MFM-Corporate Law Notes

7/31/2019 MFM-Corporate Law Notes

1/72

INDIAN COMPANIES ACT, 1956

CHAPTER 1NATURE, FEATURES, INCORPORATION AND TYPES OF COMPANIES

Q. 1 Define a Company. Explain various advantages and disadvantages of a Company.

Ans. DEFINITION

In common usage, the term company means a group ofpersons, who have associatedthemselves together, with a view of achieving some common objective.

S. 3 (1) of the Companies Act defines a company as

An association of individuals formed for some purpose and registered under the

present Companies Act or an earlier Indian Companies Act.

This definition seemed inadequate, as it was difficult to comprehend the real nature of the

company. In order to know the nature of a company, one needs to refer to the definition of L.H. Haney, who defined company as;

An incorporated association,, which is an artificial person created by law, having a separateentity, with a perpetual succession and a common seal.

CHARACTERISTICS OF A COMPANY OR ADVANTAGES OF INCORPORATION

As the characteristics are unique to the company and also formed to overcome the drawbacks

of partnership, they are also called as advantages of incorporation. Following are the

characteristics:

(1)Incorporated association: A company must be incorporated (registered) under the

Companies Act. In other words, it is the registration of the association that creates a company.

The minimum number required is two in case of private company and seven in case of publiccompany. The maximum being fifty in case of private company and unlimited in case of

public company.

(2) Artificial legal person: Company on registration is given more or less the same status of

an individual. But as the company is an entity created by law, it is called an artificial legal

person.

(3) Independent corporate personality: A company on registration has a separate identity of

its own, which is different and distinct from the members who constitute it. This principle of

independent corporate personality was laid down in the famous case of

Salomon v. Salomon and Co. Ltd. (1897) A.C. 22.

Mr. Salomon was carrying on shoe manufacturing business on proprietorship basis. He sold

his business to a company Salomon & Co. Ltd. for 30,000. Salomon received considerationin the form of shares for 20,000 of 1 each and for 10,000, he got debentures. The

company had seven members, consisting of Mr. Salomon, Mrs. Salomon, four sons and a

daughter. All the other members of the company had only 1 share each. After some time thecompany had to be wound up on account of financial difficulties. The assets realised were

6,000, while the liabilities were 10,000 to Salomon as a secured creditor and 7,000 to

outsiders who were unsecured creditors. The creditors claimed priority over Salomon (secured

creditor) on the ground, Salomon and Salomon & Co. were one and the same. It was however,

observed that The company on incorporation, has a different personality different from the


2/72

subscribers. Therefore the identity of the subscribers is immaterial. Hence Mr. Salomon was

paid first as he was a secured creditor.

(4) Limited liability: The liability of the shareholders is limited to the face value of the

shares held by them. In other words, once the full amount of the shares is paid, they cannot be

called upon to bear the loss from their personal property.

(5) Perpetual succession: A company enjoys perpetual existence. It would not cease to existeven if all its members die. It is created by law and can be put to an end only by the process of

law. Prof. Grover in his book Modern Company Law stated even a hydrogen bomb cannotdestroy a company.

(6) Hold and dispose of property: A company can hold and dispose of property in its ownname. Property of the company cannot be treated as members property and vice versa.

(7) Transferability of shares: The shares are easily transferable, when compared to that of

partnership. Though in between a . public and private company, its easier in the former whencompared to the latter.

(8) Common seal: A company is an artificial person, with no physical existence. It actsthrough the directors. The directors act on behalf of the company and enter into contracts by

affixing companys common seal. The common seal of a company is its official signature.

(9) May sue and be sued: A company having its own independent existence, can sue in its

name, to enforce any of its statutory or contractual rights and be sued in its name by others, if

it commits a breach of contract or fails to discharge its duties.

Example: An employee not getting salary, may sue the company itself and not the directors.Similarly, if an employee has to be sued, the company and not the director who shall sue.

DISADVANTAGES OF INCORPORATION

(1) Excessive formalities and expenses: Incorporating a company is both cumbersome and

expensive. The formalities to be complied with for registration are many. Running the

company also requires a lot of formalities to be followed, as well as funds.

(2) Corporate veil: The company by its separate corporate personality is accountable for itsaction. In fact, there is an invisible veil between the company and the members. The

Company acts through human agency, yet it alone is accountable. In other words, holding a

company for something which it is incapable of doing. This is a major drawback of

incorporation.

(3) Company is not a citizen: Although a company is called an artificial legal person,

enjoying many rights and being subject to many duties, yet it is not treated as a citizen. (StateTrading Corporation v. CTO AIR 1963 S.C. 1811).


3/72

Characteristics

of a Company

Incorporated

Association

Legal Person

Corporate

Personality

Limited Liability

Perpetual

Succession

Hold and

dispose Property

Transferability of

Shares

Seal

Sue and be sued


4/72

Q. 2 Explain the doctrine of Corporate veil. Under what circumstances can the veil be

lifted?

Ans. LIFTING THE CORPORATE VEILAlthough as explained earlier, company is having a separate entity of its own and is onlyresponsible for its actions, a need was felt that the veil in rare cases need to be lifted, to meet

the ends of Justice. This principle of ignoring the companys corporate Personality and

examining the character of persons, in real control of the corporate affairs is called the

principle of lifting the Corporate veil or exceptions to the principle of independent

Corporate personality of the company.

The following are the circumstances when the veil may be lifted.

(1) When the company formed is against public interest company: In Daimler & Co. Ltd.v. Continental Tyre & Rubber Co. (1916) ZA (302). The House of Lords held, A company

would assume an enemy character when persons, in defacto control of its affairs are residentsin an enemy country or, wherever resident are acting under the control of enemies.

(2) Where the company has been formed for some fraudulent Purpose or is a sham: If

the company is formed to defeat the provisions of any law, defraud creditors and avoid legal

obligations, the veil would be lifted.

Example: The defendant, a former employee of the plaintiff had agreed not to solicit the

plaintiffs customers. He attempted to evade this obligation by forming a company. Held, the

company was a sham used by the employee to defend himself from breach of a contract.(Eilford Motor Company v. Home (1933) All E.R. 109 (C.A.)).

(3) Where the company is formed for evasion of taxes: If the company is formed forevasion of taxes or to avoid some welfare measures, the veil shall be pierced.

(4) To investigate the relationship between Holding Company and Subsidiary Company.

(5) Under statutory provisions: The Act also imposes personal liability on the directors or

members of a company in certain cases.

Example: Where the membership of a private company exceeds fifty members or a public

company falls below the minimum of seven members.


5/72

Q. 3 Write a note on formation of a company.

Ans. FORMATION OF A COMPANY

Formation of a company involves two stages namely(1) Promoters and pre-incorporation contracts.

(2) Registration.

(1) Promoters and Pre-incorporation Contracts:Promoters are the persons, who undertake to a form a y and takes steps to accomplish that

purpose. As they take responsibility in forming the company,, they stand in a fiduciary ion to

the company they float.The contracts which these promoters enter for floating the are called pre-incorporation

contracts.

Effects of pre-incorporation contracts:

(1) Pre-incorporation contracts are not binding on the company, after incorporationbecause the company was not in existence at the time the contract was entered.

(2) Pre-incorporation contracts are not binding on the third party as well.(3) The promoters become personally liable.

Because of these hurdles, promoters were reluctant to enter Contracts, and floating of

company was not possible.The difficulties posed by the companys inability to ratify a Linary contract, has to a verylarge extent been overcome by S. 15 (h) and S. 19 (e) of the Specific Relief Act, 1963. Under

these sections, a company can sue and be sued, provided the contract specifically falls within

the object clause.

S. 15(h): Sometimes, the promoters of a public company have made a contract, before its

incorporation for the purpose of the company. In such cases, the company may enforce thecontract f it is warranted by the terms of incorporation. The words warranted by the terms

of incorporation means within the scope of the companys objects as stated in the

memorandum of association.

S. 19(e): The other party may also enforce the contract against the company, if the company

has adopted the contract after incorporation and it is within the terms of the incorporation.

(2) Registration:The following is the procedure to be followed for registration of the association, as a

company.

(1) An application along with the requisite fee is made to the Registrar of Companies.(2) The application must be accompanied by Memorandum of Association and Articles of

Association.

