The Companies Act, 2013

(b)(i) A Section 8 Company can issue shares to persons/entities including partnership firms.

Hence, Ram & Sons can invest 25% in the total equity of Hitarth Foundation.

(ii)Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to promote the charitable objects of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment etc., Such company intends to apply its profit in promoting its objects and prohibiting the payment of any dividend to its members. The declaration of dividend under pressure from Ram & Sons was a clear violation of the conditions of the licence granted under Section 8.

Even though Ram & Sons has a 25% stake, no member of a Section 8 company has the right to receive dividends. The right of Ram & Sons to withdraw dividend is therefore legally invalid.

In the instant case, Hitarth Foundation should deny Ram & Sons for declaration of dividend @ 10% and withdrawal of the same as it is prohibited under Section 8 company.

(iii)Revocation of license: Section 8(6) of the Companies Act, 2013 (the Act) empowers the Central Government after giving reasonable notice and opportunity to be heard, may by order, revoke the licence of the company where the company contravenes any of the requirements or the conditions of this sections subject to which a licence is issued or where the affairs of the company are conducted fraudulently, or violative of the objects of the company or prejudicial to public interest.

Section 8(7) of the Act further provides that upon revocation of the licence, the Central Government may, by order, direct the company to convert its status and change its name, wind up or amalgamate with another Section 8 company having similar objects.

On revocation, the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the register. But before such revocation, the Central Government must give it a written notice of its intention to revoke the licence and opportunity to be heard in the matter.

Order of the Central Government: Where a licence is revoked then the Central Government may, in the public interest order direct the company to convert its status and change its name, wind up or amalgamate with another company registered under this section having similar objects, to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order, or the company be wound up.

Therefore, the Central Government has the power to both revoke the licence and direct winding up in public interest.

Hence, the contention of the Hitarth Foundation is not justified as the Central Government can give order for winding up of the section 8 company in public interest.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2026, 1(b) (New Scheme).

(b)(i) Government Company [Section 2(45) of the Companies Act,

2013]: Government Company means any company in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and the section includes a company which is a subsidiary company of such a Government company.

In the instant case, 51% of the shares of State Power Corp Limited is held by the Central Government. Therefore, the company shall be treated as a Government Company. The fact that it is incorporated as a private company does not affect its status as a Government Company. Therefore, the contention of some directors that a private company cannot be a Government Company is incorrect.

In view of the above, State Power Corp Private Limited is a Government Company under Section 2(45) despite being incorporated as a private company.

(ii)Public Financial Institutions (PFI) [Section 2(72)]: A “PFI” includes

institutions specified in Schedule I of the Act (like IDBI, LIC, UTI, IFCI, ICICI, etc.) and such other institution as may be notified by the Central Government. A Government Company does not automatically become a PFI merely because 51% shares are held by the Central Government. Since State Power Corp Pvt Ltd was incorporated for infrastructure/IT purposes, there is no indication that State Power Corp Private Limited has been specifically established as a PFI under the Act or notified by the Central Government for this purpose, it cannot be regarded as a PFI. Hence, the view of the directors claiming it to be a PFI is not correct.

In view of the above, State Power Corp Private Limited cannot be considered a Public Financial Institution.

(iii)Dormant Company (Section 455): Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

“Inactive Company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years.

Since State Power Corp Private Limited has neither conducted business nor filed the required returns during the last two financial years, it qualifies as an inactive company and is eligible to apply for the status of a Dormant Company.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2026, 3(b) (New Scheme).

(b)(i) According to Section 2(68) of the Companies Act, 2013 Private Company means a company which restricts the right to transfer its share and prohibits any invitation to the public to subscribe for any share in the company.

But, according to proviso to Section 2(71) of the Companies Act, 2013 a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its Articles of Association.

The shares of a Public Company is freely transferable.

In the instant case, since Stuti Textiles Private Ltd. is a wholly owned subsidiary of SS Textiles Limited, restriction of Stuti Textiles Private Ltd. to transfer share is not correct as it is deemed to be a Public Company.

Thus, restriction on transfer of shares is incorrect.

Alternate Answer

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2026, 3(b) (New Scheme).

(b)(i) A Private Limited Company can be converted into an OPC if it meets the eligibility criteria under Section 2(62) of the Companies Act, 2013.

An OPC can have only one member and the Memorandum of OPC shall indicate the name of the other person, who shall, in the event of the subscriber's death or his incapacity to contract, become the member of the Company.

The member of OPC may at any time change the name of such other person by giving notice to the company and the company shall intimate the same to the registrar.

No person shall be eligible to become nominee in more than one OPC.

Further only a natural person who is an Indian citizen whether resident in India or otherwise-

•shall be eligible to incorporate a One Person Company;

•shall be a nominee for the sole member of a One Person Company.

Explanation I - For the purposes of this rule, the term “resident in India” means a person who has stayed in India for a period of not less than one hundred and twenty days during the immediately preceding financial year.

In view of the above, in the given case, Mrs. RM's decision to convert the Company into an OPC is legally valid.

(ii)Nominating Mr. AK may not be valid if he does not meet the residency requirement (i.e., if he has not stayed in India for at least 120 days in the preceding financial year). In that case, Mrs. RM must nominate another Indian resident.

(ii)ALTERNATE ANSWER

Here, Mrs. RM’s decision to nominate her brother Mr. AK, as a nominee is not legally valid in the case where he has obtained the foreign citizenship being in employment in London UK.

Note: Since nothing is specified as regards the citizenship of Mr. AK, a benefit of doubt may be given to the students who assumes that Mr. AK has obtained the UK citizenship being therein employment. In that case he may lose the Indian Citizenship and shall be disqualified to be nominated as a nominee.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2025, 3(b) (New Scheme).

(b)(i) According to Section 2(85) of the Companies Act, 2013, Small company means a company, other than a public company-

(i)paid-up share capital of which does not exceed four crore rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and

(ii)turnover of which as per profit and loss account for the immediately preceding financial year does not exceed forty crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:

Exceptions: This clause shall not apply to:

(A)a holding company or a subsidiary company;

(B)a company registered under section 8; or

(C)a company or body corporate governed by any special Act.

