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CA FOUNDATION – BUSINESS LAW

DEC. 2021 EXAM
TODAY TARGET – 34 MARK’s

----- Complete Concept Revision With Question & Answer

------ Important Key Aspects
------ Important Questions – For 34 MARK’S
------ CASE STUDY Based Questions

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THE LIMITED LIABILITY PARTNERSHIP ACT, 2008 – 5 MARK’S

MEANING AND CHARACTERISTICS OF LLP:

Question 1.
Explain the Meaning of LLP. State its Characteristics?

Answer
Meaning of LLP
A LLP is a new form of legal business entity with limited liability. It is an alternative
corporate business vehicle that not only gives the benefits of limited liability at low
compliance cost but allows its partners the flexibility of organising their internal structure
as a traditional partnership.
The LLP is a separate legal entity and, while the LLP itself will be liable for the full extent of
its assets, the liability of the partners will be limited. Since LLP contains elements of both ‘a
corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between
a company and a partnership.

Characteristics / Essentials of LLP

1) LLP is a body corporate: LLP is a body corporate formed and incorporated under this
Act and is a legal entity separate from that of its partners.

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2) Perpetual Succession: LLP can continue its existence irrespective of changes in

partners. Death, insanity, retirement or insolvency of partners has no impact on the
existence of LLP.
3) Separate Legal Entity: LLP is a separate legal entity from its partners.
4) Mutual Agency: Further, no partner is liable on account of the un-authorized actions of
other partners.
All partners will be the agents of the LLP alone. No one partner can bind the other partner
by his acts.
5) LLP Agreement: Mutual rights and duties of the partners within a LLP are governed by
an agreement between the partners. In the absence of any such agreement, the mutual
rights and duties shall be governed by the provisions of the LLP Act, 2008.
6) Artificial Legal Person: A LLP is an artificial legal person because it is created by a legal
process and is clothed with all rights of an individual.
7) Common Seal: LLP may have a common seal, if it decides to have one. Thus, it is not
mandatory for a LLP to have a common seal.
8) Limited Liability: Every partner of a LLP is, for the purpose of the business of LLP, the
agent of the LLP, but not of other partners (Section. 26). The liability of the partners will be
limited to their agreed contribution in the LLP
9) Management of Business: Only the designated partners are responsible for legal
compliances.
10) Minimum and Maximum number of Partners: Every LLP shall have least two
partners and shall also have at least 2 individuals as designated partners, of whom at least
one shall be resident in India. There is no maximum limit on the partners in LLP.
11) Business for Profit Only: The essential requirement for forming LLP is carrying on a
lawful business with a view to earn profit. Thus LLP cannot be formed for charitable or
non-economic purpose.
12) E-Filling of Documents: Every form or application of document required under the act
and rules, shall be filed in electronic form on the website www.mca.gov.in and
authenticated by a partner or designated partner of LLP by the use of electronic or digital
signature.

ADVANTAGES OF LLP:

Question 2.
What are the advantages of LLP form of business?

Answer
1) LLP is organized and operates on the basis of an agreement.
2) It provides flexibility without imposing detailed legal and procedural requirements.
3) It enables professional/technical expertise and initiative to combine with financial risk
taking capacity in an innovative and efficient manner.
4) It is easy to form
5) In LLP form, all partners enjoy limited liability
6) Flexible capital structure is there in this form
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7) It is easy to dissolve

Question 3.
"LLP is an alternative corporate business form that gives the benefits of limited
liability of a company and the flexibility of a partnership". Explain.

Answer

LLP is an alternative corporate business form that gives the benefits of limited liability of a
company and the flexibility of a partnership
Limited Liability: Every partner of a LLP is, for the purpose of the business of LLP, the
agent of the LLP, but not of other partners (Section 26 of the LLP Act, 2008). The liability of
the partners will be limited to their agreed contribution in the LLP, while the LLP itself will
be liable for the full extent of its assets.
Flexibility of a partnership: The LLP allows its members the flexibility of organizing their
internal structure as a partnership based on a mutually arrived agreement. The LLP form
enables entrepreneurs, professionals and enterprises providing services of any kind or
engaged in scientific and technical disciplines, to form commercially efficient vehicles
suited to their requirements. Owing to flexibility in its structure and operation, the LLP is a
suitable vehicle for small enterprises and for investment by venture capital.

INCORPORATION OF LLP:

Question 4.
What are the essential elements to incorporate LLP? Also state the steps to
incorporate LLP?

Answer
Under the LLP Act, 2008, the following elements are very essential to form a LLP in India:
To complete and submit incorporation document in the form prescribed with the
Registrar electronically
To have at least two partners for incorporation of LLP
To have registered office in India to which all communications will be made and received
To appoint minimum two individuals as designated partners who will be responsible for
number of duties including doing of all acts, matters and things as are required to be done
by the LLP. Atleast one of them should be resident in India
A person or nominee of body corporate intending to be appointed as designated partner
of LLP should hold a Designated Partner Identification Number (DPIN) allotted by MCA
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To execute a partnership agreement between the partners inter se or between the LLP
and its partners.
In the absence of any agreement the provisions as set out in First Schedule of LLP Act, 2008
will be applied
LLP Name. The LLP cannot have the same name with any other LLP, Partnership Firm or
Company
To create a LLP proper formation documents must be led with the registrar along with
the necessary filing fees.

Steps to Incorporate LLP

1. Name Resevation
The first step to incorporate Limited Liability Partnership is reservation of name of LLP.
Applicant has to file e-Form 1, for ascertaining availability and reservation of the name of
a LLP business.

2. Incorporate LLP
After reserving a name, user has to file e- Form 2 for incorporating a new Limited
Liability Partnership
e-Form 2 contains the details of LLP proposed to be incorporated, partners’/ designated
partners’ details and consent of the partners/designated partners to act as partners/
designated partners

3. LLP Agreement
Execution of LLP Agreement is mandatory as per Section 23 of the Act.
LLP Agreement is required to be filed with the registrar in e-Form 3 within 30 days of
incorporation of LLP.

EFFECTS OF REGISTRATION OF LLP

Question 5.
What are the effects of registration of LLP?

Answer
Effect of registration (Section 14 of Limited Liability Partnership Act, 2008):
On registration, a LLP shall, by its name, be capable of—
1) suing and being sued;
2) acquiring, owning, holding and developing or disposing of property, whether movable or
immovable, tangible or intangible;
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3) having a common seal, if it decides to have one; and

4) doing and suffering such other acts and things as bodies corporate may lawfully do and
suffer.

CHANGE IN NAME OF LLP

Question 6.
What is the procedure for changing the name of Limited Liability Partnership (LLP)
under the LLP Act, 2008?