(3) Written consent of each person named in the articles, as director and the undertakingto buy the qualification shares.

(4) A statutory declaration stating that all the requirements of t1 Act for registration are

complied with. It must be signed by an advocate of the Supreme Court, attorney orpleader entitled to appear before the High Court or a Chartered Accountant, who is

engaged in the formation of the company or by a person named in the articles as

director.

(5) The Registrar, if satisfied will register the association and grant it a Certificate of

Incorporation. Certificate of Incorporation is the birth certificate of the company.


6/72

(6) A private company can start its business immediately, while a public company

requires another certificate called the Certificate of Commencement of businessbefore it can start its business.

CONSEQUENCES OF NON-REGISTRATIONThe following are the consequences of non-registration

(i) The association shall be an illegal association(ii) Every member of the association becomes personally liable

(iii) The association cannot contract debts

(iv) The association cannot be ranked as a creditor

(v) The association cannot be wound up(vi) Finally, no suit can be filed for the partition of the assets or dissolution

Q. 4 Briefly explain the classification of companies under the Act.

Ans. CLASSIFICATION OF COMPANIES

The conventional classification of companies, mainly into chartered Companies, StatutoryCompanies and Registered companies may no longer hold very true. The reason being thecorporate form can take many forms in order to efficiently meet the needs of time. Thus

company law recognizes a multiple classification of companies. But one must remember, the

classification cannot be exhaustive.

(I) Chartered Companies: These companies come into existence by the by-the Royal

Charter, issued by the Head of the State In India, they are treated as foreign companies

Example East India Company, Bank of Australia

(II) Statutory Companies: These are formed under the special Statute of the Parliament

or the State Legislature. These are genera1ly, public undertaking and formed with the

main object of public utilities and not for profitsExample: RBI, SBI, LIC etc.

(III) Registered Companies: Here the companies are registered under this act or previous

acts. Companies can be further divided on the basis of:

(i) On the basis of Number,(ii) On the basis of Liability,

(iii) On the basis of Control, and

(iv) Others.

(i) On the basis of Number:

(a) One-man Company: Where majority share is held by one individual or an

entity. This sort of company had become defunct for some period of time. But now,with the increased use of information technology and computers, emergence of service

sector, it is time that the entrepreneurial capabilities of the people are given an outlet

for participation in economic activity. Such economic activity may take place throughthe creation of an economic person in the form of a company. Here there is one

member, one director.

Example: Solomon & Co.

(b) Private Company: Where the minimum number is two and maximum fifty. In

addition the following are the characteristics of a private company:

(i) Minimum paid up capital is one lakh rupees or such higher paid up capital as

may be prescribed in the articles.

(ii) Prohibits an invitation to the public to subscribe to the shares or debentures.


7/72

(iii) Prohibits any invitation or acceptance of deposits from persons other than its

members, directors or their relatives.

(c) Public Company: Is a company which;

(i) Is not a private company.

(ii) Whose minimum number are seven and maximum unlimited.(iii) Has minimum paid-up capital of five lakhs rupees c such higher paid up

capital, as may be prescribed.(iv) A private company, which is a subsidiary of a public company.

(ii) On the basis of Liability:

(a) Limited liability companies: In these companies, there is share capital and

each share has a fixed value, which t shareholder is bound to pay either at a time or byinstallment. The liability of the members is limited to the face value of G shares.

(b) Company limited by Guarantee: These types of companies may or may not

have a share capital. Each member, promises to pay a fixed sum of money, specified

in the Memorandum in the event of liquidation of the company for payment of debtsand liabilities of the company. The amount promised is called guarantee.

(c) Unlimited liability Company: Is a company, not having any limit on theliability of the members. The members of such company are liable, in the event of its

being wound up, to the extent of their fortunes to meet the obligations of thecompany Such company may or may not have a share capital.

(iii) On the basis of Control:

(a) Holding Company: Where a company has control over another company, it is

known as a holding company. A company is deemed to be a holding company of

another if:(i) Controls in the composition of the Directors of another company.

(ii) Holds more than half in nominal value of shares of another company.

(b) Subsidiary Company: Is a company under the control of another company. It

is deemed to be under control if:

(i) Composition of the Directors is controlled by, another company.

(ii) More than half in nominal value of shares, is held by another company.(iii) Is a subsidiary of a third company which itself is a subsidiary of the controlling

company.

(c) Government Company: Wherein minimum 51% of the paidup capital is held

by the Government, be it the Central Governfleflt or the State Government or both. It

can also be a subsidiary of a Government Company.

(d) Foreign Company: Is a company incorporated outside India and;

(i) Having its place of business in India or

(ii) Not less than 51% of the paid-up capital is held by one or more Indian citizensor one or more body corporate incorporated in India and having its business in

India.

(iv) Others:

(a) Producer Company: Any ten or more individuals, each of them being a

producer, or any two or more producer institutions or a combination of ten or more

individuals and producer institution, registering as a company for the purpose of

primarily dealing with the produce of its active members. It can also include be inter-

state co-operative societies. (Inserted by companies amendment in 2002)


8/72

(b) Non-Trading Company:This is also called association not for profit. Under

a license granted by the Central Government, these associations are formed with theobject of promoting commerce, arts, science, religion, charity or other useful object.

No dividends are paid to its members. It enjoys the same privileges and obligations of

a limited company.

Classification of

Companies

IChartered

Companies

IIStatutory

Companies

III

Registered

Number

One Man

Company

Private

Public

Liability

Limited

Guarantee

Unlimited

Control

Holding

Subsidiary

Government

Foreign

Others

Producer

Non-trading


9/72

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

Ans. Following are the main points of distinction between a private company and a public

company.

Criteria Private Company Public Company

1 Number ofmembers

A private company cannot haveless than two and more than fifty

members.

A public company cannot haveless than seven members; no

maximum has been fixed for it.

2 Restriction ontransfer of shares

If a private company has a sharecapital, it imposes some

restrictions on the right of its

members to transfer their shares in

the company.

In a public company, there neednot be any such restriction.

3 Restriction on

invitation topublic

A private company cannot invite

the public to buy its shares ordebentures.

A public company may do so.

4 Restriction onname

A private company must add thewords, Private Limited at theend of its name (Sec. 13).

There is no such restriction.

5 Prospectus or a

statement

A private company has not to file a

prospectus or a statement in lieu of

prospectus, with theRegistrar (Sec. 70 (3)).

A public company, must file a

prospectus, or a statement in

lieu of prospectus, with theRegistrar.

6 Issue of new

shares

A private company can issue new

shares to outsiders.

A public company must offer

new shares first to existing

equity shareholders pro rata,

unless the members in a general

meeting decide otherwise.7 Privileges It enjoys a number of privileges,

i.e., exemptions from certain

provisions of the Companies Act,

1956.

It does not enjoy privileges.

8 Number of

directors

It must have a minimum of two

directors.

It must have a minimum of

three directors.

9 Legal controls There are less legal controls. There are too many legal

controls.

10 Remuneration of

directors

Restrictions are far less. Remuneration of a director is

restricted to not more than

rupees six lakhs per annum.

11 Borrowing ofloans

Directors can borrow from privatecompanies.

Directors cannot borrow frompublic companies.


10/72

Q. 6 What are the advantages and disadvantages of incorporating a private company?

Ans. Advantages of a Private Company:This may also be called as special privileges of a private company. Following are theprivileges or advantages, which are available to all private companies, including a private

company, which is the subsidiary of a public company:

(1) Formation is Easy: A private company can be easily formed, as it requires only two

members.(2) Starting of Business: It can start its business immediately on incorporation. There is

no need to wait for certificate of commencement of business.

(3) Exempted from Issue of Prospectus: A private company is restricted from making

invitation to the public. Hence, it is not required to issue a prospectus. Thus, saves

both time and money.

(4) Exempted from the Requirement of Minimum Subscription: A private company

can proceed to allot shares without waiting for the minimum subscription. As no

shares are issued to the public, there is no question of minimum subscription.

(5) Further Issue of shares: In certain cases of new allotment, the shares must be offeredto the existing equity shareholders. But a private company can issue shares directly to

outsiders, even without making an offer to existing shareholders.(6) Exempted from Holding Statutory Meeting: A private company need not hold a

statutory meeting. Thus, there is no requirement of filing a statutory report.

