Economic Legislation I 0105

Question Paper
Economic Legislation I (161) – January 2005
• Answer all questions.

• Marks are indicated against each question..
< Answer >
1. A guarantee given for an existing debt or obligation is called a
(a) Retrospective guarantee (b) Prospective guarantee
(c) Specific guarantee (d) Simple guarantee (e) Fidelity guarantee.
(1 mark)
< Answer >
2. Which of the following instruments generally can be made payable to ‘bearer on demand’
I. A promissory note II. A bill of exchange
III. A cheque IV. A hundi
(a) Only (II) above (b) Only (III) above

(c) Both (II) and (III) above (d) Both (I) and (II) above
(e) Both (III) and (IV) above.
(1 mark)
< Answer >
3. Which of the following is a negotiable instrument by custom/usage?
(a) Debenture certificates (b) Money orders
(c) Postal orders (d) Railway receipts (e) Dock warrants.
(1 mark)
< Answer >
4. Which of the following is not the right of an auditor of a company?
(a) To have access to the books of accounts
(b) To call for information and explanations
(c) To receive notices and other communications relating to general meetings
(d) To receive remuneration for auditing the accounts
(e) To check whether the transactions of the company, which are represented merely by book entries,
are not prejudicial to the interest of the company.
(1 mark)
< Answer >
5. The auditors of the Government companies are appointed by
(a) The members in general meeting
(b) The Board of directors of the company
(c) The Comptroller and Auditor General of India
(d) The Central Government
(e) The State Government of that state in which the company is situated.
(1 mark)
< Answer >
6. Which of the following companies should appoint ‘Audit committee’?
(a) Private companies having subscribed capital of rupees ten crore
(b) Government companies having authorized capital of rupees one crore or more
(c) Every public company having paid up capital of not less than rupees five crore
(d) Every public company having issued capital of not less than rupees ten crore
(e) Every public company having subscribed capital of not less than rupees two crore.
(1 mark)
< Answer >
7. A promised to sell his car to B for Rs.50,000 provided he purchases a new car, this is called a
(a) Quasi-contract (b) Contingent contract
(c) Special contract (d) Wagering agreement (e) Ubberimae Fides contract.
(1 mark)
8. Which of the following category of directors cannot be removed by the members of the company in < Answer >
general meeting under section 284 of the Companies Act?
(a) The director appointed in casual vacancy
(b) The director appointed as additional director
(c) The director appointed as alternate director
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(d) The director appointed by the Central Government
(e) Director appointed as regular director under section 257 of the Companies Act.
(1 mark)
9. In case of modification of a charge, the particulars of modification of such charge must be filed with the < Answer >
Registrar of Companies within
(a) Twenty one days (b) Thirty days of such modification
(c) Forty five days of such modification
(d) Sixty days of such modification (e) Ninety days of such modification.
(1 mark)
< Answer >
10. Under which of the following circumstances, the office of a director shall become vacant?
(a) When a director does not obtain qualification shares within one month from the date of his
appointment
(b) When he absents himself consecutively for two Board meetings
(c) When he acts in contravention of provisions of buy-back of securities
(d) When he acts in contravention of provisions of disclosure of his interest in a contract or
arrangement entered into by the company
(e) When he acts in contravention of the provisions of inter-corporate loans/investments/ borrowing
powers of the company.
(1 mark)
< Answer >
11. Which of the following statements is false?
(a) Debentures would constitute actionable claim
(b) Issue of debentures with a maturity period of less than eighteen months are not required to appoint
a debenture trustee
(c) If no time is fixed by the company to pay back the money on the debentures, they are called
irredeemable debentures
(d) Issue of debentures with a maturity period of less than eighteen months are not required to create
debenture redemption reserve
(e) Where the maturity period of debentures exceeds eighteen months, creation of charge on the assets
of the company is optional.
(1 mark)
12. Under which of the following circumstances is a company not permitted to engage in buy-back of its < Answer >
securities?
(a) When default is made in filing its annual return
(b) When managing director is not appointed as required
(c) When annual general meeting is not conducted for a calendar year
(d) When the directors claim excess remuneration than what they are eligible
(e) When higher rate of dividend is declared at the annual general meeting.
(1 mark)
13. Which of the following offences of directors shall result into imprisonment under the Companies Act, < Answer >
1956?
I. Grant of loan to directors without obtaining permission of the Central Government under section
295
II. False declaration of company’s solvency under section 488(3)
III. Contribution to political parties in contravention of section 293 A
IV. Failure to lay balance sheet before the members under section 210 of the Act
V. Failure to distribute dividends within thirty days from the date of its declaration in annual general
meeting
(a) Only (III) above (b) Only (V) above