Answer
Change of name of LLP (Section 17 of LLP Act, 2008):
1. Notwithstanding anything contained in sections 15 and 16, where the Central
Government is satisfied that a LLP has been registered (whether through inadvertence or
otherwise and whether originally or by a change of
name) under a name which —
a) is a name referred to in sub-section (2) of section 15; or
b) is identical with or too nearly resembles the name of any other LLP or body corporate or
other name as to be likely to be mistaken for it,
the Central Government may direct such LLP to change its name, and the LLP shall comply
with the said direction within 3 months after the date of the direction or such longer period
as the Central Government may allow.
2. (i) Any LLP which fails to comply with a direction given under sub-section (1) shall be
punishable with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 5
Lakhs.
(ii) The designated partner of such LLP shall be punishable with fine which shall not be less
than Rs. 10,000 but which may extend to Rs. 1 Lakh.

REGISTERED OFFICE

Question 7.
What are the provisions of Registered office and change therein?

Answer
Registered office of LLP and change therein (Section 13):
(1) Every LLP shall have a registered office to which all communications and notices may
be addressed.
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(2) A document may be served on a LLP or a partner or designated partner thereof by

sending it by post under a certificate of posting or by registered post or by any other
manner, as may be prescribed, at the registered office and any other address specifically
declared by the LLP for the purpose in such form and manner as may be prescribed.
(3) A LLP may change the place of its registered office and file the notice of such change
with the Registrar in such form and manner and subject to such conditions as may be
prescribed and any such change shall take effect only upon such filing.
If the LLP contravenes any provisions of this section, the LLP and its every partner shall be
punishable with fine which shall not be less than Rs. 2,000 but which may extend to Rs.
25,000.

LLP AGREEMENT

Question 8.
State the Contents of LLP Agreement ?

Answer
Following are the contents of LLP Agreement
1. Name of LLP
2. Name & address of Partners & Designated Partners
3. Form of contribution & interest on contribution
4. Profit sharing ratio
5. Remuneration of Partners
6. Rights & Duties of Partners
7. Proposed Business
8. Rules for governing LLP.

PARTNERS AND THEIR RELATIONS

Partner as agent (Section 26):

Every partner of a LLP is, for the purpose of the business of the LLP, the agent of the LLP,
but not of other partners.
Extent of liability of LLP (Section 27):
(1) A LLP is not bound by anything done by a partner in dealing with a person if—
a) the partner in fact has no authority to act for the LLP in doing a particular act; and
b) the person knows that he has no authority or does not know or believe him to be a
partner of the LLP.
(2) The LLP is liable if a partner of a LLP is liable to any person as a result of a wrongful act
or omission on his part in the course of the business of the LLP or with its authority.
(3) An obligation of the LLP whether arising in contract or otherwise, shall be solely the
obligation of the LLP.
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(4) The liabilities of the LLP shall be met out of the property of the LLP.
Extent of liability of partner (Section 28):
(1) A partner is not personally liable, directly or indirectly for an obligation referred to in
sub-section (3) of section 27 solely by reason of being a partner of the LLP.
(2) The provisions of sub-section (3) of section 27 and sub-section (1) of this section shall
not affect the personal liability of a partner for his own wrongful act or omission, but a
partner shall not be personally liable for the wrongful act or omission of any other partner
of the LLP.
Holding out (Section 29):
Any person,
who by words spoken or written or by conduct,
represents himself, or knowingly permits himself to be represented to be a partner in a
LLP
is liable to any person
who has on the faith of any such representation
given credit to the LLP, whether the person representing himself or represented to be a
partner does or does not know that the representation has reached the person so giving
credit.
Unlimited liability in case of fraud (Section 30):
In case of fraud:
In the event of an act carried out by a LLP, or any of its partners,
with intent to defraud creditors of the LLP or any other person, or for any fraudulent
purpose,
the liability of the LLP and partners who acted with intent to defraud creditors or for any
fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the
LLP.
Where any business is carried on with such intent or for such purpose as mentioned in sub-
section (1), every person who was knowingly a party to the carrying on of the business in
the manner afore- said shall be punishable with
imprisonment for a term which may extend to 2 years and
with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 Lakhs.
Whistle blowing (Section 31):
The Court or Tribunal may reduce or waive any penalty leviable against any partner or
employee of a LLP, if it is satisfied that—
such partner or employee of a LLP has provided useful information during investigation
of such LLP; or
when any information given by any partner or employee (whether or not during
investigation) leads to LLP or any partner or employee of such LLP being convicted under
this Act or any other Act.
No partner or employee of any LLP may be discharged, demoted, suspended, threatened,
harassed or in any other manner discriminated against the terms and conditions of his LLP
or employment merely because of his
providing information or causing information to be provided pursuant to sub-section (1).

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Question 9.
Who are the individuals which shall not be capable of becoming a partner of a
Limited Liability Partnership?

Answer
Any individual or body corporate may be a partner in a LLP.
However, an individual shall not be capable of becoming a partner of a LLP, if—
1) he has been found to be of unsound mind by a Court of competent jurisdiction and the
finding is in force;
2) he is an undischarged insolvent; or
3) he has applied to be adjudicated as an insolvent and his application is pending.

Question 10.
What is minimum number of partners in a LLP? What is the effect of number of
partners falling below minimum?

Answer
Minimum number of partners (Section 6):
Every LLP shall have at least two partners.
If at any time the number of partners of a LLP is reduced below two and the LLP carries on
business for more than six months while the number is so reduced, the person, who is the
only partner of the LLP during the time that it so carries on business after those six months
and has the knowledge of the fact that it is carrying on business with him alone, shall be
liable personally for the obligations of the LLP incurred during that period.

Question 11.
What do you mean by Designated Partner? Whether it is mandatory to appoint
Designated partner in a LLP?

Answer
Designated Partner [Section 2(j)]:
"Designated partner" means any partner designated as such pursuant to section 7 of the
LLP Act, 2008.
According to section 7:
1. Every LLP shall have at least two designated partners who are individuals and at least
one of them shall be a resident in India.
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2. If in LLP, all the partners are bodies corporate or in which one or more partners are
individuals and bodies corporate, at least two individuals who are partners of such LLP or
nominees of such bodies corporate shall act as designated partners.
3. Resident in India: For the purposes of this section, the term "resident in India" means a
person who has stayed in India for a period of not less than 182 days during the
immediately preceding one year.

Question 12.
Discuss the conditions under which LLP will be liable and not liable for the acts of the
partner.

Answer
Conditions under which LLP will be liable [Section 27(2) of the LLP Act, 2008]
The LLP is liable if a partner of a LLP is liable to any person as a result of a wrongful act
or omission on his part in the course of the business of the LLP or with its authority.
Conditions under which LLP will not be liable [Section 27(1) of the LLP Act, 2008]
A LLP is not bound by anything done by a partner in dealing with a person if—
1. the partner in fact has no authority to act for the LLP in doing a particular act; and
2. the person knows that he has no authority or does not know or believe him to be a
partner of the LLP.

