10 Solved Problems (IRAC Method) — Company Law

These ten problems are worked in the IRAC method — Issue, Rule, Analysis, Conclusion — the way a KSLU answer sheet expects; the full Question Bank has 40+ more.

Problem 1 — All the members of a private company die together in an… (Unit 1)

Problem: All the members of a private company die together in an accident (train / boat / plane / bomb in a general meeting). Does the company cease to exist? Decide.

I — Issue. Does a company cease to exist when all its members die together in a single accident?

R — Rule. 1. A company enjoys perpetual succession — its existence is independent of its members, so the death of members does not affect the company itself; members may come and go while the company continues. 2. Being a separate legal person (Salomon v Salomon & Co. Ltd. (1897)), the company’s life is legally unconnected to the natural lives of the human beings who hold its shares.

A — Analysis. 1. Decoy — “all the human members are gone, so nothing is left of the company.” But the members are not the company; they merely hold its shares, and their death does not dissolve the separate person that is the company. 2. On the members’ death their shares transmit by operation of law to their legal representatives, who may be registered as members. The company’s property, contracts and personality remain wholly untouched by the tragedy.

C — Conclusion. The company does not cease to exist. Its shares vest in the deceased members’ legal heirs, and the company continues in law — unlike a partnership, which would dissolve on the death of its partners.

Problem 2 — A, B and C hold all the shares of a company and transfer them… (Unit 1)

Problem: A, B and C hold all the shares of a company and transfer them to X, Y and Z. Does the company remain the same entity / retain perpetual succession? Decide.

I — Issue. When every share changes hands, does the company become a different entity, or does it retain its perpetual succession?

R — Rule. 1. A company is a person distinct from its members (Salomon v Salomon & Co. Ltd. (1897)); the identity of the members is legally irrelevant to the company’s existence. 2. Perpetual succession means that members may come and go — by death, transfer or insolvency — while the company itself continues unchanged as the same legal person.

A — Analysis. 1. Decoy — “the old owners are entirely replaced, so it must now be a new company.” Ownership of shares is not ownership of the company, and a complete change of shareholders is only a change of the register. 2. The transfer merely substitutes X, Y and Z for A, B and C on the register of members. The company’s assets, contracts, name and legal personality are all unaffected by the change.

C — Conclusion. The company remains the same entity with unbroken perpetual succession; only its membership has changed, and its separate legal existence continues exactly as before.

Problem: X is the transferee of a share certificate issued under the company’s seal; the secretary affixed the seal but forged the signatures of two directors. Is the certificate valid? Decide.

I — Issue. Can the transferee rely on the doctrine of indoor management to bind the company on a certificate whose directors’ signatures were forged by the secretary?

R — Rule. 1. The doctrine of indoor management lets an outsider assume that the company’s internal formalities were duly complied with (Royal British Bank v Turquand (1856)). 2. But there is no protection against forgery — a forged document or signature is a nullity, incapable of binding the company (Ruben v Great Fingall Consolidated (1906)).

A — Analysis. 1. Decoy — “the company’s seal is genuine and the rest of the internal process is presumed regular.” Turquand’s rule cannot be stretched to cover forgery; a genuine seal does not cure forged signatures. 2. The two directors’ signatures were forged, so the certificate is not an authentic act of the company at all; there is nothing for the doctrine to validate.

C — Conclusion. The share certificate is not valid and the company is not bound by it. The holder’s only recourse, if any, lies against the person who committed the forgery, or against the company in negligence if it can be shown.

Problem 4 — A company’s registered office is in one State… (Unit 2)

Problem: A company’s registered office is in one State (Mumbai/Hubballi/Chennai); it wishes to shift it to another State (Karnataka/New Delhi/Bengaluru). Advise.

I — Issue. What procedure must a company follow to shift its registered office from one State to another?

