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B.C.O.C.-135
Company Law
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information, data and solution. Student should must read and refer the official study material provided by the university.
Note: Attempt all the questions.
Section – A
Q. 1. What is an illegal association? What are its consequences?
Ans. Illegal Associations: As per Section 464, no association or partnership consisting of more than 50 persons shall be
formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or
partnership or by the individual members thereof, unless it is registered as a company under this Act or is formed under any
other law for the time being in force. Therefore, an unregistered association so formed is regarded as an Illegal Association
although none of its object is illegal. But as an exception, a Hindu Undivided Family (HUF) carrying on any business, even for
earning profits and with any number of members without being registered or formed in pursuance of any Indian Laws is not
considered an illegal association. Also, an association or partnership, if it is formed by professionals who are governed by
special Acts, is an exception.
Consequences: In case of an illegal association, each member shall be punishable with a fine which may extend to one lakh
rupees and they will be personally liable for all liabilities incurred in the business. Further, the association cannot enter into any
contract and cannot sue any member or outsider even if it is subsequently registered as a company. It cannot be sued by a
member or outsider for any debts due to him. It can be said that an unregistered firm can be dissolved but an illegal association
cannot be dissolved because law does not recognise its very existence.
Exceptions:
 A Hindu Undivided Family (HUF) carrying on any business, even for earning profits and with any number of members
without being registered or formed in pursuance of any Indian Laws is not considered an illegal association. But, where
two joint Hindu families join hands to carry on business, the provisions of Section 464 become applicable.
 An association or partnership, if it is formed by professionals who are governed by special Acts.
Consequences: An illegal association has the following consequences:
 Each of its members shall be punishable with fine which may extend to one lakh rupees.
 Every member is personally liable for all liabilities incurred in the business.

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  The association cannot enter into any contract.
 It cannot sue any member or outsider even if it is subsequently registered as a company.
 It cannot be sued by a member or outsider for any debts due to him.
 The Association cannot be wound-up even under the provisions relating to winding-up of unregistered companies.
 In the case of Mewa Ram vs. Ram Gopal (1926), it was held that where an association was illegal and the business had
been carried for some years, none of its members could sue for partition because partition would involve realization of
the assets of the company and payment of its debts.
So, an unregistered firm can be dissolved but an illegal association cannot be dissolved because law does not recognise its
very existence. Such illegality cannot be cured by subsequent reduction in the number of its members.
Q. 2. Define a private company. State its privileges and exemptions.
Ans. A private company means a company having a minimum paid up share capital as may be prescribed and which by its
articles of association, restricts the right of members to transfer their shares, except in case of a one person company limits the
number of its members to two hundred, prohibits any invitation to the public to subscribe for any securities of company.
Restrictions on the Right of Members to Transfer their Shares: A Private Company restricts the right of a member to
transfer his shares to someone else and such restriction must be specifically provided for in its Articles of Association which
implies that its shares are not freely transferable in the same way as in case of a public company. The restrictions are placed to
maintain the private character of the company. One common restriction imposed by a private company is that if any of its
members wants to transfer his shares, he must first offer the same to existing members of the company in consideration of a
price which will be decided by the directors of the company, but the Act does not give the method of imposing the restriction.
Restriction on Maximum number of Members: Maximum number of members which a private company can have is 200
(except in One Person Company), excluding (i) its present employees and (ii) its past employees who were its member while in
employment and who continue to be member after leaving employment.
Prohibition on Invitation to Public: A private limited company cannot issue a prospectus or any other invitation, directly or
indirectly to the general public inviting to invest in its shares/debentures. In this connection, public includes any section of the
public whether selected as members or the debenture holders or as customers of the issuing company, etc. It is, therefore, not
a public invitation when it is regarded as a domestic or private concern of the persons making the invitation and those receiving
it, but any invitation to 200 or more persons does make it a public invitation.
Number of Debenture holders may exceed 200
A Private Company can issue debentures to any number of persons and these may be more than 200 also. But it cannot
make an invitation to the public to subscribe for its debentures.
Other requirements relating to a private company
 The act requires that two or more persons must subscribe their names to Memorandum of Association for forming a
private company. A person who is competent to enter into a contract can be a subscriber even a company is a legal
person and can subscribe to the Memorandum (not a partnership firm).
 According to Section 4, the words ‘Private Limited’ or any acceptable abbreviation thereof, such as ‘Pvt. Ltd.’ must be
added at the end of the name of a private limited company.
