Economic Legislation I 0405

Question Paper
Economic Legislation ñ I (161): April 2005

• Answer all questions.
• Marks are indicated against each question.
1. Under which of the following circumstances, is a company deemed to be the subsidiary of another < Answer >
company?
I. That other company controls the composition of its Board of directors.
II. The other company holds more than half of the nominal value of its equity share capital.
III. That this company is subsidiary of any company, which is that other’s subsidiary.
IV. The other company holds half of the paid up capital of this company.
(a) Both (I) and (IV) above (b) (I) (III) and (IV) above
(c) Both (III) and (IV) above (d) Both (II) and (III) above
(e) (I), (II) and (III) above.
(1 mark)
< Answer >
2. Which of the following are the disadvantages of legal justice?
I. It is always not possible to adjust to the changing needs of the society.
II. It represents the collective wisdom of community by ignoring the individual wisdom.
III.The justice follows the formality and technicality, for every disputed matter, there is a specified
form technically formulated.
IV. It is more rigid, it follows what has been laid down in precedents.
V. Uniformity and certainty in the administration of justice.
(a) Both (I) and (II) above (b) (I) (III) and (IV) above
(c) (II) (III) and (V) above (d) (II), (III), (IV) and) above
(e) All (I), (II), (III) (IV) and (V) above.
(2 marks)
3. Under which of the following situations, will a requisition (u/s169 for calling extraordinary general < Answer >
meeting) sent by the members holding one tenth of the capital carrying voting rights be considered as
invalid?
(a) Upon submission of a valid requisition, some of the members withdrew their consent
(b) Upon submission of a valid requisition, some of the members have ceased to be the members of
the company
(c) The requisition made by the persons holding shares, on which calls are due
(d) The requisition does not contain explanatory statement
(e) The requisition was signed by only one of the joint holders of shares.
(2 marks)
< Answer >
4. “Ubi jus ibi remedium” means
(a) Where there is a right there is a remedy
(b) A deal in the name of another person
(c) A plea that an agreement mentioned in the pleading was not the act of the defendant
(d) An injury is not done to one who knows
(e) Where there is a right there need not be a remedy.
(1 mark)
< Answer >
5. Which of the following is not the content of the director’s report?
(a) Material changes which have occurred between the end of the year and the date of the report,
affecting the financial position of the company
(b) The amount if any, recommended to be paid by way of dividend
(c) The conservation of energy, technology absorption and foreign exchange earnings and outgo
(d) State of company’s affairs and any amount proposed to be transferred to any reserves
(e) Statement of holding company’s interest in the subsidiary at the end of the financial year.
(1 mark)
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< Answer >
6. The term “liquidated damages” refers to
(a) The amount payable in cash
(b) The amount payable based on the actual damage sustained
(c) The amount named by the parties as payable in the event of breach
(d) The amount determined by the court as damages on a suit where the contract is silent
(e) The amount agreed upon as damages between the parties subsequent to breach.
(1 mark)
7. A certified copy of the order of the Central Government confirming the alteration of memorandum of < Answer >
association (pertaining to the shifting of registered office of the company from one State to another
State) is required to be registered with the Registrar of Companies within a period of
(a) One month from the date of the order confirming alteration
(b) Two months from the date of the order confirming alteration
(c) Three months from the date of the order confirming alteration
(d) Six months from the date of the order confirming alteration
(e) Twelve months from the date of the order confirming alteration.
(1 mark)
8. In case of creation of charge, who among the following persons can file the particulars of charge with < Answer >
the Registrar of Companies?
(a) The company itself (b) The company or charge holder
(c) The legal advisor of the company (d) Members of the company
(e) Auditors of the company.
(1 mark)
< Answer >
9. Pari passu charge means
(a) Holding equal rights in realization of asset(s) in proportion to the amount outstanding
(b) Creating a charge for the purpose of securing any issue of debentures
(c) The holder of charge intervenes by getting receiver appointed
(d) Charge may crystallize on happening of an event that may be specified in the charging deed
(e) Holding a preferential right in realization of asset(s) in proportion to the amount outstanding.
(1 mark)
< Answer >
10. Which of the following is/are the exception(s) to agreements in ‘restraint of trade’?
I. Agreement between the manufacturer and the trader not to carry on the business for ever.
II. Agreement by the principal with his agent not to carry on similar business under the agency.
III. Agreement by the manufacturer with his trader not to deal with other’s products permanently.
IV. Agree to transfer the goodwill and which restrains carrying on similar business in specified limits.
(a) Only (I) above (b) Only (II) above (c) Only (III) above
(d) Both (I) and (II) (e) Both (II) and (IV) above.
(1 mark)
< Answer >
11. Buy-back of shares of a company cannot be made
(a) From the existing shareholders on a proportionate basis
(b) From the open market
(c) From odd lot shares
(d) Through an investment company
(e) By purchasing the securities issued to employees of the company pursuant to a scheme of stock
option or sweat equity.
(1 mark)
< Answer >
12. Who among the following persons is the ‘mercantile agent’ under the Sale of Goods Act, 1930?
(a) The one who has authority in the customary course of business either to sell goods or to consign
goods for the purpose of sale or to buy goods or to raise money on the security of goods
(b) The one who is entrusted with the possession of goods for the purpose of selling them
(c) The one who is employed to buy and sell goods or transact business generally for other persons
receiving for his labor and trouble, a money payment
(d) The one who in consideration of an extra commission, guarantees his principal that the persons
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with whom he enters into a contract on behalf of the principal shall perform their obligations
(e) The one who is appointed by a seller to sell his goods by public auction for a reward generally in
the form of commission.
(1 mark)
13. ABC Limited entered into a contract with XYZ Limited (for the sale of raw material for cash at prices < Answer >
prevailing in the market) in which Mr. A, who is a director of ABC Limited, is interested. The director
did not disclose his interest at the time of the approval of the contract in the Board meeting. What is the
position of the director in the company?
(a) Mr. A, the director has to pay penalty for non-disclosure of his interest
(b) Mr. A, the director has to vacate his office as director
(c) Mr. A, the director has to undergo imprisonment for non-disclosure of his nature of interest
(d) Mr. A need not disclose his nature of interest and he can continue as director
(e) Mr. A can continue as director only with the permission of the members.
(1 mark)
14. A agreed to sell 200 kgs of rice to B @ Rs.25 per kg on a certain date. B contracted with C to sell 100 < Answer >
kg rice @ Rs.30 per kg. thinking that he will buy the rice from A and sell it to C. A could not deliver
the rice. Hence B considers that he suffered a loss of Rs.5 per kg. Can he recover this loss from A?
(a) No, B cannot recover, as this loss amounts to special damages
(b) No, B cannot recover as this loss amounts to general damages
(c) Yes, B can recover the actual loss suffered
(d) Yes, B can recover the loss, as this amounts to compensatory damages
(e) Yes, B can recover the loss, as this amounts to vindictive damages.
(1 mark)
< Answer >
15. Which of the following are the disqualifications of a person to become a director?
(a) A person who is already a director of a public company, which has not filed the annual accounts
for a continuous period of five financial years
(b) A person who is already a director of a public company, which has not filed the annual accounts
and annual return for a continuous period of three financial years
(c) A person who is already a director of a public company, which has failed to repay its deposits
before the due date
(d) A person who is already a director of a public company, which has failed to redeem debentures
before the due date
(e) A person who is already a director of a public company, which has failed to pay interest on
deposits or on debentures before the due date.
(1 mark)
< Answer >
16. Which of the following is/are the difference(s) between warranty and condition?
I. Warranty is collateral to the contract, whereas condition serves the purpose of the contract.
II. The aggrieved party can claim only damages, but he cannot rescind the contract whereas in the
case of a condition the aggrieved party can even repudiate the contract.
III. Breach of warranty amounts to breach of condition, whereas breach of condition does not amount
to breach of warranty.
(a) Only (I) above (b) Only (II) above (c) Both (I) and (III) above
(d) Both (I) and (II) above (e) All (I), (II) and (III) above.
(1 mark)
< Answer >
17. Under which of the following situations, chairman shall adjourn the meeting?
(a) When the proxies do not attend the meeting
(b) When the quorum is not present within half an hour from the time appointed for the meeting
(c) When there is a tie in any resolution and unable to decide the matter
(d) When the Board of directors are not present at the meeting
(e) When the managing director is not present at the meeting.
(1 mark)
< Answer >
18. Doctrine of ejusdem generis states that
(a) It is not the business of a court to fill up the gaps in the statute
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(b) The expression of one person or thing implies the exclusion of other persons or things of the same
class which are not mentioned
(c) A general term shall be read as if it belongs to the same kind as the specific terms preceding to it
(d) A specific provision will override a general provision
(e) The statute should be construed in a manner so as to further the intention of the legislature.
(1 mark)
19. Ram had 1,000 shares of XYZ Limited. He went to New York to see his son. Balu had stolen the share < Answer >
certificates of Ram and got the shares transferred in his favor by forging the signature of Ram. Balu
sold the shares to Lakshman at market price and Lakshman got the shares transferred in his favor and
received dividends. Ram, after his return from New York, complained to company that the share
certificates were stolen and forged, and hence the company is required to cancel the transfer of shares to
Laxman. Under the above circumstances, which of the following is true?
(a) The company need not cancel the transfer, since the shares are already transferred to Lakshman
(b) Ram cannot claim the shares, as Lakshman acquired the shares by paying adequate consideration
to Balu
(c) Once shares are transferred, it cannot be questioned on whatever may be the reason
(d) Lakshman is required to return the share certificate and repay all the dividends
(e) Sale of shares by Balu is valid.
(1 mark)
< Answer >
20. When a consent to a contract is obtained by virtue of misrepresentation, the aggrieved party can
I. Rescind the contract. II. Sue for restitution. III. Claim for damages.
(a) Only (I) above (b) Both (I) and (III) above (c) Both (II) and (III) above
(d) Both (I) and (II) above (e) All (I), (II) and (III) above.
(1 mark)
< Answer >
21. A company may convert all or any of its fully paid up shares into stock