(7) Exempted from Keeping an Index of Members: Index of members is required to be

maintained where there are more than 50 members. As a private company can have amaximum of only 50 members, there is no question of having an index of members.

(8) Minimum Number of Directors: A private company requires only a minimum of 2

directors.

Disadvantages of a Private Company:

(1) Restrictions on Members: A private company can have a maximum of only 50

members. Thus, it cannot enjoy more financial facilities as can be enjoyed by havingmore members.

(2) Restrictions on Transferability of Shares: In case of private company, there is

restriction on transferability of shares. Thus a person if requires money immediately,

may face problems. Liquidity is difficult.

(3) Restrictions on Issue of Prospectus: As a private company cannot issue prospectus,

thus it cannot enjoy the benefit of public money.

(4) Other Disadvantages:(a) A private company cannot issue share warrants.

(b) A member cannot appoint more than one person as proxy, to attend and vote at

a meeting.

(c) A private company is required to send a certificate to the Registrar stating that:(i) since the last annual general meeting, no body corporate has held

twenty-five percent or more of its paid up share capital,

(ii) it did not hold twenty-five per cent or more of its paid up share capital,of one or more public companies,

(iii) its average annual turnover in the preceding three years was not 25

crores or more, and(iv) it did not accept or renew deposits from the public.

(d) A private company, while sending its annual list of members and summary to

the registrar, must also send with this return a certificate stating that since the

date of last return, the company has not issued any invitation to the public to

subscribe for shares or debentures.


11/72

Q. 7 Under what circumstances can a private company be treated to have become a public

company?

Ans. Conversion of a private company into a public company and conversion of a public company

into private company

(1) Conversion of a private company into a public company:There are two modes namely:

(i) By default.(ii) By special resolution.(iii) Becoming a subsidiary of a public company.

(iv) By provisions of law.

(i) By default: When a private company fails to comply with the essential requirementsof a private company. However, the default must be intentional.

(ii) By special resolution: When the private company by a special resolution may become

a public company.


12/72

CHAPTER 2MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION

As one is already aware of the nature of the company, it becomes necessary to know how the

members who come and go, know about the company namely, what it can do, what it cannot do and

how to do. To find answers to these questions, every company has two very important documents,

without which no company can proceed. They are the Memorandum of Association and the

Articles of Associations. These two documents are the guiding force for a company.

Q. 1 What is the need for memorandum of association? Explain the clauses.

Ans. MEANING AND DEFINITION OF MEMORANDUM OF ASSOCIATION

Just like a country is known by its constitution, a company is known by its Memorandum ofAssociation. In other words the memorandum of association is the document which contains the rules

regarding the constitution, activities or objects of the company. It is the frame work within which a

company performs. S. 2(28) of the Act defines Memorandum as,

Memorandum means memorandum of association of a company originally formed or as altered from

time to time in pursuance of any previous companies law or of this Act.

CONTENTS OF MEMORANDUM OF ASSOCIATIONEvery company shall state the following in its Memorandum of Association:

(1) Name Clause.(2) Registered Office Clause.

(3) Objects Clause.

(4) Liability Clause.

(5) Capital Clause.(6) Association Clause or Subscription Clause.

(1) Name Clause:Every company must have a name of its own. The name gives the company a personal

existence. The promoters who select the name of the company, are required to take care that

the name is not an undesirable one.

The name and emblems of UNO and WHO, Indian National Flag, the official Seal andEmblem of Central and State Government, the name and pictorial representation of political

leaders have been prohibited.

Further, in case of public company with limited liability must add the word Limited at the

end of its name, arid the private company the word Private Limited must be added at theend.

Once the name is registered, it must be printed or affixed on the outside of every office or.

place of business, in a conspicuous position in letters easily legible, in the language in generaluse in the locality.

The department of Company Affairs, has held that if the company uses any of the following

key words in the name, it must have minimum authorized capital as stated below:


13/72

Key Words Required authorised capital(Rs.)

1 Corporation 5 Crores

2 International, globe, Universal, continental, Inter-Continental, Asia, Asiatic (being the first name)

1 Crores

3 If any of the words mentioned in (ii) is used within the

name (with or without brackets)

50 Lakhs

4 Hindustan, India, Bharat being the first word of the name. 50 Lakhs

5 If any of the words mentioned in (iv) is used within thename (with or without brackets)

5 Lakhs

6 Industries / udyog 1 Crore

7 Enterprises, Products, Business, Manufacturing 10 Lakhs

(2) Registered Office Clause: Every company must have a registered office. At the time of

registration, the memorandum must contain the name of the state, in which the registeredoffice of the company shall be situated. However, the company shall, from the date on which

it commences its business or within thirty days of incorporation, whichever is earlier, have a

registered office. The Registrar shall be intimated within 30 days of incorporation.

(3) Objects Clause: This clause defines the objects of the company and indicates what a

company can do. S. 13(1)(d) along with Table B, C, D and E requires the objects clause to bedivided into (1) Main objects of the company to be pursued by the company on its

incorporation (2) Objects incidental or ancillary to the attainment of the main objects, and (3)

Other objects f the company not included in (1) and (2). A company cannot go beyond the

object clause without the approval of the shareholders and/or approval of the CentralGovernment. It must however be noted objects cannot be illegal, immoral, opposed to public

policy or the Act.

(4) Liability Clause: This clause states, the nature of liability of the members. In case of acompany with limited liability, it must state that the liability of the members is limited

whether it is by shares or by guarantee. In the absence of this clause in the memorandum

means, that the liability of its members is unlimited.

(5) Capital Clause: This clause states, the share capital with which a company is registered and

the number and value of the shares into which it is divided.

(6) Association Clause:This clause is also known as subscription clause. It is a declaration

made by the subscribers who have signed the memorandum of their intention to form a

company.

ALTERATIONS OF MEMORANDUM ASSOCIATION

(1) Alteration of Name Clause:

(i) Where the name is an undesirable one in the opinion of the Central Government, the

name could be changed by passing an ordinary resolution at the shareholders meeting

and with the approval of central government. The central government can also directthe company to change its name within twelve months of registration. If such a

direction is issued then the company must change its name within three months, from

the date of direction, unless the time is extended. The procedure being by passing anordinary resolution.


14/72

(ii) Where the company on its own wants to change its name, the same can be done by

passing a special resolution at the shareholders meeting and with the approval of thecentral government. But no approval is needed if the change only relates to the

dropping of word private.

The change of name must be communicated to the Registrar within 30 days, who shallthen enter the new name and issue certificate with the changes incorporated.

(2) Alteration of Registered Office:Provisions in respect of change in registered office are as follows:

(i) Change within same city: Where the change is from one place to another within the

same city, town or village, it can be made by passing a resolution by Board of

Directors.(ii) Change within same state: Where the change in the red office is from one place to

another, within the same state and is within the same office of Registrar of Companies,

it could be done by passing a special resolution at the share holders meeting, followed

by filing a copy of the same with the Registrar of Companies within 30 days.

Sometimes the change, even though within the state, may fall within the jurisdiction ofanother Registrar of Companies, in which case the change shall not be effective,unless approved by Regional Director.

The company shall make an application to the Regional Director for confirmation. TheRegional Director shall confirm the alteration within 4 weeks of receipt of the

application. The company shall file with the Registrar of companies, a certified copy

of the confirmation by the Regional Director within 2 months from the date of

confirmation together with a printed copy of the memorandum as altered. TheRegistrar shall, register the same within 1 month from the date of filing.

(iii) Change from one state to another: This requires change in the Memorandum of

Association. As the change is going to affect the interest of the shareholders,debenture holders, and creditors, the Act has imposed substantive and procedural

limits upon the power of alteration, as discussed below:

(1) Substantive Limits: If the alteration is essential for the company

(i) to carry on its business more economically or more efficiently.(ii) to attain its main purpose by new or improved means (e.g. by new

scientific discoveries).

(iii) to enlarge or change the local area of the companys operation.(iv) to carry on some business, which under existing circumstances, may

conveniently or advantageously be combined with the objects, specified

in the Memorandum.

