Business law

COMPANIES ACT, 2013

Ca foundation

Ca sumit gupta - Gravity

Ca sumit gupta
(CA, MBA, M.Com, B.Ed)
Ca rankholder, air 38
 ~1~

CHAPTER 1
THE COMPANIES ACT, 2013
INTRODUCTION AND APPLICABILITY
Introduction  The Companies Act, 2013 was enacted to consolidate and amend the law
relating to the companies. The Companies Act, 2013 was preceded by the
Companies Act, 1956.
 The Companies Act, 2013 contains 470 sections and seven schedules. The entire
Act has been divided into 29 chapters.
Applicability  Companies incorporated under this Act or under any previous company law.
 Insurance companies (except the inconsistent provisions of the Insurance Act,
1938 or the IRDA Act, 1999)
 Banking companies (except the inconsistent provisions of the Banking
Regulation Act, 1949)
 Companies engaged in the generation or supply of electricity (except the
inconsistent provisions of the Electricity Act, 2003)
 Any other company governed by any special Act for the time being in force.
 Such body corporate which are notified by Central Government.
COMPANY: MEANING AND ITS FEATURES
MEANING  In the words of professor Haney
“A company is an incorporated association, which is an artificial person
created by law, having a separate entity, with a perpetual succession and a
common seal.” This definition sums up the meaning as well as the features of a
company succinctly.
 Section 2(20) defines the term ‘company’
“Company means a company incorporated under this Act or under any
previous company law”.

FEATURES OF A COMPANY
SEPARATE LEGAL  When a company is registered, it is clothed with a legal personality.
ENTITY  Its existence is distinct and separate from that of its members.
 A company can own property, have bank account, raise loans, incur liabilities
and enter into contracts.
28 62
 Even members can contract with company, acquire right against it or incur
liability to it.
 A company is capable of owning, enjoying and disposing of property in its own
name.
 A member does not even have an insurable interest in the property of the
company. The leading case on this point is of Macaura v. Northern Assurance
Co. Limited (1925):

Fact of the case

Macaura (M) was the holder of nearly all (except one) shares of a timber company.

1 CA. Sumit Gupta

 ~2~
He was also a major creditor of the company. M Insured the company’s timber in his
own name. The timber was lost in a fire. M claimed insurance compensation.
Held, M could not claim the compensation as timber was insured in company’s name
and member does not even have an insurable interest in the property of the company.
PERPETUAL  Members may die or change, but the company goes on till it is wound up on the
SUCCESSION grounds specified by the Act.
 The shares of the company may change hands infinitely but that does not affect
the existence of the company.
31  Since a company is an artificial person created by law, law alone can bring an
end to its life.
 Its existence is not affected by the death or insolvency of its members.
LIMITED (i) Limited liability company
LIABILITY The liability of the members of the company is limited to the extent of the
nominal value of shares held by them. In no case can the shareholders be asked
to pay anything more than the unpaid value of their shares.
(ii) Company limited by guarantee
The members are liable only to the extent of the amount guaranteed by them
and that too only when the company goes into liquidation.
(iii) Unlimited company
The liability of its members is unlimited. However, even if the liability of
members is unlimited the creditors cannot directly sue the members for the
debts.
ARTIFICIAL (1) A company is an artificial person as it is created by a process other than
LEGAL PERSON natural birth. It is legal because it is created by law. It is a person since it is
clothed with all the rights of an individual.
(2) As the company is an artificial person, it can act only through some human
agency (directors).
(3) A company can own property, have bank account, raise loans, incur liabilities
and enter into contracts.
(4) Even members can contract with company, acquire right against it or incur
liability to it
COMMON SEAL (1) Common seal is the official signature of a company, which is affixed by the
officers and employees of the company on its every document.
(2) Common seal is not compulsory.
(3) If there is no common seal then authorization shall be done by two directors
OR a director and a company secretary (if company has appointed a CS)

2 CA. Sumit Gupta

 ~3~

CORPORATE VEIL THEORY

MEANING  Corporate Veil refers to a legal concept whereby the company is identified
separately from the members of the company.
 If the company incurs any debts or contravenes any laws, the corporate veil
4 10 34 36 41 63 64
concept implies that members should not be liable for those errors.
 Thus, the shareholders are protected from the acts of the company.

Salomon Vs. Salomon and Co Ltd.

