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GNDU Question Paper-2024
Bachelor of Business Administration
BBA 5
th
Semester
COMPANY LAW
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt FIVE questions in all, selecting at least ONE question from each section. The
fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Write a detailed note on:
(a) Limited Liability Partnership
(b) Steps in formation of a Company.
2. What is Memorandum of Association? Discuss its major contents.
SECTION-B
3. What is Articles of Association? Discuss its major contents.
4. Is issue of a Prospectus mandatory as per law? What if a company does not want to
issue a Prospectus ? Discuss in detail.
SECTION-C
5. What is further issue of Share Capital ? Discuss.
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6. Discuss the powers and duties of a Director of a company under Companies Act.
SECTION-D
7. What are Board Meetings? How they are conducted ? Discuss.
8. Discuss the procedure of winding up of a company in detail.
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GNDU Answer Paper-2024
Bachelor of Business Administration
BBA 5
th
Semester
COMPANY LAW
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt FIVE questions in all, selecting at least ONE question from each section. The
fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Write a detailed note on:
(a) Limited Liability Partnership
(b) Steps in formation of a Company.
Ans: A Different Beginning – Two Friends, Two Dreams
Picture this: Two friends, Aarav and Meera, meet at their favourite café in Amritsar.
• Aarav wants to start a design studio with Meera.
• Meera is excited, but she’s worried: “What if the business fails? Will we lose our
personal savings, our homes?”
That’s when their mentor, an old business professor, smiles and says:
“You need a structure that gives you the flexibility of a partnership but protects your
personal assets like a company. Let me tell you about the Limited Liability Partnership… and
while we’re at it, I’ll also explain how companies are formed.”
From here, our story splits into two parts — first, the LLP, then the steps to form a company.
(a) Limited Liability Partnership (LLP)
1. What is an LLP?
A Limited Liability Partnership is a hybrid business structure that combines:
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• The flexibility of a partnership.
• The limited liability of a company.
It was introduced in India through the Limited Liability Partnership Act, 2008.
2. Key Features
1. Separate Legal Entity
o The LLP is distinct from its partners.
o It can own property, sue, and be sued in its own name.
2. Limited Liability
o Partners are liable only to the extent of their agreed contribution.
o Personal assets are protected (unless there’s fraud).
3. Minimum Two Partners
o No upper limit on the number of partners.
o At least two must be designated partners, and one must be a resident of
India.
4. Perpetual Succession
o The LLP continues even if partners change.
5. Low Compliance Cost
o Fewer formalities compared to a company.
6. No Minimum Capital Requirement
o You can start with any amount of capital.
3. Advantages
• Flexibility: Internal management is decided by the LLP Agreement.
• Credibility: Separate legal status builds trust with clients and suppliers.
• Tax Benefits: LLPs are taxed like partnerships, avoiding dividend distribution tax.
• Ease of Ownership Transfer: Partners can be changed without affecting the LLP’s
existence.
4. Disadvantages
• Cannot raise equity capital from the public.
• Not suitable for businesses aiming for large-scale public investment.
• Some sectors (like banking, insurance) are not allowed to operate as LLPs.
5. LLP vs Partnership vs Company – Quick Table
Feature
Partnership Firm
LLP
Private Company
Legal Status
Not separate
Separate
Separate
Liability
Unlimited
Limited
Limited
Partners/Shareholders
2–20
2–No limit
2–200
Compliance
Low
Moderate
High
Capital Requirement
No minimum
No minimum
₹1 lakh (earlier)
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7. Real-Life Analogy
Think of an LLP like a shared apartment:
• The apartment (LLP) is a separate legal unit.
• Each flatmate (partner) has their own room (share of ownership).
• If one flatmate breaks a vase in the living room (business loss), they pay only their
share — not the entire building’s mortgage.
(b) Steps in Formation of a Company
Now, Aarav and Meera’s cousin, Rohan, wants to start a private limited company for his
tech startup. The process is more structured and regulated than forming an LLP.
1. Decide the Type of Company
• Private Limited Company: Minimum 2 members, maximum 200.
• Public Limited Company: Minimum 7 members, no maximum limit.
• One Person Company (OPC): Single member.
2. Step-by-Step Formation Process
Step 1: Obtain Digital Signature Certificate (DSC)
• Required for all proposed directors to sign electronic forms.
• Issued by government-approved certifying agencies.
Step 2: Obtain Director Identification Number (DIN)
• Unique ID for each director.
• Can be applied through the SPICe+ form during incorporation.
Step 3: Name Reservation
• Use the RUN (Reserve Unique Name) service on the MCA portal.
• Provide up to two name choices.
• Names must be unique and comply with Companies (Incorporation) Rules.
Step 4: Prepare Documents
• Memorandum of Association (MoA): Defines the company’s objectives.
• Articles of Association (AoA): Rules for internal management.
• Identity and address proofs of directors and subscribers.
Step 5: File Incorporation Application
• Use SPICe+ form on MCA portal.
• Attach MoA, AoA, declarations, and proofs.
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• Pay prescribed fees and stamp duty.
Step 6: Verification by Registrar of Companies (ROC)
• ROC checks documents for compliance.
• May ask for clarifications or corrections.
Step 7: Issue of Certificate of Incorporation
• Once approved, ROC issues the Certificate of Incorporation with the Corporate
Identification Number (CIN).
• The company now legally exists.
Step 8: Apply for PAN and TAN
• Allotment is integrated with SPICe+ form.
• PAN (Permanent Account Number) and TAN (Tax Deduction and Collection Account
Number) are issued along with incorporation.
3. Diagram – Formation Process
Idea
↓
DSC & DIN
↓
Name Reservation
↓
Draft MoA & AoA
↓
File SPICe+ Form
↓
ROC Verification
↓
Certificate of Incorporation
↓
PAN & TAN
4. Why So Many Steps?
• To ensure transparency and legality.
