LLM Group 2 Business Law Corporate Law 2023-24 Question Paper with Solutions

For full marks, cover: the essentials as the conditions section 3 actually imposes, not as a general description of promotion; the process as a sequence with the statutory time limits attached to each step, because the timings are what the examiner can mark; and then section 3A worked out clause by clause, because the third limb is a precise question about a short section and the marks are in the four conditions that must all be satisfied before a member becomes severally liable.

The essentials for the formation of a company

Section 3(1) states them in one sentence. A company may be formed for any lawful purpose by seven or more persons in the case of a public company, two or more in the case of a private company, and one person in the case of a One Person Company, by subscribing their names or names to a memorandum and complying with the requirements of this Act in respect of registration.

A promoter stands in a fiduciary relation to the company he is forming: he may not make a secret profit, and he must disclose any interest in a transaction with the company to an independent Board or to the members. Erlanger v. New Sombrero Phosphate Co., (1878) 3 App Cas 1218, is the authority: a syndicate bought an island for £55,000 and sold it to a company it had formed, through a nominee, for £110,000, the Board being the syndicate's own men; the House of Lords allowed the company to rescind. Gluckstein v. Barnes, [1900] AC 240, went further and required the promoter to account for an undisclosed profit even where rescission was impossible.

A contract made before incorporation binds nobody as the company's contract, because there is no principal in existence and there can be no ratification. Sections 15(h) and 19(e) of the Specific Relief Act, 1963 supply the Indian solution: a pre-incorporation contract warranted by the promoters for the purposes of the company may be specifically enforced by or against the company if the company has accepted the contract and communicated the acceptance to the other party.

Filing and incorporation. The application under section 7(1) is made to the Registrar of the jurisdiction where the registered office is to be, now on the single integrated SPICe+ form which carries the name, the incorporation, the Director Identification Number, PAN, TAN, EPFO and ESIC registration, professional tax registration in Maharashtra, a bank account and optionally GSTIN. Section 7(2) requires the Registrar, on being satisfied, to register the documents and issue the certificate of incorporation; section 7(3) requires a Corporate Identity Number to be allotted.

The effect, and it is the whole point of the exercise. Section 9 provides that from the date of incorporation the subscribers and other members become a body corporate with perpetual succession, with power to hold property, to contract, and to sue and be sued. Salomon v. A. Salomon and Co. Ltd., [1897] AC 22, is what that means in practice: the company is a person distinct from those who formed it, and the motives of the incorporators are irrelevant so long as the Act is complied with.

Two provisions guard against abuse of the process. Section 7(6) makes the promoters, first directors and the persons making the declaration liable for fraud under section 447 where incorporation was obtained by false or incorrect information or by suppression of a material fact. Section 7(7) empowers the Tribunal, in the same case, to regulate the management of the company, to direct that the liability of the members shall be unlimited, to order removal of the name from the register, to order winding up, or to pass any other order it thinks fit, after hearing the company and taking into account the transactions it has entered into.

Two, the company must carry on business for more than six months in that state. The first six months are a period of grace: a company whose membership falls on a death or a transfer has half a year to restore the number, and if it does, or if it ceases to carry on business within that period, no liability arises at all.

Three, the person sought to be charged must be a member during the period after those six months. A member who leaves before the six months expire is not caught; a person who becomes a member after the period has begun is.

Four, he must be cognisant of the fact. Knowledge is an express ingredient. A member who genuinely does not know that the membership has fallen below the minimum is not liable, and the burden of showing knowledge rests on the person asserting it.

What follows when all four are satisfied is severe. The liability is for the whole debts of the company contracted during that time, not merely for the amount unpaid on the shares, and it is several, so each qualifying member may be sued alone for the whole, and the creditor need not join the others. The liability is confined to debts contracted during that time, so debts contracted before the six month period expired, and debts contracted after the number has been restored, are outside it.

Conclusion. The essentials of formation are the requisite number of persons, a lawful purpose, subscription to a memorandum that satisfies section 4, and compliance with section 7. The process runs from name reservation valid for twenty days, through the documents and declarations of section 7(1), to the certificate of incorporation under section 7(2) and the corporate personality that section 9 confers, and is not complete until the registered office is verified within thirty days under section 12 and the declaration of commencement is filed within one hundred and eighty days under section 10A. Section 3A is the price of falling below the minimum: a member who knows the company is trading with fewer than seven or two members, and lets it do so for more than six months, is severally liable for the whole of the debts contracted in that period.

