Samacheer Kalvi Class 12 Commerce Solutions Chapter 27 Company Management

I. Choose the Correct Answers

 

Question 1. A person Shall hold office as a director in ................... companies as per the Companies Act 2012
(a) 5 companies
(b) 10 companies
(c) 20 companies
(d) 15 companies
Answer: (c) 20 companies
In simple words: According to the Companies Act, a person can serve as a director in a maximum of 20 companies. This limit ensures that directors can properly manage their responsibilities across different businesses.

🎯 Exam Tip: Remember specific numerical limits and legal provisions related to director appointments, as these are common factual questions.

 

Question 2. Which ................... Director is appointed by a Financial Institution.
(a) Nominee
(b) Additional
(c) Women
(d) Shadow
Answer: (a) Nominee
In simple words: A nominee director is someone chosen by a financial institution, like a bank, to represent their interests on the company's board. They act on behalf of the institution that appointed them.

🎯 Exam Tip: Understand the different types of directors and their specific roles and appointing authorities.

 

Question 3. A Private Company shall have a minimum of ....................
(a) Seven directors
(b) Five directors
(c) Three directors
(d) Two directors
Answer: (d) Two directors
In simple words: A private company needs at least two directors to be legally formed and to operate. This ensures that there is shared responsibility and oversight in the company.

🎯 Exam Tip: Always remember the minimum and maximum number of directors required for both private and public companies.

 

Question 4. A Public Company shall have a minimum of .................... Directors.
(a) Twelve
(b) Seven
(c) Three
(d) Two
Answer: (c) Three
In simple words: A public company needs at least three directors to meet the legal requirements. This higher number compared to private companies reflects the broader public interest involved.

🎯 Exam Tip: Differentiate clearly between the director requirements for private versus public companies.

 

Question 5. A Public Company having a paid up Share Capital of Rs. .................... or more may have a directter, elected by such small shareholders.
(a) One crore
(b) Three crores
(c) Five crores
(d) Seven crores
Answer: (c) Five crores
In simple words: If a public company has a paid-up share capital of Rs. 5 crores or more, it can have a director specifically chosen by its smaller shareholders. This helps ensure that the interests of all shareholders are represented.

🎯 Exam Tip: Pay attention to the specific capital thresholds mentioned in company law for different provisions.

 

Question 6. Under the companies Act, which one of the following powers can be exercised by the Board by Directors?
(a) Power to sell the company's undertakings.
(b) Power to make call.
(c) Power to borrow money in excess of the paid up capital.
(d) Power to reappoint an auditor.
Answer: (b) Power to make call.
In simple words: The Board of Directors has the power to "make a call," which means asking shareholders to pay the remaining unpaid amount on their shares. This is a common way for companies to raise funds as needed.

🎯 Exam Tip: Understand the key powers and limitations of the Board of Directors as defined by the Companies Act.

 

Question 7. Which director need not hold qualifying shares.
(a) Directors appointed to Central Government.
(b) Directors appointed to Shareholders.
(c) Independent Director
(d) Directors appointed to Board of Directors.
Answer: (a) Directors appointed to Central Government
In simple words: Directors who are appointed by the Central Government do not need to own any shares in the company to qualify for their role. Their appointment is based on government mandate, not shareholding.

🎯 Exam Tip: Note the exceptions to general rules regarding director qualifications, especially those related to government appointments.

 

Question 8. What is the statue of Directors who regulate money of the company.
(a) Banker
(b) Holder
(c) Agent
(d) Trustees
Answer: (d) Trustees
In simple words: Directors act as trustees when they handle the company's money. This means they must manage the funds responsibly and in the best interest of the company, just like someone managing assets for others.

🎯 Exam Tip: Understand the fiduciary duties of directors, particularly their role as trustees of company assets.

