Doctrine of indoor management

Memorandum of Association and articles of association are two most important documents
needed for the incorporation of a company. The memorandum of a company is the constitution
of that company. It sets out the (a) object clause, (b) name clause, (c) registered office clause, (d)
liability clause and (e) capital clause; whereas the articles of association enumerate the internal
rules of the company under which it will be governed.
Undoubtedly, both memorandum of association and the articles of association are public
documents in the sense that any person under section 610 of Indian company act, 1956 may
inspect any document which will include the memorandum and articles of the company kept by
the registrar of companies in accordance with the rules made under the destruction of records act,
1917 being documents filed and registered in pursuance of the act. As a consequence, the
knowledge about the contents of the memorandum and articles of a company is not necessarily
restricted to the members of the company alone. Once these documents are registered with the
registrar of companies, these become public documents and are accessible by any members of
the public by paying the requisite fees. Therefore, notice about the contents of memorandum and
articles is said to be within the knowledge of both members and non-members of the company.
Such notice is a deemed notice in case of a members and a constructive notice in case of nonmembers. Thus every person dealing with the company is deemed to have a constructive notice
of the contents of the memorandum and articles of the company. An outsider dealing with the
company is presumed to have read the contents of the registered documents of the company. The
further presumption is that he has not only read and perused the documents but has also
understood them fully in the proper sense. This is known as the rule of constructive notice. So,
the doctrine or rule of constructive notice is a presumption operating in favour of the company
against the outsider. It prevents the outsider from alleging that he did not know that the
constitution of the company rendered a particular act or a particular delegation of authority ultra
vires.
The doctrine of constructive notice' is more or less an unreal doctrine. It does not take notice of
the realities of business life. People know a company through its officers and not through its
documents. The courts in India do not seem to have taken it seriously though. For example, in
Dehra Dun Mussorie Electric Tramway Co. v. Jagmandardas, the Allahabad high court allowed
an overdraft incurred by the managing agent of a company when under the articles the directors
had no power to delegate their borrowing power.
The doctrine of indoor management is an exception to the rule of constructive notice. It imposes
an important limitation on the doctrine of constructive notice. According to this doctrine
"persons dealing with the company are entitled to presume that internal requirements prescribed
in memorandum and articles have been properly observed". A transaction has two aspects,
namely, substantive and procedural. An outsider dealing with the company can only find out the
substantive aspect by reading the memorandum and articles. Even though he may find out the
procedural aspect, he cannot find out whether the procedure has been followed or not. For
example, a company may have borrowing powers by passing a resolution according to its
memorandum and articles. An outsider can only found out the borrowing powers of the
company. But he cannot find out whether the resolution has in fact been passed or not. The

outsiders dealing with the company are presumed to have read and understood the memorandum
and articles and to see that the proposed dealing is not inconsistent therewith, but they are not
bound to do more; they need not inquire into the regularity of the internal proceedings as
required by the memorandum and articles. They can presume that all is being done regularly.
The doctrine of indoor management is also known as the TURQUAND rule after Royal British
Bank v. Turquand. In this case, the directors of a company had issued a bond to Turquand. They
had the power under the articles to issue such bond provided they were authorized by a
resolution passed by the shareholders at a general meeting of the company. But no such
resolution was passed by the company. It was held that Turquand could recover the amount of
the bond from the company on the ground that he was entitled to assume that the resolution was
passed.
In one of the case the rule was stated thus: "If the directors have the power and authority to bind
the company but certain preliminaries are required to be gone through on the part of the company
before that power can be duly exercised, and then the person contracting with the directors is not
bound to see that all these preliminaries have been observed. He is entitled to presume that the
directors are acting lawfully in what they do."
In another case where the plaintiff sued the defendant company on a loan of Rs.1,50,000, it was
held that where the act done by a person, acting on behalf of the company, is within the scope of
his apparent or ostensible authority, it binds the company no matter whether the plaintiff has read
the document or not. In this case among other things the defendant company raised the plea that
the transaction was not binding as no resolution sanctioning the loan was passed by the Board of
directors. The court after referring to turquand's case and other Indian cases, held that the passing
of such a resolution is a mere matter of indoor or internal management and its absence under
such circumstances, cannot be used to defeat the just claim of a bona fide creditor.
The rule is based on public convenience and justice and the following obvious reasons:
1. the internal procedure is not a matter of public knowledge. An outsider is presumed to know
the constitution of a company, but not what may or may not have taken place within the doors
that are closed to him.
2. the lot of creditors of a limited company is not a particularly happy one; it would be
unhappier still if the company could escape liability by denying the authority of officials to act
on its behalf.
Exceptions to the doctrine of indoor management:
The exceptions to the doctrine of indoor management are as under:
1. Knowledge of irregularity: when a person dealing with a company has actual or
constructive notice of the irregularity as regards internal management, he cannot claim benefit
under the rule of indoor management. He may in some cases, be himself a part of the internal

procedure. The rule is based on common sense and any other rule would encourage ignorance
and condone dereliction of duty.
T.R Pratt (Bombay) Ltd. V. E.D. Sassoon & Co. Ltd., Company A lent money to Company B on
a mortgage of its assets. The procedure laid down in the articles for such transactions was not
complied with. The directors of the two companies were the same. Held, the lender had notice of
the irregularity and hence the mortgage was not binding.
In Howard v. Patent Ivory Co, the directors had the authority under the articles to borrow only up
to 1000 without the resolution of general meeting. For any amount beyond 1000, they needed
the consent of general meeting. But the directors borrowed 3500 from themselves without the
consent of general meeting or shareholders and accepted debentures. It was held that they had
knowledge of internal irregularity and debentures were good only up to 1000.
2. Negligence: where a person dealing with a company could discover the irregularity if he
had made proper inquiries, he cannot claim the benefit of the rule of indoor management. The
protection of the rule is also not available where the circumstances surrounding the contract are
so suspicious as to invite inquiry, and the outsider dealing with the company does not make
proper inquiry. If, for example, an officer of a company purports to act outside the scope of his
apparent authority, suspicion should arise and the outsider should make proper inquiry before
entering into a contract with the company.
Anand Bihari Lal v. Dinshaw & Co, the plaintiff, in this case, accepted a transfer of a company's
property from its accountant. Held, the transfer was void as such a transaction was apparently
beyond the scope of the accountant's authority. The plaintiff should have seen the power of
attorney executed in favour of the accountant by the company.
3. Forgery: the rule in turquand's case does not apply where a person relies upon a document
that turns out to be forged since nothing can validate forgery. A company can never be held
bound for forgeries committed by its officers. The leading case on the point is :
Ruben v. Great Fingall Consolidated Co., the secretary of a company issued a share certificate
under the company's seal with his own signature and the signature of a director forged by him.
Held, the share certificate was not binding on the company. The person who advanced money on
the strength of this certificate was not entitled to be registered as holder of the shares.
4. Acts outside the scope of apparent authority: if an officer of a company enters into a
contract with a third party and if the act of the officer is beyond the scope of his authority, the
company is not bound. In such a case, the plaintiff cannot claim the protection of the rule of
indoor management simply because under the articles the power to do the act could have been
delegated to him. The plaintiff can sue the company only if the power to act has in fact been
delegated to the officer with whom he entered into the contract.
Kreditbank Cassel v. Schenkers Ltd,a branch manager of a company drew and endorsed bills of
exchange on behalf of the company in favour of a payee to whom he was personally indebted.
He had no authority from the company to do so. Held, the company was not bound. But if an

officer of a company acts fraudulently under his ostensible authority on behalf of the company,
the company is liable for his fraudulent act.
Conclusion: Thus the doctrine of indoor management seeks to protect the interest of the
shareholders who are in minority or who remains in dark about whether the working of the
internal affairs of the company are being carried out in accordance with the memorandum and
articles. It lays down that persons dealing with a company having satisfied themselves that the
proposed transaction is not in its nature inconsistent with the memorandum and articles, are not
bound to inquire the regularity of any internal proceeding.

