Company Law Unit 1 Introduction

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Company Law Unit 1 Introduction

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Company Law Unit 1 Introduction Notes cover all the exercise questions in UGC Syllabus. Company Law Unit 1 Introduction provided here ensures a smooth and easy understanding of all the concepts. Understand the concepts behind every Unit and score well in the board exams.

Introduction

COMPANY LAW

1. The President of NCLT shall hold office until he attains the age of ____________ years.

(a) 60

(b) 67

(c) 65

(d) 70

Ans: (b) 67.

2. Maximum age limit of members of NCLT shall be _____________ years.

(a) 60

(b) 67

(c) 65

(d) 70

Ans: (c) 65.

3. Maximum age of Chairperson of NCLAT shall be ____________ years.

(a) 60

(b) 67

(c) 65

(d) 70

Ans: (d) 70

4. Maximum age of other members of NCLAT shall be ____________ years.

(a) 60

(b) 67

(c) 65

(d) 70

Ans: (b) 67.

1. Define the term court.

Ans: According to Section 2(29) of Companies Act, 2013, “court” means:

(i) The High Court having jurisdiction in relation to the place at which the registered office of the company concerned is situate, except to the extent to which jurisdiction has been conferred on any district court or district courts subordinate to that High Court under sub-clause (ii).

(ii) The district court, in cases where the Central Government has, by notification, empowered any district court to exercise all or any of the jurisdictions conferred upon the High Court, within the scope of its jurisdiction in respect of a company whose registered office is situate in the district.

(iii) The Court of Session having jurisdiction to try any offence under this Act or under any previous company law.

(iv) The Special Court established under section 435.

(v) Any Metropolitan Magistrate or a Judicial Magistrate of the First Class having jurisdiction to try any offence under this Act or under any previous company law.

2. What are appealable orders in NCLAT?

Ans: NCLAT shall hear appeals against:

(i) Order of the Tribunal.

(ii) Order of NFRA.

(iii) Any direction, decision or order referred to in section 53N of the Competition Act, 2002.

1. How is NCLT constituted?

Ans: The Central Government shall constitute a Tribunal to be known as the National Company Law Tribunal (NCLT) consisting of a President and such number of Judicial and Technical members.

(i) President: The President shall be a person who is or has been a Judge of a High Court for five years.

(ii) Judicial member: A person shall not be qualified for appointment as a Judicial Member unless he-

(a) Is, or has been, a judge of a High Court. or

(b) Is, or has been, a District Judge for at least five years. or

(c) Has, for at least ten years, been an advocate of a court.

(iii) Technical member: A person shall not be qualified for appointment as a technical member unless he-

(a) Has, for at least fifteen years been a member of the Indian Corporate Law Service or Indian Legal Service and ‘has been holding the rank of Secretary or Additional Secretary to the Government of India. or

(b) Is, or has been, in practice as a Chartered Accountant for at least fifteen years. or

(c) Is, or has been, in practice as a Cost Accountant for at least fifteen years. or

(d) Is, or has been, in practice as a Company Secretary for at least fifteen years. or

(e) Is a person of proven ability, integrity and standing having special knowledge and professional experience of not less than fifteen years in industrial finance, industrial management, industrial reconstruction, investment and accountancy;

(f) Is, or has been, for at least five years, a presiding officer of a Labour Court, Tribunal or National Tribunal constituted under the Industrial Disputes Act, 1947.

2. How is NCLAT Constituted?

Ans: The Central Government shall, by notification, constitute, an Appellate Tribunal to be known as the National Company Law Appellate Tribunal (NCLAT) consisting of a chairperson and such number of Judicial and Technical Members, not exceeding eleven, as the Central Government may deem fit.

(i) Chairperson: The chairperson shall be a person who is or has been a Judge of the Supreme Court or the Chief Justice of a High Court.

(ii) Judicial member: Judicial member shall be a person who is or has been a Judge of a High Court or is a Judicial Member of the Tribunal for five years.

(iii) Technical member: A technical member shall be a person of proven ability, integrity and standing having special knowledge and professional experience of not less than twenty-five years in industrial finance, industrial management, industrial reconstruction, investment and accountancy.

3. How are members of NCLT and NCLAT appointed?

Ans: The President of the Tribunal and the chairperson and Judicial Members of the Appellate Tribunal, shall be appointed after consultation with the Chief Justice of India.

The Members of the Tribunal and the Technical Members of the Appellate Tribunal shall be appointed on the recommendation of a Selection Committee consisting of-

(a) Chief Justice of India or his nominee – Chairperson.

(b) A senior Judge of the Supreme Court or Chief Justice of High Court-Member.

(c) Secretary in the Ministry of Corporate Affairs – Member. and

(d) Secretary in the Ministry of Law and Justice – Member.

It is to be noted that where in a meeting of the Selection Committee, there is equality of votes on any matter, the Chairperson shall have a casting vote.

4. Write a note on Special Courts under Companies Act 2013.

Ans: The Central Government may, for the purpose of providing speedy trial of offences under this Act, by notification, establish or designate as many Special Courts as may be necessary.

Establishment of Special Courts [Section 435]:

A Special Court shall consist of-

(a) A single judge holding office as Session Judge or Additional Session Judge, in case of offences punishable under this Act with imprisonment of two years or more. and

(b) A Metropolitan Magistrate or a Judicial Magistrate of the First Class, in case of other offences, who shall be appointed by the Central Government with the concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is working.

