PROBLEM QUESTIONS FOR COMPANY LAW

1. In a private limited company it is discovered that there are, in fact, 204

members. 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?
Hints - As per section 2(68), a company to be registered as a private company
must restrict its membership to 200 only. However, in counting this number of
200 members, employee members and ex-employee members (i.e., those who
become members while in the employment of the company but now having
ceased to be in the employment 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.
2. One general meeting was called by a company in December, 2012. This
meeting was adjourned to March 2013 and then held. Subsequent meeting
was held in February, 2014. Is the company liable for any irregularity ?
Hints: Section 96 of the Companies Act, 2013 requires a company to hold its
annual general meeting every calendar year. So there should be one meeting per
year and as many meetings as there are years. Thus, in the above case the meeting
held in March 2013 is actually the meeting of December 2012. Since, next meeting
is held only in February 2014, the meeting of 2013 has been missed. Under these
circumstances, unless permission of the Registrar was obtained for extension of
time which may be granted upto a period of 3 months under certain special
circumstances, the company shall be proceeded against.
In fact, the facts of the given problem are based upon the decided case of Shree
Meenakshi Mills Co. Ltd. v. Assistant Registrar of Joint Stock Companies in which case
similar decision was given.

3. The Annual General Meeting of XYZ Ltd., for the financial year ending
31-3-2013 was held on 27-9-2013. But since the financial statements had not
been audited, it was adjourned and finally held on 31-3-2014 at which the
audited financial statements were adopted. The annual general meeting for
the previous year had been held on 29-6-2012. Decide whether the holding
of the annual general meeting on 31-3-2014 for the year ending 31-3-2013 is
valid.
Hints : The facts of the problem have been based on the case of Bejoy Kumar
Karnani v. Asstt. Registrar of Companies [1985] 58 Comp. Cas. 293 wherein it was held
that even adjourned annual general meeting of a company, inter alia, must be held
within 15 months of the previous meeting. The meeting of 31-3-2014 is,
therefore, not valid.

4. The Annual General Meeting for the years 2012 and 2013 were convened
on 7-10-2014 belatedly and with great difficulty. Notices of the meetings
were dated 9-9-2014 and these were published on 12-9-2014 in a newspaper
at Calcutta. D, a shareholder, holding 7 shares of Rs. 10 each and a resident
of Calcutta sought an injunction that the resolutions passed at the meetings
be not given effect to, on the ground that the notices were received by him
only on 22-9-2014. The notices were posted to him on 16-9-2014. Discuss
whether D would succeed in getting the injunction.
Hints: Section 101. Notice of 21 clear days to be given, i.e., 21 days exclusive of
the day of the meeting and the day of the notice. Further, section 20 read along
with Rules made thereunder provide that in case of notice sent by post, the same
shall be deemed to be delivered on expiry of 48 hours. (i.e., 2 days) from the time
of its posting. Thus, notice posted on 16-9-2014 falls short of the requirements.
Notice published in a newspaper is no substitute for individual notices to be sent
to all those entitled under section 101. D should, therefore, succeed in getting, the
injunction.

5. 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.
Hints : The Companies Act, 2013 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 inter-related 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 impression that the two companies are different. 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 and remove the word ‘Asiatic’
therefrom
6. 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 authorised.
The plaintiffs had not seen the Articles. The director misappropriated the
cheque and the plaintiffs sued the company.
Is the company liable ?
Hints : 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 v. 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 rightly
exercised. In Rama Corporation v. Proved Tin & General Investment Co., on which the
problem in question is based, it was held that the plaintiffs could not rely on the
rule of indoor management because they did not know the existence of the power
to authorise the director.
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 the extent they are committed within
the scope of the authority conferred upon him.

7. 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 ?
Hints : The facts of the given problem are based on the decided case of Boreland
Trustee v. Steel Bros. & Co. Ltd., in which case, the provisions in the Articles were
held to be binding on the members. The learned judge observed 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 provisions in the Articles.
8. 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 under the
circumstances ?

Hints : Yes, director shall be held liable. A director can escape liability for mis-
statements in a prospectus only on grounds specified under section 35(2). Relying
on statements prepared by promoters is not a ground included thereunder.
Accordingly, no defence shall be available to the director.

9. ’N' a minor was registered as a shareholder of a company. After attaining

majority, he continues to receive dividend from the company. Subsequently
company went into liquidation. Does'N'have any liability ?
Answer:

1. Minors and Contracts: As per Mohri Bibi v. Dharmadas Ghose [1903]

30 ILR Cal. 539 (PC), a minor is incompetent to enter into a contract,
making any agreement by a minor to take shares void. Therefore, initially,
'N' as a minor could not have legally entered into the contract of
shareholding, and the company could have repudiated the allotment upon
discovering the minority.

