COMPANY LAW

Legal Persons. – Law regulates the rights and obligations of persons, and divides

them into two classes – (i) natural persons, or (ii) artificial persons. Natural persons are

human beings of different degrees of capacity with whom we have been dealing so far.

Artificial persons are such as are created and devised by human laws for the purposes of

society and government, which are called Corporations or Companies. We shall, in the

present Chapter, deal with this legal person – the Corporation or Company.

Corporation. – A Corporation is an artificial person, with a distinctive name, a

common seal, and created by law for the purpose of preserving in perpetual succession

rights which would fail if vested in a natural person. Corporations are either “Corporations

Sole” or “Corporations Aggregate.”

Company and its Meaning. – In the ordinary common parlance, a company means

a group of persons associated to achieve some common objective. Our object is to deal with

a company which is formed for carrying on some business and providing for limited liability of

its members. Keeping this type in mind we may define a company as a voluntary association

for profit with capital divisible into transferable shares with limited liability, having a corporate

body and common seal. The company is an artificial legal person created by law and

endowed with certain powers. It exists in the eyes or contemplation of law as thought it were

a natural person, separate and distinct from the persons who are its members. As the

company is created by law and is not itself a human being and so has no physical existence,

it is called artificial; and since it is clothed with many or the rights of a real person, it is called

a person. It is accordingly an artificial, legal person.

This concept of the company as being a separate, legal person is fundamental in

understanding the rights and duties that arise in connection with companies. It means that

property of the company is not owned by the members who own shares but by the company.

Debts of the company are debts of this artificial legal person and not of the people running
the company or owning shares in it. The company has a right to sue and can be sued, can

own property and have banking account in its own name, own money and be a creditor but

you cannot shake it by the hand, or knock it down in a fit of temper.

In consequence of the company being an entity separate and distinct from its

shareholders, the life a company is not measured by the life of any member. Accordingly, a

company has independent life in the sense that it continues to exist without regard to the

death of the individuals involved in its corporate affairs or the transfer by them of their

interests in the company; even the death of all its members does not end the company. On

account of this separateness between the company and its members, a shareholder can be

its creditor, too. Also, a shareholder cannot be held liable for the acts of the company, even

though he holds virtually the entire share capital, as may happen in what is known as a

“One-man Company.” Similarly, the shareholders cannot bind the company by their acts;

they are not its agents. These points are brought out by the House of Lords in the celebrated

case of Salomon v. Salomon & Company Limited (1887) A.C. 22.

In this case, one Saloman, who carried on a prosperous leather business, sold it in

solvent condition for the sum of £30,000 to a company which he formed consisting of

himself, his wife and a daughter and his four sons as shareholders. His wife, daughter and

four sons took one £1 share each. Salomon took 20,000 £1 shares and debentures of the

amount of £10,000 secured by a floating charge on the company’s assets as the price of the

business transferred to the company. The company ran into difficulties and had to be wound

up. The total assets amounted £6,050; its liabilities were the £10,000 secured debentures

and £8,000 owing to unsecured creditors who claimed the entire assets of £6,050, on the

ground that the company and Salomon were one and the same person and that the

company was mere “alias” or agent for Saloman, and hence they should be paid in priority to

Salomon. The House of Lords rejected this contention of the creditor and held that as soon

as the company was duly incorporated, it became in the eyes of the law a separate and
distinct, as well as independent person from Salomon and was not his agent or trustee for

him. Salomon, though holding almost all the shares in the company, was also a secured

creditor, and so must be paid his debt out of the assets of the company in priority to

unsecured creditors.

The legal personality and limited liability are the two important features of a company.

A person by buying shares, becomes entitled to participate in the profits when the company

decides to divide them, and is at liberty to dispose of them whenever he likes; and it

anything goes wrong with the company, his liability is limited by the nominal amount of the

shares held by him. As a natural consequence of incorporation and transferability of shares,

the company has perpetual succession. This means the life of the company is independent

of the lives of its members, giving immortality to the company. Hence members may come

and members may go, but the company goes on (until dissolved).

To sum up, the principal characteristics of a company may be stated as follows:

1. A company has a separate and distinct personality from its members which

constitute it.