Offences triable by Special Courts [Section 436]:

(a) All offences with imprisonment of two years or more shall be triable only by the Special Court established or designated for the area in which the registered office of the company is situated. All other offences shall be tried by Metropolitan Magistrate or a Judicial Magistrate of First Class.

(b) Where a person accused of, or suspected of the commission of, an offence under this Act is forwarded to a Magistrate, such Magistrate may authorise the detention of such person in such custody as he thinks fit for a period not exceeding fifteen days in the whole where such Magistrate is a Judicial Magistrate and seven days in the whole where such a Magistrate is an Executive Magistrate.

(c) A Special Court may, upon perusal of the police report of the facts constituting an offence under this Act or upon a complaint in that behalf, take cognizance of that offence without the accused being committed to it for trial.

When trying an offence under this Act, a Special Court may also try an offence other than an offence under this Act with which the accused may, under the Code of Criminal Procedure be charged at the same trial. The Special Court may, if it thinks fit, try in a summary way any offence under this Act which is punishable with imprisonment for a term not exceeding three years:

When at the commencement of, or in the course of, a summary trial, it appears to the Special Court that the nature of the case is such that it is, for any reason, undesirable to try the case summarily, the Special Court shall, after hearing the parties, record an order to that effect and thereafter recall any witnesses who may have been examined and proceed to hear or rehear the case in accordance with the procedure for the regular trial.

1. An association where the number of members exceeds ____________ shall be an illegal association.

(a) 50

(b) 40

(c) 35

(d) 25

Ans. (a) 50.

2. A company has a ____________ legal entity.

Ans: Separate.

3. A private limited company which is subsidiary of a public limited company shall be treated as a _____________.

(a) Small company.

(b) Private limited company.

(c) Dormant company.

(d) Public limited company.

Ans: (d) public limited company.

1. What do you mean by illegal association?

Ans: According to Section 464 of the Companies Act, 2013, any association wherein number of members exceed 50 and which is formed for the purpose of carrying on any business that has for its object the acquisition of gain, shall be an illegal association. However, the following shall not be considered as illegal association.

(i) A company formed under this Act or.

(ii) A company formed under any other law for the time being in force.

(iii) A Hindu Undivided family carrying on any business.

(iv) An association or partnership, if it is formed by professionals who are governed by special Acts.

2. Define a small company.

Ans: According to Section 2(85) of the Companies Act, 2013, a small company means a company other than a public company whose:

(i) Paid up share capital does not exceed 50 lacs or such higher prescribed amount which shall not be more than Rs. 10 crores.

(ii) Turnover of the preceding financial year does not exceed Rs. 2 crores or such higher prescribed amount which shall not be more than Rs. 100 crores.

3. Explain the concept of Dormant Companies as laid down in Companies Act 2013.

Ans: As per Section 455 (1) of the Companies Act, 2013, where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar for obtaining the status of a dormant company.

“Inactive company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years.

1. Define a company. Explain the characteristics/features of a company.

Ans: According to Section 3 (1) (i) of the Companies Act, 1956, “Company means a company formed and registered under this act or an existing company.” However, this definition fails to lay out the basic concept of a company. In the words of Lord Haney, “a company is an incorporated association which is an artificial person created by law, having a separate entity with a perpetual succession and a common seal.” A company is, thus, an artificial person created by law.

According to Section 2(22)(20) of the Companies Act, 2013, “Company means a company incorporated under this act or under any previous company law.”

Thus, there is no change in the definition of ‘Company’ with the enactment of the Companies Act, 2013. However, the concept of ‘company’ has undergone a change. A new concept called One Person Company (OPC) has been introduced which enables a single person to run a company.

Following are the main characteristics/features of a company:

(i) Separate legal entity: A company is legally regarded as an independent entity having a separate corporate existence. It is regarded as an artificial legal person which deals in its own name.

(ii) Perpetual succession: A company enjoys perpetual succession, i.e. it has a continuous existence. The life of a company is not affected by the life of its members. It is created by a legal process and can be liquidated legally.

(iii) Separate property: A company is capable of owning, controlling, managing, enjoying and disposing off property in its own name. The members do not have an insurable interest in the property of the company.

(iv) Capacity to sue and be sued: A company being an independent legal personality can sue and be sued in its own name.

(v) Common seal: Since a company does not have physical existence, it has to act through natural persons who are directors of the company and such contracts must be undertaken under the seal of the company. The common seal is the official signature of the company.

(vi) Limited liability: The liability of members of a company is limited to unpaid value of shares in case of a company limited by shares, and to the amount undertaken to be contributed to the assets of a company in the event of its being wound up, in case of company limited by guarantee.

(vii) Transferability of shares: The shares of a company are freely transferable. Previously, as per Section 3(i)(iii) of the Companies Act, 1956, certain restrictions were imposed by its articles prohibiting any invitations or acceptance of deposits from persons other than its members, directors or their relatives in case of private companies. However, Section 2(68) of the Companies Act, 2013 omits this requirement. Though articles are not required to contain the prohibition, the same shall apply by reason of Sections 73 and 76 of the 2013 Act.

Section 73: Prohibition on acceptance of deposits from the public.

Section 76: Acceptance of deposits from the public by certain companies.

(viii) Incorporated association: A company is an association which comes into existence after incorporation under the Companies Act. If not registered, it shall be an illegal association.