SUGGESTED ANSWER

In the instant case,

(i)STS Pvt. Ltd. though is a small company taking into account its turnover and paid up share capital (i.e. ₹ 10 crores and ₹ 1 crore

respectively), but since it is the subsidiary c.ompany of UV Infratech Pvt. Ltd. (UV Infratech Pvt. Ltd. holds ₹ 60,00,000 equity

share capital of STS Pvt. Ltd.), hence STS Pvt. cannot be considered as small company.

(ii)ZX Ltd. cannot be considered as a small company since it is a public company.

(ii)As per Section 2(6) of the Companies Act, 2013, an Associate Company in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

The term “significant influence” means control of at least 20% of total voting power, or control of or participation in business decisions under an agreement.

In the given case, the paid up share capital of ACD Ltd. is ₹ 80 crores. B Ltd. holds equity share capital of ₹ 15 crore in ACD Ltd. i.e. less than

20% significant influence. Therefore ACD Ltd. cannot be considered as an Associate Company of B Ltd.

Alternate conclusion

Since the question is asked with reference to B Ltd. who had stake of ₹ 15

crores in the ACD Ltd. to be considered as an associate company or not.

So, the conclusion may be alternatively as follows:

In the given case, the paid up share capital of ACD Ltd. is ₹ 80 crores. B Ltd. holds equity share capital of ₹ 15 crore in ACD Ltd. i.e. less than 20%

significant influence. Therefore, B Ltd. cannot be considered as an Associate Company.

SUGGESTED ANSWER

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2025, 1(b) (New Scheme).

(b)(i) It is a fundamental rule of Company Law that the objects of a company as stated in its memorandum can be departed from only to the extent permitted by the Act, thus far and no further. In consequence, any act done or a contract made by the company which travels beyond the powers not only of the directors but also of the company is wholly void and inoperative in law and is therefore not binding on the company.

On this account, a company can be restrained from employing its fund for purposes other than those sanctioned by the memorandum. Likewise, it can be restrained from carrying on a trade different from the one it is authorised to carry on.

The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires transaction, nor can it sue on it.

Since the memorandum is a “public document”, it is open to public inspection. Therefore, when one deals with a company one is deemed to know about the powers of the company. If in spite of this you enter into a transaction which is ultra vires the company, you cannot enforce it against the company.

In the instant case, ABC Pvt. Ltd. was authorised to trade in property only, so taking loan for construction business was ultra virus the power of the company.

Therefore, Magnum Finance Ltd. cannot enforce against ABC Pvt. Ltd. for recovery of the loan. But,

SUGGESTED ANSWER

(a)It can recover the money to the extent it has been utilised in meeting lawful debt of the company, then it steps into shoes of the debtor paid off and consequently it would be entitled to recover the loan to that extent from the company.

(b)if the money is not spent, it may stop ABC Pvt. Ltd. from spending by means of injunction and recover the unspent amount.

(ii)Formation of companies with charitable objects etc. (Section 8

company): Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to

•promote the charitable objects of commerce, art, science, sports,

education, research, social welfare, religion, charity, protection of environment etc.

•Such company intends to apply its profit in promoting its objects

and

•prohibiting the payment of any dividend to its members.

In the instant case, SNM Ltd. cannot declare dividend @10% to equity shareholders for the year ending 31st March, 2025 as it is a Section 8

company which are specifically prohibited from paying dividend. The profits of a section 8 company must be applied towards promoting its objects. Therefore, the special resolution passed in the EGM to declare a dividend is invalid.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2025, 3(b) (New Scheme).

(b)(i) Formation of companies with charitable objects etc. (Section 8 company):

•Section 8 of the Companies Act, 2013 deals with the formation of

companies which are formed to

•The Section 8 company operates under a special licence from

Central Government and the Licence revoked if conditions contravened.

•On revocation, Central Government may direct it to

•A partnership firm can be a member of Section 8 company.

In the instant case, “Harmony Foundation” a section 8 company transferred some amount to M/S LMP Associates (a Partnership firm and one of the members of the Harmony Foundation).

The Central Government, after giving an opportunity of being heard, directed the company to be wound up on the ground that a partnership firm cannot be a member of the Section 8 company and it cannot transfer any part of profit to the firm.

SUGGESTED ANSWER

Hence, the ground for winding up taken on the basis of transfer of any part of profit by Harmony Foundation to the M/S LMP Associates is correct and sufficient.

However, M/S LMP Associates can become a member of Section 8 company. Therefore, this ground is not correct hence not sufficient.

(ii)Section 5(4) and (5) of the Companies Act, 2013 contains the following provisions:

Manner of inclusion of the entrenchment provision: 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.

Notice to the registrar of the entrenchment provision: 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 such form and manner as may be prescribed.

In the instant case, Justice Private Limited can follow the above procedure i.e. with the consent of all the members and notice to the registrar to include the entrenchment provision in its Articles.

Yes, the advice will differ, if the company is public company, since it has to pass Special Resolution and also inform to the registrar.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2025, 1(b) (New Scheme).

(b)The Articles of Association are in fact the Bye-Laws of the company according to which director and other officers are required to perform their functions as regards the management of the company, its accounts and audit. It is important therefore that the auditor should study them and, while doing so he should note the provisions therein in respect of relevant matters.

Section 5 of the Companies Act, 2013 seeks to provide the contents and model of articles of association. The section lays the following law-

(1)Contains regulations: The articles of a company shall contain the regulations for management of the company.

(2)Inclusion of matters: The articles shall also contain such matters, as are prescribed under the rules. However, a company may also include such additional matters in its articles as may be considered necessary for its management.

(3)Contain provisions for entrenchment: The articles may contain provisions for entrenchment (to protect something) to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with.

(4)Manner of inclusion of the entrenchment provision: The provisions

for entrenchment shall only be made either on formation of a company,

SUGGESTED ANSWER

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.

(5)Notice to the registrar of the entrenchment provision: 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 such form and manner as may be prescribed.

(6)Forms of articles: The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in Schedule I as may be applicable to such company.

