SUGGESTED SOLUTION

CA INTERMEDIATE
SUBJECT- CORPORATE AND OTHERS LAW

Test Code – INP 2122

BRANCH - () (Date :)

Head Office : Shraddha, 3rd Floor, Near Chinai College, Andheri (E), Mumbai – 69.
Tel : (022) 26836666

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 Section - A
MULTIPLE CHOICE QUESTION :

1.(i) (A) The net profit had increased to Rs. 6.60 crores and it was more by Rs.
1.80crores in comparison to previous year’s net profit.
(ii) (B) 2% of the average net profits made during the three immediately
precedingfinancial years.
(iii) (C) Track record of minimum three years
2.(1) (A) ABZ and North South Pvt. Ltd
(2) (A) Holding Company and Associate
(3) (A) 28 lacs
3. (B) M shall bear the loss
4. (B) Mischief Rule
5. (A) 17th May 2020
6. (C) Vishal is responsible to Preet for damage sustained
7. (B) 2%
8. (A) It receives the assent of the President
9. (C) Upon expiry of five years from the end of the financial Year in which the
default was made good
10. (A) Simple delivery
11 (C) Both option (a) & (b) is correct
12. (C) Preamble
13. (C) Registered office of the company Alpha Limited.

Section – B

ANSWER : 1(A)
According to section 2(45) of the Companies Act, 2013, "Government company" means any
company in which not less than 51% of the paid-up share capital is held by the Central
Government, or by any State Government or Governments, or partly by the Central Government
and partly by one or more State Governments, and includes a company which is a subsidiary
company of such a Government company.
As per section 139(7), in the case of a Government company or any other company owned or
controlled, directly or indirectly, by the Central Government, or by any State Government, or
Governments, or partly by the Central Government and partly by one or more State Governments,
the first auditor shall be appointed by the Comptroller and Auditor-General of India within 60
days from the date of registration of the company and in case the Comptroller and Auditor -
General of India does not appoint such auditor within the said period, the Board of Directors of
the company shall appoint such auditor within the next 30 days; and in the case of failure of
the Board to appoint such auditor within the next 30 days, it shall inform the members of the
company who shall appoint such auditor within the 60 days at an extraordinary general meeting,
who shall hold office till the conclusion of the first annual general meeting .

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In the given question, Shiv Limited is a government company as 54.6% [(1.5+1.23)/ 5= 54.6%] of
the share capital is held by Central government and State Government (Punjab Government).
Thus, the first auditor of Shiv Limited shall be appointed by the Comptroller and Auditor-General
of India within 60 days from the date of registration. Thus, the appointment of first auditor by
Board of Directors on 31.10.2020 is not valid. The Board of Directors can appoint the first
auditor in case the Comptroller and Auditor-General of India does not appoint such auditor
within the said period of period 60 days. The Board of Directors of the company shall appoint
such auditor within the next 30 days.
In the case of failure of the Board to appoint such auditor within the next 30 days, it shall
inform the members of the company who shall appoint such auditor within 60 days at an
extraordinary general meeting, who shall hold office till the conclusion of the first annual
general meeting. Thus, the contention of members that its only the members who can appoint
the first auditor of the Government company, is not correct.

(6 MARKS)
ANSWER : 1(B)
Section 127 of the Companies Act, 2013 provides for punishment for failure to distribute
dividend on time. One of such situations is where a shareholder has given directions to the
company regarding the payment of the dividend and those directions cannot be complied with and
the same has not been communicated to the shareholder.

In the instant case, PQ Ltd. has failed to communicate to the shareholder Mr. Kumar about non-
compliance of his direction regarding payment of dividend. Hence, the penal provisions under
section 127 will be attracted.

(5 MARKS)
ANSWER : 1©
As per the provisions of section 142 of the Indian Contract Act 1872, where the guarantee has
been obtained by means of misrepresentation made by the creditor concerning a material part of
the transaction, the surety will be discharged. Further according to provisions of section 134, the
surety is discharged by any contract between the creditor and the principal debtor, by which the
principal debtor is released, or by any act or omission of the creditor, the legal consequence of
which is the discharge of the principal debtor.
In the given question, Priyanka wants to purchase air conditioner whose compressor should
be of copper, on credit from Rahul. Mr. Arvind has given the guarantee for payment of price.
Rahul sold the air conditioner of a particular brand on misrepresenting that it is made of copper
while it is made of aluminium of which both Priyanka & Mr. Arvind were unaware. After being
aware of the facts, Priyanka denied for payment of price. Rahul filed the suit against Mr.
Arvind for payment of price.