(c) Both (III) and (V) above (d) (I), (II), (III) and (IV) above
(e) (I), (II), (III), (IV) and (V) above.
(1 mark)
< Answer >
(a) Compromise can be a consideration for a contract
(b) Forbearance can be a consideration for a contract
(c) Abstinence can be a consideration for a contract
(d) Consideration for a contract may be illusory
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(e) Consideration should be real.
(1 mark)
< Answer >
15. Under which of the following circumstances, the Central Government can order for special audit?
I. When the affairs of any company are not being managed in accordance with sound business
principles or prudent commercial practices
II. When the company is being managed in a manner likely to cause serious injury or damage to the
interest of the trade, industry or business to which it pertains
III. Where the financial position of the company is such as to endanger its solvency
IV. When the affairs of the company are being managed in accordance with sound business principles
or prudent commercial practices
(a) Both (I) and (II) above (b) Both (I) and (III) above
(c) Both (II) and (III) above (d) (I), (II) and (III) above
(e) (I), (II), (III) and (IV) above.
(1 mark)
16. What is the minimum age limit prescribed under the Companies Act, for a person to become managing < Answer >
director of a company?
(a) Attaining the age of thirty five years (b) Attaining the age of twenty years
(c) Completing the age of eighteen years (d) Completing the age of twenty five years
(e) Attaining the age of twenty-one years.
(1 mark)
< Answer >
17. Which of the following matters requires prior approval of the Central Government?
(a) Change of name of the company under section 21 of the Companies Act
(b) Alteration of articles of association for converting private company into a public company
(c) Appointing a relative of a director for a salary of Rs.10,000 per month
(d) Change of registered office of the company from one state to another state
(e) Making any loan/giving any guarantee/providing any security by a company to its directors.
(1 mark)
< Answer >
18. Which of the following matters is not treated as ordinary business matter?
(a) Adoption of accounts
(b) Appointment or reappointment of directors
(c) Alteration of articles of association
(d) Declaration of dividend
(e) Appointment of auditors and fixation of their remuneration.
(1 mark)
19. Under section 171 of the Companies Act, the notice of the general meeting must be sent not less than < Answer >
twenty one clear days before the meeting. In this context, the word clear days means
(a) Inclusive of the date of service of the notice
(b) Exclusive of the date of meeting
(c) Inclusive of the date of service of notice and the date of meeting
(d) Exclusive of public holidays
(e) Exclusive of the date of service of notice and the date of meeting.
(1 mark)
< Answer >
20. The Doctrine of Election lays down the principle that
(a) The representatives of the people should be elected
(b) A person has the liberty to do whatever he wants
(c) A man taking a benefit under an instrument must also bear the burden
(d) Between alternative legal remedies a person may choose that which is most beneficial to him
(e) A property cannot be transferred where a suit or proceeding is pending in any Court.
(1 mark)
< Answer >
21. Instruments should be stamped under the Indian Stamp Act
I. After execution II. One month before execution
III. Before execution IV At the time of execution
V. At any time before it is produced as evidence before the competent Court
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(a) Only (I) above (b) Only (II) above
(c) (III) or (IV) above (d) (I) or (IV) above (e) Only (V) above.
(1 mark)
22. When share certificates of an investor are dematerialized under the Depositories Act, 1996 his or her < Answer >
name is entered in the records of the depository as
(a) A member of the company (b) A depositor of the depository
(c) A beneficial owner of such shares (d) A depository participant
(e) A member of the depository.
(1 mark)
< Answer >
23. Which of the following is NOT a recognized Stock Exchange?
(a) The Meerut Stock Exchange. (b) The Bangalore Stock Exchange
(c) The Madhya Pradesh Stock Exchange (d) The Nagpur Stock Exchange
(e) OTC Exchange of India.
(1 mark)
24. The Board of directors of a company declared interim dividend, within how many days the interim < Answer >
dividend shall be paid?
(a) Thirty days (b) Forty five days
(c) Sixty days (d) Ninety days (e) Forty two days.
(1 mark)
< Answer >
25. Doctrine of restitution can be invoked in the case of
(a) Quasi-contracts (b) Void agreements
(c) Valid contracts (d) Collateral contracts (e) Contingent contracts.
(1 mark)
26. What are the circumstances under which the Registrar of Companies may refuse to register a < Answer >
prospectus?
(a) When the prospectus is dated
(b) When it sets out the matters required under section 56 of the Companies Act
(c) When it contains the consent of every person in writing named as a director therein
(d) When the expert is interested in the formation of the company
(e) When the prospectus is accompanied by the consent of auditor, solicitor, attorney, lead manager,
banker, etc.
(1 mark)
27. What is the status of the joint holders for the purpose of quorum at the general meeting of the company? < Answer >
(a) Each joint holder is treated as quorum independently
(b) Joint holders will be collectively regarded as one member
(c) If the joint holders exceed two they will not be counted for quorum
(d) If the joint holders exceed three they will not be counted for quorum
(e) Joint holders are not entitled to attend the general meeting.
(1 mark)
28. An agent, who in consideration for an extra-commission, guarantees his principal that the persons with < Answer >
whom he enters into a contract on behalf of the principal, shall perform their obligations is called:
(a) Special agent (b) General agent (c) Universal agent
(d) Commission agent (e) Del-credere agent.
(1 mark)
< Answer >
29. In case of a breach of warranty in a contract of sale, the buyer can
(a) Repudiate the contract (b) Claim damages only
(c) Reject the goods (d) Refuse to pay the price (e) Not reject the goods.
(1 mark)
< Answer >
30. An extraordinary general meeting may be called by
(a) Members holding at least 10% of the issued share capital that don’t carry voting rights
(b) Members holding at least 10% of the paid-up share capital that carry voting rights
(c) Members holding at least 10% of the subscribed share capital that carry voting rights
(d) Members holding at least 10% of the called-up share capital that don’t carry voting rights
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(e) Members holding at least 10% of the authorized share capital that carry voting rights.
(1 mark)
< Answer >
31. Which of the following acts does not require passing of a special resolution?
(a) Alteration of authorized capital
(b) Alteration of articles of association
(c) Alteration of the objects clause of memorandum of association
(d) Change of registered office of the company from one state to another state
(e) Altering the name clause of a company under section 21 of the Companies Act.
(1 mark)
< Answer >
32. Which of the following does not constitute alteration of share capital?
(a) Conversion of stock into shares
(b) Transfer of shares
(c) Conversion of shares into stock
(d) Consolidation of existing shares into shares of larger denomination
(e) Sub-division of shares.
(1 mark)
< Answer >
(a) A director must be a member of the company
(b) Minimum seven persons are required for incorporation of a public company
(c) Proxy has no right to speak in the general meeting
(d) Company having profits need not declare dividends
(e) A private company cannot issue prospectus.
(1 mark)
< Answer >
34. Up to what date a director appointed to fill casual vacancy shall hold office?
(a) The last day on which the annual general meeting should have been held
(b) Until the real director, in whose place he is appointed, assumes office
(c) Till the date on which the director in whose place he is appointed would have held office
(d) Up to the next extraordinary general meeting
(e) Up to the conclusion of the annual general meeting.
(1 mark)
< Answer >
35. Which of the following resolutions require ‘special notice’ under section 190 of the Companies Act?
I. Removing a director under section 284 of the Companies Act
II. Appointment of a person (other than the retiring auditor) as an auditor under section 225 of the
Companies Act
III. Borrowing money in excess of paid up capital and free reserves under section 293(1) (d) of the
Companies Act
IV. Alteration of share capital under section 94 of the Companies Act
(a) Both (I) and (II) above (b) Both (I) and (III) above
(c) Both (II) and (III) above (d) (I), (II) and (III) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
36. How much amount shall be transferred to capital redemption reserve account when a company < Answer >
purchases its own shares out of free reserves?
(a) A sum equal to the nominal value of the shares so purchased
(b) A sum equal to the market value of the shares so purchased
(c) A sum equal to the book value of the shares so purchased
(d) A sum equal to the intrinsic value of the shares so purchased
(e) A sum equal to the market value of shares or book value of shares which ever is higher.
(1 mark)
< Answer >
37. Under which of the following modes a person becomes member of a company?
I. By subscribing his name to the memorandum of association
II. By an agreement with the company in writing
III. By entering his name as beneficial owner in the records of depository
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(a) Only (III) above (b) Both (I) and (III) above
(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
38. Which of the following matters do not require approval of the Central Government?
(a) Payment of interest out of capital
(b) Increase in numbers of directors beyond twelve
(c) Removal of auditor
(d) Appointment of cost auditor
(e) Borrowing money in excess of paid-up capital and free reserves.
(1 mark)
< Answer >
39. Which of the following matters requires passing of special resolution?
(a) To authorize buy-back of securities
(b) To appoint managing director /manager /whole time director
(c) To remove director before expiry of his term of office and appoint another in the place of
removing director
(d) To increase or reduce the number of directors of a company within the limits fixed by its articles
of association
(e) To contribute to charitable and other funds not directly relating to the business of the company or
employees of the company exceeding Rs.50,000 or 5 percent of company’s average net profits
during preceding three financial years immediately preceding, which ever is greater.
(1 mark)
< Answer >
40. As per section 591 of the Companies Act, a foreign company means
(a) A company incorporated outside India and having place of business in India
(b) A company incorporated in India and having place of business outside India
(c) A company incorporated outside India and having place of business outside India
(d) A company incorporated in India and having place of business in India
(e) A company incorporated in India but not commenced its business.
(1 mark)
< Answer >
41. The Companies (Acceptance of Deposits) Rules, 1975 are applicable to
(a) Non –Banking Finance Companies
(b) Non-Banking Non –Finance Companies
(c) Finance Companies
(d) Banking Companies
(e) Co-operative societies.
(1 mark)
< Answer >
42. Debentures cannot be issued at a discount if they are
(a) Non-cumulative (b) Redeemable (c) Convertible (d) Unsecured (e) Cumulative.
(1 mark)
< Answer >
43. Unless the articles provide higher number, the quorum for the general meeting of a public company is
(a) One third of the members personally present
(b) One fifth of the members personally present
(c) Seven members personally present
(d) Five members personally present
(e) Two members personally present.
(1 mark)
< Answer >
44. Which of the following statements is true?
(a) A share warrant can be issued by public companies as well as private companies
(b) A share warrant can be issued in respect of partly paid up shares
(c) A share warrant shall be transferred by registration of transfer deed
(d) A share warrant holder’s name is removed from the register of members
(e) Even though articles of association prohibit, share warrants can be issued.
(1 mark)
< Answer >
45. Which of the following is not one of the powers of Arbitrators?
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(a) Power to correct the clerical mistakes or errors in award
(b) Power to make the award conditional
(c) Power to extend time for making award
(d) Power to administer to the parties necessary interrogatories
(e) Power to amend the evidence produced before it.
(1 mark)
< Answer >
46. Where one or more companies are merged together it is known as
(a) Arrangement (b) Compromise (c) Reorganization
(d) Reconstruction (e) Amalgamation.
(1 mark)
< Answer >
47. Which of the following directors can be appointed by passing circular resolution?
I. Appointment of director in casual vacancy
II. Appointment of director as an additional director
III. Appointment of director as an alternate director
(a) Only (I) above (b) Only (II) above

