Tuesday, 6 December 2011

Practical Questions in Company Law


Q.No.1. Both the shareholders of the Private Company died in a car accident. Decide whether Company’s existence also comes to an end.

Sol.: The Company’s existence is not affected by the death of its shareholders, since the Company has separate legal entity. This is clearly established in Salomon Vs. Salomon & Co. Ltd, Lee Vs. Lee Air farming Ltd & Kandoli tea Co. Ltd. cases. Further the Company has having perpetual succession.

Q.No.2. In a private Company, after the death of Mr.X entire capital of the company is held by his son Y. Decide, whether Y can continue business of the co. with single shareholder.

Sol.: In such a situation, Y can continue to carry on the business of the Company but, in accordance with the provisions of Sec.45 of the Act, if the same position continues for more than six months, then y will become personally liable for all the liabilities of the Company contracted after six months from the date he becomes only shareholder.

Q.No.3. The number of members in a public Company became reduced to six on the 10th September, 1988, the Company incurs trade debts on 11th September, 1988, 2nd February, 1989 and 17th March, 1989. How far are the remaining six members liable for the debts?

Sol.: The remaining six members are  liable for the debts incurred after 6 months of the reduction in the number of members below the statutory minimum specified in Sec. 45 of the Companies Act, 1956 i.e., for debt contracted on 17th March, 1989.

Q.No.4. A public limited Company has only seven shareholders, all the shares being paid in full. All the shares of one such shareholder are sold by the court in an auction and purchased by another shareholder. The Company continues to carry on its business thereafter. Discuss the liabilities of the shareholders of the Company.

Sol.: The problem in question relates to reduction of membership below the statutory minimum. Section 12 of the Companies Act requires a public Company to have a minimum of seven members.  If at any time the membership of a public Company falls below seven and it continues’ for more than six months, then according to Section 45 of the Companies Act, 1956, every such member who was aware of this fact, would be individually (personally) liable for the debts contracted after six months.
Thus, in the above problem the remaining members shall incur personal liability for the debts contracted by the Company:
a.      If they continued to carry on the business of the Company with that reduced membership (i.e., 6) beyond six months period.
b.      Only those members who knew this fact of reduced membership shall be liable, for instance, one of the members who was abroad and thus not aware of these developments, shall not be liable.
c.       The liability shall extend only to the debts contracted after six months from the date of auction of that member’s shares.

Q.No.5. In a private limited Company it is discovered that there are, in fact, 54members. On an enquiry, it is ascertained that 6 of such members have been employees of the Company in the recent past and that they acquired their shares while they were still employees of the Company.  Is it necessary to convert the Company into a public limited Company?

Sol.: As per Section 3(1)(iii), a Company to be registered as a private Company must restrict its membership to 50 only.  But, however, in counting this number of 50 members, employee members and ex-employee members (i.e., those who become members while in the employment of the Company but now having retired still continue to retain membership) are to be excluded.  Thus, in the given case, the Company shall continue to be a private Company.  There is no need for conversion.






Q.No.6. BS & Co. Ltd. is registered as a Public Limited Company. The shareholding pattern of the Company is under.

Category

Directors & their relatives
Employees
Ex-employees (shares were allotted when they were employees)
Six couples holding shares jointly in the names of husband and wife (6 x 2)
Others
Total:
36
18
09
12
06
81

The Board of directors of the Company proposes to convert it into a private Company. Advise the Board of directors about the steps to be taken for its conversion into a private Company including reduction in the numbers of members, if necessary.

Sol.: A public limited Company may be converted into private limited Company only if the number of members is limited to 50 excluding Sec.3(1)(iii):
a.      Persons who are in the employment of the Company
b.      Persons who became members during the course of their employment & continue to be members even after their employment ceases.
c.       Further if two or more members hold shares in a Company jointly they shall be treated as a single member.
The number of members is only 48 for this purpose as noted below:

Directors and their relatives
Joint holding treated as single
Others
36
6
6
48
Hence the Company can be converted into private limited Company.

Q.No.7. The paid up share capital of Advanced Castings Pvt. Ltd is Rs.1,00,00,000 consisting of 8,00,000 Equity shares of Rs.10 each fully paid up and 2,00,000 cumulative Preference shares of Rs.10 each fully paid up. Quality Forgings Pvt. Ltd. and Supreme Engineering Pvt. Ltd. are holding 3,00,000 Equity shares and 1,50,000 Equity shares respectively in Advanced Castings Pvt. Ltd. Quality Forgings Pvt. Ltd. and Supreme Engineering Pvt. Ltd are the subsidiaries of Unique Machineries Pvt. Ltd. Examine whether Advanced Castings Pvt. Ltd. is a subsidiary of Unique Machineries Pvt. Ltd. Will your answer be different, if Unique Machineries Pvt. Ltd. controls composition of Board of Directors of Advanced Casting Pvt. Ltd.?

