It is easy to create dents on any theory subject by solving a few problems practically. Keeping this advantage in view I compiled certain problems in company law and solved the same for ready use of the students. It is not an assurance that the same problems will be asked in the streams of CA/CWA/CS, it only for a better understanding of the students. on various topices of company law.
I recommend the students appearing for CA/CWA/CS examinations to solve such problems given in various sources such the institute’s guidelines answers, past question papers, N.D. Kapoor, G.K. Kapoor text Books (older one's...you may take new author sources) etc.
NATURE OF COMPANY
1. A husband and wife were the only two members of a Private Limited Company. They were killed by their relatives. They do not have children also. Explain what happens to company.
Section 34(2) of the Act states that, an incorporated company has perpetual succession. The life of a company is not related to the life of members. Law creates the company and the law alone can dissolve it. The existence of a company is not affected by death, insolvency, retirement or transfer of shares of members. Members may come and members may go, the company continues until is dissolved. Gower, LCB in his book has given an interesting example. He says “During the war all the members of one private company, while in general meeting, were killed by a hydrogen bomb. But the company survived, not even a hydrogen bomb could have destroyed it”. Perpetual succession lends stability and long life to a company as compared to other forms of business organizations.
2. A partnership with 25 persons was formed and carried out business for some years. Later, the plaintiff filed a suit against other for a declaration that the association was invalid and claiming refund of his capital. Decide.
As per Section 11 of the Companies Act, no company, association or partnership consisting of more than 20 persons (10 in the case of banking business) can be formed for the purpose of carrying on any business for gain, unless it is registered as a company under the Companies Act, or is formed in pursuance of other Indian Law or is a Joint Hindu Family carrying on business for gain.
The effect of non-registration of an association which falls within the terms of Section 11 is that such association is illegal and has no existence in the eyes of law. The law does not recognize it so much, so no relief can be granted either to the association or to any of its members, as the contractual relationship on which it is founded is illegal [Badri Prasad V. Nagarmal AIR 1959 SC 559].
Since, the law does not recognize it, an illegal association:
i) Cannot enter into any contract;
ii) Cannot sue any members, or outsider, not even if the company is subsequently registered;
iii) Cannot be sued by a member, or an outsider for, it cannot contract any debts;
iv) Cannot be wound up by order of 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. (Raghubar Dayal V. Sarafa Chamber AIR 1954 All. 555).
However, an illegal association is liable to be taxed. [Kumara Swamy Chettiar V. ITO (1957) ITR 457].
The members of an illegal association are individually liable in respect of all acts or contracts made on behalf of the association; they cannot either individually or collectively, bring an action to enforce any contract so made, or to recover any debt due to the association [Wilkinson V. Levison (1925) 42 TLR 97].
Under sub-section (4) and (5) of Section 11, every member of an illegal association is:
i) Personally liable for all liabilities incurred in carrying on the business of, or by the illegal association, and
ii) Punishable with fine up to Rs. 10,000.
DIRECTORS
3. X is appointed as an additional Director by the Board of Directors of a company. X has not offered for reappointment at the next annual General meeting. Does he continue as the Director of that company after the date of the Annual General Meeting?
As per proviso to section 260, the additional director shall hold office only up to the date of the next annual general meeting of the company. In the present case X cannot continue beyond AGM as he was not offered for reappointment at the next AGM.
4. There were only two directors on the board of a company and the one refused to act with another. There was no provision in the articles enabling the general meeting of the shareholders to increase or reduce the number of directors. How to ensure working of the company? Advice
The company in the question appears to be private limited as the number of directors mentioned is only 2 directors. So far as a private company which is not a subsidiary of a public company is concerned, if its articles are silent as to the appointment of directors or do not specifically provide for appointment of directors otherwise than in general meeting then the directors are to be appointed in general meeting by shareholders [Swapan Dasgupta V. Navin Chand Suchanti (1988) 3 Comp. LJ 76(Cal)].
[ALTERNATIVE TO ABOVE PROBLEM & SOLUTION]
5. A private company has only two shareholders who are also the directors with equal rights of management and voting power. The company has made large profits, but there is a complete deadlock in the management of the company. One of the shareholders applied for the winding up of the company. Decide.
