PAPER – 3 : BUSINESS AND CORPORATE LAWS

QUESTIONS

1. Ajay, Vijay and Sanjay are partners of software business and jointly promises to pay
Rs.60, 000 to Kartik. Over a period of time Vijay became insolvent, but his assets are
sufficient to pay one-forth of his debts. Sanjay is compelled to pay the whole. Decide
whether Sanjay is required to pay whole amount himself to Kartik in discharging joint
promise.
2. Briefly explain how the principal is liable for the acts of an Agent and state under what
circumstances an agent is personally liable.
3. Explain the rules under the Indian Contract Act, 1872 as regards to time and place for the
performance of the promise?
4. Father promised to pay his son a sum of Rs. One lakh if the son passed C.A.
examination in the first attempt. The son passed the examination in the first attempt, but
father failed to pay the amount as promised. Son files a suit for recovery of the amount.
State along with reasons whether son can recover the amount under the Indian Contract
Act, 1872.
5. Briefly discuss the Position of a minor under the Indian Contract Act, 1872 with regard to
the contracts entered into by him.
6. What is Bailment? Explain the rights and duties of Bailor.
7. What are the rights and duties of a partner after a change in the constitution of the firm?
8. What do you understand by the term, “Implied Authority” of partner? Enumerate the acts
which are not covered under implied authority.
9. What is the meaning of ‘dissolution of partnership firm’? Briefly explain the
circumstances when the firm can be dissolved.
10. Who may become partner of a firm? Briefly explain the duties of partner.
11. What is the meaning of warranty? Briefly explain the kinds of implied warranties under
the Act.
12. Who is an ‘Unpaid Seller’? When can such an unpaid seller exercise his ‘Right of Lien’
against the goods? Explain the rules for exercising the right of lien by an unpaid seller?
13. Briefly explain passing of risk from seller to buyer under the Act.
14. How the price of the goods are ascertained in case of sale of goods?
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15. A banker made payment of a cheque in which the drawers signature was forged. Can
the banker claim protection in respect of such payment? What would be the protection if
it was a case of forgery of indorsee's signature.?
16. A, a broker draws a cheque in favour of B, a minor. B indorses the cheque in favour of
C, who in turn indorses it in favour of D. Subsequently, the bank dishonoured the
cheque. State the rights of C and D and whether B, can be made liable?
17. Do the following alterations render the negotiable instrument void?
(a) The holder of a bill alters the date of the instrument to accelerate or postpone the
time of payment.
(b) The drawer of a negotiable instrument draws a bill but forgets to write the words “or
order”. Subsequently, the holder of the instrument inserts these words.
(c) A bill payable three months after date is altered into a bill payable three months
after sight.
(d) A bill was dated 2007 instead of 2008 and subsequently the agent of the drawer
corrected the mistake.
(e) A bill is accepted payable at the Union Bank, and the holder, without the consent of
the acceptor, scores out the name of the Union Bank and inserts that of the
Syndicate Bank.
18. Define “cheque”, under the Negotiable Instrument Act, 1881. What are the differences
between a cheque and a bill of exchange?
19. X, a major, and Y, a minor, executed a Promissory Note in favour of Z. Examine with
reference to the provisions of the negotiable Instruments Act, 1881 the validity of the
Promissory Note and state whether it is binding on X and Y.
20. A Bill is drawn payable at No. A-17 CA apartments, Mayur Vihar, New Delhi, but does not
contain drawee’s name. Mr. Vinay who resides at the above address accepts the bill. Is
it a valid Bill?
21. What is the minimum and maximum bonus that are required to be paid to the employees
under the Payment of Bonus Act, 1965? Is the employer entitled to deduct or adjust any
interim bonus paid to the employees?
22. Explain the special provisions with respect to newly set up establishments.
23. Who is entitled to Bonus? Is there any disqualifications in claiming it? Give examples?
24. Describe the provisions of the Employees Provident Fund and Miscellaneous Provisions
Act, 1952 in relation to the protection against attachment of provident fund of an
employee. When the contribution made by an employee to provident fund is treated as
preferential payment in case of insolvency of an employer?
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25. An employee working in an establishment covered by the E.P.F. and M.P. Act, 1952,
leaves his employment and takes up employment in another establishment. State in this
connection:
(i) How shall the amount accumulated to his P.F. account be transferred?
(ii) What steps shall be taken if the establishment in which he has joined is not covered
by the Act?
(iii) What would be your answer if the establishment in which he was previously working
is not covered by the Act?
26. State whether the cooperative society registered under the Co-operatives Societies Act,
1912 can undertake transactions with non-members?
27. A society registered under the Cooperative Societies Act, 1912, likes to invest its surplus
funds in the securities of a Public Limited. Whether it is permitted and state other modes
of investments under the Act?
28. Explain the provisions relating to election of member of the board of a multi-state co-
operative society?
29. Briefly explain the circumstances under which the Central Government can direct a Multi-
state Co-operative Society for special audit of its accounts.
30. Explain the provisions relating to furnishing of an “Abridged form of Prospectus” by a
company under the Companies Act, 1956. State the circumstances where the said
document is not required to be accompanied with the share application form?
31. Define Private Company. Briefly explain the privileges and exemptions for a private
company as provided under the Companies Act, 1956.
32. ABC Ltd. issued a notice for holding of its AGM on 7 th November, 2008. The notice was
posted to the members on 16th October, 2008. Some of the members alleged that the
company had not complied with the provisions of the Act with regard to the period of
notice and as such the meeting was not validly called. Decide.
(i) Whether the meeting has been validly called?
(ii) If there is a shortfall in the number of days by which the notice falls short of the
statutory requirement. State and explain by how many days the notice fall short of
the statutory requirement?
(iii) Can the shortfall, if any, be condoned?
33. What do you mean by Proxy? Explain the provisions relating appointment of Proxy under
the Companies Act, 1956.
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34. Explain in brief the mode of incorporation of a company. What is the effect of registration
of company?
35. How can a person acquire membership of a public company? Explain in brief, whether
shareholders and members are similar?
36. Explain clearly the meaning of ‘Small Depositor’ as introduced by the Companies
(Amendment) Act, 2000. In what way does the Act regulate the acceptance of deposits
from small depositors? Explain.
37. What do you understand by “separate legal entity of the company?” State the
circumstances where the separate legal entity of the company can be ignored and liability
can be imposed on the persons regulating the affairs of the company?
38. A public limited company which went in for Public issue of shares had applied for listing
of shares in three recognized Stock Exchanges and out of it only two had given
permission for listing. Can the company proceed for allotment of shares?
39. State the types of charges to be registered with the Registrar of Companies and explain
the consequences of non-registration of such charges.
40. A Company wants to provide financial assistance to its employees to enable them to
subscribe for fully paid shares of the company. Does it amount to purchase of its own
shares. If, in the instant case, the company itself purchasing to redeem its preference
shares, does it amount to acquisition of its own shares?
41. Explain the meaning and significance of the ‘Pari Passu’ clause in a debenture. State
the particulars to be filed with the Registrar of Companies in case of such debentures
secured by a charge on certain assets of the Company.
42. What do you mean by certification of transfer? How nomination facility shall operate in
case of transmission of shares?
43. Under what circumstances, the Registrar may cancel the registration of a society under
Co-operative Societies Act, 1912. What are the powers of liquidator in this connection?
44. Explain the steps to be taken by a company for
(a) transfer of its registered office from one State to another.
(b) for starting a business for which there is no provision in the objects clause of the
Memorandum of Association.
45. A Рublic Limited Company has only 7 shareholders, all the shares being paid up in full.
All the shares of one such shareholder are sold by the court in an auction and purchased
by another shareholder. The company continues to carry on its business, thereafter.
Discuss the liability of remaining six members of the company.
46. Distinguish between Fully Convertible Debentures and Partly Convertible Debentures.
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47. The Articles of Association of Star Company Ltd. provides that documents may be served
upon the company only through Fax. Vikas despatches a document to the company by
post, under certificate of posting. The company does not accept it on the ground that it is
in violation of the Articles of Association. As a result Vikas suffers loss. Explain with
reference to the provisions of the Companies Act, 1956:
(i) What refusal of document by the Company is Valid?
(ii) Whether Vikas can claim damages on this basis?
48. State the procedure relating to passing of resolutions by postal ballot, under Companies
Act, 1956.
49. Briefly explain the formation and powers of the National Company Law Tribunal under
Companies Act, 1956.
50. What are the different types of meeting, under companies Act, 1956. Explain the
statutory meeting.
SUGGESTED ANSWERS/HINTS

1. According to Section 43 of Indian Contract Act, 1872 when two or more persons make a
joint promise, the promisee may, in absence of express agreement to the contrary,
compel any one or more of such joint promisers or perform the whole of the promise.
Further, if any one of two or more joint promisers makes default in such contribution, the
remaining joint promisors must bear the loss arising from such default in equal shares.