(7)Model articles: A company may adopt all or any of the regulations contained in the model articles applicable to such company.

(8)Company registered after the commencement of this Act: In case

of any company, which is registered after the commencement of this Act, in so far as the registered articles of such company do not exclude or modify the regulations contained in the model articles applicable to such company, those regulations shall, so far as applicable, be the regulations of that company in the same manner and to the extent as if they were contained in the duly registered articles of the company.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2025, 2(b) (New Scheme).

(b)(i) Conditions for an institution to be notified as PFI (Section 2(72) of

the Companies Act, 2013: No institution shall be so notified unless-

(A)it has been established or constituted by or under any Central or State Act other than this Act or the previous Companies Law; or

(B)not less than fifty-one per cent of the paid-up share capital is held or controlled by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments.

In the instant case, the major shareholders holding paid-up share capital in Rural Development Fin. Corp. Ltd. by the Central Government and State Governments is 68% (i.e. Central Government: 26%, State of Maharashtra: 18% and State of Tamilnadu: 24%), hence it will be

SUGGESTED ANSWER

regarded as ‘Public Financial Institution’ under the Companies Act, 2013.

By virtue of Section 2(72) of the Companies Act, 2013, the following institutions are to be regarded as public financial institutions:

(i)the Life Insurance Corporation of India, established under the Life Insurance Corporation Act, 1956;

(ii)the Infrastructure Development Finance Company Limited,

(iii)specified company referred to in the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002;

(iv)institutions notified by the Central Government under section 4A(2) of the Companies Act, 1956 so repealed under section 465 of this Act;

(v)such other institution as may be notified by the Central Government in consultation with the Reserve Bank of India.

(ii)No, it is not mandatory to have common seal for the company.

In case a company does not have a common seal, the authorization shall be made by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2025, 3(b) (New Scheme).

(b)(i) As per Rule 3 of the Companies (Incorporation) Rules, 2014:

Only a natural person who is an Indian citizen whether resident in India or otherwise

(a)shall be eligible to incorporate a One Person Company;

(b)shall be a nominee for the sole member of a One Person Company.

Here, “resident in India” means a person who has stayed in India for a period of not less than one hundred and twenty days during the immediately preceding financial year.

In the instant case,

(i)Robert cannot be appointed as a nominee in the OPC by Kamal as his stay in the preceding F/Y 2022-23 is only for 61 days which is less than 120 days.

SUGGESTED ANSWER

(ii)Dinkar can be appointed as a nominee in the OPC by Kamal as he is an Indian Citizen and non-resident in India.

Alternative Answer as follows:

As per Rule 3 of the Companies (Incorporation) Rules, 2014:

Only a natural person who is an Indian citizen whether resident in India or otherwise and has stayed in India for a period of not less than 120 days during the immediately preceding financial year

•shall be eligible to incorporate a OPC;

•shall be a nominee for the sole member of a OPC.

In the instant case,

(i)Robert cannot be appointed as a nominee in the OPC by Kamal as his stay in the preceding F/Y 2022-23 is only for 61 days which is less than 120 days.

(ii)Dinkar cannot be appointed as a nominee in the OPC by Kamal as he has not stayed in the preceding F/Y 2022-23 for a single day.

Procedure for changing the nominee: The member of OPC may at any time change the name of nominee by giving notice to the company and the company shall intimate the same to the Registrar.

Any such change in the name of the person shall not be deemed to be an alteration of the memorandum.

(ii)According to Section 455 of the Companies Act, 2013, where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

In the instant case, XYZ Ltd. has made a significant accounting transaction (down payment of ₹ 1 crore for plant and machinery), it does not meet the criteria of a dormant company under Section 455 of the Companies Act, 2013.

Therefore, XYZ Ltd. cannot acquire the status of dormant company.

SUGGESTED ANSWER

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2024, 1(b) (New Scheme).

(b)As per Section 2(46) of the Companies Act, 2013, holding company in relation to one or more other companies, means a company of which such companies are subsidiary companies.

Section 2(87) defines “subsidiary company” in relation to any other company (that is to say the holding company), means a company in which the holding company-

(i)controls the composition of the Board of Directors; or

(ii)exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies.

In the instant case, as on 31.03.2023, ABC Limited had a paid-up capital of ₹ 1 lakh (10,000 equity shares of ₹ 10 each). In June 2023, ABC Limited

issued additional 10,000 equity shares, which was fully subscribed. Postissue, the total paid-up capital of ABC Limited is ₹ 2 lakhs (20,000 equity shares of ₹ 10 each).

Out of these, 5,000 shares were issued to XYZ Private Limited. Since XYZ Private Limited holds only 25% of the shares in ABC Limited, it does not have control of more than one-half of the total voting power of ABC Limited. Hence, XYZ Private Limited cannot be considered as a subsidiary company of ABC Limited in terms of the second criteria stated above, that of controlling of voting power.

XYZ Private Limited is the holding company of PQR Private Limited by having control over the composition of its Board of Directors. But since XYZ Private Limited cannot be termed as a subsidiary company of ABC Limited, PQR Private Limited cannot claim the status of being a subsidiary of ABC Limited in terms of the first criteria, that of controlling of the composition of directors.

SUGGESTED ANSWER

As per section 2(6) of the Act, Associate Company in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

The expression “significant influence” means control of at least twenty per cent of total voting power, or control of or participation in business decisions under an agreement.

In terms of the above provision, the relationship between ABC Limited and XYZ Private Limited can be of an Associate Company.

Since XYZ Private Limited holds more than 20 percent of voting power in ABC Limited, it can be considered as an Associate Company of ABC Limited.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2024, 1(b) (New Scheme).

(b)(a) Section 2(62) of the Companies Act, 2013 defines one person company (OPC) as a company which has only one person as a member.

Ram wants to incorporate a company in which he will be the only member. Hence, he can incorporate an One person Company.

According to section 3(1)(c) of the Companies Act, 2013, OPC is a private limited company with the minimum paid up share capital as may be prescribed and having one member.

OPC (One Person Company) - salient features

♦ Only one person as member.