DOCTRINE OF ULTRA VIRES-EFFECTS AND EXCEPTIONS CONCEPT The object clause

of the Memorandum of the company contains the object for which the company is formed. An
act of the company must not be beyond the objects clause, otherwise it will be ultra vires and,
therefore, void and cannot be ratified even if all the members wish to ratify it. This is called the
doctrine of ultra vires, which has been firmly established in the case of Ashtray Railway Carriage
and Iron Company Ltd v. Riche. Thus the expression ultra vires means an act beyond the powers.
Here the expression ultra vires is used to indicate an act of the company which is beyond the
powers conferred on the company by the objects clause of its memorandum. An ultra vires act is
void and cannot be ratified even if all the directors wish to ratify it. Sometimes the expression
ultra vires is used to describe the situation when the directors of a company have exceeded the
powers delegated to them. Where a company exceeds its power as conferred on it by the objects
clause of its memorandum, it is not bound by it because it lacks legal capacity to incur
responsibility for the action, but when the directors of a company have exceeded the powers
delegated to them. This use must be avoided for it is apt to cause confusion between two entirely
distinct legal principles. Consequently, here we restrict the meaning of ultra vires objects clause
of the companys memorandum. Basic principles included the following: An ultra vires
transaction cannot be ratified by all the shareholders, even if they wish it to be ratified. The
doctrine of estoppel usually precluded reliance on the defense of ultra vires where the transaction
was fully performed by one party A fortiori, a transaction which was fully performed by both
parties could not be attacked. If the contract was fully executory, the defense of ultra vires might
be raised by either party. If the contract was partially performed, and the performance was held
to be insufficient to bring the doctrine of estoppel into play, a suit for quasi contract for recovery
of benefits conferred was available. If an agent of the corporation committed a tort within the
scope of his or her employment, the corporation could not defend on the ground the act was ultra
vires. ORIGIN AND DEVELOPMENT Doctrine of ultra vires has been developed to protect the
investors and creditors of the company. The doctrine of ultra vires could not be established
firmly until 1875 when the Directors, &C., of the Ashbury Railway Carriage and Iron Company
(Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653 was decided by the House of Lords. A
company called The Ashbury Railway Carriage and Iron Company, was incorporated under
the Companies Act, 1862. Its objects, as stated in the Memorandum of Association, were to
make, and sell, or lend on hire, railway carriages and waggons, and all kinds of railway plant,
fittings, machinery, and rolling-stock; to carry on the business of mechanical engineers and
general contractors ; to purchase, lease, work, and sell mines, minerals, land, and buildings; to
purchase and sell, as merchants, timber, coal, metals, or other materials, and to buy and sell any

such materials on commission or as agents. The directors agreed to purchase a concession for
making a railway in a foreign country, and afterwards (on account of difficulties existing by the
law of that country), agreed to assign the concession to a Socit Anonyme formed in that
country, which socit was to supply the materials for the construction of the railway, and to
receive periodical payments from the English company. The objects of this company, as stated in
the Memorandum of Association, were to supply and sell the materials required to construct
railways, but not to undertake their construction. The contract here was to construct a railway.
That was contrary to the memorandum of association; what was done by the directors in entering
into that contract was therefore in direct contravention of the provisions of the Company Act,
1862 It was held that this contract, being of a nature not included in the Memorandum of
Association, was ultra vires not only of the directors but of the whole company, so that even the
subsequent assent of the whole body of shareholders would have no power to ratify it. The
shareholders might have passed a resolution sanctioning the release, or altering the terms in the
articles of association upon which releases might be granted. If they had sanctioned what had
been done without the formality of a resolution, that would have been perfectly sufficient. Thus,
the contract entered into by the company was not a voidable contract merely, but being in
violation of the prohibition contained in the Companies Act , was absolutely void. It is exactly in
the same condition as if no contract at all had been made, and therefore a ratification of it is not
possible. If there had been an actual ratification, it could not have given life to a contract which
had no existence in itself; but at the utmost it would have amounted to a sanction by the
shareholders to the act of the directors, which, if given before the contract was entered into,
would not have made it valid, as it does not relate to an object within the scope of the
memorandum of association. Later on, in the case of Attorney General v. Great Eastern Railway
Co.4, this doctrine was made clearer. In this case the House of Lords affirmed the principle laid
down in Ashbury Railway Carriage and Iron Company Ltd v. Riche5 but held that the doctrine
of ultra vires ought to be reasonable, and not unreasonable understood and applied and
whatever may fairly be regarded as incidental to, or consequential upon, those things which the
legislature has authorized, ought not to be held, by judicial construction, to be ultra vires. The
doctrine of ultra vires was recognised in Indian the case of Jahangir R. Mod i v. Shamji Ladha
and has been well established and explained by the Supreme Court in the case of A.
Lakshmanaswami Mudaliar v. Life Insurance Corporation Of India8. Even in India it has been
held that the company has power to carry out the objects as set out in the objects clause of its
memorandum, and also everything, which is reasonably necessary to carry out those objects.9
For example, a company which has been authorized by its memorandum to purchase land had
implied authority to let it and if necessary, to sell it.However it has been made clear by the
Supreme Court that the company has, no doubt, the power to carry out the objects stated in the
objects clause of its memorandum and also what is conclusive to or incidental to those objects,
but it has no power to travel beyond the objects or to do any act which has not a reasonable
proximate connection with the object or object which would only bring an indirect or remote
benefit to the company. To ascertain whether a particular act is ultra vires or not, the main
purpose must first be ascertained, then special powers for effecting that purpose must be looked
for, if the act is neither within the main purpose nor the special powers expressly given by the
statute, the inquiry should be made whether the act is incidental to or consequential upon. An act
is not ultra vires if it is found: (a) Within the main purpose, or (b) Within the special powers
expressly given by the statute to effectuate the main purpose, or (c) Neither within the main
purpose nor the special powers expressly given by the statute but incidental to or consequential

