Best companies law summary notes

companies law

The companies act, 2013

Working knowledge only at foundation level

• Meaning and characteristics of a company
• Corporate veil theory and lifting of corporate veil
• Classes of companies
• Incorporation of company
• Memorandum of association and articles of association

Scope of new companies act 2013.

• 470 sections, seven schedules included in 29 chapters.
• Preceded by the companies act, 1956.

Purpose of new companies act 2013.

• Changes in the national and international economic environment
• Expansion and growth of our economy
• Improve corporate governance
• Simplify regulations
• Strengthen the interests of minority investors
• First time legislates the role of whistle-blowers

Applicability of the companies act, 2013:

• Companies incorporated under this act or under any previous company law.
• Insurance companies – insurance act, 1938 or the IRDA act, 1999)
• Banking companies – Banking regulation act, 1949)
• Companies engaged in the generation or supply of electricity  – Electricity Act, 2003)
• Company governed by any special act for the time being in force. LIC, UTI etc.
• Incorporated by any act for time being in force, as central government notified

Meaning of a company

• 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.”

• Section 2(20) of the companies act, 2013 “company means a company incorporated under this act or under any previous company law”.

Characteristics of a company

Separate legal entity:

• Clothed with a legal personality
• Separate from its members
• Different from the subscribers to the memorandum of association  or directors
• Same rights and powers as a human being.
• Own property, have bank account, raise loans, incur liabilities and enter into contracts.
• Even members can contract with company, acquire right against it or incur liability to it.
• For debt of company, company is liable not the members
• The company becomes the owner of its capital and assets.
• The shareholders are not the private or joint owners of the company’s property.

Case   :  a member does not even have an insurable interest in the property of the company.

• Macaura v. Northern assurance co. Limited (1925):
• M was the holder of 100% shares. Hence he insured timber with his name instead of company. Insurance company is not liable

Perpetual succession:

• Death, insolvency or transfer of member does not affect the existence of company,
• It will continue till winding up by law
• An artificial person created and liquidation by law only

Limited liability:

Depends upon the kind of company

• Limited liability company up to nominal value of shares
• Debts of the company do not become the debts of the shareholders.
• Limited to the extent of the nominal value of shares
• To pay maximum up to unpaid value shares.

• Limited by guarantee
• Amount guaranteed only when the company goes into liquidation.

• Unlimited company :
• Members are personally liable for the debt of the company.

Artificial legal person:

• Created other than natural birth.
• Legal or judicial but clothed with all the rights of an individual.
• Sue and be sued in its own name.
• Do everything – natural person can do except jail, take an oath, marry or practice a learned profession.
• Act only through human agency, viz., directors.
• They are not the “agents” of the members of the company.
• Their own or through the common seal can authenticate its formal acts.

Common seal:

• Official signature – affixed by the officers and employees -on its every document.
• As the symbol of its incorporation.
• The companies (amendment) act, 2015 has made the common seal optional
• In the U.K. – optional since 2006.
• Not have a common seal, the authorization shall be made by two directors or by a director and the company secretary,
• Corporate veil:
• Identified separately from the members of the company.
• Members are protected from liability of the company’s actions, any debts or contravenes any laws, errors.

The Salomon vs. Salomon and co ltd.

• One Salomon incorporated a company named “Salomon & co. Ltd.”,
• Seven subscribers – himself, his wife, four sons and one daughter.
• Took over the personal business
• Salomon took 20,000 shares of £ 1 each,
• Debentures of £ 10,000 with charge
• Wife, daughter and four sons took up one £ 1 share each
• In liquidation the unsecured creditors –  salomon

Could not be a secured creditor of the company as being one man company

• The company was a mere sham and fraud.
• Clearly established that company has its own existence
• Debentures are required to pay prior to unsecured creditors.
• A shareholder cannot be held liable

Veil of corporate personality can be lifted.

