Chapter 2 - Incorporation of company and matters incidental thererto ‘Question 1: ‘The Articles of Association of XYZ Ltd. provides the Board of Directors authority to issue bonds provided such issue is authorized by the shareholders by a necesscry resolution in the general meeting of the company. The company wos in dire need of funds and therefore, it issued the bonds to Mr. X without passing any such resolution in general meeting. Can Mr. X recover the money from the compary? Decide referring the relevant provisions of ‘the Companies Act, 2013. [Nov, 2016} Answer Relevant Provisions Doctrine of Indoor Management: ‘According to this doctrine, persons dealing with the company need not inquire whether internal proceedings relating to the contract are followed correctly, once they are satisfied that the transaction is in accordance with the memorandum and articles of association Stakeholders need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the company had gone ‘through all these proceedings in a regular manner. ‘The doctrine helps to protect external members from the company and states that the people are entitled to presume that internal proceedings are as per documents submitted with the Registrar of Companies. ‘The company is bound to Mr. X: (0 since the lender, Mr. X, had lent the money to the company assuming that the company was authorized to borrow money af ter obtaining authorization fron the members in GM: (ii) since, on the same facts, the Court held in "Royal British Bank v Turquand” that the outsiders dealing with the company were not required to inquire into the internal management of the company, and the outsiders were entitled to assume that as far as internal proceedings of the company were concerned, everything had been done regularly (termed as coctrine of indoor management). ‘Conclusion In the present case, XYZ Ltd. will be bound to return the money to Mr. X. (Question 2 ‘The directors of Smart Computers limited borrowed a sum of money from Mr. Tridey. The company’s articles provided that the directors may borrow on bonds such sums os may, from time to time, be authorized by resolution passed at a general meeting of the compary. The shareholders claimed that there had been no such resolution authorizing the loan, and therefore, it was taken without their authority and the company is not bound. ‘torrepay the loan to Tridev. In the light of the contention of shareholders, decide whether the company is bound to pay the loan [MTP May 2020] Answer Relevant provision Doctrine of Tndeor Management: ‘According to this doctrine, persons dealing with the company need not enquire whether internal proceedings relating to the contract are followed correctly, once they are satisfied that the transaction is in accordance with the memorandum and articles of association Stakeholders need not enquire whether the necessury meeting was convened and held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the company had gone ‘through all these proceedings in a regular manner.Chapter 2 - Incorporation of company and matters incidental thererto ‘The doctrine helps to protect external members from the company and states that the people are entitled to presume that internal proceedings are as per documents submitted with the Registrar of Companies. Thus, (What happens internal to a company is not a matter of public knowledge. An outsider can only presume ‘the intentions of a compary, but not know the information he/she is not privy to (ii) TF not for the doctrine, the company could escape creditors by denying the authority of officials to act on its behalf, Conclusion Ththe given question, Mr-Tridev being a persan exterral to the company, need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. Even if the shareholders claim that no resolution authorizing the loan was passed, the company is bound to pay the loan to MrTridev. ‘Question 3 ‘The role of doctrine of “Indoor management" is opposed to that of the role of ‘Constructive notice’. Comment on this statement with reference to the Companies Act, 2013. [January 2021] ‘The persons (not being members) dealing with the company are always protected by the doctrine of Indoor management. Explain. Also, explain when doctrine of Constructive Notice will apply. [Nov 2018, ICAT Module] Answer ‘According to this doctrine, persons dealing with the company cannot be assumed to have knowledge of internal problems of the company. They can simply assume that all the required things were done properly in the company. Stakeholders need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the company had gone ‘through all these proceedings in a regular manner. ‘The doctrine helps protect external members from the company and states that the people are entitled to presume that internal proceedings are as per documents submitted with the Registrar of Companies. ‘The doctrine of indoor management was evolved around 150 years ago in the context of the doctrine of constructive notice. The role of doctrine of indoor management is opposed to of the role of doctrine of constructive notice, Whereas the doctrine of constructive notice protects a company against outsiders, the doctrine of indoor management protects outsiders against the actions of a company. This doctrine also is a possible safeguard against the possibility of abusing the doctrine of constructive notice. Basis for Doctrine of Tndoor Management (0. What happens internal to a company is not a matter of public knowledge. An outsider can only presume +the intentions of a company, but not know the information he/she is not privy to (ii) TF not for the doctrine, the company could escape creditors by denying the authority of officials to act on its behalf, Exceptions to Doctrine of Indoor Management (Applicability of doctrine of constructive notice) Knowledge of irregularity: In case this ‘outsider’ has actual knowledge of irregularity within the company, the benefit under the rule of indoor management would no longer be available. In fact, he/she may well be considered port of the irregularityChapter 2 - Incorporation of company and matters incidental thererto Negligence: Tf, with a minimum of effort, the irreguarities within a company could be discovered, the benefit of the rule of indoor management would not apply. The protection of the rule is also not available in the circumstances where company does not make proper inquiry. Forgery: The rule does not apply where a person relies upona document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers. The above doctrines have been well considered while framing the provisions of various Acts pertaining to the companies worldwide. The Companies Act, 2013 and tne earlier Acts relevant for the Companies in India are no exception to the same. ‘Quection 4 ‘Mr. Raj along with his family members is running successfully a trading business. He is capable of developing his ideas and participating in the market place. To ackieve this, Mr. Raja formed a single person economic entity in the form of One Person Company with his brother Ir. King as its nominee. On 4th May 2020, Mr. King withdrew his consent as Nominee of the One Person Company. Can he do so under the provisions of the Companies Act, 2013? Examine whether the following individuals are eligible for being nominated as Nominee of the One