Mumbai University

3 Years LLB- Semester III (December 2022),

Company Law
Short Questions & Answers complied by RK

Q1) Define Company? Give two characteristics/features of incorporation?

Ans) In general, a company is an artificial person, created by law that
has a separate legal entity, perpetual succession, and common seal and
has limited liability. It is a voluntary association of person who together
contributes in the capital of the company to do business. According to
Section 2 (20) of the Company Act 2013 "Company means a company
incorporated under this Act or any previous Company Law." The
characteristics of company are as under:
i) Incorporated Association : A company comes into existence through
the operation of law. Therefore, its incorporation under the
Companies Act is must. Without such registration, no company can
come into existence.
ii) Separate Legal Entity : A company has a separate legal entity, which
is not affected by changes in the ownership. Therefore being a
separate entity, a company can contract, sue and be sued in its
corporate name and capacity.
iii) Artificial Person: A company is an artificial and juristic person that is
created by law.
iv) Limited Liability : Every shareholder of a company has limited liability.
His liability is limited to the extent of the unpaid value of the shares
held by him. If such shares are fully paid up, he is subject to no
further liability.
v) Perpetual Existence : The existence of company is not affected by
the death, retirement, and insolvency of its members. That is, the
life of a company remains unaffected by the life and the tenure of

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 its members in the company. The life of a company is infinite until it
is properly wound up as per the Companies Act.
vi) Common Seal : The company is not a natural person and has no
physical existence. Hence, it cannot put its signature. Thus, the
common seal acts as an official signature of a company that validates
the official documents.
vii) Management and Ownership : A company is not managed by all
members but by their elected representatives called Directors. Thus,
management and ownership are different.

Q2) What is meant by lifting of Corporate veil?

Ans) The Corporate Veil Theory is a legal concept which separates the
identity of the company from its members. Hence, the members are
shielded from the liabilities arising out of the company’s actions.
Therefore, if the company incurs debts or contravenes any laws, then
the members are not liable for those errors and enjoy corporate
insulation. In simpler words, the shareholders are protected from the
acts of the company.
Lifting or Piercing the Corporate Veil means looking beyond the company
as a legal person. Or, disregarding the corporate identity and paying
regard to humans instead. In certain cases, the Courts ignore the
company and concern themselves directly with the members
or managers of the company. This is called piercing the corporate veil.
Usually, Courts choose this option when the case involves a question
of control rather than ownership.Scenarios under which the Courts
consider piercing or lifting the corporate veil are as below:
a) To Determine the Character of the Company.
b) To Protect Revenue or Tax.
c) If trying to avoid a Legal Obligation.
d) Forming Subsidiaries to act as Agents.

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 e) A company formed for fraud or improper conduct or to defeat the
law
Q3) What is Memorandum of Association?
Ans) Section 2(56) of the Companies Act, 2013 defines Memorandum of
Association. It states that a “memorandum” means two things:
 Memorandum of Association as originally framed; Memorandum as
originally framed refers to the memorandum as it was during the
incorporation of the company.
 Memorandum as altered from time to time;
Memorandum of Association is a legal document which describes the
purpose for which the company is formed. It defines the powers of the
company and the conditions under which it operates. It is a document
that contains all the rules and regulations that govern a company’s
relations with the outside world.
It is mandatory for every company to have a Memorandum of
Association which defines the scope of its operations. Once prepared,
the company cannot operate beyond the scope of the document. If the
company goes beyond the scope, then the action will be considered ultra
vires and hence will be void.

Q4) What is Article of Association?

Ans) As per Section 2 (5) of the Companies Act, 2013, Articles of
Association have been defined as “The Articles of Association (AOA) of
a company originally framed or altered or applied in pursuance of any
previous company law or this Act.”
When a company is formed, certain rules and regulations are laid down
along with the objectives of the company’s operations and its purpose.
These laws regulate the internal affairs of a company. There are two
important sets of documents that define these objectives and govern the
functioning of the company and its directors or internal affairs. These
documents are Articles of Association (AOA) and Memorandum of

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Association (MOA). Articles of Association contain the by-laws that
regulate the operations and functioning of the company like the
appointment of directors and handling of financial records to name a few.
Let’s imagine the company as a machine. The articles of association then
can be considered the user’s manual for this machine. It defines the
operations that the machine is supposed to perform and how to do that
on a day-to-day basis.

Q5) What are the six clauses of MOA?

