BLS LLB 5 Years Sem 7 Company Law 2021-22 Question Paper with Solutions

The answer is (c), the National Company Law Tribunal.

Section 7(7) of the Companies Act, 2013 provides that where a company has been got incorporated by furnishing any false or incorrect information or representation, or by suppressing any material fact or information in any of the documents or declaration filed for incorporating it, the Tribunal may, on an application made to it, on being satisfied that the situation so warrants, pass such orders as it may think fit, including:

1. Regulating the management of the company;
2. Directing that the liability of the members shall be unlimited;
3. Directing removal of the name of the company from the register of companies;
4. Passing an order for the winding up of the company; or
5. Passing such other orders as it may deem fit.

The proviso to section 3(1) of the Companies Act, 2013 provides that the memorandum of a One Person Company shall indicate the name of the other person, with his prior written consent in the prescribed form, who shall, in the event of the subscriber's death or his incapacity to contract, become the member of the company, and that such written consent shall also be filed with the Registrar at the time of incorporation along with the memorandum and articles.

The consent is given in Form INC-3, and the nomination is notified in Form INC-4 on any change.

Section 13(3) of the Companies Act, 2013 provides that when any change is made in the name of a company under sub-section (2), the Registrar shall enter the new name in the register of companies in place of the old name and issue a fresh certificate of incorporation with the new name, and the change in the name shall not have effect except on the issue of such a certificate.

The operative words are "shall not have effect except on the issue of such a certificate". The change therefore takes effect on the date the certificate is issued, which the facts give as 10 August 2021, and not on the date the company happens to receive it.

1. Capital funding. A private limited company may issue equity and preference shares, debentures and convertible instruments, may make a rights issue under section 62(1)(a), a preferential allotment under section 62(1)(c) and a private placement to up to two hundred persons in a financial year under section 42, and may convert into a public company later under section 14 and go to the market. It is the vehicle venture capital and private equity investors expect;
2. Monetary benefits to the promoters. It may distribute its profits as dividend, may pay managerial remuneration without any ceiling, section 197 not applying to a private company, and may issue employee stock options and sweat equity; and
3. Taxation. It is taxed as a domestic company, with the concessional rates available to new manufacturing companies, and the promoters' return comes as dividend and capital gains on their shares.

The answer is (d), Any of these.

Section 2(45) defines a Government company as any company in which not less than fifty one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.

The definition therefore covers all three of the possibilities offered, and (d) is the only complete answer.

The answer the paper wants is (d): a natural person and an Indian citizen and resident in India.

Rule 3 of the Companies (Incorporation) Rules, 2014, as it stood when this paper was set, provided that only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company and to be a nominee for the sole member, "resident in India" meaning a person who had stayed in India for a period of not less than one hundred and eighty-two days during the immediately preceding financial year.

The answer is (c), 'Limited' or 'Private Limited' as the case may be.

Section 8(1) of the Companies Act, 2013 empowers the Central Government to license a person or association of persons about to be registered as a limited company, which has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object, which intends to apply its profits, if any, or other income in promoting its objects, and which intends to prohibit the payment of any dividend to its members, to be registered as a limited company under this section without the addition to its name of the word "Limited", or as the case may be, the words "Private Limited".

The answer is (c), MGT-15.

Section 121(1) of the Companies Act, 2013 provides that every listed public company shall prepare, in the prescribed manner, a report on each annual general meeting including the confirmation to the effect that the meeting was convened, held and conducted as per the provisions of this Act and the rules made thereunder.

Section 121(2): the company shall file with the Registrar a copy of the report within thirty days of the conclusion of the annual general meeting, with the prescribed fee. Rule 31(2) of the Companies (Management and Administration) Rules, 2014 prescribes Form MGT-15.

The options as printed are irregular: two are lettered (a). They have been relettered (a) to (d) here in the order printed.

The answer is (b): the chairman of the same meeting or, in the event of the death or inability of that chairman, by a director duly authorised by the Board for this purpose.

Section 118(1) requires every company to cause minutes of the proceedings of every general meeting to be prepared and signed in such manner as may be prescribed and kept within thirty days of the conclusion of the meeting.

The answer is (d), permanently.

Rule 25(2) of the Companies (Management and Administration) Rules, 2014, read with Secretarial Standard SS-2 issued by the Institute of Company Secretaries of India and made mandatory by section 118(10), requires that the minutes books of general meetings shall be preserved permanently and kept in the custody of the company secretary or of any director duly authorised by the Board.

The answer is (a), Every member.

Section 101(3) of the Companies Act, 2013 provides that the notice of every meeting of the company shall be given to:

1. Every member of the company, legal representative of any deceased member or the assignee of an insolvent member;
2. The auditor or auditors of the company; and
3. Every director of the company.