Person Company as on Sth Mey 2020 under the above said Act: (0 Mr. Shyam, son of Mr. Raja who is 15 years old as on 5th May 2020. (ii) -Ms. Devaki an Indian Citizen, sister of Mr. Raja stays in Dubai and Zndia. She stayed in Tndia during the period from 2nd January 2019 to 16th August 2019. Thereafter she left for Dubai and stayed there. (iii)_-Mr, Ashok, an Indian Citizen residing in India who is presently a member of « ‘One Person Company’ [November 2020] Answer Jevant provisions ‘As per section 3 of the Companies Act, 2013, the menorandum of One Person Company (OPC) shall indicate the name of the other person (nominee), who shall, in the event of the subscriber's death or his incopacity to contract, become the member of the company. The other person (nominee) whose name is given in the memorandum shall give his prior written consent in prescribed form and the same shall be filed with Registrar of companies at the time of incorporation along with its Memorandum of Association and Articles of Association ‘Such other person (nominee) may withdraw his consert in such manner as may be prescribed. Analysi ‘Therefore, in terms of the above law, Mr. King, the nominee, whose name was given in the memorandum, can withdraw his consent as a nominee of the OPC by giving a notice in writing to the sole member and to the One Person Company. Conclusion: With reference to Rule 3 of the Companies (Incorporation) Rules, 2014, following are the answers to the second part of the question as regards the eligibility for being nominated as nominee: (No minor shell become member or nominee of the OPC, Therefore, Mr. Shyam, being a miner is not eligible for being nominated as Nominee of the OPC. (i). Only « natural person who is an Indian citizen whether resident of India or otherwise, shall be a nominee or the sole member of a One Person Company. The term "Resident in India” means a person who has stayed in India for a period of not less than 120 deys during the immediately preceding financial year. Here Ms. Devaki is an Indian Citizen as well as resident in India as she stayed in India for a period of notChapter 2 - Incorporation of company and matters incidental thererto less than 120 days during the immediately preceding financial year in India. So, she is eligible for being nominated as nominee of the OPC. Even if she had stayed for less than 120 days, she would have been still eligible for being nominated as the law only requires such person being nominated to be a natural person and Indian citizen, Residential status is not a matter of consideration. ili) AS per the Rule 3 of the Companies (Incorporation) Rules, 2014, a person shall not be a member of more. than one OPC at any point of time and the said person shall not be a nominee of more than one OPC. Mn, Ashok, an Indian Citizen residing in India whe ie a member of an OPC (Not a nominee in any OPC), can be nominated as nominee, Question 5 Red Limited was incorporated on tst April, 2014 is facing severe effects of depression of the economy. Owing to its bad financial status mast of the members have started withdrawing their holding from the company. The compary had 250 members on 10th January, 2019. By 15th January, 2019, 244 members had withdrawn their holding. No new member has invested in the compary after 15th February till date. Now, Mr. A, an existing member has approached you to advise him regarding his liabilities in such a situation. IRTP Nov 2019} oR What is the minimum number of persons required to form a Private company and a Public Company? Explain the. consequences when the number of members falls below the minimum prescribed limit [MTP Nov 2021) Answer Relevant Provisions ‘According to section 3A of the Compenies Act, 2013, if at any time the number of members of a company is reduced, in the case of a public company, below seven, in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is. cagrizant of the fact that it is carrying on business with less than seven members or twa members. as the case may be, shall be severally iable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor. Conclusion Hence, in the given situation, the number of member in the said public company have fallen below 7 [250-244=6] and these members have continued beyond the specified limit of 6 months, the reduced members of the company during the period of 1 month shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor. Question 6 Yadav Dairy Products Private limited has registered its articles along with memorandum at the time of registration of company in December, 2014. Now directors of the company are of the view that provisions of icles regarding forfeiture of shares should not be changed except by a resolution of 90% majority. While as per section 14 of the Companies Act, 2013 articles may be changed by passing « special resolution only. Hence, one of the directors is of the view that they cannot make a provision against the Companies Act, 2013. You are required to advise the company on this matter. [RTP May 2020, ICAT Module] oRChapter 2 - Incorporation of company and matters incidental thererto The Articles of Association of a Compary may contain provisions for entrenchment under Section 5 of the Companies Act, 2013. What is meant by entrenchment provisions in this context? Also State the relevant provisions of the said Act dealing with entrenchment provisions [Nov 2020} Answer Relevant Provisions ‘As per section 5 of the Companies Act, 2013 the article may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if more restrictive conditions than a special resolution, are met. ‘The provisions for entrenchment shall only be made either on formation of a company, or by an amendment in the. articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company. Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Reaistrar of such provisions in prescribed manner. Conclusions In the present case, Yadav Dairy Products Private Limited is a private company and wants to protect provisions of articles regarding forfeiture of shares, It means it wants to make entrenchment of articles, which is allowed. But the company will have to pass a resolution taking permission of all the members and it should also give notice to Register of Companies regarding entrenchment of articles. Question 7 ‘Mr. Shyamlal is a B. Tech in computer science. He has promoted an IT start up and got it registered as a Private Limited Company. Initially, only he and his family members are holding all the shares in the company. While. drafting the Articles of Association of the compary, it has been included that Mr. Shyomlal will remain os @ director of the company for lifetime. Mr. Mehra, a close friend of Mr. Shyamlal has warned him (Mr. Shyamlal) that in future if 75% or more shares in the. company are. held by non- family members then by passing a Special Resolution, the relevant articles can be amended and Mr. Shyamlal may be removed from the post of director. ‘Mr. Shyamlal has approached you to advise him for protecting his position as a director for lifetime. Give your answer as per the provisions of the Companies Act, 2013. [MTP April 2021] Answer Relevant provisions AAs per the provisions of sub-section (3) of section 5 of the Companies Act, 2013, the articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions ar procedures