Question 13.
What are the rights and duties of a partner of LLP in case of his cessation as partner?

Answer
(1) Where a person has ceased to be a partner of a LLP (hereinafter referred to as “former
partner”), the former partner is to be regarded (in relation to any person dealing with the
LLP) as still being a partner of the LLP unless—
(a) the person has notice that the former partner has ceased to be a partner of the LLP; or
(b) notice that the former partner has ceased to be a partner of the LLP has been delivered
to the Registrar.
(2) The cessation of a partner from the LLP does not by itself discharge the partner from
any obligation to the LLP or to the other partners or to any other person which he incurred
while being a partner.
(3) Where a partner of a LLP ceases to be a partner, unless otherwise provided in the LLP
agreement, the former partner or a person entitled to his share in consequence of the death
or insolvency of the former partner, shall be entitled to receive from the LLP—
(a) an amount equal to the capital contribution of the former partner actually made to the
LLP; and
(b) his right to share in the accumulated profits of the LLP, after the deduction of
accumulated losses of the LLP, determined as at the date the former partner ceased to be a
partner.

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A former partner or a person entitled to his share in consequence of the death or

insolvency of the former partner shall not have any right to interfere in the management of
the LLP.

WINDING UP OF LLP

Question 14.
Enumerate the circumstances in which LLP may be wound up by Tribunal.

Answer
Circumstances in which LLP may be wound up by Tribunal (Section 64 of the LLP
Act, 2008):
A LLP may be wound up by the Tribunal:
1. if the LLP decides that LLP be wound up by the Tribunal ;
2. if, for a period of more than six months, the number of partners of the LLP is reduced
below two;
3. if the LLP is unable to pay its debts;
4. if the LLP has acted against the interests of the sovereignty and integrity of India, the
security of the State or public order;
5. if the LLP has made a default in filing with the Registrar the Statement of Account and
Solvency or annual return for any five consecutive financial years; or
6. if the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.

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LLP VS OTHER FORMS OF BUSINESS

Question 15.
Difference Between LLP and a Partnership Firm ?

BASIS LLP PARTNERSHIP

1. Regulating Act The Limited Liability The Indian Partnership Act, 1932.
Partnership Act, 2008

2. Body corporate It is a body corporate It is not a body corporate

3. Separate legal It is a legal entity separate from It is a group of persons with no

entity its members. separate legal entity

4. Creation It is created by a legal process It is created by an agreement

called registration under the LLP between the partners
Act, 2008

5. Registration Registration is mandatory. LLP Registration is voluntary. Only the

can sue and be sued in its own registered partnership firm can sue
name the third parties

6. Perpetual The death, insanity, retirement The death, insanity Retirement or

succession or insolvency of the partner(s) insolvency of the partner(s) may
does not affect its existence of affect its existence It has no
LLP. Members may join or leave perpetual succession.
but its existence continues
forever

7. Name Name of the LLP to contain the No guidelines. The partners can
word limited liability partners have as any name as per their
(LLP)suffix. choice

8. Liability Liability of each partner limited Liability of each partner is

to the extent to agreed unlimited. It can be extended upto
contribution except in case of the Personal assets of the partners.
willful fraud.

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9. Mutual agency Each partner can bind the LLP Each partner can bind the firm as
by his own acts but not the other well as other partners by his own
partners acts.

10. Designated At least two designated partners There is no provision for such
partners and partners atleast one of them under the Indian partnership Act,
shall be resident in India. 1932.

12. Legal Only designated partners are All partners are responsible for all
compliances responsible for all the the compliances and penalties
compliances and penalties under under the Act.
this Act

13. Foreign Foreign nationals can become a Foreign nationals cannot become a
partnership partner in a LLP. partner in a partnership firm.

14. Minor as Minor cannot be admitted to the Minor can be admitted to the
partner benefits of LLP. benefits of the partnership with the
prior consent of the existing
partners.

Question 16.
State the Distinction between LLP and Company?

Basis LLP Company

1. Regulating Act The LLP Act, 2008. The Companies Act, 2013

2. Members/Partners The persons who contribute to The persons who invest the
LLP are known as partners of money in the shares are known
the LLP. as members of the company.

3. Internal The internal governance The internal governance

governance structure of a LLP is governed structure of a company is
Structure by agreement between the regulated by statute (i.e.,
partners. Companies Act, 2013).

Name of the LLP to contain the Name of the public company to

4. Name word “Limited Liability contain the word “limited” and
partnership” or “LLP” as suffix. Private company to contain the
word “Private limited” as
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Suffix

5. Number of Minimum – 2 members Private company:

members/ partners Maximum – No such limit on Minimum – 2 members
the Maximum – 200 members
members in the Act. The Public company:
members of the LLP can be Minimum – 7 members
individuals/or body corporate Maximum – No such limit on the
through the nominees. members.
Members can be organizations,
trusts, another business form or
individuals.

6. Liability of Liability of a partners is Liability of a member is limited

members/ partners limited to the extent of agreed to the amount unpaid on the
contribution except in case of shares held by them.
willful fraud.

7. Management The business of the company The affairs of the company are
managed by the partners managed by board of directors
including the designated elected by the shareholders.
partners authorized in the
agreement

8. Minimum number Minimum 2 designated Private Co. – 2 directors

of partners Public Co. – 3 directors
directors/designated
Partners

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Previous Attempt questions – ( 5 Marks )

Question 1 – State The Meaning of LLP. What are the Relevant Steps to Incorporate LLP.

Question 2 –Diffrence Between LLP & Partnership.

Question 3 – Explain the Essential Elements to Incorporate LLP, and the Steps involved

Under LLP Act 2008.

Question 4 – LLP is a Alternative corporate business form that gives the benefit of Limited

Liability of Company and the Flexibility of partnership Explain.

Question – 5 State the Circumstances under which LLP may be Wound UP by Tribunal
under LLP Act 2008

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THE INDIAN PARTNERSHIP ACT, 1932 - – 16 MARK’S

Question 1
Is it possible for the partners in a firm having majority to expel a partner under the
provisions of the Indian Partnership Act, 1932? Does the firm get dissolved if the
expulsion of a partner is not valid?

Answer
Expulsion of A Partner
According to the provisions of the Indian Partnership Act, 1932 as contained in Section 33,
a partner may be expelled from the partnership subject to the following three conditions:
1. The power of expulsion of a partner should be conferred by the contract between the
partners.
2. The power should be exercised by a majority of the partners.
3. The power should be exercised in good faith which includes interest of partnership,
notice
to the partner to be expelled, and an opportunity of being heard. Hence, mere majority is
not enough.
Accordingly, it is possible for the majority of partners in a firm to expel a partner but it is
subject to fulfillment of other conditions as stated above.