The court will order the winding up of the company on the ‘just and equitable ground’. Section 433(f); [Yenidje Tobacco Co. Ltd., Re]
TYPE OF COMPANIES
6. Company B is subsidiary of company A, and company C is subsidiary of company B. Company D is a subsidiary of company C. Point out the position of C and D with relation to company A. State reasons.
The above problem is similar to illustration to section 4(1)(c) of the Companies Act, 1956. As per the provisions of Section 4(1)(c) where one company is subsidiary of another, which is itself a subsidiary of some other company, the first mentioned company shall also become the subsidiary of the last mentioned company. Hence, company C and D also subsidiary companies of Company A.
PROMOTION AND INCORPORATION
7. The promoters of a company entered into an agreement proposing to be on behalf of the company at a time when the company was not yet incorporated. The company after incorporation purported to adopt and ratify the agreement. Discuss whether the agreement can be enforced against the company?
A company, when registered, is not bound by pre-incorporation contracts, the reason being that at the time of making the contract the company was not in existence.
The position after enacting the Specific Relief Act, 1963:
The promoters found it very difficult to carry out to work of incorporation. Since contracts prior to incorporation were void and also could not be ratified, people hesitated to either supply any goods or work for the cause of incorporation. Promoters also felt shy of accepting personal responsibility. The Specific Relief Act, 1963 came as a big sigh of relief to the promoters. Section 15 of the Specific Relief Act provides that where the promoters of a company have, before its incorporation, entered into contracts for the purpose of the company and such contracts are warranted by terms of incorporation, the contract may be specifically enforced by or against the company, if the company has accepted the contract and communicated such acceptance to the other party to the contract.
8. A promoter of a company increased debts on behalf of the company before its date of commencement of business. The promoter applied for shares in that company and the debt was set off against payment in cash for allotted shares. Is such set-off valid?
The promoters have to incur various expenses in connection with the formation of a company, therefore, it is quite reasonable that they should get suitable remuneration for their services. In the given question it is mentioned that “increased debts” which is giving a meaning that increase the debts by fraud or by simply by a book entry. In such a case setting off the debt against issue of shares appears to invalid. However the remuneration may be paid in any of the following ways:
1) A commission on the purchase price of the business or property taken over by the company through him;
2) The promoter may be paid a certain lump sum;
3) He may be given fully or partly paid shares in consideration of his services rendered;
4) He may be given a commission at a fixed rate on the shares sold;
5) He may sell his own property to the company at a higher price and make profits. However, he must make full disclosure of this fact;
6) He may be given an option to buy the shares of the company at par when their maket price is higher;
7) He may be appointed as chairman of the Board of Directors of the company.
Whatever be the nature of remuneration, it must be disclosed in the prospectus if it is paid within the preceding two years from the date of the prospectus. This is to enable prospective members to know about all such payment.
9. The promoter of a Company before its incorporation entered into an agreement to buy a plot. After incorporation the company refuses to buy. Examine the position of liability.
Promoters has to disclosure such pre-incorporation contracts to the company through the medium of Board of directors. As regards ratification of promoters’ contracts, the view taken in Kelner V Baxter LR (1886) 2 CP 174 was that the company could not ratify contract made by a promoter before its incorporation. Specific performance of a contract may be enforced against a company in respect of contracts entered into by promoters on behalf of the company, if such a contract is warranted by the terms of incorporation and the company, if such a contract is warranted by the terms of incorporation and the company has accepted the contract and communicated the acceptance to the other party. (Section 15 of the Specific Relief Act, 1963). Section 19 of the same Act provides that the other party can also enforce the contract if the company has adopted it after incorporation and the contract is within the terms of incorporation.
As long as the company does not ratify, as required by the Specific Relief Act, 1963 the position remains the same as under the company law. In DR Patil V AS Dimilov AIR 1961 MP 4 AT 5, it was held that a promoter is personally liable to third parties upon all contracts made on behalf of the intended company, until with their consent, the company takes over this liability. The mere fact that it has been constituted and registered does not discharge the promoter.
10. Six of the seven signatures of the memorandum of association of a company were forged. The memorandum was duly presented, registered and a Certificate of incorporation was issued. The existence of the company was subsequently attacked in the ground of insufficiency of the required number and forgery and asked for cancellation of registration. Is this tenable?
