CS Executive Company Law Question Paper with Answer

CS Executive Company Law Question Paper with Answer from Chapter 1 (Introduction to Company Law)

Question
Distinguish between “company” and “corporation”. (4 marks) (June 2010 & June 2011)
Answer:

CompanyCorporation
The term Company is defined under Section 2(20) of Companies Act, 2013The term Corporation is defined under Section 2(11) of the Companies Act, 2013
“Company” means a company incorporated under this Companies Act, 2013 or under any previous company law.

“Body corporate” or “corporation” includes a company incorporated outside India, but does not include:

–  a co-operative society registered under any law relating to co-operative societies; and
–  any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify on this behalf;

Thus every company is a body corporateBut every ‘body corporate’ is not a company. A body incorporate under special law of state/parliament legislature is known as body corporate
Example of companies registered under Company Law: RELIANCE INDUSTRIES LIMITED, TATA INDUSTRIES LIMITEDExample of Body Corporates: RBI, SEBI, ICSI
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Question 
Distinguish between “Partnership Firm” and “Company”. (4 marks) (December 2013)

Answer:
Difference between Company and Partnership

 CompanyPartnership
Separate legal entityYesNo
Property in the name ofCompanyPartners
LiabilityLimitedUnlimited
Mutual AgencyIndividual Member/individual director is not the agents of companyEvery partner is an agent all other partners and partnership firm
Transferability of shares

Yes, subject to AOA

(Generally free in case of Public Companies)

No, a partner cannot transfer its share to some else without the consent of all other partners
Perpetual successionYesNo
ContractA member can contract with his companyA partner cannot contract with his firm
Number of members

In case of private limited – Minimum 2, Maximum-200

In case of public limited – Minimum 7, Maximum-unlimited

In case of one person company – 1 person

Minimum – 2, Maximum-50

[Rule 10 of Companies (Miscellaneous) Rules, 2014]

Applicable laws

Companies Act, 2013

Companies Act, 1956

Partnership Act, 1932

RegistrationMustOptional
DissolutionA company, being a creation of law, can only be dissolved as laid down by lawCan be dissolved at any time by agreement among the partners
AuditA company is required to have its accounts audited annually by a chartered accountant.The accounts of a firm are audited at the discretion of the partners or as per Tax Laws
DemutualizationYesNo

Question 
Distinguish between ‘Company’ and ‘Limited Liability Partnership’. (4 Marks)(Dec 2015)

Answer:

  1. In case of LLP, a ‘limited liability partnership agreement’ (LLPA) is prepared which is a different from the ‘articles of association’ of a company.
  2. Whereas the memorandum of a company is required to name the state in which it is required to be incorporated, there is no such obligation in the case of LLP. Consequently, the detail procedure involved in changing the registered office from the state of incorporation to another state is not required to be followed in case of a LLP.
  3. In the LLP Act, there is no such stipulation for minimum number of meeting of partners as stipulated for directors and shareholders meetings in the Companies Act.
  4. There is no separation between management of the LLP and the ownership as is observed in a company since all the partners, unlike all the members of a company, can take part in the day to day affairs of the LLP.
  5. In case of a company no individual director can conduct the business of the company but in an LLP, each partner has the authority to do so unless expressly prohibited by the partnership terms.
  6. Whereas, the Companies Act contemplates regulating the remuneration payable to directors, there are no corresponding provisions in the LLP Act for remuneration payable to designated partners. The same could be as per the LLP Agreement.
  7. In the case of LLP, unlike in the case of companies, there are no restrictions on the borrowing powers.
  8. The LLP can choose to maintain the accounts on cash basis/accrual basis whereas under the Companies Act, accrual method is compulsory.
  9. Audit of a company is compulsory. Conversely, the audit of LLP is not compulsory unless required under Income Tax Act, 1961.
  10. Cost audit as contemplated in Section 148 of the Companies Act, 2013 has not been prescribed for LLPs.
  11. The appointment of Company Secretaries as required under Section 203 of the Companies Act, 2013 is not provided in the LLP Act. However, the annual return of a LLP is to be certified as ‘true and correct’ by a Company Secretary in practice.