It should be noted that the expulsion of partners does not necessarily result in dissolution
of the firm. The invalid expulsion of a partner also does not put an end to the partnership
even if the partnership is at will and it will be deemed to continue as before. (Jiwan Singh v.
Lakshmi Chand AiR (1935) Lh. 332. Dwaraka Das v. Chuni Lal (1907).

Question 2
What is the procedure of registration of a partnership firm under the Indian
Partnership Act, 1932 ? What are the consequences of non-registration?

Answer
Registration of a Partnership & Consequences of Non-Registration
Procedure: (Section 58 & 59 Indian Partnership Act, 1932)
The registration of a firm may be effected at any time by filing an application in the form of
a statement, giving the necessary information, with the Registrar of Firms of the area. The
application shall be accompanied by the prescribed fee. It shall also state:
(a) the name of the firm;
(b) the place or principal place of business of the firm;
(c) the names of other places where the firm carries on business;
(d) the date when each partner joined the firm
(e) the names in full and permanent address of the partners;
(t) the duration of the firm.

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The statement shall be signed by all the partners or by their agents specially authorized in
this behalf Section 58(i). It shall also be verified by them in the prescribed manner (Section
58(2).
When the Registrar is satisfied that the above provisions have been duly complied with, he
shall record an entry of the statement in the Register of Firms and file the statement
(Section 59). He shall then issue under his hand a certificate of registration.
The non-registration of the firm does not affect the following:
1. The right of a firm or partners of a firm having no place of business in India.
2. The right to file any suit or claim of set off exceeding Rs. 100 in value
3. The right of a partner to sue for the dissolution of the firm, or for the accounts of the
dissolved firm, or for share of the property of the dissolved firm. This disability of a
partner to sue disappears with the dissolution of the firm.
4. The powers of an Official Receiver, Assignee, or Court to realize the property of an
insolvent partner of an unregistered firm.
5. The right of a third party to proceed against an unregistered firm or any of its partners.

6. The right of an unregistered firm to enforce a right arising otherwise than out of a
contract (Section 69(3) and (4).

Question 3
State the modes by which a partner may transfer his interest in the firm in favour of
another person, under the Indian Partnership Act, 1932. What are the rights of such
a transferee?

Answer
Modes by which a partner may transfer his interest entitlements & non entitlements:
According to Section 29 of the Indian Partnership Act, 1932 a partner may transfer his
interest in the firm by sale, mortgage or charge. The transfer may be absolute or partial.
The transfer does not entitle the transferee, during the continuance of the firm:

(a) to interfere in the conduct of the business of the firm, or

(ii) to require accounts of the firm, or
(iii) to inspect the books of the firm
On transfer of interest by a partner, the transferee only becomes entitled to receive share
of profit of the transferring partner. But in this case also the transferee has to accept the
account of profits agreed to by the partners [Section 29(i)].
If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is
entitled to receive the transferring partner’s share in the assets of the firm. For the purpose
of ascertaining that share, he is entitled to an account as from the date of the dissolution
(Section 29(2)).

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Question 4
What do you understand by “Implied Authority” of a partner? Is such authority
subject to any condition? Which of the acts of a partner come within the implied
authority under the Indian Partnership Act,. 1932?

Answer
Implied Authority of a Partner:
Meaning: Where there is no partnership agreement or where the agreement is silent, the
act of a partner which is done to carry on in the usual way, business of the kind carried on
by the firm, binds the firm (Section 19(1) Indian Partnership Act, 1932). This authority of a
partner to bind the firm by his acts is called implied authority. It is subject to the following
conditions:
1. The act done by the partner must relate to the normal business of the firm.
2. The act must be such as is done within the scope of the business of the firm in the usual
Way The act must be done in the name of the firm, or in any other manner expressing or
implying an intention to bind the firm (Section 22).
Acts falling within the Implied Authority of a partner:
1. Purchasing goods on behalf of the firm, in which the firm deals or which are employed in
the firm’s business.
2. Selling goods of the firm.
3. Receiving payment of the debt due to the firm and giving receipts for them.
4. Settling accounts with the persons dealing with the firm.
5. Engaging servants for the partnership business.
6. Borrowing money on the credit of the firm.
7. Drawing, accepting, indorsing bills and other negotiable instruments in the
name of the firm.
8. Pledging any goods of the firm for the purpose of borrowing money.
9. Employing a solicitor to defend an action against the firm for goods supplied.

Question 5
“Mere sharing in the profits of a business is not a conclusive proof of existence of
partnership.”- Comment.

Answer
Sharing of Profit
According to Section 4 of the Indian Partnership Act, 1932, “Partnership is the relation
between persons who have agreed to share the profits of a business carried on by all or any
of them acting for all”. This clearly reveals that sharing of profits of a business is an
important criterion of partnership. But in determining whether it is conclusive evidence of
partnership or not, the regard shall be had to the real relations between the parties, as
shown by all relevant facts taken together. Section 6 of the Indian Partnership Act, 1932,
categorically lays down that receipt by a person of a share of the profits of a business does

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not by itself make him a partner with the persons carrying on the business as there are
number of cases where the persons sharing the profits do not have relationship of partners.
For instance, in the following cases partnership relation does not exist:-
1. Joint owners of some property in sharing of profits or gross returns arising from the
property.
2. A leader of the firm who receives a share of profit.
3. A widow or child of a deceased partner who receives a share of profit.
4. A servant or agent who receives a share of profit as part of his remuneration.
5. A person who receives a share of profit in consideration of sale of business or goodwill of
the business.
Hence, mere participation in the profits of a trade is not a conclusive evidence of
partnership

Question 6
Ram, Shyam and Gopal are partners in a firm. Ram retires. Shyam and Gopal
continue to carry on firm’s business in the same “firm name”. Do you agree that in
this situation change in the relationship between partners is involved, but this is not
extinguishment of the existence of the firm itself? Give reasons.

Answer
Effect of Retirement of Partner
As per the provision of Section 39 of the Indian Partnership Act, 1932, “The dissolution of
partnership between all the partners of a firm is called the dissolution of firm.” But when
one or more partner cease to be a partner in a firm, but other continue the business of
partnership,
it is called dissolution of partnership. Thus in this case when Ram retires and Shyam and
Gopal continue to carry on firm’s business in the old firm’s name. The firm in such a case is
called a reconstituted firm. Re-constitution of a firm involves a change in the relation of
partner and not the end of the firm.