Certificate of incorporation is conclusive evidence that all requirements of the Companies Act, 1956 have been complied with and that everything is in order as regards registration and that the company has come to existence from the earliest moment of the day of incorporation stated therein with rights and liabilities of natural person. The facts of the above case are similar to Moosa V. Ebrahim, ILR (1913) 40 Cal 1 (PC), where the memorandum of association of a company was signed by two adults and by a guardian making a separate signature for each of the minors. The Registrar, however, registered the company and issued under his hand a Certificate of incorporation. It was contended that this certificate of incorporation should be declared void. Lord Macnaughten said: Their Lordships will assume that the conditions of registration prescribed by the Indian Companies Act were not duly with; that there were no seven subscribers to the memorandum and that the Registrar ought not to have granted the Certificate. But the certificate is conclusive for all purposes. Thus, the Certificate ‘prevents anyone alleging that the company does not exist’. But that does not mean that the certificate legalizes the illegal object mentioned in the memorandum. In fact, it is for the purpose of incorporation only that the certificate is made conclusive by the legislature.
PROSPECTUS
11. A company has released prospectus inviting public to invest in shares. X has applied for shares. As the company could not get even minimum subscription, it could not allot shares to X. X insists for allotment. Decide.
As per section 69(1), no shares which are offered to the public can be allotted until the minimum subscription stated in the prospectus has been subscribed and the amount payable on application has been received in cash by the company. In this context, SEBI has prescribed that any company making public or right issue must receive a minimum of 90% of the issue including devolvement on underwriter’s subscription against the entire issue before making allotment.
The amount of minimum subscription must be stated in the prospectus. Any amount other than in cash should not be included in the minimum subscription.
If the minimum subscription is not raised within 120 days after the issue of the prospectus the money paid by the subscribers must be returned forthwith. If it is not so returned, the directors become liable to repay the with 6% interest from the end of the 130th day. All money received from the applicants should be kept deposited in a separate account with a scheduled bank until the company obtains the certificate to commence business. In case the company has already obtained the said certificate the amount so received should be kept in a scheduled bank until the entire amount payable on application for shares in respect of minimum subscription has been received by the company.
12. A prospectus was issued on behalf of a company by its managing director. It contained a statement that the company was paying dividends for the last five years. In fact, the company was running on loss during the above period. A person who believed the statement and applied and got shares from the company. What is the liability of the company and/or managing director?
Nature of liability: Criminal liability for misstatement in prospectus – Section 63
In a prosecution under the section it was found that everyone of the statements as to payment of dividends for the number of years specified was true but during some years proceeding to the issue of the prospectus dividends were not paid out of current profits but out of other sources and, therefore, it was held that to the extent to which the prospectus created the impression that the company was in profits, whereas in fact it was in losses, the statements were not true in their context. R. v Kylsant (1932) 1 KB 442
Liability: Every person who is responsible for the issue of the prospectus shall be punishable with imprisonment for a term which may extend to two years or with fine which may extend to Rs. 50,000 or with both unless he proves either that the statement was immaterial or that he had believe, that the statement was true.
13. ‘A’ purchased shares in a company on the basis of prospectus which contained the name of certain persons as its directors. Before the shares were allotted some of these directors retired. ‘A’ wants to withdraw his application for the purchase of shares. Can he do so?
A statement in a prospectus as to the persons who are to be directors is a material statement, and, if it is untrue, a person subscribing on the faith of it is prima facie entitled to rescind. Re, Scottish Petroleum Co. (1883) 23 Ch D 413
A shareholder who knew that directors named in the prospectus had withdrawn or would have known it with ordinary diligence would not be allowed to avoid the allotment. Mohan Lal V. Sri Gangaji Cotton Mills Co.(1900) 4 Cal WN 369
In view of the decision in above case law we can say that A can withdraw / rescind the contract for purchase of shares.
14. A applies for the some shares on the basis of a prospectus which contains some mis-statement. The shares are allotted to him. A afterwards transfers the shares to B. Can B bring an action for a rescission on the ground misstatement?
