CA Inter Corporate and Other Laws MCQ Test 2: answer key

Question 1 · 2 marks · Management and Administration · hard

Scenario. Asterion Components Limited is an unlisted public company engaged in the manufacture of industrial machinery. As on 31st March 2026, it had 1,240 members and a paid-up equity share capital of Rs. 8 crore. Its Board decided to convene an extraordinary general meeting on 20th November 2026 to approve a major restructuring proposal and authorise the sale of an undertaking. The notice was circulated on 5th November 2026, and the directors proposed to rely on shorter notice because the transaction was commercially urgent. Members holding 96% of the paid-up voting share capital consented electronically, but these members represented only 42% of the total number of members entitled to vote. The company also received consent from several institutional shareholders who together constituted a majority in number of the remaining members.\n\nAt the meeting, 13 individual shareholders attended personally. Two other persons attended as authorised representatives of two separate corporate members, each appointed through a resolution of its respective company. Four additional persons attended as proxies appointed by individual shareholders. The Chairman included all persons present while determining quorum. Three individual shareholders left before the restructuring resolution was considered, although both authorised representatives remained present.\n\nSeparately, the Board had approved the restructuring proposal after considering a valuation report prepared by an independent professional. One director's brother held a substantial financial interest in the proposed purchaser, but the relationship was not disclosed in the explanatory statement accompanying the meeting notice. The company also completed its financial year on 31st March 2026 and subsequently failed to hold its AGM within the applicable period. The Board proposes to complete its annual return filing without mentioning the absence of the AGM.\n\nThe Board seeks legal advice on the validity of the meeting, determination of quorum and annual return obligations. Based on the facts above and the applicable provisions, answer MCQs q01 to q03.

Considering the number of members of Asterion Components Limited, which of the following correctly determines the quorum for the extraordinary general meeting while the restructuring resolution is being considered?

1. The quorum is 15 members personally present, and authorised representatives of the two corporate members can count as two members, but proxies cannot be counted. (correct answer)
2. The quorum is 15 members, and the four proxies can be counted because they are authorised to vote on behalf of members.
3. The quorum is 5 members because under the explicit statutory framework and mandatory procedural requirements of the governing legislation, the company is an unlisted public company and the number of members does not affect the requirement.
4. The quorum is 30 members because the company has more than 1,000 members and the higher threshold applies immediately.

Answer: A — The quorum is 15 members personally present, and authorised representatives of the two corporate members can count as two members, but proxies cannot be counted.

Working. Members: 1,240. Public company quorum for more than 1,000 and up to 5,000 members: 15. Initial count: 13 individual members + 2 corporate representatives = 15. Proxies: excluded. After three individual members leave: 10 + 2 = 12. The quorum therefore ceases to exist.

Explanation. Under section 103, a public company having more than 1,000 but not more than 5,000 members requires 15 members personally present, unless its articles prescribe a higher number. An authorised representative of a corporate member is treated as a member personally present. Proxies are excluded from quorum. The three individual members who leave before the business is transacted must also be considered while determining whether quorum continues to exist.

Where it goes wrong. Counting proxies as members personally present and ignoring the requirement that quorum must continue while business is transacted.

Authority. Companies Act, 2013, Section 103(1), Section 103(2); ICAI Study Material, Chapter 7, pages 7.39-7.40.

Question 2 · 2 marks · Management and Administration · medium

Whether can Asterion Components Limited validly convene its EGM at shorter notice on the basis of the consents obtained from members?

1. Yes, because consent from members holding 96% of the paid-up voting share capital is sufficient irrespective of the number of members consenting.
2. No, because for an EGM of a company having share capital, consent must be obtained from a majority in number of members entitled to vote who also represent not less than 95% of the relevant paid-up voting share capital. (correct answer)
3. Yes, because under the explicit statutory framework and mandatory procedural requirements of the governing legislation, shorter notice requires consent from only 95% of the total voting share capital, without any separate requirement relating to the number of members.
4. No, because every general meeting must invariably be convened with 21 clear days' notice and shorter notice is not permitted.

Answer: B — No, because for an EGM of a company having share capital, consent must be obtained from a majority in number of members entitled to vote who also represent not less than 95% of the relevant paid-up voting share capital.

Working. Required: majority in number AND at least 95% of relevant paid-up voting capital. Capital consent: 96%, satisfied. Number of members consenting: 42%, not a majority. Therefore, shorter notice is not permissible.