On the basis of above provisions and facts of the case, as guarantee was obtained by Rahul by
misrepresentation of the facts, Mr. Arvind will not be liable. He will be discharged from liability.

(5 MARKS)
ANSWER : 1(D)
According to Section 26 of the Negotiable Instruments Act, 1881, every person competent to
contract (according to the law to which he is subject to) has capacity to bind himself and be
bound by making, drawing, accepting, endorsing delivering and negotiating an instrument. A
party having such capacity may himself put his signature or authorize some other person to do
so.
A minor may draw, endorse, deliver and negotiate an instrument so as to bind all the parties
except himself. A minor may be a drawer where the instrument is drawn or endorsed by him. In
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that case he does not incur any liability himself although other parties to the instrument can be
made liable and the holder can receive payment from any other party thereto.

Therefore, in the instant case, the promissory note is valid and it is binding on Mr. Manoj
Malik but not on Preet, a minor.
(3 MARKS)
ANSWER : 2(A)
Not negotiable Crossing
This requires writing of words “not negotiable” in addition to the two parallel lines. These words
may be written inside or outside these lines. According to Section 130, a person taking a cheque
crossed generally or specially, bearing in either case the word “not negotiable” shall not
have, and shall not be capable of giving a better title to the cheque than that which the
person from whom he took it. It is a statutory crossing. A cheque with such crossing is not
negotiable, but continues to be transferable as before. Ordinarily, in a negotiable instrument, if
the title of the transferor is defective, the transferee, if he is a Holder in Due Course, will have a
good title. When the words “not negotiable” are written, even a Holder in Due Course will get
the same title as that of transferor. Thus, if the title of the transferor is defective, the title of
transferee will also be so.
Hence, the addition of the words not negotiable does not restrict the further transferability of the
cheque, but it entirely takes away the main feature of negotiability, which is that a holder with a
defective title can give a good title to the subsequent holder in due course.
(3 MARKS)
ANSWER : 2(B)
Deposit: According to Section 2 (31) of the Companies Act, 2013, the term ‘deposit’ includes any
receipt of money by way of deposit or loan or in any other form, by a company, but does not
include such categories of amount as may be prescribed in consultation with the Reserve bank of
India.
Rule 2 (1) (c) of the Companies (Acceptance of Deposit) Rules, 2014 states various amounts
received by a company which will not be considered as deposits. In terms of this Rule the
answers to the given situations shall be as under:
Rs. 5,00,000 raised by Rishi Confectionaries Limited through issue of non- convertible debentures
not constituting a charge on the assets of the company and listed on recognised stock exchange
as per the applicable regulations made by the SEBI, will not be considered as deposit in terms of
sub-clause (ixa) of Rule 2 (1) (c).
(i) Rs. 2,00,000 received by Raja Yarns Limited from its employee Mr. T, who draws an annual
salary of Rs. 1,50,000, as a non-interest bearing security deposit under a contract of
employment will be considered as deposit in terms of sub-clause (x) of Rule 2 (1) (c), for the
amount received is more than his annual salary of Rs. 1,50,000.
(ii) Rs. 3,00,000 received by a private company from one of the relatives of a Director. When
the relative furnishes a declaration that the said amount was received by him from his
mother as a gift, then it will not be considered as deposit in terms of sub-clause (viii) of Rule
2 (1) (c). In fact, the preceding sub-clause requires that any amount given by a relative of a
director of a private company shall not be considered as deposit if the relative furnishes a
declaration in writing to the effect that the amount is not being given out of funds acquired
by him by borrowing or accepting loans or deposits from others. Thus, the amount given
to the private company out of gifted money by one of the relatives of a director is not a
‘deposit’.
As an additional requirement, the company shall disclose the details of money so accepted
in the Board’s report.
(6 MARKS)