Minimum paid up capital - no limit prescribed. ⬥

SUGGESTED ANSWER

The memorandum of OPC shall indicate the name of the other ⬥ person, who shall, in the event of the subscriber’s death or his incapacity to contract, become the member of the company.

The other person whose name is given in the memorandum shall ⬥ give his prior written consent in prescribed form and the same shall be filed with Registrar of companies at the time of incorporation.

Such other person may be given the right to withdraw his ⬥ consent.

The member of OPC may at any time change the name of such ⬥ other person by giving notice to the company and the company shall intimate the same to the Registrar.

Any such change in the name of the person shall not be deemed ⬥ to be an alteration of the memorandum.

Only a natural person who is an Indian citizen whether resident in ⬥ India or otherwise and has stayed in India for a period of not less than 120 days during the immediately preceding financial year.

Investment activities including investment in securities of any body-corporate.

If One Person Company or any officer of such company ⬥ contravenes the provisions, they shall be punishable with fine which may extend to ten thousand rupees and with a further fine

SUGGESTED ANSWER

which may extend to one thousand rupees for every day after the first during which such contravention continues.

Here the member can be the sole member-cum-director.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2024, 2(b) (New Scheme).

(b)According to Section 2(45) of the Companies Act, 2013, Government Company means any company in which not less than 51% of the paid-up share capital is held by-

(i)the Central Government, or

(ii)by any State Government or Governments, or

(iii)partly by the Central Government and partly by one or more State Governments, and the section includes a company which is a subsidiary company of such a Government company.

As per Section 2(87) of the Companies Act, 2013, “subsidiary company” in relation to any other company (that is to say the holding company), means a company in which the holding company -

(i)controls the composition of the Board of Directors; or

(ii)exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies.

In the instant case, the State Government of X, a state in the country is holding 48 Lakh shares in Y Limited which is below 51% of the paid up share capital of Y Limited i.e. 48.45 Lakh shares (51% of 95 Lakh shares). Hence Y Limited is not a Government Company.

Further, Y Limited directly holds 2,50,600 shares in Z Private Limited, which is more than one-half of the total shares of Z Limited i.e. 2,50,000 shares (50% of 5 Lakh shares). Thus, the Company controls more than one-half of the total voting power of Z Limited. Hence Z Private Limited is a subsidiary of Y Limited.

Therefore, we can conclude that Z Private Limited is a subsidiary of Y Limited but not a Government Company since Y Limited is not a Government Company.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2023, 1(b) (Old Scheme).

(c)“Inactive company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years. [Explanation (i) to Section 455 of the Companies Act, 2013]

“ S ignificant accounting transaction” means any transaction other than -

(a)payment of fees by a company to the Registrar;

(b)payments made by it to fulfil the requirements of this Act or any other law;

(c)allotment of shares to fulfil the requirements of this Act; and

(d)payments for maintenance of its office and records.

[Explanation (ii) to Section 455 of the Companies Act, 2013]

In the instant case, MTK Private Limited was registered on 5th January, 2021 and has not started its business till now. On 7th April, 2023, a notice has been received from ROC for non-filing of Form No. INC-20A. Since the Company has not started its business and a period of more than two years have already elapsed, it will be treated as an inactive company.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2023, 6(c) (Old Scheme).

(b)Associate company [Section 2(6) of the Companies Act, 2013] in relation to another

company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

The expression “significant influence” means control of at least twenty per cent of total voting power, or control of or participation in business decisions under an agreement.

The term “joint venture” means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

In the instant case, ABC Limited has allotted equity shares with voting rights to XYZ Limited worth ₹ 15 crore and convertible preference shares worth ₹ 10 crore during the financial year 2022-23 out of the total share capital of ABC Limited of ₹ 100 crore.

Since XYZ Limited is holding only 15% significant influence ( ₹ 15 crore equity shares with voting rights) in ABC Limited, which is less than twenty per cent, XYZ Limited is not an Associate company of ABC Limited.

Important Note:

It can be assumed that the convertible preference shareholders are having voting rights and due to this, XYZ Limited is holding overall 25% paid up share capital in ABC Limited (with voting rights). Hence, XYZ limited is having significant control over ABC Limited and therefore XYZ is an Associate company of ABC Limited.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2023, 1(b) (Old Scheme).

(c)Small Company: Small Company as defined under Section 2(85) of the Companies Act, 2013 means a company, other than a public company -

(i)paid-up share capital of which does not exceed ₹ 4 crore or such higher amount as may be prescribed which shall not be more than ₹ 10 crore; and

(ii)turnover of which as per profit and loss account for the immediately preceding financial year does not exceed ₹ 40 Crore or such higher amount as may be prescribed which shall not be more than ₹ 100 crore:

Exceptions: This clause shall not apply to:

(A)a holding company or a subsidiary company;

(B)a company registered under section 8; or

(C)a company or body corporate governed by any special Act.

In the instant case, since the paid-up capital of ABC Private Limited is ₹ 35 Lakhs and turnover is ₹ 2.5 crore, it can avail the status of a small company as both the requirements with regard to paid-up share capital as well as turnover are fulfilled by the Company.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2023, 6(c) (Old Scheme).

(b)(i) Section 2(62) of the Companies Act, 2013 defines one person company as a company which has only one person as a member. However, a private company shall have minimum 2 members without any restriction on the share capital or turnover. If OPC is converted into private company Mr. Anil and Mr. Sunil both can be the members of the company and investment from Mr. Sunil can be accepted.

A One Person Company can voluntarily convert itself into a private company by following the compliances given under the Companies Act, 2013.

In the instant case, OPC formed by Mr. Anil can be voluntarily converted into a private company by following the compliances given under the Companies Act, 2013. Here, the information given relating to turnover for the financial year ended 31st March, 2019 is immaterial.

(ii)Listed company: As per the definition given in the section 2(52) of the Companies Act, 2013, it is a company which has any of its securities listed on any recognised stock exchange.

Provided that such class of companies, which have listed or intend to list such class of securities, as may be prescribed in consultation with the Securities and Exchange Board, shall not be considered as listed companies.

