TUTOR MARKED ASSIGNMENT
Course Code: ECO - 08
Course Title: Company Law
Assignment Code: ECO –
08/TMA/2015-16
Coverage: All Blocks
Maximum Marks: 100
Attempt all the
questions
1. What do you mean by
illegal association? What are its exceptions? Explain the consequences of an
illegal association? (4+6+10)
Ans: Illegal Association: Combination of persons for achievement
of common objects is called an ‘association’. In order to protect public from
the mischief of large trading associations, whose membership may go on
constantly changing, section 11 provides for their compulsory registration.
According to section 11 every association
consisting of more than 10 persons in banking business and 20 in the case of
any other business must either be registered as a company under the Companies
Act or be formed according to the provisions of some other Indian Law. An
association not so registered is an illegal association having no legal
existence. An illegal association is an association of more
than 20 persons (10 in case of banking business) which carries a business
without being registered under any law.
An association
will be termed as an illegal association, when:
(i) The
association consists of more than 20 members (10 in case of banking business);
(ii) The association
is formed for carrying on a business with the objective of earning of profits;
and
(iii) The
association is not registered as a company under the Companies Act or not
formed according to the provisions of some other Indian law.
Exceptions: The provisions of illegal association are not
applicable in the following cases:
(i) Joint Hindu Family: Such
a family can carry on family business with more than 20 members without getting
itself registered as a company under the Companies Act or any other law.
(ii) Associations not for Profit: Literary,
scientific or religious associations, clubs, welfare, charitable and traders
associations, or formation of a common fund for investment by trustees in
certain securities, etc.
(iii)
Foreign Companies.
Rules
for counting number of persons:
For counting the
number of 10 or 20, as the case may be, the word ‘person’ includes both natural
and artificial juristic persons. A company is a separate legal entity and
therefore, it will be counted only as one person.
A partnership
firm does not have a separate existence and, therefore, if it is a member of an
association, each partner of the firm will be counted as a separate person. A
Joint Hindu Family carrying on family business or trade shall be counted as
only ‘one’ person. In case two Joint Hindu families combine and form a
partnership, minors shall be excluded in computing the number of persons.
All the adults of
both the joint families shall be counted as members of the association. But if
the ‘Karta’ of a family enters into partnership with another family in his
representative capacity on behalf of his family, he shall be treated as an
individual only.
The consequences are:
1. No
legal existence: The consequence of the illegality of the
association/partnership is that its members have no remedy against each other
for contribution or apportionment in respect of partnership dealings and
transactions. An illegal association:
(a) Cannot enter
into binding contracts
(b) Cannot sue
any member or an outsider if the illegality becomes apparent.
(c) Cannot be
sued by a member or an outsider for it cannot contract any debts.
(d) Cannot be
wound up under the Act either at the instance of a creditor, a member or the
association itself. Members individually or collectively of an illegal
association cannot bring about a valid suit against another member or any other
persons for any contract made by them.
Subsequent
registration will not alter the position with regard to the past acts.
Contracts made before registration cannot be validated and sued upon by
subsequent registration. No cause of action can arise on the basis of an
illegal association.
2. Unlimited personal liability:
Every member of an illegal association
shall be personally liable for all the liabilities incurred by such business.
It will be immaterial if the creditors had knowledge of the illegality of the
association, or not.
3.
Penalty: Every
member of an illegal association shall be punishable with a fine which may
extend to? 10,000. The penal provisions will apply only where a company is
formed in contravention of this section and not where the illegality supervenes
at a subsequent stage.
However, the
court may provide relief to a member of illegal association by granting a
return of contribution paid provided such money has not been applied for the
business by such an illegal association.
In Badri Prasad
v. Nagarmal the Supreme Court held that in the case of an illegal association
no relief will be granted to its associates or members as the contractual
relationship on which it is founded is illegal, but subscribers will be
entitled to sue for recovery of their subscriptions and for this purpose have
the assets realize. This is because it does not result in enforcement of
illegal contract but it will prevent continuance of illegality. The
members of an illegal association have a beneficial interest in the property
belonging to such association.
2. (a) Discuss the
privileges enjoyed by a private company. 10
Ans: A private company enjoys several exemptions and privileges
under the Companies Act. Some of these privileges are given below:
1. Members: A private
company can be started by two persons only, whereas seven persons are required
to start a public company.
2. Commencement of business: A private
company can commence business immediately after its incorporation. It is not
required to obtain the certificate of commencement of Business.
3. Prospectus: A private
company is not required to issue or file a prospectus or statement in lieu of
prospectus with the Registrar of Companies.