(c) Both (I) and (III) above (d) Both (II) and (III) above (e) All (I), (II) and (III) above.
(1 mark)
48. ABC Ltd. whose paid up capital is Rs.2 crore, entered into a contract on June 30, 2004, with a firm in < Answer >
which a relative of a director is a partner, for purchase of certain raw material. The company applied to
Central Government for its permission for the said contract on September 8, 2004. However, the
Central Government rejected the application. In the above event, which of the following statements is
true?
(a) The company can execute the contract, even though Central Government rejected the application
to the company
(b) The Central Government shall not reject the application because, the parties already entered into
the contract
(c) The contract shall be approved by the Board of directors only
(d) The company has to obtain prior approval of the Regional Director not the subsequent approval of
the Central Government
(e) Central Government is not the proper authority to grant the permission but the Tribunal is the
appropriate authority to grant permission.
(1 mark)
49. Mr. X, who retired at an annual general meeting was re-appointed at the same meeting. However, the < Answer >
company ignored filing of his consent form with Registrar of Companies for sixty days. The Registrar
of Companies objected and imposed penalty for violation. In the above context, which of the following
statements is true?
(a) Company needs to file the consent within thirty days from the date of re-appointment of a director
(b) Company needs to file the consent within sixty days from the date of re-appointment of a director
(c) Company needs to file the consent within forty five days from the date of re-appointment of a
director
(d) No consent is required to be filed for re-appointment
(e) No consent is required for the appointment of a director.
(1 mark)
< Answer >
50. Price Worthy Ltd. has paid up capital of Rs.1 crore of which:
LIC holds 9%; SBI holds 2%; UTI holds 2%; Central Government holds 5%; and Public
Financial Institution holds 1.75% of the subscribed capital.
The company issued notice on 15th June 2004 by calling its annual general meeting on 26th July 2004
inter alia proposing the appointment of an auditor. On 30th June 2004 the company issued and allotted
5,000 preference shares of Rs.100 each to SBI by private placement. Price Worthy Ltd. advertised in
newspapers on 7th July 2004 for closure of its register of members with effect from 15th July 2004 and
the register of members shall remain closed until 26th July 2004. In the annual general meeting held on
26th July 2004, the auditor was appointed by passing an ordinary resolution. The Registrar of
Companies raised an objection that ‘since SBI holds shares in the company on the day of the meeting,
the appointment of auditor will be invalid unless made by a special resolution’. The Board of directors
of the company replied that at the time of issue of the notice, the SBI was not holding preference shares
and hence ordinary resolution is valid. In the context of the above situation, which of the following
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statements is true?
(a) Company cannot allot preference shares by private placement
(b) Preference shares by private placement cannot be allotted to SBI
(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
(e) The objection of the Registrar of Companies is not valid.
(2 marks)
51. Lucky Ltd. with a paid-up capital of Rs.10 crore and free reserves of Rs.16.8 crore as on March 31, < Answer >
2004 provided the following investments/loans/security/guarantee:
I. 50,000 equity shares of Rs.10 each at Rs.390 per share in PQR Co. Limited (as a right of receiving
shares under section 81 of the Companies Act)
II. A loan of Rs.1 crore to Albert Pharma Limited which is a wholly owned subsidiary of the Lucky
Limited
III. Security provided for purchase of 50,000 Units of US-64 issued by the UTI at Rs.14.50 each to
Kutty Limited which is a wholly owned subsidiary of Lucky Limited
IV. Investment of Rs.32,50,000 in a firm in which all the directors of Lucky Limited are partners
Which of the following amounts further, the Board of directors of the company (apart from the existing
investments/loans/security/guarantee) can provide to other bodies corporate?
(a) Rs.16,08,00,000 (b) Rs.16,80,00,000
(c) Rs.12,73,25,000 (d) Rs.15,75,50,000 (e) Rs.13,42,55,000.
(2 marks)
52. You are the consultant of Kun-Kun (Pvt.) Limited, which is a subsidiary of a public company. Your < Answer >
company has approached IFCI Limited, for a term loan of Rs.7.5 crore. IFCI Limited agreed to provide
the term loan with a condition of appointing a nominee director on the Board. On scrutiny of the articles
of association of the company, it was found that there was no provision for the appointment of a
nominee director in the company. But after appointing this nominee director the total number of
directors will go upto thirteen and it exceeds the number mentioned in the articles. As a consultant what
would be your advice 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 Central Government for increasing the number of
directors beyond twelve
(d) Company can appoint nominee director of IFCI even in the absence of a provision in the articles
of association
(e) The Board of directors can appoint nominee directors, even though after appointing this person the
number of directors in this company goes to thirteen.
(1 mark)
53. Directors of ABC Limited are not holding any shares in MDJ Limited. Similarly directors of MDJ < Answer >
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 Limited. Board of directors of ABC Limited entered into a
contract (for purchase of land) with MDJ Limited and director ‘A’ did not disclose his indirect interest
in MDJ 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, otherwise the contract
becomes invalid
(c) Director ‘A’ has violated the provisions of the Companies Act, hence he has to vacate the office
and the contract is voidable
(d) Director need not vacate his office but the contract is invalid
(e) Director ‘A’ has to vacate his office but the contract is valid and as such enforceable.
(1 mark)
54. ABC Limited held shares to the extent of 51.5% of XYZ Limited on April 1, 2004. On April 30, 2004 < Answer >
ABC Limited issued prospectus to the public and XYZ Limited intends to purchase shares to the extent
of 10% of that issued capital. Which of the following statements is/are correct?
I. A subsidiary company can be a member of its holding company without any restriction
II. A subsidiary company cannot be a member of its holding company
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III. Permission to hold the shares must be obtained from the Registrar of Companies
IV. Subsidiary company can hold shares as trustee unless holding company or subsidiary thereof is
beneficially interested under the Trust
(a) Only (I) above (b) Only (II ) above
(c) Both (I) and (II) above (d) Both (II) and (IV) above
(e) Both (I) and (IV) above.
(1 mark)
55. The Board of directors of Konika Limited a Government company received a request from a political < Answer >
party for a contribution of Rs.10 lakhs. The company was established in 2000 and its profits in the years
2001, 2002 and 2003 were Rs.50 lakhs, Rs.100 lakhs and Rs.150 lakhs respectively. In this regard,
which of the following statements is true?
(a) The company can contribute Rs.2.50 lakhs only
(b) The company can contribute Rs.5.00 lakhs only
(c) The company can contribute Rs.7.50 lakhs only
(d) The company can contribute Rs.10.00 lakhs
(e) The company cannot contribute to the political party.
(1 mark)
56. Ramachandra is a director in 20 companies as on October 1, 2004. The composition of his directorships < Answer >
is as detailed below:
I. Alternate 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 companies of other
public companies; and
IV. Director in a company registered as an association not carrying on business for profit.
Wise Limited a public limited company wants to induct Ramachandra as a director in its company. In
the context of the present situation, which of the following statements is true in terms of section 275 of
the Companies Act, 1956?
(a) Ramachandra is not qualified to be appointed as a director of Wise Limited as he is already an
alternate director in five public limited companies
(b) Ramachandra can be appointed as a director in Wise Limited, since he is within the limits
prescribed under section 275 of the Companies Act
(c) If a person is appointed as director in a company registered as an association not carrying on
business for profit he cannot be appointed as a director in other companies.
(d) Ramachandra is already a director in more than 15 companies (crossed the limits prescribed under
section 275 of the Companies Act) hence he cannot be appointed further in Wise Limited
(e) Ramachandra cannot be appointed in Wise Limited, as he is already a director in other private
companies.
(2 marks)
57. Mr.A wished to open a fire works shop for Diwali and entered into a contract with Omar Crackers < Answer >
Limited for the supply of certain crackers on or before November 12, 2004 (i.e. before Diwali). He paid
some advance to the company and agreed to pay the balance amount on receipt of the crackers. But
Omar Crackers Limited sent the consignment on November 15, 2004 after Diwali. Mr.A rejected the
crackers, which led to filing of a suit by the company for breach of contract, claiming compensation and
damages. In the context of the present situation, which of the following statements is true?
(a) The contract is enforceable, hence Mr.A must accept the goods
(b) Mr. A breached the contract, hence suit lies against him
(c) Failure to adhere to the time schedule, renders the contract void
(d) The company can claim compensation and damages from Mr.A
(e) The company can claim only damages from Mr.A.
(2 marks)
58. The Board of directors of Slow-Down Limited set up an audit committee comprising of four members, < Answer >
but did not fix the quorum. At a meeting of the audit committee only two members were present to
transact certain business. In the above situation, which of the following statements is true?
(a) One third of the members of the committee shall constitute quorum
(b) One half of the audit committee shall constitute quorum to transact the business
(c) All the four members should be present at the meeting of the audit committee to validly transact
the business
(d) The two members who were present can form quorum and transact business
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(e) Five members personally present shall be the quorum.
(1 mark)
59. At an annual general meeting of a company, one of the directors being badly heckled by irate < Answer >
shareholders had tendered his resignation orally, which was accepted (orally) by the majority of
members present at that meeting. In the above situation, which of the following statements is true?
(a) The director who has tendered resignation cannot withdraw thereby he cannot continue as a
director
(b) The oral resignation is invalid and hence he can continue as director even after the meeting
(c) The resignation is not valid unless approved by the Registrar of Companies
(d) The resignation is not valid unless approved by all the directors
(e) The resignation is not valid unless approved by a resolution in general meeting.
(1 mark)
60. Ramu was employed as a servant by Mr.Rao for one year on a salary of Rs.1,000 per month, the salary < Answer >
is payable after the completion of the year. But after three months, Ramu got another employment and
left the service. Now Ramu wants to claim the salary as per the contract entered between him and
Mr.Rao. Which of the following statements is correct?
(a) Ramu will get the salary for the whole year as per the contract
(b) Ramu will get the salary for three months only
(c) Ramu will get one-fifth of the salary, which is agreed for one year
(d) Ramu is not entitled to get any salary for the period he has been employed
(e) Ramu will get only fifty percent of the salary for the whole contract period.
(1 mark)
61. Dr. Kumar a heart specialist joined Universal Hospital Limited, Hyderabad as a consultant for a period < Answer >
of 3 years on a salary of Rs.50,000 per month. The agreement between Dr.Kumar and the Hospital
provided that after the termination of his employment Dr.Kumar should not practice as a doctor in
Hyderabad for a period of one year and if he does so he should pay Rs.2,00,000 to the Universal
Hospital Limited as liquidated damages.
Immediately after termination of the term of his employment with the Hospital, Dr. Kumar began to
practice as a doctor adjacent to the Hospital premises.
The Universal Hospital Limited sued Dr. Kumar for the recovery of Rs.2,00,000.
Which of the following statements is correct?
(a) Dr.Kumar has to pay the compensation for breach of contract
(b) The agreement between the Hospital and Dr. Kumar is valid
(c) The Hospital has right to restrain its employees from practicing their profession after the
employment
(d) The Hospital cannot recover damages because an agreement in restraint of trade is void
(e) Dr.Kumar has to pay damages to the Universal Hospital Limited for the loss caused to it.
(1 mark)
62. Murugan of Chennai entered into a contract with Raghava Reddy of Tirupathi for supply of local made < Answer >
liquor since there was no prohibition on supply of liquor to Tirupathi (Andhra Pradesh). Subsequently
prohibition was imposed by the Government of Andhra Pradesh and transportation of liquor to Tirupati
was banned. Murugan failed to supply the liquor to Raghava Reddy of Tirupathi.
Raghava Reddy sued Murugan for specific performance and damages. Murugan pleaded that the
contract could not be performed due to the prohibition imposed by the Government of Andhra Pradesh.
Which of the following statements is true?
(a) Raghava Reddy can demand performance of the contract
(b) Raghava Reddy can sue for damages
(c) Raghava Reddy cannot demand the performance of the contract, since the non-performance is due
to operation of law
(d) Murugan has to pay compensation for non-performance of the contract
(e) Raghava Reddy can claim for exemplary damages for the breach of contract.
(1 mark)
63. Six of the seven signatures to the memorandum of association of ABC Limited were forged. The < Answer >
memorandum and other relevant documents were duly presented. The Registrar of Companies
registered and issued certificate of incorporation. Later Registrar of Companies issued a notice on the
company for the winding up. Then the Board of directors expressed the doubt whether the existence of
the company be subsequently questioned on the ground that the signatures in the memorandum were
10
forged. In the above context, which of the following statements is true?
(a) The registration of the company is not valid
(b) Certificate of incorporation is valid only when the company approves in general meeting
(c) A certificate of incorporation given by the Registrar of Companies is a conclusive evidence and
hence cannot be questioned on this ground
(d) A certificate issued by the Registrar of Companies can be questioned in future for non-fulfillment
of formalities at the time of registration
(e) The certificate of incorporation is valid provided prior permission of the Central Government is
obtained.
(1 mark)
64. Ajay, Vijay, Vinod and Vinay jointly borrowed an amount of Rs.2,00,000 from Govind. Ajay and Vijay < Answer >
pleaded Govind to release them from the liability as they have no means to pay. Govind agreed to
release Ajay and Vijay and filed a suit against Vinod and Vinay for payment of the debt. Which of the
following statements is correct?
(a) Vinod and Vinay are not liable for Rs.2,00,000 as Govind released Ajay and Vijay
(b) Vinod and Vinay are liable for Rs.1,00,000 only as Govind released Ajay and Vijay
(c) Vinod and Vinay can recover the amount of Rs.2,00,000 from Ajay and Vijay as they have paid to
Govind
(d) Vinod and Vinay are liable to pay Rs.2,00,000 as Govind released Ajay and Vijay
(e) Govind cannot release Ajay and Vijay.
(1 mark)
65. Mr.X, a shareholder holding one tenth of the paid-up capital of XYZ Limited sent a requisition to the < Answer >
company to conduct an extraordinary general meeting. The directors of the company alleged that the
requisitionist has not sent the explanatory statement along with his requisition. Hence, they need not
conduct the meeting. With regard to the submission of the explanatory statement of the requisitionist,
which of the following statements is true?
(a) The requisitionist is liable to send the explanatory statement to the company along with his
requisition
(b) The requisitionist is required to send the explanatory statement to all the members of the company to
their addresses
(c) The requisitionist is required to submit the explanatory statement on the demand made by the
Board of directors
(d) The Board of directors is responsible to give explanatory statement to all the members along with
the notice of the extraordinary general meeting
(e) The requisitionist is required to give the explanatory statement only when there is a demand from
the chairman of the company.
(1 mark)
66. ABC Private Company which has 50 members (not including the persons who are in the < Answer >
employment/having been formerly in the employment of the company) and 5 directors with partly paid
up capital of Rs.10 lakhs, intended to convert itself into a public 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 converted itself into a public company and started carrying on its business.
Later on, the Registrar of Companies issued a notice treating the conversion as invalid and inoperative,
for the violation of the provisions of the Companies Act, 1956. In this context, which of the following
statements is true?
(a) The company is to make calls on the uncalled capital before the 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) The company should take the permission of National Company Law Appellate Tribunal
(e) The notice issued by the Registrar of Companies is not valid as the company did not violate any
law.
(2 marks)
67. Anita, one of the directors of XYZ Limited, did not attend the Board of directors meetings, from 1st < Answer >
July, 2004 to 30th September, 2004 without obtaining leave of absence from the Board, though the
company had sent her notice for the meetings. Two meetings were held between 1st July, 2004 and 30th
September, 2004 out of which Anita had attended one meeting. The last meeting attended by her was on
1st October, 2004. There were no further meetings of the Board of directors in October 2004. The
company convened a meeting of the Board of directors on 15th November, 2004 for which no notice
11