Meaning of “lifting the veil”

• Looking behind the company as a legal person,
• Disregarding the corporate entity
• Question of control rather than of ownership in certain cases.
• Cases where company law disregards the principle of corporate personality

 (1) To determine the character of the company i.e. to find out whether co-enemy or friend:  

Daimler co. Ltd. vs. Continental tyre & rubber co.

• Whether a company is an enemy company?

• Incorporate in England but directors are of German
• Due to first world war both were enemy country
• A company does not have mind or conscience; therefore, it cannot be a friend or foe.
• If its affairs are under the control of people of an enemy country.
• Court examine – who control the affairs of the company.

(2) To protect revenue/tax:

Dinshaw maneckjee petit,

• Income by way of dividends and interest.
• He opened some companies
• Purchased shares – dividend and interest transferred to assesse by way of loan.
• Corporate veil was lifted

(3) To avoid a legal obligation:

 As a device to reduce bonus to workmen,

Workmen of associated rubber industry ltd., v. Associated rubber industry ltd.:

• Bonus is based on profit of business
• One investment company formed subsidiary company for reducing bonus liability by transferring shares and income on it.
• Here profit is reduced by using corporate identity

• Formation of subsidiaries to act as agents:
  • As an agent or trustee of members or of company,
  • Principal will be liable

Merchandise Transport Limited vs. British Transport Commission (1982),

• A transport Company  cannot receive licenses               with own name,
• Formed a subsidiary company, license was received in the name of the Subsidiary.
• The vehicles were to be transferred
  the parent
• Parent and Subsidiary   were one commercial unit
• The application for licenses was rejected.

(5) Company formed for fraud/improper conduct or to defeat law:  

• Illegal or improper purpose,
• To defeat or circumvent law, to defraud creditors

And avoid legal obligations.

Gilford Motor Co. vs. Horne

• Mr. Horne entered in employment contract
• Not to solicit customer after leaving job.
• He used corporate personality for same

4. CLASSES OF COMPANIES UNDER THE ACT

• The growth of the economy and increase in the complexity
• Need of different forms of corporate organizations.
• The Companies Act, 2013 classified as a one-person company, private company or a public company.
•  On the basis of liability – unlimited, limited by shares or by guarantee or by both.
• On the basis of control-associate, holding and subsidiary company.
• Other forms foreign, government, small, dormant, nidhi and for charitable objects.

                            Section 2(22) liability

1. On the basis of liability:

    (a) Company limited by shares:

 Of the members is limited by memorandum of association up to unpaid amount of shares.

• His property cannot be liable for the company’s debt.
• A shareholder is a co-owner of the company not of the company’s assets.
• Rights and duties of a shareholder – his shareholdings.

(b) Company limited by guarantee:

• Section 2(21)  -limited amount as the members undertake by the memorandum
• To contribute to the assets of the company in the event of its being wound up.

Common features –

• Both state in memorandum that the members’ liability is limited.

Distinction    :

Guaranteed                                   Limited by shares

• Only after commencement               at any time

Of the winding up subject to         company’s life-time

Conditions;                                     its winding up.

• Not raise its initial working              can raise

Funds from its members.

• Other sources like endowment,       issued and paid up

Fees, charges, donations, etc.          Capital   

Narendra Kumar Agarwal vs. Saroj Maloo,

Supreme court – Refuse to accept the transfer by company and privileges of members are different

(c) Unlimited company:

Section 2(92) not having any limit on the liability of its members.

The liability ceases when he ceases to be a member.

Liability extends to the whole amount of the company’s debts

Entitled to claim contribution from other members.

The articles of association – the amount of share capital and the amount of each share.

Liability on the shareholders is similar to liability of the company.

The creditors -institute proceedings for winding

The official liquidator – call the member’s contribution.

On the basis of members:

• One person company:
• The Companies Act, 2013 introduced.
• Section 2(62) – company has one person as a member.
• Encourage entrepreneurship and corporatization
• A separate legal entity with a limited liability
• Sole proprietary – the liability extends to the owner’s entire assets – business and personal.
• Procedural requirements – simplified through exemptions -compare to other forms of companies.

