Legal Personality.......................................................................................................................20 Constitution of a Company........................................................................................................37 Doctrine of Constructive Notice and Indoor Management........................................................ !

"c#no$ledgements% C&eena' (a&ul)' *a+rina' Cacy' )oc&&ar' Nanda' "s&utos&' Datar' Nivedita' *&aili' ,upta-i' .egde' "m+er' and of course' Priyas&a.

COMPANY% /&e -oining toget&er of persons for t&e purpose of carrying on +usiness' in order to generate a profit. *elf interest is t&e underlying motive +e&ind all activities. /&ere can +e different forms of associations to carry on +usiness. Contract is t&e +asis of association0 it ties toget&er t&e people. /&ere are forms of t&e contract0 t&e corporate form and t&e partners&ip form. *o' +usiness associations can ta#e on 2 legal forms0 partners&ip and corporate forms. " co0 operative society is also an association +ound +y contract0 it is also an incorporated society. *.2172 IC"0 +ody corporate includes a company incorporated outside India +ut does not include co0operative societies. Corporations come $it&in t&e purvie$ of t&e 3nion List0 &ence co0 operative societies are e4cluded from t&e definition of t&e +ody corporate. /&e -oint .indu family is also a +ody of persons0 +ut it is not an association as it is +ased on status and not contract. /&e difference +et$een .356s t&at engage in trade and t&ose t&at don6t is t&e po$er of t&e #arta to incur de+t. If it is a non0trading family' t&e #arta can incur de+t only in case of legal necessity and +enefit to t&e family. .en t&ere is collective enterprise0 t&ere is an invisi+le entity created0 t&e individuals $&o constitute it are separate from t&e entity created. "n interest recogni7ed or protected +y t&e rule of la$ is a rig&t. " person is an entity recogni7ed +y t&e legal system as capa+le of e4ercising rig&ts and duties. Corporation is one suc& legal entity0 t&at is recogni7ed +y t&e legal system as capa+le of e4ercising rig&ts and lia+ilities. It is necessary for t&e legal system to recogni7e an entity as a person0 eg. Certain slaves $ere not recogni7ed as persons capa+le of e4ercising rig&ts and lia+ilities. *o' non0&umans can also +e recogni7ed +y la$ as +eing persons0 eg a +ody corporate. Difference between Corporation and Partnership% " corporation is legally different from a partners&ip due to t&e notion of separate legal personality. /&ere are some instances $&ere t&is notion is set aside0 eg lifting t&e corporate veil' etc. " corporation is distinct from t&e corporations $&ic& constitute t&e association. /&e status of t&e corporation can +e attained +y registration under t&e Conpanies "ct. English Law% 8arliest la$ $as 9oint *toc# Companies "ct' :;!!. In India' it $as t&e 9oint *toc# Companies "ct' :;<!. Indian La$ is +ased on 8nglis& La$0 t&e :=< Companies "ct is +ased on t&e :=!; 8nglis& statute. /&ere $as a ne$ statute in :=;<. *ome of its provisions $ere replaced +y t&e 200 "ct' $&ic& $ill +e fully effected in a fe$ years. Principles of Company la$ can +e understood in its &istorical conte4t. Corporation Sole% one person +e&ind t&e corporation at one time. /&ere is a series of successive persons. Corporation Aggregate% " group of co0e4isting persons0 so more t&an one person at a time0 eg0 company. TYPES OF CO PO AT!ONS"CLASS!F!CAT!ON OF COMPAN!ES% C&artered Corporation' *tatutory Corporation' (egistered Company. /&e *tate determines $&et&er an association is to +e recogni7ed as a legal person capa+le of e4ercising rig&ts and lia+ilities0 it all depends on t&e policy of t&e *tate. >ased on t&e mode in

$&ic& t&e recognition is granted' t&ere are t&ree types of corporations0 C&artered Corporations' *tatutory Corporations' (egistered Company. Chartered Corporation% /&e )ing' in t&e e4ercise of &is royal prerogative po$er' $ould confer t&e status of a legal personality on an association' mainly to carry on +usiness0 eg 8ast India Company. /&e mem+ers $ere given monopoly of trade in a foreign area0 t&is monopoly $as granted +y t&e C&arter. /&ey $ere not -oint stoc# companies +ut $ere regulated companies. /&e mem+ers of t&e association &ad trading rig&ts0 eac& one traded on &is o$n account0 +ut $ere regulated +y t&e rules' +ye la$s' etc. of t&e association. /&ere $as no ?uestion of limited lia+ility0 eac& mem+er earned &is o$n profit. Later' eac& mem+er &ad to ma#e a fi4ed contri+ution in t&e form of -oint stoc#. "part from t&e advantage of a monopoly' t&e corporation also &ad governmental po$er over t&e foreign area. *o' t&e mem+ers $ere given monopoly of trade $&ile t&e corporation $as given governmental po$er@sovereign po$er. >ot& $ere given +y t&e c&arter. >ot& of t&ese $ere opposed +y t&e pu+lic. *o' Cro$n $as cautious in granting C&arters0 $as only for foreign trade' not domestic trade. "s a result of t&e Industrial (evolution' t&ere $as a re?uirement of &uge amounts of capital for running t&e factories. >ut C&arters could not +e granted for t&is. *o' t&e resources of t&e community $ere tapped into. *o' Stat#tor$ Corporations evolved0 &aving a separate legal entity from t&e persons $&o formed it and contri+uted t&e funds. /&e Legislature directly conferred legal personality on t&e association' eg LIC' (>I. Most of t&ese statutory corporations are arms of t&e *tate to carry on commercial activities. /&e statutes provide t&at t&ey are +odies corporate $it& perpetual succession 1*.3 of t&e LIC "ct2. /&is is' &o$ever' not a feasi+le met&od0 it is not possi+le to enact a statute every time a corporation is to +e esta+lis&ed.

Registered Companies%
*o' t&e *tate enacted a general statute laying do$n t&e conditions to +e satisfied in order to +e a company. /&e (egistrar of Companies is given t&e po$er to confer legal personality and incorporate a company if t&e conditions are satisfied0 *.3! of t&e IC" states t&at t&e certificate of incorporation issued +y t&e (egistrar creates a legal personality. *ome felt t&at t&is is a ministerial function' ot&ers t&at it is ?uasi0-udicial. /&e first time t&is $as possi+le $as after t&e :;!! "ct $as passed in 8ngland. *o' t&e )ing and t&e legislature $ere t&e only sources +efore t&is "ct. /&ese $ere not easily approac&a+le0 so t&e partners&ip firm +ecame a popular met&od of collective enterprise. Pro+lems $it& t&e Partners&ip form0 /&e principle of mutual agency made partners&ips ris#y. /&e transfer of interest $as also to +e done only +y consent of ot&er partners. /&ere $as unlimited lia+ility. "lso' deat& insolvency' insanity resulted in dissolution of firm' unless t&ere $as a contract to t&e contrary. /&is is not so in a company. A&at &appens to t&e mem+ers of t&e company does not affect it. (egistered Companies are no$ t&e predominant form of companies. C&arter companies and *tatutory Companies are insignificant. /&ere is no c&arter company in India' and t&ere are only a fe$ statutory companies' $&ic&' in terms of t&eir si7e and strengt&' are d$arfed +y t&e economic po$er of registered companies. /&ese corporations enter into transactions0 so principles of Contract La$ +ecome important. >ut' t&ey &ave a tremendous influence on t&e lives of many people. *o' many people t&in# t&at t&ey are not mere private organi7ations +ut pu+lic ones. >ut 3

some feel t&at corporations are only private contracts. Posner says it is a standard form contract. /&ere is an ongoing de+ate as to $&et&er corporate la$ lies in t&e pu+lic or private domain. (egistered companies $ere not +orn as corporations. /&eir initial feat#res co#ld be traced to Deed of Settle%ent Co%panies0 $&ic& $as essentially a large partners&ip +ased on mutual agency and unlimited lia+ility and t&e restriction on transfer of interest $it&out unanimous consent of all t&e ot&er partners. /&e need for unanimous consent is due to t&e principle of mutual agency0 partners are lia+le for t&e acts of t&e ot&er partners and so t&ey &ave a rig&t to decide $&o t&e interest is +eing transferred to as t&ey $ill +e lia+le for &is acts. " principal is to +e lia+le for t&e acts of &is agent only if &e &as e4pressly or impliedly agreed t&at &e +e &is agent. /&e Deed of *ettlement Company evolved a novel type of partners&ip in order to o+tain a large capital. /&e agreement +et$een t&e partners $as t&e deed of settlement. /&e capital $as divided into units. /&ese units or s&ares could +e transferred $it&out t&e consent of ot&ers. In a partners&ip' all partners &ave a rig&t to manage. >ut' t&e deed of settlement provided t&at management $as to +e given to a small group called governors@directors. 5rom t&is' t&e >oard of ,overnors@Directors evolved. /&e property of t&e +usiness unit $as vested in a small group of people called trustees. " trust is $&en t&ere are too many o$ners' so legal title is given to a small group of people called t&e trustees. Bften' t&e trustees and t&e directors are t&e same. In t&e case of modern companies' t&e property +elongs to t&e company $&ic& is a separate legal entity. >ut in a Deed of *ettlement Company' t&e property $as $it& t&e trustees' In modern companies' directors can6t strictly +e called trustees as t&e property is o$ned +y t&e company and t&ey only manage it' not o$n it. Directors need not +e s&are&olders as per t&e IC"' unless t&e "o" re?uires it. /&e Deed of *ettlement Company $as not legally recogni7ed as a person. Many difficulties arise due to t&e features of t&e Deed of *ettlement Company' eg since it did not &ave a proper legal status' in case of suits' all t&e mem+ers of t&e association' at t&e time t&e transaction $as entered into' &ad to +e made parties. "ll of t&em &ad to institute a suit -ointly. Is anyone $as missing' it $ill +e non0-oinder of a necessary party' $&ic& is fatal to t&e suit. /&is defect $as t&ere even for a partners&ip0 all t&e partners at t&e time of t&e transaction &ad to +e made parties to t&e suit. >ut no$' Brder CCC of t&e CPC says t&at t&e name of t&e firm is sufficient for t&e institution of suits. In :;!!' a general enactment $as passed t&at an association could +e registered as companies. 84isting partners&ips and Deed of *ettlement Companies $ere allo$ed to +e registered. 5eatures of t&e :;!! legislation% a2 Incorporation +y mere registration0 if conditions $ere satisfied' fees paid' etc.' certificate of incorporation could +e issued. 5rom t&at date' t&e association $ould +e a +ody corporate. 1Presently in *.3! of t&e IC"2. +2 "ny association a+ove a certain num+er of mem+ers &ad to +e registered compulsorily. Partners&ips $&ic& are unincorporated +usinesses could only +e carried on $it& a limited num+er of mem+ers. 1*.:: of IC"0 :0 normally' and 20 in t&e case of +an#ing2. c2 Pu+licity of t&e affairs and accounts of t&e company0 in order t&at accounta+ility +e maintained. (ig&t of inspection is t&ere $it& t&e pu+lic' and not -ust t&e s&are&olders. /&e records &ave to +e su+mitted to t&e (egistrar 1*. :0 of IC"2. /&ese 3 principles &ave +ecome t&e basis"basic principles of corporate law&

/&ere $as one defect in t&e :;!! statute as it $as +ased on t&e Deed of *ettlement Company. Principles of partners&ip still governed it to an e4tent. /&e "ct descri+ed t&e mem+ers of t&e association as partners. Bne of t&e features of a corporation is limited lia+ility as all mem+ers do not carry on t&e +usiness. >ut t&is $as a+sent in t&e :;!! "ct. /&ere $as a clamour for limited lia+ility +y +usinesses' t&oug& anot&er segment argued against it as t&ey felt t&at lia+ility &ad to go $it& profit. /&e legislature enacted Li%ited Liabilit$ Act' ()**+ li%ited liabilit$ onl$ if certain conditions were satisfied% a2 /&e company s&ould &ave a minimum su+scri+ed capital. +2 /&e auditors of t&e company s&all +e approved +y t&e >oard of /rade0 overseeing +ody. /&e +usiness community $as not satisfied $it& t&is0 t&ey $anted limited lia+ility $it&out any conditions. DVinculum juris0 legal +ondE *ince t&e corporation is a separate legal entity' t&ere is no legal +ond +et$een t&e t&ird party and t&e mem+ers. /&e mem+ers are t&us only limitedly lia+le to t&e company for its acts0 t&e company is al$ays lia+le' it6s lia+ility is not limited. " Committee $as constituted to study t&e pro+lem and give recommendations. Lord >ram+ell $as t&e C&airman of t&e >oard of /rade and argued for limited lia+ility. .e suggested t&at FLtd.6 +e added as a component of t&e company6s name. No ot&er person allo$ed to use it a part of t&e +usiness name. /&is acts as a red flag to t&ird parties $&o contract $it& t&e company0 it $arns t&e pu+lic t&at t&e mem+ers $ould not +e lia+le for t&e de+ts of t&e company. In :;< ' t&e ,oint+Stoc- Co%panies Act $as enacted. /&ere $as no cautious approac& t&is time around. /&ere $ere no conditions for li%ited liabilit$. /&e Companies "ct' :; 2 $as t&e foundation of modern company la$ according to Palmer. 3tmost freedom $as given to t&e +usiness community. Later' more restrictions and regulations $ere placed. Companies "ct' :=0;0 >efore t&is' t&ere $as only one company. No$ t&e concept of a private company $as instituted. " private company $as a small group of persons $&o $ere allo$ed to operate in a corporate form. /&e most important advantage of t&is over t&e partners&ip $as t&e segregation of t&e private property from t&e +usiness property. Later' t&e Companies "ct' :=!; and t&e Companies "ct' :=;< $ere passed. /&e Companies "ct' 200 &as +een enacted. It $ill +e fully implemented in Bcto+er 200;. !ndian Law $as +ased on 8nglis& La$. /&e present la$ is IC"' :=< . "ttempts &ave +een made to reform t&e la$' +ut t&ese &ave +een unsuccessful. /&e company is conceived as an association of persons' t&oug& it is given a separate legal status. /&ese persons are t&e s&are&olders. /&e corporation is different from t&e persons. /&e company is incorporated on t&e +asis of documents li#e t&e "rticles of "ssociation' Memorandum of "ssociation0 $&ic& gives t&e idea t&at t&e corporation is conceived of as an association of persons. *.3!122% su+scri+ers are t&e mem+ers of t&e corporation. /&e s&are&olders are identified as t&e corporation itself0 t&ey are considered to +e sta#e&olders of t&e corporation. *.3! contemplates t&at t&e company is an association of mem+ers. >ut t&ere are many ot&ers $&o are interested in

<

t&e company. /&e predominant position assigned to t&e s&are&olders &as +een t&ere since t&e := t& Century. /&is &as +een seriously c&allenged in recent times. No$' many -urists consider t&e company to +e more t&an an association of mem+ers. *&are&older supremacy is +eing c&allenged' and sta#e&older democracy is +eing accepted. /&ere are ot&ers too $&o &ave a legal interest in t&e company0 creditors' management' employees' consumers' general pu+lic. "s per capitalism' t&e one $&o supplies t&e money is t&e o$ner of t&e +usiness. .ence t&ere is t&e idea t&at t&e s&are&olders o$n t&e company. >ut often' ot&ers contri+ute more to t&e company t&an t&e s&are&olders. /&e company does not run solely on t&e finance of t&e s&are&olders0 de+t finance is ore t&an e?uity finance. /&e dedication and t&e ?uality of employees contri+ute to its success. Professional management is essential to t&e success of a corporation. /&e society provides t&e infrastructure for t&e corporation. /&e consumers6 patronage is also necessary for t&e success of a corporation. .ence' all t&ese are sta#e&olders' and not -ust t&e s&are&olders. 5inancial "spects of Corporate ,overnance0 Car+ury Committee0 gave importance to t&e issue of sta#e&olders. A&y is t&e issue of sta-eholders important in incorporated companiesG A&y not partners&ips' etc.G /&e society depends on production' distri+ution' services0 t&ese are mostly carried out +y pu+lic corporations. /&ey &ave a virtual monopoly over industrial and commercial concerns. /&ey t&us affect t&e society to a great e4tent ad &ave t&e po$er to cripple t&e society +y unitedly pursuing detrimental policies. .ence' t&ere is more attention paid to t&e &ealt&y running of t&e +usinesses. Most investors are passive retail investors as opposed to promoters or institutional investors2 and &ave no permanent loyalty to t&e company. .ence' t&ey cannot +e treated as +eing solely responsi+le for t&e success of t&e company. .ased on the %ode of origin0 c&arter corporation' statutory corporation' registered companies. *.3!1220 Company incorporated $&en certificate issued. *.3<0 certificate is conclusive proof t&at all t&e re?uirements for t&e formation of t&e company &ave +een complied $it&. In one case' t&e signatures of mem+ers $ere forged' +ut t&is $as not noticed and t&e certificate $as issued. /&is incorporation $as c&allenged as +eing a nullity. /&e Court did not accept t&e argument. .eld0 /&at t&e certificate is conclusive proof of compliance $it& re?uirements. *.3!1220 /&e corporation is capa+le fort&$it& of e4ercising all po$ers. .ased on nat#re of liabilit$ of %e%bers towards the co%pan$ 0 limited +y s&ares' limited +y guarantee' unlimited companies. /&is is lia+ility of mem+ers to$ards t&e company and not t&ird parties. It is not related to lia+ility of company to anyone' as t&e company is al$ays lia+le. " FLimited Company6 is $&en mem+ers6 lia+ility to$ards t&e company is limited. /&ere is no lia+ility of mem+ers to$ards t&ird parties as t&ere is no privity of contract. /&e company &as entered into t&e contract and it is a separate legal entity' t&erefore t&e company is lia+le as in any ot&er contract. *o' t&e e4pression FLtd. Co.6 is erroneous. /&e "merican -urisdiction' t&us' calls it an Fincorporated company6 and not a Flimited company6. Li%ited b$ Shares% A&en t&e company &as s&are capital' one can +e a mem+er of t&e company only if one is a s&are&older. /&e e4tent of lia+ility is nominal value of s&ares toget&er $it&

premium t&at t&e s&are&older &as accepted to pay. /&e premium is usually $&en profit is earned after carrying on t&e +usiness. Nat#re of Liabilit$ Many +elieve t&at limited lia+ility is to +e confined to large si7ed corporations as it attracts many passive investors. If t&e si7e is small t&en t&e mem+ers s&ould not &ave t&e privilege of limited lia+ility. "dam *mit& $as of t&is vie$. Co limited +y s&ares and limited +y guarantee0 t&e e4tent of lia+ility is diff. for co limited +y s&ares it is limited to nominal value of s&are plus premium agreed on. In our legal system it is compulsory for nominal value to +e assigned. If s&ares are issued at a discount 1as under *. 7=2 t&en t&e lia+ility is only t&e discounted value of t&e s&ares. /&is lia+ility may arise $&en t&e co is a going concern or $&en t&e co is $inding up. A&en co is in its active life its called a going concern H it carries on +usiness. /&en t&e co can call for t&e amount remaining unpaid of t&e s&ares H t&is is t&e lia+ility $&en t&e co is a going concern. Bt&er$ise t&e co may provide t&at it can only call at t&e time of $inding up of t&e co H reserve capital under *.==. " co usually #eeps t&is amount to provide security to unsecured creditors t&oug& t&ey &ave no priority. /&e capital can +e called to pay t&e unsecured creditors $&o are t&e most vulnera+le at t&e time of $inding up of t&e co. /&e sanction for not ans$ering a call is forfeiture of s&ares. " suit can +e instituted to reali7e t&e de+t on not ans$ering a valid call H t&at amount +ecomes a de+t and so t&e company &as all t&e remedies availa+le to a creditor. /&e unsecured creditors $&o are protected may +e voluntary or involuntary. Involuntary creditors are t&ose $&o are o$ed money not on t&e +asis of a contract H t&ey do not consent to +e creditors +ut money is o$ed to t&em eg people to $&om damage &as to +e paid. A&en co is $ound up first e4penses of li?uidation are paid' t&en secured creditors are paid 1mortgage' c&arge etc.2' preferential creditors 1*.2<=2' ordinary creditors. >y t&e time ordinary creditors are reac&ed t&ere is +arely anyt&ing left H t&en reserve capital +ecomes useful to pay to ordinary creditors. Co%pan$ Li%ited b$ g#arantee H lia+ility arises only in case of $inding up of company' $&en assets are not sufficient to pay de+ts. /&e Mo" and "o" of a company $ill provide t&at if assets are insufficient' t&en mem+ers $ill agree to pay off de+ts up to a certain amount' a ceiling is placed on t&e lia+ility of t&e mem+ers. It is a conditional underta#ing of t&e mem+ers t&ey contri+ute only if assets are insufficient and contri+ute only an amount not e4ceeding t&e amount provided in t&e Mo". In t&is type of a company it is not envisaged t&at capital $ill +e raised +y a mem+er H usually creditors. "lso' t&ey are not usually for +usiness +ut for running sc&ools' etc. t&ere may +e guarantee co $it& s&are capital H &ere t&e lia+ility is limited to t&e value of t&e s&ares $&en it is a going concern and limited to guarantee $&en it is $ound up. /nli%ited Co%pan$ H lia+le only on $inding up $&en assets are insufficient' +ut t&ere is no ceiling on t&e lia+ility. Personal property can also +e used to pay off t&e de+ts. P#blic and Pri0ate Co%panies H Pvt Co $as +orn in 8ngland in :=0;' in India in :=:3. >ut t&e concept $as #no$n muc& earlier. " person could use t&e corporate form to run &is +usiness $it& no outsiders. /&e minimum no of mem+ers $as reduced from 2< 1:;!! act2 to 7 1:;<< act2. *o' small co $ere t&ere $it& one person &aving a su+stantial sta#e $ere #no$n for a $&ile called one man companies $it& no intentions of s&ares +eing &eld +y outsiders.

Li%ited Liabilit$0 Memorandum &as to state t&at lia+ility is limited in case of a limited company. Pri0ate and p#blic co.% it is erroneous to t&in# t&at mem+ers of t&e pu+lic are not associated $it& a Pvt coI it is t&e "o" $&ic& determines $&et&er t&e co is Pvt or pu+lic. " pu+lic co is us a &eterogeneous group of persons $&ile a Pvt co is &omogenous group usu related +y +lood or close association i.e. #ins&ip or friends&ip. "n association $ere t&e persons are closely related is permitted to &ave an incorporated status. /&e advantages of incorporation over partners&ip are H continuity of t&e co. H vicissitudes of t&e fles& &ave no effect on t&e co as per ,o$er. "lso' t&ere is legal separation +et$een +usiness property and separate personal property. In order to get t&ese adv t&e la$ allo$ed t&e people to form t&e co even if t&ey $ere essentially partners&ips $it& a fe$ mem+ers running t&e +usiness. " Pvt co $as recogni7ed +y t&e co act' :=07 H so incorporation $as given even if one person $as running t&e +usiness. Lee v. Lee Air Farming Co Ltd. H company formed +y pilot. 300 s&ares issued H 2== +y t&e pilot and one $it& solicitor6s cler#. " Pvt. Co &ad to &ave 2 mem+ers so t&is $as &eld to +e a co $it& separate legal personality. /&e concept of a Pvt. Co. allo$s sole proprietors@ partners&ips to en-oy t&e advantage of incorporation. *. 31i2' 1iii2' 3 1ii2 and 1iv2 define pu+lic and Pvt co. " pu+lic co is one $&ic& is not a Pvt. Co. Pvt Co. "o" contains some provisions. Ma4 no of mem+ers is not to e4ceed <0' t&ere is restriction on transfera+ility of s&ares' 1+ut in a pu+lic company s&ares are transfera+le freely H *. ::: " 1222. If any company &as no s&are capital i.e. company limited +y guarantee or unlimited company. /&ere is also a minimum paid up capital of one la#& H t&is is not t&ere in 8nglis& la$. /&e transfer of s&ares in Pvt. Co can +e restricted not pro&i+ited as s&ares of t&e co are property of t&e s&are&olders not t&e co. *. of t&e /P "ct H transfera+ility is an insepara+le incident of property. /&e Pvt co cannot invite t&e pu+lic to su+scri+e to its s&ares or de+entures. It can allot s&ares to outsiders +ut t&ere can +e no invitation for t&e pu+lic to su+scri+e. " Pvt. Co cannot accept deposits unless t&e person is a mem+er' director' relative of a director off t&e co. *. Defines $&o a relative is. /&e position of a depositor is very vulnera+le &ence t&e restriction on t&e acceptance of deposits t&is is a policy decision. Bften a company may +e started as a Pvt Co and later convert to a pu+lic co. *. :!= H a pu+lic co s&all not commence +usiness unless it gets anot&er certificate apart of certificate of incorporation H t&e trading certificate. /&is is not re?uired for a Pvt co to commence +usiness. /o get over t&is' cos are started as pvt co and later converted. *. : < H " pu+lic co to &old statutory meetings $it&in : to mont&s of commencement of +usiness in order to provide info to mem+ers $&ic& mig&t +e inconvenient for it to provide. *. <; " H Companies acceptance of deposits rules framed +y govt. for Pvt co it is restricted to mem+ers' directors' relatives of dir. /&e "o" of a Pvt co need to &ave t&e conditions' +ut t&e act does not say t&at restrictions s&ould +e complied $it& H it only says t&at "o" needs to &ave t&e provisions. A&at is t&e conse?uence of non complianceG *. !3 H t&e co loses all t&e privileges given to a Pvt co.

A. Saloman% Ailliams 9. decided0 a divided Court of "ppeals up&eld t&e decision of Ailliams +ut on different grounds. In t&e .ouse of Lords' *aloman soon after t&e case after &aving t&e decision against &im in t&e t$o lo$er Courts0 unanimous decision of t&e .ouse of Lords0 eac& -udge e4cept one $rote a separate -udgment. MacNaug&ten and .als+ury 96s decisions are most important. /&e decision e4pounds on t&e separate legal personality of a company. /&ere are 2 different vie$s on t&is decision. *ome t&in# it is a calamitous decision. >ut ot&ers t&in# it is reasona+le and proper0 eg Lord Co#e. Classification of companies% Private and Pu+lic% Brigin of private companies in 8ngland in :=0; and in India in :=:3' +y t&e Companies "ct. 1 -inds of pri0ate co%panies0 su+sidiaries of pu+lic companies and t&ose $&ic& are not su+sidiaries of pu+lic companies. 8ven +efore t&e private company $as +orn and +efore t&e Salomon decision' some pu+lic companies &ad t&e c&aracteristics of a private company. *&are&olders $ere mem+ers of a family' management $as $it& s&are&olders' no pu+lic issue' ma-ority of s&ares $it& one person 1nic#named one man companies2. /&ese $ere given legal recognition as private companies only +y t&e :=0; "ct. 3nless ot&er$ise provided' t&e provisions of t&e Companies "ct are e?ually applica+le to +ot& pu+lic and private companies. >ut some provisions are not applica+le to a private company or are modified for t&em' etc. *.:700 "s regards conduct of t&e meeting of t&e company' t&e provisions of *.:7:0:;0 apply to a pu+lic company or a private company $&ic& is a su+sidiary of a pu+lic company or a private company $&ic& is not a su+sidiary if t&e "o" is not contrary. *o' private companies can opt out of t&e regime placed +y t&e IC". *.22<0 "t least 2@3 of t&e mem+ers of t&e >oard s&all +e appointed in t&e ,eneral Meeting. /&is is only for pu+lic or su+sidiary private companies. >ut a purely pct company 1not a su+sidiary2 can opt out of t&is provision +y providing it in t&e "o". Mem+ers of t&e >oard $&o retire +y rotation0 rotational directors0 ma4imum time is 3 years0 in order to protect t&e interests of t&e minority. (egulatory regime is comparatively la4 as regards private company is concerned' as it can opt out of certain provisions t&at are mandatory for pu+lic companies. /&ere are some provisions t&at are applica+le to pu+lic companies only0 not to private companies' $&et&er su+sidiaries or not. 8g' *.: <0 statutory meeting to +e &eld $it&in :0 mont&s $it&in day $&en it is entitled to commence +usiness. >ut no$' t&e definition of a pu+lic company includes a su+sidiary private company. /&is $as added +y t&e 2000 amendment. /&e only diff is $it& respect to minimum paid up capital. /&e su+sidiary companies can &ave a capital of (s. :'00'000. Dee%ed P#blic Co%pan$% 1*.!3"2 from :=7! to 2000' repealed for all practical purposes. *.!3"1ii20 It is a company t&at satisfied all t&e re?uirements of a private company +ut treated as a pu+lic company due to legal fiction

"s pu+lic interest at sta#e0 pu+lic money mig&t indirectly +e attracted. 8g co incorporated as a Pvt co. C Co. H "o" mentions restrictions as per *. 3 1:2 1iii2. /&e co. &as only 2 s&are&olders one of t&em is J co. $&ic& gets its money from t&e pu+lic H so C Co. &as indirectly got money from t&e pu+lic H &ence it is to +e treated as a pu+lic co. P0t& Co& 2 estrictions on transferabilit$ of shares H t&ey may +e trivial or &ars& restrictions. 5ormerly a pu+lic co could also impose restrictions. >ut *. ::: " 122 H :== amendment H securities of a pu+lic co are freely transfera+le so cannot impose restrictions. /$o usual types of restrictions in "o" of a Pvt co0 Pre emption rig&ts availa+le to mem+ers of a company if a mem+er $ants to sell t&en anot&er mem+er &as t&e first rig&t to purc&ase t&e s&are. Discretionary rig&t of refusal to t&e +oard. Pro+lems $it& restrictions0 In case of pre emption $&at is t&e price at $&ic& t&ey are to +e sold' do all mem+ers &ave a rig&t or someone can +e c&osen or is it a proportionate rig&t. Price s&ould &ave a formula in t&e "o" in order to avoid future disputes. >oard &as a+solute rig&t to refuse to register transfer of s&ares. >ut t&e +oard &as to e4ercise its po$er +ona fide' in t&e +est interest of t&e co s if t&ere is an ar+itrary refusal to register transfer t&en it can +e c&allenged as mala fide. Hindustan Lever Employee Union v. HL Ltd. H merger of /ata Bil Co and anot&er co H 3 auditors came to 3 diff conclusions as to t&e value of t&e s&ares H so no fi4ed +oo# value D1Paid up capital K 5ree reserves2@ No. of *&aresE. /&ere is also a diff +et$een +oo# value and mar#et valueI t&ere may +e significant diff so price at $&ic& s&ares are to +e sold is difficult to arrive at. Matrib oomi Case H if "o" is silent $it& respect to t&e transfer of s&ares' t&en it is not a Pvt co. "s per *. of t&e /P "ct' unless t&ere is a restriction' property of any nature is freely transfera+le. *o' if t&ere is no restriction' t&en s&ares are freely transfera+le. " pu+lic co need not prepare its "o" H can adopt t&e model "o" in act' $&ic& &as no restrictions mentioned in it. " Pvt. Co t&us s&ould prepare its "o" in order to +e treated as a Pvt co and en-oy its privilege. /&ere $as no restriction on transfer in "o". /&e /oI group t&roug& vard&aman +oug&t s&ares from a family $&ic& &ad a su+stantial sta#e in t&e co. /oI applied for registration of transfer. " general meeting $as called and a resolution $as passed' "o" amended to provide t&at t&e +oard &ad a+solute po$er to refuse register transfer $it&out giving any reason. .eld H amendment valid +ut +oard &as to e4ercise po$er +ona fide and in t&e +est interest of t&e co and in an o+-ective manner. 3ro#p Co H device &as +een a+used ?uite often. /&e modern structure of corporation is a pyramid of co H inter related co are connected to eac& ot&er. 3sually &olding H su+sidiary relation +ut not compulsory. "dvantages H can &ave a &uge corporation $it& meagre capital. .olding su+sidiary relations&ip H li#e mem+ers of a family. /&e &olding co is a mem+er of t&e su+sidiary. /&e co controlled is t&e &olding@parent co and t&e co controlled is t&e su+sidiary co. 8nglis& co act uses +ot& &olding and parent co. "re &olding and su+sidiary co t&e same legal personalityG /&ey are diff H +ot& &ave separate legal personality. .o$ is t&is relations&ip

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esta+lis&edG /&e &olding co controls t&e general meeting +y &aving t&e ma-ority of t&e s&ares or can control t&e +oard. *. != H .o$ t&e re?uirement of num+ers is met0 s&ares in t&e su+sidiary can +e &eld in t&e name of a nominee. Controlling t&e general meeting H If t&e company &as issued only e?uity s&ares' t&en control can +e +y &olding t&e ma-ority of t&e s&ares of t&e company. If ma-ority of s&ares is not &eld' t&en can control +y s&ares &eld +y t&e su+sidiary. D!4!S!ON OF PO5E S% Corporation is different from t&e corporators. It is a legal person' +ut it is invisi+le. *o' it re?uires an agent in order to act on its +e&alf. /&e po$ers of t&e corporation are s&ared +et$een t&e >oard of Directors and t&e mem+ers in t&e ,eneral Meeting. /&e division of po$ers +et$een 2 organs of t&e company0 not merely agents of t&e company0 t&ey are t&e company itself. ,oer says t&at t&e division may +e compared $it& t&e division of po$er +et$een t&e e4ecutive and t&e legislature in a ca+inet form of government0 $&ere t&e e4ecutive is responsi+le and remova+le +y t&e legislature0 as per ).C. Aeir. In a company' some po$ers are vested $it& t&e >oard of Directors and some $it& t&e ,eneral Meeting. *.2=:0 /&e >oard is vested $it& all t&e po$ers of t&e company' su+-ect to t&e provisions of t&e "ct' "o"' Mo". /&e >oard can e4ercise some po$ers only $it& t&e consent of t&e ,eneral Meeting. >arring t&at' t&e po$ers of t&e >oard are co0e4tensive $it& t&at of t&e company. /&ey are not t&e delegates of t&e ,eneral Meeting0 t&ey are a primary organ. Automatic Sel! Cleansing Filter Syndicate v. Cunning am D:=0 E 2 C&ancery Court 3! ".= of t&e "o" provided t&at t&e directors &ad t&e po$er to manage t&e +usiness. ".=: conferred on t&e directors specific po$ers0 could sell any property of t&e company at $&atever price t&ey considered appropriate. /ill t&is decision' t&e notion $as t&at t&e >oard $as su+ordinate to t&e ,eneral Meeting. /&e ,eneral Meeting passed a resolution as#ing t&e >oard to sell some of t&e property to a ne$ company. /&e >oard refused to do so0 as t&e po$er $as vested $it& t&e >oard0 it $as t&eir discretionary po$er. If t&e >oard is an agent of t&e ,eneral Meeting' t&en it is +ound +y t&e resolution. >ut t&e Court did not &old so0 it &eld t&at t&e >oard $as not su+ordinate to t&e ,eneral Meeting. /&e >oard $as vested $it& plenary po$er. It $as as muc& an organ of t&e company as t&e ,eneral Meeting0 it is not an agent of t&e ,eneral Meeting. "o n S a# $ Sons v. S a# 1D:=3<E )>2 also up&eld t&e a+ove principle. " company is distinct from its s&are&olders. *ome po$ers are $it& t&e directors0 ot&ers $it& t&e s&are&olders. /&e po$er of management is $it& t&e directors alone0 only t&ey can e4ercise it. 3eneral principle is t&at t&e po$er of t&e >oard is coe4tensive $it& t&e po$er of t&e company D*.2=:E as laid do$n in Cunning am%s case. E6ceptions% Po$ers given to general Meeting +y t&e "ct0 usually legislative po$ers' eg alteration of constitution' varying class rig&ts' etc. "part from t&e "ct' t&e Constitution of t&e company can also provide for po$ers to +e given to t&e ,eneral Meeting. *.=0 "o"' Mo" $&ic& is against t&e "ct is void. *o' "o" and Mo" cannot ta#e a$ay po$ers granted +y t&e "ct.