2. In consequence of incorporation, it is an artificial legal person, enjoying

similar rights and owing similar obligations as a natural person.

3. As a corporate person the company is entitled to own and hold property as

distinct from its members.

4. As a juristic person distinct from its members it has perpetual succession.

5. The shares in the share capital of the company are generally freely

transferable. This makes the life of the company independent of the lives of its members.

6. The liability of its shareholders is limited to the unpaid value of the shares

held by them.

7. A company, though a person having nationality and a domicile is not a citizen.

It cannot therefore exercise the right of franchise, nor can it be punished, in its own person,
by imprisonment for criminal offences, although it can be fined for the contravention of the

provisions of the Companies Act.

8. As the company is not a citizen and can act only through natural persons, it

has no fundamental rights under the Constitution.

Lifting or Piercing the Corporate Veil. – The advantages of incorporation, as

explained in the previous section, particularly the concept of separate and distinct entity, are

allowed to be enjoyed only by those who do not make a fraudulent and dishonest use of the

company-the artificial legal person. For instance, the Court may not recognise the separate

existence of a company where the only purpose for which it appears to have been formed is

the evasion of taxes.

The Court may also find it just to break through the corporate shell and apply the

principle of what is known as lifting or piercing the corporate veil, where it may become

necessary in public interest to examine the character of persons in real control of the

corporate affairs. In Daimler & Co. Ltd. v. Continent Tyre & Rubber CO. (1916) 2 A.C.

307, the company was registered in England, but on the declaration of war between England

and Germany, the persons in control of the company and resident in Germany became alien

enemies. The Court disregarded the corporate fiction of separate entity of the company and

declared it an enemy company.

If the number of members falls below the statutory minimum, and the company

carries on business for money an 6 months, while the number is so reduced, every

shareholder who is aware of these facts shall be directly and severally liable to the creditors

for the debts of the company contracted during that time, the creditors being permitted to

look behind the company to the owners of the shares for their satisfaction. Thus, the

privilege of limited liability is lost by the shareholder.

which are created by Charter granted by the King or Queen in exercise of an ancient

prerogative vested in the Crown.

Types of Companies-

1. Chartered Company - A chartered company is regulated by its charter and the

Company Act does not apply to it. Such companies have no place in India since

Independence.

2. Statutory Companies, like the Reserve Bank of India or the State Bank of India,

which are created by Special Acts of Parliament or State Legislature. A statutory company is

governed by the provisions of the special Act creating it. The Companies Act does not apply

to such companies.

3. Registered Companies, which are incorporated under the Companies Act, 1956

or were registered under the previous Companies Acts therein consolidated and recognised.

A registered company may be an unlimited company, in which case the liability of

its members would be unlimited so that they can be called upon to pay to the full extent of

their fortunes in order to meet the obligations of the company. Such companies are now

almost extinct, as a vast majority of them have registered themselves as limited companies.

Another class of a registered company is a Guarantee Company, with its capital

limited by guarantee so that each member undertakes to be liable to pay the debts, of the

company up to a certain amount in case of winding up. Clubs, trade associations and

societies for promoting social objects are examples of this type; and in the case of these

companies there is no intention to make profit.

The largest in number and most important in function are Limited Liability Companies

registered with a share capital divided into shares held by shareholders whose liability is

limited to the face value of the shares held by them. This class of company will be almost

exclusively dealt with by us.

Functionally, a registered company with limited liability may be either Private or

Public, or an Association not for Profit.

 Private Company – A private company is defined as a company which by its articles

of association, (i) restricts the right to transfer its shares, (ii) limits the number of its members

(excluding employees who are members or ex-employees who were and continue to be

members) to 50, and (iii) prohibits any invitation to the public to subscribe for any of its

shares and debentures. If two or more persons hold one or more shares jointly, they shall be

treated as a single member. The name of every private company must end with the words

“Private Limited”. Since the membership of private company is confined more or less to

friends and relatives, it enjoys certain special privileges and exemptions.