Again mentioned that 

• Section 3(1)(c) –  private limited company with the minimum paid up share capital as may be prescribed and has at least one member.

OPC (One Person Company) – significant points

• Only one person as a member.
• Minimum paid up capital – no limit prescribed.
• Nomination in memorandum – subscriber’s death or incapacity – become the member of the company.
• Prior written consent – file with Registrar- at the time of incorporation.
• Right to withdraw his consent.
• Change the name inform to company – intimate to registrar
• Not an alteration of the memorandum.
• Nominee and member -a natural person, an Indian citizen and resident in India
• Stayed in India for a period of not less than 182 days during the immediately preceding one calendar year)-
  • Shall be eligible to incorporate a OPC;
• Eligible to incorporate one OPC or nominee in one company.
• Minor cannot become member, nominee or having beneficial interest.
• Cannot be incorporated or converted u/s 8
• Can be converted to private or public companies in certain cases.
• Cannot carry out Non-Banking Financial Investment activities
• Cannot convert into any kind of company up to two years except   paid up capital increased beyond fifty lakh rupees or average annual turnover exceeds two crore rupees.
• Company or any officer contravenes the provisions punishable with fine ten thousand rupees and one thousand rupees for every day
• Here the member can be the sole member and director.

Private Company [Section 2(68)]:

•  Minimum paid-up share capital
• Articles,—
• Restricts – transfer its shares;
• Except OPC, limits the number of its members to two hundred:

• Two or more persons hold jointly, treated as a single member :
• Any person acquired shares while in employment, during employment and after ceasing the employment not included.

 (iii) Cannot invite to the public to subscribe any securities

Private company – significant points

•  No minimum paid-up capital requirement.
•  Minimum number of members – 2 (except OPC -1).
•  Maximum number of members – 200, excluding, present employee-cum-members and erstwhile employee-cum-members.
• Right to transfer shares restricted.
•  Prohibition on invitation to subscribe to securities of the company.
•  Small company is a private company.
•  OPC can be formed only as a private company.

Small Company:

• Section 2(85) – other than a public company—
  • Paid-up share capital – not exceed fifty lakh rupees as prescribed not be more than five crore rupees; and
  • Turnover – last profit and loss account does not exceed two crore rupees or prescribed  -not  more than twenty crore rupees:
• Exceptions:  –not apply to:
  • A holding company or a subsidiary company;
  • A company registered under section 8; or
  • A company or body corporate governed by any special Act.

Small Company –significant points

• A private company
• Paid up capital – not more than Rs. 50 lakhs
• Turnover – not more than Rs. 2 crores.
• Should not be – Section 8 company
  • Holding or a Subsidiary company –special act

• Public company [Section 2(71)]:
• A company which—
  • Is not a private company; and
  • Has a minimum paid-up share capital, as may be prescribed :

• A subsidiary of a public company – deemed to be public company although continues to be a private company in its articles ;

Public company – significant points

• Is not a private company (Articles do not have the restricting clauses).
• Shares freely transferable.
• No minimum paid up capital requirement.
• Minimum number of members – 7.
• Maximum numbers of members – No limit.
• Subsidiary of a public company is deemed to be a public company.
• Section 3(1)(a), any lawful purpose by seven or more persons,

3. On the basis of control:

(a) Holding and subsidiary companies:

• Relative terms.
• A company of which such companies are subsidiary companies. [Section 2(46)]
• Section 2(87) -“subsidiary company”   in which
• Holding company—
  • Controls the composition of the Board of Directors; or
  • More than one-half of capital – own or together subsidiary companies:
  • “Layer” in relation to a holding company means subsidiaries.
• Example 1: A will be subsidiary of B, if B  without the consent  of other person, appoint or remove a majority of directors of A.
• Example 2: A will be subsidiary of B, if B holds more than 50% of the share capital of A.
• Example 3: B is a subsidiary of A and C is a subsidiary of B., C will be the subsidiary of A.
• If D is a subsidiary of C, D will be subsidiary of B as well as of A and so on.
• Status of private company, which is subsidiary to public company
• Deemed to be public company -although a private company in its articles.