• To protect investors, creditors, and the public.
• To maintain a public record of companies.
Bringing It Together – The Story’s End
• Aarav and Meera choose LLP for their design studio — flexible, low compliance, and
safe for personal assets.
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• Rohan chooses a Private Limited Company — more formal, but better for attracting
investors.
Both structures give them separate legal identities, but the formation process differs:
• LLP: Simpler, fewer steps.
• Company: More regulated, detailed documentation.
Conclusion
• LLP is ideal for professionals and small businesses wanting flexibility with limited
liability.
• Company formation is essential for ventures aiming for larger scale, investor
funding, and stricter governance.
2. What is Memorandum of Association? Discuss its major contents.
Ans: What is Memorandum of Association? Discuss its Major Contents
Imagine for a moment that you and a group of friends decide to start a company. You all are
excited, full of ideas, and want to bring something new into the world. But before you can
even begin building your company, the law wants to make sure that you have a clear
foundation. This foundation is like the soil on which a tree grows. If the soil is strong and
rich, the tree can flourish; if it is weak, the tree may collapse.
In the world of business and company law, this strong foundation is called the
Memorandum of Association (MOA). It is like the birth certificate of a company. Without it,
a company cannot even come into existence.
Now, let’s travel step by step through this concept in a way that feels like a story unfolding.
1. Understanding the Memorandum of Association (MOA)
Think of the MOA as a charter of the company. Just like a country has its constitution that
lays down the boundaries within which the government can function, the MOA lays down
the boundaries within which a company can operate.
The word memorandum itself means a written document, a reminder, or a note. Here, it
means a written document that contains the basic conditions on which a company is
formed.
In simple terms:
• It tells us why the company has been formed,
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• What it is allowed to do, and
• Up to what extent it can act.
If the company steps outside these boundaries, its actions are considered ultra vires (a Latin
phrase meaning “beyond the powers”), which means those actions are void and cannot be
enforced.
So, you can imagine the MOA as the map of a company’s journey: It shows the starting
point, the destination, and the route. Without it, the company would be like a ship sailing in
the sea without a compass.
2. Why is MOA so Important?
Before we go into its contents, let’s pause and ask—why is this document so significant?
• Legal Existence: A company cannot even be registered without an MOA.
• Information for Outsiders: Any person dealing with the company (like investors,
creditors, or partners) can read the MOA and understand what the company can and
cannot do.
• Boundary Setter: It fixes the limits of the company’s powers.
• Investor’s Security: People who put money into the company feel safe knowing the
company is bound by its stated objects and cannot randomly change its business
overnight.
In short, it is both a shield (protecting outsiders) and a guide (directing the company’s
activities).
3. Major Contents of Memorandum of Association
Now comes the most interesting part. If MOA is like a company’s birth certificate or
constitution, what exactly does it contain? Let’s walk through its main clauses one by one as
if we’re opening a treasure box, each clause being a jewel inside it.
(i) Name Clause
The first jewel is the Name Clause. Every company needs an identity, just like we all have
names.
• This clause specifies the legal name of the company.
• The name must not be identical or too similar to an existing company.
• It must also include the word ‘Limited’ if it is a public company and ‘Private Limited’
if it is a private company.
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For example: “Starshine Technologies Private Limited”.
This ensures the company is distinct and recognized in the business world.
(ii) Registered Office Clause
The second jewel is the Registered Office Clause.
Think of it as the company’s permanent address. Just like you have a home address where
official letters and notices can be sent, the company must also declare the state in which its
registered office will be located.
• It helps in determining the jurisdiction of the Registrar of Companies.
• All legal communications are sent here.
Without this, it would be like trying to send mail to a person without knowing where they
live!
(iii) Object Clause
Now comes the heart of the MOA—the Object Clause.
This clause answers the most important question: Why does the company exist?
• It lays down the main objects for which the company is formed.
• It also mentions incidental or ancillary objects, which are the supporting activities
the company can undertake to achieve its main purpose.
• Any activity not mentioned here is beyond the company’s power.
For example: If the object clause states that the company is formed to manufacture bicycles,
it cannot suddenly start producing medicines.
This protects shareholders and outsiders from unexpected risks.
(iv) Liability Clause
The fourth jewel is the Liability Clause.
This tells us about the extent to which the members of the company are liable.
• In a company limited by shares, members are only liable to the extent of the unpaid
amount on their shares.
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• In a company limited by guarantee, members are liable to the amount they promised
to contribute at the time of winding up.
• In an unlimited company, members’ liability is unlimited.
This clause is like a safety net, showing how much risk the owners are actually taking.
(v) Capital Clause
The next jewel is the Capital Clause.
This states the maximum amount of capital the company is authorized to raise, called the
authorized capital.
For example: A company may state in its MOA that its authorized capital is ₹10 crores,
divided into 1 crore shares of ₹10 each.
This tells investors and the government how much money the company can legally raise by
issuing shares.
(vi) Association or Subscription Clause
Finally, we come to the Association Clause, also known as the Subscription Clause.
This is where the story of the company truly begins. In this clause:
• The original promoters (minimum 2 for private companies and 7 for public
companies) declare that they wish to form the company.
• They also state how many shares they agree to take up.
It is like the first signatures on the birth certificate, confirming that these people are
bringing the company into life.
4. Bringing it All Together
If you think about it, the Memorandum of Association is like a detailed introduction of a
person:
• Name Clause = The person’s name.
• Registered Office Clause = The person’s address.
• Object Clause = The person’s career or purpose in life.
• Liability Clause = The person’s financial responsibility.
• Capital Clause = The person’s resources.
