MODULE 1 Company is what is registered under companies act, 1956.

Corporate firm- company which are registered under any other act but companies act. Corporate aggregate- person aggregated for any person for any business transaction. Corporate soul- individual (natural person) is considered as legal person in the eyes of law. Section 3- defines public and private company. Stages of corporate legal systemPromotion registration floatation winding up

commencement of business Promoter is the person who lays the foundation of the company and get it registered under the act. he appoints the 1st director nominates/selects various directors collectively board of directors. 1st director will appoint another directors which together called Board of Directors. they decide the fundamental condition for the working of company caused as memorandum of association (MOA). Any contract entered into by the director which is beyond MOA would be null and void. Thus, If a person acts in excess of Memorandum of Understanding, then he will be personally liable All the documents must be signed by each director when a new director called as article of association. AOA- for internal regulation, company can alter it any time. No special session is required. While for altering MOU, a special session is required. MOA- constitution of the company. AOA- in the terms, qualification, appointment- can be easily altered. registrar of the company can register the company and issue certificate regarding this. If company fulfill all the requirements of incorporation. name, place, capital, subscription must be there in MOA. At this stage, company can raise fund. It can be done either through public or private prospectus or statement in lieu of prospectus. PROSPECTUS- a statement of company inviting the general public to invest in it by highlighting the profit which is going to be incurred by that company.

Company has to collect the initial capital withing one year. If the company fails to do so, then company will have to wind up. Authorize capital- let a company require 2-5 lakh of capital. Then authorize capital equals to 5 lakhs. Subscribe capital- in the same example as given above, if the company issues shares for value 1.5 lakhs. This is subscribe capital. Working capital- the amount required to start functioning of a company. Preferential shareholder- they get preference over equity shares. The profit goes on accumulating. Equity shareholder- wants to be member of company to get dividend. Getting share in profit is not their right while its so with the case in preferential shareholder. Section 24,25,26,29- wining of company. with MOA, AOA and prospectus, the BOD will get the registration done which constitutes the 2nd stage. Floatation- if the company is registered and certificate of incorporation is obtained thereby giving it a legal entity, the company can raise its fund only upto amount mentioned in the capital clause. The funds can be raised by issuing a prospectus which is a kind of introduction to the public- invitation to buy shares. However, this procedure is very lengthy (1 month notice to the registrar of the company). To save time, issuance of statement in lieu of prospectus can be done. Thus, within 5 days, directors receive the permission and can arrange funds. They can work without prospectus. If the initial capital cannot be collected, then the court may order to wind up the company. The working capital should be collected within the prescribed time. Company act is the largest Act passed by Indian Parliament, it has 658 sections. TWYCROSS V. GRANT (1876) promoters always stand in fiduciary position. In the 14th century, the word company was used by merchant guilds. It was not a company, but an association which was formed by agreement. 16th century- Royale charter granted monopoly to trade. Merchants started trading overseas. Associations were regulated by charter. East India co. was one of them. These regulated charter. Company fixed their capital and this capital was represented by shares. These shares were transferable and saleable by agreement. They could share in profit as well. in the 17th century, companies who were not authorized by charter started their own business. The process and procedure was expensive and time consuming for the people. This was in the form of cooperation. They collected a huge amount of money and there were no share and no details were kept regarding the money given (i.e. accounts). Since they were not governed by any law, so they took advantage of the shareholders.

1720, british parliament passed Bubble Act so as to control these activities. Suddenly all companies disappeared like bursting of a bubble. however, it was easy for companies to form a partnership firm so they continued cheating people. Then the Parliament passed controlling companies act, 1734 so as to curb these activities and regulate the capital and ensure the registration of the partnership firm or the company. the liability of the corporation registered under trading company act was solely that of the members and person. Limiting Liability Act passed 1854 so as to limit the liability upto the value of shares. in 1929 and 1948, English company act was passed and the present is English company Act 1985. Earlier was consolidating act . in 2006, committee was constituted in UK to amend the 1985 act, but the report is pending the Indian act is the carbon copy of English act. the final act was 1913act. this has limited liability. 17 July 2007 Statutory provisions regarding lifting of corporate veil There are certain circumstances in which the statutory provisions are vague. They are the cases which the company is creating to avoid taxes. CIT v. meenakshi mills; 1967 SC 819- 3 companies in the branch office in Chennai. Company manufacturing cotton yarns. Members of the company constituted a bank to deposit the profits and borrow money time to time as per the requirement of the company. All the 3 companies were constituted separately- separate legal entity. Only because they were depositing in the same bank whose chairperson were interested in the 3 companies and the 3 companies were interested in each other, can it be said that the companies and the bank constitute one economic entity?--- no. since constituted separately, they are separate entities. To know the real character of the bank and the companies, the reason why they have been constituted has to be looked into. If the members are the same, the real character is determined by finding out the purpose for which they are created. In the situation of no profit, it was said that the profit was equal to the capital as well as interest. Thus, there was no profit to the company. Thus, the company is not liable to pay taxes. Whether bank was made to evade tax liability? What is the purpose of borrowing money from the bank? This bank was constituted only for the purpose of the 3 companies. The total capital on the bank was equal to that what was deposited by these 3 companies. There wasnt any other account holder. The bank is constituted and regulated under RBI act. That only 3 companies are the account holders in the bank does not make any difference. HELD: because the members- chairperson etc. are the same and the sole purpose of the bank is to help these 3 companies. The interest payable to the bank was finally going into the pockets of the company. The purpose of the bank was to evade taxes. Thus, the 3 companies as well as the bank constitute one economic entity. Another case by chancellory division

B company was constituted only for investing of other company A. A purchases shares of some other company. That profit as a surplus and the company was declaring the bonus. A transferred these shares to B. This was the only capital of B. this was not being shown in the profit and loss account, so the company is not liable for any dividends. It was held by the chancellory division that the same is to evade taxes and defeat public welfare. Transfer of shares must be shown in the profit and loss account. (dividends declared by D is profit and loss of B. this was the only capital of B.). thus, company A is liable for defeating the welfare legislations and its directors are answerable. The court may order B to wind up . Workmen of associated rubber industries Ltd. V. associated rubber industries Ltd (1986) 59 Comp. 134- similar facts as the above case Shantanu Ray v. UOI (1989) 65 Comp. Cases 196 Tax liablility Excise and salt act- 1944. In this case, showcause notice was issued to the director of the company u/s 11A of the act. Duty of excise has not been paid levied on transactions either by fraud, by misrepresentation, any other provisions of the act or was fraudulently repaid to evade payment of duties in order to evade payment of duties. Showcause notice to be issued to the manufacturer or producer if a licence has been issued to him. Thus, license can be issued to only the manufacturer and producer and the liability is upon the person who has signed the license. Duccans Agro co. was the company, which was also the manufacturer. Mr. Shantanu Ray was only a director and the license was issued in the name of the company. But the showcause notice was issued in the name of the director. Under this act, the director or the 3rd party is not liable. Soli sorabji counsel on behalf of the apppellant- 1. Regard to claim of duty from individual director 2. With regard to the threat to impose personal penalty on these individual directors. u/r 174- only the company to whom the license is issued is liable. duccans have obtained the license and they alone are liable for duty, if any. 21 July 2007 Characteristics of body corporate 1.Separate legal entity- after obtaining a certificate of incorporation, the company becomes a legal person 2. limited liability- limited liability act passed in 1874. Liability is only of the extent one contributed in the companies capital. This is of 3 typesa. limited by share- person who contributed in companies share is liable only for unpaid shares. Statutory minimum- application money- 5% for allotment of share. 95% is unpaid. This is payable at every call fixed by company. Call means every time company decides that it is the time to pay certain unpaid amount. When there is 50% amount is unpaid, the company may keep it as the reserve capital, in case the company gets into any emergency, when money is required by the company, it may call. The same might also be payable to the company during winding up. If the loss suffered by the company is more than that of the value of the share, the liability of the shareholder extends only upto the value of the share. This is the limited liability. b. limited by guarantee- member who constituted, incorporated, registered/ authorized can authorize this company for any business- profit making or not. Suppose there are 3 members-

