Ch. 2 Incorporation of Company and Matters Incidental Thereto: PYQ Decoder

May 20261(a)5 marksNew Scheme

(a)Dhruvika a social worker, to promote tribal art and culture in Southern Rajasthan planned to incorporate a company, the purpose of which was not only promote the tribal art but also to generate income for the tribal people. The people residing in the area are well versed in making the bamboo items, terracotta, leather goods, handmade jewellery, and textiles (hand-printed, tie and dye) but due to poor marketing, their products could not reach the buyers. The tribal products are in great demand among the people. Dhruvika thought of providing the marketing platform to such local producers (artisans) by selling the products through the e-commerce platforms. She discussed her plan with some of the prominent artisans of the tribal area and invited them to be the members of the proposed company and she had planned to distribute the net profits equally among the members as a goodwill gesture.

(i)Referring to the provisions of the Companies Act, 2013 discuss whether Dhruvika can be granted a licence to incorporate a company under Section 8 of the Companies Act, 2013. (3 Marks)

(ii)In case the artisans are unwilling to be members, can Dhruvika incorporate an One Person Company (OPC) under Section 8 of the Companies Act, 2013? (2 Marks)

(a)(i) According to sub-section (1) of Section 8 of the Companies Act, 2013, where it is proved to the satisfaction of the Central Government (the power has been delegated to ROC in this behalf) that a person or an association of persons proposed to be registered under the Companies Act, 2013, as a limited company:

(a)has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;

(b)intends to apply its profits, if any, or other income in promoting its objects; and

(c)intends to prohibit the payment of any dividend to its members,

the Central Government may, by licence issued in such manner as may be prescribed, and on such conditions as it deems fit, allow that person or association of persons to be registered as a limited company under this section without the addition to its name of the word "Limited", or as the case may be, the words "Private Limited", and thereupon the Registrar shall, on application, in the prescribed form, register such person or association of persons as a company under this section.

In the given case, Dhruvika proposed to incorporate a company with the artisans as its members. However, she intended to distribute the net profits equally among the members, which shows a clear intention of distribution of dividend to the members. Since section 8(1) of the Companies Act, 2013 specifically prohibits payment of any dividend to its members and requires the profits to be applied solely towards promotion of its objects, the licence for incorporation of the company under Section 8 cannot be granted.

(ii)According to Rule 3(5) of the Companies (Incorporation) Rules, 2014, One Person Company cannot be incorporated or converted into a company under section 8 of the Act.

Thus, even if the artisans are unwilling to be members, Dhruvika cannot incorporate an One Person Company under section 8 of the Companies Act, 2013.

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

May 20251(a)5 marksNew Scheme

(a)Amrish after completing his post-graduate degree in mechanical engineering from the United Kingdom returned back to India. Although he got a good placement in a UK based company but he thought to build his own business empire in India. Amrish belongs to Barmer district (Rajasthan) where his parents have agricultural land of 20 acres. He planned to manufacture commercial drones for the use of agricultural harvesting and assist in supply chain process. For this purpose, he planned to incorporate a private limited company having the following persons as the first subscribers to the Memorandum and Articles of Association:
(i)Amrish (himself)
(ii)Robert (He is a college friend of Amrish. He is a Citizen of UK. He has technical expertise and in order to incorporate the company visited India on a valid Business Visa).
(iii)Eliza (She is college friend of Amrish. She is a Citizen of Netherlands and has good business contacts in European Countries which will be immensely useful in marketing of the company's products).
(iv)Goma Devi (Mother of Amrish, who is illiterate. She has recently sold part of her agricultural land and has received ₹ 15 crores, out of which she agreed to subscribe ₹ 5 crores in the share capital of the proposed company).
(v)Goodwork Technologies LLP (A Limited Liability Partnership having the expertise in the field of remote sensing devices).
(vi)Mohit Electronics Private Ltd. (A Private Limited Company having expertise in the field of providing Electronics and Electricals).
Amrish planned to have the Registered Office of the proposed company at Jaipur while the factory and works office shall be at the Barmer.
For incorporation of a company, an application for registration is to be filed with the Registrar. In the given case, the initial subscribers to the company consists of one illiterate person, two foreign nationals, one LLP and one Private Limited Company.
Discuss the procedure, how these persons shall subscribe to the Memorandum of Association and Articles of Association. (5 Marks)

