Chapter 1: Preliminary - Test 2: answer key

Question 1 · 2 marks · Chapter 1: Preliminary · hard

Scenario. Suryodaya Alloys Limited was incorporated in 2011 with its registered office at Raipur and is engaged in the manufacture of aluminium sheets. Its paid-up share capital as on 31st March 2026 comprises equity share capital of ₹70 crore and 0.01% redeemable preference share capital of ₹30 crore. Of the equity share capital, the Central Government holds ₹18 crore, the Government of Odisha holds ₹10 crore, the Government of Chhattisgarh holds ₹7 crore and the remaining ₹35 crore is held by the public. The preference share capital of ₹30 crore is held by the Central Government (₹18 crore) and the Government of Odisha (₹12 crore). The company holds 74% of the equity share capital of Suryodaya Logistics Limited. Mr. Devendra Rao is the Managing Director and Ms. Priya Nair is the Chief Financial Officer of the company. The Company Secretary resigned with effect from 31st March 2026 and no successor was appointed till 31st December 2026, nor did the Board specify any director in this behalf. The annual return of the company for the financial year 2025-26, which fell due on 29th November 2026, had not been filed till 31st December 2026. The statutory balance sheet as at 31st March 2026 discloses paid-up share capital ₹100 crore, securities premium ₹22 crore, general reserve ₹38 crore, a reserve created out of revaluation of plant ₹15 crore, surplus in the statement of profit and loss ₹9 crore, deferred expenditure not written off ₹4 crore and miscellaneous expenditure not written off ₹3 crore.

With reference to section 2(45) of the Companies Act, 2013, which of the following statements about Suryodaya Alloys Limited is correct?

1. It is not a Government company, since the Central and State Governments together hold only 50% of its equity share capital.
2. It is a Government company only if the Central Government alone holds not less than 51% of the paid-up share capital.
3. It is a Government company, since the Central and State Governments together hold ₹65 crore out of the total paid-up share capital of ₹100 crore. (correct answer)
4. It is not a Government company, since preference share capital cannot be reckoned for applying the 51% test.

Answer: C — It is a Government company, since the Central and State Governments together hold ₹65 crore out of the total paid-up share capital of ₹100 crore.

Explanation. Section 2(45) applies the 51% test to the 'paid-up share capital', which comprises both equity and preference capital. Here the Governments hold equity of ₹35 crore (18 + 10 + 7) plus preference capital of ₹30 crore (18 + 12), aggregating ₹65 crore out of ₹100 crore, i.e. 65%. The company is therefore a Government company. The test is satisfied even if no single Government holds 51%, since the clause permits holding partly by the Central Government and partly by one or more State Governments.

Where it goes wrong. Restricting the 51% computation to equity capital only (which gives 50%) and ignoring the preference capital held by the Governments.

Authority. Section 2(45) of the Companies Act, 2013

Question 2 · 2 marks · Chapter 1: Preliminary · hard

In respect of the failure to file the annual return for the financial year 2025-26, who is the 'officer who is in default' under section 2(60) of the Companies Act, 2013?

1. Only Mr. Devendra Rao, since the Managing Director is always the officer in default.
2. All the eight directors, since the office of company secretary was vacant on the date of default.
3. Only Ms. Priya Nair, since the filing of statutory returns is the responsibility of the chief financial officer.
4. Mr. Devendra Rao and Ms. Priya Nair, since both are key managerial personnel, and the vacancy in the office of company secretary by itself fastens no liability. (correct answer)

Answer: D — Mr. Devendra Rao and Ms. Priya Nair, since both are key managerial personnel, and the vacancy in the office of company secretary by itself fastens no liability.

Explanation. Clause (i) of section 2(60) covers the whole-time director and clause (ii) covers key managerial personnel. The Managing Director is a whole-time director and also KMP under section 2(51)(i), while the CFO is KMP under section 2(51)(iv). Since KMP were in office, clause (iii) is not triggered and all directors do not become officers in default. A mere vacancy in the office of company secretary does not by itself create liability for any person.

Where it goes wrong. Jumping to 'all directors' under clause (iii) merely because the company secretary's post was vacant.

