Introduction to Company Law: Meaning, Nature and Characteristics

Introduction to Company Law | Overview

This article titled "Introduction to Company Law: Meaning, Nature and Characteristics" deals with an overview of
Company Law and it also discusses the distinction between Company and Partnership; Company and Hindu
Undivided Family Business.

Introduction

The concept of 'Company' or 'Corporation' in business is not new but was dealt with, in 4th century BC itself during
'Arthashastra' days. Its' shape got revamped over a period of time according to the needs of business dynamics.
Company form of business has certain distinct advantages over other forms of businesses like Sole
Proprietorship/Partnership etc. It includes features such as Limited Liability, Perpetual Succession etc.

After reading this lesson, you would be able to understand the historical development in the evolution of
corporate law in India and England, emerging regulatory aspects including Companies Act, 2013, besides dealing
with basic characteristics of the company and how it differs from other forms of businesses.

I. Meaning of a Company

The word 'company' is derived from the Latin word (Com=with or together; panis =bread), and it originally
referred to an association of persons who took their meals together. In the leisurely past, merchants took
advantage of festive gatherings, to discuss business matters.

Nowadays, business matters have become more complicated and cannot be discussed at festive gatherings.
Therefore, the company form of organization has assumed greater importance. It denotes a joint-stock enterprise
in which the capital is contributed by several people. Thus, in popular parlance, a company denotes an association
of likeminded persons formed for the purpose of carrying on some business or undertaking.

A company is a corporate body and a legal person having status and personality distinct and separate from the
members constituting it.

It is called a body corporate because the persons composing it are made into one body by incorporating it
according to the law and clothing it with legal personality. The word 'corporation' is derived from the Latin term
'corpus' which means 'body'. Accordingly, 'corporation' is a legal person created by a process other than natural
birth. It is, for this reason, sometimes called an artificial legal person. As a legal person, a corporation is capable of
enjoying many of the rights and incurring many of the liabilities of a natural person.

An incorporated company owes its existence either to a special Act of Parliament or to company law. Public
corporations like Life Insurance Corporation of India, SBI etc., have been brought into existence by special Acts of
Parliament, whereas companies like Tata Steel Ltd., Reliance Industries Limited have been formed under the
Company law i.e. Companies Act, 1956 which is being replaced by the Companies Act, 2013.

II. Definition of Company

In the legal sense, a company is an association of both natural and artificial persons (and is incorporated under the
existing law of a country). In terms of the Companies Act, 2013 (Act No. 18 of 2013) a "company" means a
company incorporated under this Act or under any previous company law [Section 2(20)].

In common law, a company is a "legal person" or "legal entity" separate from, and capable of surviving beyond the
lives of its members. However, an association formed not for profit also acquires a corporate character and falls
within the meaning of a company by reason of a license issued under Section 8(1) of the Act.

A company is not merely a legal institution. It is rather a legal device for the attainment of the social and economic
end. It is, therefore, a combined political, social, economic and legal institution. Thus, the term company has been
described in many ways. "It is a means of cooperation and organization in the conduct of an enterprise".

It is "an intricate, centralized, economic and administrative structure run by professional managers who hire
capital from the investor(s)".

Lord Justice Lindley has defined a company as " an association of many persons who contribute money or money's
worth to common stock and employ it in some trade or business and who share the profit and loss arising
therefrom. The common stock so contributed is denoted in money and is the capital of the company.
The persons who contributed in it or form it, or to whom it belongs, are members. The proportion of capital to
which each member is entitled is his "share". The shares are always transferable although the right to transfer
them may be restricted."

From the foregoing discussion, it is clear that a company has its own corporate and legal personality distinct which
is separate from its members. A brief description of the various attributes is given here to explain the nature and
characteristics of the company as a corporate body.

III. Nature and Characteristics of a Company

Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an artificial juridical
person (i.e. created by law); it is clothed with many rights, obligations, powers, and duties prescribed by law; it is
called a 'person'.

Being the creation of law, it possesses only the powers conferred upon it by its Memorandum of Association which
is the charter of the company. Within the limits of powers conferred by the charter, it can do all acts as a natural
person may do.

The most striking characteristics of a company are:

(i) Corporate personality

A company incorporated under the Act is vested with a corporate personality so it redundant bears its own name,
acts under a name, has a seal of its own and its assets are separate and distinct from those of its members. It is a
different 'person' from the members who compose it. Therefore it is capable of owning property, incurring debts,
borrowing money, having a bank account, employing people, entering into contracts and suing or being sued in
the same manner as an individual.

Its members are its owners however they can be its creditors simultaneously. A shareholder cannot be held liable
for the acts of the company even if he holds virtually the entire share capital.

A Company is an artificial person created by law. It is not a human being but it acts through human beings. It is
considered as a legal person which can enter into contracts, possess properties in its own name, sue and can be
sued by others etc. It is called an artificial person since it is invisible, intangible, and exists only in the
contemplation of law. It is capable of enjoying rights and being subject to duties.

The principle of a separate legal entity of a company was recognized in the case of Salomon v. Salomon and Co.
Ltd (1897) A.C 22, which stated that a company has a separate existence from its members. Thus, this concept
protects the shareholders from being personally liable for any wrong or obligations of the company.

(ii) Limited Liability

Limited Liability is of two kinds i.e. liability limited by the unpaid amount of shares and liability limited up to the
amount guaranteed in the memorandum. These are the limited liabilities of the shareholders in the company.

The privilege of limited liability for business debts is one of the principal advantages of doing business under the
corporate form of organization. The company, being a separate person, is the owner of its assets and bound by its
liabilities.

The liability of a member as a shareholder extends to the contribution to the capital of the company up to the
nominal value of the shares held and not paid by him. Members, even as a whole, are neither the owners of the
company's undertakings nor liable for its debts. There are various exceptions to the principle of limited liability.

In other words, a shareholder is liable to pay the balance, if any, due on the shares held by him, when called upon
to pay and nothing more, even if the liabilities of the company far exceed its assets. This means that the liability of
a member is limited.

(iii) Perpetual Succession

An incorporated company never dies, except when it is wound up as per law. A company, being a separate legal
person is unaffected by death or departure of any member and it remains the same entity, despite the total
change in the membership. A company's life is determined by the terms of its Memorandum of Association.

It may be perpetual, or it may continue for a specified time to carry on a task or object as laid down in the
Memorandum of Association. Perpetual succession, therefore, means that the membership of a company may
keep changing from time to time, but that shall not affect its continuity.
The membership of an incorporated company may change either because one shareholder has sold/transferred
his shares to another or his shares devolve on his legal representatives on his death or he ceases to be a member
under some other provisions of the Companies Act.

Thus, perpetual succession denotes the ability of a company to maintain its existence by the succession of new
individuals who step into the shoes of those who cease to be members of the company. Professor L.C.B. Gower
rightly mentions,

"Members may come and go, but the company can go on forever. During the war, all the members of one private
company, while in general meeting, were killed by a bomb, but the company survived — not even a hydrogen
bomb could have destroyed it".

(iv) Separate Property

A company is a legal person and entirely distinct from its members, is capable of owning, enjoying and disposing of
property in its own name. The company is the real person in which all its property is vested, and by which it is
controlled, managed and disposed of.

Their Lordships of the Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960 Mad. 43 held that "no
member can claim himself to be the owner of the company's property during its existence or in its winding-up". A
member does not even have an insurable interest in the property of the company.

(v) Transferability of Shares

The capital of a company is divided into parts, called shares. The shares are said to be movable property and,
subject to certain conditions, freely transferable, so that no shareholder is permanently or necessarily wedded to a
company. When the joint-stock companies were established, the object was that their shares should be capable of
being easily transferred, [In Re. Balia and San Francisco Rly., (1968) L.R. 3 Q.B. 588].

Section 44 of the Companies Act, 2013 enunciates the principle by providing that the shares held by the members
are movable property and can be transferred from one person to another in the manner provided by the articles.

If the articles do not provide anything for the transfer of shares and the Regulations contained in Table "F" in
Schedule I to the Companies Act, 2013, are also expressly excluded, the transfer of shares will be governed by the
general law relating to the transfer of movable property.

A member may sell his shares in the open market and realize the money invested by him. This provides liquidity to
a member (as he can freely sell his shares) and ensures stability to the company (as the member is not
withdrawing his money from the company). The Stock Exchanges provide adequate facilities for the sale and
purchase of shares.

As specified under Section 58(2) of the Act of 2013, the shares of a public company are freely transferable.
Further, as of now, in most of the listed companies, the shares are also transferable through Electronic mode i.e.
through Depository Participants in dematerialized form instead of physical transfers. However, there are
restrictions with respect to the transferability of shares of a Private Limited Company which are dealt in chapter 2.

(vi) Common Seal

Upon incorporation, a company becomes a legal entity with perpetual succession and a common seal. Since the
company has no physical existence, it must act through its agents and all contracts entered into by its agents must
be under the seal of the company. The Common Seal acts as the official signature of a company. The name of the
company must be engraved on its common seal.

A rubber stamp does not serve the purpose. A document not bearing a common seal of the company, when the
resolution passed by the Board, for its execution requires the common seal to be affixed is not authentic and shall
have no legal force behind it.

However, a person duly authorized to execute documents pursuant to a power of attorney granted in his favour
under the common seal of the company may execute such documents and it is not necessary for the common seal
to be affixed to such documents.

The person, authorized to use the seal, should ensure that it is kept under his personal custody and is used very
carefully because any deed, instrument or a document to which seal is improperly or fraudulently affixed will
involve the company in legal action and litigation.

(vii) Capacity to sue or be sued

A company is a body corporate, can sue and be sued in its own name. To sue means to institute legal proceedings
against (a person) or to bring a suit in a court of law. All legal proceedings against the company are to be instituted
in its name. Similarly, the company may bring an action against anyone in its own name.

A company's right to sue arises when some loss is caused to the company, i.e. to the property or the personality of
the company. Hence, the company is entitled to sue for damages in libel or slander as the case may be [Floating
Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL 762 (Guj)].

A company, as a person distinct from its members, may even sue one of its own members. A company has a right
to seek damages where a defamatory material published about it, affects its business.

Where video cassettes were prepared by the workmen of a company showing, their struggle against the
company's management, it was held to be not actionable unless shown that the contents of the cassette would be
defamatory. The court did not restrain the exhibition of the cassette. [TVS Employees Federation v. TVS and Sons
Ltd., (1996) 87 Com Cases 37].

The company is not liable for contempt committed by its officer. [Lalit Surajmal Kanodia v. Office Tiger Database
Systems India (P) Ltd., (2006) 129 Com Cases 192 Mad].

(viii) Contractual Rights

A company, being a legal entity different from its members, can enter into contracts for the conduct of the
business in its own name. A shareholder cannot enforce a contract made by his company; he is neither a party to
the contract nor be entitled to the benefit derived from of it, as a company is not a trustee for its shareholders.

Likewise, a shareholder cannot be sued on contracts made by his company. The distinction between a company
and its members is not confined to the rules of privity but permeates the whole law of contract. Thus, if a director
fails to disclose a breach of his duties towards his company, and in consequence, a shareholder is induced to enter
into a contract with the director on behalf of the company which he would not have entered into had there been
disclosure, the shareholder cannot rescind the contract.

Similarly, a member of a company cannot sue in respect of torts committed against the company, nor can he be
sued for torts committed by the company. [British Thomson-Houston Company v. Sterling Accessories Ltd.,
(1924) 2 Ch. 33]. Therefore, the company as a legal person can take action to enforce its legal rights or be sued for
breach of its legal duties. Its rights and duties are distinct from those of its constituent members.

(ix) Limitation of Action

A company cannot go beyond the power stated in its Memorandum of Association. The Memorandum of
Association of the company regulates the powers and fixes the objects of the company and provides the edifice
upon which the entire structure of the company rests.

The actions and objects of the company are limited within the scope of its Memorandum of Association.

In order to enable it to carry out its actions without such restrictions and limitations in most cases, sufficient
powers are granted in the Memorandum of Association. But once the powers have been laid down, it cannot go
beyond such powers unless the Memorandum of Association, itself altered prior to doing so.

(x) Separate Management

As already noted, the members may derive profits without being burdened with the management of the company.
They do not have effective and intimate control over its working and they elect their representatives as Directors
on the Board of Directors of the company to conduct corporate functions through managerial personnel employed
by them.

In other words, the company is administered and managed by its managerial personnel.

(xi) Voluntary Association for Profit

A company is a voluntary association for profit. It is formed for the accomplishment of some stated goals and
whatsoever profit is gained is divided among its shareholders or saved for the future expansion of the company.
Only a Section 8 company can be formed with no profit motive.

(xii) Termination of Existence

A company, being an artificial juridical person, does not die a natural death. It is created by law, carries on its
affairs according to law throughout its life and ultimately is effaced by law. Generally, the existence of a company
is terminated by means of winding up. However, to avoid winding up, sometimes companies adopt strategies like
reorganization, reconstruction, and amalgamation.

IV. Distinction between Company and Partnership

The principal points of distinction between a company and a partnership firm are as follows:

1. A company is a distinct legal person. A partnership firm is not distinct from the several persons who form
the partnership.
2. In a partnership, the property of the firm is the property of the individuals comprising it. In a company, it
belongs to the company and not to the individuals who are its members.
3. Creditors of a partnership firm are creditors of individual partners and a decree against the firm can be
executed against the partners jointly and severally. The creditors of a company can proceed only against
the company and not against its members.
4. Partners are the agents of the firm, but members of a company are not its agents. A partner can dispose of
the property and incur liabilities as long as he acts in the course of the firm's business. A member of a
company has no such power.
5. A partner cannot contract with his firm, whereas a member of a company can.
6. A partner cannot transfer his share and make the transferee a member of the firm without the consent of
the other partners, whereas a company's share can ordinarily be transferred.
7. Restrictions on a partner's authority contained in the partnership contract do not bind outsiders whereas
such restrictions incorporated in the Articles are effective because the public is bound to acquaint
themselves with them.
8. A partner's liability is always unlimited whereas that of a shareholder may be limited either by shares or a
guarantee.
9. A company has perpetual succession, i.e. the death or insolvency of a shareholder or all of them does not
affect the life of the company, whereas the death or insolvency of a partner dissolves the firm, unless
otherwise provided.
10. A company may have any number of members except in the case of a private company which cannot have
more than 200 members (excluding past and present employee members). In a public company, there
must not be less than seven persons in a private company not less than two. Further, a new concept of one
person company has been introduced which may be incorporated with only one person.
11. A company is required to have its accounts audited annually by a chartered accountant, whereas the
accounts of a firm are audited at the discretion of the partners.
12. A company, being a creation of law, can only be dissolved as laid down by law. A partnership firm, on the
other hand, is the result of an agreement and can be dissolved at any time by agreement among the
partners.

V. Distinction between Company and Hindu Undivided Family Business

1. A company consists of heterogeneous (varied or diverse) members, whereas a Hindu Undivided Family
Business consists of homogenous (unvarying) members since it consists of members of the joint family
itself.
2. In a Hindu Undivided Family business, the Karta (manager) has the sole authority to contract debts for the
purpose of the business, other coparceners cannot do so. There is no such system in a company.
3. A person becomes a member of a Hindu Undivided Family business by virtue of birth. There is no provision
to that effect in the company.
4. No registration is compulsory for carrying on a business for gain by a Hindu Undivided Family even if the
number of members exceeds twenty [Shyamlal Roy v. Madhusudan Roy, AIR 1959 Cal. 380 (385)].
Registration of a company is compulsory.

Case Analysis: Salomon v A Salomon and Co. Ltd (1897)

This Case Analysis of Salomon v A Salomon & Co. Ltd. is a landmark case that has established an important
principle that a company has a separate legal entity and its corporate veil should not be pierced so as to protect
the interest of the shareholders and uphold the true spirit of the Companies Act.
This Case Analysis of Salomon v A Salomon & Co. Ltd. is a landmark case that has established an important
principle that a company has a separate legal entity and its corporate veil should not be pierced so as to protect
the interest of the shareholders and uphold the true spirit of the Companies Act.

This principle is regarded as the core of, not only the English company law but of the universal commercial law
regime. The House of Lord in this case decided that since a company has a separate legal entity and thus at the
time of liquidation, the shareholders cannot be made personally liable for the loss of the company.

Introduction

A company is a legal person in the eyes of law. It is regarded as an artificial person. A company is separate and
independent from its members and this enables the members not to be liable for the acts of the Company. As such
even if a shareholder holds the majority of the shares of the company he is free from the burden of the acts of the
company.

Court: House of Lords

Title of the case: Salomon v. A Salomon & Co. Ltd

Citation: [1896] 11 WLUK 76

Decided On: 16 November 1896, At House of Lords, UK

Judges: Lord Halsbury LC, Lord Watson, Lord Herschell, Lord Macnaghten, Lord Morris, Lord Davey

Facts of the case

The appellant, Aron Salomon, carried on his business as a leather merchant and wholesale boot manufacturer. In
order to limit his liability, he came up with the design of transferring his business to a joint stock company, rules of
which were to be dictated by the Companies Act 1862. A preliminary agreement to settle the terms of transfer of
the business was entered on 20 July 1892 between the appellant and Adolph Anholt, who served as the trustee of
the future company, one of the terms of which was to make part payment in terms of debentures to the
appellant.

The business of the appellant was perfectly solvent and financially sound at the time of its sale to the joint stock
company. The company hence formed, exclusively consisted of the vendor/ appellant and his six other family
members – his wife, his daughter, and his four sons. The limited company, thus formed, had an authorized capital
of 40000 shares of 1 Pound each. Out of these shares, only 20007 shares were issued and subscribed, of which
20001 were held by the vendor (appellant), and the other 6 shares were held by each member of his family.

All the terms of sale were known and duly approved by the members of the family. Besides the subscription of
20001 shares by the appellant, 10000 debentures forming floating security were also issued to him in the part
payment of the share purchase money.

The Memorandum of Association was also executed duly, wherein the chief object for the formation of the
company was stated to be the realization of the terms and conditions stated in the provisional agreement of 20
July 1892. The MoA was duly registered and thus, after the other legal formalities, the company was incorporated
under the name of "Aron Salomon and Company, Limited ".

These enormous number of shares held by the vendor gave him the power to outvote other members of the
family. Further, he was also appointed as the managing director of the company. All of these led to the
centralization of power into his hands. However, in this due course, all the requirements of the Companies Act
1862 have been duly complied with.

Out of the said no of debentures issued to the appellant, he used 100 debentures as security to obtain an advance
of 5000 Pounds from one Mr. Edmund Broderip. However, due to a discrepancy in the allotment of debentures to
the appellant, fresh debentures were ultimately issued to Mr. Broderip at 8% interest.

Unfortunately, the joint stock company of the appellant became insolvent and there was a default in payment of
interest on debentures to Mr. Broderip, who in turn, instituted a legal action so as to enforce his security against
the assets of the company. Consequently, a liquidation order was passed and a liquidator was appointed at the
instance of the other unsecured creditors in order to realize the money out of the said assets.

It came to be observed that if the money extracted from the sale of assets was used to service the debt and
interest of the debentures of Mr. Broderip, then a balance of 1055 Pounds would be left, which was supposed to
be further used to satisfy the debenture debt of appellant. As known under the Companies Act, it was only after
satisfying the claims of the debenture holders, that the monetary claims of the other creditors could be met.

Hence, the acute shortage of funds for the satisfaction of the monetary claims of the unsecured creditors, which
amounted to a whopping amount of 7733 Pounds, thereby left the creditors distraught. Mr. Broderip was paid off.
However, the liquidator (on behalf of the company), so appointed by the other creditors, sought to pay off the
creditors without honoring the debenture debt of the appellant, as a result of which the appellant sued the
liquidator (the company).

The appellant sued the company at the trial court and claimed that as per the Companies Act, his joint stock
company was duly registered and incorporated and that the claims of the secured debenture holders should be
first satisfied before honoring the claims of unsecured creditors. The liquidator, lodging a counterclaim on behalf
of the company against the appellant claimed fraud upon the company and creditors and demanded to rescind the
agreement dated 20 July 1892 and cancel the allotted debentures of the appellant.

The trial court refused to grant relief to the company and observed that although the company was duly
incorporated as a limited company, it acted as an agent of the appellant as the company undertook the appellant's
business. Since the company acted as a mere agent of the appellant, therefore, he was bound to indemnify the
company to the extent of the creditor's claim. Given the decision of the trial court, both parties filed an appeal.

On 28 May 1895, the 3 judge bench of the appellate court consisting of judges Lindley LJ, Lopes LJ, Kay LJ held that
the establishment of the company was a myth or fiction and that the actual business belonged to Aron Salomon.
The other six members, who were shareholders of the Company acted as mere dummies of the appellant. The
entire scheme of formation of the company, the agreement dated 20 July, and the consequent issue of debentures
to the appellant was a mere scheme to enable him to operate the business under the cover of limited liability,
contrary to the true meaning and intention of the Companies Act 1862.

Such move of the appellant to own the debentures was to enable him to obtain preference upon the claims of
other creditors by creating a first charge on the assets. Thus, the unsecured creditors were liable to be paid by the
appellant.

Aggrieved by the decision of the appellate court, the appellant filed the present case.

Issues Stated

1. Whether there was a valid constitution of a joint stock company?

2. Whether the company was defrauded by the appellant?
3. Whether the unsecured creditors were defrauded by the appellant?

Appellants Contention

1. The appellant contended that the company should be treated like a separate legal entity company if it
fulfilled all the requirements of the legislature. The constitution of the joint stock company was valid as all
the requisites of the Companies Act have obediently complied during the formation of the company and
thereafter. The purpose of the formation of the company was lawful too.
2. If the incorporation of the Company was lawful, therefore the transactions of the company were valid too
including the debenture allotment of the appellant was lawful too. As regards to the holding of debentures
by the appellant via the agreement dated 20 July, it was contended it made no actual difference whether
the debentures were held by the appellant or any other creditor for that matter. All that mattered was a
preference in payment over the other creditors.
3. The Companies Act 1862 prescribed that holding of one share each was sufficient and that the relation
among the shareholders was not focal, in order to categorize them as a valid shareholder. In such a
backdrop, the appellate court did not have the right to impose conditions that were in contradiction to the
above rule and declare the incorporation of the company invalid.
4. The sale of the business was not done to shoulder off the mounting losses of the appellant to the third
parties but was done with a bona fide intention to mitigate unlimited liability. The business was flourishing,
solvent, and genuine at the time of its sale. Hence, the company was not defrauded by the appellant.
5. Further, the consent of the family members to act as shareholders was genuine and lawful, they gave their
approval after being well versed with all the terms and conditions.
6. As regards the conversion of the appellant's business into a limited company, it was contended that there
was nothing wrong in converting a private business with unlimited liability into a joint stock company with
limited liability, for such practice was also undertaken by the banks and other firms every day.
7. It was further contended that there was no misrepresentation of fact to the creditors nor they were
defrauded. The creditors were free to enquire about the shareholders and debenture holders of the
company and find out their proportion of shares and debentures respectively.
Respondent Contention

1. The respondent contended that the company was invalidly incorporated as it never had any independent
existence, in spite of its incorporation under the Companies Act. The appellant exercised total control over
the company by acting as its managing director. His family members merely acted as dummies and
facilitated the objectives of the appellant. They didn't have minds and will of their own and the appellant
acted as their absolute master. Thus, the company acted as an alias of the respondent and was a sham,
contrary to the actual meaning of the Companies Act.
2. The chief motive of the appellant was to mount off the losses of the business upon the third parties as the
business was in a decaying state at the time of its sale to the Company. The Appellant intended to shift the
business risk upon the creditors so that he could carry it out without any impediment and peril and thus,
defraud the company and creditors
3. Further, in order to escape the liability of the business and shelf off the losses, the appellant cunningly
employed the debentures. The fact that the appellant held the debentures was further, willingly concealed
from the creditors.
4. The company was defrauded as the terms of sale of the business were solely dictated by the vendor which
was exploitative per se as the business was overvalued by the appellant in order to obtain the exorbitant
amount of purchase money.

Decision

1. The judgment of the appellate court was reversed and the court held that the company was not an agent
of the appellant. It was held by the House of Lords that the establishment of the Company was valid and
real as per the requisites of the Companies Act. Given the legitimate institution of the company, therefore
the transactions of the company were valid, including the debenture allotment of the appellant and the
agreement dated 20 July 1892. Since the company was a separate legal entity (SLP) and therefore, in the
present case of liquidation, the shareholders shall not be personally liable for the creditor's claims, given
their limited liability. They would only be liable to the extent of their subscribed shares.
2. The court held the sale of the boot and the leather business of the appellant to the limited liability
company as valid and the consequent price paid for its sale as not exorbitant since the shareholders were
cognizant of the price and other terms and conditions of sale. The sale transaction was concluded after the
due ratification of all the shareholders. And hence, no case of fraud can be established against the
appellant.
3. The fact that the shareholders of the company consisted of the appellant and his six other family members
who held one share each, did not affect the validity of the company under the Companies Act as in order to
constitute a shareholder, it was sufficient to hold one share and that the relation among the shareholders
was irrelevant. Moreover, the Act did not prescribe the quantum of interest or influence, to be exercised
by each shareholder proportionate to one's shareholding. So, there was nothing wrong if the appellant
acted as the MD of the Company and exercised influence more than other members of his family who were
shareholders in this case.
4. Held that even if Aron Salomon chose to employ a company in order to carry out his business, there was
nothing wrong in doing so if analyzed on the anvil of true intention and meaning of the Companies Act. In
the given case where the company was duly incorporated, the motive or conduct of the promoters was
absolutely irrelevant. The company hence created should be treated like an independent person, with its
own rights and liabilities.
5. The Act contemplated the association of seven or more independent bona fide members with the mind
and will of their own to form a company so as to limit their liability. In the given case, the shareholders
collaborated out of their free will to secure their collective interests, and all the terms and conditions of
the sale were known and approved by them. The shareholders acted bona fide and consequently,
transferred their solvent business to a limited liability company in order to cap their liabilities. Hence, no
case of fraud could be established against the appellant. While coming to this proposition, reliance was
placed on the case of Erlanger v. New Sombrero Phosphate Co.[1]
6. The unsecured creditors were not defrauded as they had been given full freedom under the Companies Act
to inspect and analyze the share and debenture holding pattern of the company. It was not the duty of the
law to warn the creditors of the risk of not being paid due to the ill performance of the company. They
failed to exercise their rights and inform themselves of the terms of purchase by the company, and thereby
acted negligently.

Ratio Decidendi

The company was a separate and distinct legal entity after it was legally incorporated. Hence, the corporate veil
should not be pierced. Hence, in such cases, the shareholders cannot be made liable to pay any sum beyond their
portion of subscribed shares. In other words, they cannot be made personally liable for the unlimited liabilities
since the Companies Act limits the liability.
As per the Companies Act 1862, it was sufficient to hold one share only, in order to constitute a shareholder.[2]
Neither the relation between the shareholders nor the authority or influence exercised by them played any role
whatsoever in order to determine their position as shareholders. Since the six other members of the appellant's
family held one share each, they constituted valid shareholders, which was irrelevant to the fact that they acted as
mere dummies. Thus, once a company was duly incorporated, all the transactions that it undertook became valid
and legal per se.

Conclusion

This landmark case changed the landscape of corporate undertakings. It firmly established and underscored the
artificial personality of the Joint Stock Companies. It affirmed that the corporate veil cannot be dissolved easily so
as to endanger the rights of the shareholders. Once incorporated, the company had a separate legal identity apart
from its promoters and shareholders. This paved way for a new revolution as regards shareholder right in the
corporate environment.

Types of Company

By Mayank ShekharPublished on 30 March 2019 5:57 AM GMT

Overview : Types of Company Introduction Types of Company on the basis of Incorporation Types of Company
on the basis of Liability Other Types of Company Private Company One Person Company (OPC) Small Company
Public Company Limited Company Unlimited Company Government Companies Foreign Companies Holding and
Subsidiary Company Associate Company Investment Companies Producer Company Dormant Companies
Introduction The… Read More »
Overview : Types of Company

 Introduction
 Types of Company on the basis of Incorporation
 Types of Company on the basis of Liability
  Other Types of Company
 Private Company
 One Person Company (OPC)
 Small Company
 Public Company
 Limited Company
 Unlimited Company
 Government Companies
 Foreign Companies
 Holding and Subsidiary Company
 Associate Company
 Investment Companies
 Producer Company
 Dormant Companies

Introduction

The Companies Act, 2013 provides for the types of companies that can be promoted and registered under the Act.
The three basic types of companies which may be registered under the Act are:

 Private Companies;
 Public Companies; and
 One Person Company (to be formed as Private Limited).

Section 3 (1) of the Companies Act 2013 states that a company may be formed for any lawful purpose by—

 seven or more persons, where the company to be formed is to be a public company;

 two or more persons, where the company to be formed is to be a private company; or
 one person, where the company to be formed is to be One Person Company, that is to say, a private
company, by subscribing their names or his name to a memorandum and complying with the requirements
of this Act in respect of registration

(2) A company formed under sub-section (1) may be either—

 a company limited by shares; or

 a company limited by guarantee; or
 an unlimited company.

Types of Company

I. Types of Company on the basis of Incorporation

There are three ways in which companies may be incorporated.

a. Statutory Companies: These are constituted by a special Act of Parliament or State Legislature. The
provisions of the Companies Act, 2013 do not apply to them. Examples of these types of companies are
Reserve Bank of India, Life Insurance Corporation of India, etc.
b. Registered Companies: The companies which are incorporated under the Companies Act, 2013 or under
any previous company law, with ROC fall under this category.

II. Types of Company on the basis of Liability

Under this category there are three types of companies:

a. Unlimited Liability Companies: In this type of company, the members are liable for the company’s debts in
proportion to their respective interests in the company and their liability is unlimited. Such companies may
or may not have share capital. They may be either a public company or a private company.
b. Companies limited by guarantee: A company that has the liability of its members limited to such amount
as the members may respectively undertake, by the memorandum, to contribute to the assets of the
company in the event of its being wound-up, is known as a company limited by guarantee. The members of
a guarantee company are, in effect, placed in the position of guarantors of the company’s debts up to the
agreed amount.
c. Companies limited by shares: A company that has the liability of its members limited by the memorandum
to the amount, if any, unpaid on the shares respectively held by them is termed as a company limited by
shares. For example, a shareholder who has paid '75 on a share of face value ' 100 can be called upon to
 pay the balance of '25 only. Companies limited by shares are by far the most common and may be either
public or private.

III. Other Types of Company

a. Associations not for profit having a license under Section 8 of the Companies Act, 2013 or under any
previous company law; Private Company, Public Companies; and One Person Company
b. Government Companies;
c. Foreign Companies;
d. Holding and Subsidiary Companies;
e. Associate Companies/Joint Venture Companies
f. Investment Companies
g. Producer Companies.
h. Dormant Companies

A. Private Companies; Public Companies; and One Person Company

 Private Company

As per Section 2(68) of the Companies Act, 2013, “private company” means a company having a minimum paid-up
share capital of one lakh rupees or such higher paid-up share capital as may be prescribed[omitted by Companies
(Amendment) Act, 2015 ], and which by its articles,—

 restricts the right to transfer its shares;

 except in the case of One Person Company, limits the number of its members to two hundred:

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the
purposes of this definition, be treated as a single member:

Provided further that the following persons shall not be included in the number of members;—

a. persons who are in the employment of the company; and

b. persons who, having been formerly in the employment of the company, were members of the company
while in that employment and have continued to be members after the employment ceased, and
c. prohibits any invitation to the public to subscribe for any securities of the company; It must be noted that it
is only the number of members that is limited to two hundred. A private company may issue debentures to
any number of persons, the only condition being that an invitation to the public to subscribe for
debentures is prohibited.

The aforesaid definition of private limited company specifies the restrictions, limitations and prohibitions, which
must be expressly provided in the articles of association of a private limited company.

As per proviso to Section 14 (1), if a company being a private company alters its articles in such a manner that they
no longer include the restrictions and limitations which are required to be included in the articles of a private
company under this Act, such company shall, as from the date of such alteration, cease to be a private company.

A private company can only accept deposit from its members in accordance with section 73 of the Companies Act,
2013.

The words ‘Private Limited’ must be added at the end of its name by a private limited company. As per section 3
(1), a private company may be formed for any lawful purpose by two or more persons, by subscribing their names
to a memorandum and complying with the requirements of this Act in respect of registration.

Section 149(1) further lays down that a private company shall have a minimum number of two directors. The only
two members may also be the two directors of the private company.

 One Person Company (OPC)

With the implementation of the Companies Act, 2013, a single person could constitute a Company, under the One
Person Company (OPC) concept.

The Companies Act, 2013 has done away with redundant provisions of the previous Companies Act,1956, and
provides for a new entity in the form of one person company (OPC), while empowering the Central Government to
provide a simpler compliance regime for small companies.
The concept of One person company is quite revolutionary. It gives the individual entrepreneurs all the benefits of
a company, which means they will get credit, bank loans, access to the market, limited liability, and legal
protection available to companies.

Prior to the new Companies Act, 2013 coming into effect, at least two shareholders were required to start a
company. But now the concept of One Person Company (OPC) would provide tremendous opportunities for small
businessmen and traders, including those working in areas like handloom, handicrafts and pottery.

Further, the amount of compliance by a one-person company is much lesser in terms of filing returns, balance
sheets, audit etc. Also, rather than the middlemen usurping profits, the one person company will have direct
access to the market and the wholesale retailers. The new concept would also boost the confidence of small
entrepreneurs.

 Small Company

As recommended by the Dr JJ Irani Committee, the concept of small companies has been introduced in the
Companies, Act, 2013. The recommendation of the Irani committee in this regard was as under:

The Committee sees no reason why small companies should suffer the consequences of regulation that may be
designed to ensure balancing of interests of stakeholders of large, widely held corporates.

Company law should enable simplified decision-making procedures by relieving such companies from select
statutory internal administrative procedures. Such companies should also be subjected to reduced financial
reporting and audit requirements and simplified capital maintenance regimes.

Essentially the regime for small companies should enable them to achieve transparency at a low cost through
simplified requirements. Such a framework may be applied to small companies through exemptions, consolidated
in the form of a Schedule to the Act.

A small company is a new form of a private company under the Companies Act, 2013. A classification of a private
company into a small company is based on its size i.e. paid-up capital and turnover. In other words, such
companies are small-sized private companies.

As per section 2(85) ‘‘small company’’ means a company, other than a public company,—

i. paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be
prescribed which shall not be more than five crore rupees; or
ii. turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher
amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this definition shall apply to—

A. a holding company or a subsidiary company;

B. a company registered under section 8; or
C. a company or body corporate governed by any special Act;

 Public Company

By virtue of Section 2(71), a public company means a company which:

a. is not a private company;

b. has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be
prescribed[omitted by Companies (Amendment) Act, 2015 ].

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be
a public company for the purposes of this Act even where such subsidiary company continues to be a private
company in its articles.

By the Companies (Amendment) Act, 2015 effective from 29th May 2015 the requirement of minimum paid-up
capital for a private limited company of '1 Lakh and for a public limited company of '5 Lakhs has been removed
from the definition of the Companies under section 2(68) and 2(71) of the Companies Act, 2013.