as that are mare restrictive than these applicable in the case of special resolution are met or complied with. Usually, an article of association may be altered by passing a special resolution but entrenchment makes it one difficult to change it. So, entrenchment means making something more protective. ‘Mamer of inclusion of the entrenchment provision: ‘AS per the provisions of sub-section (4) of section 5 of the Companies Act, 2013, the provisions of entrenchment shall only be made either on formation of a company, o- by an amendment in the Articles of Association as agreed to by all the members of the company in the case of a private company and by a special resolution in case of a public company.Chapter 2 - Incorporation of company and matters incidental thererto Notice to the Registrar of the entrenchment provision: As per the provisions of sub-section (4) of section 5 of the Companies Act, 2013, where the articles contain provision for entrenchment whether made on formation or by amendment, the compary shall give notice to the Registrar of such provisions in such form and manner as may be prescribed. Conclusion In the said situation the IT startup company is a private company. Therefore, Mr. Shyamlal can get the articles altered which is agreed to by all the members whereby the amended article will say that he can be removed from the post of director only if, cay, 95% votes are cact in favour of the recalution and give notice of the same to ‘the Registrar. Question 8 ‘Mahima Ltd. was incorporated by furnishing false information. As per the Companies Act, 2013, state the powers of the Tribunal (NCLT) in this regard. [Nov 2019] Answer Relevant Provisions Order of the Tribunal: ‘According to section 7(7) of the Companies Act, 2013, where a company has been got incorporated by furnishing false or incorrect information or representation or ty suppressing any material fact or information in any of ‘the documents or declaration filed or made for incorporating such company or by any fraudulent action, the “Tribunal may, on an application made to it, on being satisfied that the situation so warrants: (i) pass such orders, as it may think fit, For regulation of the management of the company including changes, if any, in its memorandum and articles, in public interest or in the interest of the company and its members and creditors: or (ii) direct that lability of the members shall be unlimited: or (ii) direct removal of the name of the company from the register of companies; or (iv) pass an order for the winding up of the company. or () pass such other orders as it may deem fit However before making any order- (i) the company shall be given a reasonable opportunity of being heard in the matter; and (ii) the Tribunal shall take into consideration the transactions entered into by the company, including the obligations, if any, contracted or payment of eny liability Question 9 Mr. Bindra is holding 950 equity shares of Bio safe Herbals, a section 8 company. Bio safe Herbals is planning to declare dividend in the Annual General Meeting for the Financial Year ended 31-03-2070. Examine whether the act of the company is in accordance with the provisions of the Companies Act, 2013, [RTP May 2021] Answer Relevant Provisions ‘According to Section 8(1) of the Companies Act, 2013, the companies licensed under Section 8 of the Act (Formation of companies with Charitable Objects, etc.) are prohibited from paying any dividend to their members. ‘Their profits are intended to be applied only in promoting the objects for which they are formed. ConclusionsChapter 2 - Incorporation of company and matters incidental thererto Hence, in the instant case, the proposed act of Bio safe Herbals, a company licensed under Section 8 of the Companies Act, 2013, which is planning to declare dividend, is not in accordance to the provisions of the Companies Act, 2013. ‘Question 10 One of the matters contained in the articles of Dhinaan Foundation, incorporated as a limited company under section 8 of the Companies Act, 2013, was altered by passing a special resolution in its general meeting and ‘thereafter, intimation for the same was given to Registrar of Companies. However, such alteration in the articles was opposed ty Dhwaj & Co.,a partnership firm which is its member that there such alteration was not valid. ‘Advise, as per the provisions of the Companies Act, 2013, whether the contention of Dhwaj & Co. was valid and whether it can be a member in such company? IRTP May 2022] Answer According to section 8 of the Companies Act. 2013. c compary registered under this section shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government (the power has been delegated to Registrar of Companies). Also, « firm may be a member of the company registered under section 8. Here, one of the matters of articles of Dhimaan Foundation was altered by passing a special resolution in its general meeting and thereafter, intimation for the same was given to Registrar of Companies. ‘AS per the provisions of the Act, itis necessary to take previous approval of the Registrar of Companies for the. same which was not done in the present case and thus the contention of Dhwaj & Co. was valid. Also, section 8 allows a firm to be a member of such company and hence, Dhwaj & Co. can be its member (Question 11 Alfa school started imparting education on 1.4.2010, with the sole objective of providing education to children of weaker society either free of cost or at a very nominal fee depending upon the financial condition of their Parents However. an 30¢h March 2018. it came ta the knowledge af the Central Gaverament that the said school was operating by violating the objects of its objective clause due to which it was granted the status of a section 8 company under the Companies Act, 2013. Describe what powers con be exercised by the Central Government against the Alfa School, in such a case? [MTP Aug 2018, MTP March 2019, ICAT Module] oR Mr. X, in association with his relative formed a company to promote education for the children of poor section. A license was issued by the Central Government allowing the said company to be registered under section 8 of ‘the Company. Government aids and lot of funds were contributed by public for the fulfilment of the benevolent object. However, on the compliant against the compary, C& came to know about the manipulation of the funds in ‘the company and so order to revoke the license of the company. Further, directed for the amalgamation with another company registered under this section with an object to save girl child Examine the legal position as to the order passed by the Central government in the given situation in the light of. ‘the Companies Act, 2013. [MTP Oct 2018] oR State Cricket Club was formed as @ Limited Liability Company under Section 8 of the Companies Act, 2013 with ‘the object of promoting cricket by arranging introductory cricket courses at district level and friendly matches. ‘The club has been earning surplus. Of late, the affairs of the company are conducted fraudulently and dividendChapter 2 - Incorporation of company and matters incidental thererto was paid to its members. Mr. Cool, a member decided make a complaint with Regulatory Authority to curb the fraudulent activities by cancelling the license given to the