Companies Act 2013

CA Foundation

CA Deepika Rathi

CA FOUNDATION LAW 1
 CHAPTER OVERVIEW
Companies Incorporated under the Companies Act ,2013

Corporate Incorporation
Features Share Capital Shares MOA AOA
Vaile Theory of Company

1. Nominal Equity Shares Defines

Separate Company is Register Defines Rules
2. Issued and Preference object and
Legal entity, different Company Regulations,
3. Called up Shares Scope of
Perpetual from its with ROC or bye-laws
4. Paid up work of
Succession, members of Company
capital Company
Limited
liability, Get
Artificial Veil can be Certificate of With Company can Company has
Judicial With Uniform
lifted to incorporation differential not go power to
Person Rights
disregard Voting Right beyond the alter it AoA
separate scope through
legal entity defined Special
For Easy filing
follow SPICe Resolution

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 INTRODUCTION
✓ The Companies Act, 2013 was enacted to consolidate and amend the law relating to the companies.
✓ The Companies Act, 2013 was preceded by the Companies Act, 1956.
✓ The Companies Act, 2013 contains 470 sections and seven schedules.
✓ The entire Act has been divided into 29 chapters.
✓ The Companies Act, 2013 aims to improve corporate governance, simplify regulations, strengthen the interests of minority
investors and for the first time legislates the role of whistle- blowers. Thus, this enactment seeks to make our corporate
regulations more contemporary

Applicability The provisions of the Act shall apply to-

of • Companies incorporated under this Act or under any previous company law
Companies • Insurance companies (except where the provisions of the said Act are inconsistent with the provisions of the
Act,2013 Insurance Act, 1938 or the IRDA Act, 1999)
• Banking companies (except where the provisions of the said Act are inconsistent with the provisions of the
Banking Regulation Act, 1949)
• Companies engaged in the generation or supply of electricity (except where the provisions of the above Act
are inconsistent with the provisions of the Electricity Act, 2003)
• Any other company governed by any special Act for the time being in force.
• Such body corporate which are incorporated by any Act for time being in force, and as the Central
Government may by notification specify in this behalf.

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 Applicability of Companies Act 2013

Companies incorporated under this Act or under any previous company law.

Any other company governed by any Special Act for the time being in force.

Such body corporate which are incorporated by any Act for time being in force, and as the
Central Government may by notification specify in this behalf.

Insurance companies (when the provisions of the Companies Act are inconsistent with the
provisions of the Insurance Act, 1938 or the IRDA Act, 1999 the provisions of these Acts
shall apply).

Banking companies (when the provisions of the Companies Act are inconsistent with the
provisions of the Banking Regulation Act, 1949 the provisions of these Act shall apply).

Companies engaged in the generation or supply of electricity (when the provisions of the
Companies Act are inconsistent with the provisions of the Electricity Act, 2003 the
provisions of these Act shall apply).

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 COMPANY : MEANING AND ITS FEATURES
According to • “A corporation is an artificial being, invisible, intangible, existing only in contemplation of law.
Chief Justice • Being a mere creation of law, it possesses only those properties which the charter of its creation confers
Marshall upon it, either expressly or as accidental to its very existence.’’
According • “A company is an incorporated association, which is an artificial person created by law, having a separate
Professor Haney entity, with a perpetual succession and a common seal.”

Section 2(20) of
Companies Act • “Company means a company incorporated under this Act or under any previous company law”.
2013

FEATURES OF A COMPANY
1. Separate Legal Entity
• Company acquires a unique character of being a separate legal entity. Separate
• when a company is registered, it is clothed with a legal personality.
• It comes to have almost the same rights and powers as a human being.
• Its existence is distinct and separate from that of its members.
• A company can own property, have bank account, raise loans, incur liabilities and
Company Members
enter into contracts.

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 a. It is at law, a person which is different from the subscribers to the memorandum of association. Its personality is distinct
and separate from the personality of those who compose it.
b. Even members can contract with company, acquire right against it or incur liability to it. For the debts of the company,
only its creditors can sue it and not its members.
• Conclusion
✓ A company is capable of owning, enjoying and disposing of property in its own name.
✓ Although the capital and assets are contributed by the shareholders, the company becomes the owner of its capital and
assets.
✓ The shareholders are not the private or joint owners of the company’s property.
• A member does not even have an insurable interest in the property of the company {Case : Macaura Vs. Northern
Assurance Co. Limited (1925)}:
✓ Fact of the Case :- Macaura (M) was the holder of nearly all (except one) shares of a timber company. He was also a
major creditor of the company. M insured the company’s timber in his own name. The timber was lost in a fire. M
claimed insurance compensation.
✓ Held :- The insurance company was not liable to him as no shareholder has any right to any item of property owned by
the company, for he has no legal or equitable interest in them.

2. Perpetual Succession
• Members may die or change, but the company goes on till it is wound up on the grounds specified by the Act.
• The shares of the company may change hands infinitely but that does not affect the existence of the company.
• Since a company is an artificial person created by law, law alone can bring an end to its life. Its existence is not affected by the
death or insolvency of its members.

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3. Limited Liability
The liability of a member depends upon the kind of company of which he is a member.
1. Limited liability company :
• The debts of the company in totality do not become the debts of the shareholders.
• The liability of the members of the company is limited to the extent of the nominal value of shares held by them.
• In no case can the shareholders be asked to pay anything more than the unpaid value of their shares.
2. Limited by guarantee :
• The members are liable only to the extent of the amount guaranteed by them and that too only when the company
goes into liquidation.
3. Unlimited Company :
• The liability of its members is unlimited.
4. Artificial Legal Person
1. A company is an artificial person as it is created by a process other than natural birth. It is legal or judicial as it is created by
law. It is a person since it is clothed with all the rights of an individual.
2. Further, the company being a separate legal entity can own property, have banking account, raise loans, incur liabilities and
enter into contracts.
3. As the company is an artificial person, it can act only through some human agency, viz., directors.
4. Thus, a company is called an artificial legal person.
5. Common Seal
• A company being an artificial person is not bestowed with a body of a natural being.

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• Therefore, it works through the agency of human beings. Common seal is the official signature of a company, which is affixed
by the officers and employees of the company on its every document.
• The common seal is a seal used by a corporation as the symbol of its incorporation.
• The Companies (Amendment) Act, 2015 :
- has made the common seal optional by omitting the words “and a common seal” from Section 9 so as to provide an
alternative mode of authorization for companies who opt not to have a common seal.
- Rational for this amendment is that common seal is seen as a relic of medieval times.
- Even in the U.K., common seal has been made optional since 2006

Features of the Company (Summary)

Separate Legal Entity Perpetual Succession

• A company’s existence is distinct and separate from that • The existence of a company is not affected by the
of its members. It can own property, have bank account, death or insolvency of its members. The
raise loans, incur liabilities and enter into contracts. shareholders keep changing but that does not
• A company is capable of owning, disposing etc of property in affect the existence of the company.
its own name, Although the capital and assets are • Even on death of all the members of the company, it
contributed by the shareholders, the company becomes the continues to exist. Its existence is not affected by
owner of its capital and assets. the death or insolvency of its members.
• Case Law : Macaura Vs. Northern Assurance Co.
Limited (1925)

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 Limited Liability Artificial Legal Person Common Seal

The liability of a member depends upon • Company is an artificial person as it • Common seal is the official
the kind of company of which he is a is created by a process other than signature of a company, which
member. natural birth. is affixed by the officers and
a) Limited liability company – Liability • It is legal/judicial as it is created by employees of the company on
limited to the extent of unpaid value law. its every document.
on the share • It is a person since it is clothed with • The common seal is a seal
b) Company Limited by guarantee – all the rights of an individual. used by a corporation as the
Limited to the extent of amount • It act through some human agency symbol of its incorporation.
guaranteed. i.e. Directors • The Companies (Amendment)
c) Unlimited Company – The liability of • It can own property, have banking Act, 2015 has made the
members is unlimited. account, raise loans, incur liabilities common seal optional
and enter into contracts.

