BCOC - 135: COMPANY LAW | IGNOU SOLVED ASSIGNMENT 2020 - 21 | B.COM | FREE SOLVED ASSIGNMENT | CBCS PATTERN

BCOC – 135: COMPANY LAW SOLVED ASSIGNMENT 2020-2021
Bachelor of Commerce B.Com (CHOICE BASED CREDIT SYSTEM)
Third Semester School of Management Studies
Indira Gandhi National Open University Maidan Garhi, New Delhi -110068
BACHELOR OF COMMERCE CHOICE BASED CREDIT SYSTEM
BCOC – 135: COMPANY LAW ASSIGNMENT: 2020-21

Dear Students,

As explained in the Programme Guide, you have to do one Tutor Marked Assignment in this Course. The assignment has been divided into three sections. Section A Consists of long answer questions for 10 marks each, Section B consists of medium answer questions for 6 marks each and Section C consists of short answer questions for 5 marks each. Assignment is given 30% weightage in the final assessment. To be eligible to appear in the Term-end examination, it is compulsory for you to submit the assignment as per the schedule.

Before attempting the assignments, you should carefully read the instructions given in the Programme Guide. 1. Those students who are appearing in June 2020 Term End Examination they have to submit latest by in 15 March 2020. 2. Those students who are appearing in December 2020 exams. They should download the new assignment and submit the same latest by 15 October 2020. You have to submit the assignment of all the courses to the Coordinator of your Study Centre.

TUTOR MARKED ASSIGNMENT COURSE CODE: BCOC-135

COURSE TITLE: COMPANY LAW

ASSIGNMENT CODE: BCOC-135/TMA/2020-21

COVERAGE: ALL BLOCKS

Maximum Marks: 100 Note: Attempt all the questions.

SECTION – A (This section contains five questions of 10 marks each)

Q.1. What is corporate veil? Under what circumstances can the corporate veil be lifted? 10

Ans: Corporate Veil: From the juristic point of view, a company is a legal person distinct from its members [Saloman v. Saloman & Co. Ltd.]. When a company is incorporated, it has a separate legal status which is distinct from its members, shareholders, directors etc and any change is shareholding pattern or directors does not affect the existence and continuity of a company. Separate legal status of a company has led the concept of corporate veil. The effect of this principle is that there is a veil between the company and its members and company has a corporate personality which is distinct from its members.

The consequence of attributing a legal personality to a corporation is that it is distinct entity from its members and this “legal personality” is often described as an artificial person in contrast with a human being, a natural person. This clearly indicates that a corporation is completely capable of enjoying rights and of being subject to certain duties that are not same as borne by its members. Also members or directors are not personally made liable for all the acts of the company.

Corporate veil can be lifted (LIC v. Escort ltd.)

Lifting of corporate veil means disregarding the separate legal entity of any company and looking for the original persons who are in control of the company. The companies Act’ 2013 itself has provided for certain cases making the members or directors personally liable or corporate veil are lifted. These are:

1. Reduction in membership: If a company carries not business of more than six months after the number of its members has been reduced below seven in case of a public company and two in case of private company, every person who was a member of the company during the time when it carried on business after those six months and who was aware of this fact shall be severally liable for all debts contracted after six months.

2. Misdescription of the company: The name of the company should be fully and properly mentioned on all documents, instruments, etc. If an officer of a company or any other person acts on its behalf and enters into a contract or signs a negotiable instrument without fully writing the name of the company then such officer or person shall be personally liable.

3. Fraudulent trading: Where in the course of winding up of a company it appears that the business of the company has been carried on with intent to defraud creditors of the company or any other person or for any fraudulent purpose; all those who were aware of such fraud shall be personally liable without any limitation of liability.

4. Tax evasions: Corporate veil can be lifted if court is of the opinion that this doctrine is used for tax evasions or deceive tab obligations.

5. Enemy character of a company: If a company is controlled by a person who is a resident of an enemy country, in such a case court may examine the character of person in control of the company and may declare company as an enemy company and lift the corporate veil.

