Chap 5 Co Act AOA Previous Year Questions

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By Srinath Gupta Law and Audit classes

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First edition – 2020
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PREFACE TO SECOND EDITION
It gives me immense pleasure to introduce the 2nd edition of this book in the hands
of its readers. This book is prepared keeping in mind to provide conceptual understanding
of auditing and standards on auditing with simplicity.
I always felt that there should be some easy method to study and understandable
material on auditing and assurance for students of ipcc. This book provides exam-
oriented material with review questions to analyze the understanding of each topic
through flow charts.
I will feel immensely rewarded if students find this book helpful in preparing them
for their exams with clear understanding of key concepts
The curriculum of chartered accountancy demands fullest efforts, rigorous hard

work, concentrated and consistent work to taste glorious success.
Continuous and systematic approach to study will provide value addition in terms of
knowledge, application and confidence to the students. I hope that the book would serve
intended purpose of providing students concise record of concepts
I will highly appreciate the feedback and suggestions from students for further
improvements in this book.
WITH BEST WISHES,
SRINATH GUPTA LAW And AUDIT CLASSES

5.AOA
1. What is the difference between MOA and AOA (may 1998 , NOV 2002)
DISTINCTION BETWEEN MEMORANDUM & ARTICLES

Memorandum Articles
1.This is known as the primary document because 1.This is a document of secondary importance.
it is the charter of the company
2. This contains the objects & powers of the 2. This document contains the internal Rules &
company, which are known as the fundamental Regulations relating to the management of the
conditions for the incorporation of the company affairs of the company.
3.Memorandum lays down the area beyond which 3.Articles of Association provide for regulations
the activities of the company cannot go inside that area.
4. Alteration of memorandum is detailed or complex 4.Alteration of Articles is relatively simple

procedure. It may require Board resolution, ordinary procedure. It only requires a special resolution of
resolution, special resolution, approval of Central General meeting.
Government, confirmation of Tribunal depending
upon alteration.
5.Memorandum can’t contain any clause which is 5.Articles can’t contain any regulation which is
Contrary to the provisions of Act. contrary to the contents of both the memorandum
&the Act.
6. Activities which are ultra vires the memorandum 6.Activities which are ultra-vires the Articles but
are null & void-ab initio & therefore can‟t be intra-vires the memorandum may be ratified by the
ratified by the members. majority of the members.
2. What are the Statutory powers of the company to alter its Articles (may 2004, may
2014) (8marks)
MOA  The articles of Association can not contain any regulation, which is in conflict with
the contents of memorandum. If there, is any conflict between memorandum &
articles, the contents of memorandum shall prevail.
Hutton Vs the Scarborough Cliff Hotel Company Ltd.
 The company wants to issue preferential shares but it had no such power in its
memorandum or articles.
 Thereafter the company altered its articles by special resolution to enable the
company to issue shares with preferential dividend.
 It was held that the alteration is void because it is against to the capital clause of
the memorandum, the memorandum is silent on this point and the court inferred
that the memorandum intended equality of shares
ACT sec 6  The AOA must not contain any Regulation which is inconsistent with any of the
provisions of the Companies Act 2013 or any other statute.
 Ex. No company can finance for purchase of its own shares, reduction of capital
without permission of National Company Law Tribunal, pay dividend out of capital
and remuneration to the directors etc
Madhava Ramachandra Kamath Vs Canara Banking Corporation Ltd.
 In which a company passed a resolution expelling a member and authorising the

directors to register the transfer of shares without an instrument of transfer. Held
that resolution was invalid.
order of the  The Articles of Association can't contain any regulation which is inconsistent with
Tribunal OR any, order of the Tribunal or court of law
court
Unlawful or  The Articles of Association must not include any Regulation which is unlawful,
illegal illegal, immoral or Opposed to public policy.
under  Any alteration in the Article of Association must be made under bonafide
bonafide circumstances & for the benefit of the company as a whole.
interest of the
company Allen Vs Gold Reefs Of west Africa Ltd
 It Was held that it may cause hardship to an individual shareholder (lien).
Should not be Brown Vs British Abresive Wheel Co.Ltd