As per section 3 (1) (a), a public company may be formed for any lawful purpose by seven or more persons, by
subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect
of registration.
A public company may be said to be an association consisting of not less than 7 members, which is registered
under the Act. In principle, any member of the public who is willing to pay the price may acquire shares in or
debentures of it. The securities of a public company may be quoted on a Stock Exchange.

The number of members is not limited to two hundred. It may be noted that in the case of a public company, the
articles do not contain the restrictions provided in Sections 2(68) of the Act.

As per section 58(2), the securities or other interest of any member in a public company shall be freely
transferable. However, any contract or arrangement between two or more persons in respect of the transfer of
securities shall be enforceable as a contract.

The concept of free transferability of shares in public and private companies is very succinctly discussed in the case
of Western Maharashtra Development Corpn. Ltd. V. Bajaj Auto Ltd [2010] 154 Com Cases 593 (Bom).

It was held that the Companies Act, makes a clear distinction in regard to the transferability of shares relating to
private and public companies. By definition, a “private company” is a company which restricts the right to transfer
its shares. In the case of a public company, the Act provides that the shares or debentures and any interest
therein, of a company, shall be freely transferable.

The provision contained in the law for the free transferability of shares in a public company is founded on the
principle that members of the public must have the freedom to purchase and, every shareholder the freedom to
transfer.

The incorporation of a company in the public, as distinguished from the private, realm leads to specific
consequences and the imposition of obligations envisaged in law. Those who promote and manage public
companies assume those obligations. Corresponding to those obligations are rights, which the law recognizes as
inherent in the members of the public who subscribe to shares.

 Limited Company

As per section 3(2), a company formed under this Act may be either (a) a company limited by shares; or (b) a
company limited by guarantee or (c) an unlimited company.

The term ‘Limited Company’ means a company limited by shares or by guarantee.

The liability of the members, in the case of a limited company, may be limited with reference to the nominal value
of the shares, respectively held by them or to the amount which they have respectively guaranteed to contribute
in the event of winding up of the company.

Accordingly, a limited company can be further classified into: (a) Company limited by shares, and (b) Company
limited by guarantee.

a. Companies Limited by Shares

As per section 2(22), “company limited by shares” means a company having the liability of its members limited by
the memorandum to the amount, if any, unpaid on the shares respectively held by them.

Accordingly, no member of a company limited by shares can be called upon to pay more than the nominal value of
the shares held by him. If his shares are fully paid-up, he has nothing more to pay.

But in the case of partly paid shares, the unpaid portion is payable at any time during the existence of the
company on a call being made, whether the company is a going concern or is being wound up. This is the essence
of a company limited by shares and is the most common form in existence.

b. Companies Limited by Guarantee

As per section 2(21) “company limited by guarantee” means a company having the liability of its members limited
by the memorandum to such amount as the members may respectively undertake to contribute to the assets of
the company in the event of its being wound up. Clubs, trade associations, and societies for promoting different
objects are examples of such a company.

It should be noted that a special feature of this type of company is that the liability of members to pay their
guaranteed amounts arises only when the company has gone into liquidation and not when it is a going concern. A
guarantee company may or may not have a share capital.
As regards the funds, a guarantee company without share capital obtains working capital from other sources, e.g.
fees or grants. But a guarantee company having a share capital raises its initial capital from its members, while the
normal working funds would be provided from other sources, such as fees, charges, subscriptions, etc.

The Memorandum of Association of every guarantee company must state that every member of the company
undertakes to contribute to assets of the company in the event of its being wound up while he is a member for the
payment of the debts and liabilities of the company contracted before he ceases to be a member, and of the
charges, costs and expenses of winding up, and for adjustment of the rights of the contributories among
themselves, such amount as may be required, not exceeding a specified amount.

The Memorandum of a company limited by guarantee must state the amount of guarantee. It may be of different
denominations.

 Unlimited Company

As per section 2(92), “unlimited company” means a company not having any limit on the liability of its members.
Thus, the maximum liability of the member of such a company, in the event of its being wound up, might stretch
up to the full extent of their assets to meet the obligations of the company by contributing to its assets. However,
the members of an unlimited company are not liable directly to the creditors of the company, as in the case of
partners of a firm.

The liability of the members is only towards the company and in the event of its being wound up, only the
Liquidator can ask the members to contribute to the assets of the company which will be used in the discharge of
the debts of the company.

An unlimited company may or may not have share capital. Under Section 18, a company registered as an unlimited
company may subsequently re-register itself as a limited company, by altering its memorandum and articles of the
company in accordance with the provisions of Chapter II of the Companies Act subject to the provision that any
debts, liabilities, obligations or contracts incurred or entered into, by or on behalf of the unlimited company
before such conversion are not affected by such changed registration.

B. Government Companies

Section 2(45) defines a “Government Company” as any company in which not less than fifty one per cent. Of the
paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by
the Central Government and partly by one or more State Governments, and includes a company which is a
subsidiary company of such a Government company.

Notwithstanding all the pervasive control of the Government, the Government company is neither a Government
department nor a Government establishment. [Hindustan Steel Works Construction Co. Ltd. v. State of Kerala
(1998) 2 CLJ 383].

Since employees of Government companies are not Government servants, they have no legal right to claim that
the Government should pay their salary or that the additional expenditure incurred on account of revision of their
pay scales should be met by the Government. It is the responsibility of the company to pay them the salaries [ A.K.
Bindal v. Union of India (2003) 114 Com Cases 590 (SC)].

When the Government engages itself in trading ventures, particularly as Government companies under the
company law, it does not do so as a State but it does so in essence as a company. A Government company is not a
department of the Government.

C. Foreign Companies

As per section 2(42), “foreign company” means any company or body corporate incorporated outside India which
—

a. has a place of business in India whether by itself or through an agent, physically or through electronic
mode; and
b. conducts any business activity in India in any other manner

Sections 379 to 393 of the Act deal with such companies. Section 380 of the Act lays down that every foreign
company which establishes a place of business in India must, within 30 days of the establishment of such place of
business, file with the Registrar of Companies for registration.

The filing must include:

 a. a certified copy of the charter, statutes or memorandum and articles, of the company or other instrument
constituting or defining the constitution of the company and, if the instrument is not in the English
language, a certified translation thereof in the English language;
b. the full address of the registered or principal office of the company;
c. a list of the directors and secretary of the company containing such particulars as may be prescribed;
d. the name and address or the names and addresses of one or more persons resident in India authorised to
accept on behalf of the company service of process and any notices or other documents required to be
served on the company;
e. the full address of the office of the company in India which is deemed to be its principal place of business in
India;
f. particulars of opening and closing of a place of business in India on earlier occasion or occasions;
g. a declaration that none of the directors of the company or the authorised representative in India has ever
been convicted or debarred from the formation of companies and management in India or abroad; and
h. any other information as may be prescribed.

Every foreign company has to ensure that the name of the company, the country of incorporation, the fact of
limited liability of members is exhibited in the specified places or documents as required under Section 382.

Section 381 requires a Foreign Company to maintain books of Account and file a copy of the balance sheet and
profit and loss account in the prescribed form with ROC every calendar year. These accounts should be
accompanied by a list of place of business established by the foreign company in India.

Section 376 of the Companies Act, 2013 provides further that when a foreign company, which has been carrying
on business in India, ceases to carry on such business in India, it may be wound up as an unregistered company
under Sections 375 to 378 of the Act, even though the company has been dissolved or ceased to exist under the
laws of the country in which it was incorporated.

D. Holding and Subsidiary Company

On the basis of control, companies can be classified into holding, subsidiary and associate companies.

 Holding company

As per Section 2 (46), holding company, in relation to one or more other companies, means a company of which
such companies are subsidiary companies.

 Subsidiary company

Section 2 (87) provides that subsidiary company or subsidiary, in relation to any other company (that is to say the
holding company), means a company in which the holding company—

i. controls the composition of the Board of Directors; or

ii. exercises or controls more than one-half of the total share capital either at its own or together with one or
more of its subsidiary companies:

Provided that such class or classes of holding companies, shall not have layers of subsidiaries beyond the
prescribed limit. (Proviso to be notified)

For the above purpose,—

a. a company shall be deemed to be a subsidiary company of the holding company even if the control
referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;
b. the composition of a company’s Board of Directors shall be deemed to be controlled by another company if
that other company by the exercise of some power exercisable by it at its discretion can appoint or remove
all or a majority of the directors;
c. the expression “company” includes any body corporate;

E. Associate Company

As per Section 2(6), “Associate company”, in relation to another company, means a company in which that other
company has a significant influence, but which is not a subsidiary company of the company having such influence
and includes a joint venture company.

Explanation to section 2(6) provides that “significant influence” means control of at least twenty per cent. Of total
share capital, or of business decisions under an agreement.
To add more governance and transparency in the working of the company, the concept of the associate company
has been introduced. It will provide a more rational and objective framework of the associated relationship
between the companies.

Further, as per section 2 (76), Related party includes ‘Associate Company’. Hence, contract with Associate
Company will require disclosure/approval/entry in the statutory register as is applicable to contract with a related
party.

F. Investment Companies

As per explanation (a) to section 186, “investment company” means a company whose principal business is the
acquisition of shares, debentures or other securities.

An investment company is a company, the principal business of which consists of acquiring, holding and dealing in
shares and securities. The word ‘investment’, no doubt, suggests only the acquisition and holding of shares and
securities and thereby earning income by way of interest or dividend etc.

But investment companies in actual practice earn their income not only through the acquisition and holding but
also by dealing in shares and securities i.e. to buy with a view to sell later on at higher prices and to sell with a
view to buying later on at lower prices.

If a company is engaged in any other business to an appreciable extent, it will not be treated as an investment
company.

The following two sets of legal opinions are quoted below as to the meaning of an investment company:

i. According to one set of legal opinion, an “investment company” means a company which acquires and
holds shares and securities with an intent to earn income only from them by holding them. On the other
hand, another school of legal opinion holds that “an Investment Company means a company, which
acquires shares and securities for earning income by holding them as well as by dealing in such shares and
other securities”.
ii. According to Section 2(10A) of the Insurance Act, 1938, an investment company means a company whose
principal business is the acquisition of shares, stocks, debentures or other securities.

G. Producer Company

Section 465(1) of the Companies Act, 2013 provides that the Companies Act, 1956 and the Registration of
Companies (Sikkim) Act, 1961 (hereafter in this section referred to as the repealed enactments) shall stand
repealed.

However, the proviso to section 465(1) provides that the provisions of Part IX-A of the Companies Act, 1956 shall
be applicable mutatis mutandis to a Producer Company in a manner as if the Companies Act, 1956 has not been
repealed until a special Act is enacted for Producer Companies.

In view of the above provision, Producer Companies are still governed by the Companies Act, 1956. Companies
(Amendment) Act, 2002 had added a new Part IXA to the main Companies Act, 1956 consisting of 46 new Sections
from 581A to 581ZT.

According to the provisions as prescribed under Section 581A(l) of the Companies Act, 1956, a producer company
is a body corporate having objects or activities specified in Section 581B and which is registered as such under the
provisions of the Act.

The membership of producer companies is open to such people who themselves are the primary producers, which
is an activity by which some agricultural produce is produced by such primary producers.

Objects of Producer Companies

In terms of Section 581B(1) of the Companies Act, 1956, the objects of a producer company registered under this
Act may be all or any of the following matters:

 production, harvesting, procurement, grading, pooling, handling, marketing, selling, the export of primary
produce of the Members or import of goods or services for their benefit.
 processing including preserving, drying, distilling, brewing, venting, canning and packaging of the produce
of its members.
 manufacturing, sale or supply of machinery, equipment or consumables mainly to its members.
 providing education on the mutual assistance principles to its members and others.
  rendering technical services, consultancy services, training, research and development and all other
activities for the promotion of the interests of its members.
 generation, transmission and distribution of power, revitalisation of land and water resources, their use,
conservation and communications relatable to primary produce.
 insurance of producers or their primary produce.
 promoting techniques of mutuality and mutual assistance.
 welfare measures or facilities for the benefit of the members as may be decided by the Board.
 any other activity, ancillary or incidental to any of the activities referred to in clauses (a) to (i) above or
other activities which may promote the principles of mutuality and mutual assistance amongst the
members in any other manner.
 financing of procurement, processing, marketing or other activities specified in clauses (a) to (j) above,
which include extending of credit facilities or any other financial services to its members. Further, under
Section 581B(2) it has also been clarified that every producer company shall deal primarily with the
production of its active members for carrying out any of its objects specified above.

H. Dormant Companies

The Companies Act, 2013 has recognized a new set of companies called as dormant companies.

As per section 455 (1) where a company is formed and registered under this Act for a future project or to hold an
asset or intellectual property and has no significant accounting transaction, such a company or an inactive
company may make an application to the Registrar in such manner as may be prescribed for obtaining the status
of a dormant company.

Explanation appended to section 455(1) says that for the purposes of this section,—

i. “inactive company” means a company which has not been carrying on any business or operation, or has
not made any significant accounting transaction during the last two financial years, or has not filed financial
statements and annual returns during the last two financial years;
ii. “significant accounting transaction” means any transaction other than—

a. payment of fees by a company to the Registrar;

b. payments made by it to fulfill the requirements of this Act or any other law;
c. allotment of shares to fulfill the requirements of this Act; and
d. payments for maintenance of its office and records.

As per section 455(2), the Registrar on consideration of the application shall allow the status of a dormant
company to the applicant and issue a certificate in such form as may be prescribed to that effect.

Section 455(3) provides that the Registrar shall maintain a register of dormant companies in such form as may be
prescribed.

According to section 455(4), in case of a company which has not filed financial statements or annual returns for
two financial years consecutively, the Registrar shall issue a notice to that company and enter the name of such
company in the register maintained for dormant companies.

Further, a dormant company shall have such minimum number of directors, file such documents and pay such
annual fee as may be prescribed to the Registrar to retain its dormant status in the register and may become an
active company on an application made in this behalf accompanied by such documents and fee as may be
prescribed. [Section 455(5)]

Comparison of a Company with a Partnership firm and an LLP

In this article, the author seeks to briefly explain the meaning of Company, Partnership Firm and Limited Liability
Partnership under the Indian legal regime. The article also compressively compares the business entity Company
with that of a Partnership firm and an LLP.

I. Introduction

There are various forms of business entities which a person can choose from prior to starting his/her business. The
selection of the form of business entity is very crucial and depends on numerous aspects such as objects of the
proposed business, likely number of members, amount to be invested, the scale of operations, state control, legal
requirements, tax implications, advantages of one form of business over another, etc.
Generally speaking, a business entity can be categorized either as corporate or non-corporate enterprise
depending on whether they require registration to start functioning. Based on this categorization, a Partnership is
a non-corporate entity whereas a Company or an LLP is a corporate entity. Before comparing a company with
these two business entities, it is pertinent to have a basic understanding of these entities. There are different
legislation to govern and regulate the functioning of these entities in India such as the Indian Partnership Act,
1932, the Limited Liability Partnership Act, 2008, and the Companies Act, 2013.

II. The Features of a Company

A Company is a legal entity, allowed by legislation, which permits a group of people, as shareholders, to apply to
the regulators for an independent organization to be created, which can then focus on pursuing set objectives,
and empowered with legal rights which are usually only reserved for individuals. According to the Indian
Companies Act, 2013, Section 2(20) defines the term “company” to mean “a company incorporated under the
Companies Act 2013 or any previous company law.”

Thus, it is evident that a company is a corporate body and a legal person having status and personality distinct and
separate from the members constituting it. It is called a body corporate because the persons composing it are
made into one body by incorporating it according to the law and clothing it with legal personality. It is to be noted
that a corporation is a legal person created by a process other than natural birth and is therefore referred to as an
artificial legal person.

Being a legal entity, a company is clothed with many rights as well as liabilities which are available to a natural
person such as to sue and be sued, own property, hire employees or loan and borrow money. In a legal sense, a
company can be an association of both natural and artificial persons and is incorporated under the Companies Act,
2013.[1]

III. Partnership

In this form of an organisation, few like-minded persons pool up their resources to form a partnership firm.
Section 4 of the Partnership Act, 1932, defines partnership as:

“The relation between persons who have agreed to share the profits of a business carried on by all or any of them
acting for all”.

The persons who have entered into a partnership with one another are individually called “partners” and
collectively “a firm” and the name under which the business is carried out is called “firm name”. It must be noted
that a partnership is the ideal form of organisation for medium scale business operations which require a greater
amount of capital and risks than a sole proprietorship or Hindu Undivided Family. This definition chiefly brings out
the following features of partnership[2]:

 Contractual Relationship: – Since a partnership arises out of an agreement between persons, only those
persons who are competent to contract can be partners.
 Existence of business: – There can be no partnership without business. The persons who have agreed to
become partners must carry out some business activity.
 Sharing of profits: – The agreement to carry on business must be entered into, with the object of making a
profit and sharing it among all the partners.
 Mutual agency: – The business must be carried on by all the partners or by any one or more of them acting
for all the partners. Thus, each partner is both an agent and a principal for all other partners.[3]
 Limited Liability Partnership

The concept of an LLP was introduced in India via the LLP Act, 2008 to encourage entrepreneurship, knowledge
and risk capital to spur on India’s economic growth. A need was felt for an alternative form of corporate form
which was different from the traditional form of partnership with unlimited liability on one hand and a statute-
based governance structure of limited liability company on the other hand to promote and enable professional
expertise and entrepreneurial initiative to combine, organize and operate in a flexible, innovative and efficient
manner.

Thus, it can be considered as a hybrid form of business where both the elements of partnership and a corporation
exists. It implies that in case of an LLP, there will be the benefits of limited liability while allowing its members the
flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement[4].

Owing to flexibility in its structure and operation, LLP is useful for small and medium enterprises, in general, and
for the enterprises in services sector, in particular. LLP is also very suitable for professionals like company
secretaries, chartered accountants, cost accountants, advocates etc. as it helps them to form multi-disciplinary
limited liability partnership firms.
IV. Comparison of a Partnership Firm and a Company

 Prevailing Law: A partnership firm is governed under the Indian Partnership Act, 1932 whereas the law
governing the existence of a Company is the Companies Act, 2013 and rules made thereunder.
 Distinct Entity: A partnership firm is a collection of the partners and not a legal person or a separate entity
having any independent or distinct existence. It is nothing but partners bracketed together under one
name. In contrast, a company is a separate juristic entity and is distinct from its shareholders.
 Registration: It is not mandatory to register a partnership firm with the Registrar of Firms whereas for a
company to come into existence, it must be registered with the Registrar of Companies.
 Number of Members: The maximum number of members in case of a partnership firm is 100 as per the
Companies Act, 2013. Whereas in the case of a private company, the maximum number of members is 200
and unlimited in case of a public company. Also, the minimum number of members in case of both a
partnership firm and private company is 2 and 7 in case of a public company.
 Cost of Formation: The Cost of Formation is negligible in case of a partnership whereas in case of a
company, the minimum statutory fee for incorporation of a Company is relatively high.
 Liability of members: In the case of Partnership firm liability of partners to contribute toward the payment
of the partnership’s debts and liabilities is In contrast, the liability of members of a company (except an
unlimited one) to contribute toward satisfaction of the company’s debts and liabilities is limited. The
liability of shareholder may be limited either by shares or a guarantee.
 Perpetual Succession: It does not have perpetual succession as this depends upon the will of partners. It
means that the death or insolvency of a partner dissolves the firm unless otherwise provided. A company
on the other hand has perpetual succession, i.e. the death or insolvency of a shareholder or all of them
does not affect the life of the company.
 Management: In the case of a Partnership, every member of a partnership may take part in its
management unless the partnership agreements provide otherwise. On the other hand, the affairs of a
company are managed by its directors, or managing directors or manager and its members have no right to
take part in the management.
 Property: In a partnership, the property of the firm is the property of the individuals comprising it. On the
other hand, in case of a company, it belongs to the company and not to the individuals who are its
members.
 Authority of members: In a partnership, partners are the agents of the firm. A partner can dispose of the
property and incur liabilities as long as he acts in the course of the firm’s business. Whereas members of a
company are not its agents. A member of a company cannot dispose of the property and incur liabilities in
the course of the company’s business.
 Transferability of Interest: A partner cannot substitute another partner in his place unless all the other
partners agree to the same. In contrast, a shareholder can transfer his share to anybody he likes unless
specifically provided in the articles of the Company.
 Relationship with creditors: Creditors of a partnership firm are creditors of individual partners and a
decree against the firm can be executed against the partners jointly and severally. On the other hand, the
creditors of a company can proceed only against the company and not against its members.
 The requirement of Audit: It is not mandatory to audit the accounts of the partnership firm. The accounts
of a firm are audited only at the discretion of the partners. On the other hand, a company is required to
have its accounts audited annually by a chartered accountant.
 Right of Legal Representative: In case of death of a partner, the legal heirs have the right to get the refund
of the capital contribution as well as the share in accumulated profits, if any. However, the legal heirs will
not become partners in the firm. In contrast, in case of death of a member of a company, his legal
representatives’ step into his shoes for the purpose of rights in the company.
 Dissolution: A partnership firm is the result of an agreement and can be dissolved at any time by
agreement among the partners. However, a company, being a creation of law, can only be dissolved as laid
down by law.
 Right to sue: Only a registered partnership firm has the right to sue a third party whereas a company being
a legal entity has the right to sue and to be sued in return.
 Insolvency: The insolvency of a partnership firm means insolvency of all the partners which is not the
position of a company as the winding up of an insolvent company does not make the members insolvent.
 Mutual Agency: Each partner is an agent of the firm as well as of the other partners who carry on the
business but that is not the case with the company.

The major similarity between a company and a partnership firm is with regards to its tax liability. For instance, the
income of Partnership is taxed at a Flat rate of 30% plus education cess as applicable. A similar disposition can be
found with respect to the tax liability of a company as well since the income of Company is Taxed at a Flat rate of
30% Plus surcharge as applicable.[5] But it is evident that a company and partnership firm are very different
business structures.

V. Comparison of a Limited Liability Partnership and a Company

Unlike a normal partnership firm, an LLP has more similarities with a company. It can be considered as a mix or
hybrid of a partnership firm and a company. A brief comparison of a company and an LLP is given below:

 Prevailing Law: A Limited Liability Partnership is governed by the provisions of the Limited Liability
Partnership Act, 2008 and the rules framed under it whereas the law governing the existence of a Company
is the Companies Act, 2013 and rules made thereunder.
 Registration: It is mandatory to register an LLP with the Registrar of LLP and for a company to register with
the ROC.
 Distinct Entity: Both an LLP as well as a company is a body corporate and therefore a legal entity distinct
from its partners or shareholders. Both of them have perpetual succession indicating that any change in
the partners or shareholders will not affect the existence, rights and liabilities of an LLP or a company.
 Name of the entity: It is mandatory that the name of an LLP must contain the suffix “Limited Liability
Partnership” or “LLP”. Similarly, every public company should have the suffix “Limited” and every private
company should have the suffix “Private Limited.”
 Number of Members: Every LLP should have at least two partners as per Section 6 of the LLP Act.
Moreover, any individual and body corporate may be a partner in an LLP similar to a company. There is no
maximum limit for partners in an LLP. In contrast to this, a private company has a maximum limit of 200
members and a minimum of 2 members.
 Director: Every private company should have a minimum of 2 directors and every public company should
have a minimum of three directors. While Body Corporates can become a share holder of the Company, a
Private Company will need minimum 2 Individual as a Director of the Company. In contrast to this
provision, every LLP must have at least two designated partners, who are individuals and one of whom is
resident in India. In the case of an LLP of which all partners are body corporates or in which case one or
more partners are individuals and body corporates, at least two individuals who are partners or nominees
of the body corporate are to act as a designated partner.
 Flexibility in Operation: In comparison with a company, an LLP has much more flexibility in conducting its
operations. While it provides the benefit of limited liability, it is still a partnership firm which is regulated
by a partnership deed executed between the partners. On the other hand, in the case of a company, the
Companies Act prescribes a more rigid and formal board structure and decision-making requirements. It
provides that decisions must be made at validly constituted meetings, passing of resolutions and
maintenance of minutes of meetings and other statutory records to enable the Members/Directors take
benefit of Limited Liability and other features of Private Company.
 Cost of Formation: Since an LLP which is a hybrid of Partnership Firm and a Company, it is comparatively
cheaper to maintain than a Company. As LLPs are not required to hold regular Board Meetings, maintain
Statutory Registers and even filing fees are very less as compared to a company. In contrast, the minimum
Statutory fee for incorporation of a company is relatively high. It means that a company is more process-
driven and cost intensive as compared to an LLP.
 Charter Documents: An LLP Agreement is a charter of the LLP which denotes its scope of operation and
rights and duties of the partners vis-à-vis LLP. On the other hand, Memorandum and Article of Association
is the charter of the company that defines its scope of operations.
 Liability of members: An LLP is a separate entity from its members and hence is liable to the full extent of
its assets but the liability of the partners is limited to their agreed contribution in the LLP. Further, no
partner is liable on account of the independent or un-authorized actions of other partners, thus individual
partners are shielded from joint liability created by another partner’s wrongful business decisions or
misconduct. However, the liability of the firm and that of the partners who have acted with intent to
defraud the creditors or for any fraudulent purpose is to be unlimited for all or any of the debts or other. In
the case of a company, the liability of the members is generally limited to the amount required to be paid
upon each share.
 Tax liability: Profit of LLP is taxable at 30% plus a surcharge. However, sharing of profit among the
members is not liable to tax under the current tax structure. In contrast, private companies with turnover
up to Rs. 250 Crores are liable to pay tax at 25% plus surcharge and other Companies are liable for a 30 %
tax rate. Moreover, a Pvt. Ltd. Company is required to pay a Dividend Distribution tax @ approx. 16.50 % at
the time of distribution of profits to its shareholders. In contrast, Dividend Distribution is not applicable to
LLP. Once profit is declared and tax is paid by LLP, the distributed income is tax-free in the hands of the
partners.
 Statutory Audit: It is mandatory to conduct every year in case of a company whereas, in case of an LLP, it is
only when the partner’s contribution exceeds 25 lakhs or annual turnover exceeds 40 lakhs that an LLP
needs to audit its accounts.
 Share Transfer: In a Private Limited Company, a shareholder can easily transfer his shares to another
shareholder. However, in a limited Liability Partnership, such transfers are governed by the LLP agreement.
 Annual Meetings: The Companies Act prescribes that it is mandatory for companies to conduct board and
general meetings at the prescribed time. Minimum 4 board meetings are required during the financial year
having 120 days gap between 2 meetings. General meeting of shareholders to be conducted once in a year
mandatorily. However, there are no such compulsions for a Limited Liability Partnership.
VI. Conclusion

It is thus evident that each of these different forms of business structures has its own advantages and
disadvantages. While there is ease or formation and flexibility in the case of a partnership, there is the benefit of
limited liability in case of an LLP and a company. A partnership is more suited to small low-risk business. Likewise,
there are a lot of similarities between a company and LLP as discussed above. A basic difference between an LLP
and a company lies in that the internal governance structure of a company is regulated by statute (i.e. Companies
Act) whereas for an LLP it would be by a contractual agreement between partners.

The management-ownership divide inherent in a company is not there in a limited liability partnership. LLPs have
more flexibility as compared to a company. LLP have lesser compliance requirements as compared to a company.
Thus, it is evident that an LLP would be more suited to start-ups, Business, trade, manufacturers etc whereas a
company is more suited to businesses having turnover and entrepreneurs who need external funding.

Formation of a Company under the Companies Act, 2013

I. Introduction

A company is an artificial legal person who comes into existence by a process called “incorporation.” It is only
when a company has been incorporated, it becomes a distinct entity from those who invested their capital as well
as labour in it. Usually, for the formation of any company, the first step is the process known as “promotion”
where a person persuades others to contribute capital to a proposed company before it is incorporated. Such a
person is called the promoter of the company and its definition is given in Section 2(69) of the Companies Act,
2013. [1]

II. Formation of a Company as per the Companies Act, 2013

Section 3 of the Act deals with the formation of a company. It is the process which results in the incorporation of a
company. S. 3 provides that a company can be formed for any legal purpose and lays down the specifications for
the formation of a public, private and one-person company as:

 A public company must be formed with seven or more persons (3(1)(a)).

 A private company must be formed with two or more persons (3(1)(b)).
 A one-person company (OPC) is formed with a single person. It is a private company with a single member
which was introduced for the first time via the 2013 Act (3(1)(c)).

III. Definition of a Company which can be formed under Section 3 of the Act

Before delving further into the details regarding the formation of a company, it is important to understand what
exactly is the meaning of these different types of companies. Section 2(68) of the Act defines a private company as
a company that has a minimum paid-up share capital as prescribed and restricts the right to transfer its shares
according to the conditions laid down in the Articles of Association of the company. The maximum limit of
members who can form a private company is 200 except in case of an OPC.

Additionally, it is specified that for ascertaining the number of members, persons who jointly hold one or more
shares shall be treated as a single member for the purposes of the Act. The section also provides that employees
of the company as well as a person who was a former employee as well as a member and who has ceased to be an
employee but remains a member shall not be included for ascertaining the maximum number of members.
Another feature of a private company is that it prohibits the public from subscribing to the shares of the company.
[2]

Section 2(71) of the Act defines a public company. It is a company which is not a private company and has a
minimum paid-up share capital as may be prescribed. It is clarified in the proviso to the section that a subsidiary of
a public company shall also be treated as a public company even if it remains a private company under its articles.

Section 2(62) provides that a One-person Company means which only has one person as its member. It is to be
noted that prior to the Companies (Amendment) Act, 2015, a minimum paid-up share capital of rupees one lakh
for a private company and rupees five lakhs for a public company was prescribed under the Act. Currently, this
requirement has been done away with and there is no minimum paid-up share capital that is prescribed under the
Act.[3]

IV. Details concerning the Formation of a Company

Section 3 of the Act provides that in the form of a company, the members as prescribed above have to subscribe
their names to the memorandum of the company and comply with the provisions of the Act. It is specifically
provided that in case of a one-person company, the memorandum has to indicate the name of the person with his
prior consent in the prescribed form.

Such a person is to become a member of the company in the event of the subscriber’s death or his incapacity to
contract. Such a person’s written consent has to be filed with the registrar at the time of incorporation of the One-
person company along with his memorandum and articles.

It is also provided that such a person may withdraw his consent in accordance with the prescribed manner. [4]
Moreover, the member of the One-person company may also change the name of the nominee by following the
prescribed procedure. A duty is vested upon the member to intimate the company of such in the nominee by
indicating the same in the memorandum or otherwise. After this, the company has to notify the Registrar of
Companies (RoC) of such change. This clarifies that such a change in a nominee is not be treated as an alteration of
the memorandum of the company.[5]

V. Categorization of the Companies based on Liability

The Companies Act provides for the formation of both limited and unlimited companies. As per section 3(2) of the
Act, a company formed under the Act may either be a company limited by shares or a company limited by
guarantee or an unlimited company. The liability of the members, in the case of a limited company, maybe limited
with reference to the nominal value of the shares, respectively held by them or to the amount which they have
respectively guaranteed to contribute in the event of winding up of the company.

Section 2(21) of the Act defines a Company limited by guarantee as a company having the liability of its members
limited by the memorandum to such amount as the members may respectively undertake to contribute to the
assets of the company in the event of its being wound up. The contribution from members are postponed to the
event called winding up. Clubs, trade associations and societies for promoting different objects are examples of
such a company. It should be noted that a special feature of this type of company is that the liability of members
to pay their guaranteed amounts arises only when the company has gone into liquidation and not when it is a
going concern.[6]

The definition of a Company limited by shares is given in Section 2(22) of the Act. It provides that a company
having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares
respectively held by them. The contribution from members is the current requirement at the time of incorporation
or call. There is no liability for members holding fully paid-up shares.

However, in case of partly paid-up shares, the unpaid portion is payable at any time during the existence of the
company on a call being made, whether the company is a going through a concern or is being wound up. This is
the essence of a company limited by shares and is the most common form in existence.

It must be noted that a Company limited by guarantee may or may not have share capital. With respect to funds, a
guarantee company without share capital obtains working capital from other sources, e.g. fees or grants, but a
guarantee company having a share capital raises its initial capital from its members, while the normal working
funds would be provided from other sources, such as fees, charges, subscriptions, etc.

It must be noted that in the case of a guarantee company having share capital the shareholders have two-fold
liability: to pay the amount which remains unpaid on their shares, whenever called upon to pay, and secondly, to
pay the amount payable under the guarantee when the company goes into liquidation. The voting power of a
guarantee company having share capital is determined by the shareholding and not by the guarantee.[7]

In contrast to companies where there is a limit to the shareholder’s liability, an Unlimited Company means a
company not having any limit on the liability of its members as defined in Section 2(92) of the Act. It means that in
the form of the company, the members are liable for the company’s debts in proportion to their respective
interests in the company and their liability is unlimited.

However, the members of an unlimited company are not liable directly to the creditors of the company, as in the
case of partners of a firm. The liability of the members is only towards the company and in the event of its being
wound up, only the Liquidator can ask the members to contribute to the assets of the company which will be used
in the discharge of the debts of the company. It is not necessary that such companies should have share capital.
Looking at this categorization of companies based on liability, it must be noted that they are either public or
private companies.

VI. Particulars for the Formation of a Company

It is very evident that in order to form a company, the proposed members must subscribe their names to the
Memorandum of Association of the Company. The MoA is the most important document as far as a company is
concerned. It is often called the “Constitution” of the company. The preparation of the MoA of a company is one
of the first steps in the formation of a company.

It lays down the basic conditions upon which a company has to be incorporated. The Companies Act under Section
4 provides that the MoA has to be divided into five clauses as per any of the forms specified in Tables A to E in
Schedule 1.[8] The different clauses which must be mandatorily present in the MoA are the Name clause,
Registered Office clause, Objects clause, Liability Clause and the Capital Clause.[9]

In addition to the MoA, the next most important document for the formation of a company is the Articles of
Association (AoA) as provided in Section 5 of the Act. Whereas the MoA mainly handles the external affairs of a
company, the AoA is concerned with regulating the internal structure of a company. Articles are internal
regulations and bye-laws for the management of the company.[10]

The process for the incorporation or formation of a company is provided in Section 7 of the Act. In order to form a
legally valid company, it must be registered according to the conditions prescribed in the Act. An application must
be filed with the Registrar of Companies accompanied with certain documents such as the memorandum of
association, articles of association, a copy of the agreement, if any, which the company proposes to enter into with
any individual for his appointment as managing or whole-time director or manager and a declaration that all the
requirements of the Act have been complied with.[11]

The provision also has introduced certain new requirements which are listed under clauses (c) to (g) of the Act. It is
only after receiving all the documents and information listed in Section 7(1) that a registrar shall issue a certificate
of incorporation. The issue of such a certificate brings the company into existence as a legal person. It marks the
birth of a company, and the date mentioned in the certificate is regarded as the day on which the proposed
company came into existence as a distinct legal entity. The Registrar shall also allot to the company a corporate
identity number, which shall be a distinct identity for the company and which shall also be included in the
certificate.[12]

VII. Conclusion

This article discusses in detail the formation of a company as enumerated in Section 3 of the Companies Act, 2013.
The various types of companies such as private, public, and OPC have been discussed and their specialties have
also been addressed. Moreover, the different types of companies based on liability as mentioned in Section 3(2)
have also been looked into. Lastly, the process of formation of a company and the main particulars required for its
incorporation have also been discussed in this article.

