10 most important case-based questions from the Companies Act, 2013
Q1) A company, DEF limited as on 31.03.2024 had a paid-up capital of ₹1 lakh (10,000 equity shares of ₹ 10 each). In June 2024, DEF limited issued additional 10,000 equity shares of ₹ 10 each which was fully subscribed. Out of 10,000 shares, 5,000 of these shares were issued to MNO private limited company. MNO is a holding company of JKL private limited by having control over the composition of its board of directors. Now, JKL private limited claims the status of being a subsidiary of DEF limited as being a subsidiary of its subsidiary i.e. MNO private limited. Examine the validity of the claim of JKL private limited. State the relationship if any, between DEF limited & MNO Private Limited as per the provisions of the Companies Act, 2013.
Provisions:
As per Section 2(46) of the Companies Act, 2013, holding company in relation to one or more other companies, means a company of which such companies are subsidiary companies.
Section 2(87) defines “subsidiary company” in relation to any other company (that is to say the holding company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies.
Analysis and conclusion:
In the instant case, as on 31.03.2024, DEF Limited had a paid-up capital of ₹ 1 lakh (10,000 equity shares of ₹ 10 each). In June 2024, DEF Limited issued an additional 10,000 equity shares, which was fully subscribed. Post-issue, the total paid-up capital of DEF Limited is ₹ 2 lakhs (20,000 equity shares of ₹10 each).
Of these, 5,000 shares were issued to MNO Private Limited. Since MNO Private Limited holds only 25% of the shares in DEF Limited, it does not have control of more than one-half of the total voting power of DEF Limited. Hence, MNO Private Limited cannot be considered as a subsidiary company of DEF Limited in terms of the second criteria stated above, that of controlling of voting power.
MNO Private Limited is the holding company of JKL Private Limited, having control over the composition of its Board of Directors. But since MNO Private Limited cannot be termed as a subsidiary company of DEF Limited, JKL Private Limited cannot claim the status of being a subsidiary of DEF Limited in terms of the first criteria, that of controlling the composition of directors.
As per section 2(6) of the Act, Associate Company in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.
The expression “significant influence” means control of at least twenty per cent of total voting power, or control of or participation in business decisions under an agreement.
In terms of the above provision, the relationship between DEF Limited and MNO Private Limited can be of an Associate Company.
Since MNO Private Limited holds more than 20 percent of voting power in DEF Limited, it can be considered as an Associate Company of DEF Limited.
Q2) XYZ Ltd. was incorporated to hold the patent for a new product. The company is expecting to start its commercial production within the next two years. In the meanwhile, for timely installation, the company has placed the purchase order for plant and machinery with a down payment of ₹1 crore. Referring to the provisions of the Companies Act, 2013 examine, whether the company can go for acquiring the status of a dormant company?
Provisions:
According to Section 455 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 in such manner as may be prescribed for obtaining the status of a dormant company.
Facts of the case:
XYZ Ltd. was incorporated to hold the patent for a new product, hoping to start production in 2 years’ time. The company placed an order for plant & machinery and also made down payment.
Analysis:
In the instant case, XYZ Ltd. has made a significant accounting transaction (down payment of ₹ 1 crore for plant and machinery), it does not meet the criteria of a dormant company under Section 455 of the Companies Act, 2013.
Conclusion:
Therefore, XYZ Ltd. cannot acquire the status of dormant company.
Q3) A, B and C has decided to set up a new club with name of ABC club having objects to promote welfare of Christian society. They planned to do charitable work or social activity for promoting the artwork of economically weaker section of Christian society. The company obtained the status of section 8 company and started operating from 1st April, 2017 onwards. However, on 30th September 2019, it was observed that ABC club was violating the objects of its objective clause due to which it was granted the status of section 8 Company under the Companies Act 2013. Discuss what powers can be exercised by the central government against ABC club, in such a case?
Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to promote the charitable objects of commerce, art, science, education, sports etc. Such company intends to apply its profit in promoting its objects. Section 8 companies are registered by the Registrar only when a license is issued by the Central Government to them.
Since ABC Club was a Section 8 company and it was observed on 30th September, 2019 that it had started violating the objects of its objective clause.
Hence in such a situation the following powers can be exercised by the Central Government:
(i) The Central Government may by order revoke the licence of the company where the company contravenes any of the requirements or the conditions of this sections subject to which a licence is issued or where the affairs of the company are conducted fraudulently, or violative of the objects of the company or prejudicial to public interest, and on revocation the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the register. But before such revocation, the Central Government must give it a written notice of its intention to revoke the licence and opportunity to be heard in the matter.