 In Salomon vs. Salomon & Co. Ltd. the House of Lords laid down that a
company is a person distinct and separate from its members.
 In this case one Salomon incorporated a company named “Salomon & Co.
Ltd.”, with seven subscribers consisting of himself, his wife, four sons and one
daughter.
 This company took over the personal business assets of Salomon for £ 38,782
and in turn, Salomon took 20,000 shares of £ 1 each, debentures worth £ 10,000
of the company with charge on the company’s assets and the balance in cash.
 His wife, daughter and four sons took up one £ 1 share each.
 Subsequently, the company went into liquidation due to general trade
depression.
 The unsecured creditors to the tune of £ 7,000 contended that Salomon could not
be treated as a secured creditor of the company, in respect of the debentures
held by him, as he was the managing director of one-man company, which was
not different from Salomon and the cloak of the company was a mere sham and
fraud.
Held that, a shareholder cannot be held liable for the acts of the company even
though he holds virtually the entire share capital.
LIFTING OF CORPORATE VEIL
MEANING 1. It means looking behind the company as a legal person, and paying regard to the
realities behind the legal facade.
2. Where the Courts ignore the company and concern themselves directly with the
members or managers, the corporate veil may be said to have been lifted.
CASES WHERE CORPORATE VEIL CAN BE LIFTED
TO DETERMINE  It may lift the veil for ascertaining whether a company is an enemy company.
THE CHARACTER  It may be characterized as an enemy company, if its affairs are under the
OF THE COMPANY control of people of an enemy country.
 For this purpose, the Court may examine the character of the persons who are
really at the control of affairs of the company.
TO PROTECT Where corporate entity is used to evade tax, the Court can disregard the corporate
REVENUE/TAX entity.
Dinshaw Maneckjee Petit
(i) The assessee earned huge income by way of dividends and interest. So, he
opened four companies and purchased their shares in exchange of his income by
way of dividend and interest. This income was transferred back to assessee by
way of loan.

3 CA. Sumit Gupta

 ~4~
(ii) it was held that the company was not a genuine company at all but merely the
assessee himself.
(iii) The Court decided that the private companies were a sham and the corporate
veil was lifted to decide the real owner of the income.
TO AVOID A 
Where it was found that the sole purpose for the formation of the company was
LEGAL to use it as a device to reduce the amount to be paid by way of bonus to
OBLIGATION workmen.
Workmen of Associated Rubber Industries Ltd Vs ARIL
 ARIL has purchased shares of a company and receiving dividend which was
shown in profit and loss account for the purpose of calculating bonus payable to
workers.
 Later these shares were transferred to a new subsidiary formed which does not
have any business of its own.
 Due to this dividend was no more included in profit and loss account of ARIL
and hence bonus payable was reduced.
 Held that subsidiary was formed only to reduce the amount of bonus payable,
therefore corporate veil was lifted.
FORMATION OF  A company may sometimes be regarded as an agent or trustee of its members, or
SUBSIDIARIES TO of another company, and may therefore be deemed to have lost its individuality
ACT AS AGENTS in favour of its principal.
 Here the principal will be held liable for the acts of that company.
Merchandise Transport Limited vs. British Transport Commission (1982)
 A transport company wanted to obtain licenses for its vehicles, but could not do
so if applied in its own name.
 It, therefore, formed a subsidiary company, and the application for licence was
made in the name of the subsidiary.
 The vehicles were to be transferred to the subsidiary company.
 Held, the parent and the subsidiary were one commercial unit and the
application for licenses was rejected.
COMPANY Company is formed for
FORMED FOR – some illegal or improper purpose,
FRAUD – to defeat law,
– to defraud creditors or
– to avoid legal obligations.
Gilford Motors Co Vs Horne
 Horne was an employee of Gilford Motors and the contract of employment
contains a condition that he cannot solicit company’s customers after leaving
the company.
 He resigned and opened a new company and started soliciting Gilford Motors’s
customers.
 Held that he used corporate identity to defeat the provisions of employment
contract and therefore corporate veil was lifted.

