comapany law problem

8/3/2019 Comapany Law Problem

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COMPANY AND COMPENSATION LAWS

Q.1. Define a company. Explain its characteristics.Ans. A company or a Joint Stock is an organization formed by an association of person through a process oflaw for some common purpose (usually a business venture). It has a share capital divided into transferable

shares, the owners of which are known as members. It is incorporated under the Companies Act and sometimesby the Special Act of the Parliament. It is creation of law and is known as an artificial person with a perpetual

successession and a common seal In other words, a company is an artificial person existing in the eyes of law

and distinct from its members. It has no physical existence like a natural person.

Section 3(1) (i) of the Companies Act, 1956 defines a company a A company formed and registeredunder this Act or an existing Company. An existing company means A company formed and registered under

any of the previous Company Laws. The term Company has not been much clarified by the Company Act.

A corporation is an artificial being, invisible, intangible, existing only in contemplation of the law.

A company is an artificial person created by law, having separate entity with a perpetual succession and

a common seal.

CHARACTERISTIC (FEATURES )OF A COMPANY

The most distinguish characteristics of a company are:

1. Incorporated Association: A company is created when it is registered under the Companies Act. Itcomes into being from the date mentioned in the certificate of incorporation. Section 11 provides that an

association of more than 10 persons carrying on business in banking or an association registered under

the Companies Act and is deemed to be an illegal association, if it is not so registered.

2. Artificial legal person: A company is an artificial person. It is not a natural person. It exists in the eyesof the law and cannot act on its own. It has to act through a board of directors elected by the

shareholders.

3. Separate Legal Entity: A company is a separate legal entity from its shareholders. It can own propertyenter into contract, conduct business, sue or be sued. The activities and the working is regulated by its

Memorandum of Association, Articles of Association and provisions of the Companies Act. Anyone

taking legal action proceeds against the company and not the individual shareholder.

The Principle of separate legal entity was explained and emphasized in the famous case SalomonV. Saloman Ltd.

4. Perpetual Existence: A company has perpetual succession and is independent of the life of itsmembers. It existence is not affected by the death, lunancy or bankruptcy if its members or shareholdersA company can be compared with a river which remains its identy thought the parts which compose it

are constantly changing. Perpetual succession thus means that inspite of change in the membership of

the company, its continuity is not affected.5. Limited Liability: Liability of the members of the company is limited (though not in all means cases)

to the value of the shares subscribed by each of them.

6. Transferability of Shares: The shares of a company are freely transferable in the case of publiccompanies whereas they are not so in case of private companies.

7. Common Seal: Every company has its on common seal which is affixed on all the important documentsof the company the common seal, with the name of the company engraved on its, is used as asubstitute of its signatures.

8. Separate property: A company, being legal person, is capable of owning, enjoying and disposing ofproperty in its own name. The property of the company is to used for the companys business and no

for the personal benefit of its members.9. Capacity to sue and being sued: The Company is legal person and it can enforce its legal rights

Similarly it can be sued for reach of its legal duties.

Prepared by: - Mukesh Verma: 9212528831


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Q.2. What is Corporate Veil? When or under what circumstances is its lifted or pierced?

Ans. The term corporate Veil means that in the eyes lf law, company is a separate legal entity distinctfrom its members. Veil means a line of separation existing between the two i.e. one the company and the

other its members (case of separate entity as held in the famous case ofSalomon vs. Salomon and Co. Ltd.Salomon case :-Salomon Vs Salomon& Co. Ltd.

Transfer of sole proprietorship business to company:- Mr. Salomon was

carrying on the business of boot manufacturing as a sole proprietor. Heincorporated a company named salomon & Co. Ltd. For the purpose of taking

over this business.

Payment of purchase consideration by the company:

(a) Total Consideration 39000 pounds(b) Cash paid 9,000 pounds

(c) Fully paid share of 1 pounds each issued to salomon 20000 pounds

(d) Secured debentures issued to salomon 10,000 pounds

Constitution of Salomon & Co. Ltd.:- The 6 members of the family of Mr.

Salomon were issued one share each. Salomon was the managing director of

salomon & co. Ltd. Salomon & Co. Ltd. Is commonly called as one mancompany.

Inability to pay debts by the company in liquidation:- In the course ofbusiness, the company borrowed from creditors to the extent of 7000 pounds.

Due to trade depression the company ran into financial difficulties and

eventually went into liquidation. The assets realized only 6000 pounds.

Contention (debate/Argument) of unsecured creditors:- one man cannot owe

money to himself. The unsecured creditors contended that salomon wascarrying on business in the name of salomon & co. Ltd.

Decision of the court It was held that Salomon & Co. was real company fulfilling all legalrequirements. It held and identity different from its members, and thereforethe secured debentures were to be paid in priority to unsecured creditors.

Case Law [ Bacha F. Guzdar V commissioner of Income Tax. ]A company was carrying on agricultural business. The income from agriculture business were exempt from

tax. A shareholder contended that dividend received by her was also exempt from tax. The court held that

dividend received by a shareholder is not agricultural income and so dividend income is liable to be taxed.

Q.3. Distinguish between A Company and A Partnership.

Ans. Difference between A Company and A Partnership

Basis Company Partnership

1. Mode of Formation It is established by registration It is established by an agreementbetween the partners. Registration

is not compulsory under the Indian

Partnership Act, 19232



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2. Regulation Act The companies Act, 1956, applies. The Indian Partnership Act, 1932,applies.

3.Numbers of Members In the case of public company, the

minimum number is seven withoutany maximum limit. A private

company must have at least twomembers but not more than fifty.

The minimum number is two; the

maximum is twenty but in the caseof banking business it is ten.

4.Liability The liability of members is usually

limited to the amount due on the

shares held by them.

The liability of partners is

unlimited.

5. Entity A Company is an artificial person

and has a distinct legal entity

separate from its members.