detrimental to
minority  It was held that, any alteration in the articles of Association must not constitute a
fraud on minority by the majority share holders
can‟t justify  Any Alteration in the Articles of Association can’t justify Breach of contract by the
Breach of company or can’t enable the company to avoid its contractual Liabilities
contract
operate  Any alteration in the Articles of Association can’t operate Retrospectively. It can
Retrospectivel only operate either with the immediate effect or prospectively.
y or
prospectively.
3. The Board of Directors of PV Limited wants to make some changes and to alter
some Clauses of the Articles of Association which are to be urgently carried out,
which include the increase in Authorized Capital of the company, issue of shares,
increase in borrowing limits and increase in the number of directors. Please
advise the company about the procedure to be followed for alteration of Articles of
Association. (4 Marks) May 2018
Procedure for altering Articles of Association sec 14
1. A Board meeting must be held and at that meeting, the proposal for altering the
Articles of Association must be approved by the directors.
2. A general meeting must be held and at the meeting, a special resolution must be
passed for altering the Articles of Association.
3. A copy of the special resolution in prescribed Form must be filed with the Registrar of
Companies within 15 days thereof.
4. In the case of a listed public co., six copies of the Altered Articles of Association must
be filed with the stock Exchanges in which the share of company are listed (one copy
must be certified by the directors).
4. The AOA of a Ltd company provided that X shall be the law officer of the company
and shall not be removed except on the proved misconduct. The company
removed him even he was not guilty of misconduct. Decide whether company‟s
action valid? May 2004,
STEP-1: PROVISIONS OF THE ACT
1. A company or its members shall not be bound to outsiders by whatever is contained
in its articles of association.
2. Case law:
Major General Shanta Shamsher Jung Bahadur Rana Vs Kamani Brothers Private
Limited
a) The Articles-of association of the company provided that even a non-member can be
appointed as director or Managing Director and he cannot be removed except on the
Ground of proven misconduct.
b) Mr. Rana a was appointed as Managing Director and he was removed even though
there was no misconduct on his part.
Decision
c) Held the removal of Managing Director was perfectly valid because the company or its
members were not bound to outsiders (non-members) by the contents of its Articles.
STEP-2: FACTS OF THE CASE
1. The AOA of a Ltd company provided that X shall be the law officer of the company
and shall not be removed except on the proved misconduct.
2. The company removed him even he was not guilty of misconduct.
STEP-3: DECISION
1. According to above landmark case, 'X' cannot enforce the right conferred on him by
the articles against the company.
2. Hence the action can be taken by the company is valid and removal also valid
5. A Ltd Co. is formed with its articles stating that one Mr. X shall be the solicitor for
the company and that he shall not be removed except on the ground of
misconduct, can the company remove Mr. X from the position of solicitor even
though he is not guilty of misconduct? nov 2006,
1.A company or its members shall not be bound to outsiders by whatever is contained in its
articles of association.
2.Case law:
Limited
a. The Articles-of association of the company provided that even a non-member can be
b. Mr. Rana a was appointed as Managing Director and he was removed even though there
was no misconduct on his part.
Decision
c. Held the removal of Managing Director was perfectly valid because the company or its
1. The AOA of a Ltd company provided that X shall be the solicitor of the company and
shall not be removed except on the proved misconduct.
2. The company removed him even he was not guilty of misconduct.
STEP-3: DECISION
1. According to the provisions, 'X' cannot enforce the right conferred on him by the
articles against the company.
2. Hence the action can be taken by the company.
6. The articles of a public CO. clearly stated that Mr. A will be the solicitor of the
company. The company in its general meeting of the shareholders resolved
unanimously appoint B in place of A as the solicitor of the company by altering
the ARTICLES OF ASSOCIATION. Examine whether the company can do so? State
the reasons clearly. May 2007
1.A company or its members shall not be bound to outsiders by whatever is contained in its
articles of association.
2.Case law:
Limited
Decision
1. The AOA of a public Ltd company provided that Mr. A shall be the solicitor of the
company.
2. The company in its general meeting of shareholders resolved unanimously appoint B
in place of A.
STEP-3: DECISION
1. According to above landmark case, 'A' cannot enforce the right conferred on him by
the articles against the company.
7. Articles of a public company clearly stated that Mr. L will be the solicitor of the
company. And in its general meeting of the shareholders resolved unanimously to
appoint Mr. M in place of Mr. L as the Solicitor of the company by altering the
articles of association. State with reasons whether the company can do so? If L
files a case against the company for removal as a solicitor will he succeed? { May
2013}
1. A company or its members shall not be bound to outsiders by whatever is contained
in its articles of association.
2. Case law:
Limited
Decision

