corporate law 1
DESCRIPTION
concept of company lawTRANSCRIPT
Company Law 1Notes
12/20/2010
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Corporate Law 1.
What is a Company ?
What is its status ?
In terms of law company means a company formed and registered under the
companies act.
Salomon V Salomon & co (1895-99) All ER Red 33
It is a legal entity termed as a legal person having perpetual existence being
separate from the members who have found and administering it .
It is a legal person and is different from the persons found it and administering it
Could it be an association of few individuals aiming for a common goal through
an united effort?
Could company be an institution or enterprise to attain certain economic or
social goal ?
Could it be an undertaking that hires money from the public and largely
responsible to the public ? Public Accountability.
How it is different from partnership and other business undertakings ?
Features of Corporate personality.
Perpetual succession and Common seal,
Capacity to sue and be sued,
Right to own and dispose property,
An entity different from its members,
Body corporate and Independent existence,
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Limited liability,
An institution for the attainment of a common goal,
An independent self regulated enterprise,
Professionally managed entity with structurized system of conduct and functioning,
Legally recognized association which is entitled to have public contributions,
At the same time being accountable to the public.
Body Corporate:
Company is vested with a corporate personality through incorporation
Body corporate is defined to include a company incorporated under the
companies act including a company outside India.
(Ashoka Marketing Ltd V. PNB, 1930, 4 SCC 406)
The expression body corporate is wider than the term company.
Every company incorporated under the act is a body corporate but every body
corporate is not a company under the act.
Incorporation is a method of establishing a body corporate but not the
only method
The expression would include all corporations created under special acts
of parliament.
(Ayurvedic & Unani Tibia college V St of Delhi (AIR, 1962 SC 458
Societies registered under the societies registration act are not body
corporate
4
Salomon V. Salomon & Co (1895-99), All ER, 33
Salomon a boot and shoe manufacturer takes over his own business through
establishing a company by name Salomon & Salomon
His family members including himself were seven subscribers to the
memorandum of the company with two of his sons and himself being the
Board of directors
The business was transferred to company with Salomon taking majority of
shares and debentures
Charge was created on the company assets for the debentures held by
Salomon
Within a year company went into liquidation with some assets, debentures
and unsecured creditors.
Liquidation of assets could not provide the amount that is required to meet
the different stakes
Since there was a charge on the companies assets to the debentures held by
Salomon the amount realized on assets was paid to Salomon
Nothing was left to the unsecured creditors to be paid who bring up a
litigation before the court of law challenging the creation of the company
itself by the family members of Salomon with a sole purpose to take over
the existing business and to fraud the creditors
It was contended that since Salomon had the vast control on the affairs of
the company being the managing director, with other directors being his
sons the company was never in existence rather it was solely his business
and company was a fraud
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Court opined that Company is at law a different person altogether from
the subscribers of the memorandum and its members
When a memorandum is signed and duly registered the subscribers are a
body corporate irrespective of their personal status and influence on the
company.
Salomon company was not a myth or fictitious, rather was a real company
fulfilling all the legal requirements
There did not exist any provision which precluded the members from being
related to each other
While accepting the contention that the other six members being mere
puppets in the hands of Salomon, nonetheless it was observed that such
practice, while it might result in certain undesirable outcomes, was in no
manner whatsoever violative of any statutory provision.
The contention that the company was defrauded into the purchase of Salomon’s
business, was also rejected on the ground that the decision was taken in a
meeting of the Directors of the company and the fact that such Directors,
being the nominees of Salomon, must have been influenced by him, did in
no way detract the legality and propriety of the transaction
The company is at law a different person altogether from the subscribers
to the Memorandum and, although it may be that after incorporation the
business is precisely the same as it was before, and the same persons are
managers, and the same hands receive the profits, the company is not in law
the agent of the subscribers or trustee for them. Nor are subscribers as
members liable, in any shape or form,
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Kandoli Tea co Ltd, Re (ILR) 1886 13 Cal 43
A tea estate was taken over through establishing a company by the same
persons who were running the estate
Affected persons initiated court proceedings by contending that it is the
owners of the estate who themselves are party to the company and the
subsequent take over, therefore it is a transfer of property among themselves
under another name by fraud
Calcutta High Court opines that company once it is formed is a separate
entity from the its members and the status of the members before and
after does not matter. The transfer is valid as if the members of the company
had been different persons
According to S. 34(2) of the Companies Act, 1956 the incorporation
transforms a company into a body corporate capable of functioning as an
institutionalized entity.
the independent corporate personality of a company makes it the owner of
its assets and the bearer of its liabilities.
Praga tools Corp V Imanual (1969) 1 SCC 585
Even if the affairs of the company are controlled by one person, company is a
legal entity and it is irrelevant if the directors or members belong to sale
family or even if it is a one man company.
Unlike a partnership, the members in a company have a liability restricted
to the nominal value of the shares owned by them or the sum guaranteed
by them
There is nothing in the legislature which prohibit such one man
companies and great majority of them are bona fide according to the letter of
the law.7
The law recognizes the existence of the companies irrespective of the motives,
intentions schemes or conduct of the individual share holders and members.
Perpetual succession:
Members may come, members may go but the company goes on forever
Once incorporated through a legal process the legal person called company should
have to go through another legal process to loose its existence, otherwise it is
perpetual.
Provides certainty and stability in the corporate field and would have impact on
the rights and obligations of the company and the dealings of the company with
others.
Business takes place on the basis of the past performance of the company or the
future opportunities. Status and stability of the members does not hamper the
stability and status of the company.
German Date Coffee Co (1982 20 Ch D 169)
Gopalpur Tea company Ltd V. Penhok Tea co Ltd (1982, 52 comp Cas 238 Cal)
Even if the objective behind the establishment of the company is no more feasible ,
even when company cannot be continued it is only through the legal process the
perpetual succession could be validly disturbed
Company enjoys expensive birth and equally expensive funeral regardless of the
consequences.
Nothing can affect the perpetual existence of the company except the legal process to
close it validly.
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Separate Legal entity
Being separate an distinct from its members, company is an artificial personality
recognized as a legal person or corporate personality under law
The status of the members would no way affect the identity of the company which is
rather a separate legal entity.
Salomon and Salomon
Kandoli tea company
Dealings in its distinct capacity
By virtue of its separate existence it is legally empowered to execute dealings in
its own capacity. Company can deal, acquire, dispose property in its name and
under common seal.
Assets and properties of the company or not of the share holders but of the company
itself
On the similar lines it can execute legal proceedings in its legal capacity being
recognized as a legal person
Limited Liability
When obligations are incurred on behalf of the company the company is liable
but not the members.
London & globe finance Corp (1903 1 Ch 728)
J. H Rayner Ltd V Dept of Trade and Industry (1989, 3 WLR 969)
If the company has unlimited members, liability would be unlimited
If it is limited by shares, members liability would be limited by the nominal
value of the shares held by them.
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If the company is limited by guarantee, the liability of the members is limited
to the extent of their guarantee
Barrowing
Large number of assets, greater stability and chances of returns would
fetch better barrowings from the creditors
Possibility of charge on the assets of the company for the creditors would
provide incentive tool to the lenders.
Public subscription to the capital would further enlarge the scope of
financial mobility in the company
Perpetual nature and stability would play a vital role in subscriptions and
barrowings
Liquidity
Transfer of shares, trading of shares in the stock market would provide easy and
quick liquidity for both the company and as well the investors
Without anything being paid from the company, investors can get their money back
through transfer and trade
The articles of association which shall provide for the manner in which shares and
securities of the company can be effectively traded and transferred (Sec: 82 of the
Act)
Liquidity of assets and finance being a prominent feature in the working and stature
of the company provides for easy and quick financial mobility and exchange of stakes
in the company unlike other business undertakings.
However there could be some restrictions for transfer of shares in case of private
companies since are considered more analogues to partnerships than public
corporations.
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Types of companies
On the basis of nature of incorporation
Statutory
Registered
Chartered
On the basis of share holding
Private
Public
Government
On the basis of inter company relation
Holding company
Subsidiary company
Group companies
Joint venture
On the basis of liability:
Unlimited
Limited by shares
Limited by guarantee
On the basis of nature and function
Manufacturing company
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Mining company
Trading company
Service company
On the basis of nationality
National companies
Transnational companies
Multinational companies
On the basis of aims and ambitions
Company with profit motive
Company without profit motive
On the basis of standing at the stock exchanges
Listed company
Unlisted company
Formation & Incorporation: A blue print
Planning Stage:
Formulation of an Idea
Design of the project outline
Viability study
Private and Public
Study of legal implications
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Identification of persons to sign MOA
Appointment of Lawyers
Identification of Promoters
Association of persons and promotion
Association of persons and Promoters initiation
Obtaining license/permit if necessary
Pre incorporation dealings
Making agreements for infrastructure
Pre incorporation contracts
Legal compliance Check
Registration & Incorporation
Preparation of constitutional documents
Framing of Memorandum of Association
Designing of Articles of Association
Documentation
Minimum Subscription to the Memorandum
Identification of the registered office
Application for registration (Sec: 33)
Statutory declaration, Sec: 333(2)
Clarifications and removal of difficulties with the Registrar of companies
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Conditions if any
Registration of the company
Record with the Registrar of Companies
Issue of Certificate of Incorporation (sec: 34)
A Corporate personality is created
Commencement of Business :
Private companies:
as soon as certificate of incorporation is obtained
Public companies:
Design prospectus
Invitation for public subscription and issue of prospectus ( Sec; 149 )
Statement in lieu of prospectus
Public notice or advertisement
Minimum subscription (Sec; 149 A)
Allotment of Share (Sec:149 (1)(a))
Certificate of Allotment, Sec:149 (1)
Appointment of directors.