The Companies Act gives certain privileges & exemptions to private companies from some of its provisions because of the
restriction of keeping their maximum membership to 200 and also the fact that these companies cannot invite general public to
apply for the securities issued by the company. Since there are no public funds involved, these companies do not need the
provisions which are required in case of public companies. But if a private company does not abide by the restrictions imposed
by Section 2 (68), whether directly or indirectly, it shall lose the exemptions.

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 A private company has the following privileges and exemptions:
 Only two persons can form a private company as against seven in case of a public company.
 It can have only two directors as against minimum three in the case of a public company.
 In the case of a private company, the quorum of meetings is only 2 members personally present (unless its Articles
provide for a higher number), as against 5, 15 or 30 members personally present depending upon the number of members
as on the date of meeting.
 A private company is exempted from the provisions limiting managerial remuneration at 11% of net profits and a higher
percentage, as deemed fit, can be given by it.
 Directors of a private company are not required to retire by rotation.
 The Articles of a private company may provide special disqualifications for appointment of directors in addition to
those prescribed.
 A person can be a director in not more than 10 public companies, but he can be a director in maximum 20 private
companies (unless no such company is a public company or a holding or subsidiary of a public company).
 Exemption is there for a private company from appointing independent directors.
 These companies are exempted from the requirement of constituting an audit committee of the Board.
 If so provided in its Memorandum/Articles, a private company may issue shares other than equity or preference shares.
 There is no requirement for a private company to keep its rights issue open for minimum period of 15 days.
 Only passing of an ordinary resolution is needed for a private company for issuing shares to its employees under
Employee’s Stock Option Scheme (ESOP).
 Upon satisfying certain conditions, a private company may provide loans for purchase of its own shares, which include:
No other body corporate should have invested any money; borrowing from banks, FIIs or bodies corporate should be
less than double of its paid up capital or Rs. 50 crore, whichever is lower; and the private company should not have
defaulted in repayment of its existing borrowings.
 Resolutions of Board of Directors are not required to be filed with the Registrar of Companies by a private company.
 It is provided that an interested director of a private company, after declaring his interest, can participate in the Board
meeting.
Q. 3. Explain and illustrate doctrine of indoor management. What are the exceptions to this rule?
Ans. The doctrine of indoor management was first laid down in the case of Royal British Bank vs. Turquand and according
to this doctrine, anyone who is dealing with the Company is not bound to inquire into the regularity of the internal proceedings
of the Company. This doctrine allows such person to assume that provisions of the Articles have been observed by the officers
of the Company. The doctrine of constructive notice presumes that anyone dealing with the Company has read its Memorandum
and Articles even though he may not have actually read these. While entering into business transactions, the rule of constructive
notice becomes very inconvenient. For example, the Articles of a Company empowers its directors/officers to exercise certain
powers subject only to prior sanction of the shareholders, then, becomes very difficult for the outsiders to ensure whether the
required sanction of the shareholders has actually been obtained or not and it is very difficult for them to ask directors of the
Company about the prior sanctions or to provide the resolutions thereof.
A person, who intends to purchase debentures of a Company, cannot ask its directors to produce the resolution passed by
shareholders of the Company authorising them to issue the debentures. Similarly, a firm which intends to supply certain raw
material to the Company for a small amount, cannot ask the directors/officers of the Company to produce power of attorney
issued by the Company authorizing them to make these purchases and if it does so, there are chances that the firm may lose its
customer (the Company) forever. As no other means are available for outsiders to know whether the required prior approvals (as

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per the Articles) have been obtained by officers of the Company or not, the persons dealing with the company can assume that
if the directors or other officers of the Company are entering into such transactions, they have obtained necessary approvals in
terms of Company’s Articles.
Exceptions to the Doctrine of Indoor Management: Under following circumstances, an outsider dealing with a Company
cannot claim relief on the basis of doctrine of indoor management:
– No person can get protection under the doctrine of indoor management in case he has actual or implied notice about the
fact that the person acting on behalf of the Company does not have the required authority to do so and he enters into
transactions with the Company on being fully aware about the irregularity. As per the Articles of Company, its directors
were empowered to borrow up to a certain amount and they could exceed their powers with the consent of the Company
in General Meeting. The directors borrowed an amount in excess of their powers, by issuing debentures to one of the
directors, without obtaining consent of the general meeting and the Company refused to repay the amount. It was held,
that the debentures were only good to the extent of the borrowing powers of the directors as per the Articles and the
director who had lent money beyond that limit, had deemed notice about the internal irregularity.
– A person who did not consult the Memorandum/Articles of a Company and therefore, did not rely on these documents,
cannot be provided protection under the doctrine of indoor management. In the case of Rama Corporation vs. Proved
Tin & General Investment Co., the plentiff (Rama Corpn.) had given a cheque to one of the directors of the investment
Company but the Articles of the later Company did provide that its directors could delegate their powers to one of them.