6. Holding act subsidiary company: In the eyes of law, the holding company and its subsidiary company have separate legal entities. In has been held that even a hundred per cent subsidiary is a separate legal entity and its holding company is not liable for its acts. A holding company is required to attach with its final accounts, a copy of the balance sheet profit and loss account directors report of each subsidiary. Sometimes the court may refuse to treat the subsidiary company as a separate entity and treat it as only a branch of the holding company.

7. Failure to Refund application money: If the application money of those applicants to whom shares have not been allotted, is not repaid within 15 days, then the directors shall be jointly and severally liable to repay that money with interest @ 12% p.a.

8. Ultra vires acts: Directors of a company shall be personally liable for all such acts which they have done on behalf of the company if they are ultra vires the company or ultra vires the directors and the company does not ratify their acts.

9. When a company is sham: The Courts also lift the veil where a company is a mere cloak or sham (hoax).

Q.2. Discuss the role and legal status of a promoter. 10

Ans: A promoter is a person who brings a company into existence. A company may have more than one promoter. Promoter plays is significant role in the formation of a company. Some of the important functions of promoters of a company are listed below:

1. Discovery of Idea: It is the first stage in the formation of a company. Promoter is the person who discovered the idea to start a new business or expansion of an existing business. Promoter analyse the capital requirement and risk involved in his business idea.

2. Detailed investigation: After discovery of idea and analysis of risk involved in the business, promoter makes a detailed enquiry regarding production process, sources of raw materials, demand of the product, profitability of the products etc. He can also take the help of experts who helps him in deciding the plant location and layout.

3. Assembling of resources: After detailed investigation of idea and verification of that idea from the specialists, the promoter starts collecting all the resources such as capital, land, labour, machine and equipments etc to form a company.

4. Preparing necessary documents: After assembling various factors of production necessary to start a company, the promoter prepares preliminary documents such as Memorandum of association, articles of association and prospectus which is required at the time of registration of a company.

5. Entering into preliminary contracts: Promoter is the person who enters into contract with various parties prior to incorporation of a company for which he is personally liable in case company is not incorporated.

6. Naming a company: The promoter has to select a name of the company. While selecting the name the promoter keeps in mind that the name should not be identical to the name of any other company.

Legal Status of a Promoter

While the accurate description of a promoter may be difficult, his legal position is quite clear. A promoter is neither an agent of, nor a trustee for, the company because it is not in existence. But he occupies a fiduciary position in relation to the company and therefore requires making full disclosure of the relevant facts, including any profit made by him.

L.J. Lindley described the position of a promoter as follows:

"Although not an agent for the company, nor a trustee for it before its formation, the old familiar principles of law of agency and of trusteeship have been extended and very properly extended to meet such cases. It is well settled that a promoter of a company is accountable to it for all money secretly obtained by him from it just as the relationship of the principal and agent or the trustee and cestui que trust had really existed between him and the company when the money was obtained".

Similarly, it was observed in Lagunas Nitrate Co. v. Lagunas Syndicate, (1899) 2 Ch. 392 that "promoters" stand in a fiduciary relation to the company they promote and to those persons whom they induce to become shareholders in it".

The promoters undoubtedly stand in a fiduciary position. They have in their hands the creation and moulding of the company. They have the power of defining how and when and in what shape and under whose supervision it shall come into existence and begin to act. In a series of similar cases under the English Law it has been held that the promoters, being in a fiduciary position, may not make, either directly or indirectly, any profit at the expense of the company and that if he does make a profit in disregard of this rule, the company can compel him to account for it. The promoters can be compelled to surrender the secret profits.