A Partnership does not ace a

distinct legal entity separate from

the members composing it and itsexistence comes to an end upon

the death or lunacy or insolvencyof its partners.

6. Management Management is entrusted to the

elected directors who must be at

least three in number in case of apublic company and two in case of

a private company.

Normally every partner takes part

in the management of the affairs of

the firm.

7. Transfer of Shares Except in case of private company,

normally there are no restrictions

on the transfer of shares.

A partner has no right to transfer

his shares to any other person

without the consent of otherpartners.

8. Audit Under the Companies Act, 1956,audit of the accounts of a companyis compulsory.

Audit is compulsory if stated inthe partnership deed or if incomeTax Act so requires.

9. Winding up A company can be wound u only by carrying out the process laid

down in the companies Act.

A partnership may be wound upby an agreement or by an order of

the court. In case the firm is

unable to pay its debts, theinsolvency Act will apply.

Q.4. What is a private company? What are the privileges enjoyed by such a company?

Ans. Section 3(i)(iii), as a mended by the Companies (Amendment) Act, 2000 provides that a private companymeans a company which has minimum paid-up capital of rupees one lakh or such higher paid-up capital as maybe prescribed, and by its Articles of Association:

Restricts the right of transfer of shares;

Limits the number of its members to 50 excluding its employees or ex-employees who are or were andstill continue to be its members; and

Prohibits the company to invite public to subscribe to its shares or debentures.

However, if two or more persons hold shares in joint names then they are regarded only as one single

member.



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The minimum number of members required to form a private company is two. A private company shall

add the words Private Limited at the end of its name, and it may commence its business immediately afterobtaining a certificate of incorporation.

Exemption and Privileged of Private Companies The exemptions and privileges enjoyed by a private company, as provided in the Act, are as follows:(i) Only two persons (minimum) are required to form a private company.

(ii) Only two directors (minimum) are needed to run such a company.

(iii) After incorporation, a private company is allowed to commence business immediately. There is noneed to get Certificate of Commencement of business.

(iv) Private company is not required to issue a prospectus or even any statement in lieu of it. As such, it

need not be filled with the Registrar before issuing share capital.(v) Condition of minimum subscription does not apply to it.

(vi) Condition of holding any statutory meeting or filing a statutory report also do not apply to it.

(vii) It may refuse to register a transfer of shares or may put restriction on transfer of shares by its membersand its members have no right to got to Company Law Board (CLB).

(viii) Only two members constitute the quorum for meeting of its shareholders.

(ix) Directors are not required to file their consent in writing to act as Directors. Nor they have to giveany undertaking regarding taking any qualification shares. Company may be incorporated without all

this.

(x) Rules regarding to overall or maximum limit for managerial remuneration do not apply to such

companies.(xi) Even rules regarding appointment of directors are not as strict as in case of public companies.

(xii) Such a company is not under obligation to issue its new shares as rights Shares to its exiting

shareholders.(xiii) It need not keep an index of members (Sec. 151).

(xiv) The provisions of section 171 to 186 relating to general meetings, manner of taking vote, etc, mus

be followed by a public company, but a private company can make its own regulations by its articles

in this respect.

Q.5. Distinguish between a Private company and a Public Company.

Ans. Private Company and Public CompanyPoint ofDistinction Public Company Private Company

1. Minimum number of

members

A public company must have at

least 7 members.

A private company must have at least

2 members.

2. Maximum number of

members

No limit. Its members should not exceed 50 in

number (exclusive of past and presentemployees).

3. End-words of the name Public Ltd. Or Ltd. Private Ltd.

4. Minimum number of

directors

Three Two

5. Public invitation for capital It is free to invite the public to buy

its shares and debentures.

It cannot invite the public to buy, its

shares and debentures.

6. Commencement f business It cannot commence business after

incorporation unless certificate ofcommencement of business is

obtained.

It can commence business

immediately after incorporation.



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7. Prospectus It must issue and file a prospectusor statement in lieu of prospectus

before allotting its shares.

Need not issue and file a prospectus ora statement.

8. Allotment of shares It cannot allot shares without

receiving the minimum

subscription.

It can allot shares without raising the

minimum subscription.

9. Statutory meeting It must hold a statutory meeting

and must file statutory report with

the Registrar within six monthsfrom the date of obtaining the

certificate to commence business.

It is not required to hold the statutory

meeting and to file statutory report.

10. Transfer of shares Its shares are freely transferable. Its shares are not freely transferable.

11. Share warrants It cannot issue share warrants. It can issue share warrants.

12. Rules regarding Directors Appointment, re-appointment etc.

of Directors subject Government

approval.

No Government approval required for

appointment, re-appointment etc. of

Directors.

13. Managementremuneration

Legal restrictions, total managerialremuneration in a public companycannot exceed 11% of the net

profits (Section 198).

No such restriction applies to a privatecompany.

14. Quorum It is 2 in the case of private company.

Q.6. How does a private company become a public company?

Ans. Conversion of a Private Company into a Public Company: A private company may eitherautomatically become a public company of can be deliberately converted into a public company.

1. Automatic Conversion by default: If a company is found to be in default i.e. it fails to fulfill theessential requirements of being a private company [i.e. if its membership exce-eds fifty, it permits freetransfer of shares, invite public to subscribe to its shares or deb-entures, or invites or accepts deposit

from the public], it becomes a public company auto-matically, However, if the default is found to be not

willful or it is just accidental, then it ma be giver a chance by the Company Law Board to correct it.2. Deliberate Conversion: A private company may, at any time pass a special resolution deleting from its

articles the four restrictions as to membership, transfer of shares, public subscription and acceptance of

public deposits, and then from the date of alteration it becomes a public company. With in 30 days of passing the resolution referred to above, a prospectus or a statement in lieu ofprospectus together with a copy of special resolution and a copy of alt-ered articles must be filled with the

Register. For becoming a public company, the company will have to increase the numbers of its members to

at least 7 and that of its directors to at least3, if already their number was fewer than the aforesaid statutory

minimum required in that connection for a public company. Moreover, the company will also have toincrease its paid-up capital to at least Rs. 5 lakhs as required in case of a public company. Upon beco-ming a

public company, the word Private will be deleted from the name of the company.