(ii) Where a licence is revoked, the Central Government may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section. However, no such order shall be made unless the company is given a reasonable opportunity of being heard.
(iii) Where a licence is revoked and where the Central Government is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, notwithstanding anything to the contrary contained in this Act, the Central Government may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order.
Q4) Narendra Motors Limited is a government company. Shah Auto Private Limited is a private company having share capital of ten crores in the form of ten lacs shares of ₹ 100 each. Narendra Motors Limited is holding five lacs five thousand shares in Shah Auto Private Limited. Shah Auto Private Limited claimed the status of Government Company. Advise as legal advisor, whether Shah Auto Private Limited is government company under the provisions of Companies Act, 2013?
Provisions:
According to the provisions of Section 2(45) of Companies Act, 2013, Government Company means any company in which not less than 51% of the paid-up share capital is held by-
(i) the Central Government, or
(ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more State Governments, and the section includes a company which is a subsidiary company of such a Government company.
According to Section 2(87), “subsidiary company” in relation to any other company (that is to say the holding company), means a company in which the holding exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies.
Facts of the case:
Narendra Motors Limited is a government company holding five lacs five thousand shares in Shah Auto Private Limited out of 10 lac shares.
Analysis and conclusion:
By virtue of provisions of Section 2(87) of Companies Act, 2013, Shah Auto Private Limited is a subsidiary company of Narendra Motors Limited because Narendra Motors Limited is holding more than one-half of the total voting power in Shah Auto Private Limited. Further as per Section 2(45), a subsidiary company of Government Company is also termed as Government Company. Hence, Shah Auto Private Limited being subsidiary of Narendra Motors Limited will also be considered as Government Company.
Q5) Global Investments Ltd. is a large public company with a registered Articles of Association (AOA) that requires all share certificates to be signed by two directors and the Company Secretary. Mr. Fraudulent, the Company Secretary, decides to embezzle funds by issuing a fake share certificate to Mr. Innocent. Mr. Fraudulent forges the signatures of two directors, affixes the company’s common seal (which was in his custody), and hands the certificate to Mr. Innocent in exchange for a large sum of money. When Mr. Innocent tries to exercise his rights as a shareholder, the company refuses to recognize the certificate, claiming it is a forgery. Mr. Innocent argues the Doctrine of Indoor Management, stating that he is an outsider and is entitled to assume that the internal procedures (the signing by directors) were followed correctly. He claims the company is estopped from denying the genuineness of a document that appears perfect on its face and bears the company’s seal. Applying the provisions of the Companies Act, 2013, decide whether Global Investments Ltd. is bound by the forged share certificate.
Provisions:
The Doctrine of Indoor Management (Turquand Rule) protects outsiders by allowing them to assume that internal company procedures have been complied with. However, there are exceptions to this rule, one of which is “Forgery”. The case of Ruben v. Great Fingall Consolidated established that the rule of indoor management does not apply to documents that are forged and thus a nullity.
Facts of the Case:
The AOA required signatures from two directors and the Secretary. Mr. Fraudulent forged the directors’ signatures and issued a certificate without authority. Mr. Innocent relied on the certificate’s appearance to pay for the shares.
Analysis:
While the Doctrine of Indoor Management protects against internal irregularities (like a missing resolution), it cannot validate a forgery. A forged document is a complete nullity in the eyes of the law; it has no legal existence. Mr. Fraudulent had no authority to sign for the directors, and his act of forging their names cannot bind the company. The company is not responsible for the unauthorized, criminal acts of its employees that result in a forged instrument. Therefore, Mr. Innocent cannot use the “Turquand Rule” to force the company to recognize a fake document.
Conclusion:
Global Investments Ltd. is not bound by the forged share certificate, and Mr. Innocent has no rights against the company based on that document.
Q6) Prasad incorporated an OPC to run his new start-up in May, 2021. OPC borrowed ₹50 Lakhs to meet its long term fund requirements and ₹25 lakh to meet its working capital requirements on the basis of his project from a non-banking finance company (NBFC) in Oct, 2021. But due to some running hardships and new govt. policies OPC was failed to pay its debts to NBFC. Assets of the company were insufficient to pay the outstanding debts. According to the provisions of the Companies Act, 2013, Decide whether Prasad would be liable to pay the outstanding debts of NBFC in the following circumstances:-
(i) If the NBFC proceeded against the personal assets of Prasad only on the ground that he is the only shareholder and hence liable for its debts.
(ii) If the NBFC proves that the One Person Company was formed for fraud and cheating
Provisions:
According to Section 2(62) of the Companies Act, 2013, a One Person Company (OPC) means a Company which has only one person as a member. A Company is a separate legal entity distinct from its member and enjoys limited liability.