Therefore, in this case, Sanjay is entitled to receive 5,000 from Vijay’s assets and 27,500
from Ajay.
2. Principal’s liabilities for Agents acts
1. When the agent exceeds his authority, principal is liable for such acts.
2. Principal is bound by notice given to agent in the course of business.
3. A principal is liable where he has by words or conduct induced a belief in the
contracting party that the act of the agent was within the scope of his authority.
4. The principal is liable for misrepresentation or fraud of his agent acting within the
scope of his actual or apparent authority during the course of the agency business.
Agent is personally liable
1. When the contract expressly provides for the personal liability of the agent.
2. When the agent signs a negotiable instrument in his own name without making it
clear that he is signing as agent.
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3. Where the agent acts for a principal, who cannot be sued on account of his being a
foreign sovereign, ambassador, etc.,
3. Section 46 to 50 of the Indian Contract Act, 1872 are relevant for determining the time
and place for the performance of the promise, which are as follows:
If no time is specified, the promise must be performed within a reasonable time. The
expression ‘reasonable’ time is to be interpreted having regard to the facts and
circumstances of a particular case (Section 46).
(i) If a promise is to be performed on a specified date but the hour is not mentioned,
the promisor may perform it at any time during the usual hours of business, on such
day. Moreover, the delivery must be made at the usual place of business (Section
47).
(ii) Where no place is fixed, it is the duty of the promisor to ask the promisee to fix a
reasonable place for the performance of the promise. In all cases the promisor
must apply to the promisee; here no distinction is made between an obligation to
pay money and obligation to deliver goods or discharge any other obligation
[Section 40].
The above rules regarding the time and place for the performance of promise apply,
only when the promisor undertakes to perform the promise without an application
being made by the promisee.
(iii) Where the promisor has not undertaken to perform the promise without an
application by the promisee, and the promise is to be performed on a certain day, it
is the duty of the promisee to apply for performance at a proper place and within the
usual hours of business (Section 48).
Generally, the performance of any promise may be made in any manner, or at any
time which the promisee prescribes or sanctions.
4. Problem asked in the question is based on the provisions of the Indian Contract Act,
1872 as contained in Section 10. According to the provisions there should be an
intention to create legal relationship between the parties. Agreements of a social nature
or domestic nature do not contemplate legal relationship and as such are not contracts,
which can be enforced. This principle has been laid down in the case of Balfour vs.
Balfour (1912 2 KB. 571). Accordingly, applying the above provisions and the case
decision, in this case son cannot recover the amount of Rs.1 lakh from father for the
reasons explained above.
5. Position of a minor: A minor is a person who has not completed eighteen years of age.
The Indian Contract Act, 1872 places a minor in a different position as compared to
others which may be discussed as under:
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(i) A contract by a minor is altogether void. (Mohiri Bibi v. Dharmodas Ghose) A minor
is incapable of giving a promise imposing a legal obligation.
(ii) A minor can be a promisee or a beneficiary. He can hold other parties liable for the
performance of their promise.
(iii) A minor cannot be a partner in a firm. However, he may be admitted to the benefits
of partnership with the consent of all the partners.
(iv) There is no estoppel against a minor. He can always plead minority in a suit
attempting to hold him liable, no matter he might have earlier misrepresented
himself to be major in age.
(v) A minor cannot ratify contracts which he might have made during minority, after
becoming major.
(vi) A minor’s agreement being void cannot be specifically enforced. However, the
estate of a minor can be held liable for the necessities supplied to him or to his
dependents suited to his status in life.
(vii) Though the agreement of a minor is void, his guardian can, under certain
circumstances and for the benefit of minor, enter into contracts.
(viii) A minor can be an agent, but not a principal.
(ix) A minor can hold property, fully paid shares and can seek contracts of employment
or apprenticeship.
(x) The principle of restitution does not apply against a minor.
(xi) A person giving guarantee for a minor debtor can be held liable as a surety on the
default of the minor.
(xii) A minor can never be adjudicated insolvent.
6. Bailment is defined as an act whereby goods are delivered by the person to another for
some purpose upon a contract that the goods shall, when the purpose is accomplished,
be returned or otherwise disposed of according to the directions of the person delivering
them.
Bailor – the person who delivers the goods
Bailee- the person to whom the goods are delivered.
Bailors duties and rights
Duties
(i) Bailor has to disclose all the facts/faults about bailed goods to bailee.
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(ii) Under gratuitous bailment, bailor has to reimburse expenses incurred by bailee, if
any.
(iii) Bailor has to compensate the loss on bailed goods to bailee, if any.
(iv) Bailor has to accept the goods after purpose is accomplished.
Rights
(i) To enforce bailee’s duties such as right to claim damages, compensation, if any.
(ii) To terminate the contract of bailment.
(iii) To demand back goods.
(iv) To claim increase or profit from goods bailed.
7. Rights and duties of partners after a change in the constitution of the firm (Section
17, the Indian Contract Act, 1872).
This section lays down the following provisions as regards to rights and duties after the
change in the constitution of the firm:
(a) Change in the constitution of the firm: Where a change occurs in the constitution of
a firm, the mutual rights and duties of the partners in the reconstituted firm remain
the same as they were immediately before the change, as far as may be.
(b) Business continued after expiration of the term: Where a firm constituted for a fixed
term continues to carry on business after the expiry of that term, the mutual rights
and duties of the partners remain the same as they were before the expiry, so far as
they maybe consistent with the incidents of Partnership at will; and
(c) In case of additional undertaking: Where a firm constituted to carry out one or more
adventures or undertakings carries out other adventures or undertakings the mutual
rights and duties of the partners in respect of the other adventures or undertakings
are the same as those in respect of the original adventures or undertakings. But the
above provisions are however subject to the contract between the partners.
8. Implied Authority of a Partner : A Partner’s authority may be express or implied. It is
‘express’, when it is fixed between the partners by mutual agreement (oral or written). It
is implied when the law presumes certain powers exercisable by every partner unless
negative by a contract to the contrary.
In the Indian Partnership Act, 1932 sections 19 to 22 read together provide that the
act of a partner which is done to carry on in the usual way, business of the kind
carried on by the firm, binds the firm, provided the act is done in the firm’s name, or
in any manner expressing or implying an intention to bind the firm. Thus, three
conditions must be satisfied before a partner can be said to have implied authority to
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bind the firm. These are:

1. Partner should do the act to carry on in the usual way business of the firm. A usual
act done in an usual manner cannot fall within the implied authority.
2. The act should be done in the name of the firm.
3. It should imply an intention to bind the firm.
Implied authority of a partner may, however, be extended or restricted by an agreement
between the partners by an unanimous consent. But a third party dealing with a partner
is not affected by a secret limitation of a partner’s implied authority unless he has actual
notice of it (Section 20).
Besides each partner has an implied authority to bind the firm by all his acts done in an
emergency with a view to protecting the firm from any loss, provided he had acted in the
same manner as a man of ordinary prudence would have acted in like circumstances.
No Implied Authority: Sub-section 2 of section 19 gives the negative rule. It provides that
in the absence of any usage or custom of trade to the contrary, the implied authority of a
partner does not empower him to:
1. Submit a dispute relating to the business of the firm to arbitration.
2. To open a bank account on behalf of the firm in his own name.
3. Compromise or relinquish any claim or portion of a claim by the firm against a third
party.
4. Withdraw a suit or proceedings filed by the firm.
5. Admit any liability in a suit or proceedings against the firm.
6. Acquire immovable property on behalf of the firm.
7. Transfer immovable property belonging to the firm and
8. Enter into partnership on behalf of the firm.
9. Section 39 of the Indian Partnership Act, defines it as follows:
“The dissolution of partnership between all the partners of a firm is called the dissolution
of the firm.” Thus the business is stopped and the relations between all the partners
come to an end.
Dissolution of a firm may take place in the following manner (Section 30-44):
1. As a result of any agreement between all the partners this is called dissolution by
agreement.
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2. By the adjudication of all the partners, or of all the partners but one, as insolvent
this is known as compulsory dissolution.
3. By the business of the firm becoming unlawful, this is known as compulsory
dissolution.
4. As per the agreement, upon happening of any of the following contingencies
(a) efflux of time;
(b) completion of the venture for which it was entered into;
(c) death of a partner;
(d) insolvency of a partner.
In case of death of a partner, the number of the partners if do not exceed two, the
firm is to be dissolved. In case the number of partners is more than two, the firm
may continue even after the death of one partner, provided other partners agree to
do so.
5. By a partner giving notice of his intention to dissolve the firm in case of partnership
at will and the firm being dissolved as from the date mentioned as from the date of
the communication of the notice; and
6. By intervention of court in case of-
(i) a partner becoming of unsound mind;
(ii) permanent incapacity of a partner;
(iii) misconduct of a partner affecting the business;
(iv) willful persistence breach of agreement by a partner;
(v) transfer or sale of the whole interest of partner;
(vi) improbability of the business being carried on save at a loss;
(vii) the court being satisfied on other equitable grounds that the firm should
be dissolved.
