CA Intermediate Paper 2 Corporate & Other Laws PDF May'24

CA Intermediate Paper 2 Corporate & Other laws Chapter-wise compilation of RTP, MTP and PYP May’24 Modified as per new scheme Amended as per May'24 Prakshal Shah | 8779794646...

CA Intermediate Paper 2 Corporate & Other laws Chapter-wise compilation of RTP, MTP and PYP May’24 Modified as per new scheme Amended as per May'24 Prakshal Shah | 8779794646 11Attempts Compilation  CA Finalist _______________________________ (Once you print this write your name in this blank to give you the much-needed motivation. Remember what you see is what you achieve!) Disclaimer: While we have made every attempt to ensure that the information contained in this compilation has been obtained from reliable sources (from the answers given by the Institute of Chartered Accountants of India), Vivitsu is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information on this site is provided "as is," with no guarantee of completeness, accuracy, timeliness, or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability, and fitness for a particular purpose. In no event will Vivitsu, its related partnerships or corporations, or the partners, agents, or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information on this site or for any consequential, special, or similar damages, even if advised of the possibility of such damages. This compilation is presented for informational and educational purposes and should not be considered a formal book or publication. It is essential to use critical thinking and judgment when applying the knowledge and information provided in this compilation. The compiler does not endorse or promote any specific products, services, or organizations mentioned in this compilation. By using this compilation, readers agree to accept full responsibility for their actions and decisions based on the information and content provided, and they acknowledge the limitations and potential risks associated with any compilation of educational materials. Prakshal Shah | 8779794646  GETTING THE MOST FROM THIS BOOK A QUICK GUIDE 1 INITIAL READING After your initial reading of a particular chapter in your study material, go through the questions in our 3, 5, and 11 attempt’s compilations, focusing on the chapter you've just covered. Make note of challenging questions for later reference. 2 FIRST REVISION During your first revision, revisit the marked questions. If you still can't answer them, highlight them in red and review the related concepts to improve your understanding. This process helps you to grasp the key concepts and address your weak points 3 KEEP GOING WITH THE REVISIONS Repeat the reading and revision process as often as possible before your exams. Each iteration will enhance your confidence and knowledge. 4 EXAMINERS COMMENTS Pay attention to the examiner's comments in our compilations, as they highlight common mistakes. Learning from these errors will help you avoid them in your exams Prakshal Shah | 8779794646  Frequently Asked Questions 1. Why RTP’s, MTP’s and PYP’s? RTP’s, MTP’s, and PYP’s are extremely important to ensure that you reproduce ICAI language. These questions train you to understand what is important and what is expected of you. At least 41% of questions* are asked from previous RTP’s, MTP’s and PYP’s. 2. What is included? In this compiler, all questions from the last 3, 5 or 11 attempts depending on the one you have selected will be available. There will be references to the marks and the attempt from which they were asked. Identical or similar questions have been removed and references for both attempts are mentioned. 3. What is the benefit of Chapter-wise? We have categorized each and every question from all Old RTPs, MTP’s, and PYP’s into chapters. This means that you don't have to wait until you've completed your entire syllabus to tackle an RTP, MTP, or past paper. You can start solving these questions to check your conceptual clarity right after finishing a particular chapter. 4. What does amended for the latest attempt mean? When we reviewed all the questions from the past 11 attempts of RTP, MTP, and PYP’S, we didn't just segregate them Chapterwise; we also updated them to reflect the latest provisions. All the answers provided in the compilation are applicable for the May 2024 examination. So, there's no need to stress about outdated or incorrect information. 5. How are Old RTP’s, MTP’s & PYP’s beneficial for me? All old RTPs, MTPs, and PYPs have been organized according to the new syllabus issued by ICAI. This means that if a specific chapter from the old scheme is not included in the new scheme, it has been omitted. If a particular chapter in the new scheme is based on concepts from two or more chapters in the old scheme, it has been adapted to align with how the chapter should be in the new scheme. If a chapter is only partially included in the new scheme, the questions related to those specific concepts are only included in the corresponding chapter of the new scheme. A comprehensive reconciliation of the chapters between the new scheme and the old scheme is provided on the following page. 6. What if a new attempt is added post my purchase? If you have purchased materials for the May 2024 attempt, you will receive a file with the questions segregated Chapterwise specifically for that attempt. 7. What does N/A mean? It could mean any of the following: 1. No questions from that chapter have been included in the selected attempts. 2. The chapter is newly introduced, and as a result, no questions have been previously asked in RTP’s, MTP’s, or PYP’s. *This is on an average based on the last 11 attempts Prakshal Shah | 8779794646  Corporate and Other Laws Reconciliation of chapters of the new scheme (May’24) with old course New Chapter Name as per NEW Syllabus Comparison with Chapter chapters of Old No. Scheme 1 Preliminary Same 2 Incorporation of Company and Matters Incidental Same Thereto 3 Prospectus and Allotment of Securities Same 4 Share Capital and Debentures Same 5 Acceptance of Deposits by Companies Same 6 Registration of Charges Same 7 Management & Administration Same 8 Declaration and Payment of Dividend Same 9 Accounts of Companies Same 10 Audit and Auditors Same 11 Companies Incorporated Outside India * Not a part of CA inter syllabus in the old scheme 12 The Limited Liability Partnership Act, 2008 NEW addition Not a part of CA inter syllabus in the old scheme 13 The General Clauses Act, 1897 Same 14 Interpretation of Statutes Same 15 The Foreign Exchange Management Act, 1999 * Not a part of CA inter syllabus in the old scheme *These Chapters were earlier a part of CA Final Paper 4: Corporate and Other Laws. Prakshal Shah | 8779794646  Table of Contents ` Particulars Page Number 1 Preliminary 1.1 – 1.12 2 Incorporation of Company and Matters 2.1- 2.24 Incidental Thereto 3 Prospectus and Allotment of Securities 3.1 – 3.19 4 Share Capital and Debentures 4.1 - 4.29 5 Acceptance of Deposits by Companies 5.1 - 5.16 6 Registration of Charges 6.1 – 6.15 7 Management & Administration 7.1 – 7.33 8 Declaration and Payment of Dividend 8.1 – 8.18 9 Accounts of Companies 9.1 – 9.24 10 Audit and Auditors 10.1–10.23 11 Companies Incorporated Outside India 11.1 – 11.25 12 The Limited Liability Partnership Act, 2008 *N/A 13 The General Clauses Act, 1897 13.1 – 13.20 14 Interpretation of Statutes 14.1 – 14.19 15 The Foreign Exchange Management Act, 1999 15.1 – 15.30 16 Case Scenarios 16.1 – 16.48 21 MTPs: March’18, April’18, Aug’18, Oct’18, May’19, April’19, Oct’19, May’20, Oct’20, March’21, April’21, Oct ’21, Nov ’21, March ’22, April ’22, Sep ’22, Oct ’22, March ’23, April '23, Sep ’23 & Oct ‘23 11 PYPs: May’18, Nov’18, May’19, Nov’19, Nov’20, Jan’21, July ’21, Dec ’21, May’22, Nov ’22, May ‘23 12 RTPs: May’18, Nov’18, May’19, Nov’19, May’20, Nov’20, May’21, Nov ’21, May ’22, Nov ’22, May ’23, Nov ‘23 Prakshal Shah | 8779794646  1.1 Chapter 1 Preliminary Question 1 New Private Ltd. is a company registered under the Companies Act, 2013 with a paid -up share capital of ` 70 lakh and turnover of ` 30 crores. Explain the meaning of the “Small Company” and examine the following in accordance