19
December 2014
Appendix
Lawpoint’s
CS
Solutions
Company Law
Executive Programme (Syllabus 2012)
Module 1 • Paper 1
December 2014 Examination Paper’s Solution
Question 1
Comment with reasons on the following :
(a) Piercing through corporate veil (5 marks)
Ans. After incorporation, a company becomes a legal person distinct from the persons who constitute it. The decision of the leading case in this regard Salomon v. Salomon & Co. Ltd. (1897) AC 22 established the separate legal entity of a company quite distinct from its members. Ever since the said decision, courts have been rather reluctant to lift the corporate veil to see the real person behind it. Various legislations have been made to avoid the corporate legal entity. When the courts have done it, it has very often been described as lifting the veil or piercing of the veil. Where the legislations have done it, the doctrine is more popularly known as 'Creating the corporate veil.'
The Court will look behind the corporate entity and take action and make the members or the controlling persons liable for debts and obligations of the company. In Commissioner of Income Tax v. Shree Minakshi Mills Ltd (1967) SC 819, the Supreme Court held that the Income Tax Authorities are entitled to lift the corporate veil and look into the realities of the transaction. Similar view was also expressed in Juggilal Kamalpet v. Commissioner of Income Tax, (1969), SC 932.
However, the shareholders cannot ask for the lifting of the veil for their purposes. This was held in Premlata Bhatia v. Union of India (2004) 58 CL 217 (Delhi) wherein the premises of a shop were allotted on a licence to the individual licencee. She set up a wholly owned private company and transferred the premises to that company without Government consent. She could not remove the illegality by saying that she and her company were virtually the same person.
(b) Acts done outside the limits of memorandum are ultra vires.
(5 marks)
Ans. A company should devote its activities only in respect of the objects set out in the Memorandum. Any act outside the purview of the Memorandum is ultra vires i.e. beyond the power of the company. Any act done by the company beyond the authority laid in the object clause is null and void and cannot be enforced upon the company. This doctrine was first demonstrated by the House of Lords in Ashbury Railway Carriage and Iron Company Ltd. v. Riche. (1875) LR7 HL 653. Even if the shareholders ratify it unanimously, it would still be void.
An act which is intra vires the company but outside the authority of the directors may be ratified by the company in proper form as observed in Rajendra Nath Dutta v. Shilendra Nath Mukherjee, (1982) 52 Com Cases 293 (Cal.). If the act is ultra vires or beyond the powers of the directors only, the shareholders can ratify it. If it is ultra vires the articles of association, the company can alter its articles in the proper way. But if the act is ultra vires of the objects of the company, it cannot be ratified and is void. In Lakshmanaswami Mudaliar v. LIC, (1963) AIR SC 1185, the Supreme Court affirmed that an ultra vires contract remains ultra vires even if all the shareholders agree to it.
(c) ‘Reserve capital’ and ‘capital reserve’ are one and the same. (5 marks)
Ans. Reserve Capital is a part of uncalled capital of the company as decided by passing a special resolution. Capital Reserve is the accumulation of profits created out of capital profits or earnings.
Reserve Capital is receivable only at the time of winding up of the company. Capital Reserve is the amount already received by the company.
Reserve Capital is applied only at the time of winding up of a company. Capital Reserve can be applied at any time to write off the losses of capital nature or issue of bonus shares.
It is not mandatory to create Reserve Capital. It is mandatory to create Capital Reserve in case of Capital Profit.
(d) Minutes of the company can be maintained in loose leaf form.
(5 marks)
Ans. Section 118 of the Companies Act, 2013 read with rules 25 of the Companies (Management and Administration) Rules, 2014 provides that every company shall prepare, sign and keep minutes of proceedings of every general meeting, including the meeting called by the requisitionists and all proceedings of meeting of any class of share holders or creditors or Board of Directors or committee of the Board and also resolution passed by postal ballot within thirty days of the conclusion of every such meeting concerned. Minutes of proceedings of each meeting shall be entered in the books maintained for that purpose and signed as per the provisions provided in the rules. The minutes shall be kept in the registered office or such place as the members may decide by passing special resolution pursuant to requirement of section 88 read with section 94 of the Act.
The Ministry of Corporate Affairs has, by its letter No. 16047/ TA/VII, dated 16th December, 1972, clarified that the minutes can be maintained by a company in the loose-leaf form, provided it complied with the other procedural requirements of the section and at the same time took all possible safeguards against manipulation or interpolation of the minutes and bound up the loose-leaves in books at reasonable intervals, say, six months.
Therefore, minutes of the company can be maintained in loose leaf form.
Attempt all parts of either Q. No. 2 or Q. No. 2A
Question 2
Distinguish between the following : (4 marks)
(a) ‘Winding-up’ and dissolution’.
Ans. Main differences between the two concepts are as follows:
(a) Winding up is the first stage in the process whereby assets are released, liabilities are paid off and the surplus, if any distributed among its members. Dissolution is the final stage whereby the existence of the company is withdrawn by the law.
(b) After winding up, dissolution takes place. The dissolution must take place after winding up.
(c) The process of winding up is purely judicial function. The process of dissolution is purely administrative function.
(d) The winding up of a company is heard and judged by the Tribunal. The dissolution of a company is recorded and registered by the Registrar of Companies.
(e) Winding up in all cases does not culminate in dissolution. Dissolution is an act which puts an end to the life of the company.
(b) Oppression’ and ‘mismanagement’. (4 marks)
‘The words “oppression” and “mismanagement” are not defined in the Act. The meaning of these words for the purpose of Company Law should be used in a broad generic sense and not in any strict literal sense.