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• Association Clause = The person’s family or group who supports them.
Without these details, we cannot truly understand or legally recognize the company.
5. Conclusion
The Memorandum of Association is not just a boring legal document; it is the soul of a
company. It tells the story of why the company exists, what it can do, and how it is
structured. It safeguards investors, guides the directors, and ensures transparency for the
public.
In short, if a company is a living being, then the MOA is its DNA. It defines identity, purpose,
and boundaries. No matter how big or small a company grows, it always remains rooted in
the clauses of its Memorandum of Association.
SECTION-B
3. What is Articles of Association? Discuss its major contents.
Ans: What is Articles of Association? Discuss its Major Contents
Imagine you and your friends decide to start a new cricket club in your town. Everyone is
excited — you’ve collected some money, bought a few bats and balls, and even rented a
small ground. But here comes the real challenge: how will you run the club? Who will be the
captain? How will decisions be made? What if one member wants to leave and another
wants to join? And most importantly, what rules should everyone follow to avoid
unnecessary fights and confusion?
To make everything smooth, you all sit down and draft a document with clear rules and
regulations for your club. This document says things like:
• How members can join or leave.
• How matches will be organized.
• How funds will be managed.
• Who gets to make final decisions.
Now, just replace the word club with company and you’ll find yourself in the world of
Articles of Association (AOA).
What is Articles of Association?
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In simple words, the Articles of Association (AOA) is like the “rulebook” or “instruction
manual” of a company. It defines how the company will function on a day-to-day basis, how
decisions will be taken, and how the relationship between the company, its shareholders,
and its directors will be managed.
If the Memorandum of Association (MOA) is like the birth certificate of a company that
defines its identity and scope, then the Articles of Association is like its constitution that
tells how it should be governed.
Legally, the AOA is a document filed with the Registrar of Companies (RoC) at the time of
incorporation. It is a binding contract between:
1. The company and its members (shareholders)
2. Among the members themselves
This means that everyone connected with the company is bound to follow the rules laid
down in the AOA.
Why is the AOA Important?
Think of AOA as the “traffic rules” for a company. Without traffic rules, vehicles will clash,
and chaos will rule the roads. Similarly, without AOA, confusion will reign in the company
about roles, responsibilities, and rights.
Some key reasons why the AOA is important:
• It gives a framework for the smooth internal management of the company.
• It protects the interests of both shareholders and directors.
• It helps in resolving conflicts by providing clarity about rights and duties.
• It ensures that the company functions within legal boundaries.
Major Contents of Articles of Association
Now let’s open this “rulebook” and peek inside. What exactly does the AOA contain?
Although the exact contents may differ from one company to another, certain common
themes are always present.
1. Share Capital and Rights of Shareholders
This section describes:
• How much share capital the company has.
• The different types of shares (equity shares, preference shares, etc.).
• Rights attached to each type of share (like voting rights, dividend rights).
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• Procedures for issuing new shares or transferring existing ones.
Example: Imagine your cricket club decides that members who contribute more money
get extra privileges like choosing the team captain. Similarly, in a company, shareholders
may get rights based on their shares.
2. Transfer and Transmission of Shares
The AOA explains the process by which shares can be transferred from one person to
another. It also covers what happens if a shareholder dies — who gets their shares.
This ensures that ownership in the company changes hands smoothly, without disputes.
3. General Meetings
Companies are required to hold meetings where important decisions are taken. The AOA
lays down rules such as:
• How many times meetings should be held.
• How members should be notified.
• What constitutes a valid quorum (minimum members required).
• How voting will be conducted (by show of hands or by poll).
Think of it like your cricket club’s annual meeting where everyone decides on new team
jerseys, fees, or tournament participation.
4. Board of Directors
The heart of any company is its board of directors. The AOA specifies:
• How many directors the company can have.
• How they are appointed or removed.
• What powers and duties they hold.
• Their remuneration (payment).
Just like your cricket club may have a captain, vice-captain, and treasurer, the company
has directors who lead and manage.
5. Dividends and Reserves
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Profits are the reward of business. The AOA details:
• How profits will be distributed as dividends among shareholders.
• How much money should be kept aside as reserves for future growth.
For your cricket club, this is like deciding how to use extra funds — maybe buy new kits,
save for future tournaments, or distribute snacks after matches!
6. Borrowing Powers
Sometimes companies need to borrow money for expansion. The AOA explains:
• Who has the authority to borrow (usually the board).
• The limits up to which borrowing is allowed.
7. Accounts and Audit
The AOA ensures financial transparency by laying rules about maintaining proper accounts,
getting them audited, and presenting them to members.
Without this, shareholders might never know whether their money is being used wisely.
8. Winding Up
This section is about the end of the company’s life. It describes the procedure for winding
up (closing down) the company in case of insolvency, mutual decision, or legal compulsion.
For your cricket club, it’s like saying: if members lose interest and decide to dissolve the
club, here’s how the leftover funds or equipment will be divided.
9. Miscellaneous Provisions
Apart from the above, the AOA may also include:
• Rules for the use of the company seal.
• Rights of minority shareholders.
• Indemnity for directors and officers against certain legal actions.
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AOA vs MOA (A Quick Comparison)
• MOA defines what the company can do (its scope and objectives).
• AOA defines how the company will do it (its internal rules).
Think of MOA as a game plan and AOA as the rulebook.
Conclusion
To sum up, the Articles of Association is much more than just a legal formality. It is the
lifeline of a company’s internal functioning — a carefully written rulebook that keeps order,
ensures fairness, and provides guidance at every step.
Without it, a company would be like a cricket match without an umpire — full of confusion,
disputes, and chaos. With it, every member, director, and shareholder knows their role,
rights, and responsibilities.