Certificate to act as Directors (Sec; 266)
Statutory Declaration (Sec: 149 (1) (d) and 149 (2) (c))
Certificate to commence business given (Sec: 149)
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Formation of a company
A Company may be formed for any lawful purpose by (Sec: 3)
Seven or more persons in case of a public company
Two or more in case of a private company
One person in case of One Person Company
Through subscribing to the MOA
Before subscription to MOA they are called as Promoters
Who would undertake all promotional activities of the company including
pre-incorporation contracts
They also called as subscribers because they have signed and subscribed to
the MOA
Promoters could also be professionally appointed for the purpose who would
promote the company and take all necessary steps of formation of a company
and leave the Company at that level to the subscribers of MOA
Promotion and formation stage is very complex stage and most of the
important decisions and activities are undertaken at this level without which
company would not come into existence.
These decisions would definitely give rise to certain liabilities and obligations
the legal status of which is contextual and debatable.
Pre incorporation contracts are part of such contextual activities and
decisions.
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Promoter:
Means a person who has been named as such in prospectus or person having
control over the affairs of the company whether as a share holder, director
or otherwise (Sec: 2(zzq))
Twycross V Grant (1877, 2 CPD 469)
Promoter is one who undertakes to form a company with reference to a
given project and to set it going and who takes the necessary steps to
accomplish that purpose.
Those who carry on the work of formation possess the character of
promoter.
Once the company is formed, directors are appointed and take the control of
the company, the purpose and functions of the promoter come to an end.
Promotion:
All the business operations necessary to bring a company into existence are
called promotion.
Whaley Bridge Co v. Green (1879, QBD, 111)
Promotion is a business operation by which a company is generally brought
into existence.
These operations include obtaining licenses, permits if any, executing pre-
incorporation contracts.
This includes executing pre-incorporation contracts and provisional
contracts.
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Pre-incorporation contracts and Provisional contracts:
Pre-incorporation contracts are those which have been executed before the
incorporation of the company.
Provisional contracts are those that have been executed after the
incorporation of the company but before the commencement of the business.
According to sections 15 (h) and 19 (e) of the Specific Relief Act, before the
incorporation of the company, a promoter may enter into a contract for the
purpose of the company.
Specific Relief Act states :
The contract should have been entered into by the promoter for the purpose
of the company.
The terms of incorporation should warrant such contract.
The company should accept the contract after incorporation and
communicate the acceptance to the other party.
Specific performance of the contract may be enforced against the company if
the above conditions are fulfilled.
Kelner V. Baxter (1866 LR 2 CP 174)
On Pre-incorporation contracts company is not liable but the individuals who have
executed the contracts are personally liable
New borne V. Sensolid (Great Britain) Ltd (1954, 1 QB 45)
The contracts which have been entered into at the time when the company was not
in existence cannot bind the company. The persons executed those contracts cannot
be called as the agents of the company which is formed aftermath and such contracts
cannot be enforced against the company.
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Phonogram Ltd V Lane (1982, 1 QB 938)
According to the English company Law (Sec; 36 C (1)) read with of the European
communities Act (Sec: 9 (2) promotes are personally liable on a pre-
incorporation contract.
Braymist Ltd Wise Finance Co Ltd (2002, 2 All ER 333)
A contract which purports to be made by or on behalf of a company at a time
when the company has not been formed has effect, subject to any agreement to the
contrary as one made with the person purporting to ac for the company and he is
personally liable on the contract accordingly.
Seth Sobhagmal Lodha V. Edward Co. Ltd (1972, 42 Comp. Cas 1 (Raj)
Contracts on behalf of a company before its incorporation are not binding on
the company.
The general principle is that no one can authorize another to do an act on his
behalf before he himself comes into existence, before the birth one cannot appoint
agents, therefore promoters acting as an agent on behalf of the principle (prospective
company) has no legal ground.
A company which is not yet born cannot be represented and hence pre-
incorporation contracts bind promoters personally. A company can validly enter
into a contract only after it has come into existence or once it is incorporated.
Persons entering into contracts with promoters needs to be cautious about the
role and status of the company.
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Doctrine of Equity
Weavers Mills Ltd V. Balkies Ammal (AIR 1969 Mad 462)
Promoters purchased some properties through pre-incorporation
contracts for the company to be promoted. On incorporation, the company assumed
possession and built structures upon it.
It was held that company adopted the benefit of the pre-incorporation
contract, through accepting the benefits arising out of it.
Therefore according to the principles of equity company could validly enforce
the contract.
If the company accepts the benefits of the pre-incorporation contract expressly
or impliedly the company could be held liable and order of specific performance
can be given against
The contracts executed by the promoters have been utilized and hence can be
said that all that the promoter have done has been warranted by the process of
formation of the company and in such cases promoters can very well enforce the
Specific Relief Act against the company.
IncomeTax Officer V Bhurangiya Col Co Ltd (AIR 1953 Pat 298
Pre-incorporation contracts could be adopted by the companies after their
incorporation either through:
Incorporating such contracts into the articles of association
(ratifying the contract)
By entering into a fresh contract with the third party to release the
promoter from the liability (adopting the contract)
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Executing a contract with the promoters to validate and authorize
his involvement in the contract. (establishing a legal relationship between the
company and the promoter)
Provisional Contracts:
Provisional contracts are the ones which are considered to have been entered into
by the company itself.
These are the contracts executed after the issue of certificate of incorporation
but before the issue of certificate of commencement of business.
Provisional contracts are valid contracts pending the commencement of business by
the company.
These contracts bind the company once it commences the business and could be
validly enforced against the company.
Contract, the status of which is provisionally valid, pending the obtaining of the
certificate, of commencement of business, by the company.
These contracts and their status and validity comes into picture only in case of
public companies.
These contracts are considered null and void if the company fails to obtain the
certificate of commencement of business.
Otto Electrical Manufacturing Co. (1906, 2 Ch. 390)
Once the certificate of commencement of business is obtained the provisional
contract binds the company without any further formality. If the certificate is not
obtained the contract becomes null and void
Provisional contracts: An outline
Possibility of these contracts only in case of public companies.
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It is a contract entered into by a public company after its incorporation but
before it is entitled to commence its business.
This is a contract entered into by the company itself and is binding on the
company.
No need of ratification, adoption or acceptance.
Pre- Incorporation contracts: An outline (Before Provisional Contracts)
Possibility of these contracts in case of both Public and Private company.
It is a Contract entered into before incorporation.
In general company is liable for these contracts and the individual
promoter is liable to the third party.
A company cannot enter into a contract before it is incorporated. However,
under sections 15(h) and 19 (e) of the Specific Relief Act, a promoter may
enter into a contract for the purpose of the company.
According to the same provisions, the company is bound by such contracts and
should accept the contract after incorporation and communicate the same to
the other party.
Pre-incorporation contracts could be adopted, ratified by the company.
Procedure of Registration/Incorporation: (Sec: 7 )
An application shall be filed with the Registrar along with
Memorandum of Association
Articles of Association
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Declaration that all the requirements of the Act and rules there under with
respect to registration have been complied with; by an Advocate, Charted
Accountant, Cost Accountant or Company Secretary who is engaged in the
formation of the company or by a person named as
Director/Manager/Secretary of the company.
An affidavit from each of the subscribers to the memorandum and of the
directors that they are not convicted of any offence in connection with the
promotion formation or management of any company or that they have not
been guilty of fraud/breach of duty during the preceding five years and that all
the documents filed with the Registrar for registration contain information
that is correct and true to the best of their knowledge.
Name, address, identity and complete details of the subscribers to the
memorandum and as well of the first directors of the company.
Interest of the directors of the company in other firms/bodies/companies and
their consent to act as directors.
The address and details of the place of the registered office of the proposed
company and the communication address of the company till registration.
Memorandum of Association
The charter of the company or the constitution of the company defining the scope of
the company and would define and decide the relationship of the company with
the outsiders.
Memorandum means the memorandum of association of a company as originally
framed or as altered from time to time in pursuance of any previous company law
or of this Act (Sec: 2(zzf).
Memorandum of a company shall state/contain: (Sec: 5, Bill) (Sec: 13, Act).
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The name of the company including whether it is private or public or OPC
company limited: (Name Clause)
The state in which the registered office is to be situated
(Registered Office Clause)
The objects for which the company is proposed to be incorporated
(Objects Clause)
The liability of the members (say limited by share, guarantee or unlimited)
(Liability clause)
The initial share capital of the company including the each shares of the
subscribers to the memorandum : (Capital Clause)
Name Clause:
The name of the company shall not be identical with or resemble too nearly
to the name of an existing company.
Should not have been prohibited from registering as the name of the company
government such as the name of the state, central government or local bodies.
A name which is undesirable in the opinion of the government such as those
prohibited under the Emblems and Names, prevention of improper use Act,
1950.
A registered or continuously used and established trademark under the
Trademarks Act, 1999.
Monopoly over the name and name being the symbol of existence of a
corporate personality.