1. The AOA of a public Ltd company provided that Mr. L shall be the solicitor of the
company.
2. The company in its general meeting of shareholders resolved unanimously appoint
Mr. M in place of Mr. L.
STEP-3: DECISION
1. According to above landmark case, 'M' cannot enforce the right conferred on him
by the articles against the company.
3. L would not succeed in a suit filed against the company for removal as a solicitor.
8. Briefly explain the doctrine of „Constructive Notice‟ under the Companies Act,2013
{May 2003}
1. Once registered the memorandum and articles become public documents and can be
inspected by any person on payment of nominal fee
2. The doctrine prevents any person dealings with the company from alleging that he
did not know the provisions contained in the articles or memorandum
3. The doctrine of constructive notice is applicable to Memorandum, Articles, special
resolutions and any charges created by the company because all these documents
are relating to the powers of the company and registered with the ROC and
accessible to any member of the public.
4. This doctrine is meant to protect the company against the outsiders
5. Thus, every person entering into a contract with the Co. has to ascertain not only the
exact powers of the company but also the extent to which the powers have been
delegated to the director and the limitations on such powers.
6. According to this doctrine, any person who proposes to deal with the company in any
manner must satisfy the following three essential conditions.
A. Must consult the copies of both memorandum & articles.
B. He must study both the above documents
C. He must understand the contents of both the documents in the right
perspective.
7. This is also known as presumption of constructive notice.
8. If any person enters into any contract with the company or deals with the company in
any other manner, without studying the contents of memorandum and articles, he
would be doing at his own risk and the company will not be liable and will not be
bound to that person. This is the fundamental rule of constructive notice.
Case law : Kotla Venkata Swamy Vs Chinta Rama Murthy
1) The AO A of the company provided that all documents involving the company must be
signed by Managing Director, secretary and working director.
2) The Company entered into a mortgage and the mortgage deed was signed by the
Secretary and only the working director.
3) Held the mortgage deed was invalid and the company was not bound.
9. Explain the doctrine of “Indoor management” as applicable in case of companies.

Explain also the circumstances in which an outside dealing with a company
cannot claim any relief on the basis of doctrine of “Indoor Management” {May
2012}
1. The doctrine of constructive notice, proved to be very rigid and inconvenient for the
conduct of business transaction. Therefore, an exception was developed in the form
of doctrine of indoor management.
2. The Doctrine of indoor management is meant to protect the outsiders against the
company.
3. The Doctrine entitles the outsiders dealing with the company to assume that the
things have been complied in accordance with the Act
4. Hence it imposed an obligation upon the managerial persons that all the rules of
internal management must be fulfilled.
5. It is based on the principle of business convenience because the details of internal
procedures are not open to public inspection and it is unfair if an outsider dealing with
the company is presumed to have the knowledge of the internal matters.
6. According to the doctrine of indoor management, any person who proposed to deal
with the company must obtain the copies of memorandum and Articles, Study both
these documents and understand these contents in the right prospective.
7. However as far as the requirements of articles are concern, they can assume that
they have been duly satisfied.
Exception to the Doctrine of indoor management (6. Grounds)
1. Where the person dealing with the company had knowledge of irregularity.
Howard Vs Patent Ivory Co. Ltd
2. Doctrine of indoor management will not apply where the person dealing with the
company had no knowledge of the Articles.
Rama Corporation Vs Proved Tin and General Insurance Co., Ltd.,
3. Doctrine of indoor management will not apply in cases involving forgery