A,B,C. A guaranteed for 100 Rs., B for Rs. 200 and C for Rs. 300. Then As liability is upto the money guaranteed, i.e. 100, 200 and 300 respectively. This guarantee has to be conditional. c. limited by guarantee and share- when a person subscribes for share as well as gives guarantee. First, they will be liable for guarantee. Liability extends upto value of guarantee and shares. The director shall declare that the amount of the share is a reserve capital and shall be payable later. 3. perpetual succession Debenture- loan by the outsiders and not the share holders. Debenture holders cannot participate in the company meetings. Debentures can be converted to shares at any point of time. This is of 2 types- secured and unsecured debenture. Secured debenture means the companies assets is charged. Charge may be of 2 kinds- fixed and floating. Fixed assets mean property, machinery, etc., when charged. Floating charge means that the charge may be on entire companys assets. In floating charge, it is not fixed and is in the hands of the company which asset they want to sell. Only an equity share holder can sit in companys meeting and vote. Preferential share holder has a say only in aspects which affect him. Unsecured and secured debentures- people can participate only in winding up of the company. 4.Common seal- it is nothing but an authorization. It means that the given document is authentic. Appointment letter, or any agreement of contract holds the common seal of the company which means that it has been authorized by all the board members. Section 84(2)sch A part 1 talks about the common seal. Needle industry case Talks about 397 and 398 of companies act. needle industries is a company owned by English company (it is a subsidiary of British company). Roughly 38% is owned by Indian people. Rest of the company is held by the English. Newey is an independent company, the other company is the needle industry studly. It offered half of its shares to the newey company. Thus, they become roughly 1/3rd holders of the company. Shares were issued by this company and had collected 50 lacs Rs. One of the major share holders is Dad whose share holdings is approximately 20%. This person has huge plans for the company. The company in studley gives the entire share to coatsbaton ltd. in Glasgow. Dad carried out lot of work in hong kong, etc, which is not liked by the coatsbaton. So he decides to sell off his shares to an Indian holder. Then the FERA regulations come out. According to this, any foreign company cannot share more than 40% of the company in India. Madurai coats is one of the holdings of coats company. So coat wants the entire share of Dad to Madurai coats. Another major share holder is the Manohar group which holds 10%. There is no consensus between Dad and Coats company. Therefore he decides to retain the share. The RBI sends a letter to the Dad to comply with the regulations. Not for test.read module 2 case 16 PROMOTER Term not defined- used in so many provisions- 56, 63,69, 100, 112, 542, 543, etc. where the director is liable fr non disclosure of interest, the promoter is liable. He must disclose the income or benefit derived. This is called as disclosure. This is in regard to only those contracts or agreement which has been entered into by the directors on behalf of the company. If the parties to a contract are related to each other in any manner, then this must be disclosed.

A Ltd ___________contract________________B Ltd (party 1)(party2) C____________related___________________D director E director

this is a statutory duty for B & D to disclose the connection between them. If any of the parties do not disclose the same, then they are liable. Promoter is a person who enters into any contract or agreement on behalf of the co. before incorporation of the company, and after incorporation the co. ratifies such contract. After ratification, the contract will be binding on the co. and the person who entered into contract will be liable for any interest derived which had not been disclosed. If the contract is not ratified, then nthe promoter will himself be lliable. JUSTICE OGBURN- (in Twycross v. Grant) 1877- The promoter defined as a person who undertakes to firm with reference to a given project and set it going and takes necessary steps for that purpose. Any person who is participating in the formation of a co. is a promoter. Before incorporation every person who participates directly or indirectly is a promoter. But experts who are working beyond their area of expertise then they will be liable for any wrongful act done in that capacity. First Indian case- Official Liquidator v. Venu Mudalia (1958) 8 Comp. Cases 7 Company incorporated as pvt. Co. in 1927. Within a year, co. went into liquidation and then compulsory liquidation. Official liquidation appointed by HC. He sought to make the Respondent liable to repay 8,865 which they received as shareholders. Respondent was a partnership firm. Firm entered into an agreement and was appointed as a broker in the co. The firm was not much experienced because of relations with the co. were appointed to the broker. u/s 235, official liquidation is entitled to ask for order of repayment against officers, directors for any misrepresentation. Initially, commission for subscribing a share was 5% but later, it was made 15% which was ratified by the co. as well.

PROMOTER

Firm A AA A AA AA (broker) A BOD increased it to 15 % promoters

5 %

COMPANY B

1 5 % it was held that the commission cannot be more than 6%. 15 % was too much. Thus 15% was ultra vires. Ratification is ultra vires. So this was fraudulent and B were liable to repay. The shareholders are not liable to pay. Whether A were brokers or promoters A never held any position in the co. but it merely subscribed the MOA and subscribed for few shares. The court said that merely subscribing MOA and for shares would not make A the promoter. A were the shareholders and thus received the money and are not liable. If they are Promotor and 5-15 % was ultra vires then would have been liable to pay the money. Since they are not Promotors, they are merely the shareholders and they do not fit in the definition of the term promoters, they cannot be held liable. A person who originates the scheme for the formation of the company, has the memorandum and the articles prepared, executed, registered and finds the 1st director, settles the terms and makes arrangements for advertisisng and circulating the prospectus is a promoter in the fullest sense, as he controls the formation and future of the company. But a person who has done much less than this may bring himself within the meaning of the term and may be held liable as a promoter. Also, it was held that promoters are neither agents not a trustee. Weavers Mills Ltd. Rajapalayan v. Balkis Animal and Ors.1 Voli Pattabhi Rama Rao and ors. v. Sri Ramanuja Ginning and rice factory Ltd. 2 MI Erlanger v. New Sambarao Phosphate co.3

1 2

1969 Mad HC AIR 1984 AP 176 3 (1878) LR App. Cases 1278

MIE was Promoter of NSP co. It purchased an island of phosphate mines in 55,000 pounds. This was sold to a newly formed co. which was promoted by MIE in 1,10,000 pounds. Erlanger was one of the directors. Total no. of members were 5. At the time of transfer, 3 directors were out of country. These 2 directors approved the sale. Shareholders initiated a case against the co. without disclosing them by selling the property of 55,000 in 1,10,000. So, he is liable to return 55,000 to the company for non-disclosure of the co. MIE said since he was the promoter of the co., so it was his right and he also said another director were knowing about this disclosure to himself in any condition is not a disclosure the other director was under his influence. It was held that if a promoter holds a fiduciary position then, he must disclose all capital profits, etc. which he makes and he will be liable for non- disclosure. Secs. 62, 69, 63, 76, 428, 519 mentions the term promoters, but do not define them. PHONOGRAM LTD. v LANE There are two people A and B- planning to make a pop group- planning to make a co. needed money- entered into negotiations for finances- one group called Hamdale, one of subsidiary agreed to provide funds, this co. was Phonogram ltd.- agreed amount was 12000 but first installment was of 6000- Lane was the person who was doing negotiators with Phonogram and he took the amount through Jelly Music Ltd. in which he was working in the letter provisions regarding personal liability of Lane was provided- Co. did not form- Phonogram Ltd. sued for 6600 Trial Court gave the judgment in favor of Phonogram Ltd.

COMPLETE NOTES HERE 26 August, 2007 Doctrine of ultra vires In England, its not compulsory for the company to mention its object in specific term. Sec. 3a of English Companies Act, 1835- the company can act as a simple general commercial company. Sec. 35 of 1985 of the English Companies act clearly abolishes this. When any act is done by directors of the company, act is deemed to be done within the capacity of the company. Thus there is nothing like ultra vires in England now. Earlier act, there was ultra vires. Doctrine of constructive notice- because of this section 35, this doctrine is also abolished. This doctrine means that a person dealing with a company must know what is contained in the public documents of the company. (documents filed with the registrar). Eg. In AOA, it is mentioned that in order to take loan from bank, a special resolution along with acceptance of all the share holders is required, a third party cannot contend that he was not aware of this information in public domain. In India, 3rd party is not entitled to recover. (as long as parties act in good faith). This doctrine is a vague doctrine. Both these doctrines apply in India.

When company wants to deal with anything completely outside its object clause, it may not do so due to ultra vires. There are 3 kinds of ultra vires: When the company acts beyond its capacity and capacity is mentioned in memorandum Exceeding of powers- (a) by company and (b) by directors When the act done by the company is prohibited by law i.e. when it is unlawful or illegal. For these 3 acts of the company, the word ultra vires is used. However, now, the term ultra vires is used only for the 1st case. What will be the difference in the legal consequences if the company acts ultra vires and exceceding the powers? In case of ultra vires, it cannot be ratified, and it is void absolutely. In case of exceeding powers, a special resolution has to be passed to this effect, and can be ratified subsequently. Doctrine of indoor management- if a director is authorized to take loan only for a particular business and upto the maximum limit of 10 lakhs, 3rd party cannot know that. CASE PRESENTATION: Ashbury Railway carriage Co. Ltd. v. Hector Riche John Ashbury who carried out the business of railway carriages and other things related to railway carriages. A company made in 1862 for the purposes of buying Mr. Ashburys business. It was mentioned that John Ashbury shall not be interested in the company more than as a shareholder. Thus, he was not entitled to enter into independent contract with any other company, but shall continue to be only a shareholder. It was said that the working of the company will not include the job of manufacturing of railway carriages. A company from Belgium, Hector Riche entered into a contract for the manufacture of railway carriages. the expansion of the companys business could only be done in case of a special resolution. General contractors mentioned in the last few lines of the object clause. This means that the company will indulge into all types of contractors business. In 1864 this contract was entered on behalf of the company between Belgium co. and Ashbury. Another contract included obtaining concession in the manufacture of railway carriages in some other countries. Disputes arose as to payments. In 1867, there was an extraordinary meeting of the share holders regarding this. It was said that the contract should not have been entered into by the company and Ashbury did not have the capacity to enter into contracts on behalf of the companies. QUESTION: whether this contract can be ratified subsequently by the company, and whether it could be ratified even when it was void ab initio Before House of Lord 3 question: Whether contracts ultra vires? Whether it can be ratified by the share holder? If it can, whether it was ratified in the present case? 4 lords gave concurring judgments.