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*.2=30 *ome "cts t&at can +e performed +y >oard only $it& t&e consent of t&e ,eneral Meeting. /&ese restrictions on t&e >oard are an internal control mec&anism. /&e consent of t&e ,eneral Meeting is an internal control. E6ternal Control% Control of any ot&er regulating aut&ority' eg *8>I' Central ,overnment. ,eneral Control e4ercised +y t&e ,eneral Meeting0 po$er to elect or remove >oard. /&e ,eneral Meeting t&eoretically &as a superior position to t&e >oard of Directors. /&is is despite t&e Cunning ame case and *.2=:. >ut t&e >oard is a self perpetuating entity' as per "+ra&am C&ilds' $&ic& is a &uge pro+lem +eing faced presently. /&e po$ers of t&e >oard are su+-ect to t&e "o"0 t&e ,eneral Meeting can alter t&e "o" restricting t&e po$ers of t&e >oard0 &ence t&e ,eneral Meeting is t&eoretically more po$erful. >ut in actual operation' t&e >oard is more po$erful as it is a self perpetuating entity. /&e ,eneral Meeting en-oys t&e po$er of appointment and removal' +ut t&ese are only in t&eory. In a small private company' t&e directors and t&e mem+ers are one and t&e same0 t&ey are eit&er involved in or monitor t&e management. /&is is different for pu+lic corporations' $&ic& are Fo$nerless corporations6' i.e. no one can +e called an o$ner as t&e s&ares are scattered. /&is is even in t&e case of family controlled corporations. 8ven if t&e promoter group is identified' t&ey do not &old a large portion of t&e s&ares. /&ey are mainly passive investors. /&ey &ave no interest in t&e corporation. 8ven if t&ey do' t&ey don6t &ave t&e e4pertise for active participation or monitoring t&e activities of t&e corporation. " forum for discussion of affairs of t&e company is t&e "nnual ,eneral Meeting. 8ven &ere t&ere are &urdles0 financial' occupational' etc. It mig&t not +e possi+le for mem+ers to attend t&e meeting. *.:7!0 3nless ot&er$ise provided in t&e "o"' t&e ?uorum for t&e ,eneral Meeting is < mem+ers' $&ic& is ridiculously lo$. Lery fe$ mem+ers actually attend t&e ,eneral Meeting. /&oug& t&e la$ contemplates t&e ,eneral Meeting to e4ercise control over t&e >oard' factually t&ey do not perform t&is function. >ecause of t&is' t&e >oard &as +ecome a self0 perpetuating entity' as t&e ,eneral Meeting never e4ercises its po$ers. *o' corporate governance &as +ecome a ma-or issue' as it is important t&at companies +e run properly' since po$er is concentrated in a small group. *.:7 0 (ig&t to appoint a pro4y for voting' so pro4y $ars go on. People try to persuade ot&ers to give a pro4y to t&em in order to gain votes to ta#e over management. *o' corporate governance +ecomes important. *.2<<% >oard to +e appointed +y ,eneral Meeting. Certain po$ers can only +e e4ercised +y ,eneral Meeting only. *o' t&ere are many provisions $&ic& envision t&e ,eneral Meeting e4ercising control over t&e >oard. *.;:1:"20 Po$er to issue s&ares is $it& t&e >oard' +ut first &as to +e done to e4isting s&are&olders proportionately' and if t&ere is any deviation' it &as to +e done $it& t&e permission of t&e ,eneral Meeting0 +y t&e passing of a special resolution. ,/ !SD!CT!ON% In India' some special courts are t&ere. := 30 amendment to t&e IC". *.:0" to *.:0> set up t&e Company /ri+unal to try criminal offences. It $as a+olis&ed in := 7.

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/&e Co%pan$ Law .oard $as esta+lis&ed in := 3. It $as initially &aving only administrative functions. It $as an agent of t&e Central ,overnment0 Department of Corporate "ffairs. :=7!0 9udicial po$ers also granted to t&e >oard. :=;;0 /&e >oard is an independent ?uasi0-udicial +ody0 more po$ers transferred to it. National Co%pan$ Law Trib#nal0 esta+lis&ed in 2002. Company La$ >oard a+olis&ed. A&en t&e >oard $as t&ere' some po$ers $ere en-oyed +y it' ot&ers +y t&e Company Court. >y t&e 2002 amendment' t&e /ri+unal $as vested $it& t&e po$ers of t&e Company Court. Cri%inal Matters0 9urisdiction is not $it& t&e /ri+unal. It lies $it& a Court not +elo$ 9udicial Magistrate 5irst Class. *ome &ave to +e tried +y t&e *essions Court. 9urisdiction of Civil Courts is +arred. D*.:0,1+2E & ubab ai v. State o! M'0 Buster of Civil 9urisdiction. *.21::2 defines Court as regards company matters are concerned. 8ven t&oug& IC" is a commercial enactment' more t&an 2<M of it is a+out offences. /&ere are many provisions $&ic& are penal provisions. *.21::21+20 Court $&ic& tries offences s&all not +e +elo$ t&at of a 9udicial Magistrate 5irst Class. /&e Court t&at tries t&e offences is an ordinary Criminal Court governed +y t&e CrPC. Criminal proceedings can +e initiated +y t&e (egistrar' *&are&older' person aut&orised +y Central ,overnment' *8>I D*. 2:E. Bnly t&ese can +e complainants. *.<<"0 9urisdiction vested $it& *8>I for certain matters regarding listed companies 5or unlisted companies' -urisdiction is still $it& t&e Central ,overnment. *8>I can also +e given criminal -urisdiction. *8>I can also +e given -urisdiction under t&e *8>I or *C(". /&ey also provide t&at offences are to +e tried +y t&e sessions court. "s regards criminal matter t&ere is no separate court system. >ut t&ere are different courts for civil proceeding. /&ere is t&e ordinary civil court' company court' NCL/. /&e -urisdiction of t&e civil court is not +y any specific provision in any act. It can +e su+-ect matter' territorial' pecuniary -urisdiction. It is t&ere +ecause of t&e principle u+i -us i+i remedium H $&enever t&ere is a rig&t t&ere is a remedy. /&e forum for t&ese rig&ts is t&e ordinary civil court. /&is is different from appellate -urisdiction $&ic& is t&ere not +ecause of a specific rig&t +ut a due to a specific provision regarding t&e appeals eit&er :st or 2nd. /&e companies act provides for company courts. "ny rig&t or lia+ility arising out of t&e companies act $ould +e decided +y t&e company court H *. 21::21a2 read $it& *.:0. It is normally t&e &ig& court +ut can +e conferred on t&e district court in some circumstances. /&e .C +enc& t&at deals $it& company courts is t&e co court. Many po$ers are e4ercised +y t&e company court eg0 *.:00 1reduction of capital2' :0 ' 3=:0=!' company li?uidation are matters decided +y t&e co court. No$' almost all t&e po$ers of t&e co court $ill +e e4ercised +y t&e NCL/. "ppeal from t&e co la$ +oard goes to t&e .C. "ppeal from tri+unal goes to t&e appellate tri+unal 1NCL"/2 H *:0 5N. /&e *C &as revie$ po$ers. *. :0 ,>0 civil court to &ave -urisdiction $&en tri+unal or appellate tri+unal &as po$ers to determine t&e issue.

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.as t&e la$ as regards -urisdiction c&anged $it& t&e 2000 amendmentG A&en t&e co la$ +oard $as t&ere' t&e civil court &ad -urisdiction. Ait& t&e setting up of t&e tri+unal &as t&e -urisdiction +een e4cludedG " tri+unal &as -urisdiction only if t&e statute e4pressly or impliedly confers it H it cannot assume -urisdiction li#e t&e civil court can. A&enever t&ere is a rig&t and so t&ere is a remedy to t&e rig&t. i.e approac&ing t&e civil court. (.'ra)as an v. S*&' and Star +iles #or)s Ltd v. *. ,ovindan *air H +ot& cases dealt $it& -urisdiction of civil courts in co matters. >ot& &eld t&at co court does not &ave -urisdiction unless e4pressly or impliedly conferred +y t&e act' ot&er$ise civil court &as -urisdiction. 5or corp rig&ts co courts &ave' for individual rig&ts civil courts do. (.'ra)as an v. S*&' H *NDP $as a co to promote religious and secular matters. Bne of t&e mem+ers c&allenged t&e proceedings of t&e ",M H t&e notice for election and t&e agenda of t&e meeting $as not given so proceedings $ere null and void. .e approac&ed t&e co court to declare t&e proceedings null and void. /&e court &eld t&at t&e co court did not &ave e4clusive -urisdiction unless conferred and unless corporate rig&ts $ere violated. .ere' t&e appropriate forum $as t&e civil court. * 21::2 read $it& *.:0 only ena+led t&e s&are&olders to decide $&ic& court to approac& in respect to certain matters. Bnly $&en t&e provision $&ic& clearly provided for -urisdiction to +e given to t&e co court could t&e s&are&olders approac& t&e co court. Bt&er$ise t&e civil court &ad to +e approac&ed. >y virtue of +eing a mem+er of t&e co' a person &as many rig&ts. *ome are individual rig&ts H to receive dividend' to vote etc. +ut t&e co is an association of mem+ers. *ome decisions are for t&e co as a $&ole' for eg H appointment of a director $&ic& are dependent on t&e ma-ority H so even if someone disagrees' t&e ma-ority prevails. /&e ma-ority rule as laid do$n in Foss v. Harbottle H t&e mem+ers are presumed to consent0 t&ese rig&ts are corporate mem+ers&ip rig&ts. *ome rig&ts $&ic& cannot +e ta#en a$ay regardless of $&at t&e ma-ority t&in#s are called individual mem+ers&ip@personal rig&ts0 eg to vote' to receive dividend and to attend meetings etc. *. 21::2 read $it& *. :0 only defines a court H does not give -urisdiction' t&e specific provision under $&ic& t&e c&allenge &as +een made &ave to +e seen and if t&ey confer -urisdiction on t&e co court t&en t&e co court &as to +e approac&ed. Merely +ecause t&e under is under t&e co act doesn6t mean t&at t&e -urisdiction of t&e civil court is ousted. " specific provision &as to +e t&ere to ousted t&e provision and confer it e4pressly or impliedly on t&e co court. "n appropriate and satisfactory remedy &as to +e t&ere to oust t&e -urisdiction of t&e civil court. Star +iles -or)s Ltd v. *. ,ovindan *air H dispute regarding proceedings of ",M. Mr. )ris&nan $as ma-ority s&are&older. .is property $ent to &is 2 minor daug&ters. /&e official trustee of madras $as appointed t&e e4ecutor of t&e $ill and &is name $as entered into t&e register as a mem+er of t&e company. 1"s under *.:<0 and under *.!: 132 0 a +eneficial &older is deemed to +e a mem+er2. /&e ",M $as notified on 27@2@:=<7. /&e notice $as given to t&e trustee &e appointed Mr. C as a pro4y' &is name $as filed $it& t&e co. /&e c&airman denied Mr. C t&e e4ercise of &is rig&t as &is name $as not in t&e register as mem+er of t&e co. .e also said t&at t&e trustee $as not to +e included in t&e register as per *. :<3 so &e could not e4ercise &is rig&t. /&e official trustee approac&ed t&e civil court. /&e ot&er side said t&at t&e appropriate aut&ority $as not t&e civil court +ut t&e central govt.@ co. court as it dealt $it& ",M. /&e trial court admitted t&e case H &eld civil court &ad -urisdiction and t&e proceedings of t&e ",M $ere

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illegal. /&is $as up&eld +y +ot& t&e district court and t&e )erala .C H t&is $as violation of an individual rig&t of a mem+er and so t&e appropriate forum $as t&e civil court. NCL/ H +efore it' ad-udication $as +y co court' civil court' and co la$ +oard. Company >oard esta+lis&ed +y := 3 amendment essentially a delegate of central govt. in :=7! po$ers of co court $ere given to it. :=;; H *ac&ar comm. (eport H no longer a delegate of t&e govt. *. 21::2 read $it& *. :0 H -urisdiction' t&e court &aving -urisdiction refers to court mentioned in *.:0. >ut ordinarily civil court also &as -urisdiction. *.21v2 read $it& *.:0 does not confer -urisdiction. & ulab ai%s Case H if special remedy and a special court is provided for t&at remedy t&en civil court6s -urisdiction is +arred' for t&is e4press or implied +ar $as necessary. "lso &eld t&at for a constitutional matter a suit as $ell as a $rit lie. /ri+unal created as a result of 8radi committee recommendations H said .C $as over+urdened and could not decide on $inding up matters. >ut govt created a tri+unal $&ic& &as very $ide po$ers. *.:0 5O H po$ers of civil court given. *. :0 5N appeal lies +efore appellate tri+unal not .C. *o' govt &as created a special system of courts for company matters. Proble%s with NCLT H . arat .an) v. Employee o! . arat .an)' Sampat /umar0 tri+unal to +e effective su+stitute of court. Most mem+ers of t&e tri+unal &ave no -udicial ?ualifications. )no$ledge of economics' +usiness etc is given importance so any +ureaucrat $&o &as no #no$ledge of co la$ can +e appointed. *.:0 5L H a -udicial and tec&nical mem+er &as to +e t&ere H +ut can &ave a +enc& $it& only one mem+er so can actually &ave +enc& $it& no -udicial mem+er. S&(7 3. H No civil court to &ave -urisdiction over matter $&ic& t&e tri+unal or appellate tri+unal is empo$ered to deal $it&. Does t&is ma#e a difference $it& respect to -urisdiction of civil courtG >efore amendment' t&e co la$ +oard ad-udicated a fe$ matters' ot&er matters to go to t&e court. 9urisdiction of civil court $as not +arred' so could c&oose to go to t&e co court if co court not specifically mentioned. "fter 2002 amendment' matters earlier referred to t&e court are no$ referred to t&e tri+unal so c&ange in -urisdiction. NCL/ &as -urisdiction of co la$ +oard as $ell as co court. It &as muc& $ider -urisdiction t&an earlier +oard. Appeals H co la$ +oard H ?uestions of la$ $ere to +e appealed +efore t&e .C. *. :0 5N 1:2 H no mention of ?uestion of la$ so all ?uestions of fact or of la$ can +e appealed +efore t&e NCL"/' so $ider -urisdiction t&an .C. .C still &as ". 22 -urisdiction t&oug&. "ppeal from NCL"/ to *C 1*. :0 ,52 "ny tri+unal gets -urisdiction only $&en its conferred on it e4pressly or impliedly +ut -urisdiction of civil court is in&erent +ecause of principle of u+i -us i+i remedium. /&ere $ere certain po$ers conferred on a co court most of t&em &ave +een given to NCL/. /&e court referred to in t&e act is t&e co court no t&e civil court 1*. 2 1::2 read $it& *. :02. "ll po$ers specifically conferred a co court' NCL/ or Co La$ >oard H t&ey alone &ave -urisdiction. *ome provisions need not e4pressly confer -urisdiction can +e done +y necessary implication. (ig&ts

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are created +y statute 1not common la$ rig&ts2 so special courts created &ave -urisdiction to provide remedies for t&ose rig&ts. *. :0 ,> H F+y or under t&e act60 t&en NCL/ &as -urisdiction and t&at of t&e civil court is ousted. /&ere is an e4clusion clause H civil court &as no -urisdiction. >ut & ulab ai still &as relevance H if an ade?uate remedy is not provided or constitutionality of statute is c&allenged t&en court still &as -urisdiction. 5or' NCL/ t&ere is an e4clusion clause H t&is $as not t&ere for co la$ +oard. /&e concurrent -urisdiction is ousted +y *.:0 ,> H +ut it does not mean t&at all -urisdiction of t&e civil court &as +een ousted. If t&ere is a statutory remedy t&at can +e given +y t&e NCL/ t&en -urisdiction of civil court is ousted. >ut if common la$ remedy is availa+le0 statute is not relied on H t&en civil court -urisdiction is not ousted. ANDOM ST/FF% *. !0 s&ares of a su+sidiary are treated as s&ares of t&e &olding company for t&e purpose of *.!. Lalidity of t&e s&are&older6s agreement to +e loo#ed into. If t&ere is a s&are&older6s agreement t&at in some crucial matters' a group of s&are&olders $ill act as a syndicate and &o$ t&e decision of t&e syndicate $ill +e arrived at. *o' can control general meeting t&roug& a s&are&older6s agreement0 many cases say t&at t&e s&are&older6s agreement is valid. Can t&e agreement +e violatedG Is t&e rig&t enforcea+leG Can an in-unction +e granted to prevent one party from acting ot&er$iseG ,roup companies need not &ave a &olding0su+sidiary relations&ip0 cross0&oldings can also result in group companies. eg. /ata group. *.!20 " su+sidiary company cannot +e a s&are&older in a &olding company. >ut a &olding &as to +e a mem+er of a su+sidiary company. 84ceptions0 su+sidiary mig&t +e mem+er +efore &olding0su+sidiary relations&ip0 t&is mem+ers&ip can continue after t&e relations&ip arises as s&ares are property so a concession is granted. 1*.;22. >ut' voting rig&ts cannot +e e4ercised in a &olding company to prevent t&e concentration of po$er in a small group of people0 t&e &olding company $ill direct t&e decisions of t&e su+sidiary company $it& respect to votes0 t&is is +ad for governance and so *.!2 attempts to prevent t&is &arm0 t&e &arm of perpetuating po$er using a su+sidiary company. .olding0su+sidiary relations&ip is esta+lis&ed +y control of one company +y anot&er0 eit&er of >oard or of general meeting. *.!1220 >oard is controlled if ma-ority can +e removed@appointed $it&out t&e consent@concurrence of general meeting0 control of ma-ority voting po$er in t&e general meeting. " pu+lic company can &ave only 2 classes of s&ares0 e?uity and preference0 *.;< 1for payment of dividend and return of s&are capital eit&er $&en it is going concern@ $&en $ound up. Loting rig&ts0 generally confined to e?uity s&are&olders. /&ree rig&ts to s&are&olders0 voting rig&ts' dividend' return of s&are capital. Preference s&are&olders don6t normally &ave voting rig&ts unless t&e matter directly affects t&eir rig&ts. /&ey &ave a preferential rig&t to dividend and return of capital. /&e relations&ip +et$een a &olding company and a su+sidiary company is not affected +y t&e s&ares &eld +y t&e directors in t&eir individual capacity.

Proprietar$ ight of a Shareholder' or lac# t&ereof% Macuara v. *ort ern Assurance Co. H " tim+er +usinessman too# an insurance policy $it& respect to &is +usiness property in &is o$n name. Later &e converted &is +usiness to a company and transferred t&e assets to t&e company. .e o$ned all t&e s&ares in t&e company e4cept one or t$o. >ut &e did not assign t&e insurance policy to t&e company. /&e tim+er $as lost in fire. .e and t&e company -oined toget&er to claim t&e money from t&e insurance company. /&e company refuses as t&e insurer &as to &ave an insura+le interest in respect of t&e property insured0 t&e company said t&at &e &ad no insura+le interest and t&e company &ad no policy. /&e policy $ould not +e assigned after t&e loss. /&e Court &eld in favour of t&e insurance company0 t&e director and t&e company $ere separate entities. *&ares &eld as a trustee in a fiduciary relations&ip are not considered for control of t&e company0 *.!132. /&e s&ares &eld +y a &olding company as $ell as its su+sidiaries in a su+sidiary company are counted for t&e purposes of control of t&e general meeting0 *.!0 as all t&e su+sidiaries are controlled +y t&e &olding company even if t&ey are separate legal entities. Can votes governed t&roug& a s&are&older6s agreement +e counted for t&e purposes of control of t&e general meetingG Can t&e composition of t&e +oard +e controlled $it&out t&e control of t&e ma-ority of t&e votes of t&e general meetingG 8olding+ s#bsidiar$ relationship0 &o$ does it ariseG "dvantagesG /&ere may +e a company engaged in various types of +usiness activities0 t&ese re?uire different s#ills and e4pertise and so t&e policy orientation $ill +e different. In t&ese circumstances' it may +e felt t&at different companies controlled +y a central company $ould +e more effective0 effective diversification of t&e +usiness activities along $it& central co0 ordination. "not&er reason to run a +usiness t&roug& a su+sidiary is to limit lia+ility. *ome +usinesses are ris#y0 so carried on via su+sidiaries to insulate against ris#s. /&is relations&ip &as many advantages H +ut is prone to a+use too. ,overnment company0 $it& t&e advent of t&e $elfare state' t&e state &as multifarious functions to perform0 including manufacturing and entrepreneurs&ip for t&e purposes of providing to t&e citi7ens. In CI,' it $as t&oug&t t&at entrepreneurs&ip $as a private affair. /&e state also has a reg#lator$ role0 give licenses etc. it is also directly involved in running +usinesses0 t&roug& pu+lic corporations and government companies. In +ot&' t&e control is $it& t&e state. Pu+lic corporations0 directly created +y statute eg. *>I' LIC' Indian "irlines' "ir India etc. ,ovt companies0 defined in * :7 of t&e Companies "ct' not directly created +y a separate statute. " su+sidiary of a government company is also a government company. /&e provisions t&e company act are applica+le to government companies unless t&e central government passes a special order to e4empt@ modify t&e applica+ility0 * 20. " govt company is one $&ere t&e state@ central@ +ot& governments &old <:M of t&e paid up capital of t&e company. *ome provisions are applica+le only to government companies0 appointment of an auditor $&o audits t&e profit and loss accounts and t&e +alance s&eet0 &e is appointed +y t&e general meeting 1*.22!2 in an ordinary company +ut for a government company' &e is appointed +y t&e Comptroller and

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"uditor ,eneral of India 1*. :=20 formerly &e only advised t&e central government in t&e appointment. Acco#nting Standards0 prescri+ed +y C", for government companies. /&ese norms are compulsory0 cannot +e modified or $aived +y t&e Central government under *. 20. /&e capital of a government company is pu+lic money. *o controls need to +e present. A&ere t&e central govt. is a mem+er' t&en it &as to prepare a report of t&e functioning of t&e co. and t&is &as to +e laid +efore Parliament. If t&e govt. co. &as state govts. as s&are&olders' t&en t&e concerned s&are&olders' t&en t&e concerned state govts. &ave to lay t&e report +efore t&e state legislatures. If 2 pu+lic corporations o$n a co.' t&en it is not a govt. co.0 only if t&e govt. itself o$ns t&e co. can it +e considered as a govt. co. >ut' provisions relating to audit can +e applica+le even to suc& cos. as per *. :=>. /&e difference +et$een govt. cos. and t&ese cos. is t&at t&e po$er under *. 20 is availa+le only for govt. cos.0 not ?uasi0govt. cos. 5or t&e su+sidiary of a govt. co. to +e considered as a govt co.' t&e s&are capital is not seen0 only t&e provisions of *.:: &ave to +e satisfied. Pillars of a P#blic Co%pan$0 incorporation +y registration' compulsory registration' pu+licity of affairs. Compulsory registration0 any +usiness association $it& a mem+ers&ip of a+ove 20 can function only as a corporate +ody. /&is $as t&ere in t&e :;!! "ct0 carried on in all "cts0 reflected in *.:0. Ma4imum num+er of mem+ers for +an#ing +usiness $it&out incorporation0 *.:0. /&e association &as t +e for purpose of carrying on +usiness for *.:: to apply. " single act does not come $it&in t&e purvie$ of *.::0 &as to &ave some continuity0 as t&e section mentions Fcarrying on +usiness6. *.!"0 *C("0 no$ stoc# e4c&anges &ave to +e incorporated. Previously many of t&em $ere unincorporated. /&e association as suc& does not carry on any +usiness0 it only provides a mar#et facility0 t&e +usiness is carried on +y +ro#ers. .ence' $as not &it +y *. :: of t&e Companies "ct. /&e fees c&arged +y t&e e4c&ange is only incidental. Foreign Co%pan$0 *. 2172 defines +ody corporate $&ic& consists of a group of persons. It includes a foreign company0 a corporation $&ic& is incorporated outside India. " foreign company is generally not governed +y t&e Companies "ct as a co. $&ic& is incorporated under t&e Companies "ct or earlier Company La$ statutes is governed +y t&e Companies "ct0 *.3. 84isting Company0 Co. under earlier as $ell as current co. la$ statutes0 even statutes t&at &ave +een replaced +y t&e current statute. Many +luec&ip companies $ere incorporated under earlier co. la$ statutes0 t&ey are governed +y t&e Companies "ct' :=< . a foreign company is governed +y legislation in t&e country $&ere it $as incorporated. *.<=0 application of certain provisions to foreign companies0 incorporated outside India and esta+lis&ed a place of +usiness in India 1in addition to simply carrying on +usiness t&roug& agents0 co. &as to &ave a d$elling place in India2. *.:! 0 (egistered office $it&in 30 days of incorporation on t&e day of commencement of +usiness' $&ic&ever is earlier. " foreign co. can carry on +usiness $it&out a place of +usiness t&roug& agents or ot&er dealers0 if it does &ave one' t&en it comes $it&in t&e purvie$ of *.<=:0 t&is is to +e communicated to t&e

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(egistrar and constitutional documents to +e &anded over0 t&en t&at office comes $it&in t&e purvie$ of t&e "ct0 all provisions apply. *o' a narro$er definition of foreign companies given in t&e "ct. *. 2< Companies0 /&e +asic purpose of a corporation is commercial activity and earning of profit. >ut' sometimes people may form associations for p&ilantrop&ic' c&arita+le activities to promote no+le instincts of &uman +eings. /&ese associations can +e incorporated as t&ey are not &it +y *. ::. /&ey can +e registered as societies under t&e *ocieties (egistration "ct for t&e purposes of permanence. S&(90 Mo" to contain o+-ect of t&e company0 if it is not a +usiness corporation@ trading corporation' t&en some ot&er provision to +e follo$ed0 *tates in $&ic& activities are spread to +e mentioned0 t&is implies t&at non0trading corporations can +e incorporated under t&e Companies "ct. /&is re?uirement is limited to non0trading corporations due to *c&edule LII' List I' entry !20 commercial associations are $it&in t&e -urisdiction of t&e 3nion. If it is not a +usiness association' t&en entry !3 applies0 non trading activities spread over t&e country is $it&in 3nion -urisdiction' +ut t&ose t&at are confined to one *tate is governed +y t&at *tate. /&is is t&e reason t&at t&e *tates t&e activities are carried on &ave to +e mentioned in t&e Mo" at t&e time of incorporation. S&1* Co%panies0 non trading companies t&at are incorporated under t&e "ct0 some special provisions apply to t&em0 Central govt may grant license to t&em and may dispense $it& t&e $ord Flimited6 in t&e name of t&e company' $&ic& is mandatory for ot&er companies to include if t&ey are limited +y s&ares@ guarantee0 failure to do so fastens penal lia+ility on t&e company. *ignificance is given to t&e $ord Flimited60 not Fco.60 anyone can use Fco.6 +ut only limited cos. can use Flimited6. *ocieties (egistration "ct &as many disa+ilities. If company is $ound up' t&en property goes to mem+ers after disc&arging all lia+ilities0 t&is is not so for a society $&ic& transfers its property to anot&er p&ilantrop&ic society. " partners&ip firm cannot +e a mem+er of a company0 as it is a collection of individuals +y a common name0 t&e partners&ip &as no legal e4istence at all. >ut a partners&ip can +e a mem+er of a *.2< company0 t&is is specifically provided in t&e "ct0 *.2<1!2. /&e Central govt. can e4empt@modify a *.2< company from any of t&e provisions of t&e "ct. Disabilities of a S&1* co%pan$0 no dividend is to +e paid to t&e mem+ers' even if t&e company is generating a profit. 84ample0 *NDP is registered as a co. under t&e :=:3 "ct for upliftment and education of +ac#$ard classes. Nair *ervice *ociety is anot&er suc& company. /&ey &ave &uge +udgets and o$n vast property. /&ey do not &ave Flimited6 as part of t&eir name. /&ey cannot pay dividend to t&eir mem+ers. !ncorporation of S&1* co%panies0 Part > of Companies Incorporation (egulation applies to *.2< companies0 apart from general rules. Prod#cer Co%panies0 " co0operative society is not a +ody corporate $it&in t&e meaning of *. 2172 and for t&e purposes of t&e Companies "ct0 as it is in t&e *tate list' so a Central legislation cannot apply. " producer co. is in a sense' a co0operative society0 governed +y Part IC "0added +y 2002 amendment. It is an association of corporate +odies. *pecial rules govern it' not general rules.

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LE3AL PE SONAL!TY " person is not e?uivalent to a &uman +eing0 non &uman +eings are also treated as persons and some &uman are not treated as persons0 e4ample slaves in ancient times. Legal personality initially conferred on non commercial entities0 municipal corporations' c&arita+le associations etc. Persona0 mas# $orn +y actors $&en t&ey portrayed ,ods to &ide t&eir &uman faces. 5rom t&is' t&e concept of personality arose. Personality0 an entity capa+le of rig&ts and lia+ilities' $&et&er animate or inanimate 1even an idol is a person as per a Privy Council decision2. Conse:#ences that follow fro% the notion of a legal personalit$ . If t&ere is a corporation' t&en it is lia+le0 not its mem+ers0 limited lia+ility@a+sence of lia+ility for +usiness is one conse?uence. /&e ot&er conse?uence is t&e continuity of t&e +usiness0 t&e vicissitudes of t&e fles& &ave no effect on a disem+odied company0 deat&' insanity' insolvency of a company6s mem+ers do not legally affect a co.0 factually' practically it may affect t&e co.0 +ut legally it does not affect t&e e4istence of t&e company0 perpetual succession. *ince t&e company is a separate legal person' it can sue and +e sued0 Brder CCIC' CPC. >efore Brder CCC' all partners in a partners&ip firm $ere necessary parties to a litigation0 not only partners at t&e time of institution of t&e suit' +ut also t&ose $&o $ere partners at t&e time t&e cause of action arose. /&is caused muc& inconvenience for t&e enforcement of rig&ts. 5urt&er' if a partners&ip firm is not registered' it cannot enforce claims against t&ird parties +ut can incur penal' personal lia+ility $it& respect to t&ird parties. Many of t&ese inconveniences $ere o+viated +y Brder CCC0 suit can +e instituted in t&e name of t&e firm and managing partner and any ot&er partner to also +e included as parties0 so some difficulties are dealt $it&. /&is does not arise in case of a company' $&ic& is a separate legal personality. Disabilities of a co%pan$0 /&e s&are&olders' as suc&' &ave no proprietary interest in t&e properties of a company0 Macaura%s case. /&e properties +elong to t&e company' not t&e s&are&olders. /&is is not t&e case in a partners&ip firm $&ere partners o$n t&e property as $ell. Ms. .ac a F ,ul0ar v. C1+ "unstall v. Stea)man H +ot& &eld t&at s&are&olders &ave no proprietary interest in t&e properties of a company. /&is sometimes $or#s to t&e disadvantage of t&e s&are&olders. /&e corporate personality acts as a +oomerang and &its t&e person $&o &as used it0 statement used to descri+e t&is disadvantage +y many -urists. Saloman0 MacNaug&ten L9.0 t&e concept of a corporate personality is not visi+le to t&e &uman eye. /&e corporation is a contract among many people0 contractarium t&eory0 it is not visi+le. Posner0 /&e corporation is a standard form contract. 8aster +ourne and 5is&er0 It is a ne4us of contracts. "not&er disadvantage pointed out +y ,o$er0 too many formalities and procedural difficulties are t&ere $&en a company is to +e formed0 t&is is not so for a partners&ip firm. 84ample0 calling ",Ms' accounts &ave to maintained in a particular format 1*.20=2' etc. If t&e re?uirements are not complied $it&' t&en penal lia+ility is attracted0 over :70 sections in t&e "ct are penal provisions.

20

*. <0 Bfficers $&o are in default0 in many cases mens rea is not loo#ed at0 lia+ility is incurred irrespective. *o' &eavy +urden on t&ose running a +usiness in an incorporated form. 3ower0 /&ese are re?uirements for t&e formation of t&e company $&ic& are c&eap and simple +ut t&e process of $inding up is a cum+ersome' difficult process0 as difficult as a divorce in a C&ristian marriage. Farrar0 (easons $&y company formed0 continuity of +usiness@perpetual succession and floating c&arge0 a device $&ere t&e mortgager can deal $it& t&e property as if t&ere is no c&arge at all0 autonomy in dealing $it& t&e mortgage0t&is is not availa+le to any ot&er form of +usiness. Saloman0 /&e +usiness $as sold at an overestimated price. >ut' &e never committed a fraudulent act0 t&ere $as no dis&onesty on &is part0 so t&e .L &eld t&e $ay it did' since t&ere $as no fraud in t&e formation of t&e co.' it $as as separate legal personality. .e lent &is and &is $ife6s money $&en financial difficulty $as t&ere. /&e term Fassociation6 may not +e appropriate for a large0si7ed corporation. In its early &istory' a corporation $as an association of persons &aving separate legal personality and perpetual succession. "dam *mit& argued t&at t&ese advantages $ere to +e availa+le to &uge corporations re?uiring large investments0 limited lia+ility is not to +e given to all corporations0 s&ould +e only for large corporations. /&is is due to t&e fact t&at t&e money is provided +y a large num+er of people +ut used +y a small group of people0 t&e management0 so t&is is a c&ec# on t&e po$er of t&e management0 to prevent t&e a+use of t&e po$er +y t&e management. 8arlier' even if mem+ers did not actually participate in t&e affairs' t&ey #ept an eye on t&e $or#ing of t&e company and its management. /&e need for social accounta+ility only arose due to t&e rise of large corporations $&ic& can cripple society if t&ey so $is&. " corporation is an entity0 not -ust an association of its mem+ers. /&is is t&e perception no$0 t&e idea of t&e corporation +eing separate from its mem+ers0 t&is $as not present +efore t&e *aloman decision0 &ere t&e corporation $as seen -ust as a group of people pooling t&eir resources to carry on t&eir +usiness0 t&e :;!! "ct provided t&at deed of settlement companies 1essentially large partners&ips2 could +e registered as companies. Not only t&e $ord Fassociation6' +ut t&e $ord Fpartner6 $as also used for mem+ers of a co.0 t&e idea of a co. +eing a large partners&ip $as reflected in t&e earlier enactments. >erle0 Most production property in "merica is in t&e form of corporate securities. /&ere may +e companies $&ere su+stantial s&ares are &eld +y a family0 +ut t&ere are ot&ers $&ic& &ave s&ares &eld +y a $ide variety of people. /&ese people only &old t&e s&ares as property0 t&ey &ave no interest in participation0 t&ey are passive investors. /&ere are also institutional investors0 $&ic& &old most of t&e s&ares in t&e listed companies. /&ese include mutual funds0 $&ic& are used as a route to invest +y retail investors. >ut' t&e po$er is actually &eld +y t&e >oard of Directors. It is incorrect to call t&ese corporations as associations. /&e s&are&olders are simply suppliers of capital0 t&e >oard of directors actually performs most of t&e functions of t&e company. ,eneral meetings are t&inly attended0 t&e ?uorum is < mem+ers. /&e notion t&at s&are&olders form an association and carry on +usiness. *o' t&ere is a need to control t&e firing of t&e management. /&e corporation is an institution0 not an association. Capital is supplied +y people $&o are not s&are&olders0i.e. de+t provided +y +an#s $&ic& gets it from t&e pu+lic. *o' cant say t&at s&are&olders o$n t&e co. ,iant corporations are o$nerless corporations0 no one can +e said to o$n t&em0 c&ange from association toa corporation.

2:

>ut t&e "ct still mentions t&at a company is an association of persons. *.3 0 Constitutional documents of a company are contractual terms +et$een t&e company and mem+ers and mem+ers inter se. Corporate Personalit$0 Corporation as a personalit$0 an entity capa+le of rig&ts and lia+ilities0 is similar to a &uman +eing as a personality in most respects0 can o$n property' +e an employer' can +e a director@partner' can incur penal lia+ility for some crimes0 fraud' manslaug&ter etc. >ut in some cases' cannot +e e?uated $it& a &uman +eing. Managing agency system0 earlier could +e one0 no$ &as +een a+olis&ed0 contract t&at one $ill manage t&e affairs of anot&er co. Co%pan$ as a person in Constit#tional Law 0 citi7ens&ip' fundamental rig&ts' corporation as state $it&in t&e meaning of ".:2' privileges availa+le to a state corporation as t&ey are availa+le to employees of t&e *tate' separate legal personality and govt. contracts' availa+ility of $rit -urisdiction against a company etc. Salo%an;s case in 9 stages0 .e $as a leat&er merc&ant. .e sold t&e +usiness to a trustee of t&e proposed company 1not yet formed2. .e also undertoo# t&at &e $ould not start a +usiness in competition of t&at +usiness. /&e company undertoo# to pay off t&e de+ts of t&e +usiness. /&e price $as fi4ed under various &eads. /&ere $as no independent valuation made. Initially' $&en t&e company $as formed' 7 mem+ers of t&e family su+scri+ed to t&e s&ares of t&e company0 mentioned in t&e Mo"0 initially eac& &ad one s&are. /&en after company $as formed' 20'000 s&ares $ere issued to *aloman. /&e price $as not arrived at +y an independent valuation0 it $as in e4cess of t&e actual value of t&e property. /&ere $as no intention t&an anyone ot&er t&an a family mem+er +e issued s&ares. No one o+-ected to t&e price' at $&ic& t&e s&ares $ere issued. If t&e company &ad intentions to allot s&ares to outsiders su+se?uently' and price $as e4cessive' $ould t&e transaction &ave +een validG No.0 as t&ere $as fraud. >ut' t&is $as not so in t&is case as t&e s&ares $ere issued only to a family mem+er0 t&ere $as no intention to issue s&ares to anyone else and t&e price $as #no$n to every mem+er of t&e co. /&e ot&er s&are&olders did not pay anyt&ing0 t&ey $ere only legal o$ners of t&e s&ares0 t&e actually +eneficiary $as *aloman0 "n argument raised $as t&at even t&oug& t&ere $as a corporate form' since t&ere $as only one +eneficiary' t&e +usiness actually +elonged to &im. De+entures $ere issued in &is favour and a floating c&arge $as created. In a +oard meeting' &e $as appointed MD' &is sons $ere directors. /&ere $as no intention of dis&onesty0 t&e intention $as to run t&e company as a family concern0 not to +e given to outsiders0 even t&oug& t&e price $as e4cessive' t&ere $as no intention to commit fraud. Due to unforeseen circumstances' t&e leat&er industry faced pro+lems0 constant stri#es and loc#outs t&ere. .e tried to salvage t&e +usiness +y in-ecting fres& capital into t&e company. .e re?uested t&e de+entures in &is name +e cancelled and issued to anot&er man $&o &ad advanced money to t&e company. >ut company could not +e salvaged0 it $as ordered to +e $ound up. .e $as a secured creditor. /&e ot&er unsecured creditors argued t&at &e s&ould +e personally lia+le for t&e de+ts of t&e company as &e &ad effected t&e +orro$ing for t&e +usiness0 t&ere $as no difference +et$een &im and t&e +usiness0 &e only used t&e legal form to carry on +usiness.