2. What are the various kinds of companies? Explain.

Ans: The various kinds of companies are:

(A) Incorporated company: An incorporated company is formed for the purpose of carrying on a business and is incorporated under the Companies Act, 1956, Companies Act, 2013 or some earlier Companies Acts.

The various kinds of companies recognised by the Companies Act, 2013 are:

(i) Public companies limited by shares.

(ii) Public companies limited by guarantee:

(a) Having a share capital.

(b) Not having a share capital.

(iii) Public unlimited companies:

(a) Having a share capital.

(b) Not having a share capital.

(iv) Private companies limited by shares.

(v) Private companies limited by guarantee:

(a) Having a share capital.

(b) Not having a share capital.

(vi) Private unlimited companies:

(a) Having a share capital.

(b) Not having a share capital.

(vii) One Person Company (OPC) limited by shares.

(viii) OPC limited by guarantee:

(a) Having a share capital.

(b) Not having a share capital.

(ix) OPC unlimited:

(a) Having a share capital.

(b) Not having a share capital.

In addition, following are also recognised as companies, viz.:

(i) Foreign companies.

(ii) Government companies.

(B) Unincorporated companies: Large partnerships are generally called unincorporated companies.

The main features are:

(i) These are not regarded as distinct entities separate from members constituting them.

(ii) Their shares may be transferable, but liability of their members is unlimited.

(iii) These companies continue even after death or insolvency of a member and their management is vested in a selected body of directors to the exclusion of members generally.

Restrictions: Such companies can no longer be formed under the Companies Act, 1956 if the number of their members exceeds 10 in the case of companies carrying on banking business, and 20 in case of any other business [Section 11 of Companies Act, 1956].

Companies may also be classified on the following basis:

(I) On the basis of incorporation:

(i) Statutory companies: Companies created by a Special Act of legislature or Parliament such as Reserve Bank of India, Life Insurance Corporation of India, etc. are called statutory companies. The provisions of Companies Act, 1956 apply to them only, if they comply with the provisions of Special Acts under which they are framed.

For example: Enterprises of national importance such as tramways, gas and electricity companies.

Registered companies: Companies formed and registered under the Companies Act, 1956 or any other earlier Companies Acts are called registered companies.

(II) On the basis of liability:

(i) Companies with limited liability:

(a) Companies limited by shares: Companies limited by shares are the most common type of companies where the liability of members of a company is limited to the amount unpaid on shares.

Main features:

1. The liability can be enforced during the existence of the company as well as during winding up of the company.

2. If the shares are fully paid, liability of members holding such shares are nil.

(b) Companies limited by guarantee: In companies limited by guarantee, liability of members of a company is limited to a fixed amount which the members undertake to contribute to the assets of the company in the event of its being wound up.

Main features:

1. It has a separate legal personality distinct from its members.

2. The liability of its members is limited.

3. The Articles of such a company must state number of members with which the company is to be registered.

4. These companies are formed for the promotion of art, science, culture, charity, sports, commerce or for some similar purpose and not for profit.

5. They may or may not have a share capital. However, these companies have reserve capital, which cannot be mortgaged or charged in any before liquidation of the company. At the time of liquidation, it can be called by the company for paying the cost of liquidation and general liabilities.

(ii) Unlimited companies: Unlimited companies are those companies having unlimited liability. Section 3 of 2013 Act, specifically provides that 7 or more persons (2 or more in case of a private company) may form an incorporated company, with or without limited liability.

Main features:

(a) Every member is liable for debts of the company, as in an ordinary partnership, in proportion to his interest in the company.

(b) It may not have a share capital.

(c) If it has a share capital, it may be a public company or a private company. It must have its own Articles of Association. The Articles must state the number of members and amount of share capital with which company is to be registered.

(III) On the basis of number of members:

(i) Private company: According to Section 2(68), a private company means a company which by its articles:

(a) Restricts the right to transfer its shares.

(b) Except in case of one person company limits number of its members to 200 not including-

1. Persons who are in employment of company. and

2. Persons who, having been formerly in employment of company, were members of company while in that employment and have continued to be members after the employment ceased. Provided that, where two or more persons hold one or more shares in a company jointly, they shall for the purpose of the clause (b) be treated as a single member.

(c) Prohibits any invitation to public to subscribe for any securities of a company.

(ii) Public company: A public company means a company which:

(a) Is not a private company.

(b) Has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital as may be prescribed [Section 2(71)].

(iii) One Person Company (OPC): One person company means a company which has only one person as a member [Section 2 (62)].

It is a private company in which:

(a) One person should subscribe his name to a memorandum and comply with the requirements of registration [Section 3(1)(c) of the Companies Act, 2013].

(b) In the event of death of subscriber, the name of the person who shall be the member of the Company must be mentioned in the memorandum of association.

(IV) On the basis of control:

(i) Holding company: According to Section 2(46), “For the purposes of this Act, a company shall be deemed to be the holding company of another if, but only if, that other is its subsidiary.”

(ii) Subsidiary company [Section 2(87)]: “Subsidiary company” or “subsidiary’ in relation to any other company (that is to say the holding company), means a company in which the holding company:

(a) Controls the composition of the Board of Directors. or

(b) Exercises or controls more than one half of the total share capital either at its own or together with one or more of its subsidiary companies.