(a) By passing an ordinary resolution
(b) By passing special resolution
(c) With the permission of the Tribunal
(d) With the permission of the Central Government
(e) With the permission of the Registrar of Companies.
(1 mark)
< Answer >
22. Which of the following statements is false?
(a) A person selling goods is under the obligation to disclose the defects in the goods
(b) A person selling goods is under no obligation to disclose the defects in the goods
(c) Under certain circumstances silence itself is equivalent to speech
(d) When there is duty to speak, keeping silent will amount to fraud
(e) There are certain contracts which law imposes a special duty to act with the utmost good faith to
disclose all material facts.
(1 mark)
< Answer >
23. Which of the following matters require passing of ordinary resolution?
(a) To convert a private limited into a public limited company
(b) To convert public limited company into a private limited company
(c) To approve variation of share holders rights
(d) To create reserve capital
(e) To adopt annual accounts along with auditor’s report and director’s report.
(1 mark)
< Answer >
24. The Transfer of Property Act, 1882 deals with
(a) Transfer of both movable as well as immovable property
(b) Only movable property
(c) Only land
(d) All types of immovable property
(e) Intellectual property rights.
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(1 mark)
25. Board of directors of a private company, with a paid up capital of Rs.15 crore (which is not subsidiary < Answer >
of a public company), appointed a person as managing director for eight years with out the permission
of the Central Government. In the above situation which of the following is true?
(a) Appointment is not valid since the company has not been accorded the permission of the Central
Government
(b) Appointment is valid
(c) Appointment is not valid since it is for eight years
(d) Appointment is not valid as it is made by the Board of directors
(e) Appointment is not valid, as the private company shall not appoint managing director.
(1 mark)
< Answer >
26. Which of the following agreements is/are opposed to public policy?
I. Agreements, which interfere with the ordinary process of justice.
II. Agreement to help a person in making a reasonable claim arising out of a contract and then to have
a fair share in the profit.
III. Agreement, which is not extortionate against the party to whom assistance is provided.
(a) Only (I) above (b) Only (II) above (c) Both (II) and (III) above
(d) Both (I) and (II) above (e) Both (I) and (III) above.
(1 mark)
< Answer >
27. Disclaimer of onerous property means
(a) A fraudulent preference of a person interested in property mortgaged
(b) The property of the company which is troublesome to the company
(c) Property disposed by the company to its directors
(d) Property disposed by the company to its real owners
(e) Property disposed by the company to the managing director.
(1 mark)
28. Every instrument not being a bill of exchange or promissory note leviable with duty, executed out of < Answer >
India must be stamped within a period of
(a) 1 month after it has been first received in India
(b) 2 months after it has been first received in India
(c) 3 months after it has been first received in India
(d) 4 months after it has been first received in India
(e) 5 months after it has been first received in India.
(1 mark)
< Answer >
29. A company can close its register of members in a year for an aggregate period of not exceeding
(a) 21 days (b) 30 days (c) 45 days (d) 60 days (e) 90 days.
(1 mark)
< Answer >
30. Which of the following is not one of the duties of an auditor?
(a) To check whether the loans and advances made by the company have been shown as deposits
(b) To check whether the transactions of the company which are represented merely by book entries
are not prejudicial to the interest of the company
(c) To check whether any personal expenses of the promoters have been charged to company accounts
(d) To have access to books of accounts
(e) To check whether personal expenses of directors are charged to profit and loss account.
(2 marks)
< Answer >
31. Which of the following would be the rights of an individual director?
(a) To summon Board meetings (b) To approve budgets
(c) To authorize new capital investment
(d) To give approval of periodic reports to share holders (e) To formulate Board policies.
(2 marks)
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32. All instruments, which are not inland, are deemed to be foreign. Which of the following is not a < Answer >
foreign bill?
I. A bill drawn in Lucknow on a merchant in Rome payable or accepted payable in London.
II. A bill drawn in Lucknow on a merchant of Patna who was on business tour to America and
payable or accepted payable in Bombay.
III. A bill drawn in Paris but payable in Calcutta.
IV. A bill drawn in London and payable in Rome.
(a) Only (I) above (b) Only (II) above
(c) Both (II) and (III) above (d) Both (I) and (II) above
(e) All (I), (II), (III) and (IV) above.
(2 marks)
< Answer >
33. Which of the following entities can become member of a company?
I. A trust registered under the Indian Trust Act.
II. A Hindu Undivided Family
III. A partnership firm
IV. A registered trade union
V. A lunatic.
(a) Only (I) above (b) Only (III) above
(c) Both (I) and (IV) above (d) (II), (III) (IV) above
(e) All (I), (II), (III),(IV) and (V) above.
(1 mark)
34. A cheque was issued by Mr. X payable to Mr. Y or bearer and crossed “Not Negotiable”. The cheque < Answer >
was stolen and came into possession of Mr. Z who deposited the cheque into his bank and received the
payment of the same. Which of the following circumstances would follow?
(a) The paying bank is liable to pay the loss to Mr. X
(b) The collecting bank is liable to pay the loss to Mr. X
(c) The paying bank is liable to pay the loss to Mr. Y
(d) The collecting bank is liable to pay the loss to Mr. Y
(e) Mr. Z is liable to refund the money to Mr. Y as the cheque is crossed “Not Negotiable”.
(2 marks)
< Answer >
35. The floating charge created by a company on its assets, as a security to borrow, includes
(a) Assets available at the present (b) Assets of the present and past
(c) Assets of the present and future (d) Assets to be acquired in future
(e) Assets of the past and future.
(1 mark)
< Answer >
36. Which of the following contracts cannot be assigned to others?
(a) An actionable claim which is bought by an instrument
(b) Obligations which involve personal skills and talent
(c) The rights and liabilities of an adjudicated insolvent
(d) The obligations of the deceased party to a contract
(e) The rights and liabilities of a person with unsound mind.
(1 mark)
37. Scoopy Limited is engaged in the business of construction. A, B and C, directors of Scoopy Limited are < Answer >
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 true?
(a) The profits belongs to Scoopy Limited 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
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(e) Directors entered into the contract in their own names and no loss has caused to the company,
hence the directors are not liable for breach of trust.
(1 mark)
38. ABC Limited is not holding any shares in MDJ Limited. Similarly MDJ Limited is not holding any < Answer >
shares in ABC Limited. But director ‘A’ of ABC Limited singly holds 1% 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 interest in MDJ Limited. What is the legal position of
the director ‘A’ and the contract?
(a) Director ‘A’ can continue his office and also the contract is valid
(b) Director ‘A’ has to disclose his nature of interest in the Board meeting, otherwise the contract
becomes void
(c) Director ‘A’ has violated the provisions of the Companies Act hence he has to vacate the office
and the contract is voidable at the option of ABC Limited
(d) Director need not vacate but contract is invalid
(e) Director ‘A’ has to vacate his office but the contract is valid and enforceable.
(1 mark)
< Answer >
39. Which of the following instances is false?
(a) A bill is drawn payable to A or order. A endorses it to B but the endorsement does not contain the
words “or order”. B may further negotiate the instrument
(b) A bill is drawn payable to A or order for Rs.10,000/-. A endorses it to B for a sum of Rs.5,000
(c) A bill is drawn payable to A or order and due to mature on 30th May, 2004. The bill was presented
by A for payment on 30th May, 2004 and was paid
(d) A drew a bill on B payable to himself. He further endorses it to C
(e) A drew a bill on B payable to C. C endorses it to A who further endorses it to D.
(1 mark)
40. Mr. Prasad issued a cheque favoring Mr. Pankaj for a sum of Rs.10,000/- Mr. Pankaj presented the < Answer >
cheque to the banker. The banker returned the cheque. Mr. Pankaj gave a notice to Mr. Prasad on
20th day of the notice of dishonor of cheque. Under which of the following conditions section 138 of
the Negotiable Instruments Act would be applicable?
(a) The cheque is returned for the reason “Refer to Drawer”
(b) The cheque is returned for the reason “Signature of the Drawer differs”
(c) The cheque is returned for the reason “Irregular endorsement”
(d) The cheque is returned for the reason “Funds Insufficient”
(e) The cheque is returned for the reason “Not drawn on us”.
(1 mark)
< Answer >
41. Acceptance of a bill of exchange subject to the happening of an uncertain event is called
(a) General acceptance (b) Qualified acceptance
(c) Conditional acceptance (d) Contingent acceptance
(e) Invalid acceptance.
(1 mark)
42. Wonderful Company Limited, intended to conduct its 25 annual general meeting on 31.12.2004 for the < Answer >
th
year 2004, whereas, the audit of accounts were not ready by that date. The chairman received
suggestions for five different courses of actions, each from the company secretary, finance director, the
chief accountants officer, internal auditor and his wife. They are given below. Which of the following
advices is correct in the best interest of the company?
(a) The AGM can be postponed to 31.3.2005 and the accounts can be placed thereat
(b) The accounts can be adopted as it is and filed with the Registrar but it should be titled as
“unaudited balance sheet”
(c) The accounts can be placed at 26th annual general meeting
(d) The AGM can be held as scheduled but the meeting can be adjourned for adoption of accounts to a
later date at which the accounts will be ready
(e) Condonation of delay can be obtained from the Central Government.
(1 mark)
43. How many directors must retire at the first annual general meeting of a private company, which is < Answer >
subsidiary of a public company?
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subsidiary of a public company?
(a) Not less than one third of the total strength of the Board of directors
(b) Not less than one half of the total strength of the Board of directors
(c) Not less than three directors of the company
(d) Unless articles provide higher number, not less than two thirds must be the retiring category, out
of them one third must retire at every annual general meeting
(e) Nil, because directors are not required to retire in private company.
(1 mark)
44. A bill of exchange was presented for acceptance and the drawee of the bill does not accept the bill even < Answer >
after 60 hours. As regards the acceptance of bill of exchange, which of the following statements is true?
(a) The bill will be dishonored for non-acceptance if the drawee does not accept the bill within12
hours from the time of presentment
(b) The bill will be dishonored for non-acceptance if the drawee does not accept the bill within 18
(c) The bill will be dishonored for non-acceptance if the drawee does not accept the bill within 24
(d) The bill will be dishonored for non-acceptance if the drawee does not accept the bill within 36
(e) The bill will be dishonored for non-acceptance if the drawee does not accept the bill within 48