Question 7
Explain the provisions of the Indian Partnership Act, 1932 relating to the creation of
Partnership by holding out. Upto what extent such partner will be liable to the
Partnership firm.

Answer
Partnership by ‘Holding Out’
According to Section 28 of the Indian Partnership Act, 1932 “anyone who by words spoken
or written or by conduct represents himself, or knowingly permits himself to be
represented, to be a partner in a firm, is liable as a partner”. The statement includes with its
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purview representation by ail possible means enumerated in this section. Thus the person
sought to be charged with liability by holding out must have done something which
amounts to a representation that he was a partner in the business. This is known as
creation of partnership by ‘holding out’.
Extent of liability of a partner by holding out:
(i) A partner by holding out is liable as a partner in the firm to anyone who has on the faith
of, any such representation gives credit to the firm, whether the person representing
himself or represented to be a partner does or does not know that the representation has
reached the person so giving credit [section 28(1)].
(ii) Provisions of section 28 are also applicable to a former partner who has retired from
the firm without giving proper public notice of his retirement. In such case a person, who,
even subsequent to the retirement, gives credit to the firm on behalf that he was a
partner, will be entitled to hold him liable.
(iii) Where after a partner’s death the business is continued in the old firm name, the
continued use of that name or of the deceased partner’s name as a part thereof shall not
be itself make his legal representative or his estate liable for any act of the firm done after
his death [Section 28(2)].
(iv) If a person holds himself out to be the partner of a firm, he becomes personally liable.
He does not become partner of the firm and is not entitled to any rights as against those
who in fact are partners in the firm. By holding out he does not become an agent of the firm

Question 8
Describe the provisions of Indian Partnership Act. 1932 regarding the admission of
minor in the partnership firm. State the rights and liabilities of such minor before or
after he attains majority.

Answer
Minor’s Admission into a Partnership Firm: According to Section 11 of the Indian Contract
Act, 1872 an agreement by or with a minor is void (Mohri Bibi Vs. Dharm Das Ghose). As
such, a minor is incapable of entering into a contract of partnership. But with the consent of
all the partners for the time being, a minor may be admitted to the benefits of partnership
[Section 30(1)]. This provision is based on the rule that a minor cannot be a promisor, but
he can be a promisee or a beneficiary.
Position before and on his attaining the age of majority
Position before attaining majority:
Rights:
1. He has a right to such share of the property and of profits of the firm as may have been
agreed upon.
2. He has a right to have access to and inspect and copy any of the accounts of the firm but
not books. (Section 30(2).
3. When he is not given his due share of profit, he has a right to file a suit for his share of the
property of the firm. But he can do so only if he wants to sever his connection with the
firm. [Section 30(4)].
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Liabilities:
1. The liability of the minor partner is confined only to the extent of his share in the profits
and property of the firm. Over and above this, he is neither personally liable nor is his
private estate liable [Section 30(3)].
2. He cannot be declared insolvent, but if the firm is declared insolvent his share in the firm
vests in the Official Receiver or Official Assignee.

Position on attaining majority:

On attaining majority such a minor has to decide within 6 months whether he shall
continue in the firm or leave it. These six months run from the date of his attaining majority
or from the date when he first comes to know that he had been admitted to the benefits of
partnership whichever date is later. Within this period he should give a public notice of his
choice: (a) to become, or (b) not to become, a partner in the firm.
If he fails to give a public notice, he is deemed to have become a partner in the firm on the
expiry of the said six months. [Section 30(5)].
When such a minor elects to become a partner:
1. He becomes personally liable to third parties for all acts of the firm done since he was
admitted to the benefits of partnership.
2. His share in the property and profits of the firm is the share to which he was entitled as a
minor partner [Section 30(7)].
When such a minor elects not to become a partner:
1. His rights and liabilities continue to be those of a minor up to the date of the notice.
2. His share is not liable for any acts of the firm done after the date of the public notice.
3. He is entitled to sue the partners for his share or the property and profits in the firm
[Section 30(8)].

Question 9
Ram & Co., a firm consists of three partners A, B and C having one third share each in
the firm.
According to A and B, the activities of C are not in the interest of the partnership and
thus want to expel C from the firm. Advise A and B whether they can do so quoting
the relevant provisions of the Indian Partnership Act.

Answer
Normally it is not possible for the majority of partners to expel a partner from the firm
without satisfying the conditions as laid down in Section 33 of the Indian Partnership Act,
1932. The essential conditions before expulsion can be done are:
(i) power of expulsion should exist in the partnership deed (contract between the partners.
(ii) power has been exercised by the majority of the partners in good faith.
The test of good faith includes:
(a) that the expulsion must be in the interest of the partnership;
(b) that the partner to be expelled is served with a notice; and
(c) that the partner has been given an opportunity of being heard.
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Thus, in the given case A and B the majority partners can expel the partner only if the
above conditions are satisfied and procedure as stated above has been followed.
Further the invalid expulsion of a partner does not put an end to the partnership and it will
be deemed to continue as before.

Question 10
When does dissolution of a partnership firm take place under the provisions of the
Indian Partnership Act, 1932? Explain.

Answer
Dissolution of Firm: The Dissolution of Firm means the discontinuation of the jural relation
existing between all the partners of the Firm. But when only one of the partners retires or
becomes in capacitated from acting as a partner due to death, insolvency or insanity, the
partnership, i.e., the relationship between such a partner and other is dissolved, but the
rest may decide to continue. In such cases, there is in practice, no dissolution of the firm.
The particular partner goes out, but the remaining partners carry on the business of the
Firm. In the case of dissolution of the firm, on the other hand, the whole firm is dissolved.
The partnership terminates as between each and every partner of the firm Dissolution of a
Firm may take place (Section 39 - 44)
(a) as a result of any agreement between all the partners (i.e., dissolution by agreement);
(b) by the adjudication of all the partners, or of all the partners but one, as insolvent (i.e.,
compulsory dissolution);
(c) by the business of the Firm becoming unlawful (i.e., compulsory dissolution);
(d) subject to agreement between the parties, on the happening of certain contingencies,
such as:
(i) effluence of time; (ii) completion of the venture for which it was entered into; (iii)
death of a partner; (iv) insolvency of a partner. In case of death, it is to be noted that the
partners may make a contrary agreement only if their number exceeds two. If there are
only two partners the only result of either’s death will necessarily be the dissolution of the
firm. This was made clear by the Supreme Court in Commissioner of Income-tax vs. G.S.
Mills.
(e) by a partner giving notice of his intention to dissolve the firm, in case of partnership at
will and the firm being dissolved as from the date mentioned in the notice, or if no date is
mentioned, as from the date of the communication of the notice; and
(f) by intervention of court in case of: (i) a partner becoming the unsound mind; (ii)
permanent incapacity of a partner to perform his duties as such; (iii) Misconduct of a
partner affecting the business; (iv) willful or persistent branches of agreement by a
partner; (v) transfer or sale of the whole interest of a partner; (vi) improbability of the
business being carried on save at a loss; (vii) the court being satisfied on other equitable
grounds that the firm should be dissolved.