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ANSWER : 2(C)
According to Section 63 of the Companies Act, 2013, a company may issue fully paid-up bonus
shares to its members, in any manner whatsoever, out of -
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account.
Provided that no issue of bonus shares shall be made by capitalising reserves created by the
revaluation of assets.
Conditions for issue of Bonus Shares: No company shall capitalise its profits or reserves for
the purpose of issuing fully paid-up bonus shares, unless—
(i) it is authorised by its Articles;
(ii) it has, on the recommendation of the Board, been authorised in the general meeting of
the company;
(iii) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt
securities issued by it;
(iv) it has not defaulted in respect of payment of statutory dues of the employees, such as,
contribution to provident fund, gratuity and bonus;
(v) the partly paid-up shares, if any, outstanding on the date of allotment, are made fully paid-
up;
(vi) it complies with such conditions as are prescribed by Rule 14 of the Companies (Share
Capital and debentures) Rules, 2014 which states that the company which has once
announced the decision of its Board recommending a bonus issue, shall not subsequently
withdraw the same.
Further, the company has to ensure that the bonus shares shall not be issued in lieu of dividend.
For the issue of bonus shares Shiva Cement Limited will require reserves of Rs. 50,00,000 (i.e. half
of Rs. 1,00,00,000 being the paid-up share capital), which is readily available with the company.
Hence, after following the above conditions relating to the issue of bonus shares, the company
may proceed for a bonus issue of 1 share for every 2 shares held by the existing shareholders.
(5 MARKS)
ANSWER : 2(D)

(i) Normally a Proviso is added to a section of an Act to except something or qualify

something stated in that particular section to which it is added. A proviso should not be,
ordinarily, interpreted as a general rule. A proviso to a particular section carves out an
exception to the main provision to which it has been enacted as a Proviso and to no other
provision. [Ram Narian Sons Ltd. Vs. Commissioner of Sales Tax AIR (1955) S.C. 765]
(ii) Sometimes an explanation is added to a section of an Act for the purpose of explaining the
main provisions contained in that section. If there is some ambiguity in the provisions of
the main section, the explanation is inserted to harmonise and clear up and ambiguity in
the main section. Something may added be to or something may be excluded from the
main provision by insertion of an explanation. But the explanation should not be
construed to widen the ambit of the section.
(3 MARKS)
ANSWER : 3(A)
Liability of a legal representative (Section 29 of the Negotiable Instruments Act, 1881): A
legal representative of a deceased person, who signs his name on a promissory note, bill of
exchange or cheque is liable personally thereon unless he expressly limits his liability to the extent
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of the assets received by him.
Thus, in the absence of an express contract to the contrary, the liability of a legal representative is
unlimited. However, a legal representative may, by an express agreement, limit his liability to the
extent of the assets received by him.

In the light of the stated provision, Mukund can succeed in recovering Rs. 50,000 from Gireesh
as he has admitted liability of Rs. 50,000 i.e. to the extent of the assets received by him from
the Ripun, the deceased.

Yes, the limit of liability specified in the bill by Gireesh, will remain same even if value of his
inheritance is more than the liability, in case he specified the liability by an express agreement.
(4 MARKS)

ANSWER : 3(B)
Small Company: According to Section 2(85) of the Companies Act, 2013, Small Company
means a company, other than a public company,—

(1) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as
may be prescribed which shall not be more than ten crore rupees; and
(2) turnover of which as per its last profit and loss account does not exceed two crore rupees or
such higher amount as may be prescribed which shall not be more than one hundred crore
rupees.
Nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act.
As per the Companies (Specification of Definitions Details) Rules, 2014, for the purposes of sub-
clause (i) and sub-clause (ii) of clause (85) of section 2 of the Act, paid up capital and turnover of
the small company shall not exceed rupees two crores and rupees twenty crores respectively.

(i) In the present case, MNP Private Ltd., a company registered under the Companies Act, 2013
with a paid up share capital of Rs. 70 lakh and having turnover of Rs. 30 crore. Since only
one criteria of share capital not exceeding
Rs. 2 crores is met, but the second criteria of turnover not exceeding Rs. 20 crores is not met
and the provisions require both the criteria to be met in order to avail the status of a small
company, MNP Ltd. cannot avail the status of small company.

(ii) If the turnover of the company is Rs. 15 crore, then both the criteria will be fulfilled and
MNP Ltd. can avail the status of small company.
(5 MARKS)

ANSWER : 3(C)
According to section 157 of the Contract Act, 1872, if the bailee, without the consent of the
bailor, mixes the goods of the bailor with his own goods, in such a manner that it is impossible to
separate the goods bailed from the other goods and deliver them back, the bailor is entitled to
be compensated by the bailee for the loss of the goods.

