Practice Test

1. Mr. M formed a company Zen Ltd. with share capital of five lakh rupee, out of
which 80% shares were held by Mr M and his family. He was a whole-time
director of the company under a contract of employment. He had full control
over the affairs of the company. Mr M was also provided Life Insurance under
the Employment Scheme. In a sudden accident Mr M died and therefore, Mr A
the son of Mr M, as a legal representative, claimed for the Insured amount from
the company and also forwarded an application to be appointed as a director of
the company.

In light of the above case decide the following:

a. What rights Mr M had as a controlling shareholder of the Company? Is he the

owner of the company?
b. Mr M being the controlling shareholder was appointed as an employee of the
company? How far this arrangement seems valid?
c. What effect does the controlling shareholdership of Mr M have on his
contractual obligations with the company? Is Mr A entitled to the insured
amount?
a. Mr. M is the whole-time director of the company and also has a full control over the
company. He was also provided with a life insurance under the employment scheme
of the company. As far as ownership is concerned, being the majority shareholder
does not make a person owner of the company.

b. The following arrangement is valid, as being the majority shareholder does not stop
one to be employee of the company, as held in Lee v. Lee. the concept of separate
legal entity is applicable here.

c. The contractual relations remain valid even when an individual is a majority

shareholder or a whole-time director of the company.

2. ABC Ltd was a company incorporated and registered under Companies Act
2013. The objective of the company was to conduct business activity into
 manufacturing and construction. The company planned to raise funds through
public offering and therefore issued prospectus for the same. The Board of
directors, where the top layers management comprised of Mr. R as the
Managing Director and Mr. Z as the chairman, decided not to reveal the fact
that the company did not make any profit in the last financial year and they also
issued a statement in the prospectus that the company has been distributing
dividends.
The investors filed a criminal suit against the company and the directors. Decide the
liability.
The Board of directors, which include Managing Director and Chairman will invite
criminal liability under section 447 Company act, 2013 prospectus is misleading,
since the non-disclosure of fact that company was did not make any profit in last
financial year and dividends was paid out last year gave false impression of company
making

profit and suppression of such fact might have affected investor's decision to
subscribe shares whereas prospectus does not disclose all the material facts truly,
honestly and Accurately

3. Identify the type of company as per the Companies Act 2013 and give suitable
reasons:

a. Company A is a limited liability company, has its objectives for promotion of

sports. The company has share capital and intends to use its profits for
distribution of dividends once in a financial year. The company seeks for licence
under section 8 of the Companies act. Comment
It is a section 8 co. since its purpose is to promote sport

b. Company A holds 55 % voting Power in Company B, Company B holds 25 %

voting power in Company C and Company A holds 35 % voting power in
Company C. Identify the relation of Company C with Company A.
c. Company A holds 65% voting rights in Company B. Company B holds 12%
voting rights in Company E. Identify the relation between Company B and
Company E.

No relationship

d. Company A which is into e-commerce sector is incorporated in Netherlands. It

has its website access to customers in India but the server is installed in the home
country. In company A, Indian Entities own 45 % shareholding. Will the case be
different if Indian Individuals/ entities have more than 50 % shareholding?
Yes, after 50% of shareholding it will become Indian co.

e. Company A Ltd is a listed public company which has not filed annual returns
and financial statements for 2 years. The company wishes to declare itself an
inactive company and get Dormant Status under Companies Act. Comment.
Yes ,the word “Dormant” means inactive or inoperative. A dormant company is an
excellent opportunity to start a company for a future project or hold an
asset/intellectual property without having significant accounting transactions. On the
other hand if a company has not filed its annual returns for two consecutive years then
such a company will also be called as a dormant company.

f. Company A is an OPC, it wishes to convert itself into Section 8 Company?

Comment
No. Rule 3 of the Companies (Incorporation) Rules, 2014 prohibits a one person
company to be incorporated as section 8 company or to convert into a Section 8
Company

g. Company A is a public company, it wishes to convert itself into Private

Company. It has received 75% consent from shareholders. The company has
defaulted on repayment of deposits in the last financial year. Comment.
 a company should not default on repayment
according to Rule 29(1) of Companies (Incorporation) Rules, 2014 a company should
repay all defaults before conversion

h. Decide whether the arrangement is valid or not?

I.

II.

Both 1 and 2 are permitted structure