Sol.: Holding & Subsidiary Co.’s. According to section 4 of the Companies Act, a Company (Assume S Ltd.) shall be deemed to be a subsidiary of another Company (Assume H Ltd.), if & only if:
1.      Control on BOD. That the H Ltd. controls the composition of Board of directors of S Ltd. Or
2.      Control by ownership.
  1. Where S Ltd. is an existing Company in which the preference shareholders are having voting rights, H Ltd. controls more than half of the total voting power of S Ltd. (E + P)
  2. Where S Ltd. is a newly formed Company, H Ltd. holds more than half in the nominal value of S Ltd. equity share capital  (Only E) Or
3.      Chain relation. If S Ltd. is a subsidiary of A Ltd. which is subsidiary of H Ltd., then the Company S Ltd. is subsidiary of H Ltd.
Further shares held by any person as a nominee for the Co. shall be treated as being held by the said Co. Thus, the shares held by a subsidiary shall be treated as held by the Holding Co. In this case, the equity share capital of Advance Castings Private Ltd. is Rs.80,00,000 consisting of 8,00,000 Equity shares of Rs.10 each fully paid up. Quality Forgings Pvt. Ltd. and Supreme Engineering Pvt. Ltd. are holding 4,50,000 (3,00,000+1,50,000) Equity shares in Advance Castings Pvt. Ltd. As these two Companies are the subsidiaries of Unique Machineries Pvt. Ltd., it will be treated as holding more than half in nominal value of the Equity share capital of Advance Castings Pvt. Ltd. and hence Advance Castings Pvt. Ltd. is a subsidiary of Unique Machineries Pvt. Ltd.
If Unique Machineries Pvt. Ltd. control the composition of the Board of Directors of Advance Castings Pvt. Ltd., it will also be treated as holding Company by virtue of Sec.4. Hence the answer will not be different.

Q.No.8. The paid-up share capital of XYZ (Private) Co. Limited is Rs.20 lakhs consisting of 2,00,000 Equity Shares of Rs.10 each fully paid up. ABC (Private) Limited and its subsidiary DEF (Private) Limited are holding 60,000 and 50,000 shares respectively in XYZ (Private) Co. Limited. Examine with reference to the provisions of the Companies Act, 1956, whether XYZ (Private) Limited is subsidiary of ABC (Private) Limited. Would your answer be difference if DEF (Private) Limited is holding 1,10,000 shares in XYZ (Private) Co. Limited and no shares are held by ABC (Private) Limited in XYZ (Private) Co. Limited?
Sol.: Write about Holding & Subsidiary Companies in the above Question.
Further shares held by any person as a nominee for the Company shall be treated as being held by the said Company. Thus, the shares held by a subsidiary shall be treated as held by the holding Company.
Here ABC Private Limited is holding 60,000 shares in XYZ Private Limited and 50,000 shares held by DEF private limited. Therefore, ABC Limited will be deemed to be holding 1,10,000 Equity shares in XYZ Limited i.e. more than half in nominal value of the Equity Share Capital of XYZ Private Ltd. Hence XYZ Private Limited is subsidiary of ABC Private Limited.
The answer will remain the same in the second case but holding-subsidiary relationship is established by virtue of Chain relationship i.e. a subsidiary of one Company’s subsidiary will also be considered as the subsidiary of the second mentioned Company.

Q.No.9. Due to oversight some of the share transfers were registered in the Company due to which the number of members in a private Company increased from 28 to 52. What is the effect of such transfers and what is the remedy available to the Company.

Sol.: In that case, since the number of shareholder’s has crossed 50, the Company will be named as public Company. However the NCLT, on being satisfied that the failure to comply with the conditions laid down by Sec.3 was accidental or un intentional and it is just and equitable to grant relief, may, on the application of the Company or any other person interested and on such conditions as seem to the NCLT reasonable, order that the Company be relieved from such consequences as aforesaid.

Q.No.10. On acceptance of deposits a private Company becomes a Public Company.

Sol.: False. A private Company becomes a public Co. on acceptance of deposits from public through issue of advertisement. However the private Co. can accept the deposit from its shareholders, directors, from their relatives and even then the private Co. does not become a public Co. (Sec.3)

Q.No.11. By obtaining the license from the Central Government under section 25 of the Act a Company shall dispense with the word “limited” or “private limited” from its name.