4. Statutory meeting: A private
company is not required to hold a statutory meeting or to file statutory report
with the Registrar.
5. Directors: A private
company can have only two directors. It is exempted from restrictions relating
to the appointment, reappointment, retirement, and remuneration etc., of
managerial personnel.
6. Shares: A private
company can issue deferred shares with disproportionate voting rights. It is
not required to observe restrictions concerning allotment of shares, minimum
subscription, right shares, investment of funds in the same groups of
companies, etc.
7. Transfer of shares: A private
company can refuse to register any transfer of shares without any appeal.
8. Accounts: A private
company is not required to keep its annual accounts open for inspection for
non-members.
9. Quorum: Two
members personally present is sufficient quorum for the general meeting of a
private company.
10. Index of members: A private
company is not required to prepare and maintain any index to the Register of
members.
(b) Explain the ways in
which a promoter is given remuneration of Promoters. 10
Ans: Remuneration of promoters: The nature
of the promoters work in the formation of a company calls for considerable
skill for which he should be adequately remunerated. A promoter has no right
against the company for his remuneration unless there is a contract to that
effect. In the absence of such a contract, he cannot even recover from the
company payments he has made in connection with the formation of the company. A
promoter may be rewarded by the company for efforts undertaken by him in
forming the company in several ways. The more common ones are:
1. The company may to pay some remuneration
for the services rendered.
2. The promoter may make profits on
transactions entered by him with the company after making full disclosure to
the company and its members.
3. The promoter may sell his property for
fully paid shares in the company after making full disclosures.
4. The promoter may be given an option to buy
further shares in the company.
5. The promoter may be given commission on
shares sold.
6. The articles of the Company may provide for
fixed sum to be paid by the company to him. However, such provision has no
legal effect and the promoter cannot sue to enforce it but if the company makes
such payment, it cannot recover it back.
3. Explain the doctrine
of Indore Management. What are its exceptions? Discuss with examples. (10+10)
Ans: Doctrine
of Indoor Management: The doctrine of indoor
management is an exception to the rule of constructive notice. It imposes an
important limitation on the doctrine of constructive notice. According to this
doctrine, a person dealing with a company is bound to read only the public
documents. He will not be affected by any irregularity in the internal
management of the company.
The rule of indoor
management had its genesis in Royal
British Bank v. Turquand- The directors of the company borrowed a
sum of money from the plaintiff. The company’s articles provided that the
directors might borrow on bonds such sums as may from time to time be
authorized by a resolution passed at a general meeting of a company. The
shareholders claimed that there was no such resolution authorizing the loan
and, therefore, it was taken without their authority. The company was however
held bound for the loan. Once it was found that the directors could borrow
subject to a resolution, the plaintiff had the right to assume that the
necessary resolution must have been passed. The rule is based on public
convenience and justice and the following obvious reasons:
1. The internal procedure
is not a matter of public knowledge. An outsider is presumed to know the
constitution of a company, but not what may or may not have taken place within
the doors that are closed to him.
2. The lot of creditors
of a limited company is not a particularly happy one; it would be unhappier
still if the company could escape liability by denying the authority of
officials to act on its behalf.
The rule/doctrine is
applied to protect persons contracting with companies from all kinds of
internal irregularities. It has been applied to cover the acts of de facto
directors, who have not been appointed but have only assumed office at the
acquiescence of the shareholders or whose appointment is defective, or have
exercised authorities which could have been delegated to them under the Act but
actually not delegated, or who have acted without quorum.
Exceptions to the rule of
“Doctrine of Indoor Management”
Knowledge of irregularity A person who has actual
knowledge of the internal irregularity cannot claim the protection of this
rule, because he could have taken steps for self-protection. A person who
himself is a party to the inside procedure, such as a director is deemed to
know the irregularities, if any. T.R Pratt (Bombay) Ltd. V. E.D. Sassoon &
Co. Ltd. - Company A lent money to Company B on a mortgage of its
assets. The procedure laid down in the articles for such transactions was not
complied with. The directors of the two companies were the same. Held, the
lender had notice of the irregularity and hence the mortgage was not binding.
Negligence and suspicion of irregularity: where a person dealing
with a company could discover the irregularity if he had made proper inquiries,
he cannot claim the benefit of the rule of indoor management. The protection of
the rule is also not available where the circumstances surrounding the contract
are so suspicious
as to invite inquiry, and the outsider dealing with the company does not make proper inquiry.
as to invite inquiry, and the outsider dealing with the company does not make proper inquiry.