Q.7. Explain the following:(a) Holding Company,(b) Government Company,(c) Associations not for Profit or Companies not for profit(d) Producer Company,



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(e) Companies with Unlimited Liability.(f) Guarantee Company VIS--VIS Company having Share Capital.(g) Illegal Association.

Ans. (a) Holding Company: From the point of view of their control, companies are of two types: Holdingcompany and Subsidiary Company. A company is said to be the holding company in case it has control over

that other company. The other company is called its subsidiary company. According to section 4, a company is

called a Holding company in the following cases:

It controls Board of Directors of that other company, or

It holds more than 50 % of the equity nominal value of share capital of that other company

(where a company had preference shareholders before the commencement of this Act, enjoying

equal vating rights with that of Equity shareholders, for the purpose of control, holding companyshould enjoy more than of the total voting power).

(b) Government Company: Section 617 of the Companies Act defines a Government Company as one ofin which not less than 51% of the paid-up share capital is held by:

Either the Central Government; or Any State Government of Government; or

Jointly by Central Government and any one or more of the State Governments.

Furthermore, the subsidiary of Government Company is also deemed to be or is called a Government Company.

The companies Act makes some special provisions for such Government Companies which are as follows:

1. The auditor of such Government Company shall be appointed or reappointed by the CentralGovernment on the advice of the Comptroller and Auditor General of India (CAG).

2. The Comptroller and Auditor General of India has the following powers in the regard: He can direct the manner in which the accounts of the company shall be audited by the auditor.

He can conduct a supplementary or test audit of the companys accounts through certain persons

authorizing them in this respect.

He can require any information or additional information to be furnished to the persons

authorized to conduct a supplementary or test audit of Government company.

He has a right to comment upon or supplement the audit report in such manner as he may think

fit.

3. The auditor will submit a copy of the audit report to the Comptroller and Auditor General of India.

4. The report of the auditor together with the comments or supplements thereto by the comptroller andAuditor General of India shall be placed before the Annual General Meeting of the company.

5. Where the Central Government is a member of the Government Company, the Central Governmentshall prepare the annual report on the working and affairs of the company within three months of its

Annual General Meeting before which the audit report is placed. The annual report is to be laid before

both Houses of Parliament together with a copy of the audit report and the comments osupplementary report of the Comptroller and Auditor-General of India. [Section 619(A)(1)].

Where the State Government is also a member, report shall be laid before the State Legislature aswell. But where the Central Government is not a member of the Government Company, the State Government

concerned shall cause the above documents to be prepared and laid before the State Legislature.

6. The Central Government may, by notification in the Official Gazette, direct that any of theprovisions of the Act.

Shall not apply to any Government company; or



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Shall apply to any Government company with specified exceptions, modifications and

adaptation.However, such exemptions, modifications and a adaptations need to be approved by the Parliament.

(C) Associations not for Profit or Companies not for Profit: Section 25 related a licensed companies. TheCompanies Act permits or allows the registration under a license by Central Government of an associationnot for profit with Limited Liability. Such a company may or may not even use the words Limitedor Private Limited or Public Limited to its name. However, generally such a licence is given byCentral Government to an association of persons only if these conditions are fulfilled:

It is formed for promoting art, commerce, science, religion, charity or any other such

objectives.

It intends to use all its profits, if any, or other incomes for promoting above objectivesonly.

It does not allow distribution of any of its profits as dividend amongst its members.

Such an association is even allowed to name itself as Club, Association, Trust, Chamber or so instead ofcalling itself a company.

These companies are exempted for complying with the provisions of Sections 147, 160 (1)(a), 166(2),171(1), 209 (4) (a), 257, 264 (1) 285, 287, 299, 301 and 302 (2) of the companies Act either wholly or in partSuch companies may be public or private companies and may or may not have share capital, they are exempted

from complying with the requirement of minimum paid up capital of Rs. 1 lakh for a private company or Rs. 5

lakhs for a public company.[ Section 3(6)]

(D) Producer Company: In the year 2002, the companies Act as amended, making provision for registrationof Co-operatives as Companies or converting existing co-operatives into companies. Idea was to allow co-

operatives to do business within a regulatory framework similar to that of companies.A producer company can be formed by producers or producer institutions.

To be registered as Producer Company, it must:

Consist of at least 10 members; Be formed as a Private Company;

Not allow its shares to be publicly traded.

Law has also made provisions regulating the functioning of such companies.The definition of a producer company is given in section 582-A (1) of the Companies Act, which reads,

Producer companies means a body corporate having objects or activities specified in section 581B and

registered as a producer companies under this Act. Thus, a producer company is one which is registered under

the Companies Act, 1956 with the specified objects prescribed for a producer company. It is a bony corporate asif it is a private limited company.

Objects of a Producer Company

A producer company may be incorporated with any of the following objects:(a) Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export o

primary produce of the Members or import of goods or services for their benefits. Producer companymay carry on any of the activities specified clause either by itself or through other institution;

(b) Processing including preserving, drying, distilling, brewing, venting, canning and packaging of produce

of its Members;

(c) Manufacture, sale or supply of machinery, equipment or consumables mainly to its Members;(d) Providing education on the mutual assistances principle to its Members and other;

(e) Rendering technical services, consultancy services, training, research and development and all other

activities for the promotion of the interests of its members;



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(f) Generation, transmission and distribution of power, revitalization of land and water resources, their use

conservation and communication relatable to primary produce;(g) Insurance of producers or their primary produce;

(h) Promoting technique of mutuality and mutual produce;

(i) Welfare measures or facilities for the benefit of Members as may be decided by the Board;(j) Any other activity, ancillary or incidental to any of the activities referred to in clauses (a) to (i) or other

activities which may promote the principles of mutuality and mutual assistance amongst the Members in

any other manner;

(k) Financing of procurement, processing, marketing or other activities specified in clauses (a) to (j) whichinclude extending of credit facilities or any other financial services to its members.