Both limbs must be read together, and the words are wider than they look. A place of business through electronic mode was added by the Companies (Amendment) Act, 2017, and Rule 2(1)(c) of the Companies (Registration of Foreign Companies) Rules, 2014 defines it to include carrying on electronic business transactions such as business to business and business to consumer transactions, data interchange and electronic service delivery, online services such as telemarketing, telecommuting, telemedicine, education and information research, and all related data communication services, whether the main server is installed in India or outside, and whether the activity is conducted by e-mail, mobile devices, social media, cloud computing, document management or voice or data transmission.

The consequence is that a foreign company with no office, no employee and no agent in India may still be a foreign company for the purposes of this Chapter if it conducts business here electronically.

Section 379(2) is the exception, and it is the provision most often missed. Where not less than fifty per cent of the paid-up share capital, whether equity or preference or partly equity and partly preference, of a foreign company is held by one or more citizens of India, or by one or more companies or bodies corporate incorporated in India, or by both singly or in the aggregate, such company shall comply with the provisions of Chapter XXII and such other provisions of this Act as may be prescribed with regard to the business carried on by it in India as if it were a company incorporated in India. The rationale is that a company incorporated abroad but owned in India should not escape Indian company law merely by the place of its incorporation. The proviso to the old section 379 was omitted with effect from 22 January 2021.

Two further applications should be stated. Section 391(1) applies sections 34 to 36 and Chapter XX to a foreign company that makes an offer for sale of securities or issues a prospectus in India, so the criminal and civil liability for misstatement and the whole law of winding up follow the money. And section 384 applies to a foreign company, with such exceptions and modifications as may be prescribed, the provisions on the registration of charges in Chapter VI, on the annual return in section 92, on books of account in section 128 and on inspection, inquiry and investigation in Chapter XIV.

Section 381 is the accounts obligation. Every foreign company must, in every calendar year, make out a balance sheet and profit and loss account in the prescribed form containing prescribed particulars and documents, and deliver a copy to the Registrar, and if the documents are not in English a certified translation must be annexed. Rule 4 of the Companies (Registration of Foreign Companies) Rules, 2014 requires the accounts to relate to the company's Indian business operations and to be accompanied by a statement of related party transactions, a statement of repatriation of profits and a statement of transfer of funds.

Section 382 is the publicity obligation. Every foreign company must conspicuously exhibit on the outside of every office or place where it carries on business in India, in English and in the local language, the name of the company and the country in which it is incorporated; must state that name and country in every prospectus, business letter, bill head and letter paper and in all notices and other official publications; and, if the liability of its members is limited, must state that fact in legible characters in those documents and on its offices.

Section 393 completes the picture with a proposition that matters commercially: any failure by a foreign company to comply with Chapter XXII does not affect the validity of any contract, dealing or transaction entered into by the company or its liability to be sued in respect of it, but the company shall not be entitled to bring any suit, claim any set-off, make any counter-claim or institute any legal proceeding in respect of any such contract until it has complied with the Chapter. That is a disability on the plaintiff's side only, and it is the sharpest practical consequence of non-registration.

Winding up and the other statutes

A foreign company cannot be wound up as a registered company, because it is not registered here. It is wound up as an unregistered company under Part XXI: section 375(1) applies the winding up provisions to an unregistered company, section 375(2) forbids voluntary winding up, and section 375(3) confines the grounds to dissolution or cessation of business, inability to pay debts and the just and equitable ground, with inability to pay debts defined in section 375(4) by an unsatisfied statutory demand exceeding one lakh rupees unpaid for three weeks, among other tests.

The Income-tax Act governs permanent establishment, transfer pricing and withholding, and Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613, in which the Supreme Court held that the transfer of a Cayman Islands company holding Indian assets was not taxable in India, remains the leading illustration of the gap between where a group is structured and where its business is done.

The authority on a company controlled from outside India

Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd., [1916] 2 AC 307, is the case that shows why the place of incorporation is not always the end of the enquiry. The respondent company was registered in England and its business was carried on there, but all its shares save one were held by German residents and all its directors were Germans living in Germany. On the outbreak of war it sued an English company for a trade debt. The House of Lords held that although the company was an English company by incorporation, the court could look at the nationality and residence of those in de facto control to determine whether it bore enemy character, and that payment to it would amount to trading with the enemy. The action failed.