(v) to restrict or abandon any of the objects, specified in the memorandum.(vi) to sell or dispose of the whole, or any part of the undertaking, of the

company, and

(vii) to amalgamate with any other company or body of persons.(2) Procedural Limits: The following procedure is to be followed:

(i) A Special Resolution of shareholders, authorising the alteration of the

objects clause, must be passed.(ii) Thereafter, a petition must be made to the central government for

confirmation of the alteration.

(iii) If the alteration is confirmed by the central government, a certified

copy of the order, together with a printed copy of the Memorandum as

altered, must be filed with the Registrar within three months of the date


15/72

of the order, otherwise the alteration. and th entire proceedings of

alteration will lapse and become void.The certificate of the Registrar of Companies is the conclusive evidence of the

alteration and its validity (S. 18).

(3) Alteration of the Object Clause:The procedure for alteration of the object clause is the same as e alteration of

registered office from one state to another.(Refer the same).

(4) Alteration of Liability Clause:

No alteration can increase the liability unless voluntarily by the members.

(5) Alteration of Capital Clause:

The capital can be increased by passing a ordinary resolution the general bodymeeting


16/72

OBJECT CLAUSE AND THE DOCTRINE OF ULTRA VIRES

We have already stated that a company must function within the frame work of its objects. The

objects of a company serve two fold functions. They are:

(1) It tells what the company can do.(2) In the negative, it tell us what a company cannot do.

Anything that a company does which is beyond the scope of the object clause is called ultra vires theobject clause and is null and void. This doctrine was laid down in Ashbury Railway Carriages and

Wagons Company v. Riche (1875) LR & HL 653. The company was incorporated with a number of

objects. Two important objects being the company shall (a) make, sell, hire railway carriages and

wagons, and (b) to act as mechanical engineers and general contractors. The directors of thecompany, contracted with Riche to finance the construction of railway line at Belgium.

Subsequently, the directors repudiated the contract, on the ground that it was ultra vires the company.

Riche brought an action for damages for breach of contract.

The House of Lords held that the contract was ultra vires and therefore, null and void. Lord Cairns,L.C., observed thus:(i) The subscribers are to state the objects for which the proposed company is to be established

and then the company comes into existence for those objects and those only.

(ii) such a statement of objects has two-fold operation. It states affirmatively the ambit andextent of powers of the company and it states negatively that nothing shall be done beyond

that ambit and that no attempt shall be made to use the corporate life for any other purpose

than that, which is so specified.

(iii) The term general contractors must be taken to indicate the making generally of such

contracts, as are connected with the business of mechanical engineers. If the term generalcontractors is not so interpreted, it could authorise the making of contracts of any and every

description.., which, would be altogether unmeaning.(iv) Hence, the contract was entirely beyond the objects in the memorandum of association. If so,

it was thereby placed beyond the powers of the company to make the contract. If the company

could not make it, much less could it be rat fled.

Effects of Ultra Vires Transactions:

(1) Contract void: Ultra vires transactions render the contract void, giving no legal rights to thecompany or the outsiders. Such contracts can never be ratified.

(2) Property acquired under ultra vires transaction: If a company acquires property under an ultra

vires transaction, the companys right over the property shall be protected because assets so

acquired represents corporate capital.(3) Injunction: Any member may obtain an order of injunction from the Court to restrain the

company from persisting in ultra vires act.

(4) Ultra vires borrowing: In case of an ultra vires borrowing, the lender has no right of action inrespect of the loan to the company. But he has certain rights in respect of money received by

the company, provided the same is traceable. But the money lent by a company not authorised

to lend, can be recovered by it because the debtor will be stopped from pleading that thecompany had no power to lead.

(5) Directors personally liable: Directors who part with the companys money or property for

ultra vires objects, will be personally liable to restore to the company the funds used for such

purpose.


17/72

(6) Liability for torts: A company can be made liable for any tort, if the following two conditions

are satisfied, viz.:

First, the activity, in the course of which the tort has been committed, falls within the scope of

the Memorandum of Association.

Second, the servant of the company must have committed the tort within the course of hisemployment.

ARTICLES OF ASSOCIATION

Q. 2 What do you mean by Articles of Association?

Ans. Articles of Association is a document containing rules and regulations for the administration

of the company.

In case of public company limited by shares, articles of association may be submitted along with theMemorandum of Association. But in other cases namely unlimited company, company limited byguarantee and private company limited by shares, articles of association must be submitted along

with the memorandum of association.

Form and Signature of Articles: Table A in Schedule I of the Companies Act, contains, the

Regulation for management of a company. A company may either accept Table A or make changes

in the content of Table A for its articles.

The articles shall be printed, be divided into paragraphs and must be signed by all the subscribers.

Contents of Table A: The articles of a company usually deal with the following matters:

(1) the business of the company.(2) the amount of capital issued and the classes of shares into which the capital is divided; the

increase and reduction of share capital;

(3) the rights of each class of shareholders and the procedure for variation of their rights;

(4) the execution or adoption of a preliminary agreement, if any;(5) the allotment of shares; calls and forfeiture of shares for nonpayment of calls;

(6) transfer and transmission of shares;

(7) companys lien on shares;(8) exercise of borrowing powers including issue of debentures;

(9) general meetings, notices, quorum, proxy, poll, voting, resolution, minutes;

(10) number, appointment and powers of directors;

(11) dividendsinterim and finaland general reserves;(12) accounts and audit.

(13) keeping of booksboth statutory and others.

(14) regulation as to seal.(15) regulation as to winding up.

ALTERATIONS OF ARTICLES OF ASSOCIATION

A company can, at any time, alter its Articles of Association , subject to the provisions of the

Companies Act and also subject to the following conditions or restrictions:


18/72

(1) Alteration of Articles can be made only by a Special Resolution of the shareholders of the

company to that effect.(2) No alteration of Articles will be allowed, which will violate the provisions of the Companies

Act, or any other provisions of general law which may be applicable.

(3) No alteration of Articles will be allowed, which will violate the conditions, contained in theMemorandum of Association of the company.

(4) Alterations must not contain anything illegal.(5) An alteration must not constitute a fraud on the minority. In other words, an alteration must

not affect the interests of the minority shareholders.

(6) An alteration of Articles which has the effect of converting a public company into a private

company, shall have effect only if the alteration is approved by the Central Government.

(7) Alteration must be made bona fide in the interest of the company as a whole, even though theprivate interests of some members may be affected.

(8) Lastly, Articles of Associations may be altered with retrospective effect.

DISTINCTION BETWEEN MEMORANDUM OF ASSOCIATION AND ARTICLES OFASSOCIATIONThe following are the fundamental points of distinction between Memorandum of Association and

Articles of Association:

Criteria Memorandum Articles

1 Fundamentalcondition or

internal

regulations

The Memorandum contains thefundamental conditions upon

which, the company is allowed to

be incorporated. The conditionsare introduced for the benefit ofthe creditors, the shareholders and

the outside public.

The Articles of Association are theinternal regulations of the company.

They provide the manner, in which the

company is to be carried and itsproceedings disposed of.

2 Dominant or

subordinate

The memorandum is a dominant

instrument, as it states thepurposes for which the company

has come into existence.

The Articles are always held to be

subordinate to Memorandum becausethey are mere internal regulations of the

company.

3 Methods of

alteration

Section 13 provides that some of

the conditions of incorporation,

contained in the memorandum,such as the objects clause, and the

registered office clause, cannot be

altered except by the special

resolution of the company andwith the sanction of the central

government.

Section 31, on the other hand, provides

that the Articles of Association can be

altered simply by a special resolution. Itdoes not require the sanction of the

central government or of any other

authority.

4 Effect of acts

done in

contravention ofMOA and AOA

If a company does something

outside the scope of the objects

stated in the memorandum, it isabsolutely null and void and

If the company does something in

contravention of the provisions of its

Articles, it is only an irregularity and canalways be confirmed by the


19/72

incapable of ratification. shareholders, and thus rectified.

EFFECT OF MEMORANDUM AND ARTICLES

S. 36 contains provision regarding the binding force of the Memorandum and the Articles, on thecompany and its members.

They are:(1) Members and the company bound towards each other: The Memorandum and the Articles

bind the company and its members, to the same extent as if they had been respectively signedby the company and by each member.

