TUTOR MARKED ASSIGNMENT
Course Code: ECO - 08
Course Title: Company Law
Assignment Code: ECO – 08/TMA/2014-15
Coverage: All Blocks
Maximum Marks: 100
Answer
All Questions:
1. Define a Company. What are its features? Explain
under what circumstances a corporate veil can be lifted? (2+6+12)
Ans: Introduction:
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.
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 Company Act 1994 – “Company means a company formed and registered under this
Act or any existing company.” [Section 2(1.c)]
According
to Chief Justice Marshall – “A company is an artificial being invisible,
intangible and existing only in the eyes of law.”
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.
Characteristics
of a Company
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.
7.
Capital Structure: A company has to mention its maximum capital
requirements in future in its memorandum of association. Its capital is divided
into shares, which are easily transferable from person to person.
8.
Transferability of Shares: The shares of a company are freely
transferable by its members except in case of a private company, which may have
certain restrictions of such transferability.
When
can Corporate Veil of A Company be lifted?
For all purposes of law a company is regarded as a
separate entity from its shareholders. But sometimes it is sometimes necessary
to look at the persons behind the corporate veil. The separate entity of the
company is disregarded and the schemes and intentions of the persons behind are
exposed to full view which is known as lifting or piercing the corporate veil.
This is usually done in the following cases:
1. Determination of character- In Daimler Co Ltd. v. Continental
Tyre and Rubber Co., a company was incorporated in England for the
purpose of selling tyres manufactured in Germany by a German company. The
German company held the bulk of the shares in the English company and all the
directors of the company were Germans, resident in Germany. During the First
World War the English company commenced an action to recover a trade debt. And
the question was whether the company had become an enemy company and should
therefore be barred from maintaining the action.
2. For benefit of revenue- The separate existence of a company may be disregarded when the only
purpose for which it appears to have been formed is the evasion of taxes. In Sir Dinshaw Maneckjee, Re, the
assessee was a wealthy man enjoying large dividend and interest income. He
formed four private companies and agreed with each to hold a block of
investment as an agent for it. Income received was credited in the company
accounts but company handed the amount to him as pretended loan. Thus he
divided his income in four parts to reduce his tax liability. The Court
disregarded corporate entity as it was formed only to evade taxes.
3. Fraud or improper conduct- In Gilford Motor Co v. Horne,
H was appointed at the managing director of the plaintiff company on the
condition that he shall not solicit the customers of the company. He formed a
new company which undertook solicitation of plaintiff’s customers. The company
was restrained by the Court.
4. Agency or Trust or Government company- The separate existence of a company may be ignored when it is being used
as an agent or trustee. In State of UP
v. Renusagar Power Co, it was held that a power generating unit created
by a company for its exclusive supply was not regarded as a separate entity for
the purpose of excise.
5. To avoid welfare legislation- where it was found that the sole purpose of formation of new company was
to use it as a device to reduce the amount to be paid by way of bonus to
workmen, the SC pierced its corporate veil. –The Workmen Employed in Associated Rubber Industries Ltd. v. The
Associated Rubber Industries Ltd, Bhavnagar.
6. Under statutory provisions- The Act sometimes imposes personal liability on persons behind the veil in
some instances like, where business is carried on beyond six months after the
knowledge that the membership of company has gone below statutory minimum (sec
45) - Madanlal v. Himatlal,
when contract is made by misdescribing the name of the company (sec 147), when
business is carried on only to defraud creditors (sec 542).
2. What are Articles of Association? Is it
compulsory for the company to register its Articles of Association? Comment,
and discuss the restrictions on alteration of Articles of Association. (20)
Ans: Articles of Association: According to
section 2(2) of the companies act, 1956 ‘Articles” means the Articles of
association of a company as originally framed and altered from time to time in
pursuance if any previous companies law or of the present act. The articles of
association are the rules and regulation of a company framed for the purpose of
internal management of its affairs.
The Articles of
association of a company are subordinate to and are controlled by the
memorandum of association. The articles are framed mainly for carrying out the
aims and objects of the Memorandum of Association. Memorandum defines the area or business of the
company. A company cannot operate beyond the limits of its
memorandum. At the same time an Article contains the rules and
regulations of the business of the company. Therefore, Article is subordinate to,
and controlled by the Memorandum.
Registration
of the Articles.
