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COMPANY LAW Related Short Answer

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COMPANY LAW.

Unit I:

1. What is a Company under the Companies Act, 2013?

A company is an artificial legal person incorporated under the Companies Act, 2013. According to Section 2(20), a “company” means a company incorporated under this Act or under any previous company law. It has a separate legal entity, perpetual succession, and limited liability. It can own property, sue or be sued in its own name. It acts through its directors and is governed by its Memorandum and Articles of Association.

2. What are the essential attributes of a Company?

The essential features of a company include:

  • Separate Legal Entity: Company is distinct from its members.
  • Perpetual Succession: Its existence is not affected by death/insolvency of members.
  • Limited Liability: Liability of members is limited to their shareholding.
  • Transferability of Shares: Shares are freely transferable.
  • Artificial Legal Person: It has no physical existence but is recognized by law.
  • Common Seal (optional post-2015 amendment).

3. Distinguish between Partnership Firm and Company.

Basis Partnership Company
Formation By agreement By registration under Act
Legal Status No separate legal entity Separate legal entity
Liability Unlimited Limited
Transfer of Share Not transferable Freely transferable
No. of Members Max 50 (u/s 11 CoP Act) Pvt Co: Max 200, Public: No Max
Perpetual Succession No Yes

4. What is a Private Company under Companies Act, 2013?

As per Section 2(68), a private company is one that:

  • Restricts the right to transfer shares,
  • Limits the number of members to 200 (excluding employees),
  • Prohibits public invitation to subscribe shares/debentures. It requires a minimum of 2 members and 2 directors.

5. What is a Public Company?

Under Section 2(71), a public company:

  • Has no restriction on share transfer,
  • Can invite the public to subscribe to shares,
  • Requires minimum 7 members and 3 directors,
  • Its shares are listed or can be listed on stock exchanges.

6. What is a One Person Company (OPC)?

As per Section 2(62), OPC is a company with only one person as a member. It allows a single entrepreneur to operate a corporate entity with limited liability. It must have at least one nominee. It enjoys benefits like less compliance and exemptions under the Act.

7. What are the different kinds of Companies under the Companies Act, 2013?

The Act recognizes:

  • Private Company
  • Public Company
  • One Person Company
  • Company limited by shares/guarantee
  • Unlimited Company
  • Section 8 Company (Non-profit)
  • Government Company
  • Foreign Company
  • Producer Company

8. What is a Multinational Company (MNC)?

A Multinational Company (MNC) operates in more than one country but is managed from its home country. MNCs set up branches, subsidiaries, or joint ventures abroad. They bring foreign investment, technology, and employment but can also dominate local markets and affect local industries.

9. What are the advantages of Incorporation of a Company?

  • Limited Liability: Members not personally liable.
  • Separate Legal Entity: Company distinct from its owners.
  • Perpetual Succession: Continuity despite member changes.
  • Transferability of Shares: Enhances liquidity.
  • Raising Capital: Easier access to funds.
  • Credibility: Incorporated entities are more trusted.

10. What are the disadvantages of Incorporation of a Company?

  • Complex Formation Process: Requires legal formalities.
  • Compliance Burden: Regular filings and audits.
  • Lack of Privacy: Disclosures required by law.
  • Double Taxation: Income taxed at corporate and personal levels (in some cases).
  • Management Issues: Conflicts may arise between owners and directors.

11. What is meant by Incorporation of a Company?

Incorporation is the legal process of forming a company under the Companies Act. It involves filing necessary documents with the Registrar of Companies (RoC), such as:

  • Memorandum of Association (MoA)
  • Articles of Association (AoA)
  • Declaration and ID proofs of promoters and directors Upon approval, RoC issues a Certificate of Incorporation.

12. What are the documents required for Incorporation of a Company?

Key documents include:

  • MoA and AoA
  • Declaration by professionals (Form INC-8)
  • Affidavit and consent of directors (DIR-2, INC-9)
  • Proof of registered office (Form INC-22)
  • PAN, ID, address proof of directors and subscribers
  • Digital Signature Certificate (DSC)

13. What is the role of the Registrar of Companies (RoC) in incorporation?

RoC is the authority under the Ministry of Corporate Affairs (MCA) responsible for:

  • Registering companies
  • Ensuring compliance
  • Maintaining public records RoC verifies incorporation documents and issues the Certificate of Incorporation and Corporate Identity Number (CIN).

14. What are the consequences of non-compliance with incorporation provisions?

Non-compliance with incorporation provisions under the Act may result in:

  • Rejection of Incorporation
  • Penalties and fines (Sections 7 and 450)
  • Liability on promoters/directors
  • Invalidation of business operations
  • Criminal prosecution in case of fraudulent declarations

15. What is the effect of Certificate of Incorporation?

Once issued, the Certificate of Incorporation is conclusive proof of legal existence. It means:

  • Company is legally born.
  • It can enter into contracts and own property.
  • Even if there were minor irregularities in the process, the incorporation is valid. This protection flows from Section 7(7) of the Act.

16. What is meant by Memorandum of Association (MoA)?

The Memorandum of Association (MoA) is a fundamental document required for the incorporation of a company. It defines the constitution, scope of activities, and relationship with outsiders. Under Section 4 of the Companies Act, 2013, it must contain:

  1. Name Clause
  2. Registered Office Clause
  3. Object Clause (main and ancillary)
  4. Liability Clause
  5. Capital Clause
  6. Subscription Clause
    MoA sets the boundary beyond which the company cannot act; any ultra vires act is void. It is also called the charter of the company.

