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IGNOU SOLVED QUESTION PAPERS - ECO 08 (JUNE' 2011)


BACHELOR'S DEGREE PROGRAMME
Term-End Examination
June, 2011
ELECTIVE COURSE: COMMERCE
ECO-8:' COMPANY LAW
Time: 2 hours Maximum Marks: 50 (Weightage 70%)
Note: Answer any five questions.
1. Define a company and explain its features.                    2, 8
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. Describe the stages in the formation of a company. List the documents required to be filed with the registrar.  6, 4
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. What is Memorandum of Association? Explain the procedure relating to alteration of object clause.                4, 6
Ans: Memorandum of Association
Memorandum of association is the document which contains the rules regarding constitution and activities and objects of the company. It is fundamental charter of the company. Its relation towards the members and the outsiders are determined by this important document.
Section 2 (56) of the Companies Act, 2013 defines Memorandum as “Memorandum means the Memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this act”.
One of the essentials for the registration of a company is memorandum of association. It is the first step in the formation of a company. Its importance lies in the fact that it contains the fundamental clauses which have often been described as the conditions of the company’s incorporation.
Object clause and its alteration
It sets out object or vires of the company. The objects must be legal and not be against the provision of the companies Act, 2013. It is divided into two parts:
(a) The main objects and Objects incidental or ancillary to the main objects.
(b) Other objects.
Alteration of object Clause
A company may alter its objects with the passing of a special resolution. The company shall file with the registrar a copy of special resolution. The registrar shall modify the object of the company and issue a certificate regarding alteration of object clause of the company. The change in the objective shall become complete and effective from the last date of issue of certificate of alteration.
The confirmation of the central government is not required for this purpose.  Alteration of object clause is not permitted if any company has raised money from the public by issue of a prospectus, and any part of such money remains unutilised with the company.
4. Explain the 'Doctrine of indoor Management'. What are the exceptions to this rule?   4, 6
5. Explain the different ways through which a person may become member of a company.        10
Ans: The members of a company are the persons who collectively constitute the company as a corporate entity. Section 2(55) of the companies Act, 2013 defines a member as:-
1.       The subscription to MOA of a company shall be deemed to have agreed to become members of the company and on its registration, shall be entered as members in its register of members.
2.       Every other person who agrees in writing to become a member of a company and whose name is entered in the register of members shall be a member.
3.       Every person holding equity share of a company and who name is entered ass beneficial owner in the records of the depository shall be deemed to be the member of the company.
Various Modes for acquiring membership in a company
A person may become a member or shareholder of the company in any one of the following ways:-
1)      By subscribing to the Memorandum of Association: The subscriber to the Memorandum of a company are deemed to have agreed  to become a member of the company and on the registration of the company their names are entered as members on the register of members
2)      By agreeing to take qualification Shares: According to the section 266 directors of the company on delivering to registrar a written undertaking to take their qualification shares and to pay for them become the members of the company and they are in same position as if they were subscribers to the Memorandum.
3)      By transfer of shares: Shares in a company are movable property and are transferable in the same way as provided in the Articles of the company. Thus one person possesses the right to transfer his shares to another person. On the registration of transfer the transferee becomes the member of the company.
4)      By application and allotment of shares: A person may become a member of a company by an application for shares to the formal acceptance by the company. On valid allotment, the name of the shareholder is entered in the register of members
5)      By succession: On the basis of the succession certificate the legal heirs of the deceased member/shareholder get the right to be a member of the company. The company on this basis enters their name in the register of members.
6. Who are the directors of a company? How can a director be removed from office before the expiry of his term of office?                  4, 6
Ans: Meaning of Directors: 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;
Removal of directors
A director of a company can be removed by
(a) Shareholders (Sec. 169)
(b) The Tribunal (Sec. 242)
(a) Removal by shareholder: Section 169 empowers the company to remove a director by ordinary resolution before the expiry of his period of office except in the following cases:
(1) A director appointed by the tribunal under sec. 242;
(2) A nominee director of a public financial institution which is by its charter empowered to nominate a person as a director or to remove him notwithstanding any power contained in any other act;
(3) Director appointed in accordance with the principal of proportional representation, under section 163. This is to ensure that the directors appointed by the minority are not removed by a bare majority.
Special notice is required of any resolution to remove a director or to appoint somebody in his place at the meeting at which he is removed. On receipt of such notice, the company will immediately send a copy thereof to the director concerned. He may make any representation in writing and the copy of such representation may be sent by the company to every member. Where the copy of the representation is not sent to the members, in that case the director concerned may require the representation to be read at the meeting.
A vacancy created by the removal of a director as aforesaid can be filled up at the meeting at which he is removed provided special notice of the proposed appointment was also given. The director so appointed shall hold office till the date the director removed would otherwise have hold office. If the vacancy is not filled, it shall be filled up as casual vacancy except that the director removed shall not be re-appointed. The director so removed is entitled to claim compensation or damages for branch of contract.
(b) Removal by the Tribunal: On an application to the Tribunal for prevention of oppression and mismanagement, the tribunal may terminate or set aside or modify any agreement between the company and the managing director, or any other director or manager. On such termination, the director cannot serve the company in a managerial capacity for a period of five years from the date of the order of termination, without the permission of the tribunal. The director on removal cannot sue the company for damages or compensation for loss of office (Sec. 243).
Removal of a non-rotational director of a government company
Directors appointed by the state government as a nominee director can be removed by such government. The government is entitled to revoke the nomination as a matter of right, which flows from the articles of association. Revoking of the appointment by the government under the articles is not the same thing as removal of a director by the company under sec. 169. Hence, if the government revokes the nomination, there is no contravention of section 169.