Separate Legal Entity: When a Company is registered, it is clothed with a legal personality. Its existence is distinct and separate from that of its members.
Limited Liability: The liability of the members of the Company is limited to the extent of the nominal value of shares held by them. In no case, the shareholders can be asked to pay anything more than the unpaid value of their shares. The liability of OPC’s sole member is limited to the extent of unpaid share capital, if any.
Facts of the case:
In the instant case, OPC failed to pay its debts to NBFC. Assets of the company were insufficient to pay the outstanding debts.
Analysis and conclusion:
According to above provisions, we can conclude that :-
(i) If the NBFC proceeded against the personal assets of Prasad only on the ground that he is the only shareholder and hence liable for its debts: Prasad will not be personally liable to pay the outstanding debts of the NBFC merely on the ground that he is the only shareholder of the OPC because the debts of the OPC are its own and the OPC enjoys limited liability. Creditors cannot proceed against the personal assets of the member merely because he is the sole shareholder.
Therefore, the NBFC cannot proceed against the personal assets of Prasad only on the ground that he is the sole shareholder.
(ii) If the NBFC proves that the One Person Company was formed for fraud and cheating: Where a Company is incorporated or carried on with intent to defraud Creditors or for any fraudulent purpose, the “Doctrine of Lifting of Corporate Veil” applies and the Corporate Veil can be lifted. In such cases, the protection of limited liability is withdrawn and the member can be held personally responsible for the debts of the company.
Accordingly, if the NBFC proves that the OPC was incorporated for fraudulent purposes, the protection of limited liability can be withdrawn and Prasad would be liable to pay the outstanding debts of NBFC and his personal assets can be used to settle the outstanding liabilities.
Q7) Jagannath Oils Limited is a public company and having 220 members of which 25 members were employee in the company during the period 1st April, 2006 to 28th June 2016. They were allotted shares in Jagannath Oils Limited first time on 1st July, 2007 which were sold by them 1st August, 2016. After some time, on 1st December, 2016, each of those 25 members acquired shares in Jagannath Oils Limited which they are holding till date. Now company wants to convert itself into a private company. State with reasons:
(I) Whether Jagannath Oils Limited is required to reduce the number of members.
(II) Would your answer be different if above 25 members were the employee in Jagannath Oils Limited for the period from 1st April, 2006 to 28th June, 2017?
Provisions:
According to Section 2(68) of Companies Act, 2013, “Private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company.
Facts of the case:
Jagannath Oils Limited, a public company, is desirous of converting itself into a private limited company.
Analysis:
(I) Following the provisions of Section 2(68), 25 members were employees of the company but not during present membership which was started from 1st December 2016 i.e. after the date on which these 25 members were ceased to the employee in Jagannath Oils Limited. Hence, they will be considered as members for the purpose of the limit of 200 members. The company is required to reduce the number of members before converting it into a private company.
(II) On the other hand, if those 25 members were ceased to be employee on 28th June 2017, they were employee at the time of getting present membership. Hence, they will not be counted as members for the purpose of the limit of 200 members and the total number of members for the purpose of this sub-section will be 195 which is well within the maximum limit of members.
Conclusion:
Therefore, Jagannath Oils Limited is not required to reduce the number of members before converting it into a private company.
Q8) Evergreen Private Limited has 9 directors on its Board of Directors. The company’s Articles of Association currently state that the quorum for board meetings shall be 1/3rd of the total strength or 2 directors, whichever is higher. The company now intends to amend this article to specify that the quorum for board meetings shall be 1/3rd of the total strength or 4 directors, whichever is higher. Advise the company on the procedure for including this entrenchment provision in its Articles, in accordance with the provisions of the Companies Act, 2013. Would your advice differ if the company were a public company?
Provisions:
- Usually, an article of association may be altered by passing special resolution but entrenchment makes it more difficult to change it. So, entrenchment means ‘making something more protective’.
- Articles containing provisions for entrenchment imply that specified provisions of the articles may be altered only if more restrictive conditions or procedures are complied with
- Provisions for entrenchment may be made either
– on formation of the company or
– later by an amendment in the articles agreed to by all the members of the company in case of a private company and by a special resolution in case of a public company.
- Notice of entrenchment shall be given to ROC
– in Form Spice+ at the time of incorporation
– in Form Mgt-14 within 30 days from entrenchment in case of existing company.
Analysis and conclusion:
In the instant case, Evergreen Private Limited can follow the above procedure i.e. with the consent of all the members and notice to the registrar to include the entrenchment provision in its Articles.