 

Question 9. According to Companies Act, the Directors must be appointed by the ....................
(a) Central Government
(b) Company Law Tribunal
(c) Company in General Meeting
(d) Board of Directors
Answer: (c) Company in General Meeting
In simple words: The directors of a company are usually chosen and appointed by the shareholders in a general meeting. This means the owners of the company decide who will lead it.

🎯 Exam Tip: Be clear on the standard process for appointing directors, which usually involves shareholder approval.

 

Question 10. The Board of Directors can exercise the power to appoint directors in the case of.
(a) Additional Directors
(b) Filling up the Casual vacancy
(c) Alternate Directors
(d) All of the options
Answer: (d) All of the options
In simple words: The Board of Directors has the authority to appoint additional directors, fill empty spots from sudden departures (casual vacancies), and appoint alternate directors when a main director is away. They can handle all these situations.

🎯 Exam Tip: Identify the specific circumstances under which the Board of Directors has the power to appoint directors without direct shareholder approval.

II. Very Short Answer Questions

 

Question 1. Define Director.
Answer: A director is a person who is either appointed or elected to be a member of a company's Board of Directors. Their main job is to work with others on the board to decide and carry out the company's plans and goals. Directors play a crucial role in the strategic direction and governance of a company, ensuring its operations align with its objectives.
In simple words: A director is a person chosen to be on a company's board. They help make important decisions and plans for the company.

🎯 Exam Tip: When defining key terms like 'Director', include both who they are and their primary function according to relevant acts (e.g., Companies Act 2013).

 

Question 2. Name the companies required to appoint KMP
Answer: Companies that need to appoint Key Managerial Personnel (KMP) include:

• Every Listed Company.
• Every Public Company with a paid-up capital of Rs. 10 crores or more.

Key Managerial Personnel are essential for the effective management and compliance of larger, more complex companies.
In simple words: All companies listed on the stock exchange and big public companies with Rs. 10 crores or more in capital must appoint KMP.

🎯 Exam Tip: Remember both types of companies and the specific financial threshold for public companies when discussing KMP appointments.

 

Question 3. Who is a Whole Time Director?
Answer: A Whole-time Director is someone who dedicates all their working hours to the company. They have a major personal interest in the company because it is their main source of income. This deep involvement ensures their full commitment to the company's success and daily operations.
In simple words: A Whole-time Director works full-time for the company and gets most of their money from it.

🎯 Exam Tip: Emphasize the full-time commitment and financial interest as defining characteristics of a Whole-time Director.

 

Question 5. Who can be an Executive Director?
Answer: An executive director can be a Chief Executive Officer (CEO) or a Managing Director (MD) of a company or organization. They are responsible for making important decisions to achieve the company's mission and ensure its overall success. Executive directors are deeply involved in the day-to-day management and operational leadership.
In simple words: A CEO or Managing Director who leads the company and makes important daily decisions is an Executive Director.

🎯 Exam Tip: Link Executive Directors directly to operational leadership roles like CEO and MD, highlighting their decision-making authority.

III. Short Answer Questions.

 

Question 1. When are Alternative Directors Appointed?
Answer: Alternate Directors are appointed in specific situations:

• They are appointed by the Board of Directors to act as a replacement for an original director who will be out of India for at least three months.
• Their appointment must be allowed by the company's Articles of Association (AOA) or approved by a resolution passed in the Annual General Meeting.
• An Alternate Director does not act as a representative or agent of the original director, but as a director in their own right.

This temporary appointment ensures continuous board functionality even when a primary director is away.
In simple words: An Alternate Director is appointed if an original director goes out of India for 3 months or more. The company's rules must allow it, or shareholders must agree.

🎯 Exam Tip: Highlight the three key conditions for appointing an Alternate Director: absence from India, duration, and legal authorization (AOA or resolution).

 

Question 2. Who is a Shadow Director?
Answer: A shadow director is a person who is not officially a member of the company's Board of Directors but has the power to influence how the board runs the company. The board usually acts according to this person's wishes or instructions. They operate behind the scenes, guiding the company's direction without formal appointment.
In simple words: A shadow director is someone who guides the company's board without being officially appointed as a director. The board often does what they say.

