Company law MCQ Quiz - Objective Question with Answer for Company law - Download Free PDF

The correct answer is 'Doctrine of indoor management'

Key Points

• Doctrine of indoor management:
  • The doctrine of indoor management is an important principle in corporate law that acts as an exception to the doctrine of constructive notice.
  • The doctrine of constructive notice states that individuals dealing with a company are presumed to have knowledge of the company's public documents, such as its memorandum and articles of association.
  • However, the doctrine of indoor management protects outsiders (e.g., creditors, investors) dealing with the company by allowing them to assume that internal company procedures have been properly followed, even if they are not aware of the internal workings.
  • This principle ensures that third parties are not unfairly disadvantaged due to irregularities or non-compliance within the company’s internal processes.
  • The doctrine of indoor management safeguards innocent third parties and promotes trust in corporate dealings by mitigating the limitations of the doctrine of constructive notice.

Additional Information

• Other options and why they are incorrect:
  • Lifting the corporate veil:
    • Lifting the corporate veil refers to disregarding the separate legal entity of a corporation to hold its shareholders or directors personally liable for the company's actions or debts.
    • It is unrelated to the doctrine of constructive notice or indoor management.
  • Oppression and mismanagement:
    • This concept is concerned with protecting minority shareholders from unfair treatment by majority shareholders or mismanagement by company directors.
    • It does not address the limitations of the doctrine of constructive notice or provide protection to third parties dealing with the company.
  • Doctrine of ultra vires:
    • This doctrine applies to acts performed by a company that are beyond the scope of its powers as defined in its memorandum of association.
    • It is a distinct legal concept and does not directly relate to the issue of constructive notice or indoor management.

The correct answer is 'Minimum number of Directors in One Person Company is 1'

Key Points

• One Person Company (OPC):
  • An OPC is a company that can be incorporated by a single individual as per the Companies Act, 2013 in India.
  • It is a special structure designed to encourage small entrepreneurs to start their own ventures without the need for multiple partners.
• Minimum number of Directors:
  • The Companies Act, 2013 mandates that an OPC must have at least one director. This aligns with the concept of the OPC being operated by a single person.
  • However, an OPC can have up to a maximum of 15 directors, subject to compliance with the legal provisions.
• Flexibility in management:
  • The structure of the OPC is designed to give individuals flexibility and control over their business operations without requiring additional directors.
  • The single director can make decisions quickly without requiring consensus from others, which is advantageous for small-scale businesses.

Additional Information

• Option 2: Minimum 3 Directors:
  • This requirement applies to a Private Limited Company, not an OPC. A private company must have a minimum of two directors, but three is not the default requirement for any company type.
• Option 3: Minimum 4 Directors:
  • This is incorrect as no business structure under the Companies Act mandates a minimum of four directors.
• Option 4: Minimum 5 Directors:
  • This applies to a Public Limited Company. A public company must have at least three directors, not five.

The correct answer is 'Fiction theory, Concession theory, Symbolist theory, and Savigny, Salmond, Dicey's support for Fiction theory'

Key Points

• Fiction Theory:
  • Fiction theory posits that only human beings can be called persons in the legal sense, and corporate personalities are legal fictions created by law to enable certain legal functions.
  • It emphasizes that corporations are artificial entities and do not possess actual will or consciousness like natural persons.
  • Supported by legal scholars like Savigny, Salmond, and Dicey, this theory views corporations as constructs of the legal system, existing purely for convenience and legal requirements.
• Concession Theory:
  • Concession theory states that corporate bodies acquire their legal personality only when granted by the law or state authority.
  • This theory suggests that the state has control over the creation and recognition of corporate entities, emphasizing their dependence on legal provisions.
  • It reflects the idea that corporations exist as privileges conferred by the state rather than inherent entities.
• Symbolist or Brackets Theory:
  • Symbolist theory, also known as Brackets Theory, asserts that the rights and duties of a corporation are ultimately the rights and duties of its members.
  • Under this theory, the corporate entity is seen as a "symbol" or "bracket" that represents the collective rights and responsibilities of its members.
  • This theory focuses on the human beings behind the corporate entity rather than treating the corporation itself as a separate individual.

Additional Information

• Incorrect Options:
  • Option 1: Fiction theory is not referred to as 'Organic Theory'. Organic theory is a separate idea that views corporations as living organisms with their own will, distinct from Fiction theory.
  • Option 2: This option incorrectly excludes Fiction theory supporters (Savigny, Salmond, and Dicey) and mixes unrelated elements, making it incomplete and inaccurate.
  • Option 3: While Fiction and Concession theories are included, the exclusion of Symbolist theory and Fiction theory supporters makes this option partially correct but ultimately insufficient.
• Organic Theory:
  • Organic theory, often confused with Fiction theory, treats corporations as natural entities with their own will and existence, similar to living organisms.
  • This theory contrasts sharply with Fiction theory, which views corporations as artificial legal constructs.