Whereas the word securities as per the section 2(81) of the Companies Act, 2013 has been assigned the same meaning as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956.

Unlisted company means company other than listed company.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, November 2022, 5(b) (Old Scheme).

(c)As per the provisions of the Companies Act, 2013, only a natural person who is an Indian citizen and resident in India (person who stayed in India for a period of not less than 120 days during immediately preceding financial year) -

-Shall be eligible to incorporate an OPC

-Shall be a nominee for the sole member.

In the given case, Mr. R is an Indian citizen and his stay in India during the immediately preceding financial year is 130 days which is above the requirement of 120 days. Hence, Mr. R is eligible to incorporate an OPC.

Also, even though Mr. S’s name is mentioned in the Memorandum of Association as nominee and his stay in India during the immediately preceding financial year is more than 120 days, he is a foreign citizen and not an Indian citizen. Hence, S’s name cannot be given as nominee in the memorandum.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2022, 6(c) (Old Scheme).

(c)Section 2(87) defines “subsidiary company” in relatio n to any other company (that is to say the holding company), means a company in which the holding company -

(i)controls the composition of the Board of Directors; or

(ii)exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies:

For the purposes of this section -

(I)a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

(II) “layer” in relation to a holding company means its subsidiary or subsidiaries.

In the instant case, BC Private Limited together with its subsidiary KL Private Limited is holding 1,60,000 shares (90,000+70,000 respectively) which is more than one half in nominal value of the Equity Share Capital of PQ Private Limited. Hence, PQ Private Limited is subsidiary of BC Private Limited.

(ii)In the second case, the answer will remain the same. KL Private Limited is a holding 1,60,000 shares i.e., more than one half in nominal value of the Equity Share Capital of PQ Private Limited (i.e., holding more than one half of voting power). Hence, KL Private Limited is holding company of PQ Private Company and BC Private Limited is a holding company of KL Private Limited.

Hence, by virtue of Chain relationship, BC Private Limited becomes the holding company of PQ Private Limited.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2021, 6(c) (Old Scheme).

(b)(i) Meaning of Common Seal

Common seal is the official signature of a company, which is affixed by the officers and employees of the company on its every document. The common seal is a seal used by a corporation as the symbol of its incorporation.

Is it necessary for a Company to have a Common Seal?

Having a common seal is optional now. The Companies (Amendment) Act, 2015 has made the common seal optional by omitting the words “and a common seal” from Section 9 of the Companies Act, 2013 so as to provide an alternative mode of authorization for companies who opt not to have a common seal. This amendment provides that the documents which need to be authenticated by a common seal will be required to be so done, only if the company opts to have a common seal.

In case a company does not have a common seal, the authorization shall be made by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary.

(ii)Whether the phrases ‘Company Limited by Shares” and “Company Limited by Guarantee” are same?

No, the phrases 'Company Limited by Shares' and ‘Company Limited by Guarantee' are not same.

Distinction between "Company Limited by Shares" and "Company Limited by Guarantee" is tabulated as under:

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2026, 2(b) (New Scheme).

(b)Kinds of share capital: Section 43 of the Companies Act, 2013 provides the kinds of share capital. According to the said provision, the share capital of a company limited by shares shall be of two kinds, namely: -

1.‘‘Equity share capital’’, with reference to any company limited by shares, means all share capital which is not preference share capital;

Equity share capital - can be

(i)with voting rights; or

(ii)with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed;

2.‘‘Preference share capital’’, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to -

(a)payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and

(b)repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company;

Capital shall be deemed to be preference capital, despite that it is entitled to either or both of the following rights, namely: -

(a)that in respect of dividends , in addition to the preferential rights to the amounts specified as above, it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid;

(b)that in respect of capital , in addition to the preferential right to the repayment, on a winding up, of the amounts specified above, it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2023, 5(b) (Old Scheme).

(b)(i) Meaning of capital: The term capital has variety of meanings. But in relation to a company limited by shares, the term 'capital' means 'share capital'. Share capital means capital of the company expressed in terms of rupees divided into shares of fixed amount.

(ii)Classification of capital: In the domain of Company Law, the term capital can be classified as follows:

(a)Nominal or authorised or registered capital:

This expression means such capital as is authorised by memorandum of a company to be the maximum amount of share capital of the company.

(b)Issued capital: It means such capital as the company issues from time to time for subscription.

(c)Subscribed capital: As such part of the capital which is for the time being subscribed by the members of a company.

(d)Called up capital: As such part of the capital which has been called for payment. It is the total amount called up on the shares issued.

(e)Paid-up capital: It is the total amount paid or credited as paid up on shares issued. It is equal to called up capital less calls in arrears.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2021, 5(b) (Old Scheme).

(b)(i) Difference between Equity Shares with differential rights and preference shares

(ii)Doctrine of Constructive Notice: Section 399 of the Companies Act, 2013 provides that any person can inspect by electronic means any document kept by the Registrar, or make a record of the same, or get a copy or extracts of any document, including certificate of incorporation of any company on payment of prescribed fees.

The Memorandum and Articles of Association of a company when registered with Registrar of Companies, become public documents, and they are available for inspection to any person, on the payment of a nominal fee. In other words, Section 399 confers the right of inspection to all. It is, therefore, the duty of every person dealing with a company to inspect its documents and make sure that his contract is in conformity with their provisions but whether a person reads them or not, it will be presumed that he knows the contents of the documents. This kind of presumed/implied notice is called constructive notice.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2026, 2(b) (New Scheme).

(b)Memorandum of Association (MoA)

The Memorandum of Association of Company is in fact its charter; it defines its constitution and the scope of the powers of the company with which it has been established under the Act. It contains the fundamental conditions upon which alone the Company can be incorporated. It is the very foundation on which the whole edifice of the company is built.

Articles of Association (AoA)

The Articles of Association of a Company are its Rules and Regulations, which are framed to manage its internal affairs. Just as the Memorandum contains the fundamental conditions upon which the company is allowed to be incorporated, so also the articles are the internal regulations of the Company. Articles of Association is in fact, the Rules, Regulations and Bye Laws for the internal management of the affairs of the Company.

