Test Series: October, 2022

MOCK TEST PAPER 2

INTERMEDIATE GROUP – I
PAPER – 2: CORPORATE AND OTHER LAWS
ANSWERS
Division A
I. 1. (b)
2. (a)
3. (b)
II. 4. (d)
5. (c)
6. (c)
7. (c)
8. (b)
9. (c)
10. (b)
11. (d)
12. (c)
13. (c)
14. (b)
15. (d)
16. (d)
17. (c)
18. (d)
19. (a)
20. (a)

Division B
1. (a) According to section 42 of the Companies Act, 2013 any private or public company may make
private placement through issue of a private placement offer letter.
However, the offer shall be made to the persons not exceeding fifty or such higher number as
may be prescribed, in a financial year. For counting number of persons, Qualified Institutional
Buyers (QIBs) and employees of the company being offered securities under a scheme of
employees’ stock option will not be considered.
Further, Rule 14 (2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014
prescribes maximum of 200 persons who can be offered securities under the private placement in
a financial year, though this limit should be counted separately for each type of security.

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 It is to be noted that if a company makes an offer or invitation to more than the prescribed
number of persons, it shall be deemed to be an offer to the public and accordingly, it shall be
governed by the provisions relating to prospectus.
Also, a company is not permitted to make fresh offer under this section if the allotment with
respect to any offer made earlier has not been completed or otherwise, that offer has been
withdrawn or abandoned by the company. This provision is applicable even if the issue is of
different kind of security.
Any offer or invitation not in compliance with the provisions of this section shall be treated as a
public offer and all provisions will apply accordingly.
In the given case Purple Limited, though a public company can raise funds through private
placement as provisions related to private placement allow even a public company to raise funds
through this route. The company has given offer to 55 persons out of which 4 are qualified
institutional buyers and hence, the offer is given effectively to only 51 persons which is well within
the limit of 200 persons. From this point of view, the company complies the private placement
provisions.
However, as per the question, the company has given another private placement offer of
debentures before completing the allotment in respect of first offer and therefore, the second
offer does not comply with the provisions of section 42. Hence, the offers given by the company
will be treated as public offer.
In case the company gives offer for debentures in the same financial year after allotment of
equity shares is complete then both the offers can well be treated as private placement offers.
(b) (i) Section 127 of the Companies Act, 2013 provides for punishment for failure to distribute
dividend on time. One of such situations is where a shareholder has given directions to the
company regarding the payment of the dividend and those directions cannot be complied
with and the same has not been communicated to the shareholder.
In the instant case, A Ltd. has failed to communicate to the shareholder Mr. B about the
discrepancy (as per bank, account number as given by Mr. B doesn't tally with the records
of the bank) which led to non-compliance of his direction regarding payment of dividend.
Hence, the penal provisions under section 127 will be attracted.
(ii) According to section 123 of the Companies Act, 2013, a company may, before the
declaration of any dividend in any financial year, transfer such percentage of its profits for
that financial year as it may consider appropriate to the reserves of the company. Such
transfer is not mandatory and the percentage to be transferred to reserves is at the
discretion of the company.
As per the given facts, G Medical Instruments Limited has earned a profit of ` 910 crores for
the financial year 2021-2022. It has proposed a dividend @ 10%. However, it does not
intend to transfer any amount to the reserves of the company out of the profits of current
year.
As per the provisions stated above, the amount to be transferred to reserves out of profits
for any financial year is at the discretion of the company acting through its Board of
Directors. Therefore, at its discretion, if G Medical Instruments Limited decides not to
transfer any profit to reserves before the declaration of dividend at 10%, it is legally allowed
to do so.
(c) As per the provisions of section 142 of the Indian Contract Act 1872, where the guarantee has
been obtained by means of misrepresentation made by the creditor concerning a material part of
the transaction, the surety will be discharged. Further according to provisions of section 134, the
surety is discharged by any contract between the creditor and the principal debtor, by which the
principal debtor is released, or by any act or omission of the creditor, the legal consequence of
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 which is the discharge of the principal debtor.
In the given question, Prisha wanted to purchase air conditioner whose compressor should be of
copper, on credit from Ricky. Mr. Shiv has given the guarantee for payment of price. Ricky sold
the air conditioner of a particular brand on misrepresenting that it is made of copper while it is
made of aluminium of which both Prisha & Mr. Shiv were unaware. After being aware of the facts,
Prisha denied for payment of price. Ricky filed the suit against Mr. Shiv for payment of price.
On the basis of above provisions and facts of the case, as guarantee was obtained by Ricky by
misrepresentation of the facts, Mr. Shiv will not be liable. He will be discharged from liability.
(d) By virtue of provisions of section 9 of the Negotiable Instrument Act 1881, any person who for
consideration became the possessor of a negotiable instrument in good faith and without having
sufficient cause to believe that any defect existed in the title of the person from whom he derived
his title. Exception to section 47 provides if a negotiable instrument is delivered to a person, upon