Explanation. Section 101 permits a general meeting to be called at shorter notice if the prescribed consent is obtained. For an EGM of a company having share capital, the consenting members must constitute a majority in number of members entitled to vote and represent at least 95% of the paid-up share capital carrying voting rights. Although the shareholding threshold is met, the majority-in-number requirement is not established merely by obtaining consent from 42% of the members.

Where it goes wrong. Treating the 95% voting-capital requirement as the only condition for shorter notice of an EGM.

Authority. Companies Act, 2013, Section 101(1) and Section 101(2); ICAI Study Material, Chapter 7, page 7.37.

Question 3 · 2 marks · Management and Administration · hard

Since Asterion Components Limited did not hold its AGM within the applicable period, by when must it file its annual return and what additional requirement applies?

1. Within 60 days from the date on which the AGM should have been held, together with the reasons for not holding the AGM. (correct answer)
2. Within 60 days from the end of the financial year, without mentioning the reasons for not holding the AGM.
3. Within 30 days from the date on which the AGM should have been held, together with the reasons for not holding the AGM, as specifically evaluated under the mandatory statutory framework and applicable regulatory guidelines.
4. The company need not file an annual return until an AGM is actually held and approved by the members.

Answer: A — Within 60 days from the date on which the AGM should have been held, together with the reasons for not holding the AGM.

Working. Normal deadline: 60 days from the AGM. Where no AGM is held: 60 days from the date on which it should have been held, with reasons for not holding it.

Explanation. Section 92(4) requires filing of the annual return within 60 days from the date on which the AGM is held. Where no AGM is held in a particular year, the annual return must instead be filed within 60 days from the date on which the AGM should have been held, along with the reasons for not holding it. The absence of an actual AGM does not eliminate the filing obligation. The explanatory statement's disclosure requirements are separately relevant to the undisclosed interest of the director's brother.

Where it goes wrong. Assuming that the annual return filing deadline starts only after an AGM has actually taken place.

Authority. Companies Act, 2013, Section 92(4), Section 102; ICAI Study Material, Chapter 7, pages 7.27 and 7.39.

Question 4 · 2 marks · Prospectus and Allotment of Securities · hard

Scenario. Bluecrest Digital Systems Private Limited develops enterprise software and proposes to raise capital through a private placement of equity shares. Its Board identified 198 individual investors, 5 qualified institutional buyers and 4 employees who were being offered securities under an employee stock option scheme complying with the applicable provisions. The Board passed the requisite special resolution approving the proposed issue and prepared separate private placement offer-cum-application letters for the identified persons. However, the company had already circulated an earlier private placement offer for preference shares, against which allotment proceedings were still pending.\n\nThe CFO argued that the company could proceed with the new equity offer because the number of persons receiving the offer did not exceed the prescribed limit after excluding qualified institutional buyers and employees covered by the employee stock option scheme. The company subsequently received application money from several applicants and deposited the entire amount in a separate account maintained with a scheduled bank. Due to an internal processing issue, the Board could not complete allotment within the prescribed period. The company also failed to refund the application money within the subsequent statutory repayment period.\n\nMeanwhile, the company considered issuing another private placement offer to a different group of investors and proposed to use a portion of the application money already received to pay its existing operational expenses. The finance team also prepared the return of allotment but proposed filing it after 25 days from the date of allotment, citing administrative difficulties.\n\nThe company has additionally received a proposal from an existing shareholder to subscribe to securities through a separate rights issue under the applicable provisions of the Act. The Board wants to understand whether this separate route changes the procedural restrictions applicable to the earlier private placement.\n\nThe Board seeks legal advice on the permissible number of identified persons, restrictions on successive offers, allotment deadlines and the treatment of application money. Based on the facts above and the applicable provisions, answer MCQs q04 to q06.

Whether can Bluecrest Digital Systems Private Limited issue a fresh private placement offer for equity shares while the allotment relating to its earlier preference share offer is still pending?

1. Yes, because under the explicit statutory framework and mandatory procedural requirements of the governing legislation, the number of persons receiving the equity offer is within the prescribed annual limit after excluding qualified institutional buyers and eligible employees.
2. Yes, because the restriction on successive private placement offers applies only when both offers relate to the same class of securities.
3. No, because a fresh offer under section 42 cannot be made unless allotments with respect to the earlier offer have been completed or the earlier offer has been withdrawn or abandoned. (correct answer)
4. No, because a private company can make only one private placement offer during a financial year.

Answer: C — No, because a fresh offer under section 42 cannot be made unless allotments with respect to the earlier offer have been completed or the earlier offer has been withdrawn or abandoned.