22

Ailliams 9.0 /&e +usiness +elonged to *oloman. /&e company $as only &is agent or legal instrumentality. *o' t&e principal incurs t&e lia+ility' not t&e agent0 so &e incurred personal lia+ility. *eparate legal personality $as not denied +ut &eld t&at in t&is set of circumstances' t&e company $as only an agent of *oloman. /&is $as not accepted +y t&e .ouse of Lords. >ut' in many instances' a company is treated as an agent of t&e controlling s&are&olders0 especially in cases of lifting t&e corporate veil in C20 and C2:. Court of "ppeal0 up&eld t&e decision of Ailliams 9. /&e reason' &o$ever $as t&at t&ere $as no company at all0 unli#e t&e lo$er court $&ic& &eld t&at t&ere $as a company $&ic& $as an instrumentality of t&e principal s&are&older. /&e statute provided t&at t&e company &ad to &ave seven persons $&o &ad real interest in t&e company0 &ere t&e company $as a fraud. /&e legislature did not contemplate t&at t&e ot&er mem+ers $ould simply +e dummies. Bn t&e "ct as t&e persons did not &ave an independent' real interest in t&e co.0 t&ey only gave t&eir names in order to provide legality to t&e co. only one person &ad a real interest0 t&e ot&ers $ere +enamidars0 so it $as a fraud on t&e Cos. "ct. /&e co. $as not duly constituted so t&e formation of t&e co. $as a nullity. *o' *aloman $as carrying on t&e +usiness &imself and so' s&ould +e personally lia+le for its de+ts and lia+ilities. .ouse of Lords0 /&e Court of "ppeal said t&at t&ere s&ould +e seven genuine mem+ers of t&e co. /&e courts &ad to find t&e intention of t&e legislature using t&e language in t&e statute0literal interpretation of t&e statute to +e done. *o' cannot say t&at genuine interest needed' $&en "ct only mentioned t&at interest $as necessary. 9udges could not normally go +eyond t&e literal interpretation of t&e statute. *o' t&e interpretation of t&e Court of "ppeal $as un-ustified0 as no$&ere it $as mentioned t&at t&e mem+ers need to &ave genuine interest. /&e re?uirement of eac& mem+er &aving at least one s&are $as complied $it&0 it is not necessary to see if +eneficial interest is t&ere. *o' a co. $as properly formed0 t&us' t&e co. alone is lia+le for t&e de+ts of t&e +usiness. Posner0 t&e co. is a standard form contract0 +ut can +e c&anged +y t&e mem+ers. /&e "ct provides default provisions0 in t&e a+sence of any special agreement +et$een t&e mem+ers' t&ese provisions apply 1legal angle2. 8aster+ourne P 5is&er0 it is a ne4us of contracts among t&e various people associated $it& a co.0 mem+ers' creditors' directors' consumers etc 1la$ and economic angle2. 9anet Dines0 economic contractarianism 1+et$een mem+ers and co.2 and legal contractarianism 1+et$een everyone involved20 2 #inds of contractarian t&eories0 used to descri+e t&e a+ove 2 t&eories. :=;0s0 po$erful movement focusing on la$ and economics0C&icago sc&ool. :==0s0La$ and economic angle is fading0 economics does not &ave muc& of a focus anymore0 more of la$. 8conomics can play a role in deciding la$ and policy. >ut $&en la$ &as +een made'm economics no longer &as a role in its application0 t&is is t&e general perception no$. " corporation is an entity t&at &as rig&ts and lia+ilities distinct from its mem+ers. * 3!1220>ody corporate $it& perpetual succession and common seal. /&e association is a +ody corporate0 a person. >ut a co. is more t&an an association no$0 *ealy. /&ere are many provisions in t&e "ct +ased on t&e notion t&at a co. is an association of persons. *uc& as naming t&e

23

constitutional documents as Mo" and "o"0 $&ic& is +ased on t&e notion t&at a no. of people come toget&er as an association0 * 3 provides t&at t&ey are contractual terms +et$een t&e co. and t&e mem+ers and t&e mem+ers inter se0 reflects legal contractarianism. >ut no$ it6s a po$erful economic and social institution. /&e 8nglis& "ct does not mention t&at t&e contract is +et$een t&e co. and t&e mem+ers0+ut t&is &as +een accepted +y -udicial interpretation. )A Aedderman0 all t&e provisions in t&e Mo" and "o" are contractual terms +et$een t&e co. and t&e mem+ers0 so t&ey are enforcea+le. /&is vie$ is not accepted +y ot&ers. *aloman0 Ailliams' 9.0 t&e co. is an agent of t&e ma-ority s&are&olders0 t&is logic applies esp. to su+sidiary cos. $&ic& are seen as agents of &olding cos. Court of "ppeal0&ave to &ave 7 persons $it& real interest0 ot&er$ise is a fraud on t&e "ct0 it $as formed in a fraudulent manner. .ouse of Lords0s&ould use internal interpretation0 t&e misc&ief rule and golden rule can only +e used in e4ceptional circumstances0 so cannot say t&at company is an agent of t&e ma-ority s&are&older or t&at real interest of all s&are&olders is re?uired as all t&e legal re?uirements of t&e formation of a company are complied $it&0 so critici7ed +ot& Ailliams 9. and Court of "ppeals -udgments. /&e register of mem+ers determines $&o s&are&olders are 1*. :<320 no$&ere is it stated t&at all t&e mem+ers &ave to &ave real' +eneficial interest in t&e company. S&<=+ concept of a wholl$ owned s#bsidiar$ 0 all s&ares are &eld +y &olding company0 +ut su+sidiary is a separate legal personality. /&e &olding company can &old s&ares in t&e names of ot&er persons to comply $it& minimum num+er of persons re?uirement. /&is is permissi+le +y t&e specific provisions of t&e "ct. *o' re?uirement of real' +eneficial interest is not t&ere in t&e "ct0 courts cannot add it +y interpretation. /&e fact t&at a person is &olding s&ares as a nominee or a trustee does not mean t&at &e is not a mem+er and t&e company &as not +een legally formed. *.!=132 analogy to t&e case0 *oloman allotted s&ares to &is family mem+ers for t&e purpose of meetings t&e minimum no. of persons re?uirement0 t&e same is $&en a &olding company allots s&ares to its nominees in order to meet t&e minimum no. of persons re?uirement0 in +ot& cases' t&e company legally formed and $as a separate legal personality. " 3nimem+er Company0 is it a corporation sole or a corporate aggregateG "ccording to *ealy' it is a corporation aggregate. /&is is +ecause at any point in time t&ere can +e more t&an one mem+er0 a single mem+er is only t&e minimum re?uirement0 in t&e course of time more mem+ers can +e inducted. Multinational ,as Co. Ltd. v. Multinational Services Ltd. H 3 companies incorporated in 3 different -urisdictions formed a 9L0 formed 2 $&olly o$ned su+sidiaries0 &eld all t&e s&ares in +ot&. Multinational ,as Company dealt in li?uefied gas and petroleum. Multinational *ervices rendered policy seervices to Multinational ,as. /&e directors of t&ese t$o companies $ere appointed +y t&e &olding companies. *ervices $as negligent in giving advice0 so ,as suffered loss0 put into li?uidation. /&e li?uidator $anted to fasten lia+ility on t&e &olding companies and ot&er su+sidiary companies for t&eir negligence. /&e li?uidation proceedings $ere in 8ngland even t&oug& t&e company $as incorporated outside 8ngland.

2!

Part C0 Ainding up of unregistered companies0 includes foreign companies0 can +e $ound up even if not registered0 t&is $as used to li?uidate ,as Company. .eld0 t&ese foreign corporations $&o $ere t&e &olding companies cannot +e fastened lia+ility as t&ey $ere separate legal personalities0 t&e doctrine of lifting t&e corporate veil does not apply. /&e companies $ere not incorporated in 8ngland0 $ere foreign companies0 so could not +e fastened lia+ility0 t&ey $ere independent of t&e su+sidiary company $&ic& too# its o$n decision. DOCT !NE OF L!FT!N3 T8E 4E!L Lord Coo#e0 principle underlying corporate la$ is t&e separate legal personality0 t&ere are only some e4ceptions to it. Bne e4ception is $&en t&e company is formed for a fraudulent purpose0 $&en t&e company is a s&am0 t&is is t&e only e4ception according to &im. >ut ot&er t&in# t&at t&ere are ot&er e4ceptions as $ell. 84ceptions are divided into0 statutory e4ceptions and -udicial inroads into t&e concept of a separate legal personality. *tatutory e4ceptions0 a statute creates t&e corporations and it also provides e4ceptions to t&e separate legal personality0 may +e in t&e Companies "ct or ot&er statutes eg. Income /a4 "ct and ot&er revenue statutes. *.!<' <!2' :!71!21C2' 2:202:! 9udicial inroads0 many cases create t&em0 rat&er confusing due to t&e differing perceptions of t&e -udges. Propert$ rights in relation to separate legal personalit$. .ac a F ,ul0ar v. C1+ H " $oman $as a s&are&older in a tea company0 engaged +ot& in plantation and in manufacturing0 so +ot& agricultural and industrial activities engaged in0 so' t&e 3nion cannot ta4 agricultural income. /&e $oman got dividend0 t&e ?uestion $as &o$ it $as to +e dealt $it& for t&e purposes of ta4ation. /&e formula used is t&at 0M is agricultural income and !0M is industrial income0 as per t&e rules of t&e Central >ureau of Direct /a4es0 t&e $oman used t&is to claim e4emption from ta4 for 0M of t&e income. /&e court &eld t&at s&e $as a s&are&older and &ad no proprietary interest in t&e properties of t&e company. S ort v. +reasury Commission H Company compulsorily ac?uired +y t&e govt.0 t&e s&are&olders $ere not opposed to it0 dispute $as relating to price to +e paid. /&e govt. purc&ased all t&e s&ares of t&e company0 ?uestion $as $&at t&e fair price $ould +e s&are&olders0 +y purc&asing all t&e s&ares of t&e company' t&e govt. +ecame prima facie o$ners of all t&e assets of t&e company0 s&are value to +e determined according to value of assets. Court0 value of s&ares is not related to value of assets of company. *&are&olders only o$ns s&ares' $&ic& are property0 +ut do not &ave any proprietary interest in t&e assets of t&e company. Debent#re holders+ creditors of t&e company0 may +e recogni7ed as &aving a proprietary interest in t&e properties of t&e company0 as opposed to a s&are&older0 de+entures create a c&arge on t&e assets0 a mortgage is created +y secured de+entures0 so de+enture &olders +an# on t&e property for repayment on t&e amount o$ed to t&em0 any damage to t&e property is pre-udicial to t&eir interests0 so t&ey can insure t&e property against any loss0 &ence' are recogni7ed to &ave proprietary interest. 5loating C&arge0 until an event &as ta#en place0 t&e event of crystalli7ation' t&e floating c&arge does not affect t&e property. /&e Company can deal $it& t&e property as if t&ere is no c&ange at all0until crystalli7ation ta#es place. /ill crystalli7ation' t&ere is no propriety interest. Bn

2<

crystalli7ation a floating c&arge gets converted to a fi4ed c&arge0 t&en a propriety interest is created. " floating c&arge is a device t&at can +e used only +y a Company. " de+enture &older is a special type of creditor0 &as several protections accorded to &im +y t&e "ct. It is mandatory to &ave a de+enture trust0*'::7 "0 +etter $ay of enforcement of rig&ts of a de+enture &old as opposed to an ordinary creditor. ights and liabilities of a shareholder in respect of a tort" offence co%%ited b$"against the Co%pan$. Lord Coo#e0 " scientist in t&e agricultural field formed a Company in $&ic& most of t&e s&ares $ere &eld +y &im. .e $as MD and C&ief *cientist0 rendered services to a client $&o suffered loss due to negligence. /&e issue $as $&et&er &e $as lia+le for negligence. .eld0 "n action can +e against t&e Company' not t&e MD as t&e action $as +ased on a contract $&ic& $as +et$een t&e Company and client0 so t&e s&are&older as suc&' &as no lia+ility $it& respect to a tort@ +reac& contract +y t&e company0 neit&er does &e &ave any rig&ts in t&at respect0 even if &e is a ma-ority s&are&older. " s&are&older cannot sue for +reac& of contract +y a t&ird party in respect for contract +et$een t&e Company and t&e t&ird party0 as t&ere is no privity of contract. Creditors0 #no$ t&at can only claim against assets of t&e ltd.company and t&at t&e assets mig&t diminis&0 if t&ey are $illing to go t&roug& t&at ris#' only t&en $ill t&ey +e creditors0 voluntary creditors agree to ta#e t&at ris#. /&is cannot e said for an involuntary creditor' $&o is not accorded any special protection +y la$. 3ower0 all decisions on personality may +e conflicting +ut can +e classified into t$o &eads. Deviation from separate legal personality0 lifting t&e corporate veil' piercing t&e corporate veil' crac#ing open t&e corporate s&ell0 all t&ese p&rases are used to descri+e deviations. *ometimes corporate veil is lifted and corporate is e?uated $it& t&e corporations. "s regards group Companies are concerned' t&oug& eac& is a separate legal personality' t&ey are recogni7ed as a single economic entity in certain circumstances. Pal%er0 /&e cases in t&is area1 legal personality and lifting t&e veil2 are confusing. /$o +road &eads to +e considered H statutory inroads and -udicial inroads. *&ares are property0 so s&are&olders cannot +e deprived of t&em $it&out t&eir content. * 3= 9 is an e4ception0 if an offer to +uy t&eir s&ares is accepted +y =0M of t&e s&are&olders' t&en for t&e remaining :0M1 minority s&are&olders2 H t&eir s&ars can +e compulsorily accepted. (e2 .ugle 'ress H /&ere $ere t&ree s&are&olders in a company. " and > toget&er &eld =0M of t&e s&arers' C &eld :0M. " and > as#ed C to sell &is s&ares to t&em0 &e refused. " and > formed C company0 t&ey $ere sole s&are&olders of t&at. C company made an offer to +uy out t&e first company H " and > accepted0 so C6s s&ares $ere compulsorily purc&ased0using *.3=<. C approac&ed t&e court H t&e formation of t&e Company is a s&am. Court0 t&e corporate veil $as lifted0 t&e company veil and " and > $ere e?uated H t&e separate legal personality of t&e company $as ignored. S <* H separate legal personality not ignored H +ut ot&er people1 +esides t&e company 2 are also to +e lia+le. /&e section says t&at if minimum mem+ers re?uirement is not met for a period more t&an mont&s 1 it does not affect t&e life of t&e company2 ' t&en if t&e company incurs any de+t' t&en' in addition to t&e company' all persons $&o $ere mem+ers after t&e mont&s and $ere

a$are t&at t&e mem+ers&ip $as reduced +elo$ t&e statutory minimum t&en t&ey $ill +e' t&en t&ey $ill +e personally lia+le for t&e de+ts of t&e company. /&e personal lia+ility is dependent on some conditions precedent0 mem+ers&ip +elo$ statutory minimum' for si4 mont&s' mem+ers a$are t&at mem+ers&ip is +elo$ t&e statutory minimum. /&e lia+ility is only $it& respect to t&e de+ts contracted after t&e si4 mont&s period and according to Pennington' t&is is only $it& respect to +orro$ing +y t&e company0 not ot&er lia+ility0 t&is is a rat&er narro$ meaning of t&e p&rase Fdebts contracted% H $&at a+out contractual lia+ilityG /&e si4 mont&s period is an immunity period given to get t&e mem+ers&ip +ac# to t&e statutory minimum. /&e provision does not completely do a$ay $it& t&e notion of a separate legal personality0 it only provides for additional security to creditors0 so additional people are added to for t&e purpose pf lia+ility. /&e company can +e &eld lia+le H +ut so can t&e mem+ers in t&is case. A&en a s&are&older dies' t&en &is s&ares go to &is legal representative0 so &o$ can mem+ers&ip fall +elo$ statutory minimumG " mem+er cannot +e e?uated $it& $it& a s&are&older H *:<0 says t&at mem+ers &ave to +e on t&e register of mem+ers0 for t&is some legal re?uirements &ave to +e complied $it&0 so legal representatives do not automatically +ecome mem+ers0can +e so only after some formalities are completed. If t&at is not done' t&en mem+ers&ip can fall +elo$ t&e statutory minimum. "lso' t&e &eirs may already +e t&e mem+ers of t&e company H so mem+ers&ip $ill +e +elo$ statutory minimum. * !< only ma#es t&e mem+er a surety in respect of t&e de+ts contracted +y t&e company. Instances $&en t&e separate legal personality is recogni7ed as a legal fiction0 $&en t&e company is treated as an association of mem+ers and in case of group companies. (elevance of provisions li#e * !<0 $&en uni mem+er companies are recogni7ed0 +y allo$ing nominees to &old s&ares to meet minimum mem+ers&ip re?uirement. * !< does not e4tinguis& t&e companies lia+ility0 t&e legal personality of t&e company is maintained0 t&e company is li#e a principal de+tor0 +ut t&e creditors can c&oose to sue t&e mem+ers as t&ey are treated as sureties' $&o can also +e &eld lia+le. /&e mem+ers can as# for reim+ursement from t&e company as t&ey are vie$ed as sureties in a contract of guarantee. *o' some aut&ors do not consider it as a true e4ception to a notion of separate legal personality as t&e company is still lia+le. >ut ot&ers' li#e Palmer' feel t&at it is a genuine e4ception as t&ere is esta+lis&ment of a legal relations&ip +et$een t&e creditors and t&e mem+ers. * <!2 H Bnly a t&e tine of t&e insolvent $inding up of t&e company e4tends to all of t&e company1 not -ust contractual as in * !< 2 ' anyone $&o $as involved in t&e fraudulent running of t&e +usiness can +e &eld lia+le 1 mem+er' director' officer etc.2 H anyone $&o $as a party or privy to t&e fraudulent trading may incur unlimited personal lia+ility. /&e court can order t&en t&em to pay on t&e application of t&e li?uidator or a creditor. /&e rationale of t&is section is to ena+le t&e company to pay off its de+ts. /&e section applies in circumstances $&en t&e company is una+le to pay off its de+ts after it engaged in rec#less and fraudulent trading. If t&e company engaged in fraudulent trading' +ut &as sufficient assets to pay off its de+ts' t&en * <!2 does not apply0 t&at #ind of a situation is contemplated +y *.<!20 it does

27

not contemplate t&at amounts +e collected from people $&o carried out fraudulent +usiness as t&at $ould lead to a surplus $&ic& $ould go to t&e mem+ers. * <!2 only applies in a situation $&en a company engages in fraudulent trading and is una+le to pay off its de+ts. /&e guilty parties are lia+le not only for t&e de+ts due to fraudulent trading H +ut to an unlimited e4tent. Fra#d#lent trading0 not fraud in t&e tec&nical sense of t&e term0 i.e. #no$ing it to +e false' +elieving it to +e untrue' fraudulent trading need not satisfy t&e elements of fraud in t&e common la$ sense. It need not +e deceitful0 it can simply +e rec#less trading. /&e 9en#ins Committee recommended t&at t&e scope of t&e section +e $idened to include rec#less trading. S *<1 2 Liabilt$ is #nli%ited0 depends on t&e discretion of t&e court. /&e guilty parties can +e as#ed to contri+ute to t&e general assets of t&e +usiness $&ic& $ill &elp it to pay off its de+ts. /&is section does not apply $&en personal +enefit gained +y t&e people0 it is $&en t&ey contracted de+ts #no$ing t&at t&ey $ill not +e a+le to pay off t&e de+ts. *o ' t&oug& insolvency is not mentioned in t&e section +ut it is to +e t&ere for t&e section to apply. If t&ey are as#ed to contri+ute to t&e assets of t&e company in order t&at it can pay off its de+ts' t&en t&ey can +e penally lia+le under *.<! 2132 S#nshine test% A&en mem+ers t&in# t&at t&ey $ill +e a+le to tide over t&e +ad time and incur de+ts &oping t&at t&ey $ill +e a+le to pay off t&ose de+ts. "ccording to >er#ley' if t&ere $as no dis&onesty' t&en *<! 2 $ould not +e attracted. ( v. ,rant am% t&ere &as to +e some reasona+le prospects of repaying t&e de+ts0 it is o+-ective0 not su+-ective satisfaction as in t&e suns&ine test. /&ere is also dispute among academicians as to $&et&er * <!2 is actually an instance of lifting t&e corporate veil. It only results in some people +eing made lia+le at t&e time of t&e $inding up of t&e company H t&e amount goes to t&e general offers to t&e company for disc&arging t&e lia+ility of t&e company. "ccording to ,o$er' it is an instance if lifting t&e corporate veil +ut it is not so for t&e case of Palmer. "s according to t&e section some people may +e lia+le for t&e de+ts of company as in t&e stated circumstances. * :!7 1!2 1C2 0 A&en a negotia+le instrument is issued +y t&e company on +e&alf of t&e company endorsed +y t&e company0 +y someone $&o is empo$ered to do so +y t&e company0 and t&e name of t&e company is mis0descri+ed t&en t&e company can escape lia+ility and t&e officer $&o signed can +e &eld personally lia+le. 8ven t&oug& t&e officer is only an agent' &e can +e &eld personally lia+le to t&e &older of t&e negotia+le instrument $&o can directly sue t&at officer. /&is is not a case $&ere t&e agent e4cluded &is aut&ority H +ut $&en t&e name of t&e company is mis0descri+ed. If t&e company denies its lia+ility t&en t&e officer can +e made personally lia+le. S 1(1+ 1(<0 /&oug&t &olding and su+sidiary companies are separate legal personalities' t&ere are some e4ceptions to t&is. /&e +alance s&eet and profit and loss account of t&e su+sidiary are to +e anne4ed to t&e +alance s&eet and profit and loss account of t&e &olding company. In 8ngland t&ere s&all also +e a consolidated +alance s&eet and profit and loss account0 as if all t&e companies are a single entity. /&is is in order to get a clear picture of t&e real financial position

2;

of t&e group0 t&e financial position of t&esu+sidiary companies affect t&e position of t&e &olding company. /&e financial position of t&e &olding and su+sidiary companies is to +e seen at t&e same time H* 2:30 financial statements to +e prepared at a gap of not more t&an mont&s. * 2:! H t&e &olding companies &as t&e rig&t to aut&ori7e a person to persue t&e records of t&e su+sidiary company H done +y passing a resolution. " mem+er as suc& cannot do so Hand tec&nically t&e &olding company is only a mem+er of t&e su+sidiary company. * 23< mem+ers can pass a resolution to re?uest t&e central government to appoint inspectors to investigate t&e affairs of t&e company. /&is po$er can +e e4ercised +y t&e mem+ers of t&e &olding company in respect of t&e su+sidiary company. *o' +y t&ese provisions' t&e &olding and su+sidiary companies are limited as a single entity0 t&e corporate veil is pierced. /&e &olding company is treated as more t&an a s&are&older. /&e su+sidiary is seen as an economic arm of t&e &olding company so +ot& treated as t&e same economic entity. "part from t&ese provisions' t&ere are also provisions in t&e Income /a4 "ct and revenue statutes t&at +lur t&e action of a separate legal personality. ,#dicial inroads on the concept of a separate legal personalit$ H t&is is confusing as different -udges &ave never come to different conclusions in nearly identical fact situations. /&ere is a lac# of any consistent principle +eing applied. U.S. v. Mil#a)ee (e!rigeration Co Ltd H notion of a separate legal personality can +e ignored $&en fraud is perpetuated' $&en an unfair advantage is ac&ieved etc. In t&is case' t&e company $as a pu+lic utility service provider H so &ad to give e?ual treatment to all 1 as per t&e la$ of t&e state20 no preferential treatment $as permitted. /&e rail$ay company $anted to give concessions to a particular valua+le client company. >y la$' no concessions could +e given. /&e company formed a su+sidiary transport company t&roug& $&ic& it gave concessions to t&e client. /&is $as &eld to +e invalid0 as $&at one cannot do directly' one cannot do indirectly. "ones v. Libman 0 contract for sale of immovea+le property +et$een " and >. Later' " $anted to avoid t&e contract. .e formed a company in $&ic& all t&e s&ares $ere &eld +y &im0 transferred t&e property to t&e company to avoid t&e la$ful o+ligation under t&e contract. .eld0 t&e t&ird party $as "6s creation H t&e notion of separate legal personality $as ignored. /&e purpose of forming t&e company $as to avoid lia+ility0 t&e formation of t&e company $as a s&am. ,il!ord Motor Co. v. Horne0 " person $as appointed as t&e general manager of a company. /&ere $as a service contract $&ic& $as valid under *ection 27 of t&e Contract "ct0 t&e e?uivalent of t&e Indian statute0 agreement in restraint of trade. .e agreed t&at after t&e retirement from service' &e $ould not do +usiness in competition $it& t&e company for a particular period0 $as reasona+le restraint. .e resigned' esta+lis&ed a company and &e $as appointed as manager of t&e company. /&e o$ner $as &is $ife. .e claimed &e $as only an employee of t&e company0 so did not violate t&e agreement in restraint of trade. /&e court lifted t&e corporate veil as t&e creator of t&e company $as a s&am. >y and large' courts &ave stuc# to t&e notion of a separate legal personality even t&oug& t&e company is o$ned +y a single person or a company. /&ere is only one e4ception 0 $&en t&e formation of a company is a s&am. /&is is Lord Coo#e6s opinion. >ut t&ere may +e ot&er e4ceptions as $ell0 apart from fraud0 e.g. Doing somet&ing indirectly $&ic& cannot +e done directly.

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"ccording to Lord Coo#e' t&ere need not &ave +een t&e application of t&e doctrine of lifting t&e corporate veil in eit&er Li+man or ,ilford. In Li+man' t&e t&ird party $as not +ona fide0 t&e company could +e presumed to &ave #no$ledge of t&e agreement of sale. Lennard%s Carrying Company Ltd v. Asiatic 'etroleum :=:< "C 70<. .L developed t&e organic t&eory for t&e purposes of fastening criminal lia+ility on a company. *tatutory offences are t&ose $&ere t&e re?uirement of mens rea is done a$ay $it&. "s per t&e organic t&eory t&e state of minds of t&e persons controlling t&e company is treated as t&e state of mind and t&e #no$ledge of t&e company' t&e company &ad some vessels0 due to negligence t&ere $as a collusion0 company as#ed to pay compensation. "s per t&e Maritime *&ipping "ct' lia+ility $as limited if t&e o$ner did not #no$ $&et&er t&e s&ip $as sea $ort&y. .ere t&e #no$ledge of t&e MD $as treated as t&e #no$ledge of t&e company. /&is principle can +e used for Li+man and ,ilford. /&e #no$ledge can +e presumed to +e of t&e company. *o t&ere $as no necessity to lift t&e corporate veil in t&ese 2 cases $&ic& are treated as e4amples of situations $&en corporate veil is lifted to prevent in-ustice. +esco Supermar)ets Ltd v. *attras 2 1:=722 .L 3; H attri+ution t&eory. /&e act of only one person is not criminal0 +ut acts of many people ta#en toget&er +ecomes criminally lia+le. " single person is not seen. >ut t&e collective' non performance of a num+er of people can lead to t&e fastening of criminal lia+ility. /a4 matters0 even $it&out statutory provisions' courts &ave readily lifted t&e corporate veil. Theor$ of Central Control% it is mandatory for a company to &ave a residence0 a registered office0 *. :! 1:2 H t&is is t&e normal rule. >ut in certain areas' t&e residence can +e $&ere t&e central control of t&e company is t&ere. &aimler v. Continental +yres $ (ubber Ltd 0 t&e company $as in 8ngland H registered office t&ere. Directors $ere ,erman nationals0 so $ere ma-ority of its s&are&olders. /&e company instituted a suit to recover money from de+tors. /&e de+tors claimed t&at t&e company could not enforce t&e contract0 it $as an alien enemy and so &ad no contractual capacity to enforce t&e contract. /&e circumstances arose during t&e second $orld $ar. /&e test for an alien enemy is voluntary residence in t&e country $&ic& is at $ar. It $as argued t&at t&e person controlling t&e company $ere voluntary residents of ,ermany $&ic& $as at $ar $it& 8ngland. *o' even t&oug& t&e company $as 8nglis&' t&e corporate veil $as to +e lifted. /&is argument $as accepted +y t&e court $&ic& treated t&e company as an alien enemy as t&e central control $as in ,ermany even if it $as registered in 8ngland. (e F,3 Films4 Ltd H t&e company $as incorporated in 8ngland $it& a capital of :00 pounds0 it $as to produce a film entitled F/&e Monsoon6 =0M of t&e s&ooting $as done in India. /&e company $as a $&olly o$ned su+sidiary of 5ilm ,roup Inc0 a 3* company. /&e reason for forming t&e company $as to &ave ta4 advantages t&at an >ritis& firm got for ma#ing >ritis& firms. "ll t&e money $as supplied +y t&e &olding company $&ic& appointed directors' decided policy as $ell. /&e company $anted to register it as a >ritis& film. /&e revenue aut&orities o+-ected to it as t&e sole purpose of forming t&e company $as to reduce ta4 lia+ility. /&e su+sidiary $as only an agent of t&e &olding company0 film $as actually produced +y t&e parent company. *o' t&e corporate veil $as lifted0 t&e court agreed $it& t&e contention of t&e aut&orities.

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:.&H* Food &istributors v. London .orroug o! +o#er Hamlets D:=7 E 3 "ll 8( ! 2 2.Smit Stone and /nig t Ltd v. Mayor and Citi0nens o! t e city o! .irming am D:=3=E 3 "ll 8( :: 3.Unit Construction Co. v. .ulloc) D:=<=E 3 "ll 8( <3:. !.State o! U' v. (enusagar 'o#er Co . Ltd. 1:=;;2 ! *CC In all t&ese cases' t&e court disregarded t&e notion pf separate legal personality. :. >usiness o$ned +y D.N0 parent company0 t&ere $ere 2 su+sidiaries0 land o$ned +y >ron7e' ve&icles o$ned +y D.N transport. /&e directors and s&are&olders $ere t&e same. In := =' t&e local aut&ority made a compulsory purc&ase of land order for t&e land o$ned +y >ron7e0 gave compensation for t&e same. D.N also claimed compensation for disruption of +usiness. "ut&ority H +ot& companies $ere separate0 so D.N not entitled t compensation. Lord Denning0 if eac& company is treated as separate t&en no one could claim compensation a >ron7e &ad land +ut no +usiness and D.N &ad only +usiness. /&e companies could not +e segregated0 &ad to +e treated as one for t&e purpose of compensation. /&e +usiness $as carried on +y all of t&em0 so even D.N $as given compensation. /&e >orroug& Council &ad argued t&at >ron7e could not get compensation for +usiness distur+ance as it did not carry on any +usiness and D.N $as neit&er t&e o$ner' nor t&e lessee of t&e land H it $as only a licensee0 so could not get compensation. /&e court treated +ot& D.N and >ron7e as t&e economic entity0 t&e directors and s&are&olders $ere same0 t&e &olding company controlled t&e su+sidiary0 so $ere t&e same entity0 t&e corporate veil $as lifted in favour of t&e company0 generally it is done for social interest0 +ut not so in t&is situation. /&e argument t&at one cannot first separate companies and t&en claim t&em to +e t&e same and try and ta#e advantage of it0 t&is $as re-ected. 2. *mit& 9ones and )nig&t &eld H manufactured paper0 t&e o$ners&ip' control retained $it& t&e parent company. .ere too t&ere $as compulsory ac?uisition of t&e land of t&e su+sidiary. Compensation given only to t&e su+sidiary. Corporation claimed t&at t&ey $ere separate legal entities0 so parent company not to get compensation. Court0 t&e *u+sidiary $as simply an agent of t&e parent company. /&e +usiness $as operated on +e&alf of t&e parent company' so t&e parent company $as entitled to compensation. /&e court recogni7ed t&e separate legal personality of +ot& t&e companies0 +ut &eld t&at t&ere $as a principal H agent relations&ip0 t&e su+sidiary $as only an instrumentality of t&e parent company0 t&e parent company $as actually carrying on t&e +usiness. *o t&e corporate veil to +e lifted. /&is is similar to t&e vie$ ta#en +y Ailliams 9 in *olomon. Lord "t#inson relevant grounds to determine $&o actually carried on t&e +usiness0 su+sidiary company or &olding company H 1a2 $ere t&e t&e profits treated as t&at of t&e parent companyG 1+2 $ere t&e persons carrying on t&e +usiness appointed +y t&e parent companyG 1c2 $as t&e parent company t&e &ead and +rain of t&e trading ventureG 1d2 did t&e parent co determine t&e +usiness policiesG 1e2 did t&e parent company generate profit +y its effortG 1f2 $as t&e parent company in consistent controlG. If t&ese ?uestions are ans$ered in t&e positive' t&en t&e &olding company runs t&e +usiness. >ut t&e corporate veil &as +een lifted even if t&ey &ave not +een ans$ered in t&e positive. 3. Determination of residence of a company. Parent company H "lfred >oot&0 &ad t&ree $&olly o$ned su+sidiaries unit construction' >oot& and Co and >uildings0 registered on )enya under t&e )enyan la$s. Directors $ere different from parent companies as per t&e 5inance "ct' for t&e purpose of ta4 e4emption' t&ey &ad to +e residents of t&e 3). It $as &eld t&at t&e place of central control of t&e companies $as t&e place of t&e residence of t&e companies.