Every private company, an unlimited company and a company limited by
guarantee must have their own Article and it should be registered with the
Registrar of Companies along with the memorandum as per the Section 26 of
the Companies Act, 1956. But it is not necessary for a Company limited by
shares to have their own Articles. It may either have its own articles or it
may adopt either wholly or partly Table A of Schedule I of the companies Act as
Table A of schedule I of the Companies Act will automatically apply to such
companies unless it has been excluded or modified. There are three
options for the company limited by shares. They are:
1. It may adopt Table A in full or
2. It may wholly exclude Table A and set out its own Articles in
full;
3. It may set out its own Articles and adopt part of Table A.
If such a company goes in for the first alternative, then it is not
necessary to get any Article of Association Registered. It has only to endorse
on the face of the Memorandum of Association that it has adopted Table A as its
Articles of Association.
It is important to note that The articles of a private limited company
must contain the following details:
1. If the company has a share capital, the amount of share capital
with which the company is to be registered.
2. The number of members with which the company is to be
registered.
In the case of a company limited by guarantee, the articles should state
the number of members with which the company is to be registered as per Section 27
(2) of the companies Act. The articles of association must be printed, divided
into paragraphs, numbered consecutively and signed by each subscriber of the
Memorandum of Association in the presence of at least one witness who shall
attest the signature and shall likewise add his address, description and
occupation, if any as per Section 30.
Limitations on
Alternation of Articles
According to
the provisions of the act and to the conditions contained in its Memorandum of
Association, a company may by passing a special resolution alter or add to its
Articles of association. The company must file with the Registrar of Companies a copy of
special resolution within 1 month from the date of its passing
The altered
Articles of association will bind the member in the same form as the original
articles.
Limitations to alteration: The alteration
made in the articles will be valid, until they fall within any one of the
following given below:
1.
The
alteration must not authorize anything expressly or impliedly forbidden by the
companies Act.
2.
The
alteration must not extend or modify the Memorandum of Association.
3.
The
alteration must not contain anything illegal.
4.
The
alteration must not be inconsistent with any alteration made by Company Law
Board.
5.
The
alteration must be bonafide for the benefit of the company as a whole.
6.
The
alteration must not make the Articles of association unaltered as it is
regarded bad in law.
7.
Retrospective
operation of Articles of association.
8.
The
alteration must not constitute fraud on the minority by a majority.
9.
An
alteration of Articles of association to effect a conversion of a public
company into a private company cannot be made without the approval of Central
Government.
10.
There cannot
be alteration of the Articles of association so as to compel an existing member
to take or subscribe for more shares or in any way extend liability to
contribute to shares capital, unless he gives his consent in writing.
11.
A company
cannot justify breach of contract with third parties or avoid a contractual
obligation by altering Articles of association.
3. Explain the main Clauses of Memorandum of
Association and also explain the procedure of making alteration in the
different clauses of Memorandum of Association.
(20)
Ans: Memorandum of Association: Section 2 (28) of the act 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 company’s law or of this act”.
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. One of the essentials
for the registration of a company is memorandum of association (sec 33). It is
the first step in the formation of a company. Its importance lies in the fact
that it contains the fundamental clauses which have often been described as the
conditions of the company’s incorporation.
Memorandum of
association is divided into 5 clauses:
1.
Name clause
2.
Registered office clause
3.
Objects clause
4.
Liability clause and
5.
Capital clause
1. Name clause:
Name of every company limited by shares or by guarantee must end by the word
'Ltd.' or 'Pvt. Ltd.' except companies exempted u/s 25. The name must not be undesirable or most not
resemble the name of any other registered company.
2. Registered
office clause: Must contain the name of state is which registered office is
situated. Actual address of registered
office is notified to ROC within 30 days of incorporation.
3. Object
clause: It Sets out object or vires of the company. The objects must be legal
and not be against the provision of the companies Act, 1956. It is divided into
two parts: main objects and other objects.
4. Liability
clause: States that liability of members is limited to the amount unpaid on
their shares and in case of company limited by guarantee the amount which every
member undertakes to contribute to the assets of the company in the event of
its winding up.
5. Capital clause:
Every company having a share capital, the amount of share capital with which
the company is proposed to be registered and the division of its shares into a
fixed denomination.
