Incorporation of Company and

2 Matters Incidental Thereto

CHAPTER

PRACTICE QUESTIONS
1. 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.
 [ICAI Module]
Sol. 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 Indoor Management
(i) 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) If 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 part of the irregularity.
Negligence: If, with a minimum of effort, the irregularities 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 upon a 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 the earlier Acts relevant
for the Companies in India are no exception to the same.

2. Mr. Raja 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 achieve this, Mr. Raja formed
a single person economic entity in the form of One Person Company with his brother Mr. 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 5th May 2020 under the above said Act.
(i) 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 India. She stayed in India
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 a 'One Person
Company'. [Nov. 2020]

Sol. Relevant provisions: As per section 3 of the Companies Act, 2013, the memorandum 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 incapacity 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 consent in such manner as may be prescribed.
Analysis: 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:
(i) No minor shall become member or nominee of the OPC. Therefore, Mr. Shyam, being a minor
is not eligible for being nominated as Nominee of the OPC.
(ii) Only a 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 days 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 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.
12 Corporate and Other Laws
 (iii) 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.
Mr. Ashok, an Indian Citizen residing in India who is a member of an OPC (Not a nominee in
any OPC), can be nominated as nominee.

3. Red Limited was incorporated on 1st April, 2014 is facing severe effects of depression of the
economy. Owing to its bad financial status most of the members have started withdrawing their
holding from the company. The company had 250 members on 10th January, 2019. By 15th January,
2019, 244 members had withdrawn their holding. No new member has invested in the company
after 15th February till date. Now, Mr. A, an existing member has approached you to advise him
regarding his liabilities in such a situation. [RTP Nov. 2019]

Sol. Relevant Provisions: According to section 3A of the Companies 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 cognizant of the fact
that it is carrying on business with less than seven members or two members, as the case may
be, shall be severally liable 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.

4. 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 articles 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 a 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. [ICAI Module]

Sol. 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 Registrar 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
Incorporation of Company and Matters Incidental Thereto 13
 permission of all the members and it should also give notice to Register of Companies regarding
entrenchment of articles.

5. 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 company, it has been included
that Mr. Shyamlal will remain as a 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]

Sol. Relevant provisions: As 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 or procedures as that are more restrictive than
those 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.
Manner 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, or 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.
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 company 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, say, 95% votes are cast
in favour of the resolution and give notice of the same to the Registrar.

6. 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]

Sol. 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 by 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 liability of the members shall be unlimited; or
14 Corporate and Other Laws
 (iii) 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
(v) 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 any liability.

7. 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-
03-2020. Examine whether the act of the company is in accordance with the provisions of the
Companies Act, 2013. [RTP May 2021]

Sol. 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: 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.

8. One of the matters contained in the articles of Dhimaan 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 by 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? [RTP May 2022]

Sol. According to section 8 of the Companies Act, 2013, a company 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, a 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, it is 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.

9. 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, on 30th March 2018, it came to the knowledge of
the Central Government 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,
Incorporation of Company and Matters Incidental Thereto 15
 2013. Describe what powers can be exercised by the Central Government against the Alfa School,
in such a case? [ICAI Module]

Sol. Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed
to promote the charitable objects of commerce, art, science, education, sports etc. Such company
intends to apply its 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 and it had started violating the
objects of its objective clause, hence in such a situation the following powers can be exercised by
the Central Government:
(i) 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.
(ii) Where a license is revoked, the Central Government may, by order, if it is 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 and with such liabilities,
duties and obligations as may be specified in the order.

10. 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 a period of ten years and 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. [ICAI Module]

Sol. 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 as a limited company:
(i) has in its 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 its profits, if any, or other income in promoting its objects; and
(iii) intends to prohibit the payment of any dividend to its members;

16 Corporate and Other Laws

 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 and thereafter to dissolve
the club and to distribute the surplus of assets over the liabilities, if any, amongst the members will
not hold good, since there is a restriction as 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 company 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.

11. 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 10A of
the Companies Act, 2013. [MTP April 2021]

Sol. As per Section 10A of the Companies Act, 2013, a company incorporated after the commencement
of the Companies (Amendment) Second Ordinance, 2019 and having a share capital shall not
commence any business or exercise any borrowing powers unless:
(i) A declaration is filed by a director within a 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 taken by him on the date of making of such declaration; and
(ii) The company has filed with the Registrar a verification of it registered office as provided in
sub-section (2) of section 12.
Mr. Dinesh has to comply with the above requirements and procedure for commencing the business
of the company.