17. What is meant by Articles of Association (AoA)?

Articles of Association (AoA) contain the rules and regulations for the internal management of the company. Under Section 5 of the Companies Act, 2013, it governs matters like:

  • Rights and duties of directors
  • Share issuance and transfer
  • Conduct of meetings
  • Dividend distribution
    While the MoA defines the company’s objective, the AoA provides the means to achieve them. It is a binding contract between the company and its members.

18. What is the Doctrine of Ultra Vires?

The Doctrine of Ultra Vires means “beyond powers.” If a company acts beyond the scope of its Memorandum of Association (MoA), such acts are ultra vires and void. These acts cannot be ratified even by shareholders. This doctrine protects investors and creditors by restricting the misuse of company funds. The case Ashbury Railway Carriage Co. Ltd. v. Riche (1875) is a landmark on this doctrine.

19. What is the Doctrine of Constructive Notice?

This doctrine implies that every person dealing with the company is presumed to have knowledge of the contents of its public documents (MoA and AoA) registered with the Registrar of Companies. Hence, if someone enters into a contract inconsistent with these documents, they cannot claim ignorance and are held responsible for the consequences.

20. What is the Doctrine of Indoor Management?

The Doctrine of Indoor Management is an exception to the Doctrine of Constructive Notice. It protects outsiders dealing with the company in good faith by assuming that internal company procedures are properly followed. The rule originates from the case Royal British Bank v. Turquand (1856). It prevents companies from escaping liability on the ground of internal irregularities.

21. What is a Section 8 Company?

A Section 8 Company is a non-profit company formed for promoting commerce, art, science, religion, charity, or other social objectives. It applies its profits towards the promotion of its objects and prohibits dividend distribution. It enjoys several exemptions under the Companies Act, such as lower compliance and tax benefits. It is governed by Section 8 of the Act.

22. What is a Government Company?

As per Section 2(45), a Government Company is one in which 51% or more of the paid-up share capital is held by the Central Government, State Government(s), or both. It may be wholly or partly owned. These companies are subject to audit by the CAG and are primarily used for public sector enterprises like ONGC, SAIL, and BSNL.

23. What is a Foreign Company under the Act?

According to Section 2(42) of the Companies Act, 2013, a foreign company is a company incorporated outside India but having a place of business in India, whether through physical presence or electronic mode, and conducts business activity in India. Such companies must comply with prescribed provisions under Chapter XXII of the Act.

24. What is an Unlimited Company?

An unlimited company is one where there is no limit on the liability of its members. In case of liquidation, members are personally liable to cover the debts of the company. While rare, such companies are formed where high trust exists among members. They may be converted to limited companies under prescribed rules.

25. What is a Company Limited by Guarantee?

In such a company, members agree to contribute a specific amount (called a guarantee) in the event of winding up. There is no share capital, and it is generally formed for non-profit purposes like clubs, societies, or research associations. Their liability is limited to the amount guaranteed.

26. What is meant by Share Capital?

Share capital refers to the money raised by a company through the issuance of shares. It represents the funds invested by shareholders and may be of different types:

  • Authorized Capital
  • Issued Capital
  • Subscribed Capital
  • Paid-up Capital
    Share capital is crucial in determining ownership and control in a company and forms part of the financial backbone of corporate structure.

27. What are the minimum requirements for incorporation of a company?

To incorporate a company, minimum requirements include:

  • Private Company: 2 Directors, 2 Members, Registered Office
  • Public Company: 3 Directors, 7 Members, Registered Office
  • OPC: 1 Director, 1 Member, 1 Nominee
    Other requirements: DSC, DIN, MoA, AoA, PAN, Address proof, and filing with RoC through SPICe+ forms.

28. What is Digital Signature Certificate (DSC)?

DSC is an electronic form of signature used for filing documents online with the Ministry of Corporate Affairs (MCA). It ensures authenticity, security, and integrity of documents. Every director and professional involved in company registration must have a valid DSC issued by a licensed Certifying Authority.

29. What is the role of Director Identification Number (DIN)?

DIN is a unique identification number allotted to an individual who wishes to become a director in a company. Under Section 153, it is mandatory for appointment as a director. It helps the MCA track all companies in which the individual holds directorship and prevents fraudulent practices.

30. What is the penalty for furnishing false information during incorporation?

As per Section 7(5)-(7) of the Companies Act, 2013:

  • If a person provides false or incorrect information, they may face:
    • Fine: ₹1 lakh to ₹5 lakh
    • Imprisonment: Up to 5 years (in fraud cases)
    • Company can be struck off or registration cancelled Such actions ensure that only genuine companies are registered and public interest is protected.

Unit-II

1. Who is a Promoter under the Companies Act, 2013?

A promoter is a person who undertakes to form a company and takes necessary steps for its incorporation. As per Section 2(69) of the Act, a promoter is:

  • Named in the prospectus,
  • Who has control over the affairs of the company,
  • Or on whose directions the Board acts.
    Promoters perform functions like preparing MoA & AoA, arranging capital, appointing directors, and filing incorporation documents. They owe fiduciary duties to the company.

2. What are the legal duties of a promoter?

Promoters owe fiduciary duties to the proposed company. Key duties include:

  • Disclosure of profits: If the promoter gains any secret profit, it must be disclosed.
  • Avoid conflict of interest: Promoter must act in good faith.
  • Full disclosure: All material facts and transactions must be disclosed to the company or its representatives (Board/shareholders). Failure in duties may lead to liability and rescission of contract.