(a)Procedure as to how the persons shall subscribe to the Memorandum of Association and Articles of Association

In terms of Section 7(1)(a) of the Companies Act, 2013 (the Act), an application for registration shall be filed with the Registrar of Companies, within whose jurisdiction the registered office of the company is proposed to be situated in Form SPICE+ (Simplified Proforma for incorporating company electronically) plus INC 32 along with the fee as provided under the Companies (Registration Offices and Fees) Rules, 2014 and Memorandum (e-MOU in Form No.INC-33) and Articles (e-AoA in Form No. INC-34) of the company duly signed by all the subscribers to the Memorandum as prescribed under by Rule 13 of the Companies (Incorporation) Rules, 2014.

S. No.		Particulars		Legal Provision
		In the case
		of:
1	Amrish			In terms of Rule 13(a), each subscriber (in the given case, Amrish) shall add his name, address, description & occupation, if any, in the presence of at least one witness who shall attest the signature, shall sign and add his name, address, description and occupation, if any.
2.	Robert			In terms of Rule 13(f), where subscriber to the Memorandum is a Foreign National residing outside India and visited India and intended to incorporate a company, in such case the incorporation shall be allowed if, he/she is having a valid Business Visa.
3.	Eliza			In terms of Rule 13(e), where subscriber to the memorandum is a foreign national residing
				outside India his signatures and address on the Memorandum and Articles of Association and proof of identity shall be notarized by a Notary (Public) with a certificate. Since Eliza is a foreign national residing outside India, her signature and address on the Memorandum and Articles of Association and proof of identity shall be notarized by a Notary (Public) with a Certificate. Rule 13(e) further provides that if a person residing in a Country outside the Common Wealth or which is not a party to the Hague Apostille Convention, 1961, the Certificate of the Notary (Public) shall be authenticated by a Diplomatic or Consular Officer. Note: In the given case, Netherlands is a Country outside the Common Wealth hence, the Certificate of the Notary (Public) shall be authenticated by a Diplomatic or Consular Officer.
4.			Goma Devi	In terms of Rule 13(b) since Goma Devi is an illiterate person, she shall affix her thumb impression or mark which shall be described as such by the person, writing for him, who shall place the name of the subscriber against or below the mark and authenticate it by his own signature and he shall also write against the name of the subscriber, the number of shares taken by her.
5.			Goodwork Technologies LLP	In terms of Rule 13(d), where the subscriber is a Limited Liability Partnership, it shall be signed by a Partner of the Limited Liability Partnership, duly authorized by a resolution approved by all the partners of the Limited Liability Partnership.
6. Mohit				In terms of Rule 13(c), where the subscriber is
Electronics				a body corporate, the Memorandum and
Private				Articles of Association shall be signed by
Limited				director, officer or employee of the body

corporate duly authorized in this behalf by a resolution of the board of directors.

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

November 20233(a)5 marksOld Scheme

(a)A group of enthusiastic women is planning to establish the Nursing Medicare Association, a limited liability company with the objective of providing comprehensive theory and practical training to aspiring nurses. The association aims to operate under the provisions of section 8 of the Companies Act, 2013, with a core objective of education. The intended duration for the association's operation is set at ten years, after which a dissolution will be initiated. In the event of dissolution, any remaining assets exceeding liabilities will be allocated among the members according to the standard procedures permitted by the Companies Act.