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

(V) On the basis of ownership:

(i) Government company: According to Section 2(45), “Government company means any company in which not less than fifty one percent of the paid-up share capital is held by-

(a) The central government, or by any state government. or

(b) Partly by the central government and partly by one or more state governments. and.

(c) Includes a company which is a subsidiary of a government company as thus defined.”

(ii) Non-government company: Non-government company is controlled and operated by a private company.

3. Explain the stages of formation of a company.

Ans: The stages of formation of a company are:

(A) Type of company: A promoter takes all necessary steps before formation of a company. It has to be decided whether the company should be a public company, private company or one person company.

(B) Incorporation of a company: Section 3 of the Companies Act, 2013 provides that a company may be formed by:

(i) Seven or more persons, where the company to be formed is a public company.

(ii) Two or more persons, where the company to be formed is a private company. or

(iii) One person, where the company to be formed is one person company, i.e. a private company associated for any lawful purpose may by subscribing his name or their names to the memorandum of association and complying with the requirements of registration as mentioned in the Act.

(C) Application for availability of name of company: According to Section 4 of the Companies Act, 2013 the memorandum of association of a company should state the name of the company. Before registration, it is desirable to ascertain from the Registrar of Companies, whether the proposed name of the company approved or not. Section 4(4) and 4(5)(i) of the Companies Act, 2013 incorporate the procedural aspects of application for availability of name of proposed company or proposed name of existing company.

(D) Registration of the company: Following documents along with necessary fees should be filed with the Registrar at the time of registration:

(i) Memorandum of association signed by at least seven persons, if it is a public company and two persons in case of a private company [Section 7]. 

(ii) Articles of association signed by all those persons who have signed memorandum of association [Section 7]. 

(iii) Written consent by directors that they have agreed to act as directors [Form No. DIR-2][Section 7].

(iv) List of directors, their full addresses and occupations.

(v) Statement of authorised capital.

(vi) Statutory declaration stating that all requirements of the Companies Act and other formalities relating to registration have been complied with [Section 7]. Such declaration shall be signed by any one of the following persons:

(a) An advocate, a chartered accountant, cost accountant or a company secretary in practice, who is engaged in the formation of the company. or

(b) A person named in the Articles as a director, manager or secretary of the company.

(vii) An affidavit from each of the subscribers to the memorandum and from persons named as first directors, if any, in the articles is required to be filled with ROC.

Under Section 12 [Form No. INC-22], a company shall from the first day on which it begins to carry on its business, or as from 30th day after the day of its incorporation, whichever is earlier, should have a registered office.

(E) Certificate of incorporation: If all the documents mentioned above are found in order and the Registrar of Companies is satisfied that all the requirements, aforesaid, have been complied with by the company and that it is authorised to be registered under the Act, he shall register the memorandum and articles of association, if any. On registration, the registrar issues a ‘certificate of incorporation’. With the issue of this certificate, the company takes birth as a separate legal entity.

(F) Commencement of business: According to Section 149 of the Companies Act, 1956 a private company can start its business after getting a certificate of incorporation. But a public company can commence its business only after getting a certificate of commencement of business. A public company having a share capital should issue a prospectus inviting the public to subscribe to its share capital to obtain a certificate of commencement of business.

Where a company having a share capital has not issued a prospectus, the company has to file a “statement in lieu of prospectus” at least 3 days before allotment.

4. The theory of ‘lifting of the corporate veil cannot be ignored’. Discuss.

Ans: A company is a legal person and is distinct from its members. It bears its own name and a seal of its own. It can sue and be sued in its own name (Saloman v. Salomon & Co. Ltd.). This principle may be referred to as “veil of incorporation.” However, where this principle is misused for fraudulent and dishonest purposes, it becomes necessary to break through or “lift corporate veil” and find out real beneficiaries of corporate fiction. The court breaks through the corporate shell and applies the principle of “lifting off or piercing through the corporate veil”.

The circumstances under which a court may lift the corporate veil are:

(A) Common law exceptions:

(i) Separate legal entity: The court is authorised to lift the veil where company is a mere cloak or sham.

(ii) Protection of a company’s own justified interest: The court may lift the corporate veil, if a company itself wants that its separate legal entity should be ignored and treated like members.

(iii) Prevention of fraud or improper conduct: The legal personality of a company may be disregarded in the interest of justice where the machinery of incorporation has been used for some fraudulent purpose.

(B) Statutory exceptions:

(i) Number of members below statutory minimum [Section 45]: If a company carries on business for more than six months after the number of members of a company is reduced:

(a) Below seven, in case of a public company. or

(b) Below two, in case of a private company.

Every person who is a member of a company during that time shall be:

(a) Severally liable for payment of whole debts of a company contracted during that time.

(b) May be severally sued, only if he is cognizant of the fact that it is carrying on business below statutory minimum

(ii) Failure to refund application money [Section 39]: If a company fails to repay the money to applicants who have not been allotted shares within 30 days after issue of prospectus, directors of the company shall be jointly and severally liable to repay that money with interest at the rate of 6% p.a. from expiry of the 30th day.

(iii) Misdescription of company’s name [Section 12 1: An officer or an agent of a company shall be personally liable where he does any act or enters into any contract without fully or properly mentioning company’s name and address of its registered office.