Ruben Vs Great Fingal Consolidated Co.
4. Doctrine of indoor management will not apply to a person who behaves negligently
Anand Behari lal Vs Dinshaw & Co.Ltd.,
5. Doctrine of indoor management will not apply when there is no relationship of

principal and agent.
6. Doctrine of indoor management will not apply in the case of ultra vires activities.
10. The Secretary of a company issued a share certificate to „A‟ under the company‟s
seal with his own signature and the signature of a director forged by him. „A‟
borrowed money from „B‟ on the strength of this certificate „B‟ wanted to realize
the security and requested the company to register him as a holder of the shares.
Explain whether „B‟ will succeed in getting the share registered in his name {May
2007}
1. Doctrine of indoor management will not apply in cases involving forgery.
2. Forgery is null and void ab initio and it is illegal because there is no consent at all.
Facts of the case

a. The Secretary of the company issued a share certificate by affixing the common seal
and making forgery of the signatures of two directors.
b. The plaintiff contended that the signatures were genuine or forged was a part of
internal management.
Decision :
c. the court did not accept his contention and held that the rule of indoor management
is not applicable to transactions involving forgery because there is no consent at all
and the person whose signature has been forged is not even aware of that
transaction, hence not binding.

1. The Secretary of a company issued a share certificate to ‘A’ under the company’s
seal with his own signature and the signature of a director forged by him.
2. ‘A’ borrowed money from ‘B’ on the strength of this certificate ‘B’ wanted to realize
the security and requested the company to register him as a holder of the shares.
STEP-3: DECISION
1. A or B is not entitled to shares because it is a case of forgery.
2. There is absence of consent and hence the share certificate is not valid.
3. the doctrine of indoor management applies to irregularities and not to forgeries and
illegalities.
11. P the secretary of XYZ Ltd issues a share certificate in favour of A purporting to be
signed by the directors and has affixed the seal without authority. can A hold the
company liable for the shares covered by the share certificate under the
provisions of the companies Act,2013? {Nov 2007}
company.
7. Doctrine of indoor management will not apply in cases involving forgery.
8. Forgery is null and void ab initio and it is illegal because there is no consent at all.
Facts of the case

a. The Secretary of the company issued a share certificate by affixing the common seal
and making forgery of the signatures of two directors.
b. The plaintiff contended that the signatures were genuine or forged was a part of
internal management.
Decision :
c. the court did not accept his contention and held that the rule of indoor management
is not applicable to transactions involving forgery because there is no consent at all
and the person whose signature has been forged is not even aware of that
transaction hence not binding.
1. P the secretary of XYZ Ltd.

2. P issues a share certificate in favour of A purporting to be signed by the directors and
has affixed the seal without authority.
STEP-3: DECISION
1. A is not entitled to shares because it is a case of forgery.
2. There is absence of consent and hence the share certificate is not valid.
12. Under the Articles of Associations of Sunshine Ltd, Company directors had power
to borrow up to Rs. 10,000 without the consent of the general meeting . The
directors themselves lent Rs.35,000 to the company without such consent and
took debentures of the companies Act,2013. Whether the company is liable? If so,
what is the extent of liability of the company in this case? {May 2008}
company.
Exception to the Doctrine of indoor management -Where the person dealing with
the company had knowledge of irregularity
Facts of the case
a. The Articles of Association authorised the directors to borrow money up to 1,000
pounds only on behalf of the company provided they obtained the permission of the
shareholders by way of a General meeting resolution to borrow more than that.
b. The company borrowed money 3,500 pounds from one of its own directors without
passing the necessary General meeting resolution.
Decision :
c. Held the company was bound to repay 1000 pounds only because the necessary
General meeting resolution was not passed.
d. This fact must be known to the director who is a member in the company.