Of the four options offered, only "every member" appears in that list.

The answer is (d), a National holiday.

Section 96(2) provides that every annual general meeting shall be called during business hours between 9 a.m. and 6 p.m. on any day that is not a National Holiday.

The explanation to section 96(2) provides that for the purposes of the sub-section, "National Holiday" means and includes a day declared as National Holiday by the Central Government.

3. By the requisitionists themselves, section 100(4). If the Board does not, within twenty-one days from the date of receipt of a valid requisition, proceed to call a meeting for a day not later than forty-five days from the date of receipt of the requisition, the meeting may be called and held by the requisitionists themselves within a period of three months from the date of the requisition; and
4. By the Tribunal, section 98. If for any reason it is impracticable to call a meeting of a company, other than an annual general meeting, in any manner in which meetings of the company may be called, or to hold or conduct the meeting in the manner prescribed by the Act or the articles, the Tribunal may, either suo motu or on the application of any director or member who would be entitled to vote at the meeting, order a meeting to be called, held and conducted in such manner as the Tribunal thinks fit.

1. The contract must have been entered into by the promoters before the incorporation of the company and for the purposes of the company;
2. The terms of the incorporation must warrant such a contract; and
3. The company must have accepted the contract and communicated that acceptance to the other party.

Section 15(h) enables the company to enforce the contract; section 19(e) enables the other party to enforce it against the company.

Conclusion. A preliminary or pre-incorporation contract cannot bind the company as a contract, because the company did not exist when it was made, but sections 15(h) and 19(e) of the Specific Relief Act, 1963 allow either side to enforce it once the contract was for the purposes of the company and the company has accepted it and communicated that acceptance. Until then the promoter remains personally liable on it.

1. By subscription to the memorandum. Membership arises by operation of law on incorporation. No allotment, no application and no entry in the register is necessary to make a subscriber a member, though the company must enter his name;
2. By application and allotment, followed by entry in the register of members;
3. By transfer, on a proper instrument of transfer in Form SH-4 being delivered under section 56(1) and the transferee being registered;
4. By transmission, where shares vest by operation of law on the death, insolvency or lunacy of a member, and the legal representative is registered under section 56(2) on producing the succession certificate, probate or letters of administration;
5. As a beneficial owner in a depository, under limb three, for dematerialised holdings; and
6. By estoppel, where a person allows his name to appear on the register and holds himself out as a member, or knows of the entry and does not have it rectified.

Note the structure of limb two: both elements are necessary. An agreement in writing alone does not make a person a member until his name is entered in the register.

For full marks, cover: what a meeting is and why it matters, the three types of shareholders' meeting, and the requisites of validity.

A meeting is a gathering of persons entitled to attend, properly convened, for the transaction of business, at which decisions are taken by resolution. A company acts through two organs, the general meeting of members and the Board of Directors, and each expresses its will only at a duly convened meeting.

There are three types of shareholders' meeting under the Companies Act, 2013:

1. Annual General Meeting, section 96. Every company other than a One Person Company must hold one each year:

1. First AGM within nine months of the close of the first financial year, with no extension available;
2. Subsequent AGMs within six months of the close of the financial year, and not more than fifteen months between two, the Registrar being able to extend a subsequent AGM by up to three months;

3. Class meetings. Meetings of a particular class of shareholders, held where the rights attached to that class are to be varied under section 48, which requires the consent of the holders of not less than three-fourths of the issued shares of that class, or where a scheme under section 230 affects a class. Holders of not less than ten per cent of the shares of that class who did not consent may apply to the Tribunal to have the variation cancelled.

Conclusion. A meeting is a lawfully convened gathering of persons entitled to attend, held to transact business by a collective decision, and the shareholders' meetings are of three kinds: the annual general meeting, the extraordinary general meeting and the class meeting. Each answers a different need, the annual meeting for the yearly account to the members, the extraordinary meeting for urgent business, and the class meeting for a variation that affects one class alone.

1. First directors, named in the articles; failing that, the individual subscribers to the memorandum are deemed the first directors;
2. Directors appointed in general meeting, section 152(2), the general and residual rule;
3. Rotational directors, section 152(6), at least two-thirds of a public company's directors being liable to retire by rotation, one-third of those retiring at each AGM;
4. Additional director, section 161(1), appointed by the Board if the articles so authorise, holding office up to the next AGM;
5. Alternate director, section 161(2), appointed by the Board for a director absent from India for not less than three months, vacating on his return;
6. Nominee director, section 161(3), appointed on the nomination of an institution under any law or agreement, or by the Government;
7. Casual vacancy director, section 161(4), appointed by the Board for the unexpired term of a director appointed in general meeting whose office was vacated early, subject to members' approval at the next general meeting;

4. Woman director, required of every listed company and of public companies with paid-up capital of one hundred crore or turnover of three hundred crore rupees or more; and
5. Resident director, section 149(3), at least one director having stayed in India for not less than 182 days in the financial year.