Q.3. That are the requisites of a valid meeting? 10

Ans: Requisites of a Valid Meeting

If the business transacted at a meeting is to be valid and legally binding, the meeting itself must be validly held. A meeting will be considered to be validly held, if:

a)      It is properly convened by proper authority.

b)      Proper notice must be served. (Sec. 101 and Sec. 102 of the Companies Act, 2013)

c)       Proper quorum must be present in the meeting. (Sec. 103 of the Companies Act, 2013)

d)      Proper chairman must preside the meeting. (Sec. 104 of the Companies Act, 2013)

e)      Business must be validly transacted at the meeting.

f)       Proper minutes of the meeting must be prepared. (Sec. 118 and 119 of the Companies Act, 2013)

Proper Authority to Convene Meeting: A meeting must be convened or called by a proper authority. Otherwise it will not be a valid meeting. The proper authority to convene general meetings of a company is the Board of Directors. The decision to convene a general meeting and issue notice for the same must be taken by a resolution passed at a validly held Board meeting.

Notice of Meetings: A meeting in order to be valid must be convened by a proper notice issued by the proper authority. It means that the notice convening the meeting be properly drafted according to the Act and the rules, and must be served on all members who are entitled to attend and vote at the meeting. For general meeting of any kind at least 21days notice must be given to members. A shorter notice for Annual General Meeting will be valid, if all members entitled to vote give their consent. The number of days in each case shall be clear days, i.e. the days must be calculated excluding the day on which the notice is issued, a day or so for postal transit, and the day on which the meeting is to he held. Every notice of meeting of a company must specify the place and the day and hour of the meeting, and shall contain a statement of the business to be transacted thereat.

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. 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.

Chairman of a Meeting: ‘Chairman’ is the person who has been designated or elected to preside over and conduct the proceedings of a meeting. He is the chief authority in the conduct and control of the meeting.

Agenda of Meetings: The word ‘agenda’ literally means ‘things to be done’. It refers to the programme of business to be transacted at a meeting. Agenda is essential for the systematic transaction of the business of a meeting in the proper order of importance. It is customary for all organisations to send an agenda along with the notice of a meeting to all members. The business of the meeting must be conducted in the same order in which the items are placed in the agenda and the order can be varied only with the consent of the meeting.

Minute: Minute of a meeting contains a fair and correct summary of the proceedings of a meeting. Minutes must be prepared and signed within 30 days of the conclusion of the meeting. The minute books of meetings must be kept at the registered office of the company or at such other place as may be approved by the board.

Proxy: The term ‘proxy’ is used to refer to the person who is nominated by a shareholder 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.

Q.4. What is memorandum of Association? Explain the doctrine of ultra vires. 10

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.

Doctrine of Ultra vires

The word Ultra means beyond and vires means powers. So, simply Ultra vires means any act of the company outside the scope of memorandum of association. An act is said to be ultra vires when it is performed, is not authorised by the object clause in the memorandum of association. The Companies Act requires that the memorandum of every company must state the object of the company. The objects must be legal and not be against the provision of the companies Act, 2013. The object clause requires that every the company must devote itself only to the objects set out in the memorandum. Thus memorandum fixes the area beyond which a company cannot operate. Any activities beyond the object clause of the company are ultra vires the company. Such an act is void and cannot be ratified even by unanimous resolution of all the shareholders. But any act is ultra vires the articles, it can be ratified by altering the articles by passing a special resolution in the general meeting.

The main purpose of this doctrine is to protect the interest of the shareholders. They are assured that their investment is not spent on activities which are authorised by the memorandum of association. Also it safeguards the interest of the creditors as the property of the company cannot be diverted to unauthorized objects.

Consequences/Effects of Doctrine of Ultra vires

a)    Void ab initio: The ultra vires acts are null and void ab initio. The company is not bound by these acts. Even the company cannot sue or be sued upon. Ultra vires contracts are void ab initio and hence cannot become intra vires by reason of estoppel or ratification.

b)   Injunction: The members can get an injunction to restrain a company wherein ultra vires act has been or is about to be undertaken.

c)    Personal liability of Directors: It is one of the duties of directors to ensure that the corporate capital is used only for the legitimate business of the company and hence if such capital is diverted to purposes alien to the company's memorandum, the directors will be personally liable to replace it.

d)   Company's money: Where a company's money has been used ultra vires to acquire some property, the company's right over such property is held secure and the company will be the right party to protect the property. This is because, though the property has been acquired for some ultra vires object, it represents the money of the company.

e)   Borrowing: If company has no borrowing powers or has already exceeded or borrowings are made for the purpose which is ultra vires, then the contract of loan is void and no action can be brought under it to recover the money lent. Ultra vires borrowing does not create the relationship of creditor and debtor.

f)     Ultra vires torts: A company will be liable for torts or crimes committed in the pursuit of its stated objects. But a tort or crime committed in the course of activity which is ultra vires the company, the company would not be liable.