🎯 Exam Tip: Emphasize that a shadow director is not officially appointed but exercises significant influence over the board's actions.

 

Question 3. State the minimum number of Directors for a Private Company.
Answer: Under Section 149 (1) of the Companies Act, 2013, the minimum number of directors required for different types of private companies is as follows:

• For a One Person Company (OPC), the minimum requirement is one director.
• For other private companies, the minimum requirement is two directors.

This ensures that every company has at least a foundational level of oversight and governance.
In simple words: A One Person Company needs only one director, while other private companies need at least two directors.

🎯 Exam Tip: Clearly distinguish between the minimum director requirements for a One Person Company and other private companies.

IV. Long Answer Questions

 

Question 1. Who is the KMP?
Answer: Key Managerial Personnel (KMP) are defined under Section 2 (51) of the Companies Act, 2013. These individuals hold important positions and play a significant role in the management and operations of a company. KMP includes:

• CEO - Chief Executive Officer
• MD - Managing Director or Manager
• Company – Secretary
• WTD – Whole Time Director
• CFO - Chief Financial Officer
• Such other officers as may be prescribed by law.

These roles are crucial for the company's strategic decision-making and compliance with legal requirements.
In simple words: KMP are important people in a company, like the CEO, MD, Company Secretary, Whole Time Director, and CFO, who manage key parts of the business.

🎯 Exam Tip: List all the key positions that fall under Key Managerial Personnel (KMP) as per the Companies Act, 2013.

 

Question 2. Bring different types of Directors. [RASIAN]
Answer: Different types of directors play various roles within a company:

1. Residential Director: According to Section 149 (3) of the Companies Act 2013, every company must appoint at least one director who has lived in India for a total of 182 days or more during the financial year. This ensures local presence and oversight.
2. Independent Director: An independent director is not a Managing Director, Whole-time director, or Nominee director. They bring an unbiased perspective to the board and help in good governance.
3. Small Shareholder's Director: Small shareholders in a listed company can appoint a single director to represent their interests on the board. This empowers smaller investors.
4. Nominee Director: A director nominated by a financial institution (like a bank) to protect its interests in the company, especially when the company has taken loans.
5. Additional Directors: The company can appoint any individual as an Additional Director, typically for a specific period or purpose.
6. Alternate Directors: An alternate director is appointed by the Board of Directors as a substitute for an original director who will be absent from India for a period of 3 months or more.

Each type of director serves a unique purpose in maintaining the company's structure and compliance.
In simple words: There are different types of directors, like a Residential Director who lives in India, an Independent Director who is not biased, a Small Shareholder's Director, a Nominee Director from a bank, Additional Directors, and Alternate Directors who fill in temporarily.

🎯 Exam Tip: When listing director types, provide a brief, clear explanation for each, focusing on their main characteristic or role.

 

Question 3. State the Qualification of Directors.
Answer: The Companies Act, 2013, does not directly specify formal qualifications for directors. However, directors are generally expected to have suitable skills, experience, and knowledge in areas like finance, law, management, sales, marketing, research, or other relevant fields. The general qualifications often considered important for directors are:

1. A director must be a person of sound mind, capable of making rational decisions.
2. A director must hold share qualification if the company's Articles of Association (internal rules) require it.
3. A director must be an individual, not a company or partnership.
4. A director should be a solvent person, meaning they can pay their debts.
5. A director should not have been convicted by a court for any offense.

These qualities ensure that directors can effectively manage the company and fulfill their legal and ethical duties.
In simple words: Directors should be mentally sound, hold shares if company rules say so, be individuals, be able to pay their debts, and not have been convicted of crimes.

🎯 Exam Tip: Focus on the general characteristics and legal disqualifications rather than specific academic degrees, as the law emphasizes suitability over formal qualifications.