Sol.: False. Under section 25, it is not compulsory to dispense with the word Limited or a Private Limited, but it is only an optional at the wish of the Company. Because, the object of registration of a Company u/s 25 is not only to dispense the use of words Limited or Private Limited as a part of its name but to avail the exemption which may be granted to such Companies from the provisions of this Act by the Central Government.

Q.No.12. A firm can also become member of a Company which has been granted license under Section 25 of the Act.
Sol.: Yes, Sec.25 of the Companies Act permits a firm to be a member of any association or Company licensed under this section. Infact this is the only one case which permits the partnership firm to become a member of a Company.

Q.No.13. On revocation of License granted by the Central Government under section 25 the Company may continue to carry on the same Activities which were being carried on by it prior to such revocation.

Sol.: True. On revocation of license granted by the Central Government under Sec.25, the association or the Company may continue to carry on the same activities which were being carried on by it prior to such revocation.  The impact of the revocation of license is:
a.      The Company will have to add a word ‘Limited’ or ‘Private Limited’ at the end of its name.
b.      It will cease to enjoy the exemptions granted by the Central Government to such Companies.

Q.No.14. Two joint Hindu families carry on a business as joint-owners. The first family consists of 3 brothers and their respective sons being 12 in number. The second family consists of the father, 4 major sons and 2 minor sons. Is the association illegal?

Sol.: Sec.11 of the Companies Act, 1956, provides that no firm, association or Company consisting of more than 20 persons for doing any business (10 in case of banking business) shall be formed unless it is registered as a Company under the Companies Act. An association formed in violation of the above provision of the Companies Act is termed as an illegal association and does not have any legal existence and recognition. However, in computing the aforesaid number of members, viz., 10 in case of a banking business and 20 in case of any other business, minor members of the families constituting the association are not taken into account. Accordingly, in the given problem, the first family consists of 15 members (3 brothers + 12 sons) and the second family that of 5 members (1 father + 4 sons and ignoring 2 minor sons). The total number of the members of the two families constituting the association thus comes to 20. The association is not an illegal Association.

Q.No.15. The Registrar of Companies issued a Certificate of Incorporation Actually on 8th January, 1999. However, by mistake, the certificate was dated “5th January, 1999”. An allotment of shares was made before the Company was incorporated?

Sol.: The allotment of shares is valid. Sec.35 of the Companies Act, 1956 provides that a certificate of incorporation issued by the Registrar in respect of any association shall be conclusive evidence of the fact that all the requirements of the Act have been compiled within respect of registration, and that the association is a Company authorised to be registered and duly registered under the Act.
Jubilee cotton mills ltd..
a.      The registrar issued a certificate of incorporation on Jan 8th but dated it Jan 6th which was the date he received the documents.
b.      On Jan 6th, the Company made an allotment of shares to Lewis.
Held, that the certificate was conclusive evidence of incorporation on Jan 6th and that the allotment was not void on the ground that it was made before the Company was incorporated.

Q.No.16. A Limited Company is formed with its articles stating that one Mr. Srivastava shall be the solicitor for the Company, and that he shall not be removed except on the ground of misconduct.  Can the Company remove Mr. Srivastava from the position even though he is not guilty of misconduct?

Sol.: As between outsiders and the Company, Articles do not give any right to outsiders against the Company, even though their names might have been mentioned in the Articles.  An outsider cannot take advantage of the Articles to form a claim thereon against the Company.  Thus, in the given case, Company shall succeed in removing Mr.Srivastava as the solicitor of the Company without incurring any obligations.

Q.No.17. A Company, in which the directors hold majority of the shares, altered its articles so as to give power to directors to acquire shares of any shareholder, who competed with the Company’s business, to transfer his shares, at their full value, to any nominee of the directors.  S had some shares in the Company, and he was in competition with the Company.  Is S bound by the alteration?

Sol.: The power of the members to effect alteration in the Articles by passing special resolution is limited in as much as the alteration must be bonafide and in the interest of the Company.  In the given case, alteration requires taking over the shares of only those who competed with the Company’s business. Therefore, empowering the directors to take over shares of such members seems to be in the general interest of the Company as a whole and hence shall be valid.  S shall be held bound by the alteration. 

Q.No.18. Advise Asiatic Government Security Life insurance Co. Ltd. Whether it can seek an injunction against ‘The New Asiatic Insurance Co. Ltd.’ Which was subsequently formed restraining it from having in its name the word ‘Asiatic’ on the ground that it has caused confusion and can deceive the public.