10. Section 4 of the Indian Partnership Act 1932, defines Partnership. This definition lays
stress on an agreement between persons. These persons should be those, who are
competent to contract as per the provisions of Section11 of the Indian Contract Act i.e,
these persons must have capacity to contract, meaning by they are capable of entering
into a valid contract.
Section 11 defines capacity to contract as follows:
“Every person is competent to contract who is of the agent of majority according to the
law to which he is subject, and who is sound mind, and is not disqualified from
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contracting by any law to which he is subject”. Those who do not have capacity to
contract cannot be a partner. However, a minor under Section 30 of the Indian
Partnership Act can be admitted to the benefits of the partnership firm with the consent of
all the partners.
Thus to be a partner, a person must be (1) a major, (2) of sound mind, and (3) should not
be disqualified from contracting by any law.
Duties of partners [Indian Partnership Act, 1932]:
1. To work for the greatest common advantage [Section 9].
2. To be just and faithful. [Section 9].
3. To render true accounts [Section 9].
4. To give full information. [Section 9].
5. To indemnify for frauds. [Section 10].
6. To share losses. [Section 13(f)].
7. To attend diligently without remuneration. [Section 12(b)& 13(a)].
8. To hold and use property of the firm exclusively for the purpose of business.
[Section 15).
9. To account for private profits from transactions of firm etc., and from competing
business. [Section 16].
10. To act within authority.
11. Not to assign his rights. [Section 29].
12. To be liable jointly and severally. [Section 25].
11. Warranty has been defined as a stipulation essential to the main purpose of the contract,
breach of which gives rise to a claim for damages but not to cancel the contract.
Implied Warranties
(a) If the buyer, having got the possession of the goods, is later on disturbed in his
possession, he is entitled to sue the seller for the breach of the warranty, unless the
circumstances of the contract show a different intention.
(b) The goods shall be free from any charge or encumbrance in favour of any third
party not declared or known to the buyer before or at the time of contract.
(c) There is another implied warranty on the part of the seller that in case the goods are
inherently dangerous or they are likely to be dangerous to the buyer and the buyer
is ignorant of the danger, the seller must warn the buyer of the probable danger. If
there is a breach of this warranty, the seller will be liable in damages.
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12. Unpaid Seller:

A seller shall be deemed to be an unpaid seller when:
(1) the whole of the price has not been paid or tendered;
(2) a bill of exchange or other negotiable instrument has been received as conditional
payment, and the condition on which it was received has not been fulfilled by
reason of the dishonour of the instrument or otherwise. [Section 45(1)] Sale of
Goods Act, 1930).
Right of Lien:
A lien is a right to retain possession of goods until payment of the price. It is available to
the unpaid seller who is in possession of the goods sold, where:
(a) the goods have been sold without any stipulation as to credit;
(b) the goods have been sold on credit, but the terms of credit has expired;
(c) the buyer becomes insolvent.
Rules regarding lien:
1. The seller may exercise his right of lien notwithstanding that he is in possession of
the goods as agent or bailee for the buyer [Section 47(2)]. If he loses the
possession of the goods, he loses the right of lien also.
2. The lien depends on actual possession and not on title. It is not affected even if the
seller has parted with the document capable of transferring title.
3. The possession of the goods by the seller must not expressly exclude the right of
lien.
4. The lien can be exercised by the unpaid seller only for the price and not for any
other charges such as warehouse or dock charges.
5. Where an unpaid seller has made part delivery of the goods, he may exercise his
right of lien on the remainder. He may refuse to deliver such remainder of the
goods till he is paid for the goods already delivered and the goods are yet to be
delivered. Where, however, a part of the goods is delivered under such
circumstances as to show an agreement to waive the lien, the seller cannot retain
the remainder(Section 48).
6. The unpaid seller of goods, having a lien thereon, does not lose his lien by reason
only that he has obtained a decree for the price of the goods. [Section 49(2)].
13. Unless otherwise agreed, the goods remain at seller’s risk until property therein has
passed to the buyer. After that, they are at the buyer’s risk, whether delivery has been
made or not. The rule is subject to two qualifications;(i) if delivery has been delayed by
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the fault of the seller or the buyer, the goods are at he risk of the party in default, as
regards loss which might not have arisen but for the default; (ii) the duties and liabilities
of the seller or the buyer as bailee of goods for the other party remain unaffected even
when the risk has passed generally.
14. Ascertainment of Price
The meaning of the price and the rule regarding ascertainment of the price of the goods
is contained in Section 2(10), 9 and 10 of the Sale of Goods Act, 1930 respectively, as
follows:
‘Price means’ the monetary consideration for sale of goods. The price may be fixed the
contract or agreed to be fixed in a manner provided by the contract, e.g., by a valuer or
determined by the cause of dealings between the parties. When it cannot be fixed in any
of the above ways, the buyer is bound to pay to the seller at a reasonable price. What is
a reasonable price is a question of fact in each case (Section 9).
Section 10 provides for the determination of price by a third party. Where there is an
agreement to sell goods on the terms that price has to be fixed by the third party and he
either does not or cannot make such valuation, the agreement will be void. In case the
third party is prevented by the default of either party from fixing the price, the party at
fault will be liable to the damages to the others to the other party who is not at fault.
However, a buyer who has received and appropriated the goods must pay a reasonable
price for them in any eventuality.
15. In case of cheques, the paying banker is given statutory protection against the payment
of cheques having forged indorsements. And the banker cannot be held liable if it makes
payment in good faith and without any negligence (Section 85, the Negotiable
Instruments Act, 1881). But the banker will not be protected where the payment of a
cheque is made on which the drawer's signature was forged. The reason for the same is
that the banker is protected only in case of forgery of indorser's signature and not in case
of forgery of drawer's signature.
16. According to section 26 of the Negotiable Instruments Act, 1881 a minor may draw,
indorse, deliver and negotiate a negotiable instrument to bind all parties except himself.
Therefore, C and D cannot claim from B, who being a minor does not incur any liability on
the cheque. C can claim payment from A, the Drawer, only and D can claim against C,
the indorser and A, the drawer.
17. (a) Yes.
(b) No.
(c) Yes.
(d) No.
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(e) Yes.
According to Section 87 of the Negotiable Instrument Act, 1881, any material alteration of
a negotiable instrument renders the same void as against any one who is party thereto at
the time of making such alteration and does not consent thereto, unless it was made in
order to carry out the common intention of the original parties and any such alteration, if
made by an endorse discharges endorser from all liability to him in respect of the
consideration thereof. The alteration must be so material that it alters the character of
the instrument, to a great extent. Alterations of the date, amount payable, time, place of
payment are regarded as material alterations.
18. A cheque is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque in the electronic form.
Essentials:
1. Cheque is always drawn on a bank.
2. Cheque is always payable on demand.
Since a cheque is a species of a bill of exchange, it must satisfy all the
requirements of a bill of exchange, i.e.
(i) it must be in writing and signed by the drawer;
(ii) it must contain an unconditional order to pay;
(iii) the order must be to pay a certain sum of money to or to the order of a
certain person, or to the bearer of the instrument.
Distinction between a cheque and a bill of exchange
1. In a cheque the drawee is always a bank, whereas in a bill the drawee may
be a ‘bank’ or any other person.
2. In a cheque days of grace are not allowed, whereas in a bill three days of
grace are allowed for payment.
3. Notice of dishonour is not needed in a cheque, whereas notice of dishonour
is usually required in case of a bill.
4. A cheque can be drawn to bearer and made payable on demand, whereas
a bill cannot be bearer, if it is made payable on demand.
5. Cheque does not require presentment for acceptance. It needs
presentment for payment. Bill, sometimes, require presentment for
acceptance and it is advisable to present them for acceptance even when it
is not essential to do so.
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6. Cheque does not require to be stamped in India, whereas bill must be

stamped according to the law.
7. A cheque may be crossed, whereas a bill cannot be crossed.
8. A cheque being a revocable mandate, the authority may be revoked by
countermanding payment, and is determined by notice of the customer’s
death or insolvency. This is not so in the case of a bill.
9. The drawer of a bill is discharged from liability, if it is not duly presented for
payment but the drawer of a cheque is not discharged by delay of the
holder in presenting the cheque for payment unless the drawer has
suffered some loss due to delay.
19. Minor being a party to Negotiable Instrument: Every person competent to enter into
contract has capacity to incur liability by making, drawing, accepting, endorsing,
delivering and negotiating a Promissory Note, Bill of Exchange or clearance (Section 26,
Para 1, Negotiable Instrument Act, 1881).