Privileges of Private Company. – A private company enjoys the following privileges

and exemptions:-

1. Only two signatories to the memorandum are sufficient to form a private company.

2. It can commence allotment of shares before the minimum subscription is

subscribed or paid.

3. It is not required to file a statement in lieu of prospectus as it is not allowed to

issue a prospectus to the public.

4. It need not offer further shares first to the existing shareholders .

5. A private company may commence business immediately after incorporation.

6. It is not required to hold the statutory meeting and file the statutory report.

7. It may issue any kinds of shares and allow disproportionate voting right.

8. A private company need have only 2 directors.

9. Its director can vote on a contract in which he is interested.

10. Provisions relating to loans made to directors, duration of appointment, etc., of

managing agents in a public company etc., do not apply to a private company.

Loss of Privileges. – A private company will lose its privileges and will be treated as

a public company, if it fails to comply with the essential requirements of a private company,

viz., restrictions on transfer of shares; limitation of its members to fifty; and prohibition of

invitation to the public to buy its shares or debentures .

 Public Company – A public company is one which is not a private company, and

whose membership is open to the public under the provisions of its articles. The minimum

number required to form such a company is seven, but there is no limitation to the maximum

number of members. It can offer shares and debentures to the public by advertising such

offer in a prospectus. Almost all the provisions of the Act apply to it.

Distinction between Public and Private Company – The two types of companies

differ in the following respect :

1. The minimum number with which a public company can be formed is seven and in

the case of a private company it is only two.

2. There is no limitation to the maximum number of members in a public company. In

the case of a private company, the number of members must not exceed fifty.

3. A public company is required to have at least three directors, but a private

company may have only two directors.

4. The directors of a public company have to file with the Registrar consent to act as

directors, but those of a private company need not do so.

5. A public company may, and usually does, invite by the issue of prospectus the

general public to subscribe to its share capital or but its debentures, but a private company

cannot do so; it must make private arrangement to raise capital.

6. The shares in a public company, as a rule, are freely transferable. In a private

company, the transfer of shares can be made subject to certain restrictions as provided in its

articles.

7. Total managerial remuneration in a public company cannot exceed 11 per cent of

the net profits, but a private company which is not a subsidiary of a public company may pay

any remuneration.

8. A public company can issue only two kinds of shares – preference and equity, but

a private company may issue any kinds of shares and even with disproportionate voting

rights.
 4.Foreign Companies – A company incorporated in a country outside India and

under the law of that other country is a foreign company. Every foreign company having a

place of business in India is required to file which the Registrar at New Delhi and also the

Registrar of the State in which such place of business is situated a certified copy of its

charter, statute or memorandum and articles defining the constitution of the company in

English language, the full address of the registered or principal office of the company and a

list of its directors and its secretary, as well as the address of the principal place of business

in India. Every foreign company must conspicuously exhibit on the outside of every office or

place of business in India the name of the company, indicating whether Private Limited or

Public Limited or unlimited, and where incorporated.

The provisions regarding books of accounts are the same as per the Indian

companies, as also regarding registration of charges. The provisions regarding prospectus

are also almost the same as for an Indian company. A foreign company, which has been

carrying on business in India and stops its business here, may be wound up as an

unregistered company, even if it has been dissolved or has ceased to exist under the laws of

country in which it was incorporated.

5. Government Company - A Government company means any company in which

not less than 51 per cent of the paid up share capital is held by the Central Government or

by any State Government or Governments, or partly by the Central Government and partly

by one or more State Governments and includes a company which is a subsidiary of a

Government company. Government companies are also subject to the provisions of the

Companies Act as any other company, except if the Central Government by notification

exempts any Government company from the application of any of the provisions of the Act.

It provides for a special procedure for audit of Government companies and lays down

that the auditor of a Government company shall be appointed or re-appointed by the Central

Government on the advice of the Comptroller and Auditor General of India. The C. & A. G.

can direct the manner in which the accounts are to be audited, and may even conduct a
supplementary audit. His report, if any, must be placed before the annual general meeting

along with the auditor’s report. In addition to the annual report on the working of the

company, the Central Government must place before both Houses of Parliament an annual

report on the working and affairs of each Government company, together with the audit

report and any comments of C. & A. G. of India.