So, whenever you hear the term “Articles of Association,” remember it as the constitution
of a company, a document that turns a group of individuals into an organized, disciplined,
and smoothly functioning team.
4. Is issue of a Prospectus mandatory as per law? What if a company does not want to
issue a Prospectus ? Discuss in detail.
Ans: Is issue of a Prospectus mandatory as per law? What if a company does not want to
issue a Prospectus?
Imagine this: You and a group of friends decide to start a bakery business. You want to make
it big—not just a small corner shop, but a chain of bakeries across the city. To make this
dream possible, you’ll need a lot of money: money for ovens, rent, employees, and raw
materials. Your small group of friends alone cannot arrange this huge amount. So, what do
you do? You decide to invite the general public to invest in your bakery company by buying
shares.
Now, if you are asking strangers—people who don’t know you personally—to invest their
hard-earned money, will they just trust your word? Of course not. They will want some
official document that explains who you are, what your business is, how you will use their
money, and what risks are involved. That official document, in the corporate world, is
called a Prospectus.
What is a Prospectus?
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A prospectus is a formal legal document issued by a company that wants to raise money
from the public. It includes all the necessary details like:
• The objectives of the company,
• Financial information,
• Details about directors and promoters,
• Risks involved,
• How much money is required and how it will be used, and
• The terms and conditions for investors.
Think of it as a brochure or invitation card—but instead of inviting someone to a wedding,
you are inviting them to invest money in your company.
Is issuing a Prospectus mandatory?
Now comes the real question: Does every company have to issue a prospectus by law?
The simple answer is No.
The law does not make it compulsory for every company to issue a prospectus. The
Companies Act (specifically in India, the Companies Act, 2013) requires a prospectus only
when a Public Company wants to raise money by inviting subscriptions from the general
public.
Let’s break this down:
1. Public Company raising money from the public:
If a public company plans to collect funds by selling shares or debentures to the
public, then issuing a prospectus is mandatory. This is because the public needs to
know what they are investing in.
2. Private Company:
A private company is not allowed to invite the public to subscribe to its shares.
Hence, a private company does not need to issue a prospectus.
3. Public Company not inviting the public:
Sometimes, even public companies do not want to raise money from the public.
Instead, they may arrange funds privately from a small group of people such as
promoters, directors, or known investors. In such cases, they also don’t need to issue
a prospectus.
So, the law is quite clear: A prospectus is required only when the company is making a
public offer of its securities.
What if a company does not want to issue a Prospectus?
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This is where things get interesting. Suppose our bakery business decides not to ask the
public for money but instead borrows from a bank or gets funds from close investors. Do we
still need to issue a prospectus?
The answer again is No. In such a case, the company can file a document called a Statement
in Lieu of Prospectus.
Statement in Lieu of Prospectus
A Statement in Lieu of Prospectus is like a substitute. It is not as detailed as a prospectus,
but it still provides certain information to the Registrar of Companies. This ensures that the
company’s records are transparent, even though it is not going to the general public for
funds.
So, the law provides two clear paths:
1. Issue a Prospectus → If you are inviting the public to invest.
2. File a Statement in Lieu of Prospectus → If you are not inviting the public but still
need to comply with legal formalities.
Why is a Prospectus so important?
Let us pause and think: Why has the law created the concept of a prospectus in the first
place? The answer is simple—protection of investors.
If companies were free to collect money without disclosing details, investors could easily be
cheated. For example, someone could open a fake company, collect money from thousands
of people, and disappear. By making a prospectus mandatory for public offers, the law
ensures that:
• The company is transparent,
• Investors can make informed decisions, and
• Fraudulent practices are minimized.
It works like a safety helmet—you might not enjoy wearing it, but it protects you when
things go wrong.
Consequences of not issuing a Prospectus
Now imagine a public company that wants to raise money from the public but refuses to
issue a prospectus. What happens then?
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Legally, that would be a violation of the Companies Act. The company can face penalties,
and its directors can be held responsible. Investors, too, may sue the company if they suffer
losses due to lack of disclosure.
So, the law makes it very clear: If you go to the public for money, you cannot hide
information. You must issue a prospectus.
Putting it all together with an example
Let’s go back to our bakery story.
1. If you and your friends start a Private Company Bakery Ltd., you cannot ask the
public to buy shares. Hence, no prospectus is needed.
2. If you form a Public Company Bakery Ltd. but arrange funds only from your relatives
and banks, you can skip the prospectus but must file a Statement in Lieu of
Prospectus.
3. If you form a Public Company Bakery Ltd. and advertise in newspapers asking the
public to invest, then issuing a Prospectus is mandatory.
Conclusion
To sum up, the issue of a prospectus is not mandatory for all companies. It is required only
when a public company wants to invite funds from the general public. If a company does not
wish to issue a prospectus, it can still function by filing a Statement in Lieu of Prospectus.
The underlying purpose of the law is not to burden companies with paperwork but to
protect investors from fraud and ensure transparency. So, whether or not a prospectus is
issued depends entirely on how the company chooses to raise its funds.
Just like in our bakery example, whether you invite the whole town to invest or only a few
close friends will decide whether you need a prospectus or not.
SECTION-C
5. What is further issue of Share Capital ? Discuss.
Ans: What is Further Issue of Share Capital?
Imagine you are the owner of a bakery. You started small — just you, a few workers, and
one shop in your neighbourhood. To open the bakery, you used your savings, and when the
savings were not enough, you asked your family and friends to invest some money. In
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return, you gave them a share in your bakery’s ownership. This was your initial share
capital.
The bakery did well. Customers loved your cakes and bread. Soon, you started dreaming
bigger — maybe opening a new branch, buying modern equipment, or hiring more staff. But
here comes the challenge: expansion needs money, and the profit you earn from one shop
is not enough to fund such growth. What do you do?