Disadvantages of Incorporation of a Company

In this article, the author discusses the disadvantages of incorporation of a company under the Companies Act,
2013. The article mainly focuses on the doctrine of “lifting the corporate veil” and explains in details the various
scenarios in which the courts look beyond the corporation and the actual forces behind its functioning.

I. Introduction

A company is the most important form of a corporate entity in today’s world. With the passage of time, the
importance of corporate governance in a highly competitive business world became apparent which led to the
restructuring of India’s legal regime in the form of Companies Act, 2013. A company has several advantages over
other forms of business enterprises such as partnership firm, LLP, a Hindu undivided family, etc since it has a
separate independent existence, limited liability, and many other rights which are available to a legal person such
as the power to hold property, right to sue and be sued etc. However, there are certain disadvantages to this
model of a corporate entity as well.

II. Disadvantages of Incorporation of a Company

1. Lifting the Corporate Veil

All the benefits associated with the incorporation of a company are based on the basic principle that a company is
a separate entity from its shareholders for all purposes of the law. However, there are certain scenarios when it
becomes necessary to look at the persons behind the corporate veil and then some of those advantages or
benefits disappear.
The separate entity of the company is disregarded and the schemes and intentions of the persons behind are
exposed to full view. They are made personally liable for using the company as a vehicle for undesirable purposes
as in the case of Jai Narain v. Pushpa Devi Saraf [1], wherein the promoters-directors who used the company for
their own personal objectives were held accountable for their actions.

It must be realized that the separate personality of a company is a statutory privilege which must be used for
legitimate business purposes only. Where a fraudulent and dishonest use is made of the legal entity, the
individuals concerned will not be allowed to take shelter behind the corporate personality. The Court will break
through the corporate shell and apply the principle/doctrine of what is called “lifting of or piercing the corporate
veil”.

The Court will look behind the corporate entity and take action as though no entity separate from the members
existed and make the members or the controlling persons liable for debts and obligations of the company[2]. Thus,
the advantage available to members on the premise that they only have limited liability is not an absolute right.

The provisions relating to the lifting of the corporate veil are found in sections 7(7), 251(1) and 339 of the
Companies Act, 2013. These provisions look beyond the corporation to reach the real forces of action. Section 7(7)
deals with punishment for the incorporation of a company by furnishing false information; Section 251(1) deals
with liability for making a fraudulent application for removal of the name of the company from the register of
companies and Section 339 deals with liability for fraudulent conduct of business during the course of winding up.
The instances in which the corporate veil is lifted are given below:

 When it is Necessary to Determine the Legal Character of a Corporation

In the case of Daimler Co Ltd v. Continental Tyre & Rubber Co Ltd[3], the House of Lords held that a company,
though registered in England, would “assume an enemy character when persons in de facto control of its affairs,
are residents in an enemy country or, whether residents are acting under the control of the enemies.” From this
case, it is clear that the court is willing to look beyond the corporate personality in certain crucial situations.

 When a Company is Conceived and Brought Forth for Fraudulent Purposes

In cases where a company uses the corporate veil for the commission of fraud or improper conduct, courts have
lifted the veil and looked at the realities of the situation. In the case of Gilford Motor Co Ltd v. Horne[4], a
company was restrained from acting when its principal shareholder was bound by a restraint covenant and had
incorporated the company only to escape the covenant.

Another major case law in this regard is the case of Jones v. Lipman[5], in which case A agreed to sell certain land
to B. Pending completion of formalities of the said deal, A sold and transferred the land to a company which he
had incorporated with a nominal capital of £100 and of which he and a clerk were the only shareholders and
directors. This was done in order to escape a decree for specific performance in a suit brought by B.

The Court held that the company was the creature of A and a mask to avoid recognition and that in the eyes of
equity A must complete the contract since he had the full control of the limited company in which the property
was vested, and was in a position to cause the contract in question to be fulfilled.

 For the Benefit of Revenue

Another instance when the corporate veil can be lifted is when it is found that the sole purpose for which the
company was formed is to evade taxes. In such circumstances, the court will ignore the concept of a separate
entity and make the individuals concerned liable to pay the taxes which they would have paid but for the
formation of the company.

In the case of Re. Sir Dinshaw Maneckjee Petit[6], it was held by the court that the company was formed by the
assessee purely and simply as a means of avoiding supertax and the company was nothing more than the assessee
himself. It did no business, but was created simply as a legal entity to ostensibly receive the dividends and
interests and to hand them over to the assessee as pretended loans”. The Court decided to disregard the
corporate entity as it was being used for tax evasion.

A more recent example is the case of Vodafone International Holdings B.V. v. Union of India & Another [7], in
which the SC thoroughly discussed the factors which must be taken into consideration to determine whether the
transaction is a bogus and whether the corporate veil is to be lifted. The factors to be taken into consideration are:

i. the concept of participation in investment,

ii. the duration of time during which the Holding Structure exists;
iii. the period of business operations in India;
iv. the generation of taxable revenues in India;
 v. the timing of the exit; and
vi. the continuity of business on such exit.

 The Company is Only an Agent

The separate existence of a company may be ignored where it is being used as an agent or trustee. An example is
the case of Re. R.G. Films Ltd [8], in which an American company produced a film in India technically in the name
of a British Company, 90% of whose capital was held by the President of the American company which financed
the production of the film. Board of Trade refused to register the film as a British film which stated that the English
company acted merely as the nominee of the American corporation. The courts insist upon very strong evidence
for this purpose. [9]

 When the Company’s Conduct is Against Public Policy

There have been many instances where the courts have lifted the corporate veil for protecting the public policy
when a company’s conduct is in conflict with it. For example, in the case of Connors Bros. v. Connors [10], this
principle was applied against the managing director who made use of his position contrary to public policy.

In this case, the House of Lords determined the character of the company as “enemy” company, since the persons
who were de facto in control of its affairs, were residents of Germany, which was at war with England at that time.
The alien company was not allowed to proceed with the action, as that would have meant giving money to the
enemy, which was considered as monstrous and against “public policy.

 When the Company is Formed to Avoid Welfare Legislation

Much like tax evasion, avoidance of welfare legislation is very common and the approach in considering problems
arising out of such avoidance has necessarily to be the same and, therefore, where it was found that the sole
purpose for the formation of the new company was to use it as a device to reduce the amount to be paid by way
of bonus to workmen; the Supreme Court has upheld the piercing of the veil to look at the real transaction.

A landmark case in this area is the case of The Workmen Employed in Associated Rubber Industries Limited,
Bhavnagar v. The Associated Rubber Industries Ltd., Bhavnagar and another [11].

 When the Company is Formed for Inequitable Purposes

Where it is found that a company has abused its corporate personality for an unjust and inequitable purpose, the
court would not hesitate to lift the corporate veil. Further, the corporate veil could be lifted when acts of a
corporation are allegedly opposed to justice, convenience and interests of revenue or workmen or are against the
public interest. Also, when used to hide criminal activities, the court can lift the corporate veil. Thus, in appropriate
cases, the courts disregard the separate corporate personality and look behind the legal person or lift the
corporate veil.

2. A Company is Not a Citizen

Another disadvantage that a Company has is that even though it is a legal person, it is not capable of citizenship
under the Citizenship Act, 1955 or the Constitution of India. In the case of State Trading Corporation of India Ltd.
v. C.T. O[12], the Supreme Court held that the State Trading Corporation though a legal person was not a citizen
and can act only through natural persons. Nevertheless, it is to be noted that certain fundamental rights enshrined
in the Constitution for the protection of a “person” are also available to a company. However, a company has
nationality and domicile but unlike a natural person, a company cannot change its nationality.[13]

3. Formality and Expense

Another major disadvantage of incorporation of a company is that it is a very expensive affair. There are a number
of formalities which have to be complied with both as to the formation of the company and the administration of
its affairs.[14]

III. Conclusion

It is evident that there are both advantages as well as disadvantages incorporating a company under the
Companies Act, 2013. It seems that a company is more suited for businesses where there are more capital
investments as well as risks involved but a look at the pros and cons of incorporation reveals that the pros far
outweigh the cons. As long as a company is utilized for conducting the lawful purposes for which it is incorporated,
there will be no risk of the lifting of the corporate veil. Moreover, the initial expenses in forming a company will
have benefits in the long run.
A Comprehensive Analysis of Section 9 of the Companies Act, 2013

In this article, the author seeks to comprehensively analyse the effect of the registration of a company which is
provided in Section 9 of the Companies Act, 2013. The article also focuses on explaining in details the elements of
the provision with the help of judicial pronouncements.

I. Introduction

A company is the most important corporate entity in today’s business world and is formed for the fulfilment of a
lawful objective. Unlike certain other forms of business models such as a partnership firm, a company comes into
existence only upon its registration as mandated by the Companies Act. It means that the birth of a company is
dependent on receiving the certificate of incorporation from the Registrar of Companies under Section 7 of the
Act.

It is only on registration that a company receives its status as a legal person having a distinct identity and
independent existence. The effect of registration of a company has been clearly enumerated in Section 9 of the
Companies Act, 2013.

II. The Provision Regarding the Effect of Registration

Section 9 of the Act reads:

“From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the
memorandum and all other persons, as may, from time to time, become members of the company, shall be a body
corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated
company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both
movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.” [1]

III. Elements of Section 9 of the Companies Act

To put it simply, the effect of registration can be summarised as:

 The subscribers to the memorandum of association shall become members of the company.
 The company shall attain the status of a separate legal entity from the date of incorporation as provided in
the registration certificate with the name contained in the memorandum.
 The company shall have perpetual succession
 The company shall have the power to acquire, hold and dispose of property
 The company shall have the power to enter into contracts in their own name
 The company shall have the power to sue and be sued in its own name.
 Members or shareholders

The words “member” and “shareholder” are often used interchangeably and, generally speaking, apart from the
few exceptional situations, are synonyms. For instance, there are companies limited by guarantee or unlimited
companies, which may not have share capital and hence, can have no shareholders but they do have members.
Section 2(55) of the Act defines a member in relation to a company. It enunciates that a person can become a
member by subscribing to its memorandum, by allotment or by agreeing in writing to become a member and with
the name entered in the register of members, beneficial owners in records of a depository; by transmission and by
transfer as well.[2]

It must be noted that every person who is competent to contract can be a member of a company. A minor and a
person of unsound mind, being incompetent to contract, cannot be members of a company. It must be taken into
consideration that a company, being a legal person, can become a member of another company if its
memorandum empowers it to invest money in shares.[3]

 Company is a Separate Legal Entity

One of the most important features of a company is that once it is registered under the Companies Act, it
becomes vested with a corporate personality which is independent and distinct from its members. The major
effect of registration is that it bestows a company with a legal personality. It is called a body corporate because the
persons composing it are made into one body by incorporating it according to the law and clothing it with legal
personality.

The word “corporation” is derived from the Latin term “corpus” which means “body”. As a legal person, a
corporate is capable of enjoying many rights and incurring many liabilities of a natural person. In the landmark
case of Salomon v. Salomon and Co. Ltd [4], the principle that a company is a separate legal person distinct from
its members was clearly established by the court.

 Company has Perpetual Succession

Perpetual succession is another benefit of registration. Once registered, a company’s existence is not depended on
its members. It is often said than an incorporated company never dies. A company cease to exist only by
procedure prescribed by law. According to Professor Gower:

“Members may come and go, but the company can go on forever. During the war, all the members of one private
company, while in a general meeting, were killed by a bomb. But the company survived; not even hydrogen bomb
could have destroyed it.”[5]

This means neither the death nor the insolvency of its member shall have any effect on the continued existence of
the company.

Perpetual succession means that the membership of a company may keep changing from time to time, but that
shall not affect its continuity. Even if there is a complete alteration in the membership of a company, the company
shall remain the same. The membership of an incorporated company may change either because one shareholder
has sold/transferred his shares to another or his shares devolve on his legal representatives on his death or he
ceases to be a member under some other provisions of the Companies Act.

Perpetual succession denotes the ability of a company to maintain its existence by the succession of new
individuals who step into the shoes of those who cease to be members of the company. The company remains the
same entity “in the manner as river Thames is still the same river, though the parts which compose it are changing
every instant[6].”

 Power to hold Separate Property

The property of a registered company is vested in the corporate body itself. A company is capable of holding and
enjoying property in its own name once it has been properly registered. No member, not even all the members
can claim ownership of any of the company’s assets. In the case of R.F. Perumal v. H. John Deavin [7], the court
held that “no member can claim himself to be the owner of the company’s property during its existence or in its
winding-up”. In another case of Macaura v Northern Assurance Co Ltd [8], the court had held that the
shareholder does not even have in the company’s property.

 Power to Enter into Contracts

A company, being a legal entity different from its members is capable of entering into contracts for the conduct of
the business in its own name. It must be noted that a shareholder cannot enforce a contract made by his
company. It is because he is neither a party to the contract nor can he be entitled to the benefit derived from it, as
a company is not a trustee for its shareholders.

Similarly, a shareholder cannot be sued on contracts made by his company. The distinction between a company
and its members is not confined to the rules of privity but permeates the whole law of contract. Thus, if a director
fails to disclose a breach of his duties towards his company, and in consequence, a shareholder is induced to enter
into a contract with the director on behalf of the company which he would not have entered into had there been a
disclosure, the shareholder cannot rescind the contract.

 Company has the Power to Sue and Get Sued in its Own Corporate Name

Once a company has been registered and receives the certificate of incorporation, it becomes entitled to sue and
be sued in its own name. To sue means to institute legal proceedings against (a person) or to bring a suit in a court
of law. All legal proceedings against the company are to be instituted in its name. Similarly, the company may
bring an action against anyone in its own name. A company’s right to sue arises when some loss is caused to the
company, i.e., to the property or the personality of the company. Moreover, it must be noted that a company,
being distinct from its members, has the right to sue even one of its own members.

In the case of Floating Services Ltd. v. MV San Fransceco Dipaloa [9], it was held that a company has the right to
sue for damages in libel or slander as the case may be. Thus, when a defamatory material is published which
affects a company’s reputation and business, a company has every right to seek damages. In the case of Lalit
Surajmal Kanodia v. Office Tiger Database Systems India (P) Ltd [10], it was held that a company is not liable for
contempt committed by its officer.

IV. Conclusion
To conclude, it is very evident that all the rights, as well as liabilities which are vested in a company, are a result of
its registration. It is only when a company is registered that it attains the status of an artificial legal person and the
rights bestowed on them are a result of registration as well. In this article, the elements of Section 9 of the
Companies Act, 2013 have been comprehensively analysed.

Case Study: Foss v Harbottle (1843)

By Vatsala SoodPublished on 31 Dec 2020 12:59 AM GMT

In the area of corporate law, the rule of Foss v Harbottle has developed a fundamental principle: the company
itself is the proper plaintiff over an injustice committed to a company. Along with the “Salomon” concept of
separate legal personality of corporations, this principle has been of invaluable value to trade and the global
economy. This case study… Read More »

In the area of corporate law, the rule of Foss v Harbottle has developed a fundamental principle: the company
itself is the proper plaintiff over an injustice committed to a company. Along with the “Salomon” concept of
separate legal personality of corporations, this principle has been of invaluable value to trade and the global
economy.

This case study provides readers with a summary as well as a critical analysis of the important Foss v. Harbottle
case.

I. Facts of Foss v. Harbottle

Title of the case: Foss v Harbottle

Citation: [1843] 67 ER 189, (1843) 2 Hare 461

Court: Court of Chancery

Quorum: Wigram VC, Jenkins LJ

Parties to the dispute:

Petitioner: Richard Foss and Edward Starkie Turton

Defendants: Thomas Harbottle & Other’s

Minorities have often been on the other side of the coin, usually covered by derivative claims and unequal redress
for discrimination. Many researchers suggested that the Rule of Rules was repealed after the coming into effect of
the current formal derivative actions, that there will also be a rise in shareholder lawsuits and have further voiced
concern over overlaps in both derivative claims and unequal remedies for prejudice. Its basic values are still of
critical significance today.

In September 1835, a company called the Victoria Park Company was set up to purchase 180 acres (0.73 km2) of
land near Manchester (later became Victoria Park, Manchester, when the Act of Parliament turned it into
incorporation). But counter to the actual work allegedly enclosing and planting the same in an ornamental and
park-like way, and constructing houses thereon having attached gardens and fields, and then selling, renting or
otherwise disposing of them, the directors of the company along with others were indulging in the
misappropriation of the property that belonged to the company and that may result in the misappropriation of the
property that belonged to the company.

The concern was illustrated by Richard Foss and Edward Starkie Turton, two minor shareholders. They reported
that the five directors of the firm were Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead,
Richard Bealey, and the lawyers and architects (Joseph Denison, Thomas Bunting, and Richard Lane), as well as H.
E. Lloyd, Rotton, T. Peet, J. Biggs and S. Brooks (Byrom, Adshead and Westhead’s various assignees) misapplied
and falsely mortgaged the property of the company, thereby behaving in contradiction to what the company was
formed for. It clearly demands that the wrongdoers be kept liable for all the transactions and that a responsible
receiver be named.

Their argument was based on the ground below. The first argument was the fraudulent practises by which the
company’s funds were misappropriated. The second ground was due to the inadequacy of qualified directors in
the company who could potentially make up the board and the third ground was that there was no clerk or office
in the company. Because of these conditions, the owners had no right to remove the property from the directors’
hands and instead had to pursue legal action against them.

II. Issues

The concerns were whether or not the members of the corporation can bring suit on behalf of the company and
whether or not the responsible parties should be held liable for their wrongdoings.

III. Arguments Advanced and the Raised Contentions

 Petitioner

The plaintiffs argued that the corporation could not be regarded as an ordinary enterprise unless it was formed by
Parliament. In addition, in order to support the company, the act of incorporation was passed, but the directors
sought to satisfy their own desires. They also argued that directors should have served as the company’s trustees
and should be held liable for misappropriating the company’s properties. Therefore, this act permitted the
directors to sue any persons who caused the corporation any harm, although it did not allow the employees of the
company or outsiders to sue the board of directors.

 Defendant

The defendants argued that the plaintiffs had no right to pursue legal action on behalf of the company against
them.

IV. Judgement

In this case, Wigram VC dismissed the shareholders’ claim and maintained that no legal recourse against the
wrong done to the corporation can be brought by an individual shareholder or other outsiders of the company
since both the company and its shareholders are deemed to be independent legal bodies. Under Section 21(1)(a)
of the Companies Act, it is also specified that a company may sue and be sued on its own behalf and that a
member may not take any legal action on behalf of the company and that if a company has a right to sue a party
by touch, it is for the company to do so [1].

The reason the company’s owners are powerless to sue is that the corporation is the one who has actually
sustained injuries and not its members, so it is up to the company to claim or take some punitive action against
those members who have misappropriated their property.
In this circumstance, Wigram VC pursued the decisions passed on unincorporated firms in older cases and
encouraged minorities to show that all the options of redress within the internal forum have been exhausted, as
he claimed that the courts would not interfere in cases where the majority of owners are willing to ratify irregular
behaviour, but this law was deemed unfavourable [2].

Therefore, the two major principles were in essence, defined by the court. First and foremost was the Proper
Plaintiff Rule which defined that if any error made to the corporation or company suffers any damage due to the
dishonest or incompetent actions of directors or any other outsider, then only the company can sue the directors
or outsiders in order to impose its rights in such a case.

Whereas the members of the company or any outsider cannot sue on its behalf on the grounds of the Separate
Legal Entity concept, which deems the company to be a separate legal person from all the members of the
company, the company may sue and be sued on its own behalf.

This is the only explanation why in order to compensate the damages incurred by the group, only a company can
bring a legal action or institute legal proceedings against any member. A business officer can take legal action
against the wrongdoer on his behalf only if he is allowed to do so by the board of directors or by an ordinary
resolution adopted at the general meeting.

The second rule was the Majority Principal Rule which established that if the alleged wrong may be confirmed or
approved in the general meeting by a clear majority of representatives, the court would not intervene in such
situations.

However for minority owners, the enforcement of these strict principles appeared to be quite severe and unjust,
as while they were given a substantial right, they were also excluded from seeking justice under the law and had
to adhere to the wrongs done by the majority as they were the ones who control the business and minority
members had no say due to their tiny say.

Four exceptions to the general principle have also been set down in order to alleviate this harshness, where
lawsuits would be tolerated. The first and primary exception is where the alleged act was illegal and an ultra vire
to laid down rules and regulations [3].

The second exemption covers a case in which the alleged crime may only have been validly committed or
sectioned, in breach of the provision laid down in the articles by such special majority members [4].

The third exemption applies to the alleged actions involving an infringement of the personal and individual rights
of the complainant in his role as a director of the company. Third but not least the fourth exemption deals with a
case in which minority misconduct has been perpetrated by a majority who own the company themselves [5].
Therefore, both of these exceptions relate to the protection of fundamental minority rights that continue to be
secured regardless of the majority vote [6].

V. Critical Analysis

 Ultra vires

The precedent of Foss v. Harbottle holds for as long as the company functions under its mandate. Events of ultra
vires are acts that go beyond the jurisdiction of a company to perform. Both actions fell beyond the powers
expressly provided for in the Companies Act and also beyond the powers alluded to in the Articles of Association
and and the Memorandum of Association.

The shareholder may bring lawsuits against a company in cases where an act ultra vires the memorandum of
association and articles of association. These acts are null and void and cannot be made legal by the approval of
the majority members.

 Fraud on Minority

Where a majority of a company’s representatives use their influence to commit fraud or oppress the minority,
even a single shareholder is responsible for impeaching their conduct. Where a plurality of a company’s
representatives uses their influence to defraud or oppress the minority, even a single shareholder is responsible
for impeaching their conduct.

Where a majority of a company’s representatives use their influence to defraud or oppress the minority, even a
single shareholder is responsible for impeaching their conduct. Any section of duty that makes the company
should be deemed a fraud on the minority.

 Wrongdoers in Control
A controlling shareholder or managing director has a fiduciary duty to the company. The majority does not claim
the assets of the company or the rights of the minority shareholders.

 Acts Requiring Special Majority

There are certain decisions that cannot be made by a mere majority of the company’s owners. They shall be
approved by a special majority for these votes, i.e., three-fourths of the members present and voting shall be
required for voting. For e.g., an addition to an association with an essay or an association memorandum whereby
passing only an ordinary resolution or by passing a special resolution in the manner required by statute, a majority
claims to do any such act, a member or member may bring proceedings to restrain the majority [7].

 Individual Membership Rights

There are certain personal privileges asserted by each shareholder against the company and its shareholders. The
acts themselves impose on shareholders a large amount of these rights, but they can also originate from the
articles of association. These rights are the rights of people or individuals, commonly recognised as the rights of
the party leadership, and they are explicitly not protected by the rule of the majority.

The shareholder has the right to enforce his personal rights against the company, such as the right to vote, the
right to stand for the election of the chairman, etc. The right to individual membership ensures that individual
shareholders can insist that the legal laws, statutory provisions and the regulations of the memorandum and
articles which the majority of shareholders cannot waive are strictly observed.

 Oppression and Mismanagement

Where the terms of sections 241 to 246 of the Companies Act of 2013 or sections 397 and 398 of the Companies
Act of 1956 apply, a suit can be acquired by minority shareholders. It is, therefore, a constitutional right granted to
a shareholder which overrides the limits of the majority rule. The application may be made by 100 members or
members with 1/5th of the members on the company register [8].

VI. Conclusion

A company is a legal entity that is given a different legal body rather than the members who create it, i.e., the
company’s owners. The company’s decisions are made on behalf of the company by the Member-Owners and the
Board of Directors. The group also makes decisions on seeking lawsuits. As per the Companies Act 1956, the
corporation is governed by shareholders who own most of the shares. This majority theory is accepted in Foss v
Harbottle, a ground-breaking case. The majority of the shareholders’ vote was binding on the minority. This
theory has since been replaced and under the Companies Act 2013, minority owners have been granted more
control.

In order to protect the rights of minority owners, there are provisions under the Companies Act, 1956 but because
of lack of time, redress or capacity, the minority was unable or unable, financial or otherwise. Hence, there have
been several instances of minority shareholder discrimination. The Companies Act, 2013 has provided for the
protection of the interests of minority shareholders which can be called a game-changer in the battle between
majority and minority shareholders.

Promoters of a Company

The article ‘Promoters of a Company’ elucidates the role of promoters, rights, and duties of promoters in a
company. It contains various landmark judgments which establish the legal position of the promoter. The article
highlights the importance of a promoter behind the formation of the company and also extensively discusses the
liabilities of a promoter. The article contains all the important provisions of the Companies Act, 2013 which deals
with the promoters.

Introduction: Promoters of a Company

A company is a form of business organization that is characterized by a separate legal entity, limitation of liability,
and perpetual succession. It is a legal device for the fulfillment of the socioeconomic goals of society. Given the
intricate formation and working of the company, we may wonder about its convoluted task of inception. It is
exactly where the role of the promoter comes into the picture. The promoters are the people who develop the
idea of a company, make schemes for its formation, mobilize the resources and personnel and ultimately
incorporate the company.
The Companies Act 2013 lays down in detail the rights and duties of the promoters and enshrines necessary
measures for the protection of the stakeholders of the company.[1] The given article seeks to scrutinize the
position of the promoter in relation to the company from multiple focal points.

Definition of Promoters of a Company

The term ‘Promoter’ is the common parlance used in the corporate landscape. In spite of its frequent recurrence,
there has been ambiguity in its definition. The systems of common law failed to define it both legislatively and
judicially. It was considered a business term, rather than legal. Justice Bowen defined a promoter, as a person
who shoulders business operations of the commercial world, so as to bring a company into existence. Therefore,
in a nutshell, the promoter is a person who undertakes operations necessary to incorporate and organize a
corporation.

In Bosher v. Richmond Land Co.[2], the court observed the role of promoters and held that he collaborates with
the people interested in floating the enterprise, procures subscriptions and shares, and set in motion the
machinery of incorporation of the company.

In the case of Twycross v. Grant[3], the court held that the defendants were the promoters of the company from
the very beginning as they provisionally chalked out the scheme of the company, found the directors, prepared
the prospectus, and undertook all the incidental expenses such as advertising and the printing costs, etc.

The Companies Act 2013, defines promoter in Section 2(69). The act statutorily defines promoters on the basis of
its functional aspect. As per the Act, promoter means a person

1. Whose name has been mentioned as such in the prospectus of the company or whose name is identified in
the annual returns of the company under Section 92 of the Act.
2. Who exercises either direct or indirect control over the affairs of the company in the capacity of
shareholder, director, or any other position as such.
3. Who advises, directs, or controls the Board of Directors and the Board usually acts on such advice.

The proviso to this Section excludes people acting in a professional capacity. A person is said to act in a
professional capacity when he does the job of promotion in concurrence to his professional work. The most
relevant example is that of a solicitor who may prepare documents for the proposed company on behalf of the
promoters. The other example could be an accountant or agent of the promoter who help in the incorporation of
a company in their professional capacity.

However, the people acting in a professional capacity may become promoters if they do any work beyond the
scope of their professional capacity. So, if a solicitor, for that matter, helps in hiring the personnel for the company
or helps in finding the purchaser for the shares of the company, then he would be deemed as a promoter of the
proposed company.

It is to be noted that the Companies Act 2013, gives the opportunity to people to become promoters of the
company even after its formation. For example, a party may become a promoter by aiding in subscription
procurement or any other key promotional activity.

Legal Position of Promoters of a Company

The yardstick to determine the position of a person as a promoter in a company is variable. Whether a given
person is a promoter or not depends upon the facts and circumstances of each case. It is a question of fact in each
case. It primarily depends upon the role played by a person in the promotion of a business.

The promoters of the company enjoy a key position in the formation of the company. They are responsible right
from the idea of inception of the company until its execution and incorporation. The creation of the company
squarely lies in their hands. Given their advantageous position in relation to the proposed company, the courts
have fixed them with the responsibility of that of a fiduciary agent.

Thus, the position of a promoter in a company is fiduciary in nature and he is akin to that of a trustee of the
company. The fiduciary nature of the relationship warrants the relation of trust between the parties i.e. the
promoter and the other stakeholders such as the shareholders, directors, management, etc.

The above-enumerated position of the promoters as trustees of the beneficiary company was observed by the
House of Lords in the landmark case of Erlanger v. New Sombrero Phosphate Co[4]. The Madras High Court
accepted this position of the promoters in the case of Weavers Mill Ltd. v. Balkis Ammal[5]. However, they are
not technically trustees in the real sense of words as the company may not be in existence as a legal person. The
duty of a trustee emerges from its fiduciary position.
Duties of Promoter

Given the fiduciary position of the promoter, there comes a host of associated duties. The foremost duty of the
promoter is to ensure transparency in his transactions. The dealings undertaken in the promotion of the business
must be open, honest, and fair. There should be due disclosure of the profits, interest, and the other relevant
factors that might affect the interest of the stakeholders of the business.

Accepting a bonus or commission from a person who sells the property to the company is one such act of
dishonest behaviour. Disclosure of any such interest should be made to an independent and competent Board of
Directors.

In the case of Erlanger v. New Sombrero Phosphate Co.[6], the property of the promoter was sold to the company
and, of the five people, who were named as directors, three were entirely under the promoter’s control. The court
pronounced that it was incumbent upon the promoter to disclose the fact regarding the promoter’s property to an
independent board of directors. There should have been a constitution of an independent board of directors, who
could have exercised intelligent judgment on this matter.

However, it is not always practical to constitute an independent board of directors, especially in circumstances
where private businesses are converted into limited companies, as in the case of Salomon v. Salomon & Co. Ltd.
[7]. Hence, the court observed that there should be due and fair disclosure of the profits and interests to the
shareholders of the company instead of the Board of directors.

In the case of Gluckstein v. Barnes[8], the House of Lords observed that such disclosure should be made to the
entire body of shareholders and not selectively only to a few of them. This duty of disclosure commences after the
incorporation and continues until the profits are fully accounted for.

Liabilities of Promoter

The fiduciary duty of the promoter imposes liability upon him to make full disclosure of the profits, interests,
entitlements, and other relevant information, that might affect the interest of the shareholders. However,
fraudulent and exploitative practices by the promoters in order to earn undue profits grappled the business
environment and affected the interests of the stakeholders of the company, especially the shareholders. In order
to curb this rampant malpractice, the Companies Act incorporated stringent provisions, some of which are Section
35, Section 39, and Section 300.

Section 39 enumerates the mandatory amount of minimum subscription necessary for valid allotment. The
promoter should ensure that the minimum stated amount of subscription in the prospectus is subscribed by the
public and a certain percentage of application money is received. Default to meet this requirement can result in a
penalty to the company, its promoter, and the other officers in charge.

Section 35 imposes liability upon the promoter of the company for making misstatements in the prospectus.
Section 300 empowers the Official Liquidator to order an examination of the promoter in case of discovery of
fraud during the process of formation or promotion of the company, or during the conduct of its business.

Besides statutory and legislative tools, judicial pronouncements, from time to time, have also ensured
transparency of the company transactions as regards the activity of business promotion and have imposed heavy
liabilities upon the promoters for undertaking unfair trade practices.

Thus, the Companies Act and the other allied acts have made a sincere attempt to eliminate fraudulent
malpractices in Companies Promotion.

Rights of Promoter

The promoters have the right to recover all the preliminary expenses incurred in setting up and registering the
company from the board of directors. The articles of the company mention the amount to be paid to promoters.
Such an amount could be paid even after the formation of the company.

In case of liability arising under Section 35 for misstatement in the prospectus, or any other fraudulent activity
under any relevant provision, the promoters are held jointly and severally liable to pay such penalty. However, the
promoter who pays for such liability is entitled to recover the requisite proportionate amount from other co-
promoters.

The promoter is also entitled to remuneration for the services rendered in the course of incorporation and
registration of the company. This remuneration could be in the form of fully or partly paid shares or any other
means as such. Such paid remuneration should be mentioned in the prospectus if it is paid within two years
preceding the date of issue of the prospectus.
Besides these entitlements, the promoter can also become a director or shareholder of the company, given his key
position in the formation of the company. However, his role as promoter immediately terminates after the
incorporation of the company and the moment he boards the company as a stakeholder.

In the case of Twycross v. Grant[9], the court observed that the functions of the promoter come to an end as soon
as the latch of the company is handed over to the governing body i.e. the board of directors.

It must, however, be noted that the duty of the promoter is to make true disclosure of any undue profit accruing
to him to the stakeholders. This does not entitle or restrain the promoter from making any profit, whatsoever,
from the business of promotion.[10]

Conclusion

Given the ever-important role of the promoter in light of the inception and working of the company, the
Companies Act 2013 lays down detailed guidelines as regards to rights, duties, and liabilities of the promoters. The
promoter acts as the fiduciary agent of the company who is entrusted with the task of ensuring transparency in
the business proceedings of the company, right from its very promotion to its incorporation and further,
thereafter.

Breach of these fiduciary obligations results in hefty liabilities for the promoter. Thus, a promoter should seek to
strike a balance between his own personal interests and the interests of the company, in order to ensure the
efficiency and effectiveness of the company in long run.

Memorandum of Association (MoA)

The word memorandum, as defined in Section 2(56) of the Companies Act refers to the Memorandum of
Association (MoA) of a company. Subscribing one’s name to a document means appending your signature or
thumb impression thereby acknowledging the content of the document. The people who subscribe to the
memorandum of a company by signing it are called subscribers.

In this article, Ashish Agarwal outlines the important aspects of the concept.

I. What is the Memorandum of Association (MoA)?

The formation of a company is introduced in Section 3 of the Companies Act, 2013 (“the Act”) wherein it says that
any 7 people or more in case of a public company, 2 people or more in case of a private company and a person
alone in case of a one-person company can form such company by subscribing their names to a memorandum
provided they comply with the requirements of registration under the Act.

A memorandum thus is an essential prerequisite for forming a company. It is the charter of the company, laying
down the constitution of the company, the object it strives for, the share capital it has (if any), the name of its
directors and so on. It is an open-to-access document from which a person interested in the company may gather
all essential information about the company and its business before deciding whether to be associated with it or
not. It is the self-defined limits of the company and shall operate only within its confines.

In the landmark case of Ashbury Railway Carriage & Iron Co. Ltd. v. Riche [1], Lord Cairn defined the
memorandum of association as the charter of a company which defines the limitations of the power of the
company. Lord Cairn observes that it contains both affirmative and negative limitations – such as affirmatively
stating the ambit and extent of the powers legally given to the company and it states negatively, if necessary, that
nothing will be done beyond that ambit.

II. What Constitutes a Memorandum?

The Memorandum is a detailed document which will legally bind the operations of the company within its limits. It
has to be drawn carefully and meticulously. There are certain fixed clauses in a memorandum, as discussed in
Section 4 read with Schedule 1.

 Name Clause: Name of the company should indicate whether the company is private or public. A private
company name ends with “private limited” while a public company ends with just “limited”. Further, the
name should not contain any undesirable name as specified in Rule 8 of Companies (Incorporation) Rules,
2014. No identical name that resembles the name of an existing company can be used.
In Ewing v. Buttercup Margarine Co. Ltd. [2], the company Buttercup Dairy Co. successfully obtained an injunction
against Buttercup Margarine on the ground that “buttercup” being a fancy word, people might construe the
companies to be connected.