The former Company did not go through the provisions of the Articles of the investment Company and were relying on
the above doctrine. It was held that they could not do so.
– In case of forgery, there is no consent at all and therefore, the doctrine of indoor management does not cover such void
transactions. When the signatures of a person are forged, there is no consent and hence, no transaction and there is no
title at all.
– The persons who act negligently cannot claim protection under the doctrine of indoor management. Every person
dealing with an officer of a Company must properly enquire and satisfy himself about authority of the later and in case,
he does not do so, he is topped from relying on the doctrine. In one case, an accountant of a Company had transferred
some property of the Company to a person. During an action for breach of contract brought by the later, the Court held,
that the transaction was void because apparently, an accountant of a Company cannot be considered to have powers to
transfer an immovable property belonging to the Company.
– The doctrine of indoor management cannot be applied in case when there is a pre-condition, which is required to be
fulfilled, before the Company can exercise a specific power and as such, such act would be considered ultra vires not
only the directors/officers of the Company but the Company itself.
Q. 4. Who can be a director? State the modes of appointment of directors.
Ans. According to Section 2(10) of the Act, Board in relation to a company means collectively body of the directors of the
company.
WHO CAN BE APPOINTED AS A DIRECTOR?
Company can appoint only individuals as its directors. Such a person must have been allotted a Director Identification
Number (DIN). If a person applies for more than one DIN, he may be imprisoned for a period up to six months or with a fine up
to Rs. 50,000 and for continuing contraventions, there are provisions for a further fine of Rs. 500 per day till its continuance.

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Appointment of Directors
A person who is competent to contract and is allotted DIN can be appointed a director.
1. Appointment of First Directors (Section 152): Generally, Articles contain provisions about the manner for appointment
of first directors. If it is not so, individual subscribers to Memorandum, shall be deemed to be first directors of the company
until these are duly appointed. No person shall be appointed as a director of a company unless he has been allotted the DIN.
The person appointed as a director shall not act as a director unless he gives his consent to hold this office and the consent must
be filed with the Registrar within 30 days of his appointment.
2. By Shareholders in General Meeting: Every director shall be appointed by company in General Meeting except where
the Act provides otherwise. Every public company should have at least two-thirds of its total directors (excluding independent
directors) as rotational directors.
Appointment of directors in case of a Private Company: The directors are to be appointed by the shareholders in the
General Meeting of the Company, unless its Articles provide otherwise.
Manner of Rotation: 1/3rd rotational directors should retire at the first AGM of a public company and at every subsequent
AGM. Persons who became directors on the same day may retire as per agreement or otherwise by draw of lot. After retirement,
the AGM may fill up vacancies by reappointing the directors or appointing new directors.
Appointment of a director other than a retiring Director [Section 160]: The Act has laid down that if any person, other
than the retiring director wishes to stand for directorship or any member proposes a person for directorship, he must signify his
intention to do so by giving 14 days’ notice to the Company before the general meeting and the company must inform the
members at least seven days before the General meeting (1) by serving individual notices on members, by electronic mode to
those who have provided their email addresses and in writing to all other members and by placing notice of such candidature or
intention on Company’s website.
Serving of the aforesaid individual notices to members by the Company is not necessary if it advertises the candidature or
intention, not less than seven days before the meeting, at least once in a vernacular newspaper in the principal vernacular
language of the district of its registered office and at least once in English language in an English newspaper circulating in that
district. The intending person has to deposit a sum of Rs. one lakh or such higher amount as may be prescribed which shall be
refunded to the person if he gets elected as a director or gets more than 25% of total valid votes cast on show of hands or on poll
on the resolution. Such deposit is not required for independent director or a director recommended by Nomination and
Remuneration committee or recommended by Board of Directors.
Appointment of directors to be voted on individually: Section 162 states that, no motion can be made at the General Meeting
of a company for appointment of two or more persons as directors, by a single resolution, unless a resolution is first unanimously
passed that it shall be so made. Also, a motion for approving a person for appointment or for nominating him for appointment as
a director is treated as a motion for his appointment.
3. By Board of Directors: The Board of Directors may appoint:
- If authorised by the Articles, the Board can appoint additional directors but the total number of directors (including
additional director) should not be more than the maximum number fixed by Articles. The additional director holds office
up to the earlier date of the next AGM or the last date on which the AGM should have been held.
- If authorised by Articles or by a resolution by the company in General Meeting, the Board can appoint an alternate
director to act for a director during his absence from India for a period of not less than three months.