Assess the viability of the proposal and offer guidance to the promoters, taking into account the regulations outlined in the Companies Act, 2013. (5 Marks)

(a)According to section 8(1) of the Companies Act, 2013, where it is proved to the satisfaction of the Central Government that a person or an association of persons proposed to be registered under this Act as a limited company:

(a)has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;

(b)intends to apply its profits, if any, or other income in promoting its objects; and

(c)intends to prohibit the payment of any dividend to its members;

the Central Government may, by issue of licence, allow that person or association of persons to be registered as a limited liability company.

According section 8(9), if on the winding up or dissolution of a company registered under this section, there remains, after the satisfaction of its debts and liabilities, any asset, they may be transferred to another company registered under this section and having similar objects, subject to such conditions as the Tribunal may impose, or may be sold and proceeds thereof credited to Insolvency and Bankruptcy Fund formed under section 224 of the Insolvency and Bankruptcy Code, 2016.

In the instant case, the decision of the group of women to form a limited liability company for charitable purpose under section 8 for a period of ten years and thereafter to dissolve the association and to distribute the surplus of assets over the liabilities, if any, amongst the members will not hold good, since there is a restriction as pointed out in point (b) above regarding application of its profits or other income only in promoting its objects. Further, there is a restriction in the application of the surplus assets of such a company in the event of winding up or dissolution of the company as provided in sub-section (9) of section 8 of the Companies Act, 2013. Therefore, the proposal in its entirety is not feasible. The promoters will be accordingly advised that the proposal should be in conformity with the provisions of the Act.

Source⁠‌‌‌‌⁠: ICAI Suggested Answers, November 2023, 3(a) (Old Scheme).

September 20263(a)5 marksNew Scheme

(a)ABC Technologies Ltd. is a public company. According to its Articles of Association, the company can borrow money only if a resolution is passed by the Board of Directors. Mr. Raj, the Managing Director, approached National Finance Ltd. and borrowed ₹ 50 lakh on behalf of the company. He produced a copy of a Board Resolution authorizing the borrowing. Later, it was discovered that, no Board Meeting had actually been held. The resolution shown to the lender was forged by Mr. Raj.
The lender had no knowledge of the forgery and acted in good faith. Separately, another transaction took place where the company's accountant borrowed ₹ 10 lakh from a supplier in the company's name. The Articles did not authorize the accountant to borrow money, and the supplier did not verify the accountant's authority.
The company refused to repay both amounts.
(i)Explain the Doctrine of Indoor Management and identify the exceptions applicable in the above situations.
(ii)Whether the company is liable to repay ₹ 50 lakh borrowed by the Managing Director?
(iii)Whether the company is liable to repay ₹ 10 lakh borrowed by the
accountant? (5 Marks)