Conclusion. A foreign company under section 2(42) is a body incorporated outside India that has a place of business here, physically or electronically, and conducts business activity here. The Companies Act, 2013 applies to it selectively: sections 380 to 386 and 392 and 393 by force of section 379(1); the whole of Chapter XXII and such other provisions as are prescribed, as if it were an Indian company, where fifty per cent or more of its paid-up capital is held in India under section 379(2); sections 34 to 36 and Chapter XX where it has issued a prospectus in India under section 391; and the charge, annual return, accounts and investigation provisions under section 384.

The obligations are registration within thirty days, annual accounts, publicity of name and country, an agent for service, and, on default, a fine under section 392 and the loss of the right to sue in India under section 393 until compliance is made.

What a financial statement is

Section 2(40) defines a financial statement inclusively, in relation to a company, as including a balance sheet as at the end of the financial year; a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year; a cash flow statement for the financial year; a statement of changes in equity, if applicable; and any explanatory note annexed to or forming part of any of those documents. The proviso exempts a One Person Company, a small company and a dormant company from the cash flow statement.

The paper asks for four types, and that is the right count: the balance sheet, the profit and loss account, the cash flow statement and the statement of changes in equity are the four statements; the explanatory notes are the fifth item in the definition but are notes to the statements and not a statement in themselves.

The legal requirements attached to them

Section 129(1) is the governing obligation. The financial statements shall give a true and fair view of the state of affairs of the company, comply with the accounting standards notified under section 133, and be in the form or forms as may be provided for different classes of companies in Schedule III. The proviso saves insurance, banking and electricity companies, which have their own statutory forms. Section 129(2) requires the Board to lay them at every annual general meeting, and section 129(3) requires consolidated financial statements where a company has one or more subsidiaries, associate companies or joint ventures, together with a statement in Form AOC-1 containing the salient features of the subsidiaries' financial statements.

Section 136 requires a copy to be sent to every member, trustee for debenture holders and every other person entitled, not less than twenty one days before the meeting; section 137 requires filing with the Registrar in Form AOC-4 within thirty days of the annual general meeting, and section 137(3) makes default punishable by penalty. Section 128 requires the books of account to be kept at the registered office, or at another place in India on filing a notice with the Registrar, on accrual basis and double entry, preserved for eight years, and, since the Rules were amended with effect from 1 August 2022, maintained in electronic mode with an audit trail that cannot be disabled.

Section 130 allows re-opening of accounts only on an order of a court or the Tribunal on an application by the Central Government, the income tax authorities, the Securities and Exchange Board or any other statutory regulator, where the accounts were prepared in a fraudulent manner or the affairs were mismanaged; and section 131 allows the Board, with the Tribunal's approval, to prepare revised financial statements for any of the three preceding financial years where they do not comply with section 129 or section 134. Those two sections exist because before 2013 there was no lawful way to correct a filed account at all.

Redeemable, and here section 55 is mandatory: no company limited by shares may issue irredeemable preference shares, and the shares must be redeemable within twenty years, except for shares issued for infrastructure projects, which may be redeemed within thirty years subject to redemption of a minimum of ten per cent a year from the twenty first year at the holder's option. Redemption may be made only out of profits available for dividend or out of the proceeds of a fresh issue made for the purpose, and where profits are used an equivalent sum must be transferred to the Capital Redemption Reserve.

Equity shares with differential rights are governed by Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014, which caps them at seventy four per cent of the total post-issue paid-up capital, requires authorisation by the articles and an ordinary resolution, a consistent track record of distributable profits for three years and no default in filing financial statements or in repayment of deposits or dividend.

Two limits complete the picture. Section 53 prohibits the issue of shares at a discount, other than sweat equity, and makes contravention punishable, with the company liable to refund the money with interest at twelve per cent; the Companies (Amendment) Act, 2017 added an exception permitting issue at a discount to creditors on conversion of debt into shares under a statutory resolution plan or debt restructuring scheme. Section 55(3) allows a company unable to redeem preference shares to issue further redeemable preference shares with the consent of three fourths in value of the holders and the approval of the Tribunal.

The kinds of debentures

Section 2(30) defines a debenture as including debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not, and, since the Companies (Amendment) Act, 2017, excluding instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934 and such other instruments as may be prescribed in consultation with the Reserve Bank.

The protections in section 71, which distinguish a debenture from an ordinary loan. Section 71(2) forbids the issue of debentures carrying voting rights. Section 71(4) requires a Debenture Redemption Reserve out of profits available for dividend, to be used only for redemption. Section 71(5) forbids an issue to more than five hundred persons without the appointment of a debenture trustee, and section 71(6) makes his duty to protect the interests of the holders and redress their grievances.

Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 requires redemption within ten years, extended to thirty for infrastructure and certain classes, a charge on specific properties and a trust deed. Section 71(9) allows the trustee to petition the Tribunal where the assets are or are likely to become insufficient. Section 71(10) allows the Tribunal, on the application of the holders or the trustee, to direct redemption forthwith with principal and interest.

Shares and debentures compared

The case law behind the accounts and behind the instruments

On what a financial statement is worth, the governing idea is that the account is only as good as the person who checks it. In re Kingston Cotton Mill Co. (No. 2), [1896] 2 Ch 279, is where the standard begins. The company's manager had for years overstated the quantity and value of stock in hand, and the auditors had accepted his certificate without physically verifying the stock. The Court of Appeal held them not liable, Lopes L.J. saying that an auditor is a watchdog and not a bloodhound, entitled in the absence of suspicious circumstances to rely on the honesty of trusted officials.

The honest modern statement is that Indian law has moved a long way from that: section 143(3) now requires the auditor to report on the adequacy and operating effectiveness of internal financial controls, section 143(12) with Rule 13 of the Companies (Audit and Auditors) Rules, 2014 requires him to report a suspected fraud of one crore rupees or more to the Central Government, and section 132 subjects him to the National Financial Reporting Authority. An auditor who today accepted a manager's certificate about stock without verification would not be protected by a case decided in 1896.

And on the debenture, the practical authority is now statutory rather than judicial, because a debenture holder is a financial creditor under section 5(7) of the Insolvency and Bankruptcy Code, 2016. Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, in upholding the Code, explained the classification between financial and operational creditors by reference to the financial creditor's capacity to assess viability and to restructure, which is precisely why the debenture trustee, and not the individual holder, is given the powers in sections 71(9) and 71(10) and the standing to apply under section 7 of the Code.

For full marks, cover: the Fund by asking what happens to money that belongs to an investor who cannot be found, which is the problem it exists to solve; then its constitution, what is credited to it, what it is spent on and how a claimant recovers, with the seven year rule and the transfer of the shares themselves; then the Board's role, and be precise about the fact that the Board's mandate is investors in securities, so its protection of creditors is indirect and reaches debenture holders, deposit holders in listed issuers and the market generally rather than trade creditors.

Section 124: the Unpaid Dividend Account

The scheme begins one step before the Fund. Section 124(1) provides that where a dividend has been declared but has not been paid or claimed within thirty days of declaration, the company must, within seven days of the expiry of that period, transfer the total unpaid amount to a special account called the Unpaid Dividend Account opened in a scheduled bank. Section 124(2) requires the company to place on its website, within ninety days of that transfer, a statement of the names, last known addresses and the unpaid dividend of each person. Section 124(3) makes default in transferring carry interest at twelve per cent per annum for the benefit of the members in proportion to their claims. Section 124(4) allows any person claiming to be entitled to apply to the company for payment.

Section 124(5) is the seven year rule. Any money transferred to the Unpaid Dividend Account which remains unpaid or unclaimed for seven years from the date of the transfer must be transferred by the company, along with interest accrued, to the Investor Education and Protection Fund, and a statement of the details of the transfer must be sent to the authority administering the Fund.

Section 125: the Fund itself

Section 125(1) requires the Central Government to establish the Fund. Section 125(2) lists what is credited to it: grants by the Central Government after appropriation by Parliament; donations by the Central Government, State Governments, companies or any other institution; the amount in the Unpaid Dividend Account transferred under section 124(5); the amount lying in the general revenue account of the Central Government transferred under the old section 205A of the 1956 Act; the amount lying with companies in respect of matured deposits, matured debentures, application money received for allotment of securities and due for refund, and the interest accrued on each of them, in each case remaining unclaimed and unpaid for seven years; sale proceeds of fractional shares arising out of a bonus issue, merger or amalgamation for seven or more years; redemption amount of preference shares remaining unpaid or unclaimed for seven years or more; and the interest or other income received out of investments made from the Fund. The proviso makes it clear that no such amount is credited to the Fund unless the period of seven years has elapsed.