FORMATION OF COMPANY

The promoters (persons wishing to form a company) must file with the Registrar of

the State in which the registered office of the company is to be situate –

1. The Memorandum of Association;

2. The Articles of Association;

3. A statement of nominal capital,

4. The agreement, if any, which the company proposes to enter into with the

proposed managing agent;

5. A statutory declaration by an advocate or an attorney or a chartered accountant,

engaged in the formation of the company, that all requirements of the Act and Rules

thereunder in respect of registration have been complied with.

The above documents are all that a private company has to file. A public company,

having share capital, must file, in addition to the above, the following documents :-

6. A list of persons who have consented to be directors of the company;

7. A written consent duly signed to act as directors;

8. An undertaking in writing signed by each such director to take and pay for their

qualification shares, if any.

Ordinarily, both the private and public companies will file the notice of their addresses

of the Registered office;

When the necessary stamp duty and the registration fee have been paid and the

Registrar is satisfied that everything is in order, he will enter the name of the company in the

register of companies maintained by him and issue a Certificate of Incorporation with

gives the company a legal existence from the date given on it. This certificate is a conclusive

evidence that everything is in order as regards registration and that the company has come

into being with rights and obligations of a natural person, competent to enter into contracts.

PROMOTER

The “promotion” of a company is a comprehensive term denoting that process by

which a company is “incorporated” or brought into existence as a corporate body, and

‘floated’, or established financially as a going concern, by the issue of a prospectus. Anyone

who assumes primary responsibility with regard to matters relating to promotion, or any of

them, may be held to be a “promoter”. “The term ‘promoter,’ “ said Boden L. J. “is a term not

of law but of business, usually summing up in a single word a number of business

operations familiar to the commercial world by which a company is generally brought into

existence.” The word promoter is used in common parlance to denote any individual,

syndicate, association, partnership, or company, which takes all necessary steps to create

and mould a company and set it going.

A promoter stands in a fiduciary relation to the company it promotes and to those

persons whom he induces to become shareholders in it. Although a promoter is not an agent

or trustee of the company before its formation, yet the responsibility of an agent and trustee

is placed upon him to account for all moneys secretly obtained by him. Consequently, a

promoter must act honestly, and must not make, directly or indirectly, any profit at the

expense of the company he is promoting, although he may receive some remuneration for

his work. The usual ways of receiving remuneration by the promoter are: (1) by selling to the

company at a profit some property purchased by the promoter before he became one; (2) by

taking a commission on the shares sold; (3) by taking a grant of some shares of the

company; (4) by taking a grant of a lump sum of money from the company.

MEMORANDUM OF ASSOCIATION

The Memorandum of Association of a company is of supreme importance in

determining its powers and, in this respect, it is the charter of the company, which contains
the fundamental conditions upon which alone the company can be incorporated. It defines

as well as confines, the powers of the company, so that it not only shows the object of its

formation, but also the utmost scope of its operation beyond which its action cannot go. It, in

a way, regulates the external affairs of the company in relation to outsiders. Its purpose is to

enable shareholders, creditors and all those who deal with the company to know what its

powers are and what is the range of its activities or enterprise.

The Memorandum must be printed, divided into paragraphs numbered consecutively

and signed by seven subscribers (two in the case of a private company), in the presence of

a witness who shall attest the signature of each subscriber. Each subscriber must add his

address, description and occupation, and the number of shares taken.

Contents of Memorandum –The memorandum of a company limited by shares

must state the following :-

(1) The name of the company, with “limited” or “private limited” as the last words;

(2) The State in which the registered office of the company is to be situate;

(3) The objects of the company.

(4) The fact that the liability of the members is limited;

(5) The proposed amount of the capital, and its division into shares of a fixed amount;

and

(6) The declaration of associations.