was sent to Anita, on the ground that she had ceased to be a director under the Companies Act. The
meeting was held as scheduled, and certain important decisions were taken thereat. Anita, on coming to
know of the meeting on 15th November, 2004 challenges the company on convening of the Board of
directors meeting and decisions taken thereat on the ground of omission of sending notice to her. In the
above context, which of the following statements is true?
(a) Meeting is invalid and the resolutions passed at such meeting are inoperative
(b) Meeting is valid and also the resolutions passed are valid
(c) Meeting is valid but the resolutions passed are invalid
(d) Anita has no right to allege on the resolutions passed at the Board meeting
(e) Directors cannot question on the omission of notice of the Board meetings.
(2 marks)
68. Modern Limited proposes to appoint Khalid, a relative of a director of the company, as general manager < Answer >
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 is sufficient
(b) Passing of a special resolution is required
(c) Passing of an ordinary resolution and permission of the Central Government is 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 the Central Government’s permission is compulsory.
(2 marks)
69. ‘A’ the holder of a bill for Rs.1,200 makes an endorsement stating ‘pay Rs.700 to B or order and pay < Answer >
Rs.500 to C or order’. With reference to the above negotiation, which of the following statements is
true?
(a) The endorsement is invalid
(b) The endorsement to B is not valid
(c) The endorsement to C is not valid
(d) The endorsement is completely valid
(e) Endorsement in equal proportions will be valid.
(1 mark)
70. Balu buys a refrigerator from Anand for Rs.10,000 and pays the entire amount of price and informs < Answer >
Anand that he will take the refrigerator within a week. Anand thereafter sells the refrigerator to Sunil
and receives the payment in cash. Sunil has no knowledge of sale by Anand. Which of the following
statements is/are correct?
(a) Sunil will get a valid title as he buys the refrigerator in good faith
(b) Balu can recover the possession of refrigerator from Sunil
(c) Sunil will not get the valid title
(d) Balu can recover Rs.10,000, the price paid by him for the refrigerator from Sunil
(e) Both (b) and (c) above.
(1 mark)
71. Ram, Rahul and Lakshman jointly borrowed Rs.1,50,000 from Rahim by executing a promissory note. < Answer >
Ram and Lakshman are not traceable. Rahim wants to recover the entire amount from Rahul. Which of
the following statements is/are correct?
(a) Rahim can recover the entire amount from Rahul
(b) Rahim can recover only Rs.50,000 from Rahul
(c) Rahim cannot recover any amount from Rahul
(d) The promissory note executed by Ram, Rahul and Lakshman is not enforceable since Ram and
Lakshman are not traceable
(e) Both (c) and (d) above.
(1 mark)
72. The Board of directors of XYZ Limited, placed the un-audited annual accounts of the company before < Answer >
the members in annual general meeting, as the preparation of accounts and auditing is not complete.
The members in general meeting objected for this by refusing to adopt the accounts, consequently the
dividends are not declared. In the above situation, which of the following statements is true?
(a) Un-audited annual accounts shall be placed before the members if audit is not complete
(b) Members are bound to adopt the un-audited accounts once they are placed by the Board of
directors
12
(c) In case the accounts are not audited, they must be approved by the members by passing special
resolution
(d) Only audited annual accounts can be placed before the members
(e) Accounts can be audited even after their adoption in annual general meeting.
(2 marks)
73. Mr.X, a director of ABC Limited, who was appointed in the last annual general meeting, died in a car < Answer >
accident. The Board of directors appointed Mr.Y as a director to fill casual vacancy in the place of
Mr.X. But now Mr.Y resigns from the company. The Board intends to appoint Mr.Z as a director to fill
casual vacancy in the place of Mr.Y. In the above situation, which of the following statements is true?
(a) The company shall wait up to the next annual general meeting and pass ordinary resolution for
appointing Mr.Z as a director
(b) The company shall conduct an extra-ordinary general meeting and pass special resolution for
appointing Mr.Z as a director to fill casual vacancy in the place of Mr.Y
(c) The company need not conduct extra-ordinary general meeting but through resolution passed by
‘postal ballot’ may appoint Mr.Z as a director to fill casual vacancy in the place of Mr.Y
(d) The Board of directors cannot appoint Mr.Z as director to fill casual vacancy in their meeting in
the place of Mr.Y
(e) The Board of directors can appoint Mr.Z to fill the casual vacancy.
(2 marks)
74. Auditor of a company verified the accounts and submitted his report by signing on July 31, 2004. Later < Answer >
the Board of directors authenticated the accounts on August 12, 2004. When the accounts were placed
before the members for their adoption, they refused to adopt the accounts. In the above situation, which
of the following statements is true?
(a) The members are bound to adopt once the accounts are placed before them
(b) The Board must authenticate the accounts before the auditor verifies the accounts
(c) The Board should sign on the accounts within seven days from the date of auditor’s verification
(d) The Board should sign on the same day of auditors verification
(e) The Board should sign on the accounts within ten days from the date of auditor’s verification.
(1 mark)
75. A selection committee of a university interviewed Mr.A, a candidate for the post of a lecturer. Selection < Answer >
committee passed a resolution selecting Mr.A for the post. One of the committee members, acting in his
individual capacity, informed Mr.A, about the favourable response by the selection committee by way
of a resolution passed in its meeting. But Mr. A received no information from the university as regards
his selection. Subsequently, the resolution was cancelled and Mr. A was not appointed for the post. In
the above situation, which of the following statements is true?
(a) Mr.A can sue the committee member for the wrong information given by him and claim
exemplary damages
(b) Mr.A cannot sue the university
(c) Mr.A can sue the university for breach of contract and claim damages and compensation
(d) Mr.A can demand for appointing him for any post in that university
(e) Mr.A can sue the university as well as the committee member by claiming special damages.
(1 mark)
76. A, accepted a bill and delivered it to B for the purpose of getting it discounted from him. B, having < Answer >
failed to discount it, returned the bill to A, who tore the bill into two pieces intending to cancel it, and
threw the pieces into the street. B picked up the pieces and pasted them together in such a manner that
the bill seemed to have been folded for safe custody rather than cancelled. B then endorsed the bill in
favour of C, a holder in due course. In the above context, which of the following statements is true?
(a) C can recover the amount from A
(b) C cannot recover the amount from A
(c) C can recover the amount from B
(d) C will not get valid title as B is not having valid title
(e) C can recover the amount from either of them.
(1 mark)
77. KBC Limited, having its registered office in Mumbai, wants to shift its registered office from Mumbai < Answer >
to Hyderabad as the company’s works and other contracts are at Hyderabad. Which of the following
necessary steps are to be taken for implementation of the shifting?
(a) Company has to pass ordinary resolution and obtain Central Government’s permission
(b) Company has to pass special resolution and obtain Central Government’s permission
13
(c) Company has to pass special resolution and obtain Regional Director’s permission
(d) Company has to pass ordinary resolution and obtain Regional Director’s permission
(e) Company has to pass special resolution and obtain the permission of Tribunal.
(1 mark)
78. ABC Limited has twelve directors, who are scattered all over the country. Whenever there is a Board < Answer >
meeting, all twelve directors attend thereby, the cost of sitting fees is high and the directors are given
trouble to attend all the Board meetings. They sought the advice of the company secretary on this
matter, as to how they can meet and decide the matters which will not amount to violation of the
Companies Act. The company secretary advised the Board of directors to form committees so that, they
can save money and also need not waste time and energy of all directors. Taking the above matter into
account, which of the following matters can be delegated to the committee of Board of directors?
I. Power to issue debentures
II. Power to invest funds of the company subject to section 293 and section 372A of the Companies
Act
III. Power to make loans subject to section 295 and section 372A of the Companies Act
IV. Power to make calls on share holders in respect of money unpaid on their shares
V. Power to borrow money otherwise than on debentures
(a) Only (I) above (b) Both (I) and (II) above
(c) (I), (II) and (III) above (d) (II), (III) and (V) above
(e) All (I), (II), (III), (IV) and (V) above.
(2 marks)
79. A company created a charge on its assets in favour of Lika Bank Limited on October 1, 2004. This < Answer >
charge was filed with the Registrar of Companies on October 10, 2004. The Registrar of Companies
issued certificate of registration of charge on October 15, 2004. The company also created charge on
the same assets in favour of Sahara Bank Limited on October 9, 2004 and filed the charge with the
Registrar of Companies on October 10, 2004. The Registrar of Companies registered that charge and
issued certificate on October 12, 2004. Which of the following statements is correct with regard to
priority in recovering its dues by disposing of the assets?
(a) Creation of charge is more important than registration of charge hence Lika Bank Limited 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.
(1 mark)
80. Ankur agreed to sell a horse to Eswar on a condition that Eswar will keep the horse for 10 days on trial < Answer >
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 voidable at the option of Eswar
(e) The agreement becomes voidable at the option of Ankur.
(1 mark)
81. The Board of directors of ABC Limited appointed Mr. Z (who is not a managing director/manager of < Answer >
any company) as a managing director at its meeting though not mentioned in the agenda items. In this
regard, which of the following statements is true?
(a) The Board of directors do not have power to appoint managing director, hence the appointment is
invalid
(b) Without the agenda item the appointment of managing director cannot be taken in the board
meeting hence the appointment is invalid
(c) In the board meetings other than the agenda items can also be resolved with the permission of the
chair, hence the appointment is valid
(d) If managing director is appointed by the Board, permission of Registrar of Companies is required
(e) If managing director is appointed by the Board permission of Tribunal is required.
(1 mark)
14
< Answer >
(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 dishonour should be given to the drawer in case of dishonour of a bill.
(1 mark)
83 ABC Limited has 3 directors (the company also has a managing director), who are neither in the whole < Answer >
time employment of the company nor a managing director, how much remuneration can 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 >
84. Provisional contract means
(a) A contract entered into by a private company for purchase of raw material
(b) A contract entered into 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) A contract entered into by a private company with its directors.
(1 mark)
85. Which of the following instances is/are treated as crossing under the Negotiable Instruments Act, 1881? < Answer >
I. A cheque bearing across its face the words ‘account payee’ without two transverse parallel lines
II. A cheque bearing across its face the words ‘not negotiable’ without two transverse parallel lines
III. A cheque bearing across its face the words ‘not exceeding rupees two hundred’ within two
transverse parallel lines
IV. A cheque bearing across its face the words ‘Indian Bank, Himayathnagar branch, Hyderabad’
within two transverse parallel lines
V. A cheque bearing across its face the words ‘Andhra Bank, Gaganmahal branch, Hyderabad’
without two transverse parallel lines
(a) Only (I) above (b) Both (I) and (II) above
(c) (I), (II) and (III) above (d) (II), (III) and (IV) above
(e) (III), (IV) and (V) above.
(1 mark)
< Answer >
86. Compromise or arrangement shall be sanctioned by the
(a) Central Government (b) National Company Law Tribunal
(c) Registrar of Companies (d) National Company Law Appellate Tribunal
(e) Board of directors of the company.
(1 mark)
87. Powers of the CLB relating to public deposits, complaints regarding refusal to register transfer of < Answer >
securities, rectification of register of members, oppression and mismanagement etc., are transferred to
(a) National Company Law Tribunal (b) National Company Law Appellate Tribunal
(c) Supreme Court (d) High Court
(e) Central Government.
(1 mark)
< Answer >
(a) Stock issued by a company has no nominal value
(b) Stock bears no distinctive numbers
(c) Stock cannot be issued in fractions
(d) Stock can never be partly paid-up
(e) Stock cannot be allotted in the name of the company issuing the same.
(1 mark)
< Answer >
89. Payment of remuneration to an advocate depending upon the winning of the case is
(a) A wagering agreement (b) An agreement to stifle prosecution
15
(c) A gambling in litigation (d) A contingent contract
(e) A quasi-contract.
(1 mark)
90. Which of the following statements is true as regards the liability of an auditor for failure to point out in < Answer >
his report that dividend is paid out of the sale proceeds of company’s real estate?
(a) It is neither responsibility nor authority of the auditor to comment
(b) It is the responsibility of the auditor to comment, failing which he is liable to vacate the office of
auditor of the company
(c) It is the responsibility of the auditor to comment, failing which he is liable to pay penalty which is
equal to the amount of such real estate
(d) It is the responsibility of the auditor to comment, failing which he is liable to pay penalty which is
equal to the amount of 10% of dividend what is paid
(e) It is the responsibility of the auditor to comment, failing which he is liable to pay penalty, which is
equal to the amount of 40% of dividend what is paid.
(1 mark)
END OF QUESTION PAPER
16
Suggested Answers
Economic Legislation – I (161): January 2005
1. Answer : (a) < TOP >
Reason : A guarantee given for an existing debt or obligation is called a ‘Retrospective guarantee’
2. Answer : (b) < TOP >
Reason : A cheque can be made payable on ‘bearer on demand’ but all others i.e. a promissory note,
bill of exchange, or a hundi cannot be made payable to bearer on demand by virtue of
section 31 of the Reserve Bank of India Act,1934.
3. Answer : (d) < TOP >
Reason : Railway receipts are recognized as negotiable instruments by custom or usage but money
orders, postal orders, debenture certificates dock warrants are not recognized as negotiable
instruments though these documents are transferable by delivery or endorsement and
delivery. They cannot give a better title to the transferee.
4. Answer : (e) < TOP >
Reason : To check whether the transactions of the company which are represented merely by book
entries are not prejudicial to the interest of the company is the duty of the auditor and not
the right of the auditor but all others are rights of an auditor.
5. Answer : (c) < TOP >
Reason : Under section 619(2) of the Companies Act, the auditors of the Government Companies
are appointed by the Comptroller and Auditor General of India. But not by the
shareholders in general meeting.
Reason : Every public company having paid up capital of not less than five crore rupees shall
constitute an audit committee under section 292A of the Companies Act.
Reason : A promised to sell his to B for Rs.50,000 if he would like to sell it after having a new car,
is called a’ Contingent contract’.
8. Answer: (d) < TOP >
Reason: A director appointed by the Central Government cannot be removed by the members u/s
284 of the Companies Act.
Reason : The particulars of modification of a charge must be filed with the Registrar of Companies
within thirty days of such modification.
Reason : The office of a director shall become vacant when he acts in contravention of section 299 i.e.
he acts in contravention of disclosure of interest in a contract or arrangement in which he is
interested and in the case of all other situations he is not required to vacate his office u/s 283
of the companies Act, 1951.
Reason : In fact, where the maturity period of debentures exceed 18 months the debentures needs to
be secured by way of charge on the assets of the company. But in the question it is given as
if creation of charge is not required which is a false statement.
Reason : When default is made in filing its annual return by a company, such company is not
permitted to engage itself in buy-back of its securities.
Reason : Offences of directors shall result into imprisonment are contravention to comply sec. 293A
i.e. contribution to political parties in violation of the provisions and also failure to
distribute dividends within 30 days from the date of its declaration under section 207 of the
Act.
17
14. Answer: (d) < TOP >
Reason: The false statement is consideration for a contract may be illusory in fact consideration to a
contract shall not be illusory but it should be real.
Reason : Under the following circumstances the Central Government can order for special audit:-
I. When the affairs of any company are not being managed in accordance with sound
business principles or prudent commercial practices
II. When the company is being managed in a manner likely to cause serious injury or
damage to the interest of the trade, industry or business to which it pertains
III. Where the financial position of the company is such as to endanger to its solvency.
Reason : The minimum age limit prescribed under the Companies Act, for a person to become
managing director of a company is Completing the age of twenty five years.
Reason : Making any loans /giving any guarantee/ providing any security to the directors of the
company requires prior approval of the Central Government. but all others do not require
prior approval of the Central Government.
Reason : Alteration of articles is not treated as ordinary business matter