- A Casual Vacancy caused by death, resignation, insanity, insolvency of a director, etc., may be filled by the Board at its
meeting in terms of provisions of Articles. The person appointed as such shall hold office till the date up to which the
director in whose place he is appointed, would have held directorship.

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 - In terms of Articles, the Board may appoint a director nominated by an institution in pursuance of provisions of any law
for the time being in force or of an agreement or by Central/State Government by virtue of its shareholding in a Government
company.
4. Appointment of Resident Director: The Companies Act, 2013 provides that every company shall have at least one
director who has stayed in India for a total period of not less than 182 days in the previous calendar year.
5. Appointment of Independent Director: A listed public company should have at least one-third of its total number of
directors as independent directors.
Meaning of an Independent Director: Companies Act, provides that nominee directors of Banks /FIs are not independent
directors. In order to be independent director, the individual should:
- Not be a managing director or a whole-time director or a nominee director.
- Be a person of integrity having the relevant expertise/experience.
- Not be a promoter of the company or its holding, subsidiary or associate company, etc.
- Not have/had any pecuniary relationship with the company, its holding, subsidiary, etc., during immediately preceding
two financial years or the current financial year.
- Not have a relative who has pecuniary relationship/transaction with the company, its holding, subsidiary or associate
company, or their promoters, etc., amounting to 2% or more of its gross turnover or total income of fifty lakh rupees
during the Financial Year.
- Be a person who, neither himself nor any of his relatives holds or held, the position of a KMP or is or has been employee
of the Company or its holding, subsidiary or associate company in any of the preceeding three financial years; holds
together with his relatives, 2% or more of total voting power of the company or is a chief executive / director of any non-
profit organisation that receives 25% or more of its receipts from the Company.
Appointment of Independent Director [Section 150]: Independent directors may be selected from a data bank having names
/ qualifications of persons eligible & willing to act as such. The Company has to exercise due diligence before selecting
independent director who are approved in the General Meeting of the Company. In the notice of General Meeting called to
consider appointment of an independent director, an explanatory statement should be annexed indicating justification for choosing
the person for appointment as independent director. The statement should include a statement saying that in the opinion of the
Board, he fulfills the conditions specified in this Act for such an appointment. The Act prescribes the manner of appointment /
reappointment of these directors, their tenure, resignation, removal, evaluation, etc. The letter of appointment of an independent
director sets out term of his appointment; board’s expectation from him and the Committee(s) in which he is to serve, his
fiduciary duties arising out of such appointment and the accompanying liabilities, providing Directors and Officers insurance,
if any, Code of business ethics of Company expected to be followed by its directors/employees etc.
Re-appointment: Independent director are re-appointed on the basis of performance evaluation.
Remuneration: Independent director may receive remuneration as sitting fees for attending Board/Committee meetings,
reimbursement of expenses and profit related commission, etc.
Resignation or Removal
1. Resignation or removal of independent directors is in same manner as of another director.
2. An independent director who resigns or removed from the Board is replaced by a new independent director within 180
days from the date of such resignation/removal.
3. Requirement of replacement does not apply when the company fulfils the requirement of independent directors without
filling the vacancy caused by resignation/removal.

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 Separate Meetings: Independent directors should hold at least one meeting in a year without attendance of non-independent
directors and management members. They review performance of non-independent directors and the Board as a whole; review
performance of the Chairperson of the company by taking into account the views of Executive Directors and non-executive
directors; assess the quality, quantity and timeline of flow of information between Company management and Board necessary
for the Board to effectively perform its duties.
Evaluation Mechanism: Performance evaluation of independent directors is done by entire Board of Directors, excluding
the director being evaluated and on the basis of performance evaluation report, the extension/continuance of the terms of
appointment of the director is determined.
Term of office: An independent director can hold office for a term up to five consecutive years on the Board of a company.
His re-appointment is to be made by a special resolution of the Company and the same is to be disclosed in Board’s Report. An
independent director can hold office for two consecutive terms only but he will become eligible for appointment after three
years of his ceasing to be an independent director.
Code of Independent Directors: A Code of Independent Directors has been laid down for the first time by the Companies
Act, 2013, which acts as a guide to professional conduct for them. In order to promote the confidence of the investors and
minority shareholders, the independent directors have to adhere to the standards and discharge their responsibilities professionally.
Appointment of director elected by small shareholders [151]: A shareholder is considered a Small shareholder when he
holds shares of nominal value of not more than Rs. 20,000. A Company may appoint small shareholders’ director when notice to
that effect is given by not less than 1000 small shareholders or 1/10th of total number of such shareholders, whichever is lower.