A purchaser of shares in the open market has no remedy either against the company or any other person even if he purchased shares by being influenced by misrepresentation in the prospectus. Peek V Gurney (1861-73) All ER Rep 116 followed by Al-Nakib Investments (Jersey) Ltd. V. Longcroft (1991) BCLC 7 (Ch D). But it is otherwise where the prospectus was addressed not merely to the first allottees but also to influencing subsequent transactions in market. Andrews V. Mockford (1896) 1 QB 372 (CA)
15. A subscribes to the shares of a company on the basis of some statements made in the prospectus of the company, thereafter he transferred his shares to B. B finds that there were some untrue statements in the prospectus. He wants to claim compensation from company for such misstatements in the prospectus. The company refuses liability on the ground that he was not the original allottee. Decide.
Please refer the answer as above
WINDING UP
16. A petition was filed for winding up of a company on the ground not owing to a long drawn at litigation the business had come to a stand still and apart of its business was banned by legislation. For the company it was argued that it is solvent and as ample assets with which it could restart the business. Decide.
Application Section: Non-commencement or suspension of business - Section 433(c)
The Patna High Court in ROC V. Bihar Wire and Wire Products (P) Ltd. (1975) 45 Com Cases 194 listed the following points in this connection: “A long line of decisions on the point thus establish, among others, the following propositions of law:
i) That the mere fact that business has not been commenced within a year or that business has been suspended for a whole year or more by itself is not a ground for a court to order winding up, although they give the jurisdiction to the court to do so;
ii) That it has to be found out whether the non-commencement or suspension of business was for some good reason accounting for it;
iii) That the fact of non-commencement or suspension of business is an evidence which indicates that the company has no intention of carrying on business or that it is not likely to do so;
iv) That the decisive question is whether there is a reasonable hope of the company commencing or resuming business and doing it at a profit, and whether the substratum of the company has disappeared”
There is yet another consideration in the matter of order of winding up and that is, taking into consideration the wishes of the majority of the shareholders. [Middlesborough Assembly Rooms Company, (1880)]
The Court is also required to examine whether it is possible to resume the business. Based on the above decisions court may not order for winding up of the company as the company is arguing for resuming the business.
17. A creditor of a company applied for winding up of the company for its inability to pay his claim, after proper demand had been made by him and on the lapse of three weeks time from the date of such demand. It was proved to the satisfaction of the court, during enquiry, that the company was commercially solvent. Decide
The court may order for the winding up of the company under sections 433(e) and Section 434.
18. A company accepted advances from several people to the tune of Rs. 1 crore. The total value of the assets of the company is about 10 crores. One of the unsecured debtors demands repayment of his advance of Rs 10 lakhs. The company fails to pay this money even after one month of the demand. Advise the debtor
The court may order for the winding up of the company under sections 433(e) and Section 434.
COMPANY DEPOSITS
19. X deposited Rs. 100,000/- for 3 years in AB & Co., public limited company. The company failed to pay back the money with interest after the term. What are the remedies available to X?
X can approach the Company Law Board (CLB) with an application in Form No. 4 of Annexure II to the Company Law Board Regulations, 1991 in duplicate to be filled with the Bench of CLB at the place where the registered office of the is situated by hand or registered post with acknowledgment due. X can himself appear before Bench or authorize an advocate / someone on his behalf to do so. The following documents are to be attached to such application:
i)Copy of deposit receipt;
ii) Copy of correspondence exchanged with the company’
iii) Bank draft evidencing payment of application fee.
No affidavit verifying the application under section 58A(9) is required to be made. The CLB may direct the company to make the repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order. [Section 58A(9)]. Where the CLB orders repayment of deposit in full or part of otherwise directs the company by its order, the company has to comply with the order. Otherwise the persons concerned will be levied with penalty as mentioned in Section 58A(10).
OPPRESSION AND MISMANAGEMENT
20. In a private company, A, B and C are shareholders holding 60%, 35% and 5% shares respectively. B and C are appointed as directors of the company. Can A file a petition alleging oppression and mismanagement?
Section 397 of the Companies Act, 1956 has not specified that oppression as such can only be inflicted by majority shareholders. It has dealt with oppression as a phenomenon without telling who would be oppressing and who would be oppressed. While oppression by majority on the minority is a natural probability, but the reverse is also possible and it has happened in a number of cases. While dealing with such cases, the Court took into account the act of oppression without regard to who oppressed whom. [Sindri Iron Foundry (P) Ltd. Re (1964) 34 Comp. Cas 510 (Cal); Maharastra Power Development Corporation V. Dabhol Power Co. Ltd. (2003) 56 CLA 263 (Bom)].