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THE COMPANIES ACT, 2013 – 13 MARK’S

Question 1
Describe Meaning and characteristics of company.

Answer
Meaning:
In terms of the Companies Act, 2013 Section 2(20) : A “company” means a company
incorporated under this Act or under any previous company law.

NATURE AND CHARACTERISTICS OF A COMPANY:

1. Corporate personality: It is a different ‘person’ from the members who compose it. A
shareholder cannot be held liable for the acts of the company even if he holds virtually the
entire share capital. A member does not even have an insurable interest in the property of
the company.
2. Perpetual Succession: Members may die or change, but the company goes on. Death,
Unsoundness and Insolvency of all the members do not affect the existence of company.
3. Limited Liability: The liability of members will be limited
• In case of company limited by shares: Liability will be limited till the unpaid value of
shares
• In case of company limited by guarantee: Liability will be limited till the amount of
guarantee amount
• In case of unlimited liability company: In unlimited liability company liability will be
unlimited but only towards company not towards third party
4. Artificial Legal Person: A company is an artificial person created by the process other
than natural birth. It legal or judicial as it is created by law.
5. Common Seal: Common seal is the official signature of company but by amendment of
2015 now there is no compulsion on company to have common seal.

Question 2.
What is corporate veil and state the circumstances when this veil will be lifted.

Answer
Meaning of Corporate veil: The term Corporate Veil refers to the concept that members of a
company are shielded from liability connected to the company’s actions. If the company

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incurs any debts or contravenes any laws, the corporate veil concept implies that members
should not be liable for those debts

Case-law: Salomon v. Salomon and Co. Ltd.

Once a company has been validly constituted under the Companies Act, it becomes a legal
person distinct from its members and for this purpose it is immaterial whether any
member holds a large or small proportion of the shares, and whether he holds those shares
as beneficially or as a mere

Lifting of Corporate Veil:

1. To determine the character of the company i.e. to find out whether co-enemy or
friend: Daimler Co. Ltd v/s Continental Tyre & Rubber Co. Ltd.: It was held that a company
will be regarded as having enemy character if the persons having de facto control of
company are residents of enemy country or wherever they may be they are acting on
instructions of enemy.

2. To protect revenue/tax: (Re.Dinshaw Manekjee) : The assessee was receiving Huge

dividend and interest income and he created three companies to reinvest the income for
reducing the tax burden, the companies were having no business other than receiving
dividend and giving back to assessee as a pretended loan. It was held that company was not
more than the assesse himself and the assessee was held liable to pay the tax.

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.

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Question 3.
Describe about Private company and public company.

Answer
Private Company:
Private company is a company which may by its articles restrict the following:
• Restrict the right to transfer shares.
• Limits the number of members to 200 (which excludes Employees/Ex- employees and
treating Joint holders as single member)
• Prohibits invitation to public to subscribe for any securities
Other Criteria:
• It should have Minimum 2 members and maximum 200 (other than OPC)
• It should have minimum 2 directors

Public Company:
• Is a company which is not private company is considered as Public Company.
• A subsidiary of Public company is also a public company.
Other Criteria:
• It should have minimum 7 members and there is no maximum limit.
• It should have minimum 3 directors

Question 4.
Give Meaning of Holding and Subsidiary company.

Answer
If one company is holding
Either more than:
50% control over the composition of Board of Directors (Management control)
e.g. If B ltd is having 6 directors and out of that more than 50% i.e. 4 or more directors can
be appointed or removed by the direction of A ltd than A ltd will be considered as holding
company and B ltd will be considered as subsidiary.

50% control over voting power (Ownership control)

e.g if B ltd is having Rs. 10 lacs as Paid up capital and A ltd. is holding more than 50% of
paid up capital than A ltd will be considered as holding company and B ltd will be
considered as subsidiary company.

Indirect holding
e.g If A ltd is holding company of B ltd and B ltd is holding company of C ltd than A ltd will
by default become holding company of C ltd
In other company

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Then it is said to be the holding company of another company

Question 5.
What is an associated company?

Answer
Related Provision ( Associate Company):”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. Explanation provides that “significant influence” means control of
at least twenty per cent. Of total share capital, or of business decisions under an agreement.

Question 6.
Give meaning of Government Company.

Answer
Where Minimum 51% shares are held by:
• State government
• Central Government

• State and Central Government combined

It is known as Government Company.
Audit of such company will be done by Comptroller & Auditor General of India.

Question 7.
What is meant by a Guarantee Company? State the similarities and dissimilarities
between a Guarantee Company and a Company having Share Capital.

Answer
Meaning: The company having the liability of its members limited by the memorandum to
such amount as the members may respectively undertake by the memorandum to
contribute to the assets of the company in the event of its being wound up.
Thus, the liability of the member of a guarantee company is limited upto a stipulated sum
mentioned in the memorandum. Members cannot be called upon to contribute beyond that
stipulated sum.

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Similarities and dis-similarities between the Guarantee Company and the Company having
share capital:

Similarity: The common features between a ‘guarantee company’ and ‘share company’ are
legal personality and limited liability.

Difference: In the guarantee company the members may be called upon to discharge their
liability only after commencement of the winding up and only subject to certain conditions;
but in the company limited by shares, they may be called upon to do so at any time, either
during the company’s life-time or during its winding up.

Question 8.
Describe about Section 8 company.

Answer
Meaning:
When a person or an AOP wants to be registered as a limited company and it -
a. Has in its objects the promotion of Commerce, Arts , Sports, Education, Research, Social
welfare, Religion, Charity, Protection of Environment or any such other object.
b. Intends to apply its profit or other income on promoting its objectives
c. Intends to prohibit the payment of any dividend to its members.

Characteristics, advantages and disadvantages:

The Central Government may permit such registration as a limited company under this
section without addition of words “Limited” and “Private Limited”.
A firm can be a member of such company.
The MOA and AOA of this company cannot be altered without government’s prior
approval.
Central Government can also revoke the license so granted after giving an opportunity of
being heard to the company.
Government can also pass order of winding up of such company.
Government can also pass order for amalgamation of such company

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Question 9.
Describe about OPC.

Answer.
Meaning: ”One person company means a company which has only one person as a
member.”

Provisions:
Person incorporating an OPC must be a natural person ,an Indian Citizen and Resident in
India.
MOA of this company should also include the name of a nominee who, in case of
incompetence of original member become the member of such company.
The nominee must also be the Indian Citizen as well as Resident and must give a written
consent to be the nominee for such OPC.
No person shall be eligible to incorporate more then one OPC or be a nominee of such
company.