hours from the time of presentment.
(1 mark)
< Answer >
45. Which of the following directors can be appointed by passing circular resolution?
I. Appointment of director in casual vacancy.
II. Appointment of director as additional director.
III. Appointment of director as alternate director.
IV. Appointment of nominee director.
V. Appointment of managing director.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (II) and (III) above
(e) All (I), (II), (III), (IV) and (V) above.
(1 mark)
< Answer >
46. Under which of the following situations an agent is different (from a servant)?
I. An agent can transact business in his own name and still bind the principal.
II. An agent is bound to carry out work with normal skill and diligence.
III.An agent is bound to conduct the business of his principal according to the directions of his
principal.
IV. An agent is not subject to direct control and supervision of principal.
(d) Both (I) and (III) above (e) Both (I) and (IV) above.
(1 mark)
< Answer >
47. Which of the following matters do NOT require special resolution?
(a) Alteration of Articles of association
(b) Removal of a director before the expiry of his tenure of office
(c) Making of a loan to another body corporate
(d) Empowering the Board of directors to issue shares to the persons other than the existing share
holders
(e) Changing the situation clause in the Memorandum of Association.
(1 mark)
< Answer >
48. Proposal to supply certain commodity for a certain price up to a certain period is called
(a) Cross offer (b) Counter offer (c) Invitation to offer
(d) Standing offer (e) Definite offer.
(1 mark)
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49. Mr. X, who is not a member of a company, desires to inspect the register of members. The Board of < Answer >
directors refused to allow Mr. X for such inspection. In the above situation, which of the following
statements is/are true?
(a) The register of members shall not be kept open for inspection, by the members as well as non-
members
(b) The register shall be kept open for inspection, by the non-members on payment of rupee one for
each inspection and for the members free of cost
(c) The register of members shall be kept open for inspection, by the members of the company only
(d) The register of members shall be kept open for inspection, by the non-members free of cost
(e) The register of members can be kept open for inspection for members, only when there is a
provision in the articles of association of the company.
(1 mark)
< Answer >
50. Which of the following statements is false?
(a) All void agreements are not illegal
(b) Acceptance can be made even without the knowledge of the offer
(c) A minor cannot enter into a contract
(d) Partnership is an extension of principle of agency
(e) A private company cannot accept deposits from the public.
(1 mark)
51. Ravishankar is a director in 20 companies as on 31 March 2005. The composition of his directorships < Answer >
st
is as detailed below:
i. Alternative director in 2 public limited companies;
ii. Director in 14 public limited companies;
iii.Director in 3 private companies which are neither subsidiaries nor holding of other public
companies; and
iv. Director in one foreign company (registered outside India).
Wise Limited, a Private company that is not subsidiary of a public company wants to induct
Ravishankar as a director in its Board. Which of the following would decide, whether Ravishankar can
be appointed as director in Wise Ltd. in terms of section 275 of the Companies Act, 1956?
I. Wise Limited can appoint Ravishankar as a director on its Board.
II. Wise Limited has to obtain the permission of Tribunal for appointing Ravi Shankar as director,
since he already holds directorships in other companies.
III. Wise Limited has to obtain the Central Government’s permission for appointing Ravishankar as
director, since he already holds 15 directorships in other public companies.
IV. Ravishankar cannot be appointed as director in Wise Limited.
(d) Both (I) and (III) above (e) Both (I) and (II) above.
(1 mark)
< Answer >
52. Every depository and participant is required to be registered with
(a) A Stock Exchange (b) The Central Government
(c) The Registrar of Companies (d) The Securities and Exchange Board of India
(e) The State Government.
(1 mark)
53. Mr. Ram a member of Gambling Company Limited made an application to the National Company Law < Answer >
Tribunal on behalf of one hundred members seeking relief against the oppressive acts of the company
on 1.3.2005 by obtaining their consent in writing. Subsequently on 10.3.2005, out of one hundred
members, twenty-five members withdrew their consent. In these circumstances, which of the following
is true as regards the validity of the application?
(a) The application is not valid, as it was not made by the requisite number of members of the
company
(b) The validity of application will not be affected in any way, just because certain members withdrew
their consent after giving the same
(c) The application is valid only if members approve by passing special resolution with 3/4th majority
(d) The application is valid subject to the approval of National Company Law Tribunal
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(e) The application is valid subject to the approval of the Central Government.
(2 marks)
< Answer >
54. Explanatory statement under section 173 is required to be given for all
(a) Ordinary business matters
(b) Special business matters
(c) Matters which require ordinary resolutions
(d) Matters which require special resolutions
(e) Matters that require special notice under section 190 of the Companies Act, 1956.
(1 mark)
< Answer >
55. Which of the following companies shall appoint whole time company secretary?
(a) A company having paid up capital of rupees fifty lakhs or more
(b) A company having authorized capital of rupees two crore or more
(c) A company having subscribed capital of less than rupees two crore
(d) A company having paid up capital of rupees two crore and above
(e) A company having issued capital of more than rupees two crore.
(1 mark)
56. A draws a bill on B made payable to C. C endorses it to D and delivers the instrument to D. Under < Answer >
these circumstances which of the following statements is false?
(a) A is known as drawer (b) B is known as drawee
(c) C known as acceptor (d) D is known as endorsee
(e) D is known as holder.
(1 mark)
< Answer >
57. Which of the following amounts to ‘certification of transfer of shares’?
(a) Jumbling the names of joint holders of shares
(b) Endorsement on the instrument of transfer by an officer of the company that the share certificate
relating to the shares to be transferred has been lodged with the company
(c) Filling of Form-7B for transfer of shares
(d) Handing over the share certificate to the transferee along with the allotment letter
(e) Entering the name of a legal representative of the deceased member.
(1 mark)
58. M/s. Shyam Prasad & Co., has Cash Credit limits of Rs.10,00,000/- with Bangalore Bank Limited < Answer >
against the guarantee of Mr. Suresh, Mr. Mahesh and Mr. Kishore. After a period of one year M/s.
Shyam Prasad & Co., approached the Bank for enhancement of limits to Rs.12 lacs.which the bank
readily agreed, and M/s. Shyam Prasad & Co., executed the documents (Without the knowledge of the
guarantors). After one year M/s. Shyam Prasad & Co., became bankrupt and a suit was filed for
recovery of advance on Shyam Prasad & Co., and sureties. In the above circumstances, which of the
following statements is false?
(a) Mr. Suresh will not be liable as the surety
(b) Mr. Mahesh will not be liable as the surety
(c) M/s. Shyam Prasad & Co., alone will not be liable on the loan account
(d) Mr. Kishore will not be liable as the surety
(e) M/s. Shyam Prasad & Co., alone will be liable on the loan account.
(1 mark)
< Answer >
59. A resolution shall be a special resolution when
(a) The votes cast in favor of the resolution are two thirds of the votes cast against the resolution
(b) The votes cast in favor of the resolution are not less than four times compared to the votes cast
against the resolution
(c) The votes cast in favor of the resolution are not less than three times compared to the votes cast
against the resolution
(d) The votes cast in favor of the resolution are in excess of the votes cast against the resolution
(e) The votes cast in favor of the resolution are five times compared to the votes cast against the
resolution.
(1 mark)
< Answer >
60. Which of the following is not a contract of bailment?
10
(a) Deposit of fixed deposit receipts with a bank for safe custody
(b) Deposit of valuables with bank
(c) Acceptance of articles by post office as V.P.P
(d) Acceptance of goods by a transport company
(e) Deposit of money with a bank.
(1 mark)
61. XYZ Limited with paid-up capital of Rs. 18.8 crore and free reserves of Rs. 4.8 crore as on March 31, < Answer >
2005 (took a term loan of Rs. 10 crore from the State Bank of India and failed to repay the principle as
well as interest amount for a period of one and half year which is subsisting) has investments of Rs.12
crore in ABC Private Limited. In addition to the existing investments, company made the following
further investments:
• 50,000 equity shares of Rs. 10 each at Rs. 390 per share in PQR Limited.
• Investment of Rs. 1,25,000 in 11% debentures of Albert Pharma Limited
• 50,000 units of US-64 issued by the UTI at Rs. 14.50 each
• 25000 equity shares of Rs. 10 each at Rs. 50 in Moony Limited.
State Bank of India objected to this and stated that the company has violated the provisions of the
Companies Act, 1956. In the above situation which of the following is true as regards section 372A of
the Companies Act
I. The company has not violated Section 372A of the Act.
II. The company has violated Section 372A of the Act.
III.The company should take prior permission from the public financial institution for further
investments.
IV. The company should pass a special resolution in general meeting in addition to the passing of
unanimous resolution in Board meeting.
V. The company should obtain Central Governments permission before making investments.
(a) Only (I) above (b) Only (II) above (c) Both (II) and (III) above
(d) (II) (III) and (IV) above (e) (II), and (IV) above.
(2 marks)
< Answer >
62. Which of the following alternatives is false, as regards the consideration?
(a) Natural love and affection is good consideration and may support a contract if it is in writing and
registered under law
(b) Past consideration is valid and will support a subsequent promise
(c) Consideration can be from promisee or any other person even a stranger
(d) Consideration must move at the behest of the promisor
(e) Past consideration will be treated as good consideration for a contract of guarantee.
(1 mark)
63. Karthikeya Limited has preference capital of Rs. 2 crores and LIC holds 5% of the same. The company < Answer >
issued notice on 15th December 2004 by calling its annual general meeting on 26th January 2005 inter
alia proposing the appointment of an auditor. On 30th December 2004 the company allotted 30,000
preference shares of Rs.150 (paid up is Rs.100 each) each to ICICI Bank Limited as private placement.
Karthikeya Limited advertised closure of its register of members in newspapers on 7th January 2005
stating that effective from 15th January 2005 the register of members shall remain closed until 26th
January 2005. In the annual general meeting held on 26th January 2005, the auditor was appointed by
passing an ordinary resolution. The Registrar of Companies raised an objection that the company
violated the provisions of the Companies Act and the resolutions passed at such meeting were
inoperative. The chairman sought the advice of the company secretary, who advised that at the time of
issue of the notice, the ICICI Bank Limited was not holding any shares and hence ordinary resolution