3:

(esidence of parent company $as residence of a su+sidiary0 so su+sidiaries $ere residents of t&e 3) H do ta4 deduction allo$ed. /&e parent company e4ercised direct control over t&e su+sidiaries0 interference in t&eir management H at one point in time0 t&is $as relevant in t&is case. Lifting t&e corporate veil H -udicial instances H $&en t&e company is formed for a fraudulent purpose or to gain an unfair advantage. -or)men Associated (ubber#or)s Ltd v. Associated (ubber#or)s Ltd H t&e company $as profita+le. /&ere $as an amendment to t&e la+our la$0 +onus lia+ility. /&e $or#men o+-ected to t&is saying t&at t&e formation of t&e company $as a s&am. /&e court lifted t&e corporate veil H agreed t&at t&e company $as a s&am as it $as formed to reduce t&e profits and gain an unfair advantage0 cases of residence0 to determine t&e enemy c&aracter or for t&e purposes of revenue. *ocial interest &as to +e up&eld and so courts can lift t&e corporate veil0 t&e courts $ill loo# into t&e reality of t&e transaction e.g. (e F, 3Films4 Ltd ' &aimler. Company treated as agents of t&e s&are&olders0 company is a device of t&e controlling s&are&older0i.e. t&e su+sidiary is only an instrumentality of t&e &olding companies0 t&e &olding company actually carries on t&e +usiness eg0 *mit&' *tone and )nig&t0 $&ere Lord "t#inson laid do$n conditions $&en t&e su+sidiary $ould +e treated as an agent of t&e &olding company. ,roup companies0 t&e su+sidiary and t&e &olding company are t&e same economic entity e.g.(enusagar0 .indalco formed a $&olly o$ned su+sidiary $&ic& supplied electricity to t&e &olding company0 legally it $as sale of electricity. /&e *C &eld t&at t&ey $ere one and t&e same economic entity0 t&ere $as no sale involved H it $as actually generation of electricity +y .indalco itself0 so t&ere $as no ta4 lia+ility. P OMOT!ON ACT!4!TY AND T8E FO MAT!ON OF COMPAN!ES+ 8O5 A COMPANY !S .O N. " company is +orn $&en t&e registrar issues t&e certificate of incorporation. /&e date mentioned on t&e certificate is $&en t&e company +ecomes a legal person0 * 3! 122. * 3!1 22 can also +e used to argue t&at t&e company is not&ing +ut an association of t&e mem+ers0 s&are&older supremacy0 Ft&ey s&all +e a +ody corporate6 H t&is is +ecause t&e deed of settlement company $&ic& $as not&ing +ut an association of mem+ers $as incorporated into t&e "ct. /&e persons involved in t&e creation of a company are called promoters0 t&ey ta#e certain deli+erate steps in order t&at a company +e created. /&ere is no legal definition of Fpromoter6 in t&e "ct per&aps to maintain elasticity0t&oug& it is used in t&e "ct as $ell as in ot&er instruments eg t&e ta#eover load etc. Promoters perform suc& varied acts t&at t&ey cannot +e defined0 an insignificant role is sufficient. "nyone $&o assists in floating a company@ launc&ing its +usiness is a promoter e.g. introducing a potential s&are&older. * 21:21C2 H a promoter is lia+le for misstatements in t&e prospective. Promoters are t&ose $&o persons $&o ta#e certain steps in pursuit of a plan' $&ic& result in t&e creation of a company. .en and "le4ander0 promoters are t&e mid $ives of a corporation. In C :=' promoters deceived t&e pu+lic to a large e4tent. /&ey could +e +usiness $&o $ould convert t&eir +usinesses to corporations. >ut' t&ere $ere professional promoters $&o floated companies' sold t&em and started ne$ companies. /&ey a+used t&eir position due to t&e vulnera+ility involved in t&e transaction and made &uge profits in t&e process0 +y selling t&e company or t&e property at e4or+itant prices. /&is is not suc& a +ig pro+lem today as it &as +ecome rare for companies to offer s&ares to t&e pu+lic initially +y +oosting its image and increasing price s&ares. *ometimes

32

promoters $ould collect money from t&e s&are&olders and use it to purc&ase t&e property from t&e promoters at e4or+itant prices. /oday' t&ere are many regulations in place0 companies usually try and sta+ili7e t&eir +usinesses first and t&en ma#e a pu+lic issue H so t&e c&ances of a pu+lic +eing deceived &ad reduced. /&ere is an independent person0 t&e merc&ant +an#er0 $&o is involved in regulating t&e issue of t&e prospectus etc. " pu+lic issue cannot +e made $it&out a merc&ant +an#er +eing involved0 so it is not completely in t&e &ands of t&e company management. *o' some c&ec#s &ave developed. +ycroos v. ,rant 0 description of a promoter. M( Silver Mining Co v. Le#is 5!!icial Li6uidator v. Mudaliar " promoter stands on a fiduciary relations&ip $it& t&e company as &e &as t&e entire control of t&e company in its early days. Promoters usually earn profit t&roug& t&e sale of property to t&e company. *ince t&ey are fiduciaries' t&ere is no +ar on t&em entering into a contract $it& t&e company. >ut &ave to satisfy some legal conditions as per contract la$0 &ave to ma#e free full and fran# disclosure of t&eir interest in t&e transaction. /&e same applies to directors as t&ey are also fiduciaries. /&e disclosure is to +e made to t&e +eneficiary0 t&e company. >ut in t&e early stages $&o is t&e companyG Promoters &ave to disclose +enefits o+tained or secret profits to t&e company' t&ey are accounta+le to t&e company for all transactions $it& or on +e&alf of t&e company. /&ere can +e no +enefit $it&out t&e informed consent of t&e company. >ut in t&e nascent stages of t&e company' informed consent is &ard to get. /&e promoters t&emselves are t&e directors. "n effective disclosure is difficult $it&out an independent >oard of Directors. *o it s&ould +e made to t&e actual and potential mem+ers of t&e company. 8g% +y including it in t&e "rticles of "ssociation H if t&is is not done' t&en t&e company can avoid t&e contract or claim damages' or receive secret profits. If it &as suffered a loss due to t&e activities of t&e promoter' varied remedies are availa+le to t&e company and t&e promoter $ill +e made lia+le. Pre+!ncorporation Contracts H 8ntered into +efore incorporation so $it&out aut&ority of t&e company +ut on +e&alf of t&e company. Can t e company rati!y t e contract a!ter incorporationG (atification dates +ac# to t&e date on $&ic& t&e agent entered into a contract H o mig&t prove to +e a pro+lem if t&e company $as not in e4istence. /&ere &as to +e a competent principal on t&e date on $&ic& t&e agent attempted to ct on &is +e&alf for ratification to +e possi+le. 8g% " person cannot ratify a contract t&at $as entered into on &is +e&alf $&en &e $as a minor. " contract entered into +efore t&e company e4isted as a competent principal is a pre0incorporation contract. It is strictly not ratifia+le. *o' can t e promoter be made liable as t e company cannot rati!y t e contractG .e can +e made lia+le to t&e t&ird party as t&e contact is invalid as t&e principal company $as not competent at t&e time t&e contract $as entered into and so cannot +e ratified. .e is not lia+le on contract' +ut for +reac& of implied $arranty of aut&ority. /&ere is an implied representation t&at t&ere is a competent principal in e4istence $&o aut&ori7ed t&e act of t&e agent 1promoter2. *ince t&is is not true &ence' t&e promoter can +e &eld lia+le to t&e t&ird party. In 8ngland' t&e contract can +e enforced' due to t&e c&ange +y statute. In India t&e contract cannot +e enforced H eit&er +y t&e promoter or +y t&e t&ird party.

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For%ation of a Co%pan$ /&e initial mem+ers of a company $&o sign t&e constitutional documents are called su+scri+ers to t&e MB". /&e first step in t&e creation of a company is t&e preparation of t&e constitutional documents of t&e company. *ec. 33'3!'3<. " promoter normally comes into t&e picture +efore t&e incorporation of a company t&ey are associated $it& t&e formation of a company. " venture capitalist is an entrepreneur H t&ere may +e venture capitalist companies $&ic& sell units to ma#e investments in order to ma#e a profit. 5or a pu+lic company' t&ere &ave to +e a minimum of 7 su+scri+ers H t&ose $&o sign t&e constitutional documents H promoters may or may not +e su+scri+ers. /&ere are 2 constitutional documents' t&e MB" and t&e "B". /&eir re?uirements &ave to +e complied $it&. 3nder t&e 9oint *toc# Companies "ct' :;!! of 8ngland and :;<0 of India' deed of settlement companies $ere allo$ed to +e registered H so only a single constitutional document H t&e deed of settlement. 5rom :;< ' t&ere are 2 constitutional documents. "B" contains matters of internal regulation' distri+ution of po$ers' details of t&e running of t&e +usiness etc. "B" also contains t&e o+-ect of t&e company' name' registered office' aut&ori7ed capital' type of company etc. 1*ec. :3.2 If *ec :3 re?uirements are not met' t&en t&e (egistrar $ill not register t&e company. /&ese re?uirements are mandatory. Bt&er matters can also +e included in t&e MB". Capital is usually included in t&e MB" H +ut in case of an unlimited company &aving s&are capital' t&e s&are capital clause is stated in t&e "B". Section (9 H B+ligatory clauses in t&e MB" H t&ey &ave to +e in t&e MB" H can +e no$&ere else. 1n addition to obligatory clauses7 ot er clauses are also incorporated in t e M5A 8 # at is t e legal status o! t ese clauses9 /&ey could &ave +een incorporated in t&e "B". *ection : 122 only *ec. :3 clauses &ave t&e status of t&e provisions of t&e MB". Non0o+ligatory clauses are given t&e status of t&e "B". Pro%oters% .ave $ide po$ers suc& as appointment of directors and framing of t&e constitutional documents of t&e company. >ut at ot&er points in time' t&ey are at t&e mercy of t&e company. /&ey are supposed to +e reim+ursed for t&e e4penses of incorporation. >ut if t&e company refuses to pay t&en t&e promoter &as no remedy against t&e company. 8ven if suc& a clause is included in t&e "B"' t&e promoter cannot enforce it. /&e "B" is a contract +et$een t&e company and t&e mem+ers +ut t&e promoter is an outsider H t&is' &o$ever is usually a t&eoretical difficulty. For%ation of a Co%pan$ Pu+lic Company 0 7 mem+ers to +e su+scri+ers. In a Private Company 2 mem+ers are sufficient. /&ese mem+ers sign t&e documents and aut&ori7e one mem+er to present t&em to t&e (egistrar of Companies' $&o if satisfied' $ould issue t&e certificate of incorporation.

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Na%ing the Co%pan$ 2 Section 17 Company s&all not adopt a name t&at is undesira+le in t&e opinion of t&e Central ,ovt. 8m+lem and Names 1Prevention of Improper 3se2 "ct H use of some names is a criminal offence. " name s&all not +e suc& t&at it resem+les t&e name of some ot&er person@company product etc. to avoid lia+ility for t&e tort of passing off. Sec 17 po$er of t&e Central ,ovt. is delegated to t&e (egistrar of Companies' $&o determine $&at is an undesira+le name. #le <+A of t&e Companies Central ,ovt. (ules and 5orms can apply +efore &and to see t&e availa+ility of t&e name H t&is is to avoid unnecessary e4penses later on at t&e time of issuing certificate of incorporation. ! names in preferential order can +e c&osen and put in t&e form H t&e (egistrar informs of t&e availa+ility of t&e names $it&in 7 days. /&e name is reserved for mont&s $it&in $&ic& period t&e ot&er formalities for t&e formation of a company are to +e completed. i.e. preparation of MB"' "B". /&e paragrap&s are to +e consecutively num+ered e4cept for t&e last' $&ic& is t&e association clause H *ec. :! P :<' printing and signature of memorandum. Sec 1= > 97 2 /&is applies to t&e "B" as $ell H &as to +e printed and divided into paras. *ec 2 t&is is mandatory of all companies e4cept pu+lic companies limited +y s&ares. *ec 3 re?uires t&at t&e "B" of a Pvt. Co. contain some restrictions. *o' t&e "B" is necessary for a Pvt. Ltd. Co. In case of an unlimited co.' t&e "B" is to include t&e s&are capital of a co. and t&e num+er of mem+ers 0 *ection 271:2. .ence t&e "B" is necessary as capital clause is in t&e "B"' not t&e MB". In case of a guarantee co.' *ec. 27122 applies. "B" is to mention t&e no. of mem+ers H &ence "B" is necessary. *o' it is mandatory for most co.6s to &ave "B". >ut' in case of a pu+lic ltd. co.' in case "B" is not filed' /a+le " "rticles automatically apply. /a+le " articles only apply to a co. limited +y s&ares. /&ey are t&e supplementary articles for pu+lic or pvt. ltd. co.6s' $&ic& &ave +een incorporated under t&e "ct. /&ey supplement t&e "rticles prepared +y t&e co. If t&e "B" is not prepared' t&en /a+le " articles apply. >ut a pvt. co. &as to prepare t&e mandatory provisions at least H t&ose mentioned in *ec. 31:21iii2. /a+le " articles apply to t&e e4tent t&at t&ey are not inconsistent $it& t&e "B" prepared +y t&e co. .o$ever' t&e "B" provisions cannot go against t&e statute H *ec :7:0:; override t&e "B". /&is read $it& *ec. =. /&is is in *ec 2; and applies only to co.6s t&at are incorporated under t&e provisions of t&e Companies "ct. /a+le " articles cannot +e read as part of t&e "B" of a co. incorporated prior to :=< . - o can be subscribers to t e M5A and t e A5A9

3<

In case of a pu+lic co.' t&ere &ave to +e a minimum of 7 su+scri+ers' $&ile in case of pvt. co. t&ere &ave to +e a min. of 3 su+scri+ers. "ny legal person can +e a su+scri+er to t&e MB" and t&e "B" of a co. It is not necessary for a su+scri+er to +e a natural person. /&erefore' a co. can +e a su+scri+er to t&e MB" of anot&er co. H as it is a legal person. " partners&ip firm cannot +e a su+scri+er as it is not a person. /&e e4ception to t&is case is *ec. 2<1!2 H $&ere+y a firm can +e a mem+er of a c&arita+le association t&at is a registered company. "rticle 2== of t&e Constitution H /&e Pre7 may aut&ori7e anot&er person to sign t&e constitutional documents of a co. as a su+scri+er H so t&e govt. can also +e a su+scri+er. It is mandatory for every signature to +e attested +y a $itness H *ec. :<1c2. /&ere is no specific +ar in t&e Companies "ct for an N(I or foreigner +eing a su+scri+er. >ut some provisions in 58(" imposed certain restrictions H 58(" &as no$ +een replaced +y 58M" $&ic& does not impose any suc& restrictions. Doc#%ents ta-en for egistration Constitutional documents H Letter appointing name *ec. 33122' proposed contract' certificate of competent person 1co. secretary or c&artered accountant2 t&at all formalities &ave +een complied $it&. 1antecedent to and incidental to formation.2 (egistration fees 1*c&edule C2 is separate from stamp duty paya+le on constitutional documents. *ec 3!1:2% /&e (egistrar &as to certify under &is &and H +eing a delegate of t&e central govt.' &e cannot furt&er delegate &is po$ers. /&e certificate of incorporation is conclusive evidence of t&e valid formation of a co. H no irregularity or infirmity can defeat t&e incorporation. /&ere are 2 e4ceptions% 1a2 *ec :! of t&e /rade 3nion "ct and 1+2 $&en t&e co. &as an unla$ful o+-ect. *ec. 3<% Cannot su+se?uently ?uestion t&e compliance $it& t&e re?uirements for t&e formation of a co. Bnce t&e certificate of incorporation is issues' it is conclusive proof of t&e compliance $it& t&e re?uirements. "ll defects regarding t&e +irt& of t&e co. cannot +e ?uestioned. .o$ever under *ec. :! of t&e /rade 3nion "ct' even if it registered as a co.' its incorporation is null and void. A&en t&e o+-ect of t&e company is unla$ful' t&e Court can declare it to +e void. *o t&ere are provisions in ot&er statutes $&ere+y incorporation can +e ?uestioned. Co%pan$ can be -illed Court passes order of dissolution in t&e event if $inding up. *ec. < 0 H Brder of (egistrar nullifying co. after it &as suspended operations for more t&an one year after incorporation. Mergers and "malgamations H Co.6s can +e merged into ot&ers H t&ese co.6s do not e4ist anymore. In all t&ese situations' t&e +irt& of t&e co. is not ?uestioned. .ouman v. Secular Society ,uarantee co.' not to ma#e profits H +ut to spread rationality among people. *cientific approac& and not +lind religious +eliefs. Contention $as t&at t&e co. $as not properly constituted and t&at t&e certificate of incorporation $as not properly issued as it $as +lasp&emous to ?uestion t&e c&urc& and religion. *o t&e o+-ect $as unla$ful.

Court &eld H development of rationality and scientific approac& is not +lasp&emous. "lso' once t&e certificate of incorporation is issued' t&e +irt& of t&e co. cannot +e ?uestioned H it is conclusive proof. "V /ris nan v' And ra 'rab a 'vt. Ltd. Indian 84press ,roup pu+lis&es "nd&ra Pra+&a in /elugu. " $age +oard $as esta+lis&ed for t&e -ournalists of India. /&e scale of pay of $or#ing -ournalists $as on t&e +asis of categori7ation of ne$spapers depending on t&e circulation and income of ne$spapers. Indian 84press $as an all0 India ne$spaper. /&e ne$spaper $anted to reduce its lia+ility for $ages H it formed separate co.6s for all its regional ne$spapers. "nd&ra Pra+&a Pvt. Ltd. $as formed' &ad less income as it &ad less circulation. *o' t&e lia+ility for payment of $ages to -ournalists $as reduced. /&e $or#ers o+-ected to t&e creation of t&e co. as it $as for an unla$ful o+-ect H to reduce lia+ility for $ages. /&e co. argued t&e conclusiveness of t&e certificate of incorporation and so its creation could not +e ?uestioned on t&e ground t&at it $as for an unla$ful purpose. .eld% Cannot impeac& t&e certificate of incorporation issued +y t&e (egistrar of companies. E:ecutive .oard o! t e Met odist C urc o! 1ndia v. Union o! 1ndia 9ustice *u-ata Mano&ar H *out& "sian governing +ody $anted to convert to an Indian +ody. *o $anted to create a trust co. for t&e C&urc& to control properties. Arote to t&e (egistrar as#ing for reservation of name FMet&odist C&urc& of India6' t&is $as granted in :=7=. In 5e+ :=;0' anot&er co. $as formed FMet&odist C&urc& of India H .ydera+ad6. It $as formed +y 7 private individuals' mem+ers of t&e C&urc&' not of t&e governing +ody. Co. $as formed despite t&e reservation of t&e name already &aving +een granted' to anot&er Co. t&ey applied for a rene$al of t&e reservation in "pril :=;0' t&is $as granted. In "ug' :=;0 anot&er application for rene$al $as made' t&e petitioners $ere as#ed to get no o+-ection certificate from t&e .ydera+ad co. and also from t&e Nort& Indian +ody. /&ey $ent to court. .eld% 1a2 .ydera+ad co. s&ould not &ave +een granted t&e name H cannot use t&e name FMet&odist C&urc&6. 1+2 /&e co. did not need to o+tain a no o+-ection certificate. 1c2 /&e .ydera+ad co. $as ordered to +e struc# off t&e register. (easons% /&e individuals $ere not related to t&e governing +ody' so it $ould mislead t&e pu+lic H so t&e name $as undesira+le under *ec. 20. Court did not consider *ec. 3<' only used *ec. 20 and t&e guidelines of t&e Dept. of Company "ffairs. B+-ectiona+le names s&ould not +e allo$ed. /&e conclusiveness of t&e certificate of incorporation $as not considered. /&e Court &eld t&at t&e (egistrar s&ould &ave #no$n t&at t&e name $as religious and so s&ould &ave c&ec#ed as to $&et&er t&e individuals $ere connected $it& t&e C&urc&. :;: 2 C&. "pp. 7! H Cannot reopen case once certificate of incorporation is issued. Mallic) Mu ammad v. Capital Stoc) E:c ange /erala. 1:==:2 72 Comp. Cases 333 Certificate is conclusive proof e4cept in case of legality of o+-ect and trade union +eing registered as a co. CONST!T/T!ON OF A COMPANY /&e constitution of a company is divided into MB" and "B".

37

MB"% Contains certain o+ligatory clauses li#e name' registered office' +asic aspects and po$ers' o+-ect' +usiness purposes' nature and e4tent of lia+ility of mem+ers. "B"% Mainly administrative matters' po$ers of organs and agencies of a co. /&e MB" prevails over t&e "B". *ec : 1:2 and *ec. 3:. *ec. !:1:2% In cases of $inding up of t&e co. t&e su+scri+ers +ecome ipso facto mem+ers' even if s&ares are not allotted to t&em. *ec. : % (estriction on alteration of t&e +asic constitutional documents of t&e co. H only to t&e e4tent e4pressly provided in t&e "ct and in t&e mode prescri+ed. *ec. :7 gives 7 grounds for c&anging t&e o+-ect of t&e co. *ec. : 122% Bnly provisions mentioned in *ec. :3 or any ot&er specific provision s&all +e deemed to &ave status of provisions of t&e MB". Bt&er provisions in t&e MB" may +e altered in t&e same manner as "B" of t&e co. /&ese provisions do not prevail over t&e "B" H t&ey are non0 mandatory provisions in t&e MB". :=< "ct H Bnly *ec. :3 re?uirements &ave status of provisions of t&e memorandum. >ut t&is $as different in t&e :=:3 "ct H t&ere could +e a clause t&at some MB" provisions could not +e altered at all. *ec :71:2 Companies "ct' :=;<' 8ngland corresponds to *ec. : 1:2 of t&e Indian Companies "ct. *ec. :7 does not apply $&en t&e MB" pro&i+its alteration of "B" or a+rogation of special rig&ts given to a class of mem+ers. Class rig&ts can only +e varied $it& t&e consent of t&e particular class. *o' according to 8nglis& La$' non0mandatory provisions of t&e MB" can also not +e altered if pro&i+ited +y t&e MB" H *ec :71221+2. /&is is not true for India as *ec. : &as no e4ceptions. In India' one cannot &ave a clause stating t&at non0mandatory provisions of t&e MB" cannot +e altered +y virtue of *ec. = of t&e "ct. Obligator$ Pro0isions in the MOA 2 Sec& (9 Name of t&e co H promoters do not &ave an unrestricted po$er to name t&e co. " co. cannot adopt a name t&at is undesira+le in t&e opinion of t&e Central ,overnment. *o' &ave to get t&e approval of t&e Central ,overnment. *ec. 20 H t&e desira+ility of t&e name is to +e -udged +efore t&e documents of t&e co. are prepared. /&e Ministry of Corporate "ffairs &as issued a series of guidelines for t&e desira+ility of names. /&e form for application &as space to give ! options. If none of t&em are applied for' t&en anot&er application &as to +e made. /&e name s&ould not offend t&e 8m+lems and Names 1Prevention of Improper 3se2 "ct. *ec. 3 pro&i+its use of certain em+lems and names. /&e *c&edule gives a list of pro&i+ited names@em+lems. 3se of t&e names@em+lems is a penal offence. *ec. !% Bverriding section H no aut&ority can register co.@firm etc.' $it& a name t&at is offensive under t&e "ct. /ort of Passing Bff% Civil $rong to ma#e an impression in t&e mind of t&e pu+lic t&at t&e firm is some ot&er +usiness concern. /&ere is a tendency to mislead t&e pu+lic. /&is does not depend on intention.

3;

/&e remedy is a mandatory in-unction on as#ing t&e co. to c&ange its name. If t&e lia+ility of t&e co. is limited' t&en Flimited6 &as to +e included. If private t&en Fpvt. ltd.6 /&e $ord Fcompany6 is not an essential component of t&e co. name. /&e only e4ception is for *ec. 2< companies' $&ic& are c&arita+le and do not pay dividend to t&e mem+ers. *ec. 3:% No ot&er association can use t&e $ords Fltd.6 or Fpvt. ltd.6 it is an offence to use t&ese $ords improperly. MB" &as to mention t&at lia+ility of t&e mem+ers if it is so. *ec. :3122 does not mention t&e nature and e4tent of t&e lia+ility. *ec. :3132 H e4tent of lia+ility. In case of guarantee co. t&e e4tent of t&e lia+ility of eac& mem+er also &as to +e mentioned. /&is is to +e read $it& *ec. :2122 $&ic& defines a guarantee co. " co. can +e &y+rid H 2 fold lia+ility H lia+ility +y guarantee and +y s&ares H lia+ility for s&ares &eld is t&e same as t&at of a co. limited +y s&ares. Lia+ility at t&e time of $inding up in case assets are insufficient can also arise up to a certain e4tent. /&is amount is given in t&e MB" H lia+ility as a mem+er of a pure guarantee co. Lia+ility of Mem+ers of an 3nlimited Co. H *ec. 27 says t&at t&e capital clause &as to +e in t&e "B" for an unlimited co. /&is is +ecause alteration does not affect lia+ility H it remains unlimited. If it &as a s&are capital' t&e lia+ility is t&e same as $it& a co. limited +y s&ares. If t&e unlimited co. &as no s&ares' t&en *ec. :21221c2 is to +e relied on. (egistered Bffice Clause% *tate $&ere registered office is situated is to +e mentioned. "ddress of registered office is not re?uired. /&is is to +e read $it& *ec. :! . Co. s&all intimate t&e (egistrar as to t&e location of its registered office. /&e address is important for many matters H ta4 lia+ility' residence of t&e co. 1normally depends on situation of t&e registered office H e4cept $&en central control lies some$&ere else2' enemy c&aracter of t&e co. B+-ect Clause% >usiness o+-ects of t&e co. to +e mentioned in t&e MB". := < amendment made a c&ange &ere. >efore it could +e stated H Q/&e o+-ect of t&e co. isRS No$ after t&e amendment' t&e o+-ect clause is to +e t&ree tiered H main o+-ects' o+-ects ancillary to main o+-ect and ot&er o+-ects. /&is is due to t&e fact t&at all sorts of o+-ects $ere included in t&e clause H unnecessary inflation of t&e o+-ect clause. *o difficult to determine true o+-ect H t&e amendment $as introduced to cur+ t&is practice. /&e reason for t&e inflation is t&at po$ers of t&e co. are determined +y a reasona+le interpretation of t&e o+-ect clause. If t&e o+-ect cannot +e interpreted to +e ancillary to its main o+-ect' t&en it is +eyond t&e po$ers of t&e co. Inflation of t&e o+-ect clause $as to cover matters t&at could +e $it&in t&e po$ers of t&e co. .el ouse v. City -all Included su+-ective o+-ect clause H any +usiness t&at management t&oug&t fit. *uc& practices $ere t&oug&t to +e un&ealt&y +y t&e Indian Legislature' so in := < amendment. Main B+-ect% >usiness purpose of t&e company. "ncillary B+-ectives% Po$ers of t&e co. in order to pursue t&e main o+-ect of t&e co. Bt&er B+-ects% Li#e t&e main o+-ects. /&ey are also independent +usiness activities. /&e diff. +eing t&at for main o+-ects' t&e co. &as to initiate t&e +usiness $it&in : yr. of incorporation. If not t&en t&ere can +e a petition for $inding up H *ec. !331c2. >ut if ot&er o+-ects are not commenced' t&en t&ere is no conse?uence at all.

3=

Co%%ence%ent of .#siness 2 Main and Other Ob?ects *ec. :!= H Pu+lic co. &as to o+tain trading cert' $&ic& is given after certain conditions are satisfied. Contract cannot +e entered into +efore it commences +usiness. If it is' t&en it is only a provisional contract. It is not a nullity' +ut it is not +inding on t&e co. until it is eligi+le to commence +usiness. *ec. :!=1221"2% 5or commencement of ot&er o+-ects' t&e co. &as to get aut&ority +y t&e general meeting +y special resolution. Inserted +y := < amendment. *ec. :!=1221>2% if t&e approval of t&e general meeting $as not o+tained +y special resolution' i.e. only simple ma-ority $as o+tained H t&en application can +e su+mitted to central govt. for permission to commence t&e +usiness. /&e central govt. may give t&is permission if t&e votes cast in favour e4ceed t&e votes cast against. /&e provisions of trading certificate and also *ec. :!= are not applica+le to a private co. Obligator$ Cla#ses Ven)ataramana v. Coimbatore Mercantile .an) /&e terms of contract +et$een MD and co. Court &eld t&at non0o+ligatory provisions could not +e altered as it $as not provided any$&ere in t&e "ct. (am /umar v. S olapur Spinning and -eaving Co. 1>om .C2 Case dealing $it& service conditions of MD. Non0o+ligatory provisions could +e altered as t&ey $ere not part of t&e conditions laid do$n in t&e MB". :=3 "mendment "ct H gave effect to t&e >om+ay .C decision. :=< "ct H only o+ligatory provisions to +e treated as provisions of t&e MB". Bt&ers are treated as part of t&e "B". *ec. : co. s&all not alter conditions in t&e memorandum. FConditions6 H it is not restricted to o+ligatory clauses' +ut everyt&ing in t&e MB". As bury v. -atson " general meaning to +e given' not restricted meaning. Present Position% Non0o+ligatory clauses can +e amended in t&e same $ay as t&e "B" as t&ey are treated as part of t&e "B". B+-ects of a Co.% "ncillary o+-ects of a co. are not o+-ects of a co. t&ey are only po$ers of t&e co. in order t&at it may ac&ieve its o+-ects effectively and properly. /&is is not necessary as courts $ill accept ancillary activities H +ut t&is creates uncertainty. /&e +usiness community $as not $illing to leave t&is to inferences H so ancillary o+-ectives included. 1ntroduction Limited v. *ational 'rovincial .an) Co. formed for tourism purposes H 8ngland $as e4pecting a coronation at t&at time and t&ere $as a flo$ of overseas tourists e4pected. "fter t&e coronation' t&ere $ere not so many tourists so t&e co. em+ar#ed on anot&er +usiness. It started a pig +reeding farm. /&e co. too# a loan from t&e defendant +an#. /&e co. $as not profita+le' so t&e +usiness $as $ound up. >an# claimed t&e amount of t&e loan. /&e loan agreement specifically mentioned t&e purpose of +orro$ing. /&e

!0

Court said t&at pig +reeding $as not a legitimate activity. It $as not incidental or ancillary to t&e o+-ect of t&e co. H so could not +orro$ for t&at purpose. >orro$ing cannot +e an o+-ect of t&e co.' it can only +e done to pursue t&e o+-ects of t&e co. Ne$ +usiness activities can +e em+ar#ed upon +y altering t&e o+-ect clause. *ec. :!=12"2'12>2 H >oard cannot em+ar# upon a ne$ +usiness $it&out t&e approval of t&e general meeting t&roug& a special resolution. /&ere are no conse?uences if t&e co. does not pursue its ot&er o+-ects' +ut if t&e main o+-ect is not commenced $it&in one year' t&en t&ere can +e a petition to $ind up t&e co. If t&e ancillary o+-ects are completely e4traneous t&e court can say t&at t&ey are irrelevant and not consider t&em as ancillary o+-ects. "ttraction of t&e Provisions Name clause H Prior approval of t&e central govt. re?uired even for c&ange of name. Sec& 1('11'19 2 Alteration of Na%e 2 modes of alteration H 1a2 (ectificationI 1+2 "lteration t&at does not amount to rectification. Sec& 11@ ectification% Name can +e altered +y ordinary resolution. If it is not a rectification' t&en special resolution. /&ere need not +e any reason for alteration. Bnly t&ing needed is prior approval of central govt. (ectification can +e on a directive given +y t&e Central ,ovt. or in ot&er cases. If name is approved and registered +ut later it is reali7ed t&at t&ere is anot&er co. $it& t&e same or similar name' or t&e name resem+les a registered trade mar# 1$&ic& violates t&e /rademar#s "ct2 t&en t&e Central ,ovt. can direct t&e co. to c&ange its name. /&is directive can +e given $it&in : year of t&e date of incorporation in case of similarity of name P < yrs in case of violation of a registered trademar#. If suc& a directive is given' t&en co. &as to comply $it& it $it&in 3 mont&s' failing $&ic& it is an offence and t&e co. can +e punis&ed. 5or suc& a rectification' an ordinary resolution is sufficient. /&is can +e done even $it&out a central govt. directive in case t&e co. itself reali7es t&at t&e name resem+les anot&er co.6s name or a registered trademar#. /&e directive can only +e given if t&e name resem+les t&e name of a co. t&at is registered under t&e Companies "ct or any ot&er company la$. *o cannot +e given if t&e name resem+les t&at of a partners&ip firm or any ot&er +usiness concern. *ec. 2: H Name can +e c&anged $it&out giving any reason' $it& t&e previous approval of t&e Central ,ovt. " special resolution &as to +e passed. /&e altered MB" is to +e registered $it& t&e (egistrar. /&e (egistrar t&en issues a fres& certificate of incorporation. /&is is essential in order t&at t&e c&ange +e effective. /&is does not affect t&e rig&ts and lia+ilities of t&e co. *ec. 23% "ny decree o+tained against t&e co. in its old name is not a nullity H it is enforcea+le. If a suit is instituted after t&e c&ange of name' t&en it &as to +e in t&e ne$ name. >ut a suit can +e continued in its old name' if t&e suit $as instituted +efore t&e c&ange in name $as effected. egistered Office Cla#se@ Sec& (A 2 (=' (<B

!:

*ec :! % (egistered office $it&in 30 days of incorporation H to +e informed to t&e (egistrar. *ec. <:% "ll communication to t&e co. to +e sent to registered office. /&is is also important for territorial -urisdiction of t&e court for instituting a suit. /&e -urisdiction is determined +y t&e situation of t&e registered office. /&e registered office can +e c&anged 1a2 to anot&er place $it&in t&e same city@to$n@village H a mere +oard resolution is sufficient H t&is is to +e informed to t&e registrar 1+2 from one city in a state to anot&er city in t&e same state H a special resolution is re?uired H proviso to *. :! 122. /&is c&ange &as to +e confirmed +y t&e (egional Director' *. :7". 5or t&ese c&anges' a Constitutional "mendment is not necessary H +ecause t&e Mo" only re?uires t&e *tate $&ere t&e registered office is located and in t&ese c&anges' t&ere is not c&ange in *tate. 5ormerly' t&ere $as need for t&e approval of t&e Court@ Company La$ >oard of t&e special resolution for an alteration of registered office clause H no approval for alteration of o+-ect clause H only special resolution sufficient 12002 amendment2 H B+-ect clause even t&oug& no approval is re?uired' alteration +e done only on t&e 7 grounds given in *. :7 1:2 in order for t&e alteration to +e valid@permissi+le. 5ormerly' an application &ad to +e made to t&e Court $&ic& $ould serve notices to interested parties to see if t&ey &ave any o+-ection. +ata 1ron and Steel% amendment to o+-ect clause to ena+le company to ma#e political contri+ution H C&agla' 9. H t&is $as pre-udicial to infant democracy H +ut all depends on t&e interest of t&e company. *o' Courts approval necessary even t&oug& interests of company are t&e main t&ings to +e seen. !ndian Law H Court doesn6t interfere in alteration H it does not scrutini7e matter. /&is is a +usiness matter' +ut 7 grounds are t&ere. 8nglis& la$ H t&ere are no grounds for alteration H +ut any interested party can file application in court if it feels t&at it is pre-udicial to t&e company6s interests H court can invalidate alteration. (egistered Bffice Clause H special resolution H t&en Central ,ovt.6s permission to +e soug&t in : mont& H t&ese 2 to +e filed $it& t&e registrar $it&in 3 mont&s H *. :;1:2. *. :=122 H If t&e documents are not filed $it& t&e (egistrar $it&in t&e given time period' t&en t&e alteration and t&e order of t&e central govt. +ecomes void H t&e order can +e revie$ed for a period of one mont& if sufficient cause is s&o$n to t&e central govt. *. :;1!2 H e4tension of time can +e granted +y t&e central govt. H t&e govt. can grant any period of time as e4tension. Proviso to :=122 applies $&en order &as +ecome null and void due to e4piration of time H t&e order can +e revie$ed for a period of one mont&. Capital Clause H alteration affects aut&ori7ed capital of t&e co. It may +e $it&in *=!0=; or $it& *. :000:03 H approval of court is re?uired. Effect of Change in Na%e of a Co& H *. 23132 H t&e c&ange does not affect rig&ts@o+ligations or render defective any legal proceedings and any legal proceedings commenced in t&e old name can +e continued. C&ange in name does not affect ta4 lia+ility' including arrearsI also' assessment $&en it $as a private co. &olds $&en it +ecomes a pu+lic co.

!2

Economic 1nvestment Corporation Ltd. v. C1+% 0 Co. c&anged name' it $as informed to t&e CI/ H &e assessed in t&e old name H later soug&t to c&ange t&e name in t&e certificate. /&e Co. soug&t a fres& assessment H not allo$ed as Constitution remained t&e same H only name c&anged. Mal atti +ea Syndicate v. (evenue 5!!icer7 *e# "alpaiguri H !3 Com Cases 337. Name c&anged +ut legal proceedings instituted in t&e old name H t&e certificate &ad +een issued H suc& a proceeding could +e dismissed. Ne$ proceedings &ave to +e instituted in ne$ name name' +ut can continue proceedings in old name. "n appeal is a fres& suit. 'atel (oad#ays v. .ata S oes% 0 during t&e pendency of t&e suit' >ata +ecomes a pu+lic tel. co. H ne$ certificate issued. "mendment of t&e cause title $as allo$ed. 'ioneer 'rotective ,lass Fibre v. 'rotective ,lass Fibre H Pioneer c&anged its name +ut proceedings inititated in t&e ne$ name. .ere a ne$ company is not formed' only t&e name is c&anged H so can correct t&e mista#e in t&e plaint H it is not filing of a suit +y a non0e4istent person. Co. can as# for e4ecution to +e done in t&e ne$ name if name c&anged. Solvent 5ils v. . andari Cross Fuels% 0 Can c&ange from private to pu+lic during t&e pendency of t&e suit. C&ange in name H can +e compulsory H due to directive of t&e ,ovt. or a Court or $it& t&e $ill of t&e company. *uc& a c&ange in name does not affect t&e rig&ts and lia+ilities of t&e company H *. 23132. "lso' $&en legal proceedings &ave already +een instituted' t&en t&ey can +e continued even if t&ey &ad +een instituted in t&e old name. >ut if t&e proceedings are instituted after t&e name &as +een c&anged' t&en t&ere &ave +een conflicting decisions as to $&at name s&ould &ave +een used. In Mal ati +ea Syndicate conservative attitude $as ta#en H t&e appeal $as dismissed as t&e cause title mentioned t&e old name. * 23132 only says t&at a suit can +e Fcontinued6 H does not permit a suit to +e instituted in t&e old name. *ome cases &old t&at t&e c&ange does not affect t&e rig&ts of a co. H so institution of a suit in t&e old name is not a nullity H it can +e corrected at any time. "I( := 7 *C :2 7 H "I( := : *C 32< H +ot& t&ese &old t&at t&e institution of a suit in t&e old name is only an irregularity H it can +e rectified H it is not a nullity. /&is is as opposed to Mal ati $&ere it $as &eld t&at t&e error $as a nullity. A&en a merger ta#es place' transferor co. disappears H +ut its rig&ts and lia+ilities are a+sor+ed +y t&e transferee co. Alteration of the registered office cla#se H It can +e c&ange $it&in t&e city H no alteration of t&e clause arises H it is upto t&e discretion of t&e >oard H t&e general meeting need not +e consulted H t&e (egistrar is to +e informed H *. :! ' *. :7" H limited scope H t&e office is c&anged $it&in t&e state H so no alteration of t&e registered office clause arises as t&e clause only mentions t&e state in $&ic& t&e office is located. >ut t&e confirmation of t&e (egional Director &as to +e o+tained. *. :7" is not attracted in case of all c&anges $it&in t&e state H t&is arises only in t&ose states $&en t&ere is more t&an one registrar. /&e e4planation says t&at t&e section applies $&en c&ange is from -urisdiction of one registrar to -urisdiction of anot&er (egistrar. A&en c&ange is confirmed +y (egional Director' a copy &as to +e filed $it& +ot& t&e registrars. * :7" 1!2 mentions t&at copy of altered memorandum is to +e filed H +ut not alteration is to +e done H so t&ere is an error in t&e drafting of t&e section. A&en confirmation is done ' t&e old (egistrar transfers all t&e files to t&e ne$ registrar.