(2) Members inter se bound: Each member is bound to the other members, by the termscontained in the Articles. Thus, if the Articles provide about certain rights of members interse,

a member can enforce such rights against the other members.

Example: The plantiff was the shareholder of a private company. The Articles of Association,required a member who wanted to transfer his shares, to inform the directors of his intention,

and then the directors will take the said shares equally between them at a fair value. On theirrefusal to take shares, it was held that the directors as members were obliged to take shares.(Rayfield v. Hands and others (1960) Ch. 1).

(3) Company and outsiders: All outsiders, dealing with the company are assumed to have read

the articles of the company and are bound by the same. Outsiders shall be deemed to haveconstructive notice of the contents of Memorandum and Articles of the Company.

DOCTRINE OF CONSTRUCTIVE NOTICE

The memorandum and articles of association of a company are public documents. Any person who isdealing with a company, is presumed to have read and understood the proper meaning of thedocuments. In other words, no party can take the plea, that he was ignorant of what have been stated

in the memorandum and articles of association.

The doctrine of constructive notice comes to the aid of a company vis--vis the outsiders.

However, the doctrine has been described as an unreal doctrine, as it fails to take note of business

realities. Hence, the rule has in reality been diluted. The Courts have held if a person deals with thecompany in good faith and the person with whom he is dealing has ostensible authority to deal on

behalf of the company, the company will be held liable.

Example: Although the articles had clearly stated that the directors could delegate all powers, but the

power to borrow an overdraft taken by the managing agent without the sanction of the board was held

to be binding on the company. Such a temporary loan, was not governed by the rule incorporated inthe articles. (Dehdradun Mussoorie Electric Tramway Co. v. Jagmandrdas, AIR (1932) All. 141).

DOCTRINE OF INDOOR MANAGEMENT OR TURQUAND RULE

As one is aware that the doctrine of constructive notice protects the company in its dealings with

outsiders, the doctrine of indoor management comes to the aid of the outsiders, while dealing with the

company.


20/72

The doctrine of indoor management implies, anyone dealing with the company who has no means ofknowing about the internal functioning of the company has every right to presume that, things are

happening the way it ought to happen. And any irregularity will not affect the rights of the outsiders.

The company will not be allowed toescape liability.

In other words the doctrine of indoor management is an exception to the doctrine of constructivenotice.

In Royal British Bank v. Turquand (1856) 6E and B 327, the articles authorised the directors to

borrow on bonds, by a resolution passed at the general meeting of the company. A bond was issued

against the borrowings made by the company without passing the required resolution. Held, thecompany was liable on the bond as the borrower could presume that the resolution had been passed

before making the borrowing through the issue of bond. This came to be known as Turquand Rule.

Exceptions to the Rule of Indoor Management:

The doctrine of indoor management is subject to five exceptions:

(1) Knowledge of internal irregularities of the company: A person already aware of the

irregularity, cannot claim protection under this rule.

(2) Suspicion of the internal irregularity: Where a person dealing with the company is placedin such circumstances, which are suspicious in nature and which invite inquiry, he is not

protected by the doctrine.

(3) Acts void abinitio: This doctrine does not apply to acts that are void abinitio.

Example: Where the document is a forged one:

(4) Acts, outside the apparent authority of the company: Where the acts of an officer, do not

fall within the apparent authority of such an officer, protection under the doctrine cannot be

claimed.(5) No knowledge of articles: A person who at the time of entering into a contract with a

company, has no knowledge of the companys articles of association, cannot be saved or

protected by the doctrine.


21/72

CHAPTER 3PROSPECTUS

In case of public company, the funds required are more. One way of getting it is by approaching the

public. Prospectus is used to approach the public. Therefore, a prospectus aims at, soliciting

applications from interested investors, by informing them about companys business, financialposition, capital structure, directors etc. As the public subscribe to the capital by what has been stated

in the prospectus, law imposes duty on the promoters to state true statements in the prospectus.

DEFINITION AND MEANINGS. 2 (36) defines a prospectus as

any document described or issued as prospectus and includes any notice, circular, advertisement orother document inviting deposits from the public or inviting offers from the public for the

subscription or purchase of shares in or debentures of a body corporate.

Abridged prospectus: It means a memorandum containing salient features of a prospectus, as maybe prescribed. It contains only those details as are included in the prospectus, though in an abridged

form.

Deemed prospectus or prospectus by implication: Nowadays, offer of sale of shares or debentures

are made through Issue Houses. It is the Issue House, who advertises. As it is not advertised by the

company, these were not deemed to be prospectus. To check the by-passing of the provision of law,all documents containing offer of shares or debentures for sale shall be included within the definition

of prospectus and shall be deemed as prospectus by implication.

Shelf Prospectus and Information Memorandum: It is a prospectus issued by any financialinstitution or bank (whose main object is financing) for one or more issues of securities or class of

securities specified in that prospectus.

Note: Financing means making loan to or subscribing in the capital of a private company orindustrial enterprise, engaged in infrastructural financing or such other companies as the central

government may notify.

Red Herring Prospectus: It is a prospectus which does not contain all particulars on the price andquantum of securities offered. This means that in case the price is not disclosed, the number of shares

and the upper and lower price bonds are disclosed. On the other hand, an issuer can state the size and

number if shares are determined later. It is issued atleast three days prior to the opening of the offer.

A document to be prospectus, must have been issued to the public. What may be treated as, an issue

to the public depends upon the facts and circumstances of each case. In Government Stock and Other

Securities Investment Co. Ltd. v. Christopher and Others (1956) I. W.L.R. 237) it was held fordetermining whether a circular or invitation has been issued to the public or not, the test is not

L. who receives the circular but who can accept the offer made.

What does not constitute a prospectus: No offer or invitation said to be made to the public if:

(1) it is directed to a specified person.(2) it is not calculated to result in the shares or debentures becoming available to other persons.

(3) it is directed to a few persons.

When prospectus is not required to be issued: A company I not issue a prospectus jn the following

cases:

(1) In case of a private company.


22/72

(2) When promoters or directors, intend raising fund from personal contacts and acquaintances

without offering the shares and debentures to the public.(3) When shares are offered to underwriters under an underwriting arrangement.

(4) When the company intends raising funds only from existing shareholders! debenture holders.

(5) When the shares or debenture issued are uniform in all respects with shares or debenturespreviously issued and dealt in or quoted in a recognised stock exchange.

LEGAL REQUIREMENTS OF PROSPECTUSThe following are the legal requirements of prospectus:

(1) A prospectus is required to be issued only after the incorporation of the company.

(2) The prospectus must contain all the particulars1 listed in Schedule II to the Companies Act.

(3) The prospectus must be dated.(4) A prospectus must be signed by every person, mentioned therein as a director or a proposed

director, or his agent.

(5) Every application form for shares, issued by the company, must be accompanied by a copy of

the prospectus except (a) application forms, issued for bona fide invitation to a person to enterinto an underwriting agreements and (b) application forms, issued to existing members and

debenturehOlders.(6) A statement, relating to the affairs of the company by an expert, may be included iit the

prospectus.

(7) Consent of thc expert must be obtained in- writing and this fact must be stated in the

prospectus.

The term expert includes an engineer, valuer, chartered accountant, and other person, whoseprofession gives authority to a statement, made by him.

(8) No deposit can be invited without issuing an advertisement in a daily newspaper. The said

advertisement must contain a statement, reflecting the companys financial position issued bythe Company and in such a form or in such a manner, as may be prescribed.

Section 58 A of Companies (Amendment) Act, 1974, orovides that the company and the

officer, who violate the above rules, shall be punishable. These rules are not applicable tobanking companies and such other companies as the Central Government may, in consultation

with the Reserve Bank of India, specify on this behalf.

(9) Before a prospectus is issued, a copy of it must be registered with the Registrar of Companies.

(10) Prospectus shall be issued within ninety days of its registration.

Section 60(5) lays down that any company and any person, who knowingly issues a prospectus

without registration, is punishable with fine, which may extend to rupees five thousand.

CONTENTS OF A PROSPECTUS

Section 56 lays down that the matters and reports stated in Schedule II to the Act must be included in

a prospectus. The format of a prospectus is divided into three parts.