Nominee’s name with the written consent should be filed with ROC .
Nominee may withdraw his consent at anytime by giving notice to sole member of the
company. In such a case, the sole member shall give another nomination in the same
manner within 30 days of withdrawal.
When the sole member dies or becomes incapacitated from contracting then the nominee
is sole member, he has to nominate another natural person.
Prohibition on Voluntary Conversion: OPC cannot get itself converted into any other
company until 2 years of Incorporation

Mandatory Conversion: OPC should convert itself to private or public co. in the
following situations:
o Where paid up capital exceeds Rs.50 lakhs; or
o Where the average annual turnover for the past 3 F.Y. exceeds Rs.2 Crores;or
o Within 30 days , the OPC shall give notice of its conversion to the ROC.

Question 10
Describe about Doctrine of Ultravires

Answer
Meaning:
The meaning of the term ultra vires is simply “beyond (their) powers”.
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
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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.

The whole position regarding the doctrine of ultra vires can be summed up as:
o When an act is performed, which though legal in itself, is not authorized by the object
clause of the memorandum, or by the statute, it is said to be ultravires the company, and
hence null and void
o An act which is ultravires, the company cannot be ratified even by the unanimous consent
of all the shareholders.
o An act which is ultravires the directors, but intravires the company can be ratified by the
members of the company through a resolution passed at a general meeting.
o If an act is ultravires the Articles, it can be ratified by altering the Articles by a Special
Resolution at a general meeting.

Question 11.
Describe about Doctrine of Constructive notice and indoor management.

Answer
Doctrine of Constructive Notice:
This doctrine is in favour of a company i.e., it creates a presumption in favour of a
company.
Effect Of this doctrine:
Once registered MOA and AOA becomes the public documents. Therefore, any person
dealing with company is presumed to have read the Memorandum and Articles correctly.
The doctrine prevents any person dealing with a company alleging that he did not read
the provisions contained in MOA and AOA.

Case Law: (Kotla Venakataswamny v/s C Rammurthi)

The Articles of a company required that all the documents and deeds of the company
shall be signed by MD, the secretary and a working director of a company.
A mortgage deed was signed by secretary and a working director only.
It was held that the mortgage deed was invalid even though the plaintiff had acted in
good faith and money was utilised for benefit of the company.

Doctrine of Indoor Management

This Doctrine operates in favour of the outsiders.
Meaning:
As per this doctrine, outsiders dealing with the company are not required to enquire into
the internal management of the company.

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Outsiders dealing with the company are entitled to assume that as far as internal
proceedings of the company are concerned, everything has been done regularly.

Effect: If a contract is entered into on behalf of company by any director or officer of

company, It is enforceable against the company if provisions contained in the MOA and
AOA are fulfilled , even though while entering into a contract some irregularity had arisen
of which the outsider was unaware.

Case law : (Royal British Bank v/s Turquand)

The articles of a company stated that the directors could borrow money on behalf of a
company, if they are authorized by a resolution passed by the shareholders in GM.
The directors borrowed money from T without being authorized by shareholders.
T lent money assuming that shareholders had authorized the directors.
It was held that borrowing of money without any authorization was internal irregularity
and since had no Knowledge of such irregularity he was not bound

Conclusion:
The benefit can be availed:
If the person has knowledge of the MOA and AOA
He has no knowledge of internal irregularity.

Question 12.
Describe the concept of shares and share capital.

Answer
Meaning: A share represents such proportion of the interest of the shareholders as the
amount paid up thereon bears to the total capital payable to the company. It is a measure of
the interest in the company’s assets to which a person holding a share is entitled.

Equity share capital —

Meaning: ‘Equity share capital’’, with reference to any company limited by shares, means all
share capital which isnot preference share capital;
Types:
(1) with voting rights; or
(2) with differential rights as to dividend, voting or otherwise in accordance with
prescribed rules;

Preference Share capital:

Meaning: ‘Preference share capital’’, with reference to any company limited by shares,
means that part of theissued share capital of the company which carries or would carry a
preferential right with respect to—
— 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
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— 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;

Question 13.
Describe about the consequences where company was registered by providing false
information.

Answer
Furnishing of false or incorrect information or suppression of material fact at the time of
incorporation (i.e. at the time of Incorporation): If any person furnishes any false or
incorrect particulars of any information or suppresses any material information, of which
he is aware in any of the documents led with the Registrar in relation to the registration of
a company, he shall be liable for action for fraud under section 447.
Company already incorporated by furnishing any false or incorrect information or
representation or by suppressing any material fact (i.e. post Incorporation): Where, at any

time after the incorporation of a company, it is proved that the company has been got
incorporated by furnishing any false or incorrect information or representation or by
suppressing any material fact or information in any of the documents or declaration filed or
made for incorporating such company, or by any fraudulent action, the promoters, the
persons named as the first directors of the company and the persons making declaration
under this section shall each be liable for action for fraud under section 447.

Order of the Tribunal :

Where a company has been got incorporated by furnishing false or incorrect information or
representation or by suppressing any material fact or information in any of the documents
or declaration led or made for incorporating such company or by any fraudulent action, the
Tribunal may, on an application made to it, on being satisfied that the situation so
warrants,—
o pass such orders, as it may think fit, for regulation of the management of the company
including changes, if any, in its memorandum and articles, in public interest or in the
interest of the company and its members and creditors; or
o direct that liability of the members shall be unlimited; or
o direct removal of the name of the company from the register of companies; or
o pass an order for the winding up of the company; or
o pass such other orders as it may deem fit:
o Provided that before making any order,—
o the company shall be given a reasonable opportunity of being heard in the matter; and
o Tribunal shall take into consideration the transactions entered into by the company,
including the obligations, if any, contracted or payment of any liability.

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14. Explain MEMORANDUM OF ASSOCIATION & Its Contents ?

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 is the very foundation on which the whole edifice of the company is built.

Object of registering a memorandum of association:

It contains the object for which the company is formed and therefore identifies the
possible scope of its operations beyond which its actions cannot go.

It enables shareholders, creditors and all those who deal with company to know what its
powers are and what activities it can engage in.

A memorandum is a public document under Section 399 of the Companies Act, 2013.
Consequently, every person entering into a contract with the company is presumed to have
the knowledge of the conditions contained therein.

The shareholders must know the purposes for which his money can be used by the
company and what risks he is taking in making the investment.

A company cannot depart from the provisions contained in the memorandum however
imperative may be the necessity for the departure. It cannot enter into a contract or engage in any
trade or business, which is beyond the power confessed on it by the memorandum. If it does so, it
would be ultra vires the company and void.