3. What are the rights of a promoter?

A promoter has the right to:

  • Be reimbursed for pre-incorporation expenses,
  • Be indemnified if the company adopts the pre-incorporation contracts,
  • Receive remuneration if there is a valid contract.
    However, these rights are not automatic and must be contractually agreed upon. No legal status exists for the promoter after incorporation.

4. What is the role of a promoter in the formation of a company?

Promoters play a key role in:

  • Identifying business opportunity,
  • Preparing legal documents (MoA, AoA),
  • Choosing company name,
  • Arranging directors, subscribers, and registered office,
  • Filing incorporation forms with RoC,
  • Arranging for capital and professionals.
    Thus, they initiate the birth of the company and act as its creator.

5. What are pre-incorporation contracts?

These are contracts entered into by promoters on behalf of the company before its incorporation. Since the company does not exist legally, such contracts are not binding on it unless adopted later.
Under the Specific Relief Act, 1963 (Section 15 and 19), pre-incorporation contracts may be enforced if:

  • Made for the company’s purposes,
  • Accepted by the company after incorporation,
  • The company communicates acceptance.

6. Are pre-incorporation contracts binding on the company?

Pre-incorporation contracts are not automatically binding because the company had no legal existence when the contract was made. However, if the company adopts the contract after incorporation and the other party agrees, it becomes binding. Promoters remain personally liable unless novation occurs.

7. What is meant by incorporation of a company?

Incorporation is the legal process through which a company comes into existence. It involves:

  • Filing SPICe+ forms,
  • Submitting MoA, AoA, proof of office,
  • Getting DINs and DSCs,
  • Paying fees and stamp duty.
    Upon approval, the Registrar issues a Certificate of Incorporation, giving the company legal personality.

8. What is the procedure for registration of a company?

Steps include:

  1. Apply for name reservation (RUN or SPICe+ Part A)
  2. Obtain DSC & DIN
  3. Draft MoA & AoA
  4. Fill SPICe+ Part B & upload documents
  5. Pay prescribed fees
  6. RoC scrutiny and issuance of Certificate of Incorporation
    Once incorporated, a CIN (Corporate Identity Number) is assigned.

9. What is a Certificate of Incorporation?

A Certificate of Incorporation is the official document issued by the Registrar of Companies (RoC) upon successful registration of a company. It signifies:

  • Legal existence of the company,
  • Date of incorporation,
  • Company’s CIN
    It acts as conclusive evidence of the company’s formation (Section 7(7)).

10. What is the Memorandum of Association (MoA)?

MoA is the charter of the company, defining its objective, scope, and powers. It is mandatory for incorporation. Under Section 4 of the Act, it includes:

  • Name Clause
  • Registered Office Clause
  • Objects Clause
  • Liability Clause
  • Capital Clause
  • Subscription Clause
    Any act beyond the MoA is ultra vires and void.

11. What is the importance of the MoA?

MoA defines the limits within which the company can operate. It:

  • Binds the company with outsiders,
  • Regulates the powers of the company,
  • Is a public document available with the RoC,
  • Protects shareholders and creditors by defining object boundaries.
    It ensures transparency and legal accountability.

12. What are the clauses of the MoA?

The MoA includes six main clauses:

  1. Name Clause
  2. Registered Office Clause
  3. Objects Clause (Main & Ancillary)
  4. Liability Clause
  5. Capital Clause
  6. Subscription Clause
    Each clause has legal significance and defines the identity and purpose of the company.

13. What is the Articles of Association (AoA)?

AoA is a document containing the rules and regulations for the internal management of the company. It deals with:

  • Appointment and duties of directors,
  • Conduct of meetings,
  • Issue and transfer of shares,
  • Dividend policy
    It acts as a contract between company and its members.

14. What is the difference between MoA and AoA?

Basis MoA AoA
Scope Defines external boundaries Internal management
Legal Position Charter of the company Bye-laws of the company
Alteration Difficult, requires special approval Easier, by special resolution
Ultra Vires Void May be altered

15. How can MoA and AoA be altered?

  • MoA: Can be altered by special resolution and approval of Registrar or Central Government, depending on the clause (e.g., shifting registered office, change in objects).
  • AoA: Altered by special resolution (Section 14). Changes must be filed with RoC in Form MGT-14. No alteration can violate provisions of the Companies Act or prejudice members’ rights.

16. What is the legal status of a company after incorporation?

After incorporation, a company becomes a separate legal entity, distinct from its members. It acquires a legal personality and can:

  • Own property in its name,
  • Enter into contracts,
  • Sue and be sued.
    This principle was firmly established in Salomon v. Salomon & Co. Ltd. (1897). The company continues to exist irrespective of changes in membership due to death, insolvency, or withdrawal. It is governed by its Memorandum and Articles of Association and enjoys perpetual succession.

17. Can a company be held liable for pre-incorporation contracts?

A company cannot be held liable for pre-incorporation contracts as it did not legally exist when the contract was made. However, under the Specific Relief Act, 1963, such contracts can be enforced if:

  • They were made for the benefit of the company,
  • The company accepts and communicates acceptance after incorporation.
    Otherwise, promoters remain personally liable for these contracts unless a novatio (new contract) is formed between the company and the third party.