The correct answer is 'Option 1: (A)-(IV), (B)-(I), (C)-(II), (D)-(III)'

Key Points

• Lifting the Corporate Veil:
  • The principle of lifting the corporate veil is established in the case of Salomon v. Salomon.
  • It refers to disregarding the separate legal personality of the company to hold shareholders or directors accountable for the company’s actions.
  • This case laid the foundation for recognizing the company as a separate legal entity distinct from its owners, but also acknowledged instances where this distinction could be ignored to prevent fraud or injustice.
• Invitation to the Public in the Context of Prospectus:
  • In the case Nash v. Lynde, the concept of an invitation to the public is explained concerning the issuance of a prospectus.
  • A prospectus is a formal legal document issued to the public to invite investments in shares or debentures of a company.
  • This case highlights the legal implications of issuing a prospectus and the liabilities associated with misleading or incomplete information.
• Doctrine of Ultra Vires:
  • The doctrine of ultra vires is established in the case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche.
  • Ultra vires refers to acts performed by a company that go beyond the powers conferred by its Memorandum of Association.
  • This doctrine protects shareholders and creditors by ensuring that the company operates within its defined objectives.
• Doctrine of Indoor Management:
  • The doctrine of indoor management is derived from the case Royal British Bank v. Turquand.
  • This doctrine protects outsiders dealing with a company by presuming that internal company procedures are properly followed.
  • It prevents outsiders from being affected by irregularities in the internal management of the company, provided they acted in good faith.

Additional Information

• Incorrect Options:
  • Option 2: This option mismatches the cases with the concepts. For example, lifting the corporate veil is incorrectly matched with Nash v. Lynde, which deals with prospectus-related matters.
  • Option 3: This option incorrectly associates lifting the corporate veil with Royal British Bank v. Turquand, which pertains to the doctrine of indoor management.
  • Option 4: This option mismatches all cases with their respective concepts, leading to an inaccurate answer.
• Significance of Matching Cases with Concepts:
  • Understanding the correct association between legal concepts and landmark cases is crucial for interpreting and applying corporate law principles effectively.
  • It ensures that legal doctrines are applied correctly to resolve disputes and guide corporate practices.

The correct answer is 'Passing Special Resolution'

Key PointsAs per Section 149(10) and (11) of the Companies Act, 2013, the rules governing the reappointment of an independent director are as follows:

1. Tenure of Independent Director:

   • An independent director can hold office for a term of up to 5 consecutive years.

2. Reappointment:

   • After completing the first term, an independent director can be reappointed for another term of up to 5 consecutive years, provided:
     • The company passes a special resolution in a general meeting.
     • The company discloses the justification for the reappointment in the Board’s report.

3. Cooling-Off Period:

   • After serving two terms, the independent director must wait for a minimum period of three years before being eligible for reappointment. During this time, they cannot be associated with the company in any capacity.

Additional Information

• A special resolution requires at least 75% of the voting members present at the meeting to approve the resolution.
• The process ensures greater scrutiny and transparency in the reappointment of independent directors.

Key Points

Correct Answer: B. The rule that the company's public documents are assumed to be known to others

Explanation: The Doctrine of Constructive Notice is a legal concept in Company Law that implies that all persons dealing with a company are presumed to have knowledge of its public documents, such as the Memorandum of Association (MOA) and Articles of Association (AOA). This presumption arises because these documents are filed with the Registrar of Companies and are available for public inspection. The rationale behind this doctrine is to protect the company and its shareholders by assuming that individuals conducting business with the company have done their due diligence and are aware of the company's legal standing, powers, and limitations as laid out in its public documents. This doctrine plays a critical role in ensuring transparency and informed dealings with companies.

Key Points

Correct Answer: 3. The doctrine that states actions taken by a company beyond the scope of its constitutional powers are void.

Explanation: The doctrine of "Ultra Vires" is a fundamental principle in Company Law that limits the powers of a company to the objects outlined in its AOA (Articles of Association) and MOA (Memorandum of Association). If a company performs an act that is beyond these outlined objects, such an act is considered "Ultra Vires" (beyond the powers) and thus void. This doctrine ensures that shareholders' investments are used only for the purposes that the company was created for, providing a form of protection against the misuse of funds and ensuring that companies do not engage in activities unrelated to their stated objectives.