23
Society for Motor Manufacturers and Traders Ltd V. Motor Manufacturers
and Traders Mutual Insurance Co Ltd (1925, 1 Ch 675: 133 LT 330)
Registration of Company through a name gains monopoly over the
name to the registered company. The companies existence and identity vests
in the name and hence no other corporate personality should claim the same
by the name, which would amount to violation of monopoly over the name
and as well the identity of the company which is represented by name.
The name of the company is part of its business and reputation, if
the same name is used by an another company it would deceive the public
and as well as the company
Ewing V Buttercup Margarine Co, (1917, 2 Ch 1)
Plaintiff Buttercup Dairy company uses Buttercup as their name, when
defendants registered Buttercup Margarine Company Limited as their
company name, the plaintiffs brought the litigation objecting the
registration.
The court viewed that since plaintiffs have already registered the
name they enjoy the monopoly over the name, besides, if defendants are
allowed to use the same name it would create confusion in the minds of
the consumers with respect to the origin and source of the defendant
company which would be detrimental to the plaintiffs. Accordingly
defendants were restrained from using the same name.
Archer Structures Ltd V Griffiths (2004, 1 BCLC 1 (CA)
Names with phonetic similarity, use of different style, font, color, words
conveying same meaning cannot be registered
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Plaintiffs MRJ Constructions is a registered company. Defendants
registered MRJ Contractors as their company name. Plaintiffs approached the
court contending similarity and near resemblance of the name.
Court held that using different words that convey same meaning or
using phonetically or apparently similar words in different style, font, color,
size or the combination of the above cannot avoid the confusion in the minds
of the public but rather would deceive, therefore defendants cannot use the
name.
The proposed name of the company could be reserved with the
registrar of companies.
Three names in order of preference shall be filed with the registrar.
The expression “public limited’’ would be added to the actual name of
the company in case of company being a public company.
The repression ‘private limited” would be added to the actual name of
the company in case of company being a private company.
It is done to ensure the public dealings with the companies to know
about the liabilities of the members of the company as a means of fair
practice.
On special permission from the central government a company can
dispense with the suffixes of ‘public limited’ or ‘private limited’ to its name
(Sec; 4, Bill) (Sec; 25, Act)
It is possible if the company is proposed to be established for the
purpose of promoting commerce, art, science, religion, charity or any other
such useful purposes the company could be exempted from using the
expression ‘limited’.
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In such cases the profits of the company shall be used only for the
promotion of such objects, activities.
Alteration of the name of the company
Name of the company could be altered either voluntarily or compulsorily on
the direction of the central government (Sec: 15, Bill) (Sec: 21,22)
Voluntarily alteration of the name of the company takes place through a
special resolution in the general body.
An obligatory or compulsory name of change could be initiated on the
direction of the central government through an ordinary resolution in the
general body meeting.
A record with respect to such change in name shall be filed with the ROC which
shall issue a fresh certificate of incorporation evidencing the change of the
company.
(Memtec Ltd V. Lumarmech (2001, 103, Comp Cas 1078, Del)
The change of the name of the company could be initiated by the
company itself or through the order of the government or the court.
In case of voluntary change of name there shall be a special resolution
in the general body and in case of compulsory or obligatory change of name
through either the order of the court or the direction of the government there
shall be an ordinary resolution in the general body of the company.
However the rights, liabilities and obligations of the company won’t
change but continue on account of change in its name.
Sindhvi Constructions India (P) Ltd V. ROC (1997, 90 Comp Cas, 299)
The procedure established by law should be followed to change the
name of the company. The statutory procedure of resolution in the general
26
body and the approval of ROC needs to be obtained before one can effect
change in the name of the company both in the case of voluntary or
compulsory
Malhati Tea Syndicate Ltd V. Revenue Officer (1973, 43 Comp Cas 337)
Once the name has been changed through a procedure established by
law, the company has to continue and perform its rights and obligations
arisen out of its dealings in its previous name.
The changed name or old name should not be used any further in its
dealings including those have been initiated under the old name.
Once the new name is obtained the corporate personality shifts from
old name to the new name entailing the company to carry on hence forth in
the new name
Kirloskar Proprietary Ltd V. Kirloskar Dimension (P) Ltd (1999, 96 comp
Cas 726
When a petition was filed for an injunction against the use of name
‘Kirloskar’ by and against the kith and kin of the same ancestral family
members , it was held that there lies a right to use ones own name/name of
a place/ancestral name in a bona fide manner.
Lords Insulations India Pvt ltd v. Regional Director, Department of
company Affairs, Chennai & Another (2004, 122, Comp cas, 892, Mad)
It was a writ petition by the petitioners challenging the order of the
Regional Director, ROC directing the petitioners to change their companies name
The petitioner company was incorporated in 2003 by the two
outgoing directors of the respondent company which was incorporated in 1977.
27
On a complaint filed by the respondent alleging similarity of the names
petitioners were directed to change their name which is similar to the respondents
companies name
Petitioner challenge the same by filing a writ petition at Madras High
Court which opines that words “Lloyds’ and ‘Lords” are similar and identical.
Besides, words are phonetically resembling and therefore it might cause
confusion in the minds of the public with respect to the identity and origin.
Hence, the direction to change the name of the petitioner company is
valid and could be upheld.
The court happened to consider public interest and as well private
interest of the respondent company in arriving at the decision while reading
similarity and resemblance principles into the company law jurisprudence
Registered Office Clause:
Also know as situation clause that speak about the place of the establishment
of the company (see Sec: 146 Act) (Sec: 11, Bill)
The official place of communication for the company, by the company and to
the company. It is the place where the officially registered office of the
company is being situated
Any change in the place of the business needs to be informed and registered
with the ROC (Sec: 17 A, Act)
Change of the place of the registered office within the state can be done
without actually amending the Memorandum
The situation of the registered office of the company is a matter of vital legal
significance as it determines which Registrar and High Court are having
jurisdiction over it. The clause also determines the domicile and nationality
of the company.28
At the time of incorporation Memorandum contains only the name of the
State where the company is situated, however within 30 days from the date
of incorporation company shall furnish complete details of the registered
office.
The following records shall be kept at the registered office:
Register of members (Sec: 163, Act, Sec: 83, Bill)
Register of Debenture holders (Sec: 163, Act, Sec: 83, Bill)
Register of Directors (Sec: 303, Act, Sec: 151, Bill)
Register of Charges (Sec: 143, Act, Sec: 76, Bill)
Books of Accounts ( Sec: 209, Act, 116, Bill)
Alteration of Registered Clause/Change of place.
For changing the office from one place to another in the
same/city/village a general resolution in the body is required, and no
alteration of the clause is required.
For changing the office from one city/village to another a special
resolution in the body is required and no alteration of the clause is
required.
For changing the office from one state to another alteration of
registered office clause is required and for this purpose a special
resolution is required and approval of Company Law Board and the
ROC is also necessary. The approval of Central Government is also
needed for altering the memorandum in this concern (Sec: 17, Act)
Every debenture holder/creditor shall get a notice and their
confirmation is required.
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Role of State: Can State Government object change of registered office of
the company?
In Re Orissa chemicals and Distillers Ltd ( AIR 1961, Ori 162)
A sugar production company decides to shifts its registered office from
Orissa to Andhra Pradesh. Contemplating loss of revenue and effect on
states economy government of Orissa objects the shifting of the office.
Company contends that it is free to shift its office to any state of its
choice. The court opines that state is an interested party and would
be affected by the change of the office, therefore, state can object the
change of office.
Mackhinnon Mackenzia & co Pvt Ltd. In re (1967, 37 comp cas. 516)
Company intends to shift its registered office from Bengal to
Maharashtra, when company files application with the central
government for confirmation of the alteration of memorandum for
shifting the registered office state of Bengal contests and raises
objections on the ground of revenue loss and effect on its industrial
economy.
The court views that state has no locus standi to raise objections and
company have been allowed to change its registered office according to
the procedure established by law.
Minnerva Mills Ltd v. Government of Maharashtra (1975, 45 Comp. Cas 1)
Company intends to shift its registered office from Maharashtra to
Karnataka.
The procedure established by law for the purpose that is a special
resolution in the general body has been passed and for approval and
30
confirmation from the central government and company Law Board an
application has been filed by the company.
The State of Maharashtra raises objections that change of registered
office of the company would affect its interests.
The state would suffer from revenue losses and as well shifting the
office of the company would have an adverse impact on the
economic scene and the industrial scenario in the state. Company
initiate court proceedings for directions in this regard.
The court opines that state can object only when there is any
pecuniary interest of the state is involved like pending of the arrears
of service tax etc.
Otherwise the state is not a party to the alteration of memorandum
and the change of registered office of the company.
Objects Clause:
It serves double purpose in the first place it gives protection to
subscribers who learn from it the purposes to which their money can be applied.
In the second place it gives protection to persons who deal with the
company and who can infer from it the extent of the company powers.
It enables the share holders and creditors and those dealing with the
company to know what is its permitted range of enterprise.
It enables the investor/creditor to know for what purpose his money is
going to be applied.
The clause determines purposes and objectives of the company and as the
powers of the company in pursuance those objectives.
31
There could be main objects and objects incidental, ancillary to the
attainment of the main objects.
The restrictive covenant of the object clause stipulates that the powers of the
company are limited for the attainment of the objectives set forth and any
ancillary, incidental objectives which are having proximate connection with the
actual objectives.
Further the objectives shall be in contravention of the provisions of any law
in force and the societal values.
Scope of the Objects Clause:
The object laid down in the memorandum stipulates the character of
personality of the company and strictly delimits the corporate existence.