Ans) The Six clauses of MOA are as under:
 Name Clause:The first clause states the name of the company
 Registered Office Clause: The Registered Office of a company
determines its nationality and jurisdiction of courts. It is a place
of residence and is used for the purpose of all communications with
the company.
 Object Clause: Section 4(c) of the Act, details the object clause.
The Object Clause is the most important clause of Memorandum of
Association. It states the purpose for which the company is
formed. The object clause contains both, the main objects and
matters which are necessary for achieving the stated objects also
known as incidental or ancillary objects. The stated objects must
be well defined and lawful according to Section 6(b) of the
Companies Act, 2013
 Liability Clause: The Liability Clause provides legal protection to
the shareholders by protecting them from being held personally
liable for the loss of the company.
 Capital Clause: It states the total amount of share capital in the
company and how it is divided into shares. The way the amount of
capital is divided into what kind of shares.
 Subscription Clause: The Subscription Clause states who are signing
the memorandum. Each subscriber must state the number of
shares he is subscribing to.

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  Association Clause: In this clause, the subscribers to the
memorandum make a declaration that they want to associate
themselves to the company and form an association.

Q6) What is doctrine of Ultra Vires?

Ans) 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 the directors and/or the
company itself, then the said act/contract is void and not legally binding
on the company. 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 service or lends money on an ultra vires contract, then it
cannot obtain payment or recover the loan.

Q7) Distinguish between MOA and AOA?

Ans) An MOA is a legal document that every company needs to file
during its registration. It consists of the basic details of the company
with its purpose of incorporation. On the other hand, an AOA is a
document that lays down the guidelines on which the company will
operate. While MOA is mandatory for every company, AOA is
mandatory for private companies only.

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Alteration of MOA is difficult process, and in many cases it requires
statutory approvals.Articles can be altered by passing a special
resolution.
Acts beyond the scope of MOA is void and can be ratified even by
unanimous vote of members. Acts beyond the scope of AOA can be
ratified by members provided they do not violate MOA.

Q8) What is doctrine of indoor management?

Ans) The doctrine of indoor management, otherwise called the Turquand
rule, is a 150-year old idea or notion, which secures the external
environment or outsiders against the activities done by the organisation.
Any individual who goes into an agreement or is tied up with a contract
with the organisation will have to check whether the contract is within
the scope of memorandum and the articles of the company as these
documents are public documents. However, there is no prerequisite to
investigate the inward abnormalities, and regardless of whether there
are any anomalies, the organisation will be held obligated, since the
individual has followed up on the grounds of sincere trust or good faith.
If аn асt is аuthоrized by the Memоrаndum оr Аrtiсles оf Аs
sосiаtiоn, then the outsider can assume that all detailed fоrmаl
ities аre оbserved in dоing the асt. This is the Doctrine
of Indoor Mаnаgement оr the Turquаnd Rule.
Therefоre, this rule оf indооr mаnаgement is imроrtаnt tо рео
рle dealing with a сомраny through its directors or
other persons. They саn аssume thаt the members оf the соm
раny аre рerfоrming their асts within the sсорe оf their арраr
ent аuthоrity. Henсe, if an
act which is valid under the Аrtiсles, is dоne in а раrtiсulаr
mаnner, then the outsider dealing with the соmраny can assume
that the director/other officers have worked within their auth
ority.

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Q9) Decision of Royal British Bank V/s Turquand?
Ans)
Q10) Distinguish between public and private company?
Ans) A public limited company is a company listed on a recognized stock
exchange and the stocks are traded publicly. On the other hand, a
private limited company is neither listed on the stock exchange nor are
they traded. It is privately held by its members only.
The minimum number of members required to start a public company is
seven. As against this, the private limited can be started with a
minimum of two members.
Minimum directors in public company is 3 while that in private company is
2.
The public company will require a certificate of commencement post
incorporation to begin its operation. In contrast to this, a private
company can start its business right after its incorporation.
The transferability of shares is restricted completely in private limited
company. While the shareholders of a public company can transfer their
shares freely.

Q11) Distinguish between company and partnership?

Ans) According to Indian Partnership Act, 1932, Section 4 defines
Partnership as – “An agreement between persons who have agreed to
share profits of the business carried on by all or any one of them acting
for all.”
According to The Indian Companies Act, 2013 Section 2(20) defines the
term “company” to mean “a company incorporated under the Companies
Act 2013 or any previous company law. A company is said to be a legal
entity that is an association of a group of persons engaged in operating
a business.

