PRINCE ACADEMY

FOUNDATION WEEKLY TEST

ANSWER KEY

PAPER 2: BUSINESS LAWS

Time Allowed – 1.15 Hour Maximum Marks – 50

Question No. 1 7 Marks

Explain the 'Doctrine of ultra vires’ under the Companies Act, 2013. What are the consequences of
'ultra vires' acts of the company?
Answer:
Doctrine of ultra vires: The meaning of the term ultra vires is simply “beyond (their) powers”. The legal
phrase “ultra vires” is applicable only to acts done in excess of the legal powers of the doers. This
presupposes that the powers in their nature are limited. To an ordinary citizen, the law permits whatever
does the law not expressly forbid. It is a fundamental rule of Company Law that the objects of a
company as stated in its memorandum can be departed from only to the extent permitted by the Act,
thus far and no further [Ashbury Railway Company Ltd. vs. Riche].
In consequence, any act done or a contract made by the company which travels beyond the powers not
only of the directors but also of the company is wholly void and inoperative in law and is therefore not
binding on the company. On this account, a company can be restrained from employing its fund for
purposes other than those sanctioned by the memorandum. Likewise, it can be restrained from carrying
on a trade different from the one it is authorised to carry on.
Consequences of ‘ultra vires’ acts of the company:
The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires
transaction, nor can it sue on it. Since the memorandum is a “public document”, it is open to public
inspection. Therefore, when one deals with a company one is deemed to know about the powers of the
company. If in spite of this one enters into a transaction which is ultra vires the company, he/she cannot
enforce it against the company.
An act which is ultra vires the company being void, cannot be ratified by the shareholders of the
company.
However, some ultra vires act can be regularised by ratifying them subsequently. For instance, if the
act is ultra vires the power of the directors, the shareholders can ratify it; if it is ultra vires the articles
of the company, the company can alter the articles; if the act is within the power of the company but is
done irregularly, shareholders can validate such acts.

Question No. 2 3 Marks

In the Flower Fans Private Limited, there are only 5 members. All of them go in a boat on a pleasure
trip into an open sea. The boat capsizes and all of them died being drowned. Explain with reference to
the provisions of Companies Act, 2013:
(A) Is Flower Fans Private Limited no longer in existence?
 (B) Further is it correct to say that a company being an artificial person cannot own property and
cannot sue or be sued?
Answer:
(A) Perpetual Succession – A company on incorporation becomes a separate legal entity. It is an
artificial legal person and have perpetual succession which means even if all the members of a
company die, the company still continues to exist. It has permanent existence.

The existence of a company is independent of the lives of its members. It has a perpetual
succession. In this problem, the company will continue as a legal entity. The company's
existence is in no way affected by the death of all its members.

(B) The statement given is incorrect. A company is an artificial person as it is created by a process
other than natural birth. It is legal or judicial as it is created by law. It is a person since it is
clothed with all the rights of an individual. Further, the company being a separate legal entity
can own property, have banking account, raise loans, incur liabilities and enter into contracts.
Even members can contract with company, acquire right against it or incur liability to it. It can
sue and be sued in its own name. It can do everything which any natural person can do except
be sent to jail, take an oath, marry or practice a learned profession. Hence, it is a legal person
in its own sense.

Question No. 3 7 Marks

Jagannath Oils Limited is a public company and having 220 members. Of which 25 members were
employed in the company during the period 1st April 2006 to 28th June 2016. They were allotted shares
in Jagannath Oils Limited first time on 1st July 2007 which were sold by them on 1st August 2016.
After some time, on 1st December 2016, each of those 25 members acquired shares in Jagannath Oils
Limited which they are holding till date. Now the company wants to convert itself into a private
company. State with reasons:
(a) Whether Jagannath Oils Limited is required to reduce the number of members.
(b) Would your answer be different, if above 25 members were the employee in Jagannath Oils
Limited for the period from 1st April 2006 to 28th June 2017?
Answer:
According to Section 2(68) of the Companies Act, 2013, “Private company” means a company having
a minimum paid-up share capital as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:

Provided that where two or more persons hold one or more shares in a company jointly,
they shall, for the purposes of this clause, be treated as a single member:

Provided further that—

(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members
of the company while in that employment and have continued to be members after the
employment ceased,
shall not be included in the number of members; and
 (iii) prohibits any invitation to the public to subscribe for any securities of the company;
(a) Following the provisions of Section 2(68), 25 members were employees of the
company but not during present membership which was started from 1st December
2016 i.e. after the date on which these 25 members were ceased to the employee in
Jagannath Oils Limited. Hence, they will be considered as members for the purpose of
the limit of 200 members. The company is required to reduce the number of members
before converting it into a private company.