5. Write a short note on associations not for profit.

Ans: According to Section 13(1), “the memorandum of every company shall state the name of the company with “Limited” as the last word of the name in the case of a public limited company, and with “Private Limited” as the last word of the name in the case of a private limited company.” But the Central Government permits certain associations to be registered without complying the above conditions provided the following conditions are satisfied:

Conditions for grant of licence:

Section 25(1) provides that where it is proved to the satisfaction of the Central Government that an association–

(a) Is about to be formed as a limited company for promoting commerce, art, science, charity or any other useful object. and

(b) Intends to apply its profits, if any, or other income in promoting its objects and to prohibit the payment of any dividend to its members, the Central Government may by licence, direct that the association may be registered as a company with limited liability, without the addition of the word “Limited” or the words “Private Limited’

6. State the provisions relating to illegal association.

Ans: Section 11 lays down the provisions related to illegal associations: 

(i) No company, association or partnership consisting of more than ten persons shall be formed for the purpose of carrying on:

(a) The business of banking [Section 11(1)].

(b) Any other business that has for its object the acquisition of gain by the company, association or partnership or by the individual members thereof [Section 11(2)] unless it is registered as a company under this Act, or is formed in pursuance of some other Indian law.

(ii) This section shall not apply to a joint family as such carrying on a business and where a business is carried on by two or more joint families, minor members of such families shall be excluded [Section 11(3)].

Consequences of illegal association:

Every member of a company, association or partnership carrying on business in contravention of this section; shall be 

(a) Personally liable for all liabilities incurred in such business [Section 11(4)].

(b) Punishable with fine which may extend to ten thousand rupees [Section 11(5)].

1. XBRL stands for ____________.

Ans: EXtensible Business Reporting Language.

2. An ___________ is the electronic equivalent of the paper form.

Ans: E-form

3. Each transaction under e-filing is uniquely identified by a.

(a) SRN.

(b) FCRN.

(c) Prefill.

(d) Prescrutiny.

Ans: (a) SRN.

1. Define the term pre-fill.

Ans: Pre-fill is functionality in an e-Form that is used for filling automatically, the requisite data from the system without repeatedly entering the same. For example, by entering the CIN of the company, the name and registered office address of the company shall automatically be pre-filled by the system without any fresh entry.

2. What do you understand by pre scrutiny of forms?

Ans: Pre scout is a functionality that is used for checking whether certain core aspects are properly filled in the e-Form or not.

3. Define SRN.

Ans: Each transaction under e-filing is uniquely identified by a Service Request Number (SRN). On filing of an e-form, the system (MCA) will generate and provide a Service Request Number (SRN). The user can check the status of the document/transaction, by entering the SRN on the portal of MCA at any time.

4. What do you mean by an attachment in an e-form?

Ans: An attachment refers to a document that is sent as an enclosure with an e-Form by means of an attached file. The objective of the attachment is to provide details relevant to the e-Form for processing. While some attachments are optional, some are mandatory in nature.

5. What is meant by the term DSC?

Ans: DSC stands for Digital Signature Certificate. DSC is the format for physical or paper certificates or authentication. DSC can be classified into:

Class 2: Here, the identity of a person is verified against a trusted, pre-verified database.

Class 3: This is the highest level where the person needs to present himself or herself in front of a Registration Authority (RA) and prove his/ her identity.

1. Explain provisions relating to formation of a company.

Ans: The provisions relating to formation of company are as follows:

(i) An application for registration of a company shall be filed, with the Registrar within whose jurisdiction the registered office of the company is proposed to be situated, in Form No. INC-32 (SPICe)

(ii) There shall be filed with the Registrar within whose jurisdiction the registered office of a company is proposed to be situated, the following documents and information for registration, namely:

(a) The memorandum and articles of the company duly signed by all the subscribers to the memorandum.

(b) A declaration in the prescribed form by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of the company, and by a person named in the articles as a director, manager or secretary of the company, that all the requirements of this Act and the rules made thereunder in respect of registration and matters precedent or incidental thereto have been complied with.

(c) An declaration from each of the subscribers to the memorandum and from persons named as the first directors, in the articles that he is not convicted of any offence in connection with the promotion, formation or management of any company, or that he has not been found guilty of any fraud or misfeasance or of any breach of duty to any company.

(d) The address for correspondence till its registered office is established.

(e) The particulars of name, including surname or family name, residential address, nationality and such other particulars of every subscriber to the memorandum along with proof of identity, as may be prescribed, and in the case of a subscriber being a body corporate, such particular as may be prescribed.

(f) The particulars of the persons mentioned in the articles as the first directors of the company, their names, including surnames or family names, Director Identification Number, residential address, nationality and such other particulars including proof of identity as may be prescribed. and

(g) The particulars of the interests of the persons mentioned in the articles as the first directors of the company in other firms or bodies corporate along with their consent to act as directors of the company in such form and manner as may be prescribed.

2. What are the steps to be followed for online filing of documents?

Ans: The following steps are to be followed for online filing of documents:

(i) Select a category to download an e-Form from the MCA portal.

(ii) Fill the downloaded e-Form.

(iii) Attach the necessary documents as required.

(iv) Use the Prefill button in the e-Form.

(v) The applicant or a representative of the applicant needs to sign the document using a digital signature.

(vi) Click the Check Form button available in the e-Form. System will check the mandatory fields, mandatory attachment(s) and digital signature (s).

(vii) Upload the e-Form. For doing the same one has to access the MCA Portal by signing in with their username and authentication details.

(viii) The user will be shown an option of uploading e-Forms. On accessing the tab, the user will be able to upload the desired e-form.