upon the main purpose and a thing reasonably done for effectuating the main purpose. The
doctrine of ultra vires played an important role in the development of corporate powers. Though
largely obsolete in modern private corporation law, the doctrine remains in full force for
government entities. An ultra vires act is one beyond the purposes or powers of a corporation.
The earliest legal view was that such acts were void. Under this approach a corporation was
formed only for limited purposes and could do only what it was authorized to do in its corporate
charter. This early view proved unworkable and unfair. It permitted a corporation to accept the
benefits of a contract and then refuse to perform its obligations on the ground that the contract
was ultra vires. The doctrine also impaired the security of title to property in fully executed
transactions in which a corporation participated. Therefore, the courts adopted the view that such
acts were voidable rather than void and that the facts should dictate whether a corporate act
should have effect. Over time a body of principles developed that prevented the application of
the ultra vires doctrine. These principles included the ability of shareholders to ratify an ultra
vires transaction; the application of the doctrine of estoppel, which prevented the defense of ultra
vires when the transaction was fully performed by one party; and the prohibition against
asserting ultra vires when both parties had fully performed the contract. The law also held that if
an agent of a corporation committed a tort within the scope of the agent's employment, the
corporation could not defend on the ground that the act was ultra vires. Despite these principles
the ultra vires doctrine was applied inconsistently and erratically. Accordingly, modern
corporation law has sought to remove the possibility that ultra vires acts may occur. Most
importantly, multiple purposes clauses and general clauses that permit corporations to engage in
any lawful business are now included in the articles of incorporation. In addition, purposes
clauses can now be easily amended if the corporation seeks to do business in new areas. For
example, under traditional ultra vires doctrine, a corporation that had as its purpose the
manufacturing of shoes could not, under its charter, manufacture motorcycles. Under modern
corporate law, the purposes clause would either be so general as to allow the corporation to go
into the motorcycle business, or the corporation would amend its purposes clause to reflect the
new venture. State laws in almost every jurisdiction have also sharply reduced the importance of
the ultra vires doctrine. For example, section 3.04(a) of the Revised Model Business Corporation
Act, drafted in 1984, states that "the validity of corporate action may not be challenged on the
ground that the corporation lacks or lacked power to act." There are three exceptions to this
prohibition: it may be asserted by the corporation or its shareholders against the present or
former officers or directors of the corporation for exceeding their authority, by the attorney
general of the state in a proceeding to dissolve the corporation or to enjoin it from the transaction
of unauthorized business, or by shareholders against the corporation to enjoin the commission of
an ultra vires act or the ultra vires transfer of real or personal property. Government entities
created by a state are public corporations governed by municipal charters and other statutorily
imposed grants of power. These grants of authority are analogous to a private corporation's
articles of incorporation. Historically, the ultra vires concept has been used to construe the
powers of a government entity narrowly. Failure to observe the statutory limits has been
characterized as ultra vires. In the case of a private business entity, the act of an employee who is
not authorized to act on the entity's behalf may, nevertheless, bind the entity contractually if such
an employee would normally be expected to have that authority. With a government entity,
however, to prevent a contract from being voided as ultra vires, it is normally necessary to prove
that the employee actually had authority to act. Where a government employee exceeds her
authority, the government entity may seek to rescind the contract based on an ultra vires claim.

EFFECT OF ULTRA VIRES TRANSACTIONS A contract beyond the objects clause of the
companys memorandum is an ultra vires contract and cannot be enforced by or against the
company as was decided in the cases of In Re, Jon Beaufore (London) Ltd ., (1953) Ch. 131, In
S. Sivashanmugham And Others v. Butterfly Marketing PrivateLtd., (2001) 105 Comp. Cas Mad
763, A borrowing beyond the power of the company (i.e. beyond the objects clause of the
memorandum of the company) is called ultra vires borrowing. However, the courts have
developed certain principles in the interest of justice to protect such lenders. Thus, even in a case
of ultra vires borrowing, the lender may be allowed by the courts the following reliefs: (1)
Injunction --- if the money lent to the company has not been spent the lender can get the
injunction to prevent the company from parting with it. (2) Tracing--- the lender can recover his
money so long as it is found in the hands of the company in its original form. (3) Subrogation--if the borrowed money is applied in paying off lawful debts of the company, the lender can claim
a right of subrogation and consequently, he will stand in the shoes of the creditor who has paid
off with his money and can sue the company to the extent the money advanced by him has been
so applied but this subrogation does not give the lender the same priority that the original
creditor may have or had over the other creditors of the company. EXCEPTIONS TO THE
DOCTRINE OF ULTRA VIRES There are, however, certain exceptions to this doctrine, which
are as follows: 1. An act, which is intra vires the company but outside the authority of the
directors may be ratified by the shareholders in proper form.20 2. An act which is intra vires the
company but done in an irregular manner, may be validated by the consent of the shareholders.
The law, however, does not require that the consent of all the shareholders should be obtained at
the same place and in the same meeting. 3. If the company has acquired any property through an
investment, which is ultra vires, the companys right over such a property shall still be secured.
4. While applying doctrine of ultra vires, the effects which are incidental or consequential to the
act shall not be invalid unless they are expressly prohibited by the Companys Act. 5. There are
certain acts under the company law, which though not expressly stated in the memorandum, are
deemed impliedly within the authority of the company and therefore they are not deemed ultra
vires. For example, a business company can raise its capital by borrowing. 6. If an act of the
company is ultra vires the articles of association, the company can alter its articles in order to
validate the act. CASE NOTES: Eley v The Positive Government Security Life Assurance
Company, Limited, (1875-76) L.R. 1 Ex. D. 88 It was held that the articles of association were a
matter between the shareholders inter se, or the shareholders and the directors, and did not create
any contract between the plaintiff and the company and article is either a stipulation which
would bind the members, or else a mandate to the directors. In either case it is a matter between
the directors and shareholders, and not between them and the plaintiff. The Directors, &C., of the
Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L.
653. The objects of this company, as stated in the Memorandum of Association, were to supply
and sell the materials required to construct railways, but not to undertake their construction. The
contract here was to construct a railway. That was contrary to the memorandum of association;
what was done by the directors in entering into that contract was therefore in direct contravention
of the provisions of the Company Act, 1862 It was held that this contract, being of a nature not
included in the Memorandum of Association, was ultra vires not only of the directors but of the
whole company, so that even the subsequent assent of the whole body of shareholders would
have no power to ratify it. The shareholders might have passed a resolution sanctioning the
release, or altering the terms in the articles of association upon which releases might be granted.
If they had sanctioned what had been done without the formality of a resolution, that would have

