161 0404

Question Paper
Economic Legislation – I (161) : April 2004

 Answer all questions.
 Marks are indicated against each
question.
< Answer
1. Which of the following are the advantages of Law? >
(a) Formalism, as more emphasis is put on the form of law than its substance
(b) Law is conservative in nature as the lawyers and judges favor continuation of the existing law
(c) Very often law is static
(d) It is more reliable than individual judgment
(e) Both (b) and (d) above.
(1 mark)
< Answer
2. Which of the following amounts to a valid consideration? >
(a) The promise not to complain for the father’s promise to release him
(b) A promise to do something which are is already bound to do under an existing contract
(c) A person undertakes to do something more than what he is bound to do under the original
contract
(d) Both (a) and (c) above
(e) Both (b) and (c) above.
(1 mark)
< Answer
3. An absolute contract for sale of future goods can be made by >
(a) The future sale of present goods (b) Present sale of a chance of obtaining goods
(c) A sale of a mere expectation depend upon a chance
(d) Both (b) and (c) above (e) (a), (b) and (c) above.
(1 mark)
< Answer
4. Which of the following is/are not the privileges of holder in due course? >
(a) If the negotiable instrument is lost, the defenses on the part of a person liable on a negotiable
instrument cannot be set up against a holder in due course
(b) Once negotiable instrument passes through the hands of a holder in due course, it gets cleansed
of all the defects even though the holder in due course is party to the fraud
(c) Until the instrument is duly satisfied, every prior party to a negotiable instrument is liable to a
holder in due course
(d) Both (a) and (b) above
(e) Both (a) and (c) above.
(1 mark)
< Answer
5. Which of the following provisions are not applicable to private companies? >
(a) Two thirds of the directors must retire by rotation

(b) Appointment of statutory auditor
(c) Conducting of extra-ordinary general meeting
(d) Minimum number of directors
(e) Director holding office of place of profit.
(1 mark)
< Answer
6. Which of the following are the exceptions to Doctrine of caveat emptor? >
(a) Implied conditions of fitness

(b) Where the seller makes true statement in the goods and the buyer relies on the judgment of the
seller
(c) An implied condition as to quality or fitness for a general purpose may be annexed by usage of
trade
(1 mark)
< Answer
7. Explanatory statement u/s 173(2) is required to be given at an extra-ordinary general meeting for >
(a) All agenda items

(b) Ordinary business matters
(c) Matters those require ordinary resolution
(d) The matters where resolution require special notice
(e) The matters, which require special resolutions.
(1 mark)
< Answer
8. Any loss caused to the beneficial owner due to the negligence of the depository (or) participant shall >
be indemnified by the
(a) Participant (b) Depository
(c) Securities Exchange Board of India (d) Central Government
(e) Company.
(1 mark)
< Answer
9. Change of registered office of the company from one city, town, village to another city, town, village >
but from the jurisdiction of one ROC to another ROC within the same state requires-
(a) Special resolution and permission of the court
(b) Ordinary resolution and permission of the court
(c) Special resolution and permission of Central Government
(d) Special resolution and confirmation of Regional Director
(e) Special resolution and confirmation of National Company Law Tribunal.
(1 mark)
< Answer
10. ABC Ltd. company has 3 directors (the company also has managing director), who are neither in the >
whole time employment of the company nor a managing director, how much remuneration may be
paid to them under the Companies Act, 1956?
(a) Three per cent of the net profits of the company
(b) One per cent of the net profits of the company
(c) Five per cent of the net profits of the company
(d) Eleven per cent of the net profits of the company
(e) Two per cent of the net profits of the company.
(1 mark)
< Answer
11. Under the Sale of Goods Act, 1930,which of the following is/are the implied warranty(ies)? >
(a) Warranty of quiet possession (b) Warranty of freedom from encumbrances

(c) Warranty as to quality or fitness (d) Both (a) and (b) above
(e) All (a), (b) and (c) above
(1 mark)
The rights of the members of a company can be classified into < Answer
12. >
(a) Statutory rights and moral rights
(b) Moral rights and ownership rights
(c) Ownership rights and statutory rights
(d) Statutory rights and contractual rights
(e) Contractual rights and ownership rights.
(1 mark)
Under which of the following grounds, the court may set an arbitral award aside? < Answer
13. >
(a) Arbitral award deals with a dispute not contemplated by the terms which are beyond the scope
of the submission to arbitration
(b) Party was under some incapacity
(c) The arbitral award is in conflict with the public policy of India
(d) Both (b) and (c) above
(e) (a), (b) and (c) above.
(1 mark)
Provisional contracts means < Answer
14. >
(a) Contract entered by a private company for purchase of raw material
(b) A contract entered by the promoters of the company before its incorporation
(c) A contract entered into by a private company after its incorporation
(d) A contract entered into by a public company after obtaining certificate of incorporation but
before obtaining certificate of commencement of business
(e) Contracts entered into by a private company with its directors.
(1 mark)
< Answer
15. How much maximum sitting fees can be paid to a director for attending the general meeting? >
(a) Rupees three thousand (b) Ten percent of the profits

(c) Eleven percent of the current year net profits (d) Rupees five thousand
(e) Nothing can be paid.
(1 mark)
< Answer
16. Which of the following statements is false? >
(a) A cheque may be crossed (b) A demand draft can be crossed

(c) A bill of exchange can be crossed (d) The drawee of a cheque is always a banker
(e) A notice of dishonor should be given to the drawer in case of dishonor of a bill.
(1 mark)
< Answer
17. Which of the following is/are the major differences between the general meeting and a board >
meeting?
(a) No quorum is required for the adjourned meeting of the company but quorum is required for
every board meeting
(b) In the case of general meetings notice must specify the agenda items, in the case of board
meetings agenda items need not be specified
(c) In the case of general meetings members can be represented by proxy(s) but in board meetings
directors have to attend personally
(1 mark)
< Answer
18. Which of the following is/are the remedies available in case of a breach of a contract? >
(a) Rescission (b) Restitution

(c) Claim damages (d) Both (b) and (c) above
(1 mark)
< Answer
19. Under the TP Act 1882, which of the following are the exceptions to the general rule that every kind >
of property can be transferred?
(a) Right to sue (b) Stipends and pensions
(c) Actionable claims (d) Both (a) and (b) above
(1 mark)
< Answer
20. Which of the following statements is true? >
(a) All Pre incorporation contracts are void under the Companies Act, 1956
(b) Members and Company are one and same
(c) Provisional Contracts are void
(d) Central Government will appoint the first director of the company
(e) Company can exercise all those Rights that are applicable to Citizens of India.
(1 mark)
< Answer
21. The board of directors of ABC Ltd. company appointed Mr. Z as managing director at its board of >
directors meeting though not mentioned in the agenda items. Is the appointment valid?
(a) The board of directors do not have power to appoint managing director, hence the appointment
is invalid
(b) With out the agenda item the appointment of managing directors cannot be taken in the board
meeting hence the appointment is invalid
(c) In the board meetings other than the agenda items also can be resolved with the permission of
the chair hence the appointment is valid
(1 mark)
< Answer
22. Which of the following contracts is valid? >
(a) Where a contract has many objects but only one consideration
(b) Where a contract has several objects but some of which are legal and some of them are illegal,
but they both are inseparable
(c) Contracts which do not explicitly cross the limits of legality
(d) Contracts which involve non-criminal breach of law
(e) Agreement to sale of good will.
(1 mark)
< Answer
23. Which of the following instruments are permitted to use adhesive stamps? >
(a) Securities of a company by a Depository (b) Mortgage of property

(c) Entry an on advocate (d) Notarial acts
(e) Both (c) and (d) above.
(1 mark)
< Answer
24. Which of the following is true? >
(a) There are always two parties in a contract of guarantee

(b) The liability of the surety is primary
(c) It is necessary for the indemnifier to act at the request of the indemnity holder
(d) The surety generally gives the guarantee at the request of the principal debtor
(e) In a contract of indemnity three parties are necessary.
(1 mark)
< Answer
25. What is the legal position of an undated instrument under the Negotiable Instrument Act, 1881? >
(a) Not invalid (b) Invalid

(c) Voidable (d) Void ab initio
(e) Becomes void when the party claims for rights.
(1 mark)
< Answer
26. The Chairman of SEBI is appointed by >
(a) Central Government (b) Reserve Bank of India
(c) Registrar of Companies (d) Jointly by the members of SEBI and ROC
(e) Members of SEBI in consultation with the Ministry of Finance of the Central Government.
(1 mark)
< Answer
27. Which of the following is/are false? >
(a) Hire purchase agreement may be oral

(b) Hire purchase agreement is virtually a contract of bailment
(c) The hirer has an option to terminate the agreement at any stage
(d) In hire purchase where the hirer is not exercised to purchase, each installment is regarded as part
payment of the price
(e) Both (a) and (d) above.
(1 mark)
< Answer
28. The amount of compensation that can be claimed by a person for the services rendered by him when >
there was no express promise to any definite remuneration is determined by the Doctrine of
(a) Restitution (b) Uberrimae Fidei
(c) Quantum meruit (d) Supervening impossibility
(e) Caveat emptor.
(1 mark)
< Answer
29. Which of the following amounts to restrictive endorsement? >
(a) Which proposes to transfer to the endorsee a part only of the amount payable on the instrument
(b) Which prohibits further negotiation of an endorsement
(c) Which limits or negatives the liability of the endorser
(1 mark)
< Answer
30. Which of the following decisions can be taken by committee of Board of Directors? >
I. To buy shares of other companies; II. To open bank account;