18. What are the effects of incorporation of a company?

The effects of incorporation include:

  • Separate legal entity: The company is distinct from its shareholders.
  • Perpetual succession: The company continues irrespective of changes in membership.
  • Limited liability: Shareholders’ liability is limited to unpaid share value.
  • Common seal: (Optional since 2015) acts as the company’s signature.
  • Right to sue/be sued and own property.
    It also provides credibility, access to funding, and formal structure for business operations.

19. What is the relationship between the company and its promoters after incorporation?

After incorporation, promoters usually cease to have a legal relationship with the company unless:

  • They are appointed as directors or employees,
  • The company adopts pre-incorporation contracts.
    However, they can still be held liable for acts done during promotion, especially for misstatements or fraud. Promoters are not trustees or agents, but they owe fiduciary duties and must act in good faith.

20. Can promoters make a profit during promotion?

Yes, promoters can make a profit, but they must fully disclose such profits to:

  • The Board of Directors, or
  • The initial shareholders at a general meeting.
    Failure to disclose secret profits may result in:
  • The company rescinding the contract,
  • Legal action against the promoter,
  • Repayment of secret profit.
    This ensures that promoters act in the company’s best interest and uphold transparency.

21. What is the legal effect of MoA and AoA?

As per Section 10 of the Companies Act, 2013:

  • MoA and AoA form a binding contract between:
    • Company and its members,
    • Members inter se.
      They govern the company’s external scope (MoA) and internal rules (AoA). Any action beyond MoA is ultra vires and void, while AoA governs daily operations. Outsiders cannot enforce AoA unless incorporated into a contract.

22. Can the Memorandum of Association be altered?

Yes, the MoA can be altered as per provisions in Sections 13 and 14:

  • Name Clause: Requires approval of RoC and special resolution.
  • Registered Office Clause: Approval from RoC or Regional Director.
  • Object Clause: Needs special resolution and RoC approval.
  • Capital Clause: Altered by ordinary resolution. All changes must be filed with the RoC using prescribed forms like MGT-14 and INC-24.

23. What is the difference between a company and its members?

A company is a separate legal entity, distinct from its members. This distinction means:

  • The company can own property; members have no direct rights over assets.
  • The company can sue or be sued in its own name.
  • Members’ liability is limited (in most cases).
  • Members may change, but the company continues (perpetual succession). This separation is fundamental to company law.

24. Can Articles of Association be altered?

Yes, under Section 14, AoA can be altered by:

  • Passing a special resolution,
  • Filing the resolution with the RoC (Form MGT-14).
    However, changes must:
  • Not violate provisions of the Companies Act,
  • Not be against the Memorandum,
  • Not affect member rights without consent.
    Any change takes effect upon RoC approval and updated registration.

25. What happens if a company acts beyond its MoA (ultra vires act)?

An ultra vires act is void and cannot be ratified, even by all shareholders. Such actions include:

  • Contracts outside the objects clause,
  • Borrowing beyond authorized powers.
    Consequences:
  • Third parties cannot enforce such contracts,
  • Directors may be held personally liable,
  • Company may seek injunction or recovery of assets.
    This principle protects shareholders and creditors from unauthorized business risks.

26. Can the Articles override the Memorandum?

No. The Articles of Association are subordinate to the Memorandum of Association. If there is any inconsistency:

  • MoA prevails, and the conflicting part of AoA is void.
    Articles regulate internal management, while the Memorandum defines the scope of operations. The company cannot perform an act allowed by the Articles but forbidden by the MoA.

27. What is the procedure to amend Articles of Association?

To amend AoA:

  1. Pass a special resolution at a general meeting.
  2. File Form MGT-14 with the Registrar within 30 days.
  3. Ensure the new articles are consistent with the Companies Act and MoA. For conversion of a private company to a public company or vice versa, approval of RoC is also required (Form INC-27).

28. Is it mandatory for all companies to have AoA?

Yes. Every company must have Articles of Association. However:

  • Table F (default AoA under Schedule I) applies to companies limited by shares if they do not register their own AoA.
    Thus, while drafting AoA is optional, acceptance of Table F is automatic if a custom AoA is not submitted during incorporation.

29. What is Table A / Table F under Companies Act?

  • Table A (under Companies Act, 1956) and Table F (under 2013 Act) are model Articles of Association.
  • Table F is the default AoA for companies limited by shares.
    If a company does not file its own AoA, Table F applies by default and governs internal management until specifically altered.

30. What is the significance of the Object Clause in the MoA?

The Object Clause defines the scope of activities a company can undertake. It includes:

  • Main objects: Core purpose of the company.
  • Ancillary objects: Supporting activities.
  • Other objects (optional for older companies).
    Importance:
  • Prevents diversion of resources to unrelated activities.
  • Guides shareholders and creditors.
  • Any act outside this clause is ultra vires and void.

Unit-III

1. What is a Prospectus?

A prospectus is a legal document issued by a public company to invite the public to subscribe for its securities. As per Section 2(70) of the Companies Act, 2013, it includes any notice, circular, or advertisement inviting deposits or purchase of securities. A prospectus must be filed with the RoC before issue and contain:

  • Company’s financial information
  • Risk factors
  • Capital structure
  • Objectives of the issue
    Misstatements in the prospectus may lead to civil and criminal liability under Sections 34 and 35.

2. What is the importance of a Prospectus?

A prospectus is vital because:

  • It provides transparency about the company’s financials.
  • Helps investors make informed decisions.
  • Acts as a legal basis for any claim in case of misrepresentation. It ensures that companies raising public funds disclose all material facts, promoting trust and investor protection.