12. 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.[ICAIModule]

Sol. 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 office 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.
Incorporation of Company and Matters Incidental Thereto 17
 13. 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.
(ii) The Registered office is situated in Mumbai, Maharashtra (within the jurisdiction of the
Registrar, Mumbai, Maharashtra State) whereas the Corporate Office is situated 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.
(iii) The registered office situated in certain 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]

Sol. 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) In the 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 Mumbai.
As per Section 12 (5) of the Act which deals with the change in registered office outside the
local limit from one town or city to another in the same 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.
(ii) Section 12 talks about shifting of Registered office only, In the second case the corporate
office is being shifted from Pune to Mumbai under the authority of Board resolution. Shifting
of corporate office under the board resolution is valid.
(iii) In 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.

14. Anushka security equipment’s limited is a manufacturer of CCTV cameras. It has raised `100 crores
through public issue of its equity shares for starting one more unit of CCTV camera manufacturing.
It has utilized 10 crores rupees and then it realized that its existing business has 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. If not then what advise will you give
to company. If yes, then give steps to be followed. [ICAI Module]

Sol. Relevant Provisions: According to section 13 of the Companies Act, 2013 a company, which
has raised money from public through prospectus and still has any unutilised 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:
(i) the details in respect of such resolution shall also be published in the newspapers (one
in English and one in vernacular language) which is in circulation at the place where the

18 Corporate and Other Laws

 registered office of the company is situated and shall also be placed on 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.

15. The object clause of the Memorandum of Vivek Industries 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? [ICAI Module]

Sol. Relevant provision: The Companies Act, 2013 has made alteration of the memorandum simpler
and more flexible. Under section 13(1) of the Act, a company may, by a special resolution after
complying with the procedure specified in this section, alter the provisions of its Memorandum.
In the case of alteration to the objects clause, section 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 take effect 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.

16. Manglu and friends got registered a company in the name of Taxmann Advisory private limited.
Taxmann 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? [ICAI Module]

Sol. Relevant provision: According to section 16 of the Companies Act, 2013 if a company is registered
by a name which,:
(i) in the opinion of the Central Government, is identical with the name by which a company
had been previously registered, it may direct the company to change its name. Then the
company shall by passing an ordinary resolution change its name within 3 months.
(ii) is identical with a registered trade mark and owner of that trade mark apply to the Central
Government within three years of incorporation of registration 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.
Company 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 punishable.
Incorporation of Company and Matters Incidental Thereto 19
 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 same then it can change its name
voluntarily by following the provisions of sec 13.

17. S Ltd. is a company in which H Ltd. is holding 60% of its paid up share capital. 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. Can a
subsidiary hold shares in its holding company in this way? [ICAI Module]

Sol. Relevant Provisions: According to section 19 of the Companies Act, 2013 a company shall not
hold any shares in its 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:
(i) 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 holding company but in this case it will not have a right to vote in the meeting of
holding company.
Conclusion: In the given case one of the shareholders of holding company has transferred his
shares in the holding company to a 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 given situation S Ltd. can hold shares
in H Ltd.

18. Kavya Ltd. has a paid up share-capital of `80 crores. Amjali Ltd. holds a total of `50 crores of
Kavya Ltd. Now, Kavya ltd. is making huge profits and wants to expand its business and is aiming
at investing in Amjali 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 Amjali Ltd.
 [MTP March 2021]

Sol. 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—
(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:
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, Amjali Ltd. is holding more than one half (50 crores out of 80 crores) of the total share
capital of Kavya Ltd., it (Amjali Ltd.) is holding of Kavya Ltd.
20 Corporate and Other Laws
 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 any such allotment or
transfer of shares of a company to its subsidiary company shall be void:
Provided that nothing in this sub-section shall apply to a case:
(i) 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 holding company;
Conclusion: In the given question, Kavya ltd. 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.