1. Under the Articles of Associations of Sunshine Ltd Company directors had power to
borrow up to Rs. 10,000 without the consent of the general meeting.
2. The directors themselves lent Rs.35,000 to the company without such consent and
took debentures.
STEP-3: DECISION
1. The company is not liable for 35,000, since, the benefit of doctrine of indoor
management can be availed of only by an outsider who has no knowledge of any
irregularity in the internal management of the company.
2. The liability of the company is limited to ` 10,000, since the directors, having
knowledge of the fact that the limit of borrowings specified under the articles would
be exceeded, themselves lent 35,000 without the consent of the general meeting.
13. “the doctrine of indoor management always protects the persons (outsiders)
dealing with the company “ Explain the above statement also and state the
exceptions to the above rule? (5 marks) May 2015
company.


14. The persons (not being members) dealing with the company are always protected
by the doctrine of Indoor management. Explain. Also, explain when doctrine of
Constructive Notice will apply. (6 Marks) (Nov 18)
Doctrine of Indoor management
company.



DOCTRINE OF CONSTRUCTIVE NOTICE

1. Once registered the memorandum and articles become public documents and can be
inspected by any person on payment of nominal fee
2. The doctrine prevents any person dealings with the company from alleging that he
did not know the provisions contained in the articles or memorandum
3. The doctrine of constructive notice is applicable to Memorandum, Articles, special
resolutions and any charges created by the company because all these documents
are relating to the powers of the company and registered with the ROC and
accessible to any member of the public.
4. This doctrine is meant to protect the company against the outsiders
5.
6. Thus, every person entering into a contract with the Co. has to ascertain not only the
exact powers of the company but also the extent to which the powers have been
delegated to the director and the limitations on such powers.
7. According to this doctrine, any person who proposes to deal with the company in any
manner must satisfy the following three essential conditions.
8. Must consult the copies of both memorandum & articles.
9. He must study both the above documents
10. He must understand the contents of both the documents in the right perspective.
11. This is also known as presumption of constructive notice.
12. If any person enters into any contract with the company or deals with the company in
any other manner, without studying the contents of memorandum and articles, he
would be doing at his own risk and the company will not be liable and will not be
bound to that person. This is the fundamental rule of constructive notice.
STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE AND GIVE REASONS
15. An ultra vires transaction will not affect the right to acquire the property of a
company {Nov 2008} (2 marks)
1. Although ultra vires transactions are void, yet if a company has acquired some property
under an ultra vires transaction it has the right to hold that the property and protect it
against damage by other persons.
2. Therefore, the statement is true
16. Every company which is registered under the Companies Act,2013, need not have
their own Articles of association {June 2009}
i. Under Companies Act, 2013, it is mandatory for every company to have its own articles.
ii. Therefore, the given statement is false.
iii. Co can make its own AOA or adopt from schedule I
17. the Articles of association of a company can be altered by passing an ordinary

