IGNOU FREE SOLVED ASSIGNMENT: ECO - 08 COMPANY LAW (2019 - 2020)

Dear Students,

As explained in the Programme Guide, you have to do one Tutor Marked Assignment in this Course.

Assignment is given 30% weightage in the final assessment. To be eligible to appear in the Term-end examination, it is compulsory for you to submit the assignment as per the schedule. Before attempting the assignments, you should carefully read the instructions given in the Programme Guide.

This assignment is valid for two admission cycles (July 2019 and January 2020). The validity is given below:

You have to submit the assignment of all the courses to The Coordinator of your Study Centre. For appearing in June Term-End Examination, you must submit assignment to the Coordinator of your study centre latest by 15th March. Similarly for appearing in December Term-End Examination, you must submit assignments to the Coordinator of your study centre latest by 15th September.

TUTOR MARKED ASSIGNMENT

Course Code: BCOE-108

Course Title: COMPANY LAW

Assignment Code: BCOE-108 /TMA/2019-20

Coverage: All Blocks

Maximum Marks: 100

Attempt all the questions.

1. (a) What is a Company? Explain its important features.                                            (4+10)

Ans: Definition: A company is an artificial person created by law, having a separate legal entity, with a perpetual succession and a common seal. It is an association of many persons who contribute money or money’s worth to a common stock and employs it for a common purpose. The common stock so contributed is denoted in terms of money and is called capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.

According to The Companies Act’ 2013 – “Company means a every association of person formed and registered under this Act or any companies enacted prior to the Companies Act, 2013.” [sec.2(20)]

Joint Stock Company has been defined by many eminent authors, jurists and institutions. Some of these definitions are given below:

According to L. H. Haney – “A company is an artificial person created by law, having a separate legal entity, with a perpetual succession and a common seal.”

According to Chief Justice Marshall – “A company is an artificial being invisible, intangible and existing only in the eyes of law.”

Characteristics of a Company

The system of joint stock organization is very useful for large undertakings for which large capital is required. It is an incorporated association created by law, having distinctive name, a common seal, perpetual succession, limited liability etc. formed to carry on business for profit. Some of the essential characteristics of a company are given below:

1) Artificial Person: A company is an artificial person, which exists only in the eyes of law. The company carries business on its own behalf. It has a right to sue and can be sued, can have its own property and its own bank account. It can also own money and be a creditor.

2) Created by law: A company can be formed only with registration. It has to fulfill a lot of formalities to be registered. It has also to fulfill a lot of legal formalities in order to be dissolved.

3) Separate Legal entity: A company has a separate legal entity and is not affected by changes in its membership.

4) Perpetual succession: A company has a continuous existence. Its existence does not affected by admission, retirement, death or insolvency of its members. The members may come or go but the company may go forever. Only law can terminate its existence

5) Limited Liability: The liability of every member is limited to the amount he has agreed to pay to the company on the shares held by him.

6) Voluntary Association: A company is a voluntary association. It cannot compel any one to become its member or shareholder.

7) Capital Structure: A company has to mention its maximum capital requirements in future in its memorandum of association. Its capital is divided into shares, which are easily transferable from person to person.

8 ) Transferability of Shares: The shares of the company are movable property. The shares of a company are freely transferable by its members except in case of a private company, which may have certain restrictions of such transferability. [ Sec.44 of the Companies Act, 2013]

9) Common Seal: Since a company has no physical existence, it must act through its agents and all such contracts entered into by such agents must be under the seal of the company. The common seal acts as the official seal of the company. (Amendments, 2014): Now, the use of common seal has been made optional. All such documents which required affixing the common seal may now instead be signed by two directors or one director and a company secretary of the company.

10) Democratic Ownership: The directors of a company are elected by its shareholders in a democratic way.

11) Maintenance of Books: A limited Company is required by law to keep a prescribed set of account books and failure in this regard may attract penalty.

12) Periodical audit: A Company has to get its accounts periodically audited through the chartered accountants appointed for this purpose by the shareholders.