In the given question, Srijith’s employee mixed high quality sugar bailed by Amar and then
packaged it for sale. The sugars when mixed cannot be separated. As Srijith’s employee has mixed
the two kinds of sugar, he (Srijith) must compensate Amar for the loss of his sugar.
(4 MARKS)

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ANSWER : 3(D)
According to section 103 of the Companies Act, 2013, unless the articles of the company provide
for a larger number, in case of a public company, fifteen members personally present may fulfil
the requirement of quorum, if the number of members as on the date of meeting is more than
one thousand but up to five thousand.
If the specified quorum is not present within half-an-hour from the time appointed for holding a
meeting of the company, the meeting shall stand adjourned to the same day in the next week at
the same time and place, or to such other date and such other time and place as the Board may
determine.
If at the adjourned meeting also, a quorum is not present within half-an-hour from the time
appointed for holding meeting, the members present shall be the quorum.
In the instant case, there were only 12 members personally present on the day of meeting of PQ
Limited upto 11:30 AM. This was not in compliance with the required quorum as per the law. In
the adjourned meeting also, the required quorum was not present but in the adjourned meeting,
the members present shall be considered asquorum in line with the provisions of section 103.
Hence, the AGM conducted by PQ Limited after adjournment is valid.
As per the provisions of section 103(1)(b), in case of a private company, two members personally
present, shall be quorum for the meeting of a company. Therefore, in case
PQ Limited is a private company, then only two members personally present shall be the quorum
for AGM and there was no need for adjournment.
(4 MARKS)

ANSWER : 4(A)
Yes, the Director shall be held liable for the false statements made in the prospectus under
sections 34 and 35 of the Companies Act, 2013. Whereas section 34 imposes a criminal
punishment on every person who authorises the issue of such prospectus, section 35 more
particularly includes a director of the company in the imposition of liability for such mis-
statements.
The only situations when a director will not incur any liability for mis-statements in a prospectus
are as under:

(1) No criminal liability under section 34 shall apply to a person if he proves that such
statement or omission was immaterial or that he had reasonable grounds to believe, and did
up to the time of issue of the prospectus believe, that the statement was true or the
inclusion or omission was necessary.
(2) No civil liability for any mis-statement under section 35 shall apply to a person if he proves
that:
(i) having consented to become a director of the company, he withdrew his consent
before the issue of the prospectus, and that it was issued without his authority or
consent; or
(ii) the prospectus was issued without his knowledge or consent, and that on becoming
aware of its issue, he forthwith gave a reasonable public notice that it was issued
without his knowledge or consent.
(iii) that, as regards every misleading statement purported to be made by an expert or
contained in what purports to be a copy of or an extract from a report or valuation of
an expert, it was a correct and fair representation of the statement, or a correct copy
of, or a correct and fair extract from, the report or valuation; and he had reasonable

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 ground to believe and did up to the time of the issue of the prospectus believe, that
the person making the statement was competent to make it and that the said person
had given the consent required by sub-section (5) of section 26 to the issue of the
prospectus and had not withdrawn that consent before filing of a copy of the
prospectus with the Registrar or, to the defendant's knowledge, before allotment
thereunder.
Therefore, in the present case the director cannot escape the liability by stating that he had relied
on the promoters for making correct statements in the prospectus. He will be liable for mis-
statements in the prospectus.
(6 MARKS)
ANSWER : 4(B)
(1) According to section 5 of the General Clauses Act, 1897, where any Central Act has not
specifically mentioned a particular date to come into force, it shall be implemented on
the day on which it receives the assent of the President in case of an Act of Parliament.
(2) If any specific date of enforcement is prescribed in the Official Gazette, the Act shall come
into enforcement from such date.

Thus, in the given question, the SEBI (Issue of Capital and Disclosure Requirements) (Fifth
Amendment) Regulations, 2015 shall come into enforcement on 1st January, 2016 rather than
the date of its notification in the gazette.
(3 MARKS)
ANSWER : 4(C)
According to section 80 of the Companies Act, 2013, where any charge on any property or assets
of a company or any of its undertakings is registered under section 77 of the Companies Act,
2013, any person acquiring such property, assets, undertakings or part thereof or any share or
interest therein shall be deemed to have notice of the charge from the date of such
registration.

Thus, Section 80 clarifies that if any person acquires a property, assets or undertaking in respect
of which a charge is already registered, it would be deemed that he has complete knowledge of
charge from the date of its registration. Mr. Antriksh, therefore, ought to have been careful while
purchasing property and should have verified beforehand that NRT Limited had already created a
charge on the property.