4 CA. Sumit Gupta

 ~5~

CLASSES OF COMPANIES
ON THE BASIS OF LIABILITY
COMPANY LIMITED  When the liability of the members of a company is limited to the amount (if
BY SHARES any) unpaid on the shares held by them, it is known as a company limited by
Sec 2(22) shares.
 For meeting the debts of the company, the shareholder may be called upon to
contribute only to the extent of the amount, which remains unpaid on his
shareholdings.
 The members may be called upon to discharge their liability at any time during
lifetime or winding up.
 His separate property cannot be used to meet the company’s debt.
COMPANY LIMITED  The liability of the member of a guarantee company is limited upto a sum
BY GUARANTEE mentioned in the memorandum. Members cannot be called upon to contribute
Sec 2(21) beyond that stipulated sum.
 The members may be called upon to discharge their liability only after
19 commencement of the winding up.
 It does not raise its initial working funds from its members. Therefore, such a
company may be useful only where no working funds are needed.
UNLIMITED  No limit on the liability of members
COMPANY  Member can be called to contribute only in the event of winding up of
Sec 2(92) Company by the liquidator
 Liability of each member extends to amount of Company’s debt and liabilities.
 However, he can claim Contribution from other members.
52
 Creditors cannot sue the members for the debts of the company.

ON THE BASIS OF MEMBERS

ONE PERSON (1) Only one person as member.
COMPANY (2) Nature of OPC is of a Private Company.
Sec 2(62) (3) Minimum paid up capital – no limit prescribed.
(4) The memorandum of OPC shall indicate the name of the other person, who
2 17 24 53 54 55 shall, in the event of the subscriber’s death or his incapacity to contract,
become the member of the company. (Nominee)
(5) The Nominee shall give his prior written consent.
(6) Such Nominee may be given the right to withdraw his consent.
(7) The member of OPC may at any time change the name Nominee by giving
notice to the company and the company shall intimate the same to the
Registrar.
(8) Any such change in the name of the Nominee shall not be deemed to be an
alteration of the memorandum.
(9) Who can be a Member/Nominee
– Only a natural person
– who is an Indian citizen and
– resident in India or not (person who has stayed in India for a period of
not less than 120 days during the immediately preceding financial year)
(10) No person shall be eligible to incorporate more than one OPC or become

5 CA. Sumit Gupta

 ~6~
nominee in more than one such company.
Can one person become member in one OPC and Nominee in another OPC
at the same time?
(11) No minor shall become member or nominee of the OPC or can hold share
with beneficial interest.
(12) Such Company cannot be incorporated or converted into a company under
section 8 of the Act. Though it may be converted to private or public
companies in certain cases.
(13) Such Company cannot carry out Non-Banking Financial Investment
activities including investment in securities of anybody corporate.
(14) Here the member can be the sole member and director.

Example: Flipkart was established as an OPC by Sachin Bansal in 2007.

PRIVATE COMPANY Private company means a company which by its articles—
Sec 2(68) (i) Restricts the right to transfer its shares;
(ii) Limits the number of its members to two hundred:
14 42 46 (iii) Prohibits any invitation to the public to subscribe for any securities of the
company;

Notes:
(i) Joint holders of one or more shares shall be treated as a single member.
(ii) Followings are not included in number of members
(A) Persons who are in the employment of the company (Current
Employees)
(B) Persons who were former employees and members then they left
employment but are still members of the company (Former
Employees)

Some significant points

(1) Minimum number of members – 2
(2) Maximum number of members – 200
(3) Small company is a private company.
(4) OPC can be formed only as a private company.
SMALL COMPANY (i) Paid-up share capital of which does not exceed four crores’ rupees or such
Sec 2(85) higher amount as may be prescribed which shall not be more than Ten crore
rupees; and
30 33 (ii) Turnover of which as per its last profit and loss account does not exceed
Forty crore rupees or such higher amount as may be prescribed which shall
not be more than One hundred crore rupees.
(iii) Small company is always a private company.

Exceptions: This section shall not 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  Public Company is not a private company (Articles do not have the restricting

6 CA. Sumit Gupta

 ~7~
Sec 2(71) clauses).
 Shares are freely transferable.
 Minimum number of members – 7.
 Maximum numbers of members – No limit.
 Subsidiary of a public company is deemed to be a public company.
ON THE BASIS OF CONTROL
HOLDING COMPANY Subsidiary company means a company in which the holding company—
Sec 2(46) (i) Controls the composition of the Board of Directors; or
SUBSIDIARY (ii) Exercises or controls more than one-half of the total Voting Power either
COMPANY at its own or together with one or more of its subsidiary companies:
Sec 2(87) Notes:
(i) Deemed subsidiary
A company shall be deemed to be a subsidiary company of the holding
8 18 21 29 47 48 company even if the control referred above is of another subsidiary
company of the holding company;
(ii) The composition of a company’s Board of Directors
- if that other company can appoint or remove all or a majority of
the directors.
(iii) A Private company, which is subsidiary of a public company shall be
deemed to be public company.
Example 1:S Ltd will be subsidiary of H Ltd, if H Ltd controls the composition of
the Board of Directors of S Ltd.
Example 2:S Ltd will be subsidiary of H Ltd, if H Ltd holds more than 50% of the
voting power of S Ltd.
Example 3: S Ltd is a subsidiary of H Ltd and D Ltd is a subsidiary of S Ltd. In
such a case, D Ltd will be the subsidiary of H Ltd.