!3

*. :7 H formerly procedure for alteration of registered office clause and o+-ect clause $as t&e same. /&ere &ad to +e a special resolution $&ic& $as to +e approved@confirmed +y t&e company court@company la$ +oard. /&e altered memorandum and confirmation $as to +e filed $it& t&e (egistrar $&o $ould issue a fres& certificate of incorporation. /&is &olds true for t&e registered office clause' no$ approval is $it& central government. >ut for t&e o+-ect clause' only a special resolution of t&e general meeting is sufficient. /&e alteration is to +e registered $it& t&e Central govt. $it&in one mont&. /ime can +e e4tended +y t&e Central ,ovt. H * :;1!2. Ob?ect Cla#se H formerly approval of court &ad to +e o+tained H to see $&et&er t&e alteration $as $it&in t&e 7 purposes mentioned in t&e statute. 8g H Co. engaged in +usiness of interior decoration. It $anted to start money lending +usiness and closing do$n t&e interior decoration +usiness. /&e Court refused to grant permission as *. :71:21d2 contemplates t&at e4isting +usiness s&ould +e continued. In anot&er case' a c&arita+le Co. $as formed to give protection to pedestrians and pedal cyclist against atrocities +y motor ve&icle o$ners. It $anted to alter its o+-ect clause H $anted to protect motorists also. /&e Court disallo$ed t&e alteration on t&e ground t&at t&e ne$ o+-ect $as detrimental to t&e e4isting +usiness. Pvt. Co. $as engaged in insurance +usiness. /&en insurance $as nationali7ed H so t&ose cos. could no longer carry on t&e +usiness. *o could t&e o+-ect clause +e altered and ne$ +usiness +e em+ar#ed uponG *ome felt t&at it $ould +e done as it $as not voluntarily stopping of t&e +usiness. Bt&ers felt it could not +e done and t&e cos. &ad to +e $ound up. 8nglis& La$ H "ct of :; 2 allo$ed amendment of o+-ect clause for t&e first time. In India' t&is $as allo$ed +y t&e "ct of :; <. /&e court can even loo# into o+-ections raised +y creditors and also see# t&e opinion of t&e (egistrar +efore approval. (estrictions placed as t&e amendment can affect creditors' s&are&olders and employees H so independent scrutiny $as incorporated into t&e sc&eme of amendment. Normally' security &as +een given to creditors $&en alteration is made. >ut t&is can +e $aived in e4ceptional circumstances. Later' Court approval done a$ay $it& H as alteration in +usiness is essentially a +usiness proposition H t&e court &as not&ing to do $it& it H t&is is follo$ing t&e stance ta#en in 8nglis& La$ H court scrutiny &as +een done a$ay $it&. In India t&e grounds for alteration &ave +een retained +ut court scrutiny done a$ay $it&. >ut in 8ngland' court scrutiny &as +een done a$ay $it& as also t&e 7 grounds for alteration of t&e o+-ect clause. >ut if t&ere is an alteration +y special resolution' t&en a minority of t&e s&are&olders' 1:<M of voting po$er2 can go to t&e Court saying t&at t&e amendment is detrimental to t&e interests of t&e company H t&is is t&e safety valve provided in 8nglis& La$ +ut not in Indian la$. In India' t&ere is no provision as to $&o $ill c&ec# $&et&er t&e rational is $it&in t&e 7 grounds of *. :7. /&e only grounds for going to court are in *. 3=7 and *. 3=; H oppression' against pu+lic interest' mismanagement. >ut if t&e alteration does not result in any of t&ese t&en t&ere can +e no relief for t&e minority s&are&olders. *o' t&e removal of court scrutiny $it&out providing ade?uate remedies is a defect in Indian La$.

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5or t&e registered office clause' t&ere &as to +e approval +y t&e central govt. /&e creditors &ave a rig&t to o+-ect. If t&ey do' t&en court can as# for ade?uate security to +e provided H *. :7132. >ut t&ere are no safeguards for anyone ot&er t&an t&e creditors H i.e. s&are&olders. /&oug& a special resolution is needed' it cannot +e presumed t&at a ma-ority of t&e s&are&olders approve of t&e amendment as general meetings are t&inly attended. /&e alteration of registered office clause is not as fundamental as alteration of t&e o+-ect clause H yet approval of t&e central govt. is insisted on. /&e Central ,ovt. (ules and Cos. "ct H *. :71!2 H provide t&at notice of t&e alteration is to +e served on t&e (egistrar H &e &as a statutory rig&t to +e &eard in alteration of registered office clause H not for o+-ect clause H t&e *tate ,ovts. Could also o+-ect under t&e Company La$ >oard (ules H for alteration of registered office clause H as ta4 is determined on t&e +asis of t&e location of t&e registered office H also -o+ opportunities in state affected H also govt. incurred infrastructural e4penses for t&e co H eg.' su+sidies' land' etc. Diff. .Cs &ave ta#en different vie$s on t&is point. Cal .Cs H li+eral approac& H India is one nation H loss to one state is gain of anot&er *tate. Brissa .C H state govt. is pre-udicially affected and &as a rig&t to o+-ect. C&ange in (egistered Bffice can result in dislocation of a large num+er of employees 0 so t&ey can also +e pre-udicially affected. /&e fact t&at t&e c&ange $ould result in inconvenience in attending t&e general meeting is not a valid ground for placing o+-ection. Different .Cs &ave given conflicting opinions on t&e grounds for o+-ection to alteration in t&e registered office clause. A%end%ent of the Articles of Association *. : 1:2 0 In case of Mo"' a company can alter only in t&e manner prescri+ed +y t&e statute. >ut alteration of t&e "o" can +e done +y special resolution 0 so alteration of t&e "o" is a statutory rig&t of t&e company +ut t&e +asis of t&e Mo" is unaltera+ility' su+-ect to certain e4ceptions. /&is is +ecause t&e "o" deal $it& matters of internal regulation 0 suc& as &o$ t&e company can +e run efficiently 0 so t&ose $&o run t&e company s&ould +e allo$ed to alter t&e "o". Matters of internal regulation are to +e determined +y t&e present >oard mem+ers 0 so po$er of alteration given. /&is is incorporated in *. 3: 0 alteration +y special resolution 0 +ut t&is is su+-ect to certain e4ceptions 0 /&is po$er is su+-ect to t&e provisions of t&e "ct. /&e alteration s&ould not +e a fraud on t&e minority 0 t&e ma-ority cannot use t&e po$er to ta#e a$ay t&e rig&ts of t&e minority 0 t&e ma-ority cannot a+use its po$er. /&e restrictions can +e imposed +y t&e "ct' t&e constitution of t&e company' and common la$@-udicial restrictions. Can one of t&e "rticles place a restriction on t&e alteration of anot&er "rticle 0 e.g. "rticle cannot +e altered@can only +e altered +y a simple ma-ority@etc. 0 i.e. can t&e "rticles place restrictions t&at ma#e alteration practically impossi+le or too simpleG 8.g. (egulation !3 states t&at (egulation < dealing $it& service conditions s&all not +e altered. /&ere are t$o vie$s on t&is. *ome feel t&at t&is provision is invalid as it ta#es a$ay t&e rig&t of t&e company to alter its "o". *. :0 0 Lariation of Class (ig&ts 0 *pecial Protection given 0 it can +e altered only $it& t&e consent of t&at class. *. 3: 0 "lteration of t&e "o"

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*. 3 0 "o" are contractual in nature 0 +et$een mem+ers and company and mem+ers inter se. *o' it is a private arrangement. 3ower 0 t&is contract &as special features 0 1a2 t&ere is a -udicial clause 0 it is a contract relating to mem+ers&ip rig&ts onlyI 1+2 any error in contract 1Mo"@"o"2 does find t&e normal contractual remedies availa+le for t&em 0 i.e. no damages' no in-unction' rectification to reflect intention of t&e parties 0 on account of *. 3< t&at states t&at t&e certificate of incorporation is conclusive evidence t&at t&ere is no error in t&e constitutional documents of t&e company 0 so rectification is impossi+leI 1c2 if t&ere is a +reac& of t&e contract em+odied in t&e "o" +y t&e company t&en a mem+er cannot sue for damages +ut t&e company can sue for damages if a mem+er +reac&es t&e contract 0 t&is is a -udicial policy follo$ed 0 t&e reason given is t&at mem+ers can t&en collude and a+use t&e rig&t to t&e detriment of t&e creditors of t&e company as t&e earnings of t&e company s&all +e used to t&e pay damages to t&e mem+ers and not pay t&e creditors. Ebey v. 'ositive Li!e Assurance Co. "o" provided t&at Mr. 8 $ould +e appointed as solicitor for life 0 could +e removed on certain grounds alone. /&e company did not appoint &im. .e filed a suit for specific performance. /&e court &eld t&at it could not +e done. It also &eld t&at t&ere $as no contract as it $as not a mem+ers&ip rig&t t&at $as involved. /&e Ma-ority Bpinion is t&at outsiders rig&ts cannot +e included in a contract +et$een t&e company and its mem+ers. (ay!ield v. Hands (ose 9. 0 t&e contract is one of t&e most sacred type. 1Contd. from a+ove2 0 1d2 t&e contract is a pu+lic document alt&oug& a contract is usually a private document 0 t&e "o" +ecomes a pu+lic document $&en it is registered 0 t&ose $&o deal $it& t&e company &ave a legitimate e4pectation t&at t&e registered articles s&all regulate t&e internal $or#ing of t&e company. /&ird parties rely on t&ese provisions $it& respect to t&e po$ers of t&e company and its agents' etc. >ut t&e "o" can +e altered retrospectively 0 Andre# v. ,as Meter Co. /&e Mo" provided for an aut&ori7ed capital divided into 00 s&ares of T:00 eac&. *u+se?uently' in order to raise money for construction' t&e company $anted to issue preference s&ares. /&e Mo" provided for one class of s&ares alone and so t&e Mo" and "o" &ad to +e altered 1"o" altered to permit t&e issue of a different class of s&ares2 0 t&e company $anted to do it retrospectively. Issue of preference s&ares affects t&e rig&ts of e4isting s&are&olders. /&e court &eld t&at t&e alteration could +e done as $&en one +ecomes a mem+er &e is a$are t&at "o" could +e altered and so implied consent is t&ere. Allen v. ,old (ee!s o! -est A!rica /&e court &eld t&at t&e contract em+odied in t&e "o"' etc. is special as it can +e unilaterally altered retrospectively +y one of t&e parties to t&e contract 0 i.e. t&e company. "rt. 2= of t&e "o" of t&e company provided t&at t&e company s&all &ave a first and paramount lien over t&e s&ares of t&e company. " lien is possessory in nature 0 an agent &as t&e rig&t of lien $it& respect to t&e c&arges paid to &im 0 also applica+le to +ailee in t&e form of a rig&t to retain t&e goods. /&is is particular lien. ,eneral lien is $it& +an#ers for goods even if t&e goods are not in respect to a particular transaction. In a particular lien' only t&e goods of t&at transaction can +e retained. >ut in a general lien' a +an#er can retain all goods t&at are in &is possession in &is capacity as a

+an#er regardless of $&at transaction t&ey are &anded over in. In t&is case' all s&ares $ere partly paid up $it& t&e e4ception of t&e s&ares of one s&are&older 0 &e $as t&e only s&are&older $it& fully paid up s&ares. .e o$ed t&e company some money. /&e lien of t&e company $as over &is partly paid up s&ares $it& respect to amount due on s&ares as $ell as ot&er trade de+ts 1refer to (egulation = of /a+le "' *c&edule I2. /&e s&are&older died and t&e s&ares $ere in t&e possession of t&e legal &eirs and e4ecutors. /&e company altered t&e "o" retrospectively to give t&e company lien over all s&ares 0 fully or partly paid up. /&e e4ecutors c&allenged t&e action and t&e court &eld t&at a company &ad t&e po$er to c&ange t&e "o" retrospectively. Lien may +e contractual 0 am+it of lien depends on t&e contract 0 or lien may +e statutory 0 *s. :70' :7: of t&e Contract "ct 0 lien of agent' factor' +an#er' etc. /&e lien of t&e company is not statutory as t&e C" :=< does not provide for it 0 it depends on t&e "o" 0 i.e. on t&e contract +et$een t&e company and t&e mem+ers. Can a company contract $it& anot&er party to not alter t&e "o"G Can t&e mem+ers agree amongst t&emselves to not alter t&e "o"G *. 3: 0 proviso to *. 3: 0 approval of t&e Central ,ovt. re?uired if t&e "o" is altered to convert a pu+lic company to a private company. /&e po$er of t&e Central ,ovt. &as +een delegated to t&e (egistrar of Companies. /&is is not necessary $&en a private company is converted to a pu+lic company. /&e approval of t&e Central ,ovt. is re?uired as t&ere are some +enefits availa+le to only a private company in respect of statutory meetings' certificate for commencement of +usiness 1*. :!=2' etc. /&e regulatory regime t&at governs a private company is more rela4ed t&an t&at of a pu+lic company and so t&e Central ,ovt. &as to satisfy itself t&at t&e conversion is not to -ust get out of t&e regulatory regime and is actually re?uired. /&e same pro+lem does not arise $&en a private company converts to a pu+lic company and so t&e approval of t&e Central ,ovt. is not re?uired. *. 3:122 0 gives statutory effect to Allen v. ,old (ee!s 0 retrospective effect can +e given to t&e "o" 0 it is valid as if present in t&e original "o". /&is ena+les t&e company to give retrospective effect to t&e amendment 0 it is an ena+ling provision and not a general rule. *. 3:1:2 0 Po$er of a company to alter t&e "o" is restricted +y t&e provisions of t&e "ct and t&e Mo" 0 i.e. t&e o+ligatory clauses in t&e Mo" as t&e non o+ligatory clauses of t&e Mo" are treated as part of t&e "o". /&e position is different in 8ngland $&ere a provision pro&i+iting alteration of t&e non0o+ligatory provisions of t&e Mo" is valid. "n alteration of t&e "o" cannot +e inconsistent $it& t&e provisions of t&e Mo". *. 3; 0 company la$ is +ased on t&e idea t&at eac& mem+er of a company #no$s t&e e4tent of &is lia+ility. /&e e4tent of t&e lia+ility of eac& mem+er cannot +e altered to t&e pre-udice of t&e mem+ers +y an alteration of t&e "o" 0 i.e. cannot alter t&e "o" as#ing a mem+er to contri+ute more or incur a furt&er lia+ility suc& as provide a loan or ma#e contri+ution during $inding up. /&ere are e4ceptions to t&is rule to t&is rule in t&e proviso 0 t&is can +e done if t&e mem+er agrees in $riting to contri+ute more or incur any furt&er lia+ility +efore t&e alteration is made 0 so if consent is o+tained t&en t&e increased lia+ility is +inding on t&ose $&o &ad consented 0 not t&ose $&o did not consent. "not&er e4ception is in t&e case of a &i#e in t&e periodical payment to +e made to t&e company 0 i.e. a company in t&e form of a clu+ or association 0 t&is is permitted.

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*. :0 0 situation $&en a company &as different classes of s&ares and rig&ts are given to a certain class. *&ares +elong to 2 different classes if t&e principal rig&ts attac&ed to t&em are different 0 i.e. t&e rig&t to vote' rig&t to dividend' rig&t in return of capital. *. :0 states t&at t&e "o" cannot +e altered $it&out t&e consent of t&e class in ?uestion as t&e alteration mig&t pre-udicially affect t&e rig&ts of t&at class 0 t&is is inspite of *. 3: t&at gives t&e po$er to t&e company to alter t&e "o". /&e consent is eit&er t&e consent in $riting of 3@!t& of t&e mem+ers of t&e class or +y a special resolution of t&at class. >ut class rig&ts cannot +e altered at all if t&e terms of t&e issue provide t&at t&e variation is pro&i+ited 0 t&en t&e po$er of t&e company to alter t&e "o" under *. 3: is ta#en a$ay. Palmer 0 t&ere are t$o $ays of curtailing t&e po$ers of t&e company to alter t&e "o" 0 1a2 t&roug& a s&are&olderUs agreementI 1+2 company enters into a contract $it& anot&er party to pro&i+it alteration. (ussell v. *ort ern &evelopment .an) A&et&er t&e company is +ound +y a contract pro&i+iting alteration of t&e "o" 0 can it relin?uis& a statutory rig&tG *. 3: 0 special resolution re?uired for alteration 0 can t&ere +e a provision in t&e "o" or a contract made +y t&e company t&at a provision in t&e "o" s&all +e altered after consultation $it& a particular personG 0 e.g. alteration of service conditions of MD if MD consents or can t&e affected person +e given $eig&ted voting rig&tsG *. !0! 0 $&en t&e court grants relief against oppression' it &ad $ide po$ers to ma#e orders and t&e court can amend t&e constitution 0 i.e. alter t&e "o" to protect minority rig&ts +y introducing proportional representation as per *. 2 <. Proportional (epresentation can +e +y cumulative voting or +y single transfera+le vote. If t&e court ma#es suc& an amendment t&en t&e company &as not po$ers to alter suc& amendments. *o' t&e po$er of t&e company to amend t&e constitution is curtailed. 9udicial Limits on po$er of amendment 0 Allen v. ,old (ee! o! -A; ,reen alg v. Ardenne Cinemas; (ussell v. *ort ern &evelopment .an); ,ambatto v. -C' Ltd. Allen v. ,old (ee! Mr. M &eld partly and fully paid s&ares in a company. Lien $as on partly paid up s&ares. Mr. M dies and t&e company altered t&e constitution to e4tend t&e lien to fully paid up s&ares. Mr. M $as t&e only person $&o &eld fully paid up s&ares. /&e &eirs claimed t&at t&e alteration $as in +ad fait&. Court &eld t&at t&e "o" $ere in t&e nature of a contract and a mem+er cannot presume t&at an article $ill +e unaltera+le. Limitation on alteration can only +e t&roug& statute@Mo". "ny +ona fide alteration for t&e +enefit of t&e company as a $&ole is valid. /&e alteration in t&is case $as not meant to affect one person alone. " s&are&older can raise an o+-ection if &e &ad a special rig&t conferred on &im 1t&e separate rig&t is to +e enforced separately and cannot impose a restriction on t&e rig&t of alteration2 +ut t&is $as not so in t&is case. *o' in t&is case' t&e company can e4tend t&e lien +y alteration. /&e alteration &as to +e in good fait&. "lso' t&e +enefit &as to e4tend to t&e company as a $&ole and cannot +e for a particular class of s&are&olders. Many alterations are in respect of t&e s&are&olders and not for t&e company as a legal entity 0 are suc& alterations permissi+leG "nd $&at is t&e company as a $&oleG Is it t&e company as a distinct and separate legal entityG Br is it t&e entire +ody of s&are&oldersG If it is only t&e

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company as an entity t&en dividend $ill never +e increased 0 t&en a company $ill never +e a+le to approac& t&e capital mar#ets for fres& capital. It $ill also pre-udice e4isting s&are&olders and indirectly pre-udice t&e company. *o' in some cases' it can +e t&e s&are&olders. >ut usually it is t&e company as a separate legal entity. Courts are reluctant to interfere in +usiness matters due to lac# of #no$ledge or due to t&e fact t&at t&e matter comes to t&em muc& later on. *o' t&ere is a presumption t&at t&e alteration is +ona fide' unless t&ere is an error apparent on t&e face of t&e record. ,reen alg v. Ardenne Cinemas >ona fide for t&e +enefit of t&e company 0 not 2 tests +ut a single test. /&e "o" provided t&at s&are&olders &ave preemptive rig&t to +uy s&ares 0 if t&ey did not $ant to +uy t&e s&ares t&en outsiders could +uy t&em. Mr. M' t&e MD $anted to sell &is s&ares to an outsider +ut &e could not do so. *o' 8,M $as called and "o" altered 0 no$ s&ares could +e transferred to an outsider if t&e general meeting approved +y an ordinary resolution. ,' a minority s&are&older said t&e alteration $as discriminatory and for oppression of minority and not for t&e +enefit of t&e company as a $&ole. It $as for t&e +enefit of t&e ma-ority. Court &eld t&at +onafide for t&e interest of t&e company is not 2 t&ings +ut a single test. /&e s&are&older must proceed on $&at &e t&in#s is for t&e interest of t&e company. "lso' t&e company as a $&ole is to +e seen as a general +ody of s&are&olders and not as a commercial entity distinct from s&are&olders. In some cases' t&e term Vas a $&oleV can +e applied to t&e company as a commercial entity and in some cases to t&e company as a +ody of s&are&olders. .ypot&etical mem+er test 0 if t&e action is for t&e +enefit of an individual s&are&older t&at is not a mem+er of t&e ma-ority or t&e minority 0 &e is an independent mem+er $&o is concerned $it& long term +enefits 0 t&en it is for t&e +enefit of t&e company as a $&ole and is valid. /&e alteration may +e a+used +y t&e ma-ority +ut it &as to +e seen from t&e eyes of a &ypot&etical mem+er &aving long term interests in t&e company 0 $&et&er it is in t&e +enefit or disadvantage of suc& a mem+er. /&e conse?uences and actions after t&e alteration are to +e disregarded and t&ese actions can +e c&allenged as malafide later on +ut t&at $ould not mean t&at alteration is invalid. /&e po$er of e4emption from t&e pre0 emption clause is valid and is not discriminatory. *o' &ave to see if t&e alteration is discriminatory. If t&e alteration is not discriminatory t&en it is +ona fide in t&e +enefit of t&e company as a $&ole. /&e test is of non discrimination. Pennington 0 " company may +y special resolution alter its articles 0 position of general la$. /&e po$er to do so cannot +e limited or ta#en a$ay +y any provision in its Mo" or "o"' nor can its Mo" or "o" provide a procedure for alteration ot&er t&an special resolution. *o' company al$ays &as freedom to alter its "o". /&is is as against Pal%er' $&o says t&at special procedures for alteration 1e.g. unanimous consent' consent of a particular person2 can +e included H t&ey are valid. Farrar H /&e company6s po$er to alter "o" cannot +e restricted +y any provisions of t&e "o" H li#e Pennington and unli#e Palmer H so as a general rule' company is to &ave t&e po$er to alter "o" +y special resolution. Mat rib oomi v. Vard aman 1nvestment 'ublis ing H Mat&ri+&oomi is a Malayalam daily' $&ic& is a pu+lic limited company. " family o$ned s&ares in Mat&ri+&oomi. Lard&aman is t&e investment arm of t&e /imes ,roup H purc&ased s&ares from t&e family H $anted to get t&e

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s&ares registered in t&eir name. /&ere $as no restriction on t&is in t&e "o". /&e Mat&ri+&oomi management feared t&at t&is $ould +e a step in t&e process of t&e /imes ,roup ac?uiring control of t&e daily. /&is transfer $as +efore :== H no$ no restriction on transfer of s&ares of a pu+lic limited company H s. :::122. /&e amendment made to t&e "o" allo$ed t&e management to disallo$ transfer to a person t&ey t&oug&t $as undesira+le H t&is $as given retrospective effect. *o' transfera+ility of s&ares restricted. .eld' t&e alteration is valid H t&e company &as t&e po$er to give retrospective effect to its alteration. H as in Allen v. ,old (ee!. ,ambotto v. -C' Ltd.' "ustralian .ig& Court H ==.7M s&ares &eld +y Industrial 8?uity Ltd. "rt. 20" soug&t to +e introduced H if s&are&olders &eld over =0M of t&e s&ares' t&en t&ey &ad po$er to ac?uire t&e rest compulsorily. /&is amendment $as c&allenged +y minority s&are&olders. If t&e amendment passed' t&en $ould +ecome a $&olly o$ned su+sidiary H to gain ta4 +enefits. /$o contentions H 1a2 amendment $as oppressiveI 1+2 amendment led to restriction in transfera+ility of s&ares. /&is amendment $as first &eld valid H up&eld on first appeal. /&en came to "us. .C. Main -udgment H ! -udges H 'eter%s American &elicacy case cited. H Allen v. ,old (ee! test of bona !ide and for t&e +enefit of t&e company as a $&ole $as not t&e only test H often not a useful test. /$o sets of interests soug&t to +e +alanced H t&e proprietary rig&t of eac& mem+er and t&e resultant rig&t to vote and on t&e ot&er &and' t&at po$er s&ould not +e used for personal gain H not for t&e +enefit of t&e company. *o' Allen v. ,old (ee! test re-ected H criticisms $ere not satisfactorily ans$ered. *o ne$ test proposed H amendment for compulsory ac?uisition valid if it is 1a2 for a proper purpose' and 1+2 not oppressive to t&e minority. "lso' t&e process &as to +e fair H +ot& in procedure and in terms of price offered. "n e4propriation is valid if it is s&o$n t&at t&e continued s&are&olding of t&e minority is detrimental to t&e company H +y conduct' etc. H and ending t&is s&are&olding $ould +enefit for t&e company. Compulsory ac?uisition fair if t&e minority &olds s&ares in a rival company or for regulatory compliance. H ,overnment ma#es regulation t&at company can only continue if it is a $&olly o$ned su+sidiary. Court applied t&is test H struc# do$n amendment as it did not satisfy t&e test H company &ad failed to s&o$ t&at it $as not oppressive. Minority H /a4 advantages a good reason for amendment +ut did not allo$ t&at procedure $as not oppressive' so amendment not valid. Farrar H "lteration for purposes ot&er t&an e4propriation H t&en &ave to see if transaction is a fair one. If t&e alteration is for t&e purposes of e4propriation H &as to +e for a proper purpose and also &as to +e fair H so t$o0layer test. /&is distinction developed in ,ambotto H+ut 5arrar does not completely agree $it& t&is test. ,ambotto does not say $&at is fair H so &as +een &eavily critici7ed +y academicians suc& as *ealy' etc. .ro#n v. .ritis Abressive - eel Co. D:=:;0:=E "ll 8( (ep. 30; H Ma-ority &eld =;M s&ares in t&e company. /&e company $as in need of finance. Ma-ority $as ready to pump in t&e re?uired finance provided t&e minority $as got rid of H +ut t&e minority not prepared to sell t&e s&ares. *o "o" altered H if t&ere is a resolution' supported +y =0M of t&e s&are&olders' t&en minority can +e forced to sell &is s&ares. /&e resolution passed. Minority $ent to court H argued t&at it $as stripping &im of &is rig&ts as a s&are&older. .eld' alteration invalid even t&oug& purpose $as to get funds.

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Sidebottom v. /ers an Lease $ Co. D:=20E : C&. :<! H Minority &eld less t&an :0M of t&e s&ares. /&e ma-ority passed a resolution H >oard can' $it& t&e general meeting consenting' compel a s&are&older 1one $&o carried on a competing +usiness2 to sell &is s&ares to a person nominated +y t&e >oard H so not a +lan#et po$er H t&e minority s&are&older carried on t&e same +usiness H &e $as a partner of a competing +usiness. .ere' a +lan#et po$er $as not given for e4propriation H only $&en person carried on a competing +usiness could &is s&ares +e e4propriated H no distinction +et$een minority and ma-ority. .eld' t&is is a fair alteration as it is not a +rutal e4ercise of po$er +y t&e ma-ority H it is for t&e +enefit of t&e co. as t&e mem+er $&o carries on a competing +usiness and so e4propriation of &is s&ares $ill +e in t&e interest of t&e co. >ut $&at is a competing +usiness H &o$ does it lead to conflict of interest H can it +e $&en s&ares are &eld in t$o companies $&ic& manufacture t&e same productsG It pro+a+ly depends on t&e facts and circumstances of t&e case. *o' courts are reluctant to allo$ alterations for facilitating e4propriation H as a mem+er &as t&e rig&t to continue in full mem+ers&ip. *o' e4propriation allo$ed only in e4ceptional circumstances H $&en it is for a proper purpose and is fair. >ut $&at is a proper purpose depends on t&e facts and circumstances of t&e case. In e4propriation cases' a more vigorous test is applied H simply t&e fact t&at it is +eneficial for t&e company does not -ustify e4propriation H &ave to see if it is fair and does not pre-udice any mem+er etc. No &ard and fast rule t&at can +e laid do$n for t&is purpose. The AoA as a Contract s. 3 H "o" is li#e a covenant signed +y t&e company and mem+ers. "ll t&e provisions are contractual terms and are +inding on +ot&. /&e fact t&at t&e contract &as not +een actually signed is immaterial H it is as if a covenant &as +een entered into. /$o +ranc&es of t&e contract H 1:2 +et$een t&e mem+ers and t&e company' and 122 +et$een t&e mem+ers inter se. /&e contract is not +ilateral H +ut multilateral. *ince t&e contract is +et$een t&e mem+ers inter se' a pre0emption rig&t is incorporated in t&e "o" H t&e +enefit goes to t&e mem+ers. If a mem+er $ants to sell &is s&ares' t&en a pre0emptive rig&t to purc&ase t&em is t&ere $it& ot&er mem+ers H as t&ere is a contract +et$een t&em. .ay!ield v. Hands H Laisey' 9. H Co. $as a private one. Aord Fdirector6 used in "o"' +ut Court interpreted it as Fmem+er6. "o" provided H if a mem+er $ants to sell &is s&ares' it s&all +e offered to t&e ot&er mem+er $&o s&all purc&ase it H C $anted to sell &is s&ares H ot&er s&are&olders did not $ant to +uy t&em. C said t&at Fs&all6 used so t&ey $ere +ound to +uy t&em. .eld' t&is contract is enforcea+le against t&e ot&er mem+ers. Pre emption H t&ere may +e an agreed price of a formula may +e included in t&e "o" or t&e Court may decide on a price if t&ere is no suc& formula. ,enerally' $&en a duty is imposed on a mem+er t&ere is a correlative rig&t of t&e co. H it usually enforces it. "s a mem+er' one &as a rig&t to insist t&at t&e co. and ot&er mem+ers follo$ t&e provisions of t&e "o" as it is a contract. 'eter%s American &elicacy v. Heat D:=3=E "L( :2! H inconsistency +et$een t$o provisions of t&e "o". "rt. :0; H Cas& dividend to +e paid in proportion to amount of capital paid upon

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s&ares. "rt. :20 H co. to issue +onus s&ares in proportion to no. of s&ares &eld +y mem+ers. *o' "rt. :20 altered H distri+ution of +onus s&ares s&all +e in accordance $it& t&e amount paid upon t&e respective s&ares of t&e mem+ers. *ome s&ares $ere fully paid up' $&ile ot&ers $ere partly paid upon t&e respective s&ares of t&e mem+ers. /&e inconsistency $as due to a drafting defect H so soug&t to rectify t&e error +y amendment H not for t&e +enefit of t&e co. as a $&ole H only for fully paid s&are&olders. .eld' alteration $as valid and for t&e +enefit of everyone. Po$er to alteration &as to +e e4ercised for t&e +enefit of t&e co.' +ut $&en done' it can pre-udice some people H t&at itself cannot act as a restriction on t&e company6s po$er to alter. *o' bona !ide and +enefit of t&e company as a $&ole test re-ected H +ut did not propose ne$ test. "n alteration could +e restrained on t&e grounds t&at it is oppressive and not for t&e +enefit of t&e company as a $&ole' t&e court stated t&at t&e +enefit of t&e company as a $&ole H i.e. all t&e mem+ers H is not a foolproof test H t&ere may +e a valid alteration t&at does not satisfy t&e Allen v. ,old ree! ratio. Farrar H p. :2! H seven propositions laid do$n +y C9 Lat&am in 'eter%s American &elicacy. A&en an amendment affects t&e relative rig&ts of various classes of s&are&olders' +enefit of t&e co. as a $&ole not a sole test applica+le. >eing t&e o$ner of t&e s&ares' mem+ers can e4ercise some rig&ts $&ic& flo$s from t&at. H t&ere cannot +e said to oppressive to t&e minority. Po$er of alteration is not a fiduciary po$er. (ig&t to vote is incidental to t&e o$ners&ip of t&e s&ares. *o' t&e focus $as on t&e rig&ts of t&e s&are&olders $&ic& flo$ from o$ners&ip H t&is cannot +e c&allenged as +eing oppressive to t&e minority as it is only t&e mem+ers $&o e4ercise t&eir voting rig&ts $&ic& is incidental to t&e o$ners&ip of t&e s&ares. *&ares are mova+le property H .orland +rustees v. Steel .rot ers H if t&ey are used for one +enefit of t&e o$ner of t&e s&ares' t&en it is a rig&t of t&e o$ner H not an oppression of t&e minority. Bne cannot &arm anot&er person +y t&e e4ercise of t&e rig&ts over one6s property H +ut one &as t&e freedom to e4ercise t&ose rig&ts. /&ere is no legal +ar on t&e ma-ority e4ercising t&eir rig&ts for t&e purpose of advancing t&eir o$n personal interests H t&ere is no fiduciary duty involved H unli#e in t&e case of a >oard mem+er' $&o &as t&e fiduciary duty to act for t&e +enefit of t&e company. >ut t&e ma-ority po$er is not +rutal po$er H cannot +e unfairly pre-udicial to t&e minority H e.g. cannot ta#e a$ay t&e rig&t to +e a s&are&older of t&e company unless some special circumstances are present. .ro#n v. .ritis Abressive - eel Co. and Sidebottom%s case. /&e company cannot' +y any means' surrender its statutory po$er to alter t&e "o" H e.g. cannot restrict its po$er +y contract. *o' t&e rig&t to alter t&e "o" cannot +e $aived. +unt v. Simmonds D:=03E 2 C&. <0 H "rt. =< and "rt. =7 of t&e "o" H gave t&e po$er to Mr. *immonds to appoint and remove directors. 2@3rd of t&e mem+ers of t&e >oard to +e appointed +y general meeting in India for a pu+lic company H s. 2<<. >ut t&ere is no suc& provision in t&e 8nglis& statute H t&ere it depends on t&e provisions of t&e "o" irrespective of $&et&er t&e company is pu+lic or private. /&e "o" provided t&at after Mr. *immonds6 deat&' t&e po$er $ould +e e4ercised +y &is e4ecutors. /&ere $as an agreement outside t&e "o"' +et$een t&e company and Mr. *immonds t&at "rt. =< and =7 $ill not +e altered +y t&e company. "fter Mr. *immonds6 deat&' &is po$er en-oyed +y t&e e4ecutors H friction +et$een t&e e4ecutors and t&e company. *o' company altered t&e "o" ta#ing a$ay t&e po$er of t&e e4ecutors. Nuestion H can t&e po$er to alter t&e "o" +e ta#en a$ay +y a contrary agreementG .eld' 1>yron' 9.2 H co.6s statutory po$er to alter its "o" cannot +e ta#en a$ay H if t&ere is suc& a contract' it is invalid to t&e e4tent it ta#es a$ay t&e po$er. " company cannot restrict@surrender its rig&t to alter t&e "o" H +ut t&is does not mean t&at if t&ere is a contract outside "o" for restriction of alteration and

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t&e company alters t&e "o"' t&en it $on6t +e lia+le for damages for +reac& of contract. *o' t&e alteration is valid +ut t&e company &as to face t&e conse?uences for +reac& of contract. In some circumstances' t&e contract may +e a nullity. *o' no damages to +e paid.. >ut if it is not a nullity' t&en t&e company $ill +e lia+le for +reac& of contract. (ussell v. *ort ern &evelopment .an) Ltd. H If t&e s&are&olders enter into an agreement to restrict t&e alteration' t&en it is +inding on t&em. If someone violates t&e agreement' t&en remedy soug&t $ill +e in-unction H damages may not +e sufficient as a remedy. In-unction is to prevent t&e persons from violating t&e terms of t&e agreement. If t&e amendment &as already +een done' t&en t&e in-unction can +e given retrospective effect. Sout ern Foundries Ltd. v. S irlo# D:=!0E 2 "ll 8( !!< H /&ere $as a $ritten agreement +et$een *&irlo$ and *out&ern 5oundries t&at &e s&all +e appointed as MD for company H t&is $as outside t&e "o". /&e company $as ta#en over +y t&e 5ederated 5oundries Ltd. 5ederated &ad some difference of opinion $it& *&irlo$. " ne$ article $as incorporated in t&e "o" giving 5ederated t&e po$er to as# any director to resign from office H if suc& demand $as made' it $ould mean t&at t&e director no longer &eld office. /&is article violated t&e e4press contract +et$een *&irlo$ and *out&ern 5oundries. .e $as as#ed to resign' so &e ceased to +e t&e MD as &e $as no longer a director H t&is $as in violation of t&e contract. *o' t&e ?uestion $as $&et&er t&e company &ad t&e po$er to alter t&e "o" if it $ould result in t&e +reac& of a contract +et$een t&e company and some ot&er person. /&e company can alter t&e "o" even if it results in +reac& of contract H +ut t&e company $ill suffer t&e conse?uences of t&e +reac& of contract H not -ust damages' +ut ot&er remedies in case damages are insufficient. /&e court can order t&at t&e alteration s&all &ave no effect on t&e affected person or t&e alteration +e modified H t&is is only if damages is not a sufficient remedy. Contract#al Effect of the Constit#tional Doc#%ents of a Co%pan$ Hic)man v. /ent $ (omney Mars S eep .reeders Association D:=:<E : C&. ; : H "s&+ury' 9. H discussed t&e case la$ until t&en H to $&at e4tent are t&e documents contracts. D*ee +elo$E Eley v. 'ositive Li!e Assurance Co. H 8ley $as t&e solicitor H could only +e removed for misconduct. .e $as not a promoter H drafted t&e constitution of t&e company H later +ecame a mem+er H Co. did not appoint &im as a solicitor. .e filed a suit H t&ere $as a contract t&at &e $ould +e appointed H no e4press contract +ut clause in "o" provided t&at &e s&all +e appointed. .eld' "o" cannot +e treated as a contract. 8ley $as an outsider' so no contract e4isted. -ood v. 5dessa -ater -or)s Ltd. H Co. provided t&at dividend $as to +e paid in cas&. >oard decided to pay in some ot&er form H in t&e form of de+entures 1no$ cannot +e done +ecause of s. 20<1322. Bne mem+er c&allenged it as a +reac& of contract. /&ere $as no legal +ar for payment of dividend in t&e form of de+entures. /&e mem+er argued t&at t&e contract $as in t&e "o". Court &eld t&at t&e "o" acted as a contract +et$een t&e company and t&e mem+ers and t&e company is +ound as if a contract e4isted H t&e same legal effects are t&ere H t&ere is a rig&t to insist t&at t&e contract +e performed. In Eley' t&e rig&t involved $as one of an outsider H not a mem+er. In -ood' t&e rig&ts involved are t&ose of mem+ers. .ence' difference in decisions.