with the provisions of the Companies Act, 2013: (i) Whether the New Private Ltd. can avail the status of small company? (ii) What will be your answer if the turnover of the company is ` 15 crore and the capital is same as ` 70 lakh? (MTP 5 Marks Oct 21, MTP 6 Marks, Oct 20, PYP May ’18 6 Marks, Old & New SM) (Same concept different figures MTP 6 Marks Apr’22)(PYP 5 Marks ,May ’23) Answer 1 Small Company: According to Section 2(85) of the Companies Act, 2013, Small Company means a company, other than a public company,— (i) paid-up share capital of which does not exceed four crores rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and (ii) turnover of which as per its last profit and loss account does not exceed forty crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees. Nothing in this clause shall apply to— (A) a holding company or a subsidiary company; (B) a company registered under section 8; or (C) a company or body corporate governed by any special Act. (1) In the present case, New Private Ltd., a company registered under the Companies Act, 2013 with a paid up share capital of ` 70 lakh and having turnover of ` 30 crore. Since both the criteria of share capital not exceeding ` 4 crores and second criteria of turnover not exceeding 40 crores is met it can avail the status of small company. (2) If the turnover of the company is ` 15 crore, then both the criteria will be fulfilled and New Private Ltd. can avail the status of small company. Question 2 Kavya Ltd. has a paid up share-capital of Rs. 80 crores. Amjali Ltd. holds a total of Rs. 50 crores of Kavya Ltd. Now, Kavya ltd. is making huge profits and wants to expand its business and is aiming at investing in Amjali Ltd. Kavya Ltd. has approached you to analyse whether as per the provisions of the Companies Act, 2013, they can hold 1/10th of the share capital of Amjali Ltd. (MTP 5 Marks ,March 21) Answer 2 In terms of section 2 (87) of the Companies Act 2013 "subsidiary company" or "subsidiary", in relation to any other company (that is to say the holding company), means a company in which the holding company— (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: Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. Since, Kavya ltd. is holding more than one half (50 crores out of 80 crores) of the total share capital of Kavya Ltd., it (Amjali Ltd.) is holding of Kavya Ltd. Further, as per the provisions of section 19 of the Companies Act, 2013, no company shall, either by itself or through its nominees, hold any shares in its holding company and no holding company shall Prakshal Shah | 8779794646 Chapter 1 Preliminary  1.2 allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void: Provided that nothing in this sub-section shall apply to a case— (a) where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or (b) where the subsidiary company holds such shares as a trustee; or (c) where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company In the given question, Kavya ltd. cannot acquire the shares of Amjali Ltd. as the acquisition of shares does not fall within the ambit of any of the exceptions provided in section 19. Question 3 (Includes concepts of Chap 7- Management & Administration) AB Limited issued equity shares of ` 1,00,000 (10000 shares of ` 10 each) on 01.04.2020 which have been fully subscribed whereby XY Limited holds 4000 shares and PQ Limited holds 2000 shares in AB Limited. AB Limited is also holding 20% equity shares of RS Limited before the date of issue of equity shares stated above. RS Limited controls the composition of Board of Directors of XY Limited and PQ Limited from 01.08.2020. Examine with relevant provisions of the Companies Act, 2013: (i) Whether AB Limited is a subsidiary of RS Limited? (ii) Whether AB Limited can hold shares of RS Limited? (iii) Whether AB Limited can vote at Annual General Meeting of RS Limited held on 30.09.2020? (RTP Nov ’21)(Same concept different figures MTP 6 Marks , March ’22) Answer 3 This given problem is based on sub-clause (87) of Clause 2 read with section 19 of the Companies Act, 2013. As per sub-clause (87) of Clause 2 of the Companies Act, 2013 "subsidiary company" or "subsidiary", in relation to any other company (i.e., 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. For the purposes of this clause, Explanation is given providing that a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in point (i) or point (ii) above, is of another subsidiary company of the holding company. Whereas Section 19 provides that, no company shall, hold any shares in its holding company and no holding company shall allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void. Provided that nothing in this sub-section shall apply to a case where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company. Here in the instant case, AB Ltd. issued 10,000 equity shares on 1.4.2020 whereby XY Ltd. & PQ Ltd. holds 4000 & 2000 shares respectively in AB Ltd., Considering 1 share = 1 vote, XY Ltd. and PQ Ltd. together holds more than one-half (50%) of the total voting power. Therefore, AB Ltd. will be subsidiary to XY Ltd. & PQ Ltd. from 1.4.2020. Whereas AB Ltd. is already holding 20% equity shares of RS Ltd. before the date of issue of equity shares i.e. 1.4.2020. Further, RS Ltd. controls the composition of Board of Directors of XY Ltd. and PQ Ltd. from 01.08.2020. In the light of sub-clause (87) of Clause 2, RS Ltd. is a holding company of XY Ltd. and PQ Ltd. (Subsidiary companies). Following are the answers to the questions: (i) Yes. In this case AB Ltd. shall be deemed to be a subsidiary company of the holding company (RS Ltd.) as RS Ltd. controls the composition of subsidiary companies XY Ltd. & PQ Ltd. as per Prakshal Shah | 8779794646 Chapter 1 Preliminary  1.3 explanation to sub-clause (87) of Clause 2. (ii) Yes. In this case AB Limited is a subsidiary of RS Limited as AB Ltd. was holding 20% of equity shares of RS Ltd. even before it became a subsidiary company of the RS Ltd. (i.e. on 01 08.2020), according to the exception to section 19. (iii) No. The subsidiary company shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee but not where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company. Therefore, AB Ltd. cannot vote at AGM of RS Ltd. held on 30.9.2020. Question 4 The paid-up share capital of Altar Private Limited is ` 1 crore, consisting of 8 lacs Equity Shares of ` 10 each, fully paid-up and 2 lacs Cumulative Preference Shares of `10 each, fully paid-up. New Private Limited and Ultra Private Limited are holding 3 lacs Equity Shares and 50,000 Equity Shares respectively in Altar Private Limited. New Private Limited and Ultra Private Limited are the subsidiaries of PQR Private Limited. With reference to the provisions of the Companies Act, 2013 examine whether Altar Private Limited is a subsidiary of PQR Private Limited? Would your answer be different if PQR Private Limited has 8 out of 9 Directors on the Board of Altar Private Limited?