You think again about shares. The same way you issued shares in the beginning, you can
issue new shares to raise more money. This fresh issue of shares, done after the company
has already been incorporated and started functioning, is called the further issue of share
capital.
In simple words:
Further issue of share capital means when a company issues additional shares after its
initial public offering (IPO) or after it has already issued some shares to its first set of
investors.
Now let’s explore this concept deeply, step by step, in a humanized manner.
Why is Further Issue of Share Capital Needed?
Think of a growing company like a growing child. As a child grows, their needs increase —
more food, better clothes, education, and so on. Similarly, as a company grows, its financial
needs also expand. Some of the main reasons why a company goes for further issue are:
1. Expansion of Business – Just like the bakery owner wants to open more outlets,
companies need money to grow and expand their operations.
2. Modernization and Technology Upgradation – Old machines slow down production.
New machines require heavy investment, which is often collected by issuing more
shares.
3. Debt Repayment – Sometimes, companies borrow money through loans or
debentures. To repay these debts and reduce financial burden, they issue fresh
shares.
4. Working Capital Needs – Day-to-day operations like paying salaries, buying raw
material, and managing logistics require constant cash.
5. Strategic Reasons – At times, issuing more shares helps companies invite new
investors, build partnerships, or strengthen their financial base.
Types of Further Issue of Share Capital
The law (mainly Companies Act, 2013 in India) provides a proper framework for further
issue. There are several ways in which a company can issue further shares:
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1. Rights Issue
• In a rights issue, the company offers new shares to its existing shareholders first, in
proportion to their existing holdings.
• Example: If you already own 100 shares, and the company announces a rights issue
of 1:10, you get the right to buy 10 more shares.
• This method is fair because it protects the interest of current owners. They get the
first chance to maintain their level of ownership.
2. Bonus Issue
• Imagine your bakery made good profits. Instead of giving you cash, it says, “Here,
take extra shares as a gift.”
• That’s what a bonus issue is — free shares given to existing shareholders out of the
company’s accumulated profits or reserves.
• Shareholders don’t pay for it, but the value of their total holding increases.
3. Private Placement
• Here, the company doesn’t go to the public. Instead, it issues shares to a small,
select group of investors (like banks, venture capitalists, or wealthy individuals).
• This is faster and less expensive than issuing shares to the general public.
4. Preferential Allotment
• In this case, shares are issued to particular investors on a preferential basis.
• For example, if a bakery wants to bring in a famous chef as a partner, it may allot
him shares directly, even if he wasn’t an earlier investor.
5. Employee Stock Option Plan (ESOP)
• Companies sometimes reward their employees with shares.
• It motivates employees, making them feel like part-owners of the business.
Legal Provisions for Further Issue of Share Capital
Issuing new shares is not like selling cakes in a bakery. It involves rules and regulations to
ensure transparency and fairness. The Companies Act, 2013 (Section 62 and others)
provides guidelines such as:
1. Board Approval – The board of directors must approve the decision.
2. Shareholders’ Approval – In some cases, a special resolution in the general meeting
is required.
3. Filing with Registrar of Companies (RoC) – Every further issue must be recorded and
filed with the RoC.
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4. Pricing and Valuation – Shares cannot be issued at random prices; valuation must be
fair and justified.
Advantages of Further Issue of Share Capital
1. Funds Without Debt – Unlike loans, issuing shares doesn’t require repayment. The
company gets funds permanently.
2. Expansion Opportunities – It gives the company the capital to grow and compete.
3. Employee Motivation – Through ESOPs, employees become more loyal and
productive.
4. Stronger Balance Sheet – Raising funds through equity improves the financial
strength of the company.
Disadvantages or Limitations
1. Dilution of Ownership – When new shares are issued, the ownership percentage of
old shareholders decreases if they don’t buy additional shares.
2. Control Issues – New investors may gain voting rights and influence decisions.
3. Market Reaction – Sometimes, issuing too many shares makes investors feel the
company is in trouble, which can hurt its reputation.
4. Procedural Hassles – Legal compliance, paperwork, and approvals can be time-
consuming.
Real-Life Example
Take the case of Reliance Industries Limited (RIL). In 2020, it announced a rights issue worth
₹53,000 crore. Existing shareholders were given the right to buy additional shares at a
discounted price. This helped Reliance strengthen its balance sheet and reduce debt, while
shareholders got the benefit of acquiring more shares at lower cost.
Conclusion
The further issue of share capital is like adding new fuel to a moving train. Without it, the
train (company) might slow down or stop. With it, the train gains speed and can travel much
farther.
It is a crucial tool for companies to meet financial needs, expand business, and stay
competitive in the market. While it has both benefits and drawbacks, when done with
proper planning and transparency, it can be a win-win situation for both the company and
its shareholders.
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So, if we go back to our bakery story — whenever the owner dreams of expanding into new
cities, introducing new products, or simply strengthening his bakery’s finances, he can
always look at the further issue of share capital as his reliable partner in growth.
6. Discuss the powers and duties of a Director of a company under Companies Act.
Ans: Powers and Duties of a Director under the Companies Act
Imagine you are watching a cricket match. Every team has players, but among them, the
captain plays a very special role. The captain does not bat or bowl for everyone else, but he
takes decisions, guides the team, and ensures that the match is played according to the
rules of the game.
Now, in the business world, a company is like a team, and the Directors are its captains.
They are not ordinary members – they are chosen to guide the company, make important
decisions, and ensure everything runs according to law. The Companies Act (in India, the
Companies Act 2013) clearly lays down what powers a director enjoys and what duties he
must fulfill.