been perfectly sufficient. Thus, the contract entered into by the company was not a voidable
contract merely, but being in violation of the prohibition contained in the Companies Act , was
absolutely void. It is exactly in the same condition as if no contract at all had been made, and
therefore a ratification of it is not possible. If there had been an actual ratification, it could not
have given life to a contract which had no existence in itself; but at the utmost it would have
amounted to a sanction by the shareholders to the act of the directors, which, if given before the
contract was entered into, would not have made it valid, as it does not relate to an object within
the scope of the memorandum of association. Shuttleworth v Cox Brothers and Company
(Maidenhead), Limited, and Others, [1927] 2 K.B. 9 It was held that the contract, if any,
between the plaintiff and the company contained in the articles in their original form was subject
to the statutory power of alteration and if the alteration was bona fide for the benefit of the
company it was valid and there was no breach of that contract; there was no ground for saying
that the alteration could not reasonably be considered for the benefit of the company; there
being no evidence of bad faith, there was no ground for questioning the decision of the
shareholders that the alteration was for the benefit of the company; and, the plaintiff was not
entitled to the relief claimed. In Re New British Iron Company, [1898] 1 Ch. 324 It was held that
the article is not in itself a contract between the company and the directors; it is only part of the
contract constituted by the articles of association between the members of the company inter se.
But where on the footing of that article the directors are employed by the company and accept
office the terms of art. 62 are embodied in and form part of the contract between the company
and the directors. Under the article as thus embodied the directors obtain a contractual right to an
annual sum of 1000l as remuneration. It was held also that although these provisions in the
articles were only part of the contract between the shareholders inter se, the provisions were, on
the directors being employed and accepting office on the footing of them, embodied in the
contract between the company and the directors; that the remuneration was not due to the
directors in their character of members, but under the contract so embodying the provisions; and
that, in the winding-up of the company, the directors were entitled to rank as ordinary creditors
in respect of the remuneration due to them at the commencement of the winding-up. Rayfield v
Hands and Others, [1957 R. No. 603.] Field-Davis Ltd. was a private company carrying on
business as builders and contractors, incorporated in 1941 under the Companies Act, 1929 , as a
company limited by shares, having a share capital of 4,000, divided into 4,000 ordinary shares
of 1 each, of which 2,900 fully-paid shares had been issued. The plaintiff, Frank Leslie
Rayfield, was the registered holder of 725 of those shares, and the defendants, Gordon Wyndham
Hands, Alfred William Scales and Donald Davies were at all material times the sole directors of
the company. The plaintiff was a shareholder in a company. Article 11 of the articles of
association of the company required to inform the directors of his intention to transfer shares in
the company, and which provided that the directors will take the said shares equally between
them at a fair value. In accordance with this the plaintiff so notified the directors, who
contended that they need not take and pay for the plaintiffs shares, on the ground that the
articles imposed no such liability upon them. The plaintiffs claimed for the determination of the
fair value of his shares, and for an order that the directors should purchase such shares at a fair
value. It was found that the true construction of the articles required the directors to purchase the
plaintiffs shares at a fair price. Article 11 is concerned with the relationship between the
plaintiff as a member and the defendants, not as directors, but as members of the company.
Guinness v Land Corporation of Ireland, (1883) L.R. 22 Ch. D. 349 The Land Corporation of
Ireland, Limited , was incorporated under the Companies Act on the 12th of July, 1882, as a

company limited by shares. By the memorandum of association of a company limited by shares

it was stated that the objects of the company were, the cultivation of lands in Ireland , and other
similar purposes there specified, and to do all such other things as the company might deem
incidental or conducive to the attainment of any of those objects. The 8th clause of the articles of
association, provided that the capital produced by the issue of B shares shall, so far as is
necessary, be applied in making good to the holders of A shares the preferential dividend of 5
per cent., which they are to receive on the amounts paid up on their shares. This action was
brought by one of the B shareholders on behalf of himself and the others, to restrain the directors
from issuing any A shares on the footing of their being entitled to the benefit of that article, and
to restrain the directors from applying in accordance with it the capital arising from the B shares.
It was held that the application of the B capital provided for by the articles is not an application
of capital to carrying on the business of the company, but is providing an inducement to people
to take shares and subscribe capital to carry on the business and that article 8 was invalid, as it
purported to make the B capital applicable to purposes not within the objects of the company as
defined by the memorandum of association, and in a way not incidental or conducive to the
attainment of those objects, and that the directors must be restrained from acting upon it. The
articles of association of a company cannot, except in the cases provided for by sect. 12 of the
Companies Act, 1862 , modify the memorandum of association in any of the particulars required
by the Act to be stated in the memorandum. *****************************

Doctrine of Constructive Notice

The Memorandum and Articles, on registration, assume the character of public documents. The office of the Registrar
is a public office and documents registered there are open and accessible to the public at large. Therefore, every
outsider dealing with the company is deemed to have notice of the contents of the Memorandum and Articles. This is
known as Constructive Notice of Memorandum and Articles.
Under the doctrine of constructive notice, every person dealing or proposing to enter into a contract with the
company is deemed to have constructive notice of the contents of its Memorandum and Articles. Whether he actually
reads them or not, it is presumed that he has read these documents and has ascertained the exact powers of the
company to enter into contract, the extent to which these powers have been delegated to the directors and the
limitations to such powers. He is presumed not only to have read them, but to have understood them properly.
Consequently, if a person enters into a contract which is ultra vires the Memorandum, or beyond the authority of the
directors conferred by the Articles, then the contract becomes invalid and he cannot enforce it, not-withstanding the
fact that he acted in good faith and money was applied for the purposes of the company.

Doctrine of Indoor Management

The doctrine of indoor management follows from the doctrine of constructive notice laid down in various judicial
decisions. The hardships caused to outsiders dealing with a company by the rule of constructive notice have been
sought to be softened under the principle of indoor management. It affords some protection to the outsiders
against the company.
According to this doctrine, after satisfying themselves that the proposed transaction is intra vires the memorandum
and articles, persons dealing with the company are not bound to enquire whether the internal proceedings were
correctly followed. They are entitled to assume that the internal proceedings relating to the contract are regular as per
the memorandum and articles. When an outsider enters into a contract with the company, he is presumed to have
knowledge of the provisions of memorandum and articles as per the doctrine of constructive notice. But he is
not required to go beyond that and to enquire whether the internal proceedings required by these documents have
been regularly followed by the company. They need not enquire whether the necessary meeting was convened and
held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the
company had gone through all these proceedings in a regular manner. This is known as the Doctrine of Indoor
Management.
The doctrine of indoor management was first propounded by Lord Hatherlyin the celebrated case Royal British
Bank vs. Turquand. The directors of the Bank had issued a bond to Turquand. The company was empowered by its
Articles to issue such bonds provided it was authorized by a resolution of the company in general meeting. In this
case no such resolution had been passed. It was held that Turquand could recover the amount of bond from the
company on the ground that he was entitled to assume that the necessary resolution had been passed by the
company.

Exceptions to the Doctrine of Indoor Management

No benefit under the doctrine of indoor management can be claimed by a person under the following
circumstances:

Where a person dealing with the company has actual or constructive notice of any irregularity in the internal
proceedings of the company.

Where a person did not in fact consult the Memorandum and Articles of the company and consequently did
not act on knowledge of these documents.

Where a person dealing with the company was negligent and, had he not been negligent, could
have discovered the irregularity by proper enquiries.

Where a person dealing with the company relies upon a forged document or the act done by the company is
void.

Where a person enters into a contract with an agent or officer of the company and the act of
the agent/officer is beyond the authority granted to him

DOCTRINE OF ULTRA VIRES-EFFECTS AND

EXCEPTIONS
CONCEPT
The object clause of the Memorandum of the company contains the object for which the
company is formed. An act of the company must not be beyond the objects clause, otherwise it
will be ultravires and, therefore, void and cannot be ratified even if all the members wish to
ratify it. This is called the doctrine of ultra vires, which has been firmly established in the case of
Ashtray RailwayCarriage and Iron Company Ltd v. Riche. Thus the expression ultra vires means
an act beyond the powers. Here the expression ultra vires is used to indicate an act of the
company which is beyond the powers conferred on the company by the objects clause of its
memorandum. An ultra vires act is void andcannot be ratified even if all the directors wish to
ratify it. Sometimes the expression ultra vires is used to describe the situation when the directors
of a company have exceeded the powers delegated to them. Where a company exceeds its power
as conferred on it by the objects clause of its memorandum, it is not bound by it because it lacks
legal capacity to incur responsibility for the action, but when the directors of a company have
exceeded the powers delegated to them. This use must be avoided for it is apt to cause confusion
between two entirely distinct legal principles. Consequently, here we restrict the meaning of
ultra vires objects clause of the companys memorandum.
Basic principles included the following:
1. An ultra vires transaction cannot be ratified by all the shareholders, even if they wish it to
be ratified.
2. The doctrine of estoppel usually precluded reliance on the defense of ultra vires where
the transaction was fully performed by one party
3. A fortiori, a transaction which was fully performed by both parties could not be attacked.
4. If the contract was fully executory, the defense of ultra vires might be raised by either
party.
5. If the contract was partially performed, and the performance was held to be insufficient to
bring the doctrine of estoppel into play, a suit for quasi contract for recovery of benefits
conferred was available.
6. If an agent of the corporation committed a tort within the scope of his or her employment,
the corporation could not defend on the ground the act was ultra vires.