As per Section 4, Memorandum of a company shall be drawn up in such form as is

given in Tables A, B, C, D and E in Schedule I of the Companies Act, 2013.
Table A is a form for memorandum of association of a company limited by shares.
Table B is a form for memorandum of association of a company limited by guarantee and
not having a share capital.
Table C is a form for memorandum of association of a company limited by guarantee and
having a share capital.
Table D is a form for memorandum of association of an unlimited company.
Table E is a form for memorandum of association of an unlimited company and having
share capital.
The memorandum and articles of a company must be as closed to model forms, as possible,
depending upon the circumstances.

8. Content of the memorandum: The memorandum of a company shall state—

(a) the name of the company (Name Clause) with the last word ―Limited‖ in the case of a
public limited company, or the last words ―Private Limited‖ in the case of a private limited
company. This clause is not applicable on the companies formed under section 8 of the Act.

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(b) the State in which the registered office of the company (Registered Office clause) is to
be situated;

(c) the objects for which the company is proposed to be incorporated and any matter
considered necessary in furtherance thereof (Object clause);
If any company has changed its activities which are not reflected in its name, it shall change
its name in line with its activities within a period of six months from the change of activities
after complying with all the provisions as applicable to change of name.

(d) the liability of members of the company (Liability clause), whether limited or
unlimited

(e) the amount of authorized capital (Capital Clause) divided into share of fixed amounts
and the number of shares with the subscribers to the memorandum have agreed to take,
indicated opposite their names, which shall not be less than one share. A company not
having share capital need not have this clause.

(f) the desire of the subscribers to be formed into a company. The Memorandum shall
conclude with the association clause. Every subscriber to the Memorandum shall take
atleast one share, and shall write against his name, the number of shares taken by him.

The above clauses of the Memorandum are called compulsory clauses, or ―Conditions‖. In
addition to these a memorandum may contain other provisions, for example rights
attached to various classes of shares.
The Memorandum of Association of a company cannot contain anything contrary to the provisions
of the Companies Act. If it does, the same shall be devoid of any legal effect. Similarly, all other
documents of the company must comply with the provisions of the Memorandum.

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Important Questions
Q. 1 What is corporate veil and state the circumstances when this veil will be lifted.

Q. 2 Give Meaning of Holding and Subsidiary company. Explain Its Features

Q. 3 An ultra vires contract can never be made binding on the company. It cannot become
“Intravires” by reasons of estoppel, acquiescence, Iapse of time, delay or ratification.
Explain This Statement with Reference Case Law.

Q. 4 Describe about Doctrine of Constructive notice and indoor management.

Q. 5 Describe about the consequences where company was registered by providing false
information.

Q. 6 Define OPC. Explain its Essentials Points

Q. 7 Define Article Of Association. And provide the contents and model of articles of
association.

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CASE STUDY BASED QUESTIONS

Problem – 1 Mayur and Nupur purchased a taxi to ply it in partnership. They had done
business for about a year when Mayur, without the consent of Nupur, disposed of the taxi.
Nupur brought an action to recover his share in the sale proceeds. Mayur’s only defence was
that the firm was not registered. Will Nupur succeed in suit?

Solution Hint:- Principle of mutual agency will be applicable. Thus, Nupur is bound by the
action of Mayur

Problem – 2 Comment on the following statements: (i) In the absence of agreement, the
partner cannot claim interest on advances and loans given by him to the partnership firm.

Solution Hint:-The statement is partly true because interest on capital will be payable only if it
is provided in the agreement. But partner is entitled to interest on advance @ 6% even if there
is no agreement in this behalf

Problem – 3 A,B and C were partner in a firm of drapers. The partnership deed authorised the
expulsion of a partner when he was found guilty of flagrant breach of duty. A was convicted of
traveling without ticket. On this ground, he was expelled by the other partners B and C. Is the
explusion justified?

Solution Hint:-No, the expulsion is not justified.

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Problem - 4 Akash, Ashish and Anil were partners in a firm. By his willful neglect and
misconduct Anil caused serious loss to the business of the firm. After several warnings to Anil,
Akash and Ashish passed a resolution expelling Anil from the firm. By another resolution they
admitted Abhishek as a partner in place of Anil. Anil objects to his expulsion as also to the
admission of Abhishek. Is he justified in his objections?

Solution Hint:-The expulsion is justified as it requires majority approval, Further, admission is

also valid as it requires unanimous approval as it is present in this case

Problem – 5 Arun, Varun andTarun started a Kirana business in Chennai on 1st January, 2012
for a period of five years. The business resulted in a loss of ` 20,000 in the first years, `25,000 in
the second year and ` 35,000 in the third year, Varun and Tarun wish to dissolve the firm while
Arun wants to continue to business. Advise Varun and Tarun.

Solution Hint:-In case of continuous losses, Partners can move to Court for the dissolution of
Firm

Problem – 6 X Limited’s almost all the equity shares were held by Mr. Raju, he was also
debenture holder of the company which had charge on company’s asset
After few years the company goes into liquidation and its assets were insufficient to pay its
creditors Other secured creditors of the company claimed that Mr. Raju being owner of the
company should not be allowed to have claim on company’s assets as debenture holder
Can Mr. Raju have claim on the assets of the company as debenture holder?

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Solution

Provision: As per the provisions of the Companies Act, 2013, corporate Veil refers to a
legal conceptwhereby the company is identified separately from the members of the
company. The term CorporateVeil refers to the concept that members of a company are
shielded from liability connected to the company’s actions. If the company incurs any debts
or contravenes any laws, the corporate veil concept implies that members should not be
liable for those errors. The separate legal entity is the unique feature of a company. In other
words, when a company is registered, it is clothed with a legal personality and has almost
same rights and powers as a human being.Its existence is distinct and separate from that of
its members. Equity shareholders are the owners of the company while preference
shareholder, debenture holders, etc. are the creditors of the company. In the event of
liquidation of the company, creditors are the first who are paid out from the assets of the
company while after paying them all the balance would be paid to equity shareholders.
(Salmon Vs. Salmon)

Facts of the Case: In the given case, Mr. Raju was the only shareholder of all the equity
shares of X Limited and he was also the debenture holder of that company which had
charge on company’s assets. Later on, when company went into liquidation, its assets fell
insufficient to pay its creditors. Other secured creditors of the company claimed that Mr.
Raju being owner of the company should not be allowed to have claim on company’s assets
as debenture holder.

Conclusion: Though Mr. Raju, being equity shareholder of whole shares, is owner of the
company, he is also the creditor. And Mr. Raju is a separate person and the company too is
a separate legal entity. Being a debenture holder of the company, Mr. Raju is also the
creditor and can rank as a creditor for debentures held by him

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