(ix) The system will calculate the fee, including late payment fees based on the due date of filing, if applicable.

(x) MCA21 will provide a unique transaction number, the Service Request Number (SRN) which can be used by the applicant for enquiring the status pertaining to that transaction.

(xi) Filing will be complete only when the necessary payments are made.

3. Write a note on XBRL.

Ans: XBRL is a language for reporting the electronic communication of business and financial data to the regulatory authorities. It is being used across the world for reporting business and financial data. It provides major benefits in the preparation, analysis and communication of business information.

The Ministry of Corporate Affairs has mandated the following class of companies mentioned below to file financial statements in XBRL (eXtensible Business Reporting Language) mode and by using the XBRL taxonomy:

(i) All companies listed with any Stock Exchange(s) in India and their Indian subsidiaries. or

(ii) All companies having paid-up capital of Rupees five crore and above. or

(iii) All companies having turnover of rupees one hundred crore and above. or

(iv) All companies who were required to file their financial statements for FY 2010-11, using XBRL mode.

XBRL tags: In XBRL, information is not treated as a static block of text or set of numbers. Instead, information is broken down into unique items of data (e.g. total liabilities = 100). These data items are then assigned mark-up tags that make them computer-readable. For example, the tag <Liabilities> 100</Liabilities > enables a computer to understand that the item is liabilities, and it has a value of 100.

Computers can treat information that has been tagged using XBRL ‘intelligently”; they can recognise, process, store, exchange and analyse it automatically using software.

Because XBRL tags are formed in a universally-accepted way, they can be read and processed by any computer that has XBRL software. XBRL tags are defined and organised using categorisation schemes called taxonomies.

XBRL taxonomies: Different countries use different accounting standards. Reporting under each standard reflects differing definitions. The XBRL language uses different dictionaries, known as ‘taxonomies’, to define the specific tags used for each standard. Different dictionaries may be defined for different purposes and types of reporting.

Taxonomies are the computer-readable ‘dictionaries’ of XBRL. Taxonomies provide definitions for XBRL tags, they provide information about the tags, and they organise the tags so that they have a meaningful structure.

As a result, taxonomies enable computers with XBRL software to:

(i) Understand what the tag is (e.g. whether it is a monetary item, a percentage or text).

(ii) What characteristics the tag has (e. g. if it has a negative value).

(iii) Its relationship to other items (e.g. If it is part of a calculation).

BENEFITS OF XBRL:

XBRL offers major benefits at all stages of business reporting and analysis. The benefits are seen in automation, cost saving, faster, more reliable and more accurate handling of data, improved analysis and in better quality of information and decision-making.

(i) It saves cost and improves efficiency in handling business and financial information.

(ii) It is extensible and flexible which can adapt any changes according to the requirements.

(iii) It enables producers and consumers of financial data to switch resources away from costly data.

(iv) The users of financial data are able to make more efforts on analysis.

4. Who is a promoter? What is the position or status of a promoter?

Or

Write short notes on promoter and his legal position.

Ans: As per Section 2(69) of Companies Act, 2013, promoter means a person:

(a) Who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92. or

(b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise. or

(c) In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.

Legal position of promoter:

A promoter is neither an agent nor trustee of company. However his position is similar to that of an agent and trustee. A promoter stands in a fiduciary capacity towards the company. The consequences of this rule are as follows:

(i) He cannot make any direct or indirect profit at the expense of the company, without the knowledge and consent of the company. If he does so, the company can compel him to account for it.

(ii) He is not allowed to derive a profit from the sale of his own property to the company unless all material facts are disclosed.

(iii) A promoter who wishes to sell his own property to the company must make a full disclosure of his interest in the transaction.

(iv) The promoter shall not make an unfair or unreasonable use of his position. He must take care to avoid anything which has the appearance of undue influence or fraud.

5. Discuss the functions of the promoter of a company.

Ans: The functions of the promoter of a company are as follows:

(i) Conceiving the idea of the company: The process of promotion of a company begins with an idea of forming a company. A promoter has to conceive an idea about the activities that he wants to carry out through the proposed company.

(ii) Investigation and verification of idea: Another important function of a company promoter is to investigate and verify the idea conceived. He must gather facts and information about the idea and test its technical feasibility and commercial and financial viability.

(iii) Assembling the requirements: Once the idea is verified, the promoter must make every effort to assemble the basic requirements. He must have a fully equipped office and qualified staff and a company secretary, if possible. He must find out the subscribers to the memorandum and the first directors of the company. He must also plan about size, location, layout of the business.

(iv) Making preliminary contracts: A promoter is also required to make certain preliminary contracts. Such contracts may relate to purchase of land, taking over of an existing business or factory or plant and machinery, securing patents, copyright, etc.

(v) Financial planning: The promoter must prepare a plan for preliminary expenses. He is also required to decide about the capitalisation, capital structure, time and mode of capital issue, etc. He is also to make agreements with bankers, underwriters, brokers, issue managers, etc.

(vi) Compliance of legal formalities: The promoter must comply with the following legal formalities:

(a) To decide the place of registered office.

(b) To get the name approved by the Registrar.

(c) To decide about the capital of the company.

(d) To decide the objectives of the company.

(e) To prepare the memorandum and get it printed.

(f) To prepare the articles and get them printed.

(g) To get the memorandum signed by the subscribers.

(h) To get the written consent of first directors.

(i) To appoint solicitors, accountants, engineers, valuers, etc.