To understand it better, let’s imagine a company called “Bright Future Ltd.” This company
was started by some entrepreneurs with a dream to grow big. But soon, they realize that
handling such a large organization needs skilled and trustworthy leaders. So, they appoint
Directors. These directors are like the steering wheel of the company. Without them, the
company may move but will have no proper direction.
Now let us explore, in a simple and story-like way, the powers and duties of a Director.
1. Powers of a Director – The Authority to Act
The powers of a director are like the keys to the company’s treasure chest. But these keys
cannot be used recklessly – they must be used for the good of the company and its
shareholders.
Here are the main powers explained in a lively manner:
(a) Power to Manage the Affairs of the Company
Directors are responsible for controlling and managing day-to-day business operations. Just
as a captain decides the batting order in cricket, directors decide the business policies,
production levels, and market strategies of the company.
For example, in Bright Future Ltd., the directors decide whether to launch a new product or
expand into another city.
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(b) Power to Borrow Funds
Every company sometimes needs money to grow. Directors have the power to borrow
money on behalf of the company – from banks or financial institutions. But, like a
responsible family head, they cannot borrow endlessly. The borrowing is usually within
limits set by shareholders or the Articles of Association.
(c) Power to Issue Shares and Debentures
To raise funds, directors can issue shares or debentures. This is like inviting new players into
the team by offering them a stake in the company’s success.
(d) Power to Make Contracts
The director acts as the company’s agent. If a company has to sign a deal with another
business, it is the director who holds the power to enter into contracts on behalf of the
company.
For instance, if Bright Future Ltd. signs an agreement with an advertising company, the
director is the one signing it.
(e) Power to Appoint Key Officers
Just as a captain chooses the vice-captain or key fielders, directors can appoint managers,
secretaries, or other officers. They decide who will handle which department, ensuring
smooth functioning of the company.
(f) Power to Recommend Dividends
Dividends are the profits shared with shareholders. Directors recommend how much
dividend should be paid, though the final approval rests with shareholders.
(g) Other General Powers
Directors can invest company funds, approve mergers, or take decisions to ensure growth.
However, many of these require shareholder approval.
In short, the directors are like trusted leaders who have the authority to make important
decisions, but always within the boundaries of law and the company’s own rules.
2. Duties of a Director – The Responsibilities to Fulfil
If powers are like keys, then duties are the locks that keep misuse away. Powers without
duties can create chaos, so the law puts several responsibilities on directors.
Let’s explore them in simple, relatable terms:
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(a) Duty of Good Faith
A director must always act in the best interest of the company. Imagine if a cricket captain
started playing only for his own records instead of the team’s victory – the team would
suffer. Similarly, directors must put the company’s success above their personal gain.
(b) Duty of Care, Skill, and Diligence
Directors must act like responsible guardians. They must make decisions with proper care,
using their skill and knowledge. Carelessness can cause huge losses.
For example, if directors of Bright Future Ltd. invest money in a risky scheme without
research, they would be failing in their duty.
(c) Duty to Avoid Conflict of Interest
Directors must not place themselves in situations where their personal interest clashes with
the company’s interest. Suppose a director owns another business in competition with his
own company and secretly diverts contracts – that would be against his duty.
(d) Duty Not to Make Undue Gain
A director should not use his position for personal profit at the cost of the company. If he
makes undue gain, he has to return it to the company.
(e) Duty to Attend Meetings
Just as a captain cannot lead the team sitting at home, directors must attend board
meetings and actively participate in decision-making.
(f) Duty to Maintain Confidentiality
Directors have access to inside information. They must not leak confidential details to
outsiders. Imagine if a director of Bright Future Ltd. secretly tells a rival about a new product
launch – the company could suffer massive losses.
(g) Duty to Follow the Law and Articles of Association
Directors must respect the provisions of the Companies Act, Memorandum of Association,
and Articles of Association. They cannot take decisions that go beyond these legal
boundaries.
(h) Duty to Ensure Financial Transparency
Directors must make sure that proper books of accounts are maintained and financial
statements are prepared honestly. This protects shareholders and builds trust.
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3. Balance Between Powers and Duties
A beautiful aspect of corporate law is the balance between a director’s powers and duties. If
they only had powers, they might misuse them. If they only had duties without powers, they
could do nothing. The law creates a balance:
• Powers allow directors to act.
• Duties ensure they act responsibly.
Think of it like giving someone a car. The powers are the steering wheel and accelerator, but
the duties are the brakes and traffic rules. Together, they ensure a safe journey for the
company.
4. Consequences of Misuse
If directors misuse their powers or neglect their duties, the law can hold them personally
liable. They may have to compensate the company for losses, or in extreme cases, face
penalties and disqualification.
Conclusion – Directors as the Guardians of the Company
In the end, directors are like the guardians of a company’s soul. Their powers allow them to
lead, but their duties remind them to lead with honesty, care, and responsibility. Without
directors, companies would be like ships without captains – directionless and vulnerable.
The Companies Act, therefore, wisely gives them authority but also binds them with
responsibilities. For students, the key idea to remember is simple: a director is not just a
boss but a trustee, caretaker, and guide for the company.
So, whenever you think of directors, imagine them as captains of a big corporate ship. Their
powers help the ship sail forward, and their duties ensure it does not sink due to greed or
negligence.
SECTION-D
7. What are Board Meetings? How they are conducted ? Discuss.
Ans: 7. What are Board Meetings? How they are conducted? Discuss.
Imagine a ship sailing in the middle of the ocean. The ship has many workers – engineers,
sailors, cooks, cleaners – each playing their part. But at the top, there is a small group of
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people sitting in the captain’s cabin with maps and charts, deciding where the ship should
go, what route should be followed, and how resources should be used. That group of people
is like the Board of Directors of a company, and their regular discussion sessions are called
Board Meetings.