Working. Earlier preference share offer: allotment pending. Fresh equity offer: proposed. Section 42(5): fresh offer prohibited until earlier allotments are completed or earlier offer is withdrawn or abandoned.

Explanation. Section 42(5) restricts a company from making a fresh offer or invitation under the private placement provisions unless the allotments relating to an earlier offer have been completed or that offer has been withdrawn or abandoned. The restriction is not removed merely because the fresh offer relates to another class of securities. The 200-person calculation is a separate requirement and does not override the restriction on successive offers.

Where it goes wrong. Confusing the annual limit for identified persons with the independent restriction on making a fresh offer.

Authority. Companies Act, 2013, Section 42(5); ICAI Study Material, Chapter 3, pages 3.46-3.47.

Question 5 · 2 marks · Prospectus and Allotment of Securities · medium

The company received application money but failed to allot securities within the prescribed period. Which statement correctly describes the applicable allotment and repayment requirements?

1. The company must allot securities within 60 days of receiving application money; otherwise, it must repay the money within 15 days after expiry of the 60-day period, failing which interest at 12% per annum becomes payable from the expiry of the 60th day. (correct answer)
2. The company must allot securities within 30 days of receiving application money and repay the money within the next 30 days, failing which interest at 12% per annum becomes payable, as specifically evaluated under the mandatory statutory framework and applicable regulatory guidelines.
3. The company must allot securities within 60 days and may retain the application money for operational expenses during the next 15 days without any restriction.
4. The company must allot securities within 90 days and interest becomes payable only after a further 30-day grace period.

Answer: A — The company must allot securities within 60 days of receiving application money; otherwise, it must repay the money within 15 days after expiry of the 60-day period, failing which interest at 12% per annum becomes payable from the expiry of the 60th day.

Working. Allotment: 60 days. Repayment after failure to allot: next 15 days. Interest: 12% per annum from expiry of the 60th day if the repayment requirement is breached.

Explanation. Section 42(6) requires allotment within 60 days from receipt of application money. If allotment is not made, the money must be repaid within 15 days after expiry of that period. Failure to repay within the prescribed repayment period attracts interest at 12% per annum from the expiry of the 60th day. Application money must remain in a separate scheduled-bank account and cannot be diverted to operational expenses.

Where it goes wrong. Confusing the 60-day allotment period with the subsequent 15-day repayment period and the commencement of interest.

Authority. Companies Act, 2013, Section 42(6); ICAI Study Material, Chapter 3, page 3.51.

Question 6 · 2 marks · Prospectus and Allotment of Securities · hard

Considering the persons identified by Bluecrest Digital Systems Private Limited, which statement correctly applies the prescribed limit for a private placement and the return-of-allotment requirement?

1. The company has identified 207 persons for the limit because under the explicit statutory framework and mandatory procedural requirements of the governing legislation, qualified institutional buyers are excluded but employees under an employee stock option scheme must always be counted.
2. The company has identified 198 persons for the limit, as both qualified institutional buyers and employees covered by the specified employee stock option scheme are excluded; the return of allotment must nevertheless be filed within 15 days of allotment. (correct answer)
3. The company has identified 207 persons, but the return of allotment can be filed within 30 days because the offer is made to fewer than 250 persons.
4. The company has identified 198 persons and is therefore exempt from filing a return of allotment with the Registrar.

Answer: B — The company has identified 198 persons for the limit, as both qualified institutional buyers and employees covered by the specified employee stock option scheme are excluded; the return of allotment must nevertheless be filed within 15 days of allotment.

Working. Total persons: 198 + 5 + 4 = 207. Exclusions: 5 QIBs + 4 eligible ESOP employees. Counted persons: 207 - 9 = 198. PAS-3 filing: within 15 days of allotment.

Explanation. Rule 14(2) prescribes a maximum of 200 identified persons in a financial year for the relevant class of securities. Qualified institutional buyers and employees receiving securities under an employee stock option scheme under section 62(1)(b) are excluded from the calculation. Accordingly, 198 individual investors are counted. However, compliance with the numerical limit does not remove the separate requirement under section 42(8) and Rule 14(6) to file PAS-3 within 15 days of allotment.

Where it goes wrong. Correctly applying the exclusion for QIBs but overlooking the separate exclusion for employees covered by the specified employee stock option scheme.

Authority. Companies Act, 2013, Section 42(2), Section 42(8); Companies (Prospectus and Allotment of Securities) Rules, 2014, Rule 14(2) and Rule 14(6); ICAI Study Material, Chapter 3, pages 3.46 and 3.51.