Sections 125(5) to (8) constitute the authority. The Central Government constitutes an authority for the administration of the Fund, consisting of a chairperson and such other members not exceeding seven and a chief executive officer as it may appoint, which administers the Fund, maintains separate accounts, and spends the money in accordance with the rules; the accounts are audited by the Comptroller and Auditor General of India, and the audited accounts with the audit report and the annual report are laid before each House of Parliament. Section 125(9) provides that a person whose amount has been transferred to the Fund may apply for a refund in the prescribed manner, and the authority must decide within sixty days of the receipt of the verification report from the company, extendable by thirty days for reasons to be recorded.

The honest assessment. The Fund has become very large and the rate at which money is refunded out of it is low, chiefly because the original investor has died, moved, or holds under a name that no longer matches the record. The transfer of shares under section 124(6) has made claims more valuable and more contested, and the procedure under the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 is a genuine burden on the claimant, requiring the company's verification report before the authority can act.

Protection of investors, while they hold. The Listing Obligations and Disclosure Requirements Regulations, 2015 require continuous disclosure of material events, quarterly results, shareholding patterns and related party transactions, and impose the corporate governance requirements in Regulations 17 to 27, including independent directors, the audit committee and shareholder approval of material related party transactions. The Prohibition of Insider Trading Regulations, 2015 forbid trading on unpublished price sensitive information and require a structured digital database. The Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003 forbid market manipulation. The Substantial Acquisition of Shares and Takeovers Regulations, 2011 require an open offer at twenty five per cent so that a shareholder faced with a change of control may exit.

Two decisions show the reach. In Sahara India Real Estate Corporation Ltd. v. Securities and Exchange Board of India, (2013) 1 SCC 1, the Board's jurisdiction was held to extend to two unlisted companies which had raised about twenty four thousand crore rupees from roughly three crore investors on optionally fully convertible debentures, because an offer to more than forty nine persons was a public issue, and refund with fifteen per cent interest was ordered. In N. Narayanan v. Adjudicating Officer, SEBI, (2013) 12 SCC 152, a penalty on a director for the publication of falsified accounts was upheld, the Court holding that the Board has a duty to protect the integrity of the securities market and that directors owe a duty to the market not to falsify accounts.

And the creditors

The precise position is that the Board protects creditors who are investors in securities, and protects other creditors only indirectly.

Trade creditors and bank lenders are not. Their protection lies elsewhere: in the registration of charges under sections 77 to 80 of the Companies Act, in capital maintenance under sections 66, 68 and 123, in the class meeting requirement in section 230 on a scheme, and above all in the Insolvency and Bankruptcy Code, 2016, under which a financial creditor applies under section 7 and an operational creditor under section 9, the committee of creditors decides under section 21 and the waterfall in section 53 governs distribution.

The indirect protection is real and should be stated. Continuous disclosure, an audited and standardised financial statement, insider trading rules and a market in which the price reflects public information all give a lender information he would otherwise have to obtain privately. A regulator that keeps the accounts honest is protecting every person who extends credit on the strength of them, which is why N. Narayanan is as important to a lender as it is to a shareholder.

For full marks, cover: the two concepts separately, because they are two distinct grounds with different tests, oppression being conduct against a member and mismanagement being conduct against the company; the change section 241 made to the old section 397, which is that prejudice now suffices and the winding up condition has gone; then the remedies as a ladder, from the rule that ordinarily prevents a minority from suing at all, up through sections 241 to 245, investigation, exit and winding up, with the leading cases at each rung.

Mismanagement is conduct against the company. It does not require any member to be singled out. Conducting the affairs in a manner prejudicial to the interests of the company covers, for example, continuing in office after the expiry of a term, gross neglect of the company's business, siphoning of funds, sale of assets at an undervalue, or a material change of control that makes such conduct likely. In Rajahmundry Electric Supply Corporation Ltd. v. A. Nageshwara Rao, AIR 1956 SC 213, the Supreme Court upheld the appointment of an administrator where the vice chairman was in sole control, large sums were due from him, the directors were disqualified, and the company's affairs were in a state of complete disorder; that is the paradigm of mismanagement.

Section 241 widened the old law in three ways, and stating them is worth marks. Under section 397 of the Companies Act, 1956 the petitioner had to prove oppression and that the facts would justify a winding up order on the just and equitable ground and that winding up would unfairly prejudice him. Section 241 requires none of that: conduct that is merely prejudicial suffices; prejudice to the company is a ground even where no member is oppressed; and there is no winding up precondition at all. Section 244 also introduced a power of waiver of the numerical threshold, which did not exist under the 1956 Act.