Question 
Write a short note on disadvantages of company form of organization. (4 marks) (June 2010)

Answer:
Disadvantages of company form of business are:

  • Incorporation and wind up formalities and expense
  • Heavy regular compliance expenses
  • Heavy fines, penalties and even imprisonment in case of non-compliance of laws
  • Too much disclosure in form of annual returns, intimation to stock exchanges etc.
  • Demutualization (separation of ownership and management)
  • Greater tax burden as company has to pay tax on flat rates
  • Greater social responsibility
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Question 
What do you understand by the term illegal association? What are the rights and liabilities of members of an illegal association? (5 marks) (December 2008)
Or
Write a short note on; Illegal association. (4 marks) (June 2013)

Answer:
Prohibition of association or partnership of persons exceeding certain number (Section 464)
No association or partnership consisting of more than such number of persons as may be prescribed (50 as per Rule 10 of Companies (Miscellaneous) Rules, 2014) 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.

This Section is not applicable to—

  • a HUF carrying on any business; or
  • an association or partnership, if it is formed by professionals who are governed by special Acts.
  • LLP

Note: If 2 or more HUF carry on business in partnership, than while calculating total number of members involved in that business for the purpose of this section, minor members should be ignored as a minor cannot be considered as partner.

Effect of non-registration of an association or partnership as company according to provisions of this Section
Since, the law does not recognize an illegal association therefore such association:

  • cannot enter into any contract;
  • cannot sue any member, or outsider, not even if the company is subsequently registered;
  • cannot be sued by a member, or an outsider for recovery of any debts;
  • cannot be wound up by an order of the Court.

In fact, the Court cannot entertain a petition for its winding up as an unregistered company, for if it did, it would be indirectly according recognition to the illegal association.

Punishment for carrying on business in contravention of this Section
Every member of an association or partnership carrying on business in contravention of this Section

  • shall be punishable with fine which may extend to 1 lakh rupees and
  • shall also be personally liable for all liabilities incurred in such business.

Question 
The Common Seal of a company has to be affixed on all letters and documents of the company. Comment (5 marks) (December 2008)
Or
The Common Seal of a company has to be affixed on all letters In documents of the company. Comment (5 marks) (December 2009)
Or
The common seal acts as the official signature of a company. Comment (5 marks) (December 2013)

Answer:
On incorporation, a company may have a common seal. Since a company has no physical existence, therefore it has to act through its agents only. To put restriction on the misuse of the powers of those agents (directors), contracts entered into by anyone on behalf of the company may be under the common seal of the company. Thus common seal acts as official signature of the company.

After Companies (Amendment) Act, 2015, it is not compulsory for the company to have common seal. Thus a company may or may not have common seal.

As per the Companies (Amendment) Act, 2015, affixation of the common seal is no longer compulsory. A company may or may not have common seal.

Thus, it is incorrect to say that the Common Seal of a company has to be affixed on all letters and documents of the company.

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Question
A shareholder who holds 99% of the share capital of a company can be held responsible for the acts of the company. Comment (5 marks) (June 2012)
Or
A shareholder is personally liable for the acts of the company if he holds virtually the entire share capital of a company. Comment (5 marks) (December 2013)
Or
Members of a company incorporated under the Companies Act, 2013 are the agents of the company. Therefore, the company can be held liable for its acts. Comment (5 marks) (December 2017)
Or
Three companies incorporated with the same set of shareholders are treated as the same companies under the Companies Act, 2013. Comment (5 marks) (December 2017)

Answer:
Corporate personality
Being an artificial person, a company is a legal entity different and separate from its promoters, members, directors, and other stake holders. It has its own corporate name and work under that name. It

  • can hold its assets in its own name,
  • can sue or be sued in its own name,
  • can borrow/lend funds, open bank accounts, enter into contracts in its own name

Any of its shareholders or directors or other officers cannot be held liable for the acts of the company even if he/it holds the entire share capital. Further, the shareholders or individual directors are not the agents of the company and so they cannot bind company by their personal acts.