(b) Associate company [Section 2(6)]:

• A company in which other company has a significant influence, but not a subsidiary company includes a joint venture company.
• ”significant influence” –  at least twenty per cent of total voting power or participation in business decisions under an agreement;
• “Joint venture’’ – a joint arrangement or joint control of the net assets of the arrangement.
• “Total Share Capital”,  aggregate of  –
  • Paid-up equity share capital; and
  • Convertible preference share capital
• Shares held by a company in another company in a ‘fiduciary capacity’ shall not be counted

4. On the basis of access to capital:

Listed company:

• Section 2(52) – a company – any of its securities listed on any recognized stock exchange.

Unlisted company:

• Means company other than listed company.

5. Other companies:

Government Company [Section 2 (45):

• Not less than 51% of the paid-up capital  held by-
  • The Central Government, or
  • By any State Government or Governments, or
  • Partly by the Central Government, state government or its subsidiary

Foreign Company [Section 2(42)]:

• Body corporate incorporated outside India —
• A place of business in India itself or through an agent, physically or through electronic mode; and

       Business activity in India in any manner

(c) Formation of companies with charitable objects etc. (Section 8 Company):

• Section 8 – formation of companies  
• To promote the charitable objects of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment etc.
• Apply its profit in  promoting its objects and
• Prohibiting – payment of dividend to members.
•  

Examples of section 8 Federation of Indian Chambers of Commerce and Industry (FICCI), the Associated Chambers of Commerce of India (ASSOCHAM),  National Sports Club of India, Confederation of Indian Industry (CII)  etc.

Power of Central government to issue the license–

(i) Central Government to register – association of persons as a company with limited liability without addition Limited’ or ‘Private limited’ to its name, -conditions as it deems fit.

(ii) The registrar register such association of persons as a company under this section.

(iii) On registration – enjoy same privileges and obligations as of a limited company.

.15

Revocation of license:

• C.G. – Company  contravenes  requirements,  conditions  subject to which issued
• Fraudulent affairs, violation of the objects and prejudicial to public interest,
• Put ‘Limited’ or ‘Private Limited’
• Before revocation, a written notice and opportunity to be heard is required.

Order of the Central Government:

• In  public interest amalgamated with another company  having similar objects,
• To form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as specified in the order,
• Or the company be wound up.

Penalty/punishment in contravention:

• Default in complying – fine from ten lakh rupees to one crore rupees
• Directors and every officer – imprisonment extend to three years or fine from twenty five thousand rupees to twenty-five lakh rupees, or with both
• Conducted fraudulently, every officer in default- liable u/s 447 related to Fraud.

Section 8 Company- Significant points

• Formed for the promotion of commerce, art, science, religion, charity, protection environment, sports, etc.
• Requirement of minimum share capital not apply.
• Profits for the promotion of the objective
• Does not declare dividend to members.
• Operates under a special license from Central Government.
• Not Ltd. / Pvt. Ltd. – but use suitable name such as club, chambers of commerce etc.
• License revoked if conditions contravened.
• On revocation, Central Government may direct it to
  • Converts its status and change its name
  • Wind – up
  • Amalgamate with another company having similar object.
• Can call its general meeting by giving a clear 14 days’ notice instead of 21 days.
• Requirement of minimum number of directors, independent directors etc. Does not apply.
• Need not constitute Nomination and Remuneration Committee and Shareholders Relationship Committee.
• A partnership firm can be a member of Section 8 Company.

(d) Dormant company (Section 455):

• Future project or to hold an asset or intellectual property
• No significant accounting transaction
• An inactive company applies to the Registrar – obtaining the status.

“Inactive company”  

• Not  carrying any business operation,
• No significant accounting transaction, not filed financial statements and annual returns last two financial years.