Authority. Section 2(60)(i) and (ii) of the Companies Act, 2013; Section 2(51) of the Companies Act, 2013

Question 3 · 2 marks · Chapter 1: Preliminary · hard

What is the 'net worth' of Suryodaya Alloys Limited as on 31st March 2026 as per section 2(57) of the Companies Act, 2013?

1. ₹162 crore (correct answer)
2. ₹177 crore
3. ₹169 crore
4. ₹165 crore

Answer: A — ₹162 crore

Explanation. Net worth = paid-up capital ₹100 crore + securities premium ₹22 crore + general reserve ₹38 crore + credit balance of P&L ₹9 crore, less accumulated losses/deferred expenditure ₹4 crore and miscellaneous expenditure not written off ₹3 crore = ₹162 crore. The reserve of ₹15 crore created out of revaluation of assets is expressly excluded by section 2(57). The credit balance in the statement of profit and loss, securities premium and reserves created out of profits are all included.

Where it goes wrong. Adding the revaluation reserve of ₹15 crore (giving ₹177 crore) or ignoring the deferred and miscellaneous expenditure write-offs (giving ₹169 crore).

Authority. Section 2(57) of the Companies Act, 2013

Question 4 · 2 marks · Chapter 1: Preliminary · medium

What is the status of Suryodaya Logistics Limited under the Companies Act, 2013?

1. It is not a Government company, since no Government directly holds any shares in it.
2. It is a Government company, because section 2(45) includes within that expression a company which is a subsidiary company of a Government company. (correct answer)
3. It is a Government company only if the aggregate direct and indirect holding of the Governments in it is at least 51% of its paid-up share capital.
4. It is a deemed public company but not a Government company, since its holding company alone holds 74%.

Answer: B — It is a Government company, because section 2(45) includes within that expression a company which is a subsidiary company of a Government company.

Explanation. The definition of 'Government company' in section 2(45) is in two limbs: the 51% paid-up capital test, and an inclusive limb which covers 'a company which is a subsidiary company of such a Government company'. Since Suryodaya Alloys Limited is a Government company and holds 74% of Suryodaya Logistics Limited, the latter is its subsidiary under section 2(87) and hence a Government company, notwithstanding the absence of any direct Government shareholding.

Where it goes wrong. Applying only the 51% paid-up capital test and overlooking the inclusive limb relating to subsidiaries of Government companies.

Authority. Section 2(45) of the Companies Act, 2013; Section 2(87) of the Companies Act, 2013

Question 5 · 2 marks · Chapter 1: Preliminary · hard

Scenario. Vasudha Renewables (OPC) Private Limited was incorporated on 1st August 2024. Ms. Vasudha Menon, an Indian citizen who has been residing in Toronto, Canada since 2018 and who visits India only on short trips, is the sole member of the company. Her father, Mr. Suresh Menon, an Indian citizen residing in Chennai, was named in the memorandum as the nominee, and his prior written consent, duly attested, was filed with the Registrar along with the incorporation documents. The company was formed principally to hold a registered trademark relating to solar equipment and to generate solar power. For the financial year 2025-26 the paid-up share capital of the company was ₹35 lakh and its turnover was ₹1.40 crore. It is neither a holding nor a subsidiary of any company, nor is it registered under section 8 of the Companies Act, 2013. During the last two financial years the company paid ₹25,000 to the Registrar of Companies towards filing fees, incurred ₹90,000 towards maintenance of its registered office and records, and received ₹4,00,000 as licence fee from an unlisted company for use of its registered trademark. It has not carried on any manufacturing or trading activity. Ms. Vasudha died in a road accident on 12th March 2026. In April 2026, the company filed an application with the Registrar seeking the status of a dormant company under section 455 of the Companies Act, 2013.

Is the incorporation of Vasudha Renewables (OPC) Private Limited with Ms. Vasudha Menon as sole member and Mr. Suresh Menon as nominee valid?

1. Valid, since the sole member is a natural person who is an Indian citizen (residence in India not being a requirement), and the nominee is a natural person who has given prior written consent. (correct answer)
2. Invalid, since the sole member of a One Person Company must be a person resident in India.
3. Invalid, since a One Person Company must have at least two members at the time of incorporation.
4. Valid only if the nominee is also a person resident outside India, as the sole member resides abroad.