III. To change the signatories to bank account;
IV. To approve and sign annual accounts; and V. To make donations.
(a) Only (I) above (b) Both (I) and (II) above
(c) (I), (II) and (III) above (d) All (I), (II), (III), (IV) and (V) above
(e) (II), (III) and (V) above.
(1 mark)
< Answer
31. Which of the following is true as regards the difference between assignment and negotiation under >
the Negotiable Instruments Act, 1881?
(a) Assignment may or may not be in writing where as negotiation must be in writing
(b) Title of assignee is not important matter where as in case of negotiation the title of the transferor
is better then that of the transferee
(c) Consideration is presumed in case of negotiation but whereas in assignment the transferee must
prove consideration for the transfer
(d) Either of the above
(e) Both (a) and (b) above.
(1 mark)
< Answer
32. Every company should file its annual return within >
(a) 15 days of the holding of the Annual General Meeting

(b) 30 days of the holding of the Annual General Meeting
(c) 45 days of the holding of the Annual General Meeting
(d) 60 days of the holding of the Annual General Meeting
(e) 90 days of the holding of the Annual General Meeting.
(1 mark)
< Answer
33. Which of the following is false? >
(a) In case of equal guilt, the plaintiff is in a better position

(b) Consent obtained by fraud is voidable
(c) Void contract is contradiction in itself
(d) A void contract is the one which is destitute of all legal effect
(e) All illegal agreements are not void, and all void agreements are not illegal.
(1 mark)
< Answer
34. Special business matters means – >
(a) The matters which require special resolution

(b) The matters which require ordinary resolution
(c) The matters which require permission from Central Government
(d) The matters which require permission from Tribunal
(e) The matters other then ordinary business matters.
(1 mark)
< Answer
35. The board of directors of a company declared interim dividend, with in how many days the interim >
dividend must be paid?
(a) Thirty days (b) Forty five days
(c) Sixty days (d) Ninety days (e) Forty two days.
(1 mark)
< Answer
36. Which of the following matters require passing of special resolution? >
(a) Reduction of share capital

(b) Issue of shares at discount
(c) Appointment of Managing Director
(d) Alteration o capital clause of memorandum of association of a company
(e) Borrowing money is excess of paid up capital and free reserves.
(1 mark)
< Answer
37. An agreement which is found to be extortionate against the party to whom assistance is provided is >
(a) Void (b) Unenforceable
(c) Valid (d) Voidable (e) Both (a) and (b) above.
(1 mark)
< Answer
38. Securities premium account of a company can be utilized for >
(a) Payment of dividends (b) Purchase of movable property

(c) Purchase of immovable property (d) Buy-back of securities
(e) Discharge of any current liabilities.
(1 mark)
< Answer
39. Which of the following companies is required to appoint managing director or manager or whole >
time director?
(a) A company who’s paid up capital is fifty lakhs or more
(b) A company who’s paid up capital is five crore or more
(c) A company who’s paid up capital is five lakhs or more
(d) A company who’s paid up capital is fifty crore or more
(e) A company who’s paid up capital is fifty thousand or more.
(1 mark)
< Answer
40. Which of the following is true as regards to the essentials of a valid tender? >
(a) A tender must be conditional (b) A tender must be unconditional