Lord Kaynes- object clause divided into 4 parts to get the meaning of general contractors. The term refers to mechanic engineering and not civil engineering, thus getting into construction work on behalf of the company was ultra vires. The contract which was entered into was not within the purview of MOA because it was ultra vires the powers of the Director. They purchased concession of the railway, which was again not mentioned in MOA. Sec. 50- share holders of the company can decide how to extend their business to earn more profits. But in doing so, the directors cannot go beyond what was given in MOA. Even if all these share holders had decided that the business in question was profitable, because since it was a void contract, ratification could not be done in any case. MOA is a charter of company which has to be followed at all points of time. By passing a special resolution, such profitable business can be decided. But such expansion of business can be done only when the objects are related. THE DECISION IN INDIA ON SUCH MATTER TODAY WILL BE THE SAME. Whether what we are considering is capable of being treated as an independent term or not- this is to be seen. Eg. If in this case only, it was given that (a) mechanic engineering; (b) or general contractors, this is absolutely independent. 29 August 2007 ULTRA VIRES Powers; when powers become the object? Whether the powers be ultravires? Third party is be aware of MOA (under doctrine of constructive notice), if he enters into contract which the company cannot enter into, then it is ultra vires. The 3rd party cannot take the advantage of ultra vires. This doctrine is always applicable to the company itself. Rolled Steel Products (holdings Ltd) v. British Steel corporation & Anrs.4The company was actually in the business of importing and selling steel. In its memorandum of association, there were 10 articles, 1 of which were to lend and advance money, or to give guarantee to give credit or become security of persons it may seem expedient.5 It was said in the last line that all the objects have to be dealt independently. The court will look into whether or not the objects mentioned in MOA can stand as independent objects or not, even if the company explicitly mentions in the MOA that the objects have to be construed independently. 3rd company C Ltd. This company had to pay some amount to S Ltd. and then S Ltd had to pay C Ltd. R Ltd. C Ltd. . S Ltd

4 5

1985 2 WLR 908 This cannot stand as an independent object in itself. The court has to look into whether whatever has been mentioned in the MOA is an object or a power. Usually, powers are not to be mentioned in the MOA and object clause, but is there in practice.

C Ltd. gave some money to R Ltd. to be given to S Ltd. which will ultimately be given to C Ltd. but, in furtherance, they said that R give guarantee for S that they will pay the remaining money. Whether it is an object or a power? Only because of this particular transaction between R Ltd., C Ltd & S Ltd, it was a power. Had it been any other business of lending, it would have been an object. It is a power. Suppose it was mentioned in the object clause that an agent can be appointed, the same will be a power. This is so because appointment of agent will be ancillary to achieve the objects mentioned in the object clause. In this case, resolution was passes saying that we will take a loan, pay half of it and give guarantee. In due course of time, S Ltd could not pay the entire money, so C Ltd. revoked the guarantee and approached the court for repayment. The other 3 people were the trustees. Thus, the entire shareholders were in control of S Ltd. 3rd parties interest should not be affected by them. It is not a matter of 3rd parties to look into whether or not the resolution was passed properly or not. Royal Bank v. Turquand Indoor management When MOA limits the power, then the 3rd party is supposed to know. Otherwise, 3rd party is not supposed to know about the internal management of the company. 3rd party may know that this is what company is authorized to do. Whether what is mentioned in MOA is power or object is a question to be determined by the court, and not by the 3rd party. If by any way it is proved that the 3rd party was aware for what purposes directors have been doing that, then it is not ultra vires. 3rd party cannot take advantage of its own wrongs. Power is ultra vires when it is done outside the capacity. Radha Cinema Ltd. v. Chitralipi Films6 30 August 2007 Bell House Ltd. v. Citywall Properties Ltd.7 (Parnikas presentation) Based on the doctrine of ultra vires Facts: an appeal from Trial court. Contract between 2 parties. Plaintiff co. introduced defendant to Swiss Financer and for tht service, the defendant company was supposed to pay the plaintiff company 20000. Bell company- Mr. Bell is the director of the plaintiff company and his wife is another director who has authorized the director to take any step for benefit of company. company in housing contracts. plaintiff company was approached by swiss company but at that time, there was no contract for which they needed finance. This Swiss company was also the trustee of the plaintiff company. Defendant company wanted to obtain Bridging finance, for which Swiss company was introduced to defendants. Bridging finance- different kinds of finance jobs which are done. In these kind of jobs, the finance given is very limited.
6
7

1974 Tax LR
[1966] 2 All ER 674

The defendants took 1 million as finance and no commission was paid to the plaintiff. CONTENTION OF DEFENDANT- No commission can be charged for introduction of 2 companies. Mr. Squeg- solicitor of defendant company was not authorized to enter into contracts on behalf of the company. This was the earlier plea of the company. But before the trial they amended their plea and said that the solicitor is authorized, but the contract was ultra vires because the plaintiff company was not authorized to enter into such contracts as not mentioned in MOA. ISSUES1 can a defendant take the plea that the contract the company entered into is ultra vires? If he can do so when the contract is executory, can he do so or is the point relevant when the contract has been executed so far as the companys obligations are concerned? Assuming the answers to 1st 2 questions to be in affirmative, was the contract ultra vires the plaintiff company? The 3rd question was taken up by the trial judge and he rejected the case. There was an appeal. 3 main provisions in MOATo carry on any other trade of business or general business of the company which in the opinion of the director of the company can be beneficial to the company- sub clause c To turn to account any of the property and assets for the time being of the company for such considerations which the company may think 1st. sub clause q To do all such things as are incidental or conducive to the above objects or any of them.- sub clause u True construction of the MOA- commission from defendant is beneficial of company, thus falls under sec. c of MOA. On behalf of the company, plaintiffs had played their part. Once it was already executed, it cannot be said that the contract was ultra vires the company. CONTENTIONS OF DEFENDANTS Subjective test should be followed and a connection should be there of the contract with the main business. A mortgage or brokerage contract cannot be an ancillary contract to housing contract. The director or chairman has not seen whether or not such transaction will be beneficial to the company. Indoor management, cant be done. If the chairman is of the opinion that a certain contract is of convenience for the company, it should be looked into whether or not it is actually convenient to the company. HELD: Any trade or business which the directors thinks to be beneficial and have bona fide intention that it is advantageous, whether it is related to the previous transactions of the company or forms a separate transaction altogether, may be carried out. Sub clause q- the knowledge of finance of the company is very important to understand this. They would take a property, take finance, sell the property at a higher price so that both the finance company as well as they, themselves earn profits out of it.

In the present case, since the Swiss co. is a trustee of the plaintiff co., thus, the commission earned by them when they introduced the company to defendants turns into their own assets. This is because by finance also they are earning profits. Therefore, this transaction between the plaintiff and the defendant co. is well within the MOA (read subclause c and q together). Further, financing is very important for the company to conduct its business. They are providing a vent to one person to put their money and to another person for using it. Thus, it is incident to the contract (read subclause u). The plea of ultra vires can be taken by another person when the contract is executory in nature. Once the company has already executed their part, this plea cannot be taken. Indian case: Butterfly Marketing Ltd.8 Cotman v. Brougham9 FACTS: A ltd. having an agreement of underwriting while in promotion with E Ltd. E Ltd. was supposed to sell a few shares of A Ltd. and in case it fails to sell the shares, then E Ltd. takes them in lieu of underwriting commission. E Ltd. could not sell the shares (7,200 in nos.). E Ltd. went into liquidation and transferred all its shares to L Ltd. ultimately, A Ltd. also got into liquidation. Both the parties are the liquidators of the companies in liquidation. When A was in liquidation, its liquidator made a list of the contributories10 of the company. There were 2 lists. In 1st list, L Ltd. was there, but in 2nd list, E Ltd. was there. E Ltd.s liquidator was asked to pay the unpaid shares. E Ltd. took the plea that the undertaking agreement was ultra vires. 8th clause- to promote firm, issue and be interested in any company and take, acquire, hold, debenture, debenture stocks, scribs, of any company. To buy or otherwise acquire any stocks, shares or government company corporate which can be profitable held or dealt in by the company. All the above clauses must be dealt as separate clauses ISSUE- E Ltd. said that at the very outset, this MOA was not drafted on the lines of companies Act. the purpose of putting an object in MOA is so that the shareholders and the persons dealing with the company must be aware of it. The main argument is that if the object clause was made too wide, it does not fulfils these requirements. The court said that it is not the issue for the court to look into whether or not MOA is in accordance with the companies act or not. Once the company is incorporated, then the court merely has to look into interpretation of the MOA. Further, if the object clause is wide, then the subscribers risk increase, but beneficial to the parties dealing with the company. Thus, this plea cannot be taken that the object should be restricted in the court. This has to be done before the registrar. 2nd issue- whether it was a power or an object? TO BE COMPLETED (NOT DISCUSSED IN CLASS) 31 August 2007
8 9

2005 1 Comp. 736 1980 AC 514 10 Those who have to contribute to the assets of the company at the time of winding up. Like debtors, etc.