(b) On the other hand, if those 25 members ceased to be an employee on 28th June 2017,
they were employee at the time of getting present membership. Hence, they will not be
counted as members for the purpose of the limit of 200 members and the total number
of members for the purpose of this sub-section will be 195. Therefore, Jagannath Oils
Limited is not required to reduce the number of members before converting it into a
private company.

Question No. 4 7 Marks

An employee, Mr. Karan, signed a contract with his employer, company ABC Limited, that he will not
solicit the customers after leaving the employment from the company.
But after Mr. Karan left ABC Limited, he started up his own company PQR Limited and he started
soliciting the customers of ABC Limited for his own business purposes.
ABC Limited filed a case against Mr. Karan for breach of employment contract and for soliciting their
customers for own business. Mr. Karan contended that there is a corporate veil between him, and his
company and he should not be personally held liable for this.
In this context, the company ABC Limited seek your advice as to the meaning of corporate veil and
when the veil can be lifted to make the owners liable for the acts done by a company.
Answer:
Corporate Veil: Corporate Veil refers to a legal concept whereby the company is identified separately
from the members of the company.
The term Corporate Veil refers to the concept that members of a company are shielded from liability
connected to the company’s actions. If the company incurs any debts or contravenes any laws, the
corporate veil concept implies that members should not be liable for those errors. In other words, they
enjoy corporate insulation.
Thus, the shareholders are protected from the acts of the company.
However, under certain exceptional circumstances the courts lift or pierce the corporate veil by ignoring
the separate entity of the company and the promoters and other persons who have managed and
controlled the affairs of the company. Thus, when the corporate veil is lifted by the courts, the promoters
and persons exercising control over the affairs of the company are held personally liable for the acts
and debts of the company.
The following are the cases where company law disregards the principle of corporate personality or the
principle that the company is a legal entity distinct and separate from its shareholders or members:
(i) To determine the character of the company i.e. to find out whether coenemy or friend.
(ii) To protect revenue/tax
(iii) To avoid a legal obligation
 (iv) Formation of subsidiaries to act as agents
(v) Company formed for fraud/improper conduct or to defeat law
Based on the above provisions and leading case law of Gilford Motor Co. Vs Horne, the company
PQR Limited was created to avoid the legal obligation arising out of the contract, therefore that
employee Mr. Karan and the company PQR Limited created by him should be treated as one and
thus veil between the company and that person shall be lifted. Karan has formed the company only
for fraud/improper conduct or to defeat the law. Hence, he shall be personally held liable for the
acts of the company.

Question No. 5 7 Marks

BC Private Limited and its subsidiary KL Private Limited are holding 90,000 and 70,000 shares
respectively in PQ Private Limited. The paid-up share capital of PQ Private Limited is ` 30 Lakhs (3
Lakhs equity shares of ` 10 each fully paid). Analyse with reference to provisions of the Companies
Act, 2013 whether PQ Private Limited is a subsidiary of BC Private Limited. What would be your
answer if KL Private Limited holds 1,60,000 shares in PQ Private Limited and no shares are held by
BC Private Limited in PQ Private Limited?
Answer:
Section 2(87) of the Companies Act, 2013 defines “subsidiary company” in relation to any other
company (that is to say the holding company), means a company in which the holding company—
(i) 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 one or more of its subsidiary companies:
For the purposes of this section —
(I) a company shall be deemed to be a subsidiary company of the holding company
even if the control referred to in sub-clause (i) or sub-clause (ii) is of another
subsidiary company of the holding company;
(II) “layer” in relation to a holding company means its subsidiary or subsidiaries.
In the instant case, BC Private Limited together with its subsidiary KL Private Limited is
holding 1,60,000 shares (90,000+70,000 respectively) which is more than one half in nominal
value of the Equity Share Capital of PQ Private Limited. Hence, PQ Private Limited is
subsidiary of BC Private Limited.
In the second case, the answer will remain the same. KL Private Limited is a holding 1,60,000
shares i.e., more than one half in nominal value of the Equity Share Capital of PQ Private
Limited (i.e., holding more than one half of voting power). Hence, KL Private Limited is
holding company of PQ Private Company and BC Private Limited is a holding company of KL
Private Limited.
Hence, by virtue of Chain relationship, BC Private Limited becomes the holding company of
PQ Private Limited.

Question No. 6 3 Marks

A Company registered under Section 8 of the Companies Act, 2013, has been consistently making
profits for the past 5 years after a major change in the management structure. Few members contented
that they are entitled to receive dividends. Can the company distribute dividend? If yes, what is the
maximum percentage of dividend that can be distributed as per provisions of the Companies Act, 2013?
Also, to discuss this along with other regular matters, the company held a general meeting by giving
only 14 days’ notice. Is this valid?
Answer:
A company registered under Section 8 of the Companies Act, 2013 is prohibited from the payment of
any dividends to its members.
Hence in the given case, the contention of the members to distribute dividend from the profits earned is
wrong.
Also, Section 8 company is allowed to call a general meeting by giving 14 days instead of 21 days.

