Caselets-2

Legal Aspects of Business

Faculty: Dr. Bhagyashree Deshpande
Name: Raj Karajgikar
Roll No.: 21MBAMKT175
Caselet-1
Fortune Traders
Question) Fortune Traders Ltd. was registered as a Private Company. There are
264 members in the Company as stated below:
(i) Directors and their relatives 134
(ii) Employees 100
(iii) Ex-employees (shares were allotted when they were employees) 15
(iv) 5 couples holding shares jointly in the names of husband and wife (5X2)
10
(v) Others
5
Total number of members: 264
The Board of Directors of the company proposes to convert it into a public
company. Only because of the fact that its member has exceeds the minimum
prescribed criteria. Advise the Board of directors?
Answer:
Facts of the case:
 Fortune Traders limited was a private limited company.
 There are 264 members in the Company
 The number of members are as follows:
 Directors and their relatives 134, employees 100, ex-employees 15, 5
couples holding shares jointly 10, others 5.
 The board of directors are advising to convert this company in a public
company.
 The board is advising this because according to them they have exceeded
the number of members for a private company
Act to be used here:
after the above facts given of the case, clearly, Companies act’s 2013 provisions
will be required and applicable to this case
Topic of discussion:
Here the main topic of discussion will be the number of members allowed in a
private company according to the Companies Act, 2013.
Provisions regarding the discussion topic:
There are a few provisions regarding this discussion:
 First proviso explains that if two or more persons jointly hold any number
of shares in a private company, those two or more persons will be deemed
as one person only while counting the maximum limit of 200 members,
irrespective of the number of shares held by them together or separately.
 Second proviso explains that following persons (members) shall
straightforwardly not be included in the number of 200 members
irrespective of the number of shares held by them –
(A) The current employee of the company, who is also the member of the
company, which means he is working as an employee and also a member of the
company (As per Section 9 of Companies Act, 2013, a person may be a
member, employee, debtor, creditor, etc. at the same time in the same
company).
(B) The former employee of the company, who when was the employee of the
company held shares of the company while in that employment and left the
company as an employee but continued to be a member of the company. It
means that if any employee first left the company and later on acquire the shares
of the same company then he will be considered in the limit of 200 members.

Applying the provisions: After applying the above provisions we understand

that the employees and ex-employees are not currently a member of the
company.
Conclusion: The shares that are held jointly are also treated as a single share.
Hence the board of directors’ contention is incorrect because the number of
members in the company after applying the provisions comes to 144 which is
below the limit of prescribed limit members according to the Companies Act,
2013. Hence, Fortune Traders is still a private company as it has only 144
members in the company.
 Caselet-2
Question) Krishna, an assessee, was a wealthy man earning huge income by
way of dividends and interest. He formed three Private Companies and agreed
with each to hold a bloc of investment as an agent for them. The dividend and
interest income received by the companies was handed back to Krishna as a
pretended loan. This way, Krishna divided his income into three parts in a bid to
reduce his tax liability. Decide, for what purpose the three companies were
established? Whether the legal personality of all the three companies may be
disregarded.
Answer)
Facts of the case:
 Krishna, an assessee, was a wealthy man earning huge income by way of
dividends and interest.
 He formed three Private Companies and agreed with each to hold a bloc
of investment as an agent for them.
 The dividend and interest income received by the companies was handed
back to Krishna as a pretended loan.
 This way, Krishna divided his income into three parts in a bid to reduce
his tax liability.
Act in motion:
after the above facts given of the case, clearly, Companies act’s 2013 provisions
will be required and applicable to this case.
Topic of Discussion:
Corporate veil is the topic under which this case let will come.
Provisions regarding this topic:
Lifting of the Corporate Veil: The company is a separate legal entity but if it is
used for some unethical and illegal purposes the corporate veil is lifted where
the company would not be held responsible for the owners deeds.
Here in the provisions a corporate veil is lifted if,
 Where the Company is a Sham (Fraud)
 Invocation of the principal of agency
 Public Policy
 Determining True Character of the Company
 Protection of Revenue (Tax Evasion)
Applying the Provisions: Since in the case law it is visible that the companies
were only created to evade tax and not other legitimate reason, The three
companies were established for the purpose of avoiding tax liability, and not for
any legitimate purpose and therefore, income earned by all the three companies
was to be treated as the income of the assesses.
Conclusion:
The three companies were made by the sole motive of tax evasion and hence
they were completely illegitimate hence the corporate veil should be lifted and
liability of the company should be treated as the liability of the assesses.

Caselet-3
Question) The Object Clause of Memorandum of Association of ABC Pvt Ltd.
authorized the company to carry on the business of trading in Fruits and
Vegetables. The Directors of the company in recently concluded Board Meeting
decided and accordingly, the company ordered for fish for the purpose of
trading. FSH Limited supplied fish to ABC Pvt Ltd. worth Rs. 36 Lakhs. The
members of the company convened an extraordinary general meeting and
negated the proposal of the Board of Directors on the ground of ultra vires acts.
FSH Limited being aggrieved of the said decision of ABC Pvt Ltd. seeks your
advice. Advice them.
Answer)
Facts of the case:
 The MOA of ABC pvt limited authorised the company to carry business
of trading in fruits and vegetables.
 The directors concluded that they bought fish for trading purpose
 The members conducted an EGM and rejected the proposal on the basis
of ultra vires acts by the directors
 The FSH Trading co. is now aggrieved and is asking for help
Acts in motion:
As this is clearly regarding companies and its memorandum of association the
act in motion is Companies Act, 2013.
Topic of discussion
The topic of discussion here is the object clause in MOA, Ultra vires actions of
the company and the result of ultra vires behaviour.
Provisions Applicable:
The Doctrine of Ultra Vires is a fundamental rule of Company Law. It states that
the objects of a company, as specified in its Memorandum of Association, can be
departed from only to the extent permitted by the Act. Hence, if the company does
an act, or enters into a contract beyond the powers of directors and/or the
company itself, then the said act/contract is void and not legally binding on the
company.

Applying the provisions:

The new contract is not authorized by the objects clause. Thereby the co. is not
allowed to take the contract for fish. It is ultra vires i.e., beyond the powers of
the co. Therefore, FSH cannot sue the co. in a court of law. Also, as per the
doctrine of constructive notice, it was the duty of FSH to go through the MOA
of the co. registered with the registrar. He did not do so. Thereby the co cannot
be held liable.
Conclusion:
The aggrieved company that is FSH Pvt ltd cannot sue ABC Pvt ltd as the
director’s actions were completely ultra vires and hence the company cannot be
held responsible for the actions of the directors.
The term Ultra Vires means ‘Beyond Powers’. In legal terms, it is applicable only
to the acts performed in excess of the legal powers of the doer. This works on an
assumption that the powers are limited in nature. Since the Doctrine of Ultra Vires
limits the company to the objects specified in the memorandum, the company can
be:

 Restrained from using its funds for purposes other than those specified
in the Memorandum
 Restrained from carrying on trade different from the one authorized.
The company cannot sue on an ultra vires transaction. Further, it cannot be sued
too. If a company supplies goods or offers services or lends money on an ultra
vires contract, then it cannot obtain payment or recover the loan.