3. Who are Members of a Company?

Members are persons whose names are entered in the register of members. As per Section 2(55), a person becomes a member:

  • By subscribing to the Memorandum,
  • By agreeing in writing and having their name entered in the register,
  • By beneficial ownership (for depository shares).
    Members have the right to vote, receive dividends, and attend meetings.

4. Who are Shareholders? Are they different from Members?

Shareholders are individuals who hold the shares of a company. While often used interchangeably with members, there’s a technical difference:

  • All shareholders are members (in most cases).
  • But in dematerialized form, the depository is the registered member, while the beneficial owner is the shareholder. Thus, every member may not always be a shareholder.

5. What is Share Capital?

Share capital is the amount of money a company raises by issuing shares. It represents the funds contributed by shareholders. Types include:

  • Authorized capital: Maximum capital allowed.
  • Issued capital: Capital offered to public.
  • Subscribed capital: Shares taken by public.
  • Paid-up capital: Actual money received.
    Share capital forms the financial base of the company.

6. What are Shares? What are their types?

A share is a unit of ownership in a company. As per Section 2(84), shares represent a member’s stake in the company. Types include:

  1. Equity shares – carry voting rights.
  2. Preference shares – have fixed dividend and priority over equity shareholders for dividend and capital repayment.
    Shares can be fully paid, partly paid, or issued at premium/discount (subject to rules).

7. What are the rights of a shareholder?

Shareholders enjoy several rights:

  • Voting rights in general meetings.
  • Right to receive dividends.
  • Right to inspect statutory registers.
  • Right to sue for mismanagement or oppression.
  • Right to transfer shares.
    These rights vary depending on the class of shareholding and the Articles of Association.

8. What are Dividends? How are they declared?

A dividend is the portion of a company’s profit distributed to its shareholders. Under Section 123, it can be declared:

  • From current or accumulated profits,
  • Only after setting off previous losses.
    Declaration requires Board recommendation and shareholder approval. Dividends must be paid within 30 days of declaration, else the company and officers may face penalties.

9. What are Debentures?

A debenture is a debt instrument issued by a company acknowledging a loan. As per Section 2(30), it includes debenture stock, bonds, or similar instruments. Debenture holders are creditors, not owners. They may be:

  • Secured or unsecured,
  • Convertible or non-convertible.
    Interest is paid at a fixed rate, and debentures are repayable after a fixed term.

10. What are the rights of Debenture Holders?

Debenture holders have the right to:

  • Receive interest at an agreed rate,
  • Redemption as per terms,
  • Approach Tribunal in case of default,
  • Appoint a Debenture Trustee for secured debentures.
    They do not have voting rights in company decisions, unlike shareholders.

11. Who are Directors under Companies Act, 2013?

Directors are individuals appointed to manage the affairs of the company. As per Section 2(34), a director is a person appointed to the Board. Every company must have:

  • Private Co. – Minimum 2 directors
  • Public Co. – Minimum 3
  • OPC – Minimum 1
    Maximum number is 15 (more by special resolution).

12. What are the powers of Directors?

Directors exercise powers collectively as a Board. Key powers (Section 179) include:

  • Borrowing money,
  • Investing funds,
  • Approving financial statements,
  • Issuing shares or debentures.
    Some powers require shareholder approval (e.g., selling major assets). Directors also manage the company’s policies, planning, and operations.

13. What are the liabilities of Directors?

Directors are liable:

  • For breach of fiduciary duty,
  • For fraud or misstatement (civil/criminal liability),
  • Under Section 166, for failing to act in good faith or due care,
  • For non-compliance with statutory provisions (like non-filing, CSR defaults, etc.).
    Liability may be personal or joint, depending on the offence.

14. What is Independent Director?

An Independent Director is a non-executive director with no material relationship with the company. As per Section 149(6):

  • Listed companies must have at least 1/3rd independent directors.
  • They protect shareholder interest,
  • Ensure transparency and governance.
    Their role is crucial in audit, nomination, and CSR committees.

15. What is Corporate Social Responsibility (CSR)?

CSR refers to the responsibility of companies towards social and environmental well-being. As per Section 135, companies meeting the following must spend at least 2% of average net profits (past 3 years) on CSR:

  • Net worth ≥ ₹500 crore, or
  • Turnover ≥ ₹1000 crore, or
  • Net profit ≥ ₹5 crore.
    Activities include education, environment, health, poverty eradication. Unspent CSR funds must be transferred to a special fund.

16. What is a Shelf Prospectus?

A Shelf Prospectus is issued by certain public financial institutions or scheduled banks for one or more issues of securities. Under Section 31, it allows the company to raise capital in multiple tranches without issuing a fresh prospectus each time, within 1 year. A company must file an Information Memorandum for each offer after the first. It saves time and cost in repeated public issues.

17. What is a Red Herring Prospectus?

As per Section 32, a Red Herring Prospectus (RHP) is issued before the actual issue price or quantum of securities is known. It contains all details except the final price and number of shares. Used mostly in book building issues, the company must file the final prospectus with the RoC before allotment. It provides transparency during IPOs.

18. What is the liability for misstatements in a prospectus?

Under Sections 34 and 35, liability arises if a prospectus contains untrue or misleading statements:

  • Civil liability: Investors can claim compensation for losses.
  • Criminal liability: Includes imprisonment up to 10 years and fines if fraud is proven. Directors, promoters, and experts who authorized the prospectus may be held liable. The company must ensure full disclosure and truthfulness.