Question 7 · 2 marks · Acceptance of Deposits by Companies · hard

Scenario. Meridian Infrastructure Limited is an unlisted public company engaged in the construction of industrial facilities. As on 31st March 2026, its net worth was Rs. 135 crore, its turnover was Rs. 460 crore and the aggregate of its paid-up share capital, free reserves and securities premium account was Rs. 160 crore. The company proposed to raise additional funds through deposits from members as well as persons who were not members.\n\nThe Board passed an ordinary resolution authorising acceptance of deposits and proposed to invite deposits from the public. The finance director argued that the company's net worth satisfied the eligibility requirement and therefore the ordinary resolution was sufficient for every proposed deposit invitation. The company had not yet filed any special resolution with the Registrar of Companies. Its outstanding deposits from members already amounted to Rs. 12 crore, while outstanding deposits from persons other than members amounted to Rs. 35 crore.\n\nThe company proposed to accept a further Rs. 5 crore from members and Rs. 8 crore from non-members. It also intended to accept a separate short-term deposit of Rs. 12 crore, repayable after four months, to meet an unexpected working-capital requirement. The CFO argued that the short-term requirement justified accepting the entire amount despite the normal minimum deposit tenure.\n\nIn another transaction, the company accepted secured deposits from certain depositors against a proposed charge on its tangible machinery and immovable property. The company intended to create the charge after 45 days, once the valuation exercise was completed. The finance team believed that the security requirement could be postponed until the next Board meeting.\n\nThe Board seeks legal advice on eligibility, shareholder approval, deposit limits, short-term deposits and creation of security. Based on the facts above and the applicable provisions, answer MCQs q07 and q08.

Whether can Meridian Infrastructure Limited accept deposits from the public on the strength of its net worth and the ordinary resolution already passed by its Board?

1. Yes, because net worth of Rs. 135 crore automatically makes every public company eligible to accept deposits from the public without any further approval.
2. Yes, because an ordinary resolution is sufficient for every eligible company, irrespective of the amount of deposits accepted.
3. No, because an eligible company must satisfy the prescribed net worth or turnover condition and obtain prior consent by special resolution in general meeting, followed by filing that resolution with the Registrar before inviting public deposits, except where the specified section 180(1)(c) limits permit an ordinary resolution. (correct answer)
4. No, because an eligible company must have both net worth of at least Rs. 100 crore and turnover of at least Rs. 500 crore, in addition to passing a special resolution.

Answer: C — No, because an eligible company must satisfy the prescribed net worth or turnover condition and obtain prior consent by special resolution in general meeting, followed by filing that resolution with the Registrar before inviting public deposits, except where the specified section 180(1)(c) limits permit an ordinary resolution.

Working. Net worth: Rs. 135 crore, satisfying the Rs. 100 crore alternative. Turnover: Rs. 460 crore, not satisfying the Rs. 500 crore alternative. Public invitation requires prior special resolution and filing, unless the specified section 180(1)(c) exception applies.

Explanation. Rule 2(1)(e) and section 76(1) define an eligible company as a public company having net worth of at least Rs. 100 crore or turnover of at least Rs. 500 crore, subject to prior special-resolution consent and filing with the Registrar before inviting public deposits. An ordinary resolution is sufficient only where the eligible company accepts deposits within the limits specified under section 180(1)(c). The two financial criteria are alternatives, not cumulative requirements.

Where it goes wrong. Assuming that satisfying the net-worth threshold automatically removes the approval and filing requirements.

Authority. Companies Act, 2013, Section 76(1), Section 180(1)(c); Companies (Acceptance of Deposits) Rules, 2014, Rule 2(1)(e); ICAI Study Material, Chapter 5, pages 5.11 and 5.23.

Question 8 · 2 marks · Acceptance of Deposits by Companies · medium

Assuming Meridian Infrastructure Limited proposes to accept a deposit for meeting a short-term working-capital requirement, which statement correctly describes the statutory exception to the normal minimum tenure?

1. The company may accept a deposit repayable after four months if the aggregate of such short-term deposits does not exceed 10% of its paid-up share capital, free reserves and securities premium account. (correct answer)
2. The company may accept a deposit repayable after two months if the aggregate of such deposits does not exceed 25% of its paid-up share capital, free reserves and securities premium account, as specifically evaluated under the mandatory statutory framework and applicable regulatory guidelines.
3. The company may accept deposits repayable on demand if the Board records that the funds are required for a temporary business emergency.
4. The company may accept a short-term deposit without any monetary ceiling provided that the deposit is secured by a charge on tangible assets.