Exceptions to the Doctrine of Ultra vires

(i)        An act, which is intra vires to the company but outside the authority of the directors, may be ratified by the shareholders in proper form.

(ii)      If an act is beyond the articles of the company, it can be approved by altering the company's articles.

(iii)     An act which is intra vires to the company but done in an irregular manner, may be validated by the consent of the shareholders.

(iv)    If a company loans any money (beyond its authority) to a third party under a contract of debt, company can sue for the repayment of such loan.

(v)      If a company takes a loan from a third party under a contract which is beyond its authority and utilises the amount to pay off its business debts, the party giving such loan to the company is deemed to be a creditor of the company in place of those creditors to whom payment is made.

Q.5. Explain the rule known as doctrine of indoor management. What are exceptions to this rule? 10

Ans: Doctrine of Indoor Management: According to Doctrine of constructive notice, every person dealing with company is deemed to have constructive notice of the contents of memorandum and articles of association because these documents are construed as public document. The doctrine of constructive notice does in no sense mean that outsiders are deemed to have notice of the internal affairs of the company. For instance, if an act is authorised by the articles or memorandum, an outsider is entitled to assume that all the detailed formalities for doing that act have been observed. For example, the directors of the Reliance Ltd. gave a bond to SBI. The articles empowered the directors to issue such bonds under the authority of a proper resolution. In fact, no such resolution was passed. Notwithstanding that, it was held that SBI could sue on the bonds on the ground that he was entitled to assume that the resolution had been duly passed. This is the doctrine of indoor management, which is the only limitation to the doctrine of constructive notice discussed above. It guards the company from the outsiders.

Exceptions to Doctrine of Indoor Management

The aforementioned rule of Indoor Management is important to persons dealing with a company through its directors or other persons. They are entitled to assume that the acts of the directors or other officers of the company are validly performed, if they are within the scope of their apparent authority. So long as an act is valid under the articles, if done in a particular manner, an outsider dealing with the company is entitled to assume that it has been done in the manner required. The above mentioned doctrine of Indoor Management has limitations of its own. That is to say, it is inapplicable to the following cases, namely:

(a) The rule does not protect any person when the person dealing with the company has notice, whether actual or constructive, of the irregularity. Thus director of a company cannot normally claim the benefit of this rule.

(b) The doctrine in no way rewards those who behave negligently. Where the person dealing with the company is put upon an inquiry.

(c) When an instrument purporting to be executed on behalf of the company is a forgery. The doctrine of indoor management applies only to irregularities which might otherwise affect a transaction but it cannot apply to forgery which must be regarded as nullity and void ab initio.

(d) The aforementioned rule of Indoor Management is important to persons dealing with a company through its directors or other persons. They are entitled to assume that the acts of the directors or other officers of the company are validly performed, if they are within the scope of their apparent authority. But, if the acts are not within the scope of their apparent authority, this doctrine does not provide any protection.

(e) In case of void or illegal transactions, the directors or other officers of the company cannot normally claim the benefit of this rule.

Section – B (This section contains five short questions of 6 marks each)

Q.6. Define a company and explain the features of a company. 6

Ans: 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.

Q.7. Distinguish between Right Share and Bonus Share. 6

Ans: Bonus shares: Where company have large amount of undistributed profit and these profits are capitalised by converting them into shares and issued free of charge to the existing shareholders, such shares are known as bonus shares.

Right Issue: Rights Issue is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue.

