cs executive company law important chapters question answers

CS Executive Company Law Important Chapters Question Answers of Chapter 3

From ICSI Old Papers - Question Answers of Membership

Question 1
Write a short note on the Rights of Dissentient Members. (December 2013) (4 marks)
Answer:
Section 48(2) of the Companies Act, 2013 confers certain rights upon the dissenting shareholders. According to section 48(2), where the rights of any class of shares are varied, the holders of not less than 10% of the issued shares of that class, being persons who did not consent to such variation or vote in favour of the special resolution for the variation, can apply to the Tribunal to have the variation cancelled. Where any such application is made to the Tribunal, the variation will not be effective unless and until it is confirmed by the Tribunal.

The above application shall be made within 21 days after the date on which the consent was given or the resolution was passed, as the case may be, and may be made on behalf of the shareholders entitled to make the application by such one or more of their number as they may appoint in writing for the purpose.

Question 2
All the shareholders of a company are members and all the members of a company are shareholders. Comment (December 2008) (5 marks)
Or
Every shareholder of a company is known as a member while every member may not be known as a shareholder. Comment (December 2019) (5 marks)
Answer:
In case of a company limited by shares, the shareholders are the members. The terms “members” and “shareholders” are usually used interchangeably, being synonymous, as there can be no membership except through the medium of shareholding. Thus, generally speaking every shareholder is a member and every member is a shareholder.

However, there may be exceptions to this statement, e.g.,

  • a person may be a holder of share(s) by transfer but will not become its member until the transfer is registered in the books of the company in his favour and his name is entered in the register of members.
  • Similarly, a member who has transferred his shares, though he does not hold any shares yet he continues to be member of the company until the transfer is registered and his name is removed from the register of members maintained by the company [Section 88 of the Companies Act, 2013

Question 3

In what manner membership in a company can be sought? (June 2009) (8 marks)
A person may acquire the membership of a company in the following ways:

  1. By subscribing to the MOA
  2. By making an application to the company for the allotment of shares
  3. By executing an instrument of transfer of shares as transferee
  4. By consenting to the transmission of shares in his name
  5. By acquiescence or estoppels
  6. By holding the shares of the company as the beneficial owner in the records of the depository.                Accordingly, there are two important elements which must be present before a person can acquire membership of a company viz., –

(i) agreement to become a member; and

(ii) entry of the name of the person so agreeing, in the register of members of the company.

Both these conditions are cumulative. [Balkrishan Gupta v. Swadeshi Polytex Ltd. (1985) 58 Com Cases 563].

Question 4.
Explain when a person ceases to be a member of a company. (December 2010) (8 marks)
Answer:
A member ceases to be the member of the company soon his name is removed from the register of the members or register of the beneficial owner. Some of the modes of cessation of membership are:

  1. By transferring of shares to someone else
  2. Forfeiture of shares by the company in case of nonpayment of sum due by the member
  3. When company exercise its lien on the shares for the recovery of unpaid amount due by the member
  4. Death or insolvency of member
  5. Conversion of shares into share warrants or stock
  6. Buy back of shares by the company
  7. Purchase of shares by the company under the tribunal order under section 242
  8. Dissolution or winding up or striking off the name of the company
  9. Cancellation of contract of membership in case of void or voidable allotment

Question 5.
Limited Liability Partnership can become a member of a Company incorporated under the provision of the Companies Act, 2013. Comment (June 2017) (5 marks)

Answer
There are two important elements which must be present before a person can acquire membership of a company viz., –

(i) agreement to become a member; and

(ii) entry of the name of the person so agreeing, in the register of members of the company.

Thus, any person desirous of becoming a member of a company must have the legal capacity of entering into an agreement in accordance with the provisions of the Indian Contract Act, 1972.

Being an incorporated body under Limited Liability Partnership Act, 2008 can become a member of a company.

Question 6.
Four types of persons, viz., a Section 8 Company, an insolvent individual, a Trade Union, and a Pawnee, apply for membership in your public limited company. Will you accept them as a member of your company? Why? (June 2010) (4 marks)
Answer:
Subject to the Memorandum and Articles, any sui juris (a person who is competent to contract) except the company itself, can become a member of a company.

Thus

  • Section 8 company, being an artificial person, can become a member of another company.
  • A trade union registered under the Trade Union Act, can be registered as a member and can hold shares in a company in its own corporate name.
  • An insolvent may be a member of a company as long as he is on the register of members.