(b) Distinguish between a private company and a public company.                                         (10)

Ans: Private company [Sec.2(68)]: A private company is normally what the Americans call a ‘close corporation’. According to Sec.2(68), a private company means a company which has a minimum paid-up capital as may be prescribed by its Articles:

A Private company may be:

Public company [Sec. 2(71)] : A public company means a company which –

a. is not a private company

b. is a private company which is a subsidiary of a company which is not a private company.

c. has a minimum paid-up capital as may be prescribed by the articles.

From the above discussion, we find the following differences between Public Limited Company and Private Limited Company

2. What is a ‘Prospectus’? Explain the liabilities of the company and directors for misstatement in the prospectus.  (4+10)

Ans: Prospectus: Section 2(70) of the Companies Act, 2013 defines a prospectus as ““A prospectus means Any documents described or issued as a prospectus and includes any notices, circular, advertisement, or other documents inviting deposit fro the public or documents inviting offer from the public for the subscription of shares or debentures in a company.” A prospectus also includes shelf prospectus and red herring prospectus. A prospectus is not merely an advertisement. A document shall be called a prospectus if it satisfy two things:

Contents of a prospectus:

Misleading Prospectus or Mis-statement in prospectus and liabilities of directors:

A prospectus is said to be misleading or untrue in two following cases:

CRIMINAL LIABILITY FOR MIS-STATEMENT IN PROSPECTUS (SECTION 34):

Where a prospectus, issued, circulated or distributed:

a)    includes any statement which is untrue or misleading in form or context in which it is included; or

b)   where any inclusion or omission of any matter is likely to mislead;

Every person who authorises the issue of such prospectus shall be liable under section 447 i.e. fraud.

Defences available in this section are:

a)    Person prove that statement or omission was immaterial;

b)   Person has reasonable ground to believe and did believe that statement was true; or

c)    Person has reasonable ground to believe and did believe that the inclusion or omission was necessary.

CIVIL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS (SECTION 35):

Where a person has subscribed for securities of a company acting upon any misleading statement, inclusion or omission and has sustained any loss or damage as its consequence, the company and every person who:

a)    is a director at the time of the issue of prospectus;

b)   has named  as director or as proposed director with his consent;

c)    is a promoter of the company;

d)    has authorised the issue of the prospectus; and

e)    is an expert;

shall be liable to pay compensation to effected person. This civil liability shall be in addition to the criminal liability under section 36. Where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.

Defences under this section are:

a)    he has withdrawn his consent or never give his consent;

b)   the prospectus was issued without his knowledge or consent and when he become aware, gave a reasonable public notice that prospectus was issued without his knowledge or consent.

3. What do you understand by Memorandum of Association? Explain the different clauses of Memorandum of Association.                                       (4+16)

Ans: Memorandum of Association

Memorandum of association is the document which contains the rules regarding constitution and activities and objects of the company. It is fundamental charter of the company. Its relation towards the members and the outsiders are determined by this important document.

Section 2 (56) of the Companies Act, 2013 defines Memorandum as “Memorandum means the Memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this act”.

One of the essentials for the registration of a company is memorandum of association. It is the first step in the formation of a company. Its importance lies in the fact that it contains the fundamental clauses which have often been described as the conditions of the company’s incorporation.

Memorandum of association is divided into 5 clauses/contents [Sec. 4 of the Companies Act, 2013]:

1. Name clause: This clause state the name of the company. Name of every company limited by shares or by guarantee must end by the word 'Ltd.' or 'Pvt. Ltd.' except companies exempted u/s 8.  The name must not be undesirable or most not resemble the name of any other registered company.

A company may change its name at any time by passing a special resolution and with the prior approval of the Central Government. The company shall file with the registrar a copy of special resolution and a copy of the order of the central government approving the change of name. The registrar shall enter the new name of the company in the register of companies and issue a fresh certificate of incorporation to the company. The change in the name shall become complete and effective from the last date of issue of fresh certificate of incorporation.  However, it should be noted that no approval of central government will be required if the change consists merely addition or deletion of the word “private” consequent on the conversion of a public company into a private company or vice versa.