The following are the key differences between the Memorandum of Association and the Articles of Association:

(1)Clauses - Under Section 4 of the Companies Act, 2013, a Memorandum of Association (MOA) must contain six mandatory clauses viz., the Name Clause, Registered Office Clause, Object Clause, Liability Clause, Capital Clause, and Subscription Clause. These clauses, which serve as a company's charter, define its fundamental identity, scope of operations, and the relationship between the company and the outside world.

Whereas the Articles of Association of a Company shall contain the regulations for management of the company. Them Articles shall also contain such matters, as may be prescribed but nothing prescribed in this sub-section shall be deemed to prevent a Company from including such additional matters in its Articles as may be considered necessary for its management.

(2)Objectives: Memorandum of Association defines and delimits the objectives of the company whereas the Articles of association lays down the rules and regulations for the internal management of the company. Articles determine how the objectives of the company are to be achieved.

(3)Relationship: Memorandum defines the relationship of the company with the outside world and Articles define the relationship between the company and its members.

(4)Alteration: Memorandum of association can be altered only under certain circumstances and in the manner provided for in the Act. In most cases permission of the Regional Director, or the Tribunal is required. The articles can be altered simply by passing a special resolution.

(5)Ultra Vires: Acts done by the company beyond the scope of the memorandum are ultra-vires and void. These cannot be ratified even by the unanimous consent of all the shareholders. The acts ultra-vires the articles can be ratified by a special resolution of the shareholders, provided they are not beyond the provisions of the memorandum.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2025, 2(b) (New Scheme).

(b)Doctrine of Indoor Management: According to the “doctrine of indoor management” the outsiders, dealing with the company though are supposed to have satisfied themselves regarding the competence of the company to enter into the proposed contracts are also entitled to assume that as far as the internal compliance to procedures and regulations by the company is concerned, everything has been done properly.

They are bound to examine the registered documents of the company and ensure that the proposed dealing is not inconsistent therewith, but they are not bound to do more. They are fully entitled to presume regularity and compliance by the company with the internal procedures as required by the Memorandum and the Articles. Thus, the doctrine of indoor management aims to protect outsiders against the company.

The above-mentioned doctrine of Indoor Management has limitations/exceptions of its own. That is to say, it is inapplicable to the following cases, namely:

SUGGESTED ANSWER

(a)Actual or constructive knowledge of irregularity: The rule does

not protect any person when the person dealing with the company has notice, whether actual or constructive, of the irregularity.

(b)Suspicion of Irregularity: The doctrine in no way, rewards those who behave negligently. Where the person dealing with the company is put upon an inquiry, for example, where the transaction is unusual or not in the ordinary course of business, it is the duty of the outsider to make the necessary enquiry.

(c)Forgery: The doctrine of indoor management applies only to irregularities which might otherwise affect a transaction, but it cannot apply to forgery which must be regarded as nullity.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2025, 2(b) (New Scheme).

(b)(i) Doctrine of ultra vires: The meaning of the term ultra vires is simply “beyond (their) powers”. It is a fundamental rule of Company Law that any act done or a contract made by the company which travels beyond the powers not only of the directors but also of the company is wholly void and inoperative in law and is therefore not binding on the company.

The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires transaction, nor can it sue on it. Since the memorandum is a “public document”, it is open to public inspection. Therefore, when one deals with a company one is deemed to know about the powers of the company. If in spite of this you enter into a transaction which is ultra vires the company, you cannot enforce it against the company.

In the instant case, borrowing more than ₹ 1 crore was clearly beyond JV Limited’s powers as per its MoA, making the loan transaction ultra vires to the extent of the excess amount over ₹ 1 crore.

Hence, the decision of the company denying the repayment of the loan being ultra virus the company shall be valid for ₹ 4 crore.

If the funds have been applied for legitimate business purposes (such as repaying lawful debts), the lender steps into the shoes of the debtor paid off and consequently he would be entitled to recover his loan to that extent from the company.

Therefore, JV Limited cannot deny repayment of ₹ 3 crore, as it was utilised for lawful purposes, despite the ultra vires nature of the loan.

Ultimately, the company has no remedy available to recover the balance amount of loan of ₹ 1 crore as the spending thereof is not

traceable.

(ii)The documents which need to be authenticated by a common seal will be required to be so done, only if the company opts to have a common seal.

In case a company does not have a common seal, the authorization shall be made by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary.

SUGGESTED ANSWER

In the instant case, the objection of Sumati is not valid as the share certificate was signed by two directors Amit and Sumit as the company secretary was not appointed.

If the company had a company secretary, then the share certificate has to be signed by a director and the Company secretary.

Hence, yes, the answer will be different.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2024, 3(b) (New Scheme).

(b)(i) Fate of the suit and the liability of Mr. R towards the company:

Doctrine of the Indoor Management

According to the Doctrine of the Indoor Management, the outsiders are not deemed to have notice of the internal affairs of the company. They are entitled to assume that the acts of the directors or other officers of the company are validly performed, if they are within the scope of their apparent authority. So long as an act is valid under the articles, if done in a particular manner, an outsider dealing with the company is entitled to assume that it has been done in the manner required. This is the indoor management rule, that the company’s indoor affairs are the company’s problem. This rule has been laid down in the landmark case- the Royal British Bank vs. Turquand. (Known as “Turquand Rule”)

In the instant case, Mr. R is not liable to pay the amount of ₹ 1,50,000 to MNO Private Limited as he had genuine reasons to trust Mr. C, an employee of the company who had issued him a signed and sealed receipt.

(ii)Liability of Mr. R in case no receipt is issued by Mr. C:

Exceptions to doctrine of indoor management: Suspicion of irregularity is an exception to the doctrine of indoor management. The doctrine of indoor management, in no way, rewards those who behave negligently. It is the duty of the outsider to make necessary enquiry, if the transaction is not in the ordinary course of business.