Oppression is a situation which prejudices someone to be oppressed due to that situation in dealing with any one under certain circumstances. It cannot be said that any situation which purport someone to be oppressed is oppression. The whole phenomenon depends upon the circumstances of the situation.
Mismanagement is a concept which shows some unfair abuse of power by the persons in charge of management of the company.
The meaning of the term “oppression” as explained by Lord Cooper in the Scottish case of Elder v. Elder & Western Ltd., (1952) Scottish Cases 49, which has been cited with approval by Wanchoo, J (afterwards C.J.)
of the Supreme Court in Shanti Prasad v. Kalinga Tubes, (1965) 1 Comp. L.J. 193 at 204 is as under :
“The essence of the matter seems to be that the conduct complained of should at the lowest, involve a visible departure from the standards of fair dealing, on which every shareholder who entrusts his money to the company is entitled to rely.”
(c) Transfer of shares’ and ‘transmission of shares’.
(4 marks)
Ans. Refer Pg. No. 13.3 [D] 2004 and [D] 2013
(d) ‘Interim dividend’ and ‘final dividend’. (4 marks)
Ans. Refer Pg. No. 22.4 [J] 2007
OR (Alternate question to Q. No. 2)
Question 2A
(i) In an annual general meeting of Amar (Pvt.) Ltd., all the shareholders were killed in a bomb blast. State, whether the company is still in existence. If so, how ? (4 marks)
Ans. A company, being an artificial juridical person, does not die a natural death. It is created by law, carries on its affairs according to law throughout its life and ultimately is effaced by law. Generally, the existence of a company is terminated by means of winding up. However, to avoid winding up, sometimes companies adopt strategies like reorganisation, reconstruction and amalgamation.
A company is created by law and until destroyed, it will continue to exist. The corporate existence of the company is not effected even if all its members are dead. Its life is determined by the terms of its Memorandum. The membership of a company may keep on changing from time to time but that will not effect the continuity of the company. This shows that the company has a perpetual succession. Members may come and members may go but until the company is dissolved it continues to exist. Thus, perpetual succession denotes the ability of the company to maintain its existence by constant succession of new members. On death of the members, their legal heires are deemed to be holders of the shares held by the deceased. They can transfer the shares in their name producing necessary legal document required for transmission of the shares.
(ii) A housing company has sold a flat to its Managing Director by accepting 50% in cash and balance in installments. Decide whether this transaction attracts the provisions pertaining to loan to directors under section 185. If so, validate the transaction. (4 marks)
Ans. As per Section 185 of the Companies Act, 2013, no company shall directly or indirectly advance any loan to any of its directors or to any person in whom director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.
But a company may advance loan to managing or whole-time director as part of the conditions of service extended by the company to all its employees or pursuant to any scheme approved by the members by a special resolution or the company provides loans or gives guarantee or securities for the due repayment of any loan in due course of its business.
In the given case, if providing the housing loan to the Managing Director is as per the scheme extended to other employees or approved by the shareholders, it is not covered under section 185. If there is no such scheme, the company should obtain approval of the shareholders by special resolution.
(iii) “Limited liability partnership is the best suited form of entity for professionals.” Elaborate. (4 marks)
Ans. Limited Liability Partnerships (LLP) is excellent hybrid of Partnership Act and Companies Act. LLP is a very good substitute to formation of a private limited company. LLP may not be a good substitute for small family owned partnerships, but will be excellent tool for professional partnerships or partnerships where some of the partners do not want to be saddled with unlimited liability. LLPs are eminently suited to the professionals like Company Secretaries and others. They will get the benefit of limited liability and insulate them from third party claims against professional negligence or deficiency. A cross section of the professionals may come together under the banner of LLP to carry on the professional work in their respective field of specialisation, with the respective statutes according sanction for such a dispensation. Such an arrangement will bring the professionals closer and this will benefit the corporate and other clients, as they may be able to get solutions to their problems under one roof. This will also create a strong organisation of professionals and acts as a bulwark against keen competition expected to happen from the professionals abroad, with the opening of legal field under the WTO dispensation.
(iv) Shortcut Ltd. has allotted shares to investors of the company without filing prospectus with the Registrar of Companies, Mumbai. Explain the remedies available to the investors in this regard. (4 marks)
Ans. According to sections 23 of the Companies Act, 2013, a public company may issue securities (a) to public through prospectus by complying with the provisions of Part I of Chapter III of the Act or (b) through private placement by complying with the provisions of Part II of the Chapter.
Section 26(4) provides that no prospectus shall be issued by or on behalf of a company or in relation to an intended company unless on or before the date of its publication, there has been delivered to the Registrar for registration, a copy thereof signed by every person who is named therein as a director or proposed director of the company or by his duly authorised attorney.
Section 26(6) stipulates that every prospectus shall, on the face of it state that a copy has been delivered for registration to the Registrar.
If the prospectus has been issued without delivering to the Registrar, it amounts to a misstatement.
A suit may be filed under section 37 or any other action may be taken under section 34 or section 35 or section 36 by any person, group of persons or any association of persons affected by any misleading statement or the inclusion or omission of any matter in the prospectus.
If a prospectus is issued in contravention of the provisions of section 26, the company shall be punishable with fine which shall not be less than ` 50,000 but which may extend to ` 3,00,000. Every person who is knowingly a party to the issue of such prospectus shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less ` 50,000 but which may extend to ` 3,00,000. or with both.