ASSIGNMENT

Name: Deepesh Goyal

Roll No: 20/120
Course: B.Com Programme
Subject: Company Laws
Submitted To: Dr. Bhupender
Q. 1(a) " A company is an artificial person created by law with a perpetual
succession and a common seal". Comment on the statement.
Ans: In terms of the Companies Act, 2013 a “company” means a company
incorporated under this act or under any previous company law [Section 2
(68)] In common law, a company is a “legal person” or “legal entity” separate
from, and capable of surviving beyond the lives of its members.
(a) Separate legal entity: A company is a legal entity distinct from its
shareholders, directors and promoters. Its assets and liabilities are separate
from that of its owners.
(b) Artificial person: A company is the creation of law. It has to depend upon
directors, managers, etc. for getting its work done. It can carry on business in
its own name, enter into contracts, buy, sell and hold property, sue and be
sued.
(c) Limited Liability: The liability of the members is limited to the face value of
the shares held by them. They are not personally liable for the debts of the
company.
(d) Perpetual succession: Being distinct from the members, the death,
insolvency, or retirement of its members does not affect the life of the
company. Members may come and go, but the company can go forever. It can
come to an end only on winding up.
(e) Common seal: Common seal is the official signature of the company. It is
affixed on all contracts and letterheads, and is legally binding on the company

Therefore, a company is an artificial person created by law. It has not any

hand, leg, heart or physical body. Its existence comes when a company is
formed and registered under company law. After coming in existence, it can do
all business work like a human businessman. It can open his bank account.
Company can buy or sell any asset on his own name. Company gets loan on his
own name. It can sell own shares in the market.
There will not any effect on the company whether any shareholder will come
or go. Company will live even if any shareholder sells his all shares. Other
person who will buy the shares, will become the new owner of company.
Company will not have any personal relation with shareholder. Every
shareholder's liability upto his bought shares.
It has also its own a common seal. This seal will use in all the agreements
which will be done on the name of company. Company can not sign, so it is
very necessary for making common seal which company can use as showing his
identity on every agreement. All the documents will only legal if authorized
person's sign will be on the document and company's seal will be on same
document.

(b) Define a private company and state the special privileges enjoyed by it
under the Companies Act, 2013.
Ans: According to Section 2(68) of Companies Act, private companies are those
companies whose articles of association restrict the transferability of shares
and prevent the public at large from subscribing to them.

Special Privileges enjoyed by it under Companies Act,2013 are as follows:

1) Members:
A private company can be formed with only 2 persons as members.

2) Prospectus:
A private company need not issue prospectus. It is also not required to
file a ‘statement in lieu of prospectus’ with the Registrar before
allotment of shares. Thus a private company is exempted from
complying with the provisions of the Act regarding the issue of the
prospectus.

3) Certificate of commencement of business:

A private company can start business immediately after incorporation. It
need not apply for a certificate to commence business.

4) Minimum Paid Up Capital:

A private company is required to have a minimum paid up capital of 1
lakh. [Sec.3 (l) (iii)]

5) Exemption regarding right issue

A private company need not offer shares to its existing shareholders
whenever it intends to increase its subscribed capital. (Sec. 81)
6) Exemption regarding share capital:
Restrictions applicable to public companies regarding kinds of share
capital, voting rights, and issue of shares with disproportionate voting
rights and termination of disproportionate excessive rights do not apply
to private companies. (Sec. 85-90) Further, a private company can give
financial assistance for the purchase or subscription of its own shares or
its holding company.

7) Exemption regarding Directors

A private company enjoys following exemptions regarding directors:
(i) A private company may have 2 directors.

(ii) Restrictions on appointment of directors regarding undertaking to

take up qualification shares and pay for them and filing consent of
directors etc. are not applicable to private companies [Sec. 266
(5)].

(iii) All the directors may be appointed by a single resolution. (Sec.

255)

(iv) The directors need not retire by rotation (Sec. 256).

(v) The number of directors can be increased without the consent of

the Central Government. (Sec. 259)

(vi) Persons holding an office of profit can be appointed as directors of

a company without passing a special resolution. (Sec. 261)

(vii) The provision excluding an interested director from participating

in voting at board’s proceedings does not apply to a private
company. (Sec.300)

(viii) The provision requiring Government’s approval to the

amendment of provisions relating to the appointment or
reappointment of managing or whole- time does not apply. (Sec.
268)

(ix) (ix) The appointment of a whole-time managing director can be

made without the consent of the Central Government. (Sec. 269)
 (x) (x) The provisions of the Act relating to number of companies of
which a person can be a director, manager or managing director
does not apply. (Sees. 386 to 388)

(xi) Prohibition regarding granting of loans by companies to directors

does not apply. [Sec. 295(1)]

(xii) Restrictions on the powers of the Board regarding selling of the

whole or substantially the whole of the company’s undertaking or
remitting or giving time for repayment of a debt due by a director
etc., are not applicable to private companies. (Sec. 293)

Q. 2(a) What is lifting of corporate veil? State the statutory provisions under
which corporate veil may be lifted.

Ans: Lifting or piercing of corporate veil means ignoring the fact that a
company is a separate legal entity and has a separate identity (Corporate
personality). This concept disregards the separate identity of the company and
looks behind the true owners or real persons who are in control of the
company.