ORIGIN AND DEVELOPMENT

Doctrine of ultra vires has been developed to protect the investors and creditors of the company.
The doctrine of ultra vires could not be established firmly until 1875 when the Directors, &C., of
the Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75) L.R. 7
H.L. 653 was decided by the House of Lords. A company called The Ashbury Railway Carriage
and Iron Company, was incorporated under the Companies Act, 1862. Its objects, as stated in

the Memorandum of Association, were to make, and sell, or lend on hire, railway carriages and
waggons, and all kinds of railway plant, fittings, machinery, and rolling-stock; to carry on the
business of mechanical engineers and general contractors ; to purchase, lease, work, and sell
mines, minerals, land, and buildings; to purchase and sell, as merchants, timber, coal, metals, or
other materials, and to buy and sell any such materials on commission or as agents. The
directors agreed to purchase a concession for making a railway in a foreign country, and
afterwards (on account of difficulties existing by the law of that country), agreed to assign the
concession to a Socit Anonyme formed in that country, which socit was to supply the
materials for the construction of the railway, and to receive periodical payments from the English
company.
The objects of this company, as stated in the Memorandum of Association, were to supply and
sell the materials required to construct railways, but not to undertake their construction. The
contract here was to construct a railway. That was contrary to the memorandum of association;
what was done by the directors in entering into that contract was therefore in direct contravention
of the provisions of the Company Act, 1862
It was held that this contract, being of a nature not included in the Memorandum of Association,
was ultra vires not only of the directors but of the whole company, so that even the subsequent
assent of the whole body of shareholders would have no power to ratify it. The shareholders
might have passed a resolution sanctioning the release, or altering the terms in the articles of
association upon which releases might be granted. If they had sanctioned what had been done
without the formality of a resolution, that would have been perfectly sufficient. Thus, the
contract entered into by the company was not a voidable contract merely, but being in violation
of the prohibition contained in the Companies Act , was absolutely void. It is exactly in the same
condition as if no contract at all had been made, and therefore a ratification of it is not possible.
If there had been an actual ratification, it could not have given life to a contract which had no
existence in itself; but at the utmost it would have amounted to a sanction by the shareholders to
the act of the directors, which, if given before the contract was entered into, would not have
made it valid, as it does not relate to an object within the scope of the memorandum of
association.
Later on, in the case of Attorney General v. Great Eastern Railway Co.4, this doctrine was made
clearer. In this case the House of Lords affirmed the principle laid down in Ashbury
RailwayCarriage and Iron Company Ltd v. Riche5 but held that the doctrine of ultra vires
ought to be reasonable, and not unreasonable understood and applied and whatever may fairly
be regarded as incidental to, or consequential upon, those things which the legislature has
authorized, ought not to be held, by judicial construction, to be ultra vires.
The doctrine of ultra vires was recognised in Indian the case of Jahangir R. Mod i v.
ShamjiLadhaand has been well established and explained by the Supreme Court in the case of A.
LakshmanaswamiMudaliarv. Life Insurance Corporation Of India. Even in India it has been held
that the company has power to carry out the objects as set out in theobjects clause of its
memorandum, and also everything, which is reasonably necessary to carry out those objects. For
example, a company which has been authorized by its memorandum to purchaseland had implied
authority to let it and if necessary, to sell it.However it has been made clear bythe Supreme Court

that the company has, no doubt, the power to carry out the objects stated in theobjects clause of
its memorandum and also what is conclusive to or incidental to those objects, but it has no power
to travel beyond the objects or to do any act which has not a reasonable proximate connection
with the object or object which would only bring an indirect or remote benefit to the company.
To ascertain whether a particular act is ultra vires or not, the main purpose must first be
ascertained, then special powers for effecting that purpose must be looked for, if the act is neither
within the main purpose nor the special powers expressly given by the statute, the inquiry should
be made whether the act is incidental to or consequential upon. An act is not ultra vires if it is
found:
(a) Within the main purpose, or
(b) Within the special powers expressly given by the statute to effectuate the main purpose, or
(c) Neither within the main purpose nor the special powers expressly given by the statute but
incidental to or consequential upon the main purpose and a thing reasonably done for
effectuating the main purpose.
The doctrine of ultra vires played an important role in the development of corporate powers.
Though largely obsolete in modern private corporation law, the doctrine remains in full force for
government entities. An ultra vires act is one beyond the purposes or powers of a corporation.
The earliest legal view was that such acts were void. Under this approach a corporation was
formed only for limited purposes and could do only what it was authorized to do in its corporate
charter.
This early view proved unworkable and unfair. It permitted a corporation to accept the benefits
of a contract and then refuse to perform its obligations on the ground that the contract was ultra
vires. The doctrine also impaired the security of title to property in fully executed transactions in
which a corporation participated. Therefore, the courts adopted the view that such acts were
voidable rather than void and that the facts should dictate whether a corporate act should have
effect.
Over time a body of principles developed that prevented the application of the ultra vires
doctrine. These principles included the ability of shareholders to ratify an ultra vires transaction;
the application of the doctrine of estoppel, which prevented the defense of ultra vires when the
transaction was fully performed by one party; and the prohibition against asserting ultra vires
when both parties had fully performed the contract. The law also held that if an agent of a
corporation committed a tort within the scope of the agents employment, the corporation could
not defend on the ground that the act was ultra vires.
Despite these principles the ultra vires doctrine was applied inconsistently and erratically.
Accordingly, modern corporation law has sought to remove the possibility that ultra vires acts
may occur. Most importantly, multiple purposes clauses and general clauses that permit
corporations to engage in any lawful business are now included in the articles of incorporation.

In addition, purposes clauses can now be easily amended if the corporation seeks to do business
in new areas. For example, under traditional ultra vires doctrine, a corporation that had as its
purpose the manufacturing of shoes could not, under its charter, manufacture motorcycles. Under
modern corporate law, the purposes clause would either be so general as to allow the corporation
to go into the motorcycle business, or the corporation would amend its purposes clause to reflect
the new venture.
State laws in almost every jurisdiction have also sharply reduced the importance of the ultra vires
doctrine. For example, section 3.04(a) of the Revised Model Business Corporation Act, drafted
in 1984, states that the validity of corporate action may not be challenged on the ground that the
corporation lacks or lacked power to act. There are three exceptions to this prohibition: it may
be asserted by the corporation or its shareholders against the present or former officers or
directors of the corporation for exceeding their authority, by the attorney general of the state in a
proceeding to dissolve the corporation or to enjoin it from the transaction of unauthorized
business, or by shareholders against the corporation to enjoin the commission of an ultra vires act
or the ultra vires transfer of real or personal property.
Government entities created by a state are public corporations governed by municipal charters
and other statutorily imposed grants of power. These grants of authority are analogous to a
private corporations articles of incorporation. Historically, the ultra vires concept has been used
to construe the powers of a government entity narrowly. Failure to observe the statutory limits
has been characterized as ultra vires.
In the case of a private business entity, the act of an employee who is not authorized to act on the
entitys behalf may, nevertheless, bind the entity contractually if such an employee would
normally be expected to have that authority. With a government entity, however, to prevent a
contract from being voided as ultra vires, it is normally necessary to prove that the employee
actually had authority to act. Where a government employee exceeds her authority, the
government entity may seek to rescind the contract based on an ultra vires claim.