 

Question 4. State the Criminal Liabilities of Directors.
Answer: Directors can face criminal liabilities, including fines and imprisonment, for fraud or for not following statutory provisions in certain situations. These situations include:

1. If there is a false statement or misstatement made in the company's prospectus (document inviting public to buy shares).
2. If there is a failure to file a return with the registrar regarding the allotment of shares.
3. If there is a failure to notify the registrar about the conversion of shares into stock.
4. If the company fails to issue Share Certificates and Debenture Certificates as required.
5. If there is a default in holding the Annual General Meeting, a mandatory yearly meeting for shareholders.
6. If there is a failure to provide the required Financial Statements.

Such liabilities ensure directors are accountable for their actions and compliance with company law.
In simple words: Directors can be jailed or fined if they lie in company documents, don't file necessary papers, don't issue share certificates, miss annual meetings, or don't provide financial reports.

🎯 Exam Tip: List specific examples of non-compliance that lead to criminal liability for directors, showing your understanding of their legal obligations.

II Match the following.

 

Question 1.

Answer: (i) 2, (ii) 4, (iii) 1, (iv) 3
In simple words: An Alternate Director is a substitute. A Shadow Director is not officially on the board. A Residential Director lives in India for at least 182 days. Small Shareholders Directors are elected by 1000 shareholders.

🎯 Exam Tip: For matching questions, correctly associate each type of director with their defining characteristic or legal provision.

 

Question 2.

Answer: (i) 4, (ii) 3,(iii) 2, (iv) 1
In simple words: Statutory powers include making loans. Managerial powers involve contracting with others. Powers requiring a special resolution are for selling or leasing company assets. Other powers allow filling sudden vacancies.

🎯 Exam Tip: Understand the categories of powers exercised by directors and the specific actions that fall under each category.

III. Assertion and Reason

 

Question. Assertion (A): The Term Remuneration means any money or its equivalent is given or passed to any person for services rendered by him. Reason (R): It includes Rent-free, Sweat Equity shares, Concessions, Free of cost etc.
(a) (A) and (R) are True
(b) (A) and (R) False
(c) (A) is true (R) is False
(d) (A) is False (R) is True
Answer: (a) (A) and (R) are True
In simple words: The statement that 'remuneration' is payment for services is correct. Also, it's true that remuneration can include things like free rent, sweat equity shares, and other benefits, not just cash.

🎯 Exam Tip: For assertion-reason questions, first check if both statements are individually true, then determine if the reason correctly explains the assertion.

III. Assertion and Reason

 

Question 1. Assertion (A): The Term Remuneration means any money or its equivalent is given or passed to any person for services rendered by him. Reason (R): It includes Rent-free, Sweat Equity shares, Concessions, Free of cost etc.
(a) (A) and (R) are True
(b) (A) and (R) False
(c) (A) is true (R) is False
(d) (A) is False (R) is True
Answer: (a) (A) and (R) are True
In simple words: The statement about what remuneration is, and the examples of what it includes (like rent-free benefits and sweat equity shares), are both correct.

🎯 Exam Tip: When dealing with Assertion-Reason questions, first check if both statements are individually true, then check if the reason correctly explains the assertion.

 

IV. Very Short Answer Questions

 

Question 1. Define Director.
Answer: A director is a person chosen or voted onto the company's Board of Directors. Their job is to decide and carry out company plans with other board members. They do not always need to own shares or be an employee. Directors make decisions based on rules from the Articles of Association and Board meetings, as defined by the Companies Act 2013, Section 2(34). Directors play a crucial role in guiding the company towards its goals by setting the overall direction.
In simple words: A director is a person chosen to help manage a company by making decisions and setting plans. They work as a team on the Board of Directors.

🎯 Exam Tip: Always include the relevant section and act (e.g., Companies Act 2013, Section 2(34)) for a precise definition of legal terms.

 

Question 2. What are the Minimum and Maximum number of Directors and the Number of Directorship?
Answer:
Minimum Directors:
- For a One Person Company, there must be one director.
- For a Private Company, there must be two directors.
- For a Public Company, there must be three directors.