“Significant accounting transaction”

Other than —

• Payment of fees  to the Registrar;
• Payments to fulfil the requirements of this Act or any other law;
• Allotment of shares under this Act; and
• Payments -maintenance of office and records.

Nidhi Companies: (Section 406)

• Object of cultivating the habit of thrift (cost cutting), savings,
• Receiving deposits and lending to members – for their mutual benefit only

Public Financial Institutions (PFI):

Section 2(72):

• Life Insurance Corporation of India – established under the Life Insurance Corporation Act, 1956;
• The Infrastructure Development Finance Company Limited,
• Specified company – Unit Trust of India Act, 2002;
• Institutions – 4A (2) of the Companies Act, 1956 repealed u/s 465 of this Act;
• Institution – notified by the C. G. In consultation with the RBI

Conditions to be notified as PFI:

No institution shall be so notified unless—

(A) Any Central or State Act, other than this Act or the previous Companies Law; or

(B)   Government company

5. MODE OF REGISTRATION/INCORPORATION OF COMPANY

PROMOTERS:

Section 2(69) -a person—

• Named in a prospectus or  identified in  annual return  in section 92; or
• Control – affairs of the company, directly or indirectly,  as a shareholder, director
• Board of directors receives advice, directions or instructions

Simple terms

• Who  conceive and form the company
• Take all necessary steps for its registration.
• Professional capacity e.g., the solicitor, banker, accountant etc.  Not as promoters.

FORMATION OF COMPANY:

• Section 3 – basic requirement – constitution of the company.
• Public company – 7 or more persons – lawful purpose – subscribing memorandum and complying the Act.
• Private company – 2 or more persons
• Be formed as one person company (OPC)

INCORPORATION OF COMPANY:

Section 7

(1)Filing of the documents and information with the registrar:

Under whose jurisdiction -Registered office is proposed to be situated –File following documents.

• Memorandum and articles – signed by all the subscribers to the memorandum.
• Declaration by professionals  -(an advocate, a chartered   Accountant, cost accountant or company secretary in practice) and   Person named in the articles –(director, manager or secretary) –  Act and the rules   – matters precedent or incidental –have been  complied
• Declaration – subscribers to the memorandum and First directors in the articles stating that-
• Not convicted of  offence in  promotion, formation or management of company,
• Not guilty  any fraud or misfeasance or of any breach of duty  -this Act or any previous act – the last five years,
• Correct and complete and true to the best of his knowledge and belief;
• Address for correspondence till its registered office is established;
• Every subscriber to the memorandum and article – names, including surnames or family names, residential address, nationality – along with proof of identity
• Interests of the persons – the first directors of the

    Company – consent to act as directors

Particulars provided of the individual subscriber and not of the professional

(2) Issue of certificate of incorporation on registration:

• On the basis of documents and Information filed,
• The prescribed form to the effect that the proposed company is incorporated

(3) Allotment of Corporate Identity Number (CIN):

• On and from the date mentioned in the certificate
• Registrar shall allot to the company a corporate identity number,
• Distinct identity for the company

(4) Maintenance of copies of all documents and information:

• At its registered office -copies – originally filed -till its dissolution

(5) Furnishing of false or incorrect information or suppression of material fact at the time of Incorporation (i.e. at the time of Incorporation):

• Any person furnish or aware – liable for action for fraud under section 447.

(6) Company already incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact (i.e. Post Incorporation):

• The promoters, the persons named as the first directors and the persons making Declaration – liable for action for fraud under section 447.

(7) Order of the Tribunal:

• Incorrect Information, documents, declaration,                 or suppressing any material fact,
•  By any fraudulent action – company incorporated,

On an application the Tribunal satisfied then orders that

(a)  Regulation of the management – Changes in its memorandum and articles, in interest of public, company, members and creditors;

(b)  Liability of the members be unlimited;

(c) Removal – name – register of companies;

(d) Winding up of the company

(e) Other orders as deem fit:

Before making any order,—

• Reasonable opportunity of being heard in the matter
• Take into consideration the transactions, Obligations,    contracted for payment of any liability.