(a)(i) Doctrine of Indoor Management: The people who are dealing with company are entitled to presume that internal proceedings and requirements have been duly met.
The Doctrine of Indoor Management was first laid down in the case of Royal British Bank v. Turquand .
The directors of a company were authorized by the articles to borrow on bonds such sums of money as should from time to time, by a resolution of the company in general meeting, be authorized to be borrowed. The directors gave a bond to Turquand without the authority of any such resolution. The question arose whether the company was liable on the bond. Held, the company was liable on the bond, as Turquand was entitled to assume that the resolution of the company in general meeting had been passed.
Rationale of Doctrine of Indoor Management
What happens internally in a company is not a matter of public knowledge. An outsider can only presume the intentions of a company, but not know the information he/she is not privy to.
If not for the doctrine, the company could escape creditors by denying the authority of officials to act on its behalf.
Exceptions to Doctrine of Indoor Management
Relief on the ground of ‘indoor management’ cannot be claimed by an outsider dealing with the company in the following circumstances:
a.Knowledge of irregularity: In case this ‘outsider’ has actual knowledge of irregularity within the company, the benefit under the rule of indoor management would no longer be available. In fact, he/she may well be considered part of the irregularity.
b.Negligence: If with a minimum of effort, the irregularities within a company could be discovered, the benefit of the rule of indoor management would not apply. The protection of the rule is also not available where the circumstances surrounding the contract are so suspicious as to invite inquiry, and the outsider dealing with the company does not make proper inquiry.
c.Forgery: The rule does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers.
d.Where the question is in regard to the very existence of an agency.
e.Where a pre-condition is required to be fulfilled before company itself can exercise a particular power. In other words, the act done is not merely ultra vires the directors/officers but ultra vires the company itself.
In the given question, the exception of forgery is relevant to the ₹ 50
lakh transaction, whereas the exception of negligence is relevant to the ₹ 10 lakh transaction.
(ii)According to the Articles of Association of ABC Technologies Ltd., borrowing by the company requires a resolution of the Board of Directors. Although Mr. Raj, the Managing Director, produced a copy of a Board resolution authorising the borrowing, no such Board meeting was actually held and the resolution was forged by Mr. Raj.
The Doctrine of Indoor Management does not apply in case of forgery, since nothing can validate a forged document and a company can never be held bound for forgeries committed by its officers.
Therefore, National Finance Ltd. cannot claim protection under the Doctrine of Indoor Management on the basis of the forged Board resolution. Accordingly, ABC Technologies Ltd. is not liable to repay the ₹ 50 lakh borrowed on the basis of the forged resolution.
(iii)The Articles of Association did not authorize the accountant to borrow money on behalf of the company. Further, the supplier did not verify the authority of the accountant before advancing the amount.
As per the exception relating to negligence, the benefit of the Doctrine of Indoor Management is not available where the circumstances surrounding the transaction require an outsider to make an inquiry and the outsider fails to make such inquiry.
In the present question, the accountant had no authority under the Articles to borrow money and the supplier failed to verify his authority. Therefore, the supplier cannot claim the protection of the Doctrine of Indoor Management.
Hence, ABC Technologies Ltd. is not liable to repay the ₹ 10 lakh
borrowed by the accountant.
Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2026, 3(a) (New Scheme).

January 20263(a)5 marksNew Scheme

(a)A group of five professionals decided to start a private limited company in the anti-drone solutions sector under the name Ddrone Pvt. Ltd. in April 2025. The company wants to have its registered office in Mumbai.
On April 2, 2025, it applied for name reservation through RUN (Reserve Unique Name) and received approval on April 6, 2025. On May 15, 2025, due to a delay in documentation, the SPICe + (Simplified Proforma for Incorporating Company Electronically) Plus (INC-32) form for incorporation was filed after 39 days from the date of name reservation.
The company proposed two directors, one Indian resident, one foreign national residing in the U.S. The foreign director did not have a DIN, and his passport was notarized but not apostiled. The company's registered office address was not finalized at the time of filing INC-32. Memorandum of Association and Articles of Association (MoA and AoA) were signed electronically, but one subscriber used a digital signature of a third party (his consultant), with verbal consent.
Based on the above facts and applicable provisions of the Companies Act, 2013, answer the following questions:
(i)Was the name Ddrone Pvt. Ltd. still valid when INC-32 was filed on May 15, 2025?
(ii)Is it mandatory to provide the company's registered office address at the time of incorporation? What is the time limit to furnish it otherwise?
(iii)What are the consequences if the company fails to file the declaration for commencement of business within the prescribed time, and fails to carry on any business or operations? (1 + 2+ 2 = 5 Marks)

(a)(i) As per section 4 of the Companies Act, 2013, upon receipt of an application the Registrar may, on the basis of information and documents furnished along with the application, reserve the name for a period of twenty days from the date of approval or such other period.

In the given question, the company received the approval on 6 April 2025. The approval is valid for 20 days, however, the company filed SPICe+ after 39 days, which falls outside the prescribed period of 20 days. Hence, the name Ddrone Pvt. Ltd. will not be valid when INC- 32 was filed on 15 May 2025.