Maximum Directors:
- A company can have up to 15 directors, and one of these must be a resident director.
- With special approval from the Central Government and a resolution, a company can appoint more than 15 directors.

Maximum Directorships (for one person):
- One person can be a director in a maximum of 20 different companies.
- If a person holds a directorship in a public company or its subsidiary, this limit is 10 for public companies. These rules ensure that companies have enough oversight while also preventing a single person from taking on too many responsibilities across multiple companies.
In simple words: Companies need a certain number of directors, usually one for small companies, up to three for big public ones. A company can have a maximum of 15 directors. One person can be a director in up to 20 companies.

🎯 Exam Tip: Remember the specific numbers (1, 2, 3 for minimum; 15 for maximum; 20 total directorships) as they are key facts for this type of question.

 

V. Short Answer Questions.

 

Question 1. Differentiate Executive and Non-Executive Directors. [DR]
Answer:

Non-executive directors often bring an objective perspective and specialized expertise, which helps with corporate governance.
In simple words: Executive directors run the company daily and make big decisions. Non-executive directors watch over the executive directors and make sure things are done right.

🎯 Exam Tip: When differentiating, always provide a clear basis for comparison and explain the distinct roles and responsibilities of each type of director.

 

Question 2. When are alternative directors appointed?
Answer: An alternative director is appointed by the Board of Directors. They act as a replacement for a director who will be away from India for at least three months. This temporary appointment ensures that the board continues to function effectively without interruption. This system helps maintain the required number of directors and ensures smooth decision-making even when a permanent director is unavailable.
In simple words: An alternative director steps in when a regular director is out of India for three months or more.

🎯 Exam Tip: Mentioning the minimum absence period (three months) and the reason (absence from India) is crucial for a complete answer.

 

VI. Long Answer Questions

 

Question 1. Distinguish Manager and Director. [NIL] [R]
Answer:

While managers handle day-to-day operations, directors focus on the strategic vision and long-term success of the organization.
In simple words: Managers run a department, giving tasks and following plans. Directors guide the whole company, setting big plans and policies.

🎯 Exam Tip: Highlight the difference in strategic versus operational roles and the level of authority each position holds for a clear distinction.

 

Question 2. Difference between Managing Director and Whole Time Director. [P] [PAD]
Answer:

The key difference often lies in the scope of authority and whether the role involves strategic decision-making or day-to-day operational management.
In simple words: A Managing Director has more power and sets the company's direction, but a Whole-Time Director is also a full-time employee involved in company work.

🎯 Exam Tip: Focus on the level of authority, appointment requirements, and limitations on other roles to clearly differentiate between MD and WTD.

 

Question 3. Who is the KMP?
Answer: The Companies Act, 2013, introduced the term Key Managerial Personnel (KMP). KMP includes important leaders and functional heads within a company. According to Section 2(51) of the Companies Act, 2013, Key Managerial Personnel refers to:
1. The Chief Executive Officer (CEO)
2. The Managing Director (MD) or Manager
3. The Company Secretary
4. The Whole-Time Director (WTD)
5. The Chief Financial Officer (CFO)
6. Any other officers as officially designated. This classification helps in clearly defining accountability and roles within the top management structure of a company.
In simple words: Key Managerial Personnel (KMP) are the main people who run a company, like the CEO, MD, Company Secretary, and CFO. They are important for making big decisions and managing the company.

🎯 Exam Tip: Listing the specific roles covered under KMP, along with the relevant section of the Companies Act, is important for a complete answer.