Just like the captain cannot steer the ship alone without planning with his officers, a
company cannot run smoothly unless its directors sit together, exchange ideas, review
progress, and take important decisions. This process of formal, structured discussions is
what we call a Board Meeting.
Now, let us dive step by step into this concept.
1. What are Board Meetings?
A Board Meeting is an official gathering of the Board of Directors of a company. The
directors are the elected representatives who manage the overall affairs of the company on
behalf of the shareholders (the owners).
• Think of the Board Meeting as a “parliament” of the company, where directors act as
lawmakers and decision-makers.
• It is not a casual chat over tea; it is a formal and legally recognized meeting where
decisions are taken that affect the entire company, its employees, and sometimes
even society at large.
• The discussions and decisions in Board Meetings are recorded in writing (in a
document called the Minutes) so that there is proof and transparency.
In simple words, a Board Meeting is a platform where the directors of a company come
together to guide its present and shape its future.
2. Why are Board Meetings Important?
To understand the importance, let’s take another example. Imagine a cricket team. Every
match, the captain and coach call a team meeting to decide the strategy – who will bat first,
how to handle the opposition, and how to improve performance. Without such meetings,
the team would be confused and directionless.
Similarly, in a company:
• Policy Making: Big decisions like launching a new product, expanding into another
country, or merging with another company are taken.
• Accountability: Directors review the performance of the company and ensure
managers are doing their jobs properly.
• Transparency: Decisions are recorded, reducing chances of fraud or secrecy.
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• Compliance: Certain laws require companies to hold Board Meetings, making it a
legal necessity.
Thus, Board Meetings are the heartbeats of corporate governance. They keep the
organization alive, healthy, and moving in the right direction.
3. How are Board Meetings Conducted?
Now comes the most interesting part: the procedure. Just like a wedding ceremony follows
rituals step by step, a Board Meeting also follows a formal sequence.
Let’s walk through the process:
(a) Calling the Meeting (Notice)
• Before a meeting takes place, all directors must be informed in advance. This is done
by sending a Notice of Meeting.
• The notice mentions the date, time, venue, and agenda (the list of issues to be
discussed).
• It is usually sent at least 7 days before the meeting (though the exact period may
differ depending on the law of the land).
This step is like inviting guests to a wedding—you cannot just suddenly gather everyone;
they need time to prepare.
(b) Preparing the Agenda
• The Agenda is like a menu card of the meeting. It tells directors what topics will be
discussed – for example, approving the budget, appointing a new manager, or
declaring dividends.
• Having an agenda ensures that the meeting is focused and not wasted in
unnecessary talks.
(c) Quorum (Minimum Attendance)
• For the meeting to be valid, a minimum number of directors must be present. This is
called the quorum.
• For example, if a company’s law says that at least 1/3rd of directors must be present,
and the board has 9 directors, then at least 3 directors must attend.
• If the quorum is not met, the meeting cannot proceed.
It’s like a classroom test—if only 2 students turn up, the teacher cannot conduct the exam!
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(d) Conducting the Meeting
• Once the meeting begins, the Chairman (a senior director) presides over it. He
ensures discipline, fairness, and smooth discussions.
• Directors present reports, discuss issues, debate ideas, and finally take decisions.
• Decisions are usually made through a resolution – a formal proposal that is either
accepted or rejected by voting.
o Ordinary Resolution: Passed by simple majority.
o Special Resolution: Requires a higher percentage, often 75%.
(e) Recording the Minutes
• Every important detail of the meeting—who attended, what was discussed, what
decisions were made—is written down in the official record called Minutes of the
Meeting.
• These minutes are signed by the Chairman and preserved as legal proof.
This step is like writing a diary entry for the company, ensuring that nothing is forgotten and
everything is transparent.
4. Types of Board Meetings
Not all Board Meetings are the same. They can be of different kinds depending on purpose:
1. First Board Meeting: Newly formed companies must hold their first meeting within a
prescribed time.
2. Regular/Quarterly Board Meetings: To review progress and plan ahead, companies
must hold meetings at regular intervals.
3. Emergency Meetings: Called at short notice if something urgent happens (like a
sudden financial crisis).
4. Committee Meetings: Sometimes sub-groups of the board meet for specific
purposes, like audit or finance.
5. Legal Provisions Regarding Board Meetings
Different countries have their own company laws, but generally, they require:
• A minimum number of Board Meetings per year (for example, 4 in India, one in each
quarter).
• Proper notice and agenda.
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• Quorum for validity.
• Proper recording of minutes.
Thus, Board Meetings are not just traditions; they are backed by law.
6. Challenges in Board Meetings
While the idea is simple, real-life Board Meetings often face challenges:
• Lack of preparation: Some directors don’t read reports in advance, wasting time.
• Conflicts: Different directors may have clashing interests.
• Lengthy discussions: If not managed well, meetings can drag for hours.
• Dominance: Sometimes one powerful director overshadows others.
This is why good chairmanship, discipline, and mutual respect are crucial.
7. Conclusion
To wrap it up, let’s go back to our ship story. A ship may have the strongest engine and the
best crew, but if the captain and officers don’t sit together and plan the journey, the ship
may lose its way or crash. Similarly, a company may have skilled employees and modern
technology, but without effective Board Meetings, it risks drifting aimlessly.
A Board Meeting is the steering wheel of a company.
It ensures proper direction, legal compliance, and responsible decision-making. Conducted
with notice, agenda, quorum, fair discussion, and proper recording, it transforms the vision
of directors into concrete actions.
Thus, Board Meetings are not just routine formalities – they are the soul of corporate
governance, balancing the interests of shareholders, employees, and society.