was valid. He further stated that the shares allotted to ICICI Bank and LIC were not equity shares but
only preference shares and not to be counted for the purpose of section 224A of the Companies Act. In
the context of the above situation which of the following is/are TRUE?
I. The objection of the Registrar of Companies is valid.
II. The objection of the Registrar of Companies is invalid.
III. Preference shares by private placement cannot be allotted to ICICI Bank Limited.
IV. The register of members cannot be closed after dispatching the notice of the annual general
meeting.
V. The appointment of the auditor in this company must be made by a special resolution.
11
(a) Only (I) above (b) Only (II) above (c) Only (V) above
(d) Both (I) and (V) above (e) (I), (III) and (V) above.
(2 marks)
64. On 11th July 2004 at 10.00 a.m. A makes an offer to B to sell his scooter and promised to keep it open < Answer >
on the same day till 5.00 p.m. On the same day, A sold the scooter to C at 4.00 p.m. But B accepts to
buy the scooter at 5.00 p.m. Which of the following course of actions are available to B?
(a) B can file a suit for compensation and damages against A for breach of promise
(b) B has no remedy against A or C
(c) B can proceed against C for recovery of the scooter
(d) B can proceed against A for recovery of the Scooter
(e) B can proceed against C for damages.
(1 mark)
65. Little Company Limited holds share in Big Company Limited. Big Company Limited convenes its < Answer >
annual general meeting on 18.2.2005. Little company Limited authorized its managing director
Mr.Getwell on 14.2.2005 to represent the company at that annual general meeting. Mr.Getwell was
hospitalized due to ill health. In this situation, which of the following is correct?
(a) Any one of the directors of Little company may attend the meeting
(b) Mr.Getwell can appoint a proxy
(c) The legal representatives of Mr.Getwell shall attend the meeting
(d) All the directors of Little company limited have to attend on behalf of Mr.Getwell
(e) Little company Limited can request the Big company Limited to adjourn the meeting.
(1 mark)
< Answer >
66. Under which of the following circumstances the banker is entitled to refuse the payment of the cheque?
I. A cheque dated 20th May 2004 was presented for payment on 20th April 2004.
II. A cheque crossed “Account Payee” and payable to Mr. X was presented for payment for cash
across the counter.
III. A cheque crossed specially “Allahabad Bank” was presented for payment through “Andhra Bank”.
(a) Only (III) above (b) Both (I) and (II) above
(c) Both (II) and (III)) above (d) Both (I) and (III) above
(e) (I), (II) and (III) above.
(1 mark)
67. A notice of the general meeting is required to be sent to the members not less than twenty-one clear < Answer >
days. In this context, the word ‘clear days’ means
(a) Inclusive of the date of service of the notice
(b) Exclusive of date of meeting
(c) Inclusive of date of service of notice and date of meeting
(d) Exclusive of national holidays
(e) Exclusive of date of service of notice and date of meeting.
(1 mark)
68. X, the seller of a mica mine, made some exaggerating statements about the earning capacity of the < Answer >
mine. However, the buyer got an independent evaluation done and proceeded ahead with the purchase,
based on that evaluation. Later, the buyer came to know that there was no mica and he wants to proceed
against the seller for committing fraud in selling the mine to him. Which of the following statements is
true?
(a) Buyer of the mica mine can recover the amount paid to the seller
(b) Seller of the mica mine is held liable for fraud
(c) Buyer of the mica mine can cancel the contract
(d) Seller of the mica mine cannot be held liable for fraud
(e) Seller is liable to pay damages as he induced the buyer to purchase the mica mine by making
exaggerating statements.
(1 mark)
69. A prospectus issued by any financial institution or bank for one or more issues of the securities or class < Answer >
of securities specified in that prospectus is called
12
(a) A red herring prospectus (b) Shelf prospectus
(c) Information memorandum (d) Deemed prospectus
(e) Statement in lieu of prospectus.
(1 mark)
< Answer >
70. A pledge is
(a) A general contract of promise (b) A contract of agency
(c) A contract of indemnity (d) A special type of contract of guarantee
(e) A special type of contract of bailment.
(1 mark)
< Answer >
71. 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)
72. A, a minor broke his right leg in a football match. He engaged B, a doctor, for the treatment. Does the < Answer >
doctor have a valid claim for his services?
(a) The doctor has valid claim for his services from the minor himself
(b) The Doctor can claim for his services from the estate of the minor
(c) It is the choice of the doctor to opt his claim from the minor or from his estate
(d) The doctor has no valid claim for his services
(e) The doctor has claim only from the guardian of the minor, who is appointed by the competent
court.
(1 mark)
73. Section 197A of the Companies Act, 1956 provides for prohibition of simultaneous appointment of < Answer >
different categories of managerial personnel. Accordingly the category of persons are
(a) Manager and whole time director (b) Manager and managing director
(c) Manager and a director (d) Managing director and a whole time director
(e) Manager and a secretary.
(1 mark)
74. Mr. Suresh borrowed a sum of Rs 10,00,000 from Karnataka Bank as housing loan. For the purpose of < Answer >
security he delivered the documents of his house to the bank. This process is known as
(a) Hypothecation of title deeds (b) Pledge of title goods
(c) Simple mortgage (d) Equitable mortgage (e) English mortgage.
(1 mark)
< Answer >
75. The rights of the members of a company can be classified into
(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)
76. Every transfer of immovable property made with intent to defeat or delay the creditors of the transferor < Answer >
is voidable at the option of the creditor so defeated or delayed. This is known as
(a) Doctrine of election
(b) Doctrine of fraudulent transfer
(c) Marshalling by subsequent purchaser
(d) Doctrine of lispendens or lite pendente
(e) Doctrine of caveat emptor.
(1 mark)
< Answer >
77. Additional directors of a company are appointed by
(a) Board of directors (b) Members of the company
13
(c) Central Government (d) Preferential shareholders
(e) Financial institution.
(1 mark)
78. According to section 21 of the Transfer of Property Act, 1882, the interest created in favour of a person < Answer >
to take effect only on the happening of a specified event is known as
(a) Determined interest (b) Contingent interest (c) Specified interest
(d) Special interest (e) Equitable interest.
(1 mark)
79. Contracts executed by a public company after the incorporation and before obtaining the certificate of < Answer >
commencement of business are called as
(a) Pre-incorporation contracts (b) Provisional contracts (c) Quasi contracts
(d) Contingent contracts (e) Uberrimae Fidei contracts.
(1 mark)
80. ‘A’ agreed to sell to ‘B’ 3,000 tins of canned fruit, each case to contain 30 tins. ‘A’ delivered half of the < Answer >
goods packed in the cases containing 24 tins. In this situation, which of the following statements is
true?
(a) ‘B’ must accept the goods delivered, as the total value was not affected
(b) ‘B’ must accept the whole 3000 tins as per the contract, otherwise amounts to breach o f contract
(c) The contract becomes void as there is violation in the original terms
(d) ‘B’ may accept the goods so delivered, if so he shall pay for them at the contract rate
(e) ‘B’ can claim the cost of repacking the goods from ‘A’.
(1 mark)
< Answer >
81. Who can become the director of a company?
I. A company. II. A firm.
III. A corporation. IV. An individual.
V. A Hindu undivided family.
(a) Only (II) above (b) Only (IV) above
(c) (I), (II) and (III) above (d) Both (II) and (V) above
(e) All (I), (II), (III), (IV) and (V) above.
(1 mark)
< Answer >
82. Inchoate instrument is one
(a) That is ambiguous
(b) That is incomplete with respect to the signature of the person liable on the instrument
(c) That is a signed instrument which is either wholly blank or incomplete
(d) That is forged
(e) That is invalid or unenforceable.
(1 mark)
< Answer >
83 Prospectus issued by a company is
(a) An acceptance (b) An agreement
(c) An offer (d) An invitation to offer (e) A promise.
(1 mark)
< Answer >
84. Giving bribe to the Government servant to get some approval is
(a) A valid contract
(b) A voidable contract
(c) Against public policy and hence void
(d) Enforceable with the permission of the Government
(e) Enforceable with the permission of the Tribunal.
(1 mark)
< Answer >
85. An auditor appointed at the annual general meeting shall hold office
(a) Up to the next annual general meeting
14
(b) For a period of five years
(c) From the conclusion of that meeting to the conclusion of the next annual general meeting
(d) Up to the finalization of the accounts and submitting their report
(e) As per the terms of the resolution at the time of his/her appointment.
(1 mark)
< Answer >
86. A Demand Draft is a:
(a) Promissory Note (b) Bill of Exchange (c) Cheque
(d) Banker’s Cheque (e) Money Transfer.
(1 mark)
< Answer >
87. Which of the following is not the privilege 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 a 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 or discharged, every prior party to a negotiable instrument is
liable to a holder in due course
(d) The validity of the instrument as originally made or drawn cannot be denied by the
maker/drawer/acceptor for honour in a suit initiated by a holder in due course
(e) The endorser of a negotiable instrument cannot, in a suit thereon by a subsequent holder, deny the
signature or capacity to contract of any prior party to the instrument.
(1 mark)
88. Mr. Kunal draws a cheque on ABC Bank, Khairatabad Branch favouring Mr. Suresh Rao or order and < Answer >
sends the same through his agent Mr. Balu for handing over the cheque. But instead of handing over
the cheque to Mr. Suresh Rao, Mr. Balu forges the signature of Mr. Suresh Rao and encashes the
cheque through his banker, BCD Bank, Basheerbagh. Which of the following statements is true?
(a) ABC Bank has to compensate the drawer Mr. Kunal for encashment of the cheque fraudulently
(b) BCD Bank has to compensate the drawer Mr. Kunal for encashment of the cheque fraudulent ly
(c) Paying Bank should have verified the signature of payee
(d) Mr. Kunal the drawer of the cheque can claim the amount of cheque from both paying and
collecting banker for negligence
(e) Paying banker is discharged by payment in due course.
(2 marks)
< Answer >
89. The audit of accounts is mandatory in case of
(a) All companies (b) Private companies only
(c) Public companies only (d) Companies where paid-up capital exceeds Rs.5 crores
(e) Companies whose paid-up capital exceeds Rs.100 crores.
(1 mark)
< Answer >
90. Which of the following transactions is considered as ‘rematerialisation of shares’?
(a) Conversion of physical form of shares into electronic form
(b) Conversion of physical form of shares into stock
(c) Converting shares into a debt instrument
(d) Converting shares into a mutual fund
(e) Converting electronic share holdings back into physical form of share certificates.
(1 mark)
15
Suggested Answers
Economic Legislation ñ I (161): April 2005
1. Answer : (e) < TOP >
Reason : Under section 4 of the companies Act, in the following circumstances, a company is treated
as subsidiary of another company: -
a. That other company controls the composition of its Board of directors;
b. The other company holds more than half in nominal value of its equity share capital;
c. If it is subsidiary of a third company which itself is subsidiary of the controlling
company
2. Answer : (b) < TOP >
Reason : The following are the disadvantages of legal justice:

