IGNOU SOLVED QUESTION PAPERS - ECO 08 (DEC' 2014)

BACHELOR'S DEGREE PROGRAMME

Term-End Examination: December, 2014

ELECTIVE COURSE : COMMERCE

ECO-8 : COMPANY LAW

Time : 2 hours Maximum Marks : 50

(Weightage : 70%)

Note : Answer any five questions.

1. Define a company. Explain the characteristics of a company.                 4+6

Ans: Definition: 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.

According to The Companies Act’ 2013 – “Company means a every association of person formed and registered under this Act or any companies enacted prior to the Companies Act, 2013.” [sec.2(20)]

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 Chief Justice Marshall – “A company is an artificial being invisible, intangible and existing only in the eyes of law.”

Characteristics of a Company

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. Some of the essential characteristics of a company are given below:

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 the company are movable property. 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. [ Sec.44 of the Companies Act, 2013]

9) Common Seal: As a company is an artificial person, so it cannot sign any type of contracts. For this purpose its requires a common seal which acts as the official signatories of the company. All the contracts prepared by its directors must bear seal of the company.

10) Democratic Ownership: The directors of a company are elected by its shareholders in a democratic way.

11) Maintenance of Books: A limited Company is required by law to keep a prescribed set of account books and failure in this regard may attract penalty.

12) Periodical audit: A Company has to get its accounts periodically audited through the chartered accountants appointed for this purpose by the shareholders.

2. Explain the circumstances under which corporate veil can be lifted.                  10

Ans: A company is a legal person and is distinct from its members. This principle is regarded as a curtain or a veil between the company and its members protecting the later from the liabilities of the former. This veil is the corporate veil and is impassable as an iron curtain.

As per the judicial point of view, a company is a separate legal entity different from its members (saloman Vs. Saloman & co. Ltd.). When there are cases of dishonesty and fraudulence in incorporation, the law lifts the veil. This veil is a fictional veil and not a wall between the company and its members. Lifting the corporate veil may be defined as looking behind the company as a legal person and identifying the persons who are behind the scene and are responsible for the preparation of fraud. The circumstances under which the court may lift the corporate veil may be broadly divided into following two heads:-

Judicial Interpretation: following are the cases under which the court has lifted the corporate veil:

a)  Avoidance of welfare legislation: Where the device of incorporation is used for reducing the amount to be paid by way of bonus to the workmen, the Supreme Court can upheld the lifting of the veil to look at the real transactions: [workmen of Associated Rubber Industry Vs. Associated Rubber Co.]

b) Protection of Revenue: Where the medium of the company has been used for tax evasion or to circumvent tax obligation, courts have lifted the veil and looked at the realities of situation [In Sir Dinashaw Mancekjee Petit].

c) Where company is a sham: When the court finds that company is a mere cloak or sham and is used for some illegal or improper purpose, it may lift veil. The leading case on this was P.N.B. Finance V. Shital Prasad, where a person borrowed money from a company and invested it into three different companies, the lending company was advised to bring together the assets of all the three companies, as they were created to do fraud with the lending company.

d) Where the company is acting as the agent of the shareholders: Where a company is devised to act as an agent of its shareholders or of another company it will be responsible for its acts. However, it will be a question of fact every case whether the company is acting as agent for its shareholders.

e) Determination of character: Test of control is adopted in the cases when the trade is conducted with enemy country. In such cases the court will lift the veil at the times of war to see whether a company is controlled by enemy aliens. Consequently a company registered in England may be alien enemy if its agents or the persons in default controls of its affair are alien.

f) Provision of fraud or improper conduct:  The court will disregard the separate existence of the company, where it is shown the company is formed for evading contractual and statutory obligations [Gilford Motor Co. Ltd. V. Horne]

Statutory Provisions: cases are as follows:

Thus, these are the circumstances were the veil can be lifted.

3. What is meant by "Certificate of incorporation"? What are its effects ?                              5+5

4. What is a statutory meeting ? When should it be held ? What are the contents of a statutory report ? 2+2+6

5. (a) Point out the differences between a share certificate and share warrant. 5+5

(b) What are the provisions for issue of shares at a discount?

Ans: As per sec. 53 of the Companies Act, 2013, issue of shares at a discounted price is prohibited. This prohibition applies to all companies, public or private. Any issue of share at a discounted price shall be void. But a company can issue sweat equity shares to its directors or employees as a reward to them for their contributions or conversion of debt into shares. Sweat equity shares are those which are issued by a company at a discounted price or for consideration other than cash.

According to Section 54 of company act 2013, a company is permitted to issue sweat equity shares provided the following conditions are satisfied:

6. Define the term 'director'. How are directors appointed?                       2+8

Ans: Meaning of Directors and Board of Directors and their appointments

On incorporation, a company becomes a legal artificial person but it cannot act by itself and consequently it has to depend upon some human agency to act in its name. The members have no inherent right to participate in the management of the company. A large sized company may have its members running into lakhs, who are dispersed all over the country and they even lack the expertise to manage the affairs of the company, which makes it impossible to give the management of the company in their hands. Therefore a specialized body of persons called as directors are appointed by the members to manage the affairs of the company. The directors must act as a body without improper exclusion of any of the directors. The directors collectively referred to as BOARD. The board is the managerial body constituted by the members to whom is entrusted the whole management of the company.