(RTP May’19 & May’18) Answer 4 In terms of section 2 (87) of the Companies Act 2013 "subsidiary company" or "subsidiary", in relation to any other company (that is to say the holding company), means a company in which the holding company— (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: Explanation. —For the purposes of this clause,— (a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company; (b) the composition of a company's Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors. In the present case, New Pvt. Ltd. and Ultra Pvt. Ltd. together hold less than one half of the total share capital i.e. less than one-half of total voting power. Hence, PQR Private Ltd. (holding of New Pvt. Ltd. and Ultra Pvt. Ltd) will not be a holding company of Altar Pvt. Ltd. However, if PQR Pvt. Ltd. has 8 out of 9 Directors on the Board of Altar Pvt. Ltd. i.e. controls the composition of the Board of Directors; it (PQR Pvt. Ltd.) will be treated as the holding company of Altar Pvt. Ltd. Question 5 Following are some of the securities, issued by different companies related with each other, as follows:- Company Securities Issued Remarks Kleshrahit Ltd. Listed non-convertible Has the power to appoint 2/3rd redeemable preference shares issued on directors in Indriyadaman Ltd. private placement basis in terms of relevant SEBI Regulations. Indriyadaman Ltd. Listed non-convertible debt securities Holding 60% voting power in Sajagta issued on private placement basis in (P) Ltd. terms of relevant SEBI Regulations. Sajagta (P) Ltd. Listed non-convertible debt securities The company holds 52% equity shares issued on private placement basis in in Pratibodh Ltd. as an investment on terms of relevant SEBI Regulations. behalf of another company in a capacity of a trustee. Prakshal Shah | 8779794646 Chapter 1 Preliminary  1.4 Equity shares issued by the Kleshrahit Ltd. and Indriyadaman Ltd. are not listed in any of the recognized stock exchanges. In the context of aforesaid facts, answer the following question(s):- (a) Whether the aforesaid companies can be considered as listed company(ies)? (b) Explain the relationship between the aforesaid companies? (RTP May ’22) Answer 5 (a) According to section 2(52) of the Companies Act, 2013, listed company means a company which has any of its securities listed on any recognized stock exchange; Provided that such class of companies, which have listed or intend to list such class of securities, as may be prescribed in consultation with the Securities and Exchange Board, shall not be considered as listed companies. According to rule 2A of the Companies (Specification of definitions details) Rules, 2014, the following classes of companies shall not be considered as listed companies, namely:- (a) Public companies which have not listed their equity shares on a recognized stock exchange but have listed their – (i) non-convertible debt securities issued on private placement basis in terms of SEBI (Issue and Listing of Debt Securities) Regulations, 2008; or (ii) non-convertible redeemable preference shares issued on private placement basis in terms of SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013; or (iii) both categories of (i) and (ii) above. (b) Private companies which have listed their non-convertible debt securities on private placement basis on a recognized stock exchange in terms of SEBI (Issue and Listing of Debt Securities) Regulations, 2008; (c) Public companies which have not listed their equity shares on a recognized stock exchange but whose equity shares are listed on a stock exchange in a jurisdiction as specified in sub-section (3) of section 23 of the Act. Company Name Analysis and Conclusion Kleshrahit Ltd. Equity shares issued by the company are not listed. However, the company has issued listed non- convertible redeemable preference shares issued on private placement basis in terms of relevant SEBI Regulations which falls in the exceptions to the listed company, given as per clause (a)(ii) to Rule 2A, as aforesaid, and accordingly, Kleshrahit Ltd. shall not be considered as a listed company. Indriyadaman Ltd. Equity shares issued by the company are not listed. However, the company has issued listed non- convertible debt securities issued on private placement basis in terms of relevant SEBI Regulations which falls in the exceptions to the listed company, given as per clause (a)(i) to Rule 2A, as aforesaid, and accordingly, Indriyadaman Ltd. shall not be considered as a listed company. Sajagta (P) Ltd. The company has issued listed non-convertible debt securities issued on private placement basis on a recognised Stock Exchange in terms of relevant SEBI Regulations which falls in the exceptions to the listed company given as per clause (b) to Rule 2A, as aforesaid, and accordingly, Sajagta (P) Ltd. shall not be considered as a listed company. (b) According to 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. According to section 2(87) of the Companies Act, 2013, subsidiary company or subsidiary, in relation to any other company (that is to say the holding company), means a company in which the holding company— (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: Provided that such class or classes of holding companies as may be prescribed shall not have layers of Prakshal Shah | 8779794646 Chapter 1 Preliminary  1.5 subsidiaries beyond such numbers as may be prescribed. Explanation—For the purposes of this clause,— (a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company; (b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors; (c) the expression “company” includes any body corporate; (d) “layer” in relation to a holding company means its subsidiary or subsidiaries; As per the notification dated 27th December 2013, Ministry clarified that the shares held by a company or power exercisable by it in another company in a fiduciary capacity shall not be counted for the purpose of determining the holding – subsidiary relationship in terms of the provision of section 2(87) of the Companies Act, 2013. (i) Relationship between Kleshrahit Ltd. & Indriyadaman Ltd. It is given that Kleshrahit Ltd. has the power to appoint 2/3rd directors in Indriyadaman Ltd. i.e. majority of the directors can be appointed by Kleshrahit Ltd. Accordingly, as per sub-clause (i) to section 2(87) read with the Explanation given in point (b), it can be understood that Indriyadaman Ltd. is the subsidiary company of Kleshrahit Ltd. while the latter is the holding company of Indriyadaman Ltd. (ii) Relationship between Indriyadaman Ltd. & Sajagta (P) Ltd. It is given that Indriyadaman Ltd. is holding 60% voting power in Sajagta (p) Ltd. Accordingly, as per sub-clause (ii) to section 2(87), it can be understood that Sajagta (P) Ltd. is the subsidiary company of Indriyadaman Ltd. while the latter is the holding company of Sajagta (P) Ltd. as Indriyadaman Ltd. controls more than one-half of the total voting power of Sajagta (P) Ltd. (iii) Relationship between Kleshrahit Ltd. & Sajagta (P) Ltd. It is given that Indriyadaman Ltd. is holding 60% voting power in Sajagta (p) Ltd. and it has been derived that Indriyadaman Ltd. is the subsidiary company of Kleshrahit Ltd. and Sajagta (P) Ltd. is the subsidiary company of Indriyadaman Ltd., respectively. Accordingly, as per sub-clause (ii) to section 2(87) read with the Explanation given in point (a), that a company shall be deemed to be a subsidiary company of the holding company even if the control is of another subsidiary company of the holding company i.e. subsidiary of subsidiary company will be deemed to be a subsidiary of the holding company. Hence, it can be understood that Sajagta (P) Ltd. is deemed to be subsidiary company of Kleshrahit Ltd. while the latter would be considered as the holding company of Sajagta (P) Ltd. (iv) Relationship between Sajagta (P) Ltd. & Pratibodh Ltd. It is given that Sajagta (P) Ltd. holds 52% equity shares in Pratibodh Ltd. as an investment on behalf of another company in a capacity of a trustee i.e. in a fiduciary capacity. As per the notification dated 27th December 2013, Ministry (MCA) clarified that the shares held by a company or power exercisable by it in another company in a fiduciary capacity shall not be counted for the purpose of determining the holding–subsidiary relationship in terms of the provision of section 2(87) of the Companies Act, 2013. Accordingly, Sajagta (P) Ltd. & Pratibodh Ltd. do not share any holding– subsidiary relationship as the former holds shares in latter just in a fiduciary capacity on behalf of another company. Question 6 Geeta Private Limited is a start-up company. Mr. Prabodh has been appointed as Accounts Manager of Geeta Private Limited. The Board meeting for approval of accounts is to be held on 01.08.2022 and he has to prepare the financial statements for approval by the Board. Referring to section 2(40) of the Companies Act, 2013, advise Mr. Prabodh about the statements that are required to be prepared. (RTP Nov’22) Answer 6 As per section 2(40) of the Companies Act, 2013, Financial Statement in relation to a company, Prakshal Shah | 8779794646 Chapter 1 Preliminary  1.6 includes— (i) a balance sheet as at the end of the financial year; (ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year; (iii) cash flow statement for the financial year; (iv) a statement of changes in equity, if applicable; and (v) any