The remedies, as a ladder

Rung one: the rule that ordinarily bars the minority. Foss v. Harbottle, (1843) 2 Hare 461, holds that where a wrong is done to the company the company is the proper plaintiff, and that a court will not interfere with an irregularity that the majority can cure. Two shareholders complaining that directors had sold their own land to the company at an inflated price were held to have no standing. The exceptions, worked out since, are an act ultra vires or illegal; an act requiring a special majority carried out by a simple one; an invasion of the individual membership rights of the plaintiff, such as the right to vote or to have a transfer registered; and a fraud on the minority by those in control. The minority's common law remedy is therefore narrow, and the statutory remedies exist because it is narrow.

Section 242(2) then lists what the Tribunal may order, and the list is the best answer to the question what remedies are available. It may provide for the regulation of the conduct of the affairs of the company in future; the purchase of the shares of any members by other members or by the company, with the consequent reduction of capital; restrictions on the transfer or allotment of shares; the termination, setting aside or modification of any agreement between the company and the managing director, any other director or the manager, on terms that are just and equitable; the termination, setting aside or modification of any agreement with any person, provided he has had due notice and consented; the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made within three months before the application which would in a winding up be deemed a fraudulent preference; the removal of the managing director, manager or any director; the recovery of undue gains made by a managing director, manager or director during his tenure and the manner of their utilisation; the appointment of directors by the Tribunal; the imposition of costs; and any other matter for which provision is just and equitable. Section 242(4) allows interim orders for the regulation of the company's affairs.

Rung four: investigation. Section 213 allows the Tribunal, on the application of members satisfying the section 244 numbers, to order an investigation into the affairs of the company where it is satisfied that the business is being conducted with intent to defraud creditors, members or any other person, or for a fraudulent or unlawful purpose, or in a manner oppressive to any of its members, or that the company was formed for a fraudulent or unlawful purpose.

It may also do so on the application of any other person where the persons concerned in the formation or management have been guilty of fraud, misfeasance or other misconduct, or where the members have not been given all the information they might reasonably expect. Section 216 permits inspectors to determine the true persons financially interested in the company. Section 210 allows the Central Government to order an investigation of its own motion in the public interest, and section 212 to assign it to the Serious Fraud Investigation Office.

Rung six: winding up. Section 271(e) allows the Tribunal to wind up a company where it is just and equitable to do so, and Ebrahimi v. Westbourne Galleries Ltd., [1973] AC 360, is the leading case: two men who had traded as partners incorporated the business, and the majority then removed the plaintiff from the Board by a lawful ordinary resolution, leaving him with neither dividend nor salary.

The House of Lords held that a company founded on personal relationship and mutual confidence may be subjected to equitable considerations that qualify the exercise of strict legal rights, and ordered winding up. But Tata Consultancy Services holds that this cannot be the substantive prayer in a section 241 petition, so the correct course is a petition under section 271(e), and section 273(2) allows the Tribunal to refuse relief if some other remedy is available and the petitioner is acting unreasonably in seeking winding up instead.

The Supreme Court set the allotment aside, holding that directors are in a fiduciary position and that the power to allot shares must be exercised for the proper purpose of raising capital and not to gain or keep control, and that an oppressor cannot be permitted to take advantage of his own wrong by buying out the person he has oppressed. It is the case to cite whenever the facts involve an allotment, a rights issue or a transfer that changes who controls the company.

Conclusion. Oppression is conduct in the running of a company's affairs that is burdensome, harsh and wrongful to a member as a member; mismanagement is conduct prejudicial to the interests of the company itself; and section 241 has widened both by requiring only prejudice and by removing the winding up precondition that section 397 of the 1956 Act imposed.

For full marks, cover: the honest opening, which is that neither of the two is now wound up in the way the question assumes, because a defunct company is struck off under sections 248 to 252 and a sick company goes to the Insolvency and Bankruptcy Code, 2016; then each regime in detail with its grounds, procedure, consequences and the route back; and the reason the law treats them differently, which is that the first has nothing to distribute and the second has a business worth saving.

(a) Defunct companies

A defunct company is one that exists on the register and does nothing. The Act does not use the word; the Companies Act, 1956 used it in the marginal note to section 560, "Power of Registrar to strike defunct company off register", and the expression has survived in practice. The Ministry of Corporate Affairs ran a Fast Track Exit scheme under the old law for exactly these companies.