(E) Companies with unlimited liability or unlimited companies: A company having no limit on the liabilityof tits members is an unlimited company [Sec. 12(2)]. Thus the liability of mem-bers in these companies is

unlimited i.e. it may extend to personal property of the members like partnership every member is liable to

contribute, in proportion to his interest in the company, towards the amount required for payment in full of thetotal liabilities of the company, and if one is unable to contribute anything then such deficiency is to be

distributed among the rema-ining members according to their capital in the company, But it is different from an

ordinary partnership in one important respect i.e. creditors of such company cannot sue members directly andthey can only report to the winding up of the company on default because a company has a separate entity in

law. Liability of members is enforceable only at the time of winding up.

Such a company may or may not have share capital. The articles of association of an unlimited

company must state the number of members with which the company is to be Regist-ered and, in case ofcompany having share capital, the amount of share capital with which the company is to be registered. Such

company can increased or reduced its capital by passing a special resolution without the sanction of the court.

Moreover, unlimited company is free from the restriction imposed by Section 77 and can purchase its ownshares. Such companies are, however rare these days.

(F)

Basis of distinction Guarantee Company Company having Share Capital

Meaning If the memorandum states that theliability of members shall be

limited to the amount that they

have respectively guaranteed to payto the company in the event of

winding up of the company, the

company is said to be Companylimited by guarantee.

If the memorandum states that theliability of members shall be

limited to the unpaid amount on the

shares held by them, the companyis said to be a company limited by

shares.

Share capital A company limited by guaranteemay or may not have share capital

Such a company must have sharecapital.

Quantum of liability Every member shall be liable to

pay the amount that he wasguaranteed to pay to the company

in the event of winding up of the

company. Also, if the company hasa share capital the members are

liable to pay unpaid shares.

Every member shall be liable to

pay the unpaid amount on thshares held by him.

(h) Illegal Association :- An association or partnership is an illegal association ifIt consists of more than



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10 persons in case of banking business or

20 persons in case of any other business.Its object is the acquisition of gain byThe association or partnership or

The individual member thereofIt is not incorporatedAs a company under the companies Act 1956

However, a joint family carrying on business shall not be an illegal association.

If business is carried on by two or more joint families, while computing the numbers of persons, all the maleand female members of such joint families shall be counted but minor members shall be excluded.

Q.8. A promoter stands in fiduciary relationship towards the company he promotes. Explain.Or

Who is a promoter? Discuss his position in relation to the company of which he is the promoter.Ans. A Promoter is a person who does all the necessary preliminary work incidental to the very formation ofthe company. The legal or actual position of a promoter is very abnormal. He is not a trustee for the company

because there is no company yet in existence. For the same reason, he cannot be the companys agent either.As per the spirit of the provisions of the Companies Act with regard to promoters and some judicial

opinions, it may be clearly inferred that a promoter stands in a fiduciary position or relationship to thecompany. Fiduciary position means that h holds a position of good faith (complete confidence) and trust. Inthis position, he is required to act in the following manner:

(i) Transfer of benefits: A promoter, if he has secured any benefits from the negotiations/contractsentered into by him for the company, must pass on all such benefits to the company.

(ii) Not to make any profit at the expense of the company: A promoter must not make any profitdirectly or indirectly. At the expense of or by using the name of the company. If any secret profit is

mad in violation of this rule, the company may, on discovering it, compel him to account for and

surrender such profit.

(iii) Not to make unfair use of position: A promoter must not make an unfair or unreasonable use of hisposition and must take care to avoid anything which has the appearance of undue influence or fraud.

(iv) Full disclosure to the company: A promoter must make full disclosures of material facts and of hispersonal interest or profits to the company regarding the transaction, conducted with it. He can sellhis own business to the company at a profit. It is not forbidden by law. However, he has to make a

full disclosure in this connection.

Promoters are actually the first parsons who get an opportunity to control companys affaires even

before it is formed. They perform a number of operations which are known by only the business world

Promoter work till the company is born i.e. it is incorporated. A person is a promoter or not, is a matter of factand not law. However, a promoter has got no right to get any remuneration from the company he promoted

unless there is a contract or agreement entered into by him and the company after it is formed. He cannot evenclaim any reimbursement of expenses incurred by him during the promotion stage.

Q.9. Explain the following:(a) Preliminary or Pre-incorporation Contracts(b) Provisional contracts(c) Certificate of Incorporation.(d) Certificate of Incorporation.



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Ans. (a) Preliminary contracts: During promotion stages, the promoters of the company have to enter intovarious contracts with so many parties. Such contracts are all necessary for purposes such as purchasing someproperty or hiring the services of professionals like lawyers, technicians, etc. Legally, any such contracts are not

binding on the company after it is incorporated. All such contracts are called Preliminary ContractsCompany can neither sue not it can be sued on the basis of such contracts because the company was not a partyto any such contracts. A company cannot even ratify on adopt such contacts to get the benefit of such contracts.

It is so because even ratification once done takes effect from retrospective time when the company was not in

existence.

To put in summary from:

Company is not bound by any such contracts.

Company itself also cannot sue on the basis of any such contracts.

Promoters themselves are or remain personally liable on all such contracts.

Company, after its incorporation, cannot even ratify such contracts.

Specific performance of such contracts can be enforced by other parties against the company ifsuch contracts are warranted by the terms of incorporation of the company. This is so provided underprovisions ofSpecific Relief Act. For this company has to adopt such contracts in writing after its

incorporation.