Space for Notes

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 CORPORATE VEIL THEORY
• The term Corporate Veil refers to the concept that members of a
company are shielded from liability connected to the company’s actions.
• If the company incurs any debts or contravenes any laws, the corporate
veil concept implies that members should not be liable for those errors.
In other words, they enjoy corporate insulation.
• Thus, the shareholders are protected from the acts of the company. Company Curtain Members

Case Law : Salomon Vs. Salomon and Co Ltd.

• Fact of the Case :
✓ Salomon incorporated a company named “Salomon & Co. Ltd.”, with seven subscribers consisting of himself, his wife,
four sons and one daughter.
✓ This company took over the personal business assets of Salomon for £ 38,782 and in turn, Salomon took 20,000
shares of £ 1 each, debentures worth £ 10,000 of the company with charge on the company’s assets and the balance
in cash.
✓ His wife, daughter and four sons took up one £ 1 share each. Subsequently, the company went into liquidation due to
general trade depression.
✓ The unsecured creditors to the tune of £ 7,000 contended that Salomon could not be treated as a secured creditor of
the company, in respect of the debentures held by him, as he was the managing director of one-man company, which
was not different from Salomon and the cloak of the company was a mere sham and fraud.
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• Held by Lord Mac Naughten :
✓ The Company is at law a different person altogether from the subscribers to the memorandum, and though it may be
that after incorporation the business is precisely the same as it was before and the same persons are managers, and
the same hands receive the profits, the company is not in law the agent of the subscribers or trustees for them.
✓ Nor are the subscribers, as members, liable, in any shape or form, except to the extent and in the manner provided
by the Act
• Conclusion :
✓ Company has its own existence and as a result, a shareholder cannot be held liable for the acts of the company even
though he holds virtually the entire share capital.
✓ The whole law of corporation is in fact based on this theory of separate corporate entity.

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 Whether this Veil of Corporate Personality can even be lifted or pierced?
• Meaning of “Lifting the Veil” : It means looking behind the company as
a legal person. i.e., disregarding the corporate entity and paying regard,
instead, to the realities behind the legal facade.
• Where the Courts ignore the company and concern themselves directly
with the members or managers, the corporate veil may be said to have
Company Members
been lifted.
Lifting of
• Only in appropriate circumstances, the Courts are willing to lift the Corporate Veil
corporate veil and that too, when questions of control are involved
rather than merely a question of ownership.

Lifting of Corporate Veil

The following are the cases where company law disregards the principle of corporate personality or the principle that the
company is a legal entity distinct and separate from its shareholders or members:
1. To determine the character of the company i.e. to find out whether co-enemy or friend:
• In the law relating to trading with the enemy where the test of control is adopted.
• The leading case in this point is Daimler Co. Ltd. vs. Continental Tyre & Rubber Co., if the public interest is not likely to
be in jeopardy, the Court may not be willing to crack the corporate shell.
• But it may rend the veil for ascertaining whether a company is an enemy company.
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 • It is true that, unlike a natural person, a company does not have mind or conscience; therefore, it cannot be a friend
or foe.
• It may, however, be characterised as an enemy company, if its affairs are under the control of people of an enemy
country.
• For this purpose, the Court may examine the character of the persons who are really at the helm of affairs of the
company.
2. To protect revenue/tax:
• In certain matters concerning the law of taxes, duties and stamps particularly where question of the controlling
interest is in issue. [S. Berendsen Ltd. vs. Commissioner of Inland Revenue]
i. Where corporate entity is used to evade or circumvent tax, the Court can disregard the corporate entity [Juggilal
vs. Commissioner of Income Tax AIR (SC)].
ii. In [Dinshaw Maneckjee Petit], it was held that the company was not a genuine company at all but merely the
assessee himself disguised under the legal entity of a limited company. The assessee earned huge income by way
of dividends and interest. So, he opened some companies and purchased their shares in exchange of his income
by way of dividend and interest. This income was transferred back to assessee by way of loan. The Court
decided that the private companies were a sham and the corporate veil was lifted to decide the real owner of
the income.
3. To avoid a legal obligation:
• Where it was found that the sole purpose for the formation of the company was to use it as a device to reduce the
amount to be paid by way of bonus to workmen, the Supreme Court upheld the piercing of the veil to look at the real
transaction (The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar vs. The Associated Rubber
Industries Ltd., Bhavnagar and another).
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 • Case Law : The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar vs. The Associated Rubber
Industries Ltd., Bhavnagar and another
• Fact of the Case :
✓ A Limited” purchased shares of “B Limited” by investing a sum of Rs . 4,50,000.
✓ The dividend in respect of these shares was shown in the profit and loss account of the company, year after year.
✓ It was taken into account for the purpose of calculating the bonus payable to workmen of the company.
✓ Sometime in 1968, the company transferred the shares of B Limited, to C Limited a subsidiary, wholly owned by it.
✓ Thus, the dividend income did not find place in the Profit & Loss Account of A Ltd., with the result that the
surplus available for the purpose for payment of bonus to the workmen got reduced.
✓ Here a company created a subsidiary and transferred to it, its investment holdings in a bid to reduce its liability to
pay bonus to its workers.
• Held :
✓ Thus, the Supreme Court brushed aside the separate existence of the subsidiary company.
✓ The new company so formed had no assets of its own except those transferred to it by the principal company,
with no business or income of its own except receiving dividends from shares transferred to it by the principal
company and serving no purpose except to reduce the gross profit of the principal company so as to reduce the
amount paid as bonus to workmen.
4. Formation of Subsidiaries to act as agents :
• A company may sometimes be regarded as an agent or trustee of its members, or of another company, and may
therefore be deemed to have lost its individuality in favour of its principal.
• Here the principal will be held liable for the acts of that company.

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 • Case Law : Merchandise Transport Limited vs. British Transport Commission (1982)
• Fact of the Case :
✓ A transport company wanted to obtain licenses for its vehicles, but could not do so if applied in its own name.
✓ It therefore formed a subsidiary company, and the applicationfor license was made in the name of subsidiary.
✓ The vehicles were to be transferred to the subsidiary company.
• Held :
✓ The parent and the subsidiary were one commercial unit and the application for licences was rejected.
5. Company formed for fraud/improper conduct or to defeat law :
• Where the device of incorporation is adopted for some illegal or improper purpose, e.g., to defeat or
circumvent law, to defraud creditors orto avoid legal obligations. [Gilford Motor Co. vs. Horne]

Lifting of Corporate Veil (Summary)

To determine the character of the company [enemy or friend]
✓ A company does not have mind or conscience; therefore it cannot be a friend or a foe. It
Corporate may be characterized as an enemy company, if its affairs are under control of people of an
Veil will be enemy country.
lifted ✓ For this purpose the court may determine the character of persons who are incharge of
the affairs of the company.
✓ Case law : Daimler Co. Ltd. vs. Continental Tyre & Rubber Co

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 To evade tax
✓ The Courts may ignore the corporate entity of a company where it is used for tax evasion
✓ Case Law : Dinshaw Maneckjee Petit, Juggilal vs. Commissioner of Income Tax AIR
(SC).