Answer: A — The company may accept a deposit repayable after four months if the aggregate of such short-term deposits does not exceed 10% of its paid-up share capital, free reserves and securities premium account.

Working. Normal minimum tenure: 6 months. Short-term exception: maximum 10% of the prescribed aggregate and repayment not earlier than 3 months. Proposed tenure: 4 months.

Explanation. The normal minimum tenure for deposits is six months. For short-term funding requirements, the company may accept or renew deposits for a period shorter than six months, provided the amount does not exceed 10% of the aggregate of paid-up share capital, free reserves and securities premium account and the deposits are repayable only on or after three months from the date of deposit or renewal. A four-month tenure meets the minimum three-month requirement, subject to the monetary ceiling.

Where it goes wrong. Assuming that the short-term exception permits deposits repayable in less than three months or removes the monetary ceiling.

Authority. Companies Act, 2013, Section 76(1), second proviso; Companies (Acceptance of Deposits) Rules, 2014, Rule 3(1); ICAI Study Material, Chapter 5, page 5.23.

Question 9 · 2 marks · Foreign Exchange Management Act, 1999 · medium

Scenario. Mr. Aarav Mehta is an Indian citizen residing in Pune and qualifies as a person resident in India under the Foreign Exchange Management Act, 1999. During the financial year 2026-27, he proposes several overseas remittances for personal and investment purposes. In April 2026, he remitted USD 90,000 to meet the expenses of his higher education in Canada. In July 2026, he transferred another USD 65,000 to meet medical expenses of his mother, who was undergoing treatment abroad. In September 2026, he proposed to remit USD 70,000 for a private visit to Europe.\n\nHis bank informed him that the Liberalised Remittance Scheme permits resident individuals to remit up to USD 250,000 per financial year for permissible current account and capital account transactions, subject to the applicable conditions. Aarav believed that the limits for education, medical treatment and private travel operated independently and could therefore be used without considering earlier remittances.\n\nHis wife, who is also resident in India, proposed to remit USD 80,000 from her own account for purchasing an overseas residential property. Aarav offered to contribute another USD 80,000 and requested the bank to treat the combined amount as a family remittance. However, neither spouse was proposed to be a co-owner of the overseas property purchased using the other's remittance. The bank also informed them that consolidation of remittances by family members is subject to specified conditions.\n\nAarav's younger brother, aged 16 years, separately proposed to remit USD 15,000 for permissible overseas educational expenses. His father proposed to sign the relevant declaration on his behalf. The family was uncertain whether a minor could use the scheme and whether the guardian's countersignature was necessary.\n\nThe family seeks legal advice on the annual remittance ceiling, consolidation of family remittances and the requirements applicable to minors. Based on the facts above and the applicable provisions, answer MCQs q09 to q11.

Considering Aarav's three proposed and completed remittances during financial year 2026-27, which statement correctly describes the operation of the Liberalised Remittance Scheme?

1. Each purpose has an independent USD 250,000 ceiling, so the education, medical and private-visit remittances are calculated separately.
2. The total remittance ceiling is USD 250,000 per financial year, and the education, medical and private-visit remittances must be considered together while calculating the remaining permissible amount. (correct answer)
3. The ceiling applies only to capital account transactions, while current account remittances are outside the scheme.
4. The ceiling is calculated separately for every calendar year, and therefore remittances made before May 2027 are not relevant to subsequent remittances, as specifically evaluated under the mandatory statutory framework and applicable regulatory guidelines.

Answer: B — The total remittance ceiling is USD 250,000 per financial year, and the education, medical and private-visit remittances must be considered together while calculating the remaining permissible amount.

Working. Annual limit: USD 250,000. Education: USD 90,000. Medical: USD 65,000. Total utilised: USD 155,000. Remaining: USD 95,000. Proposed travel: USD 70,000. Total after proposed remittance: USD 225,000.

Explanation. The Liberalised Remittance Scheme permits resident individuals, including minors, to remit up to USD 250,000 per financial year for permissible current account and capital account transactions or a combination of both. The limit is not independently available for each purpose. Aarav has already used USD 155,000, leaving USD 95,000 of the stated annual ceiling. His proposed USD 70,000 private-visit remittance falls within that remaining amount, subject to applicable conditions.

Where it goes wrong. Treating the USD 250,000 limit as separately available for every category of permissible remittance.

Authority. Foreign Exchange Management (Current Account Transactions) Rules, 2000, Schedule III; ICAI Study Material, FEMA Chapter, pages 3.21-3.24.