Key Points

Option 2: B, C, D, E, A

B. Punishment in case of repeated default - Section 451

This section discusses the punishment for a company or any officer of the company who repeats an offence previously penalized under the provisions of the Companies Act, 2013.
C. Annual reports on Government Companies - Section 394

Section 394 mandates the preparation of an annual report by the government on the working and affairs of any government company, which must be placed before both Houses of Parliament.
D. Petition for winding up - Section 272

This section deals with the circumstances and parties who may petition for the winding up of a company, including the company itself, creditors, contributors, or others.
E. Functions of Company Secretary - Section 205

Section 205 outlines the duties of a company secretary, including reporting to the Board about compliance with the provisions of this Act, keeping the minutes of the Board and general meetings, ensuring company compliance, and other duties as prescribed.
A. Execution of Bills of Exchange, etc. - Section 21

This section states that a bill of exchange, hundi, or promissory note shall be deemed to have been made, accepted, drawn, or endorsed on behalf of the company if done so in the company's name or on its behalf with proper authority.

The task involves matching entities from List I (column 1) with their correct descriptions from List II (column 2). Here's the explanation in a comprehensive tabular form:

Key Points 
(A) Producer companies (III) Formed to convert cooperative into a company-

Producer companies are a special type of company in India, designed for agricultural producers or certain types of producers (artisans, etc.), aiming to facilitate their formation and operation, including converting cooperatives into companies.
(B) Statutory companies (I) Do not necessarily require Memorandum of Association-

Statutory companies are created by a special act of the parliament or a state legislature. They might not require a Memorandum of Association because they are governed by statutory laws rather than the Companies Act. 
(C) Section 8 company (II) Association not for profit-

Section 8 companies are established 'for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object', provided the profits, if any, or other income is applied for promoting only the objectives of the company and no dividend is paid to its members. Thus, they are essentially associations not for profit. 
(D) Small company (IV) Paid up share capital is between 50 lakh-5 crore and turnover is between 2 crore - 20 crore-

As per the Companies Act, a small company is defined based on its paid-up share capital and turnover. This definition helps in providing certain exemptions and benefits to companies falling under these criteria, making compliance easier for them. 
The correct matching, as specified in the original question, is option 2, which aligns with the explanations provided above. This matching helps in understanding the specific characteristics and legal requirements of different types of companies or associations within the Indian legal framework.

Key Points

Correct Answer: 1. Both A and R are true, and R is the correct explanation of A.

Explanation: The assertion is true as per the Companies Act, 2013, which underlines that a company is a legal entity distinct from its shareholders or members, possessing its own rights and obligations. The reason correctly supports this assertion by referencing the landmark case of Salomon v. Salomon & Co Ltd, which established the legal principle of corporate personality, affirming that a company has a separate legal existence from its members. This case is foundational in company law, illustrating the legal precedent that supports the assertion.

Key Points

Statement A: A company may issue debentures with an option to convert them to shares, either wholly or partly at the time of redemption.

• This statement is correct.
• Companies often issue convertible debentures, which allow holders to convert their debentures into shares of the company after a specified period or under certain conditions.
• This is a common practice to raise funds without immediately diluting the equity.

• This statement is correct.
• The issuance of convertible debentures, like other significant corporate actions, typically requires the approval of the company's shareholders.
• This is usually done through a special resolution in a general meeting to ensure that the shareholders support the decision, as it can affect the company's capital structure and the shareholders' equity.

• This statement is incorrect. Debentures typically do not carry voting rights.
• Voting rights are associated with equity shares, not debt instruments like debentures.
• Debentures represent a loan to the company and come with an interest payment obligation but do not confer voting rights to the holders.

• This statement is incorrect.
• Secured debentures can indeed be issued.
• Secured debentures are backed by the assets of the company, providing a claim to debenture holders on the company's assets in the event of failure to pay back the debt.
• This is a common practice to provide assurance to the debenture holders regarding the safety of their investment.

• This statement is correct.
• The role of a debenture trustee is crucial in safeguarding the interests of the debenture holders.
• The trustee ensures that the issuer complies with the terms of the debenture agreement and acts on behalf of the debenture holders in case of default or other issues.
• This is a legal requirement designed to protect investors.