The statutory provisions under which corporate veil may be lifted are as
follows:

REDUCTION OF NUMBER OF MEMBERS: Under Indian Companies Act, 2013, if

a company carries on business for more than six months after the number of
its members has been reduced to seven in case of a public company and two in
case of a private company, every person who knows this fact and is a member
during the time that the company so carries on business after the six months,
becomes liable jointly and severally with the company for the payment of
debts contracted after six months. It is only that member who remains after six
months who can be sued.

FRAUDULENT TRADING: Under Indian Companies Act, 2013, if any business of

a company is carried on with the intent to defraud creditors of the company or
creditors of any other person or for any fraudulent purpose, who was
knowingly a party to the carrying on of the business in that manner is liable to
imprisonment or fine or both. This applies whether or not the company has
been or is in the course of being wound up. This was upheld in Delhi
Development Authority v. Skipper Constructions Co. Ltd. (1997).

MISDESCRIPTION OF THE COMPANY: Under Indian Companies Act, 2013,

provides that if any officer of the company or other person acting on its behalf
signs or authorizes to be signed on behalf of the company any bill of exchange,
promissory note, endorsement, cheque or order for money or goods in which
the companies name is not mentioned in legible letters, he is liable to fine and
he is personally liable to the holder of the instrument unless the company has
already paid the amount.

PREMATURE TRADING: Another example of personal liability is mentioned in

Section 117 (8) of The English Companies Act. Under this section a public
limited company newly incorporated as such must not “do business or exercise
any borrowing power” until it has obtained from the registrar of companies a
certificate that has complied with the provisions of the act relating to the
raising of the prescribed share capital or until it has re-registered as a private
company. If it enters into any transaction contrary to this provision not only
are the company and it’s officers in default , liable to pay fines but if the
company fails to comply with its obligations in that connection within 21 days
of being called upon to do so, the directors of the company are jointly and
severally liable to indemnify the other party in respect of any loss or damage
suffered by reason of the company’s failure.

HOLDING AND SUBSIDIARY COMPANIES: In the eyes of law, the holding

company and its subsidiaries are separate legal entities.

But in the following two cases the subsidiary may lose its separate entity-

Where at the end of its financial year, the company has subsidiaries, it must lay
before its members in general meeting not only its own accounts, but also
attach therewith annual accounts of each of its subsidiaries along with copy of
the board’s and auditor’s report and a statement of the holding company’s
interest in the subsidiary.

The Court may, on the facts of a case, treat a subsidiary as merely a branch or
department of one large undertaking owned by the holding company.

(b) What is Doctrine of Indoor Management? Discuss the exceptions to

indoor management.

Ans: the meaning of the doctrine of indoor management came into existence
in 1856. The landmark issue of Royal British Bank V Turquand gives rise to the
formation of the doctrine of indoor management. It specifies and concentrates
on the appointment of managing directors; the secretary is all the heads of
association properly. The easiest story behind this principle should be
implemented strictly.
In the articles of that bank, it is clearly mentioned that one can claim a loan on
bonds and it should be repaid on the specific date. But unfortunately, the
receiver of the loan has refused to repay the amount. After long discussions,
they have issued a check with the two signatures of two directors along with
the secretary. But it comes to notice, the government does not appoint all the
directors and secretaries, and the check got cancelled. So, the check receiver
filed a case against the company, which led to wind out. By keeping this
situation in mind, the companies act 2013 also strongly supported the doctrine
of indoor management of a company is mandatory.

EXEPTIONS:
Certain exceptions are formed to benefit more people even in special cases
also. So the exceptions to the doctrine of indoor management are as follows-
1) Knowledge of Irregularity:- the presence and active participation of all
the characters is significant for the company and its growth. Still, the
exceptional case is an irregularity of any of the directors. In one
company which is having three boards of directors, one of them was
very irregular, and he doesn't know what the activities are going on at
 the company. So the other two directors have charged nearly 3,500 lb as
a penalty, and it took all his debentures.
2) Suspicious Activities:- the doctorate of indoor management in a
company has another important exception called suspicious activity. It
means, if any of the directors or other heads had identified any
suspicious activities around the contract, they can immediately research
and can find it out. If the person fails to find out the suspicious activity
and the person behind it, the court provides all the power of the
company to him to find out easily.
3) Forgery:- It is the most dangerous malpractice in any kind of
organization. As we know, the valid certificate of a share or debenture or
a loan or any other power should have the signatures of two directors
and one secretary. But the secretary has made forgery of the signatures
of two directors and issued the certificate of shares. Then after it came
into focus, the court gave the judgment to punish the secretary, penalty,
and remand also. But the contract laugh contract has an exception that
the company is not liable for the mistake of an individual.