As a Minor’s agreement is void, he cannot bind himself by becoming a party to a
Negotiable Instrument. But he may draw, endorse, deliver and negotiate such
instruments so as to bind all parties except himself (Section 26, para 2).
In view of the provisions of Section 26 explained above, the promissory note executed by
X and Y is valid even though a minor is a party to it. Y, being a minor is not liable; but
his immunity from liability does not absolve the other joint promissory, viz., X from liability
[Sulochona v. Pondiyan Bank Ltd.,].
20. Yes, it is a valid Bill and Mr. Vinay is liable thereon. The drawee may be named or
otherwise indicated in the Bill with reasonable certainty. In the present case, the
description of the place of residence indicates the name of the drawee and Mr. Vinay, by
his acceptance, acknowledges that he is the person to whom the bill is directed (Gray vs.
Milner 1819).
21. Provisions relating to minimum and maximum bonus: Subject to the provisions of the
Payment of Bonus Act, 1965 as contained in Section 10, every employer shall be bound
to pay to every employee in respect of the accounting year, a minimum bonus which shall
be 8.33% of the salary or wage earned by the employee during the accounting year or
Rs.100, whichever is higher, whether or not the employer has any allocable surplus in the
accounting year. But if the employee has not completed 15 years of age at the beginning
of the accounting year, he will be entitled to a minimum bonus which shall be 8.33% of
the salary or wage during the accounting year or Rs.60, whichever is higher.
Section 11 provides for the payment of maximum bonus: Accordingly, where in
respect of any accounting year referred to in Section 10, the allocable surplus exceeds
the amount of minimum bonus payable to the employees under that section, the
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employer shall, in lieu of such minimum bonus, be bound to pay to every employee in
respect of that accounting year bonus which shall be an amount in proportion to the
salary or wage earned by the employee during the accounting year subject to a maximum
of 20% of such salary or wage.
Section 17 provides that if in any accounting year, an employer has paid any interim
bonus (Puja bonus or other bonus) to any employee, then the former shall be entitled to
deduct the amount of bonus so paid from the amount of bonus payable by him to the
employee under the Act in respect of that accounting year. The employee shall be
entitled to receive only the balance. The employer can do the same thing even in a case
where he has paid a part of the bonus payable under this Act to an employee before the
date on which such bonus becomes payable.
22. Special provision with respect to certain establishments: Section 16 of the Payment
of Bonus Act, 1965 deals with the special provision regarding newly set up
establishment. Accordingly, where an establishment is newly set up, the employees of
such an establishment shall be entitled to be paid bonus in accordance with the
provisions of sub-sections (1A), (1B) and (1C). Newly set up establishment does not
mean that there is change in its location, management, name or ownership.
In the first five accounting years following the accounting year in which the employer
sells the goods produced or manufactured by him or renders bonus shall be payable only
in respect of the accounting year in which the employer derives profit from such
establishment. Such bonus shall be calculated in accordance with the provisions of this
Act relating to that year but without applying the provisions of Section 15 [Sub-section
(1A)]. It may be noted that an employer shall not be deemed to have derived profit in
accounting year unless:
(a) he has made provision for that year’s depreciation to which he is entitled under the
Income-tax Act or as the case may be, under the Agricultural Income Tax law; and
(b) the arrears of such depreciation and losses incurred by or in respect of the
establishment for the previous accounting years have been fully set off against his
profits. But in the sixth and seventh accounting year, the provisions of Section 15
shall apply subject to the following modifications, namely:
(i) for the sixth accounting year, set on or set off, as the case may be, shall be
made in the manner illustrated in the Fourth Schedule, taking into account the
excess or deficiency, if any, as the case may be, of the allocable surplus set
on or set off in respect of the 5th and 6th accounting years;
(ii) for the 7th accounting year, the same principle is to be followed but the excess
or deficiency of the allocable surplus set on or set off in respect of the 5th, 6th,
and 7th accounting year has to be taken into account [sub-section (1B)].
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(iii) From the 8th accounting year following the accounting year in which the
employer sells the goods produced or manufactured by him or renders
services, as the case may be, from such establishment, the provisions of
Section 15, shall apply in relation to such establishment as they apply in
relation to any other establishment [Sub-section (1C)].
For the purpose of Sub-section (1A), (1B) and (1C), sale of the goods produced or
manufactured during the course of the trial running of any factory or of the
prospecting stage of any mine or any oil field shall not be taken into consideration.
Where any question arises with regard to such production or manufacture, the
decision of the appropriate Government made after giving the parties a reasonable
opportunity of representing the case, shall be final and shall not be called into
question by any court or other authority.
23. Who is entitled to bonus: Every employee of an establishment covered under the
Payment of Bonus Act is from his employer in an accounting year provided he has
worked in that establishment for not less than thirty working days in the year on a salary
less than Rs.3,500/-- per month. [Section 2(13) read with Section 8, the payment of
Bonus Act, 1965].
If an employee is prevented from working and subsequently reinstated in service,
employee's statutory liability for bonus cannot be said to have been lost. Nor can the
employer refuse for such bonus. [ONGC(V) Sham Kumar Sahegal (1995) ILLJ].
There are, however, certain disqualifications of an employee to claim bonus in an
accounting year. An employee who has been dismissed from service for (a) fraud; or (b)
riotous or violent behaviour while on the premises of the establishment; or (c) theft,
misappropriation or sabotage of any property of the establishment is not entitled for
bonus. [Section 9].
An employee in the following cases entitled to bonus:
(i) A temporary workman is entitled to bonus on the basis of total number of days
worked by him.
(ii) An employee of a seasonal factory is entitled to proportionate bonus and not the
minimum bonus as prescribed under Section 10 of the Act.
(iii) A part time employee as a sweeper engaged on a regular basis is entitled to bonus.
[Automobile Karmchari Sangh vs. Industrial Tribunal [1970] 38 FJR 268].
(iv) A retrenched employee is eligible to get bonus provided he has worked for minimum
qualifying period. [East Asiatic Co. (P.) Ltd. vs. Industrial Tribunal [1961] 1 LLJ 720].
(v) A probationer is an employee and as such is entitled to bonus. [Bank of Madura Ltd.
vs. Employee’s Union, 1970, (2) LLJ (21)].
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(vi) A dismissed employee reinstated with back wages is entitled to bonus. [Gannon
India Ltd. vs. Niranjan Das [1984] 2 LLJ 223].
(vii) A piece-rated worker is entitled to bonus. [Mathuradas Kani vs. L.A. Tribunal AIR,
[1958], SC 899].
An employee in the following cases is not entitled to bonus:
1. An apprentice is not entitled to bonus. [Wheel & RIM Co. vs. Government
of T.N. [1971] 2 LLJ 299 40 FJR 18].
2. An employee employed through contractors on building operation is not
entitled to bonus. (Section 32).
3. An employee who is dismissed from service on the ground of misconduct
as mentioned in Section 9, is disqualified for any bonus and not merely for
bonus of the accounting year in which he is dismissed (Pandian Roadways
Corporation Ltd. vs. Presiding Officer [1996] 2 CLR 1175 (Mad.).
24. Section 10 of the Employees Provident Fund and Miscellaneous Provisions Act, 1952
provides that the amount standing to the credit of any member in the Fund or credit of
any exempted employee in a provident fund shall not in any way be capable of being
assigned or charged and shall not be liable to attachment under any decree or order of
any court in respect of any debt or liability incurred by the member or the exempted
employee. Neither the Official Assignee appointed under the Presidency Town
Insolvency Act, 1909 nor any Receiver appointed under the Provincial Insolvency Act,
1920, shall be entitled to or have any claim on, any such amount.
The amount standing to the credit of the aforesaid categories of persons at the time of
their death and payable to their nominees under the scheme or the rules of the Provident
Fund shall, subject, to any deduction authorized by the said scheme or rules, vest in the
nominees. And the amount shall be free from any debt or other liability incurred by the
deceased or the nominee before the death of the member or of the exempted employee.
Contribution to P.F. being treated as Preferential Payment (Section 11): If the
employer is adjudged an insolvent or if the employer is a company and an order for
winding thereof has been made, the amount due from the employer mentioned in Section
11(a) and (b) must be included among the debts which are to be paid in priority to all
other debts under Section 49 of the Presidency Towns Insolvency Act, Section 61 of the
Provincial Insolvency Act, and Section 530 of the Companies Act, 1956 in the distribution
of the propriety of the insolvent or the assets of the company. In other words, this
payment will be a professional payment provided the liability therefore has accrued
before the order of the adjudication or winding up is made.
25. (i) Section 17-A of EPF & MP Act, 1952 provides for the transfer of accounts of an
employee in case of his leaving the employment and taking up employment in
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another establishment and to deal with the case of an establishment to which the
Act applies and also to which it does not apply. The option to get the amount
transferred is that of the employee.