Forgery: The rule in Turquand’s
case does not apply where
a person relies upon a document that turns out to be forged since nothing can
validate forgery. In Ruben v. Great
Fingall Ltd, a co was not held bound by a certificate issued by tit
secretary by forging the signature of two directions. However, in Official Liquidator v. Commr of Police,
the Madras High Court held the company liable where the Managing Director had
forged the signature of two other directors.
Representation through articles: A person who does not
have actual knowledge of the company’s articles cannot claim as against the
company that he was entitled to assume that a power which could have been
delegated to the directors was in fact so delegated. In Rama Corporation v. Proved Tin and General
Investment Co, the plaintiffs contracted with the defendant co and
gave a cheque under the contract. The director could have been authorized but
in fact, was not. The plaintiffs had not read the articles. The director
misappropriated the cheques and plaintiff sued. Held, director not liable as it
was outside his authority.
4. (a) Explain the
various ways in which a person may become a member of a Company. 10
Ans: Modes of
acquiring the Membership of 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.
(b) What is a Share
Certificate? When must it be issued? What are the effects of a Share
Certificate? 10
Ans: Ans. A share certificate is a document of title of share
issued by a company under company's common seal which declares that the person
whose name written therein is a bon a fide holder of company's share specified
in it. A certificate,
under the common seal of the company, specifying any shares held by any member,
shall be prima facie evidence of the title of the member of such shares.
Two conditions must be fulfilled before the
issue of share certificates:
1) The board
of directors should authorise the issue by means of a resolution
2) The share
certificates should be issued only on the surrender of the letter of allotment.
Effect of share
certificates: According to section 84, a share certificate shall be prima facie
evidence of the title of the member to such shares. When share certificates are
issued, a shareholder gets the following rights:
1)
Estoppel
as to title: company cannot deny the fact that the person is not holder of the
shares.
2)
Estoppel
as to payment: company cannot deny the fact that the shares are not paid up if
in share certificate the shares are fully paid up.
5. Explain the powers
and duties of a Director. (20)
Ans: Powers and Duties of directors
Powers of directors: The powers of the Board of directors are co-extensive with those of the
company. This proposition is, however, subject to two conditions:
1) First, the Board shall
not do any act which is to be done by the company in general meeting
2) Second, the Board shall
exercise its powers subject to the provisions contained in the Companies Act,
or in the Memorandum or the Articles of the company or in any regulations made
by the company in general meeting.
Powers to be exercised at Board meetings: The Board of directors of a company shall exercise the following powers on
behalf of the company by means of resolutions passed at the meetings of the
Board, viz, the power to:
(a) make calls on shareholders in respect of money unpaid
on their shares
(b) issue debentures
(c) borrow money otherwise than on debentures
(d) invest the funds of the company
(e) make loans
Powers to be exercised
with the approval of company in general meeting
(a) sale or lease of the company’s undertaking
(b) extension of the time for payment of a debt due by a
director
(c) investment of compensation received on acquisition of
the company’s assets in securities other than trust securities
(d) borrowing of money beyond the paid-up capital of the company
(e) contributions to any charitable fund beyond Rs.50,000
in one financial year or 5% of the average net profits during the preceding
three financial years, whichever is greater.
Duties of the Directors
A. Fiduciary duties-as fiduciaries, the directors
must-
(a) exercise their powers honestly and bona fide for the
benefit of the company as a whole; and
(b) not place themselves in a position in which there is a
conflict between their duties to the company and their personal interests. They
must not make any secret profit out of their position. If they do, they have to
account for it to the company.
B. Duties of care,
skill and diligence- directors should carry out their duties with reasonable care and exercise
such degree of skill and diligence as is reasonably expected of persons of
their knowledge and status. He is not bound to bring any special qualifications
to his office.
C. Standard of care-the standard of care,
skill and diligence depends upon the nature of the company’s business and circumstances
of the case. They are various standards of the care depending upon:
(a) the type and nature of work
(b) division of powers between directors and other officers
(c) general usages and customs in that type of business;
and
(d) whether directors work gratuitously or remuneratively
D. Duty to disclose
interest-where a director is personally interested in a
transaction of the company, he is required to disclose his interest to the
board. An interested director is neither to vote on the matter of his interest
nor his presence shall count for the purposes of quorum.
E. Duty to attend
board meetings-the Act only says that the office of a director is
automatically vacated if he fails to attend three consecutive meetings of the
board or all meetings for a period of 3 months, whichever is longer. Moreover,
a director’s habitual absence may become evidence of negligence.
F. Duty not to
delegate- a director should not delegate his functions to another person. But
delegation of functions may be made to the extent to which it is authorized by
the Act or the constitution of the company.