I. II. It is always not possible to adjust to the changing needs of the society
iii The justice follows the formality and technicality, for every disputed matter, there is a
specified form technically formulated
iv It is more rigid, it follows what has been laid down in precedents

3. Answer : (c) < TOP >
Reason : The persons who made requisition-holding shares on which calls are due will not have
voting rights and any requisition made by them will be considered invalid.
4. Answer : (a) < TOP >
Reason : Ubi jus ibi remedium means Where there is a right there is a remedy
Reason : The director’s report do not contain a statement of holding companies interest in the
subsidiary as specified under section 212 (3) of the companies Act. All other options like
Material changes which have occurred between the end of the year and the date of the
report, affecting the financial position of the company, Any amount recommended to be paid
buy way of dividend, Conservation of energy, technology absorption and foreign exchange
outgo and Statement of affairs, and any amount proposed to carry to the reserves are the
contents of the director’s report.
Reason : This amount should be named in the contract as payable in the event of breach. The court
will award reasonable compensation not exceeding this amount. Actual damage need not be
proved.
Reason : A certified copy of the order of the Central Government confirming the alteration of the
Memorandum of Association is to be registered with the Registrar of Companies within
three months from the date of the order confirming alteration.
Reason : In case of creation of charge the particulars of such charge can be filed either by the
company or the lender in whose favour the charge is created.
Reason : Holding equal rights in realization of asset in proportion to the amount outstanding. is a
paripassu charge
Reason : The following are the exceptions to restraint of trade:

II. Agreement by the principal with his agent not to carry on similar business under
the agency
IV. Agreements that transfer the goodwill and which restrains carrying on of similar
business in specified limits are some of the restriction under the general rule that the
restraint of trade is void.
16
restraint of trade is void.
11. Answer : (d) < TOP >
Reason : Buy back its shares is permitted form the following methods, u/s 77A of the companies Act,
From the existing shares on a proportionate basis through the tender offer, From the open
market through either by book building or stock exchange or From odd lot shares and by
purchasing the secutities sissued to employees of the companypursuant to a scheme of stock
option or sweat equity but it cannot be made through a negotiated deal through spot
transaction or through a private arrangement or through an investment company.
Reason : The mercantile agent under the Sale of Goods Act, 1930 who has authority in the customary
course of business either to sell goods or to consign goods for the purpose of sale or to buy
goods or to raise money on the security of the goods.
Reason : When a contract is between two public companies, section 297 is not attracted and that to
the contract for a price prevailing in the market which is also exempted under the section.
Hence Mr. A need not disclose his nature of interest and approval of the board is not
required. Hence he can continue as director.
Reason : No, B cannot recover, as this loss amounts to special damages since, A was not aware of the
B’s plan of resale, he is not liable for compensating this loss.
Reason : A person who is already director of a public company which has not filed the annual
accounts and annual return for a continuous period of three financial years is only the
disqualification of a person to become director of a company and all others are not
disqualifications .
Reason : A condition is essential to the main purpose of the contract, but a warranty is collateral to the
contract, in the case breach of a condition, the aggrieved party can repudiate the contract or
claim for damages or both whereas in the case breach of a warranty, the aggrieved party can
claim only for damages but he cannot repudiate the contract. The breach of conditions may
be treated as breach of warranty whereas breach of warranty cannot be treated as breach of
condition.
Hence option (d) is correct.
Reason : Chairman shall adjourn the meeting, when the quorum is not present within half an hour
from the time appointed for the meeting
Reason : The doctrine of Ejusdem Generics is a general term shall be read as if it belongs to the same
kind as the specific terms proceeding it.
Reason : Yes, Ram will get his shares from Lakshman. The company is bound to restore the name of
the rightful owner in the register of members on becoming aware of the fact of forgery.
Lakshman is required to surrender the share certificate to the company and repay all the
dividends, benefits received by him. A person who becomes a holder of shares under a
forged transfer does not acquire a good title and is bound to return the shares to the rightful
owner.
Reason : In the case of contract entered by virtue of misrepresentation, the aggrieved party can
rescind the contract or sue for restitution but he cannot claim for damages. (Only in case of
fraud the aggrieved party can claim for damages).
Reason : A company may convert all or any of its fully paid up shares into stock by passing an
ordinary resolution
17
< TOP >
22. Answer : (a)
Reason : A person selling the goods has no obligation to disclose the defects in the goods. However if
he makes false statements as to the quality of goods, it would be fraud. Mere silence would
not amount to fraud.
< TOP >
23. Answer : (e)
Reason : To adopt annual accounts along with auditor’s report and director’s report only requires
passing of ordinary resolution but all other require passing of special resolution .
Reason : The Transfer of Property Act, 1882 deals with all types of immovable property.
Reason : The appointment is valid since the provisions of section 269 and schedule XIII is not
applicable to private companies which are not subsidiary of any public companies. It can
appoint as per its own articles of association but in the interest of the company .A private
company can have any amount of capital.
Reason : The following agreements are opposed to public policy:

I. Agreements which interferes with the ordinary process of justice
III. Agreement which is not extortionate against the party to whom assistance is provided
agreements are opposed to public policy
Reason : Disclaimer of onerous Property means the property of the company which is trouble
some to the company.
The liquidator may with the sanction of the court disclaim in writing any onerous property
belonging to the company to safeguard in full, the interests of the body of creditors and
shareholders of the Company. The property may be in the form of land of any tenure,
burdened with covenants; shares or stocks in companies; any other non-saleable or not
readily saleable property; and unprofitable contracts (Section 535). The disclaimer shall be
made within twelve months of commencement of winding up. The period of twelve months
would however begin from the date when the liquidator came to know of such property if it
is after one month of commencement of winding up. The National company Law Tribunal
(NCLT) may before grant of disclaimer require notices to be sent to persons interested in the
property. To proceed with disclaimer, the liquidator shall give notice of his intention to
apply to the NCLT for disclaimer, within 28 days of receipt of an application from an
interested party seeking to know about the disclaimer.
Reason : Every instrument not being a bill exchange or promissory note chargeable with duty,
executed out of India is to be stamped within of period of 3 months after it has been first
received in India.
Reason : A company can close its register of members in a year for an aggregate period of not
exceeding 45 days
Reason : To have access to books of accounts is not the duty of an auditor and is a right of an auditor.
But all others are duties of an auditor.
Reason : To summon Board meetings is one of the rights of an individual director but all others are
collective rights of the Board of directors.
Reason : A bill drawn in Lucknow on a merchant of Patna who was on a business tour to America
and payable or accepted payable in Bombay is not a foreign bill.
Reason : A registered trade union and a trust registered under the Indian trust act can become member
of a company, but all others cannot become members of the company.
18
Reason : As the cheque is payable to Y or bearer but with a “Not Negotiable” crossing Mr. Z is liable
to refund the money to Mr. Y The correct answer is (e).
< TOP >
35. Answer : (c)
Reason : In Indus Film corporation Limited, the borrowing of money by a film company on the
ground that all its assets (both present and future) would be subject to a lien until the loan
borrowed is repaid was held to be a floating charge by the Court.
Hence, a company can create a floating charge on the assets of the present and future.
Reason : Any contract which involves personal skill or talent or volition cannot be assigned to others,
even to the legal heirs or representations .ex; - singing, acting, playing etc.
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 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
contract would belong to the Scooby Limited and would not accrue to the three directors.
Further, it has been held in Globe Motors Limited 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 : 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 : A bill cannot be endorsed for part payment. As such the condition given in option (b) is
false. Correct answer is (b).
Reason : Section 138of Negotiable Instrument Act, is applicable only when the cheque is returned by
the drawee bank for the reason “Funds Insufficient”. As such the correct answer is (d) The
correct answer is (d)
Reason : Acceptance of a bill of exchange subject to the happening of an uncertain event is called
conditional acceptance.
Reason : As per section 220, a company shall file with the ROC. 3 copies of balance sheet, profit and
loss account, and all the documents, which are required to be annexed or attached to the
balance sheet. All such documents shall be filed within 30 days from the date on which the
balance sheet and profit and loss account were laid at AGM. If the AGM of the company is
adjourned without adopting the balance sheet, the company shall nevertheless file all such
documents with the registrar. Additionally, it shall prepare a statement of the fact of
adjournment of AGM without adopting the balance sheet and of the reasons therefor. Such
statement shall be annexed to the documents filed with the registrar.
19
statement shall be annexed to the documents filed with the registrar.
Reason : In terms of Section 255(1) of the Companies Act, 1956 one-third of the total number of
directors can be determined as non-retiring directors in the case of a public company and a
private company which is a subsidiary, of a public company. In view thereof the mandatory
requirement is that not less than two-thirds of the total number of directors of the aforesaid
companies have only to be directors liable to retire by rotation. In the case of private
companies simply even all the directors can be treated as non-retiring directors. In view of
the aforesaid legal position, it is not necessary that all the directors of a newly incorporated
company must retire at the first annual general meeting held after the incorporation thereof.
The requisite prescribed number of non-retiring directors need not therefore retire. All other
first directors including the subscribers to the memorandum of association should retire at
the first annual general meeting.
Reason : According to sec.(91) of NI Act, A bill of exchange is dishonored by non-acceptance. If the

drawee does not accept the bill within forty-eight hours from the time of presentment though
it is duly presented for acceptance. The correct answer is (e).
Reason : A person appointed as additional director and appointment of director as alternate director
can be made by passing circular resolution.
Reason : The clear differences between an agent and an employee are

I. An agent can transact business on his own name and still binds the principal while
servant can transact the business only on the name of the master and within the
authority granted by him ,
IV. An agent is not subject to direct control and supervision of principal ,while the servant
acts under direct supervision of the master and is bound to follow all reasonable orders
given to him in the course of employment.
Reason : Removal of a director before the expiry of his tenure of office does not require special
resolution.
Reason : Where goods are required over a certain period, tenders may be invited as a standing offer
which is a continuing offer, this is also called standing offer.
Reason : The register of members to be kept open for inspection of members as well as non-members
and the register can be inspected by the non-members on payment of rupee one for each
inspection and for the members on free of cost.
Reason : Section 2(b) of the Contract Act, provides that when the person to whom the proposal is
made signifies his assent thereto, the proposal is said to be accepted. It is one of the
essentials of a valid acceptance that the acceptor must be aware of the proposal at the time of
the offer. Acceptance can be made even without the knowledge of the offer is a false
statement.
51. Answer: (a) < TOP >
Reason: Since Wise Private Limited is a Private Company, Section 275 of the Companies Act, 1956
is not applicable. 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,
20
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. But of all the said and done Wise Private
Limited can appoint Ravi Shankar as a director on its Board. Since Sec. 275 is not
applicable to private companies..
Reason : Every depository and participant is required to be registered with SEBI.

Reason : It was observed in Rajahmundry Electric Supply Corporation Vs. Nageswara Rao, that the
validity of an application made under section 397 will not be affected in any way just
because certain members withdrew their consent after giving the same.
Reason: Explanatory statement under section 173 of the Companies Act, 1956 is required to be given
to all special business matters.
Reason : Companies which are required to appoint whole time company secretary is a company
having paid up capital of rupees two crore or more
Reason : In the instant bill, C is the payee of the instrument. As such option (c) is false. Correct
answer is (c).
Reason : Certification of transfer means endorsement on the instrument of transfer by an officer of the
company that the share certificate relating to the shares to be transferred has been lodged
with the company.
Reason : The surety is discharged by novation where a fresh loan account was created and no new
contract were entered with the creditor, the surety is absolved of the liability. The correct
answer is (c).
Reason : In order to pass a special resolution the votes cast in favour of the resolution should be,
Three times the number of votes cast against, if any. Refer to Section 189 of the Companies
Act, 1956.
Reason : All the alternatives of (a) to (d) are contracts of bailment as the articles are deposited by
owner for safe custody and delivery as per bailor’s instructions.
Alternative (e) money deposited in a bank is not a contract of bailment.
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 XYZ Limited has paid-up capital of Rs. 18.8 crore and free reserves
of Rs. 4.8 crore as on 31st March, 2005, the 60% of which comes out to be Rs. 14.16 crores.
Therefore, the Board can make investment upto 14.16 crores without any approval of the
shareholders.
The statement of investments
Company allowed to make up 14,16,00,000
(i.e. 60% of paid-up capital + free reserves or 100% of free reserves which ever is higher)
(in Rupees)
Existing investment 12,00,00,000
Further investment:-
21
Further investment:-
(i) 50,000 equity shares × at Rs. 390 per share 1,95,00,000
(ii) 11% Debentures of Albert Pharma Limited [The debentures are specifically included in explanation 1,25,000
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. 50 each in concord securities whose principal business 12,50,000
is acquisition of bonds.
Total Investment 14,16,00,000