It defines and at the same time delimits the status, scope, functions and
powers of the company.
The actions of the company must be invariably in confirmation to what has
been laid down as objects in the memorandum, otherwise those actions are void.
Ashbury Rly Carriage & Iron Co. Ltd Vs Riche (1875, L.R, 7 HL 663)
Acts done not strictly included in the object clause of the memorandum are
void.
The object clause sets out the reasons for the existence & functioning of the
company which should be adhered to by the company.
Company should exactly function as stipulated under the memorandum;
there could be ancillary functions which should be in proximate connection to the
main objectives.
Objects clause cannot contain words such as any measure which Board deems
necessary until unless those measures are analogues to the objectives.
32
At the same time objects clause cannot empower the board to do anything
other than what is required for fulfilling what is mentioned.
It is this type of strict construction and interpretation of objects clause that gave
rise to the doctrine of ultra vires.
Drafting of the objects clause:
Ultra vires means beyond powers and intra vires is termed as within the powers.
Main objects to be pursued by the company on its incorporation.
Objects incidental or ancillary to the attainment of the main objects, provide
there is proximate connection between the incidental and objects.
No independent objective under the guise of incidental object.
Other objects i.e., other than the main objects and the incidental objects no
other objective should be pursued by the company.
As a matter of general law there shall be no objects which go against any of
the existing laws in force.
A special resolution in the general body is required, to pursue an object, which
is not an incidental or main objective of the company.
An amendment to the object clause of the memorandum is the way out for
authorizing the company to undertake a new objective which is originally not
part of the objectives of the company.
Eastern Countries Railway V. Hawkes (1855, 5 HLC 331)
Company cannot devote any part of its funds to objects which are not
authorized by the memorandum.
It is a settled principle now that the capital of the company shall be used
only for those objectives mentioned in the memorandum.
33
Ashbury Rly Carriage & Iron Co. Ltd Vs Riche (1875, L.R, 7 HL 663)
The company comes into existence only for those purposes mentioned in
the objects clause and the funds of the company should be used only for
undertaking such acts which fall well within the scope of such objects.
In Re German Date Co. (1882, 20 , Ch.D 169)
If the company fails to work towards the furtherance of its objectives,
not only the objectives fails but as well the purpose and the very existence of
the company fails.
Re Cyclist Touring Club Co. (1907, 1, Ch. 269)
Any act which would defeat the objects of the company should not be
undertaken by the company, otherwise such acts constitute ultra vires of the
powers of the company.
Wamanlal V. Scindia Steam Navigation Co. (AIR 1944 Bom, 131)
The objects clause sets out the statement to the share holders, creditors
and all such others dealing with the company about the nature of use of
the funds in the company.
The statement of objects should give protection to the share holders
by ensuring that the funds raised for one undertaking are not going to be
risked in another.
Lakshmanaswamy Mudaliar and Others V. LIC of India, (1963, 1 Comp. L. J,
248)
While reading the well established principle in England, Lays down
guidelines on main, ancillary and incidental objectives.
34
Incidental objects proposed to be necessary for the attainment of the
main objectives should have a proximate connection with the main
object.
The people who are contending on the relevance of ancillary objectives
should establish this proximate but definite connection.
Any casual or remote connection cannot be construed as incidental or
ancillary and such acts constitute ultra vires of the powers and objects of the
company.
Objects and powers are different and both have got their own purview.
Object is the basic purpose of the company and the power is a mean or
necessary ingredient to achieve purpose.
In the strict sense powers shall not be included in the memorandum,
but in practice it has become customary to include in the object clause a
catalogue of powers also.
It may not be practically possible to mention everything that is
required for the attainment of the purposes of the company. At the same time
demarking on powers and delegations may not be possible in true sense,
therefore it is suggested not to mention or list the powers of the company.
Rather it would be advisable to leave it to the discretion of the board
of management of the company to undertake such measures and exercise such
powers which are necessary for the attainment of the objectives as specified,
provided there is enough checks and balances for such exercise.
The requirement of proximate connection also serves the purpose
retaining the focus on the basic objectives of the company and as well for
controlling such exercise of powers.
35
Substantive Ultra vires:
When the company lacks power/authority to undertake certain act that
is when the object clause is not providing for such an act, any act
undertaken in such situations is called as substantive ultra vires.
The company is not bound by the acts constituting substantive ultra
vires, since every person contracting with the company is supposed to know the
constitutional documents of the company.
Procedural Ultra Vires:
It is when the company is having power/authority to undertake certain act
that is, object clause is providing for such power, but the organ of the
company (authority exercising the power) has no authority to undertake
such an act.
Procedural ultra vires binds the company for two reasons.
The outsiders are not always expected to know the power arrangement inside
the company.
The act has been literally allowed by the company.
Construction of objects Clause and Ultra vires:
Many a times the construction and interpretation of the objects clause decides
on the acts of the company as ultra vires or intra vires.
Attorney General V. Great Eastern Railway Co. (1880, 5 AC 473)
The doctrine of ultra vires should be understood reasonably and applied while
regarding whatever is fairly incidental or ancillary as not to be ultra vires. The House
of Lords categorically points out that; company may undertake any measure that is:
Necessary for the attainment of the main objects or Incidental to.
36
Otherwise authorized by the law.
Re, John Beauforte (London) Ltd. (1953, Ch. 131)
The object of the company was to make ladies dresses. The company wanted to
manufacture veneered panels but necessary steps to alter the objects clause were
not taken. Company enters into three contracts namely 1) for the construction of the
plant 2) for the supply for veneers and 3) for the supply of coke
The company went into liquidation before performing the contracts, on litigation
initiated by the parties to the contracts, the court holds that the contracts are ultra
vires including the one for coke since while signing the contracts the name of the
company has been mentioned as ‘veneered panel manufacturers’.
Ashbury Rly Carriage & Iron Co. Ltd Vs Riche (1875, L.R, 7 HL 663)
The basic objective of the company is to make, sell, lend or hire railway carriages
and wagons, railway plants and general contractors. The company entered into a
contract with Riche to finance the construction of a railway line which the
company later repudiates.
Riche brings up litigation for damages for breach of contract and contended that the
contract is well within the meaning of general contract and was within the powers
of the company.
House of Lords holds that: the company comes into existence for only those
purposes to which the subscribers have signed.
The statement of objects serves two purposes, firstly it states the ambit and extent
of powers of the company and secondly, it states that nothing beyond the ambit shall
done or no attempt shall be made to use the corporate life for any purposes other
than the specified.
37
The general contractors must be constructed restrictively to mean the contracts
those are connected with the business of the company and the contract in question
is beyond the powers of the company.
Bell House Ltd V. City Wall Properties Ltd (1996, 2, Q. B. 656, C. A)
The objects clause states that Board Of Directors has power to carry on any
business which in the opinion of the Board of Directors may be advantageously
carried on.
The company is basically an engineering contractor; it undertakes the business of
procuring finance and enters into a contract with defendant company. On account of
defendants default, the plaintiff sue for specific performance.
Defendants contend that finance procuring is not an object of the plaintiff company
and it is ultra vires transaction. While plaintiff contended objects clause refers to the
beneficial acts and whatever is beneficial to the share holders must be construed
not as ultra vires.
Lower courts holds that ultra vires doctrine speaks about the competency of the
company to execute certain things and benefit need not be the criteria to execute
things which are beyond the objects clause.
The Court of Appeal states that the literal construction of the objects clause states
that BOD has power to carry on any business which is beneficial, therefore it is
not ultra vires but holds that the practice of such drafting of object clause should
not be allowed in the larger interest of the society.
Directors liability in ultra vires transactions:
It is the basic duty of the director is to take the objectives of the company
forward and utilize such resources as efficiently as possible for the furtherance of
the objectives of the company.
38
Director is an agent of the company and it is the duty of the agent to act within the
scope of the delegation otherwise he himself is liable but not the principal.
Modi V. Shamji Ladha (1866-67, 4 Bom HCR 185)
Deciding on the liability and the duties of the directors in case of ultra vires
transactions the court opines that; when the company is a party to any ultra vires
transaction/contract, the director would be personally held liable to the party
with whom the transaction has been entered into.
Kathiawar Trading Co. V. Virchand. ILR (1894, 18, Bom, 119)
If the money of the company has been diverted for any other objective than the one
specified in the clause or the one which is ancillary or incidental the director is
personally liable.
Directors can also held liable for breach of warranty of his authority that has been
granted by the company.
Injunctions against ultra vires transactions:
Members of the company can get an injunction to restrain the company from
undertaking an activity which is ultra vires of the objects of the company.
(Attorney General V. Great Eastern Rly Co. (1880, 5 AC 473)
Alteration of the objects clause:
Memorandum could be altered for the various reason specified under the Companies
Act. (Sec: 17, Act, 12, Bill)
There are various grounds on which company can alter its memorandum
To enable the company to carry on business in more economic and efficient
way or even to diversify the business.
To attain its purposes through new or improved means.
39
To enlarge/change local area of operation.
To undertake additional business which may be advantageously combined
with the existing business.
To restrict/abandon any of the objectives
To sell, dispose the company or amalgamate with some other company.
A special resolution in the general body is required and the same shall be
registered with the ROC (Sec; 18, act, 12, Bill)
While keeping the business of the company substantially similar but changing the mode of
conduct of the business
Straw Products Ltd V. Registrar of Companies ( 1970, 1 Comp. L. J. 93)
If the company intends to change the mode of its operation for improving the
efficiency to the advantage of the company there could no reason why it should not be
allowed.