1.Name of the Company – Section 20(1) provides that no company must be

registered by a name which, in the opinion of the Central Government, is undersirable. This

enables the Government to reject a name without giving any reason. The Registrar will

continue, as before, to refuse names identical with, or too closely resembling names already

on the register as undesirable names. The company must not give an impression that the

company is carrying on the business of some other well established company. Under the

Emblem and Names (Prevention of Improper Use) Act, 1950, the Government may declare

what names and emblems are not to be used by companies in trade marks and patents. The
use of the following has been prohibited under the above Act, viz. name and emblem of the

U.N.O. and the W.H.O., the Indian National Flag, the Official Seal and Emblems of the

Central and State Governments. Subject to the above restrictions a company may adopt any

name it likes. If by inadvertence a name is selected which is similar to that of an existing

company, it must be changed.

Once the name is registered, it must be painted or affixed on the outside of every

office or place of business, in a conspicuous position in letters easily legible in the language

in general use in the locality. It must be engraved on the seal, and mentioned in all notices,

advertisements, other official publications, negotiable instruments and orders for money or

goods (Section 147).

2. Registered Office. – Every company must have a registered office as from the

date on which it commences business or the 30th day after incorporation date whichever is

earlier, to which notices and all other communications can be sent.

3. Objects Clause – The objects clause indicates the extent of company powers and

sphere of its activities. It defines and confines the scope of company’s powers, and once

registered, it can only be altered as provided by the Act. The purpose of the memorandum is

two fold: One, to inform the members in what kind of business their capital may be used;

secondly, to inform persons dealing with the company what its powers, are. A company

cannot do anything beyond its powers, and any act beyond such powers is ultra vires and

void and cannot be ratified even by the assent of the whole body of shareholders. The

objects should, therefore, be clearly set forth in the memorandum. Ambiguous and general

provision will not be of any use. Although express powers are necessary a company may do

anything which is incidental to and consequential upon the powers specified, and the act will

not be ultra vires. Thus a trading company has an implied power to borrow, draw and accept

bills in the ordinary form, but a railway company cannot issue bills, although it may borrow

money.
 As the procedure laid down in Section 17 of the alteration of the objects clause when

some new venture is contemplated is rather cumbersome and the sanction of the Court is

essential, the promoters companies have been making the objects and purposes as wide as

possible. This practice often enabled directors to participate in activities which were neither

the main activities nor were they ancillary thereto, but were remote in character and far

removed from the main purpose. Very often, the members of the company knew nothing or

where they did know, they could not do anything. In order to enable the shareholders to

have a say in the matter, and also to let the doctrine of ultra vires have some play, Section

13 of the Act was amended on 1965 so as to make it compulsory in future for the promoters

to specify in clear terms the Main and Subsidiary objects of the company.

Section 13, as amended, provides in clauses (c) and (d) as follows :-

(c) in the case of a company in existence immediately before October 15, 1965, the

memorandum shall state the objects of the company;

(d) in the case of a company formed after October 14, 1965, the memorandum must

state –

(i) the main objects of the company to be pursued by the company on its

incorporation and objects incidental and ancillary to the attainment of the main objects;

(ii) other objects of the company not included in subclause (i).

An amendment to Section 149 prohibits a company from commencing any new

business (as stated under other objects) without obtaining the prior approval of the

shareholders by a special resolution passed in a general meeting. In some special cases the

Central Government may allow new business to be commenced even if it is approved by an

ordinary resolution.

4.LIMITATION OF LIABILITY

A declaration that the liability of the members of the company is limited to the

amounts unpaid on their shares, must be made in the memorandum. If a shareholder has

paid Rs.50 on a Rs.100 share, he be called upon to pay the balance of Rs.50, and if another
has paid Rs.100, he holds a full-paid share and cannot be called upon to pay anything. But

there is one exception to this rule, viz., that if a company continues to carry on business for

more than 6 months after the membership has fallen below 7 in the case of public company,

and 2 in the case of a private company, then all members aware of the fact are fully and

severally liable for all debts contracted after the 6 months, i.e., their liability becomes

unlimited.

5 Capital Clause :- The capital clause in the memorandum of a company, having a

share capital, states the amount of capital with which it is registered, divided into

shares of a certain amount. This capital is called the “registered”, “nominal” or

“authorised” capital. The effect of this caluse is that the company cannot issue more

shares than are authorised by the memorandum for the time being. A public

company can issue only two kinds of shares – Preference and Equity and the shares

must not give disproportionate voting rights. A private company may however, issue

any kinds of shares and with disproportional voting rights (Sections 85, 88, 90).