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*.3 H Contract +inds company and mem+ers H does not say t&at it is only restricted to mem+ers&ip rig&ts H t&at &as +een added +y -udicial interpretation H so outsiders6 rig&ts cannot +e enforced' +ut mem+ers6 rig&ts can +e. Professor Aedder+urn argues t&at all t&e provisions are contractual terms H +ut t&is &as generally not +een agreed upon +y ot&ers. /&e enforcement of t&e contract does not depend upon t&e mem+ers&ip status of t&e person 1as Eley $as a mem+er $&en &e instituted t&e suit2 +ut $&et&er t&e su+-ect matter in t&e "o" deals $it& t&e rig&ts and lia+ilities of a mem+er. Hic)man H company $as a p&ilant&ropic association H o+-ect $as to maintain t&e purity of a particular +reed of s&eep. .ic#man $as a mem+er of t&e company H &e $as not in good terms $it& t&e management H t&ey did not include &is s&eep in t&eir catalogue. /&ere $as also a t&reat t&at &e $ould +e e4pelled. *o' &e too# steps to prevent t&e e4pulsion. " provision in t&e "o" said t&at t&e disputes +et$een t&e company and t&e mem+er $ould +e settled +y ar+itration. .ic#man instituted a suit to prevent t&e management of t&e co. from e4pelling &im from t&e association. /&e co. o+-ected H &e &ad no locus standi to file a suit in court due to t&e ar+itration clause in t&e "o" H &e is +ound +y t&at clause. Court H t&is is a contractual term +et$een t&e co. and t&e mem+ers H .ic#man is +ound +y t&e ar+itration clause H so cannot file t&e suit in t&e Court. .eattie v. .eattie H ar+itration clause in "o" H dispute +et$een C' a mem+er and director' and t&e co. $it& respect to &is directors&ip. *uit $as instituted $it&out resorting to ar+itration. If Hic)man follo$ed' t&en &ave to refer to ar+itration. >ut court &eld t&at suit is maintaina+le $it&out referring matter to ar+itration. /&e clause is not +inding on t&e parties. /&is is +ecause it does not deal $it& t&e rig&ts and lia+ilities of a mem+er H it deals $it& t&e outsider6s rig&ts' i.e. directors&ip. /&ere are t$o situations% 1a2 /&ere may +e a provision in t&e "o" stating t&e terms and conditions of service of t&e &ig&est officials in t&e co. >ot& t&e co. and t&e t&ird party ta#e t&is to +e t&e contract even t&oug& an e4press contract $as not entered into. If a relations&ip &as +een entered into' i.e. appointment is done' t&en t&e "o" provisions $ill +e treated as an implied contract +et$een t&e co. and t&e t&ird party. "n implied contract &as t&e same effect as an e4press contract H it can +e relied upon. /&e pro+lem $it& suc& an implied contract is t&at it is vulnera+le H t&e provisions of t&e "o" can +e unilaterally altered +y t&e company H so left to t&e co. to determine t&e relations&ip. >ut e?uity demands t&at accrued rig&ts due to t&e "o" s&ould not +e affected +y alteration H s&ould &ave prospective' not retrospective alteration so as to not restrict t&e po$er of t&e co. to alter t&e "o". 1+2 If t&ere is an e4press contract $&ic& is in accordance $it& t&e provisions of t&e "o"' t&en "o" cannot +e altered to pre-udice t&e contractual rig&ts of t&e party. /&e e4press contract governs t&e relations&ip' not t&e "o". ectification of the AoA H main &urdle is t&e conclusiveness of t&e certificate of incorporation H e4ternal evidence is not allo$ed to rectify any document. Bral evidence is not usually allo$ed to disprove a $ritten document. .ere' t&e conclusive nature of t&e document prevents t&em from +eing rectified.

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D:==2E >CLC =3 H co. formed to manage commercial aspects of real estate H a &ousing colony H t&e flat o$ners $ere t&e s&are&olders. Can t&e "o" imply a clause t&at s&are&olders s&ould +e responsi+le for meeting part of t&e gardening e4penses' and up#eep of ot&er facilities suc& as pool' etc. H t&e "o" did not e4pressly provide t&is. *teyn' L.9.' suc& a term cannot +e implied into t&e "o". It is possi+le to imply some terms in t&e "o" in some circumstances H in t&is case t&e terms cannot +e implied into t&e "o". E6uity Li!e Assurance Society v. Hig man D2000E 3 "ll 8( = : H *teyn $as prepared to imply a term into t&e "o". Distinction made +et$een e4trinsic evidence to vary t&e terms of t&e "o" H t&is is not possi+le H and terms t&at can +e implied H not e4trinsic. Co. engaged in life assurance. "o" H directors may in t&eir discretion pay +onus to mem+ers of t&e co. $&o &ave ta#en life assurance policies. "lso' t&ere $as a provision of a minimum guarantee amount paid to all s&are&olders. /&e directors paid &uge +onus to t&ose mem+ers $&o &ad ta#en life assurance policies. Did t&e "o" imply t&at t&e discretionary +onus $ould not violate t&e minimum guarantee provisionG Court H t&ere is to +e implied a term' from t&e construction of t&e "o"' not any e4ternal evidence t&at t&e +onus s&ould not violate t&e minimum guarantee amount H t&is is inspite t&e discretionary po$er given to t&e directors H fetters imposed on t&e discretionary po$er of t&e directors H t&ese fetters can +e implied from t&e construction of t&e "o" as a $&ole. 84trinsic implied terms are not allo$ed +ut constructional implied terms $&ic& are allo$ed as t&ey can +e read into t&e "o" +y a reasona+le construction of t&e document. Shareholders; Agree%ent (ussell v. *ort ern &evelopment .an) Ltd. D:==2E 3 "ll 8( : : H />* set up in :=7= H it $as a &olding company of a group of +ric# manufacturing companies in Ireland. 5ive s&are&olders H a +an# 1:20 s&ares2' four employees of t&e company 120 s&ares eac&2. /&ere $as an agreement among t&e s&are&olders at t&e formation of t&e company t&at no furt&er s&ares $ere to +e issued $it&out unanimous consent of all t&e s&are&olders. It $as disputed $&et&er t&e company $as a party. /&ere $as a proposal to issue fres& s&ares. Bne of t&e s&are&olders' (ussell' o+-ected. /&e ?uestion $as $&et&er t&e company $ould go on $it& t&e issue of s&ares. /&e po$er to issue s&ares is $it& t&e >oard of Directors. In India' consent of general meeting is re?uired 1s. ;:1:"22 H not so in 8ngland. /&e po$er of t&e co. to alter its "o" cannot +e restricted unless it goes against t&e "ct or is a fraud on t&e minority. If t&e co. is a party to t&e agreement' t&en t&e contract is invalid as it cannot restrict t&e po$er to alter t&e "o" H &o$ever' t&e entire contract is not invalid H depends on t&e construction of t&e contract H i.e. doctrine of severa+ility applies H if t&e contract is not severa+le' t&en t&e entire contract falls. If t&e co. is removed from t&e contract' t&en it is a contract among t&e s&are&olders H t&at contract is valid H t&is depends on $&et&er t&e contract can stand alone after t&e invalid provisions are severed from it. In a s&are&olders6 agreement' only parties to t&e agreement $ill +e +ound H not ot&er s&are&olders. Co%pan$ Transactions 1a2 Pre0incorporation contracts H entered into +efore t&e company is incorporated. 1+2 Provisional contracts H entered into after incorporation. 1c2 (esiduary contracts H all ot&er contracts. s.!: H mem+ers of a co. can +e seen in its register of mem+ers. If t&ere are many s&are&olders 1a+ove <02' t&en an inde4 of register also needs to +e #ept.

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s. :<0 H register of mem+ers H contents. s. :<01:21+2 H s&ares &ave an identifia+le num+er. /&is re?uirement is violated +y s&ares &eld in t&e depository system H no num+er is assigned H it is in electronic form and #ept in t&e depository system. *&ares are in fungi+le form in t&e depository. A&en s&ares are in t&e depository system' t&en t&ey are in t&e name of t&e depository H legal o$ner is depository and +eneficial o$ner is t&e actual o$ner H t&is is recogni7ed +y s.!:. >efore t&e depository form' s&are certificates $ere issued. No$' t&ey are in a demateriali7ed form H no num+er is assigned nor are s&are certificates issued. If s&ares are in t&e depository form' t&en t&e depository6s name appears in t&e register as t&e legal o$ner. >ut t&e +eneficial o$ner is in t&e register of t&e depository H t&e +eneficial o$ner is deemed to +e a mem+er of t&e co. +y virtue of s. !:132. " su+scri+er to t&e Mo" ipso !acto +ecomes a mem+er of t&e co. H s.!:1:2 H no need for allotment of s&ares to t&at person H t&e su+scri+er is +ound to ta#e some s&ares. 8ven if co. is $ound up +efore allotment' t&e su+scri+ers &ave to pay nominal value of t&e s&ares as t&ey automatically +ecome mem+ers on incorporation. .o$ever' all ot&ers +ecome mem+ers on allotment@transfer@transmission of s&ares. *. !:122 H ot&ers can agree to +ecome mem+ers +y an agreement in $riting. /&is is modified for t&e depository system. Communication H +et$een mem+ers and t&e company' to (egistrar etc. Communication +ecomes important in case of serving notice for meetings. s.<:0<3 H service of documents on t&e company' on registrar' on mem+ers +y t&e company' s. <:0Communication is sent to t&e company at its registered address s. <30Communication to mem+er sent to at &is registered address. "ny ot&er address $&ic& &e &as provided for t&e service of suc& documents. If no address is given' t&en an advertisement in a ne$spaper circulating in t&e neig&+our&ood of t&e co. is treated as service of t&e documents H su+stituted service is recogni7ed +y s. <3132 only in some special circumstances. If an address is provided +ut it is t&oug&t t&at post is inefficient and so an advertisement is placed' t&en it cannot +e treated as service H if t&ere is a registered address given' t&en notice &as to +e served via post. s.<3122 H $&en notice is ta#en to +e served H t&is is important in case of notice of general meetings $&en 2: days clear notice is re?uired H e4cluding date of posting and date of meeting. /&ere is a presumption t&at notice is served $it&in !; &ours of posting of t&e letter. 5or ot&er notice' it is presumed t&at it is delivered in t&e time it ta#es in t&e ordinary course of post. Co%pan$ Transactions Pre+incorporation Contracts H contract purported to +e entered into +e some persons on +e&alf of a co. yet to +e +orn H also called preliminary contracts. In legal t&eory' it is a nullity. /&e principal6s lia+ility $it& respect to t&e transaction depends on t&e agent6s capacity to +ind t&e principal. /&ree parties in t&e la$ of agency H principal' agent' t&ird party. "n agent negotiates $it& t&e t&ird party on +e&alf of t&e principal H t&e result is a contract +et$een t&e principal and t&e agent H t&e agent &as no rig&ts and lia+ilities $it& respect to t&e contract if t&e agent &as +een aut&ori7ed +y t&e principal to enter into t&e transaction H can +e actual aut&ority or ostensi+le aut&ority 1$&at a reasona+le t&ird party t&in#s2 H t&is creates agency +y estoppel H agent is placed in suc& a position t&at a reasona+le t&ird party t&in#s t&at &e

<

is an agent. Principal cannot +e &eld lia+le in cases of ostensi+le aut&ority if t&ere is actual #no$ledge of t&e lac# of aut&ority of t&e agent +y t&e t&ird party. Pre0incorporation contracts H promoter purports to act on +e&alf of a company t&at is yet to +e +orn. /&e t&ird party #no$s t&at t&e company is not in e4istence H so no ?uestion of aut&ority +eing conferred on t&e promoter +y t&e company. If t&e promoter is not aut&ori7ed' t&en t&e transaction is a nullity. (atification is not possi+le. /&e principal &as to +e competent at t&e time t&e contract $as entered into H as ratification relates +ac# to t&e time t&e transaction $as entered into. *ince t&e co. $as not in e4istence' &ence' it is not a competent principal H so no ?uestion of ratification. /&e pre0incorporation contract is a nullity H neit&er t&e principal nor t&e t&ird party is lia+le. /elner v. .a:ter' *e#borne. !ndia H *pecific (elief "ct H s. :<1&2 and s. :=1e2 H "fter t&e co. comes into e4istence' t&e co. can adopt t&e contract +y a $ritten resolution and communicated to t&e t&ird party H t&en t&e contract is invalid. England H contract is a nullity. >ut promoters can +e lia+le +y t&ird party as if &e is t&e contracting party and &e can enforce contract against t&ird party H as per s. 3 C of t&e Companies "ct H +ased on s. =122 of t&e 8uropean Communities "ct. H ' onogram Ltd. v. Lane and .raymist v. -ise Finance Ltd. In case of a contract entered into +y an agent' t&ere is t&e danger t&at t&e principal $ill +e +ound +y somet&ing in t&e a+sence of aut&ority or $&en t&e agent acts in t&e e4cess of t&e aut&ority conferred. *o' t&e principal is in a precarious position. .e $ill +e lia+le only if t&e act is $it&in t&e actual@ostensi+le aut&ority of t&e agent H $&at a reasona+le t&ird party is entitled to assume. Principal can +e +ound even $&en act is outside aut&ority of agent H t&is is only in t$o cases H for a s&ip o$ner H t&en even if t&e t&ird party #no$s t&at t&e agent &as no aut&ority' t&en principal can +e +ound H agency +y necessity. Principal is prima !acie +ound in case of actual@ostensi+le aut&ority of t&e agent. /&e ?uestion of aut&ority is immaterial in case of a t&ird party H if t&e principal $ants to +ind t&e t&ird party' t&en need not see if t&e principal $ants to +ind t&e t&ird party' t&en need not see if aut&ority $as t&ere H as &e can easily ratify t&e contract later on. Principal can escape lia+ility if it is $it&in ostensi+le aut&ority H +ut can never do so in case of actual aut&ority. /&e t&ird party6s claim on t&e +asis of ostensi+le aut&ority can +e defeated if #no$ledge of lac# of aut&ority of t&e agent +y t&e t&ird party can +e proved. Categories of irreg#lar transactions0 :. transactions pro&i+ited +y la$0 nullity 2. transactions not pro&i+ited +y general la$' +ut is not permitted +y t&e Constitution of t&e company' for e4ample +y t&e o+-ect clause of t&e Mo"0 t&e doctrine of ultra vires applies and t&e transaction is rendered null and void 3. transaction is not pro&i+ited +y general la$ or +y t&e Mo" of t&e company' +ut is not aut&ori7ed +y t&e company. /&is can &appen for e4ample $&en t&e transaction is +eyond t&e aut&ority of t&e agent. .ere t&e doctrines of constructive notice and indoor management operate

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Pre0incorporation contracts and preliminary contracts0 /&e pro+lem $it& t&ese contracts is t&at it cannot +e assumed t&at t&e company gave aut&ority to t&e promoter $&en t&e transaction $as entered into. /&is is +ecause t&e company $as not in e4istence at t&e time. (atification is also not possi+le since one of t&e prere?uisites of a valid ratification is t&e presence of a competent principal. /&erefore' as per common la$' even t&e company $ants to ratify t&e acts of t&e agent 1promoter2' as far as pre0incorporation contracts are concerned' it cannot. /&e contract is a nullity as far as t&e company is concerned. elationship between the part$ and the pro%oter /elner v. .a:ter+ " contract $as entered into for and on +e&alf of t&e company for t&e sale of goods. /&ere $as no contract +et$een t&e promoter and t&e company. .ere' t&e promoters $ere &eld personally lia+le on t&e contract. *e#borne v. Sensolid+ *imilar circumstances' t&e promoters $ere &eld to +e not personally lia+le' as &ere t&e intention $as to +ind t&e company. Not t&e personal lia+ility of t&e company. /&e contract read QSigned Leopold *e#borne Ltd for Leopold *e#borne. /&us a distinction $as created $it&in common la$. In t&e :=706s 8ngland +ecame a mem+er of t&e 8C' and *ec =122 of t&e 8uropean Communities "ct and *ec 3 C of t&e Companies "ct' :=;<. (elations&ip +et$een t&e company and t&e t&ird party is t&e same. >ut t&e contract is no$ treated as a contract +et$een t&e promoter and t&e t&ird party. *o +ot& of t&em can enforce it against eac& ot&er. ' onogram v. Lane+ .ere' t&ere $as a pop0artists group' $&o $anted to set up a company called fragile management Ltd. Bne of t&e mem+ers of t&e group entered into a contract for and on +e&alf of t&e company yet to +e formed. /&ere $as an agreement entered into to pay :2000 pounds to t&e company. 000 pounds $ere given in advance to t&e promoters and t&e company $as never +orn. /&e ?uestion $&ic& arose for t&e consideration of t&e court $as $&et&er t&e promoters $ere +ound to return t&e money $&ic& t&ey &ad +orro$ed. /&e promoters argued t&at t&ere $as no personal lia+ility' and so t&ey could not +e &eld lia+le. Court used *ec =122 of t&e 8C "ct and applying t&at to t&e promoters in t&is case' &eld t&em to +e personally lia+le. .eld t&at t&e la$ treated t&e contract as one entered into +et$een t&e t&ird party and t&e promoter. If t&e company $ants to reap +enefits' it &as to enter into a fres& contract after incorporation. .rayiust v. -ise Finance+ It $as &eld in t&is case t&at not only $as t&e promoter lia+le' +ut even t&e t&ird party could +e &eld lia+le. /&e promoter can enforce t&e contract against t&e t&ird party. !n !ndia+ /&e strict -urisprudence &as +een deviated from' and $&en t&e company comes into e4istence' it can accept or adopt t&e pre0incorporation contract. /&is is after $ritten acceptance is given to t&e t&ird party. Company can t&en enforce t&e contract0 *ec :<1&2 and t&e t&ird party can enforce t&e contract against t&e company0 *ection :=1e2 of t&e *pecific (elief "ct. >ut t&e company cannot adopt all t&e contracts' and some conditions are to +e fulfilled. Bne of t&ese conditions is t&at t&e contract &as to +e Q$arranted +y t&e terms of t&e incorporationS. /&ese provisions are su+-ect to t&e ot&er provisions of t&e c&apter. *ection :! specifically states t&at some contracts cannot +e specifically enforced. /&e contracts &ave to +e closely connected $it& t&e activities of t&e company and &ave to +e $arranted +y t&e terms of incorporation.

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(elations&ip +et$een promoter and t&e t&ird party0 *ec 230132 and *ec 23< of t&e Indian Contract "ct *ec 230132' an agent can +e personally lia+le and +ound in case of a contract $&ere t&e principal' t&oug& disclosed' cannot +e sued. *ec 23<0 "nyone $&o untruly represents to anot&er person t&at &e is an agent i.e. t&is fact is not #no$n to t&e t&ird party' t&en &e can +e &eld personally lia+le. Pro0isional contracts+ *ec :!= attracted only in resDect of a pu+lic co &aving s&are capital0 " pu+lic co &as a $aiting period for t&e commencement of +usiness. " trading certificate &as to +e issued and under *ec :!= 1:2 and 122' commencement of +usiness . "lso' a pu+lic company &as to &old a statutory meeting. *ection :30 t&e B+-ect clause &as a tripartite division' into t&e main' ancillary and t&e incidental o+-ects of t&e company. /&e ot&er o+-ects of t&e company need to +e pursued only later on' not at t&e time of t&e commencement of t&e +usiness. *ection :!= 12"2 and :!= 12>2 deal $it& t&e o+-ects clause. " company cannot commence +usiness $it&out t&e satisfaction of *ection :!= 1:2 or 122' as t&e case may +e. *ection :!=1:2 provides t&at a declaration &as to +e filed $it& t&e registrar t&at clauses 1a2' 1+2 and 1c2 &ave not +een complied $it&. *ection :!= 132 states t&at after t&e declaration &as +een filed' t&e (egistrar $ill issue a certificate t&at t&e company is entitled to commence +usiness. *o' it can +e argued t&at commencement of +usiness can +e done $it&out t&e certificate and simply after t&e declaration &as +een filed $it& t&e registrar. "ny contract entered into +y t&e company +efore it is entitled to commence +usiness is a provisional contract' and suc& a contract is not +inding on t&e company till t&e date of commencement under *ection :!=1!2. " contract entered into after t&e certificate of incorporation is issued' in ot&er $ords' after t&e company is #no$n as a legal entity and +efore it is entitled to commence +usiness is a provisional contract. /&e contract is not a nullity +ut cannot +e enforced against t&e company till it is ?ualified to commence +usiness. /&e section does not say t&at t&e company cannot enforce t&e contract' +ut as per e?uity it s&ould not +e a+le to until it is ?ualified to commence +usiness. /&e contract is in suspended animation and is +inding on t&e parties only after t&e company is entitled to commence +usiness. /&e rationale +e&ind a provisional contract0 /&e pro-ect may not ta#e off due to lac# of finance' so investors need to +e assured t&at t&eir money $ill not +e spent in contracts t&at are not +inding on t&e company. /&e investors &ave to +e protected till t&e company is entitled to commence +usiness' $&ic& $ill only +e after minimum su+scription is o+tained for t&e s&ares' as per *ection :!=1:2. :. 1n re Auto Electrical Manu!acturing Company' :=0 3 C& 3=00 Corresponding provisions of t&e 8nglis& Company La$ $ere t&ere prior to :=;<' not t&ere in t&e Companies "ct' :=;<. 2. (e Ambica +e:tiles' "I( :=<0 Cal 2<:

<=

/&e goods $ere supplied +efore t&e company $as entitled to commence +usiness. /&e company $ound up +efore t&e commencement of +usiness' and t&e seller claimed amount due on t&e goods. It $as &eld t&at t&e supplier could not claim anut&ing from t&e company as t&e contract $as not +inding on t&e company till t&e date t&e company $as entitled to commence +usiness. It $as merely provisional. /&ere can +e no estoppell against a statute' as decided in Sadi /ali / an v. "ai /is ore' $&ere a minor made a representation t&at &e $as a ma-or' and t&e moneylender &ad no reason to +elieve ot&er$ise. /&e minor t&en refused to repay' and said &e $as not +ound +y t&e contract. 8eld' t&ere can +e no estoppel against a statute' as t&at $ould defeat t&e purpose of t&e statute. If goods are supplied on t&e +asis of a provisional contract and t&e company goes into li?uidation' t&e company cannot recover on t&e ground t&at t&e contract is merely provisional. /&e ,overnment can as# for t&e goods to +e returned as title &as not passed. If' &o$ever' t&e company &as consumed t&e goods' t&ey are to +e traced and t&e doctrine of tracing and follo$ing is applied. If t&e goods &ave +een sold' t&e goods &ave to +e traced. *ection :!= 1 20 penal conse?uences if t&e company commences +usinesses +efore it complies $it& t&e re?uirements of t&e section. *ection :!=12"2 12>20 " company $as incorporated +y t&e := < "mendment' and t&is $as to curtail t&e tendency to inflate t&e o+-ect clause' and t&e o+-ect clause &ad to +e divided into t&ree parts a. Main o+-ects +. "ncillary o+-ects' 1$&ic& provide t&e po$er to perform activities $&ic& are necessary to attain t&e main o+-ectives of t&e company2 c. Bt&er o+-ectives 1+usiness activities t&at a company may $ant to do su+se?uently' at a later point in time after sta+ility is ac&ieved. If t&e ot&er o+-ects are em+ar#ed upon' t&en t&e consent of t&e general meeting +y special resolution &as to +e o+tained. *ection :!= 12"2 H for t&e pursuit of t&e main o+-ectives of t&e company' no consent of t&e general meeting &as to +e o+tained. Bnly a trading certificate &as to +e o+tained to carry out t&e main o+-ectives of t&e company. /&ere may +e situations $&ere t&e significant ma-ority stalls t&e passing of a special resolution so *ection :!=12"2 cannot +e invo#ed even if t&e +usiness is advantageous to t&e company. *o *ection :!= 12>2 is applied' if a special resolution fails' +ut votes cast for e4ceed t&e votes cast against' t&en t&e company can apply to t&e Central ,overnment for permission to em+ar# on t&e said +usiness. *ection ;: 1:"20 " special resolution for issue of s&ares' if not' t&en application to t&e central government' similar to section :!=12"2 and 12>2 Doctrine of /ltra 4ires+ Charter Co%panies' even t&oug& t&e c&arter $as for a specific purpose' yet t&e po$ers of t&e company $ere li#e t&at of a natural &uman +eing' if po$ers given in c&arter $ere e4ceeded' t&en t&e validity of t&e acts $as not affected. >ut t&e cro$n could cancel t&e c&arter' $&ic& $as t&e only effective c&ec# on suc& companies.

Sutton%s ospital case Stat#tor$ corporations0 *tatute conferred po$er on corporation' mainly transport' $ater$or#s etc. 8ven if t&e transaction is +eyond t&e aut&ority of t&e company as provided +y t&e "rticles of "ssociation' +ut it &as +een entered into in good fait&' it is not null and void. In t&ese cases' lia+ility can +e attac&ed' and t&is is t&e 8nglis& position of la$. ,o$er0 pu+lic la$ is t&e source of t&e doctrine' and aut&ority is given to officials' and restrictions are placed on t&eir po$er to prevent a+use. /&is $as used in corporate la$ as $ell' to curtail t&e po$er of t&e company. /&is can +e seen in t&e conte4t of t&e rail$ay +oom' since t&e rail$ays engaged in activities $&ic& could +e considered in tort' suc& as negligence' nuisance' trespass etc. In t&ose circumstances' cur+s $ere imposed on t&e po$ers of t&e rail$ay companies and t&eir officials as $ell. *o' doctrine of ultra vires applied to statutory corporations +y t&e courts. egistered co%panies0 $ere originally deed of settlement companies' $&ic& $ere e4tended partners&ips. *o' ?uestion of $&at la$ to +e applied0 t&at of c&artered or statutory companies. In a partners&ip' t&ere $as no restriction on its po$ers' e4cept t&at t&e unanimous consent of t&e partners &ad to +e o+tained. /&e 9oint *toc# companies "ct of :; 2' in *ection ; provided t&at t&e provisions in t&e Mo" can +e altered even +y unanimous consent' o+-ect clause cannot +e altered. /&e doctrine $as clarified +y t&e "ct' and it $as &eld t&at t&e o+-ect clause could not +e altered. As bury (ail#ay Company v. (ic ie 1:;7<20 /&ere $as a company formed for t&e purpose of manufacturing rail$ay engines' laying rail$ay lines' doing mec&anical engineering. " contract $as entered into +y $&ic& t&e company agreed to give financial assistance to a company $&ic& laid rail$ay lines. ,eneral meeting approved unanimously. /&e Court &eld t&at even $it& unanimous consent' a company cannot do somet&ing not aut&ori7ed +y t&e o+-ect clause of t&e memorandum of association. /&e conservative approac& ta#en in t&is case $as to split t&e o+-ect clause into t&e necessary' incidental and ancillary o+-ects of t&e company. /&is $as t&e approac& ta#en in t&is case. Attorney ,eneral v. ,reat Eastern (ail#ay Company D:; 0E0 A&at can reasona+ly +e regarded as incidental or ancillary is $arranted +y t&e o+-et clause. " lineral interpretation to t&e o+-ect clause is to +e given. A&at is to fairly +e regarded as incidental or ancillary to t&e o+-ects of t&e company is $it&in t&e po$ers of t&e company. CLalidate if possi+leS0 t&e function of t&e court is not to stri#e do$n a statute if it can +e saved +y a reasona+le interpretation. (e "on .eau!ort D:=<3E C& :3:0 " company $as formed for t&e purpose of dealing in $omen6s clot&ing and it em+ar#ed on t&e +usiness of manufacturing vinyl pencils and t&e process incolced t&e supply of coal. It entered into a contract $it& t&e coal merc&ant for supply' and it $as supplied on credit. /&e company $as $ound up as it $as unsuccessful and t&e coal merc&ant raised a claim in t&e li?uidation proceeding. /&e li?uidator of t&e company o+-ected on t&e ground t&at t&e transaction $as a nullity +eing ultra vires of t&e o+-ect clause. /&e transaction $as &eld to +e null and void since it could not +e up&eld on any reasona+le interpretation of t&e o+-ect clause.

1ntroductions Limited v. *ational 'rovincial .an) D:= =E : "ll 8( ;;70 " company $as formed for t&e purpose of tourism devt. /&e +usiness $as not successful and t&e company decided to diversify into pig farming and too# a loan from t&e national provincial +an#. >ut t&e company $as still not successful' so it $as $ound up. >an# claimed as a creditor +ut li?uidator o+-ected as t&e transaction $as ultra vires t&e o+-ect clause in t&e memorandum of association. /&e o+-ects of t&e company included +orro$ing. *o t&e +an# contended t&at t&e transaction $as $it&in t&e o+-ects of t&e company. /&e Court &eld t&at no company could +e formed for t&e purposes of +orro$ing' and it is only a po$er to carry out t&e ot&er o+-ects of t&e company' and it $as an ancillary o+-ect of t&e company. "ncillary o+-ects cannot stand alone' and t&ey are dependant on t&e main o+-ects. /&e loan re?uest $as for a pig farming +usiness' and $as clearly +eyond t&e po$ers of t&e company. *o +an# could not claim t&e amount of t&e loan as t&e transaction $as ultra vires t&e o+-ect clause of t&e company. " p&armaceutical company $as formed' and for (PD' t&e company entered into a contract $it& t&e ,lasgo$ 3niversity to give financial assistance for researc& in +io0c&emistry. It $as &eld t&at t&is $as incidental@ancillary as t&e development of +io0c&emistry $as ultimately +eneficial to t&e company. Man#fact#ring co%pan$0 Its effluents could +e converted into an industrially mar#eta+le product +y treating it $it& caustic soda. /&e company purc&asd caustic soda for sometime. /&en' it started t&e manufacture of caustic soda +y itself and sold t&e e4cess caustic soda in t&e mar#et. Bne of t&e s&are&olders ?uestioned t&e manufacture. Court &eld' treating t&e effluents as part of t&e +usiness' t&at t&e manufacture of caustic soda $as an incidental activity $&ic& could +e related to t&e main +usiness of t&e company. " li+eral interpretation $as t&us given. A La)s manamurt y Mudaliar v. L1C0 /&e Mudaliars &ad an insurance company0 It made a donation to a trust controlled +y t&e Mudaliars. /&e "rticles of "ssociation of t&e company provided t&at t&e >an# could ma#e donations to c&arita+le trusts and associations for developing insurance +usiness' +ut t&e o+-ect clause did not provide for t&at. Life insurance company nationali7ed and ta#en over +y LIC. " suit $as filed to recover t&e money paid to t&e trust $&ic& created a$areness among t&e people a+out insurance. LIC contended t&at t&e transaction $as ultra vires. /&e "o" cannot +e used to determine t&e po$ers of t&e company' and t&at can only +e done +y loo#ing at t&e o+-ect clause of t&e company. *ince t&e o+-ect clause $as silent' donations to c&arita+le association could not +e permitted. /&e "o" can only +e referred to if t&ere is an am+iguity in t&e Mo"' +ut t&e "o" cannot +e used to e4pand t&e scope of t&e o+-ect clause of t&e company. "o" deals $it& t&e internal management of t&e company' and is not &elpful in t&e interpretation of t&e o+-ect clause e4cept $&en it is to remove am+iguity. Section 1=9.+ e6ception to the powers of a co%pan$ . Po$ers are determined $it& reference to t&e o+-ect clause' +ut in t&is section' >oard &ad po$er to ma#e donations to some funds' even if t&e o+-ect clause did not allo$ it. *o' pu+lic interest loo#ed at. /&e society is seen as a sta#e&older in t&e corporation' and t&is provision $as incorporated in :=7:. In t&e +ac#ground of $ar' $&en funds $ere re?uired. Corporations $&ic& generated profits could +e re?uested to

donate to &elp t&e society irrespective of t&e provisions of t&e o+-ect clause. /&e doctrine of ultra vires &as no application &ere. *ec 2=3 "0 donations to political parties. "ayantilal v. +ata 1ron and Steel Company 0 C&agla 9' and v. 1ndian 1ron and Steel Company' P.>. Mu#&er-i 9.0 >ot& t&e cases concerned t&e amendment to *ec :7' $&ic& involved t&e alteration of t&e o+-ect clause ena+ling t&e company to ma#e political donation. C&agla said t&at political contri+ution +y companies $as dangerous in a nascent democracy. >ut t&e court up&eld t&e amendment. /&e danger is t&at po$erful +usiness corporations $ill influence political and economic policies +y t&eir donations. Initially' t&ere $ere no restrictions' and t&en a total +an $as imposed' and no$ it is allo$ed' +ut $it& some restrictions. " ceiling is imposed on political contri+utions. *ome companies are entirely +anned from ma#ing political contri+utions altoget&er. ,overnment companies and nascent companies. 5or ot&er companies' a ceiling is imposed to t&e e4tent of <M of t&e average net profits for t&e preceding t&ree financial years. *uc& a contri+ution can not only +e made +y a resolution at t&e +oard meeting. Section 1=9 D(EDeE+ charitable contrib#tions0 Company can ma#e c&arita+le contri+utions su+-ect to t&is provision. Contri+utions are generally made for t&e purpose of earning good$ill0 so company is ultimately t&e +eneficiary as it is suc& as a responsi+le corporate or citi7en. Inflated o+-ect clause and independent o+-ect clause0 tussle +et$een +usiness community and t&e -udiciary. Po$ers of t&e company depend on its o+-ect clause0 so t&e tendency &as +een to include anyt&ing and everyt&ing in t&e o+-ect clause. "ccording to ,o$er' t&e purpose of t&e o+-ect clause is to protect t&e creditor 1$&o can see if &is loan is going to +e used to purc&ase assets for pursuing t&e o+-ectives of t&e company2' and also t&e mem+er' $&o can estimate t&e return on t&e +asis of t&e ris# involved in t&e operations of t&e company0 $&ic& are to +e +ased on t&e o+-ects of t&e company as stated in t&e o+-ects clause. Main ob?ect r#le of constr#ction0 "ll ancillary o+-ects are to read in lig&t of t&e main o+-ects of t&e company0 -udiciary gave a narro$ interpretation to curtail inflated o+-ects. /&e +usiness community claimed t&at all o+-ects $ere main o+-ects0 t&ey $ere independent o+-ects0 &ave to +e read independently. /&is tendency $as critici7ed +y t&e -udiciary. *ince t&e document $as commercial' so intention &ad to +e seen' and if t&e +usinessmen t&oug&t t&at eac& $as independent' t&en &ave to +e considered so. Lord Aren+ury in Catman v. .roug am D:=:;E "C <:! H so o+-ects not affected +y any ot&er o+-ect. S#b?ecti0e ob?ect cla#se+ >ell&ouse v. City Aall Properties D:= E 2 "ll 8( 7!0 Company $as involved in t&e construction of &ouses. Po$ers of t&e +oard $it& managing director. Company introduced defendants to financiers $&o agreed to finance t&e defendants pro-ect. 5or t&e introduction' t&ey as#ed for procuration money and t&e defendants refused to pay. /&e defendants claimed t&at t&e transaction $as ultra vires0 Plaintiffs0 $&atever t&e director t&in#s to +e ancillary could +e underta#en +y t&e company0 director t&oug&t t&e transaction $ould &elp