Difference between Bonus shares and Right issue

(a) Bonus shares are offered free of charge. Whereas, Right shares are offered at a discounted price for existing shareholders in a new share issue.

(b) Bonus shares are issued to compensate for the prevailing cash limitations. Whereas, Rights shares are issued to raise new capital for future investments.

(c) Bonus shares do not result in cash receipt. Whereas, Rights shares result in cash receipt for the company.

Q.8. Who can be a director? What is the maximum and minimum number of directors to be appointed by a company? 6

Ans: Who can be a director of a company?

Qualifications of a Director:

As regards to the qualification of directors, there is no direct provision in the Companies Act, 2013.But, according to the different provisions relating to the directors; the following qualifications may be mentioned:

1. A director must be a person of sound mind.

2. A director must hold share qualification, if the article of association provides such.

3. A director must be an individual.

4. A director should be a solvent person.

5. A director should not be convicted by the Court for any offence, etc.

Disqualifications of a director:

Section 164 of Companies Act, 2013, has mentioned the disqualification as mentioned below:

1) A person shall not be capable of being appointed director of a company, if the director is

(a) Of unsound mind by a court of competent jurisdiction and the finding is in force;

(b) An undischarged insolvent;

(c) Has applied to be adjudicated as an insolvent and his application is pending;

(d) Has been convicted by a court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence;

(e) Has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; or

(f) An order disqualifying him for appointment as director has been passed by a court in pursuance of section 203 and is in force, unless the leave of the court has been obtained for his appointment in pursuance of that section;

2) Such person is already a director of a public company which:

(a) Has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April, 1999; or

(b) Has failed to repay its deposits or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more:

Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (A) or has failed to repay its deposit or interest or redeem its debentures on due date or paid dividend referred to in clause (B).

Minimum and Maximum Number of directors:

Sec. 149 prescribes the mode of constitution of the board of directors. The purpose of the section is to prevent the company from going into the hands of a single person. The provisions relating to the minimum and maximum number of directors are explained as follows:

1. Minimum number of directors: Every public company shall have minimum of 3 directors and every private company shall have a minimum of 2 directors and every one person company must have 1 director.

a)      When number of directors fall below statutory minimum:

b)      The provisions as to number of directors are mandatory and any business transacted after the number of directors fell below the statutory minimum was held to be invalid

c)       Where the minimum number of directors are three, but only two directors were appointed, an allotment of shares by two directors was held to be invalid, though two directors were sufficient to form a quorum

2. Maximum number of directors: The Companies Act, 2013 has prescribed the maximum number of directors as 15. However, a company may appoint more than 15 directors after passing a special resolution.

Increase or Decrease in number of directors: The company in general meeting can increase or reduce the number of directors. The provisions in this regard are as follows:

1) Increase or decrease in general meeting.

2) Increase with the approval of the central government.

3. Woman Director: As per Sec. 149(1) of the Companies Act, 2013, the following companies shall appoint at least one woman director:

1) Every listed company.

2) Every other public company having a paid share capital of Rs. 100 crores or more or turnover of Rs. 300 crores or more.

Q.9. What is proxy? What are the rights of proxy? 6

Ans: The term ‘proxy’ is used to refer to the person who is nominated by a shareholder 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. Sec 105 of the Companies Act’ 2013 authorises every member to appoint another person as a proxy to attend and vote instead of himself.

Rights of Proxy:

a) A proxy has the same right as the member to speak at the meeting and to vote on a show of hands and on a poll.

b) A proxy has the right to demand poll if he is eligible as per Sec 109 of the Companies Act’ 2013.

c) A proxy can use his votes differently.

Q.10. What are articles of association? How can they be altered? 6

Ans: Articles of Association: The Articles contain rules and regulations for the internal management of the company. They are framed with the object of carrying out the aims and object of the memorandum of association and also to monitor that the same are carried as prescribed.

