Maximum Marks: 100

Attempt all the questions:

1. (a) Define an illegal association. What are the consequences of forming such an association? (3+7)

Ans: Meaning of an illegal association

According to section 464 of the Indian Companies Act, 2013, any association of persons or partnership in which the number of members is more than 50 and it carries on business for profit, it is said to be an illegal association unless it is registered as a company under the Act or is formed under any other law for the time being in force. It is important under section 464 that to call an association illegal, the business must be carried on for profit. If the motive of the organisation is not to earn profit but to serve the society, it can work as a legal association even if the number of members is more than 50. It means that this section doesn't apply to not for profit organisation such charitable institutions such as clubs, society, and charitable organisation, research institutions etc. An illegal association remains illegal in spite of the subsequent reduction in its membership till it gets registered.

Consequences of an illegal association

a)    No legal existence: An Illegal Association does not have any legal existence and it cannot sue and be sued in the court of Law.

b)   Cannot enter into contracts: An illegal association or its members cannot into binding contracts in the name of the association.

c)    Cannot be dissolve under this Act: An illegal association cannot be dissolved under the Act either at the instance of a creditor, a member or association itself. It cannot be dissolved because there is nothing to dissolve.

d)   Unlimited liability of members: The liability of all the members of the illegal association is unlimited. Third party can sue each member of such an association to recover their dues. All the members of an illegal association are personally liable for all the liabilities incurred in the business.

e)   Penalty: Every member of an illegal association is liable to pay a fine of Rs. 1 lakh.

f)     No remedy to its members: Its member has any remedy against each other for contribution in respect of dealings and transactions.

g)    Subsequent registration of an illegal association will not alter the position with regard to the past acts. Contracts made before registration of an illegal association cannot be validated.

(b)What is Articles of Association of a Company? Discuss the limitations on the powers of a company to alter Articles. (3+7)

Ans: 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”

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. The restrictions are as follows­:

a)      Such alteration cannot be with retrospective effect. Retrospective amendments be permissible as long as vested rights are not adversely affected.

b)      It should not be against provisions of Memorandum of Association or Comp Act.

c)       The alteration must be bona fide for the benefit of company as a whole

d)      Altered article cannot include anything which is illegal or opposed to public.

e)      Company cannot justify breach of contract by altering the articles.

f)       Amendment cannot increase liability of a member, unless his written consent is obtained. However, in case of club or association where member has to recurring periodical or recurring subscription or charges, a member is liable! if he does not agree in writing to the increase.

g)      The amendment must not constitute a fraud on minority. It cannot be oppression of minority.

h)      Articles cannot change a public company to a private company without approval of Central Government – sec. 2(68).

i)        Statutory powers of company to amend the Articles cannot be curtailed.

j)        Every alteration of articles which is registered by the registrar, shall be as valid as if is originally contained in the articles. [Sec. 14(3)].

2. (a) Explain the circumstances when the Directors are liable towards company and third parties. (6+6)

Ans: Directors being a principal officer of a company can be held liable not only towards company and shareholders but also towards outsiders. Liability of directors can be studied in the following heads:

1. Liability of directors towards Company: Directors have some duties towards the company by virtue of their office. The directors are liable to the company in the following cases:

a) Ultra vires Acts: Directors are personally liable to the company for ultra vires acts i.e., acts which are beyond their powers. For example, if they pay dividends out of capital, they will be liable to the company for any loss or damage suffered due to such ultra vires acts.

b) Negligence: If the directors are negligent about their duties, they are personally liable for any loss cause to the company. They are, however, not liable for errors of judgement.

c) Breach of trust: The directors occupy a fiduciary position towards the company. They must act honestly and in the interest of the company. If the directors make some secret profits or use the property of the company for their personal purpose, then they shall be liable to the company.

d) Misfeasance: The misfeasance means willful misconduct or willful negligence resulting in some loss to the company. The company can take action against the directors for any loss or damages caused to the company in case of misfeasance.

2. Liability of directors towards outsiders: Directors acts on behalf of the company, so they cannot be held personally liable to outsiders for any acts done by them on behalf of the company. They would, however, be personally liable to outsiders in the following circumstances:

a) When they enter into contracts in their own names and not in the name of the company.

b) Where the directors act ultra vires the company i.e., acts beyond their powers, in such a case company will not be liable but directors will be personally liable to third parties for breach of implied warranty of authority.

c) Where they have permitted the issue of a prospectus which contains misstatements or which does not present the true position, the directors shall be personally liable.

d) Where the directors fail to return the application money within the specified time, if the minimum subscription is not subscribed.

e) Where there is irregular allotment of shares,

f) Where the directors act fraudulently.

(b)Distinguish between transfer and transmission of shares (8)

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Ans: Transfer of shares: Shares of a public company are freely transferable. Transfer of shares means voluntarily transfer of rights and duties, if any, from a shareholder who want to quit from the membership of the company to a person who wishes to become a member of that company. Transferability of shares is an absolute right of the shareholder which cannot be denied even by the articles. Section 56 empowers every shareholder to transfer his shares in the manner laid down in the articles and in accordance with the various provisions of the law.

Transmission of shares: When the shares are transferred under the operation of law it is called transmission of shares. Transmission of shares takes place:

(i)      When the registered shareholder dies.

(ii)    When he is declared insolvent.

(iii)   In case where the shareholder is the company, it goes into liquidation.

Difference between transfer of shares and transmission of shares


Transfer of shares

Transmission of shares


Transfer of shares takes place by a voluntary and deliberate act of the transferor.

Transmission is the result of the operation of law.