(c) A tender need not be make at a proper time and place
(d) A tender in part is valid (e) A tender can be made to any person.
(1 mark)
< Answer
41. Members present at the annual general meeting of Downturn (Pvt.) Ltd. did not adopt the accounts on >
the ground that the company has not shown true profits. They, however, declared the dividend as
recommended by the Board of directors. The board of directors are entrusted the responsibility to
correct the accounts, and find out the true profits for that year by the members attended in that general
meeting The registrar of companies issued a notice on the company stating that the members of the
company violated the provisions of Companies Act by declaring the dividend out of capital. In the
context of the above scenario, Which of the following statements is/are true?
(a) It amounts to declaration of dividend out of capital, hence void
(b) It is valid provided the provisions of the companies Act is complied
(c) Private Ltd. company can declare dividend out of capital
(d) Adoption of accounts and declaration of dividend is inter related, hence with out adopting the
accounts dividend cannot be declared
(2 marks)
< Answer
42. Rasi Ltd. has paid up capital of Rs. 1 crore and LIC holds 10% of the same. The company issued notice >
on 15th June 2003 by calling its annual general meeting on 26th July 2003 inter alia proposing the
appointment of an auditor. On 30th June 2003 the company issued and allotted 50,000 preference shares
of Rs. 100 each to LIC by private placement. Rasi Ltd. advertised closure of its register of members in
newspapers on 7th July 2003 stating that effective 15th July 2003 the register of members shall remain
closed until 26th July 2003. In the annual general meeting held on 26 th July 2003, the auditor was
appointed by passing an ordinary resolution. The Registrar of Companies raised an objection that since
LIC holds more than 25% of the share capital on the day of the meeting, the appointment of auditor
will be invalid unless made by a special resolution. The chairman replied that since at the time of issue
of the notice, the LIC holding was only 10%, ordinary resolution is valid and further stated that the
shares allotted on 30th June, 2003 to LIC were preference shares only and not to be counted for the
purpose. In the context of the above situation which of the following provisions of the Companies Act
is violated?
(a) Company cannot allot preference shares by private placement
(b) Preference shares by private placement cannot be allotted to LIC
(c) The register of members cannot be closed after dispatching the notice of the annual general
meeting
(d) The appointment of the auditor in this company must be made by a special resolution
(2 marks)
< Answer
43. Anita, a minor aged 15 years, purchased 100 fully paid equity shares of a company and submitted a >
transfer deed to the company for registration in her name, duly executed by her father and natural
guardian. The company refused to transfer, as Anita is a minor. In this context which of the following
statements is/are true?
(a) Shares cannot be transferred to a minor
(b) Fully paid up shares can be transferred to the minor
(c) Through a natural guardian, shares can be transferred
(d) Shares can be transferred on the name of the natural guardian of the minor
(2 marks)
< Answer
44. On Jan 15, 2003 Amar issued a cheque for Rs.51,000 in favour of Anand drawn on Goodluck bank >
towards the settlement of a debt. Anand did not present the cheque for payment within reasonable time
though there was sufficient balance in the account of Amar. The bank went into liquidation and a
scheme for settlement of debts was approved. The bank paid 50 paise for a rupee when the cheque was
presented. Who is liable to pay the remaining amount?
(a) Amar is liable to pay Rs.25,500 with interest
(b) Bank is liable to pay Rs.51,000
(c) Amar is liable to pay Rs.25,500
(d) Amar is not liable to pay any amount
(e) Anand can sue the banker for the balance amount of Rs.25,500.
(2 marks)
< Answer
45. A company called for a meeting of board of directors without giving notice to directors as required >
under the Companies Act, 1956. All the directors attended to that meeting. Later the board of directors
at a regularly constituted meeting ratified the proceedings of that meeting, but the Registrar of
companies objected that with out sending notice under section 286 to all the directors whose addresses
are available in India, no meeting of the board of directors could be conducted; hence no resolutions
can be implemented. In the above situation what is the validity of the board meeting?
(a) With out notice the board meeting is invalid and hence the decisions cannot be implemented
(b) Directors cannot attend with out notice, hence the meeting is invalid
(c) The meeting is valid and hence the decisions can be implemented
(d) No notice is required to be sent to directors for the board meeting.
(2 marks)
< Answer
46. Amino Textiles Ltd. with paid-up capital of Rs. 30 crore and free reserves of Rs. 5 crore as on March >
31, 2002 has investments of Rs. 8 crore in various companies. The company made the following
further investments:
 50,000 Equity shares of Rs. 10 each at Rs. 390 per share in PQR Co. Ltd., inclusive of 20,000
equity shares renounced by others.
 Investment of Rs. 1 crore in 11% debentures of Albert Pharma Ltd.
 50,000 Units of US-64 issued by the UTI at Rs. 14.50 each
 25,000 Equity shares of Rs. 10 each @ Rs. 130 each in securities. Which of the following
amounts further the company apart from the existing investments can invest in other body corporates?
(a) 10,82,25,000 (b) 18,82,25,000 (c) 10,25,25,000 (d) 17,65,45,000
(e) 8,82,25,000.
(2 marks)
< Answer
47. You are the consultant of the Novo Pharmaceutical (Pvt.) Ltd. Your company has approached IFCI >
Ltd., for a term loan of Rs. 7.5 crore. While IFCI Ltd. agreed to provide the term loan with a condition
of appointing a nominee director in the board, as this company is not a subsidiary of any public
company. On scrutiny of the articles of association of our company, it was found that there was no
provision for appointment of nominee director in your company. But after appointing this nominee
director the total number of directors will go up to thirteen. As a consultant what would be your advise
to the company in this regard?
(a) The company has to alter the articles of association for having a provision of appointing the
nominee director
(b) The nominee directors cannot be appointed in a company, even though the financial institution
demands
(c) The company has to obtain the permission of Tribunal for increasing the directors more than
twelve
(d) Company can appoint nominee director of IFCI even in the absence of a provision in the articles
of association
(2 marks)
< Answer
48. Savoy Ltd. had eight members at the time of incorporation. Within two months, two of the members >
transferred their shares to one of the existing members. After one year, the company went into
liquidation and the creditors sought to recover their dues from the members. The members having paid
full value of the shares accepted no liability. Advise the legal position.
(a) The members are liable to creditors
(b) The member are not liable since their liability is limited
(c) Company is an artificial juristic person, hence it is separate from the members and the creditors
cannot recover from the members but only form the company
(e) None of the above.
(2 marks)
< Answer
49. A, B and C hold jointly 100 shares in a listed company. They want the order of names changed in the >
share certificate as B, A and C and make an application for change and lodge the original share
certificate. The company directed them to execute a proper instrument of transfer to effect the change,
In this context, which of the following statements is/are true?
(a) The company cannot reject for changing the names
(b) The joint shareholders have no authority to request for change of order of names
(c) The order of names once allotted cannot be changed
(d) The company has to reject changing the order of names
(2 marks)
< Answer
50. Standee a managing director of Aswin software Ltd. occupied the guesthouse of the company for >
commercial purposes, as his wife is carrying some other software development. On coming to know
the fact, the company ordered him to vacate the guesthouse, since the house is provided for his
residential purpose but not for the commercial purpose. He still continued to occupy the same. In the
above context which of the following statements is/are true with regard to the taking the possession
back of the guesthouse of the company?
(a) Once residence is provided, it is immaterial to the company for what purpose it is used for, hence
no action can be taken by the company
(b) The company by taking the legal aid can get the possession of the guest house
(c) Since Standee is continuing as managing director, he cannot be asked for vacation of the
residential house
(d) Managing director cannot be questioned by the company, since he is the top cadre officer
(2 marks)
< Answer
51. X, who was appointed as an additional director of a public limited company for the first time, filed his >
consent with the company by way of a letter. He also signed his consent in Form No. 29 and gave it to
the company for filling with the Registrar of Companies. Due to inadvertence the aforesaid consent
was not filed within the prescribed period. What would be the status of X as additional director?
(a) He has to vacate the office of additional director
(b) He can continue as additional director
(c) A request can be made to ROC for extension of time for filing of the Form-29, and then he can
continue as additional director
(d) He cannot be continued as additional director but he can act as regular director
(2 marks)
< Answer
52. Modern Ltd. proposes to appoint Kalid, a relative of one of the directors of the company, as general >
manager marketing on a monthly remuneration of Rs.40, 000. In this context, which of the following
provisions of the Companies Act are to be complied with?
(a) Passing of a board resolution alone is sufficient
(b) Passing of a special resolution is required
(c) Passing of an ordinary resolution and Central Government’s permission are required
(d) Prior consent of the company by a special resolution and the approval of the Central Government
is required
(e) No resolution is required to be passed, but Central Government’s permission is compulsory.
(2 marks)
< Answer
53. A company created a charge on its assets in favor of Lika Bank Ltd. On 1 st October 2003. This charge >
was filed with the Registrar of Companies on 10th October 2003. The Registrar of Companies issued
certificate of registration of charge on 15th October 2003. The same company also created charge on the
same assets in favor of Sahara Bank Ltd. On 9th October 2003 and filed the charge with the Registrar of
Companies on 10th October 2003. The Registrar of Companies registered that charge and issued
certificate on 12th October 2003. Which of the following will be your answer to have priority in
recovering its dues by disposing of the assets?
(a) Creation of charge is important than registration of charge hence Lika Bank will get priority
(b) Registration of charge took place before the other bank, hence Sahara Bank will get priority over
the other
(c) Date of filing is important, hence both will get equal priority over the assets
(d) Even though both filed on the same day who ever filed first will get priority over the other
(e) Latest filed charge holder will get priority over the other.
(2 marks)
< Answer
54. 40 out of 100 members holding 20% of the paid-up capital of ABC Ltd.company submitted a >
requisition for holding an extraordinary general meeting in order to remove the managing director from
the office. On the failure of the company to call the extraordinary general meeting within the time fixed
by law, one of the requisitionist called the meeting at the registered office of the company on a day
falling within the specified period. This requisitionist held 60% of the total paid-up capital of all the
requisitionists on the day the requisition was originally made. On the appointed day, the requisitionists
could not hold the extraordinary general meeting at the registered office as the managing director kept
it under lock. The members held the extraordinary general meeting outside the registered office