There could be different, new and improved means to attain the purposes of the company.
Government Stock Investment Co. ( 1891, 1, Ch. 649)
Adoption of a new and improved means of business necessitates the alteration of the
objects clause and registration of the same with the registrar of companies.
Area of operation could be changed or enlarged
Indian Mechanical gold Extracting Co, Re, ( 1891, 3, Ch 538)
There is no prohibition for changing or expanding the area of operation. For the
purpose an alteration of name may also be needed
40
To carry on addition business while combining it with the existing business.
In Re Ambala electric Supply Co. Ltd (1963, 33, Comp. Cas. 583)
A new business which is wholly different from the existing business can be
undertaken provided the new business is capable of being conveniently or
advantageously combined with the existing business .
Juggilal Kamlapat Jute Mills V ROC ( 1966, 1, Comp L.J 292)
A jute company was allowed to venture into the business of rubber. If the new venture
is not detrimental to the existing venture there is no problem in allowing the same.
Alteration for amalgamation, merger, sell, dispose the company or restrict or abandon
any of the objects of the company
Nagaisuree Tea Co. V Ram Chandra Karmani (1966, 2, Comp L.J 208. Cal)
Marybong and Kyel tea estate Ltd. Re (1977, 47, Comp. Cas. 802)
Amalgamation or merger might give rise to new objectives or change in the existing
objectives including abandoning existing objectives which is permitted through
alteration of the objects clause.
Liability Clause: (Sec; 12, 13, Act, 3,5 Bill)
The memorandum of a company limited by shares or guarantee shall state that the
liability of the members is limited. However memorandum need not say anything on
the nature or extent of their liability.
In case of liability limited by guarantee memorandum contains undertaking by the
subscribers that in the event of the company being wound up they are liable to
discharge the debts and liabilities of the company to the extent of the guarantee
they have given.
41
It applies to the existing members and as well those who are repudiated the
membership of the company not earlier than one year from the date of winding up.
Liability clause can also be altered which requires resolution in the general body, in
case of alteration from liability limited by shares to guarantee or vice versa.
In case of alteration to the effect from limited to unlimited or vice-versa fresh
registration or re-registration of the company is required.
However the rights and liabilities of the company won’t be affecting by such
alteration.
Capital Clause:
Speaks about the authorized capital of the company and its nominal value.
Prescribes the maximum number of shares which the company is authorized to
issue. (Sec: 12, 13, 14 Act, 3, 5 Bill)
If the company intends to issue more than one class of share capital there shall be
mentioning in the capital clause with respect to the different classes of shares and
their nominal value.
While drafting the capital clause one should consider the scope of the business
and activities of the company and the future expansion plans if any.
Alteration of capital might take place either for increasing or decreasing the
share capital for which special resolution in the general body needs to obtained
(Sec: 94, 97, 100 Act, 55, 57, Bill)
Reduction of share capital might attract creditors objections which needs to be
cleared and as well reduction would have impact on the share holdings and the
liability of the share holders. (Sec: 101-105, 59, Bill)
42
Association Clause:
Memorandum concludes with the association clause, It states that the persons
subscribing their signatures to the memorandum are desirous of being formed
into a company in pursuance of the memorandum.
It is followed by names and addresses and occupations of the subscribers and the
number of shares each subscriber has agree to take.
Contains the signatures of the members in the presence of witness with minimum
number of subscription in case of public company being seven and two in case of
private company. (Sec; 12, Act, 3, Bill)
Palniappa V. Official Liquidator (AIR 1942, Mad. 470)
The subscribers are considered the first members of the company. A subscriber
could be a company, body corporate, but not partnership firm, of joint Hindu family.
(Sec; 41, Act)
Rather subscribers are ipso facto members of the company to which they have
subscribed.
On the same lines a minor cannot be a subscriber and a guardian on behalf of a
minor makes himself liable but not the minor
Besides in case of Foreigners, NRIs and Foreign companies the Foreign Exchange
Management Act, 1999 provides for some restrictions.
Articles of Association
Internal regulations or Code of conduct for the affairs of the company, regulates
the functioning of the company (Sec: 26-31 Act, 6, Bill)
Articles means the articles of association of a company as originally framed or as
altered from time to time. (Sec: 2(2))
43
However the companies act under schedule: I, provides for various models of
articles for different companies including company limited by shares, limited by
guarantee and unlimited those may be adopted.
The subscribers to the memorandum can stipulate such regulation for the
company as they deem fit and required. However no article can go against or do
away with what the companies act is providing for or could authorize anything that
the act prohibits.
For instance, Companies act provides for share holder’s right to petition for winding
up, (Sec: 439 Act, 247, Act) and prohibits payment of bonus except out of profits
(Sec; 205, Act, 110, Bill).
Articles of association cannot preclude the share holders right or provide for
payment of bonus beyond the specification.
General outlines of the contents of articles of association:
It is a sub-ordinate document to the memorandum. It is mandatory for the private
companies to have articles of association and optional for public companies.
Regulations regarding share capital, various types of share capital, rights of share
holders, procedure of issuing share certificate etc.
Regulations pertinent to lien, charges, and indemnity.
Calls on all shares and alteration of capital.
Procedure for transfer and transmission of shares.
Forfeiture of shares and conversion of shares into stock.
Share warrants and procedure of issuing share warrants.
System of functioning. Meetings, proceedings and voting.
Board of Directors, Managers, Secretaries and their powers.
44
Accounts procedure, capitalization of profits, payment of dividends and reserves.
Provisions regarding the use and maintenance of corporate seal and the name of
the company.
Status of Articles & Memorandum (Sec: 36, Act, 9, Bill)
The memorandum and articles on registration bind the company and the members.
Provisions in the memorandum and articles are contractual terms between the
company and its members with respect to all the matters stipulated there in.
Binding on company and members.
Hickman V. Kent or Romney Marsh Sheep Breeders Asso . (1915, 1 Ch. 881)
Company and members are bound to each other as if they had entered into an
express contract. Memorandum and Articles shall be treated as an agreement between
the company and the members. The relations, status, rights and liabilities of both company
and the members depend on the memorandum and articles.
Sardar Gulab Singh V. Punjab Zamindar Bank Ltd (AIR, 1942, Lah, 47)
Articles and memorandum constitute an implied contract between the members and
the company. Both the company and the members would have recourse against each other
in case of breach of terms of the constitutional documents.
Between members.
Shiv Omkar Maheswari V. Bansidhar Jagannath (AIR, 1956, Bom. 459)
The relations between and among the members are also regulated by the
memorandum and articles concerning the rights and liabilities out of their
membership in the company.
Members impliedly agree to each other to obey the provisions of the memorandum
and articles.
45
Company and outsiders.
The constitutional documents do not imply any contract between the company and
the outsiders. A third person purporting to have rights against the company cannot relay on
the articles as a basis of his claim and must prove a special contract outside the articles.
However, in case of any specificity in the articles with respect to the relation with
an outsider, the company is bound by it.
Krishna Rao V. Anjaneyulu (AIR, 1954, Mad, 113)
When a person is appointed as director on basis of a provision in the articles, the
article constitute an implied contract between the director and the company. The
precision and specificity in the articles with respect to the matter at hand would
act as an implied contract and bind the company.
Alteration of articles: Some guidelines:
Altered articles would bind the members just in the same way as the original
articles. Companies have power to alter their articles under Sec 31.
The alteration must be lawful and should not conflict with the provision of the
companies act and any general law.
The alteration must be subject to the provisions of the memorandum. In case of
conflict with the memorandum and articles, memorandum would prevail.
The alteration shall not increase the liability of a member without his written
consent (Sec: 38).
The alteration must be bona fide for the company as a whole and individual
hardship is irrelevant.
Alteration shall not result in any discrimination between two groups of
shareholders.
46
An alteration which is otherwise valid, will not become invalid merely because it
has a retrospective effect.
Rights already acquired will not be affected by the alteration
An alteration which would amount to breach of contract with an outsider is valid,
provided outsider is entitled to damages for such breach.
Alteration requires a special resolution in the general body and the approval of the
central government (ROC)
Alteration contravention to the Act & memorandum
There are two restrictions on this power; firstly alteration should not be in
contravention of the companies act or any law in force, secondly it should not go
against the memorandum.
Madhava Ramachandra Kamath V. Canara Banking Corporation Ltd ( AIR, 1941
Mad. 354)
An alteration of articles for authorizing the directors to register the transfer the
shares without an instrument of transfer. The resolution was held to be invalid
being against the companies Act.
State of Karnataka V. Mysore Coffee Curing Works Ltd (1984, 55, comp. cas. 70)
The petitioner was a member in the company with powers to appoint three
directors and chairman of the BOD. On account of public issue and further issue of
shares the petitioners holdings in the company was reduced to 20%. The
company with a view to take away the power of appointments on the part of the
petitioner alters the articles.
On petition by the state of Karnataka, against the move of the company, court rules
that companies have unfettered power to alter their articles with only
47
restrictions being violation of memorandum and contravention of the
companies.
Alteration in breach of contract
Madhanlal V. Changdeo Sugar Mills, AIR, 1958 Bom. 250).
A company can repudiate an executed contract but will have to be answerable
to the party to the contract against breach of contract, or pay
damages/compensation to the party.
Alteration of articles cannot justify a breach of contract, and could not be a way to
escape from the contractual liability.