If a receipt under the company seal was not issued by Mr. C after receiving payment, Mr. R is liable to pay the said amount as this will be deemed to be a negligence on the part of Mr. R and it is his duty to make the necessary enquiry to check that whether Mr. C is eligible to take the payment or not.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, November 2022, 1(b) (Old Scheme).

(b)Doctrine of Indoor Management

According to this doctrine, persons dealing with the company need not inquire 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 the 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 do 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, Quick Finance Limited being external to the company, need not enquire whether the necessary resolution was passed properly. Even if Aarna Limited claims that no resolution authorizing the loan was passed, Aarna Limited is bound to repay the loan to Quick Finance Limited.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2022, 1(b) (Old Scheme).

(b)Doctrine of ultra vires:

The meaning of the term ultra vires is simply “beyond (their) powers”. The legal phrase “ultra vires” is applicable only to acts done in excess of the legal powers of the doers. This presupposes that the powers in their nature are limited. To an ordinary citizen, the law permits whatever does the law not expressly forbid. It is a fundamental rule of Company Law that the objects of a company as stated in its memorandum can be departed from only to the extent permitted by the Act, thus far and no further [Ashbury Railway Company Ltd. vs. Riche]. In consequence, any act done or a contract made by the company which travels beyond the powers not only of the directors but also of the company is wholly void and inoperative in law and is therefore not binding on the company. On this account, a company can be restrained from employing its fund for purposes other than those sanctioned by the memorandum. Likewise, it can be restrained from carrying on a trade different from the one it is authorised to carry on.

Consequences of ‘ultra vires’ acts of the company:

The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires transaction, nor can it sue on it. Since the memorandum is a “public document”, it i s open to public inspection. Therefore, when one deals with a company one is deemed to know about the powers of the company. If in spite of this one enters into a transaction which is ultra vires the company, he/she cannot enforce it against the company.

An act which is ultra vires the company being void, cannot be ratified by the shareholders of the company.

However, some ultra vires act can be regularised by ratifying them subsequently. For instance, if the act is ultra vires the power of the directors, the shareholders can ratify it; if it is ultra vires the articles of the company, the company can alter the articles; if the act is within the power of the company but is done irregularly, shareholders can validate such acts.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2022, 5(b) (Old Scheme).

(b)This case is governed by the ‘Doctrine of Ultra Vires’. According to this doctrine , any act done or a contract made by the company which travels beyond the powers of the company conferred upon it by its Memorandum of Association is wholly void and inoperative in law and is therefore not binding on the company. This is because, the Memorandum of Association of the company is, in fact, its charter; it defines its constitution and the scope of the powers of the company. Hence, a company cannot depart from the provisions contained in the memorandum however imperative may be the necessity for the departure. Hence, any agreement ultra vires the company shall be null and void.

(i)Whether AK Private Limited is liable to pay the debt?

As per the facts given, AK Private Limited borrowed ₹ 36 crores from BK Finance Limited which is beyond its borrowing power of ₹ 30 crores.

Hence, contract for borrowing of ₹ 36 crores, being ultra vires the memorandum of association and thereby ultra vires the company, is void. AK Private Limited is not, therefore, liable to pay the debt.

(ii)Remedy available to BK Finance Limited:

In light of the legal position explained above, BK Finance Limited cannot enforce the said transaction and thus has no remedy against the company for recovery of the money lent. BK Finance limited may take action against the directors of AK Private Limited as it is the personal liability of its directors to restore the borrowed funds. Besides, BK Finance Limited may take recourse to the remedy by means of ‘Injunction’, if feasible.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2021, 1(b) (Old Scheme).

(b)According to Section 2(62) of the Companies Act, 2013, a One Person Company (OPC) means a Company which has only one person as a member. A Company is a separate legal entity distinct from its member and enjoys limited liability.

Separate Legal Entity : When a Company is registered, it is clothed with a legal personality. Its existence is distinct and separate from that of its members.

Limited Liability: The liability of the members of the Company is limited to the extent of the nominal value of shares held by them. In no case, the shareholders can be asked to pay anything more than the unpaid value of their shares. The liability of OPC’s sole member is limited to the extent of unpaid share capital, if any.

In the instant case, OPC failed to pay its debts to NBFC. Assets of the company were insufficient to pay the outstanding debts.

According to above provisions, we can conclude that: -

(i)If the NBFC proceeded against the personal assets of Prasad only on the ground that he is the only shareholder and hence liable for

its debts: Prasad will not be personally liable to pay the outstanding debts of the NBFC merely on the ground that he is the only shareholder of the OPC because the debts of the OPC are its own and the OPC enjoys limited liability. Creditors cannot proceed against the personal assets of the member merely because he is the sole shareholder.

Therefore, the NBFC cannot proceed against the personal assets of Prasad only on the ground that he is the sole shareholder.

(ii)If the NBFC proves that the One Person Company was formed for

fraud and cheating : Where a Company is incorporated or carried on with intent to defraud Creditors or for any fraudulent purpose, the “Doctrine of Lifting of Corporate Veil” applies and the Corporate Veil can be lifted. In such cases, the protection of limited liability is withdrawn and the member can be held personally responsible for the debts of the company.

Accordingly, if the NBFC proves that the OPC was incorporated for fraudulent purposes, the protection of limited liability can be withdrawn and Prasad would be liable to pay the outstanding debts of NBFC and his personal assets can be used to settle the outstanding liabilities.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2026, 1(b) (New Scheme).

(b)Yes, I agree that a company is an Artificial Person.

A Company incorporated under the provisions of the Companies Act, 2013 is an artificial person as it is created by a process other than natural birth. It is legal or judicial as it is created by law.

Further, the Company being a separate legal entity can own property, have banking account, raise loans, incur liabilities and enter into contracts. Even members can contract with company, acquire right against it or incur liability to it. It can sue and be sued in its own name. It can do everything which any natural person can do except be sent to jail, take an oath, marry or practice a learned profession. Hence, it is a legal person in its own sense.

As the Company is an artificial person, it can act only through some human agency, viz., directors. The directors can control affairs of the company but they are not the “agents” of the members of the company. The directors can either on their own or through the common seal, if any, (of the company) can authenticate its formal acts.