Answer: A — Valid, since the sole member is a natural person who is an Indian citizen (residence in India not being a requirement), and the nominee is a natural person who has given prior written consent.

Explanation. Section 2(62) defines a One Person Company as a company which has only one person as a member. Rule 3 of the Companies (Incorporation) Rules, 2014, as amended with effect from 1st April 2021, requires the member and the nominee to be natural persons who are Indian citizens; residence in India is no longer a condition. The nominee's prior written consent in Form INC-3 must be filed with the memorandum. Both conditions are satisfied here.

Where it goes wrong. Applying the pre-2021 requirement that the sole member or nominee must be a person resident in India.

Authority. Section 2(62) of the Companies Act, 2013; Rule 3 of the Companies (Incorporation) Rules, 2014

Question 6 · 2 marks · Chapter 1: Preliminary · medium

On the death of Ms. Vasudha Menon on 12th March 2026, which of the following is the correct legal position?

1. The shares devolve upon the legal heirs of Ms. Vasudha under the law of succession applicable to her.
2. The company must be wound up, since a One Person Company cannot function without its sole member.
3. Mr. Suresh Menon becomes the member of the company by virtue of his nomination in the memorandum. (correct answer)
4. The Board of Directors may admit any person as a member with the approval of the Registrar of Companies.

Answer: C — Mr. Suresh Menon becomes the member of the company by virtue of his nomination in the memorandum.

Explanation. The memorandum of a One Person Company must name an individual who shall, in the event of the subscriber's death or incapacity to contract, become the member of the company. On the death of Ms. Vasudha, the nominee Mr. Suresh Menon accordingly becomes the member, and the company continues without any break; the shares do not devolve by succession because the nomination in the memorandum governs.

Where it goes wrong. Applying ordinary succession law to the shares of the deceased sole member and ignoring the statutory nominee named in the memorandum.

Authority. Section 3(1) proviso, Companies Act, 2013; Section 2(62) of the Companies Act, 2013; Rule 4 of the Companies (Incorporation) Rules, 2014

Question 7 · 2 marks · Chapter 1: Preliminary · hard

Can Vasudha Renewables (OPC) Private Limited be regarded as a 'small company' for the financial year 2026-27?

1. Not eligible, since a One Person Company can never be regarded as a small company.
2. Eligible only after it ceases to be a One Person Company and is converted into a private company.
3. Not eligible, since the turnover of a small company cannot exceed ₹2 crore in any case.
4. Eligible, since its paid-up capital and turnover are within the prescribed limits and it is neither a holding nor a subsidiary company nor a section 8 company. (correct answer)

Answer: D — Eligible, since its paid-up capital and turnover are within the prescribed limits and it is neither a holding nor a subsidiary company nor a section 8 company.

Explanation. Section 2(85) defines a small company as a company 'other than a public company' meeting the prescribed paid-up capital and turnover limits; the Rules prescribe ₹4 crore and ₹40 crore respectively. The only exclusions are a holding or subsidiary company, a section 8 company and a company governed by a special Act. A One Person Company is a private company by virtue of the proviso to section 2(68) and is not excluded, so it qualifies.

Where it goes wrong. Assuming that a One Person Company is excluded from the small company definition, or confusing the statutory ceiling of ₹2 crore in section 2(85) with the limit prescribed by the Rules.

Authority. Section 2(85) of the Companies Act, 2013; Rule 2 of the Companies (Specification of Definitions Details) Rules, 2014

Question 8 · 2 marks · Chapter 1: Preliminary · hard

Is the company entitled to be granted the status of a dormant company under section 455 of the Companies Act, 2013?

1. Eligible, since it has not carried on any business or operation during the last two financial years.
2. Not eligible, since the licence fee received for use of its trademark is a significant accounting transaction. (correct answer)
3. Eligible, since the payments made towards Registrar's fees and office maintenance are excluded from significant accounting transactions.
4. Not eligible, since a One Person Company can never be granted the status of a dormant company.

Answer: B — Not eligible, since the licence fee received for use of its trademark is a significant accounting transaction.