Ordinary business matters means:
(a) Adoption of accounts
(b) Appointment or reappointment of directors
(c) Appointment of auditors and fixation of their remuneration
(d) Declaration of dividend.
Apart from the above four matters all other matters are considered as special business
matter. Hence alteration of Article of Association is not an ordinary business matter.
Reason : A general meeting requires twenty-one clear days’ notice in writing. The word “Clear
days” means exclusive of the date of service of the notice and the date of the meeting.
Reason : The Doctrine of Election lays down the principle that a man taking a benefit under an
instrument must also bear the burden.
< TOP >
21. Answer : (c)
Reason : Instruments should be stamped under the Indian Stamp Act before or at the time of
execution under Section 17 of the Indian Stamp Act, 1899.
< TOP >
22. Answer : (c)
Reason : Under the Depositories Act, 1996, when the share certificates of an investor are
dematerialized his or her name is entered in the records of the depository as a beneficial
owner of such shares.
Reason : There is no Stock Exchange in Nagpur. The rest are recognized Stock Exchanges.
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
such resolution in the Board meeting.
18
Reason : Doctrine of Restitution can be invoked in case of Void agreements.
Reason : The registrar must refuse to register the prospectus when the expert is connected person to
the company.
Section 60 of the Companies Act requires that before a company publishes a prospectus,
inviting offers from the public to subscribe to its shares, a copy thereof duly signed by all
the directors named therein should be delivered to the Registrar for registration. Sub-
section (3) of Section 60, however, provides that the Registrar shall refuse registration of a
prospectus in the following circumstances:
When the prospectus is not dated.
When it does not set out the matter or reports as required under Section 56.
When it contains statements of reports of experts-engaged or interested in the formation of
the company (Section 57).
When it includes statement proposed to be made by an expert without a statement that he
has given and has not withdrawn his consent to the issue of prospectus.
When it does not contain consent in writing of every person named therein as director.
When the prospectus is not accompanied by the consent in writing of the auditor, attorney,
solicitor, lead manager, bankers, manager to the issue, broker, underwriters named in the
prospectus acting in that capacity.
Hence in the present question, the option (c) is that the expert is interested in the formation
of the company. Hence in such case, the Registrar of Companies shall refuse to register the
Prospectus.
Reason : A company may make its own provisions in the Articles of Association in regard to the
attendance and voting by joint shareholders provided that such provisions are not
restrictive of any rights given to the shareholders under the Companies Act or otherwise
repugnant to any provision of the Act. Any joint holder present at a meeting is entitled to
exercise voting power and will be counted for the purpose of the quorum. It may, however,
be noted that only one of the several joint holders will be entitled to exercise voting power,
likewise for the purposes of the quorum, joint shareholders will be collectively regarded as
one shareholder.
Reason : An agent, who in consideration for an extra-commission, guarantees his principal that the
persons with whom he enters into a contract on behalf of the principal, shall perform their
obligations is called a Del-credere agent
Reason : In case of breach of a warranty in a contract of sale, the buyer can reject the goods
Reason : An extraordinary general meeting may be called by members holding at least 10% of the
paid-up share capital that carries voting rights.
Reason : Matter which do not require passing of a special resolution is alteration of authorized
capital.
Reason : Transfer of shares does not constitute alteration of share capital.