company. (@_Isthere any provision under the Companies Act, 2013 to revoke the license? Lf so, state the provisions. (ii) Whether the Company may be wound up? (iii) Whether the State Cricket Club can be merged with M/s. Cool Net Private Limited, a company engaged in the business of networking? (July 2021) Answer Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to promote the charitable objects of commerce, art, ecience, education, parts ete. Such company intends to apply ite profit in promoting its objects. ‘Section 8 companies are registered by the Registrar only when a license is issued by the Central Government to them, Since, Alfa School was a Section 8 company andit had started violating the objects of is objective clause, hence in such a situation the following powers can be exercised by the Central Government: (The Central Government may by order revoke the license of the company where the company contravenes any of the requirements or the conditions of this sections subject to which a license is issued or where the affairs of the company are conducted fraudulently, or violative of the objects of ‘the company or prejudicial to public interest, and on revocation the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the register. Provided that, no such order shall be made unless the company is given a reasonable opportunity of being heard, (i) Where a license is revoked, the Central Government may, by order, if itis satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section. However, no such order shall be made unless the company is given a reasonable opportunity of being heard. (iii) Where a license is revoked and where the Central Government is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, notwithstanding anything to the. contrary contained in this Act, the Central Government may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges ond with such licbilities, duties and obligations as may be specified in the order. Conclusion of the alternative question (Mr. X. ‘According to the given situation, on revocation of license, the Central Government ordered for the amalgamation of the company with the separate entity registered under the section 8 of the Companies Act, 2013. However, ies formed were ing differe cts. Accordingly, the order passed by the Central Government after the revocation of license, is not in compliance of the Section 8 of the Companies Act, 2013, ‘Question 12 ‘A group of individuals intend to form a club namely ‘Budding Pilots Flying Club’ as limited liability company to impart class room teaching and aircraft flight training to trainee pilots. It was decided to form a limited liability company for charitable purpose under Section 8 of the Companies Act, 2013 for « period of ten years andChapter 2 - Incorporation of company and matters incidental thererto ‘thereafter the club will be dissolved and the surplus of assets over the liabilities, if any, will be distributed amongst the members as a usual procedure allowed under the Companies Act, 2013, Examine the feasibility of the proposal and advise the promoters considering the provisions of the Companies Act, 2013. [MTP Oct 2020, May 2019, ICAT Module] Answer Relevant provision ‘According to section 8(1) of the Companies Act, 2013, where it is proved to the satisfaction of the Central Government that a person or an association of persons proposed to be registered under this Act asa limited company’ (0 has inits objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object: (ii) intends to apply ts profits, if any, or other income in promoting its objects: and (iii) intends 10 prohibit the payment of any dividend 10 its members; ‘the Central Government may, by issue of license, allow that person or association of persons to be registered as a limited liability company. Conclusion In the instant case, the decision of the group of individuals to form a limited liability company for charitable purpose under section 8 for a period of ten years end thereafter to dissolve the club and to distribute the surplus of assets over the liabilities, if ary, amongst the members will not hold good, since there is a restriction 4s pointed out in point (b) above regarding application of its profits or other income only in promoting its objects. Further, there is restriction in the application of the surplus assets of such a compary in the event of winding Up or dissolution of the company as provided in sub-section (9) of Section 8 of the Companies Act, 2013. ‘Therefore, the proposal is not feasible. ‘Author's Note: Depending an the marks of the question, student may include the provision of Sec 8(9) in the Relevant provision section of this answer. Sec 8(9) is as stated below: Tf on winding up/dissolution, there remains any assets, after satisfaction of its liabilities, they may be: «0. transferred to another section 8 company having similar objects subject to T&C imposed by Tribunal, or b. gold and proceeds thereof credited to Insolvency and Bankruptcy Fund formed u/s 224 of IBC, 2016 Question 13 ‘Mr. Dinesh incorporated a new Private Limited Company under the provisions of the Companies Act, 2013 and desires to commence the business immediately. Please advise Mr. Dinesh about the procedure for commencement of business as laid under the provisions of the Section 104 of the Companies Act, 2013. [MTP April 2021] Answer ‘As per Section 104 of the Companies Act, 2013, 0 company incorporated after the commencement of the Companies (Amendment) Second Ordinance, 2019 and having « share capital shall not commence any business or exercise any borrowing powers unless: (i) A declaration is filed by a director withina period of 180 days of the date of incorporation of the company in such form and verified in such manner as may be prescribed, with the Registrar that every subscriber to the memorandum has paid the value of the shares agreed to be token by him on the date of making of such declaration: and (i)_The company has filed with the Registrar a verification of it registered office as provided in sub-sectionChapter 2 - Incorporation of company and matters incidental thererto (2) of section 12, Mr. Dinesh has to comply with the above requirements and procedure for commencing the business of the company, Question 14 XY Ltd. has its registered office at Mumbai in the State of Maharashtra. For better administrative conveniences ‘the company wants to shift its registered office from Mumbai to Nashik (within the State of Maharashtra). What formalities the company has to comply with under the provisions of the Companies Act, 2013 for shifting its registered office as stated above? Explain IMTP April 2019,MTP Oct 2019,2CAr Module] Answer ‘The Companies Act, 2013 under section 13 provides for the process of altering the Memorandum of a company. Since the location or Registered Office clause in the Memorandum only names the state in which its registered office is situated, a change in address from Mumbai to Nashik, does not result in the alteration of the ‘Memorandum and hence the provisions of section 13 (and its sub sections) do not apply in this case. However, under section 12 (5) of the Act which deals with the registered office of company, the change in registered of ice from one town or city to another in the same state, must be approved by a special resolution of the