2. Situation or Registered office clause: Must contain the name of state is which registered office is situated.  Actual address of registered office is notified to ROC with in 30 days of in corporation.

A company may change the place of its registered office from one state to another state by passing a special resolution and obtaining approval of central government.  For obtaining the approval of central government (CG), the company shall make an application to CG in such form and manner as may be prescribed. CG shall dispose of the application within 60 days. Before passing any order, CG shall satisfy itself that the creditors and lenders have consented to such alterations. After obtaining the approval, the company shall file with the registrar a copy of special resolution and a copy of the order of the central government approving the change of the address. The registrar shall enter the new address of the company in the register of companies and issue a fresh certificate of incorporation to the company. The change in the address shall become complete and effective from the last date of issue of fresh certificate of incorporation.

3. Object clause: It sets out object or vires of the company. The objects must be legal and not be against the provision of the companies Act, 2013. It is divided into two parts:

(a) The main objects and Objects incidental or ancillary to the main objects.

(b) Other objects.

A company may alter its objects with the passing of a special resolution. The confirmation of the central government is not required for this purpose. Alteration of object clause is not permitted if any company has raised money from the public by issue of a prospectus, and any part of such money remains unutilised with the company.

4. Liability clause: States that liability of members is limited to the amount unpaid on their shares and in case of company limited by guarantee the amount which every member undertakes to contribute to the assets of the company in the even of its winding up.

Liability of shareholders can be increased by express approval of each and every member. However in case the company is a club or similar association and alteration in the memorandum requires the member to pay recurring charge at a higher rate, although he does- not agree in writing to be bound by the alteration.  Liability of directors, MD or managers can be made unlimited by passing a special resolution if the article so permit and getting consent of such officer.

5. Capital clause: Every company having a share capital, the amount of share capital with which the company is proposed to be registered and the division of its shares into a fixed denomination.

If article provides, by passing an ordinary resolution in the general meeting, a company can:

As per sec. 64 of the Companies Act, 2013, notice of alternation of share capital is to be given to the ROC within 30 days along with a copy of altered memorandum. Alteration of share capital does not require any confirmation by the court, CG, CLB or any other authority.

6. Subscription clause: This clause shall state the number of shares that each subscriber to member has agreed to subscribe. Every subscriber shall agree to subscribe for at least one share.

This clause can be altered by passing a special resolution and complying with the procedure as specified in the sec. 13 for alteration of name clause and registered office clause.

4. (a) What is allotment of shares? Discuss the rules regarding allotment of shares?                      (2+8)

Ans: A public limited company invites subscriptions from the public and for this purpose a prospectus is issued. In response to this invitation, the prospective investors offer to buy shares by submitting the prescribed application form. If the application is accepted by the company, it proceeds to allot him the shares. With the issue of the letter of allotment, the offer stands accepted thereby giving rise, to a legally binding contract between the company and the shareholder. Thus, an allotment is the acceptance by the company of the offer to purchase shares. The term 'Allotment' has nowhere been defined in the Companies Act. It may be said that allotment is an appropriation by the Board of directors of a certain number of shares to a specified person in response to his application. In other words, allotment means the appropriation out of the previously un-appropriated capital of a company, of a certain number of shares to a person.

Rules regarding Allotment of Shares

The rules regarding allotment of shares can be discussed under the two broad headings:

(a) General rules and

(b) the legal rules.

General Rules: The allotment is the acceptance of an offer to purchase certain number of shares. Therefore, the general rules relating to valid acceptance of an offer must be followed. The general rules regarding allotment of shares are as follows:

i) The allotment must be made by proper authority: It is the duty of the Board of directors to allot the shares. However, the Board may delegate this authority to some other person or persons as per the provisions of the articles of association. Allotment of Shares made by an improper authority will make it void.

ii) The allotment should be made within s reasonable time: The offer to purchase shares of the company must be accepted within a reasonable time otherwise the applicants may refuse to take shares because after a reasonable time the offer lapses. What is the 'reasonable time' is a question of fact in each case.

iii) It must be communicated: The allotment of shares should be communicated to the applicants. Posting of a properly addressed and stamped letter of allotment will be taken as a valid communication. Even if this letter of allotment is delayed or lost in transit, the allottee will be liable. 'G' applied for certain shares in a company. The letter of allotment was dispatched to him but it never reached. It was held that 'G' was liable as a shareholder.

iv) It must be absolute and unconditional. The allotment of shares must conform to the terms and conditions of the application. If the allotment is not according to the terms and conditions, the applicant may refuse to accept the shares even though allotment has been made to him. If the conditions are not fulfilled, the applicant must reject the shares promptly. His silence or acceptance will debar him from this right.