19. AB Limited issued equity shares of `1,00,000 (10000 shares of `10 each) on 01.04.2020 which
have been fully subscribed whereby XY Limited holds 4000 shares and PQ Limited holds 2000
shares in AB Limited. AB Limited is also holding 20% equity shares of RS Limited before the date
of issue of equity shares 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:
(i) Whether AB Limited is a subsidiary of RS Limited?
(ii) Whether AB Limited can hold shares of RS Limited?
(iii) Whether AB Limited can vote at Annual General Meeting of RS Limited held on 30.09.2020?
 [RTP Nov 2021]

Sol. Relevant Provisions: This given problem is based on sub-clause (87) of Clause 2 read with
section 19 of the Companies Act, 2013.
As per sub-clause (87) of Clause 2 of the Companies Act, 2013 "subsidiary company" or
"subsidiary", in relation to any other company (i.e., 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 clause, Explanation is given providing that a company shall be deemed
to be a subsidiary company 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 company.
Whereas Section 19 provides that, 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 transfer of shares of a company to its subsidiary company shall be void.
Provided that nothing in this sub-section shall apply to a 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 1.4.2020.
Incorporation of Company and Matters Incidental Thereto 21
 Whereas AB Ltd. is already holding 20% equity shares of RS Ltd. before the date of issue of equity
shares i.e. 1.4.2020.
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:
(i) Yes. In this case AB Ltd. shall be deemed to be a subsidiary company of the holding company
(RS Ltd.) as RS Ltd. controls the composition of subsidiary companies XY Ltd. & PQ Ltd. as
per explanation to sub-clause (87) of Clause 2.
(ii) 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 company of the RS Ltd. (i.e. on
01 08.2020), according to the exception to section 19.
(iii) 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. cannot vote at AGM of RS Ltd. held on 30.9.2020.

20. S 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 to the existing shareholders. Accordingly, bonus shares were
allotted to S Ltd. Examine under the provisions of the Companies Act, 2013 and decide
(i) the validity of holding of shares by S Ltd. in H Ltd.
(ii) allotment of Bonus shares by H Ltd. to S Ltd. [Nov. 2020]

Sol. 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 transfer of shares of a company to its subsidiary
company shall be void.
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:
(i) 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;
(ii) Allotment of bonus shares by H Ltd. to S Ltd. is also valid in view of the above proviso.

21. As at 31st March, 2018, 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 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 :
22 Corporate and Other Laws
 (i) Can S Ltd. make further investment in equity shares of H Ltd. during 2018-19?
(ii) Can S Ltd. exercise voting rights at Annual general meeting of H Ltd.?
(iii) Can H Ltd. allot or transfer some of its shares to S Ltd.? [May 2019]

Sol. 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 S Ltd. is the subsidiary company of H Ltd. by virtue of section 2(87) of the Companies Act,
2013.
In the instant case,
(i) As 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, hold any shares in its holding company.
Therefore, S Ltd. cannot make further investment in equity shares of H Ltd. during 2018-19.
(ii) 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.
(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.

22. 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 mail under
certificate of posting. Vijay did not receive this notice and could not attend the meeting and
contended that the notice was improper.
Decide:
(i) Whether the contention of Vijay is valid.
(ii) Will your answer be the same if Vijay remains in London for two months during the notice
of the meeting and the meeting held? [ICAI Module]

Sol. 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 to 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 any document through a particular mode, for
which he shall pay such fees as may be determined by the company in its annual 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 will not be deemed to have been effected.
Conclusions: Accordingly, the questions as asked may be answered as under:
(i) The contention of Vijay shall be tenable, for the reason that the notice was not properly served.
(ii) In the 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.
Incorporation of Company and Matters Incidental Thereto 23
23. Explain the provisions of the Companies Act, 2013 relating to the ‘Service of Documents’ on a
company and the members of the company. [ICAI Module]

Sol. Under section 20 of the Companies Act, 2013 a document may be served on a company 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 as provided in the Act or the rule thereunder for filing of documents
with the registrar in electronic mode, a document may be served on Registrar or any member by
sending it to 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.
However, a member may request for delivery of any document through a particular mode, for
which he shall pay such fees as may be determined by the company in its annual general meeting.

24. 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 very well. Company has got
a very important construction 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? [ICAI Module]

Sol. 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 a partner.

25. 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 necessary resolution in the general
meeting of the company. The company was 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 company? Decide referring the relevant provisions of the Companies Act, 2013.
 [Nov. 2016]

24 Corporate and Other Laws

Sol. 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:
(i) since the lender, Mr. X, had lent the money to the company assuming that the company was
authorized to borrow money after obtaining authorization from the members in GM;
(ii) since, on the same facts, the Court held in “Royal British Bank vs. 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 doctrine of
indoor management).
Conclusion: In the present case, XYZ Ltd. will be bound to return the money to Mr. X.

 qqq

Incorporation of Company and Matters Incidental Thereto 25