In view of above, the contention of NRT Limited is correct.

(5 MARKS)
ANSWER : 4(D)

(i) Normally a Proviso is added to a section of an Act to except something or qualify

something stated in that particular section to which it is added. A proviso should not be,
ordinarily, interpreted as a general rule. A proviso to a particular section carves out an
exception to the main provision to which it has been enacted as a Proviso and to no other
provision. [Ram Narian Sons Ltd. Vs. Commissioner of Sales Tax AIR (1955) S.C. 765]
(ii) Sometimes an explanation is added to a section of an Act for the purpose of explaining the
main provisions contained in that section. If there is some ambiguity in the provisions of
the main section, the explanation is inserted to harmonise and clear up and ambiguity in
the main section. Something may added be to or something may be excluded from the
main provision by insertion of an explanation. But the explanation should not be
construed to widen the ambit of the section.
(3 MARKS)

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ANSWER : 5(A)
As per Rule 3 & 4 of the Companies (Incorporation) Rules, 2014 following the answers:
(A) Yes, it is mandatory for Nisha to withdraw her nomination in the said OPC as she is leaving
India permanently as only a natural person who is an Indian citizen and resident in India shall
be a nominee in OPC.
(B) Yes, Nisha can continue her nomination in the said OPC, if she maintained the status of
Resident of India after her marriage by staying in India for a period of not less than 182
days during the immediately preceding financial year.
(3 MARKS)
ANSWER : 5(B)
Problem on Negotiable Instrument made without consideration: Section 43 of the Negotiable
Instruments Act, 1881 provides that a negotiable instrument made, drawn, accepted, indorsed
or transferred without consideration, or for a consideration which fails, creates no obligation
of payment between the parties to the transaction. But if any such party has transferred the
instrument with or without indorsement to a holder for consideration, such holder, and every
subsequent holder deriving title from him, may recover the amount due on such instrument from
the transferor for consideration or any prior party thereto.
(i) In the problem, as asked in the question, A has drawn a bill on B and B accepted the bill
without consideration and transferred it to C without consideration. Later on in the next
transfer by C to D is for value. According to provisions of the aforesaid section 43, the
bill ultimately has been transferred to D with consideration. Therefore, D can sue any
of the parties i.e. A, B or C, as D arrived a good title on it being taken with
consideration.
(ii) As regards to the second part of the problem, the prior parties before D i.e., A, B, and
C have no right of action inter se because first part of Section 43 has clearly lays down
that a negotiable instrument, made, drawn, accepted, indorsed or transferred without
consideration, or for a consideration which fails, creates no obligation of payment
between the parties to the transaction prior to the parties who receive it on
consideration.
(5 MARKS)
ANSWER : 5(C)
Yes, the financial assistance to its employees by the company to enable them to subscribe for the
shares of the company will amount to the company purchasing its own shares. However, section
67 (3) of the Companies Act, 2013, permits a company to the give loans to its employees other
than its directors or key managerial personnel, for an amount not exceeding their salary or
wages for a period of six months with a view to enabling them to purchase or subscribe for
fully paid -up shares in the company or its holding company to be held by them by way of
beneficial ownership.
Section 68 of the Companies Act, 2013 however, allows a company to buy back its own shares
under certain circumstances and subject to fulfilment of prescribed conditions.

Purchasing in order to redemption its preference shares, does amount to acquisition or

purchase of its own shares. But this is allowed in terms of section 68 of the Companies Act,
2013 subject to the fulfilment of prescribed conditions, and upto specified limits and only after
following the prescribed procedure.
(5 MARKS)

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ANSWER : 5(D)
To conduct the business of agency according to the principal’s directions (Section 211 of the
Indian Contract Act, 1872): An agent is bound to conduct the business of his principal according
to the direction given by the principal, or, in the absence of any such directions, according to
the custom which prevails in doing business of the same kind at the place where the agent
conducts such business. When the agent acts otherwise, if any loss be sustained, he must make it
good to his principal, and, if any profit accrues, he must account for it.

In the present case, Mr. Pintu, one of the agents, sold goods of ABC Ltd. to M/s Parul Pvt.
Ltd. (on credit) which was insolvent at the time of such sale. Also, it is not the custom in ABC
Ltd. to sell the products on credit.Hence, Mr. Pintu must make good the loss to ABC Ltd.

(4 MARKS)

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