Company Law: Articles of Association Quiz

Questions and Answers

What is the primary liability of shareholders in a company limited by shares?

Liability equal to total company assets

Liability up to the unpaid amount on their shareholdings (correct)

Liability only during winding up

Unlimited liability for all debts

In a company limited by guarantee, when can members be called upon to contribute to the company's assets?

Only when the company is profitable

At any time during the company's existence or winding up (correct)

Only after the company is wound up

Only during the company's lifetime

How does an unlimited company differ from a company limited by shares?

An unlimited company cannot have shareholders

Members have limited liability in an unlimited company

Liability in an unlimited company covers all debts of the company (correct)

Members in an unlimited company are not entitled to claim contribution

What is a characteristic of a One-Person Company (OPC)?

The member must have a nominee for succession Signup and view all the answers

What is the maximum paid-up share capital allowed for a One-Person Company?

Fifty lakh rupees Signup and view all the answers

Which of the following statements accurately distinguishes an OPC from a sole proprietorship?

An OPC is a separate legal entity with limited liability for the member Signup and view all the answers

What must the memorandum of a One-Person Company include regarding the nominee?

The name of the nominee and consent for succession Signup and view all the answers

When can changes to the nominee's name in an OPC's memorandum occur?

Anytime with written notice to the company Signup and view all the answers

What does 'fiduciary capacity' mean in terms of shares held by a company?

Shares held with a duty to act in the best interest of a third party. Signup and view all the answers

Which type of company is defined as having its securities listed on a recognized stock exchange?

Listed Company Signup and view all the answers

What percentage of paid-up share capital must be held by the government for a company to be classified as a Government Company?

51% Signup and view all the answers

What characterizes a Section 8 Company under the Companies Act?

It promotes charitable objects. Signup and view all the answers

Which of the following types of companies can a partnership firm be a member of?

Section 8 Company Signup and view all the answers

What is a Dormant Company primarily recognized for?

Future project or asset holding. Signup and view all the answers

Which of the following is NOT a characteristic of Section 8 Companies?

They require a minimum number of directors. Signup and view all the answers

What defines a Foreign Company according to the given content?

A company incorporated outside India with a business presence in India. Signup and view all the answers

What is the primary purpose of the articles of association in a company?

To regulate internal management and functions of officers Signup and view all the answers

What does entrenchment in the context of articles of association refer to?

Adding provisions that protect certain regulations from alteration Signup and view all the answers

When can provisions for entrenchment be included in the articles of association?

Only at the formation of the company or by unanimous agreement among members Signup and view all the answers

What must happen if there is an alteration that converts a public company into a private company?

It must receive approval from the Central Government Signup and view all the answers

Which document lays down the rules for internal management of a company?

Articles of Association Signup and view all the answers

What should be filed with the Registrar after an alteration of the articles?

A copy of the order from the Central Government and the altered articles Signup and view all the answers

What is the primary focus of the memorandum of association?

To define the company's objectives Signup and view all the answers

What must occur within fifteen days after an alteration of the articles is made?

The altered articles must be registered Signup and view all the answers

What defines a holding company in relation to subsidiary companies?

A company that has one or more subsidiary companies under its control. Signup and view all the answers

Which of the following indicates a subsidiary relationship?

A company that holds the majority of its board of directors' positions. Signup and view all the answers

What is the minimum percentage of total voting power required for a company to have significant influence?

20% Signup and view all the answers

In which scenario would company C be regarded as a subsidiary of company A?

If B owns more than 50% of C. Signup and view all the answers

How can a holding company exert control over a subsidiary?

By possessing the majority ownership of the subsidiary's share capital. Signup and view all the answers

What can happen to the control of a subsidiary company if its holding company is allowed to appoint or remove directors?

The holding company has direct management of the subsidiary. Signup and view all the answers

Which statement best defines an associate company?

A company in which there is significant influence without being a subsidiary. Signup and view all the answers

If company D is a subsidiary of C, B is a subsidiary of A, and C is a subsidiary of A, which of the following statements is true?

D is a subsidiary of A as well. Signup and view all the answers

What is the maximum time period allowed for a company or charge holder to inform the Registrar about payment or satisfaction of a charge?

300 days Signup and view all the answers

Which form must be used to give intimation of satisfaction of a charge to the Registrar?

Form No. CHG-4 Signup and view all the answers

How long does a charge holder have to respond to the Registrar's notice to show cause regarding the satisfaction of a charge?

14 days Signup and view all the answers

What is the period for which the instrument creating a charge must be preserved?

Eight years Signup and view all the answers

What does issued capital represent?

The part of authorized capital offered for subscription Signup and view all the answers

What is nominal or authorized capital?

The maximum amount a company can raise through issuing shares Signup and view all the answers

What component contributes to the subscribed capital of a company?

Public subscriptions to shares Signup and view all the answers

Which capital represents the part of the capital called for payment?

Called-up capital Signup and view all the answers

What is the maximum number of members allowed in a private limited company?

200 Signup and view all the answers

Which of the following statements accurately describes a public limited company?