condition, i.e. it will be effective on the happening of a certain event, such negotiable instrument
cannot be further negotiated unless such event happens. However, if it is transferred t o a holder
in due course, his rights will not be affected by such condition.
‘Shama’ issued a promissory note to ‘Vihari’ on the condition that he (‘Vihari’) will demand
payment only on the death of ‘Kayah’. Before the death of ‘Kayah’, ‘Vihari’ indorsed a nd delivered
the promissory note to ‘Deepak’, who receive the promissory note in good faith. On due date,
‘Deepak’ presented the promissory note for payment but ‘Shama’ denied for payment.
From the above provisions and facts of the case, it can be said that ‘Deepak’ has received the
promissory note in good faith, he is a holder in due course and his rights will not be affected by
any condition attached to the instrument by any prior party. Therefore, ‘Deepak’ can recover the
amount due on the promissory note from ‘Shama’.
2. (a) According to Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014, the following
category of receipt is not considered as deposit:
Any amount received and held pursuant to an offer made in accordance with the provisions of the
Companies Act, 2013 towards subscription to any securities, including share application money
or advance towards allotment of securities, pending allotment, so long as such amount is
appropriated only against the amount due on allotment of the securities applied for;
It is clarified by way of Explanation that if the securities for which application money or advance
for such securities was received cannot be allotted within 60 days from the date of receipt of the
application money or advance for such securities and such application money or advance is not
refunded to the subscribers within 15 days from the date of completion of 60 days, such amount
shall be treated as a deposit under these rules.
Further, it is clarified that any adjustment of the amount for any other purpose shall not be treated
as refund.
In the given question, Rashmika Limited has received Rs. 50 Lakhs as share application money
on 01.06.2021. It failed to allot shares within the prescribed limit. Further, on 30.07.20 21 the
company adjusted the amount of Rs. 5 Lakhs received from Mr. Kumar (a customer of the
company), by way of book adjustment towards the dues payable by him to the company.
In the light of the facts of the question and provisions of Law:
(1) If such application money or advance is not refunded to the subscribers within 15 days from
the date of completion of 60 days, such amount shall be treated as a deposit. In the
question, the prescribed limit of 60 days will end on 31.07.2021 and the company has 15
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 more days to refund such application money to the subscribers. Otherwise, after lapse of
such 15 days, the amount not so refunded will be treated as deposit. Hence, the Company
Secretary of Rashmika Limited is not correct in treating the entire amount of Rs. 50 Lakh as
‘Deposits’ on 31.07.2021.
(2) Any adjustment of the amount for any other purpose shall not be treated as refund. Thus,
the amount of Rs. 5 Lakh adjusted against payment due to be received from Mr. Kumar,
cannot be treated as refund.
(b) Directors’ Responsibility Statement: According to section 134(5) of the Companies Act, 2013,
the Directors’ Responsibility Statement referred to in 134(3)(c) shall state that —
(1) in the preparation of the annual accounts, the applicable accounting standards had been
followed along with proper explanation relating to material departures;
(2) the directors had selected such accounting policies and applied them consistently and made
judgments and estimates that are reasonable and prudent so as to give a true and fair view
of the state of affairs of the company at the end of the financial year and of the profit and
loss of the company for that period;
(3) the directors had taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of this Act for safeguarding the assets
of the company and for preventing and detecting fraud and other irregularities;
(4) the directors had prepared the annual accounts on a going concern basis; and
(5) the directors, in the case of a listed company, had laid down internal financial controls to be
followed by the company and that such internal financial controls are adequate and were
operating effectively.
(6) the directors had devised proper systems to ensure compliance with the provisions of all
applicable laws and that such systems were adequate and operating effectively.
(c) (i) According to section 202 of the Indian Contract Act, 1872, where the agent has himself an
interest in the property which forms the subject matter of the agency, the agency cannot, in
the absence of an express contract, be terminated to the prejudice of suc h interest.
In other words, when the agent is personally interested in the subject matter of agency, the
agency becomes irrevocable.
In the given question, A gives authority to B to sell A’s land, and to pay himself, out of the
proceeds, the debts due to him from A.
As per the facts of the question and provision of law, A cannot revoke this authority, nor it
can be terminated by his insanity.
(ii) According to section 191 of the Indian Contract Act, 1872, a “Sub -agent” is a person
employed by, and acting under the control of, the original agent in the business of the
agency.
Section 210 provides that, the termination of the authority of an agent causes the
termination (subject to the rules regarding the termination of an agent’s authority) of the
authority of all sub-agents appointed by him.
In the given question, B is the agent of A, and C is the agent of B. Hence, C becomes a
sub- agent.
Thus, when A revokes the authority of B (agent), it results in termination of authority of sub -
agent appointed by B i.e. C (sub-agent).
(d) As per section 130 of the Negotiable Instruments Act, 1881, a cheque marked “not negotiable” is
a transferable instrument. The inclusion of the words ‘not negotiable’ however makes a