To avoid legal obligation

✓ Where the courts find that there is avoidance of welfare legislation, it will be free to lift
the corporate veil.
✓ Where it was found that the sole purpose for the formation of the company was to use it as
a device to reduce the amount to be paid by way of bonus to workmen, the Supreme Court
upheld the piercing of the veil to look at the real transaction.
Corporate ✓ Case Law : The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar vs.
Veil will be The Associated Rubber Industries Ltd., Bhavnagar and another
lifted
Formation of subsidiaries to act as agent
✓ A company may sometimes be regarded as an agent or trustee of its members, or of any
other company and may therefore be deemed to have lost its individuality in favour of its
principal.
✓ Here the principal will be held liable for any acts of the company.
✓ Case Law : Merchandise Transport Limited V. British Transport Commission

Company formed for fraud/improper conduct or to defeat law

✓ Where the device of incorporation is adopted for some illegal or improper purpose, e.g., to
defeat or circumvent law, to defraud creditors or to avoid legal obligations.
✓ Case Law: Gilford Motor Co. vs. Horne
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 CLASSES OF COMPANIES UNDER THE ACT
1. The basis of liability
Company • When the liability of the members of a company is limited by its memorandum of association to the
Limited by amount (if any) unpaid on the shares held by them, it is known as a company limited by shares.
shares • Shareholder may be called upon to contribute only to the extent of the amount, which remains unpaid on
{Section 2(22)} his shareholdings. His separate property cannot be encompassed to meet the company’s debt.
• It may be worthwhile to know that though a shareholder is a co-owner of the company, he is not a co-
owner of the company’s assets.
• The ownership of the assets remains with the company, because of its nature as a legal person.
• The extent of the rights and duties of a shareholder as co-owner is measured by his shareholdings.
Company • The company having the liability of its members limited by the memorandum to such amount as the
Limited by members may respectively undertake by the memorandum to contribute to the assets of the company in
guarantee the event of its being wound up.
{Section 2(21)} • The liability of the member of a guarantee company is limited up to a stipulated sum mentioned in the
memorandum.
• Members cannot be called upon to contribute beyond that stipulated sum.
Common • A ‘guarantee company’ and ‘the company having share capital’ are legal personality and limited liability.
Features of both • In the latter case, the member’s liability is limited by the amount remaining unpaid on the share, which
companies each member holds. Both of them have to state in their memorandum that the members’ liability is limited.

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Difference • In the case of company limited by guarantee : the members may be called upon to discharge their liability
between both only after commencement of the winding up and only subject to certain conditions.
the Companies • In the case of company limited by shares : the members may be called upon to do so at any time, either
during the company’s life-time or during its winding up.
Conclusion for • It is clear from the definition of the guarantee company that it does not raise its initial working funds from
the Company its members.
Limited by • Therefore, such a company may be useful only where no working funds are needed or where these funds
Guarantee can be held from other sources like endowment, fees, charges, donations, etc.
• Case Law: Narendra Kumar Agarwal vs. Saroj Maloo
✓ The Supreme Court has laid down that the right of a guarantee company to refuse to accept the
transfer by a member of his interest in the company is on a different footing than that of a company
limited by shares.
✓ The membership of a guarantee company may carry privileges much different from those of ordinary
shareholders.
Unlimited • “Unlimited company as a company not having any limit on the liability of its members. In such a company,
Company the liability of a member ceases when he ceases to be a member.”
{Section2(92)} • The liability of each member extends to the whole amount of the company’s debts and liabilities but he will
be entitled to claim contribution from other members.
• In case the company has share capital, the Articles of Association must state the amount of share capital
and the amount of each share.

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 • So long as the company is a going concern the liability on the shares is the only liability which can be
enforced by the company.
• The creditors can institute proceedings for winding up of the company for their claims.
• The official liquidator may call the members for their contribution towards the liabilities and debts of the
company, which can be unlimited.

Companies On the Basis of Liability

Company limited by shares Company limited by guarantee Unlimited company

• As per Sec 2(22), when the liability of • As per Sec 2(21), when the liability of a
• As per Sec 2(92), a company where
member by the memorandum is limited member is limited to the extent of
there is no limit on the liability of
to the extent of unpaid value on amount guaranteed by him.
each member.
shares. • Unlike a company limited by shares, this
• The unlimited liability exists only at
• This unpaid amount can be called up at company does not have shareholders a
the time of winding up.
anytime by the company. company limited by guarantee has one or
• Theliability ceases when the
• It means that for meeting the debts of more members.
member ceases to be a member of
the company, the shareholder may be • The guaranteed amount can be called up
the company.
called uponto contribute only to the only at the time of winding up.
• Liability of each member extends to
extent of unpaid value on the share. His • Members cannot be called upon to
amount of Company’s debt and
personal assets cannot be used to meet contribute any amount beyond the agreed
liabilities.
the company’s debt. amount.

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2. On the Basis of Members
One Person Company
• Section 2(62) : one person company (OPC) as a company which has only one person as a member.
• Such companies are permitted to be formed by The Companies Act, 2013 to encourage
entrepreneurship and corporatization of business. It is formed as a Private Company[Section 3(1)(C)].

• OPC differs from sole proprietary : OPC differs from sole proprietary concern in an aspect that OPC is a
separate legal entity with a limited liability of the member whereas in the case of sole proprietary, the
liability of owner is not restricted and it extends to the owner’s entire assets constituting of official and
personal.

Qualification of Member/Nominee of OPC

A natural person • An Indian citizen whether Resident in

India or otherwise Not A Minor
• (Resident in India means a person who
has stayed in India for the period of not (Minor cannot be member or
less than 120 days during the Nominee or hold share with
immediately preceding financial year) beneficial interest even through
guardian)
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 Name of Nominee
shall be stated in
Can be converted into memorandum
Written Consent of the
Private or Public
Nominee shall be
Company anytime
obtained
after its incorporation

No Non-Banking
Significant Nominee has a right to
Financial Investment
Points withdraw his consent
activities

Member may change

No incorporation or the nominee by giving
conversion notice
into Sec 8 Co.

Natural person
Member and Nominee
Indian Citizen Whether
in only one OPC
Resident* of India or not

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Private • “Private company” means a company having a minimum paid-up share capital as may be prescribed, and
Company which by its articles,
{Section 2(68)} i. restricts the right to transfer its shares;
ii. except in case of One Person Company, limits the number of its members to 200
• Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the
purposes of this clause, be treated as a single member:
• Provided further that—
a. persons who are in the employment of the company; and
b. persons who, having been formerly in the employment of the company, were members of the
company while in that employment and have continued to be members after the employment
ceased,
shall not be included in the number of members; and
• prohibits any invitation to the public to subscribe for any securities of the company

Small Company Means a Company, other than a Public Company-

{Section 2(85)} (i) Paid Up Share Capital of which does not exceed 50 Lakhs Rupees Or such higher amount as may be
prescribed*, which shall not be more than 10 Crore Rupees and
(ii) Turnover of which as per Profit and Loss account for the immediately preceding financial year does not
exceed 2 Crore Rupees or Such higher amount as may be prescribed*, which shall not be more than 100
Crore Rupees.

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 Provided that nothing in this clause shall apply to-
a. A holding company or a subsidiary company
b. A company registered under section 8
c. A company or body corporate governed by any special Act.
*As per Rule 2(1)(t) of Companies ( Specification of Definitions Details) Rules, 2014 Paid up Capital and
Turnover of the Small company shall not exceed Rupees 4 crores and Rupees 40 crores respectively.

Private Company (Summary)

As per Sec 2(68), Private Company means a company having a minimum paid-up share
capital as may be prescribed and its Articles of Association:
-Restricts transferability of shares
-Limits the number of members to 200
In calculation of number of members the following things must be considered:
a. Employees who are also members are not to be considered
b. Ex-employees are not to be considered provided they had acquired shares
while in employment.
c. Joint Holders are considered as one.
-Prohibits invitation to public to subscribe to securities of the company.