company. Further, presuming that the Registrar will remain the same for the whole state of Maharashtra, there will be no need for the company to seek the confirmation to such change from the Regional Director. ‘Question 15 Examine the validity of the following different decisions/proposals regarding change of office by A Ltd. under ‘the provisions of the Companies Act, 2013: (i) The Registered office is shifted from Thane (Local Limit of Thane District) to Dadar (Local limit of ‘Mumbai District), both places falling within the jurisdiction of the Registrar of Mumbai, by passing a special resolution but without obtaining the approval of the Regional Director. (id) The Regictored office is situated in Mumbai, Maharashtra (within the jurisdiction of the Registrar. ‘Mumbai, Maharashtra State) whereas the Corporate Office is situcted in Pune, Maharashtra State (within the jurisdiction of the Registrar, Pune). A Ltd. proposes to shift its corporate office from Pune to Mumbai under the authority of a Board resolution (iil) The registered office situated in certein place of a city is proposed to be shifted to another place within the local limits of the same city under the authority of Board Resolution, [July 2021] Answer Regarding the validity of Proposals w.r-t change of registered office by A Ltd. in the light of the section 12 of ‘the Companies Act, 2013: (i) Inthe first case, where the Registered office is shifted from Thane to Dadar (one District to another District) falling under jurisdiction of same ROC i.e. Registrar of Mumba ‘As per Section 12 (5) of the Act which deals with the change in registered of fice outside the local limit from one town or city to another in the some state, may take place by virtue of a special resolution passed by the company. No approval of regional director is required as both the places are falling within the Jurisdiction of the Registrar of Mumbai, Accordingly, said proposal is valid (id) Section 12 talks about shifting of Registered office only, In the second case the corporate of fice is being shifted from Pune to Mumbai under the authority of Board resolution. Shifting of corporate of fice underChapter 2 - Incorporation of company and matters incidental thererto the board resolution is valid. ‘Author's Note: Student can alternatively assume that along with corporate office, registered office will also be changed. Then in that case, registered office situated in Mumbai is changed from Mumbai to Pune falling the jurisdiction of different of ROC's in the same State. Inline section 12 (5) of the Act, where a company changes the place of its registered office from the Jurisdiction of one Registrar to the jurisdiction of another Registrar within the same State, there such ‘change ic to be confirmed by the Regional Diractor on an application made by the company. Accordingly, the said proposal may be treated as invalid, due to lack of confirmation by Regional director of such change. Gil) Tn the third case. change of registered office within the local limits of the same city. Said proposal is valid in terms it has been passed under the authority of Board resolution, ‘Question 16 Vintage security equipment’s limited is a manufacturer of CCTV cameras. Tt has raised Rs. 100 crores through public issue of its equity shares for starting one more unit of CCTV camera manufacturing. Tt has utilized 10 crores rupees and then it realized that its existing business hes no potential for expansion because government has reduced customs duty on import of CCTV camera hence imported cameras from china are cheaper than its ‘own manufacturing. Now it wants to utilize remaining amount in mobile app development business by adding a new object in its memorandum of association. Does the Companies Act, 2013 allow such change of object. Tf not then what advise will you give to company. If yes, then give steps to be followed. [RTP Nov 2019, ICAT Module] Answer Relevant Provisions ‘Arcarding ta certion 12 af the Companies Art, 2013 9 crmpany, whirh has priced maney from public theagh prospectus and still has any unutilized amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and: (0 the details in respect of such resolution shall also be published in the newspapers (one in English and fone in vernacular language) which is in circulation at the place where. the registered office of the ‘company is situated and shall also be placed ch the website of the company, if any, indicating therein ‘the justification for such change: (ii) the dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control in accordance with SEBI regulations. Company will have to file copy of special resolution with ROC and he will certify the registration within a period of thirty days, Alteration will be effective only after this certificate by ROC. ‘Question 17 ‘The object clause of the Memorandum of Vivek Indus‘ries Limited., empowers it to carry on real-estate business and any other business that is allied to it. Due to a downward trend in real-estate business, the management of ‘the company has decided to take up the business of Food processing activity. The company wants to alter its ‘Memorandum, so as to include the Food Processing Business in its objects clause. Examine whether the company can make such change as per the provisions of the Companies Act, 2013? [ICAT Module} ‘AnswerChapter 2 - Incorporation of company and matters incidental thererto Relevant provision ‘The Companies Act, 2013 has made alteration of the memorandum simpler and more flexible. Under section 13(1) of the Act, « company may, by a special resolution after complying with the procedure specitied in this section, alter the provisions of its Memorandum. In the case of alteration to the objects clause, secticn 13(6) requires the filing of the Special Resolution by ‘the company with the Registrar. Section 13 (9) states that the Registrar shall register any alteration to the ‘Memorandum with respect to the objects of the company and certify the registration within a period of thirty days from the date of filing of the special resolution by the company. ‘Section 13 (10) further stipulates that no alteration in the Memorandum shall toke ef fect unless it has been registered with the Registrar as above. Conclusion Hence, the Companies Act, 2013 permits any alteration to the objects clause with ease. Vivek Industries Limited can make the required changes in the object clause of its Memorandum of Association. ‘Question 18 ‘Manglu and friends got registered a company in the name of Taxman Advisory private limited. Texmann is a registered trademark. After 5 years when the owner of trademark came to know about the same, it filed an application with relevant authority. Can the company be compelled to change its name by the owner of trademark? Can the owner of registered trademark request the company and then company changes its name at its discretion? [ICAT Module} Answer Relevant provision ‘According to section 16 of the Companies Act, 2013 if a company is registered by a name which — (in the opinion of the Central Government, is identical with the name by which a company had been previously registered, it may direct the compeny to change its name. Then the company shall by passing can ordinary resolution change its name within 3 months Gi) isidentical with a registered trade mark