R — Rule. 1. The registered office is fixed by the situation clause of the Memorandum; shifting it to another State alters that clause and requires a special resolution and confirmation by the Central Government (Regional Director) under s.13(4). 2. The scale is graduated: a shift within the same city needs only a Board resolution; a shift to another town in the same State needs a special resolution; and a shift to another State needs a special resolution plus RD confirmation (s.13(4)–(7)). The confirmed order must then be filed with the Registrars of both States, and only on such registration does the change take legal effect.

A — Analysis. 1. Decoy — “the Board can simply pass a resolution and move.” A mere Board resolution suffices only for a shift within the same city; a shift to another town in the same State needs a special resolution, and an inter-State shift needs the added RD confirmation. 2. An inter-State shift changes the jurisdiction of the Registrar with whom the company files and can affect its creditors, so both member approval and central confirmation are insisted upon.

C — Conclusion. Advise the company to pass a special resolution, obtain the Regional Director’s confirmation, and then file the confirmed order with the Registrars of both States; only on such registration does the shift take legal effect.

Problem 5 — A person already holds directorship in 15 (or 20) companies… (Unit 3)

Problem: A person already holds directorship in 15 (or 20) companies and wants to become a director of another. Advise.

I — Issue. May a person who already holds directorships in fifteen companies accept a further directorship?

R — Rule. 1. Under s.165 a person may hold office as a director in at most twenty companies at the same time, of which not more than ten may be public companies. The limits are cumulative — both must be satisfied. 2. Because the two ceilings apply at once, a person who would exceed either the twenty-overall or the ten-public limit must first resign from enough boards to bring himself within both before accepting a fresh appointment; the bare number he currently holds is only the starting point of the inquiry.

A — Analysis. 1. Decoy — the specific figure “fifteen” invites a quick yes/no, but the real test is the twenty-overall and ten-public ceilings, not the bare number stated. 2. At fifteen directorships he is within the overall ceiling of twenty, so the additional post is permissible provided the total does not exceed twenty and the number of public companies among them does not exceed ten. One must therefore ask how many of his existing fifteen are public companies.

C — Conclusion. Advise that he may accept the further directorship only if his total remains within twenty and his public-company directorships within ten; if accepting it would breach either limit, he must first resign from one of his existing boards.

Problem 6 — Certain directors hold a Board meeting but prevent some… (Unit 3)

Problem: Certain directors hold a Board meeting but prevent some lawfully-appointed directors from attending. A quorum was present. Is the Board meeting valid?

I — Issue. Is a Board meeting valid when some validly-appointed directors are deliberately prevented from attending, even though a quorum was present?

R — Rule. 1. Every director has a right to receive notice of, and to attend and participate in, a Board meeting. The deliberate exclusion of entitled directors is a fundamental defect that vitiates the meeting, regardless of the presence of a quorum. 2. This flows from the nature of a Board meeting as the collective deliberation of the whole Board; notice to every director is essential, and its denial to a validly-appointed director voids the meeting (Bharat Kumar v British India Corporation (1993)). A quorum satisfies only the requirement of numbers, not the individual right of each director to be present and heard.

A — Analysis. 1. Decoy — “a quorum was present, so the meeting is properly constituted.” A quorum satisfies only the requirement of numbers; it cannot cure the denial of the individual right of the excluded directors to be heard. 2. Because the lawfully-appointed directors were prevented from taking part, the collective decision-making the Board is meant to embody never occurred, so the meeting was not validly held.

C — Conclusion. The Board meeting is invalid, and any resolutions passed at it are void. The proper course was to give notice to, and permit the attendance of, every director.

Problem 7 — A minor is registered as a shareholder (Unit 4)

Problem: A minor is registered as a shareholder; on attaining majority he receives dividends; the company later goes into liquidation. He denies liability as a shareholder. Decide.

I — Issue. Is a person who was registered as a shareholder while a minor liable as a member after he attains majority and continues to deal with the shares?

R — Rule. 1. A minor cannot make a valid contract, so his original registration as a member is defective. But if, on attaining majority, he affirms the membership by his conduct — by accepting dividends and not repudiating the shares within a reasonable time — he is estopped from later denying it and becomes bound as a contributory on a winding up.