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 Small Company (Summary)
As per Sec 2(85), It means a company, other than a public company which has:
-Paid up Capital –Not more than Rs.4 Crores and
-Turnover- Not more than Rs.40 Crores
In calculation of number of members the following things must be considered:
- Holding or subsidiary Company
- Section 8 Company
- Company incorporated under special Act

Public Company • “Public company” means a company which—

[Section 2(71)] i. is not a private company; and
ii. has a minimum paid-up share capital, as may be prescribed:
• Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed
to be public company for the purposes of this Act even where such subsidiary company continues to be a
private company in its articles;

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 Public Company

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

Space for Notes

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3. On the Basis of Control
Holding • A company is a holding company in relation to one or more other companies, means a company of which
Companies such companies are subsidiary companies.
[Section 2(46)] • For the purposes of this clause, the expression “company" includes any body corporate.
Subsidiary • “subsidiary company” in relation to any other company (that is to say the holding company), means a
Company company in which the holding company—
{Section 2(87)} i. controls the composition of the Board of Directors; or
ii. exercises or controls more than one-half of the total voting power either at its own or together with
one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have layers of
subsidiaries beyond such numbers as may be prescribed.
• For the purposes of this section —
i. a company shall be deemed to be a subsidiary company of the holding company even if the control
referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding
company
ii. the composition of a company’s Board of Directors shall be deemed to be controlled by another
company if that other company by exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors
iii. the expression “company” includes anybody corporate
iv. “layer” in relation to a holding company means its subsidiary or subsidiaries.

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Status of private As per section 2(71) a Private company, which is subsidiary of a public company shall be deemed to be public
company, which company for the purpose of this Act, even where such subsidiary company continues to be a private company
is subsidiary to in its articles.
public company
Examples ✓ A will be subsidiary of B, if B controls the composition of the Board of Directors of A, i.e., if B can, without
the consent or approval of any other person, appoint or remove a majority of directors of A.
✓ A will be subsidiary of B, if B holds more than 50% of the share capital of A.
✓ B is a subsidiary of A and C is a subsidiary of B. In such a case, C will be the subsidiary of A. In the like
manner, if D is a subsidiary of C, D will be subsidiary of B as well as of A and so on.
Associate • In relation to another company, means a company in which that other company has a significant influence,
Company but which is not a subsidiary company of the company having such influence and includes a joint venture
[Section 2(6)] company.
• Explanation. — For the purpose of this clause —
a. the expression “significant influence” means control of at least twenty per cent of total voting power,
or control of or participation in business decisions under an agreement;
b. the expression ”joint venture’’ means a joint arrangement whereby the parties that have joint control
of the arrangement have rights to the net assets of the arrangement.
• The term “Total Share Capital”, means the aggregate of the -
a. Paid-up equity share capital; and
b. Convertible preference share capital.

CA DEEPIKA RATHI CA FOUNDATION LAW 27

 Holding and Subsidiary Company (Summary)

• Holding Company : As per Sec 2(46), a company is a holding company if one or more are its subsidiaries.
• Subsidiary Company : As per Sec 2(87), Subsidiary company in relation to any other company means a company in which
the holding company
- controls the composition of board of directors or
- exercises or control more than half of the total voting power either on its own or together with one or more of
its subsidiary Companies.
• A private company which is a subsidiary of a public company shall be deemed to be public company for the purposes of
this Act.

Associate Company (Summary)

• As per Sec 2(6), a company in which the other company has a significant influence, but which is not a subsidiary
company of the company having significant influence.
• “Significant Influence” means control of at least 20% of the total voting power or control of or participation in business
decisions under an agreement.

CA DEEPIKA RATHI CA FOUNDATION LAW 28

4. On the Basis of Control
Listed Company • it is a company which has any of its securities listed on any recognised stock exchange.
[Section 2(46)] • Provided that such class of companies, which have listed or intend to list such class of securities, as may
be prescribed in consultation with the Securities and Exchange Board, shall not be considered as listed
companies.
Unlisted • Unlisted company means company other than listed company.
Company

5. Other Companies
Government • Government Company means any company in which not less than 51% of the paid-up share capital is held
Company by-
[Section 2(45)] i. the Central Government, or
ii. by any State Government or Governments, or
iii. partly by the Central Government and partly by one or more State Governments, and the section
includes a company which is a subsidiary company of such a Government company.
• Explanation : The “paid up share capital” shall be construed as “total voting power”, where shares with
differential voting rights have been issued.
Foreign • It means any company or body corporate incorporated outside India which—
Company i. has a place of business in India whether by itself or through an agent, physically or through electronic
[Section 2(42)] mode; and
ii. conducts any business activity in India in any other manner.

CA DEEPIKA RATHI CA FOUNDATION LAW 29

Formation of Companies with Charitable Objects etc. (Section 8 Company)

• Section 8 of the Companies Act, 2013 deals with the formation of companies which
Objective of are formed to
formation - promote the charitable objects of commerce, art, science, sports, education,
research, socialwelfare, religion, charity, protection of environment etc.
- Such company intends to apply its profit in
✓ promoting its objects and
✓ prohibiting the payment of any dividend to its members.

• Example : section 8 companies are FICCI, ASSOCHAM, National Sports Club of India,
CII etc.

CG on application by company shall

issue license under section 8

Central Government Section 8

Company
CA DEEPIKA RATHI CA FOUNDATION LAW 30
 • Section 8 allows the Central Government to register such person or association of
persons asa company with limited liability without the addition of words ‘Limited’ or
Power of
‘Private limited’ to its name, by issuing licence on such conditions as it deems fit.
Central
Government
• The registrar shall on application register such person or association of persons as a
company under this section.

• On registration the company shall enjoy same privileges and obligations as of a limited
company.

Revocation of License by Central Government may be done if

Section 8 Conditions License conditions Affairs of the company

Contravened contravened conducted fraudulently against
public policy or against the
objects

CA DEEPIKA RATHI CA FOUNDATION LAW 31

 Convert its status and change its name (Put ‘Limited’ or
‘Private Limited’ after its name)

Wind Up

Where a licence is revoked the Central Amalgamate with any other company having similar
Government shall direct to company objective.

Company
• Not less than Rs.10 lakhs which may be extend to RS.1
Crore

Punishment for Contravention of

Officer in default
section 8
• Not less than Rs.25 thousand which may be extend to
RS.25 lakhs
• Provided that when it is proved that the affairs of the
company were conducted fraudulently, every officer in
default shall be liable for action under section 447.
CA DEEPIKA RATHI CA FOUNDATION LAW 32
 Dormant Company (Section 455)
• Where a company is formed and registered under this Act for
✓ a future project or
✓ to hold an asset or
✓ intellectual property and
✓ has no significant accounting transaction,
Dormant Company • such a company or an inactive company may make an application to the Registrar in
Formed & Registered such manner as may be prescribed for obtaining the status of a dormant company.
under this act

Future Project Hold an Asset Intellectual Property Has no significant

accounting transaction

CA DEEPIKA RATHI CA FOUNDATION LAW 33

 Inactive Company
Inactive Company Means
a) a company which has not been carrying on any business or operation or
b) a company which has not made any significant accounting transaction during the last 2
financial years; or
c) a company which has not filed financial statements and annual returns during the last2
financial years.
Inactive Company “Significant accounting transaction” means any transaction other than—
i. payment of fees by a company to the Registrar;
ii. payments made by it to fulfil the requirements of this Act or any other law;
iii. allotment of shares to fulfil the requirements of this Act; and
iv. payments for maintenance of its office and records.

Nidhi Company
Company which has been incorporated as a nidhi with the object of
- Cultivating the habit of thrift (Cost Cutting) and
- Saving amongst its members, receiving deposits from and lending to
- Its members only for their mutual benefit and which complies with such rules as are
prescribed by the Central Government for regulation of such class of companies.

