Standard : CAFC

SUBJECT : LAW TIME – 1.30 Hrs.

Chapter : The Companies Act MARKS – 42 Marks

Q.1 It was decided by the court in the case of Gilford Motor Co. Vs. Horne, if the company is formed
simply as a mere device to evade legal obligations, though this is only in limited and discrete
circumstances, courts can pierce the corporate veil. In other words, if the company is mere sham
or cloak, the separate legal entity can be disregarded.
On considering the decision taken in Gilford Motor Co. Vs. Horne and facts of the problem given,
it is very much clear that Seven Stars Timbers Private Limited was formed just to evade legal
obligations of the agreement between Mr. Dhruv and Sunmoon Timber Private Limited. Hence,
Seven Stars Timbers Private Limited is just a sham or cloak and the separate legal entity
between Mr. Dhruv and Seven Stars Timbers Private Limited should be disregarded.

Q.2 This case is governed by the 'Doctrine of Ultra Vires'. According to this doctrine, any act done,
or a contract made by the company which travels beyond the powers of the company conferred
upon it by its Memorandum of Association is wholly void and inoperative in law and is therefore
not binding on the company. This is because the Memorandum of Association of the company
is, in fact, its charter; it defines its constitution and the scope of the powers of the company.
Hence, a company cannot depart from the provisions contained in the memorandum however
imperative may be the necessity for the departure. Hence, any agreement ultra vires the
company shall be null and void.
(i) Whether AK Private Limited is liable to pay the debt?
As per the facts given, AK Private Limited borrowed ₹ 36 crore from BK Finance Limited
which is beyond its borrowing power of ₹ 30 crore.
Hence, contract for borrowing of ₹ 36 crore, being ultra vires the Memorandum of
Association and thereby is void. AK Private Limited is not, therefore, liable to pay the debt.
(ii) Remedy available to BK Finance Limited:
In light of the legal position explained above, BK Finance Limited cannot enforce the said
transaction and thus has no remedy against the company for recovery of the money lent.
BK Finance limited may take action against the directors of AK Private Limited as it is the
personal liability of its directors to restore the borrowed funds. Besides, BK Finance Limited
may take recourse to the remedy by means of 'Injunction', if feasible.

Q.3 Foreign Company [Section 2(42) of the Companies Act, 2013]: It means any company or body
corporate incorporated outside India which-has a place of business in India whether by itself or
through an agent, physically or through electronic mode; and conducts any business activity in
India in any other manner.
As Mike LLC is incorporated in Singapore and having a place of business in Pune, India, it is a
foreign Company.
Q.4 (i) Perpetual Succession - A company on incorporation becomes a separate legal entity. It
is an artificial legal person and have perpetual succession which means even if all the
members of a company die, the company still continues to exist. It has permanent
existence. The existence of a company is independent of the lives of its members. It has a
perpetual succession. In this problem, the company will continue as a legal entity. The
company's existence is in no way affected by the death of all its members.
(ii) The statement given is incorrect. A company is an artificial person as it is created by a
process other than natural birth. It is legal or judicial as it is created by law. It is a person

since it is clothed with all the rights of an individual. Further, the company being a separate
legal entity can own property, have banking account, raise loans, incur liabilities and enter
into contracts. Even members can contract with company, acquire right against it or incur
liability to it. It can sue and be sued in its own name. It can do everything which any natural
person can do except be sent to jail, take an oath, marry or practice a learned profession.
Hence, it is a legal person in its own sense.

Q.5 Doctrine of ultra vires: The meaning of the term ultra vires is simply "beyond (their) powers".
The legal phrase "ultra vires" is applicable only to acts done in excess of the legal powers of the
doers. This presupposes that the powers in their nature are limited. It is a fundamental rule of
Company Law that the objects of a company as stated in its memorandum can be departed from
only to the extent permitted by the Act, thus far and no further. In consequence, any act done or
a contract made by the company which travels beyond the powers not only of the directors but
also of the company is wholly void and inoperative in law and is therefore not binding on the
company. On this account, a company can be restrained from employing its fund for purposes
other than those sanctioned by the memorandum. Likewise, it can be restrained from carrying
on a trade different from the one it is authorised to carry on.
The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires
transaction, nor can it sue on it. Since the memorandum is a "public document", it is open to
public inspection. Therefore, when one deals with a company one is deemed to know about the
powers of the company. If in spite of this you enter into a transaction which is ultra vires the
company, you cannot enforce it against the company.
An act which is ultra vires the company being void, cannot be ratified even by the unanimous
consent of all the shareholders of the company.
Hence in the given case, ABC Limited cannot enter into a contract outside the purview of its
object clause of Memorandum of Association as it becomes ultra vires and thus null and void
.
Q.6 According to doctrine of Indoor Management, persons dealing with the Company are
presumed to have read the registered documents and to see that the proposed dealing is not
inconsistent therewith, but they are not bound to do more; they need not enquire into the
regularity of internal proceedings as required by Memorandum and Articles. This was also
decided in case of Royal British Bank Vs. Turquand.
 In the instant case, XYZ Private Limited have taken loan from reputed bank for 10,00,000 by
passing Board Resolution while Special Resolution was necessary for such amount. BOD gave
an undertaking to bank that Special Resolution has been passed for such loan. The bank on
believing on such undertaking lends the money. On demanding the repayment of loan, company
denied the payment as act was ultra vires to company.
On the basis of provisions of doctrine of indoor management, the bank can claim the amount of
his loan from the company. The bank can believe on the undertaking given by board and no
need to enquire further.

Q.7. In line with the Companies Act, 2013, following are the classification of the Companies on the
basis of control:
(a) Holding and subsidiary companies: 'Holding and subsidiary companies are relative terms.
A company is a holding company in relation to one
or more other companies, means a company of which such companies are subsidiary
companies. [Section 2(46)]
For the purposes of this clause, the expression "company" includes any body corporate.
Whereas section 2(87) defines "subsidiary company" 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.
(b) Associate company [Section 2(6)]: 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.

Explanation. - For the purpose of this clause - -

(1) the expression "significant influence" means control of at least twenty per cent of total
voting power, or control of or participation in business decisions under an agreement,
(ii) the expression "joint venture" means a joint arrangement whereby the parties that have
joint control of the arrangement have rights to the net assets of the arrangement.
The term "Total Share Capital", means the aggregate of the -
(1) Paid-up equity share capital; and
(2) Convertible preference share capital.