Simplified Proforma for Incorporating Company Electronically (spice)

• MCA – simplified the process of filing of forms for incorporation of a company
• Various initiatives – ease of business – easy Setting up of business,

EFFECT OF REGISTRATION:

Section 9

• The date of incorporation – Subscribers and all other persons – time to time become members of the company.
• Be a body corporate by the name contained in the memorandum.
• All the functions – perpetual succession – acquire, hold and dispose of all properties.
• Contract – with its Members and outsider and to sue and be sued.
• All shares held by the President of India and other officers of the Central Government not make a company an agent [Heavy Electrical Union vs. State of Bihar].

EFFECT OF MEMORANDUM AND ARTICLES:

Section 10

• Registered  – bind the company and the members –
• Same Extent as signed by the company and by each member
• All the provisions of the memorandum and of the articles.
• Monies payable by any member – be a debt due to the company.

6. CLASSIFICATION OF CAPITAL

• Variety of meanings- economists; accountants, businessmen and lawyers.
• Company – limited by shares – Share capital,
• Divided into shares of fixed amount
• Contributions of persons to the common stock
• Proportion of the capital  –
• Interest, various rights and entitlement measured by a sum of money – ‘capital’

Classification of capital as per company law domain

• Nominal or authorized or registered capital:

Section 2(8)

• Authorized by MOA
• Maximum amount of share capital can be raised during life of the company
• Upon which it pays the stamp Duty.
• Estimated need, including the working capital and reserve capital.
  • Issued capital:

Section 2(50)

• Issues from time to time for subscription
• Part of authorized capital – Offered by the company includes shares allotted for consideration other than cash.
• Schedule III, obligatory to disclose in balance sheet.
  • Subscribed capital:

Section 2(86)

• Part of the capital time being subscribed by the members of a company.
• Nominal amount – taken up by the public.
• Conspicuous characters -notice, advertisement, official Communication, business letter, bill head or letter paper authorized, subscribed and paid-up capital.
• Default – company and every officer – penalty 10,000

And 5,000 respectively. [Section 60].

• Called-up capital:

Section 2(15)

• Part of   shares issued -for payment. It is the total amount called up on the shares issued.
  • Paid-up capital
• Paid or credited – called up – Capital less calls in arrears.

7. SHARES

(I) Nature of shares:

Section 2(84)

• A share in the share capital -includes stock.
• Paid up capital -Proportion of the interest of the shareholders interest in the company’s assets
• Not part owners of the undertaking
• Rights and obligations – contract, MOA and AOA, companies  act

Shares are a movable property:

Section 44

• Shares, Debentures or other interests – transferable -AOA

Shares shall be numbered:

Section 45

• Every share distinguished by its distinctive number.
• Not apply – beneficial Interest – in the records of a depository.

(II) Kinds of share capital:-

Section 43 – two kinds

5.23

Share Capital

• Equity share capital

Limited by shares, not preference share capital

• With voting rights; or
• With differential rights – dividend, voting right..
• Tata Motors, 2008 -‘A’ equity shares as rights issue one voting right but would get 5 percentage points more dividend or traded at discount having full voting.

2. Preference share capital

• Fixed rate  

Preferential right –

• Payment of dividend:
• Repayment – winding up
• Fixed premium in  memorandum or Articles of the company;

.

8. MEMORANDUM OF ASSOCIATION

• Charter; defines  constitution, scope and power
• Foundation – whole edifice (structure) – built.

Object of registering:

• Identifies scope of operations – beyond which its actions cannot go.
• Shareholders, creditors – know powers and activities engage in.
• Public document  – person entering into a contract – presumed to have knowledge -purposes and risks
• Not enter into a contract   – trade or business –

Beyond the power

• Does – ultra vires and void.

Section 4- MOA – form

Tables A , B, C, D and E in Schedule I

• Table A – limited by shares.
• Table B – limited by guarantee and not having a
• Share capital.
• Table C – limited by guarantee and having a

    Share capital.