CA DEEPIKA RATHI CA FOUNDATION LAW 34

 Public Financial Institutions
The life Insurance Corporation of India established under the Life
Insurance Corporation Act 1956

Section 2(72) The Infrastructure Development Finance Company Limited

Following institutions
Specified company referred to in the Unit Trust of India (Transfer of
are to be regarded as Undertaking and Repeal Act 2002)
Public Financial
Institutions Institutions notified by the Central Government under section 4A(2) of the
Companies Act 1956 so repealed under section 465 of the Act

Such Other institutions as may be notified by the Central Government in

consultation with the Reserve Bank of India

Conditions for an institution to be notified as PFI

1. Established or constituted by or under any Central or State Act or other than this act or the previous
Companies Law ; or
2. At least 51% of the paid up share capital is held by the CG or by SG or partly by CG and partly by one or
more SG.
CA DEEPIKA RATHI CA FOUNDATION LAW 35
 MODE OF REGISTRATION OF COMPANY
Promoters
Who has been named as such in a prospectus
A Or
Is identified by the company in the annual return referred
to in section 92

B Who has control over the affairs of the company directly

or indirectly

Promoters
Section 2(69) On whose advice, direction or instructions the Board of
C
Directors is accustomed to act.

CA DEEPIKA RATHI CA FOUNDATION LAW 36

 Minimum People required for forming a Company

Seven to form
Public Company

Two to form Private Company

One to form One Person Company + With a Nominee

CA DEEPIKA RATHI CA FOUNDATION LAW 37

 Basic requirements with respect to the constitution of Company(Section-3)
Difference Private Company Public Company One Person Company
Minimum shareholders 2 7 1
Maximum shareholders 200 Unlimited 1
Minimum Directors 2 3 1
Maximum Directors 15 (Can be exceeded by 15 (Can be exceeded by 15 (Can be exceeded by passing
Passing special resolution) passing special resolution) special resolution)
Transferability of Shares Freely Transferable Restricted
Restricted

Incorporation of a Company (Section -7)

1. Filing of the documents and information with the registrar: - For the registration of the company following documents
and information are required to be filed with the registrarwithin whose jurisdiction the registered office of the company is
proposed to be situated-
• the memorandum and articles of the company duly signed by all the subscribers to the memorandum.
• a declaration by person who is engaged in the formation of the company (an advocate, a chartered accountant, cost
accountant or company secretary in practice), and by a person named in the articles (director, manager or secretary
of the company), that all the requirements of this Act and the rules made thereunder in respect of registration and
matters precedent or incidental theretohave been complied with.

CA DEEPIKA RATHI CA FOUNDATION LAW 38

 • an declaration from each of the subscribers to the memorandum and from persons named as the first directors, if
any, in the articles stating that-
- He is not convicted of any offence in connection with the promotion,formation or management of any company,
or
- He has not been found guilty of any fraud or misfeasance or of any breachof duty to any company under this
Act or any previous company law duringthe last five years,
- And that all the documents filed with the Registrar for registration of the company contain information that is
correct and complete and true to the best of his knowledge and belief;
• the address for correspondence till its registered office is established;
• the particulars (names, including surnames or family names, residential address,nationality) of every subscriber to the
memorandum along with proof of identity,and in the case of a subscriber being a body corporate, such particulars as
may be prescribed.
• the particulars (names, including surnames or family names, the Director Identification Number, residential address,
nationality) of the persons mentioned in the articles as the subscribers to the Memorandum and such other
particulars including proof of identity as may be prescribed; and
• the particulars of the interests of the persons mentioned in the articles as the first directors of the company in other
_rms or bodies corporate along with theirconsent to act as directors of the company in such form and manner as may
be prescribed.

2. Issue of certificate of incorporation on registration: The Registrar on the basis of documents and information filed, shall
register all the documents and information in the register and issue a certificate of incorporation in the prescribed form to the
effect that the proposed company is incorporated under this Act.

CA DEEPIKA RATHI CA FOUNDATION LAW 39

3. Allotment of Corporate Identity Number (CIN) : The Registrar on the basis of documents and information filed, shall
register all the documents and information in the register and issue a certificate of incorporation in the prescribed form to
the effect that the proposed company is incorporated under this Act.

4. Maintenance of copies of all documents and information : The company shall maintain and preserve at its registered
office copies of all documents and information as originally filed, till its dissolution under this Act.

5. Furnishing of false or incorrect information or suppression of material fact at the time of incorporation (i.e. at the
time of Incorporation): If any person furnishes any false or incorrect particulars of any information or suppresses any
material information, of which he is aware in any of the documents filed with the Registrar in relation to the registration
of a company, he shall be liable for action for fraud under section 447.

6. Where, at any time after the incorporation of a company, it is proved that the company has been got incorporated
by furnishing any false or incorrect information or representation or by suppressing any material fact or information in
any of the documents or declaration filed or made for incorporating such company, or by any fraudulent action, the
promoters, the persons named as the first directors of the company and the persons making declaration under this
section shall each be liable for action for fraud under section 447.

CA DEEPIKA RATHI CA FOUNDATION LAW 40

7. Order of Tribunal : Where a company has been got incorporated by furnishing false or incorrect information or
representation or by suppressing any material fact or information in any of the documents or declaration filed or made for
incorporating such company or by any fraudulent action, the Tribunal may, on an application made to it, on being satisfied
that the situation so warrants,—
a. pass such orders, as it may think fit, for regulation of the management of the companyincluding changes, if any, in its
memorandum and articles, in public interest or in the interest of the company and its members and creditors; or
b. direct that liability of the members shall be unlimited; or
c. direct removal of the name of the company from the register of companies; or
d. pass an order for the winding up of the company; or
e. pass such other orders as it may deem fit:

• Provided that before making any order,—

- the company shall be given a reasonable opportunity of being heard in the matter; and
- the Tribunal shall take into consideration the transactions entered into by the company,including the obligations, if
any, contracted or payment of any liability.

Simplified Proforma for Incorporating Company Electronically (SPICe)

Ministry of Corporate Affairs has taken various initiatives for ease of business. In a step towards easy setting up of
business, MCA has simplified the process of filing of forms for incorporation of a company through Simplified Proforma
for incorporating company electronically.

CA DEEPIKA RATHI CA FOUNDATION LAW 41

 Summary of the above Proceeding
1. Filing of Documents to Registrar of company 2. On the basis of documents and information filed
• Signed MOA & AOA by all subscriber the Registrar shall issue a Certificate of Incorporation
• Declaration that all requirements of the act & rules have been satisfied in prescribed form and allot a Corporate Identity
by Number (CIN) to the Company which shall be
(a) Person named in AOA (i.e. Director, Manager) included in Certificate of Incorporation.
(b) Persons engaged in formation of company (i.e. Advocate, CA/CS/Cost
Accountant)
• Declaration from subscriber to MOA & first Directors stating that:
(a) They are not convicted of any offence in connection with formation
of 3.The company shall maintain and preserve at its
company registered office copies of all documents and
(b) Not guilty of misfeasance/ breach under this or previous Companies information as originally filed till its dissolution under
Act during last five years this Act.
(c ) All documents & information contained in term are correct as per
their knowledge and belief.
• Address for correspondence till registered office is established.
• Particulars and identity proof of subscribers to MOA, first Directors of
AOA. 4.If any person knowingly provides false information
• Particulars of the interests of first Directors in AOA in other firms/ or suppress any material fact liability U/S 447
bodies corporate along with consent to act as directors of the company attracted.
• Prescribed Fees

CA DEEPIKA RATHI CA FOUNDATION LAW 42

 5 .If a company is already incorporated by furnishing any false or incorrect information or representation or by
suppressing any material fact application may be filed to Tribunal.

Direct Removal of name of the company from the

register of companies

Pass an order for the winding up of the company

After giving reasonable
opportunity of being heard
the Tribunal shall pass such Direct that liability of the members shall be unlimited
order
Change MOA/AOA in the interest of Public, creditors
and member

Pass such other orders as it may deem fit

CA DEEPIKA RATHI CA FOUNDATION LAW 43

 Steps of Incorporation
• Reservation of name by filing e-application
1

• Drafting & signing of MOA & AOA and its submission to ROC. These documents have to be e-filled and e-stamped.
2

• Consent of person nominated as directors to act as directors to be submitted electronically

3

• Submission of statutory declaration of compliance and other declarations

4

• Pay fees & amount of stamp duty electronically

5

• Obtain certificate of incorporation digitally signed by ROC

6

• File declaration about address of Registered office.