ASSOCIATE  Associate Company means a company in which other company has a

COMPANY significant influence,
Sec 2(87)  but which is not a subsidiary company and includes a joint venture company.
 The term “significant influence” means control of at least 20%
11 37 51
– of total voting power, or
– of business decisions under an agreement.
ON THE BASIS OF ACCESS TO CAPITAL
Listed company It is a company which has any of its securities listed on any recognised stock
26 exchange.
Sec 2(52)
Unlisted company means company other than listed company.

OTHER COMPANIES
GOVERNMENT Government Company means any company in which not less than 51% of the
COMPANY paid-up share capital is held by-
Sec 2(45) (i) The Central Government, or
(ii) By any State Government or Governments, or
(iii) Partly by the Central Government and partly by one or more State
16 35 38 49 50 Governments, and
(iv) The section includes a company which is a subsidiary company of such a

7 CA. Sumit Gupta

 ~8~
Government company.
(v) Paid up share capital means total voting rights.

FOREIGN COMPANY It means any company or body corporate incorporated outside India which—
Sec 2(42) (i) Has a place of business in India
13 45
– whether by itself or through an agent,
– physically or through electronic mode; and
(ii) Conducts any business activity in India in any other manner
Companies with 1. Formation of Section 8 company
Charitable Objects Section 8 of the Companies Act, 2013 deals with the formation of
- Section 8 company – companies which are formed
– to Promote the charitable objects of
– commerce, art, science,
3 7 12 43 56
– sports, education,
– research,
– social welfare, religion, charity, protection of environment etc.
Examples of section 8 companies are FICCI, Tata Trusts, Reliance
Foundation, Infosys Foundation.

2. Application of Profits
Such company intends to apply its profit in
– Promoting its objects and
– Prohibiting the payment of any dividend to its members
3. License from CG
(a) CG has the power to register such person or association as section 8
company on such conditions as it deems fit.
(b) Such company has limited liability without the use of words ‘limited’ or
‘Private Limited’.
(c) The registrar shall register such person or association as a section 8
company. (Power delegated to ROC)
4. Revocation of License by CG
(a) CG may revoke the license of the company if
– The company contravenes any condition on the basis of which
license was issued, or
– Where the affairs of the company are conducted fraudulently
– Objects of the company are violated
(b) On revocation the registrar shall put ‘limited’ or ‘private limited’ after
company’s name.
(c) A written notice and reasonable opportunity of being heard will be
given before revocation.

5. Order of CG
After revocation of license CG may order that
(a) Company shall be amalgamated with another company having similar

8 CA. Sumit Gupta

 ~9~
objects
(b) Status of the company will be changed and name will also be changed
(c) Company shall be wound up
6. Penalty
If a company makes any default under this section then
 The company shall be punishable with fine not less than ten lakh
rupees and may extent to one crore rupees
 The directors and every officer who are in default shall be punishable
with fine not less than twenty-five thousand rupees and may extend to
twenty-five lakh rupees.

Important notes
(1) Can call its general meeting by giving a clear 14 days’ notice instead of 21
days.
(2) Requirement of minimum number of directors, independent directors etc.
Does not apply.
(3) Need not constitute Nomination and Remuneration Committee and
Shareholders Relationship Committee.
(4) A partnership firm can be a member of Section 8 company.
DORMANT COMPANY (1) Where a company is formed and registered under this Act
Sec 455 – for a future project or
– to hold an asset or intellectual property and
– has no significant accounting transaction,
40
such a company or an inactive company may make an application to the
Registrar for obtaining the status of a dormant company.