 Situation Clause: This specifies the State in which the registered office of the company is to be situated.
Companies are required to have a registered office within 15 days of their incorporation. The Registrar of
Companies is to be intimated within 30 days of incorporation about the details of the registered office or
within 15 days of any change in the details, in accordance with Form INC-22.
 Object Clause: The MoA must state the object the company is working for. The mandatory bifurcation of
main and ancillary objects as required before has been dispensed with by the new Act of 2013. They may
still be provided for clarity. Although the statement of express powers is necessary, powers incidental to,
or necessary for the use of express powers shall be read into the MoA without being expressly written. This
was held in Attorney General v. G.E. Rly. Co. [3]
 Liability Clause: This states whether the liability of the members is limited or unlimited. If limited, it
answers the question of whether they are limited by shares or guarantee.
i. Limited by Share: This means that the liability of a shareholder (subscriber) exists only to the
amount due on the shares issued to him. If he has already paid the amount due on his shares, no
more liability can be imposed on him.
ii. Limited by Guarantee: This means that the subscribers have chosen to limit their liability to a given
maximum amount. In case of any dispute or situation which requires them to pay, the amount shall
go to a maximum of the amount mentioned in the MoA. It is given here that if this is the situation of
a company, the MoA should mention the guaranteed amount of each subscriber.
iii. Unlimited: A company may be formed with unlimited liability for its subscribers. Here, if such a
situation arises, the personal property of the subscribers may also be taken as their liability is not
limited.
 Capital Clause: This states the amount of capital with which the company is registered. The shares into
which the capital is divided must be of a fixed amount and the number of shares which the subscribers to
the memorandum agree to subscribe to shall not be less than 1. The share capital is usually a statement
such as “Capital of 10 Lakhs = 10000 equity shares of Rs. 100 each.”
 Subscription Clause (Schedule 1): This is a statement of declaration that the subscribers whose names and
addresses are mentioned agree to subscribe to the prescribed number of shares stated against their name
in the memorandum. The statutory requirements regarding the subscription of the memorandum are that
each subscriber must take at least one share and he should mention the number of shares he agrees to
take against his name in the memorandum. This part is followed by the names, addresses and occupations
of all subscribers, the number of shares they have taken, and their signature.

III. Alteration of an MoA

Section 13 of the Companies Act deals with the alteration of most parts of a Memorandum of Association. The
basic procedure is to pass a special resolution to that effect with the subscribers, file the passed resolution with
the Registrar, and if all procedures laid down in this Section are strictly complied with, upon registration of the
alteration it will come into effect.

However, any alteration in the Share Capital is regulated by other provisions of the Act. Section 61 governs the
alteration of share capital, Section 66 governs its reduction, and Sections 230 to 237 deal with its reorganization.

The procedure for alteration given in the provisions have to be strictly complied with, i.e., complying with a
substantial part of it with minor lapses will not be deemed as complied. Any lapse of the procedure will render the
alteration a nullity.

Alterations to specific clauses of the memorandum have been discussed below:

 Alteration to the Name Clause: A special resolution is to be passed with the subscribers. Approval of the
Central government is needed, except in case of a private company converting to a public company, the
approval to delete the word “private” is not needed. An alteration of name does not create a new entity.
However, a suit in the former name of a company after the alteration has come to effect is not valid. It
needs to be substituted by the new name, and then can be continued. These were held in Malhati Tea
Syndicate Ltd. v. Revenue Officer [4], and Solvex Oils and Fertilizers v. Bhandari Cross-Fields (P) Ltd. [5]
 Alteration to Situation Clause: A change in the registered office address has different procedure depending
on the exact nature of change. For a change of address within local limits, a Board resolution and a Special
resolution is to be passed, and a notice of the change is to be served to the Registrar under INC-22 within
15 days. In case of change of address to a different State, approval of Central Government under INC-23 is
required. This approval is to be filed and registered with the Registrar.
The court held in Mackinnon v. Mackenzie & Co [6] that in case of transfer of office from a State, the State has no
inherent power to intervene. The loss of revenue that will happen because of a company’s alteration of the
registered office is not a factor on which the company’s right to alter its memorandum can be curtailed.

 Alteration to Object Clause: A special resolution is to be passed, and filed with the Registrar. The registrar
should certify the special resolution within 30 days of filing.
 Alteration in Liability: A special resolution is to be passed, and filed with the Registrar under Form MGT 14.
 Alteration in Capital: A limited company which has a share capital may make certain alterations to it
through an ordinary resolution in a general meeting itself under Section 61.

It may increase its share capital as is expedient to do. It may divide its share capital into shares of larger or smaller
values than the previously held. For instance, share capital of 10 lakh as divided previously into shares of Rs. 100
each may be altered to fewer shares of Rs 200 or reduced to more shares of Rs.50 each.

Further, a share or shares may be sub-divided into more shares of smaller amount than previously mentioned. It
may convert its fully paid-up shares into stock, and reconvert the same. It may cancel some shares which have not
been taken by any person, and diminish the amount of share capital by the amount of the shares so cancelled. This
is not deemed to be a reduction of the share capital.

Only in alterations which cause a change in the percentage of voting rights of any shareholder, the confirmation of
the Tribunal is needed. In the rest of cases, no confirmation is needed.

However, the alteration must be notified by filing it along with the altered memorandum with the Registrar within
30 days of passing it.

IV. The Binding Nature of a Memorandum

The Memorandum of Association (MoA) is a boundary set on the powers and operations of the company stating
the powers it can exercise and the area in which it can exercise those powers. Although alterations are allowed to
the memorandum following the prescribed procedure, this self-imposed limit is binding on the company. It cannot
breach the line drawn by its memorandum without the procedure of alteration to that effect or it can be made
liable for that breach legally. This evolves into the Doctrine of Ultra Vires, which declares any act of a company
ultra vires its memorandum, i.e., out of the scope envisaged by its memorandum as void. This will be dealt with in
detail in a later article.

Articles of Association: Meaning, Nature and Explanation

The Articles of Association (AoA) of a company or just “articles” are in simple terms, its bylaws. These are the rules
and regulations which govern and facilitate the daily working of the company. So when a person joins a company,
by the virtue of being a member, s/he imbibes certain rights and duties in his/her name. These rights and duties are
incidental to such membership in that company and are vested by the AoA of the company. This article explains the
various aspects of Articles of Association such as their registration and alteration.

I. Articles of Association and their Binding Nature

We know that the memorandum of association defines a boundary for the company within which its subscribers
can exercise their rights. The Articles fill this boundary with what the rights and obligations of the subscribers are,
and how they can exercise it. In sec 5(1) of the Companies Act, 2013, it has been categorically stated that the AoA
is a compilation of all the regulations and bylaws essential for managing the company.

The same was reiterated by the Hon’ble apex court in Naresh Chandra Sanyal v. The Calcutta Stock Exchange
Association Ltd. where the court observed that AoA creates a binding contract between each member in a
company (officers of the company) and the company itself. It means that the members are under a contractual
obligation to manage and regulate the internal affairs of that specific company. The court further observed that it
is a bipartite contract, i.e., a dual contract, one as aforementioned, between the company itself and its members
and the second contract among the members of the company inter se (between two or more members).

The Companies Act, 2013 (“the Act”) defines Articles in Section 2 (5) and deals with it in Section 5. Section 2(5)
states that the word “articles” refers to the articles of association of the company as framed originally or as altered
later. It includes the regulations laid down in Table A in Schedule 1 annexed to the Act, in so far as they are
applicable to that company.
II. Sub-ordinate to the Memorandum

The Articles of Association fill the boundary defined by the memorandum. Hence, it is also bound by the limits
drawn by the memorandum, and any regulation contained in the Articles which are ultra vires the memorandum
will be a nullity. Any act done on the basis of such a regulation would also be void and incapable of subsequent
rectification, as there was no authority for it to be done in the first place (Ashbury v. Watson [1]).

Thus, it is said that the Articles run subordinate to and subject to the memorandum of a company. This nature was
clarified beyond doubt by Lord Cairns in Ashbury Railway Carriage and Iron Co. Ltd. v. Riche [2]:

“Articles accept the memorandum of association as the charter of incorporation of the company and, so accepting
it the articles proceed to define the rights, duties and powers of the governing body as between themselves and
the company at large.”

However, it must be understood that neither the Articles nor the memorandum is above the Act or any other law
in force. Any provision in both these documents contravening a provision of law will be void. This has been held in
Kinetic Engineering Ltd. v. Sadhana Gadia [3].

Further, Articles are only internal regulations of the company and hence the company has complete power to alter
them when needed following the prescribed procedure.

III. Registration of Articles (Statutory Requirement)

Section 7(1) requires a company to file with the registrar within whose jurisdiction the registered office of the
company lies, the Articles of association along with the memorandum. This is required for the incorporation of the
company. The Articles need to be written, printed, divided into paragraphs, consecutively numbered, adequately
stamped and signed by all the subscribers to the memorandum and duly witnessed. They should not contain any
provision ultra vires the memorandum or the Act.

The Act contains model articles in Tables F, G, H, I and J in Schedule 1. The whole or some part of any of these
tables could be applicable to a certain kind of company. Section 5 (7) says that a company may adopt any or all of
these model regulations as its own.

Section 5 (8) says that any company registered after the Act of 2013 came in force, the whole or any part of the
table applicable to that company which has not been excluded or modified by the company’s articles will be
deemed to be a part of the Company’s articles itself in the same manner and extent as if they were made by the
company. Apart from this, Section 5(2) requires that Rule 11 of the Companies (Incorporation) Rules, 2014 shall
also be contained in the Company’s Articles.

Satisfying the above-stated points of requirements, a company is free to include any additional regulations in its
Articles as it feels necessary.

IV. Clauses in Articles of Association

The Articles of Association may be based on the models given in the tables F, G, H, I, J in Schedule 1, whichever
may be applicable to the company. Additional details may be then added, and requirements fulfilled. An ordinary
Article of Association should contain the following clauses:

 Exclusion of whole or part of Table F of Schedule 1

 Adoption of Preliminary Contracts
 Provisions Regulating Shares and Share Capital: The first major thing to deal with is the detailed provisions
for regulation of issue, allotment, transfer, transmission, conversion and forfeiture of shares. The number
of shares and their value should be mentioned. Allotment of preference shares should be dealt with. The
matters of buying back shares, their forfeiture, and issuing share certificate should also be governed
accordingly. The share capital should be written, and the procedure of its alteration specified.
 Provisions Regulating Voting Rights: The voting rights and all matters incidental thereto should be dealt
with precision. The effect of certain alterations to the voting rights should be made out. The procedure for
proxy voting should be stated.
 Provisions of Meetings: Two kinds of meetings are to be covered here. The date, frequency, agenda,
quorum and so on of the general meeting should be laid down. Similarly, the details of the Director’s
meeting should be provided. The several committees required to be formed should be detailed, along with
the rules and procedure regarding the same. Separate provision for the Audit Committee should be made.
 Provisions on Directors: Directors are an integral part of the management of a company. The Articles
should be meticulous on specifying their appointment, number, powers, duties, protocols, and removal in
all foreseeable cases. Delegation of powers should be done. Separate provisions for Managing Directors,
 Whole-time Directors, Additional Directors, Nominee Directors, Independent Director, and the managers
and secretaries required should be laid out clearly. The issue of remuneration should be written.
 Accounting, Auditing, and Winding up: Matters of bookkeeping should be governed by these provisions.
Provisions should be made about when, how and by whom will the auditing be undertaken. Provisions
relating to winding up of the company should be drawn out. Matters of indemnity and insurance should be
covered.
 Sign and Seal: Finally, the Articles should be signed by all those are subscribed to the Memorandum, duly
witnessed and appropriately stamped.

V. Alteration of Articles of Association

The company has a right to alter its articles. It is an essential right of a company that it may add, remove or modify
any clause as it feels imminent. This right is protected such that a company itself cannot waive it off by including a
clause in its articles taking away the power to alter articles. Such a clause would be void. Similarly, it cannot even
enter into an independent contract which takes away the right. This was held in Walker v. London Tramway Co.
[4]

Section 14(1) says that a company is free to alter its articles by passing a special resolution to that effect. It states
that this power includes the power to make such alterations as would convert a Private company to a public
company and vice versa. However, approval by the Tribunal would be additionally required for the latter, i.e. for
conversion from Public to Private.

Section 14(2) states that all of these alterations when made, the order of the Tribunal approving the alterations (if
required) and the printed copy of the altered articles in whole, is supposed to be filed with the Registrar within 15
days so that they can be registered by him.

Section 14(3) states that once registered under the previous subsection, the altered articles will be binding in
effect on all subscribers as if they were registered with the original articles. This means that with respect to their
operation and binding nature, they will apply on all subscribers as if they were originally present. However, this
does not mean that the alteration can be made with retrospective effect (Pyare Lal Sharma v. Managing Director,
J.K. Industries Ltd. [5]).

A company may alter an article even if it results in the breach of any contract. The right cannot be taken away by
the existence of the contract, but the company may be sued for breach (Southern Foundries v. Shirlaw [6]).

 Entrenchment

A unique concept of entrenchment has been introduced in the Act of 2013 by Section 5(3). This is with respect to
the alteration of the registered Articles of Association of the company. Entrenchment empowers the company to
specify in its Articles that certain provisions contained in the Articles may only be altered by satisfying a higher
degree of a requirement than that in a special resolution, such as requiring 100 per cent consent. This means that
some provisions could be stated in the Articles which say that certain other, pre-greed provisions of the Articles
will only be amended on satisfying the given conditions, which are more restrictive than the ordinary requirement
of a special resolution.

This provision allows for greater certainty for investors and acts as a guarantee for mostly the smaller investors
that their rights will be protected. This is a useful tool to enforce certain pre-agreed conditions. The entrenchment
provisions may be made during the formation of the company or maybe introduced later by alteration following
the procedure for alteration. In either case, a separate notice of such provisions is required to be given to the
Registrar as prescribed (Section 5(5).

VI. Limitations on the Right to Alter

 The Articles cannot be ultra vires the Memorandum.

 The alteration cannot be ultra vires the Act itself.
 The alteration cannot be illegal or opposed to Public Policy.
 The alteration cannot be male fide or deceitful in nature.
 The alteration should not be with the motive to defraud the minority shareholders by the majority. This
means that while alteration is done, the benefit of the whole company should be kept in mind, and not the
majority only. Such an alteration would be bad in law if it puts the minority at a disadvantage ( All India
Railway Men’s Benefit Fund v. Jamadar Baheshwarnath Bali [7]).
 The Articles cannot compel an existing shareholder to buy more shares, or subscribe himself to more
liability unless he gives his consent in writing (Section 38).
Doctrine of Ultra Vires in Company Law

The Doctrine of Ultra Vires: The Memorandum of Association of a company defines the objects a company is
working for and the powers and rights through the exercise of which it seeks to achieve those objects. Section 4(1)
(c) states that a company should lay down its objects and anything necessary in furtherance of such objects in its
memorandum. This specified list of objects and powers bind the company and its directors within its limit. This
means that no representative of the company can act outside the scope of these objects.

Neither can the Directors exercise a power not given in the memorandum, nor can they exercise a permissible
power for any other purpose than the furtherance of the given objects therein. This is called the doctrine of ultra
vires. in Company Law such that all acts which lie outside the scope of the Memorandum, or in other words, are
not directly or indirectly for the furtherance of the given objects in the memorandum shall be deemed to be void ab
initio. The term "ultra vires" stands for "beyond powers", and the term "void ab initio" stands for "void from the
initiation".

I. The Need and Importance of the Doctrine of Ultra Vires

The doctrine intends to protect the subscribers of a company and its investors. The people investing in a company
are assured by the doctrine that their money shall only be used for the purpose they have read and understood in
the memorandum and not for any other purpose. Many a time, a company's ultra vires actions lead to its
insolvency. Hence, the doctrine empowers the investors to first seek a remedy such as an injunction against the
ultra vires act, and later demand their money during insolvency.

II. Not an Illegality Per Se

It is pertinent to understand that the acts ultra vires are deemed as void ab initio and not an illegality. This
means that once it is proved that an act is not authorized by the memorandum, it will be so pretended that the act
was never done at all. Hence, ultra vires contracts would not bind either party legally as they were never made at
all. Repudiation of such contracts is not a breach, which would be illegality. Unless the acts violate a legal
provision, they are not illegal and hence, a punitive or compensatory liability is not incurred on the company for
doing such an Act, except in certain cases as will be detailed later.

III. Landmark Cases of Origin

The doctrine is a long-standing dictum of common law, first propounded by Lord Cairns in the House of Lords in
the landmark decision of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche [1]. The facts of the case are such
that company A defines its object in the memorandum as "… to carry on the business of mechanical engineers and
general contractors…"

A perusal of the object clause gives that the company intends to deal in mechanical engineering contracts in
buying, selling and lending railway plants. The company enters into a contract with R for financing the construction
of a railway line for the latter. It realizes that the contract is ultra vires, and repudiates it. R brings a suit for breach
of contract with two main arguments. One, that the term 'general contractors' is wide enough to include the given
contract. Two, that the majority shareholders were present and ratified the contract at its formation.

It was held that the term "general contract" is to be read in the light of the rest of the clause, which means that
the company may only deal in mechanical engineering contracts and may enter to general contracts related to
that purpose only. The House clarified in unequivocal terms that if every shareholder of the company submits that
he authorizes the said contract, even then it would be a nullity from the beginning. Acts ultra vires the
memorandum cannot be ratified by the shareholders.

In the landmark case of A. Lakshmanaswami Mudaliar v. L.I.C. [2], Justice Shah has upheld the Doctrine of Ultra
Vires which brings it in the common law of India as well. The facts are such that a given power in the
memorandum authorizes the Director to make a payment towards any charitable or benevolent object. A
resolution of shareholders is passed and Rs. 2 lakhs are paid to a charitable trust for promoting technical and
business knowledge. However, the company having been acquired by the LIC had no business of its own to
promote.

The act was held ultra vires and therefore void by the Hon'ble judge. The Court highlighted that the powers of
directors and the object of the company are distinct clauses where the former is bound by the latter. That is, the
power of the Director to make payments, or borrow money may only be exercised for the furtherance of the
objects stated, and not for any and all purposes.

It further said that for payment towards charitable purposes, a nexus should exist between the charitable purpose
and the business of the company. For instance, a company dealing in chemicals may contribute towards a
charitable organization researching in that field. Charitable donations for bona fide purposes are dealt with in
Section 181 and are different from the above powers.

In Re Jon Beauforte (London) Ltd. [3], a company had in its objects the business of costumes and gowns. It
entered ultra vires into the manufacture of veneers. Unknown to this, several creditors entered into contracts with
the company. The company went under forced liquidation. Their claims of debt were rejected by the liquidator as
their contracts were based on ultra vires acts. Held, the liquidator has been justified and ultra vires acts do not
give rise to enforceable contracts.

In Re Introductions, Ltd. v. National Provincial Bank Ltd.[4], a company entered into the business of pig breeding
ultra vires its object clause. This was not challenged in appeal. The company had an account with a Bank
(defendant) who was in return issued as security two debentures. The company went into liquidation and the bank
sought to enforce the debentures but was rejected on the basis of the doctrine.

The bank's argument was such that even if the borrowing was for an ultra vires purpose, it was expressly given in
the objects clause that the company had the power to borrow by issuing debentures, and it was further declared
in the last clause that each clause is independent of other clauses. Thus, they should be entitled to the
debentures. The court disregarded this argument again iterating that borrowing was not an end in itself.
Borrowing must be done in pursuance of an object, and since that object is not intra vires, the doctrine is attracted
nevertheless.

IV. Implied Powers

It has been held by both the House of Lords and Indian courts that the doctrine of ultra vires is not to be applied in
the strictest sense so as to prohibit anything that is not expressly written in the memorandum. This means that
matters necessary for the attainment of the given objects and issues incidental to it may be read into the
memorandum by reasonable construction. Section 4(1)(c) requires that the objects and other matters necessary
must be written. However, some flexibility of interpretation is shown in this regard to include related and implied
matters.

Similarly, the requirement is to write the objects and necessary powers. The rest of the powers of the
representatives of the company may not be written, and be inferred from the written powers and objects. For
instance, a company made for the object of trading impliedly acquires the power to lend and borrow money. This
was held in Oakbank Oil Co. v. Crum [5]. This is construed from the nature of its business and may not be written
without any damage. The underlying principle, as held in Egyptian Salt and Soda Co. v. Port Said Salt Association
[6] is that the company constituted for a particular object must be able to pursue those things incidental to or
consequential upon that object.

It goes without saying that a company is free to have a long, detailed list of individual objects writing all that it
feels necessary. It was held in Cotman v Brougham [7] that such a list of objects and the stipulation that they
would be deemed individual objects and not sub-clauses to the same object is valid.

V. Powers to be Expressly Included

Although necessary and incidental powers have been read into the memorandum of a company, decisions of the
court provide us that certain clauses must be expressly mentioned in the memorandum or the doctrine will be
attracted. The following powers are not implied:

 Power to acquire any business is similar to the company's business. (Ernest v. Nicholls [8]) Also, taking
shares in companies having similar objects. (Re William Thomas & Co. Ltd. [9])
 Very clear objects are required to authorize entering into agreements with other companies to work in
partnership or joint venture and share profits. (Re European Society Arbitration Act [10])
 Power to Promote or financially help other companies (Joint Stock Discount Co. v. Brown [11])
 Power to sell the whole of a company's undertaking
 Power to use funds for political purposes.
 Power to act as a surety or guarantor.

VI. Effect of Ultra Vires Acts

As stated, an ultra vires act is considered void ab initio. The doctrine has the following effects in the given
situations:

 Void ab initio: The company cannot sue or be sued on these acts as they are deemed to have not taken
place at all. Ultra vires cannot be subsequently made valid by either Ratification or i.e., the shareholders
cannot vote an ultra vires act as valid, as they could have in case of a Director having acted in excess of his
 powers. Nor can the conduct of the other party to a contract ultra vires bind them to the contract
(estoppel).
 Injunction: A remedy in the nature of injunction can be sought against the company preventing it from
acting ultra vires the memorandum. (Attorney General v. Gr. Eastern Rly. Co. [12])
 Borrowing and Lending of Money: An ultra vires act of borrowing or lending money by a company does
not create a creditor-debtor relationship. Hence, the contract does not exist and cannot be enforced. Held
in Madras Native Permanent Fund Ltd. [13]
 Buying a property with company money ultra vires: A property bought for a purpose ultra vires the
memorandum will still belong to the company as it represents the money of the company even if the
purpose of acquiring it was ultra vires.
 Personal Liability of Directors: It is the duty of the Directors to see that the investors' money is utilized for
the purposes laid down in the memorandum. On failure of the duty, resulting in money being used for alien
objects they can be sued personally without making the company a party, and be made liable for
compensation. If the ultra vires act is proved to be deliberate or mala fide, criminal action may also be
brought. This was held in Jehangir R. Modi v. Shamji Ladha [14].

Doctrine of Harmonious Construction: A Comprehensive Analysis

The Doctrine of Harmonious Construction: The Parliament makes a separate set of statutes, rules, legislation, and
constitutional provisions under their well-defined powers. While framing these provisions has to be done very
carefully, conflict sometimes occurs due to overlapping in their enforcement. This is because there are chances of
certain gaps being left while framing of these provisions, which legislators could not have foreseen. To deal with
such conflicts, certain doctrines and rules are propounded by courts that are used in the interpretation of statutes.
One such rule of interpretation is the Doctrine of Harmonious Construction.

This article provides an overview of the doctrine along with case laws.

I. Meaning of the Doctrine of Harmonious Construction

The Doctrine of Harmonious Construction is considered the thumb rule to the rule of interpreting statutes. The
doctrine states:

“Whenever there is a case of conflict between two or more statutes or between two or more parts or provisions of
a statute, then the statute has to be interpreted upon harmonious construction. It signifies that in case of
inconsistencies, proper harmonization is to be done between the conflicting parts so that one part does not defeat
the purpose of another.”

The doctrine is based on a cardinal principle in law that every statute has been formulated with a specific purpose
and intention and should be read as a whole. The normal presumption is that what Parliament has given by one
hand is not sought to be taken away from another. The essence is to give effect to both the provision. The adopted
interpretation of the statute should be consistent with all its provisions to avoid conflict.

If there seems an impossibility to construe or reconcile the parts/provisions harmoniously, then the matter rests
with the judiciary to decide and give final judgment. The aim of the courts is to make interpretations in a manner
that resolves the repugnancy or inconsistency between the provisions and enables the statute to become
consistent as a whole and read accordingly.

II. Origin of the Doctrine

The Doctrine of Harmonious construction originated through interpretations given by courts in a number of cases.
The evolution of the doctrine can be traced back to the very first amendment made in the Constitution of India
with the landmark judgment of Shankari Prasad v. Union of India [1]. The case dealt with the conflict between
parts III (Fundamental Rights) and IV (Directive Principles of State Policy), which form basic features of the Indian
Constitution.

The court applied the rule of Harmonious Construction and held that Fundamental rights being rights given against
the state, can be taken away in certain situations and can be amended as well by the Parliament to bring them in
conformity with constitutional provisions. Preference was given to both and it was decided that FRs and DPSPs are
just two different sides of the same coin that requires working together for the public good.

Historically, this doctrine evolved through the rule of conciliation first propounded in the case of C.P. and Berar
Act [2]. The court applied this rule of interpretation to avoid overlapping or inconsistency between entry 24 and
entry 25 of the State list and read them harmoniously by determining the extent of the concerned subjects.

III. Applicability of the Doctrine

To quote court's view on the application of the doctrine of harmonious construction:

“When there are in an enactment two provisions which cannot be reconciled with each other, they should be so
interpreted that; if possible, the effect should be given to both.” [3]

It is a well-settled principle that a statute must be read as a whole and in a manner that one part/provision of the
act is harmoniously construed in reference to the other provisions of the same Act so as to provide a consistent
enactment of the whole statute. [4]

There are five principles of this Doctrine as laid down by the apex court of India in the case of CIT v. Hindustan
Bulk Carrier:

1. “While interpreting, the court has a duty to avoid a “head-on clash” at all costs between two sections of
the same act
2. The interpretation should be done such that the provision of one section doesn’t defeat the purpose of
another unless it is impossible to effect a reconciliation between them.
3. When it is impossible to reconcile the contradictory provisions, then courts must interpret in a way to give
as much as possible effect to both provisions.
4. A Construction that reduces one of the provisions to a “useless lumber” or “dead letter” is not harmonious
construction.
5. Lastly, to harmonize is not to destroy any other statutory provisions.” [5]

The aforesaid principles give basic yet clear explanations of the usage of the rule of Harmonious Construction
while interpreting parts of any statute.

Moreover, when two provisions of a statute are in apparent conflict with each other, then both must be
interpreted in a way that gives effect to both, and no such construction should be adopted that renders either of
the provisions useless or inoperative except in the last resort. The Supreme Court has clearly illustrated the use of
this principle in Raj Krushna v. Binod Kanungo [6] case.

Section 33(2) and 123(8) of ROPA, 1951 were in apparent conflict. Where section 33(2) talks about the power of a
government servant to nominate or second a person in an election, the other section 123(8) specifies that a
government servant cannot assist any candidate in the election except by casting his vote [7]. The court
interpreted both sections harmoniously and held that a government servant has both the right to nominate or
second a candidate but is forbidden to assist in any other manner and he also has the right to vote.

IV. Relevant Case Laws

To have a fair understanding of the concept of this interpretation rule, it is important that we read upon its actual
applicability in relevant case laws.

The first is the landmark judgment in the history of the Indian Constitution, M.S.M Sharma v. Krishna Sinha. The
Petitioner in the case was alleged with that he has breached the privileges of the speaker for publishing a speech
which was delivered by the member. A show-cause notice was issued to the Petitioner for why action should not
be taken against him.

Issue of the case: Whether the privileges under Art. 194(3) prevail over the fundamental right under Art. 19 (1)(a)?
[8]

Petitioner’s Contention: The action taken by the Committee and the notice sent stands in violation of his
fundamental rights under Art 19 (1)(a) and Art. 21. However, since the respondent relied on Art. 194(3), the rule of
interpretation was involved as to which provision shall prevail.

Held: The Supreme Court applied the rule of harmonious construction and held that though Art. 194 (3) is
subordinate to Art. 21 but Indian Constitution is the supreme law in the country, and therefore, a person can be
expunged from publishing the official records of the Assembly. This is not a complete prohibition on the
fundamental right of that person.

Further, in the case of M. Nanavati v. State of Bombay [9], the matter was related to the power conferred to the
Governor under Art 161, and the court has to interpret the scope of Art 161 and Art 142 (1) of the constitution. In
the present case, Bombay HC passed a sentence against the accused. The petitioner then approached the
Governor, who passed a suspension order against the sentence of Bombay HC.

When the matter reached before Hon’ble Supreme Court, the court applied the rule of Harmonious Construction
and held that the absolute power of granting suspension to the Governor under Art 161 becomes absolved when
the matter becomes sub judice. In such situations, there is a complete scope of interference with the judicial
power of the court under Art 142.

Recently in the case of Department of Customs v. Sharad Gandhi [10], the Hon’ble Supreme Court has again
applied the principle of Harmonious construction to resolve the inconsistency between the Antiquities and Art
Treasures Act, 1972 and Customs Act, 1962. The Bench observed the “inconsistency” found in Article 254 of the
Indian Constitution between laws made by Parliament and state legislatures, stating: If the law made by the state
is repugnant to the law made by the parliament, then law made by the parliament shall prevail to the extent of
repugnance [11]. However, in the present case, the court observed that both the said act have been made by
Parliament.

V. Conclusion

It is clear that there is always a possibility of ambiguity or gaps in the laws made by the legislature. To fill those
gaps, Harmonious construction as a rule of interpretation of statutes plays a huge role in giving maximum effect to
the statutory provisions. Today, considered a chief tool in the hands of our Judiciary, the rule helps two
confronting laws work together harmoniously in delivering justice to society at large.

Doctrine of Harmonious Construction: A Comprehensive Analysis

The Doctrine of Harmonious Construction: The Parliament makes a separate set of statutes, rules, legislation, and
constitutional provisions under their well-defined powers. While framing these provisions has to be done very
carefully, conflict sometimes occurs due to overlapping in their enforcement. This is because there are chances of
certain gaps being left while framing of these provisions, which legislators could not have foreseen. To deal with
such conflicts, certain doctrines and rules are propounded by courts that are used in the interpretation of statutes.
One such rule of interpretation is the Doctrine of Harmonious Construction.

This article provides an overview of the doctrine along with case laws.

I. Meaning of the Doctrine of Harmonious Construction

The Doctrine of Harmonious Construction is considered the thumb rule to the rule of interpreting statutes. The
doctrine states:

“Whenever there is a case of conflict between two or more statutes or between two or more parts or provisions of
a statute, then the statute has to be interpreted upon harmonious construction. It signifies that in case of
inconsistencies, proper harmonization is to be done between the conflicting parts so that one part does not defeat
the purpose of another.”

The doctrine is based on a cardinal principle in law that every statute has been formulated with a specific purpose
and intention and should be read as a whole. The normal presumption is that what Parliament has given by one
hand is not sought to be taken away from another. The essence is to give effect to both the provision. The adopted
interpretation of the statute should be consistent with all its provisions to avoid conflict.

If there seems an impossibility to construe or reconcile the parts/provisions harmoniously, then the matter rests
with the judiciary to decide and give final judgment. The aim of the courts is to make interpretations in a manner
that resolves the repugnancy or inconsistency between the provisions and enables the statute to become
consistent as a whole and read accordingly.

II. Origin of the Doctrine

The Doctrine of Harmonious construction originated through interpretations given by courts in a number of cases.
The evolution of the doctrine can be traced back to the very first amendment made in the Constitution of India
with the landmark judgment of Shankari Prasad v. Union of India [1]. The case dealt with the conflict between
parts III (Fundamental Rights) and IV (Directive Principles of State Policy), which form basic features of the Indian
Constitution.

The court applied the rule of Harmonious Construction and held that Fundamental rights being rights given against
the state, can be taken away in certain situations and can be amended as well by the Parliament to bring them in
conformity with constitutional provisions. Preference was given to both and it was decided that FRs and DPSPs are
just two different sides of the same coin that requires working together for the public good.

Historically, this doctrine evolved through the rule of conciliation first propounded in the case of C.P. and Berar
Act [2]. The court applied this rule of interpretation to avoid overlapping or inconsistency between entry 24 and
entry 25 of the State list and read them harmoniously by determining the extent of the concerned subjects.

III. Applicability of the Doctrine

To quote court's view on the application of the doctrine of harmonious construction:

“When there are in an enactment two provisions which cannot be reconciled with each other, they should be so
interpreted that; if possible, the effect should be given to both.” [3]

It is a well-settled principle that a statute must be read as a whole and in a manner that one part/provision of the
act is harmoniously construed in reference to the other provisions of the same Act so as to provide a consistent
enactment of the whole statute. [4]

There are five principles of this Doctrine as laid down by the apex court of India in the case of CIT v. Hindustan
Bulk Carrier:

1. “While interpreting, the court has a duty to avoid a “head-on clash” at all costs between two sections of
the same act
2. The interpretation should be done such that the provision of one section doesn’t defeat the purpose of
another unless it is impossible to effect a reconciliation between them.
3. When it is impossible to reconcile the contradictory provisions, then courts must interpret in a way to give
as much as possible effect to both provisions.
4. A Construction that reduces one of the provisions to a “useless lumber” or “dead letter” is not harmonious
construction.
5. Lastly, to harmonize is not to destroy any other statutory provisions.” [5]

The aforesaid principles give basic yet clear explanations of the usage of the rule of Harmonious Construction
while interpreting parts of any statute.

Moreover, when two provisions of a statute are in apparent conflict with each other, then both must be
interpreted in a way that gives effect to both, and no such construction should be adopted that renders either of
the provisions useless or inoperative except in the last resort. The Supreme Court has clearly illustrated the use of
this principle in Raj Krushna v. Binod Kanungo [6] case.

Section 33(2) and 123(8) of ROPA, 1951 were in apparent conflict. Where section 33(2) talks about the power of a
government servant to nominate or second a person in an election, the other section 123(8) specifies that a
government servant cannot assist any candidate in the election except by casting his vote [7]. The court
interpreted both sections harmoniously and held that a government servant has both the right to nominate or
second a candidate but is forbidden to assist in any other manner and he also has the right to vote.

IV. Relevant Case Laws

To have a fair understanding of the concept of this interpretation rule, it is important that we read upon its actual
applicability in relevant case laws.

The first is the landmark judgment in the history of the Indian Constitution, M.S.M Sharma v. Krishna Sinha. The
Petitioner in the case was alleged with that he has breached the privileges of the speaker for publishing a speech
which was delivered by the member. A show-cause notice was issued to the Petitioner for why action should not
be taken against him.

Issue of the case: Whether the privileges under Art. 194(3) prevail over the fundamental right under Art. 19 (1)(a)?
[8]

Petitioner’s Contention: The action taken by the Committee and the notice sent stands in violation of his
fundamental rights under Art 19 (1)(a) and Art. 21. However, since the respondent relied on Art. 194(3), the rule of
interpretation was involved as to which provision shall prevail.