In view of the above decision, A can file a petition alleging oppression and mismanagement to the Company Law Board for an order under Section 397.
21. A company was controlled equally by two defendants and the two plaintiffs. An action arose alleging that the two defendants had fraudulently converted the company’s assets to their own use. Can the plaintiffs here bring an action on behalf of the company? decide
The facts of the above problem are similar to Narain Das (K) v. Bristol Grill (P) Ltd. (1997) 90 Com Cases 79 (CLB – N. Delhi). Where a company of four brothers was provided with funds by a bank for its business and three of the four brothers started using the money in breach of the agreement between them for the use of that money. It was held that the fourth brother had legitimate ground for making a complaint of oppression and financial mismanagement under sections 397 and 398. The CLB ordered readjustments in the accounts so as to ensure that the funds in which the petitioner also had an interest were not utilized for any purpose extraneous to the company’s business and the terms of the agreement between the members.
GOVERNMENT COMPANAY
22. G & S Ltd. is a public limited company in which Central Government holds 60% of shares. G & S Ltd. has 25% share holding in another public limited company E & X Ltd. In an extraordinary general meeting of E & X Ltd., the nominee of G & S Ltd. votes for removal of one director P of E & X Ltd. P files a writ petition before the High Court saying that Government of India is the person behind G & S Ltd., and the decision to vote for his removal and the action of the Government is arbitrary. G & S Ltd. plead that it is separate legal entity. Decide
In Heavy Engineering Mazdoor Union V State of Bihar (1969) the Supreme Court, while holding that Government Company will ordinarily be presumed not to be a servant or agent of the State, has also observed that inference may be drawn that such company is an agent of the Government, if in substance, it also performs governmental functions.
Where the local Government in the exercise of its power under the articles of a Government Company appointed a person as a director-cum-chairperson but subsequently removed her because of established factual irregularities, it was held that the matter belonged to the realm of contract and, therefore, could not be questioned by means of a writ. Farrel Futando V. State of Goa (1994) 80 Com Case 659 (Bom)
Where the company in question was not performing any public duty, the court did not regard it as instrumentality of the State merely on the ground that the company was under the control of the Central Government. Accordingly, an employee’s writ petition against the company was held to be not maintainable. R. Thandawavarayan V. SPIC Limited (1996) 21 Corpt LA 381 (Mad)
INVESTIGATION
23. P, a shareholder of a company, suspects that the affairs of the company are mismanaged. P is holding 25% of the shares. He approaches the Company Law Board for an order to investigate the affairs of the company. Can he succeed? Give reasons.
In the case of a company having a share capital, Section 235(2) enables ‘not less than 200 members’ or from members holding not less than 1/10th of the total voting power therein to make application to the Company Law Board irrespective of the total number of members or total voting rights in the company.
In light of the provisions of section 235, the P may succeed.
24. A, a person owner of a tea estate and also one of the directors of a company, transferred the tea estate to the company, and claimed exemptions from ad valorem duty on the ground that they themselves were the shareholders in the company. Can they claim exemptions?
A Company, registered as such under a statute governing companies, is a distinct entity and is regarded as a ‘person’ in the eyes of law. The shareholders of companies are investors endowed with certain rights under statute or under the common law. These rights do not include right to ownership of whole or part of the assets of the company. Assets belong to the company, which is itself a person and it is the only entity that can deal with its assets in the manner permitted by law. A shareholder is entitled to participate in the profits of the company as and when the company declares dividend. He is also eligible to participate in the liquidated proceeds of the assets of the company when it is wound up, but that too when all external liabilities of the company have been discharged. A shareholder has, however, certain statutory rights, like right to attend general meetings of the company; participation in broad policy formulation of the company and certain personal rights like the right to sue the company when his personal right is affected e.g. his membership of the company is cancelled. In B.F. Guzdar V. CIT [1995] 25 Com. Cas 1 (SC) it was held that a company can own property and can deal with it the way it deems fit. No member can either individually or jointly claim any ownership rights in the assets of in company during its existence or on its winding up. [Kondoli Tea Co. Ltd. in re ILR (1886); Solomon V. Solomon & Co. Ltd. [1895 – 99] All ER 33(HL); SAE (India) Ltd. V. EID Parry (India) Ltd. (1998) 18 SCL 481 (Mad)].