(2) 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.
(3) Significant Accounting Transaction means a transaction other than
– Payment of fees to registrar
– Payments made under this act or any other law
– Allotment of shares
– Payment for maintenance of its office and records
Nidhi Companies Company which has been incorporated as a nidhi with the object of cultivating
(Mutual benefit Society) the habit of cost cutting and savings amongst its members, and it is notified by
CG in official Gazette.
Public Financial The following institutions are to be regarded as public financial institutions:
Institutions (PFI) (i) The Life Insurance Corporation of India (LIC)
(ii) The Infrastructure Development Finance Company Limited (IDFC)
(iii) Specified company referred to in the Unit Trust of India Act, 2002; (UTI)
(iv) Such other institution as may be notified by the Central Government in
consultation with the Reserve Bank of India:

9 CA. Sumit Gupta

 ~ 10 ~
Conditions for an institution to be notified as PFI:
No institution shall be so notified unless—
(A) It has been established by any Central or State Act; or
(B) 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.

INCORPORATION OF A COMPANY
PROMOTERS
MEANING As per Companies Act Promotor means a person who is
Sec 2(69) - Named in Prospectus
- In control of affairs
- Giving directions to the BOD
44
In simple terms we can say,
 Persons who form the company are known as promoters.
 It is they who conceive the idea of forming the company.
 They take all necessary steps for its registration.
It should, however, be noted that persons acting only in a professional capacity
e.g., the solicitor, banker, accountant etc. are not regarded as promoters.
PROCEDURE FOR INCORPORATION OF COMPANY – Section 7
STEPS FOR (1) Filling of Documents (Form INC-32 SPICE+)
INCORPORATION (2) Issue of Certificate of Incorporation
(3) Allotment of CIN
(4) Maintenance of Copies of all documents
(5) False Information at the time of Incorporation
(6) Company already incorporated by furnishing false information
(7) Order of tribunal
DOCUMENTS TO BE (1) MOA & AOA
FILLED (2) Address for Correspondence
(3) Particulars of every subscriber
(4) Particulars of First Directors
(5) Particulars of Interest and Consent of First Directors
(6) Declaration by Professional/Director/Secretary
(7) Declaration by every subscriber and first directors
Corporate Identification  L17110MH1973PLC019786 (Reliance)
Number (CIN)  U51909KA2011PTC060489 (Flipkart)
 U0110000WB2021OPC245001 (Mansa Devi Dairy Products)
 U85110MH2010NPL207270 (Reliance Foundation)
Detailed procedure to be followed for incorporation of a company.
1. Filing of the Following documents and information are required to be filed with the
Documents and registrar –
Information with (i) The memorandum and articles of the company duly signed by all the
the Registrar subscribers to the memorandum.
(ii) A declaration by

10 CA. Sumit Gupta

 ~ 11 ~
– Professional (an advocate, a CA, CMA, CS in practice), and
– director, manager or secretary of the company
– that all the requirements of this Act have been complied
with.
(iii) A declaration from
– each of the subscribers and
– the first directors that
 He is not convicted of any offence, or
 He has not been found guilty of any fraud during the last five
years.
 And that all the documents filed contain correct & complete
information
(iv) The address for correspondence till its registered office is
established;
(v) The particulars of every subscriber along with proof of identity.
(vi) The particulars of the first directors including proof of identity
(vii) The particulars of the interests of the first directors in other firms
or bodies corporate along with their consent to act as directors.
2. Issue of Certificate The Registrar shall register all the documents and information and issue a
of Incorporation on certificate of incorporation.
Registration
3. Allotment of The Registrar shall allot to the company a corporate identity number.
Corporate Identify
Number (CIN)
4. Maintenance of The company shall
copies of all - maintain and preserve
documents and - at its registered office
Information - copies of all documents and information as originally filed,
- till its dissolution.
5. Furnishing of false If any person furnishes any false or incorrect information, he shall be liable for
information at the action for fraud u/s 447.
time of
Incorporation
6. Company already Where it is proved that
incorporated by - the company has got incorporated by furnishing any false information,
furnishing false - the promoters, the first directors and the persons making declaration
information - Shall each be liable for action for fraud u/s 447.
7. Order of the Where a company has got incorporated by furnishing false information the
Tribunal Tribunal may–
(a) Pass such orders, as it may think fit, for regulation of the management of
65 the company
(b) Direct that liability of the members shall be unlimited; or
(c) Direct removal of the name of the company from the register of companies;
or
(d) Pass an order for the winding up of the company; or
(e) Pass such other orders as it may deem fit;
Provided that before making any order –

11 CA. Sumit Gupta

 ~ 12 ~
The company shall be given
- a reasonable opportunity of being heard in the matter; and
- The Tribunal shall take consider the transactions entered into by the
company.
EFFECT OF REGISTRATION
EFFECTS 1. From the date of incorporation, the subscribers to the memorandum and
all other members of the company, shall be a body corporate.
2. Such a registered company shall be 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.
3. The company becomes a legal person separate from the incorporators.
4. A legal personality emerges from the moment of registration of a company.
5. Even if a company purchases all shares of another company, it will not be
an end to the corporate character of another company and each company
is a separate entity.
6. Even if all shares are held by the Central Government or all its shares are
held by the President of India does not make any difference in the position
of registered company.