and ouner of that trade mark apply to the Central Government within three years of incorporation of registrtion of the company, it may direct the company to change. its name, Then the company shall change its name by passing an ordinary resolution within 3 months, Compony shall give notice to ROC along with the order of Central Government within 15 days of change. In case of default company and defaulting officer are punisheble. In the given case, owner of registered trade- mark is filing objection after 5 years of registration of company with a wrong name. While it should have filed the same within 3 years, Therefore, the company cannot be compelled to change its name ‘As per section 13, company can anytime change its name by passing a special resolution and taking approval of Central Government. Therefore, if owner of registered trademark request the company for change of its name and the company accepts the seme then it can change its name voluntarily by following the provisions of sec 13. ‘Question 19 ‘The Board of Directors of Sindhu Limited wants to make some changes and to alter some Clauses of the Articles of Association which are to be urgently carried out, which include the increase in Authorized Capital of the company, issue of shares, increase in borrowing limits and increase in the number of directors. Discuss about the provisions of the Companies Act, 2013 to be followed for alteration of Articles of Association.Chapter 2 - Incorporation of company and matters incidental thererto [RTP Nov 2018) Answer Alteration in Articles of Association: Section 14 of the Companies Act, 2013, vests companies with power to alter or add to its articles. The law with respect to alteration of articles is as follows: () Alteration by special resolution: Subject to the provisions of this Act and the conditions contained in its memorandum, if any, a company may, by a special resolution alter its articles. (i) Eiling of alteration with the registrar: Every alteration of the articles and a copy of the order of the Tribunal approving the alteration, shall be filed with the Registrar, together with a printed copy of the altered articles, within 15 days in such manner as may be prescribed, who shall register the same. (iit) Any alteration made hall be valid: Any alteration of the articles registered as above shell, subject to the provisions of this Act, be valid as if it were originally contained in the articles. (jv) Alteration noted in every copy: Every alteration made in articles of a company shall be noted in every copy of the articles, as the case may be. If « company makes any default in complying with the stated provisions, the company and every of ficer who is in default shall be liable to « penalty of one thousand rupees for every copy of the articles issued without such alteration, [Section 15] ‘Question 20 Naveen incorporated a “One Person Company" making his sister Navita as the nominee. Navita is leaving India permanently due to her marriage abroad, Duc to this Fact, she is withdrawing her consent of nomination in the said One Person Company. Taking into considerations the provisions of the Companies Act, 2013 answer the questions given below: (O) Tf Navita is leaving India permanently, is it mandetory for her to withdraw her nomination in the said One Person Company? (ii) TF Navita maintained the status of Resident of India after her marriage, then can she continue her nomination in the said One Person Company? Nov 19, RTP May 2021] ‘Answer As per the Companies (Incorporation) Rules, 2014. Only a natural person who is an Indian citizen whether resident in India or otherwise shall be eligible to incorporate a One Person Company ar shall be a nominze for the sole member of a One Person Company. In line with the above provision: () No, it is not mandatory for Novita to withdraw her nomination in the said OPC as she is leaving India permanently as residential status is not relevant. A natural person who is an Indian citizen whether resident in India or otherwise can be a nominee in OPC. (i) Nevita can continue her nomination in the said OPC irrespective of her residential status as she is a natural person with Indian citizenship. Question 21 S Ltd. is a company in which H Ltd. is holding 60% of 'ts paid up share copital. One of the shareholder of H Ltd. made a charitable trust and donated his 10% shares in H Ltd. And 50 crores to the trust. He appoints S Ltd. as ‘the trustee. All the assets of the trust are held in the name of S Ltd, Cana subsidiary hold shares in its holding company in this way? [RTP Nov 2019, ICAT Module} oR Explain in the light of the provisions of the Componies Act, 2013, the circumstances under which a subsidiary company can become a member of its holding company IICAT Module}Chapter 2 - Incorporation of company and matters incidental thererto ‘Answer Relevant Provisions ‘According to section 19 of the Companies Act, 2013 « company shall not hold any shares in ts holding company either by itself or through its nominees. Also, holding company shall not allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void, Following are the exceptions to the above rule— (0 where the subsidiary company holds such shares as the legal representative of a deceased member of ‘the holding company: o (ii) where the subsidiary company holds such shares as a trustee; or (iii) where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company but in this case it will not have a right to vote in the meeting of holding compary. Conclusion In the given case one of the shareholders of holding company has transferred his shares in the holding company toa trust where the shares will be held by subsidiary company. It means now subsidiary will hold shares in the holding company. But it will hold shares in the capacity of a trustee. Therefore, we can conclude that in the ven situation S Ltd. can hold shares in H Ltd. Question 22 Kavya Ltd. has a paid up share-capital of Rs. 80 crores. Anjali Ltd. holds a total of Rs. 50 crores of Kavya Ltd. Now, Kavya Itd. is making huge profits and wants to expand its business and is aiming at investing in Anjali Ltd Kavya Ltd. has approached you to analyze whether as per the provisions of the Companies Act, 2013, they can hold 1/10th of the share capital of Anjali Ltd. [MTP March 2021), Answer Relevant provision In terms of section 2 (87) of the Companies Act 2013 “subsidiary company" or "subsidiary", in relation to any other company (that is to say the holding company). means a company in which the holding company— (0 controls the composition of the Board of Directors: or (ii) exercises or controls more than one-half of the total voting power either at its own or together with tone or more of its subsidiary companies Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. Since, Anjali Itd. is holding more than one half (50 crores out of 80 crores) of the total voting power of Kavya Ltd, it (Anjeli Ltd.) is holding of Kavya Ltd Further, as per the provisions of section 19 of the Companies Act, 2013, no company shall, either by itself or ‘through its nominees, hold any shares in its holding company and no holding company shall allot or transfer its shares to any of its subsidiary companies and ony such allotment or transfer of shares of @ company to its subsidiary company shall be void Provided that