7

CA DEEPIKA RATHI CA FOUNDATION LAW 44

 EFFECT OF REGISTRATION (Section-9)
Effect of • From the date of incorporation (mentioned in the certificate of incorporation),
Registration ✓ the subscribers to the memorandum and
(Section -9) ✓ all other persons, who may from time to time become members of the company, shall be a
- body corporate by the name contained in the memorandum.
• Such a registered company shall be
✓ capable of exercising all the functions of an incorporated company under this Act and
✓ having perpetual succession with power to acquire, hold and dispose of property, both movable and
immovable, tangible and intangible, to contract and to sue and be sued, by the said name.
Case Laws • Case Law : Hari Nagar Sugar Mills Ltd. Vs. S.S. Jhunjhunwala
✓ From the date of incorporation mentioned in the certificate, the company becomes a legal person
separate from the incorporators; and there comes into existence a binding contract between the
company and its members as evidenced by the Memorandum and Articles of Association.
✓ It has perpetual existence until it is dissolved by liquidation or struck out of the register.
✓ A shareholder who buys shares, does not buy any interest in the property of the company but in
certain cases a writ petition will be maintainable by a company or its shareholders.
• Case Law : State Trading Corporation of India vs. Commercial Tax Officer
✓ A legal personality emerges from the moment of registration of a company and from that moment the
persons subscribing to the Memorandum of Association and other persons joining as members are

CA DEEPIKA RATHI CA FOUNDATION LAW 45

 ✓ regarded as a body corporate or a corporation in aggregate and the legal person begins to function
as an entity.
✓ A company on registration acquires a separate existence and the law recognises it as a legal person
separate and distinct from its members.
• Case Law : Spencer & Co. Ltd. Madras vs. CWT Madras.
✓ A company may purchase shares of another company and thus become a controlling company.
✓ However, merely because a company purchases all shares of another company it will not serve as a
means of putting an end to the corporate character of another company and each company is a
separate juristic entity.
• Case Law : Heavy Electrical Union vs. State of Bihar
✓ The law recognizes such a company as a juristic person separate and distinct from its members.
✓ The mere fact that the entire share capital has been contributed by the Central Government and all its
shares are held by the President of India and other officers of the Central Government does not make
any difference in the position of registered company and it does not make a company an agent either
of the President or the Central Government .

Space for Notes

CA DEEPIKA RATHI CA FOUNDATION LAW 46

 Effect of Registration (Summary)

Company after getting certificate

of incorporation

Company XYZ Ltd.

Incorporation Certificate

capable of exercising all the All other persons, who may from time
Having perpetual succession with power
functions of an to time become members of the
to acquire, hold and dispose of property,
incorporated company company, shall be a
both movable and immovable, tangible
under this Act - body corporate by the name
and intangible, to contract and to sue
contained in the
and be sued, by the said name.
memorandum.

CA DEEPIKA RATHI CA FOUNDATION LAW 47

EFFECT OF MEMORANDUM & ARTICLE (Section-10)
Effect of • Where the memorandum and articles when registered, shall
Memorandum & - Bind the company and
Article - The members thereof to the same extent as if they respectively had been signed by the company and
(Section -10) by each member, and an agreement to observe all the provisions of the memorandum and of the
articles.
• All monies payable by any member to the company under the memorandum or articles shall be a debt due
from him to the company.

Company
Registration of
Money payable by the
MOA & AOA member to company
shall bind the
Shall be the debt due
from member to the
Members who had signed company
the same as members
CA DEEPIKA RATHI CA FOUNDATION LAW 48
 CLASSIFICATION OF CAPITAL
The word capital means share capital, i.e., the capital or figure in terms of so many rupees dividedinto shares of fixed amount.
The proportion of the capital to which each member is entitled is hisshare.

Nominal or Authorized or
Registered Capital Issued Capital Subscribed Capital Called up Capital Paid-up capital

Section 2(8) Section 2(50) Section 2(86) Section 2(15) It is the total amount
Authorized or • Issued Capital means Subscribed • Called-up capital is paid or credited as
Nominal Capital such capital as the capital is that that part of the paid up on shares
means suchcapital company issuesfrom part of capital capital, which has issued, it is equal to
as is authorized by time to time for which is been called for called-up capital less
the memorandum subscription. payment, calls in arrears.
subscribed by
of a company to be • It is that part of the • it is the total
the members of
the maximum authorized capital amount called up
which is offeredby the company.
amount of share on the shares
capital of the company for issued.
company. subscription.

CA DEEPIKA RATHI CA FOUNDATION LAW 49

 SHARES
Nature of Shares Share is an interest in the company Shares are movable property

➢ Section 2(84) : Shares which means a ➢ Case Law : Borland Trustees vs. Steel ➢ Section 44: The shares or
share in the share capital of a company Bors. & Co. Ltd. debentures or other interests of
and includes stock. ➢ It was observed that “a share is not a any member in a company shall be
➢ A share thus represents such proportion sum of money but is an interest measured movable property transferable in
of the interest of the shareholders as the by a sum of money and made up of the manner provided by the
amount paid up thereon bears to the various rights contained in the contract, articles of the company.
total capital payable to the company. including the right to a sum of money of a
➢ It is a measure of the interest in the more or less amount’’.
company’s assets to which a person
holdinga share is entitled.

Shares are movable property

➢ Section 45: Every share in a company having share capital shall be distinguished by its distinctive number
➢ This implies that every share shall be numbered.
➢ However, this shall not apply to a share held by a person whose name is entered as holder of beneficial interest in such share in the
records of a depository.

CA DEEPIKA RATHI CA FOUNDATION LAW 50

 Kinds of Share Capital (Section 43)

Equity Share Capital Preference Share Capital

• Equity share capital with reference to a • With reference to any company limited by
company limited by shares, meansall share shares, means that part ofthe issued share
capital which is not preference share capital. capital of the company which carries or would
carry a preferential right with respect to-

Equity Share with Equity Share with a. Payment of dividend, either as a fixed
Uniform Voting Differential Voting amount or an amount calculated as a fixed
Rights Rights rate

b. Repayment, in case of winding up or

repayment of capital of the amount
of the share capital paid up or
deemed to have been paid up.

CA DEEPIKA RATHI CA FOUNDATION LAW 51

 Capital Shall be deemed to be Preference Capital

• Capital Shall be deemed to be Preference Capital :-Despite that it is entitled to either or both of the following rights,
namely :-
a. that in respect of dividends, in addition to the preferential rights to the amounts specified as above, it has a right
to participate, whether fully or to a limited extent, with capital not entitledto the preferential right aforesaid
b. that in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the
amounts specified above, it has a right to participate, whether fully or to a limited extent, with capital not entitled
to that preferential right in any surplus which may remain after the entire capital has been repaid.
• Exception: In case of private company - Section 43 shall not apply where memorandum or articles of association of the
private company so provides.

Space for Notes

CA DEEPIKA RATHI CA FOUNDATION LAW 52

 MEMORANDUM OF ASSOCIATION
A company cannot depart from the • Section 399 : It is a public document Memorandum of Association of company
provisions contained in the • Consequently, every person entering is in fact its charter; it defines its
memorandum however imperative may into a contract with the company is constitution andthe scope of the powers
be the necessity for the departure. presumed to have the knowledge of of the company with which it has been
the conditions specified therein. established under the Act.