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Partnership Firm is a mutual agreement between two or more persons to
run the business and share profit and loss mutually. Company is an
association of persons with a common objective of providing goods and
services to customers.
Partnership is governed by Indian Partnership Act, 1932. Company is
governed by Indian Companies Act, 2013.
The main document governing partnership firm is Partnership deed.
While the main documents governing company are MOA & AOA.
For partnership, minimum 2 members are required and maximum
membership can be 100. While in case of private limited company
minimum members are 2 and maximum 200, while in public limited
company, minimum membership is 7 and maximum 200.

Q12) Write a note on prospectus?

Ans) The term "Prospectus" is defined by Section 2 (70) of the
Companies Act, 2013 as under: "A prospectus means, any document
described or issued, as prospectus and includes a red herring prospectus
referred to in Section 32 or shelf prospectus referred to in Section 31
or any notice, circular, advertisement or other document inviting offers
from the public for the subscription or purchase of any securities of a
body corporate.
In other words, a prospectus means any document, which invites deposits
from public or which invites offers from the public for purchase of
shares or debentures of a company. A document cannot be said to be
prospectus unless it is an invitation to public for subscription or for
purchase of shares or in the capacity to disco debentures of a company.

Q13) What is red hearing prospectus?

Ans) Red-herring prospectus means a prospectus which does not include
complete particulars of the quantum or price of the securities or class
of securities included therein As per Section 32 of Company Act 2013,

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a company proposing to make an offer of securities may issue a red
herring prospectus prior to the issue of a prospectus. A company
proposing to issue a red herring prospectus under sub-section (1) shall
file it with the Registrar at least three days prior to the opening of the
subscription list and the offer. A red herring prospectus shall carry the
same obligations as are applicable to a prospectus and any variation
between the red herring prospectus and a prospectus shall be highlighted
as variations in the prospectus. Upon the closing of the offer of
securities under this section, the prospectus stating therein the total
capital raised, whether by way of debt or share capital, and the closing
price of the securities and any other details as are not included in the
red herring prospectus shall be filed with the Registrar and the
Securities and Exchange Board.
Q14) Difference between Equity Shares and Preference Shares?
Q15) Explain the term promoter?
Ans) As per Section 2(69) of Companies Act. “promoter” means a
person—
(a) who has been named as such in a prospectus or is identified by the
company in the annual return referred to in section 92; or
(b) who has control over the affairs of the company, directly or
indirectly whether as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board
of Directors of the company is accustomed to act.
Thus, a promoter is the one who decides an idea for creating a
particular business at a given place and carries out a range of
formalities required for starting a business. A promoter is the one who
decides an idea for setting up a particular business at a given place and
carries out a range of formalities required for the setting up of a
business. A promoter may perhaps be an individual, a firm, and an
association of persons or a company.

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Q16) What is fixed charge and floating charge?
Ans) When a company borrows money, the lender / bank usually takes
some security for that debt. This is designed to protect the lenders'
position and also to try and get the lenders' money back if the borrower
fails. These types of security are termed fixed and floating charges.
Lenders can register either a fixed or a floating charge depending on
the type of borrowing being advanced. Both fixed and floating charge
holders are classed as secured lenders; however, there is a difference
between the two types of charges which impacts the priority order of
receiving payment should the borrowing company enter liquidation.
With a fixed charge, the borrowing is secured against one or several
specific assets; in the event of the borrower defaulting on the terms of
the agreement, the asset will be seized in order to pay back the loan.
One of the most common types of fixed charge borrowing is taking out a
mortgage. In this instance the loan is secured against the property, and
should the borrower fail to keep up with the agreed repayments, the
bank will take charge of the property and look to sell it in order to
recoup the outstanding monies. Fixed charges can be taken out on a
variety of other asset classes including land, vehicle, plant & machinery
etc.
Floating charges are different. This charge is attached to assets which
can be sold, traded, and disposed of in the course of the business’s
operations, such as stock, without obtaining consent from the lender.
Due to this a floating charge will encompass both current and future
assets to take into account those which are sold and also those which
are acquired by the business.

Q 17) What is Certificate of Incorporation?

Ans) The certificate of incorporation is the certificate which specifies
the birth of the company as a separate entity. A company legally comes
into existence or becomes a separate legal entity on the date stated in

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its certificate of incorporation. For instance, if the certificate is issued
on September 30 and the date mentioned on the certificate is
September 27, then the company is said to exist since September 27
only. The certificate of incorporation acts as compelling confirmation of
the regularity of the incorporation of the company even if there is any
flaw in its registration process. Thus, the certificate of incorporation is
conclusive evidence of the existence of a company.