GIFTS GIVEN TO A COMPANY sec. 293 (1) (e) + doctrine of ultra vires The directors are authorized to make a gift or charity of 50, 000 or 5% of the net profit. Beyond that, a gift not relating to objects of the company is ultra vires. A.Lakhsman swami Mudaliar v. LIC11 There was a company United India life Insurance Ltd. LIC came into existence in 1956. In 1955 gave 2 lakhs Rs. To a corporation called Chidambaram Trust. 2 directors of the company were trustees of the trust too. To provide scholarships to Indian students Provide lectureship To promote art, science, banking, commerce knowledge, etc. Act of LIC came into existence stating from a particular date, all the essence, liabilities and assets were of the private players shall be shifted to LIC. LIC asked the directors about the gift made to the trust in 1955 in 1957. Whether LIC can ask for transfer take place before its incorporation? The act expressly authorizes LIC to take cognizance of any payment made without any consideration 5 years prior to incorporation of LIC and LIC tribunal was formed, to which all such cases could have been taken where the transfer took place 5 years prior to the Legislation. The company has no right altogether, as this was a special resolution, and thus, LIC could raise the issue of the gift being ultra vires. Even 1 shareholder can go to the court saying that any act of the company is ultra vires. It is not so in case it exceeds its power. The tribunal directed the trustees to pay back the money. So the appeal was preferred. Arguments of directorsBy way of their art. 90(3), they are authorized- (articles cannot be used for widening the scope of MOA) It is the money of the shareholders and it is done by special resolution that the shareholders are authorized to use the money as they wanted. The charity was made out of dividends of the shareholders, which formed a separate fund. 3rd clause (point no. 3 of notes) of the memorandum of association- as per that clause, the directors are not bound to use the money for insurance purposes only. (The possibility that the money spent on knowledge enhancement coming to serve the company is extremely remote.) Court held that the transaction was ultra vires. Remedy- restitution Builder- building is already constructed, after which the company says that it was ultra vires. Doctrine of constructive notice- 3rd parties must be aware. The builder did not go through the MOA, it is his fault. Company cannot be made to suffer for this. Doctrine of constructive notice
11

AIR 1968 SC 1185

will decline only with doctrine of ultra vires. It cannot be severed and made redundant independent of the doctrine of ultra vires. Builder will have a right to take the losses suffer, directors are personally liable for this. Company is being unjustly enriched. Loan- if the company has given a loan which is ultra vires, then as per principle of restitution, the money will be realized from the 3rd party. In case he fails to pay, then the directors will be held liable. Whichever director was authorized, shall be held liable. Thus, in this case, if the trust has not spent the money, then the company can trace it back. If the trust has spent that money, then the directors can be asked to pay. Since in this case, a resolution was passed, thus all the directors were liable. After notice from the court, if the trustees spend the money, trustees are personally liable. Even the trustees taking money must be aware as per doctrine of constructive notice. By communication in resolution, intention must be determined. 12 In all ultra vires transaction wherever the company can trace the money, then the money can be reverted back to the company. Conflict13 is when contracts are still being executed. This means that some part of the contract is still to be performed by the company. The company may say that it is ultra vires. When someone has done something for the benefit of company, then the person can ask for expenses incurred by him. 14 In case of winding up, these creditors like the builder shall also be paid but once all the other liabilities of the company are already paid. Builder cannot get damages for breach of contract because of doctrine of constructive notice, which he would have got had the agreement been governed by contract act. If the loan is utilized to buy consumable products, in such cases, restitution shall not apply. The company may attach the property of the person. Restitution as per contract act is not putting the parties back to the same position, but to take back whatever you have given.15 ALTERATION OF OBJECT CLAUSE [sec. 17(1)] Procedure- a special resolution has to be passed. Clause (g)- interpretation- the starting of new business should not affect the previous business. ARTICLES OF ASSOCIATION (all matters relating to management of the company) Rules of employement How to appoint directors What shall be the voting rights of each shareholder What will be the companies right in case a shareholder has got bankrupt Public company limited by shares need not have its own articles of association. Table 1 sch A of Companies Act. if it has mentioned some areas, then the other areas, provisions mentioned in this table shall be applicable. OTHER COMPANIES
12

Gift is a type of contract, but the concept of consideration does not apply to it. Sec. 25 of ICA; because a gift deed is made whenever gifts are made. 13 Between the position of law, and doctrine of constructive notice 14 Refer to sec. 65 of contract act 15 Sec 65- either bound to return or may be made to pay compensation. (It is the courts discretion in the latter case)

Unlimited companies, companies limited by guarantee having share capital and having no share capital, private company limited by share- all these companies are required to have their AOA. For their AOA, they have to comply to forms given in table.16 In case of pvt. Ltd co. they should mention 2-3 things. For eg. they must comply with sec. 3(iii). Sec. 27(3) says that 3(iii)(a,b,c) should be mentioned. It does not say anything about 3(iii)(d). ALTERATION OF ARTICLES- special resolution must be passed for bringing about alteration of articles. Confirmation for alteration of articles is not required, only special resolution will suffice, but there is one condition. Power of alteration is given by companies act. September 7, 2007 SHELL COMPANY- it had celebrities for its advertisement. The shares rose and people bought those shares because of the advertisements. The company was not doing any business at all. The company crashed but was brought up by the investors money. Companys business commences after the shares are bought by the shareholders. Thus, after the issuing of shares, whether or not the company commenced business after issuing shares or not, the shareholders have no way to know it. No significant business at all No significant assets at all Purpose of such a company is tax evasion usually. Another reason may be that some other company may need such company for their business. For subsidiary, it is necessary that you should be in the Board of Directors and have 51% of shares. ARTICLE OF ASSOCIATION Contracting out- you want to contract something which is not allowed by the statute. Eg. a laborer may not enter into contract to work for wages less than minimum wages as prescribed by law. provisions for aleration of articles- must be for the benefit of the company as a whole. It is subject to the companies act and the memorandum. Even if interest of 1 shareholders is prejudiced, then also such an alteration can be made in order to look into the interest of the company. Brown v. British Abrasive co. ltd.17 Case: a company was in urgent need of capital. Out of 50,000 shares, the director of the company held 49,113 shares and the other director held 300 shares. The company passed a special resolution stating that when 9/10 of the shareholders ask, the 1/10 of the shareholder will be compelled to surrender their rights. the court did not allow this, as the same was being done only for gaining a complete control of the company. They already have the majority shares, only 500 shares are not there with them. Being the majority share holders, they can pass special resolutions if they want to. If they wanted to supply capital they can do that right now also, without getting the control of the rest 500 shares because getting those 500 shares will not make a material difference, as they can at any time pass a special resolution. The test is BENEFIT OF THE COMPANY AS A WHOLE, AS A SEPARATE LEGAL ENTITY.
16

Table B- company limited by shares, table C- company ltd. by guarantee and not having a share capital, table Dcompany ltd. by guarantee and having a share capital, table E- unlimited company 17 1990 1 CH 290