According to Section 2 (34) of the Companies Act, 2013, “Directors means a director appointed to the board of a company.”

According to Sec.2 (10) of the Indian Companies Act, 2013, “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company;

Appointment of Directors

Section 149 of the Companies Act, 2013, makes it obligatory on every public company to have at least three directors and on every other company to have at least two directors. The directors may be appointed in the following ways:

1. Appointment of First Directors (Sec. 152): First directors mean the director of the company who assumes office from the date of incorporation of the company. The first directors of a company may be named in its articles of association and if it is not mentioned, then the subscribers of the memorandum of association who are individual, shall be deemed to be the first directors of the company, until the directors are not appointed in accordance with Section 152.

In case of public company, if the article provides any share qualification, only such subscribers as possess the necessary share qualification shall be deemed to be directors. The articles at the time of registration may contain the names of the first directors until directors are appointed in the first general meeting.

2. Appointment of Directors by Members in the General Meeting (Sec. 152(2): Except for the first director, the subsequent directors are appointed by the company in the general meeting. Sec. 152(2) provides that not less than 2/3 of the total number of directors of a public company, or of a private company which is subsidiary of a public company must be appointed by the company in general meeting. These directors must be subject to retirement by rotation. The remaining directors of such a company and a purely private company are appointed by the company in general meeting

3. Appointment by Board of Directors: The directors are appointed in the general meeting by the members. But, the Board of Directors may also appoint the directors, in the following way:

a. Additional Directors: Section 161, of the Act, lays down that the Board may appoint additional directors if the article of association of a company empower the Board of Directors to do so. Such additional directors shall hold office only up to the date of the next annual general meeting. If the annual general meeting is not held, then such additional director vacates his office on the last day on which the annual general meeting should have been held in terms of Section 166. The additional directors are exempted from the requirement of filing consent to act as directors.

b. Casual Vacancies: Section 161 empowers the Board of Directors to appoint the directors in the casual vacancy which may occur due to any reasons like, death, resignation, insanity, insolvency etc of the directors. Such casual vacancy may be filled according to the regulations and procedure prescribed by the articles of association. A person appointed to fill a casual vacancy will hold office only till the date up to which the directors in whose place, he is appointed would have held office. 

c. Alternate Directors: The Board Meeting may be held at a time when a director is, absent for a period of more than three months from the state and in such a situation, an ‘alternate director’ is appointed. The Board of Directors can appoint the additional director in the absence of a director if so authorized by articles or by a resolution passed by the company in general meeting. The alternate director shall work until the original director return or up to the period permitted to the original director. The provision of the Act not applicable to the alternate director is as:

A. The appointment of an alternate director is not considered as an increase in the strength of the Board of Directors.

B. Alternate Directorship held by a person cannot be counted for the maximum number of directorship, which a person can hold.

C. An alternate director is not required to hold any qualification shares.

4. Appointment of Directors by Central Government: At least 100 members of the company or the members of the company who hold at least one-tenth of the total voting power, approach the Central Government for appointing a director to safeguard the interest of the company or its members or the public or to curb the oppressive and mismanagement of company’s affairs.

The term of appointment of the directors by the Central Government should not exceed 3 years and he may be removed by the Central Government for appointing another person to hold the office.

5. Appointment of Directors by Third-Parties if the Article provides (Sec. 152): A company may have ‘nominee directors’ which is permissible in a company if the articles of association gives power to such third parties to appoint their nominee on company’s board. Here the third party may be debenture holders, financial corporation, banking companies who have advanced loan to the company to safeguard their interests that the money is only used for the purpose for which it was borrowed.

6. Appointment of Directors By small shareholders if the article provides: The Small Shareholders, in case of a public company having:

i) A paid-up capital of five cores rupees or more, and

ii) one thousand or more small shareholders.

may have a director elected by such small shareholders in the manner as may be prescribed.
The directors are appointed by ordinary resolution i.e. through the majority of the shareholders. The minority of the shareholders does not get the opportunity to send representative in the Board of Directors. But, through proportional representative voting, the shareholders can get that opportunity.

7. Appointment of directors by professional representation (Sec. 163): The Directors of a company are generally appointed by simple majority. As a result majority shareholders controlling 51% or more votes may elect all directors and a substantial minority of 49% may not find any representation on the board. This section give power to the minority shareholders to elect directors through single transferable vote and cumulative voting.

7. What are the various modes of winding up ? Who can file a petition for winding up ?                  5+5

8. Write notes on any two of the following : 5+5

(a) Irregular allotment

(b) Minimum subscription

(c) Statement in lieu of a prospectus: A public company, which does not raise its capital by public issue, need not issue a prospectus. In such a case a statement in lieu of prospectus must be filed with the Registrar 3 days before the allotment of shares or debentures is made. It should be dated and signed by each director or proposed director and should contain the same particulars as are required in case of prospectus proper.

(d) Buy back of shares