premises and passed a resolution for removing the managing director from the office. Is the meeting
and such resolution valid?
(a) The extra-ordinary General meeting must be held at the registered office only, other wise the
meeting is invalid and also the resolution
(b) If the requisitionist themselves conduct the meeting, they must give an opportunity to managing
director to represent himself then only they can pass resolution other wise the resolution is invalid
(c) The meeting is valid and resolutions are also valid
(d) Managing director cannot be removed at an extra-ordinary meeting
(2 marks)
< Answer
55. ‘A’ makes a promissory note in favor of B in respect of a debt owed by ‘A’ to ‘B’. After A’s death, the >
note is found among some of the papers of the deceased A. In the above situation, can B recover the
amount on this instrument?
(a) B cannot recover the amount on this instrument
(b) B can recover the amount from the legal heirs of the deceased A
(c) B can recover the amount from the estate of A
(2 marks)
< Answer
56. Ramsay, a director in RK Limited, resigned from the Board of directors with effect from 17 th March >
2003. R K Limited, which has a managing director, did not file its balance sheet and profit and loss
account for the year ended 31st March 2003 with the Registrar of Companies. Can Ramsay be
prosecuted for non-filing of the said documents?
(a) Ramsay is liable for not filing of the profit and loss account
(b) Ramsay is held liable for not filing of the Balance sheet
(c) Ramsay is not held liable since there exist the Managing Director
(d) Directors are not held liable for not filing accounts with ROC
(2 marks)
< Answer
57. Harischandra is a director in 20 companies as on 1st October 2003. The composition of his directorships >
is as detailed below:
i. Alternative director in 5 public limited companies;
ii. Director in 9 public limited companies;
iii.Director in 5 private companies which are neither subsidiaries nor holding of other public
companies; and
iv. Director in 1 foreign company registered outside India.
Wise Ltd., a public limited company, wants to induct Harischandra as a director in its company.
Whether Harischandra can be appointed as director in Wise Ltd. in terms of Sections 275 of the
Companies Act, 1956.
(a) Wise Ltd. can appoint Harischandra as a director in its board
(b) Wise Ltd. has to obtain the Central Government’s permission for appointing Harischandra as
director, since he already crossed 15 directorships in other companies
(c) Wise Ltd. has to obtain the Central Government’s permission for appointing Harischandra as
director, since he already touched 20 directorships in other companies
(d) There are no limits prescribed for number of directorships for a person, hence Harischandra can
be appointed
(2 marks)
< Answer
58. Directors of ABC Limited are not holding any shares in MDJ Company Limited. Similarly directors of >
MDJ Company Limited are not holding any shares in ABC Limited. But wife of director ‘A’ of ABC
Limited holds 40% of the paid up share capital of MDJ Company Limited. Board of directors of ABC
Limited entered into contract (for purchase of land )with MDJ Company Limited and director ‘A’ did
not disclose his indirect interest in MDJ company limited. What is the legal position of the director A
and the contract?
(a) Director ‘A’ has not violated, hence contract is valid
(b) Director ‘A’ has to disclose his nature of interest in the board meeting, other wise the contract
become invalid
(c) Director ‘A’ has violated the provisions of the Companies Act hence he has to vacate the office
and the contract is viodable
(d) Director need not vacate but contract is invalid
(2 marks)
< Answer
59. Board of Directors of Chemky Ltd. passed a resolution for payment of sitting fees to directors and the >
same was shown as fees due to directors in the balance sheet of the company. Examine whether this
provision of fees due to directors in the balance sheet can be considered as an effective enforceable
acknowledgement of debt of the company?
(a) It is not an acknowledgement of a debt but If it is made with an intention to extend the limitation
for the liability, it is valid
(b) It is an acknowledgment of a debt
(c) Payment of sitting fees is not a debt, hence no acknowledgement of a debt
(d) No provision can be made in the balance sheet for the outstand sitting fees
(2 marks)
< Answer
60. Raven found a purse in a computer education center. He deposited the purse with proprietor of the >
center so that the real owner can claim it. However, no one claimed the purse. Raven wants the purse
back. Can he succeed?
(a) Raven will not succeed as the position of finder of lost goods is that of bailee
(b) Raven will succeed
(c) Raven will succeed by invoking the section 146 of the Indian Contract Act
(d) He is not the owner of the purse and hence he cannot succeed
(e) Raven will not succeed as the purse was found in the computer center, the owner of computer
center can claim the purse.
(2 marks)
< Answer
61. Jolly bought a second hand car from Yogesh for Rs. 85,000 and paid for it. After Jolly had used the car >
for six months, he was deprived of it because Yogesh had no title to it. Can Jolly recover the price of
the car from Yogesh?
(a) Jolly cannot recover the price since she used the car for six moths
(b) Jolly can recover the price from Yogesh
(c) Jolly did not enquire about the ownership of the car she cannot recover
(d) Jolly cannot recover since yogesh has no title to the car
(2 marks)
< Answer
62. A is a minor aged seventeen years who broke his right leg in a football match. He engaged B, a doctor, >
to set it. Does the doctor have a valid claim for his services?
(a) The doctor has valid claim for his services from the minor himself
(b) The doctor cannot claim for his services from a minor
(c) The Doctor can claim for his services from the estate of the minor
(d) It is the choice of the doctor to opt his claim from the minor or from his estate
(2 marks)
< Answer
63. Ankur agreed to sell a horse to Eswar on condition that Eswar will keep the horse for 10 days on trial >
basis and have the option to return the horse within the stipulated period, if he does not find the horse
suitable. However, the horse died on the third day without any fault of either seller or buyer. State the
legal position.
(a) The agreement becomes void
(b) Eswar has to pay damages to Ankur
(c) Ankur can file a suit for loss against Eswar
(d) The agreement becomes viodable at the option of Eswar
(e) The agreement becomes voidable at the option of Ankur
(2 marks)
< Answer
64. ‘A’ employs ‘B’ on a monthly salary of Rs. 5,000 for one year. After six months, he removes B from >
the job without his fault. B goes in search of job and meets with an accident. He spends Rs. 20,000 on
medicines. Now, he claims damages from A for breach of contract and also for medical expenses of Rs.
20,000. Will he succeed on both the counts?
(a) B has no remedy against A
(b) B can file for compensation for the breach of contract
(c) B can file for reimbursement of medical expenses incurred by him in the accident
(d) This is a direct loss caused or damage sustained because for breach of contract, hence B can claim
for re–instatement of employment
(2 marks)
< Answer
65. Arjun, a resident of Delhi, sent a letter of offer to Krishna of Hyderabad on March 01, 2003 relating to >
sale of his house property in Hyderabad for Rs.500, 000. In that letter of offer Arjun mentioned that he
must inform his acceptance on or before March 31, 2003. Krishna accepted the proposal and posted
the letter of acceptance properly addressed and duly stamped on March 29, 2003. The letter of
acceptance sent by Krishna was lost in transit. On April 30, 2003 Arjun sold his house for Rs.600, 000
to another party in Hyderabad. Krishna wants to sue Arjun for breach of contract. Which of the
following statements is/are correct?
(a) Krishna cannot succeed, as there is no contract between him and Arjun
(b) Krishna will succeed in his move as there is a valid contract between him and Arjun
(c) The offer made by Arjun to Krishna will be considered as revoked on loss of letter of acceptance
in transit
(d) Arjun has the right to sell his house even before March 31, 2003
(2 marks)
< Answer
66. Sujit, aged 17, borrowed Rs. 5,000 from Gopal by executing a promissory note. After attaining the age >
of majority, Sujit executed a fresh promissory in consideration of a promissory note executed by him
during his minority. Gopal wants to sue Sujit to recover the money. Which of the following statements
is/are correct?
(a) Gopal can sue Sujit on the basis of first promissory note
(b) Gopal can sue Sujit on the basis of second promissory note
(c) Gopal cannot sue Sujit on the basis of any of the promissory notes
(d) Gopal can sue the guardian of Sujit to recover the amount
(e) Both (c) and (d) above.
(2 marks)
< Answer
67. Mahesh, a SEBI authorized official reaches the registered office of your company at 10.00 A.M. for >
inspection of the books of accounts of your company. Since the managing director is not available, he
was led to Smart, the finance director of the company who was present at that time. As Mahesh has
come without any prior notice or appointment, Smart is not sure whether to allow the inspection or not.
Which of the following is true as regards the inspection of books of accounts with out notice on the
company?
(a) Mahesh shall be assisted to inspect the books of accounts, by the officers/employees of the
company
(b) Mahesh cannot inspect with out previous notice on the company
(c) Mahesh cannot inspect the books of the company without prior appointment with the managing
director
(d) In the presence of all the board of directors of the company inspection can be conducted that too
during office hours only
(e) Only Registrar of Companies can inspect the books but not the officials of SEBI.
(2 marks)
< Answer
68. Scoopy Ltd. is engaged in the business of construction. A, B and C, directors of the Scoopy Ltd. are >
holding 75% of the capital of this company. The company passed a resolution at its general meeting
that it would not be interested in a particular contract for construction of a bridge. Subsequently, A, B
and C obtained the same contract on their own names and obtained profits from the contract. In the
above situation, which of the following statements is/are true?
(a) The profits belongs to Scoopy Ltd. but not to the three directors since this amounts to breach of
trust
(b) The company rejected the contract, hence it is not breach of trust
(c) This will not fall under breach of duties of directors because the company passed resolution at its
general meeting and hence the profits can be used by the directors personally
(d) Directors are different from the company and hence they can enjoy their profits out of the
corporate opportunity
(2 marks)
< Answer
69. An auctioneer in Chennai advertised in a newspaper that a sale of office furniture would be held on >
September 30, 2003. A broker came from Delhi to attend the auction, but all the furniture was
withdrawn. The broker from Delhi sued the auctioneer for his loss of time and expenses. Which of the
following statements is/are correct?
(a) The broker can claim compensation from the auctioneer for breach of contract
(b) The broker will not succeed in getting compensation
(c) An invitation to make an offer is a valid offer
(d) A declaration by a person that he intends to do some thing, gives right of action to another
(2 marks)
< Answer
70. ABC Ltd. a public company (with partly paid up capital), intended to convert itself into a private >
company, and sought the advise of the Company Secretary. The Company Secretary suggested that the
company is required to pass a special resolution and file the altered memorandum and articles of
association with the Registrar of Companies. The company accordingly followed and converted itself
into a private company and started carrying its business. Later on, the Registrar of Companies issued a
notice by treating conversion invalid and inoperative, for the violation of the provisions of the
Companies Act, 1956. In this context, which of the following provisions of the Companies Act is
violated?
(a) The company is to make calls on the uncalled capital before conversion takes place
(b) The company should take permission from the Central Government before effecting the conversion
(c) The company should take permission from the National Company Law Tribunal
(d) All of the above
(2 marks)
END OF QUESTION PAPER