• Table D – an unlimited company.
• Table E – an unlimited company and having share capital.
• Closed to model forms -as possible – circumstances.

Content of the memorandum:

• The name of the company (Name Clause)
• Last word “Limited” – public limited Company, “Private Limited” – private limited company.  Not Applicable section 8 of the Act.

• Foundation, Forum, Association, Federation, Chambers, Confederation, council, Electoral trust – section 8
• Government company- “Limited”.
• OPC – below its name- “One Person Company”
  • Registered Office clause
• State  – to be situated;
  • Object clause
• Proposed to be incorporated and any matter…
• Changed  activities – not reflected in  name, change  name within six months-  complying the provisions 
  • Liability clause
    • Members – limited or unlimited,
• Limited by shares –Amount unpaid – shares held by them;
• Limited by guarantee – member undertakes to contribute
• In assets event of  being wound-up while he is a member or within one year after ceases to be a member – debts and liabilities – contracted before he ceases
• Costs of winding up – adjustment in rights of the

Contributories

• Capital Clause
• Authorized capital – fixed amounts and the number of shares
• Subscribers-agreed – opposite their names, not less than one share.
• Not having share capital need not have this clause.

(f) Association clause

• Desire of the subscribers –  at least one share -write

       Against his name, the number of shares taken by him.

• OPC – name of the person – death of the subscriber become the Member.

Memorandum must

• Printed, divided into paragraphs, numbered consecutively, signed  by seven persons –public, two – private company, one -OPC
• At least one witness-attest the signatures.
• Particulars of the signatories and witness – address, description, occupation etc.
• Legal person – subscribe Memorandum through agent.  
• Guardian of a minor – subscribes -as personal capacity.
• Above clauses –compulsory.
• In addition  – may contain other provisions –right of share
• Not contain – contrary to Companies Act.
• All other documents – comply with the Memorandum.

9. DOCTRINE OF ULTRA VIRES

• “Beyond (their) powers”.
• Acts done in excess of the legal powers of the doers.
• Powers in their nature are limited.
• Fundamental rule – the objects -departed – extent permitted by the Act.
• Beyond the powers of the company -void and inoperative -not binding on the company.
• Restrained from employing its fund or carrying on a trade different from authorized.
• A company can neither be sued nor can it sue.
• Memorandum – “public document”- open for inspection. ,
• Person- deemed to know – the powers of the company.

Example

• Supplied goods, performed service or lent money for ultra vires act
• Cannot obtain payment or recover the money lent.
• Not Expended – stop -by means of an injunction
• Take back the property in specie
• If utilized – lawful debt lender steps into the shoes of the debtor paid off.
• Act – ultra vires directors, the shareholders can ratify it
• Ultra vires the articles -alter the articles;
• Within the power of the company, shareholder can validate

Ashbury Railway Carriage and Iron Company Limited v. Riche-(1875).

Objects

• To make, sell or lend on hire, railway carriages and wagons;27
• Mechanical engineers and general contractors.
• To purchase, lease, sell and work mines.
• To purchase and sell as merchants or agents, coal, timber, metals etc.

• With Riche – financing the construction of a railway

Line in Belgium,

• His contention – contract well within general contractors and ratified by a majority of shareholders.
• Court – general contractor’s was not so interpreted,
• It includes marine and fire insurance but not finance.

Disadvantage

•  Not available protection to the shareholders and creditors.

Useful

• Members – restraining  the directors,

Nuisance (obstacle) –

• Prevents changing activities -agreed by all.
• Now object clause easily altered, just a special    resolution           

10. ARTICLES OF ASSOCIATION

• Rules and regulations to manage its internal affairs.
• Memorandum – fundamental conditions upon – incorporated,
• Bye-laws – director, officers, management, accounts

And audit.

Section 5

Model of articles of Association

(1) Contains regulations:

• Contain the regulations for management

(2) Inclusion of matters:

• Prescribed under the rules.