nothing in this sub-section shall apply to « case— (0 where the subsidiary company holds such shares as the legal representative of a deceased member of ‘the holding company; or (ii) where the subsidiary company holds such shares as a trustee; or (iii) _where the subsidiary company is a shareholder even before it became a subsidiary company of theChapter 2 - Incorporation of company and matters incidental thererto holding company Conclusion In the given question, Kavya Itd. cannot acquire the shares of Amjali Ltd. as the acquisition of shares does not fall within the ambit of any of the exceptions provided in section 19. Question 23 ‘AB Limited issued equity shares of Rs. 1,00,000 (10000 shares of Rs. 10 each) on 01.04.2020 which have been fully subscribed whereby XY Limited holds 4000 sheres and PQ Limited holds 2000 shares in AB Limited. AB Limited ie eleo holding 20% equity chara of RS Limited before the date of iseue of equity chares stated above. RS Limited controls the composition of Board of Directors of XY Limited and PQ Limited from 01.08.2020. Examine with relevant provisions of the Companies Act, 2013: (Whether AB Limited is a subsidiary of RS Limited? (i) Whether AB Limited can hold shares of RS Linited? (iii) Whether AB Limited can vote at Annual General Meeting of RS Limited held on 30.09.2020? IRTP Nov 2021] Answer Relevant Provisions This given problem is based on sub-clause (87) of Clause 2 read with section 19 of the Companies Act, 2013. AAs per sub-clause (87) of Clause 2 of the Companies Act, 2013 "subsidiary company" or "subsidiary", in relation ‘to any other company (ie., the holding company), means @ company in which the holding company— (i) controls the composition of the Board of Directors: or (i) exercises or controls more than one-half of the total voting power either at its own or together with ‘one or more of its subsidiary companies. For the purposes of this clause, Explanation is given providing that a company shall be deemed to be a subsidiary compary of the holding company even if the control referred to in point (i) or point (ii) above, is of another subsidiary company of the holding compary. Whereas Section 19 provides that, no company shall hold any shares in its holding company and no holding company shall allot ar transfer its shares to any ofits subsidiary companies and any such cllotment or transfer of shares of a company to its subsidiary company shall be void. Provided that nothing in this sub-section shall apply toa case where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company. Here in the instant case, AB Ltd, issued 10,000 equity shares on 1.4.2020 whereby XY Ltd. & PQ Ltd. holds 4000 & 2000 shares respectively in AB Ltd., Considering 1 share = 1 vote, XY Ltd. and PQ Ltd. together holds more ‘than one-half (50%) of the total voting power. Therefore, AB Ltd. will be subsidiary to XY Ltd. & PQ Ltd. from 1.42020 Whereas AB Ltd. is already holding 20% equity shares of RS Ltd. before the date of issue of equity shares i. 14.2020. Further, RS Ltd. controls the composition of Board of Directors of XY Ltd. and PQ Ltd. from 01.08.2020. In the light of sub-clause (87) of Clause 2, RS Ltd. is a holding company of XY Ltd. and PQ Ltd. (Subsidiary companies), Conclusions Following are the answers to the questions: ()__ Yes. In this case AB Ltd. shall be deemed to be a subsidiary company of the holding company (RS Ltd.)Chapter 2 - Incorporation of company and matters incidental thererto ‘5 RS Ltd. controls the composition of subsidiary companies XY Ltd. & PQ Ltd. as per explanation to sub-clause (87) of Clause 2. (i) Yes. In this case AB Limited is a subsidiary of RS Limited as AB Ltd. was holding 20% of equity shares of RS Ltd, even before it became a subsidiary compary of the RS Ltd. (ie. on 01 08.2020), according to ‘the exception to section 19, (il) No. The subsidiary company shall have.a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee but not where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company. Therefore, AB Ltd, connot vote at AGM of RS Ltd. held on 30.9.2020. Question 24 Give answer in the following cases as per the Companies Act, 2013: ( X-Ltd,, holds 20 lacs shares in ABZ Ltd. In 2017, ABZ Ltd. controls the composition of the Board of directors of X Ltd. and transfers certain shares to it. State whether such transfer of shares by ABZ Ltd, to X Ltd. is valid (i) Th continuation of above facts, Mr. R, is a member of the ABZ Ltd. He met an accident. Mr. N (son of ‘Mr. R), is one of the director of the X Ltd. He was also a nominee of shares held by Mr. R. Being a legal representative and nominee, Mr. N gets transferred the shares of Mr. R. State on the validity of the ‘transfer of such shares to Mr. N of X Ltd. [MTP Oct 2018] Answer Relevant provisions ‘AS per section 2(87) of the Companies Act, 2013, X Ltd. is a subsidiary company of ABZ Ltd. as ABZ Ltd. controls, ‘the composition of the Board of Directors of X Ltd Further, section 19 of the companies Act provides that no company shall, ether by itself or through its nominees, hold any shares in its holding company and no holding company shall allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void Provided that this sub-section shall not apply- 2) where the subsidiary company holds such sheres as the legal representative of a deceased member of ‘the holding company; or b) where the subsidiary company holds such shares as a trustee: or ©) where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company Conclusion (On the basis of the above provisions, following are the answers (Tn the given case, X Itd. already holds shares in ABZ Ltd. before becoming its subsidiary. The given situations falls within the purview of the exceptions when such transfer of shares by holding company to its subsidiary is permissible. So this transfer of shares by ABZ Ltd. to X Ltd. is valid (ii) This situation falls within the purview of exemption stating that such subsidiary company who holds such shares as the legal representative of a ceceased member of the holding company, are entitled to hold the shares of the holding company. Se Mr. N being the legal representative of the deceased member of the Holding company, was entitled for the holding of shares of ABZ Ltd. ‘Question 25 $ Ltd acquired 10% paid up share capital of H Ltd on 15th March 2017. H Ltd acquired 55% paid up share capital of S Ltd on 10th March 2018. H Ltd. on 25th September, 2020 decided to issue bonus shares in the ratio of 1:1Chapter 2 - Incorporation of company and matters incidental thererto to the existing shareholders. Accordingly, bonus shares were allotted to S Ltd. Examine under the provisions of ‘the Companies Act, 2013 and decide (0) the validity of holding of shares by S Ltd. in H Ltd. (ii) allotment of Bonus shares by H Ltd. to S Ltd [November 2020] Answer Relevant provision {As per Section 19 of the Companies Act, 2013, no company shall, hold any shares in its holding company and no holding company shall allot or transfer its shares to any of its subsidiary companies and any such allotment or trancfer of shares of a company to its subsidiary company shall be vaid. However, this shall not apply where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company. In the given case, H Ltd. has acquired 55% paid up share capital of S Ltd. on 10th