< TOP >
33. Answer : (a)
Reason : Director need not be member of the company, if the company’s articles so provide to take
qualification shares then the directors are required to take shares in the company otherwise
for the directors to become members of the company is absolutely optional.
Reason : The office of a director to fill casual vacancy is valid till the date upto which the director in
whose place he is appointed would have held office. Hence option (c) is correct.
19
Reason : Special notice under section 190 is required to be issued for removing a director under
section 284 and appointing a person as an auditor other than the retiring auditor under
section 225 of the Companies Act.
Reason : The amounts shall be transferred to capital redemption reserve when a company purchases
its own shares out of free reserves would be a sum equal to the nominal value of the shares
so purchased.
Reason : Under the following modes a person become member of a company:

a. By subscribing to the memorandum of association
b. By an agreement with the company in writing
c. By entering the name as beneficial owner in the records of depository
Reason : Borrowing money in excess of paid – up capital and free reserves do not require approval
of the central government only approval of member by special resolution is required
The following matters require approval of the Central Government
a. Payment of interest out of capital
c. Increase in numbers of directors beyond twelve
d. Removal of auditor
e. Appointment of cost auditor
Option (e) is correct where as all other matters given in options (a) to (d) require approval
of Central Government.
Reason : To authorize buy-back of securities require passing of special resolution. Whereas all
others matters require only passing of ordinary resolution.
Reason : As per section 591 of the Companies Act, a foreign company means ‘‘a company
incorporated out side India and having place of business in India’’.
Reason : The Companies (Acceptance of Deposits) Rules 1975 are applicable to Non-banking Non
–Finance Companies.
Reason : Debentures cannot be issued at a discount if they are Convertible Debentures.