C. Without valid appointment

1. Deemed or shadow director, section 2(60)(vi): a person in accordance with whose advice, directions or instructions the Board is accustomed to act, otherwise than in a professional capacity, is an "officer who is in default"; and
2. De facto director, acting without valid appointment; section 176 protects third parties, acts done by a person as a director being valid notwithstanding that his appointment is afterwards discovered to be invalid.

For full marks, cover: transfer with the section 56 procedure, the distinction from transmission, then the share certificate with the estoppels and the forgery exception.

1. Transfer of shares

Section 44 provides that the shares or debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles.

Transfer is the voluntary act of the parties by which a member conveys his shares to another by agreement.

Procedure, section 56(1): a company shall not register a transfer unless a proper instrument of transfer in Form SH-4, duly stamped, dated and executed by or on behalf of the transferor and the transferee, specifying the name, address and occupation of the transferee, has been delivered to the company within sixty days from the date of execution, along with the share certificate or, if none is in existence, the letter of allotment.

2. Share certificate

A share certificate is a document issued by a company under its common seal, or signed as prescribed, specifying the shares held by any person and the amount paid up on them.

Section 46(1): a certificate, issued under the common seal, if any, of the company or signed by two directors or by a director and the company secretary, specifying the shares held by any person, shall be prima facie evidence of the title of that person to such shares.

It is prima facie evidence, not conclusive, which distinguishes it from a share warrant, a negotiable instrument transferable by delivery.

Two estoppels flow from it:

1. Estoppel as to title. A company which has issued a certificate stating that a named person is the holder is estopped from denying his title as against a person who has acted on the faith of the certificate and changed his position. Dixon v. Kennaway & Co. [1900] 1 Ch 833; and

Conclusion. A transfer of shares is the voluntary conveyance of a member's interest to another, effected under section 56 by a proper instrument in Form SH-4 delivered within sixty days, while the share certificate issued under section 46 is the company's declaration under its common seal that the person named holds those shares. The certificate is prima facie evidence of title and not the title itself, which is why a duplicate may be issued on proof of loss and why issuing one to defraud is an offence under section 447.

Cockburn CJ in Twycross v. Grant (1877) 2 CPD 469: a promoter is "one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose." Bowen LJ: the term is "not a term of law, but of business".

The legal position

A promoter is neither an agent nor a trustee of the company, because the company does not exist when he acts, BUT he stands in a fiduciary relation to it. There can be no agency without a principal and no trust without a beneficiary, so equity fastens on him a fiduciary duty owed to the company he is creating, which crystallises the moment it comes into existence.

Lord Cairns in Erlanger v. New Sombrero Phosphate Co. (1878) 3 App Cas 1218: promoters "stand undoubtedly in a fiduciary position. They have in their hands the creation and moulding of the company. They have the power of defining how, and when, and in what shape, and under what supervision, it shall start into existence and begin to act as a trading corporation."

From that flow his duties:

1. Not to make a secret profit, and the duty is not to avoid a profit but to disclose it;

3. Section 7(6): liability for false or incorrect information furnished at incorporation, and section 7(7), under which the Tribunal may make the members' liability unlimited or wind the company up; and
4. Section 340: in a winding up, the Tribunal may assess damages against a promoter guilty of misfeasance or breach of trust, and section 300 allows his public examination where the liquidator's report discloses fraud.

His rights are few. He has no right to recover his preliminary expenses or remuneration as of right, the company not having existed when the services were rendered and being unable to ratify. He is paid only if the company, after incorporation, agrees to pay him, and any such payment or benefit must be disclosed in the prospectus under section 26. He may, however, claim contribution from co-promoters.

For full marks, cover: the promotional steps, name reservation, the section 7 documents with their forms, the certificate and its effect, and the post-incorporation filings.

Step 1: promotion. The promoters conceive the idea, investigate its commercial and legal viability, decide on the form of company and the State of the registered office, and assemble the subscribers. Under section 3(1) there must be seven or more for a public company, two or more for a private company, and one for a One Person Company.

Step 2: digital signatures and DIN. Obtain Digital Signature Certificates for the subscribers and proposed directors, and Director Identification Numbers under sections 153 and 154 for the proposed directors, since section 152(3) bars appointment without one.