(ii) Where an employee of an establishment to which the Act applies leaves his
employment and obtains re-employment in another establishment to which the Act
does not apply, the amount of accumulations to the credit of such employee in
establishment left by him shall be transferred, within such time as may be specified
by the Central Government in this behalf, to the credit of his account in the
provident fund of the establishment in which he is re-employed, if the employee so
desires and the rules in relation to that provident fund permit such transfer [Sub-
Section (1)].
(iii) Conversely, when an employee of an establishment to which the Act does not apply
leaves his employment and obtains re-employment in another establishment to
which the Act applies, the amount of accumulations to the credit of such employee
in the provident fund permit, may be transferred to the credit of his account in the
fund or as the case may be, in the provident fund of the establishment in which he is
employed [Sub-Section (2)].
26. Societies which may be registered (Section 4) : A society that has for its object the
promotion of the economic interest of its members in accordance with co-operative
principles or a Society established with the object of facilitating the operations of such a
society, may be registered under Co-operative Societies Act, 1912, with or without
limitation of liability. But unless the State Government by general or special order
otherwise directs:
(i) The liability of a Society of which a member is a registered society shall be limited.
(ii) The liability of a Society of which the object is the creation of funds to be lent to its
members and of which the majority of the members are agriculturists, and of which
no member is a registered society, shall be unlimited.
The expression ‘economic interest’ is not defined in the Act but the preamble to the
Act suggests thrift and self-help.
Co-operative principles are principles, which prompt persons to associate together
voluntarily as human beings, on a basis of equality, for promotion of their own
economic interest. A Co-operative Society is only concerned with the interests of its
members. It may undertake to deal with non-members if and only if such recourse
furthers the interests of such members.
27. The Investment decision is based on the rules of such society. If rules permit, then a
society can make an investment. However, A society registered under the Co-operative
Societies Act, 1912 may invest or deposit its funds in the following:
(i) in the Government Savings Bank or
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(ii) in any of the Securities of the Indian Trust Act, 1882.

(iii) in the shares or on the security of any other registered society. or
(iv) with any bank or person carrying on the business of banking approved for this
purpose by the Registrar; or
(v) in any other manner permitted by the rules. (Section 32).
28. Election of Members of Board (Section 45, Multi-state Co-operative Societies Act,
2002): The Central Government may make rules generally to provide for or to regulate
matters in respect of election of members of the board. No person shall be eligible to be
elected as a member of the board of a Multi-State Co-operative Society unless he is a
member of the general body of that society.
1. The conduct of elections to the board of a Multi-State Co-operative Society shall be
the responsibility of the existing board. The election of members of board shall be
held by secret ballot in the manner as may be prescribed.
2. The election of the members of the board shall be held in the general meeting of the
members of the Multi-State Co-operative Society.
3. The elected members of the board shall, if the bye-laws of such society permit, be
eligible for re-election.
4. The term of office of the elected members of the board shall be such, not exceeding
five years from the date of elections, as may be specified in the bye-laws of a Multi-
State Co-operative Society.
Provided that elected members shall continue to hold office till their successors are
elected or nominated under the provisions of this Act or the rules or bye-laws and
assume charge of their office.
5. Where the board fails to conduct election of the members of board, the Central
Registrar shall hold the election within a period of ninety days from the date when
such election became due. The expenses for holding election by the Central
Registrar shall be borne by the Multi-State Co-operative Society.

29. The Central Government will give direction for special audit, where it is of the opinion: -
(a) that the affairs of any Multi-state Co-operative Society are not being managed in
accordance with self-help and mutual aid and co-operative principles or prudent
commercial practices; or with such business principles; or
(b) that any Multi-state Co-operative Society is being managed in a manner likely to
cause serious injury or damage to the interests of the trade, industry or business to
which its pertains; or
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(c) that the financial position of any Multi-state Co-operative Society is such as to
endanger its solvency.
30. Abridged form of Prospectus: The abridged prospectus (in Form 2A) and the share
application form should bear the same printed number. The investor may detach the
share application form along with the perforated line after he has had an opportunity to
study the contents of the abridged prospectus, before submitting the same to the
company or its designated bankers. The same procedure also be followed while making
available copies of the prospectus under Section 56 of the Companies Act, 1956.
There are, however, certain exceptions to the above provisions where an abridged
prospectus containing all the prescribed details need not accompany the application
forms sent out. These exceptions are:
1. In the case of bona fide underwriting agreement. (Section 56(3)(a).
2. Where the shares or debentures are not offered to the public. (Section 56(3)(b).
3. Where the offer is made only to existing members or debenture-holders of the
company whether with or without the right of renunciation. (Section 56(3)(a).
4. In the case of issue of shares or debentures which are in all respects similar with
those previously issued and dealt in on a recognized stock exchange. (Section
56(5)(b).
The Companies (Amendment) Act, 1988 permits a company to furnish along with
the application forms for shares/debentures an abridged form of prospectus, instead
of the full, prospectus, which however, is to be furnished on demand. The
memorandum containing salient features of the prospectus accompanying the
application form shall be as per rules prescribed by the Central Government in this
behalf. It is, however, open to a company to attach full prospectus along with the
application forms.
The Government has recently revised the format of this Memorandum (abridged
prospectus) to provide for greater disclosure of information to prospective investors
so as to enable them to take an informed decision regarding investment in shares
and debentures.
31. A private company can have a greater degree of secrecy as regards its affairs and enjoys
greater freedom on its operation. It enjoys some privileges and exemptions which a
public company is deprived of. Briefly these are as follows:
1. Two or more persons may form a private company [Section 12(1)].
2. It need not hold a Statutory Meeting or file a statutory report [Section 165].
3. The consent of directors to act as such, and to take up qualification shares need not
be filed with the Registrar [Section 266].
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4. There is no restriction on the amount of overall managerial remuneration that it may

pay [Section 198].
5. The directorship of a private company is not includible in the maximum number of
directorships that a person may hold [Section 310].
6. The consent of the Central Government for advancing loans to directors is not
required [Section 295].
7. There are no restrictions on the powers of the Board of Directors [Section 293].
8. The Central Government is not empowered to prevent a change in the Board of
Directors of a company which is likely to affect management prejudicially [Section
409].
9. It can advance loans for the purchase of its own shares [Section 77(2)].
32. (i) 21 days’ clear notice of an AGM must be given [Section 171]. In case notice is sent
by post, then section 53(2) provides that the notice shall be deemed to have been
received on expiry of 48 hours from the time of its posting. For working out clear 21
days, the day of the notice and the day of the meeting shall be excluded.
Accordingly, 21 clear days’ notice has not been served and the meeting is,
therefore, not validly convened.
(ii) Worked as per (I) above, notice falls short by 2 days (i.e. Notice should have been
posted on 14.10.08). In other words, notice of the general meeting must have been
sent at least 25 days before the date of the meeting i.e. 7 th November, 2008 (where
the notice is sent by post)
(iii) According to section 171(2), an AGM called at a notice shorter than 21 clear days
shall be valid if consent is accorded thereto by all the members entitled to vote
thereat. Thus, if all the members of the company approve to the shorter notice,
shortfall may be condoned.
33. A proxy is an instrument in writing executed by a shareholder authorizing another person
to attend a meeting and to vote thereat on his behalf and in his absence. The term is
also applied to the person so appointed.
According to Section 176, the appointment of proxy must be in written instrument signed
by the appointer or his duly authorized attorney. The instrument of proxy must be
deposited with the company 48 hours before the meeting.
Further, unless articles otherwise provide:
1. a member of a company having no share capital cannot appoint a proxy;
2. a member of a private company cannot appoint more than one proxy to attend on
the same occasion;
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3. a proxy shall not be entitled to vote except on a poll.

34. Mode of registration/incorporation of company: In the case of a public company
with or without limited liability any 7 or more persons can form a company by subscribing
their names to memorandum and otherwise complying with the requirements of the
Companies Act, 1956. In exactly the same way, 2 or more persons can form a private
company [Section 12]. Persons who form the company, who conceive the idea of
forming the company are known as promoters. They take all necessary step for its
registration.
(a) Lawful purpose: The essence of validly incorporated company is that it must
consist of a particular number of persons and be an association for a lawful
purpose. Unless the purpose appears to be unlawful ex facie or is transparently
illegal or prohibited by way statute, it cannot be regarded as an unlawful purpose.
(b) Applying for the name: The promoters of the company should decide upon at
least three suitable names in order of preference to afford flexibility to the Registrar
to decide the availability of the name.
(c) Documents to be filed: After getting the name approved, the certain documents
along with the application and prescribed fees, are to be filed with the Registrar.
(d) Subscribing their names: Subscribing name means signing the names. Section
15 stipulates that the Memorandum should be signed by each subscriber who
should add his address, description and occupation in the presence of one witness.
(e) Commencement of business
(f) Statement in Lieu of Prospectus: If a public company does not issue a prospectus
inviting the public to purchase its share because, the directors think they can sell
the shares even without the issue of the prospectus, it can do so.