Question No. 7 7 Marks

Define OPC (One Person Company) and state the rules regarding its membership. Can it be converted
into a non-profit company under Section 8 or a private company?
Answer:
One Person Company (OPC) [Section 2(62) of the Companies Act, 2013]: The Act defines one person
company (OPC) as a company which has only one person as a member.
Rules regarding its membership:

 Only one person as member.

 The memorandum of OPC shall indicate the name of the other person, who shall, in the event
of the subscriber’s death or his incapacity to contract, become the member of the company.
 The other person 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 of the company along with its e-memorandum and e-articles.
 Such other person may be given the right to withdraw his consent.
 The member of OPC may at any time change the name of such other person by giving notice
to the company and the company shall intimate the same to the Registrar.
 Any such change in the name of the person shall not be deemed to be an alteration of the
memorandum.
 Only a natural person who is an Indian citizen whether resident in India or otherwise and has
stayed in India for a period of not less than 120 days during the immediately preceding financial
year-
 shall be eligible to incorporate a OPC;
 shall be a nominee for the sole member of a OPC.
 No person shall be eligible to incorporate more than one OPC or become nominee in more than
one such company.
 No minor shall become member or nominee of the OPC or can hold share with beneficial
interest.
OPC cannot be incorporated or converted into a company under section 8 of the Act. Though it may
be converted to private or public companies in certain cases.
Question No. 8 2 Marks
Explain listed company and unlisted company as per the provisions of the Companies Act, 2013.
Answer:
Listed company: As per the definition given in the section 2(52) of the Companies Act, 2013, it is a
company which has any of its securities listed on any recognised stock exchange.
Provided that such class of companies, which have listed or intend to list such class of securities, as
may be prescribed in consultation with the Securities and Exchange Board, shall not be considered as
listed companies.
Whereas the word securities as per section 2(81) of the Companies Act, 2013 has been assigned the
same meaning as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956.
Unlisted company means company other than listed company.

Question No. 9 7 Marks

Mr. R, a manufacturer of toys approached MNO Private Limited for supply of raw material worth `
1,50,000/-. Mr. R was offered a credit period of one month. Mr. R went to the company prior to the due
date and met Mr. C, an employee at the billing counter, who convinced the former that the payment can
be made to him as the billing-cashier is on leave.
Mr. R paid the money and was issued a signed and sealed receipt by Mr. C. After the lapse of due date,
Mr. R received a recovery notice from the company for the payment of ` 1,50,000/-.
Mr. R informed the company that he had already paid the above amount and being an outsider had
genuine reasons to trust Mr. C who claimed to be an employee and had issued him a receipt.
The Company filed a suit against Mr. R for non-payment of dues. Discuss the fate of the suit and the
liability of Mr. R towards company as on current date in consonance with the provision of the
Companies Act, 2013? Would your answer be different if a receipt under the company seal was not
issued by Mr. C after receiving payment?
Answer:
(i) Fate of the suit and the liability of Mr. R towards the company:

Doctrine of the Indoor Management

According to the Doctrine of Indoor Management, the outsiders are not deemed to have
notice of the internal affairs of the company. They are entitled to assume that the acts of
the directors or other officers of the company are validly performed, if they are within the
scope of their apparent authority. So long as an act is valid under the articles, if done in a
particular manner, an outsider dealing with the company is entitled to assume that it has
been done in the manner required. This is the indoor management rule, that the company’s
indoor affairs are the company’s problem. This rule has been laid down in the landmark
case-the Royal British Bank vs. Turquand. (Known as “Turquand Rule”)

In the instant case, Mr. R is not liable to pay the amount of ` 1,50,000 to MNO Private
Limited as he had genuine reasons to trust Mr. C, an employee of the company who had
issued him a signed and sealed receipt.
(ii) Liability of Mr. R in case no receipt is issued by Mr. C:

Exceptions to doctrine of indoor management: Suspicion of irregularity is an exception

to the doctrine of indoor management. The doctrine of indoor management in no way
rewards those who behave negligently. It is the duty of the outsider to make the necessary
enquiry, if the transaction is not in the ordinary course of business.

If a receipt under the company seal was not issued by Mr. C after receiving payment, Mr.
R is liable to pay the said amount as this will be deemed to be a negligence on the part of
Mr. R and it is his duty to make the necessary enquiry to check that whether Mr. C is
eligible to take the payment or not.