14,16,00,000
(-) 14,16,00,000
-
The aggregate of the existing and further investments are not exceeding the limits specified
above. Therefore the company has not violated sec 372A of the Companies Act, 1956.
Reason : Past consideration will not be treated as good consideration for a contract of guarantee
hence, the statement under alternative (e) is false. The statements in other alternatives with
regard to consideration are true from (a) to (d).
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 ICICI holds preference shares in the Kartikeya Ltd. As the ICICI is not a
Government company, the holding shares in ICICI is not considered for the purpose of
section 224A. But the Annual General Meeting is conduct on 26th January 2005, which is
not permitted and hence it is a clear violation under the Act. Hence the objection of ROC is
valid.
Reason : The sale by A to C before B’s acceptance constitutes an implied revocation of A’s offer.
Therefore, B’s subsequent acceptance would not be binding upon A. Therefore, B cannot
take any legal action against A. Proceeding against A for breach of promise or against C for
recovery of damages is also consequently ruled out.
Reason : A company is a separate legal entity. It can become member of another company. It can
attend the meeting of other company by appointing a representative. If that representative is
unable to attend the meeting, he can appoint a proxy.
Reason : In all the cases mentioned in the problem the banker is entitled to refuse the payment. In
option (a) it is a post-dated cheque (b) it is not negotiable crossing endorsed favouring Mr.
Y (c) a crossed cheque cannot be paid in cash (d) a specially crossed cheque favouring one
bank cannot be paid to another bank. As such the correct answer is (e).
Reason : A general meeting requires twenty-one days’ notice in writing. “Clear days” means
exclusive of the date of service of the notice and the date of the meeting.
Reason : If a person being induced by a false statement enters into a contract which he would not
have done otherwise, there is fraud. But if inspite of the false statement, he was not misled
or did not enter into the contract based on the statement, then there is no fraud. In the given
case buyer of the mica mine got an independent evaluation done and based on that report he
purchased the mica mine. Hence, seller of the mica mine cannot be held liable for fraud.
22
Reason : A prospectus issued by any financial institution or bank for one or more issues of the
securities or class of securities specified in that prospectus is called Shelf prospectus.
Reason : A pledge is a special type of contract of bailment.

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.
Hence, securities premium account of a company can be utilized for buy-back of securities.
Reason : Yes, the doctor has a valid claim for his services. As per Section 68 of the Indian Contract
Act, when another person supplies to 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 197A of the Companies Act, 1956, a company shall not appoint a manager u/s
2(24) and a managing director u/s2 (26) simultaneously. But company can appoint a
managing director and a whole time director, a managing director and a director, manager
and a whole time director. Hence option (b) is the correct answer and all other options are
not correct.
Reason : Where the borrowing party deposits the title goods as a security, with the bank it is known
as equitable mortgage. The correct answer is (d).
75. Answer: (d) < TOP >
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 : Every transfer of immovable property made with intent to defeat or delay the creditors of the
transferor is voidable at the option of the creditor so defeated or delayed. Further, every
transfer of immovable property made without consideration with intent to defraud a
subsequent transferee is voidable at the option of such transferee. This is known as Doctrine
of Fraudulent Transfer.
77. Answer: (a) < TOP >
Reason: Under section 260 of the Companies Act, 1956 additional directors of the company shall be
appointed by the board of directors (subject to articles of association of the company). The
power to appoint additional directors cannot be exercised by any others except the BOD.
This provision is made under appointment of directors by directors. Hence option (a) is the
correct answer, whereas all other options are not.
Reason : It is contingent since the interest is created subject to happening of an event.

Reason : Contracts executed by a public company after the incorporation and before obtaining the
certificate of commencement of business are known as Provisional contracts.
The contracts entered before the incorporation of the company are Pre-incorporation
contracts.
23
contracts.
A contract even though there is no offer, no acceptance, no consensus ad idem, etc. Such
type of contract where there is no element of contract but which still is considered as
contract is referred as quasi-contract.
The contracts on which the law imposes a special duty to act with the utmost good faith to
disclose all material information. Such type of contracts are known as Uberrimae Fidae
Contracts.
Contingent contract is a contract which kinds the parties depend upon happening or not
happening of an event which may or may not happen.
Reason : Refer to Moore & Co. Vs. Landanar & Co. in conjunction with Section 37 of the Sale of
Goods Act, 1930 explain where the seller delivers to the buyer a quantity of goods less than
he contracted to sell, the buyer may reject them, but if the buyer accepts the goods so
delivered he shall pay for them at the contract rate.
Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell,
the buyer may accept the goods included in the contract and reject the rest, or he may reject
the whole. If the buyer accepts the whole of the goods so delivered, he shall pay for them at
the contract rate.
Reason : Only an individual can become director of a company according to the provisions of section
253 of the Companies Act.
Reason : An Inchoate instrument is one where one person signs and delivers to another a stamped
instrument which is either wholly blank or incomplete, he thereby gives a prima facie
authority to the holder thereof to make or complete, as the case may be, upon it a negotiable
instrument, for any amount specified therein, and not exceeding the amount covered by the
stamp. Such an instrument is called an Inchoate instrument..
The statement given in option (b) implies an unsigned instrument that cannot create any
rights. (a), (d) and (e) are wrong. An inchoate instrument is not ambiguous or forged and is
perfectly valid and enforceable. Hence, correct answer is (c).
Reason : Prospectus issued by a company is an invitation to offer.

Reason : Giving bribe to the Government servant to get some approval is against public policy and
hence void
85. Answer: (c) < TOP >
Reason: An auditor appointed at the Annual general meeting will hold office from the conclusion of
that meeting to the conclusion of the next annual general meeting. Unlike directors who
cease to hold office if the annual general meeting is not held in accordance with section 166,
an auditor appointed under section 224 will not vacate his office if the annual general
meeting is not held on time .He will continue to hold office until the next annual general
meeting is actually held and concluded and he cannot be deemed to have vacated his office
on the last date on which the meeting ought to have been held. Similarly, where a meeting is
held but is adjourned for want of quorum or any other reason to a later date, he will hold
office till the conclusion of the adjourned meeting. Hence all other options are not correct
Reason : A demand draft is a bill of exchange drawn by one branch of a bank on other branch of the
same bank. For example, Karnataka Bank, Hyderabad issues a demand draft on its New
Delhi Branch. In this case, the Hyderabad branch is a drawer and New Delhi branch is the
drawee. Accordingly the correct answer is (b).
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
24
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). All other statements given in the question are
privileges of a holder in due course.
Reason : According to Section 85 of NI Act if a cheque payable to order purports to be indorsed by or

on behalf of the payee, the drawee (the paying banker) is discharged by Payment in Due
Course. In the instant case, the banker is not expected to know the signature of each and
every person who is not the customer of the Bank. Accordingly answer (e) is correct.
Correct answer is (e).
Reason : The audit of accounts is mandatory in case of All companies.

90. Answer: (e) < TOP >
Reason: ‘Rematerialisation’ is the term used for converting electronic holdings back into physical
form of share certificate.
< TOP OF THE DOCUMENT >
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Economic Legislation ñ I (161): April 2005

Reason : The following are the disadvantages of legal justice:

iv It is more rigid, it follows what has been laid down in precedents

Reason : The following are the exceptions to restraint of trade:

Reason : The following agreements are opposed to public policy:

Reason : According to sec.(91) of NI Act, A bill of exchange is dishonored by non-acceptance. If the

Reason : The clear differences between an agent and an employee are

Reason : Every depository and participant is required to be registered with SEBI.

Total Investment 14,16,00,000

Reason : A pledge is a special type of contract of bailment.

Reason : It is contingent since the interest is created subject to happening of an event.

Reason : Prospectus issued by a company is an invitation to offer.

Reason : According to Section 85 of NI Act if a cheque payable to order purports to be indorsed by or

Reason : The audit of accounts is mandatory in case of All companies.

< TOP OF THE DOCUMENT >

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