(B) Provisional Contracts: Contracts made after incorporation but before obtaining the Certificate tocommence business by the, company are termed as Provisional Contracts. According to Section 149(4) any

contract made by a company before the date on which it is entitled to commence business shall be provisional

only and shall not be binding on the company on the company until that date, and on that date it shall becomebinding. Therefore, if a company enters into contract after its incorporation but never gets the certificate to

commence business, contracts so entered shall not be binding upon the company. In reference to OttoElectrical Manufacturing Company, Jenkins Claim (1906) 2 ch. 390, a supplier of furniture to the companyfailed to recover his claim from the company since the company never became entitled to commence business.

The term Provisional Contract applies only to public limited companies as, only these companies

required to obtain Certificate of Commencement of Business. A private company is not required to obtainthis certificate. Private company can commence its business operation as soon as t gets certificate ofincorporation.

(C) Certificate of Incorporation, Incorporation of a company is the second stage of the company. It is effectedregistration with the Registrar of companies. For getting a company registered, certain documents have to be

field with the Registrar of Companies of the State wherein the Registered Office of the Company is to situated

These documents can be as under:

Companys Memorandum of Association.

Companys Articles of Association.

List of Companys first Directors.

A declaration that all statutory requirements have been complied with.A long with the above documents necessary filing fees and registration fees at the prescribed rates

are also to be paid. On going through these and other papers, if the Registrar is satisfied then he issues aCertificate of Incorporation t the promoters [Section34]. The certific-ate of incorporation brings the companyinto existence as a legal person. Upon its issue the company is born. Section 35 states that the Certificate, once

issued, is conclusive evidence of the fact that the company has been duly registered. In other words, once acertificate of incorp-oration has been granted, no one can question the regularity of the incorporation. In the

famous Peels case, Lord Cairns observed when once the certificate of incorporation is given, nothing isto be inquired into as to the regularity of the prior proceedings.



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It must, however, be noted that if a company having illegal objects has been registered, the illegal

objects do not become legal by the issue of the certificate. But the certificate would be a;; the same conclusiveand the legal personality of the company cannot be extinguished by cancellation of certificate of incorporation

Bowman Vs. Secular Society Ltd. The remedy in such a situation, would be To wond up the business.

Q.10. What is a Memorandum of Association? What are its contents?

Ans. The Memorandum of Association of a company is its main or principal document. No company can beregistered without it. It is as such also regarded as a life-giving document or the charter of the company, as it

regulates the relationship of the company with the outside world. Like constitute of a country, the Memorandum

of Association contains fundamental condition upon the basis of which the company is allowed to come into

existence. All such condition are ultimately necessary in the interests of all the parties going to deal with thecompany in future. These parties may be creditors, debtors, general public or even shareholders. It lays down

the powers and limits f the company beyond which the company cannot go. Any acts of the company outside

the scope of the Memorandum of Association are all regarded as just void. In other words, anything donebeyond the scope memorandum is ultra vires and devoid of any legal effect. The Memorandum of Association

is a public document and is open for inspection by any one even from public. All those dealing with the

company are presumed to have gone through it and t have knowledge of its contents. It through theMemorandum of Association that all those dealing with the company are enabled to know what the permitted

range of the company is.

According to Lord Mac Millian The purpose of memorandum is to enable the shareho-lders, creditorsand those who deal with the company to know its permitted range of enterprise.

According to Lord Cairns- The memorandum of association of a company is its charter and defines thelimitations and the powers of the company established under the Act.

Memorandum of Association has to be:

Printed;

Divided into paragraphs and numbered;

Signed by seen subscribers (or two in case of private company);

In prescribed from given in the schedule of the Act.

Clauses (contents) of Memorandum of Association: The memorandum of association of every company musthave the following clauses:

1. The name clauses: The name of the company is given in this clause. The name must have the wordLimited as the last word of the name in the case of a public Limited company and with

Private Limited as the last words of the name in the case of private Limited company.A company may choose any name but it must not be undesirable in the opinion of the Central Govt

Hie proposed name should not be identical with or too closely resemble the name of an already

existing company.

2. The Registered office clause: Every company must have a registered office. This clause states the

name of the state in which the registered office of the company will be situated. The exact addressmay be communicated later on to the Registrar of Companies, but not later than 30 days from the

date of incorporation of the company.

The importance of the registered office is that it is the address of the company where all

communication and notices are to be sent and where register of members/ debent-ureholders/charges, minutes books if general meeting etc., are kept.



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3. The object clause: It is the most important clause of the memorandum because it sets out theobjects of the company. A company cannot do anything beyond or outside the objects clause andany act done beyond them shall be void.

The objects clause is to be divided into two parts:

(i) The main objects of the company, and

(ii) Other objects of the company.The object of the company must not be illegal, immoral or opposed to public policy or against the

provisions of the Companies Act.

4. The Liability Clause: The clause contains the nature of liability of the members of the company. Incase the company is limited by shares, the liability clause must state that the liability of the

members shall be limited to the nominal value of shares held by him. In case of a company limited

by guarantee, the liability shall be limited to the amount which he has agreed to contribute in theevent of its liquidation. A company registered with unlimited liability need not give this clause in its

memorandum of association.

5. The Capital clause: This clause must indicate the amount of capital with which the company isregistered, and is known as authorized or nominal capital. This clause shall also state the number

and value of shares into which the capital is divided. The company may issue equity shares andpreference shares. The number of shares in each category and their value should be given.

6. The Subscription or Association Clause: This clause contains the names of signatories to theMemorandum and it reads like this:

We, the several persons whose names and addresses are subscribed, are desirous of being formedinto a company in pursuance of the Memorandum and we respectively agree to take the number of

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

The memorandum of association should be signed by at least seven persons in the case of publiccompany and by at least two persons in the case of a private company. The signature should also be

duly witnessed.

Q.11. How can the objects clause of the memorandum be altered?OrExplain the law relating to alteration of objects clause.