Sol.: The Companies Act, 1956 permits the promoters of a Company to choose any suitable name for the Company provided the name chosen is not undesirable.
A name may be considered undesirable where it is too similar to the name of an already existing Company.  In the present problem since the two Companies are  in insurance business, it may lead to a natural inference on the part of the public that the two are interrelated because of the word ‘Asiatic’ which is quite an imaginary word and does not mean anything.  Mere addition of the word ‘New’ is not likely to give an otherwise impression.  Therefore, on a suit by Asiatic Government Security Life Insurance Co. Ltd., Court is likely to advise the New Asiatic Insurance Co. Ltd. to change its name.

Q.No.19. The Articles of a Company provided that the shares of a member who became bankrupt would be offered for sale to other shareholders at a certain price.  Is the provision binding on the shareholders?

Sol.: The facts of the given problem are based on the decided case of Bore land Trustee vs. Steel Bros. & Co. Ltd., in which case, the provisions in the Articles were held to binding on the members.  It was held that ‘Shares having been purchased on these terms and conditions, it is impossible to say that those terms and conditions are not to be observed”. Thus, since Articles constitute a binding contract between the Company and its members, the shareholders shall be held bound by the stated provision in the Articles.

Q.No.20. The plaintiffs contracted with a director of the defendant Company and gave him a cheque under the contract. The Director could have been authorised under the Company’s articles, but was not in fact so authorized.  The plaintiff had not seen the Articles.  The Director misappropriated the cheque and the plaintiffs sued the Co. Is the Company liable?

Sol.: The problem relates to the protection that the outsider may claim against lack of authority on the part of the officers of the Company. The rule commonly known as the Doctrine of Indoor Management was first laid down in the case of The Royal British Bank vs. Turquand. However, it has been held that the rule of indoor management cannot be invoked in favour of a person who had no knowledge of the Articles of the Company.  It is because; in such a case the person cannot assume that the power (of which he has no knowledge) has been exercised.

Thus, in the present case, Company shall not be held liable by the Act of the director who has transacted beyond the scope of his authority.  A principal can be held liable for the frauds of his agent only to extent they are committed within the scope of the authority conferred upon him.

Q.No.21. A Company issued a bond under its common seal signed by two Directors. The Articles provided that the directors might borrow on bond such sums as they should be authorized by an ordinary resolution of the Company. No such resolution was passed. Is the Co. liable on the bond?
Sol.: Yes. The Company is liable on the bond.  The outsiders dealing with the Company are entitled to assume that as far as the internal proceedings of the Company are concerned, everything has been regularly done.  They are bound to read the registered document and to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the Memorandum or Articles.  (Royal British Bank vs. Turquand). The gist of the rule is that persons dealing with limited liability Companies are not bound to inquire into their indoor management and will not be affected by irregularities of which they had no notice.   The rule is based on public convenience and justice. 

Q.No.22. The Memorandum of Association of a Company was signed by two adult members and by a guardian of the other five minor members, the guardian signing separately for each minor member.  The Registrar registered the Company and issued under his hand a certificate of incorporation.  The plaintiff contended that
a.    Conditions of registration were not duly complied with, and
b.    That there were no seven subscribers to the Memorandum. Will the Court uphold his contention?

Sol.: The Certificate of incorporation is conclusive for all purposes.  According to Section 35 of the Companies Act, 1956, a certificate of incorporation given by the Registrar in respect of any association shall be conclusive evidence that all the requirements of this Act have been complied with in respect of registration and matters incidental thereto, and therefore the association will be considered as a company duly registered under this Act.

Q.No.23. The authorised signatory of a Co. issued a share certificate in favour of X, which apparently complied with the Company’s articles as it was purported to be signed by two directors and the secretary and it had the Company’s common seal affixed to it. Infact, the secretary had forged the signatures of the Directors and affixed the seal without any authority. Will the certificate be binding upon the Company?

Sol.: According to the doctrine of Indoor management, persons dealing with the Company are presumed to have read the registered documents and to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more i.e. they need not enquire into the regularity of internal proceedings as required by M&A.
But, this rule cannot be applied to forgery. In the case of forgeries, the Acts done in the name of the Company are void abinitio. A Co. can never be held bound by forgeries committed by its officers.
Ruban Vs. Great Fingual Ltd.:
¡       The plaintiff was the transferee of a share certificate issued by the defendant co. under its seal.                           
¡        The certificate was issued by the Company’s secretary, who affixed the seal and forged the signature of two directors.
¡        The certificate was held to be void.
Hence, it can be concluded that in the instant case, the certificate issued by the secretary by having forged the signatures of the directors and affixed the seal without any authority will not be binding upon the Company.