Part I:

(1) General information: Under this head information is given about (i) Name and address ofregistered office of the company. (ii) Name/(s) of stock exchange/(s) where application for listing is

made. (iii) Declaration about refund of the issue if minimum subscription of 90 per cent is not

received within 90 days from closure of the issue. (iv) Declaration about the issue of allotmentletters/refunds within a period of 10 weeks and interest in case of any delay in refund, at the

prescribed rate, under s. 73. (v) Date of opening of the issue. (vi) Date of closing of the issue. (vii)

Name and address of auditors and lead managers. (viii) Whether rating from CRISIL or any rating

agency has been obtained for the proposed debntures/ preference shares issue. If no rating has been


23/72

obtained, this should be answered as No. (ix) Name and address of the underwriters and the amount

underwritten by them.

(2) Capital structure of the company: (i) Authorised, issued, subscribed and paid-up capital. (ii)

Size of the present issue, giving separately reservation for preferential allotment to promotersand others.

(3) Terms of the present issue: (i) Terms of payment. (ii) How to apply. (iii) Any special taxbenefits.

(4) Particulars of the issue: (i) Objects. (ii) Project cost. (iii) Means of Finandng (including

contribution of promoters).

(5) Company management and project:

(i) History and main objects and present business of the company.(ii) Promoters and their background.

(iii) Location of the project

(iv) Collaborations, if any.

(v) Nature of the product(s). Export possibilities.(vi) Future prospects.

(vii) Stock market data for share/debentures of the company including high and low pricein each of the last three years and monthly high and low during the last six months, ifapplicable.

(6) Certain prescribed particulars: in regard to the company and other listed companies under the

same management, which made any capital issue during the last 3 years.(7) Outstanding litigations: relating to financial matters or criminal proceedings against the

company or directors under Schedule Xffl.

(8) Management perception of risk factors: (e.g., sensitivity to foreign exchange rate fluctuations,

difficulty in availability of raw materials or in marketing of products, cost/time overrun, etc.)

Part II:

Requires the company to give detailed information. This part is further sub-divided into three partsviz., General Information, Financial Information and Statutory and Other Information.

(1) General Information shall include information on matters like:

(i) Consent of directors, auditors, solicitors, managers to the issue, Registrars to the issue,

Bankers of the Company, Bankers to the issue and experts.(ii) Changes, if any, in directors and auditors during the last 3 years and reasons therefor.

(iii) Procedure and time schedule for allotment and issue of certificates.

(iv) Names and address of Company Secretary, legal advisor, Lead Managers, Co-managers, Auditors, Bankers to the issue.

(v) Authority for the issue and details of resolution passed therefor.

(2) Financial information includes: (i) reports of the auditors of the company with respect to its

profits and losses and assets and liabilities, and the dividends paid during the five financialyears immediately preceding the issue of prospectus; (ii) report by the accountants (who

should be named) on the profits or losses for the preceding 5 financial years and on the assets

and liabilities on a date which must not be more than 120 days before the date of the issue ofthe prospectus.

(3) Statutory and Other information includes information about:

(i) Minimum subscription.(ii) Expenses of the issue

(iii) Underwriting commission and brokerage.

(iv) Previous public or rights issue; if any, giving particulars about date of allotment,

refunds, premium/discount, etc.

(v) Issue of shares otherwise than for cash.


24/72

(vi) Commission or brokerage on previous issue.

(vii) Particulars about purchase of property, if any.(viii) Revaluation of assets, if any.

(ix) Material contracts and time and place where such documents may be inspected.

(x) Debentures and redeemable preference shares or others instruments issued butremaining outstanding on the date of the prospectus and terms of their issue.

Part III:Gives explanations of certain terms and expressions used under Part I and Part II of the Schedule.

LIABILITY FOR MIS-STATEMENTS IN THE PROSPECTUS

The public, who are investing their money in the public company, comes to know of the companyonly by the prospectus. Hence, there is an inherent duty that the prospectus must state the true picture

of the company i.e, prospectus must state things accurately and not omit material facts. The goldenrule as regards, the prospectus was laid down in New Brunswick & Canada Rly. & Land Co. v/sMuggeridge (1860)3 Lt. 651- Nothing should be stated as a fact, which is not so, and no fact should

be omitted the existence of which might in any degree affect the nature or quality of the principles

and advantages which the prospectus holds out as an inducement to take shares Hence any omissionof a material fact or addition of untrue statement in the prospectus amounts to mis-statement and both

civil and criminal action follows.

Persons

(I) Civil Liability:Liabilities for misstatement

Whenever a person subscribes to the shares or debentures of a company on the basis of untruestatements in the prospectus, has the right of action both against persons responsible for the issue of

such mis-statements as well as against the company.

(1) Against Persons: Whereas, prospectus is issued inviting persons to subscribe for shares in, or

debentures of a company, the following persons shall be liable to pay compensation to everysubscriber, for the loss he may suffer on account of the misstatement.

(a) Every person who is the director of the company at the time of issue of the prospectus;

(b) Every person who has authorized himself to be named and is named in the prospectus-as a director, or as one having agreed to become a director, either immediately or

after an interval of time; -

(c) Every promoter of the company; and

(d) Every person (including as expert) who has authorized the issue of the prospectus. Butan expert is liable only in respect of his own un-true statement.

Facts to be proved by the allottee:(a) Mis-statements must be of facts and not of law or an opinion.

(b) The mis-statement must be of material fact.

(c) And the allottee must have acted upon it.

Remedies available:

(a) Damages for fraudulent misrepresentation;

(b) Compensation

(c) Damages for non-compliance with the requirements regarding contents of the prospectus.


25/72

Defenses, available to avoid civil liability:

The persons who could be held liable have certain defenses available to absolve their liability. They

are:

(a) He withdrew the consent to act as a director, before the issue of the prospectus and it wasissued without his consent or authority; or

(b) It was issued without his knowledge or consent, and on becoming aware of the issue he gavereasonable public notice to that effect; or

(c) He withdrew his consent after the issue of the prospectus but before allotment and public

notice was given; or

(d) He had reasonable grounds to believe that the statements were true and believed them to be

true.(e) The statement was correct, and it was fair summary or copy of an experts report; or

(f) The statement was made by an official or in an official document.

Example: The directors of a Tramway company issued a prospectus stating that they had theright to run tram-cars with team power instead of the horse drawn carriages.

This statement was issued, as their application satisfying the conditions required was pendingbefore the Board of Trade. But the Board of Trade rejected their application. Peek, a

shareholder sued the directors for damages for fraud. Held, the directors were not liable for

fraud, as they honestly believed what they said in the prospectus to be true. (Derry v/s Peak11889 A. C, 337)

(2) Against the Company:

(a) Rescind the contract(b) Claim damages from the company

(II) Criminal Liability:

Where the prospectus contains any untrue statement, every person who authorizes the issue of the

prospectus is punishable with

(a) Imprisonment up to 2 years;(b) Fine up to rupees 50,000; or

(c) Both

He will not be liable is he proves either, that

(a) The statement was immaterial; or

(b) He had reasonable grounds to believe and did up to the time of the issue of the allotment

believe the statement to be true.

STATEMENT IN LIEU OF A PROSPECTUS

A public limited company, (1) which has not issued a prospectus, or (2) which has issued aprospectus, but has not proceeded to allot any of the shares, offered to the public for subscription, is

required to deliver to the Registrar a Statement in lieu of Prospectus for registration, at least three

days before the allotment of shares or debentures.


26/72

Schedule III contains the details of the particulars to be furnished. In case of private company

becoming a public company, statement in lieu of the prospectus can be filed. Schedule IV containsthe details of the particulars to be furnished for the same.

Such a statement is required to be signed by every person, who is named therein as a director or aproposed director, of the company, or by his agent authorised in writing.

If allotment of shares or debenture is made without filing the statements in lieu of prospectus, theallottee may avoid it within two months after the statutory meeting, or where no such meeting to be

held, within two months of the allotment. Contravention ilso renders the company and every director

liable to a fine upto rupees 10,000.

PUBLIC DEPOSITSDeposit means any deposit of money with the company and ncludes any amount borrowed by a

company, but shall not include such categories or amount as may be prescribed in consultation with

the RBI. [refer Rule 2(b) of Companies cceptance of Deposits) Rules 1975 for categories excluded.