Ans. Alteration of objects clause: Section 17(1) of the companies Act states that the object clause and theregistered office clause in case transfer is contempeated from one state to another can be altered only if the

change enables the company:

To carry on its business more economically and more efficiently; or

To attain its main purpose by new or improved means; or

To enlarge or change the local area of its operation; or

To carry on some business which under existing circumstances may conveniently or advantageously by

combined with the business of the company; or To restrict or abandon any of the objects specified in the Memorandum; or

To sell or dispose of the whole or any part of the undertaking of the company or any of the undertaking

if the company; or

To amalgamate with any other company or body corporate.

If any of the above purposes can be achieved, a company may alter its objects clause by passing aspecial resolution. A copy of special resolution authorizing the alteration together with a printed copy of the

memorandum as altered must be filed with the Registrar of Compan-ies within thirty days from the date of the



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resolution. The Registrar shall register the same and issue a certificate of registration within one month. The

alteration will be effective only on getting this certificate of registration.

Q.12. Explain the producer of alteration of registered office clause.

Ans. Alteration of Registered Office clause: A company may change its registered office within the same cityby passing a boards resolution only to that effect and notice is to be given to the Registrar within 30 days of the

change.

If the company wants to shift is registered office from one city to another city within the State, it muspasses special resolution authorizing the change and file its copy to the Registrar within 30 days from the date

of shifting of the office of the company.

Where there is more than one Registrar of companies in a State and the registered office is to e shiftedfrom the jurisdiction of one Registrar to the jurisdiction of another Registrar with in the same State. The

company in addition to passing a special resolution also require the confirmation of the Regional Director. An

application for this purpose should be given to the Regional Director in prescribed form and he will confirm orotherwise the shifting after giving opportunities of being heard within four weeks then a certified copy of the

confirmation order shall be filed within two months with the Registe who shall make necessary changes in the

registrar and transfer the record to the Registrar in whose jurisdiction the office is proposed to be shifted. Thenews Registrar shall issue the Certificate of Registration within one month from the date of receipt of the order

In the meanwhile the Registered office is shifted to its new location and the notice of the new address shall be

given to the new to the new Registrar within 30 days of shifting the office. [Companies Amendment Act, 2000].

Change of registered office from one state to another state is possible only when such a change enables thecompany to meet out any of the purposes given in Section 17(1) [See previous question] of the Act. In addition

to this requirement, the following procedure is to be followed for effecting the change:

A special resolution must be passed by the company and a copy thereof should be filed with theRegistrar within 30 days.

The sanction of the Company Law board is to be obtained.

Company Law Board will confirm the change only when such a change enables the com-pany to meet outany of the purposes enumerated in the Memorandum.

A certified copy of the confirmation order of the Company Law Board together with a printed copy of

the altered Memorandum must be filed with the Registrars of both the States within three months of the

CLBs order. The Registrar of each State must register the same and certify the requisition within onemonth from the date of the filing of such documents. Further, the Registrar of the present State shall

transfer all the records and documents relating to the company to the Registrar of the new State.

Certificate of registration of the transfer from both the Registrars are obtained.In this way, registered office is shifted to its new location in the new state and the notice of the new address is

given to the Registrar within 30 day of the shifting of the office.

Q.13. Discuss the doctrine of ultra-vires. And its effect.

Ans. Put in simple terms, ultra means beyond and vires means powers An action outside theMemorandum of Association is ultra-vires the company. The doctrine of ultra-vires states that an act which is

beyond the power of the company, i.e. which is not stated in the object clause of its Memorandum of association

or which is not incidental or ancillary to the attainment of such object. Is wholly inoperative and voidConsequently, it does not bind the company. Moreover, the whole body of shareholders cannot ratify it.

Thus, a company may do an act which is:

(i) Necessary for, or

(ii) Incidental to the attainment of its object, or



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(iii) Which is otherwise authorized by the Act.

The doctrine of ultra-vires has been established to provide security to the investors and creditors of thecompany for it provides that ultra-vires activities shall not be financed out of their money. Their money shall be

utilized in a specified area only and consequently, it reveals the risk their investment faces.

The doctrine of ultra-vires and its effects were brought out clearly in the famous case AshburyRailway Carriage and Iron Co. Ltd. Vs. Riche. The objects of the company, in this case, wee (a) to makesell or lend on hire, railway carriages and wagons; (b) to carry on the business of mechanical engineers and

general contractors, etc.

The company entered into a contract with Riche for financing the construction of railway line inBelgium. The question raised was whether the contract was ultra-vires the company and even the whole body of

shareholders could not ratify it.

Effects of ultra-vires Transactions:

Injunction against the company: In case a company is about to undertake an ultra-vires act, the

members (even a single member) can get an order of injunction from the court restraining the

company from going ahead with the ultra-vires andAttorney General vs. G.R. Eastern RailwayCompany.

Personal liability of Directors: It is one of the duties of Directors to see that the corporate capital isused only for the legitimate business of the company. If any part of it has been diverted to purposeswhich are beyond or outside the limit of company's Memorandum of Association, then company'sdirectors are held personally liable to compensate the company for any loss which it suffers. If they

induce any outside (third party), to contract with the company in a matter in which the company has no

power to act, they will be personally liable for any loss suffered by the outsiders.

Breach of warranty of authority: It is a general law of agency that an agent must only act within thescope of his authority. So, if he goes beyond or outside it, then he becomes personally liable towards

third parties. Similar case is also applicable to the companys Directors who are only regarded as itsagents. They also have to play or act within the limits of company's powers. So they should not make

anyone outsider to contract with the company which is ultra-vires the company itself. If they do so, then

they become personally liable towards all such third parties. Ultra-vires contracts are all void in law and hence not enforceable either by the company or against the

company.

Property acquired, if any, under such ultra-vires acts; however, if got for consideration paid by thecompany, cab be enjoyed by or held by the company.

Ultra-vires Torts, if committed by its employees while pursuing its objectives in the course of theiremployment, then company is held liable. Otherwise, if any torts are committed while acting outside the

objects then the company is not liable.All ultra-vires acts are null and void. As such any such acts cannot be ratified by the company even by

unanimous approval of its shareholders or members. However, if an acts ultra-vires its Articles of Association,

then the same can be ratified by the company by changing the Articles of Association.