Q.No.24. ABC (Pvt.) Ltd. was incorporated in 10th June, 1996. A similar Company with identical name and same objects was also incorporated on 10th June1997. ABC (PVT.) Ltd. came to know about this and filed a petition on 10th January, 1998. Explain remedies available to the first Co.

Sol.: If a Company is inadvertently registered with a name which in the opinion of the Central Government, is identical with or too nearly resembles, the name by which a Company in existence has been previously registered, the Company registered later (Sec.22):
a.      May change its name, by ordinary resolution and with the previous approval of the Central Government Or
b.      The change Shall also be carried out if a direction is received from the Regional director. When so directed by the Regional director the Company shall, by ordinary resolution and with the previous approval of the Central Government, change its name within a period of 3 months or the extended period.
In the given case ABC (Pvt.) Ltd. can complain to the Regional director to issue suitable directions to the Company incorporated on 10th June, 1997 for change of its name. In this case, the Company filed a petition on 10.1.1998 within 12 months of date of registration of second Company and so the complaint shall be accepted.

Q.No.25. Eight signatories to the memorandum out of total ten were subsequently found to be forged. The memorandum was presented for registration and of registration was issued. The existence of the Company was disputed that the registration of the Company is void. Decide?

Sol.: The Company’s registration cannot be void because, under Section 35 of the Act, a certificate of incorporation is a conclusive evidence of the fact that all the statutory requirements of the Act in relation to registration of the Company have been complied with.

Q.No.26. The registered office clause of the memorandum of association of A ltd. does not contained name of the city. Because of this registrar of Companies refused to registered the memorandum of association. Is it Correct?

Sol.: No., Sec.13 states that the registered office clause shall contain the name of the State in which the registered office of the Company is situated. Further, it may be noted that the address of the registered office is not stated in the memorandum of association. If this was done, every change there in would require the amendment of the memorandum, which is a difficult procedure. Therefore the address is stated in AOA.

Q.No.27. A Company filed a petition before the NCLT for shifting its registered office to another state.  The S.G. objected against such shifting on the ground that it would adversely effect the government revenues and employment. Decide whether objection of the State Government is tenable.

Sol.: The objection of the State Government is not tenable. In Minerva Mills Ltd. Vs. Government of Maharashtra the court refused to accept the contention of the State on the ground of loss of revenue.

Q.No.28. It is not necessary to present a copy of Articles of Association to the Registrar of the Companies at the time of incorporation of the Public Company limited by shares.

Sol.: Sec.26 provides that the Companies limited by guarantee, private limited Companies, and unlimited Companies must have their own articles of association, while a public Company limited by shares may or may not have its own articles. Since in this case it is a public company limited by shares it is not necessary to present a copy of articles of association to ROC and in such a case Table A of Schedule I (Model articles) shall be deemed to be the Company’s articles.

Q.No.29. The promoters of your Company, incorporated on 9th April, 1996, had entered into a contract with M on 8th March, 1996 for supply of goods.  After incorporation, your Company does not want to proceed with the contract.  As a Company secretary, advise the management.

Sol.: Pre-incorporation contracts in general are void and hence not binding on the Company.  However, as per the Specific Relief Act, 1963 the party to the contract can enforce the contract against the Company if: (i) the Company had adopted the same after incorporation; and (ii) the contract is warranted by the terms of incorporation. Thus, unless the Company adopts the contract, the other party cannot enforce the same against the Co. But, promoters can be held liable. 

Q.No.30. Promoters made an application for registration of a Company in the name of MCN Association. At the time of application, another Company was already registered with the similar name but it was defunct for more than 10 year. Decide whether new Company can be registered in a name which is similar to any other existing Company’s name.
Sol.: A new Company cannot be registered with a name which is quite similar to any other existing Company’s name. But in the opinion of department of Company affairs it is possible if the exiting Company is a defunct Company (Non operational) for a long time.

Q.No.31. XYZ Co. Ltd. was in the process of incorporation. Promoters of the Company signed an agreement for the purchase of certain furniture for the Company and payment was to be made to the suppliers of furniture by the Company after incorporation. The Company was incorporated and the furniture was used by it. Shortly after incorporation, the Company went into liquidation and the debt could not be paid by the Company for the purchase of above furniture. As a result suppliers sued the promoters of the Company for the recovery of money. Examine whether promoters can be held liable for payment in the following cases:
a.    When the Company has already adopted the contract after incorporation?
b.    When the Company makes a fresh contract with the suppliers in terms of pre-incorporation contract?