In light of the above facts A cannot claim exemptions.
25. A nominal value of a share in a company is Rs. 100/- out of which Rs. 50/-was called and paid up. In its publication of balance sheet, the company has shown heavy loss. X, a share holder, surrendered his 20 shares and it was accepted by the Board of Directors. Examine the validity of surrender.
Surrender of shares means voluntary return of shares to the company for cancellation. There is no provision for the surrender of shares either in the Companies Act or in Table A, but the AOA of some company may allow it as a short-cut to the long procedure of forfeiture. Surrender of shares shall be valid only when there is a provision to this effect in the AOA.
Surrender of Shares shall be valid only where the forfeiture is otherwise justified. In any other circumstance, surrender of shares cannot be accepted without the sanction of the Court, as this would amount to reduction of capital. Share are surrendered when the shareholder is unable to make the payment of subsequent calls and wishes to avoid the disgrace of forfeiture. This can happen only in the case of partly paid shares. The only exception where fully paid up shares may be accepted is where shares are surrendered in exchange for new shares of the same nominal value (but with different rights). In such a case, the capital is not reduced, but only replaced. Surrender of shares may be re-issued in the same way as forfeited shares.
In the present as the company is incurring heavy losses he may put on the ‘Beneficiaries’ list in the event company going into liquidation within one year of the cessation of his membership.
MEMORANDUM OF ASSOCIATION
26. A company put up telephone wires in a certain area. There was no power in the memorandum to put up wires there. The defendant cut the wires. Can the company sue for the damage done to the wires?
If company’s funds were used in acquiring some ultra vires property, the company has the right to hold the property and protect it against damage by other persons. National Telephone Co. V St. Peter Constables and Ayers V South Australian Banking Co. (1871) LR 3 PC 548
INVESTMENTS, LOANS, BORROWINGS AND DEBENTURES
27. A, a joint stock company, borrows money from Y beyond its powers. Has Y, a shareholder, any remedy against the company and the directors of the company?
Borrowing money beyond its powers is ultra-vires borrowing and it means:
a) Borrowings by a company where it does not have the power to borrow;
b) Borrowings in excess of the limits fixed under memorandum or articles.
With reference to ultra-vires borrowings, it is important to distinguish between borrowings which is ultra-vires the company and borrowings which are intra (within) vires the company but ultra-vires the directors.
The borrowings which are ultra-vires the company cannot be ratified even by a resolution passed by the company in its general meeting. An ultra-vires borrowing by a person on behalf of company does not give rise to any indebtedness at law or equity on the part of such company [Sinclair V. Brougham (1914)].
Remedies of the lender
i) Injunction: In case the money advanced to the company has not been spent, the lender may obtain an injunction from the Court restraining the company from parting with it;
ii) Restitution: Under the doctrine of restitution, the lender can obtain a ‘tracking order’. Accordingly, if the money of the lender is in the hands of the company in its original form or its products are capable of identification, he may claim that money or its products.
iii) Subrogation: If the company has used the money borrowed to pay off any of its intra-vires debts, the lender may be subrogated to the rights of the creditors and he will rant as a creditor up to the amount so used.
iv)Suit for breach of warranty of authority: The lender may also sue the director for breach of warranty of authority unless the borrowing is intra-vires the company and the company has ratified the same. It is based upon the principle of agency. An agent’s act outside the scope of the authority does not bind the principle unless the principal ratifies the same. The agent, however incurs a personal liability.
It does not make any difference even Y is a shareholder.
28. The Company’s Articles provided that the Directors might borrow on bonds such sums as may from to time be authorized by a resolution passed at a general meeting of the company. The directors borrowed Rs. 50,000/- from the plaintiff without any resolution being passed. The company refused to be bound by. The plaintiff sues the company for recovery of the amount. Decide. (AU).
Ultra-vires borrowings, can be divide into
- ultra-vires the company; and
- intra (within) vires the company but ultra-vires the directors.
The problem given is intra vires the company but ultra vires the directors.