explanatory note annexed to, or forming part of, any document referred to in sub- clause (i) to sub-clause (iv): Exemption: As per the proviso to section 2(40), the financial statement, with respect to one person company, small company, dormant company and private company (if such private company is a start- up) may not include the cash flow statement. In the instant case, Mr. Prabodh has to prepare the above financial statements except Cash Flow Statement; since Geeta Private Limited is a start-up private company Question 7 Hastprat Ltd. is an unlisted public company, having five directors in its board which includes two independent directors. Sankul (P) Ltd., is subsidiary company of Hastprat Ltd., actively carrying on its business, having paid up capital of ` 1.5 crore with 40 members and turnover of ` 18 crore, respectively and the said company is not a start-up company. In the context of aforesaid case-scenario, please answer to the following question(s):- Whether Sankul (P) Ltd. is mandatorily required to prepare cash flow statement for the financial year as a part of its financial statements? Provide your answer by analysing Sankul (P) Ltd. into following category of companies:- (i) One person company, (ii) Small company, (iii) Dormant company and (iv) Private company, respectively. (RTP May ‘23) Answer 7 According to section 2(10) of the Companies Act, 2013, Financial statement in relation to a company, includes— (i) a balance sheet as at the end of the financial year; (ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year; (iii) cash flow statement for the financial year; (iv) a statement of changes in equity, if applicable; and (v) any explanatory note annexed to, or forming part of, any document referred to in sub- clause (i) to sub-clause (iv): Provided that the financial statement, with respect to one person company, small company, dormant company and private company (if such private company is a start-up) may not include the cash flow statement. For considering the applicability of preparation cash flow statement in case of Sankul (P) Ltd., it is required first to be analyzed that Sankul (P) Ltd. does not fall in any of the categories of companies mentioned under proviso to section 2(10) of the Companies Act, 2013: (i) One person company – It is given that the company is having 40 members and also its name does not contain the words ‘OPC’, so it is not a one person company. (ii) Small company – A company which is a subsidiary company cannot be categorized as a small company as per proviso to section 2(85) even though its paid up capital and turnover are within the prescribed limits and accordingly, as Sankul (P) Ltd. is a subsidiary company of Hastprat Ltd., it cannot be considered as small company also. (iii) Dormant company – It is given that the company is actively carrying on its business, so it cannot be also categorized as a dormant company based upon the facts given. Prakshal Shah | 8779794646 Chapter 1 Preliminary  1.7 (iv) Private company (which is a start-up) – It is given that Sankul (P) Ltd. is not a start- up company and also, as per proviso to section 2(71) of the Act, a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles. So, Sankul (P) Ltd. shall be deemed to be a public company as it is subsidiary of Hastprat Ltd., an unlisted public company and so it will not fall into this category of exemption as well. Thus, it can be concluded that Sankul (P) Ltd. is mandatorily required to prepare cash flow statement for the financial year as a part of its financial statements as it does not fall in any of the categories of companies mentioned under proviso to section 2(10) of the Companies Act, 2013. Question 8 Teresa Ltd. is a company registered in New York (U.S.A.). The company has no place of business established in India, but it is doing online business through data interchange in India. Explain with reference to relevant provisions of the Companies Act, 2013 whether Teresa Ltd. will be treated as Foreign Company. (PYP Nov’18,6 Marks) (Same concept different figures PYP Nov’19 2 Marks) Answer 8 According to section 2(42) of the Companies Act, 2013, foreign company means any company or body corporate incorporated outside India which,- (a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and (b) conducts any business activity in India in any other manner. As per the Rule given in the Companies (Specification of Definitions Details) Rules, 2014, the term “electronic mode”, means carrying out electronically based, whether main server is installed in India or not, including, but not limited to- (i) Business to business and business to consumer transactions, data interchange and other digital supply transactions; (ii) Offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India; (iii) Financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management; (iv) Online services such as telemarketing, telecommuting, telemedicine, education and information research; and (v) All related data communication services, whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise; In the given question, Teresa Ltd. will be treated as a foreign company within the meaning of section 2(42) of the Companies Act, 2013 since it is doing online business through data interchange in India even though the company has no place of business established in India. Question 9 The information extracted from the audited Financial Statement of Smart Solutions Private Limited as at 31st March, 2020 is as below: (1) Paid-up equity share capital ₹ 50,00,000 divided into 5,00,000 equity shares (carrying voting rights) of ₹ 10 each. There is no change in the paid-up share capital thereafter. (2) The turnover is ₹ 2,00,00,000. It is further understood that Nice Software Limited, which is a public limited company, is holding 2,00,000 equity shares, fully paid-up, of Smart Solutions Private Limited. Smart Solutions Private Limited has filed its Financial Statement for the said year with the Registrar of Companies (ROC) excluding the Cash Flow Statement within the prescribed time line during the financial year 2020-21. The ROC has issued a notice to Smart Solutions Private Limited as it has failed to file the cash flow statement along with the Balance Sheet and Profit and Loss Account. You are to advise on the following points explaining the provisions of the Companies Act, 2013: Prakshal Shah | 8779794646 Chapter 1 Preliminary  1.8 (i) Whether Smart Solutions Private Limited shall be deemed to be a small company whose significant equity shares are held by a public company? (ii) Whether Smart Solutions Private Limited has defaulted in filing its financial statement? (PYP July ’21 , 6 Marks)(MTP 6 Marks Oct ’23) Answer 9 (i) According to section 2(85) of the Companies Act, 2013, small company means a company, other than a public company, having- (A) paid-up share capital not exceeding four crore rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and (B) turnover as per profit and loss account for the immediately preceding financial year not exceeding forty crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees: Provided that nothing in this clause shall apply to a holding company or a subsidiary company. Also, 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 company 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. In the given question, Nice Software Limited (a public company) holds 2,00,000 equity shares of Smart Solutions Private Limited (having paid up share capital of 5,00,000 equity shares @ ₹ 10 totaling ₹ 50 lakhs). Hence, Smart Solutions Private Limited is not a subsidiary of Nice Software Limited and hence it is a private company and not a deemed public company. Further, the paid up share capital (₹ 50 lakhs) and turnover (₹ 2 crores) is within the limit as prescribed under section 2(87), hence, Smart Solutions Private Limited can be categorised as a small company. (ii) According to section 2 (40), Financial statement in relation to a company, includes— a. a balance sheet as at the end of the financial year; b. a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year; c. cash flow statement for the financial year; d. a statement of changes in equity, if