EFFECT OF ULTRA VIRES TRANSACTIONS

A contract beyond the objects clause of the companys memorandum is an ultra vires contract
and cannot be enforced by or against the company as was decided in the cases of In Re, Jon
Beaufore (London) Ltd ., (1953) Ch. 131, In S. Sivashanmugham And Others v. Butterfly
Marketing PrivateLtd., (2001) 105 Comp. Cas Mad 763,
A borrowing beyond the power of the company (i.e. beyond the objects clause of the
memorandum of the company) is called ultra vires borrowing.
However, the courts have developed certain principles in the interest of justice to protect such
lenders. Thus, even in a case of ultra vires borrowing, the lender may be allowed by the courts
the following reliefs:

(1) Injunction if the money lent to the company has not been spent the lender can get the
injunction to prevent the company from parting with it.
(2) Tracing the lender can recover his money so long as it is found in the hands of the
company in its original form.
(3) Subrogationif the borrowed money is applied in paying off lawful debts of the company,
the lender can claim a right of subrogation and consequently, he will stand in the shoes of
thecreditor who has paid off with his money and can sue the company to the extent the money
advanced by him has been so applied but this subrogation does not give the lender the same
priority that the original creditor may have or had over the other creditors of the company.

EXCEPTIONS TO THE DOCTRINE OF ULTRA VIRES

There are, however, certain exceptions to this doctrine, which are as follows:
1. An act, which is intra vires the company but outside the authority of the directors may be
ratified by the shareholders in proper form.20
2. An act which is intra vires the company but done in an irregular manner, may be validated by
the consent of the shareholders. The law, however, does not require that the consent of all the
shareholders should be obtained at the same place and in the same meeting.
3. If the company has acquired any property through an investment, which is ultra vires, the
companys right over such a property shall still be secured.
4. While applying doctrine of ultra vires, the effects which are incidental or consequential to the
act shall not be invalid unless they are expressly prohibited by the Companys Act.
5. There are certain acts under the company law, which though not expressly stated in the
memorandum, are deemed impliedly within the authority of the company and therefore they are
not deemed ultra vires. For example, a business company can raise its capital by borrowing.
6. If an act of the company is ultra vires the articles of association, the company can alter its
articles in order to validate the act.

CASE NOTES:
Eley v The Positive Government Security Life Assurance Company, Limited, (1875-76) L.R. 1
Ex. D. 88

It was held that the articles of association were a matter between the shareholders inter se, or the
shareholders and the directors, and did not create any contract between the plaintiff and the
company and article is either a stipulation which would bind the members, or else a mandate to
the directors. In either case it is a matter between the directors and shareholders, and not between
them and the plaintiff.

The Directors, &C., of the Ashbury Railway Carriage and Iron Company (Limited) v Hector
Riche, (1874-75) L.R. 7 H.L. 653.
The objects of this company, as stated in the Memorandum of Association, were to supply and
sell the materials required to construct railways, but not to undertake their construction. The
contract here was to construct a railway. That was contrary to the memorandum of association;
what was done by the directors in entering into that contract was therefore in direct contravention
of the provisions of the Company Act, 1862
It was held that this contract, being of a nature not included in the Memorandum of Association,
was ultra vires not only of the directors but of the whole company, so that even the subsequent
assent of the whole body of shareholders would have no power to ratify it. The shareholders
might have passed a resolution sanctioning the release, or altering the terms in the articles of
association upon which releases might be granted. If they had sanctioned what had been done
without the formality of a resolution, that would have been perfectly sufficient. Thus, the
contract entered into by the company was not a voidable contract merely, but being in violation
of the prohibition contained in the Companies Act , was absolutely void. It is exactly in the same
condition as if no contract at all had been made, and therefore a ratification of it is not possible.
If there had been an actual ratification, it could not have given life to a contract which had no
existence in itself; but at the utmost it would have amounted to a sanction by the shareholders to
the act of the directors, which, if given before the contract was entered into, would not have
made it valid, as it does not relate to an object within the scope of the memorandum of
association.
Shuttleworth v Cox Brothers and Company (Maidenhead), Limited, and Others, [1927] 2 K.B.
9
It was held that

the contract, if any, between the plaintiff and the company contained in the articles in
their original form was subject to the statutory power of alteration and

if the alteration was bona fide for the benefit of the company it was valid and there was
no breach of that contract;

there was no ground for saying that the alteration could not reasonably be considered for
the benefit of the company;

there being no evidence of bad faith, there was no ground for questioning the decision of
the shareholders that the alteration was for the benefit of the company; and,
the plaintiff was not entitled to the relief claimed.

In Re New British Iron Company, [1898] 1 Ch. 324

It was held that the article is not in itself a contract between the company and the directors; it is
only part of the contract constituted by the articles of association between the members of the
company inter se. But where on the footing of that article the directors are employed by the
company and accept office the terms of art. 62 are embodied in and form part of the contract
between the company and the directors. Under the article as thus embodied the directors obtain a
contractual right to an annual sum of 1000l as remuneration. It was held also that although these
provisions in the articles were only part of the contract between the shareholders inter se, the
provisions were, on the directors being employed and accepting office on the footing of them,
embodied in the contract between the company and the directors; that the remuneration was not
due to the directors in their character of members, but under the contract so embodying the
provisions; and that, in the winding-up of the company, the directors were entitled to rank as
ordinary creditors in respect of the remuneration due to them at the commencement of the
winding-up.
Rayfield v Hands and Others, [1957 R. No. 603.]
Field-Davis Ltd. was a private company carrying on business as builders and contractors,
incorporated in 1941 under the Companies Act, 1929 , as a company limited by shares, having a
share capital of 4,000, divided into 4,000 ordinary shares of 1 each, of which 2,900 fully-paid
shares had been issued. The plaintiff, Frank Leslie Rayfield, was the registered holder of 725 of
those shares, and the defendants, Gordon Wyndham Hands, Alfred William Scales and Donald
Davies were at all material times the sole directors of the company. The plaintiff was a
shareholder in a company. Article 11 of the articles of association of the company required to
inform the directors of his intention to transfer shares in the company, and which provided that
the directors will take the said shares equally between them at a fair value. In accordance with
this the plaintiff so notified the directors, who contended that they need not take and pay for the
plaintiffs shares, on the ground that the articles imposed no such liability upon them.
The plaintiffs claimed for the determination of the fair value of his shares, and for an order that
the directors should purchase such shares at a fair value. It was found that the true construction
of the articles required the directors to purchase the plaintiffs shares at a fair price. Article 11 is
concerned with the relationship between the plaintiff as a member and the defendants, not as
directors, but as members of the company.
Guinness v Land Corporation of Ireland,(1883) L.R. 22 Ch. D. 349
The Land Corporation of Ireland, Limited , was incorporated under the Companies Act on the
12th of July, 1882, as a company limited by shares. By the memorandum of association of a
company limited by shares it was stated that the objects of the company were, the cultivation of