6 Declaration of Association or the Association Clause – At the end of the

memorandum of every company there is a declaration of association or an association

clause which reads something like this: “We, the several persons whose names and

addresses and occupations are subscribed, are desirous of being formed into a company in

pursuance of this memorandum of association and respectively agree to take the number of

shares in the capital of the company set opposite our respective names”. Then follow the

names, addresses, occupations, the number of shares of each person has taken and his

signature attested by a witness. At least 7 subscribers must sign the memorandum in the

case of a public company although 2 are sufficient in the case of private company.

ALTERATION OF MEMORANDUM

For the purposes of alteration, the provisions contained in the memorandum are

classified into two heads. Conditions and other provisions. The “conditions” are those

provisions which are compulsory clauses, namely, the name, the place of registered office
(situation) objects, limited liability and share capital. The conditions can be altered only as

expressly provided by Sections 17, 21, 94, 99, 100 and 106.

The other provisions, such as the terms of appointment of managing director or

manager contained in the memorandum can be altered by a special resolution with the

approval of the Central Government, or a clause in the memorandum fixing limit of dividends

to be paid on a particular class of shares can be altered by a special resolution.

ALTERATION OF CONDITIONS

1 Change of name – The name of the company can be changed any time by a special

resolution and with the written approval of the Central Government. If the change merely

involves the addition or deletion of the word “Private” on the conversion of a public company

into a private company or vice versa, no approval of the Central Government is necessary.

The change must be communicated to the Registrar by filing a printed or type written copy of

the special resolution within 30 days of the passing thereof. The Registrar will then issue a

fresh certificate of incorporation, and the change of name will be effective only there after.

The changed name should be noted in each copy of the memorandum and articles.

2 Change in Registered Office – The registered office may be changed any time from

one place to another within the local limits of the city, town or village where it is situated and

a notice of the change be given to the Registrar within 30 days of such change.

If the office is to be removed from one city, town or village to another city, town or

village within the same State, a special resolution should be passed, and a printed or type

written copy thereof filed within 30 days. The within 30 days of the removal of the office, a

notice to the Registrar should be given of the location of the new office.

3. Change of Registered Office from one State to another or change of objects –

The Registered office from one State to another State, or the objects of the company, can be

changed by special resolution, confirmed by the Court, if the alteration is rendered

necessary –

(a) to carry on its business more economically or more efficiently;

 (b) to attain its main purpose by new or improved means;

(c) to enlarge or change the location of its operations;

(d) to carry on some business which under existing circumstances my be

conveniently or advantageously combined with the business of the company;

(e) to restrict or abandon any of the objects specified in the memorandum;

(f) to sell or dispose of the whole, or any part, of the undertaking; or

(g) to amalgamate with any other company or body of persons.

The Court being satisfied that the notice of the resolution was given to all persons

whose interests are likely to be affected by the alteration, including the Registrar, and having

heard him and the creditors’ objections, if any, may confirm the alteration wholly or in part. A

certified copy of the Court’s order together with a printed copy of the altered memorandum

must be filed within 3 months of the date of the order with the Registrar, who will register

them and issue a certificate which will be conclusive evidence that everything has been

done properly (Section 17-19). The alteration of the objects clause must leave the business

of the company substantially what it was before with only such changes in the mode of

conducting it as would enable it to be carried on more economically or more efficiently.

Where the alteration involves a transfer of the registered office from one State to

another, the certified copy of the Court’s order confirming the change must be filed with the

Registrars of both the States who will register the same. All the records of the company will

then be transferred to the Registrar of the State to which the registered office of the

company has been transferred.

4. Alteration of Capital – Section 94 provides that a limited company having a share

capital may, if so authorised by its articles, alter the conditions of its memorandum relating to

capital by ordinary resolution in general meeting.

Articles of Association-

Companies Act defines Articles of Association as “Articles means the Articles of

Association of a Company as originally framed or as altered from time to time in pursuance

of any previous companies law or of this Act.