Appointment of Directors through System of Proportional Representation: Generally a director is appointed by special
resolution passed by a simple majority, due to which minority shareholders may not send their representative on the Board.
Section 163 provides an opportunity to such shareholders to send their representative by adopting proportional representation
system. Articles of a Company may contain provisions for appointing, once in three years, not less than two-third of total
number of directors by single transferable vote or system of cumulative voting or otherwise.
Appointment of Women Director on the Board: For every listed company and every public company having a paid-up
share capital of not less than Rs. 100 crores or turnover of Rs. 300 crores or more. Section 149 of the Act read alongwith Rule
3 of Companies (Appointment and Qualification of Directors) Rules 2014 prescribes for the appointment of at least one women
director within 6 months from its incorporation. An intermittent vacancy of women director should be filled by immediate next
board meeting or three months from date of vacancy, whichever is later.
Q. 5. Who can be appointed as an auditor of a company? What are the disqualifications of an auditor?
Ans. Who can be Appointed as an Auditor (Qualifications): For appointment/reappointment as a statutory auditor, the
person should be Chartered Accountant. If a firm/LLP is appointed as an auditor, the partners who are Chartered Accountants
will be authorised to act/sign on its behalf.
Who cannot be Appointed as an Auditor (Disqualifications): A body corporate other than an LLP, an officer or employee of
the company, person a partner/in employment of an officer or employee of the company, person who or his relative or partner (1)
is holding security/interest in the company/its subsidiary/holding/associate company or subsidiary of such holding company
of more than amount prescribed; (2) is indebted to the company/subsidiary/holding/associate company etc., of more than the
prescribed amount; (3) has given guarantee/provided security for indebtedness of a third person to company/subsidiary/
holding, etc., for prescribed amount cannot be appointed as auditor. Person or firm has business relationship with the company
etc., of the prescribed nature, or person relative of a director or in employment of company as director or KMP, person in full time
employment elsewhere or person/partner of a firm holding appointment as auditor, holding appointment as auditor in more than

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20 companies, person convicted of fraud and a period of ten years has not elapsed, and person, directly or indirectly, rendering
service prohibited to the company/subsidiary are disqualified.
Disqualification due to Fraudulent Acts: The Tribunal may direct the company to change its auditors within 15 days and
Central Government may appoint any other Auditor.
Disqualification due to Professional Misconduct: For professional/other misconduct, the NFRA can debar the member/firm
from being appointed as an auditor/internal auditor of a company/body corporate or performing any valuation for minimum six
months extendable to 10 years.
Appointment of First and Subsequent Auditors, Tenure of Appointment and Ceiling on Audit: First auditor should be
appointed by Board within 30 days of Company’s registration to hold office until conclusion of 1st AGM. An auditor is appointed
from conclusion of 1st AGM until 6th AGM and then till conclusion of every 6th meeting. Subsequent auditors are appointed in
AGM by an ordinary resolution. A person can be auditor of maximum 20 companies.
Casual Vacancy, Resignation and Removal of an Auditor: Board can fill casual vacancy of auditor for reasons other
than resignation within 30 days. Vacancy due to resignation of an auditor can be filled in General Meeting within 3 months of
Board recommendation. An auditor resigning before end of his term should file a statement to the Registrar within 30 days
thereof. By a special resolution, obtaining prior approval by Central Government and giving a reasonable opportunity of being
heard, a Company may remove an auditor before expiry of his term.
Rotation of an Auditor: Compulsory rotation of auditors should be done by listed companies, unlisted public companies
having paid-up capital of Rs. 10 crores or more and all private limited companies with paid-up share capital of Rs. 20 crores or
more. If more than one auditors are appointed, company may rotate so that they do not complete term in same year. Auditors for
Central/State Government companies are appointed by CAG.
Rights of an Auditor: Include access to books/accounts, obtain explanation, sign Report, receive notice of general meetings,
visit branch offices, claim remuneration etc. Auditors’ remuneration is decided in Company’s General Meeting or in the manner
decided in the meeting.
Auditor’s Report: Auditor’s report on accounts examined/financial statements is to be laid in Company’s General Meeting.
It should confirm that accounting/auditing standards have been followed and to the best of his information & knowledge,
accounts/financial statements give a true & fair view of state of affairs of the Company at the end of the Financial Year. Auditor’s
Report includes the following aspects:
• The information/explanations sought were obtained or not;
• Opinion whether the Company has kept proper books of account as required by law and proper returns adequate for audit
purpose were received from branches not visited.