SHARE AND SHARE CAPITAL

CLASSIFICATION OF CAPITAL
REGISTERED  “Authorized capital” or “Nominal capital” means such capital as is authorized
CAPITAL by the memorandum of a company to be the maximum amount of share capital of
the company.
 Thus, it is the sum stated in the memorandum as the capital of the company
ISSUED CAPITAL It is that part of authorized capital which is offered by the company for
subscription and includes the shares allotted for consideration other than cash.
SUBSCRIBED  Such part of the capital which is for the time being subscribed by the members of
CAPITAL a company.
 It is the nominal amount of shares taken up by the public.
 If any document of the company states authorized capital, then it must also state
subscribed and paid-up capital.
CALLED-UP Such part of the capital, which has been called for payment. It is the total amount
CAPITAL called up on the shares issued.
PAID-UP CAPITAL It is the total amount paid or credited as paid up on shares issued. It is equal to
called up capital less calls in arrears.
SHARES
NATURE OF Share means a share in the share capital of a company and includes stock.
SHARES  A share is not a sum of money but is an interest measured by a sum of money.
 Shares are a movable property
 Shares shall be numbered
KINDS OF SHARES
EQUITY SHARE The share capital shall be of two kinds, namely: —

12 CA. Sumit Gupta

 ~ 13 ~
CAPITAL (i) Equity share capital —
(1) With voting rights; or
39
(2) With differential rights as to dividend or voting. (DVRs)

PREFERENCE ‘‘Preference share capital’’, means share capital which carries or would carry a
SHARE CAPITAL preferential right with respect to:
(a) Payment of dividend, either as a fixed amount or an amount calculated at a
fixed rate before ESC
(b) Repayment, in the case of a winding up or repayment of capital before ESC

MEMORANDUM AND ARTICLES OF ASSOCIATION

MEMORANDUM OF ASSOCIATION
MEMORANDUM OF  The Memorandum of Association of company is in fact its charter;
ASSOCIATION  It defines its constitution and the scope of the powers of the company with
which it has been established under the Act.
9 Object of registering a memorandum of association:
(1) It contains the object for which the company is formed.
(2) It enables shareholders, creditors and all those who deal with company to
know what its powers are.
(3) A memorandum is a public document. Every person entering into a contract
with the company is presumed to have the knowledge of the MOA.
(4) The shareholders must know the purposes for which his money can be used
by the company and what risks he is taking in making the investment.
CONTENT OF THE MEMORANDUM
NAME CLAUSE  The name of the company with the last word “limited” in the case of a public
limited company, or the last words “private limited” in the case of a private
limited company. This clause is not applicable on the companies formed under
section 8 of the act.
 For the companies under section 8, the name shall include the words
foundation, forum, association, federation, chambers, confederation, council,
electoral trust and the like etc.
 A government company’s name must end with the word “limited”. In the case
of one person company, the words “one person company”, should be included
below its name.
REGISTERED ONCE The state in which the registered once of the company is to be situated;
CLAUSE
OBJECT CLAUSE  The objects for which the company is proposed to be incorporated and any
matter considered necessary.
 If any company has changed its activities which are not reflected in its name, it
shall change its name in line with its activities within a period of six months
from the change of activities after complying with all the provisions as
applicable to change of name.

13 CA. Sumit Gupta

 ~ 14 ~
LIABILITY CLAUSE The liability of members of the company whether limited or unlimited, and also
state, —
 In the case of a company limited by shares, that the liability of its members is
limited to the amount unpaid on the shares held by them; and
 In the case of a company limited by guarantee, the amount up to which each
member undertakes to contribute—
 To the assets of the company in the event of its being wound-up
 To the costs, charges and expenses of winding-up.
CAPITAL CLAUSE The amount of authorized capital divided into share of fixed amounts and the
number of shares with the subscribers to the memorandum have agreed to take,
indicated opposite their names, which shall not be less than one share. A company
not having share capital need not have this clause.
ASSOCIATION The desire of the subscribers to be formed into a company. The memorandum shall
CLAUSE. conclude with the association clause. Every subscriber to the memorandum shall
take atleast one share, and shall write against his name, the number of shares
taken by him.
Notes (a) It is to be noted that a company being a legal person can act through its agent,
subscribe to the memorandum.
(b) However, a minor cannot be a signatory to the memorandum as he is not
competent to contract. The guardian of a minor, who subscribes to the
memorandum on his behalf, will be deemed to have subscribed in his personal
capacity.