Rules for inviting or accepting deposits by the company:(1) No deposit can be invited, without an advertisement specifying the financial conditions,

management structure and other required particulars of the company.

(2) Declaration as to repayment of the deposit, in accordance with the terms and conditions.

(3) Declaration by the depositor that the money is not being deposited out of the funds acquiredby him by borrowing or accepting deposits from any other person.

(4) Provision for nomination to be available.

(5) No deposit payable on demand or repayable before three months can be accepted.

(6) Any deposit repayable before six months, may be accepted provided such deposits do notexceed 10% of the paid-up capital and free reserves.

(7) A company cannot accept deposits, repayable after three years.

(8) A company cannot accept deposits beyond 10% of the paidup capital.(9) Any deposit received in contravention of the above rules, have to be refunded within thirty

days of acceptance of the deposit. This period may be extended by another thirty days by the

Central Government.

(10) In case of non-repayment within the above stipulated time, the company shall be subjected tofine which shall not be less than twice the amount not repaid and every officer of the

company, who is in default shall be punishable with imprisonment for a term which may

extend up to five years.

Small depositor: Means a depositor who has deposited in a financial year, a sum not exceeding

twenty thousand rupees in a company.

In the event of the company defaulting in repayment to such depositor, intimation will have to be

given to the Company Law Board within sixty days of the default giving details. Company Law

Board shall pass appropriate orders within thirty days. Failure to comply with the provisions of law isfine of rupees five hundred per day and imprisonment up to three years.


27/72

CHAPTER 4 - MEMBERSHIP OF A COMPANY AND REGISTER OF MEMBER

MEANING OF MEMBER

According to S. 41 of the Companies Act, a member of a company means a person(i) who has subscribed his name to the memorandum.

(ii) any other person, who has agreed in writing to become a member and whose name is enteredin the register of members.

(iii) every person, holding equity share capital of a company and whose name is entered asbeneficial owner in the records of the depository (inserted by the Depositories Act, 1976).

On the other hand, a shareholder is one who holds shares in a company.

These two expressions are being used interchangeably. However where a company has a share

capital, a shareholder is also a member of the company. While in cases, where the company has no

share capital they are members. Hence a shareholder is also a member but a member may notnecessarily be a shareholder of a company.

ACQUISITION OF MEMBERSHIPA person may become a member of a company in the following ways:

(1) By subscribing to the memorandum: Signatories to the memorandum ipsofacto become

members of the company on its incorporation. By virtue of being subscribers, they aredeemed to have become members and must be entered in the register of members. Hence

neither application nor allotment of shares is necessary.

(2) By undertaking to buy qualification shares: Where a person has signed an undertaking, to

take and pay for his qualification shares, he shall as regards those shares, be in the sameposition as if he had signed the memorandum for shares of that number or value. Thus, an

undertaking on the part of the director to buy qualification shares, puts him in the position of a

subscriber to the memorandum. He is deemed to be a member of the company and must beentered in the register of members.

(3) By allotment: A person may acquire membership of a company, by application and allotment

of shares.

(4) By transmission: On the death of a shareholder, shares are transmitted to his legal

representatives, who become members of the company on their being entered in the register of

members.

(5) By transfer: A person who take shares from an existing member by sale, gift or some othertransaction, acquires membership, on his name appearing in the register of members.

(6) Membership by acquiescence and estoppel: A person is deemed to be a member of a

company, if he allows his name to be put on the register of members or otherwise holds

himself out as a member, even if there is no agreement to become a member. Thus, thisliability springs into existence as a result of acquiescence and estoppel.

(7) Joint members: When two or more persons hold share in a company in their joint names, it is

called a joint membership. In such a case, the name of the member appearing first isconsidered to be the main member for the purpose of sending notices, dividends, etc.

However, they all shall be treated as a single member.

WHO CAN BECOME A MEMBERFollowing are the categories of persons or entities, who can a member of a company:

(i) Any person competent to contract.

(ii) A company can become a member of another company.


28/72

(iii) A firm is not a legal person, and therefore cannot buy shares in its own name. However, a

firm may hold shares in the names of individual partners who may be entered as joint holders.(iv) A trustee, who buys shares, will be treated as a member in his individual capacity. However,

by Companies Amendment Act, 1963 has provided for appointment of public trustee by the

Union Government. Hence, any person holding shares in a company as a trustee, is requiredto make a declaration to the public trust within the prescribed time. A copy of such

declaration is required to be sent by the trustee to the company concerned within 21 days afterthe declaration to the public trust. Failure to do so will invite a penalty of fine. However, theseprovisions are not applicable to the following two cases:

(a) where a trust is not created by an instrument in writing; and

(b) even if the trust is created by an instrument in writing, if the value of the shares, held

in trust, does not exceed Rs. one lath or if it exceeds that amount, it does not exceed Rs. 5lakhs or 25% of the paid up share capital of the company, whichever is less.

(v) A registered society can acquire shares in a company.

(vi) A non-resident cannot become a member of a company without the permission of the Reserve

Bank of India under the Foreign Exchange Regulation Act, 1973.(vii) An insolvent, may be taken as a member so long as his name appears in the register of

members, notwithstanding the right of official assignee or receiver to be registered as amember..

(viii) A minor can be admitted to the membership of a company limited by shares, by means of

transfer of shares provided the shares are full paid up.

TERMINATION OF MEMBERSHIP

Termination of membership happens under the following circumstances:

(1) Transfer of shares: The transferor ceases to be a member when the transferee is placed on the

register of members. However, he remains liable to be placed in the B list for one year. if thecompany goes into liquidation.

(2) If his shares are forfeited by the company.(3) If the company sells his shares under some provision in its Articles, as for example, in the

exercise of its rights to enforce a lien.

(4) If he validly surrenders shares to the company, where such surrender is permitted.

(5) If his shares are sold in execution of a decree of the Court.(6) If he rescinds the contract to take shares, on the ground of misrepresentation in the prospectus

or of irregular allotment.

(7) If he is adjudicated insolvent. The shares of an insolvent, vest in the Official Receiver orAssignee.

(8) If he dies. However, the estate of the deceased member remains liable until the shares are

registered in the name of his legal representative.

(9) If redeemable preference shares are redeemed.(10) If the company is being wound up, a member remains liable as a contributor and is also

entitled to share in the surplus assets, if any.

RIGHTS AND LIABiLITIES OF MEMBERS

Rights of Members:The following are the rights of the members of a company:

(1) Statutory Rights: The statutory rights are conferred upon members of a company by the

Companies Act. These rights cannot be withheld, taken away, or modified by the

Memorandum or Articles of Association. Some of the Statutory rights of a members are as

under:


29/72

(a) A member has a right of priority to have shares offered in case of increase of capital.

(b) Right to receive notices of meetings, attend and vote at meetings.(c) Right to transfer shares.

(d) Right to receive a share certificate.

(e) Right to receive copies of annual accounts of the company.(f) Right to inspect the register of members, register of debentureholders and copies of

annual returns.(g) Right to apply to the Central Government for calling an annual general meeting if the

board of directors fails to call such a meeting.

(h) Right to apply to the Court for calling an extraordinary meeting of the company.

(i) Right to participate in appointments of directors and auditors in the annual general

meetings.(j) Right to petition to the Central Government for ordering an investigation into the

affairs of the company.

(k) Right to petition to the High Court for relief in cases of oppression and

mismanagement.(l) Right to petition to the High Court for winding up of the company.

(2) Documentary Rights: These rights are conferred upon the members by the Memorandum andArticles of Association.

(3) Proprietary Rights: Proprietary rights include the following rights:

(a) Right to be registered as a member in the companys register of members, subject onlyto valid and authorised transfer of shares.

(b) Privilege of immunity from personal liability of companys debts.

(c) Right to participate in dividend distribution, if ordered in the discretion of the

directors.(d) Finally, right to participate in the distribution of assets in case of liquidation of the

company.

(4) Remedial Rights: Remedial rights include the following rights:(a) Right to information and inspection of companys records.

(b) Right to bring representative suits on companys cause of action, to remedy

mismanagement or unauthorised acts and thereby to compel the company to enforce

its rights.