Instrument used

In case of transfer, the transferor and transferee have to execute an instrument of transfer.

The shares are transmitted on the death insolvency of member and instrument of transfer is not required only a proof of his title to the shares is required.


Transfer is the normal method of transferring property in the shares.

Transmission of share takes place only on the death or insolvency or liquidation.

Stamp duty

In case of transfer stamp duty is payable on the amount of the market value of shares

No stamp duty is payable in case of transmission.

Lock in period

During lock-in period, transfer of shares is not possible.

Transmission of shares is possible during lock-in period.


Permission of official liquidator/tribunal is required for transfer of shares.

No such permission is required for transmission of shares.

3. (a) Explain the ‘Doctrine of Indoor Management’. Point out exceptions to this doctrine. (4+6)

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.

(b) Explain the various types of resolutions. (10)


4. (a) Who is a ‘company secretary’? Discuss his various statutory duties. (3+7)

Ans: Company Secretary Appointment and his Rights and Obligations needs to understand the definitions and as per sec. 2(24) of Companies Act 2013, Company Secretary means a Company Secretary define in sec. 2(1) (c) of the Company Secretaries Act 1980. As per this clause, Company Secretary means a person who is a member of Institute of Company Secretary of India. Company Secretary is managerial personnel in a private sector company and in a public sector company; a Company Secretary is a person who can represent his company before any quasi-judicial body in relation to any legal dispute and other legal litigation.

Duties of the Company Secretary

The duties of a company secretary are classified under the following heads:

A) General Duties: General duties of a company secretary are given below:

(1) To provide to the directors of the company, collectively and individually, such guidance as they may require, with regard to their duties, responsibilities and powers;

(2) To facilitate the convening of meetings and attend Board, committee and general meetings, and maintain the minutes of these meetings;

(3) To obtain approvals from the Board, general meetings, the Government and such other authorities as required under the provisions of the Act;

(4) To represent before various regulators, Tribunal and other authorities under the Act in connection with discharge of various functions under the Act;

(5) To assist the Board in the conduct of the affairs of the company;

(6) To assist and advise the Board in ensuring good corporate governance and in complying with the corporate governance requirements and best practices; and

(7) To discharge such other duties as may be assigned by the Board from time to time;

(8) Such other duties as have been prescribed under the Act and Rules.

B) Statutory Duties: Apart from general secretarial duties with regards to organizing Board and general meetings, keeping minutes of meeting, recording approved share transfers, corresponding with directors and shareholders, maintaining statutory records, filing necessary returns with Registrar of Companies etc., the Companies Act, 2013 has also prescribed some duties and authorities, which are as follow:

1. Declaration regarding compliance with requirement of registration: In terms of section 7(1) (b) of the Companies Act, 2013, a company gets incorporated by submitting memorandum and articles duly signed along with a declaration in a prescribed form that all requirements of Act and rules have been complied with in respect of registration of company. Such declaration in prescribed form can be signed by an Advocate, a chartered accountant, cost accountant or company secretary in practice who is engaged in the formation of the company and by a person named in the articles as a director, manager or secretary of the company.

2. Authentication of documents, proceedings and contracts: A document or proceeding requiring authentication by a company or contract made by or on behalf of a company must be signed by any key managerial personnel or an officer of the company duly authorized by the Board in this behalf. However, in case of a company does not have a common seal, the requirement of law would be complied with if the authorization is done by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary.

3. Signing share certificate: Share certificates of the company should be signed by two directors (out of which one should be Managing Director or whole time director, if appointed) and Secretary or other person authorized by Board.

4. Signing annual return: Annual return to be filed with Registrar of Companies has to be signed by a director and Company Secretary. If Company does not have Company Secretary, the return can be signed by company secretary in practice.

5. Signing of financial statements: The financial statement, including consolidated financial statement is to be signed on behalf of the Board by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director, if any, and the Chief Executive Officer, the Chief Financial Officer and the company secretary of the company, wherever they are appointed.

6. Appear before NCLT: A Company Secretary can appear before National Company Law Tribunal (NCLT) on behalf of the company.

7. Secretary as Compliance Officer of listed company: As per clause (1) of Regulation 6 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, a listed company is required to appoint the company secretary to act as ‘Compliance Officer’, who will be responsible for the following:

(a) ensuring conformity with the regulatory provisions applicable to the listed entity in letter and spirit.

(b) co-ordination with and reporting to the Board, recognised stock exchange(s) and depositories with respect to compliance with rules, regulations and other directives of these authorities.

(c) ensuring that the correct procedures have been followed that would result in the correctness, authenticity and comprehensiveness of the information, statements and reports filed by the listed entity.

(d) monitoring email address of grievance redressal division as designated by the listed entity for the purpose of registering complaints by investors.

8. Demat shares: Secretary has to coordinate between depository and stock exchange in case of demat shares.

9. Additional duties: In addition to statutory duties of company secretary, he is often entrusted with additional duties like looking after legal matters, personnel matters, finance and sometime even general administration.

10. Nodal Officer: Company secretary has to perform duty of nodal officer under IEPF Rules. He shall verify all applications filed to reclaim shares from IEPF.

 (b) Explain the legal position of a promoter of a company? (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: Promoter is the person who discovered the idea to start a new business or expansion of an existing business.

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 etc.

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. Entering into preliminary contracts: Promoter is the person who enters into contract with various parties prior to incorporation of a company.

6. Naming a company: The promoter has to select a name of the 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.

5. (a) Discuss the requisites of a valid Annual General 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.

(b)Explain the various provisions of the Companies Act regarding acceptance of deposits by companies. (10)



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