ALTERNATION OF MEMORANDUM
1. Alteration of name
(sec 21): A company may change its name at any time by passing a special resolution
and with the prior approval of the Central Government. Where a company has been
registered with a name which is undesirable, the same may be changed by an
ordinary resolution and with the prior approval of the Central Government. In
such a case the central government may also within 12 months of registration
direct the company to rectify its name and the company must change the name
within 3 months from the date of direction unless the time is extended. The new
name would also require the prior approval of the Central Govt. The British
Diabetic Society was compelled to change its name to something that would not
impinge the goodwill of the British Diabetic Association (British Diabetic Association v. The
Diabetic Society).
When a company changes its name, the Registrar of Companies has to enter the
new name in the register and a new certificate of incorporation must be issued
with necessary alterations. However, it should be noted that no approval will
be required if the change consists merely addition or deletion of the word
“private” consequent on the conversion of a public company into a private
company or vice versa.
2. Alteration of
registered office clause (sec 17): Shifting of registered office from one State
to another is a complicated affair. For this purpose, sec 17 requires:
a) A special resolution of the company.
b) The sanction of the Company Law Board.
The Board can confirm the alteration only if the shifting of the registered
office from one state to another is necessary for any purposes detailed in sec
17(1).
3. Alteration
of objects (sec 17): A company may alter its objects with the passing of a special
resolution. The confirmation of the Company Law Board is not required for this
purpose. An alteration of the objects is allowed only for the purposes
mentioned in sec 17(1).
4. Alteration of liability clause: Liability of shareholders can be increased by
express approval of each and every member. (Sec. 38) However in case the company is a club or
similar association and alteration in the memorandum requires the member to pay
recurring charge at a higher rate, although he does- not agree in writing to be
bound by the alteration. Liability of
directors, MD or managers can be made unlimited by passing a special resolution
if the article so permit and getting consent of such officer. Unlimited liability of shareholders can be
made limited by:
a. Pass a
special resolution and fill it within 30 days.
b. Obtain
tribunal sanction and fill it within 3 months of the date of order.
c. Alteration
will be effective from date of registration.
5. Alteration of capital clause: Alteration of share capital (Sec. 94): If
article provides, by passing an ordinary resolution, following can be altered:
a. Increase in
authorised capital
b. Consolidate or
sub-divide the whole or any part of existing shares into shares of larger or
smaller denominations.
c. Convert its
fully paid up shares into stock or vice-versa.
d. Cancel its
unsubscribe shares by diminishing authorised capital.
If article
doesn't provide, first alter the article by passing special resolution. File copy of resolution and altered
memorandum within 30 days to ROC.
4. (a) What is a ‘Call on Shares’? What are the
essentials of a Valid Call? (10)
Ans:
Definition: A call on Shares may be defined as "A demand
made by the company on its share holders to pay whole or part of the balance
remaining unpaid on each share at any time during the life time of a
company".
For
example: The price of a share is Rs.100/-. At the time of
applying for shares, the investor has to pay Rs.5/- of the nominal value of
share i.e. Rs.5, so Rs.95/- is balance on each share. As and when the company
needs money its asks its share holders to pay, suppose the company asks its
shareholders to pay
per share, that is known as calls on shares.
per share, that is known as calls on shares.
Essentials
of a valid calls on shares:
(1)
Board Meeting for passing a call resolution: A
meeting of the Board of Directors will be called. In this meeting a resolution
will be passed regarding making a call. The resolution must specify the amount
of
call money, the date and place of its payment.
call money, the date and place of its payment.
(2)
Closing of the Register of member and the Share Transfer Book: In
the same Board meeting a resolution is passed, whereby the secretary is given
permission to close the transfer book and the register of members for a period
of about 15 days.
(3)
Preparing the call lists: After
closing the transfer book, the work of preparing the call lists from the
register of member, is under taken by the secretary. A call lists shows details
like name and address of the share holders, numbers of shares held by them, the
amount due on the call etc. This helps the secretary in sending call letters to
the members.
(4)
Drafting call letters: The
secretary prepares a draft of the all letter in consultation with the chairman
of the company. He gets the call letters printed in the required quantity. A
call letter is divided into three parts. They are: (i) A
call letter proper, (ii) A
call receipt, (iii) A
call slip.
(5)
Issuing call letters / Dispatch of call notice: After
the preparation of call lists, the secretary issues a call letter to the share
holders on their registered address. He also publishes a call notice in a
leading newspaper for the information of shareholders.
(6)
Arrangement with bankers for call money: The
has to make necessary arrangement with the bankers of the company to receive
call money from the members. Accordingly instructions are given to the bankers.