• Any report on accounts of a branch audited by a person other than company’s auditor has been received and how it was
dealt with.
• Whether Balance Sheet and P & L A/c are in agreement with books of account/returns.
• Whether Profit & Loss Account and Balance Sheet comply with Accounting Standards.
• Observations/comments of auditor on financial transactions/matters having an adverse effect on Company’s functioning.
• Whether any director is disqualified from being appointed as such.
• Any qualification/adverse remarks on maintenance of accounts/connected matters.
• Whether Company has in place adequate internal financial controls.

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 • The company has disclosed the impact of pending litigation on financial position in its financial statements and provisions
required under a law/accounting standards for material foreseeable losses on long term contracts/derivatives, has been
made.
Secretarial Audit: Every listed company, every public company having paid up capital of Rs. 50 crores or more or every
public company having a turnover of Rs. 250 crores or more should have mandatory Secretarial Audit and the Secretarial Report
conducted by a Company Secretary in practice and it should be annexed to Board’s report.
Section – B
Q. 6. What books of accounts are to be kept by a company?
Ans. The 'books of account' are to be maintained by a company as per Companies Act. The form of Balance Sheet and Profit
and Loss Account is prescribed in schedule III of the Act. Every Company shall prepare and keep at its registered office books of
account and other relevant books and papers and financial statements for every financial year which give a true and fair view of
the state of affairs of the company, including that of its branch office or offices, if any, and explain transactions effected both at
registered office and its branches and such books shall be kept on accrual basis and according to the double entry system of
accounting.
The Books of Account include record maintained with respect to:
All sums of money received and expended by the company and the matters in respect of which receipts and expenditure
take place.
All sales and purchases of goods by the company.
All assets and liabilities of the company.
The items of cost as may be prescribed (Section 2(13)).
The Company may maintain books of account and other relevant documents in electronic form. (Section 128(1). The Proper
books of account constitute such books of account as are necessary to exhibit and explain transactions and the financial position
of the business of the company. The proper books of account also include Cost Accounting records and stock records. The
Central Government may order that companies engaged in production of such goods or providing such services, as may be
prescribed, to maintain detailed cost records including utilization of material or labour or other items of cost.
Q. 7. Under what circumstances a company can be wound up.
Ans. The "winding up" or "liquidation" is a process of bringing about an end to the life of a company. In the words of Gower
"winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and
members. An administrator, called a liquidator, is appointed and he takes control of the company, collects its assets, pays its debts
and liabilities and finally distributes the surplus among the members in accordance with their rights.
The following circumstances formed the grounds for compulsory winding up:
(a) If a company has, by special resolution, resolved that the company be wound up by the Tribunal.
(b) If the company has acted against the interest of sovereignty and integrity of India, the security of state, friendly relations
with foreign states, public order, decency or morality.
(c) If on an application made by Registrar or any other person authorised by the Central Government by notification under
the Act, the Tribunal is of the opinion that the affairs have been conducted in a fraudulent manner or the Company was formed for
fraudulent and unlawful purpose or the persons concerned in the formation or management of its affair have been guilty of fraud,
misfeasance or misconduct in connection therewith and that it is proper that the company be wound up.
(d) If the company has made default in filing with the Registrar its financial statements or annual returns for immediately
preceding five consecutive financial year.

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 (e) If the company is unable to pay its debts.
(e) If the Tribunal is of the opinion that it is just and equitable that the company should be wound up (Section 271).
Q. 8. Discuss the Constitution powers of national company law tribunal.
Ans. The Power as a Civil Court: NCLT has powers as of a Civil Court under the code of Civil Procedure, 1908 to summon/
enforce attendance of any person and examining him on oath; to receive evidence on affidavit; to require the discovery/
production of documents; to issue commissions for examination of witness or documents; subject to Sections 123 & 124 of
Indian Evidence Act, 1972, to requisition any public record, document or a copy of such record or document from any offices;
to dismiss a representation for default or deciding it ex-parte or any other matter that may be prescribed.
Execution of an Order: Order of the Tribunal may be enforced in the same manner as a decree of a court in a suit.
Power to punish for Contempt: NCLT has the same powers to punish for contempt as the High Court under the provisions
of Contempt of Court Act, 1970.
Power to seek Assistance of Chief Metropolitan Magistrate etc.: The NCLT may take the assistance of Chief Metropolitan
Magistrate, Chief Judicial Magistrate, etc., in order to take custody of property, books of account or other documents during
winding up proceedings of a company or during proceeding relating to rehabilitation of a sick company.