lands in Ireland , and other similar purposes there specified, and to do all such other things as the
company might deem incidental or conducive to the attainment of any of those objects.
The 8th clause of the articles of association, provided that the capital produced by the issue of B
shares shall, so far as is necessary, be applied in making good to the holders of A shares the
preferential dividend of 5 per cent., which they are to receive on the amounts paid up on their
shares. This action was brought by one of the B shareholders on behalf of himself and the others,
to restrain the directors from issuing any A shares on the footing of their being entitled to the
benefit of that article, and to restrain the directors from applying in accordance with it the capital
arising from the B shares.
It was held that the application of the B capital provided for by the articles is not an application
of capital to carrying on the business of the company, but is providing an inducement to people
to take shares and subscribe capital to carry on the business and that article 8 was invalid, as it
purported to make the B capital applicable to purposes not within the objects of the company as
defined by the memorandum of association, and in a way not incidental or conducive to the
attainment of those objects, and that the directors must be restrained from acting upon it. The
articles of association of a company cannot, except in the cases provided for by sect. 12 of the
Companies Act, 1862 , modify the memorandum of association in any of the particulars required
by the Act to be stated in the memorandum.

Introduction:
Incorporation by registration was introduced in 1844 and the doctrine of limited liability followed in
1855.Subsequently in 1897 in Solomon v. Solomon & Company the House of Lords effected these enactments and
cemented into English law the twin concepts of corporate entity and limited liability. In that case the apex court
simply laid down that a company is a distinct legal person entirely different from the members of that company.
What this means is that the company has life of it's own, can own property, can sue and be sued in it's own name,
has perpetual life and existence to name a few of the benefits of incorporation. It is a trite law that a rather hefty veil
is drawn between these two that can be lifted only in a limited number of circumstances that seem to be fluctuating
according to current judicial thinking.
However the courts have not always applied the principal laid down in Solomon v. Solomon & Co. In a number of
circumstances, the court will pierce the corporate veil or will ignore the corporate veil to reach the person behind the
veil or reveal the true form and character of the concerned company. The rationale behind this is probably that the
law will not allow the corporate form to be misused or for the purposes which is set out in the statute. In those
circumstances in which the court feels that the corporate forms is being misused it will rip through the corporate veil
and expose its true character and nature disregarding the Solomon principal as laid down by the house of lords.
When the veil is lifted:
1.Fraud
The courts have been more that prepared to pierce the corporate veil when it fells that fraud is or could be
perpetrated behind the veil. The courts will not allow the Solomon principal to be used as an engine of fraud. The
two classic cases of the fraud exception are Gilford motor company ltd v. Horne and Jones v. Lipman .
In the first case, Mr. Horne was an ex-employee of The Gilford motor company and his employment contract
provided that he could not solicit the customers of the company. In order to defeat this he incorporated a limited
company in his wife's name and solicited the customers of the company. The company brought an action against
him. The Court of appeal was of the view that "the company was formed as a device, a stratagem, in order to mask

the effective carrying on of business of Mr. Horne" in this case it was clear that the main purpose of incorporating
the new company was to perpetrate fraud. Thus the court of appeal regarded it as a mere sham to cloak his
wrongdoings
In the second case of Jones v. Lipman a man contracted to sell his land and thereafter changed his mind in order to
avoid an order of specific performance he transferred his property to a company. russel judge specifically referred to
the judgments in Gilford v. Horne and held that the company here was " a mask which (Mr. Lipman) holds before
his face in an attempt to avoid recognition by the eye of equity" he awarded specific performance both against
Mr.Lipman and the company. Under no circumstances will the court allow the ant form of abuse of the corporate
form and when such abuse occurs the courts will step in and Jennifer Payne in her article lists three aspects of fraud,
which needs to be looked at before the corporate veil can be lifted which are
A) What are the motives of the fraudulent person relevantWhether some level of deception is necessary needs to be determined. In the case of Hilton v.plustile ltd the plaintiff
and the defendant agreed to use a medium of a company in a tenancy arrangement in order to evade the application
of the rent act 1977.The court of Appeal held that the plaintiff was not entitled to lift the veil since he had full
knowledge of the matter at all times. However another interesting question that arises is what is the effect of
deception on the other party. The issue came up for discussion in the case of Adams V.Cape industries plc.In
considering whether the corporate form has been used in such a way as to justify the lifting of the corporate veil, the
court stated that the correct test in relation to groups of companies was whether the company had been used as a
"mere faade concealing the true facts" applying this test Slade J. said that the "motives of the perpetrator may be
highly material" in both the classic cases intention to deceive the plaintiff was very much present how ever it was
not so in Adams V.Cape industries. So the point that needs to be determined is whether motive is necessary for the
fraud exemption to exist. However to get any answer it is also important to find out the nature of legal right that is
being denied to the plaintiff
b) Is the character of the legal obligation being evaded relevant?
What the court wants is to prevent limited companies from using the corporate form to evade a contractual or legal
obligation. However one needs to question whether the nature of this obligation will affect the ability of the court to
lift the corporate veil. In the classic cases the defendants sought to avoid the legal obligations that existed prior to
their incorporation, the main motive of incorporation was to avoid the performance of the legal obligation in Adams
v. Cape there was some discussion about the need to allow the veil to be lifted in order to prevent Cape avoiding
publicity as to its involvement in the sale of asbestos to America and to prevent cape from having any practical
benefit of the group's asbestos trade in the states without the attendant risks of tortuous liability. However the
tortuous liability was purely speculative. For the fraud exception to exist the defendant must deny the plaintiff some
preexisting legal right. In case no legal right is existent the intention on part of the defendant to deceive the plaintiff
must be speculative and hence less substantial in nature. if the legal right crystallizes before the incorporation of the
company then the mental element is satisfied if however the reverse then question arises if whether in such
circumstances the mental element can be satisfied. A suitable answer to this is if the legal right crystallizes after the
incorporation but before the use of the corporate form to evade the legal right, the fraud exception should be
satisfied
C) Is the timing of the incorporation of the device company relevant?
In Creasey v. Breachwood Motors Limited, the reason for the failure of the fraud exception was the timing of
incorporation of the sham company. Here Mr. Creasey brought an action against wrongful dismissal against his
employers BW. BW served a defence but four months later he was served a notice saying that the company was
insolvent .BM took over all the business except the plaintiff's claim. The plaintiff obtained an order for damages and
interest however before he received anything BW went was dissolved without going into liquidation. The plaintiff
sought an order substituting BM for BW on the grounds of justice. In this case the facts may look similar to Adams
v. Cape Industries however Richard Southwell sitting as distinguished Gilford and Horne and Jones v. Lipman on
the basis that in those cases the sham companies are had been formed with the view to carry out the fraud .in the
present case the device company BM was already in business and caring on it's own business. This a very
controversial case and should have been decided on the basis of the classic cases as it should not matter whether
device companies were created to avoid the legal obligation or whether they were in existence. Creasey should have
been otherwise decided maybe on the grounds of justice.