Sidebottom v. Kershaw, Leese & Co. Ltd.18- it must not be discriminatory against minority. Greenhalgh v. Ardera Cinemas Ltd. Anr. 19 there were 2-3 types of shares. 2,05,000 were ordinary shares. 1,50000 were fully paid up, mallad family with his relatives and friends had a control of 85% of fully paid up shares and there was 50,000 party paid shares, of which some were with T Cinema Ltd and 2 of their nominies had partly paid up shares. Green halgh had 4000 pully paid up shares. Mallad had some problems with the company and entered into an agreement with Soleshipman to sell away his share on the company. Articles of the company have the usual rules- the shareholder will have to offer the shares to any of the person in the company, only then he can offer those shares to anyone else. But Mallad had majority in the company with which it altered the article of association. Soleshipman had before this agreement purchased T Cinema Ltd. Determining test It is not necessary to validate an alteration that a particular member will get some benefit out of it. But it would be necessary to show that the alteration is needed for the equal good of members as a whole and that the burdens and benefits of the alteration will fall upon all the members alike. The alteration should not discriminate between members by conferring privileges on some and depriving others of their rights. Eg. depriving members of their preemptive rights, or increasing their liability. Preemptive rights- the person selling away the shares has to first offer them to any person in the company and then sell them away to an outsider. Sec. 38, proviso. A member may however be subjected to a sacrifice if it is for the good of the organization. Even forcibly taking away of shares is allowed if the shareholder is in competition with the company All majority powers have to be exercised in good faith for the benefit of the organization as a whole, but good faith is not lost merely because the alteration operates to the disadvantages of some members. When a person is having a contract with a company and there is a provision regarding that particular contract in the articles itself. The company altered the articles and the contractual liability of the company is altered with the alteration of articles. Company will have to abide with its contractual obligations. He can ask for damages. But injunction is not allowed. Southern Foundries Ltd. v. Shirlaw20 appointment of director was for 10 years. But before the tenure, the company was taken over by another company. New company adopted new articles and purported to remove Shirlaw as the director, then, hell be terminated from post of MD as well (there was a provision mentioning that). 2 things are implied in the contract- (1) in this contract, shirlaw cannot give a resignation. (2) company cannot remove or create a mechanism to remove Shirlaw. Damages were asked for. Another contention which was negated by the court is that Southern and Federated are 2 different entities and the amendment is being effected by Federated, which is another entity. Damages have to be given.

18 19

1920 1 CH 124 1950 2 All ER 1120 CA 20 1940 AC 701

British Murac Syndicate Ltd. v. Alperton Rubber Co.21 As long as Murac Syndicate Ltd. will have 5000 shares in the respondent co., it will have the right to appoint 2 directors. Directors were nominated, but were not accepted by the respondent and the respondents deleted the article empowering British Syndicarte to nominate 2 directors. Whether injunction can be granted? Injunction is granted only in rare cases where damages is not a proper remedy or cannot be granted. State of Karnataka v. Mysore Coffee Curing works Ltd.22 Similar facts, but injunction was granted. There are only 4 shareholders of a company and they all agree that in no time in future, well vote for increasing the share capital of the company. This can be done by raising shares. In future, there is a need of share capital to be increased, whether this agreement is binding on the company? Shareholders rights conferred by articles are subject to the power of alteration provided by law and he cannot complain. Subject to power of alteration provided by law and he cannot complain unless he can show that the alteration sought to be affected is eitherBreach of a separate contract made with him or his class It is not made for the benefit of the company. Gothami Solvent Hall Ltd. v. Mallina Bharti23 - injunction can be granted only in rare cases where damages cannot be granted. Matrabhumi Printing and Publishing Ltd v. Vardhman Publishers Ltd.24 10 September 2007 Allen v. Gold Reefs of West Africa Ltd.25 (Vaishnavis presentation) The appellant company had 90,000 Member is only a person who is a shareholder and has registered himself as shareholder. if the shareholder fails to pay share money, then a notice will be issued and if he still fails to pay, then his shares will be forfeited and the property will become the property of the directors who will be free to dispose them as they please. In case of arrears not paid by the shareholder, the company shall get the lien on the shares. When a member dies, only the executors have a right over his shares. A person called Z has 2,885 fully paid shares in lieu of land given to the company. There were other shares with him the payment of which were in arrears. Till his death, he kept applying for shares, he paid up before the call and sold away the shares in order to pay the arrears. At the time of his death, he had 36,000 not fully paid up share. The company decided to alter AOA and remove the term not fully paid up in the AOA in order to obtain lien on all the shares of Z. before this, the company had lien only on the unpaid shares. Z only formed a minority, and thus, the other shareholders approached court on the grounds of the alteration being arbitrary.
21 22

1950 2 Ch 186 ( 1984) 55 Comp. cases 70 Kar 23 (2001) 105 Comp Cases 710 24 (1992) 73 Comp cases 80 Ker 25 1901 CH CA 651

The lower court passed injunction to the representatives. The notice was mala fide because the company knew that Z was dead. Special resolution might have not been passed, because Z was the majority shareholder. since his payment was in arrears, he had no right to vote in the shareholders, thus, this contention that had he been alive, then the outcome would have been different is rejected by the court. He was aware that there might be an alteration in the AOA which would affect his right as a shareholder. being the majority shareholder, he might have entered into a contract with the company, but he did not do so. Now that he is dead, the AOA will have a retrospective effect. The alteration brought about will brought about the lien on all his shares, which will mean that there will be a lien on all the shares which have been purchased further. But the notice was not passed in bad faith as there was no other way by which the company would have recovered the money. Even if the notices were a mere formality, it was not in bad faith as it was not required by the company to send notices, still it sent notices. This alteration was not held to be arbitrary, because it did not as such target the minorities. It was applicable to all the shareholders whether or not their shares were fully paid up. In this case, Z was a minority, but he might become a majority at any point of time. State of Karnataka v. Mysore Coffee Curing works Ltd.26 (Balis presentation) Respondents were deemed to be a company registered under the act. the capital of the company was 50 lacs, divided in 4 lacs of equityshares of Rs. 10 each the rest was cumulative preference share of Rs. 10 each amounting to 10 lacs. The govt. was in control of a substantial portion in the capital of the company (19.6%). The state of Karnataka wanted to appoint the BOD. It brought about alteration in AOA, which was disputed by the state as per art. 91of AOA, according to which the governor of the state had the right to appoint a nominee for directors. It approached the HC. Sec. 106 and 107 of companies act- the state said that this petition is not maintainable under these sections of companies act. The right to nominate Director was not due to the amount of the shares that Govt. held, but because of the specific mention in the AOA. But there is no separate agreement to this respect. The only remedy with the respondent is to bring about alteration of AOA. There were a few rights mentioned in MOA and AOA. The govt. as such does not holds any particular shares that it may appoint the director. Therefore the proposed alteration of articles was to deprive the Govt. of the right to appoint the directors. Sec. 31(2) of company law. the only restriction is that imposed by the proviso that by merely carrying out an alteration in AOA, a public company may not convert itself into a private company. It has to be approved by the Govt. This case does not fall within contractual obligation of the company. But, AOA is like of a contract, binding on the members and members inter se. the members may bind the company only to the extent when his rights as a member are affected. Eg. if the solicitor of the company is affected by the alteration of the company, he cannot do so as solicitor, but as a member of the company. This is so because solicitor is a member outside the company. But being a member if his rights are being affected, then the member may raise objection. The Govts. right was not affected as a member of the company, hence, the petition was not maintainable.
26

( 1984) 55 Comp. cases 70 Kar

September 12, 2007 Russel v. northern bank development 27 If the shareholders are entering into contract among themselves that they wont amend the articles, then what is the validity of the same? Facts- bank gives funds for reconstruction. It provided funds to 2 companies dougnanam and fillough county down. 2nd made profits and 1st did not. The bank floated new company Tyrone brick ltd. 2 executive members of the 1st co. will have to be shareholders of the tyrone co. maximum authorized capital will be 1000 pounds. In 1979, after the new co. came into incorporation, there were 4 shareholders, one of which was Russels. Every shareholder has been given 20 shares, and in later stage, another shares worth 120 pounds were given. For management purposes, they entered into contract that they can manipulate the management of the company. The shareholders agreed that they will not change the share capital floatation in the market. They can only do so when they all give written consent to change. In 1988, the company floated share capital for the benefit of the public to 40 lac pounds. Samuel Russel did not agree to this kind of floatation. He filed a writ petition for the same. The ground is that this increment was in contravention to the agreement they had entered into. The court appreciated that clause 3 of the agreement was not in consonance with the statutory power. Thus, it holds no validity in the eye of law. They refered to various statutory powers vested with the co. They said that if it is provided in the article of the company that by a ordinary resolution, share capital can be changed, then the co. is authorized to do so. Thus, the company is empowered by the statutory powers vested in them (art. 131 of Companies Act of that particular country). An appeal was preferred, and contented that clause 2 and 3 are regarding voting rights of the shareholders. The judgment of the lower court was upheld. Before house of lords: The court appreciated that at the time when the shareholders agreed, TBL was not a party to the contract. So the lower courts were correct in their findings. But Russel was still awarded compensation against the shareholders because of breach of contract. September 13, 2007 Articles are binding- 1. Between company and members Borland Trustees Ltd. v. Steel Brothers and Co. Ltd.28 2. Between members inter se. The court may lift the corporate veil in case of disputes. If the directors are not complying to the articles of association, can the corporate veil be lifted? The arbitration clause which talks about dispute between a member and a company, will it be applied here? If the director uses money for unauthorized purposes, the third party cannot sue. But if the director uses money for illegal purpose, then corporate veil can be lifted. Sec. 28 of Contract act provides that in case of disputes, members may go for arbitration. Articles are infact a contract. If the article of association of the company provides that if a member decides to sell away his share, the directors have to purchase at the fare value equally among them. If the directors refuse to buy the shares, can the member approach the court? The article binds the directors in two
27 28