19. How is membership of a company acquired?

Membership can be acquired by:

  • Subscribing to the Memorandum at incorporation.
  • Agreeing in writing and getting one’s name entered in the Register of Members.
  • Beneficial ownership through a depository (for demat shares).
    As per Section 2(55), a person is a member only after being registered. Members have rights like voting, dividend, and inspection of records.

20. What is the difference between a Member and a Shareholder?

  • A Member is a person whose name appears in the Register of Members.
  • A Shareholder holds shares in the company.
    In physical form, both are the same. But in dematerialized form, the depository is the registered member, and the beneficial owner is the shareholder. Thus, all shareholders may not be members technically, especially in the case of demat shares.

21. What are the different types of Share Capital?

Under the Companies Act, share capital can be:

  1. Authorized Capital – Maximum capital a company can raise.
  2. Issued Capital – Part of authorized capital offered to public.
  3. Subscribed Capital – Capital accepted by investors.
  4. Called-up Capital – Amount asked from shareholders.
  5. Paid-up Capital – Actual amount paid.
    These categories help determine the company’s capital structure and financial base.

22. What is the difference between Equity and Preference Shares?

  • Equity Shares carry voting rights and are repaid after preference shareholders.
  • Preference Shares get fixed dividend and have priority in dividend and capital repayment but usually no voting rights.
    Equity shareholders bear more risk but also receive higher returns in growth. Preference shareholders have more security but limited upside.

23. What are Bonus Shares?

Bonus shares are free shares issued to existing shareholders out of the company’s reserves or surplus profits. They are issued in a particular ratio (e.g., 1:2) and do not require shareholders to pay any money.
They help:

  • Capitalize surplus,
  • Enhance market perception,
  • Increase liquidity of shares.
    Bonus shares are governed by Section 63 of the Companies Act, 2013.

24. What are Rights Shares?

Rights shares are offered to existing shareholders in proportion to their current holdings, usually at a discounted price. It gives them the “right” to buy additional shares before the general public.
Advantages:

  • Prevents dilution of ownership,
  • Raises additional capital efficiently.
    Rights issues are governed by Section 62 of the Act.

25. What are the rules for payment of Dividend?

As per Section 123:

  • Dividends must be paid out of current or accumulated profits.
  • Losses must be set off before declaration.
  • Declaration needs approval in the AGM.
  • Payment must be made within 30 days of declaration. Unpaid dividends must be transferred to the Unpaid Dividend Account and later to the Investor Education and Protection Fund (IEPF) after 7 years.

26. What is a Debenture Trust Deed?

A Debenture Trust Deed is an agreement between a company and a debenture trustee, setting out the terms of issue, rights of debenture holders, and remedies in case of default.
As per Rule 18 of Companies (Share Capital and Debentures) Rules, it is mandatory for secured debentures exceeding 5 years. The trustee protects debenture holders’ interests.

27. What is the role of a Debenture Trustee?

A Debenture Trustee acts as a guardian of debenture holders. Appointed under Section 71, the trustee:

  • Ensures security cover is maintained,
  • Takes legal action in case of default,
  • Represents debenture holders before Tribunal.
    Only SEBI-registered entities can act as debenture trustees in public issues.

28. What is the minimum number of directors required in a company?

As per Section 149:

  • Private Company: Minimum 2 Directors
  • Public Company: Minimum 3 Directors
  • One Person Company (OPC): Minimum 1 Director
    The maximum number is 15, which can be increased by a special resolution. At least 1 resident director (staying in India ≥ 182 days/year) is mandatory.

29. What is the liability of directors for company offences?

Directors are liable under the Companies Act for:

  • Negligence or breach of duties (Section 166),
  • Fraudulent acts (Section 447),
  • Non-compliance with filing or disclosure requirements.
    Liability can be civil or criminal, depending on the nature of the offence. Directors can be fined, imprisoned, or disqualified under Section 164 if they are involved in mismanagement or fraud.

30. What is the scope of Corporate Social Responsibility (CSR)?

CSR, under Section 135, mandates that companies:

  • With Net Worth ≥ ₹500 crore OR Turnover ≥ ₹1000 crore OR Net Profit ≥ ₹5 crore
    must spend 2% of average net profits (past 3 years) on approved CSR activities. These include:
  • Education, health, sanitation,
  • Environmental sustainability,
  • Gender equality, rural development.
    Unspent CSR funds (other than ongoing projects) must be transferred to a specified fund within 6 months.

Unit IV:

1. Who is a Director under Companies Act, 2013?

A Director is a person appointed to manage the affairs of the company. As per Section 2(34), a director is a person appointed to the Board of Directors. Directors collectively form the Board, which governs company policies and management. They must act in good faith, with due care, and in the best interests of the company.

2. What are the qualifications of a Director?

The Companies Act does not prescribe strict educational qualifications. However, a person must:

  • Be over 18 years of age,
  • Not be disqualified under Section 164 (e.g., insolvency, conviction),
  • Hold a Director Identification Number (DIN), and
  • Consent to act as director (Form DIR-2).
    Certain companies (e.g., listed companies) may have additional criteria like experience or independence.

3. What are the disqualifications of Directors under Section 164?

A person is disqualified if:

  • Convicted for an offence with imprisonment ≥ 6 months,
  • Declared insolvent and not discharged,
  • Found guilty of fraud, breach of trust,
  • Failed to file financial statements or annual returns for 3 continuous years,
  • Disqualified by court/tribunal.
    Such persons cannot be appointed or reappointed as directors.