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 significant difference in the transferability of the cheques i.e., they cannot be negotiated. The
holder of such a cheque cannot acquire title better than that of the transferor.
In the given question, A gave to B the blank cheque with ‘not negotiable crossing’. B had an
authority to fill only a sum of Rs. 3,000 but he filled it up Rs. 5,000. This makes B’s title defective.
B then endorsed it to C for consideration of Rs. 5,000.
In the light of above stated facts and provision, C is not entitled to recover the full amount from A
or B as C cannot acquire a title better than that of the transferor (B).
3. (a) (i) According to section 8(6) of the Companies Act, 2013, the Central Government may by
order revoke the licence of the company where the company contravenes any of the
requirements or the conditions of section 8 subject to which a licence is issued or where the
affairs of the company are conducted fraudulently, or in violation of the objects of the
company or prejudicial to public interest, and on revocation, the Registrar shall put ‘Limited’
or ‘Private Limited’ against the company’s name in the register. But before such revocation,
the Central Government must give it a written notice of its intention to revoke the licence
and opportunity to be heard in the matter.
Hence, in the instant case, the Central Government can revoke the license given to P
Cricket Club as section 8 company, as the affairs of the company are conducted
fraudulently and dividend was paid to its members which is in contravention to the
conditions given under section 8.
(ii) Where a licence is revoked, the Central Government may, by order, if it is satisfied that it is
essential in the public interest, direct that the company be wound up under this Act or
amalgamated with another company registered under this section.
However, no such order shall be made unless the company is given a reasonable
opportunity of being heard. [Section 8(7)] Hence, the stated company may be wound up.
(iii) A company registered under this section shall amalgamate only with another company
registered under this section and having similar objects. [Section 8(10)]
In the instant case, P Cricket Club cannot be merged with Z Net Private Limited as the
objects of both the companies are different and not similar.
(b) Section 140 of the Companies Act, 2013 prescribes procedure for removal of auditors. Under
section 140 (1) the auditor appointed under section 139 may be removed from his office before
the expiry of his term only by a special resolution of the company, after obtaining the previous
approval of the Central Government in that behalf in the prescribed manner.
From this sub section it is clear that the approval of the Central Government shall be taken first
and thereafter the special resolution of the company should be passed.
Provided that before taking any action under this sub-section, the auditor concerned shall be
given a reasonable opportunity of being heard.
Therefore, in terms of section 140 (1) of the Companies Act, 2013 read with Rule 7 of the
Companies (Audit & Auditors) Rules, 2014, the following steps should be taken for the removal of
an auditor before the completion of his term:
The application to the Central Government for removal of auditor shall be made in Form ADT-2
and accompanied with fees as provided for this purpose under the Companies (Registration
Offices and Fees) Rules, 2014.
The application shall be made to the Central Government within thirty days of the resolution
passed by the Board.