Two or more companies incorporated with the same set of shareholders cannot be treated as the same companies under the Companies Act, 2013 as every company has separate legal existence in the eyes of law.

Related Case Laws

  • Salomon v. Salomon and Co. Ltd.
  • Lee v. Lee’s Air Farming Ltd.
  • New Horizons Ltd. v. Union of India

Question 
A company incorporated under the Companies Act, 2013 being an artificial person, is not entitled to sue a natural person or to sue another company incorporated under the Companies Act, 2013. Comment (5 marks) (December 2015)

Answer:
Capacity to sue and be sued

  • A company is separate legal entity (artificial person) having its own corporate name and personality.
  • It can hold properties in its own name. No member can claim himself to be the owner of the company’s property during its existence. In other words, the property of a company is not the property of the individual members.
  • Just like natural person, it can enter into contract in its own name through its agent (directors or other authorised persons).

Therefore, according to Section 9, company may sue or may be sued in its own name (not in the name of its directors or members).

Question
A company incorporated under the Companies Act, 2013 never dies except when it is wound-up as per law. Comment (5 marks) (December 2015)
Or
In an Annual general meeting of Amar Private Limited, all the shareholders were killed in a bomb blast. State, whether the company is still in existence? (4 marks) (December 2014)
Or
Six persons are the only members of Tab (Private) Limited all of them went to the USA on a pleasure trip by airplane. On the way, the plane crashed and all the six members died. Does Tab (Private) Limited still exist? Decide. (4 marks) (December 2016)

Answer:
Perpetual Succession
Perpetual Succession means existence forever. According to Section 9, from the date of incorporation mentioned in the certificate of incorporation, every company has perpetual succession. A company is an artificial person created by law; therefore it can be dissolved or wind up by law. A company being an artificial person does not die a natural death.

In other words, members may come and go, but company can go forever.

Transferability of Shares
According to Section 44 of the Act,

  • the shares or debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company.

Even if all the shareholders are killed in a bomb blast or plane accident, shares of such shareholders will be transmitted to their legal heirs; and such legal heirs will become new members of the company.

Question
Rani is a wealthy lady enjoying large dividend and interest income she has formed 3 private companies in agreed with each of them to hold a block of investment as an agent for it income received was credited in the accounts of the company but the company handed back the amount to her as a pretended loan. This way, she divided her income into three parts in a bit to reduce her tax liability. Discuss the legality of the purpose for which the three companies were formed. (5 marks) (June 2010)
Or
“Separate personality of a company is a special privilege. In case of dishonest or fraudulent use of privilege, the corporate veil can be lifted.” Discuss. (4 marks) (June 2014)
Or
Write a short note on ‘Lifting of corporate veil’. (5 marks) (December 2014)
Or
Explain clearly the meaning of ‘lifting of Corporate Veil’ in relation to a company incorporated under the Companies Act, 2013. Examining judicial decisions, state whether the ‘corporate veil’ can be lifted in the following cases:

  • Where the corporate veil has been used for improper conduct?
  • Where the acts of the companies are opposed to workmen? (5 marks) (December 2015)

Answers:
A company is an artificial person different for its members and directors. In the eyes of law it has a separate corporate personality. It has its own corporate name. It works under that name. In normal circumstances company cannot be considered as agent or trustee of its members. Therefore members and directors of a company cannot be held liable for any act of that company.

This concept is known as Corporate Veil. Means only company can be held liable for an act done in the name of the company.  But, as per company laws, a company can be created for lawful purpose only. If a company is created for

  • dishonest use
  • fraudulent purpose
  • unlawful purpose
  • evading taxes
  • any other purpose which is against the public interest

than law can identify the persons who are behind it and are responsible for any fraud/unlawful act.