Suggested Answers
Economic Legislation – I (161) : April 2004
1. Answer : (d) < TOP
>
Reason : Advantages of law
The principles of law provide uniformity and certainty to the administration of justice.
The existence of fixed principles of law avoids he dangers of arbitrary, biased and dishonest
decisions.
The fixed principles of law protect the administration of justice from the errors of individual
judgment.
It is more reliable than individual judgment.
Disadvantages of law
The lack of flexibility in law results in hardship and injustice to people as the needs of the people
keep on changing.
Law is conservative in nature as the lawyers and judges favor continuation of the existing law as a
result very often law is static.
Another disadvantage of law is formalism, as more emphasis is put on the form of law than its
substance.
Lastly law is unduly and needlessly complex. Hence, the answer is (d).
2. Answer : (c) < TOP
>
Reason : It was held that the promise not to complain did not constitute good consideration for the
father’s promise to release him.
A promise to do something, which one is already bound to do either by general law or under an
existing contract is not a good consideration for a new promise, since it adds nothing to the
pre-existing legal or contractual obligation.
However, where a person undertakes to do something more than what he is bound to do under the
original contract, it will constitute valid consideration. Hence, the answer is (c).
>
Reason : When the contract is absolute, the seller undertakes to unconditionally sell the goods to be
acquired at a later stage. Where the contract is conditional, he contracts to sell goods
conditionally on their acquisition.
An absolute contract for sale of future goods can be categorized into:
(a) Present sale of future goods
(b) Present sale of a chance of obtaining goods, or a sale of a mere expectation dependent
upon a chance.
Hence answer is d.
4. Answer : (b) < TOP
>
Reason : Until the instrument is duly satisfied, every prior party to a negotiable instrument is liable
thereon to a holder in due course.
The defense on the part of a person liable on a negotiable instrument cannot be set up against a
holder in due course if that negotiable instrument has been lost, or obtained from such person
by means of an offense or fraud for which he is not party to the fraud or unlawful
consideration. Hence answer is b.
5. Answer : (a) < TOP
>
Reason : Subsection 1 of Section 255 is not applicable to a private company, and hence the directors of
private company need not retire by rotation as laid down by Section 255(1). Their retirement
may be determined by a separate provision in the articles of the company. However, Section
255(2) requires that the appointment of directors of a private company can be made only at a
general meeting. Hence answer is a.
>
Reason : The doctrine of caveat is re-emphasized by Section 16. A buyer who intends to buy a glass
bottle capable of holding boiling sulphuric acid without cracking should specify the purpose
for which the bottle is required. If he fails to do so, he cannot expect the seller to give him
such a bottle.
The term ‘caveat emptor’ means ‘let the buyer beware’. Caveat emptor is the general rule applicable
to sales so far as quality is concerned. A buyer purchases at his own risk and is his
responsibility to examine the goods properly before purchasing the same. If the goods are
subsequently found to be defective, the seller cannot be held liable for it.
Exceptions
1. One of the most important exceptions to the doctrine of caveat emptor are the implied
conditions of fitness for particular purpose and merchantability.
Where the buyer indicates to the seller the purpose for which the goods are required and where he
relies on the seller’s judgment and skill and where the goods are those which are dealt
with by the seller in his course of business, then the doctrine of caveat emptor will not
apply. It is the duty of the seller to supply goods for the purpose for which it is required.
In Bombay Burmah Trading Corporation vs Agha Mohammad, a buyer of timber, informed the
seller that the timber was to be used for railway sleepers. It was held that the buyer could
reject the goods if it was found to be of inferior quality.
Regarding merchantability, in Shivallingapa Shankarappa vs Balakrishna & Son, the buyer ordered
for the best quality of ‘tur dal’. However, on arrival at the destination, the tur dal had
been damaged by moisture and was no longer of merchantable quality. It was held that
the buyer could reject the goods and claim damages from the seller.
2. Where the seller makes a false representation and conceals defects in the goods, and the
buyer relies on the seller’s judgment, then the doctrine of caveat emptor will not be
applicable.
3. An implied condition as to quality or fitness for a particular purpose may be annexed by
the usage of trade.
>
Reason : Explanatory statement U/s 173 (2) is required for special business matters ,at an extra-ordinary
general meeting all the matters are special business matters only. Therefore all matters at an
extra-ordinary general meeting require explanatory statement [all four ordinary business
matters like adoption of accounts, appointment of directors, appointment of Auditors, and
declaration of dividend at an AGM do not require explanatory statement U/s 173 (2)].
>
Reason : Issue of securities to depositories, transfer of registered ownership of shares from a person to
depositories or from a depository to a beneficial owner, transfer of beneficial ownership of
shares of a company registered under the Companies Act, or a body corporate established by a
Central Government dealt with by a depository, transfer of beneficial ownership of units of
mutual funds and Unit Trust of India are not liable to stamp duties (Section 8A).
< TOP
9. Answer : (d) >
Reason : U/s 17(A) of the Companies Act, 1956 shifting of the Registered office of the company with in
the same state but from the jurisdiction of on ROC to another ROC requires – passing of
special resolution in general meeting and confirmation of Regional Director.
>
Reason : Under section 309(4) of the Companies Act, 1956 a director who is neither in the whole time
employment of the company nor managing director may be paid remuneration either by way
of a monthly, quarterly or annual payment with the approval of the central Government or by
way of commission if the company by special resolution authorizes such payment, provided
that the remuneration paid to such director, or where there is more than one such director, to
all of them together, shall not exceed one percent of the net profits of the company ,if the
company has a managing or whole time director. If the company has no such managing or
whole time director three percent of the net profits of the company
11. Answer : (e) < TOP
>
Reason : Warranty of quiet possession
According to section 14(b), in a contract of sale unless the circumstances of the contract are
such as to show a different intention there is an implied warranty that the buyer shall have and
enjoy quiet possession of the goods.
In fact, what this section means is that nobody can interfere with the possession of goods by
the buyer, because of a defective title of the seller. If the buyer is in any way prevented from
the quiet enjoyment of the goods, he can claim damages from the seller.
Warranty of freedom from encumbrances
According to section 14(c), in a contract of sale unless the circumstances of the contract are
such as to show a different intention there is an implied warranty that the goods shall be free
from any charge or encumbrance in favor of any third party not declared or known to the
buyer before or at the time when the contract is made.
This section deals with the cases where the buyer’s title to the goods is disturbed by the
existence of encumbrances not known or disclosed at the time of the contract. The implied
warranty relates not to the existence of undisclosed encumbrances, but only that the goods
should be free of them. The warranty is not broken by the mere fact that encumbrances exist.
What is necessary is that the buyer should be affected by them. It is the responsibility of the
seller to ensure that the encumbrances do not affect the buyer.
Warranty as to quality or fitness by usage of trade: [Section 16(3)]
According to this section, an implied warranty as to quality or fitness for a particular purpose
may be annexed by the usage of trade.
>
Reason : The rights of a shareholder can be classified into Statutory rights and Contractual rights. The
Statutory rights are available under the Companies Act, and the Contractual rights are
available under the Memorandum of Association of the company.
>
Reason : An arbitral award may be set a side by the court Arbitral award deals with a dispute not
contemplated by the terms which are beyond the scope of the submission to arbitration
Party was under some incapacity The arbitral award is in conflict with the public policy of India
< TOP
14. Answer : (d) >
Reason : A private Company can commence its business immediately upon incorporation. But, a public
company cannot commence its business immediately upon the incorporation. It has to obtain
one more certificate i.e. certificate of commencement of business.
A contract entered by a public company after obtaining certificate of incorporation but before
obtaining certificate of commencement of business is called a ‘provisional contract’ in case of
a private company there is no question of obtaining C.C.B. Hence no provisional contracts.
>
Reason : Director are paid setting fee for attending Board meetings but not for attending general
meetings. Hence option (e) is correct.
>
Reason : A cheque may be crossed.
A demand draft can be crossed
A bill of exchange can not be crossed
The drawee of a cheque is a banker
A notice of dishonor should be given to the drawer in case of dishonor of a bill. Correct answer is
(c).
>
Reason : The major difference between the general meeting and the board meetings are no quorum is
required for the adjourned meeting of the company where as quorum is required for every
board meeting
Notice must specify the agenda where as in the case of a board meeting agenda need not be
specified
Members can be represented by proxy(s)where as directors have to attend personally
Hence, option (e) is correct.
18. Answer : (e) (e) < TOP
>
Reason: There are alternatives available for the aggrieved party in case of a breach of contract they are
rescission of the contract, Restitution and claim damages.
>
Reason : The term property is not defined in the Act. However, Section 9 of the Act says that property
of any kind may be transferred, Exception to the general rule that ‘every kind of property can
be transferred’ is provided under Section 6.
1. Chance of an heir apparent or spes succession is: This means an interest which has not
arisen but which may arise in future. Such a chance is not property and as such cannot be
transferred.
2. Right of re-entry of the lessor on breach of an express condition of the lease.
3. Transfer of easement: Easement means an interest in land owned by another that entitles
its holder to a specific limited use or enjoyment. The right of easement alone cannot be
transferred.
4. Interest restricted in its enjoyment: Rights of purely personal nature like the right of a
pujari in a temple to receive offerings, the office of a mahunt of a mutt etc. cannot be
transferred.
5. Right to future maintenance.
6. Public offices and salaries.
7. Mere right to sue.
8. Stipends and pensions; and
9. Occupancy rights of a tenant cannot be transferred under Section 6.
>
Reason : The company law does not contain the provisions to protect the promoters for the contract they
entered before incorporation of a company. They are personally liable for the performance of
the contract. But, they have the remedy under the Specific Relief Act 1963. U/s 15 (h) and 19
(e) of that Act.
>
Reason : In the Board meetings other than agenda items can be transacted with the permission of
chairman hence, the appointment is valid.
>
Reason : Where a contract contains several promises some of which are legal and some illegal, and