Section 248(1) sets out the grounds on which the Registrar may act. He must have reasonable cause to believe that a company has failed to commence its business within one year of its incorporation; or is not carrying on any business or operation for a period of two immediately preceding financial years and has not applied for the status of a dormant company under section 455; or that the subscribers to the memorandum have not paid the subscription they undertook to pay at the time of incorporation and a declaration to that effect has not been filed within one hundred and eighty days under section 10A(1); or that the company is not carrying on any business or operations, as revealed after the physical verification carried out under section 12(9). In each case he must send notice of his intention to the company and to all its directors, requesting representations with supporting documents within thirty days.

Section 248(2) provides the voluntary route. A company may, after extinguishing all its liabilities, by a special resolution or with the consent of seventy five per cent of the members in terms of paid-up share capital, file an application to the Registrar for removing its name on any of the grounds in section 248(1); and where the company is regulated under a special Act, the approval of the regulatory body is required.

Section 249 lists the situations in which an application under section 248(2) may not be made. If at any time in the previous three months the company has changed its name or shifted its registered office from one State to another; has made a disposal for value of property or rights held by it immediately before cessation of trade, otherwise than in the ordinary course of trading; has engaged in any other activity except one necessary for making the application, concluding the affairs of the company, or complying with a statutory requirement; has made an application to the Tribunal for a compromise or arrangement which has not been concluded; or is being wound up under Chapter XX or under the Insolvency and Bankruptcy Code, 2016. Contravention makes the application void and attracts a fine of up to one lakh rupees.

Section 250 fixes the effect of dissolution: the company ceases to operate as a company from the date mentioned in the notice and the certificate of incorporation is deemed cancelled, except for the purpose of realising the amounts due to the company and for the payment or discharge of its liabilities.

(b) Sick undertakings

Here the regime the question assumes has been repealed, and an answer that describes the Board for Industrial and Financial Reconstruction as a live institution is a decade out of date.

The old law, in outline, because the comparison is the point. The Sick Industrial Companies (Special Provisions) Act, 1985 defined a sick industrial company as an industrial company registered for at least five years whose accumulated losses at the end of any financial year had equalled or exceeded its entire net worth. The Board for Industrial and Financial Reconstruction inquired into sickness, and could either sanction a scheme for rehabilitation, with reliefs and concessions from banks, financial institutions and Governments, or record an opinion that the company should be wound up and forward it to the High Court. Section 22 of that Act imposed a suspension of legal proceedings while an inquiry or scheme was pending, which in practice became a shield: a company could remain under the protection of the Board for years while its creditors could do nothing.

On admission the Adjudicating Authority, which is the National Company Law Tribunal, declares a moratorium under section 14 barring suits, execution, transfer of assets and recovery of property; the Board's powers are suspended and an interim resolution professional takes over the management under section 17; a committee of creditors of financial creditors is constituted under section 21; a resolution plan is invited, and one approved by sixty six per cent of the voting share of the committee is placed before the Adjudicating Authority under section 31, on approval binding the corporate debtor, its employees, members, creditors, guarantors and the Government. Section 12 fixes an outer limit of three hundred and thirty days including litigation; if no plan is approved, liquidation follows under section 33, and distribution is governed by the waterfall in section 53.

Four decisions settle the shape of it. Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, held that on proof of a default the Adjudicating Authority must admit a financial creditor's application, and that a State law suspending the debtor's liabilities was repugnant to the Code. Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, upheld the Code, explained the classification between financial and operational creditors, and described the primary object as resolution rather than recovery.

Why the law treats the two differently

A defunct company has nothing to distribute, so the law removes it cheaply and keeps the liabilities alive against its officers. A sick company has a business, employees and going-concern value, so the law tries to move the business to someone who can run it and pays the creditors out of what that person offers. The Sick Industrial Companies Act failed because it left the incumbent management in place and gave it a shield; the Code succeeded in the one respect that matters most for this comparison, that it removes the management on admission and puts the decision in the hands of the creditors whose money is at stake.

For full marks, cover: two of the three, at about twelve and a half marks each. All three are written below. Each opens with the definition and the governing sections, gives the concessions or the classification the topic turns on, and closes on the honest limitation.

(a) One Person Company

Section 2(62) defines a One Person Company as a company which has only one person as a member. It was created by the Companies Act, 2013 on the recommendation of the J.J. Irani Committee of 2005, and it answers a problem the law had left unsolved: a sole entrepreneur who wanted limited liability had to find at least one other person to hold a share, so that private companies all over India carried a nominal second member holding one share for the sake of the statute.