March 2018. Whereas, S Ltd. has been holding 10% paid up share capital of H Ltd. since 15th March, 2017. The said instance as asked in the. question falls under the exception stated above. Conclusion Therefore - (0) Holding of shares by S Ltd. in H Ltd. is valid in view of the proviso (c) to sub-section (1) of section 19 of the Act, which states that the restrictions of provisions of section 19(1) will not be applicable where ‘the subsidiary company is a shareholder even before it became a subsidiary company of the holding ‘company. (i) Allotment of bonus shares by H Ltd. to S Ltd. is also valid in view of the above proviso. ‘Question 26 ‘Asat 31st March, 2018, the paid up share capital of Std. is Rs. 1,00,00,000 divided into 10,00,000 equity shares of 10 each. OF this, H Ltd. is holding 6,00,000 equity shares and 4,00,000 equity shares are held by others. Simultaneously, S Ltd. is holding 5% equity shares of H Ltd. out of which 1% shares are held as a legal representative of a deceased member of H Ltd. On the basis of the given information, examine and answer the. following queries with reference to the provisions of the Companies Act, 2013 : (Can $ Ltd. make further investment in equity shares of H Ltd. during 2018-197 (ii) Can $ Ltd. exercise voting rights at Annual general meeting of H Ltd.? (iii) Can HLtd. allot or transfer some of its shares to S Ltd? [May 2019] Answer ‘The paid up share capital of S Ltd. is 1,00,00,000 divided into 10,00,000 equity shares of 10 each. Of this, H Ltd. is holding 6,00,000 equity shares. Hence, H Ltd. is the holding company of S Ltd. and $ Ltd. is the subsidiary company of H Ltd. by virtue of section 2(87) of the Companies Act, 2013 In the instant case, (OAs per the provisions of sub-section (1) of Section 19 of the Companies Act, 2013, no company shall, either by itself or through its nominees, held any shares ints holding company. Therefore, 5 Ltd. cannot make further investment in equity shares of H Ltd. during 2018-19. (i) As per second proviso to Section 19, a subsidiary company shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee. ‘Therefore, S Ltd. can exercise voting rights at the Annual General Meeting of H Ltd. only in respect of 1% shares held as a legal representative of a deceased member of H Ltd.Chapter 2 - Incorporation of company and matters incidental thererto (iii) Section 19 also provides that no holding company shall allot or transfer its shares to any of its subsidiary ‘companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void. Therefore, H Ltd. cannot allot or transfer some of its shares to S Ltd. ‘Question 27 Vijay, a member of Mayur Electricals Ltd. gave in writing to the company that the notice for any general meeting be sent to him only by registered post at his residential address at Kanpur for which he deposited sufficient money. The company sent notice to him by ordinary rail under certificate of posting. Vijay did not receive this notice end could net attand the meating and contended that the notice was improper. Decide: (Whether the contention of Vijay is vali. (i) Will your answer be the same if Vijay remains in London for two months during the notice of the meeting cand the meeting held? [RTP Nov 2020, ICAI Module] Answer Relevant Provisions ‘According to section 20(2) of the Companies Act, 2013, a document may be served on Registrar or any member by sending it te him by post or by registered post or by speed post or by courier or by delivering at his office or address, or by such electronic or other mode as may be prescribed. Provided that a member may request for delivery of ery document through a particular mode, for which he shall pay such fees as may be determined by the company in its anrwal general meeting, ‘Thus, if a member wants the notice to be served on him only by registered post at his residential address at Kanpur for which he has deposited sufficient money, the notice must be served accordingly, otherwise service willnot be deemed to have been ef fected. Conclusions ‘Accordingly. the questions as asked may be answered as under: (The contention of Vijay shall be tenable, for the reason that the notice was not properly served. (ii) Inthe given circumstances, the company is bound to serve a valid notice to Vijay by registered post at his residential address at Kanpur and not outside India. Question 28 Explain the provisions of the Companies Act, 2013 relating to the ‘Service of Documents’ on a company and ‘the members of the company. [MTP March 2021, ICAT Module} Answer Under section 20 of the Companies Act, 2013 a document may be served on a compary or an officer thereof by sending it to the company or the officer at the registered office of the company by registered post or by speed post or by courier service or by leaving it at its registered office or by means of such electronic or other mode as may be prescribed. However, in case where securities are held with a depository, the records of the beneficial ownership may be served by such depository on the company by means of electronic or other mode. Under section 20 (2), save cs provided in the Act or the rule thereunder for filing of documents with the registrar electronic mode, a document may be served on Registrar or ony member by sending it toChapter 2 - Incorporation of company and matters incidental thererto registered post or by speed post or by courier or by delivering at his office or address, or by such electronic or other mode as may be prescribed. However, a member may request for delivery of any cocument through a particular mode, for which he shall pay such fees as may be determined by the company in its annual general meeting. ‘Question 29 Parag Constructions Limited is a leading infrastructure company. One of the directors of the company Mr. Parag has been signing all construction contracts on behalf of company for many years, All the parties who ever deal with the company know Mr. Parag vary wall Company hes got ¢ vary important conetruction contract from a renowned software company. Parag constructions will do construction for this site in partnership with a local contractor Firozbhai, Mr. Parag signed partnership deed with Firozbhai on behalf of company because he has an implied authority. Later in a dispute company denied to accept liability as a partner. Can the company deny its liability as a partner? IICAT Module} Answer Relevant provision ‘As per section 22 of the Companies Act, 2013 a company may authorize any person as its attorney to execute deeds on its behalf in any place either in or outside india. But common seal should be affixed on his authority letter or the authority letter should be signed by two directors of the company or it should be signed by one director and secretary. This authority may be either general for any deeds or it may be for any specific deed. ‘A deed signed by such an attorney on behalf of the company and under his seal shall bind the company as if it were made under its common seal. Conclusion In the present case company has not neither given any written authority not affixed common seal of the ‘authority letter. It means that Mr. Parag is not legally entitled to execute deeds on behalf of the company. ‘Therefore, deeds executed by him are not binding on the company. Therefore, company can deny its liability as fa partner