Question 10 · 2 marks · Foreign Exchange Management Act, 1999 · hard

Whether can Aarav and his wife consolidate their individual remittances for the proposed overseas property purchase when neither spouse will be a co-owner of the property acquired through the other's remittance?

1. Yes, because remittances by family members can always be consolidated for every current account and capital account transaction.
2. Yes, because the relationship between the remitters is sufficient, irrespective of ownership of the overseas property.
3. No, because consolidation is not permitted for capital account transactions involving the purchase of property unless the other family members are also co-owners of the overseas property or co-partners of the overseas bank account or investment, as applicable. (correct answer)
4. No, because the Liberalised Remittance Scheme does not permit any consolidation of remittances by family members.

Answer: C — No, because consolidation is not permitted for capital account transactions involving the purchase of property unless the other family members are also co-owners of the overseas property or co-partners of the overseas bank account or investment, as applicable.

Working. Transaction: overseas property purchase, a capital account transaction. Family consolidation: generally permitted subject to conditions. Exception: no clubbing where family members are not co-owners or co-partners. Neither spouse satisfies the stated ownership condition.

Explanation. The study material permits consolidation of remittances by family members subject to each family member complying with the scheme's terms and conditions. However, the stated exception prevents clubbing for capital account transactions such as opening an overseas bank account, investment or purchase of property where the other family members are not co-owners or co-partners of the relevant account, investment or property. The proposed consolidation therefore cannot be justified merely by the marital relationship.

Where it goes wrong. Applying the general permission for family consolidation without considering the specific restriction for capital account transactions.

Authority. Foreign Exchange Management (Current Account Transactions) Rules, 2000, Schedule III; ICAI Study Material, FEMA Chapter, page 3.24.

Question 11 · 2 marks · Foreign Exchange Management Act, 1999 · hard

Whether can Aarav's 16-year-old brother use the Liberalised Remittance Scheme for the proposed educational remittance, and what formal requirement applies?

1. No, because the scheme is available only to resident individuals who have attained majority.
2. Yes, because minors are included in the scheme, but the LRS declaration form must be countersigned by the minor's natural guardian. (correct answer)
3. Yes, because under the explicit statutory framework and mandatory procedural requirements of the governing legislation, minors can remit without any declaration or guardian involvement if the remittance relates to education.
4. No, because a minor can remit only through a separate corporate account maintained by the educational institution.

Answer: B — Yes, because minors are included in the scheme, but the LRS declaration form must be countersigned by the minor's natural guardian.

Working. Age: 16 years. Minor individuals are eligible under LRS. Required declaration: LRS declaration form countersigned by the minor's natural guardian.

Explanation. The study material expressly states that all resident individuals, including minors, can use the Liberalised Remittance Scheme within the prescribed annual ceiling. In the case of a minor remitter, the LRS declaration form must be countersigned by the minor's natural guardian. The fact that the remittance is for education does not eliminate this procedural requirement.

Where it goes wrong. Assuming that minority automatically disqualifies a person from the scheme or that the educational purpose removes the guardian's countersignature requirement.

Authority. Foreign Exchange Management (Current Account Transactions) Rules, 2000, Schedule III; ICAI Study Material, FEMA Chapter, page 3.24.

Question 12 · 2 marks · Limited Liability Partnership Act, 2008 · medium

Scenario. Vertex Advisory LLP is engaged in providing financial and management consultancy services. The LLP has four partners: Rohan, Meera, Kabir and Sana. Under the LLP agreement, Rohan and Meera are designated partners, while Kabir and Sana are ordinary partners. The agreement authorises Rohan to negotiate contracts with clients but requires prior approval from the other partners before borrowing funds exceeding Rs. 25 lakh or creating security over LLP assets.\n\nDuring August 2026, Rohan approached a bank for a loan of Rs. 40 lakh in the name of the LLP. He signed the loan agreement without obtaining the required approval. Before advancing the money, the bank received a copy of the LLP agreement and was specifically informed by Meera that Rohan did not possess authority to borrow the amount without prior approval. Nevertheless, the bank proceeded with the transaction, believing that every partner was automatically authorised to undertake every transaction for the LLP.\n\nIn a separate incident, Kabir negligently prepared a consultancy report while carrying out an assignment entrusted to him by the LLP. The report contained an incorrect financial projection, causing a client to suffer a monetary loss. The client claimed compensation from both Kabir and the LLP. Sana argued that Kabir's personal liability should automatically extend to every other partner because the report was prepared in the course of LLP business.\n\nSubsequently, Rohan and another employee deliberately concealed material information from a creditor with the intention of defrauding it. The LLP received financial benefits from the transaction, although Meera and Sana claimed that they had neither participated in nor known about the fraudulent arrangement. The creditor initiated proceedings seeking recovery of the resulting losses.\n\nThe partners seek legal advice on the LLP's contractual liability, personal liability of partners and consequences of fraudulent conduct. Based on the facts above and the applicable provisions, answer MCQs q12 and q13.