(j) To get a declaration that the formalities have been complied with.

(vii) Getting the company incorporated: The Registrar, if satisfied regarding the completion of legal formalities, shall register the company and issue a certificate of incorporation.

(viii) Arranging for capital subscription: The promoter gets the prospectus or statement in lieu of the prospectus prepared and filed with the Registrar. Thereafter, he gets the shares allotted and fulfils the requirement of minimum paid up capital.

(ix) Getting certificate of commencement of business: After receiving minimum subscription, the promoter applies to the Registrar. The Registrar, if satisfied, shall issue the certificate.

6. Describe the duties and liabilities of promoters of a company.

Ans: The Companies Act, contains no provisions regarding the duties of promoter. However, it imposes certain liabilities on promoters for untrue statement in the prospectus and any sort of fraudulent trading.

Fiduciary duties: There are two fiduciary duties of a promoter:

(i) A promoter cannot make any profit at the expense of the company he promotes. If the promoter does so without the knowledge and consent of the company, the company can compel him to account for it.

(ii) A promoter cannot derive profit from the sale of his own property to the company. It is necessary for him to disclose all material facts. If a promoter without making a full disclosure sells his property to the company, the company may either repudiate the sale or affirm the contract.

Duties under Indian Contract Act: The promoter’s duty is same as that of a person acting on behalf of another individual without a contract of employment. Under Section 17 of Indian Contract Act, if he does make any misrepresentation in a prospectus he may be held guilty of fraud and would be liable for damages under Section 19 of that Act.

The liabilities of a promoter are as follows:

(i) Liability to account for secret profits: A promoter is liable to the company for all secret profits made by him without full disclosure to the company.

(ii) Liability to pay for damages: A promoter is liable to pay for damages that the company suffered by breach of fiduciary duty.

(iii) Liability for preliminary contracts: He is liable for the preliminary contracts made by him unless they are warranted by the terms of incorporation or adopted by the company after incorporation.

(iv) Liability for non-disclosure in the prospectus: The promoter is liable to compensate the shareholders for damages suffered due to non-disclosure in the prospectus [Section 56].

(v) Liability for untrue statement or misstatement in the prospectus: The liabilities of a promoter for any untrue statement or misstatement in the prospectus are as follows:

(a) He may be held liable for rescission of contract for purchase of shares.

(b) He may be sued for damages.

(c) He shall be punishable with imprisonment for a term which may extend to two years or with fine upto 50,000 or with both. [Section 62]

(vi) Liability for offences in connection with promotion, formation or management: The court may suspend a promoter from taking part in management of the company for a period of five years if he is convicted of the offence in connection with the promotion, formation or management of the company. [Section 203]

(vii) Liability for breach of duty: If during the liquidation of the company, it is found that the promoter has been guilty of breach of any duty or of any fraud in relation to the company, he may be publicly examined [Section 543].

(viii) Liability for fraud: A promoter may be liable to public examination if the court so directs on a liquidator’s report alleging fraud in the promotion or formation of the company. [Section 478].

7. How can a promoter be remunerated for the services rendered by him?

Ans: The nature of the promoter’s work in the formation of a company calls for considerable skill for which he should be adequately remunerated. A promoter has no right against the company for his remuneration unless there is a contract to that effect.

Remuneration may be paid to a promoter in any of the following ways:

(i) The promoter may purchase the business or other property and sell the same to the company at a higher price or he may sell his own business to the company at a profit.

(ii) Commission may be paid to the promoter on the purchase price of the business or property acquired by the company through him.

(iii) The company may pay him a certain lump sum as remuneration for his services.

(iv) Promoter may be given fully or partly paid shares in consideration of the services.

(v) He may be given a commission on the shares sold.

(vi) The promoters may be given the option to subscribe within a fixed period for a certain portion of the company’s unissued shares at par.

The nature of remuneration or benefit must be disclosed in the prospectus within 2 years preceding the date of the prospectus.

8. Discuss the various steps to be taken for the incorporation of a company.

Or

Discuss in brief the legal aspect of the following statement:

A public company starts its business after obtaining certificate of incorporation from the Registrar of Companies.

Ans: The following steps are required to be taken for incorporation of a company:

(i) Approval of name: Prior to registration of any company, it is necessary to obtain approval of the Registrar for the proposed name of the company. A set of three names is to be suggested in order of priority. The company may adopt any name, which is not prohibited and does not resemble the name of an existing company.

(ii) Filing of necessary documents: On the name being approved, the following documents have to be filed:

(a) Memorandum of association.

(b) Articles of association, if any.

(c) The agreement, if any, which the company proposes to enter into with any individual; for appointment of its managing or whole time director or manager.

(d) A statement of the nominal capital.

(e) Notice of address of the registered office.

(f) A list of directors and their consent to act signed by each.

(g) An undertaking in writing signed by each such director to take and pay for his qualification shares.

(h) A duly signed statutory declaration that all the requirements of the Companies Act have been complied with.

(iii) Payment of the requisite fee: The prescribed registration fee and stamp duty must be paid along with the filing of the above documents.

(iv) Registration: The Registrar of Companies, after scrutinising the documents and satisfying himself regarding the observation of legal formalities, will enter the name of the company in his register.

(v) Certificate of incorporation: After registration, the Registrar will issue a certificate of incorporation and the company will become a separate legal entity.