+uild good$ill. Defendants0 t&at s&ould not +e su+-ective' +ut o+-ective0 e4ternal evidence not to +e used to interpret t&e Mo" Court0 accepted plaintiffs contention0 t&at is su+-ective0 Court $ill see if director t&oug&t t&at transaction $as ancillary0 &ere good$ill $ould +e +uilt $&ic& $ould eventually &elp in t&e real estate +usiness of t&e company. /&e company o+-ectives contained independent o+-ect clauses and also a su+-ective o+-ect clause 1to do any ot&er +usiness $&ic& t&e >oard t&oug&t could +e conveniently carried on +y t&e company along its ot&er o+-ects2 H t&is is diff from an inflated o+-ectice clause' $&ic& mentions specific o+-ects. *o courts &ad to loo# at $&et&er >oard t&oug&t could +e conveniently carried out +y t&e company in order to determine $&et&er t&e act $as $it&in t&e po$ers of t&e company. /&e Court up&eld t&e validity of t&e su+-ective o+-ect clause and t&is &as virtually made t&e doctrine of ultra vires redundant. *uc& a su+-ective o+-ect clause may not +e effective in India' as specific o+-ects are to +e stated. /&e company is +ound +y a transaction is t&ird party +elieved t&at t&e po$ers $ere $it&in t&ose of t&e company. >ona fide +elief' and t&is is regardless of $&at t&e o+-ect clause states. (amaia&+ Company6s po$er to ma#e c&arita+le contri+utions is a statutory po$er and t&is does not depend on t&e o+-ect clause. DOCT !NE OF CONST /CT!4E NOT!CE AND !NDOO MANA3EMENT Irregular activities of t&e company0 Company can ratify unaut&ori7ed acts of t&e agent +ut $it&in t&e po$ers of t&e company' and t&e irregular contract +ecomes a regular contract. >ut contract remains irregular $&en a. transaction is pro&i+ited +y general la$s' for e4ample $&en t&e o+-ect of t&e company is to +uy its o$n s&ares or ma#e payments ot&er t&an out of t&e profits of t&e company +. t&e company6s constitution does not permit t&e activity0 for e4ample $&en t&e co does not &ave t&e capacity to enter into t&e transaction c. co &as t&e capacity +ut its agent does not &ave t&e capacity 3ltra Lires0 capacity of a co. Bn t&e ot&er &and' indoor management and constructive notice deal $it& t&e aut&ority of an agent. Doctrine of Constr#cti0e notice+ " principal is +ound +y t&e acts of &is agent even if t&ey are +eyond t&e actual aut&ority of t&e agent' +ut are $it&in t&e ostensi+le aut&ority of t&e agent or in compliance $it& t&e constitution of t&e company unless t&e t&ird party &as actual #no$ledge of t&e lac# of aut&ority. If t&e principal is a co' t&en constructive #no$ledge is sufficient. /&ere are some documents $&ic& are availa+le for pu+lic perusal and inspection. *ection :00 rig&t of perusal of t&e records@ pu+lic documents of t&e co0 t&ese are t&e Mo"' "o"' special resolutions etc. Constructive notice0 If any interest is soug&t to +e ac?uired in any immova+le property' t&en a perusal of t&e documents at t&e (egistrar6s office is done for encum+rance certificates. )no$ledge is imputed if any suc& document is registered. Means of #no$ledge is considered to

+e e?uivalent to #no$ledge. "s regards immova+le property' interest can +e created only +y registration. Compulsory registration under *ection :7 of t&e (egistration "ct' and t&is registration acts as constructive notice. *o' if t&e company6s documents are pu+lic' t&en it acts as constructive notice of t&e lac# of aut&ority of t&e agent0 if so' t&en ostensi+le aut&ority can +e relied upon. (ama Corporations Ltd v. 'rudent +in 1nvestment and ,eneral Management + *lade 9& Doctrine of constructive notice is a negative doctrine as it is to destroy ostensi+le aut&ority $&ic& is $ider t&an t&e actual aut&ority. It is not to en&ance aut&ority' and can only +e used +y t&e company' not against t&e company. A&en t&e aut&ority is curtailed' t&e +eneficiary is al$ays t&e co. If t&e documents curtail t&e ostensi+le aut&ority' t&en #no$ledge is imputed. Houg ton and Co v. *ot ard Lo#e -ills D:=27E "ll 8( (ep =7 C $as t&e director of a co $&ic& $as engaged in t&e +usiness of e4porting fruit. " fruit +ro#er' 1a factor0 " factor &as possession of t&e goods and can enter into transactions in &is o$n name even t&oug& &e is only a mercantile agent2 entered into a contract $it& C' purportedly on +e&alf of t&e company' to advance money to t&e t&ird party' / in return for all t&e transactions of t&e company to +e done +y t&e +ro#er $&o could retain sale proceeds till / cleared &is de+t. C &ad no aut&ority at all. /&e co t&erefore claimed t&at it $as not lia+le. /&e "o" of t&e Company stated t&at any of t&e po$ers of t&e >oard could +e delegated to an ordinary director. /&is $as relied on +y t&e +ro#er' $&o claimed t&at t&oug& it $as +eyond t&e actual aut&ority' it $as $it&in t&e po$ers conferred +y t&e "o". /&e Court &eld t&at t&e doctrine of constructive notice could only +e used +y t&e company' and could only +e used to restrict aut&ority' and could not en&ance aut&ority +y relying on t&e provisions of t&e "o"' so cannot act in favour of t&e t&ird party. >ro#er argued t&at &e $as to +e presumed to &ave #no$ledge of t&e "o"0 so &e could rely on it to e4tend aut&ority. "n ordinary director &as no po$er to e4tend aut&ority or to represent t&e company. No individual director &as t&e po$er' only t&e entire +oard or t&e e4ecutive@managing director &as t&e po$er. Brdinary director only &as t&ose po$ers t&at are delegated to &im +y t&e +oard0 .ere t&ere $as no delegation. Purported agent may +e given conditional aut&ority0 su+-ect to some limitations. 5or e4ample' t&e >oard can delegate its po$ers to an ordinary director in respect of negotiation and entering into loan transactions. " prudent +an# manager is to c&ec# t&e "o" to see if t&ere is delegation as $ell as $&et&er actual aut&ority &as +een delegated. /&is may +e impractical to carry out' and so it &as to +e presumed t&at t&e internal proceedings $it& respect to delegation &ave +een complied $it&. "o" mig&t &ave a provision giving t&e aut&ority to t&e director provided aut&ority is given +y t&e general meeting. " prudent person $ould c&ec# t&e "o" +efore granting loans etc. >ut if a ceiling on t&e amount of loans is placed' t&en t&ere is no means of #no$ing $&et&er t&e limit &as already +een reac&ed. No means to #no$ if t&e internal proceedings &ave ta#en place. Courts &ave ta#en a pragmatic approac&. If t&e details cannot +e o+tained +y t&e perusal of pu+lic

<

documents' t&e it is presumed t&at internal proceedings &ave +een complied $it&. /&is is t&e doctrine of indoor management' $&ic& is a modification of t&e doctrine of constructive notice. It is an e4ception to t&e doctrine of constructive notice' and operates in favour of t&e t&ird party. /&e doctrine of indoor management could not +e resorted to in Houg ton as t&e +ro#er &ad no #no$ledge of t&e "o" and an ordinary director can only +e delegated aut&ority under t&e "o"0 &e relied on ostensi+le aut&ority' not t&e pu+lic documents. /&ird party need not &ave #no$ledge of pu+lic documents to rely on t&e doctrine of indoor management0 t&is is if it is $it&in t&e ostensi+le aut&ority of t&e agent. If it is not $it&in t&e ostensi+le aut&ority of t&e agent' t&en #no$ledge of t&e pu+lic documents &as to +e t&ere in order to claim t&at internal regulations &ave +een complied $it&' and so doctrine of indoor management can +e relied on only if #no$ledge of pu+lic documents is proved. E6ceptions to ostensible a#thorit$% a2 /&ird party &as actual #no$ledge of lac# of aut&ority +2 Put on en?uiry0 transactions are suspicious in nature so prudent person s&ould &ave made an en?uiry into t&e matter. 8g' $&en director' acting on +e&alf of t&e co.' as#s for t&e amount to +e deposited into &is personal account and not t&e co. account. *ince t&is is an unusual transaction' &ence actual #no$ledge s&ould +e o+tained. c2 5orgery0 does not convey anyt&ing0 t&en t&e transaction is null and void. If t&e transaction is not $it&in t&e o+-ect clause of t&e co.' t&en it is a nullity0 doctrine of ultra vires applies. >ut t&e doctrine of constructive notice and indoor management applies $&en t&e transaction is $it&in t&e capacity of t&e co.' +ut +eyond t&e aut&ority of t&e agent $&o purported to represent t&e co. /&e doctrine of constructive notice limits t&e ostensi+le aut&ority of t&e agent0 so is in favour of t&e co. >ut t&e doctrine of indoor management is in favour of t&e t&ird party0 allo$s &im to assume t&at some internal regulations &ave +een complied $it&. >ot& doctrines cover cases $&ere t&e agent e4ceeds &is aut&ority or acts $it&out aut&ority. /&e person representing t&e co. may +e eit&er a de -ure agent or a de facto agent. (oyal .ritis .an) v. +ar6uand0 doctrine of indoor management operated. Freeman%s case0 2 indians settled do$n in 8ngland0 " P >0 t&ey formed a pvt. Co. for doing real estate +usiness. /&ey purc&ased property. /&ey $ere t&e only s&are&olders in t&e co.' &eld t&e s&ares e?ually. "B" provided0 co. to &ave ! directors. "part from " and >' 2 ot&ers $ere appointed0 one eac& +y " and >. "B" also provided t&at t&e >oard may appoint at a >oard meeting an MD and delegate to &im all or any of t&e po$ers of t&e >oard. " left 8ngland soon after t&e formation of t&e co.0 so no ?uestion of >oard meeting. > assumed t&e functioning of t&e MD0 $it& t&e #no$ledge of t&e ot&er directors. .e appointed an arc&itect firm to develop some property. /&e arc&itects claimed t&eir remuneration. /&e co. claimed t&at > &as no aut&ority to enter into t&e transaction0 &e &ad not +een appointed0 only assumed t&e post $it& t&e #no$ledge of t&e ot&ers0 so $as a de facto MD. " usurper' one t&e ot&er &and' is one $&o &as $rongly assumed t&e post of t&e MD. " de facto MD is one $&o is not legally appointed +ut is acting as t&e MD $it& t&e consent@concurrence of t&e ot&ers. .eld0 position of de facto agent is same as t&e position of t&e de -ure agent. .o$ever a usurper cannot +e covered +y t&e doctrines0 Morris D:=!0E : "ll 8( 2

Correlation between the doctrines of constr#cti0e notice and indoor %anage%ent 0 constructive notice operates in favour of t&e co. to curtail t&e pro-ected aut&ority $&ic& is $ider t&an t&e actual aut&ority. /&is is $&en lac# of aut&ority is revealed in a pu+ilic document. *ince t&e function of t&e doctrine is to curtail t&e pro-ected aut&ority' $&ic& is $ider t&an t&e actual aut&ority' it operates in favour of t&e co.0 &ence is a negative doctrine. Bstensi+le aut&ority depends on t&e conduct of t&e prinicipal0 $&ic& creates an impression in t&e mind of t&e t&ird party. Indoor management operates in favour of t&e t&ird party. It usually limits t&e scope of or serves as an e4ception to t&e constructive notice doctrine. " reasona+le t&ird party acting +ona fide can assume t&at internal regulations for conferring aut&ority &ave +een complied $it&. a2 A&en a transaction is $it&in t&e ostensi+le. 3sual aut&ority of t&e agent0 t&en t&ird party need not +e a$are of t&e provision $&ic& may deal $it& aut&ority of t&e agent0 as pu+lic document is not relied on for t&e aut&ority. /&e co. can claim t&at t&e pu+lic document limits t&e aut&ority0 +ut t&en t&ird party can assume t&at internal regulations &ave +een complied $it&0 plead indoor management. +2 A&en transaction is +eyond t&e usual aut&ority of t&e agent +ut could +e $it&in &is usual aut&ority as per t&e pu+lic documents if certain internal proceedings are complied $it&0 eg. .oug&ton6s case In situation 1a2 t&e t&ird party need not +e a$are of t&e contents of t&e pu+lic documents0 as &e is initially relying on ostensi+le aut&ority and not t&e aut&ority granted +y t&e pu+lic documents. >ut in situation 1+2' t&e t&ird party &as to &ave actual #no$ledge of t&e provisions of t&e pu+lic documents as it is +eyond t&e ostensi+le aut&ority0 and pu+lic documents are relied upon to #no$ t&e aut&ority granted. >ut in +ot& situations' t&e doctrine of indoor management is relied upon. /&ere are t$o companies0 " and >. C is a director of +ot& cos. " contract is entered +et$een " and >. it is an irregular transaction as "6s purported agent &ad no aut&ority. >ut t&is could +e cured of > invo#ed t&e doctrine of indoor management. >ut can C6s #no$ledge of t&e irregularity +e imputed to >G If so' t&en > &ad actual #no$ledge of lac# of aut&ority. 1:= 72 2 "ll8( :!0 Haley Hutc inson v. .ray ead< co.0 C and Co. J $ere in t&e same +usiness. /&ere $as a deal to purc&ase t&e s&ared of C +y J. arrangement $as to induct L into t&e >oard of J and also t&at L advance some money to J. MD negotiated it. "ccording to J6s constitution' t&e transaction $as +eyond t&e aut&ority of t&e MD0 no >oard resolution aut&ori7ation. L acted on +e&alf of C0 normally can rely on indoor management0 +ut &e $as also a director of C0 so can &is #no$ledge of t&e irregularity of t&e transaction in &is capacity as a director of J +e attri+uted to C Co. as &e $as also a director of C Co.G Normally' information of t&e agent is t&e information of t&e principal. >ut t&e mere fact t&at a person is a common director to 2 cos.' t&en &is #no$ledge as a director of C Co. is &is #no$ledge as a director of J Co. * 2=0. Companies "ct0 validity of t&e acts of a director0 t&e saving of transactions overlaps $it& t&e doctrine of indoor management. /ransaction can +e saved if t&e appointment of t&e director $as irregular. *. 2=0 applies only $it& respect to t&e irregularity of t&e office of a director0 does not cover any ot&er agent6s irregular transaction. * 2=0 covers t&e situation $&en a person purports to act as t&e director of t&e co.' +ut t&ere is an irregularity $it& respect to t&e office of t&e director0 in

appointment' or in continuance in office. *o' &ere t&e section is narro$er t&an indoor management' $&ic& covers all agents. * 2=0 can +e invo#ed +ot& +y t&e co. and t&e t&ird party. Indoor management $or#s in favor of t&e t&ird party. >ut t&e co. can ratify t&e irregular act in most cases0 e4cept $&en it pre-udices t&e rig&ts of a t&ird party. * 2=0 does not apply if t&e co. is served a notice as to t&e invalidity of appointment of t&e director. Effect of an #ltra 0ires transaction0 "n ultra vires trasaction is a nullity. *ome academicians feel t&at t&e doctrine can only +e relied upon +y t&e co.0 as it is for its +enefit0 so it is voida+le at t&e option of t&e co.' not t&e t&ird party0 ie. It can +e avoided only at t&e option of t&e co.' not t&e t&ird party. If t&e option is e4ercised' t&en t&e transaction is void and related +ac# to t&e date of t&e transaction0 ie. Loid a+ initio. /&is contract is valid till option is e4ercised. /&e term Fvoida+le6 can also +e used to signify somet&ing t&at is invalid until ratified. >ut t&e argument t&at it is voida+le only at t&e option of t&e co. &as not +een accepted. Contracts can +e e4ecutory or e4ecuted. 84ecuted0 if one of t&e partied &as disc&arged &is contractual o+ligations. 84ecutory0 $&en +ot& parties &ave to perform t&eir contractual o+ligations in t&e future. /&e relevant time is t&e time t&e contract $as concluded. " mem+er can prevent t&e co. from carrying on $it& an ultra vires contract H&e &as locus standi. >ut a creditor does not &ave t&e locus standi. e%edies a0ailable in case of #ltra 0ires contract0 8?uita+le remedies are availa+le. If money is tracea+le' t&en to +e recovered. "lso can +ase remedy on title. *u+rogation is also availa+le. C&arita+le contri+utions and t&e ultra vires doctrine0 * 2=:' 2=2' 2=3' 2=3 "' 2=3 >. TO T/O/S L!A.!L!TY OF T8E CO PO AT!ONS 2 capacities in $&ic& lia+ility can +e attac&ed0 vicarious lia+ility 1 of its agents and employees2 and co. as t&e actual tort feasor. Licarious lia+ility0 imposed +ecause of closeness o f t&e connection +et$een nature of employments and t&e tort. /&ere is no difference +et$een an ordinary person and a company $it& regard to imposing vicarious lia+ility. Initially' t&ere $as difficulty in imposing t&e lia+ility0 +ut no$ treated t&e same as a person. Citi0ens Li!e Assurance Co. v. .ro#n D:=0=E H insurance co. &eld to +e vicariously lia+le for a li+el $&ic& an employee pu+lis&ed in t&e course of employment. Company argued t&at it $as not lia+le' as it could not commit t&e malice. >ut Lindley L90 t&e employee pu+lis&ed t&e li+el in t&e course of &is employment and so t&e co. lia+le for it in t&e ordinary principles of t&e la$ of agency. Lister v. Lesly Hall Ltd. D200:E0 FIn t&e course of employment6 means t&at t&e act s&ould +e e4pressly or impliedly aut&ori7ed or sufficiently connected $it& t&e employment t&at it can +e regarded as an unaut&ori7ed manner of doing an aut&ori7ed act. In t&is case t&e $arden of t&e

+oarding &ouse $&ic& $as o$ned and managed +y t&e co. systematically se4ually a+used t&e pupils. /&e co. $as &eld lia+le for t&e acts of t&e $arden' as t&ere $as a sufficient connection +et$een t&e nature of t&e $or# and acts of a+use. "tiya&0 t&e -ustification of vicarious lia+ility is social -ustice. Is t&ere any connection +et$een vicarious lia+ility and ultra viresG *ome feel t&ere isn6t as t&e former deals $it& lia+ility0 one person is an innocent victim0 $&ile t&e latter deals $it& capacity0 +ot& parties voluntarily enter into t&e transaction. /&e co. cannot plead t&at t&e transaction is ultra vires in order to escape tortuous or criminal lia+ility. >ut some feel t&at tortuous lia+ility cannot +e attac&ed to a corporation due to t&e doctrine of ultra vires0 +ut t&is vie$ &as +een re-ected. /&e company is treated at par $it& an ordinary employer for t&e purposes of attac&ing tortuous lia+ility. Lloyd v. ,race Smit Co. D:=:2E0 company &eld lia+le for acts of a cler# $&o signed documents and induced a $ido$ to sell &er property0 $as $it&out #no$ledge of co.0 +ut co. &eld lia+le as &eld t&at cler# $as acting $it&in t&e scope of &is employment. " co. $ill +e vicariously lia+le if0 1a2 t&e agent must at t&e time of t&e tort' &ave +een acting $it&in t&e scope of &is employment and aut&ority. 1+2 t&e corporation must itself &ave &ad t&e po$er to do t&e act. M.C. Me ta v. U51 "I( :=;7 *C :0; (.*. *it yanand v. State Agro 1ndustries "I( :=73 Mysore 3:! 0 co. &eld lia+le for negligent act of driver. Madras 'ort +rust v. Sa!ujulla "I( := 2 Mad. 7;:0 co. &eld lia+le for loss of goods due to negligent &andling +y employee0 as it $as during t&e course of employment. Theories on 0icario#s liabilit$% a2 /ortious Lia+ilty cannot +e attac&ed due to doctrine of ultra vires. /&e po$ers of t&e co. are limited +y t&e o+-ects in its MB" H " tortuous act is outside t&e po$ers of t&e co. and it cannot +e fastened lia+ility. +2 " corporation is li#e any ot&er person and s&all +e vicariously lia+le for tort. c2 " corporation may incur tortuous lia+ility provided t&e act committed $as during an intra vires act. Capacity to sue0 co. &as to s&o$ t&at acts committed against it. Ultra vires tort0 tort carried out in t&e course of an ultra vires transaction. 3ower0 co. cannot escape lia+ility even if agent &as no aut&ority to do act or if &e did act for &is personal +enefit. 8.g. Lloyd v. ,race Smit . Campbell v. 'addington Corporation 1:=::2 : )> ; =0 plaintiff let &is +alcony to vie$ a procession. Defendant co. erected a stand in t&e street $&ic& +loc#ed t&e vie$. *o' plaintiff claimed damages. Co. argued t&at it &as t&e po$er to erect a stand +ut could not do so in order t&at it causes pu+lic nuisance0 so t&e co. not aut&ori7ed to do so and &ence' cannot +e lia+le. .eld0 co. lia+le0 every act is an act of t&e co. $&et&er ultra vires or intra vires. 'oulton v. L$S - (ail#ay Co. 1:; 72 L( 2B> <3!0 agreement +et$een P and rail$ay co.0 entitled to free carriage of &orse. *tationmaster demanded payment. .e refused and so $as detained. P sued t&e co. for t&e act of t&e stationmaster.

Court of "ppeal0 station master could not detain P0 could detain &is &orse0 so not allo$ed to do so0 &e did not &ave t&e po$er to do so0 so co. not lia+le. In t&e first case t&e co. did an aut&ori7ed act in an unaut&ori7ed $ay0 so lia+le. >ut in t&e second case' t&e act committed $as not aut&ori7ed at all0 &ence' co. could not +e &eld lia+le. Co%pan$ as a tortfeasor0 t&e company is directly lia+le0 no vicarious lia+ility. )no$ledge of an individual $&o is t&e directing mind and $ill of a co. may +e attri+uted to t&e co. Mayson0 "ttri+ution t&eory@ Identification t&eory @alter ego of t&e corporation Lennards% Carrying Co. Ltd. v. Asiatic 'etroleum D:=:<E "C 70<0 Lennards6 attempted to claim protection of Merc&ant *&ipping "ct0 * <02 $&ic& provided t&at it $as e4empt from lia+ility for damage due to fire on +oard t&e s&ip if it $as not due to actual fault@ privity. /&e fire $as due to defective +oilers $&ic& made t&e s&ip run aground0 s&ip $as not sea $ort&y. /&e s&ip $as grounded0 so cargo &olds destroyed0 so +en7ene cargo e4ploded and fire caused. Mr. Lennard' t&e MD #ne$ &at t&e s&ip $as not sea $ort&y0 &is #no$ledge attri+uted to t&e co.0 t&e co. &eld lia+le 1:=<72 : N> :<= HL .olton 3Engineering4 Co. Ltd. v. ". ,ra am and Sons 0 co. applied for rene$al of lease0 "ct said t&at rene$al could +e opposed on t&e ground t&at it intended to use t&e premises@ tenant contended t&at co. did not intend to use t&e premises. /enant contended t&at co. did not intend to use t&e premises for +usiness purposes. >ut t&is $as decided +y t&e directors as t&eir >oard meetings Hso t&eir #no$ledge attri+uted to t&e co.0 so t&is #no$ledge attri+uted to t&e co.0 so tenant could not succeed in &is claim. /&ose $&o represent t&e mind and $ill of t&e co.0 t&eir #no$ledge is attri+uted to t&e co.0 not t&e #no$ledge of all employees or agents of t&e co. Organic theor$0 for certain purposes' some persons &ave to +e treated as organs of t&e co.0 t&eir #no$ledge is t&e #no$ledge of t&e co.0 propounded +y Liscound .aldene in Asiatic 'etroleum& /&is +ecomes imp. In case of attri+uting mens rea for t&e purposes of fastening criminal lia+ility. +esco Supermar)ets v. *altras D:=72E "C :<30 co. c&arged $it& offence of advertising goods for sale at a price less t&an t&at at $&ic& it $as actually offered for sale0 too# place in one +ranc&. >ranc& manager not identified $it& t&e co. +ut anot&er person. /&e person $&o $as identified &ad ta#en all reasona+le care0 so co. not lia+le. /&e co. could not &ave +een a$are of t&e acts of t&e sales manager0 so &is #no$ledge could not +e attri+uted to t&e co.0 so co. not &eld lia+le. Liabilit$ of directors0 Director cannot +e lia+le for tort of co. merely co7 &e is a director. >ut $ill +e lia+le if &e is a -oint tort feasor. -illiams case0 director made negligent misstatements to t&e 3 rd party in t&e course of &is directors&ip. Director did not assume personal lia+ility &as to +e assumed in case of negligent misstatements0 .edley >yrne principle H since t&e tort in t&is case $as special and personal lia+ility $as not assumed0 so co. $as &eld lia+le &ere. C !M!NAL L!A.!L!TY OF CO PO AT!ONS .istorically t&ere $as difficulty in convicting a corporation for a crime. 1a2 personal appearance $as necessary0 t&is $as done a$ay $it& +y appearance +y attorney. 1+2 Crimes punis&a+le +y deat&0 so corporations could not +e convicted as could not suffer punis&ment. 1c2 corporation is a

70

creature of la$0 can do only $&at it is legally empo$ered to do so0 so any crime is necessarily ultra vires. "lso felt t&at mens rea could not +e proved. 5urt&er' attac&ing lia+ility to corporations $as simply attac&ing lia+ility to persons $&o may or may not &ave +een involved in t&e crime. I.e. s&are&olders0 $&ic& is patently unfair. /&ese o+-ections $ere overcome +y t$o e4ceptions0 1a2 &olding a corporation lia+le for neglect of statutory duties0 eg. 8nvironmental duties etc. 1+2 statutory offences0 $&en t&e re?uirement od mens rea is done a$ay $it&. La$ attac&es criminal lia+ility to corporations +y imposition of strict lia+ility eliminating t&e re?uirement of mens rea ie. *tatutory offences or imposition of vicarious lia+ility' $&en t&e mens rea re?uirement is not done a$ay $it&. /&e difficulty lies $it& imposition of vicarious lia+ility0 as in criminal la$' a principal is not lia+le for t&e acts of &is agent. >irming&am and ,loucester (ail$ay Co. 1:;!22 3 B> 2230 corporation $as convicted for failing to fulfil statutory duty0 case of non0feasance. De0elop%ent of attrib#tion doctrine0 A&ere t&e intent of managers and agent is attri+uted to t&e corporation0 t&e alter ego doctrine0 guilty mind of agent is mind of co. 1:2 &'' v. /ent and Susse: Contractors Ltd D:=!!E : "ll 8 ( ::= 122 ( v. 1C( Haulage D:=!!E : "ll 8 ( =: 132 Moore v. .resler Ltd D:=!!E 2 "ll 8 ( <:< /&ere $as no +reac& of statutory duty in any of t&e a+ove cases +ut lia+ility attac&ed to corporation. 1:2 co. and transport manager c&arged $it& filing false returns for t&e purc&ase of fuel. Manager #ne$ t&at returns $ere false. Co. &eld lia+le as t&e Court &eld t&at act of t&e manager $as in t&e course of &is duty0 so #no$ledge of manager attri+uted to t&e co. 122 co. contracted to supply goods0 MD and ! ot&ers c&arged in e4cess of $&at $as actually supplied0 t&is $as s&o$n in t&e returns. /&e act of t&e MD treated as t&at of t&e co. itself. 132 5acts similar to t&e case a+ove. In t&ese cases' t&e co. &eld lia+le for act of agent0 so deviation from genral principles of criminal la$0 so decisions $ere revolutionary. +esco Supermar)ets+ only t&ose aut&ori7ed +y "B" can +e considered to +e t&e directing mind and $ill of t&e co. Pu+lic nuisance' criminal li+el' statutory offences0 principal can +e &eld lia+le for t&e acts of t&e agent. If crime is of suc& a nature t&at it is not punis&a+le +y fine or corporation cannot commit' t&e co. cannot +e &eld lia+le0 eg0 +igamy' rape etc. Doctrine of identification0 +esco supermar)ets+ $&ose mind and $ill constituted t&e alter ego of t&e co. .ere +ranc& sales manager $as not identified $it& t&e co. t&ose $&o could +e identified $it& t&e co. &ad ta#en reasona+le care0 so co. not &eld lia+le. Persons $&o e4ercised plenary po$ers or t&ose aut&ori7ed +y t&e "B" or general meeting can +e t&e directing mind and $ill of t&e co.0 not even agent of t&e co. Meridian ,lobal Funs Mgt. Asia Ltd. v. Securities Commission + in Ne$ Oealand' person $&o ac?uired a su+stantial sta#e in a co. &ad to inform t&e *ecurities Commission of t&e same. "' >' investment managers in Meridian0 for t&eir B$n purposes' +ut in t&e name of t&e co ac?uired

7:

s&ares in C0 so Meridian +ecame a su+stantial s&are&older0 not informed to t&e aut&orities. Court0 not only t&ose $&o $ere in ape4 aut&ority0 doctrine of attri+ution can +e e4tended to t&ose $&o &ad $or#ed on +e&alf of t&e co. in t&e course of t&eir employment0 so co. lia+le. &irector ,eneral o! Fair +rading v. 'ioneer Concrete 3) 1Ltd.2 D:==<E : "C <! 0 Pioneer restrained from entering into contracts t&at restricted free trade0 &o$ever suc& a contract $as entered into. Pioneer claimed t&at t&is act $as one of its agents despite a specific pro&i+ition on t&e same +y t&e co. &o$ever co. &eld lia+le' even t&oug& act not carried on +y it as agent &eld to +e acting on its +e&alf. !ND!A *ection :: IPC0 Person includes co.0 so corporate criminal lia+ility recogni7ed Companies act0 co. and officers lia+le0 * 3=122' <!' 77"' ;!132' ;=132' :071<2' : . Bnly defaulting officers lia+le0 * 3' : <. Standard c artered .an) v. &irectorate o! En!orcement "I( :00< "C 2 220 can a co. +e &eld lia+le for a crime $&ere a sentence of imprisonment is t&e mandatory sentenceG Velliappa +e:tiles case 1200320 co cannot +e prosecuted for offences $&ic& re?uire imposition of mandatory term of imprisonment. "lso' if punis&ment $as imprisonment and fine' t&en court could not prescri+e only fine as t&e punis&ment. In case of a criminal statute' court $as to lean to$ards interpretation $&ic& e4empted a citi7en rat&er t&an convicted &im. /&ere are 2<0 sections in t&e companies act $&ic& are penal in nature. *ection :0 Bfficer $&o is in default0 section amended in :=;;. It dispenses $it& t&e re?uirement of mens rea $it& respect to certain offences' t&e persons mentioned in t&e section are prima facie lia+le ' $it&out loo#ing into $&et&er mens rea is t&ere or not. /&e actual lia+ility depends on $&et&er t&e specific section &as t&e re?uirement of mens rea or not0 if t&at section does not &ave suc& re?uirement t&en t&e officers are lia+le. /&ere is a presumption of guilt0 it is upto t&e officer to s&o$ t&at t&e re?uired mens rea $as not t&ere. * 30 Criminal lia+ility for misstatement in prospectus0 t&e +urden is on t&e accused to s&o$ t&at &e +elieved t&at t&e statement $as true. * 2:0 a court can ta#e cogni7ance of an offence under t&e "ct only if t&ere is a $ritten complaint +y t&e registrar' s&are&older or person aut&ori7ed +y t&e Central ,overnment. Bnly t&ese people &ave locus standi to file complaints. /&is section does not apply $&en a company is persecuting its officer. * 2:"0 composition of offences. * 2="0 some sections mention offences +ut do not provide penalties for t&e same0 t&en * 2= applies0 co. as $ell as t&e defaulting officer are punis&ed $it& fine of (s. <000. /&is is a general penal provision in t&e "ct. * <<"0 added +y t&e 2000 amendment0 po$er of t&e Central ,overnment $it& respect to certain matters is no$ transferred to *8>I $it& respect to listed pu+lic companies. CO PO ATE F!NANCE 8ow the financial re:#ire%ents of the co& are %et 0 modes of raising finance can +e 1a2 t&roug& t&e issue of securities 1not defined in t&e companies act 0* 21!<""20 +ut is defined in t&e securities contract 1regulation2 act0 * 21&2 H inclusive definition is given2. 1+2 invoice finance. 1c2 &ire purc&ase

72

1d2 loans 1e2 deposits0 a pvt co. is pro&i+ited from accepting deposits0 t&e regulation of deposits +egan in :=7!0 * <;" and companies 1acceptance of deposit2 (ules' :=7<' for non +an#ing non financial cos. 5or +an#ing cos.0 >an#ing (egulation "ct. 5or Non >an#ing 5inancial Cos.0 (>I "ct0 c&apter 3>. 1f2 commercial paper0 a refined form of a deposit0 issued +y &ig& flying cos. 5inance can +e t&roug& issue of s&ares. *ection :!= provides for pu+lic issue0 a return &as to +e filed $it& t&e registrar in order for t&e trading certificate to +e issued. "mount re?uired for minimum su+scription &as to +e o+tained in order for a trading certificate to +e o+tained. *&ares can +e issued for cas&0 $&ic& * :!=1:2 provides for. >ut can also +e issued for ot&er forms of consideration. Prior to :==:' *c&edule II mentioned $&at $as covered in minimum su+scription $as. /&is $as c&anged in :==: +y t&e Central ,overnment using its po$ers under * !:. It used to include t&ings li#e preliminary e4penses etc. No$ $&at is included in minimum su+scription is not specified0 t&oug& it still &as to +e collected0 unless it is collected' t&e return to t&e (egistrar cannot +e filed and t&e co. $ill not +e entitled to commence +usiness. D>oo# valueW1Paid up capitalK5ree reserves2 @ 1no. of s&ares2 A&en free reserves are converted to e?uity it is issue of +onus s&ares0 * 3; applies0 so t&ey are fully paid up as a mem+er cannot +e forced to incur more lia+ility.E Modes of finance0 eit&er at t&e start of t&e co. or later on after t&e co. &as +een started. 1a2 Issue of securities0 t&is is mandatory as * :!= states t&at a co. &as to issue s&ares. /&e 2 main types of securities are s&ares and de+entures. 1+2 loans and ot&er modes of credit finance0 eg overdrafts' +ridge finance 1s&ort term loans2 etc 1c2 company deposits0 medium term loans 1d2 internal accrual@reserves0 $&en t&e co. retains part of its profits for future contingencies 1e2 leasing' factoring and &ire0purc&ase. !ss#e of sec#rities /&e 2000 amendment purported to define t&e term QsecuritiesS in t&e Cos. "ct0 * 21!<""20 +ut t&at -ust as#s for a referral to t&e *ecurities Contract 1(egistration2 "ct0 t&ere * 21&2 &as an e4pansive definition0 many t&ings &ave +een included in it0 t&e 2 traditional forms of securities are s&ares and de+entures. >ut ot&er forms of securities are increasingly +ecoming important0 eg derivatives. * 21&2 deals $it& securities t&at are traded in t&e stoc# mar#et0ie0 of listed pu+lic cos. H so Qmar#eta+leS securities referred to. >ut t&e Cos "ct deals $it& securities of pvt. cos. as $ell0 so anomaly due to adoptions of definition of *C1(2". Scrip0 a provisional letter of allotment issued +y t&e co.0 t&is is +efore s&are certificates are issued0 it contains t&e no. of s&ares allotted and t&e serial no. of t&ose s&ares. /&is is as valid as a s&are certificate for t&e purposes of trade0 can trade in t&e stoc# mar#et on t&e +asis of a scrip. Stoc-0 * =! of t&e Cos "ct deals $it& alteration of capital $&ic& does not amount to reduction 0 approval of t&e court is not necessary0 it includes conversion of s&ares into stoc#. " s&are s&ould &ave a nominal value0 at least in common la$ -urisdictions0 may &ave accounting advantages.