Explanation. Section 455(3) defines a 'significant accounting transaction' as any transaction other than payment of fees to the Registrar, payments to comply with the requirements of the Act or any other law, allotment of shares to comply with such requirements, and payments for maintenance of office and records. The receipt of ₹4,00,000 as licence fee for the trademark falls outside these exclusions; it is a significant accounting transaction, which also shows the company is carrying on an operation.

Where it goes wrong. Concluding that the company is dormant merely because it has made no manufacturing or trading turnover, and treating only the excluded payments as decisive.

Authority. Section 455(1) and 455(3) of the Companies Act, 2013

Question 9 · 2 marks · Chapter 1: Preliminary · medium

Scenario. Kaveri Foods Limited reported the following in its statement of profit and loss for the financial year 2025-26: revenue from sale of goods (net of GST and sales returns) ₹186 crore; revenue from catering services ₹32 crore; interest on bank fixed deposits ₹5 crore; profit on sale of a factory shed ₹7 crore; and dividend on mutual fund units ₹1 crore. What is its 'turnover' for the purposes of the Companies Act, 2013?

Kaveri Foods Limited reported the following in its statement of profit and loss for the financial year 2025-26: revenue from sale of goods (net of GST and sales returns) ₹186 crore; revenue from catering services ₹32 crore; interest on bank fixed deposits ₹5 crore; profit on sale of a factory shed ₹7 crore; and dividend on mutual fund units ₹1 crore. What is its 'turnover' for the purposes of the Companies Act, 2013?

1. ₹186 crore
2. ₹223 crore
3. ₹231 crore
4. ₹218 crore (correct answer)

Answer: D — ₹218 crore

Explanation. Section 2(91) defines turnover as the gross amount of revenue recognised in the profit and loss account from the sale, supply or distribution of goods or on account of services rendered, or both, during a financial year. Hence ₹186 crore (goods) + ₹32 crore (services) = ₹218 crore. Interest, dividend and profit on sale of a fixed asset are not revenue from sale of goods or supply of services.

Where it goes wrong. Adding non-operating income such as interest, dividend and profit on sale of a fixed asset to arrive at turnover.

Authority. Section 2(91) of the Companies Act, 2013

Question 10 · 2 marks · Chapter 1: Preliminary · medium

Scenario. Nila Textiles Limited has a whole-time director and a chief financial officer. Mr. Bhaskar, a practising company secretary holding a certificate of practice, is engaged on a professional retainer and regularly advises the Board on compliance matters; the Board is accustomed to act on his advice. A default under the Act occurs on a matter on which Mr. Bhaskar had advised the Board. Is Mr. Bhaskar an 'officer who is in default'?

Nila Textiles Limited has a whole-time director and a chief financial officer. Mr. Bhaskar, a practising company secretary holding a certificate of practice, is engaged on a professional retainer and regularly advises the Board on compliance matters; the Board is accustomed to act on his advice. A default under the Act occurs on a matter on which Mr. Bhaskar had advised the Board. Is Mr. Bhaskar an 'officer who is in default'?

1. No, since a person who gives advice to the Board in a professional capacity is excluded by the proviso to clause (v) of section 2(60). (correct answer)
2. Yes, since the Board of Directors is accustomed to act in accordance with his advice and directions.
3. Yes, since a company secretary is a key managerial personnel and is therefore necessarily an officer in default.
4. No, since only directors can ever be officers in default under section 2(60).

Answer: A — No, since a person who gives advice to the Board in a professional capacity is excluded by the proviso to clause (v) of section 2(60).

Explanation. Clause (v) of section 2(60) covers any person in accordance with whose advice, directions or instructions the Board is accustomed to act, but the proviso expressly excludes a person who gives advice to the Board in a professional capacity. Mr. Bhaskar advises only on a professional retainer and is not the company secretary in whole-time employment, so he is not KMP under section 2(51)(ii) either.

Where it goes wrong. Applying clause (v) mechanically without noticing the professional capacity proviso, or treating any company secretary as KMP of every company.