Third party rights are not subject to the alteration of articles but alteration of
articles are subject to the bona fide rights of the third party.
Mathrubhoomi Ltd V. Vardhaman Publishing Ltd (1992, 73, Comp. cas.37).
If the contract is purely dependent upon the articles, the alteration would
naturally be operative and party to the contract is at risk of alteration, since
articles are subject to the statutory power of alteration.
If there is a separate and independent agreement, company cannot repudiate the
contract without paying damages or compensation to make good the damage or
loss suffered by the party to the contract.
Retrospective operation of the alteration.
The statutory power of the company to alter the provisions in its articles is wide
enough to include a alteration with retrospective effect.
Sidebotton V. Kershaw Lees & co. Ltd (1920, 1, Ch. 154) .
An alteration to empower the directors buy out the shares of members who
carried an any business in competition with the company.
48
On challenge by the petitioner who was a member having a business in
competition to the company, the court rules that alteration is valid and company
has got such powers.
In the interest of the company such alteration are valid and be operative on all
such businesses in competition to the company.
Vardhaman Publishing Ltd V. Mathrubhoomi Ltd (1991, 71, Comp. cas. 1)
An alteration to the articles has been made empowering the directors to refuse
any transfer of shares.
Petitioner who purchased a block of shares was rejected registration of transfer
of shares after alteration.
The court rules that petitioners right to register the transfer of shares cannot
be defeated by the alteration and alteration cannot affect the concluded
transaction. Alteration cannot take away accrued rights.
Doctrine of Constructive Notice
It is a presumption in favour of the company against the outsider and is a judicial
fiction that operates in favour of the company.
Notice is nothing but knowledge, when a person is deemed to have knowledge, he is
said to have the notice.
On registration companies, memorandum and articles become public documents
and registration is a public notice about the constitutional documents of the
company to everyone who deals with the company.
Registration of a company is a public notice to all those who would like to deal with
the company about its status, objectives and powers.
49
Doctrine of constructive notice say that an outsider dealing with a company is
presumed to have read and understood the contents of memorandum and
articles.
Presumptions operates also with reference to all such documents company files
with the ROC such as documents with reference to special resolutions (Sec: 192) of the
general body, charges (Sec: 125) created by the company etc.
Presumption applies with reference to all such documents affecting the powers of
the company.
Constructive notice is nothing but presumption with reference to the knowledge of public
documents of the company.
Mahony V. East Holyford Mining Co. (1980, All ER, Rep. 427)
Every company has its memorandum and articles open to all who are minded to have
any dealings whatsoever with the company. It is the duty of every person dealing
with the co. to inspect its public documents. But whether a person actually reads
them or not, “he is to be in the same position as he has read them.” He will be
presumed to know the contents of the documents.
Kotta Venkata Swamy V. Ramamurty (AIR, 1934, Mad. 579)
The articles of the company required that all the deeds should be signed by the
MD, Secretary and the working Director. The plaintiff accepted a mortgage deed
executed by the Secretary and working Director only.
It was held that the plaintiff could not claim under this deed. While ruling the deed as
invalid, the court observed that if the plaintiff had gone through the articles she
would not have accepted such deed which not in compliance of the articles.
Irrespective of the fact whether the deed was executed in good faith or bad faith or
whether company got benefited out of such deed or the other party would suffer loss the
deed is invalid.50
The doctrine of constructive notice saves the company from the liability arising
out of such transactions or deeds which are not in conformity with the articles of the
company
Effect of the doctrine:
Effect of the doctrine is pretty harsh on the party of the other party irrespective of
the bonfide interests and the utility of the contract
In case of ultra vires acts of the company the other party cannot claim relief on
the ground that he was unaware of the powers of the company.
In case of intra vires transaction but outside the authority of the director/the person
acting upon the company is bound provided the public documents provide
information about such delegation and non-delegation of power or even lack of
power on the part of the person acting upon.
If the lack of authority is not evident in the public document and when in the eyes
of a ordinary prudent man, there was no suspicion with reference to the powers of
the the company and when there is credible belief that there is such power given to
him by the company, in such cases the company is liable to those who are acting
bona fide.
In such situations, the person acting on behalf of the company can bind the company
to the outsider.
The bottom line is that all those who deal with the company are supposed to be
well aware of the powers of the company through the public documents.
Relevance of the doctrine:
The doctrine of constructive notice is an imaginary doctrine and is a fiction
created through judicial pronouncement.
51
It is largely criticized that the doctrine is impractical and does not take into account
the ground realities that companies known through the people who are working for
it than the documents and practically it may not be possible to look into the details
of the public documents of the company before entering into an agreement.
It is also criticized that the doctrine takes the other party for granted while
helping the company escaping from the liabilities and does not take into account the
bona fide interest of the other party
Courts in India are reluctant to apply the doctrine and taken different view
altogether
Dehradun Mussoorie Electric Tramway Co. V. Jagamandaradas (AIR, 1932, All
141)
The directors were lacking power to sub-delegate the power to borrow.
Even then, the managing agents of the company did not happen to borrow the
money which is in compliance with the articles nor it was done after obtaining
the resolution in the general body. The rejecting to apply the above doctrine
and held the company as liable to the party to the transaction.
Doctrine of Indoor Management
The doctrine states that the outsiders are not supposed to know the internal
procedures and mechanism in running the company.
While operating to protect outsiders against the company, the doctrine says that
outsiders can know the substance of the public documents but not the
procedures and technicalities of implementation (indoor management) of such
substance.
52
Royal British Bank V. Turquand (1856, 119, ER 886)
The articles of the company states that the directors might borrow money as
authorized by a resolution passed in the general body meeting. The directors of
the company barrowed a sum of money from the plaintiff in violation of the
procedure provided under the articles.
For the first time laying down the rule of indoor management, the court viewed
that public documents contain the substance of the authority which an outsider
can get to know, but the procedure of obtaining the authority whether it has
been followed or not he is not supposed to know.
Procedures followed in the matter of running the company forms internal
management which an outsider need not know, therefore, if a contract has been
executed in accordance with what has been laid down in the public document it
binds the company even if, the company has not followed the actual procedure
laid down in the articles for the implementation of such substance.
On appeal the appellate court also took similar view and held that though
companies are put on a different pedestal from that of other business
undertakings, though people dealing with are supposed to know that public
documents of the company to make it liable, they are not supposed to know
about the internal management of the company and the compliance of procedure
as provided in the public documents.
It is a presumption on the part of the company that it has followed all those
procedures which it is supposed to follow as provided in the public documents,
on default, company can make those internal managers liable but will have to
be accountable to the outsider.
The task of the outsider is to know the content of the public document , but not
know or enquire whether procedures have been followed or not, it is the duty of
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the company to be in compliance with what has been laid down and said in the
public documents.
If the public documents contain substance about such authority exercised by
the company but not the prohibition to exercise such authority, it can bind the
company against the outsiders.
Mahony V. East Hollyford Mining Co (1875, LR, 7, HL, 869)
The House of Lords addressing the issue of the extent of presumptions on the
part of the outsiders with reference to the powers of the company and the
procedural compliance of the same viewed that:
The company entering upon its business and dealing with persons external to it
is supposed on its part to have all those powers and have complied with all
those procedures, which by its articles of association and its deeds appears to
possess and to have complied with.
The company is supposed to have the powers with reference to what its
directors do with reference to the indoor management of the company which is
known them and the company only but not the outsiders.
When it appears and reasons to believe that the company has such powers and
the persons executing the same are doing it on behalf of the company, any
irregularities in the indoor management of the company may not affect the
dealings of the company with outsiders.
The persons dealing with the company are presumed to have read the public
documents of the company but are not presumed to have enquired into the
irregularities in the internal proceedings or indoor management of the
company.
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SriKrishane Rathi V. Mondal Bros & Co Ltd (AIR, 1967, Cal 75)
The articles of the company talks about borrowing powers of the directors on a
resolution obtained in the general body meetings in accordance with the procedure as
enshrined under the Act (Sec: 292)
The directors have borrowed money from the petitioner in contravention of the
above and while addressing the issue court attempts to identify the obvious reasons
of convenience and practicality in business relations.
It viewed that Memorandum and articles are public documents and are open for
access by public. The internal procedure and the information with reference to it
is not public and the public have no access to it.
Hence an outsider is presumed to know the constitution, character and functions
and powers of the company, but not what takes place in the indoors of the company
and the procedures followed there in.
It is presumed that internal management is done according to the procedure
established by law and adopted by the general body of the company. The outsiders
have nothing to do with the same but could validly bind the company in case of
internal irregularities which would not affect the dealings with the outsiders.
Exceptions.
The rules of presumptions could be rebutted on certain grounds. Circumstances by
which the presumptions can be rebutted are exceptions to the rule.
Knowledge or suspicion of irregularity
If the person dealing with the company had the actual knowledge or suspicion of
irregularity in the internal management the doctrine of indoor management
cannot be applied.
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Underwood Ltd V. Bank of Liverpool, (1924, All ER Rep 230)
A person who is a part of the internal machinery of the company or who
knows the irregularities in the affairs of the company should not be allowed
to take advantage of such irregularities.
Anand Bihari Lal V. Dinshaw & Co ( AIR 1942 417)
If there is any suspicion in the minds of the people at issue, or in situations
where ordinary prudence could have avoided the risk, the doctrine of indoor
management cannot be applied. When suspicions are aroused one should
investigate, if you fail to investigate you cannot presume that things are
rightly done.