73

>ut' many feel t&at t&e nominal value is useless0 as it does not reflect t&e real value of t&e s&ares. *toc# is consolidated0 $&en stoc# is split into smaller denominations' t&en +ecomes s&ares. * =! allo$s for t&e consolidation of fully paid s&ares into stoc# if t&e "o" allo$s for it0 also allo$s for reconversion. *toc# does not &ave a serial no. H eac& s&are &as a serial no.' unless it is in t&e demateriali7ed form0 "lso' s&ares can +e transferred as units0 cannot &old or transfer &alf a s&are. >ut t&ere can +e fractional transfer of stoc#. .ond0 an underta#ing to pay a certain sum of money0 traditionally a $ritten promise under a seal0 it is +inding' o+ligatory0 so term Q+ondS derived. Normally issued +y ,overnment. /&e person giving t&e +ond is t&e o+liger0 it is given to t&e o+ligee. Deri0ati0e0 financial arrangement0 t&e instruments6 value is derived from somet&ing else0 it &as no intrinsic value. .enderson0 it is not a product' +ut a tec&nology derived from intl finance. " derivative is a transaction $&ic& lin#s a future transaction to an asset or an inde4. Capital0means s&are capital0 not e?uity and loan capital $&ic& is incorrectly used +y some. /&e capital can +e aut&orised' su+scri+ed' paid up' uncalled. "ut&orised0 does not represent t&e assets or $&at t&e company &as collected as funds from its mem+ers. It is also called nominal capital. It is t&e nominal value of t&e s&ares $&ic& t&e co. is aut&orised to issue. /&e Mo" of a co. &as to state t&e aut&orised capital. /&is &as to +e divided into s&ares of fi4ed value. It is only in case of an unlimited co. $it& a s&are capital t&at t&e capital clause is in t&e "o" and not t&e Mo"0 * 271:2. In all ot&er #inds of cos.' t&e capital clause is in t&e Mo"0 * :31!2. The significance of a#thorised capital0 1a2 places a limitation on t&e po$er of a co. sa co. cannot issue s&ares more t&an t&e value of t&e aut&orised capital' 1+2 registration fee to +e paid to t&e Central ,overnment is determined $it& reference to t&e aut&orised capital0 *c&edule C0 so capital clause $ill not +e unnecessarily inflated. S#bscribed"!ss#ed capital0 t&e nominal value of t&e s&ares t&at are actually issued. It6s t&e amount actually collected or $&at t&e co. $ill collect. Paid #p capital0 amount already paid on t&e s&ares. /ncalled capital0 difference +@$ issued P paid up capital0 t&e amount t&at &as not +een paid on t&e s&ares. /&e co. can resolve' in a general mtg' not to call up t&e remaining amount or part of t&e uncalled capital0 e4cept in t&e case of $inding up of t&e co.0 t&is is reserve lia+ility@capital0 * ==. /&is gives an assurance to t&e creditors as funds t&at are availa+le. 3ncalled capital can +e t&e su+-ect of a floating c&arge0 +ut reserve capital cannot +e0 as it is to remain unencum+ered in order to give an assurance to unsecured creditors. aising and %aintenance of capital0 some fundamental rules relating to raising of capital are0 1a2 t&e co. cannot issue s&ares at a discount0 a mem+er &as t&e o+ligation to pay t&e nominal@ face value of t&e s&ares. /&e co. can issue s&ares a+ove t&e face value' ie at a premium. /&e rule against issuing s&ares at a discount can +e defeated. /&is can +e t&roug& t&e issue of s&ares for consideration not in cas&' +ut in #ind eg0property' services etc. since t&ere is no independent valuation of t&e consideration 1t&is is not provided for in t&e Indian system0 is t&ere in t&e 8C2' &ence' it is possi+le to a+use t&e process for t&e advantage of some persons0 esp. promoters. "lso' * 7= empo$ers t&e co. to issue s&ares at a discount $&en some conditions are met. /&e ma4imum rate of discount aut&orised +uy la$ is :0M. /&e issue of s&ares at a discount can only

7!

+e if aut&orised +y t&e gen mtg and t&e central ,overnment and only one year after t&e co. $as entitled to commence +usiness. 1+2 s&ares can +e issued at a premium. /&e amount of t&e premium is not capital +ut treated as ?uasi0capital0 it is t&e securities premium account0 t&is amount can only +e utilised for certain purposes0 * 7;. /&e rules applying to paid up capital also apply to securities premium0 e4cept to t&e e4tent of t&e e4ceptions provided in * 7;122. >arring t&ese e4ceptions' securities premium is to +e treated as s&are capital. "not&er #ind of ?uasi capital fund is t&e capital redemption reserve. Depositor$ s$ste%0 t&ere is a depository' $&o is t&e legal o$ner of t&e s&ares as regards t&e co. is concerned. /&e depository participant is an agent of t&e depository. /&e s&are&older opens an account $it& t&e depository participant $&o assigns a client ID no to t&e s&are&older. /ransactions are done t&roug& a stoc# +ro#er 1due to * :30:7 of *C1(2"2. $&en sales are made' t&en t&e name of t&e purc&aser is entered into t&e records of t&e depository. /&oug& t&e legal o$ner is t&e depository0 t&e name of t&e depository appears in t&e register of t&e co.0 yet t&e depository maintains a register of t&e +eneficial o$ners0 t&e depository &ad to periodically file a return $it& t&e co.' giving t&e names of t&e +eneficial o$ners $&o en-oy all rig&ts related to t&e s&ares. /&e +eneficial o$ners are t&e ones to $&om t&e notices of meetings are sent' t&ey are t&e ones $&o en-oy +oting rig&ts etc. /&ere are only 2 depositories in India0 as &uge infrastructure is re?uired. /&e co. does not &ave t&e capacity to effect transfers so depository system came into +eing. Pri%ar$ %ar-et0$&en co. allots s&ares@de+entures to t&e pu+lic. If securities are offered to t&e pu+lic' t&en it &as to +e compulsorily listed. * 73' Cos."ct. /&e prospectus &as to mention $&at stoc# e4c&anges t&e co. is listed on. D*. :3 *C1(2" can deal in a stoc# e4c&ange only via a +ro#er0 ie0 only a mem+er of t&e stoc# e4c& can deal in securities. >ut' t&is rule does not apply to spot delivery contracts0 * :;. *.:0; Companies "ct does not apply in a depository system' $&ic& can +e used for securities of listed pu+lic cos.E * ;20s&ares as mova+le property. >ut t&ey &ave no corpus0 no p&ysical form. /&e mar#et for t&e securities is t&e stoc# e4c&ange0 t&eir trade &as to +e organi7ed and regulated due to t&eir peculiar nature. *&ares of listed cos. "re li?uid0can +e easily converted into cas&0 t&is is lac#ing in t&e s&ares of a pvt. Co. $&ic& are not freely transfera+le. No$ 1after :== 2' all s&ares of pu+lic cos. .ave to +e freely transfera+le0 * :::"122. * 73 and * :::"122 ensure t&e free transfera+ility of s&ares of a pu+lic co. .lan- transfer0 $&en name of transferee is not mentioned0a#in to a +earer c&e?ue. Can &ave any no. of +lan# transfers till t&e date of t&e ne4t +oo# closure or $it&in 2 mont&s of t&e first +lan# transfer' $&ic&ever is later. In case of +lan# transfers' t&ere is a de facto o$ner 1t&e transferee2 and t&e de -ure o$ner 1t&e transferor' as &is name is mentioned in t&e register of mem+ers2. *o t&e co. can say t&at it is not +ound to loo# into transfers t&at are not registered0 t&e interest of ot&er persons $ill not +e considered. .o$ever' since t&e transferee is t&e real o$ner'

7<

&e can enforce all &is rig&ts as an o$ner against t&e transferor0 eg &e can as# for a pro4y to +e issued in &is favour in order to attend t&e general mtg or &e can as# for t&e rig&ts issue to +e renounced in &is favour0 * ;: *uc& issues do not arise in transfers in demateriali7ed form $&ere t&e transfer is instantly recorded0 t&ere is no concept of a s&are certificate etc. #les go0erning the raising and %aintenance of capital /&e amount paid on s&ares is paid up capital. A&at is not called is called uncalled capital. /&e uncalled capital is t&e property of t&e co. /&e co. &as a rig&t to call up t&e remaining amount0 &ence can +e called future property of t&e co. 5uture property is transfera+le0 so can create a mortgage on it' can use it as security for a loan etc. *o' secured creditors can claim uncalled capital at t&e time of $inding up. /&is $ill leave not&ing for unsecured@trade creditors. /o protect t&e unsecured creditors' co. can create reserve capital0 co. &as no rig&t to call t&at up. !ss#e of shares at a disco#nt 0 * 7=0 conditions are placed so t&at capital clause is not illusory0 so t&at creditors are not misled as to t&e amount of capital. >ut' sometimes' cos. .ave to +e permitted to issue s&ares at a discount0 ot&er$ise t&ey mig&t not survive' eg0 $&en mar#et price is +elo$ nominal value of t&e s&ares and funds need to +e raised0 t&e only $ay to in-ect funds is +y issue of s&ares0 as +orro$ing is not possi+le due to lac# of credit$ort&iness0 so due to financial compulsions' s&ares mig&t &ave to +e issued at a discount0 &ence * 7= provides an e4ception to t&e general rule t&at s&ares cannot +e issued at a discount if some conditions are met0 one year &as lapsed from commencement of +usiness' s&ares of a class t&at &ave already +een issued' permitted +y resolution of general mtg' discount normally a+ove :0M unless central ,overnment permits. Po$er $it& central ,overnment. "s +etter analysis can +e done +y t&e deptt of co. affairs' $&ic& is t&e e4ecutive' rat&er t&an t&e court' $&ic& is removed from +usiness affairs. Court does &ave t&e po$er of -udicial revie$' $&ic& it e4ercises over e4ecutive discretion. In :=7!' t&e Central ,overnment sanctioned a discount of 2<M0 so more t&an t&e :0M limit set +y t&e "ct. Forfeit#re of shares0 $&en t&e mem+er fails to pay t&e call amount' col. Can forfeit t&e s&ares. /&ere is no in&erent po$er of t&e co. to forfeit t&e s&ares0 t&is is only t&ere if t&e "o" permits forfeiture. /&e "o" deals $it& contractual rig&ts0 so rig&t of forfeiture can +e e4ercised only $&en provided in t&e "o". Palmer0 forfeiture cannot +e done for any reason ot&er t&an non0payment of call amount. >ut in India' t&ere is case0la$ $&ic& says t&at t&is can +e done. Co. cannot retain forfeited s&ares0 as cannot +e a mem+er. *o' can sell t&ese s&ares +y pu+lic issue or pvt negotiation. .ere * 7= does not apply0 sale can +e at any price. >ut' cannot &ave a clause t&at provides t&at t&e mem+er' after purc&ase' $ill not +e lia+le for t&e entire value of t&e s&are. *&ares issued at a discount0 t&e value &ere is t&e face value0 not t&e mar#et value. Sweat e:#it$ shares0 * 7="0 t&ere are also rules $&ic& govern t&e issue of s$eat e?uity s&ares. *&ares can +e issued in recognition of t&e contri+ution of a person to t&e co. *$eat e?uity s&ares are defined in 84planation II. /&ey may not strictly comply $it& t&e re?uirement of * 7=. /&ey are issued at a discount or for consideration ot&er t&an cas&.

!ss#e of shares at a pre%i#%0 issued at an amount more t&an t&e face value. /&e e4cess amount is called premium. It is not s&are capital0 +ut is included in securities premium account 1previously #no$n as s&are premium account2. It is treated at par $it& capital0 ?uasi0capital fund. /&is can +e issued for some limited purposes0 * 7;0 for issue of +onus s&ares 1capital cannot +e used to issue +onus s&ares0 only profits or free reserves can +e used0 as practically' it $ould amount to t&e issue of s&ares at a discount2' $riting off preliminary e4penses $it& respect to formation of co. or issue of s&ares' premium paya+le on redemption of preference s&ares 1cannot &ave irredeema+le preference s&ares after :== 0 ma4imum time period is 20 yrs0 s ;01<a220 usually only free reserves can +e used for redemption0 not capital0 so even t&oug& securities premium is treated at par $it& capital' it can +e used. .o$ever' securities premium cannot +e used to redeem preference s&ares0 only to redeem premium on preference s&ares. 5or redemption' free reserves to +e used0 or can +e done +y fres& issue of e?uity or preference s&ares0 * ;01:21a2. * ;01:21d20 capital redemption reserve account0 ?uasi0capital fund. S AB+ Co%%ission pa$able in connection with iss#e of shares /&ere is a lot of e4penditure involved in a pu+lic issue0 for issue of prospectus' advertisements' professional fees etc. >ro#ers are involved in a pu+lic issue. /&ey canvas for t&e co. and procure su+scriptions. /&ey can +e paid commission0 <M for s&ares' 2.<M for de+entures0 * 7 1:2. >ut * 7 132 provides t&at +ro#erage can also +e paid. /&e ris# involved in de+entures is less t&an t&at involved in s&ares0 so commission paid for de+entures is less. .o$ can * 7 1:2 and * 7 132 +e reconciledG 3nder$riters are involved in a pu+lic issue0 due to t&e ris# involved0 so under$riters t&ere in order to ensure minimum su+scription. * 7 1:2 contemplates under$riting agreements0 effectively insurance0 ie if s&ares not +oug&t +y pu+lic' t&en under$riter $ill purc&ase t&e s&ares. Commission is paid to under$riters0 +ot& $&en t&ey su+scri+e and $&en t&ey do not. Capital rede%ption reser0e0 only a +oo# ad-ustment. *ecurities premium0 e4ists in reality0 money is actually received. Capital redemption reserve can only +e used for t&e issue of +onus s&ares0 *;01:21d20 unli#e securities premium $&ic& can +e used for several purposes. DDeferred s&ares0s&ares &eld +y promoters0rts after e?uity and preference s&ares $it& respect to divedend0 +ut &ave $eig&ted voting rts. /&ese e4ist in 8ngland0 not in India after :== $it& t&e simplification of t&e capital structure for pu+lic cos. *.;<0;! apply only to pu+lic cos H *. =0122 . No$ in India' e?uity s&ares $it& differential voting rts can +e issued0 after 20000 so seem to +e deferred s&ares $it& a diff. name. >us&ell v. 5ait& 1:=702 .L : H differential voting rts up&eld. 2 met&ods of depreciation0 straig&t line and $ritten do$n value0 t&e Cos "ct only permits t&e use of t&e $ritten do$n value met&od.E ede%ption of preference shares and debent#res * ;01:21a20 preference s&ares to +e redeemed +y free reserves 1accumulated profits2 or profits of t&e year distri+uta+le as dividend. 5ree reserves can +e used +y t&e co. freely for its purposes0 it is availa+le for distri+ution.

77

/&ere are ot&er reserves $&ic& t&e co. is not free to use0 t&ese are statutory0 &ave to +e compulsorily made. (edemption can also +e done +y fres& issue of s&ares. Debent#res0only for a specified period0 money &as to +e returned at t&e end of t&e period. Initially' preference s&ares $ere permanent. Later on' redeema+le preference s&ares $ere introduced0 only for a particular period0$ere an e4ception to t&e general principle. No$' only redeema+le preference s&ares are allo$ed0 cannot &ave irredeema+le preference s&ares after :== 0 * ;01<"2. * ;0"0 a transitory provision t&at provides for t&ose preference s&ares t&at &ad +een issued as irredeema+le0 &ave to +e redeemed $it&in a period of time. De+enture &olders are creditors of t&e co. /&e co.' $&ic& is t&e de+tor' &as a rig&t to pay off &is de+t. If no period of time is stipulated' t&en t&e co. can redeem t&e de+enture at any time it $ants. 3sually' t&ere cannot +e a permanent de+tor0creditor relations&ip0 +ut t&is principle is violated +y * :200 perpetual de+entures are valid. Debent#re ede%ption eser0e0 * ::7C0 amount to +e set aside for t&e redemption of de+entures0 t&is is a statutory re?uirement0 t&is fund cannot +e utilised for any ot&er purpose apart from t&e redemption of de+entures. /&ere is no restriction on t&e redemption of de+entures0 can +e paid out of any fund0 not -ust free reserves or fres& issue li#e preference s&ares0 t&is is due to t&e nature of de+entures0 +eing a de+t' t&ey &ave to +e repaid. Maintenance of capital /&e funds of t&e co. can only +e used for carrying on t&e +usiness0 cannot +e used for unaut&ori7ed activities0 doctrine of ultra vires. 8?uity s&ares0 principal rig&ts0 rig&t to dividend' voting rig&ts' * ;7 ' rig&t as a residuary legatee' return of capital' rig&t to participate in t&e furt&er issue of s&ares 1 in a rig&ts issue' s&ares are issued. 5ree reserves can +e used +y t&e company freely for its purposes as it is all availa+le for distri+ution. /&ere are ot&er reserves $&ic& t&e company is not free to use' t&ese are statutory and &ave to +e compulsorily made. (edemption can also +e done +y fres& issue of s&ares Debent#res are only for a specified period and t&e money &as to +e returned at t&e end of t&is period. Initially preference s&ares $ere permanent and at par $it& e?uity s&ares. Later on redeema+le preference s&ares $ere introduced' only for a particular period' &o$ever t&ey $ere an e4ception to t&e general principle. No$ only redeema+le preference s&ares are allo$ed. /&ere cannot +e irredeema+le preference s&ares after t&e :== amendment to t&e *. ;01<"2. *. ;0" is a transitory provision t&at provides for t&ose preference s&ares t&at &ad +een issued as irredeema+le and conse?uently &ave to +e redeemed $it&in a fi4ed period of time. De+enture &olders are creditors of t&e company. /&e company $&ic& is t&e de+tor &as t&e rig&t to pay off its de+t. If no period of time is stipulated t&en t&e company can redeem t&e de+enture at any time it $ants. 3sually t&ere cannot +e a permanent de+tor0creditor relations&ip +ut t&is principle is violated as perpetual de+entures are &eld to +e valid. Debent#re ede%ption eser0e 2 S& ((AC H "n amount is to +e set aside for t&e redemption of de+entures as t&is is a statutory re?uirement. /&is fund cannot +e used for any ot&er purpose apart from t&e redemption of de+entures. /&ere' &o$ever' is no restriction on t&e redemption of

7;

de+entures' t&ey can +e paid out of any fund and not -ust proceeds from a fres& issue or free reserves li#e preference s&ares. /&is is due to t&e nature of de+entures' +eing a de+t t&ey &ave to +e paid. Maintenance of Capital /&e funds of t&e company can only +e used for carrying on t&e +usiness of t&e company and cannot +e used for any unaut&ori7ed activities as is dictated +y t&e doctrine of ultra vires. 8?uity s&ares &ave principal rig&ts suc& as a rig&t to dividend' voting rig&ts 1*. ;72' rig&ts as a residuary legatee' return of capital' rig&t to participate in furt&er issue of s&ares 1in a rig&ts issue' s&ares are issued at a lo$er price and t&is rig&t can +e sold2. 'rima !acie7 s&are&olders of all classes &ave t&e same rig&ts unless t&e terms of issue' /&e Companies "ct or t&e "rticles of "ssociation or Memorandum of "ssociation provide ot&er$ise. 4oting ights+ 8?uity s&are&olders &ave voting rig&ts on all matters $&ile preference s&are&olders only &ave voting rig&ts on matters t&at directly affect t&eir interest 1*. ;72. /&us a notice of general meeting is sent to all mem+ers i.e. e?uity and preference s&are&olders ali#e +ut preference s&are&olders can only vote if t&e resolution directly affects t&eir interest' e.g. rig&t to dividend' $&ic& may +e cumulative@non0cumulative' participating@non0participating. ight to Di0idend0 " preference s&are&older &as a preferential rig&t to t&e dividend as per *.;<1:21a2 and is paid +efore dividend is paid to t&e e?uity s&are&olders. " participating preference s&are &as t&e preferential rig&t as $ell as a s&are in t&e dividend distri+uted among t&e e?uity s&are&olders i.e. it participates in t&e dividend. /&is &as to +e specifically provided for in t&e "rticle of "ssociation or in t&e terms of issue' ot&er$ise t&e presumption is t&at t&e preference s&are is non0participatory. et#rn of Capital0 /&is can only +e at t&e time of $inding up. "t t&at time payment is made in t&e follo$ing manner H e4penses of li?uidation' overall preferential claim 1$or#men6s $ages2' preferential claims' unsecured loans and s&are&olders. (e Holders 1nstrument +rust Ltd.7 D:=::E 2 "ll 8.(. 2;=. and Lalc and Surana v. Hyderabad Vanaspati Ltd.7 1:==02 ; Com. Cas. !:< + >ot& cases &eld t&at a preference s&are&older &as no rig&t to sue for return of capital as &e is a s&are&older and not a creditor. (eturn of capital can also +e t&ere if t&e company is a going concern and t&ere is a reduction of capital. " preference s&are&older &as a preferential rig&t in t&e return of capital' +efore t&e e?uity s&are&olders are paid. If t&ere is money left after payment of all de+ts t&en it goes to e?uity s&are&olders as t&ey are residuary legatees. Preference s&are&olders do not get a s&are of t&is surplus unless specifically provided for in t&e terms of issue. Preference s&are&olders cannot file an application for $inding up of t&e company under *. !331e2 as &e is a s&are&older and not a creditor. It is possi+le &e may file an application under *. !331i2 claiming t&at it is -ust and e?uita+le t&at t&e company +e $ound up. /&e de+enture &older &o$ever can sue for $inding up as &e is a creditor. Preference s&are&olders can only claim dividend $&en t&e company declares dividend' generally t&e >oard recommends dividend and t&e general meting approves it. ,eneral meeting cannot en&ance t&e dividend +ut can only reduce it' if t&e "rticles so provide. /&e general meeting &as no po$er to increase t&e dividend as it is a managerial decision as to &o$ muc& must +e set aside for future use i.e. &o$ muc& is to +e reserved. /&e "rticles can also provide t&at t&e approval of t&e general meeting is not re?uired.

7=

4al#e of a Share0 t&ere is no fi4ed yardstic# to measure t&e value of a s&are. 8.g. $&en /BMCB merged $it& .LL t&ree auditors $ere employed to evaluate t&e s&ares. /&e employees union claimed t&at t&e valuation of /BMCBs s&ares and assets $as incorrect so t&e court loo#ed into it' t&e t&ree auditors claimed to t&ree differing conclusions. *ome guidelines for t&e valuation of s&ares are% 1a2 capital cover H capital employed to generate t&e cover of t&e company 1+2 yield H profit returned to s&are&olders 1c2 8arnings per s&are H Net profits @ No. of s&ares 1d2 Mar#eta+ility H $&at is t&e mar#et for s&ares i.e. &o$ many are availa+le for trading and not t&ose t&at are intended for trading' t&is affects t&e mar#eta+ility. " large floating stoc# increases mar#eta+ility' t&is increases s&are price. 5actors affecting mar#eta+ility are% t&e si7e of t&e pu+lic &olding' nominal value of s&ares' dividend policy' issue of +onus s&ares also increases t&e floating stoc# and so increases mar#eta+ility. Maintenance of Capital 2 5unds of a company can only +e used for permitted purposes' t&e company &as to maintain its capital. +revor v. - it#ort 7 D:;;7E :2 ".C. !0=& &eld t&at t&e company cannot return capital to t&e s&are&older as per t&e principle included in *. 77. /&e funds of t&e company are only categori7ed for accounting purposes +ut are all property of t&e company. /&us t&ere is no difference +et$een t&e capital and t&e ot&er funds' &o$ever all of t&em can only +e used for aut&ori7ed activities. /&ey cannot directly or indirectly +e returned to t&e s&are&olders. *o a company can use t&e s&ares generated +y s&are issues again only for aut&ori7ed purposes suc& as t&e e4penditure concerned $it& t&e +usiness of t&e company. "lso t&ere is a principle t&at capital cannot +e returned e4cept +y aut&ori7ed return suc& as t&e periodic payment of dividend. 5ormerly dividend could +e paid in #ind &o$ever t&at is no$ pro&i+ited and it must only +e paid in cas& as per *. 20<132. "not&er met&od is relieving t&e s&are&olders of t&eir lia+ility in a +uy0+ac# s&ares permissi+le in some circumstances 1* 77"2 It seems t&at t&is is an e4ception to t&e condition t&at capital s&all not +e returned to s&are&olders +ut it is actually not so as +uy0+ac# can only +e done using distri+uta+le profits i.e. purc&ase can only +e effected using distri+uta+le profits. /&is purc&ase is +eneficial for +ot& t&e company and t&e s&are&olders. /&e +uy0+ac# reduces t&e num+er of s&ares and conse?uently increases t&e earnings per s&are. A&en +uy0+ac# is conducted t&e purc&ased s&ares are destroyed or #ept as treasury s&ares $&ic& en-oy t&e rig&t to dividend +ut not to vote. /&ese s&ares are &eld +y a trust in t&e name of t&e company. S& (77 2 (7<@ (eduction of capital% >y invo#ing *. :00 t&e company can e4tinguis& e4isting lia+ility or reduce e4isting lia+ility or return capital to mem+ers. /&is is a genuine e4ception to t&e principle t&at capital s&ould not +e returned. .o$ever a stringent process is to +e follo$ed including scrutiny +y an e4ternal and independent agency. 3nder * !021+2 one relief is t&e tri+unal can as# t&e company to +uy its o$n s&ares from t&e dissenting or aggrieved s&are&older. 8ven as a means for rearrangement and restructuring t&e company return of capital is permissi+le. * 771:2 is applica+le to all companies ot&er t&an unlimited companies. " company cannot +uy +ac# its o$n s&ares unless reduction of capital is aut&ori7ed under *. :00 to :0! or *. !02. In unlimited companies t&ere is no ceiling or lia+ility and t&us t&is provision does not apply. *. 77122 is applica+le only to pu+lic companies and su+sidiary private companies so it &as a narro$er application t&an *. 771:2. " company cannot give any financial assistance for t&e

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purpose of or in connection $it& t&e purc&ase of t&e s&ares of t&at company' +arring certain e4ceptions. .elmont Finance Ltd. v. -ise 1nvestments In t&is case D: and D2 $ere &olding and su+sidiary companies respectively. D3 $as t&e c&airman of +ot& D: and D2. /&e $&olly o$ned su+sidiary o$ned P t&e plaintiff company. D3 $as also a controlling s&are&older in M. D3 made P +uy assets from M for a large consideration' as &e $as in0c&arge of managerial decisions in D: and D2. /&is price $as prima !acie unreasona+le. M used t&is to purc&ase P. /&e trial court &eld t&at t&is $as financial assistance +ut in t&e appeal it $as &eld t&at it $as not. /&e .ouse of Lords stated t&at it $as financial assistance as t&e price $as e4cessive and &elped fund its o$n purc&ase its o$n s&ares +y M. /&e intention +e&ind t&e transaction &as to +e seen in order to see $&et&er it $as financial assistance or not. *ome cases say t&at a transaction &it +y *. 77 is valid t&oug& it entails certain penal conse?uences. Bt&ers say it is null and void. Sellinger United (ubber Estate D:= ;E 2 "ll 8( :073 /&e reason for t&e inclusion of *. 77 is t&at t&e company s&all not directly or indirectly return capital to its s&are&olders e4cept in an aut&ori7ed manner. +revor v. - it#ort 7 D:;;7E :2 ".C. !07. " company purc&ased s&ares from / +ut did not pay full consideration. /&e company t&en $ent into li?uidation. / contended t&at t&e consideration &ad not +een fully paid and conse?uently claimed t&e amount as a creditor during t&e li?uidation proceedings. /&e court &eld t&at t&e company &as no po$er to purc&ase its o$n s&ares and could not use its funds to return capital. /&is $ould lead to a pre-udice to t&ose creditors $&o relied on t&e capital clause. /&e -udgment $as delivered +y Lord Aatson. .e stated t&at t&e restriction on t&e return of capital is to protect t&e ot&er s&are&olders. Paid up capital can +e lost in t&e company6s trading activities and t&at cannot +e prevented. >ut creditors of t&e company are entitled to assume t&at no part of t&e company6s capital 1assets2 $&ic& &ave +een paid into t&e coffers &ave +een su+se?uently paid out e4cept for legitimate +usiness of t&e company. "ll assets of t&e company are su+-ect to t&is rule and t&e lia+ility of t&e s&are&olders is not to +e reduced o e4tinguis&ed. 84ceptions are t&e +uy+ac# of s&ares under *77"' 77"" and 77>. (edemption of preference s&ares cannot +e seen as a true e4ception as it is done +y only employing t&e free reserves or t&e collections from fres& issue of s&ares and t&us cannot +e said to +e a reduction of capital' it is only using t&e profits of t&e company. If t&e s&ares are issued for consideration more t&an cas& t&en t&ere is a possi+ility of a+use. /&is is especially true in t&e case of purc&ase of property and services rendered +y a promoter. /&ere is no independent valuation of t&e services of t&e property. In some -urisdictions suc& an independent valuation is necessary +ut not so in India. Bnly a return &as to +e filed $it& t&e (egistrar of Companies along $it& a copy of t&e contract as per *. 7<1+2' so t&ere is a possi+ility of collusion +et$een t&e allottee and t&e company. (eduction of capital under *. :000:03 &as to +e distinguis&ed from diminis&ing of capital $&ic& is dealt $it& in *. =! on$ards. 5or reduction stringent conditions &ave to +e complied $it& suc& as a special approval of t&e general meeting &as to +e ta#en along $it& approval of t&e National Company La$ /ri+unal. /&e rules are stringent in order to protect t&e creditors of t&e company so t&e consent of all t&e creditors &as to +e t&ere unless t&e tri+unal feels t&at t&e creditors are o+-ecting merely for t&e sa#e of o+-ecting and are not really pre-udiced. If a creditor o+-ects t&e

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company &as to eit&er repay &im or provide sufficient security $it& respect to t&e de+t o$ed to &im. Palmer states t&at t&is may +e done a$ay +y t&e courts. Palmer% Diminution does not affect t&e issued capital of t&e company +ut reduction al$ays affects issued capital. *o in most cases reduction e4tinguis&es or reduces e4isting lia+ility or returns capital. /o reintroduce reality into t&e +alance s&eet t&e capital clause of t&e company may +e re$ritten e.g. if t&e company &as amassed profits and &as large reserves t&en it can convert partially paid up s&ares to fully paid up using t&ose reserves. /&us t&e company is e4tinguis&ing lia+ility' as t&ere remains no uncalled capital. "not&er met&od is t&at t&e company returns some part of t&e paid up capital and retains t&e amount of uncalled capital' t&is is reduction of capital. .o$ever t&ere may +e a case $&ere t&ere is no return of capital or reduction of e4isting lia+ility. 8ven t&en t&e issued capital can decrease. /&is is if availa+le assets are not covered so t&e capital clause is restructured. If t&e assets of a company are destroyed t&en t&e lia+ility $ill e4ceed t&e assets and t&e company $ill not +e a+le to declare a dividend for a long time. If t&e lost assets are $ritten off t&en t&e capital $ill also +e reduced +y reducing t&e nominal value of s&ares' +ut t&is does not reduce t&e e4isting lia+ility of t&e s&are&olders and neit&er is anyt&ing paid to t&e s&are&olders. A&en t&ere is no return of capital t&e creditors &ave no rig&t to o+-ect as it does not affect t&e mem+er6s lia+ility. Bt&er$ise t&e creditor6s consent &as to +e ta#en. /&e capital is restructured $&en t&e assets are destroyed or t&e assets do not correctly give t&e picture of t&e companies assets. " stringent procedure is follo$ed for reduction of capital. 8ac& creditor is served a notice and an application is made to t&e court. Bn any day of t&e &earing t&e creditors can come and raise o+-ections. /&e decision is not +y ma-ority' if any creditor o+-ects t&en &e must +e given a security or t&e de+t &as to +e paid off. /&is can +e e4cepted +y t&e court $&en it feels t&at t&e creditor $ould not +e pre-udiced. In addition to t&e notice to mem+ers a pu+lic notice &as to +e pu+lis&ed. S& (7(D1E Power of Co#rts@ Creditors can only o+-ect in case of reduction of capital. In case of t&e sale of an underta#ing t&e consent of t&e general meeting is re?uired. *ec. 2=3 /&e +oard &as t&e po$er to do so $it& t&e consent. .ere' t&e consent of t&e creditors is not re?uired. /&e sanction of t&e court is not necessary. *o t&e sale of t&e underta#ing is not a reduction $it&in t&e meaning of section :00. if a Co. &as different clauses of s&ares' e?uity and preference' t&en &o$ can reduction f capital +e effected. Is it to +e proportional i.e. pro rata reductionG "re t&e preference s&are&olders to +e paid first or t&e e?uity s&are&oldersG *ections :00 to :03 do not provide for suc& a situation. *ection ;< H preference s&are&olders &ave a preferential claim in t&e return of capital $&en t&e Co. is a going concern or on $inding up H can t&is +e used to pay t&e preferential s&are&olders first H +efore t&e e?uity s&are&olders are paid H even on reduction of capitalG /&is is time for pu+lic companies and su+sidiary private companies. >ut for private companies' t&ere is a prima facie e?uality among all classes of s&are&olders. *o' in t&e a+sence of t&e contrary provision in t&e "B"' pro0rata rule is applica+le for private companies t&at are not su+sidiaries of pu+lic companies. >ut for pu+lic and su+sidiary private companies' section ;<1:21+2 is applica+le' so preferential s&are&olders &ave a preferential rig&t to +e repaid on repayment of capital. /&is applies $&en t&ere is a return of capital. Diminution of capital H section =! 0 does not affect t&e issued capital of t&e companies H does not affect t&e e4isting lia+ility as it only affects t&e unissued capital $rt. $&ic& t&ere is no e4isting

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lia+ility. *ec. =! covers all #inds of alteration of s&are capital $&ic& does not amt. to reduction of s&are capital. *ec. =!132 H cancellation of unissued s&ares does not amt. to reduction of capital. *ec =<1220 no confirmation of t&e court is re?uired for suc& alteration0 can +e done +y general meeting if aut&ori7ed +y "B". Compulsory alteration of t&e capital clause H t&roug& an order of t&e central government. /&e consent of t&e general meeting is not re?uired. *ec ;:1!2 and =! " H conversion of de+entures@loans into s&ares. Prior to :==:' t&e state too# a proactive role in t&e corporation and running of companies Hesp. t&ru Industries Dept and (egulations "ct $ere issued in t&e favor of t&e state. /&ere $as a compulsory conversion clause H $as given to cos. and t&is $as converted into e?uity at par. /&e central govt. may +y order convert loans into e?uity H consent of t&e co.@general meeting is not necessary. /&is is a discretionary po$er vested in t&e co. /&e only $ay to c&allenge t&e order is +y claiming it is against pu+lic interest or mala fide. *ec. 770 co. cannot purc&ase its o$n s&ares or s&ares of &olding co. " su+sidiary is not permitted to +e mem+er of a &olding co. H +ut it &eld s&ares prior to +ecoming a su+sidiary' t&en sec. !2132 applies H can retain s&ares +ut no voting rig&ts en-oyed. /&e reason of t&e restriction is to prevent interloc#ing of s&ares. 84ceptions to sec. 77 H co. can purc&ase its o$n s&ares in t&e name of a trust created for t&e $elfare of t&e employees including directors $&o are in full time employment of t&e co. proviso 1+2 to section 77. *ec 77122 applica+le only to a pu+lic or a su+sidiary pvt. co. H pro&i+its financial assistance +y t&e co. for t&e purpose of or in connection $it& t&e purc&ase of its s&ares or t&e s&ares of its &olding co. FIn connection $it&6 contemplates a transaction t&at &as ta#en place. F5or t&e purpose of6 contemplates a transaction t&at may ta#e place.5inancial assistance can +e in form of payment of cas& giving guarantee or security etc.0 eac& disguised financial assistance is covered. Effect of Financial Assistance@ *77 does not state $&et&er it is void' voida+le or valid. It only states t&at a person involved in suc& a transaction $ill +e penally lia+le *771!2. /&ere are conflicting decisions on t&e validity of t&e transfers. Bne argument is t&at t&e conse?uence is t&e penalty under *771!2 and t&e validity is not affected. /&is decision $as given +y t&e Calcutta .ig& Court 1"I( :=7: Cal. :;!2. /&e ot&er decision is t&at t&e transaction is mandatorily pro&i+ited and not permitted +y la$' conse?uently +eing void. If transaction is void financial assistance can +e recovered. E6ceptions S& AAD1E Bne e4ception to t&is rule is t&at +an#ing companies can lend money in t&e ordinary course of +usiness even if it #no$s t&at t&e money is going to +e used to purc&ase its o$n s&ares. "not&er e4ception is giving financial assistance to employees for purc&asing t&e companies s&ares. /&is is applica+le only in some situations and in no case can t&e assistance e4ceed si4 mont&s pay. /&is option is not availa+le to a director. >uy0+ac# of s&ares under *. 77"' 77""' 77> are e4ception to t&is rule &o$ever t&ey can only +e made out of certain reserves of t&e company. /&e securities purc&ased in a +uy +ac# &ave to +e destroyed $it&in a period of 7 days from completion. /&ese s&ares are sometimes #ept as treasury s&ares $it& no voting po$er as t&ey could +e misused. /&e num+er of suc& s&ares is statutorily limited.

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