applicable; and e. any explanatory note annexed to, or forming part of, any document referred to in points (a) to (d): Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement. Smart Solutions Private Limited being a small company is exempted from filing a cash flow statement as a part of its financial statements. Thus, Smart Solutions Private Limited has not defaulted in filing its financial statements with ROC. Question 10 Define “Small Company”. (PYP 2 Marks Dec ‘21) Answer 10 According to section (85) of the Companies Act, 2013, ‘Small company’ means a company, other than a public company,— (i) paid-up share capital of which does not exceed four crore rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and (ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed forty crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees: Provided that nothing in this clause shall apply to— (A) a holding company or a subsidiary company; Prakshal Shah | 8779794646 Chapter 1 Preliminary  1.9 (B) a company registered under section 8; or (C) a company or body corporate governed by any special Act. As per the Companies (Specification of Definitions Details) Rules, 2014 , for the purposes of sub-clause (i) and sub-clause (ii) of clause (85) of section 2 of the Act, paid up capital and turnover of the small company shall not exceed rupees four crores and rupees forty crores respectively. Question 11 ABC Private Ltd. has two wholly owned subsidiary companies, D Private Limited and E Private Limited. Examine, whether, D Private Limited and E Private Limited will be treated as related party as per the provisions of the Companies Act, 2013? (PYP 3 Marks , May ’22) Answer 11 According to section 2(76)(viii) of the Companies Act, 2013, Related party, with reference to a company, means any body corporate which is - (A) a holding, subsidiary or an associate company of such company; (B) a subsidiary of a holding company to which it is also a subsidiary; or (C) an investing company or the venturer of the company; In the given Question, D Private Limited and E Private Limited are wholly owned subsidiary companies of ABC Private Ltd. According to stated clause (B), above, D Private Limited and E Private Limited are related parties. However, as per the Notification No. G.S.R. 464(E) dated 5th June, 2015, clause (viii) shall not apply with respect to section 188 to a private company, though being a related parties. Alternate Answer According to section 2(76)(viii)(B) of the Companies Act, 2013, Related party, with reference to a company, means any body corporate which is a subsidiary of a holding company to which it is also a subsidiary. However, Clause (viii) shall not apply with respect to section 188 (Related Party transactions) to a private company vide Notification No. G.S.R. 464(E) dated 5th June, 2015. In the given Question, D Private Limited and E Private Limited are wholly owned subsidiary companies of ABC Private Ltd. According to stated clause (B), above, D Private Limited and E Private Limited are related parties. However, as per the mentioned Notification, clause (viii) shall not apply with respect to section 188 to a private company. Therefore, D Private Limited and E Private Limited are not related parties for the purpose of section 188. Question 12 Referring the relevant provisions of the Companies Act, 2013, examine, whether following companies will be considered as listed company or unlisted company: I. ABC Limited, a public company, has listed its non-convertible Debt securities issued on private placement basis in terms of SEBI (Issue and Listing of Debt Securities) Regulations, 2008. II. CHG Limited, a public company, has listed its non-convertible redeemable preference shares issued on private placement basis in terms of SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013. III. PRS Limited, a public company, which has not listed its equity shares on a recognized stock exchange but whose equity shares are listed on a stock exchange in a jurisdiction as specified in sub-section (3) of section 23 of the Companies Act, 2013. (PYP 5 Marks , Nov ‘22) Prakshal Shah | 8779794646 Chapter 1 Preliminary  1.10 Answer 12 According to Section 2(52) of the Companies Act, 2013, listed company means a company which has any of its securities listed on any recognized stock exchange. RULE 2A: According to Rule 2A of the Companies (Specification of definitions details) Rules, 2014, the following classes of companies shall not be considered as listed companies, namely:- (a) Public companies which have not listed their equity shares on a recognized stock exchange but have listed their – (i) non-convertible debt securities issued on private placement basis in terms of SEBI (Issue and Listing of Debt Securities) Regulations, 2008; or (ii) non-convertible redeemable preference shares issued on private placement basis in terms of SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013; or (iii) both categories of (i) and (ii) above. (b) Public companies which have not listed their equity shares on a recognized stock exchange but whose equity shares are listed on a stock exchange in a jurisdiction as specified in sub-section (3) of section 23 of the Act. In view of the above provisions of the Act: (i) ABC Limited is an unlisted company. (ii) CHG Limited is an unlisted company. (iii) PRS Limited is an unlisted company. Question 13 What does the term Financial Statements include in relation to a company under the Companies Act, 2013? Which companies need not prepare a cash flow statement? (PYP Nov’18,4 Marks) Answer 13 According to section 2(40) of the Companies Act, 2013, Financial statement in relation to a company, includes— (i) a balance sheet as at the end of the financial year; (ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year; (iii) cash flow statement for the financial year; (iv) a statement of changes in equity, if applicable; and (v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv): Provided that the financial statement, with respect to one person company, small company, dormant company and private company (if such private company is a start-up company) may not include the cash flow statement. EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES: Performance of the Examinees was above average. Most of the Examinees have correctly defined the term “Financial Statements” under the Companies Act, 2013. Multiple Choice Questions (MCQ’s) Question 1 A Ltd. is holding 61% shares in B Ltd. and B Ltd. holds 51% in C Ltd. State which is the correct statement here: (a) C Ltd. is the holding company to A Ltd. Prakshal Shah | 8779794646 Chapter 1 Preliminary  1.11 (b) C Ltd. is the holding company to B Ltd. (c) B Ltd. is the Subsidiary to C Ltd. (d) Both B Ltd. and C Ltd. are subsidiary to A Ltd. (MTP 1 Mark , Sep’22) Answer 1 : (d) Question 2 “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. Here, the words ‘significant influence’ means: (a) Control of at least 10% of total voting power (b) Control of at least 15% of total voting power (c) Control of at least 20% of total voting power (d) Control of at least 25% of total voting power (MTP 1 Mark March ‘23) Answer 2 (c) Question 3 Such shares which are issued by a company to its directors or employees at a discount or for a consideration other than cash for working extraordinary hard and achieving desired output is honoured with: (a) Equity Shares (b) Preference Shares (c) Sweat Equity Shares (d) Redeemable preference shares (RTP Nov 21) Answer 3 The Answer is (c) Question 4 Roma along with her six friends has got incorporated Roma Trading Ltd. in May 2019. She kept the paid-up share capital at ` 30 lacs. Further, in April 2020, she noticed that in the last financial year, the turnover of the company was well below ` 2 crores. Advise whether the company can be treated as a ‘small company’. (a) Roma Trading Ltd. is definitely a ‘small company’ since its paid-up capital is much below ` 50 lacs and also its turnover has not exceeded the threshold limit of ` 2 crores. (b) The concept of ‘small company’ is applicable only in case of a private limited company/OPC and therefore, despite meeting the criteria of ‘small company’ it being a public limited company cannot enjoy benefits of ‘small company’. (c) Unlike a private limited company/OPC which automatically becomes a ‘small company’ as soon as it meets the criteria of ‘small company’, Roma Trading Ltd. being a public limited company has to maintain the norms applicable to a ‘small company’ continuously for two years so that, thereafter, it is treated as a ‘small company’. (d) If all the shareholders of Roma Trading Ltd. give an undertaking to the ROC stating that they will not let the paid share capital and also turnover exceed the limits applicable to a ‘small company’ in the next two years, then it can be treated as a ‘small company’. (RTP Nov ’20) Answer 4 The Answer is (b) Question 5 A Ltd. is the holding company of B Ltd. Another company C Ltd. is the subsidiary company of B Ltd. Is there any relationship between A Ltd. and C Ltd.