Term-End Examination
December, 2016
Time : 2 hours Maximum Marks : 50
(Weightage : 70%)
Note : Answer any five questions. All questions carry equal marks.
1. Explain the meaning of "Lifting of corporate veil." Discuss any four circumstances when the corporate veil can be lifted.                                4+6
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:-
a)      Judicial Interpretation
b)      Statutory Provision
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].
Statutory Provisions: cases are as follows:
1)      Number of member below statutory minimum: When at any time the number of member of a company is reduced below two in case of a private company or below seven in case of a public company and then too it continues it s business for more than six months, the every member who knows the fact will become liable to an unlimited extend for the payment of the whole debt of the company done during that time. The reason behind this is to withdraw the advantage of incorporation when the conditions are not fulfilled.
2)      Company not mentioned on the bills of exchange: When the bills of exchange, promissory note, cheque or order for money or goods are signed by officer of the company or any other person on behalf of the company, and the name of company is not fully or properly mentioned. Then the person who signed the instrument will be personally liable. Unless the amount is paid by the company.
Thus, these are the circumstances were the veil can be lifted.
2. What are the different stages in formation of a company ? Explain them.                       10
Ans: Various stages in Formation and Incorporation of a Company
Without incorporation a company cannot be formed. It comes into existence only after registration and issue of certificate of incorporation. A promoter for registration takes the following steps:
(1) Preliminary Steps
(2) Delivery of Documents to the Registrar
(3) Scrutiny of Documents by the Registrar
(4) Obtaining Certificate of Incorporation
(1) Preliminary Steps : Following preliminary steps are taken by promoter for registration :
(i) A Promoter decides the type of Company : either private or a public company he wants to be registered. It will be either limited by shares or guarantee or with or without share capital. The company may be registered with unlimited liability
(ii) The promoter also decides the place of registered office of the company. If the proper place is not decided then the name of state is at least decided by him.
(iii) Selecting the Name of the Company : The promoter also suggest four names of a proposed company as alternatives in form 1-A with a free of Rs.500 to the registrar of the company to decide about the availability and desirability of the name out of four names. This name will be decided by the registrar within seven days it will be reserved for six months.
(iv) Drafting Memorandum : The promoter may draft the memorandum with help of his solicitor, company secretary and etc.
(v) Drafting of Articles of Association for private company is essential but for a private company it is optional in place of it, it can use Table-A.
(vi) Vetting of the Drafts: The registrar may help in avoiding mistake and unnecessary delay in avoiding mistake and unnecessary delay in registration of the company.
(vii) Printing of Memorandums: Such as Memorandum and Articles of Association are required to be printed by the promoter.
(viii) Stamping on both the documents is a must according to laws applicable to them.
(ix) Signature by the Subscribers: At least 7 and 2 in case of public and private company respectively, signed by the subscribers on these public documents. In case of illiterate subscriber, he may give his thumb impression or mark.
(x) Dating : The subscribers must mention the dates on both the documents but not before the date of stamping.
(xi) Statutory Declaration : The legal compliance is completed nothing remain to be declared in connection to registration of the company. It is duly signed by the competent person prescribed in the act.
(xii) Getting consent of directors that they will act as directors of the company by the promoter.
(xiii) Getting undertaking to take at least one share which is called qualification shares by the director this consent is also taken by the promoter.
(xiv) Other contracts such as preliminary are to be drafted by the promoter.
(2) Delivery of the Documents to the Registrar : The promoter delivers the following documents to the registrar:
a)      Application for availability of name
b)      Memorandum of Association
c)       Articles of Association
d)      Copy of proposed agreement
e)      Statement on nominal capital
f)       Address of the registered office
g)      List of directors and their consent
h)      Undertaking to take up qualification shares
i)        Statutory declaration
 (3) Scrutiny of Documents: When the promoter duly file all the documents relating for incorporation to the registrar, the registrar then will scrutinize these documents from legal point of view. If all the documents found correct, he may issue a certificate of incorporation, but if finds any minor defect in the documents, then he may require for rectification. But if there is no defect, then he may be compelled to register if he denies.
(4) Certificate of Incorporation: When the registrar; after scrutiny of document feels satisfaction regarding formation formalities, he may retain all the relevant documents with him and he shall issue a Certificate of Incorporation to the company.

3. Explain the relationship and distinction between Memorandum of Association and Articles of Association.  10

4. Define a Prospectus. What are the remedies available against company and its directors for misrepresentation in the prospectus ?                      2+8
Ans: Misleading Prospectus or Mis-statement in prospectus:
A prospectus is said to be misleading or untrue in two following cases:
a)      A statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included.
b)      Omission from prospectus of any matter to mislead the investors.
Where a prospectus, issued, circulated or distributed:
a)    includes any statement which is untrue or misleading in form or context in which it is included; or
b)   where any inclusion or omission of any matter is likely to mislead;
Every person who authorises the issue of such prospectus shall be liable under section 447 i.e. fraud.
Defences available in this section are:
a)    Person prove that statement or omission was immaterial;
b)   Person has reasonable ground to believe and did believe that statement was true; or
c)    Person has reasonable ground to believe and did believe that the inclusion or omission was necessary.
Where a person has subscribed for securities of a company acting upon any misleading statement, inclusion or omission and has sustained any loss or damage as its consequence, the company and every person who:
a)    is a director at the time of the issue of prospectus;
b)   has named  as director or as proposed director with his consent;
c)    is a promoter of the company;
d)    has authorised the issue of the prospectus; and
e)    is an expert;
shall be liable to pay compensation to effected person. This civil liability shall be in addition to the criminal liability under section 36. Where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.
Defences under this section are:
a)    he has withdrawn his consent or never give his consent;
b)   the prospectus was issued without his knowledge or consent and when he become aware, gave a reasonable public notice that prospectus was issued without his knowledge or consent.
5. What are the differences between shares and debentures ?                 10
6. What is meant by 'a call on shares' ? What are the essential requisites of a valid call and forfeiture of shares ? 2+4+4
7. Can a company became a director ? Discuss the rule regarding number of directors and directorship of a company.     2+8

8. What are the different types of meetings of a company ? Explain the requisite of a valid meeting.                       2+8
9. Write short notes on any two of the following : 5+5
(a) Compulsory winding up
(b) Transfer of shares
(c) Doctrine of ultra virus
(d) Private company

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