(1992) 3 All ER (1915) 1 CH 279

manners- in the capacity of the members and in the capacity of directors. In the present case, the director does not gets bound because of his capacity as the director. It is done in capacity of the member. This is so because to be a director, it is necessary to become a member, thus the director is a member also. The director will have to buy. Shiv Omkar maheswari v. Banshidhar Jagannath29 September 15, 2007 Sec. 36 Grayfield v. Hans 1958 2 WLR 851 No share of the co. shall not be transferred to any outsider provided that none of the shareholders wish to purchase. In solicitorship, it does not flows from membership. But directors are duty bound. Any restrictions can be imposed. Skypark Builders and Distributors v. Kerala Police Housing & Construction; 2003 114 Comp. 425 ker. Construction corporation ltd- some dispute relating to completion of contract between the parties. The appellant wanted to go for arbitration. Thus, they first referred to the articles and secondly the tender notice. 1. The object clause in the memorandum 2. Articles of the company 3. Tender notice issued by the company- except where otherwise mentioned, any question of right claimed shall be dealt at courts at Trivandrum; arbitration clause mentioned in tender notice Thus, they had not excluded jurisdiction of any court. The company was empowered to refer to arbitration to grant award. Both the parties had not agreed to refer the dispute to arbitration. There cannot be any agreement which can be contrary to articles. Thus, this clause will be void. In some cases, entire contract will be void. Arbitration clause is severable. The 3rd party is not supposed to say that it is ultra vires. articles are binding on the company 1. If articles are silent on any thing, then parties are bound by the terms of the contract 2. If the agreement between parties contrary to the articles is severable, only that part of the contract is void. 3. If the agreement is absolutely against the articles, and is not severable, then the entire contract is void. VV Rangraj v. VV Gopalkrishnan & Ors.30 There are 2 brothers each having 25% of shares. The articles stated that no new member can be inducted without the opinion of the majority. In case of death of any member, his heir or nominee shall be the member of the company. If the heir does not want to become shareholder, his share shall be distributed equally among the members of the branch. But the ratio of 1:1 of
29 30

(1957) 27 Comp 255 AIR 1992 SC 453

the share has to be maintained. If one person from any branch wants to transfer his share, he has to first offer them to his branch first. This agreement is invalid because the conditions are putting extreme restriction on the transferability. You cannot take any power from the member which has been given by the article by way of contract. September 20, 2007 Major General Shanta v. kamani Bros Pvt. Ltd & Ors.31 (Paruls presentation; take write up) Shiv Omkar maheswari v. Banshidhar Jagannath (Yudhisters presentation; take write up) Respondent and appellant are members of East India Chamber of Commerce. They deal with silver. The price of the commodities is decided on the day of entering into the contract, even though the performance was to be completed in future. one of the members of syndicate came to the respondent and asked him to pay certain no. of tukdis. September 21, 2007 Matrabhumi Prinitng and Publishing Co. Ltd. & Pertains to alteration of articles, i.e., sec 31 of Companies act. 455 shares of the matrabhumi company were being transferred. The transfer of the shares was not duly registered. Prior to this transfer, in the statutory period of 2 months, the applicants filed a company petition that the delay is unjust. Further, they resisted the alteration of articles on the basis that it will be mala fide action on their part. This injunction order was not passed and they went ahead with the special meeting. Art. 17, which was included by this alteration in the articles stated as follows- board shall have right to decline to register any equity share in the company whether fully paid up or not. The Board can refuse to register provided there were sufficient reasons such as undesirable business, laudable business, etc. But this art. provided unfettered discretion to the Board to refuse registration without any reasons. This is indeed contrary to the spirit of The Companies Act. Sec. 111A- transfer in a public company. u/s 155, courts had the power to alter the registers, which has been repealed now. ISSUES1. Stamps act- whether the stamp which is to be put on the instrument of transferwhether it has to be stamped and crossed. Sec. 108(1) of Companies Act- instrument of transfer needs to be duly stamped. Some of them were not properly cancelled. When a transferer decides to give away his share, there has to be a registration of the new shareholder. Till the new shareholder does not registers, he does not gets any rights. Cancellation of stamps is required so that the same cannot be used again. 12(2) of Stamps Act says that if a stamp is not cancelled, then it shall be considered as unstamped. Sec. 63 of Stamps Act- a fine has been imposed on not cancelling the stamp. As per the requirement of 108, instrument is to be duly stamped. Duly stamped has to be read from Stamps Act. In the present case, there were many stamps not properly cancelled and the duties were not paid. Initially, when the petition was filed before the single judge, it was ordered that 432 shares be registered out of 455. The registration of other shares was refused on very fundamental grounds like nonpayment of registration fee. 2. Companies act issue- whether article inserted by alteration have a retrospective effect?
31

AIR 1959 Bom 201

Whether the minority interests have an overriding effect on the m good of the company? Retrospective effect Swaminathan v. CIDCO32 Sec. 31 does not actually provide for any retrospective effect. This is so because initially when the articles are made, it need to be signed by all the directors and members, but alteration does not require such acknowledgement, rather only a special meeting is required. Hence, sec. 31 is not meant to have retrospective effect. Retrospective can be done 1. Rights of the shareholders, secretaries, etc.- no retrospective possible 2. Other things pertaining to co. Eg. a director has exercised some power, and not by special resolution, this power is conferred on the director to validate his act. in such cases, retrospective is valid. AOA is a contract. By alteration, the contractual obligation which the company had by its promises already made cannot be taken away. Alteration, if made and made retrospective, then damages will have to be paid regarding all losses incurred on whatever was promised before the alteration. Australian High Court Judgment referred 1893 2 Ch Div. 311- the alteration of articles has to be done in consonance with the memorandum. An alteration may cause breach of contract with the shareholder, but it does not makes the alteration non applicable. The fact that the alteration prejudices or diminishes some of the rights of the shareholders does not makes it invalid. The power to alter articles must be exercised in a bona fide manner. Thus, the benefit of the company as a whole must be looked into. September 28, 2007 PROSPECTUS Public document inviting subscription of shares by the public. The 2 essential conditions for prospectus is1. The document must be public. 2. It must invite subscription of shares. If people to whom the offer is not made, they also can come and subscribe to the shares, and the company cannot refuse, then the offer is said to be public offer. When people to whom the prospectus is issued exceeds 50, then it is anyways a public issue. When offer is made to the relatives or friends of the managing director in the absence of sufficient capital to the company, it is a private issue and not a public issue. This is so because the MD offers all the relatives and friends individually and no one except the people to whom the shares are offered may accept it and buy the shares. Section 67(1) (2)& (3) and proviso to the same to be read here. 67(1)- if it is intended that the shares of the company shall pass only to a particular class, then also it is public issue.
32

1988 LR (Mad.)

Govt Stock and other securities Investment co. Ltd. v. Christopher & Ors.33 Ratan Singh v. MD of The Moga Transport Co.34 Private company- resolution passed- MD offered shares to his friends and relatives- allegation that it is a private company, so cant make public issue- held- it is not a public issue. Nash v. Lint35 Date of publication of prospectus and issue of prospectus The date put on the prospectus is the date of publication. But the date on which it came to public, it is issued on prospectus. Whether advertisement on electronic media can be considered as prospectus? Advertisement on TV cannot be considered as prospectus because the definition of prospectus is a document Document is defined in General Clauses Act. As per the definition, TV ad is not a document. As per the definition in General Clauses Act, depending upon the contents of the ad, it may be considered as a document. Red herring prospectus- when the registration is incomplete, it has to be mentioned in the prospectus that the same is subject to registration. Sec. 2(36), 55- 70- sections related to prospectus CONTENTS OF PROSPECTUS October 1, 2007 UOI v. Allied International Products Ltd.36 The SC ruling in this case was overturned by the Companies Amendment Act, 1974. When companies issue a prospectus, they contact stock exchanges. If the stock exchanges refuse to enlist such shares, then the allotment in invalid under section 73(1)(a). The amendment changed sec. 73(5). The time between the application and the acceptance/ rejection of the application is 10 weeks. But allotment can be done, even though if the allotment is made and the application is rejected then the allotment is void. FACTS The company in year 1965 offered public a subscription worth capital of 5 lacs of equity shares of 10 each and preferential shares of 100 each. The Bombay stock exchange approved, but the Calcutta and Delhi Stock exchange did not. Section 22 of Securities Contracts (Regulation) Act, 1956- appeal can be preferred if stock exchange refuse to enlist the shares. The purpose of stock exchange- shares become very liquid in a stock exchange because at any time, the shareholders may convert their shares into money in a company. If within 4 weeks, the stock exchange does not decide whether or not the permission is to be given or not, they defy the statutory requirement. The stock exchange took 7 weeks and asked to bring about various amendments in the MOA and AOA. The question is whether or not the allotment during such a period is to be deemed to be void or not. Both the courts ma de a purposive interpretation and said that the allotment is not void. PRESENT POSITION OF LAW Under 1974 amendment act, the statutory requirement was increased from 4 weeks to 10 weeks. Now, if the application is not passed within the given time period then the application is deemed to be rejected. 10 weeks have to be calculated beginning from the closure of subscription.
33 34