 

Question 4. Explain the Composition of the Board of Directors.
Answer: The composition of a company's Board of Directors is typically structured in different ways:

a) General Combination:
The Board of Directors usually includes:
- Executive Directors, who manage day-to-day operations.
- Non-Executive Directors, who provide oversight.
- At least one woman director.
- At least 50% of the Board members must be Non-Executive Directors.

b) When a Non-Executive Director is the Chairperson:
- One-third of the Board should be Independent Directors.
- If the company does not have a regular non-executive chairperson, then at least half of the Board must be Independent Directors.

c) When the Non-Executive Chairperson is a Promoter or related person:
- In this situation, half of the Board of Directors should consist of Independent Directors.
- Other members may include Whole-Time Directors, Managing Directors, and Executive Directors. A balanced board composition with diverse directors helps ensure effective governance, broader perspectives, and better decision-making for the company.
In simple words: A company's board has a mix of directors, some who run the business daily (executive) and others who oversee it (non-executive). There must be at least one woman director. The mix changes based on who is the chairperson.

🎯 Exam Tip: Remember the percentages and fractions (e.g., 50%, 1/3, 1/2) for different scenarios, as they are key details for this topic.

 

Question 5. List the disqualification of a director.
Answer: According to Section 164 of the Companies Act, 2013, a person cannot be appointed as a director of a company if they meet any of the following conditions:
- They are mentally unsound (of unsound mind).
- They are an undischarged insolvent (unable to pay debts).
- They have been found guilty of a crime by a court.
- They have not paid any money owed on shares of the company they hold.
- A court has issued an order preventing them from becoming a director.
- They do not have a Director Identification Number (DIN). These disqualifications are in place to ensure that only competent and trustworthy individuals hold positions of responsibility on a company's board.
In simple words: A person cannot be a director if they are mentally unwell, bankrupt, convicted of a crime, haven't paid for company shares, or don't have a special ID number for directors.

🎯 Exam Tip: Memorize at least five key disqualifications and reference Section 164 of the Companies Act, 2013, for full marks.

 

Question 6. How the Director of a company can be removed from the office?
Answer: A director can be removed from their position before their term ends in a few ways:

By Shareholders (Section 169):
Shareholders can remove a director by giving special notice and passing an ordinary resolution. This can happen without needing to prove mismanagement or misconduct, as long as the proper legal procedure is followed.

By Central Government:
The Central Government can remove a director if the Company Law Board recommends it, especially if the director:
- Harms the business's interests.
- Is found guilty of fraud, misbehavior, or consistent negligence in their duties.
- Manages the business without following good business practices.

By Company Law Board (CLB):
If a complaint is filed with the CLB regarding the director's unfair actions (oppression) or poor management, the CLB can order the director's removal. These provisions ensure accountability and provide a mechanism to address instances of directorial misconduct or inefficiency, protecting the company's interests.
In simple words: A director can be removed by the company's owners (shareholders), by the government if they cause harm or act badly, or by a special court if they mismanage the company.

🎯 Exam Tip: Clearly distinguish the different authorities that can remove a director (shareholders, Central Government, CLB) and the specific reasons applicable to each.

 

Question 7. What is the maximum limit for the Managerial Remuneration?
Answer: The maximum limit for managerial remuneration depends on the company's profit and capital.

General Limits based on Net Profit:
- If a company has only one Managing Director (MD), Whole Time Director (WTD), or Manager, their pay cannot be more than 5% of the company's net profit.
- If there is more than one MD, WTD, or Manager, the total pay for all of them should not be more than 11% of the company's net profit.

Remuneration with No Profit or Inadequate Profit (without Central Government approval):
The yearly remuneration limits based on effective capital are:

These regulations aim to prevent excessive executive compensation, especially in loss-making companies, and ensure fair distribution of company resources.
In simple words: How much a company can pay its managers depends on its profit. If there's only one manager, they get up to 5% of profit. If there are many, they get up to 11% of profit. If the company makes no profit, there are fixed limits based on how much money the company has.

🎯 Exam Tip: Pay close attention to the percentages (5% and 11%) and the specific financial thresholds (Rs. 5 crore, Rs. 100 crore, Rs. 250 crore) for remuneration limits.