Yes, the advice will differ, if the company is public company, since it has to pass Special Resolution and also inform to the registrar.
Q9) Mr. R, a manufacturer of toys approached MNO Private Limited for supply of raw material worth ₹ 1,50,000/-. Mr. R was offered a credit period of one month. Mr. R went to the company prior to the due date and met Mr. C, an employee at the billing counter, who convinced the former that the payment can be made to him as the billing-cashier is on leave.
Mr. R paid the money and was issued a signed and sealed receipt by Mr. C. After the lapse of due date, Mr. R received a recovery notice from the company for the payment of ₹ 1,50,000/-.
Mr. R informed the company that he had already paid the above amount and being an outsider had genuine reasons to trust Mr. C who claimed to be an employee and had issued him a receipt.
The Company filed a suit against Mr. R for non-payment of dues. Discuss the fate of the suit and the liability of Mr. R towards company as on current date in consonance with the provision of the Companies Act, 2013? Would your answer be different if a receipt under the company seal was not issued by Mr. C after receiving payment?
(i) Fate of the suit and the liability of Mr. R towards the company: Doctrine of the Indoor Management
According to the Doctrine of Indoor Management, the outsiders are not deemed to have notice of the internal affairs of the company. They are entitled to assume that the acts of the directors or other officers of the company are validly performed, if they are within the scope of their apparent authority. So long as an act is valid under the articles, if done in a particular manner, an outsider dealing with the company is entitled to assume that it has been done in the manner required. This is the indoor management rule, that the company’s indoor affairs are the company’s problem. This rule has been laid down in the landmark case-the Royal British Bank vs. Turquand. (Known as “Turquand Rule”)
In the instant case, Mr. R is not liable to pay the amount of ₹ 1,50,000 to MNO Private Limited as he had genuine reasons to trust Mr. C, an employee of the company who had issued him a signed and sealed receipt.
(ii) Liability of Mr. R in case no receipt is issued by Mr. C:
Exceptions to doctrine of indoor management: Suspicion of irregularity is an exception to the doctrine of indoor management. The doctrine of indoor management in no way rewards those who behave negligently. It is the duty of the outsider to make the necessary enquiry, if the transaction is not in the ordinary course of business.
If a receipt under the company seal was not issued by Mr. C after receiving payment, Mr. R is liable to pay the said amount as this will be deemed to be a negligence on the part of Mr. R and it is his duty to make the necessary enquiry to check that whether Mr. C is eligible to take the payment or not.
Q10) The Object clause of Memorandum of Association of ABC Pvt. Ltd. authorized the company to carry on the business of trading in property in Gurgaon. Since the company was not doing well, the Directors of the company in a recent board meeting planned to diversify the business and enter into Construction business. For this purpose, they borrowed a sum of ₹ 5 crores from Magnum Finance Ltd. But the members of the company did not approve the decision of the board hence, company refused to repay the loan. According to provisions of the Companies Act, 2013 what is the recourse available to Magnum Finance Ltd. for recovery of the loan?
Provisions:
It is a fundamental rule of Company Law that the objects of a company as stated in its memorandum can be departed from only to the extent permitted by the Act, thus far and no further. In consequence, any act done or a contract made by the company which travels beyond the powers not only of the directors but also of the company is wholly void and inoperative in law and is therefore not binding on the company.
On this account, a company can be restrained from employing its fund for purposes other than those sanctioned by the memorandum. Likewise, it can be restrained from carrying on a trade different from the one it is authorised to carry on.
The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires transaction, nor can it sue on it.
Since the memorandum is a “public document”, it is open to public inspection. Therefore, when one deals with a company one is deemed to know about the powers of the company. If in spite of this you enter into a transaction which is ultra vires the company, you cannot enforce it against the company.
Facts of the case:
The company was authorized to carry on the business of trading in property. The directors planned to diversify into construction business. For this they borrowed ₹5 cores from Magnum Finance Ltd. Later, the company refused to repay the loan.
Analysis and conclusion:
In the instant case, ABC Pvt. Ltd. was authorised to trade in property only, so taking loan for construction business was ultra virus the power of the company.
Therefore, Magnum Finance Ltd. cannot enforce against ABC Pvt. Ltd. for recovery of the loan. But
(a) It can recover the money to the extent it has been utilised in meeting lawful debt of the company, then it steps into shoes of the debtor paid off and consequently it would be entitled to recover the loan to that extent from the company.
(b) if the money is not spent, it may stop ABC Pvt. Ltd. from spending by means of injunction and recover the unspent amount.
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