Held: The Supreme Court applied the rule of harmonious construction and held that though Art. 194 (3) is
subordinate to Art. 21 but Indian Constitution is the supreme law in the country, and therefore, a person can be
expunged from publishing the official records of the Assembly. This is not a complete prohibition on the
fundamental right of that person.
Further, in the case of M. Nanavati v. State of Bombay [9], the matter was related to the power conferred to the
Governor under Art 161, and the court has to interpret the scope of Art 161 and Art 142 (1) of the constitution. In
the present case, Bombay HC passed a sentence against the accused. The petitioner then approached the
Governor, who passed a suspension order against the sentence of Bombay HC.

When the matter reached before Hon’ble Supreme Court, the court applied the rule of Harmonious Construction
and held that the absolute power of granting suspension to the Governor under Art 161 becomes absolved when
the matter becomes sub judice. In such situations, there is a complete scope of interference with the judicial
power of the court under Art 142.

Recently in the case of Department of Customs v. Sharad Gandhi [10], the Hon’ble Supreme Court has again
applied the principle of Harmonious construction to resolve the inconsistency between the Antiquities and Art
Treasures Act, 1972 and Customs Act, 1962. The Bench observed the “inconsistency” found in Article 254 of the
Indian Constitution between laws made by Parliament and state legislatures, stating: If the law made by the state
is repugnant to the law made by the parliament, then law made by the parliament shall prevail to the extent of
repugnance [11]. However, in the present case, the court observed that both the said act have been made by
Parliament.

V. Conclusion

It is clear that there is always a possibility of ambiguity or gaps in the laws made by the legislature. To fill those
gaps, Harmonious construction as a rule of interpretation of statutes plays a huge role in giving maximum effect to
the statutory provisions. Today, considered a chief tool in the hands of our Judiciary, the rule helps two
confronting laws work together harmoniously in delivering justice to society at large.

Doctrine of Indoor Management in Company Law

By Ashish AgarwalPublished on 23 Dec 2020 1:08 AM GMT

Two doctrines in Company Law running anachronistic to each other are the Doctrine of Constructive Notice and
the Doctrine of Indoor Management respectively. These are widely accepted principles evolved through
common law judgments infusing reasonableness, fairness and equity to statutory enactments. The former
protects the company against ignorant or malicious contractors and bears semblance to the caveat emptor…
Read More »
Two doctrines in Company Law running anachronistic to each other are the Doctrine of Constructive Notice and
the Doctrine of Indoor Management respectively. These are widely accepted principles evolved through common
law judgments infusing reasonableness, fairness, and equity to statutory enactments.

The former protects the company against ignorant or malicious contractors and bears semblance to the caveat
emptor doctrine of Consumer Law. It preaches the third-party contractor to perform its due diligence before
entering into an agreement. However, like all good measures, this too would come to be abused by its benefactors
unless coated by a rider doctrine. That purpose is served by the Doctrine of Indoor Management which protects the
third party's rights against the company.

I. The Doctrine of Constructive Notice

The Memorandum of Association and Articles of a company are public documents available with the Registrar for
perusal by any interested party upon payment of a nominal charge. The two documents, as detailed in previous
articles, detail the entire nature, scope and limits of the powers and objects of a company, the extent of
delegation of those powers on the Directors, and the limitations on such delegation. The company cannot perform
any act outside the scope of the memorandum of association (Doctrine of Ultra Vires).

The Articles substantiate the powers mentioned in the Memorandum with regard to the procedural requirements
and the regulations which govern all company affairs. Since the two documents are available for any interested
person to go through, the Doctrine of Constructive Notice states that any person entering into a contract with the
company will be presumed to have gone through and understood the documents in their true sense (Griffith v.
Paget) [1]. In other words, he has been given "constructive notice" of all that is contained in the documents.

For instance, if a clause in the memorandum requires a bill of exchange to be signed by two directors, the person
must make sure it is so signed, or there would arise no claim out of it.

The object of the doctrine is simple but significant. It protects the interests of the company and its subscribers
against persons who remain ignorant of due diligence. As enumerated in Halsbury, with reference to the case of
Jones v. Smith [2], where the conduct of the party shows that he had suspicions of a state of facts the knowledge
of which would affect his legal rights, but deliberately failed to make an inquiry regarding the same, he would be
deemed to have had notice.

 Kotla Venkataswamy v. Rammurthy [3]

The facts are such that a mortgage deed for Rs. 1000 was made by the company in favour of a third party. Article
15 of its articles required that such deed must be signed by three people – the Managing Director, Working
Director and the Secretary and that in absence of anyone signature it would be invalid. The deed was only signed
by the latter two and not by the Managing Director. On the party's claim to enforce the deed, the Court applied
the Doctrine of Constructive Notice to hold against him.

Held that the person is presumed to know the contents of the Articles before entering into the deed and hence it
was not maintainable.

II. The Doctrine of Indoor Management

A person may peruse the available documents and may even be presumed to understand it, but can he be
expected to check himself and make sure whether the written regulations and procedures are actually being
followed inside the company or not? The present doctrine answers it in the negative, and thus draws the line
where the responsibility of the contractor to perform due diligence ends.

The doctrine says that what happens inside the doors of a company de facto are neither concerns of the third
party nor in his ability to be checked and confirmed. Once he has perused the documents available, he may legally
presume that their contents are being observed in totality by the company and its representatives, and he may
claim his rights on that assumption.

For instance, if the memorandum requires a certain quorum to be present during the resolution by which the
contract is made, the third party may assume that such a quorum was present. Even if in fact the quorum was not
present, the contract would still be valid and enforceable.

 Royal British Bank v. Turquand [4]

This landmark case of 1856 gave rise to the Doctrine of Indoor Management. The facts of the case are such that in
a banking company, the directors were authorized to borrow money on bond up to an amount decided by the
members in general meeting. A resolution is supposed to be passed in the general meeting authorizing the
Directors to borrow amount up to a limit. A director borrowed amounts on a bond without any such resolution.
It was held in favour of the creditor that it is not his obligation to make sure that the required internal resolution is
passed. He may safely presume that as the memorandum has express provision authorizing a Director to borrow
money, the required procedure must have been followed through.

"Outsiders are bound to know the external position of the company, but are not bound to know its indoor
management."

Thus, the doctrine of indoor management was born.

 Lakshmi Ratan Cotton Mills Co. Ltd v. J. K. Jute Mitts Co. Ltd [5]

A loan was given to the defendant company by the plaintiff to the amount of Rs. 1,50,000 which it seeks in the
case. The defendant company refuses on the ground that as no resolution to sanction the loan has been passed by
the Board of Directors, the loan agreement is not binding on them.

This is a landmark case as it marks the dawn of the indoor management doctrine in Indian common law. The court
applied the doctrine to hold that the fact whether a resolution was passed or not is not the creditor's concern, and
it can be safely assumed by him to have taken place. Thus, he is liable to be paid back.

Another early Indian case is the Official Liquidator, Manasube & Co. (P.) Ltd. v. Commissioner of Police [6] where
the court reiterated that the person is expected to read the memorandum and articles but it remains highly
unlikely and unreasonable that he will check the propriety, legality and regularity of the acts of the directors.

III. Irregular Acts of Directors, Statutory Recognition and Ratification

Situations arise where Directors, though acting intra vires the memorandum and articles have no authority to
perform those acts as their appointment as directors itself suffers from infirmity or has ended. In these situations,
the acts of the directors so disqualified (or retired) done before such infirmity comes to knowledge, have been
saved by the Companies Act, 2013.

Section 176 states that acts done by directors remain valid, regarding whom it is subsequently found that their
appointment suffers from defect, disqualification or termination under any provision of the Act or the articles. It is
pertinent to note that the infirmity must have come to notice before such acts were done, and any act after the
defect is known will not be validated.

The court has upheld the provision's stand in Ram Raghubir Lal v. United Refineries (Burma) Ltd [7], saying that it
seeks to protect outsiders and members dealing with the company from suffering just because the Director's
appointment suffered from defect.

The provision runs both as an aspect of indoor management specifically recognized by the Act, as well as an
addition to the doctrine. It is an addition in the sense that even if the public documents and facts make it clear
that the appointment of the concerned director is faulty, it will still not render the acts done invalid. This was held
in the landmark case of British Asbestos Co. Ltd. v. Boyd [8].

IV. Exceptions to the Doctrine

To protect this doctrine from being abused as well, certain situations have arisen by common law jurisprudence
where this defence would not be applicable:

 Where the outsider had knowledge of irregularity – No person who has been given express or implied
notice of the irregularity and still enters into the agreement will be protected by the doctrine. If a person
knows the director does not have the authority to undergo the transaction and continues with the
transaction then he cannot claim this defence. (Howard v. Patent Ivory Co. [9]
 No knowledge of memorandum and articles – If the person seeks to rely on the doctrine of indoor
management as defence, the requirement set on him to have read the memorandum and articles needs to
be discharged first. In a case where it was shown that the defendant company did not read the articles
where it was stated that certain powers could be delegated to a Director, then they cannot claim indoor
management on the basis that the delegation was not actually done. They did not know it could be done in
the first place. (Rama Corporation v. Proved Tin & General Investment Co [10])
 Forgery – It is well settled that where the acts themselves are illegal, or void ab initio the doctrine does not
come into play at all. Thus, where a transaction involves forgery, say of the required signatures on a
certificate, then the certificate itself is a nullity and renders no title to its holder. It cannot be claimed by
the third party that the forgery was an internal act and they could not be expected to have known it.
(Rouben v. Great Fingal Consolidated [11]).
 Negligence – The defence begins with reprimanding ignorance, it is clear that it will not come to the aid of
the negligent. The person entering in an agreement still needs to exercise caution and make reasonable
 enquiries whether the person has the authority to execute the concerned agreement or not. In
Underwood v. Bank of Liverpool [12], the sole director and principal shareholder of the company
deposited in his own account some cheques drawn in favour of the company. Held, that, the bank ought to
have made inquiries as to the powers of the director.
 Again, the doctrine has no application where the question challenges the very existence of an agency. In
Varkey Souriar v. Keraleeya Banking Co. Ltd [13]., the Kerala High Court held that the doctrine is
applicable where the scope of an agent's power is under consideration, not where the fact of his agency
itself is being challenged.

V. Conclusion

The dichotomy of the constructive notice and indoor management is a finely balanced protection to each party in
any corporate transaction. The former is a defence applied only by the company against third parties, and the
latter can only be used by the third parties. Due diligence is always the obligation of the person entering into a
contract. However, once the obligation is discharged, he is free to assume that the internal regulations were
followed and claim based on that assumption. Finally, the exceptions evolved by the courts to this doctrine
remove mala fide attempts to abuse it.

Prospectus of the Company

The article Prospectus of the Compa elucidates the features of a prospectus in-depth and states remedies for
misrepresentation of the prospectus. The article contains important provisions of the Companies Act, 2013
pertaining to the prospectus. The author has cited relevant case laws to make the concept of the prospectus easy
for the readers to understand. The article deals with different types of prospectus along with their key
characteristics.

A Brief Introduction: Prospectus

The prospectus of the company is one of the key documents that serve as the face of the company and helps in
creating that first impression that induces the investors to invest in the securities of the company and provides the
financial impetus. It is a quintessential document that is an invitation to offer, inviting the general public for
making public subscription of the securities of the company.

Definition

The prospectus is basically an invitation to offer that invites the public for making a subscription of shares,
debentures, or any other securities of a body corporate.

The prospectus is an invitation to offer and not an offer as the discretion lies with the company whether to accept
or reject the subscription money in certain exceptional situations, unlike an offer where the offeror is bounded by
the terms of the contract once the acceptance is given by the offeree.

The Companies Act, 2013 has defined prospectus in Section 2(70). It includes any circular, notice, advertisement,
or other documents that invites a public offer for subscription or purchase of securities of a company. The term
prospectus includes a red herring prospectus referred to in Section 32, a Shelf prospectus referred to in Section 32,
and an abridged prospectus, specified in Section 2(1)of the Companies Act,2013. Section 33(2) prescribes that a
copy of the prospectus has to be given to each person who requests the same, before the closure of the offer and
subscription list.

Features

 A prospectus is issued only by a public company and not a private company for inviting applications for
shares and debentures, i.e. public offer. Private Companies have the option of the rights issue, bonus issue,
or private placement under Section 42 of the Companies Act for issuing securities [APL Industries Ltd v.
Securities And Exchange Board of India (2017) 200 Del].
 The terms of the contract or the objects stated in the prospectus can be varied by the company only by
way of a special resolution passed in the company’s general meeting. The dissenting shareholders may be
given the option of exit price for their incumbent shares.
 If the existing shareholders propose to sale off their shares, they are authorized to do so by virtue of the
Companies Act, in consultation with the Board of directors. Any document through which the shares are
offered for sale by them is deemed as a prospectus issued by the company; therefore, all the requirements
for prospectus and liability of omissions and misstatements become applicable.
Contents of Prospectus

Section 26 of the Companies Act, 2013 chalks out the matter which is to be stated in the prospectus and other
related nuances. The prospectus which is issued by or on behalf of the company whether before its formation or
subsequently after, has to be dated and signed by the directors of the company. A host of diverse details are
stated on the prospectus, broad details of which are extracted and mentioned below:

Requirements under Section 26(1) (a ) of the Companies Act,2013

1. Name and address of the registered office of the company, CFO, Auditors, Company Secretary, legal
advisors, bankers, trustees, underwriters
2. Declaration of the allotment letters, refund amount, if any, and opening and closing date of issue.
3. Statement by the Board of directors about the bank account details wherein the receipts of the issue are to
be kept.
4. Details of underwriting.
5. Authority for the issue and details of the resolution passed by it.
6. The capital structure of the company and the procedure and time schedule for issue and allotment of the
securities.
7. Details of minimum subscription amount payable by way of cash and premium.
8. Requisite details of directors, including their terms of appointments and remuneration.
9. Consent of directors, auditors, bankers, and other persons as may be prescribed.
10. The key objective of the public offer of securities and the terms of its present issue
11. Other miscellaneous particulars relating to the schedule of the implementation of the project, gestation
period of the project, deadlines, and progress, if any, and details of any legal action pending against the
promoter of the company since last five years immediately preceding the year of issue of prospectus.

Requirements under Section 26(1) (b) of Companies Act, 2013

Reports

1. Report by the auditor of the company regarding the profit and loss position of the company, for each of the
five financial years preceding the financial year of the issue of prospectus.
2. Report by the auditor regarding the asset and liability position of the company on the last date of accounts,
not exceeding 180 days before the issue.
3. Report about the business and its transaction in the context of which the securities are to be issued.

The above-enumerated details of the prospectus are not to be complied with if the prospectus is being issued to
the existing share or debenture holders of the previously issued prospectus or, if the current issue of prospectus,
in the context of shares or debentures is uniform in all aspect with regards to shares or debentures previously
issued.

Further, no prospectus can be issued unless a true copy of it has not been delivered to a registrar for its
registration. Such a copy of the prospectus has to be signed by each of the directors or proposed director of the
company. It is only after a due and valid registration with the registrar that a prospectus can be issued to the
general public.

However, a prospectus is deemed valid only if it is issued within 90 days of the delivery of the copy of the
prospectus to the registrar. Contravention of the above rules may lead to a fine amounting up to Rs 3,00,000 or
imprisonment of up to three years or both.

Types of Prospectus

1. Red Herring prospectus

2. Shelf prospectus
3. Abridged prospectus
4. Deemed Prospectus

Red Herring prospectus

Section 32 of the Companies Act deals with the Red Herring prospectus. It is issued by the companies planning to
offer securities, before the actual issue of the prospectus. It is filed with the registrar, at least three days before
the opening of the subscription list and the offer. It is basically a preliminary prospectus, that informs the investors
about the potential offering of the company and indicates that a company has filed for an IPO.

Red Herring prospectus does not mention the exact price and quantity of the securities offered, whereas, the
prospectus has to mention the quantum and the price of the total capital raised, the closing price of the securities,
and other details, as soon as the offer is closed which is not included in the red herring prospectus. Any variation
between the red herring prospectus and the actual prospectus has to be highlighted in the prospectus.

Filing of a Draft Red Herring Prospectus with SEBI has been made mandatory for the companies so that the SEBI
can review the disclosures and the documents and suggest requisite recommendations and variations before filing
the prospectus with the registrar.

Shelf Prospectus

Section 31 of the Companies Act,2013 regulates the issue of shelf prospectus. It is basically a prospectus that is
issued for raising multiple rounds of funds in the form of bonds.

SEBI regulates the market issue of shelf prospectus which is filed with the registrar at the first offer of securities.
The validity of such prospectus remains in force for one year and if there are multiple rounds of issue, in course of
that one year, then there is no need of filing any new prospectus.

The company issuing shelf prospectus is required to file an information memorandum with the registrar disclosing
the material facts pertaining to the new charges created, changes in the financial position of the company since its
last offer, and other requisite information. It is to be noted that filing of information memorandum has to be done
prior to the issue of a second or subsequent offer of securities under the shelf prospectus. The information
memorandum, along with the shelf prospectus, are together deemed as prospectus if any subsequent offer of
securities is made after filing of the information memorandum.

Abridged prospectus

An abridged prospectus is a memorandum that contains salient features of a prospectus as per the specifications
prescribed by SEBI. Application forms of securities cannot be issued unless they are accompanied by the abridged
prospectus. The purpose of issuing such an abridged prospectus is to reduce the public burden of a public issue of
securities. However, it is mandatory to maintain the ‘full’ prospectus in the company’s registered office.

Deemed prospectus

Section 25 of the Companies Act,2013 enumerates that any document through which the allotted securities of the
company are offered for sale, such documents are deemed as the prospectus and all the liabilities and omissions
for misstatements in the prospectus also become applicable to them. It is to be noted that the ‘issue’ of shares
involves some measure of publicity and not a single act of private communication to any one party.

Misstatement in Prospectus

Prospectus serves as a means to collate funds from the general public. Given its prima facie importance in the
finance-driven corporate infrastructure, it is used as a convenient tool to manipulate and con innocent
stakeholders and defraud them by stating untrue facts in the prospectus. This is known as a misstatement.
Misrepresentation is a facet of misstatement which means representing something as true when it is actually
false, with the intention to deceive the opposite party.

Companies Act facilitates the filing of suit for misrepresentation under Section 34, 35, 36 of the Companies
Act,2013 by any person or group of person who is affected by any misleading statement.

Remedies for Misstatement

Stringent provisions and heavy liability under the Companies Act have discouraged heavy litigation in the arena of
misrepresentation and have led to trust building among the community of business stakeholders.

Damages for fraud or deceit

Deceit basically means fraud. Hence, issuers of the prospectus are liable to pay damages to the ones who have
been fraudulently deceived by them to purchase shares in the faith of the prospectus. Fraud is said to have been
committed if any statement is made knowingly, without belief in its truth; or carelessly without knowing its
veracity. The person who has been defrauded has the remedy of claiming compensation for the losses sustained
by him due to fraud. The burden of proof lies on the plaintiff to prove his case.

Compensation under Section 35

In the case of Derry v Peek [1889] UKHL 1, the court held that the directors cannot be held liable for damages if
they acted honestly, and in good faith. However, this concept of honest belief led to widespread resentment
within the investors’ community as it failed to protect their interests in these cases of passive deceit. As a result,
liability for imputation of false statements was recognized by the Directors Liability Act 1890 and the directors
were held liable for misstatements, even if they acted under an honest belief.

Section 35 of the Companies Act 2013, incorporates this concept and holds all the people involved in the issue of
prospectus jointly and severally liable. If the representation made is false, then the directors cannot escape their
liability even if made in good faith, and the advantage to the plaintiff is that he does not have to prove the fraud
and the onus lies on the other party to disprove the representations.

Recession for misrepresentation

Besides monetary damages, the aggrieved party is entitled to rescind the contract in lieu of damages[13]. Under
this, the contract between the shareholder and the company is cancelled and the allotment money is refunded to
the shareholder. Section 75 of the Indian Contract Act,1872 entitles the aggrieved to rescind the contract and
obtain compensation for damages suffered due to the nonfulfillment of the contract. The right of cancelling or
receding the contract is lost by affirmation to the act of misrepresentation by the allottee/aggrieved, unreasonable
delay in reporting of misrepresentation, and commencement of winding up of the company.

Conclusion

A prospectus is one of the key facets of the commercial transaction of the corporate world. The Companies Act
2013 has carved out the requisite provisions to safeguard the interests of the shareholders and protect them
against fraudulent activities. Inculcation of stricter penal provisions and enhanced liabilities have led to
minimization of the deceitful activities and have sought a balance between the interest of the company and the
stakeholders respectfully.

Meetings under the Companies Act of 2013

Meetings under the Companies Act of 2013: A business can be defined as a legal institution that involves a group
of persons interested in the running of a business. A company’s management needs the efforts of several people
who debate and ponder on issues before a decision is made. The decisions are also made in meetings that are a
structured conversation between the company’s administration, typically the directors and in some cases,
representatives who address the affairs of the company and operations.

Vatsala Sood explains the provisions and guidelines for meetings under the Companies Act, 2013.

I. Introduction

A business is a vast organisation where the members of the company have to decide any matter using due thought
and prudence. The Companies Act, 2013 lays out different provisions requiring meetings to be held in order to
make decisions after vigilant deliberation. These regulations guarantee that corporations operate smoothly and
promote their efficient operation [1].

II. Annual General Meeting (Sec. 96)

In compliance with Section 96 of the Annual General Meeting of companies, every company other than a one-
person company shall conduct annual general meetings as an annual general meeting other than any other form
of meeting, and the company shall ensure that there is no difference of more than 15 months between two annual
general meetings. [2].

 First Annual General Meeting

As far as the first AGM is concerned, it should be held within nine months of the closing date of the first financial
year. Now one of the main quandaries is with regard to the company’s first financial year as several significant
reforms were taken about in the 2013 company act.

Under the current terms of the Companies Act, 31 March of the following year will be the financial year of the
company incorporated until 1 January of the following year and in all situations, the year ended on 31 March.
From the following scenario, one can understand this.

In the event that a corporation is founded on 5 January 2016, the company’s first financial year will conclude on 31
March 2017, and it can conduct its AGM on or before 31 December 2017 with respect to Section 96, which deals
with the annual general meeting.
In the same scenario, if the corporation is established on 20 December 2015 or on some date prior to 1 January
2016, the first financial year will be ended on 31 March 2016, regardless of whether or not the term is 1 year and
in such a situation, the AGM should be held on or before 31 December 2016 (i.e., within 9 months from the end of
the first financial year which is within 9 months from the closure of first financial year).

In all other situations, the AGM should take place within 6 months of the closing date of the financial year. The
registrar can also prolong the duration of the AGM, otherwise the first AGM, by a period not exceeding 3 months
for a particular reason. Under the Act, the AGM can be held between 9 a.m. and 6 p.m. on every day, including
Saturdays, Sundays and public holidays, with the exception of national holidays (26 January 15 August and 2
October).

 Notice for Annual General Meeting

No less than a clear notice of 21 days should be given for a general meeting, either in writing or by electronic
means. However, after providing a shorter notice, a general meeting can be held if the approval of not less than
95% of the members entitled to vote at such a meeting is given in writing or through electronic means.

The notice of such a meeting should consist of the location, day, date and time of the meeting and should also
include a resolution specifying the business to be carried out at the meeting. The note should be distributed to
each member of the company, to the legal representative of the deceased and to the insolvent member’s
assignor, to the auditor and to the company’s director. Section 101 of the Companies Act 2013 talks about with
the issuance of an Annual General Meeting Notice [3].

III. Quorum of Meeting

As provided for in section 103 of the Companies Act, in the case of a public corporation, the quorum of the
company shall be five directly present in the event that the overall number of members at the meeting date does
not surpass 1000, 15 in the case of more than 1000 but less than 5000, and 30 in the event of more than 5000
members at the meeting date.

In the event of a private corporation, only 2 members can make up the quorum of the meeting if they are directly
present. It was also provided that if the quorum is not completed within half an hour of the scheduled time of the
meeting, the meeting will be adjourned until the following week on the same day.

If in the adjourned meeting, the quorum is not filled within half an hour, then the existing members will represent
the quorum needed for the meeting. In the case of a conference by requisition pursuant to section 100, in the
event of a lack of quorum, the meeting stand was cancelled as provided for in section 103 (2) [4].

IV. Extraordinary General Meetings (Sec.100)

Under Section 100(1) of the Companies Act, the Board can call an extraordinary company meeting whenever it
deems appropriate. Section 100(2) points out the process for calling, in the event of a proposal, an extraordinary
general meeting.

In the case of a company with equity capital (essentially a company owned by shares), the number of shareholders
who hold not less than one-tenth of the firm’s paid-up share capital on the date of receipt of the requisition
should be voted on as the company has the right to vote on that date and in the case of a company which does not
have share capital (essentially the company limited by the company). [5]

One of the fundamental aspects of the call for a motion for a meeting is that if the board fails to continue to call
for a meeting within twenty-one days of the receipt of the request for the consideration of that matter on a day
not less than forty-five days from the date of receipt of such a request, then the meeting cab will be called by the
requests themselves in compliance with the process in which the meeting will be held by the board and the
company will bear the involved costs.

A statutory meeting and annual general meeting address the issues that form the ordinary business of the
corporation. A special business extraordinary general meeting is necessary to address the issues apart from
ordinary business, i.e., any meeting that is held rather than the statutory and annual general meetings is called an
extraordinary meeting.

In general, special general meetings are held to address issues that are severe and should not wait for debate at
the annual general meeting. The Extraordinary General Meeting can be held by both the company’s directors and
the owners who own at least one-tenth of the company’s paid-up share capital. Shareholders may apply to the
board of directors to call a meeting. If the meeting is not scheduled even after the shareholders’ order, then the
shareholders can convene the meeting [6].
The Company Law Board has the right, in compliance with Section 186 of the Companies Act, to call an
extraordinary general meeting, but not an annual general meeting. The company’s shareholders are enabled to
convene a meeting within 3 months if it is not convened by the Company Law Board within 21 days of the order.

Issues such as alteration of provisions of the Memorandum of Agreement, amendments to the Articles of
Association, schemes in relation to share capital are generally debated at an extraordinary general meeting. Any
issue that needs to be addressed in an immediate way often calls for extraordinary general meetings.

In the event that, for such reasons, the Extraordinary General Meeting cannot be held, then the Company Law
Board can call the meeting on its own authority. A notice needs to be served in advance and may contain material
such as the reason of such meetings, the involvement of directors, executives or shareholders in the matters that
prompted the meeting to need to be held. The special resolution approved at the meeting must be submitted to
the registrar within 15 days [7].

V. Power to Call Board Meetings

A company’s Secretary or a director has the authority to schedule board meetings. By following the process
provided for by the Companies Act, 2013, the board meetings can be called by the Secretary or a manager. Under
the guidance of the Chairman/Managing Director, the meeting will be called. Any director will be requested to
convene a board meeting and then a board meeting may be summoned by the chairman, secretary or any director
upon such order.

A notice needs to be served in advance for such a meeting and it should be performed under the jurisdiction of the
company. If a notice is issued without any authorization for a board meeting, so it would be deemed to be an
improper notice. If a director decides to convene a meeting of the board to discuss such pressing concerns, he
must do so with the approval of the company’s managing director.

In Sanjiv Kothari v Vasant Kumar Chordia, it was found that if a meeting is held at the registered office by the
managing director at the behest of the director on the same date to address the same concerns posed by the
director, then the director must attend that meeting and should not schedule any other meeting at a different
venue on the very same date [8].

VI. The Procedure Followed by these Meetings

In order to function effectively, all meetings conducted in companies have to obey some well-defined rules and
procedures. Certain distinctions can occur, but the standard approach is the same. Some procedures have to be
compulsorily followed:

 Issuance of notification

The board of directors and all the concerned members have to be informed beforehand about the meeting to
ensure their presence. It can be a long term or short notice depending on the situation [9].

 Contents of notice

The notice must indicate the location, date, period, outline of the subject to be addressed and some brief business
details. The date of issuance needs to be properly signed by the convener [10].

 Quorum

The party responsible for alerting the meeting shall ensure that the meeting has been notified in advance to an
appropriate quorum to be present at the meeting, as provided for in the Act. Throughout the meeting, the
quorum must be preserved [11].

 Chairman

Any meeting must be presided over by a chairman. The chairman of the meeting is usually the chairman of the
Board of Directors. He is responsible for starting and completing the consideration of resolutions at the meeting. It
is his duty to ensure that the meeting runs smoothly. By voting with hands, the chairman may also be chosen [12].

 Resolutions

In each meeting, these are the decisions made. There are also procedures and laws to be observed as they are
taken into account and voted upon. These are given in various sections. [13]

 Voting
There may be subjects on which there is no universal opinion and it is important to vote. The chairperson can call
the issues (if undecided) for a vote after a thorough debate. The Companies Act, 2013 has defined conditions for
voting in various meetings. The voting process is overseen by the chairman [14].

 Adjournment and Minutes

The meeting is ended upon due thought and debate, which is called adjournment and consequently dissolution as
members disperse. These discussions must be recorded in official company documentation mentioning the
essence of each meeting called the minutes of the meeting. As stated in the Companies Act 2013, any significant
aspect of the meeting has to be included.[15]

 Report

Companies, as in the case of the AGM, are mandated to submit a meeting report detailing the operation of the
meeting. It is important to file a copy with the registrar of the same [16].

VII. Conclusion

A company is an association of individuals. All business matters must be determined by the members of the
association. The discussions that take place in order to negotiate about the organization’s problems are known as
company meetings. The Companies Act provides provisions relating to the company’s meetings.

Meetings to negotiate on ordinary business and special business or extraordinary undertakings take place in
compliance with different procedures and regulations. The meetings can take place to decide on matters that lie
before the company at various levels.

As part company owners, shareholders have the right to hold a meeting to pass a motion. Meetings are chaired by
the chairperson of the meeting. The convention of a conference includes a compulsory quorum. The discussions
that take place to negotiate on the company’s goals are the company’s meetings. Thus, the Companies Act, 2013
provides a detailed explanation with respect to the conduct and procedure of a Company’s Business Meetings to
ensure a standard protocol adhering to the best standards of justice, reasonability and accountability.

Shares, Share Capital and Debentures: Explained

The Companies Act, 2013 (‘the Act’) defines the term ‘share’ in Section 2(84) as a share in the share capital of a
company which includes stock unless such differentiation between the two is made out. The definition does not
help us understand its nature and hence, the courts and jurists have given us many important definitions for the
same.

This article explores the meaning, differences and scope of shares, share capital and debentures.

I. Share

The Halsbury’s Law of England: It defines a ‘share’ as a right to a specified amount of the share capital of a
company, carrying with it certain rights and liabilities while the company is a going concern and in its winding up.
The Court in Borland’s Trustee v. Steel Bros[1], stated that a share in the interest of a shareholder in the company
measured by a sum of money, for the purposes of liability in the first place, and of interest in the second, but also
consisting of a series of mutual covenants entered into by all the shareholders inter se.

In Bacha Guzdar v. CIT [2] it said that a share is a right of participation in a company’s profits when it is a going
concern, and its assets when it is being wound up.

Hence, it becomes clear that to raise capital for its own purposes, a company issues shares to the public or private
individuals, and in proportion to the shares acquired by them, they acquire rights and liabilities of participation as
well, such as Voting Rights and liability to pay the amount due on share when called on.

In Indian law, a share is also included in the definition of goods under Sale of Goods Act, 1930 which labels both
shares and stock as ‘moveable property’ covered under its ambit. Section 44 of the Act categorises shares a
movable property as well.

II. Share Capital

The solitary word ‘capital’ when used in Company law often refers to the share capital itself. It is not necessary
that all companies shall have share capital although all companies limited by share must have a share capital
specified in their memorandum. Companies limited by guarantee may or may not opt to have a share capital. In a
company operating with a share capital, it means a statement included in the memorandum stating the maximum
amount of capital the company is authorized to raise and breaks down the amount into a given number of shares
of a given value each. It looks like this – “The Share Capital is Rs. 100000 divided into 10000 shares of Rs. 10 each.”

 Important Terms (Types of Capital)

i. Authorised/Registered Capital: As given in section 2 (8), “authorised capital” or “nominal capital” means
the capital which is authorised by the memorandum of a company to be the maximum amount of share
capital of the company. It is the 1 lakh amount in the above example. The company cannot raise more
money than this amount.
ii. Issued Capital: As given in section 2 (50), “issued capital” means the capital which the company issues from
time to time for the subscription. It is that part of the registered or authorized capital which the company
issues for public subscription and allotment for the time being. This is to be computed at the nominal
value.
iii. Subscribed Capital: As given in Section 2 (86), “subscribed capital” means the part of the capital which is
for the time being subscribed by the members of a company. It is that portion of the issued capital at face
value which has been subscribed for or taken up by the subscribers of shares in the company. It is clear
that the entire issued capital may or may not be subscribed. The part which does get subscribed becomes
this.
iv. Called up Capital: As given in section 2 (15), “called-up capital” means the part of the capital, which has
been called for payment. Shares are issued and the people subscribing them are not required to pay at the
time. Payment is called from time to time asking people to deposit the amount as per the shares
subscribed. Called up capital is that portion of the subscribed capital which has been called up or
demanded on the shares by the company. The amount that actually gets paid will become the paid-up
capital.
v. Paid-up Share Capital: As given in section 2 (64), “paid-up share capital” or “share capital paid-up” means
the aggregate amount of money credited as is equivalent to the amount received in respect of shares
issued. It includes any amount credited as paid-up in respect of shares of the company but does not
include any other amount received in respect of such shares, by whatever name it may be called.

 Equity and Preference Share Capital

Equity share capital is defined in the explanation to Section 43 of the Act as all share capital which is not
preference share capital. So, let us understand preference shares first.

Preference share capital is that part of the issued share capital which bears a preferential right in two respects.
One, the payment of the dividend is either done at a fixed amount or a fixed rate, unlike the equity shares. Two, at
the time of repayment of the paid-up capital, or in the case of winding up, it is seen whether or not, there is a
preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the
memorandum or articles of the company. These special qualities make these shares preferred shares, and the
capital from then the Preferred share capital.

Table of Differences

Preferred Share Capital Equity Share Capital

The amount depends on the available profits and

The fixed amount of fixed rate of dividend
foreseeable expenditure.

Dividend is paid in preference to equity shares Dividend is paid after payment of Preferred shares.

Preference is given to preferred shareholder over equity Lower preference for a preferred shareholder during
shareholder at the time of winding up. winding up.

The dividend may be cumulative. The dividend is not cumulative

Section 47 states that Voting rights of the preferred

shareholder are limited than equity holders. These can
only vote in case of a variation in their special privileges,
Equity shareholders may vote on any and all issues
or when their dividend has not been paid for 2 years.
Further, they are entitled to vote on the resolution on
winding up of a company.
 Bonus or Rights shares might be issued to existing
No Bonus or Rights shares are issued.
shareholders.

The voting right of a preferred shareholder is calculated The voting right of an equity shareholder is calculated
with respect to his share in the total preferred share with respect to his share in the total equity share capital
capital only. only.