Whether is Vertex Advisory LLP bound by the Rs. 40 lakh loan transaction entered into by Rohan when the bank had received specific information that he lacked authority to borrow the amount?

1. Yes, because every partner is automatically authorised to bind the LLP in all transactions, irrespective of the LLP agreement.
2. Yes, because a partner is the agent of the LLP and the LLP is bound even where the third party knows that the partner has no authority.
3. No, because only designated partners can enter into contracts on behalf of an LLP.
4. No, because the partner lacked authority for the transaction and the bank knew that he did not possess such authority. (correct answer)

Answer: D — No, because the partner lacked authority for the transaction and the bank knew that he did not possess such authority.

Working. Rohan's authority: absent for borrowing Rs. 40 lakh without prior approval. Bank's knowledge: established. Section 27(1): LLP not bound when both statutory conditions are satisfied.

Explanation. Under section 26, every partner is an agent of the LLP for the purpose of its business, but section 27(1) provides that the LLP is not bound by an act where the partner has no authority and the person dealing with the partner knows of that absence of authority or does not know or believe the person to be a partner. Both conditions are satisfied because Rohan lacked authority and the bank had been specifically informed of that restriction.

Where it goes wrong. Treating the general agency of a partner as unconditional authority despite the third party's knowledge of the restriction.

Authority. Limited Liability Partnership Act, 2008, Sections 26 and 27(1); ICAI Study Material, Chapter 12, page 12.23.

Question 13 · 2 marks · Limited Liability Partnership Act, 2008 · hard

Which of the following correctly describes the liability arising from Kabir's negligent consultancy report and Rohan's fraudulent conduct intended to defraud a creditor?

1. Every partner becomes personally liable for Kabir's negligence, while Rohan alone bears liability for fraud irrespective of the LLP's involvement.
2. Only the designated partners can be personally liable for wrongful acts committed by ordinary partners, and the LLP is automatically exempt whenever a designated partner denies knowledge.
3. Kabir cannot be personally liable because all wrongful acts committed during LLP business are obligations exclusively of the LLP, and fraud never affects the limitation of liability.
4. Kabir may be personally liable for his own wrongful act, but other partners are not personally liable merely because they are partners; fraudulent conduct intended to defraud creditors can attract unlimited liability, subject to the statutory provisions concerning the LLP's knowledge or authority. (correct answer)

Answer: D — Kabir may be personally liable for his own wrongful act, but other partners are not personally liable merely because they are partners; fraudulent conduct intended to defraud creditors can attract unlimited liability, subject to the statutory provisions concerning the LLP's knowledge or authority.

Working. Kabir: personal liability for his own wrongful act under section 28(2). Other partners: not personally liable merely for Kabir's act. Fraud to defraud creditors: section 30; unlimited liability, subject to the statutory conditions and defence available to the LLP.

Explanation. Section 28 protects a partner from personal liability merely because of being a partner and from another partner's wrongful act, but does not protect a partner from liability for his own wrongful act or omission. Section 30 provides for unlimited liability where business is carried on with intent to defraud creditors. Where a partner carries out the fraudulent act, the LLP is liable to the same extent unless it establishes that the act was without its knowledge or authority. Compensation liability for fraudulent conduct is also addressed separately.

Where it goes wrong. Confusing ordinary limited liability for LLP obligations with personal liability for one's own wrongful act and the special unlimited-liability consequence of fraud.

Authority. Limited Liability Partnership Act, 2008, Sections 28 and 30; ICAI Study Material, Chapter 12, pages 12.24-12.26.