(ii)As per Section 12(1) of the Companies Act, 2013, a company shall, within thirty days of its incorporation and at all times thereafter, have a registered office capable of receiving and acknowledging all communications and notices as may be addressed to it.

As per Section 12(2), a company shall furnish to the Registrar verification of its registered office within a period of thirty days of its incorporation.

Hence, it is not mandatory to provide the company’s registered office address at the time of incorporation.

(iii)As per section 10A of the Companies Act, 2013,

(1)A company having a share capital shall not commence any business or exercise any borrowing powers unless, a declaration is filed by a director within a period of one hundred and eighty days of the date of incorporation of the company in such form and verified in such manner as may be prescribed, with the Registrar that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration.

(2)If any default is made in complying with the above requirements, the company shall be liable to a penalty of fifty thousand rupees and every officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues but not exceeding an amount of one lakh rupees.

(3)Where no declaration has been filed with the Registrar within a period of one hundred and eighty days of the date of incorporation of the company and the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may, initiate action for the removal of the name of the company from the register of companies under Chapter XVIII.

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

December 20211(a)6 marksOld SchemeLaw changed

Law changed: One Person Company (OPC) residency and conversion limits: Under Rule 3 of the Companies (Incorporation) Rules, 2014 as amended by the Companies (Incorporation) Second Amendment Rules, 2021 (effective 1 April 2021), an Indian citizen, whether resident in India or otherwise, is eligible to incorporate an OPC. The stay requirement in India was reduced from 182 days to 120 days during the immediately preceding financial year. Furthermore, the mandatory conversion thresholds (paid-up capital exceeding ₹ 50 lakhs or average annual turnover exceeding ₹ 2 crore) were omitted, permitting an OPC to convert voluntarily into a private or public company at any time without any waiting period.

(a)(i) Chhavish, an Indian citizen and resident of India formed “Ekta Readymade Garments (OPC) Private Ltd .” as One Person Company on 1st April 2018 with his wife Mrs. Jyoti as nominee. The authorized and paid-up share capital of the company is ₹ 35 lakhs. He got in touch with a readymade garments buyer and was expecting to receive a substantial order by August 2020 where final delivery will be completed by December 2020. To expand the production capacity, the decided to invest an additional capital of ₹ 10 lakhs in plant and machinery. As a result, the company’s authorized and paid -up share capital is now ₹ 45 Lakhs. Promoter of the company seeks your advice. Considering the case and referring the provisions of the Companies Act, 2013, advice:
(A)Who is eligible to act as a member of OPC?
(B)Whether “Ekta Readymade Garments (OPC) Private Ltd.” can convert into any other kind of company as on 1st December 2020?
(C)If the company increases its paid up share capital by ₹ 30 lakhs in August, 2019, can it be converted in any other kind of company immediately?
(3 Marks)
(ii)Following is the extract of the Balance sheet Beltex Ltd. as on 31st March, 2020:
ParticularsAmount
(₹)
Equity & Liabilities
(1)Shareholder’s Fund
(a)Share Capital:
Authorized Capital:
10,000, 12% Preference Shares of ₹ 101,00,000
each
1,00,000 equity shares of ₹ 10 each10,00,00011,00,000
Issued & Subscribed Capital:
8000,12% Preference Shares of ₹ 1080,000
each fully paid up
90,000 equity shares of ₹ 10 each, ₹ 87,20,000
paid up
(b)Reserve and Surplus
General Reserve1,20,000
Capital Reserve75,000
Securities Premium25,000
Surplus in statement of P& L2,00,0004,20,000
(2)Non-Current Liabilities :
(a)Long-term borrowings:
Secured Loan: 12% partly convertible Debenture @ ₹ 100 each 5,00,000
On 1st April, 2020 the company has made final call at ₹ 2 each on 90,000 Equity Shares. The call money was received by 25th April, 2020. Thereafter, the company decided to capitalize it’s reserves by way of bonus @ 1 share for every 4 shares to existing shareholders.
Answer the following questions according to the Companies Act, 2013, in above case:
(A)Which of the above-mentioned sources can be used by company to issue bonus shares?
(B)Calculate the amount to be capitalized from free reserves to issue bonus shares?
(C)If the company did not ask for the final call on April 1st , 2020. Can it still issue bonus shares to its members? (3 Marks)