A — Analysis. 1. Decoy — “he was a minor when he was registered, so he was never validly a member and cannot now be made liable.” His conduct after attaining majority cures the original defect and fixes him with liability. 2. By receiving dividends after he became a major he clearly affirmed the membership and treated the shares as his own, and he did not repudiate them, so he cannot now blow hot and cold.

C — Conclusion. He is liable as a shareholder / contributory on the winding up; his denial fails, because he ratified the membership by his conduct on attaining majority and is estopped from disclaiming it.

Problem 8 — The directors, by two resolutions, resolve to make a call,… (Unit 4)

Problem: The directors, by two resolutions, resolve to make a call, but neither resolution fixes the date and amount of payment. Is the call valid?

I — Issue. Is a call valid where the directors’ resolutions do not specify the amount to be paid and the date of payment?

R — Rule. 1. A valid call must be made by a resolution of the Board, must be uniform on all shares of the class (s.49), and the resolution must specify the amount to be paid and the time and place of payment. Certainty as to the amount and date is essential, for without it the shareholder cannot know his obligation.

A — Analysis. 1. Decoy — “two resolutions were duly passed, so the call must be well made.” The number of resolutions is irrelevant; what matters is whether they fix the amount and date, and here neither does. 2. Because neither resolution states how much is to be paid or by when, the demand is uncertain, and the shareholders cannot be placed in default for failing to meet an obligation they could not ascertain.

C — Conclusion. The call is invalid for uncertainty and cannot be enforced against the shareholders; a fresh call fixing the amount, time and place would be required.

Problem 9 — A company suspends its business for more than one year… (Unit 5)

Problem: A company suspends its business for more than one year (labour strike / Tsunami / Covid-19 lockdown); a shareholder petitions for its winding up. Will he succeed?

I — Issue. Does a company’s suspension of business for more than one year entitle a shareholder to have the company wound up?

R — Rule. 1. Suspension of business is not an automatic ground for winding up. The Tribunal exercises a discretion and, under the just-and-equitable head (s.271), will refuse a petition where the suspension is temporary and the company has a bona fide intention to resume its business.

A — Analysis. 1. Decoy — “the business has been stopped for over a year, so the company must be wound up.” The mere fact and length of the suspension is not decisive; the Tribunal looks at the reason for it and the company’s intention. 2. Here the suspension flows from an external, temporary cause — a strike, a Tsunami or the Covid-19 lockdown — and the company intends to resume trading once conditions permit, so its substratum has not been destroyed.

C — Conclusion. The shareholder is unlikely to succeed; a temporary suspension of business for a genuine external reason, coupled with an intention to resume, is not a sufficient ground, and the Tribunal will exercise its discretion against ordering a winding up.

Problem 10 — A and B are the only shareholders and directors of a private… (Unit 5)

Problem: A and B are the only shareholders and directors of a private company; they fall into serious, irreconcilable hostility. A seeks advice. Advise.

I — Issue. What remedy does a shareholder-director have where a two-member quasi-partnership company has broken down in irreconcilable hostility?

R — Rule. 1. Where a company is in substance a quasi-partnership and it breaks down in deadlock or a complete loss of mutual confidence, the Tribunal may wind it up on the just and equitable ground (s.271(e); Ebrahimi v Westbourne Galleries Ltd. (1973)). 2. Alternatively, the aggrieved member may seek relief for oppression and mismanagement under s.241, where the NCLT can, among other things, order one group to buy out the other — often the preferable course, since winding up destroys the value of a going concern.

A — Analysis. 1. Decoy — “a mere quarrel between the directors is an internal management matter barred by Foss v Harbottle.” A total breakdown of the mutual trust on which a two-member quasi-partnership was founded goes well beyond an ordinary internal dispute. 2. With only two equal members, now hostile to each other, the company can no longer function on the personal confidence that was the basis of their association, which is precisely the situation the just-and-equitable ground addresses.

C — Conclusion. Advise A that he may petition for just and equitable winding up under s.271(e); but, to preserve value, he should first consider an oppression petition under s.241, asking the NCLT to order B to buy his shares at a fair value.

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