Legal Rules: So far as the private companies are concerned, the Act does not lay down any restrictions as to the allotment of shares. But the Act has laid down certain restrictions regarding the allotment of shares by public companies.

When no public offer is made: Where a public company does not offer its shares to the public but arranges the capital privately, the company cannot proceed with the allotment unless it files with the Registrar of Companies at least three days before the first allotment, a statement in lieu of prospectus. If the allotment is made in contravention to this provision, it will be termed as irregular allotment and it shall be voidable at the option of the allottee. In addition to this, every officer of the company, who is a party to such allotment shall be punishable with fine which may extent to Rs. 1,000.

When an Offer is made to the Public: Where a company offers to shares to the public:

i) a prospectus must be issued and a copy of the same should be filed with the Registrar. You should note that the company cannot allot the shares immediately after issuing the prospectus. No allotment can be made until the beginning of the fifth day from the date of issue of prospectus. The fifth day is to be counted from the date of issue of prospectus was published or was otherwise notified to the public. The beginning of the fifth day is known as 'the time of the opening of the subscription lists. The object of this provision is to enable the public to go through the prospectus and to decide whether to apply for the shares. The Companies Act, however, does not specifically provide for the time of closing the subscription list. It means that the company may keep the subscription list open for any length of time it wants. According to stock exchange regulations where the shares are listed on any stock exchange, the subscription list must be kept open for at least three days, In such cases, the prospectus usually mentions the time of closing of the subscription lists.

ii) Minimum subscription: No company can proceed to allot shares to the public until the minimum subscription (which is 90%.thc issue amount) has been subscribed, and the sum payable on applications for it has been received by the company in cash. If the company does not receive the minimum subscription of 90% of the issue amount, the entire subscription will be refunded to the applicants within 90 days from the date of closure of the issue. If there is a delay in refund of such amount by more than ten days, the company is liable to pay interest at the rate of 15% per annum for the delayed period.

iii) Application money: It is the amount which is payable on each share along with the application for purchase of shares. The amount payable on application 0% each share shall not be less than 5 per cent of the nominal amount of the share.

iv) Application money to be deposited in a scheduled bank: All the money received from applicants must be deposited in a scheduled bank and it shall remain there until the certificate to commence business is received.

v) Allotment of shares to dealt in on stock exchange. According to Section 73(1) of the Companies Act, every company intending to offer shares to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognised stock exchanges for permission for the shares to be dealt with in the stock exchange. Thus, now it is made compulsory that the shares must be listed on a recognised exchange. The prospectus must state the name of the stock exchange or each of such exchanges where the application has been 'made.

Subsequent allotment of shares: The rules regarding the subsequent allotment of shares are the same as discussed above except the rule regarding minimum subscription.

(b) What is forfeiture of shares? How is it different from surrender of shares?                                                 (4+6)

5. (a) Who can be appointed as director? How can a director can be removed from office before the expiry of his term of office?                                                  (4+10)

Ans: On incorporation, a company becomes a legal artificial person but it cannot act by itself and consequently it has to depend upon some human agency to act in its name. The members have no inherent right to participate in the management of the company. A large sized company may have its members running into lakhs, who are dispersed all over the country and they even lack the expertise to manage the affairs of the company, which makes it impossible to give the management of the company in their hands. Therefore a specialized body of persons called as directors are appointed by the members to manage the affairs of the company. The directors must act as a body without improper exclusion of any of the directors. The directors collectively referred to as BOARD. The board is the managerial body constituted by the members to whom is entrusted the whole management of the company.

