with the provision or case that shows it: Part A, cost and formality (formation, continuing compliance, penalties: sections 7, 92, 96, 137, 139, 2(60)); Part B, loss of privacy (public filings and inspection); Part C, separateness cutting against the members (Macaura, Bacha F. Guzdar); Part D, restrictions on what the company and its owners may do (objects, capital maintenance, Trevor v. Whitworth, dividends only from profits, section 123; minority subject to the majority, Foss v. Harbottle); Part E, other burdens (limited liability not absolute, taxation, a company is not a citizen, State Trading Corporation, winding up); a comparison table; a balanced conclusion.
Incorporation and its price
On registration, a company becomes a body corporate with perpetual succession (section 9). It can hold property, contract, and sue and be sued in its own name. Its members enjoy limited liability, transferable shares and continuity. These are real advantages. But the law gives them on conditions, and the conditions are the disadvantages. A sole trader or a small partnership often finds them heavier than the benefits are worth.
Part A: cost and formality
- Formation. A company is formed only by registration. It needs a memorandum and articles, declarations, the subscribers' and directors' particulars and the Registrar's fees (section 7). A sole trader simply starts trading.
- Continuing compliance. Every year the company must hold Board meetings (section 173) and, unless it is a One Person Company, an annual general meeting (section 96). It must prepare audited financial statements (sections 129, 139), file them (section 137) and file an annual return (section 92). Each step costs time and professional fees.
- Penalties. Most defaults carry fines on the company and on every officer in default (section 2(60)). A small business may find these obligations a burden out of all proportion to its size.
Part B: loss of privacy
A company's memorandum, articles, charges, accounts, annual returns and directors' particulars are filed with the Registrar. Anyone may inspect them on payment of a fee. Competitors, customers and creditors can learn its turnover, profits, borrowings and shareholders. A sole trader or partnership keeps all of this private.
Part C: separateness cuts against the members
The same separate personality that protects the members also keeps them apart from the company's property.
- No insurable interest in the company's assets. In Macaura v. Northern Assurance Co. Ltd., [1925] AC 619, Macaura sold his timber to a company in return for all its shares and then insured the timber in his own name. When it burned, he recovered nothing. The timber was the company's, and a shareholder, even holding all the shares, has no interest in its property.
- No ownership of the assets. In Bacha F. Guzdar v. Commissioner of Income-Tax, Bombay, AIR 1955 SC 74, the Supreme Court held that a shareholder acquires no interest in the company's assets by buying shares. He has only a right to share in profits when they are distributed. So the owner of a business that he has incorporated cannot treat its property as his own.
Part D: restrictions on the company and its owners
- Objects. A company may act only within its objects. An act beyond them is ultra vires and void, as in Ashbury Railway Carriage and Iron Company v. Riche, (1875) LR 7 HL 653.
- Capital cannot simply be taken back. In Trevor v. Whitworth, (1887) 12 App Cas 409, a company bought back many of its own shares, and in its liquidation a seller claimed the balance of the price. The House of Lords held the purchase void, because capital must remain available to creditors. Today a buy-back or reduction is possible only under the conditions of sections 66 to 70.
- Dividends only from profits. A dividend may be declared or paid only out of profits, or out of past profits as the Act allows (section 123). An owner cannot simply draw money out of the business when he wishes.
- The minority is bound by the majority. For a wrong done to the company, the company is the proper plaintiff, and the court will not interfere in matters the majority can confirm. That is the rule in Foss v. Harbottle, (1843) 2 Hare 461. A small shareholder therefore has less control than a partner, who has a say in every major decision.
Part E: other burdens
- Limited liability is not absolute. Lenders to small companies commonly insist on the directors' personal guarantees. The law also lifts the veil for fraud and evasion, and makes persons knowingly party to fraudulent trading personally liable (section 339).
- Taxation. The company pays tax on its profits. Dividends paid out of those profits are taxed again in the shareholders' hands.
- Not a citizen. In State Trading Corporation of India Ltd. v. Commercial Tax Officer, AIR 1963 SC 1811, a company wholly owned by the Union claimed rights under Article 19. The Supreme Court held that a corporation is not a citizen, so it could not claim those rights. Its members, who are citizens, have them; the company does not.
- Separation of ownership and control. In a large company, management passes to directors whom the members rarely meet. The members' interests and the directors' may diverge, and the members must rely on the Act's controls to keep the directors honest.
- Closing down is complex. A company ends only by winding up, insolvency liquidation, striking off or dissolution on amalgamation. Each needs formal steps and often professional help. A sole trader simply stops trading.
An illustration
A shopkeeper runs a profitable electronics shop on his own. On advice, he incorporates it as a private company, holding all but one share himself. He now has to hold Board meetings, have his accounts audited and file returns every year, and his turnover is open to his rivals. When he wants money for a family wedding, he cannot simply take it from the till. He must pay himself a salary or a dividend out of profits, and both are taxed. His bank still makes him guarantee the company's overdraft personally. If he insures the shop's stock in his own name, Macaura tells him the policy may be worthless. For a business of his size, the burdens may outweigh the gains.
Lighter alternatives
The law offers forms that reduce some of these burdens. A One Person Company need not hold an annual general meeting (section 96). Its member's resolutions may simply be entered in the minute book (section 122). A limited liability partnership under the Limited Liability Partnership Act 2008 is a body corporate with limited liability, but is run on the partners' agreement. A small business may weigh these before choosing a company, since each keeps the main advantages with fewer formalities.
Company, partnership and sole trader compared
| Point | Company | Partnership firm | Sole trader |
|---|---|---|---|
| Formation | Registration, documents, fees | Agreement; registration optional | None |
| Ongoing compliance | Meetings, audit, annual filings | Light | Minimal |
| Privacy | Accounts and returns are public | Private | Private |
| Owner's rights in assets | None in the company's assets | Shares in partnership property | Owns them |
| Withdrawing money | Dividends from profits; capital locked in | By agreement | At will |
| Control | Majority rule; directors manage | Each partner has a voice | Full |
| Closing down | Winding up or striking off | Dissolution | Stop trading |
Conclusion. Incorporation gives separate personality, limited liability and perpetual succession, but at a price. It brings the cost and formality of formation and yearly compliance, with penalties on officers in default. It also means the loss of privacy through public filings. Separateness cuts against the members, who own nothing of the company's property (Macaura, Bacha F. Guzdar). The company is confined to its objects and must keep its capital (Trevor v. Whitworth), paying dividends only from profits. The minority is bound by the majority (Foss v. Harbottle). Limited liability is often diluted by personal guarantees, profits are taxed twice, and a company cannot claim a citizen's rights (State Trading Corporation). For large enterprises the advantages outweigh these burdens. For a small business they may not.
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