Q18) What is certificate of commencement of business?

Ans) The Companies (Amendment) Ordinance 2018 has reintroduced the
concept of Certificate of Commencement of Business. Under the new
Ordinance, no company will be entitled to commence its operations
except by filing a declaration within 180 days of its incorporation
stating that the subscribers to the Memorandum of the company has
paid the value of shares so agreed by them, and files a verification of
its registered office address with the Registrar of Companies (ROC)
within 30 days of its incorporation. Based on this declaration, ROC
issues certificate of commencement of business
As per section 11 of Companies Act, 2013, now all newly incorporated
Public and Private Companies having Share Capital would be required to
obtain a certificate of commencement of business from concerned
Registrar of Companies before commencing the business or exercise of
borrowing powers.

Q19) What is constructive notice?

Ans) In companies law the doctrine of constructive notice is
a doctrine where all persons dealing with a company are deemed (or
"construed") to have knowledge of the company's articles of
association and memorandum of association. The doctrine of indoor
management is an exception to this rule.

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It is been presumed that one has the knowledge or know all the
information regarding the Articles and Memorandum of the company to
the outsider to the company. Memorandum and Articles of every
company is registered with the registrar of the companies. The office
of the registrar is a public office and the memorandum and articles of
the company which is been clearly stated on every website of the
company which every person can easily go through it without any charges
or any procedure to go through so, memorandum and articles are called
the public documents which is easily accessible and every one can access
to it before dealing with the particular company. It is therefore the
persons duty to inspect each and every document and statement of the
company. To know well about the company's preferences or the capacity
of contracting which deal they contract in or in which they not.

Q20) What is one person company?

Ans) The Companies Act, 2013 completely revolutionized corporate laws
in India by introducing several new concepts that did not exist previously.
One person is also one of new concept introduced.
As per provision of section 2(62) of the Companies Act, 2013 defined
“one person company” means a company which has only one person as
member. Any natural person (should not be minor) who is an Indian
citizen whether a resident in India or not i.e. NRI shall be eligible
to incorporate a One Person Company and appoint nominee of an OPC.
One person company is corporatization of sole proprietorship, so it has
all benefits that a corporate enjoys aside to this it has some
relaxations in provision of company law.
Following are some of benefits of One Person Company. (a) It has
separate legal entity. (b) The liability of shareholder/ director is limited.
(c) It gives suppliers and customers a sense of confidence in business. (d)
On the death/disability company can be succeed by nominee. (e) It has
some exemption available from various provisions under Company law.

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Q21) What is difference between 1956 and 2013 Act?
Ans) The Companies Act of 2013 has 464 sections and 7 schedules. The
Companies Act of 1956 had 658 sections and 15 schedules. As per
Companies Act of 1956, one person cannot form a company and as per
Companies Act of 2013, one person can form a one person company.
In the previous Act of 1956, there was no definition of Charge.
However, the Act of 2013 defines charge as an interest or lien created
on the property or assets of a company or any of its undertaking or
both as a security and includes a mortgage. Thus, the interest and lien
is included in the present Act which was absent in the earlier Act.
Under the Act of 1956, the companies had the liberty to decide the
end date of their financial year. However, the present Act states that
every financial year of a company will end on 31st March.

Q22) Solomon Vs Solomon?

Ans) Salomon transferred his business of boot making, initially run as a
sole proprietorship, to a company (Salomon Ltd.), incorporated with
members comprising of himself and his family. The price for such
transfer was paid to Salomon by way of shares, and debentures having a
floating charge (security against debt) on the assets of the company.
Later, when the company's business failed and it went into liquidation,
Salomon's right of recovery (secured through floating charge) against
the debentures stood a prior to the claims of unsecured creditors, who
would, thus, have recovered nothing from the liquidation proceeds. The
liquidator sought to overlook the separate personality of Salomon Ltd.,
distinct from its member Salomon, so as to make Salomon personally
liable for the company's debt as if he continued to conduct the business
as a sole trader. Therefore Solomon approached house of lords. The
court held that a company is a separate legal entity distinct from its
members and so insulating Mr. Salomon, the founder of A. Salomon and

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Company, Ltd., from personal liability to the creditors of the company
he founded. The court also upheld firmly the doctrine of corporate
personality, as set out in the Companies Act 1862, so that creditors of
an insolvent company could not sue the company's shareholders to pay up
outstanding debts.

*****

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