Sol.: The promoters remain personally liable on a contract made on behalf of a Company which is not yet in existence. Such a contract is deemed to have been entered into personally by the promoters and they are liable to pay damages for failure to perform the promises made in the Company’s name, even though the contract expressly provided that only the Company shall be answerable for performance.
Further, a Company cannot ratify a contract entered into by the promoters on its behalf before its incorporation. The Company can, if it desires, enter into a new contract, after its incorporation with the other party. The contract may be on the same basis and terms as given in the pre-incorporation contract made by the promoters.
It is, therefore, safer for the promoters Acting on behalf of the Company about to be formed to provide in the contract that: (a) if the Company makes a fresh contract in terms of the pre-incorporation contract, the liability of the promoters shall come to an end; and (b) if the Company does not make a fresh contract within a limited time, either of the parties may rescind the contract.
Thus applying the above principles, the answers to the questions can be:
a.    The promoters in the first case will be liable to the suppliers of furniture. There was no fresh contract entered into with the suppliers by the Company. Therefore, promoters continue to be held liable in this case for the reasons given above.
b.    In the second case obviously the liability of promoters comes to an end provided the fresh contract was entered into on the same terms at that of pre-incorporation contract.

Q.No.32. X Co. Ltd, intended to buy a rubber in Peru. Its prospectus contained extracts from an experts’ report giving the number of rubber trees in the estate. The report was inaccurate. Will any shareholder buying the shares of the Co. on the basis of the above representation have any remedy against the Co.? Can the persons authorising the issue of prospectus escape from their liability?

Sol.: In the event of any mis-statement in a prospectus, the allottees have certain remedies against the Company as well as those responsible for the issue of the prospectus.  Thus, in the present case, the allottee shall have the right to claim compensation from the Company for any loss that he might have sustained in terms of the value of shares.  But, his claim against those responsible for issue of prospectus shall not succeed since they made the statement on the basis of the report of an expert whom they believed to be competent.  However, expert can be proceeded against.

Q.No.33. X a furniture dealer, entered into a contract with the Company for furnishing the Company’s office before it could obtain certificate of commencement of business. Can X recover the price of the furniture?

Sol.: A contract made by a public Company after incorporation but before it is entitled to commence business is provisional only, and is not binding on the Company. But as soon as the certificate to commence business is obtained the contract becomes binding on the Company automatically. In this case, X can enforce the contract and recover the price of the furniture from the Company after it obtains the certificate of commencement of business.

Q.No.34. A applied for 200 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 of mis-statement?

Sol.: If there is a mis-statement of material information in a prospectus and if it has induced any shareholder to purchase shares, he can rescind the contract and claim damages from the Company.  However, to claim relief, privity of contract is necessary.  Thus, whereas ‘A’ could have obtained the aforesaid relief, ‘B’ who has purchased shares from ‘A’ and not from the Company cannot proceed against the Company (Peek Vs. Gurney).

Q.No.35. Amar subscribed shares issued by F Ltd. The prospectus of F Ltd. included a statement which was misleading in the forms and contents. On the faith of the prospectus believing it to be a true, Amar subscribed for shares and sustained loss. Can Amar sue for compensation of loss? If so, who will be sued for such loss?

Sol.: Yes, Amar can sue for compensation of loss. Sec.62 of the Companies Act provides that an allottee is entitled to claim compensation from directors, promoters and any other persons who authorised the issue of the false prospectus, for damages sustained by reason of any untrue statement in it. However, he will have to prove that misrepresentation was of material fact; he Acted on misrepresentation and has suffered damages in consequence.
The following persons are liable to pay compensation for loss or damage sustained by reason of untrue statement included in a prospectus:
a.    Every person who is a director of the Company at the time of issue of prospectus.
b.    Every person who has authorised himself to be named and is named in the prospectus either as a director, or as having agreed to become a director, either immediately or after an interval of time;
c.    Every person who is a promoter of the Company; and
d.    Every person who has authorised the issue of the prospectus.
Mr. Amar having sustained loss because of having believed the facts given in the prospectus issued by F Ltd. to be true, can sue the four categories of persons mentioned above for compensation of his loss. Apart, from above, the allottee may sue the Company for damages for deceit.

Q.No.36. All statements in a prospectus issued by X & Co. Ltd. were literally true, but it failed to disclose that the dividends stated in it as paid were not paid out of revenue profits, but out of realised capital profits. The statement that the Company had paid dividends for a number of years was true. But the Company had incurred losses for all those years, however, no disclosure of this was made in the prospectus. An allottee of shares wanted to avoid the allotment on the ground that the prospectus did not disclose this fact which, in his opinion, was very material. Would he succeed?