It can be listed on stock exchanges. Signup and view all the answers

What is the minimum number of directors required for a public limited company?

3 Signup and view all the answers

What happens if a public company operates with fewer than the required members for over six months?

Members may be held liable for the company's debts. Signup and view all the answers

Which characteristic differentiates a private limited company from a public limited company?

Public companies cannot restrict share transfer. Signup and view all the answers

Which of the following is true about the transfer of shares in a private limited company?

There are restrictions on the transfer of shares. Signup and view all the answers

What is the minimum number of members required for a private limited company to operate legally?

2 Signup and view all the answers

What consequence does a company face if it continues to operate below the minimum required number of members beyond six months?

Members become severally liable for all debts incurred. Signup and view all the answers

What is the maximum term an independent director can hold office on the Board of a company?

Five consecutive years Signup and view all the answers

Which of the following conditions would disqualify a person from being appointed as an independent director?

Being a partner in a consulting firm that has a contract with the company Signup and view all the answers

What kind of remuneration is an independent director entitled to?

Profit-related commission approved by members Signup and view all the answers

How many consecutive terms can an independent director hold office?

Two terms Signup and view all the answers

What is the waiting period before an independent director can be reappointed after ceasing to be one?

Three years Signup and view all the answers

Which of the following is NOT a requirement for an independent director's appointment?

Having family connections within the company Signup and view all the answers

What is a restriction placed on independent directors regarding their stock options?

They cannot receive any types of stock options Signup and view all the answers

Which of the following defines the maximum relationship one may have with a company to be appointed as an independent director?

Partnership with a firm auditing the company Signup and view all the answers

What happens if a contract entered into by a person is beyond the powers of the company?

The person cannot acquire any rights under the contract. Signup and view all the answers

Which statement accurately describes the Doctrine of Indoor Management?

It assumes all internal procedures of a company have been followed. Signup and view all the answers

Under what condition is a person not protected by the Doctrine of Indoor Management?

When there is an unusual transaction that raises suspicion. Signup and view all the answers

What is required of a company regarding its registered office after incorporation?

It must provide verification of its registered office to the Registrar. Signup and view all the answers

What defines a company’s domicile and nationality?

The geographical location of its registered office. Signup and view all the answers

What type of document must a company provide to its members upon request?

Memorandum, Articles, and other agreements. Signup and view all the answers

How is forgery treated under the doctrine of indoor management?

It is regarded as a nullity with no legal effect. Signup and view all the answers

What does the Doctrine of Indoor Management say about the notice of internal affairs for outsiders?

Outsiders are not required to know internal affairs. Signup and view all the answers

What is a key feature of the Companies Act, 2013 compared to the previous Act?

It legislates the role of whistle-blowers. Signup and view all the answers

What does the term 'Corporate Veil' mean in the context of company law?

It describes the practice where members are shielded from the company's liabilities. Signup and view all the answers

What characterizes a company as a 'Separate Legal Entity'?

It possesses rights and obligations independent of its members. Signup and view all the answers

Which section of the Companies Act, 2013 deals with Accounting Standards?

Section 133 Signup and view all the answers

Under what circumstances might courts lift the Corporate Veil?

When tax evasion or fraud is suspected. Signup and view all the answers

What do Abridged Prospectuses contain?

Salient features of a prospectus as specified by regulations. Signup and view all the answers

Which characteristic is NOT associated with the nature of a company?

Ownership by a single individual. Signup and view all the answers

What primary purpose does a prospectus serve?

To invite public offers for securities of a body corporate. Signup and view all the answers

What is the maximum period for redeeming preference shares for most companies?

Twenty years Signup and view all the answers

How are preference shares generally redeemed?

Out of the profits of the company or proceeds from a new issue of shares Signup and view all the answers

Which of the following statements is true regarding voting rights for preference and equity shareholders?

Equity shareholders generally enjoy voting rights while preference shareholders do not Signup and view all the answers

What is a key difference between the dividends of preference shares and equity shares?

Dividends on preference shares are generally fixed and may be cumulative Signup and view all the answers

Which of the following statements about the convertibility of shares is correct?

Preference shares can be converted into equity shares Signup and view all the answers

What happens to the repayment of capital between preference and equity shares?

Preference share capital is repaid before equity share capital Signup and view all the answers

What is the redemption characteristic of equity shares?

Equity shares are not redeemable during the lifetime of the company Signup and view all the answers

For infrastructure projects, what is the maximum period for which preference shares can be redeemed?

Thirty years Signup and view all the answers

Study Notes

Articles of Association

Articles of association function as bye-laws for company management, specifying duties of directors and officers regarding management, accounts, and audits.

Entrenchment

Alterations typically require a special resolution, but entrenchment makes changes more complex, requiring specific conditions for amendments.
Companies must notify the Registrar about entrenchment provisions in articles.
Entrenchment provisions can only be established during company formation or with unanimous member consent for private companies, and through a special resolution for public companies.

Alteration of Articles

Changes that convert a public company to a private company need Central Government approval to be valid.
Altered articles and approval copies must be filed with the Registrar within fifteen days for registration.