Q14. How can the Articles of Association of Company be changed? Explain.

Ans. Alteration of Articles of Association: The articles, being the internal regulations of the company, can befreely altered by the company, It can be altered or added to by passing a special resolution provided- (i) the

alteration is not contrary to the provisions of the Act, (ii) it is not inconsistent with or beyond the provisions of

the Memorandum, and (iii) it does not increase the liability of a member without his written consent bycompelling him to take more shares than he had held prior to the alteration. Moreover, no alteration can be

made which has the effect of converting a public company into a private company unless prior approval of the

Central Government has been obtained in that respect [section 31 & 38].Prepared by: - Mukesh Verma: 9212528831


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Thus, a company has been given wide powers under the Act to alter its Articles subject to the provisions

of the Act and the Memorandum of Association. The company cannot, in any manner, either by expressprovision or by any contract, deprive itself of the statutory power to alter its own Articles [Walker vs. LondonTramways Co.] However, the power to alter Articles by a company is subject to certain conditions. These conditions are afollows:

The alteration must not be contrary to the Memorandum and the Companies Act.

The alteration must be bonafide and in the interest of the company as a whole and not for the benefit of particular class of shareholders. [Allen vs. Cold Reefs of West Africa Ltd.] It must not result in a breach of contract with the outsiders.

It should not be illegal or opposed to public policy.

It must not have the effect of increasing the liability of members.

It should not constitute a fraud by the majority on the minority.

Procedure for alternation of Articles: The procedure for alteration is contained is Section 31 of thecompanies Act which states that a company may alter its articles of association by passing a special resolution.

However, if the alteration involves converting a public company into a private company, the approval of theCentral Government must be obtained.

It may be noted that a company can alter its articles o association as a matter of right. Section 31 gives a clear

and statutory power to the company to alter its articles of association. This power of the company cannot be

taken away in any manner. Thus, if there is a clause in the articles of association providing that the companywill not alter its articles, the clause will be invalid on the ground that it is contrary to the Company Act.

Similarly, a company cannot deprive itself of this statutory power by entering into a contract wit any one

(Andreios vs. Gas Meter Co.) Moreover, articles can be re-altered by passing a special resolution and they can

also altered with a retrospective effect (Allen vs. the Gold Reefs of west Africa Ltd.). The altered articles shallbe binding on the members in the same way as

Original articles.

Q.15. Explain the doctrine of:(A) Constructive Notice of Memorandum of Association and Articles of Association.(B) Indoor Management.

Ans. (a) Constructive notice of Memorandum of Association and Articles of Association: This doctrinesays that every person dealing with the company is presumed to have had notice of the contents of bothMemorandum of Association as well as Articles of Association. This is so because both these documents are

already registered or filed with the Registrar of Com-panies. As such, these are considered to be public

documents. Not only this, even the Office of the Registrar of Companies is also regarded as public office. Both

theses documents are quite open and very well accessible or available to all. This very presumption, that all

outsiders have read these documents, has been upheld in a number of cases. All outsiders dealing with thecompany are thus presumed not only to have read these and several documents filed with the Registrar of

Companies from time to time, but it is also presumed that they have understood their contents. This doctrineactually is an extension of the rule ofestoppel which prevents any outsider from saying that he or she did notknow the Memorandum of Association or the Articles of Association or their contents.

(B) Doctrine of Indoor Management: As against the above doctrine ofConstructive notice, the doctrine ofIndoor Management states that an outsider is not bound to like into the formalities of companys owninternal functioning or the companys internal management. So he is not affected by any irregularity in the

internal management of the companys functioning. This is known as doctrine ofindoor Management. This



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doctrine was laid down in famous case ofRoyal British Bank vs. Turquand (1856).In this case, a bond had been issued by Companys Directors to Mr. Turquand (T). Companys Article of

Association provided that bonds could be issued by if Directors were authorized by a Resolution at the

Companys board Meeting. In the present case, no such Resolution had been passed. However, court head in

favour of T and he was entitles to have assumed that such Resolution had been passed.So. Whereas the doctrine ofConstructive Notice helps to protect the company, the doctrine of Indoor

management helps to protect the personal (outsiders) dealing with the company. The latter is based on theprinciple of justice and public convenience as internal formalities of the company are not open to the public or

outsiders. Exceptions to the Doctrine of Indoor Management: No doubt that the doctrine of indoor management is ofgreat practical utility and has also been applied in a variety of cases involving rights and liabilities of the

companies and the outsiders, yet it has the following exceptions, i.e. a person dealing with the company cannottake the benefit of this doctrine in the following situations:

1. Knowledge of Irregularity: Where a person dealing with a company has actual or constructive (virtual)knowledge of the irregularity as doctrine of indoor management. For example, in Howard vs. PatentIvory Co., the Directors of the, company could borrow on behalf of the company and amount upto 1,000 and for any amount beyond1000 they were required to obtain the consent of the shareholders inGeneral Meeting. The directors themselves lent to the company an amount in excess of1,000 withoutthe consent of shareholders. Held, the directors had notice of the internal irregularity and hence thecompany was liable to them only1,000.

2. Suspicion of irregularities: Sometimes, a person dealing with the company has some suspicion ofirregularity regarding the internal management. In such cases also, he cannot take the benefit of the

doctrine of indore management. Sometimes, the circumstances surrounding the contract are suspiciouswhich invite some enquiry. In this situation the person dealing with the company should make proper

enquiry. Thus in Underwood vs. Bank of Liverpool, the sole Director of the company in this case paidinto his own account cheques drawn in favour, of the company. Held, the bank was liable as it ought tohave made proper enquiries before crediting the account of the Director.