Sol.: In the given case the Allottee of shares would succeed and he can avoid the contract on the grounds of untrue statement included in the prospectus. As per Sec.65 a prospectus shall be deemed to include an untrue statement:
a.      If it contains a statement which is misleading in the form or content.
b.      There is an Omission of any matter.

Nothing should be stated as fact which is not so, and no fact should be omitted. Thus it is not necessary that there should be false representation in prospectus, even every word included in it is true, the suppression of material facts may render it fraudulent.

Q.No.37. An allottee of shares in the Company has brought an action against director Q in the Company in respect of false statements in the prospectus. The director has contended that the statements were prepared by promoters and he had relied on them. Is the director liable?

Sol.: Sec.62 lays down civil liabilities for misstatements in prospectus. It renders every Directors liable for any misstatement in prospectus. Sec.62(2), however, lays down the circumstances under which the director concerned shall not be held liable. One of the plea that the director can take is that he had reasonable ground to believe and did upto the time of allotment of shares or debentures believe that the statement was true. In the instant case the director can absolve himself of the liability if he proves that he had reasonable grounds to believe and did believe that the statement prepared by the promoters was true. The onus of proof is on the director.

Q.No.38. No additional information in addition to the statutory requirements can be given in the prospectus.
Sol.: False., Sec.56 of the Act provides that the prospectus must contain matters specified in Part II of that Schedule. The section does not contain any negative provision regarding inclusion of additional information in the prospectus. Any additional information which may useful to the investors i.e. the contents given in Sec.56 are only minimum.

Q.No.39. In a scheme of amalgamation shareholders of Company ‘A’ was offered shares of Company ‘B’ in lieu of shares held by them in Company ‘A’. The offer letter issued by Company B to the shareholders of Company A can be regarded as prospectus?

Sol.: No, the offer Letter issued by Co. B to the shareholders of Co. A cannot be regarded as a prospectus because the offer has been made to specified persons only and no person other than those can avail the offer. The test for determination of the nature of offer is not who receives the offer but who can avail the offer. If offer can be availed only by the person to whom offer has been made, it is not a prospectus.

Q.No.40. The Directors of Vijay Electronics Ltd. allotted to themselves certain rights shares for which no application was made by certain shareholders as required by Section 81 of the Companies Act.  Discuss the validity of their action specially in view of the fact that market price of shares of the Company is 50% above par.

Sol.: If no application is made by the shareholders to whom the offer is made under Section 81 of the Companies Act, 1956, the Board of Directors may dispose of the shares in such a manner as they think most beneficial to the Company.  Therefore, unless shares were allotted to directors on terms unfavourable to the Company, the allotment would be valid.

Q.No.41. The Board of Directors of a Company reissued shares which were forfeited for non-payment of calls. As a Company secretary, tell whether Return of Allotment is required to be field?

Sol.: Return of allotment is required to be field only in case of allotment of shares. Allotment means an act of appropriation by the Board of directors of the Company out of previously unappropriated capital of the company to persons who have made application for shares. Since reissue of forfeited shares is not an allotment of shares no return of allotment need to filled.

Q.No.42. What is the remedy available to a Company if stock exchanges refuse to accept its application for listing of shares or debentures?

Sol.: Every Company going for public issue shall make an application to stock exchange(s) for obtaining the permission for listing of such shares or debentures. The prospectus shall state that application has been made for obtaining listing permission and names of such stock exchange(s). If the permission has not been applied for or having applied for has not been granted by the stock exchange(s) before the expiry of 10 weeks from the date of the closing of the subscription list the allotment made shall become void. [Sec.73(1)]. An appeal may be preferred against the refusal with Securities Appellate Tribunal & in the allotment shall not be void until the dismissal of appeal.

Q.No.43. A Co. forfeited 1000 shares of Rs.10 each on which Rs.8 had been paid up & subsequently disposed of same for Rs.1.50 each. Examine the validity of reissue of shares.
Sol.: Reissue can be at any price provided that the total sum paid by the original owner of shares together with the reissue price is not less than the par value. In other words, the discount on re-issue should not exceed the amount forfeited on those shares. The allotment is invalid since the shares have been reissued a price less than the amount remaining unpaid.

Q.No.44. The prospectus of a Company stated that application has been made to Delhi and Bombay Stock Exchanges for permitting its shares to be dealt there at. The Company applied to the said stock exchange. The Company got permission from Bombay stock Exchange only. The Company allotted shares to its applicants thereafter. Is this allotment of shares valid?