2. A declaration in Form INC-8 by an advocate, chartered accountant, cost accountant or company secretary in practice engaged in the formation, and by a person named in the articles as a director, manager or secretary, that all the requirements of the Act and the rules in respect of registration have been complied with;
3. A declaration in Form INC-9 from each subscriber and first director, that he has not been convicted of any offence in connection with the promotion, formation or management of any company, has not been found guilty of fraud, misfeasance or breach of duty to any company in the preceding five years, and that all documents filed are correct and complete;
4. The address for correspondence until the registered office is established;
5. Particulars of every subscriber with proof of identity and residence;
6. Particulars of the first directors, their DIN, and their consent in Form DIR-2; and
7. Particulars of their interests in other firms or bodies corporate.

Conclusion. Incorporation under the Companies Act, 2013 is now a single integrated filing, the SPICe+ form carrying the name reservation, the memorandum and articles, the declarations under section 7(1) and the applications for PAN, TAN and the rest. The certificate of incorporation with the Corporate Identity Number is conclusive evidence under section 7(2), but a company with share capital must still file the declaration under section 10A before it may commence business or exercise borrowing powers.

1. A company incorporated under the Act and falling within these classes must comply within six months from the date of its incorporation;
2. A company which falls into the class later must comply within six months; and
3. Any intermittent vacancy of a woman director shall be filled by the Board at the earliest but not later than the immediate next Board meeting or three months from the date of such vacancy, whichever is later.

A private company is not covered at all, however large, because the proviso speaks of listed companies and other public companies.

Conclusion. The second proviso to section 149(1) requires a woman director on the Board of every listed company and of every other public company with paid up capital of one hundred crore rupees or more or turnover of three hundred crore rupees or more, any intervening vacancy being filled within three months or by the next Board meeting, whichever is later. The requirement does not touch a private company however large, because the proviso speaks only of listed and other public companies.

2. Floating charge, on a class of assets, present and future, which changes from time to time in the ordinary course of business, such as stock in trade or book debts, under which the company remains free to deal with the assets in the ordinary course until crystallisation. Lord Macnaghten in Illingworth v. Houldsworth [1904] AC 355 described it as "ambulatory and shifting in its nature, hovering over and so to speak floating with the property".

A floating charge crystallises on the winding up of the company, the appointment of a receiver, the company ceasing to carry on business, or the happening of an event specified in the deed.

2. Registration, section 77

Section 77(1): every company creating a charge within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India, shall register the particulars of the charge with the Registrar within thirty days of its creation, in Form CHG-1, or CHG-9 for debentures, signed by the company and the charge-holder.

Section 78: where the company fails to register, the charge-holder himself may apply, on fourteen days' notice to the company. Section 82: the company must give intimation of satisfaction of a charge within thirty days in Form CHG-4. Section 84: notice of the appointment of a receiver or manager within thirty days. Section 85: every company must keep a register of charges in Form CHG-7 at its registered office, open to inspection.

3. Why registration is required

1. Publicity, and this is the principal reason. A company's assets are not visible on any public record, and a lender or supplier has no way of knowing what is already encumbered. Registration puts every charge on a public file open to inspection under section 399, so that a person about to lend to or trade with the company can search and discover what security already stands ahead of him.

2. It is the answer to the problem Salomon created. Salomon v. Salomon & Co. Ltd. [1897] AC 22 decided that a controlling member may take a secured debenture over his own company and rank ahead of the unsecured trade creditors. The law's response was not to deny him the security, but to insist that it be on the public record, so that the trade creditors deal with knowledge of it.

For full marks, cover: both definitions with section 43, the comparison table, and the two features of preference shares that carry the most marks: the twenty-year redemption rule and the acquisition of voting rights on two years' default.

Section 43 of the Companies Act, 2013 provides that the share capital of a company limited by shares shall be of two kinds only: equity share capital and preference share capital.

Equity share capital, section 43(a), means all share capital which is not preference share capital, and it may be:

1. With voting rights; or
2. With differential rights as to dividend, voting or otherwise in accordance with the prescribed rules.

Preference share capital, defined in the explanation to section 43, means that part of the issued share capital which carries or would carry a preferential right with respect to:

Redemption of preference shares, section 55

Worth naming, because it is where the examinable detail lies:

1. Redeemable only if fully paid;
2. Redeemed out of the profits of the company which would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made for the purpose;
3. Where redeemed out of profits, a sum equal to the nominal amount of the shares redeemed must be transferred to the Capital Redemption Reserve Account, which is then treated as paid-up share capital for the purposes of section 66 and may be applied in paying up unissued shares as fully paid bonus shares; and
4. Any premium payable on redemption must be provided for out of profits or out of the securities premium account before redemption.