Wednesday, December 05, 2018


Term-End Examination :June, 2018
Time : 2 hours Maximum Marks : 50
Note : Answer any five questions.
1. What is a corporate veil ? Explain any four circumstances under which it can be lifted. 2+8
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.
2. State the legal position of pre-incorporation contracts. Can the company ratify such contracts ? Give reasons. 5+5
3. Explain with examples the "doctrine of indoor management". What are the exceptions to this rule ? 5+5
4. What is 'Memorandum of Association' ? Explain its various clauses. 2+8
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.
Memorandum of association is divided into 5 clauses/contents [Sec. 4 of the Companies Act, 2013]:
1.       Name clause
2.       Situation or Registered office clause
3.       Objects clause
4.       Liability clause and
5.       Capital clause
6.       Subscription or Association Clause
1. Name clause: This clause state the name of the company. Name of every company limited by shares or by guarantee must end by the word 'Ltd.' or 'Pvt. Ltd.' except companies exempted u/s 8.  The name must not be undesirable or most not resemble the name of any other registered company.
2. Situation or Registered office clause: Must contain the name of state is which registered office is situated.  Actual address of registered office is notified to ROC within 30 days of incorporation.
3. Object clause: 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.
4. Liability clause: States that liability of members is limited to the amount unpaid on their shares and in case of company limited by guarantee the amount which every member undertakes to contribute to the assets of the company in the event of its winding up.
5. Capital clause: Every company having a share capital, the amount of share capital with which the company is proposed to be registered and the division of its shares into a fixed denomination.
6. Subscription clause: This clause shall state the number of shares that each subscriber to member has agreed to subscribe. Every subscriber shall agree to subscribe for at least one share.
5. Under what circumstances does a person cease to be a member of a company ? 10
6. Define 'director'. What is his legal position in a company ? 2+8
Ans: According to Sec.2 (54) of the Indian Companies Act “managing director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.
Legal position of Directors
It is very difficult to define precisely the position of directors in a company. The Companies Act, 2013, is also silent on this issue. Directors have been described sometimes as trustees, sometimes as agents or sometimes as managing partners. They have some attributes of all of them, but they are neither trustees nor managing partner in full sense of the term. The legal position can be discussed as under:
1. Directors as Agent: Directors are, in the eyes of law, agents of the company for which they act. The company itself cannot act, it can act only through directors and by the reason of which a relation of principal and agent is established between the company and the directors. Wherever as agent is liable those directors would be liable; where the liability would attach to the principal and principal only, the liability is the liability of the company.
Where the directors make contracts on behalf of the company, they incur no personal liability provided they act within the scope of their authority. In such a case, the company alone would be liable. Directors incur a personal liability in the following circumstances:
a)      Where the contract in their own names.
b)      Where they use the company’s name incorrectly.
c)       Where director’s exceeds their powers.
But the position of directors differ from that of the agents because an agent can enter into a contract in his own name but a director cannot. Again an agent may not disclose the name of his principal but a director must disclose the name of his principal. Hence, the directors are not agents in the true sense.
2) Directors as trustees: The directors have also been described as trustees of the company. They are trustees of the company’s money or property which comes into their hands or which is actually under their control and of the powers entrusted to them. But in real sense, the position of directors is differ from that of the trustees because a trustee can’t be an employee of the trust but a director can be an employee of the company. Again, an artificial person can become a trustee but an artificial person cannot become a director. As, only individual can be a director. Hence, directors may better be considered as quasi trustee.
3) Directors as officers: Under sec. 2(59) of the Companies Act, they are liable to certain penalties if the provisions of the Companies Act are not complied with. Moreover whether or not a director is in the employment of the company, he shall be treated as an officer of the company.
4) Directors as employees: Although directors are agents of the company, they are not employees or servants of the company. Hence they cannot claim their remuneration as a preferential creditor in the event of winding up of a company under sec. 327 of the Companies Act, 2013. But where any director, besides being a director, is also in the service or employment of the company, such as secretary, manager, accountant or otherwise, he will be treated as an employee. As such he will be entitled to the remuneration and other benefits admissible to his as an employee in addition to his rights as a director to sitting fee, etc.
5) Directors as managing partners: The directors are also sometimes described as managing partners because like a partner of a firm, they manage the affairs of the company and they are also usually important shareholders of the company. They do all proprietorial functions like allotting shares, making calls, forfeiting shares etc.
However, all the partners of a firm act on the principal of mutual agency. But it is not so in the case of directors. A director has no authority to bind the other directors and shareholders. Moreover, directors are subject to retirement by rotation whereas partners of a firm are not. Hence, the directors are not managing partners in the full sense.
Thus, directors are described as trustees, agents or managing partners. The board of directors are the brain and the only brain of the company which is the body and the company can act only through them.
7. Define quorum. Explain the legal provisions with regard to quorum. 2+8
8. "Surrender of shares is the same thing as forfeiture of shares." Comment. 10
9. Discuss the position of a company secretary. 10
10. Write short notes on any two of the following : 5+5
(a) Special Resolution
(b) Role of a Promoter
(c) Doctrine of Ultra Vires
(d) Share Certificate

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