4. What are the duties of a Director under Section 166?

As per Section 166, a director shall:

  • Act in accordance with the company’s AoA,
  • Act in good faith and in best interest of stakeholders,
  • Exercise duties with due and reasonable care,
  • Avoid conflicts of interest,
  • Not achieve undue gain.
    Violation may lead to penalties, fines up to ₹5 lakh, and civil liability.

5. Who is a Managing Director?

A Managing Director (MD) is a director entrusted with substantial powers of management. As per Section 2(54), MD has authority over routine affairs under the Board’s supervision.
The MD is usually a whole-time officer and responsible for implementing company policies, handling staff, and running operations. Appointment requires compliance with Sections 196–203.

6. Who is a Manager under Companies Act, 2013?

A Manager is an individual who has the management of the company’s whole or substantially the whole affairs. As per Section 2(53), he operates under the supervision and control of the Board.
The company cannot have both a Manager and a Managing Director at the same time. Appointment follows similar procedures to directors.

7. Who is a Company Secretary?

A Company Secretary (CS) is a key managerial personnel (KMP) responsible for:

  • Ensuring compliance with laws,
  • Maintaining records,
  • Filing returns,
  • Convening meetings and preparing minutes.
    As per Section 2(24), only a qualified member of ICSI can be appointed as CS. It is mandatory for companies with paid-up capital ≥ ₹10 crore.

8. What are the key responsibilities of a Company Secretary?

A CS is responsible for:

  • Filing statutory returns,
  • Maintaining registers under Companies Act,
  • Coordinating Board/general meetings,
  • Advising Board on corporate governance,
  • Ensuring secretarial compliance.
    Failure may result in penalties or disqualification.

9. What are the types of company meetings?

Types include:

  1. Annual General Meeting (AGM) – mandatory for public companies.
  2. Extraordinary General Meeting (EGM) – called for urgent matters.
  3. Board Meetings – conducted by directors for decision-making.
  4. Class Meetings – for specific class of shareholders.
    Meetings must follow proper notice, quorum, and minutes procedures.

10. What is the procedure for calling a Board Meeting?

As per Section 173:

  • Minimum 4 Board meetings annually (1 every quarter).
  • Notice of 7 days in writing.
  • Quorum: 1/3rd of total strength or 2 directors (whichever is higher).
  • Agenda and draft resolutions are circulated in advance. Minutes are maintained and signed by the Chairman.

11. What is an Annual General Meeting (AGM)?

AGM is a yearly meeting of shareholders, mandatory for public companies under Section 96.

  • Held within 6 months of end of financial year, but not later than 9 months.
  • Discusses financial statements, dividend, auditor appointments, etc. Failure attracts penalties under Section 99.

12. What is an Extraordinary General Meeting (EGM)?

EGM is any general meeting other than AGM. Called to decide urgent or special matters like alteration of MoA/AoA, change in capital structure, etc.
It can be called by:

  • Board,
  • Members holding ≥10% voting power,
  • Tribunal (in some cases).
    Proper notice (21 days) and quorum are mandatory.

13. What is quorum in meetings?

Quorum is the minimum number of members required to be present for a valid meeting.

  • General Meeting: 2 (private co.), 5–15 (public co. based on members).
  • Board Meeting: 1/3rd of total strength or 2 directors.
    Meeting without quorum is invalid unless adjourned properly.

14. What is the principle of majority rule in company law?

The majority rule, established in Foss v. Harbottle (1843), states that the majority of members control the company’s decisions.
Courts will not usually interfere in internal management unless:

  • Fraud is involved,
  • Minority rights are violated,
  • Acts are ultra vires.
    This ensures internal democracy but is balanced by minority protections.

15. What are the rights of minority shareholders?

Minority shareholders (those with <50% voting power) have rights such as:

  • Apply to Tribunal for oppression/mismanagement (Section 241),
  • Inspect books and accounts,
  • Vote on key decisions,
  • Protection against fraud or prejudice.
    These rights ensure fairness and accountability in corporate governance.

16. What is oppression under the Companies Act, 2013?

Oppression refers to conduct that is burdensome, harsh, or wrongful toward minority shareholders. Examples:

  • Misuse of majority power,
  • Unfair exclusion from management,
  • Diversion of funds.
    Under Section 241, affected members can apply to the NCLT for redressal.

17. What is mismanagement under the Companies Act, 2013?

Mismanagement refers to conduct that:

  • Leads to misuse of company funds,
  • Is prejudicial to the interests of the company or its members,
  • Violates laws or governance norms.
    Members can file a petition under Section 241–242 to seek remedies from the Tribunal.

18. What remedies are available against oppression and mismanagement?

Tribunal (NCLT) may:

  • Remove directors,
  • Restrict voting rights,
  • Order share buy-back,
  • Appoint independent directors,
  • Terminate or modify agreements.
    The aim is to protect minority interests and ensure fair conduct of company affairs.

19. Who can file a complaint under Section 241?

Complaint can be filed by:

  • ≥100 members or those holding ≥10% voting rights in a company with share capital,
  • 1/5th of members in a company without share capital,
  • Central Government (in public interest).
    Tribunal may waive these requirements in some cases.

20. What is the role of the Tribunal in oppression and mismanagement cases?

The National Company Law Tribunal (NCLT) examines petitions under Sections 241–242. It:

  • Investigates allegations,
  • Grants interim relief,
  • Passes final orders for removal of oppression/mismanagement,
  • Restores company’s fair functioning.
    The Tribunal ensures corporate democracy and justice within the company structure.