2. Liability During Minority: According to Fazulbhoy Jaffar v. The

Credit Bank of India AIR 1914 Bom. 128, if a minor's name remains on
the register of members without repudiation by either party, the minor
does not incur any liability on the shares during the period of minority.

3. Post-Majority Actions: However, if after attaining majority, 'N'

continued to receive dividends and did not repudiate the allotment of
shares, the situation changes. As per Fazulbhoy Zafar v. Credit Bank of
India Ltd., if 'N' received dividends and exercised his rights as a member
after attaining majority, he cannot later repudiate his liability on the
shares. By continuing to act as a shareholder after attaining majority, 'N'
effectively af rmed the contract, and thus, he would be liable as any other
adult shareholder.
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4. Winding Up and Liability: In the context of the company's liquidation,
'N' would be treated as a contributory because he did not repudiate the
shares after attaining majority. According to Palaniappa v. Of cial
Liquidator, Pasupati Bank Ltd. AIR 1942 Mad. 470, a minor or his
guardian cannot be placed on the list of contributories during winding-up
if shares were registered in his name as a minor. However, since 'N' has
now attained majority and af rmed the contract by continuing to receive
dividends, he can be placed on the list of contributories.

Conclusion: 'N' does have liability in this situation. By continuing to receive

dividends and not repudiating the share allotment after attaining majority, 'N'
has af rmed his status as a shareholder and thus bears the liability of a
contributory in the event of the company's liquidation.

10. X is already a director of 20 companies. Another company offers for the

directorship. Advice.

Answer:
Section 165 of the Companies Act, 2013:
◦ Maximum Number of Directorships: Section 165(1) of the
Companies Act, 2013, restricts a person from holding directorships
in more than 20 companies at the same time.
◦ Public Company Limitation: Out of these 20 companies, a person
cannot hold directorships in more than 10 public companies.
2. Private Companies: Directorships in private companies that are either
holding or subsidiary companies of a public company are also counted
towards this limit of 10 public companies.

3. Penalties: If a person holds directorships in more companies than

permitted under Section 165(1), he shall be liable to a penalty of Rs.
2,000 for each day after the rst during which the contravention
continues.

11. 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 62 of the Companies Act. Discuss
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the validity of their action especially in view of the fact that market
price of shares of the company is 50 per cent above par.

Answer: If no application is made by the shareholders to whom the offer

is made under Section 62 of the Companies Act, 2013, the Board of
directors may dispose of the shares in such a manner as they think most
bene cial to the company. Therefore, unless shares were allotted to
directors on terms unfavourable to the company, the allotment would be
valid.

12. P had subscribed the memorandum of 100 shares. The company was
duly registered, but he ultimately took only 30 shares. At the time of
winding up company asked to pay for all 100 shares. But 'P' refuses to pay.

Answer: Subscribers to the Memorandum - Subscribers to the Memorandum are

deemed to be members of the company even though their names may or may
not be entered in the Register of members. Accordingly, in the event of
winding-up, in spite of the fact that their names are not entered in the Register
of members, they shall be deemed as contributories for the amount remaining
unpaid on the shares they agreed to subscribe for.
In J.H. Chandler and Co. Ltd., In re (1926) 48 All. 580, a person agreed to
purchase shares in a company and subscribed to the Memorandum of
Association, but later asked the promoter to cancel his “requirements”. His
name was never entered in the register of members. It was held that he was
liable as a contributory.
Even allotment of shares is not necessary to create liability on the part of the
persons who have subscribed to the memorandum - Babulal v. Narayana Sugar
and General Mills Ltd. [1958] 28 Comp. Cas. 155 (Punj.); Universal Transport
Company Ltd. v. S. Jagjit Singh [1958] 26 Comp. Cas. 36 (Punj.).

CASES FOR WINDING UP OF COMPANY

Case: Black Sea Shipping Co. v. Viraj Overseas (P.) Ltd. [2004] 49 SCL 627
(Delhi)
Summary: In this case, the company had duly noti ed the Registrar of
Companies (ROC) about the change in the address of its registered of ce.
However, the ROC recorded the change long after the company led the
information. A lender sent a statutory notice to the company's old address, and
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the issue was whether this notice complied with the requirements for winding
up.
Holding: The court held that no fault lay with the company, as it had ful lled
its duty by notifying the ROC. Sending the statutory notice to the old address
did not comply with the provisions of Section 434(1)(a) (now Section 271(2))
of the Companies Act. Thus, the winding-up petition could not be based on this
notice.

Shankar Lal Bansal, In re [2004] 49 SCL 543 (Raj.)