III. Debentures

Another way of raising money by the company is to borrow money in return for interest. A security that the
borrowed sum will be repaid is issued in the nature of a debenture. Thus, a debenture is a tool used by the
company to raise borrowed capital in exchange for fixed rates of interest. The moneylender in this scenario is
called creditor of the company. According to Section 2(30) of the Companies Act, 2013 “debenture” includes
debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge
on the assets of the company or not. It covers both secured and unsecured debentures.

In Ram Ratan Karmarkar v. Amulya Charan Karmarkar [3], a debenture was differentiated from a loan such that a
debenture means a document which creates or acknowledges a debt. A loan creates a right in the creditor to
demand repayment, and the substance of debt is a liability upon the debtor to repay the money.

Types of Debentures

 On the Basis on Convertibility

i. Non-Convertible Debentures (NCD): These instruments cannot be converted into equity shares. They will
retain their debt character only.
ii. Partly Convertible Debentures (PCD): A part of these instruments can be converted into Equity shares in
future at the notice of the issuer. The issuer decides in which ratio the conversion is done, usually at the
time of subscription itself.
iii. Fully convertible Debentures (FCD): These debentures are fully convertible into Equity shares at the
issuer’s notice. The issuer decides the ratio of conversion. Upon conversion, the investors enjoy the same
status as any ordinary shareholders of the company.
iv. Optionally Convertible Debentures (OCD): The investor has an option to convert these debentures into
shares at a price decided by the issuer or agreed upon at the time of issue.

 On the Basis of Security

i. Secured Debentures: Secured debentures are those secured by a charge on the fixed assets of the
company issuing it. This means that if the issuer fails to pay either the principal or interest amount, his
assets can be sold for repayment of the liability to the investors. Section 71(3) of the Companies Act, 2013
provides that secured debentures may be issued by a company subject to such terms and conditions as
may be prescribed by the Central Government through rules.
ii. Unsecured Debentures: In these instruments, if the issuer defaults on payment of the interest or principal
amount, the investor has to be on the same standing as other unsecured creditors of the company waiting
for repayment. These are also called Naked Debentures.

 On the Basis of Redeemability

i. Redeemable Debentures: These are the debentures which are issued with a condition that they will be
redeemed at a fixed date or upon demand, or after notice, or under a system of periodical drawings.
Debentures, generally are redeemable and on redemption, they can be reissued or cancelled.
ii. Perpetual or Irredeemable Debentures: A Debenture, in which no time is fixed for the company to pay
back the money, is an irredeemable debenture. The holder of debenture cannot demand repayment till the
company is a going concern and does not make default in payment of interest. After the commencement of
the Companies Act, 2013, a company cannot issue perpetual or irredeemable debentures.

 On the Basis of Registration

i. Registered Debentures: A company maintains a register of debenture holders. The debenture, when
issued to a specific person’s name, mentioning such name on the certificate and the register, creates a
Registered Debenture. It can only be transferred like shares by a duly stamped instrument of transfer
satisfying the requirements of Section 56 of the Act.
ii. Bearer debentures: On the contrary, debentures may be made out to bearer, making them freely
transferable by delivery and entitling its bearer to the amount at the time of redemption. Bearer
 debentures are negotiable instruments, and the person holding it is a ‘holder in due course’ under the
Negotiable Instruments Act. He is thus entitled to receive the principal and the interest thereon (Calcutta
Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat [4]).

Winding Up of Companies

The whole process of bringing a legitimate end to the life of a firm is broken into two steps. These two processes
are winding up of companies and dissolving them. Company winding is described as a mechanism by which a
company’s life is put to an end and its property is handled for the benefit of its members and creditors. That is the
last step that brings an end to a company’s existence.

The primary aim of winding up is to identify the properties and make the instalments of the loans of the business
equitable. Thus, winding up is the mechanism by which control of the activities of a corporation is separated from
its directors, a liquidator discovers its assets, and discharges its debts from the proceeds of realisation.

I. Introduction

There may be many reasons for the company’s winding – up, including shared arrangement between creditors,
loss, insolvency, death of promoters, etc. A business may be wound up either by a tribunal or by voluntary winding
up, as per section 270 of the Companies Act, 2013. The provisions of the Act provide appropriate processes for
the liquidation of a corporation.

A formal process for permanently closing down a corporation is the winding up of the company. That is a
mechanism by which the legal life of the Company meets an endpoint in which the Company falls under the
control of a Liquidator for dissolution.

At this critical stage of the lifespan of the Company, the Liquidator controls and maintains the funds of the
Company to ensure that the benefit of the creditors is not hindered. Dissolution finally kicks in, in which the
Corporation is disbanded and the Registrar of Companies strikes the name off. Thus, the life of the company draws
to a close.

II. Winding Up v. Dissolution

The corporation does not cease to exist as such upon winding up, even that it is dissolved. The company’s
operating equipment is altered when the management is passed to the liquidator’s side and after the winding-up
begins, the company’s properties belong to the company before the breakup takes place. The corporation ceases
to exist on dissolution as a single company and becomes unable to retain, sue and be sued on its own property.
Thus, between the time of winding-up and closure, the legal existence of the corporation continues to exist.

In Pierce Leslie & Co. Ltd. V. Violet Ouchterlony [1], the Supreme Court held that the dissolution was followed by
a winding-up. There is no statutory clause vesting in a trustee or having the effect of abrogating the assets of the
dissolved company. A dissolved company’s owners or creditors cannot be considered as its descendants and
descendants. Its assets, if there are any, vest in the government upon dissolution.

It has been difficult to enforce rules concurrently with the enactment of the Insolvency and Bankruptcy Code,
2016 and to determine precedent. A lot of changes to the Act were also contained in the IBC. The Code presents
organisations with a proactive structure. There are only two forms of winding up after the passage of the
Insolvency and Bankruptcy Code: either under the Companies Act of 2013 or the IBC Code of 2016. Winding up
under this Act i.e., the Companies Act or the Insolvency and Bankruptcy Code, 2016, under section 2(94A).

III. Winding up Under Company’s Act, 2013

There were two ways of winding up up prior to the Insolvency and Bankruptcy Code, the first being the voluntary
winding up of sections 304 to 323 under the Companies Act and the second being winding up by the tribunal. With
the passage of the code, the first was deleted and instead, compulsory winding up, i.e., winding up, but the
current method under the 2013 Act is the Tribunal.

IV. Winding Up by the National Company Law Tribunal (Compulsory Winding Up)

The Tribunal can perform a winding-up if any of the conditions mentioned in section 271 are satisfied. The Tribunal
may order the winding up of the company at the request of any individual who is authorised under section 272.
  A Company Can be Wound Up by the Order of the Tribunal:

1. Where the company has agreed, by special resolution, that the company should be wound up by the
Tribunal;
2. Where the company has operated against the interests of India’s sovereignty and integrity, security of
state, good ties with foreign nations, public policy, decency or moral standards;
3. Where an application is filed by the Registrar or any other individual approved by the Central Government
and the Tribunal finds that the company’s affairs have been carried out in a fraudulent manner.

 If the Company was Designed for Fraudulent and Unlawful Purpose or

Where the individuals in the administration of the company’s affairs are guilty of fraud, misconduct or misconduct
and should be winded up in the interest of justice;

1. The company refused to file its financial statements or annual accounts with the Registrar for the
immediately preceding five successive financial years; or
2. When the Tribunal is of the view that it is right and fair that it can no longer be in business, the firm must
be wound up.

With the passage of the Insolvency and Bankruptcy Code, reasons for failure to pay debt and winding up have
been removed.

 Winding Up by Special Resolution (Section 271)

The company’s special resolution could determine that the Tribunal must wound up the Company. It is possible to
pass the resolution for any reason. The Tribunal would see, though that the liquidation is not contrary to the
general interest or to the needs of the corporation as a whole.

The Tribunal has also to take into account the company’s potential to have a financial turnaround as the company
suffered damages that forced the company to pass a special winding-up resolution. This provision is based on the
presumption that as corporate bodies, shareholders have the necessary right to judge and determine whether or
not the corporation can go out of existence.

It is the owners who have created the business and hence it is for them to dismantle the business. Without the
control of the general meeting, the directors are not allowed to file a winding up motion. Subject to approval of
the resolution, the directors will file this document.

The company must hold a general body meeting to pass a special resolution containing, in particular, its intention
to wind up the Tribunal and set out the reasons for the explanatory note attached to it stating why it is imperative
to wind up the company. It should be remembered that the court has the right to order the winding-up and is not
under any obligation.

Company acting against the interests of sovereignty and integrity of India or of the security of the State or even of
the friendly relations with foreign States.

Because of the geo-political scene and its contours, the remaining grounds of public order, decency and morals,
such grounds as behaving against the interests of Indian sovereignty and integrity or the protection of the State or
even friendly ties with foreign States, do not seem to belong to the same strain. The other factors remain a point
of contention as there are enforcement bodies that can regulate them if the companies indulge in public
indecency [2].

V. Company Affairs Conducted in a Fraudulent and Unlawful Manner

Any person authorised by the Central Government or the Registrar can apply for the winding-up proceedings
before the Tribunal. The Tribunal may order the winding up on-premises such as –

i. Conducting the company’s affairs and management in a fraudulent manner;

ii. The organisation was established for unlawful or fraudulent purposes; or
iii. The parties involved are responsible for bribery, misconduct or neglect in connection with the
establishment of the company or the administration of its affairs.
iv. The company made a default in the filing of its financial statements with the Registrar.

Section 271(d) sets out the conditions for the winding-up of the company in the case of a breach in the reporting
of the annual financial statements or in the annual returns. It is a significant feature to ensure that in
organisational company administration there is no reward for non-accountability and indiscipline and that
government corporations are not exceptions.
If a default is made over five successive financial years, the winding up clause can be invoked. In any financial
statements or annual returns, there may be defaults. This is therefore true if the annual return has been filed for
five straight financial years, but the financial statements have not been filed on a regular basis. The opposite is also
applicable. The crux and the main measure is that for five straight financial years, there may have been a default in
one of the two cases. The immediate precedent of five straight years must be further emphasised [3].

VI. Just and Equitable

The Tribunal also may order that a company be winded up if it finds that the company should be wound up for
fairness and equity. For a winding-up order, this is a fully separate and independent ground. To the degree that
this is applicable, it is meaningless that the conditions should conform to those which, on one of the six grounds,
warrant an order.

In exercising its authority on this ground, the Tribunal shall give due consideration to the interests of the company,
its employees, its creditors and shareholders and to the public at large. The relief is like a last solution where the
other solutions are not successful enough to safeguard the company’s general interests.

When the company has neglected to build the company’s key assets; the basic overview here is the case of
German Date Coffee Co, where a corporation was set up to produce coffee on the basis of a patent to be issued by
the Government of Germany and to be granted various licences. The German patent was not issued and separate
and distinct licences were established by the company. In any event, on the investor’s appeal, it was held that the
company’s substratum had ran its course and that the papers for which it was framed were impossible to
complete; and so, it was fair and equal for the company to be winded up. [4]

In Seth Mohan Lal v. Grain Chambers Ltd., the Court can make an order to wind up a company pursuant to
Section 162 of the Indian Companies Act, 1956, if the Court is of the opinion that it is reasonable and appropriate
for the company to be wound up. The Court would weigh the interests of the owners as well as of the creditors
when issuing an order to wind up on the basis that it is fair and rational that a company should be wound up.

The Company’s substratum and aims are said to have vanished if the purpose for which it was incorporated has
failed significantly, or if the Company’s operation is difficult to carry on even at a loss, or if the remaining and
future assets are deficient to satisfy the current liabilities. In the event of a substantive failure of the purpose with
which the Company was formed, it cannot be claimed that the Company is not in a position to carry out its
operations even at a loss, nor that its assets are insufficient to satisfy its responsibilities [5].

In the exercise of the Court’s powers and on the grounds of equity and fairness pursuant to Section 443(1)(b) of
the Act, the Court deferred the final judgement on that petition for a period of one year, given that during that
period, the parties take such measures to assert their cases as to establish a clear balance of equities either in
favour of or against a liquidation order in the case of Aluminium Corporation of India Ltd. v. M/s. Lakshmi Rattan
Cotton Mills Co. Ltd. [6]

In the landmark case of Yenidje Tobacco Co. Ltd., the relationships between the two directors, who were the only
shareholders, worsened to the point that they ceased to talk to each other at the same time the company itself
began to thrive and in fact, the company made rather greater profits than it did until the conflict became so
intense. The Court of Appeal unanimously ruled that it be wound up, regardless of this fact [7].

It can also be seen that the learned Judge applied to the facts of that case the principle of a just and equitable
clause, since the conditions occurring, in that case, were of an extraordinary type. In any case, however, we must
decide whether a theory which is usually confined to the two types of cases, viz., can be applied to the facts or to
the particular instance where the substratum of the company has gone or where there is a full dead-lock in the
administration of the company’s affairs [8].

VII. The Procedure of Winding Up [9] (Section 274 to Section 365)

A sequential process of winding up under the Act is important to understand. The process provided for under
the law shall be as follows:

If it is convinced that a prima facie case exists, the Tribunal can order the Company to be wound up. The Tribunal
also orders the Company to file its appeals within 30 days of the order along with a statement of its affairs (this
timeline may be extended under special circumstances).

Furthermore, the Tribunal shall also name a temporary liquidator or company liquidator at the time of the
issuance of the order. The liquidator shall, upon appointment, file a statement of the specified form within seven
days of the date of appointment, stating a conflict of interest or a loss of discretion with reference to his
appointment.
If the Tribunal has issued a winding-up order, then the directors and such other officials shall compulsorily send
the Company’s completed and audited books to the provisional Liquidator within 30 days of that order. If the
director or other officers fails to apply the audited books submitted, they shall be individually responsible for fines
and incarceration for violation of the provisions of the Act.

The Tribunal shall notify the Liquidator and the Registrar within 7 days of the date on which the order for the
appointment of the provisional liquidator is given. The Registrar shall, upon receipt of a copy of the document,
accept it and notify the Official Gazette of the order. The Registrar shall, in the case of a public company, notify the
stock market or markets where the company’s shares are listed.

The winding-up order shall be considered to be a notice of discharge to the Company’s officers, staff, and
personnel, even when the Company’s operation is continued.

Within 3 weeks of the date of issuance of the liquidation order, the liquidator of the company shall apply to the
Tribunal an application for the creation of a liquidation committee to support and track the progress of the
liquidation order. The liquidator, the representative of the secured creditors, and the competent nominee of the
Tribunal will constitute such a body.

No suit or other legal action shall be instituted, or ongoing, for by, or against the Company, except with the leave
of the Tribunal, when the order for winding-up is issued.

The Tribunal shall, following the issuance of the order of winding – up, issue an order to set up an advisory
committee to assist the liquidator and to report to the Tribunal on matters which the Tribunal may guide. The
committee shall not exceed 12 members, headed by the liquidator of the company and composed of the creditors
and contributors of the company, or of other individuals, to the degree that the Tribunal may order.

The liquidator must deliver a report to the Tribunal within 60 days after the winding-up order has been
released. The text, consisting of the existence and details of the properties, the value of the assets, the amount of
capital given, the actual and contingent liabilities, etc., should be exhaustive. It shall also report to the Liquidator
on the measures to be taken to increase the valuation of the properties. To check on the success of the Company
from time to time, the Liquidator should put periodic reports before the Tribunal.

After scrutinising the Liquidator’s report, the Tribunal shall decide the date during which the entire proceedings
are to be concluded and the Company is to be dissolved, or the Tribunal may upon review of the report, order the
disposal of the Company as a continuing entity or its properties or part thereof. A sales committee composed of
the creditors, promoters, and officers of the Company is then formed to assist the Liquidator in the transaction.

Subsequently, the liquidator of the company shall, on the order of liquidation, take into custody and manage all
the properties, results and actionable claims of which the company is or appears to be entitled. The property shall
be considered to have been in the possession of the Tribunal as of the date of the winding-up order.

The Liquidator is obligated to send to the Tribunal the records of the receipts and transfers of the Company to be
audited and a copy of the audit report to be submitted to the Tribunal and other copies to be submitted to the
Registrar for review by any interested borrower, contributor or employee [10].

The Tribunal then directs the donors to pay him some cash owed to the venture. If any money is owed to the
contributory by the corporation and the contributory has not paid the entire sum of the share, it is permitted to
set off. In addition, the Tribunal may issue summons to those accused of possessing the property of the company
and investigate such individuals. Apart from this, a declaration of the same must be submitted by the Liquidator if
some other entity has any property of the Company.

The liquidator of the company has the right to call on the creditors to prove their cases, on which a list of creditors
is prepared by the liquidator. Each creditor is then told about the approval or denial of their claims. The Liquidator,
therefore, guarantees that a notice that the company is being wound up should be included in any invoice, order
or business letter provided by or on behalf of the company.

The Liquidator shall make an appeal to the Tribunal for the winding up of the Company after all the formalities
have elapsed and the operations of the Company have been fully wound up. If the Tribunal is of the view that it is
appropriate and rational to disband the Company following the receipt of the complaint, an order of dissolution is
given. The Liquidator shall send a copy of this order to the Registrar.

VIII. Conclusion

The procedure of a company’s winding-up is not very easy; it involves many complications and technicalities within
it. There was only one Act previously that traditionally regulated this area, but it has now become more difficult to
enforce these laws concurrently and to determine precedent with the implementation of the Insolvency and
Bankruptcy Code, 2016. Therefore, because of its technical details, the area of corporate law has now become a
specialist sector but it still perpetrates other disadvantages because their association with the legal running of the
company is broken up by the individual who manages the company.

For companies and limited liability partnerships, the Code and Legislation have a favourable structure. While the
procedure is almost identical to the former regime, the biggest shift in the initiation of the winding-up process has
taken place. Earlier, a company or any of its creditors could file a voluntary winding up motion, but the winding-up
process will now be started by the company, directors, appointed partners or individuals responsible for exercising
their corporate powers. In addition, the consent of creditors covering two thirds of corporate debt is compulsory
in compliance with the Code for the initiation of voluntary winding-up proceedings.

To sum it up, a corporation that intends to wind up is now expected to comply with the Insolvency and Bankruptcy
Code, 2016. As with the Businesses Act, 1956, the Code is very detailed and broader. Owing to the involvement of
four adjudicating bodies, the High Court, the Company Law Board, the Board for Industrial and Financial
Rehabilitation and the Debt Recovery Tribunal, the Code is intended to help resolve the delays and difficulties
inherent in the method. As all cases would be filed under the Code, it will also reduce the pressure on the courts.

Corporate Social Responsibility (CSR)

Via the Companies Act, 2013, Corporate Social Responsibility (CSR) initiatives have been made mandatory for
certain businesses in India. The recently passed Companies Act, 2013 and the Regulations notified thereunder made
it statutory to spend 2 per cent of their earnings on Corporate Social Responsibility for all companies above a
certain scale.

India is the first nation in the world to have compulsory CSR investment (with exception provisions) along with
compulsory reporting. Indian businesses have to invest upwards of Rs. 10,000 crores on CSR in FY 15 and more in
subsequent years as corporate profits rise, according to some projections.

The current CSR regulations in terms of improving total social investment would be a game-changer, as CSR
regulations are a step in the right direction. However, there are certain barriers to enforcing the current CSR
legislation, which will entail steps such as enhanced regulatory supervision, more transparency about what
constitutes CSR spending, and cooperation between businesses. The accomplishment of the CSR laws will focus
largely on how well these problems are handled.

I. Introduction

India is a land with countless cultures and backgrounds. It is also the home with the greatest number of people
residing in total deprivation (although the ratio of impoverished people has declined) and the highest number of
undernourished children in the world and is gradually a significant player for the new world order. It appears that
the gains of prosperity, as many citizens claim, are not evenly spread which is the root cause of social discontent.
Industries have always been the target of those influenced by this unequal growth and, thus, are under intense
examination for their contributions to society.

This attention can only escalate with time, provided that there is an increasing knowledge of this difference
between the haves and the have nots. Many companies noticed the phenomenon immediately and proactively
responded, while others did so only when pressed. Policy and legislative authorities also reacted to this unrest.
The SEBI’s mandatory corporate transparency reports and the 2013 CSR provision in the company legislation are
two indicators of the steps taken. The national voluntary recommendations on social, ethical and economic
responsibility are similar to the SEBI’s 2013 study for the top 100 companies.

To order to fulfil the requirements under the Company Act of 2013, several businesses implementing such
programs for the first time, at least 6,000 Indian firms would be expected to conduct CSR ventures, according to
the Indian Institute of Corporate Affairs. In comparison, some figures suggest that the company’s CSR
contributions are up to 20,000 crore INR. A mix of governmental and organizational scrutiny also culminated in
businesses needing to perform their CSR responsibility more dutifully.

II. What is Corporate Social Responsibility?

The sense of obligation for the society and atmosphere (both ecologically and socially) through which an
organization exists can be described as corporate social responsibility (CSR). Organizations will perform this
obligation by waste and emissions management methods, educational and social services, conservation and
related practices [1]. CSR is not just an organization or a donation.

CSR is a means for businesses to render a tangible difference to the common good. Socially conscious companies
should not merely use capital to carry out activities which only enhance their income. They use CSR as a way of
combining the company’s market and development cultural, environmental and social goals. CSR is said to
improve its consumers and society’s image as a brand of a business. Section 135 of the Rules on Corporate Social
Responsibilities, 2014 and Schedule VII have been defined in the Companies Act, 2013 which stipulates that
Corporations shall meet their CSR.

The term “CSR” can be defined as a corporate effort that assesses and assumes liability for the environmental and
social impacts of the organization.

The concept of CSR can be defined as a corporate effort that assesses and assumes liability for the environmental
and social impacts of the organization. The word is typically used for undertakings which go beyond what
regulators or environmental conservation organizations that need. Corporate social responsibility may also be
considered “corporate citizenship” and may involve short-term expenses, which do not directly help the
organization financially but encourage meaningful social and environmental improvements.

The Chair of the CSR Committee also stated the guidance as follows when it introduced the Corporate Social
Responsibility Laws in compliance with Section 135 of Companies Act [2], 2013:

“CSR is the process by which an organization thinks about and evolves its relationships with stakeholders for the
common good, and demonstrates its commitment in this regard by adoption of appropriate business processes and
strategies. Thus, CSR is not charity or mere donations.

CSR is a way of conducting business, by which corporate entities visibly contribute to the social good. Socially
responsible companies do not limit themselves to using resources to engage in activities that increase only their
profits. They use CSR to integrate economic, environmental and social objectives with the company’s operations
and growth.”

India became, following an adjustment to the Companies Act of 2013 in April 2014, the first nation in the world to
allow corporate social responsibility (CSR) mandatory. As part of accordance with CSR, companies will spend their
income in sectors such as schooling, deprivation, equity and hunger [3].

III. Applicability of CSR Provisions

On every company including its holding or subsidiary having:

 Net worth of Rs. 500 crore or more, or

 Turnover of Rs. 1000 crore or more, or
 Net Profit of Rs. 5 crores or more

during the immediately preceding financial year, a foreign company having its branch office or project office in
India, which fulfils the criteria specified above. However, if a company ceases to meet the above criteria for 3
consecutive financial years then it is not required to comply with CSR Provisions till such time it meets the
specified criteria.

IV. What to Do When CSR is Applicable?

If a corporation is listed within the framework of the CSR, it will follow the CSR requirements. The following actions
are expected of organizations regulated under Sub-Section 1 of Section 135:

 The corporations shall be required, as provided for in Section 135(1), to constitute the Committee of
Corporate Social Responsibility of’ the following CSR body of the Board. There are 3 or more members of
the CSR Board, from whom at least one impartial member is named.
 The Board study shall express the CSR Committee’s compositions.
 Per financial year, these businesses shall invest, in compliance with their Corporate Social Management
Strategy, at least 2% of the total net income of the business generated over the next three financial years.
In compliance with the rules of Section 198 of the Companies Act, 2013, it has been explained that the
total net income is measured [4].

Furthermore, it requires that in compliance with the Companies balance sheet, income and loss report prepared
by that corporation in conjunction with subsection 3 (1), subsections (a), subparagraph (1) in section 381 and
section 198 of the Companies Act 2013 respectively, revenue or net benefit of a foreign business under the Act is
determined.

CSR explores how company operations are controlled by businesses and create a beneficial cumulative impact on
society. Organizations should show compliance with a variety of CSR requirements to illustrate strong corporate
citizenship. The magnitude and scope of a company’s gains from CSR can differ depending on its structure and are
challenging to quantify, however, a vast amount of literature calling for businesses to take measures beyond the
financial context of CSR can be located within the organization’s human resources, corporate development, or
public relations divisions or a different unit can be provided.

For certain organizations, CSR-type principles may be applied without a specific team or plan. A CSR initiative,
particularly in the competitive graduate sector, may be called a recruiting assist. Potential candidates often inquire
during an interview regarding a company’s CSR strategy and may profit from the robust approach. CSR will also
help to raise the expectations of an organization in its workers, particularly if workers may contribute by creating
payrolls, raising funds or volunteers. Companies are looking in competitive marketplaces for a new campaign plan
that can distinguish customers from rivalry [5].

CSR is responsible for generating a lot of goodwill to companies either directly or indirectly. These include-

 To have loyal staff and to encourage businesses to hold workers long-term.

 Boost the reputation of businesses and assist them to gain additional market shares.
 Companies have fewer regulatory barriers as they behave ethically.
 Boost the collective goodwill and tend to increase the “name image” of businesses.
 Aid to balance short- and long-term capital prices
 Help to restrict the role of the state in corporate relations while companies self-regulate and behave as
more ethically responsible.

CSR allows companies and their components and their owners to add to the macro-economic growth of a region.
It also allows firms to collaborate and connect, their clients and their administrative machinery [6].

V. Implementation Guidelines

A business may carry out its CSR activities by means of a registered trust or company, a company set up by its
holding company, a subsidiary or affiliate company, or otherwise, providing that the company has defined the
activities to be carried out the modalities for the use of funds and the process for reporting and tracking. If a
corporation or its holding company, affiliate or affiliate company is not established by the organisation in which
the CSR operations are carried out the entity will need to have an established track record of three years of similar
activities.

Companies can also partner with each other to collectively conduct CSR tasks, provided that each organisation is
able to report on those projects independently. A business may build up the CSR capabilities of its employees or
implementing agencies by institutions with at least three years of proven track records, providing that the expense
for such activities does not exceed 5% of the company’s overall CSR expenditure in a single financial year [7].

According to the CSR Regulations, a company which does not follow the stated requirements for a cumulative
period of three financial years is not obligated to comply with CSR obligations, which means that a company which
does not comply with any of the specified criteria for a following financial year will also be required to carry out
CSR operations until it fails to comply with the specified criteria for continuous peering. This could raise the
pressure on small enterprises who do not continue to make large profits.

An annual report on the corporation’s CSR operations in the format specified in the CSR Rules should also be
included in the report of the Board of Directors attached to the Company’s financial statements, setting out; a
brief overview of CSR regulation, the makeup of the CSR Committee, the average net profit for the previous three
financial years and the CSR expense specified. The explanations for not doing so should be set out in the Board
Report if the organisation has not been able to invest the minimum needed on its CSR initiatives.

If a company has a website, it will be mandatory to publish the company’s CSR policy on such an official site [8].

VI. Conclusion

Corporate social responsibility is no longer measured by the donation of a corporation to a charity but by its
involvement in initiatives that improve the standard of life of individuals. Corporate accountability has been a
significant concern in the field of industry and has slowly become a central practice. The major impact that private
sector operation has on workers, customers, culture, the climate, rivals, market owners, creditors, shareholders,
governments and other groups is being progressively recognized.

It is also becoming abundantly evident that organisations will add to their own prosperity and the collective
resources of the society when remembering the effect they have on the entire planet while making decisions. For
charitable organizations, corporate social accountability is a central consideration. It has been seen that a
corporation should concentrate its corporate social responsibility in several different fields.

For corporate social management, the first area of emphasis is environmental sustainability. Health, wellness,
safety and welfare are other fields to address when designing corporate social responsibility programs.
“Investment in social accountability blends financial interests of creditors with their duty and contribution to social
security considerations such as Eco sympathy, sustainable prosperity and social justice.”

Not only are certain components facets of corporate social responsibility but indeed a summary of an enterprise’s
legal principles. To certain persons, it is immoral to possess and gain too much, at the detriment of other citizens
who struggle. Furthermore, the pattern of environmental pollution contributing to illness and loss of life is
immoral to businesses. It can be inferred that the preservation of strong ethical principles and social responsibility
is not a choice but rather a duty for any organization.

CSR was passed with India in the expectation that the mindset of corporate entities might shift, which would
give back the business to a large degree, even as it was the community whose requirements first enabled it to
thrive. Similarly, the community still thought that its attempts to aid marginalized communities in many situations
would be insufficient in favour of the state.

The act of CSR did not cover much territory in spite of all its positive intentions. Nonetheless, owing to certain
regulatory and operational flaws it has struggled to establish a tortuous system for imparting CSR. This has
provided businesses with the incentive to contribute back to society. Several of the main problems confronting
Indian CSR law and regulation include insufficient standards for assessing the scale of money spends, data
integration, narrow and self-serving CSR employment or short-term money investment. The aim for the hour is
then to change the CSR law and to make it easy to track for long-term purposes. CSR laws, with some tweaks, will
greatly help the society in the near future.

National Company Law Tribunal (NCLT)

In this article, Ashish Agarwal discusses the formation and functioning of the National Company Law Tribunal
(NCLT).

I. Background & Importance

The Company Law Boards (CLB) were replaced finally with the new, powerful National Company Law Tribunal
(NCLT) or "The Tribunal" by passing a government notification under Section 408 of the Companies Act, 2013 on
1st June 2016 to that effect. This was done years after the recommendation of the Justice Eradi Committee in 2002
to include it in the Companies Act, 1956 itself.

However, as lawsuits were filed challenging the NCLT's constitutionality even before it was notified, it never came
to be, until three years after the Companies Act, 2013 ("the Act") was passed retaining the vision. The body is a
quasi-judicial authority on all legal matters relating to companies. It hears and decides cases following the
principles of natural justice and bears the exceptional powers of hearing class action suits, deregistering
companies, etc.

Under Section 434 of the Act, the powers and pending cases of the CLB were transferred to the NCLT. Further in
this regard, powers and functions of the Board of Industrial and Financial Reconstruction (BIFR), Appellate
Authority for Industrial and Financial Reconstruction (AAIFR) and the High Court were also laid on the new
authority, making it the supreme authority in all company law matters. The NCLT presently has one Principal
Bench at New Delhi and 10 subsidiary benches.

II. Composition and Rules of Procedure

The Tribunal is headed by a President, appointed by the Central Government in consultation with the Chief Justice
of India. In addition, it has such other number of judicial and technical members as may be prescribed by the
government.

The Tribunal is a quasi-judicial body which acts as a court of law in corporate disputes. It objectively hears
disputes, examines facts and pieces of evidence, and gives orders to remedy the situation. The Tribunal is not
bound by the stringent rules of the Evidence Act and other procedural codes. It has a vast arena to render justice
as long as it adheres to the principles of natural justice.

The Constitution of the NCLT was challenged as unconstitutional numerous times. In the last landmark
pronouncement of 2015 in the Madras Bar Association Case [1] the Court settled it that notwithstanding the fact
that certain principles laid in the 2010 judgment were not adhered to, the Tribunal still stands constitutionally
valid on all grounds.

III. Powers and Functions

The following are the major powers of the Tribunal under the Act:

 Class Action Lawsuits

A Class Action lawsuit is a representative suit where few people represent the homogenous injury and demands of
a larger group before the court. It is an effective remedy for a large group of people scattered geographically. This
makes it ideal for protecting the shareholders, and other depositors in a company that wrongfully usurps their
invested money.

This power has been laid down in much detail under Section 245 of the Act where it states the orders that may be
sought, the people that may be held culpable, and the requirements to be met.

 Requirements

The requirements are simple. If the members, depositors feel that the company's affairs are prejudicial to their
interests, an application is to be filed with the Tribunal stating the details of the complaint and the order that is
sought against the company.

In a company limited by shares, the application should be filed by a minimum of 100 depositors or one-tenth of
the total number of members or a number of members who hold one-tenth of the issued share capital of the
company on which all calls have been paid. In a company limited by guarantee, at least one-fifth of the total
number of members in the company should file the application. These requirements may be waived by the
Tribunal.

 People that Can Be Held Liable

The remedy, be it compensation, or any other action may be sought not only from the Company as a legal entity
but also the following persons:

i. Directors of the Company

ii. Auditor(s) or the Auditing Firm
iii. Experts/Consultant/Advisors to the Company

 Orders that May Be Sought

i. Order to restrain the company from acting ultra vires or in breach of the memorandum, the articles, the
Act or any other law in force.
ii. If a resolution which has the effect of altering the memorandum or articles was passed by misleading the
members, an order to declare such resolution void
iii. Further order to restrain the Company with its representatives from acting on such resolution
iv. Order to restrain the company from acting in breach of any resolution that was passed by the members.
v. Order with respect to compensation and damages
vi. And any other order it may deem necessary.

 Deregistration

The Tribunal has the power to order the deregistration of companies on any ground mentioned in Section 7(7) of
the Act. A company may be deregistered if, at the time of incorporation, the incorporation was sought by:

i. Furnishing false information

ii. Furnishing false representation
iii. Suppression of material fact in the filed documents and declarations
iv. Any other fraudulent action

The Tribunal has the power to order the removal of the company's name from the Register of Companies, i.e.,
deregistration; and further powers to:

i. Make any orders toward management of the Company including alterations in its MoA and Articles
ii. Direct that the members shall have unlimited liability
iii. Order winding up of the company
iv. Any other orders

 Oppression and Mismanagement

Detailed remedy against oppression and mismanagement of affairs by the Company exists with the NCLT under
the Act of 2013. Section 241 provides that an application may be filed by such members of a company who feel
that:

i. The affairs of the company are being conducted in a manner that is prejudicial to their, the company's, or
any other member(s) interests or is oppressive to them or
ii. A material change has occurred in the company's management, be it a change in Managing Director,
ownership of shares, membership or otherwise, and this change makes it likely that the affairs of the
company will be conducted prejudicial to them, the company or anybody else.

It is further stated that the Central Government may itself apply to the Tribunal if it becomes aware of the above-
stated events with regard to any company.

Based on such application, and after giving reasonable opportunity of being heard to the company, the Tribunal
may pass any orders it deemed fit to remedy the matter.

It can be said that in comparison to the Act of 1956, the provisions have set the bar for oppression a little lower,
while that of mismanagement a little higher.

 Powers of Investigation

Under Section 213, the NCLT has the power to investigate companies on an application filed by its members or
even an outsider if it is shown that there is sufficient evidence for doing so. The application may be filed by:

i. At least One hundred members holding at least one-tenth of the voting rights if the company has a share
capital
ii. One-fifth of the total number of registered members if it does not
iii. Any other person may also file an application

In case of an application filed by the members, it must be accompanied by some evidence showing that the
investigation is necessary.

In case of an application filed by an outsider, the Tribunal must be satisfied that circumstances exist where–

i. It is shown that the company is operating to defraud its investors, or in the oppression of a member, or
was incorporated for fraudulent purposes.
ii. It is shown that the Director(s) or any person concerned with the management of the company or its
formation has been found guilty of misconduct, malfeasance or fraud against the company or its members.
iii. It is shown that the members have not been given all such information regarding the company's affairs as
they might have expected.