3. No Knowledge of Articles: This rule cannot be invoked in favour of a person who did not read theMemorandum and Articles and thus did not rely on them.4. Where there is forgery: If an outsider relies or acts on a forged document, then also the rule of indoor

management does not apply. This doctrine only applies to matters involving irregularities and not tothose involving illegalities. In a case the companys secretary had issued a share certificate forging thesignatures of two Directors as required under the companys Articles of Association. Held, the

shareholders claim to be member was turned down.

5. Acts which are beyond or outside Apparent Authority: In such cases also the company is not liableSo where a person had accepted transfer of companys property from its accountant, the transaction was

held to be just null and void as it was outside the apparent authority of an accountant [Anand Bihari LalVs. dinshaw & Co.]

Exceptions of Indoor Management :-The doctrine of indoor management is subject to the following exceptions or limitations:

1. The rule does not protect any person who has actual or contructive notice of the want of authority of theperson acting on behalf of the company.

2. The rule cannot be invoked in favour in favour of a person who did not in fact consult the companys

memorandum and articles and consequently did not act in reliance of those documents.

3. If an officer of the company act in a manner, which could not ordinarily be within his powers, the persondealing with him must make proper enquiries and satisfy himself as to the officers authority. If he fails

to make enquiry, he cannot rely on the rule.



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4. The rule does not apply where a person relies upon a document that turns out to be forged.

5. The rule does not apply to transactions which are illegal or void-ab-initio.

Q.16. Distinguish between Memorandum and Articles.

Ans. The memorandum of Association differs from the Articles of Association in the following respects:

Basics of Distinction Memorandum of Association Articles of Association

1. Contents It contents the fundamentalcondition upon which alone the

company is allowed to be

incorporated. It defines and limitsthe objects of the company beyond

which the actions of company cannot

go.

It contains the internal rules andregulation relation to management

of the company.

2.Fundamental/ Subordinate It is fundamental document It is subordinate to the

Memorandum.

3. Compulsory/ optional Registration of Memorandum is

compulsory for any public company.

Registration of articles is not

necessary in case of a public

company. Public company may optfor table-A for its incorporation

purposes.

4. Relationship defined It defines the relationship between

the company and outsiders.

Ts governs internal relationship

between the company and the

members and generally have nothingto do with the outsiders.

5. Alteration Memorandum cannot be altered

easily. The company has to followthe strict procedure for the alteration

its clause.

Articles can be easily altered by

passing a special resolution.

6.Binding Effect ofultra vires

act

Acts done by a company ultra vires

the memorandum are void and

cannot be ratified by theshareholders

Acts done by a company ultra vires

the articles but ultra vires the

memorandum are simply irregularand not void and can be ratified

subsequently by the shareholders.

7. Remedy in case of ultra

vires

Outsiders have no remedy against

the company for contract entered

into ultra vires the memorandum.

Outsiders can enforce contract

against the company even if it isultra vires the articles

Q.17:- Define Corporate Identity Number?Ans:- Corporate Identity number is a 21-digit number assigned to every company incorporated on or after

Novermber 1, 2000. The Corporate Identity Number allotted to a company indicates listing status, economic

activity (industry), State, year of incorporation, ownership and sequential number assigned by ROC(Registration number)

Ist Digit Listing Status

Next 5 Digit Economic Activity (industry)



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Next 2 digits State

Next 4 Digits Year of incorporation.Next 3 digits Ownership

Last 6 Digits Sequential number assigned by ROC.

Q.18 :- Define Director Identification Number. ?

Ans:- Director Identification Number (DIN) is a unique identification number for an existing director or a

person intending to become the director of a company. In the scenario of e-filing, DIN will be a prerequisite for

filing of certain company related documents.Any individual who is a director or intends to be a director of a should apply for A DIN.

The procedure for obtaining DIN is as follows:Visit: MCA portal and fill DIN application online, a simple form available on the link Apply for DIN on

submission of this form, a Provisional DIN is generated by the system and is displayed on the screen. Save and

take a print out of the filled form, affix your photograph and send the same, along with photocopies of identityand residence proof duly attested by Notary / Gazetted Officer/ Certified Professionals ( CA/CS/CWA) to the

following address

MCA DIN CELLP.O. BOX NO-03, 201301

Uttar Pradesh, India.

The form will be processed by the MCA DIN Cell. Once approved, DIN confirmation and activation letter will

be sent to the applicant. An email in this regard will also be sent to the application at the email ID Provided inthe DIN application.

Q.19 :- Printing and Signing of Memorandum. ?Ans :- Sec-15 :- The memorandum shall

Be printed.

Be divided into paragraphs numbered consecutively

Be signed by each subscriber to memorandum and

Include the name of at least 1 witness who shall attested the signature of the subscribers.

Q.20:- DEFINITION OF PROSPECTUS AND CONTENT OF PROSPECTUS.

Ans:- Prospectus means :- Any document described or issued as a prospectus.

Prospectus includes :- Any notice, circular, advertisement or other document, inviting deposits from the public

or inviting offers from the public for the subscription or purchase of any shares of debentures.

Q.21:- LIABILITY FOR OMISSION OF FACTS IN PROSPECTUS.

Ans:- LIABILITY FOR OMISSION CONDITIONS:- Omission of any fact required to be disclosed u/s 56read with schedule II. Loss is caused to the investor by subscribing for shares. The investor relied and acted

upon the prospectus.

DEFENCES AVAILABE TO THE DIRECTOR :- The person proves that he had no knowledge of the matter

not disclosed in the prospectus. The person proves that the omission arose from an honest mistake of fact on his

part. In the opinon of the court, the omissions were immaterial. In the opinion of the court, the omissions shouldreasonably be excused.

CRIMINAL LIABILITY FOR MIS-STATEMENT IN PROSPECTUS :- Every person who authorized theissue of a prospectus containing an untrue statement shall be punishable with imprisonment upto 2 years or fine



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upto Rs. 50000 or both.

DEFENCES :- The person proves that the statement was immaterial. The person proves that he had reasonableground to believe that the statement was true and he continued to believe upto the time issue of the prospectus

that the statement was true.



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