Authority. Section 2(60)(v) of the Companies Act, 2013; Section 2(51) of the Companies Act, 2013

Question 11 · 2 marks · Chapter 1: Preliminary · hard

Scenario. Trinetra Steel Limited has 55% of its paid-up equity share capital held by the Central Government. The company had earlier issued equity shares with differential voting rights to a private investor, with the result that the total voting power held by the Central Government in the company is only 46%. Which of the following statements is correct?

Trinetra Steel Limited has 55% of its paid-up equity share capital held by the Central Government. The company had earlier issued equity shares with differential voting rights to a private investor, with the result that the total voting power held by the Central Government in the company is only 46%. Which of the following statements is correct?

1. It is a Government company, because 55% of the paid-up share capital is held by the Central Government.
2. It is not a Government company, because a Government company must have at least 51% of its paid-up capital held by the Central Government alone.
3. It is not a Government company, because where shares with differential voting rights have been issued, paid-up share capital is construed as total voting power, and the Central Government holds only 46% of such voting power. (correct answer)
4. It is a Government company, because the Explanation to section 2(45) applies only to preference shares and not to equity shares with differential rights.

Answer: C — It is not a Government company, because where shares with differential voting rights have been issued, paid-up share capital is construed as total voting power, and the Central Government holds only 46% of such voting power.

Explanation. The Explanation to section 2(45) provides that for the purposes of the clause, 'paid-up share capital' shall be construed as 'total voting power' where shares with differential voting rights have been issued. Since the Central Government's total voting power is 46%, which is below the 51% threshold, Trinetra Steel Limited is not a Government company, notwithstanding its 55% holding of paid-up equity capital.

Where it goes wrong. Applying the paid-up capital test mechanically without converting it into total voting power where differential voting rights shares exist.

Authority. Section 2(45) of the Companies Act, 2013, together with its Explanation

Question 12 · 2 marks · Chapter 1: Preliminary · hard

Scenario. Prabal Limited has asked its statutory auditor to certify its net worth as on 31st March 2026 under section 2(57). The statutory balance sheet shows: paid-up share capital ₹80 crore; securities premium ₹20 crore; general reserve created out of profits ₹30 crore; reserve created out of revaluation of land ₹12 crore; amalgamation reserve ₹8 crore; amount written back on account of depreciation ₹3 crore; and debit balance of statement of profit and loss ₹6 crore. What is the net worth?

Prabal Limited has asked its statutory auditor to certify its net worth as on 31st March 2026 under section 2(57). The statutory balance sheet shows: paid-up share capital ₹80 crore; securities premium ₹20 crore; general reserve created out of profits ₹30 crore; reserve created out of revaluation of land ₹12 crore; amalgamation reserve ₹8 crore; amount written back on account of depreciation ₹3 crore; and debit balance of statement of profit and loss ₹6 crore. What is the net worth?

1. ₹147 crore
2. ₹124 crore (correct answer)
3. ₹136 crore
4. ₹144 crore

Answer: B — ₹124 crore

Explanation. Net worth is the aggregate of paid-up share capital, reserves created out of profits, securities premium and the credit balance of the profit and loss account, less accumulated losses, deferred expenditure and miscellaneous expenditure not written off. It expressly excludes reserves created out of revaluation of assets, write-back of depreciation and amalgamation. Hence ₹80 + ₹20 + ₹30 − ₹6 = ₹124 crore.

Where it goes wrong. Including the revaluation reserve, amalgamation reserve and the write-back of depreciation, all of which are statutorily excluded.

Authority. Section 2(57) of the Companies Act, 2013

Question 13 · 2 marks · Chapter 1: Preliminary · medium

Scenario. Vaigai Components Limited has been granted the status of a dormant company by the Registrar with effect from 1st April 2025. Which of the following statements regarding its annual compliances is correct?

Vaigai Components Limited has been granted the status of a dormant company by the Registrar with effect from 1st April 2025. Which of the following statements regarding its annual compliances is correct?

1. A dormant company is exempt from filing any return or statement so long as it remains dormant.
2. A dormant company must file its financial statements in Form AOC-4 and its annual return in Form MGT-7 within the usual time.
3. A dormant company must file a return of dormancy in Form MSC-3 within sixty days of the conclusion of its annual general meeting.
4. A dormant company must file a return of dormancy in Form MSC-3 within thirty days of the end of each financial year. (correct answer)

Answer: D — A dormant company must file a return of dormancy in Form MSC-3 within thirty days of the end of each financial year.