• It cannot enter into a contract or engage

in any trade or business, which is beyond
the power confessed on it by the MEMORANDUM It is the very foundation on which the
memorandum. OF ASSOCIATION whole edifice of the company is built.
• If it does so, it would be ultra vires the
company and void.

• The shareholders must know the It contains the object for which the company
purposes for which his money can be is formed and therefore identifies the
used by the company and what risks he is possible scope of its operations beyond
taking in making the investment.
which its actions cannot go.
CA DEEPIKA RATHI CA FOUNDATION LAW 53
As per Section 4, Memorandum of a company shall be drawn up in such form as is given in Tables A, B, C, D and E in
Schedule I of the Companies Act, 2013

Table A Table B Table C Table D Table E

Table A is a form for Table B is a form for Table C is a form for Table D is a form for Table E is a form for
memorandum of memorandum of memorandum of memorandum of memorandum of
association of a association of a association of a association of an association of an
company limited by company limited by company limited by unlimited company. unlimited company
shares. guarantee and not guarantee and and having share
having a share havinga share capital.
capital. capital.

Contents of Memorandum
Name Clause Registered Object Clause Liability Clause Capital Clause Association Clause
Office Clause

CA DEEPIKA RATHI CA FOUNDATION LAW 54

Contents of Memorandum
Name Clause • This clause shall contain the name of the company, the name of a public company shall end with the word
“Limited” and in case of a private company with the words “Private Limited”.
• The name must not be similar or closely resemble the name of any other company which is already in
existence.
• The name of one person company shall include the words “One Person Company” below its name.
• This clause is not applicable on the companies formed under section 8 of the Act.
✓ The name including phrase ‘Electoral Trust’ may be allowed for Registration of companies to be
formed under section 8 of the Act, in accordance with the Electoral Trusts Scheme, 2013 notified by
the Central Board of Direct Taxes (CBDT).
✓ For the Companies under section 8 of the Act, the name shall include the words foundation, Forum,
Association, Federation, Chambers, Confederation, council, Electoral trust and the like etc.
Registered • Details of the state in which the registered office of the company is situated.
Office Clause
Object Clause • The object with which the company is incorporated, and any matters necessary for the furtherance of those
objects.
• If any company has changed its activities which are not reflected in its name, it shall change its name in
line with its activities within a period of six months from the change of activities after complying with all
the provisions as applicable to change of name.
Liability Clause • Whether the liability of the members is limited or unlimited.

CA DEEPIKA RATHI CA FOUNDATION LAW 55

Capital Clause • This clause states the amount of authorized share capital and also details about the number of shares the
capital is divided into along with the value of each share.
• A company not having share capital need not have this clause.
Association • Every subscriber to the memorandum shall take atleast one share and shall write against his name the
Clause number of shares taken by him.
Nomination • In case of One Person Company, the memorandum shall state the name of a person, who in the event of
Clause (Only for death of the subscriber, shall become the member of the company.
OPC)

Memorandum must be

Divided into Numbered Signed by at least seven

Printed persons (two in the case of a
paragraphs consecutively
private company and one in
the case of OnePerson
Company) in the presence of
at least one witness, who will
attest the signatures

CA DEEPIKA RATHI CA FOUNDATION LAW 56

 Note
A company being a legal person can through its agent, subscribe to the
memorandum.
However, a minor cannot be a signatory to the memorandum as he is not competent
to contract.
The guardian of a minor, who subscribes to the memorandum on his behalf, will be
deemed to have subscribed in his personal capacity.

• The Memorandum of Association of a company cannot contain anything contrary

to the provisions of the Companies Act.
• If it does, the same shall be devoid of any legal effect.
• Similarly, all other documents of the company must comply with the provisions of
the Memorandum

CA DEEPIKA RATHI CA FOUNDATION LAW 57

 DOCTRINE OF ULTRA VIRES
Meaning • The meaning of the term ultra vires is simply “beyond (their) powers”.
• The legal phrase “ultra vires” is applicable only to acts done in excess of the legal powers of the doers.
• This presupposes that the powers in their nature are limited.
Fundamental The fundamental rule of Company Law is that
Rule of - the objects of a company as stated in its memorandum can be departed from only to the extent permitted
Company Law by the Act, thus far and no further.
- In consequence, any act done or a contract made by the company which travels beyond the powers not
only of the directors but also of the company is wholly void and inoperative in law and is therefore not
binding on the company.
- On this account, a company can be restrained from employing its fund for purposes other than those
sanctioned by the memorandum. Likewise, it can be restrained from carrying on a trade different from the
one it is authorised to carry on.
The Impact of • The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires transaction,
the Doctrine of nor can it sue on it.
Ultra Vires • Since the memorandum is a “public document”, it is open to public inspection.
• Therefore, when one deals with a company one is deemed to know about the powers of the company.
• If in spite of this you enter into a transaction which is ultra vires the company, you cannot enforce it against
the company.

CA DEEPIKA RATHI CA FOUNDATION LAW 58

Conclusion • An act which is ultra vires the company being void, cannot be ratified by the shareholders of the company.
Sometimes, act which is ultra vires can be regularised by ratifying it subsequently.
• For instance, if the act is ultra vires the power of the directors, the shareholders can ratify it; if it is ultra
vires the articles of the company, the company can alter the articles; if the act is within the power of the
company but is done irregularly, shareholder can validate it.
Case Law Ashbury Railway Carriage and Iron Company Limited v. Riche-(1875)
➢ Fact of the Case :
• The main objects of a company were
a. To make, sell or lend on hire, railway carriages and wagons;
b. To carry on the business of mechanical engineers and general contractors
c. To purchase, lease, sell and work mines.
d. To purchase and sell as merchants or agents, coal, timber, metals etc.
• The directors of the company entered into a contract with Riche, for financing the construction of a
railway line in Belgium, and the company further ratified this act of the directors by passing a special
resolution.
• The company however, repudiated the contract as being ultra-vires.
• And Riche brought an action for damages for breach of contract.
• His contention was that the contract was well within the meaning of the word general contractors and
hence within its powers.
• Moreover it had been ratified by a majority of share-holders.

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 ➢ Held :
• It was held by the Court that the contract was null and void.
• It said that the terms general contractors was associated with mechanical engineers, i.e. it had to be
read in connection with the company’s main business.
• If, the term general contractor’s was not so interpreted, it would authorize the making of contracts
of any kind and every description, for example, marine and fire insurance.
✓ An ultra vires contract can never be made binding on the company. It cannot become “Intravires” by reasons of estoppel,
acquiescence, Iapse of time, delay or ratification.
✓ The whole position regarding the doctrine of ultra vires can be summed up as:
i. When an act is performed, which though legal in itself, is not authorized by the object clause of the memorandum, or
by the statute, it is said to be ultravires the company, and hence null and void.
ii. An act which is ultravires, the company cannot be ratified even by the unanimous consent of all the shareholders.
iii. An act which is ultravires the directors, but intravires the company can be ratified by the members of the company
through a resolution passed at a general meeting.
iv. If an act is ultravires the Articles, it can be ratified by altering the Articles by a Special Resolution at a general meeting.
✓ However, the disadvantages of this doctrine outweigh its main advantage, namely to provide protection to the
shareholders and creditors.
✓ Although it may be useful to members in restraining the activities of the directors, it is only a nuisance in so far as it prevents
the company from changing its activities in a direction which is agreed by all.
✓ Again, the purpose of doctrine of ultravires has been defeated as now the object clause can be easily altered, by passing just
a special resolution of the shareholders.