Sol.: Every company going for public issue shall make an application to stock exchange(s) for obtaining the permission for listing of such shares. The prospectus shall state that application has been made for obtaining listing permission and names of such stock exchange(s). If the permission has not been applied for or having applied for has not been granted by the all the stock exchanges before the expiry of 10 weeks from the date of the closing of the subscription list the allotment made shall become void. Therefore allotment is void in this case.

Q.No.45. Dowell Co. Ltd issued 10,000 shares of Rs. 10 each. The entire issue was under written by ICICI; but before the prospectus was issued the entire capital was subscribed by the friends of directors of the Company. Would ICICI be entitled to receive any underwriting commission?

Sol.: ‘Underwriting’ means ‘Guaranteeing’. It is a contract entered between the Company and underwriters for the purpose - in case the whole or an agreed portion of the shares or debentures are not applied for, then the underwriters will themselves apply for unsubscribed shares or debentures. As a return for the services rendered by them, the underwriters get U/C. It is payable even if the underwriters are not called upon to take any shares.

Q.No.46. As per the audited balance sheet of Dowell Ltd. as at 31st March, 1999, the details of share capital and reserves and surplus are as under.

Equity Share Capital
Reserves and surplus:
Profit and loss account
General reserves
Share premium
300.00

62.75
12.00
25.00
Break up of unsecured loans as at 31st March, 1999 in given below:

Deposits from public
Deposits from shareholders
13.00
3.62
Compute the limits up to which Dowell Ltd. can accept further deposits from public & shareholders.

Sol.: As per Balance Sheet of Dowell Ltd. as at 31.3.99.
Paid up capital:
Equity Share Capital
Share Premium
Free Reserves:
Profit and Loss a/c
General Reserves

300.00
25.00

62.75
12.00


325.00


84.75
409.75
                                    [Rs. in lakhs]
Particulars
From shareholders
From public
Limit up to which Dowell can accept deposits
       10% of Rs. 409.50 lakhs
       25% of Rs. 409.50 lakhs
Deposits as at 31st March, 1999
Maximum further deposits that can be accepted.

49.95

3.62
--
102.375

13.00
46.33
89.375
Q.No.47. M Company Limited issued 2,00,000 Equity shares of Rs. 10 each. You are allotted 100 shares. Explain any ten rights you have as a member of the Company.

Sol.: Refer to question rights of members in membership lesson (10th lesson).

Q.No.48. Is a person, holding Pref. shares in a Co., deemed to be a member of that Co.?

Sol.: Yes, a person holding preference shares in a Company is a member of that Company Membership in a Company can be obtained, by acquiring shares in it and such shares may be equity or preference. As such, a person holding preference shares shall be deemed to be its member.

Q.No.49. Can a subsidiary Company hold shares in its holding Company? S Ltd. held shares of H Ltd. before becoming its subsidiary. Will it be necessary for S Ltd. to surrender those shares on its becoming a subsidiary of H Ltd.?

Sol.: As per Section 42, a body corporate cannot be a member of a Company which is its holding Company and any allotment or transfer of shares in a Company to its subsidiary shall be void; except:
a.      Where the subsidiary holds shares in the holding Company in the capacity of a legal representative of a deceased shareholder, or
b.      Where the subsidiary holds shares as trustee, or
c.       Where the subsidiary was a member before the commencement of this Act or it held shares in the holding Company before it become its subsidiary. In these case the subsidiary can continue to hold the shares but, without to vote at meetings of the holding Company.
Since S Limited held shares of H Limited before it become its subsidiary, as per the provisions of Section 42, it is not necessary for S Limited to surrender those shares on its becoming a subsidiary of H Limited. S Limited in this case can continue to hold the shares of H Limited, but S Limited will not have the right to vote at meeting of H Limited in respect of the shares held by it.

Q.No.50. Shyam’s name appears in the register of members of a Company. He contends that he is not a member. The Company maintains that Shyam had orally agreed to become the member. Is the contention of Shyam correct?

Sol.: Yes; the contention of Shyam is correct. According to Section 41 (2) of the Companies Act, 1956, every person who agrees in writing to become a member of the Company and whose name is entered in its register, shall be a member of the Company. Agreement in writing can be either by way of application for allotment of shares or by transfer/transmission of shares. The subscribers to the memorandum of a Company are deemed to have agreed to become members of the Company and their names shall be entered in register of members on registration of the Company. There is no provision for becoming a member of the Company by oral agreement.