(g) Certificate of incorporation: Upon the registration of the documents mentioned
earlier under the head “Documents to be filed for registration of the company” and
the payment of the necessary fees, the Registrar of Companies issues a certificate
that the company is incorporated, and in the case of a limited company that it is
limited.
Effect of Registration [Section 34]
1. On the registration of the Memorandum of a company, the Registrar shall certify
under his hand that the company is incorporated and in the case of a limited
company, that the company is incorporated, and in the case of a limited company
that it is limited.
2. From the date of incorporation mentioned in the certificate, the company becomes a
legal person separate from the corporators; and there comes into existence a
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binding contract between the company and its members as evidenced by the
Memorandum and Articles of Association [Hari Nagar Sugar Mills Ltd. Vs. S.S.
Jhunjhuwala AIR 1961 SC 1669]. It has perpetual existence until it is dissolved by
liquidation or struck out of the register, and has the common seal. A shareholder
who buys shares, does not buy any interest in the property of the company but in
certain cases a writ petition will be maintainable by a company or its shareholders.
35. Modes of Acquiring Membership: A person may become a member of the company in
any one of the following ways:
1. By subscribing to the memorandum of association: The persons who subscribe
(i.e. sign) to the memorandum of association are deemed to have agreed to become
the members of the company. And on the registration of the company, their names
are entered as members on the register of members [Section 41].
2. By application and allotment of shares: A person, who agrees in writing to
become a member of the company and whose name is entered in the register of
member is also a member of the company [Section 41(2)]. The person intending to
become a member has to make an application to the company for the purchase of
its shares. On valid allotment, the name of the shareholder is entered in the
register of member.
3. By agreeing to take qualification shares: A director of a public company is
appointed when he takes or signs an undertaking to take and pay for his
qualification shares. When a director signs and files with the Registrar an
undertaking to take and pay for his qualification shares, he is in the same position
as subscriber of the memorandum of association [Section 266(2)].
4. By transfer of shares: The Companies Act provides that the shares of a public
company are freely transferable. Thus, one person may transfer his shares to any
other person. On the registration of transfer of shares, the transferee becomes the
member of the company.
5. By succession: The legal heirs of the deceased member/shareholder get a right to
be a member of the company and be registered as a member of the company on the
basis of the succession certificate. The company on the basis of the Succession
Certificate enters their name in the Register of Members.
A member and a shareholder: In the parlance of Company Law, the two words
“member” and “shareholder”, are similarly used by common people, thereby giving
an impression that they are synonymous but in fact they can be differentiated on the
following grounds:
(1) A registered member may not be a shareholder, since a company may not
be having Share Capital. For example, a company limited by guarantee
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and not having a share capital, does have members but not shareholders.
But a registered shareholder is a member, since his name appears in the
Register of Members maintained by the company.
(2) A person who owns a share warrant (bearer), is not a member since his
name does not appear in the Register of Members maintained by the
company. He is a shareholder only [Section 115(1)].
(3) A legal representative of a deceased member is a shareholder but not a
member, till he applies for registration and his name is entered in the
Register of members.
36. Small Depositor: A `Small Depositor’ means a depositor who has deposited in a
financial year a sum not exceeding Rs.20,000 in a company and includes his successors,
nominees and legal representatives. It does not include those depositors who renew
their deposits and those depositors whose repayment is not made due to death or has
been stayed by a competent court. (Section 58AA: Companies (Amendment) Act, 2000).
As per the provisions of Section 58AA, every company accepting deposits from the small
depositors shall intimate to the CLB within 15 days, the name and address of each small
depositor(s) to whom it had defaulted in repayment of deposit or interest thereon.
Thereafter, intimation shall be given on a monthly basis.
On receipt of the intimation as aforesaid, it shall:
(i) exercise the powers conferred on it under Section (9) of Section 58A i.e. direct the
company to repay the deposit.
(ii) Pass an appropriate order within 30 days from the date of receipt of intimation.
Where the order is passed after the expiry of 30 days, the small depositor must be
given opportunity of hearing, it shall not be necessary for a small depositor to be
present at the hearing of the proceedings.
37. A company in the eyes of law is regarded as an entity separate from its members. It has
an independent corporate existence. Any of its members can enter into contracts with
the company in the same manner as any other individual can and he cannot be held
liable for the acts of the company even if he holds virtually the entire share capital. The
company’s money and property belong to the company, and not to the shareholders.
(Salomon v. Salomon & Co. Ltd.).
Further, from the juristic point of view, a company is a legal person distinct from its
members (Salomon v. Salomon & Co.). It has its own corporate personality. This
principle may be referred to as ‘the veil of incorporation’. The Courts in general consider
themselves bound by this principle. The effect of this principle is that there is a fictional
veil between the company and its members. That is, the company has a corporate
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personality which is distinct from its members. This principle must be used for legitimate
business purposes only. Where the legal entity of a corporate body is misused for
fraudulent and dishonest purposes, the individuals concerned will not be allowed to take
shelter behind the corporate personality.
The human ingenuity, however, started using this veil of corporate personality blatantly
as a cloak for fraud or improper conduct. Thus it became necessary for the Courts to
break through or lift the corporate veil or crack the shell of corporate personality or
disregard the corporate personality of the company. Thus while by fiction of law a
corporation is a distinct entity, yet, in reality it is an association of persons who are in fact
the beneficial owners of all the corporate property (Gallaghar v. Germania Brewing Co.).
The circumstances or the cases in which the Courts have disregard the corporate
personality of the company are:
1. Protection of revenue: (To prevent evasion of taxation) The Courts may ignore the
corporate entity of a company where it is used for tax evasion. (Juggilal v.
Commissioner of Income Tax, B.F. Guzdar v. Commissioner of Income Tax
Bombay).
2. Prevention of fraud or improper conduct: The legal personality of a company may
also be disregarded in the interest of justice where the machinery of incorporation
has been used for some fraudulent purpose like defrauding creditors or defeating or
circumventing law. Professor Gower has rightly observed in this regard that the veil
of a corporate body will be lifted where the ‘corporate personality is being blatantly
used as a cloak for fraud or improper conduct’. Thus where a company was
incorporated as a device to conceal the identity of the perpetrator of the fraud, the
Court disregarded the corporate personality (Jones v. Lipman) (Gilford Motor Co. v.
Home).
3. Determination of character of a company whether it is enemy: A company may
assume an enemy character when persons in de facto control of its affairs are
residents in an enemy country. In such a case, the Court may examine the
character of persons in real control of the company and declare the company to be
an enemy company. (Daimler Co. Ltd. v. Continental Tyre & Rubber Co. Ltd).
4. Where the company is a sham: The Courts also lift the veil or disregard the
corporate personality of a company where a company is a mere cloak or sham
(hoax). (Gilford Motor Co. Ltd. v. Home).
5. Company avoiding legal obligation: Where the use of an incorporated company is
being made to avoid legal obligations, the Court may disregard the legal personality
of the company and proceed on the assumption as if no company existed.
6. Company acting as agent or trustee of the shareholders: Where a company is acting
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as agent for its shareholders, the shareholders will be liable for the acts of the
company (F.G. Films Ltd., In re.)
7. Avoidance of welfare legislation: Where the courts find that there is avoidance of
welfare legislation, it will be free to lift the corporate veil. (Workmen of Associated
Rubber Industry Ltd. v. Associated Rubber Industry Ltd.).
8. Protecting public policy: The Courts invariably lift the corporate veil or a disregard
the corporate personality of a company to protect the public policy and prevent
transactions contrary to public policy. (Connors v. Connors Ltd.).
9. In quasi-criminal cases: The courts pierce the corporate veil in quasi-criminal cases
in order to look behind the legal person and punish the real persons who have
violated the law.
38. Every public company is required before issuing shares for public subscription by issue
of prospectus, to make an application for listing the security in one or more recognized
stock exchanges [Section 73(1)]. The prospectus shall state the names of the stock
exchanges to which application has been made. If the permission has not been granted
by the stock exchange or each stock exchange before the expiry of 10 weeks from the
date of the closing the subscription the allotment made shall become void (Section
73(1A). An appeal may be preferred against the decision of any recognized stock
exchange refusing the aforesaid permission for enlistment under Section 22 of the
Securities Contracts (Regulation) Act, 1956 and then such allotment shall not be void,
until the dismissal of the appeal. It shall be deemed that permission has not been
granted if the application for permission has not been disposed of within the period
specified in Section 73(1A) i.e., before the expiry of 10 weeks from the closing of the
subscription lists (Section 73(5). Where the permission has not been applied for or
having been applied for has not been granted, the application money received must be
refunded to the applicants forthwith without any interest. If the money is not refunded
within 8 days after the company becomes liable to repay it, the company and every
director of the company who is in default shall, on and from the expiry of the eighth day
be jointly and severally liable to repay the money with interest at such rate which shall
not be less than 4% and not more than 15% as may be prescribed, having regard to the
length of the period of delay in making the repayment of such money [Section 73(2)]. All
moneys received as application and allotment money shall be kept in a separate bank
account maintained with a scheduled bank until the permission is granted, failure to do
so is a punishable offence [Section 73(3)].