Summary: After a winding-up order was issued, the promoters and directors of
the company wanted to revive the company. They sought a stay on the winding-
up process by ling an application under Section 466 (now Section 289) of the
Act.
Holding: The court clari ed that the proper procedure for reviving the company
is to le a petition with a scheme of revival with the Tribunal, rather than
seeking a stay under Section 466. The application was not the correct method
for attempting revival, and such matters must be handled through proper revival
schemes.

Ms. Asha Bhosle v. Magnasound (I) Ltd. [2004] 50 SCL 36 (Bom.)

Summary: The Bombay High Court dealt with the conditional appointment of
an Of cial Liquidator as the provisional liquidator. The respondent expressed a
willingness to pay the petitioner’s dues in installments, leading to a conditional
appointment.
Holding: The court allowed the conditional appointment of the Of cial
Liquidator. If the respondent defaulted in payment, the appointment would
become absolute, allowing the liquidator to take possession of the company’s
assets. If the respondent met the payment obligations, the conditional
appointment would be terminated. This case illustrates the exibility in
winding-up proceedings based on payment agreements.

Motorola India Ltd. v. DDS Mobile Communications Ltd. [2004] 56 SCL

601 (Delhi)
Summary: This case concerned whether payments made by a company to its
creditors after the commencement of winding up could be recalled, especially in
the context of avoiding fraudulent preferences.
Holding: The court ruled that payments made after the commencement of
winding up should not be called back unless they amounted to fraudulent
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preference. This means that ordinary payments made in the course of business
are generally protected, even if the company is in winding up.

Basant Lal Agarwal v. Lloyds Finance Ltd. [2005] 59 SCL 169 (Bom.)

Summary: After a winding-up order was passed, the court had to balance the
interests of secured creditors against those of small depositors. The secured
creditors’ proceedings threatened to frustrate a special scheme to repay small
depositors.
Holding: The Bombay High Court stayed the proceedings of the secured
creditors to ensure that the scheme to repay small depositors could be carried
out. The court highlighted the importance of protecting the interests of small
deposit holders, even at the expense of delaying secured creditors' claims.

Of cial Liquidator of Ahmedabad Mfg. & Calico Printing Mills Ltd. v.

IDBI [2005] 63 SCL 304 (Guj.)

Summary: This case involved the sale of a company’s property by the

liquidator. The issue was whether the court (now Tribunal) could order another
round of bidding when a report of con rmation of sale was led.
Holding: The Gujarat High Court held that another round of inter se bidding
could be ordered by the court when a report of con rmation of sale was led.
Moreover, the court could give preference to a government company as a buyer
of such property, even if its bid was marginally lesser, recognizing the public
interest in favoring government entities.

Dues Decreed under the Industrial Undertakings Act: Bellary Power (I)
Pvt. Ltd. v. Standard Industrial Engineering Co. [2010] 97 SCL 138 (Kar.)

• Summary: This case dealt with the issue of whether a petition for
winding up under Section 433 (now Section 271) of the Companies Act is
maintainable when a decree has been obtained under the Industrial
Undertakings Act.
• Holding: The court held that the petition under Section 433 of the
Companies Act was maintainable despite the decree obtained under the
Industrial Undertakings Act. The decree remained unpaid for more than
four years, which justi ed the winding-up order by the company court
(now Tribunal).
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Laxman Yeswant Prabhudesaiv. NRCLtd. [Appeal No. 461 of 2009, arising
from Company Appl. No. 593 of 2008]

• Summary: This case concerned the interpretation of the term ‘void’

under Section 536(2) (now Section 334(2)) of the Companies Act, which
deals with transactions made after the appointment of a liquidator.
• Holding: The Bombay High Court ruled that Section 536(2) allows the
Tribunal to view a transaction as not entirely void if it is for enabling the
company to continue as a going concern and to protect the interests of
shareholders and creditors. This provision grants the court exibility in
dealing with transactions potentially affected by liquidation.
Custody of Company Property: Nasayam Mohammed Feroz v. Vijetha
Agro Firms (India) Ltd. [2010] 100 SCL 373 (AP)

• Summary: This case involved a sale of land and buildings based on a

fraudulent deal that occurred before the admission of a winding-up
petition.
• Holding: The court held that such a fraudulent transaction cannot be
sustained. The property in question must remain with the Of cial
Liquidator, who takes custody of it as part of the winding-up process.
Winding Up Based on a Decree Under Appeal: Kitti Steels Ltd. v. Sanghi
Industries Ltd. [2010] 102 SCL 308 (AP)

• Summary: The issue here was whether a petition for winding up could be
based on a decree that was under appeal.
• Holding: The court determined that a petition for winding up based on a
decree that is under appeal is not tenable. This is because the decree is not
nal until the appeal process is resolved, making it inappropriate to use it
as a basis for winding up.
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