Question 14 · 2 marks · Interpretation of Statutes · medium

Scenario. The State Legislature enacted the fictional Public Transport Safety Act to regulate the use of a newly introduced category of passenger vehicles. One provision stated that no person shall operate a vehicle carrying more than eight passengers without installing the prescribed safety equipment. The statutory language did not contain any express exception for vehicles used exclusively for emergency medical transportation.\n\nA hospital challenged a penalty imposed on it for operating an ambulance carrying nine passengers during a disaster-relief operation. The hospital argued that applying the provision literally would prevent the transportation of emergency medical teams and patients in circumstances where immediate evacuation was necessary. The enforcement authority contended that the statutory words were clear and that the court could not create an exception merely because the result appeared inconvenient.\n\nIn a separate dispute, a provision of the same Act prohibited the use of mechanical devices in designated pedestrian areas. A transport operator used a small mechanically assisted mobility device within such an area and argued that the prohibition was intended only to prevent dangerous commercial vehicles from entering pedestrian zones. The court found that the provision's language could reasonably support more than one interpretation.\n\nThe legislative history showed that, before the Act, several serious accidents had occurred because large commercial vehicles were being operated through pedestrian areas. The Legislature intended to address that specific danger through restrictions on vehicle movement, but the enacted provision used broader terminology. The parties disputed whether the court should consider the earlier legal position, the defect in the previous law and the remedy introduced by the Legislature.\n\nThe court must determine when ordinary grammatical meaning should prevail, when a departure may be justified to avoid absurdity and when the legislative mischief may be considered. Based on the facts above and the applicable principles of interpretation, answer MCQs q14 and q15.

The hospital argues that the passenger restriction should not apply to emergency ambulances because applying the ordinary meaning of the words would produce an inconvenient outcome. If the statutory wording is clear and unambiguous and admits only one interpretation, which rule should ordinarily guide the court?

1. The harmonious construction rule, under which the court must treat every inconvenient statutory requirement as inapplicable.
2. The mischief rule, under which the court must always disregard the enacted words and adopt the interpretation most favourable to the hospital, as specifically evaluated under the mandatory statutory framework and applicable regulatory guidelines.
3. The golden rule, under which the court can introduce any exception that appears consistent with the general purpose of the enactment.
4. The literal rule, under which the words must ordinarily be given their natural and grammatical meaning without adopting a hypothetical construction merely because another interpretation appears more desirable. (correct answer)

Answer: D — The literal rule, under which the words must ordinarily be given their natural and grammatical meaning without adopting a hypothetical construction merely because another interpretation appears more desirable.

Working. Statutory language: assumed clear and unambiguous. Applicable primary rule: literal construction. Natural and grammatical meaning ordinarily prevails.

Explanation. The literal rule is the primary rule of construction. Where the statutory language is clear and unambiguous and is capable of only one interpretation, the court ordinarily gives the words their natural, ordinary and grammatical meaning. A court cannot replace the enacted language with a hypothetical construction simply because it considers another outcome more consistent with the supposed object or policy of the legislation.

Where it goes wrong. Confusing an inconvenient result with a legally established absurdity that justifies departure from the literal meaning.

Authority. ICAI Study Material, Interpretation of Statutes, Chapter 2, pages 2.11-2.12.

Question 15 · 2 marks · Interpretation of Statutes · hard

In the dispute concerning the mechanically assisted mobility device, which approach most appropriately describes the application of the mischief rule?

1. The court must apply the literal rule exclusively because legislative history and the previous state of law can never be considered.
2. The court must automatically apply the golden rule whenever the statutory provision is capable of two interpretations, without examining the previous law or the defect it sought to remedy.
3. The court may select any interpretation that produces a socially desirable result, even if the language of the provision cannot reasonably support that interpretation.
4. The court may examine the previous state of law, the defect or mischief that existed, the remedy introduced by the legislation and the reasons for that remedy, and adopt a construction that suppresses the mischief and advances the remedy where the statutory language is ambiguous. (correct answer)

Answer: D — The court may examine the previous state of law, the defect or mischief that existed, the remedy introduced by the legislation and the reasons for that remedy, and adopt a construction that suppresses the mischief and advances the remedy where the statutory language is ambiguous.

Working. Four inquiries: (1) Previous law. (2) Defect or mischief. (3) Legislative remedy. (4) Reason for the remedy. Application requires ambiguity and a construction that suppresses the mischief and advances the remedy.

Explanation. The rule in Heydon's Case, also known as the mischief rule, requires consideration of four matters: the previous law, the defect or mischief in that law, the remedy provided by the Legislature and the reasons for that remedy. The objective is to suppress the mischief and advance the remedy. The study material explains that this rule can be applied where the present law is ambiguous. It does not authorise a court to invent an interpretation unsupported by the statutory language.

Where it goes wrong. Confusing the golden rule, which permits limited departure to avoid absurdity, with the mischief rule, which examines the previous law and the defect addressed by the enactment.

Authority. ICAI Study Material, Interpretation of Statutes, Chapter 2, page 2.18-2.19.