According to Section 2 (34) of the Companies Act, 2013, “Directors means a director appointed to the board of a company.”

According to Sec.2 (10) of the Indian Companies Act, 2013, “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company”

Qualifications to become a Director of a company:

As regards to the qualification of directors, there is no direct provision in the Companies Act, 2013.But, according to the different provisions relating to the directors; the following qualifications may be mentioned:

1. A director must be a person of sound mind.

2. A director must hold share qualification, if the article of association provides such.

3. A director must be an individual.

4. A director should be a solvent person.

5. A director should not be convicted by the Court for any offence, etc.

Removal of directors

A director of a company can be removed by

(a) Shareholders (Sec. 169)

(b) The Tribunal (Sec. 242)

(a) Removal by shareholder: Section 169 empowers the company to remove a director by ordinary resolution before the expiry of his period of office except in the following cases:

(1) A director appointed by the tribunal under sec. 242;

(2) A nominee director of a public financial institution which is by its charter empowered to nominate a person as a director or to remove him notwithstanding any power contained in any other act;

(3) Director appointed in accordance with the principal of proportional representation, under section 163. This is to ensure that the directors appointed by the minority are not removed by a bare majority.

Special notice is required of any resolution to remove a director or to appoint somebody in his place at the meeting at which he is removed. On receipt of such notice, the company will immediately send a copy thereof to the director concerned. He may make any representation in writing and the copy of such representation may be sent by the company to every member. Where the copy of the representation is not sent to the members, in that case the director concerned may require the representation to be read at the meeting.

A vacancy created by the removal of a director as aforesaid can be filled up at the meeting at which he is removed provided special notice of the proposed appointment was also given. The director so appointed shall hold office till the date the director removed would otherwise have hold office. If the vacancy is not filled, it shall be filled up as casual vacancy except that the director removed shall not be re-appointed. The director so removed is entitled to claim compensation or damages for branch of contract.

(b) Removal by the Tribunal: On an application to the Tribunal for prevention of oppression and mismanagement, the tribunal may terminate or set aside or modify any agreement between the company and the managing director, or any other director or manager. On such termination, the director cannot serve the company in a managerial capacity for a period of five years from the date of the order of termination, without the permission of the tribunal. The director on removal cannot sue the company for damages or compensation for loss of office (Sec. 243).

Removal of a non-rotational director of a government company

Directors appointed by the state government as a nominee director can be removed by such government. The government is entitled to revoke the nomination as a matter of right, which flows from the articles of association. Revoking of the appointment by the government under the articles is not the same thing as removal of a director by the company under sec. 169. Hence, if the government revokes the nomination, there is no contravention of section 169.

(b) Discuss the advantages of e-filing of documents.                      (8)

Ans: E -filing is a key feature of the MCA -21 project of Ministry of Corporate affairs. The major benefits of e-filing are the ease of interaction with all citizens and almost a paperless environment. The notified new e -forms may be filed through electronic media or through any other computer readable media under the Companies Act. There are several advantages associated with e-filing documents such as the following:

Advantages to the company:

1. Saves time, money, and transportation costs

2. Documents can be filed without visiting the ROC office.

3. There is no need to stand in long queues for filing documents or paying filing fees.

4. Filing will be open on a 24 x 7 basis. This affords one the flexibility to do this work at one’s convenience.

5. Filing fees can be paid from the comforts of one’s office/home using credit card/Internet banking.

Advantages to the Public: Documents are available 24x7 for inspection for the public and it can be done at the convenience of home or office.

Advantages to the Government:

1. The DIN (which is compulsory for all existing and prospective directors to obtain) will help enforce accountability of directors.

2. Time and energy spent in accepting documents, filing them, corresponding with companies will be drastically reduced and channelized towards taking action against errant corporates.

3. Reduces delays in retrieving court documents

4. Enhances virtual filing accessibility from the convenience of home or the office

5. Enables attorneys and court clerks to work more efficiently by reducing the time and effort needed to manage case files.

6. Eco-friendly in nature

7. Allows most legal professionals (attorneys and paralegals) to receive notices, orders, and judgments from the court electronically.