The legal position in such cases may noted as follows:
a) If the lender was aware of the lack of authority on the part of directors, he will have no right of action against the company.
b) But where the directors, under the AOA, could exercise the borrowing powers subject to certain approvals, the lender could rely on the doctrine of indoor management that the necessary approvals would have been obtained [Royal British Bank V. Turquand (1856)].
c) The Company shall be held liable if the company borrowed by directors beyond their authority is used for the benefit of the company [Krishna Kumar Rohtagi v State Bank of India (1980)]
29. The directors of the company ‘A & Co.’, and ‘B & Co.’, were same. A & Co raised loan from B & Co. on a mortgage of its assets. Subsequently it was found that A & Co. did not follow the procedure laid down in the Articles of Association. Is the mortgage valid? What is remedy available to B & Co.?
Even A&Co. and B&Co. are under the same management, yet they are separate and distinct legal entities. B&Co. can take the shelter of doctrine of indoor management for enforcing its right of recovery of the debt for lending the money against mortgage.
As regards the validity of mortgage A&Co. or B&Co. has to register the charge with concerned ROC within 30 days of their creation.
Remedy mentioned in the previous solution are available to B&Co.
COMPANY MANAGEMNT
30. A company was formed for the purpose of carrying on the business of construction of buildings, roads, and etc. The company has donated Rs. 10 lakhs to a university. Some of the shareholders objects to this on the ground that it is ultra vires the company’s objects. Decide.
As per section 293 of the Companies Act, 1956 the Board has power to contribute in any year, to charitable and other funds not directly relating to the business of the company or the welfare of its employees, any amount not exceeding Rs. 50,000/- or not exceeding 5% of its average net profits as determined u/s 349 and 350 of the Act for the last three financial years, whichever is greater.
However, contribution to National Defence Fund or any other Fund approved by the Central Government for the purpose of National defence is exempted from the above provisions. Any amount may be contributed without obtaining the sanction of the company in general meeting in spite of any provision in the Act, the Memorandum or the Articles of the Company.
Facts available in the above case are not sufficient to assess the amount of profits, the number of years for which the company is in existence etc.
On the assumption of company having sufficient profits to donate the amount of Rs. 10 lakhs, we can say the company can donate the amount without obtaining the sanction of the company in general meeting in spite of any provision in the Act, the Memorandum or the Articles of the Company.
31. B transferred his shares to two persons and lodged the certificate with the company. The company certified the transfer. But instead of destroying his original certificate returned it to B, who borrowed money on the basis of certificate from L. decide the liability of the company to L, giving reasons.
A share certificate, is an evidence to the effect that the allottee is holding a certain number of shares of the company showing their nominal and paid-up value and distinctive numbers. This certificate is a prima facie evidence of title to the shares in the possession of shareholders. [Society Generale De Paris V Walker (1885) 11A AC 20, 29].
Moreover when the company issues a certificate, it holds out to the world that the facts contained therein are true. Whether intentionally or accidently, any person acting on it (e.g. advancing money, or buying the shares) can compel the company to pay compensation for any damage caused by reason of any misstatement as the company is bound by the statements in the certificate.
In Chambal Fertilisers & Chemicals Ltd. V Bukka Ramulu, the company issued duplicate share certificate on receipt of a complaint for loss of two share certificates for 200 shares and an affidavit and indemnity bond duly executed. Subsequently the company received these shares certificates lodged for transfer along with the relevant transfer documents. Held, the purchasers should be indemnified by the company towards the purchase consideration. Further, the company having already issued duplicate shares, the original share certificates was directed to be cancelled.
MEETINGS
32. A company has convened annual general meeting on a particular day and there was no quorum. Examine the remedy available to a shareholder or holding meeting next time.
In a general meeting, unless the Articles otherwise provide:
i) If within half an hour from the time appointed for holding the meeting, the quorum is not present, the meeting, if called upon the requisition of members, shall stand dissolved;
ii) In any other case, the meeting shall be adjourned to the same day in the next week at the same time and place or to such other day, time and place as the Board of directors may determine. The department of Company Affairs has clarified that if the Board of Directors fix another date for the adjourned general meeting, a notice must be given to the members in accordance with the provisions of the Act (Dt. 19-05-1961).
iii) If at any adjourned meeting also, quorum is not present within half an hour from the appointed time, the members present shall be the quorum.