Appeal to Appellate Tribunal: A person, who is aggrieved by an order of the Tribunal, may file an appeal to the NCLAT,
within forty five days from the date on which the copy of the order was made available. When such person is prevented from
filing the appeal within the aforesaid period of forty five days due to sufficient cause, the period may be extended by the NCLAT
by another 45 days. The National Company Law Appellate Tribunal (NCLAT) has the powers to confirm, modify or set aside the
order of the Tribunal (NCLT) appealed against by its order, after giving the parties a reasonable opportunity of being heard. But
in case, the Tribunal had passed such order with the consent of the parties, no appeal can be made to the NCLAT.
Q. 9. Explain the provisions of companies act 2013 relating to unpaid and unclaim dividends.
Ans. The dividend declared at an Annual General Meeting is required to be paid within 30 days from the date of declaration.
As per Section 124 of Companies Act, 2013 and rules made there under ("the Act"), where a dividend has been declared by a
company but has not been paid or claimed within thirty days from the date of the declaration to any shareholder entitled to the
payment of the dividend, the company shall, within seven days from the date of expiry of the said period of thirty days, transfer
the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf
in any scheduled bank to be called the Unpaid Dividend Account.The company shall within a period of ninety days of making any
transfer to unpaid dividend account prepare a statement containing names, their last known address and the unpaid dividend to
be paid to each person and place it on the website of the company, if any or any other website. If any default is made in transferring
the total amount, it shall pay from the date of such default, interest on so much of the amount as has not been transferred, the
company shall pay interest at the rate of 12% p.a.
Further, any money transferred to the Unpaid Dividend Account of a company in pursuance of Section 124 the Act, which
remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred by the company along
with interest accrued, if any, thereon to the Investor Education and Protection Fund established under sub-section (1) of section
125 of the Act. All shares in respect of which dividend has not been paid or claimed for seven consecutive years or more shall be
transferred by the company in the name of aforesaid Fund. However any claimant of shares transferred above shall be entitled to
claim the transfer of shares from Investor Educational Protection Fund in accordance with such procedure and on submission of
such document as may be prescribed.

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 Q.10 Distinguish between member and shareholder.
Ans. Definition of a Member: To become a member, it is required that the agreement in writing to take shares of the
company and the registration of his name in its register of members. Any person can take shares of a company at the initial
stage of formation or:
- By subscribing to its new shares.
- By transfer of shares from an existing member.
- By acquiring shares through takeover, renunciation etc.
- By acquiring shares by devolution (for example, transmission).
- By converting convertible debentures or loans in terms of issue/agreement.
Subscribers who agree to take shares at the time of Company’s formation become members on its incorporation automatically.
But those who agree to take shares later, become members of the Company when their names are entered in the register of
members. Shareholder holds shares in a company but a member is one whose name is recorded in Company’s Register of
Members.
Distinction between Member and Shareholder: A person may be a member but not a shareholder, for example, in a
company limited by guarantee having no share capital has only members, after transferring shares, the person ceases to be
shareholder but continues as member, legal representatives of a deceased member become shareholders immediately on his death
but become members when their names are entered in the Register of Members. A person whose shares are forfeited or who
surrender his shares may have to contribute as member in winding-up commencing within 12 months of his ceasing to be a
member.
Who can become a Member?: Any person who agrees in writing to become a member of a company can become a member
but like a contract, only the persons competent to contract can become members. A minor, according to the Indian Contract Act,
is incompetent to contract and so, he cannot become a member of the company. A partnership firm cannot buy shares in its name
but can do so in the names of its partners as joint holders. Joint shareholders in a public company are counted separate members
but in a private company, joint holders are treated as a single member. Joint holders may get registered in any order and company
may pay dividend to person whose name is first written in the register of members. A public office cannot be a member of a
company.
Minor: The Indian Contract Act, states that a minor is not competent to enter into a contract and therefore, a minor cannot
be member of a company. The company can repudiate the allotment of shares to a minor done due to ignorance of minority. Even
the minor may rescind the allotment made to him during the period of his minority. He can do so on attaining his majority also.
When certain shares are transferred in favour of a minor, transferor remains liable for all the future calls made by the company on
these shares even though he did not have any knowledge about minority status of the transferee who is a minor.
Company: A Company is a legal person and it can become a member of another company but a subsidiary company cannot
become a member of its holding company.
Partnership Firm: A Firm cannot buy shares in its name but can do so in the names of its partners as joint holders. A firm
can become member of a non-profit making company. An LLP is a separate legal entity and it can become a member of a
company.
HUF: A Hindu Undivided Family can have shares in a company in the name of its Karta, who will become member of the
company.