ARTICLES OF ASSOCIATION
MEANING (1) The articles of a company are its rules and regulations which are framed to
manage its internal affairs.
(2) It regulates domestic management of the company and creates rights &
obligations between the members and the company.
(3) Articles are the bye laws of the company according to which director and
other officers are required to perform.
Section 5 of the Companies Act, 2013 seeks to provide the contents and model of
articles of association. The section lays the following law-
CONTENT OF THE ARTICLES
1. Contains The articles of a company shall contain the regulations for management of the
regulations company.
2. Inclusion of The articles shall also contain such matters, as are prescribed under the rules.
matters However, a company may also include such additional matters in its articles as
may be considered necessary for its management.
3. Contain provisions The articles may contain provisions for entrenchment.
for entrenchment The articles may be altered only if conditions are more restrictive than special
resolution.

14 CA. Sumit Gupta

 ~ 15 ~
4. Manner of The provisions for entrenchment shall only be made
inclusion of the - either on formation of a company,
entrenchment - or by an amendment in the articles
provision - agreed to by all the members of the company in the case of a private
company and
- by a special resolution in the case of a public company.
5. Notice to the Where the articles contain provisions for entrenchmentthe company shall give
registrar of the notice to the Registrar.
entrenchment
provision
6. Forms of articles The articles of a company shall be in respective forms specified in Tables, F, G, H,
I and J in Schedule I as may be applicable to such company.
7. Model articles A company may adopt all or any of the regulations contained in the model articles
applicable to such company.

DIFFERENCES BETWEEN THE MEMORANDUM AND ARTICLES

1. OBJECTIVES Memorandum of Association defines and delimits the objectives of the company
whereas the Articles of association lays down the rules and regulations for the
internal management of the company. Articles determine how the objectives of the
company are to be achieved.
2. RELATIONSHIP Memorandum defines the relationship of the company with the outside world and
Articles define the relationship between the company and its members.

3. ALTERATION Memorandum of association can be altered only under certain circumstances and
in the manner provided for in the Act. In most cases permission of the Regional
Director, or the Tribunal is required. The articles can be altered simply by
passing a special resolution.
4. ULTRA VIRES Acts done by the company beyond the scope of the memorandum are ultra-vires
and void. These cannot be ratified even by the unanimous consent of all the
shareholders. The acts ultra-vires the articles can be ratified by a special
resolution of the shareholders.

DOCTRINE OF ULTRA VIRES

MEANING  Ultra vires means an act or transaction beyond or in excess of the
powers of the company.
1 20 23 27 59 An act or transaction shall be ultra vires if –
 It is not permitted or authorized by the Companies Act, 2013.
 It fails outside the object clause of memorandum; and

EFFECTS  An act which is ultra vires the company is void and of no legal effect.
 An ultra vires contract cannot become valid by ratification.
 An act which is ultravires the directors, it can be ratified by the members
by a resolution passed.
 An act which is ultravires the articles, it can be ratified by a Special

15 CA. Sumit Gupta

 ~ 16 ~
Resolution passed. (with retrospective effect)

PURPOSE OF DOCTRINE  The purpose of doctrine of ultravires has been defeated because now the
IS DEFEATED object clause can be altered by passing a special resolution of the
shareholders. (with prospective effect)
RELEVANT CASE Ashbury Railway Carriage & Iron Company Ltd. Vs Richie
The object clause of an industrial company contained the following objects
besides some other objects:
a) To make, sell or lend on hire, railway carriages and wagons.
b) To carry on the business of mechanical engineers and general
contractors.
c) To purchase, lease work and sell mines.

The company entered into a contract with Richie for the financing of a
construction of a railway line in Belgium.
The Court held that the word ‘general contractors’ had to be given a
restricted meaning.
 Only such contracts could be covered in the term ‘general ‘contractors’
as are in some way related or connected with mechanical engineering.
 Therefore, the company could not finance the construction of a railway
line by alleging that such a business falls under the business of general
contractors.