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 The company shall hold the general meeting within sixty days of receipt of approval of the
Central Government for passing the special resolution.
Hence, in the instant case, the decision of ABC Ltd. to remove XYZ & Associates, auditors of the
company at the general meeting held on 25-5-2022 subject to approval of Central Government is
not valid. The Approval of the Central Government shall be taken before passing the special
resolution in the general meeting.
(c) (i) The bill of exchange is drawn, mentioning expressly as ‘payable on demand’. The bill will be at
maturity for payment on 04-1-2022, if presented on 01-01-2022:
This statement is not valid as no days of grace are allowed in the case of bill payable on demand.
(ii) A holder gives notice of dishonor of a bill to all the parties except the acceptor. The drawer
claims that he is discharged form his liability as the holder fails to give notice of dishonour of the
bill to all the parties thereto:
As per section 93 of the Negotiable Instruments Act, 1881, notice of dishonor must be given by
the holder to all parties other than the maker or the acceptor or the drawee whom the holder
seeks to make liable. Accordingly, notice of dishonour to the acceptor of a bill is not necessary.
Therefore, claim of drawer that he is discharged from his liability on account of holder’s failure to
give notice to all the parties thereto, is invalid.
(d) Impact of the words “Means” and “Includes” in the definitions- The definition of a word or
expression in the definition section may either be restricting of its ordinary meaning or may be
extensive of the same.
When a word is defined to ‘mean’ such and such, the definition is ‘prima facie’ restrictive and
exhaustive, we must restrict the meaning of the word to that given in the definition section.
But where the word is defined to ‘include’ such and such, the definition is ‘prima facie’ extensive,
here the word defined is not restricted to the meaning assigned t o it but has extensive meaning
which also includes the meaning assigned to it in the definition section.
Example:
Definition of Director [section 2(34) of the Companies Act, 2013]—Director means a director
appointed to the board of a company. The word “means” suggests exhaustive definition.
Definition of Whole time director [Section 2(94) of the Companies Act, 2013] —Whole time
director includes a director in the whole time employment of the company. The word “includes”
suggests extensive definition. Other directors may be included in the category of the whole time
director.
4. (a) Entrenchment: Usually an article of association may be altered by passing special resolution but
entrenchment makes it more difficult to change it. So, entrenchment means making something
more protective.
Section 5 of the Companies Act, 2013 describes the provisions relating to entrenchment.
Articles may contain provisions for entrenchment [Section 5(3)]: The articles may contain
provisions for entrenchment to the effect that specified provisions of the articles may be altered
only if conditions or procedures as that are more restrictive than those applicable in the case of a
special resolution, are met or complied with.
Manner of inclusion of the entrenchment provision [Section 5(4)]: The provisions for
entrenchment shall only be made either on formation of a company, or by an amendment in the
articles agreed to by all the members of the company in the case of a private company and by a
special resolution in the case of a public company.

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 Notice to the registrar of the entrenchment provision [Section 5(5)]: Where the articles
contain provisions for entrenchment, whether made on formation or by amendment, the company
shall give notice to the Registrar of such provisions in such form and manner as may be
prescribed.
(b) As per the provisions of section 2(16) of the Companies Act, 2013, “charge” means an interest or
lien created on the property or assets of a company or any of its undertakings or both as security
and includes mortgage.
Whenever a company borrows money by way of loans including term loans or working capital
loans from financial institutions or banks or any other persons, by offering its property or assets,
as security a charge is created on such property or assets in favour of the lender. Such a charge
is compulsorily registrable under the provisions of the Companies Act, 2013 in accordance with
Chapter VI and the rules made in this regard.
Thus, when Krish (Private) Limited obtains working capital loans from financial institut ions by
offering stock and Accounts Receivables as security, it is required to create a charge on such
property or assets in favour of the lender. Hence, for Rs. 25 Lakh working capital loan, it is
required to create a charge on it.
Krish (Private) Limited is not required to create a charge for Rs. 5 Lakh adhoc overdraft on the
personal guarantee of a director. Since, charge is always created on the property or assets of a
company and personal guarantee of director is not a property or asset of company.
(c) Financial Year: According to Section 3(21) of the General Clauses Act, 1897, financial year shall
mean the year commencing on the first day of April.
The term Year has been defined under section 3(66) as a year reckoned according to the British
calendar. Thus, as per the General Clauses Act, 1897, year means calendar year which starts
from January to December.
Difference between Financial Year and Calendar Year: Financial year starts from first day of
April but Calendar Year starts from first day of January.