He is entitled to vote, but he loses all beneficial interest in the shares and company will pay dividend on his shares to the Official Assignee or Receiver.

  • A pawnee is not the absolute owner of shares. Thus he cannot be treated as the holder of the shares pledged in his favour, and the pawner continues to be a member and can exercise the rights of a member.

Question 7.
Raheem, who is a member of Vivek Limited, a public company, has very recently become insolvent. Can Insolvent Rahees continue as a member of the company? (June 2011) (4 marks)

Answer:
An insolvent may be a member of a company as long as he is on the register of members.

He is entitled to vote, but he loses all beneficial interest in the shares and company will pay dividend on his shares to the Official Assignee or Receiver.

Thus, Raheem can continue as a member of the company. But, being insolvent, as per Indian Contract Act, Raheem cannot enter into any agreement with the company which may increase his liabilities.

Question 8.
A member of an incorporated company becomes insolvent. He claimed the right to vote and receive dividends from the company. Referring to the provisions of the Companies Act, 2013 discuss whether his claim is valid. (December 2018) (3 marks)
Answer:
An insolvent may be a member of a company as long as he is on the register of members.

He is entitled to vote, but he loses all beneficial interest in the shares and company will pay dividend on his shares to the Official Assignee or Receiver.

Question 9.
Fortune Limited refused to enter the name of the minor son of a deceased member in the register of members on the ground that the minor cannot enter into a contract as per Section 11 of the Indian Contract Act, 1872. The shares are fully paid up. Comment on the decision of the company. (December 2009) (4 marks)

Answer:
There are two important elements which must be present before a person can acquire membership of a company viz., –

(i) agreement to become a member; and

(ii) entry of the name of the person so agreeing, in the register of members of the company.

Thus, any person desirous of becoming a member of a company must have the legal capacity of entering into an agreement in accordance with the provisions of the Indian Contract Act, 1972.

A Minor cannot become a member of a company.

But

  • A minor can be transferee in case of fully paid up shares.
  • A minor can hold the shares in the name of his lawful guardian.

Question 10.
John, who is a member of Alex Limited, is of unsound mind. Can the shareholder of unsound mind exercise his voting rights in respect of his membership in the said company? Give your advice. (June 2011) (4 marks)

Answer:
Voting or decision making activity can be done only by a person who is of sound mind. Voting on some resolution is equivalent of making an agreement on some matter with other.

As per Section 11 of Indian Contract Act, 1872, every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.

It means a person of unsound mind cannot make agreement. Therefore, a shareholder of unsound mind cannot exercise his/her voting rights in any company.

Question 11.
Thrive Limited is a public limited company, incorporated under the Companies Act, 2013. The Board of directors of the said company has recently decided to enlist an article in its article of association-related relating to expulsion of a member by a Board of directors of the company where the directors were of the view that the activities or conduct of such a member was detrimental to the interest of the company. Is the board’s decision valid in the eye of the law? (June 2011) (4 marks) 
Or
Ram Singh is a shareholder of Alexandra India Ltd. The Board of directors of the company are of the view that the conduct of Ram Singh has been detrimental to the interest of the company. Further, the Board also noted that Ram Singh is director in a company which is a competitor company of Alexandra India Ltd. The Articles of Association of Alexandra India Ltd. permit expulsion of members. The Board unanimously decided to expel Ram Singh from the company. Discuss the relevant provisions of Companies Act, 2013 in this regard. If Ram Singh files a case against the Board whether he will win the case? (Dec 2019) (5 marks)
Answer:
The Department of Company Affairs (now, Ministry of Corporate Affairs) has clarified that an article for expulsion of a member is ultra vires the company. This is because such a provision is against

  • the provisions of the Companies Act relating to the rights of a member in a company,
  • the powers of the Tribunal as an appellate authority under
    • Section 58 (Refusal of registration and appeal against refusal)
    • Section 48 (Variation of shareholders’ rights)
    • Section 235 (Power to acquire shares of shareholders dissenting from scheme or contract approved by majority)
    • Section 241 (Application to Tribunal for relief in cases of oppression and mismanagement)

Thus any power of the Board of Directors to expel a member by alteration of Articles of Association shall be illegal and void.

 According to Section 6 of the Companies Act, 2013, the Act overrides the Memorandum and Articles of Association, and any provision contained in these documents repugnant to the provisions of the Companies Act, is void.