Articles of Association lay down the rules and the regulations of the Company. A public

company may frame its own articles or may adopt Table A of the Schedule I of the Act or it

may adopt partly its own regulations and partly from Table A.

Articles of Association of the Company are the rules and regulations for the management of

the internal affairs of the Company. They lay down the rules by which the objects of the

Company are to be carried out. They regulate the conduct of the shareholders, the officers

and the creditors of the Company.

Articles of Association must be signed and registered by the subscribers to the

memorandum of association.

Articles of Association of the Company bind the Company and the shareholders as if they

had been signed by each one of them. They bind them existing and the future shareholders

of the Company.

Articles of Association must be printed and signed by each subscriber to the Memorandum

of Association. The signatures must be attested by at least one witness.

Cotents of Articles of Association-

The Articles of Association should be paragraphed ,consecutively numbered and lay down

the following rules-

1] Adoption of preliminary contracts, if any

2] Nature and value of shares and different classes of shares

3] Regarding appointment, remuneration, powers, duties etc. Of the directors and officers of

the Company

4] Regarding rights of different classes of shareholders,

5] The rules regarding the transfer and transmission of shares,

6] Making of calls, allotment of shares,

7] Forfeiture of shares, Reorganization of share capital,

8] Regarding the notices of the meeting, voting rights, quorum, proxy etc.,

9] Regarding the borrowing powers of the Company and the mode of the borrowing,

10] Regarding the winding up of the Company,

11] Regarding keeping of the Registers,

12] Rules regarding alteration of the capital etc,etc.

Doctrine of Indoor Management-

The objects with which a Company is established and the rules and regulations by which

these objects are carried out are stated in the memorandum and articles of association of

the Company not only for the benefit of the members to know the powers of the Company

and the limitations placed on them but also for the information to the outsiders who may deal

with the Company. These documents are registered with the Registrar of the Companies.

They are public documents and hence outsider can get a copy of these documents from the

office of the Registrar by paying a certain fee and thus is expected to know the powers of the

Company as stated in Memorandum of Association.

Thus it will be observed that any person dealing with the Company is supposed to know the

powers and limitations of the Company and its officers. Hence if a Company goes beyond

them powers conferred on it by the memorandum of association and an outsider enters into

contract or the act is beyond the powers of the director, he has no right to sue the Company.

This rule was laid down inn the case of Royal British Bank vs. Turquand [1836].

In this case the directors of the Bank gave a bond to Turquand which they had power to do

under articles of association provided a resolution authorizing them to do so had been

passed. In fact no resolution authorizing the directors to issue the bond to Turquand had

been passed. Turquand sued the Bank on the bond. It was argued by the Bank that since no

resolution authorizing the directors to issue the bond as required by the articles had been

passed by it, the suit by Turquand was not maintainable. It was held by the Court that
Turquand could sue the Bank notwithstanding the fact that no such resolution had been

passed by the Bank. The Court further observed that an outsider was expected to know the

powers of the Bank and not to see whether all the formalities ( in this case passing of the

resolution by the Bank)had been gone through or not. Such formalities are matters of

internal management which a stranger is bound to inquire. If a stranger were expected to

make such enquiries , it would be difficult to conduct business. The stranger should know

whether the act committed by the person on behalf of the Company is normally expected to

perform such act and whether the act is not ultra vires the Company. If the answer is yes, it

would be quite safe to enter into such a contract. He need not inquire whether a few

formalities which are necessary to be gone through before the director etc. enter into

contract had been gone through or not. This rule is known as Doctrine of Indoor

Management.

Doctrine of ultra vires-

It means “beyond the powers”. The powers of the Company beyond which it can not act are

laid down in the object clause of the memorandum of association. If the Company goes

beyond the powers conferred on it the contract or the act will be void and neither the

Company nor the outsiders will be entitled to enforce such a contract. Thus those who deal

with a Company are deemed to have constructive notice of the Company’s powers. If they

do not do so it is their fault. If even after knowing that the act is not within the powers of the

Company, they enter into a contract with the Company, they must suffer the consequences.

Such a contract or act is not binding on the Company.