(RTP May ’19) (a) There is no relationship between A Ltd. and C Ltd. Prakshal Shah | 8779794646 Chapter 1 Preliminary  1.12 (b) C Ltd. is deemed to be the subsidiary of A Ltd. (c) A Ltd. shall be deemed to be the holding company of C Ltd. provided A Ltd. acquires at least 10% stake in C Ltd. (d) C Ltd. shall be deemed to be the subsidiary of A Ltd. if the latter company acquires minimum 10% stake in the former company within six months after C Ltd. becomes subsidiary of B Ltd. Answer 5 The Answer is (b) Question 6 A Public company may be formed by: (a) Only two persons (b) Not more than three persons (c) Not more than Seven Persons (d) Seven or more Persons : (PYP Nov’22) Answer 6 : (d) Prakshal Shah | 8779794646 Chapter 1 Preliminary  2.1 Chapter 2 Incorporation of Company and Matters Incidental there to Question 1 Alfa school started imparting education on 1.4.2010, with the sole objective of providing education to children of weaker society either free of cost or at a very nominal fee depending upon the financial condition of their parents. However, on 30th March 2018, it came to the knowledge of the Central Government that the said school was operating by violating the objects of its objective clause due to which it was granted the status of a section 8 company under the Companies Act, 2013. Describe what powers can be exercised by the Central Government against the Alfa School, in such a case? (MTP Aug’18-6 Marks, MTP Mar’19-5 Marks, Old & New SM) Answer 1 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, Alfa School was a Section 8 company and 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 license of the company where the company contravenes any of the requirements or the conditions of this sections subject to which a license 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 license and opportunity to be heard in the matter. (ii) Where a license 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 license 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. Question 2 The directors of Smart Computers limited borrowed a sum of money from Mr. Tridev. The company's articles provided that the directors may borrow on bonds such sums as may, from time to time, be authorized by resolution passed at a general meeting of the company. The shareholders claimed that there had been no such resolution authorizing the loan, and therefore, it was taken without their authority and the company is not bound to repay the loan to Tridev. In the light of the contention of shareholders, decide whether the company is bound to pay the loan. (MTP 6 Marks May 20) Answer 2 Doctrine of Indoor Management: According to this doctrine, persons dealing with the company need not enquire whether internal proceedings relating to the contract are followed correctly, once they are satisfied that the transaction is in accordance with the memorandum and articles of association. Stakeholders need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the company had gone through all these proceedings in a regular manner. Prakshal Shah | 8779794646 Chapter 2 Incorporation of Company and Matters Incidental Thereto  2.2 The doctrine helps to protect external members from the company and states that the people are entitled to presume that internal proceedings are as per documents submitted with the Registrar of Companies. Thus, 1. What happens internal to a company is not a matter of public knowledge. An outsider can only presume the intentions of a company, but not know the information he/she is not privy to. 2. If not for the doctrine, the company could escape creditors by denying the authority of officials to act on its behalf. In the given question, Mr.Tridev being a person external to the company, need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. Even if the shareholders claim that no resolution authorizing the loan was passed, the company is bound to pay the loan to Mr.Tridev. Question 3 XYZ a One-Person Company (OPC) was incorporated during the year 2017-18 with an authorized capital of ` 45.00 lakhs (4.5 lakh shares of ` 10 each), The capital was fully subscribed and paid up. Turnover of the company during 2017-18 and 2018-19 was ` 2.00 crores and ` 2.5 crores respectively. Promoter of the company seeks your advice in following circumstances, whether XYZ (OPC) can convert into any other kind of company during 2019-20. Please, advise with reference to relevant provisions of the Companies Act, 2013 in the below mentioned circumstances: (i) If promoter increases the paid up capital of the company by` 10.00 lakhs during 2019-20. (ii) If turnover of the company during 2019-20 was ` 3.00 crores. (MTP 5 Marks Oct ‘20) (6 Marks April ‘19) (RTP May ’19, PYP 4 Marks ,Nov ’18) Answer 3 As per Rule 3 of the Companies (Incorporation) Rules, 2014, no One Person Company (OPC) can convert voluntarily into any kind of company except a section 8 company Besides, Section 18 of the Companies Act, 2013 provides that a company of any class registered under this Act may convert itself as a company of other class under this Act by alteration of memorandum and articles of the company in accordance with the provisions of Chapter II of the Act. Question 4 Explain the provisions of the Companies Act, 2013 relating to the ‘Service of Documents’ on a company and the members of the company. (MTP 3 Marks March 21,MTP 5 Marks Nov 21, MTP 5 Marks Sep’22, Old & New SM) Answer 4 Under section 20 of the Companies Act, 2013 a document may be served on a company or an officer thereof by sending it to the company or the officer at the registered office of the company by registered post or by speed post or by courier service or by leaving it at its registered office or by means of such electronic or other mode as may be prescribed. However, in case where securities are held with a depository, the records of the beneficial ownership may be served by such depository on the company by means of electronic or other mode. Under section 20 (2), save as provided in the Act or the rule thereunder for filing of documents with the registrar in electronic mode, a document may be served on Registrar or any member by sending it to him by post or by registered post or by speed post or by courier or by delivering at his office or address, or by such electronic or other mode as may be prescribed. However, a member may request for delivery of any document through a particular mode, for which he shall pay such fees as may be determined by the company in its annual general meeting. Prakshal Shah | 8779794646 Chapter 2 Incorporation of Company and Matters Incidental Thereto  2.3 Question 5 Mr. Shyamlal is a B. Tech in computer science. He has promoted an IT start up and got it registered as a Private Limited Company. Initially, only he and his family members are holding all the shares in the company. While drafting the Articles of Association of the company, it has been included that Mr. Shyamlal will remain as a director of the company for lifetime. Mr. Mehra, a close friend of Mr. Shyamlal has warned him (Mr. Shyamlal) that in future if 75% or more shares in the company are held by non- family members then by passing a Special Resolution, the relevant articles can be amended and Mr. Shyamlal may be removed from the post of director. Mr. Shyamlal has approached you to