DOCTRINE OF CONSTRUCTIVE NOTICE

APPLICABILITY The doctrine operates in favour of the company.
It operates against the persons dealing with the company.

EFFECT  Once registered the memorandum and articles become public documents
(Sec. 399).
 Therefore, every person dealing with the company is presumed to have
read the memorandum and articles. Further it is presumed that he has
understood the provisions of memorandum and articles correctly.
(Constructive Notice)
 Every person dealing with the company has notice of all other related
documents such as special resolutions
 Therefore, it is the duty of every person dealing with company to inspect
documents and make sure that his contract is not beyond their provisions.
 If a person enters into a contract with the company which is beyond the
powers of company or outside the authority of directors, he cannot acquire
any rights against the company.
Example Kotla Venakataswamy vs. C Rammurthi
 The articles of a company required that all the documents and deeds of the
company shall be signed by MD, the secretary as a working director of the
company.
 A mortgage deed was signed by the secretary and a working director only.
 It was held that the mortgage deed was invalid even though the plaintiff
had acted in good faith and money was utilized for the benefit of the

16 CA. Sumit Gupta

 ~ 17 ~
company.

DOCTRINE OF INDOOR MANAGEMENT OR TURQUAND’S RULE

PURPOSE The doctrine of indoor management operates infavour of the outsiders.
It is an exception to the doctrine of constructive notice.
MEANING  As per this doctrine, outsiders dealing with the company are not
required to enquire into the internal management of the company.
 Outsiders dealing with the company are entitled to assume that as far as
5 6 15 22 25 60 61 internal proceedings of the company are concerned, everything has been
done regularly, it is a presumption and therefore rebuttable.
 Thus, the doctrine protects an innocent outsider from any irregularity
present in the working of the company.
The benefit of doctrine of indoor management can be availed only if the
person dealing with the company –
 Has the knowledge of the memorandum and articles;
 Has no knowledge of internal irregularity.
RELEVANT CASE Royal British Bank vs Turquand
 The articles of a company stated that the directors could borrow money
on behalf of the company, if they are so authorized by a resolution
passed by the shareholders in GM.
 The directors borrowed money from Bank without obtaining any
authorization from shareholders.
 Bank had lent the money to the company assuming that the shareholders
had authorized the directors to borrow money as per the requirement of
the articles.
 It was held that borrowing of money by the directors without any
authorization from the shareholders amounted to a mere internal
irregularity, and since Bank had no knowledge of such internal
irregularity, he would not be prejudiced by such internal irregularity

EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT

1. Actual/Constructive Where the persons dealing with the company have knowledge of an
Knowledge of irregularityinternal irregularity, the doctrine does not protect them.
Therefore, the benefit of doctrine of indoor management shall not be
available in such a case.
Howard v Patent Ivory Manufacturing Company
 The directors of a company could borrow upto £ 1,000 without the
sanction of members in GM.
 The consent of the shareholders was required to borrow in excess of
£1,000.
 The directors themselves lent £3,500 to the company.
 It was held that the directors had the notice of the internal irregularity
and therefore the company was liable to them only for £1,000.
2. Negligence – Suspicious If there are suspicious grounds surrounding a transaction like where the

17 CA. Sumit Gupta

 ~ 18 ~
circumstances or unusual transaction is unusual or not in the ordinary course of business, it is the
magnitude of transactions duty of the outsider to make necessary enquiry.
Anand Biharilal vs. Dinshaw & Company
 An accountant of the company entered into a contract on behalf of the
company with a third party to sell the property of the company.
 It was held that the third party could not assume that the accountant
was authorized by the company to sell the property of the company.
Haughton & Co vs Nothard, lowe & wills Ltd
 A person holding directorship in two companies applied the money of
one company in payment of other company’s debt.
 The court held that this was unusual and should have been enquired if
director had such power or not.
3. Forgery This doctrine applies only to irregularities which may affect a transaction
but it cannot apply to forgery which is regarded as nullity.
Ruben v Great Fingall Consolidated Company
 A share certificate was issued under the common seal of the company.
 The secretary of the company had signed on the share certificate.
 However, the signatures of two directors were also required on it, which
were forged by the secretary.
 The Court held that in case of forgery, there is not a defect in consent,
but absence of consent, and therefore the certificate issued by way of
forgery is void. Thus, the certificate was held to be invalid.

18 CA. Sumit Gupta