Reason : Unless the articles otherwise provide, the quorum for the general meeting of a public
company is five members personally present.
Reason : As per section 115 of the Companies Act, A share warrants holder’s name is removed from
the register of members is true statement where as all other statements are false.
Reason : Amending the evidence is not the power of the arbitrators but all other options given in the
question like
(a) Power to correct the clerical mistakes or errors in award.
(b) Power to make the award conditional
(c) Power to extend time for making award.
(d) Power to administer to the parties necessary interrogatories.
(e) Power to amend the evidence produced before it.
Are the powers of the arbitrators.
Reason : Where one or more companies are merged together it is known as Amalgamation. The
term compromise indicates the existence of a dispute between two parties, which needs to
be settled amicably. The dispute usually relates to the rights of the parties. The term
20
reorganization is not the correct answer as required in the definition. Section 390(B) of the
Companies Act, 1956 defines the term arrangement to include reorganization of the share
capital of a company by consolidation of shares of different classes or by the division of
shares into shares of different classes or by both of these methods. The reconstruction is
said to have taken place when an undertaking is being carried on by a company and is in
substance transferred, not to an outsider, but to another company consisting substantially
of the same shareholders with a view to its being continued by the transferee company.
Reason : Appointment of director as additional director and appointment of director as alternate

director can be made by passing circular resolution.
Reason : Prior approval of Regional Director is compulsory not the subsequent approval of the
Central Government hence the contract is invalid in law and the director concerned will
cease to hold office from the date of contract entered by the company.
Reason : No consent is required to be filed for re-appointment of a director under section 264 of the
Companies Act.
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 SBI has been increased but not beyond the specified limit
of 25% on the date of annual general meeting of Price Worthy Ltd. Therefore the
contention of the Board of directors is right.
In the Instant case, the aggregate holding of Government and Public Financial Institutions
put together coming to (LIC holds 9%; SBI holds 2%; UTI holds 2%; Central Government
holds 5%; and Public Financial Institution holds 1.75% including the additional investment
of SBI 5,000 preference share of Rs.100/- each) 24.75% of Rs.1 crore which is not beyond
the limit prescribed , hence passing of ordinary resolution is sufficient and the contention
of Registrar of Companies is not 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.
However, section 372A shall not apply –
(i) to any investment made in shares allotted in pursuance of clause (a) of sub-
section (1) of section 81;
(ii) to any loan made by a holding company to its wholly owned subsidiary;
(iii) to any guarantee given or any security provided by a holding company in
respect of loan made to its wholly owned subsidiary;
In the given case, Lucky Ltd. made the following investments:
(i) Investment of Rs. 1,95,00,000 (i.e., 50,000 equity shares of Rs.390 per share) in
PQR Ltd. which are allotted in pursuance of section 81 of the Companies Act;
(ii) A loan of Rs.1,00,00,000 sanctioned to Albert Pharma Ltd which is a wholly
owned subsidiary of Lucky Ltd.;
(iii) Security provided to Kutty Ltd. which is a wholly owned subsidiary of Lucky
Ltd. for purchase of 50,000 Units of US-64 at Rs.14.50 approximately Rs.
7,25,000;
(iv) Investment of Rs.32,50,000 in a firm in which all the directors of Lucky Ltd. are
interested.
21
Thus, as per section 372A all the above investments are exempted and the company is eligible
to make loans/investments/give guarantee/provide security to the extent of Rs.16,80,00,000 (i.e.,
one hundred percent of free reserves).
Reason : As per section 259 of the Companies Act, 1956 in case of a public company or a private
company which is a subsidiary of a public company, any increase in the number of its
directors shall not have any effect unless approved by the Central Government.
In the given case, Kun-Kun Pvt. Ltd. can appoint nominee of IFCI (since IFCI is
established under the authority of IFCI Act which is a Statutory Authority) as its director
even if there is no provisions in the Articles of Association but, it has to comply with the
provisions of section 259 of the Companies Act, 1956 according to which the company
has to obtain the permission of the Central Government for increase in the number of its
directors beyond twelve and the provisions which are applicable to a public company are
also equally applicable to its subsidiary.
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 : As per section 42 of the Companies Act, 1956 a body corporate cannot be a member of a
company which is its holding company and any allotment or transfer of shares in a
company to its subsidiary shall be void.
However nothing in this section shall apply:-
1. Where a subsidiary company hold the shares in the capacity of a legal representative
of a deceased member of the holding company.
2. Where the subsidiary company hold the shares in the capacity of trustee, unless the
holding company or a subsidiary thereof is beneficially interested under the trust.
Hence in the given case, ABC Limited cannot be a member of its holding company but it
can hold shares as trustee under the trust unless the trust in which the company and its
holding company are benefically interested.
Reason : Under section 293 A of the Companies Act, a Government company and a company
which is in existence for less than 5 years cannot contribute to the political party.
Reason : After the commencement of this Act, no person shall, save as otherwise provided in
section 276, hold office at the same time as director in more than 92[fifteen] companies.
Exclusion of certain directorships for the purposes of sections 275, 276 and 277.
278. (1) In calculating, for the purposes of sections 275, 276, and 277, the number of
companies of which a person may be a director, the following companies shall be
excluded, namely:-
(a) a private company which is neither a subsidiary nor a holding company of a public
company;
(b) an unlimited company;
(c) an association not carrying on business for profit or which prohibits the payment of a
dividend;
(d) a company in which such person is only an alternate director, that is to say, a director
who is only qualified to act as such during the absence or incapacity of some other
director.
Hence, Ramachandra can be appointed as a director in Wise Limited, since he is within the
22
limits prescribed under section 275 of the Companies Act.
Reason: For certain contracts, time is the essence, the performance of the contract is subject to
fulfillment within a specified time, if the time is elapsed the contract becomes void. In the
present case also time is essence for the performance of the contract i.e. crackers must be
dispatched before the Diwali since the crackers are send after the Diwali, what can be done
by the trader with them, thereby he is not under obligation to accept the contract when it is
attempted to perform. That will not amount to breach of contract. The other party does not
fulfill the movement subject to condition, automatically the agreement becomes void, and
the advance amount what ever is paid will be refundable.
Reason : Section 292A of the Companies Act provides that every Audit Committee set up shall act
in accordance with the terms of reference to be specified in writing by the Board of
directors. It follows that the quorum for Audit Committee Meetings should be fixed by the
Board while constituting the Committee. If the quorum is not prescribed by the Board, all
the members of the Audit Committee should attend the meeting. Therefore, all the 4
members of the Board of Slow-Down Ltd. should be present at the meeting of Audit
Committee to validly transact the business and only two members present at the meeting
cannot validate any business.
Reason : The resignation of a director may even be oral as has been held in the case of Latchford
Premier Cinema Ltd. v. Ennion and Paterson 1931 2 Ch. 409 that where even the
resignation tendered orally at a general meeting and accepted at the meeting was held to be
effective. The director who has tendered the resignation cannot withdraw it. However, he
may do so with the consent of the general meeting. In the present case, the director who
had orally tendered his resignation at the annual general meeting which was accepted
cannot continue in his office.
Reason : Ramu is not entitled to the salary for the period he has been employed because, by leaving
the service, he has disabled himself from performing his promise in its entirety.
Reason : The hospital cannot recover damages because an agreement in restraint of trade is void,
after the termination of his service.
Reason : Raghavareddy cannot demand for specific performance of contract Since the non-
performance is due to operation of law and the contract is impossible to perform, which is
caused by the circumstances beyond the control of Murugan.
Reason : A certificate of incorporation issued by the Registrar of Companies is a conclusive