Further, the Company being an artificial person has perpetual succession and it continues to exist until it is legally dissolved. The members of a company may come and go but the company will go on forever.

However, the Company being an artificial person cannot have citizenship, lack of physical action and corporate veil can be lifted.

Thus, a company is an artificial legal person.

Authorization by a Company not having a Common Seal:

In case a company does not have a common seal, the authorization shall be made by two directors or by a director and the Company Secretary, wherever the Company has appointed a Company Secretary.

Hence, M/s Beeta Limited can do the authorization as mentioned in the above manner.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2025, 1(b) (New Scheme).

(b)(i) "Corporate veil sometimes fails to protect the members of the company from the liability connected to the company's actions."

The following are the cases where company law disregards the principle of corporate personality or the principle that the company is a legal entity distinct and separate from its shareholders or members:

(1)To determine the character of the company i.e. to find out

whether co-enemy or friend: It is true that, unlike a natural person, a company does not have mind or conscience; therefore,

SUGGESTED ANSWER

it cannot be a friend or foe. It may, however, be characterised as an enemy company, if its affairs are under the control of people of an enemy country. For this purpose, the Court may examine the character of the persons who are really at the helm of affairs of the company.

(2)To protect revenue/tax: In certain matters concerning the law of taxes, duties and stamps particularly where question of the controlling interest is in issue.

(i)Where corporate entity is used to evade or circumvent tax, the Court can disregard the corporate entity.

(ii)Where the company was not a genuine company at all but merely the assessee himself disguised under the legal entity of a limited company.

(3)To avoid a legal obligation: Where it was found that the sole purpose for the formation of the company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the Supreme Court upheld the piercing of the veil to look at the real transaction (The Workmen Employed in

Associated Rubber Industries Limited, Bhavnagar vs. The Associated Rubber Industries Ltd., Bhavnagar and another).

(4)Formation of subsidiaries to act as agents: A company may

sometimes be regarded as an agent or trustee of its members, or of another company, and may therefore be deemed to have lost its individuality in favour of its principal. Here the principal will be held liable for the acts of that company.

(5)Company formed for fraud/improper conduct or to defeat law:

Where the device of incorporation is adopted for some illegal or improper purpose, e.g., to defeat or circumvent law, to defraud creditors or to avoid legal obligations.

(ii)Effect of Memorandum and Articles: As per Section 10 of the Companies Act, 2013, where the memorandum and articles when registered, shall bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and an agreement to observe all the provisions of the memorandum and of the articles.

SUGGESTED ANSWER

All monies payable by any member to the company under the memorandum or articles shall be a debt due from him to the company.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2024, 2(b) (New Scheme).

(b)(i) Under the Companies Act, 2013, a Government company is defined in Section 2(45) as a company in which not less than 51% of the paid-up share capital is held by:

•The Central Government, or

•Any State Government or Governments, or

•Partly by the Central Government and partly by one or more State Governments,

And includes a company which is a subsidiary company of such a Government company.

In the instant case, total Government Shareholding is 40% [i.e. 20% (Government of India) + 10% (Government of Tamil Nadu) + 10% (Government of Rajasthan)] = 40%

The holding of the Life Insurance Corporation of India i.e. 8% and ABC Limited i.e. 15%, total amounting to 23% cannot be taken into account while counting the prescribed limit of 51%.

Since the total shareholding held by the Central Government and State Governments combined is 40%, which is less than 51%, XYZ Limited does not qualify to be a Government company under the provisions of the Companies Act, 2013.

(ii)One of the features of a company is that it has perpetual

succession. As per this feature, members may die or change, but the company goes on till it is wound up on the grounds specified by the Companies Act, 2013. The shares of the company may change hands infinitely but that does not affect the existence of the company. Since a company is an artificial person created by law, law alone can bring an end to its life. Its existence is not affected by the death or insolvency of its members.

In the instant case, on the death of M and N, who are holding 70% and 30% shares in the Company, the existence of the company is not

SUGGESTED ANSWER

affected, since the shares held by M and N will be legally transmitted to their legal heirs.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2024, 3(b) (New Scheme).

(b)Corporate Veil: Corporate Veil refers to a legal concept whereby the company is identified separately from the members of the company. Due to this, members of a company are shielded from liability connected to the company’s actions.

Lifting of Corporate Veil: The following are the cases where company law disregards the principle of corporate personality or the principle that the company is a legal entity distinct and separate from its shareholders or members:

(1)To determine the character of the company i.e. to find out whether co-enemy

or friend: It is true that, unlike a natural person, a company does not have mind or conscience; therefore, it cannot be a friend or foe. It may, however, be characterised as an enemy company, if its affairs are under the control of people of an enemy country. For this purpose, the Court may examine the character of the persons who are really at the helm of affairs of the company.

(2)To protect revenue/tax: In certain matters concerning the law of taxes, duties and stamps particularly where question of the controlling interest is in issue. Where corporate entity is used to evade or circumvent tax, the Court can disregard the corporate identity.

(3)To avoid a legal obligation: Where it was found that the sole purpose for the formation of the company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the Supreme Court upheld the piercing of the veil to look at the real transaction.

(4)Formation of subsidiaries to act as agents: A company may sometimes be regarded as an agent or trustee of its members, or of another company, and may therefore be deemed to have lost its individuality in favour of its principal. Here the principal will be held liable for the acts of that company.

(5)Company formed for fraud/improper conduct or to defeat law: Where the device

of incorporation is adopted for some illegal or improper purpose, e.g., to defeat or circumvent law, to defraud creditors or to avoid legal obligations.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2023, 5(b) (Old Scheme).

(c)Mike LLC is incorporated in Singapore and having a place of business in Pune, India. Since, Mike LLC is incorporated outside India and having a Place of business in India, hence it is a foreign Company.

Foreign Company [Section 2(42) of the Companies Act, 2013]: It means any company

or body corporate incorporated outside India which -

(i)has a place of business in India whether by itself or through an agent, physically or through electronic mode; and

(ii)conducts any business activity in India in any other manner.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, November 2022, 6(c) (Old Scheme).