 

Question 8. What are the duties of a director?
Answer: Directors serve as representatives and guardians of the shareholders. Their duties include:

Collective Duties (performed by the Board together):
1. Approving and verifying the company's yearly financial accounts.
2. Passing important decisions and formal agreements (resolutions) during board meetings.
3. Reporting to shareholders about the company's performance.

General Duties of Directors:
1. Assigning authority to different committees.
2. Giving clear directions to employees to follow company policies.
3. Appointing lower-level managers and other staff, such as managing directors, managers, and secretaries.
4. Acting honestly and with good intentions to help the company achieve its goals. Fulfilling these duties diligently is essential for maintaining investor confidence and ensuring the company's long-term sustainability and ethical operation.
In simple words: Directors act for the company owners. They approve accounts, make decisions in meetings, report to owners, and tell employees what to do. They must always work for the company's best interest.

🎯 Exam Tip: Categorize duties into 'collective' and 'general' to provide a structured and comprehensive answer, showing a deeper understanding of directorial responsibilities.

 

Question 9. State the powers of the Directors.
Answer: Directors have various powers to manage the company, which can be categorized as follows:

Statutory Powers (given by law):
- To issue debentures (debt instruments).
- To approve loans.
- To borrow money, excluding debentures.
- To expand into new business areas (diversify).
- To approve the company's financial statements and board report.

Managerial Powers:
- To appoint a Managing Director (MD), Manager, and Secretary.
- To oversee and manage daily operations.
- To enter into agreements with outside parties.
- To allocate, cancel, or transfer shares.
- To set the conditions for issuing debentures.

Powers Exercised Only Through a Resolution (Board or Shareholder):
- To sell or rent out any company asset.
- To hire a single agent for more than five years.
- To give a director more time to repay a loan.
- To issue bonus shares to existing shareholders.
- To borrow money exceeding the company's paid-up capital and free reserves.

Other Powers:
- To fill any temporary vacancy on the board.
- To appoint Alternate and Additional Directors, and Key Managerial Personnel (KMP).
- To appoint the first auditor of the company.
- To remove KMP.
- To declare the company's financial health (solvency). These powers are critical for the smooth functioning and strategic growth of the company, allowing directors to adapt to market conditions and operational needs.
In simple words: Directors have the power to make many decisions for the company. They can issue debt, take loans, manage staff, sell property (with approval), and appoint new directors.

🎯 Exam Tip: Grouping the powers into categories like 'Statutory', 'Managerial', and 'Requiring Resolution' helps in remembering and presenting them clearly.

 

Question 10. Mr.Raghu is appointed as a Director in a company. Is he personally liable to third parties? If so, under what circumstances is he liable?
Answer: Generally, a director like Mr. Raghu is not personally responsible to external parties if he acts within the powers given to him. The company is usually responsible for its actions. However, directors can become personally liable to third parties in specific situations:

When dealing with contracts:
a. If they sign contracts with outsiders in their personal name or capacity.
b. If they act as agents for an undisclosed principal (a company whose identity is kept secret).
c. If they enter into a contract for a company that is not yet formed or registered.
d. If the contract they make goes beyond the company's legal powers (ultra-vires).

When failing in statutory duties:
- If there is false information or a mistake in the company's prospectus (an offer document).
- If shares are allotted incorrectly or irregularly.
- If the company fails to return application money when the minimum required subscription is not met.
- If the company fails to return application money when shares and debentures are not listed on the stock exchange as promised in the prospectus. This distinction between corporate liability and personal liability helps protect directors who act in good faith while holding them accountable for their breaches of duty or fraudulent actions.
In simple words: Mr. Raghu, as a director, is usually not personally responsible for company issues unless he acts outside his powers or makes big mistakes. He becomes responsible if he signs contracts in his own name or if the company breaks rules like giving false information in its prospectus.

🎯 Exam Tip: Distinguish between contractual liabilities (actions taken personally or outside company scope) and statutory liabilities (failure to comply with legal duties) for a comprehensive answer.