The amount receive on calls is credited to a separate account called a
"Call Account". After receiving the call money, bankers arrange to
send the amount to the company. The call letter and call receipt are returned
to the shareholder with necessary entries, signature and stamp.
(7)
Entries in the call list and the register of members: After
receiving the call money, bankers return call letter and call receipt to the
members and send all call slips to the company's office. The secretary then
makes entries against the respective names in the call lists and the register of
members.
(8)
Preparing list of Defaulters: The
secretary prepares a list of those members who have not paid the call money on
the stipulated date. Such a list is called a list of defaulters. It is placed
before the Board for necessary action. Unpaid call money by members is called
as "Calls in Arrears".
(b) Give the circumstances when person ceases to be
a member of a Company. (10)
Ans: Termination of Membership: A person may
cease to be a member of a company, at any time, one of the following ways:
(1) When he
transfers his shares and the transfer is duly registered in the books of the
company.
(2) By
forfeiture of shares for non-payment of calls, if articles so provide.
(3) By a valid
surrender of shares. It is a short cut to forfeiture as it involves no legal
formalities.
(4) When the
company sells the shares, in exercise of its right or line over them, by giving
a 14 days’ notice to a debtor shareholder.
(5) When a
shareholder dies and his shares stand transmitted to his legal representative,
upon registration of the share, in the successor's name.
(6) When he is
declared insolvent and the Official Assignee disclaims the shares under his
right of 'disclaimer of onerous properly.'
(7) By
repudiating the contract of membership on the ground of misrepresentation in
the prospectus or on the ground of irregular allotment.
(8) By
conversion of share certificate into share warrant, unless the articles provide
otherwise. In this case one ceases to be a 'member' in the strict sense of the
term, that is, his name being removed from the Register of Members, although he
continues to be a shareholder of the company.
5. (a) Write an explanatory note on Quorum. (10)
Ans: Quorum
(Section 174)
‘Quorum’ means the minimum number of members who must be
present in order to constitute a valid meeting and transact busies thereat. The
quorum is generally fixed by the Articles. If the Articles of a company do not
provide for a large quorum, the following rules apply:
Ø For public company –any 5 person
personally present.
Ø For private company – any 2
person personally present.
Ø Note- Articles may provide for
larger quorum but not for shorter quorum.
Rules relating to Quorum:
1)
Only members
present in person are counted not the proxies.
2)
Preference
shares holders are not counted.
3)
Joint
holders are treated as single members.
4)
A member
present in two capacities as an individual member and as a trustee may be
counted as two members.
5)
In case a
company is the member of another company then the representative shall be
treated as a member not as a proxy.
6)
In case the
president of India or Governor of state is member and sends representatives,
such representative shall be treated as a member and not as a proxy.
Course of action in case of quorum not being present at the
general meeting [section 174]:
1)
If within ½
hour from the time appointed for holding the meeting the quorum is not present,
the meeting if called upon the requisition of members, shall stand dissolve.
2)
In any other
case, the meeting shall be adjourned to the same day in the next week, at the
same time and place or to such other day, time and place as the Board of
Directors may determine and notify accordingly.
3)
If at the
adjourned meeting also, quorum is not present within ½ hour from the appointed
time, the member present shall be quorum, even if the number of member be one.
(b) Explain the grounds of compulsory winding up of
a Company. (10)
Ans:
Grounds for Compulsory Winding up of a Company:
There are
following six reasons for the compulsory winding up of the joint stock company:
1. Special resolution: A company may
be wound up by the court if a special resolution is passed for this Purpose.
2. Failure to commence business: When the
company does not commence business within a year from its incorporation or
suspends business for a year.
3. Statutory report or meeting: Where default
is made in submitting the statutory report to the registrar's office or in
holding the statutory meeting within prescribed time or any two consecutive
annual general meetings under section 305 (b) in company ordinance 1984.
4. Reduction in number of members: Where the
number of members of public company is reduced below seven or in case of
private company below two.
5. Inability to pay its debts: Where the
company is unable to pay its debts in the following situation.
a. If a
creditor whose debt exceeds. Rs.50, 000 or one percent of its paid up capital whichever
is less under section 306 (a) Has served notice requiring payment and is not
paid within 30 days.
b. If
execution in favour of creditor remains unsatisfied or
c. If the
court is fully satisfied that the company is quite unable to pay its debts.
6. Court's decision: When the court is of the opinion that it is
just and equitable that the company should be wound up due to its
mismanagement, dead-lock, fraudulent or any other reasonable grounds.