Section 2 (5) of the Companies Act, 2013 defines articles as “Articles means Articles of Association of a company as originally framed or altered from time to time in pursuance of any previous law or of this act including so far as they apply to the company the regulations contain as the case may be in Table A to Schedule I of this act”

The Model contents of the Article of association are as under:

a)      the business of the company;

b)      the amount of capital issued and the classes of shares into which the capital is divided; the increase and reduction of the share capital;

c)       the rights of each class of shareholders and the procedure for variation of their rights;

d)      the execution or adoption of a preliminary agreement, if any;

e)      the allotment of share; calls and forfeiture of shares for non – payment of calls;

f)       transfer and transmission of shares;

g)      company’s lien on shares;

h)      exercise of borrowing powers including issues of debentures;

i)        general meeting, notices, quorum, proxy, poll, voting, resolution, minutes; etc.

Alteration of Articles of Association (Sec. 14 of the Companies Act, 2013) - Any of the clause of Articles of Association can be changed simply by a special resolution. [Section 14(1)]. According to this section, ‘alteration' includes making any addition and omissions. Thus, scope is available for making alterations to Articles.

Procedure for Alteration

a)      A decision in the meeting of the board must be taken to change all or any of the regulations of the existing articles and day, time place and agenda for the general meeting.

b)      It should be seen that the proposed alteration conforms to the provisions of the Act and the Memorandum.

c)       If the shares are listed then notice sent to the shareholders must be sent to such stock exchange.

d)      A special resolution should be passed by shareholders in the general meeting.

e)      After the articles have been altered, then six copies of such amendments (one copy must be a certified copy) should be filed with the stock exchange.

f)       Form No.23 must be filed with the Registrar.

g)      Necessary change must be made in all the copes of Articles.

If the effect of alteration is to convert a public company into a private company, the approval of the

SECTION – C (This section contains four short questions of 5 marks each)

Q.11. “Directors are trustees of the company”. Comment.          5

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.

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 differing 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.

Q.12. “Surrender of shares is the same thing as forfeiture of shares.” Comment.          5

Ans: Surrender of shares and Forfeiture of shares are two different terms. They are not same. There are some differences between the two terms which are listed below:

Difference between surrender and forfeiture of shares:

Surrender of shares

Forfeiture of shares

1.       It is an initiative of the shareholders concerned.

2.       In this case, the procedure for reduction of the share capital as provided in sec. 66 of the companies act should be followed.

3.       The shareholder is stopped from questioning validity in surrender of shares.

4.       4. The company is saved from the formalities of serving notice and working till the period of notice is over.

1.       It is at the instance of the company.

2.       No such procedure is followed for forfeiture of shares.

3.       The shareholder can challenge the defects in the notice for forfeiture of shares.

4.        The forfeiture is possible only when the articles of association of a company empowers the board of directors to do so

Q.13. In a company all shareholders are member but all members need not to be shareholders. Discuss.            5

Ans: Who is a Member of Company?

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:

a)    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.

b)   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.

c)    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.

From the above explanation we can say that every shareholder is members but all members need not be shareholders.

Q.14. Who are the persons who can inspect books of accounts?             5

Ans: Inspection of books of accounts of companies:

According to Sec 128 (3) of the Companies Act’ 2013, any director can inspect the books of accounts and other books and papers of the company during business hours. The right to inspect books of accounts and other books and papers under this section has been provided to the directors only.

The expression "Books and Papers" has been defined in section 2(12) which includes accounts, deeds, vouchers, writings and documents. The company is, therefore, required to make available the aforesaid books and papers for inspection by any directors.

Such inspection may be done by any type of director- nominee, independent, promoter or whole time. The proviso to sub-section 3 provides that a director of the Company can inspect the books of accounts of the subsidiary, only on authorisation by way of the resolution of Board of Directors. Where any other financial information maintained outside the country is required by a director, the director shall furnish a request to the company setting out the full details of the financial information sought and the period for which such information is sought (Rule 4(2)). The said information shall be provided to director within 15 days of receipt of request (Rule 4(3)). The director can seek the information only individually and not by or through his attorney holder or agent or representative (Rule 4(4)).

 

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