Unit-V

1. What is winding up of a company?

Winding up is the legal procedure to bring a company’s life to an end. It involves selling off assets, paying off liabilities, and distributing surplus (if any) to shareholders. After completion, the company is dissolved and ceases to exist as a legal entity. Winding up may be voluntary or by tribunal order.

2. What are the different modes of winding up?

Under the Companies Act, 2013, there is only one mode of winding up:

  • Winding up by Tribunal (compulsory winding up).
    Earlier voluntary winding up has been removed from the Act (post-2016 amendments). However, companies may strike off under Section 248 as an alternative.

3. What is winding up by Tribunal?

Section 271 allows winding up by Tribunal if:

  • Company passes a special resolution,
  • Acts against national interest or integrity,
  • Fraudulent conduct or affairs,
  • Default in filing financials for 5 years,
  • Tribunal finds it just and equitable.
    Tribunal’s order is final and leads to appointment of a Liquidator.

4. What is a Liquidator?

A Liquidator is a person appointed to supervise the winding up process. His duties include:

  • Taking control of company assets,
  • Paying creditors,
  • Distributing remaining assets to shareholders,
  • Submitting reports to Tribunal.
    The Official Liquidator is appointed in tribunal-led winding up.

5. Who is the Official Liquidator?

The Official Liquidator (OL) is a public servant attached to the Tribunal, appointed under Section 359. He is an officer of the Central Government and acts as liquidator in compulsory winding up cases. He supervises asset realization, claim settlement, and compliance.

6. What are the functions of the Official Liquidator?

Functions include:

  • Take charge of books, assets, and property,
  • Prepare statement of affairs,
  • Sell assets of the company,
  • Pay creditors as per priority,
  • Report fraud (if any) to Tribunal,
  • Submit final report for dissolution.

7. What are the powers of the Official Liquidator?

With Tribunal’s sanction, the OL may:

  • Institute or defend legal proceedings,
  • Carry on business for beneficial winding up,
  • Raise money on company’s assets,
  • Compromise with creditors or contributors,
  • Sell company property.
    He may exercise certain powers independently as well.

8. What are the consequences of winding up?

After winding up begins:

  • Company ceases to carry on business,
  • Legal proceedings are stayed,
  • Powers of directors cease,
  • Tribunal takes over company’s affairs,
  • Liquidator is appointed.
    Eventually, company is struck off and dissolved.

9. What happens to the employees after winding up?

Employment of all employees is terminated unless business is continued for beneficial winding up. However, they may claim:

  • Wages,
  • Gratuity,
  • Provident fund,
  • Compensation,
    as per Section 327 (workers’ dues have high priority).

10. What is the priority of payment in winding up?

Priority as per Sections 326–327:

  1. Insolvency Resolution Costs / Liquidation Expenses
  2. Workmen’s dues
  3. Secured creditors
  4. Unsecured creditors
  5. Shareholders (if surplus remains)
    Preferential payments are settled first before others.

11. What is the effect of winding up on pending suits?

Once winding up order is passed:

  • No legal proceeding shall commence or continue without leave of Tribunal (Section 279).
  • Tribunal may stay proceedings to protect company’s assets. This avoids multiplicity and ensures orderly claim resolution.

12. What is contributory liability in winding up?

A contributory is a person liable to contribute to company’s assets during winding up. Includes:

  • Current members,
  • Past members (in certain cases).
    Liability is limited to unpaid share amount. Tribunal can call upon them to pay dues.

13. Can a company continue business after winding up order?

No. The company must cease all business operations, except those required for beneficial winding up. Directors lose management powers; Liquidator controls the affairs under Tribunal’s supervision.

14. What is a Statement of Affairs?

It is a document prepared by the company’s directors, listing:

  • Assets,
  • Liabilities,
  • Debtors and creditors,
  • Security details.
    It helps the Liquidator assess the company’s financial position. It must be submitted within 30 days of winding up order.

15. How are assets of a company sold during winding up?

The Liquidator:

  • Invites bids or auctions assets,
  • Sells property to realize maximum value,
  • Deposits proceeds in liquidation account,
  • Uses funds to pay off creditors and dues.
    All steps require proper reporting and, in many cases, Tribunal’s permission.

16. What is dissolution of a company?

Dissolution is the final stage of winding up. After:

  • Settling debts,
  • Distributing surplus,
  • Filing final report,
    the Liquidator applies for dissolution. Tribunal passes an order, and the company’s name is struck off the register.

17. What is the role of Tribunal in winding up?

Tribunal:

  • Admits winding up petitions,
  • Appoints Liquidator,
  • Supervises the process,
  • Approves final accounts and dissolution.
    It has full authority to ensure fair and lawful winding up.

18. What is summary procedure for liquidation?

Summary procedure applies to companies with:

  • Assets not exceeding ₹1 crore,
  • No significant debts or liabilities.
    In such cases, the Official Liquidator handles the process directly without detailed Tribunal proceedings, ensuring faster closure.

19. What is the role of creditors during winding up?

Creditors:

  • Submit claims to Liquidator,
  • May attend creditors’ meetings,
  • Participate in committee of inspection,
    Their rights are protected and they receive payment as per priority under the Act.

20. What is voluntary striking off under Section 248?

If a company is inactive or has no operations for 2+ years, it can apply for striking off its name from the Register of Companies via Form STK-2. It’s a simple, alternative method of winding up for inactive companies.