resolution in the meeting of the Shareholders {Nov 2009}
(a) A general meeting must be held and at the meeting, a special resolution must be passed
for altering the Articles of Association.
(b) Therefore, the given statement is false.
The directors of Smart Computers limited borrowed a sum of money from Mr. Tridev. The
company's articles provided that the directors may borrow on bonds such sums as may,
from time to time, be authorized by resolution passed at a general meeting of the company.
The shareholders claimed that there had been no such resolution authorizing the loan, and
therefore, it was taken without their authority and the company is not bound to repay the loan
to Tridev. In the light of the contention of shareholders, decide whether the company is
bound to pay the loan. (6 Marks) nov 2020 MTP
Doctrine of Indoor Management: According to this doctrine, persons dealing with the
company need not enquire whether internal proceedings relating to the contract are followed
correctly, once they are satisfied that the transaction is in accordance with the memorandum
and articles of association.
Stakeholders need not enquire whether the necessary meeting was convened and held
properly or whether necessary resolution was passed properly. They are entitled to take it for
granted that the company had gone through all these proceedings in a regular manner.
The doctrine helps to protect external members from the company and states that the people
are entitled to presume that internal proceedings are as per documents submitted with the
Registrar of Companies.
Thus,
1. What happens internal to a company is not a matter of public knowledge. An outsider can
only presume the intentions of a company, but not know the information he/she is not privy
to.
2. If not for the doctrine, the company could escape creditors by denying the authority of
officials to act on its behalf.
In the given question, Mr.Tridev being a person external to the company, need not enquire
whether the necessary meeting was convened and held properly or whether necessary
resolution was passed properly. Even if the shareholders claim that no resolution authorizing
the loan was passed, the company is bound to pay the loan to Mr.Tridev
Yadav Dairy Products Private limited has registered its articles along with memorandum at the
time of registration of company in December, 2014. Now directors of the company are of the view
that provisions of articles regarding forfeiture of shares should not be changed except by a
resolution of 90% majority. While as per section 14 of the Companies Act, 2013 articles may be
changed by passing a special resolution only. Hence, one of the directors is of the view that they
cannot make a provision against the Companies Act, 2013. You are required to advise the
company on this matter. MAY 2020 RTP
As per section 5 of the Companies Act, 2013 the article may contain provisions for
entrenchment to the effect that specified provisions of the articles may be altered only if
more restrictive conditions than a special resolution, are met.
The provisions for entrenchment shall only be made either on formation of a company, or by
an amendment in the articles agreed to by all the members of the company in the case of a
private company and by a special resolution in the case of a public company.
Where the articles contain provisions for entrenchment, whether made on formation or by
amendment, the company shall give notice to the Registrar of such provisions in prescribed
manner.
In the present case, Yadav Dairy Products Private Limited is a private company and wants to protect
provisions of articles regarding forfeiture of shares. It means it wants to make entrenchment of
articles, which is allowed. But the company will have to pass a resolution taking permission of all the
members and it should also give notice to Register of Companies regarding entrenchment of articles

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For CA (FOUNDATION, INTER AND FINAL)

CA FOUNDATION – QUESTION BANK

CHARTS ALSO AVAILABLE FOR

By Srinath Gupta Law and Audit classes

PRICE: INR 000/-

Copy rights © are with author

First edition – 2020

The curriculum of chartered accountancy demands fullest efforts, rigorous hard

WITH BEST WISHES,

SRINATH GUPTA LAW And AUDIT CLASSES

DISTINCTION BETWEEN MEMORANDUM & ARTICLES

4. Alteration of memorandum is detailed or complex 4.Alteration of Articles is relatively simple

Hutton Vs the Scarborough Cliff Hotel Company Ltd.

Madhava Ramachandra Kamath Vs Canara Banking Corporation Ltd.

 In which a company passed a resolution expelling a member and authorising the

 It Was held that it may cause hardship to an individual shareholder (lien).

Should not be Brown Vs British Abresive Wheel Co.Ltd

STEP-2: FACTS OF THE CASE

9. Explain the doctrine of “Indoor management” as applicable in case of companies.

3. Doctrine of indoor management will not apply in cases involving forgery

5. Doctrine of indoor management will not apply when there is no relationship of

Ruben Vs Great Fingal Consolidated Co.

Facts of the case

STEP-2: FACTS OF THE CASE

Ruben Vs Great Fingal Consolidated Co.

Facts of the case

STEP-2: FACTS OF THE CASE

1. P the secretary of XYZ Ltd.

STEP-2: FACTS OF THE CASE

3. Doctrine of indoor management will not apply in cases involving forgery

5. Doctrine of indoor management will not apply when there is no relationship of

Exception to the Doctrine of indoor management (6. Grounds)

3. Doctrine of indoor management will not apply in cases involving forgery

5. Doctrine of indoor management will not apply when there is no relationship of

DOCTRINE OF CONSTRUCTIVE NOTICE

17. the Articles of association of a company can be altered by passing an ordinary

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