Its financial statement need not include a cash flow statement under the proviso to section 2(40). It may file a financial statement signed by one director under section 134(1), and section 137(1) gives it one hundred and eighty days from the close of the financial year to file, rather than thirty days from an annual general meeting it does not hold. It is exempt from the rotation of auditors under section 139(2) as a private company falling outside the prescribed classes.

The rules were liberalised with effect from 1 April 2021. The earlier requirement that a One Person Company convert into a private or public company on exceeding a paid-up capital of fifty lakh rupees or an average turnover of two crore rupees was removed, so there is no longer a ceiling on its size; conversion into a private or public company is permitted at any time; and a Non-Resident Indian who has stayed in India for one hundred and twenty days in the preceding financial year, reduced from one hundred and eighty two, may now incorporate one.

A prospectus proper, under section 26, is the full document for a public offer. It must state the matters and set out the reports specified in that section, must be dated and signed, and, under section 26(4), a copy signed by every person named in it as a director or proposed director must be delivered to the Registrar for registration on or before the date of publication. Section 26(6) is the rule most often forgotten: no prospectus is valid if it is issued more than ninety days after the date on which a copy was delivered to the Registrar.

A red herring prospectus, under section 32, does not include complete particulars of the quantum or price of the securities, and is used in a book-built issue. It must be filed with the Registrar at least three days before the opening of the subscription list, it carries the same obligations and liabilities as a prospectus, and on closing, the final prospectus stating the total capital raised and the closing price must be filed with the Registrar and the Securities and Exchange Board, with the variations highlighted.

A deemed prospectus, under section 25, arises where a company allots or agrees to allot securities with a view to their being offered for sale to the public: the document by which the offer is made is deemed to be a prospectus issued by the company, and an offer within six months of the allotment, or the fact that the consideration had not been fully received at the date of the offer, is evidence of that intention. The provision exists to catch the device of routing an issue through an issuing house.

Liability, in one paragraph, because a note on the prospectus without it is incomplete. Section 34 makes an untrue or misleading statement, or an omission calculated to mislead, punishable as fraud under section 447, unless the person proves it was immaterial or that he had reasonable ground to believe it true. Section 35 gives every subscriber who suffered loss a claim to compensation against the company, its directors, promoters, experts and those who authorised the issue, with the defences of withdrawal of consent, want of knowledge and reasonable belief.

Constitution and tenure. Section 409 fixes the qualifications: a Judicial Member must be or have been a judge of a High Court for five years, or a District Judge for five years, or an advocate of a court for ten years; a Technical Member must have the prescribed experience in company law, accountancy, economics or a related field. Section 410 constitutes the National Company Law Appellate Tribunal, with a chairperson and Judicial and Technical Members not exceeding eleven.

Section 412 provides for selection by a committee. Section 413 fixes the term at five years, with eligibility for reappointment for another five, and the age of retirement at sixty seven for the President and sixty five for other Members, with a bar on the appointment of a person under fifty. Section 419 requires a Principal Bench at New Delhi presided over by the President, and provides that the powers are exercisable by Benches of two Members, one Judicial and one Technical.

Procedure and finality. Section 424 provides that the Tribunal and the Appellate Tribunal are not bound by the Code of Civil Procedure but are guided by the principles of natural justice, have power to regulate their own procedure, and have the powers of a civil court in respect of summoning, discovery, evidence on affidavit and the examination of witnesses, with proceedings deemed judicial proceedings under sections 193 and 228 of the Indian Penal Code.

Section 420 requires orders to be passed after giving the parties a reasonable opportunity, and permits rectification of a mistake apparent from the record within two years. Section 421 gives an appeal to the Appellate Tribunal within forty five days, extendable by forty five days on sufficient cause. Section 423 gives an appeal to the Supreme Court within sixty days on a question of law. Section 430 bars the jurisdiction of the civil court in any matter the Tribunal or the Appellate Tribunal is empowered to determine, and forbids any injunction in respect of action taken or to be taken under those powers.

Conclusion. The three notes describe three different things the Companies Act, 2013 created: a corporate form for a single entrepreneur, with the concessions in sections 96, 122, 134 and 137 and the nominee requirement in section 4(1)(f); a family of disclosure documents, of which section 26 is the standard, section 32 the book-built variant, section 31 the repeat-issue variant, section 33 the summary and section 25 the anti-avoidance provision; and a specialist tribunal that has taken over the company jurisdiction of the High Courts, the Company Law Board and the Board for Industrial and Financial Reconstruction, whose independence has been litigated three times and was last addressed by the Supreme Court in November 2025.