where the legal promise is severable from the illegal one, then the court will enforce only the
legal promise. However, if the legal and illegal acts are inseparable, the entire transaction will
be held illegal.
Where a contract has many objects but only one consideration, if one of the objects is unlawful.
Similarly, where a contract has only one object but several considerations, the agreement, if
any one of the considerations is unlawful.
Unlawful acts are those which do not explicitly cross the limits of legality. Such sets involve a non-
criminal breach of law e.g. restraint of trade, etc.
>
Reason : The instruments on which the adhesive stamps can be used are
(i) Instruments chargeable with a duty exceeding twenty nine paise except parts of bills of
exchange payable otherwise than on demand and drawn in sets.
(ii) Bills of exchange and promissory notes drawn or made out of India.
(iii) Entry as an advocate, vakil or attorney on the roll of a High Court.
(iv) Notarial acts and
(v) Transfers by endorsement of shares in any incorporated company or other body
corporate. (Section 11) The adhesive stamps affixed should be canceled, so that it cannot be
used again (Section 12).
>
Reason : The surety generally gives the guarantee at the request of the principal debtor.
>
Reason : An undated instrument is not invalid under the Negotiable Instrument Act, 1881.
>
Reason : The Central Government appoints the Chairman of SEBI. Hence, the answer is (a).
>
Reason : Hire purchase agreement must be in writing.
>
Reason : The amount of compensation that can be claimed by a person for the services rendered by him
when there was no express promise to any definite remuneration is determined by the doctrine
of Quantum Meruit that literally means as much as earned or as much as merited. Hence, the
answer is (c).
>
Reason : Where an instrument is indorsed restrictively, it implies that the instrument cannot be
negotiated further. The person, to whom the bill is restrictively indorsed, can deal with the bill
only as directed by the indorser. By this, he is empowered to receive payment on the bill and
to sue any party whom the indorser could have sued. However, he cannot transfer his rights to
any other person unless authorized to do so.
< TOP
30. Answer : (e) >
Reason : i. The decision to buy shares of other companies cannot be taken by a Committee of the
Board as under Section 372A(2) of the Companies Act, 1956 this can be done only at the
meeting of the Board by passing a unanimous resolution approving the investment.
ii. The decision to open bank account can be taken by committee of Board if it has been so
authorized approving the investment.
iii. The decision to change signatories to bank account can be taken by Committee of Board
at its meeting provided appropriate powers for making such variations have been
delegated by the Board.
iv. The decision to approve and sign annual accounts can’t be taken by committee of Board
as Section 215 of the Act requires the annual accounts of the company to be approved by
Board of Directors before they are signed on behalf of the Board of directors by its
manager or secretary, if any, and by not less than two directors one of whom shall be a
managing direct, where there is one.
v. The power to make donations can be exercised by a committee if proper delegation
therefore is conferred on it. However, if donations are to be made to a political party or
for political purposes, the save cannot be made by Committee of Board.
>
Reason : Difference between the Assignment and Negotiation
Assignment is made in writing and signed by transferor. Negotiation requires mere delivery of a
bearer instrument and endorsement and delivery of an order instrument to effectuate a transfer.
Notice of transfer of actionable claim (debt) must be given by the transferee to the debtor in case of
assignment in order to complete his title. No such notice is necessary in case of negotiation.
The title of the assignee is subject to all the defects, equities of the assigner. In case of negotiation
the title of the transferee is better than that of the transferor.
Consideration is presumed in case of negotiation. In case of assignment the transferee must prove
consideration for the transfer. Hence answer is c.
>
Reason : Section 159 of the Companies Act, 1956 provides that
Annual return to be made by company having a share capital
Every company having a share capital shall, within sixty days from the day on which each of
the annual general meetings referred to in section 166 is held, prepare and file with the
Registrar a return containing the particulars specified in Part I of Schedule V, as they stood on
that day, regarding-
(a) Its registered office,
(b) The register of its members,
(c) The register of its debenture holders,
(d) Its shares and debentures,
(e) Its indebtedness,
(f) Its members and debenture holders, past and present, and
(g) its directors, managing directors, managers and secretaries, past and present
>
Reason : True: As per Section 2 (g) of the Indian Contract Act, 1872, a void agreement is that
agreement which is not enforceable by law. An agreement, which is either prohibited by law or
otherwise against public policy is an illegal agreement and has no legal effect. Further,
transactions collateral to an illegal agreement also become unenforceable. Therefore, it is said
all illegal agreements are void but all void agreements are not illegal.
>
Reason : Certain matters are considered as ordinary business in the annual general meeting i.e.
adoption of accounts, appointment of directors, appointment of auditors, and declaration
of dividend are called ordinary business matters. All other matters are called special business
matters. All special business matters require explanatory statement under section 173(2) of the
Companies Act. And all ordinary business matters do not require explanatory statement,
except where the appointment of auditor is made under sec.224A of the Companies Act.
>
Reason : By an insertion in section 2(14A) of the Companies Act, with effect from 13-12-
2000,dividend includes any interim dividend. So all the provisions, what ever are
applicable to final dividend are also equally applicable to interim dividend. Under section 207
of the Companies Act, 1956 where a dividend has been declared by the company but has not
been paid or warrant in respect thereof has not been posted, within thirty days, from the date
of declaration, to any shareholder entitled to the payment of the dividend, all the directors who
are knowingly party to the default shall be guilty for the violation. Hence interim dividend
must be paid with in thirty days from the date of passing of such resolution in the board
meeting.
>
Reason : Reduction of share capital requires passing of special resolution under Section 100 of the
Company Act and all other matters require Ordinary Resolution.
>
Reason : An agreement which is found to be unreasonable, extortionate and inequitable against the
party to whom assistance is provided is void and unenforceable. Hence, the answer is (e).
>
Reason : Securities premium account can be utilized only for the purposes mentioned u/s 78 of the
Companies Act, 1956. But according to the Companies (Amendment) Act, 1999,with effect
from 31-10-1998, the securities premium account can be utilized for the buy-back of securities
also. The securities premium account cannot be utilized for any other purpose other than the
purposes mentioned under section 78 of the Act. Hence, payment of dividend, purchase of
movable or immovable property or discharge of current liabilities of the company are not
permitted under the Act. Therefore, option (d) is correct, and all other options are wrong.
>
Reason : Every public company ,or a private company which is subsidiary of a public company having
a paid up capital of five crores or more shall have a managing director or manager or whole
time director.
>
Reason : A tender must be unconditional. Where a tender is conditional, the other party is not bound to
accept it.
A tender should be made at a proper time and place. Where it is provided that the tender should be
made at a particular place and time, then such a direction should be complied. Where the place
is not specified, it is the duty of the debtor to find the creditor.
A tender in part is not valid. Therefore, a tender will be valid only if relates to the whole quantity
contracted for. However, a minor deviation from the terms of the contracted for. However, a
minor deviation from the terms of the contract will not render the contract invalid.
A tender should be in a proper form and should be made to the proper person. Hence, the answer is
(b).
>
Reason : Adoption of Accounts and declaration of dividend are not interdependent and therefore there is
no illegality in the declaration of dividend even though the meeting of Downturn Ltd. did not
adopt the Annual Accounts. Section 210(1) of the Companies Act, 1956 requires the Board of
Directors to lay before the company, the Balance Sheet and Profit & Loss A/c/ The
consequences of non adoption is that in terms of Section 220(2) a statement of the fact non-
adoption and of the reasons therefore shall be annexed to the Balance Sheet and to the copies
thereof required to be filed with ROC. The Institute of Chartered Accountant of India in the
compendium of opinion (Vol.1) has held the same view. It has also provided an alternative
approach of adjourning the meeting with specific direction on the Board of the company to
suitably modify the accounts and place the modified accounts in the adjourned meeting. If it is
so done, the apparent (though not legal) inconsistency of not adopting the accounts but
declaring dividend will not be there.
When the shareholders did not accept the figure of the Profit shown in the profit and loss account,
they cannot take the risk of declaring dividend without correctly knowing the source from
which the profit will come to pay the dividend. It may even become a case of payment of
dividend out of capital which is illegal. Therefore in the instant case, whole decision will rest
on the nature and quantum of distortion in the profit shown by the Profit and Loss Account. If
distortion is not significant, then the decision to declare dividend may be taken.
>
Reason : Section 224A of the Companies Act, 1956 requires a company to appoint an auditor by passing
special resolution where 25% or more of the subscribed capital of the company is held by
public financial institution, government companies’ etc. or a combination of them. However,
said Section does not specify the date on which 25% of the subscribed share capital must be
held by the specified bodies/institutions i.e. whether the date of notice of meeting or date of
passing the special resolution shall be effective date. The Department of company Affairs has
clarified that the material date is the date of annual general meeting at which the special
resolution is required to be passed.
In the instant case the holding of LIC has increased beyond the specified limit of 25% on the date of
annual general meeting of ROSA Ltd. Therefore the contention of chairman is not right. The
right course of action will be to adjourn the meeting to another date and later issue the required
notice in accordance with the provisions of the Act and thereafter pass the special resolution in
the adjourned annual general meeting. If the company fails to pass special resolution as
aforesaid then it shall be deemed that no auditor has been appointed. In such case the provision
of Section 224(3) shall become applicable in relation to ROSA Ltd.
>
Reason : Under Indian Contract Act, a minor is not competent to contract. Hence, a minor cannot
become a member of a company as one of the pre-requisities for such acquisition is an
‘agreement in writing’. However, the Company Law Board in Nandita Jain v. Bennet Coleman
Co. Ltd. Held that a minor applying through his natural guardian for being registered as a
member was entitled to be registered as a member, if the shares are fully paid and the
application is signed by the natural guardian. The Punjab High Court has also held the same
view for transfer of fully paid shares to minor. Therefore, Ankit can appeal against the refusal