39. Types of Charges to be registered and Consequences of Non-Registration: Section
125 and 127 of the Companies Act, 1956 require the companies to get registered the
following charges with the Registrar of Companies within 30 days of their creation:
1. a charge for the purpose of securing any issue of debentures.
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2. a charge on uncalled share capital of the company

3. a charge on any immovable property, wherever situate or any interest therein.
4. a charge on any book debt of the company.
5. a charge not being a pledge, on any movable property of the company.
6. a floating charge on the undertaking or any property of the company including stock
in trade.
7. a charge on calls made but not paid.
8. a charge on a ship or any share in a ship.
9. a charge on goodwill, on a patent or license under a patent, on a trade mark or on a
copy right or a license under a copy right.
10. a charge created out of India comprising solely property situate outside India with
particulars and the instrument creating or evidencing the charge or a copy thereof.
11. a charge created in India comprising property outside India will the instrument
creating or purporting to create the charge or a verified copy thereof (Section 125).
12. a charge on a property acquired subject to charge (Section 127).
40. Section 77 of the Companies Act, 1956 allows advancing of loan by a company to its
bona fide employees for purchasing or subscribing to fully paid shares of the company.
However, such financial assistance should not exceed six months wages or salary of the
employee. If the company is purchasing for redeeming its preference shares, it does not
attract Section 77.
41. ‘Pari Passu’: Pari passu clause in a debenture means that all the debentures of the
series are to be paid rateably, if, therefore, security is insufficient to satisfy the whole
debts secured by the series of debentures, the amounts of debentures will abate
proportionately. If the clause is not made a use of then the debentures rank in
accordance with the date of issue, and if they are all issued on the same date they will be
payable according to their numerical order. A company, however, cannot issue a new
series of debentures so as to rank ‘pari passu’ with prior series unless the power to do so
is expressly reserved and contained in the debenture deed of the previous series.
Registration: In the event of the ‘pari passu’ clause being included in the debentures
secured by a charge, it is enough if the following particulars are filed with the Registrar of
Companies within 30 days after the execution of the deed containing the charges or
where there is no deed after the, execution of debentures of the series:
(i) the total amount secured by the whole series;
(ii) the dates of the resolutions authorising the issue of the series;
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(iii) the date of deed, if any, by which security is created;

(iv) a general description of the property charged; and
(v) the name of the trustees for debenture holders, if any, together with the deed
containing the charge or a certified copy of the deed or, if there is no deed, one of
the debentures of the series (Section 128).
Where more than one issue is made of debentures in the series, particulars of the
date and the amount of each issue must be filed with the Registrar. But an omission
to do so will not affect the validity of ‘the. debentures issued.
42. Where a shareholder wishes to transfer only part of his shareholding or wishes to sell
them to two or more persons, he is required to lodge the share certificate with the
company. Where he has already lodged with the company the relevant share certificates
together with an instrument of transfer for part of the shares, he may request the
company to certify on the instrument of the transfer that the share certificate for the
shares covered by the instrument of transfer has been lodged with the company.
An instrument of transfer shall be deemed to be certificated if it bearers the words
“certificate lodged” or the words to the like effect. Certification is, therefore, the act of
noting by the secretary etc., stating that the share certificate has been lodged with the
company.
Any person who becomes a nominee by virtue of the provisions of Section 109A, upon
the production of such evidence as may be required by the Board and subject as
hereinafter provided, elect, either-
(a) to a registered himself as holder of the share or debenture, as the case may be; or
(b) to make such transfer of the share or debenture, as the case may be as the
deceased shareholder or debenture holder, as the case may be, could have made.
If the person being a nominee, so becoming entitled, elects to be registered as holder of
the share or debenture, himself as the case may be, he shall deliver or send to the
company a notice in writing signed by him stating that he so elects and such notice shall
be accompanied with the death certificate of the deceased shareholder or debenture
holder, as the case may be. (Sub-section 2).
All the limitations, restrictions and provisions of this Act relating to the right to transfer
and the registration of transfers of shares or debentures shall be applicable to any such
notice or transfer as aforesaid as if the death of the member had not occurred and the
notice or transfer were a transfer signed by that shareholder or debenture holder, as the
case may be. (Sub-section 3).
person, being a nominee, becoming entitled to a share or debenture by reason of the
death of the holder shall be entitled if he were the registered holder of the share or
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debenture except that he shall not, before being registered a member in respect of his
share or debenture, be entitled in respect of it to exercise any right conferred by
membership in relation to meetings of the company:
Provided that the Board may at, any time, give notice requiring any such person to elect
either to be registered himself or to transfer the share or debenture, and if the notice is
not complied within ninety days, the Board may thereafter withhold payment of all
dividends, bonuses or other moneys payable in respect of the share or debenture, until
the requirements of the notice have been complied with (Sub-section 4).
43. The corporate existence of a society under Co-operative Societies Act, 1912 shall
continues till its registration is cancelled by the Registrar. The Registrar may cancel the
registration of a society in the following circumstances:
(i) If the Registrar, after an inquiry has been held by him under Section 35 of the Act,
into the constitution, working and financial condition of a registered society, or after
an inspection of the books of a society has been made under Section 36, or on
receipt of an application made by three-fourths of the members of a society, is of
opinion that the society ought to be dissolved. The cancellation takes effect after the
expiry of two months from the date of the order of cancellation, if no appeal is
preferred against the order by any member within that period. If, however, an appeal
is presented within that period, the cancellation takes effect only when it is
confirmed by the appellate authority i.e., the State Government (Section 39).
(ii) Where it is a condition of the registration of a society that it should consist of at
least ten members, and it is proved to the satisfaction of the Registrar that the
number of the members has been reduced to less than ten. In this case, the
cancellation takes effect from the date of the order (Sections 40 and 41).
The effect of such cancellation is that the society ceases to exist as a corporate
body from the date the cancellation takes effect (Section 41) and the Registrar may
appoint a competent person to be liquidator of the society (Section 42).
Powers of Liquidator (Section 42): The liquidator shall have the following powers:
(i) to institute and defend suits and other legal proceedings on behalf of the
society by his name of office;
(ii) to determine the contribution to be made by the members and past members
of the society respectively to the assets of the society;
(iii) to investigate all claims against the society, and subject to the provisions of
this Act, to decide questions of priority arising between claimants;
(iv) to determine the persons by whom and the proportions in which the costs of
the liquidation are to be borne; and
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(v) to give such directions relating to the collection and distribution of the
assets of the society as may seem to him to be necessary for winding up
the affairs of the society.
In so far as is necessary for carrying out the purpose of Section 42, the liquidator
may exercise certain additional powers, e.g., to summon and enforce the
attendance of witnesses; to compel the production of documents by the same
means and in the same manner as is provided for by the Civil Procedure Code.
These additional powers are, however, exercisable subject to any rules that may be
made for this purpose.
44. (a) Procedure for shifting registered office from one state to another: A company
can change its registered office from one State to another only for purpose specified
in Section 17(1) of the Companies Act, 1956 and for no other purpose.
1. Resolution of the Board of Directors: The first step in changing registered
office is that the board of directors must adopt a resolution to that effect.
2. Special resolution: A special resolution must be passed by the company in
the general body meeting of shareholders/members. (Section 17(1).
3. Confirmation by the CLB: The change shall not take effect unless and until
it is confirmed by the CLB on a petition by the Company. (Section 17(2).
4. Notice to affected parties: Before confirming the change the CLB shall
ensure that sufficient notice has been given to every person whose interest
will be affected by the change and that the consent creditors of the
company has been obtained or their debts or claims have been discharged
or secured. (Section 17(3).
5. Notice to Registrar: The CLB shall cause notice of the petition for
confirmation of the change to be served on the Registrar. The Registrar
shall also be given a reasonable opportunity to appear before the CLB and
state his objections and suggestions, if any, with respect to the
confirmation of the alteration. (Section 17(4).
6. The CLB as it may think fit impose such terms and conditions.
7. Copy of the order to be filed with ROC's: A certified copy of the order
confirming the alteration, together with a printed copy of altered
memorandum shall be filed by the company with the registrar of each of the
states who shall register the same. All the records of the company shall be
transferred.