• Also include additional matters necessary for management.

(3) Contain provisions for entrenchment:

• Protect something- provisions of the articles may be altered  -special resolution

(4) Manner of inclusion of the entrenchment provision:

• Either on formation or by an amendment in the articles agreed – all the members – private company
• Special resolution – Public company.

(5) Notice to the registrar of the entrenchment provision:

• Notice to the Registrar – form and manner – prescribed.

(6) Forms of articles:

• Tables, F, G, H, I and J in Schedule I

(7) Model articles:

• Adopt all or any of the regulations of model articles

 (8) Company registered after the commencement of this Act:

• Do not exclude or modify – model articles
• Applicable – same manner – registered articles of the company.

Memorandum of Association vs. Articles of

Association:

1. Objectives:

MOA defines and delimits the objectives

AOA- rules and regulations for internal management

How the objectives are to be achieved.

2. Relationship:

MOA – the company with the outside world

AOA – the company and its members.

3. Alteration:

MOA- altered – certain circumstances –

Most cases permission – Regional Director, or the Tribunal 

AOA- altered simply by passing a special resolution.

4. Ultra Vires:

MOA -beyond the scope of the memorandum -void.

AOA – ratified by special resolution

11. DOCTRINE OF CONSTRUCTIVE NOTICE AND INDOOR MANAGEMENT

Doctrine of Constructive Notice: (Company not liable)

Section 399

• Inspect – electronic means – kept by the Registrar
• Copy of any document on payment of prescribed fees.
• MOA & AOA – public documents – available for inspection
• Duty of every person -Inspect its documents – contract in conformity
• Presumed – knows the contents of the documents.
• This kind of presumed/implied notice is called constructive notice.

Means:

• Reads, knowledge and understand – contents of documents.
• Not only MOA & AOA – other related documents, e.g.  Special Resolutions etc. – registered with the Registrar.
• Enters into a contract – beyond the powers of the company
• Not acquire any Rights against the company.

Doctrine of Indoor Management: (Company liable)

• Exception to the doctrine of constructive notice.
• No outsiders – deemed to have notice of the internal affairs.
• An act is authorized by the Articles or memorandum,
• Outsider – assume that all the detailed formalities

Observed.

The Royal British Bank vs.Turquand.  -Turquand Rule.

• Mr. Turquand was the official manager (liquidator) of the company
• Company had given a bond for £ 2,000 to the Royal British Bank,
• Bond was under the company’s seal, signed by two directors and the Secretary.
• Directors – power to borrow – a company resolution.
• Not specifying amount in resolution

• Held that bond was valid, because it was not registrable.
• No requirement to look into the company’s internal workings.
• Indoor affairs are the company’s problem.

Exceptions to the doctrine of Indoor Management:

(Company not liable)

• Important to persons dealing with a company
• Assume – acts of the directors or officer -validly performed – done in the manner required.
• Turquand Rule has limitations of its own.
• Inapplicable to the following cases,
• Actual or constructive knowledge of irregularity:

Person dealing has notice

Howard vs. Patent Ivory Manufacturing Co.

• Directors could not defend
• Lending money to the company – the assent of the general meeting – not obtained.

Morris v Kansseen,

• Director could not defend
• An allotment of shares to him -participated in the meeting

2) Suspicion of Irregularity:

• No rewards – negligent act.
• Put upon an inquiry unusual or not in the ordinary course
• Circumstances –  suspicious

Anand Bihari Lal vs. Dinshaw & Co.

• Transfer  property from its accountant,
• The transfer was held void.
• In absence of power of attorney.

Haughton & Co. V. Nothard, Lowe & Wills Ltd.

• Directorship in two companies
• Apply the money of one in payment of debt of other.
  • Forgery:
• Applies only to irregularities
• It cannot apply to forgery
• Which regarded as nullity.

The Ruben v Great Fingall Consolidated.

• Transferee of a share Certificate issued – seal of the  company – CS – forged the signature of the two directors