Liabilities of Members:

Liabilities of the members depends upon the kind of company i.e. where the company is a limitedcompany, the liability of each is limited to the face value of the share he has agreed upon. While if

the company is a company limited by guarantee, ie liability of each member is to the extent of

guarantee agreed upon. Finally in case of company with unlimited liability, the iability of each

member is unlimited.

REGISTER OF MEMBERS

Register of Members: Register of members is prima facie evidence of, one being a member of acompany. Therefore every company must keep a register of members with the following details:

(a) the name, address of members and shares held by each and the amount paid.

(b) the date on which each person was entered in the register as a member.(c) the date on which any person ceased to be a member.

Any default in complying with the above shall render the company and every officer in default liable

to a fine which may extend to rupees 500 for every day during which the default continues.


30/72

(2) Index of Members: Every company, having more than fifty members, shall keep an index of

the names of the members of the company, unless the Register of Members itself is kept in theform of an index. The purpose of this is to enable entries relating to a particular member to be

readily found.

If there are any changes in the Register of Members, such changes must be indicated on theIndex of Members within fourteen days of the alteration.

Any non-compliance shall attract a fine upto rupees five hundred for every defaulting memberand the company.

(3) Closure of Register of Members:A company may after giving not less than seven daysnotice, publish in some newspapers circulated in the district, in which the registered office of

the company is situated, close the register of members for a period not exceeding 45 days in

each year, but not exceeding 30 days at any one time.If the register of members is closed without giving the required notice or after giving a shorter

notice or where the register is closed for an aggregate period in excess of the limit specified,

the company, and every officer of the company in default shall be punishable with fine which

may exceed to rupees five thousand for everyday during which the register is so closed.

(4) Foreign Register of Members: A company with share capital or which has issued

debentures may, if so authorised by its articles, keep in any state or country outside India abranch register of members or debenture holders residing in that state or country. TheRegistrar shall be notified within 30 days of the opening of the register, as to the place of

keeping the register. Similarly, whenever there is a change in the place of keGping the register

or discontinuance, the same shall be notified to the Registrar. Non-compliance of any ruleshall entail fine for the company and every officer upto rupees five hundred for every day of

default.

RECTIFICATION OF REGISTER OF MEMBERS:As the register of members is the prima facie evidence of, whether a person is a member or not, it is

important that the register maintains. true and correct information. The power to order rectification

now vests with the Tribunal. Prior to year 2002, it was with the Company Law Board.

It is important to note that prior to the amendment of section 111 by the Depositories Act, 1996, the

provisions, for rectification of register of members for both private companies as well as public

companies were the same. Now, the provisions for private company is dealt with under subsection 14of section 111, whereas for public companies, a new section 111A has been inserted.

Rectification of register of members of private companies and I public companies:Rectification could be on account of refusing to make changes, changing without sufficient cause, or

omitting without sufficient cause. The person aggrieved, or any member of the pany, or the company

may apply to the Tribunal for rectification of register. The petition is to be made in writing along h

the prescribed fee of rupees five hundred. This application has to be filed within two months of therefusal or within four onths of cause of action. The Tribunal after hearing the parties pass relevantorders including interim orders and/or costs.

In default of complying with the orders of the Tribunal, every officer of the company who is in

default, shall be punishable with fine which may extend to rupees ten thousand and with a further fine

which may extend up to rupees one thousand for every day after the first day after which the defaultcontinues.

Rectification of register of members of public companies:

Even in case of public companies, the power to order for rectification of register of member vests

with the Tribunal since 2002. A participant, or investor, a depository or the Securities and Exchange


31/72

Board of India can make a petition, within two months of the intimation of the refusal for

rectification along with the requisite fee.The grounds on which rectification may be sought are:

(a) Where the transfer of shares is in contravention of any provision of the SEBI, Act 1992 or any

regulation made there under.(b) Where the transfer of shares is in contravention of any provision of the Sick Industrial

Companies (Special Provision) Act, 1985.(c) Where the transfer of shares is in contravention of any provision of any other law for the time

being in force.

Note: Section 111A deals only with regard to transfer of shares and debentures. For other matters,

the remedy would be to file a civil suit.

The Tribunal after hearing the parties, may pass the relevant orders including interim orders and/or

costs.

In default of complying with the orders of the Tribunal, every officer of the company who is in

default, shall be punishable with fine which may extend to rupees ten thousand and with a furtherfine which may extend up to rupees one thousand for every day after the first day after which thedefault continues..

Every company having a share capital must file the annual return with the Registrar at least once in acalender year. Filing of the annual returns enables the Registrar to know of the changes that have

occurred during the year. Further it enables him to record the changes. 4 must be filed within 60 days

of the holding of the AGM or from the last day on which the meeting should have been held in

accordance with the provisions of the Companies Act.

The particulars to be stated in the annual return are different for the companies having a share capital,

and for the companies having no share capital.

Annual return of a company having a share capital:

The annual return must contain the particulars specified in Part 1 of Schedule V. The return must

contain the following particulars:(a) The registered office.

(b) The register of members or debenture holders both present and past.

(c) The register of debenture holders.(d) The shares and debentures of the company.

(e) The particulars of the total indebtedness of the company.

(f) Particulars of the directors, managing directors, managers and secretaries, past and present.

Annual return of the company not having a share capital must furnish the following

particulars:

(a) The address of the registered office of the company.(b) The names of members and respective dates on which they became members.

(c) The names of persons who ceased to be members, and the dates on which they ceased to be

members.(d) All particulars with respect to persons who at the date of the return were the directors of the

company, its manager and its secretary.

(e) Total indebtedness of the company.


32/72

The director and the manager or secretary of the company must sign the annual returns. If the

company has no manager or secretary then it must be signed by at least two directors. In case thecompany shares are listed on a recognized stock exchange, the whole time secretary is also required

to sign.

If the company fails to comply with any of the provisions contained in the Act, the company and

every officer of the company who is in default shall be punishable with fine, which may extend torupees five hundred for every day during which the default continues.


33/72

CHAPTER 5 - SHARE CAPITAL AND SHARES

SHARE CAPITALThe capital raised by a limited company is called the share capital. This capital is used in the

following senses:

(a) Authorised Capital: Also called as nominal or registered capital. This is the amount

specified in the memorandum of association. This is the maximum amount the company isauthorized to raise by issue of shares.

(b) Issued Capital: It is that part of the capital, that has been issued by the company for

subscription.

(c) Subscribed Capital: It is the amount of shares, that has been subscribed by the public.

(d) Called-up capital: It is that part of the nominal capital amount of the subscribed capital,which has been demanded from the subscribers for payment.

(e) Reserve capital:It is that part of the companys uncalled capital, which shall be called except

on winding up.

A company to start may issue a part of the capital called the issued capital to the public for

subscription. But no company can allot shares unless, the amount stated in the prospectus asminimum subscription, has been received by the company in cash.

Minimum subscription: The minimum subscription is the amount fixed by the Board of Directors,

after taking into account the matters specified in clause 5 of part Ito Schedule II of the Act. Thematters to be taken into account are:

(a) The purchase price of any property purchased or to be purchased;

(b) Any preliminary expenses payable;

(c) Any commission payable towards subscription of any shares;(d) The repayment of any money borrowed by the company for the above matters;

(e) Working capital;

(f) Any other expenditure.

Note: A public company cannot start, if the minimum subscription has not been received.

Irregular allotment: An allotment is irregular if:(a) The company does not file with the Registrar, a prospectus or a statement in lieu of the

prospectus at least three day prior to the allotment.

(b) Five percent amount of the nominal value of the shares payable on application, is not paid bythe subscribers or where the application money is not kept in a scheduled bank.

(c) Where the shares have not been listed on the stock exchange, within 10 weeks or the

application for listing has been rejected by the stock exchange.

If a company makes an irregular allotment, the applicant may if he so desires, avoid the allotment

within two months after the statutory meeting and if not statutory meeting is held or allotted after the

meeting, then within two months of the allotment.

ALTERATION F SHARE CAPITAL

A company having share capital may, if so authorized by the articles, alter its share capital. Thus thecapi

Date post:	05-Apr-2018
Category:	Documents
Upload:	jyotijagtap
View:	230 times
Download:	1 times

MFM-Corporate Law Notes

Documents