After giving reasonable opportunity to be heard, the inspectors appointed by the Central Government for this
purpose investigate the company and if the above grounds are found to be present, each officer of the company
who is in default, and the persons concerned with the formation and management of the company become liable
to be punished under Section 447.

 Reopening of Accounts

The Tribunal has the power under Section 130 to order a company to reopen its book of accounts or recast its
financial statements if it is satisfied on an application made in this regard by the Central Government, the SEBI, the
Income Tax Authorities, or any other statutory body. The grounds are twofold –

i. That the relevant accounts were fraudulent in nature

ii. That the company was mismanaged in the relevant period, and hence the financial statements are not
credible.

The order is to be passed after any representation made by the statutory body or the government is heard.

 Refusal to Transfer Shares

Under Section 58, members are entitled to an appeal to the Tribunal if a private or public company refuses to
register a transfer of shares or any other securities. All such refusals are to be followed by a notice from the
company to the person within 30 days, stating the reasons for refusal.
In case of a private company, a person may appeal within 30 days of receipt of the notice, and within 60 days if no
notice was received. In a public company, one may appeal in 60 days of notice, or 90 days if no notice was
received.

The Tribunal may dismiss the appeal, or allow it directing the company to register the transfer within 10 days time,
or direct rectification in the register. It may award damages.

 Conversion of Public to Private Company

Under Sections 13 to 18 of the Act, approval by the Tribunal is required for a public company to convert into a
private company. The Tribunal may impose such terms as it deems fit.

 Annual General Meeting

In case the annual general meeting is not organised in a particular required time under Section 97 and 98, a
member may file an application to the Tribunal to convene such meeting.

 Winding Up of Company

If the Tribunal is satisfied on any grounds mentioned in Section 242, it may direct that a company be wound up.

 Freeze Assets

Section 221 allows the Tribunal to freeze the assets of a company if necessary.

National Company Law Appellate Tribunal (NCLAT)

The constitution of the National Company Law Tribunal and the National Company Law Appellate Tribunal
(NCLAT or the Appellate Tribunal) was recommended by Justice Eradi Committee in 1999 and was subsequently
carried out by an amendment in 2002. However, upon a challenge to its validity in the Madras Bar Association case
of 2010, it was stopped in its tracks. Upon notification of the 2013 Act, on 1 st June 2016, the NCLAT came into
power as the supreme appellate authority in corporate disputes.

This article describes the formation and the workings of the NCLAT in details.

I. Introduction

The NCLAT is a quasi-judicial authority formed under the power of Section 410 of the Companies Act, 2013 (‘the
Act’) to hear appeals from the NCLT. However, as the years passed by, it has seen considerable addition in its
powers as it now hears appeals from the Competition Commission of India (CCI) and under matters of Section 61
of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) as well.

The NCLAT is the highest tribunal of appellate jurisdiction, and appeals from its decision lie only to the Supreme
Court. With the advent of the Act, powers and jurisdiction in these matters of the High Court, the Company Law
Boards, the Board for Industrial and Financial Reconstruction and the Appellate Authority for Industrial and
Financial Reconstruction were all transferred to the NCLT and the NCLAT accordingly in a phased manner.

II. Composition, Selection & Tenure

Chapter XXVII of the Act lays down the provisions relating to the Appellate Tribunal. Under Section 410, the NCLAT
is composed of a Chairperson and a number of Judicial Members and Technical Members as prescribed by the
Central Government. The maximum number of members is 11. The Appellate Tribunal has only one functional
bench as of now, situated in New Delhi. Another Bench in Chennai is to begin soon.

Section 411 lays down the qualifications required to be the Chairperson and other members of the Appellate
Tribunal. The Chairperson should be or have been the Chief Justice of the High Court or a Judge in the Supreme
Court. The Judicial Members are required to be a judge in a High Court or a judicial member for five years. The
Technical Member can be one who is of “proven ability, integrity and standing” and has special knowledge, the
experience of at least twenty-five years in any filed given in 411(3). Further, the members and the chairperson
should be minimum of 50 years of age.

Section 412 lays down the selection procedure for the members. The Chairperson and the Judicial members are
selected after consultation with the Chief Justice of India. The rest of the members are appointed by a Selection
Committee consisting of –
  The Chief Justice of India or a person nominated by him for the purpose as— Chairperson;
 a senior Judge in the Supreme Court or Chief Justice of High Court as— Member;
 Secretary, Ministry of Corporate Affairs as—Member;
 Secretary, Ministry of Law and Justice as—Member; and
 Secretary, Department of Financial Services under the Ministry of Finance as— Member.
 The Secretary, Ministry of Corporate Affairs shall be the Convener of the Selection Committee

A vacancy in the above selection committee does not render an appointment invalid.

Section 413 states the tenure of the members of the Appellate Tribunal. The Chairperson and all the members of
the NCLAT hold office for a period of 5 years from the date of joining office. Both are eligible for reappointment for
another 5 years. There is an upper age limit of 70 years for the Chairperson and 67 years for the Members after
which they cannot continue to hold office. Before this tenure, a member may resign by giving notice in writing to
the Central Government and may be removed on the grounds given in Section 417.

In any event, in case of absence of the Chairperson due to death, resignation or any other reasons, or him being
unable to discharge his functions, the senior-most member of the Appellate Tribunal acts as an Acting Chairperson
and discharges the functions till the need is obviated (Section 415).

Under Section 414, the salary and allowances of the members of the body are prescribed by the central
government, only subject to the condition that they shall not be varied in their disadvantage during tenure.

The Tribunal has been functional since 2016; the first team itself is holding office currently, as follows:

Name of Member Office Held Currently

Justice S J Mukhopadhaya Chairperson

Balvinder Singh Technical Member

Justice A I S Cheema Judicial Member

Justice Bansi Lal Bhat Judicial Member

Kanthi Narahari Technical Member

Justice Venugopal M Judicial Member

Justice Jarat Kumar Jain Judicial Member

Vijay Pratap Singh Technical Member

Dr Ashok Kumar Mishra Technical Member

III. Functions of the NCLAT

The nature of the NCLAT’s functions is to listen to cases in an appeal from specified lower tribunals within
limitation, and pass such orders either upholding, modifying or overturning the lower tribunal’s decision as it
deems fit. It hears cases in appeals from 3 bodies as of now:

Appeals from the NCLT under Companies Act

This is the original function with which the body was established and the solitary function before the 2017
amendment. Under Section 421 of the Act, the NCLAT sits in appeal to orders passed by the NCLT provided that
the appeal is filed within forty-five days of the order having been communicated.

On sufficient cause being shown, the Appellate Tribunal is authorized to admit appeal in condonation of any delay.
However, this delay cannot exceed another forty-five days, i.e. the Appellate Tribunal is barred from taking appeal
filed after ninety days of the communication of the order of the lower Tribunal. Section 421(2) further states that
in an order passed by consent of disputing parties, no appeal lies.

Appeals from the NCLT under the IBC, 2016

From 1st December 2016, it was brought to effect that the NCLAT will also hear appeals against any order passed
by the NCLT under Section 61 of the IBC, 2016. This appeal needs to be filed within thirty days of the order. A
further delay of fifteen days may be allowed by the tribunal if satisfied with a good reason for delay.

Appeals from the IBBI

The NCLAT sits in an appeal against orders passed by the Insolvency and Bankruptcy Board of India (IBBI) in
matters covered by Sections 202 and 211 of the IBC, 2016.

Appeals from the CCI

On 26th May 2017, part XIV of the Finance Act, 2017 came into effect. The Act has the effect of combining several
tribunals into one. Section 172 of the Finance Act amended Section 410 of the Companies Act to add the
Competition Commission of India alongside the NCLT.

Similarly, Section 53A of the Competition Act, 2002 was amended to replace the appellate authority in
competition matters to NCLAT. This means that Section 410 now states that all appeals from all orders, decisions
and directions of the NCLT and the CCI will now be heard by the NCLAT following the required procedures laid in
the Competition Act, 2002. With this move, the NCLAT has taken over the COMPAT (Competition Appellate
Tribunal).

It is pertinent to note that with respect to appeals in competition law disputes, only the relevant venue has
changed and the substantive provisions remain the same. The party would have a right to seek compensation from
the NCLT, as they would have from the COMPAT before.

Write short notes on Share Warrant.

By Mayank ShekharPublished on 21 Oct 2022 10:23 AM GMT

Find the question and answer of Company Law only on Legal Bites.

Question: Write short notes on Share Warrant.

Find the question and answer of Company Law only on Legal Bites. [Write short notes on Share Warrant.]

Answer

A Share Warrant is a document which is issued by a company under its common seal against fully paid-up shares.
This is a negotiable instrument which entitles the bearer to hold shares which are specified therein. The
registration of share warrant is not necessary and its ownership can be transferred by mere delivery. Dividend will
be paid on shares to the shareholders through a coupon which is attached to each share warrant. This coupon
bears a date on which dividend will be paid by the company to the shareholders.

The (Indian) Companies Act, 2013 does not "directly" prescribe any law related to Share Warrant.

Conditions for the issue of Share Warrants

• The shares must be fully paid up.

• The issue of share warrant must be authorised by the article of association.

• The private limited company cannot issue share warrant.

• The public limited company can issue share warrant.

• The share warrant is issued under the common seal of a company.

• The share warrant for public limited company is issued with the prior approval of the central government.

Contents of Share Warrants

Share warrant consists of three parts (Counterfoil, Share warrant and Dividend coupon). Contents of the
ShareWarrants are as follows:
• The name of the holder of shares.

• The address of shareholder.

• The number of shares held by him.

• The name of the registered office of the company

• The address of the registered office of the company.

• The distinctive number of the share certificate.

• The class of shares.

• The day and date of issue of share certificate.

• The impression of the common seal of the company.

• Signature of two directors and secretary of the company.

Procedure involved in the issue of share warrant

1) Submit an application to the company by the share holder for converting share in to share warrant.

2) The share holder should bear the stamp duty and other fee.

3) The company secretary will issue lodgement ticket (acknowledgement for the receipt of document) to the
shareholders.

4) Legal formalities related to the share warrant.

5) Share warrant shall have three parts viz., counter foil, share warrant and dividend coupons 6. The forms are
serially numbered.

6) Pass a resolution in the board meeting.

7) Share warrants are signed and sealed and informed the applicant.

8) Share holders can get the share warrant from th office of the company.

Write short notes on Share Certificate.

By Mayank ShekharPublished on 21 Oct 2022 10:22 AM GMT

Find the question and answer of Company Law only on Legal Bites.

Question: Write short notes on Share Certificate.

Find the question and answer of Company Law only on Legal Bites. [Write short notes on Share Certificate.]

Answer

A Share Certificate is a document which is issued by a company to the allottee or transferee of shares under its
common seal which specifies the shares held by any member. It is evidence that proves the title of the allottee or
transferee of shares.

According to Section 46(1) of the Companies Act, 2013

"Share Certificate is a certificate, issued under the common seal, if any, of the company, or signed by two directors
or by a director and the company secretary, wherever a company has appointed a company secretary, specifying
the shares held by any person, shall be prima facie evidence of the title of the person to such shares."

Contents of a Share Certificate

A Share Certificate consists of the followings:

 The name of the holder of shares.

 The address of shareholder.
 The number of shares held by him.
 The name of the registered office of the company
 The address of the registered office of the company.
 The distinctive number of the share certificate.
 The class of shares.
 The nominal value per share.
 Amount paid up per share.
 The day and date of issue of share certificate.
 The impression of the common seal of the company.
 Signature of two directors and secretary of the company.
 Name of transferor.
 Name of transferee.
 Date of share transfer.
 Signature of authorised signatory.

Every share certificate shall be issued under the common seal of the company to be affixed in the presence of at
least two directors and the secretary of the company. Also, all these persons must sign the share certificate.

Who can appoint a Director in the company? Explain the Conditions precedent to such an appointment. Discuss
the duties of directors.

Question: Who can appoint a Director in the company? Explain the Conditions precedent to such an
appointment. Discuss the duties of directors. [BJS 2021]

Find the question and answer of Company Law only on Legal Bites. [Who can appoint a Director in the company?
Explain the Conditions precedent to such an appointment. Discuss the duties of directors.]

Answer

A corporation is an intangible, artificial person. A living possessing a mind for decision-making and hands for
carrying out his acts, as well as information and intention is required. However, because it is an artificial person, a
corporate entity lacks all of these. Therefore, it must act via a living being. Directors are given responsibility for
running the business of the company. A director is defined in Section 2(34) of the Companies Act of 2013.

Lord Reid in the case of Tesco Supermarkets Ltd. v. Nattrass, [1971] UKHL 1, held that

“A living person has a mind which can have knowledge or intention and he has hands to carry out his intention. A
corporation has none of these it must act through living persons.”

As per the Supreme Court, it is important to appoint an individual as a director in the company as the director’s
office is the office of trust and if someone fails to carry out this trust then someone should be held responsible.
Section 149 of the Companies Act, 2013 states that the Board of Directors shall consist of individuals as directors.

Appointment of Director

The Companies Act states that only an individual may be chosen to serve on the board of directors. Typically,
shareholders are the ones that choose the directors. Two-thirds of the directors in both public and private
companies are chosen by the shareholders. The remaining one-third of the members are appointed in accordance
with the rules outlined in the Articles of Association. A Private Company's Articles of Association may specify the
procedure for electing any and all directors.

If the Articles remain silent, the shareholders must appoint the directors. The Companies Act also has a provision
that allows a business to appoint two-thirds of its directors in accordance with the principle of proportional
representation. If the business has implemented this policy, this occurs. To address malfeasance and
mismanagement, nominee directors will be nominated by the government or by independent agencies. While
carrying out their responsibilities on behalf of the organisation, directors have a responsibility to behave honestly
and with reasonable care and skill.

A managing director can only be chosen for a maximum of five years and must be an actual person. As long as the
board of directors of the original company is informed and approves of the new appointment, a managing director
of an already-existing company may be appointed as the managing director of another company.
Conditions for Appointing Directors

The following conditions are applicable when appointing a director:

1. He or she should not have been sentenced to imprisonment for any period, or a fine imposed under a number
of statutes.

2. They should not have been detained or convicted for any period under the Conservation of Foreign Exchange
and Prevention of Smuggling Activities Act, 1974.

3. He or she should have completed twenty-five (25) years of age, but be less than the age of seventy (70) years.
However, this age limit is not applicable if the appointment is approved by a special resolution passed by the
company in a general meeting or the approval of the Central Government is obtained.

4. They should be a managerial person in one or more companies and draws remuneration from one or more
companies subject to the ceiling specified in Section III of Part II of Schedule XIII.

5. He or she should be a resident of India. ‘Resident’ includes a person who has been staying in India for a
continuous period of not less than twelve (12) months immediately preceding the date of his or her appointment
as a managerial person and who has come to stay in India for taking up employment in India or for carrying on
business or vocation in India.

Role of a Director

He is in charge of managing, supervising, and directing the business in his capacity as a member of the Board of
Directors. In addition to serving as the company's agents and officers, directors also serve as its trustees. Even if
the corporation employs professional personnel to manage the organization's affairs, they are not referred to be
the company's servants. However, a director can offer his professional services to the company as a lone
employee and sole director through a separate service agreement. The Companies Act of 2013 is completely silent
regarding the position or function of directors in the company.

 As Employee: If the Board of Directors appoints and the company’s shareholders approve any full-time
director who manages the company’s day-to-day operations as an employee. In the outline of the
employment letter issued by the BoD, all the directors make to an organization.
 As Officer: As per section 2(59) of the Companies Act, 2013, the director is treated as an officer of the
company on whose directions other directors or the Board of Directors are accustomed to act. As per
section 2(60) of the Companies Act, 2013, the director is considered an “officer in default” and he is even
punished as an officer in default for non-compliance with provisions.
 As Agents of the Company: In an Agency a person is bound to form, Perpetuate a relationship of Principal
with third parties, the role and powers they get from Memorandum and Articles of the Company, if their
activities are outside the criteria given under MOA and AOA, it is beyond legal Power.
 As Trustee of the Company: They are considered the custodian of the assets of the company and are
responsible to use the assets in the best interest of the company, as a trustee of the company. They would
be held liable if they misuse or divert the assets in their vested interests.

Duties of Directors As Per Legal Provisions Under The Company Act, 2013

The Companies Act of 2013 categorises the duties and responsibilities of directors into two categories: —

1. The responsibilities and liabilities that uplift and advance the investment of directors’ work bring good
corporate governance, good management, and making fully-fledged and shrewd decisions to avoid unnecessary
risks to the company.

2. Fiduciary duties guarantee and ensure that the directors of companies always protect and secure the interests
of the company and its stakeholders, above their self-interests. The duties of a director were not expressed in the
1956 Act; however, they are specifically stated in Section 166 of the Companies Act, 2013. Directors of the
Company are bound to do the following Duties given Under Section 166 of the Companies Act, 2013:

 Activities of the Director shall always be in accordance with the AoA.

 The director shall perform in good faith in order to uplift the objects of the organisation, for the profit of
shareholders and for the well-being of the organization.
 He shall follow his duties with proper care and exercises independent judgment.
 He shall not perform any act which gives rise to conflicts.
 The director shall be held liable to pay an equal amount to the gain if he is found to be gaining any undue
advantage.
Any company's directors are a crucial component. Only a director of the company is authorised to carry out some
duties. The Companies Act of 2013 governs concerns pertaining to directors. These directors are chosen by the
Company's shareholders, and the Articles of Association of the Company details the qualifications and
disqualifications of directors. To let a person with the necessary qualifications represent the Company, a stringent
bar of five years is imposed. However, the Company Law also includes an appeal provision and a thirty-day period
to correct any filing errors.

What is a charge? State its kinds, registration and penalty for default.

By Mayank ShekharPublished on 13 Jan 2023 8:17 AM GMT

Find the question and answer of Company Law only on Legal Bites.

Question: What is a charge? State its kinds, registration and penalty for default.

Find the question and answer of Company Law only on Legal Bites. [What is a charge? State its kinds, registration
and penalty for default.]

Answer

Charge means a right created over an asset in order to secure repayment of the loan. Section 2(16) of the
Companies Act, 2013 defines a charge as an “interest or lien created on the property or assets of a company or
any of its undertakings or both as security and includes a mortgage.” In simpler words, a charge is a financial
security created by a company on its assets in order to secure repayment of loans.

Kinds of charge

There are broadly two kinds of charge. These are:

• Fixed Charge: These are those charges which are created over a specific and certain property in the sense that
the property does not lose its identity through the period of the loan.

• Floating Charge: These are those charges which are not created over a specific and certain property in the sense
that the property is not easily identifiable.

Registration of Charges

The Registration of charge is compulsory. Section 77 of the Companies Act, 2013 mandates registration of charge
by the company with the registrar of companies within thirty (30) days of its creation. Every company is duty-
bound to register a charge whether created within or outside India, whether on the tangible property or
otherwise, in a prescribed manner and on the payment of such fees as may be prescribed.

The application for registration on charge must be made by the lender in whose favour the charge is created. The
registrar of companies issues a certificate of registration of charge once he is satisfied that the charges created are
legit. This certificate acts as proof that a charge is created over an asset and that the charge holder holds a good
interest in the charged asset.

Consequences for non-registration

If a charge which is created over assets is not registered, then the following consequences may take place. These
consequences are:

 The charge shall be declared void.

 The creditors will be left with no remedy and thus they cannot claim any benefit over the charged asset but
could be eligible to recover their dues.
 The penalty in the nature of a fine may be imposed under the act and might also be imprisoned.

Penalty for Default

Section 86 of the Companies Act, 2013 imposes a penalty on the company for a fine of not less than one lakh
rupees which is extendable up to ten lakh rupees and every officer of the company who is in default shall be liable
to a penalty of not less than twenty-five thousands of rupees extendable up to ten lakhs rupees or imprisonment
which may extend up to six months or both.
Question: What do you understand by 'doctrine of indoor management'? Explain the exceptions of this
doctrine. [BJS 2021]

Find the question and answer of Company Law only on Legal Bites. [What do you understand by 'doctrine of
indoor management'? Explain the exceptions of this doctrine.]

Answer

In accordance with the doctrine of indoor management, if a company is said to enter into a contract, the member
of the company, and not any party, who enters a contract with the company, is responsible for adhering to the
company's policies. This protects outsiders who have entered into any contract with the company. The guideline is
based on simple commercial convenience for all parties involved with a Company. Internal procedures are private,
in contrast to the public documents that are available for public scrutiny, the memorandum of association and
articles of association. The opaque nature of these procedures puts the internal affairs in a position of echoing,
within the company and cannot be raised as any defence against its liability, from the act of the directors.

Origin of the concept

The Doctrine originated from an English precedent, Royal British Bank v. Turquand, (1856) 6 E&B 327. The
"Turquand Rule" is the alternative name for this concept. In this instance, the company's directors had been given
permission by the articles to borrow that amount of money on bonds as they should occasionally by passing a
special resolution in a general meeting. The plaintiff received a bond with the company's seal signed by the
secretary, and two directors, and was authorised to draw on the current account without the approval of any
resolution.

On the basis of such a bond, Turquand tried to bind the company's activity. Therefore, the primary legal issue, in
this case, was whether the firm could be held accountable for that bond. The court, in this case, held that the bond
was binding on the company as Turquand was entitled to presume that the resolution of the company has been
passed in the general meeting.

The rule was further endorsed by the House of Lords in Mahony v. East Holyford Mining Co., [1875] LR 7 HL 869,
in this case, the company's articles stipulated that two directors must sign the cheque and the secretary must
countersign it. Later it was discovered that neither the directors nor the secretary who signed the cheque had
been given the required appointment. Holding that the appointment of directors is a component of the internal
management of the company and that a person dealing with the firm is not compelled to inquire about it, the
person receiving such a cheque shall be entitled to the amount.

The above view held in the case of the House of Lords in Mahony v. East Holyford Mining Co. is supported by
Section 176 of the Companies Act, 2013, which states that the defects in the appointment of the director shall not
invalidate the acts done. According to the doctrine, everybody who enters into a contract with a business is
shielded against any abnormalities in the business' internal procedures. Because internal flaws in a corporation are
hidden from third parties, the company will be responsible for any losses they incur as a result of these
irregularities. While the idea of indoor management defends third parties against corporate policies, the doctrine
of constructive notice defends the corporation from third-party claims.

In Pacific Coast Coal Mines Ltd v. Arbuthnot, 1917 AC 607, it was observed that an outsider is presumed to know
the Constitution of a Company; but not what may or may not have taken place within the doors that are closed to
him.

Dewan Singh Hira Singh v. Minerva Mills Ltd., AIR 1959 Punj106., illustrates the exemption of this rule. A
Company's Articles limited the directors' ability to distribute more than 5,000 "A" class shares. But they went
considerably beyond and distributed more than 13,000 shares. According to the court's ruling, those who were
allotted shares were doing business with the firm in good faith and had a right to believe that the directors' actions
in allotting the shares to them fell within the purview of the authority granted to them by the company's
shareholders. They were not required to investigate whether the directors' acts related to internal management
had been carried out effectively and consistently.

Exceptions to the Doctrine of Indoor Management

1. Knowledge of Irregularity: The doctrine of indoor management does not apply when an outsider who is
engaging in business with a corporation has actual or constructive knowledge of a problem with the internal
management of the organisation. There may be instances where the outsider participates in the internal process
themselves. In the case of T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon & Co. Ltd., (1936) 6 Comp. Cas. 90., Company A
had lent money to Company B for mortgaging its assets. The method for doing so, which was outlined in the
Articles for transactions of this sort, was not followed. Both firms shared the same Directors. The lender knew
about this irregularity, hence the court decided that the transaction was not valid.

2. Forgery: It is important to remember that the Doctrine of Indoor Management does not apply when a third
party relies on a document that was falsely created in the company's name. A business is never accountable for
forgeries carried out by its employees.

In the case of Ruben v. Great Fingall Ltd.,1906 AC 439, The transferee of the share certificate printed with the
defendant company's seal was the plaintiff. The certificate was created by the company secretary, who faked the
signatures of the two company directors and attached the business seal to the document. The plaintiff in this case
argued that because the company's internal management is responsible for determining whether a signature is
genuine or fake, the company should be held accountable for it. However, the court determined that the doctrine
of indoor management has never been extended to cover a forgery. An outsider dealing with a company is not
required to question their indoor administration and will not be impacted by any irregularities they are unaware
of, according to Lord Loreburn's interpretation.

3. Negligence: If a third party engaging in business with a corporation could have learned about its management
irregularities with proper diligence, they would not be eligible for relief under the doctrine of indoor management.
When the conditions and situations surrounding the contract are so suspicious that they beg for investigation and
the outsider of the firm fails to do any effective investigations for the same, the remedy under this concept is also
not possible. In the case of Anand Bihari Lal v. Dinshaw & Co., A.I.R. (1942) Oudh 417, the company's accountant
had offered to transfer some of the company's property to the plaintiff. The transfer was declared to be void by
the court since such a transaction was outside the bounds of the accountant's power. The plaintiff had a duty to
review the power of attorney that the business had executed in favour of the accountant.

4. Acts that are beyond the scope of apparent authority: The corporation will not be held responsible for any
defaults caused by an officer's actions that go beyond the apparent limit of their authority. Because the Articles
did not grant the officer the authority to perform such activities, the outsider in this situation is not eligible for any
relief under the doctrine of Indoor Management. If the official has the authority to act on those reasons, only then
can the outsider sue the corporation under the Indoor Management theory. In the case of Kreditbank Cassel v.
Schenkers Ltd.,(1927) 1 KB 826. The company's branch manager had personally guaranteed a few bills of exchange
in the name of the business in favour of a payee. He was not given any power to do so by the Company. The firm
was determined by the court to be unbound. Additionally, it was stated that the firm would be held accountable
for any fraud committed by an officer of the company acting on behalf of the company while acting with apparent
authority.

5. Representation through Articles: This exception is the most confusing and highly controversial aspect of the
Turquand Rule. Articles of Association generally contain a clause of power of delegation. In the case of Lakshmi
Ratan Cotton Mills v. J.K. Jute Mills Co., AIR 1957 ALL 311, B was the Director of the company. The company
comprised managing agents of which B was also a Director. The Articles of Association authorized the directors to
borrow money and also empowered them to delegate this power to one or more of them. B borrowed a sum of
money from the plaintiff. Further, the Company refused to be bound by the loan on the ground that there was no
resolution passed directing to delegate the power to borrow given to B. Yet it was held in the case that the
company was bound by the loan as the Articles of Association had authorized the director to borrow money and
delegate the power for the same.

What do you mean by Mis-statement in Prospectus? Discuss the liability for misstatements in the prospectus.
[BJS 2011]

Find the question and answer of Company Law only on Legal Bites. [What do you mean by Mis-statement in
Prospectus? Discuss the liability for misstatements in the prospectus.]

Answer

Section 2(70) of the Companies Act 2013 defines a Prospectus as

Prospectus means any document described or issued as a prospectus and includes a red herring prospectus
referred to in section 32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or
other document inviting offers from the public for the subscription or purchase of any securities of body
corporate.

A misstatement in a prospectus refers to any incorrect or misleading information that is included in the document.
A prospectus is a document that is issued by a company prior to an initial public offering (IPO) or other securities
offering. It provides potential investors with information about the company, its financials, and the risks associated
with investing in the company.
The liability accrues where any person subscribes for any shares or debentures on the faith of the prospectus for
any loss or damage he may have sustained by reason of an untrue statement included therein.

In the Indian scenario, the liability for misstatements in a prospectus is governed by the Companies Act, 2013, the
Securities and Exchange Board of India (SEBI) Act, 1992 and the Securities Contracts (Regulation) Act, 1956. The
Companies Act and SEBI Act provide for civil and criminal liability for making false statements in a prospectus.

Criminal Liability

Every person who permits the release of a prospectus shall be liable under section 447 of the Companies Act of
2013 if the prospectus contains any statement that is false or misleading, or if the inclusion or omission of any
matter is likely to cause misrepresentation.

Section 447 of the Companies Act, 2013:

Without prejudice to any liability including repayment of any debt under this Act or any other law for the time
being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term
which shall not be less than six months but which may extend to ten years and shall also be liable to fine which
shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved
in the fraud:

Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than
three years.

Civil Liability

Civil liability for misstatements in the prospectus will arise when a person has sustained any loss or damage by
subscribing securities of a company based on a misleading prospectus (section 35). In such instances the following
persons shall be liable under section 447 and will have to pay compensation to persons who have sustained such
loss or damage:

 director of the company at the time of the issue of the prospectus;

 person who has agreed to be named as a director in the prospectus and is named as a director of the
company, or has agreed to become such director;
 is a promoter of the company;
 has authorised the issue of the prospectus; and
 is an expert who has been engaged or interested in the formation or promotion or management of the
company

Companies, their directors and officers, auditors, and those involved in the preparation and distribution of a
prospectus can be held liable for any misstatements or omissions in the document. SEBI has the power to take
action against any company or individual for violation of securities laws, including those related to misstatements
in a prospectus. SEBI can impose penalties, and fines, revoke licenses and also take legal action against them.

Additionally, investors can file a complaint to SEBI or the National Company Law Tribunal (NCLT) for any losses
suffered as a result of a misstatement in the prospectus.

In the Matter of the IT Solution Company, Taksheel Solutions Limited (2013), SEBI found that the Red Herring
Prospectus/Prospectus had several missing vital pieces of information which resulted in a misstatement. SEBI had
earlier prohibited the company, its promoters/directors and independent directors from buying, selling, or dealing
in securities in any manner. SEBI put restrictions on the promoters and directors from trading in the markets.

Introduction: Promoters of a Company

A company is a form of business organization that is characterized by a separate legal entity, limitation of liability,
and perpetual succession. It is a legal device for the fulfillment of the socioeconomic goals of society. Given the
intricate formation and working of the company, we may wonder about its convoluted task of inception. It is
exactly where the role of the promoter comes into the picture. The promoters are the people who develop the
idea of a company, make schemes for its formation, mobilize the resources and personnel and ultimately
incorporate the company.

The Companies Act 2013 lays down in detail the rights and duties of the promoters and enshrines necessary
measures for the protection of the stakeholders of the company.[1] The given article seeks to scrutinize the
position of the promoter in relation to the company from multiple focal points.
Definition of Promoters of a Company

The term ‘Promoter’ is the common parlance used in the corporate landscape. In spite of its frequent recurrence,
there has been ambiguity in its definition. The systems of common law failed to define it both legislatively and
judicially. It was considered a business term, rather than legal. Justice Bowen defined a promoter, as a person
who shoulders business operations of the commercial world, so as to bring a company into existence. Therefore,
in a nutshell, the promoter is a person who undertakes operations necessary to incorporate and organize a
corporation.

In Bosher v. Richmond Land Co.[2], the court observed the role of promoters and held that he collaborates with
the people interested in floating the enterprise, procures subscriptions and shares, and set in motion the
machinery of incorporation of the company.

In the case of Twycross v. Grant[3], the court held that the defendants were the promoters of the company from
the very beginning as they provisionally chalked out the scheme of the company, found the directors, prepared
the prospectus, and undertook all the incidental expenses such as advertising and the printing costs, etc.

The Companies Act 2013, defines promoter in Section 2(69). The act statutorily defines promoters on the basis of
its functional aspect. As per the Act, promoter means a person

1. Whose name has been mentioned as such in the prospectus of the company or whose name is identified in
the annual returns of the company under Section 92 of the Act.
2. Who exercises either direct or indirect control over the affairs of the company in the capacity of
shareholder, director, or any other position as such.
3. Who advises, directs, or controls the Board of Directors and the Board usually acts on such advice.

The proviso to this Section excludes people acting in a professional capacity. A person is said to act in a
professional capacity when he does the job of promotion in concurrence to his professional work. The most
relevant example is that of a solicitor who may prepare documents for the proposed company on behalf of the
promoters. The other example could be an accountant or agent of the promoter who help in the incorporation of
a company in their professional capacity.

However, the people acting in a professional capacity may become promoters if they do any work beyond the
scope of their professional capacity. So, if a solicitor, for that matter, helps in hiring the personnel for the company
or helps in finding the purchaser for the shares of the company, then he would be deemed as a promoter of the
proposed company.

It is to be noted that the Companies Act 2013, gives the opportunity to people to become promoters of the
company even after its formation. For example, a party may become a promoter by aiding in subscription
procurement or any other key promotional activity.

Legal Position of Promoters of a Company

The yardstick to determine the position of a person as a promoter in a company is variable. Whether a given
person is a promoter or not depends upon the facts and circumstances of each case. It is a question of fact in each
case. It primarily depends upon the role played by a person in the promotion of a business.

The promoters of the company enjoy a key position in the formation of the company. They are responsible right
from the idea of inception of the company until its execution and incorporation. The creation of the company
squarely lies in their hands. Given their advantageous position in relation to the proposed company, the courts
have fixed them with the responsibility of that of a fiduciary agent.

Thus, the position of a promoter in a company is fiduciary in nature and he is akin to that of a trustee of the
company. The fiduciary nature of the relationship warrants the relation of trust between the parties i.e. the
promoter and the other stakeholders such as the shareholders, directors, management, etc.

The above-enumerated position of the promoters as trustees of the beneficiary company was observed by the
House of Lords in the landmark case of Erlanger v. New Sombrero Phosphate Co[4]. The Madras High Court
accepted this position of the promoters in the case of Weavers Mill Ltd. v. Balkis Ammal[5]. However, they are
not technically trustees in the real sense of words as the company may not be in existence as a legal person. The
duty of a trustee emerges from its fiduciary position.

Duties of Promoter

Given the fiduciary position of the promoter, there comes a host of associated duties. The foremost duty of the
promoter is to ensure transparency in his transactions. The dealings undertaken in the promotion of the business
must be open, honest, and fair. There should be due disclosure of the profits, interest, and the other relevant
factors that might affect the interest of the stakeholders of the business.

Accepting a bonus or commission from a person who sells the property to the company is one such act of
dishonest behaviour. Disclosure of any such interest should be made to an independent and competent Board of
Directors.

In the case of Erlanger v. New Sombrero Phosphate Co.[6], the property of the promoter was sold to the company
and, of the five people, who were named as directors, three were entirely under the promoter’s control. The court
pronounced that it was incumbent upon the promoter to disclose the fact regarding the promoter’s property to an
independent board of directors. There should have been a constitution of an independent board of directors, who
could have exercised intelligent judgment on this matter.

However, it is not always practical to constitute an independent board of directors, especially in circumstances
where private businesses are converted into limited companies, as in the case of Salomon v. Salomon & Co. Ltd.
[7]. Hence, the court observed that there should be due and fair disclosure of the profits and interests to the
shareholders of the company instead of the Board of directors.

In the case of Gluckstein v. Barnes[8], the House of Lords observed that such disclosure should be made to the
entire body of shareholders and not selectively only to a few of them. This duty of disclosure commences after the
incorporation and continues until the profits are fully accounted for.

Liabilities of Promoter

The fiduciary duty of the promoter imposes liability upon him to make full disclosure of the profits, interests,
entitlements, and other relevant information, that might affect the interest of the shareholders. However,
fraudulent and exploitative practices by the promoters in order to earn undue profits grappled the business
environment and affected the interests of the stakeholders of the company, especially the shareholders. In order
to curb this rampant malpractice, the Companies Act incorporated stringent provisions, some of which are Section
35, Section 39, and Section 300.