8. Discuss the procedure of winding up of a company in detail.
Ans: Imagine a company as a living entity, like a tree that has grown from a small seed into a
strong plant over the years. It has employees, shareholders, debts, assets, and a purpose.
But sometimes, just like trees, companies reach a stage where they cannot continue to
grow, or the purpose they were formed for has come to an end. Perhaps it is facing financial
difficulties, shareholders want to part ways, or it has simply completed its business
objectives. At this stage, the company must be “put to rest” in a formal process called
winding up.
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Winding up is the legal process through which a company is brought to an end, its assets are
realized (turned into cash), debts are paid off, and any remaining money is distributed
among the shareholders. It’s like gently dismantling the structure of the company so that
everything is properly accounted for, leaving no loose ends behind. There are two main
types of winding up: voluntary and compulsory. Let’s explore them as if we are telling a
story of a company’s journey toward closure.
1. Voluntary Winding Up
Voluntary winding up happens when the shareholders themselves decide that it’s time to
end the company. It’s like the family of the tree deciding that it has served its purpose, and
they want to plant a new tree in a better place. Voluntary winding up can be of two types:
a) Members’ Voluntary Winding Up
This occurs when the company is solvent, meaning it has enough assets to pay off all its
debts. Here’s the step-by-step story:
1. Declaration of Solvency:
The directors prepare a statement called a “declaration of solvency” stating that the
company can pay off its debts within a specific period, usually 12 months. This is like
saying, “Yes, we are healthy enough to close peacefully.”
2. Special Resolution:
The shareholders hold a meeting and pass a special resolution to wind up the
company voluntarily. It is like the family agreeing unanimously to take down the old
tree and planting a new one.
3. Appointment of Liquidator:
A liquidator is appointed, who is like a caretaker ensuring the company’s affairs are
settled correctly. The liquidator collects the company’s assets, sells them, and uses
the proceeds to pay off debts.
4. Payment of Debts:
First, the company clears all debts with creditors. Imagine clearing all dues with
neighbors before leaving a village.
5. Distribution of Surplus Assets:
Any remaining money is distributed among the shareholders in proportion to their
shares. This is the company’s final gift to its owners.
6. Final Meeting and Dissolution:
The liquidator calls a final meeting to report the completion of winding up. After
filing this report with the Registrar of Companies (RoC), the company ceases to exist.
b) Creditors’ Voluntary Winding Up
Sometimes a company is unable to pay its debts. It’s like realizing the tree has decayed and
cannot provide fruits anymore. In this case:
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1. Decision by Directors and Shareholders:
The company decides to wind up voluntarily because it cannot meet its financial
obligations.
2. Appointment of a Liquidator:
A liquidator is appointed to manage the company’s closure.
3. Meeting of Creditors:
A meeting of creditors is held to inform them about the company’s financial situation
and how debts will be paid. Creditors are given a say in the process.
4. Liquidation Process:
The liquidator sells the company’s assets and pays creditors in a prescribed order of
priority—secured creditors first, then unsecured creditors.
5. Distribution of Remaining Assets:
If anything remains after paying debts (rare in this scenario), it is distributed among
the shareholders.
6. Final Steps:
The liquidator files a final report with the RoC, and the company is officially
dissolved.
2. Compulsory Winding Up
Now, sometimes the story is not voluntary. Imagine the village elders (the court) stepping in
because the tree has become dangerous or is harming the surroundings. This is compulsory
winding up, where the court orders the company to be closed. This usually happens when:
• The company cannot pay its debts.
• It is conducting business fraudulently.
• It is against public interest.
• The number of members falls below the minimum legal requirement.
Here’s the procedure in this scenario:
1. Filing a Petition:
A petition is filed to the court by creditors, shareholders, or the company itself. It’s
like raising an alarm that the tree is in danger.
2. Court Hearing:
The court examines the petition and the company’s condition. If satisfied, it passes
an order for winding up.
3. Appointment of Official Liquidator:
The court appoints an official liquidator, who now has the authority to take control
of the company.
4. Taking Control:
The liquidator takes over the company’s assets and operations, stopping any further
business.
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5. Realization of Assets:
Assets are sold, debts are paid, and the process follows the legal hierarchy of
payments.
6. Distribution:
After satisfying creditors, any remaining assets go to the shareholders.
7. Final Report and Dissolution:
The liquidator files a detailed report with the court, and the company is officially
struck off the register.
Key Concepts During Winding Up
• Liquidator’s Role: The liquidator is like the guardian of fairness. Their duty is to
collect assets, sell them, pay debts, and distribute remaining funds correctly. They
also investigate the company’s affairs to ensure no fraud or mismanagement
occurred.
• Order of Payment: Priority is given first to secured creditors, then to employee
wages, taxes, and finally to unsecured creditors. Only after all debts are cleared, the
shareholders receive any remaining assets.
• Legal Formalities: Winding up is guided by the Companies Act and other regulations.
Notices must be published, meetings conducted, and proper records maintained to
ensure transparency.
• Final Dissolution: Once all steps are completed, the company is removed from the
official register, ceasing to exist legally. It’s like the tree being uprooted, and the land
made ready for a new beginning.
Conclusion
The winding up of a company is not just a dry legal process—it’s a journey of closure,
responsibility, and fairness. Whether voluntary or compulsory, it ensures that debts are
cleared, shareholders are treated fairly, and the law is followed. Think of it as a company
completing its life cycle, leaving behind lessons for the future, much like the story of a tree
that grew, bore fruits, and finally gave way for new growth.
This procedure teaches valuable principles: planning, responsibility, accountability, and
fairness, which are crucial not only for companies but for life in general. By understanding
winding up as a structured yet humane process, it becomes easier to appreciate how the
corporate world balances ambition with responsibility, growth with closure, and business
with ethics.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