to the Company Law Board under Section 111 of the Companies Act, if the company
concerned is a private company or under Section 111A when the company is a public
company.
>
Reason : According to Section 84 of the Negotiable Instrument Act, if a cheque is not presented by the
payee within a reasonable time of its issue and the drawer suffers damage due to the delay
because of the failure of the bank, then the drawer is discharged from liability to the extent of
damage. In the given case Anand failed to present the cheque, though there was sufficient
balance in the account of Amar. Anand received Rs.25,500 from the bank. Amar is discharged
from liability.
Options in (a), (b), (c) and (e) are not correct. Option in (d) is correct.
>
Reason : Section 286 of the Companies Act, 1956 provides that notice of every meeting of the Board of
Directors of a company shall be given in writing to every Director for the time being in India,
and at his usual address in India to every other Director. [Section 286(1)]. Where, however,
notice is not given as required but all Directors attend the meeting and do not object to the
absence of notice, or where the absentee Director do not complaint of want of notice, the
proceedings at the meeting will not be invalid, especially, if they are ratified at a subsequent
meeting at which the absentee Directors are present. It is open to a regularly constituted
meeting of the Board of Directors to ratify that action which, though unauthorized, is done on
behalf of the company. Ratification generally relates back to the date of the act ratified.
[Bharat Fire and General Insurance Co. Ltd. v. P.P. Gupta (AIR 1968 Delhi 68)]. In the given
case, the meeting and proceedings both are quite valid.
>
Reason : According to Section 372A(1), no company shall directly or indirectly make any loan to or
give guarantee or provide security or make investment in other body corporate exceeding 60%
of its paid up share capital and free reserves, or one hundred percent of its free reserves,
whichever is more, except by a special resolution passed at a general meeting.
In the instant case, the Kamini Textiles Ltd. has paid-up capital of Rs. 30 crore and free reserves of
Rs. 5 crores as on 31st March, 1999, the 60% of which comes out to be Rs. 21 crores.
Therefore, the Board can make investment upto 21 crores without any approval of the
shareholders.
The statement of investments
(in Rupees)
Existing investment 8,00,00,000
Further investments:
(i) 20,000 Equity shares of Rs. 10 each at Rs. 390 per share in PQR Co. Ltd. 78,00,000
which were renounced by others (excluded 30,000 shares issued in rights
issue as the same are exempted under Section 372A(8)(b)]
(ii) 11% Debentures of Albert Pharma Ltd. [The debentures are specifically 1,00,00,000
included in explanation for ‘Loan’ under Section 372A(10)].
(iii) 50,000 units of US-64 @ Rs. 14.50 each. 7,25,000
(iv) 25,000 equity shares of Rs. 10 each @ Rs. 130 each in concord securities 32,50,000
whose principal business is acquisition of bonds.
Total Investment 10,17,75,000
21,00,00,000
(-) 10,17,75,000
10,82,25,000
The aggregate of the existing and further investments is below the limits specified above.
Therefore the Board is competent to make all the investments listed in the question. It is presumed
that 30,000 shares in PQR Co. Ltd. are rights issue shares and hence exempt.
The company further can make another 10,82,25,000 investments in other body corporates.
>
Reason : Financial Institutions like IDBI, SFCs, IFCI, UTI, LIC and also State Bank of India have been
given powers to appoint nominee directors in companies assisted by them in their respective
Acts. Of course, such appointment is not mandatory.
A nominee director can be appointed by financial institutions under statutory powers even if there is
no provision in the Articles of Association of the company and even if number of directors
increase beyond the limit prescribed in Articles.
>
Reason : A member is liable to contribute to the assets of the company upto the unpaid amount on the
shares held by him/her.
However, according to the provisions of Section 45 of the Act, if at any time the number of
members of a company is reduced, in the case of a public company, below seven, or in the
case of a private company below two, and the company carries on business for more than six
months while the number is so reduced, every person who is a member of the company during
the time it so carries on business after those six months and is cognizant of the fact that it is
carrying on business with fewer than seven members or two members, as the case may be,
shall be severally liable for the payment of the whole debts of the company contracted during
that time, and may be severally sued therefore.
In the given case the number of members have fallen below the statutory minimum. It is not clear
from the facts. Whether a period of more than six months has elapsed after registration of
transfer. If that period has elapsed after registration of transfer the shareholders are personally
liable as the registration would have been with the approval of the Board. If it is other wise the
shareholders are not liable.
>
Reason : In case of joint shareholdings one or more of them may require the company to alter or
rearrange the serial order of their names in the register of members of the company. In this
process, there will be need for effecting consequential changes in the share certificates issued
to them. Since no transfer of any interest in the shares takes place on such transposition, the
question of insisting on filling transfer deed with the company, may not arise. The Stock
Exchange Division of the Department of Economic Affairs has clarified that there is no need
of execution of transfer deed for transposition of names if the request for change in the order
of names was made in writing, by all the joint-holders.
In the given case, no transfer of any interest in the shares is involved. Therefore the question of
executing proper instrument of transfer to effect the change does not arise. A request signed by
all the holders (in the existing order and also proposed order) is sufficient which the Board of
directors can consider and effect transposition of names. Therefore the company’s demand for
execution of transfer deed is injustified.
>
Reason : No director, officer or any employee of the company can refuse to vacate the company’s
accommodation after he has been removed from the office. Section 630 of the Companies Act,
1956 specifies penalty for wrongful with holding of the company’s accommodation which is
given to him for his personal use only till such time he continues to be in the employment of
the company.
Section 630(1) of the Companies Act provides that if any officer or employee of a company:
i. i. wrongfully obtains possession of any property of a company; or
ii. ii. having ay such property in his possession, wrongfully withholds it or
knowingly applies it to purposes other than those expressed or directed in the Articles
and authorized by this Act; he shall, on the complaint of the company or any creditor
or any contributory thereof, be punishable with fine which may extend to Rs. 10,000
Further sub-section (2) of Section 630 provides that the court trying the offence may order
such officer or employee to deliver up or refund within a time to be fixed by the court, any
such property wrongfully obtained or wrongfully withheld or knowingly misapplied or in
default to suffer imprisonment for a term which may extend to 2 years.
The Supreme Court has in the case of Baldev Krishna Sahi v. Shipping Corp. of India, while
deciding the applicability of Section 630, held that the term officer or employee of a company
applied not only to existing officers or employees of a company but also to past officers or
employees of a company.
Therefore, in the given case, as Mr. Sandeep, the General Manager who was removed, is still
wrongfully withholding the property belonging to the Company, the company can file a
complaint to the Court under Section 630 to order Mr. Sandeep to deliver up the said property.
>
Reason : Section 264 of the Companies Act, 1956 is divided into two parts. Under the first one, every
person proposed to be a candidate for the office of a director of a public limited company
“shall sign and file with the company, his consent in writing to act as a director, if appointed”.
The objective to be achieved by this provision is quite obvious. It may be that a person who is
appointed as a director may refuse to act or disown his liability on the ground that he had
never consented to act as a director. When such a flaw is discovered later on, it becomes too
late to rectify the defect ordinarily, a person appointed as a director is not likely to refuse to
act. In a rare case, he may do so. It is only to avoid the attending consequences that the
legislature has prescribed the condition. However keeping the difference in the language of
Sub-section (1) of Section 264 and that of Sub-section (2) thereof, it has been held that non-
filing of consent with the company is at the most only an irregularly and will not render
invalid an appointment made without such consent having been filed.
Under the second limb of Section 264 the consent in the prescribed form No. 29 has to be filed
by the person concerned with the Registrar of Companies within thirty days of his
appointment. The language of this part of the Section viz. Sub-section (2) is different from that
of Sub-section (1). It mandates that a person “shall not act as a director” unless he has within
thirty days of his appointment signed and filed the aforesaid consent with the Registrar of
Companies. This is a condition precedent for acting as a director. Keeping in view the fact that
negative language is used in Sub-section (2), this provision is therefore mandatory and not a
directory one. Under Sec. 264 Sub.Sec.(2) Caluse (b) additional director’s consent need not be
filed. Hence option (b) is correct.
In the light of the above legal position, it may be stated that the person concerned signed the
relevant form and gave it to the company would be of no avail as it is he who is supposed to
file the same with the Registrar. He certainly ceases to be a director after the expiry of thirty
days from the date of his appointment.
>
Reason : Prior consent of the company in general meeting and consent of the C Govt. is required to
appoint a relative of a director for the remuneration of Rs. 40,000.
>
Reason : It appears that both the charges are of the same type. A registered charge takes priority over an
unregistered one. Registered charges take priority from the date of creation though
constructive notice arises from the date of registration. Consequently in the instant case
between 12.10.2001 to 15.10.2001, the charge in favor of Sahara Bank Ltd. will get priority.
But on and from 15.10.2001, the one created in favor of Lika Bank Ltd. will not get priority.
>
Reason : Section 169 of the Companies Act, 1956 requires the Board of directors of a company to call
an extraordinary general meeting of the company on the requisition of members to call an
extraordinary general meeting of the company on the requisition of members holding at least
10% of the paid-up capital of the company having share capital. It further provides that if the
Board does not within twenty-one days from the date of the deposit of valid requisition
proceed duly to call a meeting within forty-five days from the date of deposits of requisition,
the meeting may be called by such of the requisitionists as represent either a majority in value
of paid-up share capital held by all of them or not less than 10% of the paid-up share capital,
referred to above, whichever is less.
In the given case, since the member who convened the meeting on the failure of the Board,
being one of the requisitionists held majority of the paid up capital of all the requisitionists and
the registered office is not made available to them, the meeting may be held anywhere else as
held in R Chattier v.M. Chettiar (Madras).
>
Reason : B, cannot recover the amount on this instrument. The reason is Sec.46 of the Negotiable