1955 Ch. Div. 2643 AIR 1959 Punj. & Har. 196 35 1928 HL 36 AIR 1971 SC 251

Derry v. Peek37 This deals with misrepresentation in prospectus by directors. There was a company incorporated under the Tramways Act. This Act provided that the trams may be moved by the animal power or with the permission of the board of trade with steam power or mechanical power. The company issued the prospectus, which mentioned that the company has the authority to use mechanical and steam power and if such power is used instead of horse power, there will be more profits. A lot of people bought shares on such a statement. The company went for the consent, but it did not get the consent for using mechanical power. They were thus forced to use horse power, because of which they went into losses and were forced to wind up. Mr. Peek suffered damages because of the same. He went to the trial court for untrue statements in the prospectus. The lower court said that the company was not liable because the directors had reason to believe that they will be able to get the consent by the board of trade to use mechanical power. An appeal was preferred, where the decision was reversed. This was because when the directors made the statement in prospectus, they had not received the permission, so the statement in the prospectus was untrue. Damages were given to Mr. Peek The HL said that the directors ought to have known that they might not obtain the consent of the Board. LORD HALSBURY In the prospectus the statement made was untrue. The directors did not have any reason to believe that they will not get the permission.38 There was no mens rea.39 They also had reasonable grounds to believe that they will be able to use the mechanical power. LORD BREMMIL It did not occur to the director that they might not get the permission from the board. LORD FRIDGELALD Said the same thing. Deceit was defined again and again. The directors knew that they had a right and an honest belief that whatever they were putting in the prospectus is not right. It did not occur to them that they might not get the permission. So, the appellants were not liable to pay damages to the respondents. Progressive aluminium Ltd & Ors40 Deals with untrue statements. Misstatements and omission of facts.- sec. 62 2 exceptions to rule of criminal liability1. The untrue statement must be immaterial 2. The person should have a firm/ reasonable belief that the statements contained in the prospectus are true. Petitioner 1 was incorporated under companies act and petitioner 2-10 are directors. Company obtained permission to issue equity shares and obtained relevant license. The company was promoted by 3 promoters. PCL was one of promoters, who was into construction business for more than 2.5 decades. This company had taken over all the assets of another company PEC, the
37 38

(1889) 14 AC337 In india, the sec. is 62(civil liability) and 63 (criminal liabililty). The excpetion is that if the directors have a reasonable ground to believe that they will get the permission or there were circumstances that they will not obtain the permission. 39 This is not applicable in India, so this view does not holds any good in law in India. 40 1997 89 Comp Cases 147 (AP)

people involved in both the companies were the same. Once the company comes into existence, there will be no gestation period and they will start the production of aluminium. The registrar of company issued notice that in terms of sec 63(1), there were untrue statements because of which the shareholders had incurred loss. This will be punishment amounting to imprisonment for 2 yrs or fine. A showcause notice was issued to all the persons involved. This petition was filed u/s 633(2). The directors proved that they had genuine problems resulting in delay. There were inevitable circumstances like gulf war and thus unavailability of ships, etc. By experience of 2.5 decades, it was meant that the people involved in the company had an experience of 2.5 decades, so the court very well agreed to the same. The court stated that the delay caused in aluminium extrusion was genuine delay and circumstances not in control of the petitioners, hence the petitioners were entitled for protection u/s 633(2). Infact, they are not liable only. GOLDEN RULE EVOLVED IN New Brunswith and Canada Railway co. Ltd. Kindersley,J Through the shares, public in invited. The same is decided on the representation of representatives. So it must be strict that no the fact which does not exists be mentioned, and no fact be omitted from being mentioned. October 3, 2007 Average form of prospectus- there are application forms for share. On base of these application form, entire prospectus cannot be put. Thus, average form of prospectus is stapled at the end of the application. This is the abridged form of prospectus. It is compulsory to have an abridged form of prospectus. Contents- form 2A of The Companies Act, 1956 Statutory requirements regarding prospectus 1. It must be dated. (date of publication need to be put on the prospectus. The date of issue need not be mentioned.) 2. It must be registered with the registrar. The documents accompanying are 41draft prospectus, any statement of expert which is there, contract entered into by the company/ significant provisions of the contract when the contract is not in writing, any agreement entered pre incorporation by the promoters and the company want to accept them. If the expert himself is a promoter, director or employee or any other person related to company, then his statement shall not be considered as the statement of an expert. (expert means a person not associated with the company).42 Whether members are part of management or not has to be seen from the kind of shares they hold. Thus, preferential share holders will not be involved in management in any manner. SHELF PROSPECTUS43 For banking and financial company, everytime they are going for public issue, they need not file a prospectus. Sec. 60(b) everytime company is going to make a new issue, it has to issue an information memorandum. Procedure41 42

Sch II part I Sec. 57 43 Section 60

Apart from price of the shares, all the other relevant information will be there in the prospectus. Red Herring prospectus- it is not complete prospectus, in which it is mentioned in red letter in the prospectus that the prospectus is not complete. It is compulsory for the company to file before the registrar 3 days before the opening a red herring prospectus. Within 1 week, company refuses to transfer shares, then the money has to be returned. Comapany has issued information memorandum and basis on the same, people have applied for shares and given postdated cheques. What is the liability of the company in case it has to issue shares to those people? (the company has not filed the final prospectus, but only shelf prospectus and information memorandum). The company will have to give them an opportunity of reconsideration after stating the price. Transferability of shares. Sections- 108- 112.RAHUL BHANDARIS PRESENTATION (READ YOURSELF) Free Transferability is important, but some restrictions can be made on transferability. The foundation of transferability has to be in AOA.44 Transfer of shares complete only when there is a registration with the company concerned. Form has to be signed by the registrar of the company. MODES OF TRANSFER 1. Physical mode1.1 u/s 46A which is deemed October 4, 2007 Madhubhai Amathlal Gandhi v. UOI45 Constitutional validity of a notification was challenged. Spot delivery contract- u pay for the security and at the same time, there is the delivery of the security. Ready delivery- u pay for the security and the way in which the contract will be performed is not specified. So the performance might take place immediately or at some future time. Future contract- the performance will always occur in future. The purpose of these contract is to stop the transactions which take advantage of securities contracts. 1. The Bombay Govt.- Bombay Securities Control Act. It did not allow any other contract apart from ready delivery contract. This does not makes any sense, as such contracts are the ones which can most easily be converted into wagering contracts. Further, there is no deterrent as it makes it void, not illegal. 2. Under sec. 13 of Securities Act, 1956, the govt. recognized certain members of stock exchange and only transactions between these members were legal, others illegal. The petitioner dealt with securities in Mumbai. Only Stock exchanges recognized by the govt. could function. 2 stock exchanges- Indian and Native. The Native Stock Exchange was to be recognized as stock exchange of Bombay. There were conditions imposed on application of membership. The contention of petitioner was that the restrictions were against his right to trade freely u/a 19 (1)(g). The classification between active members and non active members were also not reasonable one.