To solve the question regarding the sequence in which the listed cases were decided, we will look into each case individually:

Key Points(A) Ashbury Railway Carriage and Iron Co Ltd v Riche (1875): This case is related to the scope of the objects clause in a company's memorandum of association. It ruled that a contract outside the scope of the objects clause was void and not merely voidable.
(B) Royal British Bank v Turquand (1856): This case established the "indoor management rule," also known as the "Turquand Rule," which holds that persons dealing with a company in good faith are entitled to assume that internal company rules are complied with.
(C) Mohori Bibee v. Dharmodas Ghose (1903): This landmark case in the Indian Contract Act determined the competency of minors to enter into contracts. It was held that a minor's contract is void ab initio.
(D) State Trading Corporation of India Ltd. v. CTO, Vishakhapatnam (1963): This case dealt with the question of whether the State Trading Corporation, being a government entity, was exempt from taxation under the Sales Tax Act. The Supreme Court of India held that it was not exempt.
(E) Salomon v. A Salomon undefined Co Ltd (1897): This foundational company law case established the principle of corporate personality, meaning a company is a legal entity separate from its shareholders.
Based on the years these cases were decided, the correct chronological order is:
1. (B) Royal British Bank v. Turquand (1856)
2. (A) Ashbury Railway Carriage and Iron Co Ltd v Riche (1875)
3. (E) Salomon v. A Salomon undefined Co Ltd (1897)
4. (C) Mohori Bibee v. Dharmodas Ghose (1903)
5. (D) State Trading Corporation of India Ltd. v. CTO, Vishakhapatnam (1963)
Hence, the correct answer is option 1: (B), (A), (E), (C), (D).

Key Points

Correct Answer Explanation:
A Red Herring Prospectus (RHP) is indeed issued prior to the issue of the main prospectus. It is a preliminary registration document filed with the securities regulator, which is not complete in terms of details on the price and number of shares to be issued. The purpose of the RHP is to gauge investor interest in the offering.
Overview of Incorrect Options:
After the issue of the main prospectus: This is incorrect because the Red Herring Prospectus comes before the final prospectus. The main prospectus is issued after the RHP and contains all final details including price and number of shares.
With the consent of shareholders: This is not accurate as the issuance of a Red Herring Prospectus is a regulatory requirement for companies seeking to go public and does not directly involve shareholder consent at this stage.
On the behest of ROC (Registrar of Companies): While the ROC plays a role in the registration of companies, the issuance of a Red Herring Prospectus is specifically related to securities regulation and is typically filed with securities regulators, not directly at the behest of the ROC.

Key Points

Statement A: To appoint an individual or a firm as an auditor  

This function is generally not within the purview of a Corporate Social Responsibility (CSR) Committee. Typically, the appointment of auditors is a responsibility of the company's board of directors or its shareholders. Hence, Statement A is incorrect.

Statement B: To recommend a CSR Policy  

One of the primary responsibilities of the CSR Committee is to formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in the CSR rules or guidelines. Hence, Statement B is correct.

Statement C: To recommend the amount of expenditure for the indicated activities  

Another crucial function of the CSR Committee is to recommend how much of the company's earnings should be spent on CSR activities. This is in line with ensuring that the company meets its CSR expenditure obligations as per the legal requirements. Hence, Statement C is correct.

Statement D: To inspect the books of accounts during business hours  

Inspecting the books of accounts is typically not a function of the CSR Committee. This task is usually reserved for auditors and the audit committee of the company. Hence, Statement D is incorrect.

Statement E: To monitor the CSR policy of the company from time to time  

Monitoring the implementation of the company's CSR Policy is a key responsibility of the CSR Committee. This includes ensuring that the activities are being carried out as per the plan and making necessary recommendations for improvement. Hence, Statement E is correct.

Hence, the correct answer is option 3: Statements B, C, and E only.

Key Points

Statement I Analysis:
This statement addresses the minimum number of directors required for different types of companies under company law.
 For a public company, the minimum number of directors required is three.
For a private company, at least two directors are required.
This requirement is in place to ensure that there is sufficient oversight and governance within the company.
Conclusion: Statement I is correct as it accurately reflects the legal requirements for the minimum number of directors in public and private companies.
Statement II Analysis:
This statement pertains to the maximum number of directors a company can have without needing to pass a special resolution.
The statement says that a company can have up to 15 directors without the need for a special resolution.
For appointing more than 15 directors, the company must pass a special resolution.
This rule is designed to maintain a manageable board size while also allowing companies the flexibility to expand their board if necessary, provided there is sufficient justification and support from the shareholders.
Conclusion: Statement II is correct as it accurately states the legal provisions regarding the maximum number of directors and the requirement for a special resolution to exceed that number.
Overall Solution:
Upon analyzing both statements, we find that:
- Statement I correctly outlines the minimum number of directors required for public and private companies.
- Statement II correctly describes the maximum number of directors a company can have without a special resolution and the need for a special resolution to exceed this limit.
- Hence, both Statement I and Statement II are correct.
Therefore, the correct option is 1) Both Statement I and Statement II are correct.