evidence. The existence of the company cannot be questioned subsequently.
Reason : As Ajay and Vijay are discharged, both Vinay and Vinod are liable to pay Rs.2,00,000.
Options in (a), (b), (c) and (e) are not correct.
Reason : Under section 169 of Companies Act, the members, who are holding 1/10 of the capital
having voting rights, may requisition for extra ordinary general meeting. Such meeting is
also called requisition meeting. In case the members send requisition, the requisitionist is
not required to send the explanatory statement. The Board of directors upon receiving the
requisition have to sent the notice of the extra ordinary general meeting along with
explanatory statement under section 173(2) to all the members of the company. Hence
option (d) is correct but not others.
Reason : A private company can convert itself into a public company by filing a certified copy of
the special resolution, and amended memorandum and articles of association with the
Registrar of Companies. But the approval of the Central Government is not required for
23
this purpose.
In the given case ABC (P) Ltd. has fulfilled all the formalities required for conversion and
it need not obtain any permission. Passing of special resolution and filing of altered
memorandum and articles of association is sufficient. Hence the notice issued by the
Registrar of Companies is not valid as the company did not violate any law.
Reason : Under section 283 of the companies Act, 1956, a director automatically vacates his/her
office, if he /she absents himself/herself from three consecutive meetings of the Board of
directors or from all meetings of the Board for a continous period of three months, which
ever is higher, with out obtaining the leave of absence from the Board.
Accordingly Anita was absent only for two board meetings in a period of three months
from 1st July to 3oth September. The provision demands that absence of three consecutive
meetings or that number of meetings in a period of three months, which ever is higher.
During that period only two meetings were conducted but not three or more (to take the
higher). Hence she has not violated the provision and thereby she continues to hold office
of directorship of XYZ Limited as director.
Under section 286 of the Companies Act, the notice of the Board meeting must be sent to
all the directors whose addresses are in India. But the company under the impression that
Anita is ceased to be director of the company did not sent the notice of the Board meeting.
If no notice is sent to any director can allege on that, and the proceedings of such meetings
becomes invalid and resolutions at such meetings also become invalid (in case any director
to whom notice is not sent alleges).
Hence the contention of Anita is valid that the company’s calling of the Board of directors
meeting and decisions taken thereat are invalid and inoperative on the ground of omission
on the part of the company to send notice to all Board of directors.
Reason : According to section 314(1B) of the Companies Act, no relative of a director of a

Company shall hold office or place of profit in the company carrying a total monthly
remuneration of not less than such sum as may be prescribed [at present a sum which is not
less than Rupees Twenty thousand] except with the prior consent of the company by a
special resolution and the approval of the Central Government.
Therefore in the present case as the monthly remuneration of Kalid, a relative of director as
General Manager (Marketing) exceeds Rs.20,000 the limit prescribed under section 314(1B),
Modern Ltd. will have to get the prior consent of the company by a special resolution passed
at the general meeting and also the approval of the Central Government before appointing
Khalid as a General Manager.
Reason : Even though the total amount of the bill has been negotiated. B and C are endorsees for
only a part of the amount and hence the endorsement is invalid.
According to sec.56 of the Negotiable Instrument Act, no writing on a negotiable
instrument is valid for the purpose of negotiation if such writing purports to transfer only a
part of the amount appearing to be due on the instrument; but where such amount has been
partly paid, a note to that effect may be endorsed on the instrument, which may then be
negotiated for the balance.
Reason : Sunil will get a valid title as he bought the refrigerator in good faith.
Reason : Rahim can recover the entire amount from Rahul as per section 43 of the Indian Contract
Act, when two or more persons makes a joint promise and there is no express agreement to
the contrary, the promisee may compel any promisor to perform the whole promise.
Reason : Under section 210 of the Companies Act 1956 only the Audited accounts of the Company
must be placed before the members in annual general meeting of the company with in six
months from the date of the closure of the accounts. The un-audited accounts (i.e. the
24
accounts not verified by the auditors of the company) shall not be placed before the
members of the company.
73. Answer: (e) < TOP >
Reason : According to section 262, if the office of a director appointed in a general meeting is
vacated before the expiry of his term, either by reason of death, resignation,
disqualification or for any other reason except retirement by rotation, then subject to the
articles of association, the Board of directors may fill up the vacancy at a meeting of the
Board. The director who has been so appointed shall hold office only till the date upto,
which the director in whose place he is appointed would have held the office.
In the present case, Mr. X is appointed in the general meeting but he died in a car accident
in his place Y is appointed by the Board of directors as casual director. But Y resigned
from the company the question is whether this will be treated as casual vacancy, which is
not filled by the members in general meeting? The answer is no only. Theoretically this
vacancy cannot be filled by the Board of directors in their meeting only the vacancy must
be filled in general meeting. But Department of Company Law Affairs clarified that in the
interest of smooth working of the company, Department will have no objection to Board of
directors filling that casual vacancy as many times as may be necessary Hence `Z’ can be
appointed as director to fill up the casual vacancy on account of `Y’s resignation. Such
vacancy shall be filled at Board meeting and no extra ordinary general meeting is required.
Since `Z’ has been appointed in place of `Y’, he shall hold office up to the date on which
`X’ would have held his office.
Reason : The Board must authenticate the accounts before the auditor verifies the accounts.
75. Answer: (b) < TOP >
Reason: Mr. A cannot sue the university because for a valid contract two ingredients must be
present i.e. offer and acceptance. Mr. A cannot argue that the university has accepted by
passing resolution, unless it is communicated to Mr. A. Communication of acceptance is
missing in the given case, Hence such contract is invalid and there by, not binding on the
university. In the famous case of Powell Vs Lee 1908,which has the similar facts, the court
held that it was not a binding contract because there was no acceptance by any authorized
representative.
Hence option (b) is correct.
Reason : C can recover the amount from A. A is liable to pay, because the cancellation was not
apparent on the face of the instrument.
Reason : KBC Ltd, having its registered office in Mumbai, wants to shift its registered office from
Mumbai to Hyderabad as the company’s works and other contracts are at Hyderabad. The
following actions are to be taken for implementation of the shifting :
The company has to pass a special resolution and obtain Central Government’ s
permission.
Reason : As per section 292 of the companies Act, the Board of directors of a company are entrusted
with the following powers:
I. Power to issue debentures
II. Power to invest funds of the company subject to section 293 and section 372A of the
Companies Act
III. Power to make loans subject to section 295 and section 372A of the Companies Act
IV. Power to make calls on share holders in respect of money unpaid on their shares
V. Power to borrow money otherwise than on debentures.
However the power to issue debentures and power to make calls on shareholders in respect of
money unpaid on their shares can be exercised by the directors only at their meeting and
remaining powers can be delegated to the committee of directors.
Hence in the given case, powers given in options (II), (III) and (V) can be exercised by the
Committee of directors and powers given in options(I) and (IV) can be exercised by the
directors only at their meeting. Hence option (d) is correct.
25
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 09.10.2004 to 10.10.2004, the charge in favour of Sahara Bank Ltd. will get
priority. But on and from 15.10.2004, the one created in favour of Lika Bank Ltd. will not
get priority.
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
inspite of the goods being in the hands of buyer.
Reason : In the Board meetings other than agenda items can be transacted with the permission of
chairman hence, the appointment is valid.
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 dishonour should be given to the drawer in case of dishonor of a bill. Correct
answer is (c).
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.
Reason : A private Company can commence its business immediately upon incorporation. But, a
public company cannot commence its business immediately upon 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 certificate of commencement
of business (C.C.B.) Hence no provisional contracts.
Reason : In case of a special crossing (i.e. from one bank to another) the crossing is permitted even
without two traverse lines. But in case of general crossing or any other crossing there
should two transverse lines.
The instances cited in III, IV and V alone are crossing. The remaining instances do not
amount to crossing. Hence option (e) alone is correct.
Reason : Compromise or arrangement shall be sanctioned by the National Company Law Tribunal
Reason: Powers of the CLB on deciding the complaints regarding non-payment of public deposits,
26
refusal to register transfer of securities, rectification of register of members, oppression
and mismanagement etc., are transferred to National Company Law Tribunal.
88. Answer: (c) < TOP >
Reason: Stock cannot be issued in fractions is a false statement. All other statements are true
statements. Hence stock can be issued in fractions.
Reason : Payment of remuneration to an advocate depending upon winning of the case is ‘Gambling
in Litigation.
Reason : Dividend is appropriation of profits, it is neither responsibility nor authority of the auditor
to comment.
< TOP OF THE DOCUMENT >
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Economic Legislation I 0105

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Question Paper

Economic Legislation I (161) – January 2005

• Answer all questions.

(a) Only (II) above (b) Only (III) above

(a) Only (III) above (b) Only (V) above

(a) Only (I) above (b) Only (II) above

Reason : Alteration of articles is not treated as ordinary business matter

Reason : Transfer of shares does not constitute alteration of share capital.

Reason : Under the following modes a person become member of a company:

Reason : Debentures cannot be issued at a discount if they are Convertible Debentures.

Reason : Appointment of director as additional director and appointment of director as alternate

Reason : Disclosure of interest in contract or arrangement — A director must disclose his

Reason : A certificate of incorporation issued by the Registrar of Companies is a conclusive

67. Answer : (a) < TOP >

Reason : According to section 314(1B) of the Companies Act, no relative of a director of a

70. Answer : (a) < TOP >

Reason : A cheque may be crossed.

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