Memorandum of Association vs. Articles of Association

Memorandum: Defines company's objectives and external relationships. Shareholders' liability limited to unpaid shares.
Articles: Set rules for achieving objectives and internal company management.

Company Types

Company Limited by Guarantee: Member liability limited to the amount pledged in case of liquidation, with potential calls at any time.
Unlimited Company: Members are liable for the company's total debts, entitled to seek contributions from other members.

Types of Companies by Number of Members

One-Person Company (OPC): A single-member company offering limited liability, distinguishing it from sole proprietorships.
Minimum paid-up capital for OPCs is mandated, with a ceiling of fifty lakh rupees and average annual turnover not exceeding two crores.
Nominee designation is required in the memorandum to ensure continuity in case of member's incapacity or death.

Types of Companies by Control

Holding and Subsidiary Companies: Where a holding company controls the subsidiary's board or holds more than half of its share capital, even if less than 50% ownership.
Example: DEF Ltd may be a holding company of ABC Ltd by controlling its board of directors.

Associate Company

An associate company is influenced significantly (at least 20% voting power) by another company but is not a subsidiary.
Shares held in a fiduciary capacity are excluded from counting for determining associate status.

Types of Companies by Access to Capital

Listed Company: Securities listed on recognized stock exchanges.
Unlisted Company: Companies that are not listed.

Other Types of Companies

Government Company: At least 51% of the paid-up capital is owned by the government. Includes subsidiaries of such companies.
Foreign Company: Incorporated outside India with a business presence in India.
Section 8 Company: Formed for charitable purposes, exempt from adding 'Limited' or 'Private Limited' to the name; can hold meetings with less notice.

Dormant Company

A company with no significant transactions, formed for future projects or asset holding, can apply for dormant status with the Registrar.
Charge satisfaction must be recorded within 300 days; the register of charges is kept permanently.

Capital Structure of Company

Capital is derived from contributions to a company's common stock.

Classification of Capital

Nominal Capital: Maximum authorized share capital as per the memorandum, upon which stamp duty is payable.
Issued Capital: Part of authorized capital offered for subscription, including non-cash consideration shares.
Subscribed Capital: Shares taken up by the public, representing nominal share amounts.
Called-up Capital: Portion of capital that has been requested for payment from members.

Independent Director Regulations

Independent directors must not have connected employment or ownership interests in the company for the three financial years prior to their appointment.
A person cannot be appointed if they or their relatives hold two percent or more of the company’s total voting power.
Independent directors are prohibited from stock options and can only receive approved remuneration and expense reimbursements.
Term duration for independent directors is up to five consecutive years, with eligibility for reappointment upon special resolution.
Maximum tenure is two consecutive terms; a three-year cooling-off period is required before reappointment in any capacity.

Companies Act, 2013 Overview

The Companies Act, 2013 replaced the Companies Act, 1956 to adapt to new economic conditions, consisting of 470 sections divided into 29 chapters.
Introduced the role and protection of whistleblowers for the first time in corporate law.

Definition and Key Terminology

Company: An artificial legal entity with perpetual succession, created by law as a separate entity under the Companies Act, 2013.
Corporate Veil: Separates the company's identity from its shareholders, protecting them from liability, but can be lifted by courts under specific conditions (e.g., fraud).
Abridged Prospectus: A summary of the main features of a prospectus as specified by the Securities and Exchange Board.
Prospectus: Any document inviting public offers for the subscription of company securities, including red herring and shelf prospectuses.
Accounting Standards: Section 133 mandates the Central Government to prescribe accounting standards based on recommendations from professional bodies.

Features of Companies

Separate Legal Entity: Companies exist independently of their owners, with distinct legal identities.

Private vs. Public Companies

Private Limited Company: Requires a minimum of two members, maximum of 200, restrictions on share transfers, and cannot be listed on stock exchanges.
Public Limited Company: Requires at least seven members, no maximum limit, shares freely transferable, and can be listed on stock exchanges.

Membership Requirements

Companies with insufficient members (less than seven for public, two for private) for over six months expose members to liabilities for debts incurred during that period.

Doctrine of Indoor Management

Protects outsiders by assuming internal company processes are duly followed.
Exceptions include when the third party is aware of irregularities or suspects fraud.

Member Rights

Members can request copies of the Memorandum, Articles, and related documents, which must be provided within seven days for a fee.

Registered Office Requirements

Companies must maintain a registered office, verified within thirty days of incorporation, serving as the legal correspondence address.

Redemption of preference shares must occur within twenty years, or thirty years for infrastructure projects, funded from profits or proceeds of new shares.

Differences Between Shares

Preference Shares: Fixed dividends, preferential repayment rights, may be convertible, and redeemable during the company's lifetime.
Equity Shares: No preferential rights, variable dividends, cannot be converted, and are non-redeemable during the lifetime of the company.

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Description

Test your knowledge on the articles of association and the concept of entrenchment within company law. This quiz covers how directors and officers manage a company's operations, accounts, and audits, and explores the significance of entrenchment in altering articles. Dive into the intricacies of corporate governance!