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 Doctrine of Ultra Vires
• The meaning of the term ultra vires is simply “beyond (their) powers”.
• The legal phrase “ultra vires” is applicable only to acts done in excess of the
legal powers of the doers.
• An act which is ultra vires the company being void, cannot be ratified by the
shareholders of the company.
• Sometimes, act which is ultra vires can be regularised by ratifying it
subsequently.
• An ultra vires contract can never be made binding on the company. It cannot
become “Intravires” by reasons of estoppel, acquiescence, Iapse of time, delay
or ratification.
• Case Law : Ashbury Railway Carriage and Iron Company Limited v. Riche-
(1875)

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 ARTICLE OF ASSOCIATION

• The articles of association of a • The document containing the • The articles of association are in fact
company are its rules and articles of association of a the bye-laws of the company
regulations, which are framed to company (the Magna Carta) is a according to which director and
manage its internal affairs. business document; hence it has other officers are required to
• Just as the memorandum contains to be construed strictly. perform their functions as regards
the fundamental conditions upon • It regulates domestic the management of the company, its
which the company is allowed to management of a company and accounts and audit.
be incorporated, so also the creates certain rights and • It is important therefore that the
articles are the internal obligations between the auditor should study them and,
regulations of the company members and the company while doing so he should note the
• Case Law : Guiness vs. Land • Case Law : S.S. Rajkumar vs. provisions therein in respect of
Corporation of Ireland Perfect Castings (P) Ltd. relevant matters.

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Section 5 of the Companies Act, 2013 seeks to provide the contents and model of articles of association. The section lays
the following law-

Contains
Regulation • The articles of a company shall contain the regulations for management of the company.

Inclusion of • The articles shall also contain such matters, as are prescribed under the rules.
matters • However, a company may also include such additional matters in its articles as may be considered
necessary for its management
Contain • The articles may contain provisions for entrenchment (to protect something) to the effect that specified
provisions for provisions of the articles may be altered only if conditions or procedures as that are more restrictive than
entrenchment those applicable in the case of a special resolution, are met or complied with.

Manner of • The provisions for entrenchment shall only be made either on formation of a company, or by an
inclusion of the amendment in the articles agreed to by all the members of the company in the case of a private company
entrenchment and by a special resolution in the case of a public company.
provision
Notice to the • Where the articles contain provisions for entrenchment, whether made on formation or by amendment,
registrar of the the company shall give notice to the Registrar of such provisions in such form and manner as may be
entrenchment prescribed.
provision

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Forms of articles • The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in Schedule I as
may be applicable to such company.
Model articles • A company may adopt all or any of the regulations contained in the model articles applicable to such
company.
Company • In case of any company, which is registered after the commencement of this Act, in so far as the registered
registered after articles of such company do not exclude or modify the regulations contained in the model articles
the applicable to such company, those regulations shall, so far as applicable, be the regulations of that
commencement company in the same manner and to the extent as if they were contained in the duly registered articles of
of this Act the company.

Space for Notes

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 Key Differences between Memorandum of Association VS. Article of Association

Serial Basis of Memorandum of Association Article of Association

No. Difference
1. Objectives Memorandum of Association defines and Articles of association lays down the rules and regulations for the
delimits the objectives of the company internal management of the company
Articles determine how the objectives of the company are to be
achieved.
2. Relationship Memorandum defines the relationship of the Articles define the relationship between the company and its
company with the outside world. members.
3. Alteration Memorandum of association can be altered The articles can be altered simply by passing a special resolution
only under certain circumstances and in the
manner provided for in the Act.
In most cases permission of the Regional
Director, or the Tribunal is required
4. Ultra Vires Acts done by the company beyond the scope The acts ultra-vires the articles can be ratified by a special
of the memorandum are ultra-vires and void. resolution of the shareholders, provided they are not beyond the
These cannot be ratified even by the provisions of the memorandum.
unanimous consent of all the shareholders

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 DOCTRINE OF CONSTRUCTIVE NOTICE
❖ The memorandum and articles of association of a company when registered with Registrar of Companies, become public
documents, and they are available for inspection to any person, on the payment of a nominal fees.
❖ It is, therefore, the duty of every person dealing with a company to inspect its documents and make sure that his contract
is in conformity with their provisions but whether a person reads them or not, it will be presumed that he knows the
contents of the documents.
❖ This kind of presumed/implied notice is called constructive notice.

By constructive notice is meant

1. Whether a person reads the documents or not, he is presumed to have knowledge of the contents of the documents, He
is not only presumed to have read the documents but also understood them in their true perspective, and
2. Every person dealing with the company not only has the constructive notice of the memorandum and articles, but also of
all the other related documents, such as Special Resolutions etc., which are required to be registered with the Registrar.

Thus, if a person enters into a contract which is beyond the powers of the company as defined in the memorandum, or
outside the authority of directors as per memorandum or articles, he cannot acquire any rights under the contract against the
company.

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 DOCTRINE OF INDOOR MANAGEMENT
❖ The Doctrine of Indoor Management is the exception to the doctrine of constructive notice.
❖ The aforesaid doctrine of constructive notice does in no sense mean that outsiders are deemed to have notice of the
internal affairs of the company.
❖ For instance, if an act is authorised by the articles or memorandum, an outsider is entitled to assume that all the detailed
formalities for doing that act have been observed.
❖ This can be explained with the help of a landmark case The Royal British Bank vs. Turquand. This is the doctrine of indoor
management popularly known as Turquand Rule.

Case Law : Royal British Bank Vs. Turquand

➢ Fact of the case
• Mr. Turquand was the official manager (liquidator) of the insolvent Cameron’s Coalbrook Steam, Coal and Swansea
and Loughor Railway Company.
• It was incorporated under the Joint Stock Companies Act, 1844.
• The company had given a bond for £ 2,000 to the Royal British Bank, which secured the company’s drawings on its
current account.
• The bond was under the company’s seal, signed by two directors and the secretary.
• When the company was sued, it alleged that under its registered deed of settlement (the articles of association),
directors only had power to borrow up to an amount authorized by a company resolution. A resolution had been
passed but not specifying how much the directors could borrow.

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➢ Held
• it was decided that the bond was valid
• so the Royal British Bank could enforce the terms.
• He said the bank was deemed to be aware that the directors could borrow only up to the amount resolutions
allowed.
• Articles of association were registered with Companies House, so there was constructive notice.
• But the bank could not be deemed to know which ordinary resolutions passed, because these were not registrable.
• The bond was valid because there was no requirement to look into the company’s internal workings.
• This is the indoor management rule, that the company’s indoor affairs are the company’s problem.
➢ Conclusion
• The benefit of doctrine of indoor, management can be availed only if the person dealing with the company
i. has the knowledge of the memorandum and articles
ii. has no knowledge of internal irregularity

Exception to the doctrine of Indoor Management

1). Actual or constructive knowledge of irregularity:
• The rule does not protect any person when the person dealing with the company has notice, whether actual or
constructive, of the irregularity.

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 • In Howard vs. Patent Ivory Manufacturing Co. where the directors could not defend the issue of debentures to
themselves because they should have known that the extent to which they were lending money to the company
required the assent of the general meeting which they had not obtained.
2) Suspicion of Irregularity:
• The doctrine in no way, rewards those who behave negligently.
• Where the person dealing with the company is put upon an inquiry, for example, where the transaction is unusualor
not in the ordinary course of business, it is the duty of the outsider to make the necessary enquiry.
• Case Law : Anand Bihari Lal vs. Dinshaw & Co. : The plaintiff accepted a transfer of a company’s property from its
accountant, the transfer was held void. The plaintiff could not have supposed, in absence of a power of attorney that
the accountant had authority to effect transfer of the company’s property.
3) Forgery:
• The rule does not apply where a person relies upon a document that turns out to be forged since nothing can validate
forgery.
• Case Law : Ruben v Great Fingall Consolidated : In this case the plaintiff was the transferee of a share certificate
issued under the seal of the defendant’s company. The company’s secretary, who had affixed the seal of the company
and forged the signature of the two directors, issued the certificate. The plaintiff contended that whether the
signature were genuine or forged was apart of the internal management, and therefore, the company should be
estopped from denying genuineness of the document.

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