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 (d) (i) Historical Setting: The history of the external circumstances which led to the enactment in
question is of much significance in construing any enactment. We have, for this purpose, to
take help from all those external or historical facts which are necessary in the understand ing
and comprehension of the subject matter and the scope and object of the enactment.
History in general and Parliamentary History in particular, ancient statutes, contemporary or
other authentic works and writings all are relevant in interpreting and con struing an Act.
(ii) Use of Foreign Decisions: Foreign decisions of countries following the same system of
jurisprudence as ours and given on laws similar to ours can be legitimately used for
construing our own Acts. However, prime importance is always to be given to the language
of the Indian statute. Further, where guidance can be obtained from Indian decisions,
reference to foreign decisions may become unnecessary.
5. (a) According to section 53 of the Companies Act, 2013, except as provided in section 54, a
company shall not issue shares at a discount. Any share issued by a company at a discount shall
be void.
According to section 54 of the Companies Act, 2013, notwithstanding anything contained in
section 53, a company may issue sweat equity shares of a class of shares already issued, if the
prescribed conditions are fulfilled.
(1) As per facts of the question and provisions of section 53 and 54 of the Companies Act,
2013, Yuvan Limited cannot issue at a discount of Rs. 1 per share. Hence, the advise of the
underwriter to issue shares at a discount is not valid.
(2) In terms of provisions of section 54 of the Companies Act, 2013, if the above shares have
been issued to employees as Sweat equity shares and prescribed conditions are fulfilled,
then the issue of shares at discount is valid.
(b) As per the provisions of Section 77 of the Companies Act, 2013, in case the charge was not
registered within 30 days of creation of the charge, the Registrar may, on an application by the
company, allow such registration to be made within a period of 60 days of such creation (i.e.
another 30 days are granted after the expiry of original 30 days), on payment of additional fees
as prescribed.
Procedure for Extension of Time Limit: For seeking extension of time, the company is required
to make an application to the Registrar in the prescribed form. It should be supported by a
declaration from the company signed by its company secretary or a director that such belated
filing shall not adversely affect the rights of any other intervening creditors of the company.
The application so made must satisfy the Registrar that the company had sufficient cause for not
filing the particulars and the instrument of charge, if any, within the original period of thirty days.
Only then he will allow registration of charge within the extended period. Further, requisite
additional fee or advalorem fee, as applicable, must also be paid.
(c)
Point of distinction Contract of Indemnity Contract of Guarantee
Number of party/ there are only two parties there are three parties creditor,
Parties to the contract namely the indemnifier principal debtor and surety.
[promisor] and the indemnified
[promisee]
Nature of liability The liability of the indemnifier The liability of the surety is
is primary and unconditional. secondary and conditional as the
primary liability is that of the
principal debtor.
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 Time of liability The liability of the indemnifier The liability arises only on the non
arises only on the happening of performance of an existing
a contingency. promise or non-payment of an
existing debt.
Time to act The indemnifier need not act at The surety acts at the request of
the request of indemnity holder principal debtor.
Right to sue third indemnifier cannot sue a third surety can proceed against
party party for loss in his own name principal debtor in his own right
as there is no privity of because he gets all the right of a
contract. Such a right would creditor after discharging the
arise only if there is an debts.
assignment in his favour.
Purpose Reimbursement of loss For the security of the creditor
Competency to All parties must be competent In the case of a contract of
contract to contract guarantee, where a minor is a
principal debtor, the contract is
still valid.

(d) Associated Words to be Understood in Common Sense Manner: When two words or
expressions are coupled together one of which generally excludes the other, obviously the more
general term is used in a meaning excluding the specific one. On the other hand, there is the
concept of ‘Noscitur A Sociis’ (‘it is known by its associates’), that is to say ‘the meaning of a
word is to be judged by the company it keeps’. When two or more words which are capable of
analogous (similar or parallel) meaning are coupled together, they are to be understood in their
cognate sense (i.e. akin in origin, nature or quality). They take, as it were, their colour from each
other, i.e., the more general is restricted to a sense analogous to the less general. It is a rule
wider than the rule of ejusdem generis, rather ejusdem generis is only an application of the
noscitur a sociis. It must be borne in mind that nocitur a sociis, is merely a rule of construction
and it cannot prevail in cases where it is clear that the wider words have been deliberately used
in order to make the scope of the defined word correspondingly wider.

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