Forgery
Forgery is a nullity, Indoor management is a rule of presumption. By a
presumption a forgery cannot be converted into a genuine transaction.
Ruben V. Great Fingall Consolidated Co. (1906. Ac. 439)
A secretary of a company forged the signatures of the directors and issued
share certificates. Company rejects to acknowledge the certificates and
register the shares. Transferee (plaintiff) contends that what happens inside
the company is unknown to the outsiders. Whether it is a forgery or actual
delegation of authority has no effect on the transaction.
Court: Doctrine applies to only genuine transactions; forgery cannot be
justified by any authority and cannot bind the company. Doctrine of indoor
management does not apply if the company denies to be bound by the
forged instrument. If the company intends to be bound by the forged
instrument the doctrine could be applied.
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Official Liquidator V. Comm. of Police (1969, 1 Comp LJ 5 Mad)
When an instrument was forged by the MD of the company, court took
pragmatic view to hold the company liable and said; when company has
delegated the authority to the agents, agent’s representation express or
implied should bind the company including the instances of forgery resulting
in the rights and liabilities with an outsider.
Acts apparently outside the authority.
If the act is apparently and ordinarily beyond the powers of the officer
exercising the powers, indoor management doctrine won’t be applied.
Kreditbank Cassell V. Schenkers Ltd (1926, 1 KB 826 CA)
Company cannot be held liable for exercise of those powers which have not been
delegated or authorized. Doctrine of indoor management cannot be applied in
cases of apparent lack of powers delegated by the company.
Anand Behari Lal V. Dinshaw & Co (1942 AIR Oudh,417)
It is the responsibility of the outsider to be cautious of apparent lack of
authority or apparent over use of authority. Such cases cannot make
company liable, since are not within the permissible limits of the powers
exercised in the name of the company.
Lakshmi Rattan Lal cotton Mills v. JK Jute Mills co (AIR, 1957 All 311)
If the delegation or non-delegation of authority is apparent or represented
through articles, the outsider cannot plead innocence and doctrine of
indoor management cannot be applied in such situations.
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Lifting of Corporate Veil
Sometime the courts and the legislature have ignored the corporate personality and instead
looked behind the fictitious entity in the given circumstances. Extension of corporate
personality to unreasonable limits would not only be unjust but as well conflict with the
sovereign function of the state.
Circumstances of lifting the veil
By the legislature:
Reduction of number of members.
Fraudulent or wrongful trading.
Premature trading.
Company groups.
Misdescription of companies name.
By the Judiciary:
Determination of character
For the benefit of revenue or taxation purpose
Fraud or improper conduct
Agency or trust
Distinct legal entity and corporate veil
No doubt company is a distinct legal entity from its members and enjoys
separate and perpetual legal status, but under the veil of such entity acts which are
called as illegal or fraudulent shall not take place.
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If corporate personality is used for such means there is a possibility of
piercing into the personality of such entity for holding the people liable
Impact of Solomon V. Solomon
Being instrumental in conferring distinct corporate personality on the companies,
the decision has been attracted with lot of criticism to have been instrumental in
encouraging corporate frauds by people running the company in the name of the
company.
Still holds good with reference to vesting corporate personality and its
implications, however got certain exceptions in the form of lifting of corporate veil in
the public interest, which breaks the fiction created through the judicial precedence.
legislative means.
Reduction in number: (Sec: 45)
If a company carries a business for more than 6 months with members less
than the statutory minimum, any person/persons who is/are a member being
aware of such reduction in membership after the lapse of the 6 month period may
become liable personally and severally for the debts of the company contracted after
the period of six months and may be severally sued for the same.
Madanlal V. Himmatlal (1997, Comp LJ 399)
Company cannot validly continue after its membership has fallen short of
statutory minimum. In such situation, if the business of the company is
continued, the remaining members of the company shall be liable for whatever
debts and obligations that have arisen after the company has fallen short of
statutory minimum membership. Reduction in membership is also a ground
for winding up (Sec; 433 (d))
Misdescription of name (Sec: 147 (4) ©)
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If the name of the company is not properly indicated, person involved in doing
of the act shall be personally liable for it. (William C.Leich Bros. Ltd (1932, All ER
892)
The directors of the company were held personally liable on a cheque
signed by them without mentioning the proper name of the company.
Fraudulent trading (Sec: 542)
If the company is being run in such a way to defraud creditors or for any
fraudulent purpose, the persons running the company may be made personally
liable for the debts of the company.
Misuse of corporate device is not permitted and people responsible for fraud
and illegal activities cannot take shelter under the veil of the corporate personality.
In case of fraud and illegal activities, the veil of the company could be
lifted and the people responsible for such activities could be personally held
liable to the third parties.
Company group accounts (Sec: 212)
To give proper information of the accounts and financial position of the group
companies or holding companies to the creditors, share holders and the public, the
accounts and balance sheet of holding company shall contain particulars about
its subsidiaries.
Non-compliance of the requirement may warrant cracking the corporate veil
of the company to hold the individuals liable.
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Judicial means.
Determination of character:
When situations become necessary for the courts to determine the character
of a company, the courts go behind the legal identify to examine the character of
the persons actually in control of it.
Daimler Co. Ltd V. Continental Tyre & Rubber Co. (1916, 2 Ac 307)
Company was incorporated in England and run by the Germans. When Tyre
Company files a case against Daimler for trade debts, the question with regard
to the actual character of the company arouse. It was basically due to
outbreak of World War I to which Germany and England were opposite
parties.
Addressing the issue of lifting the corporate veil of the company run by
Germans, the court viewed that company cannot have friends or enemies;
it cannot be loyal or disloyal. But people running the company could be, if so
company would be run accordingly.
The status and character of the company depends upon the character of
the people running it, therefore, to get to know the real character of the
company, it is needed to go beyond the veil of the company and assess the
actual character of the company. If the situation warrants that because of the
character of the people running the company, it is detrimental in the
public interest to allow the company to continue, the veil of the company
could be lifted and the people running the company could be held liable.
Adherence to corporate personality theory need not be followed when there is
public interest at stake or when adherence would cause an unjust result.
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The corporate veil can be lifted and the personality could not be adhered to if
the same is being used for fraudulent purposes to defeat the basic fabric of
corporate personality and its existence.
Sunil Kumar V. Mining & allied Mach Corp (1968, 1, comp LJ 214)
Benefit of revenue
If any revenue accrued to the government or taxes due are not paid by the
company or if the corporate veil is used to evade the tax liability the corporate veil
could be lifted to hold the individuals liable for denying revenue benefit to the
government.
In re Sir Dinshaw Maneckjee Petit (AIR 1927, Bom, 371)
Four private companies were formed for the purpose of evading tax liability by
the party to the litigation. Earned income was credited in the accounts of the company
to be handed back to Dinshaw who is having complete control over company.
The income was divided into four parts in a bid to reduce his tax liability . The
court viewed that companies were formed purely as a means of avoiding tax and
the vested corporate veil could be lifted for the offence of tax evasion.
Bacha F. Guzdar V. Commissioner of Income Tax, Bombay (AIR, 1955, SC 74)
Wherever the intention is to deceive the government and deny tax revenue to
the government the corporate veil could be lifted. Where there is no such intention
the courts refuse to pierce the corporate veil.
CIT V. Associated Clothiers Ltd (AIR 1963, Cal 629)
Some times corporate entity works like a boomerang and hits the people who
are trying to misuse it. In such cases the members will be compelled to pay the price
for misusing the corporate veil.
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Formation of companies to evade tax or reduce tax liability or using the
corporate veil to avoid tax liability on intention are negated by lifting the veil of such
corporations to hold the individuals liable.
Fraud of improper conduct
When the company is formed for the purpose of defrauding the creditors or
for improper purposes for conducting fraudulent activities, courts are reluctant to
uphold the corporate personality, rather lift the veil to hold the persons liable for
such acts.
When the courts realize that company is a mere sham for avoiding certain
liabilities or hosting fraudulent activities, courts have no other way than lifting
the veil.
Workmen V. Associated Rubber Industry Ltd (1985, 4 SCC 114)
A company created a subsidiary and transferred its investments to the
subsidiary. The subsidiary was not having any assets apart from the ones transferred
from the principal company and it was not performing any function. It was viewed
that subsidiary has been formed for fraudulent purpose to reduce gross profits and
to avoid bonus payment to the share holders. Accordingly the veil of the
subsidiary company was lifted.
Delhi Develop’t Authority V. Skipper construction Co P.Ltd, 1997, 11 SCC 430
Skipper constructions is a company formed by few individuals to lure people
into booking for plots and flats. The intention was to defraud the public by utilizing
the corporate veil. The veil was lifted to bring to the surface persons who were using
the company for defrauding people.
Jai Narain Parasrampuria V. Pushpa Devi Saraf (2006, 133, Comp cas 794)
Promoters having vast control over the affairs of the company happened to
purchase some property in the name of the company. The said promoters and 63
directors were the only members in the company. It was viewed that the
objective is to gain personal benefit by using the corporate veil. The court negated
the intentions of the promoters to use the corporate veil for fraudulent purpose.
Agency, trust or Government companies
Whenever companies individuality is at question for company being a mere
agent of its members or other companies, or even government, there is a possibility of
lifting the veil of such companies for fixing liability.