advise him for protecting his position as a director for lifetime. Give your answer as per the provisions of the Companies Act, 2013. (MTP 6 Marks April 21) Answer 5 As per the provisions of sub-section (3) of section 5 of the Companies Act, 2013, the articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of special resolution are met or complied with. Usually, an article of association may be altered by passing a special resolution but entrenchment makes it one difficult to change it. So, entrenchment means making something more protective. Manner of inclusion of the entrenchment provision: As per the provisions of sub-section (4) of section 5 of the Companies Act, 2013, the provisions of entrenchment shall only be made either on formation of a company, or by an amendment in the Articles of Association as agreed to by all the members of the company in the case of a private company and by a special resolution in case of a public company. Notice to the Registrar of the entrenchment provision: As per the provisions of sub-section (4) of section 5 of the Companies Act, 2013, where the articles contain provision for entrenchment whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed. In the said situation the IT startup company is a private company. Therefore, Mr. Shyamlal can get the articles altered which is agreed to by all the members whereby the amended article will say that he can be removed from the post of director only if, say, 95% votes are cast in favour of the resolution and give notice of the same to the Registrar. Question 6 Mr. Dinesh incorporated a new Private Limited Company under the provisions of the Companies Act, 2013 and desires to commence the business immediately. Please advise Mr. Dinesh about the procedure for commencement of business as laid under the provisions of the Section 10A of the Companies Act, 2013. (MTP 5 Marks April 21) Answer 6 As per Section 10A of the Companies Act, 2013, a company incorporated after the commencement of the Companies (Amendment) Second Ordinance, 2019 and having a share capital shall not commence any business or exercise any borrowing powers unless: (i) A declaration is filed by a director within a period of 180 days of the date of incorporation of the company in such form and verified in such manner as may be prescribed, with the Registrar that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration; and (ii) The company has filed with the Registrar a verification of it registered office as provided in sub- section (2) of section 12. Mr. Dinesh has to comply with the above requirements and procedure for commencing the business of the company. Prakshal Shah | 8779794646 Chapter 2 Incorporation of Company and Matters Incidental Thereto  2.4 Question 7 The persons (not being members) dealing with the company are always protected by the doctrine of indoor management. Explain. (MTP 6 Marks Oct 21 & Sep ‘22) Answer 7 Doctrine of Indoor Management According to this doctrine, persons dealing with the company need not inquire whether internal proceedings relating to the contract are followed correctly, once they are satisfied that the transaction is in accordance with the memorandum and articles of association. Stakeholders need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the company had gone through all these proceedings in a regular manner. The doctrine helps to protect external members from the company and states that the people are entitled to presume that internal proceedings are as per documents submitted with the Registrar of Companies. The doctrine of indoor management is opposite to the doctrine of constructive notice. Whereas the doctrine of constructive notice protects a company against outsiders, the doctrine of indoor management protects outsiders against the actions of a company. This doctrine also is a safeguard against the possibility of abusing the doctrine of constructive notice. Question 8 What is the minimum number of persons required to form a Private company and a Public company. Explain the consequences when the number of members falls below the minimum prescribed limit. (MTP 6 Marks Nov 21) Answer 8 According to section 3 of the Companies Act, 2013, a company may be formed for any lawful purpose by— (a) 7 or more persons, where the company to be formed is to be a public company; (b) 2 or more persons, where the company to be formed is to be a private company; or by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration. According to section 3A,  If at any time the number of members of a company is reduced,  in the case of a public company, below 7,  in the case of a private company, below 2, and the company carries on business for more than six months while the number of members is so reduced, then  every person who is a member of the company during the time that it so carries on business after those six months and is cognizant (aware) of the fact that it is carrying on business with less than seven members or two members, as the case may be,  shall be severally liable for the payment of the whole debts of the company contracted during that time (after six months) and may be severally sued therefore. Question 9 Mr. X, in association with his relative formed a company to promote education for the children of Prakshal Shah | 8779794646 Chapter 2 Incorporation of Company and Matters Incidental Thereto  2.5 poor section. A licence was issued by the Central Government allowing the said company to be registered under section 8 of the Company. Government aids and lot of funds were contributed by public for the fulfilment of the benevolent object. However, on the compliant against the company, CG came to know about the manipulation of the funds in the company and so order to revoke the licence of the company. Further, directed for the amalgamation with another company registered under this section with an object to save girl child. Examine the legal position as to the order passed by the Central government in the given situation in the light of the Companies Act, 2013. (MTP 6 Marks Oct ‘18) Answer 9 As per the Section 8 of the Companies Act, 2013, the Central Government may by order revoke the license of the company where the company contravenes any of the requirements or the conditions of this sections subject to which a license 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. Where a license 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. Where a license 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, 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. According to the given situation, on revocation of licence, the Central Government ordered for the amalgamation of the company with the separate entity registered under the section 8 of the Companies Act, 2013. However, an object for which both the Companies formed were promoting different objects. Accordingly, the order passed by the Central Government after the revocation of license, is not in compliance of the Section 8 of the Companies Act, 2013. Question 10 Gully Gilli Danda Club was formed as a Limited Liability Company under section 8 of the Companies Act, 2013 with the object of promoting Gilli Danda by arranging introductory courses at district level and friendly matches. The club has been earning surplus. Of late, the affairs of the company are conducted fraudulently and dividend was paid to its members. Mr. A, a member decided to make a complaint with Regulatory Authority to curb the fraudulent activities by cancelling the licence given to the company. (i) Is there any provision under the Companies Act, 2013 to revoke the licence? If so, state the provisions. (ii) Whether the company may be wound up? (iii) Whether the Gully Gilli Danda Club can be merged with Stick Private Limited, a company engaged in the business of networking? (MTP 5 Marks March ’22 & Oct ’22 & Oct ‘23)(PYP July 21 5 Marks) Answer 10 (i) According to section 8(6) of the Companies Act, 2013, the Central Government may by order revoke the licence of the company where the company contravenes any of the requirements or the conditions of section 8 subject to which a licence is issued or where the affairs of the company are conducted