Instrument Act, 1881 makes it clear that delivery of the negotiable instrument is essential in
order to bind the parties to the instrument. Until than every contract on the instrument is
incomplete and revocable. Further, delivery should be made with an intention of passing the
property in the instrument to the person to whom it is delivered.
>
Reason : In terms of Section 220 of the Companies Act, 1956, three copies of balance sheet and the
profit & loss account of the company are required to be filed with the Registrar of
Companies––
Within thirty days from the date on which such balance sheet and profit & loss account were
laid before the Annual General Meeting; or
Where the Annual General Meeting has not been held within 30 days from the latest day on or
before which the Annual General Meeting should have been held.
If default is made in complying with the aforesaid requirements, the company and every
officer of the company who is in default shall be liable to be punished with fine which may
extend to Rs.500/- for every day during which the default continues.
It was held in Ravindra Narayan v. ROC Jaipur (1994) 81 Com. Cases 925 (Rai) that ordinary
directors of a company cannot be prosecuted under Section 220 for default in filing accounts
when the company had a Managing Director at the relevant time. The recent judgement on the
fastening of liability on the directors was given in the case of G. Vijaya Lakshmi v. Securities
and Exchange Board of India 40 CLA 55, wherein the High Court held that the liability of
ordinary directors would arise only in respect of a company which had no Managing Director.
In the instant case the company had Managing Director therefore the question of liability of
any other director would not arise. Thus Ramsay, being mere director of the RK Limited, can
not be prosecuted for non-filing of balance sheet and profit and loss account for the years
ended 31st March, 2001, with the Registrar of Companies. Secondly, Ramsay had resigned
before the default committed by R K Limited by non-filing of its Balance Sheet and Profit &
Loss Account. Therefore Ramsay cannot be prosecuted for the defaults made by the company
after he has resigned.
>
Reason : As per Section 275 of the Companies Act, 1956 a person cannot hold office at the same time
as director in more than 15 companies. However Section 278 provides that certain
directorships are to be excluded for the purpose of ascertaining the ceiling of directorships.
While ascertaining the ceiling, the following directorships are required to be excluded:
Alternate Directorship: In the instant case 5 directorships are to be excluded.
Directorship in private companies which are neither subsidiary or holding companies of public
companies: In the instant case 5 directorships in private companies are to be excluded
presuming that none of such companies is a subsidiary or holding company of a public
company,
Director in foreign companies: In the instant case 1 directorship is to be excluded. Foreign
company is not a company for the purpose of Companies Act, 1956.
In nutshell, a total of 11 directorships are to be excluded leaving a balance of 9 directorships. The
permissible number is 15. Hence Wise Ltd. can appoint Omnipresent as a director in its Board.
>
Reason : Disclosure of interest in contract or arrangement — A director must disclose his interest or
concern in any contract or arrangement or any proposed contract or arrangement by or on
behalf of the company. Such interest should be disclosed to Board of Directors. [section
299(1)]. If the contract or arrangement is between companies, i.e., the company in which the
person is director and the other company, the director is deemed to be interested in the contract
only if he singly, or along with other directors, hold 2% or more shares in other company.
[section 299(6)]. While calculating the 2% shares in other company, only investment of
directors is considered. Investment of his relatives is not to be considered. [This seems to be a
loophole]. Hence, director ‘A’ in the instant case did not violate any of the provisions of the
Companies Act and the contract is valid.
>
Reason : Showing a debt in balance sheet is not ‘acknowledgement’? — Mere showing a debt in
balance sheet does not amount to ‘acknowledgement of debt’, as ‘acknowledgement’ as
envisaged in the Indian Limitation Act has to be with intention of accepting the debt with
object of extending the limitation for recovery of debt. – Smt Vijayakshmir. Hari Hara Ginning
(2000) 24 SCL 414 (AP HC DB). However, there are contrary views in L&T v. Commercial
Works (1997) 27 CLA (Snr) 55 (Del), Darjeeling Commercial v. Padam Tea (1983) 54 Comp
Cas 814 (Cal) and Bengal Silk Mills v. Ismail Golam AIR 1962 Cal 115, where it was held that
acknowledgement of debt in balance sheet duly signed is ‘acknowledgement’ of debt for
purpose of section 19 of Limitation Act.
In AV Murthy v. BS Nagabasavanna (2002) 38 SCL 639 (SC), it was observed that if the amount
borrowed is shown in the balance sheet, it may amount to acknowledgement. [However, final
opinion was not expressed as matter was to be agitated before Magistrate].
>
Reason : In the given problem, Ravi will succeed in getting the purse back from the proprietor of the
Computer Education Centre. As per Section 160 of the Indian Contract Act, it is the duty of
bailee to return or deliver the goods bailed without demand, as soon as the time for which they
were bailed, has expired or the purpose for which they were bailed has been accomplished. if
>
Reason : In the given problem, Jolly can recover the price from Yogesh even though she has used the
car for 6 months as the consideration had totally failed.
In every contact of sale, there is an implied condition that the seller has the right to sell. If the
seller’s title turns out to be defective, the buyer may reject the goods. In Rowland v. Divall
(1923), where a stolen car was sold by the seller, it was held that the buyer may recover the
full price from the seller.
>
Reason : Yes, the doctor has a valid claim for his services. As per Section 68 of the Indian Contract Act,
when another person supplies a person, who is minor, with necessaries suited to his condition
in life, the supplier is entitled to be reimbursed from the estate of the minor.
As necessaries also include medical expenses, the doctor can claim for his services from the
property of the minor. The right of the doctor is, however, known as quasi contractual right.
Hence the doctor has a valid claim.
>
Reason : Under Section 8 of the Sale of Goods Act, 1930, where there is an agreement to sell specific
goods and subsequently goods without any fault on the part of the seller or buyer perished or
become so damaged as no longer to answer to their description in the agreement before the
risk passes to the buyer, the agreement is there by avoided.
In the present case, the agreement to sell has become void due to death of the horse without any
fault of either party. Hence, the seller can not recover the price from buyer. Moreover, in an
agreement to sell, the risk of loss always rests in the hands of seller in spite of the goods being
in the hands of buyer.
>
Reason : Under Section 73 of the Indian Contract Act, when a contract has been broken, a party who
suffers by such breach is entitled to receive, from the party who has broken the contract
compensation for any loss or damage, caused to him thereby, which naturally arose in the
usual course of things from such breach or which the parties knew, when they made the
contract to be likely to result from the breach of it. Such compensation is not to be given for
any remote and indirect loss or damage sustained by reason of the breach. (Hadley v.
Baxendale).
In view of this B can at the most claim compensation for breach of contract i.e. his removal
from the job and not for medical expenses incurred by him.
>
Reason : Krishna can succeed in his move as his acceptance will be completed on posting of letter
properly addressed and duly stamped. Lost of letter of acceptance will not invalidate his
acceptance
>
Reason : Gopal cannot sue on the basis of both promissory notes, As the consideration given during
minority is no consideration. The fresh promissory note is void for want of consideration. A
minor cannot ratify his agreements on attaining majority.
>
Reason : In terms of the provisions of Section 209A(1)(iii) of the Companies Act, 1956 the books of
account and other books and papers of every company shall be open to inspection during
business hours by such officers of the Securities and Exchange Board of India as may be
authorized by it in respect of matters covered under the sections referred to in Section 55A of
the Companies Act. It is further provided under Section 209A that such inspection may be
made without giving any previous notice to the company or any officer thereof. Therefore, if
Mahesh, the authorized official of SEBI wishes to examine the books of account and other
books and papers in relation to the sections referred to in Section 55A, his request has to be
complied with. Otherwise every officer of the company who is in default for non-compliance
shall be punishable with fine which shall not be less than Rupees fifty thousand and also with
imprisonment for a term not exceeding one year.
>
Reason : The query raised is identical to the facts of the case of Cook v. Deeks (1916) I & C 554 CA. In
that case, three directors of a company held 75% of the issued capital. The company carried on
business as railway construction contractors. The three directors by their vote as holders of
75% majority resolved at a meeting of the company that the company had no interest in the
contract. The directors then obtained the contract in their own names. It was held that the
contract having been obtained under circumstances, which amounted to a breach of trust by
the directors, the benefit of the contract belonged to the company. On this analogy, any profits
derived by the three directors viz. A, B and C from the contract in this company would belong
to the Scoopy Ltd. and would not accrute to the three directors.
Further, it has been held in Globe Motors Ltd. v. Mehta Teja Singh & Co. (1984) 55 Com. Cases
445 (Del.) that an action can be brought against directors who are in control of the company to
compel such directors to account to the company for profits made by appropriating for
themselves a business opportunity which the company would otherwise have enjoyed.
>
Reason : The broker will not succeed in getting compensation, as the auction sale will not amount to a
valid offer.
>
Reason: Under section 31 of Companies Act, 1956 one of the limitations of alteration of Article of
Association is, when the alteration is for the purpose of converting public company into a
private company, approval of the central government is compulsory.
Accordingly the company is not obtained the approval of the central government hence the
conversation is invalid and violation of section 31 of the Companies Act. Hence the contention
of ROC is correct.
Therefore option (b) is correct and not others.
< TOP OF THE DOCUMENT >

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Question Paper

Economic Legislation – I (161) : April 2004

(a) Two thirds of the directors must retire by rotation

(a) Implied conditions of fitness

(a) All agenda items

(a) Warranty of quiet possession (b) Warranty of freedom from encumbrances

(a) Rupees three thousand (b) Ten percent of the profits

(a) A cheque may be crossed (b) A demand draft can be crossed

(a) Rescission (b) Restitution

(a) Securities of a company by a Depository (b) Mortgage of property

(a) There are always two parties in a contract of guarantee

(a) Not invalid (b) Invalid

(a) Hire purchase agreement may be oral

I. To buy shares of other companies; II. To open bank account;

(a) 15 days of the holding of the Annual General Meeting

(a) In case of equal guilt, the plaintiff is in a better position

(a) The matters which require special resolution

(a) Reduction of share capital

(a) Payment of dividends (b) Purchase of movable property

(a) A tender must be conditional (b) A tender must be unconditional

END OF QUESTION PAPER

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