Insolvent: When member of a Company becomes insolvent, he continues to be a member until his name is removed from the
Register of Members. He can vote, but the dividend on his shares are to be paid to his Official Receiver.

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 Foreigners: The general or special permission of RBI under the FEMA allows a foreigner to be a shareholder of a company
but when he becomes an alien enemy, all these rights as member of the Company get suspended.
Joint Holders: When two or more persons jointly hold shares in a public company, they are counted as separate members.
In case of a private company, they are treated as single member. Company should pay dividend to the person whose name appears
first in register of members. The Company can serve any notice to joint holder who is named first in the register and it will be
deemed to have been served on all of them. Any transfer of shares by joint holders has to be made jointly by all the holders.
Public Office: Offices such as income-tax department, etc., cannot be member of a company and no shares can be registered
in its name by the company. But shares can be held, in the name of a registered trade union or a Registered Society.
President and Governor: In a Government Company, shares can be held, in the name of the President of India or the State
Governor.
Section – C
Q. 11. How is first auditor appointed?
Ans. First auditor should be appointed by Board within 30 days from Company’s registration to hold office until conclusion
of first AGM. When first auditor is not appointed by the Board, then members shall appoint first auditor in an Extraordinary
General Meeting. Section 139(1) provides that an auditor is appointed by the company from the conclusion of first annual
General Meeting until sixth annual general meeting and thereafter till the conclusion of every sixth meeting. If the AGM is
adjourned, the auditor shall continue till the conclusion of adjourned meeting. Such matter of appointment is to be placed for
ratification by members at every AGM. Subsequent auditors are appointed in AGM by an ordinary resolution.
Q. 12. When can registrar refuse registration of a prospectus?
Ans. Section 26 says that a prospectus issued by or on behalf of a Company must be and also that the date on the Prospectus
shall be deemed to be the date of its publication. A copy of the Prospectus is to be delivered to the Registrar on or before the
date of its publication. Such copy has to be signed by all the persons named therein as director or proposed director or by his
duly authorised person.
The Prospectus should mention that a copy thereof has been delivered for registration to the Registrar and specify the
documents required attached to the copy so delivered. Registrar will register the Prospectus after ensuring that the legal
requirements are complied with and it is accompanied by a written consent of all the persons named in it. No prospectus shall
be issued after 90 days from the date on which a copy was delivered to Registrar.
Refusal to Register the Prospectus: The Registrar shall not register a prospectus unless it is dated, it contains matters,
reports and declaration to be set out in it, it contains statements/reports of experts who are not interested in formation/promotion/
management of the Company, it includes a statement purported to be made by an expert that he has given his written consent to
the issue of Prospectus and has not withdrawn the same before the delivery of a copy of the Prospectus to the Registrar and the
copy delivered to the Registrar is signed by every person named therein as a director or proposed director of the Company.
Q. 13. Write short note on issue of share at a premium.
Ans. When purchasers of shares are required to pay an amount more than the face value of the shares, it is known as issue
of shares at a premium. Although, the Act does not specify any conditions to regulate such an issue, but, certain conditions
about utilisation of the amount of premium collected on securities are imposed by the Act. It has been provided that premium
is not profit, and it is not distributable as dividend. The Company can capitalize it and distribute it as bonus shares. The premium
should be placed in the Security Premium Account. Share premium can only be utilised for issuing fully paid bonus shares to
members, writing off preliminary expenses, writing off commission, discount or expenses incurred on issue of shares & debentures,
premium payable on redemption of redeemable preference shares/debentures and purchase of its own securities by the Company
under Section 68.

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 Q. 14. Explain the provisions of companies act 2013 with regard to proxy.
Ans. Under Section 105(1) of the Companies Act, 2013 (hereinafter, CA), any member who is entitled to attend and vote in a
company meeting can appoint a proxy. However, a proxy cannot be appointed by a member of a company not having a share
capital unless the Articles provide for it. The government can also prescribe a class or classes of companies that may not allow its
members to appoint a proxy.
A proxy can represent not more than 50 members whose aggregate shareholding carrying voting rights must not exceed 10%.
In case a member has more than 10% shareholding carrying voting rights, then the proxy for this member cannot represent
anybody else. As per 6.1 of the Secretarial Standard on General Meetings, if a proxy is appointed for more than 50 members, he
has to choose and confirm 50 members before the inspection period starts. If he does not confirm, he will be appointed proxy for
the first 50 members, and the other proxies (instruments) would be declared invalid. Apart from this, if the member of a company
is a body corporate or the President of India or the Governor of a state, then such member's authorized representative is empow-
ered to appoint a proxy under his/her signature.

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