It may be stated here that an ultra vires act committed by a Company can not be ratified

even if all the shareholders pass a resolution to that effect. The object of the doctrine of ultra

vires is to assure the shareholders as well as creditors of the Company that the funds and

the assets of the Company will not be utilized for any purpose except those stated in the

memorandum. For example, a Company formed for the purpose of trading in electric goods

cannot manufacture electric appliances because that act will be ultra vires the Company.
Doctrine of Constructive Notice-

Memorandum and Articles of Association must be registered with the Registrar of

Companies. A Company is registered on the basis of these documents. It is only then that it

can be formed. After the registration of these documents ,they become public documents

because any member of the public can inspect them at the office of the Registrar of

Companies after paying nominal fees. Any person, therefore, dealing with the Company is

supposed to have seen them or to have notice of their contents. He is deemed to know the

powers of the Company or the directors. For example, if the Articles provide that a bill of

exchange must be signed by two directors whereas the bill was signed by only one director,

the holder can not claim the payment under such a bill. He can not plead that he did not

know the powers the directors. He is deemed by law to have a constructive notice of the

powers conferred on the directors by the Articles of the Company.

Prospectus-

It means any document described or issued as a prospectus and includes any notice,

circular, advertisement or other document inviting offers from them public for the subscription

or purchase of any shares in or debentures of any body corporate.

Thus it is important that prospectus must invite offers from the members of the public to

purchase its shares. If a promoter issues the prospectus to a few friends or relatives, it is not

conferred as an invitation to the members of public. Before it is issued to the public, it must

be filed with the Registrar.

The object of issuing the prospectus is to let the public know of the establishment of the

Company, its objects, its prospects etc. to induce the members of the public to purchase its

shares or debentures. It is a kind of invitation to the public to make an offer to the Company

for the purchase of its shares and debentures. If the invitation to purchase its shares has

been sent to the existing shareholders, it will not amount to a prospectus. The invitation to

purchase its shares or debentures to the public or any class of public is called a prospectus.
Every public Company must issue prospectus though a private Company should not do so.It

must be signed by all directors.

A public Company issues the prospectus so that its shares may be sold and minimum

subscription may be applied for. If the minimum subscription is not applied for, the

application money has to be returned to the applicants. If it is not returned, the directors are

personally liable to refund the application money and pay interest on the money so

refundable.

Contents of the Prospectus-

1] main objects of the Company

2] names, occupations and addresses of the promoters and no. shares taken by them

3] main classes of shares into which the share capital is divided, and the no. of shares

4] qualification shares of the directors

5] date of opening of subscription list

6] date of closing of subscription list

7] amount payable as application money on allotment and on calls

8] profit and loss account for previous three years

9] rate of dividends paid for previous three years

10] statement of assets and liabilities previous three years etc.etc.

There are many points, which must be stated in the prospectus.

Misleading Prospectus-

In order to sale the shares of the Company and to collect minimum subscription the

promoter may issue a very attractive prospectus to induce the public to purchase the shares

of the Company. It is possible that in their enthusiasm they may make untrue statements in

the prospectus in which case it will be called a misleading or false prospectus.

A prospectus is the basis on which the contract for sale and purchase of the shares is

entered into between the Company and the shareholders. If there is any misrepresentation

in the prospectus a share holder has a right to legal action against the company and the
promoters. Hence it must seen that there is no untrue statements in it or no material fact has

been omitted. It is said that prospectus must tell the truth , the whole truth and nothing but

truth.

The liability of the promoter or director who has authorized the issue of a misleading

prospectus is two-fold, i,e.civil and criminal. Under civil liability, a person who has purchased

the shares on the basis of misleading prospectus can sue to rescind the contract and return

the share to the Company and get back the money together with interest paid for the

purchase the shares from the Company. Under criminal liability, promoter or director are

liable to imprisonment and fine or both.

It may be stated here that the original purchaser only who has the right to rescind the

contract provided he had purchased the share4s on the faith of misleading prospectus. A

person who has purchased the shares in the open market or the subscriber to the

memorandum of association have no such right.

Share Capital of the Company-