Conclusiveness of the certificate of incorporation:

According to Section 7 of the Companies Act, 2013, the certificate of incorporation is conclusive evidence that the requirements of the Act have been complied with and prevents the reopening of matters prior and incidental thereto, and it places the existence of the company as a legal person beyond doubt.

The certificate of incorporation shall be conclusive evidence that:

(i) All the requirements of the Companies Act have been complied with in respect of registration.

(ii) The company is duly registered. and

(iii) the company came into existence on the date of the certificate.

Hence, the certificate once issued cannot be withdrawn. But if the object of the company is unlawful, the certificate of incorporation is not conclusive for this purpose.

Effects of registration [Section 34]:

(i) On the registration of the memorandum of a company, the Registrar shall certify under his hand that the company is incorporated and, in the case of a limited company that the company is limited. [Section 34(1)].

(ii) From the date of incorporation mentioned in the certificate of incorporation such of the subscribers of the memorandum and other persons, as may from time to time be members of the company, shall be a body corporate:

(a) by the name contained in the memorandum.

(b) capable of exercising all the functions of an incorporated company.

(c) having perpetual succession and a common seal.

(d) with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned in this Act [Section 34(2)].

9. What do you mean by pre-incorporation contract and provisional contract?

Or

Write a short note on pre-incorporation contracts.

Ans: Pre-incorporation contracts: Pre-incorporation or preliminary contracts are those contracts which the promoters of a company usually enter into, to acquire some property or right for the company which is yet to be incorporated. The promoters cannot act as agent for a company which has not yet come into existence and therefore, the company cannot be held liable for the acts of the promoters done before its incorporation.

Position of promoters as regards pre-incorporation contracts:

(i) Not bound by pre-incorporation contract: Even where the company takes the benefit of the contract entered into on its behalf, the company, when it comes into existence, is not bound by a pre-incorporation contract.

(ii) Cannot enforce pre-incorporation contract: A company after incorporation cannot enforce the contract made before its incorporation.

(iii) Promoters personally liable: The promoters remain personally liable to pay damages for failure to perform the promises made in the company’s name, even though the contract expressly provides that only the company shall be answerable for performance.

Ratification of a pre-incorporation contract: A company, before its incorporation, cannot ratify a contract entered into by the promoters on its behalf. The doctrine of ratification applies only if an agent contracts for principal who exists and who is competent to contract at the time of the contract by the agent. Therefore the company cannot by adoption or ratification obtain the benefit of the contract purported to have been made on its behalf before it came into existence.

Provisional contracts: Contracts entered into by a public company after its incorporation but before it is issued the certificate to commence business are known as provisional contracts.

Any contract made by a company before the date at which it is entitled to commence business shall be provisional only, and shall not be binding on the company until that date, and on that date it shall become binding. Thus,

(i) If the company is unable to obtain the certificate to commence business, the provisional contract automatically lapses.

(ii) If it gets the certificate, the provisional contract becomes binding on the company. In this case, there is no need for ratification of the contract by the company because the contract becomes binding automatically.

The words ‘shall become binding’ in Section 149(4) do not mean that the company is bound to recognise all contracts made between the date of incorporation and the date of commencement of business. The exception to the above provision is that if a contract is oppressive, fraudulent or voidable for any reason, the company may avoid it by taking appropriate proceedings.

10. When can a public limited company commence its business?

Ans: A private company can commence business soon after its incorporation, but a public company has to obtain another certificate called certificate of commencement. The certificate of commencement is issued by the Registrar of Companies on filing the following documents:

(I) In case of a company having share capital and issuing a prospectus:

(i) A copy of the prospectus.

(ii) A statutory declaration duly verified by one of the directors or the secretary of the company to the effect that:

(a) The directors have taken up and paid for their qualification shares in cash or amount equal to the amount payable by other subscribers on application and allotment.

(b) The shares payable in cash have been allotted at least to the extent of the minimum subscription.

(c) No money is liable to become refundable to applicants by reason of failure to apply for or to obtain permission for the shares or debentures to be dealt on the recognised stock exchange.

(II) In case of a company having a share capital but not issuing a prospectus:

(i) A statement in lieu of a prospectus.

(ii) A statutory declaration duly verified by any of the directors or secretary of the company that directors have taken up and paid for their qualification shares in cash an amount equal to the amount payable by other subscribers on application and allotment.

When the above requirements are complied with, the registrar shall certify that the company is entitled to commence business. This certificate is the conclusive evidence that the company is so entitled.

11. What is the procedure for online registration of a company?

Ans: Following steps must be followed for online registration of a company:

Step 1: Apply for Director Identification Number (DIN) through the official website of the Ministry of Corporate Affairs (MCA).

Step 2: Apply for Digital Signature Certificate (DSC) in order to ensure a secure way of e-filing process.

Step 3: File for New User Registration on the MCA portal. 

Step 4: File for Charter Documents like Memorandum of Association (MOA) and Articles of Association (AOA) stating the details of the registering company.

Step 5: Apply for a unique company name fulfilling all the guidelines prescribed by the MCA.

Step 6: Submit the form after filling information about the company’s address and appointment of directors, secretary and manager.

Step 7: Acquire Permanent Account Number (PAN) from authorised agents appointed by the Union Trust of India (UTI) Investor Services Ltd. or the National Securities Depository Ltd. (NSDL).

Step 8: Acquire Tax Account Number (TAN) for the company from any Assessing officer of the Income Tax Department.