The aforesaid copy of the order must be filed within three months from the
date of the order. The CLB before confirming a resolution will satisfy itself
that sufficient notice has been given to every creditor and all other persons
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whose interests are likely to be affected by the alteration including the

Registrar of Companies and the Government of the State in which the
registered office is situated. In Orient Paper Mills Ltd v. State of AIR
(1957) Ori. 232, it was observed that a State whose interests are affected
by the change of the registered office to a different State has a locus standi
to oppose shift of the registered office of a company. Accordingly, the
Orissa High Court declined to confirm change of registered office from
Orissa to West Bengal on the ground that the State has the right to protect
its revenue and therefore the interest of the State must be taken into
account.
But in Minerva Mills Ltd. v. Government of Maharashtra, the Bombay High
Court held that the CLB cannot refuse confirmation of the shifting of the
registered office on the ground of loss of revenue to a state or would
adverse effects on the general economy of the State. Similar, view was
expressed in Rank Film Distributors of India Ltd v. Registrar of Companies,
West Bengal.
(b) Section 149 (2A) prohibits a public limited company from commencing any business
other than that covered by the main objects of the company, unless it has by a
special resolution, approved for the commencement of such business and a duly
verified declaration by one of its Directors or its Secretary in the prescribed form
that such a resolution has been passed or as the case may be the provisions of
Section 149(2B) have been complied with, has been filed with the Registrar. In the
context of this prohibition, a distinction has been made between a company existing
immediately before the commencement of the Amendment Act, 1965 and one
formed after such commencement. In the former case, the special resolution is
required for commencing a new business, in relation to any of the objects
mentioned in its memorandum, which is not germane to the business it was carrying
on at the commencement of the Amendment Act. In the latter case, the special
resolution is necessary to set up a business in relation to any object other than its
main objects, or ancillary to it, on its memorandum.
Thus, for commencing the proposed new business, a special resolution of the
company would be necessary. An ordinary resolution would be sufficient if, in
addition the Central Government, on an application by the Board of Directors, allows
the company to commence such a business [Section 149(2B)].
45. The problem in question relates to reduction of membership below the statutory
minimum, Section 12 of the Companies Act, 1956 requires a public company to have a
minimum of seven members. If at any time the membership of a public company falls
below seven and it continues its business for more than six months, then according to
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section 45 of the Companies Act, 1956 every such member who was aware of this fact,
would be individually (personally) liable for all debts contracted after six months.
Thus, in the above problem, the remaining six members shall incur personal liability for
the debts contracted by the company:
(i) If they continued to carry on the business of the company with that reduced
membership (i.e., 6) beyond six month period;
(ii) Only those members who knew of this fact of reduced membership shall be liable,
for instance, one of the members who was abroad and thus not aware of those
developments, shall not be liable.
(iii) The liability shall extend only to the debts contracted after six months from the date
of auction of that member's shares.
46. Distinction between fully convertible and partly convertible debentures:
Convertible debentures can be fully or partly convertible. The major points of
distinction between fully and partly convertible debentures are highlighted below :
Features debentures Fully convertible Partly convertible
debentures
(i) Classification for debt Classified as equity for Convertible portion classified
equity ratio debt equity for computation. as ‘equity’ and non-convertible
computation portion a ‘debt’.
(ii) Flexibility in financing Highly favourable debt Favourable debt equity ratio.
equity ratio.
(iii) Capital base Higher equity capital on Relatively lower equity capital
conversion of debentures. on conversion of debentures.
(iv) Suitability Better suited for companies Better suited for companies
without established track with established track record.
record.
(v) Servicing of equity Higher burden of servicing Relatively lesser burden of
of equity. equity servicing.
(vi) Debenture Not required. Required to be created for
redemption reserve 50% of the face value of the
non-convertible portion.
(vii) Buyback Not required. Arrangement may be made
arrangements buyback of the non-convertible
portion of the debentures.
(viii) Popularity Highly popular with Not so popular with
investors. investors.
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47. Problem on service of document upon a company: The problem as asked in the question
is based on the provisions of the Companies Act, 1956 as contained in Section 51.
Accordingly a document may be served on a company or on its officer at the registered
office of the company. It must be sent either by post or by leaving it at its registered
office. If it is sent by post, it must be either by post under a certificate of posting or by
registered post. When a notice has been addressed to the company and served on the
directors, it constitutes a good service (Benabo v. Jay (William) and Partners Ltd.) The
articles of a company which contain the provisions contrary to Section 51 cannot be
enforced nor can they limit the mode of service to only one of the modes provided by the
Statute (Sadasiv Shankar Dandige V. Gandhi Seva Samaj Ltd.).
Accordingly in the first case the refusal by the Star Company Ltd. of the service of the
document is not valid.
In the second case Vikas can claim damages on this account from the Company.
48. Procedure to be followed for conducting business through postal ballot (Section
192A).
(a) The company may make a note below the notice of general meeting for
understanding of members that the transactions(s) at serial number requires
consent of shareholders through postal ballot;
(b) The board of directors shall appoint one scrutinizer, who is not in employment of the
company, may be a retired judge or any person of repute who, in the opinion of the
board can conduct the postal ballot voting process in a fair and transparent manner;
(c) The scrutinizer will be in position for 35 days (excluding holidays) from the date of
issue of notice for annual general meeting. He has to submit his final report on or
before the said period.
(d) The scrutinizer will be willing to be appointed and he is available at the registered
office of the company for the purpose of ascertaining the requisite majority;
(e) The scrutinizer shall maintain a register to record the consent or otherwise received,
including electronic media, mentioning the particulars of name, address, folio
number, number of shares, nominal value of shares, whether the shares have
voting, differential voting or non-voting rights and the scrutinizer shall also maintain
record for postal ballot which are received in defaced or mutilated form. The postal
ballot and all other papers relating to postal ballot will be under the safe custody of
the scrutinizer till the chairman considers, approves and signs the minutes of the
meeting. Thereafter, the scrutinizer shall return the ballot papers and other related
papers/register to the company so as to preserve such ballot papers and other
related papers/register safely till the resolution is given effect to;
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(f) Consent or otherwise relating to issue mentioned in notice for annual general
meeting received after 35 days from the date of issue will be strictly treated as if the
reply from the member has not been received. [Companies (Passing of the
Resolution by Postal Ballot) Rules, 2001 Notification No. G.S.R.337 (E), dated
10th May, 2001]..
If default is made in following this procedure, fine of Rs. 50,000 can be levied for
each default.
49. Composition of National Company Law Tribunal (NCLT)
The Central Government is empowered, under Section 10FB of the Companies Act,
1956, to constitute a National Company Law Tribunal to exercise and discharge such
powers and functions as may be conferred on it by or under the Companies Act or any
other law for the time being in force.
According to Section 10FC, the Tribunal shall be headed by the President who has been,
or is qualified to be a judge of a High Court and consists such number of Judicial and
Technical Members not exceeding 62, as the Central Government deems fit, to be
appointed by the Government by notification in the official gazette.
Eligibility for Members: As per Section 10FC, the Tribunal will consist of Judicial and
Technical members. Persons who have been working as Judiciary, Advocate, Member of
the Indian Company Law Service and Member of Indian Legal Service shall be
considered for the appointment as Judicial Member, and the members of Indian
Company Law Service (Accounts Branch), Chartered Accountant, Cost Accountant,
Company Secretary shall be considered for the post of Technical Members. In addition to
this, length of service in their particular nature of work will also taken into consideration.
Powers of Tribunal
 Tribunal shall have power to review its own order (Section 10 FO).
 The Tribunal, as per section 10 FM, after giving reasonable opportunity of being
heard is empowered to pass such an order as it thinks fit. It can also, within a
period of two years from the date of order, rectify any mistake and shall make
amendment in the order passed by it and shall make such amendment if the
mistake is brought to its notice by the parties.
 Tribunal may delegate its powers and duties subject to specified conditions
and limitations to any member or officer or other employee of the Tribunal to
manage any industrial company or industrial undertaking or any operating
agency under this Act as it may deem necessary.
 The Tribunal/any operating agency, on being directed by the Tribunal may seek
an assistance of Chief Metropolitan Magistrate and District Magistrate within
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whose jurisdiction, any property, books of accent or any other document of Sick
Industrial Company be situate or be found, to take into custody or to take
possession thereof.
50. Types of Meetings under Companies Act, 1956:
1. Meetings of shareholders or members:
(a) Statutory meeting.
(b) Annual general meeting.
(c) Extraordinary general meeting.
(d) Class meetings.
2. Meeting of debenture holders.
3. Meetings of creditors and contributories in winding up.
4. Meeting of creditors otherwise than in winding up.
5. Meeting of directors:
(a) Board meeting.
(b) Committee meeting.
Statutory Meeting (Section 165): Every public company limited by shares or limited by
guarantee and having a share capital must hold a general meeting of the members of the
company which may be called the statutory meeting. It is to be convened after not less
than one month but within six months from the date which the company is entitled to
commence business (sub-section 1).
A meeting held prior to statutory period of one month is not a statutory meeting. The
notice for such a meeting must say that it is intended to be statutory meeting [Gardner
Vs. Iredel (1912) I Ch.700].