7. Define 'quorum'. Explain the legal provisions with regard to quorum. Also mention the quorum required for a general meeting in case of:                         2, 4, and 4
(a) Public Company and
(b) Private Company
Ans: Quorum of Meetings: Quorum is the minimum number of members who must be present at a meeting as required by the rules. Any business transacted at a meeting without a quorum is invalid. The main purpose of having a quorum is to avoid decisions being taken at a meeting by a small minority which may be found to be unacceptable to the vast majority of members. The number constituting a quorum at any company meeting is usually laid down in the Articles of Association. In the absence of any provision in the Articles, the provisions as to quorum laid down in the Companies Act, 2013 (under Sec.103) will apply.
Quorum of Board Meeting: 1/3 rd of total strength OR 2 (Two) Directors, whichever is higher. Where meeting of Board could not be held for want of quorum, the meeting shall automatically adjourn to same time, same place at next week (Not being national holiday).
If number of directors reduced below quorum, then the remaining directors may hold the meeting for the following purposes:
a)      To call a General meeting
b)      Increase the number of directors.
c)       Quorum in case of Interested Directors:
d)      If interested director exceed or equal to 2/3 of total strength the remaining directors not being less than 2 (two) shall be the quorum.
Number of Quorum required in case of public and private company
Sec. 103 of Companies Act provides that the quorum for general meetings of shareholders shall be five members personally present in case of a public company if the number of members as on the date of meeting is upto 1000, 15 quorum if number of members as on the date of meeting is more than 1000 but upto 5000 and if number of member exceeds 5000 than 30 quorum is required; and two members personally present for any private company or articles may provide otherwise.
8. What is meant by winding up of a company? Explain the circumstances in which a company may be wound up voluntarily. 4, 6
Ans: Meaning: Winding up of a company is defined as a process by which the life of a company is brought to an end and its property administered for the benefit of its members and creditors. In words of Professor Gower, “Winding up of a company is the process whereby its life is ended and its Property is administered for the benefit of its members & creditors. An Administrator, called a liquidator is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.”
Circumstances and Modes of winding up of a company
As per section 270 of the Companies Act 2013, the procedure for winding up of a company can be initiated either:
a) By the tribunal or,
b) Voluntary.
a) Winding up by the tribunal: As per new Companies Act 2013, a company can be wound up by a tribunal in the below mentioned circumstances:
1. When the company is unable to pay its debts
2. If the company has by special resolution resolved that the company be wound up by the tribunal.
3. If the company has acted against the interest of the integrity or morality of India, security of the state, or has spoiled any kind of friendly relations with foreign or neighboring countries.
4. If the company has not filled its financial statements or annual returns for preceding 5 consecutive financial years.
5. If the tribunal by any means finds that it is just & equitable that the company should be wound up.
6. If the company in any way is indulged in fraudulent activities or any other unlawful business, or any person or management connected with the formation of company is found guilty of fraud, or any kind of misconduct.
b) Voluntary winding up of a company: The company can be wound up voluntarily by the mutual decision of members or creditors of the company, if:
a)      The company passes a Special Resolution stating about the winding up of the company.
b)      The company in its general meeting passes a resolution for winding up as a result of expiry of the period of its duration as fixed by its Articles of Association or at the occurrence of any such event where the articles provide for dissolution of company.
9. Write notes on any two of the following.        5, 5
(a) Types of shares
(b) Role of a Company Secretary
(c) Proxy
(d) Statement in lieu of prospectus
Ans: a) Types of shares: According to section 43 of the Companies Act 2013, a company can issue only two types of shares:
(a) Preference shares; and                         
(b) Equity shares.
Equity Share: According to Sec. 43 (a) of the Companies Act 2013 "an equity share is share which is not preference share". An equity share does not carry any preferential right. Equity shares are entitled to dividend and repayment of capital after the claims of preference shares are satisfied. Equity shareholders control the affairs of the company and have right to all the profits after the preference dividend has been paid.
Preference Share: According to Sec. 43 (a) of the Companies Act 2013, a share that carries the following two preferential rights is called ‘Preference Share’:
(i) Preference shares have a right to receive dividend at a fixed rate before any dividend given to equity Shares.       
(ii) Preference shares have a right to get their capital returned, before the capital of equity shareholders is returned in case the company is going to wind up.
(b) Role of a Company Secretary: The role and duties of a company secretary are classified under the following heads:
a)      To make a statutory declaration for obtaining certificate of commencement of business;
b)      To sign annual report; and
c)       To sign every balance sheet and every profit and loss account in case of non-banking companies.
d)      To work according to instructions of directors;
e)      To maintain all important correspondence, files and records for reference of directors; and
f)       To draft directors report.
g)      To organize and control head office of the company efficiently;
h)      To submit all statutory returns in time; and
i)        To draft contracts with vendors, if any, and also with underwriters and share brokers
j)        It is a company secretary’s duty to see that various departments are properly organized, supervised, co-ordinated and adequately staffed. He must act as a friend, philosopher and guide to staff.
k)      To represent the company on social functions;
l)        To act very cautiously and in the best interest of the company, in case of any emergency;
(c) Proxy: The term ‘proxy’ is used to refer to the person who is nominated by a shareholder or a member of a company to represent him at a general meeting of the company. It also refers to the instrument through which such a nominee is named and authorised to attend the meeting. Any person whether he is a member or not can be appointed as a proxy. Every proxy has the right to attend the meeting and vote in the meeting. Proxy is always appointed in the written form and should be signed by the member and duly stamped.
(d) Statement in lieu of 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.

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