Concept is very simple. Company cannot work or think on its own. Its directors and members are its mind and body. Therefore, company can’t do anything wrong own its own. Thus, for any wrong act in the name of company, members/directors can be held liable.  This concept is called “Lifting of Corporate Veil”.

It is in the interest of the members in general and in public interest to identify and punish the persons who misuse the medium of corporate personality.

In the following circumstances different courts found it necessary to lift the corporate veil and punish the actual persons who did wrong or unlawful acts under the name of company:

Protection of Revenue The Court may ignore the Separate Legal Entity status of a Company, where it is used for tax invasion or circumventing tax obligation. (Sir Dinshaw Maneckjee Petit)
Determination of enemy character of the Company Company being an artificial person cannot be enemy or friend. But during war, it may become necessary to lift the corporate veil and see the persons behind it to determine whether they are friends or enemy. This is due to the reason that though a company enjoys Separate Legal Entity but its affairs are run by individuals. (Daimler Co. Ltd. Vs Continental Tyre & Rubber Co. Ltd.)
Prevention of fraud Where a Company is used for committing frauds or improper conduct, Court may lift the corporate veil and look at the realities of the situation. (Jones vs Lipman)
Protection of public policy The Court shall lift the Corporate Veil without any hesitation to protect the public policy and prevent transaction opposed to public policy.
Company mere sham or cloak Where the Company is a mere sham and was really a ploy used for committing illegalities and to defraud people, the Court shall lift the Corporate Veil. (Gilford Motor Company vs Horne)
Where a Company acts as an agent of its shareholders If there is an arrangement between the shareholders and a Company to the effect that the Company will act as agent of shareholders for the purpose of carrying on the business, the business is essentially of that of the shareholders and will have unlimited liability.
Avoidance of Welfare Legislation Where a Company tries to avoid its legal obligations, the corporate veil shall be lifted to look at the real picture. (Workmen of Associated Rubber Industry Ltd. Vs Associated Rubber Industry Ltd.)
To punish for contempt of Court Company being an artificial person cannot disobey the orders of the Court. Therefore, the persons at fault should be identified.

Question
The Companies Act, 2013 does not provide statutory recognition of the doctrine of lifting of corporate veil. Only judicial interpretations disregard the concept of separate personality. Comment. (Dec 2019)(5 Marks)

Answer:
A company is an artificial person different for its members and directors. In the eyes of law it has a separate corporate personality. It has its own corporate name. It works under that name. In normal circumstances company cannot be considered as agent or trustee of its members. Therefore members and directors of a company cannot be held liable for any act of that company. 

This concept is known as Corporate Veil. Means only company can be held liable for an act done in the name of the company.  

But under Companies Act, 2013, there are many provisions when members or directors can be held directly liable for the act of the company.

  • Section 3A (When number of members fell down below the statutory requirements)
  • Section 7(7) [Wrong/false information during incorporation of Company]
  • Section 35(3) [Civil Liability for Mis-statements in Prospectus]
  • Section 75(1) [Damages for Fraud in case of Deposits]
  • Section 339 (Liability for Fraudulent Conduct of Business)

Thus, even Companies Act, 2013 also recognise the concept of lifting of corporate veil.

Question
Raman Pvt. Ltd. has only two shareholders, X and Y. All shares were fully paid up. X sold all his shares to Y and the company carried on its business activities thereafter. Comment. (December 2018) (5 Marks)
Or
A public limited company has only seven shareholders. Being all the shares paid in full, one such shareholder purchased all the shares of another shareholder in a private settlement between them reducing the No. of shareholders to six. The company continues to carry on its business thereafter. Discuss with reference to the Companies Act, 2013 the implications of this transaction on the functioning of the company. (June 2019) (5 marks)

Answer:

Members severally liable certain cases (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 6 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 6 months and is cognisant 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.

Thus,

  • in first case, Y shall take all steps to increase the number of members to 2 within 6 months.
  • in second case, remaining members shall take all steps to increase the number of members to 7 within 6 months.

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