(a)(i) (A) The memorandum of OPC shall indicate the name of the other person (nominee), who shall, in the event of the subscriber’s deat h or his incapacity to contract, become the member of the company.
Only a natural person who is an Indian citizen whether resident in India or otherwise-
(a)shall be eligible to incorporate One Person Company (OPC);
(b)shall be a nominee for the sole member of One Person Company (OPC).
(B)OPC cannot convert voluntarily into any kind of company unless two years have expired from the date of incorporation, except where the paid up share capital is increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees. 1
Ekta Readymade Garments Ltd. was incorporated on 1st April, 2018.
1 The Ministry of Corporate Affairs w.e.f 1st April, 2021 has removed the condition whereby OPC cannot convert voluntarily into any kind of company unless two years have expired from the date of incorporation, except where the paid up share capital is increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees.
Ekta Readymade Garments Ltd. cannot voluntarily convert the OPC into any other kind of company before expiry of two years from 1st April, 2018 i.e. upto 31st March, 2020. Thus, it can convert into any other kind of company as on 1st December, 2020.
(C)If the paid up share capital of Ekta Readymade Garments Ltd. is increased to ₹ 65 lakhs (35+30), it will be converted into other forms company immediately.
(ii)Issue of Bonus Shares
(1)According to section 63 (1) of the Companies Act, 2013, a company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of -
(i)its free reserves;
(ii)the securities premium account; or
(iii)the capital redemption reserve account.
However, no issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets.
(2)Section 63 (2) provides that the company can issue bonus shares only when the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up.
(A)The following sources can be used by the company to issue bonus shares:
1.General Reserve
2.Securities Premium
3.Surplus in statement of P&L
( B) Amount of bonus shares to be issued= 90,000 shares x 1/4
= 22,500 shares
Amount that ought to be capitalized for issue of = 22,500 x ₹ 10 per share bonus shares= ₹ 2,25,000
Total amount available to be capitalized from = 1,20,000+25,000+2,00,000 free reserves to issue bonus shares= ₹ 3,45,000
Hence, the amount to be capitalized from free reserves to issue bonus shares will be ₹ 2,25,000.
(C)A company can issue bonus shares on only fully paid shares. Hence, if the company did not ask for the final call on 1st April, 2020, it cannot issue bonus shares to its members.
Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2021, 1(a) (Old Scheme).

Also relevant to this chapter

January 2025, 6(a) OR - Srinivas Iron and Steel Ltd. is a public sector listed company engaged in the manufacture of high-end steel sheets to be supplied to various... (Ch. 8)

10,000, 12% Preference Shares of ₹ 10	1,00,000
each
1,00,000 equity shares of ₹ 10 each	10,00,000	11,00,000
Issued & Subscribed Capital:
8000,12% Preference Shares of ₹ 10		80,000
each fully paid up
90,000 equity shares of ₹ 10 each, ₹ 8		7,20,000

General Reserve	1,20,000
Capital Reserve	75,000
Securities Premium	25,000
Surplus in statement of P& L	2,00,000	4,20,000

( B) Amount of bonus shares to be issued		= 90,000 shares x 1/4
= 22,500 shares
Amount that ought to be capitalized for issue of = 22,500 x ₹ 10 per share bonus shares	= ₹ 2,25,000
Total amount available to be capitalized from = 1,20,000+25,000+2,00,000 free reserves to issue bonus shares	= ₹ 3,45,000