Explanation. A dormant company is required to file a 'Return of Dormant Company' in Form MSC-3, along with the prescribed fee, within thirty days of the end of each financial year. The obligation is a continuing annual one and is not linked to the holding of an annual general meeting; the period is thirty days from the end of the financial year and not sixty days.

Where it goes wrong. Assuming total exemption from filing for dormant companies, or importing the AGM-based timelines applicable to Form MGT-7 into Form MSC-3.

Authority. Section 455 of the Companies Act, 2013; Rule 7 of the Companies (Miscellaneous) Rules, 2014

Question 14 · 2 marks · Chapter 1: Preliminary · hard

Scenario. Sundaram Limited received requests for transfer of 4,000 equity shares in August 2025. The share certificates were eventually transferred in December 2025, well beyond the prescribed period. The delay occurred at the office of the SEBI-registered share transfer agent of the company. Who can be proceeded against as an 'officer who is in default' in respect of this delay?

Sundaram Limited received requests for transfer of 4,000 equity shares in August 2025. The share certificates were eventually transferred in December 2025, well beyond the prescribed period. The delay occurred at the office of the SEBI-registered share transfer agent of the company. Who can be proceeded against as an 'officer who is in default' in respect of this delay?

1. The whole-time director and key managerial personnel of Sundaram Limited as well as the share transfer agent, since clause (vii) of section 2(60) covers share transfer agents and registrars in respect of issue or transfer of shares. (correct answer)
2. Only the whole-time director and key managerial personnel of Sundaram Limited, since the statutory transfer agent is an independent contractor.
3. Only the share transfer agent, since the delay occurred at its end and the company had no role in it.
4. Only the Board of Directors of Sundaram Limited, collectively, since transfer is a board function.

Answer: A — The whole-time director and key managerial personnel of Sundaram Limited as well as the share transfer agent, since clause (vii) of section 2(60) covers share transfer agents and registrars in respect of issue or transfer of shares.

Explanation. Section 2(60) lists officers in default and clause (vii) specifically provides that, in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer are included. Along with them, the whole-time director and key managerial personnel remain officers in default under clauses (i) and (ii). The share transfer agent is therefore not beyond the reach of the provision.

Where it goes wrong. Treating the outsourced share transfer agent as a third party outside section 2(60), or conversely absolving the company's own KMP.

Authority. Section 2(60)(vii) of the Companies Act, 2013; Section 2(60)(i) and (ii) of the Companies Act, 2013

Question 15 · 2 marks · Chapter 1: Preliminary · medium

Scenario. Sunrise Capital Private Limited proposes to incorporate a One Person Company in which it will be the sole member, with Mr. Anil Kumar, an Indian citizen, as the nominee. Is the proposed incorporation permissible?

Sunrise Capital Private Limited proposes to incorporate a One Person Company in which it will be the sole member, with Mr. Anil Kumar, an Indian citizen, as the nominee. Is the proposed incorporation permissible?

1. Valid, since a body corporate may be the sole member of a One Person Company if it nominates an individual.
2. Invalid, since a One Person Company must have at least two individual members at all times.
3. Invalid, since only a natural person who is an Indian citizen can be a member of a One Person Company. (correct answer)
4. Valid, provided the body corporate proposing to be the sole member is incorporated in India.

Answer: C — Invalid, since only a natural person who is an Indian citizen can be a member of a One Person Company.

Explanation. For the purposes of section 3(1), a One Person Company may be formed by one person only if that person is a natural person who is an Indian citizen, whether resident in India or otherwise, and a nominee who is also a natural person and an Indian citizen is named in the memorandum with prior written consent. A company, being an artificial person, cannot be the sole member of a One Person Company; it may instead promote an ordinary private or public company.

Where it goes wrong. Assuming that because a company is a 'person' it may subscribe to the memorandum of a One Person Company.

Authority. Section 2(62) of the Companies Act, 2013; Rule 3 of the Companies (Incorporation) Rules, 2014