33. ‘S’, a shareholder, after appointing ‘P’ as his proxy at a meeting of the company, himself attended the meeting and voted on a resolution. ‘P’ therefore claimed to exercise his vote. Discuss the validity of P’s claim. (AU).
A shareholder may irrevocable power of attorney to a person to cast votes on his behalf in the general meeting and also sign proxy forms on his behalf as constituted attorney. The constituted attorney’s position is that of a proxy and he can attend and vote at the meeting. If the shareholder himself attends the meeting, the power of attorney shall stand revoked thereby. Cousins V. International Bricks Co. Ltd. (1931) 2 Ch. 90 at 101: 1932 2 Com Cases 108 (CA).
In light of the decision in the above case, P’s claim is invalid.
34. A company has passed a resolution to wind up voluntary. X a creditor raises an objection for it. Discuss the right of the creditor.
It will be noted that under section 484(1)(b), howsoever prosperous and solvent a company may be, if the members wish the company to be wound up, they can do so by passing a special resolution to that effect and no reasons need to be given. No articles of the Company can prevent the exercise of this statutory right.
And the right cannot be interfered with by any Court by means of an injunction or otherwise. British Water Gas Syndicate V Notts Derby Water Gas Co. Ltd.1889 WN 204; Ellis V Dadson, 1891 WN 43.
X cannot enforce his object through a Court by means of an injunction or otherwise.
35. A has some shares in a company. On death of A, his legal heir and successor has applied for transfer of shares in his name. The company refused to do so. Decide.
In the case of the death of the shareholder, his shares vest in his legal representatives. If they desire, they may ask the company to register them as holders of those shares and for this purpose no instrument of transfer is needed. The company can register the shares on the basis of will or succession certificate.
The rules regarding transmission of shares are given in the Articles of Association of the Company. A company may refuse to register a transmission. But this power must be regarded in good faith and in the interest of the company. However, in case of refusal, the aggrieved party can appeal to Company Law Board in the same manner as in the case of refusal to register to transfer of shares.
In case of transmission of shares, since there is not instrument of transfer, no stamp duty is required to be paid.
36. During the pendency of a petition for winding up of a company made by the Board of Directors, the workers’ union of the company claims a hearing before the winding up court. The Company opposes the claim on the ground that the workers have no interest in the company. Decide. (AU).
Section 433 of the Act provides that a company may be wound up by the Court, inter alia, if the company has passed a special resolution of its being wound up by the court. Ordinarily, directors are not entitled to present a winding up petition in the name of the company without the authority of the general meeting. However, where a winding up petition has indeed been presented by the directors, it is open to general meeting of shareholders to ratify the action of the directors. On this basis, it appears that if after submission of their application, the directors get a special resolution passed at general meeting ratifying the action of the directors, the application will be allowed.
As regarding workers opposing the winding up, there is nothing in the Companies Act expressly prohibiting workers from being heard in a winding up petition. Accordingly, the workers would be entitled to be heard though as interveners and not as parties. Also, after the winding up order is made, the workers may appeal against it. But, once the order becomes final, the workers shall not participate in any further proceedings. [National Textile Workers Union V PR Ramakrishnan (1983) 53 Comp Cas 184]. The Court shall take into account not only the interests of the shareholders and creditors but also public interest and the interest of workers and employees.
37. ‘X’ a public limited company imposes a restriction on the right of its members to transfer their shares. ‘A’ a shareholder wanted to transfer his shares to ‘B’. Advice.
Where the articles of association of the company give the directors absolute and uncontrolled power to refuse registration of a transfer, the can do so without giving any reason and such refusal can be attacked only if the directors have not exercised their discretion honestly in the interest of the company.
If their refusal is exercised mala fide, i.e. if they act oppressively, capriciously, or corruptly, the Company Law Board will interfere and order registration of the transfer of Shares (B. Choukhani V. Western India Theatres Ltd. AIR 1957 Cal. 709). The onus of proving bad faith on the part of directors, rests on the plaintiff.
Thanking you,
Yours truly,
CA Melam Ram Pavan Kumar
You may write me at: rampavankumar@yahoo.com
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