Question 12.

Mohan applied for 4,000 shares in a company but no allotment was made to him. Subsequently, 4,000 shares were transferred to him without his request and his name was entered in the register of members. Mohan knew it but took no step for the rectification of the members. Subsequently, the company went into liquidation and he was held liable as a contributory. Now Mohan wants to apply to the court for rectification of the register of members. Can he do so? Explain. (December 2012) (4 marks)

Answer:
Membership by acquiescence or estoppels

If any person allows his name without sufficient cause, to be on the register of members of the company or otherwise holds himself out or allows himself to be held out as a member, he will become member of the company. In such a case, such person is estopped from denying his membership.

Mohan did not take any step for the rectification of the register of members even after knowing the facts. Here Mohan is a member by acquiescence or estoppels.

He cannot deny his liability as a contributory. Thus, Mohan’s application will be refused by the Court.

Question 13.
ABC & Company, a partnership firm applied for shares in XYZ Limited. The company allotted the shares required by the partnership firm. In the given context, what are the liability of partners and the partnership firm? (December 2013) (4 marks)
Answer:
A partnership firm is not a legal person and therefore cannot become a member of a company.  But a partnership firm can become a member of company registered u/s 8 of Companies Act.

Therefore, the allotment stated in the question is void. As such, there is no liability partners and the partnership firm w.r.t such allotment.

Question 14.
Section 62 ensures pre-emptive rights of shareholder. Discuss (December 2012) (4 marks)
Answer:
What is ‘Right of Pre-emption’?

According to Right of Pre-emption, existing members of the company have first right to acquire the shares of the company. Thus, if a company wants to increase its subscribed capital, it shall offer the shares first to its existing shareholders. Similarly, if any/some of the member/s of the company want/s to sell their shares, such shares shall be first offered to the other existing members of the company at the fair market price which may be decided by the BOD of the company or auditor of the company.

Section 62 of the Companies Act, 2013 secures shareholders’ pre-emptive rights with regard to the further issue of share capital by the company. The Section lays down:

  • Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer.

Question 15.
A2Z Management Services Limited is a listed company quoted at Bombay Stock Exchange Limited. The company closed its register of debenture holders in June and August 2021 for 12 and 21 days respectively. The chief financial officer (CFO) of the company has informed the secretary of the company to consider closing the register in December for another 15 days for some strategic reasons. Referring to the provisions of Companies Act, 2013, examine the validity of action of the company. (June 2017) (4 Marks)
Answer:

Power to close register of members or debenture holders or other security holders (Section 91)

A company may close the register of members or the register of debenture holders or the register of other security holders for any period or periods not exceeding in the aggregate 45 days in each year, but not exceeding 30 days at any one time, subject to giving of previous notice of at least 7 days or such lesser period as may be specified by SEBI for listed companies or the companies which intend to get their securities listed, in such manner as may be prescribed.

A2Z Management Services Limited has already closed its register of debenture holders in June and August 2021 for 12 and 21 days respectively. Therefore, it can close its register of debenture-holders maximum for 12 days so that periods shall not exceed in the aggregate 45 days in the year.

Question 16
Draft ‘‘A specimen of deed of Assignment of shares of a company’’ (June 2019)(4 marks)

Answer:
A Specimen of Deed of Assignment of Shares in a Company

THIS ASSIGNMENT is made this ……………… day of …………………… between AB, son of ……………, resident of………………………… (hereinafter called “the Assignor”) of the one part, and CD, son of…………………………, resident of ………………… (hereinafter called “the Assignee”) of the other part.

THE DEED WITNESSES:

That in consideration of the sum of Rs………………… (Rupees…………………) paid by the assignee to the assignor, the receipt whereof the assignor hereby acknowledges, the said AB hereby assigns, sells and transfers to the said CD………………… Equity Shares of Rs………………… each, fully paid up, bearing consecutive Nos……………… to………………… (inclusive), which stand in the name of the assignor in the Register of Members of…………………… Co. Ltd. TO HOLD the same to the assignee absolutely, subject nevertheless to the conditions on which the assignor held the same up to date.

AND the assignee hereby agrees to take the said Equity Shares subject to such conditions.

IN WITNESS WHEREOF the assignor and the assignee do hereto affix their respective signatures on the day, month and the year stated above.

Assignor:                                                                                                                                                                             Assignee:

Signed in the presence of:

Witness 1:

Witness 2:

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