Smith, Stone & Knight Ltd V. Birmingham Corp (1939, 4 All ER 116 KB)
A company acquired a partnership concern and registered it as its subsidiary
company. The shares in the subsidiary were held by the parent company, the
management, functioning of the subsidiary was dealt with by the parent
company and as well had full control over the affairs of the subsidiary.
In a litigation when a question arouse, with respect to the individuality of
the subsidiary company as a corporate entity and the existence of agency
or trust relationship between the parent and the subsidiary the court viewed
that.
When the objectives, functions, powers, affairs and profits of the subsidiary
were decided or held or controlled by the parent company completely the
subsidiary does not have individual existence rather it is an agent or trust of
the parent company. In such cases for any irregularities or fraudulent
activities of the subsidiary the parent company could be held liable by
tearing open the veil of the subsidiary. Since, behind the veil it is parent
company/principal who is running the show, they should also bear the
liability.
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Som Prakash Rekhi V. UOI, 1981, 1, SCC 449
When the individuality and status of a Government run company arouse, the
court viewed that: when the state is performing commercial functions through the
company, when the true owner is state having control over the affairs of the
company the same is responsible for the actions, implications and consequences of
such venture.
The employee of the company filed a writ petition against the government
for his provident fund benefit claiming the company as an agent of the state. The
court addressing the issue of amenability of government companies to the writ
jurisdiction and the existence of principal agent relationship held that when
government forms or acquires a company with full control, it is assumed that
such company is an agent of the state and the functions of the company as part of the
duties and functions of the state.
In such cases compensation and other benefits to the employee of the company
would also be considered as the function/liability of the state. For any action of the
agent (government company) if needed the veil could be lifted and state could be
held liable.
Share Capital
Share means share in the capital of the company (Sec: 2(46)) and are considered as goods
under the Sale of goods Act.
Shares, debentures and other securities shall be movable property, transferable in
the manner provided by the articles of the company.
Share holder would be eligible for profits or dividends of the company and as well
liable for contribution in case of liquidation or winding up to the extent of the proportion
of the share.
Kinds of Share Capital: Equity Share Capital
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Preferential Share Capital
Equity Share Capital:
Ordinary share capital which does not have any preference or which is not preference
share capital (Sec: 85 (2))
Preferential Share Capital:
Has preferential right over the equity share capital in the matter of dividend if the
company makes a profit and declares dividend and in the matter of contribution
when company is would up or being liquidated (Sec: 85 (1))
Types of Preferential share capital
Redeemable and irredeemable preference shares.
Cumulative and non-cumulative preference shares.
Convertible and non-convertible preference shares.
Peculiar features of preferential shares:
Preferential shares entitled to a fixed rate of dividend and the company may choose to
pay them back.
Preferential share holders voting right is restricted to matters affecting their status
and benefit.
Risk less and safe investment with guaranteed income.
Debentures:
Debt instrument entitled for interest. It include debenture stock, bonds and other
securities of the company (Sec: 2(12))
Kinds of debentures:
Secured and unsecured 66
Convertible and non-convertible
Redeemable and irredeemable
Registered and unregistered
Share Capital, Public Issue & SEBI
Public issue of shares or raising of capital through public subscription is being
regulated by the market regulator and companies going for issues shall be in
compliance with the SEBI norms in this connection.
SEBI Disclosure Guidelines
Every issuer, being an unlisted company desirous of making an initial public
offer and a listed company desirous of making a rights issue for a value
exceeding Rs. 50 lacks or a public offer, to file a draft offer document with
SEBI.
SEBI may seek clarifications on the draft and put across observations to be
incorporated in the draft before it is offered to the pubic.
Before opening the issue, the issuer is required to file an updated offer
document with SEBI highlighting the changes made in the document.
SEBI can stop public issue if it is not satisfied with the draft offer document or
with the following up of the observations or with the clarifications given.
In case of bonus issue which does not require shareholders approval, the
issue shall be completed within 15 days and otherwise in sixty days
Advance disclosure of floor price or price band: two days before the issue
SEBI Issue of Capital and Disclosure Requirement Regulations, 2009
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By virtue of powers conferred under Sec: 11 A (1) (a) of SEBI Act.
Intends to enhance the level of investors protection through transparency and
efficient functioning of the primary market
Better regulation of public issues and raising of capital through strengthening the
norms of disclosure for the issuer
In any public issue substantial number of shares to be kept available for public
allotment and major public issues to be monitored by scheduled banks or public
sector financial institutions.
Advertisement of issue inviting public subscription only after registration of
prospectus with ROC
Rationalization and simplification of procedures in primary market through
liberalized issue process and by dispensing with submission of due diligence
certificate and other documents.
Sale of previously allotted shares allowed and the same is being considered as public
issue and provision for conversion of outstanding convertible instruments into
shares.
Prohibition of differential price allotment and prohibition of preferred treatment of
selected group of investors.
Uniform price allotment and uniform period of allotment of shares being made
mandatory.
Unused/unspent money during allotment of shares and settlement to be transferred
to Investors Protection and Education Fund with SEBI
Balance of interest between the issuer and the investor by ensuring security of the
issuer through obligating underwriters and merchant banker for hundred percent
commitment on the issue
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The credibility and status of companies considered while permitting public issue
and companies which have been debarred from primary market are prohibited from
going for public issue
The credibility of directors and promoters taken into account as well and
companies run by directors and promoters debarred from primary market are also
prohibited from involving in the public issue.
Subsidiary company employees are not to be treated as the employees of the
holding company with reference to allotment of shares
Uniform application of guidelines with reference to public issue, without any
exemptions
Regulation of concentration of share holdings in few hands through
Prohibition of Institutional allotment of shares
Limit on the holdings of directors and promoters
Regulation of employee share holdings
Regulation of Bonus share allotment
Regulation of monopoly of directors, promoters and institutional investors
Ensuring free and fair access to public to participate in the market
Regulation of prejudicial preferential allotment (anti-trade and anti-
competitive practices) of shares
Regulation of fraudulent activities such as irregular allotment of shares to
the insiders in the company or irregular employee share allotment.
Public Issue of Shares.
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Only public companies are allowed to go for public issue, private companies are
prohibited from.
Prospectus:
Any advertisement offering to the public shares of the company for sale are to be
contained in detail in the prospectus.
An advertisement in the newspaper stating “some shares are still available for sale
according to the terms of the prospectus of the company can be obtained on
application”. The Calcutta High Court held the same to be a prospectus as it invited
the public to purchase shares- Pramatha Nath Sanyal v Kali Kumar Dutt AIR 1925
Cal 714 Invitation to public in whatever manner to subscribe to the shares is a public
issue.
Types of Issue
Private placement
Public offer, and
Right issue
Though the general rule say that there cannot be public issue without a valid
prospectus registered with ROC, there are certain circumstances where prospectus is
not required and still such issue is considered as a valid public issue.
In the following cases shares can be offered even without a detailed prospectus-
When the shares are offered in connection with a bona fide invitation to the
person to enter in a underwriting agreement
When shares are not offered to the public
Where the shares are only offered to the existing members of the company.
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Where the shares offered are in all respects uniform with shares already
issued earlier and quoted in a recognized stock exchange.
What Constitute Public Issue
Public includes any section of the public whether elected as members or debenture
holders, or as clients of the person issuing the prospectus or in any other manner.
(Sec 67)
A document inviting to buy shares for example, to all the shareholders in a particular
company, or to the clients of a particular stock broker is also considered as a public
Issue within the meaning of the Act.
Offer not made to the public If:
It is calculated to result, directly or indirectly, in the shares becoming available for
subscription or purchase by persons other than those receiving the offer or
invitation.
It is a domestic concern of the persons making and receiving the offer or invitation.
Thus an offer to one’s kith and kin cannot be considered to be an invitation made to
the public.
-Sherwell v Combined Incandescent Mantle’s Syndicate (1907) 23 TLR 482.
issuing of a prospectus to the friends of the directors and the promoters was not
regarded as an offer/invitation to the public.
Intermediaries in Public Issue
The entire capital can be allotted to the intermediaries such as underwriters and
issuing houses.
These intermediaries will have to be those registered with SEBI to function in the
capital market.
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The intermediary then offers the shares to the public through advertisements. These
advertisements are not considered as ‘prospectus’. But today, these advertisements
are called “offer for sale” and are considered as prospectus issued by the company.
(Sec 64)
Besides the Companies Act, 1956, public issues are also governed by SEBI (Issue of
Capital and Disclosure Requirement regulations) 2009 and provisions of FEMA, where and
issuer is a non resident and the RBI’s Foreign Exchange Management (Transfer and Issue of
Security by a Person Resident Outside India) Regulations, 2000.
Rights Issue and Private Issue
It is the further issue of capital respecting the pre-emptive right of existing
shareholders to subscribe to the shares issued. (Sec: 81)
A right issue is basically when a company offers existing shareholders a right to
purchase additional shares of the company at a given price, which is at a discount to
the prevailing market price of the stock, to make the offer enticing for the
shareholders and to ensure that the rights offer is fully subscribed to.
It is generally done after the expiry of two years from the formation of the company
or after the expiry of one year from the date of first allotment which ever is earlier.
It helps the company to raise the intended capital or to the maximum extent that it
intended to raise through the public issue.
Private Issue
Also known as private equity or private placement of shares. It is basically a
procedure for issue of shares to persons other than holders of existing shares (Sec 81
(1A) ).
Further shares may be offered to any person, whether holder of an equity share or
any private individual subject to the compliance of the section.
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A special resolution needs to be obtained in the general body meeting before going
for private issue of shares.
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