44 45

VV Rangrajan v. VB Gopalakrishnan & Ors. AIR 1961 SC 21

If the act is constitutionally valid, then the notification is also valid. This was the contention of respondent, which was rejected as u/a 13, notification is also a law. if notification is reproducing whatever is envisaged by the act, then notification cannot be challenged. Rules relating to procedure for inducting members were looked into by the court. It was said that such restrictions were not unreasonable. This affect the economy of the country directly. Thus, the restriction was said to be reasonable. Second contention of the petitioner was regarding art. 14 as there was no reasonable classification between active and non active members. But the court said that there is no evidence on behalf of the petitioner that there has been discrimination. A mere contention that there has been classification is not sufficient. DEEMED PROSPECTUS Sec. 64 of Companies Act. Issue House- which issues shares of the company. They take shares from the company and then issue them. A company issues all the shares to another company B. B then offers the shares to the public. Thus, B becomes the issue house. Since there is no public offer, therefore a prospectus is not required in this case, rather a statement in lieu of prospectus is required to be filed with the registrar. 1. Whether it is necessary to issue a prospectus? 2. What if there is a problem between the 2 parties- B and whoever takes shares from B? 3. In such a case, the company will evade the liability by transferring all its shares to one person who can further sell them away. If within 6 months of transfer of shares from A to B, B invites public to sell away the shares then the offer will be the prospectus and it shall have to adhere to all requirements of prospectus. Second requirement is that of consideration. If consideration is not completely transferred to the company, then it shall be assumed that the purpose of B buying the shares was that of selling it further. This is provided in sec. 64. The liability will be that of B. Wherever there will be the liability of directors, the people in charge of issue house shall be liable. October 10, 2007 Sec. 82. By Competition act, shares can be transferred after allottemt of shares. Types of shares1. Equity shares 2. Preferential shares- they have a fixed amount or fixed rate of dividends. They will have a preference over the ordinary share holder in the case of winding up of the company to get back their shares. They may have some part in the surplus of profits, they may have a holding in surplus in assets, but this does not make the preferential shares equity shares, as when there are fixed rate or amount of dividends, then they shall continue to remain preferential share holders. Preferential share holders do not have voting rights equivalent to equity shareholders, but all the issues concerning their interest, they shall have voting rights. They have voting rights equivalent to equity shareholders in 2 circumstancesa. When they are cumulative preferential shares and they have not been paid for last 2 years.46
46

Sec. 87(2)

b. When for the last 6 years, even though non consecutive, but for 3 years, they did not obtain dividends, then also they shall get voting rights. Cumulative preferential shares- u/s 205, company can declare dividend only in the case of profit. In case of losses, it cannot declare dividend. The company is suffering losses for 2 yrs., then 3rd year it earns profit. The cumulative share holders will get cumulative profits for 3 years Non cumulative- the dividend will be paid only for the year the company earns profit. The legal presumption is in the favour of cumulative shares. To make it non- cumulative, it must be expressly mentioned that the shares are non cumulative. Another classification Participative- participation in surplus profits and assets. Eg. a company earns a profit of 10,000. It will pay its preferential share holders, then equity share holders. In case preference share holders by AOA have the right to obtain the surplus whichever is left after paying off the equity shares, then they will be participative preferential shares. This means that the share holder is participating in the companys assets as a going concern. Non participative shares- the legal provision is in the favor for non- participative shares. 3. Promoters shares Section 86 (1)(2) talks about types of shares and also talks about classes of shares. Equity shares with differential voting rights Differential shares [bill of 1997 which was never enacted stated that voting rights must be according to what is mentioned in AOA. Guidelines 1. You cannot transfer shares from 1 type to another 2. A newly formed company cannot issue these type of shares as u/s 205, company must have profits for 3 years, only then it can issue differential voting rights. 3. Company must not be made liable under 3 acts- SEBI, FEMA, securities contract regulation act. there must be proper resolution for this purpose as well. Within 25% issued share capital. Preferential share capital is supposed to be redeemable. Section 85- 90 does not apply to private company unless it is a subsidiary of public company. There cannot be only preference shares or only equity shares in a company. What is redemption? After maturity of shares, the company will give money and buy back the shares. It is different from redemption of share capital. Section 77 is buy back, section 100 is redemption. Only equity shares can be listed. October 11, 2007 The maximum time for which the company has to redeem its shares is 20 years. What for those shares which the company has issued before 1988 amendment? The provision is there in sec. 80A. (refer to clauses a and b) There are 2 ways of redemption using surplus profits of the company. Issuing fresh shares. Reduction of share capital October 13, 2007 PROCEDURE FOR ALLOTMENT

Company issues a prospectus (i.e. public company going for public issue). It will be receiving applications, called as subscription. There is some time lapse in which company is not supposed to issue any share, sec. 72. There is one date fixed after which the application for shares cannot be taken back. Minimum shares must be received within 120 days of issuing of prospectus. Within 10 days, company is to return the money back in case it is unable to attain minimum subscription. Allotment- it means division of capital of company into definite no. of shares and then assignment of those shares to members of the company. Allotment must be done by properly constituted Board. Raymond Synthetics Ltd. & Ors. v. UOI47 Sec. 73 October 15, 2007 In re Birla Corporation48 Raja Ram Corn products v. CLB49 Anarkali Sarabhi v. Commr. Of Income Tax50 Whether redemption of shares amounts to sale? Anarkali had bought certain shares which were redeemed by the company. She made a profit and there was income tax sought to be levied on the same. Anarkali contended that it was redemption and not sale. Sec. 45, 2 (47) of income tax act. Sec. 45- capital gains are taxable. 2(47)- transfer is sale, exchange or relinquishment. The contention of the appellant was that there was no transfer taking place. The appellant made a profit and to make this profit, she had to give her shares to the company. The appellant had relinquished the shares in order to gain profit. Further, court held that it amounted to sale. 1. Sec. 77 bars buy back of shares. But sec. 77(1) states that redemption of shares was an exception to same. 2. In order to redeem shares, the company had to pay a certain price to the appellant. So it did amount to sale. RATIO: redemption of shares amounts to sale and transfer as explained under Income Tax and hence taxable.

What is the rights issue? When a public company will issue new shares or further raise the capital, it will first offer them to the existing share holders. This differs from a preemptive right as in preemptive right, there is no right to renounce the right in someone elses favor. The purpose of the same is that in further allotment, the board of directors may allot the shares to their family members or relatives, and indirectly become the majority holders in the company. Thus, the shareholders are offered first, and only on their rejection, directors are allowed to issue them to whomsoever they want. PROCEDURE
47 48

AIR 1992 SC 847 2005 126 Comp Cases 647 (Bom) 49 2003 113 Comp Cases 33 50 1997 89 Comp Cases 28

Offer letter sent to all share holders and if no answer is received within 14 days, the offer is said to be rejected. There are 3 options1. He may accept the offer. 2. He may renounce his right in favor of an outsider. It is direct allotment of shares from the company to the outsider. 3. If he refuses to take the shares, the directors may allot them to whomsoever they want. This right is waived by special resolution by the shareholders. If such a thing happens, a public issue can be declared. When debentures or loan are converted into equity shares, it will not be considered as the rights issue. Section 81 When the company has taken a loan from the government and issues shares , the government may ask the company to issue shares instead of debentures on certain criterion such as profits of the past 5 years, financial conditions, etc. Section 56- this is not applicable to rights issues, even if the ultimate effect is that the shareholders renounce their rights to 3rd person and finally it is the 3rd person who gets the shares. October 18, 2007 RIGHT SHARES AND BONUS SHARES Bonus shares are turning your benefit into capital. Instead of giving profits, bonus shares are issued. Right shares, on the other hand are for money. They are first offered to the existing share holders and if they renounce, then they are offered to anybody else. Whether loan can be converted into shares? It can be done sec. 81(1)(a). it must be in terms of its issue. When the AOA or the terms provide otherwise, the right of renouncement is not necessary to be given to the shareholders. By simple majority or by special resolution, such a right of renounce can be waived. Nothing in this section applies to section 67 or to promoters. In re OCL India Ltd. 51 Highway cycles industries case- reduction of share capital 2003 115 Comp Cases 260 Company was having a capital loss. The value of the goodwill and trademark of the company reduced. First, it should be put into Profit & loss account when the value of goodwill is reduced. Thus, the contention was that only when there is net losses, then reduction of capital may be resorted to, but the court held that it is a domestic issue. Court will generally give notice to the creditors, but only in rarest of rare cases, it may say that notice need not be given. October 22, 2007 Depositories and Dmat shares- sec. 68 B- any public company going for a public capital of more than 10 crore (public issue) then, it must be in dematerialized only. Procedure 3 parites are involved- the depository participant, the investor and the company. So in triplicate copies, we have to submit the share documents. A copy is sent to the company and after the verification is obtained from the company, then the depository will open the account. READ BUY BACK AND DEMAT SHARES HERE October 23, 2007
51

[1999] 95 Comp Cases 429 (Ori)

ESCROW ACCOUNT When 2 parties are there, they can be seller purchaser, etc. taking a simple example of mortgage, if the mortgagee does not pay the tax, then the land will be confiscated. So, the Escrow agents are appointed in which the expected taxes are already paid to the agent. If he fails to pay, then the agent pays on his behalf. Later on, when all the liabilities are discharged, the amount deposited in escrow account shall be returned to him. Freeman & Lockyer v. Buckhurst Park Properties Ltd.52 (shikhas presentation.take write up) TAPESHS PRESENTATION (TAKE WRITE UP AND KNOW THE CASE ALSO) Yatins presentation (sasta write up.apne aap padho)

52

[1964] 1 All ER 630