Section 39 enumerates the mandatory amount of minimum subscription necessary for valid allotment. The
promoter should ensure that the minimum stated amount of subscription in the prospectus is subscribed by the
public and a certain percentage of application money is received. Default to meet this requirement can result in a
penalty to the company, its promoter, and the other officers in charge.

Section 35 imposes liability upon the promoter of the company for making misstatements in the prospectus.
Section 300 empowers the Official Liquidator to order an examination of the promoter in case of discovery of
fraud during the process of formation or promotion of the company, or during the conduct of its business.

Besides statutory and legislative tools, judicial pronouncements, from time to time, have also ensured
transparency of the company transactions as regards the activity of business promotion and have imposed heavy
liabilities upon the promoters for undertaking unfair trade practices.

Thus, the Companies Act and the other allied acts have made a sincere attempt to eliminate fraudulent
malpractices in Companies Promotion.

Rights of Promoter

The promoters have the right to recover all the preliminary expenses incurred in setting up and registering the
company from the board of directors. The articles of the company mention the amount to be paid to promoters.
Such an amount could be paid even after the formation of the company.

In case of liability arising under Section 35 for misstatement in the prospectus, or any other fraudulent activity
under any relevant provision, the promoters are held jointly and severally liable to pay such penalty. However, the
promoter who pays for such liability is entitled to recover the requisite proportionate amount from other co-
promoters.

The promoter is also entitled to remuneration for the services rendered in the course of incorporation and
registration of the company. This remuneration could be in the form of fully or partly paid shares or any other
means as such. Such paid remuneration should be mentioned in the prospectus if it is paid within two years
preceding the date of issue of the prospectus.

Besides these entitlements, the promoter can also become a director or shareholder of the company, given his key
position in the formation of the company. However, his role as promoter immediately terminates after the
incorporation of the company and the moment he boards the company as a stakeholder.
In the case of Twycross v. Grant[9], the court observed that the functions of the promoter come to an end as soon
as the latch of the company is handed over to the governing body i.e. the board of directors.

It must, however, be noted that the duty of the promoter is to make true disclosure of any undue profit accruing
to him to the stakeholders. This does not entitle or restrain the promoter from making any profit, whatsoever,
from the business of promotion.[10]

Conclusion

Given the ever-important role of the promoter in light of the inception and working of the company, the
Companies Act 2013 lays down detailed guidelines as regards to rights, duties, and liabilities of the promoters. The
promoter acts as the fiduciary agent of the company who is entrusted with the task of ensuring transparency in
the business proceedings of the company, right from its very promotion to its incorporation and further,
thereafter.

Breach of these fiduciary obligations results in hefty liabilities for the promoter. Thus, a promoter should seek to
strike a balance between his own personal interests and the interests of the company, in order to ensure the
efficiency and effectiveness of the company in long run.

I. What is the Memorandum of Association (MoA)?

The formation of a company is introduced in Section 3 of the Companies Act, 2013 (“the Act”) wherein it says that
any 7 people or more in case of a public company, 2 people or more in case of a private company and a person
alone in case of a one-person company can form such company by subscribing their names to a memorandum
provided they comply with the requirements of registration under the Act.

A memorandum thus is an essential prerequisite for forming a company. It is the charter of the company, laying
down the constitution of the company, the object it strives for, the share capital it has (if any), the name of its
directors and so on. It is an open-to-access document from which a person interested in the company may gather
all essential information about the company and its business before deciding whether to be associated with it or
not. It is the self-defined limits of the company and shall operate only within its confines.

In the landmark case of Ashbury Railway Carriage & Iron Co. Ltd. v. Riche [1], Lord Cairn defined the
memorandum of association as the charter of a company which defines the limitations of the power of the
company. Lord Cairn observes that it contains both affirmative and negative limitations – such as affirmatively
stating the ambit and extent of the powers legally given to the company and it states negatively, if necessary, that
nothing will be done beyond that ambit.

II. What Constitutes a Memorandum?

The Memorandum is a detailed document which will legally bind the operations of the company within its limits. It
has to be drawn carefully and meticulously. There are certain fixed clauses in a memorandum, as discussed in
Section 4 read with Schedule 1.

 Name Clause: Name of the company should indicate whether the company is private or public. A private
company name ends with “private limited” while a public company ends with just “limited”. Further, the
name should not contain any undesirable name as specified in Rule 8 of Companies (Incorporation) Rules,
2014. No identical name that resembles the name of an existing company can be used.

In Ewing v. Buttercup Margarine Co. Ltd. [2], the company Buttercup Dairy Co. successfully obtained an injunction
against Buttercup Margarine on the ground that “buttercup” being a fancy word, people might construe the
companies to be connected.

 Situation Clause: This specifies the State in which the registered office of the company is to be situated.
Companies are required to have a registered office within 15 days of their incorporation. The Registrar of
Companies is to be intimated within 30 days of incorporation about the details of the registered office or
within 15 days of any change in the details, in accordance with Form INC-22.
 Object Clause: The MoA must state the object the company is working for. The mandatory bifurcation of
main and ancillary objects as required before has been dispensed with by the new Act of 2013. They may
still be provided for clarity. Although the statement of express powers is necessary, powers incidental to,
or necessary for the use of express powers shall be read into the MoA without being expressly written. This
was held in Attorney General v. G.E. Rly. Co. [3]
 Liability Clause: This states whether the liability of the members is limited or unlimited. If limited, it
answers the question of whether they are limited by shares or guarantee.
 i. Limited by Share: This means that the liability of a shareholder (subscriber) exists only to the
amount due on the shares issued to him. If he has already paid the amount due on his shares, no
more liability can be imposed on him.
ii. Limited by Guarantee: This means that the subscribers have chosen to limit their liability to a given
maximum amount. In case of any dispute or situation which requires them to pay, the amount shall
go to a maximum of the amount mentioned in the MoA. It is given here that if this is the situation of
a company, the MoA should mention the guaranteed amount of each subscriber.
iii. Unlimited: A company may be formed with unlimited liability for its subscribers. Here, if such a
situation arises, the personal property of the subscribers may also be taken as their liability is not
limited.
 Capital Clause: This states the amount of capital with which the company is registered. The shares into
which the capital is divided must be of a fixed amount and the number of shares which the subscribers to
the memorandum agree to subscribe to shall not be less than 1. The share capital is usually a statement
such as “Capital of 10 Lakhs = 10000 equity shares of Rs. 100 each.”
 Subscription Clause (Schedule 1): This is a statement of declaration that the subscribers whose names and
addresses are mentioned agree to subscribe to the prescribed number of shares stated against their name
in the memorandum. The statutory requirements regarding the subscription of the memorandum are that
each subscriber must take at least one share and he should mention the number of shares he agrees to
take against his name in the memorandum. This part is followed by the names, addresses and occupations
of all subscribers, the number of shares they have taken, and their signature.

III. Alteration of an MoA

Section 13 of the Companies Act deals with the alteration of most parts of a Memorandum of Association. The
basic procedure is to pass a special resolution to that effect with the subscribers, file the passed resolution with
the Registrar, and if all procedures laid down in this Section are strictly complied with, upon registration of the
alteration it will come into effect.

However, any alteration in the Share Capital is regulated by other provisions of the Act. Section 61 governs the
alteration of share capital, Section 66 governs its reduction, and Sections 230 to 237 deal with its reorganization.

The procedure for alteration given in the provisions have to be strictly complied with, i.e., complying with a
substantial part of it with minor lapses will not be deemed as complied. Any lapse of the procedure will render the
alteration a nullity.

Alterations to specific clauses of the memorandum have been discussed below:

 Alteration to the Name Clause: A special resolution is to be passed with the subscribers. Approval of the
Central government is needed, except in case of a private company converting to a public company, the
approval to delete the word “private” is not needed. An alteration of name does not create a new entity.
However, a suit in the former name of a company after the alteration has come to effect is not valid. It
needs to be substituted by the new name, and then can be continued. These were held in Malhati Tea
Syndicate Ltd. v. Revenue Officer [4], and Solvex Oils and Fertilizers v. Bhandari Cross-Fields (P) Ltd. [5]
 Alteration to Situation Clause: A change in the registered office address has different procedure depending
on the exact nature of change. For a change of address within local limits, a Board resolution and a Special
resolution is to be passed, and a notice of the change is to be served to the Registrar under INC-22 within
15 days. In case of change of address to a different State, approval of Central Government under INC-23 is
required. This approval is to be filed and registered with the Registrar.

The court held in Mackinnon v. Mackenzie & Co [6] that in case of transfer of office from a State, the State has no
inherent power to intervene. The loss of revenue that will happen because of a company’s alteration of the
registered office is not a factor on which the company’s right to alter its memorandum can be curtailed.

 Alteration to Object Clause: A special resolution is to be passed, and filed with the Registrar. The registrar
should certify the special resolution within 30 days of filing.
 Alteration in Liability: A special resolution is to be passed, and filed with the Registrar under Form MGT 14.
 Alteration in Capital: A limited company which has a share capital may make certain alterations to it
through an ordinary resolution in a general meeting itself under Section 61.

It may increase its share capital as is expedient to do. It may divide its share capital into shares of larger or smaller
values than the previously held. For instance, share capital of 10 lakh as divided previously into shares of Rs. 100
each may be altered to fewer shares of Rs 200 or reduced to more shares of Rs.50 each.

Further, a share or shares may be sub-divided into more shares of smaller amount than previously mentioned. It
may convert its fully paid-up shares into stock, and reconvert the same. It may cancel some shares which have not
been taken by any person, and diminish the amount of share capital by the amount of the shares so cancelled. This
is not deemed to be a reduction of the share capital.

Only in alterations which cause a change in the percentage of voting rights of any shareholder, the confirmation of
the Tribunal is needed. In the rest of cases, no confirmation is needed.

However, the alteration must be notified by filing it along with the altered memorandum with the Registrar within
30 days of passing it.

IV. The Binding Nature of a Memorandum

The Memorandum of Association (MoA) is a boundary set on the powers and operations of the company stating
the powers it can exercise and the area in which it can exercise those powers. Although alterations are allowed to
the memorandum following the prescribed procedure, this self-imposed limit is binding on the company. It cannot
breach the line drawn by its memorandum without the procedure of alteration to that effect or it can be made
liable for that breach legally. This evolves into the Doctrine of Ultra Vires, which declares any act of a company
ultra vires its memorandum, i.e., out of the scope envisaged by its memorandum as void. This will be dealt with in
detail in a later article.

A Comparative Analysis of the Provisions of Companies Act, 1956 and Companies Act, 2013

In this article, the author seeks to comprehensively analyse the provisions of the Companies Act, 1956 and the
Companies Act, 2013. The article highlights the shortcomings of the earlier legislation and points out how the 2013
Act has rectified the same. It also focuses on the changes in definitions, incorporation, directors, share capital, CSR
etc.

I. Introduction

The colonization by the British and their enactment of laws like Joint Stock Companies Act, 1850, Joint Stock
Companies Act, 1857, Companies Act, 1866, and the Indian Companies Act, 1913 traces the history of the
beginnings of corporate governance in India. However, the most significant development took place by the
enactment of the Companies Act, 1956 on April 1 st 1956 based on the recommendations of the H.C. Bhaba
Committee.

More than half a century after the enactment of Companies Act in 1956, the new legislation, the Companies Act,
2013 was passed at the end of August 2013 based on the recommendations of the J. J. Irani committee. The new
Act brought in several much-needed changes in India’s corporate governance and fulfilled the inadequacies and
shortcomings of the 1956 Act.

A need for new legislation was felt absolutely essential because, despite several amendments to the 1956 Act, the
Act was unable to effectively handle complex issues in the context of the evolving requirements of the business
entities in India. One glaring instance of the incompetence of the Companies Act, 1956 was witnessed during the
Satyam Scam [1] which highlighted the poor state of Corporate Social Responsibility and corporate governance in
India. New legislation which was on par with foreign jurisdictions was felt necessary to accommodate the changing
needs and requirements of corporate structure and their governance as well as to protect and promote the safety
and interests of the investors in a highly competitive environment both nationally and internationally.

II. The Framework of both the Acts

Initially, The Companies Act, 2013 contains 29 Chapters divided into 470 sections and 7 schedules, as opposed to
the XIII parts divided into 658 sections and 15 schedules under the Companies Act, 1956. Currently, the total
number of sections increased to 484 under 42 chapters in the Companies Act 2013. Moreover, the new law makes
reference to subordinate legislation in the form of rules much more rigorously than the 1956 act, which forms an
integral part of the new law governing companies in India.[2]

The Companies Act, 2013 has introduced some very important concepts into India’s corporate regime such as
Corporate Social Responsibility, NCLT, Class Action Suit, One Person Company, dormant companies, etc. in order
to ensure that good governance prevails.

III. Comparative Analysis of the Provisions of both the Acts

1. Changes in Definitions and New Inclusions

  The CA, 2013 has enlarged the definition of ‘Charge’ as compared to the earlier legislation. Under the CA,
1956 only a mortgage of the property or assets were considered as a charge.[3] Whereas under the 2013
Act, ‘Charge’ means an interest or lien created on the property or assets of a company and includes a
mortgage.[4]
 The scope of the term “Officer in default” has been broadened under the new act. Whereas S. 2(31) of the
CA, 1956 explains who is an “officer in default”, the same has been incorporated under S. 2(60) of the CA,
2013. The share transfer agents, registrars and merchant bankers to the issue or transfer related issue of
shares have been brought under the scope. Moreover, directors who are aware of the default, CFO and any
Key Managerial person will also be brought under the ambit if he/she knowingly commits default.
 The CA, 2013 has provided that the financial year must mandatorily end on 31st March of every year.[5]
Whereas under the previous act, Companies were permitted to have a financial year ending on a date
decided by the said company.
 The definition of “Listed Company” has been modified under CA, 2013 to include any company which has
any of its securities listed on any recognised stock exchange[6], whereas the earlier Act only provided for
‘listed public company[7]’.
 The CA, 2013 introduces certain terms which were not defined under the 1956 Act such as:

i. Associate company (S. 2(6))

ii. Independent Directors (S. 2(47)
iii. Small company (S. 2(85))
iv. Promoter (S. 2(69))
v. Related party (S. 2(76))
vi. Global Depository Receipt (S. 2(44))
vii. Key Managerial Personnel (S. 2(51))

2. Incorporation and Incidental Matters

 Under the CA, 1956 the Certificate of incorporation of a company was considered as conclusive proof
whereas under the new legislation a certificate is not a conclusive proof as per Section of the Act. It
provides that an action can be taken even after incorporation if incorporation is on the basis of false or
incorrect incorporation.
 One of the major changes brought in by CA, 2013 was the incorporation of ‘One Person Company’ (OPC)
which found no place under the 1956 legislation. OPC means a company which has only one person as a
member as provided in S. 2(62) of the Act. It is a private company having only one member and one
director and there is no compulsion to hold an annual general meeting. The concept of OPC has been
introduced to make it easier for sole-entrepreneurs to do business. Moreover, under the 2013 Act, no prior
approval is required for the conversion of the private company to one-person company or vice versa or the
for the conversion of a private company into a public company.
 The CA, 2013 has also increased the limit of the number of members for a private company from 50 to 200.
 With respect to matters incidental to incorporation, the ‘object clause’ under the Memorandum of
Association (MOA) has been altered. Under the 1956 Act, the object clause was divided into different parts
such as main objects, incidental and other objects while now the MOA now only contains the object for
which the company is incorporated. The earlier bifurcation has been omitted under the new legislation.[8]
 There were no entrenchment provisions provided for altering the Articles of Association of a company
under the 1956 Act, whereas, under Section 5 of the 2013 Act, articles may provide for a more stringent or
restrictive procedure than the passing of a special resolution for altering the certain provisions of AoA.
 Under the 2013 Act, the Company has to file a return with the ROC in case of changes in promoters or top
ten shareholders of the company within 15 days of such change as per Section 93 whereas no such
provision existed under the 1956 Act.
 The 2013 Act permits the conversion of LLPs into companies under section 371 of the Act while such
conversion was not permitted under the earlier regime.

3. Directors of a Company

 A whole-time director, MD, manager, CEO, CS included in a board of directors

 Under the CA, 1956, the maximum number of directors in a company was 12 and in order to appoint more
directors, the approval of the central government was necessary.[9] Whereas under the CA, 2013 provides
for a maximum of 15 directors and more can be appointed by passing a special resolution in a meeting as
provided under S. 149(1) of the Act. It is thus evident that the approval of the central government is not
required under the present legal regime.
 Under the 1956 Act, there were no provisions which mandated the requirement of a woman director.
Whereas under section 149(1) of the CA, 2013, it is provided that in prescribed class or classes of
companies there should be 1 women director.
  There was no provision regarding the requirement of a Resident director under the CA, 1956, whereas,
under S. 149(3) of the CA, 2013, every company shall have at least one director who has stayed in India for
a total period of not less than 182 days in the previous calendar year.
 There was no provision under the CA, 1956 which mandated the requirement of Independent directors,
whereas under section 149(4) of the CA, 2013 every listed public company shall have at least one-third of
the total number of directors as independent directors and the Central Government may prescribe the
minimum number of independent directors in case of any class or classes of public companies.
 Whereas the duties of a director were not specifically provided under the 1956 Act, Section 166 of the CA,
2013 clearly lays them down.
 As per the 1956 Act, the maximum number of directorship was 15 whereas under the CA, 2013, the
maximum number of directorship is 20 out of which 10 can be public companies. Moreover, the new act
also includes alternate directorship but earlier alternate directorship was not included.
 There was no specific provision for the resignation of a director under the CA, 1956 whereas under Section
168 of the CA, 2013, a director can resign by tendering his resignation letter. He must also send a copy of
resignation letter within 30 days to ROC so as to ensure transparency.

4. Prospectus and Allotment of Securities

 The scope is widened to include all type of securities now than just shares.
 Specification for raising of funds by a public company through IPO/FPO, Private placement and
Rights/Bonus shares.
 Now company after varying the terms of contract or objects mentioned in the prospectus cannot use the
amount raised by it through prospectus for buying/trading/otherwise dealing in equity shares of other
company.
 Private placement offers have several conditions which are listed below:

i. Offer to a section of public other than QIBs

ii. Not more than 50 number of people
iii. In compliance with prescribed terms and conditions.
iv. Made through private placement offer letter, not through a prospectus.
v. Public placement offer should comply with the provisions of Companies Act 2013, Securities Contract
Regulation Act 1956, SEBI Act 1992.

 A person responsible for fraudulently inducing others to invest money is now liable for stringent
punishment under section 470 of the act which shall be non-compoundable.
 Any person affected by misleading statement, any inclusion/omission of a matter in the prospectus can file
suit/take an action:
 For civil liability for misstatement in the prospectus.
 For Punishment of Fraud.
 Under the earlier Companies Act 1956, only public financial institution, public sector banks or scheduled
bank with the main object of the financing were allowed to issue their shelf prospectus but now Companies
Act 2013 provides that the government shall prescribe the types of companies that can issue shelf
prospectus.

5. Shares and Debentures

 The Companies Act, 2013 seeks to regulate all types of securities as opposed to equity shares and
debentures only.
 Under the CA, 1956, there was no right of a stockholder to vote on matters of corporate policy and who
will make up the board of directors. Voting often involved decisions on issuing securities, initiating
corporate actions and making substantial changes in the corporation’s operations. However, this
distinction has been removed by the CA, 2013.
 Under the CA, 1956, the companies had a power to issue shares at discount as per S. 79 whereas under the
CA, 2013, the companies cannot issue shares at discount except sweat equity shares subject to fulfilment
of certain condition as provided under S. 53. If a company contravenes the provision shall be punishable
with a fine, not less than one lakh rupees which may extend to five lakh rupees.
 There was no exit option for the shareholder mentioned under the CA, 1956 whereas under Section 27 of
the CA, 2013, shareholders have exit option if the money raised has not been utilised.
 There was no provision for the issue of bonus shares under the CA, 1956. However, rules were framed for
public unlisted Company. Whereas under Section 63 and 23 of the CA, 2013 contains provisions for the
same.
 Earlier under the CA, 1956 there were different sections which deal with debentures, which includes
debenture trust deed, the appointment of debenture trustees etc.[10] Whereas under the CA, 2013, a
company can issue debentures with an option to convert them into shares wholly or partly approved by
 special resolution. Now there is only one section which deals in debentures which is Section 71 of the CA,
2013.

6. Audit and Dividends

 All listed companies shall not appoint any individual auditor for more than 1 to 5 consecutive years and
reappoint any auditor. It is required to fulfil that 5-year course no one can skip that rule if it has done, it
will be considered void.
 Any auditor will be bound not to provide fortunately or, unfortunately, the internal audit, advisory to
investment banking or institute, any actuarial services, bookkeeping audit sources, which is the most
confidential part.
 The dividend will be paid to the employee, keeping in mind that these are their rights. Still, it should be
given keeping in mind that those dividends not provided from the reserves or the free reserve of the
company as the reserves are the companies right. That cannot be taken out of the company’s reserve for
any personal use. it was the essential amendment made so that any misuse of reserves cannot entertain.

7. Corporate Social Responsibility (CSR)

There was no provision relating to CSR under the 1956 legislation. This is one of the most important additions
brought in through the Companies Act, 2013 under Section 135. This section provides that:

“Every company having a net worth of rupees 5 hundred crores or more, or turnover of rupees one thousand
crores or more or a net profit of rupees five crores or more during any financial year shall constitute a Corporate
social responsibility committee of a board consisting of three or more directors, out of which at least one director
shall be an independent director.”

It must be noted that this section is mandatory for all those companies which fall under the ambit of the said
provision.

8. Restructuring and Revival

 Under the CA, 1956, the scheme of compromise and arrangement was not wide enough to include a
takeover offer. Whereas now under the CA, 2013, the scheme of compromise and arrangement includes
takeover offer and works as per the SEBI guidelines
 Under the CA, 1956, the provision for Fast Track mergers were not present. However, the 2013 Act now
incorporates the provision fast track merger between two companies. It will help the two companies to put
forward their steps towards their goal at earliest.
 Reduction of capital must require two things there should not be any areas for a deposit, and there should
be the conformity of having a good standard in the market.

9. Class Action Suits

The concept of class action suits was not found under the CA, 1956. It was introduced via the CA, 2013. Now that
the provision of class action suit is introduced[11], it provides that if a class of members, depositors, or any class of
them conduct the business in any manner which is prejudicial to the interest of the company or its member file an
application before the tribunal on behalf of the company or its members. The benefit is that this will bring greater
and more efficient judicial proceedings but this section shall not apply to banking companies.

10. Acceptance of Deposits

Under the Companies Act, 1956 provisions relating to the issue of deposits were far less stringent than that in the
2013 Act. In the 1956 Act, the Central Government had the power to prescribe the limits and manner in which
deposits could be invited by the company either from the public or from its members. However, subsequent
amendments to the 2013 Act have provided for some leniency in accepting deposits, the most crucial exemptions
being given to private companies.

IV. Conclusion

From a comparative analysis of the provisions of both the Acts, it is evident that the 2013 legislation has been
successful in fulfilling the inadequacies of the previous legislation. The Act was implemented in a phase-wise
manner and it was only in 2019 that the 1956 act was completely repealed. The 2013 Act has successfully
modernised India’s company law regime and places India on equal footing with corporate legislation elsewhere in
the globe.

Question: Define 'Prospectus' and explain in brief its contents. What is the difference between 'prospectus' and
'statements in lieu of prospects'? [BJS 2017]
Find the question and answer of Company Law only on Legal Bites. [Define 'Prospectus' and explain in brief its
contents. What is the difference between 'prospectus' and 'statements in lieu of prospects'?]

Answer

A prospectus is a legal document that provides essential information about a company to potential investors. It is
governed by the Companies Act, 2013 (and its relevant rules and regulations) in India. A Public Company issues
securities to the public through a prospectus which is also referred to as a 'public offer'.

Section 2(70) of the Companies Act, 2013 defines Prospectus as follows:

"prospectus means any document described or issued as a prospectus and includes a red herring prospectus
referred to in section 32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or
other document inviting offers from the public for the subscription or purchase of any securities of body
corporate."

Matters to be stated in the Prospectus are described in detail in Section 26 of the Companies Act, 2013. A
prospectus contains the following matters:

i) Name and address of the registered office of the company, company secretary, chief financial officers, auditors,
legal advisers, bankers, trustees, if any under-writers and such other persons as may be prescribed.

ii) date of opening and closing of the issue and declaration about the issue of allotment letters and refunds within
the prescribed time.

iii) Statement by the board of directors about the separate account where receipt of issues is to be kept.

iv) Consent of directors, auditors, and bankers to the issue, experts' opinion and of such other person as may be
prescribed.

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

vi) Procedure and time schedule for the allotment and issue of securities.

vii) The capital structure of the company

Difference between 'Prospectus' and 'Statements in lieu of Prospects'?

A Prospectus is a formal document that is required to be provided to investors when securities are offered for sale.
It contains detailed information about the securities being offered, such as the terms of the offering, the risks
involved, and the financial condition of the issuer.

Statements in lieu of prospectus, also known as offering circulars, are similar to prospectus but with fewer
information requirements and less stringent rules. It's typically used for smaller, less complex offerings and for
issuers that are not required to file a prospectus. These statements also provide information about the securities
being offered but typically contain less detailed information than a prospectus.

In other words, the prospectus is prepared for filing with the Registrar of Companies and publicity whereas the
Statement in Lieu of the Prospectus is prepared only for filing purposes. The Prospectus does publicity and has a
selling approach whereas the Statement in Lieu of the Prospectus is prepared for fulfilling the legal formality of
filing with the Registrar of the companies and has an informative approach.

Disadvantages of Incorporation of a Company

I. Introduction

A company is the most important form of a corporate entity in today’s world. With the passage of time, the
importance of corporate governance in a highly competitive business world became apparent which led to the
restructuring of India’s legal regime in the form of Companies Act, 2013. A company has several advantages over
other forms of business enterprises such as partnership firm, LLP, a Hindu undivided family, etc since it has a
separate independent existence, limited liability, and many other rights which are available to a legal person such
as the power to hold property, right to sue and be sued etc. However, there are certain disadvantages to this
model of a corporate entity as well.

II. Disadvantages of Incorporation of a Company

1. Lifting the Corporate Veil

All the benefits associated with the incorporation of a company are based on the basic principle that a company is
a separate entity from its shareholders for all purposes of the law. However, there are certain scenarios when it
becomes necessary to look at the persons behind the corporate veil and then some of those advantages or
benefits disappear.

The separate entity of the company is disregarded and the schemes and intentions of the persons behind are
exposed to full view. They are made personally liable for using the company as a vehicle for undesirable purposes
as in the case of Jai Narain v. Pushpa Devi Saraf [1], wherein the promoters-directors who used the company for
their own personal objectives were held accountable for their actions.

It must be realized that the separate personality of a company is a statutory privilege which must be used for
legitimate business purposes only. Where a fraudulent and dishonest use is made of the legal entity, the
individuals concerned will not be allowed to take shelter behind the corporate personality. The Court will break
through the corporate shell and apply the principle/doctrine of what is called “lifting of or piercing the corporate
veil”.

The Court will look behind the corporate entity and take action as though no entity separate from the members
existed and make the members or the controlling persons liable for debts and obligations of the company[2]. Thus,
the advantage available to members on the premise that they only have limited liability is not an absolute right.

The provisions relating to the lifting of the corporate veil are found in sections 7(7), 251(1) and 339 of the
Companies Act, 2013. These provisions look beyond the corporation to reach the real forces of action. Section 7(7)
deals with punishment for the incorporation of a company by furnishing false information; Section 251(1) deals
with liability for making a fraudulent application for removal of the name of the company from the register of
companies and Section 339 deals with liability for fraudulent conduct of business during the course of winding up.
The instances in which the corporate veil is lifted are given below:

 When it is Necessary to Determine the Legal Character of a Corporation

In the case of Daimler Co Ltd v. Continental Tyre & Rubber Co Ltd[3], the House of Lords held that a company,
though registered in England, would “assume an enemy character when persons in de facto control of its affairs,
are residents in an enemy country or, whether residents are acting under the control of the enemies.” From this
case, it is clear that the court is willing to look beyond the corporate personality in certain crucial situations.

 When a Company is Conceived and Brought Forth for Fraudulent Purposes

In cases where a company uses the corporate veil for the commission of fraud or improper conduct, courts have
lifted the veil and looked at the realities of the situation. In the case of Gilford Motor Co Ltd v. Horne[4], a
company was restrained from acting when its principal shareholder was bound by a restraint covenant and had
incorporated the company only to escape the covenant.

Another major case law in this regard is the case of Jones v. Lipman[5], in which case A agreed to sell certain land
to B. Pending completion of formalities of the said deal, A sold and transferred the land to a company which he
had incorporated with a nominal capital of £100 and of which he and a clerk were the only shareholders and
directors. This was done in order to escape a decree for specific performance in a suit brought by B.

The Court held that the company was the creature of A and a mask to avoid recognition and that in the eyes of
equity A must complete the contract since he had the full control of the limited company in which the property
was vested, and was in a position to cause the contract in question to be fulfilled.

 For the Benefit of Revenue

Another instance when the corporate veil can be lifted is when it is found that the sole purpose for which the
company was formed is to evade taxes. In such circumstances, the court will ignore the concept of a separate
entity and make the individuals concerned liable to pay the taxes which they would have paid but for the
formation of the company.

In the case of Re. Sir Dinshaw Maneckjee Petit[6], it was held by the court that the company was formed by the
assessee purely and simply as a means of avoiding supertax and the company was nothing more than the assessee
himself. It did no business, but was created simply as a legal entity to ostensibly receive the dividends and
interests and to hand them over to the assessee as pretended loans”. The Court decided to disregard the
corporate entity as it was being used for tax evasion.
A more recent example is the case of Vodafone International Holdings B.V. v. Union of India & Another [7], in
which the SC thoroughly discussed the factors which must be taken into consideration to determine whether the
transaction is a bogus and whether the corporate veil is to be lifted. The factors to be taken into consideration are:

i. the concept of participation in investment,

ii. the duration of time during which the Holding Structure exists;
iii. the period of business operations in India;
iv. the generation of taxable revenues in India;
v. the timing of the exit; and
vi. the continuity of business on such exit.

 The Company is Only an Agent

The separate existence of a company may be ignored where it is being used as an agent or trustee. An example is
the case of Re. R.G. Films Ltd [8], in which an American company produced a film in India technically in the name
of a British Company, 90% of whose capital was held by the President of the American company which financed
the production of the film. Board of Trade refused to register the film as a British film which stated that the English
company acted merely as the nominee of the American corporation. The courts insist upon very strong evidence
for this purpose. [9]

 When the Company’s Conduct is Against Public Policy

There have been many instances where the courts have lifted the corporate veil for protecting the public policy
when a company’s conduct is in conflict with it. For example, in the case of Connors Bros. v. Connors [10], this
principle was applied against the managing director who made use of his position contrary to public policy.

In this case, the House of Lords determined the character of the company as “enemy” company, since the persons
who were de facto in control of its affairs, were residents of Germany, which was at war with England at that time.
The alien company was not allowed to proceed with the action, as that would have meant giving money to the
enemy, which was considered as monstrous and against “public policy.

 When the Company is Formed to Avoid Welfare Legislation

Much like tax evasion, avoidance of welfare legislation is very common and the approach in considering problems
arising out of such avoidance has necessarily to be the same and, therefore, where it was found that the sole
purpose for the formation of the new company was to use it as a device to reduce the amount to be paid by way
of bonus to workmen; the Supreme Court has upheld the piercing of the veil to look at the real transaction.

A landmark case in this area is the case of The Workmen Employed in Associated Rubber Industries Limited,
Bhavnagar v. The Associated Rubber Industries Ltd., Bhavnagar and another [11].

 When the Company is Formed for Inequitable Purposes

Where it is found that a company has abused its corporate personality for an unjust and inequitable purpose, the
court would not hesitate to lift the corporate veil. Further, the corporate veil could be lifted when acts of a
corporation are allegedly opposed to justice, convenience and interests of revenue or workmen or are against the
public interest. Also, when used to hide criminal activities, the court can lift the corporate veil. Thus, in appropriate
cases, the courts disregard the separate corporate personality and look behind the legal person or lift the
corporate veil.

2. A Company is Not a Citizen

Another disadvantage that a Company has is that even though it is a legal person, it is not capable of citizenship
under the Citizenship Act, 1955 or the Constitution of India. In the case of State Trading Corporation of India Ltd.
v. C.T. O[12], the Supreme Court held that the State Trading Corporation though a legal person was not a citizen
and can act only through natural persons. Nevertheless, it is to be noted that certain fundamental rights enshrined
in the Constitution for the protection of a “person” are also available to a company. However, a company has
nationality and domicile but unlike a natural person, a company cannot change its nationality.[13]

3. Formality and Expense

Another major disadvantage of incorporation of a company is that it is a very expensive affair. There are a number
of formalities which have to be complied with both as to the formation of the company and the administration of
its affairs.[14]

III. Conclusion
It is evident that there are both advantages as well as disadvantages incorporating a company under the
Companies Act, 2013. It seems that a company is more suited for businesses where there are more capital
investments as well as risks involved but a look at the pros and cons of incorporation reveals that the pros far
outweigh the cons. As long as a company is utilized for conducting the lawful purposes for which it is incorporated,
there will be no risk of the lifting of the corporate veil. Moreover, the initial expenses in forming a company will
have benefits in the long run.

Questions: Differentiate between Share Warrant and Share Certificate.

Find the question and answer of Company Law only on Legal Bites. [Differentiate between Share Warrant and
Share Certificate.]

Answer

Share Warrant Share Certificate

A Share Warrant is a document which is issued by a A Share Certificate is a document which is issued by a
company under its common seal against fully paid-up company to the allottee or transferee of shares under
shares which entitles the bearer to hold shares that are its common seal which specifies the shares held by any
specified therein. person.
It is issued by the public as well as a private limited
It is only issued by a public limited company.
company.
It is issued only against fully paid-up shares. It can be issued against fully or partially paid-up shares.
Issuance of share warrants must be authorised by the Issuance of share certificate need not to be authorised
articles of the company. by the articles of the company.
The stamp duty imposed on issuing share certificate is
Issuance of share warrant requires heavy stamp duty.
very nominal.
It is a negotiable instrument and its ownership can be It is not a negotiable instrument and its transfer can be
transferred by mere delivery. effectuated through a transfer deed.
Prior approval of the central government is required Prior approval of the central government is not required
before the issuance of a share warrant. before the issuance of the share certificate.
The holder of a share warrant cannot apply to the The holder of a share certificate can apply to the
National Company Law Tribunal for the winding up of a National Company Law Tribunal for the winding up of a
company. company.
The bearer of the share warrant is not entered in the The bearer of the share certificate is entered in the
register of members of the company. register of members of the company.
The bearer of the share warrant has no right to vote or The bearer of the share certificate has the right to vote
attend meetings or be a director. and participate in a meeting and be a director.
Dividend coupons are not attached to the share
Dividend coupons are attached with a share warrant.
certificate.