2. Group Enterprises
Sometimes in the case of group of enterprises the Solomon principal may not be adhered to and the court may lift
the veil in order to look at the economic realities of the group itself. In the case of D.H.N.food products Ltd. V.
Tower Hamlets it has been said that the courts may disregard Solomon's case whenever it is just and equitable to do
so. In the above-mentioned case the court of appeal thought that the present case where it was one suitable for lifting
the corporate veil. Here the three subsidiary companies were treated as a part of the same economic entity or group
and were entitled to compensation.
Lord Denning has remarked that 'we know that in many respects a group of companies are treated together for the
purpose of accounts, balance sheet, and profit and loss accounts. Gower too in his book says, "There is evidence of a
general tendency to ignore the separate legal group" however whether the court will pierce the corporate veil
depends on the facts of the case. The nature of shareholding and control would be indicators whether the court
would pierce the corporate veil. In the case of Woolfson the house of lords held that there was "no basis consonant
with the principle upon which on the facts of this case the corporate veil can be pierced to the effect of holding
Woolfson to be the true owner of Campbell's business or the assets of solfred "the two subsidiary companies that
were jointly claiming compensation for the value of the land and disturbance of business. The House of Lords in the
above mentioned case had remarked "properly applied the principle that it is appropriate to pierce the corporate veil
only where special circumstances exist indicating that it is a mere faade concealing the true facts" In the figurative
sense faade denotes outward appearance especially one that is false or deceptive and imports pretence and
concealment. That the corporator has complete control of the company is not enough to constitute the company as a
mere faade rather that term suggests in the context the deliberate concealment of the identity and activities of the
corporator.
The separate legal personality of the company, although a "technical point" is no matter of form it is a matter of
substance and reality and the corporator ought not, on every occasion, to be relieved of the disadvantageous
consequences of an arrangement voluntarily entered into by the corporator for reasons considered by the corporator
to be of advantage to him. In particular "the group enterprise" concept must obviously be carefully limited so that
companies who seek the advantages of separate corporate personality must generally accept the corresponding
burdens and limitations
In some cases the corporate veil has not been lifted prime examples of that are Adams V.Cape Industries. This was a
case involving a foreign judgment against a company. the court in this case held that each company in the group is a
separate entity. However one area where the courts have been particularly reluctant to recognize the concept of
group entity is with relation with corporate debts. Though it is not possible to in absence of agency or trust to hold
one group liable for the debts of another in America equitable doctrines are applied and in New Zealand as well as
Ireland there are statutory provisions for pooling of assets.
3. Agency
In the case of Bodrip v. Solomon Justice Vaughan Williams expressed that the company was nothing but an agent of
Solomon " That this business was Mr. Solomon's business and no one else's; that he chose to employ as agent a
limited company; that he is bound to indemnify that agent the company and that this agent, the company has lien on
the assets" however on appeal to the house of lords it was held that a company did not automatically become
an agent of the shareholder even if it was a one man company and they other shareholders were dummies.
A company having power to act as an agent may do so as an agent for its parent company or indeed for all or any of
the individual members if it or they authorize it to do so. If so the parent company or the members will be bound by
the acts of its agent so long as those acts are within actual or apparent scope of the authority. But there is no
presumption of any such relationship in the absence of an express agreement between the parties it will be difficult
to establish one. In cape attempt to do so failed. Incases where the agency agreement holds good and the parties
concerned have expressly agreed to such a agreement them the corporate veil shall be lifted and the principal shall
be liable for the a acts of the agent.
4. Trust
The courts may pierce the corporate veil to look at the characteristics of the shareholders. In the case of Abbey and
Planning the court lifted the corporate veil. In this case a school was run life a company but the shares were held by
trustees on educational charitable trusts. They pierced the veil in order to look into the terms on which the trustee
held the shares.

5. Tort
Usually the English courts have not lifted the veil on the ground of tort it is a phenomenon not witnessed in most
common law jurisdictions apart from Canada
6. Enemy characterIn times of war the court is prepared to lift the corporate veil and determine the nature of shareholding as it did in the
Daimler case where germen shareholders held the shares of an English company during the time of world war 1.
7. TaxAt times tax legislations warrant the lifting of the corporate veil. The courts are prepared to disregard the separate
legal personality of companies in case of tax evasions or liberal schemes of tax avoidance without any necessary
legislative authority.
Statutory support of lifting the veil( English law)
1) Reduction of number of members
Under section 24 of the companies act if a public company carries on business for more than six months may
become liable jointly and severally with the company for the payment of debts the right that this section confers on
creditors is limited. it is only that member who remains after 6 months that can be sued. The anomaly of this section
is that the liability attaches to a member and not a director unless the director also happens to be a director as well.
This section has very little practical utility because of the limitation.
2) Fraudulent or wrongful trading: a) Criminal liability: If any business of a company is carried on with the intend to defraud creditors of the company or creditors of any
other person or for any fraudulent purpose who was knowingly a party to the carrying on of the business in that
manner is liable to imprisonment or fine or both
This applies whether or not the company has been or is in the course of being wound up.
The civil liability for the same offence in now a part of the Insolvency Act
b) Sections 213(1) If in the course of winding up of a company it appears that any business of the company has been carried on with
the intend to defraud creditors of the company or creditors of any other person or for any fraudulent purpose...then
(2) The court on application of the liquidator may declare that person in who were knowingly parties to the carrying
on of business in that manner are liable to make such contributions (if any) as the court thinks proper.
Wrongful trading is dealt with in section 214 of the insolvency act and has similar provisions to section 213.however
this section operates only in cases of insolvent liquidation and the declaration can be made only against a person
who at some time before the commencement of winding up, was a director of the company and knew or ought to
have concluded at that time that there was no reasonable prospect that the company would avoid going into
liquidation.
No such declaration will take place is the court is satisfied that the person took all the possible steps to minimize the
losses.
These sections have been considered to be opposed to the Solomon principle: 3) Abuse of company names or employment of disqualified directors
Section 216 of the Insolvency Act now makes it an offence for anyone who was a director or a shadow director of
the original company at any time during the 12 months preceding its going into insolvent liquidation to be in any
way concerned (except with leave of court) during the next five years in the formation, management, of a company
or business with a name by which the original company was known or one so similar as to suggest an association
with that company.
A person acting in violation of 216 is under 217 personally liable, jointly and severally with that company and any
other person so liable, for the debts and other liabilities of that company and any other person so liable, for the debts
and liabilities of that company incurred while he was concerned in its management n breach of section 216.

d) Misdiscription of the company

Section 349(4) of the companies act provides that if any officer of the company or other person acting on its behalf
Signs or authorizes to be signed on behalf of the company any bill of exchange, promissory note, endorsement,
cheque or order for money or goods in which the companies name is not mentioned in legible letters..He is liable to
a fine and he is personally liable to the holder of such as mentioned above.
e) Premature trading.
Another example of personal liability is section 117 (8). Under this section a public limited company newly
incorporated as such must not "do business or exercise any borrowing power" until it has obtained from the registrar
of companies a certificate that has complied with the provisions of the act relating to the raising of the prescribed
share capital or until it has re-registered as a private company. if it enters into any transaction contrary to this
provision not only are the company and it's officers in default ,liable to pay fines but it the company fails to comply
with its obligations in that connection within 21 days of being called upon to do so, the directors of the company are
jointly and severally liable to indemnify the other party in respect of any loss or damage suffered by reason of the
company's failure.
Conclusion:
The Judgment of the Court Of Appeal in the Adams case is the current law, which is nothing more than a reiteration
of the law laid down by the House of Lords in Solomon's case. The bottom line being only the court will lift the veil
in the face of grave abuse of the corporate form not otherwise.