fraudulently, or in violation 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. Hence, in the instant case, the Central Government can revoke the license given to Gully Gilli Danda Club as section 8 company, as the affairs of the company are conducted fraudulently and dividend was paid to its members which is in contravention to the conditions given under section 8. Prakshal Shah | 8779794646 Chapter 2 Incorporation of Company and Matters Incidental Thereto  2.6 (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. [Section 8(7)]. Hence, the stated company may be wound up. (iii) A company registered under this section shall amalgamate only with another company registered under this section and having similar objects. [Section 8(10)] In the instant case, Gully Gilli Danda Club cannot be merged with Stick Private Limited as the objects of both the companies are different and not similar. Question 11 Sai along with his six friends desires to incorporate a Section 8 Company under the Companies Act, 2013. He is seeking your advice in the following matters : (i) What is the minimum paid-up capital requirement in case of a Section 8 Company ? (ii) Whether a firm can be member of the Section 8 Company ? (iii) Whether the Section 8 Company can pay dividend to its members ? Advise, Sai with reference to the provisions of Companies Act, 2013. (MTP 5 Marks April 22) Answer 11 (i) The requirement of having a minimum paid up share capital shall not apply to a section 8 company vide notification dated 5th June 2015. (ii) Yes, under section 8(3) of the Companies Act, 2013, a firm may be a member of the company registered under section 8. (iii) According to Section 8(1)(c) of the Companies Act, 2013, section 8 company cannot pay dividend to its members as it prohibits the payment of dividends to its members. Question 12 Paritosh and friends got registered a company in the name of Taxmann advisory Private Limited. Taxmann is a registered trademark. After 5 years when the owner of trademark came to know about the same, it filed an application with relevant authority. Can the company be compelled to change its name by the owner of trademark? Can the owner of registered trademark request the company and then company changes its name at its discretion? (MTP 6 Marks April 22, RTP May ’23, Old & New SM) Answer 12 According to section 16 of the Companies Act, 2013 if a company is registered by a name which,—  in the opinion of the Central Government, is identical with the name by which a company had been previously registered, it may direct the company to change its name. Then the company shall by passing an ordinary resolution change its name within 3 months.  is identical with a registered trade mark and owner of that trade mark apply to the Central Government within three years of incorporation of registration of the company, it may direct the company to change its name. Then the company shall change its name by passing an ordinary resolution within 3 months. Company shall give notice to ROC along with the order of Central Government within 15 days of change. In case of default, company and defaulting officer are punishable. In the given case, owner of registered trade- mark is filing objection after 5 years of registration of company with identical name. While it should have filed the same within 3 years. Therefore, the company Prakshal Shah | 8779794646 Chapter 2 Incorporation of Company and Matters Incidental Thereto  2.7 cannot be compelled to change its name. As per section 13, company can anytime change its name by passing a special resolution and taking approval of Central Government. Therefore, if owner of registered trademark requests the company for change of its name and the company accepts the same then it can change its name voluntarily by following the provisions of section 13. Question 13 A group of individuals intend to form a club namely 'Budding Pilots Flying Club' as limited liability company to impart class room teaching and aircraft flight training to trainee pilots. It was decided to form a limited liability company for charitable purpose under Section 8 of the Companies Act, 2013 for a period of ten years and thereafter the club will be dissolved and the surplus of assets over the liabilities, if any, will be distributed amongst the members as a usual procedure allowed under the Companies Act, 2013. Examine the feasibility of the proposal and advise the promoters considering the provisions of the Companies Act, 2013. (MTP 5 Marks Oct 20, PYP May ’19 , 5 Marks, Old & New SM) Answer 13 According to section 8(1) of the Companies Act, 2013, where it is proved to the satisfaction of the Central Government that a person or an association of persons proposed to be registered under this Act as a limited company— (a) has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object; (b) intends to apply its profits, if any, or other income in promoting its objects; and (c) intends to prohibit the payment of any dividend to its members; the Central Government may, by issue of licence, allow that person or association of persons to be registered as a limited liability company. In the instant case, the decision of the group of individuals to form a limited liability company for charitable purpose under section 8 for a period of ten years and thereafter to dissolve the club and to distribute the surplus of assets over the liabilities, if any, amongst the members will not hold good, since there is a restriction as pointed out in point (b) above regarding application of its profits or other income only in promoting its objects. Further, there is restriction in the application of the surplus assets of such a company in the event of winding up or dissolution of the company as provided in sub-section (9) of Section 8 of the Companies Act, 2013. Therefore, the proposal is not feasible. Question 14 Octagon Limited is holding 58% of the paid up share capital of Pentagon Limited. Vijay, one of the shareholders of Octagon Limited, holding 10% shares of the company, has made a charitable trust. He donated his 10% shareholding in Octagon Limited and ₹ 20 crore to the trust. He appointed Pentagon Limited as the trustee. All the assets of the trust are held in the name of Pentagon Limited. As per the provisions of the Companies Act, 2013, decide whether Pentagon Limited can hold shares of Octagon Limited. (MTP 6 Marks Sep’22 & March ’23, RTP Nov ’19, Old & New SM) Answer 14 According to section 19 of the Companies Act, 2013 a company shall not hold any shares in its holding company either by itself or through its nominees. Also, holding company shall not allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void. Following are the exceptions to the above rule— (a) where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or Prakshal Shah | 8779794646 Chapter 2 Incorporation of Company and Matters Incidental Thereto  2.8 (b) where the subsidiary company holds such shares as a trustee; or (c) where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company but in this case, it will not have a right to vote in the meeting of holding company. In the given case, one of the shareholders of holding company (Octagon Limited) has transferred his shares in the holding company to a trust where the shares will be held by subsidiary company (Pentagon Limited). It means now subsidiary will hold shares in the holding company. But it will hold shares in the capacity of a trustee. Therefore, we can conclude that in the given situation Pentagon Limited can hold shares in Octagon Limited. Question 15 The Articles of Association of a Company may contain provisions for entrenchment under Section 5 of the Companies Act, 2013. What is meant by entrenchment provisions in this context? Also state the relevant provisions of the said Act dealing with entrenchment provisions. (MTP 6 Marks Oct’22, PYP 3 Marks Nov’20) Answer 15 Entrenchment: 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. Section 5 of the Companies Act, 2013 describes the provisions relating to entrenchment. Articles may contain provisions for entrenchment [Section 5(3)]: The articles may contain provisions for entrenchment to the effect tha